<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1997
REGISTRATION NO. 333-32825
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
SHOPPERS FOOD WAREHOUSE CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 5411 53-0231809
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
SFW HOLDING CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6719 52-2014682
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
----------------
4600 FORBES BLVD.
LANHAM, MARYLAND 20706
(301) 306-8600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
MARK A. FLINT
CHIEF EXECUTIVE OFFICER
SHOPPERS FOOD WAREHOUSE CORP.
4600 FORBES BLVD.
LANHAM, MARYLAND 20706
(301) 306-8600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE
OF AGENT FOR SERVICE)
----------------
COPY TO:
KENNETH J. AYRES, ESQ.
JONES, DAY, REAVIS & POGUE
METROPOLITAN SQUARE
1450 G STREET, N.W.
WASHINGTON, D.C. 20005-2088
(202) 879-3791
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities act of
1933, check the following box. [X]
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
----------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
SFW HOLDING CORP.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING
THE LOCATION OF INFORMATION REQUIRED BY
PART I OF FORM S-4
<TABLE>
<CAPTION>
NO. CAPTION LOCATION OR CAPTION IN PROSPECTUS
--- ------- ---------------------------------
<C> <S> <C>
1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus...... Outside Front Cover
2. Inside Front and Outside Back
Cover Pages of Prospectus..... Inside Front Cover; Outside Back Cover;
Available Information
3. Risk Factors, Ratio of Earnings
to Fixed Charges and Other
Information................... Prospectus Summary; Risk Factors; The
Exchange Offer; Unaudited Pro Forma
Consolidated Financial Statements;
Selected Historical Financial Data
4. Terms of the Transaction....... Outside Front Cover; Prospectus Summary;
The Exchange Offer; Description of the
Senior Notes; Risk Factors; Certain
Income Tax Considerations
5. Pro Forma Financial
Information................... Prospectus Summary; Unaudited Pro Forma
Consolidated Financial Statements;
6. Material Contracts with the Selected Historical Financial Data
Company Being Acquired........ Not Applicable
7. Additional Information Required
for Reoffering by Persons and
Parties Deemed to be
Underwriters.................. Not Applicable
8. Interests of Named Experts and
Counsel....................... Not Applicable
9. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................... Not Applicable
10. Information With Respect to S-3
Registrants................... Not Applicable
11. Incorporation of Certain
Information by Reference...... Not Applicable
12. Information with Respect to S-2
or S-3 Registrants............ Not Applicable
13. Incorporation of Certain
Information by Reference...... Not Applicable
14. Information With Respect to
Registrants other than S-2 or
S-3 Registrants............... Outside Front Cover; Inside Front Cover;
Prospectus Summary; Risk Factors;
Business; Management; Use of Proceeds;
Pro Forma Consolidated Capitalization;
Unaudited Pro Forma Pro Forma
Consolidated Financial Statements;
Selected Historical Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Certain Income Tax
Considerations; Consolidated Financial
</TABLE> Statements
<PAGE>
<TABLE>
<CAPTION>
NO. CAPTION LOCATION OR CAPTION IN PROSPECTUS
--- ------- ---------------------------------
<C> <S> <C>
15. Information With Respect to S-3
Companies.......................... Not Applicable
16. Information With Respect to S-2 or
S-3 Companies...................... Not Applicable
17. Information With Respect to
Companies Other than S-2 or S-3
Companies.......................... Not Applicable
18. Information if Proxies, Consents or
Authorizations Are to Be
Solicited.......................... Not Applicable
19. Information if Proxies, Consents or
Authorizations Are Not to Be
Solicited or in an Exchange Offer.. Management; Certain Transactions;
Business
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THIS PROSPECTUS AND THE INFORMATION CONTAINED HEREIN IS SUBJECT TO CHANGE, +
+COMPLETION OR AMENDMENT WITHOUT NOTICE. THESE SECURITIES MAY NOT BE SOLD NOR +
+MAY AN OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE PROSPECTUS IS DELIVERED +
+IN FINAL FORM. UNDER NO CIRCUMSTANCES SHALL THIS PROSPECTUS CONSTITUTE AN +
+OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY +
+SALE OF THESE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, +
+SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION +
+UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER , 1997
PROSPECTUS
LOGO SHOPPERS FOOD WAREHOUSE CORP.
OFFER TO EXCHANGE ITS 9 3/4% SENIOR NOTES DUE 2004,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT (AS DEFINED),
FOR ALL OF ITS OUTSTANDING 9 3/4% SENIOR NOTES DUE 2004
THE SENIOR NOTES WILL BE FULLY AND UNCONDITIONALLY GUARANTEED BY SFW HOLDING
CORP.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998,
UNLESS EXTENDED (THE "EXPIRATION DATE").
-----------
Shoppers Food Warehouse Corp., a Delaware corporation ("Shoppers" or the
"Company"), hereby offers to exchange (the "Exchange Offer") up to $200,000,000
aggregate principal amount of its new 9 3/4% Senior Notes due 2004 (the
"Exchange Notes") for an equal principal amount of its outstanding 9 3/4%
Senior Notes due 2004 (the "Outstanding Notes") sold by the Company on June 26,
1997, upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (the "Letter of Transmittal").
The Exchange Notes and the Outstanding Notes are collectively referred to
herein as the "Senior Notes." The terms of the Exchange Notes are identical in
all material respects to those of the Outstanding Notes, except for certain
transfer restrictions and registration rights relating to the Outstanding
Notes. The Exchange Notes will be issued pursuant to, and entitled to the
benefits of, the Indenture (as defined) governing the Outstanding Notes.
On September 26, 1997, the Company paid $50 million (the "Restricted
Proceeds") of the net proceeds from the sale of the Outstanding Notes to or for
the benefit of the Company's ultimate parent, Dart Group Corporation ("Dart"),
and Dart consummated a Settlement (as defined) with certain of its
stockholders.
Interest on the Senior Notes will be payable semi-annually in arrears on June
15 and December 15 of each year, commencing on December 15, 1997, at the rate
of 9 3/4% per annum. The Senior Notes will be redeemable, in whole or in part,
at the option of the Company on or after June 15, 2001, at the redemption
prices set forth herein, plus accrued and unpaid interest, if any, to the date
of redemption. In addition, at any time on or prior to June 15, 2000, the
Company may, at its option, redeem up to 35% of the aggregate principal amount
of the Senior Notes originally issued with the net cash proceeds of one or more
Equity Offerings (as defined), at a redemption price equal to 109.75% of the
aggregate principal amount of the Senior Notes to be redeemed plus accrued and
unpaid interest to the date of redemption; provided, however, that at least 65%
of the original aggregate principal amount of the Senior Notes remains
outstanding immediately after such redemption. In the event of a Change in
Control (as defined), each holder of the Senior Notes (each a "Holder") will
have the right to require the Company to repurchase any or all of its
outstanding Senior Notes at a price equal to 101% of the principal amount
thereof, plus any accrued and unpaid interest to the date of repurchase.
However, there can be no assurance that sufficient funds would be available at
the time of any Change of Control to make any required repurchases of Senior
Notes tendered. See "Description of the Senior Notes."
The Senior Notes will be general unsecured obligations of the Company and
will rank pari passu in right of payment with all existing and future senior
indebtedness of the Company and senior in right of payment to all existing and
future subordinated indebtedness of the Company. The Senior Notes will be
effectively subordinated in right of payment to all secured indebtedness of the
Company to the extent of the value of the assets securing such indebtedness.
The Senior Notes will be fully and unconditionally guaranteed (the "Guarantee")
by SFW Holding Corp., a Delaware corporation (the "Guarantor"), the immediate
parent of Shoppers. The Guarantee will be secured by a first priority security
interest in the capital stock of Shoppers owned by the Guarantor. As of August
2, 1997, the Company had $11.5 million of senior debt outstanding that ranked
pari passu with the Senior Notes and no secured indebtedness outstanding.
(continued on next page)
-----------
SEE "RISK FACTORS," WHICH BEGINS ON PAGE 12, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER OUTSTANDING NOTES IN
THE EXCHANGE OFFER.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
The date of this Prospectus is , 1997.
<PAGE>
(continued from previous page)
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act of 1933, as amended (the "Securities Act"). This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Notes received
in exchange for Outstanding Notes where they were acquired by such broker-
dealer as a result of market-making or other trading activities. Each broker-
dealer that received Outstanding Notes from the Company and not as a result of
market-making or other trading activities, in the absence of an exemption,
must comply with the registration requirements of the Securities Act. The
Company and the Guarantor will, for a period of 90 days after consummation of
the Exchange Offer, make copies of this Prospectus available to any broker-
dealer for use in connection with any such resale.
The Outstanding Notes are designated for trading in the Private Offerings,
Resales and Trading through Automated Linkages ("PORTAL") System of the
National Association of Securities Dealers, Inc. The Exchange Notes constitute
securities for which there is no established trading market. Any Outstanding
Notes not tendered and accepted in the Exchange Offer will remain outstanding.
The Company does not intend to list the Exchange Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system, and no active public market for the Exchange Notes is currently
anticipated. If a market for the Exchange Notes should develop, such Exchange
Notes could trade at a discount from their principal amount. To the extent
that any Outstanding Notes are tendered and accepted in the Exchange Offer, a
Holder's ability to sell untendered Outstanding Notes could be adversely
affected. No assurance can be given as to the liquidity of the trading market
for either the Outstanding Notes or the Exchange Notes.
The Exchange Notes are being offered hereby in order to satisfy certain
obligations of the Company and the Guarantor contained in the Registration
Rights Agreement dated as of June 26, 1997 (the "Registration Rights
Agreement") by and among the Company, the Guarantor and an institutional
investor (the "Initial Purchaser"), entered into at the time of original
issuance of the Outstanding Notes. Neither the Company nor the Guarantor will
receive any proceeds from the Exchange Offer. The Company will pay all
expenses incident to the Exchange Offer.
The Exchange Offer is not conditioned upon any minimum principal amount of
Outstanding Notes being tendered for exchange pursuant to the Exchange Offer.
The date of acceptance and exchange (the "Exchange Date") of the Outstanding
Notes will be the third business day following the Expiration Date.
Outstanding Notes tendered pursuant to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date. In the event the Company terminates the
Exchange Offer and does not accept for exchange any Outstanding Notes with
respect to the Exchange Offer, the Company will promptly return such
Outstanding Notes to the holders thereof.
<PAGE>
AVAILABLE INFORMATION
The Company and the Guarantor have filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-4 (together
with all amendments, exhibits, schedules and supplements thereto, the
"Registration Statement") under the Securities Act with respect to the
Exchange Notes being offered hereby. This Prospectus, which forms a part of
the Registration Statement, does not contain all of the information set forth
in the Registration Statement. For further information with respect to the
Company, the Guarantor and the Exchange Notes, reference is made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete and,
where such contract or other document is an exhibit to the Registration
Statement, each such statement is qualified in all respects by the provisions
in such exhibit, to which reference is hereby made. Copies of the Registration
Statement may be examined without charge at the Public Reference Section of
the Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
the Commission's Regional Offices located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of all or any portion of the
Registration Statement can be obtained from the Public Reference Section of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of certain fees prescribed by the Commission. In addition, registration
statements and certain other filings made with the Commission through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are
publicly available through the Commission's site on the Internet's World Wide
Web, located at http://www.sec.gov.
Neither the Company nor the Guarantor is currently subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Upon completion of the Exchange Offer, the Company and
the Guarantor will be subject to the informational requirements of the
Exchange Act and, accordingly, will file periodic reports and other
information with the Commission. Notwithstanding the foregoing, the Guarantor
intends to request that the Commission, pursuant to Section 12(h) of the
Exchange Act, grant an order exempting it from complying with the
informational requirements of the Exchange Act.
In addition, the Company is required by the terms of the Indenture to
furnish the Trustee and the Holders of the Senior Notes with annual reports
containing consolidated financial statements audited by its independent
accountants and with quarterly reports containing unaudited condensed
consolidated financial statements for each of the first three quarters of each
fiscal year.
-------------
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PROSPECTUS SUMMARY
Unless otherwise noted, reference to (i) "Shoppers" or the "Company" means
collectively Shoppers Food Warehouse Corp. and its subsidiaries, (ii) the
"Guarantor" means SFW Holding Corp., the immediate parent company of Shoppers
and (iii) "Dart" means Dart Group Corporation, the immediate parent company of
the Guarantor and the ultimate parent company of Shoppers. The following
summary is qualified in its entirety by the more detailed information and
financial statements and notes thereto appearing elsewhere in this Prospectus.
Until Shoppers became a wholly-owned indirect subsidiary of Dart on February
6, 1997, Shoppers' fiscal year ended on the Saturday closest to June 30,
resulting in a 52- or 53-week year. The 1994, 1995 and 1996 fiscal years each
contained 52 weeks. The Company has since conformed to Dart's fiscal year by
changing its fiscal year to the Saturday closest to January 31. Thus, reference
to "fiscal 1994" means the 52 weeks ended July 2, 1994, "fiscal 1995" means the
52 weeks ended July 1, 1995, "fiscal 1996" means the 52 weeks ended June 29,
1996, "fiscal 1997" means the 31 weeks ended February 1, 1997 and "fiscal 1998"
means the 52 weeks ended January 31, 1998. All references to market share and
demographic data in this Prospectus are based upon industry publications.
THE COMPANY
Shoppers is a leading supermarket operator in Greater Washington, D.C. (as
defined below), operating 37 stores that target the price-conscious segment of
the market in densely populated suburban areas under the "Shoppers Food
Warehouse" and "Shoppers Club" names. Shoppers operates warehouse-style, price-
impact supermarkets that are positioned to offer the lowest overall prices in
its market area by passing on to the consumer savings achieved through labor
efficiencies and lower overhead associated with the warehouse format, while
providing the product selection and quality associated with a conventional
format. The Company's stores offer products at prices that generally range from
15% to 20% below those of its primary supermarket competitors. In-store
operations are designed to allow customers to perform certain labor-intensive
services usually offered in conventional supermarkets. For example, the
Company's stores generally do not provide service staff to support the bakery
and floral departments or the meat and seafood refrigerated cases. The stores
do, however, offer a complete line of produce, fresh baked goods, floral
assortments and freshly packaged meat and seafood products and provide service
in these departments at the request of customers. Certain merchandise is
presented on warehouse-style racks in full cartons, reducing labor-intensive
unpacking, and customers bag their own groceries. Shoppers stores also have
full-service delicatessens with some stores offering hot and cold prepared food
and self-service soup and salad bars.
The Company's stores generally are constructed with high ceilings to
accommodate warehouse racking with overhead pallet storage. Wide aisles
accommodate forklifts and, compared to conventional supermarkets, a higher
percentage of total store square footage is devoted to retail selling because
the top of the warehouse-style grocery racks on the sales floor are used to
store inventory, which reduces the need for large backroom storage and
restocking trips.
Notwithstanding the "warehouse" name, physical features and low-price
reputation, Shoppers stores have more in common with conventional supermarket
chains than with so-called "warehouse clubs." No membership fee is charged at
the Shoppers stores, which offer a selection of popular-sized national brands
and private label products as well as high quality produce, meat and seafood.
The product offerings are similar to those of conventional supermarkets with
slightly more emphasis on larger package sizes and with less emphasis on
extensive brand and size selection. All 37 of the Company's supermarkets have a
delicatessen, a bakery and a floral department while 21 stores have a beer and
wine department.
<PAGE>
While similar in most respects to conventional supermarket operators,
Shoppers distinguishes itself by providing low-price leadership while still
emphasizing quality. Shoppers does this by offering an unusual combination of
higher-end specialty departments with self-service and discount price features.
In addition, unlike traditional supermarkets, Shoppers stores offer a greater
selection of "club size" products, along with popular-sized brands. Through
this approach, Shoppers has established a unique niche among supermarket
operators in Greater Washington, D.C.
The Company's strategy is to open large new stores and upgrade existing
stores. Shoppers opened three new stores since July 1997 and has signed leases
to open two additional new stores (each between 65,000 and 75,000 square feet)
over the next two years. Also during this period, Shoppers is considering
expanding or remodeling at least two stores. Since 1992, Shoppers has opened 15
new stores (while closing four stores) and remodeled seven stores. Of its
existing 37 stores, 27 are larger than 40,000 square feet, and all but one of
these 27 stores were opened, remodeled or expanded during the last ten years.
The Company believes that its supermarkets generally have well-established
locations with favorable lease terms (including multiple options), are in good
condition and require only routine maintenance.
Shoppers is the largest supermarket chain targeting the price-conscious
segment in Greater Washington, D.C. The two primary competitors of Shoppers are
Giant Food, Inc. ("Giant") and Safeway Inc. ("Safeway"), both of which operate
in the higher-service, higher-price segment. Overall, Shoppers has the third
largest market share in Greater Washington, D.C. On a combined basis, Shoppers,
Giant and Safeway have 84% of the market share in this area. "Greater
Washington, D.C." includes Washington, D.C.; Calvert, Charles, Frederick,
Montgomery and Prince George's counties in Maryland; Arlington, Fairfax,
Loudoun, Prince William and Stafford counties in Virginia; and the independent
cities of Alexandria, Fredericksburg, Fairfax and Falls Church in Virginia.
Shoppers does not, however, operate any stores in the city of Washington, D.C.
Shoppers' share of the Greater Washington, D.C. market has increased from 11.9%
in 1992 to 13.6% in 1997; the Company believes that it exceeds its next highest
competitor by almost four times. During the same period, Giant's market share
decreased from 45.9% to 42.9% while Safeway's market share increased from 27.1%
to 27.5%.
Shoppers was incorporated in Delaware in 1956 and its principal executive
offices are at 4600 Forbes Blvd., Lanham, Maryland 20706. The telephone number
of Shoppers is (301) 306-8600.
ACQUISITION OF THE COMPANY BY DART
In June 1988, Dart acquired 50% of Shoppers for $17.4 million. On February 6,
1997, Dart's ownership increased to 100% with the buy-out of the other 50%
interest in Shoppers for $210 million (the "Acquisition"). The Acquisition was
financed 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 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.
2
<PAGE>
THE EXCHANGE OFFER
THE EXCHANGE OFFER...... The Company is offering to exchange up to
$200,000,000 aggregate principal amount of its new 9
3/4% Senior Notes due 2004 (the "Exchange Notes") for
an equal principal amount of its outstanding 9 3/4%
Senior Notes due 2004 (the "Outstanding Notes"). The
terms of the Exchange Notes are identical in all ma-
terial respects to those of the Outstanding Notes,
except for certain transfer restrictions and regis-
tration rights relating to the Outstanding Notes. The
Exchange Notes and Outstanding Notes are collectively
referred to herein as the "Senior Notes."
PURPOSE OF THE EXCHANGE
OFFER.................. The Exchange Notes are being offered to satisfy cer-
tain obligations of the Company under the Registra-
tion Rights Agreement.
EXPIRATION DATE;
WITHDRAWAL OF TENDER... The Exchange Offer will expire at 5:00 p.m., New York
City time, on , 1998, or such later date and
time to which it is extended by the Company (the "Ex-
piration Date"). The Expiration Date will not be ex-
tended beyond the 225th day after the date of the
original issuance of the Senior Notes. The tender of
Outstanding Notes pursuant to the Exchange Offer may
be withdrawn at any time prior to the Expiration
Date. Any Outstanding Notes not accepted for exchange
for any reason will be returned without expense to
the tendering Holder thereof as promptly as practica-
ble after the expiration or termination of the Ex-
change Offer.
ACCRUED INTEREST ON THE
EXCHANGE NOTES AND
OUTSTANDING NOTES...... Interest on the Exchange Notes will accrue from (A)
the later of (i) the last interest payment date on
which interest was paid on the Outstanding Notes sur-
rendered in exchange therefor or (ii) if the Out-
standing Notes are surrendered for exchange on a date
in a period which includes the record date for an in-
terest payment date to occur on or after the date of
such exchange and as to which interest will be paid,
the date of such interest payment date, or (B) if no
interest has been paid on the Outstanding Notes, from
June 26, 1997. Holders whose Outstanding Notes are
accepted for exchange will be deemed to have waived
the right to receive any interest accrued on the Out-
standing Notes.
PROCEDURES FOR
TENDERING OUTSTANDING
NOTES.................. Each holder of Outstanding Notes wishing to accept
the Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in ac-
cordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with the
Outstanding Notes and any other required documenta-
tion to the exchange agent (the "Exchange Agent") at
the address set forth herein. Outstanding Notes may
be physically delivered, but physical delivery is not
required if a confirmation of a book-entry transfer
of such Outstanding Notes to the Exchange Agent's ac-
count at The Depository Trust Company ("DTC" or the
"Depository") is delivered in a timely fashion. By
executing the Letter of Transmittal, each Holder will
represent to the Company that, among other things,
the Exchange Notes acquired
3
<PAGE>
pursuant to the Exchange Offer are being obtained in
the ordinary course of business of the person receiv-
ing such Exchange Notes, whether or not such person
is the Holder, that neither the Holder nor any such
other person is engaged in, or intends to engage in,
or has an arrangement or understanding with any per-
son to participate in, the distribution of such Ex-
change Notes and that neither the Holder nor any such
other person is an "affiliate", as defined under Rule
405 of the Securities Act, of the Company. See "The
Exchange Offer--Procedures for Tendering Outstanding
Notes."
CONDITIONS TO THE
EXCHANGE OFFER......... The Exchange Offer is not conditioned upon any mini-
mum aggregate principal amount of Outstanding Notes
being tendered for exchange. The Exchange Offer is
subject to certain customary conditions, which may be
waived by the Company. The Company currently expects
that each of the conditions will be satisfied and
that no waivers will be necessary. See "The Exchange
Offer--Conditions to the Exchange Offer."
EXCHANGE AGENT.......... Norwest Bank Minnesota, National Association.
CERTAIN INCOME TAX
CONSIDERATIONS......... An exchange of Outstanding Notes for Exchange Notes
pursuant to the Exchange Offer should be deemed not
to be a sale, exchange or other taxable event for
federal income tax purposes because the Exchange
Notes should be deemed not to differ materially in
kind or extent from the Outstanding Notes. As a re-
sult, no material federal income tax consequences
should result from an exchange of Exchange Notes for
Outstanding Notes pursuant to the Exchange Offer. For
federal income tax purposes, Exchange Notes received
by a beneficial owner of Outstanding Notes should be
treated as a continuation of the Outstanding Notes in
the hands of such owner. See "Certain Income Tax Con-
siderations."
CONSEQUENCES OF
EXCHANGING OUTSTANDING
NOTES PURSUANT TO THE
EXCHANGE OFFER......... Based on certain interpretive letters issued by the
staff of the Commission to third parties in unrelated
transactions, Holders of Outstanding Notes (other
than any Holder who is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities
Act) who exchange their Outstanding Notes for Ex-
change Notes pursuant to the Exchange Offer generally
may offer such Exchange Notes for resale, resell such
Exchange Notes and otherwise transfer such Exchange
Notes without compliance with the registration and
prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the
ordinary course of the Holders' business and such
Holders are not participating in, and have no ar-
rangement or understanding with any person to partic-
ipate in, a distribution of such Exchange Notes. Each
broker-dealer that receives Exchange Notes for its
own account in exchange for Outstanding Notes, where
such Outstanding Notes were acquired by such broker-
dealer as a result of market-making activities or
other trading activities, must acknowledge that it
will deliver a prospectus in connection with any re-
sale of such Notes. See "Plan of Distribution." In
addition, to comply with
4
<PAGE>
the securities laws of certain jurisdictions, if ap-
plicable, the Exchange Notes may not be offered or
sold unless they have been registered or qualified
for sale in such jurisdiction or an exemption from
registration or qualification is available and is
complied with. The Company has agreed, pursuant to
the Registration Rights Agreement and subject to cer-
tain specified limitations therein, to register or
qualify the Exchange Notes for offer or sale under
the securities or blue sky laws of such jurisdictions
as any Holders of the Senior Notes request in writ-
ing. If a Holder of Outstanding Notes does not ex-
change such Outstanding Notes for Exchange Notes pur-
suant to the Exchange Offer, such Outstanding Notes
will continue to be subject to the restrictions on
transfer contained in the legend thereon. In general,
the Outstanding Notes may not be offered or sold un-
less registered under the Securities Act, except pur-
suant to an exemption from, or in a transaction not
subject to, the registration requirements of the Se-
curities Act and applicable state securities laws.
5
<PAGE>
EXCHANGE NOTES
The terms of the Exchange Notes are identical in all material respects to
those of the Outstanding Notes, except for certain transfer restrictions and
registration rights relating to the Outstanding Notes.
Securities Offered...... $200,000,000 aggregate principal amount of 9 3/4% Se-
nior Notes due 2004.
Issuer.................. Shoppers Food Warehouse Corp.
Maturity Date........... June 15, 2004
Interest Payment
Dates................... Interest on the Exchange Notes will accrue from the
date of original issuance of the Outstanding Notes
(the "Issue Date") and will be payable semi-annually
in arrears on each June 15 and December 15, commenc-
ing December 15, 1997.
Ranking................. The Senior Notes will be general unsecured obliga-
tions of the Company and will rank pari passu in
right of payment with all existing or future senior
indebtedness of the Company and senior in right of
payment to all existing and future subordinated in-
debtedness of the Company. The Senior Notes will be
effectively subordinated in right of payment to all
secured indebtedness of the Company to the extent of
the value of the assets securing such indebtedness.
As of August 2, 1997, the Company had $11.5 million
of senior debt outstanding that ranked pari passu
with the Senior Notes and no secured indebtedness
outstanding.
Guarantee and
Collateral.............. The Senior Notes will be fully and unconditionally
guaranteed by the Guarantor. The Guarantee will be
secured by a first priority security interest in the
capital stock of Shoppers owned by the Guarantor. De-
pending on the outcome of pending litigation, the
Guarantor's direct ownership of Shoppers could be re-
duced to as low as 80%. See "Risk Factors--Security
for the Guarantee."
Special Mandatory
Redemption.............. The Indenture provides that in the event that a Set-
tlement did not occur on or prior to June 30, 1998,
then the Company would be obligated to use the Re-
stricted Proceeds (including accrued interest) to re-
deem $50 million aggregate principal amount of Senior
Notes (a "Special Mandatory Redemption"). On Septem-
ber 26, 1997, the Company paid $50 million ($40 mil-
lion dividend and $10 million loan) to or on behalf
of Dart in connection with Dart's consummation of a
Settlement with Robert M. Haft, Gloria G. Haft and
Linda G. Haft (the "RGL Settlement"). Accordingly,
the Company will not be obligated to redeem any of
the Senior Notes pursuant to a Special Mandatory Re-
demption.
Optional Redemption..... At any time on or prior to June 15, 2000, the Company
may, at its option, redeem up to 35% of the aggregate
principal amount of the Senior Notes originally is-
sued with the net cash proceeds of one or more Equity
Offer-
6
<PAGE>
ings, at a redemption price equal to 109.75% of the
aggregate principal amount of the Senior Notes to be
redeemed plus any accrued and unpaid interest to the
date of redemption; provided, however, that at least
65% of the original aggregate principal amount of the
Senior Notes remains outstanding immediately after
such redemption. In addition, the Senior Notes will
be redeemable, in whole or in part, at the option of
the Company on or after June 15, 2001, at the redemp-
tion prices set forth herein, plus any accrued and
unpaid interest to the date of redemption.
Change in Control....... In the event of a Change in Control, each Holder of
the Senior Notes will have the right, subject to cer-
tain conditions, to require the Company to repurchase
any or all of its outstanding Senior Notes at a price
equal to 101% of the principal amount thereof, plus
any accrued and unpaid interest to the date of repur-
chase. However, there can be no assurance that suffi-
cient funds would be available at the time of any
Change of Control to make any required repurchases of
Senior Notes tendered.
Certain Covenants....... The Indenture contains certain covenants for the ben-
efit of Holders of Senior Notes, including, among
others, covenants with respect to the following mat-
ters: (i) limitation on restricted payments; (ii)
limitation on indebtedness; (iii) limitation on in-
vestments, loans and advances; (iv) limitation on
dividends and other payment restrictions affecting
subsidiaries; (v) limitation on liens; (vi) limita-
tion on transactions with affiliates; (vii) restric-
tion on mergers, consolidations and transfers of as-
sets; (viii) limitation on lines of business; (ix)
limitation on asset sales; and (x) limitation on is-
suance and sale of capital stock of subsidiaries.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of Exchange
Notes offered hereby, the terms of which are identical in all material respects
to those of the Outstanding Notes, except for certain transfer restrictions and
registration rights relating to the Outstanding Notes. The Outstanding Notes
surrendered in exchange for the Exchange Notes will be cancelled and cannot be
reissued. The issuance of the Exchange Notes will not result in any change in
the aggregate indebtedness of the Company.
RISK FACTORS
Holders of Outstanding Notes should carefully consider all of the information
set forth in this Prospectus and, in particular, should evaluate the specific
factors set forth under "Risk Factors" in connection with the Exchange Offer.
7
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary historical financial data of Shoppers
as of and for the 52 weeks ended July 2, 1994, July 1, 1995 and June 29, 1996
and summary pro forma financial data for the 52 weeks and the 31 weeks ended
February 1, 1997, which have been derived in part from the financial statements
audited by Arthur Andersen LLP, Shoppers' independent public accountants. The
summary historical financial data as of and for the 52 weeks ended February 1,
1997, the 26 weeks ended August 3, 1996 and the 26 weeks ended August 2, 1997
have been derived from unaudited interim consolidated financial statements,
which, in the opinion of management, reflect all material adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such data. The pro forma financial data give effect to (i) the
sale of the Outstanding Notes and the application of the net proceeds therefrom
to repay the Increasing Rate Notes and to make a payment of $50 million ($40
million dividend and $10 million loan) to Dart to fund the RGL Settlement, (ii)
the use of $25 million of existing cash, cash equivalents and short-term
investments to extend a loan to Dart and (iii) the push-down accounting
treatment for the Acquisition by Dart, as though such transactions occurred on
February 4, 1996 with respect to the pro forma operating data and as of August
2, 1997 with respect to the pro forma balance sheet data.
The pro forma financial data presented herein do not purport to represent
what Shoppers' results of operations or balance sheet data would have been had
such transactions occurred at such date or to project Shoppers' results of
operation for any future period or balance sheet data at any future date. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical financial statements of Shoppers, together with the related
notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
52 WEEKS ENDED (UNAUDITED)
---------------------------- ------------------------------
31 WEEKS 52 WEEKS 26 WEEKS 26 WEEKS
ENDED ENDED ENDED ENDED
JULY 2, JULY 1, JUNE 29, FEBRUARY 1, FEBRUARY 1, AUGUST AUGUST
1994 1995 1996 1997 1997 3, 1996 2, 1997
-------- -------- -------- ----------- ----------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales................... $750,340 $790,842 $835,971 $511,025 $850,875 $419,653 $419,524
Gross profit(a)......... 157,277 174,321 183,985 112,896 190,946 96,179 99,160
Selling and
administrative
expenses(b)............ 127,643 136,798 149,570 94,304 154,594 74,379 76,677
Depreciation and
amortization........... 10,785 8,529 8,913 4,573 8,720 4,844 5,079
Interest income......... 2,189 4,682 5,789 3,526 5,985 3,113 1,797
Interest expense(c)..... 1,426 1,451 1,771 710 1,645 1,062 10,392
Net income(d)........... 12,929 19,526 18,703 10,455 20,563 12,428 3,561
Ratio of earnings to
fixed charges(e)....... 4.3x 6.4x 5.1x 4.9x 5.3x 6.1x 1.7x
OTHER DATA:
Stores open at end of
period................. 35 33 34 34 34 34 35
Capital expenditures.... $ 5,112 $ 4,693 7,355 $ 5,280 $ 9,430 $ 4,932 $ 5,861
EBITDA(f)............... 29,998 38,400 35,614 19,972 38,107 22,250 22,933
Cash flow information:
Operating activities.. 18,261 31,907 26,992 17,412 29,378 18,187 17,415
Investing activities.. (7,059) (60,474) (52,082) 2,801 (18,083) (20,127) 69,125
Financing activities.. -- -- (10,000) (10,034) (10,034) -- (86,221)
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
31 WEEKS 52 WEEKS 26 WEEKS
ENDED ENDED ENDED
FEBRUARY 1, FEBRUARY 1, AUGUST 2,
1997 1997 1997
----------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
PRO FORMA DATA (UNAUDITED):
EBITDA(f).................................... $19,972 $38,107 $22,933
Depreciation and amortization(g)............. 5,827 9,852 5,079
Interest income(h)........................... 2,034 3,413 1,706
Interest expense(i).......................... 12,654 22,120 11,044
Income taxes(j).............................. 1,441 4,133 3,673
Net income before extraordinary item......... 704 3,660 4,393
Ratio of earnings to fixed charges(e)........ 1.1x 1.3x 1.6x
Ratio of EBITDA to interest expense.......... 1.6x 1.7x 2.1x
</TABLE>
<TABLE>
<CAPTION>
(UNAUDITED)
-----------------------------
PRO FORMA
JULY 2, JULY 1, JUNE 29, FEBRUARY 1, AUGUST 3, AUGUST 2, AUGUST 2,
1994 1995 1996 1997 1996 1997 1997
------- ------- -------- ----------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents
and short-term
investments(k)......... $69,789 $97,003 $106,640 $108,738 $112,079 $ 84,289 $ 9,289
Working capital
deficit(l)............. 9,993 15,551 14,364 15,958 18,568 24,208 24,208
Total assets(m)......... 140,614 162,003 171,022 179,008 177,229 326,698 286,698
Total debt(n)........... 9,742 9,950 10,069 10,035 10,091 211,549 211,549
Stockholders' equity.... 75,804 95,330 104,033 104,488 106,351 45,805 5,805
</TABLE>
- --------
(a) Gross profit is net of LIFO expense of $364,000, $877,000 and $905,000 in
the 52 weeks ended July 2, 1994, July 1, 1995 and June 29, 1996,
respectively, $530,000 in the 31 weeks ended February 1, 1997, $905,000 in
the 52 weeks ended February 1, 1997 and $450,000 in the 26 weeks ended
August 3, 1996 and August 2, 1997, respectively.
(b) Selling and administrative expenses include a reversal of a prior period
expense related to closed stores and remodels of $500,000 for the 52 weeks
ended July 1, 1995 and reserves related to closed stores and remodels of
$294,000 and $850,000 for the 52 weeks ended June 29, 1996 and the 52 weeks
ended February 1, 1997, respectively and $850,000 for the 31 weeks ended
February 1, 1997. Selling and administrative expenses also include a
$500,000 charge for reserves against a related party receivable for the 52
weeks ended July 1, 1995.
(c) Interest expense for the 26 weeks ended August 2, 1997 includes $944,000 of
amortization of deferred financing costs.
(d) Net income for the 52 weeks ended July 2, 1994, July 1, 1995 and June 29,
1996 includes $858,000, $1,239,000 and ($224,000), net of taxes,
respectively, associated with an insurance settlement relating to one store
that incurred significant fire damage in June 1994. Net income for the 26
weeks ended August 2, 1997 includes an extraordinary loss of $3,126,000,
net of income taxes of $2,150,000, for the write-off of deferred financing
costs associated with the Increasing Rate Notes and the cumulative effect
of a change in accounting principle of $1,729,000.
(e) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income before income taxes plus fixed charges. "Fixed
charges" consist of interest expense on all indebtedness (including
amortization of deferred financing costs) and the portion of operating
lease rental payments that is representative of the interest factor.
9
<PAGE>
(f) "EBITDA" represents net income before insurance settlement, income taxes,
interest expense, interest income, depreciation and amortization, reserve
for related party receivable, non-cash charges or credits associated with
store closings and remodelings and LIFO expense. Depreciation and
amortization expense and these other items excluded from EBITDA are
significant components in understanding and assessing the Company's
financial performance. The Company believes that, in addition to cash flow
from operations and net earnings, EBITDA is a useful financial performance
measurement for assessing operating performance as it provides investors
with an additional basis to evaluate the ability of the Company to incur
and service debt and to fund capital expenditures. In evaluating EBITDA,
the Company believes that investors should consider the amount by which
EBITDA exceeds interest costs for the period, how EBITDA compares to
principal repayments on debt for the period and how EBITDA compares to
capital expenditures for the period. To evaluate EBITDA, the components of
EBITDA, such as revenues and operating expenses and the variability of such
components over time, should also be considered. Investors should be
cautioned, however, that EBITDA should not be construed as an alternative
to operating income (as determined in accordance with GAAP) as an indicator
of the Company's operating performance, or to cash flows from operating,
investing and financing activities (as determined in accordance with GAAP)
as a measure of liquidity or the Company's ability to meet all its cash
needs. The Company's method of calculating EBITDA may differ from the
methods used by other companies and, as a result, the EBITDA measures
disclosed herein may not be comparable to other similarly titled measures
disclosed by other companies.
The following table quantifies the components of EBITDA:
<TABLE>
<CAPTION>
52 WEEKS ENDED 31 WEEKS 52 WEEKS 26 WEEKS 26 WEEKS
--------------------------- ENDED ENDED ENDED ENDED
JULY 2, JULY 1, JUNE 29, FEBRUARY 1, FEBRUARY 1, AUGUST 3, AUGUST 2,
1994 1995 1996 1997 1997 1996 1997
-------- -------- -------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Profit.......... $157,277 $174,321 $183,985 $112,896 $190,946 $96,179 $99,160
Less:Selling and
administrative
expenses............. 127,643 136,798 149,570 94,304 154,594 74,379 76,677
Add: LIFO expense...... 364 877 905 530 905 450 450
Closed store reserve
(reversal)........ -- (500) 294 850 850 -- --
Reserve for related
party receivable.. -- 500 -- -- -- -- --
-------- -------- -------- -------- -------- ------- -------
EBITDA................ 29,998 38,400 35,614 19,972 38,107 22,250 22,933
======== ======== ======== ======== ======== ======= =======
</TABLE>
(g) Reflects an increase in depreciation and amortization of $1,132,000 for the
52 weeks ended February 1, 1997 and $1,254,000 for the 31 weeks ended
February 1, 1997 attributable to the amortization of excess purchase price
over the underlying net book value of assets arising from the Acquisition,
which was allocated to fixed assets, lease rights and goodwill.
(h) Reflects a decrease in interest income of $2,572,000 for the 52 weeks ended
February 1, 1997, $1,492,000 for the 31 weeks ended February 1, 1997 and a
decrease of $91,000 for the 26 weeks ended August 2, 1997. The changes in
interest income are attributable to a reduction in cash, cash equivalents
and short-term investments resulting from dividend payments to Dart offset
by interest income related to loans from Shoppers to Dart. Such loans will
bear interest at a rate of 9 3/4% per annum and have the same maturity date
as the Senior Notes. All principal and interest on any loan to Dart would
be payable on the maturity date but could be repaid at any time without
penalty. See "Risk Factors--Substantial Leverage and Debt Service."
(i) Reflects an increase in interest expense of $20,475,000 for the 52 weeks
ended February 1, 1997, $11,944,000 for the 31 weeks ended February 1, 1997
and an increase of $652,000 for the 26 weeks ended August 2, 1997
attributable to interest incurred in connection with the Senior Notes,
which include amortization of deferred financing costs of $975,000 for the
52 weeks ended February 1, 1997, $569,000 for the 31 weeks ended February
1, 1997 and $486,000 for the 26 weeks ended August 2, 1997.
10
<PAGE>
(j) Reflects a decrease in income taxes of $7,276,000 for the 52 weeks ended
February 1, 1997, $4,939,000 for the 31 weeks ended February 1, 1997 and
$178,000 for the 26 weeks ended August 2, 1997.
(k) The pro forma data reflects the effect of the Acquisition, the offering
related to the Senior Notes, the payment of loans to Dart and the payment
of Restricted Proceeds to Dart to fund the RGL Settlement. Also, reference
should be made to footnote (a) to the Pro Forma Consolidated
Capitalization.
(l) For purposes of this presentation, working capital deficit has been defined
as working capital less cash, cash equivalents and short-term investments
to present prior period comparable balances assuming the use of these
liquid assets to fund the Acquisition and for subsequent dividends and
loans to Dart.
(m) The pro forma data reflects the decrease in cash, cash equivalents and
short-term investments, the capitalization of financing costs and excess
purchase price arising from the Acquisition.
(n) The pro forma data reflects the indebtedness associated with the Senior
Notes.
11
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the following factors in
addition to the other information set forth in this Prospectus before making
an investment in the Senior Notes.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE
The Company has incurred significant indebtedness and has significant
interest expense. The Company's consolidated indebtedness was $211 million at
August 2, 1997 and its consolidated interest expense for the 26 weeks ended
August 2, 1997 was $10.4 million. In addition, subject to the restrictions in
the Indenture, the Company may incur additional indebtedness from time to
time. For the Company's ratio of earnings to fixed charges, see "Selected
Historical Financial Data."
The level of the Company's indebtedness could have important consequences to
Holders of the Senior Notes, including: (i) a substantial portion of the
Company's cash flow from operations must be dedicated to service debt and will
not be available for other purposes; (ii) the Company's ability to obtain
additional debt financing in the future for working capital and capital
expenditures may be limited; and (iii) the Company's level of indebtedness
could limit its flexibility in reacting to changes in the supermarket industry
and economic conditions in general. Certain of the Company's competitors
currently operate on a less leveraged basis and have significantly greater
operating and financing flexibility than the Company.
Shoppers believes that cash flow from operations, borrowings available under
a credit facility in the aggregate principal amount at any time outstanding
not to exceed $35 million (the "New Credit Facility") that the Company expects
to enter into with a bank or other third party and lease financings will be
sufficient to enable the Company to satisfy its anticipated requirements for
operating expenses, capital expenditures and debt service obligations. If the
Company is unable to satisfy such requirements from these sources, the Company
would be required to adopt one or more alternatives, such as reducing or
delaying capital expenditures, selling material assets or seeking additional
capital investment. No assurance can be given that the Company will enter into
the New Credit Facility or that any such alternative could be effected on
satisfactory terms.
In connection with the RGL Settlement, Shoppers loaned $10 million to Dart.
Upon entering into the New Credit Facility, the Company may loan to Dart an
additional $25 million. The Company expects such loans to bear the same
interest rate and have the same maturity date as the Senior Notes. All
principal and interest on these loans to Dart would be payable on the maturity
date but may be repaid at any time without penalty. There can be no assurance,
however, that Dart will be able to repay such principal and interest when due.
Furthermore, repayment of the Senior Notes is dependent upon the Company
refinancing its indebtedness, obtaining new equity capital or consummating a
sale of all or part of the Company. There can be no assurance that the Company
will be able to successfully accomplish any of these options.
RESTRICTIVE DEBT COVENANTS
The Indenture under which the Outstanding Notes were, and the Exchange Notes
will be, issued (the "Indenture") contains numerous covenants. See
"Description of the Senior Notes." If the Company fails to comply with these
covenants, it would be in default under the Indenture. In the event of such
default, the principal and accrued interest on the Senior Notes would become
due and payable. In addition, the Company expects that the New Credit Facility
would contain other and more restrictive covenants and would prohibit the
Company from prepaying the Senior Notes, except in certain circumstances. The
New Credit Facility also could require the Company to maintain specified
financial ratios and satisfy certain financial tests. The Company's ability to
meet such financial ratios and tests could be affected by events beyond its
control. There can be no assurance that the Company would meet such tests. A
breach of any of these covenants could result in an event of default under the
New Credit Facility. If such an event of default occurs, the lenders could
elect to declare all amounts borrowed under the New Credit Facility, together
with accrued interest, to be immediately due and
12
<PAGE>
payable and to terminate all commitments under the New Credit Facility. If the
Company were unable to repay all amounts declared due and payable, the lenders
could proceed against the collateral granted to them to satisfy the
indebtedness and other obligations due and payable. If indebtedness under the
New Credit Facility were to be accelerated, there can be no assurance that the
assets of the Company would be sufficient to repay in full such indebtedness
and the other indebtedness of the Company, including the Senior Notes. See
"Description of the Senior Notes--Certain Covenants."
EFFECTIVE SUBORDINATION
The Senior Notes will be general unsecured obligations of the Company and
will be effectively subordinated in right of payment to all secured
indebtedness of the Company, including the Company's obligations under the New
Credit Facility. The New Credit Facility would likely be secured by a
significant amount of the assets of the Company and, therefore, claims of
Holders of the Senior Notes will be effectively subordinated to the extent of
the value of the assets securing the New Credit Facility.
GEOGRAPHIC CONCENTRATION
All of the Company's stores are located in the suburbs of Washington, D.C.
and thus the performance of the Company will be particularly influenced by
developments in this area. Although the Washington, D.C. metropolitan area has
experienced relatively stable economic conditions over the past several years,
a significant economic downturn in the region could have a material adverse
effect on the business, financial condition and results of operations of the
Company.
COMPETITION
The supermarket industry is highly competitive and characterized by narrow
profit margins. Shoppers' competitors include national and regional
supermarket chains, independent and specialty grocers, drug and convenience
stores, and the newer "alternative format" food stores, including warehouse
club stores and deep- discount drug stores. Certain of its competitors have
greater financial resources than Shoppers. Supermarket chains generally
compete on the basis of location, quality of products, service, price, product
variety and store condition. Shoppers believes that it will face increased
competition in the future from other supermarket chains. To the extent the
Company reduces prices to maintain or grow its market share in the face of
competition, net income and cash generated from operations could be adversely
affected. The Company's ability to remain competitive in its markets depends
in part on its ability to remodel and update its stores and open new stores in
response to remodelings and new store openings by its competitors, which in
turn will require the continued availability of financing. See "Business--
Competition."
RELIANCE ON THIRD-PARTY SUPPLIER
Shoppers purchases approximately one-half of its grocery inventory from an
independent wholesale supplier that provides Shoppers with the benefits of
volume purchasing, private label merchandise, warehousing and distribution.
The Company's supply contract with its primary supplier expires in December
1997. Although Shoppers believes that the contract will be renewed on
comparable or more favorable terms or that it will enter into a comparable or
more favorable contract with another wholesaler, there can be no such
assurance that this will occur. In addition, the sudden loss of the Company's
primary supplier could create a disruption in the Company's sales until
arrangements with alternate suppliers could be made. See "Business--
Purchasing, Warehousing and Distribution."
LABOR RELATIONS
As of August 2, 1997, approximately 4,000 of Shoppers' employees were
covered by collective bargaining agreements. The Company's agreement with
Local 27 of the United Food and Commercial Workers Union covering 264
employees has been ratified and is expected to be signed. It will expire on
September 30, 2001. The Company has entered into a new union contract with
Local 400 of the United Food and Commercial Workers Union covering 3,669
employees that would expire in July 2000. Shoppers also has 49 employees at
its
13
<PAGE>
produce warehouse who are covered by collective bargaining agreements with
locals of the Warehouse Employees Union and the Teamsters Union. While
Shoppers believes that its relations with its employees are satisfactory, a
prolonged labor dispute could have a material adverse effect on the business,
financial condition and results of operations of the Company.
FRAUDULENT CONVEYANCE RISKS
Shoppers used the net proceeds from the sale of the Outstanding Notes to
repay the Increasing Rate Notes and to make a $40 million dividend payment and
a $10 million loan to Dart when it consummated the RGL Settlement. See "Use of
Proceeds." The net proceeds from the sale of the Increasing Rate Notes and
$72.8 million of cash and short-term investments of Shoppers were used to
finance the Acquisition. In addition, Shoppers paid a $10 million dividend to
Dart in May 1997 and may make additional dividends or loans to Dart of up to
$25 million from existing short-term investments.
In the event of a subsequent bankruptcy proceeding or a lawsuit by or on
behalf of creditors of the Company, the incurrence by the Company of the
indebtedness evidenced by the Senior Notes would be subject to review under
relevant U.S. federal and state fraudulent conveyance statutes ("Fraudulent
Conveyance Statutes"). Under these statutes, if at the time the Senior Notes
were issued and the proceeds applied, (i) the Company issued the Senior Notes
and applied the proceeds with the intent of hindering, delaying or defrauding
creditors or (ii) the Company received less than a reasonably equivalent value
or fair consideration for issuing the Senior Notes and, after so applying the
proceeds, the Company (a) was insolvent or rendered insolvent by reason of
such transactions, (b) was engaged in a business or transaction for which its
assets constituted unreasonably small capital or (c) intended to incur, or
believed that it would incur, debts beyond its ability to pay as they matured
(as the foregoing terms are defined in or interpreted under Fraudulent
Conveyance Statutes), such court could subordinate all or a part of the Senior
Notes to existing and future indebtedness of the Company, recover any payments
made on the Senior Notes or take other action detrimental to the Holders,
including, under certain circumstances, invalidating the Senior Notes.
Shoppers believes that the indebtedness and obligations evidenced by the
Senior Notes was incurred, and proceeds of the Senior Notes will be used, for
proper purposes and in good faith. Shoppers believes that at the time of, and
after giving effect to, the incurrence of the indebtedness and obligations
evidenced by the Senior Notes, it was solvent and will have sufficient capital
to carry on its business and that it will pay its debts as they mature. No
assurance can be given, however, that a court would concur with such beliefs
and positions.
The measure of insolvency for these purposes will vary depending upon the
law of the jurisdiction being applied. Generally, a company will be considered
insolvent for these purposes if the company is unable to pay its debts as they
become due in the usual course of its business or the sum of the company's
debts is greater than all the company's property at a fair valuation or if the
present fair saleable value of the company's assets is less than the amount
that will be required to pay its probable liability on its existing debts as
they become absolute and mature. In rendering its opinion on the validity of
the Senior Notes, counsel for the Company will express no opinion as to the
effect of Fraudulent Conveyance Statutes or the enforcement of creditors'
rights generally.
RISKS OF IMPLEMENTING STORE EXPANSION PROGRAM
The ability of the Company to implement a store expansion program depends,
in part, upon the identification of suitable sites and obtaining access to
such sites on reasonable commercial terms. The Company's expansion program is
also conditioned on identifying and retaining key personnel to implement this
strategy. There can be no assurance that additional suitable locations will be
available on reasonable commercial terms in the future. Furthermore, there can
be no assurance that the level of sales and profit margins achieved by
Shoppers with respect to its existing stores can be duplicated in any newly
created or expanded stores.
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CONTROLLING STOCKHOLDER
The Company is an indirect subsidiary of Dart. As a result, Dart controls
the Company through its control of the Guarantor, which has the power to elect
all of the directors of the Company and, subject to the Indenture, approve any
action requiring stockholder approval, including approving a merger of the
Company or a sale of substantially all of the assets of the Company.
Over the past three years, there has been significant litigation involving
the control of Dart. 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. Because these disputes were so extensive, 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"). 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. 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 may make it more difficult for the Company to obtain
funds through a refinancing for such purpose. See "Description of the Senior
Notes--Change in Control."
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. Investors wishing additional information
regarding these matters are directed to the public filings made by Dart with
the Commission.
On October 17, 1997, Dart entered into an agreement with Herbert H. Haft to
settle his claims to control of Dart and other litigation pending between him
and Dart. Closing of the settlement between Dart and Herbert H. Haft is
subject to final and non-appealable action by the Delaware Court of Chancery
or the Delaware Supreme Court approving all of the terms of the settlement,
terminating certain putative derivative actions pending with respect to Dart
in the Delaware Court of Chancery, and approving the RSH Settlement and a
supplemental settlement between Dart and Ronald S. Haft. There can be no
assurance as to whether court approval of the settlements will be obtained or
whether the closing of the settlement between Dart and Herbert H. Haft will
occur.
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SECURITY FOR THE GUARANTEE
The Guarantee is secured by a first priority security interest in the shares
of capital stock of Shoppers owned by the Guarantor. The Guarantor was
organized in January 1997 and has no assets or operations other than holding
100% of the issued and outstanding shares of capital stock of Shoppers. There
is no existing market for the capital stock of Shoppers. Further, there can be
no assurance that any proceeds could be realized from a sale of such capital
stock in the event of foreclosure by the Trustee.
Depending on the outcome of litigation regarding certain claimed options and
co-investment rights, and the legal challenges to the RSH Settlement, Dart's
indirect ownership, and the Guarantor's direct ownership, of the Company could
be reduced to as low as 80%.
In 1988, Dart purchased 50% of the outstanding shares of capital stock of
Shoppers from members of the Herman family. Dart was the record owner of this
interest in Shoppers until February 6, 1996. Also in 1988, Dart/SFW Corp. was
formed with the apparent intent that Dart would hold 80 of Dart/SFW Corp.'s
100 authorized shares of capital stock. However, Dart/SFW Corp.'s
organizational documents are incomplete. Dart/SFW Corp. purportedly granted
options to purchase the other 20 shares of its capital stock to members of the
Haft family. Though some of Dart's periodic reports filed with the Commission
have stated that Dart transferred its 50% interest in Shoppers to Dart/SFW
Corp., there is no record that such a transfer occurred. On February 6, 1997,
Dart and Dart/SFW Corp. each transferred their interests in Dart's ownership
of Shoppers to the Guarantor in exchange for the Guarantor's stock.
In 1995, Ronald S. Haft relinquished his claimed ownership of the purported
options to purchase up to five shares of Dart/SFW Corp.'s capital stock as
part of the RSH Settlement, but that relinquishment is subject to potential
rescission if certain pending legal challenges to the validity of that
settlement are successful. On September 26, 1997, pursuant to the RGL
Settlement, Robert M. Haft, Gloria G. Haft and Linda G. Haft relinquished
their claimed ownership of purported options to purchase up to 15 shares of
Dart/SFW Corp.'s capital stock. That relinquishment may be subject to
rescission if legal challenges to the validity of the RGL Settlement are
brought and are successful.
Whether or not it is determined that Dart/SFW Corp. received Dart's 50%
interest in Shoppers or that members of the Haft family did not receive valid
options to purchase shares of Dart/SFW Corp., members of the Haft family
potentially could claim interests in up to 20% of the Guarantor or of the
Guarantor's equity interest in Shoppers. No assurance can be given as to the
outcome of these legal disputes and uncertainties. See "--Controlling
Stockholder."
POSSIBLE CHANGE IN CONTROL
Depending on the outcome or settlement of the litigation referred to above,
one or a group of Haft family members may have power to vote in excess of 35%
of the voting stock of Dart. In such event, a Change in Control will have
occurred under the Indenture. See "Description of Senior Notes--Change in
Control." There can be no assurance that the Company will have sufficient
funds available to purchase the outstanding Senior Notes were they to be
tendered in response to a Change in Control. It is also possible that the
outcome of such litigation or settlements thereof could result in significant
ownership of the voting stock of Dart by one or more of the Haft family
members, although less than the 35% threshold required for Change in Control.
GOVERNMENT REGULATION
Shoppers is subject to regulation by a variety of governmental agencies,
including, but not limited to, the U.S. Food and Drug Administration, the U.S.
Department of Agriculture and state and local health departments and other
agencies, including those regulating the sale of beer and wine.
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ENVIRONMENTAL MATTERS
Shoppers is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as
handling and disposal practices for solid and hazardous wastes, and (ii)
impose liability for the costs of cleaning up, and certain damages resulting
from, sites of past spills, disposals or other releases of hazardous
materials.
LACK OF A PUBLIC MARKET FOR THE EXCHANGE NOTES
There is no existing market for the Exchange Notes. There can be no
assurance of the liquidity of any markets that may develop for the Exchange
Notes, the ability of Holders of the Exchange Notes to sell their Exchange
Notes, or the price at which Holders would be able to sell their Exchange
Notes. Future trading prices of the Exchange Notes will depend on many
factors, including prevailing interest rates, the Company's operating results
and the market for similar securities. No assurance can be given as to the
liquidity of the trading market for the Exchange Notes or that an active
public market for the Exchange Notes will develop or, if developed, will
continue. If an active public market does not develop or is not maintained,
the market price and liquidity of the Exchange Notes may be adversely
affected. The Company does not intend to apply for a listing of the Exchange
Notes offered hereby on any securities exchange or on a securities quotation
services.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Exchange Offer is being made by the Company to satisfy certain of its
obligations under the Registration Rights Agreement. The Registration Rights
Agreement requires the Company to use its best efforts to (i) file with the
Commission a registration statement (the "Exchange Offer Registration
Statement") under the Securities Act with respect to the Exchange Notes within
90 days after the issuance of the Outstanding Notes (the "Issue Date"), (ii)
use its best efforts to cause the Exchange Offer Registration Statement to
become effective within 180 days after the Issue Date, and (iii) keep the
Exchange Offer open for acceptance for not less than 45 days (or longer if
required by applicable law) after the date that notice of the Exchange Offer
is mailed to Holders of the Outstanding Notes.
In the event that the Company fails to satisfy these or certain other of its
obligations under the Registration Rights Agreement, the interest rate on the
Outstanding Notes will be increased 0.5% per annum and shall thereafter
increase by an additional 0.5% per annum at the beginning of each subsequent
90-day period until the Exchange Offer is consummated; provided however, that
the additional interest rate on the Outstanding Notes may not exceed at any
one time in the aggregate 1.50% per annum; and provided further, upon the
effectiveness of the Exchange Offer Registration Statement, additional
interest on the Outstanding Notes as described in this sentence shall cease to
accrue.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers to exchange, upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal (which together constitute the Exchange Offer), Exchange Notes for
an equal principal amount of Outstanding Notes. The terms of the Exchange
Notes are identical in all material respects to those of the Outstanding
Notes, except for certain transfer restrictions and registration rights
relating to the Outstanding Notes. The Exchange Notes will be entitled to the
benefits of the Indenture. See "Description of the Senior Notes."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Outstanding Notes being tendered or accepted for exchange. As of the
date of this Prospectus, $200 million aggregate principal amount of Senior
Notes is outstanding. Outstanding Notes tendered in the Exchange Offer must be
in denominations of principal amount of $1,000 or any integral multiple
thereof.
Based on Exxon Capital Holdings Corporation (available May 13, 1988), Morgan
Stanley & Co. Incorporated (available June 15, 1991), Shearman & Sterling
(available July 2, 1995), and certain other interpretive letters issued by the
staff of the Commission to third parties in unrelated transactions, Holders of
Outstanding Notes (other than any Holder who is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) who exchange their
Outstanding Notes for Exchange Notes pursuant to the Exchange Offer generally
may offer such Exchange Notes for resale, resell such Exchange Notes and
otherwise transfer such Exchange Notes without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that such Outstanding Notes are acquired in the ordinary course of
the Holders' business and such Holders are not participating in, and have no
arrangement or understanding with any person to participate in, a distribution
of such Exchange Notes. Each broker-dealer that receives Exchange Notes for
its own account in exchange for Outstanding Notes, where such Outstanding
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such Exchange Notes. See "Plan
of Distribution." In addition, to comply with the securities laws of certain
jurisdictions, if applicable, the Exchange Notes may not be offered or sold
unless they have been registered or qualified for sale in such jurisdiction or
an exemption from registration or qualification is available and complied
with. The Company has agreed, pursuant to the Registration Rights Agreement
and subject to certain specified limitations therein, to register or qualify
the Exchange Notes for offer or sale under the securities or blue sky laws of
such jurisdictions as any Holders of the Exchange Notes request in writing. If
a Holder of Outstanding Notes does not exchange such Outstanding Notes for
Exchange Notes
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pursuant to the Exchange Offer, such Outstanding Notes will continue to be
subject to the restrictions on transfer contained in the legend thereon. In
general, the Outstanding Notes may not be offered or sold unless registered
under the Securities Act, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws.
EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS
The Exchange Offer expires on the Expiration Date. The term "Expiration
Date" means 5:00 p.m., New York City time, on , 1998 unless the Company in
its sole discretion extends the period during which the Exchange Offer is
open, in which event the term "Expiration Date" means the latest time and date
on which the Exchange Offer, as so extended by the Company, expires. The
Expiration Date will not be extended beyond the 225th day after the date of
the original issuance of the Senior Notes. The Company expressly reserves the
right to extend the Exchange Offer at any time and from time to time prior to
the Expiration Date by giving written notice to Norwest Bank Minnesota,
National Association (the "Exchange Agent") and by public announcement
communicated by no later than 9:00 a.m. on the next business day following the
previously scheduled Expiration Date, unless otherwise required by applicable
law or regulation, by making a release to the Dow Jones News Service. During
any extension of the Exchange Offer, all Outstanding Notes previously tendered
pursuant to the Exchange Offer will remain subject to the Exchange Offer and
may be accepted for exchange by the Company. Any Outstanding Notes not
accepted for exchange for any reason will be returned without expense to the
tendering holder thereof as promptly as practicable after expiration or
termination of the Exchange Offer.
The initial "Exchange Date" will be the third business day following the
Expiration Date. The Company expressly reserves the right to (i) terminate the
Exchange Offer and not accept for exchange any Outstanding Notes if any of the
events set forth below under "--Conditions to the Exchange Offer" shall have
occurred and shall not have been waived by the Company and (ii) amend the
terms of the Exchange Offer in any manner, whether before or after any tender
of the Outstanding Notes. If any such termination or amendment occurs, the
Company will notify the Exchange Agent in writing and will either issue a
press release or give written notice to the Holders of the Outstanding Notes
as promptly as practicable. Unless the Company terminates the Exchange Offer
prior to 5:00 p.m., New York City time, on the Expiration Date, the Company
will exchange the Exchange Notes for the Outstanding Notes on the Exchange
Date.
This Prospectus and the related Letter of Transmittal and other relevant
materials will be mailed by the Company to record Holders of Outstanding Notes
and will be furnished to brokers, banks and similar persons whose names, or
the names of whose nominees, appear on the lists of Holders for subsequent
transmittal to beneficial owners of Outstanding Notes.
ACCRUED INTEREST ON THE SENIOR NOTES
Interest on the Exchange Notes will accrue from (A) the later of (i) the
last interest payment date on which interest was paid on the Outstanding Notes
surrendered in exchange therefor or (ii) if the Outstanding Notes are
surrendered for exchange on a date in a period which includes the record date
for an interest payment date to occur on or after the date of such exchange
and as to which interest will be paid, the date of such interest payment date,
or (B) if no interest has been paid on the Outstanding Notes, from June 26,
1997. Holders whose Outstanding Notes are accepted for exchange will be deemed
to have waived the right to receive any interest accrued on the Outstanding
Notes.
PROCEDURES FOR TENDERING OUTSTANDING NOTES
The tender to the Company of Outstanding Notes by a Holder thereof pursuant
to any one of the procedures set forth below will constitute a binding
agreement between such Holder and the Company in accordance with the terms and
subject to the conditions set forth herein and in the Letter of Transmittal.
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General Procedures. Except as set forth below, a Holder who wishes to tender
Outstanding Notes for exchange pursuant to the Exchange Offer must transmit a
properly completed and duly executed Letter of Transmittal or facsimile
thereof (all references in this Prospectus to the Letter of Transmittal shall
be deemed to include a facsimile thereof), including all other documents
required by such Letter of Transmittal, to the Exchange Agent at the address
set forth below under "--Exchange Agent" on or prior to the Expiration Date.
In addition, either (i) certificates for such Outstanding Notes must be
received by the Exchange Agent along with the Letter of Transmittal, or (ii) a
timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of
such Outstanding Notes, if such procedure is available, into the Exchange
Agent's Account at DTC (the "Book-Entry Transfer Facility") pursuant to the
procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date, or (iii) the Holder must comply
with the guaranteed delivery procedures described below.
If tendered Outstanding Notes are registered in the name of the signer of
the Letter of Transmittal and the Exchange Notes to be issued in exchange
therefor are to be issued (and any untendered Outstanding Notes are to be
reissued) in the name of the registered Holder, the signature of such signer
need not be guaranteed. In any other case, the tendered Exchange Notes must be
endorsed or accompanied by written instruments of transfer in form
satisfactory to the Company and duly executed by the registered Holder and the
signature on the endorsement or instrument of transfer must be guaranteed by a
commercial bank or trust company located or having an office or correspondent
in the United States or by a member firm of a national securities exchange or
of the National Association of Securities Dealers, Inc. or by a participant in
a recognized medallion program (any of the foregoing hereinafter referred to
as an "Eligible Institution"). If the Exchange Notes and/or Outstanding Notes
not exchanged are to be delivered to an address other than that of the
registered Holder appearing on the note register for the Outstanding Notes,
the signature on the Letter of Transmittal must be guaranteed by an Eligible
Institution.
A tender will be deemed to have been received as of the date when (i) the
tendering Holder's properly completed and duly signed Letter of Transmittal
accompanied by the Outstanding Notes is received by the Exchange Agent or (ii)
a Notice of Guaranteed Delivery or letter or facsimile transmission to similar
effect (as provided above) from an Eligible Institution is received by the
Exchange Agent or (iii) the tendering Holder's properly completed and duly
signed Letter of Transmittal accompanied by Book-Entry Confirmation is
received by the Exchange Agent. Issuances of Exchange Notes in exchange for
Outstanding Notes tendered pursuant to a Notice of Guaranteed Delivery or
letter or facsimile transmission to similar effect (as provided above) by an
Eligible Institution will be made only against deposit of (i) the Letter of
Transmittal, (ii) the tendered Outstanding Notes or Book-Entry Confirmation,
as the case may be, and (iii) any other required documents.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Outstanding Notes will
be determined by the Company, whose determination will be final and binding.
The Company reserves the absolute right to reject any or all tenders not in
proper form or the acceptances for exchange of which may, in the opinion of
counsel to the Company, be unlawful. The Company also reserves the absolute
right to waive any of the conditions of the Exchange Offer or any defect or
irregularities in tenders of any particular Holder whether or not similar
defects or irregularities are waived in the case of other Holders. None of the
Company, the Exchange Agent or any other person will be under any duty to give
notification of any defects or irregularities in tenders or will incur any
liability for failure to give any such notification. The Company's
interpretation of the terms and conditions of the Exchange Offer (including
the Letter of Transmittal and the instructions thereto) will be final and
binding.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND ALL OTHER DOCUMENTS IS AT
THE ELECTION AND RISK OF THE TENDERING HOLDERS, AND DELIVERY WILL BE DEEMED
MADE ONLY WHEN ACTUALLY RECEIVED AND CONFIRMED BY THE EXCHANGE AGENT. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED, AND THAT THE MAILING BE MADE
SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE
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EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO CONSIDER OVERNIGHT
OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE DELIVERY TO THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME,
ON THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO
THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH
HOLDERS.
Book-Entry Transfer. The Exchange Agent will make a request to establish an
account with respect to the Outstanding Notes at the Book-Entry Transfer
Facility for purposes of the Exchange Offer within two business days after the
date of the Prospectus, and any financial institution that is a participant in
the Book-Entry Transfer Facility's systems may make book-entry delivery of
Outstanding Notes by causing the Book-Entry Transfer Facility to transfer such
Outstanding Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility in accordance with such Book-Entry Transfer Facility's procedures for
transfer. However, although delivery of Outstanding Notes may be effected
through Book-Entry transfer at the Book-Entry Transfer Facility, the Letter of
Transmittal or facsimile thereof, with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and
received by the Exchange Agent at the address set forth below under "Exchange
Agent" on or prior to the Expiration Date or the guaranteed delivery
procedures described below must be complied with.
Guaranteed Delivery Procedures. If a Holder desires to tender Outstanding
Notes pursuant to the Exchange Offer, but time will not permit a Letter of
Transmittal, the Outstanding Notes or other required documents to reach the
Exchange Agent on or before the Expiration Date, or the procedure for book-
entry transfer cannot be completed on a timely basis, a tender may be effected
if the Exchange Agent has received at its office a letter or facsimile
transmission from a Eligible Institution setting forth the name and address of
the tendering Holder, the names in which the Outstanding Notes are registered,
the principal amount of the Outstanding Notes being tendered and, if possible,
the certificate numbers of the Outstanding Notes to be tendered, and stating
that the tender is being made thereby and guaranteeing that within three New
York Stock Exchange trading days after the Expiration Date, the Outstanding
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, together with a properly completed and duly executed Letter of
Transmittal and any other required documents, will be delivered by such
Eligible Institution to the Exchange Agent in accordance with the procedures
outlined above. Unless Outstanding Notes being tendered by the above-described
method are deposited with the Exchange Agent (including through a Book-Entry
Confirmation) within the time period set forth above (accompanied or preceded
by a properly completed Letter of Transmittal and any other required
documents), the Company may, at its option, reject the tender. Copies of a
Notice of Guaranteed Delivery which may be used by Eligible Institutions for
the purposes described in this paragraph are available from the Exchange
Agent.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Outstanding Notes for exchange (the "Transferor")
thereby exchanges, assigns and transfers the Outstanding Notes to the Company
and irrevocably constitutes and appoints the Exchange Agent as the
Transferor's agent and attorney-in-fact to cause the Outstanding Notes to be
assigned, transferred and exchanged. The Transferor represents and warrants
that it has full power and authority to tender, exchange, assign and transfer
the Outstanding Notes and to acquire Exchange Notes issuable upon the exchange
of such tendered Outstanding Notes and that, when the same are accepted for
exchange, the Company will acquire good and unencumbered title to the tendered
Outstanding Notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim. The Transferor also
warrants that it will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary
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or desirable to complete the exchange, assignment and transfer of tendered
Outstanding Notes. The Transferor further agrees that acceptance of any
tendered Outstanding Notes by the Company and the issuance of Exchange Notes
in exchange therefor will constitute performance in full by the Company of its
obligations under the Registration Rights Agreement and that the Company will
have no further obligations or liabilities thereunder (except in certain
limited circumstances). All authority conferred by the Transferor will survive
the death, bankruptcy or incapacity of the Transferor and every obligation of
the Transferor will be binding upon the heirs, legal representatives,
successors, assigns, executors, administrators and trustees in bankruptcy of
such Transferor.
By tendering Outstanding Notes and executing the Letter of Transmittal, the
Transferor certifies that (i) it is not an affiliate of the Company or the
Guarantor or, if the Transferor is an affiliate of the Company or the
Guarantor, it will comply with the registration and prospectus requirements of
the Securities Act to the extent applicable, (ii) the Exchange Notes are being
acquired in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the Holder, (iii) the Transferor
has not entered into an arrangement or understanding with any other person to
participate in the distribution of the Exchange Notes, (iv) the Transferor is
not a broker-dealer who purchased the Outstanding Notes for resale pursuant to
an exemption under the Securities Act, and (v) the Transferor will be able to
trade the Exchange Notes acquired in the Exchange Offer without restriction
under the Securities Act.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Outstanding Notes where such Outstanding Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
WITHDRAWAL RIGHTS
Outstanding Notes tendered pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date.
For a withdrawal to be effective, a written letter or facsimile transmission
notice of withdrawal must be received by the Exchange Agent at its address set
forth in the Letter of Transmittal not later than the close of business on the
Expiration Date. Any such notice of withdrawal must specify the person named
in the Letter of Transmittal as having tendered Outstanding Notes to be
withdrawn, the certificate numbers and principal amount of Outstanding Notes
to be withdrawn, that such Holder is withdrawing its election to have such
Outstanding Notes exchanged and the name of the registered Holder of such
Outstanding Notes, and must be signed by the Holder in the same manner as the
original signature on the Letter of Transmittal (including any required
signature guarantees) or be accompanied by evidence satisfactory to the
Company that the person withdrawing the tender has succeeded to the beneficial
ownership of the Outstanding Notes being withdrawn. The Exchange Agent will
return the properly withdrawn Outstanding Notes promptly following receipt of
notice of withdrawal. If Outstanding Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Outstanding Notes and otherwise
comply with the procedures of such facility. All questions as to the validity
of notices of withdrawals, including time of receipt, will be determined by
the Company, and such determination will be final and binding on all parties.
Any Outstanding Notes which have been tendered for exchange but which are not
exchanged for any reason will be returned to the Holder thereof without cost
to such Holder (or, in the case of Outstanding Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry transfer procedures described above, such
Outstanding Notes will be credited to an account maintained with such Book-
Entry Transfer Facility for the Outstanding Notes) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Outstanding Notes may be retendered by following one of the
procedures described under "--Procedures for Tendering Outstanding Notes"
above at any time on or prior to the Expiration Date.
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ACCEPTANCE OF OUTSTANDING NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Outstanding Notes validly tendered and not
withdrawn and the issuance of the Exchange Notes will be made on the Exchange
Date. For purposes of the Exchange Offer, the Company shall be deemed to have
accepted for exchange validly tendered Outstanding Notes when, as and if the
Company has given written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering Holders of
Outstanding Notes for the purposes of receiving Exchange Notes from the
Company and causing the Outstanding Notes to be assigned, transferred and
exchanged. Upon the terms and subject to the conditions of the Exchange Offer,
delivery of Exchange Notes to be issued in exchange for accepted Outstanding
Notes will be made by the Exchange Agent promptly after acceptance of the
tendered Outstanding Notes. Any Outstanding Notes which have been tendered for
exchange but which are not exchanged for any reason will be returned to the
Holder thereof without cost to such Holder (or, in the case of Outstanding
Notes tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry procedures described
above, such Outstanding Notes will be credited to an account maintained by
such Holder with such Book-Entry Transfer Facility for the Outstanding Notes)
as soon as practicable after withdrawal, rejection of tender or termination of
the Exchange Offer.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, or any extension
of the Exchange Offer, the Company will not be required to issue Exchange
Notes in exchange for any properly tendered Outstanding Notes not previously
accepted and may terminate the Exchange Offer (by oral or written notice to
the Exchange Agent and by timely public announcement communicated, unless
otherwise required by applicable law or regulation, by making a release to the
Dow Jones News Service) or, at its option, modify or otherwise amend the
Exchange Offer, if (i) there shall be threatened, instituted or pending any
action or proceeding before, or any injunction, order or decree shall have
been issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission (a) seeking to restrain or
prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, (b) assessing or seeking any
damages as a result thereof or (c) resulting in a material delay in the
ability of the Company to accept for exchange or exchange some or all of the
Outstanding Notes pursuant to the Exchange Offer; or (ii) the Exchange Offer
shall violate any applicable law or any applicable interpretation of the staff
of the Commission.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by it with respect to all or any portion of the Exchange Offer
regardless of the circumstances (including any action or inaction by the
Company) giving rise to such condition or may be waived by the Company in
whole or in part at any time or from time to time in its sole discretion. The
failure by the Company at any time to exercise any of the foregoing rights
will not be deemed a waiver of any such right, and each right will be deemed
an ongoing right which may be asserted at any time or from time to time. In
addition, the Company has reserved the right, notwithstanding the satisfaction
of each of the foregoing conditions, to terminate or amend the Exchange Offer.
Any determination by the Company concerning the fulfillment or non-
fulfillment of any conditions will be final and binding upon all parties.
In addition, the Company will not accept for exchange any Outstanding Notes
tendered, and no Exchange Notes will be issued in exchange for any such
Outstanding Notes, if at such time any stop order shall be threatened or in
effect with respect to the Registration Statement of which this Prospectus
constitutes a part or qualification of the Indenture under the Trust Indenture
Act of 1939, as amended.
23
<PAGE>
EXCHANGE AGENT
Norwest Bank Minnesota, National Association has been appointed as the
Exchange Agent for the Exchange Offer. Questions relating to the procedure for
tendering, as well as requests for additional copies of this Prospectus or the
Letter of Transmittal and requests for Notices of Guaranteed Delivery, should
be directed to the Exchange Agent addressed as follows:
By Registered or Facsimile Transmission By Overnight Delivery:
Certified Mail: Number:
(612) 667-4927 Norwest Bank Minnesota,
N.A.
Norwest Bank Minnesota,N.A. (For Eligible 6th Street & Marquette
Avenue
P.O. Box 1517 Institutions Only) Minneapolis, MN 55479-
Minneapolis, MN 55479- Confirm by Telephone: 0113
1517 (612) 667-0252 Attn: Corporate Trust
Attn: Corporate Trust Operation
Operation
For Information Call:
(800) 344-5128
Delivery of the Letter of Transmittal to an address other than as set forth
above, or transmission of instructions via facsimile other than as set forth
above, will not constitute a valid delivery.
Norwest Bank Minnesota, National Association also acts as Trustee under the
Indenture.
SOLICITATION OF TENDERS; EXPENSES
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer. The
Company will, however, pay the Exchange Agent reasonable and customary fees
for its services and will reimburse it for reasonable out-of-pocket expenses
in connection therewith. The expenses to be incurred in connection with the
Exchange Offer, including the fees and expenses of the Exchange Agent and
printing, accounting and legal fees, will be paid by the Company and are
estimated at approximately $300,000.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those
contained in this Prospectus. If given or made, such information or
representations should not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange made
hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company since the respective dates as
of which information is given herein. The Exchange Offer is not being made to
(nor will tenders be accepted from or on behalf of) Holders of Outstanding
Notes in any jurisdiction in which the making of the Exchange Offer or the
acceptance thereof would not be in compliance with the laws of such
jurisdiction. However, the Company may, at its discretion, take such action as
it may deem necessary to make the Exchange Offer in any such jurisdiction and
extend the Exchange Offer to Holders of Outstanding Notes in such
jurisdiction. In any jurisdiction the securities laws or blue sky laws of
which require the Exchange Offer to be made by a licensed broker or dealer,
the Exchange Offer is being made on behalf of the Company by one or more
registered brokers or dealers which are licensed under the laws of such
jurisdiction.
APPRAISAL RIGHTS
Holders of Outstanding Notes will not have dissenters' rights or appraisal
rights in connection with the Exchange Offer.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the carrying value of the Outstanding
Notes as reflected in the Company's accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company upon the exchange of Outstanding Notes for Exchange
Notes. Expenses
24
<PAGE>
incurred in connection with the issuance of the Exchange Notes will be
amortized over the term of the Exchange Notes.
TRANSFER TAXES
Holders who tender their Outstanding Notes for exchange will not be
obligated to pay any transfer taxes in connection therewith except that
Holders who instruct the Company to register Exchange Notes in the name of, or
request Outstanding Notes not tendered or not accepted in the Exchange Offer
be returned to, a person other than the registered tendering Holder will be
responsible for the payment of any applicable transfer tax thereon.
FEDERAL INCOME TAX CONSEQUENCES
Holders of the Outstanding Notes contemplating acceptance of the Exchange
Offer should consult their own tax advisers with respect to their particular
circumstances and with respect to the effects of state, local or foreign tax
laws to which they may be subject. The following discussion is based upon the
provisions of the Internal Revenue Code of 1986, as amended, U.S. Treasury
regulations, rulings and judicial decisions, in each case as in effect on the
date of this Prospectus, all of which are subject to change.
An exchange of Outstanding Notes for Exchange Notes pursuant to the Exchange
Offer should be deemed not to be a sale, exchange or other taxable event for
federal income tax purposes because the exchange Senior Notes should be deemed
not to differ materially in kind or extent from the Outstanding Notes. As a
result, no material federal income tax consequences should result from an
exchange of Outstanding Notes for Exchange Notes pursuant to the Exchange
Offer. For federal income tax purposes, an Exchange Note received by a
beneficial owner of an Outstanding Note should be treated as a continuation of
the Outstanding Note in the hands of such owner. See "Certain Income Tax
Considerations."
CONSEQUENCES FOR FAILURE TO EXCHANGE
Holders of Outstanding Notes who do not exchange Outstanding Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Outstanding Notes as set forth in the
legend thereon as a consequence of the offer or sale of the Outstanding Notes
pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and applicable state
securities laws. In general, the Outstanding Notes may not be offered or sold
unless registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and applicable
state securities laws. The Company does not currently anticipate that it will
register the Outstanding Notes under the Securities Act.
Upon consummation of the Exchange Offer, due to the restrictions on transfer
of the Outstanding Notes and the absence of such restrictions applicable to
the Exchange Notes, it is likely that the market, if any, for Outstanding
Notes will be relatively less liquid than the market for Exchange Notes.
Consequently, Holders of Outstanding Notes who do not participate in the
Exchange Offer could experience significant diminution in the value of their
Outstanding Notes, compared to the value of the Exchange Notes.
25
<PAGE>
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of Exchange
Notes offered hereby, the terms of which are identical in all material
respects to those of the Outstanding Notes, except for certain transfer
restrictions and registration rights relating to the Outstanding Notes. The
Outstanding Notes surrendered in exchange for the Exchange Notes will be
cancelled and cannot be reissued. The issuance of the Exchange Notes will not
result in any change in the aggregate indebtedness of the Company.
The net proceeds from the sale of the Outstanding Notes was approximately
$193.5 million. The Company used $143.3 million of the net proceeds to repay
the Increasing Rate Notes due 2000, including approximately $3.3 million of
accrued and unpaid interest through the date of redemption (July 25, 1997).
The net proceeds from the sale of the Increasing Rate Notes were used to
partially finance the Acquisition. The interest rate on the Increasing Rate
Notes was initially 10% per annum. On September 26, 1997, the Company used
$50.0 million of the net proceeds from the sale of the Outstanding Notes to
make a $40.0 million dividend payment and a $10.0 million loan to Dart to fund
the RGL Settlement.
26
<PAGE>
PRO FORMA CONSOLIDATED CAPITALIZATION
The following table sets forth the unaudited consolidated pro forma cash,
cash equivalents and short-term investments and capitalization of the Company
as of August 2, 1997 and as adjusted to give effect to (i) the application of
net proceeds from the sale of the Outstanding Notes to make a payment of $50
million ($40 million dividend and $10 million loan) to Dart to fund a
Settlement with certain of Dart's stockholders and (ii) the use of $25 million
of existing cash, cash equivalents and short-term investments to extend a loan
to Dart.
<TABLE>
<CAPTION>
AUGUST 2, 1997
--------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
LIQUID ASSETS:
Cash and cash equivalents.................... $ 14,058 (4,769) $ 9,289
Marketable debt securities................... 20,013 (20,013) --
Restricted Proceeds.......................... 50,218 (50,218) --
-------- ------- --------
Total liquid assets......................... $ 84,289 (75,000)(a) $ 9,289
======== ======= ========
LONG-TERM DEBT:
9 3/4% Senior Notes due 2000................. $200,000 -- $200,000
Capital lease obligation..................... 11,549 -- 11,549
-------- ------- --------
Total long-term debt........................ 211,549 -- 211,549
-------- ------- --------
STOCKHOLDERS' EQUITY:
Class A Common Stock......................... 117 -- 117
Class B Common Stock......................... 50 -- 50
Retained earnings............................ 45,638 (40,000)(b) 5,638
-------- ------- --------
Total Stockholders' Equity.................. 45,805 (40,000) 5,805
-------- ------- --------
Total capitalization........................ $257,354 (40,000) $217,354
======== ======= ========
</TABLE>
- --------
(a) Reflects the following pro forma adjustments (dollars, in thousands):
<TABLE>
<S> <C>
Dividend to Dart from Restricted Proceeds........................... $40,000
Loan to Dart from Restricted Proceeds............................... 10,000
Loan to Dart from existing cash, cash equivalents and short-term
investments........................................................ 25,000
-------
Decrease in cash, cash equivalents and short-term investments..... $75,000
=======
</TABLE>
(b) Reflects $40 million dividend paid to Dart on September 26, 1997 in
connection with the RGL Settlement.
27
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements of the
Company for the 52 weeks and the 31 weeks ended February 1, 1997 and for the
26 weeks ended August 2, 1997, give effect to (i) the sale of the Outstanding
Notes and the application of the net proceeds therefrom to repay the
Increasing Rate Notes and to make a payment of $50 million ($40 million
dividend and $10 million loan) to Dart to fund the RGL Settlement, (ii) the
use of $25 million of existing cash, cash equivalents and short-term
investments to extend a loan to Dart and (iii) the push-down accounting
treatment for the Acquisition by Dart, as though such transactions occurred on
February 4, 1996 with respect to the pro forma operating data and as of August
2, 1997 with respect to pro forma balance sheet data.
These unaudited pro forma consolidated financial statements are based upon
management's estimate of the effects of the transactions noted above. The
unaudited pro forma financial statements are not necessarily indicative of
either future results of operations or of results that might have been
achieved if the transactions had been consummated as of the indicated dates.
The unaudited pro forma financial statements should be read in conjunction
with the historical consolidated financial statements of Shoppers and the
notes thereto that appear elsewhere in this Prospectus.
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
52 WEEKS ENDED 31 WEEKS ENDED 26 WEEKS ENDED
FEBRUARY 1, 1997 FEBRUARY 1, 1997 AUGUST 2, 1997
----------------------------- ----------------------------- --------------------------
PRO PRO PRO
ACTUAL ADJ. FORMA ACTUAL ADJ. FORMA ACTUAL ADJ. FORMA
-------- ------- -------- -------- ------- -------- -------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................... $850,875 -- $850,875 $511,025 -- $511,025 $419,524 -- $419,524
Cost of sales........... 659,929 -- 659,929 398,129 -- 398,129 320,364 -- 320,364
-------- ------- -------- -------- ------- -------- -------- ---- --------
Gross profit............ 190,946 -- 190,946 112,896 -- 112,896 99,160 -- 99,160
Selling and
administrative
expenses............... 154,594 -- 154,594 94,304 -- 94,304 76,677 -- 76,677
Depreciation and
amortization........... 8,720 (3,205)(a) 5,515 4,573 (1,277)(a) 3,296 2,910 -- 2,910
Amortization of
goodwill............... -- 3,721 (b) 3,721 -- 2,171 (b) 2,171 1,861 -- 1,861
Amortization of lease
rights................. -- 616 (b) 616 -- 360 (b) 360 308 -- 308
-------- ------- -------- -------- ------- -------- -------- ---- --------
Operating income........ 27,632 (1,132) 26,500 14,019 (1,254) 12,765 17,404 -- 17,404
Interest income......... 5,985 (2,572)(c) 3,413 3,526 (1,492)(c) 2,034 1,797 (91)(c) 1,706
Interest expense........ 1,645 20,475 (d) 22,120 710 11,944 (d) 12,654 10,392 652 (d) 11,044
-------- ------- -------- -------- ------- -------- -------- ---- --------
Income before income
taxes.................. 31,972 (24,179) 7,793 16,835 (14,690) 2,145 8,809 (743) 8,066
Income taxes............ 11,409 (7,276)(e) 4,133 6,380 (4,939)(e) 1,441 3,851 (178)(e) 3,673
-------- ------- -------- -------- ------- -------- -------- ---- --------
Net income before
extraordinary item and
the cumulative effect
of a change of
accounting principle... $ 20,563 (16,903) $ 3,660 $ 10,455 (9,751) $ 704 $ 4,958 (565) $ 4,393
======== ======= ======== ======== ======= ======== ======== ==== ========
</TABLE>
(see footnotes on the following page)
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS
(a) Reflects the pro forma depreciation adjustments for the new basis of the
property and equipment and the use of the straight-line depreciation
method as of the Acquisition.
(b) Reflects the amortization of excess purchase price over the net book value
of assets acquired arising from the Acquisition, on a straight-line basis,
over a 40 year period and the amortization of lease rights, arising from
the Acquisition on a straight-line basis over the life of the leases.
(c) The changes in interest income are attributable to decreases of $5.9
million, $3.5 million and $1.8 million for the 52 weeks and 31 weeks ended
February 1, 1997 and the 26 weeks ended August 2, 1997, respectively, as a
result of the reduction in cash, cash equivalents and short-term
investments from repayment of the bridge financing for the Acquisition and
dividend payments to Dart offset by interest income of $3.4 million, $2.0
million and $1.7 million for the 52 weeks and 31 weeks ended February 1,
1997 and the 26 weeks ended August 2, 1997, respectively, related to a $35
million loan from Shoppers to Dart. On September 26, 1997, Shoppers made a
$10 million loan to Dart, which loan is evidenced by a promissory note,
bears interest at a rate of 9 3/4% per annum and is due no later than June
15, 2004. As authorized by its board of directors, Dart may borrow an
additional $25 million from the Company, in which event, the terms and
conditions of such loan will be the same as the $10 million loan.
(d) The Senior Notes have a fixed interest rate of 9.75%. Deferred financing
costs ($6.8 million) are amortized over seven years on a straight-line
basis.
<TABLE>
<CAPTION>
52 WEEKS ENDED 31 WEEKS ENDED 26 WEEKS ENDED
FEBRUARY 1, 1997 FEBRUARY 1, 1997 AUGUST 2, 1997
---------------- ---------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Historical interest
expense.................. $ 1,645 $ 710 $ 9,448
Historical amortization of
deferred financing....... -- -- 944
Add: Interest on Senior
Notes............... 19,500 11,375 9,750
Amortization of new
financing costs..... 975 569 486
Deduct:
Interest on Increasing
Rate Notes.......... -- -- (6,582)
Interest on Senior Notes
from June 26, 1997.. -- -- (2,058)
Historical amortization of
deferred financing.. -- -- (944)
------- ------- -------
Pro forma interest
expense.................. $22,120 $12,654 $11,044
======= ======= =======
</TABLE>
The pro forma income statements for the periods presented do not reflect
deferred financing costs of approximately $6 million related to the
Increasing Rate Notes which was written off as an extraordinary item upon
consummation of the sale of the Outstanding Notes.
(e) Reflects income taxes at a combined statutory rate net of the tax effect
of non-deductible goodwill.
29
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF AUGUST 2, 1997
---------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 14,058 (4,769) $ 9,289
Marketable debt securities................. 20,013 (20,013) --
Restricted proceeds........................ 50,218 (50,218) --
Accounts receivable........................ 6,735 -- 6,735
Merchandise inventories.................... 28,484 -- 28,484
Prepaid expenses........................... 1,549 -- 1,549
Due from affiliate......................... 522 -- 522
-------- ------- --------
Total current assets..................... 121,579 (75,000)(a) 46,579
Property and equipment at cost:
Land and buildings......................... 7,503 -- 7,503
Store and warehouse equipment.............. 60,992 -- 60,992
Office and automotive equipment............ 2,055 -- 2,055
Leasehold improvements..................... 3,842 -- 3,842
-------- ------- --------
74,392 -- 74,392
Accumulated depreciation and amortization.... (35,298) -- (35,298)
-------- ------- --------
Net property and equipment................. 39,094 -- 39,094
Deferred financing costs..................... 6,174 -- 6,174
Excess purchase price over net assets
acquired.................................... 146,979 -- 146,979
Lease rights................................. 11,996 -- 11,996
Note receivable.............................. -- 35,000 (a) 35,000
Other assets................................. 876 -- 876
-------- ------- --------
Total assets............................. $326,698 (40,000) $286,698
======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 38,865 -- $ 38,865
Accrued expenses:
Salary and benefits........................ 6,645 -- 6,645
Taxes other than income.................... 2,447 -- 2,447
Other...................................... 13,023 -- 13,023
Income taxes payable....................... 518 518
-------- ------- --------
Total current liabilities................ 61,498 -- 61,498
Senior Notes................................. 200,000 -- 200,000
Capital lease obligations.................... 11,549 -- 11,549
Deferred income taxes........................ 4,845 -- 4,845
Other liabilities............................ 3,001 -- 3,001
-------- ------- --------
Total liabilities........................ 280,893 -- 280,893
Stockholders' equity:
Class A common stock....................... 117 -- 117
Class B common stock....................... 50 -- 50
Retained earnings.......................... 45,638 (40,000)(b) 5,638
-------- ------- --------
Total stockholders' equity............... 45,805 (40,000) 5,805
-------- ------- --------
Total liabilities and stockholders'
equity................................ $326,698 (40,000) $286,698
======== ======= ========
</TABLE>
30
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(a) Reflects the following pro forma adjustments (dollars in thousands):
<TABLE>
<S> <C>
Dividend to Dart from Restricted Proceeds........................... $40,000
Loan to Dart from Restricted Proceeds............................... 10,000
Loan to Dart from existing cash, cash equivalents and short-term
investments........................................................ 25,000
-------
Decrease in cash, cash equivalents and short-term investments..... $75,000
=======
</TABLE>
(b) Reflects $40 million dividend paid to Dart on September 26, 1997 in
connection with the RGL Settlement.
31
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth summary historical financial data of Shoppers
as of and for the 52 weeks ended June 27, 1992, the 53 weeks ended July 3,
1993, the 52 weeks ended July 2, 1994, the 52 weeks ended July 1, 1995 and the
52 weeks ended June 29, 1996, which have been derived from the financial
statements audited by Arthur Andersen LLP, Shoppers' independent public
accountants. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements of Shoppers, together with
the related notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------
JUNE 27, JULY 3, JULY 2, JULY 1, JUNE 29,
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales........................... $639,920 $718,967 $750,340 $790,842 $835,971
Cost of sales................... 506,194 562,461 593,063 616,521 651,986
-------- -------- -------- -------- --------
Gross profit(a)................. 133,726 156,506 157,277 174,321 183,985
Selling and administrative
expenses(b).................... 107,983 124,509 127,643 136,798 149,570
Depreciation and
amortization(c)................ 10,861 12,045 10,785 8,529 8,913
Restructuring charges(d)........ -- 1,012 -- -- --
-------- -------- -------- -------- --------
Operating income................ 14,882 18,940 18,849 28,994 25,502
Interest income................. 1,638 1,474 2,189 4,682 5,789
Interest expense................ 1,519 1,576 1,426 1,451 1,771
Insurance settlement gain
(loss)(e)...................... -- -- 1,360 2,065 (355)
Provision for income taxes...... 5,757 7,205 8,043 14,764 10,462
-------- -------- -------- -------- --------
Net income...................... $ 9,244 $ 11,633 $ 12,929 $ 19,526 $ 18,703
-------- -------- -------- -------- --------
Ratio of earnings to fixed
charges(f)..................... 4.1x 4.2x 4.3x 6.4x 5.1x
OTHER DATA:
Stores open at end of period.... 32 35 35 33 34
Capital expenditures............ $ 14,553 $ 6,909 $ 5,112 $ 4,693 $ 7,355
BALANCE SHEET DATA (END OF
PERIOD):
Cash, cash equivalents and
short-term investments......... $ 44,913 $ 56,625 $ 69,789 $ 97,003 $106,640
Working capital deficit(g)...... 19,053 15,715 9,993 15,551 14,364
Total assets.................... 115,315 125,612 140,614 162,003 171,022
Total debt...................... 9,209 9,502 9,742 9,950 10,069
Stockholders' equity............ 51,242 62,875 75,804 95,330 104,033
</TABLE>
- --------
(a) Gross profit is net of LIFO expense of $329,000, $436,000, $364,000,
$877,000 and $905,000 in the 52 weeks ended June 27, 1992, July 3, 1993
(53 weeks), July 2, 1994, July 1, 1995 and June 29, 1996, respectively.
(b) Selling and administrative expenses include a reversal of a prior period
expense related to closed stores and remodels of $500,000 for the 52 weeks
ended July 1, 1995 and reserves related to closed stores and remodels of
$294,000 for the 52 weeks ended June 29, 1996. Selling and administrative
expenses also include a $500,000 charge for reserves against a related
party receivable for the 52 weeks ended July 3, 1993 and July 1, 1995.
(c) In connection with the Acquisition the Company commenced using Dart's method
of depreciating property and equipment on a straight-line basis. The
following pro forma analysis gives effect to the change in depreciation
method, assuming the new depreciation method was applied retroactively.
32
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JUNE 27, JULY 3, JULY 2, JULY 1, JUNE 29,
1992 1993 1994 1995 1996
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Pro forma amounts:
Net Income........................ $10,606 $13,491 $13,961 $19,170 $18,413
Earning per common share......... $318.18 $404.73 $418.83 $575.10 $552.39
Historical amounts:
Net Income........................ $ 9,244 $11,633 $12,929 $19,526 $18,703
Earnings per common share........ $277.32 $348.99 $387.87 $585.78 $561.09
</TABLE>
(d) Represents charges associated with the sale of Total Beverage Corp.
(e) Represents an insurance settlement relating to one store that incurred
significant fire damage in June 1994.
(f) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income before income taxes, plus fixed charges.
"Fixed charges" consist of interest expense on all indebtedness including
amortization of deferred financing costs and the portion of operating
lease rental payments that is representative of the interest factor.
(g) For purposes of this presentation, working capital deficit has been
defined as working capital less cash, cash equivalents and short-term
investments to present prior period comparable balances assuming the use
of these liquid assets to fund the Acquisition and for subsequent
dividends and loans to Dart.
33
<PAGE>
The selected historical financial data as of and for the 31 weeks ended
February 3, 1996, the 31 weeks ended February 1, 1997, the 26 weeks ended
August 3, 1996 and the 26 weeks ended August 2, 1997 have been derived from
unaudited interim consolidated financial statements, which, in the opinion of
management, reflect all material adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of such data. Results
of operations for the 26 weeks ended August 2, 1997 are not necessarily
indicative of the results that may be expected for the full year ended January
31, 1998. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements of Shoppers, together with
the related notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
31 WEEKS ENDED 26 WEEKS ENDED
----------------------- -------------------
FEBRUARY 3, FEBRUARY 1, AUGUST 3, AUGUST 2,
1996 1997 1996 1997
----------- ----------- --------- ---------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING DATA:
Sales............................. $496,121 $511,025 $419,653 $419,524
Cost of sales..................... 390,186 398,129 323,474 320,364
-------- -------- -------- --------
Gross profit(a)................. 105,935 112,896 96,179 99,160
Selling and administrative
expenses(b)...................... 89,280 94,304 74,379 76,677
Depreciation and amortization(c).. 4,766 4,573 4,844 5,079
-------- -------- -------- --------
Operating income................ 11,889 14,019 16,956 17,404
Interest income................... 3,330 3,526 3,113 1,797
Interest expense.................. 836 710 1,062 10,392
Insurance settlement (loss)(d).... (355) -- -- --
Provision for income taxes........ 5,433 6,380 6,579 3,851
-------- -------- -------- --------
Income before extraordinary item
and cumulative effect of
accounting change................ 8,595 10,455 12,428 4,958
Extraordinary loss................ -- -- -- (3,126)
Cumulative effect of accounting
change, net...................... -- -- -- 1,729
-------- -------- -------- --------
Net income(e)..................... $ 8,595 $ 10,455 $ 12,428 $ 3,561
-------- -------- -------- --------
Ratio of earnings to fixed
charges(f)....................... 4.6x 4.9x 6.1x 1.7x
OTHER DATA:
Stores open at end of period...... 34 34 34 35
Capital expenditures.............. $ 3,205 $ 5,280 $ 4,932 $ 5,861
BALANCE SHEET DATA (END OF
PERIOD):
Cash, cash equivalents and short-
term investments................. $ 98,823 $108,738 $112,079 $ 84,289
Working capital deficit(g)........ 14,906 15,958 18,568 24,208
Total assets...................... 164,348 179,008 177,229 326,698
Total debt........................ 9,965 10,035 10,091 211,549
Stockholders' equity.............. 93,925 104,488 106,351 45,805
</TABLE>
- --------
(a) Gross profit is net of LIFO expense of $530,000 in the 31 weeks ended
February 3, 1996 and February 1, 1997 and $450,000 in the 26 weeks ended
August 3, 1996 and August 2, 1997.
(b) Selling and administrative expenses include a charge for closed store and
remodels of $294,000 and $850,000 in the 31 weeks ended February 3, 1996
and February 1, 1997, respectively.
(c) In connection with the Acquisition the Company commenced using Dart's
method of depreciating property and equipment on a straight-line basis. The
following pro forma analysis gives effect to the change in depreciation
method, assuming the new depreciation method was applied retroactively.
34
<PAGE>
<TABLE>
<CAPTION>
31 WEEKS ENDED 26 WEEKS ENDED
----------------------- -------------------
FEBRUARY 3, FEBRUARY 1, AUGUST 3, AUGUST 2,
1996 1997 1996 1997
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Pro forma amounts:
Income before extraordinary
item.......................... $ 8,422 $10,186 $12,280 $ 4,958
Earnings per common share..... $252.66 $305.58 $368.40 $148.74
Net Income..................... $ 8,422 $10,186 $12,280 $ 1,832
Earning per common share...... $252.66 $305.58 $368.40 $ 54.96
Historical amounts:
Income before extraordinary
item.......................... $ 8,595 $10,455 $12,428 $ 4,958
Earnings per common share..... $257.85 $313.65 $372.84 $148.74
Net Income..................... $ 8,595 $10,455 $12,428 $ 3,561
Earnings per common share..... $257.85 $313.65 $372.84 $106.83
</TABLE>
(d) Represents an insurance settlement relating to one store that incurred
significant damage in June 1994.
(e) Net income for the 26 weeks ended August 2, 1997 includes an extraordinary
loss of $3,126,000, net of income taxes of $2,150,000, for the write-off
of deferred financing costs associated with the Increasing Rate Notes.
(f) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income before income taxes, plus fixed charges.
"Fixed charges" consist of interest expense on all indebtedness (including
amortization of deferred financing costs) and the portion of operating
lease rental payments that is representative of the interest factor.
(g) For purposes of this presentation, working capital deficit has been
defined as working capital less cash, cash equivalents and short-term
investments to present prior period comparable balances assuming the use
of these liquid assets to fund the Acquisition and for subsequent
dividends and loans to Dart.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with the
Consolidated Financial Statements of the Company, together with the related
notes thereto, and other information included elsewhere in this Prospectus.
For purposes of this discussion and analysis, comparable store sales growth is
computed for those stores that operated for both the full periods being
compared (including stores that were remodeled or expanded during either
period).
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 Greater Washington, D.C. 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. See "Risk
Factors--Controlling Stockholder." 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 transaction.
For purposes of the Standstill Order, the phrase "extraordinary actions" means
any transaction, contract or agreement, the value of which exceeds $3 million.
RESULTS OF OPERATIONS
The following table sets forth the major components of Shoppers' statement
of operations expressed as a percentage of sales:
<TABLE>
<CAPTION>
52 WEEKS ENDED 31 WEEKS ENDED 26 WEEKS ENDED
--------------------------------------- ------------------------- -----------------------------
JULY 2, 1994 JULY 1, 1995 JUNE 29, 1996 FEB. 3, 1996 FEB. 1, 1997 AUGUST 3, 1996 AUGUST 2, 1997
------------ ------------ ------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........... 79.0 78.0 78.0 78.6 77.9 77.1 76.4
----- ----- ----- ----- ----- ----- -----
Gross profit............ 21.0 22.0 22.0 21.4 22.1 22.9 23.6
Selling and
administration
expenses............... 17.0 17.3 17.9 18.0 18.5 17.7 18.3
Depreciation and
amortization........... 1.4 1.1 1.1 1.0 0.9 1.2 1.2
----- ----- ----- ----- ----- ----- -----
Operating income........ 2.5 3.7 3.1 2.4 2.7 4.0 4.1
Interest income......... 0.3 0.6 0.7 0.7 0.7 0.7 0.4
Interest expense........ 0.2 0.2 0.2 0.2 0.1 0.3 2.5
Insurance settlement
gain (loss)............ 0.2 0.3 (0.0) (0.1) -- -- --
----- ----- ----- ----- ----- ----- -----
Income before income
taxes.................. 2.8 4.3 3.5 2.8 3.3 4.5 2.1
Provision for income
taxes.................. 1.1 1.9 1.3 1.1 1.2 1.6 .9
----- ----- ----- ----- ----- ----- -----
Income before
extraordinary item and
cumulative effect of
accounting change...... 1.7 2.5 2.2 1.7 2.0 3.0 1.2
===== ===== ===== ===== ===== ===== =====
</TABLE>
36
<PAGE>
26 WEEKS ENDED AUGUST 2, 1997 COMPARED WITH THE 26 WEEKS ENDED AUGUST 3, 1996
Sales. Sales decreased by $0.2 million, from $419.7 million during the 26
weeks ended August 3, 1996 to $419.5 million during the 26 weeks ended August
2, 1997. Comparable store sales decreased 0.5% during the 26 weeks ended
August 2, 1997. The decrease was the result of extremely competitive market
conditions affecting Greater Washington, D.C., including the expansion of
other supermarket chains into this market.
Gross Profit. Gross profit increased by $3.0 million (3.1%), from $96.2
million during the 26 weeks ended August 3, 1996 to $99.2 million during the
26 weeks ended August 2, 1997. Gross profit, as a percentage of sales,
increased to 23.6% during the 26 weeks ended August 2, 1997 from 22.9% during
the 26 weeks ended August 3, 1996. The increase was 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. Selling and Administrative Expenses
("S&A") increased by $2.3 million (3.1%), from $74.4 million during the 26
weeks ended August 3, 1996 to $76.7 million during the 26 weeks ended August
2, 1997. S&A, as a percentage of sales, increased from 17.7% during the 26
weeks ended August 3, 1996 to 18.3% during the 26 weeks ended August 2, 1997.
The increase was primarily attributable to increased payroll costs associated
with negotiated union rates and store remodeling, to expenses associated with
a new store opened in July 1997 and a new store opened in August 1997.
Depreciation and Amortization. Depreciation and Amortization ("D&A")
increased $0.3 million from $4.8 million during the 26 weeks ended August 3,
1996 to $5.1 million during the 26 weeks ended August 2, 1997. The increase
was primarily due to additional depreciation and amortization associated with
goodwill and lease rights, as well as with fixed assets purchased for the new
store opened in 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 six months ended August
2, 1997. Depreciation expense for the 26 weeks ended August 3, 1996 would have
been $0.1 million more using the straight-line basis.
Operating Income. Operating income was $17.4 million for the 26 weeks ended
August 2, 1997 compared to $17.0 million during the same period in the prior
year. The increase was attributed primarily to the higher gross profits.
Interest Income and Expense. Interest income decreased $1.3 million during
the 26 weeks ended August 2, 1997 compared to the 26 weeks ended August 3,
1996 due to a reduction of funds available for short-term investing as a
result of the repayment of the bridge financing associated with the
Acquisition. Interest expense increased $9.3 million from $1.1 million during
the 26 weeks ended August 3, 1996 to $10.4 million during the 26 weeks ended
August 2, 1997 as a result of interest paid on the Increasing Rate Notes,
interest accrued on the Senior Notes and the amortization of financing costs.
Income Taxes. The effective income tax rate for the 26 weeks ended August 2,
1997 was 43.7% compared to 34.6% for the 26 weeks ended August 3, 1996. The
increase was primarily attributable to nondeductible amortization of
Acquisition-related goodwill.
Net income. Net income decreased by $10.6 million, from $12.4 million during
the 26 weeks ended August 3, 1996 to $1.8 million during the 26 weeks ended
August 2, 1997. These decreases were primarily attributable to increased
interest expense associated with the Company's indebtedness and an
extraordinary loss of $3.1 million, representing the write-off of the
unamortized portion of the financing costs associated with the Increasing Rate
Notes, net of taxes of approximately $2.2 million.
31 WEEKS ENDED FEBRUARY 1, 1997 COMPARED WITH THE 31 WEEKS ENDED FEBRUARY 3,
1996
Sales. Sales increased $14.9 million (3.0%), from $496.1 million during the
31 weeks ended February 3, 1996 to $511.0 million during the 31 weeks ended
February 1, 1997. The increase resulted primarily from sales at a new store
that was open for the entire 31 weeks ended February 1, 1997 and opened for 19
of the 31 weeks
37
<PAGE>
in the prior year. Comparable store sales growth of 0.8% was due primarily to
sales increases at two remodeled stores that were partially offset by a sales
reduction in a store affected by the new Shoppers Club and the stores affected
by the remodels.
Gross Profit. Gross profit increased $7.0 million (6.6%), from $105.9
million during the 31 weeks ended February 3, 1996 to $112.9 million during
the 31 weeks ended February 1, 1997. The increase was due to the increase in
sales and an increase in gross profit as a percentage of sales from 21.4% for
the 31 weeks ended February 3, 1996 to 22.1% for the 31 weeks ended February
1, 1997. The percentage increase in the gross profit is attributed primarily
to the slightly higher gross profits achieved in the grocery, meat and produce
departments.
Selling and Administrative Expenses. S&A increased $5.0 million (5.6%), from
$89.3 million during the 31 weeks ended February 3, 1996 to $94.3 million
during the 31 weeks ended February 1, 1997. S&A increased as a percentage of
sales from 18.0% of sales during the 31 weeks ended February 3, 1996 to 18.5%
of sales during the 31 weeks ended February 1, 1997. The increase was
primarily attributable to increases in payroll costs associated with
negotiated union rates and store remodelings, closed store reserves, insurance
reserves, advertising costs and credit and debit card fees due to a larger
portion of such sales.
Depreciation and Amortization. D&A decreased from $4.8 million during the 31
weeks ended February 3, 1996 to $4.6 million during the 31 weeks ended
February 1, 1997. D&A decreased from 1.0% of sales during the 31 weeks ended
February 3, 1996 to 0.9% of sales during the 31 weeks ended February 1, 1997.
Operating Income. Operating income for the 31 weeks ended February 1, 1997
increased $2.1 million (17.9%), from the 31 weeks ended February 3, 1996 as a
result of the factors discussed above.
Interest Income and Expense. Interest income increased from $3.3 million
during the 31 weeks ended February 3, 1996 to $3.5 million during the 31 weeks
ended February 1, 1997. Interest income increased as a result of increased
funds available for short-term investments. Interest expense decreased from
$0.8 million during the 31 weeks ended February 3, 1996 to $0.7 million during
the 31 weeks ended February 1, 1997.
Net Income. Net income increased to $10.5 million during the 31 weeks ended
February 1, 1997 from net income of $8.6 million during the 31 weeks ended
February 3, 1996. Income taxes were recorded at an effective rate of 37.9%
during the 31 weeks ended February 1, 1997 compared to 38.7% during the 31
weeks ended February 3, 1996.
52 WEEKS ENDED JUNE 29, 1996 COMPARED WITH THE 52 WEEKS ENDED JULY 1, 1995
Sales. Sales increased $45.2 million (5.7%), from $790.8 million in fiscal
1995 to $836.0 million in fiscal 1996. The increase resulted primarily from a
1.7% increase in comparable store sales, the opening of one new store in
fiscal 1996 and the restoration of one store which was temporarily closed due
to fire damage. The increase in comparable store sales growth was primarily
attributable to sales increases during the severe winter conditions in Greater
Washington, D.C.
Gross Profit. Gross profit increased $9.7 million (5.6%), from $174.3
million in fiscal 1995 to $184.0 million in fiscal 1996. Gross profit as a
percentage of sales remained unchanged at 22.0%.
Selling and Administrative Expenses. S&A increased $12.8 million (9.4%),
from $136.8 million in fiscal 1995 to $149.6 million in fiscal 1996. S&A
increased from 17.3% of sales in fiscal 1995 to 17.9% of sales in fiscal 1996.
S&A increased as a percentage of sales in fiscal 1996 primarily due to
increased payroll and payroll benefit costs.
Depreciation and Amortization. D&A increased $0.4 million (4.5%), from $8.5
million in fiscal 1995 to $8.9 million in fiscal 1996. D&A as a percentage of
sales remained unchanged at 1.1%.
Operating Income. Operating income for fiscal 1996 decreased $3.5 million
(12.1%), from $29.0 million in fiscal 1995 to $25.5 million in fiscal 1996 as
a result of the factors discussed above.
38
<PAGE>
Interest Income and Expense. Interest income increased from $4.7 million in
fiscal 1995 to $5.8 million in fiscal 1996 primarily due to increased funds
available for short-term investments. Interest expense increased from $1.5
million in fiscal 1995 to $1.8 million in fiscal 1996. The increase in
interest expense was due primarily to interest payments as a result of a
federal income tax audit.
Net Income. Net income decreased to $18.7 million in fiscal 1996 from $19.5
million in fiscal 1995. The decrease in net income resulted from factors
discussed above. In addition, the effective tax rate decreased from 43.1% in
fiscal 1995 to 35.9% in fiscal 1996 as a result of a decrease in the effective
rate paid for state income taxes and a decrease in estimated federal income
tax contingencies.
52 WEEKS ENDED JULY 1, 1995 COMPARED WITH THE 52 WEEKS ENDED JULY 2, 1994.
Sales. Sales increased $40.5 million (5.4%), from $750.3 million in fiscal
1994 to $790.8 million in fiscal 1995. The increase resulted primarily from a
7.3% increase in comparable store sales, partially offset by the closing of
two stores in fiscal 1995. The comparable store sales growth increase was
primarily attributable to the continuing maturation of several stores, an
aggressive advertising campaign and the introduction of debit and credit card
payment methods.
Gross Profit. Gross profit increased $17.0 million (10.8%), from $157.3
million in fiscal 1994 to $174.3 million in fiscal 1995. Gross profit as a
percentage of sales increased from 21.0% in fiscal 1994 to 22.0% in fiscal
1995 due primarily to higher support of merchandising programs by vendors.
Selling and Administrative Expenses. S&A increased $9.2 million (7.2%), from
$127.6 million in fiscal 1994 to $136.8 million in fiscal 1995. S&A increased
from 17.0% of sales in fiscal 1994 to 17.3% of sales in fiscal 1995. The
increase in S&A was primarily the result of increased payroll costs and, to a
lesser extent, credit card fees as a result of Shoppers' new policy of
accepting credit cards.
Depreciation and Amortization. D&A decreased $2.3 million (21.3%), from
$10.8 million in fiscal 1994 to $8.5 million in fiscal 1995. D&A decreased
from 1.4% of sales in fiscal 1994 to 1.1% of sales in fiscal 1995. The
decrease in D&A was primarily the result of a decrease in store openings and
remodelings, compared to the past three years in conjunction with the use, by
Shoppers, of accelerated methods of depreciation.
Operating Income. Operating income increased $10.2 million (53.8%), from
$18.8 million in fiscal 1994 to $29.0 million in fiscal 1995 as a result of
the factors described above.
Interest Income and Expense. Interest income increased from $2.2 million in
fiscal 1994 to $4.7 million in fiscal 1995 as a result of increased funds
available for short-term investments. Interest expense was $1.4 million in
fiscal 1994 and $1.5 million in fiscal 1995.
Net Income. Net income increased to $19.5 million in fiscal 1995 from $12.9
million in fiscal 1994. The increase in net income resulted from the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are expected to be cash flow
from operations and borrowings under 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 and meet debt service
requirements.
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 August 2, 1997. These letters of credit will mature at
various dates through December 1998.
39
<PAGE>
Shoppers generated approximately $27.0 million of cash from operating
activities during the 52-week period ended June 29, 1996 (compared to $31.9
million during the 52-week period ended July 1, 1995). For the 31 weeks ended
February 1, 1997, operating activities generated $17.4 million of cash. For
the 26 weeks ended August 2, 1997, operating activities generated $17.4
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 financing capital
expenditures and other investing activities. During the last 70 months,
Shoppers' operating activities have generated over $130.0 million of cash,
which it has used to invest in marketable securities, to pay for capital
expenditures and to provide distributions to stockholders. At August 2, 1997,
Shoppers had a working capital deficit (excluding cash, cash equivalents and
short-term investments) of $24.2 million.
Shoppers' cash used in investing activities was $52.1 million for the 52
weeks ended June 29, 1996. Investing activities consisted of capital
expenditures of $7.4 million and related primarily to new stores ($2.4
million), store remodelings ($4.2 million) and general store maintenance ($0.6
million) and purchase of short-term investments of $44.7 million. For the 31
weeks ended February 1, 1997, investing activities provided $2.8 million to
Shoppers from the sale of $8.1 million of short-term investments, partially
offset by $5.3 million of capital expenditures. For the 26 weeks ended August
2, 1997, investing activities provided $69.1 million to Shoppers from the sale
of $75.0 million of short-term investments, which amount was partially offset
by $5.9 million of capital expenditures.
Shoppers estimates that it will make capital expenditures of approximately
$11.5 million in 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 related to one store scheduled to open in the
following fiscal year is estimated to be approximately $3.5 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. See "Business--
Acquisition of the Company by Dart." In addition, Shoppers paid approximately
$7.2 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, the Company sold the Outstanding Notes and received net
proceeds of approximately $193.5 million. The Company used $143.3 million of
the net proceeds to repay the Increasing Rate Notes (including accrued
interest) in July 1997 and $50 million of the net proceeds to make a $40
million dividend and $10 million loan to Dart in September 1997.
Shoppers' current interest expense consists primarily of interest on the
Senior Notes and capital lease obligations. Interest expense decreased to $0.7
million from $0.8 million during the 31 weeks ended February 1, 1997 compared
to the 31 weeks ended February 3, 1996. Interest expense increased $9.3
million from $1.1 million during the 26 weeks ended August 3, 1996 to $10.4
million during the 26 weeks ended August 2, 1997 due to the interest paid on
the Increasing Rate Notes, interest accrued on the Senior Notes and
amortization of financing costs.
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.
EFFECTS OF INFLATION
During the past several years, the rate of general inflation has been
relatively low and has not had a significant impact on Shoppers' business.
40
<PAGE>
BUSINESS
THE COMPANY
Shoppers is a leading supermarket operator in Greater Washington, D.C. (as
defined below), operating 37 stores that target the price-conscious segment of
the market in densely populated suburban areas under the "Shoppers Food
Warehouse" and "Shoppers Club" names. Shoppers operates warehouse-style,
price-impact supermarkets that are positioned to offer the lowest overall
prices in its market area by passing on to the consumer savings achieved
through labor efficiencies and lower overhead associated with the warehouse
format, while providing the product selection and quality associated with a
conventional format. The Company's stores offer products at prices that
generally range from 15% to 20% below those of its primary supermarket
competitors. In-store operations are designed to allow customers to perform
certain labor-intensive services usually offered in conventional supermarkets.
For example, the Company's stores generally do not provide service staff to
support the bakery and floral departments or the meat and seafood refrigerated
cases. The stores do, however, offer a complete line of produce, fresh baked
goods, floral assortments and freshly packaged meat and seafood products and
provide service in these departments at the request of customers. Certain
merchandise is presented on warehouse-style racks in full cartons, reducing
labor-intensive unpacking, and customers bag their own groceries. Shoppers
stores also have full-service delicatessens with some stores offering hot and
cold prepared food and self-service soup and salad bars.
The Company's stores generally are constructed with high ceilings to
accommodate warehouse racking with overhead pallet storage. Wide aisles
accommodate forklifts and, compared to conventional supermarkets, a higher
percentage of total store square footage is devoted to retail selling because
the top of the warehouse-style grocery racks on the sales floor are used to
store inventory, which reduces the need for large backroom storage and
restocking trips.
Notwithstanding the "warehouse" name, physical features and low-price
reputation, Shoppers stores have more in common with conventional supermarket
chains than with so-called "warehouse clubs." No membership fee is charged at
the Shoppers stores, which offer a selection of popular-sized national brands
and private label products as well as high quality produce, meat and seafood.
The product offerings are similar to those of conventional supermarkets with
slightly more emphasis on larger package sizes and with less emphasis on
extensive brand and size selection. All 37 of the Company's supermarkets have
a delicatessen, a bakery and a floral department while 21 stores have a beer
and wine department.
While similar in most respects to conventional supermarket operators,
Shoppers distinguishes itself by providing low-price leadership while still
emphasizing quality. Shoppers does this by offering an unusual combination of
higher-end specialty departments with self-service and discount price
features. In addition, unlike traditional supermarkets, Shoppers stores offer
a greater selection of "club size" products, along with popular-sized brands.
Through this approach, Shoppers has established a unique niche among
supermarket operators in Greater Washington, D.C.
The Company's stores range in size from approximately 20,000 to 77,000 total
square feet and average approximately 47,000 square feet. The Shoppers stores
(including three new stores opened in fiscal 1998) can be categorized by size
as follows: (i) 10 stores smaller than 40,000 square feet; (ii) 12 stores
ranging from 40,000 to 50,000 square feet; and (iii) 15 stores larger than
50,000 square feet. The stores in the first category generally represent older
stores located in densely populated areas in which little or no supermarket
expansion could be expected due to the limited availability of real estate
locations. Despite their age and size, as a group, these stores generally
continue to perform well in terms of sales per square foot and profitability.
The next size category represents stores which more closely resemble the store
sizes operated by conventional supermarket competitors in the local area.
Finally, the category representing the largest size stores includes the eight
"Shoppers Club" supermarkets (averaging approximately 67,800 total square feet
per store). These larger size supermarkets generally have more space devoted
to specialty departments and offer more "club pack" size products.
41
<PAGE>
Shoppers is the largest supermarket chain targeting the price-conscious
segment in Greater Washington, D.C. The two primary competitors of Shoppers
are Giant Food, Inc. ("Giant") and Safeway Inc. ("Safeway"), both of which
operate in the higher-service, higher-price segment. Overall, Shoppers has the
third largest market share in Greater Washington, D.C. On a combined basis,
Shoppers, Giant and Safeway have 84% of the market share in this area.
"Greater Washington, D.C." includes Washington, D.C.; Calvert, Charles,
Frederick, Montgomery and Prince George's counties in Maryland; Arlington,
Fairfax, Loudoun, Prince William and Stafford counties in Virginia; and the
independent cities of Alexandria, Fairfax and Falls Church in Virginia.
Shoppers does not, however, operate any stores in the city of Washington, D.C.
Shoppers' share of the Greater Washington, D.C. market has increased from
11.9% in 1992 to 13.6% in 1997; the Company believes that it exceeds its next
highest competitor by almost four times. During the same period, Giant's
market share decreased from 45.9% to 42.9% while Safeway's market share
increased from 27.1% to 27.5%.
ACQUISITION OF THE COMPANY BY DART
In June 1988, Dart acquired 50% of Shoppers for $17.4 million. On February
6, 1997, Dart's ownership increased to 100% with the buy-out of the other 50%
interest in Shoppers for $210.0 million. The Acquisition was financed through
the application of $137.2 million in net proceeds raised from an offering of
the Increasing Rate Notes of SFW Acquisition Corp., a newly created indirect
subsidiary of Dart, and $72.8 million of bridge financing 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.
STORE OPERATIONS
Shoppers' store equipment and facilities are generally in good condition.
Shoppers stores are generally open 14-16 hours per day seven days a week
(allowing for shelf restocking while the stores are closed) and offer a full
range of fresh produce, fresh baked goods, fresh meats and seafood, frozen
foods, traditional grocery items and certain non-food items such as health and
beauty aids, cookware, greeting cards, magazines and seasonal items.
STORE EXPANSION AND REMODELING
The Company's strategy is to open large new stores and upgrade existing
stores. Shoppers opened three new stores since July 1997 and has signed leases
to open two new stores (each between 65,000 and 75,000 square feet) over the
next two years. Also during this period, Shoppers is considering expanding or
remodeling at least two stores. Since 1992, Shoppers has opened 15 new stores
(while closing four stores) and remodeled seven stores. Of its existing 37
stores, 27 are larger than 40,000 square feet, and all but one of these 27
stores were opened, remodeled or expanded during the last ten years. The
Company believes that its supermarkets generally have well-established
locations with favorable lease terms (including multiple options), are in good
condition and require only routine maintenance.
The following chart sets forth certain information concerning Shoppers
stores during the past six fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------
1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Number of Stores at Beginning of Period..... 26 32 35 35 33 34 34
New Stores Opened........................... 7 3 1 0 1 0 3
Stores Closed............................... 1 0 1 2 0 0 0
--- --- --- --- --- --- ---
Stores at End of Period..................... 32 35 35 33 34 34 37
Remodeled/Expanded.......................... 0 2 2 1 0 2 0
</TABLE>
42
<PAGE>
In fiscal 1998, Shoppers has opened a 74,864 square foot store in
Fredericksburg, VA, a 68,974 square foot store in Falls Church, VA and a
76,774 square foot store in Alexandria, VA . In the following two fiscal
years, Shoppers expects to open stores in College Park, MD and Landover, MD.
PRODUCT SELECTION
The Company believes that consumers in recent years have shown an increasing
preference for food stores that offer not only the wide variety of food and
non-food items carried by conventional supermarkets, but also an expanded
assortment of high-quality specialty food items and fresh produce. To respond
to this trend, Shoppers offers a complete line of produce, fresh baked goods,
freshly packaged meat and seafood products and floral assortments and provides
service in these departments at the customer's request. This strategy provides
consumers with a wider selection of better quality products and convenience
foods, while shifting its sales mix toward higher gross margin products.
Shoppers' largest supermarkets now carry over 25,000 stock keeping units
("SKUs"). Its merchandising program is designed to offer customers a wide
selection of products at prices that generally range from 15% to 20% below
those of its primary supermarket competitors. Shoppers accomplishes this
through carrying slightly fewer items than its local supermarket competitors,
primarily through pursuing less duplication of products in smaller sizes. This
program also includes a critical assessment of existing store layouts,
shelving and product mix. In addition, the Company monitors SKUs to identify
slow-moving products that may be replaced with new products.
Shoppers stores carry a variety of grocery and general merchandise under
private label names, including "Richfood" and "Shoppers Food Warehouse," which
currently account for approximately 7% of its sales. Private label products
are of a quality generally comparable to that of national brands, at
significantly lower prices, while Shoppers' gross margins on private label
products are generally higher than on national brands.
PURCHASING, WAREHOUSING AND DISTRIBUTION
Shoppers purchases approximately one-half of its grocery inventory from
Richfood of PA, Inc., formerly Super Rite Foods, Inc. ("Richfood"), a wholly-
owned subsidiary of Richfood Holdings, Inc. Because its stores receive most of
their deliveries from Richfood almost daily, Shoppers maintains only minimal
dry grocery warehouse storage space. Richfood's large volume purchasing
results in significant cost savings to Shoppers. While Shoppers is under no
obligation to purchase any particular quantity of products or minimum dollar
amounts of inventory from Richfood, the Company has agreed to use Richfood as
its "substantially exclusive supplier" for non-perishable dry-grocery, frozen
and dairy products (other than milk) and for health and beauty aids. Shoppers
does not anticipate that there will be any supply difficulties in the
foreseeable future. There can be no assurance, however, that there will be no
such disruptions. The Company's supply contract with Richfood expires in
December 1997. Although Shoppers believes that the contract will be renewed in
comparable or more favorable terms or that it will enter into a comparable or
more favorable contract with another wholesaler, there can be no assurance
that this will occur.
Shoppers also purchases products and items sold in its supermarkets from a
wide variety of sources other than Richfood. In particular, Shoppers purchases
most of its perishable products from sources other than Richfood.
Shoppers currently leases and operates a produce warehouse and a grocery
warehouse that collectively occupy approximately 60,000 square feet. Each
store submits orders to the warehouses through a centralized processing
system. Merchandise ordered from the warehouses is normally delivered to the
stores the next day. Shoppers distributes produce and grocery products from
its warehouses through a fleet of Company-owned tractors and trailers. The
Company estimates that all Shoppers stores are located within a 90-minute
drive of the warehouses.
43
<PAGE>
PROPERTIES
Shoppers has supermarkets in Virginia and Maryland, all of which are leased.
The following chart sets forth certain information regarding its stores by
size:
<TABLE>
<CAPTION>
LOCATION SIZE (GROSS SQ. FT.)
-------- --------------------
<S> <C>
Alexandria, VA (Potomac Yard)(1)........................ 76,774
Manassas, VA (Sulley Manor Drive)(1).................... 75,864
Fredericksburg, VA(1)................................... 74,864
Germantown, MD(1)....................................... 70,057
Falls Church, VA(1)..................................... 68,974
Dale City, VA(1)........................................ 63,971
Takoma Park, MD(1)...................................... 60,348
Clinton, MD............................................. 54,200
Alexandria, VA (Richmond Hwy)........................... 53,692
Alexandria, VA (N. Kings Hwy)........................... 53,380
Laurel, MD(1)........................................... 51,880
Forestville, MD......................................... 51,828
Olney, MD............................................... 51,000
Fairfax, VA............................................. 50,750
Leesburg, VA............................................ 50,101
Landover, MD (Largo).................................... 49,840
Burke, VA............................................... 49,284
Herndon, VA............................................. 48,424
Manassas, VA (Shoppers Square).......................... 47,040
Centreville, VA......................................... 47,002
Lanham, MD.............................................. 46,470
Stafford, VA............................................ 43,895
Franconia, VA........................................... 42,862
Frederick, MD........................................... 42,500
Sterling, VA............................................ 42,491
Hyattsville, MD (Chillum)............................... 40,559
Chantilly, VA........................................... 40,373
Waldorf, MD............................................. 39,920
Landover, MD (M.L. King)................................ 36,500
New Carrolton, MD....................................... 35,760
Coral Hills, MD......................................... 35,000
Annapolis, MD........................................... 28,710
Rockville, MD........................................... 26,770
Colmar Manor, MD........................................ 25,336
Annandale, VA........................................... 23,680
Alexandria, VA (Little River Turnpike).................. 23,322
Hyattsville, MD (Adelphi)............................... 20,329
</TABLE>
- --------
(1) Shoppers Club supermarket.
Most of the Company's stores are operated under long-term leases that have
favorable terms. The remaining duration (including renewal options) of most of
Shoppers' supermarket leases exceed the maturity date of the Senior Notes. The
lease for one of the Company's smallest stores is scheduled to expire in
January 1998 and there can be no assurance that such lease will be renewed.
Shoppers leases an 86,000 square foot office building in Lanham, MD that
serves as its corporate offices. The Company subleases approximately 30,000
square feet of the office building. In addition, Shoppers leases and operates a
produce warehouse and a grocery warehouse that collectively occupy
approximately 60,000
44
<PAGE>
square feet. Both of these warehouses are located in Landover, MD. See "--
Purchasing, Warehousing and Distribution" and "Certain Transactions."
ADVERTISING AND PROMOTION
Shoppers advertises primarily through newspaper, radio and television media
year-round. Shoppers' advertising and promotion strategy for its supermarkets
emphasizes "every day" low-price leadership, in addition to promoting special
prices on individual items, frequently offering price comparisons to local
supermarket competitors. Shoppers' recently introduced program, "Save Green,"
features green-colored register receipts which inform customers of their
savings on purchases at its stores versus the local supermarket competitors.
"Bonus buys" and "promotional items" in the stores are also marked with green-
colored signs to highlight in-store promotions.
Shoppers negotiates promotional arrangements with selected vendors whereby
it receives product discounts and advertising allowances. In addition,
Shoppers enters into contracts in which additional promotional allowances are
provided for co-op broadcast advertising programs. Under such arrangements,
vendors fund substantially all of the Company's advertising.
COMPETITION
The supermarket industry is highly competitive and characterized by narrow
profit margins. Shoppers' competitors include national, regional and local
supermarket chains, independent grocery stores, specialty food stores,
warehouse club stores, drug stores and convenience stores. Supermarket chains
generally compete on the basis of location, quality of products, service,
price, product variety and store condition. Shoppers competes by providing its
customers with exceptional value by offering quality produce and fresh foods,
self-service specialty departments, and a selection of national brand
groceries and private label goods, all at competitive prices. Shoppers
monitors the prices offered by its competitors on a weekly basis and uses a
computerized price management system to verify pricing positions. The
Company's ability to remain competitive in its markets depends in part on its
ability to remodel and update its stores and open new stores in response to
remodelings and new store openings by its competitors, which in turn will
require the continued availability of financing.
The number and type of competitors vary by location. Shoppers' two principal
competitors are conventional supermarket chains, Giant and Safeway, which have
market shares in Greater Washington, D.C. of 42.9% and 27.5%, respectively.
The Company believes that Shoppers' market share of 13.6% exceeds the next
highest competitor by almost four times. However, 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.
MANAGEMENT INFORMATION SYSTEMS
Shoppers' management information systems and optical scanning technology
reduce the labor costs attributable to product pricing and customer check-out.
Shoppers has optical scanning checkout technology operating in all of its
stores. All stores use electronic systems for employee time and attendance
records and inventory ordering. In addition, Shoppers is evaluating
computerized labor scheduling systems.
EMPLOYEES
As of August 2, 1997, Shoppers employed 4,293 people, including 1,363 full-
time employees. Approximately 4,000 employees were covered by collective
bargaining agreements with various locals of three unions. Shoppers has
renewed its agreement with United Food and Commercial Workers, Local 400,
which agreement expires July 1, 2000 and covers 3,669 retail clerks and meat
cutters. A substantially similar contract with Local 27 of the United Food and
Commercial Workers which covers the 264 employees subject to the collective
bargaining agreement that expired September 30, 1997 has been ratified and is
expected to be signed. It will expire on September 30, 2001. In addition,
Shoppers has 49 employees at its produce warehouse who are covered by
collective bargaining agreements with locals of the Warehouse Employees Union
and the Teamsters Union.
45
<PAGE>
TRADE NAMES, SERVICE MARKS AND TRADEMARKS
Shoppers uses a variety of trade names, service marks and trademarks. Except
for "Shoppers," "SFW," "Shoppers Food Warehouse" and "Shoppers Club," Shoppers
does not believe any of such trade names, service marks or trademarks are
material to its business. Shoppers presently has federal registration of the
"Shoppers Food Warehouse" and "Colossal Donuts" trademarks. It has federal
registration of "Shoppers Club" as a service mark and is seeking federal
registration of it as a trademark. Shoppers also has federally registered
"Shoppers," "Shoppers Food Warehouse" and "SFW" as service marks and has also
registered the "Shoppers Food Warehouse" and "SFW" designs.
GOVERNMENT REGULATION
Shoppers is subject to regulation by a variety of governmental agencies,
including, but not limited to, the U.S. Food and Drug Administration, the U.S.
Department of Agriculture and state and local health departments and other
agencies, including those regulating the sale of beer and wine.
ENVIRONMENTAL MATTERS
Shoppers is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as
handling and disposal practices for solid and hazardous wastes, and (ii)
impose liability for the costs of cleaning up, and certain damages resulting
from, sites of past spills, disposals or other releases of hazardous
materials. Shoppers conducts its operations in substantial compliance with
applicable environmental laws. Shoppers has not incurred material capital
expenditures for environmental controls during the previous three years.
LEGAL PROCEEDINGS
In the ordinary course of its 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 its 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 condition and
results of operations. See "Risk Factors--Controlling Stockholder" and public
filings made by Dart with the Commission.
46
<PAGE>
MANAGEMENT
The following table sets forth certain information with respect to the
Company's executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Mark A. Flint....................... 51 Chief Executive Officer and Director
William J. White.................... 55 President
Jack W. Binder...................... 68 Senior Vice President--Finance
Isaac Gendelman..................... 71 Senior Vice President--Produce
Roy N. Marks........................ 67 Senior Vice President--Grocery
Louis E. Davis...................... 42 Senior Vice President--Store Operations
Richard B. Stone.................... 69 Co-Chairman of the Board of Directors
Herbert H. Haft..................... 76 Co-Chairman of the Board of Directors
Keith E. Alessi..................... 42 Director
Douglas M. Bregman.................. 48 Director
Bonita A. Wilson.................... 56 Director
Howard M. Metzenbaum................ 80 Director
Harry M. Linowes.................... 69 Director
</TABLE>
Mark A. Flint has been the Chief Executive Officer and a Director of
Shoppers since February 6, 1997 and, until August 25, 1997, President of
Shoppers. He also has been the Senior Vice President and Chief Financial
Officer of Dart since September 1996. Prior to joining Dart, Mr. Flint spent
14 years serving in various capacities as Senior Vice President and Chief
Financial Officer, Chairman of the Executive Committee, and a member of the
Board of Directors of Peter J. Schmitt Holdings, Inc., a multi-state $1.3
billion food retailer and distributor, where he was responsible for corporate
development, mergers and acquisitions and finance.
William J. White has been President of Shoppers since August 25, 1997.
Before joining Shoppers, Mr. White held a number of senior management
positions in the retail-food business. He has served as Vice President of
Operations for Giant Food of Carlisle, where he was responsible for over $600
million dollars in sales volume attributable to 55 stores. He later served as
Senior Vice President of Retail Operations for Piggly Wiggly. Mr. White was
subsequently promoted to President of Piggly Wiggly, and held that position
from 1987 through 1994. Most recently, Mr. White served as President of Mega
Foods in Phoenix, Arizona, from 1995 through 1997. While President of Mega
Foods, Mr. White spearheaded a successful turn-around of the company.
Jack W. Binder has been Senior Vice President--Finance of Shoppers since
1987. Prior to that, he served as Vice President and Controller since he
joined Shoppers in 1966.
Isaac Gendelman worked at Shoppers' first store as a produce clerk beginning
in 1953. Mr. Gendelman was promoted through the ranks to Store Produce
Manager, Produce Buyer, Warehouse Manager, Vice President and, in 1987, was
promoted to Senior Vice President--Produce.
Roy N. Marks joined Shoppers in 1982 as Director of Grocery Buying. Mr.
Marks was later promoted to Vice President and, in 1991, became Senior Vice
President--Grocery.
Louis E. Davis joined Shoppers in 1971 as a cashier. Over the next several
years, he advanced within the organization, serving as a store grocery
manager, assistant store manager, store manager, grocery merchandiser,
Director of Merchandising and Director of Store Operations. He became Vice
President of Operations in 1991 and Senior Vice President--Store Operations in
1997.
Richard B. Stone was elected Co-Chairman of Shoppers on October 21, 1997.
Senator Stone serves as Co-Chairman and acting Chief Executive Officer of Dart
and Co-Chairman of Holding. Since December 1995, Senator Stone has been Voting
Trustee of a trust that now holds all of the voting stock of Dart. From 1992
to 1994, Senator Stone was a Director of International Service System. He
served as United States Ambassador to Denmark from 1991 to 1995, and he is
currently a member of the Council of American Ambassadors. He was Chief
Operating Officer of Capital Bank, N.A. from 1989 to 1991, and was Vice
Chairman of the Board of Directors of Capital Bank, N.A. from 1985 to 1991.
Senator Stone served as President Reagan's Special Envoy for Central American
Affairs and Ambassador-at-Large from 1983 to 1984. He was a United States
Senator from 1975 to 1981, representing the State of Florida.
47
<PAGE>
Herbert H. Haft has been a Director of Shoppers since 1988 and was elected
Co-Chairman of Shoppers on February 6, 1997. Mr. Haft founded Dart and has
been its Chief Executive Officer and Chairman of the Board since 1960. He has
been Co-Chairman or Chairman of the Board of Directors of Crown Books
Corporation ("Crown Books") since its organization in 1981. Mr. Haft has been
Chairman of the Board of Directors and Chief Executive Officer of Trak Auto
Corporation ("Trak Auto") since its organization in March 1983. Herbert H.
Haft is or claims to be a general partner in approximately 15 partnerships
that are debtors-in-possession under Title 11, Chapter 11 of the U.S.
Bankruptcy Code. Mr. Haft is involved in litigation against Dart relating to
the control of Dart. On October 17, 1997, Herbert H. Haft entered into a
settlement agreement with Dart. Under the terms of the settlement agreement,
upon closing of the settlement Mr. Haft would resign his positions as an
officer and director of Dart and each of its affiliates, including his
position as Co-Chairman of the Board of Directors of Shoppers. See "Risk
Factors--Controlling Stockholder" and "Risk Factors--Possible Change in
Control."
Keith E. Alessi was elected a Director of Shoppers on February 6, 1997. Mr.
Alessi is Chairman, President, Chief Executive Officer and Director of Jackson
Hewitt, Inc., the nation's second largest electronic tax preparation service.
He joined Jackson Hewitt, Inc. in June 1996. From 1988 through June 1996, Mr.
Alessi was affiliated with Farm Fresh, Inc., a regional supermarket chain
based in Norfolk, Virginia. He served in various capacities including Chief
Financial Officer, Chief Operating Officer and President. He is Vice Chairman
and a director of Farm Fresh, Inc., is a director of Cort Business Services,
the nation's largest furniture rental company and is a director of Town Sports
International.
Douglas M. Bregman was elected a Director of Shoppers on February 6, 1997.
Mr. Bregman is a partner in the law firm of Bregman, Berbert & Schwartz,
specializing in commercial real estate law. Mr. Bregman is also an Adjunct
Professor of Law at the Georgetown University Law Center. Mr. Bregman was
elected to serve as a director of each of Dart, Trak Auto and Crown Books in
June 1993.
Bonita A. Wilson was elected a Director of Shoppers on February 6, 1997. Ms.
Wilson was a retailing executive with Dalton Brody in 1993 and now serves as a
consultant. Ms. Wilson was a Sales Manager with Saks Jandel from January 1994
until June 1994 and prior to that she was a retailing executive with the May
Company. From 1990 to 1995, Ms. Wilson served on the board of directors of
Wedgewood Financial Management, Inc. Ms. Wilson was elected to serve as a
director of each of Dart, Trak Auto and Crown Books in June 1993.
Harry M. Linowes has been a Director of Shoppers, Holding and Dart since
October 21, 1997. Mr. Linowes is a Certified Public Accountant and a
consultant. Prior to his retirement, Mr. Linowes served as a Senior Partner of
BDO Siedman, L.L.P. Accountants and Consultants ("BDO Siedman") from 1992 to
1996, and as Managing Partner from 1986 to 1992. In 1986, Mr. Linowes, then
the Managing Partner of Leopold & Linowes, oversaw the merger of that firm
with BDO Siedman. Mr. Linowes is a member of the American Institute of
Certified Public Accountants, and has served as President of the Board of
Trustees of the D.C. Institute of Certified Public Accountants, as President
of the Washington, D.C. Estate Planning Counsel, and as Chairman of the
Executive Committee of CPA Associates (an international association of CPA
firms).
Howard M. Metzenbaum has been a Director of Shoppers, Holding and Dart since
October 21, 1997. He currently serves on the Board of St. Jude Research
Hospital of Memphis, and on the Board of the Public Citizen. Prior to joining
Shoppers, Senator Metzenbaum had served as president of the Consumer
Federation of America. He served also as Senator from the State of Ohio
between 1977 and 1995, and from January 1974 to December 1974. Senator
Metzenbaum was Chairman of the Board of COMCORP from 1969 to 1974. Before
joining COMCORP, he served as Chairman of the Board of ITT Consumer Services
Corp. ("ITT") from 1966 to 1968. From 1958 to 1966, he served as Chairman of
the Board of the Airport Parking Company of America, which later merged with
ITT.
48
<PAGE>
Other officers of the Company are as follows:
James K. Barnhart joined Shoppers in 1982 as Director of Data Processing and
was promoted to Assistant Vice President--Data Processing in 1987.
James Bartkowiak joined Shoppers in 1986 and was promoted to Assistant Vice
President--Grocery in 1995.
Edward A. Klig joined Shoppers as Controller in 1985 and was promoted to
Assistant Vice President and Controller in 1994.
Sandra J. Perkins has been broadcast spokesperson for Shoppers since 1986,
and has directed the co-op advertising, promotion and marketing programs for
Shoppers since 1988. Ms. Perkins was promoted to Vice President--Marketing and
Public Relations in 1997.
Frank Saunders joined Shoppers in 1967 as a helper in the meat department and
is now Assistant Vice President--Meat Operations.
EMPLOYMENT AGREEMENTS
In February 1997, Shoppers entered into letters of employment with each of
its executive officers (excluding Mark A. Flint and William J. White) and
several other key employees. The initial annual salaries of the executive
officers under the letters of employment are as follows: Jack W. Binder
($183,000), Louis E. Davis ($150,000), Isaac Gendelman ($162,000) and Roy N.
Marks ($148,500). Prior to August 1997, Shoppers conducted an analysis of
executive salaries in the supermarket industry and adjusted the salaries of
some of the Company's executive officers based on this analysis. Each executive
officer may receive a bonus in accordance with a bonus program being developed
by the Company. Each executive officer will receive life insurance and health,
dental and disability insurance. In addition, the Company pays between $350 and
$850 per month to the executive officers as an automobile allowance. If
Shoppers terminates an executive officer (excluding Mr. Flint and Mr. White)
before February 6, 1998, the Company will pay such officer an amount equal to
one-half of his annual salary. If Dart sells Shoppers before February 6, 1998,
Shoppers will pay each executive officer (excluding Mr. Flint and Mr. White) an
amount equal to his annual salary. None of the letters of employment has a
termination date.
On September 16, 1996, Dart entered into a two-year employment agreement with
Mark A. Flint, Senior Vice President and Chief Financial Officer of Dart, and
since February 6, 1997, Chief Executive Officer of Shoppers. The agreement
provides for an annual salary of $285,000, subject to annual increases as
determined by the Compensation Committee of Dart's Board of Directors. Dart
charges Shoppers for a portion of Mr. Flint's salary in accordance with a
management services agreement between Dart and Shoppers. For the 26 weeks ended
August 2, 1997, Dart charged Shoppers $140,000 (approximately 50% of Mr.
Flint's salary during that period) for the portion of Mr. Flint's time spent
working on matters for the Company. See "Certain Transactions--Agreements with
Dart."
On August 25, 1997, Shoppers entered into a one-year employment agreement
with William J. White as President of the Company. The agreement provides for
an annual base salary of $300,000 and a bonus based on performance.
49
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth in summary form all compensation for all
services rendered to Shoppers during its last three fiscal years for its former
President and the other four most highly compensated executive officers
employed by Shoppers as of the end of its most recent fiscal year.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------
FISCAL OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR(D) SALARY BONUS COMPENSATION(E) COMPENSATION(F)
- --------------------------- ------- -------- ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Kenneth Herman(a)....... 1997 $262,500 -- -- --
Former President 1996 450,000 350,000 -- $7,200
1995 450,000 350,000 -- 8,000
Robert Herman(a)........ 1997 175,000 -- -- --
Former Executive Vice
President 1996 300,000 80,000 -- 7,200
1995 300,000 80,000 -- 8,000
Mitchell Herman(b)...... 1997 113,750 -- -- --
Former Senior V.P. Cor-
porate Affairs 1996 195,000 50,000 -- 7,200
1995 190,000 50,000 -- 8,000
George Guthridge(c)..... 1997 101,000 -- -- --
Former Senior V.P. Oper-
ations 1996 171,500 55,000 -- 7,200
1995 161,500 55,000 -- 8,000
Jack Binder............. 1997 98,100 -- -- --
Senior V.P. Finance 1996 167,000 50,000 -- 7,200
1995 159,000 50,000 -- 8,000
</TABLE>
- --------
(a) Kenneth and Robert Herman each resigned as officers and directors of the
Company on February 6, 1997.
(b) Mitchell Herman left the Company on May 21, 1997.
(c) George Guthridge resigned as an officer of the Company on February 3, 1997.
(d) There were 31 weeks in fiscal 1997 compared to 52 weeks in each of fiscal
1996 and 1995.
(e) Excludes perquisites and other personal benefits, unless the aggregate
amount of such compensation is at least $50,000 or 10% of the total annual
salary and bonus reported.
(f) Includes allocations to 401(k) accounts and profit sharing accounts.
50
<PAGE>
CERTAIN TRANSACTIONS
RELATED-PARTY LEASES
In July 1990, the Company entered into an agreement to lease an 86,000
square foot office building in Lanham, Maryland, from a private partnership
(the "Partnership") that is half-owned by certain stockholders of Dart. The
lease is for 20 years and commenced on December 10, 1990. The lease provides
for annual increases in rental payments based upon the Consumer Price Index
for the Washington, D.C. metropolitan statistical area. The annual increases
may not be more than six percent or less than three percent. Rental payments
for the thirty-one weeks ended February 1, 1997 and for fiscal years ended
June 29, 1996, July 1, 1995, and July 2, 1994 were approximately $744,000,
$1,246,000, $1,210,000, and $1,175,000 respectively, and all payments over the
life of the lease total approximately $34,400,000. The Company is accounting
for the lease as a capital lease. Due to fixed rental increases during the
term of the lease, lease payments exceeded interest expense by approximately
$34,000 for the thirty-one weeks ended February 1, 1997. Interest expense
exceeded lease payments by $254,000, $292,000, and $321,000 for the fiscal
years ended June 29, 1996, July 1, 1995, and July 2, 1994, respectively.
Assuming future annual rental increases of six percent, the capital lease
obligation will continue to increase through November 2000, at which time
accumulated interest expense recognized for financial reporting purposes will
exceed lease payments by approximately $1,800,000. The lease requires the
Company to pay for maintenance, utilities, insurance and taxes. The
Partnership purchased the office building for approximately $8,663,000 in July
1990.
During the period ended February 1, 1997, and the fiscal years ended June
29, 1996, July 1, 1995, and July 2, 1994, the Company made rental payments of
approximately $3,573,000, $5,384,000, $5,985,000, and $5,327,000,
respectively, on store leases to partnerships related to stockholders of Dart.
As of February 1, 1997, the Company had ten store operating leases with
partnerships related to stockholders of Dart. The remaining future minimum
payments under these leases exclusive of option periods are approximately
$70,820,000 and expire through 2014.
The Company made payments of approximately $198,000, $278,000, $246,000, and
$246,000 during the 31 weeks ended February 1, 1997, and each of the fiscal
years ended June 29, 1996, July 1, 1995, and July 2, 1994 for warehouse
operating leases to a partnership owned by stockholders of Dart and to a
corporation related to former stockholders of the Company. As of February 1,
1997, the remaining future minimum annual payments under these leases are
approximately $1,386,000 and expire in 2002.
The Company believes that each of the above leases contains lease payments
no greater than the Company would have paid to non-affiliated persons.
SUBLEASING AGREEMENTS
The Company subleases space within one store to an entity owned by three
individuals associated with Shoppers (the Chief Executive Officer of Shoppers,
an employee of Shoppers and an employee of Dart). This entity uses the leased
space for the sale of beer and wine. The Company received rental income of
approximately $57,865, $155,000, $155,000, and $123,000 in the thirty-one
weeks ended February 1, 1997, and in the fiscal years ended June 29, 1996,
July 1, 1995, and July 2, 1994, respectively, from this entity. None of the
owners of this entity receives any financial benefit from this arrangement.
During the fiscal year ended June 29, 1996 the Company began leasing space
to Trak Auto. The Company received rental income from Trak Auto of
approximately $91,000 and $140,000 during the period ended February 1, 1997
and during the fiscal year ended June 29, 1996, respectively.
AGREEMENTS WITH DART
Concurrently with the Acquisition, the Company entered into a management
services agreement (the "Management Services Agreement") with Dart. The
Management Services Agreement allocates costs and
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expenses incurred by Dart on behalf of the Company, including tax, accounting,
internal audit, human resources and legal services. In addition, the Company
entered into a tax sharing agreement (the "Tax Sharing Agreement") with Dart.
Under the Tax Sharing Agreement, the Company will pay Dart from time to time
amounts equal to the federal and state tax liability of the Company and each
of its direct and indirect affiliated group subsidiaries (collectively, the
"Shoppers Group") computed as if the Shoppers Group was a separate and
independent affiliated group (as defined in section 1504 of the Internal
Revenue Code of 1986, as amended).
OTHER TRANSACTIONS
In February 1997, Shoppers paid and/or reimbursed Dart approximately $9.2
million in fees and expenses incurred in connection with the Acquisition.
In connection with the RGL Settlement, the Company made a $10 million loan
to Dart. Such loan bears interest at the same interest rate and has the same
maturity date as the Senior Notes. All principal and interest on such loan is
payable on the maturity date, but may be prepaid at any time without penalty.
In connection with a possible Settlement with Herbert H. Haft, Shoppers may
lend $25 million to Dart. The Company expects such loan to bear the same
interest rate and have the same maturity date as the Senior Notes. All
principal and interest on this loan to Dart would be payable on the maturity
date but could be repaid at any time without penalty.
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DESCRIPTION OF THE SENIOR NOTES
GENERAL
The Outstanding Notes were, and the Exchange Notes will be, issued under the
indenture (the "Indenture") dated as of June 26, 1997, by and among the
Company, the Guarantor and Norwest Bank Minnesota, National Association, as
trustee (the "Trustee"). The following summarizes all material terms of the
Indenture, a copy of which may be obtained upon request to the Company or the
Trustee and has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The following summary of certain provisions
of the Indenture and the Senior Notes does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Indenture
and the Trust Indenture Act of 1939, as amended (the "TIA"). As used in this
"Description of the Senior Notes," the term "Company" refers to Shoppers Food
Warehouse Corp. only and excludes its subsidiaries. The definitions of certain
capitalized terms used in the following summary are set forth under "--Certain
Definitions" below.
The Senior Notes are senior unsecured obligations of the Company, rank
senior in right of payment to all existing or future indebtedness of the
Company which is by its terms not expressly subordinated in right of payment
to the Senior Notes and rank pari passu with all other existing or future
indebtedness of the Company.
The Exchange Notes will be issued only in fully registered form, without
interest coupons, in denominations of $1,000 and integral multiples thereof.
Initially, the Trustee will act as Paying Agent and Registrar for the Senior
Notes. The Company may change any Paying Agent and Registrar without notice to
the Holders. Principal, if any, and interest on the Senior Notes will be
payable, and the transfer of the Senior Notes will be registrable, at an
office or agency of the Company in the City of New York (which initially will
be the corporate trust office of the Trustee). In addition, payment of
interest may, at the option of the Company, be made by wire transfer or check
mailed to the person entitled thereto as shown on the register for the Senior
Notes.
PRINCIPAL, MATURITY AND INTEREST
The Senior Notes are limited to $200,000,000 aggregate principal amount and
will mature on June 15, 2004. The Senior Notes bear interest at the rate of 9
3/4% per annum. Interest shall be payable in cash semi-annually in arrears on
June 15 and December 15 of each year, commencing December 15, 1997, to the
Holders on the fifteenth day prior to such interest payment date. In the event
that an interest payment date falls on a day other than a business day,
interest will be paid on the next succeeding business day and no interest on
such payment shall accrue for the period from and after such interest payment
date to such next succeeding business day. The amount of interest payable on
an interest payment date will be computed on the basis of a 360-day year
consisting of twelve 30-day months.
GUARANTEE
The Company's obligations under the Senior Notes and the Indenture are fully
and unconditionally guaranteed by the Guarantor. The Guarantee is secured by a
first priority security interest in the Capital Stock of the Company. The
Guarantor has no assets other than the shares of Capital Stock it owns in the
Company. See "Risk Factors--Security for the Guarantee."
REDEMPTION
Optional Redemption. The Senior Notes will be redeemable, in whole or in
part, at the option of the Company at any time on or after June 15, 2001, at
the redemption prices (expressed as a percentage of the principal amount
redeemed) set forth below (the "Optional Redemption Price"), plus any accrued
and unpaid interest to the date of redemption, if redeemed during the period
indicated:
<TABLE>
<CAPTION>
OPTIONAL
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
June 15, 2001 through June 14, 2002...................... 104.875%
June 15, 2002 through June 14, 2003...................... 102.4375%
June 15, 2003 and thereafter............................. 100%
</TABLE>
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Optional Redemption upon Equity Offerings. At any time until June 15, 2000,
the Company may, at its option, use the net cash proceeds of one or more
Equity Offerings to redeem up to 35% of the original aggregate principal
amount of the Senior Notes at a redemption price equal to 109.75% of the
principal amount thereof, plus any accrued and unpaid interest to the date of
redemption; provided, however, that at least 65% of the original aggregate
principal amount of the Senior Notes remains outstanding immediately after
such redemption.
Special Mandatory Redemption. The Indenture provides that in the event that
a Settlement did not occur on or prior to June 30, 1998, then the Company
would be obligated to use the Restricted Proceeds (including accrued interest)
to redeem $50 million aggregate principal amount of Senior Notes (a "Special
Mandatory Redemption"). On September 26, 1997, the Company paid $50 million
($40 million dividend and $10 million loan) to or on behalf of Dart in
connection with Dart's consummation of a Settlement with Robert M. Haft,
Gloria G. Haft and Linda G. Haft. Accordingly, the Company will not be
obligated to redeem any of the Senior Notes pursuant to a Special Mandatory
Redemption.
SELECTION AND NOTICE
In the event that less than all of the Senior Notes are to be redeemed at
any time, selection of Senior Notes for redemption will be made by the Trustee
on a pro rata basis, by lot or by such method as the Trustee shall deem fair
and appropriate; provided, however, that the Senior Notes shall be redeemed
only in integral multiples of $1,000. Notice of redemption shall be mailed by
first class mail at least 30 but not more than 60 days before the redemption
date to each Holder to be redeemed at its registered address. If any Senior
Note is to be redeemed in part only, the notice of redemption that relates to
such Senior Note shall state the portion of the principal amount thereof to be
redeemed. A new Senior Note in a principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Senior Note. On and after the redemption date,
any interest will cease to accrue on Senior Notes or portions thereof called
for redemption as long as the Company has deposited with the Paying Agent
funds in satisfaction of the redemption price pursuant to the Indenture.
CHANGE IN CONTROL
The Indenture provides that, if a Change in Control (as defined below)
occurs, each Holder shall have the right, at such Holder's option, to require
the Company to repurchase all of such Holder's Senior Notes, or any portion
thereof that is an integral multiple of $1,000, on the date (the "Repurchase
Date") that is no later than 60 days after the date of the Company Notice (as
defined below) for cash at a price equal to 101% of the principal amount of
such Senior Notes to be repurchased (the "Change in Control Repurchase
Price"), plus any accrued and unpaid interest to the Repurchase Date.
Within 30 days after the occurrence of a Change in Control, the Company is
obligated to mail to all Holders a notice (the "Company Notice") of the
occurrence of such Change in Control and of the repurchase right arising as a
result thereof. The Company must deliver a copy of the Company Notice to the
Trustee. To exercise the repurchase right, a Holder must deliver on or before
the 30th day after the date of the Company Notice irrevocable written notice
to the Trustee of the Holder's exercise of such right, together with the
Senior Notes with respect to which the right is being exercised, duly endorsed
for transfer to the Company.
A "Change in Control" will be deemed to have occurred at such time as:
(i) any Person (including any syndicate or group deemed to be a "person"
under Section 13(d)(3) of the Exchange Act, other than Dart, the Guarantor,
the Company or any employee benefit plan of the Company or the Guarantor),
is or becomes the beneficial owner (within the meaning of Rule 13d-3 under
the Exchange Act), directly or indirectly, through a purchase, merger or
other acquisition transaction or series of transactions or otherwise, of
shares of Capital Stock of the Company, the Guarantor or Dart, entitling
such Person to exercise 35% or more of the total voting power of all shares
of Capital Stock of the Company, the Guarantor or Dart, entitled to vote
generally in the election of the directors;
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(ii) there occurs any consolidation of the Company with, or merger of the
Company into, any other Person, any merger of another Person into the
Company, or any sales or transfers of all or substantially all of the
assets of the Company to another Person (other than a merger (x) which does
not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Capital Stock or (y) which is effected solely to
change the jurisdiction of incorporation of the Company and results in a
reclassification, conversion or exchange of outstanding shares of Capital
Stock into solely shares of Capital Stock); provided, however, that no
Change in Control will be deemed to occur pursuant to this clause (ii) upon
the merger of any Wholly Owned Restricted Subsidiary of the Company into
the Company; or
(iii) the replacement of a majority of the Board of Directors of the
Company from the directors who constituted the Board of Directors of the
Company on the Issue Date, and such replacement shall not have been
approved by either (a) a vote of a majority of the Board of Directors then
still in office who either were (x) members of the Board of Directors of
the Company on the Issue Date or (y) whose election as a member of the
Board of Directors was approved in the manner provided in this clause
(iii), or (b) the Voting Trustee (as defined below).
If members of the Haft family succeed 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 its
outstanding Senior Notes at a price equal to 101% of the principal amount
thereof, plus any accrued and unpaid interest to the date of repurchase. See
"Risk Factors--Controlling Stockholder" and "Risk Factors--Possible Change in
Control."
Notwithstanding the foregoing, the beneficial ownership of shares of Capital
Stock of Dart under that certain Voting Trust Agreement dated October 6, 1995
by and among Ronald S. Haft, Dart and Larry G. Schafran and Sidney B.
Silverman, as initial voting trustees, entitling such trust, acting through
one or more voting trustees (the "Voting Trustee") to exercise 35% or more of
the total voting power of all shares of Capital Stock of Dart shall not be
deemed to constitute a Change in Control. The Honorable Richard B. Stone
became the sole Voting Trustee, replacing the initial voting trustees, in
December 1995.
If a Company Notice is delivered, there can be no assurance that the Company
will have available funds sufficient to pay the Change in Control Repurchase
Price for all the Senior Notes that might be delivered by Holders seeking to
have their Senior Notes repurchased. In the event the Company is required to
purchase outstanding Senior Notes pursuant to the occurrence of a Change in
Control event, the Company expects that it would seek third-party financing to
the extent it does not have available funds to meet its purchase obligations.
However, there can be no assurance that the Company would be able to obtain
such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to repurchase upon the occurrence of a
Change in Control.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Senior Notes pursuant to the occurrence of a Change in Control.
To the extent that the provisions of any securities laws or regulations
conflict with the "Change in Control" provisions of the Indenture, the Company
shall comply with the applicable securities laws and regulations and shall not
be deemed to have breached its obligations under the "Change in Control"
provisions of the Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Restricted Payments. The Indenture provides that the Company
will not, and will not permit any of its Restricted Subsidiaries to, directly
or indirectly: (i) declare or pay any dividend on or make any distribution on
account of the Company's Capital Stock (other than dividends or distributions
payable in Capital Stock (other than Disqualified Stock) of the Company); (ii)
purchase, redeem or otherwise acquire or retire for
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value any Capital Stock of the Company, any Subsidiary of the Company or other
Affiliate of the Company (other than any such Capital Stock owned by the
Company or any Restricted Subsidiary of the Company); (iii) purchase, redeem
or otherwise acquire or retire for value any Indebtedness that is pari passu
with or subordinated to the Senior Notes except for payments of Permitted
Indebtedness in accordance with the provisions contained therein, as such
provisions may be amended from time to time, but subject to the provisions of
the Indenture; provided, however, that no such amendments shall cause such
Permitted Indebtedness (other than the New Credit Facility) to be scheduled to
mature at a date earlier than the Stated Maturity of the Indebtedness being
amended; (iv) permit any Restricted Subsidiary to declare or pay any dividend
on, or make any distribution to the Holders (as such) of, any shares of its
Capital Stock except to the Company or a Wholly Owned Restricted Subsidiary
(other than dividends or distributions payable in Capital Stock (other than
Disqualified Stock) of it or the Company); or (v) make any Investment in any
Affiliate (other than the Company or a Wholly Owned Restricted Subsidiary of
the Company) (all such payments and other actions set forth in clauses (i)
through (v) above being collectively referred to as "Restricted Payments"),
unless, at the time of such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or shall occur as a consequence thereof; and
(b) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the Issue Date (including Restricted Payments permitted by clauses
(iv), (v) and (vi) of the next succeeding paragraph), is less than the
aggregate of (A) 50% of the aggregate Adjusted Consolidated Net Income of
the Company (excluding, for purposes of this clause (A), accrued but unpaid
interest income, if any, from intercompany loans) for the first day of the
fiscal quarter including the Issue Date to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or if such Adjusted
Consolidated Net Income for such period is a deficit, 100% of such deficit)
plus (B) an amount equal to the Net Cash Proceeds (plus the noncash
proceeds, as determined in good faith by the Board of Directors) received
upon the sale of Capital Stock (other than Disqualified Stock) subsequent
to the Issue Date plus (C) an amount equal to the Net Cash Proceeds
received upon the sale or other disposition or repayment of any Investment
made after the Issue Date which had been treated as a Restricted Payment.
The foregoing provisions will not prohibit (i) if no Default or Event of
Default shall have occurred and be continuing or shall occur as a consequence
thereof, the payment to Dart by the Company from its available liquid assets
of an amount not to exceed $10,000,000; (ii) if no Default or Event of Default
shall have occurred and be continuing or shall occur as a consequence thereof,
upon the execution of the New Credit Facility, an additional payment to Dart
by the Company from its available liquid assets of an amount in the aggregate
not to exceed $15,000,000; (iii) if no Default or Event of Default shall have
occurred and be continuing or shall occur as a consequence thereof, the
payment to Dart by the Company of the Restricted Proceeds for purposes of
funding a Settlement; (iv) if no Default or Event of Default shall have
occurred and be continuing or shall occur as a consequence thereof,
Investments in Unrestricted Subsidiaries in an aggregate amount not to exceed
$10,000,000; (v) the payment of any dividend within 60 days after the date of
declaration thereof, if at the record date for such dividend such payment
would have complied with the provisions of the Indenture; and (vi) if no
Default or Event of Default shall have occurred and be continuing or shall
occur as a consequence thereof, the redemption, repurchase, retirement or
other acquisition of the Senior Notes or any Capital Stock of the Company in
exchange for, or out of the proceeds of, the substantially concurrent sale
(other than to a Restricted Subsidiary of the Company) of other Capital Stock
of the Company (other than any Disqualified Stock); provided, however, that
payments made in accordance with clauses (i), (ii) and (iii) of this paragraph
shall not be deemed to be Restricted Payments.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Limitation on Restricted Payments" were computed,
which calculations may be based upon the Company's latest available financial
statements.
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Limitation on Indebtedness. The Indenture provides that the Company shall
not, and shall not cause or permit any of its Restricted Subsidiaries to,
directly or indirectly create, incur, assume, issue, guarantee or in any
manner become liable, contingently or otherwise, for or with respect to the
payment of, any Indebtedness (including any Acquired Indebtedness) except for
the following (each of which shall be given independent effect):
(a) Indebtedness of the Company under its Increasing Rate Notes (to the
extent that the Company has satisfied the conditions in the section
entitled "Termination of the Company's Obligations" of the Increasing Rate
Note Indenture with respect to the discharge of its obligations, other than
those which expressly survive pursuant to such section), the Senior Notes
and the indentures governing such debt securities;
(b) Permitted Secured Indebtedness;
(c) any replacements, renewals, refinancings and extensions of
Indebtedness incurred under clause (b) above, provided that (i) any such
replacement, renewal, refinancing and extension (x) shall not provide for
any mandatory redemption, amortization or sinking fund requirement in an
amount greater than or at a time prior to the amounts and times specified
in the Indebtedness being replaced, renewed, refinanced or extended and (y)
shall be contractually subordinated to the Senior Notes at least to the
extent, if at all, that the Indebtedness being replaced, renewed,
refinanced or extended is subordinate to the Senior Notes, (ii) any such
Indebtedness of any Person must be replaced, refinanced or extended with
Indebtedness incurred by such Person or by the Company; and (iii) the
principal amount of Indebtedness incurred pursuant to this clause (c) (or,
if such Indebtedness provides for an amount less than the principal amount
thereof to be due and payable upon a declaration of acceleration of the
maturity thereof, the original issue price of such Indebtedness) shall not
exceed the sum of the principal amount (or with respect to Indebtedness
which provides for an amount less than the principal amount thereof to be
due and payable upon a declaration of acceleration of the maturity thereof,
the accredited value thereof) of Indebtedness so replaced, renewed,
refinanced or extended, plus accrued interest, the amount of any premium
required to be paid in connection with such replacement, renewal,
refinancing or extension pursuant to the terms of such Indebtedness or the
amount of any premium reasonably determined by the Company as necessary to
accomplish such replacement, renewal, refinancing or extension by means of
a tender offer or privately negotiated purchase, and the amount of fees and
expenses incurred in connection therewith;
(d) Indebtedness of the Company or of any of the Restricted Subsidiaries
of the Company not to exceed an amount in the aggregate at any one time
outstanding equal to the lesser of (i) $10,000,000 or (ii) an amount which
when added to the amount of Indebtedness outstanding at any one time under
the New Credit Facility equals $35,000,000, provided that such Indebtedness
permitted under this clause (d) shall be either contractually subordinated
to or rank pari passu with the Senior Notes;
(e) Indebtedness of the Company or any of the Restricted Subsidiaries of
the Company, provided (i) the Consolidated Interest Coverage Ratio of the
Company for the applicable Four Quarter Period would have been at least 1.8
to 1.0 if such incurrence or issuance of Indebtedness had occurred prior to
the second anniversary of the Issue Date and 2.0 to 1.0 thereafter, in each
case after giving pro forma effect to such incurrence or issuance and the
application of the proceeds therefrom, and (ii) such Indebtedness shall be
either contractually subordinated to or rank pari passu with the Senior
Notes;
(f) Indebtedness of the Company under the New Credit Facility;
(g) Indebtedness under Capitalized Lease Obligations of the Company and
its Restricted Subsidiaries incurred in the ordinary course of business,
not to exceed 3% of Net Sales of the Company and its Restricted
Subsidiaries on a consolidated basis during the Four Quarter Period
immediately preceding such incurrence; and
(h) any Investments permitted under the "Limitation on Investments, Loans
and Advances" covenant below (the foregoing items in clauses (a) through
(h) are referred to as "Permitted Indebtedness").
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Limitation on Investments, Loans and Advances. The Indenture provides that
the Company shall not make, and shall not permit any of its Restricted
Subsidiaries to make, any Investment, except: (i) Investments by the Company
or a Restricted Subsidiary of the Company in any Wholly Owned Restricted
Subsidiary of the Company (including any such Investment pursuant to which a
Person becomes a Wholly Owned Restricted Subsidiary of the Company) or in the
Company by any Restricted Subsidiary of the Company; (ii) Investments
represented by receivables created or acquired in the ordinary course of
business or the settlement of such receivables in the ordinary course of
business; (iii) Investments permitted to be made pursuant to the "Limitation
on Restricted Payments" covenant above; (iv) Investments represented by
advances to employees, officers and directors of the Company or its Restricted
Subsidiaries made in the ordinary course of business and consistent with
reasonable and customary business practices; (v) Permitted Investments; (vi)
Investments permitted to be made with the Net Cash Proceeds of Asset Sales
pursuant to the "Limitation on Asset Sales" covenant below and (vii) payments
made to Dart that are permitted by the provisions of the Indenture described
above under the covenant "Limitation on Restricted Payments."
Dividends and Other Payment Restrictions Affecting Subsidiaries. The
Indenture provides that the Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause
or suffer to exist or become effective any consensual encumbrance or
restriction on the ability of any Restricted Subsidiary to (a)(i) pay
dividends or make any other distributions to the Company or any of its
Restricted Subsidiaries (A) on its Capital Stock or (B) with respect to any
other interest or participation in, or measured by, its profits or (ii) pay
any Indebtedness owed to the Company or any of its Restricted Subsidiaries,
(b) make loans or advances to the Company or any of its Restricted
Subsidiaries or (c) transfer any of its properties or assets to the Company or
any of its Restricted Subsidiaries, except for (i) such encumbrances or
restrictions existing under or by reason of the Indenture or applicable law,
(ii) reasonable and customary provisions restricting subletting or assignment
of any lease entered into in the ordinary course of business, consistent with
industry practices, (iii) restrictions under any Acquired Indebtedness or any
agreement relating to any property, asset or business acquired by the Company
or any of its Restricted Subsidiaries, which restrictions existed at the time
of the acquisition, were not put in place in connection with or in
anticipation of such acquisition and are not applicable to any Person, other
than the Person acquired or to any property, asset or business other than the
property, asset and business so acquired, (iv) reasonable and customary
restrictions on transfers of all collateral imposed in connection with
Permitted Liens, and (v) replacements of restrictions imposed pursuant to
clause (iii) and this clause (v) that are not more restrictive than those
being replaced and do not apply to any additional property or assets.
Limitation on Liens. The Indenture provides that the Company shall not, and
the Company shall not permit, cause or suffer any of its Restricted
Subsidiaries to, create, incur, assume or suffer to exist any Lien of any kind
upon any of its property or assets now owned or hereafter acquired by it,
except for (a) Liens of the Company and its Restricted Subsidiaries existing
as of the Issue Date; (b) Permitted Liens; (c) Liens, arising after the Issue
Date, securing Permitted Secured Indebtedness; (d) Liens on the assets or
properties of the Company and its Restricted Subsidiaries, arising after the
Issue Date, securing Capitalized Lease Obligations permitted to be incurred
under clause (g) of the covenant "Limitation on Indebtedness," provided that
(1) the aggregate principal amount of Indebtedness secured by such Liens shall
not exceed the lesser of the cost or Fair Market Value of the assets or
property so acquired and (2) such Liens shall not encumber any assets or
property of the Company or its Restricted Subsidiaries other than the assets
or property so acquired and shall attach to such assets or property within 60
days of the acquisition of such assets or property; (e) leases and subleases
of real property which do not interfere with the ordinary conduct of the
business of the Company or any of its Restricted Subsidiaries, and which are
made on customary and usual terms applicable to similar properties; (f) Liens
securing Indebtedness which is incurred to refinance Indebtedness which has
been secured by a Lien permitted under the Indenture and is permitted to be
refinanced under the Indenture, provided that such Liens do not extend to or
cover any property or assets of the Company or any of its Restricted
Subsidiaries not securing the Indebtedness so refinanced; (g) Liens securing
Acquired Indebtedness, provided that such Liens (1) are not incurred in
connection with, or in contemplation of the acquisition of the property or
assets acquired and (2) do not extend to or cover any property or assets of
the Company or any of its Restricted Subsidiaries (other than the
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property or assets of the Restricted Subsidiary so acquired that are subject
to such Lien); (h) Liens in favor of the Trustee under the Indenture; (i)
Liens securing Indebtedness under the New Credit Facility; and (j) any
replacement, extension or renewal, in whole or in part, of any Lien described
in this or the foregoing clauses, including in connection with any refinancing
of the Indebtedness, in whole or in part, secured by any such Lien, provided
that to the extent any such clause limits the amount secured or the assets
subject to such Liens, no extension or renewal shall increase the amount or
the assets subject to such Liens, except for Liens associated with such
additional assets that are otherwise permitted hereunder. The Indenture will
further provide that the Guarantor will not create, incur, assume or suffer to
exist any Lien (other than the Lien created under the Indenture) of any kind
upon any of its property or assets (including without limitation Capital Stock
of its Restricted Subsidiaries) now owned or hereafter acquired by it.
Notwithstanding the foregoing, Liens shall be permitted by the previous
clauses (a) through (h) only to the extent that any Indebtedness secured by
such Liens is incurred pursuant to and in accordance with the provisions of
the Indenture.
Limitation on Transactions with Affiliates. The Indenture provides that
neither the Company nor any of its Restricted Subsidiaries nor the Guarantor
will, from and after the Issue Date, sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into any contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate (each of the
foregoing, an "Affiliate Transaction"), unless (a) such Affiliate Transaction
is on terms that are no less favorable to the Company or the relevant
Restricted Subsidiary than those that could have been obtained in a comparable
transaction by the Company or such Restricted Subsidiary with an unrelated
Person and (b) the Company delivers to the Trustee (i) with respect to any
Affiliate Transaction involving aggregate payments in excess of $250,000, a
resolution of the Board of Directors set forth in an officers' certificate
certifying that such Affiliate Transaction complies with clause (a) above and
such Affiliate Transaction is approved by a majority of the disinterested
members of the Board of Directors and (ii) with respect to any Affiliate
Transaction (other than the purchase in the ordinary course of business of
property or assets for resale) involving aggregate payments in excess of
$1,000,000, an opinion as to the fairness to the Company or, in the case of a
transaction with an Affiliate and a Restricted Subsidiary, to such Restricted
Subsidiary, in each case from a financial point of view issued by an
investment banking firm of national standing; provided, however, that (i) any
employment agreement, consulting agreement and indemnification obligation
entered into by the Company or any of its Restricted Subsidiaries in the
ordinary course of business and consistent with the past practice of the
Company or such Restricted Subsidiary, (ii) transactions in accordance with
the terms of the Tax Sharing Agreement or the Management Services Agreement
(provided that the Company shall not be permitted to make any payment to Dart
under the Tax Sharing Agreement in respect of taxes on accrued but unpaid
interest income of the Company on intercompany loans), (iii) the payment of
reasonable and customary fees to directors of the Company who are not
employees of the Company, and (iv) transactions permitted by the provisions of
the Indenture described above under the covenants "Limitation on Restricted
Payments" and "Limitation on Investments, Loans and Advances," in each case,
shall not be deemed Affiliate Transactions.
Restriction on Mergers, Consolidations and Transfers of Assets. The
Indenture provides that the Company shall not consolidate with or merge with
or into or sell, assign, convey, lease, transfer or otherwise dispose of all
or substantially all of its properties and assets to any Person or Persons in
a single transaction or through a series of related transactions unless: (a)
the Company shall be the continuing Person or the Person formed by or
surviving such consolidation or merger or the Person to which such sale,
assignment, conveyance, lease, transfer or other disposition is made (the
"surviving entity") shall be a corporation organized and validly existing
under the laws of the United States or any State thereof or the District of
Columbia; (b) the surviving entity shall expressly assume, by a supplemental
indenture executed and delivered to the Trustee, in form and substance
reasonably satisfactory to the Trustee, all of the obligations of the Company
under the Senior Notes and the Indenture; (c) immediately before and
immediately after giving effect to such transaction or series of transactions
(including, without limitation, any Indebtedness incurred or anticipated to be
incurred in connection with or in respect to such transaction or series of
transactions), no Default or Event of Default shall have occurred and be
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continuing; (d) the Company or the surviving entity (in the case of a merger
or consolidation involving the Company or any sale, assignment, conveyance,
lease, transfer or other disposition of all or substantially all of the
Company's properties and assets) shall immediately after giving effect to such
transaction or series of transactions (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions) have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction or series of transactions; (e)
immediately after giving effect to such transaction or series of transactions,
the Company or the surviving entity (in the case of a merger or consolidation
involving the Company or any sale, assignment, conveyance, lease, transfer or
other disposition of all or substantially all of the Company's properties and
assets) could incur $1.00 of Indebtedness pursuant to clause (e) of the
"Limitation on Indebtedness" covenant described above; and (f) the Company or
the surviving entity shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, in each case stating that such
consolidation, merger, sale, assignment, conveyance, lease, transfer or other
disposition and, if a supplemental indenture is required in connection with
such transaction or series of transactions, such supplemental indenture
complies with this covenant and that all conditions precedent in the Indenture
relating to the transaction or series of transactions have been satisfied. The
foregoing limitations in clauses (b) and (f) of this covenant shall not apply
to a merger of any Wholly Owned Restricted Subsidiary of the Company into the
Company. The foregoing provisions of this covenant relating to restrictions on
mergers, consolidations and transfers of assets shall also apply to Guarantor,
provided that with respect to clause (b) above, the Company shall be deemed to
mean Guarantor.
Limitation on Lines of Business. The Indenture provides that neither the
Company nor any of its Restricted Subsidiaries will engage in any business
other than those businesses in which the Company is engaged on the Issue Date
and any other businesses related thereto.
Limitation on Asset Sales. The Indenture provides that the Company shall
not, and shall not cause or permit any of its Restricted Subsidiaries to, make
any Asset Sale, unless (a) the Company or the applicable Restricted Subsidiary
receives consideration at the time of such Asset Sale at least equal to the
Fair Market Value of the assets sold, (b) at least 85% of the consideration
for such Asset Sale (other than assumption of trade Indebtedness) consists of
cash and Cash Equivalents, and (c) upon consummation of an Asset Sale, the
Company will within 365 days of the receipt of the proceeds therefrom, either:
(i) apply or cause the applicable Restricted Subsidiary to apply the Net Cash
Proceeds of any Asset Sale to (1) an investment in properties and assets that
replace the properties and assets that are the subject of such Asset Sale or
(2) an investment in properties and assets that will be used in the business
of the Company and its Restricted Subsidiaries as existing on the Issue Date;
(ii) in the case of a sale of a store or stores, deem such Net Cash Proceeds
to have been applied to the extent of any capital expenditures made to acquire
or construct a replacement store in the general vicinity of the store sold
within 365 days preceding the date of the Asset Sale; or (iii) repay senior
Indebtedness. If 365 days after the receipt by the Company of Net Cash
Proceeds from an Asset Sale, the accumulated Net Cash Proceeds therefrom equal
or exceed $5,000,000 (such accumulated Net Cash Proceeds are defined herein as
the "Net Cash Proceeds Offer Amount"), then the Company shall apply or cause
the applicable Restricted Subsidiary to apply such Net Cash Proceeds to the
purchase of Senior Notes tendered to the Company for purchase at a price equal
to 100% of the principal amount thereof plus accrued interest thereon to the
date of purchase pursuant to an offer to purchase made by the Company as set
forth below (a "Net Cash Proceeds Offer"). Notwithstanding the foregoing, the
Company may exclude from the foregoing provisions Asset Sales subsequent to
the Issue Date, the proceeds of which are derived from the sale and
substantially concurrent lease-back of a supermarket and/or related assets or
equipment which is acquired or constructed by the Company or a Restricted
Subsidiary subsequent to the Issue Date; provided, however, that any such sale
and substantially concurrent lease-back occurs within 270 days following such
acquisition or the completion of such construction, as the case may be.
Pending the utilization of any Net Cash Proceeds in the manner (and within the
time period) described above, the Company may use any such Net Cash Proceeds
to repay revolving loans under the New Credit Facility without a permanent
reduction of the commitment thereunder.
Each Net Cash Proceeds Offer will be mailed to Holders as shown on the
register of Holders not less than 365 nor more than 390 days after the
relevant Asset Sale, with a copy to the Trustee, shall specify the purchase
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date (which shall be no earlier than 30 days nor later than 40 days from the
date such notice is mailed) and shall otherwise comply with the procedures set
forth in the Indenture. Upon receiving notice of the Net Cash Proceeds Offer,
Holders may elect to tender their Senior Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders properly
tender Senior Notes in an amount exceeding the Net Cash Proceeds Offer, Senior
Notes of tendering Holders will be repurchased on a pro rata basis (based on
amounts tendered). A Net Cash Proceeds Offer shall remain open for a period of
20 business days or such longer period as may be required by law.
To the extent that the aggregate purchase price of Senior Notes tendered
pursuant to any Net Cash Proceeds Offer is less than the Net Cash Proceeds
Offer Amount (such shortfall constituting a "Deficiency"), the Company may use
such Deficiency for general corporate purposes. Upon completion of any Net
Cash Proceeds Offer, the Net Cash Proceeds Offer Amount shall be reset to
zero.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
purchase of the Senior Notes pursuant to a Net Cash Proceeds Offer. To the
extent that the provisions of any securities laws or regulations conflict with
the "Asset Sale" provisions of the Indenture, the Company shall comply with
the applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
Limitation on Issuance and Sale of Capital Stock of Restricted
Subsidiaries. The Indenture provides that the Company will not permit any
Restricted Subsidiary to issue any Capital Stock (other than to the Company or
to a Restricted Subsidiary) or permit any Person (other than the Company or a
Restricted Subsidiary) to own any Capital Stock of any Restricted Subsidiary;
provided, however, that the Company and any Restricted Subsidiary may, in any
single transaction, sell all, but not less than all, of the issued and
outstanding Capital Stock of any Restricted Subsidiary to any Person as
provided under the "Limitation on Asset Sales" covenant above.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture:
(i) default in the payment of any interest on the Senior Notes when it
becomes due and payable and continuance of such default for a period of 30
days; or
(ii) default in the payment of the principal of, or premium, if any, on
the Senior Notes when due (including a default in the obligation to
effectuate the Special Mandatory Redemption as provided under the section
entitled "Rights of Redemption" of the Indenture or certain provisions
relating to the Special Mandatory Redemption contained in the Pledge
Agreement or in payment upon the exercise by a Holder of its right to
require repurchase of its Senior Notes pursuant to the covenant "Repurchase
at Holder's Option Upon Change in Control" set forth in the Indenture); or
(iii) default by the Company or the Guarantor in the performance, or
breach, of any covenant in the Indenture (other than defaults specified in
clause (i) or (ii) above), or the Pledge Agreement (other than a default
specified in clause (ii) above), and continuance of such default or breach
for a period of 30 days after written notice to the Company or the
Guarantor, as the case may be, by the Trustee or to the Company or the
Guarantor, as the case may be, and the Trustee by the Holders of at least
25% in aggregate principal amount of the outstanding Senior Notes; or
(iv) failure by the Company, the Guarantor or any Restricted Subsidiary
(a) to make any payment when due with respect to any other Indebtedness
under one or more classes or issues of Indebtedness, which one or more
classes or issues of Indebtedness are in an aggregate principal amount of
$5,000,000 or more and such failure extends beyond the stated period of
grace applicable thereto or (b) to perform any term, covenant, condition or
provision of one or more classes or issues of Indebtedness, which one or
more classes or issues of Indebtedness are in an aggregate principal amount
of $5,000,000 or more, which failure, in the case of this clause (b),
results in an acceleration of the maturity thereof (whether or not such
right has yet been exercised); or
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(v) one or more judgments, orders or decrees for the payment of money in
excess of $2,500,000, either individually or in an aggregate amount, shall
be entered against the Company, the Guarantor or any of their Restricted
Subsidiaries or any of their respective properties and shall not be
discharged and there shall have been a period of 60 days during which a
stay of enforcement of such judgment or order, by reason of pending appeal
or otherwise, shall not be in effect; or
(vi) a decree, judgment or order by a court of competent jurisdiction
shall have been entered adjudging the Company, the Guarantor or any of
their respective Restricted Subsidiaries that individually or as a group
constitute a Significant Subsidiary, as bankrupt or insolvent, or approving
as properly filed a petition seeking reorganization of the Company, the
Guarantor or such Significant Subsidiary under any bankruptcy or similar
law, and such decree or order shall have continued undischarged and
unstayed for a period of 60 days; or a decree or order of a court of
competent jurisdiction over the appointment of a receiver, liquidator,
trustee or assignee in bankruptcy or insolvency of the Company, the
Guarantor or such Significant Subsidiary, or of the property of any such
Person, or for the winding up or liquidation of the affairs of any such
Person, shall have been entered, and such decree, judgment or order shall
have remained in force undischarged and unstayed for a period of 60 days;
or
(vii) the Indenture or, prior to the termination in accordance with its
terms, the Pledge Agreement, ceases to be in full force and effect or
ceases to give the Trustee, in any material respect, the Liens, rights,
powers and privileges purported to be created thereby, in each case, as
determined by a court of competent jurisdiction.
If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) occurs and is continuing, then the
Trustee or the Holders of at least 25% in aggregate principal amount of the
outstanding Senior Notes may, by written notice, and the Trustee upon the
request of the Holders of not less than 25% in aggregate principal amount of
the outstanding Senior Notes shall, declare the principal amount plus accrued
interest (if any) on all Senior Notes on the date of such declaration to be
due and payable immediately (the "Default Amount"). Upon such declaration, the
Default Amount shall become due and payable immediately. If an Event of
Default specified in clause (vi) above with respect to the Company occurs and
is continuing, then the Default Amount shall ipso facto become and be
immediately due and payable without any declaration or other act on the part
of the Trustee or any Holder.
After a declaration of acceleration, the Holders of a majority in aggregate
principal amount of outstanding Senior Notes may, by notice to the Trustee,
rescind such declaration of acceleration if all existing Events of Default
have been cured or waived, other than nonpayment of the Default Amount that
has become due solely as a result of such acceleration and if the rescission
of acceleration would not conflict with any judgment or decree by a court of
competent jurisdiction. The Holders of a majority in aggregate principal
amount of the outstanding Senior Notes also have the right to waive past
defaults under the Indenture except a default in the payment of the principal
of, premium, if any, or interest on any Senior Note, or in respect of a
covenant or a provision which cannot be modified or amended without the
consent of all Holders.
No Holder has any right to institute any proceeding with respect to the
Indenture or pursue any remedy thereunder, unless the Holder or Holders of at
least 25% in aggregate principal amount of the outstanding Senior Notes have
made written request, and offered reasonable indemnity, to the Trustee to
institute such proceeding or pursue such remedy, the Trustee has failed to
institute such proceeding or pursue such remedy within 15 days after receipt
of such notice and the Trustee has not within such 15-day period received
directions inconsistent with such written request by Holders of a majority in
aggregate principal amount of the outstanding Senior Notes. Such limitations
do not apply, however, to a suit instituted by a Holder for the enforcement of
the payment of the principal of, premium, if any, or accrued interest on, such
Senior Note on or after the respective due dates expressed in such Senior
Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and to use
the same degree of care and skill in its exercise thereof as a prudent
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Person would exercise under the circumstances in the conduct of such Person's
own affairs. Subject to the provisions of the Indenture relating to the duties
of the Trustee, in case an Event of Default shall occur and be continuing, the
Trustee is not under any obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the Holders unless
such Holders shall have offered to such Trustee reasonable indemnity. Subject
to certain provisions concerning the rights of the Trustee, the Holders of a
majority in aggregate principal amount of outstanding Senior Notes have the
right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee, or exercising any trust or power
conferred on the Trustee.
DEFEASANCE
The Company may at any time terminate all of its obligations with respect to
the Senior Notes ("legal defeasance"), except for certain obligations,
including those regarding any trust established for a legal defeasance and
obligations to register the transfer or exchange of the Senior Notes, to
replace mutilated, destroyed, lost or stolen Senior Notes and to maintain
agencies in respect of the Senior Notes. The Company may at any time terminate
its obligations under certain covenants set forth in the Indenture, some of
which are described under "Certain Covenants" above, and any omission to
comply with such obligations shall not constitute a Default or an Event of
Default with respect to the Senior Notes issued under the Indenture ("covenant
defeasance"). In order to exercise either legal defeasance or covenant
defeasance, (i) the Company must irrevocably deposit in trust with the
Trustee, for the benefit of the Holders, money or U.S. Government obligations,
or a combination thereof, in such amounts as will be sufficient to pay the
principal of, and premium, if any, and accrued interest on the Senior Notes to
redemption or maturity, as the case may be, and comply with certain other
conditions, including the delivery of opinions as to certain tax and
bankruptcy matters; provided, however, that the Trustee shall have been
irrevocably instructed to apply such money or the proceeds of such U.S.
Government obligations to said payments with respect to the Senior Notes on
the maturity date or such redemption date, as the case may be; (ii) in the
case of legal defeasance, the Company shall have delivered to the Trustee an
opinion of counsel confirming that (A) the Company has received from, or there
has been published by, the Internal Revenue Service a ruling or (B) since the
Issue Date, there has been a change in the applicable Federal income tax law,
in either case to the effect that, and based thereon such opinion of counsel
shall confirm that, the Holders will not recognize income, gain or loss for
Federal income tax purposes as a result of such legal defeasance and will be
subject to Federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such legal defeasance had not
occurred; (iii) in the case of covenant defeasance, the Company shall have
delivered to the Trustee an opinion of counsel confirming that the Holders
will not recognize income, gain or loss for Federal income tax purposes as a
result of such covenant defeasance and will be subject to Federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such covenant defeasance had not occurred; (iv) no Default or
Event of Default shall have occurred and be continuing on the date of such
deposit or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such legal defeasance or covenant defeasance shall not result
in a breach or violation of, or constitute a default under, the Indenture or
any other material agreement or instrument to which the Company, the Guarantor
or any Restricted Subsidiary is a party or by which the Company, the Guarantor
or any Restricted Subsidiary is bound; (vi) the Company shall have delivered
to the Trustee an opinion of counsel to the effect that (A) the trust funds
will not be subject to any rights of holders of Indebtedness senior in right
of payment to the Senior Notes, after the 91st day following the deposit and
(B) after the 91st day following the deposit the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally; (vii) the Company shall
have delivered to the Trustee an officers' certificate stating that the
deposit was not made by the Company with the intent of preferring the Holders
over other creditors of the Company or with the intent of defeating,
hindering, delaying or defrauding creditors of the Company or others; and
(viii) the Company shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent relating to the legal defeasance or covenant defeasance have been
complied with.
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SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of
Senior Notes) as to all outstanding Senior Notes when either (a) all such
Senior Notes theretofore authenticated and delivered (except lost, stolen or
destroyed Senior Notes which have been replaced or paid and Senior Notes for
the payment of which money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the Trustee for
cancellation and the Company has paid all sums payable by it under the
Indenture; or (b) (i) all such Senior Notes not theretofore delivered to the
Trustee for cancellation have become due and payable and have been called for
redemption and the Company has irrevocably deposited or caused to be deposited
with the Trustee as trust funds in trust for the purpose an amount of money
sufficient to pay and discharge the entire indebtedness on the Senior Notes
not theretofore delivered to the Trustee for cancellation, for principal,
premium, if any, and accrued interest to the date of such deposit or
redemption, as the case may be; (ii) the Company has paid all sums payable by
it under the Indenture; and (iii) the Company has delivered irrevocable
instructions to the Trustee to apply the deposited money toward the payment of
the Senior Notes at maturity or the redemption date, as the case may be. In
addition, the Company must deliver an officers' certificate and an opinion of
counsel stating that all conditions precedent to satisfaction and discharge
have been complied with.
MODIFICATION OF THE INDENTURE
From time to time the Company, when authorized by resolution of its Board of
Directors, and the Trustee may, without the consent of the Holders, amend,
waive or supplement the Indenture or the Senior Notes for certain specified
purposes, including, among other things, (i) curing ambiguities, defects or
inconsistencies, (ii) maintaining the qualification of the Indenture under the
TIA, (iii) making any change that does not adversely affect the rights of any
Holder, (iv) mortgaging, pledging, hypothecating or granting a security
interest in favor of the Trustee as additional security for the payment and
performance of the obligations under the Indenture, in any property or assets,
including any which is required to be mortgaged, pledged or hypothecated, or
in which a security interest is required to be granted, to the Trustee, (v)
adding to the covenants of the Company for the benefit of the Holders, or
surrendering any right or power herein conferred upon the Company, or
providing any additional rights or benefits to the Holders, (vi) evidencing
the succession of another Person to the Company, and the assumption by any
such successor of the obligations of the Company in the Indenture and in the
Senior Notes, and (vii) setting out the form of the Exchange Notes and setting
forth such other matters as are necessary in connection with the Exchange
Offer that do not adversely affect the rights of any Holder. Other amendments
and modifications of the Indenture or the Senior Notes may be made by the
Company and the Trustee with the consent of the Holders of not less than a
majority of the aggregate principal amount of the outstanding Senior Notes;
provided, however, that no such modification or amendment may, without the
consent of the Holder of each outstanding Senior Note affected thereby, (i)
reduce the principal amount outstanding of, extend the fixed maturity of, or
alter the redemption provisions of, the Senior Notes, (ii) change the currency
in which any Senior Notes or any principal, premium or the accrued interest
thereon is payable, (iii) reduce the percentage in principal amount
outstanding of Senior Notes, Holders of which must consent to an amendment,
supplement or waiver or consent to take any action under the Indenture or the
Senior Notes, (iv) impair the right to institute suit for the enforcement of
any payment on or with respect to the Senior Notes, (v) waive a default in
payment with respect to the Senior Notes, (vi) reduce the rate or extend the
time for payment of interest on the Senior Notes, (vii) affect the ranking or
security of the Senior Notes or (viii) following the mailing of a Company
Notice, modify the provisions of the Indenture with respect to such Company
Notice in a manner adverse to any Holder.
In addition, the Indenture and the Senior Notes may be amended by the
Company and the Trustee (i) to cure any defect, ambiguity or inconsistency or
to make any other provisions with respect to matters of questions arising
under the Indenture that shall not be inconsistent with the provisions
therein; provided, however that such amendment or supplement does not
adversely affect the rights of any holder thereof, or (ii) to make any other
change that does not adversely affect the rights of any holder thereunder in
any material respect.
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ADDITIONAL INFORMATION
The Indenture provides that the Company must deliver to the Trustee within
15 days after the filing of the same with the Commission, copies of the
quarterly and annual reports and of the information, documents and other
reports, if any, which the Company is required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further
provides that, notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
will file with the Commission, to the extent permitted by law or regulation,
and provide the Trustee and Holders with such quarterly and annual reports and
such information, documents and other reports specified in Section 13 and
15(d) of the Exchange Act within 15 days of the date such reports would have
been due had the Company been required to file such information, documents and
reports with the Commission. The Company will also comply with the other
provisions of TIA Section 314(a).
At any time when the Company is not required by applicable law or regulation
to file the aforementioned reports, upon the request of a Holder, the Company
will promptly furnish or cause to be furnished such information as is
specified pursuant to Rule 144A(d)(4) under the Securities Act (or any
successor provision thereto) to such Holder or to a prospective purchaser of
the Senior Notes designated by such Holder, as the case may be, in order to
permit compliance by such Holder with Rule 144A.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all such terms as well as any other
capitalized terms used herein for which no definition is provided.
"Acquired Indebtedness" means (i) with respect to any Person that becomes a
Restricted Subsidiary of the Company (or is merged with or into the Company or
any of its Restricted Subsidiaries) after the Issue Date, Indebtedness of such
Person or any of its subsidiaries existing at the time such Person becomes a
Restricted Subsidiary of the Company (or is merged with or into the Company or
any of its Restricted Subsidiaries) and which was not incurred in connection
with, or in contemplation of, such Person becoming a Restricted Subsidiary of
the Company (or being merged with or into the Company or any of its Restricted
Subsidiaries) and (ii) with respect to the Company or any of its Restricted
Subsidiaries, any Indebtedness assumed by the Company or any of its Restricted
Subsidiaries in connection with the acquisition of any assets from another
Person (other than the Company or any of its Restricted Subsidiaries), and
which was not incurred by such other Person in connection with, or in
contemplation of, such acquisition.
"Adjusted Consolidated Net Income" means, with respect to any Person, for
any period, the Consolidated Net Income of such Person for such period plus
any non-cash charges relating to the amortization of goodwill or any other
purchase accounting adjustment resulting from any acquisition.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as applied to any Person, is defined to
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such Person, whether through
the ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) any capital contribution (by means of transfer
of cash or other property to others or payment for property or services for
the account or use of others, or otherwise) to, or purchase or acquisition of
Capital Stock in, any other Person by the Company or any of its Restricted
Subsidiaries, pursuant to which such Person shall become a Restricted
Subsidiary of the Company or any of its Restricted Subsidiaries or shall be
merged with or into the Company or any of its Restricted Subsidiaries or (ii)
any acquisition by the Company or any of its Restricted Subsidiaries of the
assets of any Person which constitute substantially all of an operating unit
or business of such Person.
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"Asset Sale" means, with respect to any Person, any direct or indirect sale,
issuance, conveyance, lease, assignment, transfer or other disposition or
series of sales, transfers or other dispositions (including without
limitation, by merger or consolidation or by exchange of assets and whether by
operation of law or otherwise) made by such Person or any of its Restricted
Subsidiaries to any Person other than such Person or one of its Wholly Owned
Restricted Subsidiaries (or, in the case of a sale, transfer or other
disposition by a Restricted Subsidiary, to any Person other than the Company
or a directly or indirectly Wholly Owned Restricted Subsidiary) of any assets
of such Person or any of its Restricted Subsidiaries including, without
limitation, assets consisting of any Capital Stock or other securities held by
such Person or any of its Restricted Subsidiaries, and any Capital Stock
issued by any Restricted Subsidiary of such Person, in each case, outside of
the ordinary course of business, excluding, however, any sale, transfer or
other disposition, or series of related sales, transfers or other dispositions
(i) resulting in Net Cash Proceeds to the Company and the Restricted
Subsidiaries of $250,000 or less; (ii) of Cash Equivalents or inventory in the
ordinary course of business or obsolete equipment in the ordinary course of
business consistent with past practices of the Company; (iii) the lease or
sublease of any real or personal property in the ordinary course of business;
or (iv) the proceeds of which are not applied in accordance with the covenant
"Limitation on Asset Sales," and which, together with all other proceeds of
Asset Sales that are not applied in accordance with such covenant, do not
exceed $5,000,000.
"Board of Directors" means the board of directors of the Company or any
committee of such board of directors duly authorized to act under the
Indenture.
"Board Resolution" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have
been duly adopted by the Board of Directors of such Person and to be in full
force and effect on the date of such certification, and delivered to the
Trustee.
"Capital Stock" means, with respect to any Person, any and all shares,
partnership, membership or other interests, participations or other
equivalents (however designated, whether voting or non-voting) of such
Person's capital stock, whether now outstanding or issued after the Issue
Date, and any and all rights, warrants or options exchangeable into such
capital stock.
"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed) that is required to be classified
and accounted for as a capital lease obligation under GAAP, and, for the
purpose of the Indenture, the amount of such obligation at any date shall be
the capitalized amount thereof at such date, determined in accordance with
GAAP.
"Cash Equivalents" means (i) obligations issued or unconditionally
guaranteed by the United States of America or any agency thereof, or
obligations issued by an agency or instrumentality thereof and backed by the
full faith and credit of the United States of America having maturities of not
more than one year from the date of acquisition; (ii) commercial paper rated
the highest grade by Moody's or S&P and maturing not more than one year from
the date of creation thereof; (iii) time deposits with, and certificates of
deposit and banker's acceptances issued by, any bank having capital surplus
and undivided profits aggregating at least $500,000,000 and maturing not more
than one year from the date of creation thereof; (iv) repurchase agreements
that are secured by a perfected security interest in an obligation described
in clause (i) and are with any bank described in clause (iii); (v) shares of
any money market mutual fund that (a) has at least 95% of its assets invested
continuously in the types of investments referred to in clauses (i) and (ii)
above, (b) has net assets of not less than $500,000,000 and (c) has the
highest rating obtainable from either S&P or Moody's; and (vi) readily
marketable direct obligations issued by any state of the United States of
America or any political subdivision thereof having one of the two highest
rating categories obtainable from either Moody's or S&P.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank (as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of
such Person) prior to shares of Capital Stock of any other class of such
Person.
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"Consolidated Cash Flow" means, with respect to any Person, for any period
(all as determined on a consolidated basis in accordance with GAAP),
Consolidated Net Income of such Person in such period plus (a) to the extent
reflected in the income statement of such Person, (i) income taxes, (ii)
Interest Expense, (iii) depreciation and amortization, (iv) LIFO charges, (v)
the amount of any restructuring reserve or charge and (vi) other non-cash
charges reducing Consolidated Net Income minus (b) to the extent reflected in
such income statement, non-cash items (excluding the reversal of any non-cash
charge to the extent such non-cash charge reduced Consolidated Net Income in a
prior period) which had the effect of increasing Consolidated Net Income for
such period.
"Consolidated Interest Coverage Ratio" means, for any Person, on a
consolidated basis, the ratio of (i) Consolidated Cash Flow for such Person
and its Restricted Subsidiaries during the Four Quarter Period immediately
preceding the date of the incurrence of the proposed Indebtedness giving rise
to the need to calculate the Consolidated Interest Coverage Ratio (the
"Transaction Date") to (ii) Interest Expense of such Person for such Four
Quarter Period. For purposes of this definition, "Consolidated Cash Flow" and
"Interest Expense" shall be calculated after giving effect on a pro forma
basis for such Four Quarter Period to (i) the incurrence or repayment of any
Indebtedness of such Person or any of its Restricted Subsidiaries at any time
during or subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such incurrence or repayment and the
application of the proceeds thereof, as the case may be, occurred on the first
day of the Four Quarter Period, (ii) any Asset Sales or other asset
dispositions of such Person and its Restricted Subsidiaries occurring at any
time during or subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such Asset Sale or other asset
disposition and the applications of the proceeds therefrom occurred on the
first day of the Four Quarter Period and (iii) any Asset Acquisition or other
acquisition of assets or Capital Stock of an entity (occurring by merger or
otherwise) occurring at any time during or subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
acquisition occurred on the first day of the Four Quarter Period. If such
Person or any of its Restricted Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the preceding sentence shall give effect to
the incurrence of such guaranteed Indebtedness as if such Person or any
Restricted Subsidiary of such Person had directly incurred or otherwise
assumed such guaranteed Indebtedness. Furthermore, in calculating "Interest
Expense": (a) interest on any Indebtedness under a revolving credit facility
shall be computed based upon the pro forma average daily balance of such
Indebtedness during the Four Quarter Period; and (b) if interest on any
Indebtedness actually incurred on the Transaction Date may be determined
optionally at an interest rate based upon a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during
the Four Quarter Period.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided, however, that (a) the Net Income of any Person (the "other Person")
in which the Person in question or one of its Restricted Subsidiaries has a
joint interest with a third party (which interest does not cause the Net
Income of such other Person to be consolidated into the Net Income of the
Person in question in accordance with GAAP) shall be included only to the
extent of the amount of dividends or distributions paid to the Person in
question or one of its Restricted Subsidiaries, (b) the Net Income of any
Restricted Subsidiary of the Person in question that is subject to any
restriction or limitation on the payment of dividends or the making of other
distributions shall be excluded to the extent of such restriction or
limitation, (c) (i) the Net Income (or loss) of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition and (ii) any net gain or loss resulting from an Asset Acquisition
or Asset Sale by the Person in question or any of its Restricted Subsidiaries
shall be excluded, and (d) extraordinary gains and losses and any one-time
increase or decrease to Net Income recorded because of the adoption of new
accounting policies, practices or standards required or permitted by GAAP
shall be excluded.
"Consolidated Net Worth" means with respect to any Person at any date of
determination, the consolidated equity represented by the shares of such
Person's Capital Stock (other than Disqualified Stock) at such date, as
determined on a consolidated basis in accordance with GAAP and adjusted to
exclude all upward revaluations
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and other write-ups in the book value of any asset of such Person or a
Restricted Subsidiary of such Person subsequent to the Issue Date.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default under the Indenture.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable, in each case, at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or is exchangeable for Indebtedness, or
redeemable at the option of the holder thereof, in whole or in part, on or
prior to the Stated Maturity of the Senior Notes.
"Equity Offering" means a private placement or public offering of Capital
Stock (other than Disqualified Stock) of the Company.
"Fair Market Value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length free market transaction, for
cash, between a willing seller and a willing buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. With respect to any
Person, Fair Market Value shall be determined by the Board of Directors of
such Person acting in good faith and shall be evidenced by a Board Resolution
delivered to the Trustee.
"Four Quarter Period" means the four most recent full fiscal quarters for
which financial information is available.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date and as such principles may be
amended from time to time, including, without limitation, those set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and Statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and
any obligation, direct or indirect, contingent or otherwise, of such Person
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness of such other Person (whether arising by virtue of
partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole
or in part). The term "guarantee" used as a verb has a corresponding meaning.
"Holder" means a Person in whose name a Senior Note is registered.
"Increasing Rate Note Indenture" means the indenture dated as of February 6,
1997, by and among SFW Acquisition Corp. (predecessor to the Company), the
Guarantor and the Trustee, as amended by the First Supplemental Indenture,
dated as of February 6, 1997.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
which purchase price is due more than six months after the date of placing
such property in service or taking delivery and title thereto or the
completion of such services, except trade payables incurred in the ordinary
course that have not remained unpaid for greater than 90 days past their
original due date, or accrued liabilities arising in the ordinary course of
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business which are not overdue or which are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted and for
which adequate reserves have been made, (v) all obligations of such Person as
lessee relating to a Capitalized Lease Obligation, (vi) all indebtedness of
other Persons secured by a Lien on any asset of such Person, whether or not
such indebtedness is assumed by such Person, (vii) all indebtedness of other
Persons guaranteed by such Person (but only to the extent of the amount
actually guaranteed), (viii) to the extent not otherwise included in this
definition, obligations under currency agreements, interest rate agreements
and commodity agreements and (ix) any and all deferrals, renewals, extensions
and refunding of, or amendments, modifications or supplements to, any of the
foregoing. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date.
"Interest Expense" means, for any Person for any period, (i) total interest
obligations (paid or accrued) of such Person in respect of its Indebtedness,
determined on a consolidated basis and in accordance with GAAP (including,
without limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capitalized Lease
Obligations, commissions, discounts and other fees and charges incurred in
respect of letters of credit or bankers' acceptance financing); minus (ii)
amortization of deferred financing costs.
"Investment" means (i) any direct or indirect advance, loan or other
extension of credit or capital contribution to another Person (by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others including the purchase of property
from another Person subject to an understanding or agreement, contingent or
otherwise, to resell such property to such other Person), (ii) any commitment
to make any such advance, loan, extension or capital contribution (but
excluding accounts receivable in the ordinary course), (iii) any purchase or
acquisition (whether for cash, property, services, securities or otherwise) of
Capital Stock, bonds, notes, debentures, options, warranty or similar
instruments issued by any Person or (iv) the designation by the Company's
Board of Directors of a Restricted Subsidiary to be an Unrestricted
Subsidiary. The Company shall be deemed to make an "Investment" in an amount
equal to the Fair Market Value of the net assets of any Subsidiary determined
by the Board of Directors of the Company in good faith at the time that such
Subsidiary is designated an Unrestricted Subsidiary. Any property transferred
to an Unrestricted Subsidiary from the Company shall be deemed an Investment
valued at its Fair Market Value, as determined by the Board of Directors of
the Company in good faith at the time of such transfer.
"Issue Date" means the date of original issuance of the Senior Notes under
the Indenture.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof, or any
agreement to give any security interest).
"Management Services Agreement" means the Management Services Agreement
dated February 6, 1997, between Dart and SFW Acquisition Corp. (predecessor of
the Company).
"Moody's" means Moody's Investors Service, Inc. or if Moody's Investors
Service, Inc. shall cease rating debt securities having a maturity at original
issuance of at least one year and such ratings business shall have been
transferred to a successor Person, such successor Person; provided, however,
that if Moody's Investors Service, Inc. ceases rating debt securities having a
maturity at original issuance of at least one year and its ratings business
with respect thereto shall not have been transferred to any successor Person,
then "Moody's" shall mean any other nationally recognized rating agency (other
than S&P) that rates debt securities having a maturity at original issuance of
at least one year and that shall have been designated by the Company by a
written notice given to the Trustee.
"Net Cash Proceeds" means (a) in the case of any Asset Sale or any issuance
and sale by any Person of Capital Stock, the aggregate net cash proceeds and
Cash Equivalents received by such Person after payment of
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expenses, taxes, commissions and the like incurred in connection therewith
(and, in the case of any Asset Sale, net of the amount of cash applied to
repay Indebtedness secured by the asset involved in such Asset Sale) and (b)
in the case of any conversion or exchange of any outstanding Indebtedness or
Disqualified Stock of any Person for or into shares of Capital Stock of the
Company, the sum of (i) the proceeds received by the Company in connection
with the issuance of such Indebtedness or Disqualified Stock on the date of
such issuance and (ii) any additional amount paid by the holder to the Company
upon such conversion or exchange.
"Net Income" means, with respect to any Person for any period, the net
income (loss) of such Person determined in accordance with GAAP.
"Net Sales" means, with respect to any Person for any period, the net sales
of such Person determined in accordance with GAAP.
"New Credit Facility" means a credit facility with a bank or other third
party in the aggregate principal amount at any time outstanding not to exceed
$35,000,000 that may be secured by inventory, accounts receivable and certain
other assets of the Company and its Subsidiaries, and any replacement,
renewal, refinancing or extension thereof in accordance with clause (c) of the
covenant "Limitation on Indebtedness."
"Non Recourse Debt" means Indebtedness (i) as to which under the terms
thereof (including any related instruments, documents or filings) neither the
Company nor any of its Restricted Subsidiaries (a) provides credit support of
any kind (including any undertaking, agreement or instrument that would
constitute Indebtedness) and (b) is directly or indirectly liable (as a
guarantor or otherwise); (ii) no default with respect to which (including any
rights that the holders thereof may have to take enforcement action against an
Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any
holder of any other Indebtedness of the Company or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of the Company or any of its
Restricted Subsidiaries.
"Permitted Indebtedness" shall have the meaning ascribed to such term under
the caption titled "Limitation on Indebtedness."
"Permitted Investments" means (i) certificates of deposit with final
maturities of 3 years or less issued by United States commercial banks having
capital and surplus in excess of $100,000,000; (ii) commercial paper, bankers
acceptances, notes, bonds, debentures, repurchase agreements, call loans,
guaranteed investment certificates and other similar instruments, in each case
having a rating of investment grade by S&P or Moody's and, in each case,
having a maturity of 3 years or less; (iii) marketable direct obligations of
the United States Government or a United States agency with a maturity of 3
years or less; (iv) shares of money market mutual or similar funds having
assets in excess of $100,000,000; (v) marketable direct obligations issued by
any state of the United States of America having the highest rating obtainable
from either Moody's or S&P and having a maturity of 3 years or less; (vi)
asset-backed securities rated "AA" or higher by Moody's or S&P with a maturity
of 3 years or less; and (vii) mortgage-backed securities rated "AA" or higher
by Moody's or S&P with a maturity of 3 years or less; provided that the
Company and its Restricted Subsidiaries may not make a Permitted Investment
if, as a result of giving effect thereto, (A) more than 20% of the aggregate
Investments made pursuant to clauses (i) through (vii) of this definition are
rated "BBB" or below or (B) more than 10% of the aggregate Investments made
pursuant to clauses (i) through (vii) of this definition are made pursuant to
clause (vii) of this definition.
"Permitted Liens" means, with respect to any Person, any Lien arising by
reason of (a) any judgment, decree or order of any court, so long as such Lien
is being contested in good faith and is adequately bonded, and any appropriate
legal proceedings which may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the period
within which such proceedings may be initiated shall not have expired; (b)
taxes, assessments, governmental charges or claims not yet delinquent or which
are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted or if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have
been
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made therefor; (c) security for payment of workers' compensation or other
insurance or social security legislation; (d) security for the performance of
tenders, contracts (other than contracts for the payment of money) or leases
(excluding any Capitalized Lease Obligations incurred in the ordinary course
of business); (e) deposits to secure public or statutory obligations, or in
lieu of surety, performance or appeal bonds, entered into in the ordinary
course of business; (f) judgment and attachment Liens with respect to
judgments and attachments not giving rise to an Event of Default; (g) Liens
arising by operation of law in favor of carriers, warehousemen, landlords,
mechanics, materialmen, laborers, employees or suppliers, incurred in the
ordinary course of business and as to which a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have
been made therefor, which are not yet delinquent or are being contested in
good faith by negotiations or by appropriate proceedings which suspend the
collection thereof; (h) easements, rights-of-way, zoning and similar covenants
and restrictions and other similar encumbrances or title defects which, in the
aggregate, are not substantial in amount, and which do not in any case
materially detract from the value of the property subject thereto or
materially interfere with the ordinary conduct of the business of such Person
or any of its Restricted Subsidiaries; provided, such Liens are not incurred
in connection with any borrowing of money or any commitment to loan any money
or extend any credit; (i) Liens arising in the ordinary course of business in
favor of custom and revenue authorities arising as a matter of law to secure
payment of custom duties; (j) leases or subleases granted to others not
interfering in any material respect with the ordinary conduct of the business
of such Person or of any of its Restricted Subsidiaries or which do not in any
case materially detract from the value of the property subject thereto (as
such property is used by such Person or one or more of its Restricted
Subsidiaries); and (k) Liens arising from filing precautionary UCC financing
statements relating solely to leases not prohibited by the Indenture.
"Permitted Secured Indebtedness" means any Indebtedness secured by purchase
money Liens upon or in any assets or property either acquired by the Company
and its Restricted Subsidiaries in the ordinary course of business with the
proceeds thereof or assumed by the Company and its Restricted Subsidiaries
pursuant to an Investment not prohibited by the Indenture; provided, however,
that (i) any such purchase money Lien shall not extend to or cover any assets
or property other than the assets or property being acquired and shall attach
to such assets or property within 60 days of the acquisition of such assets or
property and (ii) the aggregate principal amount of Indebtedness secured by
such Liens shall not exceed the lesser of the cost or Fair Market Value of the
assets or property being acquired.
"Person" means an individual, a corporation, a partnership, an association,
a trust or any other entity or organization, including a government or
political subdivision or an agency or instrumentality thereof.
"Pledge Agreement" means the Pledge Agreement dated the date of the
Indenture between the Company and the Trustee.
"Restricted Account" means a dedicated account to be established by the
Trustee for investment of the Restricted Proceeds in accordance with the
Pledge Agreement.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Settlement" means one or two settlements involving total payments and
commitments by Dart and its Subsidiaries of at least $50,000,000 (which may
include related expenses and payments to mortgage lenders) in which (i)
Herbert H. Haft and/or (ii) Robert M. Haft, Gloria G. Haft and Linda G. Haft,
as the case may be, relinquish his or their claims to control of Dart, dispose
(or agree to dispose) of all or substantially all of his or their Capital
Stock in Dart, disclaim any equity interest in the Company and the Guarantor
and resign any positions of employment and board representation with Dart, the
Company and the Guarantor.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such regulation is in effect on the Issue
Date.
"S&P" means Standard & Poor's Corporation or, if Standard & Poor's
Corporation shall cease rating debt securities having a maturity at original
issuance of at least one year and such ratings business shall have been
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transferred to a successor Person, such successor Person; provided, however,
that if Standard & Poor's Corporation ceases rating debt securities having a
maturity at original issuance of at least one year and its ratings business
with respect thereto shall not have been transferred to any successor Person,
then "S&P" shall mean any other nationally recognized rating agency (other
than Moody's) that rates debt securities having a maturity at original
issuance of at least one year and that shall have been designated by the
Company by a written notice given to the Trustee.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii)
with respect to any scheduled installment of principal or interest on any debt
security, the date specified in such debt security as the fixed date on which
such installment is due and payable.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of such Person or a
combination thereof.
"Tax Sharing Agreement" means the Tax Sharing Agreement dated February 6,
1997, between Dart and SFW Acquisition Corp. (predecessor of the Company).
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company (other
than the Subsidiaries of the Company existing as of the Issue Date or any
successor to any of them) that at the time of determination shall have been
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to
a Board Resolution and (ii) any Subsidiary of an Unrestricted Subsidiary; but,
in each case, only to the extent that such Subsidiary: (a) has no Indebtedness
other than Non-Recourse Debt; (b) is not party to any agreement, contract,
arrangement or understanding with the Company or any Restricted Subsidiary of
the Company unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted
Subsidiary than those that might be obtained at the time from Persons who are
not Affiliates of the Company; (c) is a Person with respect to which neither
the Company nor any of its Restricted Subsidiaries has any direct or indirect
obligation (x) to subscribe for additional Capital Stock or (y) to maintain or
preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results; (d) has not guaranteed or otherwise
directly or indirectly provided credit support for any Indebtedness of the
Company or any of its Restricted Subsidiaries; and (e) has at least one
director on its board of directors that is not a director or executive officer
of the Company or any of its Restricted Subsidiaries and has at least one
executive officer that is not a director or executive officer of the Company
or any of its Restricted Subsidiaries. Any such designation by the Board of
Directors shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and
an officers' certificate indicating that such designation complies with the
foregoing conditions and was permitted by the covenant described above under
the caption "Certain Covenants--Limitation on Restricted Payments." If, at any
time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and Indebtedness of such
Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date. The Board of Directors of the Company may at any time
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that such designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary of the Company of any Indebtedness of such Unrestricted
Subsidiary which is outstanding at the time of such designation and such
designation shall only be permitted if (A) no Default or Event of Default
would be in existence immediately following such designation and (B) the
Company shall have delivered to the Trustee an officers' certificate
indicating that such designation complies with the foregoing conditions.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which shall at the time be owned by such Person or by
one or more Wholly Owned Restricted Subsidiaries of such Person or by such
Person and one or more Wholly Owned Restricted Subsidiaries of such Person.
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CERTAIN INCOME TAX CONSIDERATIONS
Holders of the Outstanding Notes contemplating acceptance of the Exchange
Offer should consult their own tax advisers with respect to their particular
circumstances and with respect to the effects of state, local or foreign tax
laws to which they may be subject.
The following summary describes the material U.S. Federal income tax
consequences to initial Holders of the Senior Notes who are subject to U.S.
net income tax with respect to the Senior Notes ("U.S. persons") and who hold
the Senior Notes as capital assets. There can be no assurance that the U.S.
Internal Revenue Service (the "IRS") will take a similar view of the purchase,
ownership or disposition of the Senior Notes. This discussion is based upon
the provisions of the Internal Revenue Code of 1986, as amended, U.S. Treasury
regulations, rulings and judicial decisions, in each case, as in effect on the
date of this Prospectus, all of which are subject to change. It does not
include any description of the tax laws of any state, local or foreign
governments or any estate, gift tax or transfer or other non-income tax laws
that may be applicable to the Senior Notes or Holders thereof. It does not
discuss all aspects of U.S. Federal income taxation that may be relevant to a
particular investor in light of his particular investment circumstances or to
certain types of investors subject to special treatment under the U.S. Federal
income tax laws (for example, dealers in securities or currencies,
S corporations, life insurance companies, tax-exempt organizations, taxpayers
subject to the alternative minimum tax and non-U.S.persons) and also does not
discuss Senior Notes held as a hedge against currency risks or as part of a
straddle with other investments or part of a "synthetic security" or other
integrated investment (including a "conversion transaction") comprising a
Senior Note and one or more other investments, or situations in which the
functional currency of the Holder is not the U.S. dollar.
The exchange of an Outstanding Note by a Holder for an Exchange Note should
not constitute a taxable exchange. The exchange will not result in taxable
income, gain or loss to Holders who participate in the Exchange Offer, or to
the Company. Such Holders shall have the same adjusted basis and holding
period in Exchange Notes immediately after the exchange as the Holders had in
the Outstanding Notes immediately prior to the exchange.
BOOK-ENTRY; DELIVERY AND FORM
GENERAL
The Outstanding Notes were issued in the form of a single, permanent global
Senior Note (the "Outstanding Global Note"). The Exchange Notes will be issued
in the form of a single, permanent global Senior Note in definitive, fully
registered form without interest coupons (the "Exchange Global Note"). The
Outstanding Global Note was deposited on the date of closing of the sale of
the Outstanding Notes, and the Exchange Global Note will be deposited on the
date of closing of the Exchange Offer, with the Trustee as custodian for The
Depository Trust Company ("DTC") and registered in the name of Cede & Co. as
nominee of DTC. The term "Global Note" means the Outstanding Global Note or
the Exchange Global Note, as the context may require.
THE GLOBAL NOTE
The Company expects that pursuant to procedures established by DTC (i) upon
the issuance of the Global Note, DTC or its custodian will credit, on its
internal system, the respective principal amount of Senior Notes of the
individual beneficial interests represented by the Global Note to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in the
Global Note will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC or its nominee (with respect
to interests of participants) and the records of participants (with respect to
interests of persons other than participants). Qualified institutional buyers
(as defined in Rule 144A under the Securities Act) may hold their interests in
the Global Note directly through DTC if they are participants in such system,
or indirectly through organizations which are participants in such system.
73
<PAGE>
So long as DTC, or its nominee, is the registered owner or holder of the
Senior Notes, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Senior Notes represented by such Global Note for
all purposes under the Indenture and the Senior Notes. No beneficial owner of
an interest in the Global Note will be able to transfer that interest except
in accordance with DTC's applicable procedures, in addition to those provided
for under the Indenture.
Payments of principal of, premium (if any) and interest on, the Global Note
will be made to DTC or its nominee, as the case may be, as the registered
owner thereof. None of the Company, the Trustee or any paying agent will have
any responsibility or liability for any aspect of the records relating to any
payments made on account of beneficial ownership interests in the Global Note
or for any records relating to such beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium (if any) or interest on the Global Notes will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in the Global Note
held through such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts
of customers registered in the names of nominees for such customers. Such
payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same day funds. If a
Holder requires physical delivery of a certificated Senior Note for any
reason, including to sell Senior Notes to persons in states which require
physical delivery of such Senior Notes, or to pledge such Senior Notes, such
Holder must transfer its interest in the Global Note in accordance with the
normal procedures of DTC and the procedures set forth in the Indenture.
The Company understands that DTC will take any action permitted to be taken
by a Holder of Senior Notes (including the presentation of Senior Notes for
exchange) only at the direction of one or more participants to whose account
the DTC interests in the Global Note are credited and only in respect of such
portion of the aggregate principal amount of Senior Notes as to which such
participant or participants has or have given such direction. However, if
there is an Event of Default under the Senior Notes, DTC will exchange the
Global Note for certificated Senior Notes which it will distribute to its
participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "Clearing Agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers,
banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, DTC is
under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC or its
participants or indirect participants of their respective obligations under
the rules and procedures governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Company within 90 days, certificated securities will be
issued in exchange for the Global Notes.
74
<PAGE>
PLAN OF DISTRIBUTION
Except as provided herein, this Prospectus may not be used for an offer to
resell, resale or other transfer of Exchange Notes.
There is no existing market for the Senior Notes. No assurance can be given
as to the liquidity of, or trading markets for, the Exchange Notes.
Based on existing interpretations of the Securities Act by the staff of the
Commission set forth in several no-action letters to third parties, and
subject to the immediately following sentence, the Company believes that the
Exchange Notes issued pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by the Holders thereof without
further compliance with the registration and prospectus delivery provisions of
the Securities Act. However, any Holder of Outstanding Notes who is an
"affiliate" of the Company or the Guarantor or who intends to participate in
the Exchange Offer for the purpose of distributing the Exchange Notes (i) will
not be able to rely on the interpretation by the staff of the Commission set
forth in the above-mentioned no-action letters, (ii) will not be able to
tender its Outstanding Notes in the Exchange Offer and (iii) must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Outstanding Notes unless such sale
or transfer is made pursuant to an exemption from such requirements.
Each Holder of the Outstanding Notes (other than certain specified Holders)
who wishes to exchange Outstanding Notes for Exchange Notes in the Exchange
Offer will be required to represent that (i) it is not an affiliate of the
Company or the Guarantor or, if such tendering party is an affiliate of the
Company or the Guarantor, it will comply with the registration and prospectus
requirements of the Securities Act to the extent applicable, (ii) any Exchange
Notes to be received by it were acquired in the ordinary course of its
business, whether or not such person is a Holder thereof, (iii) such tendering
party has not entered into any arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
Exchange Notes, (iv) such tendering party is not a broker-dealer who purchased
the Outstanding Notes for resale pursuant to an exemption under the Securities
Act and (v) such tendering party will be able to trade the Exchange Notes
acquired in the Exchange Offer without restriction under the Securities Act.
The Letter of Transmittal also states that by acknowledging that it will
deliver a prospectus, and by delivering such a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
In addition, in connection with any resales of Exchange Notes, any broker-
dealer (a "Participating Broker- Dealer") who acquired the Outstanding Notes
for its own account as a result of market-making activities or other trading
activities must deliver a prospectus meeting the requirements of the
Securities Act. The Commission has taken the position that Participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to the Exchange Notes (other than a resale of an unsold allotment from the
original sale of the Outstanding Notes) with this Prospectus. For a period of
90 days after the Expiration Date, the Company will make this Prospectus, as
it may be amended or supplemented, available to any Participating Broker-
Dealer for use in connection with any such resale of Exchange Notes, provided
that such Participating Broker-Dealer indicates in the Letter of Transmittal
that it is a broker-dealer. In addition, until , 1997, (90 days after the
date of this Prospectus), all dealers effecting transactions in the Exchange
Notes may be required to deliver a prospectus.
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver this Prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
who holds Outstanding Notes acquired for its own account as a result of
market-making activities or other trading activities in connection with
resales of Exchange Notes received in Exchange for Outstanding Notes. The
Company acknowledges and each Holder, other than a broker-dealer, must
acknowledge that it is not engaged in, does not intend to engage in, and has
no arrangement or understanding with any person to participate in, any
distribution of Exchange Notes.
75
<PAGE>
The Company will not receive any proceeds from the exchange of Outstanding
Notes for Exchange Notes, including those exchanged by Participating Broker-
Dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, or at
prices related to such prevailing market prices or at negotiated prices. Any
such resale may be made directly to purchasers or to or through broker-dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any person that participates in the
distribution of such Exchange Notes may be deemed an "underwriter" within the
meaning of the Securities Act and any profit on any such resale of Exchange
Notes and any commissions or concessions received by any such broker-dealers
may be deemed to be underwriting compensation under the Securities Act. The
Letter of Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date, the Company will send
additional copies of this Prospectus and any amendment or supplement to this
Prospectus to any Participating Broker-Dealer that requests such documents in
the Letter of Transmittal. The Company has agreed to pay all expenses
incidental to the Exchange Offer other than commissions or concessions of any
broker-dealers and will indemnify the Holders of the Outstanding Notes
(including Participating Broker-Dealers) participating in the Exchange Offer
against certain liabilities, including liabilities under the Securities Act.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes for Outstanding Notes pursuant to the Exchange Offer agrees
that, upon receipt of notice from the Company of the happening of any event
which makes any statement in this Prospectus untrue in any material respect or
which requires the making of any changes in this Prospectus in order to make
the statement herein not misleading (which notice the Company agrees to
deliver promptly to such broker-dealer), such broker-dealer will suspend the
use of this Prospectus until the Company has amended or supplemented this
Prospectus to correct such misstatement or omission and has furnished copies
of the amended or supplemented Prospectus to such broker-dealer. If the
Company gives any such notice to suspend the use of the Prospectus, it will
extend the 90-day period referred to above by the number of days during the
period from and including the date of the giving of such notice up to and
including when broker-dealers shall have received copies of the supplemented
or amended Prospectus necessary to permit resales of Exchange Notes.
VALIDITY OF THE SENIOR NOTES
The validity of the Senior Notes will be passed upon for the Company by
Jones, Day, Reavis & Pogue, Washington, D.C.
INDEPENDENT AUDITORS
The consolidated financial statements included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
76
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF SHOPPERS FOOD WAREHOUSE CORP......... F-2
Report of Independent Public Accountants.................................. F-3
Consolidated Balance Sheets as of July 1, 1995, June 29, 1996 and February
1, 1997.................................................................. F-4
Consolidated Statements of Income for the Three Years Ended June 29, 1996
and the Thirty-one Weeks Ended February 1, 1997.......................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the Three
Years Ended June 29, 1996 and the Thirty-one Weeks Ended February 1,
1997..................................................................... F-6
Consolidated Statements of Cash Flows for the Three Years Ended June 29,
1996 and the Thirty-one Weeks Ended February 1, 1997..................... F-7
Notes to Consolidated Financial Statements as of July 1, 1995, June 29,
1996 and February 1, 1997................................................ F-8
INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF SHOPPERS FOOD WAREHOUSE
CORP..................................................................... F-17
Interim Consolidated Balance Sheets as of August 3, 1996 and August 2,
1997 (unaudited)......................................................... F-18
Interim Consolidated Statements of Income for the Twenty-six Weeks Ended
August 3, 1996 and
August 2, 1997 (unaudited)............................................... F-19
Interim Consolidated Statements of Changes in Stockholders' Equity for the
Twenty-six Weeks Ended August 2, 1997 (unaudited)........................ F-20
Interim Consolidated Statements of Cash Flows for the Twenty-six Weeks
Ended August 3, 1996 and August 2, 1997 (unaudited)...................... F-21
Notes to Interim Consolidated Financial Statements (unaudited)............ F-22
</TABLE>
F-1
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JULY 1, 1995, JUNE 29, 1996 AND FEBRUARY 1, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Shoppers Food Warehouse Corp.:
We have audited the accompanying consolidated balance sheets of Shoppers
Food Warehouse Corp. (a Delaware corporation) and subsidiaries as of February
1, 1997, June 29, 1996, and July 1, 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for the thirty-one
weeks ended February 1, 1997 and for each of the three fiscal years in the
period ended June 29, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Shoppers Food Warehouse
Corp. and subsidiaries as of February 1, 1997, June 29, 1996, and July 1,
1995, and the results of their operations and their cash flows for the thirty-
one weeks ended February 1, 1997, and for each of the three fiscal years in
the period ended June 29, 1996, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Washington, D.C.,
April 5, 1997, except for Note 6
to which the date is June 23, 1997
F-3
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED BALANCE SHEETS
AS OF JULY 1, 1995, JUNE 29, 1996 AND FEBRUARY 1, 1997
<TABLE>
<CAPTION>
JULY 1, JUNE 29, FEBRUARY 1,
1995 1996 1997
-------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 38,650 $ 3,560 $ 13,739
Short-term investments....................... 58,353 103,080 94,999
Accounts receivable.......................... 7,633 7,708 9,244
Merchandise inventories...................... 27,253 28,342 29,699
Prepaid expenses............................. 956 1,022 2,056
Income tax receivable........................ -- 273 --
Due from affiliate........................... 522 522 522
-------- -------- --------
Total current assets....................... 133,367 144,507 150,259
-------- -------- --------
Property and equipment, at cost:
Land and buildings........................... 9,120 9,120 9,120
Store and warehouse equipment................ 71,195 75,827 78,737
Office and automotive equipment.............. 3,655 3,727 3,767
Leasehold improvements....................... 2,477 2,655 4,412
-------- -------- --------
86,447 91,329 96,036
Accumulated depreciation and amortization.... (63,504) (69,944) (73,944)
-------- -------- --------
Net property and equipment................. 22,943 21,385 22,092
Deferred income taxes.......................... 4,577 4,289 5,853
Other assets................................... 1,116 841 804
-------- -------- --------
Total assets............................... $162,003 $171,022 $179,008
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 38,275 $ 39,865 $ 41,830
Accrued expenses--
Salaries and benefits...................... 4,931 5,220 4,886
Taxes, other than income................... 1,934 1,996 2,903
Other...................................... 4,623 5,150 6,469
Income taxes payable......................... 2,152 -- 1,391
-------- -------- --------
Total current liabilities.................. 51,915 52,231 57,479
Capital lease obligation....................... 9,950 10,069 10,035
Deferred income................................ 1,218 412 2,448
Deferred rent liability........................ 3,590 4,277 4,558
-------- -------- --------
Total liabilities.......................... 66,673 66,989 74,520
-------- -------- --------
Commitments and contingencies (Notes 2 and 6)
Stockholders' equity:
Class A common stock, nonvoting, par value $5
per share, 25,000 shares authorized, 23,333
1/3 shares issued and outstanding........... 117 117 117
Class B common stock, voting, par value $5
per share, 25,000 shares authorized, 10,000
shares issued and outstanding............... 50 50 50
Retained earnings............................ 95,163 103,866 104,321
-------- -------- --------
Total stockholders' equity................. 95,330 104,033 104,488
-------- -------- --------
Total liabilities and stockholders'
equity.................................... $162,003 $171,022 $179,008
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED JULY 2, 1994, JULY 1, 1995,
JUNE 29, 1996, AND THE THIRTY-ONE WEEKS ENDED FEBRUARY 3, 1996 AND FEBRUARY 1,
1997
<TABLE>
<CAPTION>
(UNAUDITED)
JULY 2, JULY 1, JUNE 29, FEBRUARY 3, FEBRUARY 1,
1994 1995 1996 1996 1997
(52 WEEKS) (52 WEEKS) (52 WEEKS) (31 WEEKS) (31 WEEKS)
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales................... $750,340 $790,842 $835,971 $496,121 $511,025
Cost of sales........... 593,063 616,521 651,986 390,186 398,129
----------- ----------- ----------- ----------- -----------
Gross profit.......... 157,277 174,321 183,985 105,935 112,896
Selling and administra-
tive expenses.......... 127,643 136,798 149,570 89,280 94,304
Depreciation and amorti-
zation................. 10,785 8,529 8,913 4,766 4,573
----------- ----------- ----------- ----------- -----------
Operating income...... 18,849 28,994 25,502 11,889 14,019
Interest income......... 2,189 4,682 5,789 3,330 3,526
Interest expense........ 1,426 1,451 1,771 836 710
Insurance settlement,
gain (loss)............ 1,360 2,065 (355) (355) --
----------- ----------- ----------- ----------- -----------
Income before income
taxes................ 20,972 34,290 29,165 14,028 16,835
Provision for income
taxes.................. 8,043 14,764 10,462 5,433 6,380
----------- ----------- ----------- ----------- -----------
Net income............ $ 12,929 $ 19,526 $ 18,703 $ 8,595 $ 10,455
=========== =========== =========== =========== ===========
Earnings per common
share data:
Earnings per common
share................ $ 387.87 $ 585.78 $ 561.09 $ 257.85 $ 313.65
=========== =========== =========== =========== ===========
Weighted average number
of common shares
outstanding............ 33,333 1/3 33,333 1/3 33,333 1/3 33,333 1/3 33,333 1/3
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JULY 2, 1994, JULY 1, 1995,
JUNE 29, 1996 AND THE THIRTY-ONE WEEKS ENDED FEBRUARY 1, 1997
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
CLASS A CLASS B RETAINED
NONVOTING VOTING EARNINGS TOTAL
--------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, July 3, 1993..................... $117 $ 50 $ 62,708 $ 62,875
Net income.............................. -- -- 12,929 12,929
---- ---- -------- --------
Balance, July 2, 1994..................... 117 50 75,637 75,804
Net income.............................. -- -- 19,526 19,526
---- ---- -------- --------
Balance, July 1, 1995..................... 117 50 95,163 95,330
Net income.............................. -- -- 18,703 18,703
Shareholder distribution................ -- -- (10,000) (10,000)
---- ---- -------- --------
Balance, June 29, 1996.................... 117 50 103,866 104,033
---- ---- -------- --------
Net income.............................. -- -- 10,455 10,455
Shareholder distribution................ -- -- (10,000) (10,000)
---- ---- -------- --------
Balance, February 1, 1997................. $117 $ 50 $104,321 $104,488
==== ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JULY 2, 1994, JULY 1, 1995
AND JUNE 29, 1996 AND THE THIRTY-ONE WEEKS ENDED FEBRUARY 1, 1997
<TABLE>
<CAPTION>
JULY 2, JULY 1, JUNE 29, FEBRUARY 1,
1994 1995 1996 1997
(52 WEEKS) (52 WEEKS) (52 WEEKS) (31 WEEKS)
---------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash flows from operating activi-
ties:
Net income....................... $ 12,929 $ 19,526 $ 18,703 $ 10,455
Adjustments to reconcile net in-
come to net cash provided by op-
erating activities--
Depreciation and amortization... 10,785 8,529 8,913 4,573
Increase in deferred income tax-
es............................. (594) (1,058) 288 (1,564)
Loss (gain) on disposition of
assets......................... (15) 34 -- --
Effect of insurance receivable
on income...................... (104) -- -- --
Interest expense in excess of
capital lease payments......... 240 208 119 --
Increase in deferred rent lia-
bility......................... 1,082 553 687 281
Changes in operating assets and
liabilities:
Accounts receivable............ (3,952) 1,028 (75) (1,536)
Merchandise inventories........ (2,455) 1,810 (1,089) (1,357)
Prepaid expenses............... (53) (63) (66) (1,034)
Due from affiliate............. -- 490 -- --
Other assets................... (354) (252) 275 37
Accounts payable............... 1,544 2,009 1,590 1,965
Accrued expenses............... 241 (1,023) 878 1,892
Income taxes payable........... 144 1,307 (2,425) 1,664
Deferred income................ (1,177) (1,191) (806) 2,036
--------- --------- --------- --------
Net cash provided by operating
activities................... 18,261 31,907 26,992 17,412
--------- --------- --------- --------
Cash flows from investing activi-
ties:
Capital expenditures............. (5,112) (4,693) (7,355) (5,280)
Proceeds from sale of fixed as-
sets............................ 15 -- -- --
Purchase of short-term invest-
ments........................... (106,476) (138,613) (218,039) (95,421)
Sales/maturities of short-term
investments..................... 105,980 107,777 173,312 103,502
--------- --------- --------- --------
Net cash provided by (used in)
investing activities......... (5,593) (35,529) (52,082) 2,801
--------- --------- --------- --------
Cash flows from financing activi-
ties:
Shareholder distribution......... -- -- (10,000) (10,000)
Payments on capital lease........ -- -- -- (34)
--------- --------- --------- --------
Net cash used in financing ac-
tivities..................... -- -- (10,000) (10,034)
--------- --------- --------- --------
Net increase (decrease) in cash
and cash equivalents............. 12,668 (3,622) (35,090) 10,179
Cash and cash equivalents, begin-
ning of period................... 29,604 42,272 38,650 3,560
--------- --------- --------- --------
Cash and cash equivalents, end of
period........................... $ 42,272 $ 38,650 $ 3,560 $ 13,739
========= ========= ========= ========
Supplementary disclosures of cash
flow information:
Cash paid during the fiscal year
for--
Income taxes.................... $ 8,525 $ 12,091 $ 12,487 $ 6,300
Interest........................ $ 1,456 $ 1,451 $ 1,771 $ 710
========= ========= ========= ========
Supplemental disclosure of noncash
financing activity:
In fiscal year 1994, the Company
recorded an insurance
receivable and wrote-off
certain assets with a net book
value of $708,000 due to fire
damage
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31 WEEKS ENDED FEBRUARY 1, 1997 AND THE 52 WEEKS ENDED
JUNE 29, 1996, JULY 1, 1995 AND JULY 2, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements include Shoppers Food Warehouse Corp.
(a Delaware corporation) and its subsidiaries, collectively the "Company." All
significant intercompany accounts and transactions have been eliminated. As of
February 1, 1997, June 29, 1996, and July 1, 1995, the Company operated 34, 34
and 33 warehouse-style grocery stores, respectively, in Maryland and Virginia.
FISCAL YEAR
In connection with the acquisition (see Note 6), the Company changed its
fiscal year end to the Saturday closest to January 31. Previously the
Company's fiscal year ended on the Saturday closest to June 30. A fiscal year
end coinciding with the Saturday closest to a month end results in a 52 or 53
week year. The fiscal years ended June 29, 1996, July 1, 1995, and July 2,
1994 contained 52 weeks. The period ended February 1, 1997 contained 31 weeks.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary cash investments with
maturities of three months or less to be cash equivalents. The majority of
these are invested in U.S. Treasury Notes.
SHORT TERM INVESTMENTS
Effective July 1994, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The effect of adopting SFAS No. 115 did not materially
impact the Company's financial position or results of its operations. Short-
term investments consist of U.S. Government Treasury Notes with original
maturities of more than three months. As of July 1, 1995, and June 29, 1996,
the Company carried these debt securities at amortized cost as it has both the
positive intent and ability to hold these investments to maturity. Short-term
investments carried as of February 1, 1997 mature at various dates from
February 15, 1997 to November 15, 1997. Subsequent to year-end, management
liquidated a substantial amount of its short-term investments in order to
reduce the debt associated with the acquisition by Dart Group Corporation
("Dart") of 50 percent equity in the Company that it did not own (see Note 6).
Accordingly, the Company has changed its classification of its short-term
investments to available-for-sale as of February 1, 1997. The cost of these
securities approximates fair market value as of February 1, 1997, June 29,
1996 and July 1, 1995.
F-8
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MERCHANDISE INVENTORIES
The Company's inventories are priced at the lower of cost or market. Cost is
determined using the last-in, first-out method. If replacement cost (which
approximates the first-in, first-out method) had been used, inventories would
have been greater by approximately $4,375,000, $3,845,000 and $2,940,000 as of
February 1, 1997, June 29, 1996 and July 1, 1995 respectively. Net income
would have been higher by approximately $530,000 for the period ended February
1, 1997, and $905,000, $877,000, and $364,000, for the fiscal years ended June
29, 1996, July 1, 1995, and July 2, 1994, respectively.
ACCOUNTS RECEIVABLE
Accounts receivable include amounts due from vendors for coupons remitted,
cooperative advertising, merchandise rebates, as well as interest receivable
on treasury notes.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The Company depreciates property
and equipment using accelerated methods over the estimated useful lives of the
assets, generally five to seven years.
ACCRUED INSURANCE CLAIMS
The Company maintains self funded coverage with respect to general, workers
compensation, and health insurance liabilities. Claims for general and
workers' compensation are administered through insurance companies, which
estimate the obligation of reported claims. An estimate of the obligation for
health insurance claims is accrued at year-end and is based on historical
data. Expenses arising from claims are accrued as claims become subject to
estimation. Self-insurance liabilities are based on claims filed plus an
additional amount for incurred but not reported claims. These liabilities are
not discounted.
INCOME TAXES
The Company provides a deferred tax expense or benefit equal to the change
in the net deferred tax asset during the year in accordance with SFAS No. 109
"Accounting for Income Taxes." Deferred income taxes represent the future net
tax effects resulting from temporary differences between the financial
statements and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
STORE OPENING AND CLOSING COSTS
All costs of a noncapital nature incurred in opening a new store are charged
to expense as incurred. The Company opened one new store during each of the
fiscal years ended June 29, 1996 and July 2, 1994. No stores were opened
during the year ended July 1, 1995 and the period ended February 1, 1997.
The costs associated with store closings are charged to selling and
administrative expense when management makes the decision to close a store.
Such costs consist primarily of lease payments and other carrying costs of
holding the facility, net of estimated sublease income.
DEFERRED INCOME
The Company has entered into various agreements with vendors and suppliers
which provide for the payment of cash or the receipt of merchandise at the
beginning or during the contract period. These amounts are deferred and
amortized over the expected lives of the contracts.
F-9
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LONG LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value should be assessed. Impairment
is measured by comparing the carrying value to the estimated undiscounted
future cash flows expected to result from the use of the assets and their
eventual disposition. The Company has determined that as of February 1, 1997,
there has been no impairment in the carrying value of long-lived assets.
CONCENTRATION OF CREDIT RISK
The Company's assets that are exposed to credit risk consist primarily of
cash and cash equivalents, short-term investments, and accounts receivable.
The Company maintains cash and cash equivalents with major banks in its
marketplace. The Company performs periodic evaluations of the relative credit
standing of the financial institutions with which it does business. The
Company's short-term investments are invested in U.S. Government Treasury
Notes. The Company's accounts receivable balance results primarily from the
amounts due from its vendors for various promotional programs. The Company
periodically reviews its accounts receivable balance and allows for
uncollectible accounts.
CURRENT ASSETS AND CURRENT LIABILITIES
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires the disclosure of the fair value of a financial instrument for which
it is practicable to estimate the value and the methods and significant
assumptions used to estimate the value. At February 1, 1997, June 29, 1996,
and July 1, 1995 the carrying amount of current assets and current liabilities
approximates fair value due to the short maturity of those instruments.
2. DISPOSITION OF TOTAL BEVERAGE CORP.
In October 1992, the Company opened Total Beverage Corp. ("Total Beverage"),
a discount beverage retail store. On February 27, 1993, the Company entered
into an Asset Purchase Agreement (the "Agreement") to sell Total Beverage to
Dart Group Corporation ("Dart").
As proceeds from the sale, the Company received approximately $1,493,000 in
a note receivable (the "Note"). Under the terms of the Agreement, the Company
is required to reimburse the buyer for 25 percent of future operating losses
of Total Beverage, as defined in the Agreement, over a three-year period. The
operating losses of Total Beverage, which reduce the note receivable were
approximately $322,000 for the three-year period ended February 27, 1995. To
the extent of such losses, the Company will remit funds first by reducing
amounts due under the Note and then by remitting payment to the buyer. The
Note and accrued interest were due in February 1995. The Company has reflected
the Note, net of a $1,000,000 reserve, in the accompanying balance sheets as
of February 1, 1997, June 29, 1996, and July 1, 1995, respectively. Management
believes the $1,000,000 reserve is necessary to provide for the operating
losses of $322,000, certain other reductions to the Note balance per the
Agreement and for the uncertainty of collection on the Note based on the
current liquidity of Dart's Total Beverage subsidiary.
3. OTHER ACCRUED EXPENSES:
Other accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 1, JUNE 29, JULY 1,
1997 1996 1995
----------- -------- -------
<S> <C> <C> <C>
Accrued insurance.................................. $3,441 $2,719 $2,262
Reserve for store closing.......................... 1,513 853 853
Gift certificates outstanding...................... 1,090 928 815
Other.............................................. 425 650 693
------ ------ ------
Total............................................ $6,469 $5,150 $4,623
====== ====== ======
</TABLE>
F-10
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INCOME TAXES:
The provision for income taxes is comprised of the following (in thousands).
<TABLE>
<CAPTION>
THIRTY-ONE FISCAL YEAR
WEEKS ENDED ENDED
FEBRUARY 1, JUNE 29, JULY 1, JULY 2,
1997 1996 1995 1994
----------- -------- ------- -----------
<S> <C> <C> <C> <C>
Current income tax provision:
Federal........................... $ 7,412 $ 9,493 $14,248 $ 8,084
State............................. 532 681 1,574 1,088
Deferred income tax (benefit) provi-
sion............................... (1,564) 288 (1,058) (1,129)
------- ------- ------- -------
$ 6,380 $10,462 $14,764 $ 8,043
======= ======= ======= =======
</TABLE>
This effective income tax rate is reconciled to the Federal statutory rate as
follows:
<TABLE>
<CAPTION>
THIRTY-ONE FISCAL YEAR ENDED
WEEKS ENDED ------------------------
FEBRUARY 1, JUNE 29, JULY 1, JULY 2,
1997 1996 1995 1994
----------- -------- ------- -------
<S> <C> <C> <C> <C>
Federal statutory rate................... 35% 35% 35% 35%
Increase in taxes resulting from:
State income taxes, net of Federal income
tax benefit............................. 2.0 2.0 3.1 3.0
Revision of estimate for tax accruals.... -- -- 3.7 --
Other.................................... 0.9 (1.1) 1.3 0.4
---- ---- ---- ----
Effective tax rate....................... 37.9% 35.9% 43.1% 38.4%
==== ==== ==== ====
</TABLE>
Temporary differences which give rise to the deferred tax assets and
liabilities on a consolidated basis are as follows (in thousands).
<TABLE>
<CAPTION>
THIRTY-ONE FISCAL YEAR ENDED
WEEKS ENDED -------------------
FEBRUARY 1, JUNE 29, JULY 1,
1997 1996 1995
----------- --------- --------
<S> <C> <C> <C>
Deferred tax assets:
Loss on disposition of Total Beverage....... $ 374 $ 374 $ 381
Reserves for store closings and other....... 566 319 325
Deferred Rent............................... 1,705 1,600 1,433
Capital Lease............................... 505 517 946
Employee Benefits........................... 2,241 1,843 1,472
Deferred Income............................. 435 154 557
Other....................................... 326 89 --
------ -------- --------
$6,152 $ 4,896 $ 5,114
====== ======== ========
Deferred tax liabilities:
Depreciation................................ (299) (607) (526)
Other....................................... -- -- (11)
------ -------- --------
(299) (607) (537)
------ -------- --------
Net deferred tax asset........................ $5,853 $ 4,289 $ 4,577
====== ======== ========
</TABLE>
F-11
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company
believes that no valuation allowance is necessary as of February 1, 1997, June
29, 1996, and July 1, 1995 due to its history of profitable operations.
5. COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' AGREEMENT
The Company's stockholders are party to a stockholders' agreement dated June
28, 1988 (the "Stockholder Agreement"), that specifies how a stockholder can
transfer ownership of their interest in the Company's stock. In June 1996 and
September 1996, the Company declared cash dividends payable to its
stockholders. Subsequent to February 1, 1997, Dart purchased the remaining 50%
interest in the Company that it did not already own (see Note 6).
CONTROLLING STOCKHOLDER
After the Acquisition discussed in Note 6, the Company became an indirect
subsidiary of Dart. As a result, Dart controls the Company.
Over the past three years, there has been significant litigation involving
the control of Dart. 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. Because these disputes were so extensive, 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.
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.
F-12
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Dart is engaged in discussions with Herbert H. Haft and collectively with
Robert M. Haft, Linda G. Haft and Gloria G. Haft to explore opportunities to
settle claims to control of Dart and other litigation pending between them and
Dart. There can be no assurance that any definitive settlements will be
reached or as to the terms or timing of any settlements, if they occur.
401(K) PLAN
Prior to fiscal year 1995 the Company maintained a noncontributory profit
sharing plan (the "Plan") for all employees with one year of full time
continuous service. Discretionary contributions were made by the Company in
trust for the exclusive benefit of employees who qualified under the Plan. The
Board of Directors authorized a contribution of $300,000 to the Plan for the
fiscal year ended July 2, 1994. During fiscal 1995, the Company replaced the
Plan with a defined contribution 401(k) plan (the "New Plan"). The New Plan is
available to substantially all employees over the age of 21 who have completed
one year of continuous service. Discretionary contributions are made by the
Company in trust for the exclusive benefit of employees who participate in the
New Plan. The Board of Directors authorized a contribution of $400,000 to the
New Plan for both fiscal years ending June 29, 1996 and July 1, 1995. For the
thirty-one weeks ended February 1, 1997, the Company has accrued $233,000
related to its projected fiscal year 1997 contribution. All amounts
contributed to the New Plan are included in accrued salaries and benefits in
the accompanying financial statements.
MULTIEMPLOYER PLANS
The Company makes contributions to multiemployer plans for its union
employees. Such contributions, net of employee contributions, totaled
approximately $440,000, $6,205,000, $282,000, for pension, health and welfare,
and legal benefit plans, respectively, for the thirty-one weeks ended February
1, 1997. Contributions to the pension, health and welfare, and legal benefit
plans totaled approximately $838,000, $10,373,000, and $466,000, respectively,
for the year ended June 29, 1996, $787,000, $8,701,000 and $408,000,
respectively, for the year ended July 1, 1995 and $745,000, $7,437,000 and
$382,000, respectively, for year ended July 2, 1994.
LEASE COMMITMENTS
The Company leases warehouse and retail store facilities under noncancelable
lease agreements ranging from 1 to 20 years. Renewal options are available on
the majority of the leases for one or more periods of five years each. Most
leases require the payment of taxes and maintenance costs, and some leases
provide for additional rentals based on sales in excess of specified minimums.
All store leases have stated periodic rental increases. The increases are
amortized over the lives of the leases. Rent expense includes approximately
$281,000, $687,000, $802,000 and $832,000 of amortized rental increases for
the period ended February 1, 1997, and for the year ended June 29, 1996, July
1, 1995, and July 2, 1994, respectively.
Following is a schedule of annual future minimum payments under the capital
lease for office space, assuming future annual increases of 6 percent, and
noncancelable operating leases, which have initial or remaining terms in
excess of one year at February 1, 1997 (in thousands).
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASE LEASE
----------- ------- ---------
<S> <C> <C>
1998....................................................... $ 1,316 $ 13,038
1999....................................................... 1,395 13,115
2000....................................................... 1,478 12,957
2001....................................................... 1,567 12,665
2002....................................................... 1,661 12,291
Thereafter................................................. 19,742 107,833
------- --------
Total.................................................... $27,159 $171,899
========
Less--Imputed Interest..................................... 17,124
-------
Present Value of net minimum lease payments................ $10,035
Less--Current maturities................................... --
-------
Long-term capital lease obligations........................ $10,035
=======
</TABLE>
F-13
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense for operating leases charged to operations is as follows (in
thousands):
<TABLE>
<CAPTION>
THIRTY-ONE FISCAL YEAR ENDED
WEEKS ENDED ------------------------
FEBRUARY 1, JUNE 29, JULY 1, JULY 2,
1997 1996 1995 1994
----------- -------- ------- -------
<S> <C> <C> <C> <C>
Minimum rentals......................... $ 7,288 $12,021 $10,925 $11,034
Contingent rentals...................... 3,770 4,006 4,054 4,052
------- ------- ------- -------
Total................................. $11,058 $16,027 $14,979 $15,086
======= ======= ======= =======
</TABLE>
RELATED-PARTY LEASES
In July 1990, the Company entered into an agreement to lease an 86,000
square foot office building in Lanham, Maryland, from a private partnership
(the "Partnership") which is owned by stockholders of the Company. The lease
is for 20 years and it commenced December 10, 1990. The lease provides for
yearly increasing rental payments, based upon the Consumer Price Index for the
Washington D.C., metropolitan statistical area; however, the annual increases
will not be more than 6 percent or less than three percent. Rental payments
for the thirty-one weeks ended February 1, 1997 and for fiscal years ended
June 29, 1996, July 1, 1995, and July 2, 1994 were approximately $744,000,
$1,246,000, $1,210,000, and $1,175,000 respectively, and all payments over the
life of the lease total approximately $34,400,000. The Company is accounting
for the lease as a capital lease. Due to fixed rental increases during the
term of the lease, lease payments exceeded interest expense by approximately
$34,000 for the thirty-one weeks ended February 1, 1997. Interest expense
exceeded lease payments by $254,000, $292,000, and $321,000 for the fiscal
years ended June 29, 1996, July 1, 1995, and July 2, 1994, respectively.
Assuming future annual rental increases of six percent, the capital lease
obligation will continue to increase through November 2000, at which time
accumulated interest expense recognized for financial reporting purposes will
exceed lease payments by approximately $1,800,000. The lease requires the
Company to pay for maintenance, utilities, insurance, and taxes. The
Partnership purchased the office building for approximately $8,663,000 in July
of 1990.
During the period ended February 1, 1997, and the fiscal years ended June
29, 1996, July 1, 1995, and July 2, 1994, the Company made rental payments of
approximately $3,573,000, $5,384,000, $5,985,000, and $5,327,000, respectively
on store leases to partnerships related to stockholders of the Company. As of
February 1, 1997, the Company had ten store operating leases with partnerships
related to stockholders of the Company. The remaining future minimum payments
under these leases exclusive of option periods are approximately $70,820,000
and expire through 2014.
The Company made payments of approximately $198,000, $278,000, $246,000, and
$246,000 during the thirty-one weeks ended February 1, 1997, and each of the
fiscal years ended June 29, 1996, July 1, 1995, and July 2, 1994 for warehouse
operating leases to a partnership owned by stockholders of the Company and to
a corporation related to stockholders of the Company. As of February 1, 1997,
the remaining future minimum annual payments under these leases are
approximately $1,386,000 and expire in 2002.
SUBLEASING AGREEMENTS
The Company subleases space within one store for the sale of beer and wine
to an entity affiliated with its officers. The Company received rental income
of approximately $57,865, $155,000, $155,000, and $123,000 in the thirty-one
weeks ended February 1, 1997, and in the fiscal years ended June 29, 1996,
July 1, 1995, and July 2, 1994, respectively, from this entity, which is
included in selling and administrative expenses.
As of February 1, 1997, there were three unaffiliated subtenants in the
Lanham, Maryland office building leased by the Compamy from the Partnership.
The subtenants are leasing approximately 30,000 square feet. The
F-14
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
subleases expire between January 1998 and September 2000. The Company received
rental income of approximately $321,000, $551,000, $530,000 and $615,000 in
the period ending February 1, 1997 and in the fiscal years ended June 29,
1996, July 1, 1995, and July 2, 1994 respectively from its subtenants.
During the period ended June 29, 1996 the Company began leasing space to a
corporation related to the stockholders of the Company. The Company received
rental income of approximately $91,000 and $140,000 during the period ended
February 1, 1997 and during the fiscal year ended June 29, 1996.
LINE-OF CREDIT AGREEMENT/LETTERS OF CREDIT
The Company has a $35,000,000 line-of-credit with a local bank, with
interest payable at the prime rate. The Company has authorized the local bank
to issue letters of credit in connection with the Company's workers'
compensation insurance. There were no borrowings on this line in the seven
months ended February 1, 1997. As of February 1, 1997, June 29, 1996, and July
1, 1995, the Company's line of credit was reduced by outstanding letters of
credit of approximately $6,724,000, $6,424,000 and $6,135,000, respectively.
The line of credit expired on March 31, 1997, however, the letters of credit
will mature at various dates throughout 1998.
LEGAL PROCEEDINGS
The Company is involved in routine litigation incidental to operations. In
the opinion of management, it is unlikely that any exposure from these actions
will have a material impact on the Company's financial position.
INSURANCE SETTLEMENT
In June of 1994, the Company had one store that incurred significant fire
damage. The Company recorded the insurance settlement on the store's
inventory, fixed assets, reimbursable payroll costs, and other business
interruption costs. The gross insurance proceeds were $2,065,000 and
$1,360,000, during the fiscal years ended July 1, 1995, and July 2, 1994,
respectively. The amount recorded in fiscal year 1994 was net of associated
costs to write-off assets with a net book value of $708,000. During the fiscal
year ended June 29, 1996, the insurance claim was settled in full and the
Company recorded a loss of $355,000 to reflect the remaining amount received
for insurance proceeds, net of associated costs. Insurance settlements have
been reclassified from prior year presentations in the accompanying financial
statements.
6. SUBSEQUENT EVENTS
On December 16, 1996, Dart submitted offers, pursuant to the Stockholders'
Agreement governing Dart's investment in the Company, to either (i) sell all
of Dart's 50 percent equity interest in the Company or (ii) buy the 50 percent
equity interest in the Company that it did not own, in either case for a cash
price of $210 million. On December 18, 1996, the other stockholders accepted
Dart's offer to purchase their shares (the "Shares") of capital stock of the
Company. Under the terms of the Stockholders' Agreement, Dart's acquisition
(the "Acquisition") of the shares was to take place within 60 days of such
acceptance.
On February 6, 1997, Dart acquired the remaining 50% interest in the
Company. To effect the Acquisition, Dart's wholly owned subsidiary, SFW
Acquisition Corp., issued $140,000,000 in Increasing Rate Senior Notes due in
2000 ("Increasing Rate Notes") and funded the remaining portion of the
purchase price with bridge financing. Immediately following the Acquisition,
Dart liquidated a substantial amount of the Company's short-term investments
to repay the bridge financing and fee associated with the transaction. In
addition, the Company was merged with SFW Acquisition Corp. and the Company
became the obligor of the Increasing Rate Notes. Also, on February 6, 1997,
the Company authorized a $10,000,000 dividend to stockholders of record on
February 7, 1997.
F-15
<PAGE>
On June 23, 1997, the Company offered $200,000,000 in Senior Notes due 2004
(the "Senior Notes") in a private placement. Net proceeds from the sale of the
Senior Notes were used to repay $140,000,000 (plus accrued interest) of the
Increasing Rate Notes and will be used to pay dividends and loans of
$50,000,000 to the Company's ultimate parent, Dart, if and when Dart settles
litigation with certain of its stockholders. The payments to Dart would be
restricted and contingent upon the settlement of certain litigation. If the
restricted proceeds were not used for this purpose, on or prior to June 30,
1998, then the Company would be required to use the restricted proceeds
(including accrued interest) to redeem $50,000,000 aggregate principal amount
of the Senior Notes at 101% of the principal amount thereof and pay accrued
unpaid interest thereon.
The Senior Notes are general unsecured obligations of the Company and rank
pari passu in right of payment with all existing and future senior
indebtedness of the Company and senior in right of payment to all existing and
future subordinated indebtedness of the Company. The Senior Notes are
effectively subordinated in right of payment to all secured indebtedness of
the Company and contain certain restrictive covenants including, limitation on
restricted payments, limitation on indebtedness, limitation on investments,
loans and advances, limitation on dividends and other payment restrictions
affecting subsidiaries, limitation on liens, limitation on transactions with
affiliates, restriction on mergers, consolidations and transfers of assets,
limitation on lines of business, limitation on asset sales and limitation on
issuance and sale of capital stock of subsidiaries. Certain restricted
payments are permitted to the extent that an event of default has not occurred
and generally must be less than 50% of net income before non-cash charges and
unpaid interest income on intercompany loans.
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. Holding's 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 will be pushed down into the Company's
financial statements, the post acquisition consolidated financial statements
of Holdings will be 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.
7. PRO FORMA DATA FOR THE 31 WEEKS ENDED FEBRUARY 1, 1997 (UNAUDITED)
The following unaudited pro forma condensed consolidated financial
statements of the Company for the 31 weeks ended February 1, 1997 give effect
to (i) the sale of the Senior Notes and the application of the net proceeds
therefrom to repay the Increasing Rate Notes and to make a $40,000,000
dividend and a $10,000,000 loan to Dart to fund settlements with certain of
Dart's stockholders, (ii) the use of $25,000,000 of existing cash, cash
equivalents and short-term investments to extend a loan to Dart, (iii) the
push-down accounting treatment for the Acquisition by Dart and (iv) the impact
on depreciation and amortization resulting from the accounting for the
acquisition, as though such transactions occurred on June 30, 1996.
<TABLE>
<CAPTION>
31 WEEKS ENDED
FEBRUARY 1, 1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Sales..................................... $511,025
Gross Profit.............................. 112,896
Operating Income.......................... 12,765
Net Income................................ 704
</TABLE>
F-16
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AS OF AUGUST 3, 1996 AND AUGUST 2, 1997
F-17
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
AUGUST 3, AUGUST 2,
1996 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................ $ 10,538 $ 14,058
Marketable debt securities............................... 101,541 20,013
Restricted proceeds...................................... -- 50,218
Accounts receivable...................................... 8,160 6,735
Merchandise inventories.................................. 27,615 28,484
Prepaid expenses......................................... 1,215 1,549
Due from affiliate....................................... 522 522
-------- --------
149,591 121,579
-------- --------
Property and Equipment, at cost:
Land and buildings....................................... 9,120 7,503
Store and warehouse equipment............................ 76,682 60,992
Office and automotive equipment.......................... 3,767 2,055
Leasehold improvements................................... 2,656 3,842
-------- --------
92,225 74,392
Accumulated depreciation and amortization................ (70,755) (35,298)
-------- --------
Net property and equipment............................. 21,470 39,094
-------- --------
Deferred income taxes...................................... 5,214 --
Deferred financing costs................................... -- 6,174
Excess purchase price over net assets acquired............. -- 146,979
Lease rights............................................... -- 11,996
Other assets............................................... 954 876
-------- --------
Total assets........................................... $177,229 $326,698
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable......................................... $ 39,970 $ 38,865
Accrued expenses--
Salaries and benefits................................... 3,715 6,645
Taxes other than income................................. 2,357 2,447
Other................................................... 7,820 13,023
Income taxes payable..................................... 2,218 518
-------- --------
56,080 61,498
Senior Notes due 2004...................................... -- 200,000
Capital lease obligations.................................. 10,091 11,549
Deferred income taxes...................................... -- 4,845
Other liabilities.......................................... 4,707 3,001
-------- --------
Total liabilities...................................... 70,878 280,893
-------- --------
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
Retained earnings........................................ 106,184 45,638
-------- --------
Total stockholders' equity............................. 106,351 45,805
-------- --------
Total liabilities and stockholders' equity............. $177,229 $326,698
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-18
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWENTY-SIX WEEKS ENDED AUGUST 3, 1996 AND AUGUST 2, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
AUGUST 3, AUGUST 2,
1996 1997
--------- ---------
(DOLLARS AND SHARES
IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Sales..................................................... $419,653 $419,524
Cost of sales............................................. 323,474 320,364
-------- --------
Gross profit.......................................... 96,179 99,160
Selling and administrative expenses....................... 74,379 76,677
Depreciation and amortization............................. 4,844 5,079
-------- --------
Operating income...................................... 16,956 17,404
Interest income........................................... 3,113 1,797
Interest expense.......................................... 1,062 10,392
-------- --------
Income before income taxes, extraordinary item and
cumulative effect of accounting change................... 19,007 8,809
Provision for income taxes................................ 6,579 3,851
-------- --------
Net income before extraordinary item and cummulative ef-
fect of accounting change................................ 12,428 4,958
Extraordinary item:
Loss on early extinguishment of debt, net of income
taxes of $2,150........................................ -- (3,126)
Cumulative effect of accounting change ................... -- 1,729
-------- --------
Net income................................................ $ 12,428 $ 3,561
======== ========
Earnings per common share data:
Income before extraordinary item and cumulative effect
of accounting change................................... $ 372.84 $ 148.74
Extraordinary item:
Loss on early extinguishment of debt.................. -- (93.78)
Cumulative effect of accounting change, net............. -- 51.87
-------- --------
Net income.............................................. $ 372.84 $ 106.83
======== ========
Weighted average common shares outstanding................ 33 33
======== ========
Pro forma amounts assuming accounting change is applied
retroactively:
Income before extraordinary item........................ $ 12,280 $ 4,958
Earnings per common share.............................. $ 368.40 $ 148.74
Net Income.............................................. $ 12,280 $ 1,832
Earnings per common share.............................. $ 368.40 $ 54.96
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE TWENTY-SIX WEEKS ENDED AUGUST 2, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON
STOCK
-----------
CLASS CLASS RETAINED
A B EARNINGS TOTAL
----- ----- -------- --------
<S> <C> <C> <C> <C>
Balance February 1, 1997........................ $117 $50 $104,321 $104,488
Merger of SFW Acquisition Corp................ -- -- (52,244) (52,244)
Dividend paid................................. -- -- (10,000) (10,000)
Net income.................................... -- -- 3,561 3,561
---- --- -------- --------
Balance August 2, 1997.......................... $117 $50 $ 45,638 $ 45,805
==== === ======== ========
</TABLE>
F-20
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED AUGUST 3, 1996 AND AUGUST 2, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
AUGUST 3, AUGUST 2,
1996 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Cash Flows from Operating Activities:
Net income............................................. $ 12,428 $ 3,561
Adjustments to reconcile net income to net cash
provided by operating activities: --
Depreciation and amortization.......................... 4,844 5,079
Cumulative effect of accounting change................. -- (1,729)
Amortization of deferred financing costs............... -- 943
Interest in excess of capital lease payments........... 126 154
Write-off of Increasing Rate Notes financing costs..... -- 5,276
Increase in deferred rent liability.................... 279 469
Change in assets and liabilities:
Accounts receivable................................... 1,023 2,509
Merchandise inventories............................... 1,025 1,215
Prepaid expenses...................................... 60 507
Other assets.......................................... 249 (72)
Accounts payable...................................... (775) (2,965)
Accrued expenses...................................... (621) 4,190
Income taxes payable.................................. (43) (873)
Deferred income taxes................................. (243) --
Deferred income....................................... (165) (849)
--------- ---------
Net cash provided by operating activities............ $ 18,187 $ 17,415
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures................................... $ (4,932) $ (5,861)
Purchase of short-term investments..................... (127,551) (18,491)
Sales/maturities of short-term investments............. 112,356 93,477
--------- ---------
Net cash provided by(used in)investing activities.... $ (20,127) $ 69,125
--------- ---------
Cash Flows from Financing Activities:
Payments for acquisition and deferred financing costs.. $ -- $ (13,203)
Proceeds from Senior Notes............................. -- 200,000
Repayment of Increasing Rate Notes..................... -- (140,000)
Restricted proceeds.................................... -- (50,218)
Dividend to shareholder................................ -- (10,000)
Payment for acquisition debt........................... -- (72,800)
--------- ---------
Net cash used in financing activities................ $ -- $ (86,221)
--------- ---------
Net decrease in cash and equivalents..................... $ (1,940) $ 319
Cash and equivalents, beginning of period................ 12,478 13,739
--------- ---------
Cash and equivalents, end of period...................... $ 10,538 $ 14,058
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for
Interest.............................................. $ 843 $ 7,416
Income taxes.......................................... 5,946 2,826
Supplemental disclosure of noncash activities:
</TABLE>
In conjunction with the acquisition of a 50% interest in the Company, $140
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.
F-21
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWENTY-SIX WEEKS ENDED AUGUST 2, 1997 AND AUGUST 3, 1996
The accompanying condensed interim financial statements as of August 2, 1997
and for the 26 weeks ended August 2, 1997 and August 3, 1996 of the Company
have been prepared by Shoppers Food Warehouse Corp. 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. The condensed
interim financial statements and the notes thereto should be read in
conjunction with the audited consolidated financial statements and the notes
thereto commencing on page F-3 of this Prospectus.
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.
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 August 2, 1997, and the results of its
operations for the 26 weeks ended August 2, 1997 and August 3, 1996. The
results of operations for the 26 weeks ended August 2, 1997 and August 3, 1996
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 August 2, 1997 and August 3, 1996 inventories
determined on a first-in, first-out basis would have been greater by
approximately $4,827,000 and $3,920,000, respectively. Net income would have
been higher by $450,000 in both 26 week periods ended August 2, 1997 and
August 3, 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
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 24 of the 35 stores
for these departments for the quarter ended August 2, 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 Bills with a maturity of
greater than three months, United States Treasury Notes and United States
Agency Securities.
In connection with the Acquisition (see Note 5) the Company now classifies
its securities as available-for-sale. The cost of these securities
approximates fair market value as of August 2, 1997 and August 3, 1996.
F-22
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 commenced using
Dart's method of depreciating property and equipment on a straight-line basis.
Prior to the Acquisition, the Company used accelerated depreciation methods.
The following pro forma analysis gives effect to the change in depreciation
method, assuming the new depreciation method was applied retroactively.
<TABLE>
<CAPTION>
JULY 2, 1994 JULY 1, 1995 JUNE 29, 1996 FEBRUARY 1, 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>
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") is available to Dart for settlements
with certain Dart shareholders (Haft family members). If the closing of a Haft
settlement has not occurred on or before June 30, 1998, then the Company must
use the Restricted Proceeds to redeem $50 million aggregate principal amount
of the Senior Notes for $50.5 million (plus interest). Interest on the Senior
Notes accrues 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 are general unsecured obligations of the Company and rank
pari passu in right of payment with all existing and future senior
indebtedness of the Company and senior in right of payment to all existing and
future subordinated indebtedness of the Company. The Senior Notes are
effectively subordinated in right of payment to all secured indebtedness of
the Company and contain certain restrictive covenants including, limitation on
restricted payments, limitation on indebtedness, limitation on investments,
loans and advances, limitation on dividends and other payment restrictions
affecting subsidiaries, limitation on liens, limitation on transactions with
affiliates, restriction on mergers, consolidations and transfers of assets,
limitation on lines of business, limitation on asset sales and limitation on
issuance and sale of capital stock of subsidiaries. Certain
F-23
<PAGE>
SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
restricted payments are permitted to the extent that an event of default has
not occurred and generally must be less than 50% of net income before non-cash
charges and unpaid interest income on intercompany loans.
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 will be pushed down into the Company's
financial statements, the post acquisition consolidated financial statements
of Holdings will be 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--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. See public filings made by Dart with the Securities and
Exchange Commission and "Controlling Stockholder" and "Possible Change in
Control" under Risk Factors in the Registration Statement.
NOTE 8--SUBSEQUENT EVENTS
New President
On August 29, 1997, Shoppers and Dart announced the appointment of William
J. White as President of Shoppers. Mr. White has over 30 years of grocery
retailing experience and has held the position of president with two other
grocery retailers prior to joining Shoppers.
Settlement with Robert, Gloria and Linda Haft
On August 18, 1997, the Company and Dart, which owns all of the Company's
outstanding common stock, entered into an agreement 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. On
September 26, 1997, the Company paid $50 million ($40 million dividend and $10
million loan) to or on behalf of Dart in connection with Dart's consummation
of the RGL Settlement.
F-24
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER CON-
TAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE GUARANTOR. THIS PROSPECTUS DOES NOT CON-
STITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL,
OR THE SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIV-
ERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY OR THE GUARANTOR SINCE THE DATE HEREOF NOR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 12
The Exchange Offer....................................................... 18
Use of Proceeds.......................................................... 26
Pro Forma Consolidated Capitalization.................................... 27
Unaudited Pro Forma Consolidated Financial Statements.................... 28
Selected Historical Financial Data....................................... 32
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 36
Business................................................................. 41
Management............................................................... 47
Certain Transactions..................................................... 51
Description of the Senior Notes.......................................... 53
Certain Income Tax Considerations........................................ 73
Book-Entry; Delivery and Form............................................ 73
Plan of Distribution..................................................... 75
Validity of the Senior Notes............................................. 76
Independent Auditors..................................................... 76
Index to Consolidated Financial Statements............................... F-1
</TABLE>
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
-------------------------------
PROSPECTUS
-------------------------------
SHOPPERS FOOD WAREHOUSE
CORP.
LOGO
OFFER TO EXCHANGE $200,000,000
OF ITS 9 3/4% SENIOR NOTES DUE
2004, WHICH HAVE BEEN REGISTERED UNDER
THE SECURITIES ACT, FOR
$200,000,000, OF ITS OUTSTANDING 9 3/4%
SENIOR NOTES DUE 2004
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
SHOPPERS FOOD WAREHOUSE CORP.
The Restated Certificate of Incorporation of the Company (the "Company
Certificate of Incorporation"), a copy of which is filed as Exhibit 3.1 of
this Registration Statement, provides that the directors and officers of the
Company and anyone serving at the request of the Board of Directors of the
Company is indemnified by the Company to the fullest extent permitted by the
General Corporation Law of the State of Delaware (the "DGCL") or any other
applicable laws. The existing rights or protections of a director or officer
under the Company Certificate of Incorporation will not be affected by any
repeal or modification of such provisions. The Company may enter into
agreements with directors or officers that provide for indemnification greater
or different than that provided in the Company Certificate of Incorporation.
The Bylaws of the Company, a copy of which is filed as Exhibit 3.3 of this
Registration Statement, contain no provision for indemnification.
SFW HOLDING CORP.
The Certificate of Incorporation of the Guarantor (the "Guarantor
Certificate of Incorporation"), a copy of which is filed as Exhibit 3.2 of
this Registration Statement, provides that the directors and officers of the
Guarantor and anyone serving at the request of the Board of Directors of the
Guarantor is indemnified by the Guarantor to the fullest extent permitted by
the DGCL or any other applicable laws. The existing rights or protections of a
director or officer under the Guarantor Certificate of Incorporation will not
be affected by any repeal or modification of such provisions. The Guarantor
may enter into agreements with directors or officers that provide for
indemnification greater or different than that provided in the Guarantor
Certificate of Incorporation.
The Bylaws of the Guarantor, a copy of which is filed as Exhibit 3.4 to this
Registration Statement, contain no provision for indemnification.
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
Under the DGCL, directors, officers, employees, and other individuals may be
indemnified against expenses (including attorneys' fees), judgements, fines,
and amounts paid in settlement in connection with specified actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation--a "derivative action")
if they acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to
any criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful. A similar standard of care is applicable in the case of
a derivative action, except that indemnification only extends to expenses
(including attorneys' fees) incurred in connection with defense or settlement
of such an action and Delaware law requires court approval before there can be
any indemnification of expenses where the person seeking indemnification has
been found liable to the corporation.
Delaware corporations may limit the personal liability of their directors
for monetary damages for a breach of fiduciary duty; provided, however, that
the directors can still be held personally liable (i) for a breach of the duty
of loyalty to the corporation and its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL (described below), and
(iv) for any transaction from which the director derived an improper personal
benefit. Section 174 of the DGCL makes directors personally liable for
unlawful dividends or unlawful stock repurchases or redemptions in certain
circumstances and expressly sets forth a negligence standard with respect to
such liability.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER ITEM
------- ----
<C> <S>
3.1* Restated Certificate of Incorporation of the Company
3.2* Certificate of Incorporation of the Guarantor
3.3* Bylaws of the Company
3.4* Bylaws of the Guarantor
4.1* Indenture, dated as of June 26, 1997, by and among the Company, the
Guarantor and Norwest Bank Minnesota, National Association, as trustee
(the "Trustee")
4.2* Global Security, dated as of June 26, 1997, made by the Company and
guaranteed by the Guarantor
4.3* Form of Exchange Notes, including guarantee
4.4* Registration Rights Agreement, dated as of June 26, 1997, by and among
the Company, the Guarantor and Wasserstein Perella Securities, Inc.
4.5* Pledge Agreement, dated as of June 26, 1997, made by the Company to
the Trustee
5.1* Opinion of Jones, Day, Reavis & Pogue
10.1* Form of Letter of Employment. On February 4, 1997, the Company entered
into a Letter of Employment in substantially this form with certain
officers of the Company, including the following executive officers:
Jack W. Binder, Isaac Gendelman, Roy N. Marks and Louis Davis.
Schedule A to Exhibit 10.1 sets forth details contained in the Letter
of Employment with each of the executive officers listed above.
10.2* Supply Agreement, dated June 3, 1991, by and among the Company,
Shoppers Food Warehouse VA Corp., Shoppers Food Warehouse MD Corp. and
Richfood of PA, Inc. (formerly Super Rite Foods, Inc.).
10.3* Agreement, dated July 6, 1993, by and among Jumbo Produce, Inc. and
Warehouse Employees Local Union No. 730 and Drivers, Chauffeurs and
Helpers Local Union No. 639
10.4* Agreement, dated July 6, 1993, by and between the Company and United
Food Warehouse Corp. and United Food and Commercial Workers Union
Local No. 27
10.5* Tax Sharing Agreement, dated February 6, 1997, by and between Dart
Group Corporation and SFW Acquisition Corp.
10.6* Management Services Agreement, dated February 6, 1997, by and between
Dart Group Corporation and the Company
10.7* Standstill Order entered on December 6, 1995 by the Delaware Chancery
Court in Gloria G. Haft, et al. v. Larry G. Schafran, et al. (Del. Ch.
Civ. A. No. 14620) and Herbert H. Haft v. Dart Group Corporation, et
al. (Del. Ch. Civ. A. No. 14685) (incorporated by reference to Exhibit
99.1 to the Quarterly Report of Dart Group Corporation on Form 10-Q
for the period ended October 31, 1995)
10.8** Employment Agreement, dated August 25, 1997, between the Company and
William J. White.
10.9** Agreement, effective September 4, 1996, between the Company and United
Food & Commercial Workers Union, Local No. 400
12.1* Computation of Ratio of Earnings to Fixed Charges
18.1 Letter of Arthur Andersen LLP regarding change of accounting principle
21.1* List of Subsidiaries of the Guarantor and the Company
23.1* Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24.1* Power of Attorney of the Company (included herein)
24.2* Power of Attorney of the Guarantor (included herein)
25.1* Statement of eligibility of the Trustee on Form T-1
99.1* Form of Letter of Transmittal
99.2* Form of Notice of Guaranteed Delivery
99.3* Form of Letter to DTC Participants
99.4* Form of Letter to Clients and Form of Instruction to Book-Entry
Transfer Participants
</TABLE>
- --------
* Previously filed with the Commission on August 5, 1997.
** Previously filed with the Commission on October 20, 1997.
II-2
<PAGE>
(b) Financial Statement Schedules
No schedules for which provision is made in the applicable regulations of
the Commission are required under the related instructions and have therefore
been omitted.
ITEM 22. UNDERTAKINGS.
The Registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission (the "Commission") pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or
any material change to such information in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of this Registration Statement through the date of
responding to the request.
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in this Registration Statement
when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the
Registrants have been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrants of expenses incurred or paid by a director, officer or controlling
person of the Registrants in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities registered, the Registrants will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, Shoppers Food Warehouse
Corp. has duly caused this Amendment No. 2 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Lanham, in the State of Maryland, on November 18, 1997.
Shoppers Food Warehouse Corp.
By: /s/ Mark A. Flint
---------------------------------
MARK A. FLINT
Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Mark A. Flint Chief Executive Officer
- ------------------------------------- and Director November 18, 1997
Mark A. Flint
/s/ William J. White President November 18, 1997
- -------------------------------------
William J. White
* Jack W. Binder Senior Vice
- ------------------------------------- President--Finance November 18, 1997
Jack W. Binder
* Herbert H. Haft Co-Chairman of the
- ------------------------------------- Board of Directors November 18, 1997
Herbert H. Haft
Director
- -------------------------------------
Keith E. Alessi
* Douglas M. Bregman Director
- ------------------------------------- November 18, 1997
Douglas M. Bregman
* Bonita A. Wilson Director
- ------------------------------------- November 18, 1997
Bonita A. Wilson
Director
- -------------------------------------
Howard M. Metzenbaum
Director
- -------------------------------------
Harry M. Linowes
</TABLE>
- --------
* By his signature set forth below, Mark A. Flint, pursuant to duly executed
Powers of Attorney filed with the Securities and Exchange Commission, has
signed this Amendment No. 2 to the Registration Statement on behalf of the
above listed persons whose signatures are printed in Part II of this
Registration Statement, in the capacities set forth opposite their
respective names.
November 18, 1997 /s/ Mark A. Flint
---------------------------------
Mark A. Flint
II-4
<PAGE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the person whose signature appears
below under the heading "Signature" constitutes and appoints Mark A. Flint, his
true and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities to sign any or all amendments to this Registration Statement
(including any amendment and any post-effective amendments), and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-
fact and agent, acting alone, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully for all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, acting alone, or his substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following person in the capacity and on the
date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Richard B. Stone Co-Chairman of the November 18, 1997
- ------------------------------------- Board of Directors
of Shoppers Food
Richard B. Stone Warehouse Corp.
</TABLE>
- --------
* By his signature set forth below, Mark A. Flint, pursuant to the above duly
executed Power of Attorney, hereby filed with the Securities and Exchange
Commission, has signed this Amendment No. 2 to the Registration Statement on
behalf of the above listed person whose signature is printed in Part II of
this Registration Statement, in the capacity set forth opposite his name.
November 18, 1997 /s/ Mark A. Flint
---------------------------------
Mark A. Flint
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, SFW Holding Corp. has
duly caused this Amendment No. 2 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Lanham, in the State of Maryland, on November 18, 1997.
SFW Holding Corp.
By: /s/ Mark A. Flint
----------------------------------
MARK A. FLINT
President,
Chief Financial Officer
and Treasurer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
* Herbert H. Haft
- ------------------------------------- Chairman of the November 18, 1997
Herbert H. Haft Board of Directors
/s/ Mark A. Flint President, Chief
- ------------------------------------- Financial Officer November 18, 1997
Mark A. Flint and Treasurer
* Douglas M. Bregman Director
- ------------------------------------- November 18, 1997
Douglas M. Bregman
* Bonita A. Wilson Director
- ------------------------------------- November 18, 1997
Bonita A. Wilson
Director
- -------------------------------------
Howard M. Metzenbaum
Director
- -------------------------------------
Harry M. Linowes
</TABLE>
- --------
* By his signature set forth below, Mark A. Flint, pursuant to duly executed
Powers of Attorney filed with the Securities and Exchange Commission, has
signed this Amendment No. 2 to the Registration Statement on behalf of the
persons whose signatures are printed in Part II of this Registration
Statement, in the capacities set forth opposite their respective names.
/s/ Mark A. Flint
-------------------------------------
Mark A. Flint
November 18, 1997
II-6
<PAGE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the person whose signature appears
below under the heading "Signature" constitutes and appoints Mark A. Flint, his
true and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities to sign any or all amendments to this Registration Statement
(including any amendment and any post-effective amendments), and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-
fact and agent, acting alone, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully for all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, acting alone, or his substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following person in the capacity and on the
date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Richard B. Stone Co-Chairman of the November 18, 1997
- ------------------------------------- Board of Directors
Richard B. Stone of SFW Holding Corp.
</TABLE>
- --------
* By his signature set forth below, Mark A. Flint, pursuant to the above duly
executed Power of Attorney, hereby filed with the Securities and Exchange
Commission, has signed this Amendment No. 2 to the Registration Statement on
behalf of the above listed person whose signature is printed in Part II of
this Registration Statement, in the capacity set forth opposite his name.
November 18, 1997 /s/ Mark A. Flint
---------------------------------
Mark A. Flint
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
18.1 Letter of Arthur Andersen LLP regarding change in accounting
principles.
23.2 Consent of Arthur Andersen LLP
</TABLE>
<PAGE>
Exhibit 18.1
[LETTERHEAD OF ARTHUR ANDERSEN APPEARS HERE]
November 11, 1997
Shoppers Food Warehouse Corp.
4600 Forbes Boulevard
Lanham, Maryland 20706
Re: Form S-4 Amendment No.2, including financial statements for the period
ended February 1, 1997 and the six months ended August 2, 1997
Ladies and Gentlemen:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent accountants whenever there has been
a change in accounting principle or practice.
We have been informed that, as of February 6, 1997, the Company changed its
method of depreciation from the accelerated method to the straight-line method.
According to the management of the Company, this change was made to better match
the cost and usage of its assets with the related future benefits, as well as to
conform with Dart Group Corporation's accounting policies.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we have
reviewed the pertinent factors, including those related to financial reporting,
in this particular case on a subjective basis, and our opinion stated below is
based on our determination made in this manner.
We are of the opinion that the Company's change in method of accounting is to an
acceptable alternative method of accounting, which, based upon the reasons
stated for the change and our discussions with you, is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgment and business planning of your management.
We have not audited the application of this change to the financial statements
of any period subsequent to February 1, 1997. Further, we have not examined and
do not express any opinion with respect to your financial statements for the six
months ended August 2, 1997.
Very truly yours,
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Washington, D.C.
November 18, 1997
