<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED October 31, 1998
----------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to
---------- ----------
Commission file number 333-32825
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SHOPPERS FOOD WAREHOUSE CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 53-0231809
- --------------------------------------------- --------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
4600 Forbes Blvd., Lanham, Maryland, 20706
------------------------------------------
(Address of principal executive office)
(Zip Code)
(301) 306-8600
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
At December 14, 1998, the registrant had 23,333 shares of Class A Common Stock,
non-voting, $5.00 par value per share, outstanding and 10,000 shares of Class B
Common Stock, voting, $5.00 par value per share, outstanding. The common stock
of Shoppers Food Warehouse Corp. is not publicly traded.
1
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Item 1. Financial Statements
The consolidated financial statements included herein have been prepared by
Shoppers Food Warehouse Corp. ("Shoppers" or the "Company") without audit
(except for the consolidated balance sheet as of January 31, 1998, which has
been derived from the audited consolidated balance sheet as of that date)
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted, although Shoppers believes that the disclosures
are adequate to make the information presented not misleading.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in Shoppers' Annual Report on Form 10-K for the fiscal year ended
January 31, 1998.
2
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SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
October 31,|November 1, October 31, November 1,
1998 | 1997 1998 1997
---------- |---------- ---------- ----------
(Post-Acquisition)|
<S> <C> <C> <C>
Sales $220,431 | $214,076 $658,956 $633,600
Cost of sales 165,278 | 165,707 500,566 486,071
-------- | -------- -------- --------
Gross profit 55,153 | 48,369 158,390 147,529
-------- | -------- -------- --------
|
Selling and administrative |
expenses 42,711 | 41,627 127,627 118,304
Depreciation and amortization 3,200 | 3,155 9,900 8,234
-------- | -------- -------- --------
Operating income 9,242 | 3,587 20,863 20,991
|
Interest income 949 | 960 3,235 2,757
Interest expense 4,113 | 5,514 14,279 15,906
-------- | -------- -------- --------
Income (loss) before income |
taxes, extraordinary item |
and cumulative effect of |
accounting change 6,078 | (967) 9,819 7,842
Provision (benefit) for income |
taxes 2,925 | (121) 5,337 3,730
-------- | -------- -------- --------
Net income (loss) before |
extraordinary item and |
cumulative effect of |
accounting change 3,153 | (846) 4,482 4,112
Extraordinary item: |
Loss on early |
extinguishment of debt, |
net of income taxes of
$2,150 - | - - (3,126)
Cumulative effect of |
accounting change, net |
of income taxes of $1,344 - | - - 1,729
-------- | -------- -------- --------
Net income (loss) $ 3,153 | $ (846) $ 4,482 $ 2,715
======== | ======== ======== ========
|
Earnings per common share data |
(Basic and Dilutive): |
Income (loss) before |
extraordinary item and |
cumulative effect of |
accounting change $ 94.59 | $ (25.38) $ 134.46 $ 123.36
Extraordinary item: |
Loss on early |
extinguishment of |
debt - | - - (93.78)
Cumulative effect of |
accounting change - | - - 51.87
-------- | -------- -------- --------
Net income (loss) $ 94.59 | $ (25.38) $ 134.46 $ 81.45
======== | ======== ======== ========
|
Weighted average common |
shares outstanding 33 | 33 33 33
======== | ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
October 31, January 31,
1998 | 1998
---------- ----------
(Post-Acquisition)
<S> <C> <C>
ASSETS |
Current Assets: |
Cash and cash equivalents $ 4,967 | $ 4,027
Marketable debt securities - | 522
Accounts receivable net of allowance of $500 |
at October 31, 1998 11,653 | 7,950
Merchandise inventories 30,313 | 30,795
Prepaid income taxes - | 1,217
Deferred income taxes 2,693 | 4,254
Prepaid expenses 2,959 | 2,173
Note receivable from affiliate - | 522
-------- | --------
Total current assets 52,585 | 51,460
-------- | --------
|
Property and Equipment, at cost: |
Land and buildings 9,000 | 7,503
Store and warehouse equipment 44,203 | 62,496
Office and automotive equipment 731 | 2,019
Leasehold improvements 2,325 | 3,842
-------- | --------
56,259 | 75,860
Accumulated depreciation and amortization 2,410 | 36,973
-------- | --------
Net property and equipment 53,849 | 38,887
-------- | --------
|
Deferred Financing Costs 6,074 | 6,543
Goodwill net of accumulated amortization of |
$3,765 and $1,816 322,567 | 145,118
Lease Rights 15,044 | 11,689
Note Receivable from Dart Group 37,967 | 35,374
Other Assets 134 | 861
-------- | --------
|
Total assets $488,220 | $289,932
======== | ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
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SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
(Unaudited) (Audited)
October 31, January 31,
1998 | 1998
----------- ----------
(Post-Acquisition)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY |
Current Liabilities: |
Accounts payable, trade $ 16,050 | $ 40,006
Accrued expenses |
Salaries and benefits 5,296 | 4,490
Taxes other than income 3,188 | 2,687
Interest 7,140 | 2,654
Other 8,403 | 6,320
Current portion of capital lease obligation 482 | -
Accrued income taxes payable 5,030 | -
Due to affiliates 15,491 | 334
-------- | --------
Total current liabilities 61,080 | 56,491
-------- | --------
|
Senior Notes Due 2004 212,710 | 200,000
Capital Lease Obligation 12,842 | 11,315
Deferred Income Taxes 13,240 | 9,625
Other Liabilities 5,966 | 6,549
-------- | --------
Total Liabilities 305,838 | 283,980
-------- | --------
|
Commitments and Contingencies |
Stockholder's 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
Paid-in-capital 178,925 | -
Unrealized gain on investments - | 4
Retained earnings 3,290 | 5,781
-------- | --------
Total stockholder's equity 182,382 | 5,952
-------- | --------
Total liabilities and stockholder's equity $488,220 | $289,932
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
5
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SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS, (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-----------------------
October 31, November 1,
1998 1997
----------- -----------
<S> <C>
Cash Flows from Operating Activities:
Net income $ 4,482 $ 2,715
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,900 8,234
Cumulative effect of accounting change - (1,729)
Amortization of deferred financing costs 763 1,201
Amortization of revaluation of Senior Notes (1,608) -
Interest in excess of capital lease payments - 209
Write-off of Increasing Rate Notes
financing costs - 5,276
Increase in deferred rent liability 706 704
Change in assets and liabilities:
Accounts receivable (4,203) 2,354
Merchandise inventories 3,608 (1,230)
Prepaid income taxes 1,217 (951)
Prepaid expenses (786) 331
Other assets 727 (62)
Accounts payable (11,599) (1,766)
Accrued interest 1,893 6,589
Accrued expenses 732 1,911
Income taxes payable 5,030 (1,391)
Due to/from affiliates (3,626) -
Deferred income taxes (391) (190)
Deferred income (263) (1,308)
-------- --------
Net cash provided by operating activities $ 6,582 $ 20,897
-------- --------
Cash Flows from Investing Activities:
Capital expenditures $ (5,604) $ (8,819)
Purchase of short-term investments (3,604) (32,693)
Sale/maturity of short-term investments 4,121 105,281
-------- --------
Net cash provided by(used for)investing
activities $ (5,087) $ 63,769
-------- --------
Cash Flows from Financing Activities:
Payments for acquisition and deferred financing
costs $ (294) $(13,843)
Principal payments under capital lease obligations (261) -
Proceeds from Senior Notes - 200,000
Repayment of Increasing Rate Notes - (140,000)
Restricted Proceeds - (50,218)
Release of Restricted Proceeds - 50,000
Note receivable from parent - (10,000)
Dividends to shareholder - (50,000)
Payment for acquisition debt - (72,800)
-------- --------
Net cash used for financing activities $ (555) $(86,861)
-------- --------
</TABLE>
(continued on next page)
6
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SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS, (Unaudited), Continued
(dollars in thousands)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
-----------------------
October 31, November 1,
1998 1997
----------- -----------
<S> <C> <C>
Net increase (decrease) in cash and equivalents $ 940 $ (2,195)
Cash and equivalents, beginning of period 4,027 13,739
-------- --------
Cash and equivalents, end of period $ 4,967 $ 11,544
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for
Interest $ 10,687 $ 4,497
Income taxes 1,242 4,191
</TABLE>
The accompanying notes are an integral part of these statements.
7
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SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The accompanying consolidated financial statements reflect the accounts of
Shoppers Food Warehouse Corp. ("Shoppers") and its wholly-owned subsidiaries
(collectively "the Company"). The consolidated financial statements as of
October 31, 1998 and for the 13 weeks and 39 weeks ended October 31, 1998 and
November 1, 1997 of the Company have been prepared by the Company without an
audit. Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted accounting
principles ("GAAP") have been omitted from the accompanying consolidated
financial statements.
The preparation of financial statements in conformity with GAAP 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 consolidated financial
statements reflect all adjustments (which include normal recurring adjustments)
necessary to present fairly the financial position of the Company as of October
31, 1998, and the results of its operations for the 39 weeks and 13 weeks ended
October 31, 1998 and November 1, 1997. As a result of the Dart Acquisition
(defined in Note 2) certain financial statement and related footnote amounts for
periods prior to the Dart Acquisition are not comparable to corresponding
amounts subsequent to the Dart Acquisition. In addition, the results of
operations for the 39 weeks and 13 weeks ended October 31, 1998 are not
necessarily indicative of the results that may be achieved for the fiscal year
ending January 30, 1999.
NOTE 2 - ACQUISITIONS
Dart Acquisition
On May 18, 1998, a wholly-owned subsidiary ("Acquisition Subsidiary") of
Richfood Holdings, Inc. ("Richfood") acquired all of the outstanding shares of
Dart Group Corporation ("Dart"), which indirectly owns 100% of the outstanding
common stock of the Company, for $160 per share, net to the seller in cash, or
approximately $201 million (the "Dart Acquisition"). In connection with the Dart
Acquisition, Richfood caused the Acquisition Subsidiary to merge with and into
Dart (the "Merger") in a transaction in which Dart became a wholly-owned
subsidiary of Richfood. As a result of the Merger, Richfood indirectly owns 100%
of the outstanding common stock of the Company.
Richfood has accounted for the Dart Acquisition using the purchase method of
accounting, and accordingly, a new accounting basis began as of the effective
date. The assets and liabilities of Shoppers have been restated to reflect their
estimated fair market values as of the effective date of the Dart Acquisition.
The 13 weeks ended October 31, 1998, and 24 weeks of the 39 weeks ended October
31, 1998 include results of operations under this new
8
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SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
basis of accounting. The excess of the Dart Acquisition purchase price over net
assets acquired (goodwill) has been pushed-down to Shoppers. This goodwill of
approximately $326 million is based on a preliminary allocation of the purchase
price and is being amortized on a straight line basis over 40 years.
Richfood is operating Shoppers as a distinct unit separate from its other retail
and wholesale operations and has indicated that it does not presently plan to
make any material changes to Shoppers' strategic focus or operational format.
Shoppers Acquisition
On February 6, 1997, Dart indirectly acquired the 50% interest in Shoppers that
it did not already own at a cost of $210 million (the "Shoppers Acquisition")
and Shoppers became a wholly owned indirect subsidiary of Dart. Dart financed
the Shoppers 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 Shoppers Acquisition, SFW
Acquisition Corp. merged into Shoppers (with Shoppers becoming the obligor on
the Increasing Rate Notes) and Shoppers repaid the Bridge Loan from its existing
cash and the liquidation of certain short-term investments.
NOTE 3 - EARNINGS PER SHARE
Earnings per common share is based on the weighted average number of common
shares and common share equivalents outstanding during the periods presented.
The Company adopted SFAS No. 128, Earnings Per Share, in the fourth quarter of
fiscal 1998 and has restated all previously presented earnings per common share
data. The Company has no dilutive securities, therefore, earnings per common
share represents both basic and diluted earnings per common share.
NOTE 4 - INTERIM INVENTORY ESTIMATES
The Company's inventories are priced at the lower of last-in, first-out ("LIFO")
cost or market. At October 31, 1998 and January 31, 1998, inventories determined
on a first-in, first-out basis would have been greater by approximately $277,000
and $4,743,000, respectively, and pre-tax income for the 39 weeks ended October
31, 1998 and November 1, 1997 would have been greater by approximately $477,000
and $675,000, respectively.
The Company takes a complete physical inventory of its stores on a cycle count
basis (approximately 12 stores a month). All departments with perishable food
items are inventoried monthly. The Company uses a gross profit method to
determine the inventory for stores (other than departments with perishable food
items) for periods when physical counts are not taken.
9
<PAGE> 10
SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5 - LONG-TERM DEBT
Senior Notes
In June 1997, the Company refinanced the Increasing Rate Notes with $200.0
million aggregate principal amount of 9 3/4% Senior Notes due 2004 (the "Senior
Notes"). The net proceeds from the Senior Notes was $193.5 million (after fees
and expenses of approximately $6.5 million) of which $143.5 million was used to
repay the Increasing Rate Notes (including interest) and $50.0 million (the
"Restricted Proceeds") was paid to Dart in the form of a $40 million dividend
and a $10 million loan for settlements with certain Dart shareholders (Haft
family members). Interest on the Senior Notes accrued from the date of issuance
and is payable semi-annually in arrears on each June 15 and December 15. The
Senior Notes are effectively subordinated in right of payment to all secured
indebtedness of the Company and contain certain restrictive covenants including,
(i) limitation on restricted payments, (ii) limitation on indebtedness, (iii)
limitation on investments, loans and advances, (iv) limitation on liens, (v)
limitation on transactions with affiliates, (vi) restriction on mergers,
consolidations and transfers of assets, (vii) limitation on lines of business,
(viii) limitations on asset sales and (ix) limitation on issuance and sale of
capital stock of subsidiaries. The amount of distributions that the Company can
make to its shareholder is also subject to certain restrictions.
The Senior Notes are fully and unconditionally guaranteed by SFW Holding Corp.
("Holdings"), the immediate parent of the Company. Holdings holds 100% of the
common stock of Shoppers and is a wholly-owned subsidiary of Dart. The guarantee
is secured by a first priority security interest in the capital stock of the
Company owned by Holdings.
On May 18, 1998, in connection with the Dart Acquisition, the Senior Notes were
adjusted on the Company's Balance Sheet to their fair value of $221.5 million.
The $21.5 million of fair value in excess of face value of the Senior Notes is
being amortized on a straight-line basis over the stated maturity period. In
June 1998, Richfood purchased $6.5 million in face amount of the outstanding
Senior Notes in an open market transaction for a total cash payment of
approximately $7.2 million, including accrued interest.
Revolving Credit Facility
On December 22, 1997, the Company entered into a revolving loan and security
agreement (the "Credit Facility") to borrow up to $25 million. The Credit
Facility has an original term of five years and may be renewed for up to two
additional one year periods. Borrowings under the Credit Facility shall bear
interest at rates ranging from prime rate minus 0.25% to prime rate plus 0.25%,
for prime rate loans, or LIBOR plus 1.5% to LIBOR plus 2.0%, for LIBOR loans.
The Company may elect prime rate loans or LIBOR loans. Interest rates are based
upon the Company's net income, determined in accordance with GAAP; plus income
taxes, interest expense (net of interest income), amortization and depreciation
expenses, LIFO expense, other non-cash charges (excluding accruals for cash
expenses made in the ordinary course of business) and losses
10
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SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
from sales or other dispositions of assets, less gains from sales or other
dispositions and extraordinary or non-recurring gains, but including
extraordinary or non-recurring cash losses ("EBITDA"). Borrowings are limited to
eligible accounts, as defined, less any letters of credit outstanding, and are
secured by the Company's inventory and certain accounts receivable. Interest on
prime rate loans is payable monthly and interest on LIBOR loans is payable
between one and three months. The Credit Facility includes a fee on the unused
principal balance of 0.375% per annum until January 31, 1999 and a variable
annual rate from .25% to .50% based on the Company's EBITDA. Letters of credit
issued under the Credit Facility cannot exceed $10.0 million and Shoppers must
pay an annual fee of 1.25% to 1.75%, based on the level of EBITDA, of the daily
outstanding balance of any outstanding letters of credit. The Credit Facility
has certain restrictive covenants, including the maintenance of specified EBITDA
levels. As of October 31, 1998, the Company had not borrowed under the Credit
Facility, however, there were three letters of credit issued against the Credit
Facility in an aggregate amount of approximately $3.1 million.
Subsequent to October 31, 1998, the Company replaced the letters of credit with
letters of credit issued by a bank that expire October 31, 1999.
NOTE 6 - TRANSACTIONS WITH AFFILIATES
The October 31, 1998 Consolidated Balance Sheet includes $15.5 million due to
affiliates, which consists primarily of $6.2 million for the payment of
inventory purchases from subsidiaries of Richfood and $7.2 million due to
Richfood for the purchase of the Senior Notes on June 26, 1998.
On September 26, 1997, Shoppers loaned Dart $10.0 million from the Restricted
Proceeds that Dart used to fund a portion of a settlement with certain members
of the Haft family who were shareholders of Dart. The loan is in the form of a
promissory note that bears interest at 9 3/4% per annum, compounded annually.
Interest and principal are payable on June 15, 2004, however, Dart may make
interest payments prior to that time.
On January 28, 1998, Shoppers loaned Dart an additional $25.0 million that Dart
used to fund a portion of a settlement with Herbert H. Haft, who was a
shareholder of Dart. The loan is in the form of a promissory note that bears
interest at 9 3/4% per annum, compounded annually. Interest and principal are
payable on June 15, 2004, however, Dart may make interest payments prior to that
time.
During the 13 weeks ended May 2, 1998, Shoppers recorded interest income of
approximately $0.3 million and decreased the valuation reserve for a note
receivable from an affiliate of Dart by approximately $0.4 million. The
adjustments were necessary to increase the note receivable to its realizable
value from $0.5 million to approximately $1.2 million. In May 1998, Shoppers
received $1.2 million from Dart to pay-off the note receivable.
11
<PAGE> 12
SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7 - INCOME TAXES
The Company's effective income tax rate increased to 54.4% and 48.1%,
respectively, for the 39 and 13 week periods ended October 31, 1998, from 47.6%
and 12.5% for the 39 and 13 week periods ended November 1, 1997. These increases
are attributed to an increase in nondeductible amortization associated with
goodwill arising from the Dart Acquisition.
12
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Outlook
Except for historical information, statements in this Management's Discussion
and Analysis of Financial Condition and Results of Operations are
forward-looking. Actual results may differ materially due to a variety of
factors, including the Company's ability to open new stores and the effect of
regional economic conditions. Shoppers undertakes no obligation and does not
intend to update, revise or otherwise publicly release the result of any
revisions to these forward-looking statements that may be made to reflect future
events or circumstances.
Richfood intends to operate Shoppers as a distinct unit separate from its other
retail and wholesale operations and does not presently plan to make any material
changes to Shoppers' strategic focus or operational format.
Financial Condition
In connection with the Dart Acquisition, all of the excess of the purchase price
over net assets acquired (goodwill) was pushed-down to the Company. As a result,
Assets and Stockholders' Equity on the Company's Consolidated Balance Sheet each
increased by approximately $178.9 million.
Results of Operations
39 Weeks and 13 Weeks Ended October 31, 1998 Compared with the 39 Weeks and 13
Weeks Ended November 1, 1997
Sales increased by $25.4 million, or 4.0%, from $633.6 million during the 39
weeks ended November 1, 1997 to $659.0 million during the 39 weeks ended October
31, 1998. Sales increased by $6.3 million, or 3.0%, from $214.1 million during
the 13 weeks ended November 1, 1997 to $220.4 million during the 13 weeks ended
October 31, 1998. The sales increases were primarily due to additional sales
associated with four new stores opened since July 1997 (including one store that
opened in July 1998). Comparable store sales decreased 6.8% and 6.2% for the 39
weeks and 13 weeks ended October 31, 1998, respectively, compared to the
corresponding periods in the prior year. The decreases in comparable store sales
were primarily due to the new Shoppers stores drawing customers from existing
Shoppers stores and competitive market conditions.
Gross profit increased by approximately $10.9 million (7.4%), from $147.5
million during the 39 weeks ended November 1, 1997 to $158.4 million during the
39 weeks ended October 31, 1998. Gross profit increased by $6.8 million (14.0%),
from $48.4 million during the 13 weeks ended November 1, 1997 to $55.2 million
during the 13 weeks ended October 31, 1998. Gross profit, as a percentage of
sales, increased to 24.0% during the 39 weeks ended October 31, 1998 compared to
23.3% during the 39 weeks ended November 1, 1997. Gross profit, as a percentage
of sales, increased to 25.0% during the 13 weeks ended October 31, 1998, from
22.6% during the 13 weeks ended November 1, 1997. The increases in gross profit
were primarily due to the reduced number of items with special discount pricing
as well as an increase in allowances associated with the introduction of new
products.
13
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Selling and administrative expenses increased by approximately $9.3 million
(7.9%), from $118.3 million during the 39 weeks ended November 1, 1997 to $127.6
million during the 39 weeks ended October 31, 1998 and selling and
administrative expenses increased by $1.1 million (2.6%), from $41.6 million
during the 13 weeks ended November 1, 1997 to $42.7 million during the 13 weeks
ended October 31, 1998. Selling and administrative expenses, as a percentage of
sales, increased from 18.7% during the 39 weeks ended November 1, 1997 to 19.4%
during the 39 weeks ended October 31, 1998. The increase was primarily
attributable to higher advertising expenses and one-time promotional expenses at
certain locations. Selling and administrative expenses, as a percentage of
sales, were 19.4% for both the 13 weeks ended October 31, 1998 and November 1,
1997.
Depreciation and amortization increased by $1.7 million from $8.2 million during
the 39 weeks ended November 1, 1997 to $9.9 million during the 39 weeks ended
October 31, 1998. The increase was primarily due to increased amortization of
goodwill as a result of the Dart Acquisition.
Operating income was $20.9 million for the 39 weeks ended October 31, 1998
compared to $21.0 million during the same period in the prior year. The decrease
was primarily due to increased deprecation and amortization. Operating income
was $9.2 million for the 13 weeks ended October 31, 1998 compared to $3.6
million for the 13 weeks ended November 1, 1997. The increase was primarily due
to higher gross profit on increased sales.
Interest income increased approximately $0.5 million during the 39 weeks ended
October 31, 1998 compared to the 39 weeks ended November 1, 1997 due to interest
accrued on the loans to Dart and the interest recorded on the note receivable
from an affiliate of Dart (see Note 6 to the Consolidated Financial Statements).
Interest income decreased $11,000 during the 13 weeks ended October 31, 1998
compared to the 13 weeks ended November 1, 1997 due to decreased funds available
for short-term investment. The prior year periods include interest income earned
on the temporarily invested Restricted Proceeds from the $200 million debt
offering, which are no longer available for short-term investment.
Interest expense decreased $1.6 million from $15.9 million during the 39 weeks
ended November 1, 1997 to $14.3 million during the 39 weeks ended October 31,
1998. Interest expense decreased $1.4 million from $5.5 million during the 13
weeks ended November 1, 1997 to $4.1 million during the 13 weeks ended October
31, 1998. The decreases are primarily due to a reduction in interest expense due
to amortization of the adjustment to market value of the Senior Notes.
The effective income tax rate for the 39 weeks ended October 31, 1998 was 54.4%
compared to 47.6% for the 39 weeks ended November 1, 1997. The effective tax
rate for the 13 weeks ended October 31, 1998 was 48.1% compared to 12.5% for the
13 weeks ended November 1, 1997. The increases were attributable to the increase
in nondeductible amortization of acquisition related goodwill as a result of the
Dart Acquisition in May 1998.
14
<PAGE> 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Net income increased by $1.8 million, from $2.7 million during the 39 weeks
ended November 1, 1997 to $4.5 million during the 39 weeks ended October 31,
1998. The increase was primarily attributable to the inclusion of an
extraordinary item, the loss on the early extinguishment of debt, during last
fiscal year. Net income was $3.2 million during the 13 weeks ended October 31,
1998 compared to a net loss of $0.8 million during the 13 weeks ended November
1, 1997. The increase is primarily due to the increase in operating income and a
reduction in interest expense.
Liquidity and Capital Resources
The Company's principal source of liquidity is expected to be its cash flow from
operations. It is anticipated that Shoppers' principal uses of liquidity will be
to provide working capital, finance capital expenditures and meet debt service
requirements.
Letters of credit have been issued in connection with Shoppers' workers'
compensation insurance in the amount of approximately $3.1 million as of October
31, 1998. These letters of credit will mature at various dates through October
31, 1999.
During the 39 weeks ended October 31, 1998, operating activities generated net
cash of $6.6 million. 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 payables to affiliates and external vendors, thereby allowing
the Company to use cash from operations for non-current purposes, such as
financing capital expenditures and other investing activities.
For the 39 weeks ended October 31, 1998, investing activities used $5.1 million
of Shoppers' cash primarily for capital expenditures, partially offset by the
net disposition of short-term investments. Shoppers estimates that it will make
total capital expenditures of approximately $7.5 million during the 52 weeks
ending January 30, 1999. Such expenditures relate to one new store that opened
in July 1998 as well as routine expenditures for equipment. Management expects
that these capital expenditures will be financed primarily through cash flow
from operations.
Financing activities used $0.6 million of the Company's cash during the 39 weeks
ended October 31, 1998, compared to $86.9 million during the 39 weeks ended
November 1, 1997. The decrease is primarily due to payments on the Bridge Loan,
other financing costs and acquisition costs associated with the Shoppers
Acquisition during last fiscal year (see Note 2 to the Consolidated Financial
Statements).
Shoppers' current interest expense consists primarily of interest on the Senior
Notes and capital lease obligations.
The Company believes that cash flows from Shoppers' operations will be adequate
to meet its anticipated requirements for working capital, debt service and
capital expenditures.
15
<PAGE> 16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Year 2000 Compliance
The "Year 2000" issue is the result of computer systems and software programs
using only two digits rather than four to define a year. As a result, computer
systems that have date--sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. Unless remedied, the Year 2000 issue
could result in system failures, miscalculations, and the inability to process
necessary transactions or engage in similar normal business activities. In
addition to computer systems and software, any equipment using embedded chips,
such as switchgear, controllers and telephone exchanges, could also be at risk.
As a result of the Dart Acquisition, the Company's computer systems and software
programs are being incorporated into Richfood's. Richfood has developed, and has
begun implementing, a strategic, long--term information technology plan (the
"Strategic Plan") to upgrade its core application systems. Concurrently,
Richfood has developed and is implementing a plan (the Y2K Plan") to ensure that
its information systems are Year 2000 compliant. The Y2K Plan focuses on the
following three major areas:
- Information technology systems ("IT").
- Embedded technology and other systems ("Non-IT").
- Key third party relationships.
Based on the Strategic Plan and assessments conducted as part of the Y2K Plan,
Richfood determined that it would be necessary to modify or replace portions of
its software and certain hardware systems so that such systems will properly
recognize dates beyond December 31, 1999. Richfood presently believes that with
the modification or replacement of existing software and certain hardware
systems, the Year 2000 issue can be significantly mitigated. However, if such
modifications and replacements are not made, or are not completed in a timely
manner, the Year 2000 issue could have a material adverse impact on the results
of operations of the Company.
Richfood's Y2K Plan, as it pertains to the Company, involves the following three
phases:
- Assessment -- locating, listing and prioritizing the specific
technology that is potentially subject to Year 2000 issues,
assessing the actual exposure of such technology to the Year 2000
issue, and planning/scheduling the allocation of internal and third
party resources for the remediation effort.
- Remediation/Testing of non-compliant systems - selecting and
executing the method necessary to resolve the Year 2000 issues that
were identified, including replacement, upgrade, repair or
abandonment and testing the remediated or converted technology to
determine the efficacy of the resolutions.
- Implementation- placing remediated technology into operation.
16
<PAGE> 17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The assessment phase has been completed with respect to IT and Non--IT systems
that Richfood believes could be adversely affected by the Year 2000 issue. The
assessment indicated that many of the Company's significant information systems
could be adversely affected, particularly the general ledger, human resources,
payroll, and point of sale systems. Non-IT systems, including telephones,
loss-prevention and food production systems, are also being validated; however,
the Company believes that non-compliance of the Non-IT systems does not pose a
significant risk to the Company's results of operations.
With respect to IT systems, the remediation/testing phase is approximately 40%
complete, with an expected completion date of early 1999, and the implementation
phase is expected to continue until September 1999. Certain point of sale
software systems and all time and attendance systems will be upgraded or
replaced during 1999. Additionally, human resources, payroll and general ledger
system software upgrades are expected to be completed by mid 1999.
The majority of the Company's Non--IT systems are currently Year 2000 compliant;
however, certain systems, which include telephones, will need to be upgraded or
replaced. The Non--IT systems remediation/testing phase is approximately 50%
complete and full implementation is expected by mid 1999.
Richfood's evaluation of the Year 2000 readiness of the Company's material
suppliers(Richfood is the Company's primary supplier), customers and other third
parties, has not identified any class of third party providers that could
materially impact the Company's results of operations in the event of their
failure to become Year 2000 compliant. However, there can be no assurance that
the failure of any unrelated third parties to become Year 2000 compliant in a
timely manner would not result in a material on the Company's results of
operations or financial position.
Total costs associated with the Company's Y2K remediation are expected to be
approximately $3.4 million. Of this amount, approximately $3.0 million has, or
is expected to be capitalized, in accordance with GAAP, with approximately
$200,000 capitalized during the 39 weeks ended October 31, 1998 and the Company
expects to pay the majority of the remaining costs over the next 12 months. All
expenditures related to the Y2K Plan will be funded by cash flow from
operations and are not expected to impact other operating or investment plans.
No material information technology projects have been deferred as a result of
the implementation of the Y2K Plan.
The aforementioned costs of the Y2K Plan and the completion dates are based on
management's best estimates, which were derived from assumptions of future
events, including the availability of resources, key third party modification
plans and other factors. There can be no assurance that these estimates will
prove to be accurate, and actual results could vary due to uncertainties.
Although the Y2K Plan is expected to be adequate to address the Company's Year
2000 concerns, the Company could experience a material adverse effect on its
results of operations or financial position if its Year 2000 compliance schedule
is not met, if the costs to remediate the Company's Year 2000 issues
significantly exceed current estimates or if material suppliers, customers and
other businesses encounter serious problems in their Year 2000 remediation
17
<PAGE> 18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
efforts. Therefore, Richfood and the Company are in the process of developing
plans to address such contingencies, with a focus on mission critical systems.
The Company and Richfood expect to complete its contingency plans in mid 1999
and expect that such plans may include provisions relating to, among other
things, manual workarounds, stockpiling inventories and adjusting staffing
strategies, and will describe the communications, operations and IT activities
that will be utilized if the contingency plans must be executed.
Richfood's Year 2000 efforts are ongoing and the Y2K Plan will continue to
evolve as new information becomes available. The failure to correct a material
Year 2000 issue could result in an interruption in certain normal business
activities and operations. Due to the general uncertainty inherent in the Year
2000 issue, resulting in part from the uncertainty of the Year 2000 readiness of
third parties upon whom Richfood and the Company rely, the Company is unable to
determine at this time whether the consequences of Year 2000 failures will have
a material adverse impact on the Company's results of operations. However, the
Company believes that, with the implementation of the Y2K Plan as scheduled, the
possibility of significant interruptions of normal operations should be reduced.
18
<PAGE> 19
PART II
Item 1. 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, if
established, upon the business, financial condition and results of operations of
Shoppers.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
27.1 Financial Data Schedule
(B) Reports on Form 8-K
None
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHOPPERS FOOD WAREHOUSE CORP.
Date: December 15, 1998 By: /s/ WILLIAM J. WHITE
--------------------------- ------------------------------
WILLIAM J. WHITE
President
Date: December 15,1998 By: /s/ EDWARD KLIG
--------------------------- ------------------------------
EDWARD KLIG
Chief Financial Officer
20
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<FISCAL-YEAR-END> JAN-30-1999
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<PERIOD-END> OCT-31-1998
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0
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