<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 August 1, 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
---------
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)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
At September 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)
(dollars and shares in thousands, except per share data)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
--------------------- ----------------------
August 1, August 2, August 1, August 2,
1998 1997 1998 1997
----------|---------- ---------- ----------
(Post-Acquisition)
<S> <C> <C> <C>
Sales $224,527 | $209,543 $438,525 $419,524
Cost of sales 170,780 | 160,829 335,288 320,364
-------- | -------- -------- --------
Gross profit 53,747 | 48,714 103,237 99,160
-------- | -------- -------- --------
|
Selling and administrative |
expenses 44,724 | 39,132 84,916 76,677
Depreciation and |
amortization 3,836 | 3,095 6,700 5,079
-------- | -------- -------- --------
Operating income 5,187 | 6,487 11,621 17,404
|
Interest income 972 | 1,298 2,286 1,797
Interest expense 4,696 | 4,631 10,166 10,392
-------- | -------- -------- --------
Income before income taxes, |
extraordinary item and |
cumulative effect of |
accounting change 1,463 | 3,154 3,741 8,809
Provision for income taxes 1,341 | 1,373 2,412 3,851
-------- | -------- -------- --------
Net income before |
extraordinary item and |
cumulative effect of |
accounting change 122 | 1,781 1,329 4,958
Extraordinary item: |
Loss on early |
extinguishment of debt, |
net of income taxes of |
$2,150 - | (3,126) - (3,126)
Cumulative effect of |
accounting change, net |
of income taxes of $1,344 - | - - 1,729
-------- | -------- -------- --------
Net income (loss) $ 122 | $ (1,345) $ 1,329 $ 3,561
======== | ======== ======== ========
|
Earnings per common |
share data (Basic and Dilutive): |
Income before |
extraordinary item and |
cumulative effect of |
accounting change $ 3.66 | $ 53.43 $ 39.87 $ 148.74
Extraordinary item: |
Loss on early |
extinguishment of |
debt - | (93.78) - (93.78)
Cumulative effect of |
accounting change - | - - 51.87
-------- | -------- -------- --------
Net income (loss) $ 3.66 | $ (40.35) $ 39.87 $ 106.83
======== | ======== ======== ========
|
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)
August 1, January 31,
1998 1998
---------- |---------
(Post-Acquisition)
<S> <C> <C>
ASSETS |
Current Assets: |
Cash and cash equivalents $ 1,295 | $ 4,027
Marketable debt securities - | 522
Accounts receivable 10,529 | 7,950
Merchandise inventories 30,046 | 30,795
Prepaid income taxes - | 1,217
Deferred income taxes 984 | 4,254
Prepaid expenses 2,722 | 2,173
Due from affiliate - | 522
-------- | --------
Total current assets 45,576 | 51,460
-------- | --------
|
Property and Equipment, at cost: |
Land and buildings 9,000 | 7,503
Store and warehouse equipment 43,105 | 62,496
Office and automotive equipment 581 | 2,019
Leasehold improvements 2,283 | 3,842
-------- | --------
54,969 | 75,860
Accumulated depreciation and amortization 1,196 | 36,973
-------- | --------
Net property and equipment 53,773 | 38,887
-------- | --------
|
Deferred Financing Costs 6,319 | 6,543
Goodwill net of accumulated amortization of |
$1,969 and $1,816 369,867 | 145,118
Lease Rights 15,223 | 11,689
Note Receivable from Dart Group 37,099 | 35,374
Other Assets 140 | 861
-------- | --------
|
Total assets $527,997 | $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)
August 1, January 31,
1998 1998
---------- | -----------
(Post-Acquisition)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY |
Current Liabilities: |
Accounts payable, trade $ 21,356 | $ 40,006
Accrued expenses |
Salaries and benefits 5,039 | 4,490
Taxes other than income 3,006 | 2,687
Interest 2,621 | 2,654
Other 8,549 | 6,320
Current portion of capital lease obligation 482 | -
Accrued income taxes payable 4,836 | -
Due to affiliates 17,234 | 334
------- | --------
Total current liabilities 63,123 | 56,491
------- | --------
|
Senior Notes Due 2004 213,570 | 200,000
Capital Lease Obligation 13,020 | 11,315
Deferred Income Taxes 7,103 | 9,625
Other Liabilities 5,912 | 6,549
------- | --------
Total Liabilities 302,728 | 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 224,965 | -
Unrealized gain on investments - | 4
Retained earnings 137 | 5,781
-------- | --------
Total stockholder's equity 225,269 | 5,952
-------- | --------
Total liabilities and stockholder's equity $527,997 | $289,932
======== | ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
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SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS, (Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
----------------------
August 1, August 2,
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,329 $ 3,561
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,700 5,080
Cumulative effect of accounting change - (1,729)
Amortization of deferred financing costs 518 943
Amortization of bond premium (748) -
Interest in excess of capital lease payments - 154
Write-off of Increasing Rate Notes financing costs - 5,276
Increase in deferred rent liability 488 469
Change in assets and liabilities:
Accounts receivable (3,079) 2,509
Merchandise inventories 3,875 1,215
Due from affiliate 522 -
Prepaid expenses (549) 507
Prepaid income taxes 1,217 -
Other assets 721 (72)
Accounts payable (6,293) (2,965)
Accrued expenses 532 4,189
Accrued interest (1,758) -
Income taxes payable 4,836 (873)
Due to affiliates (2,405) -
Deferred income taxes (4,281) -
Deferred income (192) (849)
-------- --------
Net cash provided by operating activities $ 1,433 $ 17,415
-------- --------
Cash Flows from Investing Activities:
Capital expenditures $ (4,305) $ (5,861)
Purchase of short-term investments (3,604) (18,430)
Sale/maturity of short-term investments 4,121 93,416
-------- --------
Net cash provided by(used in)investing activities $ (3,788) $ 69,125
-------- --------
Cash Flows from Financing Activities:
Payments for acquisition and deferred financing
costs $ (294) $(13,203)
Principal payments under capital lease obligations (83) -
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 $ (377) $(86,221)
-------- --------
</TABLE>
(continued on next page)
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SHOPPERS FOOD WAREHOUSE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS, (Unaudited), Continued
(dollars in thousands)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
----------------------
August 1, August 2,
1998 1997
--------- ---------
<S> <C> <C>
Net increase (decrease) in cash and equivalents (2,732) 319
Cash and equivalents, beginning of period 4,027 13,739
-------- --------
Cash and equivalents, end of period $ 1,295 $ 14,058
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for
Interest $ 10,386 $ 7,416
Income taxes 1,242 2,826
</TABLE>
The accompanying notes are an integral part of these statements.
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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 August
1, 1998 and for the 26 weeks and 13 weeks ended August 1, 1998 and August 2,
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 August
1, 1998, and the results of its operations for the 26 weeks and 13 weeks ended
August 1, 1998 and August 2, 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 26 weeks and 13 weeks ended August 1, 1998 are not necessarily indicative of
the results that may be achieved for the fiscal year ending January 30, 1999.
NOTE 2 - ACQUISITIONS
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 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 all the Dart Acquisition using the purchase method of
accounting, and accordingly, a new accounting basis was begun. 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 week
period ended August 1, 1998 includes 11 weeks of results of operations under
this new basis of accounting. The excess of the Dart Acquisition purchase price
allocated to Shoppers over net assets acquired (goodwill) of approximately $372
million is based on a preliminary allocation of the purchase price and is being
amortized on a straight line basis over 40 years.
8
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SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
On February 6, 1997, Dart, 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 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 August 1, 1998 and August 2, 1997, inventories determined on
a first-in, first-out basis would have been greater by approximately $134,000
and $4,827,000, respectively, and pre-tax income for the 26 weeks ended August
1, 1998 and August 2, 1997 would have been greater by $335,000 and $450,000,
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.
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
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SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$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 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 to their fair value of $221.5 million. In June 1998, Richfood purchased
$6.5 million in face amount of the outstanding Senior Notes for a total cash
payment of approximately $7.2 million.
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 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 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 a 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
10
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SHOPPERS FOOD WAREHOUSE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of specified EBITDA levels. As of August 1, 1998, the Company had not borrowed
under the Credit Facility, however, there are three letters of credit issued
against the Credit Facility for approximately $3.1 million.
NOTE 6 - TRANSACTIONS WITH AFFILIATES
The August 1, 1998 Consolidated Balance Sheet includes $17.2 million due to
affiliates which consists primarily of $9.2 million for the payment of inventory
purchases from subsidiaries of Richfood and $7.2 million due to Richfood for the
purchase of Shoppers' 9 3/4 Senior Notes on June 26, 1998.
On September 26, 1997, Shoppers loaned Dart $10.0 million from the Restricted
Proceeds that Dart used for a settlement with certain Haft family members. 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 for a settlement with Herbert H. Haft. 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 by approximately
$0.4 million for a note receivable from an affiliate of Dart, to adjust the
carrying value of that note receivable. During the 13 weeks ended August 1,
1998, Shoppers received approximately $1.2 million to pay-off the note
receivable in full.
NOTE 7 - INCOME TAXES
The Company's effective income tax rate increased to 64.5% and 91.7% for the 26
and 13 week periods ended August 1, 1998 from 43.7% and 43.5% for the 26 and 13
week periods ended August 2, 1997. These increases are attributed to an increase
in nondeductible amortization associated with goodwill arising from the Dart
Acquisition.
11
<PAGE> 12
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.
Results of Operations
26 Weeks and 13 Weeks Ended August 1, 1998 Compared with the 26 Weeks
and 13 Weeks Ended August 2, 1997
Sales increased by $19.0 million, from $419.5 million during the 26 weeks ended
August 2, 1997 to $438.5 million during the 26 weeks ended August 1, 1998. Sales
increased by $15.0 million, from $209.5 million during the 13 weeks ended August
2, 1997 to $224.5 million during the 13 weeks ended August 1, 1998. The sales
increases were primarily due to the four new stores opened since July 1997
(including one store which opened in July 1998). Comparable store sales
decreased 7.3% and 5.2% for the 26 weeks and 13 weeks ended August 1, 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 $4.0 million (4.1%), from $99.2 million
during the 26 weeks ended August 2, 1997 to $103.2 million during the 26 weeks
ended August 1, 1998. Gross profit increased by $5.0 million (10.3%), from $48.7
million during the 13 weeks ended August 2, 1997 to $53.7 million during the 13
weeks ended August 1, 1998. Gross profit, as a percentage of sales, during the
26 weeks ended August 1, 1998 was comparable to the 26 weeks ended August 2,
1997. Gross profit, as a percentage of sales, increased to 23.9% during the 13
weeks ended August 1, 1998, from 23.2% during the 13 weeks ended August 2, 1997.
The increase during the 13 weeks was primarily attributed to the reduced number
of items with special discount pricing as a result of an overall price reduction
intended to reestablish the Company as an everyday low price leader.
Selling and administrative expenses increased by approximately $8.2 million
(10.7%), from $76.7 million during the 26 weeks ended August 2, 1997 to $84.9
million during the 26 weeks ended August 1, 1998 and selling and administrative
expenses increased by $5.6 million (14.3%), from $39.1 million during the 13
weeks ended August 2, 1997 to $44.7 million during the 13 weeks ended August 1,
1998. Selling and administrative expenses, as a percentage of sales, increased
from 18.3% and 18.7% during the 26 weeks and 13 weeks
12
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
ended August 2, 1997 to 19.4% and 19.9% during the 26 weeks and 13 weeks ended
August 1, 1998. The increases were primarily attributable to higher advertising
and one-time promotional expenses at certain locations.
Depreciation and amortization increased by $1.6 million from $5.1 million during
the 26 weeks ended August 2, 1997 to $6.7 million during the 26 weeks ended
August 1, 1998 and increased by $0.7 million from $3.1 million during the 13
weeks ended August 2, 1997 to $3.8 million during the 13 weeks ended August 1,
1998. The increases were primarily due to increased amortization of goodwill as
a result of the Dart Acquisition.
Operating income was $11.6 million for the 26 weeks ended August 1, 1998
compared to $17.4 million during the same period in the prior year. Operating
income was $5.2 million for the 13 weeks ended August 1, 1998 compared to $6.5
million for the 13 weeks ended August 2, 1997. The decreases were primarily due
to higher selling and administrative expenses and increased depreciation and
amortization.
Interest income increased $0.5 million during the 26 weeks ended August 1, 1998
compared to the 26 weeks ended August 2, 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 $0.3 million during the 13 weeks ended August 1, 1998 compared to the
13 weeks ended August 2, 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.
The effective income tax rate for the 26 weeks ended August 1, 1998 was 64.5%
compared to 43.7% for the 26 weeks ended August 2, 1997. The effective tax rate
for the 13 weeks ended August 1, 1998 was 91.7% compared to 43.5% for the 13
weeks ended August 2, 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.
Net income decreased by $2.3 million, from $3.6 million during the 26 weeks
ended August 2, 1997 to $1.3 million during the 26 weeks ended August 1, 1998.
The decrease was primarily attributable to income from the cumulative effect of
accounting change last fiscal year resulting from the Company adopting Dart's
method of depreciating fixed assets and to the reduction in operating income
this fiscal year. Net income was $0.1 million during the 13 weeks ended August
1, 1998 compared to a net loss of $1.3 million during the 13 weeks ended August
2, 1997. The loss in the prior fiscal year was due to the early extinguishment
of debt.
Year 2000 Compliance
The Company, in conjunction with Richfood's overall information technology
effort, has begun implementing a strategic, long-term technology plan to upgrade
its core application systems. Concurrently, it has developed, and is
implementing, a plan to ensure that its information systems are year 2000
compliant. The Company believes that with the currently planned system
13
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
conversions and upgrades, as well as certain additional modifications to
existing software, the Company will achieve year 2000 compliance without any
significant operational problems related to the Company's information systems.
Amounts expended, or to be expended, exclusively to ensure year 2000 compliance
are not expected to be material to the Company's consolidated results of
operations or financial position. The Company is also communicating with
significant external vendors, financial institutions and others with which it
does business to validate year 2000 compliance.
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 August
1, 1998. These letters of credit will mature at various dates through May 1,
1999.
During the 26 weeks ended August 1, 1998, operating activities generated net
cash of $1.4 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 26 weeks ended August 1, 1998, investing activities used $3.8 million of
Shoppers' funds primarily for capital expenditures.
Financing activities used $0.4 million of the Company's funds during the 26
weeks ended August 1, 1998 compared to $86.2 million during the 26 weeks ended
August 2, 1997. The change is due to payments for the bridge loan, financing
costs, and acquisition costs associated with the Shoppers Acquisition last
fiscal year (see Note 2 to the Consolidated Financial Statements).
Shoppers estimates that it will make capital expenditures of approximately $7.5
million during the 52 weeks ended January 30, 1999. Such expenditures relate to
one new store that opened in July 1998 as well as routine expenditures for
equipment and maintenance. Management expects that these capital expenditures
will be financed primarily through cash flow from operations.
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 over the next few years.
14
<PAGE> 15
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 Financial Data Schedule
(B) Reports on Form 8-K
None
15
<PAGE> 16
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: September 15, 1998 By: WILLIAM J. WHITE
--------------------------- -----------------------------------
WILLIAM J. WHITE
President
Date: September 15, 1998 By: EDWARD KLIG
--------------------------- -----------------------------------
EDWARD KLIG
Chief Financial Officer
16
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<S> <C>
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<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> AUG-01-1998
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0
0
<COMMON> 167
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<TOTAL-LIABILITY-AND-EQUITY> 527,997
<SALES> 438,525
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