<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(X) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended January 29, 2000
( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ____________ to ____________
Commission file number 333-32825
SFW HOLDING CORP.
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(Exact name of registrant as specified in its charter)
Delaware 52-2014682
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3300 75th Ave. Landover, Maryland 20785
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 226-1200
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act: NONE
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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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
At March 31, 2000, the registrant had 1,000 shares of Common Stock. The common
stock of SFW Holding Corp. is not publicly traded.
The registrant meets the conditions as set forth in General Instructions I(1)(a)
and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
The exhibit index begins at page 29 of this Form 10-K.
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Table of Contents
PART I
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Page
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
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Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 6
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 8
Item 8. Financial Statements and Supplementary Data 9
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 25
PART III
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Item 10. Directors, Executive Officers, Promoter and Control Person
of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners and Management 26
Item 13. Certain Relationships and Related Transactions 26
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 27
2
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PART I
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Forward Looking Statements
Statements in this report that are not historical in nature, including
references to beliefs, anticipations or expectations, are "forward-looking"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are subject to a wide variety of risks and uncertainties that could cause actual
results to differ materially from those projected including, without limitation,
the ability of Shoppers (as defined below) to open new stores, the effect of
regional economic conditions, the effect of increased competition in the markets
in which Shoppers operates and other risks described from time to time in the
Company's filings with the Securities and Exchange Commission. The Company
undertakes no obligation and does not intend to update, revise or otherwise
publicly release any revisions to these forward-looking statements, which
revisions may be made to reflect any future events or circumstances, other than
through its regular quarterly and annual reports filed with the Securities and
Exchange Commission (the "SEC").
Item 1. Business
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SFW Holding Corp. (the "Company") was incorporated in Delaware in January 1997,
and is a wholly-owned subsidiary of Dart Group Corporation ("Dart").
On May 18, 1998, a wholly-owned subsidiary of Richfood Holdings, Inc.
("Richfood") acquired all of the outstanding shares of Dart. In connection with
that acquisition, Richfood caused the subsidiary to merge with and into Dart in
a transaction in which Dart became a wholly-owned subsidiary of Richfood. As a
result of the merger, Richfood indirectly owned 100% of the outstanding common
stock of the Company.
On August 31, 1999, Richfood was acquired in a merger by a wholly-owned
subsidiary of SUPERVALU INC., a Delaware corporation ("SUPERVALU"), and the
Company became an indirect, wholly-owned subsidiary of SUPERVALU.
The Company's sole asset is its ownership of 100% of the outstanding common
stock of Shoppers Food Warehouse Corp. ("Shoppers"). The Company's business is
substantially the same as that of Shoppers and is subject to all of the risks
associated therewith. Therefore, substantially all of the information set forth
herein which pertains to the operations of the Company's business and its
financial condition references the business and financial condition of Shoppers.
Shoppers' principal executive offices are located at 4600 Forbes Blvd., Lanham,
Maryland 20706. The telephone number of Shoppers is 301-306-8600.
Operations
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Shoppers is a leading supermarket operator in Greater Washington, D.C. (as
defined below), operating 36 stores under the "Shoppers Food Warehouse" and
"Shoppers Club" names. Shoppers operates warehouse-style, price impact
superstores that focus on providing value to Shoppers' customers while offering
a convenient one stop shopping opportunity.
Most of Shoppers' price superstores offer traditional dry grocery departments,
along with strong basic perishables. In addition to national brands, Shoppers'
stores carry a variety of grocery and general merchandise under private label
names, including "Richfood" and "Shoppers Food Warehouse." Private label
products are of a quality generally comparable to that of national brands, at
significantly lower prices. Shoppers' stores carry over 30,000 items, and
generally range in size from 20,000 to 77,000 square feet with an average size
of approximately 47,000 square feet.
3
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Store Expansion and Remodeling
- ------------------------------
Shoppers has plans to open several new stores and upgrade existing stores.
Shoppers has opened 4 new stores since July, 1997 and is currently considering
expanding or remodeling at least 3 stores during fiscal 2001. Of its existing 36
stores, 27 are larger than 40,000 square feet, and all but one of Shoppers'
stores were opened, remodeled or expanded during the last ten years. The Company
believes that Shoppers' existing 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 five fiscal years:
Fiscal Year
---------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Number of Stores at Beginning of Period 33 34 34 37 38
New Stores Opened 1 0 3 1 0
Stores Closed 0 0 0 0 2
--- --- --- --- ---
Stores at End of Period 34 34 37 38 36
Remodeled/Expanded 0 2 0 2 2
Purchasing, Warehousing and Distribution
- ----------------------------------------
Shoppers purchases approximately 75% of its inventory from Richfood. Because
Shoppers' stores receive most of their deliveries from Richfood almost daily,
Shoppers maintains no warehouse storage space. Shoppers also purchases
merchandise sold in its supermarkets, in particular, beverages and snack
products, from sources other than Richfood and SUPERVALU.
Competition
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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, higher-end
specialty departments with self-service and discount price features, and a
selection of national brand groceries and private label goods, all at
competitive prices. Shoppers is the largest supermarket chain targeting the
price-conscious segment in Greater Washington, D.C. While similar in most
respects to conventional supermarket operators, 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 two primary competitors of Shoppers are Giant Food, Inc. ("Giant") and
Safeway Inc. ("Safeway"), conventional supermarket chains, both of which operate
in the higher-service, higher-price segment. Giant and Safeway have market
shares in Greater Washington, D.C. of approximately 44% and 26%, respectively.
The Company believes that Shoppers' market share is approximately 13%, the third
largest market share in Greater Washington, D.C. "Greater Washington, D.C."
includes Washington, D.C.; Calvert, Charles, Frederick, Montgomery and Prince
Georges 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' ability to remain competitive in its markets depends in part on its
ability to remodel and update its stores in response to remodelings and new
store openings by its competitors. The Company believes that Shoppers will face
increased competition in the future from other supermarket chains and Shoppers
intends to compete aggressively against existing and new competition.
4
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Employees
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As of January 29, 2000, Shoppers employed approximately 5,200 people, of whom
approximately 1,500 were full-time. Approximately 5,000 employees were covered
by collective bargaining agreements with various locals of two unions. Shoppers
has an agreement with United Food and Commercial Workers, Local 400, which will
expire July 1, 2000 and covers approximately 4,700 retail clerks and meat
cutters, and an agreement with United Food and Commercial Workers, Local 27,
which will expire September 30, 2001 and covers approximately 300 retail clerks
and meat cutters.
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," the Company
does not believe any of such trade names, service marks or trademarks are
material to Shoppers' business. Shoppers presently has federal registrations 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
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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
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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. The Company believes that
Shoppers conducts its operations in compliance with applicable environmental
laws. Shoppers has not incurred material capital expenditures for environmental
controls during the previous three years.
Item 2. Properties
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Shoppers has 18 supermarkets in Virginia and 18 in Maryland, all of which are
leased. Most are operated under long-term leases that the Company believes have
favorable terms. Shoppers' stores range in size from approximately 20,000 to
77,000 total square feet and average approximately 47,000 square feet. Shoppers'
stores can be categorized by size as follows: (i) 9 stores smaller than 40,000
square feet; (ii) 11 stores ranging from 40,000 to 50,000 square feet; and (iii)
16 stores between 50,000 and 77,000 square feet.
Shoppers leases an 86,000 square foot office building located in Lanham, MD that
serves as its corporate offices. The lease commenced in 1990 and expires in
2010. Shoppers subleases approximately 2,000 square feet of this office building
to unrelated third parties.
Item 3. Legal Proceedings
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There are no material pending legal proceedings other than ordinary routine
litigation incidental to the business of Shoppers or the Company.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
Information omitted in accordance with General Instruction I (2)(c).
5
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Part II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------------------
The Company's common stock is not publicly traded.
Item 6. Selected Financial Data
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Information omitted in accordance with General Instruction I(2)(a).
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
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Outlook
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Except for historical information, statements in the Management's Discussion and
Analysis of Financial Condition and Results of Operations are "forward-looking"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results
may differ materially due to a variety of factors, including Shoppers' ability
to open new stores and the effect of regional economic conditions. The Company
undertakes no obligation and does not intend to update, revise or otherwise
publicly release any revisions to these forward-looking statements that may be
made to reflect future events or circumstances, other than through its regular
quarterly and annual reports filed with the Securities and Exchange Commission.
Results of Operations
- ---------------------
Reference to "fiscal 2000" means the 52 weeks ended January 29, 2000, "fiscal
1999" means the 52 weeks ended January 30, 1999 and "fiscal 1998" means the 52
weeks ended January 31, 1998.
The results of operations in the financial statements present split periods due
to the acquisition of Richfood and Shoppers by SUPERVALU that occurred August
30, 1999. During fiscal 2000, SUPERVALU operated Shoppers as a distinct unit
within its retail division. Management's Discussion and Analysis of Financial
Condition and Results of Operations is based on results for the full year.
Fiscal 2000 Compared with Fiscal 1999
Sales remained relatively flat, at $885.4 in 2000 compared to $885.6 million in
fiscal 1999. The sales decrease was primarily due to the closing of two stores
during fiscal 2000. Comparable store sales were flat during fiscal 2000.
Gross profit increased by approximately $5.3 million, or 2.5%, at $218.9 million
in fiscal 2000 compared to $213.6 million in fiscal 1999. Gross profit, as a
percentage of sales, increased to 24.7% during fiscal 2000 compared to 24.1%
during fiscal 1999. The increase in gross profit was primarily due to
merchandising initiatives.
Selling and administrative expenses increased by approximately $5.6 million, or
3.3%, to $175.9 million in fiscal 2000 from $170.3 million in fiscal 1999.
Selling and administrative expenses, as a percentage of sales, increased to
19.9% during fiscal 2000 from 19.2% during fiscal 1999. The increase was
primarily attributable to an increase in payroll and benefits costs as well as
higher advertising expenses.
Operating income was $27.7 million for fiscal 2000 compared to $29.8 million for
fiscal 1999. The decrease was primarily due to the increased selling and
administrative expenses and increased amortization of goodwill and depreciation
of fixed assets.
Interest income decreased approximately $0.5 million during fiscal 2000 compared
to fiscal 1999 due to the fact that fewer investments were made as a result of a
lower cash balance held during fiscal 2000.
Interest expense decreased approximately $3.0 million from $18.5 million during
fiscal 1999 to $15.5 million during fiscal 2000. The reduction in interest
expense was primarily driven by lower debt levels due to the purchase of $24.6
million of the Senior Notes in October 1999.
6
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The effective income tax rate for fiscal 2000 was 56.4% compared to 54.3% for
fiscal 1999. The increase was attributable to a full year's worth of
depreciation of acquisition-related goodwill as a result of the Dart Acquisition
by Richfood in May 1998.
Net income was $6.9 million during fiscal 2000 compared to $7.1 million in
fiscal 1999, a decrease of 2.4%.
Fiscal 1999 Compared with Fiscal 1998
Sales increased by $29.8 million, from $855.8 million during fiscal 1998 to
$885.6 million during fiscal 1999. The sales increase was primarily due to
additional sales associated with four new stores opened since July 1997.
Comparable store sales decreased 6.0% during fiscal 1999, compared to the prior
fiscal year. The decrease in comparable store sales was primarily due to
cannibalization of existing Shoppers' stores and competitive market conditions.
Gross profit increased by $14.4 million (7.2%), from $199.2 million during
fiscal 1998 to $213.6 million during fiscal 1999. Gross profit, as a percentage
of sales, increased to 24.1% during fiscal 1999 from 23.3% during fiscal 1998.
The increase in gross profit was primarily due to promotional pricing as well as
better buying.
Selling and administrative expenses increased by $9.6 million (6.0%), from
$160.7 million during fiscal 1998 to $170.3 million during fiscal 1999. Selling
and administrative expenses, as a percentage of sales, increased from 18.8%
during fiscal 1998 to 19.2% during fiscal 1999. The increases were primarily
attributable to higher advertising expenses and one time promotional expenses at
certain locations.
Operating income was $29.8 million for fiscal 1999 compared to $27.4 million
during the prior fiscal year. The increase was primarily due to the increase in
gross profit, partially offset by the increased selling and administrative
expenses and amortization of goodwill.
Interest expense decreased approximately $2.6 million from $21.1 million during
fiscal 1998 to $18.5 million during fiscal 1999. The decrease was primarily the
result of a reduction in interest expense due to accretion of the adjustment to
market value of the Senior Notes made in conjunction with the Dart acquisition.
The effective income tax rate for fiscal 1999 was 54.3% compared to 48.5% for
fiscal 1998. The increase was attributable to nondeductible amortization of
acquisition related goodwill.
Net income increased by $3.4 million, from $3.7 million during fiscal 1998 to
$7.1 million during fiscal 1999. The increase was primarily attributable to the
increase in operating income during fiscal 1999 and an extraordinary item of
$3.1 million on the loss on early extinguishment of debt during fiscal 1998.
Effects of Inflation
- --------------------
During the last three fiscal years, the rate of general inflation has been
relatively low and has not had a significant impact on Shoppers' net sales or
income.
Liquidity and Capital Resources
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Shoppers' principal source of liquidity is expected to be its cash flows from
operations. It is anticipated that Shoppers' principal uses of liquidity will be
to provide working capital, finance capital expenditures and meet debt service
requirements.
During fiscal 2000, operating activities generated net cash of $21.1 million
compared to using $12.4 million during the prior fiscal year. The increase was
primarily due to changes in working capital.
Investing activities used $17.7 million of Shoppers' cash during fiscal 2000
compared to $5.9 million during fiscal 1999. The increase was primarily due to
an increase of $11.3 million in capital expenditures due to the major remodeling
of two of Shoppers' stores during fiscal 2000. The Company estimates that
Shoppers will make total capital expenditures of approximately $20.0 million
during the 52 weeks ending February 3, 2001. The Company expects that these
capital expenditures will be financed primarily through cash flows from
Shoppers' operations.
7
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Financing activities used $6.6 million during fiscal 2000 compared to generating
$20.9 in the prior year. The change was primarily due to the $26.7 million bond
purchase by SUPERVALU.
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.
New Accounting Standards
- ------------------------
Revenue Recognition
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 - Revenue Recognition ("SAB No.101"). SAB No. 101 provides
guidance on recognition, presentation, and disclosure of revenue in financial
statements.
Accounting for Derivative Instruments and Hedging Activities
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" was issued in June 1998. This statement
establishes comprehensive accounting and reporting standards for derivative
instruments and hedging activities.
The provisions for SAB No. 101 are effective for fiscal 2001, and for SFAS No.
133 they are effective for fiscal 2002. The Company has not yet determined the
impact, if any, these new standards may have on Shoppers' consolidated financial
position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
The registrant's market risk exposure is not material. Interest on both
Shoppers' notes receivable and Senior Notes are at fixed rates. The market value
of the fixed rate notes is subject to change due to fluctuations in market
interest rates. Neither the Company or Shoppers has any other financial
instruments that result in material exposure to interest rate risk.
Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private
- -------------------------------------------------------------------------------
Securities Litigation Reform Act of 1995
- ----------------------------------------
Any statements in this report regarding the Company's outlook for its businesses
and their respective markets, such as projections of future performance,
statements of management's plans and objectives, forecasts of market trends and
other matters, are forward-looking statements based on the assumptions and
beliefs of the Company's management. Such statements may be identified by such
words or phrases as "will likely result," "are expected to," "will continue,"
"outlook," "is anticipated," "estimate," "project," "management believes" or
similar expressions. Such forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those discussed in such forward-looking statements and no assurance can be
given that the results in any forward-looking statement will be achieved. For
these statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995.
The following is a summary of certain factors, the results of which could cause
the Company's future results to differ materially from those expressed in any
forward-looking statements contained in this report:
(1) the nature and extent of the consolidation of the retail food and food
distribution industry;
(2) the competitive practices in the retail and food distribution
industries;
(3) the ability of Shoppers to continue to recruit, train and retain
quality franchise and corporate retail store operators; and
(4) the ability of the Shoppers to attract and retain customers.
Since the Company does not operate any businesses and its sole asset is the
common stock of Shoppers, the Company is subject to the same risks and
uncertainties as Shoppers. Please refer to Exhibit 99(i) of this report, and
subsequent quarterly reports on Form 10-Q, as filed with the Securities and
Exchange Commission, for a more detailed discussion of these and other factors
that could cause the Company's actual results in future periods to differ
materially from those projected in such forward-looking statements.
8
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Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
Financial Statements Page
- -------------------- ----
Independent Auditors' Report 10
Report of Independent Auditors 11
Report of Independent Public Accountants 12
Consolidated Balance Sheets 13
Consolidated Statements of Earnings 14
Consolidated Statements of Stockholders' Equity 15
Consolidated Statements of Cash Flows 16
Notes to Consolidated Financial Statements 17
9
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INDEPENDENT AUDITORS' REPORT
----------------------------
THE BOARD OF DIRECTORS
SFW HOLDING CORP.
We have audited the accompanying consolidated balance sheet of SFW Holding Corp.
and subsidiaries ("the Company") as of January 29, 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the 22-week period ended January 29, 2000 and the 30-week period ended August
30, 1999. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SFW Holding Corp.
and subsidiaries as of January 29, 2000, and the results of their operations and
their cash flows for the 22-week period ended January 29, 2000 and the 30-week
period ended August 30, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Norfolk, Virginia
March 31, 2000
10
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THE BOARD OF DIRECTORS
SFW HOLDING CORP.:
We have audited the accompanying consolidated balance sheet of SFW Holding Corp.
(a Delaware corporation and wholly owned indirect subsidiary of Dart Group
Corporation) and subsidiaries (the "Company"), as of January 30, 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the thirty-seven week period ended January 30, 1999 and the fifteen
week period ended May 18, 1998. 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 audit. The consolidated
balance sheet of SFW Holding Corp. and subsidiaries as of January 31, 1998 and
the related consolidated statements of operations, stockholder's equity and cash
flows for the 52 weeks ended January 31, 1998, the 31 weeks ended February 1,
1997 and the 52 weeks ended June 29, 1996 were audited by other auditors whose
report, dated April 28, 1998, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the 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 audit provides 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 SFW Holding Corp. and
subsidiaries as of January 30, 1999, and the results of their operations and
their cash flows for the thirty-seven week period ended January 30, 1999 and the
fifteen week period ended May 18, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Richmond, Virginia
April 26, 1999
11
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Report of Independent Public Accountants
To the Board of Directors of SFW Holding Corp.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of SFW Holding Corp. (a Delaware
corporation and wholly owned subsidiary of SUPERVALU INC.) and subsidiaries (the
"Company") for the fifty-two week period ended January 31, 1998. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the 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 results of the operations and the cash flows of SFW
Holding Corp. and subsidiaries for the fifty-two week period ended January 31,
1998, in conformity with accounting principles generally accepted in the United
States.
Effective February 6, 1997, the Company changed its method of depreciating
property and equipment.
/s/ ARTHUR ANDERSEN LLP
Vienna, Virginia
April 28, 1998
12
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SFW HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,390 $ 6,602
Accounts receivable, net of allowance of $400 at
January 29, 2000 and $500 at January 30, 1999 10,275 13,263
Merchandise inventories 31,324 31,477
Deferred income taxes 4,185 3,432
Other current assets 2,761 1,612
-------- --------
Total current assets 51,935 56,386
Property and equipment, net 64,017 52,901
Goodwill, net of accumulated amortization of $2,784
at January 29, 2000 and $5,809 at January 30, 1999 305,431 311,371
Leasehold rights, net of accumulated amortization of $477
at January 29, 2000 and $1,146 at January 30, 1999 27,945 29,031
Note receivable 42,491 38,860
Other assets 751 1,240
-------- --------
Total assets $492,570 $489,789
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 6,245 $ 12,283
Accrued expenses 23,706 21,025
Due to affiliates 51,992 26,038
Accrued income taxes 9,315 800
Current maturities of capital lease obligations 618 531
-------- --------
Total current liabilities 91,876 60,677
Senior notes due 2004 181,748 211,764
Capital lease obligations 12,034 12,709
Deferred income taxes 14,218 12,832
Other liabilities 803 6,827
-------- --------
Total liabilities 300,679 304,809
-------- --------
Stockholders' equity:
Common Stock, voting, par value $0.01 per share, 1,000 shares
authorized, issued and outstanding -- --
Additional paid-in capital 189,408 179,091
Retained earnings 2,483 5,889
-------- --------
Total stockholders' equity 191,891 184,980
-------- --------
Total liabilities and stockholders' equity $492,570 $489,789
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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<PAGE>
SFW HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands)
<TABLE>
<CAPTION>
Post- Pre-
SUPERVALU SUPERVALU Post-Dart Pre-Dart
Acquisition Acquisition Acquisition Acquisition
---------------- --------------- ---------------- ------------
January 29, 2000 August 30, 1999 January 30, 1999 May 18, 1998 January 31, 1998
(22 weeks) (30 weeks) (37 weeks) (15 weeks) (52 weeks)
<S> <C> <C> <C> <C> <C>
Sales $ 379,975 $ 505,398 $ 636,507 $ 249,052 $ 855,769
Cost of sales 288,983 377,496 481,205 190,799 656,572
--------- --------- --------- --------- ---------
Gross profit 90,992 127,902 155,302 58,253 199,197
Selling and administrative expenses 72,928 102,968 122,306 47,990 160,713
Depreciation and amortization 6,601 8,706 10,130 3,354 11,090
--------- --------- --------- --------- ---------
Operating income 11,463 16,228 22,866 6,909 27,394
Interest income 1,048 2,652 2,684 1,544 3,587
Interest expense 6,588 8,942 12,156 6,371 21,079
--------- --------- --------- --------- ---------
Net interest expense 5,540 6,290 9,472 4,827 17,492
Earnings before income taxes,
extraordinary item and cumulative
effect of accounting change 5,923 9,938 13,394 2,082 9,902
Provision for income taxes 3,440 5,510 7,505 890 4,801
--------- --------- --------- --------- ---------
Earnings before extraordinary item
and cumulative effect of accounting
change 2,483 4,428 5,889 1,192 5,101
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 earnings $ 2,483 $ 4,428 $ 5,889 $ 1,192 $ 3,704
========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
14
<PAGE>
SFW HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Post- Pre-
SUPERVALU SUPERVALU Post-Dart Pre-Dart
Acquisition Acquisition Acquisition Acquisition
---------------- --------------- ---------------- ------------
January 29, 2000 August 30, 1999 January 30, 1999 May 18, 1998 January 31, 1998
(22 weeks) (30 weeks) (37 weeks) (15 weeks) (52 weeks)
<S> <C> <C> <C> <C> <C>
Common Stock Balance
beginning and end of period: $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
Paid-in-Capital:
Balance, beginning of period $ 189,408 $ 179,091 $ 179,091 $ 31,961 $ 31,961
Retire predecessor retained
earnings -- 10,317 -- -- --
Dart Acquisition -- -- -- 147,130 --
--------- --------- --------- --------- ---------
Balance, end of period $ 189,408 $ 189,408 $ 179,091 $ 179,091 $ 31,961
Retained Earnings:
Balance, beginning of period -- 5,889 -- (26,013) 20,283
Net income 2,483 4,428 5,889 1,192 3,704
Acquisitions -- (10,317) -- 24,821 --
Stockholder distributions -- -- -- -- (50,000)
--------- --------- --------- --------- ---------
Balance, end of period $ 2,483 $ -- $ 5,889 $ -- $ (26,013)
========= ========= ========= ========= =========
Common Stock Outstanding:
Balance, beginning and end of period 1 1 1 1 1
========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
15
<PAGE>
SFW HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Post- Pre-
SUPERVALU SUPERVALU Post-Dart Pre-Dart
Acquisition Acquisition Acquisition Acquisition
------------ ----------- ----------- -----------
January 29, August 30, January 30, May 18, January 31,
2000 1999 1999 1998 1998
(22 weeks) (30 weeks) (37 weeks) (15 weeks) (52 weeks)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,483 $ 4,428 $ 5,889 $ 1,192 $ 3,704
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,601 8,706 11,006 3,354 11,090
Cumulative effect of accounting change -- -- -- -- (1,729)
Amortization of deferred financing costs -- -- -- 173 1,214
Amortization of bond premium (1,571) (1,905) (2,554) -- --
Deferred income taxes 242 407 (2,237) (217) 526
Write-off of deferred financing costs -- -- -- -- 5,276
Other -- -- 712 294 991
Changes in assets and liabilities increasing
(decreasing) cash flows from operations:
Accounts receivable (3,786) 6,774 (4,368) (1,445) 575
Merchandise inventories (1,558) 1,711 1,970 1,666 (1,096)
Other current assets 925 (2,074) (207) 348 (174)
Other assets (30) 519 270 109 --
Accounts payable (7,368) 1,330 (30,924) 3,101 (1,824)
Accrued expenses 11,484 (8,716) (8,020) 6,615 685
Other liabilities (389) (5,636) 560 (127) --
Accrued income taxes 3,259 5,256 (91) 524 (2,609)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities 10,292 10,800 (27,994) 15,587 16,629
Cash flows from investing activities:
Capital expenditures (2,765) (14,908) (3,435) (2,960) (9,497)
Purchase of short-term investments -- -- (1,449) (2,155) (36,093)
Sales/maturities of short-term investments -- -- 4,121 -- 131,190
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing activities (2,765) (14,908) (763) (5,115) 85,600
Cash flows from financing activities:
Cash provided by (provided to) affiliated companies 2,702 21,544 19,838 (1,825) --
Purchase of bonds and bond premium (26,657) -- -- -- --
Dividend payments to stockholders -- -- -- -- (50,000)
Payments for acquisition and deferred financing costs -- -- (116) (178) (13,843)
Proceeds from Senior Notes -- -- -- -- 200,000
Repayment of Increasing-rate Notes -- -- -- -- (140,000)
Restricted Proceeds -- -- -- -- (50,218)
Release of Restricted Proceeds -- -- -- -- 50,000
Notes receivable from Dart (1,443) (2,188) 2,480 1,006 (35,000)
Payment of acquisition debt -- -- -- -- (72,800)
Principal payments under capital lease obligations (209) (379) (310) (35) (80)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities (25,607) 18,977 21,892 (1,032) (111,941)
Net increase (decrease) in cash and cash equivalents (18,080) 14,869 (6,865) 9,440 (9,712)
Cash and cash equivalents at beginning of period 21,471 6,602 13,467 4,027 13,739
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ 3,391 $ 21,471 $ 6,602 $ 13,467 $ 4,027
========= ========= ========= ========= =========
Supplemental Cash Flow Data:
Cash paid (received) during the year for:
Income taxes, net $ 4,210 $ 100 $ 20 $ 1,242 $ 4,812
Interest 8,231 9,749 19,593 47 16,868
At August 30, 1999, the date of the SUPERVALU acquisition, fixed assets and
intangibles were restated to their fair value as of that date, and accumulated
depreciation and amortization was reset to zero. The retained earnings balance
was also reset to zero, with its previous balance being moved to paid-in
capital.
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
- -------
The accompanying consolidated financial statements include the accounts of SFW
Holding Corp. (a Delaware corporation) and its subsidiaries, (the "Company") for
the 30 weeks ended August 30, 1999 ("30 weeks of fiscal 2000"), the 22 weeks
ended January 29, 2000 ("22 weeks of fiscal 2000"), the 37 weeks ended January
30, 1999 ("37 weeks of fiscal 1999"), the 15 weeks ended May 19, 1998 ("15 weeks
of fiscal 1998") and the 52 weeks ended January 31, 1998 ("fiscal 1998"). All
significant intercompany accounts and transactions have been eliminated. The
Company operates in one business segment. On May 18, 1998, a wholly-owned
subsidiary of Richfood Holdings, Inc. ("Richfood") acquired all the outstanding
shares of Dart (the "Dart Acquisition") and as a result, Richfood indirectly
owned 100% of the outstanding common stock of the Company (see Note 2). On
August 31, 1999, Richfood was acquired in a merger by a wholly-owned subsidiary
of SUPERVALU INC., a Delaware corporation ("SUPERVALU"), and the Company became
an indirect, wholly-owned subsidiary of SUPERVALU at that time (the "SUPERVALU
Acquisition"). In both the Dart Acquisition and the SUPERVALU Acquisition, the
assets and liabilities of the Company were recorded at fair value, with the
excess purchase price allocated to goodwill.
The Company owns 100% of the outstanding common stock of Shoppers Food Warehouse
Corp. ("Shoppers") and exists solely as a holding company for Shoppers. The
Company's business is substantially the same as that of Shoppers. Therefore,
substantially all of the information set forth in these Notes which pertains to
the operations of Shoppers' business and its financial condition reflects the
business and financial condition of the Company.
Fiscal Year
- -----------
The Company's fiscal year ends on the Saturday closest to January 31.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid temporary cash investments with initial
maturities of three months or less to be cash equivalents. At January 29, 2000,
there were no short term investments. At January 31, 1999, short-term
investments of approximately $2.1 million were invested in money market funds.
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 periods.
Actual results could differ from those estimates.
Inventories
- -----------
Shoppers' inventories are priced at the lower of cost or market. For
substantially all inventories, cost is determined using the last-in, first-out
("LIFO") method. At both January 29, 2000 and January 30, 1999, the LIFO value
of inventories approximated their replacement cost. Net income would have been
higher by approximately $197,000, $200,000 and $368,000 for the 30 weeks ended
August 30, 1999, the 15 weeks ended May 18, 1998 and fiscal 1998, respectively,
if inventory had been priced on a FIFO basis.
Property and Equipment
- ----------------------
Property and equipment are stated at cost. Estimated useful lives are generally
ten years for buildings and major improvements, ten years for equipment and the
shorter of the term of the lease or expected life for leasehold improvements.
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of their respective assets.
17
<PAGE>
Goodwill
- --------
Amounts paid in excess of the fair value of acquired net assets are amortized on
a straight-line basis. The recoverability of goodwill is assessed by determining
whether the goodwill balance can be recovered through projected cash flows and
operating results over its remaining life. Impairment of the asset would be
recognized when it is probable that such future undiscounted cash flows will be
less than the carrying value of the asset. Goodwill is being amortized over 40
years.
Leasehold Rights
- ----------------
Favorable leasehold rights are amortized over the term of the lease using the
straight-line method.
Other Assets
- ------------
Other assets consist of long-term deposits and a non-compete agreement. The cost
of the non-compete agreement is amortized straight line over the term of the
non-compete agreement, which is 20 years.
Fair Value of Financial Instruments
- -----------------------------------
At January 29, 2000 and January 30, 1999, the carrying amount of financial
instruments included in current assets and current liabilities approximates fair
value due to the short maturity of those instruments.
The fair value of the due to affiliates balance is not practical to estimate due
to the nature of this obligation.
The fair value for Shoppers' fixed rate Senior Notes (see Note 4) is based on
quoted market prices. The fair value of Shoppers' outstanding Senior Notes on
January 29, 2000 was approximately $181.7 million compared to $211.8 million at
January 30, 1999. The fair value of the Note Receivable from Dart (see Note 8)
approximates the carrying value.
Reclassifications
- -----------------
Certain reclassifications have been made to prior years' financial statements to
conform to the 2000 presentation. These reclassifications did not affect results
of operations as previously reported.
NOTE 2 - ACQUISITIONS
SUPERVALU Acquisition
- ---------------------
On August 31, 1999, Richfood was acquired in a merger by a wholly-owned
subsidiary of SUPERVALU INC., a Delaware corporation ("SUPERVALU"), and the
Company became an indirect, wholly-owned subsidiary of SUPERVALU at that time.
SUPERVALU has accounted for the Dart Acquisition using the purchase method of
accounting and, accordingly, a new accounting basis was established as of August
30, 1999 and was used for the remaining twenty-two weeks of fiscal 2000. The
assets and liabilities of Shoppers were restated to reflect their estimated fair
market values as of that date. The excess of the purchase price paid for
Shoppers over its net assets acquired (goodwill) of $310,076 has been pushed
down to the Company. The goodwill is being amortized on a straight-line basis
over 40 years. Certain financial statement and related footnote amounts for
periods prior to the SUPERVALU acquisition may not be comparable to
corresponding amounts subsequent to the acquisition. Pro forma amounts have not
been disclosed for the year ended January 29, 2000 in this report due to the
immaterial difference between such amounts and the amounts in the consolidated
financial statements presented.
Dart Acquisition
- ----------------
On May 18, 1998, a wholly-owned subsidiary of Richfood acquired all of the
outstanding shares of 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 Company owns 100% of the outstanding common stock of Shoppers. In
connection with the Dart
18
<PAGE>
Acquisition, Richfood caused its subsidiary to merge with and into Dart in a
transaction in which Dart became a wholly-owned subsidiary of Richfood. As a
result of the Dart Acquisition, Richfood indirectly owned 100% of the
outstanding common stock of the Company and Shoppers.
Richfood accounted for the Dart Acquisition using the purchase method of
accounting, and accordingly, a new accounting basis was established as of May
18, 1998 and the assets and liabilities of Shoppers were restated to reflect
their estimated fair market values as of that date. Fiscal 1999 includes the
results of operations for 37 weeks under this new basis of accounting. The
excess of the Dart Acquisition purchase price allocated to Shoppers over net
assets of Shoppers acquired (goodwill) has been pushed-down to the Company. This
goodwill is being amortized on a straight line basis over 40 years.
Pro forma operating results for the 52 week periods ended January 30, 1999 and
January 31, 1998 reflect the Dart Acquisition as if it had occurred on February
2, 1997. The following unaudited pro forma results of the Company reflect the
push down of acquisition entries, including, but not limited to, additional
amortization of goodwill, amortization of the fair market adjustment of the
Senior Notes, (see Note 4 - Long-Term Debt) and reversal of amortization of the
acquisition costs associated with the acquisition of the Company (in thousands).
Pro Forma Pro Forma
52 Weeks Ended 52 Weeks Ended
January 30, 1999 January 31, 1998
---------------- ----------------
Sales $885,559 $855,769
Gross profit 213,555 199,197
Income before extraordinary item and
cumulative effect of accounting
change 6,504 5,300
Net income $ 6,504 $ 3,903
NOTE 3 - PROPERTY AND EQUIPMENT
At January 29, 2000 and January 30, 1999, property and equipment consisted of
the following:
2000 1999
------- -------
Land $ 800 $ 800
Buildings and leasehold improvements 12,302 10,589
Equipment and fixtures 49,544 45,276
Construction in progress 4,164 -
Less: Accumulated depreciation (2,793) (3,764)
------- -------
Net property and equipment $64,017 $52,901
======= =======
Property and equipment includes $7.1 million of assets under a capital lease,
less the related accumulated amortization of $0.3 million at January 29, 2000.
Depreciation and amortization expense related to property and equipment,
including assets under capital lease, was approximately $3.5 million, $4.1
million, $3.7 million, $2.1 million and $5.0 million during the 22 weeks of
fiscal 2000, the 30 weeks of fiscal 2000, the 37 weeks of fiscal 1999, the 15
weeks of fiscal 1999 and fiscal 1998, respectively.
NOTE 4 - LONG-TERM DEBT
Senior Notes
- ------------
In June 1997, Shoppers issued $200.0 million aggregate principal amount of 9
3/4% Senior Notes due 2004 (the "Senior Notes"). The net proceeds from the
Senior Notes were $193.5 million (after fees and expenses of approximately $6.5
million), of which $143.5 million was used to repay debt and $50.0 million (the
"Restricted Proceeds") was paid to Dart in the form of a $40.0 million dividend
and a $10.0 million loan for settlements with certain Dart shareholders.
19
<PAGE>
Interest on the Senior Notes is 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
Shoppers 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.
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.
In October 1999, SUPERVALU repurchased $24.6 million in face amount of the
outstanding Senior Notes in open market transactions with total cash payments of
approximately $26.7 million, including accrued interest. There was no gain or
loss on this repurchase because the purchase price approximated the carrying
value.
The Senior Notes are fully and unconditionally guaranteed by the Company. The
guarantee is secured by a first priority security interest in the capital stock
of Shoppers owned by the Company.
During fiscal 1998, the early extinguishment of debt resulted in the write-off
of unamortized deferred financing costs of $5.3 million, which has been
presented in the consolidated statement of operations as an extraordinary loss,
net of the related tax benefit of $2.2 million.
NOTE 5 - INCOME TAXES
The provision for income taxes before extraordinary items and cumulative effect
of accounting change is comprised of the following (in thousands):
<TABLE>
Post- Pre-
SUPERVALU SUPERVALU Post-Dart Pre-Dart
Acquisition Acquisition Acquisition Acquisition
----------- ----------- ----------- -----------
January 29, August 30, January 30, May 18, January 31,
2000 1999 1999 1998 1998
----------- ----------- ------------ ----------- -----------
(22 weeks) (30 weeks) (37 weeks) (15 weeks) (52 weeks)
<S> <C> <C> <C> <C> <C>
Current income
tax provision:
Federal $2,888 $4,549 $ 8,562 $1,070 $4,068
State 310 554 1,180 37 207
Deferred income
tax provision
(benefit):
Federal 202 339 (1,895) (222) 526
State 40 68 (342) 5 -
------ ------ ------- ------ ------
Total $3,440 $5,510 $ 7,505 $ 890 $4,801
====== ====== ======= ====== ======
</TABLE>
20
<PAGE>
This effective income tax rate is reconciled to the Federal statutory rate as
follows:
<TABLE>
Post- Pre-
SUPERVALU SUPERVALU Post-Dart Pre-Dart
Acquisition Acquisition Acquisition Acquisition
----------- ----------- ----------- -----------
January 29, August 30, January 30, May 18, January 31,
2000 1999 1999 1998 1998
----------- ----------- ------------ ----------- -----------
(22 weeks) (30 weeks) (37 weeks) (15 weeks) (52 weeks)
<S> <C> <C> <C> <C> <C>
Federal statutory
rate 35.0% 35.0% 35.0% 35.0% 35.0%
Increase in taxes
resulting from:
State income taxes,
net of
Federal income
tax benefit 4.0 4.0 4.1 1.3 0.9
Amortization of
goodwill 19.0 16.0 16.9 6.4 12.8
Other - - - - (0.2)
----- ----- ----- ----- -----
Effective tax rate 58.0% 55.0% 56.0% 42.7% 48.5%
===== ===== ===== ===== =====
</TABLE>
As a result of the Dart Acquisition and the SUPERVALU acquisition, certain
differences have arisen between the book and tax basis of various assets and
liabilities of Shoppers and are reflected in the table that follows. Temporary
differences that give rise to the deferred tax assets and liabilities on a
consolidated basis are as follows (in thousands):
Post- Pre-
SUPERVALU SUPERVALU
Acquisition Acquisition
January 29, 2000 January 30, 1999
(52 weeks) (52 weeks)
Deferred tax assets:
Accrued expenses $ 182 $ 492
Deferred rent 566 272
Capital lease 4,845 2,442
Employee benefits 3,078 4,240
Deferred income 307 854
Other 1,421 744
------- ------
$10,399 $9,044
21
<PAGE>
Deferred tax liabilities:
Post- Pre-
SUPERVALU SUPERVALU
Acquisition Acquisition
January 29, 2000 January 30, 1999
(52 weeks) (52 weeks)
Depreciation $ 1,959 $ 2,492
Lease rights 5,262 5,691
Inventory 1,003 934
Purchase accounting
asset basis adjustments 9,328 9,327
Other 2,881 -
-------- -------
$ 20,433 $18,444
-------- -------
Net deferred tax liability $(10,034) $(9,400)
======== =======
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. Shoppers
believes that no valuation allowance is necessary due to its history of
profitable operations.
NOTE 6 - LEASE COMMITMENTS
Shoppers leases retail store space 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 $334,000, $502,000, $712,000,
$294,000 and $991,000 of amortized rental increases for the 22 weeks of fiscal
2000, the 30 weeks of fiscal 2000, the 37 weeks of fiscal 1999, the 15 weeks of
fiscal 1999 and fiscal 1998, respectively.
The following is a schedule of annual future minimum payments under the capital
lease for office space and noncancelable operating leases, which have initial or
remaining terms in excess of one year at January 30, 2000 (in thousands):
Fiscal Year Capital Lease Operating Lease
----------------------------- ------------- ---------------
2001 $ 1,443 $ 17,995
2002 1,486 19,088
2003 1,531 18,630
2004 1,576 18,609
2005 & after 12,135 182,780
------- ---------
Total $18,171 $ 257,102
=========
Imputed interest 5,519
-------
Present value of net minimum
lease payments 12,652
Current maturities 618
-------
Long-term capital lease
obligation $12,034
=======
Minimum capital lease and operating lease obligations have not been reduced by
future minimum sublease rentals of approximately $3.8 million under
noncancelable sublease agreements.
22
<PAGE>
Rent expense for operating leases charged to operations is as follows (in
thousands):
Post- Pre-
SUPERVALU SUPERVALU Post-Dart Pre-Dart
Acquisition Acquisition Acquisition Acquisition
January 29, August 30, January 30, May 18, January 31,
2000 1999 1999 1998 1998
----------- ----------- ------------ ----------- -----------
(22 weeks) (30 weeks) (37 weeks) (15 weeks) (52 weeks)
Minimum
rentals $7,018 $ 9,570 $11,605 $4,513 $14,088
Contingent
rentals 2,209 2,653 3,860 1,390 5,110
------ ------- ------- ------ --------
Total $9,227 $12,223 $15,465 $5,903 $19,198
====== ======= ======= ====== ========
Related-Party Leases
- --------------------
For the period prior to February 1, 1998, Shoppers leased its office space from
a formerly related party. The lease was accounted for as a capital lease and
Shoppers made rental payments for fiscal 1998 of approximately $1.3 million.
Subleasing Agreements
- ---------------------
Shoppers subleases space within one store for the sale of beer and wine to an
entity affiliated with its officers. Shoppers received rental income of
approximately $68,000, $93,000, $207,000, $40,000, and $209,000 during the 22
weeks ended January 29, 2000, the 30 weeks ended August 30, 1999, the 37 weeks
of fiscal 1999, the 15 weeks of fiscal 1999 and fiscal 1998, respectively, from
this entity, which is included in selling and administrative expenses.
NOTE 7 - EMPLOYEE BENEFIT PLANS
401(k) Plan
- -----------
Shoppers has a defined contribution 401(k) plan (the "401K Plan"), which is
available to substantially all employees over the age of 21 who have completed
one year of continuous service. Discretionary contributions are made by
Shoppers, in trust, for the exclusive benefit of employees who participate in
the 401K Plan. The Board of Directors authorized contributions of $284,615,
$115,384, $400,000 and $233,000 to the 401K Plan during 37 weeks of fiscal 1999,
15 weeks of fiscal 1999, fiscal 1998 and fiscal 1997, respectively. Shoppers has
accrued $607,000 as of January 29, 2000 for fiscal 2000 contributions to be made
to the 401K Plan. Amounts accrued for the contributions to be made to the 401K
Plan are included in accrued salaries and benefits in the accompanying financial
statements.
Multiemployer Plans
- -------------------
Shoppers made contributions to multi-employer plans for its union employees for
pension, health and other benefits of $5.5 million, $7.5 million, $8.5 million,
$3.5 million and $12.1 million during the 22 weeks of fiscal 2000, the 30 weeks
of fiscal 2000, the 37 weeks of fiscal 1999, the 15 weeks of fiscal 1999 and
1998, respectively.
NOTE 8 - TRANSACTIONS WITH AFFILIATES
Transactions with Richfood / SUPERVALU
- --------------------------------------
The January 29, 2000 Consolidated Balance Sheet includes $52.0 million due to
affiliates compared to $26.0 million at January 30, 1999. The $52.0 million
consists primarily of amounts due to SUPERVALU for the purchase of bonds and
amounts due for incomes taxes, inventory purchases and general and
administrative expenses. Inventory purchases from Richfood during the 22 week
post-acquisition period ended January 29, 2000 totaled $248.4 million. During
the
23
<PAGE>
30 week pre-acquisition period ended August 30, 1999, inventory purchases from
Richfood were approximately $301.0 million. Inventory purchases from Richfood
during the 37 weeks of fiscal 1999 were approximately $361.3 million.
Transactions with Dart
- ----------------------
In fiscal 1999, Dart charged Shoppers, on a monthly basis, for actual expenses
which related directly to Shoppers' operations (primarily insurance and legal
expenses). Substantially all such charges were supported by invoices from
unrelated parties designating Shoppers as recipient of the related goods or
services. Such charges were approximately $0.1 million and $0.4 million during
the 37 weeks of fiscal 1999 and the 15 weeks of fiscal 1999, respectively.
Dart Notes Receivable
- ---------------------
In connection with the 1992 sale of the assets of Total Beverage Corp. by
Shoppers to Dart, Shoppers received a note receivable from Dart of approximately
$1.5 million. In May 1998, Shoppers realized $1.2 million representing full
settlement of this note. As a result, Shoppers received approximately $0.7
million in excess of the recorded estimated realizable value of the note, which
was recognized in the Company's consolidated statement of operations during the
15 week period ended May 18, 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 stockholders 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 stockholder 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.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Shoppers is party to various legal proceedings arising from the normal course of
business activities, none of which, in management's opinion, is expected to have
a material adverse impact on the Company's consolidated results of operations or
consolidated financial position.
As of January 29, 2000, approximately 4,700 employees of Shoppers were covered
by a collective bargaining agreement with United Food and Commercial Workers,
Local 400 that will expire on July 1, 2000. The Company anticipates that the
agreement will be renewed by the expiration date.
NOTE 10 - INTERIM FINANCIAL DATA (UNAUDITED)
Selected interim financial data for the fiscal years ended January 29, 2000 and
January 30, 1999 are as follows: (in thousands)
Thirteen Week Period Ended:
January 29, October 30 July 31, May 1,
2000 1999 (1) 1999 1999
----------- ---------- -------- ---------
Sales $229,705 $215,815 $219,784 $220,069
Gross profit 54,512 53,797 55,501 55,084
Net income 1,694 1,601 1,916 1,700
24
<PAGE>
Thirteen Week Period Ended:
January 30, November 1, August 1, May 2,
1999 1998 1998 (2) 1998
----------- ---------- -------- ---------
Sales $226,603 $220,431 $224,527 $213,998
Gross profit 55,165 55,153 53,747 49,490
Net income 2,599 3,153 122 1,207
(1) Includes four weeks' results of operations prior to the SUPERVALU
Acquisition and nine weeks under the new basis of accounting established in
connection with the SUPERVALU Acquisition (Note 2).
(2) Includes two weeks' results of operations prior to the Dart Acquisition and
eleven weeks under the new basis of accounting established in connection
with the Dart Acquisition (Note 2).
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
--------------------
Not required to be included in this Form 10-K in accordance with the
instructions to Item 304 of Regulation S-K.
25
<PAGE>
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons of the
- ----------------------------------------------------------------------------
Registrant.
-----------
Information omitted in accordance with General Instruction
I(2)(c).
Item 11. Executive Compensation.
- --------------------------------
Information omitted in accordance with General Instruction
I(2)(c).
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
Information omitted in accordance with General Instruction
I(2)(c).
Item 13. Certain Relationships and Related Transactions.
- --------------------------------------------------------
Information omitted in accordance with General Instruction
I(2)(c).
26
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a)(1) Financial Statements
See Item 8.
(a)(2) Schedules
All schedules are omitted because the required information is not
applicable or it is presented in the consolidated financial
statements or related notes or the required information is not
material.
(a)(3) Exhibits
4.1 Indenture, dated June 26, 1997, by and among Shoppers Food
Warehouse Corp., SFW Holding Corp. and Norwest Bank Minnesota,
National Association (incorporated by reference to Exhibit 4.1 to
Shoppers Food Warehouse Corp. Form S-4, Registration No.
333-32825, filed with the SEC August 5, 1997).
4.2 Form of Shoppers Food Warehouse Corp. Global Security, dated June
26, 1997 (incorporated by reference to Exhibit 4.1 to Shoppers
Food Warehouse Corp. Form S-4, Registration No. 333-32825, filed
with the SEC on August 5, 1997).
10.1 Employment Agreement, dated August 18, 1997, between William
White and Shoppers Food Warehouse Corp. (incorporated by
reference to Exhibit 10.2 to the Dart Group Corporation (No.
0-1946) Quarterly Report on Form 10-Q filed with the SEC on
September 15, 1997).
10.2 Promissory Notes, dated September 26, 1997 and January 28, 1998,
from Dart Group Corporation to Shoppers Food Warehouse Corp.
(incorporated by reference to Exhibit 10.3 to Shoppers Food
Warehouse Corp. Annual Report on Form 10-K filed with the SEC on
May 1, 1998).
27 Financial Data Schedule.
Exhibit 10.1 is a management contract required to be filed as an
exhibit hereto.
99.1 Cautionary Statements Pursuant to the Securities Litigation
Reform Act
(b) Reports on Form 8-K
SFW Holding Corp. filed a Current Report on Form 8-K on February 21,
2000 reporting a change in accountants under Item 4 - Changes in
Registrant's Certifying Accountant.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SFW HOLDING CORP.
Date: April 26, 2000 By: /s/ William J. Bolton
----------------------- --------------------------------------
William J. Bolton
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: April 26, 2000 /s/ William J. Bolton
----------------------- --------------------------------------
William J. Bolton
Director and Chief Executive Officer
Date: April 26, 2000 /s/ Pamela K. Knous
----------------------- --------------------------------------
Pamela K. Knous
Vice President and Chief Financial
Officer (Principal Accounting Officer)
Date: April 26, 2000 /s/ David L. Boehnen
----------------------- --------------------------------------
David L. Boehnen
Director
Date: April 26, 2000 /s/ Jeffrey Noddle
----------------------- --------------------------------------
Jeffrey Noddle
Director
28
<PAGE>
SFW HOLDING CORP.
Exhibit Index
-------------
Exhibit
- -------
27 Financial Data Schedule
99.1 Cautionary Statements Pursuant to the Securities
Litigation Reform Act
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AS OF JANUARY 29, 2000 AND THE CONSOLIDATED
STATEMENT OF EARNINGS FOR THE 52 WEEKS ENDED JANUARY 29, 2000 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> OTHER OTHER
<FISCAL-YEAR-END> JAN-29-2000 JAN-29-2000
<PERIOD-START> SEP-01-1999 FEB-01-1999
<PERIOD-END> JAN-29-2000 AUG-30-1999
<CASH> 3,390 0
<SECURITIES> 0 0
<RECEIVABLES> 10,675 0
<ALLOWANCES> (400) 0
<INVENTORY> 31,324 0
<CURRENT-ASSETS> 51,935 0
<PP&E> 66,810 0
<DEPRECIATION> (2,793) 0
<TOTAL-ASSETS> 492,570 0
<CURRENT-LIABILITIES> 91,876 0
<BONDS> 193,782 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 191,891 0
<TOTAL-LIABILITY-AND-EQUITY> 492,570 0
<SALES> 379,975 505,398
<TOTAL-REVENUES> 379,975 505,398
<CGS> 288,983 377,496
<TOTAL-COSTS> 288,983 377,496
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,588 8,942
<INCOME-PRETAX> 5,923 9,938
<INCOME-TAX> 3,440 5,510
<INCOME-CONTINUING> 2,483 4,428
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,483 4,428
<EPS-BASIC> 74.49 132.84
<EPS-DILUTED> 74.49 132.84
</TABLE>
<PAGE>
EXHIBIT 99.1
Cautionary Statements for Purposes of the Safe Harbor Provisions
of the Securities Litigation Reform Act
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 ("Act"), SFW Holding Corp. (the "Company") is
filing cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements made by, or on behalf of the Company. When used in
this Annual Report on Form 10-K for the fiscal year ended January 29, 2000 and
in future filings by the Company with the Securities and Exchange Commission, in
the Company's press releases, other communications, and in oral statements made
by or with the approval of an authorized executive officer, the words or phrases
"will likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project", "believe" or similar expressions are intended to identify
forward-looking statements within the meaning of the Act. The following
cautionary statements are for use as a reference to a readily available written
document in connection with forward looking statements as defined in the Act.
These factors are in addition to any other cautionary statements, written or
oral, which may be made or referred to in connection with any such
forward-looking statement.
Holding Company - Totally Owned Subsidiary Risks
The Company's sole asset is its ownership of 100% of the outstanding common
stock of Shoppers Food Warehouse Corp. ("Shoppers"). The Company's business is
substantially the same as that of Shoppers and is subject to all of the risks
associated therewith. Therefore, substantially all of the information set forth
herein which pertains to the operations of the Company's business and its
financial condition references the business operations and financial condition
of Shoppers.
Business Risks
Shoppers faces risks which may prevent Shoppers from maintaining or increasing
retail sales and earnings including: competition from other retail chains,
supercenters, non-traditional competitors, and emerging alternative formats;
operating risks of certain strategically important retail operations; the
potential disruption from labor disputes; and adverse impact from the entry of
other retail chains, supercenters and non-traditional or emerging competitors
into markets where Shoppers has a retail concentration.
Risks of Expansion
Shoppers intends to continue to grow its business in part through new store
openings. Expansion is subject to a number of risks, including the adequacy of
Shoppers' capital resources; the location of suitable store sites and the
negotiation of acceptable lease terms; ability to hire, train and integrate
employees; and possible costs and other risks of integrating or adapting
operational systems.
Liquidity
Management expects that Shoppers will continue to replenish operating assets and
reduce aggregate debt with internally generated funds. If capital spending
significantly exceeds anticipated capital needs, additional funding could be
required from other sources.
Litigation
While the Company believes that Shoppers is currently not subject to any
material litigation, the costs and other effects of legal and administrative
cases and proceedings and settlements are impossible to predict with certainty.
The current environment for litigation involving retail store operators may
increase the risk of litigation being commenced against
1
<PAGE>
Shoppers. Shoppers would incur the costs of defending any such litigation
whether or not any claim had merit.
The foregoing should not be construed as exhaustive and the Company disclaims
any obligation subsequently to revise any forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
2
