-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GPcnHiCGeJD6K3IutpCRtWl7uxj/RLc72g+i5HlmAXXSq0DMz2sMLbxNPhxcqhLr ZWJWoGWWZUnZFzZzyISlUw== 0000950133-98-003309.txt : 19980916 0000950133-98-003309.hdr.sgml : 19980916 ACCESSION NUMBER: 0000950133-98-003309 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980801 FILED AS OF DATE: 19980915 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHOPPERS FOOD WAREHOUSE CORP CENTRAL INDEX KEY: 0001043065 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 522014682 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-32825 FILM NUMBER: 98709771 BUSINESS ADDRESS: STREET 1: 4600 FORBES BLVD CITY: LANHAM STATE: MD ZIP: 20706 BUSINESS PHONE: 3013068600 MAIL ADDRESS: STREET 1: 4600 FORBES BLVD CITY: LENHAM STATE: MD ZIP: 20706 10-Q 1 FORM 10-Q RE: SHOPPERS FOOD WAREHOUSE CORP. 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 2 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 3 SHOPPERS FOOD WAREHOUSE CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (dollars and shares in thousands, except per share data)
Thirteen Weeks Ended Twenty-Six Weeks Ended --------------------- ---------------------- August 1, August 2, August 1, August 2, 1998 1997 1998 1997 ----------|---------- ---------- ---------- (Post-Acquisition) 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 ======== | ======== ======== ========
The accompanying notes are an integral part of these statements. 3 4 SHOPPERS FOOD WAREHOUSE CORP. CONSOLIDATED BALANCE SHEETS (dollars in thousands)
(Unaudited) (Audited) August 1, January 31, 1998 1998 ---------- |--------- (Post-Acquisition) 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 ======== | ========
The accompanying notes are an integral part of these balance sheets. 4 5 SHOPPERS FOOD WAREHOUSE CORP. CONSOLIDATED BALANCE SHEETS (dollars in thousands)
(Unaudited) (Audited) August 1, January 31, 1998 1998 ---------- | ----------- (Post-Acquisition) 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 ======== | ========
The accompanying notes are an integral part of these balance sheets. 5 6 SHOPPERS FOOD WAREHOUSE CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS, (Unaudited) (dollars in thousands)
Twenty-six Weeks Ended ---------------------- August 1, August 2, 1998 1997 --------- --------- 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) -------- --------
(continued on next page) 6 7 SHOPPERS FOOD WAREHOUSE CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS, (Unaudited), Continued (dollars in thousands)
Twenty-six Weeks Ended ---------------------- August 1, August 2, 1998 1997 --------- --------- 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
The accompanying notes are an integral part of these statements. 7 8 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 9 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 9 10 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 11 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 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 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 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 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 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS JAN-30-1999 FEB-01-1998 AUG-01-1998 1,295 0 10,529 0 30,046 45,576 54,969 1,196 527,997 63,123 226,590 0 0 167 225,102 527,997 438,525 440,811 335,288 335,288 91,616 0 10,166 3,741 2,412 1,329 0 0 0 1,329 39.87 39.87
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