-----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, Dlk4KnGXroot57if1qK3EzDduUhR78G90rC/wUuG/yT6XZjTOyHleZhbYwtPmLd4 Q7wmPzfdLHgxHWU2dHj7/w== 0000928385-97-001927.txt : 19971119 0000928385-97-001927.hdr.sgml : 19971119 ACCESSION NUMBER: 0000928385-97-001927 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19971118 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: S-4/A SEC ACT: SEC FILE NUMBER: 333-32825 FILM NUMBER: 97723721 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SFW HOLDING CORP CENTRAL INDEX KEY: 0001043066 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 522014682 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-32825-01 FILM NUMBER: 97723722 BUSINESS ADDRESS: STREET 1: 4600 FORBES BLVD CITY: LENHAM STATE: MD ZIP: 20706 BUSINESS PHONE: 3013068600 MAIL ADDRESS: STREET 1: 4600 FORBES BLVD CITY: LENHAM STATE: MD ZIP: 20706 S-4/A 1 AMENDMENT #2 TO THE FORM S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1997 REGISTRATION NO. 333-32825 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 2 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- SHOPPERS FOOD WAREHOUSE CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 5411 53-0231809 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.) INCORPORATION OR CLASSIFICATION CODE ORGANIZATION) NUMBER) SFW HOLDING CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 6719 52-2014682 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.) INCORPORATION OR CLASSIFICATION CODE ORGANIZATION) NUMBER) ---------------- 4600 FORBES BLVD. LANHAM, MARYLAND 20706 (301) 306-8600 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- MARK A. FLINT CHIEF EXECUTIVE OFFICER SHOPPERS FOOD WAREHOUSE CORP. 4600 FORBES BLVD. LANHAM, MARYLAND 20706 (301) 306-8600 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF AGENT FOR SERVICE) ---------------- COPY TO: KENNETH J. AYRES, ESQ. JONES, DAY, REAVIS & POGUE METROPOLITAN SQUARE 1450 G STREET, N.W. WASHINGTON, D.C. 20005-2088 (202) 879-3791 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities act of 1933, check the following box. [X] If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [_] ---------------- THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SHOPPERS FOOD WAREHOUSE CORP. SFW HOLDING CORP. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION OF INFORMATION REQUIRED BY PART I OF FORM S-4
NO. CAPTION LOCATION OR CAPTION IN PROSPECTUS --- ------- --------------------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus...... Outside Front Cover 2. Inside Front and Outside Back Cover Pages of Prospectus..... Inside Front Cover; Outside Back Cover; Available Information 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information................... Prospectus Summary; Risk Factors; The Exchange Offer; Unaudited Pro Forma Consolidated Financial Statements; Selected Historical Financial Data 4. Terms of the Transaction....... Outside Front Cover; Prospectus Summary; The Exchange Offer; Description of the Senior Notes; Risk Factors; Certain Income Tax Considerations 5. Pro Forma Financial Information................... Prospectus Summary; Unaudited Pro Forma Consolidated Financial Statements; 6. Material Contracts with the Selected Historical Financial Data Company Being Acquired........ Not Applicable 7. Additional Information Required for Reoffering by Persons and Parties Deemed to be Underwriters.................. Not Applicable 8. Interests of Named Experts and Counsel....................... Not Applicable 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities................... Not Applicable 10. Information With Respect to S-3 Registrants................... Not Applicable 11. Incorporation of Certain Information by Reference...... Not Applicable 12. Information with Respect to S-2 or S-3 Registrants............ Not Applicable 13. Incorporation of Certain Information by Reference...... Not Applicable 14. Information With Respect to Registrants other than S-2 or S-3 Registrants............... Outside Front Cover; Inside Front Cover; Prospectus Summary; Risk Factors; Business; Management; Use of Proceeds; Pro Forma Consolidated Capitalization; Unaudited Pro Forma Pro Forma Consolidated Financial Statements; Selected Historical Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Certain Income Tax Considerations; Consolidated Financial
Statements
NO. CAPTION LOCATION OR CAPTION IN PROSPECTUS --- ------- --------------------------------- 15. Information With Respect to S-3 Companies.......................... Not Applicable 16. Information With Respect to S-2 or S-3 Companies...................... Not Applicable 17. Information With Respect to Companies Other than S-2 or S-3 Companies.......................... Not Applicable 18. Information if Proxies, Consents or Authorizations Are to Be Solicited.......................... Not Applicable 19. Information if Proxies, Consents or Authorizations Are Not to Be Solicited or in an Exchange Offer.. Management; Certain Transactions; Business
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +THIS PROSPECTUS AND THE INFORMATION CONTAINED HEREIN IS SUBJECT TO CHANGE, + +COMPLETION OR AMENDMENT WITHOUT NOTICE. THESE SECURITIES MAY NOT BE SOLD NOR + +MAY AN OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE PROSPECTUS IS DELIVERED + +IN FINAL FORM. UNDER NO CIRCUMSTANCES SHALL THIS PROSPECTUS CONSTITUTE AN + +OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY + +SALE OF THESE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, + +SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION + +UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED NOVEMBER , 1997 PROSPECTUS LOGO SHOPPERS FOOD WAREHOUSE CORP. OFFER TO EXCHANGE ITS 9 3/4% SENIOR NOTES DUE 2004, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT (AS DEFINED), FOR ALL OF ITS OUTSTANDING 9 3/4% SENIOR NOTES DUE 2004 THE SENIOR NOTES WILL BE FULLY AND UNCONDITIONALLY GUARANTEED BY SFW HOLDING CORP. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). ----------- Shoppers Food Warehouse Corp., a Delaware corporation ("Shoppers" or the "Company"), hereby offers to exchange (the "Exchange Offer") up to $200,000,000 aggregate principal amount of its new 9 3/4% Senior Notes due 2004 (the "Exchange Notes") for an equal principal amount of its outstanding 9 3/4% Senior Notes due 2004 (the "Outstanding Notes") sold by the Company on June 26, 1997, upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal (the "Letter of Transmittal"). The Exchange Notes and the Outstanding Notes are collectively referred to herein as the "Senior Notes." The terms of the Exchange Notes are identical in all material respects to those of the Outstanding Notes, except for certain transfer restrictions and registration rights relating to the Outstanding Notes. The Exchange Notes will be issued pursuant to, and entitled to the benefits of, the Indenture (as defined) governing the Outstanding Notes. On September 26, 1997, the Company paid $50 million (the "Restricted Proceeds") of the net proceeds from the sale of the Outstanding Notes to or for the benefit of the Company's ultimate parent, Dart Group Corporation ("Dart"), and Dart consummated a Settlement (as defined) with certain of its stockholders. Interest on the Senior Notes will be payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 1997, at the rate of 9 3/4% per annum. The Senior Notes will be redeemable, in whole or in part, at the option of the Company on or after June 15, 2001, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. In addition, at any time on or prior to June 15, 2000, the Company may, at its option, redeem up to 35% of the aggregate principal amount of the Senior Notes originally issued with the net cash proceeds of one or more Equity Offerings (as defined), at a redemption price equal to 109.75% of the aggregate principal amount of the Senior Notes to be redeemed plus accrued and unpaid interest to the date of redemption; provided, however, that at least 65% of the original aggregate principal amount of the Senior Notes remains outstanding immediately after such redemption. In the event of a Change in Control (as defined), each holder of the Senior Notes (each a "Holder") will have the right to require the Company to repurchase any or all of its outstanding Senior Notes at a price equal to 101% of the principal amount thereof, plus any accrued and unpaid interest to the date of repurchase. However, there can be no assurance that sufficient funds would be available at the time of any Change of Control to make any required repurchases of Senior Notes tendered. See "Description of the Senior Notes." The Senior Notes will be general unsecured obligations of the Company and will rank pari passu in right of payment with all existing and future senior indebtedness of the Company and senior in right of payment to all existing and future subordinated indebtedness of the Company. The Senior Notes will be effectively subordinated in right of payment to all secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness. The Senior Notes will be fully and unconditionally guaranteed (the "Guarantee") by SFW Holding Corp., a Delaware corporation (the "Guarantor"), the immediate parent of Shoppers. The Guarantee will be secured by a first priority security interest in the capital stock of Shoppers owned by the Guarantor. As of August 2, 1997, the Company had $11.5 million of senior debt outstanding that ranked pari passu with the Senior Notes and no secured indebtedness outstanding. (continued on next page) ----------- SEE "RISK FACTORS," WHICH BEGINS ON PAGE 12, FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER OUTSTANDING NOTES IN THE EXCHANGE OFFER. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------- The date of this Prospectus is , 1997. (continued from previous page) Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Outstanding Notes where they were acquired by such broker- dealer as a result of market-making or other trading activities. Each broker- dealer that received Outstanding Notes from the Company and not as a result of market-making or other trading activities, in the absence of an exemption, must comply with the registration requirements of the Securities Act. The Company and the Guarantor will, for a period of 90 days after consummation of the Exchange Offer, make copies of this Prospectus available to any broker- dealer for use in connection with any such resale. The Outstanding Notes are designated for trading in the Private Offerings, Resales and Trading through Automated Linkages ("PORTAL") System of the National Association of Securities Dealers, Inc. The Exchange Notes constitute securities for which there is no established trading market. Any Outstanding Notes not tendered and accepted in the Exchange Offer will remain outstanding. The Company does not intend to list the Exchange Notes on any securities exchange or to seek approval for quotation through any automated quotation system, and no active public market for the Exchange Notes is currently anticipated. If a market for the Exchange Notes should develop, such Exchange Notes could trade at a discount from their principal amount. To the extent that any Outstanding Notes are tendered and accepted in the Exchange Offer, a Holder's ability to sell untendered Outstanding Notes could be adversely affected. No assurance can be given as to the liquidity of the trading market for either the Outstanding Notes or the Exchange Notes. The Exchange Notes are being offered hereby in order to satisfy certain obligations of the Company and the Guarantor contained in the Registration Rights Agreement dated as of June 26, 1997 (the "Registration Rights Agreement") by and among the Company, the Guarantor and an institutional investor (the "Initial Purchaser"), entered into at the time of original issuance of the Outstanding Notes. Neither the Company nor the Guarantor will receive any proceeds from the Exchange Offer. The Company will pay all expenses incident to the Exchange Offer. The Exchange Offer is not conditioned upon any minimum principal amount of Outstanding Notes being tendered for exchange pursuant to the Exchange Offer. The date of acceptance and exchange (the "Exchange Date") of the Outstanding Notes will be the third business day following the Expiration Date. Outstanding Notes tendered pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. In the event the Company terminates the Exchange Offer and does not accept for exchange any Outstanding Notes with respect to the Exchange Offer, the Company will promptly return such Outstanding Notes to the holders thereof. AVAILABLE INFORMATION The Company and the Guarantor have filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-4 (together with all amendments, exhibits, schedules and supplements thereto, the "Registration Statement") under the Securities Act with respect to the Exchange Notes being offered hereby. This Prospectus, which forms a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement. For further information with respect to the Company, the Guarantor and the Exchange Notes, reference is made to the Registration Statement. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete and, where such contract or other document is an exhibit to the Registration Statement, each such statement is qualified in all respects by the provisions in such exhibit, to which reference is hereby made. Copies of the Registration Statement may be examined without charge at the Public Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and the Commission's Regional Offices located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any portion of the Registration Statement can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of certain fees prescribed by the Commission. In addition, registration statements and certain other filings made with the Commission through its Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly available through the Commission's site on the Internet's World Wide Web, located at http://www.sec.gov. Neither the Company nor the Guarantor is currently subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon completion of the Exchange Offer, the Company and the Guarantor will be subject to the informational requirements of the Exchange Act and, accordingly, will file periodic reports and other information with the Commission. Notwithstanding the foregoing, the Guarantor intends to request that the Commission, pursuant to Section 12(h) of the Exchange Act, grant an order exempting it from complying with the informational requirements of the Exchange Act. In addition, the Company is required by the terms of the Indenture to furnish the Trustee and the Holders of the Senior Notes with annual reports containing consolidated financial statements audited by its independent accountants and with quarterly reports containing unaudited condensed consolidated financial statements for each of the first three quarters of each fiscal year. ------------- UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. PROSPECTUS SUMMARY Unless otherwise noted, reference to (i) "Shoppers" or the "Company" means collectively Shoppers Food Warehouse Corp. and its subsidiaries, (ii) the "Guarantor" means SFW Holding Corp., the immediate parent company of Shoppers and (iii) "Dart" means Dart Group Corporation, the immediate parent company of the Guarantor and the ultimate parent company of Shoppers. The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus. Until Shoppers became a wholly-owned indirect subsidiary of Dart on February 6, 1997, Shoppers' fiscal year ended on the Saturday closest to June 30, resulting in a 52- or 53-week year. The 1994, 1995 and 1996 fiscal years each contained 52 weeks. The Company has since conformed to Dart's fiscal year by changing its fiscal year to the Saturday closest to January 31. Thus, reference to "fiscal 1994" means the 52 weeks ended July 2, 1994, "fiscal 1995" means the 52 weeks ended July 1, 1995, "fiscal 1996" means the 52 weeks ended June 29, 1996, "fiscal 1997" means the 31 weeks ended February 1, 1997 and "fiscal 1998" means the 52 weeks ended January 31, 1998. All references to market share and demographic data in this Prospectus are based upon industry publications. THE COMPANY Shoppers is a leading supermarket operator in Greater Washington, D.C. (as defined below), operating 37 stores that target the price-conscious segment of the market in densely populated suburban areas under the "Shoppers Food Warehouse" and "Shoppers Club" names. Shoppers operates warehouse-style, price- impact supermarkets that are positioned to offer the lowest overall prices in its market area by passing on to the consumer savings achieved through labor efficiencies and lower overhead associated with the warehouse format, while providing the product selection and quality associated with a conventional format. The Company's stores offer products at prices that generally range from 15% to 20% below those of its primary supermarket competitors. In-store operations are designed to allow customers to perform certain labor-intensive services usually offered in conventional supermarkets. For example, the Company's stores generally do not provide service staff to support the bakery and floral departments or the meat and seafood refrigerated cases. The stores do, however, offer a complete line of produce, fresh baked goods, floral assortments and freshly packaged meat and seafood products and provide service in these departments at the request of customers. Certain merchandise is presented on warehouse-style racks in full cartons, reducing labor-intensive unpacking, and customers bag their own groceries. Shoppers stores also have full-service delicatessens with some stores offering hot and cold prepared food and self-service soup and salad bars. The Company's stores generally are constructed with high ceilings to accommodate warehouse racking with overhead pallet storage. Wide aisles accommodate forklifts and, compared to conventional supermarkets, a higher percentage of total store square footage is devoted to retail selling because the top of the warehouse-style grocery racks on the sales floor are used to store inventory, which reduces the need for large backroom storage and restocking trips. Notwithstanding the "warehouse" name, physical features and low-price reputation, Shoppers stores have more in common with conventional supermarket chains than with so-called "warehouse clubs." No membership fee is charged at the Shoppers stores, which offer a selection of popular-sized national brands and private label products as well as high quality produce, meat and seafood. The product offerings are similar to those of conventional supermarkets with slightly more emphasis on larger package sizes and with less emphasis on extensive brand and size selection. All 37 of the Company's supermarkets have a delicatessen, a bakery and a floral department while 21 stores have a beer and wine department. While similar in most respects to conventional supermarket operators, Shoppers distinguishes itself by providing low-price leadership while still emphasizing quality. Shoppers does this by offering an unusual combination of higher-end specialty departments with self-service and discount price features. In addition, unlike traditional supermarkets, Shoppers stores offer a greater selection of "club size" products, along with popular-sized brands. Through this approach, Shoppers has established a unique niche among supermarket operators in Greater Washington, D.C. The Company's strategy is to open large new stores and upgrade existing stores. Shoppers opened three new stores since July 1997 and has signed leases to open two additional new stores (each between 65,000 and 75,000 square feet) over the next two years. Also during this period, Shoppers is considering expanding or remodeling at least two stores. Since 1992, Shoppers has opened 15 new stores (while closing four stores) and remodeled seven stores. Of its existing 37 stores, 27 are larger than 40,000 square feet, and all but one of these 27 stores were opened, remodeled or expanded during the last ten years. The Company believes that its supermarkets generally have well-established locations with favorable lease terms (including multiple options), are in good condition and require only routine maintenance. Shoppers is the largest supermarket chain targeting the price-conscious segment in Greater Washington, D.C. The two primary competitors of Shoppers are Giant Food, Inc. ("Giant") and Safeway Inc. ("Safeway"), both of which operate in the higher-service, higher-price segment. Overall, Shoppers has the third largest market share in Greater Washington, D.C. On a combined basis, Shoppers, Giant and Safeway have 84% of the market share in this area. "Greater Washington, D.C." includes Washington, D.C.; Calvert, Charles, Frederick, Montgomery and Prince George's counties in Maryland; Arlington, Fairfax, Loudoun, Prince William and Stafford counties in Virginia; and the independent cities of Alexandria, Fredericksburg, Fairfax and Falls Church in Virginia. Shoppers does not, however, operate any stores in the city of Washington, D.C. Shoppers' share of the Greater Washington, D.C. market has increased from 11.9% in 1992 to 13.6% in 1997; the Company believes that it exceeds its next highest competitor by almost four times. During the same period, Giant's market share decreased from 45.9% to 42.9% while Safeway's market share increased from 27.1% to 27.5%. Shoppers was incorporated in Delaware in 1956 and its principal executive offices are at 4600 Forbes Blvd., Lanham, Maryland 20706. The telephone number of Shoppers is (301) 306-8600. ACQUISITION OF THE COMPANY BY DART In June 1988, Dart acquired 50% of Shoppers for $17.4 million. On February 6, 1997, Dart's ownership increased to 100% with the buy-out of the other 50% interest in Shoppers for $210 million (the "Acquisition"). The Acquisition was financed through the application of $137.2 million in net proceeds raised from an offering of Increasing Rate Senior Notes due 2000 (the "Increasing Rate Notes") of SFW Acquisition Corp., a newly created indirect subsidiary of Dart, and $72.8 million of bridge financing (the "Bridge Loan") provided by a bank. Immediately after the Acquisition, SFW Acquisition Corp. merged into Shoppers (with Shoppers becoming obligor on the Increasing Rate Notes) and Shoppers repaid the Bridge Loan from its existing cash and the liquidation of certain short-term investments. 2 THE EXCHANGE OFFER THE EXCHANGE OFFER...... The Company is offering to exchange up to $200,000,000 aggregate principal amount of its new 9 3/4% Senior Notes due 2004 (the "Exchange Notes") for an equal principal amount of its outstanding 9 3/4% Senior Notes due 2004 (the "Outstanding Notes"). The terms of the Exchange Notes are identical in all ma- terial respects to those of the Outstanding Notes, except for certain transfer restrictions and regis- tration rights relating to the Outstanding Notes. The Exchange Notes and Outstanding Notes are collectively referred to herein as the "Senior Notes." PURPOSE OF THE EXCHANGE OFFER.................. The Exchange Notes are being offered to satisfy cer- tain obligations of the Company under the Registra- tion Rights Agreement. EXPIRATION DATE; WITHDRAWAL OF TENDER... The Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998, or such later date and time to which it is extended by the Company (the "Ex- piration Date"). The Expiration Date will not be ex- tended beyond the 225th day after the date of the original issuance of the Senior Notes. The tender of Outstanding Notes pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. Any Outstanding Notes not accepted for exchange for any reason will be returned without expense to the tendering Holder thereof as promptly as practica- ble after the expiration or termination of the Ex- change Offer. ACCRUED INTEREST ON THE EXCHANGE NOTES AND OUTSTANDING NOTES...... Interest on the Exchange Notes will accrue from (A) the later of (i) the last interest payment date on which interest was paid on the Outstanding Notes sur- rendered in exchange therefor or (ii) if the Out- standing Notes are surrendered for exchange on a date in a period which includes the record date for an in- terest payment date to occur on or after the date of such exchange and as to which interest will be paid, the date of such interest payment date, or (B) if no interest has been paid on the Outstanding Notes, from June 26, 1997. Holders whose Outstanding Notes are accepted for exchange will be deemed to have waived the right to receive any interest accrued on the Out- standing Notes. PROCEDURES FOR TENDERING OUTSTANDING NOTES.................. Each holder of Outstanding Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a facsimile thereof, in ac- cordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with the Outstanding Notes and any other required documenta- tion to the exchange agent (the "Exchange Agent") at the address set forth herein. Outstanding Notes may be physically delivered, but physical delivery is not required if a confirmation of a book-entry transfer of such Outstanding Notes to the Exchange Agent's ac- count at The Depository Trust Company ("DTC" or the "Depository") is delivered in a timely fashion. By executing the Letter of Transmittal, each Holder will represent to the Company that, among other things, the Exchange Notes acquired 3 pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiv- ing such Exchange Notes, whether or not such person is the Holder, that neither the Holder nor any such other person is engaged in, or intends to engage in, or has an arrangement or understanding with any per- son to participate in, the distribution of such Ex- change Notes and that neither the Holder nor any such other person is an "affiliate", as defined under Rule 405 of the Securities Act, of the Company. See "The Exchange Offer--Procedures for Tendering Outstanding Notes." CONDITIONS TO THE EXCHANGE OFFER......... The Exchange Offer is not conditioned upon any mini- mum aggregate principal amount of Outstanding Notes being tendered for exchange. The Exchange Offer is subject to certain customary conditions, which may be waived by the Company. The Company currently expects that each of the conditions will be satisfied and that no waivers will be necessary. See "The Exchange Offer--Conditions to the Exchange Offer." EXCHANGE AGENT.......... Norwest Bank Minnesota, National Association. CERTAIN INCOME TAX CONSIDERATIONS......... An exchange of Outstanding Notes for Exchange Notes pursuant to the Exchange Offer should be deemed not to be a sale, exchange or other taxable event for federal income tax purposes because the Exchange Notes should be deemed not to differ materially in kind or extent from the Outstanding Notes. As a re- sult, no material federal income tax consequences should result from an exchange of Exchange Notes for Outstanding Notes pursuant to the Exchange Offer. For federal income tax purposes, Exchange Notes received by a beneficial owner of Outstanding Notes should be treated as a continuation of the Outstanding Notes in the hands of such owner. See "Certain Income Tax Con- siderations." CONSEQUENCES OF EXCHANGING OUTSTANDING NOTES PURSUANT TO THE EXCHANGE OFFER......... Based on certain interpretive letters issued by the staff of the Commission to third parties in unrelated transactions, Holders of Outstanding Notes (other than any Holder who is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) who exchange their Outstanding Notes for Ex- change Notes pursuant to the Exchange Offer generally may offer such Exchange Notes for resale, resell such Exchange Notes and otherwise transfer such Exchange Notes without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of the Holders' business and such Holders are not participating in, and have no ar- rangement or understanding with any person to partic- ipate in, a distribution of such Exchange Notes. Each broker-dealer that receives Exchange Notes for its own account in exchange for Outstanding Notes, where such Outstanding Notes were acquired by such broker- dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any re- sale of such Notes. See "Plan of Distribution." In addition, to comply with 4 the securities laws of certain jurisdictions, if ap- plicable, the Exchange Notes may not be offered or sold unless they have been registered or qualified for sale in such jurisdiction or an exemption from registration or qualification is available and is complied with. The Company has agreed, pursuant to the Registration Rights Agreement and subject to cer- tain specified limitations therein, to register or qualify the Exchange Notes for offer or sale under the securities or blue sky laws of such jurisdictions as any Holders of the Senior Notes request in writ- ing. If a Holder of Outstanding Notes does not ex- change such Outstanding Notes for Exchange Notes pur- suant to the Exchange Offer, such Outstanding Notes will continue to be subject to the restrictions on transfer contained in the legend thereon. In general, the Outstanding Notes may not be offered or sold un- less registered under the Securities Act, except pur- suant to an exemption from, or in a transaction not subject to, the registration requirements of the Se- curities Act and applicable state securities laws. 5 EXCHANGE NOTES The terms of the Exchange Notes are identical in all material respects to those of the Outstanding Notes, except for certain transfer restrictions and registration rights relating to the Outstanding Notes. Securities Offered...... $200,000,000 aggregate principal amount of 9 3/4% Se- nior Notes due 2004. Issuer.................. Shoppers Food Warehouse Corp. Maturity Date........... June 15, 2004 Interest Payment Dates................... Interest on the Exchange Notes will accrue from the date of original issuance of the Outstanding Notes (the "Issue Date") and will be payable semi-annually in arrears on each June 15 and December 15, commenc- ing December 15, 1997. Ranking................. The Senior Notes will be general unsecured obliga- tions of the Company and will rank pari passu in right of payment with all existing or future senior indebtedness of the Company and senior in right of payment to all existing and future subordinated in- debtedness of the Company. The Senior Notes will be effectively subordinated in right of payment to all secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness. As of August 2, 1997, the Company had $11.5 million of senior debt outstanding that ranked pari passu with the Senior Notes and no secured indebtedness outstanding. Guarantee and Collateral.............. The Senior Notes will be fully and unconditionally guaranteed by the Guarantor. The Guarantee will be secured by a first priority security interest in the capital stock of Shoppers owned by the Guarantor. De- pending on the outcome of pending litigation, the Guarantor's direct ownership of Shoppers could be re- duced to as low as 80%. See "Risk Factors--Security for the Guarantee." Special Mandatory Redemption.............. The Indenture provides that in the event that a Set- tlement did not occur on or prior to June 30, 1998, then the Company would be obligated to use the Re- stricted Proceeds (including accrued interest) to re- deem $50 million aggregate principal amount of Senior Notes (a "Special Mandatory Redemption"). On Septem- ber 26, 1997, the Company paid $50 million ($40 mil- lion dividend and $10 million loan) to or on behalf of Dart in connection with Dart's consummation of a Settlement with Robert M. Haft, Gloria G. Haft and Linda G. Haft (the "RGL Settlement"). Accordingly, the Company will not be obligated to redeem any of the Senior Notes pursuant to a Special Mandatory Re- demption. Optional Redemption..... At any time on or prior to June 15, 2000, the Company may, at its option, redeem up to 35% of the aggregate principal amount of the Senior Notes originally is- sued with the net cash proceeds of one or more Equity Offer- 6 ings, at a redemption price equal to 109.75% of the aggregate principal amount of the Senior Notes to be redeemed plus any accrued and unpaid interest to the date of redemption; provided, however, that at least 65% of the original aggregate principal amount of the Senior Notes remains outstanding immediately after such redemption. In addition, the Senior Notes will be redeemable, in whole or in part, at the option of the Company on or after June 15, 2001, at the redemp- tion prices set forth herein, plus any accrued and unpaid interest to the date of redemption. Change in Control....... In the event of a Change in Control, each Holder of the Senior Notes will have the right, subject to cer- tain conditions, to require the Company to repurchase any or all of its outstanding Senior Notes at a price equal to 101% of the principal amount thereof, plus any accrued and unpaid interest to the date of repur- chase. However, there can be no assurance that suffi- cient funds would be available at the time of any Change of Control to make any required repurchases of Senior Notes tendered. Certain Covenants....... The Indenture contains certain covenants for the ben- efit of Holders of Senior Notes, including, among others, covenants with respect to the following mat- ters: (i) limitation on restricted payments; (ii) limitation on indebtedness; (iii) limitation on in- vestments, loans and advances; (iv) limitation on dividends and other payment restrictions affecting subsidiaries; (v) limitation on liens; (vi) limita- tion on transactions with affiliates; (vii) restric- tion on mergers, consolidations and transfers of as- sets; (viii) limitation on lines of business; (ix) limitation on asset sales; and (x) limitation on is- suance and sale of capital stock of subsidiaries. USE OF PROCEEDS The Company will not receive any cash proceeds from the issuance of Exchange Notes offered hereby, the terms of which are identical in all material respects to those of the Outstanding Notes, except for certain transfer restrictions and registration rights relating to the Outstanding Notes. The Outstanding Notes surrendered in exchange for the Exchange Notes will be cancelled and cannot be reissued. The issuance of the Exchange Notes will not result in any change in the aggregate indebtedness of the Company. RISK FACTORS Holders of Outstanding Notes should carefully consider all of the information set forth in this Prospectus and, in particular, should evaluate the specific factors set forth under "Risk Factors" in connection with the Exchange Offer. 7 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The following table sets forth summary historical financial data of Shoppers as of and for the 52 weeks ended July 2, 1994, July 1, 1995 and June 29, 1996 and summary pro forma financial data for the 52 weeks and the 31 weeks ended February 1, 1997, which have been derived in part from the financial statements audited by Arthur Andersen LLP, Shoppers' independent public accountants. The summary historical financial data as of and for the 52 weeks ended February 1, 1997, the 26 weeks ended August 3, 1996 and the 26 weeks ended August 2, 1997 have been derived from unaudited interim consolidated financial statements, which, in the opinion of management, reflect all material adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such data. The pro forma financial data give effect to (i) the sale of the Outstanding Notes and the application of the net proceeds therefrom to repay the Increasing Rate Notes and to make a payment of $50 million ($40 million dividend and $10 million loan) to Dart to fund the RGL Settlement, (ii) the use of $25 million of existing cash, cash equivalents and short-term investments to extend a loan to Dart and (iii) the push-down accounting treatment for the Acquisition by Dart, as though such transactions occurred on February 4, 1996 with respect to the pro forma operating data and as of August 2, 1997 with respect to the pro forma balance sheet data. The pro forma financial data presented herein do not purport to represent what Shoppers' results of operations or balance sheet data would have been had such transactions occurred at such date or to project Shoppers' results of operation for any future period or balance sheet data at any future date. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements of Shoppers, together with the related notes thereto, included elsewhere in this Prospectus.
52 WEEKS ENDED (UNAUDITED) ---------------------------- ------------------------------ 31 WEEKS 52 WEEKS 26 WEEKS 26 WEEKS ENDED ENDED ENDED ENDED JULY 2, JULY 1, JUNE 29, FEBRUARY 1, FEBRUARY 1, AUGUST AUGUST 1994 1995 1996 1997 1997 3, 1996 2, 1997 -------- -------- -------- ----------- ----------- -------- -------- (DOLLARS IN THOUSANDS) OPERATING DATA: Sales................... $750,340 $790,842 $835,971 $511,025 $850,875 $419,653 $419,524 Gross profit(a)......... 157,277 174,321 183,985 112,896 190,946 96,179 99,160 Selling and administrative expenses(b)............ 127,643 136,798 149,570 94,304 154,594 74,379 76,677 Depreciation and amortization........... 10,785 8,529 8,913 4,573 8,720 4,844 5,079 Interest income......... 2,189 4,682 5,789 3,526 5,985 3,113 1,797 Interest expense(c)..... 1,426 1,451 1,771 710 1,645 1,062 10,392 Net income(d)........... 12,929 19,526 18,703 10,455 20,563 12,428 3,561 Ratio of earnings to fixed charges(e)....... 4.3x 6.4x 5.1x 4.9x 5.3x 6.1x 1.7x OTHER DATA: Stores open at end of period................. 35 33 34 34 34 34 35 Capital expenditures.... $ 5,112 $ 4,693 7,355 $ 5,280 $ 9,430 $ 4,932 $ 5,861 EBITDA(f)............... 29,998 38,400 35,614 19,972 38,107 22,250 22,933 Cash flow information: Operating activities.. 18,261 31,907 26,992 17,412 29,378 18,187 17,415 Investing activities.. (7,059) (60,474) (52,082) 2,801 (18,083) (20,127) 69,125 Financing activities.. -- -- (10,000) (10,034) (10,034) -- (86,221)
8
31 WEEKS 52 WEEKS 26 WEEKS ENDED ENDED ENDED FEBRUARY 1, FEBRUARY 1, AUGUST 2, 1997 1997 1997 ----------- ----------- --------- (DOLLARS IN THOUSANDS) PRO FORMA DATA (UNAUDITED): EBITDA(f).................................... $19,972 $38,107 $22,933 Depreciation and amortization(g)............. 5,827 9,852 5,079 Interest income(h)........................... 2,034 3,413 1,706 Interest expense(i).......................... 12,654 22,120 11,044 Income taxes(j).............................. 1,441 4,133 3,673 Net income before extraordinary item......... 704 3,660 4,393 Ratio of earnings to fixed charges(e)........ 1.1x 1.3x 1.6x Ratio of EBITDA to interest expense.......... 1.6x 1.7x 2.1x
(UNAUDITED) ----------------------------- PRO FORMA JULY 2, JULY 1, JUNE 29, FEBRUARY 1, AUGUST 3, AUGUST 2, AUGUST 2, 1994 1995 1996 1997 1996 1997 1997 ------- ------- -------- ----------- --------- --------- --------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments(k)......... $69,789 $97,003 $106,640 $108,738 $112,079 $ 84,289 $ 9,289 Working capital deficit(l)............. 9,993 15,551 14,364 15,958 18,568 24,208 24,208 Total assets(m)......... 140,614 162,003 171,022 179,008 177,229 326,698 286,698 Total debt(n)........... 9,742 9,950 10,069 10,035 10,091 211,549 211,549 Stockholders' equity.... 75,804 95,330 104,033 104,488 106,351 45,805 5,805
- -------- (a) Gross profit is net of LIFO expense of $364,000, $877,000 and $905,000 in the 52 weeks ended July 2, 1994, July 1, 1995 and June 29, 1996, respectively, $530,000 in the 31 weeks ended February 1, 1997, $905,000 in the 52 weeks ended February 1, 1997 and $450,000 in the 26 weeks ended August 3, 1996 and August 2, 1997, respectively. (b) Selling and administrative expenses include a reversal of a prior period expense related to closed stores and remodels of $500,000 for the 52 weeks ended July 1, 1995 and reserves related to closed stores and remodels of $294,000 and $850,000 for the 52 weeks ended June 29, 1996 and the 52 weeks ended February 1, 1997, respectively and $850,000 for the 31 weeks ended February 1, 1997. Selling and administrative expenses also include a $500,000 charge for reserves against a related party receivable for the 52 weeks ended July 1, 1995. (c) Interest expense for the 26 weeks ended August 2, 1997 includes $944,000 of amortization of deferred financing costs. (d) Net income for the 52 weeks ended July 2, 1994, July 1, 1995 and June 29, 1996 includes $858,000, $1,239,000 and ($224,000), net of taxes, respectively, associated with an insurance settlement relating to one store that incurred significant fire damage in June 1994. Net income for the 26 weeks ended August 2, 1997 includes an extraordinary loss of $3,126,000, net of income taxes of $2,150,000, for the write-off of deferred financing costs associated with the Increasing Rate Notes and the cumulative effect of a change in accounting principle of $1,729,000. (e) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of income before income taxes plus fixed charges. "Fixed charges" consist of interest expense on all indebtedness (including amortization of deferred financing costs) and the portion of operating lease rental payments that is representative of the interest factor. 9 (f) "EBITDA" represents net income before insurance settlement, income taxes, interest expense, interest income, depreciation and amortization, reserve for related party receivable, non-cash charges or credits associated with store closings and remodelings and LIFO expense. Depreciation and amortization expense and these other items excluded from EBITDA are significant components in understanding and assessing the Company's financial performance. The Company believes that, in addition to cash flow from operations and net earnings, EBITDA is a useful financial performance measurement for assessing operating performance as it provides investors with an additional basis to evaluate the ability of the Company to incur and service debt and to fund capital expenditures. In evaluating EBITDA, the Company believes that investors should consider the amount by which EBITDA exceeds interest costs for the period, how EBITDA compares to principal repayments on debt for the period and how EBITDA compares to capital expenditures for the period. To evaluate EBITDA, the components of EBITDA, such as revenues and operating expenses and the variability of such components over time, should also be considered. Investors should be cautioned, however, that EBITDA should not be construed as an alternative to operating income (as determined in accordance with GAAP) as an indicator of the Company's operating performance, or to cash flows from operating, investing and financing activities (as determined in accordance with GAAP) as a measure of liquidity or the Company's ability to meet all its cash needs. The Company's method of calculating EBITDA may differ from the methods used by other companies and, as a result, the EBITDA measures disclosed herein may not be comparable to other similarly titled measures disclosed by other companies. The following table quantifies the components of EBITDA:
52 WEEKS ENDED 31 WEEKS 52 WEEKS 26 WEEKS 26 WEEKS --------------------------- ENDED ENDED ENDED ENDED JULY 2, JULY 1, JUNE 29, FEBRUARY 1, FEBRUARY 1, AUGUST 3, AUGUST 2, 1994 1995 1996 1997 1997 1996 1997 -------- -------- -------- ----------- ----------- --------- --------- Gross Profit.......... $157,277 $174,321 $183,985 $112,896 $190,946 $96,179 $99,160 Less:Selling and administrative expenses............. 127,643 136,798 149,570 94,304 154,594 74,379 76,677 Add: LIFO expense...... 364 877 905 530 905 450 450 Closed store reserve (reversal)........ -- (500) 294 850 850 -- -- Reserve for related party receivable.. -- 500 -- -- -- -- -- -------- -------- -------- -------- -------- ------- ------- EBITDA................ 29,998 38,400 35,614 19,972 38,107 22,250 22,933 ======== ======== ======== ======== ======== ======= =======
(g) Reflects an increase in depreciation and amortization of $1,132,000 for the 52 weeks ended February 1, 1997 and $1,254,000 for the 31 weeks ended February 1, 1997 attributable to the amortization of excess purchase price over the underlying net book value of assets arising from the Acquisition, which was allocated to fixed assets, lease rights and goodwill. (h) Reflects a decrease in interest income of $2,572,000 for the 52 weeks ended February 1, 1997, $1,492,000 for the 31 weeks ended February 1, 1997 and a decrease of $91,000 for the 26 weeks ended August 2, 1997. The changes in interest income are attributable to a reduction in cash, cash equivalents and short-term investments resulting from dividend payments to Dart offset by interest income related to loans from Shoppers to Dart. Such loans will bear interest at a rate of 9 3/4% per annum and have the same maturity date as the Senior Notes. All principal and interest on any loan to Dart would be payable on the maturity date but could be repaid at any time without penalty. See "Risk Factors--Substantial Leverage and Debt Service." (i) Reflects an increase in interest expense of $20,475,000 for the 52 weeks ended February 1, 1997, $11,944,000 for the 31 weeks ended February 1, 1997 and an increase of $652,000 for the 26 weeks ended August 2, 1997 attributable to interest incurred in connection with the Senior Notes, which include amortization of deferred financing costs of $975,000 for the 52 weeks ended February 1, 1997, $569,000 for the 31 weeks ended February 1, 1997 and $486,000 for the 26 weeks ended August 2, 1997. 10 (j) Reflects a decrease in income taxes of $7,276,000 for the 52 weeks ended February 1, 1997, $4,939,000 for the 31 weeks ended February 1, 1997 and $178,000 for the 26 weeks ended August 2, 1997. (k) The pro forma data reflects the effect of the Acquisition, the offering related to the Senior Notes, the payment of loans to Dart and the payment of Restricted Proceeds to Dart to fund the RGL Settlement. Also, reference should be made to footnote (a) to the Pro Forma Consolidated Capitalization. (l) For purposes of this presentation, working capital deficit has been defined as working capital less cash, cash equivalents and short-term investments to present prior period comparable balances assuming the use of these liquid assets to fund the Acquisition and for subsequent dividends and loans to Dart. (m) The pro forma data reflects the decrease in cash, cash equivalents and short-term investments, the capitalization of financing costs and excess purchase price arising from the Acquisition. (n) The pro forma data reflects the indebtedness associated with the Senior Notes. 11 RISK FACTORS Prospective investors should consider carefully the following factors in addition to the other information set forth in this Prospectus before making an investment in the Senior Notes. SUBSTANTIAL LEVERAGE AND DEBT SERVICE The Company has incurred significant indebtedness and has significant interest expense. The Company's consolidated indebtedness was $211 million at August 2, 1997 and its consolidated interest expense for the 26 weeks ended August 2, 1997 was $10.4 million. In addition, subject to the restrictions in the Indenture, the Company may incur additional indebtedness from time to time. For the Company's ratio of earnings to fixed charges, see "Selected Historical Financial Data." The level of the Company's indebtedness could have important consequences to Holders of the Senior Notes, including: (i) a substantial portion of the Company's cash flow from operations must be dedicated to service debt and will not be available for other purposes; (ii) the Company's ability to obtain additional debt financing in the future for working capital and capital expenditures may be limited; and (iii) the Company's level of indebtedness could limit its flexibility in reacting to changes in the supermarket industry and economic conditions in general. Certain of the Company's competitors currently operate on a less leveraged basis and have significantly greater operating and financing flexibility than the Company. Shoppers believes that cash flow from operations, borrowings available under a credit facility in the aggregate principal amount at any time outstanding not to exceed $35 million (the "New Credit Facility") that the Company expects to enter into with a bank or other third party and lease financings will be sufficient to enable the Company to satisfy its anticipated requirements for operating expenses, capital expenditures and debt service obligations. If the Company is unable to satisfy such requirements from these sources, the Company would be required to adopt one or more alternatives, such as reducing or delaying capital expenditures, selling material assets or seeking additional capital investment. No assurance can be given that the Company will enter into the New Credit Facility or that any such alternative could be effected on satisfactory terms. In connection with the RGL Settlement, Shoppers loaned $10 million to Dart. Upon entering into the New Credit Facility, the Company may loan to Dart an additional $25 million. The Company expects such loans to bear the same interest rate and have the same maturity date as the Senior Notes. All principal and interest on these loans to Dart would be payable on the maturity date but may be repaid at any time without penalty. There can be no assurance, however, that Dart will be able to repay such principal and interest when due. Furthermore, repayment of the Senior Notes is dependent upon the Company refinancing its indebtedness, obtaining new equity capital or consummating a sale of all or part of the Company. There can be no assurance that the Company will be able to successfully accomplish any of these options. RESTRICTIVE DEBT COVENANTS The Indenture under which the Outstanding Notes were, and the Exchange Notes will be, issued (the "Indenture") contains numerous covenants. See "Description of the Senior Notes." If the Company fails to comply with these covenants, it would be in default under the Indenture. In the event of such default, the principal and accrued interest on the Senior Notes would become due and payable. In addition, the Company expects that the New Credit Facility would contain other and more restrictive covenants and would prohibit the Company from prepaying the Senior Notes, except in certain circumstances. The New Credit Facility also could require the Company to maintain specified financial ratios and satisfy certain financial tests. The Company's ability to meet such financial ratios and tests could be affected by events beyond its control. There can be no assurance that the Company would meet such tests. A breach of any of these covenants could result in an event of default under the New Credit Facility. If such an event of default occurs, the lenders could elect to declare all amounts borrowed under the New Credit Facility, together with accrued interest, to be immediately due and 12 payable and to terminate all commitments under the New Credit Facility. If the Company were unable to repay all amounts declared due and payable, the lenders could proceed against the collateral granted to them to satisfy the indebtedness and other obligations due and payable. If indebtedness under the New Credit Facility were to be accelerated, there can be no assurance that the assets of the Company would be sufficient to repay in full such indebtedness and the other indebtedness of the Company, including the Senior Notes. See "Description of the Senior Notes--Certain Covenants." EFFECTIVE SUBORDINATION The Senior Notes will be general unsecured obligations of the Company and will be effectively subordinated in right of payment to all secured indebtedness of the Company, including the Company's obligations under the New Credit Facility. The New Credit Facility would likely be secured by a significant amount of the assets of the Company and, therefore, claims of Holders of the Senior Notes will be effectively subordinated to the extent of the value of the assets securing the New Credit Facility. GEOGRAPHIC CONCENTRATION All of the Company's stores are located in the suburbs of Washington, D.C. and thus the performance of the Company will be particularly influenced by developments in this area. Although the Washington, D.C. metropolitan area has experienced relatively stable economic conditions over the past several years, a significant economic downturn in the region could have a material adverse effect on the business, financial condition and results of operations of the Company. COMPETITION The supermarket industry is highly competitive and characterized by narrow profit margins. Shoppers' competitors include national and regional supermarket chains, independent and specialty grocers, drug and convenience stores, and the newer "alternative format" food stores, including warehouse club stores and deep- discount drug stores. Certain of its competitors have greater financial resources than Shoppers. Supermarket chains generally compete on the basis of location, quality of products, service, price, product variety and store condition. Shoppers believes that it will face increased competition in the future from other supermarket chains. To the extent the Company reduces prices to maintain or grow its market share in the face of competition, net income and cash generated from operations could be adversely affected. The Company's ability to remain competitive in its markets depends in part on its ability to remodel and update its stores and open new stores in response to remodelings and new store openings by its competitors, which in turn will require the continued availability of financing. See "Business-- Competition." RELIANCE ON THIRD-PARTY SUPPLIER Shoppers purchases approximately one-half of its grocery inventory from an independent wholesale supplier that provides Shoppers with the benefits of volume purchasing, private label merchandise, warehousing and distribution. The Company's supply contract with its primary supplier expires in December 1997. Although Shoppers believes that the contract will be renewed on comparable or more favorable terms or that it will enter into a comparable or more favorable contract with another wholesaler, there can be no such assurance that this will occur. In addition, the sudden loss of the Company's primary supplier could create a disruption in the Company's sales until arrangements with alternate suppliers could be made. See "Business-- Purchasing, Warehousing and Distribution." LABOR RELATIONS As of August 2, 1997, approximately 4,000 of Shoppers' employees were covered by collective bargaining agreements. The Company's agreement with Local 27 of the United Food and Commercial Workers Union covering 264 employees has been ratified and is expected to be signed. It will expire on September 30, 2001. The Company has entered into a new union contract with Local 400 of the United Food and Commercial Workers Union covering 3,669 employees that would expire in July 2000. Shoppers also has 49 employees at its 13 produce warehouse who are covered by collective bargaining agreements with locals of the Warehouse Employees Union and the Teamsters Union. While Shoppers believes that its relations with its employees are satisfactory, a prolonged labor dispute could have a material adverse effect on the business, financial condition and results of operations of the Company. FRAUDULENT CONVEYANCE RISKS Shoppers used the net proceeds from the sale of the Outstanding Notes to repay the Increasing Rate Notes and to make a $40 million dividend payment and a $10 million loan to Dart when it consummated the RGL Settlement. See "Use of Proceeds." The net proceeds from the sale of the Increasing Rate Notes and $72.8 million of cash and short-term investments of Shoppers were used to finance the Acquisition. In addition, Shoppers paid a $10 million dividend to Dart in May 1997 and may make additional dividends or loans to Dart of up to $25 million from existing short-term investments. In the event of a subsequent bankruptcy proceeding or a lawsuit by or on behalf of creditors of the Company, the incurrence by the Company of the indebtedness evidenced by the Senior Notes would be subject to review under relevant U.S. federal and state fraudulent conveyance statutes ("Fraudulent Conveyance Statutes"). Under these statutes, if at the time the Senior Notes were issued and the proceeds applied, (i) the Company issued the Senior Notes and applied the proceeds with the intent of hindering, delaying or defrauding creditors or (ii) the Company received less than a reasonably equivalent value or fair consideration for issuing the Senior Notes and, after so applying the proceeds, the Company (a) was insolvent or rendered insolvent by reason of such transactions, (b) was engaged in a business or transaction for which its assets constituted unreasonably small capital or (c) intended to incur, or believed that it would incur, debts beyond its ability to pay as they matured (as the foregoing terms are defined in or interpreted under Fraudulent Conveyance Statutes), such court could subordinate all or a part of the Senior Notes to existing and future indebtedness of the Company, recover any payments made on the Senior Notes or take other action detrimental to the Holders, including, under certain circumstances, invalidating the Senior Notes. Shoppers believes that the indebtedness and obligations evidenced by the Senior Notes was incurred, and proceeds of the Senior Notes will be used, for proper purposes and in good faith. Shoppers believes that at the time of, and after giving effect to, the incurrence of the indebtedness and obligations evidenced by the Senior Notes, it was solvent and will have sufficient capital to carry on its business and that it will pay its debts as they mature. No assurance can be given, however, that a court would concur with such beliefs and positions. The measure of insolvency for these purposes will vary depending upon the law of the jurisdiction being applied. Generally, a company will be considered insolvent for these purposes if the company is unable to pay its debts as they become due in the usual course of its business or the sum of the company's debts is greater than all the company's property at a fair valuation or if the present fair saleable value of the company's assets is less than the amount that will be required to pay its probable liability on its existing debts as they become absolute and mature. In rendering its opinion on the validity of the Senior Notes, counsel for the Company will express no opinion as to the effect of Fraudulent Conveyance Statutes or the enforcement of creditors' rights generally. RISKS OF IMPLEMENTING STORE EXPANSION PROGRAM The ability of the Company to implement a store expansion program depends, in part, upon the identification of suitable sites and obtaining access to such sites on reasonable commercial terms. The Company's expansion program is also conditioned on identifying and retaining key personnel to implement this strategy. There can be no assurance that additional suitable locations will be available on reasonable commercial terms in the future. Furthermore, there can be no assurance that the level of sales and profit margins achieved by Shoppers with respect to its existing stores can be duplicated in any newly created or expanded stores. 14 CONTROLLING STOCKHOLDER The Company is an indirect subsidiary of Dart. As a result, Dart controls the Company through its control of the Guarantor, which has the power to elect all of the directors of the Company and, subject to the Indenture, approve any action requiring stockholder approval, including approving a merger of the Company or a sale of substantially all of the assets of the Company. Over the past three years, there has been significant litigation involving the control of Dart. On September 7, 1994, the Board of Directors of Dart established an Executive Committee comprised of Dart's outside directors to conduct the affairs of Dart with respect to matters that were the subject of dispute between the then Chairman of the Board and Chief Executive Officer of Dart, Herbert H. Haft, and the then President and Chief Operating Officer of Dart, Ronald S. Haft. Because these disputes were so extensive, beginning in the fall of 1994, the Executive Committee assumed day-to-day involvement in Dart's management. In April 1996, the Board of Directors of Dart authorized the Executive Committee to conduct the affairs of Dart with respect to matters that are the subject of dispute between Dart and its present Co-Chairman, or in connection with which Dart and its present Co-Chairman have adverse interests, and to continue to oversee the day-to-day management of Dart. Dart has filed three lawsuits against Herbert H. Haft alleging various improper actions by him. On October 6, 1995, Dart and Ronald S. Haft entered into a settlement of litigation initiated by Ronald S. Haft to obtain control of Dart through the exercise of certain disputed stock options, and other related transactions (the "RSH Settlement"). On September 26, 1997, Dart consummated the RGL Settlement pursuant to which Dart resolved certain disputes with Robert M. Haft, Gloria G. Haft and Linda G. Haft concerning control of Dart. The RSH Settlement transactions are subject to legal challenge and, through such litigation, Herbert H. Haft seeks control of Dart. If he succeeds in litigation to obtain control of Dart (in excess of 35% of the voting stock of Dart), it would constitute a Change in Control under the Indenture permitting the Holders, subject to certain conditions, to require the Company to repurchase any or all of the Senior Notes at a price equal to 101% of the principal amount thereof, plus any accrued and unpaid interest to the date of repurchase. There can be no assurance that the Company will have sufficient funds available to purchase all of the outstanding Senior Notes were they to be tendered in response to a Change in Control. A Change in Control resulting from the Haft litigation may make it more difficult for the Company to obtain funds through a refinancing for such purpose. See "Description of the Senior Notes--Change in Control." In connection with the legal challenges to the RSH Settlement, on December 6, 1995, the Delaware Court of Chancery entered a Standstill Order (the "Standstill Order"), which restricts certain actions by Dart. Without further order of the court, Dart may not, among other things, (i) change the current composition of the Board of Directors of Dart or any of its subsidiaries or (ii) issue any additional securities of Dart or any of its subsidiaries. In addition, without first giving certain litigants not less than seven days' written notice, Dart may not take any extraordinary actions, including but not limited to actions that would result in (a) the liquidation of Dart or any of its subsidiaries or (b) the sale of any major subsidiary of Dart. For purposes of the Standstill Order, the Company is a "subsidiary" of Dart and the phrase "extraordinary actions" means any transaction, contract or agreement, the value of which exceeds $3 million. Investors wishing additional information regarding these matters are directed to the public filings made by Dart with the Commission. On October 17, 1997, Dart entered into an agreement with Herbert H. Haft to settle his claims to control of Dart and other litigation pending between him and Dart. Closing of the settlement between Dart and Herbert H. Haft is subject to final and non-appealable action by the Delaware Court of Chancery or the Delaware Supreme Court approving all of the terms of the settlement, terminating certain putative derivative actions pending with respect to Dart in the Delaware Court of Chancery, and approving the RSH Settlement and a supplemental settlement between Dart and Ronald S. Haft. There can be no assurance as to whether court approval of the settlements will be obtained or whether the closing of the settlement between Dart and Herbert H. Haft will occur. 15 SECURITY FOR THE GUARANTEE The Guarantee is secured by a first priority security interest in the shares of capital stock of Shoppers owned by the Guarantor. The Guarantor was organized in January 1997 and has no assets or operations other than holding 100% of the issued and outstanding shares of capital stock of Shoppers. There is no existing market for the capital stock of Shoppers. Further, there can be no assurance that any proceeds could be realized from a sale of such capital stock in the event of foreclosure by the Trustee. Depending on the outcome of litigation regarding certain claimed options and co-investment rights, and the legal challenges to the RSH Settlement, Dart's indirect ownership, and the Guarantor's direct ownership, of the Company could be reduced to as low as 80%. In 1988, Dart purchased 50% of the outstanding shares of capital stock of Shoppers from members of the Herman family. Dart was the record owner of this interest in Shoppers until February 6, 1996. Also in 1988, Dart/SFW Corp. was formed with the apparent intent that Dart would hold 80 of Dart/SFW Corp.'s 100 authorized shares of capital stock. However, Dart/SFW Corp.'s organizational documents are incomplete. Dart/SFW Corp. purportedly granted options to purchase the other 20 shares of its capital stock to members of the Haft family. Though some of Dart's periodic reports filed with the Commission have stated that Dart transferred its 50% interest in Shoppers to Dart/SFW Corp., there is no record that such a transfer occurred. On February 6, 1997, Dart and Dart/SFW Corp. each transferred their interests in Dart's ownership of Shoppers to the Guarantor in exchange for the Guarantor's stock. In 1995, Ronald S. Haft relinquished his claimed ownership of the purported options to purchase up to five shares of Dart/SFW Corp.'s capital stock as part of the RSH Settlement, but that relinquishment is subject to potential rescission if certain pending legal challenges to the validity of that settlement are successful. On September 26, 1997, pursuant to the RGL Settlement, Robert M. Haft, Gloria G. Haft and Linda G. Haft relinquished their claimed ownership of purported options to purchase up to 15 shares of Dart/SFW Corp.'s capital stock. That relinquishment may be subject to rescission if legal challenges to the validity of the RGL Settlement are brought and are successful. Whether or not it is determined that Dart/SFW Corp. received Dart's 50% interest in Shoppers or that members of the Haft family did not receive valid options to purchase shares of Dart/SFW Corp., members of the Haft family potentially could claim interests in up to 20% of the Guarantor or of the Guarantor's equity interest in Shoppers. No assurance can be given as to the outcome of these legal disputes and uncertainties. See "--Controlling Stockholder." POSSIBLE CHANGE IN CONTROL Depending on the outcome or settlement of the litigation referred to above, one or a group of Haft family members may have power to vote in excess of 35% of the voting stock of Dart. In such event, a Change in Control will have occurred under the Indenture. See "Description of Senior Notes--Change in Control." There can be no assurance that the Company will have sufficient funds available to purchase the outstanding Senior Notes were they to be tendered in response to a Change in Control. It is also possible that the outcome of such litigation or settlements thereof could result in significant ownership of the voting stock of Dart by one or more of the Haft family members, although less than the 35% threshold required for Change in Control. GOVERNMENT REGULATION Shoppers is subject to regulation by a variety of governmental agencies, including, but not limited to, the U.S. Food and Drug Administration, the U.S. Department of Agriculture and state and local health departments and other agencies, including those regulating the sale of beer and wine. 16 ENVIRONMENTAL MATTERS Shoppers is subject to federal, state and local laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes, and (ii) impose liability for the costs of cleaning up, and certain damages resulting from, sites of past spills, disposals or other releases of hazardous materials. LACK OF A PUBLIC MARKET FOR THE EXCHANGE NOTES There is no existing market for the Exchange Notes. There can be no assurance of the liquidity of any markets that may develop for the Exchange Notes, the ability of Holders of the Exchange Notes to sell their Exchange Notes, or the price at which Holders would be able to sell their Exchange Notes. Future trading prices of the Exchange Notes will depend on many factors, including prevailing interest rates, the Company's operating results and the market for similar securities. No assurance can be given as to the liquidity of the trading market for the Exchange Notes or that an active public market for the Exchange Notes will develop or, if developed, will continue. If an active public market does not develop or is not maintained, the market price and liquidity of the Exchange Notes may be adversely affected. The Company does not intend to apply for a listing of the Exchange Notes offered hereby on any securities exchange or on a securities quotation services. 17 THE EXCHANGE OFFER PURPOSE OF THE EXCHANGE OFFER The Exchange Offer is being made by the Company to satisfy certain of its obligations under the Registration Rights Agreement. The Registration Rights Agreement requires the Company to use its best efforts to (i) file with the Commission a registration statement (the "Exchange Offer Registration Statement") under the Securities Act with respect to the Exchange Notes within 90 days after the issuance of the Outstanding Notes (the "Issue Date"), (ii) use its best efforts to cause the Exchange Offer Registration Statement to become effective within 180 days after the Issue Date, and (iii) keep the Exchange Offer open for acceptance for not less than 45 days (or longer if required by applicable law) after the date that notice of the Exchange Offer is mailed to Holders of the Outstanding Notes. In the event that the Company fails to satisfy these or certain other of its obligations under the Registration Rights Agreement, the interest rate on the Outstanding Notes will be increased 0.5% per annum and shall thereafter increase by an additional 0.5% per annum at the beginning of each subsequent 90-day period until the Exchange Offer is consummated; provided however, that the additional interest rate on the Outstanding Notes may not exceed at any one time in the aggregate 1.50% per annum; and provided further, upon the effectiveness of the Exchange Offer Registration Statement, additional interest on the Outstanding Notes as described in this sentence shall cease to accrue. TERMS OF THE EXCHANGE OFFER The Company hereby offers to exchange, upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal (which together constitute the Exchange Offer), Exchange Notes for an equal principal amount of Outstanding Notes. The terms of the Exchange Notes are identical in all material respects to those of the Outstanding Notes, except for certain transfer restrictions and registration rights relating to the Outstanding Notes. The Exchange Notes will be entitled to the benefits of the Indenture. See "Description of the Senior Notes." The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Outstanding Notes being tendered or accepted for exchange. As of the date of this Prospectus, $200 million aggregate principal amount of Senior Notes is outstanding. Outstanding Notes tendered in the Exchange Offer must be in denominations of principal amount of $1,000 or any integral multiple thereof. Based on Exxon Capital Holdings Corporation (available May 13, 1988), Morgan Stanley & Co. Incorporated (available June 15, 1991), Shearman & Sterling (available July 2, 1995), and certain other interpretive letters issued by the staff of the Commission to third parties in unrelated transactions, Holders of Outstanding Notes (other than any Holder who is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) who exchange their Outstanding Notes for Exchange Notes pursuant to the Exchange Offer generally may offer such Exchange Notes for resale, resell such Exchange Notes and otherwise transfer such Exchange Notes without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Outstanding Notes are acquired in the ordinary course of the Holders' business and such Holders are not participating in, and have no arrangement or understanding with any person to participate in, a distribution of such Exchange Notes. Each broker-dealer that receives Exchange Notes for its own account in exchange for Outstanding Notes, where such Outstanding Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. See "Plan of Distribution." In addition, to comply with the securities laws of certain jurisdictions, if applicable, the Exchange Notes may not be offered or sold unless they have been registered or qualified for sale in such jurisdiction or an exemption from registration or qualification is available and complied with. The Company has agreed, pursuant to the Registration Rights Agreement and subject to certain specified limitations therein, to register or qualify the Exchange Notes for offer or sale under the securities or blue sky laws of such jurisdictions as any Holders of the Exchange Notes request in writing. If a Holder of Outstanding Notes does not exchange such Outstanding Notes for Exchange Notes 18 pursuant to the Exchange Offer, such Outstanding Notes will continue to be subject to the restrictions on transfer contained in the legend thereon. In general, the Outstanding Notes may not be offered or sold unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. EXPIRATION DATE; EXTENSIONS; TERMINATION; AMENDMENTS The Exchange Offer expires on the Expiration Date. The term "Expiration Date" means 5:00 p.m., New York City time, on , 1998 unless the Company in its sole discretion extends the period during which the Exchange Offer is open, in which event the term "Expiration Date" means the latest time and date on which the Exchange Offer, as so extended by the Company, expires. The Expiration Date will not be extended beyond the 225th day after the date of the original issuance of the Senior Notes. The Company expressly reserves the right to extend the Exchange Offer at any time and from time to time prior to the Expiration Date by giving written notice to Norwest Bank Minnesota, National Association (the "Exchange Agent") and by public announcement communicated by no later than 9:00 a.m. on the next business day following the previously scheduled Expiration Date, unless otherwise required by applicable law or regulation, by making a release to the Dow Jones News Service. During any extension of the Exchange Offer, all Outstanding Notes previously tendered pursuant to the Exchange Offer will remain subject to the Exchange Offer and may be accepted for exchange by the Company. Any Outstanding Notes not accepted for exchange for any reason will be returned without expense to the tendering holder thereof as promptly as practicable after expiration or termination of the Exchange Offer. The initial "Exchange Date" will be the third business day following the Expiration Date. The Company expressly reserves the right to (i) terminate the Exchange Offer and not accept for exchange any Outstanding Notes if any of the events set forth below under "--Conditions to the Exchange Offer" shall have occurred and shall not have been waived by the Company and (ii) amend the terms of the Exchange Offer in any manner, whether before or after any tender of the Outstanding Notes. If any such termination or amendment occurs, the Company will notify the Exchange Agent in writing and will either issue a press release or give written notice to the Holders of the Outstanding Notes as promptly as practicable. Unless the Company terminates the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date, the Company will exchange the Exchange Notes for the Outstanding Notes on the Exchange Date. This Prospectus and the related Letter of Transmittal and other relevant materials will be mailed by the Company to record Holders of Outstanding Notes and will be furnished to brokers, banks and similar persons whose names, or the names of whose nominees, appear on the lists of Holders for subsequent transmittal to beneficial owners of Outstanding Notes. ACCRUED INTEREST ON THE SENIOR NOTES Interest on the Exchange Notes will accrue from (A) the later of (i) the last interest payment date on which interest was paid on the Outstanding Notes surrendered in exchange therefor or (ii) if the Outstanding Notes are surrendered for exchange on a date in a period which includes the record date for an interest payment date to occur on or after the date of such exchange and as to which interest will be paid, the date of such interest payment date, or (B) if no interest has been paid on the Outstanding Notes, from June 26, 1997. Holders whose Outstanding Notes are accepted for exchange will be deemed to have waived the right to receive any interest accrued on the Outstanding Notes. PROCEDURES FOR TENDERING OUTSTANDING NOTES The tender to the Company of Outstanding Notes by a Holder thereof pursuant to any one of the procedures set forth below will constitute a binding agreement between such Holder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. 19 General Procedures. Except as set forth below, a Holder who wishes to tender Outstanding Notes for exchange pursuant to the Exchange Offer must transmit a properly completed and duly executed Letter of Transmittal or facsimile thereof (all references in this Prospectus to the Letter of Transmittal shall be deemed to include a facsimile thereof), including all other documents required by such Letter of Transmittal, to the Exchange Agent at the address set forth below under "--Exchange Agent" on or prior to the Expiration Date. In addition, either (i) certificates for such Outstanding Notes must be received by the Exchange Agent along with the Letter of Transmittal, or (ii) a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Outstanding Notes, if such procedure is available, into the Exchange Agent's Account at DTC (the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry transfer described below, must be received by the Exchange Agent prior to the Expiration Date, or (iii) the Holder must comply with the guaranteed delivery procedures described below. If tendered Outstanding Notes are registered in the name of the signer of the Letter of Transmittal and the Exchange Notes to be issued in exchange therefor are to be issued (and any untendered Outstanding Notes are to be reissued) in the name of the registered Holder, the signature of such signer need not be guaranteed. In any other case, the tendered Exchange Notes must be endorsed or accompanied by written instruments of transfer in form satisfactory to the Company and duly executed by the registered Holder and the signature on the endorsement or instrument of transfer must be guaranteed by a commercial bank or trust company located or having an office or correspondent in the United States or by a member firm of a national securities exchange or of the National Association of Securities Dealers, Inc. or by a participant in a recognized medallion program (any of the foregoing hereinafter referred to as an "Eligible Institution"). If the Exchange Notes and/or Outstanding Notes not exchanged are to be delivered to an address other than that of the registered Holder appearing on the note register for the Outstanding Notes, the signature on the Letter of Transmittal must be guaranteed by an Eligible Institution. A tender will be deemed to have been received as of the date when (i) the tendering Holder's properly completed and duly signed Letter of Transmittal accompanied by the Outstanding Notes is received by the Exchange Agent or (ii) a Notice of Guaranteed Delivery or letter or facsimile transmission to similar effect (as provided above) from an Eligible Institution is received by the Exchange Agent or (iii) the tendering Holder's properly completed and duly signed Letter of Transmittal accompanied by Book-Entry Confirmation is received by the Exchange Agent. Issuances of Exchange Notes in exchange for Outstanding Notes tendered pursuant to a Notice of Guaranteed Delivery or letter or facsimile transmission to similar effect (as provided above) by an Eligible Institution will be made only against deposit of (i) the Letter of Transmittal, (ii) the tendered Outstanding Notes or Book-Entry Confirmation, as the case may be, and (iii) any other required documents. All questions as to the validity, form, eligibility (including time of receipt) and acceptance for exchange of any tender of Outstanding Notes will be determined by the Company, whose determination will be final and binding. The Company reserves the absolute right to reject any or all tenders not in proper form or the acceptances for exchange of which may, in the opinion of counsel to the Company, be unlawful. The Company also reserves the absolute right to waive any of the conditions of the Exchange Offer or any defect or irregularities in tenders of any particular Holder whether or not similar defects or irregularities are waived in the case of other Holders. None of the Company, the Exchange Agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or will incur any liability for failure to give any such notification. The Company's interpretation of the terms and conditions of the Exchange Offer (including the Letter of Transmittal and the instructions thereto) will be final and binding. THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND ALL OTHER DOCUMENTS IS AT THE ELECTION AND RISK OF THE TENDERING HOLDERS, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED AND CONFIRMED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED, AND THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE 20 EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS. Book-Entry Transfer. The Exchange Agent will make a request to establish an account with respect to the Outstanding Notes at the Book-Entry Transfer Facility for purposes of the Exchange Offer within two business days after the date of the Prospectus, and any financial institution that is a participant in the Book-Entry Transfer Facility's systems may make book-entry delivery of Outstanding Notes by causing the Book-Entry Transfer Facility to transfer such Outstanding Notes into the Exchange Agent's account at the Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's procedures for transfer. However, although delivery of Outstanding Notes may be effected through Book-Entry transfer at the Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof, with any required signature guarantees and any other required documents, must, in any case, be transmitted to and received by the Exchange Agent at the address set forth below under "Exchange Agent" on or prior to the Expiration Date or the guaranteed delivery procedures described below must be complied with. Guaranteed Delivery Procedures. If a Holder desires to tender Outstanding Notes pursuant to the Exchange Offer, but time will not permit a Letter of Transmittal, the Outstanding Notes or other required documents to reach the Exchange Agent on or before the Expiration Date, or the procedure for book- entry transfer cannot be completed on a timely basis, a tender may be effected if the Exchange Agent has received at its office a letter or facsimile transmission from a Eligible Institution setting forth the name and address of the tendering Holder, the names in which the Outstanding Notes are registered, the principal amount of the Outstanding Notes being tendered and, if possible, the certificate numbers of the Outstanding Notes to be tendered, and stating that the tender is being made thereby and guaranteeing that within three New York Stock Exchange trading days after the Expiration Date, the Outstanding Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, together with a properly completed and duly executed Letter of Transmittal and any other required documents, will be delivered by such Eligible Institution to the Exchange Agent in accordance with the procedures outlined above. Unless Outstanding Notes being tendered by the above-described method are deposited with the Exchange Agent (including through a Book-Entry Confirmation) within the time period set forth above (accompanied or preceded by a properly completed Letter of Transmittal and any other required documents), the Company may, at its option, reject the tender. Copies of a Notice of Guaranteed Delivery which may be used by Eligible Institutions for the purposes described in this paragraph are available from the Exchange Agent. TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL The Letter of Transmittal contains, among other things, the following terms and conditions, which are part of the Exchange Offer. The party tendering Outstanding Notes for exchange (the "Transferor") thereby exchanges, assigns and transfers the Outstanding Notes to the Company and irrevocably constitutes and appoints the Exchange Agent as the Transferor's agent and attorney-in-fact to cause the Outstanding Notes to be assigned, transferred and exchanged. The Transferor represents and warrants that it has full power and authority to tender, exchange, assign and transfer the Outstanding Notes and to acquire Exchange Notes issuable upon the exchange of such tendered Outstanding Notes and that, when the same are accepted for exchange, the Company will acquire good and unencumbered title to the tendered Outstanding Notes, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim. The Transferor also warrants that it will, upon request, execute and deliver any additional documents deemed by the Exchange Agent or the Company to be necessary 21 or desirable to complete the exchange, assignment and transfer of tendered Outstanding Notes. The Transferor further agrees that acceptance of any tendered Outstanding Notes by the Company and the issuance of Exchange Notes in exchange therefor will constitute performance in full by the Company of its obligations under the Registration Rights Agreement and that the Company will have no further obligations or liabilities thereunder (except in certain limited circumstances). All authority conferred by the Transferor will survive the death, bankruptcy or incapacity of the Transferor and every obligation of the Transferor will be binding upon the heirs, legal representatives, successors, assigns, executors, administrators and trustees in bankruptcy of such Transferor. By tendering Outstanding Notes and executing the Letter of Transmittal, the Transferor certifies that (i) it is not an affiliate of the Company or the Guarantor or, if the Transferor is an affiliate of the Company or the Guarantor, it will comply with the registration and prospectus requirements of the Securities Act to the extent applicable, (ii) the Exchange Notes are being acquired in the ordinary course of business of the person receiving such Exchange Notes, whether or not such person is the Holder, (iii) the Transferor has not entered into an arrangement or understanding with any other person to participate in the distribution of the Exchange Notes, (iv) the Transferor is not a broker-dealer who purchased the Outstanding Notes for resale pursuant to an exemption under the Securities Act, and (v) the Transferor will be able to trade the Exchange Notes acquired in the Exchange Offer without restriction under the Securities Act. Each broker-dealer that receives Exchange Notes for its own account in exchange for Outstanding Notes where such Outstanding Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. See "Plan of Distribution." WITHDRAWAL RIGHTS Outstanding Notes tendered pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. For a withdrawal to be effective, a written letter or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth in the Letter of Transmittal not later than the close of business on the Expiration Date. Any such notice of withdrawal must specify the person named in the Letter of Transmittal as having tendered Outstanding Notes to be withdrawn, the certificate numbers and principal amount of Outstanding Notes to be withdrawn, that such Holder is withdrawing its election to have such Outstanding Notes exchanged and the name of the registered Holder of such Outstanding Notes, and must be signed by the Holder in the same manner as the original signature on the Letter of Transmittal (including any required signature guarantees) or be accompanied by evidence satisfactory to the Company that the person withdrawing the tender has succeeded to the beneficial ownership of the Outstanding Notes being withdrawn. The Exchange Agent will return the properly withdrawn Outstanding Notes promptly following receipt of notice of withdrawal. If Outstanding Notes have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Outstanding Notes and otherwise comply with the procedures of such facility. All questions as to the validity of notices of withdrawals, including time of receipt, will be determined by the Company, and such determination will be final and binding on all parties. Any Outstanding Notes which have been tendered for exchange but which are not exchanged for any reason will be returned to the Holder thereof without cost to such Holder (or, in the case of Outstanding Notes tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described above, such Outstanding Notes will be credited to an account maintained with such Book- Entry Transfer Facility for the Outstanding Notes) as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Outstanding Notes may be retendered by following one of the procedures described under "--Procedures for Tendering Outstanding Notes" above at any time on or prior to the Expiration Date. 22 ACCEPTANCE OF OUTSTANDING NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES Upon the terms and subject to the conditions of the Exchange Offer, the acceptance for exchange of Outstanding Notes validly tendered and not withdrawn and the issuance of the Exchange Notes will be made on the Exchange Date. For purposes of the Exchange Offer, the Company shall be deemed to have accepted for exchange validly tendered Outstanding Notes when, as and if the Company has given written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering Holders of Outstanding Notes for the purposes of receiving Exchange Notes from the Company and causing the Outstanding Notes to be assigned, transferred and exchanged. Upon the terms and subject to the conditions of the Exchange Offer, delivery of Exchange Notes to be issued in exchange for accepted Outstanding Notes will be made by the Exchange Agent promptly after acceptance of the tendered Outstanding Notes. Any Outstanding Notes which have been tendered for exchange but which are not exchanged for any reason will be returned to the Holder thereof without cost to such Holder (or, in the case of Outstanding Notes tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry procedures described above, such Outstanding Notes will be credited to an account maintained by such Holder with such Book-Entry Transfer Facility for the Outstanding Notes) as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other provision of the Exchange Offer, or any extension of the Exchange Offer, the Company will not be required to issue Exchange Notes in exchange for any properly tendered Outstanding Notes not previously accepted and may terminate the Exchange Offer (by oral or written notice to the Exchange Agent and by timely public announcement communicated, unless otherwise required by applicable law or regulation, by making a release to the Dow Jones News Service) or, at its option, modify or otherwise amend the Exchange Offer, if (i) there shall be threatened, instituted or pending any action or proceeding before, or any injunction, order or decree shall have been issued by, any court or governmental agency or other governmental regulatory or administrative agency or commission (a) seeking to restrain or prohibit the making or consummation of the Exchange Offer or any other transaction contemplated by the Exchange Offer, (b) assessing or seeking any damages as a result thereof or (c) resulting in a material delay in the ability of the Company to accept for exchange or exchange some or all of the Outstanding Notes pursuant to the Exchange Offer; or (ii) the Exchange Offer shall violate any applicable law or any applicable interpretation of the staff of the Commission. The foregoing conditions are for the sole benefit of the Company and may be asserted by it with respect to all or any portion of the Exchange Offer regardless of the circumstances (including any action or inaction by the Company) giving rise to such condition or may be waived by the Company in whole or in part at any time or from time to time in its sole discretion. The failure by the Company at any time to exercise any of the foregoing rights will not be deemed a waiver of any such right, and each right will be deemed an ongoing right which may be asserted at any time or from time to time. In addition, the Company has reserved the right, notwithstanding the satisfaction of each of the foregoing conditions, to terminate or amend the Exchange Offer. Any determination by the Company concerning the fulfillment or non- fulfillment of any conditions will be final and binding upon all parties. In addition, the Company will not accept for exchange any Outstanding Notes tendered, and no Exchange Notes will be issued in exchange for any such Outstanding Notes, if at such time any stop order shall be threatened or in effect with respect to the Registration Statement of which this Prospectus constitutes a part or qualification of the Indenture under the Trust Indenture Act of 1939, as amended. 23 EXCHANGE AGENT Norwest Bank Minnesota, National Association has been appointed as the Exchange Agent for the Exchange Offer. Questions relating to the procedure for tendering, as well as requests for additional copies of this Prospectus or the Letter of Transmittal and requests for Notices of Guaranteed Delivery, should be directed to the Exchange Agent addressed as follows: By Registered or Facsimile Transmission By Overnight Delivery: Certified Mail: Number: (612) 667-4927 Norwest Bank Minnesota, N.A. Norwest Bank Minnesota,N.A. (For Eligible 6th Street & Marquette Avenue P.O. Box 1517 Institutions Only) Minneapolis, MN 55479- Minneapolis, MN 55479- Confirm by Telephone: 0113 1517 (612) 667-0252 Attn: Corporate Trust Attn: Corporate Trust Operation Operation For Information Call: (800) 344-5128 Delivery of the Letter of Transmittal to an address other than as set forth above, or transmission of instructions via facsimile other than as set forth above, will not constitute a valid delivery. Norwest Bank Minnesota, National Association also acts as Trustee under the Indenture. SOLICITATION OF TENDERS; EXPENSES The Company has not retained any dealer-manager or similar agent in connection with the Exchange Offer and will not make any payments to brokers, dealers or others for soliciting acceptances of the Exchange Offer. The Company will, however, pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for reasonable out-of-pocket expenses in connection therewith. The expenses to be incurred in connection with the Exchange Offer, including the fees and expenses of the Exchange Agent and printing, accounting and legal fees, will be paid by the Company and are estimated at approximately $300,000. No person has been authorized to give any information or to make any representations in connection with the Exchange Offer other than those contained in this Prospectus. If given or made, such information or representations should not be relied upon as having been authorized by the Company. Neither the delivery of this Prospectus nor any exchange made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the respective dates as of which information is given herein. The Exchange Offer is not being made to (nor will tenders be accepted from or on behalf of) Holders of Outstanding Notes in any jurisdiction in which the making of the Exchange Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. However, the Company may, at its discretion, take such action as it may deem necessary to make the Exchange Offer in any such jurisdiction and extend the Exchange Offer to Holders of Outstanding Notes in such jurisdiction. In any jurisdiction the securities laws or blue sky laws of which require the Exchange Offer to be made by a licensed broker or dealer, the Exchange Offer is being made on behalf of the Company by one or more registered brokers or dealers which are licensed under the laws of such jurisdiction. APPRAISAL RIGHTS Holders of Outstanding Notes will not have dissenters' rights or appraisal rights in connection with the Exchange Offer. ACCOUNTING TREATMENT The Exchange Notes will be recorded at the carrying value of the Outstanding Notes as reflected in the Company's accounting records on the date of the exchange. Accordingly, no gain or loss for accounting purposes will be recognized by the Company upon the exchange of Outstanding Notes for Exchange Notes. Expenses 24 incurred in connection with the issuance of the Exchange Notes will be amortized over the term of the Exchange Notes. TRANSFER TAXES Holders who tender their Outstanding Notes for exchange will not be obligated to pay any transfer taxes in connection therewith except that Holders who instruct the Company to register Exchange Notes in the name of, or request Outstanding Notes not tendered or not accepted in the Exchange Offer be returned to, a person other than the registered tendering Holder will be responsible for the payment of any applicable transfer tax thereon. FEDERAL INCOME TAX CONSEQUENCES Holders of the Outstanding Notes contemplating acceptance of the Exchange Offer should consult their own tax advisers with respect to their particular circumstances and with respect to the effects of state, local or foreign tax laws to which they may be subject. The following discussion is based upon the provisions of the Internal Revenue Code of 1986, as amended, U.S. Treasury regulations, rulings and judicial decisions, in each case as in effect on the date of this Prospectus, all of which are subject to change. An exchange of Outstanding Notes for Exchange Notes pursuant to the Exchange Offer should be deemed not to be a sale, exchange or other taxable event for federal income tax purposes because the exchange Senior Notes should be deemed not to differ materially in kind or extent from the Outstanding Notes. As a result, no material federal income tax consequences should result from an exchange of Outstanding Notes for Exchange Notes pursuant to the Exchange Offer. For federal income tax purposes, an Exchange Note received by a beneficial owner of an Outstanding Note should be treated as a continuation of the Outstanding Note in the hands of such owner. See "Certain Income Tax Considerations." CONSEQUENCES FOR FAILURE TO EXCHANGE Holders of Outstanding Notes who do not exchange Outstanding Notes for Exchange Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Outstanding Notes as set forth in the legend thereon as a consequence of the offer or sale of the Outstanding Notes pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Outstanding Notes may not be offered or sold unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not currently anticipate that it will register the Outstanding Notes under the Securities Act. Upon consummation of the Exchange Offer, due to the restrictions on transfer of the Outstanding Notes and the absence of such restrictions applicable to the Exchange Notes, it is likely that the market, if any, for Outstanding Notes will be relatively less liquid than the market for Exchange Notes. Consequently, Holders of Outstanding Notes who do not participate in the Exchange Offer could experience significant diminution in the value of their Outstanding Notes, compared to the value of the Exchange Notes. 25 USE OF PROCEEDS The Company will not receive any cash proceeds from the issuance of Exchange Notes offered hereby, the terms of which are identical in all material respects to those of the Outstanding Notes, except for certain transfer restrictions and registration rights relating to the Outstanding Notes. The Outstanding Notes surrendered in exchange for the Exchange Notes will be cancelled and cannot be reissued. The issuance of the Exchange Notes will not result in any change in the aggregate indebtedness of the Company. The net proceeds from the sale of the Outstanding Notes was approximately $193.5 million. The Company used $143.3 million of the net proceeds to repay the Increasing Rate Notes due 2000, including approximately $3.3 million of accrued and unpaid interest through the date of redemption (July 25, 1997). The net proceeds from the sale of the Increasing Rate Notes were used to partially finance the Acquisition. The interest rate on the Increasing Rate Notes was initially 10% per annum. On September 26, 1997, the Company used $50.0 million of the net proceeds from the sale of the Outstanding Notes to make a $40.0 million dividend payment and a $10.0 million loan to Dart to fund the RGL Settlement. 26 PRO FORMA CONSOLIDATED CAPITALIZATION The following table sets forth the unaudited consolidated pro forma cash, cash equivalents and short-term investments and capitalization of the Company as of August 2, 1997 and as adjusted to give effect to (i) the application of net proceeds from the sale of the Outstanding Notes to make a payment of $50 million ($40 million dividend and $10 million loan) to Dart to fund a Settlement with certain of Dart's stockholders and (ii) the use of $25 million of existing cash, cash equivalents and short-term investments to extend a loan to Dart.
AUGUST 2, 1997 -------------------------------- ACTUAL ADJUSTMENTS PRO FORMA -------- ----------- --------- (DOLLARS IN THOUSANDS) (UNAUDITED) LIQUID ASSETS: Cash and cash equivalents.................... $ 14,058 (4,769) $ 9,289 Marketable debt securities................... 20,013 (20,013) -- Restricted Proceeds.......................... 50,218 (50,218) -- -------- ------- -------- Total liquid assets......................... $ 84,289 (75,000)(a) $ 9,289 ======== ======= ======== LONG-TERM DEBT: 9 3/4% Senior Notes due 2000................. $200,000 -- $200,000 Capital lease obligation..................... 11,549 -- 11,549 -------- ------- -------- Total long-term debt........................ 211,549 -- 211,549 -------- ------- -------- STOCKHOLDERS' EQUITY: Class A Common Stock......................... 117 -- 117 Class B Common Stock......................... 50 -- 50 Retained earnings............................ 45,638 (40,000)(b) 5,638 -------- ------- -------- Total Stockholders' Equity.................. 45,805 (40,000) 5,805 -------- ------- -------- Total capitalization........................ $257,354 (40,000) $217,354 ======== ======= ========
- -------- (a) Reflects the following pro forma adjustments (dollars, in thousands): Dividend to Dart from Restricted Proceeds........................... $40,000 Loan to Dart from Restricted Proceeds............................... 10,000 Loan to Dart from existing cash, cash equivalents and short-term investments........................................................ 25,000 ------- Decrease in cash, cash equivalents and short-term investments..... $75,000 =======
(b) Reflects $40 million dividend paid to Dart on September 26, 1997 in connection with the RGL Settlement. 27 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma consolidated financial statements of the Company for the 52 weeks and the 31 weeks ended February 1, 1997 and for the 26 weeks ended August 2, 1997, give effect to (i) the sale of the Outstanding Notes and the application of the net proceeds therefrom to repay the Increasing Rate Notes and to make a payment of $50 million ($40 million dividend and $10 million loan) to Dart to fund the RGL Settlement, (ii) the use of $25 million of existing cash, cash equivalents and short-term investments to extend a loan to Dart and (iii) the push-down accounting treatment for the Acquisition by Dart, as though such transactions occurred on February 4, 1996 with respect to the pro forma operating data and as of August 2, 1997 with respect to pro forma balance sheet data. These unaudited pro forma consolidated financial statements are based upon management's estimate of the effects of the transactions noted above. The unaudited pro forma financial statements are not necessarily indicative of either future results of operations or of results that might have been achieved if the transactions had been consummated as of the indicated dates. The unaudited pro forma financial statements should be read in conjunction with the historical consolidated financial statements of Shoppers and the notes thereto that appear elsewhere in this Prospectus. UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS
52 WEEKS ENDED 31 WEEKS ENDED 26 WEEKS ENDED FEBRUARY 1, 1997 FEBRUARY 1, 1997 AUGUST 2, 1997 ----------------------------- ----------------------------- -------------------------- PRO PRO PRO ACTUAL ADJ. FORMA ACTUAL ADJ. FORMA ACTUAL ADJ. FORMA -------- ------- -------- -------- ------- -------- -------- ---- -------- Sales................... $850,875 -- $850,875 $511,025 -- $511,025 $419,524 -- $419,524 Cost of sales........... 659,929 -- 659,929 398,129 -- 398,129 320,364 -- 320,364 -------- ------- -------- -------- ------- -------- -------- ---- -------- Gross profit............ 190,946 -- 190,946 112,896 -- 112,896 99,160 -- 99,160 Selling and administrative expenses............... 154,594 -- 154,594 94,304 -- 94,304 76,677 -- 76,677 Depreciation and amortization........... 8,720 (3,205)(a) 5,515 4,573 (1,277)(a) 3,296 2,910 -- 2,910 Amortization of goodwill............... -- 3,721 (b) 3,721 -- 2,171 (b) 2,171 1,861 -- 1,861 Amortization of lease rights................. -- 616 (b) 616 -- 360 (b) 360 308 -- 308 -------- ------- -------- -------- ------- -------- -------- ---- -------- Operating income........ 27,632 (1,132) 26,500 14,019 (1,254) 12,765 17,404 -- 17,404 Interest income......... 5,985 (2,572)(c) 3,413 3,526 (1,492)(c) 2,034 1,797 (91)(c) 1,706 Interest expense........ 1,645 20,475 (d) 22,120 710 11,944 (d) 12,654 10,392 652 (d) 11,044 -------- ------- -------- -------- ------- -------- -------- ---- -------- Income before income taxes.................. 31,972 (24,179) 7,793 16,835 (14,690) 2,145 8,809 (743) 8,066 Income taxes............ 11,409 (7,276)(e) 4,133 6,380 (4,939)(e) 1,441 3,851 (178)(e) 3,673 -------- ------- -------- -------- ------- -------- -------- ---- -------- Net income before extraordinary item and the cumulative effect of a change of accounting principle... $ 20,563 (16,903) $ 3,660 $ 10,455 (9,751) $ 704 $ 4,958 (565) $ 4,393 ======== ======= ======== ======== ======= ======== ======== ==== ========
(see footnotes on the following page) 28 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS (a) Reflects the pro forma depreciation adjustments for the new basis of the property and equipment and the use of the straight-line depreciation method as of the Acquisition. (b) Reflects the amortization of excess purchase price over the net book value of assets acquired arising from the Acquisition, on a straight-line basis, over a 40 year period and the amortization of lease rights, arising from the Acquisition on a straight-line basis over the life of the leases. (c) The changes in interest income are attributable to decreases of $5.9 million, $3.5 million and $1.8 million for the 52 weeks and 31 weeks ended February 1, 1997 and the 26 weeks ended August 2, 1997, respectively, as a result of the reduction in cash, cash equivalents and short-term investments from repayment of the bridge financing for the Acquisition and dividend payments to Dart offset by interest income of $3.4 million, $2.0 million and $1.7 million for the 52 weeks and 31 weeks ended February 1, 1997 and the 26 weeks ended August 2, 1997, respectively, related to a $35 million loan from Shoppers to Dart. On September 26, 1997, Shoppers made a $10 million loan to Dart, which loan is evidenced by a promissory note, bears interest at a rate of 9 3/4% per annum and is due no later than June 15, 2004. As authorized by its board of directors, Dart may borrow an additional $25 million from the Company, in which event, the terms and conditions of such loan will be the same as the $10 million loan. (d) The Senior Notes have a fixed interest rate of 9.75%. Deferred financing costs ($6.8 million) are amortized over seven years on a straight-line basis.
52 WEEKS ENDED 31 WEEKS ENDED 26 WEEKS ENDED FEBRUARY 1, 1997 FEBRUARY 1, 1997 AUGUST 2, 1997 ---------------- ---------------- -------------- (DOLLARS IN THOUSANDS) Historical interest expense.................. $ 1,645 $ 710 $ 9,448 Historical amortization of deferred financing....... -- -- 944 Add: Interest on Senior Notes............... 19,500 11,375 9,750 Amortization of new financing costs..... 975 569 486 Deduct: Interest on Increasing Rate Notes.......... -- -- (6,582) Interest on Senior Notes from June 26, 1997.. -- -- (2,058) Historical amortization of deferred financing.. -- -- (944) ------- ------- ------- Pro forma interest expense.................. $22,120 $12,654 $11,044 ======= ======= =======
The pro forma income statements for the periods presented do not reflect deferred financing costs of approximately $6 million related to the Increasing Rate Notes which was written off as an extraordinary item upon consummation of the sale of the Outstanding Notes. (e) Reflects income taxes at a combined statutory rate net of the tax effect of non-deductible goodwill. 29 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF AUGUST 2, 1997 --------------------------------- ACTUAL ADJUSTMENTS PRO FORMA -------- ----------- --------- (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents.................. $ 14,058 (4,769) $ 9,289 Marketable debt securities................. 20,013 (20,013) -- Restricted proceeds........................ 50,218 (50,218) -- Accounts receivable........................ 6,735 -- 6,735 Merchandise inventories.................... 28,484 -- 28,484 Prepaid expenses........................... 1,549 -- 1,549 Due from affiliate......................... 522 -- 522 -------- ------- -------- Total current assets..................... 121,579 (75,000)(a) 46,579 Property and equipment at cost: Land and buildings......................... 7,503 -- 7,503 Store and warehouse equipment.............. 60,992 -- 60,992 Office and automotive equipment............ 2,055 -- 2,055 Leasehold improvements..................... 3,842 -- 3,842 -------- ------- -------- 74,392 -- 74,392 Accumulated depreciation and amortization.... (35,298) -- (35,298) -------- ------- -------- Net property and equipment................. 39,094 -- 39,094 Deferred financing costs..................... 6,174 -- 6,174 Excess purchase price over net assets acquired.................................... 146,979 -- 146,979 Lease rights................................. 11,996 -- 11,996 Note receivable.............................. -- 35,000 (a) 35,000 Other assets................................. 876 -- 876 -------- ------- -------- Total assets............................. $326,698 (40,000) $286,698 ======== ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................... $ 38,865 -- $ 38,865 Accrued expenses: Salary and benefits........................ 6,645 -- 6,645 Taxes other than income.................... 2,447 -- 2,447 Other...................................... 13,023 -- 13,023 Income taxes payable....................... 518 518 -------- ------- -------- Total current liabilities................ 61,498 -- 61,498 Senior Notes................................. 200,000 -- 200,000 Capital lease obligations.................... 11,549 -- 11,549 Deferred income taxes........................ 4,845 -- 4,845 Other liabilities............................ 3,001 -- 3,001 -------- ------- -------- Total liabilities........................ 280,893 -- 280,893 Stockholders' equity: Class A common stock....................... 117 -- 117 Class B common stock....................... 50 -- 50 Retained earnings.......................... 45,638 (40,000)(b) 5,638 -------- ------- -------- Total stockholders' equity............... 45,805 (40,000) 5,805 -------- ------- -------- Total liabilities and stockholders' equity................................ $326,698 (40,000) $286,698 ======== ======= ========
30 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (a) Reflects the following pro forma adjustments (dollars in thousands): Dividend to Dart from Restricted Proceeds........................... $40,000 Loan to Dart from Restricted Proceeds............................... 10,000 Loan to Dart from existing cash, cash equivalents and short-term investments........................................................ 25,000 ------- Decrease in cash, cash equivalents and short-term investments..... $75,000 =======
(b) Reflects $40 million dividend paid to Dart on September 26, 1997 in connection with the RGL Settlement. 31 SELECTED HISTORICAL FINANCIAL DATA The following table sets forth summary historical financial data of Shoppers as of and for the 52 weeks ended June 27, 1992, the 53 weeks ended July 3, 1993, the 52 weeks ended July 2, 1994, the 52 weeks ended July 1, 1995 and the 52 weeks ended June 29, 1996, which have been derived from the financial statements audited by Arthur Andersen LLP, Shoppers' independent public accountants. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements of Shoppers, together with the related notes thereto, included elsewhere in this Prospectus.
FISCAL YEAR ENDED -------------------------------------------- JUNE 27, JULY 3, JULY 2, JULY 1, JUNE 29, 1992 1993 1994 1995 1996 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) OPERATING DATA: Sales........................... $639,920 $718,967 $750,340 $790,842 $835,971 Cost of sales................... 506,194 562,461 593,063 616,521 651,986 -------- -------- -------- -------- -------- Gross profit(a)................. 133,726 156,506 157,277 174,321 183,985 Selling and administrative expenses(b).................... 107,983 124,509 127,643 136,798 149,570 Depreciation and amortization(c)................ 10,861 12,045 10,785 8,529 8,913 Restructuring charges(d)........ -- 1,012 -- -- -- -------- -------- -------- -------- -------- Operating income................ 14,882 18,940 18,849 28,994 25,502 Interest income................. 1,638 1,474 2,189 4,682 5,789 Interest expense................ 1,519 1,576 1,426 1,451 1,771 Insurance settlement gain (loss)(e)...................... -- -- 1,360 2,065 (355) Provision for income taxes...... 5,757 7,205 8,043 14,764 10,462 -------- -------- -------- -------- -------- Net income...................... $ 9,244 $ 11,633 $ 12,929 $ 19,526 $ 18,703 -------- -------- -------- -------- -------- Ratio of earnings to fixed charges(f)..................... 4.1x 4.2x 4.3x 6.4x 5.1x OTHER DATA: Stores open at end of period.... 32 35 35 33 34 Capital expenditures............ $ 14,553 $ 6,909 $ 5,112 $ 4,693 $ 7,355 BALANCE SHEET DATA (END OF PERIOD): Cash, cash equivalents and short-term investments......... $ 44,913 $ 56,625 $ 69,789 $ 97,003 $106,640 Working capital deficit(g)...... 19,053 15,715 9,993 15,551 14,364 Total assets.................... 115,315 125,612 140,614 162,003 171,022 Total debt...................... 9,209 9,502 9,742 9,950 10,069 Stockholders' equity............ 51,242 62,875 75,804 95,330 104,033
- -------- (a) Gross profit is net of LIFO expense of $329,000, $436,000, $364,000, $877,000 and $905,000 in the 52 weeks ended June 27, 1992, July 3, 1993 (53 weeks), July 2, 1994, July 1, 1995 and June 29, 1996, respectively. (b) Selling and administrative expenses include a reversal of a prior period expense related to closed stores and remodels of $500,000 for the 52 weeks ended July 1, 1995 and reserves related to closed stores and remodels of $294,000 for the 52 weeks ended June 29, 1996. Selling and administrative expenses also include a $500,000 charge for reserves against a related party receivable for the 52 weeks ended July 3, 1993 and July 1, 1995. (c) In connection with the Acquisition the Company commenced using Dart's method of depreciating property and equipment on a straight-line basis. The following pro forma analysis gives effect to the change in depreciation method, assuming the new depreciation method was applied retroactively. 32
FISCAL YEAR ENDED ----------------------------------------- JUNE 27, JULY 3, JULY 2, JULY 1, JUNE 29, 1992 1993 1994 1995 1996 -------- ------- ------- ------- -------- Pro forma amounts: Net Income........................ $10,606 $13,491 $13,961 $19,170 $18,413 Earning per common share......... $318.18 $404.73 $418.83 $575.10 $552.39 Historical amounts: Net Income........................ $ 9,244 $11,633 $12,929 $19,526 $18,703 Earnings per common share........ $277.32 $348.99 $387.87 $585.78 $561.09
(d) Represents charges associated with the sale of Total Beverage Corp. (e) Represents an insurance settlement relating to one store that incurred significant fire damage in June 1994. (f) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of income before income taxes, plus fixed charges. "Fixed charges" consist of interest expense on all indebtedness including amortization of deferred financing costs and the portion of operating lease rental payments that is representative of the interest factor. (g) For purposes of this presentation, working capital deficit has been defined as working capital less cash, cash equivalents and short-term investments to present prior period comparable balances assuming the use of these liquid assets to fund the Acquisition and for subsequent dividends and loans to Dart. 33 The selected historical financial data as of and for the 31 weeks ended February 3, 1996, the 31 weeks ended February 1, 1997, the 26 weeks ended August 3, 1996 and the 26 weeks ended August 2, 1997 have been derived from unaudited interim consolidated financial statements, which, in the opinion of management, reflect all material adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such data. Results of operations for the 26 weeks ended August 2, 1997 are not necessarily indicative of the results that may be expected for the full year ended January 31, 1998. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements of Shoppers, together with the related notes thereto, included elsewhere in this Prospectus.
31 WEEKS ENDED 26 WEEKS ENDED ----------------------- ------------------- FEBRUARY 3, FEBRUARY 1, AUGUST 3, AUGUST 2, 1996 1997 1996 1997 ----------- ----------- --------- --------- (UNAUDITED) (UNAUDITED) (DOLLARS IN THOUSANDS) OPERATING DATA: Sales............................. $496,121 $511,025 $419,653 $419,524 Cost of sales..................... 390,186 398,129 323,474 320,364 -------- -------- -------- -------- Gross profit(a)................. 105,935 112,896 96,179 99,160 Selling and administrative expenses(b)...................... 89,280 94,304 74,379 76,677 Depreciation and amortization(c).. 4,766 4,573 4,844 5,079 -------- -------- -------- -------- Operating income................ 11,889 14,019 16,956 17,404 Interest income................... 3,330 3,526 3,113 1,797 Interest expense.................. 836 710 1,062 10,392 Insurance settlement (loss)(d).... (355) -- -- -- Provision for income taxes........ 5,433 6,380 6,579 3,851 -------- -------- -------- -------- Income before extraordinary item and cumulative effect of accounting change................ 8,595 10,455 12,428 4,958 Extraordinary loss................ -- -- -- (3,126) Cumulative effect of accounting change, net...................... -- -- -- 1,729 -------- -------- -------- -------- Net income(e)..................... $ 8,595 $ 10,455 $ 12,428 $ 3,561 -------- -------- -------- -------- Ratio of earnings to fixed charges(f)....................... 4.6x 4.9x 6.1x 1.7x OTHER DATA: Stores open at end of period...... 34 34 34 35 Capital expenditures.............. $ 3,205 $ 5,280 $ 4,932 $ 5,861 BALANCE SHEET DATA (END OF PERIOD): Cash, cash equivalents and short- term investments................. $ 98,823 $108,738 $112,079 $ 84,289 Working capital deficit(g)........ 14,906 15,958 18,568 24,208 Total assets...................... 164,348 179,008 177,229 326,698 Total debt........................ 9,965 10,035 10,091 211,549 Stockholders' equity.............. 93,925 104,488 106,351 45,805
- -------- (a) Gross profit is net of LIFO expense of $530,000 in the 31 weeks ended February 3, 1996 and February 1, 1997 and $450,000 in the 26 weeks ended August 3, 1996 and August 2, 1997. (b) Selling and administrative expenses include a charge for closed store and remodels of $294,000 and $850,000 in the 31 weeks ended February 3, 1996 and February 1, 1997, respectively. (c) In connection with the Acquisition the Company commenced using Dart's method of depreciating property and equipment on a straight-line basis. The following pro forma analysis gives effect to the change in depreciation method, assuming the new depreciation method was applied retroactively. 34
31 WEEKS ENDED 26 WEEKS ENDED ----------------------- ------------------- FEBRUARY 3, FEBRUARY 1, AUGUST 3, AUGUST 2, 1996 1997 1996 1997 ----------- ----------- --------- --------- Pro forma amounts: Income before extraordinary item.......................... $ 8,422 $10,186 $12,280 $ 4,958 Earnings per common share..... $252.66 $305.58 $368.40 $148.74 Net Income..................... $ 8,422 $10,186 $12,280 $ 1,832 Earning per common share...... $252.66 $305.58 $368.40 $ 54.96 Historical amounts: Income before extraordinary item.......................... $ 8,595 $10,455 $12,428 $ 4,958 Earnings per common share..... $257.85 $313.65 $372.84 $148.74 Net Income..................... $ 8,595 $10,455 $12,428 $ 3,561 Earnings per common share..... $257.85 $313.65 $372.84 $106.83
(d) Represents an insurance settlement relating to one store that incurred significant damage in June 1994. (e) Net income for the 26 weeks ended August 2, 1997 includes an extraordinary loss of $3,126,000, net of income taxes of $2,150,000, for the write-off of deferred financing costs associated with the Increasing Rate Notes. (f) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of income before income taxes, plus fixed charges. "Fixed charges" consist of interest expense on all indebtedness (including amortization of deferred financing costs) and the portion of operating lease rental payments that is representative of the interest factor. (g) For purposes of this presentation, working capital deficit has been defined as working capital less cash, cash equivalents and short-term investments to present prior period comparable balances assuming the use of these liquid assets to fund the Acquisition and for subsequent dividends and loans to Dart. 35 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis should be read in conjunction with the Consolidated Financial Statements of the Company, together with the related notes thereto, and other information included elsewhere in this Prospectus. For purposes of this discussion and analysis, comparable store sales growth is computed for those stores that operated for both the full periods being compared (including stores that were remodeled or expanded during either period). OUTLOOK Except for historical information, statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations are forward-looking. Actual results may differ materially due to a variety of factors, including the Company's ability to open new stores, the effect of regional economic conditions and the Company's ability to compete in the highly competitive supermarket industry in Greater Washington, D.C. Shoppers believes that it will face increased competition in the future from other supermarket chains and intends to compete aggressively against existing and new competition. Litigation involving the control of Dart could adversely affect the Company's business, financial condition and results of operations. See "Risk Factors--Controlling Stockholder." On December 6, 1995, the Delaware Court of Chancery entered the Standstill Order, which restricts certain actions by Dart. Without further order of the court, Dart may not (i) change its certificate of incorporation or bylaws; (ii) change the current composition of Dart's board of directors or any of its subsidiaries; (iii) change the current Haft family officers of Dart or any of its subsidiaries; or (iv) issue any additional securities of Dart or any of its subsidiaries (except employee stock options issued in the ordinary course of business). In addition, without first giving Herbert H. Haft and certain other litigants not less than seven days' written notice, Dart may not take any extraordinary actions, including but not limited to actions that would result in (a) the liquidation of Dart or any of its subsidiaries, (b) the sale of any major subsidiary of Dart or (c) a disadvantage to any Class B stockholder of Dart through any debt transaction. For purposes of the Standstill Order, the phrase "extraordinary actions" means any transaction, contract or agreement, the value of which exceeds $3 million. RESULTS OF OPERATIONS The following table sets forth the major components of Shoppers' statement of operations expressed as a percentage of sales:
52 WEEKS ENDED 31 WEEKS ENDED 26 WEEKS ENDED --------------------------------------- ------------------------- ----------------------------- JULY 2, 1994 JULY 1, 1995 JUNE 29, 1996 FEB. 3, 1996 FEB. 1, 1997 AUGUST 3, 1996 AUGUST 2, 1997 ------------ ------------ ------------- ------------ ------------ -------------- -------------- Sales................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales........... 79.0 78.0 78.0 78.6 77.9 77.1 76.4 ----- ----- ----- ----- ----- ----- ----- Gross profit............ 21.0 22.0 22.0 21.4 22.1 22.9 23.6 Selling and administration expenses............... 17.0 17.3 17.9 18.0 18.5 17.7 18.3 Depreciation and amortization........... 1.4 1.1 1.1 1.0 0.9 1.2 1.2 ----- ----- ----- ----- ----- ----- ----- Operating income........ 2.5 3.7 3.1 2.4 2.7 4.0 4.1 Interest income......... 0.3 0.6 0.7 0.7 0.7 0.7 0.4 Interest expense........ 0.2 0.2 0.2 0.2 0.1 0.3 2.5 Insurance settlement gain (loss)............ 0.2 0.3 (0.0) (0.1) -- -- -- ----- ----- ----- ----- ----- ----- ----- Income before income taxes.................. 2.8 4.3 3.5 2.8 3.3 4.5 2.1 Provision for income taxes.................. 1.1 1.9 1.3 1.1 1.2 1.6 .9 ----- ----- ----- ----- ----- ----- ----- Income before extraordinary item and cumulative effect of accounting change...... 1.7 2.5 2.2 1.7 2.0 3.0 1.2 ===== ===== ===== ===== ===== ===== =====
36 26 WEEKS ENDED AUGUST 2, 1997 COMPARED WITH THE 26 WEEKS ENDED AUGUST 3, 1996 Sales. Sales decreased by $0.2 million, from $419.7 million during the 26 weeks ended August 3, 1996 to $419.5 million during the 26 weeks ended August 2, 1997. Comparable store sales decreased 0.5% during the 26 weeks ended August 2, 1997. The decrease was the result of extremely competitive market conditions affecting Greater Washington, D.C., including the expansion of other supermarket chains into this market. Gross Profit. Gross profit increased by $3.0 million (3.1%), from $96.2 million during the 26 weeks ended August 3, 1996 to $99.2 million during the 26 weeks ended August 2, 1997. Gross profit, as a percentage of sales, increased to 23.6% during the 26 weeks ended August 2, 1997 from 22.9% during the 26 weeks ended August 3, 1996. The increase was primarily due to a more proactive pricing strategy on selected items, to a reduction in the number of items which are offered at special discounts on a weekly basis in stores, and to a higher allowance income achieved through increased vendor participation. Selling and Administrative Expenses. Selling and Administrative Expenses ("S&A") increased by $2.3 million (3.1%), from $74.4 million during the 26 weeks ended August 3, 1996 to $76.7 million during the 26 weeks ended August 2, 1997. S&A, as a percentage of sales, increased from 17.7% during the 26 weeks ended August 3, 1996 to 18.3% during the 26 weeks ended August 2, 1997. The increase was primarily attributable to increased payroll costs associated with negotiated union rates and store remodeling, to expenses associated with a new store opened in July 1997 and a new store opened in August 1997. Depreciation and Amortization. Depreciation and Amortization ("D&A") increased $0.3 million from $4.8 million during the 26 weeks ended August 3, 1996 to $5.1 million during the 26 weeks ended August 2, 1997. The increase was primarily due to additional depreciation and amortization associated with goodwill and lease rights, as well as with fixed assets purchased for the new store opened in July 1997 offset by a reduction of assets becoming fully depreciated in 1997 and 1996. In connection with the Acquisition, the Company commenced using Dart's method of depreciating property and equipment on a straight-line basis. Prior to the Acquisition, the Company used accelerated methods. The cumulative effect of this change in accounting principle has been recorded in the interim financial statements for the six months ended August 2, 1997. Depreciation expense for the 26 weeks ended August 3, 1996 would have been $0.1 million more using the straight-line basis. Operating Income. Operating income was $17.4 million for the 26 weeks ended August 2, 1997 compared to $17.0 million during the same period in the prior year. The increase was attributed primarily to the higher gross profits. Interest Income and Expense. Interest income decreased $1.3 million during the 26 weeks ended August 2, 1997 compared to the 26 weeks ended August 3, 1996 due to a reduction of funds available for short-term investing as a result of the repayment of the bridge financing associated with the Acquisition. Interest expense increased $9.3 million from $1.1 million during the 26 weeks ended August 3, 1996 to $10.4 million during the 26 weeks ended August 2, 1997 as a result of interest paid on the Increasing Rate Notes, interest accrued on the Senior Notes and the amortization of financing costs. Income Taxes. The effective income tax rate for the 26 weeks ended August 2, 1997 was 43.7% compared to 34.6% for the 26 weeks ended August 3, 1996. The increase was primarily attributable to nondeductible amortization of Acquisition-related goodwill. Net income. Net income decreased by $10.6 million, from $12.4 million during the 26 weeks ended August 3, 1996 to $1.8 million during the 26 weeks ended August 2, 1997. These decreases were primarily attributable to increased interest expense associated with the Company's indebtedness and an extraordinary loss of $3.1 million, representing the write-off of the unamortized portion of the financing costs associated with the Increasing Rate Notes, net of taxes of approximately $2.2 million. 31 WEEKS ENDED FEBRUARY 1, 1997 COMPARED WITH THE 31 WEEKS ENDED FEBRUARY 3, 1996 Sales. Sales increased $14.9 million (3.0%), from $496.1 million during the 31 weeks ended February 3, 1996 to $511.0 million during the 31 weeks ended February 1, 1997. The increase resulted primarily from sales at a new store that was open for the entire 31 weeks ended February 1, 1997 and opened for 19 of the 31 weeks 37 in the prior year. Comparable store sales growth of 0.8% was due primarily to sales increases at two remodeled stores that were partially offset by a sales reduction in a store affected by the new Shoppers Club and the stores affected by the remodels. Gross Profit. Gross profit increased $7.0 million (6.6%), from $105.9 million during the 31 weeks ended February 3, 1996 to $112.9 million during the 31 weeks ended February 1, 1997. The increase was due to the increase in sales and an increase in gross profit as a percentage of sales from 21.4% for the 31 weeks ended February 3, 1996 to 22.1% for the 31 weeks ended February 1, 1997. The percentage increase in the gross profit is attributed primarily to the slightly higher gross profits achieved in the grocery, meat and produce departments. Selling and Administrative Expenses. S&A increased $5.0 million (5.6%), from $89.3 million during the 31 weeks ended February 3, 1996 to $94.3 million during the 31 weeks ended February 1, 1997. S&A increased as a percentage of sales from 18.0% of sales during the 31 weeks ended February 3, 1996 to 18.5% of sales during the 31 weeks ended February 1, 1997. The increase was primarily attributable to increases in payroll costs associated with negotiated union rates and store remodelings, closed store reserves, insurance reserves, advertising costs and credit and debit card fees due to a larger portion of such sales. Depreciation and Amortization. D&A decreased from $4.8 million during the 31 weeks ended February 3, 1996 to $4.6 million during the 31 weeks ended February 1, 1997. D&A decreased from 1.0% of sales during the 31 weeks ended February 3, 1996 to 0.9% of sales during the 31 weeks ended February 1, 1997. Operating Income. Operating income for the 31 weeks ended February 1, 1997 increased $2.1 million (17.9%), from the 31 weeks ended February 3, 1996 as a result of the factors discussed above. Interest Income and Expense. Interest income increased from $3.3 million during the 31 weeks ended February 3, 1996 to $3.5 million during the 31 weeks ended February 1, 1997. Interest income increased as a result of increased funds available for short-term investments. Interest expense decreased from $0.8 million during the 31 weeks ended February 3, 1996 to $0.7 million during the 31 weeks ended February 1, 1997. Net Income. Net income increased to $10.5 million during the 31 weeks ended February 1, 1997 from net income of $8.6 million during the 31 weeks ended February 3, 1996. Income taxes were recorded at an effective rate of 37.9% during the 31 weeks ended February 1, 1997 compared to 38.7% during the 31 weeks ended February 3, 1996. 52 WEEKS ENDED JUNE 29, 1996 COMPARED WITH THE 52 WEEKS ENDED JULY 1, 1995 Sales. Sales increased $45.2 million (5.7%), from $790.8 million in fiscal 1995 to $836.0 million in fiscal 1996. The increase resulted primarily from a 1.7% increase in comparable store sales, the opening of one new store in fiscal 1996 and the restoration of one store which was temporarily closed due to fire damage. The increase in comparable store sales growth was primarily attributable to sales increases during the severe winter conditions in Greater Washington, D.C. Gross Profit. Gross profit increased $9.7 million (5.6%), from $174.3 million in fiscal 1995 to $184.0 million in fiscal 1996. Gross profit as a percentage of sales remained unchanged at 22.0%. Selling and Administrative Expenses. S&A increased $12.8 million (9.4%), from $136.8 million in fiscal 1995 to $149.6 million in fiscal 1996. S&A increased from 17.3% of sales in fiscal 1995 to 17.9% of sales in fiscal 1996. S&A increased as a percentage of sales in fiscal 1996 primarily due to increased payroll and payroll benefit costs. Depreciation and Amortization. D&A increased $0.4 million (4.5%), from $8.5 million in fiscal 1995 to $8.9 million in fiscal 1996. D&A as a percentage of sales remained unchanged at 1.1%. Operating Income. Operating income for fiscal 1996 decreased $3.5 million (12.1%), from $29.0 million in fiscal 1995 to $25.5 million in fiscal 1996 as a result of the factors discussed above. 38 Interest Income and Expense. Interest income increased from $4.7 million in fiscal 1995 to $5.8 million in fiscal 1996 primarily due to increased funds available for short-term investments. Interest expense increased from $1.5 million in fiscal 1995 to $1.8 million in fiscal 1996. The increase in interest expense was due primarily to interest payments as a result of a federal income tax audit. Net Income. Net income decreased to $18.7 million in fiscal 1996 from $19.5 million in fiscal 1995. The decrease in net income resulted from factors discussed above. In addition, the effective tax rate decreased from 43.1% in fiscal 1995 to 35.9% in fiscal 1996 as a result of a decrease in the effective rate paid for state income taxes and a decrease in estimated federal income tax contingencies. 52 WEEKS ENDED JULY 1, 1995 COMPARED WITH THE 52 WEEKS ENDED JULY 2, 1994. Sales. Sales increased $40.5 million (5.4%), from $750.3 million in fiscal 1994 to $790.8 million in fiscal 1995. The increase resulted primarily from a 7.3% increase in comparable store sales, partially offset by the closing of two stores in fiscal 1995. The comparable store sales growth increase was primarily attributable to the continuing maturation of several stores, an aggressive advertising campaign and the introduction of debit and credit card payment methods. Gross Profit. Gross profit increased $17.0 million (10.8%), from $157.3 million in fiscal 1994 to $174.3 million in fiscal 1995. Gross profit as a percentage of sales increased from 21.0% in fiscal 1994 to 22.0% in fiscal 1995 due primarily to higher support of merchandising programs by vendors. Selling and Administrative Expenses. S&A increased $9.2 million (7.2%), from $127.6 million in fiscal 1994 to $136.8 million in fiscal 1995. S&A increased from 17.0% of sales in fiscal 1994 to 17.3% of sales in fiscal 1995. The increase in S&A was primarily the result of increased payroll costs and, to a lesser extent, credit card fees as a result of Shoppers' new policy of accepting credit cards. Depreciation and Amortization. D&A decreased $2.3 million (21.3%), from $10.8 million in fiscal 1994 to $8.5 million in fiscal 1995. D&A decreased from 1.4% of sales in fiscal 1994 to 1.1% of sales in fiscal 1995. The decrease in D&A was primarily the result of a decrease in store openings and remodelings, compared to the past three years in conjunction with the use, by Shoppers, of accelerated methods of depreciation. Operating Income. Operating income increased $10.2 million (53.8%), from $18.8 million in fiscal 1994 to $29.0 million in fiscal 1995 as a result of the factors described above. Interest Income and Expense. Interest income increased from $2.2 million in fiscal 1994 to $4.7 million in fiscal 1995 as a result of increased funds available for short-term investments. Interest expense was $1.4 million in fiscal 1994 and $1.5 million in fiscal 1995. Net Income. Net income increased to $19.5 million in fiscal 1995 from $12.9 million in fiscal 1994. The increase in net income resulted from the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity are expected to be cash flow from operations and borrowings under the New Credit Facility that the Company is seeking to enter into with a bank or other third party to borrow (under a line of credit and letters of credit) up to an aggregate of $25 million. It is anticipated that the Company's principal uses of liquidity will be to provide working capital, finance capital expenditures and meet debt service requirements. Letters of credit have been issued by NationsBank N.A. in connection with the Company's workers' compensation insurance in the amount of approximately $6.7 million as of August 2, 1997. These letters of credit will mature at various dates through December 1998. 39 Shoppers generated approximately $27.0 million of cash from operating activities during the 52-week period ended June 29, 1996 (compared to $31.9 million during the 52-week period ended July 1, 1995). For the 31 weeks ended February 1, 1997, operating activities generated $17.4 million of cash. For the 26 weeks ended August 2, 1997, operating activities generated $17.4 million of cash. One of the principal uses of cash in the Company's operating activities is inventory purchases. However, Shoppers' relatively high inventory turnover enables the Company to finance a substantial portion of its inventory through trade payables, thereby allowing the Company to use cash from operations for non-current purposes such as financing capital expenditures and other investing activities. During the last 70 months, Shoppers' operating activities have generated over $130.0 million of cash, which it has used to invest in marketable securities, to pay for capital expenditures and to provide distributions to stockholders. At August 2, 1997, Shoppers had a working capital deficit (excluding cash, cash equivalents and short-term investments) of $24.2 million. Shoppers' cash used in investing activities was $52.1 million for the 52 weeks ended June 29, 1996. Investing activities consisted of capital expenditures of $7.4 million and related primarily to new stores ($2.4 million), store remodelings ($4.2 million) and general store maintenance ($0.6 million) and purchase of short-term investments of $44.7 million. For the 31 weeks ended February 1, 1997, investing activities provided $2.8 million to Shoppers from the sale of $8.1 million of short-term investments, partially offset by $5.3 million of capital expenditures. For the 26 weeks ended August 2, 1997, investing activities provided $69.1 million to Shoppers from the sale of $75.0 million of short-term investments, which amount was partially offset by $5.9 million of capital expenditures. Shoppers estimates that it will make capital expenditures of approximately $11.5 million in the 52 weeks ended January 31, 1998. Such expenditures relate to three new store openings as well as routine expenditures for equipment and maintenance. Management expects that these capital expenditures will be financed primarily through cash flow from operations and the New Credit Facility. Capital expenditures related to one store scheduled to open in the following fiscal year is estimated to be approximately $3.5 million. In February 1997, $137.2 million of the net proceeds from the sale of the Increasing Rate Notes and $72.8 million of Shoppers' cash, cash equivalents and short-term investments were used to fund the Acquisition. See "Business-- Acquisition of the Company by Dart." In addition, Shoppers paid approximately $7.2 million in fees and expenses incurred by Dart in connection with the Acquisition. On February 6, 1997, the Company also declared a dividend of $10.0 million that was paid on May 30, 1997. In June 1997, the Company sold the Outstanding Notes and received net proceeds of approximately $193.5 million. The Company used $143.3 million of the net proceeds to repay the Increasing Rate Notes (including accrued interest) in July 1997 and $50 million of the net proceeds to make a $40 million dividend and $10 million loan to Dart in September 1997. Shoppers' current interest expense consists primarily of interest on the Senior Notes and capital lease obligations. Interest expense decreased to $0.7 million from $0.8 million during the 31 weeks ended February 1, 1997 compared to the 31 weeks ended February 3, 1996. Interest expense increased $9.3 million from $1.1 million during the 26 weeks ended August 3, 1996 to $10.4 million during the 26 weeks ended August 2, 1997 due to the interest paid on the Increasing Rate Notes, interest accrued on the Senior Notes and amortization of financing costs. The Company believes that cash flows from Shoppers' operations and borrowings under the New Credit Facility will be adequate to meet its anticipated requirements for working capital, debt service and capital expenditures over the next few years. However, there can be no assurances that Shoppers will generate sufficient cash flow from operations or that it will be able to borrow under the New Credit Facility. EFFECTS OF INFLATION During the past several years, the rate of general inflation has been relatively low and has not had a significant impact on Shoppers' business. 40 BUSINESS THE COMPANY Shoppers is a leading supermarket operator in Greater Washington, D.C. (as defined below), operating 37 stores that target the price-conscious segment of the market in densely populated suburban areas under the "Shoppers Food Warehouse" and "Shoppers Club" names. Shoppers operates warehouse-style, price-impact supermarkets that are positioned to offer the lowest overall prices in its market area by passing on to the consumer savings achieved through labor efficiencies and lower overhead associated with the warehouse format, while providing the product selection and quality associated with a conventional format. The Company's stores offer products at prices that generally range from 15% to 20% below those of its primary supermarket competitors. In-store operations are designed to allow customers to perform certain labor-intensive services usually offered in conventional supermarkets. For example, the Company's stores generally do not provide service staff to support the bakery and floral departments or the meat and seafood refrigerated cases. The stores do, however, offer a complete line of produce, fresh baked goods, floral assortments and freshly packaged meat and seafood products and provide service in these departments at the request of customers. Certain merchandise is presented on warehouse-style racks in full cartons, reducing labor-intensive unpacking, and customers bag their own groceries. Shoppers stores also have full-service delicatessens with some stores offering hot and cold prepared food and self-service soup and salad bars. The Company's stores generally are constructed with high ceilings to accommodate warehouse racking with overhead pallet storage. Wide aisles accommodate forklifts and, compared to conventional supermarkets, a higher percentage of total store square footage is devoted to retail selling because the top of the warehouse-style grocery racks on the sales floor are used to store inventory, which reduces the need for large backroom storage and restocking trips. Notwithstanding the "warehouse" name, physical features and low-price reputation, Shoppers stores have more in common with conventional supermarket chains than with so-called "warehouse clubs." No membership fee is charged at the Shoppers stores, which offer a selection of popular-sized national brands and private label products as well as high quality produce, meat and seafood. The product offerings are similar to those of conventional supermarkets with slightly more emphasis on larger package sizes and with less emphasis on extensive brand and size selection. All 37 of the Company's supermarkets have a delicatessen, a bakery and a floral department while 21 stores have a beer and wine department. While similar in most respects to conventional supermarket operators, Shoppers distinguishes itself by providing low-price leadership while still emphasizing quality. Shoppers does this by offering an unusual combination of higher-end specialty departments with self-service and discount price features. In addition, unlike traditional supermarkets, Shoppers stores offer a greater selection of "club size" products, along with popular-sized brands. Through this approach, Shoppers has established a unique niche among supermarket operators in Greater Washington, D.C. The Company's stores range in size from approximately 20,000 to 77,000 total square feet and average approximately 47,000 square feet. The Shoppers stores (including three new stores opened in fiscal 1998) can be categorized by size as follows: (i) 10 stores smaller than 40,000 square feet; (ii) 12 stores ranging from 40,000 to 50,000 square feet; and (iii) 15 stores larger than 50,000 square feet. The stores in the first category generally represent older stores located in densely populated areas in which little or no supermarket expansion could be expected due to the limited availability of real estate locations. Despite their age and size, as a group, these stores generally continue to perform well in terms of sales per square foot and profitability. The next size category represents stores which more closely resemble the store sizes operated by conventional supermarket competitors in the local area. Finally, the category representing the largest size stores includes the eight "Shoppers Club" supermarkets (averaging approximately 67,800 total square feet per store). These larger size supermarkets generally have more space devoted to specialty departments and offer more "club pack" size products. 41 Shoppers is the largest supermarket chain targeting the price-conscious segment in Greater Washington, D.C. The two primary competitors of Shoppers are Giant Food, Inc. ("Giant") and Safeway Inc. ("Safeway"), both of which operate in the higher-service, higher-price segment. Overall, Shoppers has the third largest market share in Greater Washington, D.C. On a combined basis, Shoppers, Giant and Safeway have 84% of the market share in this area. "Greater Washington, D.C." includes Washington, D.C.; Calvert, Charles, Frederick, Montgomery and Prince George's counties in Maryland; Arlington, Fairfax, Loudoun, Prince William and Stafford counties in Virginia; and the independent cities of Alexandria, Fairfax and Falls Church in Virginia. Shoppers does not, however, operate any stores in the city of Washington, D.C. Shoppers' share of the Greater Washington, D.C. market has increased from 11.9% in 1992 to 13.6% in 1997; the Company believes that it exceeds its next highest competitor by almost four times. During the same period, Giant's market share decreased from 45.9% to 42.9% while Safeway's market share increased from 27.1% to 27.5%. ACQUISITION OF THE COMPANY BY DART In June 1988, Dart acquired 50% of Shoppers for $17.4 million. On February 6, 1997, Dart's ownership increased to 100% with the buy-out of the other 50% interest in Shoppers for $210.0 million. The Acquisition was financed through the application of $137.2 million in net proceeds raised from an offering of the Increasing Rate Notes of SFW Acquisition Corp., a newly created indirect subsidiary of Dart, and $72.8 million of bridge financing provided by a bank. Immediately after the Acquisition, SFW Acquisition Corp. merged into Shoppers (with Shoppers becoming obligor on the Increasing Rate Notes) and Shoppers repaid the Bridge Loan from its existing cash and the liquidation of certain short-term investments. STORE OPERATIONS Shoppers' store equipment and facilities are generally in good condition. Shoppers stores are generally open 14-16 hours per day seven days a week (allowing for shelf restocking while the stores are closed) and offer a full range of fresh produce, fresh baked goods, fresh meats and seafood, frozen foods, traditional grocery items and certain non-food items such as health and beauty aids, cookware, greeting cards, magazines and seasonal items. STORE EXPANSION AND REMODELING The Company's strategy is to open large new stores and upgrade existing stores. Shoppers opened three new stores since July 1997 and has signed leases to open two new stores (each between 65,000 and 75,000 square feet) over the next two years. Also during this period, Shoppers is considering expanding or remodeling at least two stores. Since 1992, Shoppers has opened 15 new stores (while closing four stores) and remodeled seven stores. Of its existing 37 stores, 27 are larger than 40,000 square feet, and all but one of these 27 stores were opened, remodeled or expanded during the last ten years. The Company believes that its supermarkets generally have well-established locations with favorable lease terms (including multiple options), are in good condition and require only routine maintenance. The following chart sets forth certain information concerning Shoppers stores during the past six fiscal years:
FISCAL YEAR ---------------------------------- 1992 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- ---- Number of Stores at Beginning of Period..... 26 32 35 35 33 34 34 New Stores Opened........................... 7 3 1 0 1 0 3 Stores Closed............................... 1 0 1 2 0 0 0 --- --- --- --- --- --- --- Stores at End of Period..................... 32 35 35 33 34 34 37 Remodeled/Expanded.......................... 0 2 2 1 0 2 0
42 In fiscal 1998, Shoppers has opened a 74,864 square foot store in Fredericksburg, VA, a 68,974 square foot store in Falls Church, VA and a 76,774 square foot store in Alexandria, VA . In the following two fiscal years, Shoppers expects to open stores in College Park, MD and Landover, MD. PRODUCT SELECTION The Company believes that consumers in recent years have shown an increasing preference for food stores that offer not only the wide variety of food and non-food items carried by conventional supermarkets, but also an expanded assortment of high-quality specialty food items and fresh produce. To respond to this trend, Shoppers offers a complete line of produce, fresh baked goods, freshly packaged meat and seafood products and floral assortments and provides service in these departments at the customer's request. This strategy provides consumers with a wider selection of better quality products and convenience foods, while shifting its sales mix toward higher gross margin products. Shoppers' largest supermarkets now carry over 25,000 stock keeping units ("SKUs"). Its merchandising program is designed to offer customers a wide selection of products at prices that generally range from 15% to 20% below those of its primary supermarket competitors. Shoppers accomplishes this through carrying slightly fewer items than its local supermarket competitors, primarily through pursuing less duplication of products in smaller sizes. This program also includes a critical assessment of existing store layouts, shelving and product mix. In addition, the Company monitors SKUs to identify slow-moving products that may be replaced with new products. Shoppers stores carry a variety of grocery and general merchandise under private label names, including "Richfood" and "Shoppers Food Warehouse," which currently account for approximately 7% of its sales. Private label products are of a quality generally comparable to that of national brands, at significantly lower prices, while Shoppers' gross margins on private label products are generally higher than on national brands. PURCHASING, WAREHOUSING AND DISTRIBUTION Shoppers purchases approximately one-half of its grocery inventory from Richfood of PA, Inc., formerly Super Rite Foods, Inc. ("Richfood"), a wholly- owned subsidiary of Richfood Holdings, Inc. Because its stores receive most of their deliveries from Richfood almost daily, Shoppers maintains only minimal dry grocery warehouse storage space. Richfood's large volume purchasing results in significant cost savings to Shoppers. While Shoppers is under no obligation to purchase any particular quantity of products or minimum dollar amounts of inventory from Richfood, the Company has agreed to use Richfood as its "substantially exclusive supplier" for non-perishable dry-grocery, frozen and dairy products (other than milk) and for health and beauty aids. Shoppers does not anticipate that there will be any supply difficulties in the foreseeable future. There can be no assurance, however, that there will be no such disruptions. The Company's supply contract with Richfood expires in December 1997. Although Shoppers believes that the contract will be renewed in comparable or more favorable terms or that it will enter into a comparable or more favorable contract with another wholesaler, there can be no assurance that this will occur. Shoppers also purchases products and items sold in its supermarkets from a wide variety of sources other than Richfood. In particular, Shoppers purchases most of its perishable products from sources other than Richfood. Shoppers currently leases and operates a produce warehouse and a grocery warehouse that collectively occupy approximately 60,000 square feet. Each store submits orders to the warehouses through a centralized processing system. Merchandise ordered from the warehouses is normally delivered to the stores the next day. Shoppers distributes produce and grocery products from its warehouses through a fleet of Company-owned tractors and trailers. The Company estimates that all Shoppers stores are located within a 90-minute drive of the warehouses. 43 PROPERTIES Shoppers has supermarkets in Virginia and Maryland, all of which are leased. The following chart sets forth certain information regarding its stores by size:
LOCATION SIZE (GROSS SQ. FT.) -------- -------------------- Alexandria, VA (Potomac Yard)(1)........................ 76,774 Manassas, VA (Sulley Manor Drive)(1).................... 75,864 Fredericksburg, VA(1)................................... 74,864 Germantown, MD(1)....................................... 70,057 Falls Church, VA(1)..................................... 68,974 Dale City, VA(1)........................................ 63,971 Takoma Park, MD(1)...................................... 60,348 Clinton, MD............................................. 54,200 Alexandria, VA (Richmond Hwy)........................... 53,692 Alexandria, VA (N. Kings Hwy)........................... 53,380 Laurel, MD(1)........................................... 51,880 Forestville, MD......................................... 51,828 Olney, MD............................................... 51,000 Fairfax, VA............................................. 50,750 Leesburg, VA............................................ 50,101 Landover, MD (Largo).................................... 49,840 Burke, VA............................................... 49,284 Herndon, VA............................................. 48,424 Manassas, VA (Shoppers Square).......................... 47,040 Centreville, VA......................................... 47,002 Lanham, MD.............................................. 46,470 Stafford, VA............................................ 43,895 Franconia, VA........................................... 42,862 Frederick, MD........................................... 42,500 Sterling, VA............................................ 42,491 Hyattsville, MD (Chillum)............................... 40,559 Chantilly, VA........................................... 40,373 Waldorf, MD............................................. 39,920 Landover, MD (M.L. King)................................ 36,500 New Carrolton, MD....................................... 35,760 Coral Hills, MD......................................... 35,000 Annapolis, MD........................................... 28,710 Rockville, MD........................................... 26,770 Colmar Manor, MD........................................ 25,336 Annandale, VA........................................... 23,680 Alexandria, VA (Little River Turnpike).................. 23,322 Hyattsville, MD (Adelphi)............................... 20,329
- -------- (1) Shoppers Club supermarket. Most of the Company's stores are operated under long-term leases that have favorable terms. The remaining duration (including renewal options) of most of Shoppers' supermarket leases exceed the maturity date of the Senior Notes. The lease for one of the Company's smallest stores is scheduled to expire in January 1998 and there can be no assurance that such lease will be renewed. Shoppers leases an 86,000 square foot office building in Lanham, MD that serves as its corporate offices. The Company subleases approximately 30,000 square feet of the office building. In addition, Shoppers leases and operates a produce warehouse and a grocery warehouse that collectively occupy approximately 60,000 44 square feet. Both of these warehouses are located in Landover, MD. See "-- Purchasing, Warehousing and Distribution" and "Certain Transactions." ADVERTISING AND PROMOTION Shoppers advertises primarily through newspaper, radio and television media year-round. Shoppers' advertising and promotion strategy for its supermarkets emphasizes "every day" low-price leadership, in addition to promoting special prices on individual items, frequently offering price comparisons to local supermarket competitors. Shoppers' recently introduced program, "Save Green," features green-colored register receipts which inform customers of their savings on purchases at its stores versus the local supermarket competitors. "Bonus buys" and "promotional items" in the stores are also marked with green- colored signs to highlight in-store promotions. Shoppers negotiates promotional arrangements with selected vendors whereby it receives product discounts and advertising allowances. In addition, Shoppers enters into contracts in which additional promotional allowances are provided for co-op broadcast advertising programs. Under such arrangements, vendors fund substantially all of the Company's advertising. COMPETITION The supermarket industry is highly competitive and characterized by narrow profit margins. Shoppers' competitors include national, regional and local supermarket chains, independent grocery stores, specialty food stores, warehouse club stores, drug stores and convenience stores. Supermarket chains generally compete on the basis of location, quality of products, service, price, product variety and store condition. Shoppers competes by providing its customers with exceptional value by offering quality produce and fresh foods, self-service specialty departments, and a selection of national brand groceries and private label goods, all at competitive prices. Shoppers monitors the prices offered by its competitors on a weekly basis and uses a computerized price management system to verify pricing positions. The Company's ability to remain competitive in its markets depends in part on its ability to remodel and update its stores and open new stores in response to remodelings and new store openings by its competitors, which in turn will require the continued availability of financing. The number and type of competitors vary by location. Shoppers' two principal competitors are conventional supermarket chains, Giant and Safeway, which have market shares in Greater Washington, D.C. of 42.9% and 27.5%, respectively. The Company believes that Shoppers' market share of 13.6% exceeds the next highest competitor by almost four times. However, Shoppers believes that it will face increased competition in the future from other supermarket chains and intends to compete aggressively against existing and new competition. MANAGEMENT INFORMATION SYSTEMS Shoppers' management information systems and optical scanning technology reduce the labor costs attributable to product pricing and customer check-out. Shoppers has optical scanning checkout technology operating in all of its stores. All stores use electronic systems for employee time and attendance records and inventory ordering. In addition, Shoppers is evaluating computerized labor scheduling systems. EMPLOYEES As of August 2, 1997, Shoppers employed 4,293 people, including 1,363 full- time employees. Approximately 4,000 employees were covered by collective bargaining agreements with various locals of three unions. Shoppers has renewed its agreement with United Food and Commercial Workers, Local 400, which agreement expires July 1, 2000 and covers 3,669 retail clerks and meat cutters. A substantially similar contract with Local 27 of the United Food and Commercial Workers which covers the 264 employees subject to the collective bargaining agreement that expired September 30, 1997 has been ratified and is expected to be signed. It will expire on September 30, 2001. In addition, Shoppers has 49 employees at its produce warehouse who are covered by collective bargaining agreements with locals of the Warehouse Employees Union and the Teamsters Union. 45 TRADE NAMES, SERVICE MARKS AND TRADEMARKS Shoppers uses a variety of trade names, service marks and trademarks. Except for "Shoppers," "SFW," "Shoppers Food Warehouse" and "Shoppers Club," Shoppers does not believe any of such trade names, service marks or trademarks are material to its business. Shoppers presently has federal registration of the "Shoppers Food Warehouse" and "Colossal Donuts" trademarks. It has federal registration of "Shoppers Club" as a service mark and is seeking federal registration of it as a trademark. Shoppers also has federally registered "Shoppers," "Shoppers Food Warehouse" and "SFW" as service marks and has also registered the "Shoppers Food Warehouse" and "SFW" designs. GOVERNMENT REGULATION Shoppers is subject to regulation by a variety of governmental agencies, including, but not limited to, the U.S. Food and Drug Administration, the U.S. Department of Agriculture and state and local health departments and other agencies, including those regulating the sale of beer and wine. ENVIRONMENTAL MATTERS Shoppers is subject to federal, state and local laws, regulations and ordinances that (i) govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes, and (ii) impose liability for the costs of cleaning up, and certain damages resulting from, sites of past spills, disposals or other releases of hazardous materials. Shoppers conducts its operations in substantial compliance with applicable environmental laws. Shoppers has not incurred material capital expenditures for environmental controls during the previous three years. LEGAL PROCEEDINGS In the ordinary course of its business, Shoppers is party to various legal actions that the Company believes are routine in nature and incidental to the operation of its business. The Company believes that the outcome of the proceedings to which Shoppers currently is party will not have a material adverse effect upon its business, financial condition and results of operations. Dart, however, is a party to certain legal proceedings that could have an adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors--Controlling Stockholder" and public filings made by Dart with the Commission. 46 MANAGEMENT The following table sets forth certain information with respect to the Company's executive officers and directors.
NAME AGE POSITION - ---- --- -------- Mark A. Flint....................... 51 Chief Executive Officer and Director William J. White.................... 55 President Jack W. Binder...................... 68 Senior Vice President--Finance Isaac Gendelman..................... 71 Senior Vice President--Produce Roy N. Marks........................ 67 Senior Vice President--Grocery Louis E. Davis...................... 42 Senior Vice President--Store Operations Richard B. Stone.................... 69 Co-Chairman of the Board of Directors Herbert H. Haft..................... 76 Co-Chairman of the Board of Directors Keith E. Alessi..................... 42 Director Douglas M. Bregman.................. 48 Director Bonita A. Wilson.................... 56 Director Howard M. Metzenbaum................ 80 Director Harry M. Linowes.................... 69 Director
Mark A. Flint has been the Chief Executive Officer and a Director of Shoppers since February 6, 1997 and, until August 25, 1997, President of Shoppers. He also has been the Senior Vice President and Chief Financial Officer of Dart since September 1996. Prior to joining Dart, Mr. Flint spent 14 years serving in various capacities as Senior Vice President and Chief Financial Officer, Chairman of the Executive Committee, and a member of the Board of Directors of Peter J. Schmitt Holdings, Inc., a multi-state $1.3 billion food retailer and distributor, where he was responsible for corporate development, mergers and acquisitions and finance. William J. White has been President of Shoppers since August 25, 1997. Before joining Shoppers, Mr. White held a number of senior management positions in the retail-food business. He has served as Vice President of Operations for Giant Food of Carlisle, where he was responsible for over $600 million dollars in sales volume attributable to 55 stores. He later served as Senior Vice President of Retail Operations for Piggly Wiggly. Mr. White was subsequently promoted to President of Piggly Wiggly, and held that position from 1987 through 1994. Most recently, Mr. White served as President of Mega Foods in Phoenix, Arizona, from 1995 through 1997. While President of Mega Foods, Mr. White spearheaded a successful turn-around of the company. Jack W. Binder has been Senior Vice President--Finance of Shoppers since 1987. Prior to that, he served as Vice President and Controller since he joined Shoppers in 1966. Isaac Gendelman worked at Shoppers' first store as a produce clerk beginning in 1953. Mr. Gendelman was promoted through the ranks to Store Produce Manager, Produce Buyer, Warehouse Manager, Vice President and, in 1987, was promoted to Senior Vice President--Produce. Roy N. Marks joined Shoppers in 1982 as Director of Grocery Buying. Mr. Marks was later promoted to Vice President and, in 1991, became Senior Vice President--Grocery. Louis E. Davis joined Shoppers in 1971 as a cashier. Over the next several years, he advanced within the organization, serving as a store grocery manager, assistant store manager, store manager, grocery merchandiser, Director of Merchandising and Director of Store Operations. He became Vice President of Operations in 1991 and Senior Vice President--Store Operations in 1997. Richard B. Stone was elected Co-Chairman of Shoppers on October 21, 1997. Senator Stone serves as Co-Chairman and acting Chief Executive Officer of Dart and Co-Chairman of Holding. Since December 1995, Senator Stone has been Voting Trustee of a trust that now holds all of the voting stock of Dart. From 1992 to 1994, Senator Stone was a Director of International Service System. He served as United States Ambassador to Denmark from 1991 to 1995, and he is currently a member of the Council of American Ambassadors. He was Chief Operating Officer of Capital Bank, N.A. from 1989 to 1991, and was Vice Chairman of the Board of Directors of Capital Bank, N.A. from 1985 to 1991. Senator Stone served as President Reagan's Special Envoy for Central American Affairs and Ambassador-at-Large from 1983 to 1984. He was a United States Senator from 1975 to 1981, representing the State of Florida. 47 Herbert H. Haft has been a Director of Shoppers since 1988 and was elected Co-Chairman of Shoppers on February 6, 1997. Mr. Haft founded Dart and has been its Chief Executive Officer and Chairman of the Board since 1960. He has been Co-Chairman or Chairman of the Board of Directors of Crown Books Corporation ("Crown Books") since its organization in 1981. Mr. Haft has been Chairman of the Board of Directors and Chief Executive Officer of Trak Auto Corporation ("Trak Auto") since its organization in March 1983. Herbert H. Haft is or claims to be a general partner in approximately 15 partnerships that are debtors-in-possession under Title 11, Chapter 11 of the U.S. Bankruptcy Code. Mr. Haft is involved in litigation against Dart relating to the control of Dart. On October 17, 1997, Herbert H. Haft entered into a settlement agreement with Dart. Under the terms of the settlement agreement, upon closing of the settlement Mr. Haft would resign his positions as an officer and director of Dart and each of its affiliates, including his position as Co-Chairman of the Board of Directors of Shoppers. See "Risk Factors--Controlling Stockholder" and "Risk Factors--Possible Change in Control." Keith E. Alessi was elected a Director of Shoppers on February 6, 1997. Mr. Alessi is Chairman, President, Chief Executive Officer and Director of Jackson Hewitt, Inc., the nation's second largest electronic tax preparation service. He joined Jackson Hewitt, Inc. in June 1996. From 1988 through June 1996, Mr. Alessi was affiliated with Farm Fresh, Inc., a regional supermarket chain based in Norfolk, Virginia. He served in various capacities including Chief Financial Officer, Chief Operating Officer and President. He is Vice Chairman and a director of Farm Fresh, Inc., is a director of Cort Business Services, the nation's largest furniture rental company and is a director of Town Sports International. Douglas M. Bregman was elected a Director of Shoppers on February 6, 1997. Mr. Bregman is a partner in the law firm of Bregman, Berbert & Schwartz, specializing in commercial real estate law. Mr. Bregman is also an Adjunct Professor of Law at the Georgetown University Law Center. Mr. Bregman was elected to serve as a director of each of Dart, Trak Auto and Crown Books in June 1993. Bonita A. Wilson was elected a Director of Shoppers on February 6, 1997. Ms. Wilson was a retailing executive with Dalton Brody in 1993 and now serves as a consultant. Ms. Wilson was a Sales Manager with Saks Jandel from January 1994 until June 1994 and prior to that she was a retailing executive with the May Company. From 1990 to 1995, Ms. Wilson served on the board of directors of Wedgewood Financial Management, Inc. Ms. Wilson was elected to serve as a director of each of Dart, Trak Auto and Crown Books in June 1993. Harry M. Linowes has been a Director of Shoppers, Holding and Dart since October 21, 1997. Mr. Linowes is a Certified Public Accountant and a consultant. Prior to his retirement, Mr. Linowes served as a Senior Partner of BDO Siedman, L.L.P. Accountants and Consultants ("BDO Siedman") from 1992 to 1996, and as Managing Partner from 1986 to 1992. In 1986, Mr. Linowes, then the Managing Partner of Leopold & Linowes, oversaw the merger of that firm with BDO Siedman. Mr. Linowes is a member of the American Institute of Certified Public Accountants, and has served as President of the Board of Trustees of the D.C. Institute of Certified Public Accountants, as President of the Washington, D.C. Estate Planning Counsel, and as Chairman of the Executive Committee of CPA Associates (an international association of CPA firms). Howard M. Metzenbaum has been a Director of Shoppers, Holding and Dart since October 21, 1997. He currently serves on the Board of St. Jude Research Hospital of Memphis, and on the Board of the Public Citizen. Prior to joining Shoppers, Senator Metzenbaum had served as president of the Consumer Federation of America. He served also as Senator from the State of Ohio between 1977 and 1995, and from January 1974 to December 1974. Senator Metzenbaum was Chairman of the Board of COMCORP from 1969 to 1974. Before joining COMCORP, he served as Chairman of the Board of ITT Consumer Services Corp. ("ITT") from 1966 to 1968. From 1958 to 1966, he served as Chairman of the Board of the Airport Parking Company of America, which later merged with ITT. 48 Other officers of the Company are as follows: James K. Barnhart joined Shoppers in 1982 as Director of Data Processing and was promoted to Assistant Vice President--Data Processing in 1987. James Bartkowiak joined Shoppers in 1986 and was promoted to Assistant Vice President--Grocery in 1995. Edward A. Klig joined Shoppers as Controller in 1985 and was promoted to Assistant Vice President and Controller in 1994. Sandra J. Perkins has been broadcast spokesperson for Shoppers since 1986, and has directed the co-op advertising, promotion and marketing programs for Shoppers since 1988. Ms. Perkins was promoted to Vice President--Marketing and Public Relations in 1997. Frank Saunders joined Shoppers in 1967 as a helper in the meat department and is now Assistant Vice President--Meat Operations. EMPLOYMENT AGREEMENTS In February 1997, Shoppers entered into letters of employment with each of its executive officers (excluding Mark A. Flint and William J. White) and several other key employees. The initial annual salaries of the executive officers under the letters of employment are as follows: Jack W. Binder ($183,000), Louis E. Davis ($150,000), Isaac Gendelman ($162,000) and Roy N. Marks ($148,500). Prior to August 1997, Shoppers conducted an analysis of executive salaries in the supermarket industry and adjusted the salaries of some of the Company's executive officers based on this analysis. Each executive officer may receive a bonus in accordance with a bonus program being developed by the Company. Each executive officer will receive life insurance and health, dental and disability insurance. In addition, the Company pays between $350 and $850 per month to the executive officers as an automobile allowance. If Shoppers terminates an executive officer (excluding Mr. Flint and Mr. White) before February 6, 1998, the Company will pay such officer an amount equal to one-half of his annual salary. If Dart sells Shoppers before February 6, 1998, Shoppers will pay each executive officer (excluding Mr. Flint and Mr. White) an amount equal to his annual salary. None of the letters of employment has a termination date. On September 16, 1996, Dart entered into a two-year employment agreement with Mark A. Flint, Senior Vice President and Chief Financial Officer of Dart, and since February 6, 1997, Chief Executive Officer of Shoppers. The agreement provides for an annual salary of $285,000, subject to annual increases as determined by the Compensation Committee of Dart's Board of Directors. Dart charges Shoppers for a portion of Mr. Flint's salary in accordance with a management services agreement between Dart and Shoppers. For the 26 weeks ended August 2, 1997, Dart charged Shoppers $140,000 (approximately 50% of Mr. Flint's salary during that period) for the portion of Mr. Flint's time spent working on matters for the Company. See "Certain Transactions--Agreements with Dart." On August 25, 1997, Shoppers entered into a one-year employment agreement with William J. White as President of the Company. The agreement provides for an annual base salary of $300,000 and a bonus based on performance. 49 SUMMARY COMPENSATION TABLE The following table sets forth in summary form all compensation for all services rendered to Shoppers during its last three fiscal years for its former President and the other four most highly compensated executive officers employed by Shoppers as of the end of its most recent fiscal year.
ANNUAL COMPENSATION -------------------------------- FISCAL OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION YEAR(D) SALARY BONUS COMPENSATION(E) COMPENSATION(F) - --------------------------- ------- -------- ------- --------------- --------------- Kenneth Herman(a)....... 1997 $262,500 -- -- -- Former President 1996 450,000 350,000 -- $7,200 1995 450,000 350,000 -- 8,000 Robert Herman(a)........ 1997 175,000 -- -- -- Former Executive Vice President 1996 300,000 80,000 -- 7,200 1995 300,000 80,000 -- 8,000 Mitchell Herman(b)...... 1997 113,750 -- -- -- Former Senior V.P. Cor- porate Affairs 1996 195,000 50,000 -- 7,200 1995 190,000 50,000 -- 8,000 George Guthridge(c)..... 1997 101,000 -- -- -- Former Senior V.P. Oper- ations 1996 171,500 55,000 -- 7,200 1995 161,500 55,000 -- 8,000 Jack Binder............. 1997 98,100 -- -- -- Senior V.P. Finance 1996 167,000 50,000 -- 7,200 1995 159,000 50,000 -- 8,000
- -------- (a) Kenneth and Robert Herman each resigned as officers and directors of the Company on February 6, 1997. (b) Mitchell Herman left the Company on May 21, 1997. (c) George Guthridge resigned as an officer of the Company on February 3, 1997. (d) There were 31 weeks in fiscal 1997 compared to 52 weeks in each of fiscal 1996 and 1995. (e) Excludes perquisites and other personal benefits, unless the aggregate amount of such compensation is at least $50,000 or 10% of the total annual salary and bonus reported. (f) Includes allocations to 401(k) accounts and profit sharing accounts. 50 CERTAIN TRANSACTIONS RELATED-PARTY LEASES In July 1990, the Company entered into an agreement to lease an 86,000 square foot office building in Lanham, Maryland, from a private partnership (the "Partnership") that is half-owned by certain stockholders of Dart. The lease is for 20 years and commenced on December 10, 1990. The lease provides for annual increases in rental payments based upon the Consumer Price Index for the Washington, D.C. metropolitan statistical area. The annual increases may not be more than six percent or less than three percent. Rental payments for the thirty-one weeks ended February 1, 1997 and for fiscal years ended June 29, 1996, July 1, 1995, and July 2, 1994 were approximately $744,000, $1,246,000, $1,210,000, and $1,175,000 respectively, and all payments over the life of the lease total approximately $34,400,000. The Company is accounting for the lease as a capital lease. Due to fixed rental increases during the term of the lease, lease payments exceeded interest expense by approximately $34,000 for the thirty-one weeks ended February 1, 1997. Interest expense exceeded lease payments by $254,000, $292,000, and $321,000 for the fiscal years ended June 29, 1996, July 1, 1995, and July 2, 1994, respectively. Assuming future annual rental increases of six percent, the capital lease obligation will continue to increase through November 2000, at which time accumulated interest expense recognized for financial reporting purposes will exceed lease payments by approximately $1,800,000. The lease requires the Company to pay for maintenance, utilities, insurance and taxes. The Partnership purchased the office building for approximately $8,663,000 in July 1990. During the period ended February 1, 1997, and the fiscal years ended June 29, 1996, July 1, 1995, and July 2, 1994, the Company made rental payments of approximately $3,573,000, $5,384,000, $5,985,000, and $5,327,000, respectively, on store leases to partnerships related to stockholders of Dart. As of February 1, 1997, the Company had ten store operating leases with partnerships related to stockholders of Dart. The remaining future minimum payments under these leases exclusive of option periods are approximately $70,820,000 and expire through 2014. The Company made payments of approximately $198,000, $278,000, $246,000, and $246,000 during the 31 weeks ended February 1, 1997, and each of the fiscal years ended June 29, 1996, July 1, 1995, and July 2, 1994 for warehouse operating leases to a partnership owned by stockholders of Dart and to a corporation related to former stockholders of the Company. As of February 1, 1997, the remaining future minimum annual payments under these leases are approximately $1,386,000 and expire in 2002. The Company believes that each of the above leases contains lease payments no greater than the Company would have paid to non-affiliated persons. SUBLEASING AGREEMENTS The Company subleases space within one store to an entity owned by three individuals associated with Shoppers (the Chief Executive Officer of Shoppers, an employee of Shoppers and an employee of Dart). This entity uses the leased space for the sale of beer and wine. The Company received rental income of approximately $57,865, $155,000, $155,000, and $123,000 in the thirty-one weeks ended February 1, 1997, and in the fiscal years ended June 29, 1996, July 1, 1995, and July 2, 1994, respectively, from this entity. None of the owners of this entity receives any financial benefit from this arrangement. During the fiscal year ended June 29, 1996 the Company began leasing space to Trak Auto. The Company received rental income from Trak Auto of approximately $91,000 and $140,000 during the period ended February 1, 1997 and during the fiscal year ended June 29, 1996, respectively. AGREEMENTS WITH DART Concurrently with the Acquisition, the Company entered into a management services agreement (the "Management Services Agreement") with Dart. The Management Services Agreement allocates costs and 51 expenses incurred by Dart on behalf of the Company, including tax, accounting, internal audit, human resources and legal services. In addition, the Company entered into a tax sharing agreement (the "Tax Sharing Agreement") with Dart. Under the Tax Sharing Agreement, the Company will pay Dart from time to time amounts equal to the federal and state tax liability of the Company and each of its direct and indirect affiliated group subsidiaries (collectively, the "Shoppers Group") computed as if the Shoppers Group was a separate and independent affiliated group (as defined in section 1504 of the Internal Revenue Code of 1986, as amended). OTHER TRANSACTIONS In February 1997, Shoppers paid and/or reimbursed Dart approximately $9.2 million in fees and expenses incurred in connection with the Acquisition. In connection with the RGL Settlement, the Company made a $10 million loan to Dart. Such loan bears interest at the same interest rate and has the same maturity date as the Senior Notes. All principal and interest on such loan is payable on the maturity date, but may be prepaid at any time without penalty. In connection with a possible Settlement with Herbert H. Haft, Shoppers may lend $25 million to Dart. The Company expects such loan to bear the same interest rate and have the same maturity date as the Senior Notes. All principal and interest on this loan to Dart would be payable on the maturity date but could be repaid at any time without penalty. 52 DESCRIPTION OF THE SENIOR NOTES GENERAL The Outstanding Notes were, and the Exchange Notes will be, issued under the indenture (the "Indenture") dated as of June 26, 1997, by and among the Company, the Guarantor and Norwest Bank Minnesota, National Association, as trustee (the "Trustee"). The following summarizes all material terms of the Indenture, a copy of which may be obtained upon request to the Company or the Trustee and has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The following summary of certain provisions of the Indenture and the Senior Notes does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Indenture and the Trust Indenture Act of 1939, as amended (the "TIA"). As used in this "Description of the Senior Notes," the term "Company" refers to Shoppers Food Warehouse Corp. only and excludes its subsidiaries. The definitions of certain capitalized terms used in the following summary are set forth under "--Certain Definitions" below. The Senior Notes are senior unsecured obligations of the Company, rank senior in right of payment to all existing or future indebtedness of the Company which is by its terms not expressly subordinated in right of payment to the Senior Notes and rank pari passu with all other existing or future indebtedness of the Company. The Exchange Notes will be issued only in fully registered form, without interest coupons, in denominations of $1,000 and integral multiples thereof. Initially, the Trustee will act as Paying Agent and Registrar for the Senior Notes. The Company may change any Paying Agent and Registrar without notice to the Holders. Principal, if any, and interest on the Senior Notes will be payable, and the transfer of the Senior Notes will be registrable, at an office or agency of the Company in the City of New York (which initially will be the corporate trust office of the Trustee). In addition, payment of interest may, at the option of the Company, be made by wire transfer or check mailed to the person entitled thereto as shown on the register for the Senior Notes. PRINCIPAL, MATURITY AND INTEREST The Senior Notes are limited to $200,000,000 aggregate principal amount and will mature on June 15, 2004. The Senior Notes bear interest at the rate of 9 3/4% per annum. Interest shall be payable in cash semi-annually in arrears on June 15 and December 15 of each year, commencing December 15, 1997, to the Holders on the fifteenth day prior to such interest payment date. In the event that an interest payment date falls on a day other than a business day, interest will be paid on the next succeeding business day and no interest on such payment shall accrue for the period from and after such interest payment date to such next succeeding business day. The amount of interest payable on an interest payment date will be computed on the basis of a 360-day year consisting of twelve 30-day months. GUARANTEE The Company's obligations under the Senior Notes and the Indenture are fully and unconditionally guaranteed by the Guarantor. The Guarantee is secured by a first priority security interest in the Capital Stock of the Company. The Guarantor has no assets other than the shares of Capital Stock it owns in the Company. See "Risk Factors--Security for the Guarantee." REDEMPTION Optional Redemption. The Senior Notes will be redeemable, in whole or in part, at the option of the Company at any time on or after June 15, 2001, at the redemption prices (expressed as a percentage of the principal amount redeemed) set forth below (the "Optional Redemption Price"), plus any accrued and unpaid interest to the date of redemption, if redeemed during the period indicated:
OPTIONAL YEAR REDEMPTION PRICE ---- ---------------- June 15, 2001 through June 14, 2002...................... 104.875% June 15, 2002 through June 14, 2003...................... 102.4375% June 15, 2003 and thereafter............................. 100%
53 Optional Redemption upon Equity Offerings. At any time until June 15, 2000, the Company may, at its option, use the net cash proceeds of one or more Equity Offerings to redeem up to 35% of the original aggregate principal amount of the Senior Notes at a redemption price equal to 109.75% of the principal amount thereof, plus any accrued and unpaid interest to the date of redemption; provided, however, that at least 65% of the original aggregate principal amount of the Senior Notes remains outstanding immediately after such redemption. Special Mandatory Redemption. The Indenture provides that in the event that a Settlement did not occur on or prior to June 30, 1998, then the Company would be obligated to use the Restricted Proceeds (including accrued interest) to redeem $50 million aggregate principal amount of Senior Notes (a "Special Mandatory Redemption"). On September 26, 1997, the Company paid $50 million ($40 million dividend and $10 million loan) to or on behalf of Dart in connection with Dart's consummation of a Settlement with Robert M. Haft, Gloria G. Haft and Linda G. Haft. Accordingly, the Company will not be obligated to redeem any of the Senior Notes pursuant to a Special Mandatory Redemption. SELECTION AND NOTICE In the event that less than all of the Senior Notes are to be redeemed at any time, selection of Senior Notes for redemption will be made by the Trustee on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate; provided, however, that the Senior Notes shall be redeemed only in integral multiples of $1,000. Notice of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each Holder to be redeemed at its registered address. If any Senior Note is to be redeemed in part only, the notice of redemption that relates to such Senior Note shall state the portion of the principal amount thereof to be redeemed. A new Senior Note in a principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Senior Note. On and after the redemption date, any interest will cease to accrue on Senior Notes or portions thereof called for redemption as long as the Company has deposited with the Paying Agent funds in satisfaction of the redemption price pursuant to the Indenture. CHANGE IN CONTROL The Indenture provides that, if a Change in Control (as defined below) occurs, each Holder shall have the right, at such Holder's option, to require the Company to repurchase all of such Holder's Senior Notes, or any portion thereof that is an integral multiple of $1,000, on the date (the "Repurchase Date") that is no later than 60 days after the date of the Company Notice (as defined below) for cash at a price equal to 101% of the principal amount of such Senior Notes to be repurchased (the "Change in Control Repurchase Price"), plus any accrued and unpaid interest to the Repurchase Date. Within 30 days after the occurrence of a Change in Control, the Company is obligated to mail to all Holders a notice (the "Company Notice") of the occurrence of such Change in Control and of the repurchase right arising as a result thereof. The Company must deliver a copy of the Company Notice to the Trustee. To exercise the repurchase right, a Holder must deliver on or before the 30th day after the date of the Company Notice irrevocable written notice to the Trustee of the Holder's exercise of such right, together with the Senior Notes with respect to which the right is being exercised, duly endorsed for transfer to the Company. A "Change in Control" will be deemed to have occurred at such time as: (i) any Person (including any syndicate or group deemed to be a "person" under Section 13(d)(3) of the Exchange Act, other than Dart, the Guarantor, the Company or any employee benefit plan of the Company or the Guarantor), is or becomes the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act), directly or indirectly, through a purchase, merger or other acquisition transaction or series of transactions or otherwise, of shares of Capital Stock of the Company, the Guarantor or Dart, entitling such Person to exercise 35% or more of the total voting power of all shares of Capital Stock of the Company, the Guarantor or Dart, entitled to vote generally in the election of the directors; 54 (ii) there occurs any consolidation of the Company with, or merger of the Company into, any other Person, any merger of another Person into the Company, or any sales or transfers of all or substantially all of the assets of the Company to another Person (other than a merger (x) which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Capital Stock or (y) which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Capital Stock into solely shares of Capital Stock); provided, however, that no Change in Control will be deemed to occur pursuant to this clause (ii) upon the merger of any Wholly Owned Restricted Subsidiary of the Company into the Company; or (iii) the replacement of a majority of the Board of Directors of the Company from the directors who constituted the Board of Directors of the Company on the Issue Date, and such replacement shall not have been approved by either (a) a vote of a majority of the Board of Directors then still in office who either were (x) members of the Board of Directors of the Company on the Issue Date or (y) whose election as a member of the Board of Directors was approved in the manner provided in this clause (iii), or (b) the Voting Trustee (as defined below). If members of the Haft family succeed in litigation to obtain control of Dart (in excess of 35% of the voting stock of Dart) it would constitute a Change in Control under the Indenture, permitting the Holders, subject to certain conditions, to require the Company to repurchase any or all of its outstanding Senior Notes at a price equal to 101% of the principal amount thereof, plus any accrued and unpaid interest to the date of repurchase. See "Risk Factors--Controlling Stockholder" and "Risk Factors--Possible Change in Control." Notwithstanding the foregoing, the beneficial ownership of shares of Capital Stock of Dart under that certain Voting Trust Agreement dated October 6, 1995 by and among Ronald S. Haft, Dart and Larry G. Schafran and Sidney B. Silverman, as initial voting trustees, entitling such trust, acting through one or more voting trustees (the "Voting Trustee") to exercise 35% or more of the total voting power of all shares of Capital Stock of Dart shall not be deemed to constitute a Change in Control. The Honorable Richard B. Stone became the sole Voting Trustee, replacing the initial voting trustees, in December 1995. If a Company Notice is delivered, there can be no assurance that the Company will have available funds sufficient to pay the Change in Control Repurchase Price for all the Senior Notes that might be delivered by Holders seeking to have their Senior Notes repurchased. In the event the Company is required to purchase outstanding Senior Notes pursuant to the occurrence of a Change in Control event, the Company expects that it would seek third-party financing to the extent it does not have available funds to meet its purchase obligations. However, there can be no assurance that the Company would be able to obtain such financing. Neither the Board of Directors of the Company nor the Trustee may waive the covenant relating to a Holder's right to repurchase upon the occurrence of a Change in Control. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Senior Notes pursuant to the occurrence of a Change in Control. To the extent that the provisions of any securities laws or regulations conflict with the "Change in Control" provisions of the Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the "Change in Control" provisions of the Indenture by virtue thereof. CERTAIN COVENANTS The Indenture contains, among others, the following covenants: Limitation on Restricted Payments. The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend on or make any distribution on account of the Company's Capital Stock (other than dividends or distributions payable in Capital Stock (other than Disqualified Stock) of the Company); (ii) purchase, redeem or otherwise acquire or retire for 55 value any Capital Stock of the Company, any Subsidiary of the Company or other Affiliate of the Company (other than any such Capital Stock owned by the Company or any Restricted Subsidiary of the Company); (iii) purchase, redeem or otherwise acquire or retire for value any Indebtedness that is pari passu with or subordinated to the Senior Notes except for payments of Permitted Indebtedness in accordance with the provisions contained therein, as such provisions may be amended from time to time, but subject to the provisions of the Indenture; provided, however, that no such amendments shall cause such Permitted Indebtedness (other than the New Credit Facility) to be scheduled to mature at a date earlier than the Stated Maturity of the Indebtedness being amended; (iv) permit any Restricted Subsidiary to declare or pay any dividend on, or make any distribution to the Holders (as such) of, any shares of its Capital Stock except to the Company or a Wholly Owned Restricted Subsidiary (other than dividends or distributions payable in Capital Stock (other than Disqualified Stock) of it or the Company); or (v) make any Investment in any Affiliate (other than the Company or a Wholly Owned Restricted Subsidiary of the Company) (all such payments and other actions set forth in clauses (i) through (v) above being collectively referred to as "Restricted Payments"), unless, at the time of such Restricted Payment: (a) no Default or Event of Default shall have occurred and be continuing or shall occur as a consequence thereof; and (b) such Restricted Payment, together with the aggregate of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the Issue Date (including Restricted Payments permitted by clauses (iv), (v) and (vi) of the next succeeding paragraph), is less than the aggregate of (A) 50% of the aggregate Adjusted Consolidated Net Income of the Company (excluding, for purposes of this clause (A), accrued but unpaid interest income, if any, from intercompany loans) for the first day of the fiscal quarter including the Issue Date to the end of the Company's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or if such Adjusted Consolidated Net Income for such period is a deficit, 100% of such deficit) plus (B) an amount equal to the Net Cash Proceeds (plus the noncash proceeds, as determined in good faith by the Board of Directors) received upon the sale of Capital Stock (other than Disqualified Stock) subsequent to the Issue Date plus (C) an amount equal to the Net Cash Proceeds received upon the sale or other disposition or repayment of any Investment made after the Issue Date which had been treated as a Restricted Payment. The foregoing provisions will not prohibit (i) if no Default or Event of Default shall have occurred and be continuing or shall occur as a consequence thereof, the payment to Dart by the Company from its available liquid assets of an amount not to exceed $10,000,000; (ii) if no Default or Event of Default shall have occurred and be continuing or shall occur as a consequence thereof, upon the execution of the New Credit Facility, an additional payment to Dart by the Company from its available liquid assets of an amount in the aggregate not to exceed $15,000,000; (iii) if no Default or Event of Default shall have occurred and be continuing or shall occur as a consequence thereof, the payment to Dart by the Company of the Restricted Proceeds for purposes of funding a Settlement; (iv) if no Default or Event of Default shall have occurred and be continuing or shall occur as a consequence thereof, Investments in Unrestricted Subsidiaries in an aggregate amount not to exceed $10,000,000; (v) the payment of any dividend within 60 days after the date of declaration thereof, if at the record date for such dividend such payment would have complied with the provisions of the Indenture; and (vi) if no Default or Event of Default shall have occurred and be continuing or shall occur as a consequence thereof, the redemption, repurchase, retirement or other acquisition of the Senior Notes or any Capital Stock of the Company in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Restricted Subsidiary of the Company) of other Capital Stock of the Company (other than any Disqualified Stock); provided, however, that payments made in accordance with clauses (i), (ii) and (iii) of this paragraph shall not be deemed to be Restricted Payments. Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an officers' certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by the covenant "Limitation on Restricted Payments" were computed, which calculations may be based upon the Company's latest available financial statements. 56 Limitation on Indebtedness. The Indenture provides that the Company shall not, and shall not cause or permit any of its Restricted Subsidiaries to, directly or indirectly create, incur, assume, issue, guarantee or in any manner become liable, contingently or otherwise, for or with respect to the payment of, any Indebtedness (including any Acquired Indebtedness) except for the following (each of which shall be given independent effect): (a) Indebtedness of the Company under its Increasing Rate Notes (to the extent that the Company has satisfied the conditions in the section entitled "Termination of the Company's Obligations" of the Increasing Rate Note Indenture with respect to the discharge of its obligations, other than those which expressly survive pursuant to such section), the Senior Notes and the indentures governing such debt securities; (b) Permitted Secured Indebtedness; (c) any replacements, renewals, refinancings and extensions of Indebtedness incurred under clause (b) above, provided that (i) any such replacement, renewal, refinancing and extension (x) shall not provide for any mandatory redemption, amortization or sinking fund requirement in an amount greater than or at a time prior to the amounts and times specified in the Indebtedness being replaced, renewed, refinanced or extended and (y) shall be contractually subordinated to the Senior Notes at least to the extent, if at all, that the Indebtedness being replaced, renewed, refinanced or extended is subordinate to the Senior Notes, (ii) any such Indebtedness of any Person must be replaced, refinanced or extended with Indebtedness incurred by such Person or by the Company; and (iii) the principal amount of Indebtedness incurred pursuant to this clause (c) (or, if such Indebtedness provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the maturity thereof, the original issue price of such Indebtedness) shall not exceed the sum of the principal amount (or with respect to Indebtedness which provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the maturity thereof, the accredited value thereof) of Indebtedness so replaced, renewed, refinanced or extended, plus accrued interest, the amount of any premium required to be paid in connection with such replacement, renewal, refinancing or extension pursuant to the terms of such Indebtedness or the amount of any premium reasonably determined by the Company as necessary to accomplish such replacement, renewal, refinancing or extension by means of a tender offer or privately negotiated purchase, and the amount of fees and expenses incurred in connection therewith; (d) Indebtedness of the Company or of any of the Restricted Subsidiaries of the Company not to exceed an amount in the aggregate at any one time outstanding equal to the lesser of (i) $10,000,000 or (ii) an amount which when added to the amount of Indebtedness outstanding at any one time under the New Credit Facility equals $35,000,000, provided that such Indebtedness permitted under this clause (d) shall be either contractually subordinated to or rank pari passu with the Senior Notes; (e) Indebtedness of the Company or any of the Restricted Subsidiaries of the Company, provided (i) the Consolidated Interest Coverage Ratio of the Company for the applicable Four Quarter Period would have been at least 1.8 to 1.0 if such incurrence or issuance of Indebtedness had occurred prior to the second anniversary of the Issue Date and 2.0 to 1.0 thereafter, in each case after giving pro forma effect to such incurrence or issuance and the application of the proceeds therefrom, and (ii) such Indebtedness shall be either contractually subordinated to or rank pari passu with the Senior Notes; (f) Indebtedness of the Company under the New Credit Facility; (g) Indebtedness under Capitalized Lease Obligations of the Company and its Restricted Subsidiaries incurred in the ordinary course of business, not to exceed 3% of Net Sales of the Company and its Restricted Subsidiaries on a consolidated basis during the Four Quarter Period immediately preceding such incurrence; and (h) any Investments permitted under the "Limitation on Investments, Loans and Advances" covenant below (the foregoing items in clauses (a) through (h) are referred to as "Permitted Indebtedness"). 57 Limitation on Investments, Loans and Advances. The Indenture provides that the Company shall not make, and shall not permit any of its Restricted Subsidiaries to make, any Investment, except: (i) Investments by the Company or a Restricted Subsidiary of the Company in any Wholly Owned Restricted Subsidiary of the Company (including any such Investment pursuant to which a Person becomes a Wholly Owned Restricted Subsidiary of the Company) or in the Company by any Restricted Subsidiary of the Company; (ii) Investments represented by receivables created or acquired in the ordinary course of business or the settlement of such receivables in the ordinary course of business; (iii) Investments permitted to be made pursuant to the "Limitation on Restricted Payments" covenant above; (iv) Investments represented by advances to employees, officers and directors of the Company or its Restricted Subsidiaries made in the ordinary course of business and consistent with reasonable and customary business practices; (v) Permitted Investments; (vi) Investments permitted to be made with the Net Cash Proceeds of Asset Sales pursuant to the "Limitation on Asset Sales" covenant below and (vii) payments made to Dart that are permitted by the provisions of the Indenture described above under the covenant "Limitation on Restricted Payments." Dividends and Other Payment Restrictions Affecting Subsidiaries. The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to (a)(i) pay dividends or make any other distributions to the Company or any of its Restricted Subsidiaries (A) on its Capital Stock or (B) with respect to any other interest or participation in, or measured by, its profits or (ii) pay any Indebtedness owed to the Company or any of its Restricted Subsidiaries, (b) make loans or advances to the Company or any of its Restricted Subsidiaries or (c) transfer any of its properties or assets to the Company or any of its Restricted Subsidiaries, except for (i) such encumbrances or restrictions existing under or by reason of the Indenture or applicable law, (ii) reasonable and customary provisions restricting subletting or assignment of any lease entered into in the ordinary course of business, consistent with industry practices, (iii) restrictions under any Acquired Indebtedness or any agreement relating to any property, asset or business acquired by the Company or any of its Restricted Subsidiaries, which restrictions existed at the time of the acquisition, were not put in place in connection with or in anticipation of such acquisition and are not applicable to any Person, other than the Person acquired or to any property, asset or business other than the property, asset and business so acquired, (iv) reasonable and customary restrictions on transfers of all collateral imposed in connection with Permitted Liens, and (v) replacements of restrictions imposed pursuant to clause (iii) and this clause (v) that are not more restrictive than those being replaced and do not apply to any additional property or assets. Limitation on Liens. The Indenture provides that the Company shall not, and the Company shall not permit, cause or suffer any of its Restricted Subsidiaries to, create, incur, assume or suffer to exist any Lien of any kind upon any of its property or assets now owned or hereafter acquired by it, except for (a) Liens of the Company and its Restricted Subsidiaries existing as of the Issue Date; (b) Permitted Liens; (c) Liens, arising after the Issue Date, securing Permitted Secured Indebtedness; (d) Liens on the assets or properties of the Company and its Restricted Subsidiaries, arising after the Issue Date, securing Capitalized Lease Obligations permitted to be incurred under clause (g) of the covenant "Limitation on Indebtedness," provided that (1) the aggregate principal amount of Indebtedness secured by such Liens shall not exceed the lesser of the cost or Fair Market Value of the assets or property so acquired and (2) such Liens shall not encumber any assets or property of the Company or its Restricted Subsidiaries other than the assets or property so acquired and shall attach to such assets or property within 60 days of the acquisition of such assets or property; (e) leases and subleases of real property which do not interfere with the ordinary conduct of the business of the Company or any of its Restricted Subsidiaries, and which are made on customary and usual terms applicable to similar properties; (f) Liens securing Indebtedness which is incurred to refinance Indebtedness which has been secured by a Lien permitted under the Indenture and is permitted to be refinanced under the Indenture, provided that such Liens do not extend to or cover any property or assets of the Company or any of its Restricted Subsidiaries not securing the Indebtedness so refinanced; (g) Liens securing Acquired Indebtedness, provided that such Liens (1) are not incurred in connection with, or in contemplation of the acquisition of the property or assets acquired and (2) do not extend to or cover any property or assets of the Company or any of its Restricted Subsidiaries (other than the 58 property or assets of the Restricted Subsidiary so acquired that are subject to such Lien); (h) Liens in favor of the Trustee under the Indenture; (i) Liens securing Indebtedness under the New Credit Facility; and (j) any replacement, extension or renewal, in whole or in part, of any Lien described in this or the foregoing clauses, including in connection with any refinancing of the Indebtedness, in whole or in part, secured by any such Lien, provided that to the extent any such clause limits the amount secured or the assets subject to such Liens, no extension or renewal shall increase the amount or the assets subject to such Liens, except for Liens associated with such additional assets that are otherwise permitted hereunder. The Indenture will further provide that the Guarantor will not create, incur, assume or suffer to exist any Lien (other than the Lien created under the Indenture) of any kind upon any of its property or assets (including without limitation Capital Stock of its Restricted Subsidiaries) now owned or hereafter acquired by it. Notwithstanding the foregoing, Liens shall be permitted by the previous clauses (a) through (h) only to the extent that any Indebtedness secured by such Liens is incurred pursuant to and in accordance with the provisions of the Indenture. Limitation on Transactions with Affiliates. The Indenture provides that neither the Company nor any of its Restricted Subsidiaries nor the Guarantor will, from and after the Issue Date, sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into any contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (a) such Affiliate Transaction is on terms that are no less favorable to the Company or the relevant Restricted Subsidiary than those that could have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person and (b) the Company delivers to the Trustee (i) with respect to any Affiliate Transaction involving aggregate payments in excess of $250,000, a resolution of the Board of Directors set forth in an officers' certificate certifying that such Affiliate Transaction complies with clause (a) above and such Affiliate Transaction is approved by a majority of the disinterested members of the Board of Directors and (ii) with respect to any Affiliate Transaction (other than the purchase in the ordinary course of business of property or assets for resale) involving aggregate payments in excess of $1,000,000, an opinion as to the fairness to the Company or, in the case of a transaction with an Affiliate and a Restricted Subsidiary, to such Restricted Subsidiary, in each case from a financial point of view issued by an investment banking firm of national standing; provided, however, that (i) any employment agreement, consulting agreement and indemnification obligation entered into by the Company or any of its Restricted Subsidiaries in the ordinary course of business and consistent with the past practice of the Company or such Restricted Subsidiary, (ii) transactions in accordance with the terms of the Tax Sharing Agreement or the Management Services Agreement (provided that the Company shall not be permitted to make any payment to Dart under the Tax Sharing Agreement in respect of taxes on accrued but unpaid interest income of the Company on intercompany loans), (iii) the payment of reasonable and customary fees to directors of the Company who are not employees of the Company, and (iv) transactions permitted by the provisions of the Indenture described above under the covenants "Limitation on Restricted Payments" and "Limitation on Investments, Loans and Advances," in each case, shall not be deemed Affiliate Transactions. Restriction on Mergers, Consolidations and Transfers of Assets. The Indenture provides that the Company shall not consolidate with or merge with or into or sell, assign, convey, lease, transfer or otherwise dispose of all or substantially all of its properties and assets to any Person or Persons in a single transaction or through a series of related transactions unless: (a) the Company shall be the continuing Person or the Person formed by or surviving such consolidation or merger or the Person to which such sale, assignment, conveyance, lease, transfer or other disposition is made (the "surviving entity") shall be a corporation organized and validly existing under the laws of the United States or any State thereof or the District of Columbia; (b) the surviving entity shall expressly assume, by a supplemental indenture executed and delivered to the Trustee, in form and substance reasonably satisfactory to the Trustee, all of the obligations of the Company under the Senior Notes and the Indenture; (c) immediately before and immediately after giving effect to such transaction or series of transactions (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect to such transaction or series of transactions), no Default or Event of Default shall have occurred and be 59 continuing; (d) the Company or the surviving entity (in the case of a merger or consolidation involving the Company or any sale, assignment, conveyance, lease, transfer or other disposition of all or substantially all of the Company's properties and assets) shall immediately after giving effect to such transaction or series of transactions (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions) have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately prior to such transaction or series of transactions; (e) immediately after giving effect to such transaction or series of transactions, the Company or the surviving entity (in the case of a merger or consolidation involving the Company or any sale, assignment, conveyance, lease, transfer or other disposition of all or substantially all of the Company's properties and assets) could incur $1.00 of Indebtedness pursuant to clause (e) of the "Limitation on Indebtedness" covenant described above; and (f) the Company or the surviving entity shall have delivered to the Trustee an officers' certificate and an opinion of counsel, in each case stating that such consolidation, merger, sale, assignment, conveyance, lease, transfer or other disposition and, if a supplemental indenture is required in connection with such transaction or series of transactions, such supplemental indenture complies with this covenant and that all conditions precedent in the Indenture relating to the transaction or series of transactions have been satisfied. The foregoing limitations in clauses (b) and (f) of this covenant shall not apply to a merger of any Wholly Owned Restricted Subsidiary of the Company into the Company. The foregoing provisions of this covenant relating to restrictions on mergers, consolidations and transfers of assets shall also apply to Guarantor, provided that with respect to clause (b) above, the Company shall be deemed to mean Guarantor. Limitation on Lines of Business. The Indenture provides that neither the Company nor any of its Restricted Subsidiaries will engage in any business other than those businesses in which the Company is engaged on the Issue Date and any other businesses related thereto. Limitation on Asset Sales. The Indenture provides that the Company shall not, and shall not cause or permit any of its Restricted Subsidiaries to, make any Asset Sale, unless (a) the Company or the applicable Restricted Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the assets sold, (b) at least 85% of the consideration for such Asset Sale (other than assumption of trade Indebtedness) consists of cash and Cash Equivalents, and (c) upon consummation of an Asset Sale, the Company will within 365 days of the receipt of the proceeds therefrom, either: (i) apply or cause the applicable Restricted Subsidiary to apply the Net Cash Proceeds of any Asset Sale to (1) an investment in properties and assets that replace the properties and assets that are the subject of such Asset Sale or (2) an investment in properties and assets that will be used in the business of the Company and its Restricted Subsidiaries as existing on the Issue Date; (ii) in the case of a sale of a store or stores, deem such Net Cash Proceeds to have been applied to the extent of any capital expenditures made to acquire or construct a replacement store in the general vicinity of the store sold within 365 days preceding the date of the Asset Sale; or (iii) repay senior Indebtedness. If 365 days after the receipt by the Company of Net Cash Proceeds from an Asset Sale, the accumulated Net Cash Proceeds therefrom equal or exceed $5,000,000 (such accumulated Net Cash Proceeds are defined herein as the "Net Cash Proceeds Offer Amount"), then the Company shall apply or cause the applicable Restricted Subsidiary to apply such Net Cash Proceeds to the purchase of Senior Notes tendered to the Company for purchase at a price equal to 100% of the principal amount thereof plus accrued interest thereon to the date of purchase pursuant to an offer to purchase made by the Company as set forth below (a "Net Cash Proceeds Offer"). Notwithstanding the foregoing, the Company may exclude from the foregoing provisions Asset Sales subsequent to the Issue Date, the proceeds of which are derived from the sale and substantially concurrent lease-back of a supermarket and/or related assets or equipment which is acquired or constructed by the Company or a Restricted Subsidiary subsequent to the Issue Date; provided, however, that any such sale and substantially concurrent lease-back occurs within 270 days following such acquisition or the completion of such construction, as the case may be. Pending the utilization of any Net Cash Proceeds in the manner (and within the time period) described above, the Company may use any such Net Cash Proceeds to repay revolving loans under the New Credit Facility without a permanent reduction of the commitment thereunder. Each Net Cash Proceeds Offer will be mailed to Holders as shown on the register of Holders not less than 365 nor more than 390 days after the relevant Asset Sale, with a copy to the Trustee, shall specify the purchase 60 date (which shall be no earlier than 30 days nor later than 40 days from the date such notice is mailed) and shall otherwise comply with the procedures set forth in the Indenture. Upon receiving notice of the Net Cash Proceeds Offer, Holders may elect to tender their Senior Notes in whole or in part in integral multiples of $1,000 in exchange for cash. To the extent Holders properly tender Senior Notes in an amount exceeding the Net Cash Proceeds Offer, Senior Notes of tendering Holders will be repurchased on a pro rata basis (based on amounts tendered). A Net Cash Proceeds Offer shall remain open for a period of 20 business days or such longer period as may be required by law. To the extent that the aggregate purchase price of Senior Notes tendered pursuant to any Net Cash Proceeds Offer is less than the Net Cash Proceeds Offer Amount (such shortfall constituting a "Deficiency"), the Company may use such Deficiency for general corporate purposes. Upon completion of any Net Cash Proceeds Offer, the Net Cash Proceeds Offer Amount shall be reset to zero. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the purchase of the Senior Notes pursuant to a Net Cash Proceeds Offer. To the extent that the provisions of any securities laws or regulations conflict with the "Asset Sale" provisions of the Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the "Asset Sale" provisions of the Indenture by virtue thereof. Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries. The Indenture provides that the Company will not permit any Restricted Subsidiary to issue any Capital Stock (other than to the Company or to a Restricted Subsidiary) or permit any Person (other than the Company or a Restricted Subsidiary) to own any Capital Stock of any Restricted Subsidiary; provided, however, that the Company and any Restricted Subsidiary may, in any single transaction, sell all, but not less than all, of the issued and outstanding Capital Stock of any Restricted Subsidiary to any Person as provided under the "Limitation on Asset Sales" covenant above. EVENTS OF DEFAULT The following are Events of Default under the Indenture: (i) default in the payment of any interest on the Senior Notes when it becomes due and payable and continuance of such default for a period of 30 days; or (ii) default in the payment of the principal of, or premium, if any, on the Senior Notes when due (including a default in the obligation to effectuate the Special Mandatory Redemption as provided under the section entitled "Rights of Redemption" of the Indenture or certain provisions relating to the Special Mandatory Redemption contained in the Pledge Agreement or in payment upon the exercise by a Holder of its right to require repurchase of its Senior Notes pursuant to the covenant "Repurchase at Holder's Option Upon Change in Control" set forth in the Indenture); or (iii) default by the Company or the Guarantor in the performance, or breach, of any covenant in the Indenture (other than defaults specified in clause (i) or (ii) above), or the Pledge Agreement (other than a default specified in clause (ii) above), and continuance of such default or breach for a period of 30 days after written notice to the Company or the Guarantor, as the case may be, by the Trustee or to the Company or the Guarantor, as the case may be, and the Trustee by the Holders of at least 25% in aggregate principal amount of the outstanding Senior Notes; or (iv) failure by the Company, the Guarantor or any Restricted Subsidiary (a) to make any payment when due with respect to any other Indebtedness under one or more classes or issues of Indebtedness, which one or more classes or issues of Indebtedness are in an aggregate principal amount of $5,000,000 or more and such failure extends beyond the stated period of grace applicable thereto or (b) to perform any term, covenant, condition or provision of one or more classes or issues of Indebtedness, which one or more classes or issues of Indebtedness are in an aggregate principal amount of $5,000,000 or more, which failure, in the case of this clause (b), results in an acceleration of the maturity thereof (whether or not such right has yet been exercised); or 61 (v) one or more judgments, orders or decrees for the payment of money in excess of $2,500,000, either individually or in an aggregate amount, shall be entered against the Company, the Guarantor or any of their Restricted Subsidiaries or any of their respective properties and shall not be discharged and there shall have been a period of 60 days during which a stay of enforcement of such judgment or order, by reason of pending appeal or otherwise, shall not be in effect; or (vi) a decree, judgment or order by a court of competent jurisdiction shall have been entered adjudging the Company, the Guarantor or any of their respective Restricted Subsidiaries that individually or as a group constitute a Significant Subsidiary, as bankrupt or insolvent, or approving as properly filed a petition seeking reorganization of the Company, the Guarantor or such Significant Subsidiary under any bankruptcy or similar law, and such decree or order shall have continued undischarged and unstayed for a period of 60 days; or a decree or order of a court of competent jurisdiction over the appointment of a receiver, liquidator, trustee or assignee in bankruptcy or insolvency of the Company, the Guarantor or such Significant Subsidiary, or of the property of any such Person, or for the winding up or liquidation of the affairs of any such Person, shall have been entered, and such decree, judgment or order shall have remained in force undischarged and unstayed for a period of 60 days; or (vii) the Indenture or, prior to the termination in accordance with its terms, the Pledge Agreement, ceases to be in full force and effect or ceases to give the Trustee, in any material respect, the Liens, rights, powers and privileges purported to be created thereby, in each case, as determined by a court of competent jurisdiction. If an Event of Default (other than an Event of Default specified in clause (vi) above with respect to the Company) occurs and is continuing, then the Trustee or the Holders of at least 25% in aggregate principal amount of the outstanding Senior Notes may, by written notice, and the Trustee upon the request of the Holders of not less than 25% in aggregate principal amount of the outstanding Senior Notes shall, declare the principal amount plus accrued interest (if any) on all Senior Notes on the date of such declaration to be due and payable immediately (the "Default Amount"). Upon such declaration, the Default Amount shall become due and payable immediately. If an Event of Default specified in clause (vi) above with respect to the Company occurs and is continuing, then the Default Amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. After a declaration of acceleration, the Holders of a majority in aggregate principal amount of outstanding Senior Notes may, by notice to the Trustee, rescind such declaration of acceleration if all existing Events of Default have been cured or waived, other than nonpayment of the Default Amount that has become due solely as a result of such acceleration and if the rescission of acceleration would not conflict with any judgment or decree by a court of competent jurisdiction. The Holders of a majority in aggregate principal amount of the outstanding Senior Notes also have the right to waive past defaults under the Indenture except a default in the payment of the principal of, premium, if any, or interest on any Senior Note, or in respect of a covenant or a provision which cannot be modified or amended without the consent of all Holders. No Holder has any right to institute any proceeding with respect to the Indenture or pursue any remedy thereunder, unless the Holder or Holders of at least 25% in aggregate principal amount of the outstanding Senior Notes have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding or pursue such remedy, the Trustee has failed to institute such proceeding or pursue such remedy within 15 days after receipt of such notice and the Trustee has not within such 15-day period received directions inconsistent with such written request by Holders of a majority in aggregate principal amount of the outstanding Senior Notes. Such limitations do not apply, however, to a suit instituted by a Holder for the enforcement of the payment of the principal of, premium, if any, or accrued interest on, such Senior Note on or after the respective due dates expressed in such Senior Note. During the existence of an Event of Default, the Trustee is required to exercise such rights and powers vested in it under the Indenture and to use the same degree of care and skill in its exercise thereof as a prudent 62 Person would exercise under the circumstances in the conduct of such Person's own affairs. Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default shall occur and be continuing, the Trustee is not under any obligation to exercise any of its rights or powers under the Indenture at the request or direction of any of the Holders unless such Holders shall have offered to such Trustee reasonable indemnity. Subject to certain provisions concerning the rights of the Trustee, the Holders of a majority in aggregate principal amount of outstanding Senior Notes have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee. DEFEASANCE The Company may at any time terminate all of its obligations with respect to the Senior Notes ("legal defeasance"), except for certain obligations, including those regarding any trust established for a legal defeasance and obligations to register the transfer or exchange of the Senior Notes, to replace mutilated, destroyed, lost or stolen Senior Notes and to maintain agencies in respect of the Senior Notes. The Company may at any time terminate its obligations under certain covenants set forth in the Indenture, some of which are described under "Certain Covenants" above, and any omission to comply with such obligations shall not constitute a Default or an Event of Default with respect to the Senior Notes issued under the Indenture ("covenant defeasance"). In order to exercise either legal defeasance or covenant defeasance, (i) the Company must irrevocably deposit in trust with the Trustee, for the benefit of the Holders, money or U.S. Government obligations, or a combination thereof, in such amounts as will be sufficient to pay the principal of, and premium, if any, and accrued interest on the Senior Notes to redemption or maturity, as the case may be, and comply with certain other conditions, including the delivery of opinions as to certain tax and bankruptcy matters; provided, however, that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government obligations to said payments with respect to the Senior Notes on the maturity date or such redemption date, as the case may be; (ii) in the case of legal defeasance, the Company shall have delivered to the Trustee an opinion of counsel confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the Issue Date, there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders will not recognize income, gain or loss for Federal income tax purposes as a result of such legal defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such legal defeasance had not occurred; (iii) in the case of covenant defeasance, the Company shall have delivered to the Trustee an opinion of counsel confirming that the Holders will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such legal defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, the Indenture or any other material agreement or instrument to which the Company, the Guarantor or any Restricted Subsidiary is a party or by which the Company, the Guarantor or any Restricted Subsidiary is bound; (vi) the Company shall have delivered to the Trustee an opinion of counsel to the effect that (A) the trust funds will not be subject to any rights of holders of Indebtedness senior in right of payment to the Senior Notes, after the 91st day following the deposit and (B) after the 91st day following the deposit the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (vii) the Company shall have delivered to the Trustee an officers' certificate stating that the deposit was not made by the Company with the intent of preferring the Holders over other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (viii) the Company shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent relating to the legal defeasance or covenant defeasance have been complied with. 63 SATISFACTION AND DISCHARGE The Indenture will be discharged and will cease to be of further effect (except as to surviving rights or registration of transfer or exchange of Senior Notes) as to all outstanding Senior Notes when either (a) all such Senior Notes theretofore authenticated and delivered (except lost, stolen or destroyed Senior Notes which have been replaced or paid and Senior Notes for the payment of which money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust) have been delivered to the Trustee for cancellation and the Company has paid all sums payable by it under the Indenture; or (b) (i) all such Senior Notes not theretofore delivered to the Trustee for cancellation have become due and payable and have been called for redemption and the Company has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount of money sufficient to pay and discharge the entire indebtedness on the Senior Notes not theretofore delivered to the Trustee for cancellation, for principal, premium, if any, and accrued interest to the date of such deposit or redemption, as the case may be; (ii) the Company has paid all sums payable by it under the Indenture; and (iii) the Company has delivered irrevocable instructions to the Trustee to apply the deposited money toward the payment of the Senior Notes at maturity or the redemption date, as the case may be. In addition, the Company must deliver an officers' certificate and an opinion of counsel stating that all conditions precedent to satisfaction and discharge have been complied with. MODIFICATION OF THE INDENTURE From time to time the Company, when authorized by resolution of its Board of Directors, and the Trustee may, without the consent of the Holders, amend, waive or supplement the Indenture or the Senior Notes for certain specified purposes, including, among other things, (i) curing ambiguities, defects or inconsistencies, (ii) maintaining the qualification of the Indenture under the TIA, (iii) making any change that does not adversely affect the rights of any Holder, (iv) mortgaging, pledging, hypothecating or granting a security interest in favor of the Trustee as additional security for the payment and performance of the obligations under the Indenture, in any property or assets, including any which is required to be mortgaged, pledged or hypothecated, or in which a security interest is required to be granted, to the Trustee, (v) adding to the covenants of the Company for the benefit of the Holders, or surrendering any right or power herein conferred upon the Company, or providing any additional rights or benefits to the Holders, (vi) evidencing the succession of another Person to the Company, and the assumption by any such successor of the obligations of the Company in the Indenture and in the Senior Notes, and (vii) setting out the form of the Exchange Notes and setting forth such other matters as are necessary in connection with the Exchange Offer that do not adversely affect the rights of any Holder. Other amendments and modifications of the Indenture or the Senior Notes may be made by the Company and the Trustee with the consent of the Holders of not less than a majority of the aggregate principal amount of the outstanding Senior Notes; provided, however, that no such modification or amendment may, without the consent of the Holder of each outstanding Senior Note affected thereby, (i) reduce the principal amount outstanding of, extend the fixed maturity of, or alter the redemption provisions of, the Senior Notes, (ii) change the currency in which any Senior Notes or any principal, premium or the accrued interest thereon is payable, (iii) reduce the percentage in principal amount outstanding of Senior Notes, Holders of which must consent to an amendment, supplement or waiver or consent to take any action under the Indenture or the Senior Notes, (iv) impair the right to institute suit for the enforcement of any payment on or with respect to the Senior Notes, (v) waive a default in payment with respect to the Senior Notes, (vi) reduce the rate or extend the time for payment of interest on the Senior Notes, (vii) affect the ranking or security of the Senior Notes or (viii) following the mailing of a Company Notice, modify the provisions of the Indenture with respect to such Company Notice in a manner adverse to any Holder. In addition, the Indenture and the Senior Notes may be amended by the Company and the Trustee (i) to cure any defect, ambiguity or inconsistency or to make any other provisions with respect to matters of questions arising under the Indenture that shall not be inconsistent with the provisions therein; provided, however that such amendment or supplement does not adversely affect the rights of any holder thereof, or (ii) to make any other change that does not adversely affect the rights of any holder thereunder in any material respect. 64 ADDITIONAL INFORMATION The Indenture provides that the Company must deliver to the Trustee within 15 days after the filing of the same with the Commission, copies of the quarterly and annual reports and of the information, documents and other reports, if any, which the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further provides that, notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company will file with the Commission, to the extent permitted by law or regulation, and provide the Trustee and Holders with such quarterly and annual reports and such information, documents and other reports specified in Section 13 and 15(d) of the Exchange Act within 15 days of the date such reports would have been due had the Company been required to file such information, documents and reports with the Commission. The Company will also comply with the other provisions of TIA Section 314(a). At any time when the Company is not required by applicable law or regulation to file the aforementioned reports, upon the request of a Holder, the Company will promptly furnish or cause to be furnished such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto) to such Holder or to a prospective purchaser of the Senior Notes designated by such Holder, as the case may be, in order to permit compliance by such Holder with Rule 144A. CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the covenants and other provisions of the Indenture. Reference is made to the Indenture for the full definition of all such terms as well as any other capitalized terms used herein for which no definition is provided. "Acquired Indebtedness" means (i) with respect to any Person that becomes a Restricted Subsidiary of the Company (or is merged with or into the Company or any of its Restricted Subsidiaries) after the Issue Date, Indebtedness of such Person or any of its subsidiaries existing at the time such Person becomes a Restricted Subsidiary of the Company (or is merged with or into the Company or any of its Restricted Subsidiaries) and which was not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary of the Company (or being merged with or into the Company or any of its Restricted Subsidiaries) and (ii) with respect to the Company or any of its Restricted Subsidiaries, any Indebtedness assumed by the Company or any of its Restricted Subsidiaries in connection with the acquisition of any assets from another Person (other than the Company or any of its Restricted Subsidiaries), and which was not incurred by such other Person in connection with, or in contemplation of, such acquisition. "Adjusted Consolidated Net Income" means, with respect to any Person, for any period, the Consolidated Net Income of such Person for such period plus any non-cash charges relating to the amortization of goodwill or any other purchase accounting adjustment resulting from any acquisition. "Affiliate" means, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as applied to any Person, is defined to mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Asset Acquisition" means (i) any capital contribution (by means of transfer of cash or other property to others or payment for property or services for the account or use of others, or otherwise) to, or purchase or acquisition of Capital Stock in, any other Person by the Company or any of its Restricted Subsidiaries, pursuant to which such Person shall become a Restricted Subsidiary of the Company or any of its Restricted Subsidiaries or shall be merged with or into the Company or any of its Restricted Subsidiaries or (ii) any acquisition by the Company or any of its Restricted Subsidiaries of the assets of any Person which constitute substantially all of an operating unit or business of such Person. 65 "Asset Sale" means, with respect to any Person, any direct or indirect sale, issuance, conveyance, lease, assignment, transfer or other disposition or series of sales, transfers or other dispositions (including without limitation, by merger or consolidation or by exchange of assets and whether by operation of law or otherwise) made by such Person or any of its Restricted Subsidiaries to any Person other than such Person or one of its Wholly Owned Restricted Subsidiaries (or, in the case of a sale, transfer or other disposition by a Restricted Subsidiary, to any Person other than the Company or a directly or indirectly Wholly Owned Restricted Subsidiary) of any assets of such Person or any of its Restricted Subsidiaries including, without limitation, assets consisting of any Capital Stock or other securities held by such Person or any of its Restricted Subsidiaries, and any Capital Stock issued by any Restricted Subsidiary of such Person, in each case, outside of the ordinary course of business, excluding, however, any sale, transfer or other disposition, or series of related sales, transfers or other dispositions (i) resulting in Net Cash Proceeds to the Company and the Restricted Subsidiaries of $250,000 or less; (ii) of Cash Equivalents or inventory in the ordinary course of business or obsolete equipment in the ordinary course of business consistent with past practices of the Company; (iii) the lease or sublease of any real or personal property in the ordinary course of business; or (iv) the proceeds of which are not applied in accordance with the covenant "Limitation on Asset Sales," and which, together with all other proceeds of Asset Sales that are not applied in accordance with such covenant, do not exceed $5,000,000. "Board of Directors" means the board of directors of the Company or any committee of such board of directors duly authorized to act under the Indenture. "Board Resolution" means, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Capital Stock" means, with respect to any Person, any and all shares, partnership, membership or other interests, participations or other equivalents (however designated, whether voting or non-voting) of such Person's capital stock, whether now outstanding or issued after the Issue Date, and any and all rights, warrants or options exchangeable into such capital stock. "Capitalized Lease Obligation" means any obligation to pay rent or other amounts under a lease of (or other agreement conveying the right to use) any property (whether real, personal or mixed) that is required to be classified and accounted for as a capital lease obligation under GAAP, and, for the purpose of the Indenture, the amount of such obligation at any date shall be the capitalized amount thereof at such date, determined in accordance with GAAP. "Cash Equivalents" means (i) obligations issued or unconditionally guaranteed by the United States of America or any agency thereof, or obligations issued by an agency or instrumentality thereof and backed by the full faith and credit of the United States of America having maturities of not more than one year from the date of acquisition; (ii) commercial paper rated the highest grade by Moody's or S&P and maturing not more than one year from the date of creation thereof; (iii) time deposits with, and certificates of deposit and banker's acceptances issued by, any bank having capital surplus and undivided profits aggregating at least $500,000,000 and maturing not more than one year from the date of creation thereof; (iv) repurchase agreements that are secured by a perfected security interest in an obligation described in clause (i) and are with any bank described in clause (iii); (v) shares of any money market mutual fund that (a) has at least 95% of its assets invested continuously in the types of investments referred to in clauses (i) and (ii) above, (b) has net assets of not less than $500,000,000 and (c) has the highest rating obtainable from either S&P or Moody's; and (vi) readily marketable direct obligations issued by any state of the United States of America or any political subdivision thereof having one of the two highest rating categories obtainable from either Moody's or S&P. "Common Stock" of any Person means Capital Stock of such Person that does not rank (as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person) prior to shares of Capital Stock of any other class of such Person. 66 "Consolidated Cash Flow" means, with respect to any Person, for any period (all as determined on a consolidated basis in accordance with GAAP), Consolidated Net Income of such Person in such period plus (a) to the extent reflected in the income statement of such Person, (i) income taxes, (ii) Interest Expense, (iii) depreciation and amortization, (iv) LIFO charges, (v) the amount of any restructuring reserve or charge and (vi) other non-cash charges reducing Consolidated Net Income minus (b) to the extent reflected in such income statement, non-cash items (excluding the reversal of any non-cash charge to the extent such non-cash charge reduced Consolidated Net Income in a prior period) which had the effect of increasing Consolidated Net Income for such period. "Consolidated Interest Coverage Ratio" means, for any Person, on a consolidated basis, the ratio of (i) Consolidated Cash Flow for such Person and its Restricted Subsidiaries during the Four Quarter Period immediately preceding the date of the incurrence of the proposed Indebtedness giving rise to the need to calculate the Consolidated Interest Coverage Ratio (the "Transaction Date") to (ii) Interest Expense of such Person for such Four Quarter Period. For purposes of this definition, "Consolidated Cash Flow" and "Interest Expense" shall be calculated after giving effect on a pro forma basis for such Four Quarter Period to (i) the incurrence or repayment of any Indebtedness of such Person or any of its Restricted Subsidiaries at any time during or subsequent to the last day of the Four Quarter Period and on or prior to the Transaction Date, as if such incurrence or repayment and the application of the proceeds thereof, as the case may be, occurred on the first day of the Four Quarter Period, (ii) any Asset Sales or other asset dispositions of such Person and its Restricted Subsidiaries occurring at any time during or subsequent to the last day of the Four Quarter Period and on or prior to the Transaction Date, as if such Asset Sale or other asset disposition and the applications of the proceeds therefrom occurred on the first day of the Four Quarter Period and (iii) any Asset Acquisition or other acquisition of assets or Capital Stock of an entity (occurring by merger or otherwise) occurring at any time during or subsequent to the last day of the Four Quarter Period and on or prior to the Transaction Date, as if such acquisition occurred on the first day of the Four Quarter Period. If such Person or any of its Restricted Subsidiaries directly or indirectly guarantees Indebtedness of a third Person, the preceding sentence shall give effect to the incurrence of such guaranteed Indebtedness as if such Person or any Restricted Subsidiary of such Person had directly incurred or otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating "Interest Expense": (a) interest on any Indebtedness under a revolving credit facility shall be computed based upon the pro forma average daily balance of such Indebtedness during the Four Quarter Period; and (b) if interest on any Indebtedness actually incurred on the Transaction Date may be determined optionally at an interest rate based upon a prime or similar rate, a eurocurrency interbank offered rate, or other rates, then the interest rate in effect on the Transaction Date will be deemed to have been in effect during the Four Quarter Period. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided, however, that (a) the Net Income of any Person (the "other Person") in which the Person in question or one of its Restricted Subsidiaries has a joint interest with a third party (which interest does not cause the Net Income of such other Person to be consolidated into the Net Income of the Person in question in accordance with GAAP) shall be included only to the extent of the amount of dividends or distributions paid to the Person in question or one of its Restricted Subsidiaries, (b) the Net Income of any Restricted Subsidiary of the Person in question that is subject to any restriction or limitation on the payment of dividends or the making of other distributions shall be excluded to the extent of such restriction or limitation, (c) (i) the Net Income (or loss) of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition and (ii) any net gain or loss resulting from an Asset Acquisition or Asset Sale by the Person in question or any of its Restricted Subsidiaries shall be excluded, and (d) extraordinary gains and losses and any one-time increase or decrease to Net Income recorded because of the adoption of new accounting policies, practices or standards required or permitted by GAAP shall be excluded. "Consolidated Net Worth" means with respect to any Person at any date of determination, the consolidated equity represented by the shares of such Person's Capital Stock (other than Disqualified Stock) at such date, as determined on a consolidated basis in accordance with GAAP and adjusted to exclude all upward revaluations 67 and other write-ups in the book value of any asset of such Person or a Restricted Subsidiary of such Person subsequent to the Issue Date. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default under the Indenture. "Disqualified Stock" means any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable, in each case, at the option of the holder thereof), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is exchangeable for Indebtedness, or redeemable at the option of the holder thereof, in whole or in part, on or prior to the Stated Maturity of the Senior Notes. "Equity Offering" means a private placement or public offering of Capital Stock (other than Disqualified Stock) of the Company. "Fair Market Value" means, with respect to any asset or property, the price which could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing buyer, neither of whom is under undue pressure or compulsion to complete the transaction. With respect to any Person, Fair Market Value shall be determined by the Board of Directors of such Person acting in good faith and shall be evidenced by a Board Resolution delivered to the Trustee. "Four Quarter Period" means the four most recent full fiscal quarters for which financial information is available. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Issue Date and as such principles may be amended from time to time, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and Statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part). The term "guarantee" used as a verb has a corresponding meaning. "Holder" means a Person in whose name a Senior Note is registered. "Increasing Rate Note Indenture" means the indenture dated as of February 6, 1997, by and among SFW Acquisition Corp. (predecessor to the Company), the Guarantor and the Trustee, as amended by the First Supplemental Indenture, dated as of February 6, 1997. "Indebtedness" means, with respect to any Person at any date of determination (without duplication), (i) all indebtedness of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (including reimbursement obligations with respect thereto), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services, except trade payables incurred in the ordinary course that have not remained unpaid for greater than 90 days past their original due date, or accrued liabilities arising in the ordinary course of 68 business which are not overdue or which are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and for which adequate reserves have been made, (v) all obligations of such Person as lessee relating to a Capitalized Lease Obligation, (vi) all indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such indebtedness is assumed by such Person, (vii) all indebtedness of other Persons guaranteed by such Person (but only to the extent of the amount actually guaranteed), (viii) to the extent not otherwise included in this definition, obligations under currency agreements, interest rate agreements and commodity agreements and (ix) any and all deferrals, renewals, extensions and refunding of, or amendments, modifications or supplements to, any of the foregoing. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date. "Interest Expense" means, for any Person for any period, (i) total interest obligations (paid or accrued) of such Person in respect of its Indebtedness, determined on a consolidated basis and in accordance with GAAP (including, without limitation, amortization of original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capitalized Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letters of credit or bankers' acceptance financing); minus (ii) amortization of deferred financing costs. "Investment" means (i) any direct or indirect advance, loan or other extension of credit or capital contribution to another Person (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others including the purchase of property from another Person subject to an understanding or agreement, contingent or otherwise, to resell such property to such other Person), (ii) any commitment to make any such advance, loan, extension or capital contribution (but excluding accounts receivable in the ordinary course), (iii) any purchase or acquisition (whether for cash, property, services, securities or otherwise) of Capital Stock, bonds, notes, debentures, options, warranty or similar instruments issued by any Person or (iv) the designation by the Company's Board of Directors of a Restricted Subsidiary to be an Unrestricted Subsidiary. The Company shall be deemed to make an "Investment" in an amount equal to the Fair Market Value of the net assets of any Subsidiary determined by the Board of Directors of the Company in good faith at the time that such Subsidiary is designated an Unrestricted Subsidiary. Any property transferred to an Unrestricted Subsidiary from the Company shall be deemed an Investment valued at its Fair Market Value, as determined by the Board of Directors of the Company in good faith at the time of such transfer. "Issue Date" means the date of original issuance of the Senior Notes under the Indenture. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof, or any agreement to give any security interest). "Management Services Agreement" means the Management Services Agreement dated February 6, 1997, between Dart and SFW Acquisition Corp. (predecessor of the Company). "Moody's" means Moody's Investors Service, Inc. or if Moody's Investors Service, Inc. shall cease rating debt securities having a maturity at original issuance of at least one year and such ratings business shall have been transferred to a successor Person, such successor Person; provided, however, that if Moody's Investors Service, Inc. ceases rating debt securities having a maturity at original issuance of at least one year and its ratings business with respect thereto shall not have been transferred to any successor Person, then "Moody's" shall mean any other nationally recognized rating agency (other than S&P) that rates debt securities having a maturity at original issuance of at least one year and that shall have been designated by the Company by a written notice given to the Trustee. "Net Cash Proceeds" means (a) in the case of any Asset Sale or any issuance and sale by any Person of Capital Stock, the aggregate net cash proceeds and Cash Equivalents received by such Person after payment of 69 expenses, taxes, commissions and the like incurred in connection therewith (and, in the case of any Asset Sale, net of the amount of cash applied to repay Indebtedness secured by the asset involved in such Asset Sale) and (b) in the case of any conversion or exchange of any outstanding Indebtedness or Disqualified Stock of any Person for or into shares of Capital Stock of the Company, the sum of (i) the proceeds received by the Company in connection with the issuance of such Indebtedness or Disqualified Stock on the date of such issuance and (ii) any additional amount paid by the holder to the Company upon such conversion or exchange. "Net Income" means, with respect to any Person for any period, the net income (loss) of such Person determined in accordance with GAAP. "Net Sales" means, with respect to any Person for any period, the net sales of such Person determined in accordance with GAAP. "New Credit Facility" means a credit facility with a bank or other third party in the aggregate principal amount at any time outstanding not to exceed $35,000,000 that may be secured by inventory, accounts receivable and certain other assets of the Company and its Subsidiaries, and any replacement, renewal, refinancing or extension thereof in accordance with clause (c) of the covenant "Limitation on Indebtedness." "Non Recourse Debt" means Indebtedness (i) as to which under the terms thereof (including any related instruments, documents or filings) neither the Company nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness) and (b) is directly or indirectly liable (as a guarantor or otherwise); (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Company or any of its Restricted Subsidiaries to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity; and (iii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Company or any of its Restricted Subsidiaries. "Permitted Indebtedness" shall have the meaning ascribed to such term under the caption titled "Limitation on Indebtedness." "Permitted Investments" means (i) certificates of deposit with final maturities of 3 years or less issued by United States commercial banks having capital and surplus in excess of $100,000,000; (ii) commercial paper, bankers acceptances, notes, bonds, debentures, repurchase agreements, call loans, guaranteed investment certificates and other similar instruments, in each case having a rating of investment grade by S&P or Moody's and, in each case, having a maturity of 3 years or less; (iii) marketable direct obligations of the United States Government or a United States agency with a maturity of 3 years or less; (iv) shares of money market mutual or similar funds having assets in excess of $100,000,000; (v) marketable direct obligations issued by any state of the United States of America having the highest rating obtainable from either Moody's or S&P and having a maturity of 3 years or less; (vi) asset-backed securities rated "AA" or higher by Moody's or S&P with a maturity of 3 years or less; and (vii) mortgage-backed securities rated "AA" or higher by Moody's or S&P with a maturity of 3 years or less; provided that the Company and its Restricted Subsidiaries may not make a Permitted Investment if, as a result of giving effect thereto, (A) more than 20% of the aggregate Investments made pursuant to clauses (i) through (vii) of this definition are rated "BBB" or below or (B) more than 10% of the aggregate Investments made pursuant to clauses (i) through (vii) of this definition are made pursuant to clause (vii) of this definition. "Permitted Liens" means, with respect to any Person, any Lien arising by reason of (a) any judgment, decree or order of any court, so long as such Lien is being contested in good faith and is adequately bonded, and any appropriate legal proceedings which may have been duly initiated for the review of such judgment, decree or order shall not have been finally terminated or the period within which such proceedings may be initiated shall not have expired; (b) taxes, assessments, governmental charges or claims not yet delinquent or which are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted or if a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been 70 made therefor; (c) security for payment of workers' compensation or other insurance or social security legislation; (d) security for the performance of tenders, contracts (other than contracts for the payment of money) or leases (excluding any Capitalized Lease Obligations incurred in the ordinary course of business); (e) deposits to secure public or statutory obligations, or in lieu of surety, performance or appeal bonds, entered into in the ordinary course of business; (f) judgment and attachment Liens with respect to judgments and attachments not giving rise to an Event of Default; (g) Liens arising by operation of law in favor of carriers, warehousemen, landlords, mechanics, materialmen, laborers, employees or suppliers, incurred in the ordinary course of business and as to which a reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor, which are not yet delinquent or are being contested in good faith by negotiations or by appropriate proceedings which suspend the collection thereof; (h) easements, rights-of-way, zoning and similar covenants and restrictions and other similar encumbrances or title defects which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of such Person or any of its Restricted Subsidiaries; provided, such Liens are not incurred in connection with any borrowing of money or any commitment to loan any money or extend any credit; (i) Liens arising in the ordinary course of business in favor of custom and revenue authorities arising as a matter of law to secure payment of custom duties; (j) leases or subleases granted to others not interfering in any material respect with the ordinary conduct of the business of such Person or of any of its Restricted Subsidiaries or which do not in any case materially detract from the value of the property subject thereto (as such property is used by such Person or one or more of its Restricted Subsidiaries); and (k) Liens arising from filing precautionary UCC financing statements relating solely to leases not prohibited by the Indenture. "Permitted Secured Indebtedness" means any Indebtedness secured by purchase money Liens upon or in any assets or property either acquired by the Company and its Restricted Subsidiaries in the ordinary course of business with the proceeds thereof or assumed by the Company and its Restricted Subsidiaries pursuant to an Investment not prohibited by the Indenture; provided, however, that (i) any such purchase money Lien shall not extend to or cover any assets or property other than the assets or property being acquired and shall attach to such assets or property within 60 days of the acquisition of such assets or property and (ii) the aggregate principal amount of Indebtedness secured by such Liens shall not exceed the lesser of the cost or Fair Market Value of the assets or property being acquired. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Pledge Agreement" means the Pledge Agreement dated the date of the Indenture between the Company and the Trustee. "Restricted Account" means a dedicated account to be established by the Trustee for investment of the Restricted Proceeds in accordance with the Pledge Agreement. "Restricted Subsidiary" of a Person means any Subsidiary of the referent Person that is not an Unrestricted Subsidiary. "Settlement" means one or two settlements involving total payments and commitments by Dart and its Subsidiaries of at least $50,000,000 (which may include related expenses and payments to mortgage lenders) in which (i) Herbert H. Haft and/or (ii) Robert M. Haft, Gloria G. Haft and Linda G. Haft, as the case may be, relinquish his or their claims to control of Dart, dispose (or agree to dispose) of all or substantially all of his or their Capital Stock in Dart, disclaim any equity interest in the Company and the Guarantor and resign any positions of employment and board representation with Dart, the Company and the Guarantor. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act, as such regulation is in effect on the Issue Date. "S&P" means Standard & Poor's Corporation or, if Standard & Poor's Corporation shall cease rating debt securities having a maturity at original issuance of at least one year and such ratings business shall have been 71 transferred to a successor Person, such successor Person; provided, however, that if Standard & Poor's Corporation ceases rating debt securities having a maturity at original issuance of at least one year and its ratings business with respect thereto shall not have been transferred to any successor Person, then "S&P" shall mean any other nationally recognized rating agency (other than Moody's) that rates debt securities having a maturity at original issuance of at least one year and that shall have been designated by the Company by a written notice given to the Trustee. "Stated Maturity" means, (i) with respect to any debt security, the date specified in such debt security as the fixed date on which the final installment of principal of such debt security is due and payable and (ii) with respect to any scheduled installment of principal or interest on any debt security, the date specified in such debt security as the fixed date on which such installment is due and payable. "Subsidiary" means, with respect to any Person, any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of such Person or a combination thereof. "Tax Sharing Agreement" means the Tax Sharing Agreement dated February 6, 1997, between Dart and SFW Acquisition Corp. (predecessor of the Company). "Unrestricted Subsidiary" means (i) any Subsidiary of the Company (other than the Subsidiaries of the Company existing as of the Issue Date or any successor to any of them) that at the time of determination shall have been designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution and (ii) any Subsidiary of an Unrestricted Subsidiary; but, in each case, only to the extent that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with the Company or any Restricted Subsidiary of the Company unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (c) is a Person with respect to which neither the Company nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Capital Stock or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) has at least one director on its board of directors that is not a director or executive officer of the Company or any of its Restricted Subsidiaries and has at least one executive officer that is not a director or executive officer of the Company or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the Board Resolution giving effect to such designation and an officers' certificate indicating that such designation complies with the foregoing conditions and was permitted by the covenant described above under the caption "Certain Covenants--Limitation on Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date. The Board of Directors of the Company may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company of any Indebtedness of such Unrestricted Subsidiary which is outstanding at the time of such designation and such designation shall only be permitted if (A) no Default or Event of Default would be in existence immediately following such designation and (B) the Company shall have delivered to the Trustee an officers' certificate indicating that such designation complies with the foregoing conditions. "Wholly Owned Restricted Subsidiary" of any Person means a Restricted Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which shall at the time be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries of such Person or by such Person and one or more Wholly Owned Restricted Subsidiaries of such Person. 72 CERTAIN INCOME TAX CONSIDERATIONS Holders of the Outstanding Notes contemplating acceptance of the Exchange Offer should consult their own tax advisers with respect to their particular circumstances and with respect to the effects of state, local or foreign tax laws to which they may be subject. The following summary describes the material U.S. Federal income tax consequences to initial Holders of the Senior Notes who are subject to U.S. net income tax with respect to the Senior Notes ("U.S. persons") and who hold the Senior Notes as capital assets. There can be no assurance that the U.S. Internal Revenue Service (the "IRS") will take a similar view of the purchase, ownership or disposition of the Senior Notes. This discussion is based upon the provisions of the Internal Revenue Code of 1986, as amended, U.S. Treasury regulations, rulings and judicial decisions, in each case, as in effect on the date of this Prospectus, all of which are subject to change. It does not include any description of the tax laws of any state, local or foreign governments or any estate, gift tax or transfer or other non-income tax laws that may be applicable to the Senior Notes or Holders thereof. It does not discuss all aspects of U.S. Federal income taxation that may be relevant to a particular investor in light of his particular investment circumstances or to certain types of investors subject to special treatment under the U.S. Federal income tax laws (for example, dealers in securities or currencies, S corporations, life insurance companies, tax-exempt organizations, taxpayers subject to the alternative minimum tax and non-U.S.persons) and also does not discuss Senior Notes held as a hedge against currency risks or as part of a straddle with other investments or part of a "synthetic security" or other integrated investment (including a "conversion transaction") comprising a Senior Note and one or more other investments, or situations in which the functional currency of the Holder is not the U.S. dollar. The exchange of an Outstanding Note by a Holder for an Exchange Note should not constitute a taxable exchange. The exchange will not result in taxable income, gain or loss to Holders who participate in the Exchange Offer, or to the Company. Such Holders shall have the same adjusted basis and holding period in Exchange Notes immediately after the exchange as the Holders had in the Outstanding Notes immediately prior to the exchange. BOOK-ENTRY; DELIVERY AND FORM GENERAL The Outstanding Notes were issued in the form of a single, permanent global Senior Note (the "Outstanding Global Note"). The Exchange Notes will be issued in the form of a single, permanent global Senior Note in definitive, fully registered form without interest coupons (the "Exchange Global Note"). The Outstanding Global Note was deposited on the date of closing of the sale of the Outstanding Notes, and the Exchange Global Note will be deposited on the date of closing of the Exchange Offer, with the Trustee as custodian for The Depository Trust Company ("DTC") and registered in the name of Cede & Co. as nominee of DTC. The term "Global Note" means the Outstanding Global Note or the Exchange Global Note, as the context may require. THE GLOBAL NOTE The Company expects that pursuant to procedures established by DTC (i) upon the issuance of the Global Note, DTC or its custodian will credit, on its internal system, the respective principal amount of Senior Notes of the individual beneficial interests represented by the Global Note to the respective accounts of persons who have accounts with such depositary and (ii) ownership of beneficial interests in the Global Note will be limited to persons who have accounts with DTC ("participants") or persons who hold interests through participants. Ownership of beneficial interests in the Global Note will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of persons other than participants). Qualified institutional buyers (as defined in Rule 144A under the Securities Act) may hold their interests in the Global Note directly through DTC if they are participants in such system, or indirectly through organizations which are participants in such system. 73 So long as DTC, or its nominee, is the registered owner or holder of the Senior Notes, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the Senior Notes represented by such Global Note for all purposes under the Indenture and the Senior Notes. No beneficial owner of an interest in the Global Note will be able to transfer that interest except in accordance with DTC's applicable procedures, in addition to those provided for under the Indenture. Payments of principal of, premium (if any) and interest on, the Global Note will be made to DTC or its nominee, as the case may be, as the registered owner thereof. None of the Company, the Trustee or any paying agent will have any responsibility or liability for any aspect of the records relating to any payments made on account of beneficial ownership interests in the Global Note or for any records relating to such beneficial ownership interests. The Company expects that DTC or its nominee, upon receipt of any payment of principal, premium (if any) or interest on the Global Notes will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of the Global Note as shown on the records of DTC or its nominee. The Company also expects that payments by participants to owners of beneficial interests in the Global Note held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants. Transfers between participants in DTC will be effected in the ordinary way in accordance with DTC rules and will be settled in same day funds. If a Holder requires physical delivery of a certificated Senior Note for any reason, including to sell Senior Notes to persons in states which require physical delivery of such Senior Notes, or to pledge such Senior Notes, such Holder must transfer its interest in the Global Note in accordance with the normal procedures of DTC and the procedures set forth in the Indenture. The Company understands that DTC will take any action permitted to be taken by a Holder of Senior Notes (including the presentation of Senior Notes for exchange) only at the direction of one or more participants to whose account the DTC interests in the Global Note are credited and only in respect of such portion of the aggregate principal amount of Senior Notes as to which such participant or participants has or have given such direction. However, if there is an Event of Default under the Senior Notes, DTC will exchange the Global Note for certificated Senior Notes which it will distribute to its participants. DTC has advised the Company as follows: DTC is a limited purpose trust company organized under the laws of State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations and certain other organizations. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly ("indirect participants"). Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in the Global Note among participants of DTC, DTC is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither the Company nor the Trustee will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. Certificated Securities. If DTC is at any time unwilling or unable to continue as a depositary for the Global Note and a successor depositary is not appointed by the Company within 90 days, certificated securities will be issued in exchange for the Global Notes. 74 PLAN OF DISTRIBUTION Except as provided herein, this Prospectus may not be used for an offer to resell, resale or other transfer of Exchange Notes. There is no existing market for the Senior Notes. No assurance can be given as to the liquidity of, or trading markets for, the Exchange Notes. Based on existing interpretations of the Securities Act by the staff of the Commission set forth in several no-action letters to third parties, and subject to the immediately following sentence, the Company believes that the Exchange Notes issued pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by the Holders thereof without further compliance with the registration and prospectus delivery provisions of the Securities Act. However, any Holder of Outstanding Notes who is an "affiliate" of the Company or the Guarantor or who intends to participate in the Exchange Offer for the purpose of distributing the Exchange Notes (i) will not be able to rely on the interpretation by the staff of the Commission set forth in the above-mentioned no-action letters, (ii) will not be able to tender its Outstanding Notes in the Exchange Offer and (iii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any sale or transfer of the Outstanding Notes unless such sale or transfer is made pursuant to an exemption from such requirements. Each Holder of the Outstanding Notes (other than certain specified Holders) who wishes to exchange Outstanding Notes for Exchange Notes in the Exchange Offer will be required to represent that (i) it is not an affiliate of the Company or the Guarantor or, if such tendering party is an affiliate of the Company or the Guarantor, it will comply with the registration and prospectus requirements of the Securities Act to the extent applicable, (ii) any Exchange Notes to be received by it were acquired in the ordinary course of its business, whether or not such person is a Holder thereof, (iii) such tendering party has not entered into any arrangement or understanding with any person to participate in the distribution (within the meaning of the Securities Act) of Exchange Notes, (iv) such tendering party is not a broker-dealer who purchased the Outstanding Notes for resale pursuant to an exemption under the Securities Act and (v) such tendering party will be able to trade the Exchange Notes acquired in the Exchange Offer without restriction under the Securities Act. The Letter of Transmittal also states that by acknowledging that it will deliver a prospectus, and by delivering such a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. In addition, in connection with any resales of Exchange Notes, any broker- dealer (a "Participating Broker- Dealer") who acquired the Outstanding Notes for its own account as a result of market-making activities or other trading activities must deliver a prospectus meeting the requirements of the Securities Act. The Commission has taken the position that Participating Broker-Dealers may fulfill their prospectus delivery requirements with respect to the Exchange Notes (other than a resale of an unsold allotment from the original sale of the Outstanding Notes) with this Prospectus. For a period of 90 days after the Expiration Date, the Company will make this Prospectus, as it may be amended or supplemented, available to any Participating Broker- Dealer for use in connection with any such resale of Exchange Notes, provided that such Participating Broker-Dealer indicates in the Letter of Transmittal that it is a broker-dealer. In addition, until , 1997, (90 days after the date of this Prospectus), all dealers effecting transactions in the Exchange Notes may be required to deliver a prospectus. Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver this Prospectus in connection with any resale of such Exchange Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer who holds Outstanding Notes acquired for its own account as a result of market-making activities or other trading activities in connection with resales of Exchange Notes received in Exchange for Outstanding Notes. The Company acknowledges and each Holder, other than a broker-dealer, must acknowledge that it is not engaged in, does not intend to engage in, and has no arrangement or understanding with any person to participate in, any distribution of Exchange Notes. 75 The Company will not receive any proceeds from the exchange of Outstanding Notes for Exchange Notes, including those exchanged by Participating Broker- Dealers. Exchange Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, or at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through broker-dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any Exchange Notes. Any broker-dealer that resells Exchange Notes that were received by it for its own account pursuant to the Exchange Offer and any person that participates in the distribution of such Exchange Notes may be deemed an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Notes and any commissions or concessions received by any such broker-dealers may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 90 days after the Expiration Date, the Company will send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any Participating Broker-Dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay all expenses incidental to the Exchange Offer other than commissions or concessions of any broker-dealers and will indemnify the Holders of the Outstanding Notes (including Participating Broker-Dealers) participating in the Exchange Offer against certain liabilities, including liabilities under the Securities Act. By acceptance of this Exchange Offer, each broker-dealer that receives Exchange Notes for Outstanding Notes pursuant to the Exchange Offer agrees that, upon receipt of notice from the Company of the happening of any event which makes any statement in this Prospectus untrue in any material respect or which requires the making of any changes in this Prospectus in order to make the statement herein not misleading (which notice the Company agrees to deliver promptly to such broker-dealer), such broker-dealer will suspend the use of this Prospectus until the Company has amended or supplemented this Prospectus to correct such misstatement or omission and has furnished copies of the amended or supplemented Prospectus to such broker-dealer. If the Company gives any such notice to suspend the use of the Prospectus, it will extend the 90-day period referred to above by the number of days during the period from and including the date of the giving of such notice up to and including when broker-dealers shall have received copies of the supplemented or amended Prospectus necessary to permit resales of Exchange Notes. VALIDITY OF THE SENIOR NOTES The validity of the Senior Notes will be passed upon for the Company by Jones, Day, Reavis & Pogue, Washington, D.C. INDEPENDENT AUDITORS The consolidated financial statements included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. 76 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- CONSOLIDATED FINANCIAL STATEMENTS OF SHOPPERS FOOD WAREHOUSE CORP......... F-2 Report of Independent Public Accountants.................................. F-3 Consolidated Balance Sheets as of July 1, 1995, June 29, 1996 and February 1, 1997.................................................................. F-4 Consolidated Statements of Income for the Three Years Ended June 29, 1996 and the Thirty-one Weeks Ended February 1, 1997.......................... F-5 Consolidated Statements of Changes in Stockholders' Equity for the Three Years Ended June 29, 1996 and the Thirty-one Weeks Ended February 1, 1997..................................................................... F-6 Consolidated Statements of Cash Flows for the Three Years Ended June 29, 1996 and the Thirty-one Weeks Ended February 1, 1997..................... F-7 Notes to Consolidated Financial Statements as of July 1, 1995, June 29, 1996 and February 1, 1997................................................ F-8 INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF SHOPPERS FOOD WAREHOUSE CORP..................................................................... F-17 Interim Consolidated Balance Sheets as of August 3, 1996 and August 2, 1997 (unaudited)......................................................... F-18 Interim Consolidated Statements of Income for the Twenty-six Weeks Ended August 3, 1996 and August 2, 1997 (unaudited)............................................... F-19 Interim Consolidated Statements of Changes in Stockholders' Equity for the Twenty-six Weeks Ended August 2, 1997 (unaudited)........................ F-20 Interim Consolidated Statements of Cash Flows for the Twenty-six Weeks Ended August 3, 1996 and August 2, 1997 (unaudited)...................... F-21 Notes to Interim Consolidated Financial Statements (unaudited)............ F-22
F-1 SHOPPERS FOOD WAREHOUSE CORP. CONSOLIDATED FINANCIAL STATEMENTS AS OF JULY 1, 1995, JUNE 29, 1996 AND FEBRUARY 1, 1997 F-2 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Shoppers Food Warehouse Corp.: We have audited the accompanying consolidated balance sheets of Shoppers Food Warehouse Corp. (a Delaware corporation) and subsidiaries as of February 1, 1997, June 29, 1996, and July 1, 1995, and the related consolidated statements of income, stockholders' equity and cash flows for the thirty-one weeks ended February 1, 1997 and for each of the three fiscal years in the period ended June 29, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Shoppers Food Warehouse Corp. and subsidiaries as of February 1, 1997, June 29, 1996, and July 1, 1995, and the results of their operations and their cash flows for the thirty- one weeks ended February 1, 1997, and for each of the three fiscal years in the period ended June 29, 1996, in conformity with generally accepted accounting principles. Arthur Andersen LLP Washington, D.C., April 5, 1997, except for Note 6 to which the date is June 23, 1997 F-3 SHOPPERS FOOD WAREHOUSE CORP. CONSOLIDATED BALANCE SHEETS AS OF JULY 1, 1995, JUNE 29, 1996 AND FEBRUARY 1, 1997
JULY 1, JUNE 29, FEBRUARY 1, 1995 1996 1997 -------- -------- ----------- (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents.................... $ 38,650 $ 3,560 $ 13,739 Short-term investments....................... 58,353 103,080 94,999 Accounts receivable.......................... 7,633 7,708 9,244 Merchandise inventories...................... 27,253 28,342 29,699 Prepaid expenses............................. 956 1,022 2,056 Income tax receivable........................ -- 273 -- Due from affiliate........................... 522 522 522 -------- -------- -------- Total current assets....................... 133,367 144,507 150,259 -------- -------- -------- Property and equipment, at cost: Land and buildings........................... 9,120 9,120 9,120 Store and warehouse equipment................ 71,195 75,827 78,737 Office and automotive equipment.............. 3,655 3,727 3,767 Leasehold improvements....................... 2,477 2,655 4,412 -------- -------- -------- 86,447 91,329 96,036 Accumulated depreciation and amortization.... (63,504) (69,944) (73,944) -------- -------- -------- Net property and equipment................. 22,943 21,385 22,092 Deferred income taxes.......................... 4,577 4,289 5,853 Other assets................................... 1,116 841 804 -------- -------- -------- Total assets............................... $162,003 $171,022 $179,008 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................. $ 38,275 $ 39,865 $ 41,830 Accrued expenses-- Salaries and benefits...................... 4,931 5,220 4,886 Taxes, other than income................... 1,934 1,996 2,903 Other...................................... 4,623 5,150 6,469 Income taxes payable......................... 2,152 -- 1,391 -------- -------- -------- Total current liabilities.................. 51,915 52,231 57,479 Capital lease obligation....................... 9,950 10,069 10,035 Deferred income................................ 1,218 412 2,448 Deferred rent liability........................ 3,590 4,277 4,558 -------- -------- -------- Total liabilities.......................... 66,673 66,989 74,520 -------- -------- -------- Commitments and contingencies (Notes 2 and 6) Stockholders' equity: Class A common stock, nonvoting, par value $5 per share, 25,000 shares authorized, 23,333 1/3 shares issued and outstanding........... 117 117 117 Class B common stock, voting, par value $5 per share, 25,000 shares authorized, 10,000 shares issued and outstanding............... 50 50 50 Retained earnings............................ 95,163 103,866 104,321 -------- -------- -------- Total stockholders' equity................. 95,330 104,033 104,488 -------- -------- -------- Total liabilities and stockholders' equity.................................... $162,003 $171,022 $179,008 ======== ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. F-4 SHOPPERS FOOD WAREHOUSE CORP. CONSOLIDATED STATEMENTS OF INCOME FOR THE FISCAL YEARS ENDED JULY 2, 1994, JULY 1, 1995, JUNE 29, 1996, AND THE THIRTY-ONE WEEKS ENDED FEBRUARY 3, 1996 AND FEBRUARY 1, 1997
(UNAUDITED) JULY 2, JULY 1, JUNE 29, FEBRUARY 3, FEBRUARY 1, 1994 1995 1996 1996 1997 (52 WEEKS) (52 WEEKS) (52 WEEKS) (31 WEEKS) (31 WEEKS) ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Sales................... $750,340 $790,842 $835,971 $496,121 $511,025 Cost of sales........... 593,063 616,521 651,986 390,186 398,129 ----------- ----------- ----------- ----------- ----------- Gross profit.......... 157,277 174,321 183,985 105,935 112,896 Selling and administra- tive expenses.......... 127,643 136,798 149,570 89,280 94,304 Depreciation and amorti- zation................. 10,785 8,529 8,913 4,766 4,573 ----------- ----------- ----------- ----------- ----------- Operating income...... 18,849 28,994 25,502 11,889 14,019 Interest income......... 2,189 4,682 5,789 3,330 3,526 Interest expense........ 1,426 1,451 1,771 836 710 Insurance settlement, gain (loss)............ 1,360 2,065 (355) (355) -- ----------- ----------- ----------- ----------- ----------- Income before income taxes................ 20,972 34,290 29,165 14,028 16,835 Provision for income taxes.................. 8,043 14,764 10,462 5,433 6,380 ----------- ----------- ----------- ----------- ----------- Net income............ $ 12,929 $ 19,526 $ 18,703 $ 8,595 $ 10,455 =========== =========== =========== =========== =========== Earnings per common share data: Earnings per common share................ $ 387.87 $ 585.78 $ 561.09 $ 257.85 $ 313.65 =========== =========== =========== =========== =========== Weighted average number of common shares outstanding............ 33,333 1/3 33,333 1/3 33,333 1/3 33,333 1/3 33,333 1/3 =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements. F-5 SHOPPERS FOOD WAREHOUSE CORP. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE FISCAL YEARS ENDED JULY 2, 1994, JULY 1, 1995, JUNE 29, 1996 AND THE THIRTY-ONE WEEKS ENDED FEBRUARY 1, 1997
COMMON STOCK ----------------- CLASS A CLASS B RETAINED NONVOTING VOTING EARNINGS TOTAL --------- ------- -------- -------- (DOLLARS IN THOUSANDS) Balance, July 3, 1993..................... $117 $ 50 $ 62,708 $ 62,875 Net income.............................. -- -- 12,929 12,929 ---- ---- -------- -------- Balance, July 2, 1994..................... 117 50 75,637 75,804 Net income.............................. -- -- 19,526 19,526 ---- ---- -------- -------- Balance, July 1, 1995..................... 117 50 95,163 95,330 Net income.............................. -- -- 18,703 18,703 Shareholder distribution................ -- -- (10,000) (10,000) ---- ---- -------- -------- Balance, June 29, 1996.................... 117 50 103,866 104,033 ---- ---- -------- -------- Net income.............................. -- -- 10,455 10,455 Shareholder distribution................ -- -- (10,000) (10,000) ---- ---- -------- -------- Balance, February 1, 1997................. $117 $ 50 $104,321 $104,488 ==== ==== ======== ========
The accompanying notes are an integral part of these consolidated statements. F-6 SHOPPERS FOOD WAREHOUSE CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED JULY 2, 1994, JULY 1, 1995 AND JUNE 29, 1996 AND THE THIRTY-ONE WEEKS ENDED FEBRUARY 1, 1997
JULY 2, JULY 1, JUNE 29, FEBRUARY 1, 1994 1995 1996 1997 (52 WEEKS) (52 WEEKS) (52 WEEKS) (31 WEEKS) ---------- ---------- ---------- ----------- (DOLLARS IN THOUSANDS) Cash flows from operating activi- ties: Net income....................... $ 12,929 $ 19,526 $ 18,703 $ 10,455 Adjustments to reconcile net in- come to net cash provided by op- erating activities-- Depreciation and amortization... 10,785 8,529 8,913 4,573 Increase in deferred income tax- es............................. (594) (1,058) 288 (1,564) Loss (gain) on disposition of assets......................... (15) 34 -- -- Effect of insurance receivable on income...................... (104) -- -- -- Interest expense in excess of capital lease payments......... 240 208 119 -- Increase in deferred rent lia- bility......................... 1,082 553 687 281 Changes in operating assets and liabilities: Accounts receivable............ (3,952) 1,028 (75) (1,536) Merchandise inventories........ (2,455) 1,810 (1,089) (1,357) Prepaid expenses............... (53) (63) (66) (1,034) Due from affiliate............. -- 490 -- -- Other assets................... (354) (252) 275 37 Accounts payable............... 1,544 2,009 1,590 1,965 Accrued expenses............... 241 (1,023) 878 1,892 Income taxes payable........... 144 1,307 (2,425) 1,664 Deferred income................ (1,177) (1,191) (806) 2,036 --------- --------- --------- -------- Net cash provided by operating activities................... 18,261 31,907 26,992 17,412 --------- --------- --------- -------- Cash flows from investing activi- ties: Capital expenditures............. (5,112) (4,693) (7,355) (5,280) Proceeds from sale of fixed as- sets............................ 15 -- -- -- Purchase of short-term invest- ments........................... (106,476) (138,613) (218,039) (95,421) Sales/maturities of short-term investments..................... 105,980 107,777 173,312 103,502 --------- --------- --------- -------- Net cash provided by (used in) investing activities......... (5,593) (35,529) (52,082) 2,801 --------- --------- --------- -------- Cash flows from financing activi- ties: Shareholder distribution......... -- -- (10,000) (10,000) Payments on capital lease........ -- -- -- (34) --------- --------- --------- -------- Net cash used in financing ac- tivities..................... -- -- (10,000) (10,034) --------- --------- --------- -------- Net increase (decrease) in cash and cash equivalents............. 12,668 (3,622) (35,090) 10,179 Cash and cash equivalents, begin- ning of period................... 29,604 42,272 38,650 3,560 --------- --------- --------- -------- Cash and cash equivalents, end of period........................... $ 42,272 $ 38,650 $ 3,560 $ 13,739 ========= ========= ========= ======== Supplementary disclosures of cash flow information: Cash paid during the fiscal year for-- Income taxes.................... $ 8,525 $ 12,091 $ 12,487 $ 6,300 Interest........................ $ 1,456 $ 1,451 $ 1,771 $ 710 ========= ========= ========= ======== Supplemental disclosure of noncash financing activity: In fiscal year 1994, the Company recorded an insurance receivable and wrote-off certain assets with a net book value of $708,000 due to fire damage
The accompanying notes are an integral part of these consolidated statements. F-7 SHOPPERS FOOD WAREHOUSE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31 WEEKS ENDED FEBRUARY 1, 1997 AND THE 52 WEEKS ENDED JUNE 29, 1996, JULY 1, 1995 AND JULY 2, 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The consolidated financial statements include Shoppers Food Warehouse Corp. (a Delaware corporation) and its subsidiaries, collectively the "Company." All significant intercompany accounts and transactions have been eliminated. As of February 1, 1997, June 29, 1996, and July 1, 1995, the Company operated 34, 34 and 33 warehouse-style grocery stores, respectively, in Maryland and Virginia. FISCAL YEAR In connection with the acquisition (see Note 6), the Company changed its fiscal year end to the Saturday closest to January 31. Previously the Company's fiscal year ended on the Saturday closest to June 30. A fiscal year end coinciding with the Saturday closest to a month end results in a 52 or 53 week year. The fiscal years ended June 29, 1996, July 1, 1995, and July 2, 1994 contained 52 weeks. The period ended February 1, 1997 contained 31 weeks. USE OF ESTIMATES IN FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid temporary cash investments with maturities of three months or less to be cash equivalents. The majority of these are invested in U.S. Treasury Notes. SHORT TERM INVESTMENTS Effective July 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The effect of adopting SFAS No. 115 did not materially impact the Company's financial position or results of its operations. Short- term investments consist of U.S. Government Treasury Notes with original maturities of more than three months. As of July 1, 1995, and June 29, 1996, the Company carried these debt securities at amortized cost as it has both the positive intent and ability to hold these investments to maturity. Short-term investments carried as of February 1, 1997 mature at various dates from February 15, 1997 to November 15, 1997. Subsequent to year-end, management liquidated a substantial amount of its short-term investments in order to reduce the debt associated with the acquisition by Dart Group Corporation ("Dart") of 50 percent equity in the Company that it did not own (see Note 6). Accordingly, the Company has changed its classification of its short-term investments to available-for-sale as of February 1, 1997. The cost of these securities approximates fair market value as of February 1, 1997, June 29, 1996 and July 1, 1995. F-8 SHOPPERS FOOD WAREHOUSE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) MERCHANDISE INVENTORIES The Company's inventories are priced at the lower of cost or market. Cost is determined using the last-in, first-out method. If replacement cost (which approximates the first-in, first-out method) had been used, inventories would have been greater by approximately $4,375,000, $3,845,000 and $2,940,000 as of February 1, 1997, June 29, 1996 and July 1, 1995 respectively. Net income would have been higher by approximately $530,000 for the period ended February 1, 1997, and $905,000, $877,000, and $364,000, for the fiscal years ended June 29, 1996, July 1, 1995, and July 2, 1994, respectively. ACCOUNTS RECEIVABLE Accounts receivable include amounts due from vendors for coupons remitted, cooperative advertising, merchandise rebates, as well as interest receivable on treasury notes. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. The Company depreciates property and equipment using accelerated methods over the estimated useful lives of the assets, generally five to seven years. ACCRUED INSURANCE CLAIMS The Company maintains self funded coverage with respect to general, workers compensation, and health insurance liabilities. Claims for general and workers' compensation are administered through insurance companies, which estimate the obligation of reported claims. An estimate of the obligation for health insurance claims is accrued at year-end and is based on historical data. Expenses arising from claims are accrued as claims become subject to estimation. Self-insurance liabilities are based on claims filed plus an additional amount for incurred but not reported claims. These liabilities are not discounted. INCOME TAXES The Company provides a deferred tax expense or benefit equal to the change in the net deferred tax asset during the year in accordance with SFAS No. 109 "Accounting for Income Taxes." Deferred income taxes represent the future net tax effects resulting from temporary differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. STORE OPENING AND CLOSING COSTS All costs of a noncapital nature incurred in opening a new store are charged to expense as incurred. The Company opened one new store during each of the fiscal years ended June 29, 1996 and July 2, 1994. No stores were opened during the year ended July 1, 1995 and the period ended February 1, 1997. The costs associated with store closings are charged to selling and administrative expense when management makes the decision to close a store. Such costs consist primarily of lease payments and other carrying costs of holding the facility, net of estimated sublease income. DEFERRED INCOME The Company has entered into various agreements with vendors and suppliers which provide for the payment of cash or the receipt of merchandise at the beginning or during the contract period. These amounts are deferred and amortized over the expected lives of the contracts. F-9 SHOPPERS FOOD WAREHOUSE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) LONG LIVED ASSETS Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value should be assessed. Impairment is measured by comparing the carrying value to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. The Company has determined that as of February 1, 1997, there has been no impairment in the carrying value of long-lived assets. CONCENTRATION OF CREDIT RISK The Company's assets that are exposed to credit risk consist primarily of cash and cash equivalents, short-term investments, and accounts receivable. The Company maintains cash and cash equivalents with major banks in its marketplace. The Company performs periodic evaluations of the relative credit standing of the financial institutions with which it does business. The Company's short-term investments are invested in U.S. Government Treasury Notes. The Company's accounts receivable balance results primarily from the amounts due from its vendors for various promotional programs. The Company periodically reviews its accounts receivable balance and allows for uncollectible accounts. CURRENT ASSETS AND CURRENT LIABILITIES SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires the disclosure of the fair value of a financial instrument for which it is practicable to estimate the value and the methods and significant assumptions used to estimate the value. At February 1, 1997, June 29, 1996, and July 1, 1995 the carrying amount of current assets and current liabilities approximates fair value due to the short maturity of those instruments. 2. DISPOSITION OF TOTAL BEVERAGE CORP. In October 1992, the Company opened Total Beverage Corp. ("Total Beverage"), a discount beverage retail store. On February 27, 1993, the Company entered into an Asset Purchase Agreement (the "Agreement") to sell Total Beverage to Dart Group Corporation ("Dart"). As proceeds from the sale, the Company received approximately $1,493,000 in a note receivable (the "Note"). Under the terms of the Agreement, the Company is required to reimburse the buyer for 25 percent of future operating losses of Total Beverage, as defined in the Agreement, over a three-year period. The operating losses of Total Beverage, which reduce the note receivable were approximately $322,000 for the three-year period ended February 27, 1995. To the extent of such losses, the Company will remit funds first by reducing amounts due under the Note and then by remitting payment to the buyer. The Note and accrued interest were due in February 1995. The Company has reflected the Note, net of a $1,000,000 reserve, in the accompanying balance sheets as of February 1, 1997, June 29, 1996, and July 1, 1995, respectively. Management believes the $1,000,000 reserve is necessary to provide for the operating losses of $322,000, certain other reductions to the Note balance per the Agreement and for the uncertainty of collection on the Note based on the current liquidity of Dart's Total Beverage subsidiary. 3. OTHER ACCRUED EXPENSES: Other accrued expenses consist of the following (in thousands):
FEBRUARY 1, JUNE 29, JULY 1, 1997 1996 1995 ----------- -------- ------- Accrued insurance.................................. $3,441 $2,719 $2,262 Reserve for store closing.......................... 1,513 853 853 Gift certificates outstanding...................... 1,090 928 815 Other.............................................. 425 650 693 ------ ------ ------ Total............................................ $6,469 $5,150 $4,623 ====== ====== ======
F-10 SHOPPERS FOOD WAREHOUSE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. INCOME TAXES: The provision for income taxes is comprised of the following (in thousands).
THIRTY-ONE FISCAL YEAR WEEKS ENDED ENDED FEBRUARY 1, JUNE 29, JULY 1, JULY 2, 1997 1996 1995 1994 ----------- -------- ------- ----------- Current income tax provision: Federal........................... $ 7,412 $ 9,493 $14,248 $ 8,084 State............................. 532 681 1,574 1,088 Deferred income tax (benefit) provi- sion............................... (1,564) 288 (1,058) (1,129) ------- ------- ------- ------- $ 6,380 $10,462 $14,764 $ 8,043 ======= ======= ======= =======
This effective income tax rate is reconciled to the Federal statutory rate as follows:
THIRTY-ONE FISCAL YEAR ENDED WEEKS ENDED ------------------------ FEBRUARY 1, JUNE 29, JULY 1, JULY 2, 1997 1996 1995 1994 ----------- -------- ------- ------- Federal statutory rate................... 35% 35% 35% 35% Increase in taxes resulting from: State income taxes, net of Federal income tax benefit............................. 2.0 2.0 3.1 3.0 Revision of estimate for tax accruals.... -- -- 3.7 -- Other.................................... 0.9 (1.1) 1.3 0.4 ---- ---- ---- ---- Effective tax rate....................... 37.9% 35.9% 43.1% 38.4% ==== ==== ==== ====
Temporary differences which give rise to the deferred tax assets and liabilities on a consolidated basis are as follows (in thousands).
THIRTY-ONE FISCAL YEAR ENDED WEEKS ENDED ------------------- FEBRUARY 1, JUNE 29, JULY 1, 1997 1996 1995 ----------- --------- -------- Deferred tax assets: Loss on disposition of Total Beverage....... $ 374 $ 374 $ 381 Reserves for store closings and other....... 566 319 325 Deferred Rent............................... 1,705 1,600 1,433 Capital Lease............................... 505 517 946 Employee Benefits........................... 2,241 1,843 1,472 Deferred Income............................. 435 154 557 Other....................................... 326 89 -- ------ -------- -------- $6,152 $ 4,896 $ 5,114 ====== ======== ======== Deferred tax liabilities: Depreciation................................ (299) (607) (526) Other....................................... -- -- (11) ------ -------- -------- (299) (607) (537) ------ -------- -------- Net deferred tax asset........................ $5,853 $ 4,289 $ 4,577 ====== ======== ========
F-11 SHOPPERS FOOD WAREHOUSE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company believes that no valuation allowance is necessary as of February 1, 1997, June 29, 1996, and July 1, 1995 due to its history of profitable operations. 5. COMMITMENTS AND CONTINGENCIES: STOCKHOLDERS' AGREEMENT The Company's stockholders are party to a stockholders' agreement dated June 28, 1988 (the "Stockholder Agreement"), that specifies how a stockholder can transfer ownership of their interest in the Company's stock. In June 1996 and September 1996, the Company declared cash dividends payable to its stockholders. Subsequent to February 1, 1997, Dart purchased the remaining 50% interest in the Company that it did not already own (see Note 6). CONTROLLING STOCKHOLDER After the Acquisition discussed in Note 6, the Company became an indirect subsidiary of Dart. As a result, Dart controls the Company. Over the past three years, there has been significant litigation involving the control of Dart. On September 7, 1994, the Board of Directors of Dart established an Executive Committee comprised of Dart's outside directors to conduct the affairs of Dart with respect to matters that were the subject of dispute between the then Chairman of the Board and Chief Executive Officer of Dart, Herbert H. Haft, and the then President and Chief Operating Officer of Dart, Ronald S. Haft. Because these disputes were so extensive, beginning in the fall of 1994, the Executive Committee assumed day-to-day involvement in Dart's management. In April 1996, the Board of Directors of Dart authorized the Executive Committee to conduct the affairs of Dart with respect to matters that are the subject of dispute between Dart and its present Co-Chairman, or in connection with which Dart and its present Co-Chairman have adverse interests, and to continue to oversee the day-to-day management of Dart. Dart has filed three lawsuits against Herbert H. Haft alleging various improper actions by him. On October 6, 1995, Dart and Ronald S. Haft entered into a settlement of litigation initiated by Ronald S. Haft to obtain control of Dart through the exercise of certain disputed stock options, and other related transactions (the "RSH Settlement"). The RSH Settlement transactions are subject to legal challenge and, through such litigation, Herbert H. Haft seeks control of Dart. In connection with the legal challenges to the RSH Settlement, on December 6, 1995, the Delaware Court of Chancery entered a Standstill Order (the "Standstill Order"), which restricts certain actions by Dart. Without further order of the court, Dart may not, among other things, (i) change the current composition of the Board of Directors of Dart or any of its subsidiaries or (ii) issue any additional securities of Dart or any of its subsidiaries. In addition, without first giving certain litigants not less than seven days' written notice, Dart may not take any extraordinary actions, including but not limited to actions that would result in (a) the liquidation of Dart or any of its subsidiaries or (b) the sale of any major subsidiary of Dart. For purposes of the Standstill Order, the Company is a "subsidiary" of Dart and the phrase "extraordinary actions" means any transaction, contract or agreement, the value of which exceeds $3 million. F-12 SHOPPERS FOOD WAREHOUSE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Dart is engaged in discussions with Herbert H. Haft and collectively with Robert M. Haft, Linda G. Haft and Gloria G. Haft to explore opportunities to settle claims to control of Dart and other litigation pending between them and Dart. There can be no assurance that any definitive settlements will be reached or as to the terms or timing of any settlements, if they occur. 401(K) PLAN Prior to fiscal year 1995 the Company maintained a noncontributory profit sharing plan (the "Plan") for all employees with one year of full time continuous service. Discretionary contributions were made by the Company in trust for the exclusive benefit of employees who qualified under the Plan. The Board of Directors authorized a contribution of $300,000 to the Plan for the fiscal year ended July 2, 1994. During fiscal 1995, the Company replaced the Plan with a defined contribution 401(k) plan (the "New Plan"). The New Plan is available to substantially all employees over the age of 21 who have completed one year of continuous service. Discretionary contributions are made by the Company in trust for the exclusive benefit of employees who participate in the New Plan. The Board of Directors authorized a contribution of $400,000 to the New Plan for both fiscal years ending June 29, 1996 and July 1, 1995. For the thirty-one weeks ended February 1, 1997, the Company has accrued $233,000 related to its projected fiscal year 1997 contribution. All amounts contributed to the New Plan are included in accrued salaries and benefits in the accompanying financial statements. MULTIEMPLOYER PLANS The Company makes contributions to multiemployer plans for its union employees. Such contributions, net of employee contributions, totaled approximately $440,000, $6,205,000, $282,000, for pension, health and welfare, and legal benefit plans, respectively, for the thirty-one weeks ended February 1, 1997. Contributions to the pension, health and welfare, and legal benefit plans totaled approximately $838,000, $10,373,000, and $466,000, respectively, for the year ended June 29, 1996, $787,000, $8,701,000 and $408,000, respectively, for the year ended July 1, 1995 and $745,000, $7,437,000 and $382,000, respectively, for year ended July 2, 1994. LEASE COMMITMENTS The Company leases warehouse and retail store facilities under noncancelable lease agreements ranging from 1 to 20 years. Renewal options are available on the majority of the leases for one or more periods of five years each. Most leases require the payment of taxes and maintenance costs, and some leases provide for additional rentals based on sales in excess of specified minimums. All store leases have stated periodic rental increases. The increases are amortized over the lives of the leases. Rent expense includes approximately $281,000, $687,000, $802,000 and $832,000 of amortized rental increases for the period ended February 1, 1997, and for the year ended June 29, 1996, July 1, 1995, and July 2, 1994, respectively. Following is a schedule of annual future minimum payments under the capital lease for office space, assuming future annual increases of 6 percent, and noncancelable operating leases, which have initial or remaining terms in excess of one year at February 1, 1997 (in thousands).
CAPITAL OPERATING FISCAL YEAR LEASE LEASE ----------- ------- --------- 1998....................................................... $ 1,316 $ 13,038 1999....................................................... 1,395 13,115 2000....................................................... 1,478 12,957 2001....................................................... 1,567 12,665 2002....................................................... 1,661 12,291 Thereafter................................................. 19,742 107,833 ------- -------- Total.................................................... $27,159 $171,899 ======== Less--Imputed Interest..................................... 17,124 ------- Present Value of net minimum lease payments................ $10,035 Less--Current maturities................................... -- ------- Long-term capital lease obligations........................ $10,035 =======
F-13 SHOPPERS FOOD WAREHOUSE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Rent expense for operating leases charged to operations is as follows (in thousands):
THIRTY-ONE FISCAL YEAR ENDED WEEKS ENDED ------------------------ FEBRUARY 1, JUNE 29, JULY 1, JULY 2, 1997 1996 1995 1994 ----------- -------- ------- ------- Minimum rentals......................... $ 7,288 $12,021 $10,925 $11,034 Contingent rentals...................... 3,770 4,006 4,054 4,052 ------- ------- ------- ------- Total................................. $11,058 $16,027 $14,979 $15,086 ======= ======= ======= =======
RELATED-PARTY LEASES In July 1990, the Company entered into an agreement to lease an 86,000 square foot office building in Lanham, Maryland, from a private partnership (the "Partnership") which is owned by stockholders of the Company. The lease is for 20 years and it commenced December 10, 1990. The lease provides for yearly increasing rental payments, based upon the Consumer Price Index for the Washington D.C., metropolitan statistical area; however, the annual increases will not be more than 6 percent or less than three percent. Rental payments for the thirty-one weeks ended February 1, 1997 and for fiscal years ended June 29, 1996, July 1, 1995, and July 2, 1994 were approximately $744,000, $1,246,000, $1,210,000, and $1,175,000 respectively, and all payments over the life of the lease total approximately $34,400,000. The Company is accounting for the lease as a capital lease. Due to fixed rental increases during the term of the lease, lease payments exceeded interest expense by approximately $34,000 for the thirty-one weeks ended February 1, 1997. Interest expense exceeded lease payments by $254,000, $292,000, and $321,000 for the fiscal years ended June 29, 1996, July 1, 1995, and July 2, 1994, respectively. Assuming future annual rental increases of six percent, the capital lease obligation will continue to increase through November 2000, at which time accumulated interest expense recognized for financial reporting purposes will exceed lease payments by approximately $1,800,000. The lease requires the Company to pay for maintenance, utilities, insurance, and taxes. The Partnership purchased the office building for approximately $8,663,000 in July of 1990. During the period ended February 1, 1997, and the fiscal years ended June 29, 1996, July 1, 1995, and July 2, 1994, the Company made rental payments of approximately $3,573,000, $5,384,000, $5,985,000, and $5,327,000, respectively on store leases to partnerships related to stockholders of the Company. As of February 1, 1997, the Company had ten store operating leases with partnerships related to stockholders of the Company. The remaining future minimum payments under these leases exclusive of option periods are approximately $70,820,000 and expire through 2014. The Company made payments of approximately $198,000, $278,000, $246,000, and $246,000 during the thirty-one weeks ended February 1, 1997, and each of the fiscal years ended June 29, 1996, July 1, 1995, and July 2, 1994 for warehouse operating leases to a partnership owned by stockholders of the Company and to a corporation related to stockholders of the Company. As of February 1, 1997, the remaining future minimum annual payments under these leases are approximately $1,386,000 and expire in 2002. SUBLEASING AGREEMENTS The Company subleases space within one store for the sale of beer and wine to an entity affiliated with its officers. The Company received rental income of approximately $57,865, $155,000, $155,000, and $123,000 in the thirty-one weeks ended February 1, 1997, and in the fiscal years ended June 29, 1996, July 1, 1995, and July 2, 1994, respectively, from this entity, which is included in selling and administrative expenses. As of February 1, 1997, there were three unaffiliated subtenants in the Lanham, Maryland office building leased by the Compamy from the Partnership. The subtenants are leasing approximately 30,000 square feet. The F-14 SHOPPERS FOOD WAREHOUSE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) subleases expire between January 1998 and September 2000. The Company received rental income of approximately $321,000, $551,000, $530,000 and $615,000 in the period ending February 1, 1997 and in the fiscal years ended June 29, 1996, July 1, 1995, and July 2, 1994 respectively from its subtenants. During the period ended June 29, 1996 the Company began leasing space to a corporation related to the stockholders of the Company. The Company received rental income of approximately $91,000 and $140,000 during the period ended February 1, 1997 and during the fiscal year ended June 29, 1996. LINE-OF CREDIT AGREEMENT/LETTERS OF CREDIT The Company has a $35,000,000 line-of-credit with a local bank, with interest payable at the prime rate. The Company has authorized the local bank to issue letters of credit in connection with the Company's workers' compensation insurance. There were no borrowings on this line in the seven months ended February 1, 1997. As of February 1, 1997, June 29, 1996, and July 1, 1995, the Company's line of credit was reduced by outstanding letters of credit of approximately $6,724,000, $6,424,000 and $6,135,000, respectively. The line of credit expired on March 31, 1997, however, the letters of credit will mature at various dates throughout 1998. LEGAL PROCEEDINGS The Company is involved in routine litigation incidental to operations. In the opinion of management, it is unlikely that any exposure from these actions will have a material impact on the Company's financial position. INSURANCE SETTLEMENT In June of 1994, the Company had one store that incurred significant fire damage. The Company recorded the insurance settlement on the store's inventory, fixed assets, reimbursable payroll costs, and other business interruption costs. The gross insurance proceeds were $2,065,000 and $1,360,000, during the fiscal years ended July 1, 1995, and July 2, 1994, respectively. The amount recorded in fiscal year 1994 was net of associated costs to write-off assets with a net book value of $708,000. During the fiscal year ended June 29, 1996, the insurance claim was settled in full and the Company recorded a loss of $355,000 to reflect the remaining amount received for insurance proceeds, net of associated costs. Insurance settlements have been reclassified from prior year presentations in the accompanying financial statements. 6. SUBSEQUENT EVENTS On December 16, 1996, Dart submitted offers, pursuant to the Stockholders' Agreement governing Dart's investment in the Company, to either (i) sell all of Dart's 50 percent equity interest in the Company or (ii) buy the 50 percent equity interest in the Company that it did not own, in either case for a cash price of $210 million. On December 18, 1996, the other stockholders accepted Dart's offer to purchase their shares (the "Shares") of capital stock of the Company. Under the terms of the Stockholders' Agreement, Dart's acquisition (the "Acquisition") of the shares was to take place within 60 days of such acceptance. On February 6, 1997, Dart acquired the remaining 50% interest in the Company. To effect the Acquisition, Dart's wholly owned subsidiary, SFW Acquisition Corp., issued $140,000,000 in Increasing Rate Senior Notes due in 2000 ("Increasing Rate Notes") and funded the remaining portion of the purchase price with bridge financing. Immediately following the Acquisition, Dart liquidated a substantial amount of the Company's short-term investments to repay the bridge financing and fee associated with the transaction. In addition, the Company was merged with SFW Acquisition Corp. and the Company became the obligor of the Increasing Rate Notes. Also, on February 6, 1997, the Company authorized a $10,000,000 dividend to stockholders of record on February 7, 1997. F-15 On June 23, 1997, the Company offered $200,000,000 in Senior Notes due 2004 (the "Senior Notes") in a private placement. Net proceeds from the sale of the Senior Notes were used to repay $140,000,000 (plus accrued interest) of the Increasing Rate Notes and will be used to pay dividends and loans of $50,000,000 to the Company's ultimate parent, Dart, if and when Dart settles litigation with certain of its stockholders. The payments to Dart would be restricted and contingent upon the settlement of certain litigation. If the restricted proceeds were not used for this purpose, on or prior to June 30, 1998, then the Company would be required to use the restricted proceeds (including accrued interest) to redeem $50,000,000 aggregate principal amount of the Senior Notes at 101% of the principal amount thereof and pay accrued unpaid interest thereon. The Senior Notes are general unsecured obligations of the Company and rank pari passu in right of payment with all existing and future senior indebtedness of the Company and senior in right of payment to all existing and future subordinated indebtedness of the Company. The Senior Notes are effectively subordinated in right of payment to all secured indebtedness of the Company and contain certain restrictive covenants including, limitation on restricted payments, limitation on indebtedness, limitation on investments, loans and advances, limitation on dividends and other payment restrictions affecting subsidiaries, limitation on liens, limitation on transactions with affiliates, restriction on mergers, consolidations and transfers of assets, limitation on lines of business, limitation on asset sales and limitation on issuance and sale of capital stock of subsidiaries. Certain restricted payments are permitted to the extent that an event of default has not occurred and generally must be less than 50% of net income before non-cash charges and unpaid interest income on intercompany loans. The Senior Notes are fully and unconditionally guaranteed by SFW Holding Corp. ("Holdings"), the immediate parent of the Company. The guarantee is secured by a first priority security interest in the capital stock of the Company owned by Holdings. Prior to the Acquisition, Holdings had no material assets, liabilities or operations independent of the Company. As of the Acquisition date, Dart contributed its initial 50% interest in the Company to Holdings for 100% of the stock of Holdings. This interest was recorded at Dart's carryover basis. Subsequent to the merger of SFW Acquisition Corp. into the Company, Holdings became the immediate parent of the Company. Holding's sole purpose is to own the Company's stock. Since Holdings' sole asset is its investment in the Company and the accounting for the Acquisition will be pushed down into the Company's financial statements, the post acquisition consolidated financial statements of Holdings will be substantially the same as the Company's consolidated financial statements. Accordingly, no separate financial statements of Holdings are presented because this information would not be material to investors. 7. PRO FORMA DATA FOR THE 31 WEEKS ENDED FEBRUARY 1, 1997 (UNAUDITED) The following unaudited pro forma condensed consolidated financial statements of the Company for the 31 weeks ended February 1, 1997 give effect to (i) the sale of the Senior Notes and the application of the net proceeds therefrom to repay the Increasing Rate Notes and to make a $40,000,000 dividend and a $10,000,000 loan to Dart to fund settlements with certain of Dart's stockholders, (ii) the use of $25,000,000 of existing cash, cash equivalents and short-term investments to extend a loan to Dart, (iii) the push-down accounting treatment for the Acquisition by Dart and (iv) the impact on depreciation and amortization resulting from the accounting for the acquisition, as though such transactions occurred on June 30, 1996.
31 WEEKS ENDED FEBRUARY 1, 1997 ---------------------- (DOLLARS IN THOUSANDS) Sales..................................... $511,025 Gross Profit.............................. 112,896 Operating Income.......................... 12,765 Net Income................................ 704
F-16 SHOPPERS FOOD WAREHOUSE CORP. INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF AUGUST 3, 1996 AND AUGUST 2, 1997 F-17 SHOPPERS FOOD WAREHOUSE CORP. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AUGUST 3, AUGUST 2, 1996 1997 --------- --------- (DOLLARS IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents................................ $ 10,538 $ 14,058 Marketable debt securities............................... 101,541 20,013 Restricted proceeds...................................... -- 50,218 Accounts receivable...................................... 8,160 6,735 Merchandise inventories.................................. 27,615 28,484 Prepaid expenses......................................... 1,215 1,549 Due from affiliate....................................... 522 522 -------- -------- 149,591 121,579 -------- -------- Property and Equipment, at cost: Land and buildings....................................... 9,120 7,503 Store and warehouse equipment............................ 76,682 60,992 Office and automotive equipment.......................... 3,767 2,055 Leasehold improvements................................... 2,656 3,842 -------- -------- 92,225 74,392 Accumulated depreciation and amortization................ (70,755) (35,298) -------- -------- Net property and equipment............................. 21,470 39,094 -------- -------- Deferred income taxes...................................... 5,214 -- Deferred financing costs................................... -- 6,174 Excess purchase price over net assets acquired............. -- 146,979 Lease rights............................................... -- 11,996 Other assets............................................... 954 876 -------- -------- Total assets........................................... $177,229 $326,698 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable......................................... $ 39,970 $ 38,865 Accrued expenses-- Salaries and benefits................................... 3,715 6,645 Taxes other than income................................. 2,357 2,447 Other................................................... 7,820 13,023 Income taxes payable..................................... 2,218 518 -------- -------- 56,080 61,498 Senior Notes due 2004...................................... -- 200,000 Capital lease obligations.................................. 10,091 11,549 Deferred income taxes...................................... -- 4,845 Other liabilities.......................................... 4,707 3,001 -------- -------- Total liabilities...................................... 70,878 280,893 -------- -------- Commitments and Contingencies Stockholders' Equity: Class A common stock, nonvoting, par value $5.00 per share, 25,000 shares authorized; 23,333 1/3 shares issued.................................................. 117 117 Class B common stock, voting, par value $5.00 per share, 25,000 shares authorized; 10,000 shares issued.......... 50 50 Retained earnings........................................ 106,184 45,638 -------- -------- Total stockholders' equity............................. 106,351 45,805 -------- -------- Total liabilities and stockholders' equity............. $177,229 $326,698 ======== ========
The accompanying notes are an integral part of these balance sheets. F-18 SHOPPERS FOOD WAREHOUSE CORP. CONSOLIDATED STATEMENTS OF INCOME FOR THE TWENTY-SIX WEEKS ENDED AUGUST 3, 1996 AND AUGUST 2, 1997 (UNAUDITED)
AUGUST 3, AUGUST 2, 1996 1997 --------- --------- (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) Sales..................................................... $419,653 $419,524 Cost of sales............................................. 323,474 320,364 -------- -------- Gross profit.......................................... 96,179 99,160 Selling and administrative expenses....................... 74,379 76,677 Depreciation and amortization............................. 4,844 5,079 -------- -------- Operating income...................................... 16,956 17,404 Interest income........................................... 3,113 1,797 Interest expense.......................................... 1,062 10,392 -------- -------- Income before income taxes, extraordinary item and cumulative effect of accounting change................... 19,007 8,809 Provision for income taxes................................ 6,579 3,851 -------- -------- Net income before extraordinary item and cummulative ef- fect of accounting change................................ 12,428 4,958 Extraordinary item: Loss on early extinguishment of debt, net of income taxes of $2,150........................................ -- (3,126) Cumulative effect of accounting change ................... -- 1,729 -------- -------- Net income................................................ $ 12,428 $ 3,561 ======== ======== Earnings per common share data: Income before extraordinary item and cumulative effect of accounting change................................... $ 372.84 $ 148.74 Extraordinary item: Loss on early extinguishment of debt.................. -- (93.78) Cumulative effect of accounting change, net............. -- 51.87 -------- -------- Net income.............................................. $ 372.84 $ 106.83 ======== ======== Weighted average common shares outstanding................ 33 33 ======== ======== Pro forma amounts assuming accounting change is applied retroactively: Income before extraordinary item........................ $ 12,280 $ 4,958 Earnings per common share.............................. $ 368.40 $ 148.74 Net Income.............................................. $ 12,280 $ 1,832 Earnings per common share.............................. $ 368.40 $ 54.96
The accompanying notes are an integral part of these statements. F-19 SHOPPERS FOOD WAREHOUSE CORP. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE TWENTY-SIX WEEKS ENDED AUGUST 2, 1997 (UNAUDITED)
COMMON STOCK ----------- CLASS CLASS RETAINED A B EARNINGS TOTAL ----- ----- -------- -------- Balance February 1, 1997........................ $117 $50 $104,321 $104,488 Merger of SFW Acquisition Corp................ -- -- (52,244) (52,244) Dividend paid................................. -- -- (10,000) (10,000) Net income.................................... -- -- 3,561 3,561 ---- --- -------- -------- Balance August 2, 1997.......................... $117 $50 $ 45,638 $ 45,805 ==== === ======== ========
F-20 SHOPPERS FOOD WAREHOUSE CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE TWENTY-SIX WEEKS ENDED AUGUST 3, 1996 AND AUGUST 2, 1997 (UNAUDITED)
AUGUST 3, AUGUST 2, 1996 1997 --------- --------- (DOLLARS IN THOUSANDS) Cash Flows from Operating Activities: Net income............................................. $ 12,428 $ 3,561 Adjustments to reconcile net income to net cash provided by operating activities: -- Depreciation and amortization.......................... 4,844 5,079 Cumulative effect of accounting change................. -- (1,729) Amortization of deferred financing costs............... -- 943 Interest in excess of capital lease payments........... 126 154 Write-off of Increasing Rate Notes financing costs..... -- 5,276 Increase in deferred rent liability.................... 279 469 Change in assets and liabilities: Accounts receivable................................... 1,023 2,509 Merchandise inventories............................... 1,025 1,215 Prepaid expenses...................................... 60 507 Other assets.......................................... 249 (72) Accounts payable...................................... (775) (2,965) Accrued expenses...................................... (621) 4,190 Income taxes payable.................................. (43) (873) Deferred income taxes................................. (243) -- Deferred income....................................... (165) (849) --------- --------- Net cash provided by operating activities............ $ 18,187 $ 17,415 --------- --------- Cash Flows from Investing Activities: Capital expenditures................................... $ (4,932) $ (5,861) Purchase of short-term investments..................... (127,551) (18,491) Sales/maturities of short-term investments............. 112,356 93,477 --------- --------- Net cash provided by(used in)investing activities.... $ (20,127) $ 69,125 --------- --------- Cash Flows from Financing Activities: Payments for acquisition and deferred financing costs.. $ -- $ (13,203) Proceeds from Senior Notes............................. -- 200,000 Repayment of Increasing Rate Notes..................... -- (140,000) Restricted proceeds.................................... -- (50,218) Dividend to shareholder................................ -- (10,000) Payment for acquisition debt........................... -- (72,800) --------- --------- Net cash used in financing activities................ $ -- $ (86,221) --------- --------- Net decrease in cash and equivalents..................... $ (1,940) $ 319 Cash and equivalents, beginning of period................ 12,478 13,739 --------- --------- Cash and equivalents, end of period...................... $ 10,538 $ 14,058 ========= ========= Supplemental Disclosure of Cash Flow Information: Cash paid for Interest.............................................. $ 843 $ 7,416 Income taxes.......................................... 5,946 2,826 Supplemental disclosure of noncash activities:
In conjunction with the acquisition of a 50% interest in the Company, $140 million of debt was pushed down into the Company's financial statements, (see Note 5). The accompanying notes are an integral part of these statements. F-21 SHOPPERS FOOD WAREHOUSE CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWENTY-SIX WEEKS ENDED AUGUST 2, 1997 AND AUGUST 3, 1996 The accompanying condensed interim financial statements as of August 2, 1997 and for the 26 weeks ended August 2, 1997 and August 3, 1996 of the Company have been prepared by Shoppers Food Warehouse Corp. without an audit. Certain information and footnote disclosures normally included in the financial statements in accordance with generally accepted accounting principles have been omitted from the accompanying interim financial statements. The condensed interim financial statements and the notes thereto should be read in conjunction with the audited consolidated financial statements and the notes thereto commencing on page F-3 of this Prospectus. NOTE 1--GENERAL The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates. In the opinion of the Company, the accompanying unaudited interim consolidated financial statements reflect all adjustments (which include normal recurring adjustments) necessary to present fairly the financial position of the Company as of August 2, 1997, and the results of its operations for the 26 weeks ended August 2, 1997 and August 3, 1996. The results of operations for the 26 weeks ended August 2, 1997 and August 3, 1996 are not necessarily indicative of the results to be achieved for the full fiscal year. NOTE 2--EARNINGS PER SHARE Earnings per share is computed using the weighted average number of shares of common stock outstanding during the periods. In March 1997 the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. The Company does not expect the implementation of SFAS No. 128 to have a material effect on the primary earnings per share reflected in the accompanying financial statements. NOTE 3--INTERIM INVENTORY ESTIMATES The Company's inventories are priced at the lower of last-in, first-out ("LIFO") cost or market. At August 2, 1997 and August 3, 1996 inventories determined on a first-in, first-out basis would have been greater by approximately $4,827,000 and $3,920,000, respectively. Net income would have been higher by $450,000 in both 26 week periods ended August 2, 1997 and August 3, 1996. The Company takes a physical inventory on a store-by-store basis of its grocery, frozen food, dairy and health and beauty care departments semiannually and the Company uses a gross profit method to determine inventories for those departments for quarters when complete physical counts are not taken. The Company took a physical inventory in 24 of the 35 stores for these departments for the quarter ended August 2, 1997. All perishable departments are inventoried monthly. NOTE 4--SHORT-TERM INSTRUMENTS AND MARKETABLE DEBT SECURITIES The Company's short-term instruments included United States Treasury Bills, with a maturity of three months or less, and money market funds. Marketable debt securities included United States Treasury Bills with a maturity of greater than three months, United States Treasury Notes and United States Agency Securities. In connection with the Acquisition (see Note 5) the Company now classifies its securities as available-for-sale. The cost of these securities approximates fair market value as of August 2, 1997 and August 3, 1996. F-22 SHOPPERS FOOD WAREHOUSE CORP. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 5--ACQUISITION On February 6, 1997, Dart Group Corporation ("Dart") acquired the 50% interest in Shoppers that it did not already own for $210 million (the "Acquisition") and Shoppers became a wholly-owned subsidiary of Dart. Dart financed the Acquisition through the application of $137.2 million in net proceeds raised from an offering of Increasing Rate Senior Notes due 2000 (the "Increasing Rate Notes") of SFW Acquisition Corp., a newly created wholly- owned indirect subsidiary of Dart, and $72.8 million of bridge financing (the "Bridge Loan") provided by a bank. Immediately after the Acquisition, SFW Acquisition Corp. merged into Shoppers (with Shoppers becoming obligor on the Increasing Rate Notes) and Shoppers repaid the Bridge Loan from its existing cash and the liquidation of certain short-term investments. The Acquisition was recorded using the purchase method of accounting and Dart's interest in Shoppers has been pushed down into the accompanying financial statements. The purchase price has been allocated to the assets and liabilities of Shoppers and the remaining excess purchase price over the net assets acquired of $148.8 million represents goodwill which will be amortized over 40 years. In connection with the Acquisition, the Company commenced using Dart's method of depreciating property and equipment on a straight-line basis. Prior to the Acquisition, the Company used accelerated depreciation methods. The following pro forma analysis gives effect to the change in depreciation method, assuming the new depreciation method was applied retroactively.
JULY 2, 1994 JULY 1, 1995 JUNE 29, 1996 FEBRUARY 1, 1997 (52 WEEKS) (52 WEEKS) (52 WEEKS) (31 WEEKS) ------------ ------------ ------------- ---------------- Pro forma amounts: Net income.............. $13,961 $19,170 $18,413 $10,186 Earnings per common share................. $418.83 $575.10 $552.39 $305.58 Historical amounts: Net income.............. $12,929 $19,526 $18,703 $10,455 Earnings per common share................. $387.87 $585.78 $561.09 $313.65
NOTE 6--LONG-TERM DEBT In June 1997, Shoppers refinanced the Increasing Rate Notes with $200.0 million aggregate principal amount of 9 3/4% Senior Notes due 2004 (the "Senior Notes"). The net proceeds from the Senior Notes was $193.5 million (after fees and expenses of approximately $6.5 million) of which $143.5 million was used to repay the Increasing Rate Notes (including interest) and $50.0 million (the "Restricted Proceeds") is available to Dart for settlements with certain Dart shareholders (Haft family members). If the closing of a Haft settlement has not occurred on or before June 30, 1998, then the Company must use the Restricted Proceeds to redeem $50 million aggregate principal amount of the Senior Notes for $50.5 million (plus interest). Interest on the Senior Notes accrues from the date of issuance and is payable semi-annually in arrears on each June 15 and December 15, commencing December 15, 1997. The Senior Notes are general unsecured obligations of the Company and rank pari passu in right of payment with all existing and future senior indebtedness of the Company and senior in right of payment to all existing and future subordinated indebtedness of the Company. The Senior Notes are effectively subordinated in right of payment to all secured indebtedness of the Company and contain certain restrictive covenants including, limitation on restricted payments, limitation on indebtedness, limitation on investments, loans and advances, limitation on dividends and other payment restrictions affecting subsidiaries, limitation on liens, limitation on transactions with affiliates, restriction on mergers, consolidations and transfers of assets, limitation on lines of business, limitation on asset sales and limitation on issuance and sale of capital stock of subsidiaries. Certain F-23 SHOPPERS FOOD WAREHOUSE CORP. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) restricted payments are permitted to the extent that an event of default has not occurred and generally must be less than 50% of net income before non-cash charges and unpaid interest income on intercompany loans. The Senior Notes are fully and unconditionally guaranteed by SFW Holding Corp. ("Holdings"), the immediate parent of the Company. The guarantee is secured by a first priority security interest in the capital stock of the Company owned by Holdings. Prior to the Acquisition, Holdings had no material assets, liabilities or operations independent of the Company. As of the Acquisition date, Dart contributed its initial 50% interest in the Company to Holdings for 100% of the stock of Holdings. This interest was recorded at Dart's carryover basis. Subsequent to the merger of SFW Acquisition Corp. into the Company, Holdings became the immediate parent of the Company. Holdings' sole purpose is to own the Company's stock. Since Holdings' sole asset is its investment in the Company and the accounting for the Acquisition will be pushed down into the Company's financial statements, the post acquisition consolidated financial statements of Holdings will be substantially the same as the Company's consolidated financial statements. Accordingly, no separate financial statements of Holdings are presented because this information would not be material to investors. NOTE 7--LEGAL PROCEEDINGS In the ordinary course of business, Shoppers is party to various legal actions that the Company believes are routine in nature and incidental to the operation of its business. The Company believes that the outcome of the proceedings to which Shoppers currently is party will not have a material adverse effect upon the business, financial condition and results of operations. Dart however, is a party to certain legal proceedings that could have an adverse effect on the Company's business, financial conditions and results of operations. See public filings made by Dart with the Securities and Exchange Commission and "Controlling Stockholder" and "Possible Change in Control" under Risk Factors in the Registration Statement. NOTE 8--SUBSEQUENT EVENTS New President On August 29, 1997, Shoppers and Dart announced the appointment of William J. White as President of Shoppers. Mr. White has over 30 years of grocery retailing experience and has held the position of president with two other grocery retailers prior to joining Shoppers. Settlement with Robert, Gloria and Linda Haft On August 18, 1997, the Company and Dart, which owns all of the Company's outstanding common stock, entered into an agreement to settle certain litigation and enter other related transactions (the "RGL Settlement") with Robert M. Haft, Gloria G. Haft, Linda G. Haft and certain related parties. On September 26, 1997, the Company paid $50 million ($40 million dividend and $10 million loan) to or on behalf of Dart in connection with Dart's consummation of the RGL Settlement. F-24 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN- FORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER CON- TAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE GUARANTOR. THIS PROSPECTUS DOES NOT CON- STITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIV- ERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM- STANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THE GUARANTOR SINCE THE DATE HEREOF NOR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. --------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 1 Risk Factors............................................................. 12 The Exchange Offer....................................................... 18 Use of Proceeds.......................................................... 26 Pro Forma Consolidated Capitalization.................................... 27 Unaudited Pro Forma Consolidated Financial Statements.................... 28 Selected Historical Financial Data....................................... 32 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 36 Business................................................................. 41 Management............................................................... 47 Certain Transactions..................................................... 51 Description of the Senior Notes.......................................... 53 Certain Income Tax Considerations........................................ 73 Book-Entry; Delivery and Form............................................ 73 Plan of Distribution..................................................... 75 Validity of the Senior Notes............................................. 76 Independent Auditors..................................................... 76 Index to Consolidated Financial Statements............................... F-1
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ------------------------------- PROSPECTUS ------------------------------- SHOPPERS FOOD WAREHOUSE CORP. LOGO OFFER TO EXCHANGE $200,000,000 OF ITS 9 3/4% SENIOR NOTES DUE 2004, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT, FOR $200,000,000, OF ITS OUTSTANDING 9 3/4% SENIOR NOTES DUE 2004 , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. SHOPPERS FOOD WAREHOUSE CORP. The Restated Certificate of Incorporation of the Company (the "Company Certificate of Incorporation"), a copy of which is filed as Exhibit 3.1 of this Registration Statement, provides that the directors and officers of the Company and anyone serving at the request of the Board of Directors of the Company is indemnified by the Company to the fullest extent permitted by the General Corporation Law of the State of Delaware (the "DGCL") or any other applicable laws. The existing rights or protections of a director or officer under the Company Certificate of Incorporation will not be affected by any repeal or modification of such provisions. The Company may enter into agreements with directors or officers that provide for indemnification greater or different than that provided in the Company Certificate of Incorporation. The Bylaws of the Company, a copy of which is filed as Exhibit 3.3 of this Registration Statement, contain no provision for indemnification. SFW HOLDING CORP. The Certificate of Incorporation of the Guarantor (the "Guarantor Certificate of Incorporation"), a copy of which is filed as Exhibit 3.2 of this Registration Statement, provides that the directors and officers of the Guarantor and anyone serving at the request of the Board of Directors of the Guarantor is indemnified by the Guarantor to the fullest extent permitted by the DGCL or any other applicable laws. The existing rights or protections of a director or officer under the Guarantor Certificate of Incorporation will not be affected by any repeal or modification of such provisions. The Guarantor may enter into agreements with directors or officers that provide for indemnification greater or different than that provided in the Guarantor Certificate of Incorporation. The Bylaws of the Guarantor, a copy of which is filed as Exhibit 3.4 to this Registration Statement, contain no provision for indemnification. GENERAL CORPORATION LAW OF THE STATE OF DELAWARE Under the DGCL, directors, officers, employees, and other individuals may be indemnified against expenses (including attorneys' fees), judgements, fines, and amounts paid in settlement in connection with specified actions, suits or proceedings, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation--a "derivative action") if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. A similar standard of care is applicable in the case of a derivative action, except that indemnification only extends to expenses (including attorneys' fees) incurred in connection with defense or settlement of such an action and Delaware law requires court approval before there can be any indemnification of expenses where the person seeking indemnification has been found liable to the corporation. Delaware corporations may limit the personal liability of their directors for monetary damages for a breach of fiduciary duty; provided, however, that the directors can still be held personally liable (i) for a breach of the duty of loyalty to the corporation and its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL (described below), and (iv) for any transaction from which the director derived an improper personal benefit. Section 174 of the DGCL makes directors personally liable for unlawful dividends or unlawful stock repurchases or redemptions in certain circumstances and expressly sets forth a negligence standard with respect to such liability. II-1 ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES. (a) Exhibits
EXHIBIT NUMBER ITEM ------- ---- 3.1* Restated Certificate of Incorporation of the Company 3.2* Certificate of Incorporation of the Guarantor 3.3* Bylaws of the Company 3.4* Bylaws of the Guarantor 4.1* Indenture, dated as of June 26, 1997, by and among the Company, the Guarantor and Norwest Bank Minnesota, National Association, as trustee (the "Trustee") 4.2* Global Security, dated as of June 26, 1997, made by the Company and guaranteed by the Guarantor 4.3* Form of Exchange Notes, including guarantee 4.4* Registration Rights Agreement, dated as of June 26, 1997, by and among the Company, the Guarantor and Wasserstein Perella Securities, Inc. 4.5* Pledge Agreement, dated as of June 26, 1997, made by the Company to the Trustee 5.1* Opinion of Jones, Day, Reavis & Pogue 10.1* Form of Letter of Employment. On February 4, 1997, the Company entered into a Letter of Employment in substantially this form with certain officers of the Company, including the following executive officers: Jack W. Binder, Isaac Gendelman, Roy N. Marks and Louis Davis. Schedule A to Exhibit 10.1 sets forth details contained in the Letter of Employment with each of the executive officers listed above. 10.2* Supply Agreement, dated June 3, 1991, by and among the Company, Shoppers Food Warehouse VA Corp., Shoppers Food Warehouse MD Corp. and Richfood of PA, Inc. (formerly Super Rite Foods, Inc.). 10.3* Agreement, dated July 6, 1993, by and among Jumbo Produce, Inc. and Warehouse Employees Local Union No. 730 and Drivers, Chauffeurs and Helpers Local Union No. 639 10.4* Agreement, dated July 6, 1993, by and between the Company and United Food Warehouse Corp. and United Food and Commercial Workers Union Local No. 27 10.5* Tax Sharing Agreement, dated February 6, 1997, by and between Dart Group Corporation and SFW Acquisition Corp. 10.6* Management Services Agreement, dated February 6, 1997, by and between Dart Group Corporation and the Company 10.7* Standstill Order entered on December 6, 1995 by the Delaware Chancery Court in Gloria G. Haft, et al. v. Larry G. Schafran, et al. (Del. Ch. Civ. A. No. 14620) and Herbert H. Haft v. Dart Group Corporation, et al. (Del. Ch. Civ. A. No. 14685) (incorporated by reference to Exhibit 99.1 to the Quarterly Report of Dart Group Corporation on Form 10-Q for the period ended October 31, 1995) 10.8** Employment Agreement, dated August 25, 1997, between the Company and William J. White. 10.9** Agreement, effective September 4, 1996, between the Company and United Food & Commercial Workers Union, Local No. 400 12.1* Computation of Ratio of Earnings to Fixed Charges 18.1 Letter of Arthur Andersen LLP regarding change of accounting principle 21.1* List of Subsidiaries of the Guarantor and the Company 23.1* Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1) 23.2 Consent of Arthur Andersen LLP 24.1* Power of Attorney of the Company (included herein) 24.2* Power of Attorney of the Guarantor (included herein) 25.1* Statement of eligibility of the Trustee on Form T-1 99.1* Form of Letter of Transmittal 99.2* Form of Notice of Guaranteed Delivery 99.3* Form of Letter to DTC Participants 99.4* Form of Letter to Clients and Form of Instruction to Book-Entry Transfer Participants
- -------- * Previously filed with the Commission on August 5, 1997. ** Previously filed with the Commission on October 20, 1997. II-2 (b) Financial Statement Schedules No schedules for which provision is made in the applicable regulations of the Commission are required under the related instructions and have therefore been omitted. ITEM 22. UNDERTAKINGS. The Registrants hereby undertake: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the "Securities Act"); (ii) To reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission (the "Commission") pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of this Registration Statement through the date of responding to the request. (5) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in this Registration Statement when it became effective. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrants pursuant to the foregoing provisions, or otherwise, the Registrants have been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrants of expenses incurred or paid by a director, officer or controlling person of the Registrants in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities registered, the Registrants will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act, Shoppers Food Warehouse Corp. has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lanham, in the State of Maryland, on November 18, 1997. Shoppers Food Warehouse Corp. By: /s/ Mark A. Flint --------------------------------- MARK A. FLINT Chief Executive Officer and Director Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /s/ Mark A. Flint Chief Executive Officer - ------------------------------------- and Director November 18, 1997 Mark A. Flint /s/ William J. White President November 18, 1997 - ------------------------------------- William J. White * Jack W. Binder Senior Vice - ------------------------------------- President--Finance November 18, 1997 Jack W. Binder * Herbert H. Haft Co-Chairman of the - ------------------------------------- Board of Directors November 18, 1997 Herbert H. Haft Director - ------------------------------------- Keith E. Alessi * Douglas M. Bregman Director - ------------------------------------- November 18, 1997 Douglas M. Bregman * Bonita A. Wilson Director - ------------------------------------- November 18, 1997 Bonita A. Wilson Director - ------------------------------------- Howard M. Metzenbaum Director - ------------------------------------- Harry M. Linowes
- -------- * By his signature set forth below, Mark A. Flint, pursuant to duly executed Powers of Attorney filed with the Securities and Exchange Commission, has signed this Amendment No. 2 to the Registration Statement on behalf of the above listed persons whose signatures are printed in Part II of this Registration Statement, in the capacities set forth opposite their respective names. November 18, 1997 /s/ Mark A. Flint --------------------------------- Mark A. Flint II-4 POWER OF ATTORNEY KNOWN ALL MEN BY THESE PRESENTS, that the person whose signature appears below under the heading "Signature" constitutes and appoints Mark A. Flint, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign any or all amendments to this Registration Statement (including any amendment and any post-effective amendments), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in- fact and agent, acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following person in the capacity and on the date indicated.
SIGNATURE TITLE DATE /s/ Richard B. Stone Co-Chairman of the November 18, 1997 - ------------------------------------- Board of Directors of Shoppers Food Richard B. Stone Warehouse Corp.
- -------- * By his signature set forth below, Mark A. Flint, pursuant to the above duly executed Power of Attorney, hereby filed with the Securities and Exchange Commission, has signed this Amendment No. 2 to the Registration Statement on behalf of the above listed person whose signature is printed in Part II of this Registration Statement, in the capacity set forth opposite his name. November 18, 1997 /s/ Mark A. Flint --------------------------------- Mark A. Flint II-5 SIGNATURES Pursuant to the requirements of the Securities Act, SFW Holding Corp. has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lanham, in the State of Maryland, on November 18, 1997. SFW Holding Corp. By: /s/ Mark A. Flint ---------------------------------- MARK A. FLINT President, Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE * Herbert H. Haft - ------------------------------------- Chairman of the November 18, 1997 Herbert H. Haft Board of Directors /s/ Mark A. Flint President, Chief - ------------------------------------- Financial Officer November 18, 1997 Mark A. Flint and Treasurer * Douglas M. Bregman Director - ------------------------------------- November 18, 1997 Douglas M. Bregman * Bonita A. Wilson Director - ------------------------------------- November 18, 1997 Bonita A. Wilson Director - ------------------------------------- Howard M. Metzenbaum Director - ------------------------------------- Harry M. Linowes
- -------- * By his signature set forth below, Mark A. Flint, pursuant to duly executed Powers of Attorney filed with the Securities and Exchange Commission, has signed this Amendment No. 2 to the Registration Statement on behalf of the persons whose signatures are printed in Part II of this Registration Statement, in the capacities set forth opposite their respective names. /s/ Mark A. Flint ------------------------------------- Mark A. Flint November 18, 1997 II-6 POWER OF ATTORNEY KNOWN ALL MEN BY THESE PRESENTS, that the person whose signature appears below under the heading "Signature" constitutes and appoints Mark A. Flint, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign any or all amendments to this Registration Statement (including any amendment and any post-effective amendments), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in- fact and agent, acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following person in the capacity and on the date indicated.
SIGNATURE TITLE DATE /s/ Richard B. Stone Co-Chairman of the November 18, 1997 - ------------------------------------- Board of Directors Richard B. Stone of SFW Holding Corp.
- -------- * By his signature set forth below, Mark A. Flint, pursuant to the above duly executed Power of Attorney, hereby filed with the Securities and Exchange Commission, has signed this Amendment No. 2 to the Registration Statement on behalf of the above listed person whose signature is printed in Part II of this Registration Statement, in the capacity set forth opposite his name. November 18, 1997 /s/ Mark A. Flint --------------------------------- Mark A. Flint II-7 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE ------- ----------- ---- 18.1 Letter of Arthur Andersen LLP regarding change in accounting principles. 23.2 Consent of Arthur Andersen LLP
EX-18.1 2 EXHIBIT 18.1 Exhibit 18.1 [LETTERHEAD OF ARTHUR ANDERSEN APPEARS HERE] November 11, 1997 Shoppers Food Warehouse Corp. 4600 Forbes Boulevard Lanham, Maryland 20706 Re: Form S-4 Amendment No.2, including financial statements for the period ended February 1, 1997 and the six months ended August 2, 1997 Ladies and Gentlemen: This letter is written to meet the requirements of Regulation S-K calling for a letter from a registrant's independent accountants whenever there has been a change in accounting principle or practice. We have been informed that, as of February 6, 1997, the Company changed its method of depreciation from the accelerated method to the straight-line method. According to the management of the Company, this change was made to better match the cost and usage of its assets with the related future benefits, as well as to conform with Dart Group Corporation's accounting policies. A complete coordinated set of financial and reporting standards for determining the preferability of accounting principles among acceptable alternative principles has not been established by the accounting profession. Thus, we cannot make an objective determination of whether the change in accounting described in the preceding paragraph is to a preferable method. However, we have reviewed the pertinent factors, including those related to financial reporting, in this particular case on a subjective basis, and our opinion stated below is based on our determination made in this manner. We are of the opinion that the Company's change in method of accounting is to an acceptable alternative method of accounting, which, based upon the reasons stated for the change and our discussions with you, is also preferable under the circumstances in this particular case. In arriving at this opinion, we have relied on the business judgment and business planning of your management. We have not audited the application of this change to the financial statements of any period subsequent to February 1, 1997. Further, we have not examined and do not express any opinion with respect to your financial statements for the six months ended August 2, 1997. Very truly yours, EX-23.2 3 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report and to all references to our Firm included in or made a part of this Registration Statement. ARTHUR ANDERSEN LLP Washington, D.C. November 18, 1997 -----END PRIVACY-ENHANCED MESSAGE-----