SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10 Q
(Mark One)
( X ) Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the quarterly period ended May 30, 1998 Commission File number 0-80.
( ) Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from
to
SEAWAY FOOD TOWN, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-4471466
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) (Identification No.)
1020 Ford Street, Maumee, Ohio 43537
(Address of principal executive offices) (Zip Code)
419/893-9401
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at July 9, 1998
Common stock, without par 6,648,927 shares
value (stated value $2.00 per share)
<PAGE>
PART I. FINANCIAL INFORMATION
Summarized Financial Information:
The following consolidated statements of income, condensed
consolidated balance sheets, and condensed consolidated statements
of cash flows are unaudited, but include all adjustments, consisting
only of normal recurring accruals, which the Company considers
necessary for a fair presentation of its financial position, results
of operations and cash flows for the periods and the dates indicated.
Since the unaudited financial statements have been prepared in
accordance with instructions to Form 10-Q, they do not contain all
disclosures normally provided in annual financial statements; they
should be read in conjunction with the consolidated financial statements
and notes thereto appearing in the Company's 1997 Annual Report to
Shareholders.
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION (CONTINUED)
Consolidated Statements of Income
(Thousands of Dollars - Except
Average Share and Per-Share Data)
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
May 30, May 31, May 30, May 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $154,557 $151,284 $468,444 $455,106
Cost of merchandise sold 113,621 112,003 344,905 338,292
---------- ---------- ---------- ----------
Gross profit 40,936 39,281 123,539 116,814
Selling, general and
administrative expenses 37,796 36,215 113,445 107,833
---------- ---------- ---------- ----------
Operating profit 3,140 3,066 10,094 8,981
Interest expense (967) (920) (2,938) (2,861)
Other income - net 529 360 1,049 1,243
---------- ---------- ---------- ----------
Income before income taxes 2,702 2,506 8,205 7,363
Provision for income taxes (1,004) (905) (3,401) (2,923)
---------- ---------- ---------- ----------
Net income $ 1,698 $ 1,601 $ 5,164 $ 4,440
========== ========== ========== ==========
Per common share:
Net income - basic and
diluted $ .26 $ .24 $ .78 $ .67
========== ========== ========== ==========
Dividends paid $ .04 $ .04 $ .12 $ .12
========== ========== ========== ==========
Average number of shares
outstanding - basic and
diluted 6,648,927 6,628,944 6,639,840 6,602,091
========== ========== ========== ==========
See notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION (Continued)
Condensed Consolidated Balance Sheets
(Thousands of Dollars)
<CAPTION>
May 30, August 30,
1998 1997
(NOTE)
ASSETS ---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,589 $ 9,491
Income tax recoverable 305 0
Notes and accounts receivable 8,570 6,945
Less allowance for doubtful accounts (450) (450)
Merchandise inventories (Note B) 69,999 67,065
Less LIFO reserve (18,134) (18,473)
Prepaid expenses, including deferred
income taxes 4,861 4,512
---------- ----------
73,740 69,090
Other assets 4,078 4,831
Property and equipment:
Cost 218,960 210,487
Less accumulated depreciation and
amortization (127,473) (119,842)
---------- ----------
Net property and equipment 91,487 90,645
---------- ----------
$169,305 $164,566
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 47,915 $ 44,174
Income taxes --- 935
Accrued liabilities 14,156 12,811
Long-term debt due within one year 1,490 1,959
---------- ----------
Total current liabilities 63,561 59,879
Long-term debt 42,940 45,565
Deferred income taxes 3,258 3,258
Deferred other 3,747 4,688
Shareholders' equity:
Common stock 13,298 8,838
Capital in excess of stated value 0 0
Retained earnings 42,501 42,338
---------- ----------
Total shareholders' equity 55,799 51,176
---------- ----------
$169,305 $164,566
========== ==========
NOTE: The balance sheet at August 30, 1997 has been derived from the audited
consolidated financial statements at that date but does not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION (Continued)
Condensed Consolidated Statements of Cash Flows
(Thousands of Dollars)
<CAPTION>
Thirty-Nine Weeks Ended
May 30, May 31,
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES-net cash provided $ 14,535 $ 9,068
INVESTING ACTIVITIES
Expenditures for property and equipment (11,907) (15,785)
Proceeds from sale of property and other assets 577 103
Cash paid to acquire business --- (2,110)
Other 750 1,035
---------- ----------
Net cash used in investing activities (10,580) (16,757)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 2,500 15,300
Payments of long-term debt (5,594) (11,427)
Payments for acquisition of common shares --- (77)
Dividends paid (796) (748)
Decrease in deferred other (967) (4,777)
---------- ----------
Net cash provided by (used in) financing activities (4,857) 7,825
---------- ----------
Increase (decrease) in cash and cash equivalents (902) 136
Cash and cash equivalents at beginning of period 9,491 9,766
---------- ----------
Cash and cash equivalents at end of period $ 8,589 $ 9,902
========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 2,264 $ 2,654
========== ==========
Income Taxes $ 4,281 $ 4,667
========== ==========
See notes to consolidated financial statements
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
Notes to Consolidated Financial Statements
Note A. Net income per common share is based on the weighted average
number of shares outstanding during the periods. At February 28,
1998, the Company adopted Financial Accounting Standards Board
Statement No. 128, Earnings per Share which replaced the calculation
of primary and fully diluted earnings per share with basic and diluted
earnings per share. The Company has no potentially dilutive securities
in any of the periods presented, therefore, the adoption of Statement
No. 128 had no effect on earnings per share.
On April 9, 1998, the Board of Directors authorized a three for two
stock split, payable on May 6, 1998 to shareholders of record on
April 21, 1998. Accordingly, all per share and share data have been
restated to reflect the stock split.
On April 10, 1997, the Board of Directors authorized a two for one
stock split, payable on May 7, 1997 to shareholders of record on
April 22, 1997. Accordingly, all per share and share data have
been restated to reflect the stock split.
Financial Accounting Standards Board Statement No. 131 -- Segments,
will be applicable for fiscal 1999. This statement dictates the
use of a management approach to report financial and descriptive
information about the Company's operating segments. The impact on
the Company has not been determined.
Note B. Meat, produce and pharmacy inventories are valued at the lower
of cost using the first-in, first-out (FIFO) method, or market.
All other merchandise inventories (including store inventories
which are determined by the retail inventory method) are valued
at the lower of cost using, the last-in, first-out (LIFO method,
or market.
Note C. Effective May 20, 1997, the Company acquired two supermarkets in
Michigan for $2,100,000. The acquisition was accounted for under
the purchase method of accounting.
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The following table sets forth certain income statement components
expressed as a percentage of net sales and the year-to-year percentage
changes in such components.
<TABLE>
<CAPTION>
Percentage Percentage
Percentage of change Percentage of change in
Net Sales in dollars Net Sales dollars
--------------- ------------ --------------- ----------
3rd Qtr.'98 39 39 39 Weeks'98
3rd Qtr. 3rd Qtr. Compared to Weeks Weeks Compared to
1998 1997 3rd Qtr.'97 1998 1997 39 Weeks'97
- -------- -------- ----------- ------ ------ ------------
<C> <C> <C> <S> <C> <C> <C>
100.0% 100.0% 2.2% Net sales 100.0% 100.0% 2.9%
======== ======== ======= ====== ====== ======
26.5 26.0 4.2 Gross profit 26.4 25.7 5.8
Selling,general and
administrative
24.5 23.9 4.4 expense 24.2 23.7 5.2
2.0 2.1 2.4 Operating profit 2.2 2.0 12.4
.6 .6 5.1 Interest expense .6 .6 2.7
.3 .2 46.9 Other income - net .2 .2 (15.6)
Income before income
1.7 1.7 7.8 taxes 1.8 1.6 11.4
Provision for income
.6 .6 10.9 taxes .7 .6 4.0
- -------- ------- ------- ------- ------- ------
1.1 1.1 6.0 Net income 1.1 1.0 16.3
======== ======= ======= ======= ======= ======
</TABLE>
Net sales for the third quarter of 1998 were $154,557,000 or 2.2% higher than
the same quarter in 1997. On a year-to-date basis, net sales were
$468,444,000 or 2.9% higher than 1997. These net increases were largely
attributable to increases in supermarket and drugstore sales resulting from
two additional supermarkets, one new drugstore and various remodeled
locations. Sales from stores in operation both this past quarter as well as
the same quarter a year ago decreased slightly by 0.3%.
Subsequent to the end of Third Quarter, 1998, the Company completed major
remodeling projects in Bucyrus, and Findlay, Ohio. Customer response since
the remodeling has been excellent, confirmed by an increased level of sales
activity. The company has acquired a new supermarket location in Adrian,
Michigan, a 55,000 square foot store which is expected to open by late fall
1998. Two major remodels of existing stores located in Norwalk and
Mansfield, Ohio are expected to be completed by October, 1998. In addition,
the Company expects to complete negotiations within the next 30 days on the
acquisitions of two supermarkets within the Company's marketing area.
Efforts are continuing in seeking additional store acquisitions within the
Company's existing trading area. Additional revenues can be expected from
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
this activity as early as in the Company's First Quarter, 1999. With respect
to acquisitions, the Company expects all to immediately accrete to earnings.
Gross margins, as a percent of sales, increased .5% in the third quarter
of 1998 compared to the same quarter in 1997. On a year-to-date basis,
margins increased .7% over 1997. Most of these increases were
attributable to increased selling margins in the retail stores.
As a percent of sales, selling, general and administrative expenses
increased .6% during the current quarter compared to the same quarter of
the prior year. Increased selling costs relating to new and remodeled
locations were the principal reasons for the increases. On a year-to-
date basis, costs increased .5%. These increases related to new and
remodeled locations, as well as increases in various administrative
expenses, especially in the Information Systems area.
The Company continues to experience a very stable labor situation.
During the first quarter of fiscal 1998, the Company reached a five year
agreement in addition to the remaining one year on the expiring
agreement, with its warehouse and transportation associates. This has
permitted the Company to embark on a warehouse remodeling project whereby
one warehouse will be closed along with increased space utilization in
another, thus improving operational efficiency. The Company also has
contracts in place with major unions relating to its store employees
until the middle of 1999.
Interest expense in the current quarter was $47,000 higher than for the
same quarter of 1997. On a year-to-date basis interest costs have
increased $77,000. Slightly higher interest rates on reduced borrowings
accounted for this increase.
Other income - net increased $287,000 resulting primarily from $767,000
of gain on sale of land and a warehouse facility offset by a $500,000
expense from a lease termination. The Company terminated this lease
arrangement with Maumee Associates related to construction of a new store
after conducting an updated market survey. Director Richard K. Ransom is
a 20% owner of Maumee Associates. On a year-to-date basis other income -
net decreased $194,000 due to the gains and lease termination, along
with decreases in miscellaneous other income categories.
Income taxes as a percent of pre-tax income approximates the statutory
tax rates in effect. An effective tax rate of 37% was used in this past
quarter versus a rate of 36% for the third quarter of fiscal 1997. On a
year-to-date basis for 1998 a rate of 37% was used compared to 39.7% for
1997. The percentage decrease on a year-to-date basis is due mainly to
the implementation of various tax planning strategies.
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Net income for the quarter was $1,698,000 ($.26 per common share) which
compares to $1,601,000 ($.24 per common share) for the same quarter last
year. On a current trailing four quarters' basis, net income was $7,136,000
($1.08 per common share) compared to $6,866,000 ($1.04 per common share)
for the prior four quarters, a 3.9% increase. While we expect the
environment to remain challenging in the fourth quarter, we should start
to see our performance improve in the first quarter of fiscal 1999 as a
result of several recent iniatives noted earlier in this report.
Impact of Inflation
Inflation increases the Company's major costs, inventory and labor. The
Company's provisions for LIFO inventories for the past quarter has
resulted in a decrease in cost of sales of $200,000 in the third quarter
of 1998 compared to a increase of $101,000 in the third quarter of 1997.
The Company has generally been able to maintain margins by adjusting its
retail prices, but competitive conditions may from time to time render
it unable to do so in seeking to maintain its market share.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Measures of liquidity for the third quarter of the last two years were
as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 3rd Qtr. 1998 3rd Qtr. 1997
- --------------------- ------------- -------------
<S> <C> <C>
Working capital (1) 28,313 27,234
Unused lines of revolving credit 42.0 14.7
Current ratio (1) 1.45 1.43
(1) Includes add-back of gross LIFO reserve.
</TABLE>
During the thirty-nine weeks of fiscal 1998, the Company's working
capital (includes the add-back of the gross LIFO reserve) increased
$629,000 from the Company's fiscal year end on August 30, 1997. The
working capital ratio was 1.45 to 1 at the end of this quarter compared
to 1.46 to 1 at August 30, 1997 and 1.43 to 1 at May 31, 1997.
Borrowings under the Company's Revolving Credit Agreements decreased,
mainly due to the Senior Note placement in August, 1997 and decreased
capital expenditures.
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The funds required by the Company on a continuing basis for both working
capital, capital expenditures, and other needs are generated principally
through operations, long-term borrowings and capital leases,
supplemented by borrowings under revolving credit note agreements which
have been arranged primarily through institutional lenders. The Company
is not aware of any trends, demands, commitments or uncertainties which
will result or which are reasonably likely to result in a material change
in the Company's liquidity. During the third quarter of 1998 the Company
borrowed against revolving credit agreements with the maximum amount
outstanding under such agreements amounting to $6,400,000, with
$3,000,000 being outstanding as of the end of the quarter.
Cash Flows from Operating Activities
Cash provided by operating activities increased approximately $5,467,000
from $9,068,000 to $14,535,000 for the comparative thirty-nine week
period. This increase is attributable to the increase in net income
compared to the same period a year earlier, along with an increase in
accounts payable and decreases in notes and accounts receivable and
merchandise inventories.
Cash Flows from Investing Activities
During the thirty-nine weeks of 1998, the Company used $10,580,000 of
cash in investing activities, this compared to $16,757,000 used in the
thirty-nine weeks of 1997 resulting from decreased expenditures for
property and equipment in 1998 versus 1997. Expenditures for 1998 are
slightly below the Company's $18,000,000 forecast for the year.
Cash Flows from Financing Activities
Cash flows used by financing activities during the thirty-nine weeks of
1998 were $4,857,000 which compares to $7,825,000 provided during the
thirty-nine weeks of 1997. The decrease was due to a decrease in net
borrowings during the period compared to a year earlier, along with a
decrease in deferred other.
Year 2000 Modifications
The Company has completed its assessment and is in the process of making
all modifications to its computer systems deemed to be necessary by
management to account for and report business transactions beginning on
January 1, 2000. Furthermore, the Company expects that all such
modifications, including the pre-testing of systems, to be completed by
no later than the end of March, 1999. Costs for outside
assistance with the Company's Year 2000 modifications are not expected
to be material. The Company has been assisted by an outside consultant to
review its plan and progress being made with the necessary
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
modifications. The Company does not anticipate any material issues
related to the Year 2000 modifications.
Cautionary Statement for Purposes of Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995
Except for historical facts, all matters discussed in this report which
are forward looking involve risks and uncertainties. A number of
factors could adversely affect future results, liquidity and capital
resources. These factors include, but are not limited to, competitive
pressures from other major supermarket operators, including entry of new
competitive stores in the Company's market, the level of discounting by
competitors, the stability of distribution incentives from suppliers,
economic conditions in the Company's primary markets and other
uncertanities detailed from time to time in the Company's Securities and
Exchange Commission filings. Although management believes it has the
business strategy and resources needed for improved operations, future
revenue and margin trends cannot be reliably predicted.
<PAGE>
Item 6. - Exhibits and Reports on Form 8 K.
6(b) Reports on Form 8 K.
There were no Form 8 K reports required to be filed by the
Company during any of the months included in the most recently
completed fiscal quarter.
/s/ Richard B. Iott
Signature
Richard B. Iott, President and
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
SEAWAY FOOD TOWN, INC.
Registrant
/s/ Richard B. Iott
Date July 9, 1998 By ___________________________
Richard B. Iott, President
and Chief Executive Officer
/s/ Waldo E. Yeager
Date July 9, 1998 By ____________________________
Waldo E. Yeager,
Chief Financial Officer,
Treasurer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-29-1998
<PERIOD-END> MAY-30-1998
<CASH> 8,589
<SECURITIES> 0
<RECEIVABLES> 8,570
<ALLOWANCES> (450)
<INVENTORY> 51,865
<CURRENT-ASSETS> 73,740
<PP&E> 218,960
<DEPRECIATION> (127,473)
<TOTAL-ASSETS> 169,305
<CURRENT-LIABILITIES> 63,561
<BONDS> 42,940
<COMMON> 13,298
0
0
<OTHER-SE> 42,501
<TOTAL-LIABILITY-AND-EQUITY> 169,305
<SALES> 154,557
<TOTAL-REVENUES> 154,557
<CGS> 113,621
<TOTAL-COSTS> 113,621
<OTHER-EXPENSES> 37,797
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 967
<INCOME-PRETAX> 2,701
<INCOME-TAX> 1,004
<INCOME-CONTINUING> 1,697
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,697
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
