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 29, 1999 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 8, 1999
Common stock, without par 6,673,643 shares
value (stated value $2.00 per share)
<PAGE>
Index
Seaway Food Town, Inc.
Part I. Financial information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income -- Thirteen and Thirty-nine
weeks ended May 29, 1999 and May 30, 1998.
Consolidated Balance Sheets -- May 29, 1999 and August 29,1998.
Condensed Consolidated Statements of Cash Flows -- Thirty-nine
weeks ended May 29, 1999 and May 30, 1998.
Notes to Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
Item 3. Quantitative and Qualitative Disclosure of Market Risk.
Part II. Other Information
Item 5. Other information.
Item 6. Exhibits and Reports on Form 8-K.
Signatures
<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 29, May 30, May 29, May 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $167,306 $154,557 $494,318 $468,444
Cost of merchandise sold 124,558 114,912 369,006 348,713
---------- ---------- -------- ----------
Gross profit 42,748 39,645 125,312 119,731
Selling, general and
Administrative expenses 38,945 36,268 113,830 108,926
---------- ---------- --------- ----------
Operating profit 3,803 3,377 11,482 10,805
Interest expense (1,001) (965) (3,000) (2,929)
Other income - net 91 290 246 329
---------- ---------- -------- ----------
Income before income taxes 2,893 2,702 8,728 8,205
Provision for income taxes (1,030) (1,004) (3,120) (3,041)
---------- ---------- -------- ----------
Net income $ 1,863 $ 1,698 $ 5,608 $ 5,164
========== ========== ========== ==========
Per common share:
Net income - basic and
Diluted $ .28 $ .26 $ .84 $ .78
========== ========== ========== ==========
Dividends paid $ .045 $ .04 $ .135 $ .12
========== ========== ========== ==========
Average number of shares
outstanding - basic and
diluted 6,673,643 6,648,927 6,662,417 6,639,840
========== ========== ========== =========
See notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION (Continued)
Consolidated Balance Sheets
(Thousands of Dollars)
<CAPTION>
May 29, August 29,
1999 1998
ASSETS ---------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,687 $ 8,968
Income tax recoverable --- 100
Notes and accounts receivable, less allowance
For doubtful accounts of $500 ($450 in 1998) 9,930 7,674
Merchandise inventories 58,090 50,293
Prepaid expenses, including deferred
income taxes 3,738 3,922
---------- ------------
82,445 70,957
Other assets 6,496 3,731
Property and equipment:
Cost 231,885 220,628
Less accumulated depreciation and
amortization (136,308) (126,653)
---------- ------------
Net property and equipment 95,577 93,975
---------- ------------
$184,518 $168,663
========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 49,246 $ 43,402
Income taxes 641 31
Accrued liabilities 14,531 12,569
Long-term debt due within one year 2,080 1,393
---------- ------------
Total current liabilities 66,498 57,395
Long-term debt 49,363 47,966
Deferred income taxes 2,474 2,474
Deferred other 3,714 3,475
Shareholders' equity:
Common stock 13,347 13,298
Capital in excess of stated value 358 ---
Retained earnings 48,764 44,055
---------- ------------
Total shareholders' equity 62,469 57,353
---------- ------------
$184,518 $168,663
========== ============
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 29, May 30,
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES-net cash provided $16,158 $ 14,535
INVESTING ACTIVITIES
Expenditures for property and equipment (11,281) (11,907)
Proceeds from sale of property and other assets 177 577
Cash paid to acquire businesses (4,869) ---
Other 149 750
----------- -----------
Net cash used in investing activities (15,824) (10,580)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 10,900 2,500
Payments of long-term debt (8,816) (5,594)
Dividends paid (899) (796)
Increase (decrease) in deferred other 200 (967)
----------- -----------
Net cash provided by (used in) financing
activities 1,385 (4,857)
----------- -----------
Increase (decrease) in cash and cash equivalents 1,719 (902)
Cash and cash equivalents at beginning of
period 8,968 9,491
----------- -----------
Cash and cash equivalents at end of period $10,687 $ 8,589
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest $ 3,153 $ 2,264
=========== ===========
Income Taxes $ 2,411 $ 4,281
=========== ===========
See notes to consolidated financial statements
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
Notes to Consolidated Financial Statements
Note A. Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the thirteen and thirty-nine week periods
ended May 29, 1999 are not necessarily indicative of the results
that may be expected for the year ended August 28, 1999.
The balance sheet at August 29, 1998 has been derived from the audited
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.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form
10-K for the year ended August 29, 1998.
Note B. Inventories
Meat, produce, bakery, deli and drug 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.
Inventories have been reduced by $17,979,000 and $18,325,000 at
May 29,1999 and August 29, 1998 respectively from amounts which
would have been reported under the FIFO method (which approximates
current cost).
Note C. Earnings Per Share
Net income per common share is based on the weighted average
number of shares outstanding during the periods. The Company has no
potentially dilutive securities.
<PAGE>
PART I. FINANCIAL INFORMATION (Continued)
Notes to Consolidated Financial Statements (Unaudited)
Note D. New Accounting Standards
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.
Financial Accounting Standards Board Statement No. 133 -- Accounting
for Derivative Instruments and Hedging Activities, will be applicable
for fiscal 2001. This statement requires all derivatives to be
recorded at their fair value.
Note E. Acquisition
On January 16, 1999, the Company acquired a store in Piqua, Ohio
for $2,600,000. On April 19, 1999, the Company acquired a store in
Willard, Ohio for $2,269,000. These acquisitions were accounted
for under the purchase method of accounting. The results of
operations are included in the accompanying 1999 statements of income
from the date of acquisition through May 29, 1999.
<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>
Percentage Percentage
Percentage of change Percentage of change in
Net Sales in dollars Net Sales dollars
------------ ----------- ------------- ----------
<CAPTION>
3rd 3rd 3rd Qtr.'99 39 39 39 Weeks '99
Qtr. Qtr. compared to Weeks Weeks Compared to
1999 1998 3rd Qtr.'98 1999 1998 39 Weeks '98
- ------ ------ ------------ ----- ----- ------------
<C> <C> <C> <S> <C> <C> <C>
100.0% 100.0% 8.3 Net sales 100.0% 100.0% 5.5
====== ======= ======= ===== ===== =====
25.6 25.7 7.8 Gross profit 25.3 25.6 4.7
Selling,general
and administra-
23.3 23.5 7.4 tive expense 23.0 23.3 4.5
2.3 2.2 12.6 Operating profit 2.3 2.3 6.3
.6 .6 3.7 Interest expense .6 .6 2.4
.0 .1 (68.6) Other income - net .0 .1 (25.2)
Income before
1.7 1.7 7.1 income taxes 1.7 1.8 6.4
Provision for income
.6 .6 2.6 taxes .6 .7 2.6
- ----- ------ ------- ----- ----- ------
1.1 1.1 9.7 Net income 1.1 1.1 8.6
====== ====== ======== ===== ===== ======
</TABLE>
Net sales for the third quarter of 1999 were $167,306,000 or 8.25% higher than
the same quarter in 1998. On a year-to-date basis, net sales were $494,318,000
or 5.52% higher than 1998. These net increases were largely
attributable to increases in supermarket and drugstore sales resulting
from two addition supermarkets, one additional Pharm drugstore, and
various remodeled locations. Inclement weather helped boost sales in the
second quarter, however sales have remained strong since early 1999. Sales
from stores in operation both this past quarter as well as the same quarter
a year ago increased by 3.73%.
Gross margins, as a percent of sales, decreased .1% in the third quarter of
1999 compared to the same quarter in 1998. On a year-to-date basis, margins
decreased .3% over 1998. Most of these decreases, which are very minor, were
attributable to increased warehousing and transportation costs.
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
As a percent of sales, selling, general and administrative expenses decreased
.2% during the current quarter compared to the same quarter of the prior
year. Increased sales during the quarter offset by selling costs relating
to new and remodeled locations were the principal reasons for the decreases.
On a year-to-date basis, costs decreased .3%. This decrease related to
increased sales volume offset by higher costs in new and remodeled locations,
as well as increases in various administrative expenses. This decrease
in selling, general and administrative expenses for the most part, offsets
the decrease in gross margin percentage, both this past quarter as well as
the year to date period.
The Company continues to experience a very stable labor situation. During
this past quarter, the company negotiated a new labor contract for its major
retail clerk union through 2002.
Interest expense in the current quarter was $36,000 higher than for the
same quarter of 1998. On a year-to-date basis interest costs have increased
$71,000. Interest expense has remained very comparable from year to year
with decreased rates on slightly higher borrowings.
Other income - net decreased in the third quarter and the year to date period
resulting primarily from a decrease in gains on asset disposals offset by
increases in royalty income.
Income taxes as a percent of pre-tax income approximates the statutory tax
rates in effect. The percentage decrease in the third quarter 1999 compared
to 1998 is due mainly to the continued benefits from various tax planning
strategies. An effective tax rate of 35.6% was used in the third quarter of
fiscal 1999 versus a rate of 37.2% for the third quarter of fiscal 1998. On
a year-to-date basis, the rate is 35.8% in 1999 compared to 37.0% in 1998.
Net income for the quarter was $1,863,000 ($.28 per common share) which
compares to $1,698,000 ($.26 per common share) for the same quarter last
year. On a current trailing four quarters' basis, net income was
$7,428,000 ($1.11 per common share) compared to $7,136,000 ($1.08 per common
share) for the prior four quarters, a 4.1% increase.
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 $123,000 in the third quarter of 1999
compared to a decrease of $200,000 in the third quarter of 1998. 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.
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES
Overview
Measures of liquidity for the third quarter of the last two years were as
follows:
<TABLE>
(Dollars in millions) 3rd Qtr. 3rd Qtr.
- ---------------------- 1999 1998
<CAPTION> -------- --------
<S> <C> <C>
Working capital (1) 33.9 28.3
Unused lines of revolving credit 33.5 42.0
Current ratio (1) 1.51 1.45
(1) Includes add-back of gross LIFO reserve.
</TABLE>
During the thirty-nine weeks of fiscal 1999, the Company's working capital
(includes the add-back of the gross LIFO reserve) increased $2,039,000 from
the Company's fiscal year end on August 29, 1998. The working capital
ratio was 1.51 to 1 at the end of this quarter compared to 1.56 to 1 at
August 29, 1998 and 1.45 to 1 at May 30, 1998. Borrowings under the
Company's Revolving Credit Agreements increased mainly due to increased
inventory levels, capital expenditures and store acquisitions.
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 1999 the Company borrowed against revolving
credit agreements with the maximum amount outstanding under such agreements
amounting to $14,500,000, with $11,500,000 being outstanding as of the end
of the quarter. The Company has exercised its call option to pay off
$8,000,000 of Senior notes in January of 2000. This will result
in a corresponding increase in the Company's borrowings under its Revolving
Credit Agreement. This amount will continue to be considered long-term
under the Revolving Credit Agreement.
Cash Flows from Operating Activities
Cash provided by operating activities increased approximately $1,623,000 from
$14,535,000 to $16,158,000 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 accrued
liabilities, offset by increases in notes and accounts receivable and
merchandise inventories.
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Cash Flows from Investing Activities
During the thirty-nine weeks of 1999, the Company used $15,824,000 of cash in
investing activities, this compared to $10,580,000 used in the thirty-nine
weeks of 1998 resulting from increased expenditures for the acquisition of
two stores in 1999 versus 1998.
Cash Flows from Financing Activities
Cash flows provided by financing activities during the thirty-nine weeks of
1999 were $1,385,000 which compares to $4,857,000 used during the thirty-nine
weeks of 1998. The increase was due to an increase in net borrowings during
the period compared to a year earlier, along with an increase in deferred
other.
Year 2000 Modifications
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As the date changes
from December 31, 1999 to January 1, 2000, many existing computer programs,
if not corrected, will read the date as January 1, 1900, or otherwise
incorrectly interpret the date. This may cause the computer to malfunction or
to cease to function altogether. The Company has determined that it must
modify or replace significant portions of its software. The Company's
Year 2000 project is comprised of Information Technology (IT) areas such
as business applications within the mainframe computer or other
environments; non IT areas such as microprocessors and embedded
chips in operating equipment; and third party reliance such as banks,
utility companies and vendors. The Company is monitoring these areas
in four phases, consisting of assessment, remediation, testing and
implementation. The state of readiness in each of these areas, as well as
the definition of each phase, is presented below:
<PAGE>
Management's Discussion and Analysis of Financial Condition
And Results of Operations (continued)
<TABLE>
<CAPTION>
Project Assessment Remediation Testing Implementation
Segment
<S> <C> <C> <C> <C>
IT areas:
Mainframe Complete Complete 90% Complete 90% Complete
Expected Expected
completion completion
date, 7/99 date, 7/99
Other Complete 100% 80% Complete 55% Complete
Complete
Expected Expected
Completion completion completion
5/99 date, 9/99 date, 10/99
Non IT areas Complete 100% 90%
Complete Complete 60%plete
Expected Expected
Completion completion completion
3/99 date, 8/99 date, 9/99
Third Complete 100% Not applicable Not applicable
Parties Completion
date, 6/99
. Assessment is an inventory of IT, non-IT, and third party reliance
affected by the Year 2000 issue.
. Remediation is the changes to the code, obtaining compliant vendor
software or obtaining reliance from the third parties that the
Year 2000 issue has been addressed.
. Testing is the test of the changes to internally developed and
vendor upgraded software.
. Implementation is the rollout of the tested software into production.
The Company has completed all assessments and has completed
additional remediation, testing and implementation since year-end. We
are still working with one third party software supplier for specific
upgrades to the UNIX environment. This issue is currently being
addressed and a solution will be developed by July, 1999.
<PAGE>
Management's Discussion and Analysis of Financial Condition
And Results of Operations (continued)
The costs of the Year 2000 project through second quarter of fiscal 1999,
excluding costs of internal Company employees, total $847,000 which has been
charged to expense.
Management of the Company believes it has an effective program in place
to resolve the Year 2000 issue in a timely manner. However, the Company
cannot guarantee that it will not experience Year 2000 problems originating
from its own computers or those of third parties with whom the company does
business. As noted above, the Company has not yet completed all necessary
phases of the Year 2000 program. The significant risks of the Year
2000 project include unsuccessful testing of code changes or vendor
upgrades, failed attempts to obtain compliant vendor software, and failures
on the part of crucial vendors or utility companies.
The Company has assembled a Year 2000 Contingency team and scheduled
Contingency planning training. Contingency plans have been created
and are currently being reviewed. These plans will be finalized by September,
1999. The Company followed a Grocery Industry suggested process to address
the contingency issue. This plan addresses support for January 1, 2000,
anticipated increased consumer demand for the Year 2000, and a Public
Relations program for customer communication and education on the Food
Industry and the Company's readiness for the Year 2000.
Item 3. Quantitative and Qualitative Disclosure of Market Risk
The Company had interest rate cap agreements to manage interest
rate exposure through May, 1999. These transactions reduced the
Company's exposure to significant variations in interest rates.
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 uncertainties 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 5. - Other information
The Company's Board of Directors has authorized management
to retain an investment banking firm to assist the Company
in the evaluation of various strategic alternatives, which
might include a merger, a business combination, or a
strategic alliance that would enhance shareholder value.
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
Date July 12, 1999 By /s/Richard B. Iott
Richard B. Iott, President
and Chief Executive Officer
Date July 12, 1999 By /s/ Waldo E. Yeager
Waldo E. Yeager,
Chief Financial Officer,
Treasurer
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-28-1999
<PERIOD-END> MAY-29-1999
<CASH> 10,687
<SECURITIES> 0
<RECEIVABLES> 10,430
<ALLOWANCES> (500)
<INVENTORY> 58,090
<CURRENT-ASSETS> 82,445
<PP&E> 231,885
<DEPRECIATION> (136,308)
<TOTAL-ASSETS> 184,518
<CURRENT-LIABILITIES> 66,498
<BONDS> 49,363
<COMMON> 13,347
0
0
<OTHER-SE> 49,122
<TOTAL-LIABILITY-AND-EQUITY> 184,518
<SALES> 167,306
<TOTAL-REVENUES> 167,306
<CGS> 124,558
<TOTAL-COSTS> 124,558
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,001
<INCOME-PRETAX> 2,893
<INCOME-TAX> 1,030
<INCOME-CONTINUING> 1,863
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,863
<EPS-BASIC> .28
<EPS-DILUTED> .28
