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 November 28, 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 January 7, 1999
Common stock, without par 6,648,928 shares
value (stated value $2.00 per share)
<PAGE>
PART I. FINANCIAL INFORMATION
Summarized Financial Information:
The following consolidated statements of income, 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
1998 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
November 28, November 29,
1998 1997
---------------- ----------------
<S> <C> <C>
Net sales $156,630 $153,952
Cost of merchandise sold 116,887 114,664
----------- -----------
Gross profit 39,743 39,288
Selling, general and
administrative expenses 36,603 36,149
----------- -----------
Operating profit 3,140 3,139
Interest expense - net (1,010) (1,003)
Other income - net 73 40
----------- -----------
Income before income taxes 2,203 2,176
Provision for income taxes 782 805
----------- -----------
Net income $1,421 $1,371
=========== ===========
Per common share:
Net income - basic and diluted $ .21 $ .21
=========== ===========
Dividends paid $ .045 $ .04
=========== ===========
Average number of shares
Outstanding - basic and diluted 6,648,928 6,628,752
=========== ===========
See notes to financial statements
<PAGE>
</TABLE>
<TABLE>
PART I. FINANCIAL INFORMATION (Continued)
Consolidated Balance Sheets
(Thousands of Dollars)
<CAPTION>
November 28, August 29,
1998 1998 (NOTE)
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,948 $ 8,968
Income tax recoverable --- 100
Notes and accounts receivable 9,106 8,124
Less allowance for doubtful accounts (450) (450)
Merchandise inventories 77,230 68,618
Less LIFO reserve (18,205) (18,325)
Prepaid expenses, including deferred
income taxes 4,150 3,922
------------- -------------
82,779 70,957
Other assets 3,722 3,731
Property and equipment:
Cost 223,080 220,628
Less accumulated depreciation and
amortization (130,363) (126,653)
------------- -------------
Net property and equipment 92,717 93,975
------------- -------------
$179,218 $168,663
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 49,824 $ 43,402
Income taxes 747 31
Accrued liabilities 11,860 12,569
Long-term debt due within one year 4,753 1,383
------------- -------------
Total current liabilities 67,184 67,395
Long-term debt 47,960 47,966
Deferred income taxes 2,474 2,474
Deferred other 3,125 3,475
Shareholders' equity:
Common stock 13,298 13,298
Retained earnings 45,177 44,055
------------- -------------
Total shareholders' equity 58,475 57,353
------------- -------------
$ 179,218 $168,663
============= =============
NOTE: 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.
See notes to financial statements
<PAGE>
</TABLE>
<TABLE>
PART I. FINANCIAL INFORMATION (Continued)
Condensed Consolidated Statements of Cash Flows
(Thousands of Dollars)
<CAPTION>
Thirteen Weeks Ended
--------------------
November November
28, 1998 29, 1997
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES-net cash provided $ 1,799 $ 1,572
INVESTING ACTIVITIES
Expenditures for property and equipment (2,521) (2,596)
Proceeds from sale of property and other assets 18 22
Other (6) 259
---------- ---------
Net cash used in investing activities (2,509) (2,315)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 3,700 2,400
Payments of long-term debt (346) (451)
Dividends paid (299) (265)
Decrease in deferred other (365) (475)
---------- ---------
Net cash provided by financing activities 2,690 1,209
---------- ---------
Increase in cash and cash equivalents 1,980 466
Cash and cash equivalents at beginning of period 8,968 9,491
---------- ---------
Cash and cash equivalents at end of period $10,948 $ 9,957
========== =========
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period for:
Interest $ 1,249 $ 337
========== ==========
Income Taxes $ (33) $ 100
========== ==========
See notes to financial statements
<PAGE>
</TABLE>
PART I. FINANCIAL INFORMATION (Continued)
Notes to Financial Statements
Note A. 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.
All amounts in the consolidated financial statements referring to
shares, share prices and per share amounts have been adjusted
retroactively for the May, 1998 three-for-two stock split.
Note B. 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.
Note C. 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.
<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 change
from prior year
-----------------
Percentage of net sales
- -----------------------
First First First Qtr. 1999
Qtr. Qtr. Compared to
1999 1998 First Qtr. 1998
- ------- ------ ----------------
<C> <C> <S> <C>
100.0% 100.0% Net Sales 1.7%
====== ====== =====
25.4% 25.5% Gross Profit 1.2
Selling, general and
23.4 23.5 administrative expenses 1.3
2.0 2.0 Operating profit 0
.6 .6 Interest expense - net .7
.0 .0 Other income - net 82.5
1.4 1.4 Income before income taxes 1.2
.5 .5 Provision for income taxes 2.9
- ------ ------- ------
.9% .9% 3.6
====== ======= ======
Net sales for the first quarter of 1999 were $156,630,000 or 1.74% higher
than the same quarter in 1998. This net increase was attributable to
increases in drugstore sales. Sales from stores in operation both the first
quarter of 1999 as well as the same quarter a year ago increased 1.58%.
Gross margins, as a percent of sales, decreased .1% in the first quarter
of 1999 compared to the same quarter in 1998.
As a percent of sales, selling, general and administrative expenses decreased
.1% during the first quarter of 1999 compared to the same quarter of the
prior year. This decrease was attributable principally to increased sales
nd a reduction in supply cost and repairs and maintenance offset by increases
in retail store wage and benefit expenses and utility expenses.
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The Company continues to experience a very stable labor situation. The
Company has contracts in place with major unions relating to stores until
the middle of 1999.
Interest expense increased $7,000 compared with the same quarter of
1998. Slightly higher borrowings accounted for this increase with
slightly lower borrowing rates.
Other income - net increased $33,000 resulting primarily from royalty income.
Income taxes as a percent of pre-tax income approximates the statutory tax
rates in effect. The percentage decrease in first quarter 1999 compared to
1998 is due mainly to the implementation of various tax planning strategies.
An effective tax rate of 35.5% was used in the first quarter of 1999
versus a rate of 37.0% for the first quarter of fiscal 1998. The lower rate
used in the first quarter of 1999 is expected to continue in the second
quarter as well.
Net income for the quarter was $1,421,000 ($.21 per common share) which
compares to $1,371,000 ($.21 per common share) for the same quarter last
year. On a current trailing four quarters' basis, net income was
$7,034,000 ($1.05 per common share) compared to $6,792,000 ($1.02 per common
share) for the prior four quarters, a 3.6% increase. The Company expects
its fiscal 1999 second quarter net income to be comparable with its fiscal
1998 second quarter.
Impact of Inflation
Inflation increases the Company's major costs, inventory and labor.
The Company's provisions for LIFO inventories has resulted in a decrease in
cost of sales of $120,000 in the first quarter of 1999 compared to a decrease
of $86,000 in the first 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 first quarter of the last two years were
as follows:
</TABLE>
<TABLE>
<CAPTION>
(Dollars in millions) 1st Quarter
- ---------------------- --------------
1999 1998
------ ------
<S> <C> <C>
Working capital (1) $33.8 $29.7
Unused lines of revolving credit (2) 33.0 39.0
Current ratio (1) 1.50 1.46
</TABLE>
(1) Includes add-back of gross LIFO reserve.
(2) Represents unused amount under the five year $45.0
million revolving credit agreement.
During the first thirteen weeks of fiscal 1999, the Company's working
capital (includes the add-back of the gross LIFO reserve) increased
$1,913,000 from the Company's fiscal year end on August 29, 1998. The
current ratio was 1.50 to 1 at the end of this quarter compared to 1.56
to 1 at August 29, 1998 and 1.46 to 1 at November 29, 1997. Borrowings
under the Company's Revolving Credit Agreements increased slightly,
primarily to finance inventory increases for the holiday season.
The funds required by the Company on a continuing basis for 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 first quarter of 1999 the Company borrowed against revolving
credit agreements with the maximum amount outstanding under such agreements
amounting to $15,000,000, with $12,000,000 being outstanding as of the end
of the quarter.
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Cash Flows from Operating Activities
Cash provided by operating activities increased approximately
$227,000 from $1,572,000 to $1,799,000 for the comparative thirteen week
period. This increase is attributable to the increase in accounts payable
and accrued liabilities as compared to the same period in fiscal 1998 offset
by increases in inventories.
Cash Flows from Investing Activities
During the first quarter of 1999, the Company used $2,509,000 of cash
in investing activities. This compares to $2,315,000 used in the first
quarter of 1998, a result of increased expenditures for miscellaneous
other investments in 1999 versus 1998.
Cash Flows from Financing Activities
Cash provided by financing activities during the first quarter of 1999
was $2,690,000 which compares to cash provided of $1,209,000 during
the first quarter of 1998. The increase was due to an increase in net
borrowings during the period.
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 60% Complete 30% Complete
Expected Expected
completion completion
date, 3/99 date, 4/99
Other Complete 60% 40% Complete 20% Complete
Complete
Expected Expected
Expected completion completion
completion date, 6/99 date, 10/99
date, 2/99
Non IT areas Complete 80% Not started Not started
Complete
Expected Expected
Expected completion completion
completion date, 4/99 date, 6/99
date, 3/99
Third Complete 60% Not applicable Not applicable
Parties Complete
Expected
completion
date, 11/99
</TABLE>
. 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. However, the expected
completion dates have been extended relative to year-end evaluations.
The costs of the Year 2000 project through fiscal 1998, excluding costs of
internal Company employees, total $600,000 which has been charged to
expense. These costs have been funded through operating cash flows. Future
costs are not expected to be material.
<PAGE>
Management's Discussion and Analysis of Financial Condition
And Results of Operations (continued)
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. Contingency plans have not been fully
developed; however, the Company intends to finalize its contingency plan
for these risks by April of 1999.
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 4 - Results of votes of security holders
(a) The Annual Meeting of Shareholders of Seaway Food Town,
Inc. was held on January 7, 1999.
(b) The election of the Directors previously nominated and
as set forth in the Proxy Statement of December 4, 1998,
which is incorporated herein by reference, was by the
following vote:
Shares Shares voted
Voted FOR AUTHORITY TO VOTE
WITHHELD
Waldo E. Yeager 5,937,219 12,409
Richard B. Iott 5,936,919 12,709
Eugene R. Wos 5,932,399 17,229
(c) Pursuant to the proposal set forth in the Proxy Statement of
December 4, 1998, which is incorporated herein by reference,
approval of Ernst & Young, LLP as independent auditors for the
fiscal year ending August 28, 1999 was by the following vote:
Shares voted FOR 5,921,348
Shares voted AUTHORITY TO
VOTE WITHHELD 16,936
Shares voted AGAINST 11,344
(d) A proposal to amend the Articles of Incorporation by adding a
modified version of the Ohio Share Acquisition Statue under
which the Board of Directors may reject certain proposals to acquire
Company stock without submitting the proposals to a vote of the
shareholders.
Shares voted FOR 4,967,567
Shares voted AUTHORITY TO
VOTE WITHHELD 24,229
Shares voted AGAINST 957,832
<PAGE>
(e) A proposal to amend the Code of Regulations to provide that
members of the Board of Directors may be removed only for good
cause.
Shares voted FOR 4,957,790
Shares voted AUTHORITY TO
VOTE WITHHELD 24,875
Shares voted AGAINST 966,963
(f) A proposal to amend the Code of Regulations to require that any
shareholder wishing to nominate a candidate for the Board of
Directors must do so at least 90 days before the annual
shareholders meeting or 30 days before a special meeting held for
the purpose of electing directors.
Shares voted FOR 5,004,700
Share voted AUTHORITY TO
VOTE WITHHELD 20,253
Shares voted AGAINST 924,675
(g) A proposal to amend the Code of Regulations to provide that a
special meeting of the Board of Directors may be called with
48 hours notice.
Shares voted FOR 5,896,543
Shares voted AUTHORITY TO
VOTE WITHHELD 22,564
Shares voted AGAINST 30,521
(h) A proposal to amend the Articles of Incoporation to increase the
number of authorized shares of Company common stock from 12,000,000
to 24,000,000.
Shares voted FOR 5,399,563
Shares voted AUTHORITY TO
VOTE WITHHELD 21,203
Shares voted AGAINST 528,862
<PAGE>
(i) A proposal to amend the Company's Articles of Incorporation
(1) To provide that if a majority of the Board of Directors
has approved a merger or similar transaction, then the
vote of holders of a simple majority of the voting power of
the Company will suffice to approve the transaction.
(2) To broaden the transactions covered by the above
provision to include "combinations" and "majority share
acquisitions" as defined in the Ohio Revised Code.
Shares voted FOR 4,855,730
Shares voted AUTHORITY TO
VOTE WITHHELD 21,812
Shares voted AGAINST 1,072,086
<PAGE>
Item 6. - Exhibits and Reports on Form 8 K.
6(b) Reports on Form 8 K.
Form 8 K filed on December 4, 1998
/s/ Richard B. Iott
Signature
Richard B. Iott, President and
Chief Operating 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: January 11, 1999 By /s/ Richard B. Iott
Richard B. Iott,
President and
Chief Executive Officer
Date: January 11, 1999 By /s/ Waldo E. Yeager
Waldo E. Yeager,
Chief Financial Officer,
Treasurer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-28-1999
<PERIOD-END> NOV-28-1998
<CASH> 10,948
<SECURITIES> 0
<RECEIVABLES> 9,106
<ALLOWANCES> (450)
<INVENTORY> 59,025
<CURRENT-ASSETS> 82,779
<PP&E> 223,080
<DEPRECIATION> (130,363)
<TOTAL-ASSETS> 179,218
<CURRENT-LIABILITIES> 67,184
<BONDS> 47,960
<COMMON> 13,298
0
0
<OTHER-SE> 45,177
<TOTAL-LIABILITY-AND-EQUITY> 179,218
<SALES> 156,630
<TOTAL-REVENUES> 156,630
<CGS> 116,887
<TOTAL-COSTS> 116,887
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,010
<INCOME-PRETAX> 2,203
<INCOME-TAX> 782
<INCOME-CONTINUING> 1,421
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,421
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
