SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 10, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to __________________
Commission File Number 0-549
SCHULTZ SAV-O STORES, INC.
(Exact Name of Registrant as Specified in its Charter)
WISCONSIN 39-0600405
(State or other jurisdiction I.R.S. Employer
of incorporation of organization) Identification No.)
2215 UNION AVENUE 53081
SHEBOYGAN, WISCONSIN (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number
including area code 920-457-4433
---------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark |X| 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 (of for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark |X| whether the registrant has filed all
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date.
As of November 17, 1998, 6,577,779 shares of Common Stock, $0.05 par
value, were issued and outstanding.
SCHULTZ SAV-O STORES, INC.
FORM 10-Q INDEX
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Unaudited Consolidated Statements of Earnings 4
Unaudited Consolidated Statements of Cash Flows 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 7
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
SCHULTZ SAV-O STORES, INC.
CONSOLIDATED BALANCE SHEETS
Unaudited Audited
October 10, January 3,
Assets 1998 1998
------ -------------- ------------
Current assets:
Cash and equivalents $ 30,828,000 $ 23,124,000
Receivables 9,309,000 9,718,000
Inventories 20,996,000 21,741,000
Other current assets 2,267,000 3,635,000
Deferred income taxes 4,496,000 4,131,000
------------- -------------
Total current assets 67,896,000 62,349,000
Noncurrent receivable under
capital subleases 6,885,000 7,270,000
Property under capital leases, net 2,565,000 2,786,000
Other noncurrent assets 3,554,000 3,782,000
Property and equipment, net 21,682,000 22,679,000
------------- -------------
Total Assets $ 102,582,000 $ 98,866,000
============= =============
Liabilities and Shareholders' Investment
----------------------------------------
Current liabilities:
Accounts payable $ 23,919,000 $ 21,305,000
Accrued salaries and benefits 5,161,000 4,395,000
Accrued insurance 3,630,000 3,095,000
Retail repositioning reserve 710,000 610,000
Other accrued liabilities 2,902,000 2,861,000
Current obligations under capital leases 731,000 665,000
Current maturities of long-term debt 105,000 201,000
------------- -------------
Total current liabilities 37,158,000 33,132,000
Long-term obligations under capital leases 10,600,000 11,177,000
Long-term debt 3,078,000 3,165,000
Deferred income taxes 880,000 1,008,000
Shareholders' investment:
Common stock 438,000 438,000
Additional paid-in capital 14,164,000 13,940,000
Retained earnings 55,530,000 51,299,000
Treasury stock (19,266,000) (15,293,000)
------------- -------------
Total shareholders' investment 50,866,000 50,384,000
------------- -------------
Total Liabilities and Shareholders' Investment $ 102,582,000 $ 98,866,000
============= =============
3
SCHULTZ SAV-O STORES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
For the 12-weeks ended For the 40-weeks ended
October 10, October 4, October 10, October 4,
1998 1997 1998 1997
Net sales $ 112,550,000 $ 105,826,000 $ 368,760,000 $ 354,496,000
Costs and expenses:
Cost of products sold 94,459,000 89,409,000 309,156,000 298,805,000
Operating and administrative
expenses 15,019,000 13,763,000 50,564,000 47,627,000
---------------- ---------------- ---------------- ---------------
Operating income 3,072,000 2,654,000 9,040,000 8,064,000
Interest income 366,000 362,000 956,000 902,000
Interest expense (181,000) (195,000) (634,000) (653,000)
---------------- ---------------- ---------------- ----------------
Earnings before income taxes 3,257,000 2,821,000 9,362,000 8,313,000
Provision for income taxes 1,263,000 1,087,000 3,632,000 3,201,000
---------------- ---------------- ---------------- ---------------
Net earnings $ 1,994,000 $ 1,734,000 $ 5,730,000 $ 5,112,000
================ ================ ================ ===============
Basic earnings per share $ 0.29 $ 0.25 $ 0.84 $ 0.74
================ ================ ================ ===============
Diluted earnings per share $ 0.29 $ 0.25 $ 0.82 $ 0.73
================ ================ ================ ===============
Cash dividends paid per share $ 0.08 $ 0.07 $ 0.22 $ 0.20
================ ================ ================ ===============
Average common and equivalent shares 6,937,000 7,026,000 6,978,000 7,042,000
================ ================ ================ ===============
4
SCHULTZ SAV-O STORES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the 40-weeks ended
October 10, October 4,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 5,730,000 $5,112,000
Adjustments to reconcile net
earnings to net cash flows
from operating activities
Depreciation and amortization 3,900,000 3,326,000
Changes in assets and liabilities
Receivables 409,000 (6,452,000)
Inventories 745,000 2,901,000
Other current assets 1,290,000 (2,304,000)
Accounts payable 2,614,000 4,406,000
Accrued liabilities 1,173,000 (373,000)
------------ -----------
Net cash flows from operating activities 15,861,000 6,616,000
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (2,431,000) (1,325,000)
Receipt of principal amounts under capital
sublease agreements 341,000 388,000
Proceeds from asset sales 99,000 120,000
------------ ----------
Net cash flows from investing activities (1,991,000) (817,000)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment for acquisition of treasury stock (4,585,000) (3,727,000)
Payment of cash dividends (1,499,000) (1,401,000)
Proceeds from exercise of stock options 612,000 817,000
Principal payments under capital lease
obligations (511,000) (540,000)
Principal payments on long-term debt (183,000) (274,000)
------------ -----------
Net cash flows from financing activities (6,166,000) (5,125,000)
----------- -----------
CASH AND EQUIVALENTS:
Net increase 7,704,000 674,000
Balance, beginning of period 23,124,000 27,763,000
-------------- -----------
Balance, end of period $ 30,828,000 $ 28,437,000
============== ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 640,000 $ 686,000
Income taxes paid 4,147,000 4,582,000
5
SCHULTZ SAV-O STORES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The financial statements included herein have been prepared by the Company,
without audit. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted, although the Company believes that
the disclosures are adequate to make the information presented not misleading.
The interim financial statements furnished with this report reflect all
adjustments of a normal recurring nature, which are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods presented. It is suggested that these financial statements be read in
conjunction with the audited financial statements and the notes thereto included
in the Company's 1997 annual report to shareholders, as incorporated by
reference in the Company's Form 10-K for the fiscal year ended January 3, 1998.
(2) Interest Expense
For the 12-weeks ended For the 40-weeks ended
October 10, October 4, October 10, October 4,
1998 1997 1998 1997
-------- -------- -------- --------
Imputed - capital leases $109,000 $115,000 $363,000 $383,000
Long-term debt 72,000 80,000 245,000 270,000
Other - - 26,000 -
-------- -------- -------- --------
Interest expense $181,000 $195,000 $634,000 $653,000
======== ======== ======== ========
(3) Other Current Assets
October 10, January 3,
1998 1998
Prepaid expenses $ 1,174,000 $1,209,000
Receivable under capital
subleases 487,000 443,000
Property held for resale 313,000 1,663,000
Other assets 293,000 320,000
----------- ----------
Other current assets $ 2,267,000 $3,635,000
=========== ==========
6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Selected costs and results as a percent of net sales:
- --------------------------------------------------------------------------------
For the 12-weeks ended For the 40-weeks ended
October 10, October 4, October 10, October 4,
1998 1997 1998 1997
------- -------- ------- ------
Cost of products sold 83.9% 84.5% 83.8% 84.3%
Operating and administrative
expenses 13.3 13.0 13.7 13.4
Earnings before income taxes 2.9 2.7 2.5 2.3
Net earnings 1.8 1.6 1.6 1.4
- --------------------------------------------------------------------------------
Net Sales
Net sales for the 12- and 40-week periods ended October 10, 1998 were
$112,550,000 and $368,760,000, respectively, compared to $105,826,000 and
$354,496,000 for the same periods ended October 4, 1997, respectively. The
increases of $6,724,000 and $14,264,000, or 6.4% and 4.0%, were due primarily to
increased wholesale business volume resulting from the Company's continued
additions and enhancements to its "virtual chain" of franchised and corporate
retail supermarkets. Since October 4, 1997, the Company has completed five
franchise facility projects. These franchise projects include one new market
store, one replacement store, and three additions to existing stores.
Collectively, these completed projects, located in Poynette, Lomira, Waterloo,
Howards Grove, and Waupaca, Wisconsin added approximately 60,000 square feet of
store selling space. On an aggregate basis, these stores contributed in excess
of $3,500,000 in additional sales for the first 40 weeks of 1998 compared to the
same period in 1997. Additionally, during the third quarter of 1998, the Company
completed its renovation of the second supermarket it purchased from Nash Finch
last October. With the opening of this replacement supermarket, the Company
closed its older, noncompetitive corporate store in Appleton, Wisconsin.
Also in conjunction with its "virtual chain" marketing concept, the Company
continues to provide a number of ongoing customer savings, incentives,
promotions and rewards to its top shoppers as part of its Piggly Wiggly
Preferred Club(R) electronic card marketing program. These card marketing
promotions and rewards continue to positively impact net sales.
In addition to improved wholesale business volume, corporate retail sales also
continued to increase despite the absence of food price inflation. Corporate
stores open more than one year continued to show improved sales volume compared
to the prior year. Retail sales also increased due to additional and more
competitive corporate stores in Appleton and Oshkosh, Wisconsin since October 4,
1997. As of October 10, 1998, the Company had 69 franchised and 18 corporate
supermarkets compared to 69 franchised and 16 corporate supermarkets at October
4, 1997.
The Company currently expects that its positive trends in sales throughout the
first three quarters will continue into the fourth quarter; however, the Company
expects the level of its fourth quarter sales will be difficult to match those
of last year's fourth quarter due principally to the following: (i) the fourth
quarter of 1998 will be a 12-week quarter compared to 13 weeks for the fourth
quarter of 1997; (ii) in 1998, some of the Company's competitors opened a number
of large supermarkets competing directly with some of the Company's stores in
certain market areas; (iii) during the fourth quarter of 1997, the Company had
two corporate store grand openings in the greater Appleton, Wisconsin market
resulting in higher sales volume; and (iv) the Company closed down one
franchised unit in early November 1998 as part of a two-store consolidation.
7
The Company intends to attempt to continue its positive revenue trends by
pursuing expansion or renovation projects at six franchise retail operations.
These projects are in various phases of planning or construction, with
completions scheduled throughout the first six months of 1999. They involve one
new market franchise store in Cottage Grove, Wisconsin, one replacement
franchise store in Fort Atkinson, Wisconsin, and four franchise expansion stores
in Beaver Dam, Kiel, Crivitz, and Randolph, Wisconsin. On an aggregate basis,
these four expansion projects are expected to increase selling square footage by
approximately 40% at these stores.
Cost of Products Sold
Cost of products sold, as a percent of sales, decreased to 83.9% and 83.8% for
the 12-and 40-week periods ended October 10, 1998, compared to the 84.5% and
84.3%, respectively, for the same periods in 1997. This decrease was a direct
result of an increase in higher margin retail sales from additional corporate
stores in Appleton and Oshkosh, Wisconsin opened since October 4, 1997. With
these additional corporate stores, the Company's percentage of higher margin
retail sales volume continued to increase relative to the lower margin wholesale
sales. The Company expects this trend to continue through the end of 1998.
Operating and Administrative Expenses
Operating and administrative expenses, as a percent of sales, increased to 13.3%
and 13.7% for the 12- and 40-week periods ended October 10, 1998, compared to
13.0% and 13.4% for the same periods in 1997. Total operating and administrative
expenses increased primarily because of increased wages, benefits and other
general operating costs for the new corporate supermarkets in Appleton and
Oshkosh, Wisconsin. With these additional stores, the Company expects this trend
to continue through the end of 1998.
Due to the ongoing highly competitive nature of the industry, certain Company
franchise operators and corporate retail supermarkets continue to experience
operational difficulties in their respective marketplaces. The Company continues
to evaluate various business alternatives relating to its underperforming
operations. The Company's business alternatives include, but are not limited to,
the sale and subsequent conversion of corporate stores to franchise units,
closing stores, or implementing other operational changes. Similar to certain
prior years, implementation of these alternatives may result in the Company
incurring certain repositioning or restructuring charges for replaced, closed or
sold stores. These actions can negatively impact net earnings in the short-term,
but the Company believes that such actions will help improve the Company's
long-term profitability.
Net Earnings
Net earnings for the 12- and 40-week periods ended October 10, 1998, compared to
the same periods in 1997, increased 15.0% and 12.1% to $1,994,000 and
$5,730,000, respectively. Diluted earnings per share for the 12-and 40-week
periods ended October 10, 1998 increased 16.0% to $0.29 compared with $0.25 in
1997, and 12.3% to $0.82 compared with $0.73 in 1997. The Company's number of
consecutive quarters showing increases in net earnings over the prior year's
quarter has been extended to 23. With continuing improvements in sales and
productivity, the Company's net earnings-to-sales ratio for the 12- and 40-week
periods ended October 10, 1998 improved to 1.8% and 1.6%, respectively, compared
to 1.6% and 1.4% for the same periods in 1997.
8
Liquidity and Capital Resources
The Company's favorable 1998 year to date operating results continued to enhance
its strong financial position. As has been the case in recent years, the primary
source of liquidity for the 40-week period ended October 10, 1998 was cash
generated from operating activities. Cash provided by operating activities was
$15,861,000, an increase of $9,245,000 over the prior year 40-week period ended
October 4, 1997 cash inflow of $6,616,000. The increase in cash flows from
operations was due primarily to the timing of cash receipts, cash payments and
changes in short-term financing to its wholesale customers for the purchase of
new equipment.
Net cash outflows from investing activities for the 40-week period ended October
10, 1998 totaled $1,991,000, compared to $817,000 during the same period in
1997. The change was due in large part to an increase in capital expenditures
compared to the same period in 1997. A significant portion of the current year
capital expenditure related to corporate business system technology improvements
and equipment purchases for the Appleton store that was renovated and opened in
August 1998. The Company has a 1998 capital budget of $4,300,000, of which
approximately $1,900,000 remains available for future expenditures. The Company
anticipates financing these needs from internally generated capital.
Net cash outflows from financing activities for the 40-week period ended October
10, 1998 was $6,166,000, compared to $5,125,000 during the same period in 1997.
The additional cash outflows was due principally to increased common stock
repurchases during the 40-weeks ended October 10, 1998 compared to the same
period in 1997. On September 22, 1998, the Company completed its existing
$5,000,000 stock repurchase program that commenced in January 1997 after having
repurchased 235,000 shares of its common stock at $14.50 per share. As a result
of the completion of its existing stock repurchase plan, the Company's Board of
Directors has instituted a new stock repurchase program which will allow the
Company to repurchase up to an additional $5,000,000 of its common stock from
time to time in the open market, pursuant to privately negotiated transactions,
or otherwise, not including the repurchase of common stock issuable upon the
exercise of stock options granted under the Company's stock option plans. This
was the fourth announced stock repurchase program over the past seven years that
have been fully completed by the Company. Since the first stock repurchase
program commenced in January 1992, the Company has repurchased over 2,200,000
shares of its common stock.
The Company maintains a revolving credit facility agreement with two lending
institutions to provide up to $16 million of borrowings at rates not to exceed
the bank's prime rates. At October 10, 1998 and October 4, 1997, the Company had
no borrowings outstanding under these agreements.
The Company's Board of Directors declared a fourth quarter cash dividend on its
common stock of $0.08 per share. The dividend will be payable on November 27,
1998 to shareholders of record as of November 13, 1998.
In summary, cash and equivalents increased $7,704,000 during the first 40 weeks
of 1998, compared to an increase of $674,000 during the same period in 1997. Due
to the Company's significant cash and other liquid assets, its consistent
ability to generate cash flows from operations and availability of external
financing, the Company foresees no difficulty in providing financing necessary
to fund its capital commitments and working capital needs for the foreseeable
future.
9
Year 2000 Issues
The Company is dependent on computer hardware, software and other business
systems ("IT systems") and non-information technology systems such as
communication equipment, tractors and trailers, refrigeration controllers,
scales, and other equipment containing embedded microprocessor technology
("non-IT systems"). The Company uses these IT and non-IT systems in several
critical operating areas including product procurement and merchandising, retail
store and warehouse distribution operations, inventory order entry and labor
management, and accounting, administrative and maintenance systems.
In 1997, the Company began evaluating its IT and non-IT systems in order to
identify and adjust date sensitive systems for year 2000 compliance. As part of
this undertaking, the Company established a team, headed by the Company's Vice
President of Business Systems Support Group. The team is staffed primarily with
internal professionals within the business systems group and some outside
consultants on an as-needed basis. The team leader reports periodically on the
year 2000 status to the Executive Committee and to the Company's Board of
Directors.
The team developed a plan to assess its IT and non-IT systems for year 2000
compliance requirements. The plan consisted of three main project phases: (1) to
make an inventory listing of all IT and non-IT systems that may be subject to
the year 2000 issue along with an assessment as to the scope of the issue as it
related to these systems; (2) to remediate any and all year 2000 compliance
problems; and (3) to test, validate and implement systems subsequent to
remediation.
At the end of the first quarter of 1998, the Company had substantially completed
the first phase of the project. An inventory list of all systems have been
identified and documented. Nearly half of all IT and non-IT systems previously
identified have also been remediated at this time. The Company believes it will
complete all remaining remediation efforts for existing systems over the next
six months. Insofar as testing, validation and implementation are concerned, the
Company has tested some of the core IT systems and has determined that they are
projected to be year 2000 compliant by mid-1999. With regard to non-IT systems,
the Company also expects these systems to be year 2000 compliant in 1999. The
Company estimates it will cost $500,000 to become year 2000 compliant, all of
which will be charged to operations.
As part of the year 2000 project, the Company has identified business
relationships with third parties, including suppliers, vendors, financial
institutions and other service providers, which the Company believes is critical
to its business operations. In connection with this, the Company has been
communicating with these third parties through correspondence and/or interviews
to ascertain the extent to which they are addressing their year 2000 compliance
issues. The Company will continue to assess and monitor the progress of these
third parties in resolving year 2000 issues. The Company undertakes a certain
amount of risk by relying on the third parties' own year 2000 assessment.
Because of this, the Company believes that a key vendor's failure to resolve its
year 2000 issues is the most likely worst case scenario for the Company. Such
failure could result in the Company not being able to procure products from a
key vendor on a timely basis. The Company does not expect this most likely worst
case scenario to have a material adverse impact on its core retail and wholesale
businesses due principally to the Company's network of suppliers and vendors.
The Company will, however, develop contingency plans to work with these key
third parties in 1999.
The projections and project completion dates cited above are based on
management's best estimates and may be updated from time to time as additional
information becomes available.
10
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Form 10-Q are "forward-looking statements"
intended to qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as the Company "believes," "anticipates,"
"expects" or words of similar import. Similarly, statements that describe the
Company's future plans, objectives, strategies or goals are also forward-looking
statements. Such forward-looking statements are subject to certain risks and
uncertainties including, but not limited, to the following: (i) presence of
intense competitive market activity in the Company's market areas; (ii) ability
to identify and develop new market locations for expansion purposes; (iii)
continuing ability to obtain reasonable vendor marketing funds for promotional
purposes; (iv) ongoing advancing information technology requirements; (v)
ongoing absence of food price inflation; (vi) the Company's ability to continue
to recruit, train and retain quality franchise and corporate retail store
operators; and (vii) the potential recognition of repositioning charges
resulting from potential closures, conversions and consolidations of retail
stores due principally to the competitive nature of the industry and to the
quality of the Company's retail store operators. Shareholders, potential
investors and other readers are urged to consider these factors carefully in
evaluating the forward-looking statements and are cautioned not to place undue
reliance on such forward-looking statements. The forward-looking statements made
herein are only made as of the date of this report and the Company undertakes no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
11
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.16 1990 Stock Option Plan, as amended as of October 15, 1998.
Exhibit 10.17 1995 Equity Incentive Plan, as amended as of October 15,
1998.
Exhibit 10.18 Form of Nonqualified Stock Option Agreement under 1995
Equity Incentive Plan.
Exhibit 10.19 Schultz Sav-O Stores, Inc. Officer Annual Incentive Plan,
as amended as of October 15, 1998.
Exhibit 10.20 Form of Global Amendment to Nonqualified Stock Option
Agreement(s) to be entered into with existing option
grantees. Such amendments are materially different only as
to the name of the grantee and the date of execution.
Exhibit 27 Financial Data Schedule.
(b) No reports of Form 8-K were filed by the Company during the first 40 weeks
of fiscal 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHULTZ SAV-O STORES, INC.
--------------------------
(Registrant)
November 20, 1998 /S/Armand C. Go
- ------------------------------- -----------------------------
(Date) Armand C. Go, Treasurer and
Chief Accounting Officer
13