10-Q 1 0001.txt SCHULTZ SAV-O STORES, INC. FORM 10-Q 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 7, 2000 --------------- 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 SHEBOYGAN, WISCONSIN 53081 ---------------------- ------------ (Address of principal (Zip Code) 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 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 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 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 10, 2000, 5,971,669 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 - October 7, 2000 and January 1, 2000 3 Unaudited Consolidated Statements of Earnings - 12-weeks and 40-weeks ended October 7, 2000 and October 9, 1999 4 Unaudited Consolidated Statements of Cash Flows - 40-weeks ended October 7, 2000 and October 9, 1999 5 Notes to Unaudited Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk 11 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 7, January 1, Assets 2000 2000 -------------------------------------------------------------------------------------------------------------------------- Current assets: Cash and equivalents $ 33,242,000 $ 22,433,000 Receivables 11,872,000 6,629,000 Inventories 23,537,000 26,313,000 Other current assets 3,049,000 3,410,000 Deferred Income taxes 3,900,000 3,900,000 -------------------------------------------------------------------------------------------------------------------------- Total current assets 75,600,000 62,685,000 -------------------------------------------------------------------------------------------------------------------------- Noncurrent receivable under capital subleases 4,248,000 4,531,000 Property under capital leases, net 3,145,000 3,462,000 Other noncurrent assets 2,163,000 2,664,000 Property and equipment, net 19,794,000 20,285,000 -------------------------------------------------------------------------------------------------------------------------- Total assets $ 104,950,000 $ 93,627,000 ========================================================================================================================== Liabilities and Shareholders' Investment -------------------------------------------------------------------------------------------------------------------------- Current liabilities: Accounts payable $ 27,349,000 $ 19,545,000 Accrued salaries and benefits 5,788,000 5,284,000 Accrued insurance 3,502,000 3,002,000 Retail repositioning reserve 325,000 450,000 Other accrued liabilities 3,122,000 3,765,000 Current obligations under capital leases 764,000 696,000 Current maturities of long-term debt 166,000 146,000 -------------------------------------------------------------------------------------------------------------------------- Total current liabilities 41,016,000 32,888,000 -------------------------------------------------------------------------------------------------------------------------- Long-term obligations under capital leases 8,465,000 9,069,000 Long-term debt 2,721,000 2,865,000 Deferred income taxes 836,000 836,000 Shareholders' investment: Common stock 438,000 438,000 Additional paid-in capital 14,980,000 14,961,000 Retained earnings 67,718,000 63,995,000 Treasury stock (31,224,000) (31,425,000) -------------------------------------------------------------------------------------------------------------------------- Total shareholders' investment 51,912,000 47,969,000 -------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' investment $ 104,950,000 $ 93,627,000 ========================================================================================================================== See notes to unaudited consolidated financial statements.
3 SCHULTZ SAV-O STORES, INC. UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
---------------------------------------------------------------------------------------------------------------------------- For the 12-weeks ended For the 40-weeks ended ---------------------------------------------------------------------------------------------------------------------------- October 7, October 9, October 7, October 9, 2000 1999 2000 1999 ---------------------------------------------------------------------------------------------------------------------------- Net sales $ 116,341,000 $ 113,406,000 $ 380,488,000 $ 375,481,000 Cost of products sold 97,498,000 95,053,000 317,716,000 314,584,000 ---------------------------------------------------------------------------- Gross profit 18,843,000 18,353,000 62,772,000 60,897,000 Operating and administrative expenses 16,510,000 15,774,000 54,476,000 52,225,000 ---------------------------------------------------------------------------- Operating income 2,333,000 2,579,000 8,296,000 8,672,000 Interest income 372,000 331,000 950,000 973,000 Interest expense (197,000) (177,000) (656,000) (590,000) ---------------------------------------------------------------------------- Earnings before income taxes 2,508,000 2,733,000 8,590,000 9,055,000 Provision for income taxes 953,000 1,060,000 3,264,000 3,513,000 ---------------------------------------------------------------------------------------------------------------------------- Net earnings $ 1,555,000 $ 1,673,000 $ 5,326,000 $ 5,542,000 ============================================================================================================================ Earnings per share Basic: net earnings $ 0.26 $ 0.27 $ 0.90 $ 0.86 weighted average shares 5,951,000 6,251,000 5,945,000 6,432,000 Diluted: net earnings $ 0.26 $ 0.26 $ 0.89 $ 0.84 weighted average shares and equivalents 5,998,000 6,421,000 5,994,000 6,607,000 Dividends per share $ 0.09 $ 0.09 $ 0.27 $ 0.25 ============================================================================================================================ See notes to unaudited consolidated financial statements.
4 SCHULTZ SAV-O STORES, INC. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------------------------------------------------------------------------------------------- For the 40-weeks ended October 7, October 9, 2000 1999 -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 5,326,000 $ 5,542,000 Adjustments to reconcile net earnings to net cash flows from operating activities Depreciation and amortization 4,022,000 3,809,000 Changes in assets and liabilities Receivables (5,243,000) (6,402,000) Inventories 2,776,000 113,000 Other current assets 388,000 (340,000) Accounts payable 7,804,000 2,008,000 Accrued liabilities 255,000 1,268,000 -------------------------------------------------------------------------------------------------------------------------- Net cash flows from operating activities 15,328,000 5,998,000 -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property and equipment (2,714,000) (2,120,000) Receipt of principal amounts under capital sublease agreements 251,000 313,000 Other 7,000 129,000 -------------------------------------------------------------------------------------------------------------------------- Net cash flows from investing activities (2,456,000) (1,678,000) -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of cash dividends (1,604,000) (1,611,000) Principal payments under capital lease obligations (536,000) (504,000) Exercise of stock options 232,000 45,000 Principal payments on long-term debt (124,000) (117,000) Payment for acquisition of treasury stock (55,000) (8,503,000) Other 24,000 13,000 -------------------------------------------------------------------------------------------------------------------------- Net cash flows from financing activities (2,063,000) (10,677,000) -------------------------------------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS: Net change 10,809,000 (6,357,000) Balance, beginning of period 22,433,000 34,334,000 -------------------------------------------------------------------------------------------------------------------------- Balance, end of period $ 33,242,000 $ 27,977,000 ========================================================================================================================== See notes to unaudited consolidated financial statements.
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 1999 annual report to shareholders, as incorporated by reference in the Company's Form 10-K for the fiscal year ended January 1, 2000. (2) Interest Expense
----------------------------------------------------------------------------------------------------------------------- For the 12-weeks ended For the 40-weeks ended October 7, 2000 October 9, 1999 October 7, 2000 October 9, 1999 ----------------------------------------------------------------------------------------------------------------------- Imputed - capital leases $ 130,000 $ 103,000 $ 434,000 $ 342,000 Long-term debt 67,000 70,000 222,000 235,000 Other - 4,000 - 13,000 ----------------------------------------------------------------------------------------------------------------------- Interest expense $ 197,000 $ 177,000 $ 656,000 $ 590,000 ======================================================================================================================= (3) Other Current Assets ---------------------------------------------------------------------------------------------------- October 7, 2000 January 1, 2000 ---------------------------------------------------------------------------------------------------- Prepaid expenses $ 1,793,000 $ 1,500,000 Retail systems and supplies for resale 549,000 496,000 Receivable under capital subleases 358,000 326,000 Property held for resale 349,000 1,088,000 ---------------------------------------------------------------------------------------------------- Other current assets $ 3,049,000 $ 3,410,000 ====================================================================================================
6 (4) Segment Reporting Summarized financial information for the third quarter and year-to-date of 2000 and 1999 concerning the Company's reportable segments is shown in the following tables (in thousands):
------------------------------------------------------------------------------------------------------------------ For the 12-weeks ended For the 40-weeks ended Sales October 7, October 9, October 7, October 9, 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------ Wholesale sales $ 94,871 $ 94,360 $ 309,336 $ 312,075 Intracompany sales (26,219) (27,787) (87,180) (94,103) -------------- -------------- -------------- -------------- Net wholesale sales 68,652 66,573 222,156 217,972 Retail sales 47,689 46,833 158,332 157,509 ------------------------------------------------------------------------------------------------------------------ Total sales $ 116,341 $ 113,406 $ 380,488 $ 375,481 ================================================================================================================== ------------------------------------------------------------------------------------------------------------------ For the 12-weeks ended For the 40-weeks ended Earnings Before Income Tax October 7, October 9, October 7, October 9, 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------ Wholesale $ 1,880 $ 2,089 $ 6,505 $ 6,772 Retail 453 490 1,791 1,900 -------------- -------------- -------------- ------------- Total operating income 2,333 2,579 8,296 8,672 Interest income 372 331 950 973 Interest expense (197) (177) (656) (590) ------------------------------------------------------------------------------------------------------------------ Earnings before income taxes $ 2,508 $ 2,733 $ 8,590 $ 9,055 ==================================================================================================================
(5) Supplementary Disclosure of Cash Flow Information Interest and taxes paid included in the Company's cash flow from operations for the 40-weeks ended were as follows: ------------------------------------------------------------------------------- October 7, 2000 October 9, 1999 ------------------------------------------------------------------------------- Interest paid $ 654,000 $ 587,000 Taxes paid 3,697,000 3,794,000 ------------------------------------------------------------------------------- 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations --------------------- -------------------------------------------------------------------------------- For the 12-weeks ended For the 40-weeks ended October 7, October 9, October 7, October 9, 2000 1999 2000 1999 -------------------------------------------------------------------------------- Gross margin 16.2% 16.2% 16.5% 16.2% Operating and administrative expenses 14.2 13.9 14.3 13.9 Earnings before income taxes 2.2 2.4 2.3 2.4 Net earnings 1.3 1.5 1.4 1.5 -------------------------------------------------------------------------------- Net Sales Net sales for the 12- and 40-week periods ended October 7, 2000 were $116.3 million and $380.5 million, respectively, compared to $113.4 million and $375.5 million, respectively, for the same periods in 1999. The increases of $2.9 million and $5.0 million, or 2.6% and 1.3%, respectively, were due primarily to increased net wholesale sales volume. Retail sales for the 12- and 40-week periods ended October 7, 2000 were $47.7 million and $158.3 million, respectively, compared to $46.8 million and $157.5 million for the same periods in 1999. Total retail sales volume was positively impacted by one corporate store that was converted from a franchise unit in November 1999 and the increased volume resulting from the replacement store in Racine, Wisconsin in May 2000. However, several of the Company's retail market areas continued to experience intense competitive activities. Net wholesale sales for the 12- and 40-week periods ended October 7, 2000 were $68.7 million and $222.2 million, respectively, compared to $66.6 million and $218.0 million for the same periods in 1999. The increases of $2.1 million and $4.2 million, or 3.1% and 1.9%, respectively, were attributable to: (1) the successful conversion to the Piggly Wiggly program of two new market Wisconsin franchise stores from other wholesalers during the third quarter of 1999; (2) the successful conversion to the Piggly Wiggly program of one new market Wisconsin franchise unit from another wholesaler in January 2000; and (3) the opening of one new market franchise supermarket in Kewaskum, Wisconsin in June 2000. The conversion of one franchise supermarket into a corporate store in November 1999 and additional competitive activities in certain franchise market areas offset some of the net wholesale sales volume increase. As of October 7, 2000, the Company had 71 independent franchise-owned supermarkets and 19 corporate stores, all operating under the Piggly Wiggly(R) banner. For the remainder of 2000, the Company anticipates corporate retail sales to be flat or to decrease relative to last year's same quarter due to the successful 50th anniversary of Piggly Wiggly in Wisconsin held during the fourth quarter of 1999. With regard to store projects, the Company facilitated the opening of a franchise replacement supermarket in New Holstein, Wisconsin in September 2000. Additionally, the Company has expansion projects in various phases of planning and construction which include replacement franchise stores in Slinger and Campbellsport, Wisconsin and a replacement corporate store in Sheboygan, Wisconsin. These projects are scheduled for completion throughout 2001. On an aggregate basis, the Company anticipates these projects to have an approximately $7.5 million positive impact on sales on an annualized basis. Gross Margin Gross margin, as a percent of sales, for the third quarters of 2000 and 1999 remained constant at 16.2%. For the three quarters ended October 7, 2000, gross margin, as a percent of sales, improved to 16.5% compared to 16.2% for same period last year. This improvement, primarily due to retail operations, 8 continued to be attributable to merchandising and product promotional mix improvements that were initiated at the beginning of 2000. The incremental sales generated by the Company resulting from the success of the 50th anniversary promotion held during the fourth quarter last year had a corresponding negative impact on gross margin, as a percent of sales. Therefore, the Company projects that gross margin, as a percent of sales, for the fourth quarter of 2000 should be nominally higher than the same period in 1999. Operating and Administrative Expenses Operating and administrative expenses, as a percent of sales, increased to 14.2% and 14.3% for the 12- and 40-week periods ended October 7, 2000 respectively, compared to 13.9% for both periods in 1999. For the third quarter of 2000, the Company incurred incremental retail health and accident insurance expenses of $260,000 and additional distribution payroll costs approximating $200,000, compared to the same quarter last year. For the 2000 year-to-date three quarters, the Company has incurred incremental retail health and accident insurance expenses of $910,000, distribution payroll and fuel costs totaling $490,000, and one-time professional service fees approximating $380,000, respectively. Projected on an annualized basis, the Company anticipates incremental retail health and accident insurance and distribution payroll expenses of approximately $1.2 million and $500,000, respectively, compared to a year ago. The incremental retail health and accident insurance expenses was solely attributable to three rate increases between September 1, 1999 and February 1, 2000. The increase in distribution payroll costs was due primarily to increased levels of overtime being utilized. This was a direct result of a very tight labor market in Sheboygan, Wisconsin. One-time professional fees were incurred to evaluate certain Company strategic initiatives. Due to the ongoing highly competitive nature of the industry in the Company's markets, certain Company franchise operators and corporate retail supermarkets continue to experience a variety of operational issues in their respective marketplaces. The Company continues to evaluate various business alternatives relating to these 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 is likely to result in the Company incurring certain repositioning or restructuring charges for these replaced, closed or sold stores and negatively impact net earnings in the short-term. However, 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 7, 2000 decreased 7.1% and 3.9% to $1,555,000 and $5,326,000 respectively, compared to $1,673,000 and $5,542,000 for the same periods in 1999. Diluted earnings per share for both 2000 and 1999 third quarters were $0.26. For the 40-week period ended October 7, 2000, diluted earnings per share increased 6.0% to $0.89, compared to $0.84 in 1999. Due to significant share repurchases in 1999, the weighted average common shares and equivalents for the third quarter and year-to-date of 2000 were 5,998,000 and 5,994,000, compared to 6,421,000 and 6,607,000, respectively, for the same periods in 1999. Liquidity and Capital Resources ------------------------------- At October 7, 2000, the Company had cash and equivalents totaling $33.2 million. At year-end 1999, cash and equivalents aggregated $22.4 million. The net cash inflow of $10.8 million was attributable to certain operational, investing and financing activities as described below. 9 The Company had net cash inflows from operating activities of $15.3 million during the first three quarters of 2000, compared to a net cash inflow of $6.0 million for the same period in 1999. 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 the Company's wholesale customers. Net cash outflows from investing activities for the 40-week period ended October 7, 2000 totaled $2.5 million, compared to $1.7 million for the same period in 1999. The Company incurred $2.7 million in capital expenditures during the first three quarters of 2000. Approximately 80% of the expenditures related to equipment purchases for the replacement supermarket in Racine, Wisconsin as well as other corporate retail store equipment and technological upgrades. As of October 7, 2000, the Company still has approximately $2.7 million available as part of its fiscal 2000 capital budget of $5.4 million. The Company does not anticipate investing all of the remaining $2.7 million during the fourth quarter of 2000. Net cash outflows from financing activities for the 40-week period ended October 7, 2000 totaled nearly $2.1 million compared to $10.7 million for the same period in 1999. The significant decrease was due exclusively to the Company repurchasing only 5,000 shares of common stock from the open market during the first three quarters of 2000 aggregating $55,000, compared to 523,600 shares totaling $8.5 million for the same period last year. Due to certain strategic initiatives that were reviewed and evaluated during early 2000, the Company repurchased only 5,000 shares during the first three quarters of 2000. Subject to market conditions and other factors, the Company has decided to resume its repurchasing of its outstanding common stock from the open market. The Company's working capital position at October 7, 2000 was $34.6 million, compared to $29.8 million at January 1, 2000. The Company's current ratio at October 7, 2000 was 1.84 to 1.00 with cash and equivalents constituting substantially all of the working capital. The Company also has unsecured revolving bank credit facilities aggregating $16.0 million, which remains available for use in its entirety. At October 7, 2000, the Company's liquidity position continues to be very favorable and strong. The Company, therefore, anticipates that it will be able to satisfy its current operating needs and planned capital expenditures with current working capital and expected cash flows from operations. Separately, the Company had previously announced that it expected to make a decision and a selection of a software solution for the Company's business system needs before the end of 2000. As of this date, the Company believes that further investigation of alternatives is required and, therefore, a final decision is expected to extend beyond 2000. 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," "projects" 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 and opportunities for expansion purposes; (iii) continuing ability to obtain reasonable vendor marketing funds for promotional purposes; (iv) ongoing advancing information technology requirements which may require the Company to spend substantial capital expenditures and can dilute the Company's earnings for a significant period; and (v) the Company's ability to continue to recruit, train and retain quality franchise and corporate retail store operators. Due principally to the competitive nature of the industry and to the quality of its retail store operators, the Company continues to evaluate various courses of action relating to its underperforming retail operations. These courses of action include closures, conversions and consolidations of retail stores. Implementation of these actions can result in certain repositioning charges to the Company. 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company believes that its exposure to market risks related to changes in foreign currency exchange rates, interest rate fluctuations and trade accounts receivable is immaterial. 11 PART II Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 Financial Data Schedule. (b) Reports of Form 8-K The Company filed one current report on Form 8-K dated October 30, 2000 with respect to its press release for the third quarter and related disclosure requirements of Regulation FD. 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 13, 2000 /s/ Elwood F. Winn --------------------------- --------------------------------------------- (Date) Elwood F. Winn, Executive Vice President, Chief Financial Officer and Secretary November 13, 2000 /s/ Armand C. Go --------------------------- --------------------------------------------- (Date) Armand C. Go, Vice President, Treasurer and Chief Accounting Officer 12 EXHIBIT INDEX Exhibit Description 27 Financial Data Schedule 13