SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-1
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996)
FOR FISCAL YEAR ENDED MARCH 2, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
----------------- ---------------
Commission File No. 1-7013
SLOAN'S SUPERMARKETS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1829183
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
823 Eleventh Avenue, New York, NY 10019-3535
(Address of principal executive offices) (Zip code)
(212) 541-5534
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.02 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of May 22, 1997, 3,132,289 shares of the registrant's common stock, $0.02 par
value, were outstanding. The aggregate market value of the common stock held by
nonaffiliates of the registrant (i.e., excluding shares held by executive
officers, directors, and control persons as defined in Rule 405) on that date
was $4,374,371 computed at the closing price on that date.
Documents Incorporated by Reference: None
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
COMPANY BACKGROUND
The fiscal year ended February 26, 1995 consisted of 52 weeks. The fiscal year
ended March 3, 1996 consisted of 53 weeks. The fiscal year ended March 2, 1997
consisted of 52 weeks.
RESULTS OF OPERATIONS (1997 COMPARED TO 1996)
Net income was $1,159,678 for the fiscal year ended March 2, 1997 as compared to
$1,742,266 for the fiscal year ended March 3, 1996. The 1996 income included a
gain of $1,001,397 on the sale of the leasehold of one supermarket during the
year.
Sales for the 1997 fiscal year were $51,792,539 as compared to $50,279,245 for
fiscal year 1996. The increase in sales was primarily due to the fact that three
stores acquired during 1996 were open for the entire 1997 year, as well as the
opening of two additional stores at the beginning of the 1997 year. The increase
in sales generated by the additional stores was partially offset by the fact
that the prior year consisted of 53 weeks as compared with 52 weeks in 1997 as
well as a decline in same store sales of $3,949,350 (after adjusting 1996 same
store sales downward to reflect a comparable 52 week period). Same store sales
declined due to (a) management's decision to seek higher margins over sales, (b)
a decrease in the selling price of cereals (which constitute approximately 7.5%
of the Company's grocery sales) as a result of manufacturers lowering wholesale
prices of cereals by approximately 20% in April 1996 and (c) a reduction in
beverage sales during the summer months of 1997 as compared to the same period
in 1996. Beverage sales, which ordinarily represent approximately 17% of summer
sales, were negatively impacted by the abnormally cool weather in the New York
area. The Company anticipates that until completion of its planned remodelling
program, same store sales will remain constant as a result of management's
intention to maintain current margin levels. Management believes that same store
sales will increase as the remodelling and refurbishment of stores is completed.
Gross profit was $20,608,413 (39.79% of sales) in 1997 as compared to
$19,243,125 (38.27% of sales) in 1996. The improvement in the 1997 period mainly
reflects the implementation of the better buying program utilizing the
distribution center of an affiliate to make bulk purchases, on a direct basis at
better prices, as well as the expansion of the sales of value-added, higher
margin products. Additionally, prices were selectively increased. During 1997
the Company recognized as income approximately $1,340,000 of advertising and
volume achievement allowances as compared to approximately $1,141,000 during
1996.
Store operating, general and administrative expenses were $17,739,680 in 1997
(34.25% of sales) as compared to $16,811,184 (33.44% of sales) in 1996. The
primary reasons for the increase were the expenses associated with the
additional stores operating in the 1997 year and the extra costs incurred with
the start-up of the new stores.
Nonstore operating expense decreased to $287,966 in 1997 as compared to $414,165
in 1996, mainly as a result of lower legal expense. The decrease in legal
expenses was a result of the Company's reduced need during the year for the
services of outside legal counsel in connection with litigation, real estate and
general corporate matters.
-2-
<PAGE>
Interest expense was $709,454 in 1997 as compared with $551,631 in 1996. The
increase is attributable to the additional borrowing incurred to finance the
purchase of the three stores acquired during fiscal 1996.
RESULTS OF OPERATIONS (1996 COMPARED TO 1995)
Net income was $1,742,266 for the year ended March 3, 1996 compared to $362,088
for the year ended February 26, 1995. The 1996 income includes a gain of
$1,001,397 on the sale of the leasehold of one of its supermarkets during the
year.
Sales in 1996 were $50,279,245 compared to $48,366,513 in 1995. The increase in
sales is primarily due to 1996 having 53 weeks compared to 52 weeks in 1995 and
the fact that three additional stores were operated for part of 1996.
Gross profit was $19,243,125 (38.27%) in 1996 compared to $17,447,668 (36.07%)
in 1995. Gross profit has continued to increase as a result of improved cost
controls, more efficient inventory purchasing and a better product mix.
Advertising and volume achievement allowances from vendors continued to be a
significant portion of gross profit. During 1996, the Company recognized as
income approximately $1,141,000 of these allowances from vendors compared to
approximately $1,350,000 during 1995. This decrease is primarily the result of
fewer new products being introduced by vendors during fiscal 1996 as compared to
fiscal 1995. The deferred portion of the advertising income was approximately
$172,000 at March 3, 1996 compared to approximately $354,000 at February 26,
1995.
Store operating, general and administrative expenses increased to $16,811,184 in
1996 from $15,623,576 in 1995. As a percentage of sales, these expenses were
33.4% and 32.3% for 1996 and 1995, respectively. The increase is primarily due
to additional depreciation and amortization applicable to the Supermarkets
acquired, the additional costs incurred in opening the new Supermarket and
additional payroll costs associated with a new union contract, which took effect
during fiscal 1996.
Nonstore operating expenses increased to $414,165 in 1996 compared to $395,400
in 1995. As a percentage of sales, nonstore operating expenses remained fairly
constant. Interest expense increased to $551,631 in 1996 from $406,193. The
increase is primarily the result of the additional bank loan for the purchase of
the three Supermarkets.
LIQUIDITY AND CAPITAL RESOURCES
During the fiscal year ended March 2, 1997, the Company reduced its working
capital deficiency by approximately $1,373,000 and reduced its long-term debt by
$1,200,000.
Sales and gross profits have increased in each of the last three years and
management anticipates that this trend will continue, along with the continued
generation of significant cash flows from operations.
The Company has received commitment letters from European American Bank ("EAB")
and certain participating lenders with respect to a secured bank facility
comprised of a $12,000,000 five year term loan to refinance existing bank debt,
fund the payment of $4,000,000 of liabilities to affiliates of John Catsimatidis
which are owed by certain companies the Company
-3-
<PAGE>
may acquire by merger from Mr. Catsimatidis or companies controlled by him (the
"Food Group") and provide working capital; an $8,000,000 five year term loan to
finance the remodelling of existing stores (including stores to be acquired from
the Food Group) and the installation of a point-of-sale and management
information system; and a $5,000,000 revolving line of credit for additional
working capital which line of credit shall be for a two year period. The
foregoing commitments are subject to the negotiation and execution of definitive
documentation satisfactory to EAB and the participating lenders. The Company
believes that such facility, together with cash flow generated from the
Company's operations, will be sufficient to sustain the operations of the
Company for at least two years after the proposed merger.
INFLATION
The Company does not believe that inflation has had, or will have in the
foreseeable future, a material impact upon the Company's operating results.
-4-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page No.
--------
Report of independent certified public accountants F-1
Consolidated financial statements:
Balance sheets F-2 - F-3
Statements of operations F-4
Statements of stockholders' equity F-5
Statements of cash flows F-6
Notes to consolidated financial statements F-7 - F-25
-5-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders of
Sloan's Supermarkets, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Sloan's
Supermarkets, Inc. and subsidiaries as of March 2, 1997 and March 3, 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended March 2, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sloan's
Supermarkets, Inc. and subsidiaries as of March 2, 1997 and March 3, 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended March 2, 1997, in conformity with generally accepted
accounting principles.
May 30, 1997
F-1
<PAGE>
<TABLE>
<CAPTION>
Sloan's Supermarkets, Inc.
and Subsidiaries
Consolidated Balance Sheets
March 2, 1997 March 3, 1996
----------- -----------
<S> <C> <C>
ASSETS
Current:
Cash ................................................................................ $ 70,237 $ 71,242
Accounts receivable - net of allowance for doubtful accounts of
$30,000 in both years ............................................................ 501,916 282,182
Inventory ........................................................................... 5,873,991 5,461,283
Prepaid expenses and other current assets ........................................... 299,887 167,512
Due from related parties ............................................................ 1,830,127 527,694
----------- -----------
Total current assets ........................................................... 8,576,158 6,509,913
Property and equipment:
Furniture, fixtures and equipment ................................................... 5,466,456 5,461,146
Leasehold interests and improvements ................................................ 11,704,425 11,657,126
----------- -----------
17,170,881 17,118,272
Less: Accumulated depreciation and amortization .................................... 4,527,506 2,947,116
----------- -----------
Net property and equipment ..................................................... 12,643,375 14,171,156
Due from affiliates .................................................................... 337,304 318,005
Deposits and other assets .............................................................. 313,585 301,230
Deferred costs ......................................................................... 115,489 115,358
Noncompete agreement - net of accumulated amortization of
$311,567 and $232,535, respectively ................................................. 478,749 557,781
Deferred finance costs - net of accumulated amortization of
$35,048 and $9,190, respectively .................................................... 350,801 120,105
----------- -----------
$22,815,461 $22,093,548
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
Sloan's Supermarkets, Inc.
and Subsidiaries
Consolidated Balance Sheets
March 2, 1997 March 3, 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Accounts payable, trade ......................................................... $ 6,593,412 $ 5,591,948
Accrued payroll, vacation and withholdings ...................................... 491,857 703,785
Accrued expenses and other current liabilities .................................. 377,431 473,506
Revolving credit facility ....................................................... 1,000,000 1,000,000
Current portion of long-term debt ............................................... 1,200,000 1,200,000
------------ ------------
Total current liabilities .................................................. 9,662,700 8,969,239
Long-term debt ..................................................................... 4,200,000 5,400,000
Deferred credits ................................................................... -- 172,442
Deferred rent ...................................................................... 794,645 553,429
------------ ------------
Total liabilities .......................................................... 14,657,345 15,095,110
Commitments and contingencies
Stockholders' equity:
Preferred stock, $50 par - shares authorized 500,000; none issued ............... -- --
Common stock, $0.02 par - shares authorized 10,000,000;
outstanding 3,132,289 ........................................................ 62,646 62,646
Additional paid-in capital ...................................................... 18,248,286 18,248,286
Accumulated deficit ............................................................. (10,152,816) (11,312,494)
------------ ------------
Total stockholders' equity ................................................. 8,158,116 6,998,438
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
Sloan's Supermarkets, Inc.
and Subsidiaries
Consolidated Statements of Operations
March 2, March 3, February 26,
Year ended 1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Sales ............................................................ $ 51,792,539 $ 50,279,245 $ 48,366,513
Cost of sales .................................................... 31,184,126 31,036,120 30,918,845
------------ ------------ ------------
Gross profit ............................................. 20,608,413 19,243,125 17,447,668
Store operating, general and administrative
expenses ...................................................... 17,739,680 16,811,184 15,623,576
Management fee ................................................... 644,811 628,491 604,582
------------ ------------ ------------
2,223,922 1,803,450 1,219,510
Nonstore operating expense ....................................... 287,966 414,165 395,400
------------ ------------ ------------
Operating profit ......................................... 1,935,956 1,389,285 824,110
Other income (expense):
Interest income ............................................... 22,581 36,671 34,364
Other income (expenses) - net ................................. (41,072) 17,218 7,365
Interest expense .............................................. (709,454) (551,631) (406,193)
Gain on sale of leasehold interests ........................... -- 1,001,397 --
------------ ------------ ------------
(727,945) 503,655 (364,464)
Earnings before provision for income
taxes, discontinued operations and
extraordinary item .................................... 1,208,011 1,892,940 459,646
Provision for income taxes ....................................... 48,333 62,000 80,059
------------ ------------ ------------
Earnings before discontinued operations
and extraordinary item ................................ 1,159,678 1,830,940 379,587
Loss from discontinued operations ................................ -- -- (17,499)
Extraordinary loss on early extinguishment of
long-term debt ................................................ -- (88,674) --
------------ ------------ ------------
Net income ....................................................... $ 1,159,678 $ 1,742,266 $ 362,088
------------ ------------ ------------
Income (loss) per share of common stock:
Earnings before discontinued operations and ................... $ .37 $ .58 $ .13
extraordinary item
Discontinued operations ....................................... -- -- (.01)
Extraordinary item ............................................ -- (.03) --
------------ ------------ ------------
$ .37 $ .55 $ .12
Weighted average common shares outstanding ....................... 3,132,000 3,171,000 2,919,000
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Sloan's Supermarkets, Inc.
and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended March 2, 1997, March 3, 1996 and February 26, 1995
Common stock
------------------------------- Additional Total
Number of paid-in Accumulated stockholders'
shares Amount capital deficit equity
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, February 27, 1994 ......... 2,397,605 $ 47,952 $ 15,850,610 $(11,779,478) $ 4,119,084
Exercise of stock options .......... 450,000 9,000 766,000 -- 775,000
Declaration of 10% stock dividend .. 284,684 5,694 1,631,676 (1,637,370) --
Net income ......................... -- -- -- 362,088 362,088
------------ ------------ ------------ ------------ ------------
Balance, February 26, 1995 ......... 3,132,289 62,646 18,248,286 (13,054,760) 5,256,172
Net income ......................... -- -- -- 1,742,266 1,742,266
------------ ------------ ------------ ------------ ------------
Balance, March 3, 1996 ............. 3,132,289 62,646 18,248,286 (11,312,494) 6,998,438
Net income ......................... -- -- -- 1,159,678 1,159,678
------------ ------------ ------------ ------------ ------------
Balance, March 2, 1997 ............. 3,132,289 $ 62,646 $ 18,248,286 $(10,152,816) $ 8,158,116
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Sloan's Supermarkets, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
Year ended March 2, 1997 March 3, 1996 February 26, 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 1,159,678 $ 1,742,266 $ 362,088
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of leasehold interests ............................ -- (1,001,397) --
Depreciation and amortization .................................. 1,699,677 1,279,604 976,505
Extraordinary loss on early extinguishment of long-term debt ... -- 88,674 --
Changes in operating assets and liabilities, net of effect
from acquisition of supermarkets:
Restricted cash .......................................... -- 26,952 6,323
Accounts receivable - net ................................ (219,734) (5,334) 262,758
Inventory ................................................ (412,708) (826,866) (318,607)
Prepaid expenses and other current assets ................ (132,375) 60,553 94,640
Due from related parties - net ........................... (1,302,433) (313,874) 237,485
Receivable from officer .................................. (19,299) (20,788) (17,906)
Other assets ............................................. (12,355) (34,084) (73,119)
Deferred credits ......................................... -- (5,605) 121,677
Accounts payable, trade .................................. 1,001,464 (269,174) 277,935
Accrued payroll, vacation and withholdings ............... (211,928) 112,836 (163,920)
Accrued expenses and other current liabilities ........... (96,075) 278,296 (268,061)
Accrued rent leveling .................................... 241,216 215,471 28,678
Other credits ............................................ (172,442) (181,213) (148,447)
---------- ---------- ----------
Net cash provided by operating activities .............. 1,522,686 1,146,317 1,378,029
Cash flows from investing activities:
Proceeds from sale of leaseholds - net .............................. -- 1,708,293 --
Acquisition of new stores ........................................... -- (5,781,000) --
Capital expenditures - net .......................................... (52,609) (763,527) (393,563)
---------- ---------- ----------
Net cash used in investing activities .................. (52,609) (4,836,234) (393,563)
Cash flows from financing activities:
Deferred financing costs ............................................ (271,082) (118,730) --
Repayments of bank loan ............................................. (1,200,000) (4,195,614) (1,089,912)
Proceeds from bank loan ............................................. -- 8,000,000 --
---------- ---------- ----------
Net cash provided by (used in) financing activities .... (1,471,082) 3,685,656 (1,089,912)
Net decrease in cash ................................................... (1,005) (4,261) (105,446)
Cash, beginning of year ................................................ 71,242 75,503 180,949
---------- ---------- ----------
Cash, end of year ...................................................... $ 70,237 $ 71,242 $ 75,503
Supplemental disclosures of cash flow information:
Cash paid for interest .............................................. $ 709,727 $ 551,608 $ 405,797
Cash paid for taxes ................................................. 52,971 46,080 155,499
Noncash transactions:
Exercise of cash options ............................................ $ -- $ -- $ 775,000
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
Sloan's Supermarkets, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
1. BUSINESS
The operations of Sloan's Supermarkets, Inc. and subsidiaries ("Sloan's" or
the "Company") have historically consisted of the manufacture of cast
component parts for the fine jewelry industry. The Company changed its name
from Designcraft Industries, Inc. to its present name in 1993.
As a result of the sale of the assets of its remaining jewelry businesses,
the Company no longer operates in the fine jewelry manufacturing business.
On March 19, 1993, Namdor Inc. ("Namdor"), a wholly-owned subsidiary of the
Company, purchased certain assets relating to 11 supermarkets in the New
York metropolitan area (the "Supermarkets") from CKMR Corporation. The
purchased assets included machinery and equipment, furniture, fixtures,
leasehold improvements, inventory of supplies and merchandise located at
the Supermarkets and a noncompete agreement (amortized on a straight-line
basis over 10 years - the life of the agreement). The net cash price for
the assets and the noncompete agreement was approximately $8.8 million. In
addition, at the time of the purchase, Namdor assumed certain accounts
payable of the business's prior owners in an amount of $5,000,000.
The acquisition of the Supermarkets by the Company has been accounted for
as a purchase transaction in accordance with Accounting Principles Board
Opinion No. 16, "Business Combinations". As such, the purchase price has
been allocated to assets acquired and liabilities assumed based on their
estimated fair values. The excess of the fair value of assets acquired less
liabilities assumed over cost has been allocated to reduce proportionately
the values assigned to noncurrent assets in determining their fair values.
On October 13, 1995, the Company purchased three supermarket store
locations including furniture and fixtures, leasehold improvements and
inventory from a company owned by the Chairman of the Board. The purchase
price of $5,000,000 was based on a fair market evaluation performed by an
independent third party. Such acquisition was financed with a term loan. In
addition, the Company purchased inventory at the locations at a cost of
$781,000.
F-7
<PAGE>
On August 29, 1995, the Company sold one store leasehold to a third party
for approximately $1.7 million. The sale resulted in a net gain of
approximately $1.0 million. The store's supermarket equipment was
transferred to a new store location which was opened during February 1996.
In addition, the Company opened its first health and beauty aid store
during March 1996. As of the date of this report, the Company operates 14
supermarkets and one health and beauty aid store.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Sloan's
Supermarkets, Inc. and its wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in
consolidation.
Fiscal Year
The Company's fiscal year is comprised of 52 or 53 weeks ending on the
Sunday closest to the last day of February. The 1997 year consisted of 52
weeks, 1996 of 53 weeks and 1995 of 52 weeks.
Inventories
Store inventories are valued principally at the lower of cost or market
with cost determined under the retail method.
Property and Equipment
Depreciation of furniture, fixtures and equipment is computed by the
straight-line method over the estimated useful lives of the assets, with
lives ranging from seven to ten years. Leasehold improvements are amortized
over the shorter of their estimated useful lives or the lease term by the
straight-line method.
F-8
<PAGE>
Leases
The Company charges the cost of noncancelable operating lease payments and
beneficial leaseholds to operations on a straight-line basis over the lives
of the leases.
Included in income for the fiscal year ended February 26, 1995 are benefits
of $143,000, related to charges taken in the prior fiscal year for deferred
rents.
Deferred Advertising
Advertising rebates and space allocation allowances are deferred and
recognized over the period of the agreement which historically have ranged
from one to three years. Advertising costs are expensed as incurred.
Deferred advertising included in the balance sheet was $0 and $72,442,
respectively, for the years March 2, 1997 and March 3, 1996.
Advertising expense included in the income statement was $144,539, $105,129
and $114,009, respectively, for the year ended March 2, 1997, March 3, 1996
and February 26, 1995.
Income Per Share
Per share data are based on the weighted average number of shares of common
stock and common stock equivalents outstanding during each year. Income
(loss) per share is computed by the treasury stock method; primary and
fully diluted income (loss) per share are the same. The 10% stock dividend
in fiscal 1995 has been retroactively applied to all periods presented.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), which requires a liability
method of accounting for income taxes. Under the liability method, deferred
income taxes are recognized for the tax consequences of "temporary
differences" by applying applicable statutory tax rates to differences
between the financial statement carrying amounts and the tax bases of
existing assets and liabilities.
F-9
<PAGE>
The Company files a consolidated Federal income tax return that includes
the accounts of its subsidiaries. The Company and its subsidiaries file
separate state and local income tax returns.
F-10
<PAGE>
Fair Value of Financial Instruments
The carrying values of financial instruments including cash, accounts
receivable, accounts payable and due from related parties approximate fair
value at March 2, 1997 and March 3, 1996 because of the relative short
maturities of these instruments.
The aggregate fair value of the bank debt approximates its carrying amount
because of its recent and frequent repricing based upon market conditions.
Reclassifications
Certain reclassifications have been made to the presentations for fiscal
1996 and 1995 to conform to the presentation for fiscal 1997.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Long-lived Assets
During 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long- lived
Assets to Be Disposed Of" ("SFAS 121"), was issued. SFAS 121 requires the
Company to review long-lived assets and certain identifiable assets related
to those assets for impairment whenever circumstances and situations change
such that there is an indication that the carrying amounts may not be
recoverable. If the undiscounted future cash flows of the enterprise are
less than their carrying amounts, their carrying amounts are reduced to
fair value and an impairment loss is recognized. The adoption of this
pronouncement in fiscal 1997 did not have a significant impact on the
Company's financial statements.
F-11
<PAGE>
Stock Options
The Company accounts for all transactions under which employees receive
shares of stock or other equity instruments in the Company or the Company
incurs liabilities to employees in amounts based on the price of its stock
in accordance with the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees". The Company has not
adopted the fair value method encouraged but not required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". Appropriate pro forma and other information has been
included herein.
3. RELATED PARTY TRANSACTIONS
The Company has advanced funds to companies owned by the Chairman of the
Board who is also the principal stockholder of the Company. As of March 2,
1997 and March 3, 1996, the Company is owed approximately $337,000 and
$318,000, including $133,304 and $114,005 of accrued interest,
respectively. Such advances bear interest at prime plus 1.25% per annum
(9.50% at March 2, 1997 and 9.50% at March 3, 1996).
F-12
<PAGE>
Red Apple Group, Inc. ("Red Apple"), a corporation wholly owned and
controlled by the Company's Chairman of the Board, supervises all
operations of the Supermarkets pursuant to a management agreement entered
into in March 1993 (the "Management Agreement"). The Management Agreement
is terminable by either party after March 19, 1998. The term of the
agreement shall automatically be extended for additional one-year periods
unless either party has given the other notice of termination no later than
90 days prior to the end of the previous term. As of the date of this
report, no such notice has been given. The Management Agreement requires
the Company to pay to Red Apple a quarterly fee equal to 1.25% of all sales
made in or from the Supermarkets. The quarterly fee payable under the
Management Agreement does not necessarily equal the costs which would have
been or may be incurred by the Company on a stand-alone basis.
The Company has various amounts receivable from supermarket companies owned
by the Chairman of the Board related to the allocation of volume,
advertising and other rebates to the Company. Rebates, whether allocated or
directly attributed to the Company, are recorded as reductions to cost of
sales or advertising expense over the life of the related agreement.
Rebates recorded as reductions to expenses approximated $1.7, $1.1 and $1.4
million during fiscal 1997, 1996 and 1995, respectively.
Red Apple also provides maintenance services for the Company which are not
covered by the Management Agreement. Such services include supermarket
refrigeration, electrical and equipment maintenance. During the 1997, 1996
and 1995 fiscal years, the Company incurred approximately $-0-, $123,000
and $90,000, respectively.
F-13
<PAGE>
City Produce Distributors, Inc., a corporation indirectly wholly owned and
controlled by the Chairman of the Board, sells produce and certain grocery
items to the Company at prices consistent with other third parties. During
the 1997, 1996 and 1995 fiscal years, such purchases aggregated
approximately $5,263,000, $3,618,000 and $2,900,000, respectively.
Newspaper advertising for the Supermarkets is frequently pooled with
advertising for other supermarkets which are not owned by the Company but
which are operated by Red Apple or its affiliates under the Sloan's name.
In such cases, the Company pays a proportionate share of such advertising
expenses based upon its number of Supermarkets covered in the
advertisements. Such amounts allocated to the Company approximated
$115,000, $136,000 and $139,000 during fiscal 1997, 1996 and 1995,
respectively.
At March 2, 1997 and March 3, 1996, the net amount due from related parties
resulting from the above transactions amounted to $1,830,127 and $527,694,
respectively.
Lowenthal, Landau, Fischer & Bring, P.C., a law firm of which a director of
the Company is a member, was paid $219,000, $213,000 and $117,000 in fees
for rendering legal services to the Company during the fiscal years ended
March 2, 1997, March 3, 1996 and February 26, 1995, respectively.
4. COMMITMENTS AND CONTINGENCIES
The Company operates primarily in leased facilities, under noncancelable
operating leases expiring at various dates through 2018. Certain leases
provide for contingent rents (based upon store sales exceeding stipulated
amounts or on the Consumer Price Index), escalation clauses and renewal
options ranging from five to fifteen years. The Company is obligated under
all leases to pay for taxes, insurance and common area maintenance
expenses.
F-14
<PAGE>
Rent expense under noncancelable operating leases, including leases with
related parties for the fiscal years ended March 2, 1997, March 3, 1996 and
February 26, 1995, respectively, is as follows:
March 2, March 3, February 26,
Year ended 1997 1996 1995
---------- ---------- ----------
Base rents ................. $2,781,602 $2,350,162 $1,972,164
Contingent rents ........... 30,000 30,000 30,000
---------- ---------- ----------
Rent expense ............... $2,811,602 $2,380,162 $2,002,164
Future minimum lease commitments under noncancelable leases as of March 2,
1997 are:
Fiscal year ending:
1998 ............................... $ 2,215,556
1999 ............................... 2,036,400
2000 ............................... 1,962,441
2001 ............................... 2,009,949
2002 ............................... 1,946,376
Thereafter ......................... 20,559,901
------------
$ 30,730,623
The Company may also expand its operations through acquisitions of
supermarkets and/or businesses which the Company believes would complement
its core supermarket business. The Company is continuing to pursue the
possibility of purchasing additional supermarkets from other companies
owned by John Catsimatidis.
F-15
<PAGE>
5. INCOME TAXES
The Company adopted, effective March 1, 1993, SFAS 109 which, among other
things, requires a change from the deferred method to the liability method
of accounting for income taxes and allows recognition of deferred tax
assets based on the likelihood of realization of a tax benefit in future
years. Pursuant to the adoption of SFAS 109, deferred income taxes are
provided for the temporary differences between the tax basis and financial
accounting reporting basis of the Company's net assets and liabilities. The
effect of adopting SFAS 109 had no impact on the results of operations or
financial position of the Company.
Deferred tax expense or benefit is the change in the computed tax asset or
liability balance. As of March 2, 1997 and March 3, 1996, the Company had
total deferred tax assets of approximately $790,000 and $1,020,000,
respectively, of which approximately $680,000 and $980,000 is related to
net operating loss carryforwards which are available to offset income
earned in future years, and approximately $230,000 and $140,000 in deferred
tax liabilities related to excess tax depreciation. However, the net
deferred tax assets were offset by a valuation allowance of an equal
amount. Accordingly, for the year ended March 2, 1997, no deferred income
tax benefit was recognized.
The Company utilized approximately $1,200,000, $1,700,000 and $-0- of net
operating loss carryforwards during fiscal 1997, 1996 and 1995,
respectively, the benefit of which offsets current income taxes payable. As
of March 2, 1997, the Company had available Federal net operating loss
carryforwards of approximately $2,000,000, of which the tax benefits of
$1,000,000 when and if realized, will be credited directly to additional
paid-in capital.
The income tax expense amounts in the consolidated statements of operations
consist of state income taxes and Federal alternative minimum taxes.
F-16
<PAGE>
6. DEBT
Credit Facility and Term Loan Agreement
On October 13, 1995, the Company entered into a five-year credit agreement
with European American Bank which replaced its previous credit agreement.
The new agreement includes a $1,000,000 revolving credit facility and
$7,000,000 term loan. The new agreement, which permits borrowings based on
the prime rate plus 1.25%, contains covenants, representations and events
of default typical of credit facility agreements, including financial
covenants which require the Company to meet, among other things, debt
service coverage ratios and fixed charge coverage ratios and which limit
advances to affiliates. Similar to the Company's prior credit agreements,
the new revolving credit facility and term loan is secured by equipment,
general intangibles and accounts receivable.
Long-term debt consists of the following:
March 2, March 3,
1997 1996
----------- ------------
Loan payable to bank at prime plus 1.25% per
annum (9.5% at March 2, 1997), interest
payable monthly in arrears, principal
payable in monthly installments of $100,000
beginning November 13, 1995
(collateralized by certain assets of the
Company, including store equipment and
leases) ..................................... $ 5,400,000 $ 6,600,000
Less: Current portion .......................... (1,200,000) (1,200,000)
----------- ------------
$ 4,200,000 $ 5,400,000
=========== ============
Deferred financing costs related to the loan payable to bank are being
amortized over the life of the related debt. As a result of the refinancing
of the credit agreement, the Company wrote off deferred financing costs
which pertained to the previous credit agreement. The write-off of $88,674
is reflected in the consolidated financial statements as an extraordinary
item.
F-17
<PAGE>
Principal maturities of long-term debt follow:
1998 ............................ $1,200,000
1999 ............................ 1,200,000
2000 ............................ 1,200,000
2001 ............................ 1,800,000
----------
$5,400,000
7. STOCKHOLDERS' EQUITY
On November 16, 1994, the Company declared a 10% stock dividend payable on
January 20, 1995 to stockholders of record on December 20, 1994.
Earnings per share and weighted average shares outstanding have been
restated to reflect the 10% stock dividend.
8. RETIREMENT PLANS
The Company participates in various defined contribution multi- employer
union pension plans which are administered jointly by management and union
representatives and which sponsor most full-time and certain part-time
union employees. The pension expense for these plans approximated $630,000,
$800,000 and $702,000 in fiscal 1997, 1996 and 1995, respectively. The
Company could, under certain circumstances, be liable for unfunded vested
benefits or other expenses of jointly administered union/management plans.
F-18
<PAGE>
9. STOCK OPTION PLANS
During fiscal 1990, the Company granted to the Chairman of the Board and
principal stockholder of the Company a nonqualified stock option to
purchase an aggregate of 200,000 shares of common stock at a price of $5.00
per share. During fiscal 1993, the exercise price of these options had been
reduced to $2.00 per share (the fair market value at that date) by approval
of the Company's stockholders. During fiscal 1991, the Company granted the
Chairman a nonqualified stock option to purchase an aggregate of 250,000
shares of common stock at a price of $1.50 per share. On October 20, 1994,
the options were exercised by the Chairman. The purchase price for the
options exercised were paid for by offsetting loans previously made to the
Company by the Chairman or by companies controlled by the Chairman.
On October 7, 1994, the Company granted the Chairman an aggregate of
250,000 shares of common stock at a price of $4.12 per share (the fair
market value at that date).
The Company currently has one incentive grant and four nonqualified grants
under which stock options may be granted to officers, directors and key
employees of the Company - the 1994 Employee Incentive Grant (the "1994
Grant"), the 1994 Nonqualified Grant (the "1994 NQ Grant"), the 1995
Chairman's Nonqualified Options (the "Chairman's Grant"), the 1994
Director's Nonqualified Grant (the "Directors' Grant"), and the 1994
Nonqualified Recruitment Grant (the "1994 Recruitment Grant"). The options
to purchase common shares generally are issued at fair market value on the
date of the grant, begin vesting on the date of the grant, and expire ten
years from issuance and are conditioned upon continual employment during
the vesting period.
Under the 1994 Grant and the 1994 NQ Grant, the Company granted options to
purchase up to 100,000 and 35,000 shares of common stock, respectively.
In addition to the one incentive grant, the Company has granted stock
options to certain key executives and directors. The vesting terms and
contractual lives of these grants are similar to that of the incentive
grant.
F-19
<PAGE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations for its stock
option grants. Generally, compensation expense is not recognized for stock
option grants.
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), the Company discloses
the pro forma impact of recording compensation expense utilizing the
Black-Scholes model. The Black-Scholes option valuation model was developed
for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
Black-Scholes model does not necessarily provide a reliable measure of the
fair value of its stock options.
Since no stock options were granted in the past two years, no pro forma
calculations pursuant to SFAS 123 have been presented.
F-20
<PAGE>
A summary of the status of the Company's stock options is presented below:
Weighted Average
Shares Exercise Price
--------- --------
Balance, February 27, 1994 ........ - $ -
Granted ...................... 473,000 4.29
Exercised .................... - -
Forfeited .................... - -
Balance, February 26, 1995 ........ 473,000 4.29
Granted ...................... - -
Exercised .................... - -
Forfeited .................... (9,000) 5.63
Balance, March 3, 1996 ............ 464,000 4.27
Granted ...................... - -
Exercised .................... - -
Forfeited .................... (8,000) 5.63
Balance March 2, 1997 ............. 456,000 $4.24
Options exercisable as of March 2, 1997, March 3, 1996 and February 26,
1995 were 442,800, 444,200 and 446,600, respectively.
F-21
<PAGE>
The following table summarizes information as of March 2, 1997 concerning
outstanding and exercisable options:
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------- -------- -------- -------- -------- --------
$3.75 275,000 6.69 $3.75 275,000 $3.75
5.63 33,000 6.81 5.63 33,000 5.63
5.63 85,000 6.81 5.63 85,000 5.63
3.81 30,000 7.69 3.81 30,000 3.81
3.81 33,000 2.69 3.81 19,800 3.81
$3.75-5.63 456,000 6.50 4.24 442,800 4.24
10. LITIGATION
In June 1994, the United States Federal Trade Commission (the "FTC")
commenced an action alleging that the mergers by John Catsimatidis, the
Company and three other entities controlled by Mr. Catsimatidis
(collectively, the "companies") of 32 Sloan's Supermarkets between 1991 and
1993 violated Federal antitrust laws because the effect of the mergers
might be substantially to lessen competition among supermarkets within four
Manhattan residential neighborhoods. The complaint indicated that the FTC
could seek divestiture of up to ten supermarkets owned by the companies.
F-22
<PAGE>
In order to avoid the costs of protracted litigation in the matter and
without admitting that any antitrust law was violated as alleged in the
complaint, on November 21, 1994, the companies entered into a settlement
agreement with the Acting Director of the Bureau of Competition of the FTC
regarding the claims made by the FTC against them (the "Settlement
Agreement"). The companies agreed in the Settlement Agreement that within
twelve months from the date of a final order in the proceeding they would
divest themselves of an aggregate of six supermarkets in Manhattan, chosen
by them from a list of sixteen supermarkets specifically designated in the
Settlement Agreement (none of which are owned by the Company) and certain
alternate supermarkets referenced in the Settlement Agreement (five of
which were then owned by the Company). Nothing in the Settlement Agreement
required the Company to divest itself of any of its supermarkets, but
divestiture of supermarkets owned by the Company would count towards
satisfaction of the divestiture obligations.
An order embodying the Settlement Agreement was made effective March 6,
1995 (the "Order"). Pursuant to that Order, for a period of 10 years from
March 6, 1995, the companies cannot, without prior FTC approval, acquire
any interest in any existing supermarket in a designated area. The order
does not restrict the companies from acquiring an interest in a supermarket
by leasing or purchasing a new location that at the time of merger (and for
six months prior to the merger) is not being operated as a supermarket.
In March 1996, an application (the "Application") was made to modify the
Order so as to lift the divestiture requirements other than with respect to
one store on the Upper West Side which was not owned by the Company. The
FTC approved the divestiture of that store and its divestiture was
completed on May 9, 1996. On April 29, 1996, the Application was revised;
and it was further revised in August and September so as to seek relief
solely with respect to the requirements of divestiture of any supermarkets
in the Chelsea section of Manhattan.
F-23
<PAGE>
On September 13, 1996, the FTC granted the Application as modified, and
deleted the requirements of divestiture in Chelsea. Simultaneously, the FTC
appointed a trustee to divest four supermarkets pursuant to the Order, as
modified. The trustee was not granted any authority to divest until the FTC
approved a trustee agreement between the trustee and the companies. An
agreement was entered into with the trustee which would have been effective
upon approval by the FTC.
Subsequent to the modification of the Order, Supermarket Acquisition Corp.
("SAC"), Red Apple Supermarket, Inc. ("RAS") and Gristede's Supermarkets,
Inc. ("Gristede's") sold an aggregate of four stores in compliance with the
divestiture provisions of the Order, as modified. Based thereon, the
trustee agreement will not become effective.
A settlement of FTC claims relating to the divestiture provisions of the
Order has been agreed to pursuant to which $600,000 has been paid to the
FTC. No portion of such amount was borne by the companies.
On August 8, 1994, a lawsuit against the Company and Mr. Catsimatidis was
instituted in the United States District Court for the Southern District of
New York by RMED International, Inc. ("RMED"), a former stockholder of the
Company.
F-24
<PAGE>
The complaint alleges, among other things, that RMED and a purported class
consisting of persons who purchased the Company's common stock on or after
March 19, 1993 were damaged by alleged nondisclosures in certain filings
made by the Company with the Securities and Exchange Commission between
January 1993 and June 1994 relating to an investigation by the FTC. The
complaint alleges that such nondisclosures constituted violations of
Federal and New York State securities laws, as well as common law fraud and
seeks damages (including punitive damages) in an unspecified amount
(although in discovery proceedings the named plaintiff has claimed that its
damages were approximately $800,000), as well as costs and disbursements of
the action. On June 2, 1994, the Company issued a press release which
disclosed the FTC action.
On September 30, 1994, the defendants filed a motion to dismiss for failure
to state a cause of action and for lack of subject matter jurisdiction over
the state claims. The motion was denied. In June 1995, RMED filed a motion
for class certification, and discovery was held in abeyance pending
disposition of that motion. The motion was granted in March 1996 and
discovery is now proceeding. Management believes that the lawsuit is
without merit and intends to defend the action vigorously; however, the
outcome cannot be determined.
F-25
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
SLOAN'S SUPERMARKETS, INC.
By: /s/John Catsimatidis
--------------------
John A. Catsimatidis
Chairman of the Board
Dated: September 30, 1997
