SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 K
(Mark One)
(X) Annual Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Fiscal Year ended August 30, 1997
( ) 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 0-80.
SEAWAY FOOD TOWN, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-4471466
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1020 Ford Street, Maumee, Ohio 43537
(Address of principal executive offices) (Zip Code)
419/893-9401
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Title of each class
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, without par value (stated value $2.00 per share)
Title of Class
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
Page 1 of 2 of Cover Page
<PAGE>
2
Disclosure of Delinquent Form Filing
Indicate by check mark if disclosure of delinquent filings pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive Proxy or
information statement incorporated by reference in Part III of this
Form 10 K or any amendments to this Form 10 K.
( X )
The aggregate market value of voting stock held by nonaffiliates of the
registrant is approximately $66,897,229 as of November 14, 1997
The number of shares outstanding of the issuer's classes
of common stock as of the November 14, 1997.
Common stock, without par 4,419,168 shares
value (stated value $2.00
per share)
Documents Incorporated by Reference
Parts II and IV Portions of the Annual Report to Shareholders of
Seaway Food Town, Inc., for the year ended August 30,
1997("Annual Report") are filed as Exhibit 13 and
are incorporated by reference into Parts II and IV.
Part III Portions of the Seaway Food Town, Inc. Proxy Statement,
for the annual shareholders meeting to be held January
8, 1998 are incorporated by reference into part III
Page 2 of 2 of Cover Page
<PAGE>
3
PART I
Item 1. Business
Seaway Food Town, Inc., was founded in 1957 and is a leading
regional supermarket chain located predominantly in northwest and
central Ohio and southeast Michigan. Beginning in 1986, the Company
began adding deep discount drugstores to its chain. The merchandise
sold in these stores is similar to that sold in a conventional super-
market but with a greater emphasis on non-food items and package size
of such items. At year end, the Company operated 17 Food Town Super-
markets, 27 Food Town Plus Supermarkets, and 25 deep discount drugstores
under the name of the Pharm.
No material portion of the Company's business is seasonal, as that
term is commonly used, although holiday periods may result in greater
sales volume. There is substantial competition, principally price-
oriented, from national, regional and local companies. The Company is
in one line of business selling substantially the same types of retail
food and convenience-related non-food merchandise.
The Company employs approximately 2,370 employees on a full-time
basis and 2,681 on a part-time basis.
Item 2. Properties
The Company leases 46 of its stores (3 of which are accounted for
as capital leases) and certain other facilities and equipment under
leases generally for fifteen years, although some are for shorter as well
as longer periods. The Company owns 23 stores and a relatively large
distribution center (approximately 477,174 square feet) which includes
offices, warehousing and shipping facilities, located in Maumee, Ohio.
It also owns a 133,000 square foot warehouse in Toledo, Ohio which is
used as a satellite facility and a 105,000 square foot warehouse facility
which houses health and beauty aids and general merchandise operations.
The Company believes that its physical facilities, both leased and owned,
are suitable and adequate for the intended uses and purposes.
At August 30, 1997, the approximate undepreciated cost of real
property subject to mortgages was $12,388,000 and the approximate
undepreciated cost of real property subject to capital lease obligations
was $3,607,000.
<PAGE>
4
Item 3. Legal Proceedings.
There are no significant legal proceedings pending.
Item 4. Submission of matters to a vote of Security Holders.
No matters have been submitted to a vote of security holders
since the Annual Meeting held January 9, 1997.
PART II
Item 5. Market for registrant's common equity and related security
holder matters.
Information with respect to the market for the registrant's common
stock and related security holder matters on page 31 of Exhibit (13)
filed hereunder is incorporated herein by reference.
Item 6. Selected financial data.
The five year summary of selected financial data on page 11 of
Exhibit (13) filed hereunder is incorporated herein by reference.
Item 7. Management's discussion and analysis of financial condition
and results of operations.
Management's discussion and analysis of financial condition and
results of operations included on pages 13 through 18 of Exhibit (13)
filed hereunder is incorporated herein by reference.
Item 8. Financial statements and supplementary data.
The consolidated financial statements and report of independent
auditors on pages shown below of Exhibit (13) filed hereunder are
incorporated herein by reference.
Page(s)
-------
Financial Highlights 12
Report of Independent Auditors 19
Consolidated Statements of Income 20
Consolidated Balance Sheets 21 - 22
Consolidated Statements of Cash Flows 23
Consolidated Statements of Shareholders' Equity 24
Notes to Consolidated Financial Statements 25 - 30
Item 9. Changes in and disagreements with accountants on accounting
and financial disclosure.
There have been no disagreements on accounting and financial
disclosure matters reported on Form 8-K during the fiscal years ended
August 30, 1997 and August 31, 1996.
<PAGE>
5
PART III
Item 10. Directors and executive officers of the Registrant.
Information with respect to non-officer directors is included in
the Proxy Statement in the Section entitled "Information concerning
Nominees and Directors" and is incorporated herein by reference.
Information with respect to executive officers, family relationships
and business experience is included in the Proxy Statement in the
Sections entitled "Executive Compensation," "Compensation of Directors,"
and "Executive Officers". That information (except the Compensation
Committee Report, and the graph indicating Comparison of 4 Year
Cumulative Total Return), is incorporated herein by reference.
Item 11. Executive Compensation.
Information regarding Executive Compensation is included in the
Proxy Statement in the sections entitled "Interest of Management
in Certain Transactions," "Executive Compensation," and "Compensa-
tion of Directors". That information (except the Compensation Committee
Report, and the graph indicating Comparison of 4 Year Cumulative
Total Return), is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information as to Security Ownership of Certain Beneficial Owners and
Management included in the Proxy Statement in the Sections entitled
"Information Concerning Nominees and Directors," and "Principal Holders
of Voting Securities" is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information regarding Certain Relationships and Related Transactions
is included in the Proxy Statement in the Sections entitled "Interest of
Management in Certain Transactions," "Executive Compensation," and
"Compensation of Directors". That information (except the Compensation
Committee Report, and the graph indicating Comparison of 4 Year Cumulative
Total Return), is incorporated herein by reference.
<PAGE>
6
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents or portions thereof indicated are filed
as a part of this report on Form 10-K.
(1) The following consolidated financial statements of Seaway Food
Town, Inc. and its subsidiaries, included on pages 19 - 30 of
Exhibit (13) filed hereunder are incorporated by reference in
Item 8.
Report of Independent Auditors
Consolidated statements of Income - Years ended
August 30, 1997, August 31, 1996 and August 26, 1995
Consolidated balance sheets at August 30, 1997 and
August 31, 1996
Consolidated statements of cash flows - Years ended August 30,
1997, August 31, 1996 and August 26, 1995
Consolidated statement of shareholders' equity - Years ended
August 30, 1997, August 31, 1996 and August 26, 1995
Notes to consolidated financial statements
(2) The following consolidated financial statement schedules of
Seaway Food Town, Inc. and its subsidiaries are filed under
Item 14(d):
SCHEDULE PAGE(S)
-------- -------
Schedule II - Valuation and qualifying accounts 9
All other schedules have been omitted since the required information is
not present or is not present in amounts sufficient to require submission
of the schedule, or because the information required is included in the
consolidated financial statements or the notes thereto.
<PAGE>
7
b.) Reports on Form 8-K.
No reports on Form 8-K were required to be filed for the
three months ended August 30, 1997.
c.) Exhibits Required by Item 601 of Regulation S-K Index.
Exhibit 3 - Data required by this item has previously been
filed and is incorporated by reference from the
Company's Annual Report on Form 10-K for the Year
Ended September 25, 1982, File 0-80.
A copy of the Amendment to the Articles of
Incorporation filed with the Secretary of
State of Ohio, January 17, 1989, is incorporated by
reference from the Company's Annual Report on Form
10-K for the Year Ended August 26, 1989, File 0-80.
4 - Data required by this item has previously been
filed and is incorporated herein by reference
from the Company's Annual Report on Form 10-K
for the Year Ended September 26, 1981, File 0-80.
10 - Contracts required by this item have previously
been filed and are Incorporated herein by reference
from the Company's Annual Report on Form 10-K for
the Years Ended September 26, 1981, September 24,
1983, the eleven months ended August 27, 1988, File
0-80, on the Company's Issuer Tender Offer Statement
on Schedule 13 E-4 filed November 4, 1987, and on
form 10-K for the years ended August 25, 1990,
August 31, 1991, August 29, 1992, August 28, 1993,
and August 27, 1994.
11 - Computation of income per share.
13 - Portions of the 1997 Annual Report to Shareholders
(to the extent incorporated by reference hereunder.)
21 - Subsidiaries of the Registrant.
23 - Consent of Independent Auditors.
27 - Financial Data Schedule
d.) Financial Statements Required by Regulation S-X.
Included in Item 14 (a), above.
<PAGE>
8
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, thereunto
duly authorized.
SEAWAY FOOD TOWN, INC.
(Registrant)
By /s/ Richard B. Iott
Date November 14, 1997 Richard B. Iott, President, CEO & Director
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
By /s/ Wallace D. Iott
Date November 14, 1997 Wallace D. Iott, Chairman of the Board
& Director
By /s/ Waldo E. Yeager
Date November 14, 1997 Waldo E. Yeager, Director
(Chief Financial Officer and
Treasurer)
By /s/ Thomas M. O'Donnell
Date November 14, 1997 Thomas M. O'Donnell, Director
By /s/ David J. Walrod
Date November 14, 1997 David J. Walrod, Director
By /s/ Richard K. Ransom
Date November 14, 1997 Richard K. Ransom, Director
By /s/ Joel A. Levine
Date November 14, 1997 Joel A. Levine, Director
By /s/ Eugene R. Wos
Date November 14, 1997 Eugene R. Wos, Director
By /s/ W. Geoffrey Lyden
Date November 14, 1997 W. Geoffrey Lyden, Director
<PAGE>
9
<TABLE>
<CAPTION>
SEAWAY FOOD TOWN, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended August 30, 1997, August 31, 1996, and August 26, 1995
Charge
Balance at (credit) to Charged Balance
beginning of costs and to other Deductions at end of
period expenses accounts from reserves period
Allowance
for doubtful
accounts:
<S> <C> <C> <C> <C> <C>
1997 $ 450,000 $ 8,511 --- $ 8,511(A) $ 450,000
============ =========== ======== ============= =========
1996 $ 450,000 $ 18,398 --- $ 18,398(A) $ 450,000
============ =========== ======== ============= =========
1995 $ 450,000 $ 7,249 --- $ 7,249 (A) $ 450,000
============ =========== ======== ============= =========
(A) - Accounts charged off during the year, net of
recoveries of accounts previously charged off.
</TABLE>
F-3
<PAGE>
10
<TABLE>
EXHIBIT 11
SEAWAY FOOD TOWN, INC.
<CAPTION>
COMPUTATION OF INCOME PER SHARE
1997 1996 1995 1994 1993
<S> ----- ----- ---- ---- ----
Income before extraordinary item
and cumulative effect of change <C> <C> <C> <C> <C>
in accounting (thousands of $6,412 $5,505 $4,480 $2,438 $1,123
dollars) ====== ====== ====== ====== ======
Net income (thousands of dollars) $6,412 $5,505 $4,480 $2,059 $1,123
====== ====== ====== ====== ======
Weighted average number of common
shares outstanding during the
period for purposes of computing
primary earnings per share 4,410,313 4,395,322 4,393,286 4,613,762 4,664,032
Net shares to be issued upon
exercise of dilutive options
after applying treasury stock --- --- --- --- ---
method ----- ----- ------ ------ ------
Adjusted outstanding shares for
purpose of computing income per
share assuming full dilution 4,410,313 4,395,322 4,393,286 4,613,762 4,664,032
========= ========= ========= ========= =========
Income per common share:
Assuming no dilution:
Income before extraordinary item
and cumulative effect of change
in accounting $1.45 $1.25 $1.02 $.53 $.24
Extraordinary item --- --- --- (.03) ---
Cumulative effect of change in
accounting for income taxes --- --- --- (.05) ---
----- ----- ------ ------ ------
Net income $1.45 $1.25 $1.02 $.45 $.24
===== ===== ====== ====== ======
Fully diluted (A)
Income before extraordinary item
and cumulative effect of change
in accounting for income taxes $1.45 $1.25 $1.02 $.53 $.24
Extraordinary item --- --- --- (.03) ---
Cumulative effect of change in
accounting for income taxes --- --- --- (.05) ---
----- ----- ------ ------ ------
Net income $1.45 $1.25 $1.02 $.45 $.24
====== ====== ====== ====== ======
(A) - Not appearing on face of
income statement
</TABLE>
<PAGE>
<TABLE>
11 EXHIBIT (13)
<CAPTION>
PORTIONS OF THE 1997 ANNUAL REPORT TO SHAREHOLDERS
SEAWAY FOOD TOWN, INC.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands except share and per share data)
For the Fiscal Year Ended 1997 1996 (1) 1995 1994 1993
- ------------------------- ---- -------- ---- ---- ----
CONSOLIDATED SUMMARY OF OPERATIONS
<S> <C> <C> <C> <C> <C>
Net sales $608,373 $597,462 $559,244 $546,193 $566,883
Cost of merchandise sold 451,070 445,309 418,128 409,305 428,478
-------- -------- -------- -------- -------
Gross profit 157,303 152,153 141,116 136,888 138,405
Selling, general and administrative
expenses 144,524 139,344 131,267 129,921 133,175
-------- -------- -------- -------- --------
Operating profit 12,779 12,809 9,849 6,967 5,230
Interest expense (3,774) (4,316) (4,469) (4,410) (4,660)
Other income - net 1,596 943 1,815 1,169 1,133
-------- ------- -------- -------- --------
Income before income taxes, extra-
ordinary item and cumulative
effect 10,601 9,436 7,195 3,726 1,703
Provision for income taxes 4,189 3,931 2,715 1,288 580
-------- -------- -------- -------- --------
Income before extraordinary item and
cumulative effect 6,412 5,505 4,480 2,438 1,123
Extraordinary item (2) -- -- -- (123) --
Cumulative effect of change in
accounting (3) -- -- -- (256) --
-------- -------- -------- -------- --------
Net income $ 6,412 $ 5,505 $ 4,480 $ 2,059 $ 1,123
======== ======== ======== ======== =======
PER COMMON SHARE DATA (4)
Income before extraordinary
item and cumulative effect $ 1.45 $ 1.25 $ 1.02 $ .53 $ .24
Net income 1.45 1.25 1.02 .45 .24
Cash dividends 0.23 0.20 .195 .18 .18
Book value 11.58 10.34 9.29 8.38 8.00
YEAR END POSITION
Total assets $164,566 $155,465 $154,001 $155,203 $152,771
Property and equipment - net 90,645 85,004 84,000 85,346 85,653
Net working capital 9,211 3,281 6,086 8,937 6,555
Long-term debt 45,565 42,715 48,399 55,060 55,705
Shareholders' equity 51,176 45,453 40,731 37,585 37,173
FINANCIAL RATIOS
Income before extraordinary item and
cumulative effect as a percent of
sales 1.05% .92% .80% .45% .20%
Current ratio 1.15:1 1.05:1 1.11:1 1.16:1 1.12:1
Long-term debt to equity ratio .89:1 .94:1 1.19:1 1.46:1 1.50:1
OTHER DATA
Weighted average shares outstanding
(4) 4,410,313 4,395,322 4,393,286 4,613,762 4,664,032
Net cash provided by operations $15,153 $24,524 $19,829 $16,183 $16,534
Property and equipment additions 19,537 15,071 13,698 12,681 17,353
Depreciation and amortization 14,441 13,502 12,551 12,311 11,562
LIFO charge (credit) included in
cost of merchandise sold 364 (47) 581 (18) (492)
Associates at year end 5,051 4,472 4,551 4,500 4,860
Stores in operation 69 66 66 66 64
Notes: (1) 53 week year; (2) Loss from early extinguishment of debt, less
applicable income taxes; (3) Reflects adoption of Statement of
Financial Accounting Standards No. 109 "Accounting for income
taxes". (4) The weighted average shares outstanding and all
per common share amounts have been adjusted retroactively for
the May, 1997 two for one stock split.
</TABLE>
<PAGE>
<TABLE>
12
<CAPTION>
SEAWAY FOOD TOWN, INC.
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)
1997 1996 (1) 1995
-------- --------- -----------
RESULTS OF OPERATIONS
<S> <C> <C> <C>
Net sales $608,373 $597,462 $559,244
Operating profit 12,779 12,809 9,849
Income before income taxes 10,601 9,436 7,195
Net income 6,412 5,505 4,480
Per common share (2) 1.45 1.25 1.02
Percent of sales 1.05% .92% .80%
Percent of shareholders' equity 12.53% 12.11% 11.00%
Cash dividends per common share (2) .23 .20 .195
OTHER FINANCIAL INFORMATION
Total assets $164,566 $155,465 $154,001
Capital expenditures 19,537 15,071 13,698
Depreciation and amortization 14,441 13,502 12,551
Long-term debt 45,565 42,715 48,399
Shareholders' equity 51,176 45,453 40,731
Book value per common share (2) 11.58 10.34 9.29
Effective tax rate 39.5% 41.7% 37.7%
Weighted average shares outstanding (2) 4,410,313 4,395,322 4,393,286
Number of stores in operation, at year 69 66 66
end
NASDAQ National Market Price Range 26 - 9 9 3/8 - 7 3/4 8 1/8 - 4 3/4
(1) 53 week year
(2) The weighted average shares outstanding and all per common share
amounts have been adjusted retroactively for the May, 1997 two for one
stock split.
</TABLE>
<PAGE>
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
At year end, the Company operated forty-four retail supermarkets under
the names of Food Town and Food Town Plus as well as twenty-five discount
drugstores under the name of The Pharm within an area of about 150 miles
from the Company's Maumee, Ohio (Toledo area) headquarters. All stores are
located in northwest and central Ohio and southeast Michigan. The Company
also has extensive warehousing and distribution facilities located in the
Toledo area to support its operations.
This analysis of the Company's results of operations and financial
condition should be read in conjunction with the accompanying consolidated
financial statements, including the notes thereto, and the information
presented in the summary of selected financial data.
RESULTS OF OPERATIONS
The following table sets forth certain income statement components
expressed as a percentage of net sales and the year-to-year percentage changes
in such components.
<TABLE>
<CAPTION>
Percentage change
Percentage of Net Sales from prior year
- ---------------------- ------------------
1997 1996 1995 Compared Compared
52 wks. 53 wks. 52 wks. to 1996 to 1995
- ------ ------- ------- -------- -------
<C> <C> <C> <S> <C> <C>
100.0% 100.0% 100.0% Net sales 1.8% 6.8%
25.9 25.4 25.2 Gross profit 3.4 7.8
Selling, general and
23.8 23.3 23.4 administrative 3.7 6.2
2.1 2.1 1.8 Operating profit -.2 30.1
.6 .7 .8 Interest expense -12.6 -3.4
.3 .2 .3 Other income - net 69.2 -48.0
1.8 1.6 1.3 Income before income taxes 12.3 31.1
.7 .7 .5 Provision for income taxes 6.6 44.8
1.1 .9 .8 Net income 16.5 22.9
</TABLE>
<PAGE>
14
The following table details the number and format of the Company-operated stores
as of the end of each respective fiscal year:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Food Town Supermarkets:
Conventional Food Town Stores 17 18 20
Food Town Plus Stores 27 25 24
--- --- ---
Total Supermarkets 44 43 44
--- --- ---
The Pharm Drugstores 25 23 22
--- --- ---
Total Retail Stores 69 66 66
=== === ===
</TABLE>
During 1997 the Company opened five new stores, including a new marketplace
store, two Pharms, and two newly acquired conventional supermarkets. One of
the two Pharms was a conversion from a conventional supermarket. In
addition, four existing supermarkets incurred major remodeling, resulting
in three new Food Town Plus supermarkets and one conversion from a Plus
store to the Company's new upscale marketplace format. This activity
increased the overall total retail space by approximately 201,000 square
feet, an 8.6% increase. All stores operate predominately in northwest and
central Ohio and southeast Michigan.
NET SALES
Consolidated net sales increased 1.8% in 1997 in comparison to 1996 and
increased 6.8% in 1996 in comparison to 1995. Fiscal 1996 includes 53 weeks.
After adjusting for the effect of the extra week in 1996, sales were 3.8%
higher in 1997 than in 1996, and 4.8% higher in 1996 than in 1995. The
dollar increase in sales from 1996 to 1997 was largely due to increased sales
in the drugstores. The Company had 64 comparable stores (including replacement
supermarkets and format conversions) in operation throughout the three year
period of 1997, 1996, and 1995. Those comparable store sales increased 1.7%
in 1997 compared to 1996 and 4.8% in 1996 compared to 1995.
GROSS PROFIT
The gross profit percentage increased from 25.4% in 1996 to 25.9% in
1997. During 1997 margins continued to improve with the implementation of
certain new merchandising strategies both in the supermarkets and in the
drugstores. In 1996, gross profits increased slightly in both the
supermarkets and the drugstores compared to 1995, from 25.2% to 25.4%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In 1997, selling, general and administrative expenses increased by $5.2
million, and increased by .5% as a percentage of sales from 23.3% to 23.8%.
This dollar increase in 1997 compared to 1996 was attributable principally
to retail store wage expense, utility costs, supply costs, occupancy costs,
and depreciation on equipment offset somewhat by a decrease in repairs and
maintenance. In 1996, selling, general and administrative expenses increased
by $8.1 million, but decreased by .1% as a percentage of sales due to
higher sales. This dollar increase in 1996 compared to 1995 was attributable
principally to retail store wage expense, utility costs, repairs and
maintenance, and supply costs, offset somewhat by a decline in bad check
expense.
<PAGE>
15
OPERATING PROFIT
Operating profit (earnings from operations before interest, other income
and income taxes) was $12.8 million or 2.1% of net sales for 1997 and 1996.
Operating profit was unchanged because the increase in gross profit during
1997 offset the increase in selling, general and administrative expenses. As
a percentage of net sales, operating profit was 2.1% in 1996 and 1.8% in
1995. Operating profit increased 30.1% in 1996 from 1995 as gross profit
improved and operating expenses were slightly lower in 1996 compared to 1995.
INTEREST EXPENSE
Interest expense decreased by $542,000 in 1997 which resulted in an .1%
reduction as a percent of sales. This reduction resulted from lower
borrowing rates throughout 1997. Interest expense decreased slightly by
$153,000 in 1996 compared to 1995 due to lower borrowing levels. The
approximate weighted average interest rate on long-term debt as of the end of
the year was 7.78% in 1997 versus 7.79% in 1996 and 7.93% in 1995.
OTHER INCOME
Other income increased $653,000 in 1997 over fiscal 1996. Other income
in 1996 included a net loss of $277,000 from the disposition of assets
throughout the year. Other income in 1997 included $84,000 in net gains from
the disposal of assets as well as approximately $82,000 of additional
service fee income, as compared to 1996.
Other income decreased $872,000 in 1996 over 1995. Other income in 1995
included a gain of $637,000 from the sale of the Company's dairy operation and
1996 included a net loss of $277,000 from the disposition of assets throughout
the year.
INCOME TAXES
The effective income tax rates for 1997, 1996, and 1995, were 39.5%,
41.7%, and 37.7%, respectively. The effective state and local income tax rate
in 1997 was 2.7% lower than in 1996 which, in turn, was .3% higher than in
1995. During 1997 certain corporate organizational changes were implemented
which resulted in lower state and local income taxes. The Company expects to
continue to benefit from the lower income tax rate in the upcoming fiscal
year. Tax credits, principally from job credits, were only .2% in 1997
compared to .1% in 1996 and 2.2% in 1995. Job credits expired at the end
of calendar 1994 and were not reinstated until October 1, 1996, at which
time the Company again took advantage of this tax credit.
NET INCOME AND INCOME PER COMMON SHARE
Net income increased by 16.5% in 1997 to $6,412,000 or 1.1% of sales, a
dollar increase of $907,000 from the 1996 net income of $5,505,000. Net income
per common share in 1997 was $1.45 as compared to $1.25 in 1996, an increase
of 16.0%. These increases are the result of increased sales, increased gross
margins, as well as lower interest costs and increases in other income. It is
estimated that the extra week in the fiscal 1996 reporting period added
approximately $642,000 (or $.15 per common share) to the Company's reported
net income. Net income increased 22.9% in 1996 to $5,505,000, an increase of
$1,025,000 over the 1995 net income of $4,480,000 due, in part, to the extra
week in 1996. Net income per common share in 1996 was $1.25 as compared to
$1.02 per share in 1995, an increase of 22.5%. All per share calculations
have been adjusted retroactively for the May, 1997 two-for-one stock split.
<PAGE>
16
IMPACT OF INFLATION
Inflation increases the Company's major costs, inventory and labor.
Because of the high inventory turnover in the food and drug retailing industry
and the Company's use of the last-in, first-out (LIFO) valuation method for a
majority of its inventory, the impact of inflation is normally reflected very
quickly in the results of operations. The food and drug retailing industry
has experienced little or no food inflation over the last three years. The
Company's provisions for LIFO inventories for the past three years increased
or (decreased) cost of sales by 364,000 in 1997, $(47,000) in 1996, and
$581,000 in 1995. The Company has generally been able to maintain margins by
adjusting its retail prices, but competitive conditions may from time to time
render it unable to do so while maintaining its market share.
CAPITAL RESOURCES AND LIQUIDITY
OVERVIEW
Measures of liquidity for each of the last three years were as follows:
<TABLE>
<CAPTIO
(Dollars in millions) 1997 1996 1995
--------------------- ---- ---- ----
<S> <C> <C> <C>
Working capital (1) $27.7 $21.4 $24.2
Unused lines of revolving credit $41.4 $20.0 (2) $17.4
Current ratio (1) 1.46 to 1 1.35 to 1 1.42 to 1
(1) Includes add-back of gross LIFO reserve.
(2) $30.0 million under the new 5-year revolving credit agreement
closed subsequent to the end of 1996.
</TABLE>
Management believes that the Company is maintaining a strong capital
structure.
In late September, 1996, the Company closed on a five year, $45.0
million revolving credit agreement with three banks which permit the Company
to borrow at lower interest rates than under the former two year agreement.
Covenants under the new agreement are the same or slightly less restrictive.
The Company's revolving credit agreement represents a continuing source
of capital which is available to provide working capital, finance capital
additions as well as the early extinguishment of certain long-term debt. On
August 28, 1997, the Company closed a 15-year, $25.0 million senior unsecured
debt agreement with an insurance company. As a result of this transaction,
the Company was using only $3.6 million of its $45.0 million revolving credit
as of the end of 1997. The Company expects to reduce the commitment to $30.0
million late in the Company's First Quarter of 1998. The Company is in a
solid financial position for its future expansion and growth plans.
In October, 1994, the Company authorized the repurchase of 200,000 shares
of the Company's stock on the open market or from private sources, at market
prices. From the date of that authorization through the month of October,
1997, the Company has repurchased 104,443 shares, all of which occurred prior
to the May, 1997 two-for-one stock split. Authorized, but unissued shares
have been and will continue to be used by the Company in funding its annual
contribution to its ESOP and for other corporate purposes.
<PAGE>
17
The Company anticipates merging its Employee's Stock Ownership Plan (ESOP)
into its 401(k) salary deferral plan effective January 1, 1998. Once the
change is finalized, stock contributions previously made by the Company to the
ESOP will be made to the 401(k). Also, employees will have the option of
investing a portion of their 401(k) salary deferrals in Company stock. If an
employee chooses that option, the Company will make certain matching contribu-
tions of Company stock to the employee's 401(k) account.
At the January, 1998 Annual Meeting, shareholders will be asked to approve
an amendment to the Articles of Incorporation increasing authorized stock from
6,000,000 to 12,000,000 shares. This will ensure the availability of stock
for future capital needs.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash provided by operating activities in 1997 was $15.2 million, a
decrease of $9.3 million from the $24.5 million provided in 1996. This
decrease was primarily related to an increase of $3.5 million in merchandise
inventories as well as increased notes and accounts receivable, offset by
increases in net income and depreciation and amortization.
Cash provided by operating activities in 1996 was $24.5 million, an
increase of $4.7 million from the $19.8 million provided in 1995. This
increase was primarily attributable to the increases in net income and
accounts payable and accrued liabilities.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used in investing activities was $20.2 million in 1997, an increase
of $6.4 million from the $13.8 million provided in 1996. This increase is
attributable to an increase in the expenditures for property and equipment,
most of which was spent on the acquisition of two new supermarkets, one
new Plus store, one new Pharm and several store remodel projects.
Cash used in investing activities was $13.8 million in 1996, an increase
of $4.9 million from the $8.9 million expended in 1995. This increase was
primarily attributable to an increase in the expenditures for property and
equipment, most of which was spent on one new supermarket, one new Plus store
under construction, and several store remodel projects.
The total retail store square footage increased by approximately 201,000
square feet in 1997. The Company continues to maintain a high level of store
remodel activity to keep its retailing facilities up to date and to continue
attracting new customers and hold existing customers.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash provided by financing activities was $4.8 million in 1997, a net
increase of $13.2 million from the $8.4 million used in 1996. This increase
is the result of an increase in net proceeds from long-term debt. During
1997 the Company received $40.3 million in proceeds from borrowings against
the Company's revolving credit agreement and new senior unsecured debt
agreement. In 1996, the Company received $7.2 million primarily from its
revolving credit agreement.
This compares to $2.3 million received in 1995, most of which related to the
revolving credit agreement. In 1997, the Company made payments of $38.6
million on its long-term debt as compared to $13.4 million in 1996 and $10.3
million in 1995. During all three years the Company made debt payments on
its revolving credit agreement in addition to other regular debt payments and
<PAGE>
18
the payoff of some higher interest rate debt. During 1997 the Company spent
$77,000 for the repurchasing of Company common shares, a decrease of
approximately $225,000 from the prior year. In 1996 the Company spent
$302,000 for the repurchasing of Company common shares, a decrease of $515,000
from its expenditures in 1995.
1998 CAPITAL PROGRAM
Total capital expenditures are expected to approximate $18.0 million in
1998, primarily for new and expanded store construction within the Company's
existing marketing area. The Company continues to maintain a high priority
in keeping its stores in a modern, attractive condition. This is implemented
by periodically reviewing all stores with the thought of providing the
Company's customers within the store's trading area with the best possible
shopping facility. Therefore, the Company's plan for store construction,
acquisition, remodeling and expansion is frequently reviewed and revised in
light of changing conditions. The Company's ability to proceed with projects,
or to complete projects during a particular period, is subject to normal
construction and other delays.
Cash provided by operations along with the remaining $41.4 million
available under the existing credit agreements will be more than sufficient
for financing fiscal 1998 capital additions and other business needs as well
as presently scheduled maturities of long-term debt. As mentioned earlier,
the Company expects to reduce the commitments under the existing revolving
credit agreement by $15.0 million before the end of First Quarter of Fiscal
1998.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical facts, all matters discussed in this report which
are forward looking involve risks and uncertainties. A number of factors
could adversely affect future results, liquidity and capital resources.
These factors include, but are not limited to, competitive pressures from
other major supermarket operators including entry of new competitive stores
in the Company's market, the level of discounting by competitors, the
stability of distribution incentives from suppliers, economic conditions in
the Company's primary markets and other uncertainties detailed from time to
time in the Company's Securities and Exchange Commission filings. Although
management believes it has the business strategy and resources needed for
improved operations, future revenue and margin trends cannot be reliably
predicted.
<PAGE>
19
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Seaway Food Town, Inc.
We have audited the accompanying consolidated balance sheets of Seaway Food
Town, Inc. as of August 30, 1997 and August 31, 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended August 30, 1997. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these 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 audit to
obtain reasonable assurance about whether the 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Seaway Food
Town, Inc. at August 30, 1997 and August 31, 1996, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended August 30, 1997 in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
October 17, 1997
Toledo, Ohio
<PAGE>
20
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996, AND AUGUST 26, 1995
(Dollars in thousands, except per share data)
1997 1996 1995
--------- --------- ---------
(52 weeks) (53 weeks) (52 weeks)
<S> <C> <C> <C>
Net sales $608,373 $597,462 $559,244
Cost of merchandise sold 451,070 445,309 418,128
----------- ----------- -----------
Gross profit 157,303 152,153 141,116
Selling, general and administrative
expenses 144,524 139,344 131,267
----------- ----------- -----------
Operating profit 12,779 12,809 9,849
Interest expense (3,774) (4,316) (4,469)
Other income - net 1,596 943 1,815
----------- ----------- -----------
Income before income taxes 10,601 9,436 7,195
Provision for income taxes 4,189 3,931 2,715
----------- ----------- -----------
Net income $6,412 $5,505 $4,480
======= ======= =======
Net income per common share $ 1.45 $ 1.25 $ 1.02
======= ======= ======
See accompanying notes
</TABLE>
<PAGE>
21
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
AUGUST 30, 1997 AND AUGUST 31, 1996
(Dollars in thousands, except per share data)
1997 1996
------ ------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $9,491 $9,766
Notes and accounts receivable, less allowance of
$450 for doubtful accounts 6,495 5,913
Merchandise inventories 48,592 44,390
Prepaid expenses 1,425 1,342
Deferred income taxes 3,087 3,672
-------- ---------
Total current assets 69,090 65,083
Other assets 4,831 5,378
Property and equipment, at cost
Land 4,841 4,177
Buildings and improvements 70,991 68,424
Leasehold improvements 31,103 28,996
Equipment 103,552 96,659
-------- ---------
210,487 198,256
Less accumulated depreciation and amortization 119,842 113,252
-------- ---------
Net property and equipment 90,645 85,004
-------- ---------
$164,566 $155,465
======== ========
See accompanying notes
</TABLE>
<PAGE>
22
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
AUGUST 30, 1997 AND AUGUST 31, 1996
(Dollars in thousands, except per share data)
1997 1996
------- ------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $44,174 $44,437
Income taxes 935 1,524
Accrued liabilities:
Insurance 4,195 4,727
Payroll 3,181 2,908
Taxes, other than income 2,487 2,385
Other 2,948 2,707
-------- ---------
12,811 12,727
Long-term debt due within one year 1,959 3,114
-------- ---------
Total current liabilities 59,879 61,802
Long-term debt 45,565 42,715
Deferred income taxes 3,258 4,408
Deferred other 4,688 1,087
Shareholders' equity
Serial preferred stock, without par value:
300,000 shares authorized, none issued --- ---
Common stock, without par value (stated value
$2 per share): 6,000,000 shares authorized,
4,419,168
shares outstanding (4,397,218, as restated, 8,838 4,397
in 1996)
Capital in excess of stated value --- 1,017
Retained earnings 42,338 40,039
-------- ---------
Total shareholders' equity 51,176 45,453
-------- ---------
$164,566 $155,465
========= =========
See accompanying notes
</TABLE>
<PAGE>
23
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996, AND AUGUST 26, 1995
(Dollars in thousands)
1997 1996 1995
---------- ---------- ----------
(52 weeks) (53 weeks) (52 weeks)
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 6,412 $ 5,505 $ 4,480
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 14,441 13,502 12,551
Provision for ESOP 401 397 334
Deferred income taxes (565) (329) (394)
Equity in (income) loss of affiliates (24) 28 (93)
Loss (gain) on disposal of property
and equipment (10) 277 (553)
Changes in assets and liabilities
affecting operations:
Notes and accounts receivable (582) 674 (460)
Merchandise inventories (3,518) (326) 685
Prepaid expenses (84) 29 (99)
Accounts payable
and accrued liabilities (729) 4,270 2,158
Income taxes (589) 497 1,220
------- ------- -------
Net cash provided by operating activities 15,153 24,524 19,829
Cash flows from investing activities
Expenditures for property
and equipment (19,537) (15,017) (12,079)
Proceeds from sale of property and equipment 416 288 3,046
Cash paid to acquire business (2,134) --- ---
Other 1,071 960 163
------- ------- -------
Net cash used in investing activities (20,184) (13,769) (8,870)
Cash flows from financing activities
Proceeds from issuance of long-term debt 40,300 7,200 2,275
Payments of long-term debt (38,605) (13,377) (10,343)
Payments for acquisitions of common shares (77) (302) (817)
Dividends paid (1,013) (878) (851)
Increase (decrease) in deferred other 4,151 (1,034) (958)
------- ------- -------
Net cash provided by (used in) financing
activities 4,756 (8,391) (10,694)
------- ------- -------
Increase (decrease) in cash and cash equivalents (275) 2,364 265
Cash and cash equivalents at
beginning of year 9,766 7,402 7,137
------- ------- -------
Cash and cash equivalents at end of year $ 9,491 $ 9,766 $ 7,402
======= ======= =======
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 3,779 $ 4,271 $ 4,480
Income taxes 5,343 3,762 1,756
See accompanying notes
</TABLE>
<PAGE>
24
<TABLE>
<CAPTION>
SEAWAY FOOD TOWN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED AUGUST 30, 1997, AUGUST 31, 1996 AND AUGUST 26, 1995
(Dollars in thousands, except per share data)
Capital
in Excess Total
COMMON STOCK of Share-
----------------- Stated Retained holdes'
Shares Amount Value Earnings Equity
------- ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance at August 27, 1994 2,242,373 $4,485 $ 434 $32,666 $37,585
Net income (52 weeks) 4,480 4,480
Purchase of common shares for
treasury (82,421) (165) (21) (631) (817)
Issuance of common shares to 33,400 67 267 334
ESOP
Dividends paid-$.195 per share (851) (851)
--------- ----- ---- ------- -------
Balance at August 26, 1995 2,193,352 4,387 680 35,664 40,731
Net income (53 weeks) 5,505 5,505
Purchase of common shares for
treasury (18,279) (37) (13) (252) (302)
Issuance of common shares to
ESOP 23,536 47 350 397
Dividends paid - $.20 per share (878) (878)
--------- ------ ----- ------- -------
Balance at August 31, 1996 2,198,609 4,397 1,017 40,039 45,453
Net income (52 weeks) 6,412 6,412
Purchase of common shares for
treasury (3,743) (7) (5) (65) (77)
Effect of stock split 2,209,584 4,419 (1,384) (3,035) ---
Issuance of common shares to
ESOP 14,718 29 372 401
Dividends paid - $.23 per share (1,013) (1,013)
--------- ------ ------- ------- ------
Balance at August 30, 1997 4,419,168 $8,838 $0 $42,338 $51,176
See accompanying notes
</TABLE>
<PAGE>
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.SIGNIFICANT ACCOUNTING POLICIES
Business -- The business of Seaway Food Town, Inc. and its consolidated
subsidiaries (the Company) consists of the sale and distribution of food,
drugs, and related products, principally through supermarkets and drugstores
predominately in northwest and central Ohio and southeast Michigan.
Basis of presentation -- The consolidated financial statements include the
accounts of Seaway Food Town, Inc. and all wholly-owned subsidiaries. All
amounts in the consolidated financial statements referring to shares, share
prices and per share amount have been adjusted retroactively for the May,
1997 two-for-one stock split.
Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.
Cash and cash equivalents -- The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be
cash equivalents. The carrying amount reported in the balance sheets for
cash equivalents approximates its fair value.
Inventories -- Meat, produce, bakery, deli and drug inventories are valued
at the lower of cost, using the first-in, first-out (FIFO) method, or
market. Approximately 85% of the FIFO inventories are valued at the
lower of cost, using the last-in, first-out (LIFO) method, or market.
Inventories have been reduced by $18,473,000 and $18,109,000 at August 30,
1997 and August 31, 1996, respectively, from amounts which would have been
reported under the FIFO method (which approximates current cost).
Depreciation and amortization -- Depreciation and amortization are provided
principally under the straight-line method at rates based upon the estimated
useful lives of the various classes of assets. Capital leases not involving
a purchase of the assets are amortized over the lease term.
Advertising -- The Company expenses the costs of advertising as incurred.
Advertising expense was $4,689,000 in 1997, $4,311,000 in 1996 and
$4,029,000 in 1995.
Pensions -- The Company contributes to pension plans covering substantially
all employees. Pension costs include defined contributions based upon
wages, and specified amount per hour as required under collective
bargaining agreements. The Company's policy is to fund pension costs
annually in the amount accrued.
Deferred income taxes -- Deferred income taxes are provided on the asset and
liability method for all significant temporary differences between income
reported for financial statement purposes and taxable income.
Net income per common share -- Net income per common share is based upon the
weighted average number of common shares outstanding of 4,410,313 in 1997,
4,395,322 in 1996 and 4,393,286 in 1995.
<PAGE>
26
New accounting standard -- Financial Accounting Standards Board Statement,
No. 131 -- Segments, will be applicable for fiscal 1999. This statement
dictates the use of a management approach to report financial and
descriptive information about the Company's operating segments. The
impact on the Company has not been determined.
2.STORE ACQUISITIONS
Effective May 20, 1997, the Company acquired two supermarkets in Michigan
for $2,134,000. The acquisition was accounted for under the purchase
method of accounting. The results of operations for these stores are
included in the accompanying statements of income for the period from
May 20, 1997 through August 30, 1997.
3.NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt at August 30, 1997 and August 31, 1996 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
7.42% to 9.22% senior
notes payable to insurance
companies, due through 2013 $33,000 $12,000
8.75% mortgage notes payable
to insurance companies,
payment due
quarterly to 2002 753 1,663
6% to 7.29% mortgage
notes payable, payments
due annually to 2008 5,701 6,529
8.19% term note payable,
payments due monthly to
2000 194 4,133
Revolving credit loan agree-
ments with banks, with
interest of 6.64% to 7.81% 3,600 15,000
Long-term lease obligations
(see Note 5):
7.25% industrial develop-
ment revenue bonds,
payments due annually
to 2000 300 1,055
Other, 7.35% to 13%,
payments due in varying
monthly amounts through
2004 3,976 5,449
--------- ----------
47,524 45,829
Less amount due within one
year 1,959 3,114
--------- ----------
$45,565 $42,715
========= ==========
</TABLE>
<PAGE>
27
At August 30, 1997 the Company had a revolving credit agreement permitting
borrowings up to $45,000,000 in the aggregate ($15,000,000 per bank) due
October 1, 2001. Interest is charged, at the Company's option, at the
current prime rate, swing line rate, or a certain percentage point in
excess of the current LIBOR rate based on a ratio of total liabilities to
tangible net worth. The Company is required to pay a fee of .20% to .25%
on any unused portion of the loan commitment. The Company had borrowings
of $3,600,000 under this agreement at August 30, 1997.
The Company has interest rate cap agreements to manage interest rate
exposure. These transactions reduce the Company's exposure to significant
variations in interest rates. At August 30, 1997, a notional amount of
$20,000,000 was covered by these agreements at an average rate of 9.375%
through 1999. If the counterparties to these agreements fail to perform,
the Company would no longer be protected from interest rate fluctuations by
these agreements and could incur additional interest expense as a result.
The Company does not anticipate nonperformance by the counterparties.
The Company issued an additional $25,000,000 senior notes to an insurance
company in August, 1997. The senior note agreements provide for repurchases
of the notes, at either the Company's or holder's option, in amounts not in
excess of $8,000,000 in 2000, $12,000,000 in 2005 and $13,000,000 in 2008.
In addition, the agreement allows for prepayments, at the Company's option,
subject to certain prepayment provisions.
The senior notes and revolving credit loan agreements referred to above
include certain working capital, net worth and debt service covenants along
with restrictions on the payment of cash dividends. The restriction of
dividends is based on a percentage of the excess of income available for
debt service.
At August 30, 1997, the approximate undepreciated cost of property and
equipment subject to mortgages was $12,388,000.
Annual maturities of long-term debt for each of the five fiscal years
subsequent to August 30, 1997 are as follows: 1998 - $1,959,000; 1999 -
$1,668,000; 2000 - $12,450,000; 2001 - $849,000; and 2002 - $501,000.
At August 30, 1997, the carrying value of the long-term debt in aggregate,
excluding capitalized lease obligations, approximates its fair value due to
the significant amount of variable rate long-term debt. The fair value is
estimated using discounted cash flow analyses, based on the Company's
current incremental borrowing rates.
4.INCOME TAXES
The provision (credit) for income taxes consists of the following (in
thousands):
<PAGE>
28
<TABLE>
<CAPTION
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $4,115 $3,315 $2,263
State and local 639 945 846
--------- --------- ---------
4,754 4,260 3,109
Deferred:
Federal (483) (265) (132)
State and local (82) (64) (262)
-------- -------- --------
(565) (329) (394)
------- -------- --------
$4,189 $3,931 $2,715
======= ======== ========
</TABLE>
The consolidated effective tax rate differs from the statutory U.S. Federal
tax rate for the following reasons and by the following percentages:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Statutory U.S. Federal
tax rate 34.0% 34.0% 34.0%
Increase (reduction) in taxes
resulting from:
State and local income
taxes net of the related
reduction in federal
income taxes 3.5 6.2 5.9
Tax credits ( .2) ( .1) (2.2)
Other 2.2 1.6 --
------ ----- -----
Effective tax rate 39.5% 41.7% 37.7%
===== ===== =====
</TABLE>
Significant components of the Company's deferred income tax assets and
liabilities as of August 30, 1997 and August 31, 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Deferred income tax assets:
Accrued expenses $2,760 $3,125
Expenses inventoried for tax purposes 919 864
Other 430 565
------ -------
$4,109 $4,554
====== ======
Deferred income tax liabilities:
Excess tax depreciation $3,037 $4,472
Deferred project costs 835 747
Other 409 71
------ -------
$4,281 $5,290
====== ======
The above are reflected in the balance sheets as of August 30, 1997 and
August 31, 1996 as follows (in thousands):
1997 1996
Current deferred income tax asset $3,087 $3,672
====== ======
Noncurrent deferred income tax liability $3,258 $4,408
====== ======
</TABLE>
<PAGE>
29
5.EMPLOYEE BENEFIT PLANS
For eligible nonunion employees, the Company has a 401(k) salary deferral
plan which permits employee salary deferrals of up to 15%, but not to
exceed the maximum annual allowable amount for income tax purposes, and
an Employees' Stock Ownership Plan (ESOP). Allocations to the participants
in the ESOP are not less than 2 1/2% of total annual compensation. Company
matching contributions to the 401(k) plan are 50% of employee salary
deferral contributions. The Company matching contributions are not made
on salary deferrals in excess of 6% of an employee's compensation. The
Company's expense for these plans was $1,007,000 in 1997, $893,000 in
1996, and $946,000 in 1995.
In addition, the Company contributes to several area-wide defined benefit
union pension plans established under collective bargaining agreements.
The aggregate costs for these plans amounted to $2,313,000 in 1997,
$2,378,000 in 1996, and $2,293,000 in 1995. Under the Multi-employer
Pension Plan Amendments Act of 1980, the Company could become liable for its
proportionate share of unfunded vested benefits, if any, in the event of
the termination of, or its withdrawal or partial withdrawal from, the
union-sponsored plans to which the Company makes contributions.
6.LEASE COMMITTMENTS
Capital leases
The cost and accumulated amortization of property leased under long-
term noncancellable leases are as follows (in thousands):
<TABLE>
<CAPTION
1997 1996
------- -------
<S> <C> <C>
Land $ 56 $ 256
Buildings 6,613 8,019
Equipment 4,864 7,031
--------- ---------
11,533 15,306
Less accumulated
amortization 7,926 9,411
--------- ---------
$ 3,607 $ 5,895
======= =======
</TABLE>
Future minimum lease payments under capital leases together with the
present value of net minimum lease payments as of August 30, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
1998 $1,664
1999 1,211
2000 800
2001 599
2002 372
Later years 486
-------
Total minimum lease payments 5,132
Less amount representing interest 856
-------
Present value of net minimum lease
payments (included in long-term
debt at August 30, 1997 -- see
Note 2) $4,276
=======
</TABLE>
<PAGE>
30
Operating leases
Minimum annual rentals for facilities and equipment leased under
operating leases aggregate approximately $42,632,000 payable as follows (in
thousands):
<TABLE>
<CAPTION>
Facilities Equipment
---------- ---------
<S> <C> <C>
1998 $ 5,996 $176
1999 5,985 176
2000 5,522 176
2001 4,941 54
2002 4,510
Later years 15,096
-------- --------
$42,050 $582
======== ========
</TABLE>
The leases expire at various dates from 1998 to 2012 and substantially all
are renewable for one or more successive five year periods, in some cases at
slightly higher rentals.
Total rent expense attributable to operating leases amounted to approx-
imately $6,285,000 in 1997, $5,843,000 in 1996, and $5,915,000 in 1995 and
included provisions for additional rentals of $227,000 in 1997, $250,000 in
1996, and $234,000 in 1995 based upon gross sales in excess of specified
amounts.
The Company entered into capital leases amounting to approximately $54,000
in 1996 and $1,619,000 in 1995.
7.QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial data for the years ended August 30, 1997, and
August 31, 1996 are presented below (in thousands of dollars except per
share amounts):
<TABLE>
<CAPTION
First Second Third Fourth (1)
-------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net sales:
1997 $147,951 $155,871 $151,284 $153,267
1996 144,212 152,826 145,911 154,513
Gross profit:
1997 37,592 39,941 39,281 40,489
1996 35,979 38,916 37,335 39,923
Net income:
1997 991 1,848 1,601 1,972
1996 451 1,464 1,164 2,426
Net income per
common share:
1997 .23 .42 .36 .44
1996 .11 .33 .26 .55
(1) 14 week period in 1996 compared to 13 week period in 1997
</TABLE>
<PAGE>
31
MARKET PRICE OF COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS
The following table sets forth, for the quarterly periods indicated, the high
and low sales prices of the common stock.
<TABLE>
<CAPTION>
Common Divi-
Fiscal dends paid
Quarter High Low (Per share)
-------- ----- ----- ------------
<S> <C> <C> <C> <C>
1996 1st 8 1/4 7 3/4 $ .05
2nd 8 5/8 8 .05
3rd 8 5/8 8 1/8 .05
4th 9 3/8 8 1/8 .05
Full Year 9 3/8 7 3/4 $ .20
1997 1st 13 1/2 9 $ .05
2nd 14 12 .06
3rd 23 1/2 12 3/4 .06
4th 26 18 3/4 .06
Full Year 26 9 $ .23
The price is the high and low price on the NASDAQ
National Market. As of August 30, 1997, the approximate
number of record holders of common stock was 449.
Share and dividend prices have been adjusted retroactively
to reflect the May, 1997 two-for-one stock split.
</TABLE>
<PAGE>
32
EXHIBIT 21
SEAWAY FOOD TOWN, INC.
SUBSIDIARIES OF REGISTRANT
At the fiscal year ended August 30, 1997 the Company had the
following subsidiaries, all of which are included in the consolidated
financial statements:
<TABLE>
<CAPTION>
State in
Percentage of voting which
Name Securities owned incorporated
- ------------------------- -------------------- -------------
<S> <C> <C>
Northern Distributing Co. 100 Ohio
Gruber's Food Town, Inc. 100 Michigan
Tracy & Avery Food Town, Inc. 100 Ohio
Fjord Properties, Inc. 100 Michigan
Valley Farm Distributing Company 100 Ohio
Third Fjord Properties, Inc. 100 Ohio
Third Fjord Properties Community
Urban Redevelopment Corp. 100 Ohio
Fifth Fjord Properties, Inc. 100 Michigan
Fifth Fjord Properties of
Ohio, Inc. 100 Ohio
Seaway Properties, Inc. 100 Ohio
Custer Pharmacy, Inc. 75 Michigan
Buckeye Discount, Inc. 100 Ohio
Seaway Milk Processing, Inc. 100 Ohio
Monroe Acquisition Corporation 100 Michigan
JRHW6 Corporation 100 Michigan
The Pharm of Michigan, Inc. 100 Michigan
The following affiliate is accounted for on the equity basis:
Port Clinton Realty Co.
(Partnership) 39 N/A
</TABLE>
<PAGE>
33
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report
[Form 10-K] of Seaway Food Town, Inc. of our report dated October
17, 1997, included in Exhibit 13 to Form 10-K.
Our audits also included the financial statement schedule of Seaway
Food Town, Inc. listed in Item 14(a). This schedule is the
responsibility of the Company's management. Our responsibility is
to express an opinion based on our audits. In our opinion, the
financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Toledo, Ohio
October 17, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-30-1997
<PERIOD-END> AUG-30-1997
<CASH> 9,491
<SECURITIES> 0
<RECEIVABLES> 6,945
<ALLOWANCES> 450
<INVENTORY> 48,592
<CURRENT-ASSETS> 69,090
<PP&E> 210,487
<DEPRECIATION> 119,842
<TOTAL-ASSETS> 164,566
<CURRENT-LIABILITIES> 59,879
<BONDS> 45,565
<COMMON> 8,838
0
0
<OTHER-SE> 42,338
<TOTAL-LIABILITY-AND-EQUITY> 164,566
<SALES> 608,373
<TOTAL-REVENUES> 608,373
<CGS> 451,070
<TOTAL-COSTS> 451,070
<OTHER-EXPENSES> 144,524
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,774
<INCOME-PRETAX> 10,601
<INCOME-TAX> 4,189
<INCOME-CONTINUING> 6,412
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,412
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.45
