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 29, 1998
( ) 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
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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.
( )
The aggregate market value of voting stock held by non-affiliates of the
registrant is approximately $72,890,595 as of November 13, 1998.
The number of shares outstanding of the issuer's classes
of common stock as of the November 13, 1998.
Common stock, without par 6,648,928 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 29,
1998 (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
7, 1999 are incorporated by reference into part III.
Page 2 of 2 of Cover Page
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PART I
Item 1. Business
Seaway Food Town was founded in 1948 and incorporated 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 supermarket but with a greater emphasis on non-food
items and package size of such items. At year end, the Company
operated 14 Food Town Supermarkets, 30 Food Town Plus Supermarkets,
1 Kash N Karry Supermarket, 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 2,405 employees on a full-time
basis and 2,447 on a part-time basis.
Item 2. Properties
The Company leases 47 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 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 29, 1998, the approximate undepreciated cost of real
property subject to mortgages was $11,986,000 and the approximate
undepreciated cost of real property subject to capital lease obligations
was $2,455,000.
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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 8, 1998.
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 41 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 20 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 22 through 28 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.
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Financial Highlights 21
Report of Independent Auditors 29
Consolidated Statements of Income 30
Consolidated Balance Sheets 31 - 32
Consolidated Statements of Cash Flows 33
Consolidated Statements of Shareholders' Equity 34
Notes to Consolidated Financial Statements 35 - 40
</TABLE>
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 29, 1998 and August 30, 1997.
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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.
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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 29 - 40 of
Exhibit (13) filed hereunder are incorporated by reference in
Item 8.
Report of Independent Auditors
Consolidated statements of Income - Years ended
August 29, 1998, August 30, 1997, and August 31, 1996.
Consolidated balance sheets at August 29, 1998 and
August 30, 1997
Consolidated statements of cash flows - Years ended August 29, 1998,
August 30, 1997, and August 31, 1996.
Consolidated statements of shareholders' equity - Years ended
August 29, 1998, August 30, 1997, and August 31, 1996.
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.
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7
b.) Reports on Form 8-K.
No reports on Form 8-K were required to be filed for the
three months ended August 29, 1998.
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.
In addition we are filing, herewith, a copy of
the Amendment to the Articles of Incorporation
filed with the Secretary of State of Ohio,
May 18, 1998.
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.
13 - Portions of the 1998 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.
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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 13, 1998 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 13, 1998 Wallace D. Iott, Chairman of the Board
& Director
By /s/ Waldo E. Yeager
Date November 13, 1998 Waldo E. Yeager, Director
(Chief Financial Officer and
Treasurer)
By /s/ Thomas M. O'Donnell
Date November 13, 1998 Thomas M. O'Donnell, Director
By /s/ David J. Walrod
Date November 13, 1998 David J. Walrod, Director
By /s/ Richard K. Ransom
Date November 13, 1998 Richard K. Ransom, Director
By /s/ Joel A. Levine
Date November 13, 1998 Joel A. Levine, Director
By /s/ Eugene R. Wos
Date November 13, 1998 Eugene R. Wos, Director
By /s/ W. Geoffrey Lyden
Date November 13, 1998 W. Geoffrey Lyden, Director
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<TABLE>
SEAWAY FOOD TOWN, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended August 29, 1998, August 30, 1997, and August 31, 1996
<CAPTION>
Charge
Balance at (credit) Charged Balance
beginning to costs to Deductions at end of
of period and other from period
expenses accounts reserves
Allowance
for doubtful
accounts:
<S> <C> <C> <C> <C> <C>
1998 $ 450,000 $ 11,428 --- $ 11,428 (A) $ 450,000
========= ======== ===== ============ =========
1997 $ 450,000 $ 8,511 --- $ 8,511 (A) $ 450,000
========= ======== ===== ============ =========
1996 $ 450,000 $ 18,398 --- $ 19,398 (A) $ 450,000
========= ======== ===== ============ =========
(A) - Accounts charged off during the year, net of
recoveries of accounts previously charged off.
</TABLE>
<PAGE>
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EXHIBIT 3
AMENDED ARTICLES OF INCORPORATION
OF
SEAWAY FOOD TOWN, INC.
FIRST: The name of said Corporation shall be SEAWAY FOOD TOWN, INC.
SECOND: The place in the State of Ohio where its principal office is
located is the City of Maumee. Lucas County.
THIRD: The purposes of the Corporation are:
1. To conduct, own, lease, manage and operate supermarkets,
restaurants, and general mercantile businesses at wholesale and retail,
and to buy, sell, produce and deal in all kinds of groceries, sundries,
canned foods, confectionery, vegetables, fruits, meats, fish,
beverages, food products, milk products, bakery products, and all other
articles used and sold in the grocery, baking, meat, supermarket,
restaurant and general mercantile business.
2. To take, lease, purchase or otherwise acquire, and to own, use,
hold, sell, convey, exchange, lease, mortgage, work, improve, develop,
and otherwise handle, deal in and dispose of real estate, real
property, and any interest or right therein.
3. To manufacture, purchase, or otherwise acquire, sell, assign and
transfer, exchange or otherwise dispose of, and to invest, trade, deal
in or deal with goods, wares, merchandise and personal property of every
class and description.
4. To purchase, acquire, hold, mortgage, pledge, hypothecate, loan
money upon, exchange, sell and otherwise deal in personal property
and real property of every kind, character and description
whatsoever and wheresoever situated, and any interest therein.
5. To acquire by purchase, subscription, underwriting, participation in
syndicates or otherwise, and to hold, own, sell, exchange, pledge,
hypothecate or otherwise dispose of shares of stock, bonds, mortgages,
debentures,trust receipts, participation certificates, certificates of
beneficial interest, notes and other securities, obligations contracts,
choises in action, and evidences of indebtedness generally, or interests
therein, of any corporations, associations, firms, trusts, persons,
governments, states, municipalities and other organizations: to receive,
collect and dispose of interest, dividends and income upon, of or from
any of the foregoing; to exercise any and all rights and
privileges of individual ownership or interest in obligations,
including the right to vote thereon for any and all purposes, and
to do any and all acts and things for the preservation, protection,
improvement and enhancement in value thereof; and to aid, by loan,
subsidy, guarantee or otherwise those issuing, creating or responsible
for same.
<PAGE>
11
Each purpose specified in any clause or paragraph of this Article is
an independent purpose and shall not be limited or restricted by reference
to or inference from the terms of any other clause or paragraph of
these Amended Articles of Incorporation.
The Corporation reserves the right substantially to change its purposes.
If a change of purposes is authorized by the vote now or hereafter required by
statute, dissenting shareholders shall not have the appraisal or payment
rights provided by the Corporation Code of Ohio for dissenting shareholders.
FOURTH: The number of shares which the Corporation is authorized to
have outstanding is 12,300,000, consisting of 12,000,000 Common Shares,
without par value ("Common Shares") and 300,000 Serial Preferred
Shares, without par value ("Serial Preferred Shares").
The shares of such classes shall have the following express terms:
DIVISION A
Express Terms of Common Shares
The Common Shares shall be subject to the express terms of the
Serial Preferred Shares and any series thereof. Each Common Share shall
be equal to every other Common Share. The holders of Common Shares shall be
entitled to one vote for each such share upon all matters presented to
shareholders, except those matters presented to the holders of Serial
Preferred Shares for voting thereon as a class.
DIVISION B
Express Terms of Serial Preferred Shares
Section 1. Serial Preferred Shares may be issued from time to time in one or
more series. All Serial Preferred Shares shall be of equal rank and shall be
identical, except in respect of the matters that may be fixed by the Board of
Directors as hereinafter provided, and each share of each series shall be
identical with all other shares of such series, except as to the date from
which dividends are cumulative.
Subject to the provisions of Sections 2 to 6, inclusive, of this
Division B, which provisions shall apply to all Serial Preferred Shares,
the Board of Directors hereby is authorized to cause Serial Preferred Shares
to be issued in one or more series and with respect to each such series
prior to the issuance thereof to fix:
(a) The designation of the series, which may be by distinguishing
number, letter or title.
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12
(b) The number of shares of the series, which number the Board of
Directors may (except where otherwise provided in the creation of
the series) increase or decrease (but not below the number of
shares thereof then outstanding).
(c) The annual dividend rate of the series.
(d) The dates at which dividends, if declared, shall be payable, and
the dates from which dividends shall be cumulative.
(e) The redemption rights and price or prices, if any, for shares of
the series.
(f) The terms and amount of any sinking fund provided for the purchase
or redemption of shares of the series.
(g) The amounts payable on shares of the series in the event of
any voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Corporation.
(h) Whether the shares of the series shall be convertible into
Common Shares, and, if so, the conversion price or prices, any
adjustments thereof, and all other terms and conditions upon which
such conversion may be made.
(i) Restrictions (in addition to those set forth in Section 6(b) of
this Division) on the issuance of shares of the same series or of
any other class or series.
The Board of Directors is authorized to adopt from time to time
amendments to the Amended Articles of Incorporation fixing, with respect
to each such series, the matters described in clauses (a) to (i), inclusive,
of this Section 1.
Section 2. The holders of Serial Preferred Shares of each series, in
preference to the holders of Common Shares and of any other class of shares
ranking junior to the Serial Preferred Shares, shall be entitled to receive
out of any funds legally available and when and as declared by the Board of
Directors dividends in cash at the rate for such series fixed in accordance
with the provisions of Section 1 of this Division B, payable quarterly on
the dates fixed for such series. No dividends may be paid upon or declared
or set apart for any of the Serial Preferred Shares for any quarterly
dividend period unless at the same time a like proportionate dividend
for the same quarterly dividend period, ratably in proportion to the
respective annual dividend rates fixed therefor, shall be paid upon or
declared or set apart for all Serial Preferred Shares of all series then
issued and outstanding and entitled to receive such dividend.
Section 3. (a) Subject to the express terms of each series and to the
provisions of Section 6(b)(iii) of this Division B, the Corporation may from
time to time redeem all or any part of the Serial Preferred Shares of any
series at the time outstanding (i) at the option of the Board of
Directors at the applicable redemption price for such series fixed in
accordance with the provisions of Section 1 of this Division B, or (ii)
in fulfillment of the requirement of any sinking fund provided for
shares of such series at the applicable sinking fund redemption price,
<PAGE>
13
fixed in accordance with the provisions of Section 1 of this Division B,
together in each case with an amount equal to all dividends accrued and
unpaid thereon (whether or not such dividends shall have been earned or
declared) to the redemption date.
(b) Notice of every such redemption shall be mailed, postage prepaid, to the
holders of record of the Serial Preferred Shares to be redeemed at their
respective addresses then appearing on the books of the Corporation, not less
than 30 days nor more than 60 days prior to the date fixed for such
redemption. At any time before or after notice has been given as above
provided, the Corporation may deposit the aggregate redemption price of the
Serial Preferred Shares to be redeemed with any bank or trust company in
Cleveland, Ohio, or Toledo, Ohio, having capital and surplus of more than
$5,000,000, named in such notice, and direct that such deposited amount be
paid to the respective holders of the Serial Preferred Shares so to be
redeemed, in amounts equal to the redemption price of all Serial Preferred
Shares so to be redeemed, on surrender of the share certificate or
certificates held by such holders. Upon the making of such deposit such
holders shall cease to be shareholders with respect to such shares, and after
such notice shall have been given and such deposit shall have been made
such holders shall have no interest in or claim against the
Corporation with respect to such shares except only to receive such money from
such bank or trust company without interest or the right to exercise, before
the redemption date, any unexpired privileges of conversion. In case less
than all of the outstanding Serial Preferred Shares are to be redeemed, the
Corporation shall select pro rata or by lot the shares so to be redeemed in
such manner as shall be prescribed by its Board of Directors.
If the holders of Serial Preferred Shares which shall have been called
for redemption shall not, within six years after such deposit, claim the
amount deposited for the redemption thereof, any such bank or trust company
shall, upon demand, pay over to the Corporation such unclaimed amounts and
thereupon such bank or trust company and the Corporation shall be
relieved of all responsibility in respect thereof and to such holders.
(c) Any Serial Preferred Shares which are redeemed by the Corporation
pursuant to the provisions of this Section 3 and any Serial Preferred Shares
which are purchased and delivered in satisfaction of any sinking fund
requirements provided for shares of such series and any Serial Preferred
Shares which are converted in accordance with the express terms thereof shall
be canceled and not reissued. Any Serial Preferred Shares otherwise
acquired by the Corporation shall resume the status of authorized and
unissued Serial Preferred Shares without serial designation.
Section 4. (a) The holders of Serial Preferred Shares of any series shall, in
case of liquidation, dissolution or winding up of the affairs of the
Corporation, be entitled to receive in full out of the assets of the
Corporation, including its capital, before any amount shall be paid or
distributed among the holders of the Common Shares or any shares ranking
junior to the Serial Preferred Shares, the amounts fixed with respect to
shares of such series in accordance with Section 1 of this Division B, plus
an amount equal to all dividends accrued and unpaid thereon (whether or
not such dividends shall have been earned or declared) to the date of
payment of the amount due pursuant to such liquidation, dissolution or
winding up of the affairs of the Corporation. In case the net assets of the
<PAGE>
14
Corporation legally available therefor are insufficient to permit the
payment upon all outstanding Serial Preferred Shares and any shares ranking
on a parity therewith of the full preferential amount to which they are
respectively entitled, then such net assets shall be distributed ratably
upon outstanding Serial Preferred Shares and any shares ranking on a parity
therewith in proportion to the full preferential amount to which each
such share is entitled.
After payment to holders of Serial Preferred Shares of the full
preferential amounts as aforesaid, holders of Serial Preferred Shares as such
shall have no right or claim to any of the remaining assets of the
Corporation.
(b) The merger or consolidation of the Corporation into or with any other
corporation, or the merger of any other corporation into it, or the sale,
lease or conveyance of all or substantially all the property or business
of the Corporation, shall not be deemed to be a dissolution, liquidation or
winding up for the purposes of this Section 4.
Section 5. (a) The holders of Serial Preferred Shares shall be entitled to
one vote for each share; and, except as otherwise provided herein or
required by law, the holders of Serial Preferred Shares and the holders
of Common Shares shall vote together as one class on all matters. No
adjustment of the voting rights of holders of Serial Preferred Shares
shall be made for an increase or decrease in the number of Common Shares
authorized or issued or for share splits or combinations of the Common
Shares or for share dividends on any class of shares payable solely in
Common Shares.
If, and so often as, the Corporation shall be in default in dividends in
an amount equivalent to six full quarterly dividends on any series of
Serial Preferred Shares at the time outstanding, whether or not earned or
declared, the holders of Serial Preferred Shares of all series, voting
separately as a class and in addition to all other rights to vote for
Directors, shall be entitled to elect, as herein provided, two members of
the Board of Directors of the Corporation; provided, however, that
the holders of Serial Preferred Shares shall not have or exercise such
special class voting rights except at meetings of the shareholders for the
election of Directors at which the holders of not less than 45% of the
outstanding Serial Preferred Shares of all series then outstanding are
present in person or by proxy; and provided further that the special
class voting rights provided for herein when the same shall have become
vested shall remain so vested until all accrued and unpaid dividends on the
Serial Preferred Shares of all series then outstanding shall have been paid,
whereupon the holders of Serial Preferred Shares shall be divested of their
special class voting rights in respect of subsequent elections of Directors,
subject to the revesting of such special class voting rights in the event
hereinabove specified in this paragraph.
In the event of default entitling the holders of Serial Preferred Shares
to elect two Directors as above specified, a special meeting of the
shareholders for the purpose of electing such Directors shall be called by
the Secretary of the Corporation upon written request of, or may be called
by, the holders of record of at least 15% of the Serial Preferred Shares of
all series at the time outstanding, and notice thereof shall be given in
the same manner as that required for the annual meeting of shareholders;
provided, however, that the Corporation shall not be required to call such
special meeting if the annual meeting of shareholders shall be held within
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15
90 days after the date of receipt of the foregoing written request from the
holders of Serial Preferred Shares. At any meeting at which the holders
of Serial Preferred Shares shall be entitled to elect Directors, the holders
of 45% of the then outstanding Serial Preferred Shares of all series,
present in person or by proxy, shall be sufficient to constitute a
quorum, and the vote of the holders of a majority of such shares so present
at any such meeting at which there shall be such a quorum shall be
sufficient to elect the members of the Board of Directors which the
holders of Serial Preferred Shares are entitled to elect as hereinabove
provided.
The two Directors who may be elected by the holders of Serial Preferred
Shares pursuant to the foregoing provisions shall be in addition to any other
Directors then in office or proposed to be elected otherwise than pursuant to
such provisions, and nothing in such provisions shall prevent any change
otherwise permitted in the total number of Directors of the Corporation or
require the resignation of any Director elected otherwise than pursuant to
such provisions.
(b) The affirmative vote of the holders of at least a majority of the Serial
Preferred Shares at the time outstanding, given in person or by proxy at a
meeting called for the purpose at which the holders of Serial Preferred
Shares shall vote separately as a class, shall be necessary to effect any
one or more of the following (but so far as the holders of Serial
Preferred Shares are concerned, such action may be effected with such vote):
(i) Any amendment, alteration or repeal of any of the provisions of the
Amended Articles of Incorporation or of the Code of Regulations of
the Corporation which affects adversely the voting powers,
rights or preferences of the holders of Serial Preferred
Shares; provided, however, that, for the purpose of this clause
(i) only, neither the amendment of the Amended Articles of
Incorporation so as to authorize or create, or to increase the
authorized or outstanding amount of, Serial Preferred Shares
or of any shares of any class ranking on a parity with or
junior to the Serial Preferred Shares, nor the amendment
of the provisions of the Code of Regulations so as to
increase the number of Directors of the Corporation, shall be
deemed to affect adversely the voting powers, rights or
preferences of the holders of Serial Preferred Shares; and
provided further, that if such amendment, alteration or repeal
affects adversely the rights or preferences of one or more
but not all series of Serial Preferred Shares at the time
outstanding, only the vote of the holders of at least a majority
of the number of the shares at the time outstanding of the
series so affected shall be required;
(ii) The authorization or creation of, or the increase in the authorized
amount of, any shares of any class, or any security convertible into
shares of any class, ranking prior to the Serial Preferred Shares;
(iii) The purchase or redemption (for sinking fund purposes or otherwise)
of less than all of the Serial Preferred Shares then outstanding
except in accordance with a share purchase offer made to all
holders of record of Serial Preferred Shares, unless all
dividends upon all Serial Preferred Shares then outstanding for
all previous quarterly dividend periods shall have been declared and
<PAGE>
16
paid or funds therefor set apart and all accrued sinking fund
obligations applicable thereto shall have been complied with;
(iv) The consolidation of the Corporation with or its merger into any
other corporation unless the corporation resulting from such
consolidation or merger will have after such consolidation or
merger no class of shares either authorized or outstanding
ranking prior to or on a parity with the Serial Preferred
Shares except the same number of shares ranking prior to or
on a parity with the Serial Preferred Shares and having the
same rights and preferences as the shares of the Corporation
authorized and outstanding immediately preceding such
consolidation or merger, and each holder of Serial Preferred Shares
immediately preceding such consolidation or merger shall receive
the same number of shares, with the same rights and preferences,
of the resulting corporation; or
(v) The authorization of any shares ranking on a parity with the Serial
Preferred Shares or an increase in the authorized number of Serial
Preferred Shares.
Section 6. For the purpose of this Division B:
Whenever reference is made to shares "ranking prior to the Serial
Preferred Shares" or "on a parity with the Serial Preferred Shares", such
reference shall mean and include all shares of the Corporation in respect of
which the rights of the holders thereof as to the payment of dividends or as
to distributions in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the corporation are given
preference over, or rank on an equality with (as the case may be) the rights
of the holders of Serial Preferred Shares; and whenever reference is made
to shares "ranking junior to the Serial Preferred Shares", such reference
shall mean and include all shares of the Corporation in respect of which
the rights of the holders thereof as to the payment of dividends and
as to distributions in the event of a voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation are
junior and subordinate to the rights of the holders of Serial Preferred
Shares.
FIFTH: Section 1. Except as provided in Section 2 of this Article FIFTH,
notwithstanding any provision of the Ohio Revised Code now or hereafter
in force requiring for any purpose the vote, consent, waiver or release
of the holders of shares entitling them to exercise two-thirds, or
any other proportion of the voting power of the Corporation or
classes of shares thereof, such action, unless otherwise expressly
required by Statute or by these Amended Articles of Incorporation, may
be taken by the vote, consent, waiver or release of the holders of
shares entitling them to exercise a majority of the voting power of
the corporation of such class or classes.
Section 2. Any merger or consolidation of the Corporation with or into
any other corporation, any dissolution, or any sale, lease, exchange or
other disposition of all or substantially all of the assets of the
Corporation to or with any other corporation, person or entity, shall
<PAGE>
17
require the affirmative vote of the holders of at least two-thirds of
each class or classes of the outstanding shares of capital stock of
the Corporation issued and outstanding and entitled to vote. The
provisions of this Section 2 of Article FIFTH shall not apply to any
transaction described in the preceding sentence which has been approved
by resolution unanimously adopted by the Board of Directors of the
Corporation at a meeting at which a quorum is present.
The Board of Directors of the Corporation shall have the power and duty
to determine for the purposes of this Article FIFTH, on the
basis of information then known to it, whether any sale, lease,
exchange or other disposition of part of the assets of the Corporation
involves substantially all the assets of the Corporation. Any such
determination by the Board shall be conclusive and binding for all
purposes of this Article FIFTH.
This Section 2 of Article FIFTH may not be amended or rescinded except by
the affirmative vote of the holders of at least two-thirds of each class
or classes of the outstanding shares of capital stock of the
Corporation issued and outstanding and entitled to vote, at any
regular or special meeting of the shareholders if notice of the
proposed alteration or amendment be contained in the notice of the
meeting.
SIXTH: Except as otherwise expressly provided herein, no shareholder of the
Corporation shall by reason of his holding shares of any class have any
pre-emptive or preferential right to purchase or subscribe to any shares
of any class of the Corporation, now or hereafter authorized, or any
notes, debentures, bonds or other securities convertible into or carrying
options or warrants to purchase shares of any class, now or hereafter
authorized, whether or not the issuance of any such shares, or such
notes, debentures, bonds or other securities, would affect adversely
the dividend or voting rights of such shareholder, and the Board of
Directors may issue shares of any class of the Corporation, or any
notes, debentures, bonds, or other securities convertible into or
carrying options or warrants to purchase shares of any class,
without offering any such shares of any class, either in whole or in
part, to the existing shareholders of any class; provided, however,
that the Board of Directors may, in its discretion, grant such
preferential subscription rights at such price and upon such other terms
and conditions as it may determine.
SEVENTH: The Board of Directors is hereby authorized to fix and determine
and to vary the amount of working capital of the Corporation, to
determine whether any, and, if any, what part, of its surplus, however
created or arising, shall be used or disposed of or declared in
dividends or paid to shareholders, and, without action by shareholders,
to use and apply such surplus, or any part thereof, at any time or
from time to time, in the purchase or acquisition of shares of any
class, voting trust certificates and shares, bonds, debentures,
notes, scrip, warrants, obligations, evidences of indebtedness of
the corporation or other securities of the corporation to such
extent or amount and in such manner and upon such terms as the Board of
Directors shall deem expedient.
<PAGE>
18
EIGHTH: (a) A Director or officer shall not be disqualified from dealing or
contracting with the Corporation as vendor, purchaser, employee, agent or
otherwise; nor shall any transaction or contract or act of the
Corporation be void or voidable or in any way affected or invalidated by
the fact that any director or officer, or any firm of which any director
or officer is a member, or any corporation of which any director
or officer is a shareholder, director or officer is in any way
interested in such transaction or contract or act, provided the fact
that such director or officer, or such firm, or such corporation
is so interested shall be disclosed or shall be known to the
Board of Directors or such members thereof as shall be present at
any meeting of the Board of Directors at which action upon any such
contract or transaction or act shall be taken; nor shall any such
director or officer be accountable or responsible to the Corporation
for or in respect to any such transaction or contract or act of the
Corporation or for any gains or profits realized by him by reason of
the fact that he, or any firm of which he is a member, or any
corporation of which he is a shareholder, director or officer is
interested in such transaction or contract or act; and any such
director or officer may be counted in determining the existence of
a quorum at any meeting of the Board of Directors of the Corporation
which shall authorize or take action in respect to any such contract,
or transaction, or act, and may vote to authorize, ratify, or approve
any such contract or transaction or act, with like force and effect as
if he, or any firm of which he is a member, or any corporation of which
he is a shareholder, director or officer were not interested in
such transaction or contract or act.
(b) Every person who is or has been a director or officer of the
Corporation shall be indemnified by it against expenses and liabilities
reasonably incurred by him in connection with either (1) any action,
suit or proceeding to which he may be a party defendant, or (2) any
claim of liability asserted against him, by reason of his having been
director or officer of the Corporation. Without limitation, the term
"expenses" shall include any amount paid or agreed to be paid in
satisfaction of a judgment or in settlement of a judgment or claim of
liability other than any amount paid or agreed to be paid to the
Corporation itself. The Corporation shall not, however, indemnify any
director or officer in respect to matters as to which he shall be
finally adjudged liable for negligence or misconduct in the performance
of his duties as such director or officer, nor, in the case of a
settlement, unless such settlement shall be found to be in the
interest of the Corporation (1) by the court having jurisdiction of
the action, suit or proceeding against such director or officer
or of a suit involving his right to indemnification, or (2) by
a majority of the directors of the Corporation then in office other
than those involved (whether or not such majority constitutes a
quorum), or, if there are not at least two directors of the
Corporation then in office other than those involved, by a majority
of a committee (selected by the Board of Directors) of three or
more shareholders of the Corporation who are not directors or
officers; provided that such indemnity in case of a settlement
shall not be allowed by such directors or committee of
shareholders unless it is found by independent legal counsel that
such settlement is reasonable in amount and in the interest
of the Corporation. The foregoing right of indemnification shall
not be exclusive of any other rights to which any such director or
<PAGE>
19
officer may be entitled under any regulations, agreement, or vote
of shareholders, or to which any such director or officer may
be entitled as a matter of law; and the foregoing right of
indemnification shall inure to the benefit of the heirs,
executors and administrators of any such director or officer.
NINTH: These Amended Articles of Incorporation supersede and take the place
of the existing Articles of Incorporation, and all amendments
thereto and thereof.
<PAGE>
<TABLE>
<CAPTION>
20
EXHIBIT (13)
PORTIONS OF THE 1998 ANNUAL REPORT TO SHAREHOLDERS
SEAWAY FOOD TOWN, INC.
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands except share and per share data)
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended 1998 1997 1996(1) 1995 1994
CONSOLIDATED SUMMARY OF
OPERATIONS
Net sales $625,178 $608,373 $597,462 $559,244 $546,193
Cost of merchandise sold (2) 465,797 455,631 449,498 422,145 412,927
-------- -------- -------- -------- --------
Gross profit 159,381 152,742 147,964 137,099 133,266
Selling, general and
administrative
Expenses (2) 144,671 138,890 134,180 126,402 125,366
-------- -------- -------- -------- --------
Operating profit 14,710 13,852 13,784 10,697 7,900
Interest expense - net (3,835) (3,760) (4,302) (4,409) (4,367)
Other income - net 167 509 (46) 907 193
-------- -------- -------- -------- --------
Income before income taxes,
extraordinary item and
cumulative effect 11,042 10,601 9,436 7,195 3,726
Provision for income taxes 4,058 4,189 3,931 2,715 1,288
-------- -------- -------- -------- --------
Income before extraordinary
item and Cumulative effect 6,984 6,412 5,505 4,480 2,438
Extraordinary item (3) -- -- -- -- (123)
Cumulative effect of change in
Accounting (4) -- -- -- -- (256)
-------- -------- -------- -------- --------
Net income $6,984 $ 6,412 $ 5,505 $ 4,480 $ 2,059
======== ======== ======== ======== ========
PER COMMON SHARE DATA (5)
Income before extraordinary
and cumulative effect basic
and diluted $ 1.05 $ .97 $ .83 $ .68 $ .35
Net income - basic and diluted 1.05 .97 .83 .68 .30
Cash dividends .16 .15 .13 .13 .12
Book value 8.62 7.72 6.89 6.19 5.59
YEAR END POSITION
Total assets $168,663 $164,566 $155,465 $154,001 $155,203
Property and equipment - net 93,975 90,645 85,004 84,000 85,346
Net working capital 13,562 9,211 3,281 6,086 8,937
Long-term debt 47,966 45,565 42,715 48,399 55,060
Shareholders' equity 57,353 51,176 45,453 40,731 37,585
FINANCIAL RATIOS
Income before extraordinary
item and cumulative effect
as a percent of sales 1.12% 1.05% .92% .80% .45%
Current ratio 1.24:1 1.15:1 1.05:1 1.11:1 1.16:1
Long-term debt to equity ratio .84:1 .89:1 .94:1 1.19:1 1.46:1
OTHER DATA
Weighted average shares outstanding
- basic and diluted (5) 6,642,112 6,615,470 6,592,983 6,589,929 6,920,943
Net cash provided by
operations $16,732 $15,153 $24,524 $19,829 $16,183
Property and equipment
additions 19,822 19,537 15,071 13,698 12,681
Depreciation and amortization 14,986 14,441 13,502 12,551 12,311
LIFO charge (credit) included
in cost of merchandise sold (148) 364 (47) 581 (18)
Associates at year end 4,852 5,051 4,472 4,551 4,500
Stores in operation 70 69 66 66 66
Notes: (1) 53 week year; (2) Advertising expense was reclassified from
selling, general and administrative expenses to cost of merchandise sold in
1994 through 1997 to conform to the 1998 presentation. (3) Loss from early
extinguishment of debt,less applicable income taxes; (4) Reflects adoption of
Statement of Financial Accounting Standards No. 109 "Accounting for income
taxes". (5) The weighted average shares outstanding and all per common
share amounts have been adjusted retroactively for the May, 1997 two-for-one
stock split and the May, 1998 three-for-two stock split.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
21
SEAWAY FOOD TOWN, INC.
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)
1998 1997 1996 (1)
-------- -------- ---------
<S> <C> <C> <C>
RESULTS OF OPERATIONS
Net sales $625,178 $608,373 $597,462
Operating profit 14,710 13,852 13,784
Income before income taxes 11,042 10,601 9,436
Net income 6,984 6,412 5,505
Per common share - basic and
diluted (2) 1.05 .97 .83
Percent of sales 1.12% 1.05% .92%
Percent of shareholders' equity 12.18% 12.53% 12.11%
Cash dividends per common share (2) $ .16 $ .15 $ .13
OTHER FINANCIAL INFORMATION
Total assets $168,663 $164,566 $155,465
Property and equipment additions 19,822 19,537 15,071
Depreciation and amortization 14,986 14,441 13,502
Long-term debt 47,966 45,565 42,715
Shareholders' equity 57,353 51,176 45,453
Book value per common share (2) 8.62 7.72 6.89
Effective tax rate 36.8% 39.5% 41.7%
Weighted average shares outstanding
- basic and dilued (2) 6,642,112 6,615,470 6,592,983
Number of stores in operation, 70 69 66
at year end
NASDAQ National Market Price Range 21 - 11 1/4 17 1/3 - 6 6 1/4 - 5 1/8
(1) 53 week year
(2) The weighted average shares outstanding and all per common share
amounts have been adjusted retroactively for the May, 1998 three-for-two
stock split and the May, 1997 two-for-one stock split.
</TABLE>
<PAGE>
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
At year end, the Company operated forty-five retail supermarkets under
the names of Food Town, Food Town Plus and Kash N Karry, 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
<C> <C> <C> <S> <C> <C>
1998 1997 1996 Compared Compared
52 wks. 52 wks. 53 wks. to 1997 to 1996
- ------- ------- ------- -------- --------
100.0% 100.0% 100.0% Net sales 2.8% 1.8%
25.5% 25.1 24.8 Gross profit 4.3 3.2
Selling, general and
23.1 22.8 22.5 administrative 4.2 3.5
2.4 2.3 2.3 Operating profit 6.2 .5
.6 .6 .7 Interest expense - net 2.0 -12.6
.0 .1 .0 Other income - net -67.2 -1206.5
1.8 1.8 1.6 Income before income taxes 4.2 12.3
.7 .7 .7 Provision for income taxes -3.1 6.6
1.1 1.1 .9 Net income 8.9 16.5
</TABLE>
The following table details the number and format of the Company-operated
stores as of the end of each respective fiscal year:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Food Town Supermarkets:
Conventional Food Town Stores 14 17 18
Food Town Plus Stores 30 27 25
Kash N Karry 1 -- --
----- ----- -----
Total Supermarkets 45 44 43
The Pharm Drugstores 25 25 23
----- ----- -----
Total Retail Stores 70 69 66
</TABLE>
<PAGE>
23
During 1998 the Company opened a new supermarket which operates in a
everyday low priced, limited assortment format. This store, operating
under the Kash N Karry banner, was converted from a conventional
supermarket format which closed late in fiscal 1997. In addition, the
Company converted three conventional supermarkets into Food Town Plus
stores which offers a greatly expanded variety of products and services.
At the end of the fiscal year the Company's total stores' square footage
was 2,597,000, a 1.6% increase from a year earlier.
During 1997 the Company opened five new stores, including an expanded
Plus store with a greatly enlarged food court, two Pharms and two
newly acquired conventional supermarkets. One of the two new Pharms was
converted from a conventional supermarket. During 1997, the Company's total
store square footage increased 8.6% from the end of fiscal 1996. All stores
operate predominately in northwest and central Ohio and southeast Michigan.
Net Sales
Consolidated net sales increased 2.8% in 1998 in comparison to 1997
and increased 1.8% in 1997 in comparison to 1996. 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. The dollar increase in sales from 1997 to
1998 was due to increased sales in the drugstores and supermarkets. The
dollar increase in sales from 1996 to 1997 was largely due to increased
sales in the drug stores. The Company had 64 comparable stores (including
replacement supermarkets and format conversions) in operation throughout the
three year period of 1998, 1997, and 1996. Those comparable store sales
increased 0.2% in 1998 compared to 1997 and 1.7% in 1997 compared to 1996.
Gross Profit
The gross profit percentage increased from 25.1% in 1997 to 25.5% in
1998. During 1998 margins continued to improve with the implementation of
certain new merchandising strategies both in the supermarkets and in the
drugstores. In 1997, gross profits increased slightly in both the
supermarkets and the drugstores compared to 1996, from 24.8% to 25.1%.
Advertising expense was reclassified from selling, general and
administrative expenses to cost of merchandise sold for 1996 and 1997 to
conform to the 1998 presentation.
Selling, General and Administrative Expenses
In 1998, selling, general and administrative expenses increased by
$5.8 million, an increase of .3% as a percentage of sales from 22.8% to
23.1%. This dollar increase in 1998 compared to 1997 was attributable
principally to wage expense, supply costs, occupancy costs, repairs
and maintenance, and depreciation on equipment, legal fees and information
technology expenses. In 1997, selling, general and administrative expenses
increased by $4.7 million, an increase of .3% as a percentage of sales. This
dollar increase in 1997 compared to 1996 was attributable principally to
retail store wage expense, utility costs, supply costs, and depreciation
on equipment offset somewhat by a decrease in repairs and maintenance.
<PAGE>
24
Operating Profit
Operating profit (earnings from operations before interest, other
income and income taxes) was $14.7 million or 2.4% of net sales for
1998 and $13.9 million or 2.3% for 1997. As a percentage of net sales,
operating profit was 2.3% in 1997 and 1996.
Interest Expense
Interest expense increased by $75,000 in 1998. This increase resulted
from increased borrowings offset somewhat by lower borrowing rates throughout
1998. Interest expense decreased slightly by $542,000 in 1997 compared to
1996 due to lower borrowing rates. The approximate weighted average interest
rate on long-term debt as of the end of the year was 7.65% in 1998 versus
7.78% in 1997 and 7.79% in 1996.
Other Income - Net
Net other income decreased $342,000 in 1998 over fiscal 1997. Other
income in 1998 included a net gain of $484,000 from the disposition
of assets throughout the year offset by a loss of $500,000 on a lease
termination, plus decreases of $259,000 in miscellaneous other income.
Net other income increased $555,000 in 1997 over 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 $149,000 of increases
in miscellaneous other income as compared to 1996.
Income Taxes
The effective income tax rates for 1998, 1997, and 1996, were 36.8%,
39.5%, and 41.7%, respectively. The effective state and local income tax rate
in 1998 was 3.4% which was down from 3.5% in 1997 and 6.2% in 1996.
During 1998 and 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.
Net Income and Income per Common Share
Net income increased by 8.9% in 1998 to $6,984,000 or 1.1% of sales, a
dollar increase of $572,000 from the 1997 net income of $6,412,000. Net
income per common share in 1998 was $1.05 per share as compared to $.97 per
share in 1997, an increase of 8.2%. These increases are the result of
increased sales and increased gross margins. Net income increased 16.5% in
1997 to $6,412,000, an increase of $907,000 over the 1996 net income of
$5,505,000 due, in part, to the extra week in 1996. Net income per common
share in 1997 was $.97 as compared to $.83 per share in 1996. 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. All per share calculations have been adjusted retroactively
for the May, 1998 three-for-two stock split and the May, 1997 two-
for-one stock split.
<PAGE>
25
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 decreased cost of sales by $148,000 in 1998, increased
cost of sales by $364,000 in 1997, and decreased cost of sales by $47,000
in 1996. 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:
(Dollars in millions) 1998 1997 1996
--------- --------- ---------
Working capital (1) $31.9 $27.7 $21.4
Unused lines of revolving credit $36.7 $41.4 $20.0 (2)
Current ratio (1) 1.56 to 1 1.46 to 1 1.35 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.
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, and $8.3 million at the end of
fiscal 1998. The Company has sufficient sources of capital 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, 1998, 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 may continue to be used by the Company for
corporate purposes, including the funding of its annual contribution to its
401(k) plan.
<PAGE>
26
The Company merged its Employee's Stock Ownership Plan (ESOP)into its
401(k) salary deferral plan effective January 1, 1998. The stock
contributions previously made by the Company to the ESOP will be made to the
401(k). Also, the Company anticipates amending the 401(k) so that,
effective on January 1, 1999, employees will have the option of investing
a portion of their 401(k) salary deferral in Company Stock. If an
employee chooses that option, the Company will make certain matching
contributions of Company Stock to the employee's 401(k) account.
At the January, 1998 Annual Meeting, shareholders approved 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 1998 was $16.7 million,
an increase of $1.5 million from the $15.2 million provided in 1997. This
increase was primarily related to lower increases in merchandise inventories
as well as increases in net income, depreciation and amortization.
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 attributable to the increases in net income and
depreciation and amortization, offset by increases in merchandise
inventories and notes and accounts receivables.
Cash Flows from Investing Activities
Cash used in investing activities was $16.7 million in 1998, a decrease
of $3.5 million from the $20.2 million provided in 1997. This
decrease is attributable to a decrease in the expenditures for property and
equipment.
Cash used in investing activities was $20.2 million in 1997, an increase
of $6.4 million from the $13.8 million expended in 1996. This increase
was primarily attributable to an increase in the expenditures for
property and equipment, most of which was spent on two new supermarkets,
one new Plus store, and several store remodel projects.
The total retail store square footage increased by approximately
41,065 square feet in 1998. 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 used in financing activities was $.5 million in 1998, a net
decrease of $5.3 million from the $4.8 million provided in 1997. This
decrease is the result of a decrease in deferred other. During 1998 the
Company received $7.8 million in proceeds from borrowings against the
Company's revolving credit agreement. In 1997, the Company received $40.3
million from borrowings against the Company's revolving credit agreement
and new senior unsecured debt agreement. This compares to $7.2
million received in 1996, most of which related to the revolving credit
agreement. In 1998, the Company made payments of $6.0 million on its long-
term debt as compared to $38.6 million in 1997 and $13.4 million in 1996.
During all three years the Company made debt payments on its revolving
credit agreement in addition to other regular debt payments and the payoff
of some higher interest rate debt. During 1998 the Company did not
repurchase any Company common shares.
In 1997 the Company spent $77,000 for the repurchasing of Company common
shares, a decrease of $225,000 from its expenditures in 1996.
<PAGE>
27
1999 Capital Program
Total capital expenditures are expected to approximate $20.0 million
in 1999, 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. In addition, the Company continues
to look for existing well operated stores which could be acquired by the
Company. 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 $36.7
million available under the existing credit agreements will be more than
sufficient for financing fiscal 1999 capital additions and other
business needs as well as presently scheduled maturities of long-term debt.
Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. As the date
changes from December 31, 1999 to January 1, 2000, many existing computer
programs, if not corrected, will read the date as January 1, 1900, or
otherwise incorrectly interpret the date. This may cause the computer to
malfunction or to cease to function altogether. The Company has determined
that it must modify or replace significant portions of its software. The
Company has broken its Year 2000 project down according to Information
Technology (IT) areas such as business applications within the mainframe
computer or other environments; non IT areas such as microprocessors and
embedded chips in operating equipment; and third party reliance such as
banks, utility companies and vendors. The Company is monitoring these
areas in four phases, consisting of assessment, remediation, testing and
implementation. The state of readiness in each of these areas as well
as the definition of each phase is presented below:
<TABLE>
<CAPTION>
Project Assessment Remediation Testing Implementation
Segment
- ----------- ---------- ----------- ---------- ---------------
<S> <C> <C> <C> <C>
IT areas:
Mainframe Complete Complete 40% Complete 30% Complete
Expected Expected
completion completion
date, 1/99 date, 3/99
Other Complete 50% Complete 30% Complete 10% Complete
Expected Expected Expected
completion completion completion
date, 12/98 date, 3/99 date, 9/99
==========================================================================
Non IT Complete 20% Complete Not started Not started
areas
Expected Expected Expected
completion completion completion
date, 12/98 date, 2/99 date, 2/99
==========================================================================
Third Complete 40% Complete Not Not
Parties Expected applicable applicable
completion
date, 11/99
==========================================================================
</TABLE>
<PAGE>
28
- - Assessment is an inventory of IT, non-IT, and third party reliance affected
by the Year 2000 issue.
- - Remediation is the changes to the code, obtaining compliant vendor software
or obtaining reliance from the third parties that the Year 2000 issue has
been addressed.
- - Testing is the test of the changes to internally developed and vendor
upgraded software.
- - Implementation is the rollout of the tested software into production.
The costs of the Year 2000 project through fiscal 1998, excluding costs
of internal Company employees, total $520,000 which has been charged to
expense. These costs have been funded through operating cash flows. Future
costs are not expected to be material.
Management of the Company believes it has an effective program in place
to resolve the Year 2000 issue in a timely manner. However, the Company
cannot guarantee that it will not experience Year 2000 problems originating
from its own computers or those of third parties with whom the company does
business. As noted above, the Company has not yet completed all necessary
phases of the Year 2000 program. The significant risks of the Year
2000 project include unsuccessful testing of code changes or vendor
upgrades, failed attempts to obtain compliant vendor software, and failures
on the part of crucial vendors or utility companies. Contingency plans
have not been fully developed; however, the Company intends to finalize
its contingency plan for these risks by December 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>
29
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 29, 1998, and August 30, 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended August 29, 1998. 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 29, 1998 and August 30, 1997, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended August 29, 1998 in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
October 16, 1998
Toledo, Ohio
<PAGE>
30
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 29, 1998, AUGUST 30, 1997, AND AUGUST 31, 1996
(Dollars in thousands, except per share data)
1998 1997 1996
------- ------- -------
(52 weeks) (52 weeks) (53 weeks)
<S> <C> <C> <C>
Net sales $625,178 $608,373 $597,462
Cost of merchandise sold 465,797 455,631 449,498
--------- --------- ---------
Gross profit 159,381 152,742 147,964
Selling, general and
administrative expenses 144,671 138,890 134,180
--------- --------- ---------
Operating profit 14,710 13,852 13,784
Interest expense - net (3,835) (3,760) (4,302)
Other income - net 167 509 (46)
--------- --------- ---------
Income before income taxes 11,042 10,601 9,436
Provision for income taxes 4,058 4,189 3,931
--------- --------- ---------
Net income $6.984 $6,412 $5,505
========= ========= =========
Net income per common share -
basic and diluted $ 1.05 $ .97 $ .83
======= ======= =======
See accompanying notes
</TABLE>
<PAGE>
31
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
AUGUST 29, 1998 AND AUGUST 30, 1997
(Dollars in thousands, except per share data)
1998 1997
ASSETS ----- -----
<S> <C> <C>
Current assets
Cash and cash equivalents $8,968 $9,491
Income tax recoverable 100 ---
Notes and accounts receivable, less allowance
of $450 for doubtful accounts 7,674 6,495
Merchandise inventories 50,293 48,592
Prepaid expenses 1,518 1,425
Deferred income taxes 2,404 3,087
------- -------
Total current assets 70,957 69,090
Other assets 3,731 4,831
Property and equipment, at cost
Land 7,903 4,841
Buildings and improvements 75,019 70,991
Leasehold improvements 31,077 31,103
Equipment 106,629 103,552
-------- --------
220,628 210,487
Less accumulated depreciation and amortization 126,653 119,842
-------- --------
Net property and equipment 93,975 90,645
-------- --------
$168,663 $164,566
======== ========
See accompanying notes
</TABLE>
<PAGE>
32
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
AUGUST 29, 1998 AND AUGUST 30, 1997
(Dollars in thousands, except per share data)
1998 1997
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Accounts payable $43,402 $44,174
Income taxes 31 935
Accrued liabilities:
Insurance 3,374 4,195
Payroll 3,195 3,181
Taxes, other than income 2,613 2,487
Other 3,387 2,948
------- -------
12,569 12,811
Long-term debt due within one year 1,393 1,959
------- -------
Total current liabilities 57,395 59,879
Long-term debt 47,966 45,565
Deferred income taxes 2,474 3,258
Deferred other 3,475 4,688
Shareholders' equity
Serial preferred stock, without par value:
300,000 shares authorized, none issued --- ---
Common stock, without par value (stated value
$2 per share):12,000,000 shares authorized,
6,648,928 shares outstanding (6,628,752, as
restated, in 1997) 13,298 8,838
Capital in excess of stated value --- ---
Retained earnings 44,055 42,338
------- -------
Total shareholders' equity 57,353 51,176
------- -------
$168,663 $164,566
======= =======
See accompanying notes
</TABLE>
<PAGE>
33
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 29, 1998, AUGUST 30, 1997, and AUGUST 31, 1996
(Dollars in thousands)
1998 1997 1996
--------- --------- ---------
(52 weeks)(52 weeks) (52 weeks)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,984 $ 6,412 $ 5,505
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 14,986 14,441 13,502
Provision for ESOP 255 401 397
Deferred income taxes (101) (565) (329)
Equity in (income) loss of affiliates (3) (24) 28
Loss (gain) on disposal of property
and equipment (484) (10) 277
Changes in assets and liabilities
affecting operations:
Notes and accounts receivable (1,179) (582) 674
Merchandise inventories (1,701) (3,518) (326)
Prepaid expenses (93) (84) 29
Accounts payable
and accrued liabilities (928) (729) 4,270
Income taxes (1,004) (589) 497
-------- ------- -------
Net cash provided by operating
activities 16,732 15,153 24,524
Cash flows from investing activities:
Expenditures for property
and equipment (18,455) (19,537) (15,017)
Proceeds from sale of property and
equipment 623 416 288
Cash paid to acquire business --- (2,134) ---
Other 1,103 1,071 960
-------- ------- -------
Net cash used in investing activities (16,729) (20,184) (13,769)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 7,800 40,300 7,200
Payments of long-term debt (5,965) (38,605) (13,377)
Payments for acquisitions of common shares --- (77) (302)
Dividends paid (1,062) (1,013) (878)
Increase (decrease) in deferred other (1,299) 4,151 (1,034)
-------- ------- -------
Net cash provided by (used in)
financing activities (526) 4,756 (8,391)
-------- ------- -------
Increase (decrease) in cash and cash (523) (275) 2,364
equivalents
Cash and cash equivalents at
beginning of year 9,491 9,766 7,402
------- ------- -------
Cash and cash equivalents at end of year $8,968 $ 9,491 $ 9,766
======= ======= =======
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 2,931 $ 3,779 $ 4,271
Income taxes 5,144 5,343 3,762
Non-cash investing activities:
During fiscal 1998 the Company exchanged real estate with a basis of
$1,367,000
See accompanying notes
</TABLE?
<PAGE>
34
</TABLE>
<TABLE>
<CAPTION>
SEAWAY FOOD TOWN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED AUGUST 29, 1998, AUGUST 30, 1997, and AUGUST 31, 1996
(Dollars in thousands, except per share data)
Capital
in Excess Total
COMMON STOCK of Share-
----------------- Stated Retained holders'
Shares Amounts Value Earnings Equity
------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at August 27, 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 - $.13 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 - $.15 per share (1,013) (1,013)
--------- ------ ----- ------- -------
Balance at August 30, 1997 4,419,168 8,838 0 42,338 51,176
Net income (52 weeks) 6,984 6,984
Issuance of common shares
to ESOP 13,459 27 228 255
Effect of stock split 2,216,301 4,433 (228) (4,205) ---
Dividends paid - $.16 per share (1,062) (1,062)
--------- ----- ----- ------- -------
Balance at August 29, 1998 6,648,928 $13,298 0 $44,055 $57,353
========= ======= ===== ======= ========
</TABLE?
<PAGE>
See accompanying notes
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Seaway Food Town, Inc.
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 drug-
stores 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 amounts have been adjusted retroactively for the May,
1998 three-for-two stock split and 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 and deli 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
$18,325,000 and $18,473,000 at August 29, 1998 and August 30, 1997,
respectively, from amounts which would have been reported under the FIFO
method (which approximates current cost).
Impairment of long-lived assets -- The carrying value of long-lived and
intangible assets is reviewed quarterly to determine if facts and
circumstances suggest that the assets may be impaired or that the
amortization period may need to be changed. The Company considers external
factors relating to each asset including local market developments. If
these external factors and the projected undiscounted cash flows over the
remaining amortization period indicate that the asset will not be
recoverable, the carrying value will be adjusted to the estimated fair
value. As of August 29, 1998 the Company does not believe there is any
indication that the carrying value or the amortization period of its assets
needs to be adjusted.
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 $5,054,000 in 1998, $4,689,000 in 1997 and
$4,311,000 in 1996. Advertising expenses have been recorded as cost of
merchandise sold in fiscal 1998. The amounts have been reclassed from
selling, general and administrative to cost of merchandise sold for each of
the prior years presented.
Pensions -- The Company contributes to pension plans covering substantially
all employees. Pension costs include defined contributions based upon
wages, and specified amounts 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.
<PAGE>
36
Net income per common share -- Net income per common share is based upon
the weighted average number of common shares outstanding of 6,642,112 in
1998, 6,615,470 in 1997 and 6,592,983 in 1996. The Company adopted
Statement of Financial Accounting Standards No. 128 "Earnings per Share,"
during fiscal 1998. There was no effect on earnings per share as a result
of adoption for any periods presented, as the Company has no potentially
dilutive securities.
Reclassifications -- Certain other reclassifications were made to 1996 and
1997 balances to conform to the 1998 presentation.
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 1997 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 29, 1998 and August 30, 1997 consisted of the
following (in thousands):
</TABLE>
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
7.42% to 9.22% senior
notes payable to insurance
companies, due through 2013 $33,000 $33,000
Revolving credit loan agree-
ments with banks, interest
of 6.56% to 7.75% 8,300 3,600
6% to 7.25% mortgage notes
payable payments due
annually to 2008 4,997 5,701
Other notes payable 124 947
Long-term lease
obligations (see Note
5):
7.25% industrial develop-
ment revenue bonds,
payments due annually
to 2000 200 300
Other, 7.35% to 13%,
payments due in varying
monthly amounts through
2004 2,738 3,976
------- -------
49,359 47,524
Less amount due within one
year 1,393 1,959
------- -------
$47,966 $45,565
======= =======
</TABLE>
<PAGE>
37
At August 29, 1998, 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
$8,300,000 under this agreement at August 29, 1998.
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 29, 1998, 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 has two senior note agreements which 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 agreements allow for prepayments, at the Company's option,
subject to certain prepayment provisions. The Company issued $25,000,000 of
these senior notes to an insurance company in August, 1997.
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 29, 1998, the approximate undepreciated cost of property and
equipment subject to mortgages was $11,986,000.
Annual maturities of long-term debt for each of the five fiscal years
subsequent to August 29, 1998 are as follows: 1999 - $1,393,000; 2000 -
$12,070,000; 2001 - $646,000; 2002 - $465,000; and 2003 - $433,000.
At August 29, 1998, the carrying value of the long-term debt in aggregate,
excluding capitalized lease obligations, approximates its fair value. The
fair value is estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates.
<PAGE>
38
4.INCOME TAXES
The provision (credit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal $3,562 $4,115 $3,315
State and local 597 639 945
------- ------- --------
4,159 4,754 4,260
Deferred:
Federal (72) (483) (265)
State and local (29) (82) (64)
------- ------- --------
(101) (565) (329)
------- ------- --------
$4,058 $4,189 $3,931
====== ====== ======
</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>
1998 1997 1996
----- ----- -----
<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 3.4 3.5 6.2
Other (.6) 2.0 1.5
----- ----- -----
Effective tax rate 36.8% 39.5% 41.7%
===== ===== =====
</TABLE>
Significant components of the Company's deferred income tax assets and
liabilities as of August 29, 1998 and August 30, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred income tax assets:
Accrued expenses $2,253 $2,760
Expenses inventoried for tax purposes 950 919
Other 419 430
------ ------
$3,622 $4,109
====== ======
Deferred income tax liabilities:
Excess tax depreciation $2,500 $3,037
Deferred project costs 393 835
Other 799 409
------ ------
$3,692 $4,281
====== ======
</TABLE>
<PAGE>
39
The above are reflected in the balance sheets as of August 29, 1998 and
August 30, 1997 as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Current deferred income tax asset $2,404 $3,087
====== ======
Noncurrent deferred income tax liability $2,474 $3,258
====== ======
</TABLE>
5.EMPLOYEE BENEFIT PLANS
Effective January 1, 1998, the Company merged its Employee Stock Ownership
Plan into the 401(k) plan. Employee contributions to the 401(k) plan consist
of salary deferrals of up to 15%, not to exceed the maximum annual allowable
amount for income tax purposes. The Company matches 50% of employee salary
deferral contributions up to 6% of an employee's compensation, and
contributes Company common stock in an amount not less than 2 1/2% of each
eligible employee's total annual compensation. The Company's expense was
$1,115,000 in 1998, $1,007,000 in 1997, and $893,000 in 1996.
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 $2,571,000 in 1998, $2,313,000
in 1997, and $2,378,000 in 1996. 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 COMMITMENTS
Capital leases
The cost and accumulated amortization of property leased under long-term
noncancellable leases are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Land $ 56 $ 56
Buildings 6,523 6,613
Equipment 2,509 4,864
---------- --------
9,088 11,533
Less accumulated
amortization 6,633 7,926
---------- ---------
$ 2,455 $ 3,607
======= =======
</TABLE>
Future minimum lease payments under capital leases together with the present
value of net minimum lease payments as of August 29, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $1,211
2000 800
2001 599
2002 372
2003 307
Later years 179
------------
Total minimum lease payments 3,468
Less amount representing interest 530
------------
Present value of net minimum lease
payments (included in long-term
debt at August 29, 1998 -- see
Note 2) $2,938
=======
</TABLE>
<PAGE>
40
Operating leases
Minimum annual rentals for facilities and equipment leased under operating
leases aggregate approximately $38,331,000 payable as follows (in thousands):
<TABLE>
<CAPTION>
Facilities Equipment
---------- ---------
<S> <C> <C>
1999 $ 6,215 $176
2000 5,748 176
2001 5,167 55
2002 4,736
2003 3,805
Later years 12,253
-------- --------
$37,924 $407
======= =======
</TABLE>
The leases expire at various dates from 1999 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
approximately $6,735,000 in 1998, $6,285,000 in 1997, and $5,843,000 in
1996 and included provisions for additional rentals of $171,000 in 1998,
$227,000 in 1997, and $250,000 in 1996 based upon gross sales in excess
of specified amounts.
7.QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial data for the years ended August 29, 1998, and August 30,
1997 are presented below (in thousands of dollars except per share amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales:
1998 $153,952 $159,935 $154,557 $156,734
1997 147,951 155,871 151,284 153,267
Gross profit:
1998 39,288 40,798 39,645 39,650
1997 36,435 38,868 38,026 39,413
Net income:
1998 1,371 2,095 1,698 1,820
1997 991 1,848 1,601 1,972
Net income per common share
basic and diluted:
1998 .21 .31 .26 .27
1997 .15 .28 .24 .30
</TABLE>
<PAGE>
41
MARKET PRICE OF COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS
The following table sets forth, for the quarterly periods indicated, the high
and low close prices of the common stock.
<TABLE>
<CAPTION>
Common Divi-
Fiscal dends paid
Quarter High Low (Per share)
--------- ----- ------ -----------
<S> <C> <C> <C> <C>
1997 1st 9 6 $.03
2nd 9 1/3 8 .04
3rd 15 2/3 8 1/2 .04
4th 17 1/3 12 1/2 04
Full Year 17 1/3 6 $.15
1998 1st 15 5/32 11 1/4 .04
2nd 18 1/4 12 1/8 .04
3rd 19 5/32 14 3/4 .04
4th 21 14 1/4 .04
Full Year 21 11 1/4 .16
</TABLE>
The price is the high and low close price on the NASDAQ National Market.
As of August 29, 1998, the approximate number of record holders of
common stock was 433. Share and dividend prices have been adjusted
retroactively to reflect the May, 1998 three-for-two stock split
and the May, 1997 two-for-one stock split.
<PAGE>
42
EXHIBIT 21
SEAWAY FOOD TOWN, INC.
SUBSIDIARIES OF REGISTRANT
At the fiscal year ended August 29, 1998 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>
43
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
16, 1998, 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 16, 1998
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