-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pn0Dde4CMaPgFAP5kotqcb2HR9Y657Ri5QMlPjKuj1fdZXufdfYsP8Fa1/BO6+NN brgFWOctSHUqXDe7PuBqvA== 0000897069-96-000061.txt : 19960325 0000897069-96-000061.hdr.sgml : 19960325 ACCESSION NUMBER: 0000897069-96-000061 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951230 FILED AS OF DATE: 19960322 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHULTZ SAV O STORES INC CENTRAL INDEX KEY: 0000087588 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 390600405 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-00549 FILM NUMBER: 96537518 BUSINESS ADDRESS: STREET 1: 2215 UNION AVE CITY: SHEBOYGAN STATE: WI ZIP: 53081 BUSINESS PHONE: 4144574433 MAIL ADDRESS: STREET 1: 2215 UNION AVE CITY: SHEBOYGAN STATE: WI ZIP: 53081 10-K405 1 SCHULTZ SAV-O STORES, INC. FORM 10-K 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 December 30, 1995 OR __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 0-549 SCHULTZ SAV-O STORES, INC. (Exact name of registrant as specified in its charter) Wisconsin 39-0600405 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 2215 Union Avenue Sheboygan, Wisconsin 53081 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (414) 457-4433 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Class Common Stock, $0.05 par value Common Stock Purchase Rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of voting stock held by non-affiliates of the registrant as of March 20, 1996: $63,838,987* Number of shares outstanding of the registrant's Common Stock as of March 20, 1996: 4,653,598 PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED HEREIN BY REFERENCE: 1995 Annual Report to Shareholders (incorporated by reference into Parts II and IV to the extent indicated therein). Definitive Proxy Statement for 1996 annual meeting of shareholders (incorporated by reference into Part III to the extent indicated therein). _______________ * Only excludes shares beneficially owned by directors and officers of the registrant. PART I Item 1. Business. General Schultz Sav-O Stores, Inc. ("Company") is engaged in distributing food and related products at wholesale and retail. As of December 30, 1995, the Company franchised 66 and owned 19 retail supermarkets under the Piggly Wiggly/R/ name in its Eastern Wisconsin and Northeastern Illinois market area. While the Company has a presence in some larger metropolitan areas, it has attempted to develop a niche for serving the food shopping needs of customers in smaller and suburban communities within its market areas. The Company is the primary supplier to its 85 franchised and corporate owned Piggly Wiggly supermarkets. The Company also serves as a wholesaler to a number of small, independently operated retail supermarkets in its market area. The Company supplies a variety of products to its franchised and corporate supermarkets and other wholesale customers primarily from its warehouse and distribution center in Sheboygan, Wisconsin. The Company also provides its franchised and corporate supermarkets and other customers with fresh, frozen and processed meat, eggs and deli products from a third-party distribution facility in Milwaukee, Wisconsin on a contract basis. Additionally, the Company bottles carbonated soft drinks, fruit drinks and drinking and distilled water under its Springtime label and supplies these products to its franchised and corporate supermarkets and other wholesale customers. The Company is a Wisconsin corporation organized in 1912. Wholesale Operations For several years the Company has been emphasizing its more profitable wholesale distribution business and the associated expansion of its franchise store base, while also effecting changes to its corporate retail operations to improve profitability. As part of implementing this corporate strategy, the Company has sold and converted 11 underperforming corporate retail supermarkets into franchise units and added 12 new replacement or new market franchise supermarkets since 1991. In 1995, there were 7 franchise expansion projects in process, resulting in 6 completed expansions and 1 expansion that will be completed in early 1996. Additionally, in 1995, 3 replacement stores were completed and 3 replacement stores are expected to be completed in 1996. Finally, in 1995, 1 new market franchise unit was completed and 2 new market franchise units are projected to be completed in 1996. These expansion, replacement and new market franchise projects added approximately 98,000 square feet of store space in 1995, and are projected to add approximately 87,000 square feet in 1996 if all scheduled projects are completed. The following table shows the Company's development of, and changes in, its franchised and corporate retail supermarkets for the periods presented:
Franchised Supermarkets Corporate Supermarkets Number of Supermarkets 1991 1992 1993 1994 1995 1991 1992 1993 1994 1995 Beginning of Year 53 51 59 64 65 33 32 26 21 20 New Market Supermarkets(a) 1 2 1 -- 1 1 -- -- -- -- Replacement Supermarkets(b) 1 3 1 1 3 1 -- -- -- -- Converted to Franchise(c) 1 6 4 1 -- (1) (6) (4) (1) -- Terminated Operations(d) (3) (4) (3) (1) (3) (2) -- (1) -- (1) Terminated Franchises(e) (4) -- -- -- -- -- -- -- -- -- New Franchises(f) 2 1 2 -- -- -- -- -- -- -- End of Year 51 59 64 65 66 32 26 21 20 19 === === === === === === === === === === Remodeled Supermarkets(g) 2 3 1 5 6 2 1 3 -- -- _______________ (a) New market supermarkets are newly constructed supermarkets in market areas not recently served by the Company. (b) Replacement supermarkets are newly constructed supermarkets whose opening corresponds with the closure of a nearby franchised or corporate supermarket of the Company. (c) Corporate supermarkets which become franchise units are included as reductions to corporate supermarket totals and additions to franchised supermarket totals in this category. (d) Terminated operations represent supermarkets which are no longer going concerns, including replaced supermarkets. (e) Terminated franchises are existing supermarkets which are no longer parties to franchise relationships with the Company. (f) New franchises are additions to the Company's franchise group, other than through conversion from corporate supermarkets. (g) Remodeled supermarkets represent supermarkets which have undergone substantial expansion and/or remodeling totaling at least $250,000.
During 1995, the Company established new earnings records, but sales decreased from the previous year. The increase in earnings was principally the result of continued improvements in the Company's wholesale operations, where the lower gross margins associated with wholesale sales were offset by the decreased operating and administrative expenses associated with previously sold retail operations. The Company believes one of the competitive advantages it provides to its franchised supermarkets is its value-oriented customer merchandising and community-specific marketing support program, pursuant to which franchisees participate with corporate stores in systemwide promotions and other merchandising events. Through a variety of partnering, merchandising and marketing programs, the Company benefits its franchisees through additional sales resulting from heightened consumer name recognition and in-store merchandising programs, combined with special promotional pricing. Additional services include retail accounting, preparation of store payrolls, preparation of print, electronic and outdoor media advertising (including various point-of-sale materials), assistance in the selection and analysis of store locations, lease negotiations, store design, floor layout, merchandising planning, equipment selection, engineering and architectural services, retail technology implementation and support, labor planning and scheduling and product category supervision. Certain of such services are provided as part of the franchise relationship, and other services are provided for a separate fee intended to cover the Company's costs. To maintain and improve its ability to be a low-cost supplier, in 1995 the Company installed a new computer-assisted buying system, implemented a truck routing system and installed on-board truck computers. The Company is the primary supplier to all of its franchised and corporate supermarkets. The Company is also a wholesaler to a number of small, independently operated retail supermarkets in its market area, although less than 3% of the Company's 1995 net sales was derived from such operations. The volume provided by the Company's wholesale operations benefits its retail operations by enhancing the Company's purchasing power and enabling it to improve the efficiency of its distribution system. Franchisees pay fees to the Company determined by the retail sales of their supermarkets. The Company does not charge an initial fee to the franchisee for granting a franchise. Consistent with industry practice, in certain situations, the Company provides credit enhancements to certain qualified franchisees by (i) leasing the franchisee's supermarket premises and/or equipment and, in turn, subleasing the premises and/or equipment to the franchisee and/or (ii) guaranteeing a portion of the franchisee's bank borrowings. The Company owns the right to grant Piggly Wiggly franchises in its market areas, which includes designated counties in Eastern Wisconsin, Northeastern Illinois and the Upper Peninsula of Michigan. The Company's right to grant franchises is exclusive in these areas, except that if there are less than 40 supermarkets in the franchise territory operated under the Piggly Wiggly and certain other names, the current franchisor has the right to operate for its own account, or to franchise, supermarkets in the territory under those names. As of December 30, 1995, there were 85 supermarkets operated in the Company's territory that satisfied this requirement. The Company's franchise rights are of unlimited duration and are not subject to any specific termination provision. The Company is not required to pay any additional franchise or other fees to the current franchisor. The only material obligation imposed on the Company is that the supermarkets operated under the Piggly Wiggly and other names must comply with the standards imposed on supermarkets in the Piggly Wiggly system. The Company believes its own franchised and corporate store standards exceed the Piggly Wiggly system standards. Retail Operations During 1995, a number of the Company's corporate retail stores continued not to meet financial performance goals. The Company closed its underperforming Palatine, Illinois corporate supermarket in February 1995. In order to improve the Company's results of operations, the Company continues to evaluate various business alternatives relating to these underperforming operations, including the sale and subsequent conversion of these stores into franchise units, closing the stores or implementing other operational changes. The Company's franchised and corporate supermarkets stock a comprehensive selection of groceries, frozen foods, prepared foods, fresh produce, meat, poultry, eggs and dairy products. The Company's franchised and corporate supermarkets also allocate display space to non-food items, such as health and beauty aids, housewares, periodicals, video cassette rentals, flowers and plants, greeting cards and general merchandise. The Company's franchised and corporate supermarkets carry a broad range of branded merchandise and private label product alternatives to branded merchandise. In general, the private label products carried by the Company's franchised and corporate supermarkets have lower selling prices, but higher gross profit margins, than branded merchandise. Consistent with trends generally within the industry, the Company continues to experience increases in retail customer demand for private label store brands and believes its Topco line of private label products is satisfying this consumer trend. See "Purchasing and Distribution." Pricing differentials between 1995 and 1994 did not materially effect net sales. In 1995, the Company introduced the Piggly Wiggly Preferred Club Card/R/, a new customer-friendly card-based marketing program. The Piggly Wiggly Preferred Club Card is intended to reward current customers and attract new customers by offering "clipless coupons" on weekly advertised specials and "automatic" savings on monthly store specials. The card also doubles as a check-cashing and video rental identification card. Initial test results have been very favorable for the Company's retail stores, and 11 of the Company's corporate and franchise stores are already operating with the program, with 54 additional stores currently planned for installation in 1996. The program was developed by the Company's Marketing and Retail Technology Groups and the Company currently plans to install the program in all of its corporate and franchise stores. The Company's franchised supermarkets range in size from 8,340 square feet to 47,000 square feet, with an average of 23,720 square feet. The Company's corporate supermarkets range in size from 14,900 square feet to 46,250 square feet, with an average of 29,600 square feet. All of the Company's franchised and corporate supermarkets contain several perishable or specialty service departments, such as fresh and processed meat; take- home entrees and snacks; produce; fresh seafood; delicatessen; flowers and plants; and baked goods. A number of supermarkets also contain or provide for one or more of the following: wine and spirit sales; video rentals; TicketMaster/R/ ticket centers; in-house banking services; automated teller machines; and on-line debit and credit card check-out services. Purchasing and Distribution The Company purchases groceries in sufficient volume to qualify for favorable price brackets for most items. The Company purchases brand name grocery merchandise directly from the manufacturers or processors and purchases substantially all of its private label items through Topco Associates, Inc. ("Topco"). The Company purchases produce, meat and seafood from a variety of sources. Topco is a national purchasing cooperative whose member-owners consist of 42 regional supermarket chains who collectively operate approximately 3,500 stores. According to Topco data, its member-owners accounted for approximately 14% of United States grocery store sales volume in 1995. In 1995, purchases through Topco accounted for approximately 14% of the Company's total inventory purchases. The Company also purchases store and warehouse equipment and supplies, primarily bags and packaging material, through Topco. Topco's size and purchasing power enable it to employ large-volume, low-cost purchasing techniques on behalf of its member-owners, including the Company. Approximately 77% of the products supplied to the Company's stores in 1995 were supplied from the Company and its direct contract third-party distribution centers. The remainder were supplied by direct store delivery vendors. The Company owns its 364,000 square foot warehouse and distribution center in Sheboygan, Wisconsin. With the exception of fresh, frozen and processed meat, eggs and deli products, all products supplied by the Company are distributed from its Sheboygan facility. While the Company performs the buying function, a third-party contractor in Milwaukee, Wisconsin performs the warehousing and transportation for the Company's meat operations. The Company believes this arrangement has provided it with operating cost efficiencies and has enabled it to expand its wholesale product offerings and better satisfy wholesale customer delivery schedules through improved capacity. As described above under "Wholesale Operations," the Company believes one of its competitive advantages is its community-oriented marketing programs. High visibility outdoor billboard advertising stress the value and customer service provided by the Company's local Piggly Wiggly supermarkets. The Company also sponsors local events and festivals throughout the marketing area to improve its Piggly Wiggly name recognition, such as the Midwest's largest fireworks display at Milwaukee's Summerfest lakefront music festival. The Company operates a leased, full service trucking fleet, which consists of 25 tractors, 40 refrigerated trailers and 6 dry trailers. The Company augments its transportation requirements with temporary leasing arrangements as conditions warrant. On January 1, 1996, the Company formed PW Trucking, Inc., a wholly-owned subsidiary, to provide contract and common carrier services throughout a seven-state Midwest territory for the Company and other companies. Revenues from unrelated parties generated by this business are expected to be nominal in 1996. Bottling Operations The Company bottles carbonated soft drinks, fruit drinks and drinking and distilled water under its Springtime label. The Company also bottles soft drinks for several regional beverage distributors on a contract basis. The Company supplies these products to its franchised and corporate supermarkets and independent supermarket customers. The Company's bottling facility occupies approximately 5,000 square feet within its Sheboygan warehouse and distribution center. The sale of these products accounted for less than 1% of the Company's 1995 net sales. Competition The wholesale and retail food industry is highly competitive. At the wholesale level, the Company competes with regional and national wholesalers, such as Fleming Companies, Inc., SuperValu Inc., Roundy's, Inc. and Nash Finch Co. In addition to price, product quality and variety, competitive factors include credit support to customers and the provision of various support services, such as advertising; accounting and financial services; merchandising; facilities engineering, design and project management; and retail technology support. The Company believes that the location of its Sheboygan warehouse and distribution facility and the wide range of support and marketing services provided to its franchised and corporate retail supermarkets allow it to provide prompt and efficient low-priced, high-quality products and important supplemental services to its franchised and corporate supermarkets and other customers. The degree of competition at the retail level varies with store location. In most of its franchised and corporate supermarket locations, the Company competes primarily with local retail operators, virtually all of whom are affiliated with competing wholesalers through arrangements similar to the Company's franchisees. In its remaining supermarket locations, the Company competes with national and regional retail chain stores, such as Sentry Food Stores, Pick 'N Save, Cub Foods, Jewel Food Stores, Dominicks Finer Foods, Copp's Supermarkets and Kohl's Food Stores. Other competitors include the general merchandise, wholesale club and supercenter format stores of Wal-Mart Stores, Inc., K Mart Corp. and ShopKo. Principal retail competitive factors include price, product quality and variety, store location and appearance and the extent of a store's perishable product and service departments. The Company believes its supermarkets' emphasis on low-cost, high-quality products, community- based multi-media marketing and merchandising programs and a high degree of in-store customer service and friendliness provide its franchised and corporate supermarkets with a competitive advantage in many of their retail market areas. Certain of the Company's competitors at both the wholesale and retail level may have a competitive advantage resulting from utilizing lower-cost, non-union workforces. Certain of the Company's competitors have greater financial resources and marketing budgets than the Company. Also, certain competitors using the general merchandise, wholesale club format or supercenter format may choose to carry and market a less extensive variety of products for which they may choose to sell such items at a lower per unit cost than the Company. Employees As of December 30, 1995, the Company employed approximately 1,600 persons, of whom approximately 1,150 were employed in the operation of the Company's corporate retail supermarkets. A majority of the Company's corporate retail employees are employed on a part-time basis. Of the Company's remaining employees, approximately 225 are engaged in warehousing and trucking activities and the remainder are corporate and administrative personnel. The Company is currently negotiating new collective bargaining agreements covering approximately 75 retail clerks and meat cutters to replace agreements that expired in November 1995. The Company and employees are continuing to operate under the terms of the expired contract while the new contract is negotiated. Four separate collective bargaining agreements covering approximately 120 total retail clerks and meat cutters expire at different times throughout 1996. The Company's collective bargaining agreement covering the approximately 225 warehouse and trucking employees at its Sheboygan distribution facility expires in February 1997. The Company does not currently anticipate any strikes, work stoppages or slowdowns in connection with renewing such agreements. Item 1A. Executive Officers of the Company. Positions and Offices with the Name and Age Company James H. Dickelman, 48 . . . . Chairman of the Board, President and Chief Executive Officer John H. Dahly, 55 . . . . . . . Executive Vice President, Chief Financial Officer, Treasurer and Secretary Michael R. Houser, 44 . . . . . Senior Vice President--Marketing and Merchandising William K. Jacobson, 45 . . . . Senior Vice President--Retail Operations Kenneth S. Folberg, 35 . . . . Vice President--Logistics Larry D. Hayes, 53 . . . . . . Vice President--Meat, Bakery and Deli Operations John S. Kwas, 56 . . . . . . . Vice President--Grocery Procurement Thomas J. Timler, 38 . . . . . Vice President--Business Systems Support Group Frank D. Welch, 55 . . . . . . Vice President--Engineering and Assistant Secretary Messrs. Dickelman, Dahly, Houser and Jacobson are also members of the Company's Board of Directors. Executive officers are generally elected annually at the annual meeting of the Board of Directors held on the date of the Company's annual meeting of shareholders. Each executive officer holds office until his successor has been elected or until his prior death, resignation or removal. All of the Company's executive officers have served in the positions indicated or in other management positions with the Company for more than the last five years. Thomas H. Fox, formerly Senior Vice President--Director of Retail Operations and Robert A. Hobart, formerly Vice President--Director of Management Information Services, retired from the Company in March and January 1996, respectively. Item 2. Properties. As is customary in the Company's industry, a substantial portion of the Company's capital assets are leased. As of December 30, 1995, the Company leased 17 of its corporate supermarkets and owned 2 supermarkets. The leased supermarkets range in size from 14,900 to 41,200 square feet, with an average of 29,060 square feet. The Company generally leases its supermarkets from nonaffiliated real estate developers under long-term leases. Such leases generally contain initial terms of 15 to 20 years with several five-year renewal options. None of such existing lease arrangements contain Company repurchase options nor is the land underlying any of such supermarkets owned by the Company. No leases are scheduled to expire in 1996. As of December 30, 1995, the Company subleased 47 of its leased supermarkets, and leased 2 owned supermarkets, to independent operators who are wholesale customers of the Company and, except for one, are also franchisees. Renovations and expansions continue at 3 franchise retail operations. These renovations involve 1 addition to an existing franchise store, and 2 replacement franchise units. Additionally, two new market franchise retail operations are expected to be completed in 1996. These projects are expected to add approximately 49,000 square feet of store space. The Company owns its warehouse/distribution center and headquarters complex in Sheboygan, Wisconsin which occupies approximately nine acres of a 16-acre site owned by the Company. The facility provides approximately 30,500 square feet of space for offices and related activities, approximately 364,000 square feet of warehouse space and approximately 5,000 square feet for the Company's bottling facility. The Company also leases approximately 4,500 square feet of office space in Sheboygan under a five-year lease expiring at the end of 1997, which is used for customer support services. The Company owns approximately 22 acres of commercially zoned property in two Wisconsin communities. The Company has entered into brokerage arrangements for the development and sale of these properties. Item 3. Legal Proceedings. There are no material legal proceedings to which the Company is a party or to which any of its property is subject, other than ordinary routine litigation incidental to the Company's business. No material legal proceedings were terminated during the fourth quarter of 1995. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of the Company's shareholders during the fourth quarter of 1995. PART II Item 5. Market for the Company's Common Stock and Related Shareholder Matters. Pursuant to General Instruction G to Form 10-K ("Instruction G"), the information required by this Item is incorporated herein by reference from information included under the caption entitled "Company Business" set forth in the Company's 1995 Annual Report to Shareholders ("Annual Report"). Item 6. Selected Financial Data. Pursuant to Instruction G, the information required by this Item is incorporated herein by reference from information included under the caption entitled "Selected Five-Year Financial Highlights" set forth in the Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Pursuant to Instruction G, the information required by this Item is incorporated herein by reference from information included under the caption entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth in the Annual Report. Item 8. Financial Statements and Supplementary Data. Pursuant to Instruction G, the Balance Sheets of the Company as of December 30, 1995 and December 31, 1994, the Statements of Shareholders' Investment, Earnings and Cash Flows for each of the three fiscal years in the period ended December 30, 1995, together with the related Notes to Financial Statements (including supplementary financial data), are incorporated herein by reference from information included under the captions having substantially the same titles as set forth in the Annual Report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. PART III Item 10. Directors and Executive Officers of the Company. Pursuant to Instruction G, the information required by this Item (other than such information regarding executive officers which appears in Item 1A hereof and information required by Item 405 of Regulation S-K, which is inapplicable) is incorporated by reference from information included under the caption entitled "Election of Directors" set forth in the Company's definitive Proxy Statement for its 1995 annual meeting of shareholders ("Proxy Statement"). Item 11. Executive Compensation. Pursuant to Instruction G, the information required by this Item is incorporated by reference from information included under the caption entitled "Executive Compensation" set forth in the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. Pursuant to Instruction G, the information required by this Item is incorporated by reference from information included under the captions entitled "Principal Shareholders" and "Election of Directors" set forth in the Proxy Statement. Item 13. Certain Relationships and Related Transactions. Pursuant to Instruction G, the information required by this Item is incorporated by reference from information under the caption entitled "Compensation and Stock Option Committee Interlocks and Insider Participation" set forth in the Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) The following documents are filed as a part of this Form 10-K: Page Reference Page 1995 Annual Reference Report 1. Financial Statements. Form 10-K to Shareholders Balance Sheets as of December 30, 1995 and December 31, 1994 -- 10-11 Statements of Shareholders' Investment, Earnings and Cash Flows for the fiscal years 1995, 1994 and 1993 -- 10-12 Notes to Financial Statements -- 13-19 Report of Independent Public Accountants -- 23 The additional information referred to under "Financial Statement Schedules" below is filed as part of this Form 10-K and should be read in conjunction with the financial statements referred to above. 2. Financial Statement Schedules. Report of Independent Public F-1 -- Accountants Schedule VIII - Valuation and F-2 -- Qualifying Accounts and Reserves All other schedules have been omitted as not required or not applicable or the information required to be shown thereon is included in the financial statements and related notes. 3. Exhibits. (a) The Exhibits filed or incorporated by reference herewith are as specified in the Exhibit Index included herein. (b) No reports on Form 8-K were filed by the Company during the fourth quarter of 1995. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SCHULTZ SAV-O STORES, INC. Date: March 22, 1996 By /s/ John H. Dahly John H. Dahly Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Company in the capacities indicated as of the date indicated above. /s/ James H. Dickelman /s/ Bernard S. Kubale James H. Dickelman, Chairman of Bernard S. Kubale, Director Board, President, Chief Executive Officer and Director (Principal Executive Officer) /s/ John H. Dahly /s/ Martin Crneckiy, Jr. John H. Dahly, Executive Vice Martin Crneckiy, Jr., Director President, Chief Financial Officer and Director (Principal Financial and Accounting Officer) /s/ Howard C. Dickelman /s/ R. Bruce Grover Howard C. Dickelman, Director R. Bruce Grover, Director /s/ William K. Jacobson /s/ Michael R. Houser William K. Jacobson, Director Michael R. Houser, Director REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES TO SCHULTZ SAV-O STORES, INC.: We have audited in accordance with generally accepted auditing standards, the financial statements included in Schultz Sav-O Stores, Inc.'s annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 7, 1996. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index to financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Milwaukee, Wisconsin February 7, 1996. SCHULTZ SAV-O STORES, INC. SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE FISCAL YEARS 1995, 1994 AND 1993 Allowance for Doubtful Accounts-- Changes in the allowance for doubtful accounts are summarized as follows: 1995 1994 1993 Balance, beginning of year $1,750,000 $1,750,000 $3,050,000 Provision charged to earnings 2,079,000 526,000 4,143,000 (Writeoffs), net of recoveries (1,264,000) (526,000) (5,443,000) ---------- ---------- --------- Balance, end of year $2,565,000 $1,750,000 $1,750,000 ========= ========= ========== EXHIBIT INDEX SCHULTZ SAV-O STORES, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 30, 1995 Exhibit No. Description 3.1 Restated Articles of Incorporated, as amended. [Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988.] 3.2 By-Laws, as amended and restated as of January 24, 1991. [Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 29, 1990.] 4.1 Restated Articles of Incorporation, as amended (included as Exhibit 3.1). [Incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988.] 4.2 Rights Agreement dated December 20, 1988 between the Company and First Bank (N.A.), Milwaukee, Wisconsin. [Incorporated by reference to Exhibit 4 to the Company's Current Report on Form 8-K dated December 21, 1988.] 4.3 Amendment to Rights Agreement dated February 2, 1989 between the Company and First Bank (N.A.), Milwaukee, Wisconsin. [Incorporated by reference to Exhibit 2 to the Company's Form 8 dated February 20, 1989.] 4.4 Letter dated June 30, 1992 constituting appointment of Firstar Trust Company (f/k/a First Wisconsin Trust Company) as the successor rights agent under the Rights Agreement dated December 20, 1988, as amended. [Incorporated by reference to Exhibit 4.4 to the Company's Annual Report on Form 10-K dated March 31, 1994.] As summarized in Notes (3) and (8) of the Notes to Financial Statements incorporated by reference from the Company's 1995 Annual Report to Shareholders, as part of Parts II and IV of this Form 10-K, the Company has various outstanding long-term debt and capital lease obligations. None of such obligations individually exceeds 10% of the Company's total assets. The Company hereby agrees to furnish to the Commission, upon its request, a copy of each instrument with respect to such obligations. 10.1 Master Franchise Agreement, dated April 23, 1982, between Commodores Point Terminal Corporation and Piggly Wiggly Corporation. [Incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended January 1, 1982.] 10.2 Agreement, dated August 1, 1982, between the Company and Commodores Point Terminal Corporation. [Incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended January 1, 1982.] 10.3 Amendment to Master Franchise Agreement, dated October 15, 1982, between the Company and Piggly Wiggly Corporation. [Incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the year ended January 1, 1982.] 10.4 Form of Director/Officer Indemnity Agreement. [Incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended January 2, 1988.] This Agreement is required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of Form 10-K. 10.5 Form of Key Executive Employment and Severance Agreement, dated as of October 19, 1990, between the Company and each of James H. Dickelman, John H. Dahly, and Michael R. Houser, and dated as of January 31, 1996, between the Company and William K. Jacobson. [Incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 29, 1990.] This Agreement is required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of Form 10-K. 10.6 Membership and Licensing Agreement dated August 1, 1973 by and between Topco Associates, Inc. (Cooperative) and the Company 10.7 Articles of Incorporation of Topco Associates, Inc. (Cooperative). [Incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988.] 10.8 Bylaws of Topco Associates, Inc. (Cooperative), as amended through June 7, 1995. 10.9 1990 Stock Option Plan, as amended as of March 17, 1993. [Incorporated by reference to exhibit 10.10 to the Company's Annual Report on Form 10- K for the year ended January 2, 1993.] This Plan is required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of Form 10-K. 10.10 1995 Equity Incentive Plan. [Incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year December 31, 1994.] This Plan is required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of Form 10-K. 10.11 Schultz Sav-O Stores, Inc. Executive Benefit Restoration Plan. [Incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994.] This Plan is required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of Form 10-K. 10.12 Schultz Sav-O Stores, Inc. Officer Annual Incentive Plan. [Incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994.] This Plan is required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of Form 10-K. 13 Portions of the 1995 Annual Report to Shareholders expressly incorporated by reference into this Form 10-K. 23 Consent of Independent Public Accountants. 27 Financial Data Schedule (EDGAR version only). 99 Definitive Proxy Statement for 1995 Annual Meeting of Shareholders (filed with the Commission under Regulation 14A and incorporated by reference herein to the extent indicated in this Form 10-K). EX-10.6 2 EXHIBIT 10.6 MEMBERSHIP & LICENSING AGREEMENT EXHIBIT 10.6 MEMBERSHIP AND LICENSING AGREEMENT This agreement is entered into this 1st day of August, 1973, by and between TOPCO ASSOCIATES, INC., (COOPERATIVE), a cooperative association organized under the laws of the State of Wisconsin (hereinafter called Association), and Schultz Sav-O Stores, Inc., a corporation organized under the laws of the State of Wisconsin (hereinafter called Member), and supersedes any prior membership or licensing agreements. It is mutually agreed as follows: 1. The terms and provisions of the Articles of Incorporation and Bylaws of the Association are hereby incorporated in this agreement as is fully set forth herein. Each amendment to said Articles of Incorporation and Bylaws shall be treated as an amendment to this agreement. 2. The Association grants to the member a license to sell and distribute from its warehouse or warehouses in the following location or locations products bearing the trademarks or trade names owned by the Association set forth in Exhibit A (as the same may from time to time be amended by agreement of the parties): Sheboygan, Wisconsin Racine, Wisconsin 3. Member shall provide to the Association a list of stores serviced by the warehouses described in paragraph 2 as of June 30 and December 31 of each year. IN WITNESS WHEREOF, the parties hereto have signed this agreement. TOPCO ASSOCIATES, INC. By /s/ Robert D. Fernd SCHULTZ SAV-O STORES, INC. By /s/ Howard C. Dickelman EXHIBIT A Membership and Original: Dated August 1, 1973 Licensing Agreement Between Topco Associates, Revision: Dated May 14, 1985 Inc. and Schultz Sav-O Stores, Inc. Revision No. 2; supersedes Exhibit dated: July 18, 1974 Programs of the Association in which the Member is entitled to participate: Frozen Dairy Grocery Proc Meat, Fish & Poultry Equipment/Supplies Produce HBA/General Merchandise SBM Fresh Meat Trademarks and trade names in the following Brand Groups as established by the Membership and owned by the Association: AM Brands Group Beacon Top Crest Valu Time Elna Top Fresh Valu Pro Mega TA Brands Group Dog Club Gaylord Top Frost Food Club Topco Member Own Brand: [_] Yes [X] No EX-10.8 3 EXHIBIT 10.8 BYLAWS EXHIBIT 10.8 BYLAWS OF TOPCO ASSOCIATES, INC. (COOPERATIVE) As Amended June 7, 1995 PREFACE Topco Associates, Inc. (hereinafter referred to as "Topco") was incorporated in 1944 as a cooperative association under the Wisconsin Cooperative Association Act. Topco is completely owned by several supermarket companies, grocery wholesalers, and foodservice entities located throughout the world. Topco's corporate headquarters are in Skokie, Illinois. Topco's mission is to be the most effective and least cost provider of private label goods, perishables and value-added programs and services. Topco's further mission is to ensure that the quality of its products and services will meet consumer and owner expectations. Topco strives to accomplish these missions by leveraging the combined strengths of its owner companies so as to enhance their competitive positions and profitability. INDEX TO BYLAWS OF TOPCO ASSOCIATES, INC. Page I. General Stipulations 2 II. Ownership Definitions 2 III. Member-Owner and Topco Responsibilities 3 IV. Board, Officers and Executive Committee 4 V. Service Charges and Dividends 6 VI. Financial Information and Capital 7 Requirements; Credit Provisions VII. Meetings of Member-Owners 9 VIII. Commencement of Member-Ownership; Licensing 10 IX. Withdrawal 11 X. Indemnification; Damages 13 BYLAWS OF TOPCO ASSOCIATES, INC. ARTICLE I GENERAL STIPULATIONS 1.1 State of Incorporation: Topco Associates, Inc. (referred to herein as "Topco") is incorporated in the State of Wisconsin as a co- operative under Chapter 185, Wisconsin Statutes. 1.2 Services: The services of Topco are divided into the following nine programs, plus such additional programs as may from time to time be approved by the Board of Directors: (a) frozen foods, excluding meat, fish and poultry, (b) dairy and bakery products, (c) grocery products, (d) processed meat, fish and poultry; delicatessen, (e) equipment and supplies, (f) health and beauty care and general merchandise, (g) produce, (h) fresh meat, and (i) financial and administrative services. Segments of programs may be established as appropriate. 1.3 Fiscal Year: The fiscal year of Topco shall begin on the first day of April in each year and shall end on the last day of March in each year. 1.4 Amendments: These bylaws may be amended, repealed, or altered, in whole or in part, by a vote of two-thirds (2/3) of the full member- owners who are present at a regular or special meeting. ARTICLE II OWNERSHIP DEFINITIONS 2.1 Member-ownership in Topco shall be open to corporations, divisions of corporations, firms, partnerships, cooperative associations or other economic units who shall have been elected to member-ownership in Topco in accordance with these bylaws. The economic units that are considered to be part of a "member-owner" shall be determined in the context of the applicant's election to membership and the relationship between it and Topco. Member-ownership in Topco by a division or subsidiary does not necessarily grant member-ownership to the parent corporation or to other divisions or subsidiaries of the parent. 2.2 A member-owner shall be either a full member-owner or an associate member-owner. A full member-owner is one that is entitled to participate in at least four full programs. An associate member- owner is one that is entitled to participate in at least one full program. Each member-owner shall consist of one or more operating units which shall be specified in the letter of application. 2.3 The term "operating division" shall refer to a licensed operating unit of a member-owner. ARTICLE III MEMBER-OWNER AND TOPCO RESPONSIBILITIES 3.1 Each member-owner shall fully promote the products bearing trademarks owned by Topco for which such member-owner is licensed, in order to meet, enhance, develop and expand the demand for such products. 3.2 The Board of Directors, or the President pursuant to the authority of the Board, may establish policies and procedures whereby Topco provides to a member-owner various items under a trademark of the member-owner. Unless established otherwise, Topco shall be deemed the principal procuring agent for member-owner labeled products for categories in which the member-owner participates. The member-owner agrees to reimburse Topco for all incremental out-of-pocket costs incurred by Topco in the development and execution of procurement programs using brands of the member-owner, and to be responsible for all inventories of product and packaging bearing such member's trademarks, and any related packaging plates, provided they were authorized by the member-owner. Each member-owner shall be responsible for trademark protection for products provided by Topco pursuant to this section and shall handle all trade dress grievances which may relate to such matters. 3.3 The trademarks owned by Topco and its subsidiaries shall be used only on products purchased from or through Topco or with the specific approval of Topco. No member-owner shall sell or permit the sale of faulty merchandise bearing a trademark of Topco or subsidiary thereof without express permission from Topco. 3.4 Topco shall prevent the infringement of a trademark owned by Topco or a subsidiary if Topco believes that a trademark is being infringed, that it is necessary to take legal action and that the expense of such action is reasonably justified under the circumstances. No claim shall arise against Topco for damages which may result from a finding or decision that any trademark of Topco is invalid, unenforceable and/or not infringed. 3.5 All information, materials and/or documents distributed or provided to a member-owner shall be held and maintained in confidence by such member-owner and shall not be disclosed to any third party or operating unit of the member-owner that is not a participant in the program or segment to which the information relates, without the express, written consent of Topco. All information, materials, and/or documents distributed or provided to Topco by a member-owner shall be held in confidence by Topco and shall not be disclosed to any other member-owner or to any third party without the express, written consent of the member-owner. All such confidential information, materials, and/or documents received by any member- owner, or by Topco, shall be returned to Topco or the member owner, as the case may be, upon termination of such member-owner's membership. 3.6 Each member-owner shall report its store locations (or the store locations of its customers, in the case of a wholesaler) with such frequency as Topco may specify. A member-owner that is a foodservice distributor shall report its member or branch locations with such frequency as Topco may specify. ARTICLE IV BOARD OF DIRECTORS, OFFICERS AND EXECUTIVE COMMITTEE 4.1 Board of Directors; Executive Committee 4.1.1 Topco's business shall be managed by its Board of Directors. The Board shall exercise all powers of Topco and perform whatever actions that are not required to be performed by the member-owners pursuant to statute, the Articles of Incorporation or these bylaws. 4.1.2 The Board shall consist of a director representing each full member-owner, plus two. Each director and each alternate director shall be elected by a majority vote of the full member-owners and shall serve until the next annual meeting of member-owners or until his or her successor is elected, or removed by a majority vote of all full member-owners. 4.1.3 Each full member-owner may submit for election the name of the person designated by it as its representative on the Board, as well as that of an alternate director who may attend and vote at Board meetings in the event the primary director is unable to do so. Any vacancy existing in the Board may be filled by a majority of the directors then in office, though less than a quorum, and the directors so chosen shall hold office until the next annual election or until their successors are elected, whichever is sooner. 4.1.4 The Board shall meet annually without notice immediately after the annual membership meeting. The Board may also meet upon five days' notice from the President or Chairman. The President or Chairman shall schedule a meeting if requested by a majority of the directors in writing. 4.1.5 A quorum for all meetings of the Board is a majority of the directors in office. Action taken by a majority of the directors present at Board meetings shall constitute an act of the Board except as is otherwise specifically provided by statute, the Articles of Incorporation or the bylaws. Alternate directors attending Board meetings in place of directors shall be counted for quorum and voting requirements. 4.1.6 The Chairman of the Board may invite other representatives of one or more member-owners to attend any meeting of the Board as guests. 4.1.7 At the annual meeting, the Board shall elect the principal officers of Topco who, along with the immediate past Chairman during the year following his final year as Chairman, shall constitute the Executive Committee. Any officer or member of the Executive Committee may be removed at any time by the Board of Directors. The Executive Committee has full powers of the Board when the Board is not in session, except it may not elect officers, apportion proceeds or fill vacancies on the Board. A majority of the members of the Executive Committee constitute a quorum for the transaction of business, and the act of the majority of the members present at a meeting at which there is a quorum shall constitute an act of the Executive Committee. Any action which may be taken by the Board of Directors or by the Executive Committee at a meeting may be taken without a meeting if the action is approved in writing by all directors or all Executive Committee members. 4.1.8 The Executive Committee shall make such recommendations to the Board of Directors as it considers necessary or desirable to assure that Topco is responsive to the needs of the member-owners. Without limiting the generality of the foregoing, the Committee may periodically review the program operating budgets and financial statements of Topco, consult with Topco's outside auditors and review the scope and results of their audits, consider proposed new programs of Topco, and review the performance of Topco in present programs. The Committee may hold meetings from time to time when called by the Chairman of the Board or when requested by a majority of the Committee. Any meeting of the Executive Committee may be postponed at the request of a member of the Committee if five days' notice of such meeting has not been given. 4.1.9 At, or shortly after, each annual meeting of the Board, the Chairman of the Board shall appoint the members of committees of the Board other than the Executive Committee, each such committee to consist of three or more directors or alternate directors, and to have such name and such function as the Board or the Chairman shall specify. 4.1.10 The Board of Directors shall cause the books of Topco to be audited by a Certified Public Accountant immediately following the close of each fiscal year. The audit report, together with the report of the business operations during the previous year, shall be submitted to the members at or prior to the annual meeting. 4.2 Officers 4.2.1 The principal officers of Topco shall be a Chairman of the Board, a President, two or more Vice Presidents, a Secretary-Treasurer, and may include a Vice Chairman of the Board. All principal officers shall be directors. The principal officers shall be elected by the Board of Directors at each annual meeting and shall hold office until a successor is elected. No person who is not an employee of Topco shall be eligible to serve more than four consecutive one-year terms as a principal officer, except that the person elected as Chairman of the Board may serve as such even though his or her term constitutes a fifth or sixth one-year term. The principal officers elected by the Board shall perform such duties as may from time to time be prescribed by the Board of Directors and the Chairman of the Board. 4.2.2 The President may from time to time, with the approval of the Board of Directors, appoint from the ranks of the employees of Topco, such officers as he or she may deem necessary. Such appointed officers shall hold office for such period, have such authority, and perform such duties as the President prescribes, and may be removed at any time by the Board of Directors or the President. 4.2.3 The Chairman of the Board shall be the principal representative of the member-owners of Topco and shall preside at all meetings of the member-owners, of the Board of Directors and of the Executive Committee. He or she shall provide general operating direction to the President and shall perform such other duties as are assigned to him or her by the Board of Directors. 4.2.4 The President shall be the chief executive officer of Topco. He or she shall, with the guidance of the Chairman of the Board, direct Topco's operations in conformity with the policies established by the Board of Directors. The President shall establish policies and procedures relating to the operations of Topco including, without limitation, such matters as member forecasts and commitments, methods of procurement, price averaging and member credit. The President shall insure that adequate notice is given for all meetings of member-owners, the Board and the Executive Committee. ARTICLE V SERVICE CHARGES AND DIVIDENDS 5.1 Prior to the beginning of each fiscal year, the Board of Directors shall consider, modify if necessary, and approve the annual budget which has been recommended by the Executive Committee. The budget shall be recovered through any combination of base service charges, markups of product cost, and other income received by Topco as may be approved by the Board of Directors. The Board of Directors may, at any time before the end of fiscal year, modify the budgets. 5.2 Each member-owner's base service charge for a program or program segment to which a base service charge is applicable shall be determined by applying a regressive scale of percentages, to be approved annually by or pursuant to the authority of the Board of Directors, to its purchases of products in the program or segment. The President with the approval of the Executive Committee may establish minimum base service charges for each program or program segment. Reductions may be made in a member-owner's base service charge as a result of automated order placement and such other procedures as the Board of Directors may recognize from time to time as contributing to reductions in the cost of Topco. A member- owner's base service charges may be increased to cover any additional costs incurred as a result of Topco's procurement of products under the member-owner's own trademark. 5.3 At least once annually, the Board of Directors shall return patronage dividends to member-owners based on their purchases of the product to which such patronage dividends are attributable. Adjustments may be made as appropriate to reflect participation. Patronage dividends shall also be returned to third parties in the case of a dividend attributable to a product which, at the request of a member-owner, and with the approval of Topco management, is sold to such third party or parties and resold to such, member- owner. 5.4 Patronage dividends shall be distributed by means of cash or qualified written notices of allocation, as the Board of Directors deems appropriate, provided that the amount distributed in the form of qualified written notices of allocation shall not exceed 80% of the total amount distributable. Each member-owner consents and agrees that the amount of any patronage dividend distributed to it by a qualified written notice of allocation (as defined in section 1388 of the Internal Revenue Code of 1986, as amended from time to time, or in any comparable or substitute provision) shall be included in the gross income of such member-owner at its stated dollar amount in the taxable year of such member-owner in which such qualified written notice of allocation is received by such member- owner. Qualified written notices of allocation shall (a) be redeemable only upon termination of owner-membership or as the Board of Directors may determine; (b) provide that upon termination of owner-membership, or if the holder becomes insolvent, or any default shall occur in the payment of any debt due to Topco, the amount represented thereby may be retained by Topco until 91 days following the payment of all debts due from the member-owner to Topco, or may be used to offset or pay down any debt from the holder to Topco, whether or not such debts shall then be due; (c) bear no interest; and (d) be subordinated in right of payment to all indebtedness to Topco. 5.5 Topco shall have the right to set off the amount due from it to a member-owner evidenced by a qualified notice of allocation against any claim Topco may have against such member-owner. No member-owner may assign, sell, transfer or subject to any lien or encumbrance any patronage dividend distributed to it in the form of a qualified written notice of allocation. ARTICLE VI FINANCIAL INFORMATION AND CAPITAL REQUIREMENTS; CREDIT PROVISIONS 6.1 Financial Information or Credit Enhancement: Within 90 days of the end of its fiscal year, each member-owner shall submit to Topco its annual financial statements, including statements of income, stockholders' equity, changes in financial position and notes, and a balance sheet. All annual financial statements shall be certified by a certified public accountant. In addition, each member-owner shall report to Topco its sales volume with such frequency and in such detail as the Board of Directors, or the President pursuant to the authority of the Board, may direct. Each member-owner shall also provide to Topco, on a quarterly basis, unaudited financial statements including balance sheets and statements of income and expenses. Topco may waive the foregoing requirements if the member- owner provides credit enhancement arrangements satisfactory to Topco. 6.2 Capital Requirements. 6.2.1 Each member-owner shall own common stock of Topco, which shall be purchased for $100 per share. The number of shares of common stock required to be owned by a member- owner shall be fixed and may from time to time be changed by the Board of Directors. 6.2.2 Topco's capital requirements shall consist of base capital and program capital. 6.2.3 Topco's base capital requirements shall be provided by the purchase of common stock Each member-owner shall have an equal share of the base capital requirements and own an equal number of shares of common stock of Topco, except that an associate member-owner shall be required to own one-fourth of the number of shares that would be required of it were it a full member-owner, multiplied by the number of programs in which it participates, but the number of shares shall not exceed the number that would be required of a full member-owner. Shares required to be purchased by a new member-owner shall be purchased in two or more installments, the amount and timing of which shall be prescribed by or pursuant to the authority of the Board of Directors. 6.2.4 The Board of Directors shall determine separate capital requirements for each of the programs of Topco to finance Topco's inventory of products and receivables and other capital costs related to such programs. These program capital requirements may be provided by amounts represented by qualified written notices of allocation issued on account of patronage dividends as described in Article V. If the aggregate program capital requirements provided by qualified written notices of allocation that are applicable to a member-owner exceed 80% of the patronage dividends due to such member-owner, the excess shall be provided by an interest-free deposit by such member-owner which shall be refunded at such time as the patronage dividends due to such member-owner are adequate to meet such requirements. 6.2.5 After the beginning of a fiscal year, the Board of Directors may determine that Topco's program capital requirements shall be changed. The amount of such change and its allocation among programs shall be determined by the Board. 6.2.6 The Board of Directors may, directly or through one or more committees, take such steps as it deems appropriate to protect Topco against potential loss arising out of the default or financial failure of a member-owner. Such steps may include, but are not limited to, a refusal to extend credit, the requirement of credit enhancements (such as letters of credit, cash deposits, and third-party guarantees), the establishment of credit limits, and the non-redemption of qualified written notices of allocation issued to a member-owner pursuant to these bylaws, without regard to the redemption of similar notices issued to other member-owners at the same time. 6.2.7 Each member-owner shall be responsible for paying its debts to Topco, including without limitation the purchase price for products purchased from Topco, as well as service and other charges due to Topco, in accordance with credit terms established from time to time by Topco. The failure of a member-owner to make such payment shall constitute a default under these bylaws. 6.2.8 Each member-owner shall be responsible for, and shall be deemed to have guaranteed the prompt payment of, all obligations to Topco or its suppliers payable by a subsidiary, affiliate, or other third party to whom product or packaging purchased from or through Topco is supplied at the request of such member-owner, licensed operating division, or any affiliate thereof. Subrogation claims of a member-owner against an account debtor arising out of payments pursuant to such guarantee shall be subordinate to direct claims by Topco or its supplier(s). 6.2.9 Capital requirements and base service charges for member- owners that include more than one subsidiary, division or other licensed unit may be set on the basis that all such units together are a single member-owner, or on the basis that some or all of such units are separate member-owners, as determined by Topco. ARTICLE VII MEETINGS OF MEMBER-OWNERS 7.1 The annual meeting of the member-owners of Topco shall be held within eight-and-one-half (8 1/2) months after the close of the fiscal year, at such place and on such date as the Board of Directors or the President shall, upon proper notice, designate. 7.2 Notice of the annual meeting of member-owners and of any special meeting of members-owners shall be sent to each member-owner (except a member-owner who participates only in the financial and administrative services program) by mail, addressed to the last known post office address, at least ten (10) days before such meeting. Notice of special meetings shall state the purpose of such meetings. 7.3 Each member-owner, except a member-owner who participates only in the financial and administrative services program, shall have the right to attend each member-owners' meeting. The representative or delegate of each full member-owner at member-owners' meetings shall be that member-owner's representative on the Topco Board of Directors, or in his or her absence, the alternate director from that member-owner. An associate member-owner entitled to attend a member-owners' meeting may be represented by any representative thereof designated by it. 7.4 Any matters not requiring approval by the member-owners shall be considered or determined by the Board, Executive Committee, or by Topco as specified in these bylaws. 7.5 A quorum at a member-owners' meeting shall be a majority of the full member-owners at that time. A majority of the quorum shall decide any question posed at such meeting, unless otherwise specified by these bylaws, the Articles of Incorporation or statute. 7.6 Each full member-owner shall be entitled to cast one vote at each meeting regardless of the number of shares held. 7.7 Any action which may be taken at a meeting may be taken without a meeting if all member-owners entitled to vote approve the action in writing. 7.8 Any meeting of the member-owners may be held jointly with a meeting of the Board of Directors. At any such joint meeting, each member- owner shall be entitled to have one representative present. In addition, persons invited to attend the meeting as guests pursuant to Section 4.1.6 shall be entitled to attend any such joint meeting. ARTICLE VIII COMMENCEMENT OF MEMBER-OWNERSHIP; LICENSING 8.1 Applications for member-ownership shall be in writing, shall specify the programs and program segments in which the proposed member-owner wishes to participate, and shall contain an agreement to be bound by these bylaws and to purchase the number of shares of common stock required by these bylaws. The application for member-ownership shall set forth: (a) the trademarks of Topco and its subsidiaries, if any, for which the member-owner wishes to be licensed, and any limitations on such license; (b) the location of the place or places of business for which the trademarks for Topco will be licensed; (c) if applicable, that the member-owner wishes to purchase from or through Topco products under the member-owner's own trademark; (d) the programs and segments of programs of Topco in which the member- owner desires to participate; (e) the warehouse locations to which the member-owner wishes Topco to ship product; (f) the territory of prime responsibility of the member-owner, if any; and (g) any other conditions attaching to the member-ownership. 8.2 The application for member-ownership shall be submitted to the Board of Directors or full member-owners for approval. Such approval shall become final upon the affirmative vote of three-fourths of the directors or full member-owners, entitled to vote, either at a meeting or by mail ballot. 8.3 The Board of Directors or full member-owners, may set conditions of member-ownership at the time that an application is approved. The Board of Directors or full member-owners, may cancel any or all of such conditions at any time. 8.4 The (i) trademarks of Topco and its subsidiaries for which a member- owner is licensed, (ii) warehouse locations to which Topco will ship or cause to be shipped products, (iii) Topco programs and segments of programs in which a member-owner is entitled to participate, (iv) right of the member-owner, if any, to purchase through Topco, products under the member-owner's own trademark, and (v) conditions attaching to the ownership, are those that are (a) set forth In an agreement between the member-owner and Topco, or (b) set forth in the application for membership of the member-owner as approved by the Board or full member-owners, or (c) designated in writing by Topco to the member-owner. A member-owner's right with respect to a warehouse location shall automatically terminate if and when such member-owner no longer operates a warehouse at such location. Except as provided in these bylaws, a member-owner's rights with respect to the foregoing may not be withdrawn or modified without its agreement. 8.5 An operating unit that is acquired by a member-owner (as distinct from a store or group of stores that are in the same geographic area of one or more licensed units of the member-owner and that are to be served by a warehouse owned by the member-owner prior to acquisition) is not part of that member-owner for purposes of these bylaws unless the member-owner makes application with respect to such operating unit and the application is approved by the Board of Directors or full member-owners. ARTICLE IX WITHDRAWAL 9.1 A member-owner may withdraw from member-ownership voluntarily or may be required by Topco to withdraw. Withdrawal from member-ownership cancels any license from Topco to the member-owner. 9.2 Required Withdrawals 9.2.1 In the event that a member-owner shall become subject to the jurisdiction of a bankruptcy court and the bankruptcy trustee rejects the agreement between the member-owner and Topco, the member-owner shall be deemed to have withdrawn on the date of such rejection. 9.2.2 A member-owner may be required to withdraw for any of the following reasons: (a) If the member-owner should violate the terms and conditions of, or default under, any contract between it and Topco, Topco's bylaws or Topco's Articles of Incorporation; (b) If the member-owner should commit any act or pursue any course of conduct injurious to the welfare of Topco, including but not limited to failure to pay its debts to Topco or to suppliers for products purchased through Topco; and (c) If a member-owner should misrepresent or misuse any product bearing a trademark owned or controlled by Topco, or handle, utilize, sell, and/or offer to sell such a product in a manner injurious to the goodwill which attaches to said trademark or to the reputation of Topco. 9.2.3 If a member-owner undergoes a change of control as defined in section 9.4.3, Topco may require that the member-owner withdraw. A member-owner contemplating a transaction which will result in a change of control may request Topco to waive its right to require withdrawal in the event a specified transaction is consummated. The Board of Directors shall act upon such a request within thirty (30) days of its receipt. The vote on such request may be taken either at a meeting or by mail ballot. If the Board waives Topco's right to terminate, such waiver shall be binding upon Topco. 9.2.4 Services After Withdrawal: A member-owner who has been required to withdraw for a reason specified in section 9.2.2 shall not be entitled to purchase any products from or through Topco after the date of withdrawal. A member- owner who withdraws voluntarily or is required to withdraw because of a change of control shall be entitled to service after the date of withdrawal in accordance with section 9.7. 9.3 Withdrawal From Programs. A member-owner (or any of its licensed units) may also withdraw from participation in specific programs by giving Topco written notice of such withdrawal on or prior to its effective date, which shall be at the end of any calendar month. The member-owner shall be entitled to service in a program from which it has withdrawn in accordance with section 9.7. 9.4 Required Withdrawal: Topco shall follow the procedures herein described in requiring a withdrawal from member-ownership. 9.4.1 Within ninety (90) days of the date Topco obtains knowledge of a basis for withdrawal, Topco may institute withdrawal procedures by giving written notice to the member-owner describing such reason for requiring withdrawal and notifying such member-owner of the time and place of the meeting of the Board of Directors at which such required withdrawal will be considered. 9.4.2 At the meeting at which the Board of Directors considers the withdrawal, the member-owner shall have the tight to be heard both in person and by counsel. If a three-fourths majority of the directors present at such a meeting votes to require withdrawal: (a) the member-owner shall be deemed to have withdrawn on the date set by the Board; and (b) the member-owner shall cease to be a stockholder as of the date of withdrawal and Topco shall purchase the stock of such member-owner in the manner set forth in this article. The date of withdrawal shall be set by the Board and shall be within three (3) months of the date on which the vote to withdraw is taken. 9.4.3 Definition of Change of Control: A change in control shall take place if the ownership of either the net assets, a majority of the voting stock or a majority of the voting partnership interests in a member-owner are acquired, whether by operation of law or otherwise, by persons outside the controlling group. The controlling group shall be all owners of either a sole interest, a voting partnership interest, or voting stock in a member-owner on June 9, 1992 or the date of admission to membership, whichever is later. The controlling group shall also include the heirs and legatees of such members-owners, subject to the following: (a) in case Topco shall obtain knowledge of a change in control and shall not within 90 days thereafter institute termination procedures, or shall institute termination procedures but shall not vote to terminate the membership, the controlling group shall thereafter be the owners of the sole interest, the voting partnership interests or the voting stock of the member- owner immediately after the event that constituted such change in control; and (b) for the purpose of determining whether the ownership of the majority of the voting stock of a member-owner has been acquired by persons outside the controlling group, where the member-owner is a corporation and voting stock is held by more than 300 persons, the shares held by persons who own less than 2% of such shares and who are not directors, officers or employees of the member-owner, or affiliated with or related to persons who own 2% or more of such shares or who are directors, officers or employees of the member-owner, shall be excluded in determining the number of shares of the member- owner that are outstanding and the number that are owned by persons inside and outside of the controlling group. 9.5 Procedure for Redeeming Stock: Promptly after the date of withdrawal, the former member-owner shall deliver to Topco its certificates evidencing common stock in Topco in return for an appropriate receipt. Unless the common stock owned by the member- owner in Topco is held by Topco pursuant to a valid security agreement, Topco shall pay the member-owner $100.00 for each share of common stock owned by the member-owner at the time of termination less the amount of debts of the member-owner to Topco which have not been paid including, but not limited to, debts as to which the member-owner has received a discharge under federal or state bankruptcy or insolvency laws. The amount, if any, payable to the member-owner shall be paid 91 days following the payment of all debts due from the member-owner to Topco and may offset and be applied to the payment of any debt of the member-owner to Topco. Nothing contained in this paragraph shall be construed to give a terminated member-owner a preference upon the assets of Topco over the other member-owners or to give such terminated member-owner any of the rights of a shareholder in Topco. Amounts due to a terminated member-owner under this section shall not bear interest. 9.6 A member-owner who withdraws from any program or program segment of Topco may continue member-ownership provided that after such withdrawal the member-owner continues to meet the eligibility requirements set forth in these bylaws. Withdrawal may commence at the end of any calendar month which is twelve months or more after such member-owner began its participation in such program or segment, by giving to Topco written notice of its election to withdraw on or prior to its effective day. 9.7 A member-owner who withdraws voluntarily from Topco or from a program or program segment or is required to withdraw from Topco because of a change of control, shall pay Topco its base service charges until the effective date of withdrawal and, unless the withdrawal relates only to a program segment in which the member- owner has participated for less than two years, an additional amount equal to (a) three times 175% of the monthly average of the member- owner's base service charges for the program or segment, in the case of the produce, fresh meat or equipment and supplies programs (payable on the date of withdrawal) and (b) twelve times 175% of the monthly average of the member-owner's base service charges for the program or segment in the case of any other program (payable in four equal quarterly installments, the first of which shall be due on the date of withdrawal), and shall have the right to continue to participate in such program or segment during such three or twelve month period. The monthly averages shall be calculated for the most recent twelve month period preceding the effective date of withdrawal, including the month in which such withdrawal occurs. A member-owner whose commitments to Topco (with respect to product in a program or segment from which such member-owner has withdrawn) beyond the three or twelve month period, shall be responsible to Topco with respect to such commitments and shall also pay additional service charges beyond such three or twelve month period in an equitable amount as determined by Topco. The Board of Directors may impose such conditions it deems advisable to limit the exercise by member-owners of their rights to withdrawal from programs or segments of programs of Topco in order to ensure that any withdrawals from a particular program or segment will take place gradually. 9.8 A member-owner or operating division thereof which has not made purchases through Topco of any Topco program, segment or brand for a period of twelve consecutive months shall be considered to have withdrawn from that program, segment or brand effective with the last recorded purchase. Such member-owner shall pay Topco any additional amount due pursuant to section 9.7 promptly after the expiration of the twelve month period. ARTICLE X INDEMNIFICATION; DAMAGES 10.1 Indemnification: Each present or former director or officer of Topco shall be indemnified by Topco in accordance with and to the full extent authorized by the provisions of the Wisconsin Co-operative Association Act as it may from time to time be amended. 10.2 Damages: If a member-owner violates a bylaw or breaches a provision of his or her membership and licensing agreement, Topco shall have a claim against said member-owner for any damages resulting therefrom and for such other relief as the court deems appropriate. These rights shall be in addition to the other remedies granted herein to Topco. EX-13 4 EXHIBIT 13 PAGES OF ANNUAL REPORT EXHIBIT 13 [Page 3 of Annual Report] Selected Five-Year Financial Highlights Fiscal Year (a)(b) 1995 1994 1993 1992 1991 (Dollars and shares in thousands, except per share data) Statements of earnings data: Net sales . . . . . $439,646 $446,362 $469,577 $490,403 $480,410 Earnings before income taxes . . . 9,500 8,653 7,519 4,139 4,137 Provision for income taxes . . . 3,660 3,252 2,767 1,622 1,626 Net earnings . . . 5,840 5,401 4,752 2,517 2,511 Per share of common and equivalent shares Earnings . . . . 1.20 1.02 0.86 0.44 0.43 Cash dividends . 0.22 0.10 0.08 0.07 0.06 Weighted average common and equivalent shares(c) 4,981 5,257 5,489 5,690 5,858 Balance sheet data (at fiscal year-end): Working capital . . $24,855 $21,197 $20,805 $22,091 $12,415 Total assets . . . 87,034 89,099 83,391 84,796 82,118 Current maturities of long-term debt and current obligations under capital leases . . 1,114 1,037 1,050 1,243 1,457 Long-term debt . . 3,719 4,056 1,035 1,288 1,742 Capital lease obligations . . . 13,268 14,046 14,979 15,980 16,770 Total shareholders' investment . . . . 43,288 41,457 41,501 38,864 37,948 Other data: Capital additions . $3,545 $3,640 $8,528 $1,718 $3,940 Depreciation and amortization . . . 4,467 4,654 4,861 5,625 6,071 NOTES: (a) The Company's fiscal year ends on the Saturday closest to December 31. The 1992 fiscal year was a 53-week period. All other fiscal years presented were 52-week periods. (b) All data should be read in conjunction with the Company's audited financial statements and "Management's discussion and analysis of financial condition and results of operations" as set forth in this Annual Report. (c) The weighted average common and equivalent shares have been retroactively adjusted for the two-for-one stock split, effected in the form of a 100% stock dividend, on September 15, 1995. [Pages 10 to 12 of Annual Report] Balance sheets As of December 30, 1995 and December 31, 1994 Assets 1995 1994 Current assets: Cash and equivalents . . . . . . $14,424,000 $14,310,000 Receivables, less allowance for doubtful accounts of $2,565,000 and $1,750,000, respectively . . . . . . . . . . 5,562,000 6,838,000 Inventories . . . . . . . . . . . 20,458,000 21,327,000 Other current assets . . . . . . 5,025,000 2,441,000 Amounts currently receivable under capital sublease agreements . . . . . . . . . . . 581,000 518,000 Deferred income taxes . . . . . . 3,504,000 3,875,000 ---------- ---------- Total current assets . . . . . . 49,554,000 49,309,000 ---------- ---------- Amounts receivable under capital sublease agreements, less current portion . . . . . . . . . . . . . 9,361,000 9,943,000 Leased property under capital leases, less accumulated amortization . . . . . . . . . . . 3,089,000 3,372,000 Other noncurrent assets . . . . . . 2,203,000 1,331,000 Property and equipment, net . . . . 22,827,000 25,144,000 ---------- ---------- Total assets . . . . . . . . . . . $87,034,000 $89,099,000 ========== ========== Liabilities & shareholders' investment 1995 1994 Current liabilities: Accounts payable . . . . . . . . $12,340,000 $11,356,000 Accrued liabilities- Employee benefits . . . . . . . 2,440,000 2,242,000 Retail repositioning reserve . . 1,145,000 5,046,000 Insurance related . . . . . . . 2,805,000 2,416,000 Other . . . . . . . . . . . . . 4,855,000 6,015,000 Current maturities of long-term debt . . . . . . . . . . . . . . 337,000 323,000 Current obligations under capital leases . . . . . . . . . . . . . 777,000 714,000 ---------- ---------- Total current liabilities . . . . 24,699,000 28,112,000 ---------- ---------- Deferred income taxes . . . . . . . 2,060,000 1,428,000 Long-term debt . . . . . . . . . . 3,719,000 4,056,000 Long-term obligations under capital leases . . . . . . . . . . . . . . 13,268,000 14,046,000 Shareholders' investment . . . . . 43,288,000 41,457,000 ---------- ---------- Total liabilities and shareholders' investment . . . . . . . . . . . . $87,034,000 $89,099,000 ========== ========== The accompanying notes to financial statements are an integral part of these balance sheets. Statements of shareholder's investment For the fiscal years 1995, 1994 and 1993
Preferred Stock Common Stock Additional $3.00 Par $0.05 Par Paid-in Treasury Stock Share- Retained holders' Shares Amount Shares Amount Capital Earnings Shares Amount Investment Balance, January 2, 1993 . . . . . . . . 3,000 $300,000 2,916,785 $146,000 $12,680,000 $26,989,000 (99,066) ($1,251,000) $38,864,000 Net earnings . . . . 4,752,000 4,752,000 Cash dividends declared: Preferred stock- $3.00 per share . Common stock- (9,000) (9,000) $0.08 per share . (436,000) (436,000) Exercise of stock options . . . . . . 6,787 91,000 91,000 Acquisition of treasury stock . . . (130,654) (1,761,000) (1,761,000) ----- -------- --------- -------- ---------- ---------- -------- --------- ----------- Balance, January 1, 1994 . . . . . . . . 3,000 300,000 2,916,785 146,000 12,680,000 31,296,000 (222,933) (2,921,000) 41,501,000 Net earnings . . . . 5,401,000 5,401,000 Cash dividends declared: Preferred stock- $3.00 per share . (9,000) (9,000) Common stock- $0.10 per share . (509,000) (509,000) Exercise of stock options . . . . . . 29,549 433,000 433,000 Acquisition of treasury stock . . . (302,167) (5,360,000) (5,360,000) ------ --------- --------- ------- ----------- ---------- --------- ----------- ---------- Balance, December 31, 1994 . . . . . . . . 3,000 300,000 2,916,785 146,000 12,680,000 36,179,000 (495,551) (7,848,000) 41,457,000 Net earnings . . . . 5,840,000 5,840,000 Cash dividends declared: Preferred stock- $3.00 per share . (9,000) (9,000) Common stock-$0.22 per share . . . . (1,038,000) (1,038,000) Exercise of stock options . . . . . . 168,000 53,359 487,000 655,000 Acquisition of treasury stock . . . (152,294) (3,475,000) (3,475,000) Repurchase of preferred stock . . (2,841) (284,000) 142,000 142,000 Two-for-one stock split effected in the form of a 100% stock dividend . . . 2,916,785 146,000 (117,000) (585,486) (29,000) -- ------ ------- --------- -------- --------- ---------- ---------- ----------- ---------- Balance, December 30, 1995 . . . . . . . . 159 $16,000 5,883,570 $292,000 $12,990,000 $40,855,000 (1,179,972) ($10,865,000) $43,288,000 ====== ======= ========= ======== =========== ========== ========== =========== ==========
The accompanying notes to financial statements are an integral part of these statements of shareholders' investment. Statements of earnings For the fiscal years 1995, 1994 and 1993
1995 1994 1993 Net sales . . . . . . . . . . . $439,646,000 $446,362,000 $469,577,000 Costs and expenses: Cost of products sold . . . Operating and administrative 369,130,000 372,867,000 388,289,000 expenses . . . . . . . . . . . 61,034,000 64,401,000 73,062,000 ---------- ---------- ---------- Operating income . . . . . . . 9,482,000 9,094,000 8,226,000 Interest income . . . . . . . . 944,000 453,000 131,000 Interest expense . . . . . . . (926,000) (894,000) (838,000) ---------- ---------- ----------- Earnings before income taxes . 9,500,000 8,653,000 7,519,000 Provision for income taxes . . 3,660,000 3,252,000 2,767,000 ---------- ---------- ---------- Net earnings . . . . . . . . . $5,840,000 $5,401,000 $4,752,000 ========== ========== ========== Earnings per common and equivalent share . . . . . . . $1.20 $1.02 $0.86 ======= ====== =======
The accompanying notes to financial statements are an integral part of these statements of earnings. Statements of cash flows For the fiscal years 1995, 1994 and 1993
1995 1994 1993 Cash flows from operating activities: Net earnings . . . . . . . . $5,840,000 $5,401,000 $4,752,000 Adjustments to reconcile net earnings to net cash provided by operating activities- Depreciation and amortization. . . . . . . 4,467,000 4,654,000 4,861,000 Deferred income taxes . . . 1,003,000 (1,333,000) (1,261,000) Changes in assets and liabilities- Decrease in receivables . . 1,276,000 1,504,000 1,028,000 Decrease (increase) in inventories . . . . . . 869,000 (7,000) (213,000) (Increase) decrease in other current assets. . . . . . (2,584,000) 295,000 75,000 Increase (decrease) in accounts payable. . . . . 984,000 (830,000) (604,000) (Decrease) increase in accrued liabilities . . . (4,099,000) 4,739,000 (1,223,000) ---------- ----------- --------- Net cash flows from operating activities . . . . . . . . . . 7,756,000 14,423,000 7,415,000 ---------- ----------- --------- Cash flows from investing activities: Expenditures for property and equipment . . . . . . . . . (3,545,000) (3,640,000) (8,528,000) Proceeds from asset sales . . 599,000 538,000 2,866,000 Receipt of principal amounts under capital sublease agreements . . . . . . . . . 518,000 564,000 578,000 Proceeds from maturity of short-term investments . . . -- 2,953,000 -- Investment in short-term securities . . . . . . . . . -- -- (2,953,000) ----------- ---------- ---------- Net cash flows from investing activities . . . . . . . . . . (2,428,000) 415,000 (8,037,000) ---------- --------- ----------- Cash flows from financing activities: Payment for acquisition of treasury stock . . . . . . . (3,475,000) (5,360,000) (1,761,000) Payment of cash dividends . . (1,047,000) (518,000) (445,000) Principal payments on capital lease obligations . . . . . (714,000) (797,000) (790,000) Proceeds from exercise of stock options . . . . . . . 487,000 433,000 91,000 Principal payments on long-term debt . . . . . . . (323,000) (300,000) (453,000) Repurchase of preferred stock (142,000) -- -- Net cash flows from financing activities . . . . . . . . . . (5,214,000) (6,542,000) (3,358,000) ----------- ----------- ---------- Cash and equivalents: Net increase (decrease) . . . 114,000 8,296,000 (3,980,000) Balance, beginning of year . 14,310,000 6,014,000 9,994,000 ----------- ----------- --------- Balance, end of year . . . . $14,424,000 $14,310,000 $6,014,000 =========== =========== ===========
The accompanying notes to financial statements are an integral part of these statements of cash flows. [Pages 13 to 19 of Annual Report] Notes to financial statements for the fiscal years 1995, 1994 and 1993 (1) Description of Business- The Company is engaged in the food distribution business through franchised and corporate retail supermarkets and as a supplier to independent food stores. The supermarkets and food stores supplied by the Company are located in eastern Wisconsin and northeastern Illinois. All franchise and corporate stores operate under the name of Piggly Wiggly/R/. (2) Accounting Policies- (a) Accounting periods- The Company's fiscal year ends on the Saturday closest to December 31. The 1995, 1994 and 1993 fiscal years were 52-week periods ended December 30, 1995, December 31, 1994 and January 1, 1994, respectively. (b) Cash and equivalents- Cash and equivalents consist of demand deposits at commercial banks and highly liquid investments with a maturity of three months or less when purchased. Cash equivalents are stated at cost which approximate market value. (c) Inventories- Inventories, substantially all of which consist of food, groceries and related products for resale, are stated at the lower of cost or market value. Cost is determined primarily on the last-in, first-out (LIFO) method. For meat and produce, cost is determined on the first-in, first- out (FIFO) method. At December 30, 1995 and December 31, 1994, 83% and 82%, respectively, of all inventories were accounted for under the LIFO method. The excess of replacement or current cost over the stated LIFO cost of inventory was $9,631,000 and $9,451,000 at December 30, 1995 and December 31, 1994, respectively. (d) Other current assets- Other current assets consist of the following: 1995 1994 Land and building for resale . $2,389,000 $ 734,000 Prepaid expenses . . . . . . . 657,000 1,092,000 Retail systems for resale and other assets . . . . . . . . . 1,979,000 615,000 --------- --------- Other current assets . . . . . $5,025,000 $2,441,000 ========= ========= (e) Property and equipment, net- Property and equipment are stated at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the assets. Facility remodeling and upgrade costs on leased stores are capitalized as leasehold improvements and are amortized over the shorter of the remaining lease term or the useful life of the asset. Upon disposal, the appropriate asset cost and accumulated depreciation are retired. Gains and losses on disposition are included in earnings. Property and equipment, net, consisted of the following: 1995 1994 Land and buildings . . . . . . $18,508,000 $18,441,000 Leasehold improvements . . . . 5,566,000 6,027,000 Equipment and fixtures . . . . 31,186,000 32,264,000 ---------- ---------- 55,260,000 56,732,000 Less accumulated depreciation and amortization . . . . . . . (32,433,000) (31,588,000) ---------- ---------- Property and equipment, net . . $22,827,000 $25,144,000 ========== ========== (f) Retail repositioning reserve- Estimated repositioning and termination expenses associated with the closure, replacement or disposal of stores, consisting primarily of lease payments, charges to reduce assets to net realizable value and severance payments, are charged to operating and administrative expenses upon the decision to close, replace or dispose of a store as soon as the amounts are reasonably estimable. Due to inherent uncertainties in estimating these repositioning and termination costs, it is at least reasonably possible that the Company's estimates may change in the near term. The reserves recorded at December 31, 1994 relating to the Palatine, Illinois and other corporate supermarkets approximated actual cash payments in 1995. (g) Earnings per common and equivalent share- Earnings per common and equivalent share is computed by dividing net earnings by the weighted average number of common shares outstanding during each year plus common stock equivalents. Net earnings, for purposes of the earnings per share computation, is determined after taking into account all of the preferred dividend requirements. For fiscal 1995, earnings per share increased by the excess of the aggregate par value of the 2,841 shares of preferred stock over the repurchase price tendered pursuant to the Company's redemption offer. Common stock equivalents result from the assumed exercise of outstanding stock options and affect earnings per share when they have a dilutive effect. Primary and fully diluted earnings per share are the same for all years. All historical share, per share amounts, stock option data and market prices of the Company's common stock appearing in the financial statements and notes thereto have been retroactively adjusted for the stock split. The number of common and equivalent shares utilized in the per share calculations were 4,981,000, 5,257,000 and 5,489,000 in fiscal 1995, 1994 and 1993, respectively. (h) Supplementary disclosure of cash flow information- Interest and taxes paid included in the Company's cash flow from operations were as follows: 1995 1994 1993 Interest paid . . . . . $ 902,000 $ 918,000 $ 843,000 Taxes paid . . . . . . 3,368,000 2,835,000 4,177,000 (i) 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. (j) Store pre-opening costs- Costs associated with the opening of new stores, consisting primarily of advertising, supplies, occupancy and payroll, are charged to operating and administrative expenses as incurred. Depreciation and amortization of property and equipment, and leasehold improvements begin in the period a store begins operations. (k) Standards on impairment of long-lived assets- In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", which the Company is required to adopt no later than the first quarter of fiscal 1996. Under this pronouncement, the Company is required to assess the recoverability of the carrying amount of long-lived assets currently held or assets committed to a plan of disposal resulting from various events or changes in circumstances. The Company does not anticipate that the adoption of this standard will have a material impact on the financial statements. (l) Advertising costs- Costs incurred for producing and communicating advertising are expensed when incurred. (m) Reclassifications- Certain 1994 and 1993 amounts previously reported have been reclassified to conform to the 1995 presentation. (3) Long-Term Debt- The Company has a loan agreement providing unsecured revolving credit facilities totaling $16,000,000 through April 30, 1997. This arrangement provides for borrowings at rates not to exceed the prime rate. There are no compensating balance requirements. There were no borrowings outstanding under this agreement during 1995 and 1994. At December 30, 1995, the fair value of the financial instruments approximated carrying value. Long-term debt consists of the following: 1995 1994 Mortgage note, 9.675%, due in monthly installments of $33,026 including interest due through June 2012 . . . . . . . . . . . . $3,274,000 $3,344,000 Term note, 9.91%, due in quarterly installments of $55,000 through June 1998 . . . . . . . . . . . . 515,000 735,000 Land contract, 10.0%, due in annual installments of $33,333 through March 2003 . . . . . . . . . . . . 267,000 300,000 --------- --------- 4,056,000 4,379,000 Less current maturities . . . . . . (337,000) (323,000) --------- --------- Long-term debt . . . . . . . . . . $3,719,000 $4,056,000 ========== ========= The revolving credit and term note agreements contain various covenants including, among others, the maintenance of defined working capital, net worth of $36,000,000, certain debt-equity ratios, restrictions against pledging of or liens upon certain assets, mergers, significant changes in ownership and limitations on restricted payments. As of December 30, 1995, $3,240,000 of retained earnings were available for restricted payments, including cash dividends and stock repurchases. The total amount of long-term debt due in each of the fiscal years 1996 through 2000 will be $337,000, $345,000, $209,000, $144,000 and $156,000, respectively, and $2,865,000 from 2001 to 2012. Interest expense consists of the following: 1995 1994 1993 Interest on long-term debt . . . . . . . . . $419,000 $312,000 $209,000 Imputed interest - capital leases . . . . 507,000 582,000 629,000 -------- -------- --------- Interest expense . . . $926,000 $894,000 $838,000 ======== ======= ======= (4) Income Taxes- The difference between the statutory federal income tax rate and the effective rate is summarized as follows: 1995 1994 1993 Federal income tax statutory rate . . . . 34.0% 34.0% 34.0% Increase (decrease) in taxes resulting from- State income taxes, net of federal income tax benefit 5.1 5.1 5.0 Other, net . . . . . . (0.6) (1.5) (2.2) ----- ------- ------ Effective income tax rate . . . . . . . . . 38.5% 37.6% 36.8% ===== ====== ====== The Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", in the first quarter of 1993. As prescribed by this pronouncement, the computation of deferred taxes was revised so that the amount of deferred income taxes on the balance sheet reflects current income tax rates. The implementation of this pronouncement did not have a material effect on net earnings. Components of provision for income tax consist of the following: 1995 1994 1993 Currently payable Federal . . . . . . .$2,082,000 $3,606,000 $3,315,000 States . . . . . . . 575,000 979,000 713,000 Deferred . . . . . . . 1,003,000 (1,333,000) (1,261,000) --------- --------- --------- Provision for income tax . . . . . . . . .$3,660,000 $3,252,000 $2,767,000 ========= ========= ========= The components of deferred income tax assets and liabilities at December 30, 1995 and December 31, 1994 were as follows: 1995 1994 Deferred income tax assets: Insurance related . . . . . . $1,094,000 $ 967,000 Bad debt reserve . . . . . . 1,000,000 685,000 Capital lease accounting . . 622,000 590,000 Vacation pay . . . . . . . . 597,000 637,000 Retail repositioning reserve 447,000 1,975,000 Other . . . . . . . . . . . . 857,000 997,000 --------- --------- Total deferred income tax assets . . . . . . . . . . . . 4,617,000 5,851,000 --------- --------- Deferred income tax liabilities: Property and equipment . . . (2,705,000) (3,042,000) Pension . . . . . . . . . . . (468,000) (362,000) --------- ---------- Total deferred income tax liabilities . . . . . . . . . (3,173,000) (3,404,000) ---------- ---------- Net deferred income tax asset . $1,444,000 $2,447,000 ========= ========= The net deferred income tax asset as of December 30, 1995 and December 31, 1994 were classified in the balance sheet as follows: 1995 1994 Current deferred income tax asset . . . . . . . . . . . . $3,504,000 $3,875,000 Noncurrent deferred income tax liability . . . . . . . . . . (2,060,000) (1,428,000) --------- --------- Net deferred income tax asset . $1,444,000 $2,447,000 ========= ========= (5) Preferred Stock- The Articles of Incorporation provide for the cumulative payment of dividends on the preferred stock and, if not paid at the rate of 3% per annum, there are certain restrictions on the payment of common stock dividends. The preferred stock is callable at par value. On September 11, 1995, the Company announced a self-tender offer for all 3,000 outstanding shares of the Company's preferred stock at a cash price of $50 per share. The offer commenced on such date and expired at midnight on October 30, 1995. Of the 3,000 outstanding shares of preferred stock, 2,841 shares, representing approximately 94.7%, were tendered and accepted by the Company pursuant to the offer. The Company paid the $142,000 aggregate purchase price for the 2,841 shares from its available cash on hand. At December 30, 1995, 3,000 shares of preferred stock are authorized and 159 shares remain outstanding. The Company has 1,000,000 shares of $.05 par value class B preferred stock authorized, none of which have been issued. These shares are issuable in such series and with such relative rights and preferences as may be determined from time to time by the Board of Directors. The class B preferred shares would be subordinated in all respects to the existing rights and preferences of the Company's outstanding preferred stock. (6) Commitments and Contingent Liabilities- The Company has projected capital expenditures for fiscal 1996 at $3,300,000. Commitments of less than $2,000,000 were made as of December 30, 1995. As of December 30, 1995, the Company was contingently liable under guarantees of bank note agreements of wholesale customers totaling $15,770,000. All of the loan guarantees are fully collateralized, principally with equipment and inventory, and, to a lesser extent, with building facilities. (7) Retirement Plans- The Company has a trusteed retirement savings defined contribution plan, which includes provisions of Section 401(k) of the Internal Revenue Code, for the benefit of its non-union eligible employees. Annual provisions are based on a mandatory 5% of eligible participant compensation and additional amounts at the sole discretion of the Board of Directors. Provisions for the three fiscal years ended 1995, 1994 and 1993 were $720,000, $700,000 and $660,000, respectively. Beginning in October 1994, the plan allows participants to make pretax contributions and the Company matches certain percentages of employee contributions. The Company's matching contributions for 1995 and 1994 was $68,000 and $17,000, respectively. The Company has union-administered multi-employer pension plans covering all hourly paid employees represented by collective bargaining agreements. Total pension expense, which the Company funds as accrued, was $1,599,000, $1,668,000 and $1,852,000 in fiscal years 1995, 1994 and 1993, respectively. Complete information with respect to the Company's portion of plan net assets and the actuarial present value of accumulated plan benefits is not available. (8) Leases- The Company leases most of its retail stores under lease agreements with original lease periods of 15 to 20 years and typically with five-year renewal options. Exercise of such options is dependent on, among others, the level of business conducted at the location. Executory costs, such as maintenance and real estate taxes, are generally the Company's responsibility. In several situations, the Company will enter into a lease for a store and sublease the store to a wholesale customer. Additionally, the Company leases transportation equipment, principally tractors and trailers, and certain office equipment. Some leases contain contingent rental provisions based on sales volume at retail stores or miles traveled for tractors and trailers. Contingent rental expense associated with the Company's capital leases and sublease income were not material to the Company's financial statements. Capitalized leases are calculated using interest rates appropriate at the inception of each lease. A summary of real property utilized by the Company under capital leases is as follows: 1995 1994 Investments in leased property $5,466,000 $5,466,000 under capital leases . . . . . . . Less accumulated amortization . . . (2,377,000) (2,094,000) --------- --------- Leased property under capital leases . . . . . . . . . . . . . . $3,089,000 $3,372,000 ========= ========= Amortization of leased property under capital leases, included in operating and administrative expense amounted to $283,000, $331,000 and $360,000 in fiscal years 1995, 1994 and 1993, respectively. The following is a schedule of future minimum lease payments under capital leases and subleases and the present value of such payments as of December 30, 1995: Amounts Amounts receivable payable under under capital capital leases subleases 1996 . . . . . . . . . . . . . $ 2,486,000 $ 1,806,000 1997 . . . . . . . . . . . . . 2,478,000 1,797,000 1998 . . . . . . . . . . . . . 2,432,000 1,751,000 1999 . . . . . . . . . . . . . 2,296,000 1,616,000 2000 . . . . . . . . . . . . . 2,209,000 1,529,000 2001-2009 . . . . . . . . . . . 15,401,000 10,978,000 ---------- ---------- Total minimum lease payments . 27,302,000 19,477,000 Less amount representing interest . . . . . . . . . . . (13,257,000) (9,535,000) ---------- ---------- Present value of minimum lease payments and amounts receivable . . . . . . . . . . 14,045,000 9,942,000 Less current portion . . . . . (777,000) (581,000) --------- --------- Long-term obligations and receivables $13,268,000 $ 9,361,000 ========== ========= The following is a schedule of future minimum lease payments required under operating leases for retail stores, transportation equipment and office equipment that have noncancelable lease terms in excess of one year as of December 30, 1995: 1996 . . . . . . . . . . . . . . . . . . . . $ 7,018,000 1997 . . . . . . . . . . . . . . . . . . . . 6,396,000 1998 . . . . . . . . . . . . . . . . . . . . 6,140,000 1999 . . . . . . . . . . . . . . . . . . . . 5,947,000 2000 . . . . . . . . . . . . . . . . . . . . 5,412,000 2001-2014 . . . . . . . . . . . . . . . . . . 49,571,000 ---------- Total minimum lease payments . . . . . . . . 80,484,000 Less minimum amounts receivable under noncancelable subleases . . . . . . . . . . (57,631,000) ---------- Net minimum lease payments . . . . . . . . . $22,853,000 ========== Rental expenses for all operating leases amounted to $5,614,000, $6,190,000 and $6,651,000 in fiscal years 1995, 1994 and 1993, respectively. These amounts include $1,113,000, $1,444,000 and $1,407,000, respectively, for contingent rentals. (9) Stock Option Plans- The Company has stock option plans which provide for the grant of either incentive or nonqualified stock options to key employees at not less than 100% of fair market value at the date of grant. Options granted are exercisable for seven years from the date of grant and vest ratably over the first three years. Such vesting may be accelerated by the compensation and stock option committee of the Board of Directors or upon a change in control of the Company, as defined by the plans. As of December 30, 1995, no incentive stock options were granted. Nonqualified stock option data is as follows: Range of per Number of share option shares prices Shares under option at January 2, 1993 . . . . . . . 356,928 $3.75-$8.75 Options granted . . . . . . 86,000 6.63 Options exercised . . . . . (13,574) 3.75-5.34 ------- ----------- Shares under option at January 1, 1994 . . . . . . . 429,354 $3.75-$8.75 Options granted . . . . . . 99,300 7.63 Options exercised . . . . . (59,098) 3.75-7.67 Options canceled . . . . . . (17,206) 6.25-8.75 ------- ----------- Shares under option at December 31, 1994 . . . . . . 452,350 $5.34-$8.75 Options granted . . . . . . 96,200 9.75 Options exercised . . . . . (78,184) 14.75-21.75 ------- ----------- Shares under option at December 30, 1995 . . . . . . 470,366 $6.25-$9.75 ======= =========== Shares reserved for grant at December 30, 1995 433,000 ======= Options granted in January 1996 88,600 $15.75 ======= ======= When options were exercised, the Company realized certain income tax benefits. These benefits resulted in a decrease in current income taxes payable and a corresponding increase in additional paid-in capital. Nonqualified stock options exercisable at December 30, 1995 and December 31, 1994 were for 285,000 and 283,384 shares, respectively. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", which the Company is required to adopt no later than fiscal 1996. Under this pronouncement, the Company, at a minimum, will be required in fiscal 1996 to provide additional disclosures of pro forma net income and pro forma earnings per share as if the fair value based method of accounting for stock options had been used to account for stock-based compensation cost. (10) Common Stock- On July 28, 1995, the Board of Directors authorized a two-for-one common stock split, effected in the form of a 100% stock dividend distributed on September 15, 1995, to shareholders of record on September 1, 1995. All historical share, per share amounts, stock option data and market prices of the Company's Common Stock have been restated to retroactively reflect the stock split. At December 30, 1995, of the 40,000,000 shares of Common Stock authorized, 5,833,570 shares are issued and 4,653,598 shares are outstanding. All common shares issued and issuable include one associated common stock purchase right which entitle shareholders to purchase one share of common stock from the Company at an exercise price equivalent to $21 per share. The rights become exercisable after a person acquires beneficial ownership of 20% or more of the Company's Common Stock. The rights do not have any voting rights and may be redeemed at a price of $0.01 per right. At December 30, 1995, approximately 6,355,000 shares of common stock were reserved for issuance upon exercise of the rights. Under certain circumstances, the rights may be exchanged at a ratio of one share per right. The rights expire on January 6, 1999. Upon the occurrence of certain defined events, the rights will be modified to entitle the holder (other than an "acquiring person") to purchase the shares of Common Stock of the Company or of such acquiring person having a market value of two times the exercise price of the rights. (11) Quarterly Results of Operations (Unaudited)- The Company includes sixteen weeks in its first quarter and twelve weeks in each subsequent quarter. Summarized quarterly financial information for fiscal years 1995 and 1994 follows: Quarter ended 1995 April 22 July 15 October 7 December 30 Net sales . . . $132,278,000 $101,996,000 $99,373,000 $105,999,000 Cost of products sold . . . . . 110,989,000 85,262,000 83,109,000 89,770,000 Net earnings . 1,237,000 1,556,000 1,385,000 1,662,000 Earnings per common and equivalent share . . . . $0.24 $0.31 $0.28 $0.37 ----- ----- ------ ------ Quarter ended 1994 April 23 July 16 October 8 December 31 Net sales . . . $135,180,000 $104,167,000 $101,894,000 $105,121,000 Cost of products sold . . . . . 113,078,000 86,958,000 85,280,000 87,551,000 Net earnings . 1,110,000 1,415,000 1,255,000 1,622,000 Earnings per common and equivalent share . . . . $0.20 $0.26 $0.24 $0.32 --------- -------- --------- --------- [Pages 19 to 22 of Annual Report] Management's discussion and analysis of financial condition and results of operations Results of Operations Selected costs and results as a percent of net sales for the fiscal years presented: 1995 1994 1993 Cost of products sold . . . . 84.0% 83.5% 82.7% Operating and administrative 13.9 14.4 15.6 expenses . . . . . . . . . . Earnings before income taxes 2.2 1.9 1.6 Net earnings . . . . . . . . 1.3 1.2 1.0 1995 Compared with 1994 Net sales for 1995 were $439,646,000 compared to 1994 net sales of $446,362,000. The decrease of $6,716,000, or 1.5%, was due primarily to the Company's continuing efforts to dispose of underperforming or noncompetitive corporate retail stores through conversion to franchise units and closures. Since the beginning of 1994, the Company has terminated its relationship with one multi-store wholesale customer, converted one corporate retail supermarket into a franchised unit, closed one underperforming corporate retail supermarket and added one new franchised supermarket. These combined actions resulted in a net sales decrease approximating $9,000,000. As of December 30, 1995, the Company had 66 franchised and 19 corporate supermarkets compared to 65 franchised and 20 corporate supermarkets at the end of fiscal year 1994. Consistent with the Company's business strategy to expand its wholesale volume, there are eight franchise supermarket facility projects currently in various phases of planning or construction, with completions scheduled throughout 1996. These projects involve three additions to existing franchise stores, three replacement franchise supermarkets and two new market franchise units involving an aggregate exceeding 106,000 of additional store selling space. Upon completion, these projects should help the Company position itself to reverse prior years' decreasing sales trends. Additionally, in 1995, the Company began implementing a new electronic card marketing and electronic coupon program designed to increase customer savings, make grocery shopping easier and faster and, ultimately, reward loyal customers. Continuing roll-out of this program in 1996 throughout its franchised and corporate supermarket base should also enhance the Company's sales growth potential. Pricing differentials between 1995 and 1994 did not materially affect 1995 net sales. Cost of products sold, as a percent of sales, increased by 0.5% to 84.0% in 1995 compared to 1994. While the percentage increased, total cost of products sold decreased by $3,737,000, or 1.0%, in 1995 compared to 1994. The increased percentage of sales was a direct result of the continued reduction in 1995 of the amount of higher margin retail sales compared to the continued increased amount of lower margin wholesale sales. The Company expects this sales mix trend to continue in fiscal 1996. The lower margins associated with wholesale sales continued in 1995 to be more than offset by significantly reduced operating and administrative expenses from the disposal of one corporate supermarket and its conversion to franchised unit in December 1994 and the closure of the underperforming Palatine, Illinois corporate retail supermarket in February 1995. Operating and administrative expenses, as a percent of sales, decreased by 0.5% to 13.9% in 1995 compared to 1994. The decrease of $3,367,000 was primarily a result of the elimination of operating expenses (consisting of payroll, supplies, rent, utilities, depreciation and other administrative expenses) associated with the corporate retail supermarket that was sold and converted into a franchise unit and the closure of the Palatine, Illinois corporate supermarket. Additionally, charges relating to retail repositioning expenses, consisting of termination costs of replaced, closed or sold stores, amounted to $1,003,000 in 1995 (compared to $3,668,000 in 1994). Such charges in 1995 pertained to five retail facilities. The decreases in operating and administrative expenses during 1995 could have been greater if not for the bad debt charges of $2,079,000 in 1995 (compared to $526,000 in 1994) due to additional exposure from underperforming or noncompetitive franchised retail supermarkets. In 1996, certain franchise operators may continue to experience operational difficulties resulting from intense retail competition due to the opening of several new competitive stores in our markets. As a result of the foregoing, earnings before income taxes, as a percent of sales, increased to 2.2%, or $9,500,000, in 1995 from 1.9%, or $8,653,000, in 1994. The effective income tax rate increased to 38.5%, compared to 37.6% in 1994. The provision for income taxes in 1995 and 1994 was $3,660,000 and $3,252,000, respectively. The Company attained 1.3% of net earnings to sales ratio for 1995. Net earnings and earnings per share in 1995 increased 8.1% and 17.6% to $5,840,000 and $1.20 per share, respectively, compared to $5,401,000 and $1.02 per share in 1994. This increase was principally the result of continued improvements in the Company's wholesale operations. The Company's earnings continued in 1995 to be favorably impacted by the Company's strategic decision in 1992 to expand its wholesale volume, largely through the conversion of underperforming or noncompetitive corporate supermarkets to franchise stores or closing their operations. On a percentage basis, earnings per common and equivalent share increased more than net earnings as a result of share repurchases during 1995 which reduced the number of average common and equivalent shares outstanding. Additionally, 1995 earnings per common and equivalent share increased $0.03 as a result of the Company's repurchase at a substantial discount of nearly all of its outstanding preferred stock in October 1995. Certain Company retail stores continue to be underperforming or noncompetitive in their respective marketplaces and, as a result, continue to incur operating losses. In order to further improve the Company's results from operations, management continues to evaluate various business alternatives relating to these operations, including the sale and subsequent conversion of these stores into franchise units, closing the stores or implementing other operational changes. Similar to prior fiscal years, implementation of these changes will likely result in the Company incurring certain repositioning charges involving the termination costs of replaced, closed or sold stores. While these repositioning charges may decrease the Company's reported net earnings for the period or periods in which the actions are taken, management believes that such actions may help improve the Company's long-term profitability. 1994 Compared with 1993 Net sales for 1994 were $446,362,000 compared to net sales of $469,577,000 for 1993. The decrease of $23,215,000, or 4.9%, was due primarily to the continuing increase in the relative percentage of wholesale sales to retail sales, as the Company continued to dispose of underperforming or noncompetitive corporate retail stores through conversion to franchise units or closures. The following changes in 1993 and throughout 1994 within the Company's customer base reduced year-to- year comparative sales levels and increased the relative percentage of wholesale sales to retail sales during the year: (i) the sale of four corporate retail supermarkets in 1993 and one corporate retail supermarket in 1994, and their conversion to franchise supermarkets; (ii) the addition of two new franchises in 1993; (iii) the closing of one underperforming corporate supermarket in 1993 upon the expiration of its lease; and (iv) the termination of one multi-store wholesale customer in 1994. Additionally, intense retail competition continued to impact sales negatively. The trends first noted in 1992 toward consumer purchases of lower priced, private label products continued through 1994. These trends had a nominal adverse impact on sales. The Company experienced nominal inflation in certain branded label foods in 1994 due principally to significant price increase in coffee and paper products. Cost of products sold, as a percent of sales, increased by 0.8% to 83.5% in 1994 compared to 1993. While the percentage increased, total cost of products sold decreased by $15,422,000 in 1994 compared to 1993. The increased percentage was a direct result of a reduction in the amount of higher margin retail sales compared to the increased amount of lower margin wholesale sales. The lower margins associated with wholesale sales continued in 1994 to be more than offset by significantly reduced operating and administrative expenses from the disposal of underperforming or noncompetitive corporate retail stores. Operating and administrative expenses, as a percent of sales, decreased by 1.2% to 14.4% in 1994 compared to 1993. The decrease of $8,661,000 was primarily a result of the elimination of operating expenses associated with the corporate retail supermarkets that have been sold and converted into franchise units in 1993. The decrease in operating and administrative expenses during 1994 could have been greater if not for the charges relating to repositioning expenses amounting to $3,668,000 and $1,953,000 in 1994 and 1993, respectively. Such charges in 1994 pertained to three retail facilities, including, particularly, the Palatine, Illinois corporate supermarket. As a result of the foregoing, earnings before income taxes, as a percent of sales, increased to 1.9%, or $8,653,000, in 1994 from 1.6%, or $7,519,000, in 1993. The effective income tax rate increased to 37.6%, compared to 36.8% in 1993. The provision for income taxes in 1994 and 1993 was $3,252,000 and $2,767,000, respectively. Net earnings in 1994 increased 13.7% to $5,401,000, or $1.02 per share, compared to $4,752,000, or $0.86 per share in 1993. This increase was principally the result of continued improvements in the Company's wholesale operations. On a percentage basis, earnings per common and equivalent share increased more than net earnings as a result of share repurchases during 1994 which reduced the number of weighted average common and equivalent shares outstanding. Liquidity and Capital Resources Net cash inflows from operating activities in fiscal 1995 were $7,756,000, a decrease of $6,667,000 from the prior year. The decrease was attributable primarily to cash outlays relating to previously expensed retail repositioning reserve. Cash inflows also decreased due to additional investments in retail systems for resale and other current assets in fiscal 1995. Net cash outflows from investing activities were $2,428,000 in fiscal 1995 compared to net cash inflows from investing activities of $415,000 in the prior year. The change was due primarily to proceeds of $2,953,000 from the maturity of short-term investments during 1994. Expenditures for property and equipment totaled $3,545,000 in 1995 compared to $3,640,000 in 1994. The Company has projected capital expenditures of $3,300,000 for 1996 which it expects to fund from internally generated capital. Net cash outflows from financing activities were $5,214,000 in 1995 compared to $6,542,000 in 1994. As a result of the Company's shareholder enhancement plan adopted in July 1995, the Company reacquired 152,294 shares of its common stock aggregating $3,475,000 financed in full through available working capital (compared to 302,167 shares or $5,360,000 in 1994). Since only approximately $500,000 remained available under the Board of Directors' stock repurchase authorization at year end, the Board of Directors authorized an additional increase of its common stock repurchase program from $8,000,000 to $10,000,000. Also as a result of the Board of Directors' action to increase dividend payments by 167% under shareholder enhancement plan, total common stock dividends paid for 1995 increased to $1,047,000 from $518,000 in 1994. The Company also paid $142,000 in 1995 to repurchase substantially all of its preferred stock. Under the Company's loan agreements, $3,240,000 of retained earnings were available for the payment of cash dividends, stock repurchases and other restricted payments as of December 30, 1995. As a result of the foregoing, cash and equivalents for fiscal 1995 increased by $114,000, resulting in a 1995 year-end balance of $14,424,000. The Company is the prime lessee of new facilities and subleases such facilities to independent franchise operators. All new facilities in 1995 were financed by operating lease agreements. The Company also leases transportation equipment, principally tractors and trailers, and certain office equipment. Some leases contain contingent rental provisions based on sales volume at retail stores or miles traveled for transportation equipment. At December 30, 1995, the Company had $7,018,000 of future minimum lease payments required under operating leases in 1996 and $4,336,000 of amounts receivable under noncancelable subleases in 1996. Contingent rentals for 1995 and 1994 were $1,113,000 and $1,444,000, respectively. Additionally, at December 30, 1995, the Company had $13,268,000 of long-term capital lease obligations, $9,361,000 of which represented noncurrent receivables from wholesale customers under capital leases. Under a new financial accounting standard that is effective for fiscal year 1996, the Company is required to assess the recoverability of the carrying amount of long-lived assets currently held or assets committed to a plan of disposal resulting from various events or changes in circumstances. The Company does not anticipate that the adoption of this standard will have a material impact on its financial statements. The Company typically provides short-term financing support to its wholesale customers for the purchase of facilities and equipment for new stores. This financing support is subsequently refinanced, typically through banks, with the Company receiving reimbursement. At December 30, 1995, $375,000, which arose from franchisees' facilities and equipment purchases, was included in receivables to be refinanced. Additionally, the Company was contingently liable under guarantees of wholesale customers' bank note agreements totaling $15,770,000 and $14,343,000 at December 30, 1995 and December 31, 1994, respectively. All of the loan guarantees are fully collateralized, principally with equipment and inventory, and to a lesser extent, with building facilities. At December 30, 1995, the Company's ratio of total liabilities to shareholders' investment was 1.01, compared to 1.15 at December 31, 1994. The decrease in this ratio was principally attributable to the significant decrease in retail repositioning reserve in 1995 resulting from the Company's termination settlement associated with the closing of the Palatine, Illinois supermarket. Additionally, at December 30, 1995, the Company had available the entire amount of unsecured revolving bank credit facilities totaling $16,000,000. The Company believes its cash and debt-to-equity positions continue to compare favorably to most industry competitors. Additionally, the Company believes that its financial condition provides it with adequate long-term flexibility to finance anticipated capital requirements without adversely impacting its financial position or liquidity. [Page 22 of Annual Report] Company Business The Company is engaged in distributing food and related products at wholesale and retail. At December 30, 1995, the Company franchised 66 and operated 19 retail supermarkets under the Piggly Wiggly/R/ name in its eastern Wisconsin and northeastern Illinois market area. The Company owns the right to grant Piggly Wiggly franchises in its market area. The Company is the primary supplier to its franchised and corporate stores. The Company also serves as a wholesaler to other smaller independent retail stores in its market area. The Company supplies products to its franchised and corporate supermarkets and other wholesale customers primarily from its distribution center in Sheboygan, Wisconsin. The Company also provides its stores and other customers with fresh, frozen and processed meat products from a third-party distribution facility on a contract basis. Additionally, the Company bottles soft drinks and drinking and distilled water under its Springtime/R/ label and supplies these products exclusively to its customers. The Company employs approximately 1,600 persons, 1,150 of whom are employed in the operation of corporate retail supermarkets. A majority of the Company's retail employees are employed on a part-time basis. Of the Company's remaining employees, 225 are engaged in warehousing, distribution and trucking activities and the remainder are corporate and administrative personnel. The Company's common stock is traded over-the-counter on the Nasdaq National Market. There are approximately 1,075 beneficial holders of the Company's common stock. For the fiscal quarters indicated, the following table sets forth the high and low last sale prices for the Company's common stock as reported on the Nasdaq National Market and the per share cash dividends declared. High Low Cash Dividends 1995 First Quarter . . . . . $11 1/2 $9 3/4 $0.03 Second Quarter . . . . 11 5/8 10 3/4 0.03 Third Quarter . . . . . 15 11 1/4 0.08 Fourth Quarter . . . . 15 1/2 14 1/4 0.08 1994 First Quarter . . . . . $8 1/2 $7 5/8 $0.02 Second Quarter . . . . 9 1/8 8 0.02 Third Quarter . . . . . 10 8 7/8 0.03 Fourth Quarter . . . . 10 1/8 9 5/8 0.03 See "Management's discussion and analysis of financial condition and results of operations" for retained earnings available for payments. [Page 23 of Annual Report] Report of independent public accountants To Schultz Sav-O Stores, Inc.: We have audited the accompanying balance sheets of Schultz Sav-O Stores, Inc. (a Wisconsin corporation) as of December 30, 1995 and December 31, 1994 and the related statements of shareholders' investment, earnings and cash flows for each of the three fiscal years in the period ended December 30, 1995. 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 financial position of Schultz Sav-O Stores, Inc. as of December 30, 1995 and December 31, 1994, and the results of its operations and its cash flows for each of the three fiscal years in the period ended December 30, 1995, in conformity with generally accepted accounting principles. Milwaukee, Wisconsin February 7, 1996 Arthur Andersen LLP EX-23 5 EXHIBIT 23 CONSENT EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To Schultz Sav-O Stores, Inc.: As independent public accountants, we hereby consent to the incorporation of our reports, included and incorporated by reference in this Form 10-K, into the Company's previously filed Form S-8 Registration Statement, File No. 33-34991. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Milwaukee, Wisconsin, March 20, 1996 EX-27 6 EXHIBIT 27 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED OR INCORPORATED BY REFERENCE INTO SCHULTZ SAV-O STROES INC.'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 YEAR DEC-30-1995 JAN-01-1995 DEC-30-1995 14,242,000 0 8,127,000 2,565,000 20,458,000 49,554,000 55,260,000 32,433,000 87,034,000 24,699,000 3,719,000 16,000 0 292,000 42,980,000 87,034,000 439,646,000 439,646,000 369,130,000 0 61,034,000 0 926,000 9,500,000 3,660,000 5,840,000 0 0 0 5,840,000 1.20 1.20 Amounts included in "Other costs and expenses."
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