-----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, VyuH/IGyCmGEFY5AKh4vAQCLNwK6OmmhfweVECpU7UiP+tRpqDQihlLo8/4rh/XV dtiDpegEs6sFuqoEZ+Iblw== 0000897069-97-000129.txt : 19970321 0000897069-97-000129.hdr.sgml : 19970321 ACCESSION NUMBER: 0000897069-97-000129 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961228 FILED AS OF DATE: 19970320 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: 97559911 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 28, 1996 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 Identification No.) organization) 2215 Union Avenue Sheboygan, Wisconsin 53081 (Address of principal (Zip Code) executive 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 18, 1997: $66,960,590* Number of shares outstanding of the registrant's Common Stock as of March 18, 1997: 4,623,098 PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED HEREIN BY REFERENCE: 1996 Annual Report to Shareholders (incorporated by reference into Parts II and IV to the extent indicated therein). Definitive Proxy Statement for 1997 annual meeting of shareholders (to be filed with the Commission under Regulation 14A within 120 days after the end of the registrant's fiscal year and, upon such filing, to be 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 28, 1996, the Company franchised 68 and owned 16 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 84 franchised and corporate owned Piggly Wiggly supermarkets. The Company also serves as a wholesaler to a number of small, independently operated retail supermarkets and convenience stores in its market area. The Company believes it has established itself as a niche food marketer in small to mid-size markets by delivering the product variety, quality of perishable products, pricing and promotional programs traditionally found only in large metropolitan markets, evolving into a unique hybrid of retailer and wholesaler which it believes has become a "virtual chain" of retail stores served by a vertically integrated wholesaler. All Piggly Wiggly supermarkets, both franchised and owned, participate in a single, coordinated advertising and merchandising program which typically includes a weekly newspaper ad insert, outdoor boards, television and radio spots, sponsorship of entertainment and charitable events, and the Company's Piggly Wiggly Preferred Club Card/R/. The Company believes that this coordinated program allows it to leverage the combined buying power of all its franchised and owned stores and deliver a powerful and effective promotional vehicle for its participating vendor partners. Additionally, the Company believes it provides its franchised stores with cost effective administrative support services and financial resources that enable the operation of efficient, contemporary supermarkets, while the independent retail ownership of the franchisee provides the entrepreneurial spirit and community involvement that is an integral part of marketing in smaller markets. The successful combination of these elements creates the partnership between the Company and its franchisee retailers that results in a virtual chain with its franchisees, of coordinated and integrated retail food distribution. The Company, operating as a virtual chain, is able to achieve superior performance compared to traditional wholesalers, yet avoids having to make large direct capital investments at the retail level to grow its business. The franchisee retailer, as part of the virtual chain, benefits from lower costs of product and the coordinated promotional activity normally associated only with larger retail grocery chains. The Company believes this structure enables it to leverage the favorable elements of both a wholesaler and a retailer, giving the Company and its franchisees a unique advantage in its marketplace. The Company believes this advantage has been a key component in its success over the past few years as the virtual chain concept has evolved. This concept will continue to be a cornerstone of the Company's growth strategy. 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/TM/ label and supplies these products to its 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 which, combined with its unique marketing and merchandising program, has created an effective and efficient virtual chain, while also effecting changes to its corporate retail operations to improve profitability. The Company believes one of the competitive advantages it provides to its franchised supermarkets through its "virtual chain" strategy 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. As part of implementing its corporate strategy to improve the profitability of its corporate retail operations, the Company has sold and converted 12 underperforming corporate retail stores into franchise units and added 15 new replacement or new market franchise supermarkets since 1991. In 1996, there were three franchise expansion projects resulting in one completed expansion and two expansions that will be completed in early 1997. Additionally, in 1996, two replacement stores were completed and two replacement stores are projected to be completed in 1997. Finally, in 1996, one new market franchise unit was completed and three new market franchise units are projected to be completed in 1997. These expansion, replacement and new market franchise projects added approximately 49,400 square feet of store space in 1996, and are projected to add approximately 150,000 square feet in 1997 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:
Franchise Supermarkets Corporate Supermarkets Number of Supermarkets 1992 1993 1994 1995 1996 1992 1993 1994 1995 1996 Beginning of Year 51 59 64 65 66 32 26 21 20 19 New Market Supermarkets(a) 2 1 -- 1 1 -- -- -- -- -- Replacement Supermarkets(b) 3 1 1 3 2 -- -- -- -- -- Converted to Franchise(c) 6 4 1 -- 1 (6) (4) (1) -- (1) Terminated Operations(d) (4) (3) (1) (3) (2) -- (1) -- (1) (2) New Franchises(e) 1 2 -- -- -- -- -- -- -- -- End of Year 59 64 65 66 68 26 21 20 19 16 == == == == == == == == == == Remodeled Supermarkets(f) 3 1 5 6 1 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) New franchises are additions to the Company's franchise group, other than through conversion from corporate supermarkets. (f) Remodeled supermarkets represent supermarkets which have undergone substantial expansion and/or remodeling totaling at least $250,000.
During 1996, the Company established new earnings records on increased sales 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 is the primary supplier to all of its franchised and corporate supermarkets. The Company also serves as a wholesaler to other small independent retail stores in its market area, although less than 3% of the Company's 1996 net sales was derived from such operations. 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, in turn, subleasing the premises 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 28, 1996, there were 84 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 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, magazines and 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." Based on the Company's internal wholesale price index, management does not believe that inflation had a significant effect on sales between 1996 and 1995. In 1996, same store sales increased as the Company continued the introduction of the Piggly Wiggly Preferred Club Card/R/, a customer- friendly card-based marketing program. During 1996, the Piggly Wiggly Preferred Club Card program was installed in 39 stores, bringing the number of installations to 50 stores with the remaining 33 stores schedules for installation during 1997. 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. Additionally, the Piggly Wiggly Preferred Club Card program includes the ability to issue point of sale coupons redeemable on future purchases. The Company believes that the Piggly Wiggly Preferred Club Card and the coordinated marketing and merchandising program it supports are key components driving the increase in same store sales in 1996. The Company's franchised supermarkets range in size from 8,340 square feet to 47,000 square feet, with an average of 24,070 square feet. The Company's corporate supermarkets range in size from 19,980 square feet to 46,250 square feet, with an average of 31,100 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. Most supermarkets also contain or provide for one or more of the following: wine and spirit sales; video rentals; photo processing services; TicketMaster/R/ ticket centers; in-house banking services; automated teller machines; and on-line debit and credit card check-out services. During 1996, certain of the Company's corporate retail stores continued to not meet financial performance goals. The Company converted one corporate retail store to a franchise retail store in February 1996 and closed two smaller, outdated and underperforming corporate retail stores in September and October 1996, respectively. 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. 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 40 regional supermarket chains and food services organizations 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 1996. In 1996, 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 1996 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 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 distribution services 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 the community-oriented marketing programs provided to franchisees as part of its "virtual chain" strategy. Coordinated weekly newspaper ad inserts, high visibility outdoor billboard advertising and television and radio 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 22 tractors and 40 refrigerated trailers. The Company augments its transportation requirements with temporary leasing arrangements as conditions warrant. PW Trucking, Inc., a wholly-owned subsidiary of the Company, provides contract and common carrier services throughout the Company's operating territory. Revenues from unrelated parties generated by this business were nominal in 1996 and are expected to be nominal in 1997. The Company bottles carbonated soft drinks, fruit drinks and drinking and distilled water under its Springtime/TM/ label. 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 distribution center. The sale of these products accounted for less than 1% of the Company's 1996 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 its distribution facilities 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, SuperSaver, 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 Stores, Inc. 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 28, 1996, the Company employed approximately 1,550 persons, of whom approximately 1,050 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 200 are engaged in warehousing and trucking activities and approximately 300 are corporate and administrative personnel. Six separate collective bargaining agreements covering a total of approximately 620 retail clerks and meat cutters expire at different times throughout 1997. The Company does not currently anticipate any strikes, work stoppages or slowdowns in connection with renewing such agreements. The Company recently entered into a new collective bargaining agreement covering the warehouse and trucking employees at its Sheboygan distribution facility that expires in February 2002. Item 1A. Executive Officers of the Company. Name and Age Positions and Offices with the Company James H. Dickelman, 49 . Chairman of the Board, President and Chief Executive Officer John H. Dahly, 56 . . . . Executive Vice President, Chief Financial Officer, Treasurer and Secretary Michael R. Houser, 45 . . Senior Vice President--Marketing and Merchandising William K. Jacobson, 46 . Senior Vice President--Retail Operations Kenneth S. Folberg, 36 . Vice President--Logistics Larry D. Hayes, 54 . . . Vice President--Meat, Bakery and Deli Operations John S. Kwas, 57 . . . . Vice President--Grocery Procurement Thomas J. Timler, 39 . . Vice President--Business Systems Support Group Frank D. Welch, 56 . . . 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. 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 28, 1996, the Company leased 15 of its corporate supermarkets and owned one supermarket. The leased supermarkets range in size from 19,980 to 41,200 square feet, with an average of 30,080 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 1997. As of December 28, 1996, the Company subleased 46 of its leased supermarkets, and leased one owned supermarket, to independent operators who are wholesale customers of the Company and, except for one, are also franchisees. Renovations and expansions continue at six franchise retail operations. These renovations involve two additions to existing franchise stores, and four replacement franchise units. Additionally, three new market franchise retail operations are expected to be completed in 1997. These projects are expected to add approximately 150,000 square feet of store space. The Company owns its 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 14,500 square feet of office space in Sheboygan under a four-year lease expiring in August 2000, which is used for customer support services. The Company owns approximately 17 acres of commercially zoned property in two Wisconsin communities. The Company has entered into brokerage arrangements for the 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 1996. 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 1996. 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 "Common Stock Information" set forth in the Company's 1996 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 "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 Consolidated Balance Sheets of the Company as of December 28, 1996 and December 30, 1995, the Consolidated Statements of Earnings, Cash Flows and Shareholders' Investment for each of the three fiscal years in the period ended December 28, 1996, together with the related Notes to Consolidated 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 1997 annual meeting of shareholders ("Proxy Statement").* * The Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year. 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 Committee 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 1996 Annual Reference Report 1. Financial Statements. Form 10-K to Shareholders Consolidated Balance Sheets as of -- 13 December 28, 1996 and December 30, 1995 Consolidated Statements of -- 14-15 Earnings, Cash Flows and Shareholders' Investment for the fiscal years 1996, 1995 and 1994 Notes to Consolidated Financial -- 16-21 Statements Report of Independent Public -- 12 Accountants 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 and Reports on Form 8-K. (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 1996. 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 20, 1997 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 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 5, 1997. 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 5, 1997. SCHULTZ SAV-O STORES, INC. SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE FISCAL YEARS 1996, 1995 AND 1994 Allowance for Doubtful Accounts-- Changes in the allowance for doubtful accounts are summarized as follows: 1996 1995 1994 Balance, beginning of $2,565,000 $1,750,000 $1,750,000 year Provision charged to earnings 987,000 2,079,000 526,000 (Writeoffs)/recoveries, net 98,000 (1,264,000) (526,000) --------- --------- --------- Balance, end of year $3,650,000 $2,565,000 $1,750,000 ========= ========= ========= EXHIBIT INDEX SCHULTZ SAV-O STORES, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996 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 1996 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. [Incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 30, 1995.] 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. [Incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 30, 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 1996 Annual Report to Shareholders expressly incorporated by reference into this Form 10-K. 21 Subsidiary of Registrant. 23 Consent of Independent Public Accountants. 27 Financial Data Schedule (EDGAR version only). 99 Definitive Proxy Statement for 1997 Annual Meeting of Shareholders (to be filed with the Commission under Regulation 14A within 120 days after the end of the Company's fiscal year and, upon such filing, incorporated by reference herein to the extent indicated in this Form 10-K). EX-13 2 ANNUAL REPORT PORTIONS [Page 4 of Annual Report] FIVE-YEAR FINANCIAL HIGHLIGHTS
Fiscal Year(a)(b) (Dollars in thousands, except per share data) 1996 1995 1994 1993 1992 Consolidated statements of earnings data: Net sales $453,921 $439,646 $446,362 $469,577 $490,403 Gross profit 72,429 70,516 73,495 81,288 90,288 Earnings before income taxes 10,512 9,500 8,653 7,519 4,139 Provision for income taxes 4,047 3,660 3,252 2,767 1,622 Net earnings 6,465 5,840 5,401 4,752 2,517 Earnings per share 1.35 1.20 1.02 0.86 0.44 Cash dividends per share 0.36 0.22 0.10 0.08 0.07 Weighted average shares outstanding(c) 4,789 4,981 5,257 5,489 5,690 Consolidated balance sheet data (at fiscal year-end): Working capital $ 29,274 $ 24,855 $ 21,197 $ 20,805 $ 22,091 Total assets 97,972 94,203 94,404 89,822 92,338 Current obligations under capital leases and current maturities oflong-term debt 1,047 1,114 1,037 1,050 1,243 Long-term debt 3,375 3,719 4,056 1,035 1,288 Long-term obligations under capital leases 12,368 13,268 14,046 14,979 15,980 Total shareholders' investment 47,035 43,288 41,457 41,501 38,864 Other data: Capital additions $ 3,420 $ 3,545 $ 3,640 $ 8,528 $ 1,718 Depreciation and amortization 4,451 4,467 4,654 4,861 5,625 __________________________________________ (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 consolidated 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 shares outstanding for 1994, 1993 and 1992 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 8 to 11 of Annual Report] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Special Note Regarding Forward-Looking Statements Certain matters discussed in this Annual Report to Shareholders are "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as Company "believes," "anticipates," "expects" or words of similar import. Similarly, statements that describe the Company's future plans, objectives or goals are forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and which could cause actual results to differ materially from those currently anticipated. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this report and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Results of Operations The following tables set forth certain items from the Company's Consolidated Statements of Earnings as a percent to sales and the year-to- year percentage changes in the amounts of such components.
Percent to sales Percentage change 1996 1995 1994 1996 vs. 1995 1995 vs. 1994 Net Sales 100.00% 100.00% 100.00% 3.25% (1.50%) Cost of products sold 84.04% 83.96% 83.53% 3.35% (1.00%) Operating and administrative expenses 13.63% 13.88% 14.43% 1.41% (5.23%) Earnings before income taxes 2.32% 2.16% 1.94% 10.65% 9.79% Net earnings 1.42% 1.33% 1.21% 10.70% 8.13%
1996 vs. 1995 Net Sales Net sales for 1996 were $453,921,000 compared to $439,646,000 for 1995. The increase of $14,275,000, or 3.25%, was due primarily to the continuing emphasis on wholesale sales, coupled with moderate increases in same-store franchise and corporate retail sales. Franchise and corporate retail sales improved, in large part, due to the continuing success of the customer-friendly card-based marketing program, the Piggly Wiggly Preferred Club Card/R/. The total sales increase over the prior year was the first such increase since fiscal year 1992. This sales increase was attained despite the sale and conversion of one corporate store to a franchise unit in February 1996 and the closure of two smaller, outdated and underperforming corporate retail supermarkets in September and October 1996, respectively. With respect to facility projects during 1996, the Company opened one new market franchise supermarket in August totaling 17,300 square feet of aggregate selling space. Additionally, the Company completed the expansion and renovation of one franchise store in February and opened two new replacement stores in October and November, respectively. These three expansion and replacement projects yielded an increase of 32,100 square feet of aggregate selling space, or an increase of 63.8% at the three stores. As of December 28, 1996, the Company had 68 franchised and 16 corporate supermarkets, compared to 66 franchised and 19 corporate stores at the end of fiscal year 1995. Consistent with the Company's business strategy to expand its wholesale volume, there are nine supermarket facility projects currently in various phases of planning or construction, with completions scheduled throughout 1997. These projects involve four additions to existing franchise stores, two replacement franchise supermarkets, one new market corporate supermarket and two new market franchise stores totaling nearly 150,000 square feet of additional store selling space. Upon completion, these projects should continue to help the Company position itself for additional increases in sales. In 1996, the Company continued its rollout of the electronic card marketing and electronic coupon program designed to increase customer savings, make grocery shopping easier and faster and, ultimately, reward loyal customers. Based on the Company's internal wholesale price index, management does not believe that inflation had a significant effect on sales between years. Cost of Products Sold Cost of products sold, as percent of sales, increased 0.08% from 83.96% in 1995 to 84.04% in 1996. This minimal increase was principally a direct result of the continued reduction in 1996 of higher margin retail sales compared to the increasing amount of lower margin wholesale sales. With the Company's continuing emphasis on wholesale volume, the Company expects this sales mix trend to continue in 1997. The lower margins associated with wholesale sales were offset by reduced operating and administrative expenses from the sale of one corporate supermarket and its subsequent conversion to a franchised unit in February 1996 and the closures of two underperforming corporate stores in September and October 1996. Operating and Administrative Expenses Operating and administrative expenses amounted to 13.63% of net sales in 1996, compared to 13.88% in 1995. While the percentage decreased, total operating and administrative expenses increased $858,000, or 1.41%, between years. Due principally to higher sales, certain variable expenses such as wages and salaries and insurance premium costs increased. These increased variable costs, however, were offset by the elimination of certain operating expenses resulting from the sale and conversion of one corporate store into a franchise unit in February and the closure of two smaller, outdated and underperforming corporate stores in September and October, respectively. Due to the highly competitive nature of the industry, certain franchise operators and corporate retail stores continue to experience operational difficulties in their respective marketplaces. As a result, the Company continues to incur significant receivable realization charges from its underperforming franchise operators. Total realization charges relating to wholesale bad debts and retail subsidies were comparable for both years, totaling $2,349,000 and $2,229,000 in 1996 and 1995, respectively. Additionally, the Company continues to evaluate various business alternatives relating to the operations of its underperforming corporate retail stores. The Company's business alternatives include the sale and subsequent conversion of these stores into franchise units, the closing of noncompetitive stores or the implementation of other operational changes. Similar to prior years, implementation of these changes may result in the Company incurring certain costs of replaced, closed or sold stores. These actions can negatively impact net earnings in the short-term, but management believes that such actions will help improve the Company's long-term profitability. For 1996 and 1995, retail repositioning and restructuring costs amounted to $299,000 and $1,003,000, respectively. Earnings Before Income Taxes As a result of the foregoing, the Company's earnings before income taxes increased 10.65% to $10,512,000 in fiscal 1996, from $9,500,000 in 1995. As a percent of sales, earnings before income taxes increased from 2.16% in 1995 to 2.32% in 1996. Net Earnings After applying an effective tax rate of 38.5% to earnings before income taxes, net earnings for 1996 increased 10.7% to $6,465,000, compared with the prior year's net earnings of $5,840,000. With improvements in sales and productivity, the Company's net earnings-to- sales ratio for 1996 improved to 1.42%, compared to 1.33% for fiscal 1995. Additionally, 1996 earnings per share increased 12.5% to $1.35 from $1.20 in 1995. The earnings per share percentage increase in 1996 could have been greater if not for the $0.03 per share positive adjustment in fiscal 1995. This adjustment was a direct result of the Company's redemption at a substantial discount of nearly all of its outstanding preferred stock in October 1995. On a percentage basis, earnings per share increased more than net earnings due to additional share repurchases during the first half of 1996 which reduced the number of weighted average shares outstanding. 1995 vs. 1994 Net Sales Net sales for 1995 totaled $439,646,000 compared to $446,362,000 for 1994. 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. In 1994 and 1995, the Company 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. On an aggregate basis, these actions negatively impacted net sales by approximately $9,000,000. Pricing differentials between 1995 and 1994 did not materially affect 1995 net sales. As of December 30, 1995, the Company had 66 franchised and 19 corporate stores compared to 65 franchised and 20 corporate stores at December 31, 1994. In an effort to improve sales, the Company in late 1995 began implementing the Piggly Wiggly Preferred Club Card/R/, a new electronic card marketing program. This program was designed primarily to increase customer savings, make grocery shopping easier and faster, and, ultimately, reward loyal customers. Cost of Products Sold Cost of products sold, as a percent of sales, increased 0.43% to 83.96% 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 the prior year. The increased percentage of sales was a 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. Lower margins associated with wholesale sales were more than offset by significantly reduced operating and administrative expenses from the disposal of one corporate supermarket and its conversion to franchised store in December 1994 and the closure of an underperforming Illinois corporate retail store in February 1995. Operating and Administrative Expenses Operating and administrative expenses amounted to 13.88% of net sales in 1995, compared to 14.43% in 1994. The decrease of $3,367,000, or 5.23%, was primarily due to the elimination of operating expenses, such as payroll, supplies, rent, utilities and depreciation, associated with a corporate retail store that was sold and converted into a franchise unit and the closure of an underperforming Illinois corporate supermarket. Additionally, in 1995, repositioning or restructuring charges consisting of termination costs of five replaced, closed or sold stores amounted to $1,003,000 (compared to $3,668,000 in 1994). The decrease in operating and administrative expenses during 1995 could have been greater if not for the charges to operations relating to bad debts and retail subsidies. Total charges approximated $2,229,000 for fiscal 1995, compared to $1,151,000 for 1994, due primarily to additional exposure from underperforming or noncompetitive franchised retail supermarkets. Earnings Before Income Taxes As a result of the foregoing, the Company's earnings before income taxes increased 9.79% to $9,500,000 in fiscal 1995, from $8,653,000 in 1994. As a percent of sales, earnings before income taxes increased from 1.94% in 1994 to 2.16% in 1995. Net Earnings On an after-tax basis, net earnings for 1995 increased 8.13% to $5,840,000, compared with $5,401,000 for 1994. With improvements in wholesale operations, the Company attained 1.33% of net earnings-to-sales ratio for 1995, compared to 1.21% for 1994. Earnings per share for 1995 also increased to $1.20, compared to $1.02 for the prior year. On a percentage basis, earnings per share increased more than net earnings as a result of share repurchases during 1995 which reduced the number of weighted average shares outstanding. The 1995 earnings per share, however, was positively impacted by $0.03 due to the repurchase of substantially all of the Company's preferred stock in October 1995. Liquidity and Capital Resources The Company's operating results continue to enhance its strong financial position. The primary source of liquidity for 1996 was cash generated from operations. Cash provided by operating activities during 1996 was $12,862,000, compared to $6,620,000 in 1995. The significant increase in cash flow from operations between 1996 and 1995 was due primarily to the following: (a) timing with respect to dispositions of various real property previously held for resale; (b) cash realization from retail technology systems already installed and operational in retail supermarkets; and (c) increase in certain accrued liabilities, most notably, accrued insurance. These amounts have enabled the Company to internally fund its capital expenditures, purchase shares of its Common Stock and pay cash dividends. Net cash outflows for investing activities for 1996 and 1995 were very comparable. Total capital expenditures for 1996 and 1995 were $3,420,000 and $3,545,000, respectively. The Company's capital budget for 1997 is $5,200,000, of which commitments of $3,150,000 have been made as of December 28, 1996. More than half of the 1997 capital budget is allocated for various equipment and fixtures for new and existing stores, some of which relate to retail technology upgrades. Additionally, the Company has allocated approximately $1,800,000 for warehouse distribution upgrades and office technology equipment. The Company expects to finance these projects from internally generated capital. Net cash outflows for financing activities were $4,173,000 in 1996 compared to $5,214,000 in 1995. Total stock repurchases in 1996 were less than the prior year due to the Board of Directors' action in May 1996 terminating the Company's open market stock repurchase plan originally adopted in May 1994. The 1994 stock repurchase plan resulted in the repurchase by the Company of over 736,000 shares at an aggregate cost of approximately $7,900,000. On January 29, 1997, the Board of Directors reinstated the stock repurchase plan and authorized th repurchase of up to $5,000,000 of its outstanding Common Stock. Repurchases under the stock buy-back authorization are to be effected from time to time in the open market, pursuant to privately negotiated transactions or otherwise, and may include, but will not be reduced by, the repurchase of Common Stock issuable upon the exercise of stock options granted under the Company's stock option plans. Total cash dividend payouts on a per share basis increased 63.64% from $0.22 in 1995 to $0.36 per share in 1996. At December 28, 1996, under the Company's loan agreements, $3,430,000 of retained earnings were available for the payment of cash dividends and other restricted payments. In order to carry out the 1997 stock repurchase plan, the Company is obtaining an amendment to its loan agreement increasing the available retained earnings amount to $12,263,000. In summary, cash and equivalents for fiscal 1996 increased $5,938,000, resulting in a substantial year-end balance of $27,531,000. Of the year-end cash balance, a substantial amount was invested in short- term investments with maturities of less than three months, such as commercial paper and tax-exempt and taxable money market fund with strong credit ratings. The Company has no investment in derivatives. The Company is the prime lessee of new retail store facilities and subleases such facilities to independent franchise operators. All new facilities in 1996 were financed by operating lease agreements. The Company also leases transportation equipment, principally tractors and trailers, corporate office space 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 28, 1996, the Company had $7,637,000 of minimum lease payments required under operating leases in 1997 and $5,273,000 of amounts receivable under noncancelable subleases in 1997. Contingent rentals for 1996 and 1995 were $1,012,000 and $1,113,000, respectively. Additionally, at December 28, 1996, the Company had $12,368,000 of long-term capital lease obligations, $8,239,000 of which represented noncurrent receivables from wholesale customers under capital leases. The Company typically provides short-term financing support to its wholesale customers for the purchase of facilities and equipment for new stores. The financing support is subsequently refinanced, typically through banks, with the Company receiving reimbursement. Additionally, the Company was contingently liable under guarantees of wholesale customers' bank note agreements totalling $15,094,000 and $15,770,000 at December 28, 1996 and December 30, 1995, respectively. All of the loan guarantees are fully collateralized, principally with equipment and inventory and, to a lesser extent, with building facilities. At December 28, 1996, the Company's ratio of total liabilities to shareholders' investment was 1.08, compared to 1.18 at December 30, 1995. The ratio decrease was principally attributable to higher net earnings. Additionally, at December 28, 1996, 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 very 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. Company Business The Company is engaged in distributing food and related products at wholesale and retail. At December 28, 1996, the Company franchised 68 and operated 16 corporate retail supermarkets under the Piggly Wiggly/R/ name in its eastern Wisconsin and northeastern Illinois market areas. The Company owns the right to grant Piggly Wiggly franchises in its market areas. 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 areas. The Company supplies grocery, frozen food, dairy and produce to its customers through its 364,000 square foot distribution center in Sheboygan, Wisconsin. Also, the Company provides its customers with fresh, frozen and processed meats, eggs and deli items through a third-party distribution facility in Milwaukee, Wisconsin 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 1,550 individuals, nearly 1,050 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, approximately 200 are engaged in warehousing, distribution and trucking activities, and nearly 300 are corporate and administrative personnel. [Page 12 of Annual Report] REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors and Shareholders Schultz Sav-O Stores, Inc. We have audited the accompanying consolidated balance sheets of Schultz Sav-O Stores, Inc. and its subsidiary as of December 28, 1996 and December 30, 1995 and the related consolidated statements of earnings, cash flows and shareholders' investment for each of the three fiscal years in the period ended December 28, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conduct our audits in accordance with generally accepted accounting 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Schultz Sav-O Stores, Inc. and its subsidiary as of December 28, 1996 and December 30, 1995, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 28, 1996, in conformity with generally accepted accounting principles. Milwaukee, Wisconsin Arthur Andersen LLP February 5, 1997 [Page 13 to 15 of Annual Report] CONSOLIDATED BALANCE SHEETS As of December 28, 1996 and December 30, 1995 Assets 1996 1995 Current Assets: Cash and equivalents $27,531,000 $21,593,000 Receivables 5,676,000 5,562,000 Inventories 22,316,000 20,458,000 Other current assets 3,367,000 5,606,000 Deferred income taxes 3,824,000 3,504,000 ---------- ---------- Total current assets 62,714,000 56,723,000 ---------- ---------- Noncurrent receivable under capital subleases 8,239,000 9,361,000 Property under capital leases, net 3,073,000 3,089,000 Other noncurrent assets 2,402,000 2,203,000 Property and equipment, net 21,544,000 22,827,000 ---------- ---------- Total assets $97,972,000 $94,203,000 ========== ========== Liabilities & shareholders' investment Current liabilities: Accounts payable $20,332,000 $19,509,000 Accrued salaries and benefits 4,189,000 4,000,000 Accrued insurance 3,328,000 2,805,000 Retail repositioning reserve 852,000 1,145,000 Other accrued liabilities 3,692,000 3,295,000 Current obligations under capital leases 702,000 777,000 Current maturities of long-term debt 345,000 337,000 ---------- ---------- Total current liabilities 33,440,000 31,868,000 ---------- ---------- Long-term obligations under capital leases 12,368,000 13,268,000 Long-term debt 3,375,000 3,719,000 Deferred income taxes 1,754,000 2,060,000 Shareholders' investment: Preferred stock, $100 par value, authorized 3,000 shares, issued and outstanding 159 shares in 1995 - 16,000 Common stock, $0.05 par value, authorized 20,000,000 shares, issued 5,833,570 in 1996 and 1995 292,000 292,000 Additional paid-in capital 13,331,000 12,990,000 Retained earnings 45,654,000 40,855,000 Treasury stock at cost, 1,214,472 shares in 1996 and 1,179,972 shares in 1995 (12,242,000) (10,865,000) ---------- ---------- Total shareholders' investment 47,035,000 43,288,000 ---------- ---------- Total Liabilities and Shareholders' Investment $97,972,000 $94,203,000 ========== ========== See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF EARNINGS For fiscal years 1996, 1995 and 1994 1996 1995 1994 Net sales $453,921,000 $439,646,000 $446,362,000 Costs and expenses: Cost of products sold 381,492,000 369,130,000 372,867,000 Operating and administrative expenses 61,892,000 61,034,000 64,401,000 ---------- ---------- ---------- Operating income 10,537,000 9,482,000 9,094,000 Interest income 842,000 944,000 453,000 Interest expense (867,000) (926,000) (894,000) ---------- ---------- ---------- Earnings before income taxes 10,512,000 9,500,000 8,653,000 Provision for income taxes 4,047,000 3,660,000 3,252,000 ---------- ---------- ---------- Net Earnings $ 6,465,000 $ 5,840,000 $ 5,401,000 ========== ========== ========== Earnings per Share $1.35 $1.20 $1.02 ==== ==== ====
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS For fiscal years 1996, 1995 and 1994 1996 1995 1994 Cash flows from operating activities: Net earnings $ 6,465,000 $ 5,840,000 $ 5,401,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 4,451,000 4,467,000 4,654,000 Deferred income taxes (626,000) 1,003,000 (1,333,000) Changes in assets and liabilities: Receivables (114,000) 1,276,000 1,504,000 Inventories (1,858,000) 869,000 (7,000) Other current assets 2,335,000 (2,584,000 295,000 Accounts payable 823,000 (152,000) 1,044,000 Accrued liabilities 1,386,000 (4,099,000) 4,739,000 ---------- ---------- ---------- Net cash flows from operating activities 12,862,000 6,620,000 16,297,000 ---------- ---------- ---------- Cash flows from investing activities: expenditures for property and equipment (3,420,000) (3,545,000) (3,640,000) Receipt of principal amounts under capital subleases 581,000 518,000 564,000 Proceeds from asset sales 88,000 599,000 538,000 Proceeds from maturity of short-term investments - - 2,953,000 ---------- ---------- ---------- Net cash flows from investing activities (2,751,000) (2,428,000) 415,000 ---------- ---------- ---------- Cash flows from financing activities: Payment for acquisition of treasury stock (2,233,000) (3,475,000) (5,360,000) Payment of cash dividends (1,666,000) (1,047,000) (518,000) Proceeds from exercise of stock options 856,000 487,000 433,000 Principal payments on capital lease obligations (777,000) (714,000) (797,000) Principal payments on long-term debt (337,000) (323,000) (300,000) Repurchase of preferred stock (16,000) (142,000) - ---------- ---------- ---------- Net cash flows from financing activities (4,173,000) (5,214,000) (6,542,000) ---------- ---------- ---------- Cash and equivalents: Net increase(decrease) 5,938,000 (1,022,000) 10,170,000 Balance, beginning of year 21,593,000 22,615,000 12,445,000 ---------- ---------- ---------- Balance, End of Year $27,531,000 $21,593,000 $22,615,000 ========== ========== ==========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT As of December 28, 1996, December 30, 1995 and December 31, 1994 1996 1995 1994 Shares Amount Shares Amount Shares Amount Preferred Stock, $100 par Beginning of year 159 $ 16,000 3,000 $ 300,000 3,000 $ 300,000 Repurchase of preferred stock (159) (16,000) (2,841) (284,000) - - --------- -------- --------- --------- --------- -------- End of year - - 159 16,000 3,000 300,000 ========= ======== ========= ========= ========= ======== Common Stock, $0.05 par Beginning of year 5,833,570 292,000 2,916,785 146,000 2,916,785 146,000 Two-for-one stock split effected in the form of a 100% stock dividend - - 2,916,785 146,000 - - --------- -------- --------- --------- --------- -------- End of year 5,833,570 292,000 5,833,570 292,000 2,916,785 146,000 ========= ======== ========= ========= ========= ======== Additional Paid-in Capital Beginning of year 12,990,000 12,680,000 12,680,000 Exercise of stock options 341,000 168,000 - Repurchase of preferred stock - 142,000 - --------- -------- ------- --------- -------- -------- End of year 13,331,000 12,990,000 12,680,000 ========= ========== ======== ========== ======== ========== Retained Earnings Beginning of year 40,855,000 36,179,000 31,296,000 Net earnings 6,465,000 5,840,000 5,401,000 Cash dividends Preferred stock ($3.00 per share) - (9,000) (9,000) Common stock ($0.36 per share in 1996, $0.22 in 1995 and $0.10 in 1994) (1,666,000) (1,038,000) (509,000) Two-for-one stock split effected in the form of a 100% stock dividend (117,000) - --------- ---------- -------- ---------- -------- ---------- End of year 45,654,000 40,855,000 36,179,000 ========= ========== ======== ========== ======== ========== Treasury Stock Beginning of year (1,179,972) (10,865,000) (495,551) (7,848,000) (222,933) (2,921,000) Exercise of stock options 111,300 856,000 53,359 487,000 29,549 433,000 Acquisition of treasury stock (145,800) (2,233,000) (152,294) (3,475,000) (302,167) (5,360,000) Two-for-one stock split effected in the form of a 100% stock dividend - - (585,486) (29,000) - - --------- ---------- --------- ---------- -------- --------- End of year (1,214,472) (12,242,000) (1,179,972) (10,865,000) (495,551) (7,848,000) ========= ========== ========= ========== ======== ========= Total Shareholders' Investment, End of Year $47,035,000 $43,288,000 $41,457,000 ========= ========== ========= ========== ======== ==========
See notes to consolidated financial statements. [Pages 16 to 21 of Annual Report] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For fiscal years 1996, 1995 and 1994 (A) 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 retail supermarkets and independent food stores supplied by the Company are located in eastern Wisconsin and northeastern Illinois. All franchised and corporate stores operate under the name of Piggly Wiggly./R/ (B) Summary of Significant Accounting Policies Accounting periods The Company's fiscal year ends on the Saturday closest to December 31. The 1996, 1995 and 1994 fiscal years were 52-week periods ended December 28, 1996, December 30, 1995 and December 31, 1994, respectively. Principles of consolidation The financial statements include the accounts of Schultz Sav-O Stores, Inc. and its wholly-owned subsidiary, PW Trucking, Inc. Any intercompany accounts and transactions have been eliminated. 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. Receivables Receivables are shown net of allowance for doubtful accounts of $3,650,000 and $2,565,000 at December 28, 1996 and December 30, 1995, respectively. 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 28, 1996 and December 30, 1995, 82% and 83%, 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 $9,447,000 and $9,631,000 at December 28, 1996 and December 30, 1995, respectively. Other current assets Other current assets at December 28, 1996 and December 30, 1995 consisted of the following: 1996 1995 Retail systems for resale $1,108,000 $1,649,000 Property held for resale 940,000 2,389,000 Prepaid expenses 615,000 657,000 Receivable under capital subleases 504,000 581,000 Store equipment and supplies for resale 200,000 330,000 --------- --------- Other current assets $3,367,000 $5,606,000 ========= ========= 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, at December 28, 1996 and December 30, 1995 consisted of the following: 1996 1995 Land and buildings $18,382,000 $18,508,000 Leasehold improvements 5,398,000 5,566,000 Equipment and fixtures 29,911,000 31,186,000 ---------- ---------- 53,691,000 55,260,000 Less accumulated depreciation and amortization (32,147,000) (32,433,000) ========== ========== Property and equipment, net $21,544,000 $22,827,000 ========== ========== The Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed of" in 1996. The Company determined that the adoption of this standard did not have a material impact on its financial statements for 1996. Accounts Payable Accounts payable included $6,968,000 and $7,169,000 at December 28, 1996 and December 30, 1995, respectively, of issued checks that have not cleared the Company's disbursing bank accounts. 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. Earnings per share Earnings per share 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. 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 prior to distribution date appearing in the financial statements and notes thereto have been retroactively adjusted for the stock split in September 1995. The weighted average number of shares outstanding utilized in the per share calculations were 4,789,000, 4,981,000 and 5,257,000 for fiscal years 1996, 1995 and 1994, respectively. Supplementary disclosure of cash flow information Interest and taxes paid included in the Company's cash flow from operations were as follows: 1996 1995 1994 Interest paid $ 873,000 $ 902,000 $ 918,000 Taxes paid 4,071,000 3,368,000 2,835,000 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. 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. Advertising costs Costs incurred for producing and communicating advertising are expensed when incurred. Reclassifications Certain 1995 and 1994 amounts previously reported have been reclassified to conform to the 1996 presentation. (C) Long-Term Debt The Company has a loan agreement providing unsecured revolving credit facilities totaling $16,000,000 through April 30, 1998. This arrangement provides for borrowings at rates not to exceed the bank's prime rate. There are no compensating balance requirements. There were no borrowings outstanding under this agreement during 1996 and 1995. Long-term debt at December 28, 1996 and December 30, 1995 consisted of the following: 1996 1995 Mortgage note, 9.675% due in monthly installments of $33,026 including interest due through June 2012 $3,191,000 $3,274,000 Term note, 9.91%, due in quarterly installments of $55,000 through June 1998 295,000 515,000 Land contract, 10.0%, due in annual installments of $33,333 through March 2003 234,000 267,000 --------- --------- 3,720,000 4,056,000 Less current maturities (345,000) (337,000) --------- --------- Long-term debt $3,375,000 $3,719,000 ========= ========= At December 28, 1996, the fair value of the financial instruments approximated carrying value. 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 28, 1996, $3,430,000 of retained earnings were available for cash dividends and other restricted payments. The total amount of long-term debt due in each of the fiscal years 1997 through 2001 will be $345,000, $209,000, $144,000, $156,000 and $168,000, respectively, and $2,697,000 from 2002 to 2012. Interest expenses consisted of the following: 1996 1995 1994 Interest on long- term debt $383,000 $419,000 $312,000 Imputed interest- capital leases 484,000 507,000 582,000 ------- ------- ------- Interest expense $867,000 $926,000 $894,000 ======= ======= ======= (D) Income Taxes The difference between the statutory federal income tax rate and the effective rate is summarized as follows: 1996 1995 1994 Federal income tax statutory rate 34.0% 34.0% 34.0% State income taxes, net of federal income tax benefit 5.3 5.1 5.1 Other, net (0.8) (0.6) (1.5) ---- ---- ---- Effective income tax rate 38.5% 38.5% 37.6% ==== ==== ==== Components of provision for income taxes consisted of the following: 1996 1995 1994 Currently payable Federal $3,804,000 $2,082,000 $3,606,000 State 869,000 575,000 979,000 Deferred (626,000) 1,003,000 (1,333,000) --------- --------- --------- Provision for income taxes 4,047,000 3,660,000 3,252,000 ========= ========= ========= The components of deferred income tax assets and liabilities at December 28, 1996 and December 30, 1995 were as follows: 1996 1995 Deferred income tax assets: Bad debt reserve $1,414,000 $1,000,000 Accrued insurance 1,296,000 1,094,000 Capital lease accounting 716,000 622,000 Vacation pay 513,000 597,000 Retail repositioning reserve 332,000 447,000 Other 574,000 857,000 --------- --------- Total deferred income tax assets 4,855,000 4,617,000 --------- --------- Deferred income tax liabilities: Property and equipment (2,470,000) (2,705,000) Pension (315,000) (468,000) --------- --------- Total deferred income tax liabilities (2,785,000) (3,173,000) --------- --------- Net deferred income tax asset $2,070,000 $1,444,000 ========= ========= The net deferred income tax asset as of December 28, 1996 and December 30, 1995 were classified in the balance sheet as follows: 1996 1995 Current deferred income tax asset $3,824,000 $3,504,000 Noncurrent deferred income tax liability (1,754,000) (2,060,000) --------- --------- Net deferred income tax asset $2,070,000 $1,444,000 ========= ========= (E) Commitments and Contingent Liabilities The Company has projected capital expenditures for fiscal year 1997 at $5,200,000. Commitments approximating $3,150,000 were made as of December 28, 1996. As of December 28, 1996, the Company was contingently liable under guarantees of bank note agreements of wholesale customers totaling $15,094,000. All of the loan guarantees are fully collateralized, principally with equipment and inventory, and to a lesser extent, with building facilities. (F) 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 1996, 1995 and 1994 were $793,000, $720,000 and $700,000, respectively. Beginning in October 1994, the plan allowed participants to make pretax contributions. The Company then matches certain percentages of employee contributions. The Company's matching contributions for 1996 and 1995 were $71,000 and $68,000, 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 $1,564,000, $1,599,000 and $1,668,000 in fiscal years 1996, 1995 and 1994, 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. (G) 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 a majority of 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, corporate office space 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 were calculated using interest rates appropriate at the inception of each lease. A summary of real property utilized by the Company under capital leases at December 28, 1996 and December 30, 1995 was as follows: 1996 1995 Investments in leased property under capital leases $5,264,000 $5,466,000 Less accumulated amortization (2,191,000) (2,377,000) --------- --------- Property under capital leases, net $3,073,000 $3,089,000 ========= ========= Amortization of leased property under capital leases, included in operating and administrative expenses, amounted to $273,000, $283,000 and $331,000 in fiscal years 1996, 1995 and 1994, 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 28, 1996: Capital lease Capital sublease obligations receivables 1997 $ 2,228,000 $ 1,533,000 1998 2,201,000 1,506,000 1999 2,167,000 1,473,000 2000 2,126,000 1,411,000 2001 2,131,000 1,416,000 2002-2009 13,174,000 8,740,000 ---------- ---------- Total minimum lease payments 24,027,000 16,079,000 Less interest (10,957,000) (7,336,000) ---------- ---------- Present value of minimum lease payments and amounts receivable 13,070,000 8,743,000 Less current portion (702,000) (504,000) ---------- ---------- Long-term obligations and receivable $12,368,000 $8,239,000 ========== ========== The following is a schedule of future minimum lease payments required under operating leases for retail stores, transportation equipment, corporate office space and office equipment that have noncancelable lease terms in excess of one year as of December 28, 1996: 1997 $ 7,637,000 1998 7,582,000 1999 7,432,000 2000 6,933,000 2001 6,376,000 2002-2016 63,985,000 ---------- Total minimum lease payments 99,945,000 Lease minimum amounts receivable under noncancelable subleases (82,297,000) ---------- Net minimum lease payments $17,648,000 ========== Rental expenses for all operating leases amounted to $3,813,000, $3,958,000 and $4,486,000 in fiscal years 1996, 1995 and 1994, respectively. These amounts include $1,012,000, $1,113,000 and $1,444,000, respectively, for contingent rentals. (H) Stock Option Plans The Company has stock option plans which provide for the grant of either incentive or nonqualified stock options to key employees. The exercise price of each option is equal to the market price of the Company's stock on 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 Stock Option Committee of the Board of Directors or upon a change in control of the Company, as defined by the plans. The Company applies Accounting Principles Board Opinion 25 in accounting for its stock option plans. In 1995, the Financial Accounting Standard Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which established financial accounting and reporting standards for stock-based employee compensation. The statement allows for companies to continue to apply the accounting treatment under the provisions of APB 25. Effective fiscal year 1996, the Company has elected to adopt the disclosure requirement of SFAS 123, however, in the opinion of management, the proforma impact of compensation expense for stock-based employee arrangements is not material to the financial statements. As of December 28, 1996, no incentive stock options have been granted. Following is a summary of the status of nonqualified stock options for the fiscal years 1996, 1995 and 1994: Number of Range of per shares share option prices 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 Options granted 88,600 15.75 Options exercised (111,300) 14.75-16.50 Options canceled (1,866) 7.63 ------- ----------- Shares under option at December 28, 1996 445,800 6.25-15.75 ======= ========== Shares reserved for grant at December 28, 1996 344,400 ======= Options granted in January 1997 95,800 $14.50 ======= ======= 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 28, 1996 and December 30, 1995 were 271,700 and 285,000 shares, respectively. (I) Preferred Stock 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 were authorized and 159 shares remain outstanding. In August 1996, the Company repurchased the remaining 159 shares outstanding at par. The Company has 1,000,000 shares of $0.05 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. (J) 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 prior to distribution date have been restated to retroactively reflect the stock split. At December 28, 1996, of the 20,000,000 shares of Common Stock authorized, 5,833,570 shares were issued and 4,619,098 shares were outstanding. All common shares issued and issuable include one associated common stock purchase right which entitles 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 28, 1996, approximately 6,624,000 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. (K) Unaudited Quarterly Financial Information The Company includes sixteen weeks in its first quarter and twelve weeks in each subsequent quarter. Summarized quarterly and annual financial information for fiscal years 1996 and 1995 follows: (Dollars in thousands, except per share data) Fiscal Year Ended December 28, 1996 First Second Third Fourth Year Net Sales $134,079 $105,544 $105,383 $108,915 $453,921 Gross profit 21,531 17,005 16,646 17,247 72,429 Net earnings 1,261 1,576 1,472 2,156 6,465 Earnings per share $0.26 $0.33 $0.31 $0.45 $1.35 Weighted average shares outstanding 4,824,000 4,752,000 4,770,000 4,779,000 4,789,000 ========= ========= ========= ========= ========= (Dollars in thousands, except per share data) Fiscal Year Ended December 30, 1995 First Second Third Fourth Year Net Sales $132,278 $101,996 $99,373 $105,999 $439,646 Gross profit 21,289 16,734 16,264 16,229 70,516 Net earnings 1,237 1,556 1,385 1,662 5,840 Earnings per share $0.24 $0.31 $0.28 $0.37 $1.20 Weighted average shares outstanding 4,984,000 4,965,000 4,952,000 4,879,000 4,981,000 ========= ========= ========= ========= ========= [Page 22 of Annual Report] Common Stock Information The Company's Common Stock is traded over-the-counter on the Nasdaq Stock Market under the symbol SAVO. There are approximately 1,040 beneficial holders of the Company's Common Stock. An analysis of high and low stock prices by quarter and for the last three years are as follows:
First Second Third Fourth Year High Low High Low High Low High Low High Low 1996 $16.50 $14.00 $15.00 $12.25 $13.75 $12.25 $15.00 $13.00 $16.50 $12.25 1995 11.50 9.75 11.63 10.75 15.00 11.25 15.50 14.25 15.50 9.75 1994 8.50 7.63 9.13 8.00 10.00 8.88 10.13 9.63 10.13 7.63
Cash dividends paid per share were: First Second Third Fourth Year 1996 $0.08 $0.08 $0.10 $0.10 $0.36 1996 0.03 0.03 0.08 0.08 0.22 1996 0.02 0.02 0.03 0.03 0.10 Stock prices and dividend information have been adjusted to reflect the two-for-one stock split effected in the form of a 100% stock dividend on September 15, 1995. EX-21 3 SUBSIDIARY LIST SUBSIDIARY OF REGISTRANT The only subsidiary of Schultz Sav-O Stores, Inc. is PW Trucking, Inc., a Wisconsin corporaton. EX-23 4 CONSENT 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. ARTHUR ANDERSEN LLP Milwaukee, Wisconsin, March 14, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 1 YEAR DEC-28-1996 DEC-31-1995 DEC-28-1996 27,531,000 0 9,326,000 3,650,000 22,316,000 62,714,000 53,691,000 32,147,000 97,972,000 33,440,000 3,375,000 292,000 0 0 46,743,000 97,972,000 453,921,000 453,921,000 381,492,000 0 61,892,000 0 867,000 10,512,000 4,047,000 6,465,000 0 0 0 6,465,000 1.35 1.35 Amounts included in "Other costs and expenses". Net of "Allowances for doubtful accounts".
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