SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Schedule 14D-9
Solicitation/Recommendation Statement Pursuant to
Section 14(d)(4) of the Securities Exchange Act of 1934
MIMBRES VALLEY FARMERS ASSOCIATION, INC.
(Name of subject company)
Mimbres Valley Farmers Association, Inc.
(Name of Person Filing Statement)
Common Stock
(Title of Class of Securities)
CUSIP Number of Class of Securities: Not Applicable
Donald B. Monnheimer
Kemp, Smith, Duncan & Hammond, P.C.
500 Marquette NW, Suite 1200
Albuquerque, New Mexico 87102
(505) 247-2315
Fax: (505) 764-5480
(Name, address and telephone number of person authorized to
receive notice and communications on behalf of the person
filing statement)
<PAGE>
Item 1. Security and Subject Company
This statement relates to common stock of Mimbres Valley
Farmers Association, Inc., a New Mexico corporation ("Farmers"),
whose principal executive offices are at 811 South Platinum,
Deming, New Mexico 88030.
Item 2. Tender Offer of the Bidder
This statement relates to a tender offer dated June 3, 1996 by
John Brownfield, John Keck, J.W. Donaldson Jr., Frederick H.
Sherman, Kenny Stevens, Harold Morrow and approximately 54 other
persons. Mr. Brownfield's address is HC 66, Box 28, Deming, New
Mexico 88030; Mr. Keck's address is Alamo Rancho Company, 83-555
Airport Blvd., Thermal, California 92274; Mr. Donaldson's address
is Rt. 2, Box 129, Deming, New Mexico 88030; Mr. Sherman's address
is Sherman & Sherman, P.C., 210 South Silver, Deming, New Mexico
88030; Mr. Stevens' address is Rt. 2, Box 1285, East Dona Ana Road,
Deming, New Mexico 88030; and Mr. Morrow's address is Morrow &
Company, 800 West Florida, Deming, New Mexico 88030. The tender
offer indicates that the bidders other than the persons named above
are included solely for the purpose of providing legal ownership
for all the shares that may be purchased, in view of a requirement
of the Farmers articles and bylaws that restricts legal ownership
of Farmers shares to a maximum of 240 per person. The tender offer
indicates that the six individuals named above will be the
beneficial owners of all acquired stock, and will exercise all
power pertaining to such stock.
Item 3. Identity and Background
The person filing this statement is Mimbres Valley Farmers
Association, Inc., whose address is 811 South Platinum, Deming, New
Mexico 88030.
There are material actual or potential conflicts of interest
between Farmers and three of the bidders: John Brownfield, J.W.
Donaldson, Jr., and Harold Morrow. Messrs. Brownfield and
Donaldson are current directors of Farmers, and may have a conflict
of interest arising from their duty of loyalty to the shareholders
of Farmers. Farmers believes, however, that this conflict of
interest may be resolved by Messrs. Brownfield and Donaldson fully
abstaining from any deliberation or vote of the Board pertaining to
the tender offer or the response of Farmers thereto. To date,
Messrs. Brownfield and Donaldson have so abstained. For the eleven
years prior to June 4, 1996, when he resigned, Mr. Morrow was the
outside auditor of Farmers. Farmers believes that Mr. Morrow's
resignation without notice and under the circumstances, and also
certain statements attributable to Mr. Morrow in the tender offer,
constitute conflicts of interest with his duty owed to Farmers in
his role as a certified public accountant.
<PAGE>
Item 4. The Solicitation and Recommendation
See pages 1 through 5 of the attached Exhibit EX-20 (Letter
dated August 22, 1996 from James E. Keeler, Chairman of the Farmers
Board of Directors, to Farmers shareholders). See also the
Schedule 14D-9 dated June 15, 1996 (previously filed), and Exhibit
A attached thereto, and the Schedule 14D-9 dated June 26
(previously filed), and Exhibit A attached thereto.
Item 5. Persons Retained, Employed or to Be Compensated
None.
Item 6. Recent Transactions and Intent with Respect to Securities
Not applicable.
Item 7. Certain Negotiations and Transactions by the Subject
Company
No negotiation is being undertaken or is underway by Farmers
in response to the tender offer, and there is no transaction, board
resolution, agreement in principle, or signed contract, that
relates to or would result in any of the circumstances listed in
Item 7(a)(1) through (4).
Item 8. Additional Information to be Furnished
None.
Item 9. Material to be Furnished as Exhibits
See Exhibit EX-20 (Letter dated August 22, 1996 from James E.
Keeler, Chairman of the Farmers Board of Directors, to Farmers
shareholders).
Signature. After reasonable inquiry and to the best of my
knowledge and belief, I certify that the information set forth in
this statement is true, complete and correct.
August 22, 1996 James E. Keeler
James E. Keeler, Chairman of
the Board and President
[Mimbres Valley Farmers Association letterhead]
August 22, 1996
All Mimbres Valley Farmers
Association Shareholders
Re: June 3 Tender Offer
Dear Shareholder:
On June 3, 1996, a tender offer (the "Tender Offer") was made
by John Brownfield, John Keck, J.W. Donaldson, Jr., Frederick H.
Sherman, Kenny Stevens, Harold Morrow and others (the "Bidders")
for all outstanding common stock of Mimbres Valley Farmers
Association, Inc. ("Farmers"). The price offered under the Tender
Offer (the "Tender Price") is $50 per share. In response to the
Tender Offer, the board of directors of Farmers (the "Board")
engaged Rogoff, Diamond & Walker LLP ("Rogoff"), an Albuquerque
accounting firm, to do a valuation report of Farmers (the "Report")
for the purpose of allowing the Board to make a sound
recommendation about the Tender Offer to the shareholders. To
permit sufficient time for the completion of the Report, the Board
also sought and obtained an extension of the expiration of the
Tender Offer, to September 16, 1996.
Rogoff delivered the Report to the Board on August 2.
Enclosed with this letter is Rogoff's cover letter, together with
two addenda to that letter. The first addendum is an executive
summary of the Report; the second addendum discusses the difference
in per share value of the company's stock for tender offer
evaluation purposes versus other purposes, and indicates how the
present value of Farmers' stock to shareholders could be increased
by greater dividends, increased marketability, and other factors.
The complete Report, which includes 30 pages of text and 23
exhibits, is available for review by shareholders at the Farmers
office, 811 South Platinum, Deming, New Mexico, during regular
business hours. Farmers will also provide copies of the Report to
any shareholder upon request, for the cost of copying and, if
applicable, postage.
Using a combination of methods, which are noted in the first
addendum and are discussed in greater detail in the body of the
Report, Rogoff estimates that the value of Farmers stock to a
single owner or unified ownership group---such as the Bidders if
they were successful in obtaining control of the company through
the Tender Offer---is $283 per share, or over 5-1/2 times the
Tender
Price of $50 per share. Rogoff estimates the present value of
Farmers stock to the shareholders, under current circumstances and
company policies, as considerably less, $106 per share, or
approximately 2-1/8 times the Tender Price. Since by either measure
the value of the stock greatly exceeds the Tender Price, the Board
recommends that the Tender Offer be rejected. The Board notes that
even if a majority of the shareholders wished to sell control of
the company, the control value of $283 per share indicates that
this would be better accomplished by openly offering the company to
the whole universe of potential buyers, rather than settling for
the grossly inadequate Tender Price offered by the Bidders.
Since the purpose of the Report was to evaluate the adequacy
of the Tender Offer, the Report estimates the worth of Farmers as
of June 3, 1996, the date of the Tender Offer. The Report
considers and makes adjustments for the future anticipated effect
on Farmers of Peppers, the new grocery competitor; however, the
Report does not reflect actual results of Farmers since Peppers
opened in late June. Although the Board believes that it is very
unlikely that competition from Peppers will significantly change
the valuation estimated in the Report, the Board recognizes that
sales information since Peppers' opening compared to historical
sales could be material to a shareholder's decision of whether to
offer his stock under the Tender Offer. Accordingly, the Board
intends to provide to shareholders in early September such
comparative sales information as is available at that time.
Notwithstanding the fact that the valuations in the Report
greatly exceed the Tender Price, the Board has concern about the
large difference Rogoff estimates between the value to a single
owner (i.e., $283 per share) and the present value to shareholders
($106 per share). Although the Report attributes approximately 37%
of this difference to a "minority discount" (that is, the absence
of a "control premium"), which would presumably exist as long as
Farmers (or any other corporation) is owned by a large number of
shareholders, the Report estimates that most of the difference is
due to two other factors: the lack of an active market for the
stock (43% of the difference), and restrictions on the amount of
stock any one person can own (20% of the difference). The Report
indicates certain actions that Farmers could take to modify these
two factors, and thus to increase the value of the company's stock
to the shareholders. The Board believes adoption of some or all of
these measures deserves serious consideration.
The Board's concern about the relatively low value of Farmers'
stock to shareholders is based on two related grounds. First,
Farmers is a for-profit corporation, and as such its primary
purpose must be to provide value for its shareholders. Farmers
cannot, legally, be run simply for charitable purposes, or solely
for the benefit of the community. Neither the Board nor its legal
counsel, however, believes that this is necessarily inconsistent
with Farmers' long-held philosophy of providing value to the
community. Maintaining good-will and customer loyalty, and taking
actions to remain a valued and respected member of the community,
are universally regarded as sound business practices, especially if
the business takes a long-term view, as Farmers does. Indeed, a
successful long-term business must almost by definition give good
value to its community. The Report states that Farmers "has been
prudently managed" and that "[m]anagement has performed at a high
level and has exploited business opportunities as evidenced by
<PAGE>
financial results in recent years". The Report also contains no
suggestion that Farmers should change its basic business practices.
Nevertheless, there is no question that the Board has a fundamental
duty to maximize the shareholders' overall return (i.e., the
combination of dividends and appreciated share value).
Second, it is clear that the large discrepancy between
shareholder value and the control value of the company, and the
even larger discrepancy between the control value and the
historical share price, are precisely what prompted the Tender
Offer. It is equally clear that a continuation of this discrepancy
in value will serve as a constant temptation for future takeover
attempts, with all the expense and disruption that they may entail.
It should be noted that even if shareholders residing in the Deming
area refused a particular tender offer because of loyalty to
Farmers, shareholders who reside elsewhere, and who perhaps never
did live around Deming, can only be expected to decide to tender or
not to tender exclusively on economic grounds. And as more and
more of Farmers' outstanding stock passes by way of inheritance,
the portion of the shareholders who lack an emotional attachment to
Farmers will gradually increase.
In the second addendum to its cover letter, Rogoff discusses
a number of actions that might be employed to increase the value of
Farmers' stock to shareholders. These actions include increasing
dividends, repurchasing stock, and encouraging a more active market
in the stock. Rogoff also indicates that the current provision in
the Articles of Incorporation that restricts the number of shares
that may be owned by any one person acts as a value inhibitor. The
Board is of the opinion that some or all of the measures discussed
by Rogoff should be implemented in some form, including
consideration of modification or repeal of the stock ownership
restriction. On the other hand, the Board believes very strongly
that nothing should be done until there has been ample opportunity
for thorough discussion of this entire issue among the
shareholders. <F1> To that end, the Board proposes to include a
discussion item on increasing shareholder value on the agenda of
the annual meeting in October. The Board currently has no
intention, however, of seeking a shareholder vote on any related
matter.
The Bidders announced the extension of the tender period to
September 16, 1996 in a July 1 press release and a July 1 letter to
<F1> Amendment or repeal of the stock ownership restriction would
require shareholder approval in any case. The Board notes that
although this provision was adopted for the purpose of maintaining
community ownership of Farmers, the provision cannot be entirely
effective because control of shares can still be concentrated
through a contractual agreement. The Tender Offer, which
identified dozens of proposed legal owners of to-be-acquired stock,
but only six beneficial owners, gives a good example of how the
stock ownership restriction can be defeated. Although the
restriction is certainly an impediment to control, it is not a bar.
<PAGE>
Farmers shareholders. In the letter, the Bidders disclosed that as
of July 1 the number of shares tendered was 871, which is
approximately 6.3 percent of the 13,776 outstanding shares.
Given the contents and conclusions of the Report, shareholders
who previously tendered their stock to the Bidders may now wish to
withdraw such stock. Under Rule 14d-7 of the Securities and
Exchange Commission, shareholders have a right to withdraw their
shares at any time until the expiration of the tender period (at
12:00 p.m. (midnight) New York City time on September 16) by
delivering a notice of withdrawal to Mimbres Valley Abstract and
Title Company, 210 East Poplar, Deming, New Mexico 88030. Notices
of withdrawals should conform with the requirements described in
the second paragraph of Section 6 of the Tender Offer (titled
"Withdrawal Rights"). For the convenience of shareholders who
would like to exercise their right of withdrawal, a "Notice of
Withdrawal" form is enclosed with this letter. Shareholders who
have questions about the withdrawal procedure, or who encounter any
difficulties in withdrawing their shares, are welcome to contact
Farmers for assistance.
Very truly yours,
MIMBRES VALLEY FARMERS ASSOCIATION, INC.
By James E. Keeler
James E. Keeler
Chairman of the Board of Directors
<PAGE>
NOTICE OF WITHDRAWAL
OF SHARES OF MIMBRES VALLEY FARMERS ASSOCIATION, INC.
tendered in response to that certain tender offer by
John Brownfield, John Keck, J.W. Donaldson, Jr.,
Frederick H. Sherman, Kenny Stevens, Harold Morrow et al.,
dated June 3, 1996 and amended July 1, 1996 (the "Tender Offer")
(Deliver to Mimbres Valley Abstract and Title Co., 210 E. Poplar,
Deming, NM 88030. Fax: (505) 546-9697.)
1. Name of person who tendered shares:__________________________.
2. Number of shares to be withdrawn:__________.
3. Name of registered holder of the shares, if different from the
name of the person who tendered the shares:_______________________.
4. Certificate numbers of shares tendered, if certificates have
been delivered to Mimbres Valley Abstract and Title Company:______
________________________________________.
Pursuant to the terms of the Tender Offer and Securities and
Exchange Commission Rule 14d-7 (which Rule controls in the event of
any conflict between the Tender Offer and the Rule), I request
withdrawal of my shares as described above. I also request
immediate notification if for any reason this withdrawal will not
be promptly honored.
___________________________________
(Signature)
Name:______________________________
Address:___________________________
___________________________
Telephone:_________________________
SIGNATURE GUARANTEE:
Authorized Signature & Date:__________________________________.
Name and title:________________________________.
Name and address of Company:_____________________________________
(commercial bank or trust company having office, branch, or agency
in the U.S., or member of N.A.S.D. or member firm of any registered
national securities exchange in the U.S.).
Telephone number:__________________________.
MIMBRES VALLEY
FARMERS ASSOCIATION, INC.
dba FARMERS, INC.
VALUATION
June 3, 1996
Mr. James E. Keeler
President and Chairman of the Board
Mimbres Valley Farmers Association, Inc.
811 South Platinum
Deming, NM 88030
Dear Mr. Keeler:
We enclose our valuation report of Mimbres Valley Farmers
Association, Inc. dba Farmers, Inc. (the Company) dated June 3,
1996 (date of tender offer from Brownfield, Keck et al). The
purpose of the valuation is to estimate the fair market value of
the Company's common stock. As indicated in our June 12, 1996
engagement letter, we understand that our valuation estimate
may be used by the Board in evaluating an unsolicited takeover
offer received from the Brownfield, Keck, et al group (Brownfield
group), and in providing recommendations to the shareholders.
Estimated fair market value is defined as, the price at which
property would change hands between a willing buyer and a willing
seller when the former is not under any compulsion to buy and the
latter is not under any compulsion to sell, and both parties having
reasonable knowledge of the relevant facts.
Our report is based on historical and prospective financial
information provided to us by management and other third parties.
Had we audited or reviewed the underlying data, matters may have
come to our attention which would have resulted in our using
amounts which differ from those provided. Accordingly, we take no
responsibility for the underlying data presented in this report.
Users of this business valuation should be aware that business
valuations are based on future earnings potential that may or may
not materialize. Therefore, the actual results achieved during the
projection period will vary from the projections used in this
valuation and the variations may be material. Because this
valuation is performed in order for the Board to evaluate the
reasonableness of the June 3, 1996 tender offer, we have estimated
the value of the Company and the related per share amount under the
assumption that the Board may entertain this offer as well as other
offers to realize an appropriate value for the Company and the
Company's stock.
Based on our study and analytical procedures, we have concluded
that a reasonable estimate of the acquisition value of the Company
as of June 3, 1996, to a buyer obtaining control of the Company is
$3,900,000, or $283 per share.
<PAGE>
Mr. James E. Keeler
President and Chairman of the Board
Mimbres Valley Farmers Association, Inc.
Page Two
We recognize that this per share value differs significantly from
what the Company's shares have traded for in recent years, and what
these shares might trade for if the tender offer is rejected and
the Board takes other actions to establish a market for this stock.
We address these matters further in Addendum II to this letter.
We have no present or contemplated financial interest in the
Company. Our fees for this valuation are based upon our normal
hourly billing rates, and are in no way contingent upon the results
of our findings. We have no responsibility to update this report
for events and circumstances occurring subsequent to the date of
this report.
This report has been prepared for the Company for evaluating an
unsolicited takeover offer from the Brownfield group by evaluating
the reasonableness of the amount in the June 3, 1996 tender offer,
and is not to be used to obtain credit or for any other purposes.
Rogoff, Diamond & Walker LLP
/S/
Albuquerque, New Mexico
July 18, 1996
Addendum I - Executive Summary
Addendum II - Valuation for Tender Offer Evaluation versus
Valuation for Other Purposes
ii
Farmers, Inc. Addendum I
Executive Summary - June 3, 1996 Valuation Page 1 of 2
Introduction -
The Company's operations, conducted exclusively in Deming, New
Mexico consist of the retail sale of groceries, hardware & sporting
goods, furniture & appliances, crafts, clothing, animal feeds,
gasoline and the rental of space to unrelated tenants.
The Company owns a mall/supermarket facility which contains its
"IGA" supermarket, Ben Franklin crafts, clothing, and furniture &
appliance sales locations, and space which it leases to unrelated
tenants. The Company's hardware sales were also located in the
mall facility through March 31, 1996, prior to opening its expanded
"True-Value" hardware & sporting goods sales operation in a newly
renovated leased building.
Operations and Competition -
The Company's operations were relatively stable for the five most
recent fiscal years for which audited financial statements and
annual reports have been prepared (Years ended June 30, 1991 -
1995). During this period there were no significant changes in
facilities or operations and the Company enjoyed increasing
revenues and net income as a result of continued population growth
in the Deming/Luna County area and because of favorable relations
with its wholesale grocery and hardware suppliers. During this
period, supermarket and grocery sales accounted for approximately
70% of Company revenues.
The Company incurred additional debt in fiscal 1996 to pay for
leasehold improvements and related costs to open the new hardware
store, as well as to begin increasing inventory levels for
the new store. Late in fiscal 1996 a new supermarket competitor
("Peppers" ) opened. Peppers opened in June 1996, with its "Grand
Opening" held in July 1996.
Facilities -
In addition to its supermarket/mall facility, the company owns
several other buildings and a parcel of undeveloped land with
frontage on the Columbus highway (adjacent to the new Peppers
supermarket). Estimated fair market value of the Company's
facilities exceeds depreciated cost by approximately $2,000,000.
iii
<PAGE>
Farmers, Inc. Addendum I
Executive Summary - June 3, 1996 Valuation Page 2 of 2
Valuation Estimates -
The Company has been valued for purposes of evaluating the
reasonableness of the $50 per share tender offer, for the 13,776
shares of outstanding common stock. The value of the Company
was determined to be $3,900,000 or $283 per share. This value is
less than "adjusted book value" (sometimes considered a "minimum
value" for valuation purposes), because we understand the Board has
no intention to dispose of the assets or business operations of the
Company and similarly, the Brownfield group has indicated their
intent to continue the Company operations if they are successful.
The $283 per share value was determined by considering the adjusted
net book value, as well as two other methods of valuation -
discounted future cash flows and comparison to sales of operating
companies.
Limited sales and purchases of Company stock in recent years have
been for significantly less than $283 per share. $283 is the
estimated value for evaluating the tender offer -- for a situation
where a buyer, who would have the ability to do whatever they wish
to do with the company -- is seeking control of the company. This
is not the estimated value per share in other situations, including
that which existed prior to the tender offer. We estimate the
value of the Company's stock is $106 per share in the absence of a
tender offer or similar Board action to dispose of the Company or
its operations, in the absence of an active market for the stock,
and with current restrictions on stock ownership. Actions could be
taken to establish a market for the Company's stock, which would
increase the value.
iv
Valuation for Tender Offer Evaluation Addendum II
versus Valuation for other Purposes Page 1 of 4
Discounts -
In our valuation report we provide a valuation estimate which
recognizes that the Company has received an unsolicited tender
offer. This valuation estimate differs from an estimate of the
value per share in the absence of such an offer. This difference
is represented by a "control premium" which quantifies the
potential to an individual or group of investors of having the
ability to exercise the prerogatives of control, which include
appointing management, acquiring or liquidating assets, changing
the articles of incorporation or bylaws and liquidating,
dissolving, selling out or recapitalizing the Company. We have
determined that this benefit of control justifies a premium of 30%
as discussed in the 'Control Premiums and Marketability Discounts'
section of our report.
We also believe that in the absence of the tender offer, a minority
discount would be appropriate. The minority discount is
essentially the opposite or reverse (absence) of the control
premium. A control premium of 30% would be equivalent to a
minority discount of 23% (30% divided by 130%).
There has not been an active market in the Company's shares (one
cannot contact a stockbroker or the Company and readily sell or buy
shares in the Company). This lack of marketability further reduces
the value of the individual shares. In a tender offer situation, a
marketability discount is not appropriate, because a ready and
willing buyer (Brownfield group) has identified itself. However,
in the absence of this tender offer and in the absence of Board
action to establish a market for the shares, we believe that a
marketability discount of 35% would be appropriate. If the Board
takes actions to establish a market, and the Company continued
operations, the need for a marketability discount might be reduced
or eliminated. However, a minority discount would still be
appropriate in such a situation.
Furthermore, the restriction on accumulating more than 1.2% of the
company's stock by any one shareholder may further act to hold down
the value per share. This restriction has served the purpose of
keeping a broad range of community ownership, in keeping with the
Company's purpose, but limits anyone selling Company stock to
buyers who do not already own the maximum number of shares allowed.
This restriction also reduces the potential for an individual or
group of individuals to "bid up" the price of the shares in an
attempt to acquire either outright ownership, control, or Board
representation. We believe that an additional discount of 25% is
appropriate to recognize this factor as a value "inhibitor".
Our estimate of value of the overall company for purposes of
evaluating the reasonableness of the tender offer is $3,900,000, or
$283 per share.
v
<PAGE>
Valuation for Tender Offer Evaluation Addendum II
versus Valuation for other Purposes Page 2 of 4
To estimate the per share value of the Company's common stock in
the absence of (1) the tender offer for control of the Company, (2)
an active trading market and (3) with the existing restrictions on
stock ownership, we apply the above discounts as follows:
<TABLE>
<S> <C>
Value for evaluation of tender offer, per share
(value in sale or "merger & acquisition" setting) $283
Less - 23% minority interest discount (to reverse
effect of 30% control premium) (65)
Value of stock, if actively trading, in
absence of tender offer or other actions
to sell the Company 218
Less - 35% marketability discount (76)
Value of stock, in absence of active trading
market, and in absence of tender offer or
other actions to sell the Company 142
Less 25% discount for restrictive stock ownership
covenants in Articles of Incorporation (36)
Value of stock, with current restrictions,
in absence of tender offer or other actions
to sell the company $106
</TABLE>
It should be noted that the 23% minority interest discount, the 35%
marketability discount and the 25% discount for restrictions on
stock ownership are not "additive", which would result in a
combined discount of 83%. Rather, these discounts are taken
sequentially, which results in a combined discount of approximately
63%.
The $106 per share amount would correlate to an 'Owners value',
"the value of an asset to its current owner, given the owner's
current use of the asset and current resources and capabilities for
economically exploiting the asset; this standard does not
necessarily contemplate a sale transaction." (Pratt, 3rd Edition,
page 544).
vi
<PAGE>
Valuation for Tender Offer Evaluation Addendum II
versus Valuation for other Purposes Page 3 of 4
The obvious question that might arise is why have the shares been
trading in the $18 to $25 per share range rather than in a range
which includes $106 per share? We do not have the answer to that
question but can speculate that the stock's "par" value of $25 per
share, the dividend rate of $1 per share in recent years and the
limited number of shares that any individual can own may all be
contributing factors to the stock trading at the level that it has.
Adequacy of Dividends -
We believe that it is not appropriate to look at dividends as the
only indication of value of the Company's stock. For example, if
the $1 per share annual dividend paid in recent years was
considered a return on investment of 5%, this would equate to a per
share value of approximately $20 (which may be indicative of how
certain sales of stock were valued).
In a growing company, a large portion of earnings is typically
retained to fund internal growth (i.e. the necessary increases in
working capital and property, plant and equipment). Furthermore,
investors in common stocks typically look to capital appreciation
as a significant portion of the investment return they will
ultimately realize. Composite statistics for the grocery store
industry (compiled by Value Line, May 17, 1996) indicate that
dividends as a percentage of net profit have been approximately 25%
in recent years, and Value Line estimates that this percentage will
be 23% in the 1999 - 2001 timeframe. The average annual "dividend
yield" (dividends as a percentage of stock price) have ranged from
1.5% to 2.3% in recent years and is expected to be 1.5% in the 1999
- - 2001 timeframe. Investors accept dividend yields at these levels
because they expect a portion of their investment return in the
form of capital gains (increases in price per share).
As an example, if the Company was to pay out $1 per share in
dividends, and this represented approximately a quarter of its
earnings, this would support a per share value of about $67 (using
a 1.5% dividend yield rate). However, the Company's earnings have
been significantly greater than $4 per share and the Company has
retained the majority of its earnings for growth and to pay off
debt incurred to acquire property and equipment, and make
improvements to its stores.
vii
<PAGE>
Valuation for Tender Offer Evaluation Addendum II
versus Valuation for other Purposes Page 4 of 4
Earnings per share ranged from $15.94 to $30.88 between fiscal 1991
and fiscal 1995 (see Exhibit 3 to our report). If the Company's
earnings were no better than $16 per share in future years, and
dividends of 25% of earnings were paid, this would result in annual
dividends of $4 per share. If the Company paid annual dividends of
$4 per share and a dividend yield of 1.5% was considered
appropriate, this would equate to a stock price of $267, based on
industry average dividend payment and dividend yield rates. As
discussed in our report, the Company would likely be valued at
somewhat less than the industry averages as most of the entities in
the supermarket business are larger and serve wider geographic
market areas ("equivalent" unrestricted actively trading value of
the Company's stock based on methods used to value the
Company is $218).
We believe the Board could take steps to enhance the value and
liquidity (marketability) of its common stock, such as paying out
additional dividends, periodically repurchasing a portion of the
shares based on some formula for estimating share value, and
perhaps taking steps to establish a more active trading market for
the stock.
viii
