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.
<PAGE>
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:
<TABLE>
<CAPTION>
Franchise Supermarkets Corporate Supermarkets
Number of
Supermarkets 1992 1993 1994 1995 1996 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
========= ========= =========
<PAGE>
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).
[Page 4 of Annual Report]
<TABLE>
FIVE-YEAR FINANCIAL HIGHLIGHTS
<CAPTION>
Fiscal Year(a)(b)
(Dollars in thousands, except per share
data) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
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.
</TABLE>
<PAGE>
[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.
<TABLE>
<CAPTION>
Percent to sales Percentage change
1996 1995 1994 1996 vs. 1995 1995 vs. 1994
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
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>
[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>
[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.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
For fiscal years 1996, 1995 and 1994
1996 1995 1994
<S> <C> <C> <C>
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
==== ==== ====
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For fiscal years 1996, 1995 and 1994
1996 1995 1994
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C>
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
========= ========== ========= ========== ======== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
[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>
[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:
<TABLE>
<CAPTION>
First Second Third Fourth Year
High Low High Low High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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.
SUBSIDIARY OF REGISTRANT
The only subsidiary of Schultz Sav-O Stores, Inc. is PW
Trucking, Inc., a Wisconsin corporaton.
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
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<FISCAL-YEAR-END> DEC-28-1996
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