EXHIBIT 13
[Page 3 of Annual Report]
Selected Five-Year Financial Highlights
Fiscal Year (a)(b)
1995 1994 1993 1992 1991
(Dollars and shares in thousands, except per
share data)
Statements of
earnings data:
Net sales . . . . . $439,646 $446,362 $469,577 $490,403 $480,410
Earnings before
income taxes . . . 9,500 8,653 7,519 4,139 4,137
Provision for
income taxes . . . 3,660 3,252 2,767 1,622 1,626
Net earnings . . . 5,840 5,401 4,752 2,517 2,511
Per share of common
and equivalent
shares
Earnings . . . . 1.20 1.02 0.86 0.44 0.43
Cash dividends . 0.22 0.10 0.08 0.07 0.06
Weighted average
common and
equivalent
shares(c) 4,981 5,257 5,489 5,690 5,858
Balance sheet data
(at fiscal year-end):
Working capital . . $24,855 $21,197 $20,805 $22,091 $12,415
Total assets . . . 87,034 89,099 83,391 84,796 82,118
Current maturities
of long-term debt
and current
obligations under
capital leases . . 1,114 1,037 1,050 1,243 1,457
Long-term debt . . 3,719 4,056 1,035 1,288 1,742
Capital lease
obligations . . . 13,268 14,046 14,979 15,980 16,770
Total shareholders'
investment . . . . 43,288 41,457 41,501 38,864 37,948
Other data:
Capital additions . $3,545 $3,640 $8,528 $1,718 $3,940
Depreciation and
amortization . . . 4,467 4,654 4,861 5,625 6,071
NOTES:
(a) The Company's fiscal year ends on the Saturday closest to December
31. The 1992 fiscal year was a 53-week period. All other fiscal
years presented were 52-week periods.
(b) All data should be read in conjunction with the Company's audited
financial statements and "Management's discussion and analysis of
financial condition and results of operations" as set forth in
this Annual Report.
(c) The weighted average common and equivalent shares have been
retroactively adjusted for the two-for-one stock split, effected
in the form of a 100% stock dividend, on September 15, 1995.
[Pages 10 to 12 of Annual Report]
Balance sheets
As of December 30, 1995 and December 31, 1994
Assets 1995 1994
Current assets:
Cash and equivalents . . . . . . $14,424,000 $14,310,000
Receivables, less allowance for
doubtful accounts of
$2,565,000 and $1,750,000,
respectively . . . . . . . . . . 5,562,000 6,838,000
Inventories . . . . . . . . . . . 20,458,000 21,327,000
Other current assets . . . . . . 5,025,000 2,441,000
Amounts currently receivable
under capital sublease
agreements . . . . . . . . . . . 581,000 518,000
Deferred income taxes . . . . . . 3,504,000 3,875,000
---------- ----------
Total current assets . . . . . . 49,554,000 49,309,000
---------- ----------
Amounts receivable under capital
sublease agreements, less current
portion . . . . . . . . . . . . . 9,361,000 9,943,000
Leased property under capital
leases, less accumulated
amortization . . . . . . . . . . . 3,089,000 3,372,000
Other noncurrent assets . . . . . . 2,203,000 1,331,000
Property and equipment, net . . . . 22,827,000 25,144,000
---------- ----------
Total assets . . . . . . . . . . . $87,034,000 $89,099,000
========== ==========
Liabilities & shareholders'
investment 1995 1994
Current liabilities:
Accounts payable . . . . . . . . $12,340,000 $11,356,000
Accrued liabilities-
Employee benefits . . . . . . . 2,440,000 2,242,000
Retail repositioning reserve . . 1,145,000 5,046,000
Insurance related . . . . . . . 2,805,000 2,416,000
Other . . . . . . . . . . . . . 4,855,000 6,015,000
Current maturities of long-term
debt . . . . . . . . . . . . . . 337,000 323,000
Current obligations under capital
leases . . . . . . . . . . . . . 777,000 714,000
---------- ----------
Total current liabilities . . . . 24,699,000 28,112,000
---------- ----------
Deferred income taxes . . . . . . . 2,060,000 1,428,000
Long-term debt . . . . . . . . . . 3,719,000 4,056,000
Long-term obligations under capital
leases . . . . . . . . . . . . . . 13,268,000 14,046,000
Shareholders' investment . . . . . 43,288,000 41,457,000
---------- ----------
Total liabilities and shareholders'
investment . . . . . . . . . . . . $87,034,000 $89,099,000
========== ==========
The accompanying notes to financial statements are an integral part
of these balance sheets.
Statements of shareholder's investment
For the fiscal years 1995, 1994 and 1993
Preferred Stock Common Stock Additional
$3.00 Par $0.05 Par Paid-in Treasury Stock Share-
Retained holders'
Shares Amount Shares Amount Capital Earnings Shares Amount Investment
Balance, January 2,
1993 . . . . . . . . 3,000 $300,000 2,916,785 $146,000 $12,680,000 $26,989,000 (99,066) ($1,251,000) $38,864,000
Net earnings . . . . 4,752,000 4,752,000
Cash dividends
declared:
Preferred stock-
$3.00 per share .
Common stock- (9,000) (9,000)
$0.08 per share . (436,000) (436,000)
Exercise of stock
options . . . . . . 6,787 91,000 91,000
Acquisition of
treasury stock . . . (130,654) (1,761,000) (1,761,000)
----- -------- --------- -------- ---------- ---------- -------- --------- -----------
Balance, January 1,
1994 . . . . . . . . 3,000 300,000 2,916,785 146,000 12,680,000 31,296,000 (222,933) (2,921,000) 41,501,000
Net earnings . . . . 5,401,000 5,401,000
Cash dividends
declared:
Preferred stock-
$3.00 per share . (9,000) (9,000)
Common stock-
$0.10 per share . (509,000) (509,000)
Exercise of stock
options . . . . . . 29,549 433,000 433,000
Acquisition of
treasury stock . . . (302,167) (5,360,000) (5,360,000)
------ --------- --------- ------- ----------- ---------- --------- ----------- ----------
Balance, December 31,
1994 . . . . . . . . 3,000 300,000 2,916,785 146,000 12,680,000 36,179,000 (495,551) (7,848,000) 41,457,000
Net earnings . . . . 5,840,000 5,840,000
Cash dividends
declared:
Preferred stock-
$3.00 per share . (9,000) (9,000)
Common stock-$0.22
per share . . . . (1,038,000) (1,038,000)
Exercise of stock
options . . . . . . 168,000 53,359 487,000 655,000
Acquisition of
treasury stock . . . (152,294) (3,475,000) (3,475,000)
Repurchase of
preferred stock . . (2,841) (284,000) 142,000 142,000
Two-for-one stock
split effected in
the form of a 100%
stock dividend . . . 2,916,785 146,000 (117,000) (585,486) (29,000) --
------ ------- --------- -------- --------- ---------- ---------- ----------- ----------
Balance, December 30,
1995 . . . . . . . . 159 $16,000 5,883,570 $292,000 $12,990,000 $40,855,000 (1,179,972) ($10,865,000) $43,288,000
====== ======= ========= ======== =========== ========== ========== =========== ==========
The accompanying notes to financial statements are an integral part of
these statements of shareholders' investment.
Statements of earnings
For the fiscal years 1995, 1994 and 1993
1995 1994 1993
Net sales . . . . . . . . . . . $439,646,000 $446,362,000 $469,577,000
Costs and expenses:
Cost of products sold . . .
Operating and administrative 369,130,000 372,867,000 388,289,000
expenses . . . . . . . . . . . 61,034,000 64,401,000 73,062,000
---------- ---------- ----------
Operating income . . . . . . . 9,482,000 9,094,000 8,226,000
Interest income . . . . . . . . 944,000 453,000 131,000
Interest expense . . . . . . . (926,000) (894,000) (838,000)
---------- ---------- -----------
Earnings before income taxes . 9,500,000 8,653,000 7,519,000
Provision for income taxes . . 3,660,000 3,252,000 2,767,000
---------- ---------- ----------
Net earnings . . . . . . . . . $5,840,000 $5,401,000 $4,752,000
========== ========== ==========
Earnings per common and
equivalent share . . . . . . . $1.20 $1.02 $0.86
======= ====== =======
The accompanying notes to financial statements are an integral part of
these statements of earnings.
Statements of cash flows
For the fiscal years 1995, 1994 and 1993
1995 1994 1993
Cash flows from operating
activities:
Net earnings . . . . . . . . $5,840,000 $5,401,000 $4,752,000
Adjustments to reconcile net
earnings to net cash provided
by operating activities-
Depreciation and
amortization. . . . . . . 4,467,000 4,654,000 4,861,000
Deferred income taxes . . . 1,003,000 (1,333,000) (1,261,000)
Changes in assets and
liabilities-
Decrease in receivables . . 1,276,000 1,504,000 1,028,000
Decrease (increase) in
inventories . . . . . . 869,000 (7,000) (213,000)
(Increase) decrease in other
current assets. . . . . . (2,584,000) 295,000 75,000
Increase (decrease) in
accounts payable. . . . . 984,000 (830,000) (604,000)
(Decrease) increase in
accrued liabilities . . . (4,099,000) 4,739,000 (1,223,000)
---------- ----------- ---------
Net cash flows from operating
activities . . . . . . . . . . 7,756,000 14,423,000 7,415,000
---------- ----------- ---------
Cash flows from investing
activities:
Expenditures for property and
equipment . . . . . . . . . (3,545,000) (3,640,000) (8,528,000)
Proceeds from asset sales . . 599,000 538,000 2,866,000
Receipt of principal amounts
under capital sublease
agreements . . . . . . . . . 518,000 564,000 578,000
Proceeds from maturity of
short-term investments . . . -- 2,953,000 --
Investment in short-term
securities . . . . . . . . . -- -- (2,953,000)
----------- ---------- ----------
Net cash flows from investing
activities . . . . . . . . . . (2,428,000) 415,000 (8,037,000)
---------- --------- -----------
Cash flows from financing
activities:
Payment for acquisition of
treasury stock . . . . . . . (3,475,000) (5,360,000) (1,761,000)
Payment of cash dividends . . (1,047,000) (518,000) (445,000)
Principal payments on capital
lease obligations . . . . . (714,000) (797,000) (790,000)
Proceeds from exercise of
stock options . . . . . . . 487,000 433,000 91,000
Principal payments on
long-term debt . . . . . . . (323,000) (300,000) (453,000)
Repurchase of preferred stock (142,000) -- --
Net cash flows from financing
activities . . . . . . . . . . (5,214,000) (6,542,000) (3,358,000)
----------- ----------- ----------
Cash and equivalents:
Net increase (decrease) . . . 114,000 8,296,000 (3,980,000)
Balance, beginning of year . 14,310,000 6,014,000 9,994,000
----------- ----------- ---------
Balance, end of year . . . . $14,424,000 $14,310,000 $6,014,000
=========== =========== ===========
The accompanying notes to financial statements are an integral part of
these statements of cash flows.
[Pages 13 to 19 of Annual Report]
Notes to financial statements for the fiscal years 1995, 1994 and 1993
(1) Description of Business-
The Company is engaged in the food distribution business through
franchised and corporate retail supermarkets and as a supplier to
independent food stores.
The supermarkets and food stores supplied by the Company are located
in eastern Wisconsin and northeastern Illinois. All franchise and
corporate stores operate under the name of Piggly Wiggly/R/.
(2) Accounting Policies-
(a) Accounting periods-
The Company's fiscal year ends on the Saturday closest to December
31. The 1995, 1994 and 1993 fiscal years were 52-week periods ended
December 30, 1995, December 31, 1994 and January 1, 1994, respectively.
(b) Cash and equivalents-
Cash and equivalents consist of demand deposits at commercial banks
and highly liquid investments with a maturity of three months or less when
purchased. Cash equivalents are stated at cost which approximate market
value.
(c) Inventories-
Inventories, substantially all of which consist of food, groceries
and related products for resale, are stated at the lower of cost or market
value. Cost is determined primarily on the last-in, first-out (LIFO)
method. For meat and produce, cost is determined on the first-in, first-
out (FIFO) method. At December 30, 1995 and December 31, 1994, 83% and
82%, respectively, of all inventories were accounted for under the LIFO
method.
The excess of replacement or current cost over the stated LIFO cost
of inventory was $9,631,000 and $9,451,000 at December 30, 1995 and
December 31, 1994, respectively.
(d) Other current assets-
Other current assets consist of the following:
1995 1994
Land and building for resale . $2,389,000 $ 734,000
Prepaid expenses . . . . . . . 657,000 1,092,000
Retail systems for resale and
other assets . . . . . . . . . 1,979,000 615,000
--------- ---------
Other current assets . . . . . $5,025,000 $2,441,000
========= =========
(e) Property and equipment, net-
Property and equipment are stated at cost. Depreciation is provided
on the straight-line method over the estimated useful lives of the assets.
Facility remodeling and upgrade costs on leased stores are capitalized as
leasehold improvements and are amortized over the shorter of the remaining
lease term or the useful life of the asset. Upon disposal, the
appropriate asset cost and accumulated depreciation are retired. Gains
and losses on disposition are included in earnings.
Property and equipment, net, consisted of the following:
1995 1994
Land and buildings . . . . . . $18,508,000 $18,441,000
Leasehold improvements . . . . 5,566,000 6,027,000
Equipment and fixtures . . . . 31,186,000 32,264,000
---------- ----------
55,260,000 56,732,000
Less accumulated depreciation
and amortization . . . . . . . (32,433,000) (31,588,000)
---------- ----------
Property and equipment, net . . $22,827,000 $25,144,000
========== ==========
(f) Retail repositioning reserve-
Estimated repositioning and termination expenses associated with the
closure, replacement or disposal of stores, consisting primarily of lease
payments, charges to reduce assets to net realizable value and severance
payments, are charged to operating and administrative expenses upon the
decision to close, replace or dispose of a store as soon as the amounts
are reasonably estimable. Due to inherent uncertainties in estimating
these repositioning and termination costs, it is at least reasonably
possible that the Company's estimates may change in the near term. The
reserves recorded at December 31, 1994 relating to the Palatine, Illinois
and other corporate supermarkets approximated actual cash payments in
1995.
(g) Earnings per common and equivalent share-
Earnings per common and equivalent share is computed by dividing net
earnings by the weighted average number of common shares outstanding
during each year plus common stock equivalents. Net earnings, for
purposes of the earnings per share computation, is determined after taking
into account all of the preferred dividend requirements. For fiscal 1995,
earnings per share increased by the excess of the aggregate par value of
the 2,841 shares of preferred stock over the repurchase price tendered
pursuant to the Company's redemption offer. Common stock equivalents
result from the assumed exercise of outstanding stock options and affect
earnings per share when they have a dilutive effect. Primary and fully
diluted earnings per share are the same for all years. All historical
share, per share amounts, stock option data and market prices of the
Company's common stock appearing in the financial statements and notes
thereto have been retroactively adjusted for the stock split. The number
of common and equivalent shares utilized in the per share calculations
were 4,981,000, 5,257,000 and 5,489,000 in fiscal 1995, 1994 and 1993,
respectively.
(h) Supplementary disclosure of cash flow information-
Interest and taxes paid included in the Company's cash flow from
operations were as follows:
1995 1994 1993
Interest paid . . . . . $ 902,000 $ 918,000 $ 843,000
Taxes paid . . . . . . 3,368,000 2,835,000 4,177,000
(i) Use of estimates-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
(j) Store pre-opening costs-
Costs associated with the opening of new stores, consisting primarily
of advertising, supplies, occupancy and payroll, are charged to operating
and administrative expenses as incurred. Depreciation and amortization of
property and equipment, and leasehold improvements begin in the period a
store begins operations.
(k) Standards on impairment of long-lived assets-
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", which the Company is required to adopt no later than the first
quarter of fiscal 1996. Under this pronouncement, the Company is required
to assess the recoverability of the carrying amount of long-lived assets
currently held or assets committed to a plan of disposal resulting from
various events or changes in circumstances. The Company does not
anticipate that the adoption of this standard will have a material impact
on the financial statements.
(l) Advertising costs-
Costs incurred for producing and communicating advertising are
expensed when incurred.
(m) Reclassifications-
Certain 1994 and 1993 amounts previously reported have been
reclassified to conform to the 1995 presentation.
(3) Long-Term Debt-
The Company has a loan agreement providing unsecured revolving credit
facilities totaling $16,000,000 through April 30, 1997. This arrangement
provides for borrowings at rates not to exceed the prime rate. There are
no compensating balance requirements. There were no borrowings
outstanding under this agreement during 1995 and 1994.
At December 30, 1995, the fair value of the financial instruments
approximated carrying value. Long-term debt consists of the following:
1995 1994
Mortgage note, 9.675%, due in
monthly installments of $33,026
including interest due through
June 2012 . . . . . . . . . . . . $3,274,000 $3,344,000
Term note, 9.91%, due in quarterly
installments of $55,000 through
June 1998 . . . . . . . . . . . . 515,000 735,000
Land contract, 10.0%, due in annual
installments of $33,333 through
March 2003 . . . . . . . . . . . . 267,000 300,000
--------- ---------
4,056,000 4,379,000
Less current maturities . . . . . . (337,000) (323,000)
--------- ---------
Long-term debt . . . . . . . . . . $3,719,000 $4,056,000
========== =========
The revolving credit and term note agreements contain various
covenants including, among others, the maintenance of defined working
capital, net worth of $36,000,000, certain debt-equity ratios,
restrictions against pledging of or liens upon certain assets, mergers,
significant changes in ownership and limitations on restricted payments.
As of December 30, 1995, $3,240,000 of retained earnings were available
for restricted payments, including cash dividends and stock repurchases.
The total amount of long-term debt due in each of the fiscal years
1996 through 2000 will be $337,000, $345,000, $209,000, $144,000 and
$156,000, respectively, and $2,865,000 from 2001 to 2012.
Interest expense consists of the following:
1995 1994 1993
Interest on long-term
debt . . . . . . . . . $419,000 $312,000 $209,000
Imputed interest -
capital leases . . . . 507,000 582,000 629,000
-------- -------- ---------
Interest expense . . . $926,000 $894,000 $838,000
======== ======= =======
(4) Income Taxes-
The difference between the statutory federal income tax rate and the
effective rate is summarized as follows:
1995 1994 1993
Federal income tax
statutory rate . . . . 34.0% 34.0% 34.0%
Increase (decrease) in
taxes resulting from-
State income taxes,
net of federal
income tax benefit 5.1 5.1 5.0
Other, net . . . . . . (0.6) (1.5) (2.2)
----- ------- ------
Effective income tax
rate . . . . . . . . . 38.5% 37.6% 36.8%
===== ====== ======
The Company adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes", in the first quarter of 1993. As
prescribed by this pronouncement, the computation of deferred taxes was
revised so that the amount of deferred income taxes on the balance sheet
reflects current income tax rates. The implementation of this
pronouncement did not have a material effect on net earnings.
Components of provision for income tax consist of the following:
1995 1994 1993
Currently payable
Federal . . . . . . .$2,082,000 $3,606,000 $3,315,000
States . . . . . . . 575,000 979,000 713,000
Deferred . . . . . . . 1,003,000 (1,333,000) (1,261,000)
--------- --------- ---------
Provision for income
tax . . . . . . . . .$3,660,000 $3,252,000 $2,767,000
========= ========= =========
The components of deferred income tax assets and liabilities at
December 30, 1995 and December 31, 1994 were as follows:
1995 1994
Deferred income tax assets:
Insurance related . . . . . . $1,094,000 $ 967,000
Bad debt reserve . . . . . . 1,000,000 685,000
Capital lease accounting . . 622,000 590,000
Vacation pay . . . . . . . . 597,000 637,000
Retail repositioning reserve 447,000 1,975,000
Other . . . . . . . . . . . . 857,000 997,000
--------- ---------
Total deferred income tax
assets . . . . . . . . . . . . 4,617,000 5,851,000
--------- ---------
Deferred income tax
liabilities:
Property and equipment . . . (2,705,000) (3,042,000)
Pension . . . . . . . . . . . (468,000) (362,000)
--------- ----------
Total deferred income tax
liabilities . . . . . . . . . (3,173,000) (3,404,000)
---------- ----------
Net deferred income tax asset . $1,444,000 $2,447,000
========= =========
The net deferred income tax asset as of December 30, 1995 and
December 31, 1994 were classified in the balance sheet as follows:
1995 1994
Current deferred income tax
asset . . . . . . . . . . . . $3,504,000 $3,875,000
Noncurrent deferred income tax
liability . . . . . . . . . . (2,060,000) (1,428,000)
--------- ---------
Net deferred income tax asset . $1,444,000 $2,447,000
========= =========
(5) Preferred Stock-
The Articles of Incorporation provide for the cumulative payment of
dividends on the preferred stock and, if not paid at the rate of 3% per
annum, there are certain restrictions on the payment of common stock
dividends. The preferred stock is callable at par value.
On September 11, 1995, the Company announced a self-tender offer for
all 3,000 outstanding shares of the Company's preferred stock at a cash
price of $50 per share. The offer commenced on such date and expired at
midnight on October 30, 1995. Of the 3,000 outstanding shares of
preferred stock, 2,841 shares, representing approximately 94.7%, were
tendered and accepted by the Company pursuant to the offer. The Company
paid the $142,000 aggregate purchase price for the 2,841 shares from its
available cash on hand. At December 30, 1995, 3,000 shares of preferred
stock are authorized and 159 shares remain outstanding.
The Company has 1,000,000 shares of $.05 par value class B preferred
stock authorized, none of which have been issued. These shares are
issuable in such series and with such relative rights and preferences as
may be determined from time to time by the Board of Directors. The class
B preferred shares would be subordinated in all respects to the existing
rights and preferences of the Company's outstanding preferred stock.
(6) Commitments and Contingent Liabilities-
The Company has projected capital expenditures for fiscal 1996 at
$3,300,000. Commitments of less than $2,000,000 were made as of December
30, 1995.
As of December 30, 1995, the Company was contingently liable under
guarantees of bank note agreements of wholesale customers totaling
$15,770,000. All of the loan guarantees are fully collateralized,
principally with equipment and inventory, and, to a lesser extent, with
building facilities.
(7) Retirement Plans-
The Company has a trusteed retirement savings defined contribution
plan, which includes provisions of Section 401(k) of the Internal Revenue
Code, for the benefit of its non-union eligible employees. Annual
provisions are based on a mandatory 5% of eligible participant
compensation and additional amounts at the sole discretion of the Board of
Directors. Provisions for the three fiscal years ended 1995, 1994 and
1993 were $720,000, $700,000 and $660,000, respectively. Beginning in
October 1994, the plan allows participants to make pretax contributions
and the Company matches certain percentages of employee contributions.
The Company's matching contributions for 1995 and 1994 was $68,000 and
$17,000, respectively.
The Company has union-administered multi-employer pension plans
covering all hourly paid employees represented by collective bargaining
agreements. Total pension expense, which the Company funds as accrued,
was $1,599,000, $1,668,000 and $1,852,000 in fiscal years 1995, 1994 and
1993, respectively. Complete information with respect to the Company's
portion of plan net assets and the actuarial present value of accumulated
plan benefits is not available.
(8) Leases-
The Company leases most of its retail stores under lease agreements
with original lease periods of 15 to 20 years and typically with five-year
renewal options. Exercise of such options is dependent on, among others,
the level of business conducted at the location. Executory costs, such as
maintenance and real estate taxes, are generally the Company's
responsibility. In several situations, the Company will enter into a
lease for a store and sublease the store to a wholesale customer.
Additionally, the Company leases transportation equipment, principally
tractors and trailers, and certain office equipment. Some leases contain
contingent rental provisions based on sales volume at retail stores or
miles traveled for tractors and trailers. Contingent rental expense
associated with the Company's capital leases and sublease income were not
material to the Company's financial statements.
Capitalized leases are calculated using interest rates appropriate at
the inception of each lease. A summary of real property utilized by the
Company under capital leases is as follows:
1995 1994
Investments in leased property $5,466,000 $5,466,000
under capital leases . . . . . . .
Less accumulated amortization . . . (2,377,000) (2,094,000)
--------- ---------
Leased property under capital
leases . . . . . . . . . . . . . . $3,089,000 $3,372,000
========= =========
Amortization of leased property under capital leases, included in
operating and administrative expense amounted to $283,000, $331,000 and
$360,000 in fiscal years 1995, 1994 and 1993, respectively.
The following is a schedule of future minimum lease payments under
capital leases and subleases and the present value of such payments as of
December 30, 1995:
Amounts
Amounts receivable
payable under under capital
capital leases subleases
1996 . . . . . . . . . . . . . $ 2,486,000 $ 1,806,000
1997 . . . . . . . . . . . . . 2,478,000 1,797,000
1998 . . . . . . . . . . . . . 2,432,000 1,751,000
1999 . . . . . . . . . . . . . 2,296,000 1,616,000
2000 . . . . . . . . . . . . . 2,209,000 1,529,000
2001-2009 . . . . . . . . . . . 15,401,000 10,978,000
---------- ----------
Total minimum lease payments . 27,302,000 19,477,000
Less amount representing
interest . . . . . . . . . . . (13,257,000) (9,535,000)
---------- ----------
Present value of minimum lease
payments and amounts
receivable . . . . . . . . . . 14,045,000 9,942,000
Less current portion . . . . . (777,000) (581,000)
--------- ---------
Long-term obligations and
receivables $13,268,000 $ 9,361,000
========== =========
The following is a schedule of future minimum lease payments required
under operating leases for retail stores, transportation equipment and
office equipment that have noncancelable lease terms in excess of one year
as of December 30, 1995:
1996 . . . . . . . . . . . . . . . . . . . . $ 7,018,000
1997 . . . . . . . . . . . . . . . . . . . . 6,396,000
1998 . . . . . . . . . . . . . . . . . . . . 6,140,000
1999 . . . . . . . . . . . . . . . . . . . . 5,947,000
2000 . . . . . . . . . . . . . . . . . . . . 5,412,000
2001-2014 . . . . . . . . . . . . . . . . . . 49,571,000
----------
Total minimum lease payments . . . . . . . . 80,484,000
Less minimum amounts receivable under
noncancelable subleases . . . . . . . . . . (57,631,000)
----------
Net minimum lease payments . . . . . . . . . $22,853,000
==========
Rental expenses for all operating leases amounted to $5,614,000,
$6,190,000 and $6,651,000 in fiscal years 1995, 1994 and 1993,
respectively. These amounts include $1,113,000, $1,444,000 and
$1,407,000, respectively, for contingent rentals.
(9) Stock Option Plans-
The Company has stock option plans which provide for the grant of
either incentive or nonqualified stock options to key employees at not
less than 100% of fair market value at the date of grant. Options granted
are exercisable for seven years from the date of grant and vest ratably
over the first three years. Such vesting may be accelerated by the
compensation and stock option committee of the Board of Directors or upon
a change in control of the Company, as defined by the plans. As of
December 30, 1995, no incentive stock options were granted.
Nonqualified stock option data is as follows:
Range of per
Number of share option
shares prices
Shares under option at
January 2, 1993 . . . . . . . 356,928 $3.75-$8.75
Options granted . . . . . . 86,000 6.63
Options exercised . . . . . (13,574) 3.75-5.34
------- -----------
Shares under option at
January 1, 1994 . . . . . . . 429,354 $3.75-$8.75
Options granted . . . . . . 99,300 7.63
Options exercised . . . . . (59,098) 3.75-7.67
Options canceled . . . . . . (17,206) 6.25-8.75
------- -----------
Shares under option at
December 31, 1994 . . . . . . 452,350 $5.34-$8.75
Options granted . . . . . . 96,200 9.75
Options exercised . . . . . (78,184) 14.75-21.75
------- -----------
Shares under option at
December 30, 1995 . . . . . . 470,366 $6.25-$9.75
======= ===========
Shares reserved for grant at
December 30, 1995 433,000
=======
Options granted in
January 1996 88,600 $15.75
======= =======
When options were exercised, the Company realized certain income tax
benefits. These benefits resulted in a decrease in current income taxes
payable and a corresponding increase in additional paid-in capital.
Nonqualified stock options exercisable at December 30, 1995 and December
31, 1994 were for 285,000 and 283,384 shares, respectively.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", which the Company is required to adopt no later
than fiscal 1996. Under this pronouncement, the Company, at a minimum,
will be required in fiscal 1996 to provide additional disclosures of pro
forma net income and pro forma earnings per share as if the fair value
based method of accounting for stock options had been used to account for
stock-based compensation cost.
(10) Common Stock-
On July 28, 1995, the Board of Directors authorized a two-for-one
common stock split, effected in the form of a 100% stock dividend
distributed on September 15, 1995, to shareholders of record on September
1, 1995. All historical share, per share amounts, stock option data and
market prices of the Company's Common Stock have been restated to
retroactively reflect the stock split. At December 30, 1995, of the
40,000,000 shares of Common Stock authorized, 5,833,570 shares are issued
and 4,653,598 shares are outstanding.
All common shares issued and issuable include one associated common
stock purchase right which entitle shareholders to purchase one share of
common stock from the Company at an exercise price equivalent to $21 per
share. The rights become exercisable after a person acquires beneficial
ownership of 20% or more of the Company's Common Stock. The rights do not
have any voting rights and may be redeemed at a price of $0.01 per right.
At December 30, 1995, approximately 6,355,000 shares of common stock were
reserved for issuance upon exercise of the rights. Under certain
circumstances, the rights may be exchanged at a ratio of one share per
right. The rights expire on January 6, 1999. Upon the occurrence of
certain defined events, the rights will be modified to entitle the holder
(other than an "acquiring person") to purchase the shares of Common Stock
of the Company or of such acquiring person having a market value of two
times the exercise price of the rights.
(11) Quarterly Results of Operations (Unaudited)-
The Company includes sixteen weeks in its first quarter and twelve
weeks in each subsequent quarter. Summarized quarterly financial
information for fiscal years 1995 and 1994 follows:
Quarter ended
1995 April 22 July 15 October 7 December 30
Net sales . . . $132,278,000 $101,996,000 $99,373,000 $105,999,000
Cost of products
sold . . . . . 110,989,000 85,262,000 83,109,000 89,770,000
Net earnings . 1,237,000 1,556,000 1,385,000 1,662,000
Earnings per
common and
equivalent
share . . . . $0.24 $0.31 $0.28 $0.37
----- ----- ------ ------
Quarter ended
1994 April 23 July 16 October 8 December 31
Net sales . . . $135,180,000 $104,167,000 $101,894,000 $105,121,000
Cost of products
sold . . . . . 113,078,000 86,958,000 85,280,000 87,551,000
Net earnings . 1,110,000 1,415,000 1,255,000 1,622,000
Earnings per
common and
equivalent
share . . . . $0.20 $0.26 $0.24 $0.32
--------- -------- --------- ---------
[Pages 19 to 22 of Annual Report]
Management's discussion and analysis of
financial condition and results of operations
Results of Operations
Selected costs and results as a percent of net sales for the fiscal
years presented:
1995 1994 1993
Cost of products sold . . . . 84.0% 83.5% 82.7%
Operating and administrative 13.9 14.4 15.6
expenses . . . . . . . . . .
Earnings before income taxes
2.2 1.9 1.6
Net earnings . . . . . . . . 1.3 1.2 1.0
1995 Compared with 1994
Net sales for 1995 were $439,646,000 compared to 1994 net sales of
$446,362,000. The decrease of $6,716,000, or 1.5%, was due primarily to
the Company's continuing efforts to dispose of underperforming or
noncompetitive corporate retail stores through conversion to franchise
units and closures. Since the beginning of 1994, the Company has
terminated its relationship with one multi-store wholesale customer,
converted one corporate retail supermarket into a franchised unit, closed
one underperforming corporate retail supermarket and added one new
franchised supermarket. These combined actions resulted in a net sales
decrease approximating $9,000,000. As of December 30, 1995, the Company
had 66 franchised and 19 corporate supermarkets compared to 65 franchised
and 20 corporate supermarkets at the end of fiscal year 1994.
Consistent with the Company's business strategy to expand its
wholesale volume, there are eight franchise supermarket facility projects
currently in various phases of planning or construction, with completions
scheduled throughout 1996. These projects involve three additions to
existing franchise stores, three replacement franchise supermarkets and
two new market franchise units involving an aggregate exceeding 106,000 of
additional store selling space. Upon completion, these projects should
help the Company position itself to reverse prior years' decreasing sales
trends. Additionally, in 1995, the Company began implementing a new
electronic card marketing and electronic coupon program designed to
increase customer savings, make grocery shopping easier and faster and,
ultimately, reward loyal customers. Continuing roll-out of this program
in 1996 throughout its franchised and corporate supermarket base should
also enhance the Company's sales growth potential. Pricing differentials
between 1995 and 1994 did not materially affect 1995 net sales.
Cost of products sold, as a percent of sales, increased by 0.5% to
84.0% in 1995 compared to 1994. While the percentage increased, total
cost of products sold decreased by $3,737,000, or 1.0%, in 1995 compared
to 1994. The increased percentage of sales was a direct result of the
continued reduction in 1995 of the amount of higher margin retail sales
compared to the continued increased amount of lower margin wholesale
sales. The Company expects this sales mix trend to continue in fiscal
1996. The lower margins associated with wholesale sales continued in 1995
to be more than offset by significantly reduced operating and
administrative expenses from the disposal of one corporate supermarket and
its conversion to franchised unit in December 1994 and the closure of the
underperforming Palatine, Illinois corporate retail supermarket in
February 1995.
Operating and administrative expenses, as a percent of sales,
decreased by 0.5% to 13.9% in 1995 compared to 1994. The decrease of
$3,367,000 was primarily a result of the elimination of operating expenses
(consisting of payroll, supplies, rent, utilities, depreciation and other
administrative expenses) associated with the corporate retail supermarket
that was sold and converted into a franchise unit and the closure of the
Palatine, Illinois corporate supermarket. Additionally, charges relating
to retail repositioning expenses, consisting of termination costs of
replaced, closed or sold stores, amounted to $1,003,000 in 1995 (compared
to $3,668,000 in 1994). Such charges in 1995 pertained to five retail
facilities. The decreases in operating and administrative expenses during
1995 could have been greater if not for the bad debt charges of $2,079,000
in 1995 (compared to $526,000 in 1994) due to additional exposure from
underperforming or noncompetitive franchised retail supermarkets. In
1996, certain franchise operators may continue to experience operational
difficulties resulting from intense retail competition due to the opening
of several new competitive stores in our markets.
As a result of the foregoing, earnings before income taxes, as a
percent of sales, increased to 2.2%, or $9,500,000, in 1995 from 1.9%, or
$8,653,000, in 1994.
The effective income tax rate increased to 38.5%, compared to 37.6%
in 1994. The provision for income taxes in 1995 and 1994 was $3,660,000
and $3,252,000, respectively.
The Company attained 1.3% of net earnings to sales ratio for 1995.
Net earnings and earnings per share in 1995 increased 8.1% and 17.6% to
$5,840,000 and $1.20 per share, respectively, compared to $5,401,000 and
$1.02 per share in 1994. This increase was principally the result of
continued improvements in the Company's wholesale operations. The
Company's earnings continued in 1995 to be favorably impacted by the
Company's strategic decision in 1992 to expand its wholesale volume,
largely through the conversion of underperforming or noncompetitive
corporate supermarkets to franchise stores or closing their operations.
On a percentage basis, earnings per common and equivalent share increased
more than net earnings as a result of share repurchases during 1995 which
reduced the number of average common and equivalent shares outstanding.
Additionally, 1995 earnings per common and equivalent share increased
$0.03 as a result of the Company's repurchase at a substantial discount of
nearly all of its outstanding preferred stock in October 1995.
Certain Company retail stores continue to be underperforming or
noncompetitive in their respective marketplaces and, as a result, continue
to incur operating losses. In order to further improve the Company's
results from operations, management continues to evaluate various business
alternatives relating to these operations, including the sale and
subsequent conversion of these stores into franchise units, closing the
stores or implementing other operational changes. Similar to prior fiscal
years, implementation of these changes will likely result in the Company
incurring certain repositioning charges involving the termination costs
of replaced, closed or sold stores. While these repositioning charges may
decrease the Company's reported net earnings for the period or periods in
which the actions are taken, management believes that such actions may
help improve the Company's long-term profitability.
1994 Compared with 1993
Net sales for 1994 were $446,362,000 compared to net sales of
$469,577,000 for 1993. The decrease of $23,215,000, or 4.9%, was due
primarily to the continuing increase in the relative percentage of
wholesale sales to retail sales, as the Company continued to dispose of
underperforming or noncompetitive corporate retail stores through
conversion to franchise units or closures. The following changes in 1993
and throughout 1994 within the Company's customer base reduced year-to-
year comparative sales levels and increased the relative percentage of
wholesale sales to retail sales during the year: (i) the sale of four
corporate retail supermarkets in 1993 and one corporate retail supermarket
in 1994, and their conversion to franchise supermarkets; (ii) the addition
of two new franchises in 1993; (iii) the closing of one underperforming
corporate supermarket in 1993 upon the expiration of its lease; and (iv)
the termination of one multi-store wholesale customer in 1994.
Additionally, intense retail competition continued to impact sales
negatively.
The trends first noted in 1992 toward consumer purchases of lower
priced, private label products continued through 1994. These trends had a
nominal adverse impact on sales. The Company experienced nominal
inflation in certain branded label foods in 1994 due principally to
significant price increase in coffee and paper products.
Cost of products sold, as a percent of sales, increased by 0.8% to
83.5% in 1994 compared to 1993. While the percentage increased, total
cost of products sold decreased by $15,422,000 in 1994 compared to 1993.
The increased percentage was a direct result of a reduction in the amount
of higher margin retail sales compared to the increased amount of lower
margin wholesale sales. The lower margins associated with wholesale sales
continued in 1994 to be more than offset by significantly reduced
operating and administrative expenses from the disposal of underperforming
or noncompetitive corporate retail stores.
Operating and administrative expenses, as a percent of sales,
decreased by 1.2% to 14.4% in 1994 compared to 1993. The decrease of
$8,661,000 was primarily a result of the elimination of operating expenses
associated with the corporate retail supermarkets that have been sold and
converted into franchise units in 1993. The decrease in operating and
administrative expenses during 1994 could have been greater if not for the
charges relating to repositioning expenses amounting to $3,668,000 and
$1,953,000 in 1994 and 1993, respectively. Such charges in 1994 pertained
to three retail facilities, including, particularly, the Palatine,
Illinois corporate supermarket.
As a result of the foregoing, earnings before income taxes, as a
percent of sales, increased to 1.9%, or $8,653,000, in 1994 from 1.6%, or
$7,519,000, in 1993.
The effective income tax rate increased to 37.6%, compared to 36.8%
in 1993. The provision for income taxes in 1994 and 1993 was $3,252,000
and $2,767,000, respectively.
Net earnings in 1994 increased 13.7% to $5,401,000, or $1.02 per
share, compared to $4,752,000, or $0.86 per share in 1993. This increase
was principally the result of continued improvements in the Company's
wholesale operations. On a percentage basis, earnings per common and
equivalent share increased more than net earnings as a result of share
repurchases during 1994 which reduced the number of weighted average
common and equivalent shares outstanding.
Liquidity and Capital Resources
Net cash inflows from operating activities in fiscal 1995 were
$7,756,000, a decrease of $6,667,000 from the prior year. The decrease
was attributable primarily to cash outlays relating to previously expensed
retail repositioning reserve. Cash inflows also decreased due to
additional investments in retail systems for resale and other current
assets in fiscal 1995.
Net cash outflows from investing activities were $2,428,000 in fiscal
1995 compared to net cash inflows from investing activities of $415,000 in
the prior year. The change was due primarily to proceeds of $2,953,000
from the maturity of short-term investments during 1994. Expenditures for
property and equipment totaled $3,545,000 in 1995 compared to $3,640,000
in 1994. The Company has projected capital expenditures of $3,300,000 for
1996 which it expects to fund from internally generated capital.
Net cash outflows from financing activities were $5,214,000 in 1995
compared to $6,542,000 in 1994. As a result of the Company's shareholder
enhancement plan adopted in July 1995, the Company reacquired 152,294
shares of its common stock aggregating $3,475,000 financed in full through
available working capital (compared to 302,167 shares or $5,360,000 in
1994). Since only approximately $500,000 remained available under the
Board of Directors' stock repurchase authorization at year end, the Board
of Directors authorized an additional increase of its common stock
repurchase program from $8,000,000 to $10,000,000. Also as a result of
the Board of Directors' action to increase dividend payments by 167% under
shareholder enhancement plan, total common stock dividends paid for 1995
increased to $1,047,000 from $518,000 in 1994. The Company also paid
$142,000 in 1995 to repurchase substantially all of its preferred stock.
Under the Company's loan agreements, $3,240,000 of retained earnings were
available for the payment of cash dividends, stock repurchases and other
restricted payments as of December 30, 1995.
As a result of the foregoing, cash and equivalents for fiscal 1995
increased by $114,000, resulting in a 1995 year-end balance of
$14,424,000.
The Company is the prime lessee of new facilities and subleases such
facilities to independent franchise operators. All new facilities in 1995
were financed by operating lease agreements. The Company also leases
transportation equipment, principally tractors and trailers, and certain
office equipment. Some leases contain contingent rental provisions based
on sales volume at retail stores or miles traveled for transportation
equipment. At December 30, 1995, the Company had $7,018,000 of future
minimum lease payments required under operating leases in 1996 and
$4,336,000 of amounts receivable under noncancelable subleases in 1996.
Contingent rentals for 1995 and 1994 were $1,113,000 and $1,444,000,
respectively. Additionally, at December 30, 1995, the Company had
$13,268,000 of long-term capital lease obligations, $9,361,000 of which
represented noncurrent receivables from wholesale customers under capital
leases.
Under a new financial accounting standard that is effective for
fiscal year 1996, the Company is required to assess the recoverability of
the carrying amount of long-lived assets currently held or assets
committed to a plan of disposal resulting from various events or changes
in circumstances. The Company does not anticipate that the adoption of
this standard will have a material impact on its financial statements.
The Company typically provides short-term financing support to its
wholesale customers for the purchase of facilities and equipment for new
stores. This financing support is subsequently refinanced, typically
through banks, with the Company receiving reimbursement. At December 30,
1995, $375,000, which arose from franchisees' facilities and equipment
purchases, was included in receivables to be refinanced. Additionally,
the Company was contingently liable under guarantees of wholesale
customers' bank note agreements totaling $15,770,000 and $14,343,000 at
December 30, 1995 and December 31, 1994, respectively. All of the loan
guarantees are fully collateralized, principally with equipment and
inventory, and to a lesser extent, with building facilities.
At December 30, 1995, the Company's ratio of total liabilities to
shareholders' investment was 1.01, compared to 1.15 at December 31, 1994.
The decrease in this ratio was principally attributable to the significant
decrease in retail repositioning reserve in 1995 resulting from the
Company's termination settlement associated with the closing of the
Palatine, Illinois supermarket. Additionally, at December 30, 1995, the
Company had available the entire amount of unsecured revolving bank credit
facilities totaling $16,000,000.
The Company believes its cash and debt-to-equity positions continue
to compare favorably to most industry competitors. Additionally, the
Company believes that its financial condition provides it with adequate
long-term flexibility to finance anticipated capital requirements without
adversely impacting its financial position or liquidity.
[Page 22 of Annual Report]
Company Business
The Company is engaged in distributing food and related products at
wholesale and retail. At December 30, 1995, the Company franchised 66 and
operated 19 retail supermarkets under the Piggly Wiggly/R/ name in its
eastern Wisconsin and northeastern Illinois market area. The Company owns
the right to grant Piggly Wiggly franchises in its market area.
The Company is the primary supplier to its franchised and corporate
stores. The Company also serves as a wholesaler to other smaller
independent retail stores in its market area.
The Company supplies products to its franchised and corporate
supermarkets and other wholesale customers primarily from its distribution
center in Sheboygan, Wisconsin. The Company also provides its stores and
other customers with fresh, frozen and processed meat products from a
third-party distribution facility on a contract basis. Additionally, the
Company bottles soft drinks and drinking and distilled water under its
Springtime/R/ label and supplies these products exclusively to its
customers.
The Company employs approximately 1,600 persons, 1,150 of whom are
employed in the operation of corporate retail supermarkets. A majority of
the Company's retail employees are employed on a part-time basis. Of the
Company's remaining employees, 225 are engaged in warehousing,
distribution and trucking activities and the remainder are corporate and
administrative personnel.
The Company's common stock is traded over-the-counter on the Nasdaq
National Market. There are approximately 1,075 beneficial holders of the
Company's common stock.
For the fiscal quarters indicated, the following table sets forth the
high and low last sale prices for the Company's common stock as reported
on the Nasdaq National Market and the per share cash dividends declared.
High Low Cash
Dividends
1995
First Quarter . . . . . $11 1/2 $9 3/4 $0.03
Second Quarter . . . . 11 5/8 10 3/4 0.03
Third Quarter . . . . . 15 11 1/4 0.08
Fourth Quarter . . . . 15 1/2 14 1/4 0.08
1994
First Quarter . . . . . $8 1/2 $7 5/8 $0.02
Second Quarter . . . . 9 1/8 8 0.02
Third Quarter . . . . . 10 8 7/8 0.03
Fourth Quarter . . . . 10 1/8 9 5/8 0.03
See "Management's discussion and analysis of financial condition and
results of operations" for retained earnings available for payments.
[Page 23 of Annual Report]
Report of independent public accountants
To Schultz Sav-O Stores, Inc.:
We have audited the accompanying balance sheets of Schultz Sav-O
Stores, Inc. (a Wisconsin corporation) as of December 30, 1995 and
December 31, 1994 and the related statements of shareholders' investment,
earnings and cash flows for each of the three fiscal years in the period
ended December 30, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Schultz Sav-O
Stores, Inc. as of December 30, 1995 and December 31, 1994, and the
results of its operations and its cash flows for each of the three fiscal
years in the period ended December 30, 1995, in conformity with generally
accepted accounting principles.
Milwaukee, Wisconsin
February 7, 1996 Arthur Andersen LLP