-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DBo/H79XEMTKKxpvWjMppF3XEFPfoV0+FgWAdtnkzoPtiqaS+bxR4SpPG9TjAxam x26CG+65MditotA389URVQ== 0000897069-98-000143.txt : 19980317 0000897069-98-000143.hdr.sgml : 19980317 ACCESSION NUMBER: 0000897069-98-000143 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980313 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHULTZ SAV O STORES INC CENTRAL INDEX KEY: 0000087588 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 390600405 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-00549 FILM NUMBER: 98565514 BUSINESS ADDRESS: STREET 1: 2215 UNION AVE CITY: SHEBOYGAN STATE: WI ZIP: 53081 BUSINESS PHONE: 4144574433 MAIL ADDRESS: STREET 1: 2215 UNION AVE CITY: SHEBOYGAN STATE: WI ZIP: 53081 10-K405 1 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 January 3, 1998. 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: (920) 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 11, 1998: $92,482,688*. Number of shares outstanding of the registrant's Common Stock as of March 11, 1998: 6,811,879. PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED HEREIN BY REFERENCE: 1997 Annual Report to Shareholders (incorporated by reference into Parts II and IV to the extent indicated therein). Definitive Proxy Statement for 1998 annual meeting of shareholders (to be filed with the Commission under Regulation 14A within 120 days after the end of the registrant's fiscal year and, upon such filing, to be incorporated by reference into Part III to the extent indicated therein). _______________ * Only excludes shares beneficially owned by directors and officers of the registrant. PART I Item 1. Business. General Schultz Sav-O Stores, Inc. ("Company") is engaged in distributing food and related products at wholesale and retail. As of January 3, 1998, the Company franchised 68 and owned 18 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 86 franchised and corporate-owned Piggly Wiggly supermarkets. The Company also serves as a wholesaler to a number of smaller, 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 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, on a contract basis, with fresh, frozen and processed meat, eggs and deli products from a third-party distribution facility in Milwaukee, Wisconsin. Through contracts with several vendors, the Company also offers a line of carbonated soft drinks, fruit drinks and drinking and distilled water under its Springtime/TM/ label. 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 refinement 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 under a separate fee arrangement 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 continues to seek opportunities to expand and acquire corporate and franchise stores, to convert or close underperforming stores and to enter new markets. In 1997, the Company converted an independent operator from another wholesaler into a Piggly Wiggly franchise unit and converted an underperforming franchise store operation into a corporate unit. Additionally, the Company opened one new market corporate store, one new market franchise store, one replacement franchise store and completed three franchise store renovations. In the fall, the Company also acquired two corporate supermarkets in the greater Appleton market from a competitor. One of the acquired stores has been operational since November, while the other is projected to be remodeled and opened in July 1998. In aggregate, the total number of franchise and corporate stores increased from 84 at December 28, 1996 to 86 at January 3, 1998. The completed projects, along with the stores acquired and already operational, resulted in a net increase in store square footage of approximately 190,000 square feet. The following table shows the Company's development of, and changes in, its franchised and corporate retail supermarkets for the periods presented:
Franchise Supermarkets Corporate Supermarkets Number of Supermarkets 1993 1994 1995 1996 1997 1993 1994 1995 1996 1997 Beginning of Year 59 64 65 66 68 26 21 20 19 16 New Market Supermarkets(a) 1 -- 1 1 1 -- -- -- -- 1 Replacement Supermarkets(b) 1 1 3 2 1 -- -- -- -- -- Converted to/from Franchise(c) 4 1 -- 1 (1) (4) (1) -- (1) 1 Terminated Operations(d) (3) (1) (3) (2) (2) (1) -- (1) (2) -- New Franchises(e) 2 -- -- -- 1 -- -- -- -- -- End of Year 64 65 66 68 68 21 20 19 16 18 === === === === === === === === === === Remodeled Supermarkets(f) 1 5 6 1 3 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) Supermarkets that are converted from corporate to franchise units, or vice versa, are included as reductions to supermarket totals in one category and corresponding additions to totals in the other 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 $300,000.
For 1997, the Company reported record net earnings, net earnings per share and net earnings as a percentage of sales. The increase in earnings and profitability was principally the result of expanded and improved operations and the completion of the rollout of the Company's Piggly Wiggly Preferred Club electronic card marketing program. The Company is the primary supplier to all of its franchised and corporate supermarkets. The Company also serves as a wholesaler to other smaller independent retail stores in its market area, accounting for approximately 2% of the Company's 1997 net sales. 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 January 3, 1998, there were 86 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 certain 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-procured line of branded private-label products is satisfying this consumer trend. See "Purchasing and Distribution." Based on the Company's internal wholesale price index, inflation did not have a significant effect on sales between 1997 and 1996. In 1997, same store sales increased as the Company completed the introduction of the Piggly Wiggly Preferred Club Card/R/, a customer- friendly, card-based marketing program. The Piggly Wiggly Preferred Club Card is intended to reward current customers and attract new customers by offering "clipless coupons" on weekly advertised specials and "automatic" savings on monthly store specials. The card also doubles as a check- cashing and video rental identification card. 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 1997. The Company's franchised supermarkets range in size from 8,340 square feet to 47,000 square feet, with an average of 24,175 square feet. The Company's corporate supermarkets range in size from 19,980 square feet to 54,850 square feet, with an average of 33,400 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 1997, certain of the Company's stores continued to fail to meet financial performance goals. The Company closed one such store during 1997 and converted another franchise store into a corporate unit. In order to further improve the Company's results of operations, the Company continues to evaluate various business alternatives relating to its underperforming operations, including the sale or conversion of these stores, closing stores and 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 produce, meat and seafood from a variety of sources. The Company purchases substantially all of its private label items through Topco Associates, Inc. ("Topco"). Topco is a national purchasing cooperative whose member-owners consist of 30 regional supermarket chains and food services organizations who collectively operate approximately 3,800 stores. According to Topco data, its member-owners accounted for approximately 15% of United States grocery store sales volume in 1997. In 1997, 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 1997 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 41 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 1997 and are expected to be nominal in 1998. The Company offers a line of carbonated soft drinks, fruit drinks and drinking and distilled water, under its Springtime/TM/ label, to its franchised and corporate supermarkets and independent supermarket customers. During 1997, the Company closed its bottling facility in Sheboygan, Wisconsin and currently outsources production of these products to a number of vendors. The sale of these products accounted for less than 1% of the Company's 1997 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 January 3, 1998, the Company employed approximately 1,680 persons, of whom approximately 1,230 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 210 are engaged in warehousing and trucking activities and approximately 240 are corporate and administrative personnel. Four separate collective bargaining agreements, covering a total of approximately 200 employees expire in 1998. The Company does not currently anticipate any strikes, work stoppages or slowdowns in connection with renewing such agreements. The Company has entered into a 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. Positions and Offices with the Name and Age Company James H. Dickelman, 50 . . . . . . Chairman of the Board, President and Chief Executive Officer John H. Dahly, 57 . . . . . . . . . Executive Vice President, Chief Financial Officer and Secretary Michael R. Houser, 46 . . . . . . . Executive Vice President--Marketing and Merchandising William K. Jacobson, 47 . . . . . . Senior Vice President--Retail Operations Kenneth S. Folberg, 37 . . . . . . Vice President--Logistics and Labor Relations Armand C. Go, 35 . . . . . . . . . Treasurer and Chief Accounting Officer Larry D. Hayes, 55 . . . . . . . . Vice President--Meat, Bakery and Deli Operations John S. Kwas, 58 . . . . . . . . . Vice President--Grocery Procurement Thomas J. Timler, 40 . . . . . . . Vice President--Business Systems Support Group Frank D. Welch, 57 . . . . . . . . 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 five years. Item 2. Properties. As is typical in the Company's industry, a substantial portion of the Company's capital assets are leased. As of January 3, 1998, the Company leased 17 corporate supermarkets and owned one supermarket. The leased supermarkets range in size from 19,980 to 54,850 square feet, with an average of 32,690 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. One corporate store lease in Appleton, Wisconsin is scheduled to expire in 1998. Upon expiration, the Company does not intend to renew this lease inasmuch as the acquired corporate store that is being renovated will replace this older, noncompetitive store. As of January 3, 1998, the Company subleased 49 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 five franchise and one corporate retail operations. These renovations involve four additions to existing franchise stores, one replacement franchise unit and a renovation of one acquired corporate supermarket. Additionally, one new market franchise supermarket opened in January 1998. These projects are expected to add approximately 85,000 square feet of selling 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 and approximately 364,000 square feet of warehouse space. 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 routine litigation incidental to the Company's business. No material legal proceedings were terminated during the fourth quarter of 1997. 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 1997. 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 1997 Annual Report to Shareholders (the "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 January 3, 1998 and December 28, 1996, the Consolidated Statements of Earnings, Cash Flows and Shareholders' Investment for each of the three fiscal years in the period ended January 3, 1998, 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 1998 annual meeting of shareholders (the "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: 1. Financial Statements. Consolidated Balance Sheets as of January 3, 1998 and December 28, 1996 Consolidated Statements of Earnings, Cash Flows and Shareholders' Investment for the fiscal years 1997, 1996 and 1995 Notes to Consolidated Financial Statements Report of Independent Public Accountants The foregoing Financial Statements are incorporated by reference to the pocket part included in the Company's Annual Report to Shareholders for the fiscal year ended January 3, 1998. 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. Page Reference: Form 10-K 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 fiscal year 1997. 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 12, 1998 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/ William K. Jacobson James H. Dickelman, Chairman of William K. Jacobson, Director Board, President, Chief Executive Officer and Director (Principal Executive Officer) /s/ John H. Dahly /s/ Bernard S. Kubale John H. Dahly, Executive Vice President, Bernard S. Kubale, Director Chief Financial Officer and Director (Principal Financial Officer) /s/ Armand C. Go /s/ Martin Crneckiy, Jr. Armand C. Go, Treasurer and Chief Martin Crneckiy, Jr., Director Accounting Officer (Principal Accounting Officer) /s/ Howard C. Dickelman /s/ R. Bruce Grover Howard C. Dickelman, Director R. Bruce Grover, Director /s/ Michael R. Houser Michael R. Houser, Director REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS We have audited in accordance with generally accepted auditing standards, the financial statements included in Schultz Sav-O Stores, Inc.'s annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 6, 1998. 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. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Milwaukee, Wisconsin February 6, 1998. SCHULTZ SAV-O STORES, INC. SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE FISCAL YEARS 1997, 1996 AND 1995 Allowance for Doubtful Accounts-- Changes in the allowance for doubtful accounts are summarized as follows: 1997 1996 1995 Balance, beginning of year $3,650,000 $2,565,000 $1,750,000 Provision charged to earnings 656,000 987,000 2,079,000 (Writeoffs)/recoveries, net (356,000) 98,000 (1,264,000) --------- --------- --------- Balance, end of year $3,950,000 $3,650,000 $2,565,000 ========= ========= ========= EXHIBIT INDEX SCHULTZ SAV-O STORES, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 3, 1998 Exhibit No. Description 3.1 Restated Articles of Incorporated, as amended. Incorporated by reference to Exhibit 3.1 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). 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 1997 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, 1997, 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, 1996. 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, 1996. Incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 30, 1996. 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 1997 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 1998 Annual Meeting of Shareholders (to be filed with the Commission under Regulation 14A within 120 days after the end of the Company's fiscal year and, upon such filing, incorporated by reference herein to the extent indicated in this Form 10- K). EX-13 2 EXHIBIT 13 FIVE-YEAR FINANCIAL HIGHLIGHTS Fiscal Year(a)(b) (dollars in thousands, except per share data) 1997 1996 1995 1994 1993 Consolidated statements of earnings data: Net sales $473,006 $453,921 $439,646 $446,362 $469,577 Gross profit 73,907 72,429 70,516 73,495 81,288 Earnings before income taxes 12,418 10,512 9,500 8,653 7,519 Provision for income taxes 4,781 4,047 3,660 3,252 2,767 Net earnings 7,637 6,465 5,840 5,401 4,752 Earnings per share- basic 1.11 0.93 0.82 0.70 0.58 Earnings per share- diluted 1.06 0.90 0.79 0.68 0.57 Cash dividends per share 0.273 0.240 0.147 0.067 0.050 Weighted average shares and equivalents outstanding (c) 7,148 7,187 7,402 7,886 8,234 Net earnings-to- 1.01% sales ratio 1.61% 1.42% 1.33% 1.21% Consolidated balance sheet data (at fiscal year-end): Working capital $29,217 $ 28,579 $ 24,855 $ 21,197 $ 20,805 Total assets 98,866 98,204 94,435 94,624 90,042 Current obligations under capital leases and current maturities of long-term debt 866 1,047 1,114 1,037 1,050 Long-term debt 3,165 3,375 3,719 4,056 1,035 Long-term obligations under capital leases 11,177 12,368 13,268 14,046 14,979 Total shareholders' investment 50,384 47,035 43,288 41,457 41,501 Other data: Capital additions $ 4,868 $ 3,420 $ 3,545 $ 3,640 $ 8,528 Depreciation and amortization 4,517 4,451 4,467 4,654 4,861 __________________________________________ Notes: (a) The Company's fiscal year ends on the Saturday closest to December 31. The 1997 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 to Shareholders. (c) The weighted average shares and equivalents outstanding for prior years have been retroactively restated to account for the three-for-two stock split on September 5, 1997, and/or for the two-for-one stock split on September 15, 1995. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Special Note Regarding Forward-Looking Statements Certain matters discussed in this Management's Discussion and Analysis 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 statements will include words such as the 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 January 3, 1998 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 of net sales and the year-to-year percentage changes in the amounts of such line items. Percent of net sales Percentage change 1997 1996 1995 1997 vs. 1996 1996 vs. 1995 Net Sales 100.0% 100.0% 100.0% 4.2% 3.2% Cost of products sold 84.4% 84.0% 84.0% 4.6% 3.3% Operating and administrative expenses 13.1% 13.6% 13.9% (0.2%) 1.4% Earnings before income taxes 2.6% 2.3% 2.2% 18.1% 10.7% Net earnings 1.6% 1.4% 1.3% 18.1% 10.7% 1997 vs. 1996 Net Sales Net sales for the 53-week period ended January 3, 1998 increased 4.2% to $473,006,000, compared to $453,921,000 for the 52-week period ended December 28, 1996. Sales, adjusted for the extra week in fiscal 1997, increased 2.3% compared to 1996. Fiscal 1998 will be a 52-week year. Sales in 1997 benefitted primarily from increased wholesale business volume resulting from the October 1997 completion of the two-year implementation of the Piggly Wiggly Preferred Club/R/ electronic card marketing program. Sales in fiscal 1997 also benefitted from additions and enhancements to the Company's "virtual chain" base of franchised and corporate supermarkets. In April 1997, the Company converted an independent operator from another wholesaler into a Piggly Wiggly franchise unit. In October 1997, the Company converted a franchise unit in Oshkosh, Wisconsin into a corporate supermarket. During 1997, the Company also completed one new market corporate store, one new market franchise store, one replacement franchise store and three additions to existing franchise stores. These completed projects, located in Appleton, DePere, Evansville, Plymouth, Manitowoc and Waterloo, Wisconsin, added approximately 115,000 of aggregate store selling space. Of these completed projects, the Appleton store was the first corporate store opened by the Company since 1991. While the Company's emphasis remains in increasing its wholesale business volume, the Company will continue to explore retail opportunities. Sales, however, were negatively impacted by closures of two underperforming corporate stores in Racine and Stevens Point, Wisconsin in September and October 1996, respectively, and one underperforming franchise store in Plover, Wisconsin in September 1997; and the impact of additional competitive activity due to new stores in certain markets. As of January 3, 1998, the Company had 68 franchised and 18 corporate supermarkets, compared to 68 franchised and 16 corporate stores at the end of fiscal year 1996. Consistent with the Company's business strategy to expand its wholesale volume, the Company opened a 17,600 square foot new market franchise supermarket in Poynette, Wisconsin in January 1998. In addition to this completed project, there are currently six additional supermarket facility projects in various phases of planning or construction, with completions scheduled throughout 1998. These projects involve four additions to existing franchise stores in Howards Grove, Waupaca, Beaver Dam and Kiel, Wisconsin; one replacement franchise supermarket in Lomira, Wisconsin; and one renovation to the acquired corporate supermarket in Appleton, Wisconsin. On an aggregate basis, these six new facilities, upon completion, are expected to add approximately 85,000 square feet of store selling space. Additionally, the Company expects these projects to continue to help the Company position itself against competitive pressures in these local marketplaces. Based on the Company's internal wholesale price index, inflation did not have a significant effect on sales between years. In the fall of 1997, the Company acquired two operating supermarkets in the Menasha and Appleton, Wisconsin market areas from Nash Finch Company. The Company renovated the Menasha store subsequent to the purchase and the Company opened this corporate store in November 1997 and closed its noncompetitive south side Appleton store. As part of an expansion plan, the Company temporarily closed the acquired Appleton store. The Company projects the renovated Appleton corporate store to open in July 1998. Upon completion of the Appleton store project, the Company expects to close its other smaller, noncompetitive and older corporate Appleton store. The two replacement corporate supermarkets will aggregate approximately 85,000 square feet, an increase of 93% over the combined 44,160 square feet of the older units. Cost of Products Sold Cost of products sold, as percent of sales, increased 0.4% from 84.0% in 1996 to 84.4% in 1997. This nominal increase was principally a direct result of the continued reduction in 1997 of higher margin retail sales compared to the increasing amount of lower margin wholesale sales. With the acquisition of two retail stores from Nash Finch and one retail store from a franchise operator and their respective conversions to corporate supermarkets, the Company projects the percentage of higher margin retail sales volume to increase in 1998 relative to 1997 levels. In spite of this expected change in sales mix, the Company will continue to emphasize increasing its wholesale volume. Operating and Administrative Expenses Operating and administrative expenses, as a percent of sales, decreased 0.5% from 13.6% in 1996 to 13.1% in 1997. Total operating and administrative expenses in 1997 decreased due principally to the closing of two smaller underperforming corporate retail stores in September and October 1996, respectively. Additionally, the Company experienced lower provisions for self-insured health and casualty programs due to reduced frequency and severity of claims. These decreases were particularly evident during the fourth quarter of 1997. The decrease in operating and administrative expenses was partially offset by higher variable expenses, such as wages and salaries. Certain variable expenses increased due principally to higher sales volume. 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 a number of underperforming franchise operators. Total realization charges relating to wholesale bad debts and retail subsidies were comparable for both years, totaling $2,046,000 and $2,349,000 in 1997 and 1996, 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 can result in the Company incurring certain repositioning or restructuring charges involving the termination costs of replaced, closed or sold stores. These actions can negatively impact net earnings in the short-term, but management believes that such action will help improve the Company's long-term profitability. For 1997 and 1996, retail repositioning and restructuring costs amounted to $1,071,000 and $299,000, respectively. The significant increase in retail repositioning costs in 1997 compared to 1996 was attributable to: (i) the closure of an underperforming franchise supermarket in Plover, Wisconsin during 1997 and resulting in a $700,000 pretax charge to operations; and (ii) the closing and termination costs relating to two smaller noncompetitive corporate stores that are to be replaced by the two retail stores acquired from Nash Finch resulting in a $300,000 pretax charge to operations. The Company also incurred additional charges of $300,000 relating to market development and startup costs due to the opening of the new market corporate store in Appleton, Wisconsin and the conversion of the acquired Menasha, Wisconsin supermarket into the Piggly Wiggly format. Net Earnings As a result of the foregoing, the Company's earnings before income taxes increased 18.1% to $12,418,000 in fiscal 1997, from $10,512,000 in fiscal 1996. As a percent of sales, earnings before income taxes increased from 2.3% in 1996 to 2.6% in 1997. After applying an effective tax rate of 38.5% to earnings before income taxes for both years, net earnings for 1997 increased 18.1% to $7,637,000, compared with the 1996 net earnings of $6,465,000. With continuing improvements in sales and productivity, the Company's net earnings-to-sales ratio for 1997 improved to 1.6%, compared to 1.4% for fiscal 1996. Additionally, 1997 diluted earnings per share increased 17.8% to $1.06 from $0.90 in 1996. As of January 3, 1998, the Company has reported 20 consecutive quarters in which it has shown increased earnings over the prior year's quarter. 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 3.2%, 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/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 were three supermarket facility projects that were completed in 1996. These completed projects consisted of two replacement franchise supermarkets in Hubertus and Edgerton, Wisconsin and one new market franchise supermarket in Lodi, Wisconsin. The Company also sold and converted one of its corporate supermarkets into a franchise unit. These projects continued to help the Company position itself for additional increases in sales. Also 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, inflation had no significant effect on sales between years. Cost of Products Sold Cost of products sold, as a percent of sales, did not change between years. 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, respectively. Operating and Administrative Expenses Operating and administrative expenses amounted to 13.6% of net sales in 1996, compared to 13.9% 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 1996 and the closure of two smaller, outdated and underperforming corporate stores in September and October 1996, respectively. Due to the highly competitive nature of the industry, certain franchise operators and corporate retail stores continued to experience operational difficulties in their respective marketplaces. As a result, the Company continued 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. Similar to prior years, the Company incurred certain repositioning or restructuring charges involving the termination costs of replaced, closed of sold stores. For 1996 and 1995, retail repositioning and restructuring costs amounted to $299,000 and $1,003,000, respectively. Net Earnings As a result of the foregoing, the Company's earnings before income taxes increased 10.7% to $10,512,000 in fiscal 1996, from $9,500,000 in 1995. As a percent of sales, earnings before income taxes increased from 2.2% in 1995 to 2.3% in 1996. 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 1.4%, compared to 1.3% for fiscal 1995. Additionally, 1996 diluted earnings per share increased 13.9% to $0.90 from $0.79 in 1995. The diluted 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, diluted 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. Liquidity and Capital Resources The Company's favorable 1997 operating results continued to enhance its strong financial position. As was the case in 1996, the primary source of liquidity during 1997 was cash generated from operations. Cash provided by operating activities during 1997 was $8,234,000, compared to $12,862,000 in 1996. Cash flow from operations decreased between years due principally to the increase in outstanding receivables from franchise operators due in large part to short-term financing support for purchase of facilities and equipment for new stores approximating $2,400,000. The decrease in net cash inflows from operations between years did not adversely affect the Company's ability to internally fund its capital expenditures, purchase shares of its common stock and pay cash dividends. Net earnings from operations of $7,637,000 served as the Company's main source of funding in 1997. Net cash outflows for investing activities were $6,920,000 in 1997 compared to $2,751,000 in 1996. This significant increase was primarily attributable to the $2,701,000 acquisition of two retail stores from Nash Finch. Additionally, capital expenditures totaled $4,868,000 for 1997, compared to $3,420,000 in 1996. The 42% increase in 1997 capital expenditures was due in large part to the $1,755,000 of equipment and fixtures purchased for the corporate store that the Company opened in Appleton, Wisconsin in October 1997 and for distribution upgrades and office technology equipment approximating $557,000. For 1998, the Company's capital budget is estimated at $4,300,000, of which $2,889,000 has been committed as of January 3, 1998. More than half of the 1998 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 $640,000 to purchase office technology equipment. The Company expects to finance these projects from internally generated capital. Net cash outflows for financing activities were $5,953,000 in 1997 compared to $4,173,000 in 1996. Total stock repurchases were substantially higher in 1997 due to the Board of Directors' January 29, 1997 reinstatement of the Company's stock repurchase plan of up to $5,000,000 of its outstanding common stock. The 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. They may also include, but the amount of the authorization 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. Shares repurchased during 1997 was 289,856 with an aggregate cost of $3,835,000. Total cash dividend payouts on a per share basis increased 13.8% from $0.240 in 1996 to $0.273 per share in 1997. At January 3, 1998, under the Company's loan agreements, $8,469,000 of retained earnings were available for the payment of cash dividends and other restricted payments. In summary, cash and equivalents for fiscal 1997 decreased $4,639,000, resulting in a year-end balance of $23,124,000. Of the year- end cash balance, nearly two-thirds was invested in short-term investments with maturities of less than three months, such as taxable and tax-exempt money market funds and commercial paper with strong credit ratings. The Company has not, and does not intend to, invest in derivative securities. The Company is the prime lessee of new retail store facilities and subleases such facilities to independent franchise operators. All new facilities in 1997 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 January 3, 1998, the Company had $8,805,000 of minimum lease payments required under operating leases in 1998 and $5,658,000 of amounts receivable under noncancelable subleases in 1998. Contingent rentals for 1997 and 1996 were $1,029,000 and $1,012,000, respectively. Additionally, at January 3, 1998, the Company had $11,177,000 of long-term capital lease obligations, $7,270,000 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 or remodeled 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 totaling $13,226,000 and $15,094,000 at January 3, 1998 and December 28, 1996, respectively. All of the loan guarantees are fully collateralized, principally with equipment and inventory and, to a lesser extent, with building facilities. At January 3, 1998, the Company's ratio of total liabilities to shareholders' investment was 0.96, compared to 1.09 at December 28, 1996. The ratio decrease was principally attributable to record earnings and reduction in long-term debt in 1997. At January 3, 1998, 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. The Company has assessed and continues to assess the impact of the year 2000 issue on its operations, including the development of cost estimates for, and the extent of programming changes required to address this issue. The Company is also assessing the impact of this issue with its key vendors and suppliers. Although final cost estimates have yet to be determined, based on current information available, the Company anticipates that its year 2000 costs will only result in an immaterial increase to the Company's expenses during 1998. Company Business The Company is engaged in distributing food and related products at wholesale and retail. At January 3, 1998, the Company franchised 68 and operated 18 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. The Company employs approximately 1,680 individuals, nearly 1,230 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 210 are engaged in warehousing, distribution and trucking activities, and nearly 240 are corporate and administrative personnel. 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 January 3, 1998 and December 28, 1996 and the related consolidated statements of earnings, cash flows and shareholders' investment for each of the three fiscal years in the period ended January 3, 1998. 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 January 3, 1998 and December 28, 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 3, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Milwaukee, Wisconsin Arthur Andersen LLP February 6, 1998 CONSOLIDATED BALANCE SHEETS As of January 3, 1998 and December 28, 1996 Assets 1997 1996 Current Assets: Cash and equivalents $23,124,000 $27,763,000 Receivables 9,718,000 5,676,000 Inventories 21,741,000 22,316,000 Other current assets 3,635,000 2,672,000 Deferred income taxes 4,131,000 3,824,000 ---------- ---------- Total current assets 62,349,000 62,251,000 ---------- ---------- Noncurrent receivable under capital subleases 7,270,000 8,239,000 Property under capital leases, net 2,786,000 3,073,000 Other noncurrent assets 3,782,000 3,097,000 Property and equipment, net 22,679,000 21,544,000 ---------- ---------- Total assets $98,866,000 $98,204,000 ========== ========== Liabilities & shareholders' investment Current liabilities: Accounts payable $21,305,000 $20,564,000 Accrued salaries and benefits 4,395,000 4,189,000 Accrued insurance 3,095,000 3,328,000 Retail repositioning reserve 610,000 852,000 Other accrued liabilities 2,861,000 3,692,000 Current obligations under capital leases 665,000 702,000 Current maturities of long-term debt 201,000 345,000 ---------- ---------- Total current liabilities 33,132,000 33,672,000 ---------- ---------- Long-term obligations under capital leases 11,177,000 12,368,000 Long-term debt 3,165,000 3,375,000 Deferred income taxes 1,008,000 1,754,000 Shareholders' investment: Common stock, $0.05 par value, authorized 20,000,000 shares, issued 8,750,342 in 1997 and 1996 438,000 292,000 Additional paid-in capital 13,940,000 13,331,000 Retained earnings 51,299,000 45,654,000 Treasury stock at cost, 1,938,463 shares in 1997 and 1,214,472 shares in 1996 (15,293,000) (12,242,000) ---------- ---------- Total shareholders' investment 50,384,000 47,035,000 ---------- ---------- Total liabilities and shareholders' investment $98,866,000 $98,204,000 ========== ========== See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF EARNINGS For fiscal years 1997, 1996 and 1995 1997 1996 1995 Net sales $473,006,000 $453,921,000 $439,646,000 Costs and expenses: Cost of products sold 399,099,000 381,492,000 369,130,000 Operating and administrative expenses 61,799,000 61,892,000 61,034,000 ---------- ---------- ---------- Operating income 12,108,000 10,537,000 9,482,000 Interest income 1,157,000 842,000 944,000 Interest expense (847,000) (867,000) (926,000) ---------- ---------- ---------- Earnings before income taxes 12,418,000 10,512,000 9,500,000 Provision for income taxes 4,781,000 4,047,000 3,660,000 ---------- ---------- ---------- Net earnings $ 7,637,000 $ 6,465,000 $ 5,840,000 ---------- ---------- ---------- Earnings per share-basic $1.11 $0.93 $0.82 ===== ===== ===== Earnings per share-diluted $1.06 $0.90 $0.79 ===== ===== ===== See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS For fiscal years 1997, 1996 and 1995 1997 1996 1995 Cash flows from operating activities: Net earnings $ 7,637,000 $ 6,465,000 $ 5,840,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 4,517,000 4,451,000 4,467,000 Deferred income taxes (609,000) (626,000) 1,003,000 Changes in assets and liabilities: Receivables (4,042,000) (114,000) 1,276,000 Inventories 1,476,000 (1,858,000) 869,000 Other current assets (551,000) 2,335,000 (2,584,000) Accounts payable 741,000 823,000 (140,000) Accrued liabilities (935,000) 1,386,000 (4,099,000) ---------- ---------- ---------- Net cash flows from operating activities 8,234,000 12,862,000 6,632,000 ---------- ---------- ---------- Cash flows from investing activities: Capital additions (4,868,000) (3,420,000) (3,545,000) Proceeds from asset sales 144,000 88,000 599,000 Acquisition of retail stores (2,701,000) - - Receipt of principal amounts under capital subleases 505,000 581,000 518,000 ---------- ---------- ---------- Net cash flows from investing activities (6,920,000) (2,751,000) (2,428,000) ---------- ---------- ---------- Cash flows from financing activities: Payment for acquisition of treasury stock (3,835,000) (2,233,000) (3,475,000) Payment of cash dividends (1,879,000) (1,666,000) (1,047,000) Proceeds from exercise of stock options 817,000 856,000 487,000 Principal payments on capital lease obligations (702,000) (777,000) (714,000) Principal payments on long- term debt (354,000) (337,000) (323,000) Repurchase of preferred stock - (16,000) (142,000) ---------- ---------- ---------- Net cash flows from financing activities (5,953,000) (4,173,000) (5,214,000) ---------- ---------- ---------- Cash and equivalents: Net change (4,639,000) 5,938,000 (1,010,000) Balance, beginning of year 27,763,000 21,825,000 22,835,000 ---------- ---------- ---------- Balance, end of year $ 23,124,000 $ 27,763,000 $21,825,000 ========== ========== ========== See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT For fiscal years 1997, 1996 and 1995 1997 1996 1995 Shares Amount Shares Amount Shares Amount Preferred Stock, $100 par Beginning of year - $ - 159 $ 16,000 3,000 $ 300,000 Repurchase of preferred stock - - (159) (16,000) (2,841) (284,000) ---------- --------- ---------- --------- ---------- ---------- End of year - - - - 159 16,000 ========== ========= ========== ========= ========== ========== Common Stock, $0.05 par Beginning of year 5,833,570 292,000 5,833,570 292,000 2,916,785 146,000 Three-for-two stock split effected in the form of 50% stock dividend, net of fractional shares 2,916,772 146,000 - - - - Two-for-one stock split effected in the form of a 100% stock dividend - - - - 2,916,785 146,000 ---------- --------- ---------- ---------- ---------- --------- End of year 8,750,342 438,000 5,833,570 292,000 5,833,570 292,000 ========== ========= =========== ========== ========== ========== Additional Paid-in Capital Beginning of year 13,331,000 12,990,000 12,680,000 Exercise of stock options 609,000 341,000 168,000 Repurchase of preferred stock - - 142,000 ---------- ---------- ---------- End of year 13,940,000 13,331,000 12,990,000 Retained Earnings ========== ========== ========== Beginning of year 45,654,000 40,855,000 36,179,000 Net earnings 7,637,000 6,465,000 5,840,000 Cash dividends Preferred stock ($3.00 per share) - - (9,000) Common stock ($0.273 per share in 1997, $0.240 in 1996 and $0.147 in 1995) (1,879,000) (1,666,000) (1,038,000) Three-for-two stock split effected in the form of a 50% stock dividend, net of fractional shares (113,000) - - Two-for-one stock split effected in the form of a 100% stock dividend - - (117,000) ---------- ---------- ---------- End of year 51,299,000 45,654,000 40,855,000 ========== ========== ========== Treasury Stock Beginning of year (1,214,472) (12,242,000) (1,179,972) (10,865,000) (495,551) (7,848,000) Exercise of stock options 173,100 817,000 111,300 856,000 53,359 487,000 Acquisition of treasury stock (289,856) (3,835,000) (145,800) (2,233,000) (152,294) (3,475,000) Three-for-two stock split effected in the form of a 50% stock dividend, net of fractional shares (607,235) (33,000) - - - - Two-for-one stock split effected in the form of a 100% stock dividend - - - - (585,486) (29,000) ---------- ---------- ---------- ---------- ---------- ---------- End of year (1,938,463) (15,293,000) (1,214,472) (12,242,000) (1,179,972) (10,865,000) ========== ========== ========== ========== ========== ========== Shareholders' investment, end of year $50,384,000 $47,035,000 $43,288,000 ========== ========== ========== See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For fiscal years 1997, 1996 and 1995 (I) 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/ (II) Summary of Significant Accounting Policies Accounting periods The Company's fiscal year ends on the Saturday closest to December 31. The 1997 fiscal year was a 53-week period ended January 3, 1998. The 1996 and 1995 fiscal years were 52-week periods ended December 28, 1996 and December 30, 1995, 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 $3,950,000 and $3,650,000 at January 3, 1998 and December 28, 1996, 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 January 3, 1998 and December 28, 1996, 81% and 82%, respectively, of all inventories were accounted for under the LIFO method. The excess of current cost over the stated LIFO cost of inventory was $9,609,000 and $9,447,000 at January 3, 1998 and December 28, 1996, respectively. Other current assets Other current assets at January 3, 1998 and December 28, 1996 consisted of the following: 1997 1996 Property held for resale $1,663,000 $ 245,000 Prepaid expenses 1,209,000 615,000 Receivable under capital subleases 443,000 504,000 Retail systems and supplies for resale 320,000 1,308,000 --------- --------- Other current assets $3,635,000 $2,672,000 ========= ========= 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 January 3, 1998 and December 28, 1996 consisted of the following: 1997 1996 Land and buildings $18,455,000 $18,382,000 Leasehold improvements 5,391,000 5,398,000 Equipment and fixtures 33,537,000 29,911,000 ---------- ---------- 57,383,000 53,691,000 Less accumulated depreciation and amortization (34,704,000) (32,147,000) ---------- ---------- Property and equipment, net $22,679,000 $21,544,000 ========== ========== Accounts payable Accounts payable included $7,583,000 and $6,968,000 at January 3, 1998 and December 28, 1996, 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 estimated. 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 In March 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) Number 128, "Earnings per Share." The new standard simplifies the standards for computing earnings per share and requires presentation of two new amounts, basic and diluted earnings per share. Basic earnings per share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding and common stock equivalents during the year. Common stock equivalents used in computing diluted earnings per share related to stock options which, if exercised, would have a dilutive effect on earnings per share. The Company's calculations of earnings per share-basic and earnings per share-diluted were as follows: 1997 1996 1995 Net earnings available for common shareholders $7,637,000 $6,465,000 $5,831,000 Weighted average shares outstanding 6,871,000 6,944,000 7,135,000 Earnings per share- basic $1.11 $0.93 $0.82 --------- --------- --------- Net earnings available for common shareholders $7,637,000 $6,465,000 $5,831,000 Weighted average shares outstanding 6,871,000 6,944,000 7,135,000 Stock options' dilutive effect 277,000 243,000 267,000 Weighted average shares and equivalents outstanding 7,148,000 7,187,000 7,402,000 Earnings per share- diluted $1.06 $0.90 $0.79 Supplementary disclosure of cash flow information Interest and taxes paid included in the Company's cash flow from operations were as follows: 1997 1996 1995 Interest paid $ 878,000 $ 873,000 $ 902,000 Taxes paid 5,911,000 4,071,000 3,368,000 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 1996 and 1995 amounts previously reported have been reclassified to conform to the 1997 presentation. (III) Acquisition On September 5, 1997, the Company acquired substantially all of the assets of two retail grocery stores located in and around Appleton, Wisconsin from Nash Finch Company, a publicly-held owned Delaware corporation for $2,701,000 in cash. The acquisition was accounted for as a purchase. Accordingly, the assets of the acquired retail supermarkets are included in the Company's consolidated balance sheet as of January 3, 1998. The purchase price was allocated based upon the relative fair market value of assets acquired. The excess of the purchase price over assets acquired approximated $900,000 and is being amortized over 15 years. The results of operations of one of the retail stores that has been operational since November was not significant. The other retail store is currently undergoing renovation and is projected to open in July 1998. The Company financed the acquisition solely through working capital from operations. (IV) Long-Term Debt The Company has a loan agreement providing unsecured revolving credit facilities totaling $16,000,000 through April 30, 1999. 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 1997 and 1996. Long-term debt at January 3, 1998 and December 28, 1996 consisted of the following: 1997 1996 Mortgage note, 9.675% due in monthly installments of $33,026 including interest due through June 2012 $3,091,000 $3,191,000 Term note, 9.91%, due in quarterly installments of $55,000 through June 1998 75,000 295,000 Land contract, 10.0%, due in annual installments of $33,333 through March 2003 200,000 234,000 --------- --------- 3,366,000 3,720,000 Less current maturities (201,000) (345,000) --------- --------- Long-term debt $3,165,000 $3,375,000 ========= ========= At January 3, 1998, 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 January 3, 1998, $8,469,000 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 1998 through 2002 will be $201,000, $144,000, $156,000, $168,000 and $182,000, respectively, and $2,515,000 from 2003 to 2012. Interest expenses consisted of the following: 1997 1996 1995 Interest on long- term debt $350,000 $383,000 $419,000 Imputed interest- capital leases 497,000 484,000 507,000 ------- ------- ------- Interest expense $847,000 $867,000 $926,000 ======= ======= ======= (V) Income Taxes The difference between the statutory federal income tax rate and the effective rate is summarized as follows: 1997 1996 1995 Federal income tax 34.1% 34.0% 34.0% State income taxes, net of federal income tax benefit 5.2 5.3 5.1 Other, net (0.8) (0.8) (0.6) ----- ----- ----- Effective income tax rate 38.5% 38.5% 38.5% ===== ===== ===== Components of provision for income taxes consisted of the following: 1997 1996 1995 Currently payable Federal $4,433,000 $3,804,000 $2,082,000 State 957,000 869,000 575,000 Deferred (609,000) (626,000) (1,003,000) --------- --------- --------- Provision for income taxes 4,781,000 4,047,000 3,660,000 ========= ========= ========= The components of deferred income tax assets and liabilities at January 3, 1998 and December 28, 1996 were as follows: 1997 1996 Deferred income tax assets: Bad debt reserve $1,541,000 $1,424,000 Accrued insurance 1,050,000 1,277,000 Capital lease accounting 694,000 716,000 Vacation pay 570,000 513,000 Retail repositioning reserve 238,000 332,000 Other 1,161,000 593,000 --------- --------- Total deferred income tax assets 5,254,000 4,855,000 --------- --------- Deferred income tax liabilities: Property and equipment (1,945,000) (2,470,000) Pension (186,000) (315,000) --------- --------- Total deferred income tax liabilities (2,131,000) (2,785,000) --------- --------- Net deferred income tax asset $3,123,000 $2,070,000 ========= ========= The net deferred income tax asset as of January 3, 1998 and December 28, 1996 were classified in the balance sheet as follows: 1997 1996 Current deferred income tax asset $4,131,000 $3,824,000 Noncurrent deferred income tax liability (1,008,000) (1,754,000) --------- --------- Net deferred income tax asset $3,123,000 $2,070,000 ========= ========= (VI) Commitments and Contingent Liabilities The Company has projected capital expenditures for fiscal year 1998 at $4,300,000. Commitments approximating $2,889,000 were made as of January 3, 1998. As of January 3, 1998, the Company was contingently liable under guarantees of bank note agreements of wholesale customers totaling $13,226,000. All of the loan guarantees are fully collateralized, principally with equipment and inventory, and to a lesser extent, with building facilities. (VII) 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 1997, 1996 and 1995 were $835,000, $793,000 and $720,000, respectively. The plan allows participants to make pretax contributions. The Company then matches certain percentages of employee contributions. The Company's matching contributions for 1997, 1996 and 1995 were $79,000, $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 $1,456,000, $1,564,000 and $1,599,000 in fiscal years 1997, 1996 and 1995, 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. (VIII) 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 was 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 January 3, 1998 and December 28, 1996 was as follows: 1997 1996 Investments in leased property under capital leases $5,264,000 $5,264,000 Less accumulated amortization (2,478,000) (2,191,000) --------- --------- Property under capital leases, net $2,786,000 $3,073,000 ========= ========= Amortization of leased property under capital leases, included in operating and administrative expenses, amounted to $287,000, $273,000 and $283,000 in fiscal years 1997, 1996 and 1995, 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 January 3, 1998: Capital lease Capital sublease obligations receivables 1998 $ 2,059,000 $ 1,365,000 1999 2,059,000 1,364,000 2000 2,017,000 1,302,000 2001 2,020,000 1,305,000 2002 2,023,000 1,308,000 2003-2009 10,939,000 7,220,000 ---------- ---------- Total minimum lease payments 21,117,000 13,864,000 Less interest (9,275,000) (6,151,000) ---------- ---------- Present value of minimum lease payments and amounts receivable 11,842,000 7,713,000 Less current portion (665,000) (443,000) ---------- ---------- Long-term obligations and receivable $11,177,000 $7,270,000 ========== ========== 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 January 3, 1998: 1998 $ 8,805,000 1999 8,638,000 2000 8,216,000 2001 7,713,000 2002 7,743,000 2003-2017 69,001,000 ----------- Total minimum lease payments 110,116,000 Lease minimum amounts receivable under noncancelable subleases (82,146,000) ----------- Net minimum lease payments $27,970,000 =========== Rental expenses for all operating leases amounted to $3,912,000, $3,813,000 and $3,958,000 in fiscal years 1997, 1996 and 1995, respectively. These amounts include $1,029,000, $1,012,000 and $1,113,000, respectively, for contingent rentals. (IX) 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". The statement allows for companies to recognize as compensation expense over the vesting period the fair value of all stock- based awards on the date of grant. Alteratively, SFAS No. 123 allows entities to continue to apply the provisions of APB 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair value- based method defined in SFAS No. 123 has been applied. In fiscal year 1996, the Company adopted the disclosure requirements of SFAS No. 123. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net earnings would have been reduced to the following pro forma amounts below: 1997 1996 1995 Net earnings As reported $7,637,000 $6,465,000 $5,840,000 Pro forma 7,417,000 6,305,000 5,752,000 ---------- ---------- ---------- Earnings per share-diluted As reported $1.06 $0.09 $0.79 Pro forma 1.04 0.8 0.78 Since the compensation cost is reflected over the vesting period of three years and compensation cost for options granted prior to January 1, 1995 is not considered, the full impact of calculating the compensation cost under SFAS No. 123 is not reflected in the pro forma net earnings presented above. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1997, 1996 and 1995: 1997 1996 1995 Dividend yield 2.06% 2.50% 2.50% Expected volatility 25.62% 20.92% 19.85% Risk-free interest rate 6.36% 5.35% 7.54% Expected term of grant 5.5 years 6.0 years 6.0 years As of January 3, 1998, no incentive stock options have been granted. Following is a summary of the status of nonqualified stock options for the fiscal years 1997, 1996 and 1995: Number of Range of per shares share option prices Shares under option at December 31, 1994 678,525 $3.56-$5.83 Granted 144,300 6.50 Exercised (117,276) 9.83-14.50 Shares under option at December 30, 1995 705,549 4.17-6.50 Granted 132,900 10.50 Exercised (166,950) 9.83-11.00 Forfeited (2,799) 5.09 Shares under option at December 28, 1996 668,700 4.17-10.50 Granted 143,700 9.67 Exercised (173,100) 9.33-16.33 Shares under option at January 3, 1998 639,300 4.17-10.50 Shares reserved for grant at January 3, 1998 372,900 Options granted in January 1998 151,500 $15.00 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 January 3, 1998 were 341,150 shares. (X) Preferred Stock The Company has 3,000 shares of preferred stock authorized. Prior to 1995, all of the shares were issued and outstanding. In fiscal years 1995 and 1996, the Company repurchased all of the shares issued. Therefore, at January 3, 1998 and December 28, 1996, no shares of preferred stock were issued and outstanding. The Company also 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. (XI) Common Stock On July 25, 1997, the Board of Directors authorized a three-for-two common stock split, effected in the form of a 50% stock dividend distributed on September 5, 1997, to shareholders of record on August 20, 1997. All historical share amounts, per share amounts, stock option data and market prices of the Company's common stock prior to dividend distribution date have been restated to retroactively reflect the stock split. At January 3, 1998, of the 20,000,000 shares of common stock authorized, 8,750,342 shares were issued and 6,811,879 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 $14 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 $0.0067 per right. At January 3, 1998, approximately 9,762,000 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. Unaudited Quarterly Financial Information The Company generally includes sixteen weeks in its first quarter and twelve weeks in each subsequent quarter. In fiscal year 1997, the fourth quarter consisted of thirteen weeks. Summarized quarterly and annual financial information for fiscal years 1997 and 1996 follows: (dollars in thousands, except per share data) Fiscal Year Ended January 3, 1998 First Second Third Fourth Year Net Sales $138,826 $109,844 $105,826 $118,510 $473,006 Gross profit 22,077 17,197 16,417 18,216 73,907 Net earnings 1,587 1,791 1,734 2,525 7,637 Earnings per share- basic 0.23 0.26 0.25 0.37 1.11 Earnings per share- diluted 0.22 0.25 0.24 0.35 1.06 Weighted average shares and equivalents outstanding 7,200,000 7,164,000 6,823,000 7,161,000 7,148,000 (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- basic 0.18 0.23 0.21 0.31 0.93 Earnings per share- diluted 0.17 0.22 0.21 0.30 0.90 Weighted average shares and equivalents outstanding 7,245,000 7,161,000 7,142,000 7,172,000 7,187,000 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 1,025 beneficial holders of the Company's common stock. An analysis of high and low last sale stock prices by quarter and for the last three years are as follows:
First Second Third Fourth Year High Low High Low High Low High Low High Low 1997 $11.50 $9.33 $12.50 $10.67 $17.00 $12.25 $16.50 $15.13 $17.00 $9.33 1996 11.00 9.33 10.00 8.17 9.00 8.17 10.00 8.67 11.00 8.17 1995 7.67 6.50 7.67 7.17 10.00 7.58 10.33 9.50 10.33 6.50
Cash dividends paid per share were:
First Second Third Fourth Year 1997 $0.067 $0.066 $0.070 $0.070 $0.273 1996 0.053 0.053 0.067 0.067 0.240 1995 0.020 0.020 0.053 0.054 0.147
Under the Company's loan agreements, $8,469,000 of retained earnings were available for the payment of cash dividends, stock repurchases and other restricted payments at January 3, 1998. * Stock prices and dividend information have been adjusted to reflect the three-for-two stock split effected in the form of a 50% stock dividend on September 5, 1997 and the two-for-one stock split effected in the form of a 100% stock dividend on September 15, 1995. EX-21 3 EXHIBIT 21 SUBSIDIARY OF REGISTRANT The only subsidiary of Schultz Sav-O Stores, Inc. is PW Trucking, Inc., a Wisconsin corporation. EX-23 4 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To Schultz Sav-O Stores, Inc.: As independent public accountants, we hereby consent to the incorporation of our reports, included and incorporated by reference in this Form 10-K, into the Company's previously filed Form S-8 Registration Statement, File No. 33-34991. ARTHUR ANDERSEN LLP Milwaukee, Wisconsin March 12, 1998 EX-27 5
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF SCHULTZ SAV-O STORES, INC. AS OF AND FOR THE 53 WEEKS ENDED JANUARY 3, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 YEAR JAN-03-1998 DEC-29-1996 JAN-03-1998 23,124,000 0 9,718,000 0 21,741,000 62,349,000 57,383,000 34,704,000 98,866,000 33,132,000 3,165,000 438,000 0 0 49,946,000 98,866,000 473,006,000 473,006,000 399,099,000 0 61,799,000 0 847,000 12,418,000 4,781,000 7,637,000 0 0 0 7,637,000 1.11 1.06 Net of "Allowances for doubtful accounts" Amounts included in "Other costs and expenses".
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