-----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, P/IV1NWn1aVbD4R3BDnYdrOvnXEYUOqvB58mdVIrFK7R56omSlMktQympaO80L3i jgYXci0FEN9xkLic9vwE6w== 0000897069-99-000194.txt : 20010312 0000897069-99-000194.hdr.sgml : 20010312 ACCESSION NUMBER: 0000897069-99-000194 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990102 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCHULTZ SAV O STORES INC CENTRAL INDEX KEY: 0000087588 STANDARD INDUSTRIAL CLASSIFICATION: 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: 99581016 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 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 2, 1999. 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 organization) Identification No.) 2215 Union Avenue Sheboygan, Wisconsin 53081 (Address of principal executive offices) (Zip Code) 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 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 24, 1999: $97,181,105*. Number of shares outstanding of the registrant's Common Stock as of March 24, 1999: 6,560,179. PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED HEREIN BY REFERENCE: 1998 Annual Report to Shareholders (incorporated by reference into Parts II and IV to the extent indicated therein). Definitive Proxy Statement for 1999 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 benefically owned by directors and officers of the registrant PART I Special Note Regarding Forward-Looking Statements We make certain "forward-looking statements" in this Form 10-K, such as statements about our future plans, goals and other events that have not yet occurred. We intend that these statements will qualify for the safe harbors from liability provided by the Private Securities Litigation Reform Act of 1995. You can generally identify these forward-looking statements because we use words such as we "believe," "anticipate," "expect" or similar words when we make them. Whether or not these forward-looking statements will be accurate in the future will depend on certain risks, including risks associated with: o the presence of intense competition in our marketplace; o our ability to identify and develop new market locations for expansion purposes; o our ability to obtain reasonable vendor marketing funds for promotional purposes; o our information technology requirements; o the continued absence of food price inflation; o our ability to continue to recruit, train and retain quality franchise and corporate retail store operators; and o the potential recognition of repositioning charges resulting from potential closures, conversions or consolidations of our franchised and corporate stores, whether due to the competitive nature of our industry, to the quality of our franchised and corporate retail store operators or to other factors. You should consider these risks and factors and the impact they may have when you evaluate our forward-looking statements. We make these statements based only on our knowledge and expectations on the date of this Form 10-K. We will not necessarily update these statements or other information in this Form 10-K based on future events or circumstances. Please read this entire Form 10-K to better understand our business and the risks associated with our operations. Item 1. Business. General Schultz Sav-O Stores, Inc. is engaged in distributing food and related products at wholesale and retail. As of January 2, 1999, we franchised 68 and owned 18 retail supermarkets under the Piggly Wiggly (R) name. While we have a presence in some larger metropolitan areas, we have attempted to develop a niche for serving the food shopping needs of customers in smaller and suburban communities within our market areas. We are the primary supplier to our 86 franchised and corporate-owned Piggly Wiggly supermarkets. We also serve as a wholesaler to a number of smaller, independently operated retail supermarkets and convenience stores in our market areas. We believe that we have established ourselves 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. As a hybrid of retailer and wholesaler, we have created a "virtual chain" of retail stores served by a vertically-integrated wholesaler. In 1998, our virtual chain had approximately $730 million -2- in retail sales. Virtually all Piggly Wiggly supermarkets, both franchised and owned, participate in a single, coordinated merchandising and advertising program which typically includes: o a weekly newspaper ad insert; o outdoor boards; o television and radio spots; o sponsorship of entertainment and charitable events; and o our Piggly Wiggly Preferred Club (R) Card program. We believe that this coordinated program allows us to leverage the combined buying power of all our franchised and corporate stores and deliver a powerful and effective promotional vehicle for our participating vendor partners. Additionally, we believe that we provide our 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 our franchisees provides the entrepreneurial spirit and community involvement that we believe is an integral part of marketing in smaller markets. The successful combination of these elements creates the partnership between us and our franchisee retailers that results in a virtual chain of coordinated and integrated retail food distribution. By operating as a virtual chain, we are able to achieve superior performance compared to traditional wholesalers, yet avoid having to make large direct capital investments at the retail level to grow our business. The franchisee retailer, as part of the virtual chain, benefits from lower cost of products and the coordinated promotional activity normally associated only with larger retail grocery chains. We believe that this structure enables us to leverage the favorable elements of both a wholesaler and a retailer, giving us and our franchisees a unique advantage in our marketplace. We believe that this advantage has been a key component in our success over the past few years as the virtual chain concept has evolved. We supply a variety of products to our franchised and corporate supermarkets and other wholesale customers, primarily from our warehouse and distribution center in Sheboygan, Wisconsin. We also provide our franchised and corporate supermarkets and other customers with fresh, frozen and processed meat, eggs and deli products from a third-party distribution facility in Milwaukee, Wisconsin. Through arrangements with several vendors, we also offer a line of carbonated soft drinks, fruit drinks and drinking and distilled water under our Springtime (TM) label. We are a Wisconsin corporation organized in 1912 and maintain our corporate headquarters at 2215 Union Avenue, Sheboygan, Wisconsin 53081. You can visit our internet website at http://www.shopthepig.com. Wholesale Operations For several years, we have emphasized our more profitable wholesale distribution business and the associated refinement of our franchise store base which, combined with our unique marketing and merchandising program, has created an effective and efficient virtual chain. We believe that one of the competitive advantages we provide to our franchised supermarkets through our "virtual chain" strategy is our 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, we benefit our franchisees through additional sales resulting from heightened consumer name recognition and in-store merchandising programs, combined with special promotional pricing. Additional services that we provide to our franchisees include: -3- o retail accounting; o preparation of store payrolls; o preparation of print, electronic and outdoor media advertising (including various point- of-sale materials); o assistance in the selection and analysis of store locations; o financing and lease negotiations; o store design and floor layout; o merchandising planning; o equipment selection and sourcing; o engineering and architectural services; o retail technology implementation and support; o labor planning and scheduling; and o product category supervision. We provide some of these services as part of the franchise relationship, while other services are provided under a separate fee arrangement intended to cover our costs. As part of implementing our corporate strategy to improve the profitability of our corporate retail operations, we continue to seek opportunities to expand and acquire corporate and franchise stores, to convert or close underperforming stores and to enter new markets. In 1998, we opened one new market franchise store, replaced one older franchise store, completed expansions of two existing franchise stores and consolidated two franchise stores serving the same market. In aggregate, the total number of franchise and corporate stores remained at 86 at the end of 1998, but total store square footage increased by approximately 65,000 square feet. In early 1999, we completed the consolidation of two additional franchise stores and replaced another franchise store. Renovations and expansions continue at six franchise operations. These renovations involve four expansions of existing franchise stores, one replacement franchise unit and development of one new market store. These projects are expected to increase the square footage of selling space at such stores by an average of approximately 40%. The following table shows our development of, and changes in, our franchised and corporate retail supermarkets for the periods presented: -4-
Franchise Supermarkets Corporate Supermarkets ==================================== ====================================== Number of 1994 1995 1996 1997 1998 1994 1995 1996 1997 1998 Supermarkets ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- - - ------------ Beginning of Year 64 65 66 68 68 21 20 19 16 18 New Market Supermarkets(a) -- 1 1 1 1 -- -- -- 1 -- Replacement Supermarkets(b) 1 3 2 1 1 -- -- -- -- 1 Converted to/from Franchise(c) 1 -- 1 (1) -- (1) -- (1) 1 -- Terminated Operations(d) (1) (3) (2) (2) (2) -- (1) (2) -- (1) New Franchises(e) -- -- -- 1 -- -- -- -- -- -- End of Year 65 66 68 68 68 20 19 16 18 18 == == == == == == == == == == Remodeled Supermarkets(f) 5 6 1 3 2 -- -- -- -- -- - - --------------- (a) New market supermarkets are newly constructed supermarkets in market areas not recently served by us. (b) Replacement supermarkets are newly constructed supermarkets whose opening corresponds with the closure of a nearby franchised or corporate supermarket. (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 that are no longer going concerns, including replaced supermarkets. (e) New franchises are additions to our franchise group, other than through conversion from corporate supermarkets. (f) Remodeled supermarkets represent supermarkets that have undergone substantial expansion and/or remodeling totaling at least $300,000.
For 1998, we reported record net earnings, net earnings per share and net earnings as a percentage of sales. The fourth quarter of 1998 was our 24th consecutive quarter of earnings increases over the prior year. The increase in earnings and profitability has been principally the result of expanded and improved operations. We are the primary supplier to all of our franchised and corporate supermarkets. We also serve as a wholesaler to other smaller independent retail stores in our market area, accounting for approximately 2% of our 1998 net sales. Franchisees pay us fees, determined by the retail sales of their supermarkets. We do not charge an initial fee to franchisees for granting a franchise. Consistent with industry practice, in certain situations, we provide 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. As a result of an amendment to our Piggly Wiggly Master Franchise Agreement entered into in June 1998, we have expanded our franchise territory to include additional counties in Wisconsin, Illinois and Michigan, as well as portions of Iowa and Minnesota. We now have exclusive rights to grant Piggly Wiggly franchises in: o the entire state of Wisconsin; o the upper peninsula of Michigan; o designated counties in northern Illinois; -5- o designated counties in southeastern Minnesota; and o designated counties in eastern Iowa. We believe that the increase in our franchise territory will provide additional opportunities for us to pursue our plans to expand the areas that we serve as a food wholesaler and retailer. Our franchise rights are of unlimited duration and are not subject to any specific termination provision. We are not required to pay franchise fees to the current franchisor in the market areas we were able to serve prior to June 1998. In the new territories in Wisconsin, Minnesota, Michigan, Iowa and Illinois, we are required to pay franchise fees. The only other material obligation imposed on us in our expanded franchise territory 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. We believe that our own franchised and corporate store standards exceed the Piggly Wiggly system standards. Retail Operations Our franchised and corporate supermarkets stock a comprehensive selection of groceries, frozen foods, prepared foods, fresh produce, meat, poultry, eggs and dairy products. Our 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. Our 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 our franchised and corporate supermarkets have lower selling prices, but higher gross profit margins, than branded merchandise. Consistent with trends generally within the industry, we continue to experience increases in retail customer demand for private-label store brands and believe that our Topco-procured line of branded private-label products is satisfying this consumer trend. See "Purchasing and Distribution." Based on our internal wholesale price index, inflation did not have a significant effect on sales between 1998 and 1997, except with regard to tobacco products. 1998 was our first full year with the Piggly Wiggly Preferred Club (R) Card, a customer-friendly, card-based marketing program. We designed the Piggly Wiggly Preferred Club Card 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 allows us to maintain a valuable, integrated database that we use to identify our best customers and their preferences so that the virtual chain of stores can better serve its customers. We will never sell customer-specific information in our data base for use by third parties. The card also doubles as a check-cashing and video rental identification card. Additionally, the Piggly Wiggly Preferred Club Card program affords the ability to issue point-of-sale coupons redeemable on future purchases. We believe that the Piggly Wiggly Preferred Club Card and the coordinated marketing and merchandising program it supports will be key components to our future growth. Our franchised supermarkets range in size from 8,340 square feet to 47,000 square feet, with an average of 24,720 square feet. Our corporate supermarkets range in size from 19,980 square feet to 54,850 square feet, with an average of 33,945 square feet. All of our franchised and corporate supermarkets contain several perishable or specialty service departments, including: o fresh and processed meat; o take-home entrees and snacks; o fresh fruits and vegetables; o fresh seafood; -6- o delicatessen; o flowers and plants; and o baked goods. Several supermarkets also contain or provide one or more of the following: o wine and spirit sales; o video rentals; o lottery sales; o photo processing services; o TicketMaster (R) ticket centers; o in-house banking services; o automated teller machines; and o on-line debit and credit card check-out services. During 1998, certain of our stores continued to fail to meet certain financial performance goals. We closed one such store during 1998 as part of a consolidation with another franchise supermarket. In order to further improve our results of operations, we continue to evaluate various business alternatives relating to our underperforming operations, including the sale or conversion of these stores, closing stores and implementing other operational changes. Purchasing and Distribution We purchase groceries in sufficient volume to qualify for favorable price brackets for most items. We purchase brand name grocery merchandise directly from the manufacturers or processors and purchase produce, meat and seafood from a variety of sources. We purchase substantially all of our private label items and fresh meats through Topco Associates, Inc. Topco is a national purchasing cooperative whose member-owners consist of 30 regional supermarket chains and food services organizations who collectively operate approximately 2,200 stores. According to Topco data, its member-owners accounted for approximately 14% of United States grocery store sales volume in 1998. In 1998, purchases through Topco accounted for approximately 15% of our total inventory purchases. We also purchase 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. We and our direct-contract, third-party distribution center supplied approximately 79% of the products supplied to our stores in 1998. The remainder were supplied by direct store delivery vendors. We own our 364,000 square-foot distribution center in Sheboygan, Wisconsin. With the exception of fresh, frozen and processed meat, eggs and deli products, we distribute all products that we supply from our Sheboygan facility. While we perform the buying function, a third-party contractor in Milwaukee, Wisconsin performs the distribution services for our meat operations. We believe that this arrangement provides us with operating cost efficiencies and the ability to expand our wholesale product offerings and better satisfy wholesale customer delivery schedules through improved capacity. -7- As described above under "Wholesale Operations," we believe that one of our competitive advantages is the community-oriented marketing programs that we provide to franchisees as part of our "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 our local Piggly Wiggly supermarkets. We also sponsor local events and festivals throughout the marketing area to improve our Piggly Wiggly name recognition, such as the Midwest's largest fireworks display at Milwaukee's Summerfest lakefront music festival. We operate a leased, full-service trucking fleet, which consists of 22 tractors and 41 refrigerated trailers. We augment our transportation requirements with temporary leasing arrangements as conditions warrant. PW Trucking, Inc., our wholly-owned subsidiary, provides contract and common carrier services throughout our operating territory. Revenues from unrelated parties generated by this business were nominal in 1998 and are expected to be nominal in 1999. Competition The wholesale and retail food industry is highly competitive. At the wholesale level, we compete with regional and national wholesalers, such as Fleming Companies, Inc., SuperValu Inc., Roundy's, Inc. and Nash Finch Co. Key competitive factors include the provision of the following services to franchise customers: o credit support; o advertising; o accounting and financial services; o merchandising; o facilities engineering; o design and project management; and o retail technology support. We believe that our distribution facilities and the wide range of support and marketing services provided to our franchised and corporate retail supermarkets allow us to provide prompt and efficient, low-priced, high-quality products and important supplemental services to our franchised and corporate supermarkets and other customers. The degree of competition at the retail level varies with store location. In most of our franchised and corporate supermarket locations, we compete primarily with local retail operators, virtually all of whom are affiliated with competing wholesalers through arrangements similar to those we have with our franchisees. In some of our supermarket locations, however, we also compete 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. and others. We believe that the principal retail competitive factors include: o price; o product quality and variety; o store location and appearance; and o the quality of a store's perishable product and service departments. -8- We believe our 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 our franchised and corporate supermarkets with a competitive advantage in many retail market areas. Certain of our competitors at both the wholesale and retail level may have a competitive advantage resulting from utilizing lower-cost, non-union workforces. Certain of our competitors have greater financial resources and marketing budgets than we do. 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, which may allow them to sell such items at a lower per unit cost than we do. Employees As of January 2, 1999, we employed approximately 1,700 persons, including approximately 1,250 in the operation of our corporate retail supermarkets. A majority of our corporate retail employees are employed on a part-time basis. Of our remaining employees, approximately 210 are engaged in warehousing and trucking activities and approximately 240 are corporate and administrative personnel. Two collective bargaining agreements, covering a total of approximately 115 employees expire in 1999. We do not currently anticipate any strikes, work stoppages or slowdowns in connection with renewing such agreements. Item 1A. Executive Officers.
Name and Age Positions and Offices with the Company ------------ -------------------------------------- James H. Dickelman, 51................ Chairman of the Board, President and Chief Executive Officer Michael R. Houser, 47................. Executive Vice President - Marketing and Merchandising John H. Dahly, 58..................... Executive Vice President, Chief Financial Officer and Secretary William K. Jacobson, 48............... Senior Vice President - Retail Operations and Development and Assistant Secretary Kenneth S. Folberg, 38................ Vice President - Logistics and Labor Relations Armand C. Go, 37...................... Treasurer and Chief Accounting Officer Larry D. Hayes, 56.................... Vice President - Meat, Bakery and Deli Operations John S. Kwas, 59...................... Vice President - Grocery Procurement Thomas J. Timler, 41.................. Vice President - Business Systems Support Group
Messrs. Dickelman, Houser, Dahly and Jacobson are also members of our Board of Directors. Executive officers are generally elected annually at the annual meeting of our Board of Directors held on the date of our 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 our executive officers have served in the positions indicated or in other management positions with Schultz Sav-O Stores for more than five years. -9- Item 2. Properties. As is typical in our industry, a substantial portion of our capital assets are leased. As of January 2, 1999, we 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 33,220 square feet. We generally lease our 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 repurchase options; nor do we own the land underlying any of such supermarkets. As of January 2, 1999, we subleased 51 of our leased supermarkets and leased one owned supermarket to independent operators who are our wholesale customers and franchisees. Renovations and expansions continue at six franchise operations. These renovations involve four expansions of existing franchise stores, one replacement franchise unit and development of one new market store. These projects are expected to increase the square footage of selling space at such stores by an average of approximately 40%. We own our distribution center and headquarters complex in Sheboygan, Wisconsin which occupies approximately nine acres of a 16-acre site that we own. The facility provides approximately 30,500 square feet of space for offices and related activities and approximately 364,000 square feet of warehouse space. We also lease 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. We own approximately 5 acres of commercially zoned property in Wisconsin. We have entered into brokerage arrangements for the sale of this property. Item 3. Legal Proceedings. There are no material legal proceedings to which we are a party or to which any of our property is subject, other than routine litigation incidental to our business. No material legal proceedings were terminated during the fourth quarter of 1998. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of our shareholders during the fourth quarter of 1998. -10- PART II Item 5. Market for Our Common Stock and Related Shareholder Matters. Pursuant to our program for compensation of independent directors, we issued 300 shares of our common stock to each of our three nonemployee directors (other than those who receive fees for professional services provided to Schultz Sav-O Stores) on January 28, 1999. Such issuances were exempt from registration under the Securities Act of 1933 in accordance with Section 4(2) of that act. Pursuant to General Instruction G to Form 10-K ("Instruction G"), the other information required by this Item is incorporated herein by reference from information included under the caption entitled "Common Stock Information" set forth in our 1998 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 7A. Quantitative and Qualitative Disclosures About Market Risk. We believe that our exposure to market risk related to changes in foreign currency exchange rates, interest rate fluctuations and trade accounts receivable is immaterial. Item 8. Financial Statements and Supplementary Data. Pursuant to Instruction G, the Consolidated Balance Sheets of the Company as of January 2, 1999 and January 3, 1998, the Consolidated Statements of Earnings, Cash Flows and Shareholders' Investment for each of the three fiscal years in the period ended January 2, 1999, 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. -11- 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 our definitive Proxy Statement for our 1999 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 our 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 "Stock Ownership of Management and Others" 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. -12- 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 2, 1999 and January 3, 1998 Consolidated Statements of Earnings, Cash Flows and Shareholders' Investment for the fiscal years 1998, 1997 and 1996 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 2, 1999. 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) We filed no reports on Form 8-K during the fourth quarter of fiscal year 1998. -13- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, 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 25, 1999 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, as amended, this report has been signed as of the date above by the following persons on behalf of the Company in the capacities indicated. /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/ Michael R. Houser John H. Dahly, Executive Vice President, Michael R. Houser, Director Chief Financial Officer, Secretary 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/ Steven R. Barth Steven R. Barth, Director -14- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS We have audited, in accordance with generally accepted auditing standards, the financial statements included in Schultz Sav-O Stores, Inc.'s annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 5, 1999. 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 5, 1999. SCHULTZ SAV-O STORES, INC. SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE FISCAL YEARS 1998, 1997 AND 1996 Allowance for Doubtful Accounts-- Changes in the allowance for doubtful accounts are summarized as follows: 1998 1997 1996 -------------- ------------- ------------ Balance, beginning of year $3,950,000 $3,650,000 $2,565,000 Provision charged to earnings 350,000 656,000 987,000 (Writeoffs)/recoveries, net -- (356,000) 98,000 ---------- ---------- ---------- Balance, end of year $4,300,000 $3,950,000 $3,650,000 ========== ========== ========== F-2 EXHIBIT INDEX SCHULTZ SAV-O STORES, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 2, 1999 Exhibit No. Description ----------- ----------- 3.1 Restated Articles of Incorporated, as amended. Incorporated by reference to Exhibit 3.1 to our Annual Report on Form 10-K for the year ended December 31, 1988. 3.2 By-Laws, as amended and restated as of March 16, 1999. 4.1 Restated Articles of Incorporation, as amended (included as Exhibit 3.1). As summarized in Notes (4) and (8) of the Notes to Financial Statements incorporated by reference from our 1998 Annual Report to Shareholders, as part of Parts II and IV of this Form 10-K, we have various outstanding long-term debt and capital lease obligations. None of such obligations individually exceeds 10% of our total assets. We hereby agree 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 our Annual Report on Form 10-K for the year ended January 1, 1982. 10.2 Agreement, dated August 1, 1982, between Schultz Sav-O Stores and Commodores Point Terminal Corporation. Incorporated by reference to Exhibit 10.2 to our 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 Schultz Sav-O Stores and Piggly Wiggly Corporation. Incorporated by reference to Exhibit 10.3 to our Annual Report on Form 10-K for the year ended January 1, 1982. 10.4 Amendment No. 2 to Piggly Wiggly Master Franchise Agreement, dated June 3, 1998, between Schultz Sav-O Stores and Piggly Wiggly Corporation. Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the period ended April 25, 1998. 10.5 Form of Director/Officer Indemnity Agreement. Incorporated by reference to Exhibit 10.4 to our 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. E-1 Exhibit No. Description ----------- ----------- 10.6 Form of Key Executive Employment and Severance Agreement, dated as of October 19, 1990, between Schultz Sav-O Stores and each of James H. Dickelman, John H. Dahly, and Michael R. Houser, and dated as of January 31, 1997, between Schultz Sav-O Stores and William K. Jacobson. Incorporated by reference to Exhibit 10.5 to our 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. 10.7 Form of amendment to Key Executive Employment and Severance Agreement between Schultz Sav-O Stores and each of James H. Dickelman, John H. Dahly, Michael R. Houser, and William K. Jacobson. Incorporated by reference to Exhibit 10.13 to our Quarterly Report on Form 10-Q for the period ended July 18, 1998. This agreement is required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of Form 10-K. 10.8 Membership and Licensing Agreement dated August 1, 1973 by and between Topco Associates, Inc. (Cooperative) and Schultz Sav-O Stores. Incorporated by reference to Exhibit 10.6 to our Annual Report on Form 10-K for the year ended December 30, 1996. 10.9 Articles of Incorporation of Topco Associates, Inc. (Cooperative). Incorporated by reference to Exhibit 10.12 to our Annual Report on Form 10-K for the year ended December 31, 1988. 10.10 Bylaws of Topco Associates, Inc. (Cooperative), as amended through June 7, 1996. Incorporated by reference to Exhibit 10.8 to our Annual Report on Form 10-K for the year ended December 30, 1996. 10.11 1990 Stock Option Plan, as amended and restated as of October 15, 1998. Incorporated by reference to Exhibit 10.16 to our Quarterly Report on Form 10-Q for the period ended October 10, 1998. 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 1995 Equity Incentive Plan, as amended and restated as of January 28, 1999. This plan is required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of Form 10-K. 10.13 Form of Nonqualified Stock Option Agreement under 1995 Equity Incentive Plan.. This form of agreement is required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of Form 10-K. 10.14 Schultz Sav-O Stores, Inc. Executive Benefit Restoration Plan. Incorporated by reference to Exhibit 10.10 to our 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. E-2 Exhibit No. Description ----------- ----------- 10.15 Schultz Sav-O Stores, Inc. Officer Annual Incentive Plan, as amended and restated as of January 28, 1999. This plan is required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of Form 10-K. 10.16 Loan Agreement, dated as of December 3, 1992, among Schultz Sav-O Stores, M&I Marshall & Ilsley Bank and Firstar Bank (Milwaukee), as amended as of December 31, 1998. 13 Portions of the 1998 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. 99 Definitive Proxy Statement for 1999 Annual Meeting of Shareholders (to be filed with the Commission under Regulation 14A within 120 days after the end of our fiscal year and, upon such filing, incorporated by reference herein to the extent indicated in this Form 10-K). EX-3.2 2 BYLAWS --------------------------------------------- AMENDED AND RESTATED AS OF 3/16/99 --------------------------------------------- BYLAWS OF SCHULTZ SAV-O STORES, INC. (a Wisconsin corporation) ARTICLE I. OFFICES 1.01 Principal and Business Offices. The corporation may have such principal and other business offices, either within or without the State of Wisconsin, as the Board of Directors may designate or as the business of the corporation may require from time to time. 1.02 Registered Office. The registered office of the corporation required by the Wisconsin Business Corporation Law to be maintained in the State of Wisconsin may be, but need not be, identical with the principal office in the State of Wisconsin, and the address of the registered office may be changed from time to time by the Board of Directors or by the registered agent. The business office of the registered agent of the corporation shall be identical to such registered office. ARTICLE II. SHAREHOLDERS 2.01 Place of Meetings. Meetings of the shareholders of the corporation shall be held at such place as may be designated from time to time by resolution of the Board of Directors of the corporation. If no such place is designated, then the meeting shall be held at the general office of the corporation in Sheboygan County, Wisconsin. 2.02 Annual Meeting. The annual meeting of the shareholders shall be held on the second Wednesday of May of each year commencing with the year 1956. If such day is a legal holiday then the meeting shall be held on the next secular day. 2.03 Special Meetings. Special meetings of the shareholders may be called by any officer of the corporation, the Board of Directors, or by the holders of not less than one tenth of all the shares entitled to vote at the meeting. 2.04 Notice of Shareholders' Meetings. Written notice stating the place, day and hour of the meeting, and in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than fifty days before the date of the meeting, either personally or by mail, by or at the direction of the president, the secretary, or the officer or person calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his address as it appears on the stock record books or similar records of the corporation, with postage thereon prepaid. 2.05 Meetings Without Notice. Any meeting of the shareholders of the corporation at which all of the shareholders entitled to vote are present, either in person or by proxy, shall be a legal meeting of the shareholders without notice. The shareholders may transact any business at such meeting which may lawfully be transacted at any meeting of the shareholders regularly called and notified. 2.06 Voting of Shares. Each outstanding share, entitled to vote, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders. A shareholder may vote either in person or by proxy appointed in writing by the shareholder, or by his duly 1 authorized attorney-in-fact. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. 2.07 Quorum. A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at the meeting of shareholders. If a quorum be not present at a meeting, the majority present in person or by proxy may adjourn from time to time, without notice other than by announcement at the meeting, until the holders of the amount of shares requisite to constitute a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. 2.08 Conduct of Meetings. The President and, in his absence, the Vice President and, in their absence, any shareholder entitled to vote chosen by the shareholders present shall call the meeting of the shareholders to order and shall act as chairman of the meeting, and the Secretary of the corporation shall act as secretary of all meetings of the shareholders, but, in the absence of the Secretary, the presiding officer may appoint any shareholder entitled to vote to act as secretary of the meeting. 2.09 Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than fifty days and, in case of a meeting of shareholders, not less than ten days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders or shareholders entitled to receive payment of a dividend, the close of business on the date on which notice of the meeting is mailed or on the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting has been made as provided in this section, such determination shall be applied to any adjournment thereof. ARTICLE III. BOARD OF DIRECTORS 3.01 General Powers and Number. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed under the direction of, the Board of Directors. The number of directors of the corporation shall be determined from time to time by the Board of Directors and shall be divided into three classes designated as Class I, Class II and Class III, respectively. At the 1989 annual meeting of shareholders, the directors of Class I shall be elected for a term to expire at the first annual meeting of shareholders after their election, and until their successors are elected and qualify, the directors of Class II shall be elected for a term to expire at the second annual meeting of shareholders after their election, and until their successors are elected and qualify, and the directors of Class III shall be elected for a term to 2 expire at the third annual meeting of shareholders after their election, and until their successors are elected and qualify. At each annual meeting of shareholders after the 1989 annual meeting of shareholders the successors to the class of directors whose terms shall expire at the time of such annual meeting shall be elected to hold office until the third succeeding annual meeting of shareholders, and until their successors are elected and qualify. A director may be removed by the shareholders only at a meeting called for the purpose of removing the director, and the meeting notice shall state that the purpose, or one of the purposes, of the meeting is removal of the director. A director may be removed from office with or without cause if the votes cast to remove the director exceeds the number of votes cast not to remove such director. A director may resign at any time by delivering written notice which complies with the Wisconsin Business Corporation Law to the Board of Directors, to the President (in his capacity as chairman of the Board of Directors) or to the corporation. A director's resignation is effective when the notice is delivered unless the notice specifies a later effective date. From time to time, the Board of Directors may elect one or more former or retiring directors as Directors Emeritus of the corporation. Directors Emeritus shall be invited to attend and participate in all meetings of the Board of Directors (and shall be provided with all information and documents provided to directors generally) but shall not have a vote on any matter before the Board of Directors and shall not be counted in determining the presence of a quorum at any meeting of the Board of Directors. Each Director Emeritus of the corporation shall be deemed a "Director" for purposes of Article VIII of these bylaws and shall be entitled to such compensation as may be determined by the Board of Directors. 3.02 Qualifications. Directors need not be residents of the State of Wisconsin or shareholders of the corporation. No other restrictions, limitations or qualifications may be imposed on individuals for service as a director. 3.03 Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than this bylaw immediately after the annual meeting of shareholders and each adjourned session thereof. The place of such regular meeting shall be the same as the place of the meeting of shareholders which precedes it, or such other suitable place as may be communicated to the directors at or prior to such meeting of shareholders. To the extent practicable, the date, time and place, either within or without the State of Wisconsin, for the holding of additional regular meetings of the Board of Directors shall be communicated amongst and generally agreed upon by the directors at any meeting of the Board of Directors. 3.04 Special Meetings. Special meetings of the Board of Directors may be called by or at the request of the President or any two directors. The President or Secretary may fix any place, either within or without the State of Wisconsin, as the place for holding any special meeting of the Board of Directors, and if no other place is fixed the place of the meeting shall be the principal business office of the corporation in the State of Wisconsin. 3.05 Notice; Waiver. Notice of each special meeting of the Board of Directors shall be given by written notice delivered or communicated in person, by telegraph, teletype, 3 facsimile or other form of wire or wireless communication, or by mail or private carrier, to each director at his business address or at such other address as such director shall have designated in writing filed with the Secretary, in each case not less than twenty-four hours prior to the meeting. The notice need not prescribe the purpose of the special meeting of the Board of Directors or the business to be transacted at such meeting. If mailed, such notice shall be deemed to be effective when deposited in the United States mail so addressed, with postage thereon prepaid. If notice is given by telegram, such notice shall be deemed to be effective when the telegram is delivered to the telegraph company. If notice is given by private carrier, such notice shall be deemed to be effective when delivered to the private carrier. Whenever any notice whatever is required to be given to any director of the corporation under the articles of incorporation or these bylaws or any provision of the Wisconsin Business Corporation Law, a waiver thereof in writing, signed at any time, whether before or after the date and time of meeting, by the director entitled to such notice shall be deemed equivalent to the giving of such notice. The corporation shall retain any such waiver as part of the permanent corporate records. A director's attendance at or participation in a meeting waives any required notice to him or her of the meeting unless the director at the beginning of the meeting or promptly upon his or her arrival objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. 3.06 Quorum. Except as otherwise provided by the Wisconsin Business Corporation Law or by the articles of incorporation or these bylaws, a majority of the number of directors specified in Section 3.01 of these bylaws shall constitute a quorum for the transaction of business at any meeting of the Board of Directors. Except as otherwise provided by the Wisconsin Business Corporation Law or by the articles of incorporation or by these bylaws, a quorum of any committee of the Board of Directors created pursuant to Section 3.12 hereof shall consist of a majority of the number of directors appointed to serve on the committee. A majority of the directors present (though less than such quorum) may adjourn any meeting of the Board of Directors or any committee thereof, as the case may be, from time to time without further notice. 3.07 Manner of Acting. The affirmative vote of a majority of the directors present at a meeting of the Board of Directors or a committee thereof at which a quorum is present shall be the act of the Board of Directors or such committee, as the case may be, unless the Wisconsin Business Corporation Law, the articles of incorporation or these bylaws require the vote of a greater number of directors. 3.08 Conduct of Meetings. The Chairman of the Board and, in his absence, the President and, in his absence, a Vice President in the order provided under Section 4.07, and in their absence, any director chosen by the directors present, shall call meetings of the Board of Directors to order and shall act as chairman of the meeting. The Secretary of the corporation shall act as secretary of all meetings of the Board of Directors but in the absence of the Secretary, the presiding officer may appoint any other person present to act as secretary of the meeting. Minutes of any regular or special meeting of the Board of Directors shall be prepared and distributed to each director. 4 3.09 Vacancies. Except as provided below, any vacancy occurring in the Board of Directors, including a vacancy resulting from an increase in the number of directors, may be filled by any of the following: (a) the shareholders; (b) the Board of Directors; or (c) if the directors remaining in office constitute fewer than a quorum of the Board of Directors, the directors, by the affirmative vote of a majority of all directors remaining in office. If the vacant office was held by a director elected by a voting group of shareholders, only the holders of shares of that voting group may vote to fill the vacancy if it is filled by the shareholders, and only the remaining directors elected by that voting group may vote to fill the vacancy if it is filled by the directors. A vacancy that will occur at a specific later date, because of a resignation effective at a later date or otherwise, may be filled before the vacancy occurs, but the new director may not take office until the vacancy occurs. Any vacancy resulting from a director's death, resignation, removal, disqualification or otherwise shall be filled for the unexpired portion of such director's term. 3.10 Compensation. The Board of Directors, irrespective of any personal interest of any of its members, may establish reasonable compensation of all directors for services to the corporation as directors, officers or otherwise, or may delegate such authority to an appropriate committee. The Board of Directors also shall have authority to provide for or delegate authority to an appropriate committee to provide for reasonable pensions, disability or death benefits, and other benefits or payments, to directors, officers and employees and to their estates, families, dependents or beneficiaries on account of prior services rendered by such directors, officers and employees to the corporation. 3.11 Presumption of Assent. A director who is present and is announced as present at a meeting of the Board of Directors or any committee thereof created in accordance with Section 3.12 hereof, when corporate action is taken, assents to the action taken unless any of the following occurs: (a) the director objects at the beginning of the meeting or promptly upon his or her arrival to holding the meeting or transacting business at the meeting; (b) the director's dissent or abstention from the action taken is entered in the minutes of the meeting; or (c) the director delivers written notice that complies with the Wisconsin Business Corporation Law of his or her dissent or abstention to the presiding officer of the meeting before its adjournment or to the corporation immediately after adjournment of the meeting. Such right of dissent or abstention shall not apply to a director who votes in favor of the action taken. 3.12 Committees. The Board of Directors, by resolution adopted by the affirmative vote of a majority of all of the directors then in office, may create one or more committees, appoint members of the Board of Directors to serve on the committees and designate other members of the Board of Directors to serve as alternates. Each committee shall have two or more members who shall, unless otherwise provided by the Board of Directors, serve at the pleasure of the Board of Directors. A committee may be authorized to exercise the authority of the Board of Directors, except that a committee may not do any of the following: (a) authorize distributions; (b) approve or propose to shareholders action that the Wisconsin Business Corporation Law requires to be approved by shareholders; (c) fill vacancies on the Board of Directors or, unless the Board of Directors provides by resolution that vacancies on a committee shall be filled by the affirmative vote of the remaining 5 committee members, on any Board committee; (d) amend the corporation's articles of incorporation; (e) adopt, amend or repeal bylaws; (f) approve a plan of merger not requiring shareholder approval; (g) authorize or approve reacquisition of shares, except according to a formula or method prescribed by the Board of Directors; and (h) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, except that the Board of Directors may authorize a committee to do so within limits prescribed by the Board of Directors. Unless otherwise provided by the Board of Directors in creating the committee, a committee may employ counsel, accountants and other consultants to assist it in the exercise of its authority. 3.13 Telephonic Meetings. Except as herein provided and notwithstanding any place set forth in the notice of the meeting or these bylaws, members of the Board of Directors (and any committees thereof created pursuant to Section 3.12 hereof) may participate in regular or special meetings by, or through the use of, any means of communication by which all participants may simultaneously hear each other, such as by conference telephone. If a meeting is conducted by such means, then at the commencement of such meeting the presiding officer shall inform the participating directors that a meeting is taking place at which official business may be transacted. Any participant in a meeting by such means shall be deemed present in person at such meeting. If action is to be taken at any meeting held by such means on any of the following: (a) a plan of merger or share exchange; (b) a sale, lease, exchange or other disposition of substantial property or assets of the corporation; (c) a voluntary dissolution or the revocation of voluntary dissolution proceedings; or (d) a filing for bankruptcy, then the identity of each director participating in such meeting must be verified by the disclosure at such meeting by each such director of each such director's social security number to the secretary of the meeting before a vote may be taken on any of the foregoing matters. For purposes of the preceding clause (b), the phrase "sale, lease, exchange or other disposition of substantial property or assets" shall mean any sale, lease, exchange or other disposition of property or assets of the corporation having a net book value equal to 20% or more of the net book value of the total assets of the corporation on and as of the close of the fiscal year last ended prior to the date of such meeting and as to which financial statements of the corporation have been prepared. Notwithstanding the foregoing, no action may be taken at any meeting held by such means on any particular matter which the presiding officer determines, in his or her sole discretion, to be inappropriate under the circumstances for action at a meeting held by such means. Such determination shall be made and announced in advance of such meeting. 3.14 Action without Meeting. Any action required or permitted by the Wisconsin Business Corporation Law to be taken at a meeting of the Board of Directors or a committee thereof created pursuant to Section 3.12 hereof may be taken without a meeting if the action is taken by all members of the Board or of the committee. The action shall be evidenced by one or more written consents describing the action taken, signed by each director or committee member and retained by the corporation. Such action shall be effective when the last director or committee member signs the consent, unless the consent specifies a different effective date. 6 ARTICLE IV. OFFICERS 4.01 Number. The principal officers of the corporation shall be a Chairman of the Board, President, the number of Vice Presidents as authorized from time to time by the Board of Directors, a Secretary, and a Treasurer, each of whom shall be elected by the Board of Directors. Such other officers and assistant officers as may be deemed necessary may be elected or appointed by the Board of Directors. The Board of Directors may also authorize any duly authorized officer to appoint one or more officers or assistant officers. Any two or more offices may be held by the same person. 4.02 Election and Term of Office. The officers of the corporation to be elected by the Board of Directors shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of the shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as is practicable. Each officer shall hold office until his or her successor shall have been duly elected or until his or her prior death, resignation or removal. 4.03 Removal. The Board of Directors may remove any officer and, unless restricted by the Board of Directors or these bylaws, an officer may remove any officer or assistant officer appointed by that officer, at any time, with or without cause and notwithstanding the contract rights, if any, of the officer removed. The election or appointment of an officer does not of itself create contract rights. 4.04 Resignation. An officer may resign at any time by delivering notice to the corporation that complies with the Wisconsin Business Corporation Law. The resignation shall be effective when the notice is delivered, unless the notice specifies a later effective date and the corporation accepts the later effective date. 4.05 Vacancies. A vacancy in any principal office because of death, resignation, removal, disqualification or otherwise, shall be filled by the Board of Directors for the unexpired portion of the term. If a resignation of an officer is effective at a later date as contemplated by Section 4.04 hereof, the Board of Directors may fill the pending vacancy before the effective date if the Board provides that the successor may not take office until the effective date. 4.06 Chairman of the Board. The Chairman of the Board shall preside when present at all meetings of directors. He shall also preside at all meetings of shareholders and shall perform all such other functions and duties as may be assigned to him by the Board of Directors. He shall also have authority to sign documents and instruments in the absence of the President. 4.07 President. The President shall be the principal executive officer of the corporation and, subject to the direction of the Board of Directors, shall in general supervise and control all of the business and affairs of the corporation. In the absence of the Chairman of the Board, the President shall, when present, preside at all meetings of the shareholders and of the Board of Directors. He shall have authority, subject to such rules as may be prescribed by the Board of Directors, to appoint such agents and employees of the corporation as he shall 7 deem necessary, to prescribe their powers, duties and compensation, and to delegate authority to them. Such agents and employees shall hold office at the discretion of the President. He shall have authority to sign, execute and acknowledge, on behalf of the corporation, all deeds, mortgages, bonds, stock certificates, contracts, leases, reports and all other documents or instruments necessary or proper to be executed in the course of the corporation's regular business, or which shall be authorized by resolution of the Board of Directors; and, except as otherwise provided by law or the Board of Directors, he may authorize any Vice President or other officer or agent of the corporation to sign, execute and acknowledge such documents or instruments in his place and stead. In general, he shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors from time to time. 4.08 The Vice Presidents. In the absence of the President or in the event of the President's death, inability or refusal to act, or in the event for any reason it shall be impracticable for the President to act personally, the Vice President (or, in the event there be more than one Vice President, the Executive Vice President, or in his absence the Vice Presidents in the order designated by the Board of Directors, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Any Vice President may sign, with the Secretary or Assistant Secretary, certificates for shares of the corporation; and shall perform such other duties and have such authority as from time to time may be delegated or assigned to him or her by the President or by the Board of Directors. The execution of any instrument of the corporation by any Vice President shall be conclusive evidence, as to third parties, of his or her authority to act in the stead of the President. 4.09 The Secretary. The Secretary shall: (a) keep minutes of the meetings of the shareholders and of the Board of Directors (and of committees thereof) in one or more books provided for that purpose (including records of actions taken by the shareholders or the Board of Directors (or committees thereof) without a meeting); (b) see that all notices are duly given in accordance with the provisions of these bylaws or as required by the Wisconsin Business Corporation Law; (c) be custodian of the corporate records and of the seal of the corporation and see that the seal of the corporation is affixed to all documents the execution of which on behalf of the corporation under its seal is duly authorized; (d) maintain a record of the shareholders of the corporation, in a form that permits preparation of a list of the names and addresses of all shareholders, by class or series of shares and showing the number and class or series of shares held by each shareholder; (e) sign with the President, or a Vice President, certificates for shares of the corporation, the issuance of which shall have been authorized by resolution of the Board of Directors; (f) have general charge of the stock transfer books of the corporation; and (g) in general perform all duties incident to the office of Secretary and have such other duties and exercise such authority as from time to time may be delegated or assigned by the President or by the Board of Directors. 4.10 The Treasurer. The Treasurer shall: (a) have charge and custody of and be responsible for all funds and securities of the corporation; (b) maintain appropriate accounting records; (c) receive and give receipts for moneys due and payable to the corporation from any 8 source whatsoever, and deposit all such moneys in the name of the corporation in such banks, trust companies or other depositaries as shall be selected in accordance with the provisions of Section 5.04; and (d) in general perform all of the duties incident to the office of Treasurer and have such other duties and exercise such other authority as from time to time may be delegated or assigned by the President or by the Board of Directors. If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of his or her duties in such sum and with such surety or sureties as the Board of Directors shall determine. 4.11 Assistant Secretaries and Assistant Treasurers. There shall be such number of Assistant Secretaries and Assistant Treasurers as the Board of Directors or the President may from time to time authorize. The Assistant Secretaries may sign with the President or a Vice President certificates for shares of the corporation the issuance of which shall have been authorized by a resolution of the Board of Directors. The Assistant Treasurers shall respectively, if required by the Board of Directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors shall determine. The Assistant Secretaries and Assistant Treasurers, in general, shall perform such duties and have such authority as shall from time to time be delegated or assigned to them by the Secretary or the Treasurer, respectively, or by the President or the Board of Directors. 4.12 Other Assistants and Acting Officers. The Board of Directors and the President shall have the power to appoint, or to authorize any duly appointed officer of the corporation to appoint, any person to act as assistant to any officer, or as agent for the corporation in his or her stead, or to perform the duties of such officer whenever for any reason it is impracticable for such officer to act personally, and such assistant or acting officer or other agent so appointed by the Board of Directors or an authorized officer shall have the power to perform all the duties of the office to which he or she is so appointed to be an assistant, or as to which he or she is so appointed to act, except as such power may be otherwise defined or restricted by the Board of Directors, the President or the appointing officer. ARTICLE V. CONTRACTS, LOANS, CHECKS AND DEPOSITS; SPECIAL CORPORATE ACTS 5.01 Contracts. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute or deliver any instrument in the name of and on behalf of the corporation, and such authorization may be general or confined to specific instances. In the absence of other designation, all deeds, mortgages and instruments of assignment or pledge made by the corporation shall be executed in the name of the corporation by the President or one of the Vice Presidents and by the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer; the Secretary or an Assistant Secretary, when necessary or required, shall affix the corporate seal, if any, thereto; and when so executed no other party to such instrument or any third party shall be required to make any inquiry into the authority of the signing officer or officers. 5.02 Loans. No indebtedness for borrowed money shall be contracted on behalf of the corporation and no evidences of such indebtedness shall be issued in its name unless 9 authorized by or under the authority of a resolution of the Board of Directors. Such authorization may be general or confined to specific instances. 5.03 Checks, Drafts, etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by or under the authority of a resolution of the Board of Directors. 5.04 Deposits. All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositaries as may be selected by or under the authority of a resolution of the Board of Directors. 5.05 Voting of Securities Owned by this Corporation. Subject always to the specific directions of the Board of Directors, (a) any shares or other securities issued by any other corporation and owned or controlled by this corporation may be voted at any meeting of security holders of such other corporation by the President of this corporation if he be present, or in his absence by any Vice President of this corporation who may be present, and (b) whenever, in the judgment of the President, or in his absence, of any Vice President, it is desirable for this corporation to execute a proxy or written consent in respect to any shares or other securities issued by any other corporation and owned by this corporation, such proxy or consent shall be executed in the name of this corporation by the President or one of the Vice Presidents of this corporation, without necessity of any authorization by the Board of Directors, affixation of corporate seal, if any, or countersignature or attestation by another officer. Any person or persons designated in the manner above stated as the proxy or proxies of this corporation shall have full right, power and authority to vote the shares or other securities issued by such other corporation and owned by this corporation the same as such shares or other securities might be voted by this corporation. ARTICLE VI. CERTIFICATES FOR SHARES; TRANSFER OF SHARES 6.01 Certificates for Shares. Certificates representing shares of the corporation shall be in such form, consistent with the Wisconsin Business Corporation Law, as shall be determined by the Board of Directors. Such certificates shall be signed by the President or a Vice President and by the Secretary or an Assistant Secretary. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the corporation. All certificates surrendered to the corporation for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except as provided in Section 6.06. 6.02 Facsimile Signatures and Seal. The seal of the corporation, if any, on any certificates for shares may be a facsimile. The signature of the president or Vice President and the Secretary or Assistant Secretary upon a certificate may be facsimiles if the certificate 10 is manually signed on behalf of a transfer agent, or a registrar, other than the corporation itself or an employee of the corporation. 6.03 Signature by Former Officers. The validity of a share certificate is not affected if a person who signed the certificate (either manually or in facsimile) no longer holds office when the certificate is issued. 6.04 Transfer of Shares. Prior to due presentment of a certificate for shares for registration of transfer the corporation may treat the registered owner of such shares as the person exclusively entitled to vote, to receive notifications and otherwise to have and exercise all the rights and power of an owner. Where a certificate for shares is presented to the corporation with a request to register for transfer, the corporation shall not be liable to the owner or any other person suffering loss as a result of such registration of transfer if (a) there were on or with the certificate the necessary endorsements, and (b) the corporation had no duty to inquire into adverse claims or has discharged any such duty. The corporation may require reasonable assurance that such endorsements are genuine and effective and compliance with such other regulations as may be prescribed by or under the authority of the Board of Directors. 6.05 Restrictions on Transfer. The face or reverse side of each certificate representing shares shall bear a conspicuous notation of any restriction imposed by the corporation upon the transfer of such shares. 6.06 Lost, Destroyed or Stolen Certificates. Where the owner claims that certificates for shares have been lost, destroyed or wrongfully taken, a new certificate shall be issued in place thereof if the owner (a) so requests before the corporation has notice that such shares have been acquired by a bona fide purchaser, (b) files with the corporation a sufficient indemnity bond if required by the Board of Directors or any principal officer, and (c) satisfies such other reasonable requirements as may be prescribed by or under the authority of the Board of Directors. 6.07 Consideration for Shares. The Board of Directors may authorize shares to be issued for consideration consisting of any tangible or intangible property or benefit to the corporation, including cash, promissory notes, services performed, contracts for services to be performed or other securities of the corporation. Before the corporation issues shares, the Board of Directors shall determine that the consideration received or to be received for the shares to be issued is adequate. The determination of the Board of Directors is conclusive insofar as the adequacy of consideration for the issuance of shares relates to whether the shares are validly issued, fully paid and nonassessable. The corporation may place in escrow shares issued in whole or in part for a contract for future services or benefits, a promissory note, or otherwise for property to be issued in the future, or make other arrangements to restrict the transfer of the shares, and may credit distributions in respect of the shares against their purchase price, until the services are performed, the benefits or property are received or the promissory note is paid. If the services are not performed, the benefits or property are not received or the promissory note is not paid, the corporation may cancel, in whole or in part, the shares escrowed or restricted and the distributions credited. 11 6.08 Stock Regulations. The Board of Directors shall have the power and authority to make all such further rules and regulations not inconsistent with law as it may deem expedient concerning the issue, transfer and registration of shares of the corporation. ARTICLE VII. SEAL 7.01 The Board of Directors may provide for a corporate seal for the corporation. ARTICLE VIII. INDEMNIFICATION 8.01 Provision of Indemnification. The corporation shall, to the fullest extent permitted or required by Sections 180.0850 to 180.0859, inclusive, of the Wisconsin Business Corporation Law, including any amendments thereto (but in the case of any such amendment, only to the extent such amendment permits or requires the corporation to provide broader indemnification rights than prior to such amendment), indemnify its Directors and Officers against any and all Liabilities, and advance any and all reasonable Expenses, incurred thereby in any Proceeding to which any such Director or Officer is a Party because he or she is or was a Director or Officer of the corporation. The corporation shall also indemnify an employee who is not a Director or Officer, to the extent that the employee has been successful on the merits or otherwise in defense of a Proceeding, for all Expenses incurred in the Proceeding if the employee was a Party because he or she is or was an employee of the corporation. The rights to indemnification granted hereunder shall not be deemed exclusive of any other rights to indemnification against Liabilities or the advancement of Expenses which a Director, Officer or employee may be entitled under any written agreement, Board resolution, vote of shareholders, the Wisconsin Business Corporation Law or otherwise. The corporation may, but shall not be required to, supplement the foregoing rights to indemnification against Liabilities and advancement of Expenses under this Section 8.01 by the purchase of insurance on behalf of any one or more of such Directors, Officers or employees, whether or not the corporation would be obligated to indemnify or advance Expenses to such Director, Officer or employee under this Section 8.01. All capitalized terms used in this Article VIII and not otherwise defined herein shall have the meaning set forth in Section 180.0850 of the Wisconsin Business Corporation Law. ARTICLE IX. AMENDMENTS 9.01 By Shareholders. These bylaws may be amended or repealed and new bylaws may be adopted by the shareholders at any annual or special meeting of the shareholders at which a quorum is in attendance. 9.02 By Directors. Except as otherwise provided by the Wisconsin Business Corporation Law, the articles of incorporation or these bylaws, these bylaws may also be amended or repealed and new bylaws may be adopted by the Board of Directors provided, however, that the shareholders in adopting, amending or repealing a particular bylaw may provide therein that the Board of Directors may not amend, repeal or readopt that bylaw and provided, further, that the Board of Directors shall have no power to amend or repeal any provisions of Article II. 12 9.03 Implied Amendments. Any action taken or authorized by the shareholders or by the Board of Directors which would be inconsistent with the bylaws then in effect but which is taken or authorized by affirmative vote of not less than the number of shares or the number of directors required to amend the bylaws so that the bylaws would be consistent with such action shall be given the same effect as though the bylaws had been temporarily amended or suspended so far, but only so far, as is necessary to permit the specific action so taken or authorized. ARTICLE X. SHAREHOLDER PROPOSALS 10.01 Annual Meetings. (a) Nominations of persons for election to the Board of Directors of the corporation and the proposal of business to be considered by the shareholders may be made at an annual meeting of shareholders by any shareholder of the corporation who (i) is a shareholder of record at the time of giving of notice provided for in this Section 10.01, (ii) is entitled to vote at the meeting, and (iii) complies with the notice procedures set forth in this Section 10.01. (b) For nominations or other business to be properly brought before an annual meeting of shareholders by a shareholder, such shareholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a shareholder's notice shall be received by the Secretary of the corporation at the principal offices of the corporation not later than the earlier of (i) the date 45 days prior to the first anniversary (the "Anniversary Date") of the date set forth, in the corporation's proxy statement for the last annual meeting of shareholders held by the corporation, as the date on which the corporation first mailed definitive proxy materials for such annual meeting of shareholders and (ii) the later of (x) the date 70 days prior to the annual meeting of shareholders before which the shareholder providing notice desires to bring the business set forth in the notice and (y) the date 10 days following the day on which public announcement of the date of such meeting is first made. Such shareholder's notice shall be signed by the shareholder of record who intends to make the nomination or introduce the other business (or his duly authorized proxy or other representative), shall bear the date of signature of such shareholder (or proxy or other representative) and shall set forth: (A) the name and address, as they appear on the corporation's books, of such shareholder and the beneficial owner or owners, if any, on whose behalf the nomination or other proposal is made; (B) the class and number of shares of the corporation that are beneficially owned by such shareholder or beneficial owner or owners; (C) a representation that such shareholder is a holder of record of shares of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to make the nomination or introduce the other business specified in the notice; (D) in the case of any proposed nomination for election or re-election as a director, (i) the name and residential address of the person or persons to be nominated, (ii) a description of all arrangements or understandings between such shareholder or beneficial owner or owners and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination is to be made by such shareholder, (iii) such other information regarding each nominee proposed by such shareholder as would be required to be disclosed in solicitations of proxies 13 for elections of directors, or would be otherwise required to be disclosed, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934 (the "Exchange Act"), including any information that would be required to be included in a proxy statement filed pursuant to Regulation 14A had the nominee been nominated by the Board of Directors and (iv) the written consent of each nominee to be named in a proxy statement and to serve as a director of the corporation if so elected; and (E) in the case of any other business that such shareholder proposes to bring before the meeting, (i) a brief description of the business desired to be brought before the meeting and, if such business includes a proposal to amend these bylaws, the language of the proposed amendment, (ii) such shareholder's and beneficial owner's or owners' reasons for conducting such business at the meeting and (iii) any material interest in such business of such shareholder and beneficial owner or owners. (c) Notwithstanding the foregoing provisions of this Section 10.01 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the corporation at least 45 days prior to the Anniversary Date, a shareholder's notice required by this Section 10.01 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be received by the Secretary at the principal offices of the corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the corporation. 10.02 Special Meetings. (a) Only such business shall be conducted at a special meeting of the shareholders of the corporation as is described in the notice of such meeting sent to shareholders in accordance with Section 2.04 of these bylaws. (b) Nominations of persons for election to the Board of Directors at a special meeting of shareholders at which directors are to be elected may be made a shareholder only if such shareholder (i) is a shareholder of record at the time of giving of notice of such meeting, (ii) is entitled to vote at the meeting, and (iii) complies with the notice procedures set forth in this Section 10.02. (c) Any shareholder desiring to nominate persons for election to the Board of Directors at such a special meeting shall cause a written notice to be received by the Secretary of the corporation at the principal offices of the corporation not earlier than ninety days prior to such special meeting and not later than the close of business on the later of (x) the date 60 days prior to such special meeting and (y) the date 10 days following the day on which public announcement is first made of the date of such special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. Such written notice shall be signed by the shareholder of record who intends to make the nomination (or his duly authorized proxy or other representative), shall bear the date of signature of such shareholder (or proxy or other representative) and shall set forth: (i) the name and address, as they appear on the corporation's books, of such shareholder and the beneficial owner or owners, if any, on whose behalf the nomination is made; (ii) the class and number of shares of the corporation which are beneficially owned by such shareholder or beneficial owner or owners; (iii) a representation that such shareholder is a holder of record of shares of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to make the nomination specified in the notice; (iv) the name and residence address of the person or persons to be nominated; (v) a description of all arrangements or understandings between such shareholder or beneficial owner or owners and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination is to be made by such shareholder; (vi) such other information regarding each nominee proposed by such shareholder as would be required to be disclosed in solicitations of proxies for elections of directors, or would be otherwise required to be disclosed, in each case pursuant to Regulation 14A under the Exchange Act, including any information that would be required to be included in a proxy statement filed pursuant to Regulation 14A had the nominee been nominated by the Board of Directors; and (vii) the written consent of each nominee to be named in a proxy statement and to serve as a director of the corporation if so elected. 10.03 General. (a) Only persons who are nominated by or at the direction of the Board of Directors or nominated by shareholders of the corporation in compliance with the procedures set forth in this Article X shall be eligible to serve as directors. Only such business shall be conducted at an annual meeting or special meeting of shareholders as shall have been brought before such meeting by or at the direction of the Board of Directors or by a shareholder in compliance with the procedures set forth in this Article X. The chairman of any meeting of shareholders shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Article X and, if any proposed nomination or business is not in compliance with this Article X, to declare that such defective proposal shall be disregarded. (b) For purposes of this Article X, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (c) In addition to complying with the foregoing provisions of this Article X, a shareholder shall comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Article X. Nothing in this Article X shall be deemed to limit the corporation's obligation to include shareholder proposals in its proxy statement if such inclusion is required by Rule 14a-8 under the Exchange Act. EX-10.12 3 1995 EQUITY INCENTIVE PLAN EXHIBIT 10.12 ----------------------------------------------- Adopted 12/20/94 Effective 1/30/95 As Amended Through 1/28/99 ----------------------------------------------- SCHULTZ SAV-O STORES, INC. 1995 EQUITY INCENTIVE PLAN Section 1. Purpose The purpose of Schultz Sav-O Stores, Inc. 1995 Equity Incentive Plan (the "Plan") is to promote the best interests of Schultz Sav-O Stores, Inc. (the "Company") and its shareholders by providing key employees of the Company and its Affiliates (as defined below) with an opportunity to acquire a, or increase their, proprietary interest in the Company. It is intended that the Plan will promote continuity of management and increased incentive and personal interest in the welfare of the Company by those key employees who are primarily responsible for shaping and carrying out the long-range plans of the Company and securing the Company's continued growth and financial success. Section 2. Definitions As used in the Plan, the following terms shall have the respective meanings set forth below: (a) "Affiliate" shall mean any entity that, directly or through one or more intermediaries, is controlled by, controls, or is under common control with, the Company. (b) "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock or Performance Share granted under the Plan. (c) "Award Agreement" shall mean any written agreement, contract or other instrument or document evidencing any Award granted under the Plan. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (e) "Commission" shall mean the Securities and Exchange Commission. (f) "Committee" shall mean the Compensation and Stock Option Committee of the Board of Directors of the Company (or any other committee thereof designated by such Board to administer the Plan); provided, however, that the Committee is composed of not less than two directors, each of whom is a "disinterested person" within the meaning of Rule 16b-3. (g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. -1- (h) "Fair Market Value" shall mean, with respect to any property (including, without limitation, any Shares or other securities), the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee. (i) "Incentive Stock Option" shall mean an option granted under Section 6(a) of the Plan that is intended to meet the requirements of Section 422 of the Code (or any successor provision thereto). (j) "Key Employee" shall mean any officer or other key employee of the Company or of any Affiliate who is responsible for or contributes to the management, growth or profitability of the business of the Company or any Affiliate as determined by the Committee in its discretion. (k) "Non-Qualified Stock Option" shall mean an option granted under Section 6(a) of the Plan that is not intended to be an Incentive Stock Option. (l) "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option. (m) "Participating Key Employee" shall mean a Key Employee designated to be granted an Award under the Plan. (n) "Performance Period" shall mean, in relation to Performance Shares, any period for which a performance goal or goals have been established. (o) "Performance Share" shall mean any right granted under Section 6(d) of the Plan that will be paid out as a Share (which, in specified circumstances, may be a Share of Restricted Stock). (p) "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization or government or political subdivision thereof. (q) "Released Securities" shall mean Shares of Restricted Stock with respect to which all applicable restrictions have expired, lapsed or been waived. (r) "Restricted Securities" shall mean Awards of Restricted Stock or other Awards under which issued and outstanding Shares are held subject to certain restrictions. (s) "Restricted Stock" shall mean any Share granted under Section 6(c) of the Plan or, in specified circumstances, a Share paid in connection with a Performance Share under Section 6(e) of the Plan. (t) "Rule 16b-3" shall mean Rule 16b-3 as promulgated by the Commission under the Exchange Act, or any successor rule or regulation thereto. -2- (u) "Shares" shall mean shares of common stock of the Company, $0.05 par value (including the associated Common Stock Purchase Rights), and such other securities or property as may become subject to Awards pursuant to an adjustment made under Section 4(b) of the Plan. (v) "Stock Appreciation Right" shall mean any right granted under Section 6(b) of the Plan. Section 3. Administration The Plan shall be administered by the Committee; provided, however, that if at any time the Committee shall not be in existence, the functions of the Committee as specified in the Plan shall be exercised by those members of the Board of Directors of the Company who qualify as "disinterested persons" under Rule 16b-3. Subject to the terms of the Plan and applicable laws and without limitation by reason of enumeration, the Committee shall have full discretionary power and authority to: (i) designate Participating Key Employees; (ii) determine the type or types of Awards to be granted to each Participating Key Employee under the Plan; (iii) determine the number of Shares to be covered by (or with respect to which payments, rights or other matters are to be calculated in connection with) Awards granted to Participating Key Employees; (iv) determine the terms and conditions of any Award granted to a Participating Key Employee; (v) determine whether, to what extent and under what circumstances Awards granted to Participating Key Employees may be settled or exercised in cash, Shares, other securities, other Awards or other property, and the method or methods by which Awards may be settled, exercised, canceled, forfeited or suspended; (vi) determine whether, to what extent and under what circumstances cash, Shares, other Awards and other amounts payable with respect to an Award granted to Participating Key Employees under the Plan shall be deferred either automatically or at the election of the holder thereof or of the Committee; (vii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan (including, without limitation, any Award Agreement); (viii) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time or from time to time, and shall be final, conclusive and binding upon all Persons, including the Company, any Affiliate, any Participating Key Employee, any holder or beneficiary of any Award, any shareholder and any employee of the Company or of any Affiliate. -3- Section 4. Shares Available for Award (a) Shares Available. Subject to adjustment as provided in Section 4(b): (i) Number of Shares Available. The number of Shares with respect to which Awards may be granted under the Plan shall be 1,250,000, subject to the limitations set forth in Section 6(c)(i). (ii) Accounting for Awards. The number of Shares covered by an Award under the Plan, or to which such Award relates, shall be counted on the date of grant of such Award against the number of Shares available for granting Awards under the Plan. (iii) Sources of Shares Deliverable Under Awards. Any Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or of treasury Shares. (b) Adjustments. In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee may, in such manner as it may deem equitable, adjust any or all of (i) the number and type of Shares subject to the Plan and which thereafter may be made the subject of Awards under the Plan; (ii) the number and type of Shares subject to outstanding Awards; and (iii) the grant, purchase or exercise price with respect to any Award, or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; provided, however, in each case, that with respect to Awards of Incentive Stock Options no such adjustment shall be authorized to the extent that such authority would cause the Plan to violate Section 422(b) of the Code (or any successor provision thereto); and provided further that the number of Shares subject to any Award payable or denominated in Shares shall always be a whole number. Section 5. Eligibility Any Key Employee, including any executive officer or employee-director of the Company or of any Affiliate, who is not a member of the Committee shall be eligible to be designated a Participating Key Employee. Section 6. Awards (a) Option Awards. The Committee is hereby authorized to grant Options to Key Employees with the terms and conditions as set forth below and with such additional terms and conditions, in either case not inconsistent with the provisions of the Plan, as the Committee shall determine in its discretion. -4- (i) Exercise Price. The exercise price per Share of an Option granted pursuant to this Section 6(a) shall be determined by the Committee; provided, however, that such exercise price shall not be less than 100% of the Fair Market Value of a Share on the date of grant of such Option. (ii) Option Term. The term of each Option shall be fixed by the Committee; provided, however, that in no event shall the term of any Option exceed a period of seven years from the date of its grant. (iii) Exercisability and Method of Exercise. An Option shall become exercisable in such manner and within such period or periods and in such installments or otherwise as shall be determined by the Committee. The Committee also shall determine the method or methods by which, and the form or forms, including, without limitation, cash, Shares, other securities, other Awards, other property or any combination thereof, having a Fair Market Value on the exercise date equal to the relevant exercise price, in which payment of the exercise price with respect to any Option may be made or deemed to have been made. (iv) Incentive Stock Options. The terms of any Incentive Stock Option granted under the Plan shall comply in all respects with the provisions of Section 422 of the Code (or any successor provision thereto) and any regulations promulgated thereunder. Notwithstanding any provision in the Plan to the contrary, no Incentive Stock Option may be granted hereunder after the tenth anniversary of the adoption of the Plan by the Board of Directors of the Company. (b) Stock Appreciation Right Awards. The Committee is hereby authorized to grant Stock Appreciation Rights to Key Employees. Subject to the terms of the Plan and any applicable Award Agreement, a Stock Appreciation Right granted under the Plan shall confer on the holder thereof a right to receive, upon exercise thereof, the excess of (i) the Fair Market Value of one Share on the date of exercise over (ii) the grant price of the Stock Appreciation Right as specified by the Committee, which shall not be less than 100% of the Fair Market Value of one Share on the date of grant of the Stock Appreciation Right. Subject to the terms of the Plan, the grant price, term, methods of exercise, methods of settlement (including whether the Participating Key Employee will be paid in cash, Shares, other securities, other Awards, or other property or any combination thereof), and any other terms and conditions of any Stock Appreciation Right shall be as determined by the Committee in its discretion. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it may deem appropriate, including, without limitation, restricting the time of exercise of the Stock Appreciation Right to specified periods as may be necessary to satisfy the requirements of Rule 16b-3. -5- (c) Restricted Stock Awards (i) Issuance. The Committee is hereby authorized to grant Awards of Restricted Stock to Key Employees; provided, however, that the aggregate number of Shares of Restricted Stock granted under the Plan to all Participating Key Employees as a group shall not exceed 75,000 Shares (such number of Shares subject to adjustment in accordance with the terms of Section 4(b) hereof) of the total number of Shares available for Awards under Section 4(a)(i). (ii) Restrictions. Shares of Restricted Stock granted to Participating Key Employees shall be subject to such restrictions as the Committee may impose in its discretion (including, without limitation, any limitation on the right to vote a Share of Restricted Stock or the right to receive any dividend or other right or property), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise, as the Committee may deem appropriate in its discretion. (iii) Registration. Any Restricted Stock granted under the Plan to a Participating Key Employee may be evidenced in such manner as the Committee may deem appropriate in its discretion, including, without limitation, book-entry registration or issuance of a stock certificate or certificates. In the event any stock certificate is issued in respect of Shares of Restricted Stock granted under the Plan to a Participating Key Employee, such certificate shall be registered in the name of the Participating Key Employee and shall bear an appropriate legend (as determined by the Committee) referring to the terms, conditions and restrictions applicable to such Restricted Stock. (iv) Payment of Restricted Stock. At the end of the applicable restriction period relating to Restricted Stock granted to a Participating Key Employee, one or more stock certificates for the appropriate number of Shares, free of restrictions imposed under the Plan, shall be delivered to the Participating Key Employee or, if the Participating Key Employee received stock certificates representing the Restricted Stock at the time of grant, the legends placed on such certificates shall be removed. (v) Forfeiture. Except as otherwise determined by the Committee in its discretion, upon termination of employment of a Participating Key Employee (as determined under criteria established by the Committee in its discretion) for any reason during the applicable restriction period, all Shares of Restricted Stock still subject to restriction shall be forfeited by the Participating Key Employee; provided, however, that the Committee may, when it finds that a waiver would be in the best interests of the Company, waive in whole or in part any or all remaining restrictions with respect to Shares of Restricted Stock held by a Participating Key Employee. (d) Performance Share Awards (i) Issuance. The Committee is hereby authorized to grant Awards of Performance Shares to Key Employees. -6- (ii) Performance Goals and Other Terms. The Committee shall determine in its discretion the Performance Period, the performance goal or goals to be achieved during any Performance Period, the proportion of payments, if any, to be made for performance between the minimum and full performance levels, the restrictions applicable to Shares of Restricted Stock received upon payment of Performance Shares if Performance Shares are paid in such manner, and any other terms, conditions and rights relating to a grant of Performance Shares. Performance goals established by the Committee may be based on one or more measures such as return on shareholders' equity, earnings or any other standard or standards deemed relevant by the Committee, measured internally or relative to other organizations and before or after extraordinary items. (iii) Rights and Benefits During the Performance Period. The Committee may provide that, during a Performance Period, a Participating Key Employee shall be paid cash amounts, with respect to each Performance Share held by such Participating Key Employee, in the same manner, at the same time, and in the same amount paid, as a cash dividend on a Share. Participating Key Employees shall have no voting rights with respect to Performance Shares held by them. (iv) Adjustments with Respect to Performance Shares. Any other provision of the Plan to the contrary notwithstanding, the Committee may in its discretion at any time or from time to time adjust performance goals (up or down) and minimum or full performance levels (and any intermediate levels and proportion of payments related thereto), adjust the manner in which performance goals are measured, or shorten any Performance Period or waive in whole or in part any or all remaining restrictions with respect to Shares of Restricted Stock issued in payment of Performance Shares, if the Committee determines that conditions, including but not limited to, changes in the economy, changes in competitive conditions, changes in laws or governmental regulations, changes in generally accepted accounting principles, changes in the Company's accounting policies, acquisitions or dispositions by the Company or its Affiliates, or the occurrence of other unusual, unforeseen or extraordinary events, so warrant. (v) Payment of Performance Shares. As soon as is reasonably practicable following the end of the applicable Performance Period, one or more certificates representing the number of Shares equal to the number of Performance Shares payable shall be registered in the name of and delivered to the Participating Key Employee; provided, however, that any Shares of Restricted Stock payable in connection with Performance Shares shall, pending the expiration, lapse, or waiver of the applicable restrictions, be evidenced in the manner as set forth in Section 6(c)(iii) hereof. (e) General (i) No Consideration for Awards. Awards shall be granted to Participating Key Employees for no cash consideration unless otherwise determined by the Committee. -7- (ii) Award Agreements. Each Award granted under the Plan shall be evidenced by an Award Agreement in such form (consistent with the terms of the Plan) as shall have been approved by the Committee. (iii) Awards May Be Granted Separately or Together. Awards to Participating Key Employees under the Plan may be granted either alone or in addition to, in tandem with, or in substitution for, any other Award or any award granted under any other plan of the Company or any Affiliate. Awards granted in addition to, or in tandem with, other Awards, or in addition to, or in tandem with, awards granted under any other plan of the Company or any Affiliate, may be granted either at the same time as or at a different time from the grant of such other Awards or awards. (iv) Forms of Payment Under Awards. Subject to the terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award to a Participating Key Employee may be made in such form or forms as the Committee shall determine, and may be made in a single payment or transfer, in installments, or on a deferred basis, in each case in accordance with rules and procedures established by the Committee in its discretion. Such rules and procedures may include, without limitation, provisions for the payment or crediting of interest on installment or deferred payments. (v) Limits on Transfer of Options. Except as otherwise provided by the Board of Directors of the Company or the Committee, Awards granted under the Plan shall not be transferable other than as designated by the Participating Key Employee by will, or by the laws of descent and distribution. In the event that the Board of Directors of the Company or the Committee shall permit a transfer of an Award, any permitted transferee shall have all of the rights of the Participating Key Employee under the Plan, as if the Participating Key Employee had retained such Award. (vi) Term of Awards. Except as otherwise provided in the Plan, the term of each Award shall be for such period as may be determined by the Committee. (vii) Rule 16b-3 Six-Month Limitations. To the extent required in order to comply with Rule 16b-3 only, any equity security offered pursuant to the Plan may not be sold for at least six months after acquisition, except in the case of death or disability, and any derivative security issued pursuant to the Plan shall not be exercisable for at least six months, except in case of death or disability of the holder thereof. Terms used in the preceding sentence shall, for the purposes of such sentence only, have the meanings, if any, assigned or attributed to them under Rule 16b-3. (viii) Share Certificates; Representation. In addition to the restrictions imposed pursuant to Section 6(c) and Section 6(d) hereof, all certificates for Shares delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the rules, regulations and other requirements of the Commission, Nasdaq Stock Market or any stock exchange or other market upon which such Shares are then listed or traded, and any applicable federal or state securities laws, and the Committee may cause a legend or legends to -8- be put on any such certificates to make appropriate reference to such restrictions. The Committee may require each Participating Key Employee, or other Person who acquires Shares under the Plan by means of an Award originally made to a Participating Key Employee to represent to the Company in writing that such Participating Key Employee, or other Person is acquiring the Shares without a view to the distribution thereof. Section 7. Amendment and Termination of the Plan; Correction of Defects and Omissions (a) Amendments to and Termination of the Plan. The Board of Directors of the Company may at any time amend, alter, suspend, discontinue or terminate the Plan; provided, however, that shareholder approval of any amendment of the Plan shall also be obtained if otherwise required by: (i) the rules and/or regulations promulgated under Section 16 of the Exchange Act (in order for the Plan to remain qualified under Rule 16b-3); (ii) the Code or any rules promulgated thereunder (in order to allow for Incentive Stock Options to be granted under the Plan); or (iii) the quotation or listing requirements of the Nasdaq National Market or any principal securities exchange or market on which the Shares are then traded (in order to maintain the quotation or listing of the Shares thereon). Termination of the Plan shall not affect the rights of Participating Key Employees with respect to Awards previously granted to them, and all unexpired Awards shall continue in force and effect after termination of the Plan except as they may lapse or be terminated by their own terms and conditions. (b) Correction of Defects, Omissions and Inconsistencies. The Committee may in its discretion correct any defect, supply any omission or reconcile any inconsistency in any Award or Award Agreement in the manner and to the extent it shall deem desirable to carry the Plan into effect. Section 8. General Provisions (a) No Rights to Awards. No Key Employee, Participating Key Employee or other Person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Key Employees, Participating Key Employees or holders or beneficiaries of Awards under the Plan. The terms and conditions of Awards need not be the same with respect to each Participating Key Employee. (b) Withholding. No later than the date as of which an amount first becomes includible in the gross income of a Participating Key Employee for federal income tax purposes with respect to any Award under the Plan, the Participating Key Employee shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Committee, withholding obligations arising with respect to Awards to Participating Key Employees under the Plan may be settled with Shares previously owned by the Participating Key Employee; provided, however, that the Participating Key Employee may not settle such obligations with Shares that are part of, or are received upon exercise of, the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company and any Affiliate shall, to the extent permitted by -9- law, have the right to deduct any such taxes from any payment otherwise due to the Participating Key Employee. The Committee may establish such procedures as it deems appropriate for the settling of withholding obligations with Shares, including, without limitation, the establishment of such procedures as may be necessary to satisfy the requirements of Rule 16b-3. (c) No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other or additional compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases. (d) Rights and Status of Recipients of Awards. The grant of an Award shall not be construed as giving a Participating Key Employee the right to be retained in the employ of the Company or any Affiliate. Further, the Company or any Affiliate may at any time dismiss a Participating Key Employee from employment, free from any liability, or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. Except for rights accorded under the Plan and under any applicable Award Agreement, Participating Key Employees shall have no rights as holders of Shares as a result of the granting of Awards hereunder. (e) Unfunded Status of the Plan. Unless otherwise determined by the Committee, the Plan shall be unfunded and shall not create (or be construed to create) a trust or a separate fund or funds. The Plan shall not establish any fiduciary relationship between the Company or the Committee and any Participating Key Employee or other Person. To the extent any Person holds any right by virtue of a grant under the Plan, such right (unless otherwise determined by the Committee) shall be no greater than the right of an unsecured general creditor of the Company. (f) Governing Law. The validity, construction and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the internal laws of the State of Wisconsin and applicable federal law. (g) Severability. If any provision of the Plan or any Award Agreement or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction, or as to any Person or Award, or would disqualify the Plan, any Award Agreement or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan, any Award Agreement or the Award, such provision shall be stricken as to such jurisdiction, Person or Award, and the remainder of the Plan, any such Award Agreement and any such Award shall remain in full force and effect. -10- (h) No Fractional Shares. No fractional Shares or other securities shall be issued or delivered pursuant to the Plan, any Award Agreement or any Award, and the Committee shall determine (except as otherwise provided in the Plan) whether cash, other securities or other property shall be paid or transferred in lieu of any fractional Shares or other securities, or whether such fractional Shares or other securities or any rights thereto shall be canceled, terminated or otherwise eliminated. (i) Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. Section 9. Effective Date of the Plan The Plan shall be effective as of January 30, 1995 subject to shareholder approval of the Plan within 12 months following the date of adoption of the Plan by the Board of Directors, and all Awards granted under the Plan prior to the date of shareholder approval shall be subject to such approval and the effective date of such Award grants shall be deemed to be the date of such shareholder approval. Section 10. Term of the Plan No Award shall be granted under the Plan following the fifth anniversary of its effective date. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award theretofore granted may extend beyond such date and, to the extent set forth in the Plan, the authority of the Committee to amend, alter, adjust, suspend, discontinue or terminate any such Award, or to waive any conditions or restrictions with respect to any such Award, and the authority of the Board of Directors of the Company to amend the Plan, shall extend beyond such date. -11- EX-10.13 4 NONQUALIFIED STOCK OPTION AGREEMENT EXHIBIT 10.13 SCHULTZ SAV-O STORES, INC. NONQUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT, made and entered into as of this day of , 199_ (the "Grant Date"), by and between SCHULTZ SAV-O STORES, INC., a Wisconsin corporation (the "Company"), and (the "Optionee"). W I T N E S S E T H : WHEREAS, the terms of the Schultz Sav-O Stores, Inc. 1995 Equity Incentive Plan (the "Plan"), to the extent not stated herein, are specifically incorporated by reference in this Agreement and defined terms used herein which are not otherwise defined shall have the meaning set forth in the Plan; WHEREAS, the purpose of the Plan is to permit the grant of various equity-based incentive awards, including options to purchase shares of the Company's Common Stock, $.05 par value ("Common Stock"), to be granted to certain key employees of the Company; WHEREAS, the Optionee is now employed by the Company in a key capacity and has exhibited judgment, initiative and efforts which have contributed materially to the successful performance of the Company; and WHEREAS, the Company desires the Optionee to remain in the Company's employ and wishes to provide the Optionee with the opportunity to secure or increase his stock ownership in the Company in order to develop even a stronger incentive to put forth maximum effort for the continued success and growth of the Company. NOW, THEREFORE, in consideration of the premises and of the covenants and agreements herein set forth, the parties hereby mutually covenant and agree as follows: 1. Grant of Options. Subject to the terms and conditions of the Plan and this Agreement, and shareholder approval of the Plan at the Company's 1995 annual meeting of shareholders, the Company grants to the Optionee this option (the "Option") to purchase from the Company all or any part of the aggregate number of ______ shares of Common Stock (the "Optioned Shares"), subject to adjustment as provided in Paragraph 7. This Option is intended to constitute a nonqualified stock option and shall not be treated as an incentive stock option within the meaning of Section 422A of the Internal Revenue Code of 1986, as amended. 2. Option Price. The option price to be paid for the Optioned Shares shall be $______ per share, subject to adjustment as provided in Paragraph 7. The per share option price has been determined by the Compensation and Stock Option Committee (the "Committee") of the Board of Directors of the Company (the "Board") to be not less than 100% of the fair market value of the Common Stock on the Grant Date. 3. Exercise of Option. a. Subject to the terms and conditions of the Plan and except as otherwise provided in this Agreement, this Option may be exercised by the Optionee while in the employ of the Company, in whole or in part, from time to time or at any time, beginning on the Grant Date and ending on the seventh anniversary of the Grant Date (the "Termination Date") in accordance with the following schedule: Cumulative Percentage Elapsed Number of of Optioned Shares Years After Grant Date Which May be Purchased ---------------------- ---------------------- Less Than One Year 0% One Year 33-1/3% Two Years 66-2/3% Three Years and After 100% b. If the Optionee is discharged or leaves the employ of the Company for any reason (other than termination by the Company for "cause," the death or disability of the Optionee or the retirement of the Optionee), prior to the Termination Date, this Option, to the extent not theretofore exercised but then permitted to be exercised under the percentage limitations of Paragraph 3(a), may be exercised by the Optionee or by his legal representative at any time within three months after the date of termination of employment upon the tender to the Company in cash or its equivalent of the full purchase price (and not by the tender of previously acquired Common Stock), but in no event later than the Termination Date. c. If the Optionee dies while he is in the employ of the Company, or if his employment is terminated by reason of his retirement or his disability prior to the Termination Date, this Option, to the extent not theretofore exercised (regardless of the percentage limitations of Paragraph 3(a)), may be exercised in whole or in part as follows: (i) by the legal representative of the Optionee at any time within six months after the date of the Optionee's death or (ii) by the Optionee or his legal representative at any time within three months after the termination of the Optionee's employment by reason of retirement or disability, but in no event later than the Termination Date in either case. d. If the Optionee's employment is terminated by the Company "for cause," this Option to the extent not theretofore exercised shall terminate immediately and shall not be exercisable following such termination of employment. For purposes of this Paragraph 3, termination by the Company "for cause" shall mean any termination of the Optionee by reason of any action or omission on the part of the Optionee which is deemed contrary to the interests of the Company or not in the interests of the Company, as determined by the Board in its sole discretion. e. This Option may be exercised during the life of the Optionee only by the Optionee (or his legal representative as provided in this Paragraph 3). 2 4. Manner of Exercise and Payment. This Option may be exercised only by written notice to the Company by the Optionee (or his legal representative as provided in Paragraph 3) of the Optionee's (or such legal representative's) intent to exercise all or part of this Option, served upon the Secretary of the Company at its office at Sheboygan, Wisconsin, specifying the number of Optioned Shares in respect to which this Option is being exercised, accompanied by payment of the aggregate option price for such Optioned Shares, at the Optionee's (or such legal representative's) election (except as limited in Paragraph 3): (a) in cash or by certified check or bank draft to the order of the Company; (b) by delivering previously acquired shares of Common Stock, duly endorsed in blank or accompanied by stock powers duly endorsed in blank, valued at their fair market value at the time of exercise as determined by the Committee; or (c) by any combination of (a) and (b). For purposes of (b) and (c) above, the term "previously acquired shares of Common Stock" shall only include Common Stock owned by the Optionee prior to the exercise of this Option and shall not include shares of Common Stock which are being acquired pursuant to the exercise of this Option. Upon receipt of the payment of the aggregate option price for all of the Optioned Shares so purchased, certificates for such Optioned Shares shall be issued by or on behalf of the Company to the Optionee. The Optioned Shares so acquired, upon payment in full of the aggregate option price, shall be fully paid and nonassessable, except as provided by Section 180.0622(2) (b) of the Wisconsin Statutes. 5. Transferability; Limitations. Subject to the limitations of this Section 5, this Option shall be transferable, in whole or in part, upon the surrender of this Option by the Optionee to the Company for one or more new Options of like tenor representing, in the aggregate, the right to purchase the number of shares of Common Stock purchasable hereunder, each of such new Options to represent the right to purchase such number of shares of Common Stock as shall be designated by the Optionee at the time of such surrender, subject to the terms and conditions of the Plan and this Option. This Option may only be transferred by will or by the laws of descent or distribution, or to any member of the Optionee's "immediate family," as such term is defined in Rule 16a-1(e) under the Securities Exchange Act of 1934 (the "Exchange Act") or to trusts, partnerships or other entities established solely for the benefit of members of the Optionee's immediate family; provided, however, that (x) there may be no consideration for any such transfer, (y) subsequent transfers of any portion of this Option must also be in compliance with this Section 5 and (z) promptly after making any such transfer, the Optionee shall provide to the Company the Notice of Transfer of Option attached as Exhibit 1 hereto. In the event of such a permitted transfer of this Option, the transferee shall have all of the rights of the Optionee under the Plan and this Option, as if the Optionee had retained this Option. The terms of this Option shall be binding upon the permitted transferees, executors, administrators, heirs and successors of the Optionee. 6. Tax Withholding. a. The Company may require as a condition precedent to the issuance or transfer of any shares of Common Stock upon exercise of this Option that the Optionee pay to the Company, upon its demand, or otherwise make arrangements satisfactory to the Company for payment of, such amount as may be requested by the Company for the purpose of 3 satisfying the Company's tax withholding requirement. If the amount so requested is not so paid or if such arrangements are not made, the Company may refuse to issue or transfer any Optioned Shares upon exercise of this Option. b. The Optionee shall be permitted to satisfy the Company's tax withholding requirements by delivering shares of previously owned Common Stock having a fair market value (as determined by the Committee) on the date income is recognized by the Optionee (the "Tax Date") pursuant to the exercise of this Option equal to the minimum amount required to be withheld. If the number of shares of Common Stock determined pursuant to the preceding sentence shall include a fractional share, the number of shares delivered shall be reduced to the next lower whole number and the Optionee shall deliver to the Company cash in lieu of such fractional share, in an amount equal to the Common Stock's then fair market value as determined by the Committee, or otherwise make arrangements satisfactory to the Company for payment of such amount 7. Adjustment to Optioned Shares and Option Price. In the event of a capital adjustment resulting from a stock dividend (other than a stock dividend in lieu of an ordinary cash dividend), stock split, reorganization, spin-off, split-up or distribution of assets to shareholders, recapitalization, merger, consolidation, combination or exchange of shares or the like, the Optioned Shares and the per share option price (but not the aggregate option price for all Optioned Shares, as adjusted) shall be adjusted in a manner consistent with such capital adjustment and in accordance with the Plan; provided, however, that no such adjustment shall require the Company to issue any fractional shares and the adjustment shall be limited accordingly as determined by the Committee. The determination of the Committee as to any adjustment shall be final. 8. Transfer Restrictions. The Optioned Shares to be acquired upon exercise of this Option may not be sold or offered for sale except pursuant to an effective registration statement under the Securities Act of 1933, as amended ("Act"), or in a transaction which, in the opinion of legal counsel for the Company, is exempt from the registration provisions of the Act. 9. Status of Optionee. The Optionee shall not be deemed for any purposes to be a shareholder of the Company with respect to any of the Optioned Shares except to the extent that this Option shall have been exercised, the aggregate option price for the Optioned Shares purchased shall have been fully paid and a stock certificate shall have been issued by or on behalf of the Company therefor. 10. Employment. It is fully understood that nothing contained in this Agreement or the Plan shall be deemed to confer upon the Optionee any right to continue in the employ of the Company, nor to interfere in any way with the right of the Company to terminate the employment of the Optionee at any time. 11. Interpretation by Committee. As a condition of the granting of this Option, the Optionee agrees, for himself and his legal representatives, that the Plan and this Agreement shall be subject to discretionary interpretation by the Committee and that any interpretation by the Committee of the terms of the Plan and this Agreement shall be final, binding and 4 conclusive on the Optionee and his legal representatives in all respects and shall not subject to challenge or dispute by the Optionee or his legal representatives. 12. Change in Control. a. Notwithstanding any other provision of this Agreement (including, without limitation, Paragraph 3) upon the occurrence of a Change in Control (as hereinafter defined) this Option, to the extent then outstanding and unexercised, shall become immediately exercisable in full for the remainder of its term, but prior to the Termination Date, and the Optionee shall have the right for a period of 30 days following the Change in Control to require the Company to purchase this Option for cash at the aggregate Acceleration Price (as hereinafter defined) for all Optioned Shares then subject to issuance upon exercise of this Option; provided, however, that, if then required by the rules under Section 16 of the Securities Exchange Act of 1934, as amended ("Section 16 Rules"), the Optionee shall have the right to exercise this Option or require the Company to purchase this Option only if at least six months has elapsed between the Grant Date and the Change in Control date. b. The "Acceleration Price" shall be the excess of the highest of the following over the option price per share set forth in Paragraph 2 (as the same may be adjusted from time to time pursuant to Paragraph 7) on the Change in Control date: (i) the highest reported ask price of the Common Stock, as reported on NASDAQ or the principal securities exchange or market upon which the Common Stock is then listed or traded, on or within the 60 days prior to and including the Change in Control date; (ii) the highest purchase or sale price of the Common Stock reported in a Schedule 13D or an amendment thereto as paid or received on or within the 60 days prior to and including the Change in Control date; (iii) the highest tender offer price paid or offered for the Common Stock on or within the 60 days prior to and including the Change in Control date; and (iv) the highest cash merger or similar price paid or offered for the Common Stock on or within the 60 days prior to and including the Change of Control date. c. A "Change in Control" (and the Change in Control date) shall be the occurrence of any one of the following events (certain defined terms used in this Paragraph 12(c) are defined in Paragraph 12(d)): (i) the first day of receipt by the Company of a Schedule 13D, any amendment thereto or notice of a public announcement confirming that any Person (other than any employee benefit plan of the Company or of any subsidiary of the Company or any Person organized, appointed or established pursuant to the terms of any such benefit plan or any Person who is a key employee of the Company), together with his Affiliates or Associates, is 5 or becomes the Beneficial Owner of securities representing at least 20% of the combined voting power of the Company; (ii) the first day on which two or more of the members of the Board are not Continuing Directors; (iii) the day on which the shareholders of the Company approve (A) any business combination, consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Common Stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, or (B) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company; or (iv) the day on which the shareholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company. d. For purposes of this Paragraph 12: (i) a "Person" shall mean any individual, firm, corporation, partnership, trust or other entity. (ii) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. (iii) a Person shall be a "Beneficial Owner" of securities (A) which such Person beneficially owns, directly or indirectly, or (B) which such Person has the right to acquire (whether such right is exercisable immediately or only with the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing) or upon the exercise of conversion rights, exchange rights, rights, warrants, options or otherwise, other than if such Person acquires or has the right to acquire such securities as an underwriter, broker, dealer or selling group member in connection with the public or private distribution of such securities pursuant to an underwriting or similar agreement with the Company. (iv) "Continuing Directors" means any member of the Board who was a member of the Board on December 20, 1994, and any successor of a Continuing Director who is recommended or elected to succeed the Continuing Director by a majority of the remaining Continuing Directors. 13. Modification. At any time and from time to time the Committee may direct execution of an instrument providing for the modification, extension or renewal of this Option; provided, however, that no such modification, extension or renewal shall (a) confer on the Optionee any right or benefit which could not be conferred on him by the grant of a new option under the Plan at such time or (b) alter, impair or adversely affect this Option or Agreement without the written consent of the Optionee. 6 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Optionee has hereunto affixed his signature as of the day and year first above written. SCHULTZ SAV-O STORES, INC. By: ___________________________ Title:__________________________ ------------------------------- ___________________, Optionee 7 Exhibit 1 SCHULTZ SAV-O STORES, INC. NOTICE OF TRANSFER OF STOCK OPTION This Notice is intended to (i) inform Schultz Sav-O Stores, Inc. (the "Company"), that ________________ ( the "Optionee") has transferred and assigned to the transferee named below (the "Transferee"), a member of the Optionee's "immediate family," as such term is defined in Rule 16a-1(e) of the Securities Exchange Act of 1934, or a trust, partnership or other entity established solely for the benefit of members of the Optionee's immediate family, all of the Optionee's right, title and interest in and to a nonqualified stock option (or portion thereof described below) to purchase ___________ shares of common stock of the Company at a price of $_____ per share, originally granted to the Optionee pursuant to the Nonqualified Stock Option Agreement, dated _____________, 19__, issued by the Company to the undersigned (the "Option") and (ii) request the Company to issue a new Option in the name of the Transferee. No consideration has been or will be received by the Optionee in connection with this transfer. The Option has been validly transferred and assigned by the Optionee to the following: - - -------------------------------- ------------------------------------- Name of Transferee Street Address, City, State, Zip Code - - -------------------------------- If entire Option has not been transferred, number of shares underlying the portion transferred - - --------------------------------- ------------------ Signature of Optionee Date of Transfer - - --------------------------------- ------------------------------------- Signature of Transferee Name By executing this Notice, the Transferee hereby agrees to comply with and be subject to the terms and conditions of the Option. Receipt of this Notice is hereby acknowledged this ___ day of _________, 19__. SCHULTZ SAV-O STORES, INC. By Name: Title: EX-10.15 5 OFFICER ANNUAL INCENTIVE PLAN As Amended Through January 28, 1999 SCHULTZ SAV-O STORES, INC. OFFICER ANNUAL INCENTIVE PLAN 1. Purpose The purpose of the Schultz Sav-O Stores, Inc. Officer Annual Incentive Plan ("Plan") is to (a) reward Participants on an individual and team basis for the achievement of corporate financial goals and objectives which increase the economic value of the Company for the benefit of all shareholders; (b) provide competitive levels of compensation to its executive officers to enable the Company to attract and retain highly qualified and talented individuals who are able to exert a significant impact on the economic value of the Company for the benefit of all shareholders; (c) encourage teamwork and cooperation in the achievement of corporate financial goals and objectives; and (d) recognize differences in the performance of individual Participants. 2. Plan Administration The Compensation and Stock Option Committee of the Board of Directors (the "Committee") shall have full power, authority and responsibility for the design, construction, administration and interpretation of the Plan. The Committee may from time to time or at any time make such decisions and adopt such rules and regulations for the design, construction, administration and interpretation of the Plan as it deems appropriate. Any such decision made by the Committee shall be final, conclusive and binding upon all Participants and any person claiming under or through them. A majority of the members of the Committee shall constitute a quorum. All determinations of the Committee shall be made by at least a majority of a quorum. Any decision or determination reduced to writing and signed by all of the members of the Committee shall be fully as effective as if it had been made by a unanimous vote at a meeting of the Committee duly called and held. 3. Definitions 3.1 "Base Salary" means the dollar amount of a Participant's annual base salary actually earned during the Plan Year, without adjustment for bonuses (hereunder or otherwise), salary deferrals, value of benefits, stock option or other equity-based incentive award grants or exercises, imputed income, special payments, amounts contributed to or earned under the Company's Retirement Savings Plan or its Executive Benefits Restoration Plan or similar existing or future plans. 3.2 "Base Salary Percentage" means the percentage arrived at by dividing a Participant's Base Salary for a specified Plan Year by the aggregate Base Salaries of all Participants for the same Plan Year. 3.3 "Bonus Amount" means a Participant's annual aggregate bonus amount which is calculated in the manner set forth in Section 5.1. 3.4 "Bonus Pool" means the dollar amount of the cash award pool established for the specified Plan Year for the distribution of Bonus Awards to Participants for such Plan Year, calculated as follows: Bonus Pool = 10% of the dollar amount of the Current Year EVA + 5% of the dollar amount of the Incremental EVA + $25,000 for each percentage point increase, if any, in net sales of the Company for the specified Plan Year over net sales of the Company in the preceding Plan Year, each as reflected in the Company's audited financial statements for such Plan Years, subject to adjustment as determined by the Board to take into account extraordinary, unusual or nonrecurring events or circumstances (other than the acquisition of other supermarkets or businesses). 3.5 "Company Performance Bonus Pool" shall be equal to twenty-five percent (25%) of the Bonus Pool for the specified Plan Year. 3.6 "Current Year EVA" means the EVA as calculated for the specified Plan Year. 3.7 "Economic Value Added" or "EVA" means the NOPAT that remains after subtracting the product of the Threshold Rate of Return multiplied by the Investment Amount, expressed as follows: EVA = NOPAT C [Threshold Rate of Return x Investment Amount] EVA may be positive or negative. 3.8 "Incremental EVA" means the Current Year EVA minus the EVA for the prior Plan Year. For purposes of calculating Incremental EVA for the 1995 Plan Year, the EVA for 1994 was $1,128,000. Incremental EVA may not be negative. 3.9 "Individual Performance Bonus" shall have the meaning set forth in Section 5.1. 3.10 "Individual Performance Bonus Pool" shall be equal to seventy-five percent (75%) of the Bonus Pool for the specified Plan Year. 3.11 "Individual Performance Factor" shall have the meaning set forth in Section 5.2. -2- 3.12 "Investment Amount" means the dollar amount of the Company's average investment for the Plan Year, calculated by adding the investment reflected on the Company's financial statements as of the end of each fiscal quarter, and then dividing by four, where investment is determined as follows: Investment = indebtedness for borrowed money + shareholders' investment + obligations under capital leases 3.13 "NOPAT" means the Company's net earnings after tax (without reduction for any Bonus Amounts or Bonus Pool accrued, paid or payable under the Plan), plus interest expense after tax for the Plan Year, all as reflected in the Company's audited financial statements for the Plan Year. 3.14 "Participant" means an eligible executive officer of the Company under Section 4.1 who has been selected to participate in the Plan for the Plan Year pursuant to Section 4.2. 3.15 "Plan Year" means the one-year period coincident with the Company's applicable fiscal year. 3.16 "Threshold Rate of Return" shall be the target percentage rate of return on the Investment Amount for the specified Plan Year established by the Committee at the beginning of each Plan Year based on the Company's weighted average cost of capital. For the 1995 Plan Year, the Threshold Rate of Return has been established by the Committee as 9.1%. 4. Eligibility 4.1 Eligible Executive Officers. In general, all executive officers of the Company (which generally shall include those Company officers listed as such in the Company's annual report to shareholders) at the beginning of a Plan Year will be eligible for participation in the Plan. However, nomination of an executive officer by the Chief Executive Officer and approval by the Committee will be required for actual participation. 4.2 Nomination and Approval. Each Plan Year, the Company's Chief Executive Officer will nominate eligible executive officers to participate in the Plan for the specified Plan Year. The Committee will have the final authority to select the Participants for such Plan Year from among the eligible executive officers nominated by the Company's Chief Executive Officer. Selection normally will take place, and will be communicated to each Participant, prior to or shortly after the beginning of the specified Plan Year. 5. Bonus Amounts; Individual Performance Factors 5.1 Calculation of Bonus Amounts. Each Participant's Bonus Amount for a specified Plan Year will be equal to his pro-rata portion of the Company Performance Bonus Pool plus his Individual Performance Bonus. For any -3- specified Plan Year, a Participant's pro-rata portion of the Company Performance Bonus Pool shall be equal to the product of the Participant's Base Salary Percentage multiplied by the Company Performance Bonus Pool. The Participant's Individual Performance Bonus shall be equal to the product of the Participant's Base Salary Percentage multiplied by the Individual Performance Bonus Pool multiplied by his Individual Performance Factor; provided, however, that the aggregate Individual Performance Bonuses for all Participants for a specified Plan Year may not exceed the Individual Performance Bonus Pool for such Plan Year. If the aggregate Individual Performance Bonuses for all Participants for a specified Plan Year would exceed the Individual Performance Bonus Pool for such Plan Year, then the Committee in its discretion shall adjust the Participants' Individual Performance Bonuses so that such aggregate Individual Performance Bonuses will not exceed the Individual Performance Bonus Pool for such Plan Year. 5.2 Individual Performance Factor Calculation. Each Participant's Individual Performance Factor for a Plan Year will be based on the Participant's accomplishment of individual and/or group financial and/or other goals or objectives established by the Company's Chief Executive Officer, with the approval and ratification of the Committee (or as determined solely by the Committee in the case of the Company's Chief Executive Officer), as of the beginning of the specified Plan Year. Whenever possible, individual performance will be evaluated according to quantifiable or objective benchmarks of success and the level of the Participant's relative achievement of such quantifiable benchmarks. An achievement percentage continuum that ranges from achieving 0% to 150% of the quantifiable benchmark opportunity will be established and the Participant's relative level of achievement of such quantifiable benchmarks will be enumerated accordingly from 0 to 1.5 based on such continuum. After the end of a Plan Year, the Company's Chief Executive Officer, with the approval and ratification of the Committee (or solely by the Committee in the case of the Company's Chief Executive Officer), will evaluate and rate the Participant's performance over the Plan Year and the relative contribution of the Participant to the achievement of the previously established individual or group financial or other performance goals and objectives, and this evaluation will result in the Participant's Individual Performance Factor being determined according to the following schedule: Performance Individual Individual Rating Performance Factor ----------------- ------------------ Very Good 1.5 1.5 Good 1.0 Satisfactory 0.5 Marginal 0.0 -4- 6. Change in Status During the Plan Year 6.1 New Hire or Promotion An executive officer who is newly hired or promoted during a specified Plan Year to an executive officer position which, if held by the Participant at the beginning of the Plan Year, would have otherwise allowed the Participant to be eligible for participation in the Plan will generally not be eligible to receive a Bonus Amount for such Plan Year; provided, however, that the Company's Chief Executive Officer, with the approval and ratification of the Committee (or solely by the Committee in the case of the Company's Chief Executive Officer) may waive this policy and allow such executive officer to receive a pro rata Bonus Amount for such Plan Year based on the percentage of the Plan Year the executive officer was employed in such eligible executive officer position (determined based on the actual number of full months of employment in such executive officer position during the Plan Year divided by 12). Any such waiver of this policy will take into account such factors as the executive officer's contributions to the Company's achievement of corporate financial goals and objectives in such executive officer position and the portion of the Plan Year the individual actually spent in such executive officer position. 6.2 Death, Disability or Retirement If a Participant's employment as an effective officer is terminated during a Plan Year by reason of death, disability or normal or early retirement, the Participant (or his or her heirs or personal representatives in the case of death) will receive a pro rata Bonus Amount for such Plan Year based on the percentage of the Plan Year the Participant was employed in such position (determined based on the actual number of full months of employment of such Participant during the Plan Year divided by 12). 6.3 Termination for any Other Reason If a Participant's employment is terminated during a Plan Year for any reason other than death, disability or retirement, such Participant will generally not be eligible to receive a Bonus Amount for such Plan Year; provided, however, that the Company's Chief Executive Officer, with the approval and ratification of the Committee (or solely the Committee in the case of the Company's Chief Executive Officer) may waive this policy and allow such Participant to receive a pro-rata Bonus Amount for such Plan Year based on the percentage of the Plan Year the executive officer was employed in such eligible executive officer position (determined based on the actual number of full months of employment in such executive officer position during the Plan Year divided by 12). -5- 7. Administrative Provisions 7.1 Amendments and Terminations. The Company's Board of Directors shall have the right to modify or amend this Plan in whole or in part from time to time or at any time, or suspend it or terminate it entirely; provided, however, that no such modification, amendment, suspension or termination may, without the consent of any affected Participants (or beneficiaries of such Participants in the event of death), reduce the rights of any such Participants (or beneficiaries, as applicable) to a payment or distribution of a Bonus Amount already determined and earned under Plan terms in effect prior to such change. A Participant shall not be deemed to have earned or have any right to any Bonus Amount for a Plan Year until completion of that Plan Year and the determination of Bonus Amounts for such Plan Year by the Company's Chief Executive Officer and/or the Committee. 7.2 Effect of Award on Other Employee Benefits. By acceptance of a Bonus Amount, each Participant agrees that such Bonus Amount is special additional compensation and that it will not affect adversely any other employee benefit (e.g., Retirement Savings Plan, Executive Benefits Restoration Plan, life insurance, etc.), in which the Participant participates or to which he is entitled, except as provided in Section 7.4 below. The existence of the Plan or the grant of any Bonus Amounts hereunder shall not restrict the ability of the Committee or the Board to grant any other discretionary bonuses to any executive officers, employees or others outside of the Plan. 7.3 Retirement Programs; Severance Agreements. Bonus Amounts paid under this Plan shall be included in the Participant's compensation for purposes of the Company's Retirement Savings Plan, Executive Benefits Restoration Plan, any other qualified employee benefit plan and any applicable key executive employment and severance agreement with the Company. 7.4 No Right to Continued Employment or Additional Bonus Amounts. A Participant's eligibility for or actual receipt of a Bonus Amount in any specified Plan Year shall not give the Participant any right to continued employment with the Company, and the right and power to dismiss or terminate the employment of the Participant for any reason whatsoever (other than as otherwise specified in any applicable contract of employment between the Participant and the Company) is specifically reserved to the Company. In addition, the selection of an eligible executive officer as a Participant in the Plan for any Plan Year shall not require or infer the inclusion or selection of such person as a Participant for any subsequent Plan Year or, if such person is subsequently so included or selected, shall not require that the same Bonus Amount provided to the Participant under the Plan for an earlier Plan Year be provided to such Participant for the subsequent Plan Year. -6- 7.5 Adjustments to Performance Goals. When a performance goal or objective is based on Economic Value Added or other quantifiable financial or accounting measures, it may be appropriate to exclude certain items in order to properly measure performance. The Committee in its discretion will decide those items that shall be considered in adjusting actual results. For example, some types of items that may be considered for exclusion are: a. Extraordinary Items. Any gains or losses which will be treated as extraordinary in the Company's financial statements under generally accepted accounting principles. b. Unanticipated Nonrecurring Non-Ordinary Course Items. Unanticipated, nonrecurring, nonordinary course items such as: (i) Gains or losses from the sale or disposal of real estate or property. (ii) Gains resulting from insurance recoveries when such gains relate to claims filed in prior years. (iii) Losses resulting from natural catastrophes, when the cause of the catastrophe is beyond the control of the Company and did not result from any failure or negligence on the Company's part. (iv) Changes in accounting policies or practices. 7.6 Payment of Bonus Amounts. The Bonus Amounts payable for a Plan Year as determined by the Chief Executive Officer and/or Committee shall be distributed by the Company as soon as practicable after the date of the first public release of the Company's complete audited financial statements for such Plan Year. 8. Miscellaneous 8.1 Indemnification. Each person who is or who shall have been a member of the Committee or of the Company's Board of Directors, shall not be liable for, and shall be indemnified and held harmless by the Company against and from, any and all loss, cost, liability or expense (including attorneys' fees and disbursements) that may be imposed upon or incurred by him or her in connection with any claim, action, suit or proceeding to which he or she may be a party by reason of any action taken or failure to act under or pursuant to the Plan. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification, advancement of expenses or reimbursement to which such persons may be entitled under the Company's Articles of Incorporation, By-Laws, Indemnity Agreements, as a matter of law under the Wisconsin -7- Business Corporation Law, under applicable insurance policies or otherwise, or any other power or authority that the Company may have to indemnify or reimburse them or hold them harmless. 8.2 Expenses of the Plan. The expenses of administering this Plan shall be borne by the Company 8.3 Withholding Taxes. The Company shall deduct from all Bonus Amounts paid or payable under the Plan any federal or state taxes required by law to be withheld with respect to such payments. 8.4 Non-Transferrable Benefits. Bonus Amounts (or any interests therein) paid or payable under the Plan are personal to Participants and are non-transferrable and non-assignable during the life of a Participant. 8.5 Unsecured Rights. The right of any Participant to receive a Bonus Amount under the Plan when determined and earned shall be an unsecured claim against the general assets of the Company and the Participant shall have no rights in or against any specific assets of the Company as a result of participation hereunder. 8.6 Powers of Company Not Affected. The existence of the Plan shall not affect in any way the right or power of the Company, the Board of Directors or its shareholders to make or authorize any or all adjustments, recapitalization, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business or any other corporate act or proceeding, whether of a similar character or otherwise. 8.7 Governing Law. This Plan shall be construed in accordance with and governed by the laws of the State of Wisconsin. 8.8 Effective Date. The effective date of the Plan is January 1, 1995. -8- EX-10.16 6 LOAN AGREEMENT EXHIBIT 10.16 LOAN AGREEMENT THIS AGREEMENT is made as of the 3rd day of December, 1992, by and among SCHULTZ SAV-O STORES, INC., a Wisconsin corporation ("Borrower"), M&I MARSHALL & ILSLEY BANK, a Wisconsin banking corporation ("M&I") and FIRSTAR BANK MILWAUKEE, NATIONAL ASSOCIATION, a national banking association ("Firstar") (collectively, the "Banks" and individually, a "Bank"). Unless otherwise indicated herein, capitalized terms shall have the meanings set forth in Section 9 hereof. WITNESSETH: WHEREAS, Borrower has available from M&I a $9,000,000 revolving credit facility (the "Existing M&I Facility") evidenced by a promissory note (the "Existing M&I Note") in the principal amount of $9,000,000; and WHEREAS, Borrower has available from Firstar a $7,000,000 revolving credit facility (the "Existing Firstar Facility" and collectively, with the Existing M&I Facility, the "Existing Facilities") evidenced by a promissory note (the "Existing Firstar Note") in the principal amount of $7,000,000; and WHEREAS, Borrower has requested that the Banks amend and replace the Existing Facilities with a $9,000,000 revolving line of credit facility from M&I (the "M&I Line of Credit") and a $7,000,000 revolving line of credit facility from Firstar (the "Firstar Line of Credit" and collectively, with the M&I Line of Credit, the "Lines of Credit"); and WHEREAS, Banks are willing to extend the Lines of Credit to Borrower, but only on the terms and conditions hereinafter set forth and in reliance on the representations and warranties of Borrower herein contained. NOW, THEREFORE, in consideration of the premises and mutual agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Lines of Credit. M&I and Firstar each agree to extend to Borrower revolving credit loans (the "Loans") under the M&I Line of Credit and the Firstar Line of Credit, respectively, on the terms and conditions hereinafter set forth in this Agreement. All loans made to Borrower pursuant to the Existing M&I Facility and the Existing Firstar Facility which are outstanding as of the date hereof shall be deemed to be for purposes of this Agreement Loans made pursuant to the M&I Line of Credit and the Firstar Line of Credit, respectively, as of the date hereof. (a) Interest. Interest shall accrue on the unpaid principal amount of the Loans from time to time outstanding at a rate per annum equal to (i) the Prime Rate or (ii) the Offered Rate from time to time elected by Borrower, with such rate to be adjusted, and with each such adjustment to become effective, with each election by Borrower at the Prime Rate or the Offered Rate, as the case may be. If all or a portion of the principal amount of any Loan made hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), any overdue principal amount thereof shall bear interest at a rate per annum equal to the Prime Rate plus two percent (2%). Interest shall be payable monthly in arrears on the first day of each month and at maturity. Interest shall be computed on the basis of a 360-day year for the actual number of days elapsed. Any change in the interest rate resulting from a change in the Prime Rate or the Offered Rate shall become effective as of the opening of business on the day on which such change in the Prime Rate or the Offered Rate shall become effective. Each Bank is authorized to debit Borrower's account at such Bank (Account No. 39-4440 in the case of M&I, and Account No. 12520901 in the case of Firstar) by the amount of any interest payment which is due to such Bank. (b) Master Notes. Loans made by M&I and Firstar, respectively, under the M&I Line of Credit and the Firstar Line of Credit, respectively, shall be evidenced by two promissory notes of Borrower substantially in the form of Exhibits A-l and A-2 (the "Master Notes") payable to the order of M&I and Firstar, respectively, and each representing in the aggregate the obligation of Borrower to pay to M&I and Firstar, respectively, the lesser of (a) such Bank's Line of Credit or (b) the aggregate unpaid principal amount of all Loans made by such Bank, with interest thereon as provided in subsection 1(a). The Master Notes shall be dated as of the date of this Agreement and shall be stated to mature on April 30, 1995 (the "Maturity Date"). Upon the execution and delivery of the Master Notes by Borrower to Banks, the Existing Notes shall be superseded and replaced by the Master Notes. (c) Statement of Account. Each Bank shall record on its records all Loans made to Borrower by such Bank and accrued interest thereon. Each Bank shall also record all payments made by Borrower to such Bank. At least once a month, each Bank may render a statement of account showing as of the date thereof the indebtedness owed to such Bank on its Line of Credit, debited and credited as set forth above. Unless Borrower notifies such Bank in writing of an objection to said statement within thirty (30) days of the receipt of said statement, said statement shall be deemed correct and accepted by Borrower and conclusively binding upon Borrower. (d) Borrowings; Payments. All Loans to Borrower under the Lines of Credit shall be made only in amounts not less than $50,000. All payments by Borrower to a Bank with respect to repayment of Loans under such Bank's Line of Credit shall be made only in amounts of not less than $50,000; provided that on the Maturity Date Borrower shall repay Banks all indebtedness outstanding under the Lines of Credit. (e) Procedure to Change Amount Outstanding. Duly authorized officers, employees or agents of Borrower designated by Borrower to Banks in writing, may from time to time, either orally or in writing, contact a designated officer or employee of either Bank, requesting that such Bank increase or decrease the total 2 principal amount outstanding under such Bank's Line of Credit; provided that at no time shall the principal amount outstanding under such Bank's Line of Credit exceed such Bank's Total Commitment. Upon compliance with the terms and conditions hereof, such Bank shall immediately increase or decrease the principal balance then outstanding under its Line of Credit by crediting or debiting, whichever is appropriate, the requested amount from the Borrower's account at such Bank referred to in subsection 1(a), above. All such requests must be received by such Bank no later than 2:00 p.m. All requests received after that time shall be processed as if received on the following business day. Each oral request shall be confirmed in writing by the authorized person making the request and delivered to such Bank in the manner provided in subsection 10(e), below. Notwithstanding anything herein to the contrary, neither Bank shall have an obligation to increase the principal amount outstanding under its Line of Credit after the Maturity Date, or if any event shall have occurred which either of itself or with the lapse of time or the giving of notice, or both, would constitute an Event of Default under this Agreement. (f) Reduction of Total Commitments. Borrower may, upon not less than ten (10) days prior written notice to the affected Bank, reduce such Bank's Total Commitment in integral multiples of $100,000.00; provided, such reduction shall be accompanied by a prepayment of Loans made hereunder by such Bank, together with accrued interest on the amount so prepaid to the date of such prepayment, to the extent, if any, that the amount of Loans by such Bank then outstanding exceed the amount of such Bank's Total Commitment as then reduced. Once reduced pursuant to this provision, neither Bank's Total Commitment may thereafter be increased by Borrower. 2. Availability Fee. As additional compensation to the Banks for their agreement to extend the Lines of Credit to Borrower, Borrower agrees to pay to each Bank an availability fee (the "Availability Fee") quarterly in arrears on the first day of each quarterly period (or portion thereof) commencing January 1, 1993 and at maturity. The Availability Fee due to each Bank for any quarterly period (or portion thereof) shall be an amount equal to the product of (i) the average daily unused amount of such Bank's Line of Credit available for disbursement during such period multiplied by (ii) 0.000625. Each Bank's Availability Fee shall be payable quarterly in arrears commencing January 1, 1993 and every three months thereafter on the first business day of each calendar quarter until the Maturity Date. 3. Representations and Warranties. In order to induce the Banks to enter into this Agreement and to make the loans herein provided for, and in recognition of the fact that the Banks are acting in reliance thereupon, Borrower hereby covenants, represents and warrants as follows: (a) Corporate Existence; Corporate Power. Borrower is a corporation duly organized, validly existing, and in good standing under the laws of the State of Wisconsin and is duly authorized under all applicable provisions of law to 3 carry on its business as presently conducted. Borrower is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of its property or the conduct of its business requires such qualification and the failure to so qualify either individually or in the aggregate would have a material adverse effect on Borrower's financial condition or the conduct of its business. Borrower has the corporate power and authority to enter into, deliver, issue and perform all of its obligations under this Agreement and the Master Notes and to borrow hereunder. (b) No Legal Bar; Enforceable Obligations. The execution, delivery and performance of this Agreement and the Master Notes and any other agreement, certificate or instrument delivered by Borrower to Banks in connection with this Agreement, prospective borrowings hereunder and use of the proceeds thereof by Borrower (i) have been duly authorized by all necessary corporate action, (ii) are not at variance with or in contravention of any provisions of the Articles of Incorporation and By-Laws of Borrower, (iii) will not violate any indenture, contract or agreement to which Borrower is a party or to which it is subject or any statute, rule or regulation binding upon Borrower, (iv) will not require any consent or approval of Borrower's stockholders and (v) will not result in, or require, the creation or imposition of any Lien on any of Borrower's properties or revenues pursuant to any requirement of law or contractual obligation of Borrower except as provided in this Agreement. This Agreement, the Master Notes and any other agreement, certificate or instrument delivered by Borrower to Banks in connection with this Agreement when duly executed and delivered on behalf of the Borrower will constitute legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their terms. (c) Litigation. Except as set forth on Schedule 1 hereto, Borrower is not a party to any litigation or administrative proceedings, nor so far as it is known by Borrower is any litigation or administrative proceeding threatened against it which would, if adversely determined, cause any material adverse change in Borrower's financial condition or in the conduct of its business. (d) Financial Condition. All copies of financial statements, documents, contracts, agreements and assignments which Borrower has furnished to Banks are true and correct in all material respects. There has been no material change in the property or business operations of Borrower since the date of the last financial statement delivered to Banks, except pursuant to the conduct of its ordinary business, and except as shall have been disclosed in writing by Borrower to Banks prior to the date of execution of this Agreement. The Banks have previously been provided with true, correct and complete copies of Note Agreements dated May 31, 1983 and August 1, 1986 by and between Borrower and Prudential Insurance Company of America and all amendments thereto (collectively, the "Note Agreements"). The Note Agreements are in full force and effect as of the date hereof and Borrower is not in default of any of its obligations under either of the Note Agreements. 4 (e) Taxes. Borrower has paid all federal, state and local taxes which are required to be paid by it (except for taxes being contested in good faith by appropriate proceedings and as to which reserves have been established by Borrower in accordance with GAAP consistently applied, which reserves and are set forth in Borrower's financial statements). (f) Securities Laws; Investment Company Act; Board Regulations. Borrower has filed and will file when due all statements, if any, which it may be required to file under the provisions of any state or federal securities laws or regulations. Borrower is not an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended, nor is Borrower engaged, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time in effect. (g) Ownership of Property. Borrower owns all of its assets that appear on its balance sheet free and clear of any Liens, except as previously disclosed in writing by Borrower to Banks prior to the date hereof and except for financing leases referred to in Borrower's financial statements. (h) Environmental Laws. Except as otherwise provided on Schedule 2 hereto, (i) Borrower is in compliance with all Environmental Laws and all requirements of law relating to pollution and environmental regulations in the respective jurisdictions where Borrower is presently doing business or conducting operations except for those matters where the failure to comply with all Environmental Laws and such requirements of law would not have a material adverse effect on the financial condition or results of operations of Borrower; (ii) to Borrower's knowledge after reasonable investigation, no Person has caused or permitted materials to be stored, deposited, treated, recycled or disposed of on, under or at any real estate owned, leased or occupied by Borrower, which materials, if known to be present, would require cleanup, removal or some other remedial action under Environmental Laws; (iii) to Borrower's knowledge after reasonable investigation, there are not now, nor have there ever been, tanks or other facilities on, under, or at any real estate owned or occupied by Borrower which contained materials which, if known to be present in soils or ground water, would require cleanup, removal or some other remedial action under Environmental Laws; (iv) to Borrower's knowledge after reasonable investigation, there are no conditions existing currently or likely to exist during the term of this loan which would subject Borrower to damages, penalties, injunctive relief or cleanup costs under any Environmental Laws or which require or are likely to require cleanup, removal, remedial action or other response pursuant to Environmental Laws by Borrower; and (v) Borrower is not subject to any judgment, decree, order or citation related to or arising out of Environmental Laws and has not been named or listed as a potentially responsible party by any governmental body or agency in a matter arising under any Environmental Laws. Borrower has all permits, licenses and approvals required 5 under Environmental Laws and has paid all fees relating thereto and is in compliance with all terms and conditions thereof. (i) ERISA. All Plans maintained by Borrower are in compliance in all material respects with the applicable provisions of ERISA; Borrower has not incurred any "accumulated funding deficiency" within the meaning of Section 302 of ERISA in connection with any Plan; and there has been no "reportable event" within the meaning of Section 4034(b) of ERISA for any Plan the occurrence of which would have a material adverse effect on Borrower, nor has Borrower incurred any material liability to the Pension Benefit Guaranty Corporation. 4. Affirmative Covenants of Borrower. Borrower covenants and agrees that so long as the Lines of Credit remain in effect, any Master Note remains outstanding and unpaid or any amount is owed to the Banks, Borrower shall: (a) Financial Statements. Deliver to each Bank: (i) as soon as practicable and in any event within 45 days after the end of each fiscal quarter in each fiscal year, statements of earnings and cash flows of the Borrower for the period from the beginning of the current fiscal year to the end of such quarterly period, and a balance sheet of Borrower as at the end of each such quarterly period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year, all in reasonable detail and certified by an authorized financial officer of Borrower, subject to changes resulting from year-end adjustments; (ii) as soon as practicable and in any event within 90 days after the end of each fiscal year, a statement of earnings, reconciliation of retained earnings, a statement of cash flows and a balance sheet of Borrower as at the end of such year, setting forth in each case in comparative form corresponding figures from the preceding annual audit, all in reasonable detail and accompanied by an opinion of independent public accountants of recognized standing selected by Borrower which opinion shall be without qualification as to the compliance of such statements and balance sheet with GAAP; (iii) promptly upon transmission thereof, copies of all such financial statements, proxy statements, notices and reports as it shall send to its stockholders and copies of all registration statements (without exhibits) and all reports which it files with the Securities and Exchange Commission (or any governmental body or agency succeeding to the functions of the Securities and Exchange Commission); (iv) promptly upon receipt thereof, a copy of all other reports submitted to Borrower by independent accountants in connection with any annual, interim or special audit made by them of the books of Borrower; 6 (v) Each Bank may at any time, and without notice to or consent of Borrower, deliver to any financial institution which is a participant in the loans which are the subject of this Agreement, copies of all financial statements, reports, or any other documents delivered to Banks hereunder; provided, however, that neither Bank shall participate the loans which are the subject of this Agreement to any third party (other than an affiliate of such Bank or its holding company) without the prior written consent of the Borrower and the other Bank party hereto; and (vi) with reasonable promptness, such other financial data as the Banks may reasonably request. Together with each delivery of financial statements required by clauses (i) and (ii), above, Borrower will deliver to each of the Banks a completed Officer's Certificate substantially in the form attached hereto as Exhibit B. Together with each delivery of financial statements required by clause (ii), above, Borrower will deliver to the Banks a letter report of said accountants stating that, in making the audit necessary to the opinion with respect to such financial statements, they have obtained no knowledge of any Event of Default or Default, or, if any such Event of Default or Default exists, specifying the nature and period of existence thereof. Borrower also covenants that forthwith upon the President or Chief Financial Officer of Borrower obtaining knowledge of an Event of Default or Default, it will deliver to the Banks an Officer's Certificate specifying the nature thereof, the period of existence thereof, and what action Borrower proposes to take with respect thereto. Any management letters or other material non-public financial information provided to the Banks by Borrower pursuant to this Agreement shall be used only by the Banks, their respective employees, agents and representatives, and their respective accountants and auditors in connection with the administration of this Agreement and the indebtedness hereunder, and otherwise shall be held in confidence; provided, however, that nothing herein contained shall be deemed to prohibit any disclosure to regulatory or governmental authorities required by applicable law or regulation. (b) Books and Records; Inspection of Property. Keep proper books of record and account; permit any person designated by the Banks (at Banks' expense) to visit and inspect any of the properties of Borrower, to examine the corporate books and financial records of Borrower and make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of Borrower with the principal officers of Borrower, all at such reasonable times and as often as the Banks may reasonably request. (c) Maintenance of Property Insurance. Keep its properties, whether owned or leased, in good condition, repair and working order, other than property no longer deemed by Borrower necessary for the conduct of its business; maintain 7 purchased insurance or self-insurance reserves in such amounts and against such liabilities and hazards as customarily is maintained by other companies operating similar businesses and together with each delivery of financial statements under clause (ii) of subsection 4(a) it will, upon the Banks' request, deliver an Officer's Certificate specifying the details of such insurance in effect. (d) Taxes. Pay and discharge all lawful taxes, assessments and governmental charges upon it or against its properties prior to the date on which penalties are attached thereto, unless and to the extent only that such taxes are contested in good faith and by appropriate proceedings by Borrower and Borrower has established appropriate reserves for the payment of such taxes in accordance with GAAP. 5. Negative Covenants. Borrower covenants and agrees that so long as the Lines of Credit remain in effect, any Master Note remains outstanding and unpaid or any amount is owed the Banks, Borrower shall not, directly or indirectly: (a) Working Capital. Permit Working Capital at any time to be less than $5,000,000. (b) Tangible Net Worth. Permit Tangible Net Worth at any time to be less than $32,000,000. (c) Total Liabilities to Net Worth. Permit the ratio of Total Liabilities to Tangible Net Worth at any time to exceed 2.0 to 1.0. (d) Fixed Charge Coverage. Permit the Fixed Charge Coverage Ratio at any time to be less than 2.0 to 1.0 (e) Total Liabilities Plus Contingent Liabilities to Tangible Net Worth. Permit the ratio of the sum of Total Liabilities plus Contingent Liabilities to Tangible Net Worth at any time to exceed 2.5 to 1.0. (f) Restricted Payments. (i) Pay or declare any dividend on any class of its stock, or (ii) make any other distribution on account of any class of its stock, or (iii) redeem, purchase or otherwise acquire, directly or indirectly, any shares of its stock (all of the foregoing being herein called "Restricted Payments") except out of Net Earnings Available For Restricted Payments. There shall not be included in Restricted Payments or in any computation of Net Earnings Available For Restricted Payments: (x) dividends paid, or distributions made, in stock of Borrower; or (y) exchanges of stock of one or more classes of Borrower, except to the extent that cash or other value payable by Borrower is involved in such exchange; or (z) retirements of stock out of the proceeds of the simultaneous sale of other stock. (g) Liens. Create, assume or suffer to exist any Lien upon any of its property or assets, whether now owned or hereafter acquired, except: 8 (i) Liens for taxes not yet due or which are being actively contested in good faith by appropriate proceedings; (ii) other Liens incidental to the conduct of its business or the ownership of its property and assets which were not incurred in connection with the borrowing of money or the obtaining of advances or credit, and which do not in the aggregate materially detract from the value of its property or assets or materially impair the use thereof in the operation of its business; (iii) Liens presently existing that are described in Schedule 3 hereto; (iv) Liens in connection with Capital Lease Obligations; (v) Liens on life insurance policies owned by Borrower securing policy loans obtained from the insurers under such policies, provided that (A) the aggregate amount borrowed on each policy shall not exceed the loan value thereof, and (B) Borrower shall not incur any liability to repay any such loan; (vi) other Liens placed upon property being acquired by Borrower to secure a portion of the purchase price thereof securing Debt permitted by clause (iv) of subsection 5(h); (vii) liens in favor of a lender or investor which are granted in connection with a transaction permitted by subsection 5(1); and (viii) other Liens; provided the aggregate principal amount of indebtedness secured by such Liens and incurred in any fiscal year of Borrower shall not exceed $1,000,000; provided, however, that if Borrower does create, assume or suffer to exist a Lien on any of its property other than as permitted above, it will make or cause to be made an effective provision whereby all indebtedness under this Agreement will be secured by such liens equally and ratably with any and all other indebtedness thereby secured so long as any such other indebtedness shall be secured. Borrower covenants that it will, and will cause its independent public accountants to, make specific reference to the provisions of this paragraph in all financial statements of Borrower hereafter delivered to any creditor, prospective creditor or credit rating agency. (h) Debt. Create, incur, assume or suffer to exist any Funded Debt, except: (i) Funded Debt represented by the Master Notes; 9 (ii) Funded Debt of Borrower not exceeding an aggregate principal amount of $1,530,000 at any time outstanding pursuant to the Note Agreements; (iii) Capital Lease Obligations which are subject to limitations specified in subsection 5(k); (iv) other Funded Debt of Borrower not exceeding an aggregate principal amount of $4,000,000 at any time outstanding; and (v) Funded Debt incurred in connection with Liens permitted by subsection 5(g)(viii). (i) Loans, Advances, Investments and Contingent Liabilities. Make or permit to remain outstanding any loan or advance to, or guarantee, endorse or otherwise be or become contingently liable, directly or indirectly, in connection with the obligations, stock or dividends of, or own, purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any Person, except that Borrower may: (i) acquire and own stock, obligations or securities received in settlement of debts (created in the ordinary course of business) owing to Borrower; (ii) own, purchase or acquire prime commercial paper (or unrated commercial paper issued by corporate obligors which support the issuance of such commercial paper through the availability of a line of credit provided by a United States commercial bank having capital resources in excess of $50,000,000) and certificates of deposit due within one year from the date of purchase and bank repurchase agreements, in United States commercial banks (having capital resources in excess of $50,000,000), in each case payable in the United States in United States dollars, obligations of the United States Government or any agency thereof, and obligations guaranteed by the United States Government; (iii) endorse negotiable instruments for collection in the ordinary course of business; (iv) make or permit to remain outstanding travel and other like advances to officers and employees in the ordinary course of business; (v) guarantee, endorse or otherwise be or become contingently liable, directly or indirectly, in connection with the obligations of any other person if Borrower shall be and remain at all times in compliance with subsection 5(e); and 10 (vi) make or permit to remain outstanding loans, advances and investments in Topco, provided that the aggregate amount of all such loans, advances and investments (at cost) at any time outstanding shall not exceed an amount necessary for Borrower to maintain its membership in Topco in good standing; (j) Merger and Sale of Assets. Merge or consolidate with any other corporation or sell, lease or transfer or otherwise dispose of all or a substantial part of its assets, or assets which shall have contributed more than 20% of Net Earnings for any of the three fiscal years then most recently ended, to any Person. (k) Lease Rentals. Enter into, or permit to remain in effect, any agreements to rent or lease (as lessee) any real or personal property (except transportation equipment) for initial terms (including options to renew or extend any term, whether or not exercised) of more than one year if after giving effect thereto the aggregate amount of all payments in any fiscal year payable by Borrower to lessors under all such leases, minus the aggregate of all rentals received by Borrower in such fiscal year from all sub-lessees would exceed 1.3% of gross consolidated sales of Borrower and its Subsidiaries for the preceding fiscal year. (l) Sale and Lease-Back. Enter into any arrangement with any lender or investor or to which such lender or investor is a party providing for the leasing by Borrower of real or personal property which has been or is to be sold or transferred by Borrower to such lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such property or rental obligations of Borrower except to the extent that any such arrangement with a lender or investor is made in connection with the development by the Borrower of a new Retail Outlet and such arrangement is completed within 18 months after the opening of such new Retail Outlet. (m) Sale or Discount of Receivables. Sell with recourse, or discount or otherwise sell for less than the face value thereof, any of its notes or accounts receivable. (n) Restrictions on Transactions With Stockholders. Directly or indirectly, purchase, acquire or lease any property (other than shares of stock of Borrower) from, or sell, dispose of or lease any property (other than shares of stock of Borrower) to, or otherwise deal with, in the ordinary course of business or otherwise (i) any Substantial Stockholder, or (ii) any corporation in which a Substantial Stockholder owns 5% or more of the outstanding voting stock, except that such Substantial Stockholder may be a director, officer or employee of Borrower and may be paid reasonable compensation in connection therewith. 11 (o) Certain Contracts. Enter into or be a party to: (i) any contract providing for the making of loans, advances or capital contributions to any Person (except where the obligation is limited to a fixed maximum amount which is within the limitations of subsection 5(i)), or for the purchase of any property from any Person, in each case in order to enable such Person to maintain working capital, net worth or any other balance sheet condition or to pay debts, dividends or expenses; or (ii) any contract for the purchase of materials, supplies or other property or services if such contract (or any related document) requires that payment for such materials, supplies or other property or services shall be made regardless of whether or not delivery of such materials, supplies or other property or services is ever made or tendered; or (iii) any contract for the sale or use of materials, supplies or other property, or the rendering of services, if such contract (or any related document) requires that payment for such materials, supplies or other property, or the use thereof, or payment for such services, shall be subordinated to any indebtedness (of the purchaser or user of such materials, supplies or other property or the Person entitled to the benefit of such services) owed or to be owed to any Person; provided however, that nothing contained in this clause (iii) shall prohibit the Borrower from becoming a general unsecured creditor of another Person in the ordinary course of business or shall prevent the Borrower from agreeing to subordinate obligations payable by its franchisees in favor of third party lenders, as and to the extent required by such lenders; or (iv) any other contract which, in economic effect, is substantially equivalent to a guarantee, except as permitted by, and within the limitations of, subsection 5(e). (p) Letters of Credit for Worker's Compensation. Have outstanding letters of credit issued for the account of Borrower for the benefit of various states to secure the payment of worker's compensation liability in such states in an aggregate amount available to be drawn thereunder in excess of $10,000,000. (q) Change in Control. Permit any Person or group of Persons acting in concert (other than affiliates, including without limitation, employee benefit plans, of the Borrower) to acquire more than 30% of the Borrower's outstanding voting securities, or permit any two or more nominees proposed by the Borrower for election to its board of directors to be defeated in such election pursuant to any single vote of shareholders of the Borrower. 12 6. Event of Default. An "Event of Default" shall be deemed to have occurred if: (a) Any representation or warranty made by Borrower in this Agreement, or in any certificate of Borrower furnished to Banks hereunder, shall prove to have been incorrect in any material respect as of the time when made. (b) If Borrower shall fail to pay any interest or principal on any Loan when due hereunder, fail to pay any Availability Fees when due hereunder, or fail to pay when due any principal or interest on any of its other indebtedness, if any, to Banks, whether at maturity or by acceleration or otherwise, and such failure shall continue uncured for a period of ten (10) days after the applicable due date. (c) Borrower shall default in the performance or observance of any covenant or agreement contained in this Agreement or in any other agreement between Borrower and Banks; provided, however, that a breach in the performance or observance of an affirmative covenant or agreement contained in Section 4 of this Agreement shall only constitute a default if the breach remains uncured for a period of thirty (30) days after written notice thereof from Banks to Borrower. (d) Borrower shall: (i) Apply for or consent to the appointment of a receiver, trustee or liquidator of Borrower or of all or substantial part of the assets of Borrower; (ii) Be unable to, or admit in writing its inability to, pay its debts as they mature; (iii) Make a general assignment for the benefit of creditors; (iv) Be adjudicated bankrupt or insolvent; (v) File a voluntary petition in bankruptcy or a petition or an answer seeking reorganization or an arrangement with creditors or to take advantage of any insolvency law, or an answer admitting the material allegations of a petition filed against Borrower in any bankruptcy, reorganization or insolvency proceeding; or (vi) Corporate action shall be taken by Borrower for the purpose of effecting any of the foregoing. (e) A petition for an order, judgment or decree shall be filed, without the application, approval or consent of Borrower, with any court of competent jurisdiction, seeking reorganization of Borrower, or the appointment of a receiver, 13 trustee or liquidator of Borrower or of all or a substantial part of the assets of Borrower, and such petition shall remain undismissed for any period of sixty (60) days. (f) An Event of Default (as such term is defined in the Note Agreements) shall have occurred (regardless of whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or otherwise) under the Note Agreements. (g) Borrower shall default in the payment of principal or interest on any obligation (other than obligations hereunder or under the Note Agreements) for borrowed money in a principal amount greater than or equal to $250,000 beyond any period of grace provided with respect thereto or in the performance of any other agreement, term or condition contained therein or in any agreement or security interest relating to any such obligation, if the effect of such default is to cause or permit the holder or holders of such obligation (or a trustee or agent on behalf of such holder or holders) to cause such obligation to become due prior to its stated maturity. (h) A final judgment which, together with other outstanding final judgments against it, exceeds an aggregate of $100,000 shall be entered against Borrower and remains outstanding and unsatisfied or unstayed after sixty (60) days from the date of entry thereof, unless an appeal has been taken and perfected within the time provided by law and suitable bond has been provided or other agreement made to stay execution of such judgment. 7. Rights Upon Default. If the Events of Default specified in Sections 6(d) and 6(e) shall occur, the Banks' obligations to make Loans hereunder shall immediately terminate and any Loan (with accrued interest thereon) and other amounts owing under this Agreement and the Master Notes shall immediately become due and payable. If any other Event of Default shall occur, the Banks may (i) by notice of default to Borrower, declare the Banks' obligations hereunder terminated forthwith, whereupon such obligations shall terminate, and/or (ii) by notice of default to Borrower, declare any Loan and all amounts owing hereunder and under the Master Notes to be due and payable forthwith, whereupon the same shall become immediately due and payable. Except as expressly provided above in this Section, presentment, demand, protest and further notice of any kind are hereby expressly waived. Notwithstanding the foregoing, the Banks' obligations to maintain the confidentiality of any nonpublic financial information of Borrower provided to Banks pursuant to Section 4(a) of this Agreement shall survive the termination of its other obligations hereunder. In the event of any occurrence of any Event of Default, Borrower shall pay all costs and expenses which may be incurred by Banks with respect thereto and with respect to the collection of any amounts due Banks pursuant hereto or the enforcement of any provisions hereof, including reasonable attorneys' fees and expenses of litigation, and all such sums shall be and become part of the indebtedness pursuant to this Agreement. In addition to and not in lieu of any other right or remedy they may have at any time, Banks at any time and from time to time at their election, may (but they shall not be required to) do or perform or comply with 14 or cause to be done or performed or complied with anything which Borrower may be required to do or comply with under this Agreement if Borrower shall fail to do so; Borrower shall reimburse Banks upon demand for any reasonable cost or expense Banks may pay or incur in such respect, together with interest thereon at the Prime Rate plus two percent (2%) from the date of such demand until paid. The failure of Banks at any time or from time to time to exercise any right or remedy, whether arising from or by virtue of any event of default or otherwise, shall not constitute a waiver of any such right or remedy and shall not impair the right of Banks to exercise such right or remedy or any other right or remedy thereafter or to insist upon strict performance. No waiver of any right or remedy by Banks shall be valid or effective unless made in writing and signed by an officer of each Bank. Any effective waiver of any right or remedy shall not be deemed to constitute a waiver of any other right or remedy then existing or which may thereafter arise or accrue. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Upon the occurrence of any Event of Default, and pursuant to the provisions of this Section, Banks may sue to enforce the obligations of Borrower pursuant to this Agreement. 8. Conditions of Disbursement. Banks shall be under no obligation to make any advances under the Lines of Credit pursuant to this Agreement unless the following conditions shall have been fulfilled: (a) The representations and warranties of Borrower contained herein shall be true at the time of the initial advance and at the time of each subsequent advance under this Agreement as though such representations and warranties were made at such time. (b) Borrower shall have performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by it. (c) Prior to the initial advance under this Agreement Borrower shall have delivered to Banks an opinion in writing of Borrower's legal counsel, which counsel shall be acceptable to Banks, dated on or after the date of this Agreement, to the effect that (i) Borrower is a corporation duly organized and existing under the laws of the State of Wisconsin, and has the power and authority to enter into this Agreement and to make borrowings and execute and deliver the Master Notes as provided for herein; (ii) the execution and delivery of this Agreement and compliance with the terms hereof by Borrower and the execution and delivery of the Master Notes pursuant hereto are not at variance or in contravention of any provision of the Articles of Incorporation, or By-Laws of Borrower, or any indenture, contract or agreement of which such counsel has knowledge after due inquiry, to which Borrower is a party or to which it is subject (or that any such contravention has been appropriately waived), or any statute, rule or regulation binding upon Borrower; (iii) all corporate action necessary to authorize Borrower to enter into this Agreement, to perform its obligations hereunder, including the obtaining of the Lines of Credit hereunder, and to execute and deliver any and all documents necessary to comply with the provisions of this Agreement has been taken; (iv) this Agreement and the Master Notes have been duly executed by Borrower; 15 (v) this Agreement and the Master Notes constitute the legal, valid and binding obligations of Borrower and are enforceable against Borrower in accordance with their terms, except for bankruptcy, insolvency, or the grant of equitable remedies and other standard exceptions; (vi) no consent of any public body, agency, commission or board is necessary to the making and assumption of obligations hereunder by Borrower; and (vii) so far as it is known to such counsel and except as set forth in Schedule 1 to this Agreement, there is no material litigation, and there are no material proceedings by any public body, agency or authority, pending or threatened against Borrower. (d) Borrower shall furnish to Banks copies of its most recent financial statements prepared in accordance with the provisions of subsection 4(a). (e) Borrower shall furnish Banks with certified resolutions of its Board of Directors authorizing its execution and delivery of this Agreement and the performance of its obligations and covenants contained herein. (f) Borrower shall furnish Banks with a certificate of incumbency with respect to the persons authorized to execute this Agreement, the Master Notes, and all other documents to be executed in connection with the transactions which are the subject of this Agreement. 9. Definitions. For purposes of this Agreement, the following terms shall have the following meanings: (a) "Capital Lease Obligations" shall mean all rental obligations which, under GAAP, are or will be required to be capitalized on the books of Borrower (including, without limitation, all existing rental obligations which are required to be so capitalized for calendar or fiscal years beginning after December 31, 1980), in each case taken at the amount thereof accounted for as indebtedness (net of interest expense) in accordance with such principles. (b) "Contingent Liability" shall mean, as to any Person, any guarantee of indebtedness or any other obligation of any second Person or any assurance with respect to the financial condition of any second Person, whether direct, indirect or contingent, including, without limitation, (i) any purchase or repurchase agreement or other arrangement of whatever nature having the effect of assuring or holding harmless any third Person against loss with respect to any obligation of such second Person and (ii) any Customer Advances; provided, however, that the term "Contingent Obligation" shall not include (y endorsements of instruments for deposit or collection in the ordinary course of business or (z) any obligations to reimburse an issuer of a letter of credit permitted under subsection 5(p). (c) "Current Debt" shall mean any obligation for borrowed money (and any notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money) payable on demand or within a period of one year from the date of the creation thereof; provided that any obligation 16 shall be treated as Funded Debt, regardless of its term, if such obligation is renewable pursuant to the terms thereof or of a revolving credit or similar agreement effective for more than one year after the date of the creation of such obligation, or may be payable out of the proceeds of a similar obligation pursuant to the terms of such obligation or of any such agreement. Any obligation secured by a Lien on, or payable out of the proceeds of such production from, property of Borrower shall be deemed to be Funded or Current Debt, as the case may be, of Borrower even though such obligation shall not be assumed by Borrower. (d) "Customer Advances" shall mean receivables of Borrower, payable by customers operating Retail Outlets, arising out of sales by Borrower to such customers of fixtures and equipment, which shall have remained outstanding for more than thirty (30) consecutive days. (e) "Environmental Laws" shall mean all federal, state and local laws including statutes, regulations ordinances, codes, rules and other governmental restrictions and requirements relating to the discharge, emission or release of air pollutants, water pollutants or process waste water or otherwise relating in any way, directly or indirectly, to the environment or hazardous substances in general or to storage tanks, petroleum products, PCBs or asbestos, including, but not limited to, the Federal Solid Waste Disposal Act, the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource Conservation Environmental Responsibility, Cleanup and Liability Act of 1980, regulations of the Environmental Protection Agency, regulations of the Nuclear Regulatory Agency, and regulations of any state department of natural resources, state environmental protection agency or any governmental authority whatsoever, now or at any time hereafter in effect. (f) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may, from time to time, be supplemented or amended. (g) "Fixed Charge Coverage Ratio" shall mean the ratio of (i) the sum of pre-tax income plus depreciation and amortization plus interest expense to (ii) the sum of interest expense plus current maturities of long-term debt plus the current portion of Capital Lease Obligations; provided, however, that for purposes of calculating the Fixed Charge Coverage Ratio, there shall be excluded from both the numerator and the denominator the effects that loans and other financing transactions have on the Company's results of operations to the extent such loans and financing transactions relate to financing provided by the Company to or on behalf of its franchisees. (h) "Funded Debt" shall mean any obligation payable more than one year from the date of the creation thereof, which under GAAP is shown on the balance sheet as a liability (including, without limitation, Capital Lease Obligations and excluding reserves for deferred income taxes and other reserves to the extent that such reserves do not constitute an obligation). 17 (i) "GAAP" shall mean generally accepted accounting principles in the United States of America in effect from time to time. (j) "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, and any lease in the nature thereof). (k) "Net Earnings" shall mean gross revenues of Borrower less all operating and non-operating expenses of Borrower including all charges of a proper character (including current and deferred taxes on income, provision for taxes on unremitted foreign earnings which are included in gross revenues, and current additions to reserves), but not including in gross revenues any gains (net of expenses and taxes applicable thereto) in excess of losses resulting from the sale, conversion or other disposition of capital assets (i.e., assets other than current assets), any gains resulting from the write-up of assets, any equity of Borrower in the unremitted earnings of any other corporation, or any earnings of any Person acquired by Borrower through purchase, merger or consolidation or otherwise for any year prior to the year of acquisition, all determined in accordance with GAAP. (l) "Net Earnings Available For Restricted Payments" shall mean an amount equal to (i) the sum of (A $4,263,000, (B) 40% (or minus 100% in the case of a deficit) of Net Earnings for the period (taken as one accounting period) commencing December 29, 1991, and terminating at the end of the last fiscal quarter preceding the date of any proposed Restricted Payment, and (C) 100% of the net cash proceeds received by the Company from the issuance or sale of authorized but unissued shares of its Common Stock, but only to the extent of the number of such shares previously acquired in transactions which constituted the making of Restricted Payments, less (ii) the sum of all Restricted Payments made on or after December 29, 1991. (m) "Net Worth" shall mean, as of the time of any determination thereof, the sum of (A) the par value (or value stated on the books of Borrower) of the capital stock of all classes of Borrower, plus (or minus in the case of a deficit) (B) the amount of the surplus, whether capital or earned, of Borrower, plus (C) the prepaid franchise rights and trademarks under the Piggly Wiggly Master Franchise Agreement, provided however, that Net Worth shall not include any intangible assets not reflected on Borrower's most recent balance sheet; all determined in accordance with GAAP consistent with those followed in the preparation of the financial statements referred to in subsection 4 (a). (n) "Offered Rate" shall mean with respect to each Bank, the rate of interest per annum from time to time offered by such Bank to Borrower on Loans. Each Bank shall be entitled to fix and establish its Offered Rate in its sole and absolute discretion. Upon the request of Borrower, each Bank shall provide Borrower with a 18 quotation of its current Offered Rate. Each Bank may make loans at, above or below its Offered Rate. (o) "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. (p) "Plan" shall mean as to any Person any pension plan, including a "multi-employer plan" as defined in Section 4001(a) (3) of ERISA, that is covered by Title IV of ERISA and in respect of which that Person or a Commonly Controlled Entity of that Person is an "employer" as defined in Section 3(5) of ERISA. (q) "Prime Rate" shall mean with respect to each Bank, such Bank's announced prime rate per annum from time to time in effect. Each Bank may make loans at, above or below its Prime Rate. (r) "Retail Outlets" shall mean and include stores, engaged in retail trade, owned or operated by Borrower of the type presently operated by Borrower and engaged in operations similar to those presently conducted by Borrower, and such stores owned or operated by customers of Borrower. (s) "Substantial Stockholder" shall mean (i) any Person owning, beneficially or of record, directly or indirectly, either individually or together with all other Persons to whom such Person is related by blood, adoption or marriage, stock of Borrower (of any class having ordinary voting power for the election of directors) aggregating 5% or more of such voting power or (ii) any Person related by blood, adoption or marriage to any Person described or coming within the provisions of clause (i) of this subsection 9(s). (t) "Tangible Net Worth" shall mean, as of the time of any determination thereof, the excess of (i) the sum of (A) the par value (or value stated on the books of Borrower) of the capital stock of all classes of Borrower, plus (or minus in the case of a deficit) (B) the amount of the surplus, whether capital or earned, of Borrower, plus (C) the prepaid franchise rights and trademarks under the Piggly Wiggly Master Franchise Agreement, over (ii) the sum of treasury stock, unamortized debt discount and expense, good will, trademarks, trade names, patents, deferred charges and other intangible assets and any write-up of the value of any assets after December 28, 1985; all determined in accordance with GAAP consistent with those followed in the preparation of the financial statements referred to in subsection 4(a); provided however, that assets held under Capitalized Leases and leasehold improvements shall not be classified as intangible assets in determining the amount of Tangible Net Worth. (u) "Topco" shall mean Topco Associates, Inc., a cooperative non-profit buying organization. 19 (v) "Total Commitment" of M&I shall mean $9,000,000 less the aggregate amount of reductions, if any, in M&I's Total Commitment requested by Borrower pursuant to subsection 1(g) and the "Total Commitment" of Firstar shall mean $7,000,000 less the aggregate amount of reductions, if any, in Firstar's Total Commitment requested by Borrower pursuant to subsection 1(g). (w) "Total Liabilities" shall mean the aggregate of all liabilities and reserves of every kind and character of Borrower determined in accordance with GAAP consistent with those followed in the preparation of the financial statements referred in subsection 3(d). (x) "Working Capital" shall mean the excess of current assets over current liabilities of Borrower, both determined in accordance with GAAP consistent with those followed in the preparation of the financial statements referred to in subsection 4(a), provided that there shall not be included in current assets (i) any loans or advances made by Borrower except travel and other like advances to officers and employees in the ordinary course of business, nor (ii) any assets known by Borrower to be located outside (including any amounts at any time outstanding payable by Persons known by Borrower to be located outside) the United States of America and Canada, and further provided that current assets shall include an amount equal to (i) 50% of LIFO reserves included in the financial statements and footnotes thereto delivered to the Banks pursuant to subsection 4(a) and (ii) the difference between $16,000,000 and the aggregate principal amount of debt outstanding pursuant to the Master Notes. 10. Miscellaneous. (a) The provisions of this Agreement shall inure to the benefit of and be binding upon any successor to any of the parties hereto and shall extend and be available to any holder of the Master Notes and renewals thereof. Borrower may not assign or otherwise transfer its rights under this Agreement except with the prior written consent of the Banks. (b) The Banks and the Borrower may, from time to time, enter into written amendments, supplements or modifications hereto for the purpose of adding provisions to any agreements, instruments or other documents hereunder or for the purpose of changing in any manner the rights of the Banks or of the Company thereunder, and the Banks may execute and deliver to the Company a written instrument waiving, on such terms and conditions as the Banks may specify in such instrument, any of the requirements of this Agreement or any Default or Event of Default and its consequences. In the case of any waiver, the Company and the Banks shall be restored to their former position and rights under this Agreement, and any Default or Event of Default waived shall be deemed to be cured and not continuing. However, no waiver of a Default or Event of Default shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. 20 No amendment, supplement, modification, or waiver shall be effective except if in writing and duly executed by both Banks and the Company. (c) In the event that any date provided herein for any payment by Borrower shall be a Saturday, Sunday, or legal holiday, such payment date shall be deemed to be the next business day following such Saturday, Sunday or legal holiday. (d) All representations and warranties made herein shall survive the extension of any advance under this Agreement and the execution and the delivery of the Master Notes or renewals thereof. (e) Unless otherwise specified, all notices, requests and demands to be to or upon the respective parties hereto shall be deemed to be effective only if in writing or if given by facsimile transmission, telegraph or telex and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made, in the case of a delivered notice, when delivered by hand, or, in the case of a mailed notice, when deposited in the mail, postage prepaid, or in the case of telegraphic notice, when delivered to the telegraph company, or, in the case of telex notice, when sent, answer back received, or, in the case of a facsimile transmission, upon acknowledgement of receipt, addressed as follows, or to such other address as may be hereafter specified by the respective parties hereto and any future holders of the Master Notes: Borrower: Schultz Sav-O Stores, Inc. 2215 Union Avenue Sheboygan, WI 53081 Attention: Mr. John H. Dahly Fax: (414) 457-6295 Banks: M&I Marshall & Ilsley Bank 770 North Water Street Milwaukee, WI 53202 Attention: Ms. Gina A. Peter Fax: (414) 765-7625 Firstar Bank Milwaukee, National Association 777 East Wisconsin Avenue Milwaukee, WI 53202 Attention: Mr. Scott D. Roeper Fax: (414) 765-5062 provided that any notice, request or demand upon the Banks pursuant to Section 1 hereof shall not be effective until received. 21 (f) Borrower shall (i) pay or reimburse Banks for all of their reasonable out-of-pocket costs and expenses incurred in connection with the negotiation, consideration, development, preparation and/or execution of and any amendment, supplement or modification to, this Agreement, the Master Notes or any other document prepared in connection herewith (whether or not any such amendment, supplement or modification is effected or consummated), and the consummation of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Banks, (ii) pay and reimburse Banks for all of their reasonable costs and expenses including, but not limited to, litigation costs incurred in connection with the enforcement or preservations of any rights or questions arising under this Agreement, the Master Notes or any such other document prepared in connection herewith, including, without limitation, reasonable fees and disbursements of counsel to Banks, and (iii) pay, indemnify and hold the Banks harmless from any and all recording and filing fees and any and all liabilities with respect to or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of any consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of this Agreement or any such other documents. The obligations in this Paragraph shall survive repayment of the Master Notes and all other amounts payable hereunder. (g) This Agreement, the Master Notes and all other documents delivered in connection herewith and the rights and obligations of the parties thereto shall be governed by, and construed and interpreted in accordance with the laws of the State of Wisconsin. Venue for the settlement of disputes under this Agreement shall be the United States District Court for the Eastern District of Wisconsin or the Circuit Court of Milwaukee County, Wisconsin. Borrower consents to the exercise of jurisdiction by these courts and of vesting of venue therein. (h) In addition to any of the rights and remedies provided by law, or any other rights or remedies provided for in this Agreement or any document delivered in connection herewith, upon the occurrence of any Event of Default, Banks are hereby irrevocably authorized, at any time and from time to time without prior notice to Borrower, any such notice being expressly waived by Borrower, to set-off, appropriate and apply any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case direct or indirect or contingent or matured or unmatured, at any time held or owing by the Banks to or for the credit of the account of Borrower, or any part thereof, in such amounts as Banks may elect, against and on account of the obligations and liabilities of Borrower to Banks hereunder or under the Master Notes, and claims of every nature and description of Banks against Borrower, whether arising hereunder, under any note or otherwise, that the Banks may elect, whether or not the Banks have made any demand for payment although such obligations, liabilities and claims may be contingent or unmatured. 22 (i) Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. (j) Any term defined herein may, unless the context otherwise requires, be used in the singular or the plural, depending on the reference. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. SCHULTZ SAV-O STORES, INC. By: /s/ James H. Dickelman James H. Dickelman, Chairman, President and Chief Executive Officer Attest: /s/ John H. Dahly John H. Dahly, Executive Vice President, Chief Financial Officer, Treasurer and Secretary 23 M&I MARSHALL & ILSLEY BANK By: /s/ Gina A. Peter Gina A. Peter, Vice President Attest: /s/ ___________, Vice President (Title) FIRSTAR BANK MILWAUKEE, NATIONAL ASSOCIATION By: /s/ Scott Roeper Scott D. Roeper, Vice President Attest: /s/ Stephen Carlton Stephen E. Carlton (Title) Commercial Banking Officer 24 EXHIBITS TO LOAN AGREEMENT -------------------------- Exhibit A-l Master Note Exhibit A-2 Master Note Exhibit B Officer's Certificate SCHEDULES TO LOAN AGREEMENT --------------------------- Schedule 1 Litigation Schedule 2 Environmental Matters Schedule 3 Existing Liens 25 Exhibit A-1 MASTER NOTE Milwaukee, Wisconsin $9,000,000 December 3, 1992 FOR VALUE RECEIVED, the undersigned, being a Wisconsin corporation (the "Borrower"), hereby unconditionally promises to pay on the Maturity Date, to the order of M&I Marshall & Ilsley Bank, a Wisconsin banking corporation (the "Bank") , at the offices of Bank located at 770 North Water Street, Milwaukee, Wisconsin 53202, in lawful money of the United States of America and in immediately available funds, the lesser of (a) the amount of the M&I Line of Credit or (b) the aggregate unpaid principal amount of all Loans made by the Bank to the Borrower pursuant to the Agreement (as hereinafter defined). The Borrower also unconditionally promises to pay interest in like money at said offices on the unpaid principal amount hereof from time to time outstanding for the period from and including the date hereof until such amount shall be paid in full, as provided in the Agreement. The holder of this Master Note is hereby authorized to record the date and amount of each Loan made by such holder, and the date and amount of each payment or prepayment of principal, and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded. This Master Note is one of the Master Notes referred to in the Loan Agreement, dated as of December 3, 1992, by and between the Borrower, the Bank and First Wisconsin National Bank of Milwaukee (as amended, modified or supplemented from time to time, the "Agreement"), is entitled to the benefits thereof and is subject to optional and mandatory prepayment in whole or in part as provided therein. All capitalized terms used in this Master Note, unless herein defined, shall have the meanings assigned to such terms in the Agreement. Reference is made to the Agreement for relevant terms and provisions which bear upon this Master Note and the payments hereunder. Upon the occurrence of an Event of Default as specified in the Agreement, the amounts then remaining unpaid under this Master Note may be declared to be or may become immediately due and payable as provided in the Agreement. No delay or omission on the part of the Bank or any holder hereof in exercising any right or option herein given to the Bank or any holder hereof in exercising any right or option herein given to the Bank or holder hereof shall impair such right or option or be considered as a waiver thereof or acquiescence in any default hereunder. Borrower hereby waives presentment, demand, notice of dishonor, protest and all other notices and proceedings required as a condition for payment or collection hereof. In the event of default hereunder, Borrower agrees to pay all costs of collection, including reasonable attorneys' fees. This Master Note shall be governed by and construed in accordance with the laws of the State of Wisconsin. BORROWER: SCHULTZ SAV-O STORES, INC. By: /s/ James H. Dickelman (SEAL) James H. Dickelman, Chairman, President and Chief Executive Officer Attest: /s/ John H. Dahly John H. Dahly, Executive Vice President, Chief Financial Officer, Treasurer and Secretary 2 Exhibit A-2 MASTER NOTE Milwaukee, Wisconsin $7,000,000 December 3, 1992 FOR VALUE RECEIVED, the undersigned, being a Wisconsin corporation (the "Borrower"), hereby unconditionally promises to pay on the Maturity Date, to the order of Firstar Bank Milwaukee, National Association, a national banking association (the "Bank"), at the offices of Bank located at 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202, in lawful money of the United States of America and in immediately available funds, the lesser of (a) the amount of the Firstar Line of Credit or (b) the aggregate unpaid principal amount of all Loans made by the Bank to the Borrower pursuant to the Agreement (as hereinafter defined). The Borrower also unconditionally promises to pay interest in like money at said offices on the unpaid principal amount hereof from time to time outstanding for the period from and including the date hereof until such amount shall be paid in full, as provided in the Agreement. The holder of this Master Note is hereby authorized to record the date and amount of each Loan made by such holder, and the date and amount of each payment or prepayment of principal, and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded. This Master Note is one of the Master Notes referred to in the Loan Agreement, dated as of December 3, 1992, by and between the Borrower, the Bank and M&I Marshall & Ilsley Bank (as amended, modified or supplemented from time to time, the "Agreement"), is entitled to the benefits thereof and is subject to optional and mandatory prepayment in whole or in part as provided therein. All capitalized terms used in this Master Note, unless herein defined, shall have the meanings assigned to such terms in the Agreement. Reference is made to the Agreement for relevant terms and provisions which bear upon this Master Note and the payments hereunder. Upon the occurrence of an Event of Default as specified in the Agreement, the amounts then remaining unpaid under this Master Note may be declared to be or may become immediately due and payable as provided in the Agreement. No delay or omission on the part of the Bank or any holder hereof in exercising any right or option herein given to the Bank or any holder hereof in exercising any right or option herein given to the Bank or holder hereof shall impair such right or option or be considered as a waiver thereof or acquiescence in any default hereunder. Borrower hereby waives presentment, demand, notice of dishonor, protest and all other notices and proceedings required as a condition for payment or collection hereof. In the event of default hereunder, Borrower agrees to pay all costs of collection, including reasonable attorneys' fees. This Master Note shall be governed by and construed in accordance with the laws of the State of Wisconsin. BORROWER: SCHULTZ SAV-O STORES, INC. By: /s/ James H. Dickelman (SEAL) James H. Dickelman, Chairman, President and Chief Executive Officer Attest: /s/ John H. Dahly John H. Dahly, Executive Vice President, Chief Financial Officer, Treasurer and Secretary 2 Exhibit B to Loan Agreement _______________ ____ 1992 Ms. Gina Peter Mr. Scott Roeper Vice President Vice President M&I Marshall & Ilsley Bank Firstar Bank Milwaukee, N.A. 770 North Water Street 777 East Wisconsin Avenue Milwaukee, WI 53202-3593 Milwaukee, WI 53202 Dear Gina and Scott: Pursuant to Section 4(a) of the Loan Agreement (the "Loan Agreement") dated October __, 1992 among Schultz Sav-O Stores, Inc., M&I Marshall & Ilsley Bank and Firstar Bank Milwaukee, National Association, the following sets forth calculations of the Company's compliance with certain of the financial covenants of the Loan Agreement: (A) Working Capital Computation (Section 5(a)) Add: Current Assets $ ---------- 50% of LIFO reserve included in the Borrower's financial statements (Section 9(x)) ---------- Unused portion of revolving credit availability (Section 9(x)) ---------- $ ----------- Deduct: Current Liabilities $ Working Capital ----------- $ Minimum requirement ----------- $ 5,000,000 =========== Ms. Gina Peter and Mr. Scott Roeper _______________ ___ 1992 Page 2 (B) Tangible Net Worth (Section 5(b)) Minimum requirement $ ----------- $ 32,000,000 (C) Total Liabilities to Tangible =========== Net Worth (Section 5(c)) Total liabilities and shareholders' investment Less: Shareholders' investment $ ----------- Total Liabilities $ ----------- Ratio of Total Liabilities to $ Tangible Net Worth ----------- to 1.00 Maximum permitted ============ 2.00 to 1.00 (D) Fixed Charge Coverage ============ (Section 5(d)) Add: Pretax income $ $ ----------- ----------- Depreciation and amortization ----------- Interest expense ----------- $ =========== Add: Interest expense $ ----------- Long-term debt: current ----------- Capital leases: current ----------- $ ============ Fixed Charge Coverage Ratio to 1.00 ============ Minimum permitted 2.00 to 1.00 ============ Ms. Gina Peter and Mr. Scott Roeper _______________ ___ 1992 Page 3 (E) Total Liabilities Plus Contingent Liabilities to Tangible Net Worth (Section 5(e)) Add: Total Liabilities $ ----------- Contingent Liabilities: Notes ----------- Contingent Liabilities: Leases ----------- Total Liabilities plus Contingent Liabilities $ =========== Ratio of sum of Total Liabilities plus Contingent Liabilities to Tangible Net Worth to 1.00 ============ Maximum permitted 2.50 to 1.00 ============ (F) Restricted Payments (Sections 5(f) and 9(n)) Earnings Available for Distribution $ 4,263,000 ============ Net Earnings for cumulative period from December 29, 1991 through most recent fiscal quarter: $ ----------- 40% of Net Earnings $ ----------- 100% of net cash proceeds received from resales of Common Stock previously acquired in transactions which constituted the making of Restricted Payments $ ----------- Unrestricted funds $ ----------- Less: Restricted Payments made since December 29, 1991: $ ----------- Net Earnings Available for Restricted Payments $ =========== Ms. Gina Peter and Mr. Scott Roeper _______________ ___ 1992 Page 4 In accordance with Section 4(a) of the Loan Agreement, I hereby certify, to the best of my knowledge and belief, that there exists no condition, event or act which would constitute an Event of Default (as defined in the Loan Agreement), and there exists no condition, event or act which, with notice or lapse of time, or both, would constitute an Event of Default. Very truly yours, SCHULTZ SAV-O STORES, INC. /s/ John Dahly John H. Dahly Executive Vice President, Chief Financial Officer, Treasurer and Secretary / smb Enclosure SCHEDULE 1 Litigation and Proceedings 1. On November 21, 1991, the Company announced the closing of its unsuccessful one-year old Bartlett, Illinois corporate-owned Piggly Wiggly Store and the recording of a reserve of approximately $2,100,000 for anticipated store closure costs. The store was covered by a twenty year lease. After several months of informal negotiations to arrive at a mutual settlement to terminate the lease, the landlord, Bartlett Commons Partnership, an Illinois general partnership, initiated a complaint on April 28, 1992 in the United States District Court, Northern District of Illinois, Eastern Division, alleging damages in excess of $5,000,000, plus its attorneys' fees and costs. Document requests and notices for depositions have been served in the case and depositions are now being held. The Company believes it has liability which could exceed present reserves. The Company is presently engaged in out-of-court settlement discussions, which if satisfactorily concluded, would result in an additional charge to earnings. If settlement discussions are unsuccessful, the Company intends to vigorously defend itself, but is unable to completely and accurately assess final liability. 2. The Company is the sole defendant in a breach of contract lawsuit pending in the United States District Court for the Western District of Texas, Economic Dutch Consultants USA, Inc. v. Schultz Sav-O Stores, Inc., Case No. 92-CA-240. The case arises from equipment leases for video tapes and video players entered into in 1988 between the Company and Comprehensive Leasing Corporation. The monthly rental amount for all of the leases combined is approximately $30,000. The plaintiff claims to be the assignee of Comprehensives' rights under the leases and sues for $30,000 per month since about August of 1991, when the initial three-year term of the leases expired and the Company ceased making payments. Thus, the present amount of plaintiff's claim is in the range of $450,000 to $500,000. The Company disputes that the plaintiff is the assignee of the leases and has asserted a variety of defenses to the claim for payment. The Company has also asserted a counterclaim seeking damages in the range of $800,000 to $1,500,000. Plaintiff has challenged the counterclaim. The Company has pending motions to dismiss the case for lack of jurisdiction and improper venue. If these motions are granted, the plaintiff could elect to pursue its claims in Wisconsin, but is unlikely to do so. In light of the Company's substantial defenses, both procedural and on the merits, the Company does not presently believe that it has any liability to the plaintiff. 3. The City of Mequon, Wisconsin is considering the adoption of a completely new zoning code which may cause an adverse change in the zoning of certain commercial real estate owned by the Company at the southeast corner of Mequon and Wauwatosa Roads. This real estate was acquired by the Company in settlement of a claim against an individual, and not with the intention of making it the site of a new store location. The affected parcel has a value estimated by the Company to be approximately $500,000. The change in zoning could have an adverse impact on the value of this property. The Company considers it to be a remote possibility that this proceeding could result in a material adverse effect on the value of such property. 2 SCHEDULE 2 - ENVIRONMENTAL MATTERS The Company has leased a retail store facility as part of a strip center in downtown Belvidere, Illinois since 1984. While the retail operation is very successful, the facility and the equipment are in need of major renovation and the Company desires to expand the store size by approximately 10,000 SF to a total of 37,000 SF. In connection with a developer's assessment of the land and facilities, certain contaminants were found during Phase One and Phase Two environment tests. Extensive research indicates that the Company and its retail operation were not a contributing factor to the contamination. The Company believes it is not responsible for the contamination, and further improvement of the site and continuation of retail operations will not increase the contamination or residual risk the Company already has by its mere presence as a lessee operating a retail grocery store during the past nine years. Schedule 3 - Existing Liens 1. Leases of video rental packages at various store locations, including videocassette tapes, display cabinets, storage fixtures, video players, televisions, and signage. 2. Sale-leaseback transactions covering all equipment and fixtures located at stores in Oshkosh (Aviation Plaza - 2155 South Koeller) and Oak Creek (2201 East Rawson), Wisconsin. FIRST AMENDMENT TO LOAN AGREEMENT THIS FIRST AMENDMENT TO LOAN AGREEMENT, made as of this 23rd day of September, 1994, by and among SCHULTZ SAV-O STORES, INC. ("Borrower"), M&I MARSHALL & ILSLEY BANK, a Wisconsin banking corporation ("M&I"), and FIRSTAR BANK MILWAUKEE, NATIONAL ASSOCIATION, a national banking association ("Firstar") (together with M&I, the "Banks"). Unless otherwise indicated, capitalized terms used herein and not defined shall have the meanings assigned thereto in the Loan Agreement described below. W I T N E S S E T H: WHEREAS, Borrower, M&I and Firstar are parties to that certain Loan Agreement dated as of December 3, 1992 (the "Loan Agreement"); and WHEREAS, Borrower has available a $9,000,000 revolving line of credit facility with M&I and a $7,000,000 revolving line of credit facility with Firstar (collectively, the "Lines of Credit"); and WHEREAS, Borrower and the Banks desire to amend the Loan Agreement to extend the Maturity Date of the Lines of Credit, to increase the minimum Tangible Net Worth required to be maintained by the Borrower, to amend the covenants relating to Liens and Funded Debt and to amend the definition of Net Earnings Available for Restricted Payments. NOW, THEREFORE, in consideration of the premises and mutual agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Amendment to Section 1(b) (Master Notes). The definition of Maturity Date in Section 1(b) is amended by deleting "April 30, 1995" and inserting in lieu thereof "April 30, 1997." 2. Amendment to Section 5(b) (Tangible Net Worth). Section 5(b) of the Loan Agreement is deleted in its entirety and the following is inserted in lieu thereof: "Permit Tangible Net Worth at any time to be less than $36,000,000." 3. Amendment to Section 5(g) (Liens). Section 5(g) is amended by deleting the word "and" at the end of Subsection 5(g)(viii), by substituting ";" for the period at the end of Subsection 5(g)(ix) and by adding the following clauses: "(x) the lien in favor of The Penn Mutual Life Insurance Company in the form of a Mortgage securing an obligation not to exceed $3,500,000 on certain real property owned by the Borrower and located at 5328 Grand Avenue, Gurnee, Illinois (the "Gurnee Mortgage Debt"); and (xi) the Lien in favor of James M. and Beverly A. Lehrer in the form of a Land Contract securing an obligation not to exceed $300,000 on certain real property owned by the Borrower and located at Highway 55 and County Trunk Highway CE, Kaukauna, Wisconsin (the "Kaukauna Land Contract") ." 4. Amendment to Section 5(h) (Debt). Section 5(h) is amended by deleting the word "and" at the end of Subsection 5(h)(iv), by substituting ";" for the period at the end of Subsection 5(h)(v) and by adding the following clauses: "(vi) Funded Debt of the Borrower not exceeding an aggregate principal amount of $3,500,000 due on the Gurnee Mortgage Debt; and (vii) Funded Debt of the Borrower not exceeding an aggregate principal amount of $300,000 due on the Kaukauna Land Contract." 5. Amendment to Section 9(1) (Net Earnings Available For Restricted Payments). The definition of Net Earnings Available For Restricted Payments is amended by deleting the phrase ". . . (A) $4,263,000, (B) 40% (or minus 100% in the case of a deficit). . ." and inserting in lieu thereof the phrase ". . . (A) $7,263,000, (B) 50% (or minus 100% in the case of a deficit). . ." 6. Effective Date. This Amendment is effective as of the date hereof upon the execution and delivery by the Borrower to the Banks of the following: (a) This Amendment duly executed by the President and Secretary of the Borrower; and (b) A copy of the resolution or resolutions, in form satisfactory to the Banks and their legal counsel, duly adopted by the Board of Directors of the Borrower approving this Amendment, certified to be true and correct by the President and Secretary of the Borrower. 7. Miscellaneous. (a) Continuance of Loan Documents. Except as specifically amended by this Amendment, the Loan Agreement and all other instruments, documents and agreements executed and delivered in connection with the Loan Agreement (collectively, the "Loan Documents") remain in full force and effect. (b) Representations and Warranties. The Borrower represents and warrants that the execution, delivery and performance of this Amendment are within the corporate powers of the Borrower, have been duly authorized by all necessary 2 corporate action and do not and will not (a) require any consent or approval of the shareholders of the Borrower; (b) violate any provision of the Articles of Incorporation or By-laws of the Borrower or of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to the Borrower; (c) require the consent or approval of, or filing a registration with, any government body, agency or authority; or (d) result in any breach of or constitute a default under, or result in the imposition of any lien, charge or encumbrance upon any property of the Borrower pursuant to any indenture or other agreement or instrument under which the Borrower is a party or by which it or its properties may be bound or affected. The Borrower further represents and warrants that this Amendment constitutes the legal, valid and binding obligation of the Borrower enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy or similar laws affecting the enforceability of creditors' rights generally. In addition, each of the representations and warranties made by the Borrower in the Loan Agreement are true and correct as of the date of this Amendment. (c) References. When any Loan Document is referred to in any other Loan Document or any of the other documents, instruments or materials executed and delivered heretofore or hereafter pursuant to the Loan Agreement, it shall be deemed to refer to such Loan Document as amended by this Amendment. (d) Expenses and Attorneys' Fees. The Borrower shall pay all fees and expenses incurred by the Banks, including the reasonable fees of counsel, in connection with the preparation of this Amendment, the consummation of the transactions contemplated by this Amendment and the protection or enforcement of the rights of the Banks under the Loan Agreement. (e) Survival. All agreements, representations and warranties made in this Amendment or in any documents delivered pursuant to this Amendment survive the execution of this Amendment and the delivery of any such document. (f) Governing Law. This Amendment and the other documents issued pursuant to this Amendment are governed by the laws of the State of Wisconsin without reference to the conflict of law principles of such State. (g) Counterparts; Headings. This Amendment may be executed in several counterparts, each of which shall be deemed an original, but such counterparts shall together constitute one and the same agreement. Article and Section headings in this Amendment are inserted for convenience of reference only and shall not constitute a part hereof. (h) Severability. Any provision of this Amendment that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Amendment or affecting the validity or enforceability of such provision in any other jurisdiction. 3 IN WITNESS WHEREOF, the parties hereto have executed this First Amendment to Loan Agreement as of the day, month and year first above-written. SCHULTZ SAV-O STORES, INC. By: /s/ James H. Dickelman James H. Dickelman, Chairman, President and Chief Executive Officer Attest: /s/ John Dahly John H. Dahly, Executive Vice President, Chief Financial Officer, Treasurer and Secretary M&I MARSHALL & ILSLEY BANK By: /s/ Gina A. Peter Gina A. Peter, Vice President Attest: /s/ Jeffrey Ticknor Jeffrey T. Ticknor, Vice President FIRSTAR BANK MILWAUKEE, NATIONAL ASSOCIATION By: /s/ Scott Roeper Scott D. Roeper, Vice President Attest: /s/ Caroline Krider Caroline Krider, Assistant Vice President 4 SECOND AMENDMENT TO LOAN AGREEMENT THIS SECOND AMENDMENT TO LOAN AGREEMENT, made as of this 17th day of December, 1996, by and among SCHULTZ SAV-O STORES, INC. ("Borrower"), M&I MARSHALL & ILSLEY BANK, a Wisconsin banking corporation ("M&I"), and FIRSTAR BANK MILWAUKEE, NATIONAL ASSOCIATION, a national banking association ("Firstar" and, together with M&I, the "Banks"). Unless otherwise indicated, capitalized terms used herein and not defined shall have the meanings assigned thereto in the Loan Agreement described below. W I T N E S S E T H: WHEREAS, Borrower, M&I and Firstar are parties to that certain Loan Agreement dated as of December 3, 1992, as amended by that certain First Amendment to Loan Agreement dated September 23, 1994 (as so amended, the "Loan Agreement"); and WHEREAS, Borrower has available a $9,000,000 revolving line of credit facility with M&I and a $7,000,000 revolving line of credit facility with Firstar (collectively, the "Lines of Credit"); and WHEREAS, Borrower and the Banks desire to amend the Loan Agreement to extend the Maturity Date of the Lines of Credit. NOW, THEREFORE, in consideration of the premises and mutual agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Amendment to Section 1(b) (Master Notes). The definition of Maturity Date in Section 1(b) is amended by deleting "April 30, 1997" and inserting in lieu thereof "April 30, 1998." 2. Effective Date. This Amendment shall be effective upon the execution and delivery by Borrower to the Banks of the following: a) This Amendment duly executed by the President and Secretary of Borrower; and b) A copy of the resolution or resolutions, in form satisfactory to the Banks and their legal counsel, duly adopted by the Board of Directors of Borrower approving this Amendment, certified to be true and correct by the President and Secretary of Borrower. 3. Miscellaneous. a) Continuance of Loan Documents. Except as specifically amended by this Amendment, the Loan Agreement and all other instruments, documents and agreements executed and delivered in connection with the Loan Agreement (collectively, the "Loan Documents") remain in full force and effect. This Amendment is an amendment and not a novation. b) Representations and Warranties. Borrower represents and warrants that the execution, delivery and performance of this Amendment are within the corporate powers of Borrower, have been duly authorized by all necessary corporate action and do not and will not (a) require any consent or approval of the shareholders of Borrower; (b) violate any provision of the Articles of Incorporation or By-laws of Borrower or of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to Borrower; (c) require the consent or approval of, or filing of a registration with, any government body, agency or authority; or (d) result in any breach of or constitute a default under, or result in the imposition of any lien, charge or encumbrance upon any property of Borrower pursuant to any indenture or other agreement or instrument under which Borrower is a party or by which it or its properties may be bound or affected. Borrower further represents and warrants that this Amendment constitutes the legal. valid and binding obligation of Borrower enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy or similar laws affecting the enforceability of creditors' rights generally. In addition, each of the representations and warranties made by Borrower in the Loan Agreement are true and correct as of the date of this Amendment. c) References. When any Loan Document is referred to in any other Loan Document or any of the other documents, instruments or materials executed and delivered heretofore or hereafter pursuant to the Loan Agreement, it shall be deemed to refer to such Loan Document as amended by this Amendment. d) Expenses and Attorneys' Fees. In accordance with Section 10(f) of the Loan Agreement, Borrower shall pay all fees and expenses incurred by the Banks, including the reasonable fees of counsel, in connection with the preparation of this Amendment, the consummation of the transactions contemplated by this Amendment and the protection or enforcement of the rights of the Banks under the Loan Agreement. e) Survival. All agreements, representations and warranties made in this Amendment or in any documents delivered pursuant to this Amendment shall survive the execution of this Amendment and the delivery of any such document. f) Government Law. This Amendment and the other documents issued pursuant to this Amendment are governed by the laws of the State of Wisconsin without reference to the conflict of law principles of such state. 2 g) Counterparts; Headings. This Amendment may be executed in several counterparts, each of which shall be deemed an original, but such counterparts shall together constitute one and the same agreement. Article and Section headings in this Amendment are inserted for convenience of reference only and shall not constitute a part hereof. h) Severability. Any provision of this Amendment that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Amendment or affecting the validity or enforceability of such provision in any other jurisdiction. IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment to Loan Agreement as of the day, month and year first above-written. SCHULTZ SAV-O STORES, INC. By: /s/ James H. Dickelman James H. Dickelman, Chairman, President and Chief Executive Officer Attest: /s/ John Dahly John H. Dahly, Executive Vice President, Chief Financial Officer, Treasurer and Secretary M&I MARSHALL & ILSLEY BANK By: /s/ Gina A. Peter Gina A. Peter, Senior Vice President Attest: /s/ Jeffrey Ticknor Jeffrey T. Ticknor, Vice President 3 FIRSTAR cBANK MILWAUKEE, NATIONAL ASSOCIATION By: /s/ Scott Roeper Scott D. Roeper, First Vice President Attest: /s/ Caroline Krider Caroline Krider, Vice President 4 THIRD AMENDMENT TO LOAN AGREEMENT THIS THIRD AMENDMENT TO LOAN AGREEMENT, made as of this 14th day of May, 1997, by and among SCHULTZ SAV-O STORES, INC. ("Borrower"), M&I MARSHALL & ILSLEY BANK, a Wisconsin banking corporation ("M&I"), and FIRSTAR BANK MILWAUKEE, NATIONAL ASSOCIATION, a national banking association ("Firstar" and, together with M&I, the "Banks"). Unless otherwise indicated, capitalized terms used herein and not defined shall have the meanings assigned thereto in the Loan Agreement described below. W I T N E S S E T H: WHEREAS, Borrower, M&I and Firstar are parties to that certain Loan Agreement dated as of December 3, 1992, as amended by that certain First Amendment to Loan Agreement dated September 23, 1994 (the "First Amendment") and that certain Second Amendment to Loan Agreement dated December 17, 1996 (the "Second Amendment") (as so amended, the "Loan Agreement"); and WHEREAS, Borrower has available a $9,000,000 revolving line of credit facility with M&I and a $7,000,000 revolving line of credit facility with Firstar (collectively, the "Lines of Credit") pursuant to the Loan Agreement; and WHEREAS, Borrower and the Banks desire to amend the Loan Agreement to amend the definitions of Maturity Date and Net Earnings Available For Restricted Payments. NOW, THEREFORE, in consideration of the premises and mutual agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Amendment to Section 1(b) (Master Notes). The definition of Maturity Date is amended by deleting "April 30, 1998" and inserting in lieu thereof "April 30, 1999." 2. Amendment to Section 9(1) (Net Earnings Available For Restricted Payments). The definition of Net Earnings Available For Restricted Payments is amended by restating the definition in its entirety as follows: (1) "Net Earnings Available For Restricted Payments" shall mean an amount equal to (i) the sum of (A) $12,263,000, (B) 50% (or minus 100% in the case of a deficit) of Net Earnings for the period (taken as one accounting period) commencing December 29, 1991, and terminating at the end of the last fiscal quarter preceding the date of any proposed Restricted Payment, (C) 100% of the tax benefit realized by the Borrower as a result of the exercise by employees of stock options of the Borrower (reflected in the Borrower's Consolidated Statement of Shareholders' Investment as "Exercise of Stock Options" under the heading "Additional Paid-in Capital"), and (D) 100% of the net cash proceeds received by the Company from the issuance or sale of authorized but unissued shares of its Common Stock, but only to the extent of the number of such shares previously acquired in transactions which constituted the making of Restricted Payments, less (ii) the sum of all Restricted Payments made on or after December 29, 1991. 3. Effective Date. This Amendment shall be effective upon the execution and delivery by Borrower to the Banks of the following: a) This Amendment duly executed by the President and Secretary of Borrower; and b) A copy of the resolution or resolutions, in form satisfactory to the Banks and their legal counsel, duly adopted by the Board of Directors of Borrower approving this Amendment, certified to be true and correct by the Secretary of Borrower. 4. Miscellaneous. a) Continuance of Loan Documents. Except as specifically amended by this Amendment, the Loan Agreement and all other instruments, documents and agreements executed and delivered in connection with the Loan Agreement (collectively, the "Loan Documents") remain in full force and effect. This Amendment is an amendment and not a novation. b) Representations and Warranties. Borrower represents and warrants that the execution, delivery and performance of this Amendment are within the corporate powers of Borrower, have been duly authorized by all necessary corporate action and do not and will not (a) require any consent or approval of the shareholders of Borrower; (b) violate any provision of the Articles of Incorporation or By-laws of Borrower or of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to Borrower; (c) require the consent or approval of, or filing of a registration with, any government body, agency or authority; or (d) result in any breach of or constitute a default under, or result in the imposition of any lien, charge or encumbrance upon any property of Borrower pursuant to any indenture or other agreement or instrument under which Borrower is a party or by which it or its properties may be bound or affected. Borrower further represents and warrants that this Amendment constitutes the legal, valid and binding obligation of Borrower enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy or similar laws affecting the enforceability of creditors' rights generally. In addition, each of the representations and warranties made by Borrower in the Loan Agreement are true and correct as of the date of this Amendment except for matters permitted or contemplated by the Loan Agreement. c) References. When any Loan Document is referred to in any other Loan Document or any of the other documents, instruments or materials executed and 2 delivered heretofore or hereafter pursuant to the Loan Agreement, it shall be deemed to refer to such Loan Document as amended by this Amendment. d) Expenses and Attorneys' Fees. In accordance with Section 10(f) of the Loan Agreement, Borrower shall pay all fees and expenses incurred by the Banks, including the reasonable fees of counsel, in connection with the preparation of this Amendment, the consummation of the transactions contemplated by this Amendment and the protection or enforcement of the rights of the Banks under the Loan Agreement. e) Survival. All agreements, representations and warranties made in this Amendment or in any documents delivered pursuant to this Amendment shall survive the execution of this Amendment and the delivery of any such document. f) Government Law. This Amendment and the other documents issued pursuant to this Amendment are governed by the laws of the State of Wisconsin without reference to the conflict of law principles of such state. g) Counterparts; Headings. This Amendment may be executed in several counterparts, each of which shall be deemed an original, but such counterparts shall together constitute one and the same agreement. Article and Section headings in this Amendment are inserted for convenience of reference only and shall not constitute a part hereof. h) Severability. Any provision of this Amendment that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Amendment or affecting the validity or enforceability of such provision in any other jurisdiction. IN WITNESS WHEREOF, the parties hereto have executed this Third Amendment to Loan Agreement as of the day, month and year first above-written. SCHULTZ SAV-O STORES, INC. By: /s/ James H. Dickelman James H. Dickelman, Chairman, President and Chief Executive Officer Attest: /s/ John Dahly John H. Dahly, Executive Vice President, Chief FinancialOfficer, Treasurer and Secretary 3 M&I MARSHALL & ILSLEY BANK By: /s/ Gina A. Peter Gina A. Peter, Senior Vice President Attest: /s/ Jeffrey Ticknor Jeffrey T. Ticknor, Vice President FIRSTAR BANK MILWAUKEE, NATIONAL ASSOCIATION By: /s/ Scott Roeper Scott D. Roeper, First Vice President Attest: /s/ Caroline Krider Caroline Krider, Vice President 4 FOURTH AMENDMENT TO LOAN AGREEMENT THIS FOURTH AMENDMENT TO LOAN AGREEMENT, effective as of this 31st day of December, 1998, by and among SCHULTZ SAV-O STORES, INC. ("Borrower"), M&I MARSHALL & ILSLEY BANK, a Wisconsin banking corporation ("M&I"), and FIRSTAR BANK MILWAUKEE, N.A., a national banking association ("Firstar" and, together with M&I, the "Banks"). Unless otherwise indicated, capitalized terms used herein and not defined shall have the meanings assigned thereto in the Loan Agreement described below. W I T N E S S E T H: WHEREAS, Borrower, M&I and Firstar are parties to that certain Loan Agreement dated as of December 3, 1992, as amended by that certain First Amendment to Loan Agreement dated September 23, 1994, that certain Second Amendment to Loan Agreement dated December 17, 1996, and that certain Third Amendment to Loan Agreement dated May 14, 1997 (as so amended, the "Loan Agreement"); and WHEREAS, Borrower has available a $9,000,000 revolving line of credit facility with M&I and a $7,000,000 revolving line of credit facility with Firstar (collectively, the "Lines of Credit") pursuant to the Loan Agreement; and WHEREAS, Borrower and the Banks desire to amend the Loan Agreement to amend the definitions of Maturity Date and Net Earnings Available For Restricted Payments and to add a representation and warranty regarding the Year 2000 issue. NOW, THEREFORE, in consideration of the premises and mutual agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Amendment to Section 1(b) (Master Notes). The definition of Maturity Date is amended by deleting "April 30, 1999" and inserting in lieu thereof "April 30, 2001." 2. Amendment to Section 9(1) (Net Earnings Available For Restricted Payments). The definition of Net Earnings Available For Restricted Payments is amended by restating the definition in its entirety as follows: (1) "Net Earnings Available For Restricted Payments" shall mean an amount equal to (i) the sum of (A) $17,263,000, (B) 50% (or minus 100% in the case of a deficit) of Net Earnings for the period (taken as one accounting period) commencing December 29, 1991, and terminating at the end of the last fiscal quarter preceding the date of any proposed Restricted Payment, (C) 100% of the tax benefit realized by the Borrower as a result of the exercise by employees of stock options of the Borrower (reflected in the Borrower's Consolidated Statement of Shareholders' Investment as "Exercise of Stock Options" under the heading "Additional Paid-in Capital"), and (D) 100% of the net cash proceeds received by the Company from the issuance or sale of authorized but unissued shares of its Common Stock, but only to the extent of the number of such shares previously acquired in transactions which constituted the making of Restricted Payments, less (ii) the sum of all Restricted Payments made on or after December 29, 1991. 3. Addition of Subsection 3(j). A new subsection 3(j) is hereby added to the Loan Agreement to read as follows: (j) Year 2000. The Borrower has reviewed the areas within its business and operations which could be adversely affected by, and has developed or is developing a program to address on a timely basis, the "Year 2000 Issue" (that is, the risk that computer applications used by the Borrower may be unable to recognize and perform properly date-sensitive functions involving certain dates prior to and any date on or after December 31, 1999), and has made related appropriate inquiry of material suppliers and vendors. Based on such review and program, the Borrower believes that the "Year 2000 Issue" will not have a material adverse effect on the business, operations, assets, condition (financial or other) or results of operations of the Borrower. From time to time, at the request of the Banks, the Borrower shall provide to the Banks such updated information or documentation as is requested regarding the status of its efforts to address the Year 2000 Issue. 4. Effective Date. This Amendment shall be effective upon the execution and delivery by Borrower to the Banks of the following: a) This Amendment duly executed by the President and Secretary of Borrower; and b) A copy of the resolution or resolutions, in form satisfactory to the Banks and their legal counsel, duly adopted by the Board of Directors of Borrower approving this Amendment, certified to be true and correct by the Secretary of Borrower. 5. Miscellaneous. a) Continuance of Loan Documents. Except as specifically amended by this Amendment, the Loan Agreement and all other instruments, documents and agreements executed and delivered in connection with the Loan Agreement (collectively, the "Loan Documents") remain in full force and effect. This Amendment is an amendment and not a novation. b) Representations and Warranties. Customer represents and warrants that the execution, delivery and performance of this Amendment are within the corporate powers of Borrower, have been duly authorized by all necessary corporate action and do not and will not (a) require any consent or approval of the shareholders of Borrower; (b) violate any provision of the Articles of Incorporation or By-laws of Borrower or of any law, rule, regulation, order, writ, judgment, injunction, decree, 2 determination or award presently in effect having applicability to Borrower; (c) require the consent or approval of, or filing of a registration with, any government body, agency or authority; or (d) result in any breach of or constitute a default under, or result in the imposition of any lien, charge or encumbrance upon any property of Borrower pursuant to any indenture or other agreement or instrument under which Borrower is a party or by which it or its properties may be bound or affected. Borrower further represents and warrants that this Amendment constitutes the legal, valid and binding obligation of Borrower enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy or similar laws affecting the enforceability of creditors' rights generally. In addition, each of the representations and warranties made by Borrower in the Loan Agreement are true and correct as of the date of this Amendment except for matters permitted or contemplated by the Loan Agreement. c) References. When any Loan Document is referred to in any other Loan Document or any of the other documents, instruments or materials executed and delivered heretofore or hereafter pursuant to the Loan Agreement, it shall be deemed to refer to such Loan Document as amended by this Amendment. d) Expenses and Attorneys' Fees. In accordance with Section 10(f) of the Loan Agreement, Borrower shall pay all fees and expenses incurred by the Banks, including the reasonable fees of counsel, in connection with the preparation of this Amendment, the consummation of the transactions contemplated by this Amendment and the protection or enforcement of the rights of the Banks under the Loan Agreement. e) Survival. All agreements, representations and warranties made in this Amendment or in any documents delivered pursuant to this Amendment shall survive the execution of this Amendment and the delivery of any such document. f) Governing Law. This Amendment and the other documents issued pursuant to this Amendment are governed by the laws of the State of Wisconsin without reference to the conflict of law principles of such state. g) Counterparts; Headings. This Amendment may be executed in several counterparts, each of which shall be deemed an original, but such counterparts shall together constitute one and the same agreement. Article and Section headings in this Amendment are inserted for convenience of reference only and shall not constitute a part hereof. h) Severability. Any provision of this Amendment that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Amendment or affecting the validity or enforceability of such provision in any other jurisdiction. 3 IN WITNESS WHEREOF. the parties hereto have executed this Third Amendment to Loan Agreement as of the day, month and year first above-written. SCHULTZ SAV-O STORES, INC. By: /s/ James H. Dickelman James H. Dickelman, Chairman, President and Chief Executive Officer Attest: /s/ Armond Go Armand C. Go, Treasurer and Chief Accounting Officer M&I MARSHALL & ILSLEY BANK /s/ Jeffrey Ticknor Jeffrey T. Ticknor, Vice President FIRSTAR BANK MILWAUKEE, N.A. By: /s/ Caroline V. Krider Caroline V. Krider, Vice President 4 EX-13 7 FINANCIALS
Five-Year Financial Highlights ================================================== ============================================================================ (dollars in thousands, except per share data) Fiscal Year (a) (b) - - -------------------------------------------------- --------------- -------------- -------------- --------------- -------------- 1998 1997 1996 1995 1994 - - -------------------------------------------------- --------------- -------------- -------------- --------------- -------------- Consolidated statements of earnings data: Net sales $ 484,885 $ 473,006 $ 453,921 $ 439,646 $ 446,362 Gross profit 78,070 73,907 72,429 70,516 73,495 Earnings before income taxes 13,916 12,418 10,512 9,500 8,653 Provision for income taxes 5,398 4,781 4,047 3,660 3,252 Net earnings 8,518 7,637 6,465 5,840 5,401 Earnings per share - basic 1.26 1.11 0.93 0.82 0.70 Earnings per share - diluted 1.23 1.06 0.90 0.79 0.68 Cash dividends per share 0.30 0.27 0.24 0.15 0.07 Weighted average shares and equivalents outstanding (c) 6,923 7,148 7,187 7,402 7,886 Net earnings-to-sales ratio 1.76% 1.61% 1.42% 1.33% 1.21% Consolidated balance sheet data (at fiscal year-end): Working capital $ 32,884 $ 29,217 $ 28,579 $ 24,855 $ 21,197 Total assets 105,096 98,866 98,204 94,435 94,624 Current obligations under capital leases and current maturities of long-term debt 792 866 1,047 1,114 1,037 Long-term debt 3,021 3,165 3,375 3,719 4,056 Long-term obligations under capital leases 9,764 11,177 12,368 13,268 14,046 Total shareholders' investment 53,085 50,384 47,035 43,288 41,457 Other data: Capital additions $ 3,847 $ 4,868 $ 3,420 $ 3,545 $ 3,640 Depreciation and amortization 5,075 4,517 4,451 4,467 4,654 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. (c) The weighted average shares and equivalents outstanding for 1997 and 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 RESPONSIBILITIES FOR FINANCIAL REPORTING The management of Schultz Sav-O Stores, Inc. is responsible for the preparation, objectivity and integrity of the Company's consolidated financial statements contained in the Company's 1998 Annual Report to Shareholders. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include amounts that are based on management's best estimates and informed judgments. To help assure that financial information is reliable and assets are safeguarded, management maintains a system of internal controls and procedures which it believes is effective in accomplishing these objectives. These controls and procedures are designed to provide reasonable assurance, at appropriate costs, that transactions are executed and recorded in accordance with management's authorization. The Company's consolidated financial statements have been audited by its independent public accountants, Arthur Andersen LLP, whose report was based on audits conducted in accordance with generally accepted auditing standards and is presented below. As part of its audit, it performs a review of the Company's system of internal controls for the purpose of determining the amount of reliance to place on those controls relative to the audit tests it performs. The Audit Committee of the Board of Directors, composed of directors who are not officers or employees of the Company, meets periodically with Arthur Andersen LLP and management to satisfy itself that each is properly discharging its responsibilities. The independent public accountants have direct access to the Audit Committee. James H. Dickelman John H. Dahly Armand C. Go Chairman, President and Executive Vice President, Treasurer and Chief Executive Officer Chief Financial Officer Chief Accounting and Secretary Officer 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 2, 1999 and January 3, 1998 and the related consolidated statements of earnings, cash flows and shareholders' investment for each of the three fiscal years in the period ended January 2, 1999. 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 conducted 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 2, 1999 and January 3, 1998, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 2, 1999, in conformity with generally accepted accounting principles. Milwaukee, Wisconsin Arthur Andersen LLP February 5, 1999
CONSOLIDATED BALANCE SHEETS As of January 2, 1999 and January 3, 1998 - - ----------------------------------------------------------------------------- --------------------- -------------------- Assets 1998 1997 - - ----------------------------------------------------------------------------- --------------------- -------------------- Current assets: Cash and equivalents $ 34,334,000 $ 23,124,000 Receivables 6,233,000 9,718,000 Inventories 23,951,000 21,741,000 Other current assets 2,385,000 3,635,000 Deferred income taxes 4,376,000 4,131,000 - - ----------------------------------------------------------------------------- --------------------- -------------------- Total current assets 71,279,000 62,349,000 - - ----------------------------------------------------------------------------- --------------------- -------------------- Noncurrent receivable under capital subleases 6,107,000 7,270,000 Property under capital leases, net 2,499,000 2,786,000 Other noncurrent assets 3,524,000 3,782,000 Property and equipment, net 21,687,000 22,679,000 - - ----------------------------------------------------------------------------- --------------------- -------------------- Total assets $ 105,096,000 $ 98,866,000 ============================================================================= ===================== ==================== Liabilities and Shareholders' Investment - - ----------------------------------------------------------------------------- --------------------- -------------------- Current liabilities: Accounts payable $ 24,798,000 $ 21,305,000 Accrued salaries and benefits 5,040,000 4,395,000 Accrued insurance 3,020,000 3,095,000 Retail repositioning reserve 685,000 610,000 Other accrued liabilities 4,060,000 2,861,000 Current obligations under capital leases 656,000 665,000 Current maturities of long-term debt 136,000 201,000 - - ----------------------------------------------------------------------------- --------------------- -------------------- Total current liabilities 38,395,000 33,132,000 - - ----------------------------------------------------------------------------- --------------------- -------------------- Long-term obligations under capital leases 9,764,000 11,177,000 Long-term debt 3,021,000 3,165,000 Deferred income taxes 831,000 1,008,000 Shareholders' investment: Common stock, $0.05 par value, authorized 20,000,000 shares, issued 8,750,342 in 1998 and 1997 438,000 438,000 Additional paid-in capital 14,359,000 13,940,000 Retained earnings 57,792,000 51,299,000 Treasury stock at cost, 2,155,463 shares in 1998 and 1,938,463 shares in 1997 (19,504,000) (15,293,000) - - ----------------------------------------------------------------------------- --------------------- -------------------- Total shareholders' investment 53,085,000 50,384,000 - - ----------------------------------------------------------------------------- --------------------- -------------------- Total liabilities and shareholders' investment $ 105,096,000 $ 98,866,000 ============================================================================= ===================== ==================== See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF EARNINGS For fiscal years 1998, 1997 and 1996 - - ----------------------------------------------------------- ------------------- ------------------- -------------------- 1998 1997 1996 - - ----------------------------------------------------------- ------------------- ------------------- -------------------- Net sales $ 484,885,000 $ 473,006,000 $ 453,921,000 Cost and expenses: Cost of products sold 406,815,000 399,099,000 381,492,000 Operating and administrative expenses 64,580,000 61,799,000 61,892,000 - - ----------------------------------------------------------- ------------------- ------------------- -------------------- Operating income 13,490,000 12,108,000 10,537,000 Interest income 1,242,000 1,157,000 842,000 Interest expense (816,000) (847,000) (867,000) - - ----------------------------------------------------------- ------------------- ------------------- -------------------- Earnings before income taxes 13,916,000 12,418,000 10,512,000 Provision for income taxes 5,398,000 4,781,000 4,047,000 - - ----------------------------------------------------------- ------------------- ------------------- -------------------- Net earnings $ 8,518,000 $ 7,637,000 $ 6,465,000 - - ----------------------------------------------------------- ------------------- ------------------- -------------------- Earnings per share - basic $1.26 $1.11 $0.93 =========================================================== =================== =================== ==================== Earnings per share - diluted $1.23 $1.06 $0.90 =========================================================== =================== =================== ==================== See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS For fiscal years 1998, 1997 and 1996 - - ----------------------------------------------------------- ------------------- ------------------- -------------------- 1998 1997 1996 - - ----------------------------------------------------------- ------------------- ------------------- -------------------- Cash flows from operating activities Net earnings $ 8,518,000 $ 7,637,000 $ 6,465,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 5,075,000 4,517,000 4,451,000 Deferred income taxes (254,000) (609,000) (626,000) Changes in current assets and liabilities: Receivables 3,485,000 (4,042,000) (114,000) Inventories (2,210,000) 1,476,000 (1,858,000) Other current assets 1,419,000 (551,000) 2,335,000 Accounts payable 3,493,000 741,000 823,000 Accrued liabilities 2,096,000 (935,000) 1,386,000 - - ----------------------------------------------------------- ------------------- ------------------- -------------------- Net cash flows from operating activities 21,622,000 8,234,000 12,862,000 - - ----------------------------------------------------------- ------------------- ------------------- -------------------- Cash flows from investing activities Capital additions (3,847,000) (4,868,000) (3,420,000) Receipt of principal amounts under capital subleases 443,000 505,000 581,000 Proceeds from asset sales 103,000 144,000 88,000 Acquisition of retail stores - (2,701,000) - - - ----------------------------------------------------------- ------------------- ------------------- -------------------- Net cash flows from investing activities (3,301,000) (6,920,000) (2,751,000) - - ----------------------------------------------------------- ------------------- ------------------- -------------------- Cash flows from financing activities: Payment for acquisition of treasury stock (5,017,000) (3,835,000) (2,233,000) Payment of cash dividends (2,025,000) (1,879,000) (1,666,000) Proceeds from exercise of stock options 806,000 817,000 856,000 Principal payments on capital lease obligations (665,000) (702,000) (777,000) Principal payments on long-term debt (210,000) (354,000) (337,000) Repurchase of preferred stock - - (16,000) - - ----------------------------------------------------------- ------------------- ------------------- -------------------- Net cash flows from financing activities (7,111,000) (5,953,000) (4,173,000) - - ----------------------------------------------------------- ------------------- ------------------- -------------------- Cash and equivalents: Net change 11,210,000 (4,639,000) 5,938,000 Balance, beginning of year 23,124,000 27,763,000 21,825,000) - - ----------------------------------------------------------- ------------------- ------------------- -------------------- Balance, end of year $ 34,334,000 $ 23,124,000 $ 27,763,000 =========================================================== =================== =================== ==================== See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT For fiscal years 1998, 1997 and 1996 - - ------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 ---------------------------------------------------------------------------------------- Shares Amount Shares Amount Shares Amount - - ------------------------------------------------------------------------------------------------------------------------------- Preferred Stock, $100 par Beginning of year - $ - - $ - 159 $ 16,000 Repurchase of preferred stock - - - - (159) (16,000) - - ------------------------------------------------------------------------------------------------------------------------------- End of year - - - - - - =============================================================================================================================== Common Stock, $0.05 par Beginning of year 8,750,342 438,000 5,833,570 292,000 5,833,570 292,000 Three-for-two stock split effected in the form of a 50% stock dividend, net of fractional shares - - 2,916,772 146,000 - - - - ------------------------------------------------------------------------------------------------------------------------------- End of year 8,750,342 438,000 8,750,342 438,000 5,833,570 292,000 =============================================================================================================================== Additional Paid-in Capital Beginning of year 13,940,000 13,331,000 12,990,000 Exercise of stock options 419,000 609,000 341,000 - - ------------------------------------------------------------------------------------------------------------------------------- End of year 14,359,000 13,940,000 13,331,000 =============================================================================================================================== Retained Earnings Beginning of year 51,299,000 45,654,000 40,855,000 Net earnings 8,518,000 7,637,000 6,465,000 Cash dividends Common stock ($0.30 per share in 1998, $0.27 per share in 1997 and $0.24 in 1996) (2,025,000) (1,879,000) (1,666,000) Three-for-two stock split effected in the form of a 50% stock dividend, net of fractional shares - (113,000) - - - ------------------------------------------------------------------------------------------------------------------------------- End of year 57,792,000 51,299,000 45,654,000 =============================================================================================================================== Treasury Stock Beginning of year (1,938,463) (15,293,000) (1,214,472) (12,242,000) (1,179,972) (10,865,000) Acquisition of treasury stock (335,050) (5,017,000) (289,856) (3,835,000) (145,800) (2,233,000) Exercise of stock options 118,050 806,000 173,100 817,000 111,300 856,000 Three-for-two stock split effected in the form of a 50% stock dividend, net of fractional shares - - (607,235) (33,000) - - - - ------------------------------------------------------------------------------------------------------------------------------- End of year (2,155,463) (19,504,000) (1,938,463) (15,293,000) (1,214,472) (12,242,000 =============================================================================================================================== Shareholders' investment, end of year $53,085,000 $ 50,384,000 $ 47,035,000 =============================================================================================================================== See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For fiscal years 1998, 1997 and 1996 (1) Description of Business The Company is engaged in the food distribution business through franchised and corporate retail supermarkets and as a supplier to independent food stores. The franchised and corporate retail Piggly Wiggly(R) supermarkets and independent food stores supplied by the Company are located in eastern Wisconsin and northeastern Illinois. In an agreement with the owner of the Piggly Wiggly franchise in 1998, the Company expanded its geographic marketing area to include all of Wisconsin, Michigan's Upper Peninsula, portions of Minnesota and Iowa, and additional counties in Illinois. (2) Summary of Significant Accounting Policies Fiscal year The Company's fiscal year ends on the Saturday closest to December 31. The 1998 and 1996 fiscal years were 52-week periods ended January 2, 1999 and December 28, 1996, respectively. The 1997 fiscal year was a 53-week period ended January 3, 1998. 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 $4,300,000 and $3,950,000 at January 2, 1999 and January 3, 1998, 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 2, 1999 and January 3, 1998, 78% and 81%, respectively, of all inventories were accounted for under the LIFO method. The excess of current cost over the stated LIFO cost of inventory was $10,032,000 and $9,609,000 at January 2, 1999 and January 3, 1998, respectively. Other current assets Other current assets at January 2, 1999 and January 3, 1998 consisted of the following: - - ----------------------------------------- ----------------- ---------------- 1998 1997 - - ----------------------------------------- ----------------- ---------------- Prepaid expenses $1,086,000 $1,209,000 Property held for resale 578,000 1,663,000 Receivable under capital subleases 407,000 443,000 Retail systems and supplies for resale 314,000 320,000 - - ----------------------------------------- ----------------- ---------------- Other current assets $2,385,000 $3,635,000 ========================================= ================= ================ Property and equipment, net Property and equipment are stated at cost. Depreciation is amortized on the straight-line method over the estimated useful lives of the assets. Equipment generally has a useful life of 4 to 7 years, computer hardware and software have a useful life of 3 to 5 years, buildings and land improvements have a useful life of 10 to 35 years, and leasehold improvements generally has a useful life of 10 to 20 years. 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 2, 1999 and January 3, 1998 consisted of the following: - - ----------------------------- ---------------- ---------------- 1998 1997 - - ----------------------------- ---------------- ---------------- Land and buildings $18,731,000 $18,455,000 Leasehold improvements 5,578,000 5,391,000 Equipment and fixtures 33,266,000 33,537,000 - - ----------------------------- ---------------- ---------------- 57,575,000 57,383,000 Less accumulated depreciation and amortization (35,888,000) (34,704,000) - - ----------------------------- ---------------- ---------------- Property and equipment, net $21,687,000 $22,679,000 ============================= ================ ================ Other noncurrent assets Other noncurrent assets at January 2, 1999 and January 3, 1998 consisted of the following: - - ---------------------------- ----------------- ---------------- 1998 1997 - - ---------------------------- ----------------- ---------------- Long term software, net $1,393,000 $1,299,000 Goodwill, net 836,000 891,000 Other intangibles, net 318,000 409,000 Other 977,000 1,183000 - - ---------------------------- ----------------- ---------------- Total $3,524,000 $3,782,000 ============================ ================= ================ Accounts payable Accounts payable includes $8,225,000 and $7,583,000 at January 2, 1999 and January 3, 1998, 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. Supplementary disclosure of cash flow information Interest and taxes paid included in the Company's cash flow from operations were as follows: - - ----------------- ------------- ------------- --------------- 1998 1997 1996 - - ----------------- ------------- ------------- --------------- Interest paid $ 822,000 $ 878,000 $ 873,000 Taxes paid 4,956,000 5,911,000 4,071,000 - - ----------------- ------------- ------------- --------------- 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. Advertising costs Costs incurred for producing and communicating advertising are generally expensed when incurred. New accounting pronouncements In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," which the Company has adopted for its fiscal 1998. The Company's segment reporting data are incorporated in these notes to consolidated financial statements identified as item (13). In March 1998, the AICPA issued Statement of Position (SOP) 98-1, "Accounting For the Costs of Computer Software Developed For or Obtained For Internal Use". SOP 98-1, which the Company is required to adopt in fiscal 1999, requires the capitalization of certain costs incurred in connection with developing or obtaining internal use software. The Company currently expenses all internal software-related costs as incurred. The Company does not anticipate this SOP 98-1 to have any material effect on its financial statements. Reclassifications Certain 1997 and 1996 amounts previously reported have been reclassified to conform to the 1998 presentation. (3) Acquisition In 1997, the Company acquired substantially all of the assets of two retail supermarkets located in the greater Appleton, Wisconsin area from a competitor for $2,701,000 in cash. The acquisition was accounted for as a purchase. Accordingly, the assets of the acquired retail stores were incorporated with the Company's consolidated balance sheets as of January 3, 1998. The purchase price was allocated based upon the relative fair market values of assets acquired. The excess of the purchase price over assets acquired approximated $900,000 and is currently being amortized over 15 years. The Company financed the acquisition solely through working capital from operations. One of the stores opened as a corporate store in November 1997 and the second store was remodeled and opened, also as a corporate store, in August 1998. (4) Long-Term Debt The Company has a loan agreement providing unsecured revolving credit facilities totaling $16,000,000 through April 30, 2001. 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 1998 or 1997. Long-term debt at January 2, 1999 and January 3, 1998 consisted of the following: ------------------------------------------------------------ 1998 1997 ------------------------------------------------------------ Mortgage note, 9.675%, due in monthly installments of $33,026 including interest due through June 2012 $2,990,000 $3,091,000 Land contract, 10.0%, due in annual installments of $33,333 through March 2003 167,000 200,000 Term note, 9.91%, due in quarterly installments of $55,000 through June 1998 - 75,000 ----------------------------------------------------------- 3,157,000 3,366,000 Less current maturities (136,000) (201,000) - - ------------------------------------------------------------ Long-term debt $3,021,000 $3,165,000 =========================================================== At January 2, 1999, the fair value of the financial instruments were not materially different from the carrying value. The revolving credit and term note agreements contain various covenants including, among others, the maintenance of defined working capital, net worth requirements, certain debt-equity ratios, restrictions against pledging of or liens upon certain assets, mergers, significant changes in ownership and limitations on restricted payments. The total amount of long-term debt due in each of the fiscal years 1999 through 2003 will be $136,000, $156,000, $168,000, $182,000 and $197,000, respectively, and $2,318,000 from 2004 to 2012. Interest expense consisted of the following: ------------------------------------------------------------ 1998 1997 1996 ------------------------------------------------------------ Interest on long-term debt $315,000 $350,000 $383,000 Imputed interest-capital 473,000 497,000 484,000 leases Other 28,000 - - - - ------------------------------------------------------------- Interest expense $816,000 $847,000 $867,000 ============================================================ (5) Income Taxes The difference between the statutory federal income tax rate and the effective rate is summarized as follows: - - ------------------------------------------------------------- 1998 1997 1996 - - ------------------------------------------------------------- Federal income tax 34.2% 34.1% 34.0% State income taxes, net of federal income tax benefit 5.2 5.2 5.3 Other, net (0.6) (0.8) (0.8) - - ------------------------------------------------------------- Effective income tax rate 38.8% 38.5% 38.5% ============================================================= Components of provision for income taxes consisted of the following: ----------------------------------------------------------- 1998 1997 1996 ----------------------------------------------------------- Currently payable Federal $4,611,000 $4,433,000 $3,804,000 States 1,041,000 957,000 869,000 Deferred (254,000) (609,000) (626,000) ----------------------------------------------------------- Provision for income taxes $5,398,000 $4,781,000 $4,047,000 =========================================================== The components of deferred income tax assets and liabilities at January 2, 1999 and January 3, 1998 were as follows: ----------------------------------------------------------- 1998 1997 ----------------------------------------------------------- Deferred income tax assets: Bad debt reserve $1,677,000 $1,541,000 Accrued insurance 1,170,000 1,050,000 Capital lease accounting 712,000 694,000 Vacation pay 629,000 570,000 Retail repositioning reserve 267,000 238,000 Other 1,130,000 1,161,000 ----------------------------------------------------------- Total deferred income tax assets 5,585,000 5,254,000 ----------------------------------------------------------- Deferred income tax liabilities: Property and equipment (1,975,000) (1,945,000) Pension (65,000) (186,000) ----------------------------------------------------------- Total deferred income tax liabilities (2,040,000) (2,131,000) ----------------------------------------------------------- Net deferred income tax asset $3,545,000 $3,123,000 =========================================================== The Company currently has no requirements for a valuation allowance for its deferred income tax assets. The net deferred income tax asset as of January 2, 1999 and January 3, 1998 were classified in the balance sheet as follows: - - -------------------------------- -------------- ------------- 1998 1997 - - -------------------------------- -------------- ------------- Current deferred income tax asset $4,376,000 $4,131,000 Noncurrent deferred income tax liability (831,000) (1,008,000) - - -------------------------------- -------------- ------------- Net deferred income tax asset $3,545,000 $3,123,000 ================================ ============== ============= (6) Commitments and Contingent Liabilities The Company has projected capital expenditures for fiscal 1999 at $3,300,000. Commitments approximating $750,000 were made as of January 2, 1999. As of January 2, 1999, the Company was contingently liable under guarantees of bank note agreements of wholesale customers totaling $16,051,000. All of the loan guarantees are substantially collateralized, principally with equipment and inventory, and to a lesser extent, with building facilities. (7) Retirement Plans The Company has a trusteed retirement savings defined contribution plan, which includes provisions of Section 401(k) of the Internal Revenue Code, for the benefit of its non-union eligible employees. Annual provisions are based on a mandatory 5% of eligible participant compensation and additional amounts at the sole discretion of the Board of Directors. Provisions for the three fiscal years ended 1998, 1997 and 1996 were $890,000, $835,000 and $793,000, respectively. The plan allows participants to make pretax contributions. The Company then matches certain percentages of employee contributions. The Company's matching contributions for 1998, 1997 and 1996 were $82,000, $79,000 and $71,000, respectively. The Company has union-administered multi-employer pension plans covering all hourly paid employees represented by collective bargaining agreements. Total pension expense was $1,616,000, $1,456,000 and $1,564,000 in fiscal years 1998, 1997 and 1996, respectively. Complete information with respect to the Company's portion of plan net assets and the actuarial present value of accumulated plan benefits is not available. (8) Leases The Company leases most of its retail stores under lease agreements with original lease periods of 15 to 20 years and typically with five-year renewal options. Exercise of such options is dependent on, among others, the level of business conducted at the location. Executory costs, such as maintenance and real estate taxes, are generally the Company's responsibility. In 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 2, 1999 and January 3, 1998 was as follows: ------------------------------------------------------------- 1998 1997 ------------------------------------------------------------- Investments in leased property under capital leases $5,264,000 $5,264,000 Less accumulated amortization (2,765,000) (2,478,000) ------------------------------------------------------------- Property under capital leases, net $2,499,000 $2,786,000 ============================================================= Amortization of leased property under capital leases, included in operating and administrative expenses, amounted to $287,000, $287,000 and $273,000 in fiscal years 1998, 1997 and 1996, 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 2, 1999: ------------------------------------------------------------ Capital Capital lease sublease obligations receivables ------------------------------------------------------------ 1999 $ 1,884,000 $ 1,189,000 2000 1,841,000 1,126,000 2001 1,841,000 1,127,000 2002 1,841,000 1,127,000 2003 1,852,000 1,137,000 2004-2009 8,744,000 5,740,000 ------------------------------------------------------------ Total minimum lease payments 18,003,000 11,446,000 Less interest (7,583,000) (4,932,000) ------------------------------------------------------------ Present value of minimum lease payments and amounts receivable 10,420,000 6,514,000 Less current portion (656,000) (407,000) ------------------------------------------------------------ Long-term obligations and receivable $ 9,764,000 $ 6,107,000 ============================================================ 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 2, 1999: - - ------------------------------------- ----------------------- $ 10,031,000 1999 2000 9,596,000 2001 9,058,000 2002 9,088,000 2003 8,919,000 2004-2017 79,142,000 - - ------------------------------------- ----------------------- 125,834,000 Total minimum lease payments Lease minimum amounts receivable under noncancelable subleases (94,826,000) - - ------------------------------------- ----------------------- Net minimum lease payments $ 31,008,000 - - ------------------------------------- ----------------------- Rental expenses, net of rental income from subleases, for all operating leases amounted to $4,589,000, $3,912,000 and $3,813,000 in fiscal years 1998, 1997 and 1996, respectively. These amounts include $957,000, $1,029,000 and $1,012,000, respectively, for contingent rentals. (9) Stock Option Plans The Company has stock option plans which provide for the grant of either incentive or nonqualified stock options to key employees. 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. Financial Accounting Standard (FAS) 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 FAS No. 123 has been applied. In fiscal 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: - - ----------------- ------------- -------------- ------------- 1998 1997 1996 - - ----------------- ------------- -------------- ------------- Net earnings As reported $8,518,000 $7,637,000 $6,465,000 Pro forma 8,181,000 7,417,000 6,305,000 - - ----------------- ------------- -------------- ------------- Earnings per share-diluted As reported $1.23 $1.06 $0.90 Pro forma 1.18 1.04 0.88 ================= ============= ============== ============= 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 1998, 1997 and 1996: - - ------------------------- ---------- ----------- ----------- 1998 1997 1996 - - ------------------------- ---------- ----------- ----------- Dividend yield 2.00% 2.06% 2.50% Expected volatility 26.81% 25.62% 20.92% Risk-free interest rate 5.49% 6.36% 5.35% Expected term of grant 5.5 years 5.5 years 6.0 years ========================= ========== =========== =========== As of January 2, 1999, no incentive stock options have been granted. Following is a summary of the status of nonqualified stock options for the fiscal years 1998, 1997 and 1996: - - ------------------------------ -------------- --------------- Weighted Number average of shares exercise prices - - ------------------------------ -------------- --------------- Shares under option at December 30, 1995 705,549 $ 5.15 Granted 132,900 10.50 Exercised (166,950) 5.13 Forfeited (2,799) 5.09 - - ------------------------------ -------------- --------------- Shares under option at December 28, 1996 668,700 6.22 Granted 143,700 9.67 Exercised (173,100) 4.72 - - ------------------------------ -------------- --------------- Shares under option at January 3, 1998 639,300 7.40 Granted 151,500 15.00 Exercised (118,050) 6.83 - - ------------------------------ -------------- --------------- Shares under option at January 2, 1999 672,750 9.21 ============================== ============== =============== Shares reserved for grant at January 2, 1999 221,400 ============================== ============== =============== Options granted in January 1999 165,700 $16.13 ============================== ============== =============== 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. Exercise prices for options outstanding as of January 2, 1999 ranged from $4.42 to $15.00. The weighted average remaining contractual life of these options is approximately 4 1/2 years. Nonqualified stock options outstanding at January 2, 1999 were exercisable for 402,750 shares. (10) 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 2, 1999 and January 3, 1998, no shares of preferred stock were issued nor outstanding. The Company also has 1,000,000 shares of $0.05 par value class B preferred stock authorized, none of which has 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. (11) 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 the dividend distribution date have been restated to retroactively reflect the stock split. Prior to January 6, 1999, common shares issued and issuable included one associated common stock purchase right which entitled shareholders to purchase one share of common stock from the Company at an exercise price equivalent to $14 per share. The rights became exercisable after a person acquired beneficial ownership of 20% or more of the Company's common stock. The rights did not have any voting rights and would have been redeemed at a price of $0.0067 per right. On January 6, 1999, these rights expired pursuant to their terms. (12) 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: - - ------------------- ------------ ------------ ------------- 1998 1997 1996 - - ------------------- ------------ ------------ ------------- Net earnings available for common shareholders $8,518,000 $7,637,000 $6,465,000 Weighted average shares outstanding 6,749,000 6,871,000 6,944,000 Earnings per share-basic $1.26 $1.11 $0.93 - - ------------------- ------------ ------------ ------------- Net earnings available for common shareholders $8,518,000 $7,637,000 $6,465,000 Weighted average shares outstanding 6,749,000 6,871,000 6,944,000 Stock options' dilutive effect 174,000 277,000 243,000 Weighted average shares and equivalents outstanding 6,923,000 7,148,000 7,187,000 Earnings per share-diluted $1.23 $1.06 $0.90 - - ------------------- ------------ ------------ ------------- (13) Segment Reporting In June 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 131, "Disclosures about Segments of An Enterprise and Related Information," which the Company has adopted for its fiscal 1998. Based on management responsibility, the Company has identified two business segments, wholesale and retail, in which it operates. The wholesale segment represents the Company's business activities relating to food wholesale distribution. At January 2, 1999, the Company provided products to 68 franchised units, 18 corporate stores and a number of independent retail stores. The wholesale segment includes warehousing, transportation and other logistical functions, and derives its revenues primarily from the sale of groceries, produce, dairy, meat and cigarette products to the Company's franchised, corporate and independent retail customers. The retail segment relates to the Company's retail supermarket activities. Revenues are realized through the sale of groceries, dairy, produce, meat, bakery, deli and other merchandise by the Company's corporate retail stores to retail consumers. The accounting policies of the two segments are the same as those described in the Summary of Significant Accounting Policies. The Company's management utilizes several measurement tools in evaluating each segment's performance and each segment's resource requirements. However, the principal measurement tools are consistent with the Company's consolidated financial statements and accordingly are reported on a similar basis. Wholesale operating profits on sales through the Company's corporate stores are allocated to the retail segment. The "corporate" heading includes corporate-related items, principally cash and equivalents. As it relates to operating income, "corporate" heading includes corporate-related items allocated to the appropriate segments. Summarized financial information concerning the Company's reportable segments is shown in the following table (in thousands). - - ------------------------ ------------ ------------ ------------ Sales 1998 1997 1996 - - ------------------------ ------------ ------------ ------------ Wholesale sales $ 404,047 $ 399,197 $ 382,354 Intracompany sales (123,912) (107,988) (103,886) Net wholesale sales 280,135 291,209 278,468 Retail sales 204,750 181,797 175,453 - - ------------------------ ------------ ------------ ------------ Total $ 484,885 $ 473,006 $ 453,921 ======================== ============ ============ ============ - - ------------------------ ------------ ------------ ------------ Operating Income 1998 1997 1996 - - ------------------------ ------------ ------------ ------------ Wholesale $ 9,749 $ 9,029 $ 8,499 Retail 3,741 3,079 2,038 Total operating income 13,490 12,108 10,537 Interest income 1,242 1,157 842 Interest expense (816) (847) (867) - - ------------------------ ------------ ------------ ------------ Earnings before income taxes $ 13,916 $ 12,418 $ 10,512 - - ------------------------ ------------ ------------ ------------ - - ------------------------ ------------ ------------ ------------ Capital Expenditures 1998 1997 1996 - - ------------------------ ------------ ------------ ------------ Wholesale $ 149 $ 365 $ 378 Retail 2,443 3,628 1,087 Corporate 1,255 875 1,955 - - ------------------------ ------------ ------------ ------------ Total $ 3,847 $ 4,868 $ 3,420 ======================== ============ ============ ============ - - ------------------------ ------------ ------------ ------------ Depreciation and Amortization 1998 1997 1996 - - ------------------------ ------------ ------------ ------------ Wholesale $ 818 $ 985 $ 950 Retail 2,338 1,881 2,095 Corporate 1,919 1,651 1,406 - - ------------------------ ------------ ------------ ------------ Total $ 5,075 $ 4,517 $ 4,451 ======================== ============ ============ ============ - - ------------------------ ------------ ------------ ------------ Identifiable Assets 1998 1997 1996 - - ------------------------ ------------ ------------ ------------ Wholesale $ 32,040 $ 32,244 $ 42,655 Retail 26,550 25,972 21,073 Corporate 46,506 40,650 34,476 - - ------------------------ ------------ ------------ ------------ Total $ 105,096 $ 98,866 $ 98,204 ======================== ============ ============ ============ Unaudited Quarterly Financial Information The Company generally includes sixteen weeks in its first quarter and twelve weeks in each subsequent quarter. In fiscal 1997, the fourth quarter consisted of thirteen weeks. Summarized quarterly and annual financial information for fiscal years 1998 and 1997 follows:
- - ---------------------------------------------------- ---------------------------------------------------------------------- (dollars and shares in thousands, except per share Fiscal Year Ended January 2, 1999 data) - - ---------------------------------------------------- ---------------------------------------------------------------------- First Second Third Fourth Year - - --------------------------------------- ---------------- ---------------- ---------------- ---------------- --------------- Net sales $142,142 $114,068 $112,550 $116,125 $484,885 Gross profit 23,063 18,450 18,091 18,466 78,070 Net earnings 1,711 2,025 1,994 2,788 8,518 Earnings per share - basic 0.25 0.30 0.29 0.42 1.26 Earnings per share - diluted 0.24 0.29 0.29 0.41 1.23 Weighted average shares and equivalents outstanding 7,140 7,014 6,937 6,773 6,923 - - --------------------------------------- ---------------- ---------------- ---------------- ---------------- --------------- - - ---------------------------------------------------- ---------------------------------------------------------------------- (dollars and shares in thousands, except per share Fiscal Year Ended January 3, 1998 data) - - ---------------------------------------------------- ---------------------------------------------------------------------- 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 7,104 7,051 7,026 7,293 7,255 - - -------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
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 1,000 beneficial holders of the Company's common stock. An analysis of the 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 - - ------------ ---------- ----------- ---------- ----------- ----------- ---------- ----------- ---------- ----------- ---------- 1998 $17.75 $15.00 $17.50 $15.50 $16.00 $15.13 $16.50 $15.50 $17.75 $15.00 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 - - ------------ ---------- ----------- ---------- ----------- ----------- ---------- ----------- ---------- ----------- ---------- Cash dividends paid per share were: - - ---------------- ------------------ ------------------ ------------------ ------------------ ------------------ First Second Third Fourth Year - - ---------------- ------------------ ------------------ ------------------ ------------------ ------------------ 1998 $0.07 $0.07 $0.08 $0.08 $0.30 1997 0.06 0.07 0.07 0.07 0.27 1996 0.05 0.05 0.07 0.07 0.24 - - ---------------- ------------------ ------------------ ------------------ ------------------ ------------------
Under the Company's loan agreements, approximately $11.9 million of retained earnings were available for the payment of cash dividends, stock repurchases and other restricted payments at January 2, 1999. o 1997 and 1996 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Special Note Regarding Forward-Looking Statements Certain matters discussed in this press release are "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as the Company "believes," "anticipates," "expects" or words of similar import. Similarly, statements that describe the Company's future plans, objectives, strategies or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties including, but not limited, to the following: (1) presence of intense competitive market activity in the Company's market areas; (2) ability to identify and develop new market locations for expansion purposes; (3) continuing ability to obtain reasonable vendor marketing funds for promotional purposes; (4) ongoing advancing information technology requirements; (5) ongoing nominal food price inflation; (6) the Company's ability to continue to recruit, train and retain quality franchise and corporate retail store operators; and (7) the potential recognition of repositioning charges resulting from potential closures, conversions and consolidations of retail stores due principally to the competitive nature of the industry and to the quality of the Company's retail store operators. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this report and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Results of Operations The following table sets 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 - - -------------------------------------- -------------------------------------------------- --- --------------------------------- 1998 1997 1998 1997 1996 vs. 1997 vs. 1996 - - -------------------------------------- ---------------- ---------------- ---------------- --- ---------------- ---------------- Net sales 100.0% 100.0% 100.0% 2.5% 4.2% Cost of products sold 83.9% 84.4% 84.0% 1.9% 4.6% Operating and administrative expenses 13.3% 13.1% 13.6% 4.5% (0.2%) Earnings before income taxes 2.9% 2.6% 2.3% 12.1% 18.1% Net earnings 1.8% 1.6% 1.4% 11.5% 18.1% - - -------------------------------------- ---------------- ---------------- ---------------- --- ---------------- ----------------
1998 vs. 1997 Net Sales Net sales for the 52-week period ended January 2, 1999 increased 2.5% to $484.9 million, compared to $473.0 million for the 53-week period ended January 3, 1998. Sales for 1998, adjusted for the extra week in fiscal 1997, increased 4.5% compared to the prior year. Fiscal 1998 sales surpassed the Company's previous record sales for a 52-week year. While the Company's total sales were $484.9 million in 1998, the Company's "virtual chain" of 86 stores generated retail volume approximating $730 million in 1998. Wholesale sales in 1998 increased 1.2% to $404.0 million, compared to $399.2 million in 1997. On a comparative 52-week period, 1998 wholesale sales increased 3.2% over 1997. The improvement in wholesale sales volume was principally attributable to the opening of one new corporate store in Appleton, Wisconsin in October 1997; the replacement of two noncompetitive corporate Appleton stores with expanded and remodeled facilities as part of the acquisition from a competitor; the opening of one new market store in Poynette, Wisconsin in January 1998; and the completion of franchise facility projects in Howards Grove, Waupaca and Lomira, Wisconsin in 1998. Wholesale sales was, however, negatively impacted by the closure of the Plover facility in September 1997 and the conversion of one Oshkosh store from franchise to corporate in October 1997. There are currently six additional facility projects in various phases of planning or construction, with completions scheduled throughout the first six months of 1999. These projects involve four major franchise expansion projects in Beaver Dam, Kiel, Crivitz and Randolph, Wisconsin; one replacement franchise store in Fort Atkinson, Wisconsin; and one new market franchise unit in Cottage Grove, Wisconsin. The four expansion stores, upon completion, will increase their aggregate square footage of selling space by approximately 40%. Based on the Company's internal wholesale price index, except for tobacco products, inflation did not have a significant effect on sales between years. Retail sales improved 12.6% to $204.8 million in 1998, compared to $181.8 million in 1997. On a comparative 52-week period, 1998 retail sales increased 14.8% compared to fiscal 1997. The improvement in retail sales volume was principally attributable to the opening of the three new Appleton corporate stores. This improvement was, however, offset by the two closed stores. The Company's retail sales volume was also positively impacted by the Oshkosh store that was converted from franchise to corporate in October 1997. Finally, during fiscal 1998, the Company continued to recognize the benefits of the Piggly Wiggly Preferred Club(R) electronic card marketing program. This unique card marketing program continues to grant special incentives to higher purchase level shoppers and it continues to reward customers with weekly savings without clipping in-ad coupons. Additionally, customers are encouraged to return to Piggly Wiggly supermarkets with special "Pig Deal" next trip savings offers issued automatically by participating manufacturers. This card marketing program is available to all of the Company's "virtual chain" stores. Cost of Products Sold Cost of products sold, as a percent of sales, decreased 0.5% to 83.9% in 1998 from 84.4% in 1997. This decrease was a direct result of increased higher margin corporate retail sales due principally to the net one additional corporate store in Appleton and the additional corporate store in Oshkosh since October 1997. Lower margin net wholesale sales as a percentage of sales decreased to 57.8% compared to 61.6% in 1997. Conversely, higher margin retail sales as a percentage of sales increased to 42.2% compared to 38.4% in 1997. Based solely on current franchise projects outstanding, the Company anticipates the wholesale sales percentage to increase nominally in 1999. Operating and Administrative Expenses Fiscal 1998 operating and administrative expenses, as a percentage of sales, increased to 13.3%, compared to 13.1% in 1997. This increase of 0.2%, or $2.8 million, was principally attributable to higher operating expenses relating to the additional stores in Appleton and Oshkosh. Fiscal 1998 depreciation attributable to retail increased to $2.3 million from $1.9 million in 1997. This increase in retail operating expenses was partially offset by lower administrative expenses in the wholesale segment. During 1998, particularly in the last two quarters, the Company experienced lower provisions for workers compensation and general liability due to reduced frequency and severity of claims. The Company's overall experience ratio has improved due to improved loss control programs. 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 receivable realization charges from a number of underperforming franchise operators. During fiscal 1998, the Company incurred realization charges relating to wholesale bad debts and retail subsidies totaling $1.5 million, compared to $2.0 million in 1997. Although certain franchise retail operations have improved, the Company continues to evaluate various business initiatives relating to the operations of its underperforming stores. These initiatives include, but are not limited to, the sale and subsequent conversion of these stores, the closure of these supermarkets or the implementation of other operational changes. As with prior years, implementation of any of these options 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 earnings results in the short-term, but the Company believes that such actions will help improve the Company's long-term profitability. Fiscal 1998 and 1997 repositioning charges totaled $0.2 million and $1.1 million, respectively. The fiscal 1998 repositioning costs were principally attributable to the occupancy costs of closing and terminating two franchise operations in Wisconsin. Fiscal 1997 repositioning charges were more significant due principally to the $0.7 million costs relating to the Company's closing of the Plover franchised store and the $0.3 million charge for closing the Company's two noncompetitive stores in Appleton. Net Earnings The Company's fiscal 1998 operating income increased 11.4% to $13.5 million, compared to $12.1 million in 1997. After allocating wholesale operating profits on sales through the Company's corporate stores to the Company's retail segment, the wholesale segment recognized $9.7 million in operating income while the retail segment recognized $3.7 million. Fiscal 1998 earnings before income taxes increased 12.1% to $13.9 million, compared to $12.4 million in 1997. As a percent of sales, earnings before income taxes increased to 2.9% in 1998 from 2.6% in 1997. Net earnings for 1998 increased 11.5% to $8.5 million, compared to $7.6 million in 1997. With continuing improvements in sales and productivity, the Company's net earnings-to-sales ratio for 1998 improved to 1.8%, compared to 1.6% for fiscal 1997. The Company's net earnings-to-sales ratio ranks as one of the best in its industry. Additionally, the Company has had earnings performance of 24 consecutive quarters showing increased earnings over the prior year's quarter. Diluted earnings per share increased 16.0% to $1.23 from $1.06 in 1997. On a percentage basis, diluted earnings per share increased more than net earnings due to additional share repurchases in fiscal 1998 which reduced the weighted average shares and equivalents outstanding. 1997 vs. 1996 Net Sales Net sales for the 53-week period ended January 3, 1998 increased 4.2% to $473.0 million, compared to $453.9 million for the 52-week period ended December 28, 1996. Sales, adjusted for the extra week in fiscal 1997, increased 2.3% compared to 1996. Wholesale volume in 1997 increased 4.4% to $399.2 million, compared to $382.4 million in 1996. Retail sales increased 3.6% to $181.8 million in 1997, compared to $175.5 million in 1996. On a comparative 52 week period, 1997 wholesale and retail sales increased 2.4% and 1.7%, respectively, from 1996. The improvement in sales volume in 1997 was attributable to the increased business volume resulting from the October 1997 completion of the two-year implementation of the Piggly Wiggly Preferred Club electronic card marketing program. Fiscal 1997 sales also benefited 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 in Milton, Wisconsin from a competing wholesaler into a Piggly Wiggly franchise unit. In October 1997, the Company converted a franchise unit in Oshkosh, Wisconsin into a corporate retail supermarket. During fiscal 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 added approximately 115,000 of aggregate store selling space. In fiscal 1997, sales were negatively impacted by closures of two underperforming corporate stores and one underperforming franchise unit and the impact of additional competitive activity due to new stores in certain markets. At January 3, 1998, the Company had 68 franchised and 18 corporate supermarkets, compared to 68 franchised and 16 corporate stores at December 28 ,1996. 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 a competitor. 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. The Company then temporarily closed the acquired Appleton store for renovation. This newly renovated store was opened in August 1998. Upon its completion, the Company closed its noncompetitive north side Appleton store. These two replacement corporate supermarkets aggregated 85,000 square feet of store selling space, an increase of 93% over the combined 44,000 square feet of the closed units. Cost of Products Sold Fiscal 1997 cost of products sold, as a percent of sales, increased 0.4% to 84.4%, compared to 84.0% in 1996. This increase was principally a direct result of the increased ratio of lower margin wholesale sales to total sales. The percentage of net wholesale sales to total sales increased to 61.6% in 1997, compared to 61.3% in 1996. Operating and Administrative Expenses Operating and administrative expenses, as a percent of sales, decreased 0.5% to 13.1% in 1997 from 13.6% in 1996. Total operating and administrative expenses in 1997 decreased due principally to the closing of two smaller underperforming corporate retail stores in the fall of 1996. 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. Total depreciation and amortization expense between years were comparable at approximately $4.5 million. However, depreciation attributable to retail decreased by about 10% between years due principally to the closures of two corporate stores in the fall of 1996. Certain variable operating expenses, such as wages and salaries, increased due to higher sales volume. Due to the 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 a number of underperforming franchise operators. Total 1997 and 1996 realization charges relating to wholesale bad debts and retail subsidies were $2.0 million and $2.3 million, respectively. For 1997 and 1996, retail repositioning and restructuring charges amounted to $1.1 million and $0.3 million, respectively. The increase in retail repositioning costs in 1997 compared to 1996 was principally attributable to (1) the closure of an underperforming franchise supermarket in Plover, Wisconsin during 1997 resulting in a $700,000 pretax charge to operations; and (2) the closing and termination costs relating to two smaller noncompetitive corporate stores that were replaced by the two acquired stores from a competitor resulting in a $300,000 pretax charge to operations. Additionally, the Company incurred charges approximating $300,000 relating to market development and start-up costs due to the opening of the new market corporate store in Appleton, Wisconsin and the conversion of the acquired Menasha supermarket into the Piggly Wiggly format. Net Earnings The Company's 1997 earnings before income taxes increased 18.1% to $12.4 million, compared to $10.5 million in 1996. As a percent of sales, earnings before income taxes increased to 2.6% in 1997 from 2.3% in 1996. After allocating to the retail segment the wholesale operating profits on sales made to the Company's corporate stores, the wholesale segment contributed $9.0 million and $8.5 million to 1997 and 1996 pretax earnings, respectively. Additionally, retail segment contributed $3.1 million and $2.0 million, respectively, to the 1997 and 1996 pretax earnings. Net earnings for 1997 increased 18.1% to $7.6 million compared $6.5 million in 1996. With continued improvements in sales volume and productivity, the Company's net earnings-to-sales ratio for 1997 improved to 1.6%, compared to 1.4% for 1996. Additionally, 1997 diluted earnings per share increased 17.8% to $1.06 from $0.90 in 1996. Liquidity and Capital Resources The Company's favorable 1998 operating results continued to enhance its strong financial position. During fiscal 1997, the primary source of liquidity was cash generated from operations. Total cash generated from operations for fiscal 1998 was $21.6 million, compared to $8.2 million in 1997. Cash flow from operations increased significantly between years due principally to the decrease in outstanding receivables from franchise operators. This was due in large part to timing of cash receipts and the minimal balance for short-term financing support for purchase of facilities and equipment for new stores. In fiscal 1998, the balance of the short-term financing support was less than $100,000; in fiscal 1997, the balance was $2.4 million. Although inventory levels based on replacement cost increased by $2.6 million, this increment overall did not negatively affect cash flows due to the corresponding increase in accounts payable. Net cash outflows for investing activities totaled $3.3 million in 1998 compared to $6.9 million in 1997. This decrease in outflows was attributable to the $2.7 million outlay the Company incurred in 1997 in acquiring two retail stores from a competitor. Additionally, total capital expenditures decreased to $3.8 million in 1998, compared to $4.9 million in 1997. Of the total capital expenditures of $3.8 million, the Company invested $2.4 million for retail upgrades. For 1999, the Company's capital budget is estimated at $3.3 million, of which $750,000 has been committed as of January 2, 1999. Of this $3.3 million total, the Company has allocated $1.5 million for retail upgrades, $750,000 for technology hardware and software, and $325,000 for distribution upgrades. The Company expects to finance these projects from internally generated capital. Net cash outflows for financing activities were $7.1 million in 1998 compared to $6.0 million in 1997. Total stock repurchases was higher in 1998 due in large part to a block repurchase of 235,000 shares from an affiliate at $14.50 per share. In September 1998, the Company completed its existing $5.0 million stock repurchase program that commenced in January 1997. This was the Company's fourth announced stock repurchase program over the past seven years that have been fully completed by the Company. The Company's Board of Directors subsequently authorized a new stock repurchase program permitting the Company to repurchase up to an additional $5.0 million of its common stock from time to time in the open market, pursuant to privately negotiated transactions, or otherwise. As of January 2, 1999, the full authorized amount remains available for stock repurchase. Since the first stock repurchase program commenced in January 1992, the Company has repurchased over 2.2 million shares, or approximately 25%, of its issued common stock. In summary, cash and equivalents for fiscal 1998 increased $11.2 million, resulting in a year-end balance of $34.3 million. Of this year-end cash balance, approximately $25 million was invested in short-term investments with maturities of less than three months, such as taxable money market funds and commercial paper with strong credit ratings. The Company does not use any form of derivative securities for hedging or for other reasons. The Company is generally the prime lessee of new retail store facilities, which it then subleases to independent franchise operators. All new facilities in 1998 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. Contingent rentals for 1998 and 1997 were both approximately $1.0 million. At January 2, 1999, the Company had recorded $10.0 million of minimum lease payments required to be paid under operating leases in 1999 and $6.5 million of amounts receivable under noncancelable subleases in 1999. Additionally, at January 2, 1999, the Company had $9.8 million of long-term capital lease obligations, $6.1 million 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. After being provided, this financing support is subsequently refinanced, typically through banks, with the Company being reimbursed. As part of the financing program, the Company had contingent liabilities under bank note guarantees totaling $16.1 million at January 2, 1999. All of the loan guarantees are substantially collateralized, principally with equipment and inventory and, to a lesser extent, with building facilities. At January 2, 1999, the Company's ratio of total liabilities to shareholders' investment was 0.98, which was very comparable to 0.96 at January 3, 1998. At January 2, 1999, the Company had available the entire amount of its unsecured revolving bank credit facilities totaling $16.0 million. The Company believes its cash, working capital and debt-to-equity positions continue to compare very favorably to most industry competitors. Additionally, the Company believes that its financial condition and cash flow from operations will continue to provide it with adequate long-term flexibility to finance anticipated capital requirements without adversely impacting its financial position or liquidity. Year 2000 Issues The Company is dependent on computer hardware, software and other business systems ("IT systems") and non-information technology systems, such as communication equipment, tractors and trailers, refrigeration controllers, scales, and other equipment containing embedded microprocessor technology ("non-IT systems"). The Company uses these IT and non-IT systems in several critical operating areas including product procurement and merchandising, retail store and warehouse distribution operations; inventory order entry and labor management; and accounting, administrative and maintenance systems. In 1997, the Company began evaluating its IT and non-IT systems in order to identify and adjust date sensitive systems for year 2000 compliance. As part of this undertaking, the Company established a team, headed by the Company's Vice President of Business Systems Support Group. The team is staffed primarily with internal professionals within the business systems group and some outside consultants on an as-needed basis. The team leader reports periodically on the year 2000 status to the Company's Executive Committee and its Board of Directors. The team developed a plan to assess its IT and non-IT systems for year 2000 compliance requirements. The plan consists of three main project phases: (1) to make an inventory listing of all IT and non-IT systems that may be subject to the year 2000 issue along with an assessment as to the scope of the issue as it related to these systems; (2) to remediate any and all year 2000 compliance problems; and (3) to test, validate and implement systems subsequent to remediation. At the end of the first quarter of 1998, the Company had substantially completed the first phase of the project. An inventory list of all systems have been identified and documented. Nearly half of all IT and non-IT systems previously identified have also been remediated at this time. The Company believes it will complete all remaining remediation efforts for existing systems over the next few months. Insofar as testing, validation and implementation are concerned, the Company has tested some of its core IT systems and has determined that they are projected to be year 2000 compliant by mid-1999. With regard to non-IT systems, the Company also expects these systems to be year 2000 compliant in 1999. The Company estimates it will cost less than $500,000 to become year 2000 compliant approximately $350,000 of which will be charged to operations in 1999. As part of its year 2000 project, the Company has identified business relationships with third parties, including suppliers, vendors, financial institutions and other service providers, which the Company believes are critical to its business operations. The Company has been communicating with these third parties through correspondence and/or interviews to ascertain the extent to which they are addressing their year 2000 compliance issues. The Company will continue to assess and monitor the progress of these third parties in resolving year 2000 issues. The Company undertakes a certain amount of risk by relying on the third parties' own year 2000 assessment. Because of this, the Company believes that a key vendor's failure to resolve its year 2000 issues is the most likely worst case scenario for the Company. Such failure could result in the Company not being able to procure products from a key vendor on a timely basis. The Company does not expect this most likely worst case scenario to have a material adverse impact on its core retail and wholesale businesses due principally to the Company's network of alternative suppliers and vendors. The Company will, however, develop contingency plans to work with these key third parties in 1999. Company Business The Company is engaged in distributing food and related products at wholesale and retail. At January 2, 1999, the Company franchised 68 and operated 18 corporate retail supermarkets under the Piggly Wiggly name in its eastern and northeastern Illinois market areas. In a 1998 agreement with Piggly Wiggly Company, owner of the national Piggly Wiggly franchise, the Company expanded its exclusive geographic marketing and operating area to include all of Wisconsin, Michigan's Upper Peninsula, portions of Minnesota and Iowa, and additional counties in Illinois. The Company is the prime supplier to its franchised and corporate supermarkets. The Company also serves as a wholesaler to other smaller independent retail store 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, froze and processed meats, eggs and deli items through a third party distribution facility in Milwaukee, Wisconsin on a contract basis. The Company employs approximately 1,700 persons, nearly 1,250 of whom are employed in the corporate retail segment operations. 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. EX-21 8 SUBSIDIARIES EXHIBIT 21 Subsidiary of the Registrant The only subsidiary of Schultz Sav-O Stores, Inc. is PW Trucking, Inc., a Wisconsin corporation. EX-23 9 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 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. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Milwaukee, Wisconsin March 26, 1999 EX-27 10 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF SCHULTZ SAV-O STORES, INC. AS OF AND FOR THE YEAR ENDED JANUARY 2, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JAN-02-1999 JAN-04-1998 JAN-02-1999 34,334,000 0 6,233,000 0 23,951,000 71,279,000 57,575,000 35,888,000 105,096,000 38,395,000 3,021,000 0 0 438,000 52,647,000 105,096,000 484,885,000 484,885,000 406,815,000 0 64,580,000 0 816,000 13,916,000 5,398,000 8,518,000 0 0 0 8,518,000 1.26 1.23 Net of "Allowances for doubtful accounts". Amounts included in "Other costs and expenses".
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