-----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, VvT9yT9ejOZSZwC1fWt00ju5Ova+2LnF0lcYikIb0nZhl51RUNgVZNu0KsQS7HuV yKg0aFQFarOPvULil04a7A== 0000897069-00-000171.txt : 20010312 0000897069-00-000171.hdr.sgml : 20010312 ACCESSION NUMBER: 0000897069-00-000171 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000322 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: 575849 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 1, 2000. 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 20, 2000: $48,361,461. Number of shares outstanding of the registrant's Common Stock as of March 22, 2000: 5,943,569. PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED HEREIN BY REFERENCE: 1999 Annual Report to Shareholders (incorporated by reference into Parts II and IV to the extent indicated therein). Definitive Proxy Statement for 2000 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). 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 business systems requirements; 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 report. We will not necessarily update these statements or other information in this report based on future events or circumstances. Please read this entire report 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 1, 2000, we franchised 69 and owned 19 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 88 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 1999, our virtual chain had approximately $750 million in retail sales. The virtual chain encompasses all Piggly Wiggly supermarkets, both franchised and owned, in a single, coordinated merchandising and advertising program which typically includes: -2- 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 significant 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 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 performance counseling and supervision; 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 merchandising planning; o equipment selection and sourcing; o engineering services, including store design, floor layout and facility project management; 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. In addition to continuing to leverage the combined merchandising power of our "virtual chain" of stores that we service or operate, we have created an advertising alliance with another operator and franchisor of Piggly Wiggly stores in South Carolina and completed our first combined effort in January 2000. We will endeavor to expand these efforts to other non-competing supermarkets in 2000. 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 1999, we: o opened a new market franchise store in Cottage Grove, Wisconsin; o closed an older franchise store and replaced it with a more competitive and larger facility in Fort Atkinson, Wisconsin; o consolidated two franchise stores, resulting in the closure of one franchise store in St. Francis, Wisconsin; o converted formerly independent operators as franchisees in Niagara and Winneconne, Wisconsin; and o converted an Oshkosh, Wisconsin franchise store to a corporate store. -4- The following table shows our development of, and changes in, our franchised and corporate retail supermarkets for the periods presented:
Franchise Supermarkets | Corporate Supermarkets -------------------------------------------------------------------------------- Number of 1995 1996 1997 1998 1999 | 1995 1996 1997 1998 1999 Supermarkets ---- ---- ---- ---- ---- | ---- ---- ---- ---- ---- - - ------------ | Beginning of Year 65 66 68 68 68 | 20 19 16 18 18 | New Market Supermarkets(a) 1 1 1 1 1 | -- -- 1 -- -- | Replacement Supermarkets(b) 3 2 1 1 1 | -- -- -- 1 -- | Converted to/from Franchise(c) -- 1 (1) -- (1) | -- (1) 1 -- 1 | Terminated Operations(d) (3) (2) (2) (2) (2) | (1) (2) -- (1) -- | New Franchises(e) -- -- 1 -- 2 | -- -- -- -- -- | End of Year 66 68 68 68 69 | 19 16 18 18 19 == == == == == | == == == == == | Remodeled Supermarkets(f) 6 1 3 2 4 | -- -- -- -- --
- - --------------- (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. The following projects are scheduled for completion in 2000: o construction of one new market franchise store in Kewaskum, Wisconsin; o replacement of existing franchise supermarkets in Pardeeville and New Holstein, Wisconsin; o expansion of existing franchise stores in Jackson and Kaukauna, Wisconsin; and o replacement of one corporate store in Racine, Wisconsin. Additionally, we expect to have one replacement franchise store in Slinger, Wisconsin and one replacement corporate store in Zion, Illinois in 2001. 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 1999 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 -5- 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. Under our Piggly Wiggly Master Franchise Agreement, our franchise territory includes all of Wisconsin, the upper peninsula of Michigan and designated counties in northern Illinois, southeastern Minnesota and eastern Iowa. Our franchise rights are of unlimited duration and are not subject to any specific termination provision. We are required to pay franchise fees to the current franchisor in parts of our market areas. The only other material obligation imposed on us in our franchise territory is that the supermarkets operated under the Piggly Wiggly name 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 store branded 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 store brands and believe that our Topco-procured line of branded 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 1999 and 1998, except with regard to tobacco products. The Piggly Wiggly Preferred Club(R) Card marketing program, a customer-friendly, card-based system, is in place in all our corporate and franchised supermarkets. 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, processed by a standardized front-end point-of-sale system, 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 25,500 square feet. Our corporate supermarkets range in size from 19,980 square feet to 54,850 square feet, with an average of 34,990 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; o delicatessen; o flowers and plants; and -6- 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. Certain franchised and corporate stores continue to fail to meet certain financial performance goals. We closed one such store during 1999. In order to further improve our results of operations, we continue to evaluate various business alternatives relating to 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 31 regional supermarket chains and food services organizations who collectively operate approximately 2,050 stores. According to Topco data, its member-owners accounted for approximately 13% of United States grocery store sales volume in 1999. In 1999, purchases through Topco accounted for approximately 13% 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 more than 73% of the products supplied to our franchised and corporate stores in 1999. 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. 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 -7- 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 1999 and are expected to be nominal in 2000. 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. We believe that key competitive factors include the provision of the following services to franchise customers: o credit enhancements and working capital support; o advertising; o retail performance and supervision counseling; 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, 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, such as Wal-Mart Stores, Inc., K-Mart Corp., 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 1, 2000, we employed approximately 1,790 persons, including approximately 1,330 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 200 are engaged in warehousing and trucking activities and approximately 260 are corporate and administrative personnel. Seven retail collective bargaining agreements, covering a total of approximately 720 employees expire in 2000. 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, 52...Chairman of the Board, President and Chief Executive Officer Michael R. Houser, 48....Executive Vice President-Marketing and Merchandising John H. Dahly, 59........Executive Vice President, Chief Financial Officer and Secretary William K. Jacobson, 49..Senior Vice President-Retail Operations and Development and Assistant Secretary Elwood F. Winn, 49.......Senior Vice President-Strategic Planning Armand C. Go, 38.........Vice President, Treasurer and Chief Accounting Officer Larry D. Hayes, 57.......Vice President-Meat, Bakery and Deli Operations John S. Kwas, 60.........Vice President-Grocery Procurement Thomas J. Timler, 42.....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, except that Mr. Winn was President and Chief Executive Officer of Certified Grocers Midwest Inc. (CGM), Hodgkins, Illinois, from 1992 until October 1998 and, subsequently, consultant to CGM until September 1999. -9- Item 2. Properties. ---------- As is typical in our industry, a substantial portion of our retail store facilities are leased. As of January 1, 2000, we leased 18 corporate supermarkets and owned one supermarket. The leased supermarkets range in size from 19,980 to 54,850 square feet, with an average of 34,360 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 1, 2000, we subleased 53 of our leased supermarkets and leased one owned supermarket to independent operators who are our wholesale customers and franchisees. Expansions continue at two franchise and one corporate supermarket. These projects are expected to increase the aggregate square footage of selling space at such stores by approximately 25%. In addition, we are constructing a new market franchise store and three replacement franchise stores. 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 lease expiring in August 2003, which is used for customer support services. 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 1999. 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 1999. -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 556 shares of our common stock to each of our four nonemployee directors who do not receive fees for professional services provided to Schultz Sav-O Stores on January 27, 2000. 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 1999 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 1, 2000 and January 2, 1999, the Consolidated Statements of Earnings, Cash Flows and Shareholders' Investment for each of the three fiscal years in the period ended January 1, 2000, 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 2000 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, 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 1, 2000 and January 2, 1999 Consolidated Statements of Earnings, Cash Flows and Shareholders' Investment for the fiscal years 1999, 1998 and 1997 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 1, 2000. 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 1999. -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 22, 2000 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, Vice President, Treasurer Martin Crneckiy, Jr., Director and Chief Accounting Officer (Principal Accounting Officer) /s/ Walter G. Winding /s/ R. Bruce Grover - - --------------------------------------- ------------------------------------ Walter G. Winding, Director R. Bruce Grover, Director /s/ Steven R. Barth /s/ Bruce J. Olson - - --------------------------------------- ------------------------------------ Steven R. Barth, Director Bruce J. Olson, 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 4, 2000. 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 4, 2000. F-1 SCHULTZ SAV-O STORES, INC. SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE FISCAL YEARS 1999, 1998 AND 1997 Allowance for Doubtful Accounts-- Changes in the allowance for doubtful accounts are summarized as follows: 1999 1998 1997 ------------ ------------ ------------ Balance, beginning of year $4,300,000 $3,950,000 $3,650,000 Provision charged to earnings 820,000 350,000 656,000 (820,000) -- (356,000) ---------- --------- ---------- (Writeoffs)/recoveries, net Balance, end of year $4,300,000 $4,300,000 $3,950,000 ========== ========== ========== F-2 EXHIBIT INDEX SCHULTZ SAV-O STORES, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 1, 2000 ----------------------------------------- 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. Incorporated by reference to Exhibit 3.2 to our Annual Report on Form 10-K for the year ended January 2, 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 1999 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. Incorporated by reference to Exhibit 10.12 to our Annual Report on Form 10-K for the year ended January 2, 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. Incorporated by reference to Exhibit 10.13 to our Annual Report on Form 10-K for the year ended January 2, 1999. 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. Incorporated by reference to Exhibit 10.15 to our Annual Report on Form 10-K for the year ended January 2, 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. Incorporated by reference to Exhibit 10.16 to our Annual Report on Form 10-K for the year ended January 2, 1999. 13 Portions of the 1999 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 the 2000 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). E-3 EX-13 2 FIVE-YEAR FINANCIAL HIGHLIGHTS Exhibit 13 ---------- Five-Year Financial Highlights
================================================================================================================================ (dollars in thousands, except per share data) Fiscal Year (a) (b) - - -------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - - -------------------------------------------------------------------------------------------------------------------------------- Consolidated statements of earnings data: Net sales $ 496,959 $ 484,885 $ 473,006 $ 453,921 $ 439,646 Gross profit 80,350 78,070 73,907 72,429 70,516 Earnings before income taxes 13,656 13,916 12,418 10,512 9,500 Provision for income taxes 5,298 5,398 4,781 4,047 3,660 Net earnings 8,358 8,518 7,637 6,465 5,840 Earnings per share - basic 1.32 1.26 1.11 0.93 0.82 Earnings per share - diluted 1.30 1.23 1.06 0.90 0.79 Cash dividends per share 0.34 0.30 0.27 0.24 0.15 Weighted average shares and equivalents outstanding (c) 6,438 6,923 7,148 7,187 7,402 Net earnings-to-sales ratio 1.68% 1.76% 1.61% 1.42% 1.33% Consolidated balance sheet data (at fiscal year-end): Working capital $ 29,797 $ 32,884 $ 29,217 $ 28,579 $ 24,855 Total assets 93,627 104,316 98,866 98,204 94,435 Current obligations under capital leases and current maturities of long-term debt 842 792 866 1,047 1,114 Long-term debt 2,865 3,021 3,165 3,375 3,719 Long-term obligations under capital leases 9,069 9,764 11,177 12,368 13,268 Total shareholders' investment 47,969 53,085 50,384 47,035 43,288 Other data: Capital additions $ 3,209 $ 3,847 $ 4,868 $ 3,420 $ 3,545 Depreciation and amortization 4,959 5,075 4,517 4,451 4,467 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 1999 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. /s/ James H. Dickelman /s/ John H. Dahly /s/ Armand C. Go James H. Dickelman John H. Dahly Armand C. Go Chairman, President and Executive Vice President, Vice President, Treasurer and Chief Executive Officer Chief Financial Officer Chief Accounting Officer and Secretary 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 1, 2000 and January 2, 1999 and the related consolidated statements of earnings, cash flows and shareholders' investment for each of the three fiscal years in the period ended January 1, 2000. 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 1, 2000 and January 2, 1999, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 1, 2000, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Milwaukee, Wisconsin Arthur Andersen LLP February 4, 2000 CONSOLIDATED BALANCE SHEETS As of January 1, 2000 and January 2, 1999
- - ------------------------------------------------------------------------------------------------------------------ Assets 1999 1998 - - ------------------------------------------------------------------------------------------------------------------ Current assets: Cash and equivalents $ 22,433,000 $ 34,334,000 Receivables 6,629,000 5,453,000 Inventories 26,313,000 23,951,000 Other current assets 3,410,000 2,385,000 Deferred income taxes 3,900,000 4,376,000 - - ------------------------------------------------------------------------------------------------------------------ Total current assets 62,685,000 70,499,000 - - ------------------------------------------------------------------------------------------------------------------ Noncurrent receivable under capital subleases 4,531,000 6,107,000 Property under capital leases, net 3,462,000 2,499,000 Other noncurrent assets 2,664,000 3,524,000 Property and equipment, net 20,285,000 21,687,000 ================================================================================================================== Total assets $ 93,627,000 $ 104,316,000 ================================================================================================================== Liabilities and Shareholders' Investment - - ------------------------------------------------------------------------------------------------------------------ Current liabilities: Accounts payable $ 19,545,000 $ 24,018,000 Accrued salaries and benefits 5,284,000 5,040,000 Accrued insurance 3,002,000 3,020,000 Retail repositioning reserve 450,000 685,000 Other accrued liabilities 3,765,000 4,060,000 Current obligations under capital leases 696,000 656,000 Current maturities of long-term debt 146,000 136,000 - - ------------------------------------------------------------------------------------------------------------------ Total current liabilities 32,888,000 37,615,000 - - ------------------------------------------------------------------------------------------------------------------ Long-term obligations under capital leases 9,069,000 9,764,000 Long-term debt 2,865,000 3,021,000 Deferred income taxes 836,000 831,000 Shareholders' investment: Common stock, $0.05 par value, authorized 20,000,000 shares, issued 8,750,342 in 1999 and 1998 438,000 438,000 Additional paid-in capital 14,961,000 14,359,000 Retained earnings 63,995,000 57,792,000 Treasury stock at cost, 2,808,997 shares in 1999 and 2,155,463 shares in 1998 (31,425,000) (19,504,000) - - ------------------------------------------------------------------------------------------------------------------ Total shareholders' investment 47,969,000 53,085,000 - - ------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' investment $ 93,627,000 $ 104,316,000 ================================================================================================================== See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF EARNINGS For fiscal years 1999, 1998 and 1997
- - ------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 - - ------------------------------------------------------------------------------------------------------------------------ Net sales $ 496,959,000 $ 484,885,000 $ 473,006,000 Cost and expenses: Cost of products sold 416,609,000 406,815,000 399,099,000 Operating and administrative expenses 67,108,000 64,580,000 61,799,000 - - ------------------------------------------------------------------------------------------------------------------------ Operating income 13,242,000 13,490,000 12,108,000 Interest income 1,175,000 1,242,000 1,157,000 Interest expense (761,000) (816,000) (847,000) - - ------------------------------------------------------------------------------------------------------------------------ Earnings before income taxes 13,656,000 13,916,000 12,418,000 Provision for income taxes 5,298,000 5,398,000 4,781,000 - - ------------------------------------------------------------------------------------------------------------------------ Net earnings $ 8,358,000 $ 8,518,000 $ 7,637,000 - - ------------------------------------------------------------------------------------------------------------------------ Earnings per share - basic $1.32 $1.26 $1.11 ======================================================================================================================== Earnings per share - diluted $1.30 $1.23 $1.06 ======================================================================================================================== See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS For fiscal years 1999, 1998 and 1997
- - ------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 - - ------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities Net earnings $ 8,358,000 $ 8,518,000 $ 7,637,000 Adjustments to reconcile net earnings to net cash Provided by operating activities: Depreciation and amortization 4,959,000 5,075,000 4,517,000 Deferred income taxes 481,000 (422,000) (1,053,000) Changes in current assets and liabilities: Receivables (1,176,000) 4,265,000 (4,042,000) Inventories (2,362,000) (2,210,000) 1,476,000 Other current assets (630,000) 1,222,000 (746,000) Accounts payable (4,473,000) 2,713,000 741,000 Accrued liabilities 310,000 2,264,000 (491,000) - - ------------------------------------------------------------------------------------------------------------------------ Net cash flows from operating activities 5,467,000 21,425,000 8,039,000 - - ------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities Capital expenditures (3,209,000) (3,847,000) (4,868,000) Receipt of principal amounts under capital subleases 407,000 443,000 505,000 Acquisition of retail stores - - (2,701,000) Other investing activities 311,000 300,000 339,000 - - ------------------------------------------------------------------------------------------------------------------------ Net cash flows from investing activities (2,491,000) (3,104,000) (6,725,000) - - ------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities Payment for acquisition of treasury stock (12,864,000) (5,031,000) (3,835,000) Payment of cash dividends (2,155,000) (2,025,000) (1,879,000) Exercise of stock options 924,000 806,000 817,000 Principal payments on capital lease obligations (655,000) (665,000) (702,000) Principal payments on long-term debt (146,000) (210,000) (354,000) Other financing activities 19,000 14,000 - - - ------------------------------------------------------------------------------------------------------------------------ Net cash flows from financing activities (14,877,000) (7,111,000) (5,953,000) - - ------------------------------------------------------------------------------------------------------------------------ Cash and equivalents Net change (11,901,000) 11,210,000 (4,639,000) Balance, beginning of year 34,334,000 23,124,000 27,763,000 - - ------------------------------------------------------------------------------------------------------------------------ Balance, end of year $ 22,433,000 $ 34,334,000 $ 23,124,000 ======================================================================================================================== See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT For fiscal years 1999, 1998 and 1997
- - ------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - - ------------------------------------------------------------------------------------------------------------------------------- Shares Amount Shares Amount Shares Amount - - ------------------------------------------------------------------------------------------------------------------------------- Common Stock, $0.05 par Beginning of year 8,750,342 438,000 8,750,342 438,000 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 8,750,342 438,000 - - ------------------------------------------------------------------------------------------------------------------------------- Additional Paid-in Capital Beginning of year 14,359,000 13,940,000 13,331,000 Tax benefits from exercise of stock options 602,000 419,000 609,000 - - ------------------------------------------------------------------------------------------------------------------------------- End of year 14,961,000 14,359,000 13,940,000 - - ------------------------------------------------------------------------------------------------------------------------------- Retained Earnings Beginning of year 57,792,000 51,299,000 45,654,000 Net earnings 8,358,000 8,518,000 7,637,000 Cash dividends Common stock ($0.34 per share in 1999, $0.30 per share in 1998 and $0.27 per share in 1997) (2,155,000) (2,025,000) (1,879,000) Three-for-two stock split effected in the form of a 50% stock dividend, net of fractional shares - - (113,000) - - ------------------------------------------------------------------------------------------------------------------------------- End of year 63,995,000 57,792,000 51,299,000 - - ------------------------------------------------------------------------------------------------------------------------------- Treasury Stock Beginning of year (2,155,463) (19,504,000) (1,938,463) (15,293,000) (1,214,472) (12,242,000) Acquisition of treasury stock (821,600) (12,864,000) (335,950) (5,031,000) (289,856) (3,835,000) Exercise of stock options 166,750 924,000 118,050 806,000 173,100 817,000 Three-for-two stock split effected in the form of a 50% stock dividend, net of fractional shares - - - - (607,235) (33,000) Other 1,316 19,000 900 14,000 - - - - ------------------------------------------------------------------------------------------------------------------------------- End of year (2,808,997) (31,425,000) (2,155,463) (19,504,000) (1,938,463) (15,293,000) - - ------------------------------------------------------------------------------------------------------------------------------- Shareholders' investment, end of year $47,969,000 $53,085,000 $50,384,000 - - ------------------------------------------------------------------------------------------------------------------------------- See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For fiscal years 1999, 1998 and 1997 (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 1999 and 1998 fiscal years were 52-week periods ended January 1, 2000 and January 2, 1999, 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 at January 1, 2000 and January 2, 1999. 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 1, 2000 and January 2, 1999, 81% and 78%, respectively, of all inventories were accounted for under the LIFO method. The excess of current cost over the stated LIFO cost of inventory was $9,872,000 and $10,032,000 at January 1, 2000 and January 2, 1999, respectively. Other current assets Other current assets at January 1, 2000 and January 2, 1999 consisted of the following: - - --------------------------------------------------------------------- 1999 1998 - - --------------------------------------------------------------------- Prepaid expenses $1,500,000 $1,086,000 Property held for resale 1,088,000 578,000 Retail systems and supplies for resale 496,000 314,000 Receivable under capital subleases 326,000 407,000 ===================================================================== Other current assets $3,410,000 $2,385,000 ===================================================================== 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 have 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 1, 2000 and January 2, 1999 consisted of the following: - - --------------------------------------------------------------------- 1999 1998 - - --------------------------------------------------------------------- Land and buildings $18,842,000 $18,731,000 Leasehold improvements 5,772,000 5,578,000 Equipment and fixtures 35,375,000 33,266,000 - - --------------------------------------------------------------------- 59,989,000 57,575,000 Less accumulated depreciation and amortization (39,704,000) (35,888,000) - - --------------------------------------------------------------------- Property and equipment, net $20,285,000 $21,687,000 ===================================================================== Other noncurrent assets Other noncurrent assets, net of accumulated amortization of $2,716,000 and $2,140,000, at January 1, 2000 and January 2, 1999 consisted of the following: - - --------------------------------------------------------------------- 1999 1998 - - --------------------------------------------------------------------- Capitalized software, net $1,475,000 $1,393,000 Goodwill, net 777,000 836,000 Other intangibles, net 227,000 318,000 Other 185,000 977,000 ===================================================================== Total $2,664,000 $3,524,000 ===================================================================== The Company regularly reviews the carrying value of capitalized software cost. A loss may be recognized when the value of estimated undiscounted cash flow benefit related to the asset falls below the unamortized cost. Accounts payable Accounts payable includes $6,277,000 and $8,225,000 at January 1, 2000 and January 2, 1999, 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: - - ----------------------------------------------------------- 1999 1998 1997 - - ----------------------------------------------------------- Interest paid $ 760,000 $ 822,000 $ 878,000 Taxes paid 4,649,000 4,956,000 5,911,000 - - ----------------------------------------------------------- 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. Reclassifications Certain 1998 and 1997 amounts previously reported have been reclassified to conform to the 1999 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 totaled $890,000 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 under this agreement during 1999 or 1998. Long-term debt at January 1, 2000 and January 2, 1999 consisted of the following: ----------------------------------------------------------------------- 1999 1998 ----------------------------------------------------------------------- Mortgage note, 9.675%, due in monthly installments of $33,026 including interest due through June 2012 $2,878,000 $2,990,000 Land contract, 10.0%, due in annual installments of $33,333 through March 2003 133,000 167,000 ----------------------------------------------------------------------- 3,011,000 3,157,000 Less current maturities (146,000) (136,000) ======================================================================= Long-term debt $2,865,000 $3,021,000 ======================================================================= At January 1, 2000, 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 2000 through 2004 will be $146,000, $168,000, $182,000, $197,000 and $180,000, respectively, and $2,138,000 from 2005 to 2012. Interest expense consisted of the following: ------------------------------------------------------------------------ 1999 1998 1997 ------------------------------------------------------------------------ Interest on long- term debt $302,000 $315,000 $350,000 Imputed interest- capital leases 445,000 473,000 497,000 Other 14,000 28,000 - ======================================================================== Interest expense $761,000 $816,000 $847,000 ======================================================================== (5) Income Taxes The difference between the statutory federal income tax rate and the effective rate is summarized as follows: - - ------------------------------------------------------------------------- 1999 1998 1997 ------------------------------------------------------------------------ Federal income tax 34.0% 34.2% 34.1% State income taxes, net of federal income tax benefit 4.5 4.7 4.6 Other, net 0.3 (0.1) (0.2) ========================================================================= Effective income tax rate 38.8% 38.8% 38.5% ========================================================================= Components of provision for income taxes consisted of the following: - - ------------------------------------------------------------------------- 1999 1998 1997 ------------------------------------------------------------------------ Currently payable Federal $3,934,000 $4,779,000 $4,877,000 State 883,000 1,041,000 957,000 Deferred 481,000 (422,000) (1,053,000) ======================================================================== Provision for income taxes $5,298,000 $5,398,000 $4,781,000 ======================================================================== The components of deferred income tax assets and liabilities at January 1, 2000 and January 2, 1999 were as follows: ------------------------------------------------------------------------ 1999 1998 ------------------------------------------------------------------------ Deferred income tax assets: Bad debt reserve $1,677,000 $1,677,000 Accrued insurance 1,182,000 1,170,000 Capital lease accounting 727,000 712,000 Vacation pay 652,000 629,000 Retail repositioning reserve 176,000 267,000 Other 747,000 1,130,000 ------------------------------------------------------------------------ Total deferred income tax assets 5,161,000 5,585,000 ------------------------------------------------------------------------ Deferred income tax liabilities: Property and equipment (2,025,000) (1,975,000) Pension (72,000) (65,000) ------------------------------------------------------------------------ Total deferred income tax liabilities (2,097,000) (2,040,000) ======================================================================== Net deferred income tax assets $3,064,000 $3,545,000 ======================================================================== The Company currently has no requirements for a valuation allowance for its deferred income tax assets. The net deferred income tax assets as of January 1, 2000 and January 2, 1999 were classified in the balance sheet as follows: - - ------------------------------------------------------------------------- 1999 1998 - - ------------------------------------------------------------------------- Current deferred income tax asset $3,900,000 $4,376,000 Noncurrent deferred income tax liability (836,000) (831,000) ========================================================================= Net deferred income tax assets $3,064,000 $3,545,000 ========================================================================= (6) Commitments and Contingent Liabilities The Company has projected capital expenditures for fiscal 2000 at $5,400,000. Commitments approximating $2,715,000 were made as of January 1, 2000. As of January 1, 2000, the Company was contingently liable under guarantees of bank note agreements of wholesale customers totaling $17,897,000. 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 1999, 1998 and 1997 were $930,000, $890,000 and $835,000, respectively. The plan allows participants to make pretax contributions. The Company then matches certain percentages of employee contributions. The Company's matching contributions for 1999, 1998 and 1997 were $90,000, $82,000 and $79,000, respectively. The Company has union-administered multi-employer pension plans covering all hourly paid employees represented by collective bargaining agreements. Total pension expense was $1,696,000, $1,616,000 and $1,456,000 in fiscal years 1999, 1998 and 1997, respectively. (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 1, 2000 and January 2, 1999 was as follows: ------------------------------------------------------------------ 1999 1998 ------------------------------------------------------------------ Investments in leased property under capital leases $6,514,000 $5,264,000 Less accumulated amortization (3,052,000) (2,765,000) ================================================================== Property under capital leases, net $3,462,000 $2,499,000 ================================================================== Amortization of leased property under capital leases, included in operating and administrative expenses, amounted to $287,000 for each of the fiscal years 1999, 1998 and 1997, 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 1, 2000: ------------------------------------------------------------ Capital Capital lease sublease obligations receivables ------------------------------------------------------------ 2000 $ 1,841,000 $ 907,000 2001 1,841,000 907,000 2002 1,841,000 907,000 2003 1,852,000 918,000 2004 1,656,000 923,000 2005-2009 7,089,000 3,499,000 ------------------------------------------------------------ Total minimum lease payments 16,120,000 8,061,000 Less interest (6,355,000) (3,204,000) ------------------------------------------------------------ Present value of minimum lease payments and amounts receivable 9,765,000 4,857,000 Less current portion (696,000) (326,000) ------------------------------------------------------------ Long-term obligations and receivable $ 9,069,000 $ 4,531,000 ============================================================ 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 1, 2000: - - ------------------------------------------------------------ 2000 $ 10,430,000 2001 9,912,000 2002 9,778,000 2003 9,609,000 2004 9,275,000 2005-2020 82,386,000 - - ------------------------------------------------------------ Total minimum lease payments 131,390,000 Less minimum amounts receivable under noncancelable subleases (103,182,000) - - ------------------------------------------------------------ Net minimum lease payments $ 28,208,000 - - ------------------------------------------------------------ Rental expenses, net of rental income from subleases, for all operating leases amounted to $5,010,000, $4,589,000 and $3,912,000 in fiscal years 1999, 1998 and 1997, respectively. These amounts include $1,054,000, $957,000 and $1,029,000, 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. Prior to year 2000, options granted are exercisable for seven years from the date of grant. Beginning in January 2000, options granted are now exercisable for ten years from the date of grant. The options continue to 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 FAS No. 123. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under FAS No. 123, the Company's net earnings would have been reduced to the following pro forma amounts below: - - -------------------------------------------------------------- 1999 1998 1997 - - -------------------------------------------------------------- Net earnings As reported $8,358,000 $8,518,000 $7,637,000 Pro forma 8,012,000 8,181,000 7,417,000 - - -------------------------------------------------------------- Earnings per share-diluted As reported $1.30 $1.23 $1.06 Pro forma 1.24 1.18 1.04 ============================================================== 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 FAS No. 123 is not reflected in the pro forma net earnings presented above for 1997. 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 1999, 1998 and 1997: - - -------------------------------------------------------------- 1999 1998 1997 - - -------------------------------------------------------------- Dividend yield 2.00% 2.00% 2.06% Expected volatility 25.91% 26.81% 25.62% Risk-free interest rate 4.75% 5.49% 6.36% Expected term of grant 5.5 years 5.5 years 5.5 years ============================================================== The fair values of each option granted in 1999, 1998 and 1997 were $4.27, $4.28 and $2.82, respectively. As of January 1, 2000, no incentive stock options have been granted. Following is a summary of the status of nonqualified stock options for the fiscal years 1999, 1998 and 1997: - - --------------------------------------------------------------- Weighted Number average of shares exercise prices - - --------------------------------------------------------------- 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 Granted 165,700 16.13 Exercised (166,750) 5.54 Forfeited (27,500) 14.81 - - --------------------------------------------------------------- Shares under option at January 1, 2000 644,200 11.70 =============================================================== Shares reserved for grant at January 1, 2000 583,200 =============================================================== Options granted in January 2000 162,200 $12.00 =============================================================== When options were exercised, the Company realized certain income tax benefits. These benefits resulted in a decrease in current income taxes payable and a corresponding increase in additional paid-in capital. Exercise prices for options outstanding as of January 1, 2000 ranged from $5.08 to $16.13. The weighted average remaining contractual life of these options is approximately 4 years. Nonqualified stock options outstanding at January 1, 2000, January 2, 1999 and January 3, 1998 were exercisable for 363,900, 402,750 and 362,900 shares. These shares were exercisable at the weighted average prices of $9.29, $6.96 and $5.86 at January 1, 2000, January 2, 1999 and January 3, 1998, respectively. (10) 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. (11) 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: - - ------------------------------------------------------------- 1999 1998 1997 - - ------------------------------------------------------------- Net earnings available for common shareholders $8,358,000 $8,518,000 $7,637,000 Weighted average shares outstanding 6,336,000 6,749,000 6,871,000 Earnings per share-basic $1.32 $1.26 $1.11 - - ------------------------------------------------------------- Net earnings available for common shareholders $8,358,000 $8,518,000 $7,637,000 Weighted average shares outstanding 6,336,000 6,749,000 6,871,000 Stock options' dilutive effect 102,000 174,000 277,000 Weighted average shares and equivalents outstanding 6,438,000 6,923,000 7,148,000 Earnings per share-diluted $1.30 $1.23 $1.06 - - ------------------------------------------------------------- (12) Segment Reporting The Company's operations are classified into two reportable business segments, wholesale and retail. The operational performance of both wholesale and retail segments are managed and evaluated by management. The wholesale segment represents the Company's business activities relating to food wholesale distribution. At January 1, 2000, the Company provided products to 69 franchised units, 19 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 1999 1998 1997 - - ---------------------------------------------------------------- Wholesale sales $ 411,913 $ 404,047 $ 399,197 Intracompany sales (123,376) (123,912) (107,988) --------------------------------------- Net wholesale sales 288,537 280,135 291,209 Retail sales 208,422 204,750 181,797 ================================================================ Total $ 496,959 $ 484,885 $ 473,006 ================================================================ - - ---------------------------------------------------------------- Earnings before income taxes 1999 1998 1997 - - ---------------------------------------------------------------- Wholesale $ 9,870 $ 9,749 $ 9,029 Retail 3,372 3,741 3,079 --------------------------------------- Total operating income 13,242 13,490 12,108 Interest income 1,175 1,242 1,157 Interest expense (761) (816) (847) ================================================================ Earnings before income taxes $ 13,656 $ 13,916 $ 12,418 ================================================================ - - ---------------------------------------------------------------- Capital Expenditures 1999 1998 1997 - - ---------------------------------------------------------------- Wholesale $ 199 $ 149 $ 365 Retail 1,869 2,443 3,628 Corporate 1,141 1,255 875 ================================================================ Total $ 3,209 $ 3,847 $ 4,868 ================================================================ - - ---------------------------------------------------------------- Depreciation and Amortization 1999 1998 1997 - - ---------------------------------------------------------------- Wholesale $ 705 $ 818 $ 985 Retail 2,339 2,338 1,881 Corporate 1,915 1,919 1,651 ================================================================ Total $ 4,959 $ 5,075 $ 4,517 ================================================================ - - ---------------------------------------------------------------- Identifiable Assets 1999 1998 1997 - - ---------------------------------------------------------------- Wholesale $ 33,941 $ 32,040 $ 32,244 Retail 28,546 26,550 25,972 Corporate 31,140 45,726 40,650 ================================================================ Total $ 93,627 $ 104,316 $ 98,866 ================================================================ Unaudited Quarterly Financial Information The Company generally includes sixteen weeks in its first quarter and twelve weeks in each subsequent quarter. Summarized quarterly and annual financial information for fiscal years 1999 and 1998 follows:
- - --------------------------------------------------------------------------------------------------------------------------- (dollars and shares in thousands, except per share data) Fiscal Year Ended January 1, 2000 - - --------------------------------------------------------------------------------------------------------------------------- First Second Third Fourth Year - - --------------------------------------------------------------------------------------------------------------------------- Net sales $146,951 $115,124 $113,406 $121,478 $496,959 Gross profit 23,796 18,748 18,353 19,453 80,350 Net earnings 1,831 2,038 1,673 2,816 8,358 Earnings per share - basic 0.28 0.32 0.27 0.47 1.32 Earnings per share - diluted 0.27 0.31 0.26 0.46 1.30 Weighted average shares and equivalents outstanding 6,756 6,601 6,421 6,095 6,438 - - ---------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------- (dollars and shares in thousands, except per share data) Fiscal Year Ended January 2, 1999 - - --------------------------------------------------------------------------------------------------------------------------- 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 - - ---------------------------------------------------------------------------------------------------------------------------
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 980 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 1999 $17.38 $15.88 $17.13 $16.00 $16.50 $15.75 $15.75 $11.25 $17.38 $11.25 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 - - ---------------------------------------------------------------------------------------------------------------------------
Cash dividends paid per share were: - - ------------------------------------------------------------------------------ First Second Third Fourth Year - - ------------------------------------------------------------------------------ 1999 $0.08 $0.08 $0.09 $0.09 $0.34 1998 0.07 0.07 0.08 0.08 0.30 1997 0.06 0.07 0.07 0.07 0.27 - - ------------------------------------------------------------------------------ Under the Company's loan agreements, approximately $2,000,000 of retained earnings were available for the payment of cash dividends, stock repurchases and other restricted payments at January 1, 2000. o The 1997 stock price 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 report 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 - - -------------------------------------------------------------------------------- 1999 1998 1999 1998 1997 vs. 1998 vs. 1997 - - -------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% 2.5% 2.5% Cost of products sold 83.8% 83.9% 84.4% 2.4% 1.9% Operating and administrative expenses 13.5% 13.3% 13.1% 3.9% 4.5% Earnings before income taxes 2.7% 2.9% 2.6% (1.9%) 12.1% Net earnings 1.7% 1.8% 1.6% (1.9%) 11.5% - - -------------------------------------------------------------------------------- 1999 vs. 1998 Net Sales Net sales for 1999 were $497.0 million, compared to $484.9 million for 1998. The increase of $12.1 million, or 2.5%, was due to increased wholesale and retail sales. Wholesale sales in 1999 increased 3.0% to $288.5 million, compared to $280.1 million in 1998. The wholesale sales improvement was attributable to the following: [] The completion of franchise store facility projects in Fort Atkinson, Crivitz, Beaver Dam, Randolph and Kiel, Wisconsin during the first half of 1999; [] The opening of one new market franchise store in Cottage Grove, Wisconsin in May 1999; q The completion of franchise store facility projects in Waupaca and Lomira, Wisconsin during the second quarter of 1998; [] The successful conversion to the Piggly Wiggly program of two new market franchise stores in Niagara and Winneconne, Wisconsin from other wholesalers during the third quarter of 1999; and [] A series of successful marketing events, including the 50th anniversary of Piggly Wiggly in Wisconsin held in October and November of 1999. Net wholesale sales were, however, negatively impacted by the Company's two consolidations which were completed in November 1998 and January 1999 resulting in two franchise store closures. Retail sales increased 1.8% to $208.4 million in 1999, compared to $204.8 million in 1998. This improvement in retail sales volume was primarily attributable to the Company's opening of its replacement corporate store in Appleton, Wisconsin in August 1998 and the continued success of various marketing and promotional events. To a lesser extend, retail sales also increased due to the conversion of one franchise store in Oshkosh, Wisconsin into a corporate store in November 1999. Competitive pressures in certain market areas, however, had an adverse impact on the Company's retail sales in 1999. There are currently seven additional facility projects in various phases of planning or construction, with completions scheduled throughout 2000. These projects involve two additions or expansions to existing franchise facilities in Jackson and Kaukauna, Wisconsin, one expansion of a corporate supermarket in Racine, Wisconsin, one new franchise market store in Kewaskum, Wisconsin and three replacement franchise stores in Pardeeville, New Holstein and Slinger, Wisconsin, respectively. The three expansion stores, upon completion, will increase their aggregate square footage of selling space by approximately 25%. Additionally, the Company will begin the planning stages for the replacement of its corporate Zion, Illinois store in 2000. The Company expects this project to be completed in 2001. As part of the Company's continuing efforts to recruit new customers, the Company converted an independent operator in Markesan, Wisconsin from another wholesaler to a Piggly Wiggly supermarket in early February 2000. Based on the Company's internal wholesale price index, except for tobacco products, inflation did not have a significant effect on sales between years. Cost of Products Sold Cost of products sold, as a percent of sales, decreased nominally to 83.8% in 1999 from 83.9% in 1998. Lower margin net wholesale sales, as a percentage of sales, increased nominally to 58.1% compared to 57.8% in 1998. Conversely, higher margin retail sales, as a percentage of sales, decreased to 41.9% in 1999 compared to 42.2% in 1998. Based solely on current franchise projects outstanding and the three recent conversions from independent operators in Niagara, Winneconne and Markesan, Wisconsin to Piggly Wiggly, the Company anticipates its wholesale sales percentage to increase in 2000. Operating and Administrative Expenses Operating and administrative expenses, as a percent of sales, increased to 13.5% in 1999, compared to 13.3% in 1998. This increase of 0.2%, or $2.5 million, was principally attributable to a number of factors. From the retail business segment, the Company incurred additional expenses of approximately $850,000 relating to both the Appleton store that was opened in August 1998 and to the Oshkosh store that was converted from a franchise store to a corporate store in November 1999. From the wholesale business segment, the Company incurred additional realization charges of nearly $800,000 in 1999 compared to 1998. Additionally, the Company incurred and expensed more than $500,000 for its comprehensive analysis and evaluation of the Company's ongoing core business (non-Y2K related) requirements. Due to the continuing competitive nature of the industry, certain franchise operators and corporate retail stores continue to experience operational difficulties in their respective marketplaces. As a result, the Company continues to incur significant receivable realization charges from a number of under-performing franchise operators. Total 1999 and 1998 realization charges relating to wholesale bad debts and retail subsidies were $2.3 million and $1.5 million, respectively. Although certain franchise retail operations have improved, the Company continues to evaluate various business initiatives relating to the operations of its under-performing and non-competitive 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, sold or closed stores. These actions can negatively impact earnings results in the short-term, but the Company believes that such actions will help the Company's long-term profitability. During 1999, the Company did not incur any repositioning charges, compared to $200,000 for 1998. Net Earnings The Company's fiscal 1999 operating income decreased 1.8% to $13.2 million, compared to $13.5 million in 1998. After allocating wholesale operating profits on sales through the Company's corporate stores to retail, the wholesale segment yielded $9.9 million in operating income while the retail segment contributed $3.3 million. Fiscal 1999 earnings before income taxes decreased 1.9% to $13.7 million, compared to $13.9 million in 1998. As a percent of sales, earnings before income taxes decreased to 2.7% in 1999 from 2.9% in 1998. Net earnings for 1999 decreased 1.9% to $8.4 million, compared to $8.5 million in 1998. Due principally to the intense competitiveness in certain market areas, the Company's net earnings-to-sales ratio decreased nominally to 1.7% in 1999, compared to 1.8% in 1998. In spite of the nominal decline, the Company's net earnings-to-sales ratio continues to rank as one of the best in the wholesale grocery industry. Diluted earnings per share for 1999 increased 5.7% to $1.30 from $1.23 in 1998. Although net earnings decreased nominally in 1999 compared to 1998, diluted earnings per share increased due to the Company's repurchases of 821,600 shares which reduced the weighted average shares and equivalents outstanding. 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. 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 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 were, 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. 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 three new Appleton corporate stores in 1997 and 1998. This improvement was, however, partially 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 more fully realized the benefits of the Piggly Wiggly Preferred Club(R) electronic card marketing program. 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 57.7% compared to 61.6% in 1997. Conversely, higher margin retail sales as a percentage of sales increased to 42.3% compared to 38.4% in 1997. 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. 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. Due to the highly competitive nature of the industry, certain franchise operators and corporate retail stores continued to experience operational difficulties in their respective marketplaces. As a result, the Company continued to incur receivable realization charges from a number of under-performing 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. Fiscal 1998 and 1997 repositioning charges totaled $200,000 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 $700,000 costs relating to the Company's closing of the Plover franchised store and the $300,000 charge for closing the Company's two non-competitive 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. 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. Liquidity and Capital Resources The Company's favorable 1999 operating results continued to enhance its strong financial position. During fiscal 1999, the primary source of liquidity was cash generated from operations. Total cash generated from operations for fiscal 1999 was $5.5 million, compared to $21.4 million in 1998. Cash flow from operations decreased significantly between years due principally to the significant decrease in outstanding payables to vendors. This was due in large part to timing of cash payments. Although inventory levels increased between years, the Company paid for the additional inventory on or before January 1, 2000. Net cash outflows for investing activities totaled $2.5 million in 1999 compared to $3.1 million in 1998. This decrease in outflows was primarily attributable to reduced capital expenditures in 1999, compared to 1998. Of the total capital expenditures of $3.2 million, the Company invested more than $1.8 million for retail upgrades. The wholesale and corporate capital expenditures were principally technology-related upgrades. For 2000, the Company's capital budget is estimated at $5.4 million, of which $2.7 million has been committed as of January 1, 2000. Of this $5.4 million total, the Company has allocated $3.5 million for retail replacement units and upgrades, $500,000 for technology hardware and software, and $400,000 for distribution upgrades. This capital budget of $5.4 million is exclusive of any capital expenditure the Company may incur in 2000 as a result of its comprehensive evaluation of the core business systems. Similar to prior years, the Company expects to finance these projects from internally generated capital. Net cash outflows for financing activities were $14.9 million in 1999 compared to $7.1 million in 1998. The Company repurchased 821,600 shares of its own stock in 1999 aggregating $12.9 million. This was significantly higher than total repurchases of $5.0 million in 1998. The Company's Board of Directors amended the stock repurchase program twice during 1999, permitting the Company to repurchase up to an additional $15.0 million of its common stock from time to time in the open market, pursuant to privately negotiated transactions, or otherwise. As of January 1, 2000, only $2.1 million remained available for stock repurchases. Since the first stock repurchase program commenced in January 1992, the Company has repurchased over 3,000,000 shares, or approximately one-third, of its issued common stock. In summary, cash and equivalents for fiscal 1999 decreased $11.9 million, resulting in a year-end balance of $22.4 million. Of this year-end cash balance, approximately $10.7 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 1999 were financed through 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 1999 and 1998 were both approximately $1.0 million. At January 1, 2000, the Company had recorded $10.4 million of minimum lease payments required to be paid under operating leases in 2000. Additionally, at January 1, 2000, the Company had $9.1 million of long-term capital lease obligations, $4.5 million of which represented long-term 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 $17.9 million at January 1, 2000. All of the loan guarantees are substantially collateralized, principally with equipment and inventory and, to a lesser extent, with building facilities. At January 1, 2000, the Company's ratio of total liabilities to shareholders' investment was 0.95, which was comparable to the ratio of 0.97 at January 2, 1999. At January 1, 2000, 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 The Company completed its comprehensive review, testing, validation and implementation of all information technology (IT) and non-IT systems before the end of 1999. This project included an evaluation of internally developed software, third party software, technology hardware, third party interfaces and assessments of third party Y2K compliance. During 1999, the Company incurred approximately $320,000 relating to its Y2K remediation efforts. Majority of the cost incurred pertained to necessary technological hardware and software which were appropriately capitalized. Based on all system tests performed after January 1, 2000, the Company did not experience any material Y2K problem. The Company believes that all of its IT and non-IT systems are currently operating properly, and the Company does not anticipate any material or significant problem to arise in the future. Company Business The Company is engaged in distributing food and related products at wholesale and retail. At January 1, 2000, the Company franchised 69 and operated 19 corporate retail supermarkets under the Piggly Wiggly name in its eastern and northeastern Illinois market areas. The Company is the prime supplier to its franchised and corporate supermarkets. The Company also serves as a wholesaler to other smaller independent retail stores in its market areas. The Company supplies grocery, frozen food, dairy and produce to its customers through its 364,000 square foot distribution center in Sheboygan, Wisconsin. Also, the Company provides its customers with fresh, frozen and processed meats, eggs and deli items through a third party distribution facility in Milwaukee, Wisconsin on a contract basis. The Company employs approximately 1,790 persons, nearly 1,330 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 200 are engaged in warehousing, distribution and trucking activities, and nearly 260 are corporate and administrative personnel. EX-21 3 SUBSIDIARY OF THE REGISTRANT Exhibit 21 ---------- Subsidiary of the Registrant The only subsidiary of Schultz Sav-O Stores, Inc. is PW Trucking, Inc., a Wisconsin corporation. EX-23 4 CONSENT Exhibit 23 ---------- CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 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 22, 2000 EX-27 5 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF SCHULTZ SAV-O STORES AS OF AND FOR THE YEAR ENDED JANUARY 1, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 YEAR JAN-01-2000 JAN-03-1999 JAN-01-2000 22,433,000 0 6,629,000 0 26,313,000 62,685,000 59,989,000 39,704,000 93,627,000 32,888,000 2,865,000 0 0 438,000 47,531,000 93,627,000 496,959,000 496,959,000 416,609,000 0 67,108,000 0 1,175,000 13,656,000 5,298,000 8,358,000 0 0 0 8,358,000 1.32 1.30 Net of "Allowances for doubtful accounts." Amounts included in "Other costs and expenses."
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