EX-13 3 pdm57x13.txt PORTIONS OF 2000 ANNUAL REPORT EXHIBIT 13 Five-Year Financial Highlights
====================================================================================================================== (dollars in thousands, except per share data) Fiscal Year (a) (b) ---------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------------------------------------------------------------------------------------------------------------------- Consolidated statements of earnings data: Net sales $ 502,056 $ 496,959 $ 484,885 $ 473,006 $ 453,921 Gross profit 82,753 80,350 78,070 73,907 72,429 Earnings before income taxes 12,762 13,656 13,916 12,418 10,512 Provision for income taxes 4,849 5,298 5,398 4,781 4,047 Net earnings 7,913 8,358 8,518 7,637 6,465 Earnings per share - basic 1.33 1.32 1.26 1.11 0.93 Earnings per share - diluted 1.33 1.30 1.23 1.06 0.90 Cash dividends per share 0.36 0.34 0.30 0.27 0.24 Weighted average shares and equivalents outstanding (c) 5,951 6,438 6,923 7,148 7,187 Consolidated balance sheet data (at fiscal year-end): Working capital $ 30,721 $ 29,797 $ 32,884 $ 29,217 $ 28,579 Total assets 104,899 93,627 104,316 98,866 98,204 Current obligations under capital leases and current maturities of long-term debt 954 842 792 866 1,047 Long-term debt 2,685 2,865 3,021 3,165 3,375 Long-term obligations under capital leases 8,284 9,069 9,764 11,177 12,368 Total shareholders' investment 49,513 47,969 53,085 50,384 47,035 Other data: Net earnings-to-sales ratio (d) 1.58% 1.68% 1.76% 1.61% 1.42% Capital additions $ 5,278 $ 3,209 $ 3,847 $ 4,868 $ 3,420 Depreciation and amortization 5,215 4,959 5,075 4,517 4,451 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 1996 have been retroactively restated to account for the three-for-two stock split on September 5, 1997. (d) The net earnings-to-sales ratio represents the net margin realized by the Company from each dollar of sale. This ratio is used by many companies in our industry to measure the profitability of their sales.
E-21 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 2000 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. Elwood F. Winn Armand C. Go President and Vice President, Chief Financial Officer, Chief Executive Officer Treasurer and Secretary E-22 Report of Independent Public Accountants To the Board of Directors and Shareholders of Schultz Sav-O Stores, Inc.: We have audited the accompanying consolidated balance sheets of Schultz Sav-O Stores, Inc. (a Wisconsin Corporation) and its subsidiary as of December 30, 2000 and January 1, 2000 and the related consolidated statements of earnings, cash flows and shareholders' investment for each of the three fiscal years in the period ended December 30, 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Schultz Sav-O Stores, Inc. and its subsidiary as of December 30, 2000 and January 1, 2000, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 30, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Milwaukee, Wisconsin February 8, 2001 E-23 CONSOLIDATED BALANCE SHEETS As of December 30, 2000 and January 1, 2000
------------------------------------------------------------------------------------------------------------------------ Assets 2000 1999 ------------------------------------------------------------------------------------------------------------------------ Current assets: Cash and equivalents $ 31,309,000 $ 22,433,000 Receivables 11,691,000 6,629,000 Inventories 24,259,000 26,313,000 Other current assets 2,916,000 3,410,000 Deferred income taxes 4,102,000 3,900,000 ------------------------------------------------------------------------------------------------------------------------ Total current assets 74,277,000 62,685,000 ------------------------------------------------------------------------------------------------------------------------ Noncurrent receivable under capital subleases 4,163,000 4,531,000 Property under capital leases, net 3,051,000 3,462,000 Other noncurrent assets 1,995,000 2,664,000 Property and equipment, net 21,413,000 20,285,000 ------------------------------------------------------------------------------------------------------------------------ Total assets $ 104,899,000 $ 93,627,000 ======================================================================================================================== Liabilities and Shareholders' Investment ------------------------------------------------------------------------------------------------------------------------ Current liabilities: Accounts payable $ 27,700,000 $ 19,545,000 Accrued salaries and benefits 5,673,000 5,284,000 Accrued insurance 3,032,000 3,002,000 Retail repositioning reserve 495,000 450,000 Other accrued liabilities 5,702,000 3,765,000 Current obligations under capital leases 785,000 696,000 Current maturities of long-term debt 169,000 146,000 ------------------------------------------------------------------------------------------------------------------------ Total current liabilities 43,556,000 32,888,000 ------------------------------------------------------------------------------------------------------------------------ Long-term obligations under capital leases 8,284,000 9,069,000 Long-term debt 2,685,000 2,865,000 Deferred income taxes 861,000 836,000 Shareholders' investment: Common stock, $0.05 par value, authorized 20,000,000 shares, issued 8,750,342 in 2000 and 1999 438,000 438,000 Additional paid-in capital 15,174,000 14,961,000 Retained earnings 69,767,000 63,995,000 Treasury stock at cost, 3,165,213 shares in 2000 and 2,808,997 shares in 1999 (35,866,000) (31,425,000) ------------------------------------------------------------------------------------------------------------------------ Total shareholders' investment 49,513,000 47,969,000 ------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' investment $ 104,899,000 $ 93,627,000 ======================================================================================================================== See notes to consolidated financial statements.
E-24 CONSOLIDATED STATEMENTS OF EARNINGS For fiscal years 2000, 1999 and 1998
------------------------------------------------------------------------------------------------------------------------ 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------ Net sales $ 502,056,000 $ 496,959,000 $ 484,885,000 Cost of products sold 419,303,000 416,609,000 406,815,000 ------------------------------------------------------------------------------------------------------------------------ Gross profit 82,753,000 80,350,000 78,070,000 Operating and administrative expenses 70,488,000 67,108,000 64,580,000 ------------------------------------------------------------------------------------------------------------------------ Operating income 12,265,000 13,242,000 13,490,000 Interest income 1,349,000 1,175,000 1,242,000 Interest expense (852,000) (761,000) (816,000) ------------------------------------------------------------------------------------------------------------------------ Earnings before income taxes 12,762,000 13,656,000 13,916,000 Provision for income taxes 4,849,000 5,298,000 5,398,000 ------------------------------------------------------------------------------------------------------------------------ Net earnings $ 7,913,000 $ 8,358,000 $ 8,518,000 ------------------------------------------------------------------------------------------------------------------------ Earnings per share - basic $1.33 $1.32 $1.26 ======================================================================================================================== Earnings per share - diluted $1.33 $1.30 $1.23 ======================================================================================================================== See notes to consolidated financial statements.
E-25 CONSOLIDATED STATEMENTS OF CASH FLOWS For fiscal years 2000, 1999 and 1998
------------------------------------------------------------------------------------------------------------------------ 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net earnings $ 7,913,000 $ 8,358,000 $ 8,518,000 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 5,215,000 4,959,000 5,075,000 Deferred income taxes (177,000) 481,000 (422,000) Changes in current assets and liabilities: Receivables (5,062,000) (1,176,000) 4,265,000 Inventories 2,054,000 (2,362,000) (2,210,000) Other current assets 544,000 (630,000) 1,222,000 Accounts payable 8,155,000 (4,473,000) 2,713,000 Accrued liabilities 2,612,000 310,000 2,264,000 ------------------------------------------------------------------------------------------------------------------------ Net cash flows from operating activities 21,254,000 5,467,000 21,425,000 ------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Capital expenditures (5,278,000) (3,209,000) (3,847,000) Receipt of principal amounts under capital subleases 326,000 407,000 443,000 Other investing activities 8,000 311,000 300,000 ------------------------------------------------------------------------------------------------------------------------ Net cash flows from investing activities (4,944,000) (2,491,000) (3,104,000) ------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Payment for acquisition of treasury stock (6,067,000) (12,864,000) (5,031,000) Payment of cash dividends (2,141,000) (2,155,000) (2,025,000) Exercise of stock options 1,602,000 924,000 806,000 Principal payments on capital lease obligations (696,000) (655,000) (665,000) Principal payments on long-term debt (156,000) (146,000) (210,000) Other financing activities 24,000 19,000 14,000 ------------------------------------------------------------------------------------------------------------------------ Net cash flows from financing activities (7,434,000) (14,877,000) (7,111,000) ------------------------------------------------------------------------------------------------------------------------ Cash and equivalents: Net change 8,876,000 (11,901,000) 11,210,000 Balance, beginning of year 22,433,000 34,334,000 23,124,000 ------------------------------------------------------------------------------------------------------------------------ Balance, end of year $ 31,309,000 $ 22,433,000 $ 34,334,000 ======================================================================================================================== See notes to consolidated financial statements.
E-26 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT For fiscal years 2000, 1999 and 1998
---------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------ Shares Amount Shares Amount Shares Amount ---------------------------------------------------------------------------------------------------------------------- Common Stock, $0.05 par Beginning of year 8,750,342 $438,000 8,750,342 $438,000 8,750,342 $438,000 ---------------------------------------------------------------------------------------------------------------------- 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 14,961,000 14,359,000 13,940,000 Tax benefits from exercise of stock options 213,000 602,000 419,000 ---------------------------------------------------------------------------------------------------------------------- End of year 15,174,000 14,961,000 14,359,000 ---------------------------------------------------------------------------------------------------------------------- Retained Earnings Beginning of year 63,995,000 57,792,000 51,299,000 Net earnings 7,913,000 8,358,000 8,518,000 Cash dividends Common stock ($0.36 per share in 2000, $0.34 per share in 1999 and $0.30 per share in 1998) (2,141,000) (2,155,000) (2,025,000) ---------------------------------------------------------------------------------------------------------------------- End of year 69,767,000 63,995,000 57,792,000 ---------------------------------------------------------------------------------------------------------------------- Treasury Stock Beginning of year (2,808,997) (31,425,000) (2,155,463) (19,504,000) (1,938,463) (15,293,000) Acquisition of treasury stock (558,540) (6,067,000) (821,600) (12,864,000) (335,950) (5,031,000) Exercise of stock options 200,100 1,602,000 166,750 924,000 118,050 806,000 Other 2,224 24,000 1,316 19,000 900 14,000 ---------------------------------------------------------------------------------------------------------------------- End of year (3,165,213) (35,866,000) (2,808,997) (31,425,000) (2,155,463) (19,504,000) ---------------------------------------------------------------------------------------------------------------------- Shareholders' investment, end of year $49,513,000 $47,969,000 $53,085,000 ----------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. E-27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For fiscal years 2000, 1999 and 1998 (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 2000, 1999 and 1998 fiscal years were 52-week periods ended December 30, 2000, January 1, 2000, and January 2, 1999, respectively. Revenue recognition Wholesale revenue is recognized at the time products are shipped, as shipments are F.O.B. shipping point. Retail revenue is recognized at the point of sale. Principles of consolidation The consolidated financial statements include the accounts of Schultz Sav-O Stores, Inc. and its wholly-owned subsidiary, PW Trucking, Inc. 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 The Company records receivables primarily from its wholesale customers, most of which are franchised customers. The Company continuously monitors the financial viability of its customers and provides an allowance for doubtful accounts related to both credit worthiness and retail subsidies that are provided to these customers. Receivables are shown net of allowance for doubtful accounts of $3,850,000 and $4,300,000 at December 30, 2000 and January 1, 2000, respectively. Inventories Inventories, substantially all of which consist of food, groceries and related products for resale, are stated at the lower of cost or market value. Cost is determined primarily on the last-in, first-out (LIFO) method. For meat and produce, cost is determined on the first-in, first-out (FIFO) method. At December 30, 2000 and January 1, 2000, 79% and 81%, respectively, of all inventories were accounted for under the LIFO method. E-28 The excess of current cost over the stated LIFO cost of inventory was $10,284,000 and $9,872,000 at December 30, 2000 and January 1, 2000, respectively. Other current assets Other current assets at December 30, 2000 and January 1, 2000 consisted of the following: --------------------------------------------------------------------- 2000 1999 --------------------------------------------------------------------- Prepaid expenses $1,417,000 $1,500,000 Property held for resale 647,000 1,088,000 Retail systems and supplies for resale 484,000 496,000 Receivable under capital subleases 368,000 326,000 --------------------------------------------------------------------- Other current assets $2,916,000 $3,410,000 ===================================================================== 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 December 30, 2000 and January 1, 2000 consisted of the following: ------------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------------ Land and buildings $18,939,000 $18,842,000 Leasehold improvements 5,609,000 5,772,000 Equipment and fixtures 39,032,000 35,375,000 ------------------------------------------------------------------------ 63,580,000 59,989,000 Less accumulated depreciation and amortization (42,167,000) (39,704,000) ------------------------------------------------------------------------ Property and equipment, net $21,413,000 $20,285,000 ======================================================================== Other noncurrent assets Other noncurrent assets, net of accumulated amortization of $3,385,000 and $2,716,000, at December 30, 2000 and January 1, 2000 consisted of the following: ------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------ Capitalized software, net $963,000 $1,475,000 Goodwill, net 717,000 777,000 Other intangibles, net 136,000 227,000 Other 179,000 185,000 ------------------------------------------------------------------ Total $1,995,000 $2,664,000 ================================================================== 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. E-29 Accounts payable Accounts payable includes $11,537,000 and $6,277,000 at December 30, 2000 and January 1, 2000, 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, related facility costs (taxes, utilities and maintenance), 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. At December 30, 2000, the remaining capital repositioning reserve was $495,000, which was comprised of $275,000 of remaining lease costs and $220,000 of related facility costs. It is expected that these costs will be completely expended by the end of 2002. Financial instruments The Company's financial instruments consist of various debt facilities and cash equivalents. At December 30, 2000, the fair market value of the financial instruments was not materially different from the carrying value. Supplementary disclosure of cash flow information Interest and taxes paid included in the Company's cash flow from operations were as follows: ----------------------------------------------------------------- 2000 1999 1998 ----------------------------------------------------------------- Interest paid $851,000 $760,000 $822,000 Taxes paid 4,873,000 4,649,000 4,956,000 ----------------------------------------------------------------- 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 1999 and 1998 amounts previously reported have been reclassified to conform to the 2000 presentation. New accounting pronouncements In September 2000, the Financial Accounting Standards Board issued its final consensus on Emerging Issues Task Force ("EITF") Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs". The Company has historically presented shipping revenues as a component of net sales and the related costs of getting goods to the warehouse as part of cost of goods sold and the costs of shipping goods to customers as part of operating and administrative expenses. Shipping and handling costs included in operating and administrative expenses were $5,567,000, $5,355,000 and $5,201,000, in 2000, 1999, and 1998, respectively. E-30 In May 2000, the EITF also issued No. 00-14, "Accounting for Certain Sales Incentives". Issue 00-14 addresses the recognition, measurement, and income statement classification for sales incentives offered voluntarily by a vendor without charge to customers that can be used in, or that are exercisable by a customer as a result of, a single exchange transaction. This pronouncement will be adopted during fiscal 2001. Management is in the process of quantifying the potential impact of this change. (3) Long-Term Debt The Company has a loan agreement providing unsecured revolving credit facilities totaling $16,000,000 through April 30, 2003. 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 2000 or 1999. Long-term debt at December 30, 2000 and January 1, 2000 consisted of the following: --------------------------------------------------------------------------- 2000 1999 --------------------------------------------------------------------------- Mortgage note, 9.675%, due in monthly $2,754,000 $2,878,000 installments of $33,026 including interest due through June 2012 Land contract, 10.0%, due in annual installments of $33,333 through March 2003 100,000 133,000 --------------------------------------------------------------------------- 2,854,000 3,011,000 Less current maturities (169,000) (146,000) --------------------------------------------------------------------------- Long-term debt $2,685,000 $2,865,000 =========================================================================== At December 30, 2000, the fair value of the long-term debt was 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 2001 through 2005 will be $169,000, $182,000, $196,000, $180,000 and $198,000, respectively, and $1,929,000 from 2006 to 2012. Interest expense consisted of the following: -------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------- Interest on long-term debt $287,000 $302,000 $315,000 Imputed interest-capital leases 565,000 445,000 473,000 Other - 14,000 28,000 -------------------------------------------------------------------- Interest expense $852,000 $761,000 $816,000 ==================================================================== (4) Income Taxes The difference between the statutory federal income tax rate and the effective rate is summarized as follows: --------------------------------------------------------------------- 2000 1999 1998 --------------------------------------------------------------------- Federal income tax 34.0% 34.0% 34.2% State income taxes, net of federal income tax benefit 4.8 4.5 4.7 Other, net (0.8) 0.3 (0.1) --------------------------------------------------------------------- Effective income tax rate 38.0% 38.8% 38.8% ===================================================================== E-31 Components of provision for income taxes consisted of the following: --------------------------------------------------------------------- 2000 1999 1998 --------------------------------------------------------------------- Currently payable Federal $4,076,000 $3,934,000 $4,779,000 State 950,000 883,000 1,041,000 Deferred (177,000) 481,000 (422,000) --------------------------------------------------------------------- Provision for income taxes $4,849,000 $5,298,000 $5,398,000 ===================================================================== The components of deferred income tax assets and liabilities at December 30, 2000 and January 1, 2000 were as follows: --------------------------------------------------------------------- 2000 1999 --------------------------------------------------------------------- Deferred income tax assets: Bad debt reserve $1,502,000 $1,677,000 Accrued insurance 1,195,000 1,182,000 Capital lease accounting 743,000 727,000 Vacation pay 718,000 652,000 Retail repositioning reserve 193,000 176,000 Other 585,000 747,000 --------------------------------------------------------------------- Total deferred income tax assets 4,936,000 5,161,000 --------------------------------------------------------------------- Deferred income tax liabilities: Property and equipment (1,618,000) (2,025,000) Pension (77,000) (72,000) --------------------------------------------------------------------- Total deferred income tax liabilities (1,695,000) (2,097,000) --------------------------------------------------------------------- Net deferred income tax assets $3,241,000 $3,064,000 ===================================================================== The Company currently has no requirements for a valuation allowance for its deferred income tax assets. The net deferred income tax assets as of December 30, 2000 and January 1, 2000 were classified in the balance sheet as follows: -------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------- Current deferred income tax asset $4,102,000 $3,900,000 Noncurrent deferred income tax liability (861,000) (836,000) -------------------------------------------------------------------- Net deferred income tax assets $3,241,000 $3,064,000 ==================================================================== (5) Commitments and Contingent Liabilities As of December 30, 2000, the Company was contingently liable under guarantees of bank note agreements of wholesale customers totaling $17,985,000. All of the loan guarantees are substantially collateralized, principally with equipment and inventory, and to a lesser extent, with building facilities. Capital expenditure commitments made by the Company as of December 30, 2000 were approximately $4,150,000. (6) 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 E-32 sole discretion of the Board of Directors. Provisions for the three fiscal years ended 2000, 1999 and 1998 were $975,000, $930,000 and $890,000, respectively. The plan allows participants to make pretax contributions. The Company then matches certain percentages of employee contributions. The Company's matching contributions for 2000, 1999 and 1998 were $95,000, $90,000 and $82,000, respectively. The Company has union-administered multi-employer pension plans covering all hourly paid employees represented by collective bargaining agreements. Total pension expense was $1,814,000, $1,696,000 and $1,616,000 in fiscal years 2000, 1999 and 1998, respectively. (7) 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 December 30, 2000 and January 1, 2000 was as follows: -------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------- Investments in leased property under $6,514,000 $6,514,000 capital leases Less accumulated amortization (3,463,000) (3,052,000) -------------------------------------------------------------------- Property under capital leases, net $3,051,000 $3,462,000 ==================================================================== Amortization of leased property under capital leases, included in operating and administrative expenses, amounted to $411,000, $287,000 and $287,000 in fiscal years 2000, 1999, 1998, respectively. The following is a schedule of future minimum lease payments under capital leases and subleases and the present value of such payments as of December 30, 2000: ----------------------------------------------------------------------- Capital lease Capital sublease obligations receivables ----------------------------------------------------------------------- 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 1,698,000 932,000 2006-2009 5,391,000 2,567,000 ----------------------------------------------------------------------- Total minimum lease payments 14,279,000 7,154,000 Less interest (5,210,000) (2,623,000) ----------------------------------------------------------------------- Present value of minimum lease payments 9,069,000 4,531,000 and amounts receivable Less current portion (785,000) (368,000) ----------------------------------------------------------------------- Long-term obligations and receivable $8,284,000 $4,163,000 ======================================================================= E-33 The following is a schedule of future minimum lease payments required under operating leases for retail stores, transportation equipment, corporate office space and office equipment that have noncancelable lease terms in excess of one year as of December 30, 2000: ---------------------------------------------------------------------- 2001 $11,641,000 2002 11,523,000 2003 11,309,000 2004 10,860,000 2005 10,437,000 2006-2020 87,468,000 ---------------------------------------------------------------------- Total minimum lease payments 143,238,000 Less minimum amounts receivable under noncancelable subleases (106,787,000) ---------------------------------------------------------------------- Net minimum lease payments $36,451,000 ---------------------------------------------------------------------- Rental expenses, net of rental income from subleases, for all operating leases amounted to $5,260,000, $5,010,000 and $4,589,000 in fiscal years 2000, 1999 and 1998, respectively. These amounts include $1,035,000, $1,054,000 and $957,000, respectively, for contingent rentals. (8) 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. 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: ------------------------------------------------------------------------ 2000 1999 1998 ------------------------------------------------------------------------ Net earnings As reported $7,913,000 $8,358,000 $8,518,000 Pro forma 7,577,000 8,012,000 8,181,000 ------------------------------------------------------------------------ Earnings per share-diluted As reported $1.33 $1.30 $1.23 Pro forma 1.27 1.24 1.18 ======================================================================== 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 2000, 1999 and 1998: ----------------------------------------------------------------------- 2000 1999 1998 ----------------------------------------------------------------------- Dividend yield 2.00% 2.00% 2.00% Expected volatility 25.01% 25.91% 26.81% Risk-free interest rate 6.57% 4.75% 5.49% Expected term of grant 5.5 years 5.5 years 5.5 years ======================================================================= The fair values of each option granted in 2000, 1999 and 1998 were $3.48, $4.27 and $4.28, respectively. E-34 As of December 30, 2000, no incentive stock options have been granted. Following is a summary of the status of nonqualified stock options for the fiscal years 2000, 1999 and 1998: ----------------------------------------------------------------------- Number of shares Weighted average exercise prices ----------------------------------------------------------------------- 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 Granted 187,200 11.84 Exercised (200,100) 8.01 Forfeited (28,600) 14.38 ----------------------------------------------------------------------- Shares under option at December 30, 2000 602,700 12.85 ======================================================================= Shares reserved for grant at December 30, 2000 424,600 ======================================================================= Options granted in February 2001 252,000 $11.63 ======================================================================= 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 December 30, 2000 ranged from $6.50 to $16.13. The weighted average remaining contractual life of these options is approximately 4 years. Nonqualified stock options outstanding at December 30, 2000, January 1, 2000 and January 2, 1999 were exercisable for 289,500, 363,900 and 402,750 shares. These shares were exercisable at the weighted average prices of $12.09, $9.29 and $6.96 at December 30, 2000, January 2, 1999 and January 3, 1998, respectively. (9) Common Stock 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. (10) 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 had antidilutive shares for 2000, 1999 and 1998 of $441,000, $153,700 and none, respectively. E-35 The Company's calculations of earnings per share-basic and earnings per share-diluted were as follows: --------------------------------------------------------------------------- 2000 1999 1998 --------------------------------------------------------------------------- Net earnings available for common $7,913,000 $8,358,000 $8,518,000 shareholders Weighted average shares outstanding 5,935,000 6,336,000 6,749,000 Earnings per share-basic $1.33 $1.32 $1.26 --------------------------------------------------------------------------- Net earnings available for common $7,913,000 $8,358,000 $8,518,000 shareholders Weighted average shares outstanding 5,935,000 6,336,000 6,749,000 Stock options' dilutive effect 16,000 102,000 174,000 Weighted average shares and equivalents outstanding 5,951,000 6,438,000 6,923,000 Earnings per share-diluted $1.33 $1.30 $1.23 --------------------------------------------------------------------------- (11) 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 December 30, 2000, the Company provided products to 71 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. E-36 Summarized financial information concerning the Company's reportable segments is shown in the following table (in thousands).
-------------------------------------- ---------------- --------------- ---------------- Sales 2000 1999 1998 -------------------------------------- ---------------- --------------- ---------------- Wholesale sales $ 409,437 $ 411,913 $ 404,047 Intracompany sales (114,910) (123,376) (123,912) ---------------- --------------- ---------------- Net wholesale sales 294,527 288,537 280,135 Retail sales 207,529 208,422 204,750 -------------------------------------- ---------------- --------------- ---------------- Total $ 502,056 $ 496,959 $ 484,885 ====================================== ================ =============== ================ -------------------------------------- ---------------- --------------- ---------------- Earnings before income taxes 2000 1999 1998 -------------------------------------- ---------------- --------------- ---------------- Wholesale $ 9,351 $ 9,870 $ 9,749 Retail 2,914 3,372 3,741 ---------------- --------------- ---------------- Total operating income 12,265 13,242 13,490 Interest income 1,349 1,175 1,242 Interest expense (852) (761) (816) -------------------------------------- ---------------- --------------- ---------------- Earnings before income taxes $ 12,762 $ 13,656 $ 13,916 ====================================== ================ =============== ================ -------------------------------------- ---------------- --------------- ---------------- Capital Expenditures 2000 1999 1998 -------------------------------------- ---------------- --------------- ---------------- Wholesale $ 378 $ 199 $ 149 Retail 2,214 1,869 2,443 Corporate 2,686 1,141 1,255 -------------------------------------- ---------------- --------------- ---------------- Total $ 5,278 $ 3,209 $ 3,847 ====================================== ================ =============== ================ -------------------------------------- ---------------- --------------- ---------------- Depreciation and Amortization 2000 1999 1998 -------------------------------------- ---------------- --------------- ---------------- Wholesale $ 829 $ 820 $ 933 Retail 3,001 2,450 2,457 Corporate 1,385 1,689 1,685 -------------------------------------- ---------------- --------------- ---------------- Total $ 5,215 $ 4,959 $ 5,075 ====================================== ================ =============== ================ -------------------------------------- ---------------- --------------- ---------------- Identifiable Assets 2000 1999 1998 -------------------------------------- ---------------- --------------- ---------------- Wholesale $ 31,764 $ 33,941 $ 32,040 Retail 28,260 28,546 26,550 Corporate 44,875 31,140 45,726 -------------------------------------- ---------------- --------------- ---------------- Total $ 104,899 $ 93,627 $ 104,316 ====================================== ================ =============== ================
E-37 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 2000 and 1999 follows:
--------------------------------------------- --------------------------------------------------------------------- (dollars and shares in thousands, except per share data) Fiscal Year Ended December 30, 2000 --------------------------------------------- --------------------------------------------------------------------- First Second Third Fourth Year -------------------------------------- -------------- -------------- --------------- -------------- --------------- Net sales $147,688 $116,459 $116,341 $121,568 $502,056 Gross profit 24,459 19,471 18,843 19,980 82,753 Net earnings 1,869 1,903 1,555 2,586 7,913 Earnings per share - basic 0.31 0.32 0.26 0.44 1.33 Earnings per share - diluted 0.31 0.32 0.26 0.44 1.33 Weighted average shares and equivalents outstanding 5,999 5,989 5,951 5,916 5,951 -------------------------------------- -------------- -------------- --------------- -------------- --------------- --------------------------------------------- --------------------------------------------------------------------- (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 -------------------------------------- -------------- -------------- --------------- -------------- --------------- Common Stock Information The Company's common stock is traded over-the-counter on the Nasdaq Stock Market under the symbol SAVO. There are approximately 1,200 shareholders 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 2000 $13.00 $ 9.88 $12.00 $10.25 $12.06 $10.50 $12.00 $10.63 $13.00 $ 9.88 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 ------------ -------- --------- --------- --------- --------- --------- --------- --------- -------- --------- Cash dividends paid per share were: --------------- ------------------ ------------------ ------------------ ------------------ ------------------ First Second Third Fourth Year --------------- ------------------ ------------------ ------------------ ------------------ ------------------ 2000 $0.09 $0.09 $0.09 $0.09 $0.36 1999 0.08 0.08 0.09 0.09 0.34 1998 0.07 0.07 0.08 0.08 0.30 --------------- ------------------ ------------------ ------------------ ------------------ ------------------ Under the Company's loan agreements, approximately $6,100,000 of retained earnings were available for the payment of cash dividends, stock repurchases and other restricted payments at December 30, 2000.
E-38 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", "projects" 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: (i) presence of intense competitive market activity in the Company's market areas; (ii) ability to identify and develop new market locations and opportunities for expansion purposes; (iii) continuing ability to obtain reasonable vendor marketing funds for promotional purposes; (iv) ongoing advancing information technology requirements, which may require the Company to spend substantial capital expenditures and can dilute the Company's earnings for a significant period; and (v) the Company's ability to continue to recruit, train and retain quality franchise and corporate retail store operators. Due principally to the competitive nature of the industry and to the quality of its retail store operators, the Company continues to evaluate various courses of action relating to its underperforming retail operations. These courses of action include closures, conversions and consolidations of retail stores. Implementation of these actions can result in certain repositioning charges to the Company. 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 --------------------------------------- ------------------------------------------ ------------------------------ 2000 1999 1998 2000 1999 vs. 1999 vs. 1998 --------------------------------------- ------------- -------------- ------------- -------------- --------------- Net sales 100.0% 100.0% 100.0% 1.0% 2.5% Gross margin 16.5% 16.2% 16.1% 3.0% 2.9% Operating and administrative expenses 14.0% 13.5% 13.3% 5.0% 3.9% Earnings before income taxes 2.5% 2.7% 2.9% (6.5%) (1.9%) Net earnings 1.6% 1.7% 1.8% (5.3%) (1.9%) --------------------------------------- ------------- -------------- ------------- -------------- ---------------
2000 vs. 1999 Net Sales Net sales for 2000 were $502.1 million, compared to $497.0 million for 1999. This was the first time in the Company's history that the half-billion dollar annual sales volume milestone was reached. The increase of $5.1 million, or 1.0%, was due to increased net wholesale sales. Net wholesale sales in 2000 increased 2.1% to $294.5 million, compared to $288.5 million in 1999. The net wholesale sales improvement was attributable to the following: E-39 o 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; o The successful conversion to the Piggly Wiggly program of one new market franchise unit in Markesan, Wisconsin from another wholesaler in January 2000; and o The completion of one new market franchise supermarket in Kewaskum, Wisconsin in June 2000. The conversion of one franchise supermarket into a corporate store in November 1999 and additional competitive activities in certain franchise market areas offset some of the net wholesales sales volume increase. Retail sales decreased nominally to $207.5 million in 2000, compared to $208.4 million in 1999. This decrease was principally attributable to several of the Company's retail stores experiencing intense competitive pressures. The changes in net sales broken down by both wholesale and retail sales is summarized in the following chart: --------------------------------------------------------------- Sales 2000 1999 --------------------------------------------------------------- Wholesale sales $ 409,437 $ 411,913 Intracompany sales (114,910) (123,376) ------------------------------------- Net wholesale sales 294,527 288,537 Retail sales 207,529 208,422 --------------------------------------------------------------- Total $ 502,056 $ 496,959 =============================================================== Compared to 1999, net wholesale sales for 2000 increased 2.1%. In 2000, the quantity of items sold by our wholesale business decreased nominally but this decrease was more than offset by an increase in the prices of goods sold. During 2000, our retail grocery prices increased by approximately 2%, but the quantity of retail sales decreased by a slightly larger margin, resulting in a net retail sale decrease of 0.4%. As part of the Company's continuing efforts to expand its "virtual chain" program, a new 55,000 square-foot franchise replacement supermarket was completed in January 2001 in Slinger, Wisconsin. There are currently four additional facility projects in various phases of planning or construction with completions scheduled throughout 2001. These projects include one replacement franchise unit in Campbellsport, Wisconsin; one expanded franchise store in Mequon, Wisconsin; and two replacement corporate stores in Sheboygan, Wisconsin and Zion, Illinois, respectively. Additionally, the Company announced on January 31, 2001, an agreement to convert a retail supermarket owned and operated by Kohler Company into a Piggly Wiggly franchise unit before the end of the second quarter of 2001. These five facility projects and one new market franchise store will increase aggregate selling space by nearly 75,000 square feet and should contribute to potentially increased wholesale sales in 2001. Based on the Company's internal wholesale price index, inflation did not have a significant effect on sales between years. Gross Margin Our gross margin increased from 16.2% in 1999 to 16.5% in 2000. The improvement in gross margin was primarily related to merchandising and promotional changes initiated early in 2000. In 1999, retail gross margin was adversely impacted by certain promotional events, including the 50th anniversary of Piggly Wiggly(R) stores in Wisconsin. Wholesale gross margins remained virtually unchanged between 2000 and 1999 and were not impacted by a change in the mix of goods sold. E-40 Operating and Administrative Expenses Operating and administrative expenses, as a percent of sales, increased to 14.0% in 2000, compared to 13.5% in 1999. This increase of 0.5%, or $3.4 million, was principally attributable to the following factors: o Due primarily to three retail union health and accident rate increases between September 1, 1999 and February 1, 2000, the Company incurred additional health and accident insurance expenses of approximately $1.1 million, or an increase of 33%, compared to 1999 levels. The Company believes that further rate increases are possible during 2001. o Due to the extremely tight labor market in Wisconsin, especially in Sheboygan, additional overtime hours were necessary to operate the Company's distribution facility. This resulted in the Company incurring incremental distribution payroll costs approximating $500,000. o As the Company continued its efforts to evaluate various strategic alternatives, one-time professional fees in excess of $400,000 were incurred. The Company continues to evaluate various acquisition and strategic alternatives. Due to the continuing competitive nature of the industry, certain franchise operators and corporate retail stores continue to experience operational challenges in their respective marketplaces. As can be expected from a franchisor-franchisee relationship, Schultz has direct receivable exposure from two major factors. First, if there is an underperforming franchise operator, Schultz's exposure can increase. Second, certain marketplace events, such as increased competition, can result in increased realization. Both factors can exist in any franchise operation. The company continuously monitors the financial viability of its retail customers and provides an allowance for both customer credit worthiness and retail subsidies that are provided to these customers. As a result, the company continues to incur significant receivable realization charges from a number of underperforming franchise operators. Total 2000, 1999 and 1998 realization charges relating to wholesale bad debts and retail subsidies were $1.7 million, $2.3 million and $1.5 million, respectively, which are included as a component of Operating and Administrative Expenses on the Consolidated Statement of Earnings. The retail subsidy component of these charges was $1.5 million in both 2000 and 1999 and $1.1 million in 1998. Although certain franchise retail operations have improved, the company continues to evaluate various business initiatives relating to the operations of its underperforming and noncompetitive 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 would likely result in the company incurring certain repositioning or restructuring charges involving the termination costs of replaced, sold or closed stores. These actions would likely negatively impact earnings results in the short-term, however, the company would likely only take such action if it believes that such actions will help the company's long-term profitability. While the company did not incur any significant repositioning expenses during fiscal 2000 and 1999, the company believes there is a greater likelihood that additional repositioning expenses may be incurred in 2001 as the company further evaluates its options with regard to certain stores. Net Earnings The Company's fiscal 2000 operating income decreased 7.4% to $12.3 million, compared to $13.2 million in 1999. After allocating wholesale operating profits on sales through the Company's corporate stores to retail, the wholesale segment yielded $9.4 million in operating income while the retail segment contributed $2.9 million, compared to $9.9 million wholesale and $3.3 million retail for fiscal 1999. Fiscal 2000 earnings before income taxes decreased 6.5% to $12.8 million, compared to $13.7 million in 1999. As a percent of sales, earnings before income taxes decreased to 2.5% in 2000 from 2.7% in 1999. E-41 Net earnings for 2000 decreased 5.3% to $7.9 million, compared to $8.4 million in 1999. Due principally to the intense competitiveness in certain market areas, the Company's net earnings-to-sales ratio decreased nominally to 1.58% in 2000, compared to 1.68% in 1999. The net earnings-to-sales ratio represents the net margin realized by the Company from each dollar of sale. This ratio is used by many companies in our industry to measure the profitability of their sales. As a result of significant Company stock repurchases in 2000 and 1999, diluted earnings per share for 2000 increased 2.3% to $1.33 from $1.30 in 1999. The Company's weighted average common shares and equivalents were 5,951,000 and 6,438,000 for 2000 and 1999, respectively. 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 volume. Net 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: o The completion of two Wisconsin franchise store facility projects during the second quarter of 1998; o The completion of five Wisconsin franchise store facility projects during the first half of 1999; o The opening of one new market franchise store in May 1999; o The successful conversion to the Piggly Wiggly program of two new market franchise stores from other wholesalers during the third quarter of 1999; and o 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 extent, retail sales also increased due to the conversion of one franchise store 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. The changes in net sales broken down by both wholesale and retail sales is summarized in the following chart: ---------------------------------------------------------------- Sales 1999 1998 ---------------------------------------------------------------- Wholesale sales $ 411,913 $ 404,047 Intracompany sales (123,376) (123,912) ------------------------------------- Net wholesale sales 288,537 280,135 Retail sales 208,422 204,750 ---------------------------------------------------------------- Total $ 496,959 $ 484,885 ================================================================ Compared to 1998, net wholesale sales for 1999 increased 3.0% and net retail sales for 1999 increased 1.8%. The majority of both of these increases was due to an increase in the quantity of items sold. E-42 During 1999 the Company had seven facility projects, all but one of which were completed in 2000. These projects included expansions in Kaukauna and Jackson, Wisconsin; one corporate replacement store in Racine, Wisconsin; two replacement supermarkets in Pardeeville and New Holstein, Wisconsin; and one new market store in Kewaskum, Wisconsin. Gross Margin Our gross margin increased nominally from 16.1% in 1998 to 16.2% in 1999. Wholesale and retail gross margins both increased nominally between 1999 and 1998. 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 experienced operational difficulties in their respective marketplaces. As a result, the Company continued to incur significant realization charges from a number of underperforming 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 improved, the Company continued to evaluate various business initiatives relating to the operations of its underperforming and noncompetitive stores. These initiatives included, but were not limited to, the sale and subsequent conversion of these stores, the closure of these supermarkets or the implementation of other operational changes. 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 to 1.68% in 1999, compared to 1.76% in 1998. 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. Liquidity and Capital Resources During fiscal 2000 the primary source of liquidity was cash generated from operations. Total cash generated from operations for fiscal 2000 was $21.3 million, compared to $5.5 million in 1999. Cash flow from operations increased significantly between years due principally to timing of cash receipts, cash payments and changes in short-term financing to the Company's wholesale customers. E-43 Net cash outflows for investing activities totaled $4.9 million in 2000 compared to $2.5 million in 1999. This increase in outflows was primarily attributable to increased capital expenditures in 2000, compared to 1999. Of the total capital expenditures of $5.3 million in 2000, the Company invested more than $2.2 million for retail upgrades. Approximately 55% of the retail expenditures related to equipment purchases for the replacement supermarket in Racine, Wisconsin. The remainder of the retail expenditures was used for other corporate retail store equipment and technological upgrades. The wholesale and corporate capital expenditures of $3.1 million in 2000, compared to $1.3 million in 1999, were principally technology-related upgrades. For 2001 the Company's capital budget is estimated at $7.1 million, of which $4.15 million was committed as of December 30, 2000. Of this $7.1 million total, the Company has allocated $4.5 million for retail replacement units and upgrades, $1.1 for technology hardware and software and $1.1 for distribution upgrades. This capital budget of $7.1 million is exclusive of any capital expenditures the Company may incur in 2001 as a result of its comprehensive evaluation of the core business systems. The Company expects to finance these projects from internally generated capital. If the Company decides to channel its working capital to certain strategic growth needs, the Company can also avail itself of its current unused and unsecured bank revolving line of credit totaling $16 million. Net cash outflows for financing activities were $7.4 million in 2000 compared to $14.9 million in 1999. The Company repurchased 558,540 shares of its own stock in 2000 aggregating $6.1 million, compared to 821,600 shares for $12.9 million during 1999. The Company's Board of Directors amended the stock repurchase program twice during 2000, increasing the stock repurchase program from $15 million to eventually $25 million of repurchase authority as of the end of the year. As of December 30, 2000, only $7.4 million remained available for stock repurchases. Since the first stock repurchase program commenced in January 1992, the Company has repurchased nearly 3,500,000 shares, or approximately 40%, of its outstanding common stock. In summary, cash and equivalents for fiscal 2000 increased $8.9 million, resulting in a year-end balance of $31.3 million. Of this year-end cash balance, approximately $21.9 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. At December 30, 2000, the Company served as the prime lessee of store facilities operated by more than 80% of its existing franchise operators. As part of this arrangement/credit enhancement, the Company subleases the property to the store operator at lease terms similar to those that the Company has with the prime landlord. All new facilities in 2000 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 2000 and 1999 were both approximately $1.0 million. At December 30, 2000, the Company had recorded $11.6 million of minimum lease payments required to be paid under operating leases in 2001. Additionally, at December 30, 2000, the Company had $8.3 million of long-term capital lease obligations, $4.2 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 nearly $18.0 million at December 30, 2000. All of the loan guarantees are substantially collateralized, principally with equipment and inventory and, to a lesser extent, with building facilities. At December 30, 2000, the Company's ratio of total liabilities to shareholders' investment was 1.12, compared to a ratio of 0.95 at January 1, 2000. E-44 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. Company Business The Company is engaged in distributing food and related products at wholesale and retail. At April 27, 2001, the Company franchised 72 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 1,750 persons, nearly 1,300 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 250 are corporate and administrative personnel. E-45