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.