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.
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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.
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