Five-Year Financial Highlights
================================================== ============================================================================
(dollars in thousands, except per share data) Fiscal Year (a) (b)
- - -------------------------------------------------- --------------- -------------- -------------- --------------- --------------
1998 1997 1996 1995 1994
- - -------------------------------------------------- --------------- -------------- -------------- --------------- --------------
Consolidated statements of earnings data:
Net sales $ 484,885 $ 473,006 $ 453,921 $ 439,646 $ 446,362
Gross profit 78,070 73,907 72,429 70,516 73,495
Earnings before income taxes 13,916 12,418 10,512 9,500 8,653
Provision for income taxes 5,398 4,781 4,047 3,660 3,252
Net earnings 8,518 7,637 6,465 5,840 5,401
Earnings per share - basic 1.26 1.11 0.93 0.82 0.70
Earnings per share - diluted 1.23 1.06 0.90 0.79 0.68
Cash dividends per share 0.30 0.27 0.24 0.15 0.07
Weighted average shares and equivalents
outstanding (c) 6,923 7,148 7,187 7,402 7,886
Net earnings-to-sales ratio 1.76% 1.61% 1.42% 1.33% 1.21%
Consolidated balance sheet data (at fiscal
year-end):
Working capital $ 32,884 $ 29,217 $ 28,579 $ 24,855 $ 21,197
Total assets 105,096 98,866 98,204 94,435 94,624
Current obligations under capital leases and
current maturities of long-term debt 792 866 1,047 1,114 1,037
Long-term debt 3,021 3,165 3,375 3,719 4,056
Long-term obligations under capital leases 9,764 11,177 12,368 13,268 14,046
Total shareholders' investment 53,085 50,384 47,035 43,288 41,457
Other data:
Capital additions $ 3,847 $ 4,868 $ 3,420 $ 3,545 $ 3,640
Depreciation and amortization 5,075 4,517 4,451 4,467 4,654
NOTES: (a) The Company's fiscal year ends on the Saturday closest to December
31. The 1997 fiscal year was a 53-week period. All other fiscal
years presented were 52-week periods.
(b) All data should be read in conjunction with the Company's audited
consolidated financial statements and "Management's discussion and
analysis of financial condition and results of operations" as set
forth in this Annual Report.
(c) The weighted average shares and equivalents outstanding for 1997
and prior years have been retroactively restated to account for
the three-for-two stock split on September 5, 1997 and/or for the
two-for-one stock split on September 15, 1995.
MANAGEMENT'S RESPONSIBILITIES FOR FINANCIAL REPORTING
The management of Schultz Sav-O Stores, Inc. is responsible for the preparation,
objectivity and integrity of the Company's consolidated financial statements
contained in the Company's 1998 Annual Report to Shareholders. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles and include amounts that are based on management's best
estimates and informed judgments.
To help assure that financial information is reliable and assets are
safeguarded, management maintains a system of internal controls and procedures
which it believes is effective in accomplishing these objectives. These controls
and procedures are designed to provide reasonable assurance, at appropriate
costs, that transactions are executed and recorded in accordance with
management's authorization.
The Company's consolidated financial statements have been audited by its
independent public accountants, Arthur Andersen LLP, whose report was based on
audits conducted in accordance with generally accepted auditing standards and is
presented below. As part of its audit, it performs a review of the Company's
system of internal controls for the purpose of determining the amount of
reliance to place on those controls relative to the audit tests it performs.
The Audit Committee of the Board of Directors, composed of directors who are not
officers or employees of the Company, meets periodically with Arthur Andersen
LLP and management to satisfy itself that each is properly discharging its
responsibilities. The independent public accountants have direct access to the
Audit Committee.
James H. Dickelman John H. Dahly Armand C. Go
Chairman, President and Executive Vice President, Treasurer and
Chief Executive Officer Chief Financial Officer Chief Accounting
and Secretary Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Schultz Sav-O Stores, Inc.
We have audited the accompanying consolidated balance sheets of Schultz Sav-O
Stores, Inc. and its subsidiary as of January 2, 1999 and January 3, 1998 and
the related consolidated statements of earnings, cash flows and shareholders'
investment for each of the three fiscal years in the period ended January 2,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted accounting
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Schultz Sav-O
Stores, Inc. and its subsidiary as of January 2, 1999 and January 3, 1998, and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended January 2, 1999, in conformity with generally
accepted accounting principles.
Milwaukee, Wisconsin Arthur Andersen LLP
February 5, 1999
CONSOLIDATED BALANCE SHEETS
As of January 2, 1999 and January 3, 1998
- - ----------------------------------------------------------------------------- --------------------- --------------------
Assets 1998 1997
- - ----------------------------------------------------------------------------- --------------------- --------------------
Current assets:
Cash and equivalents $ 34,334,000 $ 23,124,000
Receivables 6,233,000 9,718,000
Inventories 23,951,000 21,741,000
Other current assets 2,385,000 3,635,000
Deferred income taxes 4,376,000 4,131,000
- - ----------------------------------------------------------------------------- --------------------- --------------------
Total current assets 71,279,000 62,349,000
- - ----------------------------------------------------------------------------- --------------------- --------------------
Noncurrent receivable under capital subleases 6,107,000 7,270,000
Property under capital leases, net 2,499,000 2,786,000
Other noncurrent assets 3,524,000 3,782,000
Property and equipment, net 21,687,000 22,679,000
- - ----------------------------------------------------------------------------- --------------------- --------------------
Total assets $ 105,096,000 $ 98,866,000
============================================================================= ===================== ====================
Liabilities and Shareholders' Investment
- - ----------------------------------------------------------------------------- --------------------- --------------------
Current liabilities:
Accounts payable $ 24,798,000 $ 21,305,000
Accrued salaries and benefits 5,040,000 4,395,000
Accrued insurance 3,020,000 3,095,000
Retail repositioning reserve 685,000 610,000
Other accrued liabilities 4,060,000 2,861,000
Current obligations under capital leases 656,000 665,000
Current maturities of long-term debt 136,000 201,000
- - ----------------------------------------------------------------------------- --------------------- --------------------
Total current liabilities 38,395,000 33,132,000
- - ----------------------------------------------------------------------------- --------------------- --------------------
Long-term obligations under capital leases 9,764,000 11,177,000
Long-term debt 3,021,000 3,165,000
Deferred income taxes 831,000 1,008,000
Shareholders' investment:
Common stock, $0.05 par value, authorized 20,000,000 shares, issued
8,750,342 in 1998 and 1997 438,000 438,000
Additional paid-in capital 14,359,000 13,940,000
Retained earnings 57,792,000 51,299,000
Treasury stock at cost, 2,155,463 shares in 1998 and
1,938,463 shares in 1997 (19,504,000) (15,293,000)
- - ----------------------------------------------------------------------------- --------------------- --------------------
Total shareholders' investment 53,085,000 50,384,000
- - ----------------------------------------------------------------------------- --------------------- --------------------
Total liabilities and shareholders' investment $ 105,096,000 $ 98,866,000
============================================================================= ===================== ====================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF EARNINGS
For fiscal years 1998, 1997 and 1996
- - ----------------------------------------------------------- ------------------- ------------------- --------------------
1998 1997 1996
- - ----------------------------------------------------------- ------------------- ------------------- --------------------
Net sales $ 484,885,000 $ 473,006,000 $ 453,921,000
Cost and expenses:
Cost of products sold 406,815,000 399,099,000 381,492,000
Operating and administrative expenses 64,580,000 61,799,000 61,892,000
- - ----------------------------------------------------------- ------------------- ------------------- --------------------
Operating income 13,490,000 12,108,000 10,537,000
Interest income 1,242,000 1,157,000 842,000
Interest expense (816,000) (847,000) (867,000)
- - ----------------------------------------------------------- ------------------- ------------------- --------------------
Earnings before income taxes 13,916,000 12,418,000 10,512,000
Provision for income taxes 5,398,000 4,781,000 4,047,000
- - ----------------------------------------------------------- ------------------- ------------------- --------------------
Net earnings $ 8,518,000 $ 7,637,000 $ 6,465,000
- - ----------------------------------------------------------- ------------------- ------------------- --------------------
Earnings per share - basic $1.26 $1.11 $0.93
=========================================================== =================== =================== ====================
Earnings per share - diluted $1.23 $1.06 $0.90
=========================================================== =================== =================== ====================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For fiscal years 1998, 1997 and 1996
- - ----------------------------------------------------------- ------------------- ------------------- --------------------
1998 1997 1996
- - ----------------------------------------------------------- ------------------- ------------------- --------------------
Cash flows from operating activities
Net earnings $ 8,518,000 $ 7,637,000 $ 6,465,000
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 5,075,000 4,517,000 4,451,000
Deferred income taxes (254,000) (609,000) (626,000)
Changes in current assets and liabilities:
Receivables 3,485,000 (4,042,000) (114,000)
Inventories (2,210,000) 1,476,000 (1,858,000)
Other current assets 1,419,000 (551,000) 2,335,000
Accounts payable 3,493,000 741,000 823,000
Accrued liabilities 2,096,000 (935,000) 1,386,000
- - ----------------------------------------------------------- ------------------- ------------------- --------------------
Net cash flows from operating activities 21,622,000 8,234,000 12,862,000
- - ----------------------------------------------------------- ------------------- ------------------- --------------------
Cash flows from investing activities
Capital additions (3,847,000) (4,868,000) (3,420,000)
Receipt of principal amounts under capital subleases 443,000 505,000 581,000
Proceeds from asset sales 103,000 144,000 88,000
Acquisition of retail stores - (2,701,000) -
- - ----------------------------------------------------------- ------------------- ------------------- --------------------
Net cash flows from investing activities (3,301,000) (6,920,000) (2,751,000)
- - ----------------------------------------------------------- ------------------- ------------------- --------------------
Cash flows from financing activities:
Payment for acquisition of treasury stock (5,017,000) (3,835,000) (2,233,000)
Payment of cash dividends (2,025,000) (1,879,000) (1,666,000)
Proceeds from exercise of stock options 806,000 817,000 856,000
Principal payments on capital lease obligations (665,000) (702,000) (777,000)
Principal payments on long-term debt (210,000) (354,000) (337,000)
Repurchase of preferred stock - - (16,000)
- - ----------------------------------------------------------- ------------------- ------------------- --------------------
Net cash flows from financing activities (7,111,000) (5,953,000) (4,173,000)
- - ----------------------------------------------------------- ------------------- ------------------- --------------------
Cash and equivalents:
Net change 11,210,000 (4,639,000) 5,938,000
Balance, beginning of year 23,124,000 27,763,000 21,825,000)
- - ----------------------------------------------------------- ------------------- ------------------- --------------------
Balance, end of year $ 34,334,000 $ 23,124,000 $ 27,763,000
=========================================================== =================== =================== ====================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
For fiscal years 1998, 1997 and 1996
- - -------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
- - -------------------------------------------------------------------------------------------------------------------------------
Preferred Stock, $100 par
Beginning of year - $ - - $ - 159 $ 16,000
Repurchase of preferred stock - - - - (159) (16,000)
- - -------------------------------------------------------------------------------------------------------------------------------
End of year - - - - - -
===============================================================================================================================
Common Stock, $0.05 par
Beginning of year 8,750,342 438,000 5,833,570 292,000 5,833,570 292,000
Three-for-two stock split effected
in the form of a 50% stock
dividend, net of fractional shares - - 2,916,772 146,000 - -
- - -------------------------------------------------------------------------------------------------------------------------------
End of year 8,750,342 438,000 8,750,342 438,000 5,833,570 292,000
===============================================================================================================================
Additional Paid-in Capital
Beginning of year 13,940,000 13,331,000 12,990,000
Exercise of stock options 419,000 609,000 341,000
- - -------------------------------------------------------------------------------------------------------------------------------
End of year 14,359,000 13,940,000 13,331,000
===============================================================================================================================
Retained Earnings
Beginning of year 51,299,000 45,654,000 40,855,000
Net earnings 8,518,000 7,637,000 6,465,000
Cash dividends
Common stock ($0.30 per share in
1998, $0.27 per share in 1997 and
$0.24 in 1996) (2,025,000) (1,879,000) (1,666,000)
Three-for-two stock split effected
in the form of a 50% stock
dividend, net of fractional shares - (113,000) -
- - -------------------------------------------------------------------------------------------------------------------------------
End of year 57,792,000 51,299,000 45,654,000
===============================================================================================================================
Treasury Stock
Beginning of year (1,938,463) (15,293,000) (1,214,472) (12,242,000) (1,179,972) (10,865,000)
Acquisition of treasury stock (335,050) (5,017,000) (289,856) (3,835,000) (145,800) (2,233,000)
Exercise of stock options 118,050 806,000 173,100 817,000 111,300 856,000
Three-for-two stock split effected
in the form of a 50% stock
dividend, net of fractional shares - - (607,235) (33,000) - -
- - -------------------------------------------------------------------------------------------------------------------------------
End of year (2,155,463) (19,504,000) (1,938,463) (15,293,000) (1,214,472) (12,242,000
===============================================================================================================================
Shareholders' investment, end of year $53,085,000 $ 50,384,000 $ 47,035,000
===============================================================================================================================
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For fiscal years 1998, 1997 and 1996
(1) Description of Business
The Company is engaged in the food distribution business through
franchised and corporate retail supermarkets and as a supplier to independent
food stores. The franchised and corporate retail Piggly Wiggly(R) supermarkets
and independent food stores supplied by the Company are located in eastern
Wisconsin and northeastern Illinois. In an agreement with the owner of the
Piggly Wiggly franchise in 1998, the Company expanded its geographic marketing
area to include all of Wisconsin, Michigan's Upper Peninsula, portions of
Minnesota and Iowa, and additional counties in Illinois.
(2) Summary of Significant Accounting Policies
Fiscal year
The Company's fiscal year ends on the Saturday closest to December 31.
The 1998 and 1996 fiscal years were 52-week periods ended January 2, 1999 and
December 28, 1996, respectively. The 1997 fiscal year was a 53-week period ended
January 3, 1998.
Principles of consolidation
The financial statements include the accounts of Schultz Sav-O Stores,
Inc. and its wholly-owned subsidiary, PW Trucking, Inc. Any intercompany
accounts and transactions have been eliminated.
Cash and equivalents
Cash and equivalents consist of demand deposits at commercial banks and
highly liquid investments with a maturity of three months or less when
purchased. Cash equivalents are stated at cost which approximate market value.
Receivables
Receivables are shown net of allowance for doubtful accounts of
$4,300,000 and $3,950,000 at January 2, 1999 and January 3, 1998, respectively.
Inventories
Inventories, substantially all of which consist of food, groceries and
related products for resale, are stated at the lower of cost or market value.
Cost is determined primarily on the last-in, first-out (LIFO) method. For meat
and produce, cost is determined on the first-in, first-out (FIFO) method. At
January 2, 1999 and January 3, 1998, 78% and 81%, respectively, of all
inventories were accounted for under the LIFO method. The excess of current cost
over the stated LIFO cost of inventory was $10,032,000 and $9,609,000 at January
2, 1999 and January 3, 1998, respectively.
Other current assets
Other current assets at January 2, 1999 and January 3, 1998 consisted of
the following:
- - ----------------------------------------- ----------------- ----------------
1998 1997
- - ----------------------------------------- ----------------- ----------------
Prepaid expenses $1,086,000 $1,209,000
Property held for resale 578,000 1,663,000
Receivable under capital subleases 407,000 443,000
Retail systems and supplies for resale 314,000 320,000
- - ----------------------------------------- ----------------- ----------------
Other current assets $2,385,000 $3,635,000
========================================= ================= ================
Property and equipment, net
Property and equipment are stated at cost. Depreciation is amortized on
the straight-line method over the estimated useful lives of the assets.
Equipment generally has a useful life of 4 to 7 years, computer hardware and
software have a useful life of 3 to 5 years, buildings and land improvements
have a useful life of 10 to 35 years, and leasehold improvements generally has a
useful life of 10 to 20 years. Facility remodeling and upgrade costs on leased
stores are capitalized as leasehold improvements and are amortized over the
shorter of the remaining lease term or the useful life of the asset. Upon
disposal, the appropriate asset cost and accumulated depreciation are retired.
Gains and losses on disposition are included in earnings. Property and
equipment, net, at January 2, 1999 and January 3, 1998 consisted of the
following:
- - ----------------------------- ---------------- ----------------
1998 1997
- - ----------------------------- ---------------- ----------------
Land and buildings $18,731,000 $18,455,000
Leasehold improvements 5,578,000 5,391,000
Equipment and fixtures 33,266,000 33,537,000
- - ----------------------------- ---------------- ----------------
57,575,000 57,383,000
Less accumulated
depreciation and
amortization (35,888,000) (34,704,000)
- - ----------------------------- ---------------- ----------------
Property and equipment, net $21,687,000 $22,679,000
============================= ================ ================
Other noncurrent assets
Other noncurrent assets at January 2, 1999 and January 3, 1998 consisted
of the following:
- - ---------------------------- ----------------- ----------------
1998 1997
- - ---------------------------- ----------------- ----------------
Long term software, net $1,393,000 $1,299,000
Goodwill, net 836,000 891,000
Other intangibles, net 318,000 409,000
Other 977,000 1,183000
- - ---------------------------- ----------------- ----------------
Total $3,524,000 $3,782,000
============================ ================= ================
Accounts payable
Accounts payable includes $8,225,000 and $7,583,000 at January 2, 1999
and January 3, 1998, respectively, of issued checks that have not cleared the
Company's disbursing bank accounts.
Retail repositioning reserve
Estimated repositioning and termination expenses associated with the
closure, replacement or disposal of stores, consisting primarily of lease
payments, charges to reduce assets to net realizable value and severance
payments, are charged to operating and administrative expenses upon the decision
to close, replace or dispose of a store as soon as the amounts are reasonably
estimated. Due to inherent uncertainties in estimating these repositioning and
termination costs, it is at least reasonably possible that the Company's
estimates may change in the near term.
Supplementary disclosure of cash flow information
Interest and taxes paid included in the Company's cash flow from
operations were as follows:
- - ----------------- ------------- ------------- ---------------
1998 1997 1996
- - ----------------- ------------- ------------- ---------------
Interest paid $ 822,000 $ 878,000 $ 873,000
Taxes paid 4,956,000 5,911,000 4,071,000
- - ----------------- ------------- ------------- ---------------
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Advertising costs
Costs incurred for producing and communicating advertising are generally
expensed when incurred.
New accounting pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which the Company has adopted for its fiscal 1998. The Company's segment
reporting data are incorporated in these notes to consolidated financial
statements identified as item (13).
In March 1998, the AICPA issued Statement of Position (SOP) 98-1,
"Accounting For the Costs of Computer Software Developed For or Obtained For
Internal Use". SOP 98-1, which the Company is required to adopt in fiscal 1999,
requires the capitalization of certain costs incurred in connection with
developing or obtaining internal use software. The Company currently expenses
all internal software-related costs as incurred. The Company does not anticipate
this SOP 98-1 to have any material effect on its financial statements.
Reclassifications
Certain 1997 and 1996 amounts previously reported have been reclassified
to conform to the 1998 presentation.
(3) Acquisition
In 1997, the Company acquired substantially all of the assets of two
retail supermarkets located in the greater Appleton, Wisconsin area from a
competitor for $2,701,000 in cash. The acquisition was accounted for as a
purchase. Accordingly, the assets of the acquired retail stores were
incorporated with the Company's consolidated balance sheets as of January 3,
1998. The purchase price was allocated based upon the relative fair market
values of assets acquired. The excess of the purchase price over assets acquired
approximated $900,000 and is currently being amortized over 15 years. The
Company financed the acquisition solely through working capital from operations.
One of the stores opened as a corporate store in November 1997 and the second
store was remodeled and opened, also as a corporate store, in August 1998.
(4) Long-Term Debt
The Company has a loan agreement providing unsecured revolving credit
facilities totaling $16,000,000 through April 30, 2001. This arrangement
provides for borrowings at rates not to exceed the bank's prime rate. There are
no compensating balance requirements. There were no borrowings outstanding under
this agreement during 1998 or 1997.
Long-term debt at January 2, 1999 and January 3, 1998 consisted of the
following:
------------------------------------------------------------
1998 1997
------------------------------------------------------------
Mortgage note, 9.675%, due in
monthly installments of
$33,026 including interest
due through June 2012 $2,990,000 $3,091,000
Land contract, 10.0%, due in
annual installments of
$33,333 through March 2003
167,000 200,000
Term note, 9.91%, due in
quarterly installments of
$55,000 through June 1998 - 75,000
-----------------------------------------------------------
3,157,000 3,366,000
Less current maturities (136,000) (201,000)
- - ------------------------------------------------------------
Long-term debt $3,021,000 $3,165,000
===========================================================
At January 2, 1999, the fair value of the financial instruments were not
materially different from the carrying value. The revolving credit and term note
agreements contain various covenants including, among others, the maintenance of
defined working capital, net worth requirements, certain debt-equity ratios,
restrictions against pledging of or liens upon certain assets, mergers,
significant changes in ownership and limitations on restricted payments.
The total amount of long-term debt due in each of the fiscal years 1999
through 2003 will be $136,000, $156,000, $168,000, $182,000 and $197,000,
respectively, and $2,318,000 from 2004 to 2012. Interest expense consisted of
the following:
------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------
Interest on
long-term debt $315,000 $350,000 $383,000
Imputed
interest-capital 473,000 497,000 484,000
leases
Other 28,000 - -
- - -------------------------------------------------------------
Interest expense $816,000 $847,000 $867,000
============================================================
(5) Income Taxes
The difference between the statutory federal income tax rate and the
effective rate is summarized as follows:
- - -------------------------------------------------------------
1998 1997 1996
- - -------------------------------------------------------------
Federal income tax 34.2% 34.1% 34.0%
State income taxes, net
of federal income tax
benefit 5.2 5.2 5.3
Other, net (0.6) (0.8) (0.8)
- - -------------------------------------------------------------
Effective income tax rate 38.8% 38.5% 38.5%
=============================================================
Components of provision for income taxes consisted of the following:
-----------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------
Currently payable
Federal $4,611,000 $4,433,000 $3,804,000
States 1,041,000 957,000 869,000
Deferred (254,000) (609,000) (626,000)
-----------------------------------------------------------
Provision for
income taxes $5,398,000 $4,781,000 $4,047,000
===========================================================
The components of deferred income tax assets and liabilities at January
2, 1999 and January 3, 1998 were as follows:
-----------------------------------------------------------
1998 1997
-----------------------------------------------------------
Deferred income tax assets:
Bad debt reserve $1,677,000 $1,541,000
Accrued insurance 1,170,000 1,050,000
Capital lease accounting 712,000 694,000
Vacation pay 629,000 570,000
Retail repositioning reserve 267,000 238,000
Other 1,130,000 1,161,000
-----------------------------------------------------------
Total deferred income tax
assets 5,585,000 5,254,000
-----------------------------------------------------------
Deferred income tax
liabilities:
Property and equipment (1,975,000) (1,945,000)
Pension (65,000) (186,000)
-----------------------------------------------------------
Total deferred income tax
liabilities (2,040,000) (2,131,000)
-----------------------------------------------------------
Net deferred income tax asset $3,545,000 $3,123,000
===========================================================
The Company currently has no requirements for a valuation allowance for
its deferred income tax assets. The net deferred income tax asset as of January
2, 1999 and January 3, 1998 were classified in the balance sheet as follows:
- - -------------------------------- -------------- -------------
1998 1997
- - -------------------------------- -------------- -------------
Current deferred income tax
asset $4,376,000 $4,131,000
Noncurrent deferred income tax
liability (831,000) (1,008,000)
- - -------------------------------- -------------- -------------
Net deferred income tax asset $3,545,000 $3,123,000
================================ ============== =============
(6) Commitments and Contingent Liabilities
The Company has projected capital expenditures for fiscal 1999 at
$3,300,000. Commitments approximating $750,000 were made as of January 2, 1999.
As of January 2, 1999, the Company was contingently liable under
guarantees of bank note agreements of wholesale customers totaling $16,051,000.
All of the loan guarantees are substantially collateralized, principally with
equipment and inventory, and to a lesser extent, with building facilities.
(7) Retirement Plans
The Company has a trusteed retirement savings defined contribution plan,
which includes provisions of Section 401(k) of the Internal Revenue Code, for
the benefit of its non-union eligible employees. Annual provisions are based on
a mandatory 5% of eligible participant compensation and additional amounts at
the sole discretion of the Board of Directors. Provisions for the three fiscal
years ended 1998, 1997 and 1996 were $890,000, $835,000 and $793,000,
respectively. The plan allows participants to make pretax contributions. The
Company then matches certain percentages of employee contributions. The
Company's matching contributions for 1998, 1997 and 1996 were $82,000, $79,000
and $71,000, respectively.
The Company has union-administered multi-employer pension plans covering
all hourly paid employees represented by collective bargaining agreements. Total
pension expense was $1,616,000, $1,456,000 and $1,564,000 in fiscal years 1998,
1997 and 1996, respectively. Complete information with respect to the Company's
portion of plan net assets and the actuarial present value of accumulated plan
benefits is not available.
(8) Leases
The Company leases most of its retail stores under lease agreements with
original lease periods of 15 to 20 years and typically with five-year renewal
options. Exercise of such options is dependent on, among others, the level of
business conducted at the location. Executory costs, such as maintenance and
real estate taxes, are generally the Company's responsibility. In a majority of
situations, the Company will enter into a lease for a store and sublease the
store to a wholesale customer. Additionally, the Company leases transportation
equipment, principally tractors and trailers, corporate office space and certain
office equipment. Some leases contain contingent rental provisions based on
sales volume at retail stores or miles traveled for tractors and trailers.
Contingent rental expense associated with the Company's capital leases and
sublease income was not material to the Company's financial statements.
Capitalized leases were calculated using interest rates appropriate at
the inception of each lease. A summary of real property utilized by the Company
under capital leases at January 2, 1999 and January 3, 1998 was as follows:
-------------------------------------------------------------
1998 1997
-------------------------------------------------------------
Investments in leased property
under capital leases $5,264,000 $5,264,000
Less accumulated amortization (2,765,000) (2,478,000)
-------------------------------------------------------------
Property under capital leases,
net $2,499,000 $2,786,000
=============================================================
Amortization of leased property under capital leases, included in
operating and administrative expenses, amounted to $287,000, $287,000 and
$273,000 in fiscal years 1998, 1997 and 1996, respectively.
The following is a schedule of future minimum lease payments under
capital leases and subleases and the present value of such payments as of
January 2, 1999:
------------------------------------------------------------
Capital Capital
lease sublease
obligations receivables
------------------------------------------------------------
1999 $ 1,884,000 $ 1,189,000
2000 1,841,000 1,126,000
2001 1,841,000 1,127,000
2002 1,841,000 1,127,000
2003 1,852,000 1,137,000
2004-2009 8,744,000 5,740,000
------------------------------------------------------------
Total minimum lease payments 18,003,000 11,446,000
Less interest (7,583,000) (4,932,000)
------------------------------------------------------------
Present value of minimum
lease payments and amounts
receivable 10,420,000 6,514,000
Less current portion (656,000) (407,000)
------------------------------------------------------------
Long-term obligations and
receivable $ 9,764,000 $ 6,107,000
============================================================
The following is a schedule of future minimum lease payments required
under operating leases for retail stores, transportation equipment, corporate
office space and office equipment that have noncancelable lease terms in excess
of one year as of January 2, 1999:
- - ------------------------------------- -----------------------
$ 10,031,000
1999
2000 9,596,000
2001 9,058,000
2002 9,088,000
2003 8,919,000
2004-2017 79,142,000
- - ------------------------------------- -----------------------
125,834,000
Total minimum lease payments
Lease minimum amounts receivable
under noncancelable subleases (94,826,000)
- - ------------------------------------- -----------------------
Net minimum lease payments $ 31,008,000
- - ------------------------------------- -----------------------
Rental expenses, net of rental income from subleases, for all operating
leases amounted to $4,589,000, $3,912,000 and $3,813,000 in fiscal years 1998,
1997 and 1996, respectively. These amounts include $957,000, $1,029,000 and
$1,012,000, respectively, for contingent rentals.
(9) Stock Option Plans
The Company has stock option plans which provide for the grant of either
incentive or nonqualified stock options to key employees. The exercise price of
each option is equal to the market price of the Company's stock on the date of
grant. Options granted are exercisable for seven years from the date of grant
and vest ratably over the first three years. Such vesting may be accelerated by
the Stock Option Committee of the Board of Directors or upon a change in control
of the Company, as defined by the plans.
Financial Accounting Standard (FAS) No. 123 allows entities to continue
to apply the provisions of APB 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair value-based method defined in FAS No. 123 has been
applied. In fiscal 1996, the Company adopted the disclosure requirements of SFAS
No. 123. Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's net
earnings would have been reduced to the following pro forma amounts below:
- - ----------------- ------------- -------------- -------------
1998 1997 1996
- - ----------------- ------------- -------------- -------------
Net earnings
As reported $8,518,000 $7,637,000 $6,465,000
Pro forma 8,181,000 7,417,000 6,305,000
- - ----------------- ------------- -------------- -------------
Earnings per
share-diluted
As reported $1.23 $1.06 $0.90
Pro forma 1.18 1.04 0.88
================= ============= ============== =============
Since the compensation cost is reflected over the vesting period of three
years and compensation cost for options granted prior to January 1, 1995 is not
considered, the full impact of calculating the compensation cost under SFAS No.
123 is not reflected in the pro forma net earnings presented above. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1998, 1997 and 1996:
- - ------------------------- ---------- ----------- -----------
1998 1997 1996
- - ------------------------- ---------- ----------- -----------
Dividend yield 2.00% 2.06% 2.50%
Expected volatility 26.81% 25.62% 20.92%
Risk-free interest rate 5.49% 6.36% 5.35%
Expected term of grant 5.5 years 5.5 years 6.0 years
========================= ========== =========== ===========
As of January 2, 1999, no incentive stock options have been granted.
Following is a summary of the status of nonqualified stock options for the
fiscal years 1998, 1997 and 1996:
- - ------------------------------ -------------- ---------------
Weighted
Number average
of shares exercise
prices
- - ------------------------------ -------------- ---------------
Shares under option at
December 30, 1995 705,549 $ 5.15
Granted 132,900 10.50
Exercised (166,950) 5.13
Forfeited (2,799) 5.09
- - ------------------------------ -------------- ---------------
Shares under option at
December 28, 1996 668,700 6.22
Granted 143,700 9.67
Exercised (173,100) 4.72
- - ------------------------------ -------------- ---------------
Shares under option at
January 3, 1998 639,300 7.40
Granted 151,500 15.00
Exercised (118,050) 6.83
- - ------------------------------ -------------- ---------------
Shares under option at
January 2, 1999 672,750 9.21
============================== ============== ===============
Shares reserved for grant at
January 2, 1999 221,400
============================== ============== ===============
Options granted in
January 1999 165,700 $16.13
============================== ============== ===============
When options were exercised, the Company realized certain income tax
benefits. These benefits resulted in a decrease in current income taxes payable
and a corresponding increase in additional paid-in capital.
Exercise prices for options outstanding as of January 2, 1999 ranged from
$4.42 to $15.00. The weighted average remaining contractual life of these
options is approximately 4 1/2 years. Nonqualified stock options outstanding at
January 2, 1999 were exercisable for 402,750 shares.
(10) Preferred Stock
The Company has 3,000 shares of preferred stock authorized. Prior to
1995, all of the shares were issued and outstanding. In fiscal years 1995 and
1996, the Company repurchased all of the shares issued. Therefore, at January 2,
1999 and January 3, 1998, no shares of preferred stock were issued nor
outstanding.
The Company also has 1,000,000 shares of $0.05 par value class B
preferred stock authorized, none of which has been issued. These shares are
issuable in such series and with such relative rights and preferences as may be
determined from time to time by the Board of Directors.
(11) Common Stock
On July 25, 1997, the Board of Directors authorized a three-for-two
common stock split, effected in the form of a 50% stock dividend distributed on
September 5, 1997 to shareholders of record on August 20, 1997. All historical
share amounts, per share amounts, stock option data and market prices of the
Company's common stock prior to the dividend distribution date have been
restated to retroactively reflect the stock split.
Prior to January 6, 1999, common shares issued and issuable included one
associated common stock purchase right which entitled shareholders to purchase
one share of common stock from the Company at an exercise price equivalent to
$14 per share. The rights became exercisable after a person acquired beneficial
ownership of 20% or more of the Company's common stock. The rights did not have
any voting rights and would have been redeemed at a price of $0.0067 per right.
On January 6, 1999, these rights expired pursuant to their terms.
(12) Earnings Per Share
Basic earnings per share is computed by dividing net earnings by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings per share is computed by dividing net earnings by the weighted
average number of shares of common stock outstanding and common stock
equivalents during the year. Common stock equivalents used in computing diluted
earnings per share related to stock options which, if exercised, would have a
dilutive effect on earnings per share.
The Company's calculations of earnings per share-basic and earnings per
share-diluted were as follows:
- - ------------------- ------------ ------------ -------------
1998 1997 1996
- - ------------------- ------------ ------------ -------------
Net earnings
available for
common
shareholders $8,518,000 $7,637,000 $6,465,000
Weighted average
shares
outstanding 6,749,000 6,871,000 6,944,000
Earnings per
share-basic $1.26 $1.11 $0.93
- - ------------------- ------------ ------------ -------------
Net earnings
available for
common
shareholders $8,518,000 $7,637,000 $6,465,000
Weighted average
shares
outstanding 6,749,000 6,871,000 6,944,000
Stock options'
dilutive effect 174,000 277,000 243,000
Weighted average
shares and
equivalents
outstanding 6,923,000 7,148,000 7,187,000
Earnings per
share-diluted $1.23 $1.06 $0.90
- - ------------------- ------------ ------------ -------------
(13) Segment Reporting
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 131, "Disclosures about Segments of An Enterprise and Related
Information," which the Company has adopted for its fiscal 1998. Based on
management responsibility, the Company has identified two business segments,
wholesale and retail, in which it operates.
The wholesale segment represents the Company's business activities
relating to food wholesale distribution. At January 2, 1999, the Company
provided products to 68 franchised units, 18 corporate stores and a number of
independent retail stores. The wholesale segment includes warehousing,
transportation and other logistical functions, and derives its revenues
primarily from the sale of groceries, produce, dairy, meat and cigarette
products to the Company's franchised, corporate and independent retail
customers. The retail segment relates to the Company's retail supermarket
activities. Revenues are realized through the sale of groceries, dairy, produce,
meat, bakery, deli and other merchandise by the Company's corporate retail
stores to retail consumers.
The accounting policies of the two segments are the same as those
described in the Summary of Significant Accounting Policies. The Company's
management utilizes several measurement tools in evaluating each segment's
performance and each segment's resource requirements. However, the principal
measurement tools are consistent with the Company's consolidated financial
statements and accordingly are reported on a similar basis. Wholesale operating
profits on sales through the Company's corporate stores are allocated to the
retail segment. The "corporate" heading includes corporate-related items,
principally cash and equivalents. As it relates to operating income, "corporate"
heading includes corporate-related items allocated to the appropriate segments.
Summarized financial information concerning the Company's reportable
segments is shown in the following table (in thousands).
- - ------------------------ ------------ ------------ ------------
Sales 1998 1997 1996
- - ------------------------ ------------ ------------ ------------
Wholesale sales $ 404,047 $ 399,197 $ 382,354
Intracompany sales (123,912) (107,988) (103,886)
Net wholesale sales 280,135 291,209 278,468
Retail sales 204,750 181,797 175,453
- - ------------------------ ------------ ------------ ------------
Total $ 484,885 $ 473,006 $ 453,921
======================== ============ ============ ============
- - ------------------------ ------------ ------------ ------------
Operating Income 1998 1997 1996
- - ------------------------ ------------ ------------ ------------
Wholesale $ 9,749 $ 9,029 $ 8,499
Retail 3,741 3,079 2,038
Total operating income
13,490 12,108 10,537
Interest income 1,242 1,157 842
Interest expense (816) (847) (867)
- - ------------------------ ------------ ------------ ------------
Earnings before income
taxes $ 13,916 $ 12,418 $ 10,512
- - ------------------------ ------------ ------------ ------------
- - ------------------------ ------------ ------------ ------------
Capital Expenditures 1998 1997 1996
- - ------------------------ ------------ ------------ ------------
Wholesale $ 149 $ 365 $ 378
Retail 2,443 3,628 1,087
Corporate 1,255 875 1,955
- - ------------------------ ------------ ------------ ------------
Total $ 3,847 $ 4,868 $ 3,420
======================== ============ ============ ============
- - ------------------------ ------------ ------------ ------------
Depreciation and
Amortization 1998 1997 1996
- - ------------------------ ------------ ------------ ------------
Wholesale $ 818 $ 985 $ 950
Retail 2,338 1,881 2,095
Corporate 1,919 1,651 1,406
- - ------------------------ ------------ ------------ ------------
Total $ 5,075 $ 4,517 $ 4,451
======================== ============ ============ ============
- - ------------------------ ------------ ------------ ------------
Identifiable Assets 1998 1997 1996
- - ------------------------ ------------ ------------ ------------
Wholesale $ 32,040 $ 32,244 $ 42,655
Retail 26,550 25,972 21,073
Corporate 46,506 40,650 34,476
- - ------------------------ ------------ ------------ ------------
Total $ 105,096 $ 98,866 $ 98,204
======================== ============ ============ ============
Unaudited Quarterly Financial Information
The Company generally includes sixteen weeks in its first quarter and
twelve weeks in each subsequent quarter. In fiscal 1997, the fourth quarter
consisted of thirteen weeks. Summarized quarterly and annual financial
information for fiscal years 1998 and 1997 follows:
- - ---------------------------------------------------- ----------------------------------------------------------------------
(dollars and shares in thousands, except per share Fiscal Year Ended January 2, 1999
data)
- - ---------------------------------------------------- ----------------------------------------------------------------------
First Second Third Fourth Year
- - --------------------------------------- ---------------- ---------------- ---------------- ---------------- ---------------
Net sales $142,142 $114,068 $112,550 $116,125 $484,885
Gross profit 23,063 18,450 18,091 18,466 78,070
Net earnings 1,711 2,025 1,994 2,788 8,518
Earnings per share - basic 0.25 0.30 0.29 0.42 1.26
Earnings per share - diluted 0.24 0.29 0.29 0.41 1.23
Weighted average shares and
equivalents outstanding 7,140 7,014 6,937 6,773 6,923
- - --------------------------------------- ---------------- ---------------- ---------------- ---------------- ---------------
- - ---------------------------------------------------- ----------------------------------------------------------------------
(dollars and shares in thousands, except per share Fiscal Year Ended January 3, 1998
data)
- - ---------------------------------------------------- ----------------------------------------------------------------------
First Second Third Fourth Year
- - -------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Net sales $138,826 $109,844 $105,826 $118,510 $473,006
Gross profit 22,077 17,197 16,417 18,216 73,907
Net earnings 1,587 1,791 1,734 2,525 7,637
Earnings per share - basic 0.23 0.26 0.25 0.37 1.11
Earnings per share - diluted 0.22 0.25 0.24 0.35 1.06
Weighted average shares and
equivalents outstanding 7,104 7,051 7,026 7,293 7,255
- - -------------------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Common Stock Information
The Company's common stock is traded over-the-counter on the Nasdaq Stock
Market under the symbol SAVO. There are approximately 1,000 beneficial holders
of the Company's common stock. An analysis of the high and low last sale stock
prices by quarter and for the last three years are as follows:
- - ------------ ---------------------- ---------------------- ---------------------- ---------------------- ----------------------
First Second Third Fourth Year
- - ------------ ---------------------- ---------------------- ---------------------- ---------------------- ----------------------
High Low High Low High Low High Low High Low
- - ------------ ---------- ----------- ---------- ----------- ----------- ---------- ----------- ---------- ----------- ----------
1998 $17.75 $15.00 $17.50 $15.50 $16.00 $15.13 $16.50 $15.50 $17.75 $15.00
1997 11.50 9.33 12.50 10.67 17.00 12.25 16.50 15.13 17.00 9.33
1996 11.00 9.33 10.00 8.17 9.00 8.17 10.00 8.67 11.00 8.17
- - ------------ ---------- ----------- ---------- ----------- ----------- ---------- ----------- ---------- ----------- ----------
Cash dividends paid per share were:
- - ---------------- ------------------ ------------------ ------------------ ------------------ ------------------
First Second Third Fourth Year
- - ---------------- ------------------ ------------------ ------------------ ------------------ ------------------
1998 $0.07 $0.07 $0.08 $0.08 $0.30
1997 0.06 0.07 0.07 0.07 0.27
1996 0.05 0.05 0.07 0.07 0.24
- - ---------------- ------------------ ------------------ ------------------ ------------------ ------------------
Under the Company's loan agreements, approximately $11.9 million of
retained earnings were available for the payment of cash dividends, stock
repurchases and other restricted payments at January 2, 1999.
o 1997 and 1996 stock prices and dividend information have been adjusted to
reflect the three-for-two stock split effected in the form of a 50% stock
dividend on September 5, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this press release are "forward-looking statements"
intended to qualify for the safe harbors from liability established by the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the
statement will include words such as the Company "believes," "anticipates,"
"expects" or words of similar import. Similarly, statements that describe the
Company's future plans, objectives, strategies or goals are also forward-looking
statements. Such forward-looking statements are subject to certain risks and
uncertainties including, but not limited, to the following: (1) presence of
intense competitive market activity in the Company's market areas; (2) ability
to identify and develop new market locations for expansion purposes; (3)
continuing ability to obtain reasonable vendor marketing funds for promotional
purposes; (4) ongoing advancing information technology requirements; (5) ongoing
nominal food price inflation; (6) the Company's ability to continue to recruit,
train and retain quality franchise and corporate retail store operators; and (7)
the potential recognition of repositioning charges resulting from potential
closures, conversions and consolidations of retail stores due principally to the
competitive nature of the industry and to the quality of the Company's retail
store operators. Shareholders, potential investors and other readers are urged
to consider these factors carefully in evaluating the forward-looking statements
and are cautioned not to place undue reliance on such forward-looking
statements. The forward-looking statements made herein are only made as of the
date of this report and the Company undertakes no obligation to publicly update
such forward-looking statements to reflect subsequent events or circumstances.
Results of Operations
The following table sets forth certain items from the Company's Consolidated
Statements of Earnings as a percent of net sales and the year-to-year percentage
changes in the amounts of such line items.
- - -------------------------------------- -------------------------------------------------- --- ---------------------------------
Percent of net sales Percentage change
- - -------------------------------------- -------------------------------------------------- --- ---------------------------------
1998 1997
1998 1997 1996 vs. 1997 vs. 1996
- - -------------------------------------- ---------------- ---------------- ---------------- --- ---------------- ----------------
Net sales 100.0% 100.0% 100.0% 2.5% 4.2%
Cost of products sold 83.9% 84.4% 84.0% 1.9% 4.6%
Operating and administrative expenses
13.3% 13.1% 13.6% 4.5% (0.2%)
Earnings before income taxes 2.9% 2.6% 2.3% 12.1% 18.1%
Net earnings 1.8% 1.6% 1.4% 11.5% 18.1%
- - -------------------------------------- ---------------- ---------------- ---------------- --- ---------------- ----------------
1998 vs. 1997
Net Sales
Net sales for the 52-week period ended January 2, 1999 increased 2.5% to
$484.9 million, compared to $473.0 million for the 53-week period ended January
3, 1998. Sales for 1998, adjusted for the extra week in fiscal 1997, increased
4.5% compared to the prior year. Fiscal 1998 sales surpassed the Company's
previous record sales for a 52-week year. While the Company's total sales were
$484.9 million in 1998, the Company's "virtual chain" of 86 stores generated
retail volume approximating $730 million in 1998.
Wholesale sales in 1998 increased 1.2% to $404.0 million, compared to
$399.2 million in 1997. On a comparative 52-week period, 1998 wholesale sales
increased 3.2% over 1997. The improvement in wholesale sales volume was
principally attributable to the opening of one new corporate store in Appleton,
Wisconsin in October 1997; the replacement of two noncompetitive corporate
Appleton stores with expanded and remodeled facilities as part of the
acquisition from a competitor; the opening of one new market store in Poynette,
Wisconsin in January 1998; and the completion of franchise facility projects in
Howards Grove, Waupaca and Lomira, Wisconsin in 1998. Wholesale sales was,
however, negatively impacted by the closure of the Plover facility in September
1997 and the conversion of one Oshkosh store from franchise to corporate in
October 1997. There are currently six additional facility projects in various
phases of planning or construction, with completions scheduled throughout the
first six months of 1999. These projects involve four major franchise expansion
projects in Beaver Dam, Kiel, Crivitz and Randolph, Wisconsin; one replacement
franchise store in Fort Atkinson, Wisconsin; and one new market franchise unit
in Cottage Grove, Wisconsin. The four expansion stores, upon completion, will
increase their aggregate square footage of selling space by approximately 40%.
Based on the Company's internal wholesale price index, except for tobacco
products, inflation did not have a significant effect on sales between years.
Retail sales improved 12.6% to $204.8 million in 1998, compared to $181.8
million in 1997. On a comparative 52-week period, 1998 retail sales increased
14.8% compared to fiscal 1997. The improvement in retail sales volume was
principally attributable to the opening of the three new Appleton corporate
stores. This improvement was, however, offset by the two closed stores. The
Company's retail sales volume was also positively impacted by the Oshkosh store
that was converted from franchise to corporate in October 1997. Finally, during
fiscal 1998, the Company continued to recognize the benefits of the Piggly
Wiggly Preferred Club(R) electronic card marketing program. This unique card
marketing program continues to grant special incentives to higher purchase level
shoppers and it continues to reward customers with weekly savings without
clipping in-ad coupons. Additionally, customers are encouraged to return to
Piggly Wiggly supermarkets with special "Pig Deal" next trip savings offers
issued automatically by participating manufacturers. This card marketing program
is available to all of the Company's "virtual chain" stores.
Cost of Products Sold
Cost of products sold, as a percent of sales, decreased 0.5% to 83.9% in
1998 from 84.4% in 1997. This decrease was a direct result of increased higher
margin corporate retail sales due principally to the net one additional
corporate store in Appleton and the additional corporate store in Oshkosh since
October 1997. Lower margin net wholesale sales as a percentage of sales
decreased to 57.8% compared to 61.6% in 1997. Conversely, higher margin retail
sales as a percentage of sales increased to 42.2% compared to 38.4% in 1997.
Based solely on current franchise projects outstanding, the Company anticipates
the wholesale sales percentage to increase nominally in 1999.
Operating and Administrative Expenses
Fiscal 1998 operating and administrative expenses, as a percentage of
sales, increased to 13.3%, compared to 13.1% in 1997. This increase of 0.2%, or
$2.8 million, was principally attributable to higher operating expenses relating
to the additional stores in Appleton and Oshkosh. Fiscal 1998 depreciation
attributable to retail increased to $2.3 million from $1.9 million in 1997. This
increase in retail operating expenses was partially offset by lower
administrative expenses in the wholesale segment. During 1998, particularly in
the last two quarters, the Company experienced lower provisions for workers
compensation and general liability due to reduced frequency and severity of
claims. The Company's
overall experience ratio has improved due to improved loss control programs.
Due to the highly competitive nature of the industry, certain franchise
operators and corporate retail stores continue to experience operational
difficulties in their respective marketplaces. As a result, the Company
continues to incur receivable realization charges from a number of
underperforming franchise operators. During fiscal 1998, the Company incurred
realization charges relating to wholesale bad debts and retail subsidies
totaling $1.5 million, compared to $2.0 million in 1997. Although certain
franchise retail operations have improved, the Company continues to evaluate
various business initiatives relating to the operations of its underperforming
stores. These initiatives include, but are not limited to, the sale and
subsequent conversion of these stores, the closure of these supermarkets or the
implementation of other operational changes. As with prior years, implementation
of any of these options can result in the Company incurring certain
repositioning or restructuring charges involving the termination costs of
replaced, closed or sold stores. These actions can negatively impact earnings
results in the short-term, but the Company believes that such actions will help
improve the Company's long-term profitability. Fiscal 1998 and 1997
repositioning charges totaled $0.2 million and $1.1 million, respectively. The
fiscal 1998 repositioning costs were principally attributable to the occupancy
costs of closing and terminating two franchise operations in Wisconsin. Fiscal
1997 repositioning charges were more significant due principally to the $0.7
million costs relating to the Company's closing of the Plover franchised store
and the $0.3 million charge for closing the Company's two noncompetitive stores
in Appleton.
Net Earnings
The Company's fiscal 1998 operating income increased 11.4% to $13.5
million, compared to $12.1 million in 1997. After allocating wholesale operating
profits on sales through the Company's corporate stores to the Company's retail
segment, the wholesale segment recognized $9.7 million in operating income while
the retail segment recognized $3.7 million. Fiscal 1998 earnings before income
taxes increased 12.1% to $13.9 million, compared to $12.4 million in 1997. As a
percent of sales, earnings before income taxes increased to 2.9% in 1998 from
2.6% in 1997.
Net earnings for 1998 increased 11.5% to $8.5 million, compared to $7.6
million in 1997. With continuing improvements in sales and productivity, the
Company's net earnings-to-sales ratio for 1998 improved to 1.8%, compared to
1.6% for fiscal 1997. The Company's net earnings-to-sales ratio ranks as one of
the best in its industry. Additionally, the Company has had earnings performance
of 24 consecutive quarters showing increased earnings over the prior year's
quarter.
Diluted earnings per share increased 16.0% to $1.23 from $1.06 in 1997.
On a percentage basis, diluted earnings per share increased more than net
earnings due to additional share repurchases in fiscal 1998 which reduced the
weighted average shares and equivalents outstanding.
1997 vs. 1996
Net Sales
Net sales for the 53-week period ended January 3, 1998 increased 4.2% to
$473.0 million, compared to $453.9 million for the 52-week period ended December
28, 1996. Sales, adjusted for the extra week in fiscal 1997, increased 2.3%
compared to 1996. Wholesale volume in 1997 increased 4.4% to $399.2 million,
compared to $382.4 million in 1996. Retail sales increased 3.6% to $181.8
million in 1997, compared to $175.5 million in 1996. On a comparative 52 week
period, 1997 wholesale and retail sales increased 2.4% and 1.7%, respectively,
from 1996. The improvement in sales volume in 1997 was attributable to the
increased business volume resulting from the October 1997 completion of the
two-year implementation of the Piggly Wiggly Preferred Club electronic card
marketing program. Fiscal 1997 sales also benefited from additions and
enhancements to the Company's "virtual chain" base of franchised and corporate
supermarkets. In April 1997, the Company converted an independent operator in
Milton, Wisconsin from a competing wholesaler into a Piggly Wiggly franchise
unit. In October 1997, the Company converted a franchise unit in Oshkosh,
Wisconsin into a corporate retail supermarket. During fiscal 1997, the Company
also completed one new market corporate store, one new market franchise store,
one replacement franchise store and three additions to existing franchise
stores.
These completed projects added approximately 115,000 of aggregate store selling
space. In fiscal 1997, sales were negatively impacted by closures of two
underperforming corporate stores and one underperforming franchise unit and the
impact of additional competitive activity due to new stores in certain markets.
At January 3, 1998, the Company had 68 franchised and 18 corporate supermarkets,
compared to 68 franchised and 16 corporate stores at December 28 ,1996. Based on
the Company's internal wholesale price index, inflation did not have a
significant effect on sales between years.
In the fall of 1997, the Company acquired two operating supermarkets in
the Menasha and Appleton, Wisconsin market areas from a competitor. The Company
renovated the Menasha store subsequent to the purchase and the Company opened
this corporate store in November 1997 and closed its noncompetitive south side
Appleton store. The Company then temporarily closed the acquired Appleton store
for renovation. This newly renovated store was opened in August 1998. Upon its
completion, the Company closed its noncompetitive north side Appleton store.
These two replacement corporate supermarkets aggregated 85,000 square feet of
store selling space, an increase of 93% over the combined 44,000 square feet of
the closed units.
Cost of Products Sold
Fiscal 1997 cost of products sold, as a percent of sales, increased 0.4%
to 84.4%, compared to 84.0% in 1996. This increase was principally a direct
result of the increased ratio of lower margin wholesale sales to total sales.
The percentage of net wholesale sales to total sales increased to 61.6% in 1997,
compared to 61.3% in 1996.
Operating and Administrative Expenses
Operating and administrative expenses, as a percent of sales, decreased
0.5% to 13.1% in 1997 from 13.6% in 1996. Total operating and administrative
expenses in 1997 decreased due principally to the closing of two smaller
underperforming corporate retail stores in the fall of 1996. Additionally, the
Company experienced lower provisions for self-insured health and casualty
programs due to reduced frequency and severity of claims. These decreases were
particularly evident during the fourth quarter of 1997. Total depreciation and
amortization expense between years were comparable at approximately $4.5
million. However, depreciation attributable to retail decreased by about 10%
between years due principally to the closures of two corporate stores in the
fall of 1996. Certain variable operating expenses, such as wages and salaries,
increased due to higher sales volume.
Due to the competitive nature of the industry, certain franchise
operators and corporate retail stores continued to experience operational
difficulties in their respective marketplaces. As a result, the Company
continued to incur significant receivable realization charges from a number of
underperforming franchise operators. Total 1997 and 1996 realization charges
relating to wholesale bad debts and retail subsidies were $2.0 million and $2.3
million, respectively. For 1997 and 1996, retail repositioning and restructuring
charges amounted to $1.1 million and $0.3 million, respectively. The increase in
retail repositioning costs in 1997 compared to 1996 was principally attributable
to (1) the closure of an underperforming franchise supermarket in Plover,
Wisconsin during 1997 resulting in a $700,000 pretax charge to operations; and
(2) the closing and termination costs relating to two smaller noncompetitive
corporate stores that were replaced by the two acquired stores from a competitor
resulting in a $300,000 pretax charge to operations. Additionally, the Company
incurred charges approximating $300,000 relating to market development and
start-up costs due to the opening of the new market corporate store in Appleton,
Wisconsin and the conversion of the acquired Menasha supermarket into the Piggly
Wiggly format.
Net Earnings
The Company's 1997 earnings before income taxes increased 18.1% to $12.4
million, compared to $10.5 million in 1996. As a percent of sales, earnings
before income taxes increased to 2.6% in 1997 from 2.3% in 1996. After
allocating to the retail segment the wholesale operating profits on sales made
to the Company's corporate stores, the wholesale segment contributed $9.0
million and $8.5 million to 1997 and 1996 pretax earnings, respectively.
Additionally, retail segment contributed $3.1 million and $2.0 million,
respectively, to the 1997 and 1996 pretax earnings. Net earnings for 1997
increased 18.1% to $7.6 million compared $6.5 million in 1996. With continued
improvements in sales volume and productivity, the Company's net
earnings-to-sales
ratio for 1997 improved to 1.6%, compared to 1.4% for 1996. Additionally, 1997
diluted earnings per share increased 17.8% to $1.06 from $0.90 in 1996.
Liquidity and Capital Resources
The Company's favorable 1998 operating results continued to enhance its
strong financial position. During fiscal 1997, the primary source of liquidity
was cash generated from operations. Total cash generated from operations for
fiscal 1998 was $21.6 million, compared to $8.2 million in 1997. Cash flow from
operations increased significantly between years due principally to the decrease
in outstanding receivables from franchise operators. This was due in large part
to timing of cash receipts and the minimal balance for short-term financing
support for purchase of facilities and equipment for new stores. In fiscal 1998,
the balance of the short-term financing support was less than $100,000; in
fiscal 1997, the balance was $2.4 million. Although inventory levels based on
replacement cost increased by $2.6 million, this increment overall did not
negatively affect cash flows due to the corresponding increase in accounts
payable.
Net cash outflows for investing activities totaled $3.3 million in 1998
compared to $6.9 million in 1997. This decrease in outflows was attributable to
the $2.7 million outlay the Company incurred in 1997 in acquiring two retail
stores from a competitor. Additionally, total capital expenditures decreased to
$3.8 million in 1998, compared to $4.9 million in 1997. Of the total capital
expenditures of $3.8 million, the Company invested $2.4 million for retail
upgrades. For 1999, the Company's capital budget is estimated at $3.3 million,
of which $750,000 has been committed as of January 2, 1999. Of this $3.3 million
total, the Company has allocated $1.5 million for retail upgrades, $750,000 for
technology hardware and software, and $325,000 for distribution upgrades. The
Company expects to finance these projects from internally generated capital.
Net cash outflows for financing activities were $7.1 million in 1998
compared to $6.0 million in 1997. Total stock repurchases was higher in 1998 due
in large part to a block repurchase of 235,000 shares from an affiliate at
$14.50 per share. In September 1998, the Company completed its existing $5.0
million stock repurchase program that commenced in January 1997. This was the
Company's fourth announced stock repurchase program over the past seven years
that have been fully completed by the Company. The Company's Board of Directors
subsequently authorized a new stock repurchase program permitting the Company to
repurchase up to an additional $5.0 million of its common stock from time to
time in the open market, pursuant to privately negotiated transactions, or
otherwise. As of January 2, 1999, the full authorized amount remains available
for stock repurchase. Since the first stock repurchase program commenced in
January 1992, the Company has repurchased over 2.2 million shares, or
approximately 25%, of its issued common stock.
In summary, cash and equivalents for fiscal 1998 increased $11.2 million,
resulting in a year-end balance of $34.3 million. Of this year-end cash balance,
approximately $25 million was invested in short-term investments with maturities
of less than three months, such as taxable money market funds and commercial
paper with strong credit ratings. The Company does not use any form of
derivative securities for hedging or for other reasons.
The Company is generally the prime lessee of new retail store facilities,
which it then subleases to independent franchise operators. All new facilities
in 1998 were financed by operating lease agreements The Company also leases
transportation equipment, principally tractors and trailers, corporate office
space and certain office equipment. Some leases contain contingent rental
provisions based on sales volume at retail stores or miles traveled for
transportation equipment. Contingent rentals for 1998 and 1997 were both
approximately $1.0 million. At January 2, 1999, the Company had recorded $10.0
million of minimum lease payments required to be paid under operating leases in
1999 and $6.5 million of amounts receivable under noncancelable subleases in
1999. Additionally, at January 2, 1999, the Company had $9.8 million of
long-term capital lease obligations, $6.1 million of which represented
noncurrent receivables from wholesale customers under capital leases.
The Company typically provides short-term financing support to its
wholesale customers for the purchase of facilities and equipment for new or
remodeled stores. After being provided, this financing support is subsequently
refinanced, typically through banks, with the Company being reimbursed. As part
of the financing program, the Company had contingent liabilities under bank note
guarantees totaling $16.1 million at January 2, 1999.
All of the loan guarantees are substantially collateralized, principally with
equipment and inventory and, to a lesser extent, with building facilities.
At January 2, 1999, the Company's ratio of total liabilities to
shareholders' investment was 0.98, which was very comparable to 0.96 at January
3, 1998. At January 2, 1999, the Company had available the entire amount of its
unsecured revolving bank credit facilities totaling $16.0 million.
The Company believes its cash, working capital and debt-to-equity
positions continue to compare very favorably to most industry competitors.
Additionally, the Company believes that its financial condition and cash flow
from operations will continue to provide it with adequate long-term flexibility
to finance anticipated capital requirements without adversely impacting its
financial position or liquidity.
Year 2000 Issues
The Company is dependent on computer hardware, software and other
business systems ("IT systems") and non-information technology systems, such as
communication equipment, tractors and trailers, refrigeration controllers,
scales, and other equipment containing embedded microprocessor technology
("non-IT systems"). The Company uses these IT and non-IT systems in several
critical operating areas including product procurement and merchandising, retail
store and warehouse distribution operations; inventory order entry and labor
management; and accounting, administrative and maintenance systems.
In 1997, the Company began evaluating its IT and non-IT systems in order
to identify and adjust date sensitive systems for year 2000 compliance. As part
of this undertaking, the Company established a team, headed by the Company's
Vice President of Business Systems Support Group. The team is staffed primarily
with internal professionals within the business systems group and some outside
consultants on an as-needed basis. The team leader reports periodically on the
year 2000 status to the Company's Executive Committee and its Board of
Directors.
The team developed a plan to assess its IT and non-IT systems for year
2000 compliance requirements. The plan consists of three main project phases:
(1) to make an inventory listing of all IT and non-IT systems that may be
subject to the year 2000 issue along with an assessment as to the scope of the
issue as it related to these systems; (2) to remediate any and all year 2000
compliance problems; and (3) to test, validate and implement systems subsequent
to remediation.
At the end of the first quarter of 1998, the Company had substantially
completed the first phase of the project. An inventory list of all systems have
been identified and documented. Nearly half of all IT and non-IT systems
previously identified have also been remediated at this time. The Company
believes it will complete all remaining remediation efforts for existing systems
over the next few months. Insofar as testing, validation and implementation are
concerned, the Company has tested some of its core IT systems and has determined
that they are projected to be year 2000 compliant by mid-1999. With regard to
non-IT systems, the Company also expects these systems to be year 2000 compliant
in 1999. The Company estimates it will cost less than $500,000 to become year
2000 compliant approximately $350,000 of which will be charged to operations in
1999.
As part of its year 2000 project, the Company has identified business
relationships with third parties, including suppliers, vendors, financial
institutions and other service providers, which the Company believes are
critical to its business operations. The Company has been communicating with
these third parties through correspondence and/or interviews to ascertain the
extent to which they are addressing their year 2000 compliance issues. The
Company will continue to assess and monitor the progress of these third parties
in resolving year 2000 issues. The Company undertakes a certain amount of risk
by relying on the third parties' own year 2000 assessment. Because of this, the
Company believes that a key vendor's failure to resolve its year 2000 issues is
the most likely worst case scenario for the Company. Such failure could result
in the Company not being able to procure products from a key vendor on a timely
basis. The Company does not expect this most likely worst case scenario to have
a material adverse impact on its core retail and wholesale businesses due
principally to the Company's network of alternative suppliers and vendors. The
Company will, however, develop contingency plans to work with these key third
parties in 1999.
Company Business
The Company is engaged in distributing food and related products at
wholesale and retail. At January 2,
1999, the Company franchised 68 and operated 18 corporate retail supermarkets
under the Piggly Wiggly name in its eastern and northeastern Illinois market
areas. In a 1998 agreement with Piggly Wiggly Company, owner of the national
Piggly Wiggly franchise, the Company expanded its exclusive geographic marketing
and operating area to include all of Wisconsin, Michigan's Upper Peninsula,
portions of Minnesota and Iowa, and additional counties in Illinois.
The Company is the prime supplier to its franchised and corporate
supermarkets. The Company also serves as a wholesaler to other smaller
independent retail store in its market areas. The Company supplies grocery,
frozen food, dairy and produce to its customers through its 364,000 square foot
distribution center in Sheboygan, Wisconsin. Also, the Company provides its
customers with fresh, froze and processed meats, eggs and deli items through a
third party distribution facility in Milwaukee, Wisconsin on a contract basis.
The Company employs approximately 1,700 persons, nearly 1,250 of whom are
employed in the corporate retail segment operations. A majority of the Company's
retail employees are employed on a part-time basis. Of the Company's remaining
employees, approximately 210 are engaged in warehousing, distribution and
trucking activities, and nearly 240 are corporate and administrative personnel.