SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 1998.
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-549
SCHULTZ SAV-O STORES, INC.
(Exact name of registrant
as specified in its charter)
Wisconsin 39-0600405
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
2215 Union Avenue
Sheboygan, Wisconsin 53081
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including
area code: (920) 457-4433
Securities registered pursuant to Section 12(b)
of the Act: None
Securities registered pursuant to Section 12(g)
of the Act:
Title of Class
Common Stock, $0.05 par value
Common Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days:
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Aggregate market value of voting stock held by non-affiliates of the
registrant as of March 11, 1998: $92,482,688*.
Number of shares outstanding of the registrant's Common Stock as of March
11, 1998: 6,811,879.
PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED HEREIN BY REFERENCE:
1997 Annual Report to Shareholders (incorporated by reference into
Parts II and IV to the extent indicated therein).
Definitive Proxy Statement for 1998 annual meeting of shareholders
(to be filed with the Commission under Regulation 14A within 120 days
after the end of the registrant's fiscal year and, upon such filing,
to be incorporated by reference into Part III to the extent indicated
therein).
_______________
* Only excludes shares beneficially owned by directors and officers of
the registrant.
<PAGE>
PART I
Item 1. Business.
General
Schultz Sav-O Stores, Inc. ("Company") is engaged in distributing
food and related products at wholesale and retail. As of January 3, 1998,
the Company franchised 68 and owned 18 retail supermarkets under the
Piggly Wiggly/R/ name in its Eastern Wisconsin and Northeastern Illinois
market area. While the Company has a presence in some larger metropolitan
areas, it has attempted to develop a niche for serving the food shopping
needs of customers in smaller and suburban communities within its market
areas.
The Company is the primary supplier to its 86 franchised and
corporate-owned Piggly Wiggly supermarkets. The Company also serves as a
wholesaler to a number of smaller, independently operated retail
supermarkets and convenience stores in its market area.
The Company believes it has established itself as a niche food
marketer in small to mid-size markets by delivering the product variety,
quality of perishable products, pricing and promotional programs
traditionally found only in large metropolitan markets, evolving into a
unique hybrid of retailer and wholesaler which it believes has become a
"virtual chain" of retail stores served by a vertically integrated
wholesaler. All Piggly Wiggly supermarkets, both franchised and owned,
participate in a single, coordinated advertising and merchandising program
which typically includes a weekly newspaper ad insert, outdoor boards,
television and radio spots, sponsorship of entertainment and charitable
events, and the Company's Piggly Wiggly Preferred Club Card/R/. The
Company believes that this coordinated program allows it to leverage the
combined buying power of all its franchised and owned stores and deliver a
powerful and effective promotional vehicle for its participating vendor
partners. Additionally, the Company believes it provides its franchised
stores with cost effective administrative support services and financial
resources that enable the operation of efficient, contemporary
supermarkets, while the independent retail ownership of the franchisee
provides the entrepreneurial spirit and community involvement that is an
integral part of marketing in smaller markets. The successful combination
of these elements creates the partnership between the Company and its
franchisee retailers that results in a virtual chain of coordinated and
integrated retail food distribution. The Company, operating as a virtual
chain, is able to achieve superior performance compared to traditional
wholesalers, yet avoids having to make large direct capital investments at
the retail level to grow its business. The franchisee retailer, as part
of the virtual chain, benefits from lower costs of product and the
coordinated promotional activity normally associated only with larger
retail grocery chains. The Company believes this structure enables it to
leverage the favorable elements of both a wholesaler and a retailer,
giving the Company and its franchisees a unique advantage in its
marketplace. The Company believes this advantage has been a key component
in its success over the past few years as the virtual chain concept has
evolved. This concept will continue to be a cornerstone of the Company's
growth strategy.
The Company supplies a variety of products to its franchised and
corporate supermarkets and other wholesale customers primarily from its
warehouse and distribution center in Sheboygan, Wisconsin. The Company
also provides its franchised and corporate supermarkets and other
customers, on a contract basis, with fresh, frozen and processed meat,
eggs and deli products from a third-party distribution facility in
Milwaukee, Wisconsin. Through contracts with several vendors, the Company
also offers a line of carbonated soft drinks, fruit drinks and drinking
and distilled water under its Springtime/TM/ label.
The Company is a Wisconsin corporation organized in 1912.
Wholesale Operations
For several years, the Company has been emphasizing its more
profitable wholesale distribution business and the associated refinement
of its franchise store base which, combined with its unique marketing and
merchandising program, has created an effective and efficient virtual
chain, while also effecting changes to its corporate retail operations to
improve profitability.
The Company believes one of the competitive advantages it provides to
its franchised supermarkets through its "virtual chain" strategy is its
value-oriented customer merchandising and community-specific marketing
support program, pursuant to which franchisees participate with corporate
stores in systemwide promotions and other merchandising events. Through a
variety of partnering, merchandising and marketing programs, the Company
benefits its franchisees through additional sales resulting from
heightened consumer name recognition and in-store merchandising programs,
combined with special promotional pricing. Additional services include
retail accounting, preparation of store payrolls, preparation of print,
electronic and outdoor media advertising (including various point-of-sale
materials), assistance in the selection and analysis of store locations,
lease negotiations, store design, floor layout, merchandising planning,
equipment selection, engineering and architectural services, retail
technology implementation and support, labor planning and scheduling and
product category supervision. Certain of such services are provided as
part of the franchise relationship, and other services are provided under
a separate fee arrangement intended to cover the Company's costs.
As part of implementing its corporate strategy to improve the
profitability of its corporate retail operations, the Company continues to
seek opportunities to expand and acquire corporate and franchise stores,
to convert or close underperforming stores and to enter new markets. In
1997, the Company converted an independent operator from another
wholesaler into a Piggly Wiggly franchise unit and converted an
underperforming franchise store operation into a corporate unit.
Additionally, the Company opened one new market corporate store, one new
market franchise store, one replacement franchise store and completed
three franchise store renovations. In the fall, the Company also acquired
two corporate supermarkets in the greater Appleton market from a
competitor. One of the acquired stores has been operational since
November, while the other is projected to be remodeled and opened in July
1998. In aggregate, the total number of franchise and corporate stores
increased from 84 at December 28, 1996 to 86 at January 3, 1998. The
completed projects, along with the stores acquired and already
operational, resulted in a net increase in store square footage of
approximately 190,000 square feet.
The following table shows the Company's development of, and changes
in, its franchised and corporate retail supermarkets for the periods
presented:
<TABLE>
<CAPTION>
Franchise Supermarkets Corporate Supermarkets
Number of
Supermarkets 1993 1994 1995 1996 1997 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Year 59 64 65 66 68 26 21 20 19 16
New Market Supermarkets(a) 1 -- 1 1 1 -- -- -- -- 1
Replacement Supermarkets(b) 1 1 3 2 1 -- -- -- -- --
Converted to/from
Franchise(c) 4 1 -- 1 (1) (4) (1) -- (1) 1
Terminated Operations(d) (3) (1) (3) (2) (2) (1) -- (1) (2) --
New Franchises(e) 2 -- -- -- 1 -- -- -- -- --
End of Year 64 65 66 68 68 21 20 19 16 18
=== === === === === === === === === ===
Remodeled Supermarkets(f) 1 5 6 1 3 3 -- -- -- --
_______________
(a) New market supermarkets are newly constructed supermarkets in market areas
not recently served by the Company.
(b) Replacement supermarkets are newly constructed supermarkets whose opening
corresponds with the closure of a nearby franchised or corporate
supermarket of the Company.
(c) Supermarkets that are converted from corporate to franchise units, or vice
versa, are included as reductions to supermarket totals in one category
and corresponding additions to totals in the other category.
(d) Terminated operations represent supermarkets which are no longer going
concerns, including replaced supermarkets.
(e) New franchises are additions to the Company's franchise group, other than
through conversion from corporate supermarkets.
(f) Remodeled supermarkets represent supermarkets which have undergone
substantial expansion and/or remodeling totaling at least $300,000.
</TABLE>
For 1997, the Company reported record net earnings, net earnings per
share and net earnings as a percentage of sales. The increase in earnings
and profitability was principally the result of expanded and improved
operations and the completion of the rollout of the Company's Piggly
Wiggly Preferred Club electronic card marketing program.
The Company is the primary supplier to all of its franchised and
corporate supermarkets. The Company also serves as a wholesaler to other
smaller independent retail stores in its market area, accounting for
approximately 2% of the Company's 1997 net sales.
Franchisees pay fees to the Company, determined by the retail sales
of their supermarkets. The Company does not charge an initial fee to the
franchisee for granting a franchise. Consistent with industry practice,
in certain situations, the Company provides credit enhancements to certain
qualified franchisees by (i) leasing the franchisee's supermarket premises
and, in turn, subleasing the premises to the franchisee and/or (ii)
guaranteeing a portion of the franchisee's bank borrowings.
The Company owns the right to grant Piggly Wiggly franchises in its
market areas, which includes designated counties in Eastern Wisconsin,
Northeastern Illinois and the Upper Peninsula of Michigan. The Company's
right to grant franchises is exclusive in these areas, except that, if
there are less than 40 supermarkets in the franchise territory operated
under the Piggly Wiggly and certain other names, the current franchisor
has the right to operate for its own account, or to franchise,
supermarkets in the territory under those names. As of January 3, 1998,
there were 86 supermarkets operated in the Company's territory that
satisfied this requirement. The Company's franchise rights are of
unlimited duration and are not subject to any specific termination
provision. The Company is not required to pay any additional franchise or
other fees to the current franchisor. The only material obligation
imposed on the Company is that the supermarkets operated under the Piggly
Wiggly and certain other names must comply with the standards imposed on
supermarkets in the Piggly Wiggly system. The Company believes its own
franchised and corporate store standards exceed the Piggly Wiggly system
standards.
Retail Operations
The Company's franchised and corporate supermarkets stock a
comprehensive selection of groceries, frozen foods, prepared foods, fresh
produce, meat, poultry, eggs and dairy products. The Company's franchised
and corporate supermarkets also allocate display space to non-food items,
such as health and beauty aids, housewares, magazines and periodicals,
video cassette rentals, flowers and plants, greeting cards and general
merchandise. The Company's franchised and corporate supermarkets carry a
broad range of branded merchandise and private-label product alternatives
to branded merchandise. In general, the private-label products carried by
the Company's franchised and corporate supermarkets have lower selling
prices, but higher gross profit margins, than branded merchandise.
Consistent with trends generally within the industry, the Company
continues to experience increases in retail customer demand for private-
label store brands and believes its Topco-procured line of branded
private-label products is satisfying this consumer trend. See "Purchasing
and Distribution." Based on the Company's internal wholesale price index,
inflation did not have a significant effect on sales between 1997 and
1996.
In 1997, same store sales increased as the Company completed the
introduction of the Piggly Wiggly Preferred Club Card/R/, a customer-
friendly, card-based marketing program. The Piggly Wiggly Preferred Club
Card is intended to reward current customers and attract new customers by
offering "clipless coupons" on weekly advertised specials and "automatic"
savings on monthly store specials. The card also doubles as a check-
cashing and video rental identification card. Additionally, the Piggly
Wiggly Preferred Club Card program includes the ability to issue point of
sale coupons redeemable on future purchases. The Company believes that
the Piggly Wiggly Preferred Club Card and the coordinated marketing and
merchandising program it supports are key components driving the increase
in same store sales in 1997.
The Company's franchised supermarkets range in size from 8,340 square
feet to 47,000 square feet, with an average of 24,175 square feet. The
Company's corporate supermarkets range in size from 19,980 square feet to
54,850 square feet, with an average of 33,400 square feet. All of the
Company's franchised and corporate supermarkets contain several perishable
or specialty service departments, such as fresh and processed meat, take-
home entrees and snacks, produce, fresh seafood, delicatessen, flowers and
plants, and baked goods. Most supermarkets also contain or provide for
one or more of the following: wine and spirit sales, video rentals, photo
processing services, TicketMaster/R/ ticket centers, in-house banking
services, automated teller machines, and on-line debit and credit card
check-out services.
During 1997, certain of the Company's stores continued to fail to
meet financial performance goals. The Company closed one such store
during 1997 and converted another franchise store into a corporate unit.
In order to further improve the Company's results of operations, the
Company continues to evaluate various business alternatives relating to
its underperforming operations, including the sale or conversion of these
stores, closing stores and implementing other operational changes.
Purchasing and Distribution
The Company purchases groceries in sufficient volume to qualify for
favorable price brackets for most items. The Company purchases brand name
grocery merchandise directly from the manufacturers or processors and
purchases produce, meat and seafood from a variety of sources. The
Company purchases substantially all of its private label items through
Topco Associates, Inc. ("Topco"). Topco is a national purchasing
cooperative whose member-owners consist of 30 regional supermarket chains
and food services organizations who collectively operate approximately
3,800 stores. According to Topco data, its member-owners accounted for
approximately 15% of United States grocery store sales volume in 1997. In
1997, purchases through Topco accounted for approximately 14% of the
Company's total inventory purchases. The Company also purchases store and
warehouse equipment and supplies, primarily bags and packaging material,
through Topco. Topco's size and purchasing power enable it to employ
large-volume, low-cost purchasing techniques on behalf of its
member-owners, including the Company.
Approximately 77% of the products supplied to the Company's stores in
1997 were supplied from the Company and its direct-contract, third-party
distribution centers. The remainder were supplied by direct store
delivery vendors. The Company owns its 364,000 square foot distribution
center in Sheboygan, Wisconsin. With the exception of fresh, frozen and
processed meat, eggs and deli products, all products supplied by the
Company are distributed from its Sheboygan facility. While the Company
performs the buying function, a third-party contractor in Milwaukee,
Wisconsin performs the distribution services for the Company's meat
operations. The Company believes this arrangement has provided it with
operating cost efficiencies and has enabled it to expand its wholesale
product offerings and better satisfy wholesale customer delivery schedules
through improved capacity.
As described above under "Wholesale Operations," the Company believes
one of its competitive advantages is the community-oriented marketing
programs provided to franchisees as part of its "virtual chain" strategy.
Coordinated weekly newspaper ad inserts, high-visibility outdoor billboard
advertising and television and radio advertising stress the value and
customer service provided by the Company's local Piggly Wiggly
supermarkets. The Company also sponsors local events and festivals
throughout the marketing area to improve its Piggly Wiggly name
recognition, such as the Midwest's largest fireworks display at
Milwaukee's Summerfest lakefront music festival.
The Company operates a leased, full-service trucking fleet, which
consists of 22 tractors and 41 refrigerated trailers. The Company
augments its transportation requirements with temporary leasing
arrangements as conditions warrant. PW Trucking, Inc., a wholly-owned
subsidiary of the Company, provides contract and common carrier services
throughout the Company's operating territory. Revenues from unrelated
parties generated by this business were nominal in 1997 and are expected
to be nominal in 1998.
The Company offers a line of carbonated soft drinks, fruit drinks and
drinking and distilled water, under its Springtime/TM/ label, to its
franchised and corporate supermarkets and independent supermarket
customers. During 1997, the Company closed its bottling facility in
Sheboygan, Wisconsin and currently outsources production of these products
to a number of vendors. The sale of these products accounted for less
than 1% of the Company's 1997 net sales.
Competition
The wholesale and retail food industry is highly competitive. At the
wholesale level, the Company competes with regional and national
wholesalers, such as Fleming Companies, Inc., SuperValu Inc., Roundy's,
Inc. and Nash Finch Co. In addition to price, product quality and
variety, competitive factors include credit support to customers and the
provision of various support services, such as advertising; accounting and
financial services; merchandising; facilities engineering, design and
project management; and retail technology support. The Company believes
that its distribution facilities and the wide range of support and
marketing services provided to its franchised and corporate retail
supermarkets allow it to provide prompt and efficient low-priced, high-
quality products and important supplemental services to its franchised and
corporate supermarkets and other customers.
The degree of competition at the retail level varies with store
location. In most of its franchised and corporate supermarket locations,
the Company competes primarily with local retail operators, virtually all
of whom are affiliated with competing wholesalers through arrangements
similar to the Company's franchisees. In its remaining supermarket
locations, the Company competes with national and regional retail chain
stores, such as Sentry Food Stores, Pick 'N Save, SuperSaver, Cub Foods,
Jewel Food Stores, Dominicks Finer Foods, Copp's Supermarkets and Kohl's
Food Stores. Other competitors include the general merchandise, wholesale
club and supercenter format stores of Wal-Mart Stores, Inc., K Mart Corp.
and ShopKo Stores, Inc. Principal retail competitive factors include
price, product quality and variety, store location and appearance, and the
extent of a store's perishable product and service departments. The
Company believes its supermarkets' emphasis on low-cost, high-quality
products, community-based multi-media marketing and merchandising programs
and a high degree of in-store customer service and friendliness provide
its franchised and corporate supermarkets with a competitive advantage in
many of their retail market areas.
Certain of the Company's competitors at both the wholesale and retail
level may have a competitive advantage resulting from utilizing
lower-cost, non-union workforces. Certain of the Company's competitors
have greater financial resources and marketing budgets than the Company.
Also, certain competitors using the general merchandise, wholesale club
format or supercenter format may choose to carry and market a less
extensive variety of products for which they may choose to sell such items
at a lower per unit cost than the Company.
Employees
As of January 3, 1998, the Company employed approximately 1,680
persons, of whom approximately 1,230 were employed in the operation of the
Company's corporate retail supermarkets. A majority of the Company's
corporate retail employees are employed on a part-time basis. Of the
Company's remaining employees, approximately 210 are engaged in
warehousing and trucking activities and approximately 240 are corporate
and administrative personnel. Four separate collective bargaining
agreements, covering a total of approximately 200 employees expire in
1998. The Company does not currently anticipate any strikes, work
stoppages or slowdowns in connection with renewing such agreements. The
Company has entered into a collective bargaining agreement covering the
warehouse and trucking employees at its Sheboygan distribution facility
that expires in February 2002.
Item 1A. Executive Officers of the Company.
Positions and Offices with the
Name and Age Company
James H. Dickelman, 50 . . . . . . Chairman of the Board, President
and Chief Executive Officer
John H. Dahly, 57 . . . . . . . . . Executive Vice President, Chief
Financial Officer and Secretary
Michael R. Houser, 46 . . . . . . . Executive Vice President--Marketing
and Merchandising
William K. Jacobson, 47 . . . . . . Senior Vice President--Retail
Operations
Kenneth S. Folberg, 37 . . . . . . Vice President--Logistics and Labor
Relations
Armand C. Go, 35 . . . . . . . . . Treasurer and Chief Accounting
Officer
Larry D. Hayes, 55 . . . . . . . . Vice President--Meat, Bakery and
Deli Operations
John S. Kwas, 58 . . . . . . . . . Vice President--Grocery Procurement
Thomas J. Timler, 40 . . . . . . . Vice President--Business Systems
Support Group
Frank D. Welch, 57 . . . . . . . . Vice President--Engineering and
Assistant Secretary
Messrs. Dickelman, Dahly, Houser and Jacobson are also members of the
Company's Board of Directors.
Executive officers are generally elected annually at the annual
meeting of the Board of Directors held on the date of the Company's annual
meeting of shareholders. Each executive officer holds office until his
successor has been elected or until his prior death, resignation or
removal.
All of the Company's executive officers have served in the positions
indicated or in other management positions with the Company for more than
five years.
Item 2. Properties.
As is typical in the Company's industry, a substantial portion of the
Company's capital assets are leased. As of January 3, 1998, the Company
leased 17 corporate supermarkets and owned one supermarket. The leased
supermarkets range in size from 19,980 to 54,850 square feet, with an
average of 32,690 square feet.
The Company generally leases its supermarkets from nonaffiliated real
estate developers under long-term leases. Such leases generally contain
initial terms of 15 to 20 years, with several five-year renewal options.
None of such existing lease arrangements contain Company repurchase
options; nor is the land underlying any of such supermarkets owned by the
Company. One corporate store lease in Appleton, Wisconsin is scheduled to
expire in 1998. Upon expiration, the Company does not intend to renew
this lease inasmuch as the acquired corporate store that is being
renovated will replace this older, noncompetitive store. As of January 3,
1998, the Company subleased 49 of its leased supermarkets and leased one
owned supermarket to independent operators who are wholesale customers of
the Company and, except for one, are also franchisees.
Renovations and expansions continue at five franchise and one
corporate retail operations. These renovations involve four additions to
existing franchise stores, one replacement franchise unit and a renovation
of one acquired corporate supermarket. Additionally, one new market
franchise supermarket opened in January 1998. These projects are expected
to add approximately 85,000 square feet of selling space.
The Company owns its distribution center and headquarters complex in
Sheboygan, Wisconsin which occupies approximately nine acres of a 16-acre
site owned by the Company. The facility provides approximately 30,500
square feet of space for offices and related activities and approximately
364,000 square feet of warehouse space. The Company also leases
approximately 14,500 square feet of office space in Sheboygan under a
four-year lease expiring in August 2000, which is used for customer
support services.
The Company owns approximately 17 acres of commercially zoned
property in two Wisconsin communities. The Company has entered into
brokerage arrangements for the sale of these properties.
Item 3. Legal Proceedings.
There are no material legal proceedings to which the Company is a
party or to which any of its property is subject, other than routine
litigation incidental to the Company's business. No material legal
proceedings were terminated during the fourth quarter of 1997.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of 1997.
PART II
Item 5. Market for the Company's Common Stock and Related Shareholder
Matters.
Pursuant to General Instruction G to Form 10-K ("Instruction G"), the
information required by this Item is incorporated herein by reference from
information included under the caption entitled "Common Stock Information"
set forth in the Company's 1997 Annual Report to Shareholders (the "Annual
Report").
Item 6. Selected Financial Data.
Pursuant to Instruction G, the information required by this Item is
incorporated herein by reference from information included under the
caption entitled "Five-Year Financial Highlights" set forth in the Annual
Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Pursuant to Instruction G, the information required by this Item is
incorporated herein by reference from information included under the
caption entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" set forth in the Annual Report.
Item 8. Financial Statements and Supplementary Data.
Pursuant to Instruction G, the Consolidated Balance Sheets of the
Company as of January 3, 1998 and December 28, 1996, the Consolidated
Statements of Earnings, Cash Flows and Shareholders' Investment for each
of the three fiscal years in the period ended January 3, 1998, together
with the related Notes to Consolidated Financial Statements (including
supplementary financial data), are incorporated herein by reference from
information included under the captions having substantially the same
titles as set forth in the Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Company.
Pursuant to Instruction G, the information required by this Item
(other than such information regarding executive officers which appears in
Item 1A hereof and information required by Item 405 of Regulation S-K,
which is inapplicable) is incorporated by reference from information
included under the caption entitled "Election of Directors" set forth in
the Company's definitive Proxy Statement for its 1998 annual meeting of
shareholders (the "Proxy Statement").*
* The Proxy Statement will be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the end
of the Company's fiscal year.
Item 11. Executive Compensation.
Pursuant to Instruction G, the information required by this Item is
incorporated by reference from information included under the caption
entitled "Executive Compensation" set forth in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Pursuant to Instruction G, the information required by this Item is
incorporated by reference from information included under the captions
entitled "Principal Shareholders" and "Election of Directors" set forth in
the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
Pursuant to Instruction G, the information required by this Item is
incorporated by reference from information under the caption entitled
"Compensation Committee and Stock Option Committee Interlocks and Insider
Participation" set forth in the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as a part of this Form 10-K:
1. Financial Statements.
Consolidated Balance Sheets as of
January 3, 1998 and December 28, 1996
Consolidated Statements of Earnings,
Cash Flows and Shareholders' Investment
for the fiscal years 1997, 1996 and 1995
Notes to Consolidated Financial
Statements
Report of Independent Public Accountants
The foregoing Financial Statements are incorporated by reference to
the pocket part included in the Company's Annual Report to Shareholders
for the fiscal year ended January 3, 1998.
The additional information referred to under "Financial Statement
Schedules" below is filed as part of this Form 10-K and should be read in
conjunction with the financial statements referred to above.
Page
Reference:
Form 10-K
2. Financial Statement Schedules.
Report of Independent Public F-1
Accountants
Schedule VIII - Valuation and F-2
Qualifying Accounts and Reserves
All other schedules have been omitted as not required or not
applicable or the information required to be shown thereon is included in
the financial statements and related notes.
3. Exhibits and Reports on Form 8-K.
(a) The Exhibits filed or incorporated by reference herewith
are as specified in the Exhibit Index included herein.
(b) No reports on Form 8-K were filed by the Company during the
fourth quarter of fiscal year 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SCHULTZ SAV-O STORES, INC.
Date: March 12, 1998 By /s/ John H. Dahly
John H. Dahly
Executive Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Company in the capacities indicated as of the date indicated above.
/s/ James H. Dickelman /s/ William K. Jacobson
James H. Dickelman, Chairman of William K. Jacobson, Director
Board, President, Chief Executive Officer
and Director (Principal Executive Officer)
/s/ John H. Dahly /s/ Bernard S. Kubale
John H. Dahly, Executive Vice President, Bernard S. Kubale, Director
Chief Financial Officer and Director
(Principal Financial Officer)
/s/ Armand C. Go /s/ Martin Crneckiy, Jr.
Armand C. Go, Treasurer and Chief Martin Crneckiy, Jr.,
Director Accounting Officer
(Principal Accounting Officer)
/s/ Howard C. Dickelman /s/ R. Bruce Grover
Howard C. Dickelman, Director R. Bruce Grover, Director
/s/ Michael R. Houser
Michael R. Houser, Director
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards,
the financial statements included in Schultz Sav-O Stores, Inc.'s annual
report to shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated February 6, 1998. Our audit was made
for the purpose of forming an opinion on those statements taken as a
whole. The schedule listed in the index to financial statements is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly states
in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
February 6, 1998.
<PAGE>
SCHULTZ SAV-O STORES, INC.
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS 1997, 1996 AND 1995
Allowance for Doubtful Accounts--
Changes in the allowance for doubtful accounts are summarized as
follows:
1997 1996 1995
Balance, beginning of year $3,650,000 $2,565,000 $1,750,000
Provision charged to earnings 656,000 987,000 2,079,000
(Writeoffs)/recoveries, net (356,000) 98,000 (1,264,000)
--------- --------- ---------
Balance, end of year $3,950,000 $3,650,000 $2,565,000
========= ========= =========
<PAGE>
EXHIBIT INDEX
SCHULTZ SAV-O STORES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 3, 1998
Exhibit No. Description
3.1 Restated Articles of Incorporated, as amended.
Incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1988.
3.2 By-Laws, as amended and restated as of January
24, 1991. Incorporated by reference to Exhibit
3.2 to the Company's Annual Report on Form 10-K
for the year ended December 29, 1990.
4.1 Restated Articles of Incorporation, as amended
(included as Exhibit 3.1).
4.2 Rights Agreement dated December 20, 1988 between
the Company and First Bank (N.A.), Milwaukee,
Wisconsin. Incorporated by reference to Exhibit
4 to the Company's Current Report on Form 8-K
dated December 21, 1988.
4.3 Amendment to Rights Agreement dated February 2,
1989 between the Company and First Bank (N.A.),
Milwaukee, Wisconsin. Incorporated by reference
to Exhibit 2 to the Company's Form 8 dated
February 20, 1989.
4.4 Letter dated June 30, 1992 constituting
appointment of Firstar Trust Company (f/k/a
First Wisconsin Trust Company) as the successor
rights agent under the Rights Agreement dated
December 20, 1988, as amended. Incorporated by
reference to Exhibit 4.4 to the Company's Annual
Report on Form 10-K dated March 31, 1994.
As summarized in Notes [(3)] and [(8)] of the
Notes to Financial Statements incorporated by
reference from the Company's 1997 Annual Report
to Shareholders, as part of Parts II and IV of
this Form 10-K, the Company has various
outstanding long-term debt and capital lease
obligations. None of such obligations
individually exceeds 10% of the Company's total
assets. The Company hereby agrees to furnish to
the Commission, upon its request, a copy of each
instrument with respect to such obligations.
10.1 Master Franchise Agreement, dated April 23,
1982, between Commodores Point Terminal
Corporation and Piggly Wiggly Corporation.
Incorporated by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the
year ended January 1, 1982.
10.2 Agreement, dated August 1, 1982, between the
Company and Commodores Point Terminal
Corporation. Incorporated by reference to
Exhibit 10.2 to the Company's Annual Report on
Form 10-K for the year ended January 1, 1982.
10.3 Amendment to Master Franchise Agreement, dated
October 15, 1982, between the Company and Piggly
Wiggly Corporation. Incorporated by reference
to Exhibit 10.3 to the Company's Annual Report
on Form 10-K for the year ended January 1, 1982.
10.4 Form of Director/Officer Indemnity Agreement.
Incorporated by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the
year ended January 2, 1988. This Agreement is
required to be filed as an exhibit to this
Form 10-K pursuant to Item 14(c) of Form 10-K.
10.5 Form of Key Executive Employment and Severance
Agreement, dated as of October 19, 1990, between
the Company and each of James H. Dickelman, John
H. Dahly, and Michael R. Houser, and dated as of
January 31, 1997, between the Company and
William K. Jacobson. Incorporated by reference
to Exhibit 10.5 to the Company's Annual Report
on Form 10-K for the year ended December 29,
1990. This Agreement is required to be filed as
an exhibit to this Form 10-K pursuant to
Item 14(c) of Form 10-K.
10.6 Membership and Licensing Agreement dated August
1, 1973 by and between Topco Associates, Inc.
(Cooperative) and the Company. Incorporated by
reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended
December 30, 1996.
10.7 Articles of Incorporation of Topco Associates,
Inc. (Cooperative). Incorporated by reference
to Exhibit 10.12 to the Company's Annual Report
on Form 10-K for the year ended December 31,
1988.
10.8 Bylaws of Topco Associates, Inc. (Cooperative),
as amended through June 7, 1996. Incorporated
by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the year ended
December 30, 1996.
10.9 1990 Stock Option Plan, as amended as of March
17, 1993. Incorporated by reference to exhibit
10.10 to the Company's Annual Report on Form 10-
K for the year ended January 2, 1993. This Plan
is required to be filed as an exhibit to this
Form 10-K pursuant to Item 14(c) of Form 10-K.
10.10 1995 Equity Incentive Plan. Incorporated by
reference to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the year December
31, 1994. This Plan is required to be filed as
an exhibit to this Form 10-K pursuant to
Item 14(c) of Form 10-K.
10.11 Schultz Sav-O Stores, Inc. Executive Benefit
Restoration Plan. Incorporated by reference to
Exhibit 10.10 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994.
This Plan is required to be filed as an exhibit
to this Form 10-K pursuant to Item 14(c) of
Form 10-K.
10.12 Schultz Sav-O Stores, Inc. Officer Annual
Incentive Plan. Incorporated by reference to
Exhibit 10.11 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994.
This Plan is required to be filed as an exhibit
to this Form 10-K pursuant to Item 14(c) of
Form 10-K.
13 Portions of the 1997 Annual Report to
Shareholders expressly incorporated by reference
into this Form 10-K.
21 Subsidiary of Registrant.
23 Consent of Independent Public Accountants.
27 Financial Data Schedule (EDGAR version only).
99 Definitive Proxy Statement for 1998 Annual
Meeting of Shareholders (to be filed with the
Commission under Regulation 14A within 120 days
after the end of the Company's fiscal year and,
upon such filing, incorporated by reference
herein to the extent indicated in this Form 10-
K).
EXHIBIT 13
FIVE-YEAR FINANCIAL HIGHLIGHTS
Fiscal Year(a)(b)
(dollars in thousands,
except per share
data) 1997 1996 1995 1994 1993
Consolidated
statements of
earnings data:
Net sales $473,006 $453,921 $439,646 $446,362 $469,577
Gross profit 73,907 72,429 70,516 73,495 81,288
Earnings before
income taxes 12,418 10,512 9,500 8,653 7,519
Provision for income
taxes 4,781 4,047 3,660 3,252 2,767
Net earnings 7,637 6,465 5,840 5,401 4,752
Earnings per share-
basic 1.11 0.93 0.82 0.70 0.58
Earnings per share-
diluted 1.06 0.90 0.79 0.68 0.57
Cash dividends per
share 0.273 0.240 0.147 0.067 0.050
Weighted average
shares and
equivalents
outstanding (c) 7,148 7,187 7,402 7,886 8,234
Net earnings-to- 1.01%
sales ratio 1.61% 1.42% 1.33% 1.21%
Consolidated balance
sheet data (at
fiscal year-end):
Working capital $29,217 $ 28,579 $ 24,855 $ 21,197 $ 20,805
Total assets 98,866 98,204 94,435 94,624 90,042
Current obligations
under capital
leases and current
maturities of
long-term debt 866 1,047 1,114 1,037 1,050
Long-term debt 3,165 3,375 3,719 4,056 1,035
Long-term
obligations under
capital leases 11,177 12,368 13,268 14,046 14,979
Total shareholders'
investment 50,384 47,035 43,288 41,457 41,501
Other data:
Capital additions $ 4,868 $ 3,420 $ 3,545 $ 3,640 $ 8,528
Depreciation and
amortization 4,517 4,451 4,467 4,654 4,861
__________________________________________
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 to
Shareholders.
(c) The weighted average shares and equivalents outstanding for
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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Management's Discussion and
Analysis 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 statements 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 or goals are forward-looking statements. Such forward-
looking statements are subject to certain risks and uncertainties which
are described in close proximity to such statements and which could cause
actual results to differ materially from those currently anticipated.
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 January 3, 1998 and the Company undertakes no obligation to publicly
update such forward-looking statements to reflect subsequent events or
circumstances.
Results of Operations
The following tables set 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
1997 1996 1995 1997 vs. 1996 1996 vs. 1995
Net Sales 100.0% 100.0% 100.0% 4.2% 3.2%
Cost of
products sold 84.4% 84.0% 84.0% 4.6% 3.3%
Operating and
administrative
expenses 13.1% 13.6% 13.9% (0.2%) 1.4%
Earnings before
income
taxes 2.6% 2.3% 2.2% 18.1% 10.7%
Net earnings 1.6% 1.4% 1.3% 18.1% 10.7%
1997 vs. 1996
Net Sales
Net sales for the 53-week period ended January 3, 1998 increased 4.2%
to $473,006,000, compared to $453,921,000 for the 52-week period ended
December 28, 1996. Sales, adjusted for the extra week in fiscal 1997,
increased 2.3% compared to 1996. Fiscal 1998 will be a 52-week year.
Sales in 1997 benefitted primarily from increased wholesale business
volume resulting from the October 1997 completion of the two-year
implementation of the Piggly Wiggly Preferred Club/R/ electronic card
marketing program. Sales in fiscal 1997 also benefitted 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 from another wholesaler into a Piggly Wiggly
franchise unit. In October 1997, the Company converted a franchise unit
in Oshkosh, Wisconsin into a corporate supermarket. During 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, located in Appleton,
DePere, Evansville, Plymouth, Manitowoc and Waterloo, Wisconsin, added
approximately 115,000 of aggregate store selling space. Of these
completed projects, the Appleton store was the first corporate store
opened by the Company since 1991. While the Company's emphasis remains in
increasing its wholesale business volume, the Company will continue to
explore retail opportunities. Sales, however, were negatively impacted by
closures of two underperforming corporate stores in Racine and Stevens
Point, Wisconsin in September and October 1996, respectively, and one
underperforming franchise store in Plover, Wisconsin in September 1997;
and the impact of additional competitive activity due to new stores in
certain markets. As of January 3, 1998, the Company had 68 franchised and
18 corporate supermarkets, compared to 68 franchised and 16 corporate
stores at the end of fiscal year 1996.
Consistent with the Company's business strategy to expand its
wholesale volume, the Company opened a 17,600 square foot new market
franchise supermarket in Poynette, Wisconsin in January 1998. In addition
to this completed project, there are currently six additional supermarket
facility projects in various phases of planning or construction, with
completions scheduled throughout 1998. These projects involve four
additions to existing franchise stores in Howards Grove, Waupaca, Beaver
Dam and Kiel, Wisconsin; one replacement franchise supermarket in Lomira,
Wisconsin; and one renovation to the acquired corporate supermarket in
Appleton, Wisconsin. On an aggregate basis, these six new facilities,
upon completion, are expected to add approximately 85,000 square feet of
store selling space. Additionally, the Company expects these projects to
continue to help the Company position itself against competitive pressures
in these local marketplaces. 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 Nash Finch
Company. 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. As part of an
expansion plan, the Company temporarily closed the acquired Appleton
store. The Company projects the renovated Appleton corporate store to
open in July 1998. Upon completion of the Appleton store project, the
Company expects to close its other smaller, noncompetitive and older
corporate Appleton store. The two replacement corporate supermarkets will
aggregate approximately 85,000 square feet, an increase of 93% over the
combined 44,160 square feet of the older units.
Cost of Products Sold
Cost of products sold, as percent of sales, increased 0.4% from 84.0%
in 1996 to 84.4% in 1997. This nominal increase was principally a direct
result of the continued reduction in 1997 of higher margin retail sales
compared to the increasing amount of lower margin wholesale sales. With
the acquisition of two retail stores from Nash Finch and one retail store
from a franchise operator and their respective conversions to corporate
supermarkets, the Company projects the percentage of higher margin retail
sales volume to increase in 1998 relative to 1997 levels. In spite of
this expected change in sales mix, the Company will continue to emphasize
increasing its wholesale volume.
Operating and Administrative Expenses
Operating and administrative expenses, as a percent of sales,
decreased 0.5% from 13.6% in 1996 to 13.1% in 1997. Total operating and
administrative expenses in 1997 decreased due principally to the closing
of two smaller underperforming corporate retail stores in September and
October 1996, respectively. 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. The decrease in operating and
administrative expenses was partially offset by higher variable expenses,
such as wages and salaries. Certain variable expenses increased due
principally to higher sales volume.
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 significant receivable realization charges
from a number of underperforming franchise operators. Total realization
charges relating to wholesale bad debts and retail subsidies were
comparable for both years, totaling $2,046,000 and $2,349,000 in 1997 and
1996, respectively. Additionally, the Company continues to evaluate
various business alternatives relating to the operations of its
underperforming corporate retail stores. The Company's business
alternatives include the sale and subsequent conversion of these stores
into franchise units, the closing of noncompetitive stores or the
implementation of other operational changes. Similar to prior years,
implementation of these changes 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 net earnings in the short-term, but management believes that such
action will help improve the Company's long-term profitability. For 1997
and 1996, retail repositioning and restructuring costs amounted to
$1,071,000 and $299,000, respectively. The significant increase in retail
repositioning costs in 1997 compared to 1996 was attributable to: (i) the
closure of an underperforming franchise supermarket in Plover, Wisconsin
during 1997 and resulting in a $700,000 pretax charge to operations; and
(ii) the closing and termination costs relating to two smaller
noncompetitive corporate stores that are to be replaced by the two retail
stores acquired from Nash Finch resulting in a $300,000 pretax charge to
operations. The Company also incurred additional charges of $300,000
relating to market development and startup costs due to the opening of the
new market corporate store in Appleton, Wisconsin and the conversion of
the acquired Menasha, Wisconsin supermarket into the Piggly Wiggly format.
Net Earnings
As a result of the foregoing, the Company's earnings before income
taxes increased 18.1% to $12,418,000 in fiscal 1997, from $10,512,000 in
fiscal 1996. As a percent of sales, earnings before income taxes
increased from 2.3% in 1996 to 2.6% in 1997.
After applying an effective tax rate of 38.5% to earnings before
income taxes for both years, net earnings for 1997 increased 18.1% to
$7,637,000, compared with the 1996 net earnings of $6,465,000. With
continuing improvements in sales and productivity, the Company's net
earnings-to-sales ratio for 1997 improved to 1.6%, compared to 1.4% for
fiscal 1996. Additionally, 1997 diluted earnings per share increased
17.8% to $1.06 from $0.90 in 1996.
As of January 3, 1998, the Company has reported 20 consecutive
quarters in which it has shown increased earnings over the prior year's
quarter.
1996 vs. 1995
Net Sales
Net sales for 1996 were $453,921,000 compared to $439,646,000 for
1995. The increase of $14,275,000, or 3.2%, was due primarily to the
continuing emphasis on wholesale sales, coupled with moderate increases in
same store franchise and corporate retail sales. Franchise and corporate
retail sales improved, in large part, due to the continuing success of the
customer-friendly card-based marketing program, the Piggly Wiggly
Preferred Club/R/. The total sales increase over the prior year was the
first such increase since fiscal year 1992. This sales increase was
attained despite the sale and conversion of one corporate store to a
franchise unit in February 1996 and the closure of two smaller, outdated
and underperforming corporate retail supermarkets in September and October
1996, respectively. With respect to facility projects during 1996, the
Company opened one new market franchise supermarket in August totaling
17,300 square feet of aggregate selling space. Additionally, the Company
completed the expansion and renovation of one franchise store in February
and opened two new replacement stores in October and November,
respectively. These three expansion and replacement projects yielded an
increase of 32,100 square feet of aggregate selling space, or an increase
of 63.8% at the three stores. As of December 28, 1996, the Company had 68
franchised and 16 corporate supermarkets, compared to 66 franchised and 19
corporate stores at the end of fiscal year 1995.
Consistent with the Company's business strategy to expand its
wholesale volume, there were three supermarket facility projects that were
completed in 1996. These completed projects consisted of two replacement
franchise supermarkets in Hubertus and Edgerton, Wisconsin and one new
market franchise supermarket in Lodi, Wisconsin. The Company also sold
and converted one of its corporate supermarkets into a franchise unit.
These projects continued to help the Company position itself for
additional increases in sales. Also in 1996, the Company continued its
rollout of the electronic card marketing and electronic coupon program
designed to increase customer savings, make grocery shopping easier and
faster and, ultimately, reward loyal customers. Based on the Company's
internal wholesale price index, inflation had no significant effect on
sales between years.
Cost of Products Sold
Cost of products sold, as a percent of sales, did not change between
years. The lower margins associated with wholesale sales were offset by
reduced operating and administrative expenses from the sale of one
corporate supermarket and its subsequent conversion to a franchised unit
in February 1996 and the closures of two underperforming corporate stores
in September and October 1996, respectively.
Operating and Administrative Expenses
Operating and administrative expenses amounted to 13.6% of net sales
in 1996, compared to 13.9% in 1995. While the percentage decreased, total
operating and administrative expenses increased $858,000, or 1.41%,
between years. Due principally to higher sales, certain variable expenses
such as wages and salaries and insurance premium costs increased. These
increased variable costs, however, were offset by the elimination of
certain operating expenses resulting from the sale and conversion of one
corporate store into a franchise unit in February 1996 and the closure of
two smaller, outdated and underperforming corporate stores in September
and October 1996, respectively.
Due to the highly competitive nature of the industry, certain
franchise operators and corporate retail stores continued to experience
operational difficulties in their respective marketplaces. As a result,
the Company continued to incur significant receivable realization charges
from its underperforming franchise operators. Total realization charges
relating to wholesale bad debts and retail subsidies were comparable for
both years, totaling $2,349,000 and $2,229,000 in 1996 and 1995,
respectively. Similar to prior years, the Company incurred certain
repositioning or restructuring charges involving the termination costs of
replaced, closed of sold stores. For 1996 and 1995, retail repositioning
and restructuring costs amounted to $299,000 and $1,003,000, respectively.
Net Earnings
As a result of the foregoing, the Company's earnings before income
taxes increased 10.7% to $10,512,000 in fiscal 1996, from $9,500,000 in
1995. As a percent of sales, earnings before income taxes increased from
2.2% in 1995 to 2.3% in 1996.
After applying an effective tax rate of 38.5% to earnings before
income taxes, net earnings for 1996 increased 10.7% to $6,465,000,
compared with the prior year's net earnings of $5,840,000. With
improvements in sales and productivity, the Company's net earnings-to-
sales ratio for 1996 improved to 1.4%, compared to 1.3% for fiscal 1995.
Additionally, 1996 diluted earnings per share increased 13.9% to $0.90
from $0.79 in 1995. The diluted earnings per share percentage increase in
1996 could have been greater if not for the $0.03 per share positive
adjustment in fiscal 1995. This adjustment was a direct result of the
Company's redemption at a substantial discount of nearly all of its
outstanding preferred stock in October 1995. On a percentage basis,
diluted earnings per share increased more than net earnings due to
additional share repurchases during the first half of 1996 which reduced
the number of weighted average shares outstanding.
Liquidity and Capital Resources
The Company's favorable 1997 operating results continued to enhance
its strong financial position. As was the case in 1996, the primary
source of liquidity during 1997 was cash generated from operations. Cash
provided by operating activities during 1997 was $8,234,000, compared to
$12,862,000 in 1996. Cash flow from operations decreased between years
due principally to the increase in outstanding receivables from franchise
operators due in large part to short-term financing support for purchase
of facilities and equipment for new stores approximating $2,400,000. The
decrease in net cash inflows from operations between years did not
adversely affect the Company's ability to internally fund its capital
expenditures, purchase shares of its common stock and pay cash dividends.
Net earnings from operations of $7,637,000 served as the Company's main
source of funding in 1997.
Net cash outflows for investing activities were $6,920,000 in 1997
compared to $2,751,000 in 1996. This significant increase was primarily
attributable to the $2,701,000 acquisition of two retail stores from Nash
Finch. Additionally, capital expenditures totaled $4,868,000 for 1997,
compared to $3,420,000 in 1996. The 42% increase in 1997 capital
expenditures was due in large part to the $1,755,000 of equipment and
fixtures purchased for the corporate store that the Company opened in
Appleton, Wisconsin in October 1997 and for distribution upgrades and
office technology equipment approximating $557,000. For 1998, the
Company's capital budget is estimated at $4,300,000, of which $2,889,000
has been committed as of January 3, 1998. More than half of the 1998
capital budget is allocated for various equipment and fixtures for new and
existing stores, some of which relate to retail technology upgrades.
Additionally, the Company has allocated approximately $640,000 to purchase
office technology equipment. The Company expects to finance these
projects from internally generated capital.
Net cash outflows for financing activities were $5,953,000 in 1997
compared to $4,173,000 in 1996. Total stock repurchases were
substantially higher in 1997 due to the Board of Directors' January 29,
1997 reinstatement of the Company's stock repurchase plan of up to
$5,000,000 of its outstanding common stock. The repurchases under the
stock buy-back authorization are to be effected from time to time in the
open market, pursuant to privately negotiated transactions or otherwise.
They may also include, but the amount of the authorization will not be
reduced by, the repurchase of common stock issuable upon the exercise of
stock options granted under the Company's stock option plans. Shares
repurchased during 1997 was 289,856 with an aggregate cost of $3,835,000.
Total cash dividend payouts on a per share basis increased 13.8% from
$0.240 in 1996 to $0.273 per share in 1997.
At January 3, 1998, under the Company's loan agreements, $8,469,000
of retained earnings were available for the payment of cash dividends and
other restricted payments.
In summary, cash and equivalents for fiscal 1997 decreased
$4,639,000, resulting in a year-end balance of $23,124,000. Of the year-
end cash balance, nearly two-thirds was invested in short-term investments
with maturities of less than three months, such as taxable and tax-exempt
money market funds and commercial paper with strong credit ratings. The
Company has not, and does not intend to, invest in derivative securities.
The Company is the prime lessee of new retail store facilities and
subleases such facilities to independent franchise operators. All new
facilities in 1997 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. At January
3, 1998, the Company had $8,805,000 of minimum lease payments required
under operating leases in 1998 and $5,658,000 of amounts receivable under
noncancelable subleases in 1998. Contingent rentals for 1997 and 1996
were $1,029,000 and $1,012,000, respectively. Additionally, at January 3,
1998, the Company had $11,177,000 of long-term capital lease obligations,
$7,270,000 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. The financing support is subsequently refinanced,
typically through banks, with the Company receiving reimbursement.
Additionally, the Company was contingently liable under guarantees of
wholesale customers' bank note agreements totaling $13,226,000 and
$15,094,000 at January 3, 1998 and December 28, 1996, respectively. All
of the loan guarantees are fully collateralized, principally with
equipment and inventory and, to a lesser extent, with building facilities.
At January 3, 1998, the Company's ratio of total liabilities to
shareholders' investment was 0.96, compared to 1.09 at December 28, 1996.
The ratio decrease was principally attributable to record earnings and
reduction in long-term debt in 1997. At January 3, 1998, the Company had
available the entire amount of unsecured revolving bank credit facilities
totaling $16,000,000.
The Company believes its cash and debt-to-equity positions continue
to compare very favorably to most industry competitors. Additionally, the
Company believes that its financial condition provides it with adequate
long-term flexibility to finance anticipated capital requirements without
adversely impacting its financial position or liquidity.
The Company has assessed and continues to assess the impact of the
year 2000 issue on its operations, including the development of cost
estimates for, and the extent of programming changes required to address
this issue. The Company is also assessing the impact of this issue with
its key vendors and suppliers. Although final cost estimates have yet to
be determined, based on current information available, the Company
anticipates that its year 2000 costs will only result in an immaterial
increase to the Company's expenses during 1998.
Company Business
The Company is engaged in distributing food and related products at
wholesale and retail. At January 3, 1998, the Company franchised 68 and
operated 18 corporate retail supermarkets under the Piggly Wiggly/R/ name
in its eastern Wisconsin and northeastern Illinois market areas. The
Company owns the right to grant Piggly Wiggly franchises in its market
areas.
The Company is the primary supplier to its franchised and corporate
stores. 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 1,680 individuals, nearly 1,230 of
whom are employed in the operation of corporate retail supermarkets. 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.
<PAGE>
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 3, 1998 and
December 28, 1996 and the related consolidated statements of earnings,
cash flows and shareholders' investment for each of the three fiscal years
in the period ended January 3, 1998. 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 conduct 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 3, 1998 and
December 28, 1996, and the results of their operations and their cash
flows for each of the three fiscal years in the period ended January 3,
1998, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Milwaukee, Wisconsin Arthur Andersen LLP
February 6, 1998
<PAGE>
CONSOLIDATED BALANCE SHEETS
As of January 3, 1998 and December 28, 1996
Assets 1997 1996
Current Assets:
Cash and equivalents $23,124,000 $27,763,000
Receivables 9,718,000 5,676,000
Inventories 21,741,000 22,316,000
Other current assets 3,635,000 2,672,000
Deferred income taxes 4,131,000 3,824,000
---------- ----------
Total current assets 62,349,000 62,251,000
---------- ----------
Noncurrent receivable under capital
subleases 7,270,000 8,239,000
Property under capital leases, net 2,786,000 3,073,000
Other noncurrent assets 3,782,000 3,097,000
Property and equipment, net 22,679,000 21,544,000
---------- ----------
Total assets $98,866,000 $98,204,000
========== ==========
Liabilities & shareholders' investment
Current liabilities:
Accounts payable $21,305,000 $20,564,000
Accrued salaries and benefits 4,395,000 4,189,000
Accrued insurance 3,095,000 3,328,000
Retail repositioning reserve 610,000 852,000
Other accrued liabilities 2,861,000 3,692,000
Current obligations under capital
leases 665,000 702,000
Current maturities of long-term debt 201,000 345,000
---------- ----------
Total current liabilities 33,132,000 33,672,000
---------- ----------
Long-term obligations under capital
leases 11,177,000 12,368,000
Long-term debt 3,165,000 3,375,000
Deferred income taxes 1,008,000 1,754,000
Shareholders' investment:
Common stock, $0.05 par value,
authorized 20,000,000 shares,
issued 8,750,342 in 1997 and 1996 438,000 292,000
Additional paid-in capital 13,940,000 13,331,000
Retained earnings 51,299,000 45,654,000
Treasury stock at cost, 1,938,463
shares in 1997 and 1,214,472
shares in 1996 (15,293,000) (12,242,000)
---------- ----------
Total shareholders' investment 50,384,000 47,035,000
---------- ----------
Total liabilities and shareholders'
investment $98,866,000 $98,204,000
========== ==========
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
For fiscal years 1997, 1996 and 1995
1997 1996 1995
Net sales $473,006,000 $453,921,000 $439,646,000
Costs and expenses:
Cost of products sold 399,099,000 381,492,000 369,130,000
Operating and
administrative expenses 61,799,000 61,892,000 61,034,000
---------- ---------- ----------
Operating income 12,108,000 10,537,000 9,482,000
Interest income 1,157,000 842,000 944,000
Interest expense (847,000) (867,000) (926,000)
---------- ---------- ----------
Earnings before income taxes 12,418,000 10,512,000 9,500,000
Provision for income taxes 4,781,000 4,047,000 3,660,000
---------- ---------- ----------
Net earnings $ 7,637,000 $ 6,465,000 $ 5,840,000
---------- ---------- ----------
Earnings per share-basic $1.11 $0.93 $0.82
===== ===== =====
Earnings per share-diluted $1.06 $0.90 $0.79
===== ===== =====
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For fiscal years 1997, 1996 and 1995
1997 1996 1995
Cash flows from operating
activities:
Net earnings $ 7,637,000 $ 6,465,000 $ 5,840,000
Adjustments to reconcile net
earnings to net cash
provided by operating
activities:
Depreciation and
amortization 4,517,000 4,451,000 4,467,000
Deferred income taxes (609,000) (626,000) 1,003,000
Changes in assets and
liabilities:
Receivables (4,042,000) (114,000) 1,276,000
Inventories 1,476,000 (1,858,000) 869,000
Other current assets (551,000) 2,335,000 (2,584,000)
Accounts payable 741,000 823,000 (140,000)
Accrued liabilities (935,000) 1,386,000 (4,099,000)
---------- ---------- ----------
Net cash flows from operating
activities 8,234,000 12,862,000 6,632,000
---------- ---------- ----------
Cash flows from investing
activities:
Capital additions (4,868,000) (3,420,000) (3,545,000)
Proceeds from asset sales 144,000 88,000 599,000
Acquisition of retail stores (2,701,000) - -
Receipt of principal amounts
under capital subleases 505,000 581,000 518,000
---------- ---------- ----------
Net cash flows from investing
activities (6,920,000) (2,751,000) (2,428,000)
---------- ---------- ----------
Cash flows from financing
activities:
Payment for acquisition of
treasury stock (3,835,000) (2,233,000) (3,475,000)
Payment of cash dividends (1,879,000) (1,666,000) (1,047,000)
Proceeds from exercise of
stock options 817,000 856,000 487,000
Principal payments on capital
lease obligations (702,000) (777,000) (714,000)
Principal payments on long-
term debt (354,000) (337,000) (323,000)
Repurchase of preferred stock - (16,000) (142,000)
---------- ---------- ----------
Net cash flows from financing
activities (5,953,000) (4,173,000) (5,214,000)
---------- ---------- ----------
Cash and equivalents:
Net change (4,639,000) 5,938,000 (1,010,000)
Balance, beginning of year 27,763,000 21,825,000 22,835,000
---------- ---------- ----------
Balance, end of year $ 23,124,000 $ 27,763,000 $21,825,000
========== ========== ==========
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
For fiscal years 1997, 1996 and 1995
1997 1996 1995
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C>
Preferred Stock, $100 par
Beginning of year - $ - 159 $ 16,000 3,000 $ 300,000
Repurchase of preferred
stock - - (159) (16,000) (2,841) (284,000)
---------- --------- ---------- --------- ---------- ----------
End of year - - - - 159 16,000
========== ========= ========== ========= ========== ==========
Common Stock, $0.05 par
Beginning of year 5,833,570 292,000 5,833,570 292,000 2,916,785 146,000
Three-for-two stock split
effected in the form of
50% stock dividend, net
of fractional shares 2,916,772 146,000 - - - -
Two-for-one stock split
effected in the form of a
100% stock dividend - - - - 2,916,785 146,000
---------- --------- ---------- ---------- ---------- ---------
End of year 8,750,342 438,000 5,833,570 292,000 5,833,570 292,000
========== ========= =========== ========== ========== ==========
Additional Paid-in Capital
Beginning of year 13,331,000 12,990,000 12,680,000
Exercise of stock options 609,000 341,000 168,000
Repurchase of preferred
stock - - 142,000
---------- ---------- ----------
End of year 13,940,000 13,331,000 12,990,000
Retained Earnings ========== ========== ==========
Beginning of year 45,654,000 40,855,000 36,179,000
Net earnings 7,637,000 6,465,000 5,840,000
Cash dividends
Preferred stock ($3.00
per share) - - (9,000)
Common stock ($0.273 per
share in 1997, $0.240
in 1996 and $0.147 in
1995) (1,879,000) (1,666,000) (1,038,000)
Three-for-two stock split
effected in the form of a
50% stock dividend, net
of fractional shares (113,000) - -
Two-for-one stock split
effected in the form of a
100% stock dividend - - (117,000)
---------- ---------- ----------
End of year 51,299,000 45,654,000 40,855,000
========== ========== ==========
Treasury Stock
Beginning of year (1,214,472) (12,242,000) (1,179,972) (10,865,000) (495,551) (7,848,000)
Exercise of stock options 173,100 817,000 111,300 856,000 53,359 487,000
Acquisition of treasury
stock (289,856) (3,835,000) (145,800) (2,233,000) (152,294) (3,475,000)
Three-for-two stock split
effected in the form of a
50% stock dividend, net
of fractional shares (607,235) (33,000) - - - -
Two-for-one stock split
effected in the form of a
100% stock dividend - - - - (585,486) (29,000)
---------- ---------- ---------- ---------- ---------- ----------
End of year (1,938,463) (15,293,000) (1,214,472) (12,242,000) (1,179,972) (10,865,000)
========== ========== ========== ========== ========== ==========
Shareholders' investment,
end of year $50,384,000 $47,035,000 $43,288,000
========== ========== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For fiscal years 1997, 1996 and 1995
(I) 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 retail supermarkets and independent food
stores supplied by the Company are located in eastern Wisconsin and
northeastern Illinois. All franchised and corporate stores operate under
the name of Piggly Wiggly./R/
(II) Summary of Significant Accounting Policies
Accounting periods
The Company's fiscal year ends on the Saturday closest to December 31.
The 1997 fiscal year was a 53-week period ended January 3, 1998. The 1996
and 1995 fiscal years were 52-week periods ended December 28, 1996 and
December 30, 1995, respectively.
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
$3,950,000 and $3,650,000 at January 3, 1998 and December 28, 1996,
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 3, 1998 and December 28, 1996, 81% and 82%,
respectively, of all inventories were accounted for under the LIFO method.
The excess of current cost over the stated LIFO cost of inventory was
$9,609,000 and $9,447,000 at January 3, 1998 and December 28, 1996,
respectively.
Other current assets
Other current assets at January 3, 1998 and December 28, 1996 consisted
of the following:
1997 1996
Property held for resale $1,663,000 $ 245,000
Prepaid expenses 1,209,000 615,000
Receivable under capital subleases 443,000 504,000
Retail systems and supplies for
resale 320,000 1,308,000
--------- ---------
Other current assets $3,635,000 $2,672,000
========= =========
Property and equipment, net
Property and equipment are stated at cost. Depreciation is provided on
the straight-line method over the estimated useful lives of the assets.
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 3, 1998 and December 28, 1996
consisted of the following:
1997 1996
Land and buildings $18,455,000 $18,382,000
Leasehold improvements 5,391,000 5,398,000
Equipment and fixtures 33,537,000 29,911,000
---------- ----------
57,383,000 53,691,000
Less accumulated depreciation
and amortization (34,704,000) (32,147,000)
---------- ----------
Property and equipment, net $22,679,000 $21,544,000
========== ==========
Accounts payable
Accounts payable included $7,583,000 and $6,968,000 at January 3,
1998 and December 28, 1996, 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.
Earnings per share
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) Number 128, "Earnings
per Share." The new standard simplifies the standards for computing
earnings per share and requires presentation of two new amounts, basic and
diluted 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:
1997 1996 1995
Net earnings available
for common
shareholders $7,637,000 $6,465,000 $5,831,000
Weighted average
shares outstanding 6,871,000 6,944,000 7,135,000
Earnings per share-
basic $1.11 $0.93 $0.82
--------- --------- ---------
Net earnings available
for common
shareholders $7,637,000 $6,465,000 $5,831,000
Weighted average
shares outstanding 6,871,000 6,944,000 7,135,000
Stock options'
dilutive effect 277,000 243,000 267,000
Weighted average
shares and
equivalents
outstanding 7,148,000 7,187,000 7,402,000
Earnings per share-
diluted $1.06 $0.90 $0.79
Supplementary disclosure of cash flow information
Interest and taxes paid included in the Company's cash flow from
operations were as follows:
1997 1996 1995
Interest paid $ 878,000 $ 873,000 $ 902,000
Taxes paid 5,911,000 4,071,000 3,368,000
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.
Store pre-opening costs
Costs associated with the opening of new stores, consisting primarily
of advertising, supplies, occupancy and payroll, are charged to operating
and administrative expenses as incurred. Depreciation and amortization of
property and equipment and leasehold improvements begin in the period a
store begins operations.
Advertising costs
Costs incurred for producing and communicating advertising are
expensed when incurred.
Reclassifications
Certain 1996 and 1995 amounts previously reported have been
reclassified to conform to the 1997 presentation.
(III) Acquisition
On September 5, 1997, the Company acquired substantially all of the
assets of two retail grocery stores located in and around Appleton,
Wisconsin from Nash Finch Company, a publicly-held owned Delaware
corporation for $2,701,000 in cash. The acquisition was accounted for as
a purchase. Accordingly, the assets of the acquired retail supermarkets
are included in the Company's consolidated balance sheet as of January 3,
1998. The purchase price was allocated based upon the relative fair
market value of assets acquired. The excess of the purchase price over
assets acquired approximated $900,000 and is being amortized over 15
years. The results of operations of one of the retail stores that has
been operational since November was not significant. The other retail
store is currently undergoing renovation and is projected to open in July
1998. The Company financed the acquisition solely through working capital
from operations.
(IV) Long-Term Debt
The Company has a loan agreement providing unsecured revolving credit
facilities totaling $16,000,000 through April 30, 1999. 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 1997 and 1996.
Long-term debt at January 3, 1998 and December 28, 1996 consisted of
the following:
1997 1996
Mortgage note, 9.675% due in
monthly installments of $33,026
including interest due through
June 2012 $3,091,000 $3,191,000
Term note, 9.91%, due in quarterly
installments of $55,000 through
June 1998 75,000 295,000
Land contract, 10.0%, due in annual
installments of $33,333 through
March 2003 200,000 234,000
--------- ---------
3,366,000 3,720,000
Less current maturities (201,000) (345,000)
--------- ---------
Long-term debt $3,165,000 $3,375,000
========= =========
At January 3, 1998, the fair value of the financial instruments
approximated carrying value. The revolving credit and term note
agreements contain various covenants including, among others, the
maintenance of defined working capital, net worth of $36,000,000, certain
debt-equity ratios, restrictions against pledging of or liens upon certain
assets, mergers, significant changes in ownership and limitations on
restricted payments. As of January 3, 1998, $8,469,000 of retained
earnings were available for cash dividends and other restricted payments.
The total amount of long-term debt due in each of the fiscal years
1998 through 2002 will be $201,000, $144,000, $156,000, $168,000 and
$182,000, respectively, and $2,515,000 from 2003 to 2012.
Interest expenses consisted of the following:
1997 1996 1995
Interest on long-
term debt $350,000 $383,000 $419,000
Imputed interest-
capital leases 497,000 484,000 507,000
------- ------- -------
Interest expense $847,000 $867,000 $926,000
======= ======= =======
(V) Income Taxes
The difference between the statutory federal income tax rate and the
effective rate is summarized as follows:
1997 1996 1995
Federal income tax 34.1% 34.0% 34.0%
State income taxes,
net of federal
income tax benefit 5.2 5.3 5.1
Other, net (0.8) (0.8) (0.6)
----- ----- -----
Effective income tax
rate 38.5% 38.5% 38.5%
===== ===== =====
Components of provision for income taxes consisted of the following:
1997 1996 1995
Currently payable
Federal $4,433,000 $3,804,000 $2,082,000
State 957,000 869,000 575,000
Deferred (609,000) (626,000) (1,003,000)
--------- --------- ---------
Provision for income
taxes 4,781,000 4,047,000 3,660,000
========= ========= =========
The components of deferred income tax assets and liabilities at
January 3, 1998 and December 28, 1996 were as follows:
1997 1996
Deferred income tax assets:
Bad debt reserve $1,541,000 $1,424,000
Accrued insurance 1,050,000 1,277,000
Capital lease accounting 694,000 716,000
Vacation pay 570,000 513,000
Retail repositioning reserve 238,000 332,000
Other 1,161,000 593,000
--------- ---------
Total deferred income tax assets 5,254,000 4,855,000
--------- ---------
Deferred income tax liabilities:
Property and equipment (1,945,000) (2,470,000)
Pension (186,000) (315,000)
--------- ---------
Total deferred income tax
liabilities (2,131,000) (2,785,000)
--------- ---------
Net deferred income tax asset $3,123,000 $2,070,000
========= =========
The net deferred income tax asset as of January 3, 1998 and December
28, 1996 were classified in the balance sheet as follows:
1997 1996
Current deferred income tax asset $4,131,000 $3,824,000
Noncurrent deferred income tax
liability (1,008,000) (1,754,000)
--------- ---------
Net deferred income tax asset $3,123,000 $2,070,000
========= =========
(VI) Commitments and Contingent Liabilities
The Company has projected capital expenditures for fiscal year 1998
at $4,300,000. Commitments approximating $2,889,000 were made as of
January 3, 1998.
As of January 3, 1998, the Company was contingently liable under
guarantees of bank note agreements of wholesale customers totaling
$13,226,000. All of the loan guarantees are fully collateralized,
principally with equipment and inventory, and to a lesser extent, with
building facilities.
(VII) 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 1997, 1996 and
1995 were $835,000, $793,000 and $720,000, respectively. The plan allows
participants to make pretax contributions. The Company then matches
certain percentages of employee contributions. The Company's matching
contributions for 1997, 1996 and 1995 were $79,000, $71,000 and $68,000,
respectively.
The Company has union-administered multi-employer pension plans
covering all hourly paid employees represented by collective bargaining
agreements. Total pension expense, which the Company funds as accrued,
was $1,456,000, $1,564,000 and $1,599,000 in fiscal years 1997, 1996 and
1995, 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.
(VIII) 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 3, 1998 and December 28, 1996
was as follows:
1997 1996
Investments in leased property
under capital leases $5,264,000 $5,264,000
Less accumulated amortization (2,478,000) (2,191,000)
--------- ---------
Property under capital leases, net $2,786,000 $3,073,000
========= =========
Amortization of leased property under capital leases, included in
operating and administrative expenses, amounted to $287,000, $273,000 and
$283,000 in fiscal years 1997, 1996 and 1995, 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 3, 1998:
Capital lease Capital sublease
obligations receivables
1998 $ 2,059,000 $ 1,365,000
1999 2,059,000 1,364,000
2000 2,017,000 1,302,000
2001 2,020,000 1,305,000
2002 2,023,000 1,308,000
2003-2009 10,939,000 7,220,000
---------- ----------
Total minimum lease payments 21,117,000 13,864,000
Less interest (9,275,000) (6,151,000)
---------- ----------
Present value of minimum lease
payments and amounts receivable 11,842,000 7,713,000
Less current portion (665,000) (443,000)
---------- ----------
Long-term obligations and
receivable $11,177,000 $7,270,000
========== ==========
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 3, 1998:
1998 $ 8,805,000
1999 8,638,000
2000 8,216,000
2001 7,713,000
2002 7,743,000
2003-2017 69,001,000
-----------
Total minimum lease payments 110,116,000
Lease minimum amounts receivable under
noncancelable subleases (82,146,000)
-----------
Net minimum lease payments $27,970,000
===========
Rental expenses for all operating leases amounted to $3,912,000,
$3,813,000 and $3,958,000 in fiscal years 1997, 1996 and 1995,
respectively. These amounts include $1,029,000, $1,012,000 and
$1,113,000, respectively, for contingent rentals.
(IX) 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.
The Company applies Accounting Principles Board Opinion 25 in
accounting for its stock option plans. In 1995, the Financial Accounting
Standard Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation". The statement allows for companies to recognize as
compensation expense over the vesting period the fair value of all stock-
based awards on the date of grant. Alteratively, SFAS 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 SFAS No. 123 has been applied. In fiscal year
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:
1997 1996 1995
Net earnings
As reported $7,637,000 $6,465,000 $5,840,000
Pro forma 7,417,000 6,305,000 5,752,000
---------- ---------- ----------
Earnings per
share-diluted
As reported $1.06 $0.09 $0.79
Pro forma 1.04 0.8 0.78
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 1997, 1996 and
1995:
1997 1996 1995
Dividend yield 2.06% 2.50% 2.50%
Expected volatility 25.62% 20.92% 19.85%
Risk-free interest rate 6.36% 5.35% 7.54%
Expected term of grant 5.5 years 6.0 years 6.0 years
As of January 3, 1998, no incentive stock options have been granted.
Following is a summary of the status of nonqualified stock options for the
fiscal years 1997, 1996 and 1995:
Number of Range of per
shares share option prices
Shares under option at
December 31, 1994 678,525 $3.56-$5.83
Granted 144,300 6.50
Exercised (117,276) 9.83-14.50
Shares under option at
December 30, 1995 705,549 4.17-6.50
Granted 132,900 10.50
Exercised (166,950) 9.83-11.00
Forfeited (2,799) 5.09
Shares under option at
December 28, 1996 668,700 4.17-10.50
Granted 143,700 9.67
Exercised (173,100) 9.33-16.33
Shares under option at
January 3, 1998 639,300 4.17-10.50
Shares reserved for grant at
January 3, 1998 372,900
Options granted in
January 1998 151,500 $15.00
When options were exercised, the Company realized certain income tax
benefits. These benefits resulted in a decrease in current income taxes
payable and a corresponding increase in additional paid-in capital.
Nonqualified stock options exercisable at January 3, 1998 were 341,150
shares.
(X) 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 3, 1998 and December 28, 1996, no shares of preferred stock were
issued and outstanding.
The Company also has 1,000,000 shares of $0.05 par value class B
preferred stock authorized, none of which have 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.
(XI) 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 dividend
distribution date have been restated to retroactively reflect the stock
split. At January 3, 1998, of the 20,000,000 shares of common stock
authorized, 8,750,342 shares were issued and 6,811,879 shares were
outstanding.
All common shares issued and issuable include one associated common
stock purchase right which entitles shareholders to purchase one share of
common stock from the Company at an exercise price equivalent to $14 per
share. The rights become exercisable after a person acquires beneficial
ownership of 20% or more of the Company's common stock. The rights do not
have any voting rights and may be redeemed at a price of $0.0067 per
right. At January 3, 1998, approximately 9,762,000 shares of common stock
were reserved for issuance upon exercise of the rights. Under certain
circumstances, the rights may be exchanged at a ratio of one share per
right. The rights expire on January 6, 1999. Upon the occurrence of
certain defined events, the rights will be modified to entitle the holder
(other than an "acquiring person") to purchase the shares of common stock
of the Company or of such acquiring person having a market value of two
times the exercise price of the rights.
Unaudited Quarterly Financial Information
The Company generally includes sixteen weeks in its first quarter and
twelve weeks in each subsequent quarter. In fiscal year 1997, the fourth
quarter consisted of thirteen weeks. Summarized quarterly and annual
financial information for fiscal years 1997 and 1996 follows:
(dollars in
thousands, except
per share data) Fiscal Year Ended January 3, 1998
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 7,200,000 7,164,000 6,823,000 7,161,000 7,148,000
(dollars in thousands,
except per share data) Fiscal Year Ended December 28, 1996
First Second Third Fourth Year
Net Sales $134,079 $105,544 $105,383 $108,915 $453,921
Gross profit 21,531 17,005 16,646 17,247 72,429
Net earnings 1,261 1,576 1,472 2,156 6,465
Earnings per share-
basic 0.18 0.23 0.21 0.31 0.93
Earnings per share-
diluted 0.17 0.22 0.21 0.30 0.90
Weighted average shares
and equivalents
outstanding 7,245,000 7,161,000 7,142,000 7,172,000 7,187,000
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 1,025
beneficial holders of the Company's common stock. An analysis of high and
low last sale stock prices by quarter and for the last three years are as
follows:
<TABLE>
<CAPTION>
First Second Third Fourth Year
High Low High Low High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
1995 7.67 6.50 7.67 7.17 10.00 7.58 10.33 9.50 10.33 6.50
</TABLE>
Cash dividends paid per share were:
<TABLE>
<CAPTION>
First Second Third Fourth Year
<S> <C> <C> <C> <C>
1997 $0.067 $0.066 $0.070 $0.070 $0.273
1996 0.053 0.053 0.067 0.067 0.240
1995 0.020 0.020 0.053 0.054 0.147
</TABLE>
Under the Company's loan agreements, $8,469,000 of retained earnings
were available for the payment of cash dividends, stock repurchases and
other restricted payments at January 3, 1998.
* 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 and the two-for-one stock split
effected in the form of a 100% stock dividend on September 15, 1995.
EXHIBIT 21
SUBSIDIARY OF REGISTRANT
The only subsidiary of Schultz Sav-O Stores, Inc. is PW
Trucking, Inc., a Wisconsin corporation.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Schultz Sav-O Stores, Inc.:
As independent public accountants, we hereby consent to the incorporation
of our reports, included and incorporated by reference in this Form 10-K,
into the Company's previously filed Form S-8 Registration Statement, File
No. 33-34991.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
March 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SCHULTZ SAV-O STORES, INC. AS OF AND FOR THE
53 WEEKS ENDED JANUARY 3, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> JAN-03-1998
<CASH> 23,124,000
<SECURITIES> 0
<RECEIVABLES> 9,718,000<F1>
<ALLOWANCES> 0<F2>
<INVENTORY> 21,741,000
<CURRENT-ASSETS> 62,349,000
<PP&E> 57,383,000
<DEPRECIATION> 34,704,000
<TOTAL-ASSETS> 98,866,000
<CURRENT-LIABILITIES> 33,132,000
<BONDS> 3,165,000
438,000
0
<COMMON> 0
<OTHER-SE> 49,946,000
<TOTAL-LIABILITY-AND-EQUITY> 98,866,000
<SALES> 473,006,000
<TOTAL-REVENUES> 473,006,000
<CGS> 399,099,000
<TOTAL-COSTS> 0<F2>
<OTHER-EXPENSES> 61,799,000<F2>
<LOSS-PROVISION> 0<F2>
<INTEREST-EXPENSE> 847,000
<INCOME-PRETAX> 12,418,000
<INCOME-TAX> 4,781,000
<INCOME-CONTINUING> 7,637,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,637,000
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.06
<FN>
<F1>Net of "Allowances for doubtful accounts"
<F2>Amounts included in "Other costs and expenses".
</FN>
</TABLE>
