<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period (12 weeks) ended September 6, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from to
------------------- ---------------------
Commission file number 1-10876
-------
SHOPKO STORES, INC.
(Exact name of registrant as specified in its Charter)
Minnesota 41-0985054
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
700 Pilgrim Way, Green Bay, Wisconsin 54304
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (920) 497-2211
--------------
Former name, former address and former fiscal year, if changed since last
report:
N/A
- --------------------------------------------------------------------------------
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 report(s), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
The number of shares outstanding of each of the issuer's classes of Common
Stock as of October 3, 1997 is as follows:
Title of Each Class Shares Outstanding
------------------- ------------------
Common Shares 25,722,024
Exhibit Index Page 1 of Page 27
on Page 24
<PAGE> 2
SHOPKO STORES, INC.
FORM 10-Q
FOR THE 28 WEEKS ENDED SEPTEMBER 6, 1997
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I Item 1 - Financial Statements
Consolidated Statements of Earnings for the 12 weeks 3
ended September 6, 1997 and September 7, 1996
Consolidated Statements of Earnings for the 28 weeks 4
ended September 6, 1997 and September 7, 1996
Consolidated Balance Sheets as of September 6, 5
1997, September 7, 1996 and February 22, 1997
Consolidated Statements of Cash Flows for the 28 6
weeks ended September 6, 1997 and September 7,
1996
Consolidated Statements of Shareholders' Equity for 7
the 28 weeks ended September 6, 1997 and for the
year ended February 22, 1997
Notes to Consolidated Financial Statements 8-10
Item 2 - Management's Discussion and Analysis of Financial 11-18
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosure About 18
Market Risk (not applicable)
Part II Item 2 - Changes in Securities 19
Item 4 - Submission of Matters to a Vote of Security Holders 20
Item 5 - Other Information 21
Item 6 - Exhibits and Reports on Form 8-K 21-22
Signatures 23
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Second Quarter (12 Weeks) Ended
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
September 6, September 7, % Increase
1997 1996 (Decrease)
- ------------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Net sales $ 546,106 $ 498,517 9.5
Licensed department rentals and other income 2,900 2,924
------------ ------------
549,006 501,441 9.5
Costs and expenses:
Cost of Sales 426,254 385,543
Selling, general and administrative expenses 94,064 87,978
Depreciation and amortization expenses 13,927 13,983
------------ ------------
534,245 487,504 9.6
Income from operations 14,761 13,937 5.9
Interest expense 7,888 7,478
------------ ------------
Earnings before income taxes 6,873 6,459 6.4
Provision for income taxes 2,700 2,537
------------ ------------
Net earnings $ 4,173 $ 3,922 6.4
============ ============
Basic net earnings per common share $ 0.15 $ 0.12
============ ============
Weighted average number of common shares
outstanding 26,975 32,052
Diluted net earnings per common share $ 0.15 $ 0.12
============ ============
Adjusted average number of common shares
outstanding 27,831 32,472
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Year To Date (28 Weeks) Ended
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
September 6, September 7, % Increase
1997 1996 (Decrease)
- ------------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Net sales $ 1,266,074 $ 1,109,428 14.1
Licensed department rentals and other income 6,743 6,755
-------------- -------------
1,272,817 1,116,183 14.0
Costs and expenses:
Cost of Sales 982,639 850,063
Selling, general and administrative expenses 218,216 201,366
Nonrecurring charge 2,800 --
Depreciation and amortization expenses 33,456 31,810
-------------- -------------
1,237,111 1,083,239 14.2
Income from operations 35,706 32,944 8.4
Interest expense 16,913 17,000
-------------- -------------
Earnings before income taxes 18,793 15,944 17.9
Provision for income taxes 7,382 6,263
-------------- -------------
Net earnings $ 11,411 $ 9,681 17.9
============== =============
Basic net earnings per common share $ 0.38 $ 0.30
============== =============
Weighted average number of common shares
outstanding 29,983 32,052
Diluted net earnings per common share $ 0.37 $ 0.30
============== =============
Adjusted average number of common shares
outstanding 30,675 32,472
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Second Quarter as of Fiscal Year End
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
September 6, September 7, February 22,
ASSETS 1997 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 9,248 $ 52,023 $ 124,550
Receivables, less allowance for losses of
$6,086, $3,870 and $5,585, respectively 85,206 70,924 95,178
Merchandise inventories 368,391 374,125 334,962
Other current assets 20,874 17,922 10,482
----------------- ---------------- ----------------
Total current assets 483,719 514,994 565,172
Other assets and deferred charges 6,556 5,637 5,558
Intangible assets - net 70,014 50,965 60,330
Property and equipment at cost:
Land 107,982 108,491 107,982
Buildings 492,313 489,147 492,001
Equipment 330,331 299,520 313,505
Leasehold improvements 50,231 48,846 49,929
Property under construction 1,214 782 2,219
Property under capital leases 26,419 21,968 26,419
----------------- ---------------- ----------------
1,008,490 968,754 992,055
Less accumulated depreciation and amortization:
Property and equipment 413,633 359,562 380,643
Property under capital leases 9,993 8,359 8,580
----------------- ---------------- ----------------
Net property and equipment 584,864 600,833 602,832
----------------- ---------------- ----------------
Total assets $ 1,145,153 $ 1,172,429 $ 1,233,892
================= ================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable - trade $ 186,362 $ 174,364 $ 165,712
Accrued compensation and related taxes 32,978 23,441 34,861
Accrued other liabilities 105,705 89,848 113,064
Accrued income and other taxes 19,822 21,312 17,664
Current portion of long-term obligations 2,014 1,096 2,014
----------------- ---------------- ----------------
Total current liabilities 346,881 310,061 333,315
Long-term obligations 417,690 414,849 418,714
Deferred income taxes 24,090 22,753 20,999
Shareholders' equity:
Common stock 339 321 322
Additional paid-in capital 281,399 244,339 245,137
Retained earnings 226,904 180,106 215,405
Less treasury stock (152,150) -- --
----------------- ---------------- ----------------
Total shareholders' equity 356,492 424,766 460,864
----------------- ---------------- ----------------
Total liabilities and shareholders' equity $ 1,145,153 $ 1,172,429 $ 1,233,892
================= ================ ================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Year to Date (28 weeks) Ended
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands)
September 6, September 7,
1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 11,411 $ 9,681
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 33,456 31,810
Provision for losses on receivables 215 132
Gain on sale of property and equipment (1,031)
Deferred income taxes 1,497 1,680
Change in assets and liabilities:
Receivables 10,388 (15,342)
Merchandise inventories (33,429) (51,692)
Other current assets (8,730) (8,303)
Other assets and intangibles 41 (2,679)
Accounts payable 20,716 29,726
Accrued liabilities (5,338) 19,559
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 30,227 13,541
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Payments for property and equipment (10,685) (15,013)
Proceeds from the sale of property and equipment 1,472
Business acquisition, net of cash acquired (13,215) (30,500)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (23,900) (44,041)
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Change in common stock from stock options 9,941 485
Change in common stock from public offering 23,419
Purchase of treasury stock (152,150)
Dividend payment (7,050)
Reduction in capital leases and debt (2,839) (381)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash (used in) financing activities (121,629) (6,946)
- -----------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (115,302) (37,446)
Cash and cash equivalents at beginning of year 124,550 89,469
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of second quarter $ 9,248 $ 52,023
=============================================================================================================================
Supplemental cash flow information:
Noncash investing and financial activities -
Restricted stock issued $ 1,012
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Common Stock Capital in Treasury Stock
--------------------- Excess of Retained -----------------
Shares Amount Par Value Earnings Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT FEBRUARY 24, 1996 32,005 $ 320 $ 242,843 $ 178,468
Net earnings 44,946
Sale of common stock under option plans 97 1 1,248
Income tax benefit related to stock options 35
Issuance of restricted stock 65 1 1,011 (1,012)
Restricted stock expense 63
Cash dividend declared on common
stock - $0.22 per share (7,060)
--------------------------------------------------------------------------------------
BALANCES AT FEBRUARY 22, 1997 32,167 322 245,137 215,405
Net earnings 11,411
Sale of common stock under option plans 706 7 9,934
Sale of common stock in public offering 984 10 23,409
Income tax benefit related to stock options 2,749
Remeasurement of restricted stock 170 (170)
Restricted stock expense 258
Purchase of Treasury Stock (8,174) $(152,150)
--------------------------------------------------------------------------------------
BALANCES AT SEPTEMBER 6, 1997 33,857 $ 339 $ 281,399 $ 226,904 (8,174) $(152,150)
======================================================================================
</TABLE>
Interim data subject to year end audit.
See notes to consolidated financial statements.
7
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Policies:
The Company's 1997 Annual Report on Form 10-K contains a summary of significant
accounting policies which includes the consolidated financial statements and
the notes to the consolidated financial statements. The same accounting
policies are followed in the preparation of interim reports.
During the current fiscal year, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 128, "Earnings Per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure." SFAS No. 128 specifies
the computation, presentation and disclosure requirements for earnings per
share. The required disclosures are displayed on the Company's Statements of
Earnings. SFAS No. 129 requires an entity to explain the pertinent rights and
privileges of the various securities outstanding. SFAS No. 129 has no impact
on the Company's financial statements. In 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information." Both statements must be adopted by
the Company beginning February 1, 1998. However, early adoption is permitted.
The Company is currently evaluating the impact of these statements on the
consolidated financial statements.
Inventories:
The Company uses the LIFO method for substantially all inventories. If the
first-in, first-out (FIFO) method had been used, these inventories would have
been $44.2 million and $41.2 million higher at September 6, 1997 and at
September 7, 1996, respectively.
Intangible Assets:
The excess of cost over fair value of the net assets of businesses acquired is
amortized using the straight-line method over 20 to 22 years. Accumulated
amortization for these costs was $4.1 million and $1.4 million at September 6,
1997 and September 7, 1996, respectively.
Income Taxes:
The provision for income tax expense for the first half of fiscal 1998 was $7.4
million, of which $5.9 million is current and $1.5 million is deferred tax
expense, respectively. Deferred income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
<PAGE> 9
Net Earnings Per Common Share:
Basic net earnings per common share are computed by dividing net earnings by
the weighted average number of common shares outstanding. Diluted net earnings
per common share are computed by dividing net earnings by the weighted average
number of common shares outstanding increased by the number of dilutive
potential common shares based on the treasury stock method.
Acquisition:
On August 20, 1997, ProVantage acquired The Mikalix Group, Inc. and its
subsidiaries ("Mikalix"), an international privately held group of companies
based in Alexandria, Virginia. Mikalix's primary subsidiary is PharMark
Corporation ("PharMark"), a software and database development company providing
information driven strategies for optimizing medical and pharmaceutical
outcomes. The purchase price for Mikalix was approximately $15.2 million, of
which $13.2 million was paid in cash and $2.0 million is due over the next two
years. The sellers of Mikalix may also be entitled to contingent payments of
up to $8.0 million in the aggregate based on future increases in the market
value of ProVantage's outstanding common stock (the "Contingent Payments").
The Contingent Payments, if any, will be due on the first to occur of August
20, 2002 and certain liquidity events related to ProVantage. The Contingent
Payments may be made, at ProVantage's election, in either cash, Company common
stock, or ProVantage common stock; provided, however, that any stock used for
such payments must be traded in a public market.
<PAGE> 10
Significant Events:
On April 24, 1997, the Company and Supervalu Inc. ("Supervalu") entered into an
agreement pursuant to which Supervalu exited its 46% investment in the Company.
Under the terms of the agreement, the companies completed two simultaneous
transactions. The first transaction was a $150.0 million stock buyback,
whereby the Company repurchased 8,174,387 shares of its common stock held by
Supervalu for $18.35 per share. The second transaction was a secondary public
offering of Supervalu's remaining 6,557,280 shares of the Company's common
stock and 983,592 additional shares which were issued by the Company to cover
over-allotments. The secondary offering was priced at $25.00 per share on June
26, 1997. The stock buyback and secondary offering were completed on July 2,
1997. The Company received $23.4 million proceeds from the sale of the
over-allotment shares. Supervalu paid the underwriting discount for the shares
it sold and certain other expenses related to the secondary offering. However,
the Company and Supervalu each agreed to bear the costs and expenses of their
own counsel.
On August 13, 1997, the Company approved a change in its fiscal year. The
Company's fiscal year will now end on the Saturday closest to the end of
January, commencing with the fiscal year ending January 31, 1998. This change
will conform the Company's fiscal year to the National Retail Federation Retail
Calendar. The transition period will be reported on Form 10-K.
Statement of Registrant:
The data presented herein is unaudited, but in the opinion of management,
includes all adjustments (which consist only of normal recurring accruals)
necessary for a fair presentation of the consolidated financial position of the
Company and its subsidiaries at September 6, 1997 and September 7, 1996 and the
results of their operations and cash flows for the periods then ended. These
interim results are not necessarily indicative of the results of the fiscal
years as a whole because the operations of the Company are highly seasonal.
The third and fourth fiscal quarters contribute a significant part of the
Company's earnings due to the Christmas selling season.
<PAGE> 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth items from the Company's unaudited consolidated
financial statements for the second quarter and first half of fiscal 1998 and
1997 as a percentage of net sales:
<TABLE>
<CAPTION>
Second Quarter First Half
-------------- ----------
Fiscal Fiscal Fiscal Fiscal
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues
Net sales 100.0% 100.0% 100.0% 100.0%
Licensed department rentals and other 0.5 0.6 0.5 0.6
income
----- ----- ----- -----
100.5 100.6 100.5 100.6
Costs and expenses
Cost of sales 78.1 77.3 77.6 76.6
Selling, general and administrative 17.2 17.7 17.2 18.1
expenses
Nonrecurring charge 0.0 0.0 0.2 0.0
Depreciation and amortization expenses 2.6 2.8 2.7 2.9
----- ----- ----- -----
97.8 97.8 97.7 97.6
Income from operations 2.7 2.8 2.8 3.0
Interest expense 1.4 1.5 1.3 1.5
----- ----- ----- -----
Earnings before income taxes 1.3 1.3 1.5 1.5
Provision for income taxes 0.5 0.5 0.6 0.6
----- ----- ----- -----
Net earnings 0.8% 0.8% 0.9% 0.9%
===== ===== ===== =====
</TABLE>
The Company has two business segments: a Retail Store segment (which includes
general merchandise, retail pharmacy and retail optical operations) and a
ProVantage segment (which includes prescription benefit management, mail
service pharmacy, vision benefit management and healthcare information
technology). Intercompany sales, which consist of prescriptions that were both
sold at a ShopKo pharmacy and processed by ProVantage, have been eliminated.
<PAGE> 12
The following tables set forth items from the Company's business segments as
percentages of net sales:
RETAIL STORE SEGMENT
<TABLE>
<CAPTION>
Second Quarter First Half
-------------- ----------
Fiscal Fiscal Fiscal Fiscal
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Licensed departmental rentals and other 0.6 0.6 0.6 0.7
income
------ ----- ----- -----
100.6 100.6 100.6 100.7
Costs and expenses
Cost of sales 74.5 74.9 73.9 74.5
Selling, general and administrative 19.3 19.1 19.4 19.3
expenses
Depreciation and amortization expenses 2.9 3.1 3.1 3.2
----- ----- ----- -----
96.8 97.1 96.4 96.9
Income from operations 3.9 % 3.6 % 4.2 % 3.7 %
</TABLE>
PROVANTAGE SEGMENT
<TABLE>
<CAPTION>
Second Quarter First Half
-------------- ----------
Fiscal Fiscal Fiscal Fiscal
1998 1997 1998 1997
------ ------ ------ -------
<S> <C> <C> <C> <C>
Revenues
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Licensed department rentals and other 0.2 0.2 0.2 0.2
income
----- ----- ----- -----
100.2 100.2 100.2 100.2
Costs and expenses
Cost of sales 93.5 93.1 93.3 92.9
Selling, general and administrative 3.6 3.2 3.6 3.1
expenses
Depreciation and amortization expenses 0.8 0.6 0.8 0.5
----- ----- ----- -----
98.0 96.9 97.7 96.4
Income from operations 2.2 % 3.3 % 2.5 % 3.8 %
</TABLE>
<PAGE> 13
Net Sales
The following table presents the Company's consolidated net sales for the
second quarter and first half of fiscal 1998 and fiscal 1997:
<TABLE>
<CAPTION>
SECOND QUARTER % INCREASE/
-------------- -----------
(DECREASE)
----------
FISCAL FISCAL
1998 1997 TOTAL COMP
---- ---- ----- ----
<S> <C> <C> <C> <C>
Retail Store $442.9 $430.2 3.0 2.8
ProVantage 109.3 72.8 50.0 N/A
Intercompany (6.1) (4.5) N/A N/A
----- ----- --- ---
Consolidated $546.1 $498.5 9.5
====== ====== ===
</TABLE>
<TABLE>
<CAPTION>
FIRST HALF % INCREASE/
---------- -----------
(DECREASE)
----------
FISCAL FISCAL
1998 1997 TOTAL COMP
---- ---- ----- ----
<S> <C> <C> <C> <C>
Retail Store $1,020.3 $976.8 4.4 4.1
ProVantage 259.4 142.3 82.3 N/A
Intercompany (13.6) (9.7) N/A N/A
------ ----- --- ---
Consolidated $1,266.1 $1,109.4 14.1
======== ======== ====
</TABLE>
The 2.8% increase in second quarter retail comparable store sales are derived
from increases in the following categories: Retail Health - 10.3%, Apparel -
2.1% and Hardlines/Home - 0.3%. The 4.1% increase in first half retail
comparable store sales are derived from increases in the following categories:
Retail Health - 10.8%, Apparel - 4.4% and Hardlines/Home - 1.1%. Changes in
retail comparable store sales are based upon those stores which were open for
the entire preceding fiscal year.
The increase in ProVantage sales in the second quarter and first half is due
primarily to internally generated growth and the acquisition of CareStream
Scrip Card in August 1996. Included in ProVantage sales are amounts billed to
insurance companies, third party administrators and self-funded medical plan
sponsors and the amounts billed to pharmaceutical manufacturers and third party
formulary administrators for formulary fees.
<PAGE> 14
Since the second quarter of last year, the Company opened four Vision Advantage
free-standing optical centers as part of a new retail format. Two Vision
Advantage Stores were opened during the third quarter and another two were
opened during the fourth quarter of fiscal 1997. This format focuses on
providing value-priced, high quality eye wear that can be manufactured in about
an hour.
Gross Margin:
The following table sets forth gross margin as a percent of net sales:
<TABLE>
<CAPTION>
Second Quarter
--------------
Retail Store ProVantage Consolidated
------------ ---------- ------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross margin percent 25.5 % 25.1 % 6.5 % 6.9 % 21.9 % 22.7 %
Gross margin percent prior
to LIFO charge 25.7 % 25.3 % N/A N/A 22.1 % 22.8 %
<CAPTION>
First Half
----------
Retail Store ProVantage Consolidated
------------ ---------- ------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross margin percent 26.1 % 25.5 % 6.7 % 7.1 % 22.4 % 23.4 %
Gross margin percent prior
to LIFO charge 26.3 % 25.7 % N/A N/A 22.6 % 23.6 %
</TABLE>
The increase in the retail store gross margin rate in the second quarter and
first half is primarily due to a shift in the sales mix away from lower gross
margin promotional sales. ProVantage's decrease in the second quarter and first
half is primarily attributable to a larger percentage of its sales coming from
the lower gross margin claims processing activities. The retail store and
consolidated gross margin percentages for the second quarter and first half
reflect LIFO charges of $1.1 million and $2.4 million, respectively. This is
compared to the prior year's LIFO expense of $0.8 million in the second quarter
and $1.9 million in the first half.
<PAGE> 15
Selling, General and Administrative Expenses:
Consolidated selling, general and administrative expenses as a percentage of
sales decreased to 17.2 percent for the second quarter this year from 17.7
percent last year. The decrease is primarily due to the leveraging of expenses
on increased sales. The retail selling, general and administrative expenses
were 19.3 percent of net sales compared with 19.1 percent last year. The
increase is primarily due to increased costs related to investment in
information systems technology. ProVantage selling, general and administrative
expenses were 3.6 percent of net sales compared with 3.2 percent last year.
This increase is primarily due to costs associated with building an
infrastructure to support continued growth. For the first half, consolidated
selling, general and administrative expenses decreased to 17.2% of sales from
18.1% of sales last year. The decrease is primarily due to increased
ProVantage sales. Retail selling, general and administrative expenses were
19.4 of net sales compared with 19.3 percent last year. ProVantage selling,
general and administrative expenses were 3.6 percent of net sales compared with
3.1 percent last year.
Interest Expense:
Interest expense for the second quarter and first half was 1.4 percent of sales
and 1.3 percent of sales, respectively. This is compared to the prior year's
1.5 percent of sales in both the second quarter and first half of last year.
The decrease is primarily due to increased sales.
Liquidity and Capital Resources:
The Company relies primarily on cash generated from its operations, with its
remaining funding requirements being met from short-term and long-term
borrowings. Cash provided from operating activities was $30.2 million for the
first half of fiscal 1998 compared to $13.5 million for the same period last
year. The increase is primarily due to better utilization of working capital
pertaining to inventory net of accounts payable. The Company had no borrowings
outstanding under its revolving credit agreement at the end of the first half
of both fiscal 1998 and fiscal 1997.
Funds generated from operations, and if necessary, the Company's revolving
credit agreement are expected to fund the projected working capital needs and
total capital expenditures through fiscal 1998. The Company did not require
additional indebtedness to fund the stock repurchase from Supervalu, Inc.
("Supervalu"). The Company entered into a new $200 million revolving credit
facility on July 8, 1997. The new facility, effective through January 31,
2002, has terms and conditions similar to those of the prior credit agreement.
<PAGE> 16
The Company's principal use of cash is for the purchase of property, equipment
and systems technology. The Company spent $10.7 million on capital
expenditures (net of acquisitions) in the first half of fiscal 1998, compared
to $15.0 million (net of acquisitions) for the same period last year. The
Company's total capital expenditures for fiscal 1998 are anticipated to
approximate $40.0 to $50.0 million, the majority of which would relate to
existing retail business to support ongoing replacements, merchandise
initiatives and continued investment in systems technology, excluding capital
required for acquisitions of businesses or real estate. Such plans may be
reviewed and revised from time to time in light of changing conditions.
The Company expects to pursue growth of its retail store business through
acquisition of existing retail stores or businesses. The Company may also
consider the acquisition of health services businesses. Such plans may be
reviewed and revised from time to time in light of changing conditions.
Depending upon the size and structure of any such acquisitions, the Company may
require additional capital resources. The Company believes that adequate
sources of capital will be available.
On October 4, 1996, the Company and the founders of Bravell entered into an
agreement whereby the Company (i) acquired the remaining 3% of the common stock
of Bravell which the Company did not acquire in January 1995, (ii) extinguished
all remaining contingent payment obligations to the founders, and (iii)
terminated the founders' employment agreements. On April 10, 1997, the Company
satisfied its obligations under this agreement by making a payment of
approximately $8.9 million to the founders.
<PAGE> 17
On August 20, 1997, ProVantage acquired The Mikalix Group, Inc. and its
subsidiaries ("Mikalix"), an international privately held group of companies
based in Alexandria, Virginia. Mikalix's primary subsidiary is PharMark
Corporation ("PharMark"), a software and database development company providing
information driven strategies for optimizing medical and pharmaceutical
outcomes. PharMark has two primary products. The first is RATIONALMED, a
retrospective drug utilization review software product which is used to monitor
misused or misprescribed medications. Its 8,000 rules generate approximately
25,000 alerts to physicians per month. The second is EPIMED, an outcomes
research software product supporting access to a global health care database
with medical and drug data. RATIONALMED and EPIMED cover approximately 19.1
million lives. These products are sold outside the United States by the
subsidiary euroPharMark, Ltd. The purchase price for Mikalix was
approximately $15.2 million, of which $13.2 million was paid in cash and $2.0
million is due over the next two years. The sellers of Mikalix may also be
entitled to contingent payments of up to $8.0 million in the aggregate based on
future increases in the market value of ProVantage's outstanding common stock
(the "Contingent Payments"). The Contingent Payments, if any, will be due on
the first to occur of August 20, 2002 and certain liquidity events related to
ProVantage. The Contingent Payments may be made, at ProVantage's election, in
either cash, Company common stock, or ProVantage common stock; provided,
however, that any stock used for such payments must be traded in a public
market.
Termination of Plan of Reorganization:
On September 7, 1996, the Company entered into a Plan of Reorganization with
Phar-Mor, Inc. ("Phar-Mor") and Cabot Noble, Inc. ("Cabot Noble"). Pursuant to
the Plan of Reorganization, the Company and Phar-Mor would have become
subsidiaries of Cabot Noble. On April 2, 1997, the Company, Cabot Noble and
Phar-Mor mutually agreed to terminate this planned business combination. The
Company recorded a nonrecurring pre-tax charge of $2.8 million ($0.05 per
share) during the first quarter of fiscal 1998 for costs incurred in connection
with the terminated business combination.
Stock Buyback Agreement:
On April 24, 1997, the Company and Supervalu entered into an agreement pursuant
to which Supervalu exited its 46% investment in the Company. See "Significant
Events" in Notes to Consolidated Financial Statements in Item 1.
Change in Fiscal Calendar:
On August 13, 1997, the Company approved a change in the fiscal year calendar.
See "Significant Events" in Notes to Consolidated Financial Statements in Item
1.
<PAGE> 18
Inflation:
Inflation has and is expected to have only a minor effect on the results of
operations of the Company and its internal and external sources of liquidity.
Forward-Looking Statements:
Item 2 of this Form 10-Q, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward-looking statements within
the meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements include, without
limitation, statements regarding growth and capital expenditure plans and
capital requirements. Such statements are subject to important factors which
could cause the Company's actual results to differ materially from those
anticipated by the forward-looking statements. These factors include those
referenced in the Company's current Annual Report on Form 10-K or as may be
described from time to time in the Company's subsequent SEC filings.
Item 3: Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
<PAGE> 19
PART II - OTHER INFORMATION
Item 2. Changes in Securities
(a) The Company's Restated Articles of Incorporation (the "Restated Articles")
provide that if Supervalu's beneficial ownership of shares of the Company's
Common Stock is reduced to less than 15% through a public distribution effected
by a sale, dividend or other distribution, a supermajority vote will be
required for certain business combinations involving the Company. The
completion of the secondary offering by Supervalu on July 2, 1997 caused these
provisions to come into effect. Under such provisions, the Restated Articles
require, with certain exceptions, the affirmative vote of 75% of the Company's
voting stock to effect a merger, sale or lease of substantially all of the
assets of the Company, the issuance or transfer of securities of the Company or
certain other transactions, where the other party to the transaction is the
beneficial owner of 5% or more of the Company's outstanding voting stock. In
addition, each such covered transaction, with certain exceptions, must be
approved by a majority of the outstanding voting stock of the Company,
excluding the voting stock beneficially owned by the other party to the
transaction. Any amendment, change or repeal of this provision of the Restated
Articles would require the affirmative vote of 75% of the outstanding voting
stock, and a majority of the outstanding shares of voting stock excluding
voting stock beneficially owned by any party which is the beneficial owner of
5% or more of the outstanding voting stock.
(b) On July 2, 1997, a dividend of one preferred share purchase right (a
"Right") for each outstanding share of the Company's Common Stock was issued to
the shareholders of record at the close of business on such date. The
description and terms of the Rights are set forth in the Rights Agreement
between the Company and Norwest Bank Minnesota, N.A., as agent, dated as of
July 3, 1992 ("the Rights Agreement"). A more complete description of the
Rights and the Rights Agreement is contained in the Company's Current Report on
Form 8-K dated June 26, 1997 and the exhibits thereto which are incorporated
herein by reference.
(c) On September 24, 1997, the Board of Directors approved the amendment and
restatement of the Rights Agreement. The amendment and restatement increased
the purchase price (as defined therein) from $65.00 to $100.00, lowered the
threshold for a so-called "flip in" from 30% to 15%, and extended the final
expiration date from April 15, 2002 to September 23, 2007. A more complete
description of the amendment and restatement is contained in the Company's
Current Report on Form 8-K dated September 24, 1997 and exhibits thereto which
are incorporated by reference herein.
(d) On September 24, 1997, the Board of Directors of the Company approved the
reincorporation of the Company into Wisconsin from Minnesota. The
reincorporation proposal will be submitted to shareholders for approval at the
1998 Annual Meeting of Shareholders.
<PAGE> 20
(e) On August 20, 1997, ProVantage acquired Mikalix as described under Item 2
of this Form 10-Q which description is incorporated by reference herein. The
securities which may be issued to the sellers of Mikalix were sold in reliance
on Section 4(2) of the Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its 1997 Annual Meeting of Shareholders on
August 13, 1997.
(b) Votes cast for the election of directors at the 1997 Annual
Meeting were as follows:
Mr. Podany:
For 21,904,409
Withheld Authority 197,287
Mr. Eugster:
For 21,906,831
Withheld Authority 194,865
Mr. Watson
For 21,905,547
Withheld Authority 196,149
Messrs. Wright, Girard, Kramer and Tyrrell terms of office as directors
continued after the 1997 Annual Meeting of Shareholders. Subsequent to the
1997 Annual Meeting, Mr. Wright resigned from the Board, and Dr. Reinertsen
joined the Board.
<PAGE> 21
Votes cast to ratify the appointment of Deloitte & Touche LLP as the Company's
auditors for the fiscal year ending January 31, 1998 were as follows:
For 22,079,788
Against 5,400
Abstain 16,508
Broker Non-Vote 0
Item 5. Other Information
On July 2, 1997, Stephen E. Watson, retired President, Chairman/Chief Executive
Officer of the Department Store Division of Dayton Hudson Corporation, and
William J. Podany, the Company's Executive Vice President and Chief Operating
Officer, joined the Company's Board of Directors. Also on July 2, 1997, Dale
P. Kramer was named Chairman of the Board of Directors.
On August 20, 1997, Dr. James L. Reinertsen, M.D., Chief Executive Officer of
HealthSystem Minnesota and Chairman of the Institute for Clinical Systems
Integration joined the Company's Board of Directors. He replaced Michael W.
Wright, Chairman, President and Chief Executive Officer of Supervalu Inc., who
resigned from the Board pursuant to the terms of the Stock Buyback and
Secondary Offering Agreement between ShopKo and Supervalu.
On September 24, 1997, the Company extended beyond October 1, 1997 the
effective date of the resignation from the Board of Directors of Jeffrey C.
Girard. Mr. Girard, former Executive Vice President and Chief Financial
Officer of Supervalu, had previously submitted his resignation effective upon
the date a successor Board member is recruited or on October 1, 1997, whichever
occurred first, pursuant to the terms of the Secondary Offering and Stock
Buyback Agreement with Supervalu. Mr. Girard will remain on the Board until a
successor is identified.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 Credit Agreement dated as of July 8, 1997 among
ShopKo Stores, Inc., the Banks named therein and
Banker's Trust Company, as Agent (incorporated by
reference to the Company's Quarterly Report on Form
10-Q of the quarterly period (16 weeks) ended
June 14, 1997.)
<PAGE> 22
10.2 Agreement dated September 24, 1997 regarding
effectiveness of resignation of Jeffrey C.
Girard (incorporated by reference to the Company's
Current Report on Form 8-K dated September 24, 1997.)
10.3 Rights Agreement between ShopKo Stores and Norwest
Bank Minnesota, N.A. dated as of July 3, 1992,
as amended and restated as of September 24, 1997
(incorporated by reference to the Company's
Amendment No. 1 to Registration Statement on Form
8-A/A dated September 29, 1997.)
11 Computation of Earnings Per Common and Common
Equivalent Share.
12 Statements Re Computation of Ratios.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed Current Reports on Form 8-K in the second quarter of
fiscal 1998 as follows:
Date of Report Items Reported
- -------------- --------------
June 20, 1997 Items 5,7 - The Company announced
results of its first fiscal
quarter ended June 14, 1997.
June 26, 1997 Items 5,7 - The Company announced
the expected distribution of
one Right per share of
outstanding Company common
stock.
August 13, 1997 Item 8 - The Company approved a
change in its fiscal year to
conform to the National Retail
Federation Retail calendar.
August 20, 1997 Items 5,7 - The Company announced
that Dr. James L. Reinertsen,
M.D., had joined the Company's
Board of Directors and that
Mr. Wright had resigned from
the Board.
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHOPKO STORES, INC. (Registrant)
Date: October 17, 1997 By: /s/ Richard D. Schepp
---------------------------------
Richard D. Schepp
Vice President Legal
Affairs/Secretary
(Duly Authorized Officer of
Registrant)
Date: October 17, 1997 By: /s/ Jeffery R. Simons
---------------------------------
Jeffery R. Simons
Vice President and Controller
(Chief Accounting Officer and
Duly Authorized Officer of
Registrant)
<PAGE> 24
EXHIBIT INDEX
SHOPKO STORES, INC.
10-Q REPORT
<TABLE>
<CAPTION>
Exhibit Sequential
Number Exhibit Page Number
- ------ ------- -----------
<S> <C> <C>
10.1 Credit Agreement dated as of July 8, 1997
among ShopKo Stores, Inc., the Banks named
therein and Banker's Trust Company, as Agent
(incorporated by reference to the Company's
Quarterly Report on Form 10-Q of the quarterly
period (16 weeks) ended June 14, 1997.)
10.2 Agreement, dated September 24, 1997
regarding effectiveness of resignation of Jeffrey
C. Girard (incorporated by reference to the
Company's Current Report on Form 8-K dated
September 24, 1997.)
10.3 Rights Agreement between ShopKo Stores
and Norwest Bank Minnesota, N.A. dated as
of July 3, 1992, as amended and restated as
of September 24, 1997 (incorporated by
reference to the Company's Amendment No. 1
to Registration Statement on Form 8-A/A dated
September 29, 1997.)
11 Computation of Earnings Per Common and
Common Equivalent Share.
12 Statements Re Computation of Ratios.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
SHOPKO STORES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
First Half as of Fiscal Years Ended
-------------------------------------------------------------------------------------------------
September 6, September 7, February 22, February 24, February 25,
1997 1996 1997 1996 1995
(28 Weeks) (28 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BASIC:
Net earnings $ 11,411 $ 9,681 $ 44,946 $ 38,439 $ 37,790
=============== ============== ================= ==================== ===================
Weighted average number of
outstanding common shares 29,983 32,052 32,092 32,005 32,014
=============== ============== ================= ==================== ===================
Net earnings per common
share - basic (1) $ 0.38 $ 0.30 $ 1.40 $ 1.20 $ 1.18
=============== ============== ================= ==================== ===================
DILUTED:
Net earnings $ 11,411 $ 9,681 $ 44,946 $ 38,439 $ 37,790
=============== ============== ================= ==================== ===================
Weighted average number of
outstanding common shares 29,983 32,052 32,092 32,005 32,014
Number of common shares
issuable assuming exercise
of stock options 692 420 278 51 4
--------------- -------------- ----------------- -------------------- -------------------
Weighted average number of
outstanding common and
common equivalent shares -
assuming full dilution 30,675 32,472 32,370 32,056 32,018
=============== ============== ================= ==================== ===================
Net earnings per common
share - diluted (1) $ 0.37 $ 0.30 $ 1.39 $ 1.20 $ 1.18
=============== ============== ================= ==================== ===================
</TABLE>
(1) Earnings per share are computed by dividing net earnings by the weighted
average number of outstanding common and common equivalent shares.
<PAGE> 1
SHOPKO STORES, INC. AND SUBSIDIARIES
EXHIBIT 12 - STATEMENTS RE COMPUTATION OF RATIOS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
First Half as of Fiscal Years Ended
-----------------------------------------------------------------------------------------
September 6, September 7, February 22, February 24, February 25,
1997 1996 1997 1996 1995
(28 Weeks) (28 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges
----------------------------------
COMPUTATION OF EARNINGS
1 Pretax Income $ 18,793 $ 15,944 $ 74,022 $ 63,140 $ 62,418
2 Add previously capitalized interest
amortized during the period 298 295 548 540 503
3 Less interest capitalized during
the period 0 128 128 249 1,309
----------- ------------ ------------ ----------- ---------------
4 Total earnings (sum of lines 1 to 3) 19,091 16,111 74,442 63,431 61,612
COMPUTATION OF FIXED CHARGES
5 Interest (1) 16,913 17,128 31,905 34,531 30,351
6 Interest factor in rental expense 1,541 1,382 2,657 2,689 2,403
----------- ------------ ------------ ----------- ---------------
7 Total fixed charges (sum of lines
5 and 6) 18,454 18,510 34,562 37,220 32,754
8 TOTAL EARNINGS AND
FIXED CHARGES (LINE 4
PLUS LINE 7 $ 37,545 $ 34,621 $ 109,004 $ 100,651 $ 94,366
=========== ============ ============ =========== ===============
9 Ratio (line 8 divided by line 7) 2.0 1.9 3.2 2.7 2.9
</TABLE>
(1) Includes capitalized interest
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-23-1997
<PERIOD-END> SEP-06-1997
<CASH> 9,248
<SECURITIES> 0
<RECEIVABLES> 91,292
<ALLOWANCES> 6,086
<INVENTORY> 368,391
<CURRENT-ASSETS> 483,719
<PP&E> 1,008,490
<DEPRECIATION> 423,626
<TOTAL-ASSETS> 1,145,153
<CURRENT-LIABILITIES> 346,881
<BONDS> 0
0
0
<COMMON> 339
<OTHER-SE> 356,153
<TOTAL-LIABILITY-AND-EQUITY> 1,145,153
<SALES> 1,266,074
<TOTAL-REVENUES> 1,272,817
<CGS> 982,639
<TOTAL-COSTS> 1,237,111
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,913
<INCOME-PRETAX> 18,793
<INCOME-TAX> 7,382
<INCOME-CONTINUING> 11,411
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,411
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.37
</TABLE>
