<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 November 29, 1997
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 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 November 29, 1997 is as follows:
Title of Each Class Shares Outstanding
------------------- ------------------
Common Shares 25,742,496
Exhibit Index Page 1 of Page 26
on Page 23
<PAGE> 2
SHOPKO STORES, INC.
FORM 10-Q
FOR THE 12 WEEKS AND 40 WEEKS ENDED NOVEMBER 29, 1997
INDEX
Page
Part I Item 1 - Financial Statements
Consolidated Statements of Earnings for the 12 weeks 3
ended November 29, 1997 and November 30, 1996
Consolidated Statements of Earnings for the 40 weeks 4
ended November 29, 1997 and November 30, 1996
Consolidated Balance Sheets as of November 29, 5
1997, November 30, 1996 and February 22, 1997
Consolidated Statements of Cash Flows for the 40 6
weeks ended November 29, 1997 and November 30,
1996
Consolidated Statements of Shareholders' Equity for 7
the 40 weeks ended November 29, 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 11-19
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosure About 19
Market Risk (not applicable)
Part II Item 2 - Changes in Securities and Use of Proceeds 20
Item 5 - Other Information 20
Item 6 - Exhibits and Reports on Form 8-K 21
Signatures 22
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Third Quarter (12 Weeks) Ended
- -------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
November 29, November 30, % Increase
1997 1996 (Decrease)
- -------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Net sales $ 608,389 $ 591,208 2.9
Licensed department rentals and other income 2,853 3,168
----------- -----------
611,242 594,376 2.8
Costs and expenses:
Cost of sales 470,246 459,950
Selling, general and administrative expenses 98,154 94,146
Depreciation and amortization expenses 14,960 14,287
----------- -----------
583,360 568,383 2.6
Income from operations 27,882 25,993 7.3
Interest expense 8,265 7,983
----------- -----------
Earnings before income taxes 19,617 18,010 8.9
Provision for income taxes 7,705 7,074
----------- -----------
Net earnings $ 11,912 $ 10,936 8.9
=========== ===========
Basic net earnings per common share $ 0.46 $ 0.34
=========== ===========
Weighted average number of common shares
outstanding 25,718 32,073
Diluted net earnings per common share $ 0.45 $ 0.34
=========== ===========
Adjusted weighted average number of common shares
outstanding 26,468 32,413
</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 (40 Weeks) Ended
- ----------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
November 29, November 30, % Increase
1997 1996 (Decrease)
- ----------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Net sales $ 1,874,463 $ 1,700,636 10.2
Licensed department rentals and other income 9,596 9,923
----------- -----------
1,884,059 1,710,559 10.1
Costs and expenses:
Cost of sales 1,452,885 1,310,013
Selling, general and administrative expenses 316,370 295,512
Nonrecurring charge 2,800 -
Depreciation and amortization expenses 48,416 46,097
----------- -----------
1,820,471 1,651,622 10.2
Income from operations 63,588 58,937 7.9
Interest expense 25,178 24,983
----------- -----------
Earnings before income taxes 38,410 33,954 13.1
Provision for income taxes 15,087 13,337
----------- -----------
Net earnings $ 23,323 $ 20,617 13.1
=========== ===========
Basic net earnings per common share $ 0.81 $ 0.64
=========== ===========
Weighted average number of common shares
outstanding 28,704 32,073
Diluted net earnings per common share $ 0.79 $ 0.64
=========== ===========
Adjusted weighted average number of common shares
outstanding 29,415 32,413
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Third Quarter as of Fiscal Year End
- ---------------------------------------------------------------------------------------------------------
(In thousands)
November 29, November 30, February 22,
ASSETS 1997 1996 1997
- ---------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 18,469 $ 44,058 $ 124,550
Receivables, less allowance for losses of
$5,515, $4,460 and $5,585, respectively 91,362 94,924 95,178
Merchandise inventories 445,088 434,028 334,962
Other current assets 21,319 15,582 10,482
---------- ---------- ----------
Total current assets 576,238 588,592 565,172
Other assets and deferred charges 5,874 5,936 5,558
Intangible assets - net 69,789 50,908 60,330
Property and equipment at cost:
Land 107,982 108,237 107,982
Buildings 493,743 490,862 492,001
Equipment 341,414 304,311 313,505
Leasehold improvements 50,351 49,148 49,929
Property under construction 368 988 2,219
Property under capital leases 26,419 21,968 26,419
---------- ---------- ----------
1,020,277 975,514 992,055
Less accumulated depreciation and amortization:
Property and equipment 426,939 370,989 380,643
Property under capital leases 10,599 8,985 8,580
---------- ---------- ----------
Net property and equipment 582,739 595,540 602,832
---------- ---------- ----------
Total assets $1,234,640 $1,240,976 $1,233,892
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------
Current liabilities:
Short-term debt $ 5,000 $ - $ -
Accounts payable - trade 230,345 229,074 165,712
Accrued compensation and related taxes 35,494 26,969 34,861
Accrued other liabilities 123,090 81,375 113,064
Accrued income and other taxes 27,941 30,538 17,664
Current portion of long-term obligations 2,014 1,096 2,014
---------- ---------- ----------
Total current liabilities 423,884 369,052 333,315
Long-term obligations 417,252 414,505 418,714
Deferred income taxes 24,249 21,198 20,999
Shareholders' equity:
Common stock 339 321 322
Additional paid-in capital 282,168 244,841 245,137
Retained earnings 238,927 191,059 215,405
Less treasury stock (152,179) - -
---------- ---------- ----------
Total shareholders' equity 369,255 436,221 460,864
---------- ---------- ----------
Total liabilities and shareholders' equity $1,234,640 $1,240,976 $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 (40 weeks) Ended
- ---------------------------------------------------------------------------------------------
(In thousands)
November 29, November 30,
1997 1996
- ---------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 23,323 $ 20,617
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 48,416 46,097
Provision for losses on receivables (160) 165
Gain on sale of property and equipment (1,847)
Deferred income taxes 1,683 (102)
Change in assets and liabilities:
Receivables 4,607 (39,375)
Merchandise inventories (110,126) (111,595)
Other current assets (9,203) (5,736)
Other assets and intangibles 103 (3,592)
Accounts payable 64,699 84,436
Accrued liabilities 22,681 27,373
- ---------------------------------------------------------------------------------------------
Net cash provided by operating activities 46,023 16,441
- ---------------------------------------------------------------------------------------------
Cash flows from investing activities:
Payments for property and equipment (22,535) (23,572)
Proceeds from the sale of property and equipment 2,566
Business acquisition, net of cash acquired (13,215) (30,500)
- ---------------------------------------------------------------------------------------------
Net cash (used in) investing activities (35,750) (51,506)
- ---------------------------------------------------------------------------------------------
Cash flows from financing activities:
Change in short-term debt 5,000
Change in common stock from stock options 10,710 987
Change in common stock from public offering 23,419
Purchase of treasury stock (152,179)
Dividend payment (10,582)
Reduction in capital leases and debt (3,304) (751)
- ---------------------------------------------------------------------------------------------
Net cash (used in) financing activities (116,354) (10,346)
- ---------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (106,081) (45,411)
Cash and cash equivalents at beginning of year 124,550 89,469
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents at end of third quarter $ 18,469 $ 44,058
=============================================================================================
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 23,323
Sale of common stock under option plans 763 7 10,703
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 369
Purchase of Treasury Stock (8,174) $(152,179)
- ----------------------------------------------------------------------------------------------------------------
BALANCES AT NOVEMBER 29, 1997 33,914 $ 339 $282,168 $238,927 (8,174) $(152,179)
================================================================================================================
</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 $45.4 million and $42.1 million higher at November 29, 1997 and at
November 30, 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 $4.9 million and $2.0 million at November 29,
1997 and November 30, 1996, respectively.
8
<PAGE> 9
Income Taxes:
The provision for income tax expense for the first three quarters of fiscal
1998 was $15.1 million, of which $13.4 million is current and $1.7 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.
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.
Acquisitions:
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.
Subsequent Event:
On December 19, 1997, ShopKo acquired Penn-Daniels, Incorporated
("Penn-Daniels"), a retail chain headquartered in Quincy, Illinois for
approximately $18.0 million in cash and $43.0 million of assumed debt, of which
approximately $21.0 million was retired at the time of the closing. The
acquisition will be accounted for under the purchase method of accounting.
Penn-Daniels currently operates 18 Jacks discount stores in Iowa, Illinois and
Missouri and one Lots-A-Deals close-out store in Moline, Illinois. ShopKo
plans to convert the Jacks retail locations to ShopKo stores, including the
likely addition of in-store pharmacies and optical centers by July 1998, with
remerchandising and remodeling to begin in January 1998.
9
<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 November 29, 1997 and November 30, 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.
10
<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 third quarter and the first three quarters of
fiscal 1998 and 1997 as a percentage of net sales:
<TABLE>
<CAPTION>
Third Quarter Year to Date
----------------------- --------------------
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 income 0.5 0.5 0.5 0.6
------ ------ ------ ------
100.5 100.5 100.5 100.6
Costs and expenses
Cost of sales 77.3 77.8 77.5 77.0
Selling, general and administrative expenses 16.1 15.9 16.9 17.4
Nonrecurring charge 0.0 0.0 0.1 0.0
Depreciation and amortization expenses 2.5 2.4 2.6 2.7
------ ------ ------ ------
95.9 96.1 97.1 97.1
Income from operations 4.6 4.4 3.4 3.5
Interest expense 1.4 1.4 1.3 1.5
------ ------ ------ ------
Earnings before income taxes 3.2 3.0 2.0 2.0
Provision for income taxes 1.3 1.2 0.8 0.8
------ ------ ------ ------
Net earnings 2.0 % 1.8 % 1.2 % 1.2 %
====== ====== ====== ======
</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.
11
<PAGE> 12
The following tables set forth items from the Company's business segments as
percentages of net sales:
RETAIL STORE SEGMENT
<TABLE>
<CAPTION>
Third Quarter Year to Date
--------------------- --------------------
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 income 0.6 0.6 0.6 0.6
------ ------ ------ ------
100.6 100.6 100.6 100.6
Costs and expenses
Cost of sales 74.2 75.0 74.0 74.7
Selling, general and administrative expenses 17.9 17.6 18.9 18.7
Depreciation and amortization expenses 2.7 2.7 2.9 3.0
------ ------ ------ ------
94.8 95.3 95.9 96.4
Income from operations 5.8 % 5.3 % 4.7 % 4.3 %
</TABLE>
PROVANTAGE SEGMENT
<TABLE>
<CAPTION>
Third Quarter Year to Date
--------------------- --------------------
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 income 0.0 0.1 0.1 0.2
------ ------ ------ ------
100.0 100.1 100.1 100.2
Costs and expenses
Cost of sales 91.8 92.8 92.8 92.8
Selling, general and administrative expenses 4.3 3.3 3.8 3.2
Depreciation and amortization expenses 1.1 0.8 0.9 0.6
------ ------ ------ ------
97.1 96.9 97.5 96.6
Income from operations 2.9 % 3.2 % 2.6 % 3.5 %
</TABLE>
12
<PAGE> 13
Net Sales
The following table presents the Company's consolidated net sales for the third
quarter and the first three quarters of fiscal 1998 and fiscal 1997:
<TABLE>
<CAPTION>
THIRD QUARTER % INCREASE
-------------------- ------------
FISCAL FISCAL
1998 1997 TOTAL COMP
-------- -------- ----- -----
<S> <C> <C> <C> <C>
Retail Store $ 498.7 $ 496.1 0.5 0.4
ProVantage 116.7 100.4 16.2 N/A
Intercompany (7.0) (5.3) N/A N/A
-------- -------- ----- -----
Consolidated $ 608.4 $ 591.2 2.9
======== ======== =====
<CAPTION>
YEAR TO DATE % INCREASE
-------------------- ------------
FISCAL FISCAL
1998 1997 TOTAL COMP
-------- -------- ----- -----
<S> <C> <C> <C> <C>
Retail Store $1,518.9 $1,472.9 3.1 2.8
ProVantage 376.1 242.7 55.0 N/A
Intercompany (20.5) (15.0) N/A N/A
-------- -------- ----- -----
Consolidated $1,874.5 $1,700.6 10.2
======== ======== =====
</TABLE>
The 0.4% increase in third quarter retail comparable store sales are derived
from changes in the following categories: Retail Health increased 9.2%,
Hardlines/Home decreased 2.1% and Apparel decreased 0.9%. The 2.8% increase in
the first three quarters of retail comparable store sales are derived from
changes in the following categories: Retail Health increased 10.3%, Apparel
increased 2.5% and Hardlines/Home remained flat. Changes in retail comparable
store sales are based upon those stores which were open for the entire
preceding fiscal year.
Since the third quarter of last year, the Company opened an additional two
Vision Advantage free-standing optical centers as part of a new retail format.
These two Vision Advantage stores were opened in the fourth quarter of fiscal
1997 and increased the total number of Vision Advantage stores opened to four.
This format focuses on providing value-priced, high quality eye wear that can
be manufactured in about an hour.
13
<PAGE> 14
The increase in ProVantage sales in the third quarter is due primarily to
internally generated growth. The increase in ProVantage sales in the first
three quarters 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, amounts billed to pharmaceutical
manufacturers and third party formulary administrators for formulary fees and
fees for health information technology services.
Gross Margin:
The following table sets forth gross margin as a percent of net sales:
<TABLE>
<CAPTION>
Third 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 25.8 % 25.0 % 8.2 % 7.2 % 22.7 % 22.2 %
Gross margin percent prior to
LIFO charge 26.0 % 25.2 % N/A N/A 22.9 % 22.4 %
<CAPTION>
Year to Date
----------------------------------------------
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 26.0 % 25.3 % 7.2 % 7.2 % 22.5 % 23.0 %
Gross margin percent prior to
LIFO charge 26.2 % 25.5 % N/A N/A 22.7 % 23.1 %
</TABLE>
The increase in the retail store gross margin rate in the third quarter is
primarily attributable to generating better margins on promotional sales. The
increase in the retail store gross margin rate in the first three quarters is
primarily due to a shift in the sales mix away from lower gross margin
promotional sales and generating better margins on the promotional sales.
ProVantage's increase in the third quarter is primarily attributable to
slower sales growth in the lower gross margin claims processing activities
resulting in a larger percentage of its sales coming from the higher gross
margin mail service and health information technology services. The retail
store and consolidated gross margin percentages for the third quarter and the
first three quarters reflect LIFO charges of $1.2 million and $3.6 million,
respectively. This is compared to the prior year's LIFO expense of $1.0
million in the third quarter and $2.9 million in the first three quarters.
14
<PAGE> 15
Selling, General and Administrative Expenses:
Consolidated selling, general and administrative expenses as a percentage of
sales increased to 16.1 percent for the third quarter this year from 15.9
percent last year. The retail selling, general and administrative expenses were
17.9 percent of net sales compared with 17.6 percent last year. The increase
is primarily due to increased costs related to investment in information
systems technology and advertising. ProVantage selling, general and
administrative expenses were 4.3 percent of net sales compared with 3.3 percent
last year. This increase is primarily due to continued investment in
information technology and infrastructure support related to continued growth.
For the first three quarters, consolidated selling, general and administrative
expenses decreased to 16.9 percent of sales from 17.4 percent of sales last
year. The decrease is primarily due to increased ProVantage sales. Retail
selling, general and administrative expenses were 18.9 percent of net sales
compared with 18.7 percent last year. ProVantage selling, general and
administrative expenses were 3.8 percent of net sales compared with 3.2 percent
last year.
Interest Expense:
Interest expense for the third quarter and the first three quarters was 1.4
percent of sales and 1.3 percent of sales, respectively. This is compared to
the prior year's 1.4 percent of sales in the third quarter and 1.5 percent of
sales in the first three quarters of last year. The decrease in the first three
quarters 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 $46.0 million for the
first three quarters of fiscal 1998 compared to $16.4 million for the same
period last year. The Company had $5.0 million outstanding under its revolving
credit agreement at the end of the third quarter of fiscal 1998 and nothing
outstanding at the end of the third quarter of 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 January 31, 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.
15
<PAGE> 16
The Company's principal use of cash is for the purchase of property, equipment
and systems technology. The Company spent $22.5 million on capital
expenditures (net of acquisitions) in the first three quarters of fiscal 1998,
compared to $23.6 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 new
store construction or 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.
16
<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.
On December 19, 1997, ShopKo acquired Penn-Daniels, Incorporated
("Penn-Daniels"), a retail chain headquartered in Quincy, Illinois for
approximately $18.0 million in cash and $43.0 million of assumed debt, of which
approximately $21.0 million was retired at the time of the closing. The
Company utilized available cash to fund the acquisition and the retirement of a
portion of Penn-Daniels outstanding debt. The acquisition will be accounted
for under the purchase method of accounting. Penn-Daniels currently operates
18 Jacks discount stores in Iowa, Illinois and Missouri and one Lots-A-Deals
close-out store in Moline, Illinois.
17
<PAGE> 18
ShopKo plans to convert the Jacks retail locations to ShopKo stores, including
the likely addition of in-store pharmacies and optical centers, with
remerchandising and remodeling to begin in January 1998. The stores will
remain open during remodeling, which is targeted for completion in July 1998.
The capital expenditures related to the remodeling are anticipated to be
approximately $35.0 million. In addition, ShopKo expects to incur nonrecurring
pre-tax costs of $12.0 to $15.0 million for duplicate operations at the
Penn-Daniels administrative office and warehouse until they are consolidated
with ShopKo's operations and for pre-opening costs associated with the regrand
opening of the stores. These estimated costs are expected to be incurred
primarily in the fourth quarter of fiscal 1998 (the period ending January 31,
1998) and the first half of fiscal 1999. The Company expects to fund these
capital expenditures and costs from available cash and, if necessary, borrowing
under the Company's revolving credit facility. The Penn-Daniels acquisition is
expected to be slightly accretive to fiscal 1999 earnings per share excluding
the nonrecurring pre-tax costs described above, and to be dilutive to fiscal
1999 earnings when such costs are factored into next year's results.
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 ($0.06 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.
18
<PAGE> 19
Management Realignment:
On December 10, 1997, the Company announced the election of William J. Podany
to the position of President and Chief Operating Officer of ShopKo's stores
division and the election of Jeffrey A. Jones to the position of Executive Vice
President and Chief Operating Officer of ProVantage, Inc. Mr. Podany will
continue as Executive Vice President and a member of the Board of Directors of
ShopKo Stores, Inc. ShopKo has initiated a search to fill the position of
Chief Financial Officer. In the interim, Mr. Jones will continue handling
Chief Financial Officer responsibilities. Dale P. Kramer will continue to hold
the corporate titles of Chairman of the Board, President and Chief Executive
Officer of ShopKo Stores, Inc., and will head the overall operations of the
Corporation.
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:
Forward-looking statements made herein are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based upon management's assumptions and beliefs
in light of information currently available to it and 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.
19
<PAGE> 20
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) On September 24, 1997, the Board of Directors approved the amendment and
restatement of the Rights Agreement between the Company and Norwest Bank
Minnesota, N.A., as agent, dated as of July 3, 1992. 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.
(b) 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.
Item 5. Other Information
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 and the Company have subsequently
agreed that Mr. Girard will remain on the Board for the remainder of his
current term, which expires at the 1998 Annual Shareholders Meeting. Mr.
Girard is expected to be nominated to serve an additional term at that time.
20
<PAGE> 21
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.1 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.)
10.2 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 third quarter of
fiscal 1998 as follows:
Date of Report Items Reported
- -------------- --------------
September 24, 1997 Items 5,7 - The Company approved the
reincorporation of the Company into
Wisconsin from Minnesota, extended the
effective date for the resignation from
the Board of Directors of Jeffrey C.
Girard and approved the amendment and
restatement of the Rights Agreement.
November 20, 1997 Items 5,7 - The Company announced an agreement
whereby the Company will acquire
Penn-Daniels.
21
<PAGE> 22
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: January 12, 1998 By: /s/ Richard D. Schepp
--------------------------------------
Richard D. Schepp
Vice President Legal Affairs/Secretary
(Duly Authorized Officer of Registrant)
Date: January 12, 1998 By: /s/ Jeffery R. Simons
--------------------------------------
Jeffery R. Simons
Vice President and Controller
(Chief Accounting Officer and Duly
Authorized Officer of Registrant)
22
<PAGE> 23
EXHIBIT INDEX
SHOPKO STORES, INC.
10-Q REPORT
Exhibit Sequential
Number Exhibit Page Number
------- ------- -----------
10.1 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.)
10.2 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.
<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>
Year to Date as of Fiscal Years Ended
------------------------------------------------------------------------
November 29, November 30, February 22, February 24, February 25,
1997 1996 1997 1996 1995
(40 Weeks) (40 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BASIC:
Net earnings $ 23,323 $ 20,617 $ 44,946 $ 38,439 $ 37,790
========== ========== ========== ========= =========
Weighted average number of
outstanding common shares 28,704 32,073 32,092 32,005 32,014
========== ========== ========== ========= =========
Net earnings per common
share - basic (1) $ 0.81 $ 0.64 $ 1.40 $ 1.20 $ 1.18
========== ========== ========== ========= =========
DILUTED:
Net earnings $ 23,323 $ 20,617 $ 44,946 $ 38,439 $ 37,790
========== ========== ========== ========= =========
Weighted average number of
outstanding common shares 28,704 32,073 32,092 32,005 32,014
Number of common shares
issuable assuming exercise
of stock options 711 340 278 51 4
---------- ---------- ---------- --------- ---------
Weighted average number of
outstanding common and
common equivalent shares -
assuming full dilution 29,415 32,413 32,370 32,056 32,018
========== ========== ========== ========= =========
Net earnings per common
share - diluted (1) $ 0.79 $ 0.64 $ 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>
Year to Date as of Fiscal Years Ended
------------------------------------------------------------------------
November 29, November 30, February 22, February 24, February 25,
1997 1996 1997 1996 1995
(40 Weeks) (40 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 $ 38,410 $ 33,954 $ 74,022 $ 63,140 $ 62,418
2 Add previously capitalized interest
amortized during the period 423 421 548 540 503
3 Less interest capitalized during
the period 0 128 128 249 1,309
------------- ---------- ------------ --------- ---------
4 Total earnings (sum of lines 1 to 3) 38,833 34,247 74,442 63,431 61,612
COMPUTATION OF FIXED CHARGES
5 Interest (1) 25,178 25,111 31,905 34,531 30,351
6 Interest factor in rental expense 2,227 2,060 2,657 2,689 2,403
------------- ---------- ------------ --------- ---------
7 Total fixed charges (sum of lines
5 and 6) 27,405 27,171 34,562 37,220 32,754
8 TOTAL EARNINGS AND
FIXED CHARGES (line 4
plus line 7) $ 66,238 $ 61,418 $ 109,004 $ 100,651 $ 94,366
============= ========== ============ ========= =========
9 Ratio (line 8 divided by line 7) 2.4 2.3 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> NOV-29-1997
<CASH> 18,469
<SECURITIES> 0
<RECEIVABLES> 96,877
<ALLOWANCES> 5,515
<INVENTORY> 445,088
<CURRENT-ASSETS> 576,238
<PP&E> 1,020,277
<DEPRECIATION> 437,538
<TOTAL-ASSETS> 1,234,640
<CURRENT-LIABILITIES> 423,884
<BONDS> 0
0
0
<COMMON> 339
<OTHER-SE> 368,916
<TOTAL-LIABILITY-AND-EQUITY> 1,234,640
<SALES> 1,874,463
<TOTAL-REVENUES> 1,884,059
<CGS> 1,452,885
<TOTAL-COSTS> 1,820,471
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,178
<INCOME-PRETAX> 38,410
<INCOME-TAX> 15,087
<INCOME-CONTINUING> 23,323
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,323
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.79
</TABLE>
