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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[XX] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
For the transition period from February 23, 1997 to January 31, 1998
Commission file number 1-10876
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SHOPKO STORES, INC.
(Exact name of registrant as specified in its Charter)
Minnesota 41-0985054
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
700 Pilgrim Way, Green Bay, Wisconsin 54304
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (920) 497-2211
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
-------------------------------- ------------------------
Common Stock, par value $0.01 per share New York Stock Exchange
Series B Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Page 1 of 80 Exhibit index on page 63
(Cover page 1 of 2 pages)
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 31, 1998 was approximately $826,453,760 (based upon the
closing price of Registrant's Common Stock on the New York Stock Exchange on
such date).
Number of shares of $0.01 par value Common Stock outstanding as of March 31,
1998: 25,946,080.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference portions of the definitive Proxy Statement
for the Registrant's Annual Meeting of Shareholders to be held on May 13, 1998.
(Cover page 2 of 2 pages)
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PART I
ITEM 1. BUSINESS
GENERAL
ShopKo Stores, Inc. ("ShopKo" or the "Company"), a Minnesota corporation,
was incorporated in 1961 and in 1971 became a wholly owned subsidiary of
Supervalu Inc. ("Supervalu"). On October 16, 1991, the Company sold 17,250,000
common shares or 54% of equity ownership in an initial public offering. On July
2, 1997, Supervalu exited its remaining 46% investment in the Company through a
stock buyback and secondary public offering. The Company's principal executive
offices are located at 700 Pilgrim Way, Green Bay, Wisconsin 54304, and its
telephone number is (920) 497-2211.
ShopKo is a specialty discount retailer which provides general merchandise
and health services through its retail stores. The Company's 148 retail stores
and four free-standing optical centers are operated in 17 Midwest, Pacific
Northwest and Western Mountain states. ShopKo also provides custom prescription
benefit management services; pharmacy mail service; vision benefit management
services and health care knowledge through technology and clinical support
services though its subsidiary ProVantage, Inc. ("ProVantage"). The ProVantage
businesses are conducted throughout the United States and parts of Europe.
Effective with the fiscal year ended January 31, 1998, the Company changed
its fiscal year end from the last Saturday in February to the Saturday nearest
January 31. This change was made in order to coincide the Company's fiscal year
with the calendar predominantly used by the retail industry. The current year
consolidated balance sheet and statements of earnings, cash flows and
shareholders' equity were issued for the year ended January 31, 1998 (49 weeks).
All other years presented are for 52 weeks ending the last Saturday in February.
The table below illustrates how the fiscal years are referred to in this Form
10-K.
February 23, 1997 through January 31, 1998 (49 weeks) 1997
February 25, 1996 through February 22, 1997 (52 weeks) 1996
February 26, 1995 through February 24, 1996 (52 weeks) 1995
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 health information technology).
Intercompany sales, which consist of prescriptions that were both sold at a
ShopKo pharmacy and processed by ProVantage, have been eliminated. Financial
information about these segments is included in Note K of the Notes to
Consolidated Financial Statements for fiscal year 1997.
The Company's Retail Store net sales mix for the last three fiscal years
was:
1997 1996 1995
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Softline 25% 25% 24%
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Hardline/Home 54% 54% 56%
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Retail Health Services 21% 21% 20%
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MERCHANDISING PHILOSOPHY - MANAGEMENT
ShopKo is committed to offering quality merchandise, service
and value to meet customers' requirements for health, home, family basics,
casual apparel and seasonal needs in its stores with speed, friendliness and
simplicity. The Company strives to differentiate itself from its competition.
ShopKo's goal is to improve performance by meeting customer needs more quickly
and having more of what people expect as their lifestyle needs change.
With a focus on serving the customer and building customer loyalty, ShopKo
successfully undertook a significant strategic repositioning under its
Vision 2000 program between 1991 and 1995. That strategy combined a new,
upscale image with an increased emphasis on customer service. Building upon
Vision 2000, the Company has developed and implemented Beyond 2000, a long-term
strategic operating model which is based upon creating market opportunities by
serving time-strapped consumers' changing shopping habits. The Beyond 2000
operating model is based upon four interdependent strategic initiatives - a
differentiation strategy; an integrated business planning process; execution by
an integrated lateral management organization; and delivery of comprehensive
value.
ShopKo's differentiation strategy focuses on accentuation of selected and
targeted merchandise categories tied to changing lifestyle needs. Within these
merchandise categories, shoppers will find meaningful assortments of sizes,
colors and styles. A strong national brand presence is combined with ShopKo's
private brands to offer a unique product mix.
ShopKo's merchandise has been reorganized into stratified categories that
are defined and driven by customer lifestyles and end usage. An integrated
business planning process has allowed ShopKo to identify and prioritze growth
potentials based on the changing lifestyle needs of its customers. Through an
"infrastructural funding process," ShopKo management allocates store shelf
space, inventory commitments and external advertising space and prioritizes
in-store capital improvement disbursements among the various categories of
merchandise. Heavier infrastructure commitments are given to those categories
in which ShopKo has achieved a strong market presence and other categories
believed by ShopKo management to have the potential to become prominent
categories. Regular and systematic analysis of category stratification is
performed at various levels as part of the Company's business planning process.
Beyond 2000 is accomplished through ShopKo's Operating Committee which is
headed by the President, Chief Operating Officer of the Retail Stores Division
and composed of senior vice presidents from the areas of merchandising,
logistics and replenishment, advertising, in-store marketing, store operations,
customer service, finance, legal, information systems and human resources. The
Operating Committee seeks to create a performance-driven culture predicated on
fast, friendly customer service. The Operating Committee has reengineered the
work processes of the Company's central organization and store operations. The
reengineered work processes require centralized decisions with respect to
product selection, pricing, space utilization and marketing to allow store
personnel to focus solely on overall customer satisfaction through inventory
in-stock position, creation of a friendly environment and simplification of the
shopping experience to allow customers to complete their shopping as quickly as
they desire.
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ShopKo delivers added lifestyle value preferences in the shopping
experience beyond just a value price. The equity value of ShopKo's
differentiated, proprietary branded product demands superior quality for a
compelling price. Clarity of the merchandise offering, simplicity, speed and
friendliness of the shopping experience all contribute to ShopKo's
comprehensive value. Improved inventory replenishment and speed to the sales
floor ensures greater trend correctness, targeted product dominance and
differentiation.
MERCHANDISING AND SERVICES - RETAIL STORE
ShopKo's retail stores carry a wide assortment of trend correct branded and
private label "softline" goods such as women's, men's and children's apparel,
shoes, jewelry, cosmetics and accessories and "hardline/home" goods such as
housewares, home textiles, household supplies, health and beauty aids, home
entertainment products, small appliances, furniture, music/videos, toys,
sporting goods, social occasion products, candy, snack foods, seasonal and
everyday basic categories. The Company's stores carry a broad assortment of
merchandise, thus providing customers with a convenient one-stop shopping source
for everyday items. The Company's accommodating customer service policies
provide customers with a pleasant shopping experience.
The Company believes that it offers leading brand names in its merchandise
lines, concentrating on brands which have wide customer acceptance and provide
quality and value. In addition, ShopKo has well developed private label
programs. ShopKo subjects its private label merchandise and direct imports to
independent testing and certification for product performance, safety and fit.
In addition, the Company's in-house quality assurance and technical design team
analyzes and develops the quality of its fashion offerings. This allows the
Company to deliver a better and more consistent product, with greater control
and efficiency.
The Company also provides professional health services in most of its
stores. Of the Company's 149 stores as of January 31, 1998, 129 include pharmacy
centers and 127 include optical centers. On December 19, 1997, ShopKo acquired
the retail chain Penn-Daniels, Incorporated ("Penn-Daniels"), which operated 18
Jacks discount stores and one Lots-A-Deals close-out store in Iowa, Illinois and
Missouri. The Company is converting 17 of the Jacks retail locations to ShopKo
stores including the addition of in-store pharmacies and optical centers to most
of these stores. In addition to generating store traffic and building customer
loyalty, these services contribute significantly to the Company's overall
profitability and provide the opportunity for additional growth. Each store with
pharmacy and optical centers employs or contracts with an average of
approximately three licensed pharmacists, one licensed optometrist and six
opticians. The Company's optometrists perform in-store eye exams and prescribe
correctional lenses, most of which are fabricated in the Company's centralized
optical laboratory and in approximately 77 in-store finishing labs which, in
fiscal 1997, dispensed over 632,000 eyewear prescriptions. The in-store
finishing labs typically service other stores in the vicinity and provide
customers with same day or next day optical service for single vision lenses.
The Company opened four new free-standing optical centers, Vision
Advantage, during October 1996 and February 1997. This format focuses on
providing value-priced, high quality eyewear that can be manufactured in about
an hour. Convenience to the customer, price and quality are the primary drivers
of this business, which leverages heavily off of the Company's 19 years of
retail optical experience.
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MERCHANDISING AND SERVICES - PROVANTAGE
ProVantage, which conducts its business throughout the United States and
parts of Europe, provides a full menu of services such as; prescription benefit
management services, pharmacy mail services, vision benefit management services
and health information technology services. In four years, ProVantage has
transformed various independent business units into a comprehensive benefit
management enterprise.
In fiscal 1993, the Company leveraged its retail pharmacy experience by
developing ProVantage Mail Service, a prescription management and mail service
pharmacy that was offered to health care plan sponsors throughout the United
States. Because of the success of this service, management decided to expand it,
and acquired a prescription claims processing firm, Bravell, Inc., in January
1995. This acquisition enabled the Company to develop ProVantage into a full
service prescription benefit management ("PBM") company; providing custom
prescription benefit management, benefit plan design, a network of approximately
50,000 retail pharmacies, program administration, formulary administration,
clinical services, and claims and benefit processing services to insurance
companies, third party administrators and self-funded health care plan sponsors.
In August 1996, the Company acquired CareStream Scrip Card, a PBM firm that
provides services similar to those provided by ProVantage. Health care plan
sponsors are increasingly utilizing PBM firms in order to reduce their costs.
The sponsors direct or encourage plan participants to utilize managed care
pharmacy benefit programs that are developed and administered by PBM firms.
These programs control pharmacy costs by monitoring decisions regarding the
usage of, for example, generic drugs instead of brand name drugs. As health care
sponsors seek ways to reduce costs and increase the quality of care, PBM
companies such as ProVantage will have greater importance.
In fiscal 1996, ProVantage Vision Benefit Management Service ("VBM") was
started. Similar to a PBM, the VBM provides benefit management services to
client plan sponsors offering vision benefits to their plan participants.
ProVantage's VBM was formed to leverage the Company's expertise in retail
optical services and PBM. The VBM has established a growing national network
(currently at 6,500) of retail optical chains and private ophthalmologists,
optometrists and opticians. In August 1996, the VBM acquired United Wisconsin
Insurance Company's vision benefit management business. This acquisition gave
ProVantage's VBM an immediate market presence in the vision benefit management
industry. Unlike the PBM, the VBM offers insured as well as uninsured services.
The insured products are sold by licensed independent and employee sales agents,
and are underwritten by a licensed insurance company. The VBM's arrangement with
this insurance company requires the VBM to market the insurer's vision products
and to perform various administrative services, such as maintenance of
eligibility records, network maintenance, claims processing, and certain
accounting services. The insurer underwrites all insured contracts and provides
other insurance-related services such as actuarial review. In consideration for
its services, ProVantage's VBM receives a commission equal to the insurer's
profits derived from the business. In consideration of the insurer's insurance
services, the insurer receives an underwriting fee plus certain other insurance
services fees, which in part are based on losses derived from the business.
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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. One product is RationalMed, a
clinical drug utilization review software product which is used to monitor
misused or misprescribed medications. Its 8,000 clinical rules generate
approximately 25,000 alerts to physicians per month demonstrating significant
savings for its clients. Another product is EpiMed, a drug and disease outcomes
research software product supporting access to a global repository of integrated
pharmaceutical and health claims information. At the end of fiscal 1997, the
confidentialized global health care database provided information on
approximately 22.0 million patients yielding over 75.0 million patient years of
history. EpiMed allows its customers to determine the efficacy of drugs and the
impact of drugs and various diseases on patients. This product is targeted
toward large drug companies, providers, universities and governmental research
agencies. Both of these products are also sold outside the United States by the
subsidiary euroPharMark, Ltd.
Another component of ProVantage's health information technology is ProVmed.
ProVmed is a joint venture between ProVantage and American Medical Security
Holdings, Inc. ("AMS"). ProVantage owns 80% of ProVmed, and AMS owns the
remaining 20%. ProVmed utilizes leading-edge data warehousing technologies to
provide enterprise-wide decision support products and services for medical
management. ProVmed integrates medical, pharmaceutical, financial and
administrative data to provide health care payer and provider organizations with
the actionable information necessary to improve patient outcomes and lower
health care costs.
MARKETING AND ADVERTISING
The Company markets its general merchandise and retail pharmacy and optical
services via weekly newspaper circulars to reach a broad-based customer segment
consisting largely of middle income families. These full-color circulars average
24 pages and feature values in all departments of the stores and have a
circulation of more than 3.5 million. Direct mail vehicles are used selectively
at key promotional periods and have a circulation of more than 5.0 million. All
printed advertising materials are designed by the Company's in-house graphic
design team and photographed in the Company's own photography studio. In
addition to the newspaper circulars, the Company uses image building television
and radio advertising focusing on differentiating ShopKo stores.
The Company prices its merchandise so as to be competitive with its
discount retail competitors both regional and national. In general, the Company
utilizes its frequent advertising of a large group of high demand items to
reinforce its competitive price image and to generate store traffic, rather than
attempting to meet the lowest available price on every item. The Company
believes it provides comprehensive value through its offering of quality
trend-right, lifestyle merchandise at compelling prices in an attractive
easy-to-use shopping environment.
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ProVantage focuses its PBM and VBM marketing efforts on self-funded
medical plan sponsors, third party administrators, insurance companies, health
maintenance organizations ("HMO's") and pharmaceutical companies. Marketing of
health information technology services is targeted to governmental agencies,
insurance companies, HMO's and pharmaceutical manufacturers. These services are
marketed through an internal sales force and a network of independent brokers.
This national sales team customizes each program to meet each client's needs and
cost containment goals.
STORE LAYOUT AND DESIGN
ShopKo stores are designed for simplicity, speed and ease of shopping
experience. The stores feature a fashion stage at the store entrance to create
the upscale image of the store. The stores also feature competitive assortments
of softlines, hard/home lines and professional pharmacy and optical
departments. Most ShopKo stores now feature Vision 2000 merchandising,
fixturing and product assortments. The optical and pharmacy departments are
placed near the front of the store with the remainder of the store being laid
out in a "racetrack" configuration which takes customers between and around
departments. Current promotionally priced items are prominently displayed.
Over the last several years, the Company has substantially remodeled
its stores. Seventeen of the Jacks locations that were acquired in December
1997 are being converted to ShopKo's current format with remodeling targeted
for completion in July 1998. The Company expects to continue to explore and
test alternative store layout and display techniques and merchandise mixes.
Depending on the cost of land acquisition, size of store and site preparation
work, the Company expects that a typical new store's cost for land acquisition,
site preparation, building and fixturing will generally approximate $6.0 to
$11.0 million. The Company believes that opportunities to lower the initial
capital outlay for new stores exist through leasing, sale and leaseback, or
other financing alternatives. Remodels, which generally take place
approximately every ten years, usually cost from $0.5 to $2.5 million per
store. A store renovation, where the square footage is expanded or more
extensive remodeling is needed, usually costs from $1.6 to $3.0 million per
store.
The Company's average store size is approximately 89,000 square feet with
approximately 82% of the stores greater than 74,000 square feet. The Company's
traditional new stores are based on one of three standard prototypes; a 99,000
square foot store, an 88,000 square foot store or a 74,000 square foot store.
The prototype selected depends on the community and the retail competition in
the immediate area. In comparison to old versions, the Company's current
prototypes feature a greater portion of store square footage dedicated to
selling space and less space dedicated to the storage of inventory.
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STORE OPERATIONS AND MANAGEMENT
The Company's store operations organization focuses on leadership,
performance, merchandising innovation and excellence in execution, striving for
continual improvements in overall customer satisfaction, which is measured by an
independent research firm for the Company's unique Customer Satisfaction and
Loyalty Monitor process. The successful Beyond 2000 operating model has been
integrated into store operations with significant improvements in operating
efficiency and dedication to customer service. Best practices have been shared
and communicated across the organization as the "ShopKo Way." The store
operations organization is now focusing on a framework of three leadership
planks as part of the Company's Beyond 2000 operating model. These three planks
are People, Performance and Profit.
The Company believes it has improved associate satisfaction despite a
challenging environment characterized by low unemployment and intense
competition for quality associates. The Company has undertaken an intensive
management and associate development program to ensure commitment to the
Company's mission and principles. This education was intended to sharpen
management's focus and ability to drive sales through integrated partnership
with the central organization.
The Company recently completed a comprehensive strategic initiative geared
toward improved customer service, enhanced store execution and reduced costs.
This initiative identified non-value-added activities which were eliminated to
simultaneously increase productivity and enhance associate availability to help
customers. The Company's Customer Satisfaction and Loyalty Monitor scores
continue to indicate that a significant majority of the Company's customers are
pleased with their overall shopping experience.
Technological innovation to support store performance and profitability
included multi-media computer based training as well as implementation of an
innovative resource management system which provides on-line sales forecasting
in 15 minute increments, ties labor scheduling to customer traffic patterns and
eliminates duplication of human resources and payroll processes in the stores
and the general office.
Store operations management is held accountable to aggressive plans and
comprehensive goals. Ongoing development of this management team is emphasized,
to ensure the Company has the competencies required for continued success.
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PURCHASING AND DISTRIBUTION
ShopKo purchases merchandise from more than 2,100 vendors with its ten
largest vendors accounting for approximately 29% of the Company's purchases
during fiscal 1997. The Company believes that most merchandise, other than
branded goods, is available from a variety of sources. ShopKo is working with
its entire supply chain to link its vendors into ShopKo's general merchandise
business planning process to reduce costs and make the replenishment function
more efficient. More than 800 vendors were linked to the Company's electronic
data interchange ("EDI") purchase order systems as of January 31, 1998. Vendors
electronically receive point-of-sale information, allowing them to respond to
changing inventory levels in the stores. The Company has also implemented the
use of electronic purchase order acknowledgments issued by vendors based on the
sales information they have received. In addition, approximately 360 vendors are
now electronically transmitting invoices directly into the Company's automated
invoice matching system.
The Company continues to upgrade its merchandise planning, allocation and
control systems. In addition, SKU level physical inventories continue to improve
perpetual inventory accuracy. Management believes these upgrades and
improvements in the physical inventory process allow the Company to more
effectively manage in-stock positions and better manage merchandise assortment.
Direct imports accounted for approximately 7% of the Company's purchases
(based upon cost of goods), during fiscal 1997. The Company buys its imported
goods, principally in the Far East, and ships the goods to its distribution
centers for distribution to the stores.
Utilization of the three distribution centers has enabled the Company to
purchase the majority of its merchandise directly from manufacturers (thus
reducing its cost of goods), to reduce direct vendor-to-store deliveries (thus
reducing freight charges and cost of goods through consolidated volume
purchasing) and to increase the pick and pull capabilities allowing the Company
to enhance the effectiveness and efficiency of its store replenishment process.
The Company believes that these cost reductions help it remain price
competitive. During fiscal 1997, approximately 85% of the merchandise sold by
the Company (excluding optical and pharmaceutical products) flowed through its
distribution centers.
Included in the Penn-Daniels' acquisition was a leased warehouse in Quincy,
Illinois which serviced their Jacks stores. The warehouse is being converted
into a distribution center similar to the Company's other three distribution
centers.
ShopKo's shoe department (other than certain nationally branded athletic
shoes) is in every store and is the principal department operated by a third
party under license. The Company retains a percentage of the gross proceeds
collected as rent.
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MANAGEMENT INFORMATION SYSTEMS
ShopKo uses information technology to improve customer service, reduce
operating costs and provide information for management decision support. The
Company utilizes modern point-of-sale terminal systems for electronic price
lookup and tracking sales information at store and SKU level. Integrated earth
satellite communications systems are used to provide on-line credit card and
check authorization. Portable radio-frequency terminals are used extensively in
the stores for merchandise receiving, stocking, replenishment, pricing and label
printing. The Company also makes extensive use of automated labor scheduling
systems within the stores.
The Company's ProVantage division operates an electronic network tying
in approximately 50,000 retail pharmacies to process third-party claims.
ProVantage also utilizes similar systems to support its vision benefit
management business. ProVantage has developed proprietary software to perform
database enhancement and querying essential to its clinical services.
ShopKo's warehouse management system is a state-of-the-art software
package. The warehouse management system operates in a distributed processing
environment, providing complete warehouse functionality such as conveyor control
and direction of picking and putaway processes via portable radio-frequency
terminals. The warehouse management system communicates back to the central
computers over the earth satellite network to update perpetual inventory records
and accounting systems.
The Company utilizes the tools of modern electronic commerce to support its
focus on total supply chain management. This includes integrated replenishment
systems, vendor managed inventories and EDI. In addition, the Company plans to
implement support for advanced shipping notices ("ASN") and 128 barcode scanning
in Fall 1998 to further optimize the receipt and distribution of merchandise.
The Company's management believes that these initiatives will result in higher
customer service levels, optimized inventory, and greater productivity. In
fiscal 1997, the Company installed a space planning system that links sales
volume to the allocation of space within its stores.
The Company is aggressively moving from a purely mainframe computer
environment to a networked client/server architecture. All stores, distribution
centers and corporate offices are electronically connected for transaction
processing, electronic mail and multi-media training.
In fiscal 1998, the Company expects to complete the replacement of its
merchandise applications with new, open architecture client/server applications
running on a massively parallel processor. These new applications are the result
of a large scale retail systems integration strategy. Several of these new
applications were completed within the last two years.
Many of the Company's merchandising and health service applications are
highly data intensive. ShopKo has implemented advanced data warehousing and
decision support applications running on a massively parallel processor to
provide timely and actionable information to decision makers within ShopKo. In
addition, this technology enables the Company to use data mining tools to
analyze data for market basket analysis to test effectiveness of promotional
campaigns.
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The Company utilizes a merchandise financial planning system which
integrates the planning of dollars and units by season. This system also
facilitates the ongoing monitoring of actual results to plans and forecasts
which is used to increase purchases for uptrending categories and reduce
purchases for downtrending categories. In 1997, the Company also installed a
promotional planning and management system which integrates the activities
associated with ad space assignment, ad creation and ad tracking.
EXPANSION
The Company's current growth plan for the retail business is to increase
the number of retail stores to achieve economies of scale and to capitalize on
the Company's existing infrastructure. The Company intends to consider the
acquisition of existing stores, either as specific sites, in clusters, or as
part of an existing business. The Company believes that selective and
opportunistic acquisitions of retail stores or sites will allow the Company to
achieve economies of scale, improve the Company's profitability, and maintain
its financial strength. In December 1997, ShopKo acquired the Penn-Daniels
retail chain which added 17 stores (after two locations are closed) to the
Company's retail store base. The Company may also consider new store
construction, financed with its own capital or utilizing leases, sale and
leaseback, or other financing alternatives. The Company's plans with respect to
new store growth are subject to change, and there can be no assurance that the
Company will achieve its plans.
In reviewing possible retail store acquisitions, the Company intends to
take a disciplined approach to ensure the Company's competitive position and
financial integrity. The key elements of such an approach are: avoiding
excessive debt and maintaining a balance sheet which will exhibit the Company's
financial strength to the vendor and creditor communities; leveraging the
Company's existing infrastructure, including the Company's advanced management
information and distribution systems; maintaining adequate liquidity for the
Company's operations; and critically evaluating the competitive environment for
all new stores.
The Company expects that ProVantage will grow through internal and external
initiatives. Internal initiatives will emanate from additional marketing efforts
by the present sales force to obtain new customers, and to obtain additional
revenues through the implementation of new products to existing customers.
ProVantage anticipates continued growth in the number of PBM and VBM plan
participants. At the end of fiscal 1997, ProVantage had approximately 4.7
million plan participants under management. This compares with 4.1 million plan
participants under management at the end of fiscal 1996 and 1.7 million plan
participants under management at the end of fiscal 1995. Plan participants are
persons who are enrolled in or are entitled to company managed prescription or
vision benefits under a health plan. The August 1997 acquisition of Mikalix
provides additional opportunities for growth in the health care knowledge
business. This growth will not only be from the addition of new customers but
also from those products being sold to existing customers. External initiatives
will be pursued opportunistically through acquisitions or other strategic
alliances. ProVantage's operations are distinct from the Company's retail
operations, and the Company may, at some point in the future, consider
monetizing all or part of its investment through one or more public or private
transactions. However, there can be no assurance if or when any such transaction
will occur.
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COMPETITION
The discount general merchandise business is very competitive. ShopKo
competes in most of its markets with a variety of national, regional and local
discount stores and national category killers and specialty niche retailers. In
addition, department stores compete in some branded merchandise lines, discount
specialty retail chains compete in some merchandise lines such as electronics,
bed and bath, housewares, casual furniture and toys, and pharmaceutical and
optical operations compete with some of ShopKo's pharmacy and optical centers.
The Company believes that the principal competitive factors in its markets
include store location; differentiated merchandising; quality of product
selection; attractiveness and cleanliness of the stores; responsiveness to
changing lifestyle needs and regional and local trends; customer service;
in-stock availability of merchandise; and advertising.
The Company's principal national general merchandise discount chain
competitors are Wal-Mart, Kmart and Target, each of which is substantially
larger than, and has greater resources than, the Company. Kmart stores directly
compete with approximately 96% of the Company's stores and Target stores
directly compete with approximately 68% of its stores. In addition, the Company
estimates that at the end of fiscal 1997, approximately 86% of its stores were
either in direct competition with or indirectly impacted by the presence of a
Wal-Mart store. The Company also competes with regional chains in some markets
in the Midwest and the Pacific Northwest.
Historically, the entry of one of these chains into an area served by one
of the Company's stores generally has had an adverse effect on the affected
ShopKo store's sales growth for approximately 12 months. After the 12 month time
period, the ShopKo store generally has resumed a positive growth trend. Such
entry often has resulted in permanently intensified price competition. The
Company's efficiency measures and distribution center expenditures are important
aspects of its efforts to maintain or improve operating margins and market share
in these markets.
The health care benefit management industry is a dynamic growing
marketplace and very competitive. The Company believes that its primary
competitive advantages are advanced technologies which allow it to provide
clinical and health care knowledge services designed to reduce health care costs
while improving the quality of health care. ProVantage competes for health care
clients with a number of prescription benefit management companies including PCS
Health Systems, Inc. (a subsidiary of Eli Lilly and Co.), Merck-Medco Managed
Care, Inc. (a subsidiary of Merck & Co., Inc.), Express Scripts, Inc., Caremark
International, Inc., (a subsidiary of Med Partners, Inc.), Advance ParadigM,
Inc., Eckerd Health Services, WHP Health Initiatives, Inc. (a subsidiary of
Walgreen Co.) and Diversified Pharmaceutical Services, Inc. (a subsidiary of
SmithKline Beecham), many of which are substantially larger than ProVantage and
each of which has considerable resources.
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14
SEASONALITY
The retail general merchandise operations of the Company are highly
seasonal, and historically, the third and fourth fiscal quarters have
contributed a significant part of the Company's earnings due to the Christmas
selling season. Because the Company has changed its fiscal year end to the
Saturday closest to the end of January, the Christmas selling season in fiscal
1998 and forward will primarily impact the fourth fiscal quarter.
EMPLOYEES
As of January 31, 1998, the Company employed approximately 21,000 persons,
of whom approximately 10,400 were full-time employees and 10,600 were part-time
employees. During the Christmas shopping season, the Company typically employs
approximately 2,000 additional persons on a temporary basis. None of the
Company's employees are covered by collective bargaining agreements.
GOVERNMENT REGULATION
The Company's health services business is subject to extensive federal and
state laws and regulations governing, among other things:
Licensure and Regulation of Retail Pharmacies and Optical Centers
There are extensive federal and state regulations applicable to the
practice of pharmacy and optometry at the retail level. Most states have laws
and regulations governing the operation and licensing of pharmacies and optical
centers, and regulate standards of professional practice by pharmacy and optical
service providers. These regulations are issued by an administrative body in
each state (typically, a pharmacy board or board of optometry), which is
empowered to impose sanctions for non-compliance.
Licensure and Regulation of Mail Service Pharmacy
The Company's mail service pharmacy is duly licensed and in good standing,
in accordance with the laws and regulations of the State of Wisconsin.
Additionally, many of the states into which the Company delivers pharmaceuticals
have laws and regulations that require out-of-state mail service pharmacies to
register with the board of pharmacy or similar regulatory body in the state.
These states generally permit the mail service pharmacy to follow the laws of
the state within which the mail service pharmacy is located. The Company has
registered in every state in which, to the Company's knowledge, such
registration is required. In addition, various pharmacy associations and boards
of pharmacy have promoted enactment of laws and regulations directed at
restricting or prohibiting the operation of out-of-state mail service pharmacies
by, among other things, requiring compliance with all laws of certain states
into which the mail service pharmacy dispenses medications whether or not those
laws conflict with the laws of the state in which the pharmacy is located. To
the extent such laws or regulations are found to be applicable to the Company,
the Company would be required to comply with them. Other statutes and
regulations impact the Company's mail service operations. Federal statutes and
regulations govern the labeling,
14
15
packaging, advertising and adulteration of prescription drugs and the dispensing
of controlled substances. The Federal Trade Commission requires mail order
sellers of goods generally to engage in truthful advertising, to stock a
reasonable supply of the product to be sold, to fill mail orders within thirty
days, and to provide customers with refunds when appropriate. The United States
Postal Service has statutory authority to restrict the transmission of drugs and
medicines through the mail to a degree that could have an adverse effect on the
Company's mail service operations. The United States Postal Service has
exercised such statutory authority only with respect to controlled substances.
Alternative means of delivery are available to the Company.
Regulation of Prescription Benefit Management Services
Various forms of government regulations affect or could affect providers of
prescription benefit management services. Among the most prominent forms of such
regulation are the following:
Many states have licensure or registration laws governing certain types of
ancillary health care organizations, including Preferred Provider Organizations,
Third Party Administrators and Utilization Review Organizations. These laws
differ significantly from state to state, and the application of such laws to
the activities of pharmacy benefit managers is often unclear. The Company has
registered under such laws in those states in which the Company has concluded
such registration is required.
Numerous states have also adopted "any willing provider" legislation, which
requires pharmacy network sponsors to admit for network participation any retail
pharmacy willing to meet a health care plan's price and other terms. The Company
has not been materially affected by these statutes because it administers a
network of over 50,000 retail pharmacies and will admit any qualified, licensed
pharmacy that agrees to comply with the terms of its plans.
"Anti-kickback" statutes at the federal and state level prohibit an entity
from paying or receiving any remuneration to induce the referral of health care
plan beneficiaries or the purchase of items or services for which payment may be
made under such health care plans. Additionally, most states have consumer
protection laws that have been the basis for investigations and multi-state
settlements relating to financial incentives provided by pharmaceutical
manufacturers to retail pharmacies in connection with pharmaceutical switching
programs. At the federal level, such regulations pertain to beneficiaries of
Medicare, Medicaid or other federally-funded health care programs. State
regulations typically pertain to beneficiaries of any health care plan. Under
the federal regulations, safe harbors exist for certain properly disclosed
payments made by vendors to group purchasing organizations. To the Company's
knowledge, these anti-kickback laws have not been applied to prohibit PBMs from
receiving amounts from pharmaceutical manufacturers in connection with
pharmaceutical purchasing and formulary management programs, to therapeutic
substitution programs conducted by independent PBMs or to the contractual
relationships such as those the Company has with certain of its customers.
15
16
Under the Federal Food Drug and Cosmetic Act of 1933, the U.S. Food and
Drug Administration ("FDA") has responsibility for regulating prescription drug
advertising and promotional activities. Traditionally, the FDA has used this
authority to regulate the promotional activities of drug manufacturers. On
January 6, 1998, the FDA issued a Notice and Draft Guidance regarding its intent
to regulate "promotional" activities performed by prescription benefit
management companies and other health care organizations in certain
circumstances, depending on the relationship between the organization and the
manufacturer of the product being "promoted." In response to the FDA's request
for public comments on the Draft Guidance, the Company and ProVantage submitted
written comments on April 3, 1998. It is the Company's and ProVantage's position
that FDA regulation of prescription benefit management companies is
inappropriate and unnecessary. There can be no assurance, however, that the FDA
will not assert jurisdiction over certain aspects of the Company's or
ProVantage's operations, and the impact of such assertion could materially and
adversely affect the Company's or ProVantage's business.
Regulation of Vision Benefit Management Services
The Company's vision benefit management services are subject to the same or
similar state and federal regulation as the prescription benefit management
services described above.
Applicability of Insurance Laws
The Company's prescription pharmaceutical plans currently offered or
administered by the Company are on a fee-for-service basis, and are therefore
not generally subject to state insurance laws. The insured vision benefit plans
administered by the Company are underwritten by an unaffiliated licensed
insurer, and the Company believes it is in material compliance with all
applicable insurance laws.
Legislative and regulatory initiatives pertaining to such health care
related issues as reimbursement policies, payment practices, therapeutic
substitution programs, and other health care cost containment issues are
frequently introduced at both state and federal level. The Company is unable to
predict accurately whether or when legislation may be enacted or regulations may
be adopted relating to the Company's health services operations or what the
effect of such legislation or regulations may be.
The Company's management believes the Company is in substantial compliance
with, or is in the process of complying with, all existing statutes and
regulations material to the operation of the Company's health services business
and, to date, no state or federal agency has taken enforcement action against
the Company for any material non-compliance, and to the Company's knowledge, no
such enforcement against the Company is presently contemplated.
16
17
FORWARD-LOOKING STATEMENTS
In accordance with the Private Securities Litigation Reform Act of 1995,
the Company can obtain a "safe-harbor" for forward-looking statements by
identifying those statements and by accompanying those statements with
cautionary statements which identify factors that could cause actual results to
differ from those in the forward-looking statements. Accordingly, the following
information contains or may contain forward-looking statements: (1) information
included or incorporated by reference in this Annual Report on Form 10-K,
including, without limitation, statements made under Item 1, Business, including
statements made under the subheadings "Merchandising and Services-Retail Store,"
"Merchandising and Services - ProVantage," "Store Operations and Management,"
"Purchasing and Distribution," "Management Information Systems," "Expansion,"
and "Competition," and under Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, (2) information included or
incorporated by reference in future filings by the Company with the Securities
and Exchange Commission including, without limitation, statements with respect
to growth and expansion plans, projected sales, revenues, earnings, costs and
capital expenditures, and product development and product roll-out plans, and
(3) information contained in written material, releases and oral statements
issued by, or on behalf of, the Company including, without limitation,
statements with respect to growth and expansion plans, projected sales,
revenues, earnings, costs and capital expenditures, and product development and
product roll-out plans. The Company's actual results may differ materially from
those contained in the forward-looking statements identified above. Factors
which may cause such a difference to occur include, but are not limited to, (i)
heightened competition, including specifically increased price competition from
national and regional discount stores, specialty stores, and prescription
benefit management companies, (ii) adverse weather conditions in the Company's
retail markets, (iii) changes in the prescription drug industry regarding
pricing, formulary use, or reimbursement practices, (iv) minimum wage
legislation, (v) adverse developments in regulatory and litigation matters,
including those affecting health care services, particularly prescription
benefit managers, (vi) interest rates, (vii) real estate costs and construction
and development costs, (viii) inventory imbalances caused by unanticipated
fluctuations in consumer demand, (ix) trends in the economy which affect
consumer confidence and consumer demand for the Company's goods, particularly
trends affecting the Company's markets, (x) possible termination of prescription
benefit management contracts with key clients or pharmaceutical manufacturers,
(xi) the availability of suitable retail real estate which can be acquired on
terms which are acceptable to the Company and (xii) loss of key management
personnel; (xiii) prescription benefit management industry margin erosion: (xiv)
changes in pricing or discount practices of pharmaceutical manufacturers; (xv)
risks associated with the development of new health care products and services;
(xvi) risks associated with the consummation of acquisitions and integration of
new businesses with the Company's existing business; (xvii) risks associated
with the management and continuance of ProVantage's rapid growth; and (xviii)
other risks described from time to time in the Company's SEC filings.
17
18
ITEM 2. PROPERTIES
As of January 31, 1998, the Company operated 149 retail stores and four
stand alone optical centers in 17 Midwest, Western Mountain and Pacific
Northwest states. The following table sets forth the geographic distribution of
the Company's present stores:
# OF # OF
STATE STORES STATE STORES
-----------------------------------------------------------
California 1 Nebraska 11
Colorado 3 Nevada 3
Idaho 8 Oregon 4
Illinois 12 South Dakota 6
Iowa 12 Utah 15
Michigan 4 Washington 10
Minnesota 13 Wisconsin 41
Missouri 1 --------------
Montana 5 Subtotal 149
--------------
Ohio * 4
--------------
Total 153
==============
- -------
* Vision Advantage Optical Centers
Of the Company's 149 ShopKo retail stores at January 31, 1998, the Company
owns the land and building outright with respect to 84 stores, owns the building
subject to a ground lease with respect to 5 stores and leases the land and
building with respect to 10 stores. The Company's wholly-owned subsidiary,
ShopKo Properties, Inc., owns the land and building outright with respect to 27
stores, owns the building subject to a ground lease with respect to 3 stores and
leases the land and building with respect to 1 store. Of the 18 Jacks stores and
1 Lots-A-Deals store that were acquired, the Company owns the land and building
outright with respect to 10 stores, 7 of which are subject to mortgages, and
leases the land and building with respect to 8 Jacks stores and 1 Lots-A-Deals
store. In March 1998, the Lots-A-Deals store in Moline, Illinois was closed, and
the Iowa City, Iowa Jacks store will be closed by June 1998. Both facilities are
leased. The ground leases expire at various dates ranging from 2012 through 2038
and the other leases expire at various dates ranging from 2000 through 2020. All
four Vision Advantage stores are leased. The size of a typical Vision Advantage
store is approximately 2,500 square feet.
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19
The Company's other principal properties are as follows:
SQ. FT OF
BUILDING
LOCATION USE SPACE TITLE
- ------------------------------------------------------------------------------------------------------------
Green Bay, WI Corporate Headquarters 228,000 Owned
Quincy, IL Corporate Headquarters 15,000 Owned
(Will be closed in May 1998)
Wisconsin Rapids, WI Information Services Dept. Satellite Office 1,300 Leased
De Pere, WI Distribution Center 265,000 Owned
Boise, ID Distribution Center 210,000 Owned
Omaha, NE Distribution Center 50,000 Owned
Quincy, IL Distribution Center 449,500 Leased
Green Bay, WI ProVantage Mail Service 10,000 Leased
Brookfield, WI ProVantage Claims Processing Facility 14,400 Leased
Lawrence, WI Corporate Headquarters - South 114,300 Owned
Annex/Return Center
Elm Grove, WI ProVantage Claims Processing/ 5,300 Leased
Administrative Office Annex
Salt Lake City, UT ProVantage Regional Office 1,250 Leased
Alexandria, VA PharMark Office 15,500 Leased
London, England euroPharMark Office 500 Leased
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various litigation matters arising in the
ordinary course of its business. Management believes that none of this
litigation will have a material adverse effect on the Company's financial
condition or results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no matter submitted during the fourth quarter of fiscal year 1997
to a vote of the security holders of Registrant.
EXECUTIVE OFFICERS OF THE REGISTRANT
SERVED IN EMPLOYED
CURRENT BY THE
POSITION COMPANY
NAME AGE* POSITION SINCE SINCE
---- ---- -------- ----- -----
Dale P. Kramer 58 President, Chief Executive Officer and Chairman of 1991 1971
the Board
William J. Podany 51 Executive Vice President; President, Chief Operating 1997 1994
Officer of Retail Stores Division; Director
Michael J. Bettiga 44 Senior Vice President, General Merchandise Manager, 1995 1977
Retail Health Services
Paul A. Burrows 49 Senior Vice President, Chief Information Officer 1998 1998
Roger J. Chustz 47 Senior Vice President, General Merchandise 1993 1993
Manager, Apparel
Steven T. Harig 43 Senior Vice President, Planning, Replenishment 1993 1989
and Analysis, Distribution and Transportation
Gary A. Hillerman 49 Senior Vice President, General Merchandise 1997 1996
Manager, Hardlines
Michael J. Hopkins 47 Senior Vice President, General Merchandise 1995 1995
Manager, Home and Hardlines
Jeffrey A. Jones 51 Senior Vice President and Chief Financial 1997 1993
Officer; Executive Vice President and Chief
Operating Officer of ProVantage, Inc.
Rodney D. Lawrence 40 Senior Vice President, Store Marketing, 1996 1996
Store Planning
David A. Liebergen 52 Senior Vice President, Human Resources, 1993 1973
Legal Affairs and Internal Communication
L. Terry McDonald 55 Senior Vice President, Marketing 1994 1994
Richard D. Schepp 37 Senior Vice President, General Counsel and Secretary 1997 1992
*as of January 31, 1998
There are no family relationships between or among any of the directors or
executive officers of the Company.
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21
The term of office of each executive officer is from one annual meeting of
the directors until the next annual meeting of directors or until a successor
for each is selected.
There are no arrangements or understandings between any of the executive
officers of the Registrant and any other person (not an officer or director of
the Registrant acting as such) pursuant to which any of the executive officers
were selected as an officer of the Registrant.
Each of the executive officers of the Company has been in the employ of the
Company for more than five years, except for William J. Podany, Paul A. Burrows,
Roger J. Chustz, Gary A. Hillerman, Michael J. Hopkins, Jeffrey A. Jones, Rodney
D. Lawrence and L. Terry McDonald.
Mr. Podany has been a director to the Company since July 1997 and Executive
Vice President since November 1994. In November 1997, he was promoted to
President, Chief Operating Officer of ShopKo's Retail Stores Division. He has
held senior merchandising executive officer positions with Allied Stores, May
Department Stores and Carter Hawley Hale since 1978. From 1992 to 1994, Mr.
Podany was Executive Vice President - Merchandising, Planning and Distribution
of Carter Hawley Hale, a federation of four department store chains. From 1987
to 1992, he was Senior Vice President and General Merchandise Manager of
Thalhimer's and Sibley's, both divisions of May Department Stores. Mr. Podany
has held a broad range of other retail merchandising positions since beginning
his career in 1969.
Mr. Burrows joined the Company in January 1998 as Senior Vice President and
Chief Information Officer. Mr. Burrows was First Vice President/Chief
Information Officer with Coldwell Banker Corp. from June 1996 through December
1997. Prior to that, Mr. Burrows was employed with Broadway Stores, Inc.
(formerly Carter Hawley Hale Stores, Inc.) for thirteen years, most recently as
Senior Vice President, Information Services.
Mr. Chustz has been Senior Vice President - General Merchandise Manager,
Apparel of the Company since October 1993. Mr. Chustz also served as Vice
President - General Merchandise Manager, Apparel from March 1993 to October
1993. Mr. Chustz was employed by Maison Blanche in various positions from 1975
through 1992, most recently as Senior Vice President - General Merchandising
Manager. Mr. Chustz also served as President of Brocato immediately prior to
joining the Company.
Mr. Hillerman has been Senior Vice President - General Merchandise Manager,
Hardlines since March 1997. Mr. Hillerman also served as Vice President -
Divisional Merchandise Manager from March 1996 to March 1997. He was Divisional
Merchandise Manager at Dillards from 1991 to 1996. Mr. Hillerman also served as
Vice President of Buying at Tuesday Morning and Senior Vice President - General
Merchandise Manager of Hardlines and Home at May Company.
Mr. Hopkins has been Senior Vice President - General Merchandise Manager,
Home and Hardlines since November 1995. From 1992 to 1995, Mr. Hopkins was
Senior Vice President - Merchandise Planning and Distribution at Carter Hawley
Hale. Prior thereto, Mr. Hopkins served as Senior Vice President and General
Merchandise Manager of Home with Broadway Southwest division of Carter Hawley
Hale from 1985 to 1992.
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Mr. Jones has been Executive Vice President, Chief Operating Officer of
ProVantage, Inc. since November 1997 and Senior Vice President and Chief
Financial Officer of the Company since November 1993. Mr. Jones was Senior Vice
President and Chief Financial Officer for Trans World Music Corporation from
1990 through 1993. Prior to joining Trans World Music Corporation, Mr. Jones had
eight years of chief financial officer experience and twelve years experience
with Arthur Anderson & Co.
Mr. Lawrence has been Senior Vice President - Store Marketing and Store
Planning since May 1996. He was Vice President - Store Planning with Broadway
Stores, Inc. from 1994 to 1996. Mr. Lawrence was Director of Store Planning with
Carter Hawley Hale Stores, Inc. from 1992 to 1994 and Vice President - Visual
Merchandising with Broadway from 1989 to 1992.
Mr. McDonald has been Senior Vice President - Marketing of the Company
since July 1994. Mr. McDonald was Senior Vice President - Marketing with Payless
Shoe Source from 1988 to 1994 and Senior Vice President - Advertising & Sales
Promotion with M. O'Neil Co., from 1986 to 1988. Payless Shoe Source and M.
O'Neil Co. are both divisions of May Department Stores. Mr. McDonald also held
various merchandising and marketing positions, including Vice President -
General Merchandise Manager, Home and Vice President Advertising and Sales
Promotion with Cain-Sloan Co., an Allied Stores Division.
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23
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
ShopKo Stores, Inc. common shares are listed on the New York Stock Exchange
under the symbol "SKO" and in the newspapers as "ShopKo." As of March 20, 1998,
ShopKo's common shares were held by 1,030 record owners.
The following table sets forth the high and low reported closing sales
prices for the Common Stock for the last two fiscal years as reported on the New
York Stock Exchange Composite Tape.
HIGH LOW DIVIDEND
---- --- --------
Fiscal Year 1996
First Quarter (ended June 15, 1996) $16.5000 $11.2500 $ 0.11
Second Quarter (ended September 7, 1996) 16.2500 13.5000 0.11
Third Quarter (ended November 30, 1996) 16.2500 15.0000 --
Fourth Quarter (ended February 22, 1997) 16.1250 14.3750 --
Fiscal Year 1997
First Quarter (ended June 14, 1997) $26.8750 $14.5000 $ --
Second Quarter (ended September 6, 1997) 29.7500 25.5000 --
Third Quarter (ended November 29, 1997) 28.8125 21.0000 --
Fourth Quarter (ended January 31, 1998) 25.6250 19.2500 --
The closing sales price of the Common Stock on the New York Stock Exchange
on April 2, 1998 was $32.50 per share.
As a result of the proposed transaction with Phar-Mor and Cabot Noble, the
Company was prohibited from declaring or paying any dividends. Upon termination
of such transaction, the Company determined to retain earnings, if any, for the
growth and expansion of its business and not declare or pay any cash dividends.
Future dividends will be subject to the discretion of the Company's Board of
Directors and will depend upon the Company's results of operations, financial
condition, capital expenditure program, debt repayment requirements and other
factors, some of which are beyond the Company's control. There can be no
assurance as to whether or when the Company's Board of Directors will change the
current policy regarding dividends.
The Registrant's revolving credit agreement has a restrictive covenant
which requires maintenance of a minimum net worth. This covenant may potentially
limit the payment of dividends. As of January 31, 1998, the Company was in
compliance with this covenant; having a net worth balance of $396.0 million
compared to a required balance of $306.4 million.
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ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS ENDED
-----------------------------------------------------------------
JAN. 31, FEB. 22, FEB. 24, FEB. 25, FEB. 26,
1998 1997 1996 1995 1994(1)
(49 WKS) (52 WKS) (52 WKS) (52 WKS) (52 WKS)
- --------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS (MILLIONS)
- --------------------------------------------------------------------------------------------------------------------------
Net sales $2,448 $2,333 $1,968 $1,853 $1,739
Licensed department rentals and other income 12 13 14 12 12
Gross margin 564 550 501 488 453
Selling, general and administrative expenses 404 397 361 356 344
Nonrecurring charge(2) 3
Depreciation and amortization expenses 58 60 56 53 47
Interest expense - net 31 32 34 29 21
Earnings before income taxes 80 74 63 62 53
Net earnings 49 45 38 38 32
- --------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (DOLLARS)
- --------------------------------------------------------------------------------------------------------------------------
Basic net earnings per common share $1.73 $1.40 $1.20 $1.18 $1.00
Diluted net earnings per common share 1.71 1.39 1.20 1.18 1.00
Cash dividends declared per common share(3) -- 0.22 0.44 0.44 0.44
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL DATA (MILLIONS)
- --------------------------------------------------------------------------------------------------------------------------
Working capital $144 $232 $215 $187 $119
Property and equipment-net 630 603 617 618 578
Total assets 1,251 1,234 1,118 1,110 953
Total debt(4) 440 421 416 429 337
Total shareholders' equity 396 461 422 397 374
Capital expenditures 32 39 53 95 134
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
- --------------------------------------------------------------------------------------------------------------------------
Current ratio 1.4 1.7 1.8 1.7 1.5
Return on beginning assets 4.0 % 4.0 % 3.5 % 4.0 % 4.1 %
Return on beginning shareholders' equity 10.6 % 10.7 % 9.7 % 10.1 % 9.0 %
Total debt as % of total capitalization(5) 51.4 % 46.6 % 48.5 % 50.9 % 46.2 %
- --------------------------------------------------------------------------------------------------------------------------
OTHER YEAR END DATA
- --------------------------------------------------------------------------------------------------------------------------
Stores open at year end 149(6) 130 129 124 117
Average store size-square feet 88,754 89,840 89,945 90,260 90,440
(1) The effect of adopting Statement of Financial Accounting Standards
("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," resulted in a decrease in net earnings of $0.6 million
($0.02 per share). Adoption of SFAS No. 109, "Accounting for Income
Taxes," had no effect on reported net earnings or financial position.
(2) Nonrecurring charge related to the termination of the proposed
combination with Phar-Mor and Cabot Noble.
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25
(3) Upon termination of the proposed combination with Phar-Mor and Cabot
Noble, the Company determined to retain earnings for the growth and
expansion of its business and not declare or pay any cash dividends.
(4) Total debt includes short-term debt, current portion of long-term
obligations and long-term obligations.
(5) Total capitalization includes shareholders' equity, total debt and
non-current deferred income taxes.
(6) Includes 19 stores acquired from Penn-Daniels, Incorporated. In March,
1998, the Lots-A-Deals store in Moline, Illinois was closed, and the Iowa
City, Iowa Jacks store will be closed by June 1998.
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26
The following unaudited supplemental financial information for the 52
weeks ended January 31, 1998 and February 1, 1997 is provided for comparative
purposes. See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.
SUPPLEMENTAL FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
52 WEEKS ENDED
JANUARY 31, 1998 (F1997) AND FEBRUARY 1, 1997 (F1996)
RETAIL STORE PROVANTAGE CORPORATE TOTAL
---------------------------------------------------------------------------------------------------
F1997 F1996 F1997 F1996 F1997 F1996 F1997 F1996
- ------------------------------------------------------------------------------------------------------------------------------------
Net Sales $ 2,103,419 $ 2,000,830 $ 500,891 $ 330,048 $ (27,388) $ (20,509) $ 2,576,922 $ 2,310,369
Comparable store
sales increase 3.8% 5.9%
Sales increase over 1996 5.1% 51.8% 11.5%
Gross Margin 555,807 524,829 37,283 22,444 593,090 547,273
Percent of net sales 26.4% 26.3% 7.4% 6.8% 23.0% 23.7%
Other Income 11,724 12,333 539 844 12,263 13,177
Percent of net sales 0.6% 0.6% 0.1% 0.3% 0.5% 0.6%
Selling, general and
administrative expenses 381,099 365,580 19,990 11,828 26,603 16,070 427,692 393,478
Percent of net sales 18.1% 18.3% 4.0% 3.6% 16.6% 17.0%
Nonrecurring charge 2,800 2,800
Depreciation and
amortization expenses 56,112 57,053 4,779 2,233 405 471 61,296 59,757
Percent of net sales 2.7% 2.9% 0.9% 0.7% 2.4% 2.6%
Income from operations 130,320 114,529 13,053 9,227 (29,808) (16,541) 113,565 107,215
Percent of net sales 6.2% 5.7% 2.6% 2.8% 4.4% 4.7%
Interest expense - net 32,239 32,000
Earnings before income taxes 81,326 75,215
Provision for income taxes 31,944 29,546
Net earnings $ 49,382 $ 45,669
Earnings per share - basic $ 1.74 $ 1.42
Earnings per share - diluted $ 1.72 $ 1.40
- ------------------------------------------------------------------------------------------------------------------------------------
The unaudited financial information should be read in conjunction with the
Company's audited consolidated financial statements including the notes
thereto.
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27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In August 1997, the Company approved a change in its fiscal year end to
the Saturday closest to the end of January, commencing January 31, 1998. This
change in the Company's fiscal year conforms to the National Retail Federation
calendar. The Company's audited consolidated financial statements were issued
for the 49 weeks ended January 31, 1998 (fiscal 1997), the 52 weeks ended
February 22, 1997 (fiscal 1996), and the 52 weeks ended February 24, 1996
(fiscal 1995). For comparative purposes, the Company is also providing
supplemental unaudited financial information concerning the Company's results
of operations for the 52 weeks ended January 31, 1998 and February 1, 1997
which information is included in Item 6 on this Form 10-K. In the opinion of
management, this unaudited financial information includes all adjustments for a
fair presentation of the results of operations for the periods presented.
RESULTS OF OPERATIONS
The following table sets forth items from the Company's Consolidated
Statements of Earnings as percentages of consolidated net sales:
FISCAL YEARS ENDED
-------------------------------------------
JAN. 31, 1998 FEB. 22, 1997 FEB. 24, 1996
(49 WEEKS) (52 WEEKS) (52 WEEKS)
------------- ------------- -------------
Revenues:
Net sales 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.5 0.6 0.7
------- -------- --------
100.5 100.6 100.7
Costs and expenses:
Cost of sales 77.0 76.4 74.5
Selling, general and administrative expenses 16.5 17.0 18.4
Nonrecurring charge 0.1
Depreciation and amortization expenses 2.4 2.6 2.9
------- -------- --------
96.0 96.0 95.8
Income from operations 4.5 4.6 4.9
Interest expense 1.2 1.4 1.7
------- -------- --------
Earnings before income taxes 3.3 3.2 3.2
Provision for income taxes 1.3 1.3 1.2
------- -------- --------
Net earnings 2.0% 1.9% 2.0%
======= ======== ========
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28
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 health information technology).
Intercompany sales, which consist of prescriptions that were both sold at a
ShopKo pharmacy and processed by ProVantage, have been eliminated.
The following tables set forth items from the Company's business segments
as percentages of net sales:
RETAIL STORE SEGMENT
FISCAL YEARS ENDED
-------------------------------------------
JAN. 31, 1998 FEB. 22, 1997 FEB. 24, 1996
(49 WEEKS) (52 WEEKS) (52 WEEKS)
------------- ------------- -------------
Revenues:
Net sales 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.6 0.6 0.7
------- ------- -------
100.6 100.6 100.7
Costs and expenses:
Cost of sales 73.6 73.8 73.8
Selling, general and administrative expenses 18.0 18.3 18.3
Depreciation and amortization expenses 2.6 2.8 2.9
------- ------- -------
94.2 94.9 95.0
Income from operations 6.4% 5.7% 5.7%
======= ======= =======
PROVANTAGE SEGMENT
FISCAL YEARS ENDED
-------------------------------------------
JAN. 31, 1998 FEB. 22, 1997 FEB. 24, 1996
(49 WEEKS) (52 WEEKS) (52 WEEKS)
------------- ------------- -------------
Revenues:
Net sales 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.1 0.2 0.5
------- -------- --------
100.1 100.2 100.5
Costs and expenses:
Cost of sales 92.5 93.1 91.0
Selling, general and administrative expenses 3.9 3.8 5.5
Depreciation and amortization expenses 1.0 0.6 1.1
------- -------- --------
97.4 97.5 97.6
Income from operations 2.7% 2.7% 2.9%
======= ======== ========
FISCAL 1997 COMPARED TO FISCAL 1996
Consolidated net sales for fiscal 1997 (49 weeks) increased $114.4 million
or 4.9%, over fiscal 1996 (52 weeks) to $2,447.8 million. When compared to the
corresponding 49-week period of the previous fiscal year, consolidated net
sales increased 11.0%.
28
29
Retail Store sales for fiscal 1997 (49 weeks) decreased 0.2% or $4.2
million from fiscal 1996 (52 weeks) to $2,001.6 million. When compared to the
corresponding 49-week period of the previous fiscal year, Retail Store sales
increased 5.1% and comparable Retail Store sales increased 3.7%. The
comparable Retail Store increases for that period by category were as follows:
Retail Health--10.3%, Apparel--2.8%, and Hardline/Home--1.6%. The Company
attributes these comparable Retail Store increases in large part to the success
of its merchandising operations and marketing initiatives. Changes in retail
comparable store sales for a year are based upon those stores which were open
for the entire preceding year.
ProVantage sales for fiscal 1997 (49 weeks) increased 35.4% or $123.4
million over fiscal 1996 (52 weeks) to $472.2 million. When compared to the
corresponding 49-week period of the previous fiscal year, ProVantage sales
increased 47.1%. This increase is primarily attributable to growth in claims
processing activities, most of which was internally generated and a portion of
which was due to the acquisition of CareStream Scrip Card. Included in
ProVantage sales are amounts billed to insurance companies, third party
administrators and self-funded medical plan sponsors for medical claims and
claims processing fees; the amount of prescription sales through the mail
service pharmacy; the amounts billed to pharmaceutical manufacturers and third
party formulary administrators for formulary fees; and contract and license
fees for health information technology services. The formulary fees included
in ProVantage sales were $13.6 million and $16.7 million for fiscal years 1997
and 1996, respectively. On a per claim basis, net formulary fees were $0.48
and $0.51 for fiscal years 1997 and 1996, respectively. Management expects the
net formulary fees per claim to continue to decline in fiscal 1998.
Consolidated gross margins as percentages of sales were 23.0% and 23.6%
for fiscal 1997 and 1996, respectively. Retail Store gross margins as
percentages of sales were 26.4% and 26.2% for fiscal 1997 and 1996,
respectively. The Retail Store gross margins include a LIFO credit of $3.7
million for fiscal 1997 and a LIFO charge of $2.6 million for fiscal 1996.
Retail Store gross margins, before LIFO expense, were 26.2% and 26.3% for
fiscal 1997 and 1996, respectively. ProVantage gross margins as percentages of
sales were 7.5% and 6.9% for fiscal 1997 and 1996, respectively. This increase
is primarily due to improved gross margin rates in ProVantage's formulary
business.
Consolidated selling, general and administrative expenses as a percentage
of net sales decreased to 16.5% in fiscal 1997, compared with 17.0% in fiscal
1996. Retail Store selling, general and administrative expenses were 18.0% and
18.3% of net sales for fiscal 1997 and 1996, respectively. This improvement is
primarily due to more effectively managing store payroll costs. ProVantage
selling, general and administrative expenses increased 0.1% of net sales to
3.9% compared with 3.8% in fiscal 1996. This increase is primarily due to
additional investments in information technology and infrastructure support
related to continued growth. Selling, general and administrative expenses will
be impacted in fiscal 1998 by the Penn-Daniels acquisition. See "Capital
Expenditures and Acquisitions."
29
30
The Company's operating earnings (earnings before interest and income
taxes) increased 4.9% to $111.0 million in fiscal 1997 from $105.8 million in
fiscal 1996. Retail Store operating earnings (earnings before corporate
expenses, interest and income taxes) increased 12.0% to $127.3 million in
fiscal 1997 compared to $113.7 million in fiscal 1996. This increase is
primarily due to increased sales and expense control initiatives. ProVantage
operating earnings increased 32.8% in fiscal 1997 to $12.7 million compared to
$9.5 million in fiscal 1996. This increase is primarily due to growth in
prescription benefit management services and business acquisitions.
Net interest expense as a percentage of net sales decreased to 1.2% in
fiscal 1997 compared with 1.4% in fiscal 1996. This decrease is primarily due
to increased sales.
Supplemental Comparison of Fiscal 1997 to Fiscal 1996
The supplemental comparison should be read in conjunction with the
Company's unaudited financial information for the 52 weeks ended January 31,
1998 and February 1, 1997 included in Item 6 on this Form 10-K.
ANNUAL CONSOLIDATED SALES SUMMARY
52 WEEKS
2/2/97- 2/4/96- % COMPARABLE STORE
Dollars in Millions 1/31/98 2/1/97 % % CHANGE SALES INCREASE
------------------------------------------------------------------
Business Segments
Retail Store $2,103.4 $2,000.8 5.1% 3.8%
ProVantage 500.9 330.1 51.8% N/A
Intercompany (27.4) (20.5) N/A N/A
-------- -------- --------
Consolidated $2,576.9 $2,310.4 11.5% N/A
======== ========
Consolidated gross margin as a percent of sales for the 52 weeks ended
January 31, 1998 was 23.0% compared with 23.7% for the 52 weeks ended February
1, 1997. The Retail Store gross margin as a percent of sales for the same
period was 26.4% compared with 26.3% for the preceding period. The FIFO Retail
Store gross margin as a percent of sales for the 52 weeks was 26.3% compared
with 26.4%. ProVantage's gross margin as a percent of sales for the same
period increased to 7.4% from 6.8% primarily due to improved gross margin rates
in its formulary business.
Consolidated selling, general and administrative expenses as a percent of
sales for the 52 weeks ended January 31, 1998 decreased to 16.6% from 17.0%.
Retail Store selling, general and administrative expense as a percent of sales
for the same period was 18.1% compared with 18.3% for the preceding period.
This decrease is primarily due to more effectively managing store payroll
costs. ProVantage's selling, general and administrative expenses increased to
4.0% of sales for the 52 weeks ended January 31, 1998 compared with 3.6% of
sales for the preceding period. This increase is primarily due to additional
investments in information technology and infrastructure support related to
continued growth.
30
31
FISCAL 1996 COMPARED TO FISCAL 1995
Consolidated net sales for fiscal 1996 (52 weeks) increased 18.6% or
$365.4 million over fiscal 1995 (52 weeks) to $2,333.4 million.
Retail Store sales increased 6.6% or $124.7 million over fiscal 1995 to
$2,005.7 million. Comparable Retail Store sales increased 6.0%. The
comparable Retail Store increases by category were as follows: Apparel--12%,
Retail Health--8% and Hardline/Home--3%. Changes in retail comparable store
sales for a fiscal year are based upon those stores which were open for the
entire preceding fiscal year.
ProVantage sales increased 271.7% or $254.9 million over fiscal 1995 to
$348.8 million. Management attributes this increase primarily to internally
generated growth and supplementally to 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. The formulary fees included in ProVantage
sales were $16.7 million and $5.7 million for fiscal years 1996 and 1995,
respectively. On a per claim basis, net formulary fees were $0.51 and $0.79
for fiscal years 1996 and 1995, respectively.
Consolidated gross margins as percentages of sales were 23.6% and 25.5%
for fiscal 1996 and 1995, respectively. Retail Store gross margins as
percentages of sales were 26.2% for both fiscal years and include LIFO charges
of $2.6 million and $2.2 million for fiscal 1996 and 1995, respectively.
Retail Store gross margins, before LIFO expense, were 26.3% in fiscal 1996 and
fiscal 1995. ProVantage gross margins as percentages of sales were 6.9% and
9.0% for fiscal 1996 and 1995, respectively. This decrease is attributable to
a larger percentage of the sales coming from the lower gross margin claims
processing activities and to an increase in the percentage of formulary fees
shared with clients.
Consolidated selling, general and administrative expenses decreased 1.4%
of net sales to 17.0% compared with 18.4% in fiscal 1995. The decrease is due
to increased sales related to ProVantage. Retail Store selling, general and
administrative expenses were 18.3% of net sales for both fiscal years.
ProVantage selling, general and administrative expenses decreased 1.7% of net
sales to 3.8% compared with 5.5% in fiscal 1995. This decrease is primarily
due to leveraging costs against increasing sales volumes.
The Company's operating earnings (earnings before interest and income
taxes) increased 8.6% to $105.8 million in fiscal 1996 from $97.4 million in
fiscal 1995. Retail Store operating earnings (earnings before corporate
expenses, interest and income taxes) increased 6.0% to $113.7 million in fiscal
1996 compared to $107.2 million in fiscal 1995. This increase is primarily due
to increased sales. ProVantage operating earnings increased in fiscal 1996 to
$9.5 million compared to $2.7 million in fiscal 1995. This increase is
primarily due to growth in prescription benefit management services and
business acquisitions.
Net interest expense in fiscal 1996 decreased from the prior year by 0.3%
of net sales to 1.4% of net sales. This decrease is primarily due to increased
sales and increased interest income. Interest income increased to $4.3 million
in fiscal 1996 compared with $1.8 million in fiscal 1995.
31
32
LIQUIDITY AND CAPITAL RESOURCES
The Company relies on cash generated from its operations, with the
remaining needs being met by short-term and long-term borrowings. Cash
provided from operating activities was $142.6 million, $111.7 million and
$155.6 million in fiscal years 1997, 1996 and 1995, respectively.
The Company entered into a new $200.0 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. Funds generated
from operations, and if necessary, the revolving credit facility are expected
to fund the projected working capital needs and total capital expenditures
through fiscal 1998.
CAPITAL EXPENDITURES AND ACQUISITIONS
The Company spent $32.0 million on capital expenditures (excluding
acquisitions) in fiscal 1997, compared to $38.9 million in fiscal 1996 and
$53.0 million in fiscal 1995. The following table sets forth the components of
the Company's capital expenditures and acquisitions (in millions):
FISCAL YEARS ENDED
--------------------------------------------
JAN. 31, 1998 FEB. 22, 1997 FEB. 24, 1996
(49 WEEKS) (52 WEEKS) (52 WEEKS)
------------- ------------- -------------
Capital Expenditures
New stores $ 0.0 $ 2.5 $14.9
Remodeling and refixturing 12.6 14.6 24.7
Distribution centers 0.7 1.3 0.7
Management information and point-of-sale equipment
and systems 18.0 18.8 11.7
Other 0.7 1.7 1.0
----- ----- -----
Total $32.0 $38.9 $53.0
===== ===== =====
Acquisitions $40.5 $30.5 $ -
===== ===== =====
While the Company did not complete any major remodels in existing ShopKo
stores or construct any new stores in fiscal 1997, the Company did spend $12.6
million for merchandise initiatives and store equipment and fixturing
replacements. On December 19, 1997, ShopKo acquired the retail chain
Penn-Daniels, Incorporated ("Penn-Daniels"), which operated 18 Jacks discount
stores and one Lots-A-Deals close-out store in Iowa, Illinois and Missouri.
The Company is converting 17 of the Jacks retail locations to ShopKo stores,
including the addition of in-store pharmacies and optical centers. 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.
32
33
The Company's total capital expenditures for the fiscal year ending
January 30, 1999 are anticipated to approximate $80.0 to $90.0 million, the
majority of which would relate to remodeling the recently acquired Penn-Daniels
stores, supporting the existing retail business for merchandise initiatives and
ongoing store equipment and fixturing replacements and continuing investments
in systems technology. This amount excludes any capital that may be 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 August 2, 1996, the Company completed the acquisition of CareStream
Scrip Card from Avatex Corporation, formerly known as Foxmeyer Health
Corporation. CareStream Scrip Card is a prescription benefit management company
which has been integrated with the Company's ProVantage subsidiary. The
purchase price was $30.5 million in cash, with a supplemental cash payment of
between $2.5 million and $5.0 million due between six months and five years
after August 2, 1996. The purchase price was funded from the Company's
available cash.
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.
On August 20, 1997, the Company 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 $15.3 million, of
which $13.3 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 the Company'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.
33
34
On December 19, 1997, ShopKo bought the outstanding stock of Penn-Daniels,
a retail chain headquartered in Quincy, Illinois for approximately $16.4
million in cash and $42.5 million of assumed debt, of which approximately $21.0
million was retired at the time of the closing. The Company utilized cash and
borrowings under its revolving credit facility to fund the acquisition and the
retirement of a portion of Penn-Daniels outstanding debt. The acquisition was
accounted for under the purchase method of accounting. Penn-Daniels operated
18 Jacks discount stores in Iowa, Illinois and Missouri and one Lots-A-Deals
close-out store in Moline, Illinois. The results of Penn-Daniels operations
since the date of acquisition have been included in the fiscal 1997
consolidated statement of earnings.
In connection with the Penn-Daniels acquisition, ShopKo expects to incur
nonrecurring pre-tax costs of approximately $10.0 million for duplicate
operations at the Penn-Daniels administrative office and warehouse until they
are consolidated with ShopKo's operations and for other transaction related
items. These estimated costs are expected to be incurred primarily in the
first half of fiscal 1998. The Company expects to fund these 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 1998 earnings per share excluding the nonrecurring pre-tax
costs described above, and to be slightly dilutive to fiscal 1998 earnings when
such costs are factored into fiscal 1998 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 1997 for costs incurred in
connection with the terminated business combination.
STOCK BUYBACK AGREEMENT
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.
34
35
YEAR 2000
The Company is in the process of addressing Year 2000 compliance.
Management has initiated a comprehensive project designed to eliminate or
minimize any business disruption associated with date processing problems in
computer and other electronic systems. The Company will utilize both internal
and external resources to complete the Year 2000 assessment, modification (where
necessary) and testing process.
As a result of the significant investment made by the Company in both
hardware and software over the past several years, management does not
anticipate that Year 2000 compliance initiatives will be disruptive to its
operations. The overall cost of these initiatives is not expected to have a
material impact on the Company's financial statements.
As part of the process, the Company is also communicating with others with
whom it does significant business to determine their Year 2000 compliance
readiness. There can be no guarantee that the systems of other companies on
which the Company's systems rely will be compliant, or that a failure by
another company to bring its systems into compliance would not have a material
adverse effect on the Company.
TREASURY STOCK RETIREMENT
In the first quarter of fiscal 1998, the Company will retire all 8,174,387
shares of common stock held as treasury stock for accounting purposes, and such
shares will be returned to the status of authorized but unissued shares. As a
result, the $152.2 million assigned to treasury stock will be eliminated with a
corresponding decrease in par value, additional paid-in capital and retained
earnings.
INFLATION
Inflation has not had a significant effect on the results of operations of
the Company or its internal and external sources of liquidity.
RECENT PRONOUNCEMENTS
In 1997, Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," and SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information," were issued. Both statements must
be adopted by the Company beginning February 1, 1998. The Company is currently
evaluating the impact of these statements on the consolidated financial
statements.
35
36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated financial statements and supplementary data are included
on pages 41 to 60 and are incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
36
37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10, as to Directors of the
Registrant and the information required by Item 401 of Regulation S-K, is
incorporated herein by reference to the Registrant's definitive Proxy
Statement dated April 10, 1998 filed with the Securities and Exchange
Commission pursuant to Regulation 14A in connection with the Registrant's 1998
Annual Meeting of Shareholders. Information regarding executive officers is
included in Part I above.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference
to the Registrant's definitive Proxy Statement dated April 10, 1998 filed with
the Securities and Exchange Commission pursuant to Regulation 14A in connection
with the Registrant's 1998 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated herein by reference
to the Registrant's definitive Proxy Statement dated April 10, 1998 filed with
the Securities and Exchange Commission pursuant to Regulation 14A in connection
with the Registrant's 1998 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated herein by
reference to the Registrant's definitive Proxy Statement dated April 10, 1998
filed with the Securities and Exchange Commission pursuant to Regulation 14A in
connection with the Registrant's 1998 Annual Meeting of Shareholders.
37
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Consolidated Financial Statements:
See "Index to Consolidated Financial Statements and Financial
Statement Schedules" on page 39, the Independent Auditors' Report on
page 40 and the Consolidated Financial Statements on pages 41 to 60,
all of which are incorporated herein by reference.
2. Financial Statement Schedules:
See "Index to Consolidated Financial Statements and Financial
Statement Schedules" on page 39 and the Financial Statement Schedule on
page 61, all of which are incorporated herein by reference.
3. Exhibits:
See "Exhibit Index" on pages 63 to 68 which is incorporated herein by
reference.
Pursuant to Regulation S-K, Item 601(b) (4) (iii), the
Registrant hereby agrees to furnish to the Commission, upon request, a
copy of each instrument and agreement with respect to long-term debt of
the Registrant and its consolidated subsidiaries which does not exceed
10 percent of the total assets of the Registrant and its subsidiaries
on a consolidated basis.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K in the fourth quarter of
fiscal 1997 as follows:
Date of Report Items Reported
- ---------------- --------------------------------------------------------------
January 16, 1998 Items 5,7 - The Company presented unaudited financial
information for each quarter of fiscal 1996, for the full
year of fiscal 1996, and for each of the first three quarters
of fiscal 1997 as if the Company had been using the National
Retail Federation Retail calendar as its fiscal year for
those periods.
38
39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE
-----
Index to Consolidated Financial Statements of ShopKo Stores, Inc. and Subsidiaries
- ----------------------------------------------------------------------------------
Independent Auditors' Report...................................................................... 40
Consolidated Statements of Earnings
for each of the three years in the period ended January 31, 1998............................... 41
Consolidated Balance Sheets as of January 31, 1998 and February 22, 1997.......................... 42
Consolidated Statements of Cash Flows
for each of the three years in the period ended January 31, 1998................................ 43
Consolidated Statements of Shareholders' Equity
for each of the three years in the period ended January 31, 1998................................ 44-45
Notes to Consolidated Financial Statements ........................................................ 46-60
Index to Financial Statement Schedules
- --------------------------------------
Schedule VIII-Valuation and Qualifying Accounts ................................................... 61
All other schedules are omitted because they are not applicable or not
required.
39
40
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
ShopKo Stores, Inc.:
We have audited the consolidated balance sheets of ShopKo Stores, Inc. and
subsidiaries as of January 31, 1998 and February 22, 1997 and the related
consolidated statements of earnings, shareholders' equity and cash flows for
the year (49 weeks) ended January 31, 1998 and for each of the two years (52
weeks) in the period ended February 22, 1997. Our audits also included the
consolidated financial statement schedule listed in the Index at Item 14. These
financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of ShopKo Stores, Inc. and
subsidiaries as of January 31, 1998 and February 22, 1997, and the results of
their operations and their cash flows for the year (49 weeks) ended January 31,
1998 and for each of the two years (52 weeks) in the period ended February 22,
1997 in conformity with generally accepted accounting principles. Also, in our
opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
March 12, 1998
40
41
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Fiscal Years Ended
- ------------------------------------------------------------------------------------------------------
January 31, February 22, February 24,
1998 1997 1996
(49 Weeks) (52 Weeks) (52 Weeks)
- ------------------------------------------------------------------------------------------------------
Revenues:
Net sales $ 2,447,847 $ 2,333,407 $ 1,968,016
Licensed department rentals and other income 11,756 13,058 13,924
- ------------------------------------------------------------------------------------------------------
2,459,603 2,346,465 1,981,940
Costs and expenses:
Cost of sales 1,883,891 1,783,741 1,466,733
Selling, general and administrative expenses 403,635 397,092 361,402
Nonrecurring charge 2,800
Depreciation and amortization expenses 58,252 59,833 56,383
- ------------------------------------------------------------------------------------------------------
2,348,578 2,240,666 1,884,518
Income from operations 111,025 105,799 97,422
Interest expense - net 30,582 31,777 34,282
- ------------------------------------------------------------------------------------------------------
Earnings before income taxes 80,443 74,022 63,140
Provision for income taxes 31,598 29,076 24,701
- ------------------------------------------------------------------------------------------------------
Net earnings $ 48,845 $ 44,946 $ 38,439
======================================================================================================
Basic net earnings per common share $ 1.73 $ 1.40 $ 1.20
Weighted average number of
common shares outstanding 28,161 32,092 32,005
Diluted net earnings per common share $ 1.71 $ 1.39 $ 1.20
Adjusted weighted average number of
common shares outstanding 28,569 32,370 32,056
See notes to consolidated financial statements.
41
42
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
January 31, February 22,
1998 1997
- ---------------------------------------------------------------------------------------------------------
Assets
- ---------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 54,344 $ 124,550
Receivables, less allowance for losses of
$8,637 and $5,585, respectively 97,812 95,178
Merchandise inventories 376,568 334,962
Other current assets 13,508 10,482
- ---------------------------------------------------------------------------------------------------------
Total current assets 542,232 565,172
Other assets and deferred charges 7,202 5,558
Intangible assets - net 71,668 60,330
Property and equipment - net 629,733 602,832
- ---------------------------------------------------------------------------------------------------------
Total assets $ 1,250,835 $ 1,233,892
=========================================================================================================
- ---------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- ---------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable - trade $ 193,646 $ 165,712
Accrued compensation and related taxes 39,964 34,861
Accrued other liabilities 135,522 113,064
Accrued income and other taxes 24,502 17,664
Current portion of long-term obligations 4,174 2,014
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 397,808 333,315
Long-term obligations 436,125 418,714
Deferred income taxes 20,906 20,999
Shareholders' equity:
Preferred stock; none outstanding
Common stock; shares issued, 33,941 at January 31, 1998
and 32,167 at February 22, 1997 339 322
Additional paid-in capital 283,520 245,137
Retained earnings 264,316 215,405
Less treasury stock; 8,174 shares (152,179)
- ---------------------------------------------------------------------------------------------------------
Total shareholders' equity 395,996 460,864
=========================================================================================================
Total liabilities and shareholders' equity $ 1,250,835 $ 1,233,892
=========================================================================================================
See notes to consolidated financial statements.
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43
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Years Ended
- -----------------------------------------------------------------------------------------------------------------------------------
January 31, February 22, February 24,
1998 1997 1996
(49 Weeks) (52 Weeks) (52 Weeks)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 48,845 $ 44,946 $ 38,439
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 58,252 59,833 56,383
Provision for losses on receivables 2,999 1,200 23
(Gain) on the sale of property and equipment (540) (2,140) (2,739)
Deferred income taxes (1,334) (1,620) 5,206
Change in assets and liabilities (excluding effects of
business acquisitions):
Receivables (3,593) (40,636) (13,470)
Merchandise inventories (9,872) (12,529) 78,190
Other current assets (1,282) 523 2,448
Other assets and intangibles (1,878) (13,062) (2,879)
Accounts payable 17,867 21,074 (4,655)
Accrued liabilities 33,137 54,133 (1,395)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 142,601 111,722 155,551
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment (32,003) (38,899) (53,012)
Proceeds from the sale of property and equipment 2,348 3,275 4,171
Business acquisitions, net of cash acquired (40,488) (30,500)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (70,143) (66,124) (48,841)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in short-term debt (15,000)
Change in common stock from stock options 10,907 1,249
Change in common stock from public offering 23,419
Purchase of treasury stock (152,179)
Dividends paid (10,583) (14,083)
Reduction in debt and capital leases (24,811) (1,183) (756)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) FINANCING ACTIVITIES (142,664) (10,517) (29,839)
- -----------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (70,206) 35,081 76,871
Cash and cash equivalents at beginning of year 124,550 89,469 12,598
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 54,344 $ 124,550 $ 89,469
===================================================================================================================================
Supplemental cash flow information:
Noncash investing and financial activities -
Capital lease obligations incurred $ 5,533 $ 2,573
Restricted stock issued $ 416 $ 1,012
Cash paid during the period for:
Interest $ 29,265 $ 31,663 $ 34,803
Income taxes $ 26,852 $ 30,086 $ 33,062
See notes to consolidated financial statements.
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44
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share data)
Common Stock Additional Treasury Stock
---------------- Paid-in Retained --------------
Shares Amount Capital Earnings Shares Amount
- ---------------------------------------------------------------------------------------------
Balances at February 25, 1995 32,005 $ 320 $ 242,843 $ 154,112
Net earnings 38,439
Cash dividends declared on
common stock - $0.44 per share (14,083)
- ---------------------------------------------------------------------------------------------
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 dividends declared on
common stock - $0.22 per share (7,060)
- ---------------------------------------------------------------------------------------------
Balances at February 22, 1997 32,167 322 245,137 215,405
Net earnings 48,845
Sale of common stock
under option plans 780 7 10,900
Income tax benefit related
to stock options 3,658
Sale of common stock
in public offering 984 10 23,409
Issuance of restricted stock 10 246 (246)
Remeasurement of restricted
stock 170 (170)
Restricted stock expense 482
Purchase of treasury stock (8,174) $ (152,179)
=============================================================================================
Balances at January 31, 1998 33,941 $ 339 $ 283,520 $ 264,316 (8,174) $ (152,179)
=============================================================================================
(Continued on next page.)
44
45
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share data)
Total
-------------------
Shares Amount
- ----------------------------------------------------------------
Balances at February 25, 1995 32,005 $ 397,275
Net earnings 38,439
Cash dividends declared on
common stock - $0.44 per share (14,083)
- ----------------------------------------------------------------
Balances at February 24, 1996 32,005 421,631
Net earnings 44,946
Sale of common stock
under option plans 97 1,249
Income tax benefit related
to stock options 35
Issuance of restricted stock 65 -
Restricted stock expense 63
Cash dividends declared on
common stock - $0.22 per share (7,060)
- ----------------------------------------------------------------
Balances at February 22, 1997 32,167 460,864
Net earnings 48,845
Sale of common stock
under option plans 780 10,907
Income tax benefit related
to stock options 3,658
Sale of common stock in public
offering 984 23,419
Issuance of restricted stock 10 -
Remeasurement of restricted stock -
Restricted stock expense 482
Purchase of treasury stock (8,174) (152,179)
================================================================
Balances at January 31, 1998 25,767 $395,996
================================================================
See notes to consolidated financial statements.
45
46
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation:
The consolidated financial statements include the accounts of ShopKo
Stores, Inc. and its subsidiaries ("ShopKo" or the "Company"). All
significant intercompany accounts and transactions have been eliminated. The
Company, which is a Minnesota corporation, was incorporated in 1961 and in 1971
became a wholly owned subsidiary of Supervalu Inc. ("Supervalu"). On October
16, 1991, the Company sold 17,250,000 common shares or 54% of equity ownership
in an initial public offering. On July 2, 1997, Supervalu exited its remaining
46% investment in the Company through a stock buyback and secondary public
offering.
ShopKo is engaged in the business of providing general merchandise and
health services through its retail stores. Retail stores are operated in the
Midwest, Western Mountain and Pacific Northwest states and four free-standing
optical centers are located in Ohio. The Company also provides custom
prescription benefit management services; pharmacy mail service; vision benefit
management services and health care knowledge through technology and clinical
support services through its subsidiary ProVantage, Inc. ("ProVantage").
ProVantage conducts business throughout the United States and parts of Europe.
Change in Fiscal Year:
The Company changed its fiscal year end from the last Saturday in February
to the Saturday nearest January 31, effective with the fiscal year ended
January 31, 1998. This change was made in order to coincide the Company's
fiscal year with the calendar predominantly used by the retail industry. The
current year consolidated balance sheet and statements of earnings, cash flows
and shareholders' equity are presented for the year ended January 31, 1998 (49
weeks). All other years presented are for 52 weeks ending the last Saturday in
February. In addition, the table below illustrates how the fiscal years are
referred to in the notes to consolidated financial statements.
February 23, 1997 through January 31, 1998 (49 weeks) 1997
February 25, 1996 through February 22, 1997 (52 weeks) 1996
February 26, 1995 through February 24, 1996 (52 weeks) 1995
Cash and Cash Equivalents:
The Company records all highly liquid investments with a maturity of three
months or less as cash equivalents. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," these investments are classified as trading
securities and are reported at fair value.
46
47
Receivables:
Receivables consist of amounts collectible from third party pharmacy
insurance carriers and self-funded medical plan sponsors for medical claims,
from merchandise vendors for promotional and advertising allowances, from
retail store customers for optical, main store layaway and pharmacy purchases
and from pharmaceutical manufacturers and third party formulary administrators
for formulary fees. Substantially all amounts are expected to be collected
within one year.
Merchandise Inventories:
Merchandise inventories are stated at the lower of cost or market. Cost,
which includes certain distribution and transportation costs, is determined
through use of the last-in, first-out (LIFO) method for substantially all
inventories. If the first-in, first-out (FIFO) method had been used to
determine cost of inventories, the Company's inventories would have been higher
by approximately $38.1 million at January 31, 1998, $41.8 million at February
22, 1997 and $39.2 million at February 24, 1996.
Property and Equipment:
Property and equipment are carried at cost. The cost of buildings and
equipment is depreciated over the estimated useful lives of the assets.
Buildings and certain equipment (principally computer and retail store
equipment) are depreciated using the straight-line method. Remaining properties
are depreciated on an accelerated basis. Useful lives generally assigned are:
buildings-25 to 50 years; retail store equipment-8 to 10 years; warehouse,
transportation and other equipment-3 to 10 years. Costs of leasehold
improvements are amortized over the period of the lease or the estimated useful
life of the asset, whichever is shorter, using the straight-line method.
Property under capital leases is amortized over the related lease term using
the straight-line method. Interest on property under construction of $0.1 and
$0.2 million was capitalized in fiscal years 1996 and 1995, respectively.
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48
The components of property and equipment are:
JAN. 31, 1998 FEB. 22, 1997
----------------- ----------------
(in thousands)
Property & equipment at cost:
Land $ 118,723 $107,982
Buildings 522,732 492,001
Equipment 348,817 313,505
Leasehold improvements 53,932 49,929
Property under construction 456 2,219
Property under capital leases 26,419 26,419
--------- --------
1,071,079 992,055
Less accumulated depreciation & amortization:
Property & equipment 430,293 380,643
Property under capital leases 11,053 8,580
--------- --------
Net property & equipment $ 629,733 $602,832
========= ========
Intangible Assets:
The excess of cost over fair value of the net assets of businesses
acquired is amortized using the straight-line method over 18 to 22 years.
Accumulated amortization for these costs was $5.7 million and $2.5 million at
January 31, 1998 and February 22, 1997, respectively.
Impairment of Long Lived Assets:
The Company evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of long lived assets may warrant
revision or that the remaining balance of an asset may not be recoverable. The
measurement of possible impairment is based on the ability to recover the
balance of assets from expected future operating cash flows on an undiscounted
basis. In the opinion of management, no such impairment existed as of January
31, 1998 or February 22, 1997.
Accrued Other Liabilities:
Accrued other liabilities include amounts related to ProVantage for
medical claims and formulary rebate sharing and other current liabilities not
related to compensation or taxes. As of January 31, 1998 and February 22,
1997, the amounts payable by ProVantage for medical claims and formulary rebate
sharing included in the accrued other liabilities were $56.4 million and $39.8
million, respectively.
48
49
ProVantage Accounting:
ProVantage records as sales the amounts billed to insurance companies,
third party administrators and self-funded medical plan sponsors for medical
claims and claims processing fees, the amount of prescription sales through the
mail service pharmacy, the amounts billed to pharmaceutical manufacturers and
third party formulary administrators for formulary fees and contract and
license fees for health information technology services. Cost of sales
includes the amounts paid to network pharmacies and optical centers for medical
claims, the cost of prescription medications sold through the mail service
pharmacy and the amounts paid to plan sponsors for shared formulary fees.
Pre-opening Costs:
Pre-opening costs of retail stores are charged against earnings in the
year the store opens.
Net Earnings Per Common Share:
In 1997, SFAS No. 128, "Earnings Per Share" was issued. SFAS No. 128
replaces the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per 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. All earnings per share amounts for all periods
presented are restated to conform with the adoption of SFAS No. 128. For
fiscal years 1997, 1996 and 1995, respectively, the weighted average shares
outstanding were increased by 408,000, 278,000 and 51,000 for the dilutive
effect of employee stock options in calculating diluted earnings per share.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reporting period. Actual results could differ from those
estimates.
B. ACQUISITIONS
On January 3, 1995, the Company completed the acquisition of Bravell, Inc.
("Bravell"), a prescription benefit management company. The transaction was
accounted for as a purchase, whereby the Company acquired 97% of the
outstanding common stock of Bravell for approximately $17.3 million. The
Company was also required to make additional payments which were contingent
upon future results of Bravell's operations. In fiscal 1996, $0.7 million was
paid based on the results of fiscal 1995. On April 10, 1997, the Company made
a payment of approximately $8.9 million to the founders of Bravell to (i)
acquire the remaining 3% of the common stock of Bravell which the Company did
not acquire in January 1995, (ii) extinguish all remaining contingent payment
obligations to the founders and (iii) terminate the founders' employment
agreements.
49
50
On August 2, 1996, the Company completed the acquisition of CareStream
Scrip Card from Avatex Corporation, formerly known as Foxmeyer Health
Corporation. CareStream Scrip Card is a prescription benefit management company
which has been integrated with the Company's ProVantage subsidiary. The
purchase price was $30.5 million in cash, with a supplemental cash payment of
between $2.5 million and $5.0 million due between six months and five years
after August 2, 1996. The purchase price was funded from the Company's
available cash.
On August 20, 1997, the Company 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 $15.3 million, of
which $13.3 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 the Company'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, the Company bought the outstanding stock of
Penn-Daniels, Incorporated ("Penn-Daniels"), a retail chain headquartered in
Quincy, Illinois for approximately $16.4 million in cash and $42.5 million of
assumed debt, of which approximately $21.0 million was retired at the time of
the closing. The Company utilized cash and borrowings under its revolving
credit facility to fund the acquisition and the retirement of a portion of
Penn-Daniels' outstanding debt. The acquisition was accounted for under the
purchase method of accounting. Penn-Daniels operated 18 Jacks discount stores
in Iowa, Illinois and Missouri and one Lots-A-Deals close-out store in Moline,
Illinois.
The allocation of the purchase prices of Bravell, CareStream Scrip Card
and Mikalix were based on fair values at the dates of acquisition. The excess
of the purchase prices over the fair value of the net assets acquired
(goodwill) of approximately $72.0 million is being amortized on a straight-line
basis over 18 to 22 years. The allocation of the purchase price of
Penn-Daniels was based on estimated fair values at the date of acquisition.
The estimates are based on available information and are subject to change upon
completion of the appraisal process. The results of Bravell's, CareStream
Scrip Card's, Mikalix's and Penn-Daniels' operations since the dates of
acquisition have been included in the consolidated statement of earnings.
C. SHORT-TERM DEBT
The Company entered into a new $200.0 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. The Company
pays an annual facility fee of 1/5 of one percent. As of January 31, 1998 and
February 22, 1997, the Company had no amounts outstanding under the current or
prior agreements.
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51
The Company also issues letters of credit during the ordinary course of
business as required by foreign vendors. As of January 31, 1998 and February
22, 1997, the Company had issued letters of credit for $21.5 million and $33.4
million, respectively.
D. LONG-TERM OBLIGATIONS AND LEASES
(in thousands)
JAN. 31, 1998 FEB. 22, 1997
---------------- -------------
Senior Unsecured Notes, 9.0% due November 15, 2004, less
unamortized discount of $200 and $227, respectively $ 99,800 $ 99,773
Senior Unsecured Notes, 8.5% due March 15, 2002, less
unamortized discount of $150 and $184, respectively 99,850 99,816
Senior Unsecured Notes, 9.25% due March 15, 2022, less
unamortized discount of $462 and $480, respectively 99,538 99,520
Senior Unsecured Notes, 6.5% due August 15, 2003, less
unamortized discount of $154 and $182, respectively 99,846 99,818
Industrial Revenue Bond, 6.4% due May 1, 2008 1,000 1,000
Mortgage obligations 21,304
Capital lease obligations 18,961 20,801
-------- --------
440,299 420,728
Less current portion 4,174 2,014
-------- --------
Long-term obligations $436,125 $418,714
======== ========
The notes contain certain covenants which, among other things, restrict
the ability of the Company to consolidate, merge or convey, transfer or lease
its properties and assets substantially as an entirety, to create liens or to
enter into sale and leaseback transactions.
The mortgage obligations represent debt collaterized by certain properties
assumed in the Penn-Daniels acquisition. The interest rates on this debt range
from 7.25% to 8.75% with maturities ranging from February 1999 to April 2007.
Approximate annual maturities of long-term obligations, excluding capital
leases, for the five years subsequent to the year ended January 31, 1998 are as
follows (in thousands):
LONG-TERM
YEAR OBLIGATIONS
----- -----------
1998 $ 2,087
1999 3,211
2000 1,511
2001 1,642
2002 106,349
Later 306,538
-----------
Total maturities $421,338
===========
The underwriting and issuance costs of all the long-term obligations are
being amortized over the terms of the notes using the straight-line method. At
January 31, 1998 and February 22, 1997, $2.3 million and $2.6 million remained
to be amortized over future periods. Amortization expense for these costs was
$0.3 million in fiscal years 1997, 1996 and 1995.
The Company leases certain stores and computer equipment under capital
leases. Many of these leases include renewal options, and occasionally, include
options to purchase.
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Amortization of property under capital leases was $2.5, $2.7 and $1.1
million in fiscal years 1997, 1996 and 1995, respectively. Minimum future
obligations under capital leases in effect at January 31, 1998 are as follows
(in thousands):
LEASE
YEAR OBLIGATIONS
---- -----------
1998 $ 3,968
1999 2,689
2000 2,492
2001 2,492
2002 2,520
Later 24,777
-------
Total minimum future obligations 38,938
Less interest 19,977
-------
Present value of minimum future obligations $18,961
=======
The present values of minimum future obligations shown above are
calculated based on interest rates ranging from 7.4% to 13.4%, with a weighted
average of 10.5%, determined to be applicable at the inception of the leases.
Interest expense on the outstanding obligations under capital leases was
$2.1, $2.2 and $1.7 million in fiscal years 1997, 1996 and 1995, respectively.
Contingent rent expense, based primarily on sales performance, for capital
and operating leases was $0.5 million in each of the fiscal years 1997, 1996
and 1995.
In addition to its capital leases, the Company is obligated under
operating leases, primarily for land and buildings. Minimum future obligations
under operating leases in effect at January 31, 1998 are as follows (in
thousands):
LEASE
YEAR OBLIGATIONS
---- -----------
1998 $ 6,700
1999 6,618
2000 6,397
2001 5,794
2002 4,991
Later 52,987
-------
Total minimum obligations $83,487
=======
Total minimum rental expense, net of sublease income, related to all
operating leases with terms greater than one year was $5.3, $4.6 and $3.5
million in fiscal years 1997, 1996 and 1995, respectively.
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53
Certain operating leases require payments to be made on an escalating
basis. The accompanying consolidated statements of earnings reflect rent
expense on a straight-line basis over the term of the leases. An obligation of
$2.8 million and $1.8 million, representing pro-rata future payments, is
reflected in the accompanying consolidated balance sheets at January 31, 1998
and February 22, 1997, respectively.
E. INCOME TAXES
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. Components of the
Company's net deferred tax liability are as follows (in thousands):
1997 1996
-------------- ---------
Deferred tax liabilities:
Property and equipment $ 26,200 $ 25,812
LIFO inventory valuation 9,800 6,518
Other 3,098 2,418
-------- --------
Total deferred tax liabilities 39,098 34,748
-------- --------
Deferred tax assets:
Reserves and allowances (20,620) (15,155)
Capital leases (2,252) (2,033)
-------- --------
Total deferred tax assets (22,872) (17,188)
-------- --------
Net deferred tax liability $ 16,226 $ 17,560
======== ========
The amounts reflected in the provision for income taxes are based on
applicable federal statutory rates, adjusted for permanent differences between
financial and taxable income. The provision for federal and state income taxes
includes the following (in thousands):
1997 1996 1995
-------- -------- -------
Current
Federal $27,812 $25,858 $16,163
State 5,191 4,838 3,332
General business and other tax credits (71)
Deferred (1,334) (1,620) 5,206
------- ------- -------
Total provision $31,598 $29,076 $24,701
======= ======= =======
The effective tax rate varies from the statutory federal income tax rate
for the following reasons:
1997 1996 1995
---- ----- ----
Statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefits 4.3 4.0 4.0
Other 0.0 0.3 0.1
--------- -------- -------
Effective income tax rate 39.3% 39.3% 39.1%
========= ======== =======
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Provision is made for deferred income taxes and future income tax benefits
applicable to temporary differences between financial and tax reporting. The
sources of these differences and the effects of each are as follows (in
thousands):
1997 1996 1995
---- ---- ----
Depreciation $ (142) $ 3,256 $ 2,804
Inventory and LIFO valuation reserves 2,021 (212) 2,544
Insurance accruals & valuation reserves (148) (1,625) (537)
Other property related items - (707) 117
Compensation (1,690) (433) (329)
Other (1,375) (1,899) 607
------- --------- -------
Total deferred tax (benefit) expense $(1,334) $ (1,620) $ 5,206
======= ========= =======
Other temporary differences between financial and tax reporting include
amortization and interest relating to capital leases and certain provisions for
expenses which are not deducted for tax purposes until paid.
F. PREFERRED AND COMMON STOCK
The Company has 20,000,000 shares of $0.01 preferred stock authorized but
unissued. There are 75,000,000 shares of $0.01 par value common stock
authorized.
The Company's Stock Option Plans allow the granting of stock options to
various officers, directors and other employees of the Company at prices not
less than 100 percent of fair market value, determined by the closing price on
the date of grant. The Company has reserved 2,400,000 and 1,200,000 shares for
issuance under the 1991 and 1995 Stock Option Plans. The majority of these
options vest at the rate of 40% on the second anniversary of the grant date and
20% annually thereafter for officers and employees and at the rate of 60% on
the second anniversary of the date of grant and 20% annually thereafter for
non-employee directors. All stock options vest immediately upon a change of
control. Changes in the options are as follows (shares/options in thousands):
WEIGHTED AVE.
SHARES PRICE RANGE EXERCISE PRICE
----------------- --------------
Outstanding, February 25, 1995 1,936 $10.00 - $16.25 $ 13.54
Granted 576 10.50 - 10.75 10.64
Canceled and forfeited (139) 10.00 - 16.25 (13.77)
--------- ----------------- --------
Outstanding, February 24, 1996 2,373 10.00 - 16.25 12.82
Granted 542 10.63 - 16.25 11.59
Exercised (97) 10.00 - 15.00 (12.91)
Canceled and forfeited (182) 10.00 - 16.25 (11.84)
--------- ----------------- --------
Outstanding, February 22, 1997 2,636 10.00 - 16.25 12.63
Granted 1,233 17.88 - 28.69 21.45
Exercised (783) 10.00 - 16.25 (13.98)
Canceled and forfeited (790) 10.00 - 24.56 (11.41)
--------- ----------------- --------
Outstanding, January 31, 1998 2,296 $10.00 - $28.69 $ 17.32
========= ================= ========
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OPTIONS WEIGHTED AVE.
EXERCISABLE EXERCISE PRICE
----------- --------------
January 31, 1998 741 $13.39
February 22, 1997 1,305 14.14
February 24, 1996 1,062 14.39
The following tables summarize information about stock options outstanding
at January 31, 1998 (shares in thousands):
Options Outstanding
- ---------------------------------------------------------------------------------------------------------------------------
Range of Exercise Weighted Average Remaining Weighted Average
Prices Shares Outstanding at Jan. 31, 1998 Contractual Life Exercise Price
- --------------------------------------------------------------- ------------------------------------ --------------------
$10.00 to $14.00 547 6.8 years $10.58
14.01 to 18.00 754 5.7 15.80
18.01 to 28.69 995 9.5 22.18
---------------- ------ ------ -------
$10.00 to $28.69 2,296 7.6 $17.32
Options Exercisable
------------------------------------------------------------------------------
Range of Exercise Prices Shares Exercisable at Jan. 31, 1998 Weighted Average Exercise Price
- -------------------------------- -------------------------------------- --------------------------------------
$10.00 to $14.00 276 $10.60
14.01 to 18.00 465 15.04
18.01 to 28.69 -- --
---------------- --- ------
$10.00 to $28.69 741 $13.39
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost
has been recognized for the Company's stock option plans. If the Company had
elected to recognize compensation cost based on the fair value of the options
granted at grant date as prescribed by SFAS No. 123, net earnings and diluted
net earnings per common share would have been reduced to the proforma amounts
indicated below:
1997 1996
---- ----
Net earnings (in thousands)
As reported $48,845 $44,946
Pro forma 48,325 44,228
Diluted net earnings per common share
As reported $ 1.71 $ 1.39
Pro forma 1.69 1.37
The weighted average fair value of options granted was $7.35 per share in
fiscal 1997 and $3.04 per share in fiscal 1996.
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The fair value of stock options used to compute pro forma net earnings and
diluted net earnings per common share disclosures is the estimated present
value at grant date using the Black-Scholes option-pricing model with weighted
average assumptions as follows:
1997 1996
---- ----
Risk-free interest rate 7.0% 7.0%
Expected volatility 35.0% 29.0%
Dividend yield 0.0% 0.0%
Expected option life, standard option 2.0 to 5.0 years 5.0 years
Expected option life, performance vested option -- 2.5 years
In fiscal 1993, the Company adopted a Restricted Stock Plan which provides
awards of up to 200,000 shares of common stock to key employees of the Company.
Plan participants are entitled to cash dividends and to vote their respective
shares. Restrictions limit the sale or transfer of the shares during a
restricted period. There were 75,000 and 70,000 shares of restricted stock
outstanding at January 31, 1998 and February 22, 1997, respectively.
G. EMPLOYEE BENEFITS
Substantially all employees of the Company are covered by a defined
contribution profit sharing plan. The plan provides for two types of company
contributions; an amount determined annually by the Board of Directors and an
employer matching contribution equal to one-half of the first 6 percent of
compensation contributed by participating employees. Contributions were $12.8,
$11.8 and $7.7 million for fiscal years 1997, 1996 and 1995, respectively.
The Company also has change of control severance agreements with certain
key officers. Under these agreements, the officers are entitled to a lump-sum
cash payment equal to a multiple of one, two or three times their annual salary
plus a multiple of one, two or three times their average annual bonus for the
three fiscal years immediately preceding the date of termination, if, within
two years after a "change of control" (as defined in such agreements) the
Company terminates the individual's employment without cause.
In accordance with SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," the Company accrues the
estimated cost of retiree benefits, other than pensions, during employees'
credited service period. The net periodic costs for postretirement benefits
include the following (in thousands):
1997 1996 1995
---- ---- ----
Service cost for benefits accumulated during the year $130 $ 98 $ 98
Interest cost on accumulated benefit obligation 138 95 96
---- ---- ----
Net periodic postretirement benefit cost $268 $193 $194
==== ==== ====
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57
The Company's postretirement health care plans currently are not funded.
The accumulated postretirement benefit obligations are as follows (in
thousands):
JAN. 31, FEB. 22,
1998 1997
---------- ----------
Retirees $ 343 $ 423
Active plan participants 1,842 1,163
Unrecognized net (loss) (425) ---
---------- ----------
Total accumulated postretirement obligations $ 1,760 $ 1,586
========== ==========
The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% as of January 31, 1998 and 7.3% as
of February 22, 1997.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 8.3% for fiscal 1997 decreasing each
successive year until it reaches 5.5% in fiscal 2015 after which it remains
constant. A 1% increase in the health care trend rate would have an immaterial
effect on the accumulated postretirement benefit obligation at the end of
fiscal 1997 and fiscal 1996 and on the net periodic cost for the fiscal years.
H. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure is made in accordance with the requirements of
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." The
following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments.
Short-term debt and long-term obligations: The carrying amounts, if any,
of the Company's borrowings under its short-term revolving credit agreement
approximate their fair value. The fair values of the Company's long-term
obligations are estimated using discounted cash flow analysis based on interest
rates that are currently available to the Company for issuance of debt with
similar terms and remaining maturities.
The carrying amounts and fair values of the Company's financial
instruments at January 31, 1998 are as follows (amounts in thousands):
CARRYING
AMOUNT FAIR VALUE
------ ----------
Long-term obligations:
Senior Unsecured Notes, due November 15, 2004 $99,800 $113,101
Senior Unsecured Notes, due March 15, 2002 99,850 107,680
Senior Unsecured Notes, due March 15, 2022 99,538 122,868
Senior Unsecured Notes, due August 15, 2003 99,846 100,509
Industrial Revenue Bond, due May 1, 2008 1,000 1,000
Mortgage obligations 21,304 21,112
Capital lease obligations 18,961 21,733
57
58
I. UNAUDITED QUARTERLY FINANCIAL INFORMATION
Unaudited quarterly financial information is as follows:
(In thousands, except per share data)
Fiscal Year (49 Weeks) Ended January 31, 1998
- --------------------------------------------------------------------------------------------------------------
First Second Third Fourth Year
(16 Weeks) (12 Weeks) (12 Weeks) (9 Weeks) (49 Weeks)
- --------------------------------------------------------------------------------------------------------------
Net sales $719,968 $546,106 $608,389 $573,384 $2,447,847
Gross margins 163,583 119,852 138,143 142,378 563,956
Net earnings 7,238 4,173 11,912 25,522 48,845
Basic net earnings per common share 0.22 0.15 0.46 0.99 1.73
Weighted average shares 32,240 26,975 25,718 25,749 28,161
Diluted net earnings per common share 0.22 0.15 0.45 0.98 1.71
Adjusted weighted average shares 32,767 27,831 26,468 26,086 28,569
Dividends declared per common share - - - - -
Price range per common share* 26 7/8-14 1/2 29 3/4-25 1/2 28 13/16-21 25 5/8-19 1/4 29 3/4-14 1/2
Fiscal Year (52 Weeks) Ended February 22, 1997
- --------------------------------------------------------------------------------------------------------------
First Second Third Fourth Year
(16 Weeks) (12 Weeks) (12 Weeks) (12 Weeks) (52 Weeks)
- --------------------------------------------------------------------------------------------------------------
Net sales $610,911 $498,517 $591,208 $632,771 $2,333,407
Gross margins 146,391 112,974 131,258 159,043 549,666
Net earnings 5,759 3,922 10,936 24,329 44,946
Basic net earnings per common share 0.18 0.12 0.34 0.76 1.40
Weighted average shares 32,020 32,052 32,073 32,092 32,092
Diluted net earnings per common share 0.18 0.12 0.34 0.75 1.39
Adjusted weighted average shares 32,431 32,472 32,413 32,370 32,370
Dividends declared per common share 0.11 0.11 - - 0.22
Price range per common share* 16 1/2-11 1/4 16 1/4-13 1/2 16 1/4-15 16 1/8-14 3/8 16 1/2-11 1/4
*Price range per common share reflects the highest and lowest stock market
prices on the New York Stock Exchange during each quarter.
58
59
J. SIGNIFICANT EVENTS
Termination of Combination:
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 one-time pre-tax charge of approximately $2.8 million
($0.06 per share) during the first quarter of fiscal 1997 to cover costs
associated with the terminated business combination.
Common Stock Buyback and Secondary Offering:
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.
59
60
K. BUSINESS SEGMENT INFORMATION
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 health information technology).
Information about the Company's operations in the different businesses is as
follows (in thousands):
Fiscal Years
-----------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
Net sales
Retail Store $ 2,001,568 $ 2,005,731 $ 1,881,038
ProVantage 472,215 348,780 93,845
Intercompany* (25,936) (21,104) (6,867)
- --------------------------------------------------------------------------------------------------------------
Total net sales $ 2,447,847 $ 2,333,407 $ 1,968,016
- --------------------------------------------------------------------------------------------------------------
* Intercompany sales consist of prescriptions that were both sold at a ShopKo
pharmacy and processed by ProVantage.
Earnings before income taxes
Retail Store $ 127,269 $ 113,683 $ 107,216
ProVantage 12,664 9,533 2,713
Corporate (28,908) (17,417) (12,507)
Interest expense (30,582) (31,777) (34,282)
- --------------------------------------------------------------------------------------------------------------
Earnings before income taxes $ 80,443 $ 74,022 $ 63,140
- --------------------------------------------------------------------------------------------------------------
Assets
Retail Store $ 1,051,875 $ 985,374 $ 991,285
ProVantage 143,308 123,847 38,981
Corporate 55,652 124,671 87,694
- --------------------------------------------------------------------------------------------------------------
Total assets $ 1,250,835 $ 1,233,892 $ 1,117,960
- --------------------------------------------------------------------------------------------------------------
Depreciation and amortization expenses
Retail Store $ 53,245 $ 57,036 $ 54,982
ProVantage 4,641 2,312 1,009
Corporate 366 485 392
- --------------------------------------------------------------------------------------------------------------
Total depreciation and amortization expenses $ 58,252 $ 59,833 $ 56,383
- --------------------------------------------------------------------------------------------------------------
Capital expenditures
Retail Store $ 27,762 $ 34,258 $ 51,915
ProVantage 3,514 2,953 136
Corporate 727 1,688 961
- --------------------------------------------------------------------------------------------------------------
Total capital expenditures $ 32,003 $ 38,899 $ 53,012
- --------------------------------------------------------------------------------------------------------------
60
61
SHOPKO STORES, INC. AND SUBSIDIARIES
SCHEDULE VIII. VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
BALANCE AT CHG. TO
BEG. OF COSTS & DEDUCTIONS BALANCE AT
YEAR EXP. (ADDITIONS) END OF YEAR
---------------------------------------------------------------------------
Year (52 weeks) ended
February 24, 1996:
Allowance for losses $3,590 $ 23 $ 401 * $ 3,212
Inventory valuation reserves 5,500 (3,500) 2,000
------------- ---------- --------- ----------
Total $9,090 $(3,477) $ 401 $ 5,212
============= ========== ========= ==========
Year (52 weeks) ended
February 22,1997:
Allowance for losses $3,212 $ 1,200 $(1,173) * $ 5,585
Inventory valuation reserves 2,000 1,000 3,000
------------- ---------- --------- ----------
Total $5,212 $ 2,200 $(1,173) $ 8,585
============= ========== =========
Year (49 weeks) ended
January 31, 1998:
Allowance for losses $5,585 $ 2,999 $ (53) * $ 8,637
Inventory valuation reserves** 3,000 1,500 4,500
------------- ---------- --------- ----------
Total $8,585 $ 4,499 $ (53) $13,137
============= ========== ========= ==========
* Net of charges to accounts other than bad debt expense, primarily promotion
and advertising.
** Excludes amounts related to the Penn-Daniels' acquisition.
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62
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECTION 13 OR 15(D) 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: April 30, 1998 By: /s/ DALE P. KRAMER*
------------------------------------
Dale P. Kramer
Chairman of the Board, President and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
--------- -------------------------------- --------------
/S/ DALE P. KRAMER* Chairman of the Board, President April 30, 1998
- --------------------- and Chief Executive Officer
Dale P. Kramer
/S/ JEFFREY A. JONES Senior Vice President and Chief April 30, 1998
- --------------------- Financial Officer
Jeffrey A. Jones
/S/ JEFFERY R. SIMONS
- ---------------------- Chief Accounting Officer April 30, 1998
Jeffery R. Simons
/S/ WILLIAM J. PODANY* Director April 30, 1998
- -----------------------
William J. Podany
/S/ WILLIAM J. TYRRELL* Director April 30, 1998
- -------------------------
William J. Tyrrell
/S/ JACK W. EUGSTER* Director April 30, 1998
- ----------------------
Jack W. Eugster
/s/ JAMES L. REINERTSEN, M.D.* Director April 30, 1998
- ------------------------------
James L. Reinertsen, M.D.
/s/ STEPHEN E. WATSON* Director April 30, 1998
- ----------------------
Stephen E. Watson
/S/ JEFFREY C. GIRARD* Director April 30, 1998
- ------------------------
Jeffrey C. Girard
*By Richard D. Schepp pursuant to Powers of Attorney.
62
63
EXHIBIT INDEX
SHOPKO STORES, INC.
10-K REPORT
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- -------- ------- ------------------
2.1 Agreement and Plan of Merger, dated as of March 31,
1998, by and between the Registrant and New ShopKo,
Inc. incorporated by reference to the Registrant's definitive
Proxy Statement dated April 10, 1998 filed in connection
with the Registrant's 1998 Annual Meeting of Shareholders.
3.1 Restated Articles of Incorporation of the Company,
incorporated by reference to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-42283).
3.2 Bylaws of the Company, as amended, incorporated
by reference to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-42283).
4.1.1 Indenture dated as of March 12, 1992 between
the Company and First Trust National Association,
as trustee, with respect to senior notes due
March 15, 2002, incorporated by reference from
the Registrant's Form 10-K, Annual Report to the
Securities and Exchange Commission for the 53
weeks ended February 29, 1992.
4.1.2 Indenture dated as of March 12, 1992 between the
Company and First Trust National Association, as
trustee, with respect to senior notes due March 15,
2022, incorporated by reference from the
Registrant's Form 10-K, Annual Report to the
Securities and Exchange Commission for the 53
weeks ended February 29, 1992.
4.1.3 Indenture dated as of July 15, 1993 between the
Company and First Trust National Association, as
trustee, incorporated by reference from the
Registrant's Form 10-K, Annual Report to the
Securities and Exchange Commission for the 52
weeks ended February 26, 1994.
63
64
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- -------- ------- ------------------
4.2 Rights Agreement between the Company and
Norwest Bank Minnesota, National Association, dated
as of July 3, 1992, as amended and restated as of
September 24, 1997 (including form of preferred
stock designation), incorporated by reference from the
Registrant's Amendment No. 1 to Registration
Statement on Form 8-A/A dated September 29, 1997.
4.3 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 from the Registrant's Form 10-Q,
Quarterly Report to the Securities and Exchange
Commission for the 16 weeks ended June 14, 1997.
10.1 ShopKo Stores, Inc. 1991 Stock Option Plan,
incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration
No. 33-42283). (1)
10.2 Amendment to Section 11 of ShopKo Stores, Inc.
1991 Stock Option Plan, incorporated by reference
to the Registrant's definitive Proxy Statement dated
May 9, 1995 filed in connection with the Registrant's
1995 Annual Meeting of Shareholders. (1)
10.3 Form of Stock Option Agreement and First Amend-
ment thereto between the Company and certain
Officers and Employees of the Company pursuant
to the ShopKo Stores, Inc. 1991 Stock Option Plan,
incorporated by reference from the Registrant's
Form 10-K, Annual Report to the Securities and
Exchange Commission for the 52 weeks ended
February 25, 1995. (1)
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65
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- -------- ------- ------------------
10.4 Alternative Form of Stock Option Agreement between
the Company and certain Officers and Employees
of the Company pursuant to the ShopKo Stores, Inc.
1991 Stock Option Plan, incorporated by reference
from the Registrant's Form 10-K, Annual Report to
the Securities and Exchange Commission for the 52
weeks ended February 25, 1995. (1)
10.5 ShopKo Stores, Inc. 1995 Stock Option Plan,
incorporated by reference from the Registrant's
Form 10-Q, Quarterly Report to the Securities and
Exchange Commission for the 12 weeks ended
December 2, 1995. (1)
10.6 ShopKo Stores, Inc. Profit Sharing and Super
Saver Plan Trust Agreement (1989 Restatement),
as amended, incorporated by reference to the
Registrant's Registration Statement on Form S-1
(Registration No. 33-42283). (1)
10.7 First and second amendments to ShopKo Stores,
Inc. Profit Sharing and Super Saver Plan Trust
Agreement, incorporated by reference from the
Registrant's Form 10-K, Annual Report to the
Securities and Exchange Commission for the 52
weeks ended February 27, 1993. (1)
10.8 Form of Change of Control Severance Agreement
between the Company and Certain Officers and
Employees of the Company, incorporated by
reference from the Registrant's Form 10-K, Annual
Report to the Securities and Exchange
Commission for the 52 weeks ended February 25, 1995. (1)
10.9 Registration Rights Agreement dated as of October
8, 1991 between the Company and Supermarket
Operators of America, Inc., incorporated by reference
to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-45833).
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66
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- -------- ------- ------------------
10.10 Supply Agreement (Food Products) dated as of
October 8, 1991 between the Company and
Supervalu Inc., incorporated by reference to
the Registrant's Registration Statement on Form
S-1 (Registration No. 33-45833).
10.11 Indemnification, Tax Matters and Guarantee Fee
Agreement dated as of October 8, 1991 between the
Company and Supervalu Inc., incorporated by reference
to the Registrant's Registration Statement on Form S-1
(Registration No. 33-45833).
10.12 Insurance Matters Agreement dated as of October
8, 1991 between the Company and Supervalu
Inc., incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration
No. 33-45833).
10.13 Form of Indemnification Agreement between the
Company and directors and certain officers of
the Company, incorporated by reference to the
Registrant's Registration Statement on Form S-1
(Registration No. 33-42283). (1)
10.14 ShopKo Senior Officers Deferred Compensation
Plan, incorporated by reference from the
Registrant's Form 10-K, Annual Report to the
Securities and Exchange Commission for the 53
weeks ended February 29, 1992. (1)
10.15 ShopKo Directors Deferred Compensation Plan,
incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration
No. 33-45833). (1)
10.16 Shopko Stores, Inc. Executive Incentive Plan,
incorporated by reference from the Registrant's
Form 10-Q, Quarterly Report to the Securities
and Exchange Commission for the 16 weeks
ended June 14, 1997.
66
67
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- -------- ------- ------------------
10.17 ShopKo Stores, Inc. 1993 Restricted Stock Plan,
as amended, incorporated by reference to the
Registrant's definitive Proxy Statement dated
May 19, 1994 filed in connection with the
Registrant's 1994 Annual Meeting of
Shareholders. (1)
10.18 Stock Buyback and Secondary Offering Agreement
dated April 24, 1997 among the Company, Supervalu
Inc. and Supermarket Operators of America, Inc.,
incorporated by reference to the Registrant's Current
Report on Form 8-K dated April 24, 1997.
10.19 Amendment to Stock Buyback Agreement, incorporated
by reference to the Company's Registration Statement
on Form S-3 (Reg. No. 333-26615).
10.20 Termination of Stock Options/Waiver of Vesting of
Restricted Stock, incorporated by reference from
the Registrant's Form 10-Q, Quarterly Report to the
Securities and Exchange Commission for the 16 weeks
ended June 14, 1997.
10.21 Agreement dated September 24, 1997 regarding
effectiveness of resignation of Jeffrey C. Girard,
incorporated by reference to the Registrant's Current
Report on Form 8-K dated September 24, 1997.
10.22 ShopKo Stores, Inc. 1998 Stock Incentive Plan
incorporated by reference to the Registrant's
definitive Proxy Statement dated April 10, 1998
filed in connection with the Registrant's 1998
Annual Meeting of Shareholders. (1)
11* Computation of Earnings Per Common and
Common Equivalent Share.
12* Statements Re Computation of Ratios.
67
68
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- -------- ------- ------------------
21.1* Subsidiaries of the Registrant.
23.1* Consent of Deloitte & Touche LLP.
24.1* Directors' Powers of Attorney.
27* Financial Data Schedule
*Filed herewith
(1) A management contract or compensatory plan or arrangement.
68