<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period (13 weeks) ended October 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------
Commission file number 1-10876
-------
SHOPKO STORES, INC.
(Exact name of registrant as specified in its Charter)
Wisconsin 41-0985054
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
700 Pilgrim Way, Green Bay, Wisconsin 54304
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (920) 497-2211
-------------------------
Former name, former address and former fiscal year, if changed since last
report:
N/A
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -----
The number of shares outstanding of each of the issuer's classes of Common Stock
as of November 27, 1998 is as follows:
Title of Each Class Shares Outstanding
------------------- ------------------
Common Shares 26,107,300
Exhibit Index Page 1 of 27
on Page 22
1
<PAGE> 2
SHOPKO STORES, INC.
FORM 10-Q
FOR THE 13 WEEKS AND 39 WEEKS ENDED OCTOBER 31, 1998
INDEX
Page
----
Part I Item 1 - Financial Statements
Consolidated Statements of Earnings for the 13 weeks 3
ended October 31, 1998 and November 1, 1997
Consolidated Statements of Earnings for the 39 weeks 4
ended October 31, 1998 and November 1, 1997
Consolidated Balance Sheets as of October 31, 1998, 5
November 1, 1997 and January 31, 1998
Consolidated Statements of Cash Flows for the 39 6
weeks ended October 31, 1998 and November 1, 1997
Consolidated Statements of Shareholders' Equity for 7
the 39 weeks ended October 31, 1998 and for the period
ended January 31, 1998
Notes to Consolidated Financial Statements 8-9
Item 2 - Management's Discussion and Analysis of Financial 10-19
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosure About 19
Market Risk (not applicable)
Part II Item 5 - Other Information 20
Item 6 - Exhibits and Reports on Form 8-K 20
Signatures 21
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Third Quarter (13 Weeks) Ended
- --------------------------------------------------------------------------------------------------
(In thousands, except per share data)
October 31, November 1,
1998 1997 % Increase
- --------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Net sales $731,270 $613,954 19.1
Licensed department rentals and other income 3,162 3,017
-------- --------
734,432 616,971 19.0
Costs and expenses:
Cost of sales 578,433 478,404
Selling, general and administrative expenses 115,774 102,159
Nonrecurring charge 1,786 -
Depreciation and amortization expenses 16,508 16,180
-------- --------
712,501 596,743 19.4
Income from operations 21,931 20,228 8.4
Interest expense 10,464 8,853
-------- --------
Earnings before income taxes 11,467 11,375 0.8
Provision for income taxes 4,503 4,467
-------- --------
Net earnings $ 6,964 $ 6,908 0.8
======== ========
Basic net earnings per common share $ 0.27 $ 0.27
======== ========
Weighted average number of common shares
outstanding 26,093 25,691
Diluted net earnings per common share $ 0.26 $ 0.26
======== ========
Adjusted weighted average number of common
shares outstanding 26,517 26,485
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Year To Date (39 Weeks) Ended
- ----------------------------------------------------------------------------------------------------
(In thousands, except per share data)
October 31, November 1,
1998 1997 % Increase
- ----------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Net sales $2,055,524 $1,766,763 16.3
Licensed department rentals and other income 8,931 8,902
---------- ----------
2,064,455 1,775,665 16.3
Costs and expenses:
Cost of sales 1,611,518 1,371,599
Selling, general and administrative expenses 342,351 305,881
Nonrecurring charge 5,723 2,800
Depreciation and amortization expenses 51,378 46,693
---------- ----------
2,010,970 1,726,973 16.4
Income from operations 53,485 48,692 9.8
Interest expense 28,759 24,025
---------- ----------
Earnings before income taxes 24,726 24,667 0.2
Provision for income taxes 9,711 9,688
---------- ----------
Net earnings $ 15,015 $ 14,979 0.2
========== ==========
Basic net earnings per common share $ 0.58 $ 0.51
========== ==========
Weighted average number of common shares
outstanding 26,010 29,283
Diluted net earnings per common share $ 0.57 $ 0.50
========== ==========
Adjusted weighted average number of common
shares outstanding 26,493 29,913
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Third Quarter as of Fiscal Year End
- ---------------------------------------------------------------------------------------------------------------
(In thousands)
October 31, November 1, January 31,
ASSETS 1998 1997 1998
- ---------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 6,948 $ 9,795 $ 54,344
Receivables, less allowance for losses of
$9,412, $5,926 and $8,637, respectively 106,545 87,787 97,812
Merchandise inventories 534,923 434,758 376,568
Other current assets 15,472 19,809 13,508
----------- ----------- -----------
Total current assets 663,888 552,149 542,232
Other assets and deferred charges 7,430 6,429 7,202
Intangible assets - net 71,120 69,763 71,668
Property and equipment at cost:
Land 121,553 107,982 118,723
Buildings 539,587 493,537 522,732
Equipment 396,495 337,952 348,817
Leasehold improvements 57,682 50,337 53,932
Property under construction 1,041 1,982 456
Property under capital leases 46,667 26,419 26,419
----------- ----------- -----------
1,163,025 1,018,209 1,071,079
Less accumulated depreciation and amortization:
Property and equipment 476,249 422,619 430,293
Property under capital leases 13,071 10,397 11,053
----------- ----------- -----------
Net property and equipment 673,705 585,193 629,733
----------- ----------- -----------
Total assets $ 1,416,143 $ 1,213,534 $ 1,250,835
=========== =========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current liabilities:
Short-term debt $ 80,000 $ 23,000 $ -
Accounts payable - trade 268,276 224,849 193,646
Accrued compensation and related taxes 34,271 33,866 39,964
Accrued other liabilities 121,734 107,101 135,522
Accrued income and other taxes 16,044 21,018 24,502
Current portion of long-term obligations 4,855 2,014 4,174
----------- ----------- -----------
Total current liabilities 525,180 411,848 397,808
Long-term obligations 452,390 417,398 436,125
Deferred income taxes 20,683 24,090 20,906
Shareholders' equity:
Common stock 261 339 339
Additional paid-in capital 227,902 282,000 283,520
Retained earnings 189,727 230,009 264,316
Less treasury stock - (152,150) (152,179)
----------- ----------- -----------
Total shareholders' equity 417,890 360,198 395,996
----------- ----------- -----------
Total liabilities and shareholders' equity $ 1,416,143 $ 1,213,534 $ 1,250,835
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Year to Date (39 Weeks) Ended
- ----------------------------------------------------------------------------------------------
(In thousands)
October 31, November 1,
1998 1997
- ----------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 15,015 $ 14,979
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 51,378 46,693
Provision for losses on receivables 599 190
Gain on sale of property and equipment (916) (247)
Deferred income taxes 2,732 (21)
Change in assets and liabilities (excluding
effects of business acquisitions):
Receivables (9,332) 11,073
Merchandise inventories (164,238) (96,589)
Other current assets (4,911) (3,235)
Other assets and intangibles (2,269) (1,356)
Accounts payable 74,630 34,714
Accrued liabilities (25,738) (883)
- ----------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (63,050) 5,318
- ----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Payments for property and equipment (66,777) (25,153)
Proceeds from the sale of property and equipment 1,588 717
Business acquisitions, net of cash acquired (22,089)
- ----------------------------------------------------------------------------------------------
Net cash (used in) investing activities (65,189) (46,525)
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Change in short-term debt 80,000 23,000
Change in common stock from stock options 4,229 10,643
Change in common stock from public offering 23,419
Purchase of treasury stock (152,150)
Reduction in debt and capital leases (3,386) (3,240)
- ----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 80,843 (98,328)
- ----------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (47,396) (139,535)
Cash and cash equivalents at beginning of year 54,344 149,330
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of third quarter $ 6,948 $ 9,795
==============================================================================================
Supplemental cash flow information:
Noncash investing and financial activities -
Retirement of treasury stock $ 152,179
Capital lease obligations incurred $ 20,247
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Common Stock Capital in Treasury Stock
-------------------- Excess of Retained ----------------------
Shares Amount Par Value Earnings Shares Amount
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT FEBRUARY 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)
Net earnings 15,015
Sale of common stock under option plans 332 4 4,225
Income tax benefit related to stock options 2,201
Restricted stock expense 449
Retirement of treasury stock (8,174) (82) (62,044) (90,053) 8,174 152,179
----------------------------------------------------------------------------
BALANCES AT OCTOBER 31, 1998 26,099 $261 $227,902 $189,727 - $ -
============================================================================
</TABLE>
Interim data subject to year end audit.
See notes to consolidated financial statements.
7
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 quarter and 39 weeks ended October
31, 1998. The consolidated balance sheet, statements of earnings and cash flows
for the preceding fiscal year are presented for the comparable quarter and 39
weeks ended November 1, 1997.
Accounting Policies:
- --------------------
The Company's 1997 Annual Report on Form 10-K (the Transition Report for the
period ending January 31, 1998) contains a summary of significant accounting
policies which includes the consolidated financial statements and the notes to
the consolidated financial statements. The same accounting policies are followed
in the preparation of interim reports.
In 1997, Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," were issued. In February 1998, SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits,"
was issued. These statements had to be adopted by the Company beginning February
1, 1998.
SFAS N0. 130, "Reporting Comprehensive Income," which specifies how to report
and display comprehensive income and its components, has no impact on the
Company's consolidated financial statements.
The Company will adopt SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information," and SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," this fiscal year. It is not
anticipated that these SFAS's will significantly impact the Company's annual
financial statements.
Inventories:
- ------------
The Company uses the LIFO method for substantially all inventories. If the
first-in, first-out (FIFO) method had been used, these inventories would have
been $41.8 million and $44.9 million higher at October 31, 1998 and at November
1, 1997, respectively.
8
<PAGE> 9
Intangible Assets:
- ------------------
The excess of cost over fair value of the net assets of businesses acquired is
amortized using the straight-line method over 20 to 22 years. Accumulated
amortization for these costs was $8.4 million and $4.7 million at October 31,
1998 and November 1, 1997, respectively.
Income Taxes:
- -------------
The provision for income tax expense for the first three quarters of fiscal 1998
was $9.7 million, of which $7.0 million was current and $2.7 million was
deferred tax expense. Deferred income taxes reflect the net tax effect of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Net Earnings Per Common Share:
- ------------------------------
Basic net earnings per common share are computed by dividing net earnings by the
weighted average number of common shares outstanding. Diluted net earnings per
common share are computed by dividing net earnings by the weighted average
number of common shares outstanding increased by the number of dilutive
potential common shares based on the treasury stock method.
Statement of Registrant:
- ------------------------
The data presented herein is unaudited, but in the opinion of management,
includes all adjustments (which consist only of normal recurring accruals)
necessary for a fair presentation of the consolidated financial position of the
Company and its subsidiaries at October 31, 1998 and November 1, 1997 and the
results of their operations and cash flows for the periods then ended. These
interim results are not necessarily indicative of the results of the fiscal
years as a whole because the operations of the Company are highly seasonal. A
significant part of the Company's earnings have historically been achieved in
the fourth fiscal quarter due to the Christmas selling season.
9
<PAGE> 10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth items from the Company's unaudited consolidated
financial statements for the third quarter and the first three quarters of
fiscal 1998 and 1997 as a percentage of net sales:
<TABLE>
<CAPTION>
Third Quarter Year to Date
-------------------------- -------------------------
Fiscal Fiscal Fiscal Fiscal
1998 1997 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Net sales 100.0% 100.0% 100.0% 100.0%
Licensed department rentals and other
income 0.4 0.5 0.4 0.5
---------- --------- --------- ---------
100.4 100.5 100.4 100.5
Costs and expenses
Cost of sales 79.1 77.9 78.4 77.6
Selling, general and administrative
expenses 15.8 16.6 16.6 17.3
Nonrecurring charge 0.2 0.0 0.3 0.2
Depreciation and amortization expenses 2.3 2.6 2.5 2.6
---------- --------- --------- ---------
97.4 97.2 97.8 97.7
Income from operations 3.0 3.3 2.6 2.8
Interest expense 1.4 1.5 1.4 1.4
---------- --------- --------- ---------
Earnings before income taxes 1.6 1.8 1.2 1.4
Provision for income taxes 0.6 0.7 0.5 0.6
---------- --------- --------- ---------
Net earnings 1.0% 1.1% 0.7% 0.8%
========== ========= ========= =========
</TABLE>
The Company has two business segments: a Retail Store segment (which includes
general merchandise, retail pharmacy and retail optical operations) and a
ProVantage segment (which includes prescription benefit management, mail service
pharmacy, vision benefit management and health information technology).
Intercompany sales, which consist of prescriptions that were both sold at a
ShopKo pharmacy and processed by ProVantage, have been eliminated.
10
<PAGE> 11
The following tables set forth items from the Company's business segments as
percentages of net sales:
RETAIL STORE SEGMENT
<TABLE>
<CAPTION>
Third Quarter Year to Date
-------------------------- -------------------------
Fiscal Fiscal Fiscal Fiscal
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues
Net sales 100.0% 100.0% 100.0% 100.0%
Licensed departmental rentals and other
income 0.5 0.6 0.5 0.6
---------- ---------- ---------- ----------
100.5 100.6 100.5 100.6
Costs and expenses
Cost of sales 75.2 74.5 74.4 74.0
Selling, general and administrative
expenses 18.3 18.8 19.3 19.5
Depreciation and amortization expenses 2.6 3.0 2.8 3.0
---------- ---------- ---------- ----------
96.1 96.3 96.5 96.5
Income from operations 4.4% 4.3% 4.0% 4.1%
</TABLE>
PROVANTAGE SEGMENT
<TABLE>
<CAPTION>
Third Quarter Year to Date
-------------------------- ------------------------
Fiscal Fiscal Fiscal Fiscal
1998 1997 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Net sales 100.0% 100.0% 100.0% 100.0%
Licensed department rentals and other
income 0.1 0.1 0.1 0.1
---------- --------- --------- ---------
100.1 100.1 100.1 100.1
Costs and expenses
Cost of sales 93.3 92.9 93.1 93.0
Selling, general and administrative
expenses 3.7 3.6 3.8 3.9
Depreciation and amortization expenses 1.0 1.1 1.1 0.9
---------- --------- --------- ---------
98.0 97.5 98.0 97.8
Income from operations 2.1% 2.6% 2.1% 2.3%
</TABLE>
11
<PAGE> 12
Net Sales:
The following table presents the Company's consolidated net sales for the third
quarter and cumulative for the first three quarters of fiscal 1998 and fiscal
1997:
<TABLE>
<CAPTION>
THIRD QUARTER % INCREASE
------------------------- --------------
FISCAL FISCAL
1998 1997 TOTAL COMP
-------- -------- ----- ----
<S> <C> <C> <C> <C>
Retail Store $571.0 $ 496.5 15.0 7.3
ProVantage 169.6 124.8 35.9 N/A
Intercompany (9.3) (7.3) N/A N/A
------ -------- ----- ---
Consolidated $731.3 $ 614.0 19.1
====== ======== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR TO DATE % INCREASE
------------------------- --------------
FISCAL FISCAL
1998 1997 TOTAL COMP
-------- -------- ----- ----
<S> <C> <C> <C> <C>
Retail Store $1,607.2 $1,419.1 13.3 6.2
ProVantage 474.4 367.5 29.1 N/A
Intercompany (26.1) (19.8) N/A N/A
-------- -------- ----- ---
Consolidated $2,055.5 $1,766.8 16.3
======== ======== =====
</TABLE>
The 7.3% increase in third quarter retail comparable store sales are derived
from the following categories: Retail Health increased 12.2%, Hardlines/Home
increased 8.8% and Apparel increased 0.5%. The 6.2% increase in the first three
quarters of retail comparable store sales are derived from the following
categories: Retail Health increased 11.6%, Hardlines/Home increased 6.7% and
Apparel increased 0.2%. Changes in retail comparable store sales are based upon
those stores which were open for the entire preceding fiscal year.
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 Lots-A-Deals
store in Moline, Illinois was closed in March 1998, and the Iowa City, Iowa
store was closed in May 1998. The Company converted the remaining 17 Jacks
retail locations to ShopKo stores, including the addition of in-store pharmacies
and optical centers in 16 of those stores. These new ShopKo stores had grand
openings in July 1998. The Jacks stores sales are included in ShopKo's net sales
since acquisition but are not included in comparable store sales since the
stores were not owned by ShopKo for the entire preceding fiscal year. The
Company operated 147 retail stores at the end of the third quarter this year
compared to 130 retail stores at the end of the third quarter last year.
12
<PAGE> 13
The increase in ProVantage sales in the third quarter and the first three
quarters is due primarily to internally generated growth. Included in ProVantage
sales are the following: (i) administrative and dispensing fees plus the cost of
pharmaceuticals dispensed by pharmacies participating in ProVantage's pharmacy
network or by ProVantage's mail service pharmacy to members of health benefit
plans sponsored by ProVantage's clients; (ii) amounts billed to pharmaceutical
manufacturers and third party formulary administrators for formulary fees; (iii)
administrative fees plus the cost of eyeglasses and contact lenses relating to
ProVantage's vision benefit management services; and (iv) contract and license
and service fees for health information technology services.
Gross Margin:
The following table sets forth gross margin as a percent of net sales:
<TABLE>
<CAPTION>
Third Quarter
--------------------
Retail Store ProVantage Consolidated
-------------------- -------------------- --------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
1998 1997 1998 1997 1998 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Gross margin percent 24.8% 25.5% 6.7% 7.1% 20.9% 22.1%
Gross margin percent prior to
LIFO charge 25.0% 25.8% N/A N/A 21.1% 22.3%
<CAPTION>
Year to Date
--------------------
Retail Store ProVantage Consolidated
-------------------- -------------------- --------------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
1998 1997 1998 1997 1998 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Gross margin percent 25.6% 26.0% 6.9% 7.0% 21.6% 22.4%
Gross margin percent prior to
LIFO charge 25.8% 26.3% N/A N/A 21.8% 22.6%
</TABLE>
The decrease in the retail store gross margin rate in the third quarter is
primarily due to increased promotional sales, increased third party pharmacy
sales and an overall reduction in gross margin rates as sales shifted from
apparel to hardlines and home. The decrease in the retail store gross margin
rate for the first three quarters is primarily attributable to lower gross
margin rates in general merchandise due to increased promotional sales and
planned lower gross margin rates in retail pharmacy due to the increased third
party business. ProVantage's decrease in the third quarter is primarily
attributable to planned reductions in claims processing fees. ProVantage's
decrease in the first three quarters is primarily attributable to increased
sales volume coming from the lower gross margin claims processing activities.
The retail store and consolidated gross margin percentages for the third quarter
and the first three quarters reflect LIFO charges of $1.3 million and $3.8
million, respectively. This is compared to the prior year's LIFO expense of $1.2
million in the third quarter and $3.2 million in the first three quarters.
13
<PAGE> 14
Selling, General and Administrative Expenses:
Consolidated selling, general and administrative expense as a percent of sales
for the third quarter decreased to 15.8 percent from 16.6 percent in the prior
year. Third quarter retail selling, general and administrative expense as a
percent of sales was 18.3 percent compared with 18.8 percent last year.
Excluding the results of the 17 new stores, retail selling, general and
administrative expenses as a percent of sales was 17.9 percent for the third
quarter. The decrease is primarily due to expense control initiatives at the
store level and leveraging expenses over the increased sales volume. For the
first three quarters, consolidated selling, general and administrative expenses
decreased to 16.6 percent of sales from 17.3 percent of sales last year. The
decrease is primarily due to expense control initiatives and increased
ProVantage sales. Retail selling, general and administrative expenses for the
first three quarters were 19.3 percent of net sales compared with 19.5 percent
last year. Excluding the results of the 17 new stores, retail selling, general
and administrative expenses as a percent of sales was 18.8 percent for the first
three quarters. The decrease is primarily due to continued expense control
initiatives at store level. ProVantage's third quarter selling, general and
administrative expense as a percent of sales was 3.7 percent compared with 3.6
percent last year. This increase is primarily due to ProVantage building its
infrastructure for continued growth and the costs to initiate new clients.
ProVantage selling, general and administrative expenses for the first three
quarters were 3.8 percent of net sales compared with 3.9 percent last year. This
decrease is primarily due to leveraging expenses over the increased sales
volume.
Liquidity and Capital Resources:
The Company relies primarily on cash generated from its operations, with its
remaining funding requirements being met from short-term and long-term
borrowings. Cash provided from net earnings before depreciation and amortization
was $66.4 million for the first three quarters of fiscal 1998 compared to $61.7
million for the same period last year. The Company had $80.0 million outstanding
under its revolving credit agreement at the end of the third quarter of fiscal
1998 compared to $23.0 million at the end of the third quarter of fiscal 1997.
The Company entered into a new $200.0 million revolving credit facility on July
8, 1997. The new facility is with a consortium of banks, is unsecured and is
effective through January 31, 2002. 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 except
for possible acquisitions described below.
The Company's principal use of cash is for the purchase of property, equipment
and systems technology. During the first three quarters of fiscal 1998,
additional cash was used for increases in inventory levels in the newly acquired
Penn-Daniels locations. The Company spent $66.8 million on capital expenditures
in the first three quarters of fiscal 1998, compared to $25.2 million on capital
expenditures (excluding acquisitions) for the same period last year.
14
<PAGE> 15
On September 8, 1998, the Company announced plans to open 13 new stores in 1999.
Ten of the new stores are former Venture store locations which will be remodeled
including the addition of in-store pharmacies and optical centers. Three
additional locations will be new stores. All 13 stores will be leased, of which
7 will be operating leases and 6 will be capital leases.
The Company's total capital expenditures for the fiscal year ending January 30,
1999 are anticipated to approximate $90.0 to $100.0 million, the majority of
which would relate to remodeling the recently acquired Penn-Daniels stores and
leased Venture store locations, supporting the existing retail business for
merchandise initiatives and ongoing store equipment and fixturing replacements
and continuing investments in systems technology. 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 20, 1997, ProVantage acquired The Mikalix Group, Inc. and its
subsidiaries ("Mikalix"), an international privately held group of companies
based in Alexandria, Virginia. Mikalix's primary subsidiary is PharMark
Corporation ("PharMark"), a software and database development company providing
information driven strategies for optimizing medical and pharmaceutical
outcomes. The purchase price for Mikalix was approximately $15.3 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. The acquisition was accounted for
under the purchase method of accounting. The results of Mikalix's operations
since the date of acquisition have been included in the Company's consolidated
statements of earnings.
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. The results of Penn-Daniels'
operations since the date of acquisition have been included in the Company's
consolidated statements of earnings.
15
<PAGE> 16
In connection with the Penn-Daniels acquisition, ShopKo has incurred
nonrecurring pre-tax costs of $5.7 million year to date eliminating duplicate
operations at the Penn-Daniels administrative office and warehouse and other
transaction related items. The Company incurred $1.8 million in nonrecurring
pre-tax costs in the third quarter of fiscal 1998. The Company funded these
costs from available cash and borrowings 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.
With the rapid growth of the ProVantage business, the Company believes it will
be increasingly difficult to realize the full value of ProVantage while combined
with the Shopko Retail Stores. The Company has been exploring ways to recognize
the value of both disparate businesses through a full or partial separation, the
timing of which is dependent on general market conditions.
The Company had been testing a stand alone optical store format with four stores
in Ohio. The results were mixed and it was decided to end the test and close the
stores. The stores were closed on August 29, 1998. The closings did not have a
material financial impact on the Company.
Year 2000:
STATE OF READINESS
In order to address Year 2000 compliance, the Company has initiated a
comprehensive project designed to eliminate or minimize any business disruption
associated with potential date processing problems in its information technology
("IT") systems, as well as its non-IT systems (e.g., HVAC systems, building
security systems, etc.). The project consists of five phases: company awareness,
assessment, strategy and work plan development, renovation and testing. The
Company has completed the first three phases for both IT and non-IT systems and
is actively engaged in completing the fourth phase (i.e., renovation).
With respect to IT systems, approximately 66.0 percent of the Company's critical
business systems are currently compliant, approximately 9.0 percent of them will
be retired and approximately 25.0 percent are in the process of being renovated.
With respect to non-IT systems, the assessment phase indicated a need for only
minor renovation work. For both IT and non-IT systems, the renovation phase
currently underway is expected to be completed in the second quarter of fiscal
1999. The testing phase for both IT and non-IT systems is planned to be
completed in the third quarter of fiscal 1999.
16
<PAGE> 17
As part of its Year 2000 project, the Company has initiated communications with
all of its merchandise vendors and services suppliers to assess their state of
Year 2000 readiness. A significant percentage of its vendors have responded in
writing to the Company's Year 2000 readiness inquiries. The Company plans to
continue assessment of its third party business partners, including face-to-face
meetings with management and/or onsite visits as deemed appropriate. Despite the
Company's diligence, there can be no guarantee that the systems of other
companies which the Company relies upon to conduct its day-to-day business will
be compliant.
COSTS
As a result of the significant investment made by the Company in both hardware
and software over the past several years, the majority of its IT systems do not
require renovation. The Company estimates that it will incur internal and
external expenses of $4.0 to $6.0 million in conjunction with the Year 2000
compliance project. These costs will be spread throughout the course of this
project, and are not expected to have a material effect on the Company's
financial statements.
RISKS
With respect to the risks associated with its IT and non-IT systems, the Company
believes that the most reasonably likely worst case scenario is that the Company
will experience a number of minor system malfunctions and errors in the early
days and weeks of the Year 2000 that were not detected during its renovation and
testing efforts. The Company also believes that these problems will not be
overwhelming and will not have a material effect on the Company's operations or
financial results.
With respect to the risks associated with third parties, the Company believes
that the most reasonably likely worst case scenario is that some of the
Company's merchandise vendors will not be compliant and will have difficulty
filling orders and flowing goods. Management also believes that the number of
such vendors will have been minimized by the Company's program of identifying
non-compliant vendors and replacing or jointly developing alternative supply or
delivery solutions prior to the Year 2000.
The Company also designs and sells software products to third parties through
its ProVantage subsidiary. While the Company has taken appropriate steps to
ensure the readiness of this software and believes it to be compliant, the
Company cannot be certain that the software will operate error free, or that the
Company will not be subject to litigation, whether the software operates error
free or not. However, the Company believes that based on its efforts to ensure
compliance, and the terms and conditions of its software licensing contracts, it
is not reasonably likely that the Company will be subject to such litigation.
17
<PAGE> 18
The Company has limited the scope of its risk assessment to those factors which
it can reasonably be expected to have an influence upon. For example, the
Company has made the assumption that government agencies, utility companies, and
national telecommunications providers will continue to operate. Obviously, the
lack of such services could have a material effect on the Company's ability to
operate, but the Company has little if any ability to influence such an outcome,
or to reasonably make alternative arrangements in advance for such services in
the event they are unavailable.
CONTINGENCY PLANS
The Company has not yet completed its planning and preparations to handle the
most reasonably likely worst case scenarios described above. The Company intends
to develop contingency plans for these scenarios during the second quarter of
fiscal 1999. The Company believes that this is the appropriate timeframe for
developing such plans and that efforts prior to that time should be focused on
renovation, testing and verification of vendor compliance.
YEAR 2000 READINESS STATEMENTS
To allow its customers and suppliers an opportunity to assess the Company's
state of readiness for the Year 2000, the Company maintains a Year 2000 web page
at www.shopko.com. Statements made or contained herein or therein or any past
statements made or contained herein or therein are deemed Year 2000 Readiness
Statements and are subject to the Year 2000 Information and Readiness Disclosure
Act (P.L. 105-271), to the fullest extent permitted by law.
Treasury Stock Retirement:
In the first quarter of fiscal 1998, the Company retired all 8,174,387 shares of
common stock held as treasury stock for accounting purposes, and such shares
were returned to the status of authorized but unissued shares. As a result, the
$152.2 million assigned to treasury stock was eliminated with a corresponding
decrease in par value, additional paid-in capital and retained earnings.
Stock Repurchase Program:
On March 26, 1998, the Company announced that the Board of Directors had
authorized the repurchase of up to $20.0 million of the Company's Common Stock.
Repurchased shares will be used for stock-based employee benefit plans and other
corporate purposes. As of the end of the first three quarters, no shares of
Common Stock had been repurchased under this program.
Inflation:
Inflation has and is expected to have only a minor effect on the results of
operations of the Company and its internal and external sources of liquidity.
18
<PAGE> 19
Forward-Looking Statements:
Item 2 of this Form 10-Q, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward-looking statements within
the meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements include, without limitation,
statements regarding earnings, growth, capital expenditure plans, capital
requirements and statements related to "Year 2000" issues. Such statements are
subject to important factors which could cause the Company's actual results to
differ materially from those anticipated by the forward-looking statements.
These factors include, but are not limited to: (1) unanticipated problems or
delays encountered in making the Company's information systems Year 2000
compliant, (2) higher than anticipated costs in making information systems Year
2000 compliant, (3) unanticipated litigation or other disputes with customers,
suppliers or others involving Year 2000 issues, (4) erroneous certifications
from third parties as to Year 2000 compliance, and (5) those factors referenced
in the Company's Annual Report on Form 10-K (the Transition Report for the
period ending January 31, 1998) which are incorporated herein by reference or as
may be described from time to time in the Company's subsequent SEC filings.
Item 3: Quantitative and Qualitative Disclosure About Market Risk
- ------- ---------------------------------------------------------
Not applicable.
19
<PAGE> 20
PART II - OTHER INFORMATION
Item 5. Other Information
- ------- -----------------
On November 17, 1998, the Company announced that Gregory H. Wolf had
joined the Company's Board of Directors. The press release announcing
that Mr. Wolf had joined the Company's Board of Directors is attached
as an exhibit hereto and is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits.
11 Computation of Earnings Per Common and Common Equivalent
Share.
12 Statements Re Computation of Ratios.
27 Financial Data Schedule.
99 Press Release dated November, 16, 1998.
(b) Reports on Form 8-K. None.
20
<PAGE> 21
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHOPKO STORES, INC. (Registrant)
Date: December 11, 1998 By: /s/ Richard D. Schepp
----------------------------------
Richard D. Schepp
Senior Vice President General
Counsel and Secretary
(Duly Authorized Officer of
Registrant)
Date: December 11, 1998 By: /s/ Jeffery R. Simons
----------------------------------
Jeffery R. Simons
Vice President and Controller
(Chief Accounting Officer and Duly
Authorized Officer of Registrant)
21
<PAGE> 22
EXHIBIT INDEX
SHOPKO STORES, INC.
10-Q REPORT
Exhibit Sequential
Number Exhibit Page Number
- ------- ------- -----------
11 Computation of Earnings Per Common and
Common Equivalent Share.
12 Statements Re Computation of Ratios.
27 Financial Data Schedule.
99 Press Release dated November 16, 1998.
22
<PAGE> 1
EXHIBIT 11 - COMPUTATION OF EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year to Date as of Fiscal Years Ended
------------------------------------------------------
October 31, November 1, January 31, February 1,
1998 1997 1998 1997
(39 Weeks) (39 Weeks) (52 Weeks) (52 Weeks)
------------------------------------------------------
<S> <C> <C> <C> <C>
BASIC:
Net earnings $ 15,015 $ 14,979 $ 49,382 $ 45,669
============ ============ ============ ============
Weighted average number of
outstanding common shares 26,010 29,283 28,398 32,090
============ ============ ============ ============
Net earnings per common
share - basic (1) $ 0.58 $ 0.51 $ 1.74 $ 1.42
============ ============ ============ ============
DILUTED:
Net earnings $ 15,015 $ 14,979 $ 49,382 $ 45,669
============ ============ ============ ============
Weighted average number of
outstanding common shares 26,010 29,283 28,398 32,090
Number of common shares
issuable assuming exercise
of stock options 483 630 377 473
------------ ------------ ------------ ------------
Weighted average number of
outstanding common and
common equivalent shares -
assuming full dilution 26,493 29,913 28,775 32,563
============ ============ ============ ============
Net earnings per common
share - diluted (1) $ 0.57 $ 0.50 $ 1.72 $ 1.40
============ ============ ============ ============
</TABLE>
(1) Earnings per share are computed by dividing net earnings by the weighted
average number of outstanding common and common equivalent shares.
23
<PAGE> 1
SHOPKO STORES, INC. AND SUBSIDIARIES
EXHIBIT 12 - STATEMENTS RE COMPUTATION OF RATIOS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year to Date as of Fiscal Years Ended
-------------------------------------------------------
October 31, November 1, January 31, February 1,
1998 1997 1998 1997
(39 Weeks) (39 Weeks) (52 Weeks) (52 Weeks)
-------------------------------------------------------
<S> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges
----------------------------------
COMPUTATION OF EARNINGS
1 Pretax Income 24,726 24,667 81,326 75,215
2 Add previously capitalized interest
amortized during the period 413 411 550 548
3 Less interest capitalized during
the period 124 0 0 128
-------- -------- -------- --------
4 Total earnings (sum of lines
1 to 3) 25,015 25,078 81,876 75,635
COMPUTATION OF FIXED CHARGES
5 Interest (1) 28,883 24,025 32,239 32,128
6 Interest factor in rental expense 3,138 2,114 2,691 2,657
-------- -------- -------- --------
7 Total fixed charges (sum of lines
5 and 6) 32,021 26,139 34,930 34,785
8 TOTAL EARNINGS AND
FIXED CHARGES (LINE 4
PLUS LINE 7) 57,036 51,217 116,806 110,420
======== ======== ======== ========
9 Ratio (line 8 divided by line 7) 1.8 2.0 3.3 3.2
(1) Includes capitalized interest
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> AUG-02-1998
<PERIOD-END> OCT-31-1998
<CASH> 6,948
<SECURITIES> 0
<RECEIVABLES> 115,957
<ALLOWANCES> 9,412
<INVENTORY> 534,923
<CURRENT-ASSETS> 663,888
<PP&E> 1,163,025
<DEPRECIATION> 489,320
<TOTAL-ASSETS> 1,416,143
<CURRENT-LIABILITIES> 525,180
<BONDS> 0
0
0
<COMMON> 261
<OTHER-SE> 417,629
<TOTAL-LIABILITY-AND-EQUITY> 1,416,143
<SALES> 2,055,524
<TOTAL-REVENUES> 2,064,455
<CGS> 1,611,518
<TOTAL-COSTS> 2,010,970
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,759
<INCOME-PRETAX> 24,726
<INCOME-TAX> 9,711
<INCOME-CONTINUING> 15,015
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,015
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0.57
</TABLE>
<PAGE> 1
EXHIBIT 99
NEWS RELEASE
Investor contact:
Phyllis Proffer
(920) 429-4391
Media contact:
Sheree Olson
(920) 429-4186
GREGORY H. WOLF JOINS SHOPKO'S BOARD OF DIRECTORS
Green Bay, Wisconsin (November 16, 1998) -- ShopKo Stores, Inc. (NYSE:SKO) today
announced the addition of Gregory H. Wolf to its board of directors. Wolf is
President and Chief Executive Officer of Humana, Inc., one of the nation's
largest publicly traded managed health care companies, based in Louisville,
Kentucky. The addition of Wolf, approved by ShopKo's board of directors,
increases the size of ShopKo's board from seven to eight members. Wolf's initial
term on the board will expire at ShopKo's 1999 annual meeting of shareholders,
where he will stand for reelection.
"I have known Greg Wolf for many years and am pleased he is joining ShopKo's
board of directors," said Dale P. Kramer, ShopKo Chairman, President and Chief
Executive Officer. "Greg is a leader in the managed care and insurance fields,
and a dynamic and well-respected chief executive officer. His expertise will
undoubtedly enhance our strategies for continued growth."
Wolf was named President and Chief Executive Officer of Humana, Inc., December
1, 1997. He joined the company in 1995 through the acquisition of
EMPHESYS/Employers Health Insurance. In 1994, he engineered the initial public
offering (IPO) for the EMPHESYS Financial Group. That IPO was the nation's most
successful large cap IPO that year, providing the greatest return to
shareholders as of year end. Wolf began his career at Employers Health, based in
Green Bay, Wisconsin, in 1988 and held several executive offices before assuming
the President's post in 1994.
Wolf serves on the boards of the Boys and Girls Clubs of Green Bay, Greater
Louisville Inc., The Louisville Downtown Development Corporation, National City
Bank of Kentucky and Humana, Inc.
26
<PAGE> 2
Wolf is a native of Erie, Pennsylvania, and is married with two children. He
earned a bachelor's degree from Penn State University, where he was recently
distinguished with the Penn State Alumni Fellows Award for exceptional
contribution to the University's academic community. Wolf received a master's
degree in Hospital and Health Services Administration from Central Michigan
University.
ShopKo Stores, Inc., headquartered in Green Bay, Wisconsin, is a leading
specialty discount retailer operating 147 stores in 16 states primarily in the
Upper Midwest, Western Mountain and Pacific Northwest regions. The Company also
serves the rapidly growing managed health care industry through its wholly-owned
subsidiary, ProVantage, Inc. Serving a client base representing more than 25
million lives worldwide, ProVantage offers information technology support
services, custom prescription benefit management (PBM) and vision benefit
management (VBM) services. For more information about ShopKo or ProVantage,
visit our web site at www.shopko.com.
This press release may contain forward-looking statements within the meaning of
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Such statements are subject to important factors which could cause the
Company's actual results to differ materially from those anticipated by the
forward-looking statements. These factors include those referenced in the
Company's current Annual Report on Form 10-K or as may be described from time to
time in the Company's subsequent SEC filings.
27
