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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year (52 weeks) ended January 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-10876
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SHOPKO STORES, INC.
(Exact name of registrant as specified in its Charter)
Wisconsin 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:
<TABLE>
<CAPTION>
Name of each exchange on
Title of each class which registered
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<S> <C>
Common Stock, par value $0.01 per share New York Stock Exchange
Series B Preferred Stock Purchase Rights New York Stock Exchange
</TABLE>
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 91 Exhibit index on page 73
(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, 1999 was approximately $777,376,778 (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,
1999: 26,140,380.
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 26, 1999.
(Cover page 2 of 2 pages)
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PART I
ITEM 1. BUSINESS
GENERAL
ShopKo Stores, Inc. ("ShopKo" or the "Company"), a Wisconsin 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. As of January 30, 1999, the
Company's 147 retail stores operated in 16 Midwest, Pacific Northwest and
Western Mountain states. ShopKo also provides custom health benefit management
services; pharmacy mail services; vision benefit management services and health
information and clinical support services though its subsidiary ProVantage
Health Services, Inc. ("ProVantage"). ProVantage conducts business principally
throughout the United States.
On February 4, 1999, ProVantage filed a registration statement for the
initial public offering of ProVantage's common stock. If the offering is
completed as currently contemplated, ProVantage would retain $20.0 million from
the offering proceeds. ShopKo would receive approximately $62.8 million as
payment on a dividend note, and ShopKo would own between approximately 66.0% and
70.0% of ProVantage's common stock. There can be no assurance that ProVantage's
initial public offering will be completed or that it will be completed on the
terms described above. ShopKo intends to use any proceeds from payment on the
dividend note for strategic and/or financial alternatives.
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. Consequently, for
that transition year, the statements of earnings, cash flows and shareholders'
equity are presented for the 49-week period ended January 31, 1998. The table
below illustrates how the fiscal years are referred to in this Form 10-K.
<TABLE>
<CAPTION>
Period Fiscal Year
<S> <C>
February 1, 1998 through January 30, 1999 (52 weeks) 1998
February 23, 1997 through January 31, 1998 (49 weeks) 1997
February 25, 1996 through February 22, 1997 (52 weeks) 1996
</TABLE>
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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 health benefit management services,
pharmacy mail services, vision benefit management services and health
information and clinical support services). 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 L of the Notes to Consolidated Financial Statements for fiscal
year 1998.
RETAIL STORES
The Company's Retail Store net sales mix for the last three fiscal years
was:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Softline 24% 25% 25%
Hardline/Home 54% 54% 54%
Retail Health Services 22% 21% 21%
</TABLE>
MERCHANDISING PHILOSOPHY - RETAIL STORE
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 experienced and well-trained 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 each of
these merchandise categories, shoppers will find a wide assortment of sizes,
colors and styles. A strong national brand presence is combined with ShopKo's
private brands to offer a unique product mix.
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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 prioritize 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 and Chief Executive Officer and composed of senior vice
presidents from all areas of the Company. 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.
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.
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The Company also provides professional health services in most of its
stores. Of the Company's 147 stores as of January 30, 1999, 145 include pharmacy
centers and 144 include optical centers. On December 19, 1997, ShopKo acquired
the retail chain Penn-Daniels, Incorporated ("Penn-Daniels"), which operated 18
Jacks' discount stores in Iowa, Illinois and Missouri and one Lots-A-Deals
close-out store in Illinois. The Company converted 17 of the Jacks' retail
locations to ShopKo stores. The Lots-A-Deals store and one Jacks' store were
closed in fiscal 1998. The conversion of the 17 Jacks' stores included the
addition of in-store pharmacies (except in one store) and optical centers. 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 89 in-store finishing labs which, in fiscal 1998, dispensed over
690,000 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 had been testing a stand alone optical store format with four
stores in Ohio. The results were mixed and it was decided to close the stores.
The stores were closed on August 29, 1998. The closings did not have a material
financial impact on the Company.
MARKETING AND ADVERTISING - RETAIL STORE
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 5.1 million. Direct mail vehicles are used selectively
at key promotional periods and have a circulation of more than 6.9 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-correct, lifestyle merchandise at compelling prices in an attractive
easy-to-use shopping environment.
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RETAIL STORE LAYOUT AND DESIGN
ShopKo stores are designed for simplicity, speed and ease of the 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, hardline/home goods and professional pharmacy and optical
departments. 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.
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
have been converted to ShopKo's current format. 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 $2.0 to $4.5 million per store.
The Company's average store size is approximately 89,000 square feet with
approximately 83.0% 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.
RETAIL 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.
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The Company believes it has improved teammate satisfaction despite a
challenging environment characterized by low unemployment and intense
competition for quality teammates. The Company has undertaken an intensive
management and teammate development program to ensure commitment to the
Company's mission and principles. This education is intended to sharpen
management's focus and ability to drive sales through an integrated partnership
with the central organization and a focus on leadership.
The Company improved customer service through a comprehensive strategic
initiative designed to enhance store execution and reduce 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 for the last two
years 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.
PURCHASING AND DISTRIBUTION - RETAIL STORE
ShopKo purchases merchandise from more than 2,300 vendors with its ten
largest vendors accounting for approximately 30.0% of the Company's purchases
during fiscal 1998. 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 700 vendors were linked to the Company's electronic
data interchange ("EDI") purchase order systems as of January 30, 1999. 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, over 390 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 assortments.
Direct imports accounted for approximately 8.0% of the Company's purchases
(based upon cost of goods) during fiscal 1998. The Company buys its imported
goods, principally in the Far East, and ships the goods to its distribution
centers for distribution to the stores.
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Utilization of the four 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 1998, approximately 88.0% of the merchandise sold by
the Company (excluding optical and pharmaceutical products) flowed through its
distribution centers.
The Company will be expanding its distribution centers in Wisconsin and
Idaho. These expansions will improve service to the stores, reduce backroom
congestion and support the Company's anticipated growth. The Wisconsin
distribution center will be expanded to approximately 550,000 square feet and
the Idaho distribution center will be expanded to approximately 325,000 square
feet. Construction on these facilities is expected to be completed in early
2000.
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.
MANAGEMENT INFORMATION SYSTEMS - RETAIL STORE
ShopKo uses information technology to improve customer service, reduce
operating costs and provide actionable information for timely merchandising
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.
ShopKo's state-of-the-art warehouse management system operates in a
distributed processing environment, providing complete warehouse functionality
such as conveyor control and direction of picking and put-away processes via
portable radio-frequency terminals. In addition, this system is highly
integrated with the Company's central information systems through its
telecommunications network, thereby ensuring up-to-date perpetual inventory
records, as well as facilitating highly accurate merchandise allocation and
distribution decisions upstream.
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 Spring 1999 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 levels, and greater productivity.
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In fiscal 1998, the Company completed the replacement of its mainframe
based merchandise applications with new, open architecture, client/server
applications running on a massively parallel processor complex. In addition, the
Company installed an assortment planning application, thereby completing its
Merchandise Planning Initiative which integrates merchandise financial planning,
space planning, and assortment planning processes. The installation of these
applications in 1998 was the culmination of a multi-year strategy that fully
integrates the Company's operational, planning, and decision support systems,
while at the same time providing significant improvements in functionality and
the scalability necessary to support the Company's future growth plans.
Finally, the Company's investments in the above systems and technical
architecture have enabled it to convert the massive amounts of transaction based
"raw data" it amasses in the normal course of business into "actionable
information" by implementing a data warehouse, as well as the decision support
tools required to effectively access the information stored in the warehouse.
Additionally, this technology enables the Company to use data mining tools to
analyze sales data in order to validate and optimize the effectiveness of
promotional campaigns.
EXPANSION - RETAIL STORE
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
improve its profitability and maintain its financial strength. 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 December 1997, ShopKo acquired the Penn-Daniels retail chain which added
17 stores (after two locations were closed) to the Company's retail store base.
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 are leased, of which 7
are operating leases and 6 are capital leases.
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 or acquired stores.
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COMPETITION - RETAIL STORE
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, national category killers, specialty niche retailers and
internet 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 92.0% of the Company's stores, Target stores directly
compete with approximately 65.0% of its stores and Wal-Mart stores compete with
approximately 88.0% of the Company's stores. 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.
SEASONALITY - RETAIL STORE
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.
PROVANTAGE
PRODUCTS AND SERVICES - PROVANTAGE
ProVantage provides prescription and vision benefit management services
and healthcare information-based products and clinical services. ProVantage
believes that its pharmacy benefit management services, in combination with its
information-based products and services, results in a highly differentiated
product offering with the potential to assess the effectiveness of healthcare
services, identify ways of improving healthcare results, and lower
pharmaceutical and, more importantly, overall medical costs.
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Healthcare Benefit Management Services
ProVantage provides high quality, cost efficient pharmacy benefit
management services to health plan sponsors. As of January 1999, ProVantage
provided pharmacy benefit services to approximately 4.5 million people and
vision benefit management services to approximately 500,000 people through more
than 3,500 customers. ProVantage's core client base has historically been small
to mid-size employers, insurance companies, third party administrators, health
maintenance organizations and self-funded healthcare plan sponsors. We
increasingly are marketing our pharmacy benefit management services to larger
organizations based on our advanced clinical and information-based products and
services.
ProVantage's pharmacy benefit management services include national retail
pharmacy network administration, claims adjudication services, mail pharmacy
service, formulary development and management and benefit plan design
consultation. We manage a network of over 50,000 retail pharmacies to provide
prescription drugs to health plan members. We contract with these pharmacies to
fill prescriptions at predetermined, negotiated rates, which are significantly
more favorable than typical retail prices, in exchange for designating them as
network pharmacies. Health plan members can fill prescriptions at a network
pharmacy in all 50 states, Puerto Rico and the Virgin Islands. We use on-line
point-of-sale electronic claims processing with pharmacies for swift
adjudication of pharmacy claims.
ProVantage is compensated for pharmacy benefit management services through
processing fees, clinical service fees, formulary administration fees and
reimbursement of the cost of the pharmaceuticals dispensed. In addition, various
ancillary and information management fees may be charged.
ProVantage mail service pharmacy offers health plans and their members a
cost effective way to receive maintenance prescription drugs to treat chronic
illnesses. Members mail their prescriptions, which typically provide for up to a
three month supply, to our mail service pharmacy, where we process and mail
their prescriptions, typically within two business days of receipt. Our mail
service pharmacy helps control prescription costs for health plan sponsors by
buying drugs at volume discounts and dispensing generic drug products when
appropriate. As of February 1999, the ProVantage mail service pharmacy in Green
Bay, Wisconsin, dispensed and mailed approximately 75,000 prescriptions per
month.
ProVantage's Advanced Therapeutic Intervention program is one of the key
differentiating features of its pharmacy benefit management services. We began
providing this service in mid-1998. The Advanced Therapeutic Intervention
program analyzes the prescription drug and medical encounter data of each of our
participating clients. Using the RationalMed software, this data is analyzed to
identify specific patients who have been prescribed drugs that significantly
increase the patient's risk of hospitalization due to the underlying medical
condition and multiple diseases. A clinical pharmacist reviews the results and
determines those patients for whom intervention is appropriate. The clinical
staff, under the direction of our physicians, intervenes by issuing alerts for
these patients to the treating physicians. These alerts inform the treating
physicians of the medical condition, prescribing pattern or other factors that
create the increased hospitalization risk.
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ProVantage's pharmacy benefit management services also include plan design
consultation intended to reduce drug costs while promoting clinically
appropriate drug use. The most common plan design features offered are co-pay
options, incentives for substituting generic for branded drugs, limitations of
the number of days per prescription and requirements that maintenance drugs be
filled by the mail service pharmacy. We assign an account executive to work
closely with each customer to determine the appropriate plan design features
based on the customer's specific benefit requirements.
ProVantage provides vision benefit management services to client plan
sponsors offering vision benefits. As of January 1999, ProVantage's vision
benefit management business covered approximately 500,000 people through a
national network of approximately 4,500 retail optical chains and private
ophthalmologists, optometrists and opticians. Unlike the pharmacy benefit
management business, the vision benefit management business offers self-insured
as well as fully-insured products. The self-insured products offered are similar
to the pharmacy benefit management product and service offering. The insured
products are sold by licensed independent and employee sales agents and are
underwritten by a licensed insurance company, a subsidiary of American
International Group.
Healthcare Information Technology
ProVantage's healthcare information technology allows ProVantage to add
value to the pharmacy benefit management services. We have acquired or developed
a number of healthcare information products and services over the last several
years. These products include RationalMed, ProVQuery, ProVMed and ProVCOR.
RationalMed is clinical outcomes assessment software that integrates
the clients' medical claim, diagnosis, and pharmaceutical data to identify
problematic prescribing patterns and quantify the resulting increased risk of
patient hospitalization or other adverse medical events. RationalMed uses
therapeutic criteria for disease categories and over 7,800 rules that are based
on medical research to analyze the integrated medical data for drug-drug,
drug-disease, over- and under-utilization, duplication and duration conflicts.
The physician can therefore determine whether treating the condition is worth
this added risk.
ProVQuery is an internet-accessible pharmaceutical decision support
software system. The system provides clients with desk-top access to their
prescription claims detail for profiling, national comparisons, drug category
breakdown and demographic analyses.
ProVMed is an administrative, financial and clinical decision support tool
that provides direct and easy access to company-wide data traditionally
contained in the customer's separate databases. ProVMed gives clients the
ability to access their medical and pharmaceutical data as well as to view that
data relative to national norms. ProVMed was developed as a joint venture with
American Medical Security, Inc., one of our principal pharmacy benefit
management clients. ProVantage owns 80.0% of this joint venture.
ProVCOR is a healthcare decision support product currently under
development. ProVCOR is designed to help study the effects of pharmaceutical and
clinical interventions on healthcare treatment and results in specific disease
areas. It is also being designed to offer disease-specific "datamarts," which
can be accessed by the customer to create or support disease management
programs.
13
<PAGE> 14
CLIENTS - PROVANTAGE
ProVantage currently provides health benefit management services for over
3,500 health benefit plan customers, covering over 5.0 million plan members.
ProVantage's health benefit management client base is comprised of health
maintenance organizations, third party administrators, insurance companies,
self-funded healthcare plan sponsors and government agencies. ProVantage's ten
largest customers accounted for approximately 35.2% of ProVantage's revenues in
fiscal 1998, approximately 37.1% of ProVantage's revenues in fiscal 1997 and
approximately 42.8% of ProVantage's revenues in fiscal 1996. In addition, one of
those ten customers, American Medical Security, Inc., accounted for
approximately 11.4% of ProVantage's revenues in fiscal 1998, 11.7% of
ProVantage's revenues in fiscal 1997 and 17.9% of ProVantage's revenues in
fiscal 1996. ProVantage's health information technology clients include federal
and state agencies, third party health plan administrators, health maintenance
organizations, insurance companies and pharmaceutical manufacturers. Ten states
currently use ProVantage's health information technology for the operation of
their state Medicaid programs.
SALES AND MARKETING - PROVANTAGE
ProVantage markets its pharmacy benefit management services on the basis of
high quality customer service, advanced clinical capabilities, including the
Advanced Therapeutic Intervention program and healthcare information products.
ProVantage has a nationwide sales force of 12 regional sales managers and one
director.
Sales of the healthcare information products tend to require marketing
support by our senior executives and approval at senior levels in a client's
organization and tend to have a long sales cycle. ProVantage's sales strategy in
these circumstances is to differentiate itself with these products and then to
cross-sell the traditional pharmacy benefit management and other services to the
health information technology customers.
ProVantage has sales offices in:
Charlotte, North Carolina Atlanta, Georgia
Dallas, Texas Omaha, Nebraska
Salt Lake City, Utah Chicago, Illinois
Scottsdale, Arizona Arlington, Virginia
Green Bay, Wisconsin Milwaukee, Wisconsin
ProVantage also uses a national network of independent agents and brokers
to market their products. For certain healthcare information products,
ProVantage may in the future use strategic partners or other distribution
channels for product marketing.
14
<PAGE> 15
SUPPLIERS - PROVANTAGE
ProVantage has a large number of suppliers for goods and services.
However, only a few are significant in terms of sustaining our daily business.
McKesson HBOC, Inc. is our current wholesaler of pharmaceuticals for our mail
service pharmacy. International Business Machines Corporation, Oracle
Corporation and MicroStrategy Incorporated provide key computer systems that we
use to manage our internal databases and decision support tools. Commencing in
2000, ProVantage plans to use the claims processing programs of Systems
Xcellence USA, Inc. to process pharmacy claims in the retail network.
MANAGEMENT INFORMATION SYSTEMS - PROVANTAGE
ProVantage 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.
ACQUISITIONS AND ALLIANCES - PROVANTAGE
Beyond internal growth, ProVantage intends to selectively pursue the
acquisition of companies that either increase the size of its pharmacy benefit
management business or augment its advanced clinical and health information
technology capabilities.
In addition to acquisitions, ProVantage is seeking corporate alliances to
expand its health information technology capabilities. These types of alliances
allow ProVantage to gain access to new technology and data without committing
the level of financial and management resources associated with a major
acquisition.
COMPETITION - PROVANTAGE
ProVantage faces direct competition in both the pharmacy benefit management
and vision benefit management businesses. The pharmacy benefit management
industry is relatively consolidated and dominated by large companies with
significant resources. Many of the large pharmacy benefit management companies
are owned by large companies, including pharmaceutical manufacturers, which can
provide them with significant purchasing power and other advantages which we do
not have. Competitors in this industry include other pharmacy benefit management
companies, drug retailers, physician practice management companies, and
insurance companies/health maintenance organizations. In addition to many
smaller companies, ProVantage's six primary competitors for pharmacy benefit
management customers are:
15
<PAGE> 16
- PCS Health Systems, Inc., a subsidiary of Rite-Aid Corp.
- Merck-Medco Managed Care, LLC, a subsidiary of Merck & Co., Inc.
- Express Scripts, Inc.
- Caremark International, Inc., a subsidiary of MedPartners, Inc.
- Advance Paradigm, Inc.
- Diversified Pharmaceutical Services, Inc., a subsidiary of
SmithKline Beecham, which has announced that it will be acquired
by Express Scripts, Inc.
ProVantage may also experience competition from other sources in the
future, such as internet-based drug stores. Pharmacy benefit management
companies compete primarily on the basis of price, service, reporting
capabilities and clinical services. The primary competitor for vision benefit
management services is Vision Service Plan, which is the largest vision benefit
management provider in the nation. Vision benefit management companies compete
principally on the basis of size and scope of network, service and price. In
most cases, the competitors listed above are large, profitable and
well-established companies with substantially greater financial and marketing
resources than ProVantage.
ProVantage's competitive strengths include the ability to help customers
lower hospitalization and other medical costs, our reputation for client
service, our database of integrated medical and pharmaceutical data, the use of
cutting-edge technology, and clinical capabilities that leverage our database
and technology strengths. We believe that pharmacy benefit management companies
which are unaffiliated with pharmaceutical manufacturers will be in a
competitively advantaged position; due to our independence, we are able to use
our products and an independent pharmacy and therapeutics committee to ensure
that decisions are primarily based on drug efficacy rather than on economics
alone.
CONSOLIDATED
EMPLOYEES
As of January 30, 1999, the Company employed approximately 21,000 persons,
of whom approximately 11,000 were full-time employees and 10,000 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:
16
<PAGE> 17
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, 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.
17
<PAGE> 18
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
prescription benefit management companies from receiving amounts from
pharmaceutical manufacturers in connection with pharmaceutical purchasing and
formulary management programs, to therapeutic substitution programs conducted by
independent prescription benefit management companies or to the contractual
relationships such as those the Company has with certain of its customers.
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.
Privacy and Confidentiality Legislation
Most of ProVantage's activities involve the receipt or use of confidential,
medical information concerning individual members, including the transfer of the
confidential information to the member's health benefit plan. In addition,
ProVantage uses aggregated data (that is, data from which information which
identifies specific patients is removed) for research and analysis purposes.
Legislation has been proposed at the federal level and in several states to
restrict the use and disclosure of confidential medical information. To date,
no such legislation has been enacted that adversely impacts our ability to
provide our services, but there can be no assurance that federal or state
governments will not enact legislation, impose restrictions or adopt
interpretations of existing laws that could have a material adverse effect on
our operations.
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.
18
<PAGE> 19
Comprehensive Pharmacy Benefit Management Legislation
Although no state or the federal government has passed legislation
regulating pharmacy benefit management activities in a comprehensive manner,
such legislation has been introduced on several occasions. Such legislation,
if enacted in any state in which we have a significant concentration of
business or if enacted by the federal government, could adversely impact our
operations.
Future Legislative Initiatives
Legislative and regulatory initiatives pertaining to such health care
related issues as reimbursement policies, payment practices, therapeutic
substitution programs, and other healthcare cost containment issues are
frequently introduced at both the 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.
Substantial Compliance
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
businesses 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.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
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, 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 ("SEC")
including, without limitation, statements with respect to growth, acquisition
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, acquisition 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) the risk
factors described below, (ii) the risk factors described in ProVantage's
Registration Statement on Form S-1 (Reg. No. 333-71743), as amended, and (iii)
other risks described from time to time in the Company's and ProVantage's SEC
filings.
19
<PAGE> 20
An investment in ShopKo's Common Stock or other securities carries certain
risks. Investors should carefully consider the risks described below, the risks
described in ProVantage's registration statement filed with the SEC, and other
risks which may be disclosed from time to time in ShopKo's and ProVantage's
filings with the SEC before investing in ShopKo's Common Stock or other
securities.
ShopKo's Industry is Intensely Competitive. The Company operates in a
highly competitive environment which includes other discount retail merchants as
well as mass merchants, internet retailers and other general merchandise,
apparel and household merchandise retailers. The Company's retail health
services face competition from independent and chain pharmacies and optical
centers. The discount retail merchandise business is subject to excess capacity
and certain competitors of the Company are much larger and have substantially
greater resources than the Company. The competition for customers has
intensified in recent years as larger competitors, such as Wal-Mart, Kmart and
Target, have moved into the Company's geographic markets. Although the Company
has performed well notwithstanding this intensified competition, there is no
assurance that the Company will be able to continue to compete successfully.
ShopKo Has a Significant Amount of Debt Which May Increase as ShopKo Grows.
At January 30, 1999, the Company had approximately $467.2 million of long-term
debt and other long-term obligations. The Company could incur more debt as it
expands its retail operations. This additional debt could have adverse effects
on the Company, including the following: (i) additional financing may not be
available to the Company upon terms as favorable as those currently available to
the Company, (ii) a significant portion of the Company's cash flow from
operations may be dedicated to the payment of principal and interest on debt,
(iii) the ability to capitalize on significant business opportunities may be
limited, and (iv) the leverage may make the Company more vulnerable to economic
downturns and may limit its ability to withstand competitive pressure and any
adverse changes in government regulation.
ShopKo May be Unable to Secure Additional Retail Store Sites. The Company's
plans to increase its retail stores will depend in part upon the availability of
existing retail stores or store sites. There can be no assurance that such
stores or sites will be available, or that they will be available on terms
acceptable to the Company. Rising real estate costs and construction and
development costs could also inhibit the Company's ability to grow. If the
Company is unable to grow its retail business, the Company's financial
performance could be adversely affected.
20
<PAGE> 21
ShopKo May be Adversely Affected by Litigation. The sale of retail
merchandise and provision of in-store pharmacy and optical services entail an
inherent risk of liability. The Company is currently subject to a number of
lawsuits, and it is expected that the Company from time to time will be subject
to similar suits in the ordinary course of business. The Company currently
maintains insurance intended to cover a majority of such claims, subject to a
$250,000 deductible for general liability claims and a $500,000 deductible for
liability claims arising from prescription dispensing errors, and management
believes that its insurance programs are adequate. There can be no assurance,
however, that claims in excess of insurance coverage or claims not covered by
insurance coverage will not arise. There can be no assurance that the Company
will be able to obtain insurance coverage in the future on acceptable terms, if
at all. A successful claim against the Company substantially in excess of its
insurance coverage, or for claims which are not covered by such insurance, could
have a material adverse effect on its financial condition and results of
operations. In addition, claims against the Company, regardless of merit or
eventual outcome, may have a material adverse effect upon its reputation and
business.
Seasonality of ShopKo's General Merchandise Business and Fluctuations in
Quarterly Performance. The retail general merchandise operations of the Company
are highly seasonal, with the Christmas selling season contributing a
significant part of the Company's earnings. The Christmas selling season
primarily impacts the fourth fiscal quarter. The Company's operating results are
also subject to adverse weather conditions in the Company's retail markets,
particularly in the Midwest and Western U.S. Fluctuations in the Company's
results can also result from inventory imbalance caused by unanticipated
fluctuations in consumer demand. These and other factors could cause ShopKo's
operating results to fall below its expectations or the expectations of market
analysts and investors. If the Company does not meet such expectations, the
price of the Common Stock may decline significantly.
Dependence on Key Management and Directors. The Company believes that its
continued success will depend to a significant extent upon the continued
services of its senior management and a seasoned Board of Directors. The loss of
the services of key senior management and Board members could have a material
adverse effect on the Company's business.
Vulnerability to General Economic Conditions. General economic factors that
are beyond the Company's control may impact the Company's forecasts and actual
performance. Such factors include interest rates, recession, inflation,
deflation, consumer credit availability, consumer debt levels, tax rates and
policy, unemployment trends and other matters that influence consumer confidence
and spending. Increasing volatility in financial markets may cause these factors
to change with a greater degree of frequency and magnitude.
Labor Conditions Can Impact ShopKo's Performance. The Company's performance
is dependent on attracting and retaining quality employees. Many of such
employees are in entry level or part time positions with historically high rates
of turnover. The Company's ability to meet its labor needs while controlling
costs is subject to external factors such as unemployment levels, minimum wage
legislation and changing demographics.
21
<PAGE> 22
Anti-Takeover Provisions May Inhibit Premium Offers for the Company's
Common Stock. Certain provisions of the Company's Restated Articles of
Incorporation, as amended, and By-laws, the existence of authorized but unissued
capital stock, certain provisions of Wisconsin law and the Company's Rights Plan
may tend to deter unfriendly offers or other efforts to obtain control of the
Company that are not approved by the Company's Board of Directors. This could
make the Company less attractive to a potential acquirer and deprive the
Company's shareholders of opportunities to sell their shares of Common Stock at
a premium price.
ITEM 2. PROPERTIES
As of January 30, 1999, the Company operated 147 retail stores in 16
Midwest, Western Mountain and Pacific Northwest states. The following table sets
forth the geographic distribution of the Company's present stores:
<TABLE>
<CAPTION>
# OF # OF
STATE STORES STATE STORES
---------------------------------------------------------
<S> <C> <C> <C>
California 1 Montana 5
Colorado 3 Nebraska 11
Idaho 8 Nevada 3
Illinois 11 Oregon 4
Iowa 11 South Dakota 6
Michigan 4 Utah 15
Minnesota 13 Washington 10
Missouri 1 Wisconsin 41
--------------
Total 147
==============
</TABLE>
Of the Company's 147 ShopKo retail stores at January 30, 1999, 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 subsidiaries own
the land and building outright with respect to 37 stores, 7 of which are subject
to mortgages, own the building subject to a ground lease with respect to 3
stores and lease the land and building with respect to 8 stores. 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.
22
<PAGE> 23
The Company's other principal properties are as follows:
<TABLE>
<CAPTION>
SQ. FT OF
BUILDING
LOCATION USE SPACE TITLE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Green Bay, WI Corporate Headquarters 228,000 Owned
Lawrence, WI Corporate Headquarters - South 114,300 Owned
Annex/Return Center
Quincy, IL Closed: Corporate Headquarters 15,000 Owned
(Penn-Daniels)
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
Brookfield, WI ProVantage Claims Processing/ 14,100 Leased
Administrative Office
Elm Grove, WI ProVantage Claims Processing/ 15,700 Leased
Administrative Office Annex
Green Bay, WI ProVantage Mail Service 10,000 Leased
Arlington, VA PharMark Office 15,500 Leased
Green Bay, WI ProVMed Office 7,200 Leased
Salt Lake City, UT ProVantage Regional Office 1,250 Leased
Dallas, TX ProVantage Regional Office 500 Leased
</TABLE>
As of the Spring of 1999, construction is underway on a new 60,000 square
foot corporate headquarters for ProVantage in Pewaukee, Wisconsin to replace the
Elm Grove and Brookfield facilities. The new building is expected to be
available for occupancy in the Summer of 1999. It is expected that this building
will be owned by ShopKo and leased to ProVantage.
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.
23
<PAGE> 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders of
Registrant during the fourth quarter of fiscal year 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
SERVED IN EMPLOYED
CURRENT BY THE
POSITION COMPANY
NAME AGE* POSITION** SINCE SINCE
---- ---- --------------------------------------------------- --------- --------
<S> <C> <C> <C> <C>
Dale P. Kramer 59 Chairman of the Board 1997 1971
William J. Podany 52 President and Chief Executive Officer 1999 1994
Michael J. Bettiga 45 Senior Vice President, General Merchandise Manager, 1995 1977
Retail Health Services
Paul A. Burrows 50 Senior Vice President, Chief Information Officer 1998 1998
Roger J. Chustz 48 Senior Vice President, General Merchandise 1993 1993
Manager, Apparel and Product Development
Ingrid A. Davis 40 Senior Vice President of Stores 1998 1997
Paul H. Freischlag, 44 Senior Vice President, Chief Financial Officer 1998 1998
Jr.
Steven T. Harig 44 Senior Vice President, Planning, Replenishment 1993 1989
and Analysis, Distribution and Transportation
Gary A. Hillerman 50 Senior Vice President, General Merchandise 1997 1996
Manager, Hardlines
Michael J. Hopkins 48 Senior Vice President, General Merchandise 1995 1995
Manager, Home and Hardlines
Rodney D. Lawrence 41 Senior Vice President, Store Marketing 1996 1996
David A. Liebergen 53 Senior Vice President, Human Resources 1993 1973
and Internal Communication
L. Terry McDonald 56 Senior Vice President, Marketing 1994 1994
Richard D. Schepp 38 Senior Vice President, General Counsel and Secretary 1997 1992
</TABLE>
*as of January 30, 1999
**as of April 19, 1999
There are no family relationships between or among any of the directors or
executive officers of the Company.
24
<PAGE> 25
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,
Ingrid A. Davis, Paul H. Freischlag, Jr., Gary A. Hillerman, Michael J. Hopkins,
Rodney D. Lawrence and L. Terry McDonald.
Mr. Podany was promoted to President and Chief Executive Officer in March
1999. He has been a director to the Company since July 1997. In November 1997,
he was promoted to President, Chief Operating Officer of ShopKo's Retail Stores
Division. He had been Executive Vice President since November 1994. He has held
senior merchandising executive officer positions with Allied Stores, May
Department Stores and Carter Hawley Hale Stores, Inc. 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.
Ms. Davis joined the Company in February 1997 as Vice President Special
Projects. Most recently Ms. Davis held the position of Regional Vice President
of Store Operations. Prior to that, Ms. Davis was with the Target division of
Dayton Hudson Corp. as Director of Super Target Stores. She also held a variety
of operations management positions with Best Price Clothing Stores, Inc.,
Conran's Habitat and the Lerner Division of The Limited, Inc.
Mr. Freischlag joined ShopKo in July 1998 as Senior Vice President, Chief
Financial Officer. Mr. Freischlag was Treasurer and Vice President for Royal
Ahold, Zaandam, The Netherlands from July 1996 to July 1998. Prior to that, he
was with The Stop & Shop Companies in Boston, Massachusetts for nine years, most
recently as Vice President and Treasurer.
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 Department Stores.
25
<PAGE> 26
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 Stores, Inc. Prior thereto, Mr. Hopkins served as Senior Vice President and
General Merchandise Manager of Home with Broadway Southwest division of Carter
Hawley Hale Stores, Inc. from 1985 to 1992.
Mr. Lawrence has been Senior Vice President - Store Marketing 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.
26
<PAGE> 27
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 29, 1999,
ShopKo's common shares were held by 954 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.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
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
Fiscal Year 1998
First Quarter (ended May 2, 1998) $34.9375 $25.8750
Second Quarter (ended August 1, 1998) 36.6250 29.2500
Third Quarter (ended October 31,1998) 32.5000 25.1250
Fourth Quarter (ended January 30, 1999) 33.6875 29.6875
</TABLE>
The closing sales price of the Common Stock on the New York Stock Exchange
on April 6, 1999 was $30.4375 per share.
The Company'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 30, 1999, the Company was in compliance
with this covenant; having a net worth balance of $459.2 million compared to a
required balance of $334.2 million.
The Company currently intends to retain earnings for the growth and
expansion of its business and not to declare or pay any cash dividends.
27
<PAGE> 28
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------------------------------------
JAN. 30, JAN. 31, FEB. 22, FEB. 24, FEB. 25,
1999 1998(1) 1997 1996 1995
(52 WKS) (49 WKS) (52 WKS) (52 WKS) (52 WKS)
- ------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS (MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $2,981 $2,448 $2,333 $1,968 $1,853
Licensed department rentals and other income 12 12 13 14 12
Gross margin 662 564 550 501 488
Selling, general and administrative expenses 472 404 397 361 356
Nonrecurring charge 6(2) 3(3)
Depreciation and amortization expenses 68 58 60 56 53
Interest expense - net 38 31 32 34 29
Earnings before income taxes 92 80 74 63 62
Net earnings 56 49 45 38 38
- ------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (DOLLARS)
- ------------------------------------------------------------------------------------------------------------------------------
Basic net earnings per common share $2.14 $1.73 $1.40 $1.20 $1.18
Diluted net earnings per common share 2.10 1.71 1.39 1.20 1.18
Cash dividends declared per common share(4) 0.22 0.44 0.44
- ------------------------------------------------------------------------------------------------------------------------------
FINANCIAL DATA (MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------
Working capital $167 $144 $232 $215 $187
Property and equipment-net 704 630 603 617 618
Total assets 1,374 1,251 1,234 1,118 1,110
Total debt(5) 472 440 421 416 429
Total shareholders' equity 459 396 461 422 397
Capital expenditures 100 32 39 53 95
- ------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
- ------------------------------------------------------------------------------------------------------------------------------
Current ratio 1.4 1.4 1.7 1.8 1.7
Return on beginning assets 4.4 % 4.0 % 4.0 % 3.5 % 4.0 %
Return on beginning shareholders' equity 14.0 % 10.6 % 10.7 % 9.7 % 10.1 %
Total debt as % of total capitalization(6) 49.3 % 51.4 % 46.6 % 48.5 % 50.9 %
- ------------------------------------------------------------------------------------------------------------------------------
OTHER YEAR END DATA
- ------------------------------------------------------------------------------------------------------------------------------
Stores open at year end 147 149(7) 130 129 124
Average store size-square feet 89,106 88,754 89,840 89,945 90,260
</TABLE>
28
<PAGE> 29
(1) Fiscal year end was changed from the last Saturday in February to the
Saturday nearest January 31.
(2) Nonrecurring charge related to the elimination of duplicate operations at
the Penn-Daniels administrative office and warehouse.
(3) Nonrecurring charge related to the termination of the proposed combination
with Phar-Mor and Cabot Noble.
(4) 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.
(5) Total debt includes short-term debt, current portion of long-term
obligations and long-term obligations.
(6) Total capitalization includes shareholders' equity, total debt and
non-current deferred income taxes.
(7) Includes 19 stores acquired from Penn-Daniels, Incorporated, two of which
closed in fiscal 1998.
29
<PAGE> 30
The following supplemental financial information for the 52 weeks ended
January 30, 1999 (audited), January 31, 1998 (unaudited) and February 1, 1997
(unaudited) is provided for comparative purposes. See Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations.
SUPPLEMENTAL FINANCIAL INFORMATION
ShopKo Stores, Inc. and Subsidiaries
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE DATA
- ----------------------------------------------------------------------------------------------------------------------------
52 Weeks Ended
January 30, 1999 (F1998), January 31, 1998 (F1997) and February 1, 1997 (F1996)
- ----------------------------------------------------------------------------------------------------------------------------
Retail Store ProVantage
------------------------------------------- -------------------------------------------
F1998 F1997 F1996 F1998 F1997 F1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $2,351,183 $2,103,419 $2,000,830 $666,154 $500,891 $330,048
Comparable store
sales increase 5.7% 3.8% 5.9%
Sales increase over
prior year 11.8% 5.1% 33.0% 51.8%
Gross margin 615,352 555,807 524,829 47,120 37,283 22,444
Percent of net sales 26.2% 26.4% 26.3% 7.1% 7.4% 6.8%
Other income 11,599 11,724 12,333 726 539 844
Percent of net sales 0.5% 0.6% 0.6% 0.1% 0.1% 0.3%
Selling, general and
administrative expenses 426,082 381,099 365,580 24,910 19,990 11,828
Percent of net sales 18.1% 18.1% 18.3% 3.8% 4.0% 3.6%
Nonrecurring charge
Depreciation and
amortization expenses 60,106 56,112 57,053 6,776 4,779 2,233
Percent of net sales 2.6% 2.7% 2.9% 1.0% 0.9% 0.7%
Income from operations 140,763 130,320 114,529 16,160 13,053 9,227
Percent of net sales 6.0% 6.2% 5.7% 2.4% 2.6% 2.8%
</TABLE>
This unaudited financial information for fiscal years 1997 and 1996 should be
read in conjunction with the Company's audited consolidated financial statements
including the notes thereto.
30
<PAGE> 31
SUPPLEMENTAL FINANCIAL INFORMATION
ShopKo Stores, Inc. and Subsidiaries
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE DATA
- ----------------------------------------------------------------------------------------------------------------------------
52 Weeks Ended
January 30, 1999 (F1998), January 31, 1998 (F1997) and February 1, 1997 (F1996)
- ----------------------------------------------------------------------------------------------------------------------------
Corporate Total
------------------------------------------- -------------------------------------------
F1998 F1997 F1996 F1998 F1997 F1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $(35,886) $(27,388) $(20,509) $2,981,451 $2,576,922 $2,310,369
Comparable store
sales increase
Sales increase over
prior year 15.7% 11.5%
Gross margin 662,472 593,090 547,273
Percent of net sales 22.2% 23.0% 23.7%
Other income 12,325 12,263 13,177
Percent of net sales 0.4% 0.5% 0.6%
Selling, general and
administrative expenses 20,554 26,603 16,070 471,546 427,692 393,478
Percent of net sales 15.8% 16.6% 17.0%
Nonrecurring charge 5,723 2,800 5,723 2,800
Depreciation and
amortization expenses 708 405 471 67,590 61,296 59,757
Percent of net sales 2.2% 2.4% 2.6%
Income from operations (26,985) (29,808) (16,541) 129,938 113,565 107,215
Percent of net sales 4.4% 4.4% 4.7%
Interest expense - net 38,311 32,239 32,000
Earnings before income taxes 91,627 81,326 75,215
Provision for income taxes 35,991 31,944 29,546
Net earnings $55,636 $49,382 $45,669
Earnings per share - basic $2.14 $1.74 $1.42
Earnings per share - diluted $2.10 $1.72 $1.40
</TABLE>
This unaudited financial information for fiscal years 1997 and 1996 should be
read in conjunction with the Company's audited consolidated financial statements
including the notes thereto.
31
<PAGE> 32
]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 52 weeks ended January 30, 1999 (fiscal 1998), the 49 weeks ended
January 31, 1998 (fiscal 1997) and the 52 weeks ended February 22, 1997 (fiscal
1996). 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 immediately preceding this management's discussion and analysis. 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:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------------
JAN. 30, 1999 JAN. 31, 1998 FEB. 22, 1997
(52 WEEKS) (49 WEEKS) (52 WEEKS)
---------- --------- ---------
<S> <C> <C> <C>
Revenues:
Net sales 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.4 0.5 0.6
------ ------ ------
100.4 100.5 100.6
Costs and Expenses:
Cost of sales 77.8 77.0 76.4
Selling, general and administrative expenses 15.8 16.5 17.0
Nonrecurring charge 0.2 0.1
Depreciation and amortization expenses 2.2 2.4 2.6
------ ------ ------
96.0 96.0 96.0
Income from operations 4.4 4.5 4.6
Interest expense - net 1.3 1.2 1.4
------ ------ ------
Earnings before income taxes 3.1 3.3 3.2
Provision for income taxes 1.2 1.3 1.3
------ ------ ------
Net earnings 1.9% 2.0% 1.9%
====== ====== ======
</TABLE>
The Company has two business segments: a Retail Store segment (which
includes general merchandise, retail pharmacy and retail optical operations) and
a ProVantage segment (which includes health benefit management services,
pharmacy mail services, vision benefit management services and health
information and clinical support services). Intercompany sales, which consist of
prescriptions that were both sold at a ShopKo pharmacy and processed by
ProVantage, have been eliminated.
32
<PAGE> 33
The following tables set forth items from the Company's business segments
as percentages of net sales:
RETAIL STORE SEGMENT
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------------
JAN. 30, 1999 JAN. 31, 1998 FEB. 22, 1997
(52 WEEKS) (49 WEEKS) (52 WEEKS)
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Net sales 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.5 0.6 0.6
------ ------ ------
100.5 100.6 100.6
Costs and Expenses:
Cost of sales 73.8 73.6 73.8
Selling, general and administrative expenses 18.1 18.0 18.3
Depreciation and amortization expenses 2.6 2.6 2.8
------ ------ ------
94.5 94.2 94.9
Income from operations 6.0% 6.4% 5.7%
====== ====== ======
</TABLE>
PROVANTAGE SEGMENT
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------------
JAN. 30, 1999 JAN. 31, 1998 FEB. 22, 1997
(52 WEEKS) (49 WEEKS) (52 WEEKS)
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Net sales 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.1 0.1 0.2
------ ------ ------
100.1 100.1 100.2
Costs and Expenses:
Cost of sales 92.9 92.5 93.1
Selling, general and administrative expenses 3.8 3.9 3.8
Depreciation and amortization expenses 1.0 1.0 0.6
------ ------ ------
97.7 97.4 97.5
Income from operations 2.4% 2.7% 2.7%
====== ====== ======
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
Consolidated net sales for fiscal 1998 (52 weeks) increased $533.6
million or 21.8% over fiscal 1997 (49 weeks) to $2,981.5 million.
Retail Store sales for fiscal 1998 (52 weeks) increased 17.5% or $349.6
million from fiscal 1997 (49 weeks) to $2,351.2 million. The Company attributes
this increase primarily to the 17 new stores acquired from Penn-Daniels,
Incorporated ("Penn-Daniels"), three additional weeks in the fiscal year and
merchandising operations and marketing initiatives.
33
<PAGE> 34
ProVantage sales for fiscal 1998 (52 weeks) increased 41.1% or $193.9
million over fiscal 1997 (49 weeks) to $666.2 million. This increase is due
primarily to internally generated growth in claims processing, mail pharmacy and
formulary fees. Included in ProVantage sales are the following: (i)
administrative and dispensing fees plus the cost of pharmaceuticals dispensed by
pharmacies participating in the network maintained by ProVantage 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 sales of eyeglasses and contact lenses relating to
ProVantage's vision benefit management services; and (iv) license and service
fees for health information technology and clinical support services.
Consolidated gross margins as percentages of sales were 22.2% and 23.0% for
fiscal 1998 and 1997, respectively. Retail Store gross margins as percentages of
sales were 26.2% and 26.4% for fiscal 1998 and 1997, respectively. The Retail
Store gross margins include LIFO credits of $3.6 million for fiscal 1998 and
$3.7 million for fiscal 1997. Retail Store gross margins, before LIFO credits,
were 26.0% and 26.2% for fiscal 1998 and 1997, respectively. This decrease is
primarily due to increases in promotional sales and third party sales in retail
pharmacy. ProVantage gross margins as percentages of sales were 7.1% and 7.5%
for fiscal 1998 and 1997, respectively. This decrease is attributable to
increases in the cost of prescriptions and the addition of larger clients with
lower average transaction fees, offset in part by the addition of higher margin
clinical services and information technology products.
Consolidated selling, general and administrative expenses as a percentage
of net sales decreased to 15.8% in fiscal 1998, compared with 16.5% in fiscal
1997. Retail Store selling, general and administrative expenses were 18.1% and
18.0% of net sales for fiscal 1998 and 1997, respectively. Excluding the 17 new
stores related to the Penn-Daniels acquisition and expenses incurred for year
2000 compliance, retail selling, general and administrative expenses as a
percent of sales were 17.6% for fiscal 1998. The decrease is attributable to
continued expense control initiatives at store level. ProVantage selling,
general and administrative expenses decreased to 3.8% compared with 3.9% in
fiscal 1997. This decrease is primarily due to leveraging expenses over the
increased sales volume.
The Company's operating earnings (earnings before interest and income
taxes) increased 17.0% to $129.9 million in fiscal 1998 from $111.0 million in
fiscal 1997. Retail Store operating earnings (earnings before corporate
expenses, interest and income taxes) increased 10.6% to $140.8 million in fiscal
1998 compared to $127.3 million in fiscal 1997. This increase is primarily due
to increased sales and expense control initiatives. ProVantage operating
earnings increased 27.6% in fiscal 1998 to $16.2 million compared to $12.7
million in fiscal 1997. This increase is due to internally generated growth
primarily in health benefit management services.
Net interest expense as a percentage of net sales increased to 1.3% in
fiscal 1998 compared with 1.2% in fiscal 1997. The increase is attributable to
additional borrowings for working capital and remodeling costs associated with
the new stores acquired from Penn-Daniels in fiscal 1997.
34
<PAGE> 35
Supplemental Comparison of Fiscal 1998 to Fiscal 1997
The supplemental comparison should be read in conjunction with the
Company's audited financial information for the 52 weeks ended January 30, 1999
and the Company's unaudited financial information for the 52 weeks ended January
31, 1998 included in Item 6 on this Form 10-K.
ANNUAL CONSOLIDATED SALES SUMMARY
52 WEEKS
<TABLE>
<CAPTION>
% COMPARABLE
2/1/98- 2/2/97- STORE SALES
Dollars in Millions 1/30/99 1/31/98 % CHANGE INCREASE
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Business Segments
Retail Store $2,351.2 $2,103.4 11.8% 5.7%
ProVantage 666.2 500.9 33.0%
Intercompany (35.9) (27.4) N/A
--------- --------- -----
Consolidated $2,981.5 $2,576.9 15.7%
======== ======== =====
</TABLE>
Consolidated net sales for the 52 weeks ended January 30, 1999 increased
15.7% compared to the corresponding 52-week period of the previous fiscal year.
Retail Store sales for the same period increased 11.8%, primarily due to the 17
new stores acquired from Penn-Daniels and increased comparable Retail Store
sales. Comparable Retail Store sales increased 5.7% and the changes for that
period by category were as follows: Retail Health--11.9%, Hardline/Home--5.9%
and Apparel--(0.2%). Changes in retail comparable store sales for a year are
based upon those stores which were open for the entire preceding year.
ProVantage sales increased 33.0% for this period. This increase is due primarily
to internally generated growth in claims processing, mail pharmacy and formulary
fees.
Consolidated gross margin as a percent of sales for the 52 weeks ended
January 30, 1999 was 22.2% compared with 23.0% for the 52 weeks ended January
31, 1998. The Retail Store gross margin as a percent of sales for the same
period was 26.2% compared with 26.4% for the preceding period. The FIFO Retail
Store gross margin as a percent of sales for the 52 weeks was 26.0% compared
with 26.2%. The decrease in the Retail Store gross margin rate is primarily
attributable to additional promotional sales and increased third party sales in
retail pharmacy. ProVantage's gross margin as a percent of sales for the same
period decreased to 7.1% from 7.4% primarily due to increasing prescription
costs and the addition of larger clients with lower average transaction fees,
offset in part by the addition of higher margin clinical services and
information technology products.
35
<PAGE> 36
Consolidated selling, general and administrative expenses as a percent of
sales for the 52 weeks ended January 30, 1999 decreased to 15.8% from 16.6%.
Retail Store selling, general and administrative expenses as a percent of sales
for the same period were 18.1% for both this year and the prior year. Excluding
the 17 new stores related to the Penn-Daniels acquisition and expenses incurred
for year 2000 compliance, retail selling, general and administrative expenses as
a percent of sales were 17.6% for fiscal 1998. The decrease is primarily due to
continued expense control initiatives at store level. ProVantage's selling,
general and administrative expenses decreased to 3.8% of sales for the 52 weeks
ended January 30, 1999 compared with 4.0% of sales for the preceding 52-week
period. This decrease is primarily due to leveraging expenses over the increased
sales volume.
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.
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. The Company attributes
this decrease to three fewer weeks due to the fiscal year change.
ProVantage sales for fiscal 1997 (49 weeks) increased 35.4% or $123.4
million over fiscal 1996 (52 weeks) to $472.2 million. 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.
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 increased
operating costs subsequent to the acquisition of PharMark Corporation and its
affiliates ("PharMark") and additional investments in information technology and
infrastructure support related to continued growth.
36
<PAGE> 37
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 higher gross margin rates 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
<TABLE>
<CAPTION>
% COMPARABLE
2/2/97- 2/4/96- STORE SALES
Dollars in Millions 1/31/98 2/1/97 % CHANGE INCREASE
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Business Segments
Retail Store $2,103.4 $2,000.8 5.1% 3.8%
ProVantage 500.9 330.1 51.8%
Intercompany (27.4) (20.5) N/A
--------- --------- -----
Consolidated $2,576.9 $2,310.4 11.5%
======== ======== =====
</TABLE>
Consolidated net sales for the 52 weeks ended January 31, 1998 increased
11.5% over the corresponding 52-week period of the previous year. During this
period, Retail Store sales increased 5.1% and comparable Retail Store sales
increased 3.8%. The comparable Retail Store increases for that period by
category were as follows: Retail Health--10.9%, Apparel--3.2% and
Hardline/Home--1.8%. Changes in retail comparable store sales for a year are
based upon those stores which were open for the entire preceding year.
ProVantage sales increased 51.8% during this 52-week period. 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.
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.
37
<PAGE> 38
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 expenses as a percent of sales
for the same period were 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 increased operating cost
subsequent to the acquisition of PharMark and additional investments in
information technology and infrastructure support related to continued growth.
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 $73.8 million, $142.6 million and $111.7 million
in fiscal years 1998, 1997 and 1996, respectively. This decrease in fiscal 1998
is primarily due to increased working capital needs associated with the new
stores and planned higher inventory levels across the rest of the chain.
As of January 30, 1999, the Company had a $200.0 million revolving credit
agreement with a consortium of banks. This credit facility is unsecured and is
effective through January 31, 2002. Funds generated from operations, and if
necessary, the revolving credit facility or other short-term borrowings are
expected to fund the projected working capital needs and total capital
expenditures through fiscal 1999 except for possible acquisitions described
below.
CAPITAL EXPENDITURES AND ACQUISITIONS
The Company spent $99.7 million on capital expenditures (excluding
acquisitions) in fiscal 1998, compared to $32.0 million in fiscal 1997 and $38.9
million in fiscal 1996. The following table sets forth the components of the
Company's capital expenditures and acquisitions (in millions):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------------
JAN. 30, 1999 JAN. 31, 1998 FEB. 22, 1997
(52 WEEKS) (49 WEEKS) (52 WEEKS)
---------- ---------- ----------
<S> <C> <C> <C>
Capital Expenditures
New stores $42.6 $ 0.0 $ 2.5
Remodeling and refixturing 15.2 12.6 14.6
Distribution centers 1.4 0.7 1.3
Management information and point-of-sale equipment
and systems 34.5 18.0 18.8
Other 6.0 0.7 1.7
----- ------ ------
Total $99.7 $32.0 $38.9
===== ===== =====
Acquisitions $40.5 $30.5
===== =====
</TABLE>
38
<PAGE> 39
On December 19, 1997, ShopKo acquired the retail chain Penn-Daniels which
operated 18 Jacks' discount stores and one Lots-A-Deals close-out store in Iowa,
Illinois and Missouri. During fiscal 1998, the Company converted 17 of the
Jacks' retail locations to ShopKo stores, including the addition of in-store
pharmacies and optical centers in 16 of those stores. The capital expenditures
related to those new stores were approximately $32.9 million.
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 to include the addition of in-store pharmacies and optical centers.
Three additional locations will be newly constructed stores. All 13 stores are
leased, of which 7 are operating leases and 6 are capital leases. The capital
expenditures related to these new stores were approximately $9.7 million.
The Company's total capital expenditures for the fiscal year ending January
29, 2000 are anticipated to approximate $150.0 to $170.0 million. The
expenditures would relate to remodeling the ten former Venture store locations
and construction of the three new stores; supporting the existing retail
business for merchandise initiatives and ongoing store equipment and fixturing
replacements; continuing investments in systems technology; and infrastructure
improvements in distribution centers. 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, plus a supplemental cash payment equal to 1.5%
of ProVantage's market value subject to a minimum of $2.5 million and a maximum
of $5.0 million. The right of Avatex to the supplemental cash payment expires on
August 2, 2001. Such supplemental payment will be capitalized as additional
purchase price and amortized over a period of 15 to 18 years.
On October 4, 1996, the Company and the founders of Bravell, Inc.
("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.
39
<PAGE> 40
On August 20, 1997, the Company acquired PharMark, a software and database
development business providing information driven strategies for optimizing
medical and pharmaceutical outcomes, based in Arlington, Virginia. The purchase
price for PharMark was approximately $15.2 million, of which $14.2 million has
been paid in cash and a total of $1.0 million is due in 1999. The sellers of
PharMark 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 or certain
liquidity events related to ProVantage. The Contingent Payments may be made, at
ProVantage's election, in either cash, Company common stock, or ProVantage
common stock; provided, however, that any stock used for such payments must be
traded in a public market. The Contingent Payments, if any, will be capitalized
as additional purchase price and amortized over a period of 15 to 19 years.
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 $23.3 million
has been retired. 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 Company's consolidated statement of earnings.
In connection with the Penn-Daniels acquisition, ShopKo incurred
nonrecurring pre-tax costs of $5.7 million eliminating duplicate operations at
the Penn-Daniels administrative office and warehouse and other transaction
related items in fiscal 1998. The Company funded these costs from available cash
and borrowings under the Company's revolving credit facility.
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 close the stores.
The stores were closed on August 29, 1998. The closings did not have a material
financial impact on the Company.
On February 4, 1999, the Company and ProVantage announced that a
registration statement for the initial public offering of ProVantage's common
stock had been filed with the Securities and Exchange Commission. The
registration statement was filed for approximately $100.0 million of ProVantage
common stock. ProVantage will receive approximately $20.0 million for operating
capital and strategic alternatives and the Company will utilize the balance for
strategic and/or financial alternatives.
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 fiscal 1997 for costs incurred in connection with the terminated business
combination.
40
<PAGE> 41
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 in 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.
YEAR 2000
State of Readiness
In order to address Year 2000 compliance, the Company is actively engaged
in 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, is nearing completion of the renovation phase and has commenced the
testing phase.
With respect to IT systems, approximately 77.0 percent of the Company's
critical business systems are currently compliant, approximately 13.0 percent
are in the process of being renovated and approximately 10.0 percent of them
will be retired. 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.
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.
41
<PAGE> 42
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 of which approximately $2.0 million has already
been incurred.
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.
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 commenced the development of contingency plans for the most
reasonably likely worst case scenarios described above and anticipates that the
majority of these plans will be in place by July 31, 1999.
42
<PAGE> 43
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 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 January 30, 1999, no shares of Common Stock had been
repurchased under this program.
SENIOR NOTE REPURCHASE PROGRAM
On February 8, 1999, ShopKo announced that its Board of Directors had
authorized the Company to repurchase its Senior Notes from time to time in the
open market and through privately negotiated transactions. Any purchases would
depend on price, market conditions and other factors. As of March 31, 1999, the
Company has repurchased approximately $57.1 million of the Senior Notes.
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.
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. In February 1998, SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," was issued. These statements were adopted by the Company beginning
February 1, 1998.
SFAS No. 130, "Reporting Comprehensive Income," which specifies how to
report and display comprehensive income and its components, had no impact on the
Company's consolidated financial statements.
43
<PAGE> 44
The Company adopted 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. These SFASs
did not significantly impact the Company's consolidated financial statements.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. The Company believes this statement will have
no impact on the Company's consolidated financial statements.
MARKET RISK
The Company is exposed to market risk from changes in interest rates.
Under the Company's revolving credit facility, the Company has various borrowing
options for short-term loans. During fiscal 1998, the monthly average amount
borrowed under the revolving credit facility was approximately $28.0 million,
and the weighted average interest rate was 6.0% per annum. If the Company's
weighted average interest rate had increased by 10.0% for fiscal 1998, net
income would have been reduced by an immaterial amount. Management continually
monitors the interest rate environment with the objective of lowering borrowing
costs without subjecting the Company to excessive exposure to fluctuating
interest rates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by Item 7a, as to Quantitative and Qualitative
Disclosures about Market Risk is included on page 44 and are incorporated by
reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated financial statements and supplementary data are included
on pages 49 to 70 and are incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
44
<PAGE> 45
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
19, 1999 filed with the Securities and Exchange Commission pursuant to
Regulation 14A in connection with the Registrant's 1999 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 19, 1999 filed with
the Securities and Exchange Commission pursuant to Regulation 14A in connection
with the Registrant's 1999 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 19, 1999 filed with
the Securities and Exchange Commission pursuant to Regulation 14A in connection
with the Registrant's 1999 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 19, 1999 filed with
the Securities and Exchange Commission pursuant to Regulation 14A in connection
with the Registrant's 1999 Annual Meeting of Shareholders.
45
<PAGE> 46
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 Schedule" on page 47, the Independent Auditors'
Report on page 48 and the Consolidated Financial Statements on
pages 49 to 70, all of which are incorporated herein by
reference.
2. Financial Statement Schedule:
See "Index to Consolidated Financial Statements and Financial
Statement Schedule" on page 47 and the Financial Statement
Schedule on page 71, all of which are incorporated herein by
reference.
3. Exhibits:
See "Exhibit Index" on pages 73 to 78 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 Registrant filed Current Reports on Form 8-K in the fourth fiscal
quarter of fiscal 1998 as follows:
Date of Report Items Reported
January 22, 1999 Items 5, 7 - The Company reported
(1) the announcement of Mr. Dale
Kramer's intention to retire as
President and Chief Executive
Officer, (2) the filing of a
registration statement with respect
to the initial public offering of
the common stock of ProVantage
Health Services, Inc. and (3) the
authorization of a senior debt
repurchase program.
46
<PAGE> 47
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
<S> <C>
Index to Consolidated Financial Statements of ShopKo Stores, Inc. and Subsidiaries
Independent Auditors' Report................................................................. 48
Consolidated Statements of Earnings
for each of the three years in the period ended January 30, 1999.................... 49
Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998...................... 50
Consolidated Statements of Cash Flows
for each of the three years in the period ended January 30, 1999.................... 51
Consolidated Statements of Shareholders' Equity
for each of the three years in the period ended January 30, 1999.................... 52-53
Notes to Consolidated Financial Statements .................................................. 54-70
Index to Financial Statement Schedule
Schedule VIII-Valuation and Qualifying Accounts ............................................ 71
All other schedules are omitted because they are not applicable or not required.
</TABLE>
47
<PAGE> 48
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 30, 1999 and January 31, 1998 and the related
consolidated statements of earnings, shareholders' equity and cash flows for the
year (52 weeks) ended January 30, 1999, the year (49 weeks) ended January 31,
1998 and for the year (52 weeks) 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 30, 1999 and January 31, 1998, and the results of
their operations and their cash flows for the year (52 weeks) ended January 30,
1999, the year (49 weeks) ended January 31,1998 and the year (52 weeks) 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, 1999
48
<PAGE> 49
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
- ----------------------------------------------------------------------------------------------------------------------
January 30, January 31, February 22,
1999 1998 1997
(52 Weeks) (49 Weeks) (52 Weeks)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net sales $ 2,981,451 $ 2,447,847 $ 2,333,407
Licensed department rentals and other income 12,325 11,756 13,058
- ----------------------------------------------------------------------------------------------------------------------
2,993,776 2,459,603 2,346,465
Costs and Expenses:
Cost of sales 2,318,979 1,883,891 1,783,741
Selling, general and administrative expenses 471,546 403,635 397,092
Nonrecurring charge 5,723 2,800
Depreciation and amortization expenses 67,590 58,252 59,833
- ----------------------------------------------------------------------------------------------------------------------
2,863,838 2,348,578 2,240,666
Income from operations 129,938 111,025 105,799
Interest expense - net 38,311 30,582 31,777
- ----------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 91,627 80,443 74,022
Provision for income taxes 35,991 31,598 29,076
- ----------------------------------------------------------------------------------------------------------------------
Net earnings $ 55,636 $ 48,845 $ 44,946
======================================================================================================================
Basic net earnings per common share $ 2.14 $ 1.73 $ 1.40
Weighted average number of common shares outstanding 26,035 28,161 32,092
Diluted net earnings per common share $ 2.10 $ 1.71 $ 1.39
Adjusted weighted average number of common
shares outstanding 26,517 28,569 32,370
</TABLE>
See notes to consolidated financial statements.
49
<PAGE> 50
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
- ------------------------------------------------------------------------------------------------------
Assets
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 30,219 $ 54,344
Receivables, less allowance for losses of
$7,487 and $8,637, respectively 117,652 97,812
Merchandise inventories 434,643 376,568
Other current assets 5,461 13,508
- ------------------------------------------------------------------------------------------------------
Total current assets 587,975 542,232
Other assets and deferred charges 6,960 7,202
Intangible assets - net 74,749 71,668
Property and equipment - net 703,840 629,733
- ------------------------------------------------------------------------------------------------------
Total assets $ 1,373,524 $ 1,250,835
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- ------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable - trade $ 189,581 $ 193,646
Accrued compensation and related taxes 40,955 39,964
Accrued other liabilities 169,530 135,522
Accrued income and other taxes 16,127 24,502
Current portion of long-term obligations 4,597 4,174
- ------------------------------------------------------------------------------------------------------
Total current liabilities 420,790 397,808
Long-term obligations 467,191 436,125
Deferred income taxes 26,301 20,906
Shareholders' equity:
Preferred stock; none outstanding
Common stock; shares issued, 26,129 at January 30, 1999
and 33,941 at January 31, 1998 261 339
Additional paid-in capital 228,479 283,520
Retained earnings 230,502 264,316
Less treasury stock; 8,174 shares (152,179)
- ------------------------------------------------------------------------------------------------------
Total shareholders' equity 459,242 395,996
- ------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,373,524 $ 1,250,835
- ------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
50
<PAGE> 51
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Years Ended
- --------------------------------------------------------------------------------------------------------------------------------
January 30, January 31, February 22,
1999 1998 1997
(52 Weeks) (49 Weeks) (52 Weeks)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 55,636 $ 48,845 $ 44,946
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 67,590 58,252 59,833
Provision for losses on receivables 609 2,999 1,200
Loss (gain) on the sale of property and equipment 415 (540) (2,140)
Deferred income taxes 12,000 (1,334) (1,620)
Change in assets and liabilities (excluding effects of business
acquisitions):
Receivables (19,857) (3,593) (40,636)
Merchandise inventories (64,630) (9,872) (12,529)
Other current assets 1,442 (1,282) 523
Other assets and intangibles (5,839) (1,878) (13,062)
Accounts payable (4,065) 17,867 21,074
Accrued liabilities 30,548 33,137 54,133
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 73,849 142,601 111,722
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment (99,725) (32,003) (38,899)
Proceeds from the sale of property and equipment 2,301 2,348 3,275
Business acquisitions, net of cash acquired (40,488) (30,500)
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (97,424) (70,143) (66,124)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in common stock from stock options 4,572 10,907 1,249
Change in common stock from public offering 23,419
Purchase of treasury stock (152,179)
Dividends paid (10,583)
Reduction in debt and capital leases (5,122) (24,811) (1,183)
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) FINANCING ACTIVITIES (550) (142,664) (10,517)
- --------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (24,125) (70,206) 35,081
Cash and cash equivalents at beginning of year 54,344 124,550 89,469
- --------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 30,219 $ 54,344 $ 124,550
- --------------------------------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Noncash investing and financial activities -
Retirement of treasury stock $ 152,179
Capital lease obligations incurred $ 35,779 $ 5,533
Restricted stock issued $ 416 $ 1,012
Cash paid during the period for:
Interest $ 38,140 $ 29,265 $ 31,663
Income taxes $ 28,423 $ 26,852 $ 30,086
</TABLE>
See notes to consolidated financial statements.
51
<PAGE> 52
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share data)
<TABLE>
<CAPTION>
Common Stock
---------------------- Additional
Paid-in Retained
Shares Amount Capital Earnings
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances at February 24, 1996 32,005 $320 $242,843 $178,468
Net earnings 44,946
Sale of common stock under option plans 97 1 1,248
Income tax benefit related to stock options 35
Issuance of restricted stock 65 1 1,011 (1,012)
Restricted stock expense 63
Cash 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
- -----------------------------------------------------------------------------------------------------
Balances at January 31, 1998 33,941 339 283,520 264,316
Net earnings 55,636
Sale of common stock under option plans 362 4 4,568
Income tax benefit related to stock options 2,435
Restricted stock expense 603
Retirement of treasury stock (8,174) (82) (62,044) (90,053)
- -----------------------------------------------------------------------------------------------------
Balances at January 30, 1999 26,129 $261 $228,479 $230,502
=====================================================================================================
</TABLE>
See notes to consolidated financial statements.
52
<PAGE> 53
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share data)
<TABLE>
<CAPTION>
TREASURY STOCK TOTAL
----------------------------------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
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) (8,174) (152,179)
- --------------------------------------------------------------------------------------------------
Balances at January 31, 1998 (8,174) (152,179) 25,767 395,996
Net earnings 55,636
Sale of common stock under option plans 362 4,572
Income tax benefit related to stock options 2,435
Restricted stock expense 603
Retirement of treasury stock 8,174 152,179
- --------------------------------------------------------------------------------------------------
Balances at January 30, 1999 26,129 $459,242
==================================================================================================
</TABLE>
See notes to consolidated financial statements.
53
<PAGE> 54
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 Wisconsin 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
professional health services through its retail stores. Retail stores are
operated in the Midwest, Western Mountain and Pacific Northwest states. The
Company also provides custom health benefit management services; pharmacy mail
services; vision benefit management services and health information and clinical
support services through its subsidiary ProVantage Health Services, Inc.
("ProVantage"). ProVantage conducts business principally throughout the United
States.
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. Consequently, for
that transition year, the statements of earnings, cash flows and shareholders'
equity are presented for the 49-week period ended January 31, 1998. The table
below illustrates how the fiscal years are referred to in the notes to
consolidated financial statements.
<TABLE>
<S> <C>
February 1, 1998 through January 30, 1999 (52 weeks) 1998
February 23, 1997 through January 31, 1998 (49 weeks) 1997
February 25, 1996 through February 22, 1997 (52 weeks) 1996
</TABLE>
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.
54
<PAGE> 55
Receivables
Receivables consist of amounts collectible from third party pharmacy
insurance carriers and self-funded medical plan sponsors for medical claims;
from retail store customers for optical, main store layaway and pharmacy
purchases; from pharmaceutical manufacturers and third party formulary
administrators for formulary fees; and from merchandise vendors for promotional
and advertising allowances. 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 $34.4 million at January 30, 1999, $38.1 million at January 31,
1998 and $41.8 million at February 22, 1997.
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 $0.2, $0.0 and
$0.1 million was capitalized in fiscal years 1998, 1997 and 1996, respectively.
The components of property and equipment are:
<TABLE>
<CAPTION>
JAN. 30, 1999 JAN. 31, 1998
------------- -------------
(in thousands)
<S> <C> <C>
Property and equipment at cost:
Land $121,577 $118,723
Buildings 540,953 522,732
Equipment 408,313 348,817
Leasehold improvements 58,820 53,932
Property under construction 12,999 456
Property under capital leases 58,004 26,419
--------- ---------
1,200,666 1,071,079
Less accumulated depreciation and amortization:
Property and equipment 487,137 430,293
Property under capital leases 9,689 11,053
-------- --------
Net property and equipment $703,840 $629,733
======== ========
</TABLE>
55
<PAGE> 56
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 $9.4 million and $5.7 million at January 30,
1999 and January 31, 1998, 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
30, 1999 or January 31, 1998.
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 30, 1999 and January 31, 1998, the amounts
payable by ProVantage for medical claims and formulary rebate sharing included
in the accrued other liabilities were $73.2 million and $56.4 million,
respectively.
ProVantage Accounting
ProVantage's net sales are recorded when earned and include: (i)
administrative and dispensing fees plus the cost of pharmaceuticals dispensed by
pharmacies participating in the network maintained by ProVantage 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 sales of eyeglasses and contact lenses relating to
ProVantage's vision benefit management services; and (iv) license and service
fees for health information technology and clinical support 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
During fiscal 1998, the Company expensed pre-opening costs of retail
stores, except for advertising, as incurred. Pre-opening advertising costs are
charged against earnings in the year the advertising events occur. In years
prior to fiscal 1998, pre-opening costs of retail stores were charged against
earnings in the year the store was opened.
56
<PAGE> 57
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. For fiscal years
1998, 1997 and 1996, respectively, the weighted average shares outstanding were
increased by 482,000, 408,000 and 278,000 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.
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, plus a supplemental cash payment equal to 1.5%
of ProVantage's market value subject to a minimum of $2.5 million and a maximum
of $5.0 million. The right of Avatex to the supplemental cash payment expires on
August 2, 2001. Such supplemental payment will be capitalized as additional
purchase price and amortized over a period of 15 to 18 years.
57
<PAGE> 58
On August 20, 1997, the Company acquired The Mikalix Group, Inc. and its
subsidiaries ("Mikalix"), an international privately held group of companies
based in Arlington, Virginia. Mikalix's primary subsidiary is PharMark
Corporation, a software and database development business providing information
driven strategies for optimizing medical and pharmaceutical outcomes. The
purchase price for Mikalix was approximately $15.2 million, of which $14.2
million has been paid in cash and $1.0 million is due in 1999. 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 or certain
liquidity events related to ProVantage. The Contingent Payments may be made, at
ProVantage's election, in either cash, Company common stock, or ProVantage
common stock; provided, however, that any stock used for such payments must be
traded in a public market. The Contingent Payments, if any, will be capitalized
as additional purchase price and amortized over a period of 15 to 19 years.
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. 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. Penn-Daniels operated 18 Jacks' discount stores
in Iowa, Illinois and Missouri and one Lots-A-Deals close-out store in Moline,
Illinois.
These acquisitions were accounted for under the purchase method of
accounting and the allocations of the purchase prices 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 $76.5 million is
being amortized on a straight-line basis over 18 to 22 years. 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
As of January 30, 1999, the Company had a $200.0 million revolving credit
agreement with a consortium of banks. The credit facility is unsecured and is
effective through January 31, 2002. The Company pays an annual facility fee of
1/5 of one percent. As of January 30, 1999 and January 31, 1998, the Company had
no amounts outstanding under the current or prior agreements. The weighted
average interest rate on borrowings under the credit agreement for fiscal 1998
was 6.0%.
The Company also issues letters of credit during the ordinary course of
business as required by foreign vendors. As of January 30, 1999 and January 31,
1998, the Company had issued letters of credit for $17.3 million and $21.5
million, respectively.
58
<PAGE> 59
D. LONG-TERM OBLIGATIONS AND LEASES
(In thousands)
<TABLE>
<CAPTION>
JAN. 30, 1999 JAN. 31, 1998
------------- -------------
<S> <C> <C>
Senior Unsecured Notes, 9.0% due November 15, 2004, less
unamortized discount of $170 and $200, respectively $ 99,830 $ 99,800
Senior Unsecured Notes, 8.5% due March 15, 2002, less
unamortized discount of $113 and $150, respectively 99,887 99,850
Senior Unsecured Notes, 9.25% due March 15, 2022, less
unamortized discount of $443 and $462, respectively 99,557 99,538
Senior Unsecured Notes, 6.5% due August 15, 2003, less
unamortized discount of $126 and $154, respectively 99,874 99,846
Industrial Revenue Bond, 6.4% due May 1, 2008 1,000 1,000
Mortgage obligations 19,177 21,304
Capital lease obligations 52,463 18,961
-------- --------
471,788 440,299
Less current portion 4,597 4,174
-------- --------
Long-term obligations $467,191 $436,125
======== ========
</TABLE>
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 collateralized by certain
properties assumed in the Penn-Daniels acquisition. The interest rates on this
debt range from 7.50% 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 30, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
LONG-TERM
YEAR OBLIGATIONS
---- -----------
<S> <C>
1999 $ 3,212
2000 1,512
2001 1,644
2002 106,350
2003 101,517
Later 205,090
-------
Total maturities $419,325
========
</TABLE>
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 30, 1999 and January 31, 1998, $2.0 million and $2.3 million remained to
be amortized over future periods. Amortization expense for these costs was $0.3
million in fiscal years 1998, 1997 and 1996.
The Company leases certain stores under capital leases. Many of these
leases include renewal options, and occasionally, include options to purchase.
59
<PAGE> 60
Amortization of property under capital leases was $2.2, $2.5 and $2.7
million in fiscal years 1998, 1997 and 1996, respectively. Minimum future
obligations under capital leases in effect at January 30, 1999 are as follows
(in thousands):
<TABLE>
<CAPTION>
CAPITAL LEASE
YEAR OBLIGATIONS
---- -------------
<S> <C>
1999 $ 5,115
2000 5,893
2001 5,893
2002 5,918
2003 5,543
Later 80,036
--------
Total minimum future obligations 108,398
Less interest (55,935)
--------
Present value of minimum future obligations $52,463
========
</TABLE>
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
9.6%, determined to be applicable at the inception of the leases.
Interest expense on the outstanding obligations under capital leases was
$2.8, $2.1 and $2.2 million in fiscal years 1998, 1997 and 1996, respectively.
Contingent rent expense, based primarily on sales performance, for capital
and operating leases was $0.5 million in fiscal years 1998, 1997 and 1996.
In addition to its capital leases, the Company is obligated under operating
leases, primarily for land, buildings and computer equipment. Minimum future
obligations under operating leases in effect at January 30, 1999 are as follows
(in thousands):
<TABLE>
<CAPTION>
OPERATING LEASE
YEAR OBLIGATIONS
---- -----------
<S> <C>
1999 $ 17,674
2000 15,231
2001 13,163
2002 10,742
2003 8,581
Later 100,070
--------
Total minimum obligations $165,461
========
</TABLE>
Total minimum rental expense, net of sublease income, related to all
operating leases with terms greater than one year was $9.3, $5.3 and $4.6
million in fiscal years 1998, 1997 and 1996, respectively.
60
<PAGE> 61
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 $3.2
million and $2.8 million, representing pro-rata future payments, is reflected in
the accompanying consolidated balance sheets at January 30, 1999 and January 31,
1998, 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):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Property and equipment $33,557 $26,200
Intangibles 2,394 1,210
LIFO inventory valuation 11,188 9,800
Other 625 1,335
------- -------
Total deferred tax liabilities 47,764 38,545
------- -------
Deferred tax assets:
Reserves and allowances (14,391) (14,950)
Capital leases (2,443) (2,252)
Compensation and benefits (2,704) (5,117)
------- -------
Total deferred tax assets (19,538) (22,319)
------- -------
Net deferred tax liability $28,226 $16,226
======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current
Federal $19,465 $27,812 $25,858
State 4,572 5,191 4,838
General business and other tax credits (46) (71)
Deferred 12,000 (1,334) (1,620)
------- ------- -------
Total provision $35,991 $31,598 $29,076
======= ======= =======
</TABLE>
The effective tax rate varies from the statutory federal income tax rate
for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefits 4.3 4.3 4.0
Other 0.0 0.0 0.3
--- --- ---
Effective income tax rate 39.3% 39.3% 39.3%
===== ===== =====
</TABLE>
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):
61
<PAGE> 62
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Depreciation $ 8,394 $ (142) $ 3,256
Inventory and LIFO valuation reserves 714 2,021 (212)
Insurance accruals and valuation reserves 57 (148) (1,625)
Other property related items (474) (707)
Compensation 3,081 (1,690) (433)
Other 228 (1,375) (1,899)
------- -------- --------
Total deferred tax expense (benefit) $12,000 $(1,334) $(1,620)
======= ======== ========
</TABLE>
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 and Stock Incentive Plan allows the
granting of stock options and other equity-based awards 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 4,850,000 shares for issuance under the 1991 and 1995 Stock
Option Plans and the 1998 Stock Incentive Plan. The majority of the options
under the 1991 and 1995 Stock Option Plans 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. The options from the
1998 Stock Option Plan vest in accordance with vesting schedules determined at
the discretion of the Compensation Committee of the Board of Directors. All
stock options vest immediately upon a change of control. Changes in the options
are as follows (shares/options in thousands):
62
<PAGE> 63
<TABLE>
<CAPTION>
WEIGHTED AVE.
SHARES PRICE RANGE EXERCISE PRICE
------ ----------- --------------
<S> <C> <C> <C>
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)
Cancelled 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)
Cancelled and forfeited (790) 10.00 - 24.56 (11.41)
----- ------------- -------
Outstanding, January 31, 1998 2,296 10.00 - 28.69 17.32
Granted 324 28.19 - 36.44 30.66
Exercised (361) 10.00 - 16.25 (12.65)
Cancelled and forfeited (157) 10.00 - 31.75 (19.52)
----- ------------- -------
Outstanding, January 30, 1999 2,102 $10.00 -$36.44 $20.02
===== ============== ======
</TABLE>
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVE.
EXERCISABLE EXERCISE PRICE
----------- --------------
<S> <C> <C>
January 30, 1999 549 $13.39
January 31, 1998 741 13.39
February 22, 1997 1,305 14.14
</TABLE>
The following tables summarize information about stock options outstanding
at January 30, 1999 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------------------------------------------------------------
Range of Exercise Shares Outstanding at Jan. Weighted Average Remaining Weighted Average
Prices 30, 1999 Contractual Life Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$10.00 to $15.00 656 4.4 years $12.84
15.01 to 20.00 727 8.2 19.26
20.01 to 36.44 719 9.1 27.35
---------------- ----- --- ------
$10.00 to $36.44 2,102 7.3 $20.02
================ ===== === ======
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
------------------------------------------------------------------------
Range of Exercise Prices Shares Exercisable at Jan. 30, 1999 Weighted Average Exercise Price
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$10.00 to $15.00 526 $13.27
15.01 to 20.00 23 16.22
20.01 to 36.44 -- --
---------------- --- ------
$10.00 to $36.44 549 $13.39
================ === ======
</TABLE>
63
<PAGE> 64
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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net earnings (in thousands)
As reported $55,636 $48,845 $44,946
Pro forma 53,972 48,325 44,228
Diluted net earnings per common share
As reported $ 2.10 $ 1.71 $ 1.39
Pro forma 2.04 1.69 1.37
</TABLE>
The weighted average fair value of options granted was $10.96, $7.35 and
$3.04 per share in fiscal years 1998, 1997 and 1996, respectively.
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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5.3% 7.0% 7.0%
Expected volatility 34.0% 35.0% 29.0%
Dividend yield 0.0% 0.0% 0.0%
Expected option life, standard option (years) 1.0 to 5.0 2.0 to 5.0 5.0
Expected option life, performance vested option (years) 2.5
</TABLE>
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 shares of restricted stock outstanding at
January 30, 1999 and January 31, 1998.
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 $14.2,
$12.8 and $11.8 million for fiscal years 1998, 1997 and 1996, respectively.
64
<PAGE> 65
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
following disclosure is made in accordance with the requirements of SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits."
The net periodic costs for postretirement benefits include the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost for benefits accumulated during the year $131 $130 $ 98
Interest cost on accumulated benefit obligation 139 138 95
---- ---- ----
Net periodic postretirement benefit cost $270 $268 $193
==== ==== ====
</TABLE>
The Company's postretirement healthcare plans currently are not funded. The
changes in accumulated postretirement benefit obligations are as follows (in
thousands):
<TABLE>
<CAPTION>
JAN. 30, JAN. 31,
1999 1998
-------- --------
<S> <C> <C>
Benefit obligation at beginning of year $1,760 $1,586
Service cost 131 130
Interest cost 139 138
Net benefit payments (134) (94)
------ ------
Benefit obligation at end of year $1,896 $1,760
====== ======
</TABLE>
The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% as of January 30, 1999 and January
31, 1998.
The assumed healthcare cost trend rate used in measuring the accumulated
postretirement benefit obligation was 8.1% for fiscal 1998 decreasing each
successive year until it reaches 5.5% in fiscal 2015 after which it remains
constant. A 1.0% increase in the healthcare trend rate would not have a material
effect on either the accumulated postretirement benefit obligation at the end of
fiscal 1998 and fiscal 1997 or the net periodic benefit 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.
65
<PAGE> 66
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 30, 1999 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
CARRYING
AMOUNT FAIR VALUE
<S> <C> <C>
Long-term obligations:
Senior Unsecured Notes, due November 15, 2004 $99,830 $109,752
Senior Unsecured Notes, due March 15, 2002 99,887 104,650
Senior Unsecured Notes, due March 15, 2022 99,557 116,077
Senior Unsecured Notes, due August 15, 2003 99,874 98,886
Industrial Revenue Bond, due May 1, 2008 1,000 1,000
Mortgage obligations 19,177 19,357
Capital lease obligations 52,463 53,742
</TABLE>
66
<PAGE> 67
I. UNAUDITED QUARTERLY FINANCIAL INFORMATION
Unaudited quarterly financial information is as follows:
<TABLE>
<CAPTION>
(In thousands, except per share data)
Fiscal Year (52 Weeks) Ended January 30, 1999
- ------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Year
(13 weeks) (13 weeks) (13 weeks) (13 weeks) (52 weeks)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $645,801 $678,453 $731,270 $925,927 $2,981,451
Gross margins 139,232 151,937 152,837 218,466 662,472
Net earnings 2,151 5,900 6,964 40,621 55,636
Basic net earnings per common share 0.08 0.23 0.27 1.56 2.14
Weighted average shares 25,869 26,067 26,093 26,113 26,035
Diluted net earnings per common
share 0.08 0.22 0.26 1.53 2.10
Adjusted weighted average shares 26,346 26,626 26,517 26,592 26,517
Price range per common share* 34 15/16-25 7/8 36 5/8-29 1/4 32 1/2-25 1/8 33 11/16-29 11/16 36 5/8-25 1/8
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year (49 Weeks) Ended January 31, 1998
- ------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Year
(16 weeks) (12 weeks) (12 weeks) (9 weeks) (49 weeks)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
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
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Price range per common share reflects the highest and lowest stock market
prices on the New York Stock Exchange during each quarter.
67
<PAGE> 68
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 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 in 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.
Treasury Stock Retirement:
In 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.
K. SUBSEQUENT EVENTS
On February 4, 1999, the Company and ProVantage announced that a
registration statement for the initial public offering of ProVantage's common
stock had been filed with the Securities and Exchange Commission. The
registration statement was filed for approximately $100.0 million of ProVantage
common stock. ProVantage will receive approximately $20.0 million for operating
capital and strategic alternatives and the Company will utilize the balance for
strategic and/or financial alternatives.
On February 8, 1999, the Company announced that its Board of Directors had
authorized the Company to repurchase its Senior Notes from time to time in the
open market and through privately negotiated transactions. Any purchases would
depend on price, market conditions and other factors. As of March 31, 1999, the
Company has repurchased approximately $57.1 million of the Senior Notes.
68
<PAGE> 69
L. BUSINESS SEGMENT INFORMATION
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," was issued effective for fiscal years ending after
December 15, 1998. The Company has adopted this statement for the year ended
January 30, 1999.
The Company's reportable segments are strategic business units that offer
different products and services, and include a Retail Store segment (which
includes general merchandise, retail pharmacy and retail optical operations) and
a ProVantage segment (which includes health benefit management services,
pharmacy mail services, vision benefit management services and health
information and clinical support services).
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Intersegment sales and transfers
are accounted for at current market prices. The Company evaluates performance
based on operating earnings of the respective business segments.
69
<PAGE> 70
Summarized financial information concerning the Company's reportable
segments is shown in the following table (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
-----------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Net sales
<S> <C> <C> <C>
Retail Store $ 2,351,183 $ 2,001,568 $ 2,005,731
ProVantage 666,154 472,215 348,780
Intercompany* (35,886) (25,936) (21,104)
- ----------------------------------------------------------------------------------------------------------------------
Total net sales $ 2,981,451 $ 2,447,847 $ 2,333,407
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Intercompany sales consist of prescriptions that were both sold at a ShopKo
pharmacy and processed by ProVantage.
<TABLE>
<S> <C> <C> <C>
Earnings before income taxes
Retail Store $ 140,763 $ 127,269 $ 113,683
ProVantage 16,160 12,664 9,533
Corporate (26,985) (28,908) (17,417)
Interest expense (38,311) (30,582) (31,777)
- ----------------------------------------------------------------------------------------------------------------------
Earnings before income taxes $ 91,627 $ 80,443 $ 74,022
- ----------------------------------------------------------------------------------------------------------------------
Assets
Retail Store $ 1,147,221 $ 1,040,146 $ 985,374
ProVantage 200,777 155,037 123,847
Corporate 25,526 55,652 124,671
- ----------------------------------------------------------------------------------------------------------------------
Total assets $ 1,373,524 $ 1,250,835 $ 1,233,892
- ----------------------------------------------------------------------------------------------------------------------
Depreciation and amortization expenses
Retail Store $ 60,106 $ 53,245 $ 57,036
ProVantage 6,776 4,641 2,312
Corporate 708 366 485
- ----------------------------------------------------------------------------------------------------------------------
Total depreciation and amortization expenses $ 67,590 $ 58,252 $ 59,833
- ----------------------------------------------------------------------------------------------------------------------
Capital expenditures
Retail Store $ 85,531 $ 27,762 $ 34,258
ProVantage 8,863 3,514 2,953
Corporate 5,331 727 1,688
- ----------------------------------------------------------------------------------------------------------------------
Total capital expenditures $ 99,725 $ 32,003 $ 38,899
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's areas of operations are principally in the United States. No
major customer accounted for a significant amount of consolidated revenue in
fiscal years 1998, 1997 and 1996.
70
<PAGE> 71
SHOPKO STORES, INC. AND SUBSIDIARIES
SCHEDULE VIII. VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
BALANCE CHARGES
AT TO
BEGINNING COSTS & DEDUCTIONS BALANCE AT
OF YEAR EXPENSES (ADDITIONS) END OF YEAR
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
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
=================================================================
Year (52 weeks) ended January 30, 1999:
Allowance for losses $ 8,637 $ 609 $ 1,759 * $ 7,487
Inventory valuation reserves 4,500 500 4,000
-----------------------------------------------------------------
Total $ 13,137 $ 609 $ 2,259 $ 11,487
=================================================================
</TABLE>
*Net of charges to accounts other than bad debt expense, primarily promotion
and advertising.
**Excludes amounts related to the Penn-Daniels' acquisition.
71
<PAGE> 72
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 28, 1999
By: /S/ WILLIAM J. PODANY*
---------------------------------------
William J. Podany, 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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ DALE P. KRAMER* Chairman of the Board April 28, 1999
--------------------
Dale P. Kramer
/S/ PAUL H. FREISCHLAG, JR. Senior Vice President and Chief April 28, 1999
---------------------------- Financial Officer
Paul H. Freischlag, Jr.
/S/ JEFFERY R. SIMONS Chief Accounting Officer April 28, 1999
----------------------
Jeffery R. Simons
/S/ WILLIAM J. PODANY* Director April 28, 1999
-----------------------
William J. Podany
/S/ WILLIAM J. TYRRELL* Director April 28, 1999
-------------------------
William J. Tyrrell
/S/ JACK W. EUGSTER* Director April 28, 1999
----------------------------
Jack W. Eugster
/s/ JEFFREY C. GIRARD * Director April 28, 1999
-------------------------
Jeffrey C. Girard
/s/ JAMES L. REINERTSEN, M.D.* Director April 28, 1999
--------------------------------
James L. Reinertsen, M.D.
/s/ STEPHEN E. WATSON* Director April 28, 1999
------------------------
Stephen E. Watson
/S/ GREGORY H. WOLF* Director April 28, 1999
----------------------
Gregory H. Wolf
</TABLE>
*By Richard D. Schepp pursuant to Powers of Attorney.
72
<PAGE> 73
EXHIBIT INDEX
SHOPKO STORES, INC.
10-K REPORT
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
EXHIBIT NUMBER IN MANUALLY
NUMBER EXHIBIT SIGNED ORIGINAL
- ------- ------- ---------------
<S> <C> <C>
3.1 Amended and restated Articles of Incorporation of the
Company, incorporated by reference to the Company's
Current Report on Form 8-K dated May 22, 1998 (the "May
1998 Form 8-K").
3.2 By-laws of the Company, incorporated by reference to the
Company's definitive Proxy Statement dated April 10, 1998
in connection with the Company's 1998 Annual Meeting of
Shareholders.
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
("2002 Indenture"), 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 First Supplemental Indenture, dated as of May 22, 1998,
between the Company and U.S. Bank Trust, as Trustee, with
respect to the 2002 Indenture, incorporated by reference to
the May 1998 Form 8-K.
4.1.3 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 ("2022 Indenture"), 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.
4.1.4 First Supplemental Indenture dated as of May 22, 1998, between
the Company and U.S. Bank Trust, as Trustee, with respect to
the 2022 Indenture, incorporated by reference to the May 1998
Form 8-K.
</TABLE>
73
<PAGE> 74
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
EXHIBIT NUMBER IN MANUALLY
NUMBER EXHIBIT SIGNED ORIGINAL
- ------- ------- ---------------
<S> <C> <C>
4.1.5 Indenture dated as of July 15, 1993 between the Company and
First Trust National Association, as Trustee ("Senior Debt
Indenture"), 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.
4.1.6 First Supplemental Indenture, dated as of May 22, 1998,
between the Company and U.S. Bank Trust, as Trustee, with
respect to the Senior Debt Indenture, incorporated by
reference to the May 1998 Form 8-K.
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), ("Rights
Agreement") incorporated by reference from the
Registrant's Amendment No. 1 to Registration
Statement on Form 8-A/A dated September 29, 1997.
4.2.1 Rights Agreement Amendment, incorporated by reference to May
1998 Form 8-K.
4.3 Credit Agreement dated as of July 8, 1997 ("Credit
Agreement") 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.
4.3.1 Assumption Agreement, dated as of May 22, 1998 with respect to
the Credit Agreement incorporated by reference to the May 1998
Form 8-K.
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)
</TABLE>
74
<PAGE> 75
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
EXHIBIT NUMBER IN MANUALLY
NUMBER EXHIBIT SIGNED ORIGINAL
- ------- ------- ---------------
<S> <C> <C>
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)
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)
</TABLE>
75
<PAGE> 76
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
EXHIBIT NUMBER IN MANUALLY
NUMBER EXHIBIT SIGNED ORIGINAL
- ------- ------- ---------------
<S> <C> <C>
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 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).
10.10 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).
10.11 Form of Indemnification Agreement between the
Company and directors and certain officers of
the Company, incorporated by reference to the
Registrant's Form 10-Q, Quarterly Report to the
Securities and Exchange Commission for the 13
weeks ended August 1, 1998.
10.12 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)
10.13 ShopKo Directors Deferred Compensation Plan,
incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration
No. 33-45833). (1)
</TABLE>
76
<PAGE> 77
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
EXHIBIT NUMBER IN MANUALLY
NUMBER EXHIBIT SIGNED ORIGINAL
- ------- ------- ---------------
<S> <C> <C>
10.14 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. (1)
10.15 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)
10.16 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.
10.17 Amendment to Stock Buyback Agreement, incorporated
by reference to the Company's Registration Statement
on Form S-3 (Reg. No. 333-26615).
10.18 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.
10.19 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)
10.20 ShopKo Stores, Inc. 1999 Executive Incentive Plan
incorporated by reference to the Registrant's definitive
Proxy Statement dated April 19, 1999 filed in conjunction
with the Registrant's 1999 Annual Meeting of
Shareholders.
</TABLE>
77
<PAGE> 78
<TABLE>
<CAPTION>
SEQUENTIAL PAGE
EXHIBIT NUMBER IN MANUALLY
NUMBER EXHIBIT SIGNED ORIGINAL
- ------- ------- ---------------
<S> <C> <C>
11* Computation of Earnings Per Common and
Common Equivalent Share.
12* Statements Re Computation of Ratios.
21.1* Subsidiaries of the Registrant.
23.1* Consent of Deloitte & Touche LLP.
24.1* Directors' Powers of Attorney.
27* Financial Data Schedule.
</TABLE>
*Filed herewith
(1) A management contract or compensatory plan or arrangement.
78
<PAGE> 1
SHOPKO STORES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------
JAN. 30, 1999 JAN. 31, 1998 FEB. 22, 1997
(52 WKS) (49 WKS) (52 WKS)
---------------------------------------------
<S> <C> <C> <C>
BASIC:
Net earnings $55,636 $48,845 $44,946
=============================================
Weighted average number of
outstanding common shares 26,035 28,161 32,092
Net earnings per common
share - basic (1) $2.14 $1.73 $1.40
=============================================
DILUTED:
Net earnings $55,636 $48,845 $44,946
=============================================
Weighted average number of
outstanding common shares 26,035 28,161 32,092
Number of common shares
issuable assuming exercise
of stock options 482 408 278
---------------------------------------------
Adjusted weighted average number
of outstanding common and
common equivalent shares -
assuming dilution 26,517 28,569 32,370
=============================================
Net earnings per common
share - diluted (1) $2.10 $1.71 $1.39
=============================================
</TABLE>
(1) Earnings per share are computed by dividing net earnings by the weighted
average number of outstanding common and common equivalent shares.
79
<PAGE> 1
SHOPKO STORES, INC. AND SUBSIDIARIES
EXHIBIT 12 - STATEMENTS RE COMPUTATION OF RATIOS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------
JAN. 30, JAN. 31, FEB. 22, FEB. 24, FEB. 25,
1999 1998 1997 1996 1995
(52 WKS) (49 WKS) (52 WKS) (52 WKS) (52 WKS)
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges
COMPUTATION OF EARNINGS
1 Pretax Income $91,627 $80,443 $74,022 $63,140 $62,418
2 Add previously capitalized interest
amortized during the period 555 550 548 540 503
3 Less interest capitalized during the
period 171 0 128 249 1,309
-------- ---------- -------- -------- --------
4 Total earnings (sum of lines 1 to 3) 92,011 80,993 74,442 63,431 61,612
COMPUTATION OF FIXED CHARGES
5 Interest (1) 38,482 30,582 31,905 34,531 30,351
6 Interest factor in rental expense 4,087 2,691 2,657 2,689 2,403
-------- ---------- -------- -------- --------
7 Total fixed charges (sum of lines 5 42,569 33,273 34,562 37,220 32,754
and 6)
8 TOTAL EARNINGS AND FIXED CHARGES
(LINE 4 PLUS LINE 7) $134,580 $114,266 $109,004 $100,651 $94,366
======== ======== ======== ======== =======
9 Ratio (line 8 divided by line 7) 3.2 3.4 3.2 2.7 2.9
</TABLE>
(1) Includes capitalized interest.
80
<PAGE> 1
EXHIBIT 21.1 - SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION
- ---- ----------------------
<S> <C>
ShopKo Properties, Inc. Minnesota
Penn-Daniels, Incorporated Delaware
ShopKo Pharmacies, Inc. Michigan
SVS Trucking, Inc. Minnesota
ShopKo Ventures - Duluth, Inc. Minnesota
ProVantage Holdings, Inc. Delaware
ProVantage Health Services, Inc. Delaware
PVHS, Inc. Delaware
ProVantage Prescription Management Services L.L.C. Wisconsin
Bravell, Inc. Wisconsin
ProVantage Mail Services, Inc. Minnesota
ProVantage Vision Management Minnesota
Services, Inc.
PharMark Corporation Delaware
Euro PharMark Ltd. United Kingdom
ProVMed, LLC Wisconsin
</TABLE>
81
<PAGE> 1
EXHIBIT 23.1 - INDEPENDENT AUDITORS' CONSENT
INDEPENDENT AUDITORS' CONSENT
- -----------------------------
We consent to the incorporation by reference in Registration Statements No.
33-43952, No. 33-58584, No. 33-70666, No. 33-81902, No. 333-948 and No.
333-53577, all on Form S-8 of ShopKo Stores, Inc. of our report dated March 12,
1999, appearing in the Annual Report on Form 10-K of ShopKo Stores, Inc. and
subsidiaries for the year (52 weeks) ended January 30, 1999.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
April 28, 1999
82
<PAGE> 1
EXHIBIT 24.1 - DIRECTORS' POWERS OF ATTORNEY
DIRECTOR'S POWER OF ATTORNEY
The undersigned director of ShopKo Stores, Inc. designates Richard D.
Schepp with the power of substitution, as his true and lawful attorney-in-fact
for the purpose of: (i) executing his name and on his behalf the ShopKo Stores,
Inc. Form 10-K for the fiscal year ended January 30, 1999 and any related
amendments and/or supplements; (ii) generally doing all things in his name and
on his behalf in his capacity as a director to enable ShopKo Stores, Inc. to
comply with the provisions of the Securities Exchange Act of 1934, as amended,
and all requirements of the Securities and Exchange Commission; and (iii)
ratifying and confirming his signature as it may be signed by the
attorney-in-fact to the Form 10-K and any related amendments and/or supplements
thereto.
Dated this 21st day of April, 1999.
/s/ Dale P. Kramer
-------------------
Dale P. Kramer
83
<PAGE> 2
DIRECTOR'S POWER OF ATTORNEY
The undersigned director of ShopKo Stores, Inc. designates Richard D.
Schepp with the power of substitution, as his true and lawful attorney-in-fact
for the purpose of: (i) executing his name and on his behalf the ShopKo Stores,
Inc. Form 10-K for the fiscal year ended January 30, 1999 and any related
amendments and/or supplements; (ii) generally doing all things in his name and
on his behalf in all his capacities with ShopKo Stores, Inc. to enable ShopKo
Stores, Inc. to comply with the provisions of the Securities Exchange Act of
1934, as amended, and all requirements of the Securities and Exchange
Commission; and (iii) ratifying and confirming his signature as it may be signed
by the attorney-in-fact to the Form 10-K and any related amendments and/or
supplements thereto.
Dated this 21st day of April, 1999.
/s/ William J. Podany
----------------------
William J. Podany
84
<PAGE> 3
DIRECTOR'S POWER OF ATTORNEY
The undersigned director of ShopKo Stores, Inc. designates Richard D.
Schepp with the power of substitution, as his true and lawful attorney-in-fact
for the purpose of: (i) executing his name and on his behalf the ShopKo Stores,
Inc. Form 10-K for the fiscal year ended January 30, 1999 and any related
amendments and/or supplements; (ii) generally doing all things in his name and
on his behalf in his capacity as a director to enable ShopKo Stores, Inc. to
comply with the provisions of the Securities Exchange Act of 1934, as amended,
and all requirements of the Securities and Exchange Commission; and (iii)
ratifying and confirming his signature as it may be signed by the
attorney-in-fact to the Form 10-K and any related amendments and/or supplements
thereto.
Dated this 21st day of April, 1999.
/s/ William J. Tyrrell
-----------------------
William J. Tyrrell
85
<PAGE> 4
DIRECTOR'S POWER OF ATTORNEY
The undersigned director of ShopKo Stores, Inc. designates Richard D.
Schepp with the power of substitution, as his true and lawful attorney-in-fact
for the purpose of: (i) executing his name and on his behalf the ShopKo Stores,
Inc. Form 10-K for the fiscal year ended January 30, 1999 and any related
amendments and/or supplements; (ii) generally doing all things in his name and
on his behalf in his capacity as a director to enable ShopKo Stores, Inc. to
comply with the provisions of the Securities Exchange Act of 1934, as amended,
and all requirements of the Securities and Exchange Commission; and (iii)
ratifying and confirming his signature as it may be signed by the
attorney-in-fact to the Form 10-K and any related amendments and/or supplements
thereto.
Dated this 21st day of April, 1999.
/s/ Jack W. Eugster
--------------------
Jack W. Eugster
86
<PAGE> 5
DIRECTOR'S POWER OF ATTORNEY
The undersigned director of ShopKo Stores, Inc. designates Richard D.
Schepp with the power of substitution, as his true and lawful attorney-in-fact
for the purpose of: (i) executing his name and on his behalf the ShopKo Stores,
Inc. Form 10-K for the fiscal year ended January 30, 1999 and any related
amendments and/or supplements; (ii) generally doing all things in his name and
on his behalf in his capacity as a director to enable ShopKo Stores, Inc. to
comply with the provisions of the Securities Exchange Act of 1934, as amended,
and all requirements of the Securities and Exchange Commission; and (iii)
ratifying and confirming his signature as it may be signed by the
attorney-in-fact to the Form 10-K and any related amendments and/or supplements
thereto.
Dated this 21st day of April, 1999.
/s/ James L. Reinertsen, M. D.
-------------------------------
James L. Reinertsen, M. D.
87
<PAGE> 6
DIRECTOR'S POWER OF ATTORNEY
The undersigned director of ShopKo Stores, Inc. designates Richard D.
Schepp with the power of substitution, as his true and lawful attorney-in-fact
for the purpose of: (i) executing his name and on his behalf the ShopKo Stores,
Inc. Form 10-K for the fiscal year ended January 30, 1999 and any related
amendments and/or supplements; (ii) generally doing all things in his name and
on his behalf in his capacity as a director to enable ShopKo Stores, Inc. to
comply with the provisions of the Securities Exchange Act of 1934, as amended,
and all requirements of the Securities and Exchange Commission; and (iii)
ratifying and confirming his signature as it may be signed by the
attorney-in-fact to the Form 10-K and any related amendments and/or supplements
thereto.
Dated this 21st day of April, 1999.
/s/ Stephen E. Watson
----------------------
Stephen E. Watson
88
<PAGE> 7
DIRECTOR'S POWER OF ATTORNEY
The undersigned director of ShopKo Stores, Inc. designates Richard D.
Schepp with the power of substitution, as his true and lawful attorney-in-fact
for the purpose of: (i) executing his name and on his behalf the ShopKo Stores,
Inc. Form 10-K for the fiscal year ended January 30, 1999 and any related
amendments and/or supplements; (ii) generally doing all things in his name and
on his behalf in his capacity as a director to enable ShopKo Stores, Inc. to
comply with the provisions of the Securities Exchange Act of 1934, as amended,
and all requirements of the Securities and Exchange Commission; and (iii)
ratifying and confirming his signature as it may be signed by the
attorney-in-fact to the Form 10-K and any related amendments and/or supplements
thereto.
Dated this 21st day of April, 1999.
/s/ Jeffrey C. Girard
----------------------
Jeffrey C. Girard
89
<PAGE> 8
DIRECTOR'S POWER OF ATTORNEY
The undersigned director of ShopKo Stores, Inc. designates Richard D.
Schepp with the power of substitution, as his true and lawful attorney-in-fact
for the purpose of: (i) executing his name and on his behalf the ShopKo Stores,
Inc. Form 10-K for the fiscal year ended January 30, 1999 and any related
amendments and/or supplements; (ii) generally doing all things in his name and
on his behalf in his capacity as a director to enable ShopKo Stores, Inc. to
comply with the provisions of the Securities Exchange Act of 1934, as amended,
and all requirements of the Securities and Exchange Commission; and (iii)
ratifying and confirming his signature as it may be signed by the
attorney-in-fact to the Form 10-K and any related amendments and/or supplements
thereto.
Dated this 21st day of April, 1999.
/s/ Gregory H. Wolf
--------------------
Gregory H. Wolf
90
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