<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period (13 weeks) ended May 1, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
------------------------ --------------------
Commission file number 1-10876
-------
SHOPKO STORES, INC.
(Exact name of registrant as specified in its Charter)
Wisconsin 41-0985054
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
700 Pilgrim Way, Green Bay, Wisconsin 54304
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (920) 497-2211
-------------------------
Former name, former address and former fiscal year, if changed since last
report:
N/A
- -------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ----
The number of shares outstanding of each of the issuer's classes of Common Stock
as of May 17, 1999 is as follows:
<TABLE>
<CAPTION>
Title of Each Class Shares Outstanding
------------------- ------------------
<S> <C>
Common Shares 26,206,080
Exhibit Index Page 1 of Page 25
on Page 22
</TABLE>
1
<PAGE> 2
SHOPKO STORES, INC.
FORM 10-Q
FOR THE 13 WEEKS ENDED MAY 1, 1999
INDEX
Page
----
Part I Item 1 - Financial Statements
Consolidated Statements of Earnings for the 13 weeks 3
ended May 1, 1999 and May 2, 1998
Consolidated Balance Sheets as of May 1, 1999, 4
May 2, 1998 and January 30, 1999
Consolidated Statements of Cash Flows for the 13 5
weeks ended May 1, 1999 and May 2, 1998
Consolidated Statements of Shareholders' Equity for 6
the 13 weeks ended May 1, 1999 and for the period
ended January 30, 1999
Notes to Consolidated Financial Statements 7-9
Item 2 - Management's Discussion and Analysis of Financial 10-18
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosure About 19
Market Risk
Part II Item 6 - Exhibits and Reports on Form 8-K 20
Signatures 21
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries First Quarter (13 Weeks) Ended
- -------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
May 1, May 2, % Increase/
1999 1998 (Decrease)
- -------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Net sales $ 759,857 $ 645,801 17.7
Licensed department rentals and other income 2,918 2,943
------------- ------------
762,775 648,744 17.6
Costs and expenses:
Cost of sales 607,662 506,569
Selling, general and administrative expenses 120,669 110,834
Nonrecurring charge 1,696
Depreciation and amortization expenses 17,648 17,073
------------- ------------
745,979 636,172 17.3
Income from operations 16,796 12,572 33.6
Interest expense - net 9,692 9,029
------------- ------------
Earnings before income taxes and
extraordinary item 7,104 3,543 100.5
Provision for income taxes 2,791 1,392
------------- ------------
Earnings before extraordinary item 4,313 2,151 100.5
Extraordinary (loss) on early retirement of debt,
net of income taxes of $2,443 (3,776)
------------- ------------
Net earnings $ 537 $ 2,151 (75.0)
============= ============
Basic earnings per common share
before extraordinary item $ 0.16 $ 0.08
Extraordinary (loss) on early retirement of debt (0.14)
------------- ------------
Basic net earnings per common share $ 0.02 $ 0.08
============= ============
Weighted average number of common shares
outstanding 26,140 25,869
Diluted earnings per common share
before extraordinary item $ 0.16 $ 0.08
Extraordinary (loss) on early retirement of debt (0.14)
------------- ------------
Diluted net earnings per common share $ 0.02 $ 0.08
============= ============
Adjusted weighted average number of common
shares outstanding 26,591 26,346
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries First Quarter as of Fiscal Year End
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
May 1, May 2, January 30,
ASSETS 1999 1998 1999
- ----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 84,240 $ 28,968 $ 30,219
Receivables, less allowance for losses of
$7,695, $9,722 and $7,487, respectively 124,860 92,010 117,652
Merchandise inventories 483,876 401,938 434,643
Other current assets 11,594 8,677 5,461
---------------- ---------------- -----------------
Total current assets 704,570 531,593 587,975
Other assets and deferred charges 6,980 6,991 6,960
Intangible assets - net 73,637 72,024 74,749
Property and equipment at cost:
Land 121,332 118,725 121,577
Buildings 541,799 523,013 540,953
Equipment 428,172 360,450 408,313
Leasehold improvements 74,233 53,951 58,820
Property under construction 3,275 3,410 12,999
Property under capital leases 58,004 26,419 58,004
---------------- ---------------- -----------------
1,226,815 1,085,968 1,200,666
Less accumulated depreciation and amortization:
Property and equipment 503,238 445,836 487,137
Property under capital leases 10,235 11,670 9,689
---------------- ---------------- -----------------
Net property and equipment 713,342 628,462 703,840
---------------- ---------------- -----------------
Total assets $ 1,498,529 $ 1,239,070 $ 1,373,524
================ ================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Short-term debt $ 159,000 $ -- $ --
Accounts payable - trade 240,423 212,347 189,581
Accrued compensation and related taxes 35,488 30,002 40,955
Accrued other liabilities 146,080 118,138 169,530
Accrued income and other taxes 17,429 14,259 16,127
Current portion of long-term obligations 2,734 5,552 4,597
---------------- ---------------- -----------------
Total current liabilities 601,154 380,298 420,790
Long-term obligations 409,543 433,636 467,191
Deferred income taxes 26,831 21,651 26,301
Shareholders' equity:
Common stock 262 260 261
Additional paid-in capital 229,652 226,661 228,479
Retained earnings 231,087 176,564 230,502
---------------- ---------------- -----------------
Total shareholders' equity 461,001 403,485 459,242
---------------- ---------------- -----------------
Total liabilities and shareholders' equity $ 1,498,529 $ 1,239,070 $ 1,373,524
================ ================ =================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Year to Date (13 weeks) Ended
- ---------------------------------------------------------------------------------------------------------
(In thousands)
May 1, May 2,
1999 1998
- ---------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 537 $ 2,151
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 17,648 17,073
Provision for losses on receivables 209 112
Gain on sale of property and equipment (673)
Deferred income taxes (767) 5,527
Extraordinary loss on early retirement of debt,
net of tax benefit 3,776
Change in assets and liabilities:
Receivables (7,417) 5,690
Merchandise inventories (49,233) (25,370)
Other current assets (4,834) 57
Other assets and intangibles (472) (888)
Accounts payable 50,842 18,701
Accrued liabilities (23,396) (35,854)
- --------------------------------------------------------------------------------------------------------
Net cash (used in) operating activities (13,780) (12,801)
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Payments for property and equipment (26,221) (14,888)
Proceeds from the sale of property and equipment 746
- --------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (25,475) (14,888)
- --------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Change in short-term debt 159,000
Change in common stock from stock options 765 3,453
Early retirement of debt (64,208)
Reduction in debt and capital leases (2,281) (1,140)
- --------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 93,276 2,313
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 54,021 (25,376)
Cash and cash equivalents at beginning of year 30,219 54,344
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of first quarter $ 84,240 $ 28,968
========================================================================================================
Supplemental cash flow information:
Noncash investing and financial activities-
Retirement of treasury stock $ 152,179
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Common Stock Treasury Stock
-------------------- Additional -------------------------
Paid-in Retained
Shares Amount Capital Earnings Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 31, 1998 33,941 $ 339 $ 283,520 $ 264,316 (8,174) $ (152,179)
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) 8,174 152,179
-------------------------------------------------------------------------------------------
BALANCES AT JANUARY 30, 1999 26,129 261 228,479 230,502 - -
Net earnings 537
Sale of common stock under option
plans 54 1 764
Income tax benefit related to
stock options 409
Restricted stock expense 48
------------------------------------------------------------------------------------------
BALANCES AT MAY 1, 1999 26,183 $ 262 $ 229,652 $ 231,087 - $ -
==========================================================================================
</TABLE>
Interim data subject to year end audit.
See notes to consolidated financial statements.
6
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Policies:
The Company's 1998 Annual Report on Form 10-K contains a summary of significant
accounting policies which includes the consolidated financial statements and the
notes to the consolidated financial statements. The same accounting policies are
followed in the preparation of interim reports.
In June 1998, Statement of Financial Accounting Standard ("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.
Inventories:
The Company uses the LIFO method for substantially all inventories. If the
first-in, first-out (FIFO) method had been used, these inventories would have
been $35.6 million and $39.3 million higher at May 1, 1999 and at May 2, 1998,
respectively.
Intangible Assets:
The fair value of the intangible assets of businesses acquired are amortized
using the straight-line method over 18 to 22 years. Accumulated amortization for
these assets was $10.4 million and $6.4 million at May 1, 1999 and May 2, 1998,
respectively.
Extraordinary Item:
During the first quarter of fiscal 1999, the Company retired debt with a face
value of $57.1 million prior to maturity. The debt repurchases resulted in an
extraordinary after tax charge of $3.8 million.
Income Taxes:
The provision for income tax expense, including the income tax benefit for the
extraordinary item, for the first quarter of fiscal 1999 was $0.3 million, of
which $1.1 million is current taxes offset by a $0.8 million deferred tax
credit. 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.
7
<PAGE> 8
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.
Business Segment Information:
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 in the Company's 1998 Annual Report
on Form 10-K. Intersegment sales and transfers are accounted for at current
market prices. The Company evaluates performance based on operating earnings of
the respective business segments.
Summarized financial information concerning the Company's reportable segments is
shown in the following table (in thousands):
<TABLE>
<CAPTION>
First Quarter as of
------------------------------
May 1, May 2,
1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Net sales
Retail Store $ 549,460 $ 504,180
ProVantage 222,155 149,874
Intercompany* (11,758) (8,253)
- ----------------------------------------------------------------------------------------
Total net sales $ 759,857 $ 645,801
- ----------------------------------------------------------------------------------------
</TABLE>
* Intercompany sales consist of prescriptions that were both sold at a ShopKo
pharmacy and processed by ProVantage.
<TABLE>
<S> <C> <C>
Earnings before income taxes and extraordinary item
Retail Store $ 18,037 $ 16,699
ProVantage 3,930 3,225
Corporate (5,171) (7,352)
Interest expense (9,692) (9,029)
- ---------------------------------------------------------------------------------------
Earnings before income taxes and extraordinary item $ 7,104 $ 3,543
- ---------------------------------------------------------------------------------------
Assets
Retail Store $ 1,219,737 $ 1,052,491
ProVantage 191,442 151,107
Corporate 87,350 35,472
- ---------------------------------------------------------------------------------------
Total assets $ 1,498,529 $ 1,239,070
- ---------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 9
The Company's areas of operations are principally in the United States. No major
customer accounted for a significant amount of consolidated revenue during the
first quarters of fiscal 1999 and fiscal 1998.
Statement of Registrant:
The data presented herein is unaudited, but in the opinion of management,
includes all adjustments (which consist only of normal recurring accruals)
necessary for a fair presentation of the consolidated financial position of the
Company and its subsidiaries at May 1, 1999 and May 2, 1998 and the results of
their operations and cash flows for the periods then ended. These interim
results are not necessarily indicative of the results of the fiscal years as a
whole because the operations of the Company are highly seasonal. The fourth
fiscal quarter has historically contributed a significant part of the Company's
earnings due to the Christmas selling season.
9
<PAGE> 10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth items from the Company's unaudited consolidated
financial statements for the first quarter of fiscal 1999 and 1998 as a
percentage of net sales:
<TABLE>
<CAPTION>
First Quarter
----------------
Fiscal Fiscal
1999 1998
----- -----
<S> <C> <C>
Revenues
Net sales 100.0 % 100.0 %
Licensed department rentals and other income 0.4 0.4
----- -----
100.4 100.4
Costs and expenses
Cost of sales 80.0 78.4
Selling, general and administrative expenses 15.9 17.2
Nonrecurring charge 0.3
Depreciation and amortization expenses 2.3 2.6
----- -----
98.2 98.5
Income from operations 2.2 1.9
Interest expense - net 1.3 1.4
----- -----
Earnings before income taxes and
extraordinary item 0.9 0.5
Provision for income taxes 0.3 0.2
----- -----
Earnings before extraordinary item 0.6 0.3
Extraordinary (loss) on early retirement of debt,
net of income taxes (0.5)
----- -----
Net earnings 0.1 % 0.3 %
===== =====
</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.
10
<PAGE> 11
The following tables set forth items from the Company's business segments as
percentages of net sales:
RETAIL STORE SEGMENT
<TABLE>
<CAPTION>
First Quarter
-------------------------
Fiscal Fiscal
1999 1998
---------- ----------
<S> <C> <C>
Revenues
Net sales 100.0 % 100.0 %
Licensed departmental rentals and other income 0.5 0.6
---------- ----------
100.5 100.6
Costs and expenses
Cost of sales 74.8 74.4
Selling, general and administrative expenses 19.6 19.8
Depreciation and amortization expenses 2.8 3.1
---------- ----------
97.2 97.3
Income from operations 3.3 % 3.3 %
<CAPTION>
PROVANTAGE SEGMENT
First Quarter
--------------------------
Fiscal Fiscal
1999 1998
---------- ----------
<S> <C> <C>
Revenues
Net sales 100.0 % 100.0 %
Licensed department rentals and other income 0.0 0.1
--------- ----------
100.0 100.1
Costs and expenses
Cost of sales 93.8 93.2
Selling, general and administrative expenses 3.5 3.8
Depreciation and amortization expenses 0.9 0.9
--------- ----------
98.2 97.9
Income from operations 1.8 % 2.2 %
</TABLE>
11
<PAGE> 12
Net Sales
The following table presents the Company's consolidated net sales for the first
quarter of fiscal 1999 and fiscal 1998:
<TABLE>
<CAPTION>
First Quarter % Increase
------------- ----------
Fiscal Fiscal
1999 1998 Total Comp
---- ---- ----- ----
<S> <C> <C> <C> <C>
Retail Store $549.5 $504.2 9.0 8.1
ProVantage 222.2 149.9 48.2 N/A
Intercompany (11.8) (8.3) N/A N/A
------ ----- ---- ---
Consolidated $759.9 $645.8 17.7
====== ====== ====
</TABLE>
The 8.1% increase in first quarter retail comparable store sales are derived
from the following categories: Retail Health increased 16.3%, Apparel increased
6.5% and Hardlines/Home increased 5.1%. Changes in retail comparable store sales
are based upon those stores which were open for the entire preceding fiscal
year.
In April 1999, the Company opened ten former Venture locations and one former
Target location. All of these locations include in-store pharmacies and optical
centers. Two additional new stores will be opening during the third quarter of
fiscal 1999.
On December 19, 1997, ShopKo acquired the retail chain Penn-Daniels,
Incorporated ("Penn-Daniels"), which operated 18 Jacks' discount stores and one
Lots-A-Deals close-out store in Iowa, Illinois and Missouri. 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. In March 1998, the Lots-A-Deals store in Moline, Illinois was closed,
and the Iowa City, Iowa store closed in May 1998.
The increase in ProVantage sales in the first quarter is due primarily to
internally generated growth in claims processing and mail pharmacy. 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.
12
<PAGE> 13
Gross Margin:
The following table sets forth gross margin as a percent of net sales:
<TABLE>
<CAPTION>
First Quarter
-------------
Retail Store ProVantage Consolidated
------------ ---------- ------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross margin percent 25.2 % 25.6 % 6.2 % 6.8 % 20.0 % 21.6 %
Gross margin percent prior to
LIFO charge 25.4 % 25.8 % N/A N/A 20.2 % 21.8 %
</TABLE>
The decrease in the retail store gross margin rate is primarily attributable to
planned lower gross margin rates in general merchandise due to increased
promotional sales and lower gross margin rates in retail pharmacy due to
increased third party business. ProVantage's decrease in gross margin rate is
primarily due to increasing prescription drug costs and the addition of larger
clients with lower average transaction fees. The retail store and consolidated
gross margin percentages reflect LIFO charges of $1.3 million for both this year
and last year.
Selling, General and Administrative Expenses:
Consolidated selling, general and administrative expenses as a percent of sales
for the first quarter were 15.9 percent compared with 17.2 percent last year.
Retail selling, general and administrative expenses as a percent of sales for
the quarter were 19.6 percent compared with 19.8 percent last year. Excluding
expenses incurred for year 2000 compliance, retail selling, general and
administrative expenses as a percent of sales were 19.5 percent for the first
quarter compared to 19.8 percent last year. This reduction is primarily due to
leveraging store payroll cost against increased sales volume. ProVantage's
selling, general and administrative expenses were 3.5 percent of sales for the
first quarter compared to 3.8 percent of sales for the same period last year.
This is primarily due to leveraging fixed costs against increased sales volume.
Liquidity and Capital Resources:
The Company relies primarily on cash generated from its operations, with its
remaining funding requirements being met from short-term and long-term
borrowings. Cash provided from net earnings before depreciation and amortization
was $18.2 million for the first quarter of fiscal 1999 compared to $19.2 million
for the same period last year. The Company had $159.0 million outstanding under
its credit agreements at the end of the first quarter of fiscal 1999 compared to
nothing outstanding at the end of the first quarter of fiscal 1998. This
increase in amount outstanding is primarily due to early retirement of long-term
debt, increased cash balances and increased inventory due to our new stores.
The Company has accumulated cash in anticipation of the Pamida acquisition.
13
<PAGE> 14
As of May 1, 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. In April 1999, the Company negotiated a $50.0 million
unsecured bankers acceptance note which is due October 20, 1999. 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.
The Company's principal use of cash is for the purchase of property, equipment
and systems technology. The Company spent $26.2 million on capital expenditures
in the first quarter of fiscal 1999, compared to $14.9 million on capital
expenditures for the same period last year. 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 majority of which would relate to
remodeling the 11 stores opened in April 1999 and constructing the two new
stores that will open in the third quarter; expansion of the Company's
distribution facilities; supporting the existing retail business for merchandise
initiatives and ongoing store equipment and fixturing replacements; and
continuing investments in systems technology. The Company plans to expand its
distribution centers in Wisconsin and Idaho and to build a new distribution
facility near Omaha, Nebraska. The total capital expenditures for these
distribution facilities for fiscal years 1999 and 2000 will be approximately
$70.0 to $75.0 million with approximately $40.0 to $45.0 million being spent in
fiscal 1999. These amounts exclude 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 20, 1997, ProVantage 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 was
paid in cash and $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 and certain liquidity events related to
ProVantage. The Contingent Payments may be made, at ProVantage's election, in
either cash, Company common stock, or ProVantage common stock; provided,
however, that any stock used for such payments must be traded in a public
market. The Contingent Payments, if any, will be capitalized as additional
purchase price and amortized over a period of 15 to 19 years.
14
<PAGE> 15
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 $25.5 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. The results of Penn-Daniels' operations since the
date of acquisition have been included in the Company's consolidated statements
of earnings.
In connection with the Penn-Daniels acquisition, the Company incurred $1.7
million in nonrecurring pre-tax costs in the first quarter of fiscal 1998. The
Company funded these costs from available cash and borrowings under the
Company's revolving credit facility.
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, net proceeds will total approximately $82.8 million.
ProVantage would retain $20.0 million from the offering and ShopKo would receive
approximately $62.8 million as payment on a dividend note. After completion of
the offering, ShopKo would own between 66.0 percent and 70.0 percent 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.
On May 10, 1999, the Company and Pamida Holdings Corporation ("Pamida") signed a
definitive agreement for ShopKo to acquire Pamida in a transaction that values
Pamida at approximately $375.0 million, including the assumption of
approximately $265.0 million in debt and capitalized lease obligations. Pamida,
which is headquartered in Omaha, Nebraska, operates 147 stores in 15 Midwestern,
North Central and Rocky Mountain states as of January 31, 1999.
Under the terms of the transaction, a subsidiary of ShopKo has commenced a
tender offer for all of Pamida's outstanding voting common shares at a price of
$11.50 per share. The tender offer is contingent upon customary conditions,
including the tender of at least 51.0 percent of Pamida's outstanding voting
stock on a fully diluted basis (but not assuming conversion of the non-voting
shares). The acquisition is expected to close by early July 1999, at which time
a subsidiary of the Company will be merged into Pamida with non-tendered shares
being converted into the right to receive $11.50 per share. The Company will
consummate the transaction with cash on hand, and plans to refinance Pamida's
debt with a combination of proceeds from the ProVantage initial public offering
and new ShopKo debt and equity offerings. There can be no assurance that this
acquisition will be completed or that it will be completed on the terms
described above.
15
<PAGE> 16
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 89.0 percent of the Company's critical
business systems are currently compliant and approximately 11.0 percent are in
the process of being renovated. With respect to non-IT systems, the assessment
phase indicated a need for only minor renovation work. For both IT and non-IT
systems, the renovation phase currently underway is expected to be completed in
the second quarter of fiscal 1999. The Company has certified 22.0 percent of its
business systems and the remaining 78.0 percent will be certified during the
third 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.
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 $2.9 million has already been
incurred. $2.0 million was incurred in fiscal 1998, and $0.9 million was
incurred in the first quarter of fiscal 1999.
16
<PAGE> 17
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 litigation which
will have a material adverse effect on the Company.
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.
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.
17
<PAGE> 18
Treasury Stock Retirement:
In the first quarter of fiscal 1998, the Company retired all 8,174,387 shares of
common stock held as treasury stock for accounting purposes, and such shares
were returned to the status of authorized but unissued shares. As a result, the
$152.2 million assigned to treasury stock was eliminated with a corresponding
decrease in par value, additional paid-in capital and retained earnings.
Stock Repurchase Program:
On March 26, 1998, the Company announced that the Board of Directors had
authorized the repurchase of up to $20.0 million of the Company's Common Stock.
Repurchased shares will be used for stock-based employee benefit plans and other
corporate purposes. As of the end of the first quarter of fiscal 1999, no shares
of Common Stock had been repurchased under this program.
Senior Notes Buyback Program:
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 May 1, 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.
Forward-Looking Statements:
Item 2 of this Form 10-Q, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward-looking statements within
the meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements include, without limitation,
statements regarding earnings, growth and capital expenditure plans and capital
requirements. Such statements are subject to important factors which could cause
the Company's actual results to differ materially from those anticipated by the
forward-looking statements. These factors include those referenced in the
Company's Annual Report on Form 10-K for the period ending January 30, 1999 or
as may be described from time to time in the Company's subsequent SEC filings.
18
<PAGE> 19
Item 3: Quantitative and Qualitative Disclosures About Market Risk
For information as to the Company's Quantitative and Qualitative Disclosures
About Market Risk, please see the Company's Annual Report on Form 10-K for the
fiscal year ending January 30, 1999. There have been no material changes in the
Company's quantitative or qualitative exposure to market risk since the end of
fiscal 1998.
19
<PAGE> 20
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
11 Computation of Earnings Per Common and Common
Equivalent Share.
12 Statements Re Computation of Ratios.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
The Company filed Current Reports on Form 8-K in the first quarter of
fiscal 1999 as follows:
None.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHOPKO STORES, INC. (Registrant)
Date: June 1, 1999 By: /s/ Richard D. Schepp
----------------------------------------------
Richard D. Schepp
Senior Vice President General Counsel
and Secretary
(Duly Authorized Officer of Registrant)
Date: June 1, 1999 By: /s/ Jeffery R. Simons
----------------------------------------------
Jeffery R. Simons
Vice President and Controller
(Chief Accounting Officer and Duly
Authorized Officer of Registrant)
21
<PAGE> 22
EXHIBIT INDEX
SHOPKO STORES, INC.
10-Q REPORT
Exhibit Sequential
Number Exhibit Page Number
- ------- ------- -----------
11 Computation of Earnings Per Common and
Common Equivalent Share.
12 Statements Re Computation of Ratios.
27 Financial Data Schedule.
22
<PAGE> 1
ShopKo Stores, Inc. and Subsidiaries
Exhibit 11 - Computation of Earnings Per Common and
Common Equivalent Share
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
First Quarters as of Fiscal Years Ended
---------------------------------------------------------------------------------------
May 1, May 2, January 30, January 31, February 1,
1999 1998 1999 1998 1997
(13 Weeks) (13 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BASIC:
Earnings before
extraordinary item $ 4,313 $ 2,151 $ 55,636 $ 49,382 $ 45,669
Extraordinary item (3,776)
-------------- -------------- --------------- -------------- ---------------
Net earnings $ 537 $ 2,151 $ 55,636 $ 49,382 $ 45,669
============== ============== =============== ============== ===============
Weighted average number of
outstanding common shares 26,140 25,869 26,035 28,398 32,090
============== ============== =============== ============== ===============
Earnings per common
share before extraordinary
item - basic (1) $ 0.16 $ 0.08 $ 2.14 $ 1.74 $ 1.42
Extraordinary item - basic (1) (0.14)
-------------- -------------- --------------- -------------- ---------------
Net earnings per common
share - basic (1) $ 0.02 $ 0.08 $ 2.14 $ 1.74 $ 1.42
============== ============== =============== ============== ===============
DILUTED:
Earnings before
extraordinary item $ 4,313 $ 2,151 $ 55,636 $ 49,382 $ 45,669
Extraordinary item (3,776)
-------------- -------------- --------------- -------------- ---------------
Net earnings $ 537 $ 2,151 $ 55,636 $ 49,382 $ 45,669
============== ============== =============== ============== ===============
Weighted average number of
outstanding common shares 26,140 25,869 26,035 28,398 32,090
Number of common shares
issuable assuming exercise
of stock options 451 477 482 377 473
-------------- -------------- --------------- -------------- ---------------
Weighted average number of
outstanding common and
common equivalent shares -
assuming full dilution 26,591 26,346 26,517 28,775 32,563
============== ============== =============== ============== ===============
Earnings per common
share before extraordinary
item - diluted (1) $ 0.16 $ 0.08 $ 2.10 $ 1.72 $ 1.40
Extraordinary item - diluted (1) (0.14)
-------------- -------------- --------------- -------------- ---------------
Net earnings per common
share - diluted (1) $ 0.02 $ 0.08 $ 2.10 $ 1.72 $ 1.40
============== ============== =============== ============== ===============
</TABLE>
(1) Earnings per share are computed by dividing net earnings by the weighted
average number of outstanding common and common equivalent shares.
23
<PAGE> 1
ShopKo Stores, Inc. and Subsidiaries
Exhibit 12 - Statements Re Computation of Ratios
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
First Quarters as of Fiscal Years Ended
-----------------------------------------------------------------------------------
May 1, May 2, January 30, January 31, February 1,
1999 1998 1999 1998 1997
(13 Weeks) (13 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges
Computation of Earnings
1 Pretax income before extraordinary item $ 7,104 $ 3,543 $ 91,627 $ 80,443 $ 74,022
2 Add previously capitalized interest
amortized during the period 140 139 555 550 548
3 Less interest capitalized during
the period 74 17 171 0 128
-------------- --------------- -------------- --------------- --------------
4 Total earnings (sum of lines 1 to 3) 7,170 3,665 92,011 80,993 74,442
Computation of Fixed Charges
5 Interest (1) 9,766 9,046 38,482 30,582 31,905
6 Interest factor in rental expense 1,100 1,069 4,087 2,691 2,657
-------------- --------------- -------------- --------------- --------------
7 Total fixed charges (sum of lines
5 and 6) 10,866 10,115 42,569 33,273 34,562
8 TOTAL EARNINGS AND
FIXED CHARGES (line 4
plus line 7) $ 18,036 $ 13,780 $ 134,580 $ 114,266 $ 109,004
============== =============== ============== =============== ==============
9 Ratio (line 8 divided by line 7) 1.7 1.4 3.2 3.4 3.2
</TABLE>
(1) Includes capitalized interest
24
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
<CASH> 84,240
<SECURITIES> 0
<RECEIVABLES> 132,555
<ALLOWANCES> 7,695
<INVENTORY> 483,876
<CURRENT-ASSETS> 704,570
<PP&E> 1,226,815
<DEPRECIATION> 513,473
<TOTAL-ASSETS> 1,498,529
<CURRENT-LIABILITIES> 601,154
<BONDS> 0
0
0
<COMMON> 262
<OTHER-SE> 460,739
<TOTAL-LIABILITY-AND-EQUITY> 1,498,529
<SALES> 759,857
<TOTAL-REVENUES> 762,775
<CGS> 607,662
<TOTAL-COSTS> 745,979
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,692
<INCOME-PRETAX> 7,104
<INCOME-TAX> 2,791
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (3,776)
<CHANGES> 0
<NET-INCOME> 537
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
