<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period (13 weeks) ended October 28, 2000
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) 429-2211
---------------------------
Former name, former address and former fiscal year, if changed since last
report:
N/A
--------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- --------
The number of shares outstanding of each of the issuer's classes of Common Stock
as of November 15, 2000 is as follows:
<TABLE>
<CAPTION>
Title of Each Class Shares Outstanding
------------------- ------------------
<S> <C>
Common Shares 28,698,590
Exhibit Index Page 1 of Page 28
on Page 22
</TABLE>
1
<PAGE> 2
SHOPKO STORES, INC.
FORM 10-Q
FOR THE 13 WEEKS AND 39 WEEKS ENDED OCTOBER 28, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I Item 1 - Financial Statements
Condensed Consolidated Statements of Earnings for the 3
13 weeks ended October 28, 2000 and October 30, 1999
Condensed Consolidated Statements of Earnings for the 4
39 weeks ended October 28, 2000 and October 30, 1999
Condensed Consolidated Balance Sheets as of October 28, 5
2000, October 30, 1999 and January 29, 2000
Condensed Consolidated Statements of Cash Flows for the 6
39 weeks ended October 28, 2000 and October 30, 1999
Condensed Consolidated Statement of Shareholders' 7
Equity for the 39 weeks ended October 28, 2000
Notes to Condensed Consolidated Financial Statements 8-10
Item 2 - Management's Discussion and Analysis of Financial 11-19
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosure About 19
Market Risk
Part II Item 1 - Legal Proceedings 20
Item 6 - Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Third Quarter (13 Weeks) Ended
-------------------------------------------------------------------------------------------
(In thousands, except per share data)
October 28, October 30,
2000 1999
-------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Net sales $ 814,191 $ 806,032
Licensed department rentals and other income 3,388 3,531
--------- ---------
817,579 809,563
Costs and expenses:
Cost of sales 619,500 605,507
Selling, general and administrative expenses 166,748 152,794
Special charges 3,121 3,372
Depreciation and amortization expenses 24,314 21,806
--------- ---------
813,683 783,479
Income from operations 3,896 26,084
Interest expense - net (16,881) (13,638)
--------- ---------
(Loss) earnings from continuing operations before
income taxes (12,985) 12,446
Provision for income taxes (4,561) 4,690
--------- ---------
(Loss) earnings from continuing operations (8,424) 7,756
Income from discontinued operations, net of
income taxes of $1,227 1,602
--------- ---------
Net (loss) earnings $ (8,424) $ 9,358
========= =========
Earnings per share of common stock:
Basic:
(Loss) earnings from continuing operations $ (0.29) $ 0.26
Earnings from discontinued operations - 0.05
--------- ---------
Net (loss) earnings $ (0.29) $ 0.31
========= =========
Diluted:
(Loss) earnings from continuing operations $ (0.29) $ 0.25
Earnings from discontinued operations - 0.05
--------- ---------
Net (loss) earnings $ (0.29) $ 0.30
========= =========
Weighted average number of common
shares outstanding 28,698 30,376
Adjusted weighted average number of common
shares outstanding 28,700 30,702
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Year to Date (39 Weeks) Ended
-------------------------------------------------------------------------------------------
(In thousands, except per share data)
October 28, October 30,
2000 1999
-------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Net sales $ 2,383,325 $ 2,020,978
Licensed department rentals and other income 9,794 9,762
------------ --------------
2,393,119 2,030,740
Costs and expenses:
Cost of sales 1,783,409 1,512,705
Selling, general and administrative expenses 487,647 398,796
Special charges 7,233 4,213
Depreciation and amortization expenses 69,112 55,351
------------ --------------
2,347,401 1,971,065
Income from operations 45,718 59,675
Interest expense - net (47,636) (34,875)
------------ --------------
(Loss) earnings from continuing operations before
income taxes (1,918) 24,800
Provision for income taxes 789 9,290
------------ --------------
(Loss) earnings from continuing operations (2,707) 15,510
Discontinued operations:
Income from discontinued operations, net of
income taxes of $1,201 and $4,632, respectively 1,567 6,252
Gain on sale of discontinued business, net of
income taxes of $19,024 and $22,482, respectively 29,407 34,754
------------ --------------
Earnings before extraordinary item 28,267 56,516
Extraordinary (loss) on retirement of debt,
net of income taxes of $2,443 (3,776)
------------ --------------
Net earnings $ 28,267 $ 52,740
============ ==============
Earnings per share of common stock:
Basic:
(Loss) earnings from continuing operations $ (0.09) $ 0.56
Earnings from discontinued operations 0.05 0.23
Gain on sale of discontinued business 1.01 1.25
Extraordinary (loss) on retirement of debt - (0.14)
------------ --------------
Net earnings $ 0.97 $ 1.90
============ ==============
Diluted:
(Loss) earnings from continuing operations $ (0.09) $ 0.55
Earnings from discontinued operations 0.05 0.22
Gain on sale of discontinued business 1.01 1.23
Extraordinary (loss) on retirement of debt - (0.13)
------------ --------------
Net earnings $ 0.97 $ 1.87
============ ==============
Weighted average number of common
shares outstanding 29,119 27,775
Adjusted weighted average number of common
shares outstanding 29,175 28,197
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Third Quarter as of Fiscal Year End
--------------------------------------------------------------------------------------------------------------------
(In thousands)
October 28, October 30, January 29,
ASSETS 2000 1999 2000
--------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 26,607 $ 19,891 $ 17,195
Receivables, less allowance for losses of
$5,503, $5,747 and $5,613, respectively 63,388 54,454 56,463
Merchandise inventories 926,753 778,192 659,451
Other current assets 12,483 15,987 13,772
Net assets of discontinued operations 101,618 104,619
------------ ------------ -------------
Total current assets 1,029,231 970,142 851,500
Other assets and deferred charges 19,221 11,014 16,396
Intangible assets - net 214,384 205,188 204,224
Property and equipment at cost:
Land 141,379 130,384 135,591
Buildings 673,119 572,702 572,761
Equipment 573,206 471,265 500,484
Leasehold improvements 97,745 88,153 90,333
Property under construction 25,932 33,094 54,759
Property under capital leases 139,602 104,200 103,248
------------ ------------ -------------
1,650,983 1,399,798 1,457,176
Less accumulated depreciation and amortization:
Property and equipment 607,332 528,396 547,109
Property under capital leases 34,088 29,604 29,346
------------ ------------ -------------
Net property and equipment 1,009,563 841,798 880,721
------------ ------------ -------------
Total assets $ 2,272,399 $ 2,028,142 $ 1,952,841
============ ============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------
Current liabilities:
Short-term debt $ 439,000 $ 325,000 $ 245,000
Accounts payable - trade 386,444 345,440 308,081
Accrued compensation and related taxes 44,900 47,609 50,054
Accrued other liabilities 122,894 132,494 115,582
Accrued income and other taxes 37,660 17,128 20,666
Current portion of long-term obligations 6,409 4,979 5,590
------------ ------------ -------------
Total current liabilities 1,037,307 872,650 744,973
Long-term obligations, less current portion 486,745 444,331 451,078
Deferred income taxes 42,534 48,688 62,288
Shareholders' equity:
Common stock 306 304 304
Additional paid-in capital 384,563 381,361 381,354
Retained earnings 361,194 283,383 332,872
Less treasury stock (40,250) (2,575) (20,028)
------------ ------------ -------------
Total shareholders' equity 705,813 662,473 694,502
------------ ------------ -------------
Total liabilities and shareholders' equity $ 2,272,399 $ 2,028,142 $ 1,952,841
============ ============ =============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Year to Date (39 weeks) Ended
----------------------------------------------------------------------------------------------------
(In thousands)
October 28, October 30,
2000 1999
----------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 28,267 $ 52,740
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Depreciation and amortization 69,112 55,351
Provision for losses on receivables 343 181
Loss (gain) on the sale of property and equipment 15 (1,836)
(Gain) on sale of ProVantage stock (48,431) (57,236)
Deferred income taxes (11,643) 14,777
Extraordinary loss on early extinguishment of debt,
net of tax benefit 3,776
Change in assets and liabilities (excluding effects of
business acquisitions):
Receivables (7,267) (16,022)
Merchandise inventories (271,818) (175,076)
Other current assets (6,751) (3,921)
Net assets of discontinued operations 9,669 (37,575)
Other assets and intangibles (18,666) 5,905
Accounts payable 78,319 65,924
Accrued liabilities 20,167 (31,141)
----------------------------------------------------------------------------------------------------
Net cash (used in) operating activities (158,684) (124,153)
----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Payments for property and equipment (151,974) (75,441)
Proceeds from the sale of property and equipment 2,801 4,357
Proceeds from the sale of ProVantage stock 143,381 106,431
Business acquisitions, net of cash acquired (2,070) (94,033)
----------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (7,862) (58,686)
----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Change in short-term debt 194,000 230,708
Change in common stock from stock options 2,892 3,828
Change in common stock from public offering 147,337
Purchase of treasury stock (20,222) (2,575)
Retirement of debt and capital leases (712) (206,785)
----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 175,958 172,513
----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 9,412 (10,326)
Cash and cash equivalents at beginning of period 17,195 30,217
----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 26,607 $ 19,891
====================================================================================================
Supplemental cash flow information:
Noncash investing and financial activities -
Capital lease obligations incurred $ 36,938
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries
------------------------------------------------------------------------------------------------------------------------------
(In thousands) (UNAUDITED)
Common Stock Treasury Stock
----------------------- Additional --------------------------
Paid-in Retained
Shares Amount Capital Earnings Shares Amount
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 29,
2000 30,400 $ 304 $ 381,354 $ 332,872 (816) $ (20,028)
Net earnings 28,267
Sale of common stock under
option plans 203 2 2,890
Income tax benefit related to
stock options 319
Restricted stock expense 55
Purchase of treasury stock (1,088) (20,222)
--------------------------------------------------------------------------------------
BALANCES AT OCTOBER 28,
2000 30,603 $ 306 $ 384,563 $ 361,194 (1,904) $ (40,250)
======================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Accounting Policies:
The Company's fiscal 1999 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.
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 $32.9 million, $38.6 million, and $28.9 million higher at October 28, 2000,
October 30, 1999 and January 29, 2000, 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.
Acquisitions:
On July 6, 1999, the Company acquired all of the outstanding voting and
nonvoting common stock of Pamida Holdings Corporation ("Pamida") for $94.0
million in cash, $285.8 million in assumed debt and $138.6 million in assumed
trade and other accrued liabilities. The Company utilized cash from its
operations to fund this acquisition.
On June 29, 2000, the Company acquired all of the outstanding stock of P. M.
Place Stores ("Places") for $2.1 million in cash and approximately $28.8 million
in assumed debt and accrued liabilities. Places was headquartered in Bethany,
Missouri and operated 49 discount stores in Missouri, Iowa, Kansas and Illinois.
After liquidating the Places stores' inventories and a brief remodeling period,
48 of the stores reopened during the third quarter under the Pamida store
concept. The Bethany, Missouri headquarters and one store location were closed.
The transaction is not expected to have a material impact on the Company's
current fiscal year results.
These acquisitions were accounted for under the purchase method of accounting
and the results of operations since the dates of acquisition have been included
in the accompanying condensed consolidated financial statements.
8
<PAGE> 9
Discontinued Operations
On June 16, 2000, the Company completed the sale of its 11,710,000 shares of
ProVantage Health Services, Inc. ("ProVantage") common stock for approximately
$143.4 million in cash on a pre-tax basis, or $12.25 per share. The sale was
made pursuant to a tender offer to purchase all of the outstanding shares of
common stock of ProVantage at $12.25 per share in cash by Merck & Co., Inc.
("Merck") and PV Acquisition Corp., an indirect wholly-owned subsidiary of
Merck.
The results of operations of ProVantage have been presented as discontinued
operations. Accordingly, previously reported statement of earnings information
has been reclassified to reflect this presentation. Net sales of ProVantage for
the 13 weeks ended October 30, 1999 were $225.9 million. Net sales of ProVantage
for the 20 weeks ended June 17, 2000 and the 39 weeks ended October 30, 1999
were $420.9 million and $655.7 million, respectively.
Assets and liabilities related to ProVantage have been presented as net assets
from discontinued operations. Accordingly, previously reported balance sheet and
cash flow information for October 30, 1999 and January 29, 2000 has been
reclassified to reflect this presentation.
Business Segment Information:
The Company's reportable segments are based on the Company's strategic business
operating units, and include a ShopKo Retail segment (which includes ShopKo
stores general merchandise, retail pharmacy and retail optical operations) and a
Pamida Retail segment (which includes Pamida stores general merchandise and
retail pharmacy operations).
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in the Company's fiscal 1999 Annual
Report on Form 10-K. The Company evaluates performance based on operating
earnings of the respective business segments.
9
<PAGE> 10
Summarized financial information concerning the Company's reportable segments is
shown in the following table (in thousands):
<TABLE>
<CAPTION>
Third Quarter Ended Year to Date
------------------------------- ---------------------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales
ShopKo Retail $ 627,569 $ 626,780 $ 1,835,721 $ 1,786,804
Pamida Retail 186,622 179,252 547,604 234,174
-------------------------------------------------------------------------------------------------------
Total net sales $ 814,191 $ 806,032 $ 2,383,325 $ 2,020,978
=======================================================================================================
Income from operations
ShopKo Retail $ 8,815 $ 28,392 $ 56,966 $ 72,342
Pamida Retail 4,139 5,574 12,530 5,790
Corporate (9,058) (7,882) (23,778) (18,457)
-------------------------------------------------------------------------------------------------------
Income from operations $ 3,896 $ 26,084 $ 45,718 $ 59,675
========================================================================================================
</TABLE>
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 three quarters of fiscal 2000 and fiscal 1999.
Statement of Registrant:
The data presented herein is unaudited, but in the opinion of management,
includes all adjustments (which consist only of normal recurring accruals)
necessary for a fair presentation of the consolidated financial position of the
Company and its subsidiaries at October 28, 2000 and October 30, 1999 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.
10
<PAGE> 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth items from the Company's unaudited condensed
consolidated financial statements for the third quarter and the first three
quarters of fiscal 2000 and 1999 as a percentage of net sales:
<TABLE>
<CAPTION>
Third Quarter Year to Date
------------- ------------
Fiscal Fiscal Fiscal Fiscal
2000 1999 2000 1999
----------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Licensed department rentals and other
income 0.4 0.4 0.4 0.5
----- ----- ----- -----
100.4 100.4 100.4 100.5
Costs and expenses
Cost of sales 76.1 75.1 74.8 74.9
Selling, general and administrative
expenses 20.5 19.0 20.5 19.7
Special charges 0.3 0.4 0.3 0.2
Depreciation and amortization expenses 3.0 2.7 2.9 2.7
----- ----- ----- -----
99.9 97.2 98.5 97.5
Income from operations 0.5 3.2 1.9 3.0
Interest expense - net (2.1) (1.7) (2.0) (1.7)
----- ----- ----- -----
(Loss) earnings from continuing operations
before income taxes (1.6) 1.5 (0.1) 1.3
Provision for income taxes (0.6) 0.5 0.0 0.5
----- ----- ----- -----
(Loss) earnings from continuing operations (1.0) 1.0 (0.1) 0.8
Discontinued operations:
Income from discontinued operations, net of
income taxes 0.0 0.2 0.1 0.3
Gain on sale of discontinued business, net
of income taxes 0.0 0.0 1.2 1.7
----- ----- ----- -----
Earnings before extraordinary item (1.0) 1.2 1.2 2.8
Extraordinary (loss) on retirement of
debt, net of income taxes 0.0 0.0 0.0 (0.2)
----- ----- ----- -----
Net (loss) earnings (1.0)% 1.2 % 1.2 % 2.6 %
===== ===== ===== =====
</TABLE>
11
<PAGE> 12
On June 16, 2000, the Company completed the sale of its 11,710,000 shares of
ProVantage Health Services, Inc. ("ProVantage") common stock for approximately
$143.4 million in cash on a pre-tax basis, or $12.25 per share to Merck & Co.,
Inc. ("Merck") and PV Acquisition Corp., an indirect wholly-owned subsidiary of
Merck. The Company's financial results reflect the operations of ProVantage as
discontinued operations for all periods presented.
The Company has two business segments: a ShopKo Retail segment (which includes
ShopKo stores general merchandise, retail pharmacy and retail optical
operations) and a Pamida Retail segment (which includes Pamida stores general
merchandise and retail pharmacy operations).
The following tables set forth items from the Company's business segments as
percentages of net sales:
<TABLE>
<CAPTION>
Third Quarter Year to Date
------------- ------------
Fiscal Fiscal Fiscal Fiscal
2000 1999 2000 1999
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SHOPKO RETAIL
Revenues
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Licensed departmental rentals and other
income 0.5 0.5 0.5 0.5
---------- --------- --------- ---------
100.5 100.5 100.5 100.5
Costs and expenses
Cost of sales 76.8 75.2 75.1 74.8
Selling, general and administrative
expenses 19.4 18.2 19.4 19.0
Depreciation and amortization expenses 2.9 2.6 2.9 2.7
---------- --------- --------- ---------
99.1 96.0 97.4 96.5
Income from operations 1.4 % 4.5 % 3.1 % 4.0 %
PAMIDA RETAIL
Revenues
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Licensed departmental rentals and other
income 0.3 0.3 0.2 0.3
---------- --------- --------- ---------
100.3 100.3 100.2 100.3
Costs and expenses
Cost of sales 73.8 74.8 73.8 75.0
Selling, general and administrative
expenses 21.1 19.2 21.3 19.5
Depreciation and amortization expenses 3.2 3.2 2.8 3.3
---------- --------- --------- ---------
98.1 97.2 97.9 97.8
Income from operations 2.2 % 3.1 % 2.3 % 2.5 %
</TABLE>
12
<PAGE> 13
Net Sales:
The following table presents the Company's consolidated net sales for the third
quarter and the first three quarters of fiscal 2000 and fiscal 1999:
<TABLE>
<CAPTION>
% INCREASE/
THIRD QUARTER (DECREASE)
------------- ----------
FISCAL FISCAL
2000 1999 TOTAL COMP
------ ---- ----- ----
<S> <C> <C> <C> <C>
ShopKo Retail $627.6 $626.8 0.1 (0.9)
Pamida Retail 186.6 179.2 N/A
------ ------ ---
Consolidated $814.2 $806.0 1.0
====== ====== ===
<CAPTION>
YEAR TO DATE
------------
<S> <C> <C> <C> <C>
ShopKo Retail $1,835.7 $1,786.8 2.7 1.0
Pamida Retail 547.6 234.2 N/A
-------- -------- ----
Consolidated $2,383.3 $2,021.0 17.9
======== ======== ====
</TABLE>
The 0.9% decrease in third quarter ShopKo Retail comparable store sales are
derived from the following categories: Retail Health increased 11.2%,
Hardlines/Home decreased 3.8% and Apparel decreased 5.0%. The 1.0% increase in
the first three quarters of retail comparable store sales are derived from the
following categories: Retail Health increased 11.5%, Hardlines/Home decreased
1.6% and Apparel decreased 2.6%. The store sales changes exclude layaway sales
in both years. The Company believes that third quarter and year to date ShopKo
Retail comparable store sales have been adversely affected by a difficult
economic environment, especially in the core Midwest region, and to a lesser
degree, increased competition from new market entries. Changes in retail
comparable store sales are based upon those stores which were open for the
entire preceding fiscal year.
During the first quarter, the Company opened three new ShopKo stores and three
new Pamida stores and closed one Pamida store. The ShopKo store in Plover,
Wisconsin is a relocation from Stevens Point, Wisconsin. During the second
quarter, the Company opened 12 new Pamida stores. The Company opened 2 new
ShopKo stores and 60 new Pamida stores during the third quarter. Forty-eight of
the 60 new Pamida stores were remodeled Places stores. All of the new ShopKo
stores include in-store pharmacies and optical centers and 4 of the new Pamida
stores include in-store pharmacies.
13
<PAGE> 14
On July 6, 1999, the Company acquired the retail chain Pamida, Inc. ("Pamida"),
which operated 152 Pamida stores in 15 Midwest, North Central and Rocky Mountain
states. Since the acquisition, 82 additional Pamida stores were opened and 3
Pamida stores were closed, increasing the number of Pamida stores in operation
from 152 to 231 stores as of October 2000. Pamida stores include in-store
pharmacies in 65 of their stores. Pamida Retail sales are included in net sales
since their acquisition but they are not included in retail comparable store
sales since they were not owned by ShopKo for the entire preceding fiscal year.
On June 29, 2000, the Company acquired the retail chain P. M. Place Stores
("Places") which operated 49 discount stores in Missouri, Iowa, Kansas and
Illinois. Forty-eight of these stores were reopened in October 2000 under the
Pamida store concept and one store located in an existing Pamida location was
closed. The Places store inventories were liquidated by a third party and the
related sales were not included in net sales.
Gross Margin:
The following table sets forth gross margin as a percent of net sales:
<TABLE>
<CAPTION>
Third Quarter
ShopKo Retail Pamida Retail Consolidated
-------------- ------------- ------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross margin percent 23.2 % 24.8 % 26.2 % 25.2 % 23.9 % 24.9 %
Gross margin percent prior to
LIFO charge 23.4 % 25.0 % 26.1 % 25.4 % 24.0 % 25.1 %
<CAPTION>
Year to Date
------------
<S> <C> <C> <C> <C> <C> <C>
Gross margin percent 24.9 % 25.2 % 26.2 % 25.0 % 25.2 % 25.1 %
Gross margin percent prior to
LIFO charge 25.1 % 25.4 % 26.3 % 25.2 % 25.3 % 25.4 %
</TABLE>
Consolidated gross margin, as reclassified, as a percent of sales for the third
quarter was 23.9 percent compared to 24.9 percent last year. ShopKo Retail gross
margin as a percent of sales was 23.2 percent compared with 24.8 percent last
year. This decrease is primarily attributable to reduced gross margin rates on
regular-priced merchandise, a shift in the mix from regular- to sale-priced
merchandise and increased third party sales in retail pharmacy. Pamida Retail
gross margin as a percent of sales was 26.2 percent for the quarter compared
with 25.2 percent last year. This increase is due to the elimination of the
highly promotional ad events reflected in prior year margins, partly offset by
inefficiencies in the recently expanded distribution center in Indiana.
14
<PAGE> 15
Consolidated gross margin, as reclassified, as a percent of sales for the first
three quarters ended October 28, 2000 was 25.2 percent compared with 25.1
percent for the same period last year. The ShopKo Retail gross margin as a
percent of sales for the same period was 24.9 percent compared with 25.2 percent
last year. This decrease is primarily attributable to increased third party
sales in retail pharmacy. Pamida Retail gross margin as a percent of sales was
26.2 percent for the 39 weeks ended October 28, 2000 compared to 25.0 percent
last year for the 17 weeks ended October 30, 1999.
Selling, General and Administrative Expenses:
Consolidated selling, general and administrative expenses, as reclassified, as a
percent of sales for the third quarter were 20.5 percent compared with 19.0
percent last year. ShopKo Retail selling, general and administrative expenses as
a percent of sales for the quarter were 19.4 percent compared to 18.2 percent
last year due primarily to increased store labor costs and costs related to new
stores. Pamida Retail selling, general and administrative expenses were 21.1
percent of sales for the quarter compared to 19.2 percent last year. This
increase is due primarily to deleveraging of store payroll and fixed costs
against decreased sales volume in stores that were open both this year and last
year.
Consolidated selling, general and administrative expenses, as reclassified, as a
percent of sales for the first three quarters ended October 28, 2000 increased
to 20.5 percent from 19.7 percent last year. ShopKo Retail selling, general and
administrative expenses as a percent of sales were 19.4 percent compared to 19.0
percent last year. This increase is due primarily to increased store labor
costs. Pamida Retail selling, general and administrative expenses as a percent
of sales were 21.3 percent for the 39 weeks ended October 28, 2000 compared to
19.5 percent last year for the 17 weeks ended October 30, 1999.
Special Charges:
During the third quarter ended October 28, 2000, the Company incurred $3.1
million in special pre-tax costs relating primarily to Pamida's conversion of
the Places locations. The Company incurred $7.2 million in special pre-tax costs
relating to the Pamida acquisition and Pamida's conversion of the Places
locations during the first three quarters ended October 28, 2000. During the
remainder of the current fiscal year, the Company expects to incur additional
special charges of approximately $0.5 to $1.0 million for these purposes.
Interest Expense - Net:
Interest expense, as reclassified, for the third quarter was $16.9 million
compared to $13.6 million last year. This increase is primarily due to
additional debt as a result of increased capital expenditures, funding the
Places acquisition and funding working capital needs of new stores.
Interest expense, as reclassified, for the first three quarters ended October
28, 2000 was $47.6 million compared to $34.9 million last year. This increase is
primarily due to funding the Pamida acquisition, increased capital expenditures
and working capital needs of new stores.
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<PAGE> 16
Income Taxes:
The effective tax rate for the third quarter was 35.1 percent compared with 37.7
percent last year. The effective tax rate for the first three quarters was 41.1
percent compared with 37.5 percent last year. This change is mainly due to
nondeductible goodwill amortization of $1.4 million in the third quarter and
$4.0 million in the first three quarters associated with the Pamida and Places
acquisitions.
Gain on Sale of Discontinued Business:
In the second quarter of fiscal 2000, as a result of ProVantage being sold to
Merck, the Company recognized a gain, net of income taxes, of $29.4 million. As
a result of the initial public offering of ProVantage in the second quarter of
fiscal 1999, the Company recognized a gain, net of income taxes, of $34.8
million.
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. With regard to cash generated from operations, earnings before
interest, taxes, depreciation and amortization were $114.8 million for the first
three quarters of fiscal 2000 compared to $115.0 million for the same period
last year.
As of October 28, 2000, the Company had $342.3 million of Senior Unsecured Notes
outstanding. These Senior Unsecured Notes have maturity dates ranging from March
2002 to March 2022, with approximately $242.6 million principal amount of Senior
Unsecured Notes maturing between March 2002 and November 2004. A more detailed
description of these notes is contained in Note D to the notes to the
consolidated financial statements in the Company's fiscal 1999 Annual Report on
Form 10-K.
In addition to the Senior Unsecured Notes, the Company had $439.0 million
outstanding under its bank credit facilities as of the end of the third quarter
of fiscal 2000 compared to $325.0 million outstanding as of the end of the third
quarter of fiscal 1999. This increase is primarily due to additional debt as a
result of increased capital expenditures and funding working capital needs for
new stores. A brief description of these credit facilities, including the size
of the facility, the principal amount borrowed under the facility at the end of
the Company's third quarter, and the scheduled maturity of the facility, is set
forth below ($ in millions):
16
<PAGE> 17
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING AS OF
OCTOBER 28,
DESCRIPTION 2000 AVAILABILITY / MATURITY DATE(S)
---------------------------------------- -------------------------------- --------------------------------------------
<S> <C> <C>
Available funding for this facility
decreases by $25.0 on each of the
$100.0 Bankers following dates: December 31, 2000,
Acceptance Note $100.0 January 31, 2001, March 31, 2001 and April
30, 2001.
---------------------------------------- -------------------------------- --------------------------------------------
---------------------------------------- -------------------------------- --------------------------------------------
$185.0 - 364 day revolving credit
facility $143.0 Maturity date - August 28, 2001
---------------------------------------- -------------------------------- --------------------------------------------
---------------------------------------- -------------------------------- --------------------------------------------
$200.0 - multi year revolving credit
facility $196.0 Maturity date - January 31, 2002
---------------------------------------- -------------------------------- --------------------------------------------
</TABLE>
As of October 28, 2000, the Company was in compliance with the covenants
contained in the credit agreements for the facilities described above.
The Company also issues letters of credit during the ordinary course of business
as required by foreign vendors. As of October 28, 2000 and October 30, 1999, the
Company had issued letters of credit of $50.1 and $27.7 million, respectively.
The Company also has various other long term obligations in the form of
mortgages and capital lease obligations primarily for property and equipment.
The Company anticipates refinancing all or a major portion of the credit
facilities set forth above within the first half of fiscal 2001. While there can
be no assurance that the Company will be able to refinance its credit
facilities, the Company believes that based on preliminary discussions with
potential lenders that adequate sources of financing will be available. The
terms of any new facilities may be less favorable than the Company's current
facilities with regard to interest rates, collateral, financial covenants and
other terms. If the Company is unable to refinance its existing credit
facilities on a timely basis, or if the Company's new credit facilities impose
significantly higher borrowing costs on the Company, the Company's results of
operations and financial condition could be materially adversely affected.
17
<PAGE> 18
The Company's principal use of cash is for the purchase of property, equipment
and systems technology. The Company spent $152.0 million on capital expenditures
during the first three quarters of fiscal 2000, compared to $75.4 million on
capital expenditures for the same period last year. ProVantage's capital
expenditures are excluded for both years. The Company's total capital
expenditures for the fiscal year ending February 3, 2001 are anticipated to
approximate $190.0 to $210.0 million, which excludes ProVantage's capital
expenditures incurred prior to the sale of the Company's interests in
ProVantage. The expenditures relate to construction of the new ShopKo and Pamida
stores; expansion and building of ShopKo distribution centers; supporting the
existing retail business for merchandise initiatives and ongoing store equipment
and fixturing replacements; and continuing investments in systems technology. At
the present time, the Company has paused its pursuit of growth of its retail
store businesses through new store construction or acquisition of existing
retail stores or businesses and there are no plans to open any new ShopKo or
Pamida stores during fiscal 2001. The Company currently expects capital
expenditures for the year ending February 1, 2002 to be approximately $90.0
million; however, these plans are currently under review and subject to change.
Such plans may be reviewed and revised from time to time in light of changing
conditions.
The Company opened one new Pamida store during November 2000.
On June 16, 2000, the Company completed the sale of its 11,710,000 shares of
ProVantage common stock for approximately $143.4 million in cash on a pre-tax
basis, or $12.25 per share to Merck.
Stock Repurchase Program:
On January 12, 2000, the Company announced that the Board of Directors had
authorized the repurchase of another $20.0 million of the Company's Common Stock
which authorization was subsequently increased by $0.2 million. As of October
28, 2000, 1,088,100 shares of Common Stock had been repurchased for
approximately $20.2 million 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. During the first
quarter of fiscal 1999, the Company repurchased approximately $57.1 million of
the Senior Notes, resulting in an extraordinary loss of $3.8 million, net of
income tax benefit of $2.4 million.
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.
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<PAGE> 19
Forward-Looking Statements:
Item 2 of this Form 10-Q, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward-looking statements within
the meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements include, without limitation,
statements regarding earnings, growth and capital expenditure plans, financing
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 29, 2000 or as may be described from time to time in the Company's
subsequent SEC filings.
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 29, 2000. There have been no material changes in the
Company's quantitative or qualitative exposure to market risk since the end of
fiscal 1999.
19
<PAGE> 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported in the Company's 10-Q report for the quarter ended July
29, 2000, the Company has been added as a defendant in a purported class action
filed May 8, 2000 in the Circuit Court of the State of Wisconsin for Waukesha
County by James Jorgensen (Case No. 00CV-938), an alleged stockholder of
ProVantage Health Services, Inc. ("ProVantage") (the "Action"). The original
complaint evidencing the Action (the "Original Complaint") named ProVantage and
the directors of ProVantage as defendants (the "Original Defendants") and
alleged, among other things, that (1) ProVantage's directors breached their
respective fiduciary duties in connection with the sale of ProVantage to Merck &
Co., Inc. ("Merck"), and (2) the proposed price for ProVantage's common stock
did not represent the true value of ProVantage.
On or about August 18, 2000, an amended complaint (the "Amended Complaint") was
filed in the Action which, among other things, added the Company as a defendant.
The Amended Complaint alleges, among other things, that the Company aided and
abetted the Original Defendants in breaching their fiduciary duties. The Amended
Complaint requests that the Circuit Court, among other things, declare that the
Action is a proper class action, rescind the tender offer/merger pursuant to
which ProVantage was purchased by Merck, and award compensatory monetary
damages, including reasonable attorneys' and experts' fees.
The Company believes the Action to be without merit and the Company intends to
contest all allegations set forth in the Complaint. There can be no assurances,
however, with regard to the outcome of the Action.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10 Letter agreements for consulting services between Girard
Financial Consulting and the Registrant dated
September 29, 2000 and December 4, 2000.
12 Statements Re Computation of Ratios.
27.1 Financial Data Schedule (third quarter ended
October 28, 2000).
27.2 Financial Data Schedule (fiscal year ended
January 29, 2000).
27.3 Financial Data Schedule (third quarter ended
October 30, 1999).
(b) Reports on Form 8-K.
The Company filed Current Reports on Form 8-K in the third quarter of
fiscal 2000 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: December 11, 2000 By: /s/ William J. Podany
-------------------------------------------
William J. Podany
Chairman, President and Chief Executive Officer
(Duly Authorized Officer of Registrant)
Date: December 11, 2000 By: /s/ Brian W. Bender
-------------------------------------------
Brian W. Bender
Chief Financial Officer
(Chief Financial Officer
of Registrant)
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<PAGE> 22
EXHIBIT INDEX
SHOPKO STORES, INC.
10-Q REPORT
Exhibit Sequential
Number Exhibit Page Number
10 Letter agreements for consulting services
between Girard Financial Consulting and the
Registrant dated September 29, 2000 and
December 4, 2000.
12 Statements Re Computation of Ratios.
27.1 Financial Data Schedule (third quarter ended
October 28, 2000).
27.2 Financial Data Schedule (fiscal year ended
January 29, 2000).
27.3 Financial Data Schedule (third quarter ended
October 30, 1999).
22
