<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 July 29, 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 August 14, 2000 is as follows:
<TABLE>
<CAPTION>
Title of Each Class Shares Outstanding
------------------- ------------------
<S> <C>
Common Shares 28,696,530
Exhibit Index Page 1 of Page 49
on Page 22
</TABLE>
1
<PAGE> 2
SHOPKO STORES, INC.
FORM 10-Q
FOR THE 13 WEEKS AND 26 WEEKS ENDED JULY 29, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I Item 1 - Financial Statements
Condensed Consolidated Statements of Earnings for the 3
13 weeks ended July 29, 2000 and July 31, 1999
Condensed Consolidated Statements of Earnings for the 4
26 weeks ended July 29, 2000 and July 31, 1999
Condensed Consolidated Balance Sheets as of July 29, 5
2000, July 31, 1999 and January 29, 2000
Condensed Consolidated Statements of Cash Flows for the 6
26 weeks ended July 29, 2000 and July 31, 1999
Condensed Consolidated Statement of Shareholders' 7
Equity for the 26 weeks ended July 29, 2000
Notes to Condensed Consolidated Financial Statements 8-10
Item 2 - Management's Discussion and Analysis of Financial 11-18
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosure About 18
Market Risk
Part II Item 1 - Legal Proceedings 19
Item 4 - Submission of Matters to Vote of Security Holders 19-20
Item 6 - Exhibits and Reports on Form 8-K 20-21
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 Second Quarter (13 Weeks) Ended
----------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
July 29, July 31, % Increase/
2000 1999 (Decrease)
----------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Net sales $ 819,543 $ 665,486 22.6
Licensed department rentals and other income 3,321 3,327
------------- --------------
822,864 668,813 23.0
Costs and expenses:
Cost of sales 606,126 496,179
Selling, general and administrative expenses 165,623 133,110
Special charges 2,872 841
Depreciation and amortization expenses 22,789 17,958
------------- --------------
797,410 648,088 23.0
Income from operations 25,454 20,725 22.8
Interest expense - net (16,172) (11,372)
------------- --------------
Earnings from continuing operations before
income taxes 9,282 9,353 (0.8)
Provision for income taxes 4,127 3,559
------------- --------------
Earnings from continuing operations 5,155 5,794 (11.0)
Discontinued operations:
Income from discontinued operations, net of income
taxes of $245 and $1,655, respectively 333 2,297
Gain on sale of discontinued business, net of income
taxes of $19,024 and $22,482, respectively 29,407 34,754
------------- --------------
Net earnings $ 34,895 $ 42,845 (18.6)
============= ==============
Earnings per share of common stock:
Basic:
Earnings from continuing operations $ 0.18 $ 0.22
Earnings from discontinued operations 0.01 0.09
Gain on sale of discontinued business 1.01 1.29
------------- --------------
Net earnings $ 1.20 $ 1.60
============= ==============
Diluted:
Earnings from continuing operations $ 0.18 $ 0.21
Earnings from discontinued operations 0.01 0.09
Gain on sale of discontinued business 1.01 1.27
------------- --------------
Net earnings $ 1.20 $ 1.57
============= ==============
Weighted average number of common
shares outstanding 29,075 26,810
Adjusted weighted average number of common
shares outstanding 29,139 27,299
</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 (26 Weeks) Ended
----------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
July 29, July 31, % Increase/
2000 1999 (Decrease)
----------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Net sales $ 1,569,134 $ 1,214,946 29.6
Licensed department rentals and other income 6,406 6,231
------------- --------------
1,575,540 1,221,177 29.0
Costs and expenses:
Cost of sales 1,163,909 907,198
Selling, general and administrative expenses 320,899 246,002
Special charges 4,112 841
Depreciation and amortization expenses 44,798 33,545
------------- --------------
1,533,718 1,187,586 29.1
Income from operations 41,822 33,591 24.5
Interest expense - net (30,755) (21,237)
------------- --------------
Earnings from continuing operations before
income taxes 11,067 12,354 (10.4)
Provision for income taxes 5,350 4,600
------------- --------------
Earnings from continuing operations 5,717 7,754 (26.3)
Discontinued operations:
Income from discontinued operations, net of income
taxes of $1,201 and $3,405, respectively 1,567 4,650
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 36,691 47,158 (22.2)
Extraordinary (loss) on retirement of debt,
net of income taxes of $2,443 (3,776)
------------- --------------
Net earnings $ 36,691 $ 43,382 (15.4)
============= ==============
Earnings per share of common stock:
Basic:
Earnings from continuing operations $ 0.20 $ 0.29
Earnings from discontinued operations 0.05 0.18
Gain on sale of discontinued business 1.00 1.31
Extraordinary (loss) on retirement of debt - (0.14)
------------- --------------
Net earnings $ 1.25 $ 1.64
============= ==============
Diluted:
Earnings from continuing operations $ 0.20 $ 0.29
Earnings from discontinued operations 0.05 0.17
Gain on sale of discontinued business 1.00 1.29
Extraordinary (loss) on retirement of debt - (0.14)
------------- --------------
Net earnings $ 1.25 $ 1.61
============= ==============
Weighted average number of common
shares outstanding 29,330 26,475
Adjusted weighted average number of common
shares outstanding 29,412 26,945
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Second Quarter as of Fiscal Year End
--------------------------------------------------------------------------------------------------------------------
(In thousands)
July 29, July 31, January 29,
ASSETS 2000 1999 2000
--------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 23,021 $ 34,575 $ 26,916
Receivables, less allowance for losses of
$5,507, $7,730 and $6,826, respectively 103,490 150,960 179,140
Merchandise inventories 723,364 657,157 663,164
Other current assets 10,538 13,283 16,042
------------- ------------- --------------
Total current assets 860,413 855,975 885,262
Other assets and deferred charges 17,949 36,538 16,396
Intangible assets - net 212,843 233,445 272,193
Property and equipment at cost:
Land 138,710 132,241 135,591
Buildings 655,049 584,970 572,761
Equipment 545,256 487,162 539,399
Leasehold improvements 100,848 86,051 91,242
Property under construction 14,717 29,673 54,759
Property under capital leases 119,027 105,793 103,248
------------- ------------- --------------
1,573,607 1,425,890 1,497,000
Less accumulated depreciation and amortization:
Property and equipment 586,725 520,107 558,216
Property under capital leases 32,380 30,290 29,346
------------- ------------- --------------
Net property and equipment 954,502 875,493 909,438
------------- ------------- --------------
Total assets $ 2,045,707 $ 2,001,451 $ 2,083,289
============= ============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------
Current liabilities:
Short-term debt $ 327,671 $ 84,751 $ 245,000
Accounts payable - trade 286,622 296,883 281,291
Accrued compensation and related taxes 46,495 46,453 51,548
Accrued other liabilities 110,072 197,945 211,049
Accrued income and other taxes 43,645 24,065 18,970
Current portion of long-term obligations 7,101 146,127 6,416
------------- ------------- --------------
Total current liabilities 821,606 796,224 814,274
Long-term obligations, less current portion 467,261 445,113 453,084
Deferred income taxes 42,645 52,142 69,771
Minority interest 52,488 51,658
Shareholders' equity:
Common stock 306 304 304
Additional paid-in capital 384,541 381,201 381,354
Retained earnings 369,598 273,979 332,872
Less treasury stock (40,250) (20,028)
------------- ------------- --------------
Total shareholders' equity 714,195 655,484 694,502
------------- ------------- --------------
Total liabilities and shareholders' equity $ 2,045,707 $ 2,001,451 $ 2,083,289
============= ============= ==============
</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 (26 weeks) Ended
--------------------------------------------------------------------------------------------------------------
(In thousands)
July 29, July 31,
2000 1999
--------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 36,691 $ 43,382
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 44,798 37,736
Provision for losses on receivables 164 427
Loss (gain) on sale of property and equipment 72 (2,201)
(Gain) on sale of ProVantage (48,431) (57,236)
Deferred income taxes (12,557) 19,800
Extraordinary loss on early extinguishment of debt,
net of tax benefit 3,776
Change in assets and liabilities (excluding effects of
business acquisitions):
Receivables (46,976) (24,933)
Merchandise inventories (67,673) (50,920)
Other current assets (3,271) (4,266)
Other assets and intangibles (6,407) (3,440)
Accounts payable (12,480) 36,603
Accrued liabilities 16,488 (33,347)
--------------------------------------------------------------------------------------------------------------
Net cash (used in) operating activities (99,582) (34,619)
--------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Payments for property and equipment (92,855) (53,828)
Proceeds from the sale of property and equipment 1,422 4,529
Proceeds from the sale of ProVantage 143,381 106,431
Business acquisition, net of cash acquired (1,230) (94,033)
--------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 50,718 (36,901)
--------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Change in short-term debt 65,227 (9,567)
Change in common stock from stock options 3,710
Issuance of common stock from public offering 2,871 147,337
Purchase of treasury stock (20,222)
Retirement of debt and capital leases (2,907) (65,604)
--------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 44,969 75,876
--------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (3,895) 4,356
Cash and cash equivalents at beginning of year 26,916 30,219
--------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of second quarter $ 23,021 $ 34,575
==============================================================================================================
Supplemental cash flow information:
Noncash investing and financial activities -
Capital lease obligations incurred $ 16,363
</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 36,691
Sale of common stock
under option plans 201 2 2,869
Income tax benefit related
to stock options 318
Restricted stock expense 35
Purchase of treasury stock (1,088) (20,222)
--------------------------------------------------------------------------------------
BALANCES AT JULY 29, 2000 30,601 $ 306 $ 384,541 $ 369,598 (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 $31.9 million, $36.9 million, and $28.9 million higher at July 29, 2000,
July 31, 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 $3.1 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 are expected to reopen in late September 2000 under the Pamida
store concept. The Bethany, Missouri headquarters and one store location will be
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 restated to reflect this presentation. Net sales of ProVantage for the
7 weeks ended June 17, 2000 and the 13 weeks ended July 31, 1999 were $145.3
million and $214.9 million, respectively. Net sales of ProVantage for the 20
weeks ended June 17, 2000 and the 26 weeks ended July 31, 1999 were $420.9
million and $429.8 million, respectively.
Assets and liabilities related to ProVantage have been removed from the
Condensed Consolidated Balance Sheets at July 29, 2000. ProVantage's assets of
$220.5 million and liabilities of $81.5 million are included in the Condensed
Consolidated Balance Sheets at July 31, 1999. Assets of $257.2 million and
liabilities of $112.2 million related to ProVantage are included in the
Condensed Consolidated Balance Sheets at January 29, 2000.
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>
Second Quarter Ended First Half Ended
------------------------------------ ----------------------------------------
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales
ShopKo Retail $ 624,717 $ 610,564 $ 1,208,152 $ 1,160,024
Pamida Retail 194,826 54,922 360,982 54,922
-------------------------------------------------------------------------------------------------------------------------
Total net sales $ 819,543 $ 665,486 $ 1,569,134 $ 1,214,946
-------------------------------------------------------------------------------------------------------------------------
Income from operations
ShopKo Retail $ 25,322 $ 25,913 $ 48,151 $ 43,950
Pamida Retail 7,975 216 8,391 216
Corporate (7,843) (5,404) (14,720) (10,575)
-------------------------------------------------------------------------------------------------------------------------
Income from operations $ 25,454 $ 20,725 $ 41,822 $ 33,591
-------------------------------------------------------------------------------------------------------------------------
</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 half 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 July 29, 2000 and July 31, 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 second quarter and first half of
fiscal 2000 and 1999 as a percentage of net sales:
<TABLE>
<CAPTION>
Second Quarter First Half
-------------- ----------
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 0.5 0.4 0.5
----------- --------- ---------- ----------
100.4 100.5 100.4 100.5
Costs and expenses
Cost of sales 74.0 74.6 74.2 74.7
Selling, general and administrative
expenses 20.2 20.0 20.4 20.2
Special charges 0.3 0.1 0.3 0.1
Depreciation and amortization expenses 2.8 2.7 2.8 2.7
----------- --------- ---------- ----------
97.3 97.4 97.7 97.7
Income from operations 3.1 3.1 2.7 2.8
Interest expense - net (2.0) (1.7) (2.0) (1.8)
----------- --------- ---------- ----------
Earnings from continuing operations before
income taxes 1.1 1.4 0.7 1.0
Provision for income taxes 0.5 0.5 0.3 0.4
----------- --------- ---------- ----------
Earnings from continuing operations 0.6 0.9 0.4 0.6
Discontinued operations:
Income from discontinued operations, net of
income taxes 0.0 0.3 0.1 0.4
Gain on sale of discontinued business, net
of income taxes 3.6 5.2 1.9 2.9
----------- --------- ---------- ----------
Earnings before extraordinary item 4.2 6.4 2.4 3.9
Extraordinary (loss) on retirement of
debt, net of income taxes 0.0 0.0 0.0 (0.3)
----------- --------- ---------- ----------
Net earnings 4.2 % 6.4 % 2.4 % 3.6 %
=========== ========= ========== ==========
</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>
SHOPKO RETAIL
Second Quarter First Half
-------------- ----------
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 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 74.4 74.5 74.3 74.6
Selling, general and administrative
expenses 19.1 19.2 19.3 19.4
Depreciation and amortization expenses 2.9 2.6 2.9 2.7
----------- ---------- ---------- ----------
96.4 96.3 96.5 96.7
Income from operations 4.1 % 4.2 % 4.0 % 3.8 %
PAMIDA RETAIL
Second Quarter First Half
-------------- ----------
Fiscal Fiscal Fiscal Fiscal
2000 1999 2000 1999
----------- ---------- ---------- ----------
Revenues
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Licensed departmental rentals and other
income 0.2 0.3 0.2 0.3
----------- ---------- ---------- ----------
100.2 100.3 100.2 100.3
Costs and expenses
Cost of sales 72.5 75.6 73.8 75.6
Selling, general and administrative
expenses 21.1 20.6 21.5 20.6
Depreciation and amortization expenses 2.5 3.7 2.6 3.7
----------- ---------- ---------- ----------
96.1 99.9 97.9 99.9
Income from operations 4.1 % 0.4 % 2.3 % 0.4 %
</TABLE>
12
<PAGE> 13
Net Sales:
The following table presents the Company's consolidated net sales for the second
quarter and first half of fiscal 2000 and fiscal 1999:
<TABLE>
<CAPTION>
Second Quarter % Increase
-------------- ----------
Fiscal Fiscal
2000 1999 Total Comp
---- ---- ----- ----
<S> <C> <C> <C> <C>
ShopKo Retail $624.7 $610.6 1.8 1.2
Pamida Retail 194.8 54.9 N/A
----- ---- ---
Consolidated $819.5 $665.5 22.6
====== ====== ====
</TABLE>
<TABLE>
<CAPTION>
First Half % Increase
---------- ----------
Fiscal Fiscal
2000 1999 Total Comp
---- ---- ----- ----
<S> <C> <C> <C> <C>
ShopKo Retail $1,208.1 $1,160.0 4.5 2.0
Pamida Retail 361.0 54.9 N/A
----- ---- ---
Consolidated $1,569.1 $1,214.9 29.6
======== ======== ====
</TABLE>
The 1.2% increase in second quarter ShopKo Retail comparable store sales are
derived from the following categories: Retail Health increased 12.1%,
Hardlines/Home decreased 2.2% and Apparel decreased 2.6%. The 2.0% increase in
first half retail comparable store sales are derived from the following
categories: Retail Health increased 11.6%, Hardlines/Home decreased 0.9% and
Apparel decreased 1.6%. The store sales changes exclude layaway sales in both
years. 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. All three of the new
ShopKo stores include in-store pharmacies and optical centers. During the second
quarter, the Company opened 12 new Pamida stores, one of which includes an
in-store pharmacy.
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, 22 additional Pamida stores were opened and 3
Pamida stores were closed, increasing the number of Pamida stores in operation
from 152 to 171 stores as of July 2000. Pamida stores include in-store
pharmacies in 62 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.
13
<PAGE> 14
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 are expected to reopen in September 2000
under the Pamida store concept and one store located in an existing Pamida
location will be closed. The Place's store inventories are being liquidated by a
third party and the related sales have not been included in net sales.
Gross Margin:
The following table sets forth gross margin as a percent of net sales:
<TABLE>
<CAPTION>
Second 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 25.6 % 25.5 % 27.5 % 24.4 % 26.0 % 25.4 %
Gross margin percent prior to
LIFO charge 25.8 % 25.7 % 27.6 % 24.4 % 26.2 % 25.6 %
</TABLE>
<TABLE>
<CAPTION>
First Half
----------
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 25.7 % 25.4 % 26.2 % 24.4 % 25.8 % 25.3 %
Gross margin percent prior to
LIFO charge 25.9 % 25.6 % 26.3 % 24.4 % 26.0 % 25.5 %
</TABLE>
Consolidated gross margin, as restated, as a percent of sales for the second
quarter was 26.0 percent compared to 25.4 percent last year. The 60 basis point
increase is primarily attributable to higher gross margin rates in ShopKo Retail
general merchandise and the full quarter contribution of the Pamida division.
Consolidated gross margin dollars increased 26.1 percent to $213.4 million for
the same period. ShopKo Retail gross margin as a percent of sales was 25.6
percent compared with 25.5 percent last year. ShopKo Retail gross margin dollars
increased 2.5 percent to $159.9 million for the same period. Pamida Retail gross
margin as a percent of sales was 27.5 percent for the quarter.
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Consolidated gross margin, as restated, as a percent of sales for the first half
ended July 29, 2000 was 25.8 percent compared with 25.3 percent for the same
period last year. The ShopKo Retail gross margin as a percent of sales for the
same period was 25.7 percent compared with 25.4 percent last year. This increase
is attributable primarily to higher gross margin rates in ShopKo's Retail
general merchandise. Consolidated gross margin dollars increased 31.7 percent to
$405.2 million for the same period. ShopKo Retail gross margin dollars increased
5.5 percent to $310.7 million. Pamida Retail gross margin as a percent of sales
was 26.2 percent for the first half.
Selling, General and Administrative Expenses:
Consolidated selling, general and administrative expenses, as restated, as a
percent of sales for the second quarter were 20.2 percent compared with 20.0
percent last year. ShopKo Retail selling, general and administrative expenses as
a percent of sales for the quarter were 19.1 percent compared to 19.2 percent
last year. Pamida Retail selling, general and administrative expenses were 21.1
percent of sales for the quarter.
Consolidated selling, general and administrative expenses, as restated, as a
percent of sales for the 26 weeks ended July 29, 2000 increased to 20.4 percent
from 20.2 percent last year. ShopKo Retail selling, general and administrative
expenses as a percent of sales were 19.3 percent compared to 19.4 percent last
year. Pamida Retail selling, general and administrative expenses as a percent of
sales were 21.5 percent for the first half.
Special Charges:
During the second quarter ended July 29, 2000, the Company incurred $2.9 million
in special pre-tax costs relating to the Pamida acquisition for employee
retention programs, elimination of administrative functions and various other
integration initiatives. The Company incurred $4.1 million in special pre-tax
costs for these purposes during the first half ended July 29, 2000. During the
remainder of the current fiscal year, the Company expects to incur additional
special charges of approximately $1.0 to $2.0 million for these purposes.
Interest Expense - Net:
Interest expense, as restated, for the second quarter increased 42.2 percent to
$16.2 million and for the first half increased 44.8 percent to $30.8 million.
This increase is primarily due to additional debt as a result of last year's
Pamida acquisition.
Income Taxes:
The effective tax rates for the second quarter were 44.5 percent compared with
38.1 percent last year. The effective tax rates for the first half were 48.3
percent compared with 37.2 percent last year. This increase is mainly due to
nondeductible goodwill amortization of $1.5 million in the second quarter and
$2.6 million in the first half associated with the Pamida acquisition.
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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. Earnings before interest, taxes, depreciation and amortization were
$86.6 million for the first half of fiscal 2000 compared to $67.1 million for
the same period last year. The Company had $327.7 million outstanding under its
credit agreements at the end of the first half of fiscal 2000 compared to $84.8
million outstanding at the end of the first half of fiscal 1999. This increase
is primarily due to additional debt as a result of last year's Pamida
acquisition. The Company has a $200.0 million revolving credit agreement with a
consortium of banks of which $200.0 million was outstanding as of July 29, 2000.
This credit facility is unsecured and is effective through January 31, 2002. The
Company also has an unsecured $100.0 million 364-day credit facility, expiring
August 31, 2000, of which $38.1 million was outstanding as of July 29, 2000. In
addition, the Company also has various other unsecured credit facilities,
including a $75.0 million seasonal facility which will expire August 31, 2000
and a banker's acceptance note which allows borrowing from $25.0 to $100.0
million based on the seasonal needs of the Company. The banker's acceptance note
expires April 30, 2001. As of July 29, 2000, $89.6 million was outstanding under
these two credit facilities. On August 29, 2000, the $100.0 million 364-day
credit facility and the $75.0 million seasonal facility were replaced with a new
$175.0 million unsecured 364-day facility that will expire August 28, 2001. This
facility has the provision that will allow the Company to increase the
availability of funds to $250.0 million during the life of the agreement as
needed. Funds generated from operations and borrowings under these credit
facilities are expected to fund the projected working capital needs and total
capital expenditures through fiscal 2000.
The Company's principal use of cash is for the purchase of property, equipment
and systems technology. The Company spent $92.9 million on capital expenditures
in the first half of fiscal 2000, compared to $53.8 million on capital
expenditures for the same period last year. The Company's total capital
expenditures for the fiscal year ending February 3, 2001 are anticipated to
approximate $200.0 to $230.0 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.
These amounts exclude any capital that may be required for acquisitions of
businesses. Such plans may be reviewed and revised from time to time in light of
changing conditions.
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The Company plans to open 60 new Pamida stores including the 48 converted Places
stores during the third fiscal quarter and one Pamida store during the fourth
fiscal quarter. The Company also plans to open 2 new ShopKo stores in the fall.
In total, the Company expects to open 5 ShopKo stores and 28 Pamida stores in
addition to the 48 Places stores in fiscal 2000.
The Company expects to pursue growth of its retail store business through new
store construction or acquisition of existing retail stores or 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 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 July 29,
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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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 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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On May 8, 2000, a purported class action was filed 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 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its 2000 Annual Meeting of Shareholders on May 24, 2000.
(b) Votes cast for the election of directors at the 2000 Annual Meeting were as
follows:
Jack W. Eugster:
For 27,047,670
Withheld Authority 382,975
Stephen E. Watson:
For 27,046,120
Withheld Authority 384,525
Messrs. Podany, Kramer, Girard, Turner and Wolf terms of office as directors
continued after the 2000 Annual Meeting of Shareholders.
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Votes cast to approve the Company's 2000 Executive Incentive Plan.
For 26,822,490
Against 580,294
Abstain 27,861
Broker Non-Vote 0
Votes cast to ratify the appointment of Deloitte & Touche LLP as the Company's
auditors for the fiscal year ending February 3, 2001 were as follows:
For 27,389,296
Against 7,337
Abstain 34,012
Broker Non-Vote 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
2 Agreement and Plan of Merger among Merck & Co., Inc., PV
Acquisition Corp. and ProVantage Health Services, Inc.,
dated as of May 4, 2000 (incorporated by reference to the
Company's current report on Form 8-K dated May 4, 2000).
3 Amended and Restated Bylaws of ShopKo Stores, Inc.
12 Statements Re Computation of Ratios.
27 Financial Data Schedule.
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(b) Reports on Form 8-K.
The Company filed Current Reports on Form 8-K in the second quarter of
fiscal 2000 as follows:
Date of Report Items Reported
May 4, 2000 Items 5 and 7 - Agreement between ShopKo Stores,
Inc. and Merck & Company for Merck to acquire
ShopKo's subsidiary ProVantage Health Services,
Inc.
June 16, 2000 Items 2, 5, and 7 - Sale of ProVantage Health
Services to Merck & Company, resignation of Chief
Financial Officer, Paul H. Freischlag, Jr., the
Company's expected future financial results and the
following financial statements: (i) an unaudited
pro forma condensed consolidated balance sheet at
April 29, 2000, (ii) an unaudited pro forma
condensed consolidated statement of earnings for
the 13 weeks ended April 29, 2000 and (iii) an
unaudited pro forma condensed consolidated
statement of earnings for the fiscal year ended
January 29, 2000.
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)
<TABLE>
<S> <C>
Date: September 11, 2000 By: /s/ Richard D. Schepp
---------------------
Richard D. Schepp
Senior Vice President General Counsel and Secretary
(Duly Authorized Officer of Registrant)
Date: September 11, 2000 By: /s/ John E. Gustavson
----------------------
John E. Gustavson
Acting Controller, Chief Accounting Officer
(Chief Accounting Officer and Duly
Authorized Officer of Registrant)
</TABLE>
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EXHIBIT INDEX
SHOPKO STORES, INC.
10-Q REPORT
<TABLE>
<CAPTION>
Exhibit Sequential
Number Exhibit Page Number
------ ------- -----------
<S> <C> <C>
2 Agreement and Plan of Merger among Merck & Co.,
Inc., PV Acquisition Corp. and ProVantage Health
Services, Inc., dated as of May 4, 2000 (incorporated
by reference to the Company's current report on
Form 8-K dated May 4, 2000).
3 Amended and Restated Bylaws of ShopKo Stores, Inc.
12 Statements Re Computation of Ratios.
27 Financial Data Schedule.
</TABLE>
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