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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year (52 weeks) ended January 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
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Commission file number 1-10876
SHOPKO STORES, INC.
(Exact name of registrant as specified in its Charter)
Wisconsin 41-0985054
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
700 Pilgrim Way, Green Bay, Wisconsin 54304
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (920) 429-2211
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, par value $0.01 per share New York Stock Exchange
Series B Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Page 1 of 110 Exhibit index on page 75
(Cover page 1 of 2 pages)
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 7, 2000 was approximately $611,287,322.50 (based upon the
closing price of Registrant's Common Stock on the New York Stock Exchange on
such date).
Number of shares of $0.01 par value Common Stock outstanding as of April 7,
2000: 29,585,430.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference portions of the definitive Proxy Statement
for the Registrant's Annual Meeting of Shareholders to be held on May 24, 2000.
(Cover page 2 of 2 pages)
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PART I
ITEM 1. BUSINESS
GENERAL
ShopKo Stores, Inc. ("ShopKo" or the "Company"), a Wisconsin corporation,
was incorporated in 1961 and in 1971 became a wholly owned subsidiary of
Supervalu Inc. ("Supervalu"). On October 16, 1991, the Company sold 17,250,000
common shares or 54% of equity ownership in an initial public offering. On July
2, 1997, Supervalu exited its remaining 46% investment in the Company through a
stock buyback and secondary public offering. The Company's principal executive
offices are located at 700 Pilgrim Way, Green Bay, Wisconsin 54304, and its
telephone number is (920) 429-2211.
The Company has three business segments: a ShopKo Retail segment, a Pamida
Retail segment and a ProVantage health benefit management segment. ShopKo is a
customer lifestyle-driven specialty discount retailer located primarily in
mid-size and larger communities. As of January 29, 2000, the Company had 160
ShopKo retail stores operating in 19 Midwest, Pacific Northwest and Western
Mountain states. Pamida is a general merchandise discount retailer serving
smaller and more rural communities. As of January 29, 2000, the Company had 157
Pamida retail stores operating in 15 Midwest, North Central and Rocky Mountain
states. The Company also serves the rapidly growing managed healthcare industry
through the ProVantage Health Services, Inc. ("ProVantage") segment. ProVantage
is a leading health benefit management company providing pharmacy benefit and
health information technology services to its customers. Financial information
about these segments is included in Note I of the Notes to Consolidated
Financial Statements for fiscal year 1999.
The Company changed its fiscal year end from the last Saturday in February
to the Saturday nearest January 31, effective with the fiscal year ended January
31, 1998. This change was made in order to coincide the Company's fiscal year
with the calendar predominantly used by the retail industry. Consequently, for
that transition year, the statements of earnings, cash flows and shareholders'
equity are presented for the 49-week period ended January 31, 1998. The table
below illustrates how the fiscal years are referred to in this Form 10-K.
Period Fiscal Year
January 31, 1999 through January 29, 2000 (52 weeks) 1999
February 1, 1998 through January 30, 1999 (52 weeks) 1998
February 23, 1997 through January 31, 1998 (49 weeks) 1997
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SHOPKO RETAIL
MERCHANDISING PHILOSOPHY - SHOPKO RETAIL
ShopKo Retail is committed to offering quality merchandise, service and
value to meet customers' requirements for health, home, family basics, casual
apparel and seasonal needs in its stores with speed, friendliness and
simplicity. ShopKo Retail strives to differentiate itself from its competition
by meeting customer needs more quickly and by anticipating the needs of its
customers' changing lifestyles.
With a focus on serving the customer and building customer loyalty, ShopKo
successfully undertook a significant strategic repositioning under its Vision
2000 program between 1991 and 1995. That strategy combined a new, upscale image
with an increased emphasis on customer service. Building upon Vision 2000,
ShopKo has developed and implemented Beyond 2000, a long-term strategic
operating model which is based upon creating market opportunities by serving
time-strapped consumers' changing shopping habits. The Beyond 2000 operating
model is based upon four interdependent strategic initiatives:
- a differentiation strategy;
- an integrated business planning process;
- execution by an experienced and well-trained management organization;
and
- delivery of comprehensive value.
Differentiation Strategy. ShopKo's differentiation strategy focuses on
accentuation of selected and targeted merchandise categories tied to changing
lifestyle needs. Within each of these merchandise categories, shoppers will find
a wide assortment. A strong national brand presence is combined with ShopKo's
private brands to offer a unique product mix.
Integrated Business Planning Process. ShopKo has reorganized its
merchandise into stratified categories that are defined and driven by customer
lifestyles. An integrated business planning process has allowed ShopKo to
identify and prioritize growth potentials of its product categories based on the
changing lifestyle needs of its customers. These priorities are used to allocate
store shelf space, inventory commitments, external advertising space and
in-store capital improvement disbursements among the various categories of
merchandise. This process is called "infrastructural funding." ShopKo makes
heavier infrastructure commitments to categories in which ShopKo has a strong
market presence and other categories ShopKo believes has the potential to become
prominent categories. ShopKo performs regular and systematic analysis of
category rankings as part of its business planning process.
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Execution. Beyond 2000 is executed through ShopKo's operating committee,
which is headed by ShopKo's Chairman, President and Chief Executive Officer and
composed of senior vice presidents from all areas of ShopKo. The operating
committee seeks to create a performance-driven culture. The operating committee
has reengineered the work processes of its central organization and store
operations. The reengineered work processes require centralized decisions with
respect to product selection, pricing, space utilization and marketing. This
allows store personnel to focus on overall customer satisfaction through
inventory in-stock position, creation of a friendly environment and
simplification of the shopping experience.
Delivery of Comprehensive Value. ShopKo delivers comprehensive value to its
customers through the shopping experience in its retail stores. Comprehensive
value is more than just delivering a superior quality product at a compelling
price. The comprehensive value ShopKo delivers is also based on:
- ensuring that merchandise, particularly advertised merchandise, is
available for purchase,
- providing clarity of merchandise offering,
- continually responding to customers' changing lifestyle needs,
- ensuring the speed of merchandise to the sales floor, and
- providing simplicity, speed and friendliness in the shopping
experience.
MERCHANDISING AND SERVICES - SHOPKO RETAIL
The ShopKo Retail store net sales mix for the last three fiscal years was:
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1999 1998 1997
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Hardlines 57% 58% 57%
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Softlines 23% 24% 25%
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Retail Health 20% 18% 18%
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ShopKo's retail stores carry a wide assortment of trend-correct branded and
private label softline goods such as:
- women's, men's and children's apparel,
- shoes,
- jewelry,
- cosmetics, and
- accessories.
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ShopKo also carries a wide assortment of seasonal and everyday basic
categories of hardline goods such as:
- housewares, - music/videos,
- home textiles, - toys,
- household supplies, - sporting goods,
- health and beauty aids, - social occasion products,
- home entertainment products, - candy, and
- small appliances, - snack foods.
- furniture,
ShopKo carries a broad assortment of merchandise to provide customers with a
convenient one-stop shopping source for everyday items. ShopKo's accommodating
customer service policies provide customers with a pleasant shopping experience.
ShopKo believes that it offers leading brand names in its merchandise
lines. It concentrates on brands which have wide customer acceptance and provide
quality and value. In addition, ShopKo has well developed private label
programs. ShopKo subjects its private label merchandise and direct imports to
independent testing and certification for product performance, safety and fit.
In addition, ShopKo's in-house quality assurance and technical design team
analyzes and develops the quality of its fashion offerings. This allows ShopKo
to deliver a better and more consistent product, with greater control and
efficiency.
The Company also provides professional health services in most of its
stores. Of the Company's 160 stores as of January 29, 2000, 158 include pharmacy
centers and 157 include optical centers. In addition to generating store traffic
and building customer loyalty, these services contribute significantly to the
Company's overall profitability and provide the opportunity for additional
growth. Each store with pharmacy and optical centers employs or contracts with
an average of approximately three licensed pharmacists, one licensed optometrist
and six opticians. ShopKo's pharmacies filled over 11.8 million prescriptions in
fiscal 1999. ShopKo's optometrists perform in-store eye exams and prescribe
correctional lenses, most of which are fabricated in the Company's centralized
optical laboratory and in approximately 102 in-store finishing labs. In fiscal
1999, ShopKo dispensed over 714,000 eyewear prescriptions. The in-store
finishing labs typically service other ShopKo stores in the vicinity and provide
customers with same day or next day optical service for single vision lenses.
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MARKETING AND ADVERTISING - SHOPKO RETAIL
ShopKo markets its general merchandise and retail pharmacy and optical
services by using weekly newspaper circulars, which enables ShopKo to reach a
broad-based group of customers consisting largely of middle income families.
These full-color circulars average 24 pages and feature values in all of the
departments in ShopKo's stores and have a circulation of more than 5.3 million.
ShopKo uses direct mail advertisements selectively during key promotional
periods. These direct mail advertisements have a circulation of more than 7.0
million. All printed advertising materials are designed by the Company's
in-house graphic design team and photographed in the Company's own photography
studio. In addition to the newspaper circulars and direct mail advertisements,
ShopKo uses image building television and radio advertising, which focuses on
differentiating ShopKo stores from its competition.
ShopKo prices its merchandise so as to be competitive with its regional and
national discount retail competitors. In general, ShopKo uses its frequent
advertising of a large group of high demand items to reinforce its competitive
price image and to generate store traffic, rather than attempting to meet the
lowest available price on every item. ShopKo believes it provides comprehensive
value through its offering of quality trend-correct, lifestyle merchandise at
compelling prices in an attractive, customer-friendly shopping environment.
SHOPKO RETAIL STORE LAYOUT AND DESIGN
ShopKo stores are designed for simplicity, speed and ease of the shopping
experience. The stores feature a fashion stage at the store entrance to create
the upscale image of the store. The stores also feature competitive assortments
of softline goods, hardline goods and professional pharmacy and optical
departments. ShopKo places its optical and pharmacy departments near the front
of the store. ShopKo designs the remainder of the store in a "racetrack"
configuration which takes customers between and around departments. ShopKo
prominently displays promotionally priced items.
Over the last several years, ShopKo has substantially remodeled its stores.
ShopKo expects to continue to explore and test alternative store layout and
display techniques and merchandise mixes. Depending on the cost of land
acquisition, size of store and site preparation work, the Company expects that a
typical new ShopKo store's cost for land acquisition, site preparation, building
and fixturing will generally approximate $8.0 to $13.0 million. The Company
believes that opportunities to lower the initial capital outlay for new stores
exist through leasing, sale and leaseback, or other financing alternatives.
Remodels, which generally take place approximately every ten years, usually cost
from $0.5 to $2.5 million per ShopKo store. A ShopKo store renovation, where the
square footage is expanded or more extensive remodeling is needed, usually costs
from $2.0 to $4.5 million per store.
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The Company's average ShopKo store size is over 89,000 square feet with
over 61.0% of the ShopKo stores greater than 90,000 square feet. The Company is
basing new ShopKo stores on one of three standard prototypes; a 110,000 square
foot store, a 100,000 square foot store or a 90,000 square foot store. The
prototype selected depends on the community and the retail competition in the
immediate area. In comparison to older versions of ShopKo stores, its current
prototypes feature a greater portion of store square footage dedicated to
selling space and less space dedicated to the storage of inventory.
SHOPKO RETAIL STORE OPERATIONS AND MANAGEMENT
ShopKo's store operations organization focuses on:
- leadership,
- performance,
- merchandising innovation, and
- excellence in execution.
ShopKo strives for continual improvements in overall customer satisfaction,
which is measured by an independent research firm for the Company's unique
process entitled "Customer Satisfaction and Loyalty Monitor." The successful
Beyond 2000 operating model has been integrated into store operations with
significant improvements in operating efficiency and dedication to customer
service. Best practices have been shared and communicated across the
organization as the "ShopKo Way." The store operations organization is now
focusing on a framework of three leadership planks as part of the Company's
Beyond 2000 operating model. These three planks are people, performance and
profit.
People. The Company believes that it has improved teammate satisfaction
despite a challenging environment characterized by low unemployment and intense
competition for quality teammates. The Company has undertaken an intensive
management and teammate development program to ensure commitment to the
Company's mission and principles. This education is intended to sharpen
management's focus and ability to drive sales through an integrated partnership
with the central organization and a focus on leadership.
Performance. The Company improved customer service through a comprehensive
strategic initiative designed to enhance store execution and reduce costs. This
initiative identified non-value-added activities which were eliminated to
simultaneously increase productivity and enhance associate availability to help
customers. ShopKo's Customer Satisfaction and Loyalty Monitor indicates that
over 87.0% of ShopKo's customers give ShopKo high performance ratings over the
last two years for overall satisfaction.
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Profit. ShopKo uses technological innovation to support store performance
and profitability. These innovations include multi-media computer-based training
for our associates, as well as implementation of an innovative resource
management system which provides on-line sales forecasting in 15 minute
increments, ties labor scheduling to customer traffic patterns and eliminates
duplication of human resources and payroll processes in the stores and the
general office.
ShopKo holds its store operations management team accountable for execution
of aggressive plans and achievement of comprehensive goals. ShopKo emphasizes
ongoing development of this management team to ensure that ShopKo has the
competencies required for continued success.
PURCHASING AND DISTRIBUTION - SHOPKO RETAIL
ShopKo purchases merchandise from more than 1,960 vendors. ShopKo's ten
largest vendors accounted for approximately 38.5% of ShopKo's purchases during
fiscal 1999. ShopKo believes that most merchandise, other than branded goods, is
available from a variety of sources. ShopKo is working with its entire supply
chain to link its vendors into ShopKo's general merchandise business planning
process to reduce costs and to replenish its inventory more efficiently. ShopKo
linked more than 790 vendors to its electronic data interchange purchase order
systems as of January 29, 2000. Vendors electronically receive point-of-sale
information from ShopKo, which allows them to respond to changing inventory
levels in the stores. The Company has also implemented the use of electronic
purchase order acknowledgments issued by vendors based on the sales information
they have received. In addition, over 470 vendors are now electronically
transmitting invoices directly into the Company's automated invoice matching
system.
The Company continues to upgrade its merchandise planning, allocation and
control systems. In addition, stock keeping unit level physical inventories
continue to improve perpetual inventory accuracy. Management believes these
upgrades and improvements in the physical inventory process allow the Company to
more effectively manage in-stock positions and better manage merchandise
assortments.
Direct imports accounted for approximately 7.9% of ShopKo's purchases,
based upon cost of goods, during fiscal 1999. ShopKo buys its imported goods,
principally in the Far East, and ships the goods to its distribution centers for
distribution to the stores.
Utilization of four distribution centers has enabled ShopKo to:
- purchase the majority of its merchandise directly from manufacturers
which reduces its cost of goods,
- reduce direct vendor-to-store deliveries, which reduces freight
charges and cost of goods through consolidated volume purchasing, and
- Increase its pick and pull capabilities, enhancing the effectiveness
and efficiency of its store replenishment process.
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ShopKo believes that these cost reductions help it remain price competitive.
During fiscal 1999, approximately 88.0% of the merchandise sold by ShopKo,
excluding optical and pharmaceutical products, flowed through its distribution
centers.
The Company is in the process of expanding its distribution centers in
Wisconsin and Idaho and replacing its distribution center in Nebraska. These
projects will improve service to ShopKo stores, reduce backroom congestion and
support its anticipated growth. The Company expects to complete the expansion in
Wisconsin and Idaho in early 2000. The Company expects to complete the Nebraska
facility in 2001.
ShopKo's shoe department, other than certain nationally branded athletic
shoes, is in every store and is the principal department operated by a third
party under license. ShopKo retains a percentage of the gross proceeds collected
as rent. By the end of fiscal 2000, Payless ShoeSource, Inc. will be operating
as a licensee in every ShopKo store.
MANAGEMENT INFORMATION SYSTEMS - SHOPKO RETAIL
ShopKo uses information technology to improve customer service, reduce
operating costs and provide useful information to help ShopKo make timely
decisions regarding merchandising. ShopKo uses modern point-of-sale terminal
systems for electronic price lookup and tracking sales information at store and
stock keeping unit level. ShopKo uses frame relay communications technology to
provide on-line credit card and check authorization. ShopKo uses portable
radio-frequency terminals extensively in its stores for merchandise receiving,
stocking, replenishment, pricing and label printing. ShopKo also makes extensive
use of automated labor scheduling systems within its stores.
The Company's merchandising systems are client/server based, utilizing
massively parallel processing technology within an open systems architecture.
This suite of systems is highly integrated, providing functionality such as
perpetual inventory management, automated replenishment, promotional planning,
space planning, merchandise financial planning and assortment planning. In
addition, ShopKo converts the massive amounts of transaction based "raw data" it
amasses daily into "actionable information" through the use of a merchandise
data warehouse which serves as an online decision support tool for the Company's
knowledgeable workers.
ShopKo's state-of-the-art warehouse management system provides complete
warehouse functionality such as conveyor control and direction of picking and
put-away processes by using portable radio-frequency terminals. In addition,
this system is highly integrated with the Company's central information systems
through its telecommunications network, thereby ensuring up-to-date perpetual
inventory records, as well as facilitating highly accurate merchandise
allocation and distribution decisions to its management team.
ShopKo uses electronic commerce technology in support of its focus on total
supply chain management. This includes integrated replenishment systems, vendor
managed inventories and electronic data interchange. ShopKo believes that these
tools have resulted in higher in-stock service levels, optimized inventory
levels and greater productivity.
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In fiscal 1999, ShopKo successfully completed its Year 2000 readiness
project, as well as implementation of a number of new systems capabilities,
including a "Put-to-Light" system which optimizes the merchandise picking
process in the distribution centers; advanced shipment notification in the
distribution centers; expansion of the merchandise data warehouse to include
optical; high speed frame relay communications links to all of the stores; and a
number of point of sale enhancements to improve productivity and customer
satisfaction during the check-out process.
EXPANSION - SHOPKO RETAIL
The Company's current growth plan for the retail business is to increase
the number of retail stores to achieve economies of scale and to capitalize on
the Company's existing infrastructure. The Company intends to consider the
acquisition of existing stores, either as specific sites, in clusters, or as
part of an existing business. The Company believes that selective and
opportunistic acquisitions of retail stores or sites will allow the Company to
improve its profitability and maintain its financial strength. The Company may
also consider new store construction, financed with its own capital or by using
leases, sale and leaseback, or other financing alternatives. The Company's plans
with respect to new store growth are subject to change, and the Company cannot
assure that it will achieve its plans.
In April 1999, the Company opened ten former Venture locations and one
former Target location as ShopKo stores. In October 1999, two additional new
ShopKo stores were opened. All of these locations include in-store pharmacies
and optical centers. All 13 stores are leased, of which 7 are operating leases
and 6 are capital leases.
On February 14, 2000, the Company announced plans to open five new ShopKo
stores in fiscal 2000. In total, the Company expects to open 5 to 9 ShopKo
stores during fiscal 2000.
In reviewing possible retail store acquisitions, ShopKo intends to take a
disciplined approach to ensure the Company's competitive position and financial
integrity. The key elements of this disciplined approach are:
- maintaining a balance sheet which will exhibit the Company's
financial strength to the vendor and creditor communities;
- leveraging the Company's existing infrastructure, including
the Company's advanced management information and distribution
systems;
- maintaining adequate liquidity for the Company's operations; and
- using an analytical system for site selection that models
demographics, competition, geography and location.
The Company has decided to implement a very measured e-commerce strategy
that will initially leverage the Company's retail brick and mortar strengths.
Although the Company has been selling retail merchandise over the internet for
the past three years, the Company's intention is to explore possible alliances
with companies that have the expertise to do this on a much larger scale.
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COMPETITION - SHOPKO RETAIL
The discount general merchandise business is very competitive. ShopKo
competes in most of its markets with a variety of national, regional and local
discount stores, national category killers, specialty niche retailers, catalog
merchants and internet retailers. In addition, department stores compete in some
branded merchandise lines, discount specialty retail chains compete in some
merchandise lines such as electronics, bed and bath, housewares, casual
furniture and toys, and pharmaceutical and optical operations compete with some
of ShopKo's pharmacy and optical centers. ShopKo believes that the principal
competitive factors in its markets include:
- store location;
- differentiated merchandising;
- competitive pricing;
- quality of product selection;
- attractiveness and cleanliness of the stores;
- responsiveness to changing lifestyle needs and regional and local
trends;
- customer service;
- in-stock availability of merchandise; and
- advertising.
ShopKo's principal national general merchandise discount chain competitors
are Wal-Mart, Kmart and Target, each of which is substantially larger than, and
has greater resources than, the Company. Kmart stores compete with approximately
93.0% of the ShopKo stores, Target stores compete with approximately 69.0% of
the ShopKo stores and Wal-Mart stores compete with approximately 91.0% of the
ShopKo stores. ShopKo also competes with regional chains in some markets in the
Midwest and the Pacific Northwest.
Historically, the entry of one of these chains into an area served by a
ShopKo store generally has had an adverse effect on the affected store's sales
growth for approximately 12 months. After the 12 month time period, the ShopKo
store generally has resumed a positive growth trend. Entry by one of these
competitors into a ShopKo market often has resulted in permanently intensified
price competition. The Company's efficiency measures and distribution center
expenditures are important aspects of ShopKo's efforts to maintain or improve
operating margins and market share in these markets.
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SEASONALITY - SHOPKO RETAIL
ShopKo's retail general merchandise operations are highly seasonal.
Historically, ShopKo's third and fourth fiscal quarters have contributed a
significant part of the Company's earnings due to the Christmas selling season.
Because the Company has changed its fiscal year end to the Saturday closest to
the end of January, the Christmas selling season in fiscal 1998 and forward will
primarily impact the fourth fiscal quarter.
PAMIDA RETAIL
On July 6, 1999, the Company acquired all of the outstanding voting and
nonvoting common stock of Pamida, Inc. ("Pamida") for $94.0 million in cash,
$285.8 million in assumed debt and $138.6 million in assumed trade and other
accrued liabilities. Pamida is a retail chain headquartered in Omaha, Nebraska.
MERCHANDISING PHILOSOPHY - PAMIDA RETAIL
Pamida executes a location strategy which offers consumers in small, rural
communities convenient one-stop shopping. A typical store carries a broad
assortment of value-priced hardlines and softlines merchandise as well as
consumables and, in approximately 66 stores, a pharmacy.
Pamida stores generally are located in small towns where there often is
less competition from another major general merchandise retailer and which
Pamida considers to be either too small to support more than one major general
merchandise retailer (thereby creating a potential barrier to entry by a major
competitor) or too small to attract competitors whose stores generally are
designed to serve larger populations.
Pamida's merchandising policy is to provide customers with reliable and
convenient family shopping and to feature nationally advertised brand-name
products as well as select private-label merchandise at attractive prices.
Pamida operates its stores on a self-service, primarily cash-and-carry basis and
runs weekly advertised promotions throughout the year. Pamida places special
emphasis on maintaining a strong in-stock position in all merchandise
categories, particularly with respect to advertised items. Pamida's typical
customers are price-conscious families across the income spectrum.
MERCHANDISING AND SERVICES - PAMIDA RETAIL
Pamida Retail store net sales mix since acquisition was:
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1999
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Hardlines 70%
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Softlines 20%
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Pharmacy 10%
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Pamida's softlines division includes:
- men's, women's, children's and infant's clothing,
- footwear,
- accessories and
- jewelry.
Pamida's hardlines division includes categories such as:
- health and beauty aids, - automotive accessories,
- housewares, - paper and cleaning supplies,
- hardware, - paint,
- sporting goods, - toys,
- stationery, - small appliances and electronic items,
- videos, - compact discs and tapes,
- lawn and garden supplies, - linens and other domestics,
- cameras and accessories, - pet supplies, and
- consumables, - candy items.
Pamida currently owns and operates pharmacies in 61 of its larger stores,
and five of Pamida's other stores contain prescription pharmacies leased to and
operated by independent pharmacists. The pharmacies have proved to be effective
in building customer loyalty and attracting customers who are likely to purchase
other items in addition to prescription drugs. Pamida intends, subject to
regulatory considerations and the ability to purchase established pharmacy
operations in local communities, to include a pharmacy in each of its new
prototype stores and to add pharmacies to existing stores.
MARKETING AND ADVERTISING - PAMIDA RETAIL
Pamida's extensive advertising primarily utilizes colorful weekly circulars
developed by a centralized advertising department at Pamida's headquarters. Such
circulars advertise brand-name and other merchandise at significant price
reductions and are inserted into local newspapers or mailed directly to
customers. Pamida also uses local shopper's publications and coupon books.
PAMIDA RETAIL STORE LAYOUT AND DESIGN
Pamida typically invests approximately $2.9 to $3.1 million in a new
prototype store. Such expenditures consist primarily of approximately $1.7 to
$1.8 million for building and land costs, $0.7 to $0.8 million for the initial
store inventory (net of $0.3 to $0.4 million financed by vendors) and
approximately $0.4 to $0.5 million for store fixtures and equipment.
Pamida's stores average approximately 30,000 square feet of sales area and
range in size from approximately 6,000 to 51,000 square feet of sales area.
Pamida uses a 35,000 square foot prototype when building new stores.
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PAMIDA RETAIL STORE OPERATIONS AND MANAGEMENT
The methods that Pamida employs to build customer loyalty and satisfaction
are weekly advertised specials, competitive pricing, clean and orderly stores,
friendly well-trained personnel, a liberal return policy and a wide variety of
special customer services.
PURCHASING AND DISTRIBUTION - PAMIDA RETAIL
Pamida maintains a centralized purchasing, merchandise allocation and store
planning staff at its central offices. Pamida's point-of-sale data capture
equipment located in its stores provides current information to Pamida's buyers
to assist them in managing inventories, effecting prompt reorders of popular
items, eliminating slow-selling merchandise and reducing markdowns.
The merchandise in Pamida's stores is purchased from approximately 2,200
primary manufacturers, suppliers and other vendors. Centralized purchasing
enables Pamida to more effectively control the cost of merchandise and to take
advantage of promotional programs and volume discounts offered by certain
vendors. Pamida continuously seeks to optimize merchandise costs, including
promotional allowances offered by its suppliers. Pamida also has centralized the
management of returned merchandise, which enables Pamida to most effectively
secure vendor credits and refunds with respect to such merchandise.
Pamida operates distribution facilities in Omaha, Nebraska and Lebanon,
Indiana, both of which serve primarily as redistribution centers for bulk
shipments and promotional merchandise on which cost savings can be realized
through quantity purchasing. During fiscal 1999, approximately 74.0% of Pamida's
merchandise was distributed to the stores through these distribution centers,
while the remaining merchandise was supplied directly to the stores by
manufacturers or distributors.
The primary Omaha distribution facility consists of 336,000 square feet.
Pamida owns another distribution center in Omaha which is 135,000 square feet.
The Lebanon distribution center is currently 200,000 square feet, with an
expansion to 418,000 square feet expected to be complete in the second quarter
of fiscal 2000. After completion of the Lebanon expansion, both Omaha and
Lebanon will be full-service operations that provide both full-case and
less-than-case merchandise distribution.
MANAGEMENT INFORMATION SYSTEMS - PAMIDA RETAIL
Pamida's information technology strategy is aimed at providing the customer
with a shopping experience offering accurate pricing information, merchandise
which is always available as advertised, and an efficient check-out. This
strategy is implemented with systems which result in a low cost of operation and
maintenance, while retaining the flexibility to adapt to a rapidly changing
retail and technology environment.
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At the end of fiscal year 1999, Pamida completed a three year initiative to
replace every mainframe-based legacy application with state-of-the-art
client/server applications and hardware platforms. The successful completion of
this transition has resulted in a very streamlined open systems architecture
that is easy to maintain, readily lends itself to modification and is
inexpensive to support. All new server platforms are composed of the latest
computer processors and operating systems, delivering information to users on a
high capacity fiber optic network. With these systems, Pamida is well-positioned
to leverage this highly scalable infrastructure to easily expand as the number
of stores and distribution centers increases.
Pamida's warehouse management system incorporates automated conveying and
assisted picking functionality via radio frequency terminals and hand-held laser
scanning devices. Merchandising and financial systems offer true average
costing, automated replenishment, space planning and financial planning, all
centralized around a single core application. In addition, as more and more
vendors become a part of Pamida's growing electronic data interchange system,
handling costs and order lead times decline and the costs of data accuracy
errors on vendor purchase orders are reduced.
Over the course of fiscal year 2000, Pamida will be engaged in a number of
projects, including expansion of the Lebanon, Indiana distribution center, which
will include the same scalable server and network technology now used in Omaha.
Stores will be able to print new clearance labels on site, and shelf labels can
be printed in-aisle as soon as an item is scanned. Dramatically reducing the
response time to price changes. A new allocation application will make greater
use of sales data to optimize store inventory levels, and the upgrade of the
core merchandising system will include a web-based interface, allowing user
access to timely information from virtually anywhere.
EXPANSION - PAMIDA RETAIL
Since the acquisition, Pamida opened seven new stores and closed two
stores, increasing the total number of Pamida stores to 157. On February 14,
2000, the Company announced plans to open eight new Pamida stores in fiscal
2000, and expects to open a total of 20 to 25 Pamida stores in fiscal 2000. At
the time of the acquisition, Pamida also operated four Heartland Home Furniture
stores. On August 30, 1999, the Company sold the entire Heartland Home Furniture
business to a group of investors.
The Company has identified numerous communities which are potential sites
for Pamida's prototype stores and in which it believes it can achieve a leading
market position, although there is no assurance that Pamida will open stores in
such communities or on any particular time schedule.
COMPETITION - PAMIDA RETAIL
The general merchandise retail business is highly competitive. Pamida's
stores generally compete with other general merchandise retailers, supermarkets,
drug and specialty stores, mail order and catalog merchants, internet retailers
and, in some communities, department stores. Competitors consist both of
independent stores and of regional and national chains, some of which have
substantially greater financial resources than Pamida. The type and degree of
competition and the number of competitors which Pamida's stores face vary
significantly by market.
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Pamida stores generally are located in small towns where there is no direct
local competition from another major general merchandise retailer and which may
be either too small to support more than one major general merchandise retailer
(thereby creating a potential barrier to entry by a major competitor) or too
small to attract competitors whose stores generally are designed to serve larger
populations. Pamida believes that, in terms of sales, it is the leading general
merchandise retailer in approximately 73.9% of the communities in which its
stores are located.
Pamida's principal national general merchandise discount chain competitors
are Kmart, Alco, Wal-Mart and Target. As of January 29, 2000, Kmart stores
compete with approximately 13.4% of Pamida's stores, Alco competes with
approximately 10.2% of Pamida's stores, Wal-Mart competes with approximately
10.2% of Pamida stores and Target stores compete with approximately 2.6% of
Pamida's stores.
In recent years Pamida's business strategy has been to focus its store
expansion program on communities with less likelihood of the entry of a new
major competitor, but there can be no assurance that in the future major
competitors will not open additional stores in Pamida's markets.
SEASONALITY - PAMIDA RETAIL
Pamida's business, like that of most other general merchandise retailers,
is seasonal. First quarter sales are lower than sales during the other three
fiscal quarters, while fourth quarter sales amount to approximately 29.0% of the
full year's sales and normally involve a greater proportion of higher margin
merchandise.
PROVANTAGE
On July 19, 1999, the initial public offering of 5,600,000 shares of
ProVantage common stock at $18.00 per share was completed. The Company also sold
an additional 840,000 shares of ProVantage common stock pursuant to the
underwriters' over-allotment option. The Company received approximately $106.0
million in this transaction of which $20.0 million was retained by ProVantage.
As a result of these transactions, ShopKo maintains a 64.5% ownership stake in
ProVantage. ProVantage's stock is listed on the New York Stock Exchange under
the symbol `PHS.'
PRODUCTS AND SERVICES - PROVANTAGE
ProVantage provides prescription and vision benefit management services
and healthcare information-based products and clinical services. ProVantage
believes that its pharmacy benefit management services, in combination with its
information-based products and services, result in a highly differentiated
product offering with the potential to assess the effectiveness of healthcare
services, identify ways of improving healthcare results, and lower
pharmaceutical and, more importantly, overall medical costs.
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Healthcare Benefit Management Services
ProVantage provides high quality, cost efficient pharmacy benefit
management services to health plan sponsors. As of January 2000, ProVantage
provided pharmacy benefit management services to approximately 5.0 million
people and vision benefit management services to approximately 542,000 people
for more than 3,000 customers. ProVantage's core client base has historically
been small to mid-size employers, insurance companies, third party
administrators, health maintenance organizations and self-funded healthcare plan
sponsors. ProVantage increasingly markets its pharmacy benefit management
services to larger organizations based on its advanced clinical and
information-based products and services.
ProVantage's pharmacy benefit management services include national retail
pharmacy network administration, claims adjudication services, mail pharmacy
service, formulary development and management and benefit plan design
consultation. ProVantage manages a network of over 50,000 retail pharmacies to
provide prescription drugs to health plan members. ProVantage contracts with
these pharmacies to fill prescriptions at predetermined, negotiated rates, which
are significantly more favorable than typical retail prices, in exchange for
designating them as network pharmacies. Health plan members can fill
prescriptions at a network pharmacy in all 50 states, Puerto Rico and the Virgin
Islands. ProVantage uses on-line point-of-sale electronic claims processing with
pharmacies for swift adjudication of pharmacy claims.
ProVantage is compensated for pharmacy benefit management services through
processing fees, clinical service fees, formulary administration fees and
reimbursement of the cost of the pharmaceuticals dispensed. In addition, various
ancillary and information management fees may be charged.
ProVantage's mail service pharmacy offers health plans and their members a
cost-effective way to receive maintenance prescription drugs to treat chronic
illnesses. Members mail their prescriptions, which typically provide for up to
a three-month supply, to ProVantage's mail service pharmacy, where it is
processed and their prescriptions are mailed, typically within two business days
of receipt. The mail service pharmacy helps control prescription costs for
health plan sponsors by buying drugs at volume discounts and dispensing generic
drug products when appropriate. As of January 2000, the ProVantage mail service
pharmacy in Green Bay, Wisconsin dispensed and mailed approximately 100,000
prescriptions per month.
During the fourth quarter of fiscal 1999, ProVantage entered into a
strategic relationship with drugstore.com, an internet provider of prescription
fulfillment. Members of clients of ProVantage will have the opportunity
beginning in fiscal 2000 to transmit their prescriptions to drugstore.com
through the internet. ProVantage's mail service pharmacy will fill and deliver
all prescriptions of a thirty-day or greater supply processed through
drugstore.com. All prescriptions processed by drugstore.com for less than thirty
days will be filled and delivered by drugstore.com.
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ProVantage's pharmacy benefit management services also include plan design
consultation intended to reduce drug costs while promoting clinically
appropriate drug use. The most common plan design features offered are co-pay
options, incentives for substituting generic for branded drugs, limitations on
the number of days per prescription and requirements that maintenance drugs be
filled by the mail service pharmacy. ProVantage assigns an account executive to
work closely with each customer to determine the appropriate plan design
features based on the customer's specific benefit requirements.
ProVantage also offers and manages formularies for clients. ProVantage's
formulary is a list of drugs that are reviewed for safety and efficacy using its
advanced analytical intelligence tools. Formularies reduce costs through generic
substitutions therapeutic substitution and other techniques.
ProVantage provides vision benefit management services to client plan
sponsors offering vision benefits. As of January 2000, ProVantage's vision
benefit management business covered approximately 542,000 people through a
national network of approximately 10,500 retail optical chains and private
ophthalmologists, optometrists and opticians. Unlike the pharmacy benefit
management business, the vision benefit management business offers self-insured
as well as fully insured products. The self-insured products offered are similar
to the pharmacy benefit management product and service offering. The insured
products are sold by licensed independent and employee sales agents and are
underwritten by a licensed insurance company.
Healthcare Information Technology
ProVantage's healthcare information technology allows it to add value to
its pharmacy benefit management services. It has gained a core competency in
developing, maintaining, and analyzing large repositories of integrated
pharmaceutical and health claims information.
ProVantage's ability to integrate patient pharmacy, medical and lab data
allows its customers to assess overall healthcare results by identifying
opportunities to improve outcomes. One of ProVantage's principal
information-based services is the Advanced Therapeutic Intervention ("ATI")
Program. This program is designed to:
- review a customer's pharmaceutical utilization and medical diagnosis,
claims and prescription data on an integrated basis,
- identify prescribing patterns that exceed recommended periods of
use, unnecessary drug duplication and over- and under-utilization,
- identify specific patients who have been prescribed drugs that
significantly increase the risk of hospitalization or other adverse
medical events due to underlying medical conditions and multiple
diseases, and
- intervene with the treating physicians to identify significant drug
therapy related risks.
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The core of the ATI program is RationalMed. RationalMed is a clinical
outcomes assessment software that integrates the customers' medical claim,
diagnosis and pharmaceutical data to identify problematic prescribing patterns
and quantify the resulting increased risk of patient hospitalization or other
adverse medical events.
CLIENTS - PROVANTAGE
ProVantage currently provides health benefit management services for over
3,000 health benefit plan customers, covering approximately 5.5 million plan
members. ProVantage's health benefit management client base is comprised of
health maintenance organizations, third party administrators, insurance
companies, self-funded healthcare plan sponsors and government agencies.
ProVantage's ten largest customers accounted for approximately 41.4% of
ProVantage's revenues in fiscal 1999, approximately 36.5% of ProVantage's
revenues in fiscal 1998 and approximately 38.2% of ProVantage's revenues in
fiscal 1997. In addition, one of those ten customers, American Medical Security,
Inc., accounted for approximately 11.2% of ProVantage's revenues in fiscal 1999,
11.8% of ProVantage's revenues in fiscal 1998 and 12.1% of ProVantage's revenues
in fiscal 1997. ProVantage's health information technology clients include
federal and state agencies, third party health plan administrators, health
maintenance organizations, insurance companies and pharmaceutical manufacturers.
Ten states currently use ProVantage's health information technology for the
operation of their state Medicaid programs.
SALES AND MARKETING - PROVANTAGE
ProVantage markets its pharmacy benefit management services on the basis of
high quality customer service, advanced clinical capabilities, including the ATI
program and healthcare information products. ProVantage has a nationwide sales
force of eight regional sales managers, one general agent and two regional vice
presidents.
Sales of the healthcare information products tend to require marketing
support by its senior executives and approval at senior levels in a client's
organization and tend to have a long sales cycle. ProVantage's sales strategy in
these circumstances is to differentiate itself with these products and then to
cross-sell the traditional pharmacy benefit management and other services to the
health information technology customers.
ProVantage has sales offices in:
Charlotte, North Carolina Atlanta, Georgia
Dallas, Texas Omaha, Nebraska
Salt Lake City, Utah Chicago, Illinois
Scottsdale, Arizona Arlington, Virginia
Green Bay, Wisconsin Milwaukee, Wisconsin
ProVantage also uses a national network of independent agents and brokers
to market their products. For certain healthcare information products,
ProVantage may in the future use strategic partners or other distribution
channels for product marketing.
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SUPPLIERS - PROVANTAGE
ProVantage has a large number of suppliers for goods and services.
However, only a few are significant in terms of sustaining its daily business.
McKesson HBOC, Inc. is ProVantage's current wholesaler of pharmaceuticals for
its mail service pharmacy. International Business Machines Corporation, Oracle
Corporation and MicroStrategy Incorporated provide key computer systems that are
used to manage the internal databases and decision support tools. Commencing
late in fiscal 2000, ProVantage plans to use the claims processing programs of
Systems Xcellence USA, Inc. to process pharmacy claims in the retail network.
MANAGEMENT INFORMATION SYSTEMS - PROVANTAGE
ProVantage operates an electronic network tying in approximately 50,000
retail pharmacies to process third-party claims. ProVantage also utilizes
similar systems to support its vision benefit management business. ProVantage
has developed proprietary software to perform database enhancement and querying
essential to its clinical services.
ACQUISITIONS, ALLIANCES AND STRATEGIC INITIATIVES - PROVANTAGE
Beyond internal growth, ProVantage intends to selectively pursue the
acquisition of companies that either increase the size of its pharmacy benefit
management business or augment its advanced clinical and health information
technology capabilities.
In addition to acquisitions, ProVantage is seeking corporate alliances to
expand its health information technology capabilities. These types of alliances
allow ProVantage to gain access to new technology and data without committing
the level of financial and management resources associated with a major
acquisition.
ProVantage may also pursue other strategic initiatives in order to better
position its business in the marketplace in which it competes, to provide its
business with greater resources or to otherwise enhance its business prospects
and stockholder value.
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COMPETITION - PROVANTAGE
ProVantage faces direct competition in both the pharmacy benefit management
and vision benefit management businesses. The pharmacy benefit management
industry is relatively consolidated and dominated by large companies with
significant resources. Many of the large pharmacy benefit management companies
are owned by large companies, including pharmaceutical manufacturers, which can
provide them with significant purchasing power and other advantages which we do
not have. Competitors in this industry include other pharmacy benefit management
companies, drug retailers, physician practice management companies, and
insurance companies/health maintenance organizations. In addition to many
smaller companies, ProVantage's five primary competitors for pharmacy benefit
management customers are:
- PCS Health Systems, Inc., a subsidiary of Rite-Aid Corp.,
- Merck-Medco Managed Care, LLC, a subsidiary of Merck & Co., Inc.,
- Express Scripts, Inc.,
- Caremark Rx, Inc., and
- Advance Paradigm, Inc.
ProVantage may also experience competition from other sources in the
future. Pharmacy benefit management companies compete primarily on the basis of
price, service, reporting capabilities and clinical services. The primary
competitor for vision benefit management services is Vision Service Plan, which
is the largest vision benefit management provider in the nation. Vision benefit
management companies compete principally on the basis of size and scope of
network, service and price. In most cases, the competitors listed above are
large, profitable and well-established companies with substantially greater
financial and marketing resources than ProVantage.
BACKLOG - PROVANTAGE
While ProVantage has historically signed agreements with new clients for
pharmacy benefit management services for which it has phased-in implementation
over subsequent months, ProVantage has not generally operated with any
significant backlog.
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CONSOLIDATED
EMPLOYEES
As of January 29, 2000, the Company employed approximately 30,000 persons,
of whom approximately 15,300 were full-time employees and 14,700 were part-time
employees. During the Christmas shopping season, the Company typically employs
additional persons on a temporary basis. None of the Company's employees are
covered by collective bargaining agreements.
GOVERNMENT REGULATION
The Company's health services business is subject to extensive federal and
state laws and regulations governing, among other things:
Licensure and Regulation of Retail Pharmacies and Optical Centers
There are extensive federal and state regulations applicable to the
practice of pharmacy and optometry at the retail level. Most states have laws
and regulations governing the operation and licensing of pharmacies and optical
centers, and regulate standards of professional practice by pharmacy and optical
service providers. These regulations are issued by an administrative body in
each state, typically a pharmacy board or board of optometry, which is empowered
to impose sanctions for non-compliance.
Licensure and Regulation of Mail Service Pharmacy
ProVantage's mail service pharmacy is duly licensed and in good standing,
in accordance with the laws and regulations of the State of Wisconsin.
Additionally, many of the states into which ProVantage delivers pharmaceuticals
have laws and regulations that require out-of-state mail service pharmacies to
register with the board of pharmacy or similar regulatory body in the state.
These states generally permit the mail service pharmacy to follow the laws of
the state within which the mail service pharmacy is located. ProVantage has
registered in every state in which, to ProVantage's knowledge, such registration
is required. In addition, various pharmacy associations and boards of pharmacy
have promoted enactment of laws and regulations directed at restricting or
prohibiting the operation of out-of-state mail service pharmacies by, among
other things, requiring compliance with all laws of certain states into which
the mail service pharmacy dispenses medications whether or not those laws
conflict with the laws of the state in which the pharmacy is located. To the
extent such laws or regulations are found to be applicable to ProVantage,
ProVantage would be required to comply with them. Other statutes and regulations
impact ProVantage's mail service operations. Federal statutes and regulations
govern the labeling, packaging, advertising and adulteration of prescription
drugs and the dispensing of controlled substances. The Federal Trade Commission
requires mail order sellers of goods generally to engage in truthful
advertising, to stock a reasonable supply of the product to be sold, to fill
mail orders within thirty days, and to provide customers with refunds when
appropriate. The United States Postal Service has statutory authority to
restrict the transmission of drugs and medicines through the mail to a degree
that could have an adverse effect on ProVantage's mail service operations. The
United States Postal Service has exercised such statutory authority only with
respect to controlled substances. Alternative means of delivery are available to
ProVantage.
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Regulation of Prescription Benefit Management Services
Various forms of government regulations affect or could affect providers of
prescription benefit management services. Among the most prominent forms of such
regulation are the following:
Many states have licensure or registration laws governing certain types of
ancillary healthcare organizations, including preferred provider organizations,
third party administrators and utilization review organizations. These laws
differ significantly from state to state, and the application of such laws to
the activities of pharmacy benefit managers is often unclear. ProVantage has
registered under such laws in those states in which ProVantage has concluded
such registration is required.
Numerous states have also adopted "any willing provider" legislation, which
requires pharmacy network sponsors to admit for network participation any retail
pharmacy willing to meet a healthcare plan's price and other terms. ProVantage
has not been materially affected by these statutes because it administers a
network of over 50,000 retail pharmacies and will admit any qualified, licensed
pharmacy that agrees to comply with the terms of its plans.
"Anti-kickback" statutes at the federal and state level prohibit an entity
from paying or receiving any remuneration to induce the referral of healthcare
plan beneficiaries or the purchase of items or services for which payment may be
made under such healthcare plans. Additionally, most states have consumer
protection laws that have been the basis for investigations and multi-state
settlements relating to financial incentives provided by pharmaceutical
manufacturers to retail pharmacies in connection with pharmaceutical switching
programs. At the federal level, such regulations pertain to beneficiaries of
Medicare, Medicaid or other federally-funded healthcare programs. State
regulations typically pertain to beneficiaries of any healthcare plan. Under the
federal regulations, safe harbors exist for certain properly disclosed payments
made by vendors to group purchasing organizations. To ProVantage's knowledge,
these anti-kickback laws have not been applied to prohibit prescription benefit
management companies from receiving amounts from pharmaceutical manufacturers in
connection with pharmaceutical purchasing and formulary management programs, to
therapeutic substitution programs conducted by independent prescription benefit
management companies or to the contractual relationships such as those
ProVantage has with certain of its customers.
Regulation of Vision Benefit Management Services
ProVantage's vision benefit management services are subject to the same or
similar state and federal regulation as the prescription benefit management
services described above.
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Privacy and Confidentiality Legislation
Most of ProVantage's activities involve the receipt or use of confidential,
medical information concerning individual members, including the transfer of the
confidential information to the member's health benefit plan. In addition,
ProVantage uses aggregated data, that is, data from which information which
identifies specific patients is removed, for research and analysis purposes.
Legislation has been proposed at the federal level and in several states to
restrict the use and disclosure of confidential medical information. To date, no
such legislation has been enacted that adversely impacts ProVantage's ability to
provide its services, but there can be no assurance that federal or state
governments will not enact legislation, impose restrictions or adopt
interpretations of existing laws that could have a material adverse effect on
ProVantage's operations.
Applicability of Insurance Laws
ProVantage's prescription pharmaceutical plans currently offered or
administered by ProVantage are on a fee-for-service basis, and are therefore not
generally subject to state insurance laws. The insured vision benefit plans
administered by ProVantage are underwritten by an unaffiliated licensed insurer,
and ProVantage believes it is in material compliance with all applicable
insurance laws.
Comprehensive Pharmacy Benefit Management Legislation
Although no state or the federal government has passed legislation
regulating pharmacy benefit management activities in a comprehensive manner,
such legislation has been introduced on several occasions. Such legislation, if
enacted in any state in which we have a significant concentration of business or
if enacted by the federal government, could adversely impact our operations.
Future Legislative Initiatives
Legislative and regulatory initiatives pertaining to such healthcare
related issues as reimbursement policies, payment practices, therapeutic
substitution programs, and other healthcare cost containment issues are
frequently introduced at both the state and federal level. The Company is unable
to predict accurately whether or when legislation may be enacted or regulations
may be adopted relating to the Company's health services operations or what the
effect of such legislation or regulations may be.
Substantial Compliance
The Company's management believes the Company is in substantial compliance
with, or is in the process of complying with, all existing statutes and
regulations material to the operation of the Company's health services
businesses and, to date, no state or federal agency has taken enforcement action
against the Company for any material non-compliance, and to the Company's
knowledge, no such enforcement against the Company is presently contemplated.
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FORWARD-LOOKING STATEMENTS AND RISK FACTORS
In accordance with the Private Securities Litigation Reform Act of 1995,
the Company can obtain a "safe-harbor" for forward-looking statements by
identifying those statements and by accompanying those statements with
cautionary statements which identify factors that could cause actual results to
differ from those in the forward-looking statements. Accordingly, the following
information contains or may contain forward-looking statements: (1) information
included or incorporated by reference in this Annual Report on Form 10-K,
including, without limitation, statements made under Item 1, Business, and under
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations, (2) information included or incorporated by reference in future
filings by the Company with the Securities and Exchange Commission ("SEC")
including, without limitation, statements with respect to growth, acquisition
and expansion plans, projected sales, revenues, earnings, costs and capital
expenditures, and product development and product roll-out plans, and (3)
information contained in written material, releases and oral statements issued
by, or on behalf of, the Company including, without limitation, statements with
respect to growth, acquisition and expansion plans, projected sales, revenues,
earnings, costs and capital expenditures, and product development and product
roll-out plans. The Company's actual results may differ materially from those
contained in the forward-looking statements identified above. Factors which may
cause such a difference to occur include, but are not limited to, (i) the risk
factors described below, (ii) the risk factors described in ProVantage's Annual
Report on Form 10-K for the fiscal year ended January 29, 2000, and (iii) other
risks described from time to time in the Company's and ProVantage's SEC filings.
An investment in ShopKo's Common Stock or other securities carries certain
risks. Investors should carefully consider the risks described below, the risks
described in ProVantage's Annual Report on Form 10-K filed with the SEC, and
other risks which may be disclosed from time to time in ShopKo's and
ProVantage's filings with the SEC before investing in ShopKo's Common Stock or
other securities.
Competition in the retail industry could limit ShopKo's growth
opportunities and reduce its profitability. The Company competes in the discount
retail merchandise and retail health services businesses. These businesses are
highly competitive. The competitive environment subjects the Company to the risk
of reduced profitability. The Company competes with other discount retail
merchants as well as mass merchants, catalog merchants, internet retailers and
other general merchandise, apparel and household merchandise retailers. The
Company's retail health services business competes with independent and chain
pharmacies and optical centers. The discount retail merchandise business is
subject to excess capacity and some of the Company's competitors are much larger
and have substantially greater resources than the Company. The competition for
customers and store locations has intensified in recent years as larger
competitors, such as Wal-Mart, Kmart and Target, have moved into the Company's
geographic markets. The Company expects a further increase in competition from
these national discount retailers. The Company cannot assure you that it will be
able to continue to compete successfully.
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The Company's inability to secure additional retail store sites could limit
our growth opportunities. If additional retail store sites are unavailable, the
Company may not be able to carry out a significant part of its growth strategy,
which could materially adversely affect its future growth. The Company's plans
to increase the number of its retail stores will depend in part upon the
availability of existing retail stores or store sites. There can be no assurance
that such stores or sites will be available to the Company for purchase or
lease, or that they will be available on terms acceptable to the Company. Rising
real estate costs and construction and development costs could also inhibit the
Company's ability to grow. If the Company is unable to grow its retail business,
the Company's financial performance could be adversely affected.
The Company's conversion, integration and operation of companies which it
acquires may not succeed or generate the expected results, which may have a
significant adverse effect on its financial performance and its growth strategy
and prospects. If the Company is unable to integrate companies which it acquires
into its business, then its financial performance and its growth strategy and
prospects may be adversely affected. A significant part of its growth strategy
depends on its ability to identify and acquire companies which complement its
business, such as Pamida, Inc., and to integrate those companies into its
management and operational structure. This integration requires substantial
management, logistical and financial resources which might otherwise be devoted
to our existing operations. The Company's failure to accommodate this growth
could have a material adverse affect on its results of operations.
The Company's ProVantage subsidiary is subject to various risks, which
could adversely affect the Company's financial performance. If the Company's
ProVantage subsidiary is adversely affected by the business and other risks to
which it is subject, then the Company's results of operations and financial
results may suffer. For fiscal 1999, the Company's ProVantage subsidiary
generated approximately 23.1% of the Company's sales and approximately 10.8% of
the Company's income from operations. The ProVantage business is substantially
different from the Company's retail business and is subject to additional and
different risks. To the extent these risks could materially and adversely effect
ProVantage, they could also have a material and adverse effect on the Company.
The risks that ProVantage is subject to include the following:
- ProVantage's industry is very competitive and this competition is
reducing profitability in ProVantage's industry.
- Consistent with industry practice, ProVantage does not have long-term
contracts with its customers, network pharmacies or pharmaceutical
manufacturers and loss of a significant number of these contractual
relationships could materially adversely affect ProVantage and its
results of operations.
- ProVantage is introducing new products which the market may not
accept.
- ProVantage is growing rapidly, and if ProVantage is unable to manage
this growth, then its business and results of operations could be
materially adversely affected.
- Other governmental actions, including changes in healthcare finance
and reimbursement practices and patient confidentiality laws, could
materially adversely affect ProVantage.
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- ProVantage may be subject to liability claims which are not covered by
insurance, which may adversely affect ProVantage's results of
operations.
- ProVantage relies on the use of intellectual property, such as
computer software, to conduct its business, which, if not properly
protected, could be lost, restricted, copied or used by other
businesses which could have a material adverse effect on ProVantage.
The foregoing is a summary of the risk factors applicable to ProVantage.
For a more complete description of those risks, please see ProVantage's Annual
Report on Form 10-K for the fiscal year ended January 29, 2000.
The Company's general merchandise business is seasonal and quarterly
performance fluctuates, which may cause volatility or a decline in the price of
its securities. Because the Company's retail business is seasonal, its results
of operations may fluctuate which may lead to significant volatility or declines
in the price of its securities. The Company's retail general merchandise
business is highly seasonal. The Christmas selling season has historically
contributed a significant part of its earnings and primarily impacts the fourth
fiscal quarter. Inventory imbalances caused by unanticipated fluctuations in
consumer demand also results in fluctuations of the Company's results. This
seasonality and these fluctuations cause the Company's operating results to vary
considerably from quarter to quarter and could materially adversely affect the
market price of its securities.
Loss of the Company's key management personnel, especially William J.
Podany, the Company's chairman, president and chief executive officer, could
materially adversely affect the Company's business. The Company's success
depends to a significant extent on the continued services of its senior
management, particularly William J. Podany. The Company does not have employment
contracts with members of its senior management, including Mr. Podany. If the
Company loses key senior management, then its business could be materially
adversely affected.
Adverse weather and general economic conditions could have a significant
adverse effect on the Company's business. Because the Company's business is
subject to adverse weather conditions in its retail markets, particularly in the
Midwest, Western Mountain and Pacific Northwest regions, its operating results
may be unexpectedly and materially adversely affected. Frequent or unusually
heavy snow, ice or rain storms in its markets could have a material adverse
effect on its sales and earnings and could adversely impact its ability to make
scheduled interest payments on its indebtedness. General economic factors in the
regions in which the Company operates that are beyond its control may also
materially adversely affect its forecasts and actual performance. The factors
that may materially adversely affect its forecasts and actual performance
include interest rates, recession, inflation, deflation, consumer credit
availability, consumer debt levels, tax rates and policy, unemployment trends
and other matters that influence consumer confidence and spending. Increasing
volatility in financial markets may cause these factors to change with a greater
degree of frequency and magnitude.
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Labor conditions may have a material adverse impact on its performance. If
the Company cannot attract and retain quality employees, its business will
suffer. The Company depends on attracting and retaining quality employees. Many
of its employees are in entry level or part-time positions with historically
high rates of turnover. The Company may be unable to meet its labor needs while
controlling costs due to external factors such as unemployment levels, minimum
wage legislation and changing demographics
The Company has a significant amount of debt which could adversely affect
its business and growth prospects. At January 29, 2000, the Company had
approximately $459.5 million of long-term debt and other long-term obligations.
The Company expects to incur more debt as it expands its retail operations. This
additional debt could have significant adverse effects on its business. For
example, it could:
- make it more difficult for it to obtain additional financing on
favorable terms,
- require the Company to dedicate a substantial portion of its cash
flows from operations to the repayment of its debt and the interest on
its debt,
- limit its ability to capitalize on significant business opportunities,
- make the Company more vulnerable to economic downturns, and
- contain certain covenants which restrict our ability to operate its
business.
Anti-Takeover provisions in the Company's organizational documents and
statutes may inhibit premium offers for its common stock. Anti-takeover
provisions in its amended and restated articles of incorporation, by-laws and
Wisconsin law and its rights plan may deter unfriendly offers or other efforts
to obtain control of the Company. This could make the Company less attractive to
a potential acquirer and deprive its shareholders of opportunities to sell their
shares of common stock at a premium price.
Pending or future litigation could subject the Company to significant
monetary damages. If the Company becomes subject to liability claims which are
in excess of its insurance coverage or are not covered by its insurance
policies, the Company may be liable for damages and other expenses which could
have a material adverse effect on its business, operating results and financial
condition. In addition, any claims against the Company, regardless of merit or
eventual outcome, may have a material adverse effect on its reputation and
business. The sale of retail merchandise and provision of in-store pharmacy and
optical services entail a risk of litigation and liability. The Company is
currently subject to a number of lawsuits, and expects that from time to time it
will be subject to similar suits in the ordinary course of business. The Company
currently maintains insurance intended to cover a majority of liability claims,
subject to a $250,000 deductible for general liability claims and for liability
claims arising from prescription dispensing errors. The Company believes that
its insurance programs are adequate. The Company cannot assure that it will be
able to maintain appropriate types or levels of insurance in the future, that
adequate replacement policies will be available on acceptable terms, or that
insurance will cover all claims against the Company.
29
30
ITEM 2. PROPERTIES
As of January 29, 2000, the Company operated 160 ShopKo retail stores in 19
Midwest, Western Mountain and Pacific Northwest states. The following table sets
forth the geographic distribution of the present ShopKo stores:
# OF # OF
STATE STORES STATE STORES
-------------------------------------------------------------
California 1 Missouri 3
Colorado 3 Montana 5
Idaho 9 Nebraska 11
Illinois 13 Nevada 3
Indiana 2 Oregon 4
Iowa 13 South Dakota 6
Kansas 2 Utah 15
Kentucky 1 Washington 10
Michigan 4 Wisconsin 42
Minnesota 13
--------------
Total 160
==============
Of the Company's 160 ShopKo retail stores at January 29, 2000, the number
of stores owned and leased are listed below:
Owns Land and Owns Building Subject Leases Land and
Building Outright to Ground Lease Building Total
----------------- --------------- -------- -----
ShopKo Stores 84 5 23 112
Wholly-owned
subsidiaries 37* 3 8 48
Total 121 8 31 160
* Seven of which are subject to mortgages.
The ground leases expire at various dates ranging from 2012 through 2038 and the
other leases expire at various dates ranging from 2000 through 2020.
30
31
As of January 29, 2000, the Company operated 157 Pamida retail stores in 15
Midwest, North Central and Rocky Mountain states. The following table sets forth
the geographic distribution of the present Pamida stores:
# OF # OF
STATE STORES STATE STORES
-------------------------------------------------------------
Illinois 5 Montana 6
Indiana 8 Nebraska 15
Iowa 26 North Dakota 7
Kansas 2 Ohio 10
Kentucky 7 South Dakota 6
Michigan 13 Wisconsin 15
Minnesota 27 Wyoming 9
Missouri 1 ----------
Total 157
==========
Of the Company's 157 Pamida retail stores at January 29, 2000, the number
of stores owned and leased are listed below:
Owns Store Leases Store
Premises Premises Total
---------- ------------ -----
Pamida Stores 30 127 157
The leases expire at various dates ranging from 2000 through 2023.
31
32
The Company's other principal properties are as follows:
SQ. FT OF
BUILDING
LOCATION USE SPACE TITLE
- ---------------------------------------------------------------------------------------------------------------------
Green Bay, WI ShopKo Corporate Headquarters 228,000 Owned
Lawrence, WI ShopKo Corporate Headquarters - South
Annex/Return Center 114,300 Owned
Quincy, IL Closed: Corporate Headquarters
(Penn-Daniels) 15,000 Owned
Wisconsin Rapids, WI Information Services Dept. Satellite Office 1,700 Leased
Green Bay, WI ShopKo Corporate Headquarters - Glory Road Annex I 6,600 Leased
Green Bay, WI ShopKo Corporate Headquarters - Glory Road Annex II 2,600 Leased
De Pere, WI ShopKo Distribution Center 265,000 Owned
Boise, ID ShopKo Distribution Center 210,000 Owned
Omaha, NE ShopKo Distribution Center 50,000 Owned
Quincy, IL ShopKo Distribution Center 449,500 Leased
Omaha, NE Pamida Corporate Headquarters/Distribution Center 215,000 Owned
Omaha, NE Pamida Distribution Center 336,000 Owned
Lebanon, IN Pamida Distribution Center 200,000 Leased
Omaha, NE Pamida Return Center 41,000 Owned
Waukesha, WI ProVantage Corporate Headquarters 60,000 Leased
Green Bay, WI ProVantage Mail Service 10,000 Leased
Arlington, VA PharMark Office 15,500 Leased
Green Bay, WI ProVMed Office 7,200 Leased
The Waukesha, Wisconsin building is owned by ShopKo and leased to
ProVantage.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various litigation matters arising in the
ordinary course of its business. Management believes that none of this
litigation will have a material adverse effect on the Company's financial
condition, results of operations or statements of cash flows.
32
33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders of
Registrant during the fourth quarter of fiscal year 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
SERVED IN EMPLOYED
CURRENT BY THE
POSITION COMPANY
NAME AGE* POSITION** SINCE SINCE
---- ---- ------------------------------------------- ----- -----
William J. Podany 53 Chairman of the Board, President and Chief
Executive Officer 2000 1994
Rick M. Ausick 46 Senior Vice President, General Merchandise
Manager, Home 1999 1999
Michael J. Bettiga 46 Senior Vice President, ShopKo Stores and Retail
Health Services 1999 1977
Paul A. Burrows 51 Senior Vice President, Chief Information Officer 1998 1998
Roger J. Chustz 49 Senior Vice President, General Merchandise
Manager, Apparel and Product Development 1993 1993
Dennis C. Folz 52 Senior Vice President, Human Resources 1999 1998
Paul H. Freischlag, 46 Senior Vice President, Chief Financial Officer
Jr. 1998 1998
Steven T. Harig 45 Senior Vice President, Planning, Replenishment
and Analysis, Distribution and Transportation 1993 1989
Gary A. Hillerman 51 Senior Vice President, General Merchandise
Manager, Hardlines 1997 1996
Michael J. Hopkins 49 President, Pamida 1999 1995
Rodney D. Lawrence 42 Senior Vice President, Store Planning, Real Estate,
Construction and Store Marketing 1996 1996
L. Terry McDonald 57 Senior Vice President, Marketing 1994 1994
Richard D. Schepp 39 Senior Vice President, General Counsel and
Secretary 1997 1992
*as of January 29, 2000
**as of April 7, 2000
There are no family relationships between or among any of the directors or
executive officers of the Company.
33
34
The term of office of each executive officer is from one annual meeting of
the directors until the next annual meeting of directors or until a successor
for each is selected.
There are no arrangements or understandings between any of the executive
officers of the Registrant and any other person (not an officer or director of
the Registrant acting as such) pursuant to which any of the executive officers
were selected as an officer of the Registrant.
Each of the executive officers of the Company has been in the employ of the
Company for more than five years, except for Rick M. Ausick, Paul A. Burrows,
Dennis C. Folz, Paul H. Freischlag, Jr., Gary A. Hillerman and Rodney D.
Lawrence.
Mr. Ausick has been Senior Vice President, General Merchandise Manager/Home
since joining ShopKo in November 1999. Prior to joining ShopKo he was Vice
President of Merchandising for Home with the T. Eaton Company LTD in Toronto,
Ontario from August 1998 to August 1999. From 1984 to 1998, Mr. Ausick was
employed by Burdines, a division of Federated Department Stores, most recently
as Senior Vice President, General Merchandise Manager. Prior to that, he held
various positions with Marshall Field and Company from 1977 to 1984.
Mr. Burrows joined the Company in January 1998 as Senior Vice President and
Chief Information Officer. Mr. Burrows was First Vice President/Chief
Information Officer with Coldwell Banker Corp. from June 1996 through December
1997. Prior to that, Mr. Burrows was employed with Broadway Stores, Inc.
(formerly Carter Hawley Hale Stores, Inc.) for thirteen years, most recently as
Senior Vice President, Information Services.
Mr. Folz has been Senior Vice President, Human Resources since May 1999. He
was Vice President of Organization and Leadership Development since he joined
the Company in August 1998. From 1987 to August 1998, Mr. Folz held various
positions with Personnel Decisions, Inc., most recently Partner and Senior Vice
President of Organizational Effectiveness.
Mr. Freischlag joined ShopKo in July 1998 as Senior Vice President, Chief
Financial Officer. Mr. Freischlag was Treasurer and Vice President for Royal
Ahold, Zaandam, The Netherlands from July 1996 to July 1998. Prior to that, he
was with The Stop & Shop Companies in Boston, Massachusetts for nine years, most
recently as Vice President and Treasurer.
Mr. Hillerman has been Senior Vice President - General Merchandise Manager,
Hardlines since March 1997. Mr. Hillerman also served as Vice President -
Divisional Merchandise Manager from March 1996 to March 1997. He was Divisional
Merchandise Manager at Dillards from 1991 to 1996. Mr. Hillerman also served as
Vice President of Buying at Tuesday Morning and Senior Vice President - General
Merchandise Manager of Hardlines and Home at May Department Stores.
Mr. Lawrence has been Senior Vice President - Store Planning, Real Estate,
Construction and Store Marketing since May 1996. He was Vice President - Store
Planning with Broadway Stores, Inc. from 1994 to 1996. Mr. Lawrence was Director
of Store Planning with Carter Hawley Hale Stores, Inc. from 1992 to 1994 and
Vice President - Visual Merchandising with Broadway from 1989 to 1992.
34
35
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
ShopKo Stores, Inc. common shares are listed on the New York Stock Exchange
under the symbol "SKO" and in the newspapers as "ShopKo." As of March 24, 2000,
ShopKo's common shares were held by 944 record owners.
The following table sets forth the high and low reported closing sales
prices for the Common Stock for the last two fiscal years as reported on the New
York Stock Exchange Composite Tape.
HIGH LOW
---- ---
Fiscal Year 1998
First Quarter (ended May 2, 1998) $34.9375 $25.8750
Second Quarter (ended August 1, 1998) 36.6250 29.2500
Third Quarter (ended October 31, 1998) 32.5000 25.1250
Fourth Quarter (ended January 30, 1999) 33.6875 29.6875
Fiscal Year 1999
First Quarter (ended May 1, 1999) $36.0625 $28.2500
Second Quarter (ended July 31, 1999) 40.6250 33.3125
Third Quarter (ended October 30, 1999) 38.2500 23.0000
Fourth Quarter (ended January 29, 2000) 25.3750 18.1875
The closing sales price of the Common Stock on the New York Stock Exchange
on April 7, 2000 was $20.75 per share.
The Company's revolving credit agreement has a restrictive covenant which
requires maintenance of a minimum net worth. This covenant may potentially limit
the payment of dividends. As of January 29, 2000, the Company was in compliance
with this covenant; having a net worth balance of $694.5 million compared to a
required balance of $385.3 million.
The Company has not paid any cash dividends in the last two fiscal years.
The Company currently intends to retain earnings for the growth and expansion of
its business and not to declare or pay any cash dividends.
35
36
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS ENDED
-------------------------------------------------------------------
JAN. 29, JAN. 30, JAN. 31, FEB. 22, FEB. 24,
2000 1999 1998(1) 1997 1996
(52 WKS) (52 WKS) (49 WKS) (52 WKS) (52 WKS)
- ------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS (MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------
Net sales $3,898 $2,959 $2,434 $2,333 $1,968
Licensed department rentals and other income 14 12 12 13 14
Gross margin 850 662 564 550 501
Selling, general and administrative expenses 601 472 404 397 361
Special charges 8(2) 6(3) 3(4)
Depreciation and amortization expenses 84 68 58 60 56
Interest expense - net 47 38 31 32 34
Gain on sale of ProVantage stock 57
Earnings before income taxes, minority
interest and extraordinary item 180 92 80 74 63
Earnings before minority interest
and extraordinary item 108 56 49 45 38
Earnings before extraordinary item 106(5) 56 49 45 38
Net earnings 102 56 49 45 38
- ------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (DOLLARS)
- ------------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share before
extraordinary item $3.75 $2.14 $1.73 $1.40 $1.20
Basic net earnings per common share 3.62 2.14 1.73 1.40 1.20
Diluted earnings per common share before
extraordinary item 3.70 2.10 1.71 1.39 1.20
Diluted net earnings per common share 3.57 2.10 1.71 1.39 1.20
Cash dividends declared per common share(6) 0.22 0.44
- ------------------------------------------------------------------------------------------------------------------------------
FINANCIAL DATA (MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------
Working capital $71 $167 $144 $232 $215
Property and equipment-net 909 704 630 603 617
Total assets 2,083 1,374 1,251 1,234 1,118
Total debt(7) 705 472 440 421 416
Total shareholders' equity 695 459 396 461 422
Capital expenditures 152 100 32 39 53
- ------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
- ------------------------------------------------------------------------------------------------------------------------------
Current ratio 1.1 1.4 1.4 1.7 1.8
Return on beginning assets 7.4 % 4.4 % 4.0 % 4.0 % 3.5 %
Return on beginning shareholders' equity 22.2 % 14.0 % 10.6 % 10.7 % 9.7 %
Total debt as % of total capitalization(8) 46.3 % 49.3 % 51.4 % 46.6 % 48.5 %
- ------------------------------------------------------------------------------------------------------------------------------
OTHER YEAR END DATA
- ------------------------------------------------------------------------------------------------------------------------------
ShopKo stores open at year end 160 147 149(9) 130 129
Average ShopKo store size-square feet 89,545 89,106 88,754 89,840 89,945
Pamida stores open at year end(10) 157
Average Pamida store size-square feet 36,055
36
37
(1) Fiscal year end was changed from the last Saturday in February to the
Saturday nearest January 31.
(2) Special charges related to employee retention programs, elimination of
administrative functions and various integration initiatives at Pamida.
(3) Special charges related to the elimination of duplicate operations at the
Penn-Daniels administrative office and warehouse.
(4) Special charges related to the termination of the proposed combination with
two other parties.
(5) The repurchase of Senior Notes resulted in an extraordinary loss of $3.8
million, net of income tax benefit of $2.4 million.
(6) Upon termination of the proposed combination with two other parties, the
Company determined to retain earnings for the growth and expansion of its
business and not declare or pay any cash dividends.
(7) Total debt includes short-term debt, current portion of long-term
obligations, long-term obligations and payable to related party.
(8) Total capitalization includes shareholders' equity, minority interest,
total debt and non-current deferred income taxes.
(9) Includes 19 stores acquired from Penn-Daniels, Incorporated, two of which
closed in fiscal 1998.
(10) The Company acquired the Pamida retail store chain in July 1999.
37
38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In August 1997, the Company approved a change in its fiscal year end to the
Saturday closest to the end of January, commencing January 31, 1998. This change
in the Company's fiscal year conforms to the National Retail Federation
calendar. The Company's audited consolidated financial statements were issued
for the 52 weeks ended January 29, 2000 (fiscal 1999), the 52 weeks ended
January 30, 1999 (fiscal 1998) and the 49 weeks ended January 31, 1998 (fiscal
1997).
RESULTS OF OPERATIONS
The following table sets forth items from the Company's Consolidated
Statements of Earnings as percentages of consolidated net sales:
FISCAL YEARS ENDED
----------------------------------------------
JAN. 29, 2000 JAN. 30, 1999 JAN. 31, 1998
(52 WEEKS) (52 WEEKS) (49 WEEKS)
---------- ---------- ----------
Revenues:
Net sales 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.4 0.4 0.5
------- ------ ------
100.4 100.4 100.5
Costs and Expenses:
Cost of sales 78.2 77.6 76.8
Selling, general and administrative expenses 15.4 15.9 16.6
Special charges 0.2 0.2 0.1
Depreciation and amortization expenses 2.2 2.3 2.4
---- ------ ------
96.0 96.0 95.9
Income from operations 4.4 4.4 4.6
Interest expense - net (1.2) (1.3) (1.3)
Gain on sale of ProVantage stock 1.4 0.0 0.0
--- --- ---
Earnings before income taxes, minority interest and
extraordinary item 4.6 3.1 3.3
Provision for income taxes 1.8 1.2 1.3
--- --- ---
Earnings before minority interest and
extraordinary item 2.8 1.9 2.0
Minority interest (0.1) 0.0 0.0
----- --- ---
Earnings before extraordinary item 2.7 1.9 2.0
Extraordinary (loss) on retirement of debt,
net of income taxes (0.1) 0.0 0.0
----- --- ---
Net earnings 2.6% 1.9% 2.0%
=== === ===
38
39
The Company has three business segments: a ShopKo Retail segment (which
includes ShopKo stores general merchandise, retail pharmacy and retail optical
operations), a Pamida Retail segment (which includes Pamida stores general
merchandise and retail pharmacy operations) and a ProVantage segment (which
includes health benefit management services, pharmacy mail services, vision
benefit management services and health information technology and clinical
support services). Intercompany sales, which consist of prescriptions that were
both sold at a ShopKo pharmacy or at a Pamida pharmacy and processed by
ProVantage, have been eliminated in consolidation.
The following tables set forth items from the Company's business segments
as percentages of net sales:
SHOPKO RETAIL SEGMENT
FISCAL YEARS ENDED
----------------------------------------------
JAN. 29, 2000 JAN. 30, 1999 JAN. 31, 1998
(52 WEEKS) (52 WEEKS) (49 WEEKS)
---------- ---------- ----------
Revenues:
Net sales 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.5 0.5 0.6
------ ------ ------
100.5 100.5 100.6
Costs and Expenses:
Cost of sales 74.1 73.8 73.6
Selling, general and administrative expenses 17.8 18.1 18.0
Depreciation and amortization expenses 2.5 2.6 2.6
------ ------ ------
94.4 94.5 94.2
Income from operations 6.1% 6.0% 6.4%
====== ====== ======
PAMIDA RETAIL SEGMENT
FISCAL YEAR ENDED
----------------------------------------------
JAN. 29, 2000
(30 WEEKS)
----------
Revenues:
Net sales 100.0%
Licensed department rentals and other income 0.3
------
100.3
Costs and Expenses:
Cost of sales 73.7
Selling, general and administrative expenses 19.2
Depreciation and amortization expenses 2.5
------
95.4
Income from operations 4.9%
======
39
40
PROVANTAGE SEGMENT
FISCAL YEARS ENDED
----------------------------------------------
JAN. 29, 2000 JAN. 30, 1999 JAN. 31, 1998
(52 WEEKS) (52 WEEKS) (49 WEEKS)
---------- ---------- ----------
Revenues:
Net sales 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.0 0.1 0.1
------ ------ ------
100.0 100.1 100.1
Costs and Expenses:
Cost of sales 93.3 92.7 92.5
Selling, general and administrative expenses 3.6 3.9 4.0
Depreciation and amortization expenses 1.1 1.0 1.0
------ ------ ------
98.0 97.6 97.5
Income from operations 2.0% 2.5% 2.6%
====== ====== ======
FISCAL 1999 COMPARED TO FISCAL 1998
Consolidated net sales for fiscal 1999 (52 weeks) increased $939.5 million
or 31.8% over fiscal 1998 (52 weeks) to $3,898.1 million.
ShopKo Retail Store sales for fiscal 1999 increased 10.9% or $255.7 million
from fiscal 1998 to $2,606.9 million. The Company attributes this increase
primarily to increased comparable ShopKo Retail Store sales and the 13 new
ShopKo stores opened during the year. ShopKo comparable Retail Store sales
increased 6.2%, and the changes for that period by category were as follows:
Retail Health - 16.9%, Hardlines - 5.5% and Softlines - 5.2%. Changes in retail
comparable store sales for a year are based upon those stores which were open
for the entire preceding year.
In July 1999, the Company acquired the retail chain Pamida, Inc.
("Pamida"), which operated 152 Pamida stores and 4 Heartland Home Furniture
stores in 15 Midwest, North Central and Rocky Mountain states as of July 31,
1999. Since the acquisition, seven additional Pamida stores were opened and two
Pamida stores were closed, increasing the number of Pamida stores in operation
from 152 to 157 stores as of January 29, 2000. On August 30, 1999, the Company
sold the entire Heartland Home Furniture business to a group of investors.
Pamida stores' 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. Pamida Retail Store sales for the
30 weeks ended January 29, 2000 were $441.2 million.
ProVantage sales for fiscal 1999 increased 40.3% or $259.1 million over
fiscal 1998 to $902.4 million. This increase is due primarily to internally
generated growth in claims processing and mail pharmacy.
40
41
Consolidated gross margins as percentages of sales were 21.8% and 22.4% for
fiscal 1999 and 1998, respectively. ShopKo Retail gross margins as percentages
of sales were 25.9% and 26.2% for fiscal 1999 and 1998, respectively. The ShopKo
Retail gross margins include LIFO credits of $4.0 million for fiscal 1999 and
$3.6 million for fiscal 1998. ShopKo Retail gross margins, before LIFO credits,
were 25.7% and 26.0% for fiscal 1999 and 1998, respectively. The decrease in the
ShopKo retail gross margin rate is primarily attributable to increased third
party sales in retail pharmacy as well as other changes in our merchandising
mix. Pamida Retail gross margin as a percent of sales was 26.3% for the 30 weeks
ended January 29, 2000 and include a LIFO credit of $1.6 million. Pamida Retail
gross margin, before LIFO credit, was 25.9% for the 30 weeks ended January 29,
2000. ProVantage gross margins as percentages of sales were 6.7% and 7.3% for
fiscal 1999 and 1998, respectively. The decrease in the gross margin rate is
primarily due to increasing prescription drug costs and the addition of larger
clients with lower average transaction fees.
Consolidated selling, general and administrative expenses as a percentage
of net sales decreased to 15.4% in fiscal 1999, compared with 15.9% in fiscal
1998. ShopKo Retail selling, general and administrative expenses were 17.8% and
18.1% of net sales for fiscal 1999 and 1998, respectively. This reduction is
primarily due to leveraging store payroll and fixed costs against increased
sales volume. Pamida Retail selling, general and administrative expenses were
19.2% of sales for the 30 weeks ended January 29, 2000. ProVantage selling,
general and administrative expenses decreased to 3.6% compared with 3.9% in
fiscal 1998. This decrease is primarily due to leveraging costs against
increased sales volume.
The Company's operating earnings (earnings before interest, gain on
issuance of subsidiary stock, income taxes, minority interest and extraordinary
item) increased 31.1% to $170.4 million in fiscal 1999 from $129.9 million in
fiscal 1998. ShopKo Retail operating earnings (earnings before corporate
expenses, interest and income taxes) increased 13.0% to $159.1 million in fiscal
1999 compared to $140.8 million in fiscal 1998. This increase is primarily due
to increased sales. Pamida Retail operating earnings were $21.5 million for the
30 weeks ended January 29, 2000. ProVantage operating earnings increased 13.8%
in fiscal 1999 to $18.4 million compared to $16.2 million in fiscal 1998. This
increase is due to internally generated growth primarily in health benefit
management services.
Net interest expense as a percentage of net sales decreased to 1.2% in
fiscal 1999 compared with 1.3% in fiscal 1998. This decrease is primarily due to
increased sales.
FISCAL 1998 COMPARED TO FISCAL 1997
Consolidated net sales for fiscal 1998 (52 weeks) increased $524.6 million
or 21.6% over fiscal 1997 (49 weeks) to $2,958.6 million.
ShopKo Retail sales for fiscal 1998 (52 weeks) increased 17.5% or $349.6
million from fiscal 1997 (49 weeks) to $2,351.2 million. The Company attributes
this increase to the 17 new stores acquired from Penn-Daniels, Incorporated
("Penn-Daniels"), three additional weeks in the fiscal year and merchandising
operations and marketing initiatives. On a 52-week basis, ShopKo comparable
Retail Store sales increased 5.7%, and the changes for that period by category
were as follows: Retail Health - 11.9%, Hardlines - 5.9% and Softlines - (0.2%).
41
42
ProVantage sales for fiscal 1998 (52 weeks) increased 40.4% or $185.0
million over fiscal 1997 (49 weeks) to $643.3 million. This increase is due
primarily to internally generated growth in claims processing and mail pharmacy.
Consolidated gross margins as percentages of sales were 22.4% and 23.2% for
fiscal 1998 and 1997, respectively. ShopKo Retail gross margins as percentages
of sales were 26.2% and 26.4% for fiscal 1998 and 1997, respectively. The ShopKo
Retail gross margins include LIFO credits of $3.6 million for fiscal 1998 and
$3.7 million for fiscal 1997. ShopKo Retail gross margins, before LIFO credits,
were 26.0% and 26.2% for fiscal 1998 and 1997, respectively. This decrease is
primarily due to increases in promotional sales and third party sales in ShopKo
Retail pharmacy. ProVantage gross margins as percentages of sales were 7.3% and
7.5% for fiscal 1998 and 1997, respectively. This decrease is attributable to
increases in the cost of prescriptions and the addition of larger clients with
lower average transaction fees, offset in part by the addition of higher margin
clinical services and information technology products.
Consolidated selling, general and administrative expenses as a percentage
of net sales decreased to 15.9% in fiscal 1998, compared with 16.6% in fiscal
1997. ShopKo Retail selling, general and administrative expenses were 18.1% and
18.0% of net sales for fiscal 1998 and 1997, respectively. Excluding the 17 new
stores related to the Penn-Daniels acquisition and expenses incurred for year
2000 compliance, ShopKo Retail selling, general and administrative expenses as a
percent of sales were 17.6% for fiscal 1998. The decrease is attributable to
continued expense control initiatives at store level. ProVantage selling,
general and administrative expenses were 3.9% and 4.0% of net sales for fiscal
1998 and 1997, respectively. This decrease is primarily due to leveraging
expenses over the increased sales volume.
The Company's operating earnings (earnings before interest and income
taxes) increased 17.0% to $129.9 million in fiscal 1998 from $111.0 million in
fiscal 1997. ShopKo Retail operating earnings (earnings before corporate
expenses, interest and income taxes) increased 10.6% to $140.8 million in fiscal
1998 compared to $127.3 million in fiscal 1997. This increase is primarily due
to increased sales and expense control initiatives. ProVantage operating
earnings increased 34.0% in fiscal 1998 to $16.2 million compared to $12.1
million in fiscal 1997. This increase is due to internally generated growth
primarily in health benefit management services.
Net interest expense as a percentage of net sales was 1.3% in both fiscal
1998 and fiscal 1997.
42
43
LIQUIDITY AND CAPITAL RESOURCES
The Company relies on cash generated from its operations, with the
remaining needs being met by short-term and long-term borrowings. Cash provided
from operating activities was $64.5 million, $73.8 million and $142.6 million in
fiscal years 1999, 1998 and 1997, respectively.
On July 19, 1999, the initial public offering of 5,600,000 shares of
ProVantage common stock at $18.00 per share was completed. The Company also sold
an additional 840,000 shares of ProVantage common stock pursuant to the
underwriters' over-allotment option. The Company received approximately $106.0
million in this transaction of which $20.0 million was retained by ProVantage.
The Company used the remaining proceeds of the offering to pay down its
short-term debt. ProVantage's stock is listed on the New York Stock Exchange
under the symbol `PHS.'
On July 21, 1999, the Company completed an offering of 4,025,000 shares of
its common stock at $38.50 per share. The Company used the net offering proceeds
of approximately $147.1 million for repayment of a portion of the debt it
assumed in connection with its recent acquisition of Pamida and for other
corporate purposes.
The Company had a $200.0 million revolving credit agreement with a
consortium of banks of which $195.0 million was outstanding as of January 29,
2000. This credit facility is unsecured and is effective through January 31,
2002. In April 1999, the Company negotiated a $50.0 million unsecured banker's
acceptance note which came due April 17, 2000 of which $50.0 million was
outstanding as of January 29, 2000. The $50.0 million outstanding under the
unsecured banker's acceptance note was repaid on April 17, 2000. Another
unsecured banker's acceptance note was negotiated and will expire April 30,
2001. Varying amounts are available under this note and range from $25.0 to
$100.0 million based upon the seasonal needs of the Company. As of April 17,
2000, there was $60.0 million outstanding under this credit agreement. In
September 1999, the Company also negotiated a $100.0 million unsecured 364-day
credit facility.
Pamida's $125.0 million committed Loan and Security Agreement, as amended,
had been utilized by Pamida prior to the Company's acquisition of Pamida and
shortly thereafter for working capital purposes. During August 1999, the
remaining balance of this loan was paid in full and the agreement was
terminated.
On September 2, 1999, the Company redeemed all of Pamida's 11 3/4% senior
subordinated notes in return for payments of approximately $153.2 million, which
included principal, accrued interest and premium due on call. The Company funded
this redemption from cash flows from operations and other financing activities.
The Company has entered into a credit agreement with ProVantage which
provides that ProVantage may borrow up to $25.0 million from the Company on a
revolving basis. ProVantage's capital needs are expected to be met through the
proceeds of its initial public offering, cash generated from its operations, and
borrowings under the credit agreement with the Company or third party sources.
43
44
CAPITAL EXPENDITURES AND ACQUISITIONS
The Company spent $151.7 million on capital expenditures (excluding
acquisitions) in fiscal 1999, compared to $99.7 million in fiscal 1998 and $32.0
million in fiscal 1997. The following table sets forth the components of the
Company's capital expenditures and acquisitions (in millions):
FISCAL YEARS ENDED
----------------------------------------------
JAN. 29, 2000 JAN. 30, 1999 JAN. 31, 1998
(52 WEEKS) (52 WEEKS) (49 WEEKS)
---------- ---------- ----------
Capital Expenditures
New stores $57.2 $42.6 $ 0.0
Remodeling and refixturing 18.7 15.2 12.6
Distribution centers 25.9 1.4 0.7
Management information and point-of-sale equipment
and systems 33.0 34.5 18.0
Other 16.9 6.0 0.7
------ ----- -----
Total $151.7 $99.7 $32.0
====== ===== =====
Acquisitions $104.0 $40.5
====== =====
During fiscal 1999, the Company converted 10 former Venture store locations
and one former Target store location to ShopKo stores, including the addition of
in-store pharmacies and optical centers. Also, during fiscal 1999, the Company
opened two new ShopKo stores. During fiscal 1999, the Company began the
expansion of the ShopKo distribution centers in Idaho and Wisconsin and the
building of a new distribution center in Omaha, Nebraska. Since the Pamida
acquisition, the Company has opened seven new Pamida stores and closed two
Pamida stores.
On February 14, 2000, the Company announced plans to open five new ShopKo
stores and eight new Pamida stores in fiscal 2000, with more store openings
planned for later in the year. In total, the Company expects to open 5 to 9
ShopKo stores and 20 to 25 Pamida stores in fiscal 2000.
The Company's total capital expenditures for the fiscal year ending
February 3, 2001 are expected to approximate $200.0 to $250.0 million. The
expenditures would 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. This
amount excludes 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.
The Company expects to pursue growth of its Retail Store business through
new store construction or acquisition of existing retail stores or businesses.
ProVantage expects to consider and, if appropriate, pursue the acquisition of
health services or health information technology businesses. Such plans may be
reviewed and revised from time to time in light of changing conditions.
44
45
Funds generated from operations, and if necessary, the Company's revolving
credit facility or other short-term borrowings are expected to fund the
projected working capital needs and total capital expenditures through fiscal
2000 except for possible acquisitions described above. Depending upon the size
and structure of any such acquisitions, the Company and/or ProVantage may
require additional capital resources. The Company believes that adequate sources
of capital will be available.
On August 2, 1996, the Company completed the acquisition of CareStream
ScripCard from Avatex Corporation, formerly known as Foxmeyer Health
Corporation. CareStream ScripCard was a prescription benefit management company
which has been integrated with the Company's ProVantage subsidiary. The purchase
price was $30.5 million in cash, plus a supplemental cash payment equal to 1.5%
of ProVantage's market value subject to a minimum of $2.5 million and a maximum
of $5.0 million. On August 10, 1999, Avatex exercised its supplemental cash
payment right in the amount of $5.0 million which was paid by ProVantage to
Avatex in August 1999. This payment was capitalized as additional purchase price
and will be amortized over 18 years.
On August 20, 1997, the Company acquired PharMark, a software and database
development business providing information driven strategies for optimizing
medical and pharmaceutical outcomes, based in Arlington, Virginia. The purchase
price for PharMark was approximately $15.2 million. The sellers of PharMark may
also be entitled to contingent payments of up to $8.0 million in the aggregate
based on future increases in the market value of ProVantage's outstanding common
stock (the "Contingent Payments"). The Contingent Payments, if any, will be due
on the first to occur of August 20, 2002 or the date on which the Company ceases
to own at least a majority of ProVantage's common stock. 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 18 years.
On December 19, 1997, ShopKo bought the outstanding stock of Penn-Daniels,
a retail chain headquartered in Quincy, Illinois for approximately $16.4 million
in cash and $42.5 million of assumed debt, of which approximately $26.6 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. Penn-Daniels operated 18 Jacks discount stores
in Iowa, Illinois and Missouri and one Lots-A-Deals close-out store in Moline,
Illinois.
In connection with the Penn-Daniels acquisition, ShopKo incurred special
pre-tax costs of $5.7 million eliminating duplicate operations at the
Penn-Daniels administrative office and warehouse and other transaction related
items in fiscal 1998. The Company funded these costs from available cash and
borrowings under the Company's revolving credit facility.
45
46
On July 6, 1999, the Company completed a tender offer for all of the
outstanding voting common stock of Pamida at a price of $11.50 per share. The
Company simultaneously acquired all of Pamida's non-voting common stock from 399
Venture Partners, Inc. at a price of $11.50 per share. Pamida is a retail chain
headquartered in Omaha, Nebraska operating 157 Pamida stores in 15 Midwest,
North Central and Rocky Mountain states as of January 29, 2000. At the time of
the acquisition, Pamida also operated 4 Heartland Home Furniture stores. On
August 30, 1999, the Company sold the entire Heartland Home Furniture business
to a group of investors. During fiscal 1999, the Company incurred $8.1 million
in special pre-tax costs relating to the Pamida acquisition for employee
retention programs, elimination of administrative functions and various
integration initiatives. During fiscal 2000, the Company expects to incur
additional special charges of approximately $4.0 to $6.0 million for the same
integration initiatives mentioned above.
On December 31,1999, ProVantage acquired for $5.0 million the remaining
minority interest held in ProVMed LLC that was not already owned by ProVantage.
ProVMed LLC performs advanced data warehousing, clinical and administration
information support services. The purchase price included an allocation to
goodwill of $3.4 million that is being amortized over a period of 20 years.
All acquisitions have been accounted for under the purchase method of
accounting and the results of all acquisition's operations have been included in
the Company's consolidated statements of earnings since the acquisition dates.
TERMINATION OF PLAN OF REORGANIZATION
On April 2, 1997, the Company and two other parties mutually agreed to
terminate a planned business combination. The Company recorded special pre-tax
charges of $2.8 million ($0.06 per share) during fiscal 1997 for costs incurred
in connection with the terminated business combination.
STOCK BUYBACK AGREEMENT
On April 24, 1997, the Company and Supervalu Inc. ("Supervalu") entered
into an agreement pursuant to which Supervalu exited its 46 percent investment
in the Company. Under the terms of the agreement, the companies completed two
simultaneous transactions. The first transaction was a $150.0 million stock
buyback, whereby the Company repurchased 8,174,387 shares of its common stock
held by Supervalu for $18.35 per share. The second transaction was a secondary
public offering of Supervalu's remaining 6,557,280 shares of the Company's
common stock and 983,592 additional shares which were issued by the Company to
cover over-allotments. The secondary offering was priced at $25.00 per share on
June 26, 1997. The stock buyback and secondary offering were completed on July
2, 1997. The Company received $23.4 million proceeds from the sale of the
over-allotment shares. Supervalu paid the underwriting discount for the shares
it sold and certain other expenses related to the secondary offering.
46
47
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.
During fiscal 1999, 815,600 shares of common stock had been repurchased for
approximately $20.0 million. 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. As of March 15, 2000, no shares of Common Stock had been
repurchased under this program.
SENIOR NOTE REPURCHASE PROGRAM
On February 8, 1999, ShopKo announced that its Board of Directors had
authorized the Company to repurchase its Senior Notes from time to time in the
open market and through privately negotiated transactions. Any purchases would
depend on price, market conditions and other factors. During 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.
RECENT PRONOUNCEMENTS
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 significant impact on the Company's
consolidated financial statements.
MARKET RISK
The Company is exposed to market risk from changes in interest rates based
on its financing activities. At January 29, 2000, the Company had $245.0 million
of short-term debt with a weighted average interest rate of 6.4%. This
short-term debt was incurred under the Company's credit facilities to fund the
Company's working capital requirements and repay the debt assumed in the Pamida
acquisition. This short-term debt exposes the Company to the possibility of
increased or decreased interest expense in the event of changes in short-term
interest rates. During fiscal 1999, the monthly average amount borrowed under
the short-term credit facilities was approximately $184.6 million, and the
weighted average interest rate was 5.9% per annum. If the Company's weighted
average interest rate were to change by 10.0% for fiscal 1999, net income would
have changed by an immaterial amount.
47
48
At January 29, 2000, the Company had fixed-rate long-term debt totaling
$459.5 million. These instruments are fixed-rate; and therefore, do not expose
the Company to the possibility of earnings loss or gain due to changes in market
interest rates. In general, fluctuation in the market value of these instruments
based on fluctuation in interest rates, would impact the Company's earnings and
cash flows only if the Company were to reacquire all or a portion of these
instruments prior to their maturity. Management continually monitors the
interest rate environment with the objective of lowering borrowing costs without
subjecting the Company to excessive exposure to fluctuating interest rates.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by Item 7a, as to Quantitative and Qualitative
Disclosures about Market Risk is included on pages 47 to 48 and are incorporated
by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated financial statements are included on pages 53 to 72 and
are incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10, as to Directors of the Registrant
and the information required by Items 401 and 405 of Regulation S-K, is
incorporated herein by reference to the Registrant's definitive Proxy Statement
dated April 17, 2000 filed with the Securities and Exchange Commission pursuant
to Regulation 14A in connection with the Registrant's 2000 Annual Meeting of
Shareholders. Information regarding executive officers is included in Part I
above.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference
to the Registrant's definitive Proxy Statement dated April 17, 2000 filed with
the Securities and Exchange Commission pursuant to Regulation 14A in connection
with the Registrant's 2000 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated herein by reference
to the Registrant's definitive Proxy Statement dated April 17, 2000 filed with
the Securities and Exchange Commission pursuant to Regulation 14A in connection
with the Registrant's 2000 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated herein by reference
to the Registrant's definitive Proxy Statement dated April 17, 2000 filed with
the Securities and Exchange Commission pursuant to Regulation 14A in connection
with the Registrant's 2000 Annual Meeting of Shareholders.
49
50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Consolidated Financial Statements:
See "Index to Consolidated Financial Statements and Financial
Statement Schedule" on page 51, the Independent Auditors' Report on
page 52 and the Consolidated Financial Statements on pages 53 to 72,
all of which are incorporated herein by reference.
2. Financial Statement Schedule:
See "Index to Consolidated Financial Statements and Financial
Statement Schedule" on page 51 and the Financial Statement Schedule on
page 73, all of which are incorporated herein by reference.
3. Exhibits:
See "Exhibit Index" on pages 75 to 80 which is incorporated herein by
reference.
Pursuant to Regulation S-K, Item 601(b) (4) (iii), the Registrant
hereby agrees to furnish to the Commission, upon request, a copy of
each instrument and agreement with respect to long-term debt of the
Registrant and its consolidated subsidiaries which does not exceed 10
percent of the total assets of the Registrant and its subsidiaries on
a consolidated basis.
(b) Reports on Form 8-K:
The Registrant filed Current Reports on Form 8-K in the fourth fiscal
quarter of fiscal 1999 as follows:
None.
50
51
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
Index to Consolidated Financial Statements of ShopKo Stores, Inc. and Subsidiaries
Independent Auditors' Report................................................................... 52
Consolidated Statements of Earnings
for each of the three years in the period ended January 29, 2000......................... 53
Consolidated Balance Sheets as of January 29, 2000 and January 30, 1999...................... 54
Consolidated Statements of Cash Flows
for each of the three years in the period ended January 29, 2000......................... 55
Consolidated Statements of Shareholders' Equity
for each of the three years in the period ended January 29, 2000......................... 56-57
Notes to Consolidated Financial Statements .................................................. 58-72
Index to Financial Statement Schedule
Schedule II-Valuation and Qualifying Accounts ................................................. 73
All other schedules are omitted because they are not applicable or not required.
51
52
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
ShopKo Stores, Inc.:
We have audited the consolidated balance sheets of ShopKo Stores, Inc. and
subsidiaries as of January 29, 2000 and January 30, 1999, and the related
consolidated statements of earnings, shareholders' equity and cash flows for the
year (52 weeks) ended January 29, 2000, the year (52 weeks) ended January 30,
1999 and the year (49 weeks) ended January 31, 1998. Our audits also included
the financial statement schedule listed in the Index at Item 14. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of ShopKo Stores, Inc. and
subsidiaries as of January 29, 2000 and January 30, 1999, and the results of
their operations and their cash flows for the year (52 weeks) ended January 29,
2000, the year (52 weeks) ended January 30,1999 and the year (49 weeks) ended
January 31, 1998 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
March 15, 2000
52
53
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Fiscal Years Ended
- ----------------------------------------------------------------------------------------------------------------
January 29, January 30, January 31,
2000 1999 1998
(52 Weeks) (52 Weeks) (49 Weeks)
- ----------------------------------------------------------------------------------------------------------------
Revenues:
Net sales $ 3,898,090 $ 2,958,557 $ 2,433,929
Licensed department rentals and other income 13,856 12,325 11,756
- ----------------------------------------------------------------------------------------------------------------
3,911,946 2,970,882 2,445,685
Costs and Expenses:
Cost of sales 3,047,930 2,296,085 1,869,973
Selling, general and administrative expenses 601,157 471,546 403,635
Special charges 8,068 5,723 2,800
Depreciation and amortization expenses 84,438 67,590 58,252
- ----------------------------------------------------------------------------------------------------------------
3,741,593 2,840,944 2,334,660
Income from operations 170,353 129,938 111,025
Interest expense - net (46,894) (38,311) (30,582)
Gain on sale of ProVantage stock 56,760
- ----------------------------------------------------------------------------------------------------------------
Earnings before income taxes, minority interest and extraordinary
item 180,219 91,627 80,443
Provision for income taxes 71,800 35,991 31,598
- ----------------------------------------------------------------------------------------------------------------
Earnings before minority interest and extraordinary item 108,419 55,636 48,845
Minority interest (2,463)
- ----------------------------------------------------------------------------------------------------------------
Earnings before extraordinary item 105,956 55,636 48,845
Extraordinary (loss) on retirement of debt, net of income taxes
of $2,443 (3,776)
- ----------------------------------------------------------------------------------------------------------------
Net earnings $ 102,180 $ 55,636 $ 48,845
================================================================================================================
Basic earnings per common share before extraordinary item $ 3.75 $ 2.14 $ 1.73
Extraordinary (loss) on retirement of debt (0.13)
- ----------------------------------------------------------------------------------------------------------------
Basic net earnings per common share $ 3.62 $ 2.14 $ 1.73
================================================================================================================
Weighted average number of common shares outstanding 28,237 26,035 28,161
Diluted earnings per common share before extraordinary item $ 3.70 $ 2.10 $ 1.71
Extraordinary (loss) on retirement of debt (0.13)
- ----------------------------------------------------------------------------------------------------------------
Diluted net earnings per common share $ 3.57 $ 2.10 $ 1.71
================================================================================================================
Adjusted weighted average number of common shares outstanding 28,595 26,517 28,569
See notes to consolidated financial statements.
53
54
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
January 29, January 30,
2000 1999
- ---------------------------------------------------------------------------------------------------------
Assets
- ---------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 26,916 $ 30,219
Receivables, less allowance for losses of
$6,826 and $7,487, respectively 179,140 117,652
Merchandise inventories 663,164 434,643
Other current assets 16,042 5,461
- ---------------------------------------------------------------------------------------------------------
Total current assets 885,262 587,975
Other assets and deferred charges 16,396 6,960
Intangible assets - net 272,193 74,749
Property and equipment - net 909,438 703,840
- ---------------------------------------------------------------------------------------------------------
Total assets $ 2,083,289 $ 1,373,524
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- ---------------------------------------------------------------------------------------------------------
Current liabilities:
Short-term debt $ 245,000 $ -
Accounts payable - trade 281,291 189,581
Accrued compensation and related taxes 51,548 40,955
Accrued other liabilities 211,049 169,530
Accrued income and other taxes 18,970 16,127
Current portion of long-term obligations 6,416 4,597
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 814,274 420,790
Long-term obligations and leases, less current portions 453,084 467,191
Deferred income taxes 69,771 26,301
Minority interest 51,658
Shareholders' equity:
Preferred stock; none outstanding
Common stock; shares issued, 30,400 at January 29, 2000
and 26,129 at January 30, 1999 304 261
Additional paid-in capital 381,354 228,479
Retained earnings 332,872 230,502
Less treasury stock, at cost; 816 shares (20,028)
- ---------------------------------------------------------------------------------------------------------
Total shareholders' equity 694,502 459,242
- ---------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,083,289 $ 1,373,524
- ---------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
54
55
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Years Ended
- -----------------------------------------------------------------------------------------------------------------------------
January 29, January 30, January 31,
2000 1999 1998
(52 Weeks) (52 Weeks) (49 Weeks)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 102,180 $ 55,636 $ 48,845
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 84,438 67,590 58,252
Provision for losses on receivables 1,256 609 2,999
(Gain) loss on the sale of property and equipment (3,110) 415 (540)
Gain on sale of ProVantage stock (56,760)
Deferred income taxes 42,213 12,000 (1,334)
Extraordinary loss on early extinguishment of debt,
net of tax benefit 3,776
Change in assets and liabilities (excluding effects of
business acquisitions):
Receivables (53,993) (19,857) (3,593)
Merchandise inventories (29,941) (64,630) (9,872)
Other current assets (3,419) 1,442 (1,282)
Other assets and intangibles (8,143) (5,839) (1,878)
Accounts payable 21,010 (4,065) 17,867
Accrued liabilities (34,985) 30,548 33,137
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 64,522 73,849 142,601
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment (151,731) (99,725) (32,003)
Proceeds from the sale of property and equipment 7,871 2,301 2,348
Business acquisitions, net of cash acquired (104,033) (40,488)
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (247,893) (97,424) (70,143)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in short-term debt 150,708
Change in common stock from stock options 3,974 4,572 10,907
Change in common stock from public offering 147,147 23,419
Proceeds from the sale of ProVantage stock 105,955
Purchase of treasury stock (20,028) (152,179)
Retirement of debt and capital leases (207,688) (5,122) (24,811)
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 180,068 (550) (142,664)
- -----------------------------------------------------------------------------------------------------------------------------
Net (decrease) in cash and cash equivalents (3,303) (24,125) (70,206)
Cash and cash equivalents at beginning of year 30,219 54,344 124,550
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 26,916 $ 30,219 $ 54,344
- -----------------------------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Noncash investing and financial activities -
Retirement of treasury stock $ 152,179
Capital lease obligations incurred $ 3,568 $ 35,779
Restricted stock issued $ 416
Cash paid during the period for:
Interest $ 52,783 $ 38,140 $ 29,265
Income taxes $ 24,631 $ 28,423 $ 26,852
See notes to consolidated financial statements.
55
56
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Common Stock
------------------- Additional
Paid-in Retained
Shares Amount Capital Earnings
- ------------------------------------------------------------------------------------------------
Balances at February 22, 1997 32,167 $ 322 $ 245,137 $ 215,405
Net earnings 48,845
Sale of common stock under option plans 780 7 10,900
Income tax benefit related to stock options 3,658
Sale of common stock in public offering 984 10 23,409
Issuance of restricted stock 10 246 (246)
Remeasurement of restricted stock 170 (170)
Restricted stock expense 482
Purchase of treasury stock
- ------------------------------------------------------------------------------------------------
Balances at January 31, 1998 33,941 339 283,520 264,316
Net earnings 55,636
Sale of common stock under option plans 362 4 4,568
Income tax benefit related to stock options 2,435
Restricted stock expense 603
Retirement of treasury stock (8,174) (82) (62,044) (90,053)
- ------------------------------------------------------------------------------------------------
Balances at January 30, 1999 26,129 261 228,479 230,502
Net earnings 102,180
Sale of common stock under option plans 246 3 3,971
Income tax benefit related to stock options 1,797
Sale of common stock in public offering 4,025 40 147,107
Restricted stock expense 190
Purchase of treasury stock
- ------------------------------------------------------------------------------------------------
Balances at January 29, 2000 30,400 $ 304 $ 381,354 $ 332,872
================================================================================================
See notes to consolidated financial statements.
56
57
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Treasury Stock Total
---------------------- ------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------
Balances at February 22, 1997 32,167 $ 460,864
Net earnings 48,845
Sale of common stock under option plans 780 10,907
Income tax benefit related to stock options 3,658
Sale of common stock in public offering 984 23,419
Issuance of restricted stock 10
Remeasurement of restricted stock
Restricted stock expense 482
Purchase of treasury stock (8,174) $ (152,179) (8,174) (152,179)
- ---------------------------------------------------------------------------------------------------
Balances at January 31, 1998 (8,174) (152,179) 25,767 395,996
Net earnings 55,636
Sale of common stock under option plans 362 4,572
Income tax benefit related to stock options 2,435
Restricted stock expense 603
Retirement of treasury stock 8,174 152,179
- ---------------------------------------------------------------------------------------------------
Balances at January 30, 1999 26,129 459,242
Net earnings 102,180
Sale of common stock under option plans 246 3,974
Income tax benefit related to stock options 1,797
Sale of common stock in public offering 4,025 147,147
Restricted stock expense 190
Purchase of treasury stock (816) (20,028) (816) (20,028)
- ---------------------------------------------------------------------------------------------------
Balances at January 29, 2000 (816) $ (20,028) 29,584 $ 694,502
===================================================================================================
See notes to consolidated financial statements.
57
58
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
The consolidated financial statements include the accounts of ShopKo
Stores, Inc. and its majority owned subsidiaries ("ShopKo" or the "Company").
All significant intercompany accounts and transactions have been eliminated.
ShopKo is engaged in the business of providing general merchandise and
professional health services through its two retail store chains. ShopKo Retail
stores are operated in the Midwest, Western Mountain and Pacific Northwest
states. Pamida, Inc. ("Pamida") Retail stores are operated in the Midwest, North
Central and Rocky Mountain states. The Company also provides health benefit
management services, pharmacy mail services, vision benefit management services
and health information technology and clinical support services through its
subsidiary ProVantage Health Services, Inc. ("ProVantage"). ProVantage conducts
business principally throughout the United States.
Change in Fiscal Year
The Company changed its fiscal year end from the last Saturday in February
to the Saturday nearest January 31, effective with the fiscal year ended January
31, 1998. This change was made in order to coincide the Company's fiscal year
with the calendar predominantly used by the retail industry. Consequently, for
that transition year, the statements of earnings, cash flows and shareholders'
equity are presented for the 49-week period ended January 31, 1998. The table
below illustrates how the fiscal years are referred to in the notes to
consolidated financial statements.
January 31, 1999 through January 29, 2000 (52 weeks) 1999
February 1, 1998 through January 30, 1999 (52 weeks) 1998
February 23, 1997 through January 31, 1998 (49 weeks) 1997
Cash and Cash Equivalents
The Company records all highly liquid investments with a maturity of three
months or less as cash equivalents.
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Receivables
Receivables consist of amounts collectible from third party pharmacy
insurance carriers and self-funded medical plan sponsors for medical claims;
from retail store customers for optical and pharmacy purchases; from merchandise
vendors for promotional and advertising allowances; and from pharmaceutical
manufacturers and third party formulary administrators for formulary fees.
Substantially all amounts are expected to be collected within one year.
Merchandise Inventories
Merchandise inventories are stated at the lower of cost or market. Cost,
which includes certain distribution and transportation costs, is determined
through use of the last-in, first-out (LIFO) method for substantially all
inventories. If the first-in, first-out (FIFO) method had been used to determine
cost of inventories, the Company's inventories would have been higher by
approximately $28.9 million at January 29, 2000 and $34.4 million at January 30,
1999.
Property and Equipment - Net
Property and equipment are carried at cost. The cost of buildings and
equipment is depreciated over the estimated useful lives of the assets.
Buildings and certain equipment (principally computer and retail store
equipment) are depreciated using the straight-line method. Remaining properties
are depreciated on an accelerated basis. Useful lives generally assigned are:
buildings-25 to 50 years; retail store equipment-8 to 10 years; warehouse,
transportation and other equipment-3 to 10 years. Costs of leasehold
improvements are amortized over the period of the lease or the estimated useful
life of the asset, whichever is shorter, using the straight-line method.
Property under capital leases is amortized over the related lease term using the
straight-line method.
The components of property and equipment are:
JAN. 29, 2000 JAN. 30, 1999
------------- -------------
(in thousands)
Property and equipment at cost:
Land $ 135,591 $ 121,577
Buildings 572,761 540,953
Equipment 539,399 408,313
Leasehold improvements 91,242 58,820
Property under construction 54,759 12,999
Property under capital leases 103,248 58,004
---------- ----------
1,497,000 1,200,666
Less accumulated depreciation and amortization:
Property and equipment 558,216 487,137
Property under capital leases 29,346 9,689
---------- ----------
Net property and equipment $ 909,438 $ 703,840
========== ==========
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Intangible Assets - Net
Intangible assets related to acquisitions are amortized using the
straight-line method over 18 to 40 years. Underwriting and issuance costs of
long-term obligations are amortized over the term of the obligations using the
straight-line method. Accumulated amortization for intangible assets was $20.4
million and $11.7 million at January 29, 2000 and January 30, 1999,
respectively.
Impairment of Long Lived Assets
The Company evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful lives of long lived assets may warrant
revision or that the remaining balance of an asset may not be recoverable. The
measurement of possible impairment is based on the ability to recover the
balance of assets from expected future operating cash flows on an undiscounted
basis. Impairment losses, if any, would be measured by comparing the carrying
amount of the asset to the present value of the cash flows using discounted
rates that reflect the inherent risks of the underlying business. In the opinion
of management, no such impairment existed as of January 29, 2000 or January 30,
1999.
Accrued Other Liabilities
Accrued other liabilities include other current liabilities not related to
compensation or taxes and amounts related to ProVantage for medical claims and
formulary rebate sharing. As of January 29, 2000 and January 30, 1999, the
amounts payable by ProVantage for medical claims and formulary rebate sharing
included in the accrued other liabilities were $93.7 million and $73.2 million,
respectively.
Revenue Recognition
Revenues from the Company's retail stores are recognized at the time
customers take possession of merchandise purchased or services are rendered, net
of returns. Revenues from licensed departments are recorded at the net amounts
to be received from licensees.
ProVantage's net sales are recorded when earned and include: (i)
administrative and dispensing fees plus the cost of pharmaceuticals dispensed by
pharmacies participating in the network maintained by ProVantage or by
ProVantage's mail service pharmacy to members of health benefit plans sponsored
by ProVantage's clients; (ii) administrative fees plus the cost of sales of
eyeglasses and contact lenses relating to vision benefit management services;
and (iii) license and service fees for health information technology and
clinical support services.
Pre-opening Costs
The Company expenses pre-opening costs of retail stores as incurred.
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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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the fiscal 1998 and 1997
consolidated financial statements to conform to those used in fiscal 1999.
B. ACQUISITIONS
The Company on January 3, 1995 acquired 97% of the outstanding common stock
of Bravell, Inc. ("Bravell"), a pharmacy benefits management firm for
approximately $17.3 million. The Company was also required to make additional
payments that were contingent upon the future results of Bravell's operations.
In fiscal 1996, $0.7 million was paid based on the financial results for fiscal
1995. The Company made a payment of approximately $8.9 million to the founders
of Bravell on April 10, 1997 to (i) acquire the remaining 3% of the common stock
of Bravell which the Company did not acquire in fiscal 1995, (ii) extinguish all
remaining contingent payment obligations to the founders and (iii) terminate the
founders' employment agreements.
On August 2, 1996, the Company completed the acquisition of CareStream
ScripCard from Avatex Corporation, formerly known as Foxmeyer Health
Corporation. CareStream ScripCard was a prescription benefit management company
which has been integrated with the Company's ProVantage subsidiary. The purchase
price was $30.5 million in cash, plus a supplemental cash payment equal to 1.5%
of ProVantage's market value subject to a minimum of $2.5 million and a maximum
of $5.0 million. On August 10, 1999, Avatex exercised its right to the
supplemental cash payment in the amount of $5.0 million which ProVantage paid to
Avatex in August 1999. This payment was capitalized as additional purchase price
and will be amortized over 18 years.
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On August 20, 1997, the Company acquired The Mikalix Group, Inc. and its
subsidiaries ("Mikalix"), an international privately held group of companies
based in Alexandria, Virginia. Mikalix's primary subsidiary is PharMark
Corporation, a software and database development business providing information
driven strategies for optimizing medical and pharmaceutical outcomes. The
purchase price for Mikalix was approximately $15.2 million. The sellers of
Mikalix may also be entitled to contingent payments of up to $8.0 million in the
aggregate based on future increases in the market value of ProVantage's
outstanding common stock (the "Contingent Payments"). The Contingent Payments,
if any, will be due on the first to occur of August 20, 2002 or the date on
which the Company ceases to own at least a majority of ProVantage's common
stock. 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 18 years.
On December 19, 1997, the Company bought the outstanding stock of
Penn-Daniels, Incorporated ("Penn-Daniels"), a retail chain headquartered in
Quincy, Illinois for approximately $16.4 million in cash and $42.5 million of
assumed debt. Penn-Daniels operated 18 Jacks' discount stores in Iowa, Illinois
and Missouri and one Lots-A-Deals close-out store in Moline, Illinois. In
connection with the Penn-Daniels acquisition, the Company incurred special
charges of $5.7 million eliminating duplicate operations at the Penn-Daniels
administrative office and warehouse and other transaction related items.
On July 6, 1999, the Company acquired all of the outstanding voting and
nonvoting common stock of Pamida for $94.0 million in cash, $285.8 million in
assumed debt and $138.6 million in assumed trade and other accrued liabilities.
Pamida is a retail chain headquartered in Omaha, Nebraska operating Pamida
retail stores in 15 Midwest, North Central and Rocky Mountain states. In
connection with the Pamida acquisition, the Company incurred special charges of
$8.1 million for employee retention programs, elimination of administrative
functions and various integration initiatives. The allocation of the purchase
price of Pamida was based on estimated fair values at the date of acquisition.
The estimates are based on available information and are subject to change upon
completion of the appraisal process.
On December 31, 1999, ProVantage acquired for $5.0 million the remaining
minority interest held in ProVMed LLC that was not already owned by ProVantage.
ProVMed LLC performs advanced data warehousing, clinical and administration
information support services. The purchase price included an allocation to
goodwill of $3.4 million that is being amortized over a period of 20 years.
These acquisitions were accounted for under the purchase method of
accounting and the allocations of the purchase prices were based on fair values
at the dates of acquisition. The aggregate excess of the purchase prices over
the fair value of the net assets acquired (goodwill) of approximately $61.2
million, excluding Pamida, is being amortized on a straight-line basis over 18
to 22 years. Goodwill associated with the Pamida acquisition of approximately
$186.6 million is being amortized on a straight-line basis over 40 years. The
results of operations since the dates of acquisition have been included in the
consolidated statements of earnings.
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The pro forma effects of these acquisitions, excluding Pamida, were not
material on the Company's statements of earnings. The following presents
selected unaudited pro forma consolidated statement of earnings information that
has been prepared assuming the Pamida acquisition occurred on January 31, 1999
and February 1, 1998, respectively:
(in thousands, except per share data) Year To Date (52) Weeks Ended
January 29, January 30,
2000 1999
----------- -----------
Net sales $4,181,567 $3,630,951
Earnings before extraordinary item 101,190 56,678
Diluted earnings per share before extraordinary item 3.54 2.14
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition been consummated on such
dates, or for any other future dates or periods, nor do the results give effect
to the special charges related to the Pamida acquisition, synergies, cost
savings or other charges expected to result from the acquisition of Pamida.
C. SHORT-TERM DEBT
As of January 29, 2000, 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. The Company pays an annual facility fee of
1/5 of one percent. In April 1999, the Company negotiated a $50.0 million
unsecured banker's acceptance note which is due April 17, 2000. In September
1999, the Company also negotiated a $100.0 million unsecured 364-day credit
facility and pays an annual facility fee of 0.17 percent. The Company had $245.0
million outstanding as of January 29, 2000; $195.0 million outstanding under the
revolving credit agreement and $50.0 million outstanding under the banker's
acceptance note. There were no amounts outstanding under the current or prior
agreements as of January 30, 1999. The weighted average interest rate on
borrowings outstanding as of January 29, 2000 was 6.4%.
The Company's revolving credit agreement has a restrictive covenant which
requires maintenance of a minimum net worth. This covenant may potentially limit
the payment of dividends. As of January 29, 2000, the Company was in compliance
with this covenant; having a net worth balance of $694.5 million compared to a
required balance of $385.3 million.
The Company also issues letters of credit during the ordinary course of
business as required by foreign vendors. As of January 29, 2000 and January 30,
1999, the Company had issued letters of credit for $25.2 million and $17.3
million, respectively.
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D. LONG-TERM OBLIGATIONS AND LEASES
(in thousands)
JAN. 29, 2000 JAN. 30, 1999
------------- -------------
Senior Unsecured Notes, 9.0% due November 15, 2004, less
unamortized discount of $87 and $170, respectively $ 72,623 $ 99,830
Senior Unsecured Notes, 8.5% due March 15, 2002, less
unamortized discount of $33 and $113, respectively 70,142 99,887
Senior Unsecured Notes, 9.25% due March 15, 2022, less
unamortized discount of $424 and $443, respectively 99,576 99,557
Senior Unsecured Notes, 6.5% due August 15, 2003, less
unamortized discount of $98 and $126, respectively 99,902 99,874
Mortgage and other obligations 19,726 20,177
Capital lease obligations 97,531 52,463
------------ -------------
459,500 471,788
Less current portion 6,416 4,597
------------ -------------
Long-term obligations $ 453,084 $ 467,191
============ =============
The notes contain certain covenants which, among other things, restrict the
ability of the Company to consolidate, merge or convey, transfer or lease its
properties and assets substantially as an entirety, to create liens or to enter
into sale and leaseback transactions.
During 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.
The mortgage obligations represent debt collateralized by certain
properties assumed in the Penn-Daniels acquisition. The other obligations
include industrial revenue bonds and a note payable. The interest rates on this
debt range from 5.5% to 8.8% with maturities ranging from March 2002 to March
2009.
Approximate annual maturities of long-term obligations, excluding capital
leases, for the five years subsequent to the year ended January 29, 2000 are as
follows (in thousands):
LONG-TERM
YEAR OBLIGATIONS
---- -----------
2000 $ 1,862
2001 1,973
2002 76,823
2003 101,748
2004 73,871
Later 105,692
-----------
Total maturities $ 361,969
===========
The Company leases certain stores and equipment under capital leases. Many
of these leases include renewal options, and occasionally, include options to
purchase. In addition to its capital leases, the Company is obligated under
operating leases, primarily for land, buildings and computer equipment.
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Minimum future obligations under capital and operating leases in effect at
January 29, 2000 are as follows (in thousands):
CAPITAL LEASE OPERATING LEASE
YEAR OBLIGATIONS OBLIGATIONS
---- ------------- ---------------
2000 $ 13,834 $ 26,566
2001 13,756 23,233
2002 13,567 20,176
2003 12,414 17,945
2004 11,560 15,679
Later 125,103 157,861
------------- ---------------
Total minimum future obligations 190,234 $ 261,460
===============
Less interest (92,703)
-------------
Present value of minimum future obligations $ 97,531
=============
The present values of minimum future obligations shown above are calculated
based on interest rates ranging from 7.0% to 14.6% for capital leases determined
to be applicable at the inception of the capital leases.
Contingent rent expense, based primarily on sales performance, for capital
and operating leases was $0.9 million in fiscal year 1999 and $0.5 million in
fiscal years 1998 and 1997. Total minimum rental expense, net of sublease
income, related to all operating leases with terms greater than one year was
$20.7, $9.3 and $5.3 million in fiscal years 1999, 1998 and 1997, respectively.
Certain operating leases require payments to be made on an escalating basis. The
accompanying consolidated statements of earnings reflect rent expense on a
straight-line basis over the term of the leases.
E. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Components of the
Company's net deferred tax liability are as follows (in thousands):
1999 1998
---- ----
Deferred tax liabilities:
Property and equipment $ 50,637 $ 33,557
Intangibles 15,880 2,394
Inventory valuation 17,233 11,188
Gain on sale of ProVantage 18,694
Other 2,314 625
--------- -----------
Total deferred tax liabilities 104,758 47,764
--------- -----------
Deferred tax assets:
Reserves and allowances (20,359) (14,391)
Capital leases (8,802) (2,443)
Compensation and benefits (6,515) (2,704)
--------- -----------
Total deferred tax assets (35,676) (19,538)
--------- -----------
Net deferred tax liability $ 69,082 $ 28,226
========= ===========
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The amounts reflected in the provision for income taxes are based on
applicable federal statutory rates, adjusted for permanent differences between
financial and taxable income. The provision for federal and state income taxes
includes the following (in thousands):
1999 1998 1997
---- ---- ----
Current
Federal $ 22,575 $ 19,419 $ 27,741
State 7,012 4,572 5,191
Deferred 42,213 12,000 (1,334)
---------- --------- -----------
Total provision $ 71,800 $ 35,991 $ 31,598
========== ========= ===========
The effective tax rate varies from the statutory federal income tax rate
for the following reasons:
1999 1998 1997
---- ---- ----
Statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefits 4.1 4.3 4.3
Goodwill 0.7
----- ----- -----
Effective income tax rate 39.8% 39.3% 39.3%
===== ===== =====
F. PREFERRED AND COMMON STOCK
The Company has 20,000,000 shares of $0.01 preferred stock authorized but
unissued. There are 75,000,000 shares of $0.01 par value common stock
authorized.
The Company's Stock Option Plans and Stock Incentive Plan allow the
granting of stock options and other equity-based awards to various officers,
directors and other employees of the Company at prices not less than 100 percent
of fair market value, determined by the closing price on the date of grant. The
Company has reserved 4,850,000 shares for issuance under the 1991 and 1995 Stock
Option Plans and the 1998 Stock Incentive Plan. Options under the 1991 and 1995
Stock Option Plans and the 1998 Stock Incentive Plan vest generally over two to
five years. Most stock options vest immediately upon a change of control.
Option activity is summarized as follows (shares/options in thousands):
WEIGHTED AVE.
SHARES PRICE RANGE EXERCISE PRICE
-------------- ------------------ ------------------
Outstanding, February 22, 1997 2,636 $ 10.00 - $16.25 $ 12.63
Granted 1,233 17.88 - 28.69 21.45
Exercised (783) 10.00 - 16.25 (13.98)
Cancelled and forfeited (790) 10.00 - 24.56 (11.41)
-------------- ----------------- -----------------
Outstanding, January 31, 1998 2,296 10.00 - 28.69 17.32
Granted 324 28.19 - 36.44 30.66
Exercised (361) 10.00 - 16.25 (12.65)
Cancelled and forfeited (157) 10.00 - 31.75 (19.52)
-------------- ----------------- -----------------
Outstanding, January 30, 1999 2,102 10.00 - 36.44 20.02
Granted 1,031 23.31 - 37.63 27.69
Exercised (246) 10.00 - 20.00 (16.17)
Cancelled and forfeited (249) 10.00 - 35.13 (28.05)
-------------- ----------------- -----------------
Outstanding, January 29, 2000 2,638 $ 10.00 - $37.63 $ 22.62
============== ================= =================
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OPTIONS WEIGHTED AVE.
EXERCISABLE EXERCISE PRICE
----------- --------------
January 29, 2000 1,110 $ 17.65
January 30, 1999 549 13.39
January 31, 1998 741 13.39
The following tables summarize information about stock options outstanding
at January 29, 2000 (shares in thousands):
Options Outstanding
-----------------------------------------------------------------------------------------
Range of Exercise Shares Outstanding at Jan. 29 Weighted Average Remaining Weighted Average
Prices 2000 Contractual Life Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
$10.00 to $20.00 1,081 5.4 years $16.20
20.01 to 25.00 925 9.1 23.75
25.01 to 37.63 632 8.9 31.95
---------------- ----- --- ------
$10.00 to $37.63 2,638 7.5 $22.62
================ ===== === ======
Options Exercisable
------------------------------------------------------------------------
Range of Exercise Prices Shares Exercisable at Jan. 29, 2000 Weighted Average Exercise Price
- -------------------------------------------------------------------------------------------------------------------
$10.00 to $20.00 951 $16.28
20.01 to 25.00 130 24.56
25.01 to 37.63 29 31.34
---------------- ----- ------
$10.00 to $37.63 1,110 $17.65
================ ===== ======
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the Company's stock option plans. If the Company had elected
to recognize compensation cost based on the fair value of the options granted at
grant date as prescribed by SFAS No. 123, net earnings and diluted net earnings
per common share would have been reduced to the pro forma amounts indicated
below:
1999 1998 1997
---- ---- ----
Net earnings (in thousands)
As reported $ 102,180 $ 55,636 $ 48,845
Pro forma 101,117 53,972 48,325
---------- ---------- ----------
Diluted net earnings per common share
As reported $ 3.57 $ 2.10 $ 1.71
Pro forma 3.54 2.04 1.69
---------- ---------- ----------
The weighted average fair value of options granted was $10.82, $10.96 and
$7.35 per share in fiscal years 1999, 1998 and 1997, respectively.
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The fair value of stock options used to compute pro forma net earnings and
diluted net earnings per common share disclosures is the estimated present value
at grant date using the Black-Scholes option-pricing model with weighted average
assumptions as follows:
1999 1998 1997
---- ---- ----
Risk-free interest rate 6.4% 5.3% 7.0%
Expected volatility 36.0% 34.0% 35.0%
Dividend yield 0.0% 0.0% 0.0%
Expected option life, standard option (years) 1.0 to 5.0 1.0 to 5.0 2.0 to 5.0
In fiscal 1993, the Company adopted a Restricted Stock Plan which provides
awards of up to 200,000 shares of common stock to key employees of the Company.
Plan participants are entitled to cash dividends and to vote their respective
shares. Restrictions limit the sale or transfer of the shares during a
restricted period. There were 25,000 shares and 75,000 shares of restricted
stock outstanding at January 29, 2000 and January 30, 1999, respectively.
G. EMPLOYEE BENEFITS
Substantially all employees of the Company are covered by a defined
contribution profit sharing plan. The plan for ShopKo and ProVantage employees
provides for two types of company contributions: an amount determined annually
by the Board of Directors and an employer matching contribution equal to
one-half of the first 6 percent of compensation contributed by participating
employees. Pamida's plan matches one-half of the first 5 percent of compensation
contributed by participating employees. Contributions were $13.9, $14.2 and
$12.8 million for fiscal years 1999, 1998 and 1997, respectively.
The Company also provides certain postretirement benefits, other than
pensions. Costs associated with these benefits are accrued during the employee's
service period. The annual cost and accumulated benefit obligation associated
with these benefits are not material.
H. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, receivables, accounts payable, accrued
liabilities and short-term debt approximate their fair value. The fair values of
the Company's long-term obligations are estimated using discounted cash flow
analysis based on interest rates that are currently available to the Company for
issuance of debt with similar terms and remaining maturities.
The carrying amounts and fair values of the Company's long-term obligations
(excluding capital leases) at January 29, 2000 and January 30, 1999 are as
follows (amounts in thousands):
JANUARY 29, JANUARY 30,
2000 1999
---- ----
Carrying amount $361,969 $419,325
Fair value 367,633 449,722
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I. 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), a Pamida Retail segment (which includes Pamida stores general
merchandise and retail pharmacy operations) and a ProVantage segment (which
includes health benefit management services, pharmacy mail services, vision
benefit management services and health information technology and clinical
support services).
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Intersegment sales and transfers
are accounted for at current market prices. The Company evaluates performance
based on operating earnings of the respective business segments.
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Summarized financial information concerning the Company's reportable
segments is shown in the following table (in thousands):
Fiscal Years
--------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Net sales
ShopKo Retail $ 2,606,883 $ 2,351,183 $ 2,001,568
Pamida Retail 441,187
ProVantage 902,390 643,260 458,297
Intercompany* (52,370) (35,886) (25,936)
- ----------------------------------------------------------------------------------------------------------------------------
Total net sales $ 3,898,090 $ 2,958,557 $ 2,433,929
- ----------------------------------------------------------------------------------------------------------------------------
* Intercompany sales consist of prescriptions that were both sold at a ShopKo pharmacy or at a Pamida pharmacy and
processed by ProVantage.
Income from operations
ShopKo Retail $ 159,084 $ 140,763 $ 127,269
Pamida Retail 21,467
ProVantage 18,384 16,160 12,057
Corporate (28,582) (26,985) (28,301)
- --------------------------------------------------------------------------------------------------------------------------
Income from operations $ 170,353 $ 129,938 $ 111,025
- --------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization expenses
ShopKo Retail $ 64,126 $ 60,106 $ 53,245
Pamida Retail 10,764
ProVantage 9,024 6,776 4,715
Corporate 524 708 292
- --------------------------------------------------------------------------------------------------------------------------
Total depreciation and amortization expenses $ 84,438 $ 67,590 $ 58,252
- --------------------------------------------------------------------------------------------------------------------------
Capital expenditures
ShopKo Retail $ 94,168 $ 85,531 $ 27,762
Pamida Retail 25,978
ProVantage 15,872 8,863 3,514
Corporate 15,713 5,331 727
- --------------------------------------------------------------------------------------------------------------------------
Total capital expenditures $ 151,731 $ 99,725 $ 32,003
- --------------------------------------------------------------------------------------------------------------------------
As of January 29, As of January 30, As of January 31,
2000 1999 1998
Assets
ShopKo Retail $ 1,249,674 $ 1,147,221 $ 1,040,146
Pamida Retail 548,170
ProVantage 257,249 198,251 155,010
Corporate 28,196 28,052 55,679
- --------------------------------------------------------------------------------------------------------------------------
Total assets $ 2,083,289 $ 1,373,524 $ 1,250,835
- --------------------------------------------------------------------------------------------------------------------------
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J. SIGNIFICANT EVENTS
Termination of Combination
On April 2, 1997, the Company and two other parties mutually agreed to
terminate a planned business combination. The Company recorded a one-time
pre-tax charge of approximately $2.8 million ($0.06 per share) during fiscal
1997 to cover costs associated with the terminated business combination.
Common Stock Buyback and Secondary Offering
On April 24, 1997, the Company and Supervalu Inc. ("Supervalu") entered
into an agreement pursuant to which Supervalu exited its 46 percent investment
in the Company. Under the terms of the agreement, the companies completed two
simultaneous transactions. The first transaction was a $150.0 million stock
buyback, whereby the Company repurchased 8,174,387 shares of its common stock
held by Supervalu for $18.35 per share. The second transaction was a secondary
public offering of Supervalu's remaining 6,557,280 shares of the Company's
common stock and 983,592 additional shares which were issued by the Company to
cover over-allotments. The secondary offering was priced at $25.00 per share on
June 26, 1997. The stock buyback and secondary offering were completed on July
2, 1997. The Company received $23.4 million proceeds from the sale of the
over-allotment shares. Supervalu paid the underwriting discount for the shares
it sold and certain other expenses related to the secondary offering.
Treasury Stock Retirement
In fiscal 1998, the Company retired all 8,174,387 shares of common stock
held as treasury stock for accounting purposes, and such shares were returned to
the status of authorized but unissued shares. As a result, the $152.2 million
assigned to treasury stock was eliminated with a corresponding decrease in par
value, additional paid-in capital and retained earnings.
ProVantage Initial Public Offering
On July 19, 1999, the initial public offering of 6,440,000 shares of
ProVantage common stock at $18.00 per share was completed which included the
underwriters' over-allotment option of 840,000 shares. The Company received
approximately $106.0 million in the transaction and recognized a $56.8 million
pre-tax gain. The Company retained approximately 64.5 percent of ProVantage's
stock. ProVantage's stock is listed on the New York Stock Exchange under the
symbol `PHS.'
ShopKo Stock Offering
On July 21, 1999, the Company completed an offering of 4,025,000 shares of
common stock at $38.50 per share. The Company used the net proceeds of
approximately $147.1 million of the offering for repayment of a portion of the
debt it assumed in connection with its recent acquisition of Pamida.
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72
Repurchase of ShopKo Stock
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.
As of December 6, 1999, 815,600 shares of Common Stock had been repurchased for
approximately $20.0 million. 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. As of March 15, 2000, no shares of Common Stock had been
repurchased under this program.
K. UNAUDITED QUARTERLY FINANCIAL INFORMATION
Unaudited quarterly financial information is as follows:
(In thousands, except per share data)
Fiscal Year (52 Weeks) Ended January 29, 2000
-----------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Year
(13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks) (52 Weeks)
-----------------------------------------------------------------------------------------------------------------------
Net sales $ 752,650 $ 868,488 $ 1,018,191 $ 1,258,761 $ 3,898,090
Gross margin 152,195 183,101 215,036 299,828 850,160
Earnings before extraordinary
item 4,313 42,845 9,358 49,440 105,956
Net earnings 537 42,845 9,358 49,440 102,180
Basic earnings per common
share before
extraordinary item 0.16 1.60 0.31 1.67 3.75
Weighted average shares 26,140 26,810 30,376 29,621 28,237
Diluted earnings per common
share before extraordinary item 0.16 1.57 0.30 1.66 3.71
Adjusted weighted average shares 26,591 27,299 30,702 29,786 28,595
Price range per common share* 36 1/16-28 1/4 40 5/8-33 5/16 38 1/4-23 25 3/8-18 3/16 40 5/8-18 3/16
------------------------------------------------------------------------------------------------------------------------
Fiscal Year (52 Weeks) Ended January 30, 1999
------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Year
(13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks) (52 Weeks)
------------------------------------------------------------------------------------------------------------------------
Net sales $ 641,700 $ 672,524 $ 726,448 $ 917,885 $ 2,958,557
Gross margin 139,232 151,937 152,837 218,466 662,472
Earnings before extraordinary
item 2,151 5,900 6,964 40,621 55,636
Net earnings 2,151 5,900 6,964 40,621 55,636
Basic earnings per common
share before
extraordinary item 0.08 0.23 0.27 1.56 2.14
Weighted average shares 25,869 26,067 26,093 26,113 26,035
Diluted earnings per common
share before extraordinary item 0.08 0.22 0.26 1.53 2.10
Adjusted weighted average shares 26,346 26,626 26,517 26,592 26,517
Price range per common share* 34 15/16-25 7/8 36 5/8-29 1/4 32 1/2-25 1/8 33 11/16-29 11/16 36 5/8-25 1/8
------------------------------------------------------------------------------------------------------------------------
*Price range per common share reflects the highest and lowest stock market
prices on the New York Stock Exchange during each quarter.
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SHOPKO STORES, INC. AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
BALANCE CHARGES
AT TO
BEGINNING COSTS & DEDUCTIONS BALANCE AT
OF YEAR EXPENSES (ADDITIONS) END OF YEAR
-----------------------------------------------------------------
Year (49 weeks) ended January 31, 1998:
Allowance for losses $ 5,585 $ 2,999 $ (53) * $ 8,637
Inventory valuation reserves** 3,000 1,500 4,500
Year (52 weeks) ended January 30, 1999:
Allowance for losses $ 8,637 $ 609 $ 1,759 * $ 7,487
Inventory valuation reserves 4,500 500 4,000
Year (52 weeks) ended January 29, 2000:
Allowance for losses $ 7,487 $ 1,256 $ 1,917 * $ 6,826
Inventory valuation reserves** 4,000 1,600 2,400
* Net of charges to accounts other than bad debt expense, primarily promotion
and advertising.
** Excludes amounts related to acquisitions.
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74
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
ShopKo Stores, Inc. (Registrant)
Date: April 26, 2000
--------------
By: /s/ WILLIAM J. PODANY*
------------------------------------------
William J. Podany, Chairman, President and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
---------------- ------------------- ---------
/S/ WILLIAM J. PODANY* Chairman of the Board, President and April 26, 2000
----------------------- Chief Executive Officer
William J. Podany
/S/ PAUL H. FREISCHLAG, JR. Senior Vice President and Chief April 26, 2000
---------------------------- Financial Officer
Paul H. Freischlag, Jr.
/S/ JEFFERY R. SIMONS Chief Accounting Officer April 26, 2000
----------------------
Jeffery R. Simons
/S/ JACK W. EUGSTER* Director April 26, 2000
----------------------------
Jack W. Eugster
/s/ JEFFREY C. GIRARD * Director April 26, 2000
-------------------------
Jeffrey C. Girard
/S/ DALE P. KRAMER* Director April 26, 2000
--------------------
Dale P. Kramer
/s/ JOHN G. TURNER* Director April 26, 2000
---------------------
John G. Turner
/s/ STEPHEN E. WATSON* Director April 26, 2000
------------------------
Stephen E. Watson
/S/ GREGORY H. WOLF* Director April 26, 2000
----------------------
Gregory H. Wolf
* By Richard D. Schepp pursuant to Powers of Attorney.
74
75
EXHIBIT INDEX
SHOPKO STORES, INC.
10-K REPORT
SEQUENTIAL PAGE
EXHIBIT NUMBER IN MANUALLY
NUMBER EXHIBIT SIGNED ORIGINAL
- ------ ------- ---------------
2.1 Agreement and Plan of Merger dated as of May 10, 1999, by and
among the Company, ShopKo Merger Corp. and Pamida Holdings
Corporation, incorporated by reference to Exhibit 99(c) (1) to
the Company's Schedule 14D-1 filed May 17, 1999.
3.1 Amended and restated Articles of Incorporation of the Company,
incorporated by reference to the Company's Current Report on
Form 8-K dated May 22, 1998 (the "May 1998 Form 8-K").
3.2 By-laws of the Company, incorporated by reference to the
Company's definitive Proxy Statement dated April 10, 1998 in
connection with the Company's 1998 Annual Meeting of
Shareholders.
4.1.1 Indenture dated as of March 12, 1992 between the Company and
First Trust National Association, as trustee, with respect to
senior notes due March 15, 2002 ("2002 Indenture"),
incorporated by reference from the Registrant's Form 10-K,
Annual Report to the Securities and Exchange Commission for
the 53 weeks ended February 29, 1992.
4.1.2 First Supplemental Indenture, dated as of May 22, 1998,
between the Company and U.S. Bank Trust, as Trustee, with
respect to the 2002 Indenture, incorporated by reference to
the May 1998 Form 8-K.
4.1.3 Indenture dated as of March 12, 1992 between the
Company and First Trust National Association, as
trustee, with respect to senior notes due March 15,
2022 ("2022 Indenture"), incorporated by reference
from the Registrant's Form 10-K, Annual Report to the
Securities and Exchange Commission for the 53
weeks ended February 29, 1992.
75
76
SEQUENTIAL PAGE
EXHIBIT NUMBER IN MANUALLY
NUMBER EXHIBIT SIGNED ORIGINAL
- ------ ------- ---------------
4.1.4 First Supplemental Indenture dated as of May 22, 1998, between
the Company and U.S. Bank Trust, as Trustee, with respect to
the 2022 Indenture, incorporated by reference to the May 1998
Form 8-K.
4.1.5 Indenture dated as of July 15, 1993 between the Company and
First Trust National Association, as Trustee ("Senior Debt
Indenture"), incorporated by reference from the Registrant's
Form 10-K, Annual Report to the Securities and Exchange
Commission for the 52 weeks ended February 26, 1994.
4.1.6 First Supplemental Indenture, dated as of May 22, 1998,
between the Company and U.S. Bank Trust, as Trustee, with
respect to the Senior Debt Indenture, incorporated by
reference to the May 1998 Form 8-K.
4.2 Rights Agreement between the Company and Norwest
Bank Minnesota, National Association, dated as of July 3,
1992, as amended and restated as of September 24, 1997
(including form of preferred stock designation), ("Rights
Agreement") incorporated by reference from the
Registrant's Amendment No. 1 to Registration
Statement on Form 8-A/A dated September 29, 1997.
4.2.1 Rights Agreement Amendment, incorporated by reference to May
1998 Form 8-K.
.
4.3 Credit Agreement dated as of July 8, 1997 ("Credit Agreement")
among ShopKo Stores, Inc., the Banks named therein and
Banker's Trust Company, as agent, incorporated by reference
from the Registrant's Form 10-Q, Quarterly Report to the
Securities and Exchange Commission for the 16 weeks ended June
14, 1997.
4.3.1 Assumption Agreement, dated as of May 22, 1998 with respect to
the Credit Agreement incorporated by reference to the May 1998
Form 8-K.
10.1 ShopKo Stores, Inc. 1991 Stock Option Plan,
incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration
No. 33-42283). (1)
76
77
SEQUENTIAL PAGE
EXHIBIT NUMBER IN MANUALLY
NUMBER EXHIBIT SIGNED ORIGINAL
- ------ ------- ---------------
10.2 Amendment to Section 11 of ShopKo Stores, Inc.
1991 Stock Option Plan, incorporated by reference
to the Registrant's definitive Proxy Statement dated
May 9, 1995 filed in connection with the Registrant's
1995 Annual Meeting of Shareholders. (1)
10.3 Form of Stock Option Agreement and First Amend-
ment thereto between the Company and certain
Officers and Employees of the Company pursuant
to the ShopKo Stores, Inc. 1991 Stock Option Plan,
incorporated by reference from the Registrant's
Form 10-K, Annual Report to the Securities and
Exchange Commission for the 52 weeks ended
February 25, 1995. (1)
10.4 Alternative Form of Stock Option Agreement between
the Company and certain Officers and Employees
of the Company pursuant to the ShopKo Stores, Inc.
1991 Stock Option Plan, incorporated by reference
from the Registrant's Form 10-K, Annual Report to
the Securities and Exchange Commission for the 52
weeks ended February 25, 1995. (1)
10.5 ShopKo Stores, Inc. 1995 Stock Option Plan,
incorporated by reference from the Registrant's
Form 10-Q, Quarterly Report to the Securities and
Exchange Commission for the 12 weeks ended
December 2, 1995. (1)
10.6 ShopKo Stores, Inc. Profit Sharing and Super
Saver Plan Trust Agreement (1989 Restatement),
as amended, incorporated by reference to the
Registrant's Registration Statement on Form S-1
(Registration No. 33-42283). (1)
10.7 First and second amendments to ShopKo Stores,
Inc. Profit Sharing and Super Saver Plan Trust
Agreement, incorporated by reference from the
Registrant's Form 10-K, Annual Report to the
Securities and Exchange Commission for the 52
weeks ended February 27, 1993. (1)
77
78
SEQUENTIAL PAGE
EXHIBIT NUMBER IN MANUALLY
NUMBER EXHIBIT SIGNED ORIGINAL
- ------ ------- ---------------
10.8 Form of Change of Control Severance Agreement
between the Company and Certain Officers and
Employees of the Company, incorporated by
reference from the Registrant's Form 10-K, Annual
Report to the Securities and Exchange
Commission for the 52 weeks ended February 25,
1995. (1)
10.9 Indemnification, Tax Matters and Guarantee Fee
Agreement dated as of October 8, 1991 between
the Company and Supervalu Inc., incorporated
by reference to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-45833).
10.10 Insurance Matters Agreement dated as of October
8, 1991 between the Company and Supervalu
Inc., incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration
No. 33-45833).
10.11 Form of Indemnification Agreement between the
Company and directors and certain officers of
the Company, incorporated by reference to the
Registrant's Form 10-Q, Quarterly Report to the
Securities and Exchange Commission for the 13
weeks ended August 1, 1998.
10.12 ShopKo Senior Officers Deferred Compensation
Plan, incorporated by reference from the
Registrant's Form 10-K, Annual Report to the
Securities and Exchange Commission for the 53
weeks ended February 29, 1992. (1)
10.13 ShopKo Directors Deferred Compensation Plan,
incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration
No. 33-45833). (1)
78
79
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- ------ ------- ---------------
10.14 ShopKo Stores, Inc. Executive Incentive Plan,
incorporated by reference from the Registrant's
Form 10-Q, Quarterly Report to the Securities
and Exchange Commission for the 16 weeks
ended June 14, 1997. (1)
10.15 ShopKo Stores, Inc. 1993 Restricted Stock Plan,
as amended, incorporated by reference to the
Registrant's definitive Proxy Statement dated
May 19, 1994 filed in connection with the
Registrant's 1994 Annual Meeting of
Shareholders. (1)
10.16 Stock Buyback and Secondary Offering Agreement
dated April 24, 1997 among the Company, Supervalu
Inc. and Supermarket Operators of America, Inc.,
incorporated by reference to the Registrant's Current
Report on Form 8-K dated April 24, 1997.
10.17 Amendment to Stock Buyback Agreement, incorporated
by reference to the Company's Registration Statement
on Form S-3 (Reg. No. 333-26615).
10.18 Termination of Stock Options/Waiver of Vesting of
Restricted Stock, incorporated by reference from
the Registrant's Form 10-Q, Quarterly Report to the
Securities and Exchange Commission for the 16 weeks
ended June 14, 1997.
10.19 ShopKo Stores, Inc. 1998 Stock Incentive Plan
incorporated by reference to the Registrant's
definitive Proxy Statement dated April 10, 1998
filed in connection with the Registrant's 1998
Annual Meeting of Shareholders. (1)
10.20 ShopKo Stores, Inc. 1999 Executive Incentive Plan
incorporated by reference to the Registrant's
definitive Proxy Statement dated April 19, 1999
filed in conjunction with the Registrant's 1999
Annual Meeting of Shareholders.
79
80
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- ------ ------- ---------------
10.21 ShopKo Stores, Inc. 2000 Executive Long-Term Incentive Plan,
incorporated by reference from the Registrant's definitive Proxy
Statement dated April 17, 2000 filed in connection with the
Registrant's 2000 Annual Meeting of Shareholders (1).
10.22* ShopKo Stores, Inc. Executive Retirement Plan, dated February
1999 (1).
10.23* Independent Contractor Agreement between the Company and Mr.
Kramer dated January 30, 2000 (1).
11* Computation of Earnings Per Common and Common Equivalent
Share.
12* Statements Re Computation of Ratios.
21.1* Subsidiaries of the Registrant.
23.1* Consent of Deloitte & Touche LLP.
24.1* Directors' Powers of Attorney.
27* Financial Data Schedule.
* Filed herewith
(1) A management contract or compensatory plan or arrangement.
80