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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 (53 weeks) ended February 3, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _____________________________
Commission file number 1-10876
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SHOPKO STORES, INC.
(Exact name of registrant as specified in its Charter)
Wisconsin 41-0985054
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
700 Pilgrim Way, Green Bay, Wisconsin 54304
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (920) 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 221 Exhibit index on page 65
(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 2, 2001 was approximately $ 218,049,403.50 (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 2,
2001: 28,698,590.
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 June 5, 2001.
(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 two business segments: a ShopKo Retail segment and a Pamida
Retail segment. ShopKo is a customer lifestyle-driven specialty discount
retailer located primarily in mid-size and larger communities. As of February 3,
2001, the Company had 164 ShopKo retail stores operating in 19 Midwest, Pacific
Northwest and Western Mountain states. On January 31, 2001, the Company
announced a strategic reorganization plan to close 23 Shopko retail stores and a
related distribution center serving those stores. The closings were complete by
April 9, 2001. The remaining 141 ShopKo stores, as of April 9, 2001,operate in
15 states. Pamida is a general merchandise discount retailer serving smaller and
more rural communities. As of February 3, 2001, the Company had 229 Pamida
retail stores operating in 16 Midwest, North Central and Rocky Mountain states.
Financial information about these segments is included in Note J of the Notes to
Consolidated Financial Statements for fiscal year 2000.
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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:
o a differentiation strategy;
o an integrated business planning process;
o execution by an experienced and well-trained management organization;
and
o 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 utilizes an integrated
business planning process that allows 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
improvements among the various categories of merchandise. This process is called
"infrastructural funding." ShopKo performs regular and systematic analysis of
category rankings as part of its business planning process and makes heavier
infrastructure commitments to categories in which ShopKo has a strong market
presence and categories which ShopKo believes have the potential to become
prominent categories.
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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 is responsible for sustaining ShopKo's 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:
o ensuring that merchandise, particularly advertised merchandise, is
available for purchase,
o providing clarity of merchandise offering,
o continually responding to customers' changing lifestyle needs,
o ensuring the speed of merchandise to the sales floor, and
o 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:
2000 1999 1998
---- ---- ----
Hardlines 55% 57% 58%
Softlines 23% 23% 24%
Retail Health 22% 20% 18%
ShopKo's retail stores carry a wide assortment of trend-correct branded and
private label softline goods, including:
o women's, men's and children's apparel,
o shoes,
o jewelry,
o cosmetics, and
o accessories.
ShopKo also carries a wide assortment of seasonal and everyday basic
categories of hardline goods such as:
o housewares, o music/videos,
o home textiles, o toys,
o household supplies, o sporting goods,
o health and beauty aids, o greeting cards and gift wrap,
o home entertainment products, o candy,
o small appliances, o snack foods, and
o furniture, o lawn and garden.
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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 164 stores as of February 3, 2001, 162 include pharmacy
centers and 161 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 12.6 million prescriptions in
fiscal 2000. 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 105 in-store finishing labs. In fiscal
2000, ShopKo dispensed over 746,900 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. As
of April 9, 2001, the Company had closed 23 Shopko stores. Of the remaining 141
ShopKo stores, 140 include pharmacy and optical centers and 89 have in-store
finishing labs.
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 4.5 million. ShopKo
uses direct mail advertisements selectively during key promotional periods.
These direct mail advertisements have a circulation of 6 million. All printed
advertising materials are designed by the Company's in-house 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, casual lifestyle
merchandise at compelling prices in an attractive, customer-friendly shopping
environment.
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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. Remodels, which generally take place
approximately every ten years, usually cost from $0.8 to $1.3 million per ShopKo
store. A ShopKo store renovation, where the square footage is expanded or more
extensive remodeling is needed, usually costs from $1.5 to $2.0 million per
store. No remodels or renovations are planned for fiscal 2001.
The Company's average ShopKo store size is over 90,000 square feet. The
Company has based recently opened ShopKo stores on a 85,000 square foot store.
The prototype may vary depending 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. 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 $8.5 to
$10.0 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. The Company does not plan to open any new ShopKo
stores in fiscal 2001.
SHOPKO RETAIL STORE OPERATIONS AND MANAGEMENT
ShopKo's store operations organization focuses on:
o leadership,
o performance,
o merchandising innovation, and
o 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.
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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 88% of ShopKo's customers give ShopKo high performance ratings over the
last two years for overall satisfaction.
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 2,500 vendors. ShopKo's ten
largest vendors accounted for approximately 37.4% of ShopKo's purchases during
fiscal 2000. 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 1,000 vendors to its electronic data interchange purchase order
systems as of February 3, 2001. Vendors electronically receive point-of-sale
information from ShopKo, which allows them to respond to changing inventory
levels in the stores. The Company continues to implement the use of electronic
purchase order acknowledgments issued by vendors based on the sales information
they have received. In addition, over 1,000 vendors are now electronically
transmitting invoices directly into the Company's automated invoice matching
system.
The Company continues to upgrade its merchandise 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.
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Direct imports accounted for approximately 9.0% of ShopKo's purchases,
based upon cost of goods, during fiscal 2000. 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 distribution centers has enabled ShopKo to:
o purchase the majority of its merchandise directly from manufacturers
which reduces its cost of goods,
o reduce direct vendor-to-store deliveries, which reduces freight
charges and cost of goods through consolidated volume purchasing, and
o increase its pick and pull capabilities, enhancing the effectiveness
and efficiency of its store replenishment process.
ShopKo believes that these cost reductions help it remain price
competitive. During fiscal 2000, approximately 88% of the merchandise sold by
ShopKo, excluding optical and pharmaceutical products, flowed through its
distribution centers.
The Company completed expansion of its distribution centers in Wisconsin
and Idaho during fiscal 2000 and completed construction of a replacement for its
distribution center in Nebraska in the first quarter of fiscal 2001. Providing
an approximately 27% increase in ShopKo retail distribution center square
footage, these projects will improve service to stores, reduce backroom
congestion and support future growth.
Effective March 23, 2001, ShopKo closed its Illinois distribution center
due to the expansion of its three other distribution centers and the corporate
restructuring announced on January 31, 2001.
Pursuant to a license agreement, Payless ShoeSource, Inc. operates ShopKo's
shoe department (other than certain nationally-branded athletic shoes) in every
ShopKo store. ShopKo retains a percentage of the gross proceeds collected as
rent.
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.
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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 transaction-based "raw data" it amasses daily into
"actionable information" which serves as a decision support tool for the
Company's management.
ShopKo's 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.
In fiscal 2000, ShopKo successfully completed implementation of a number of
new systems capabilities, including a system which assists in more effective
in-store merchandise flow, an inbound transportation management system, and a
purchase order tracking system for imported merchandise. In addition, the
Company conducted the successful pilot of a markdown optimization system which
will go into full scale use in fiscal 2001.
EXPANSION - SHOPKO RETAIL
The Company does not currently anticipate pursuing growth of the Shopko
retail business through the addition of new stores in fiscal 2001. In the
future, assuming the Company can achieve acceptable financial returns from new
stores, the Company expects that growth of the Shopko retail store base will
return to the modest levels achieved over the last several years, excluding
growth through acquisitions (approximately 1-3 stores per year). See Item 7-
Management Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources. As conditions allow, the Company
intends to consider increasing the number of ShopKo retail stores to achieve
economies of scale and to capitalize on the Company's existing infrastructure.
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.
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 health and beauty aids, household cleaning and
supplies, 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:
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o store location;
o differentiated merchandising;
o competitive pricing;
o quality of product selection;
o attractiveness and cleanliness of the stores;
o responsiveness to changing lifestyle needs and regional and local
trends;
o customer service;
o in-stock availability of merchandise; and
o 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. Of the 141 ShopKo stores remaining
after reorganization, the percentage of stores where these competitors are
present is as follows:
o Wal-Mart 94%
o Kmart 93%
o Target 72%
ShopKo also competes with regional chains in some markets in the Midwest
and the Pacific Northwest. These competitors continue to open new stores in
Shopko's markets.
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.
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.
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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 strategy is to offer consumers in small, rural communities a
convenient one-stop shopping format. A typical store carries a broad assortment
of value-priced hardlines and softlines merchandise as well as consumables, and
71 stores have pharmacy centers.
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 strategy is to provide customers with a reliable and
convenient family shopping experience featuring nationally advertised brand-name
products as well as select private-label merchandise at competitive prices.
Pamida stores are self-service. Advertising circulars are run weekly. Pamida
places special emphasis on maintaining a strong in-stock position in all
merchandise categories.
MERCHANDISING AND SERVICES - PAMIDA RETAIL
Pamida Retail store net sales mix was:
2000 1999
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Hardlines 70% 70%
Softlines 19% 20%
Pharmacy 11% 10%
Pamida's softlines division includes:
o men's, women's, children's and infant's clothing,
o men's and women's footwear,
o accessories, and
o cosmetics.
Pamida's hardlines division includes categories such as:
o home furnishings, o seasonal,
o hardware, o consumables,
o domestics, o health and beauty aids, and
o electronics, o automotive.
o lawn and garden,
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As of February 3, 2001, Pamida owned and operated pharmacies in 71 of its
stores; five of Pamida's pharmacies are leased to and operated by independent
pharmacists. The pharmacies have proven to be effective in building customer
loyalty and attracting customers who are likely to purchase other items in
addition to prescription drugs. Pamida intends to continue to grow its pharmacy
base.
MARKETING AND ADVERTISING - PAMIDA RETAIL
Pamida's advertising primarily utilizes colorful weekly circulars developed
by a centralized advertising staff. Circulars advertise brand-name and other
merchandise at competitive prices.
PAMIDA RETAIL STORE LAYOUT AND DESIGN
Pamida typically invests approximately $2.9 to $3.2 million in a new
prototype store. Such expenditures consist primarily of approximately $1.8 to
$2.0 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 million for store fixtures and equipment.
Pamida's stores average approximately 33,000 square feet of sales area and
range in size from approximately 6,000 to 51,000 square feet of sales area.
Pamida uses a 24,000 or 35,000 square foot prototype when building new stores.
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 and a liberal return policy.
PURCHASING AND DISTRIBUTION - PAMIDA RETAIL
Pamida maintains a centralized purchasing, merchandise allocation and space
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.
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.
Pamida has entered into an agreement with Payless ShoeSource, Inc. to be
the primary vendor within the shoe category.
Pamida operates distribution facilities in Omaha, Nebraska; Lebanon,
Indiana; and Bethany, Missouri; all of which serve primarily as distribution
centers for bulk shipments and promotional and replenishment merchandise on
which cost savings can be realized through quantity purchasing. During fiscal
2000, approximately 72% of Pamida's merchandise was distributed to the stores
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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.
During fiscal 2000, the Company doubled the size of the Lebanon distribution
center from 200,000 square feet to 418,000 square feet and converted it to a
full-service operation providing both full-case and less-than-case merchandise
distribution, similar to the Omaha facility. Including the 53,000 square foot
distribution center in Bethany, Missouri that was part of the Places
acquisition discussed below, Pamida increased its distribution center square
footage by 76% in fiscal 2000.
MANAGEMENT INFORMATION SYSTEMS - PAMIDA RETAIL
Pamida's information technology strategy is to implement systems that
result in a low cost of operation and maintenance, while retaining the
flexibility to adapt to a rapidly changing retail and technology environment.
Over the course of the 2001 fiscal year, Pamida will be engaged in a number
of projects to upgrade its systems infrastructure, including installation of a
new space and assortment planning system, the addition of gift card and
non-receipt returns, the installation of a new retail management system, the
addition of Advanced Shipping Notice and the upgrade of several auxiliary
decision support systems.
EXPANSION - PAMIDA RETAIL
On June 29, 2000, the Company acquired the retail chain P.M. Place Stores
Company ("Places") which operated 49 discount stores in Missouri, Iowa, Kansas,
and Illinois. Forty-eight of these stores were reopened as Pamida stores and one
Places store, located in an existing Pamida location, was closed.
During fiscal 2000, Pamida opened 76 new stores, including the 48 converted
Places stores, and closed four stores, increasing the total number of Pamida
stores to 229 as of February 3, 2001.
The Company expects that growth of the Pamida retail store base for the
next few years will be below the growth achieved by the Company since it
acquired Pamida. Although the Company does not currently anticipate pursuing
growth of the Pamida retail business in fiscal 2001, through the addition of new
stores, the Company intends to return to modest store growth as conditions allow
and 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. There is, however, no assurance that the Company 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. The
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type and degree of competition and the number of competitors with which Pamida's
stores compete vary by market.
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.
The following is a recap of major competition as a percent of the Pamida
markets where the competition is present:
o Wal-mart 13%
o Kmart 9%
o Alco 7%
o Target 2%
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 32% of the
full year's sales and normally involve a greater proportion of higher margin
merchandise.
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DISCONTINUED OPERATIONS
At the start of fiscal 2000, the Company maintained a 64.5% ownership
interest in ProVantage Health Services, Inc. ("ProVantage"). ProVantage provides
health benefit management services, pharmacy mail services, vision benefit
management services and health information technology and clinical support
services. On June 16, 2000, the Company sold its interest in ProVantage pursuant
to a tender offer by a third party to acquire all of the outstanding shares of
ProVantage. For financial information regarding the sale see Note A of the Notes
to the Consolidated Financial Statements.
CONSOLIDATED
EMPLOYEES
The Company employs approximately 20,000 persons in its Shopko division, of
whom approximately 10,000 are full-time employees and 10,000 are part-time
employees. Pamida employs approximately 7,200 persons. During the Christmas
shopping season, the Company typically employs additional persons on a temporary
basis. Approximately, 2,500 employees were terminated as a result of the
reorganization announced on January 31, 2001. Most of the employees were
terminated as liquidation of the closed store inventories was completed. None of
the Company's employees are covered by collective bargaining agreements.
GOVERNMENT REGULATION
The Company's pharmacy and optical 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.
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 pharmacy and optical services
operations or what the effect of such legislation or regulations may be.
16
17
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 pharmacy and optical
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.
17
18
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, financing 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, and (ii) other risks described
from time to time in the Company's SEC filings.
An investment in ShopKo's Common Stock or other securities carries certain
risks. Investors should carefully consider the risks described below and other
risks which may be disclosed from time to time in ShopKo's filings with the SEC
before investing in ShopKo's Common Stock or other securities.
The Company has a significant amount of debt which could adversely affect
its business and growth prospects. At February 3, 2001, the Company had
approximately $695.1 million of long-term debt and other long-term obligations.
On March 12, 2001, the Company consummated a new, three-year senior secured
credit facility (the "Secured Credit Facility"). The restrictions and
limitations in the Secured Credit Facility, as well as the significant amount of
debt in general, could have significant adverse effects on its business. For
example, it:
o makes it more difficult for the Company to obtain additional financing
on favorable terms,
o restricts capital expenditures,
o requires 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,
o limits the Company's ability to open new stores or to make
acquisitions,
o limits the Company's ability to capitalize on significant business
opportunities,
o makes the Company more vulnerable to economic downturns, adverse
retail industry conditions and competitive pressures, and subjects the
Company to certain covenants which restrict its ability to operate its
business.
18
19
The Company may not achieve the expected benefits of current or future
reorganizations. During the fourth quarter of fiscal 2000, the Company announced
a strategic reorganization plan to improve the productivity of its assets and
reduce debt. The plan included store and distribution center closings and a
one-time charge to earnings of approximately $125 million. The Company expects
that the implementation of the plan will result in an increase in the Company's
profitability and efficiency. However, the analysis underlying this plan
involved many variables and uncertainties. As a result, the Company may not
achieve any of the expected benefits. The Company cannot assure you that
additional reorganizations of this nature, together with related charges to
earnings, will not be required in the future to improve the productivity and
efficiency in the Company's ShopKo and Pamida segments. Such reorganizations and
charges to earnings could have a material adverse effect on our financial
position or results of operations.
The Company may be unable to execute its expansion plans, which may have a
significant adverse effect on its financial performance and its growth strategy
and prospects. The Company considers expansion in the number of its retail
stores to be an integral part of its plan to achieve projected operating results
in future years. In an effort to reduce the Company's overall debt, as well as,
comply with the restrictions and limitations in the Secured Credit Facility, the
Company does not anticipate opening any new retail stores in 2001 and may reduce
its store expansion plans in future years. Furthermore, the Company expects that
any new stores will typically require an extended period of time to reach the
sales and profitability levels of its existing stores. The opening of any new
stores does not ensure that those stores will ever be as profitable as existing
stores, especially when those new stores are opened in highly competitive
markets. The failure to expand by opening new retail stores as planned and the
failure to generate anticipated sales and earnings growth in markets where new
stores are opened could have a material adverse effect on the Company's future
sales growth and profitability.
If the Company is not able to remodel its existing store base on schedule
or to carry out such plans in a cost-effective manner, then the Company's
results of operations and financial condition could be materially adversely
affected. The Company believes that remodeling its stores is a necessary aspect
of delivering comprehensive value to its customers and maintaining its upscale
image. In an effort to reduce the Company's overall debt, as well as, comply
with the restrictions and limitations in the Secured Credit Facility, the
Company has reduced its capital expenditure plans for 2001 and may be required
to delay scheduled remodeling of its retail stores. The failure to upgrade the
Company's existing retail stores could have a material adverse effect on the
Company's anticipated sales and profitability. To the extent the Company is able
to upgrade its existing stores, the associated expenses could result in a
significant impact on our net income in the future and there can be no assurance
that these upgrades will generate any of the anticipated benefits.
The Company's quarterly performance fluctuates, which may cause volatility or a
decline in the price of its securities. Fluctuations in the Company's quarterly
operating results have occurred in the past and may occur in the future based on
a variety of factors, including:
o seasonality in the Company's operations, especially during the
Christmas selling season which has historically contributed a
significant part of the Company's earnings and primarily impacts the
fourth fiscal quarter,
19
20
o inventory imbalances caused by unanticipated fluctuations in consumer
demand or inefficiencies in the Company's distribution centers and
methods,
o margin rate compression resulting from competitive pricing pressure,
o increases and decreases in advertising and promotional expenses,
o changes in the Company's product mix,
o the ability to manage operating expenses, and
o the competitive and general economic conditions discussed below.
These fluctuations could cause the Company's operating results to vary
considerably from quarter to quarter and could materially adversely affect the
market price of its securities.
Competition in the retail industry could limit ShopKo's growth
opportunities and reduce its profitability. The Company competes in the discount
retail merchandise business. This business is 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 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.
General economic conditions and adverse weather could have a significant
adverse effect on the Company's business. The Company operates its retail stores
in limited regions of the country. To the extent adverse economic conditions and
weather have a regional impact on the regions in which the Company operates the
Company may be disproportionately susceptible to such factors compared to peers
that have a larger national base of operations. General economic factors in the
regions in which the Company operates that are beyond its control may materially
adversely affect its forecasts and actual performance. The factors that may
materially adversely affect its forecasts and actual performance include energy
prices, 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. 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.
20
21
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.
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.
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.
21
22
ITEM 2. PROPERTIES
As of February 3, 2001, the Company operated 164 ShopKo retail stores in 19
Midwest, Western Mountain and Pacific Northwest states. During the first quarter
of fiscal 2001, 23 stores, located in seven states were closed. The following
table sets forth the geographic distribution of these ShopKo stores as of the
indicated date:
# OF # OF # OF # OF
STATE STORES STORES STATE STORES STORES
FEB.3, APR. 9, FEB. 3, APR.9,
2001 2001 2001 2001
---------------- ------------ ---------- ----------------------- ---------- -----------
California 1 1 Missouri 3 0
Colorado 3 3 Montana 5 5
Idaho 9 9 Nebraska 13 11
Illinois 15 10 Nevada 3 3
Indiana 2 0 Oregon 4 4
Iowa 13 5 South Dakota 6 6
Kansas 2 0 Utah 15 15
Kentucky 1 0 Washington 10 10
Michigan 4 4 Wisconsin 42 42
Minnesota 13 13
---- ----
Total 164 141
==== ====
Of the Company's 164 ShopKo retail stores at February 3, 2001 and 141 at
April 9, 2001, the number of stores owned and leased are listed below:
Owns Land and Building Owns Building Subject Leases Land
Outright to Ground Lease and Building Total
---------------------- ----------------------- ----------------------- -----------------
Feb. 3, Apr. 9, Feb. 3, Apr.9, Feb. 3, Apr. 9, Feb.3, Apr. 9,
2001 2001 2001 2001 2001 2001 2001 2001
------- ------- ------- ------- ------- ------- ------ -------
ShopKo Stores 84 82 5 5 27 16 116 103
Wholly-owned
subsidiaries 37* 31** 3 3 8 4 48 38
Total 121 113 8 8 35 20 164 141
* Seven of which are subject to mortgages.
** Three 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 2001 through 2020.
22
23
As of February 3, 2001, the Company operated 229 Pamida retail stores in 16
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 8 Montana 6
Indiana 9 Nebraska 15
Iowa 43 North Dakota 7
Kansas 5 Ohio 14
Kentucky 10 South Dakota 6
Michigan 20 Tennessee 4
Minnesota 27 Wisconsin 18
Missouri 28 Wyoming 9
--------
Total 229
========
Of the Company's 229 Pamida retail stores at February 3, 2001, the number
of stores owned and leased are listed below:
Owns Store Leases Store
Premises Premises Total
---------- ------------- ------
Pamida 54 127 181
P.M. Place 6 42 48
---- ---- ----
Total 60 169 229
The leases expire at various dates ranging from 2001 through 2023.
23
24
As of February 3, 2001, the Company's other principal properties were 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 6,600 Leased
Road Annex I*
Green Bay, WI ShopKo Corporate Headquarters - Glory Road 2,600 Leased
Annex II*
De Pere, WI ShopKo Distribution Center 494,000 Owned
Boise, ID ShopKo Distribution Center 347,000 Owned
Omaha, NE ShopKo Distribution Center 394,000 Owned
Quincy, IL ShopKo Distribution Center** 449,500 Leased
Omaha, NE Pamida Corporate Headquarters/Distribution 215,000 Owned
Center
Omaha, NE Pamida Distribution Center 336,000 Owned
Lebanon, IN Pamida Distribution Center 418,000 Leased
Bethany, MO Closed: Corporate Headquarters
(P.M. Places Stores) 85,000 Owned
Bethany, MO Pamida Distribution Center 53,000 Owned
Omaha, NE Pamida Return Center 40,000 Owned
Waukesha, WI ProVantage Corporate Headquarters*** 60,000 Owned
*Lease expires on May 31, 2001 and will not be renewed.
**Closed as of March 23, 2001.
***The Waukesha, Wisconsin building is owned by ShopKo and leased to ProVantage.
24
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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 cash flows.
In addition, during fiscal 2000, the Company was added as a defendant in a
purported class action filed May 8, 2000 in the Circuit Court of the State of
Wisconsin for Waukesha County by James Jorgensen (Allen v. ProVantage Health
Services; Case No. 00CV-938), an alleged stockholder of ProVantage Health
Services, Inc. ("ProVantage") (the "Action"). The original complaint evidencing
the Action (the "Original Complaint") named ProVantage and the directors of
ProVantage as defendants (the "Original Defendants") and alleged, among other
things, that (1) ProVantage's directors breached their respective fiduciary
duties in connection with the sale of ProVantage to Merck & Co., Inc. ("Merck"),
and (2) the proposed price for ProVantage's common stock did not represent the
true value of ProVantage.
On or about August 18, 2000, an amended complaint (the"Amended Complaint")
was filed in the Action which, among other things, added the Company as a
defendant. The Amended Complaint alleges, among other things, that the Company
aided and abetted the Original Defendants in breaching their fiduciary duties.
The Amended Complaint requests that the Circuit Court, among other things,
declare that the Action is a proper class action, rescind the tender
offer/merger pursuant to which ProVantage was purchased by Merck, and award
compensatory monetary damages, including reasonable attorneys' and experts'
fees.
The Company believes the Action to be without merit and the Company intends
to contest all allegations set forth in the Complaint. There can be no
assurances, however, with regard to the outcome of the Action.
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26
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 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT
SERVED IN EMPLOYED
CURRENT BY THE
POSITION COMPANY
NAME AGE* SINCE SINCE
POSITION**
- ----------------- ----- ------------------------------------------ --------- -------
William J. Podany 54 Chairman of the Board, President and Chief
Executive Officer 2000 1994
Rick M. Ausick 47 Senior Vice President, General Merchandise
Manager, Home 1999 1999
Brian W. Bender 52 Senior Vice President,Chief Financial Officer 2000 2000
Michael J. Bettiga 47 Senior Vice President, Stores/ Retail Health
Operations 1999 1977
Paul A. Burrows 52 Senior Vice President, Chief Information Officer 1998 1998
Dennis C. Folz 53 Senior Vice President, Human Resources 1999 1998
Steven T. Harig 46 Senior Vice President, Planning, Replenishment
And Analysis, Distribution and Transportation 1993 1989
Gary A. Hillerman 52 Senior Vice President, General Merchandise
Manager, Hardlines 1997 1996
Michael J. Hopkins 50 President, Pamida 1999 1995
Rodney D. Lawrence 43 Senior Vice President, Store Marketing, Store
Planning, Construction and Real Estate 1996 1996
L. Terry McDonald 58 Senior Vice President, Marketing and Communications 1994 1994
*as of February 3, 2001
**as of April 14, 2001
There are no family relationships between or among any of the directors or
executive officers of the Company.
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.
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27
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, Brian W. Bender,
Paul A. Burrows, Dennis C. Folz, 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. Bender has been Senior Vice President, Chief Financial Officer since
October, 2000. Prior to joining ShopKo, Mr. Bender most recently served as Vice
President and Chief Financial Officer at Egghead.com from November 1996 to
December 1999. Mr. Bender also served in that role at Egghead.com from May 1995
to May 1996. Mr. Bender was Senior Vice President and Chief Financial Officer at
Proffitt's, Inc. in 1996 and Senior Vice President and Controller at Younkers,
Inc. from 1993 to 1995. From 1976 to 1993, Mr. Bender served in numerous roles
for May Department Stores and its divisions, including Corporate Vice President
for Capital Planning and Analysis at May from 1987 to 1989; and Senior Vice
President and Chief Financial Officer at Sibley's from 1989 to 1990 and at May
D&F from 1990 to 1993.
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. 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.
27
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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 9, 2001,
ShopKo's common shares were held by 1,045 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 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
Fiscal Year 2000
First Quarter (ended April 29, 2000) $20.7500 $16.2500
Second Quarter (ended July 29, 2000) $21.0000 $14.3125
Third Quarter (ended October 28, 2000) $14.4375 $5.8750
Fourth Quarter (ended February 3, 2001) $10.9900 $3.3750
The closing sales price of the Common Stock on the New York Stock Exchange
on April 2, 2001 was $7.65 per share.
The Company's Secured Credit Facility (see Note L of Notes to consolidated
financial statements) has a restrictive covenant that prohibits the payment of
dividends. The Company has not paid any cash dividends in the last two years.
The Company currently intends to retain earnings for the payment of debt and
future growth and expansion of its business and not to declare or pay any cash
dividends.
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ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS ENDED
---------------------------------------------------------------------------------
Feb. 3, Jan. 29, Jan. 30, Jan. 31, Feb. 22,
2001 2000 1999 1998(1) 1997
(53 Wks) (52 Wks) (52 Wks) (49 Wks) (52 Wks)
-------- -------- -------- -------- ---------
Summary of Operations (Millions)
Net sales $3,517 $3,048 $2,351 $2,002 $2,006
Licensed department rentals and other income 13 14 12 11 12
Gross margin 865(2) 790 615 529 526
Selling, general and administrative expenses 674 568 447 385 384
Special charges(3) 9 8 6 3
Restructuring charge 115
Depreciation and amortization expenses 94 75 61 54 58
Interest expense - net 66 48 39 31 31
(Loss) earnings from continuing operations before
income taxes (79) 104 75 67 65
(Loss) earnings from continuing operations (50) 63 46 41 40
Discontinued operations, net 34 43 9 8 5
(Loss) earnings before extraordinary item (16) 106 56 49 45
Net (loss) earnings (16) 102(4) 56 49 45
------ ------ ------ ------ ------
Per Share Data (Dollars)
Basic (loss) earnings per common share from
continuing operations ($1.72) $2.22 $1.77 $1.45 $1.23
Basic net (loss) earnings per common share (0.55) 3.62 2.14 1.73 1.40
Diluted (loss) earnings per common share from
continuing operations (1.72) 2.19 1.74 1.43 1.22
Diluted net (loss) earnings per common share (0.55) 3.57 2.10 1.71 1.39
Cash dividends declared per common share 0.22
------ ------ ------- ------ ------
Financial Data (Millions)
Working capital $174 $88 $136 $130 $219
Property and equipment-net 977 881 689 620 600
Total assets 1,997 1,934 1,308 1,200 1,182
Total debt(5) 874 702 472 440 421
Total shareholders' equity 662 695 459 396 461
Capital expenditures 196 136 91 28 36
------ ------- ------- ------ ------
Financial Ratios
Current ratio 1.3 1.1 1.4 1.4 1.8
Return on beginning assets (0.8)% 7.8% 4.6% 4.1% 4.1%
Return on beginning shareholders' equity (2.3)% 22.2% 14.0% 10.6% 10.7%
Total debt as % of total capitalization(6) 56.1% 48.7% 49.5% 51.5% 46.6%
------ ------- -------- ------ ------
Other Year End Data
ShopKo stores open at year end 164 160 147 149(7) 130
Average ShopKo store size-square feet 90,175 89,545 89,106 88,754 89,840
Pamida stores open at year end 229 157(8)
Average Pamida store size-square feet 33,232 36,055
(1) Fiscal year end was changed from the last Saturday in February to the
Saturday nearest January 31.
(2) Includes restructuring charge of $10.4 million related to inventory
liquidation.
(3) Special charges relates to various costs incurred in connection with
business acquisitions, including process and system integration, employee
retention and store conversions, and, in fiscal 1997, costs associated with
unsuccessful business acquisitions.
(4) Includes extraordinary loss on retirement of debt of $3.8 million.
(5) Total debt includes short-term debt, total long-term obligations and leases
and other long-term obligations.
(6) Total capitalization includes shareholders' equity, total debt and
non-current deferred income taxes.
(7) Includes 19 stores acquired from Penn-Daniels, Incorporated, two of which
closed in fiscal 1998.
(8) The Company acquired the Pamida retail store chain in July 1999.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
During fiscal 2000, the Company undertook two transactions that affect the
comparability of its financial statements. First, on June 16, 2000, the Company
sold its remaining 64.5% interest in ProVantage Health Services, Inc.
("ProVantage") pursuant to a tender offer by a third party to acquire all of the
outstanding shares of ProVantage. ProVantage had previously issued 35.5% of its
shares to the public in July 1999. The results of operations of ProVantage have
been presented as discontinued operations. Accordingly, previously reported
financial statement information has been reclassified to reflect this
presentation.
On January 31, 2001, the Company announced a strategic reorganization plan
whereby the Company will close 23 ShopKo retail stores and a related
distribution center serving those stores and downsize its corporate workforce.
In connection with its reorganization plan, the Company has incurred a total
pretax charge of $125.0 million.
Except as otherwise indicated, the following discussion is limited to
continuing operations, excluding the effects of restructuring charges.
RESULTS OF OPERATIONS
The following table sets forth items from our Consolidated Statements of
Operations as percentages of consolidated net sales:
FISCAL YEARS ENDED
------------------------------------------------
FEB. 3, 2001 JAN. 29, 2000 JAN. 30, 1999
(53 WEEKS) (52 WEEKS) (52 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 75.1 74.1 73.8
Selling, general and administrative expenses 19.2 18.6 19.0
Special charges 0.3 0.3 0.3
Depreciation and amortization expenses 2.6 2.4 2.6
------- ------ ------
97.2 95.4 95.7
Income from operations 3.2 5.0 4.8
Interest expense - net (1.9) (1.6) (1.6)
------- ------ ------
Earnings from continuing operations before
income taxes 1.3 3.4 3.2
Provision for income taxes 0.6 1.3 1.2
Earnings from continuing operations 0.7% 2.1% 2.0%
======= ====== ======
30
31
We have two business segments: a ShopKo Retail segment (which includes ShopKo
stores general merchandise, retail pharmacy and retail optical operations) and a
Pamida Retail segment (which includes Pamida stores general merchandise and
retail pharmacy operations).
The following tables set forth items from our business segments as
percentages of net sales:
SHOPKO RETAIL SEGMENT
FISCAL YEARS ENDED
------------------------------------------------
FEB. 3, 2001 JAN. 29, 2000 JAN. 30, 1999
(53 WEEKS) (52 WEEKS) (52 WEEKS)
----------- -------------- --------------
Revenues:
Net sales 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.4 0.5 0.5
------ ------ ------
100.4 100.5 100.5
Costs and Expenses:
Cost of sales 75.3 74.1 73.8
Selling, general and administrative expenses 18.2 17.8 18.1
Depreciation and amortization expenses 2.5 2.5 2.6
------ ------ ------
96.0 94.4 94.5
Income from operations 4.4% 6.1% 6.0%
====== ====== ======
PAMIDA RETAIL SEGMENT
FISCAL YEARS ENDED
----------------------------
FEB. 3, 2001 JAN. 29, 2000
(53 WEEKS) (30 WEEKS)
------------ -------------
Revenues:
Net sales 100.0% 100.0%
Licensed department rentals and other income 0.2 0.3
------ ------
100.2 100.3
Costs and Expenses:
Cost of sales 74.6 73.7
Selling, general and administrative expenses 20.0 19.2
Depreciation and amortization expenses 2.7 2.5
------ ------
97.3 95.4
Income from operations 2.9% 4.9%
====== ======
31
32
FISCAL 2000 COMPARED TO FISCAL 1999
Fiscal 2000, which ended on February 3, 2001, covered 53 weeks, while
fiscal 1999, which ended on January 29, 2000, covered 52 weeks.
Continuing Operations
Consolidated net sales for fiscal 2000 increased 15.4% to $3.5 billion,
compared with $3.0 billion for fiscal 1999. This increase was due to a full year
of Pamida operations (versus 30 weeks in the prior year), an increase in the
number of retail stores, an additional week of sales in fiscal 2000 and an
increase in ShopKo Retail comparable store sales.
ShopKo Retail Store sales for fiscal 2000 increased 4.0% or $104.0 million
from fiscal 1999 to $2.7 billion. This increase is due primarily to the five new
ShopKo Retail stores opened during the year, one of which was a relocation of an
existing store. In addition, ShopKo Retail comparable store sales (52 weeks
versus 52 weeks) increased 0.7%, compared to a 6.2% increase in the prior year.
Changes in comparable store sales in fiscal 2000 by category were as follows:
Retail Health --10.8%, Hardlines - (1.6)% and Softlines - (2.6)%. Changes in
retail comparable store sales for a year are based upon those stores that were
open for the entire preceding fiscal year. Comparable store sales were adversely
impacted by a difficult economic environment, especially in the Company's core
Midwest region, as well as, increased competition in certain of our markets. The
Company believes increased fuel and energy costs, adverse weather conditions and
unfavorable consumer credit terms have all negatively impacted the Company's
sales in fiscal 2000.
Pamida Retail stores sales have been included in consolidated net sales
since their acquisition but they are not included in retail comparable store
sales, since the Company did not own them for the entire preceding fiscal year.
Pamida Retail store sales for the 53 weeks ended February 3, 2001 were $806.2
million and sales for the 30 weeks ended January 29, 2000 were $441.2 million.
In addition to a full year of sales, Pamida Retail sales increased due to a net
72 new stores in fiscal 2000, including 48 stores acquired in the acquisition of
P.M. Place Stores Company ("Places").
Consolidated gross margin, as a percent of sales for fiscal 2000 was 24.9%
compared with 25.9% for fiscal 1999. ShopKo Retail gross margin as a percent of
sales for fiscal 2000 was 24.7% compared with 25.9% last year. ShopKo Retail
gross margins include LIFO credits of $7.2 million for fiscal 2000 and $4.0
million for fiscal 1999. The gross margin rate was negatively impacted by an
increase in promotional sales and clearance activity at reduced gross margin
rates, particularly in the ready-to-wear apparel area, an increase in third
party sales in retail pharmacy (which carry lower gross margin rates), and
freight and shrink costs, partially offset by the favorable LIFO adjustment. The
Pamida Retail gross margin as a percent of sales was 25.4% for fiscal 2000
compared to 26.3% during the 30 weeks ended January 29, 2000. Pamida Retail
gross margins include LIFO credits of $2.6 million for fiscal 2000 and $1.6
million for fiscal 1999. The decrease in gross margin rate is primarily
attributable to operational difficulties in the recently expanded Indiana
distribution facility and an increase in clearance activity at reduced margin
rates, partially offset by the favorable LIFO adjustment.
32
33
Consolidated selling, general and administrative expenses ("SG&A"), as a
percent of sales, were 19.2% in fiscal 2000 compared to 18.6% in fiscal 1999.
ShopKo Retail selling, general and administrative expenses were 18.2% and 17.8%
of net sales in fiscal 2000 and 1999, respectively. Comparable amounts for
Pamida Retail were 20.0% and 19.2%, respectively. The increases reflect higher
store labor, employee benefit and occupancy costs and, as to Pamida Retail,
increased store pre-opening costs associated with the number of new stores
opened in fiscal 2000.
Special charges were incurred in connection with business acquisitions
related to process and systems integration, employee retention programs, and
store conversions. In fiscal 2000, the Company incurred $4.8 million of
integration and employee retention costs associated with the Pamida acquisition
and $4.4 million of store conversion costs associated with the Places
acquisition. Special charges of $8.1 million incurred in fiscal 1999 relate to
integration and employee retention costs associated with the Pamida acquisition.
The Company incurred $5.7 million of store conversion and integration costs in
fiscal 1998 related to the Penn-Daniels acquisition in December 1997.
Net interest expense for the 53 weeks ended February 3, 2001 was $66.0
million, or 1.9% of net sales, compared to $48.1 million, or 1.6% of net sales,
last year. This increase is primarily due to additional debt incurred as a
result of increased capital expenditures and funding working capital needs of
new stores, as well as higher borrowing rates. As a result of higher interest
rates under the Company's new three-year, senior secured revolving credit
facility established March 12, 2001, (the "Secured Credit Facility"), the
Company expects interest expense to increase in fiscal 2001.
33
34
Store Closings and Restructuring
The Company undertook a study in the fourth quarter of fiscal 2000 to
analyze individual store performance and its corporate staffing structure. As a
result of the study, on January 31, 2001, the Company announced a strategic
reorganization plan whereby the Company will close 23 ShopKo retail stores and a
related distribution center serving those stores and downsize its corporate
workforce. These closings will result in the termination of approximately 2,500
employees, including approximately 180 employees at the ShopKo and Pamida
corporate headquarters. Most of the corporate-level employees were terminated on
that date with the remaining employees terminated as the liquidation of the
stores' inventory is completed, which is expected to be completed by the end of
the first quarter of fiscal 2001. In connection with its reorganization plan,
the Company incurred a total pretax charge of $125.0 million, consisting of a
provision for inventory write downs, expected cost for lease terminations,
carrying costs for closed stores through their disposition, write down of the
net book value of assets that are unable to be redeployed, and separation costs
for employees, both at the store and the corporate level.
Following is a breakdown of the restructuring charge (in thousands):
Asset write downs $57,155
Lease termination and property carrying costs 45,752
Inventory liquidation costs 10,447
Employee separation costs 9,262
Other costs 2,416
------
Total $ 125,032
=========
The impact of this charge was to reduce income from continuing operations,
net of income taxes, by $75.9 million ($2.62 per share).
Inventory liquidation costs have been included in cost of sales for
financial reporting purposes. A total of $1.2 million of employee termination
and other costs were paid as of February 3, 2001. Net sales of the stores to be
closed totaled $208.9, $207.7 and $111.5 million in fiscal 2000, 1999 and 1998,
respectively.
Discontinued Operations
In the second quarter of fiscal 2000, the Company sold its remaining
interest in ProVantage and recognized an after-tax gain of $32.6 million. In
fiscal 1999, as a result of the initial public offering of ProVantage, the
Company recognized an after-tax gain of $34.5 million. Income from discontinued
operations was $1.6 million and $8.8 million in fiscal 2000 and 1999,
respectively.
FISCAL 1999 COMPARED TO FISCAL 1998
Consolidated net sales for fiscal 1999 (52 weeks) increased $696.9 million
or 29.6% over fiscal 1998 (52 weeks) to $3,048.1 million. ShopKo Retail Store
sales for fiscal 1999 increased 10.9% or $255.7 million from fiscal 1998 to
$2,606.9 million. This increase is due primarily to increased comparable ShopKo
Retail Store sales and the 13 new ShopKo Retail stores opened during the
34
35
year. ShopKo comparable Retail Store sales increased 6.2% during fiscal 1999 and
the changes by category were: Retail Health - 16.9%, Hardlines - 5.5%, and
Softlines - 5.2%.
In July 1999, the Company acquired the retail chain Pamida, Inc.
("Pamida"), which operated 152 Pamida stores in 15 Midwest, North Central and
Rocky Mountain states. In fiscal 1999, the Company opened seven additional
Pamida stores and closed two Pamida stores. Pamida Retail store sales for the 30
weeks ended January 29, 2000 were $441.2 million.
Consolidated gross margins as percentages of sales were 25.9% and 26.2% 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. 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 merchandising mix. Pamida Retail gross margin as a
percent of sales was 26.3% for the 30 weeks ended January 29, 2000, and reflects
a LIFO credit of $1.6 million.
Consolidated selling, general and administrative expenses as a percentage
of net sales decreased to 18.6% in fiscal 1999, compared with 19.0% 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 net sales for the 30 weeks ended January 29, 2000.
Net interest expense in fiscal 1999 increased by approximately $9.3 million
from fiscal 1998, due to debt incurred to fund the Pamida acquisition and store
growth.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations primarily from cash generated from
operations, with remaining funding requirements being met from short-term and
long-term borrowings. Cash provided from operating activities was $23.0 million,
$66.9 million and $73.5 million in fiscal 2000, 1999 and 1998, respectively.
As of February 3, 2001, the Company had $342.4 million of Senior Unsecured
Notes outstanding. These Senior Unsecured Notes have maturity dates ranging from
March 2002 to March 2022, with approximately $242.8 million principal amount of
Senior Unsecured Notes maturing between March 2002 and November 2004. A more
detailed description of these notes is contained in Note E of the Notes to the
Consolidated Financial Statements. Subject to certain limitations set forth in
the Secured Credit Facility, proceeds of the Secured Credit Facility or funds
from other sources may be used to retire or repurchase those Senior Unsecured
Notes maturing during the term of the Secured Credit Facility.
In addition to the Senior Unsecured Notes, the Company had $341.3 million
outstanding under its bank credit facilities as of the end of fiscal 2000
compared to $245.0 million outstanding as of the end of fiscal 1999.
35
36
On March 12, 2001, the Company closed on the Secured Credit Facility. See
Note L of the Notes to the Consolidated Financial Statements. The Company used
proceeds from the Secured Credit Facility to pay off the outstanding amounts
under its existing bank credit facilities, and those facilities were terminated.
The Secured Credit Facility provides for revolving credit borrowings of up to
$500.0 million and a term loan of $100.0 million both of which bear interest at
the bank's base rate plus 0.0% to 0.5% for base margin loans or the Eurodollar
rate plus 2.0% to 2.5% for Eurodollar loans depending on the Company's operating
cash flow. The Secured Credit Facility terminates March 12, 2004 but the
facility may be extended for an additional year at the Company's option subject
to certain conditions. The Secured Credit Facility is secured by all of the
Company's inventory and accounts receivable and requires the Company to meet
financial performance covenants relating to minimum operating cash flows and
borrowing availability. The terms of the Secured Credit Facility also prohibit
the Company from paying dividends and set limits as to new indebtedness,
repurchases of common stock and capital expenditures.
The Company believes that the Secured Credit Facility, together with
expected cash from operations, will provide sufficient liquidity to finance
continuing operations, including planned capital expenditures, for fiscal 2001.
However, if the Company's operating results were to deteriorate significantly
for whatever reason, or if the Company were to require significant additional
capital for unexpected events, the Company could suffer liquidity problems which
would materially adversely affect its results of operations and financial
condition. Furthermore, as described above, the Company has a significant amount
of debt obligations maturing in the period from March 2002 to November 2004.
While the Company believes it will have sufficient liquidity to retire these
debt obligations as they mature, there can be no assurance that the Company will
be able to retire or refinance these obligations. If the Company cannot retire
or refinance these obligations as they mature, the Company's results of
operations and financial condition will be materially adversely affected.
CAPITAL EXPENDITURES AND ACQUISITIONS
The Company spent $196.0 million on capital expenditures (excluding
acquisitions) in fiscal 2000, compared to $135.9 million in fiscal 1999 and
$90.9 million in fiscal 1998. The following table sets forth the components of
capital expenditures and acquisitions (in millions):
FISCAL YEARS ENDED
---------------------------------------------------
FEB. 3, 2001 JAN. 29, 2000 JAN. 30, 1999
(53 WEEKS) (52 WEEKS) (52 WEEKS)
------------ ------------- -------------
Capital Expenditures
New stores $68.6 $57.2 $42.6
Remodeling and refixturing 47.6 18.7 15.2
Distribution centers 57.8 25.9 1.4
Management information and point-of-sale
equipment and systems 20.9 17.8 26.3
Other 1.1 16.3 5.4
------ ------ -----
Total $196.0 $135.9 $90.9
====== ====== =====
Acquisitions $2.1 $94.0
==== =====
36
37
During fiscal 2000, the Company opened five new ShopKo stores, including
the addition of in-store pharmacies and optical centers. The ShopKo store in
Plover, Wisconsin is a relocation from Stevens Point, Wisconsin. Also, during
fiscal 2000, the Company opened 76 new Pamida stores and closed four Pamida
stores. Forty-eight of the new Pamida stores were remodeled Places stores. Four
of the new Pamida stores include in-store pharmacies. During fiscal 2000, the
Company also expanded the distribution centers in Idaho and Wisconsin and built
a new distribution center in Omaha, Nebraska.
On June 29, 2000, the Company acquired all of the outstanding stock of
Places for $2.1 million in cash and approximately $28.8 million in assumed debt
and accrued liabilities. Places was headquartered in Bethany, Missouri and
operated 49 discount stores in Missouri, Iowa, Kansas and Illinois. After
liquidating the Places stores' inventories and a brief remodeling period, 48 of
the stores reopened during the third quarter under the Pamida store concept.
Net Store Activity
After giving effect to the store closings announced on January 31, 2001,
the Company ended the year with a net increase of 53 new stores, as follows.
Feb. 3, 2001 Jan. 29, 2000
------------ -------------
ShopKo 141 160
Pamida 229 157
--- ---
370 317
The Company's projected capital expenditures for fiscal 2001 approximate
$40.0 million, which are within the restrictions on capital expenditures in the
Secured Credit Facility. The expenditures are expected to relate primarily to
ongoing store equipment and fixturing, information systems, and merchandise
initiatives. This amount excludes any capital that may be required for
acquisitions of businesses. However, the Company does not expect to pursue
growth of its retail store business through new store construction or
acquisitions in fiscal 2001. Such plans may be reviewed and revised from time to
time in light of changing conditions.
STOCK REPURCHASE PROGRAM
On January 12, 2000, the Company announced that its Board of Directors had
authorized the repurchase of $20.0 million of Common Stock which authorization
was subsequently increased by $0.2 million. As of February 3, 2001, 1,088,100
shares of Common Stock had been repurchased for approximately $20.2 million
under this program. Future purchases of Common Stock are limited by the
covenants contained in the Secured Credit Facility.
SENIOR NOTE REPURCHASE PROGRAM
On February 8, 1999, the Company announced that its Board of Directors had
authorized the repurchase of its Senior Notes from time to time in the open
market and through privately negotiated transactions. During fiscal year 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.
37
38
INFLATION
Inflation has and is expected to have only a minor effect on the results of
the Company's operations and internal and external sources of liquidity.
RECENT PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued. The
new standard requires all derivatives to be recorded on the balance sheet at
fair value and establishes accounting treatment for various types of hedges.
This statement, as amended will have no significant impact on the Company's
consolidated financial statements.
MARKET RISK
Because of the level of variable interest rate debt in the Company's
capital structure, the Company is exposed to earnings or cash flow fluctuations
due to changes in interest rates. At February 3, 2001, the Company had $341.3
million of variable rate debt with a weighted average interest rate of 6.9%.
This debt was incurred under bank credit facilities to fund working capital
requirements and repay the debt assumed in the Pamida acquisition. This debt
exposes the Company to changes in interest expense brought about by changes in
interest rates. During fiscal 2000, the monthly average amount borrowed under
the variable rate credit facilities was approximately $361.8 million, and the
weighted average interest rate was 7.1%. If the weighted average interest rate
were to increase by 10.0% for fiscal 2000, net loss would have increased by
approximately $1.6 million.
At February 3, 2001, the Company had fixed-rate long-term debt totaling
$497.5 million. As these instruments are fixed-rate, they 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.
38
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by Item 7a, as to Quantitative and Qualitative
Disclosures about Market Risk is included on page 38 and are incorporated by
reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated financial statements are included on pages 44 to 62 and
are incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
39
40
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 May 1, 2001 filed with the Securities and Exchange Commission pursuant to
Regulation 14A in connection with the Registrant's 2001 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 May 1, 2001 filed with the
Securities and Exchange Commission pursuant to Regulation 14A in connection with
the Registrant's 2001 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 May 1, 2001 filed with the
Securities and Exchange Commission pursuant to Regulation 14A in connection with
the Registrant's 2001 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 May 1, 2001 filed with the
Securities and Exchange Commission pursuant to Regulation 14A in connection with
the Registrant's 2001 Annual Meeting of Shareholders.
40
41
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 42 , the Independent Auditors' Report on
page 43 and the Consolidated Financial Statements on pages 44 to 62,
all of which are incorporated herein by reference.
2. Financial Statement Schedule:
See "Index to Consolidated Financial Statements and Financial
Statement Schedule" on page 42 and the Financial Statement Schedule on
page 63, all of which are incorporated herein by reference.
3. Exhibits:
See "Exhibit Index" on pages 65 to 70 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 with respect to the fourth
fiscal quarter of fiscal 2000 as follows:
Report on Form 8-K, dated January 25, 2001, with respect to (i) the Company's
January 25, 2001 news release announcing it had obtained a commitment for a new
credit facility and (ii) the Company's January 31, 2001 news release regarding
the Company's strategic reorganization plan. The Form 8-K reported Items 5 and
7.
41
42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
Index to Consolidated Financial Statements of ShopKo Stores, Inc. and Subsidiaries
Independent Auditors' Report................................................................. 43
Consolidated Statements of Operations
for each of the three years in the period ended February 3, 2001.................... 44
Consolidated Balance Sheets as of February 3, 2001 and January 29, 2000 ..................... 45
Consolidated Statements of Cash Flows
for each of the three years in the period ended February 3, 2001.................... 46
Consolidated Statements of Shareholders' Equity
for each of the three years in the period ended February 3, 2001.................... 47-48
Notes to Consolidated Financial Statements ................................................... 49-62
Index to Financial Statement Schedule
Schedule II-Valuation and Qualifying Accounts ............................................ 63
All other schedules are omitted because they are not applicable or not required.
42
43
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 February 3, 2001 and January 29, 2000, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year (53 weeks) ended February 3, 2001, the year (52 weeks) ended January
29, 2000 and the year (52 weeks) ended January 30, 1999. 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 the
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 February 3, 2001 and January 29, 2000, and the results of
their operations and their cash flows for the year (53 weeks) ended February 3,
2001, the year (52 weeks) ended January 29, 2000 and the year (52 weeks) ended
January 30, 1999, 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, 2001
43
44
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Fiscal Years Ended
---------------------------------------------
February 3, January 29, January 30,
2001 2000 1999
(53 Weeks) (52 Weeks) (52 Weeks)
--------------- ------------ --------------
Revenues:
Net sales $ 3,517,112 $ 3,048,070 $ 2,351,183
Licensed department rentals and other income 13,423 13,592 11,599
--------------- ------------ --------------
3,530,535 3,061,662 2,362,782
Costs and Expenses:
Cost of sales, including restructuring charge of $10,447 in fiscal 2000 2,652,155 2,257,991 1,735,831
Selling, general and administrative expenses 673,542 568,220 446,636
Special charges 9,224 8,068 5,723
Restructuring charge 114,585
Depreciation and amortization expenses 94,079 75,414 60,814
--------------- ------------ --------------
3,543,585 2,909,693 2,249,004
(Loss) income from operations (13,050) 151,969 113,778
Interest expense - net (65,961) (48,107) (38,854)
--------------- ------------ --------------
(Loss) earnings from continuing operations before income taxes (79,011) 103,862 74,924
Provision (credit) for income taxes (29,036) 41,170 28,770
--------------- ------------ --------------
(Loss) earnings from continuing operations (49,975) 62,692 46,154
Discontinued operations:
Income from discontinued operations, net of income taxes of $1,201,
$6,515 and $7,221, respectively 1,567 8,799 9,482
Gain on sale of discontinued business, net of income taxes of $14,496
and $22,295, respectively 32,590 34,465
--------------- ------------ --------------
(Loss) earnings before extraordinary item (15,818) 105,956 55,636
Extraordinary (loss) on retirement of debt, net of income taxes of $2,443 (3,776)
--------------- ------------ --------------
Net (loss) earnings $ (15,818) $ 102,180 $ 55,636
(Loss) earnings per share of common stock: =============== ============ ==============
Basic:
(Loss) earnings from continuing operations $ (1.72) $ 2.22 $ 1.77
Earnings from discontinued operations 0.05 0.31 0.37
Gain on sale of discontinued business 1.12 1.22 -
Extraordinary (loss) on retirement of debt - (0.13) -
--------------- ------------ --------------
Net (loss) earnings $ (0.55) $ 3.62 $ 2.14
=============== ============ ==============
Diluted:
(Loss) earnings from continuing operations $ (1.72) $ 2.19 $ 1.74
Earnings from discontinued operations 0.05 0.31 0.36
Gain on sale of discontinued business 1.12 1.20 -
Extraordinary (loss) on retirement of debt - (0.13) -
--------------- ------------ --------------
Net (loss) earnings $ (0.55) $ 3.57 $ 2.10
=============== ============ ==============
Weighted average number of common shares outstanding 29,014 28,237 26,035
Adjusted weighted average number of common shares outstanding 29,014 28,595 26,517
See notes to consolidated financial statements.
44
45
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
February 3, January 29,
2001 2000
--------------- -------------------
Assets
Current assets:
Cash and cash equivalents $ 2,800 $ 17,195
Receivables, less allowance for losses of
$2,362 and $2,713, respectively 57,581 56,463
Merchandise inventories 713,925 659,451
Other current assets 17,043 13,772
Net assets of discontinued operations 85,925
--------------- -------------------
Total current assets 791,349 832,806
Other assets and deferred charges 14,486 16,396
Intangible assets - net 214,091 204,224
Property and equipment - net 976,791 880,721
--------------- -------------------
Total assets $ 1,996,717 $ 1,934,147
=============== ===================
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 171,279 $ 245,000
Accounts payable - trade 245,641 308,081
Accrued compensation and related taxes 42,336 50,054
Accrued other liabilities 125,141 115,582
Accrued income and other taxes 25,682 20,666
Current portion of long-term obligations and leases 7,185 5,590
--------------- -------------------
Total current liabilities 617,264 744,973
Long-term obligations and leases, less current portions 660,321 451,078
Other long-term obligations 34,810
Deferred income taxes 22,575 43,594
Shareholders' equity:
Preferred stock; none outstanding
Common stock; shares issued, 30,603 at
February 3, 2001 and 30,400 at
January 29, 2000 306 304
Additional paid-in capital 384,563 381,354
Retained earnings 317,128 332,872
Less treasury stock; 1,904 shares at February 3, 2001
and 816 shares at January 29, 2000 (40,250) (20,028)
--------------- -------------------
Total shareholders' equity 661,747 694,502
--------------- -------------------
Total liabilities and shareholders' equity $ 1,996,717 $ 1,934,147
=============== ===================
See notes to consolidated financial statements.
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46
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Years Ended
------------------------------------------------------
February 3, January 29, January 30,
2001 2000 1999
(53 Weeks) (52 Weeks) (52 Weeks)
-------------- ------------- ------------
Cash flows from operating activities:
(Loss) earnings from continuing operations $ (49,975) $ 62,692 $ 46,154
Adjustments to reconcile net (loss) earnings to net
cash provided by operating activities:
Depreciation and amortization 94,079 75,414 60,814
Provision for losses on receivables 618 397 426
(Gain) loss on the sale of property and (306) (3,112) 415
equipment
Restructuring charge 125,032
Deferred income taxes (19,343) 19,052 10,274
Change in assets and liabilities (excluding
effects of business acquisitions):
Receivables (1,739) (18,250) 7,120
Merchandise inventories (69,657) (29,348) (62,946)
Other current assets 53 (3,164) 2,373
Other assets and intangibles (16,317) (9,679) (2,702)
Accounts payable (62,485) 28,565 2,651
Accrued liabilities 23,054 (55,690) 8,917
-------------- ------------- ------------
Net cash provided by operating activities of
Continuing operations 23,014 66,877 73,496
Net cash flows from discontinued operations (28,061) (35,483) (9,453)
Cash flows from investing activities:
Payments for property and equipment (195,972) (135,859) (90,862)
Proceeds from the sale of property and equipment 4,500 7,871 2,301
Proceeds from the sale of discontinued business 143,381 105,955
Business acquisitions, net of cash acquired (2,070) (94,033)
-------------- ------------- ------------
Net cash (used in) investing activities (50,161) (116,066) (88,561)
Cash flows from financing activities:
Change in short-term debt 96,279 150,708
Change in common stock from stock options 2,892 3,974 4,572
Change in common stock from public offering 147,147
Purchase of treasury stock (20,222) (20,028)
Retirement of debt and capital leases (38,136) (210,151) (4,179)
-------------- ------------- ------------
Net cash provided by financing activities 40,813 71,650 393
-------------- ------------- ------------
Net (decrease) in cash and cash equivalents (14,395) (13,022) (24,125)
Cash and cash equivalents at beginning of year 17,195 30,217 54,342
-------------- ------------- ------------
Cash and cash equivalents at end of year $ 2,800 $ 17,195 $ 30,217
-------------- ------------- ------------
Supplemental cash flow information:
Noncash investing and financial activities -
Retirement of treasury stock $ 152,179
Capital lease obligations incurred $ 42,364 $ 3,568 35,779
Cash paid during the period for:
Interest $ 66,147 $ 48,894 $ 38,683
Income taxes $ 24,473 $ 17,705 $ 29,973
See notes to consolidated financial statements.
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SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Common Stock Treasury Stock
-------------------- ----------------------
Additional
Paid-in Retained
Shares Amount Capital Earnings Shares Amount
------ --------- --------- ----------- -------- -----------
Balances at January 31, 1998 33,941 $ 339 $ 283,520 $ 264,316 (8,174) $ (152,179)
Net earnings 55,636
Sale of common stock under option plans 362 4 4,568
Income tax benefit related to stock options 2,435
Restricted stock expense 603
Retirement of treasury stock (8,174) (82) (62,044) (90,053) 8,174 152,179
------ --------- -------- ----------- ------ -----------
Balances at January 30, 1999 26,129 261 228,479 230,502 - -
Net earnings 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 under public offering 4,025 40 147,107
Restricted stock expense 190
Purchase of treasury stock (816) (20,028)
------ --------- -------- ----------- ------ -----------
Balances at January 29, 2000 30,400 304 381,354 332,872 (816) (20,028)
Net loss (15,818)
Sale of common stock under option plans 203 2 2,890
Income tax benefit related to stock options 319
Restricted stock expense 74
Purchase of treasury stock (1,088) (20,222)
------ --------- -------- ----------- ------ -----------
Balances at February 3, 2001 30,603 $ 306 $384,563 $ 317,128 (1,904) $ (40,250)
====== ========= ======== =========== ====== ===========
See notes to consolidated financial statements.
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SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Total
-----------------------
Shares Amount
Balances at January 31, 1998 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 ------ ------------
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 under public offering 4,025 147,147
Restricted stock expense 190
Purchase of treasury stock (816) (20,028)
------ ------------
Balances at January 29, 2000 29,584 694,502
Net loss (15,818)
Sale of common stock under option plans 203 2,892
Income tax benefit related to stock options 319
Restricted stock expense 74
Purchase of treasury stock (1,088) (20,222)
------ ------------
Balances at February 3, 2001 28,699 $ 661,747
====== ============
See notes to consolidated financial statements.
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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
Cash and Cash Equivalents
The Company records all highly liquid investments with a maturity of three
months or less as cash equivalents.
Receivables
Receivables consist of amounts collectible from merchandise vendors for
promotional and advertising allowances; from third party pharmacy insurance
carriers; and from retail store customers for optical and pharmacy purchases.
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 $19.1 million at February 3, 2001 and $28.9 million at January 29,
2000.
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.
49
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The components of property and equipment are:
Feb. 3, 2001 Jan. 29, 2000
------------ -------------
(in thousands)
Property and equipment at cost:
Land $139,485 $135,591
Buildings 687,237 572,761
Equipment 533,440 500,484
Leasehold improvements 98,730 90,333
Property under construction 26,512 54,759
Property under capital leases 144,209 103,248
-------------- ----------------
1,629,613 1,457,176
Less accumulated depreciation and amortization:
Property and equipment 561,194 547,109
Property under capital leases 34,473 29,346
Less reserve for impairment on assets to be disposed 57,155
-------------- ----------------
Net property and equipment $976,791 $880,721
============== ================
Intangible Assets - Net
Intangible assets related to acquisitions are amortized using the
straight-line method over 15 to 40 years. Underwriting and issuance costs of
long-term obligations are amortized over the term of the obligations.
Accumulated amortization for intangible assets was $13.0 million and $7.0
million at February 3, 2001 and January 29, 2000, 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, except for assets identified for disposal as disclosed in Note C
to the consolidated financial statements, no such impairment existed as of
February 3, 2001 or January 29, 2000.
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.
Pre-opening Costs
The Company expenses pre-opening costs of retail stores as incurred.
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51
Special Charges
The Company incurs various costs in connection with business acquisitions
related to process and systems integration, employee retention programs, and
store conversions. These costs are classified as special charges in the
accompanying consolidated statements of operations. In fiscal 2000, the Company
incurred $4.8 million of integration and employee retention costs associated
with the Pamida acquisition and $4.4 million of store conversion costs
associated with the Places acquisition. Special charges of $8.1 million incurred
in fiscal 1999 relate to integration and employee retention costs associated
with the Pamida acquisition. The Company incurred $5.7 million of store
conversion and integration costs in fiscal 1998 related to the Penn-Daniels
acquisition in December 1997.
Net Earnings (Loss) Per Common Share
Basic net earnings (loss) per common share and diluted net (loss) per
common share are computed by dividing net earnings (loss) 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.
Discontinued Operations
On July 19, 1999, ProVantage Health Services, Inc. ("ProVantage"), a then
wholly-owned subsidiary of the Company, completed an initial public offering of
its common shares. The Company received proceeds of approximately $106.0 million
and recognized a gain on the transaction of $34.5 million, net of income taxes.
As a result of this transaction, the Company's ownership interest in ProVantage
was reduced to 64.5%.
ProVantage provided health benefit management services, pharmacy mail
services, vision benefit management services and health information technology
and clinical support services.
On June 16, 2000, the Company sold its remaining interest in ProVantage
pursuant to a tender offer by a third party to acquire all of the outstanding
shares of ProVantage, for proceeds of approximately $143.4 million, resulting in
a gain of $32.6 million, net of income taxes.
The results of operations of ProVantage have been presented as discontinued
operations. Accordingly, previously reported statement of operations information
has been reclassified to reflect this presentation. Net sales of ProVantage for
the 20 weeks ended June 17, 2000 were $397.9 million. Net sales of ProVantage
for the 52 weeks ended January 29, 2000 and the 52 weeks ended January 30, 1999
were $850.0 million and $607.4 million, respectively.
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Assets and liabilities related to ProVantage have been presented as net
assets from discontinued operations. Accordingly, previously reported balance
sheet information as of January 29, 2000 and cash flow information for the years
ended January 29, 2000 and January 30, 1999 have been reclassified to reflect
this presentation.
Recent Accounting Pronouncement
In June 1998, Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", was issued. The
new standard requires all derivatives to be recorded on the balance sheet at
fair value and establishes accounting treatment for various types of hedges.
This statement, as amended, will have no significant impact on the Company's
consolidated financial statements.
B. ACQUISITIONS
On June 29, 2000, the Company acquired all of the outstanding stock of P.M.
Place Stores ("Places") for $2.1 million in cash and approximately $28.8 million
in assumed debt and accrued liabilities. Places was headquartered in Bethany,
Missouri and operated 49 discount stores in Missouri, Iowa, Kansas and Illinois.
After liquidating the Places stores' inventories and a brief remodeling period,
48 of the stores reopened during the third quarter under the Pamida store
concept. The Bethany, Missouri headquarters and one store location were closed.
The pro forma effect of this acquisition is not material to the Company's
consolidated statements of operations.
On July 6, 1999, the Company acquired all of the outstanding 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.
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 $199.3
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 operations.
The following presents selected unaudited pro forma consolidated statement of
operations 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 $3,331,547 $3,023,577
Earnings from continuing operations 57,926 47,195
Net earnings 97,414 56,677
Diluted earnings per share from continuing operations 2.03 1.78
52
53
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
date, 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. RESTRUCTURING RESERVE
The Company undertook a study in the fourth quarter of fiscal 2000 to
analyze individual store performance and its corporate staffing structure. As a
result of the study, on January 31, 2001, the Company announced a strategic
reorganization plan whereby the Company will close 23 ShopKo retail stores and a
related distribution center serving those stores and downsize its corporate
workforce. These closings will result in the termination of approximately 2,500
employees, including approximately 180 employees at the ShopKo and Pamida
corporate headquarters. Most of the corporate-level employees were terminated on
that date with the remaining employees terminated as the liquidation of the
stores' inventory is completed, which is expected to be completed by the end of
the first quarter of fiscal 2001. In connection with its reorganization plan,
the Company incurred a total pre tax charge of $125.0 million, consisting of a
provision for inventory write downs, expected cost for lease terminations,
carrying costs for closed stores through their disposition, write down of the
net book value of assets that are unable to be redeployed, and separation costs
for employees, both at the store and the corporate level.
Following is a breakdown of the restructuring charges (in thousands):
Asset writedowns $ 57,155
Lease termination and property carrying costs 45,752
Inventory liquidation costs 10,447
Employee separation costs 9,262
Other costs 2,416
----------
Total $ 125,032
----------
Inventory liquidation costs have been included in cost of sales in the
accompanying consolidated statement of operations. A total of $1.2 million of
employee termination and other costs were paid as of February 3, 2001. Net
carrying value of property and equipment held for disposal at February 3, 2001
total $22.1 million. Included in accrued other liabilities at February 3, 2001,
is $32.6 million related to accrued restructuring costs. Net sales of the stores
to be closed totaled $208.9, $207.7 and $111.5 million in fiscal 2000, 1999 and
1998, respectively.
D. SHORT-TERM DEBT
As of February 3, 2001, the Company had outstanding $341.3 million under
various unsecured short term credit facilities. The corresponding amount at
January 29, 2000 was $245.0 million. The related weighted average interest rates
on borrowings outstanding at February 3, 2001 and January 29, 2000 were 6.9% and
6.4%, respectively. As discussed in Note L to the consolidated financial
statements, on March 12, 2001, the Company entered into a new secured financing
arrangement whereby all amounts outstanding under the previous short term
facilities were paid off and the facilities terminated. At February 3, 2001, the
Company has classified as current that portion of the
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debt outstanding that it expects to repay and not reborrow during fiscal 2001
under its new financing arrangement.
The Company also issues letters of credit during the ordinary course of
business as required by foreign vendors. As of February 3, 2001 and January 29,
2000, the Company had outstanding letters of credit for $40.7 million and $25.2
million, respectively.
E. LONG-TERM OBLIGATIONS AND LEASES (in thousands)
Feb. 3, 2001 Jan. 29, 2000
------------ -------------
Senior Unsecured Notes, 9.0% due November 15, 2004, less
unamortized discount of $49 and $87, respectively $ 72,661 $ 72,623
Senior Unsecured Notes, 8.5% due March 15, 2002, less
unamortized discount of $18 and $33, respectively 70,189 70,142
Senior Unsecured Notes, 9.25% due March 15, 2022, less
unamortized discount of $405 and $424, respectively 99,595 99,576
Senior Unsecured Notes, 6.5% due August 15, 2003, less
unamortized discount of $70 and $98, respectively 99,930 99,902
Mortgage and other obligations 22,234 19,726
Revolving credit facility 170,000
Capital lease obligations 132,897 94,699
----------- -----------
667,506 456,668
Less current portion 7,185 5,590
----------- -----------
Long-term obligations $660,321 $451,078
=========== ===========
The notes contain certain covenants which, among other things, restrict the
ability of the Company to consolidate, merge or convey, transfer or lease its
properties and assets substantially as an entirety, to create liens or to enter
into sale and leaseback transactions.
The interest rates on the mortgage and other obligations range from 5.4% to
9.5% with maturities ranging from March 2002 to March 2009 and are collaterized
by property with a net book value of $49.6 million at February 3, 2001.
Amounts outstanding under the revolving credit facility represent amounts
due under short term credit facilities at February 3, 2001 that were refinanced
under a new long term financing arrangement entered into in March 2001 (see
Notes D and L).
Approximate annual maturities of long-term obligations, excluding capital
leases, for the five years subsequent to the year ended February 3, 2001 are as
follows (in thousands):
LONG-TERM
YEAR OBLIGATIONS
---- -----------
2001 $ 2,168
2002 77,080
2003 101,939
2004 243,991
2005 982
Later 108,449
---------
Total maturities $ 534,609
=========
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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.
Minimum future obligations under capital and operating leases in effect at
February 3, 2001 are as follows (in thousands):
Capital Lease Operating Lease
Year Obligations Obligations
---- - ----------- ---------------
2001 $ 16,942 $ 22,197
2002 16,956 18,781
2003 16,583 17,035
2004 16,161 16,020
2005 15,874 14,103
Later 164,752 110,211
----------- -----------
Total minimum future obligations 247,268 $ 198,347
===========
Less interest (114,371)
-----------
Present value of minimum future obligations $ 132,897
===========
The present values of minimum future obligations shown above are calculated
based on interest rates ranging from 6.5% to 14.1% 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 $1.0 million in fiscal year 2000, $0.8 million in
fiscal year 1999 and $0.5 million in fiscal year 1998. Total minimum rental
expense, net of sublease income, related to all operating leases with terms
greater than one year was $26.1, $19.7 and $8.0 million in fiscal years 2000,
1999 and 1998, respectively. Certain operating leases require payments to be
made on an escalating basis. The accompanying consolidated statements of
operations reflect rent expense on a straight-line basis over the term of the
leases.
F. 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 related to continuing operations are as
follows (in thousands):
2000 1999
--------- -------
Deferred tax liabilities:
Property and equipment $ 51,405 $45,232
Intangibles 10,950 13,802
Inventory valuation 35,122 17,217
Other 5,969 2,314
--------- -------
Total deferred tax liabilities 103,446 78,565
--------- -------
Deferred tax assets:
Reserves and allowances (22,520) (19,693)
Restructuring and impairment reserves (47,654)
Capital leases (9,866) (8,802)
Compensation and benefits (4,349) (6,515)
--------- -------
Total deferred tax assets (84,389) (35,010)
========= =======
Net deferred tax liability $ 19,057 $43,555
========= =======
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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 (credit) for federal and state
income taxes related to continuing operations includes the following (in
thousands):
2000 1999 1998
--------- --------- ---------
Current
Federal $ (8,699) $ 16,088 $ 15,000
State (994) 6,030 3,496
Deferred (19,343) 19,052 10,274
--------- --------- ---------
Total provision (credit) $ (29,036) $ 41,170 $ 28,770
========= ========= =========
The effective tax rate related to continuing operations varies from the
statutory federal income tax rate for the following reasons:
2000 1999 1998
------ ------ ------
Statutory income tax rate (35.0%) 35.0% 35.0%
State income taxes, net of federal tax benefits (3.7) 4.2 4.0
Goodwill 2.4 0.9
Other (0.4) (0.5) (0.6)
----- ---- ----
Effective income tax rate (benefit) (36.7%) 39.6% 38.4%
===== ==== ====
G. 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.
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.
On March 26, 1998, the Company's Board of Directors authorized the
repurchase of up to $20.0 million of common stock. During fiscal 1999, 815,600
shares of common stock were repurchased for approximately $20.0 million. On
January 12, 2000, the Company's Board of Directors authorized the repurchase of
another $20.0 million of common stock which authorization was subsequently
increased by $0.2 million. As of February 3, 2001, 1,088,100 shares of common
stock had been repurchased for approximately $20.2 million under this program.
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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, 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
Granted 800 5.31 - 18.19 8.37
Exercised (203) 10.00 - 17.88 14.26
Cancelled and forfeited (429) 5.31 - 34.88 24.79
----- ---------------- ------
Outstanding, February 3, 2001 2,806 $ 5.31 - $ 37.63 $18.83
===== ================= ======
Options Weighted Ave.
Exercisable Exercise Price
----------- --------------
February 3, 2001 988 $19.10
January 29, 2000 1,110 17.65
January 30, 1999 549 13.39
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The following tables summarize information about stock options outstanding
at February 3, 2001 (shares in thousands):
Options Outstanding
-----------------------------------------------------------------------------------------
Range of Exercise Shares Outstanding at Feb. 3, Weighted Average Remaining Weighted Average
Prices 2001 Contractual Life Exercise Price
- ------------------------------------- ------------------------------- ------------------------------ --------------------------
$5.31 to $15.00 904 7.5 years $ 7.55
15.01 to 23.31 1,194 7.8 20.91
23.32 to 37.63 708 7.6 29.70
- ------------------------------------- ------------------------------- ------------------------------ --------------------------
$5.31 to $37.63 2,806 7.7 $ 18.83
===================================== =============================== ============================== ==========================
Options Exercisable
------------------------------------------------------------------------
Range of Exercise Prices Shares Exercisable at Feb. 3, Weighted Average Exercise Price
2001
--------------------------------- ---------------------------------- -------------------------------------
$5.31 to $15.00 304 $11.85
15.01 to 23.31 440 19.57
23.32 to 37.63 244 27.30
--------------------------------- ---------------------------------- -------------------------------------
$5.31 to $37.63 988 $19.10
================================= ================================== =====================================
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, (loss) earnings and diluted (loss)
earnings per common share would have been reduced to the pro forma amounts
indicated below:
2000 1999 1998
-------- ------- -------
(Loss) earnings from continuing operations
(in thousands)
As reported $(49,975) $62,692 $46,154
Pro forma (51,056) 61,089 44,490
Diluted (loss) earnings from continuing operations
per common share
As reported $ (1.72) $2.19 $1.74
Pro forma (1.76) 2.14 1.68
The weighted average fair value of options granted was $3.50, $10.82 and
$10.96 per share in fiscal years 2000, 1999 and 1998, respectively.
The fair value of stock options used to compute pro forma (loss) earnings
from continuing operations and diluted (loss) earnings from continuing
operations 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:
2000 1999 1998
---------- ---------- ----------
Risk-free interest rate 5.2% 6.4% 5.3%
Expected volatility 55.4% 36.0% 34.0%
Dividend yield 0.0% 0.0% 0.0%
Expected option life, standard option (years) 1.0 to 5.0 1.0 to 5.0 1.0 to 5.0
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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 of restricted stock outstanding at
both February 3, 2001 and January 29, 2000.
H. EMPLOYEE BENEFITS
Substantially all employees of the Company are covered by a defined
contribution profit sharing plan. The plan for ShopKo 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 $5.3, $13.4 and $14.1 million for
fiscal years 2000, 1999 and 1998, 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.
I. 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 quoted market values or
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 February 3, 2001 and January 29, 2000 are as
follows (amounts in thousands):
February 3, January 29,
2001 2000
----------- -----------
Carrying amount $ 534,609 $ 361,969
Fair value 428,933 367,633
J. BUSINESS SEGMENT INFORMATION
The Company's reportable segments are based on the Company's strategic
business operating units, and include a ShopKo Retail segment (which includes
ShopKo stores general merchandise, retail pharmacy and retail optical
operations) and a Pamida Retail segment (which includes Pamida stores general
merchandise and retail pharmacy operations).
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on operating earnings of the respective business segments.
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60
Summarized financial information concerning the Company's reportable
segments is shown in the following table (in thousands):
Fiscal Years
--------------------------------------------------------------
2000 1999 1998
--------------- -------------- -------------------
Net sales
ShopKo Retail $ 2,710,885 $ 2,606,883 $ 2,351,183
Pamida Retail 806,227 441,187
--------------- -------------- -------------------
Total net sales $ 3,517,112 $ 3,048,070 $ 2,351,183
=============== ============== ===================
(Loss) income from operations
ShopKo Retail $ 118,735 $ 159,084 $ 140,763
Pamida Retail 23,150 21,467
Corporate (1) (154,935) (28,582) (26,985)
--------------- -------------- -------------------
(Loss) income from operations $ (13,050) $ 151,969 $ 113,778
=============== ============== ===================
Depreciation and amortization expenses
ShopKo Retail $ 70,602 $ 64,126 $ 60,106
Pamida Retail 22,350 10,764
Corporate 1,127 524 708
--------------- -------------- -------------------
Total depreciation and amortization expenses $ 94,079 $ 75,414 $ 60,814
=============== ============== ===================
Capital expenditures
ShopKo Retail $ 110,089 $ 94,168 $ 85,531
Pamida Retail 84,769 25,978
Corporate 1,114 15,713 5,331
--------------- -------------- -------------------
Total capital expenditures $ 195,972 $ 135,859 $ 90,862
=============== ============== ===================
As of February 3, As of January 29, As of January 30,
2001 2000 1999
Assets -------------------- ------------------- --------------------
ShopKo Retail $ 1,276,816 $ 1,271,856 $ 1,166,468
Pamida Retail 694,106 548,170
Corporate (2) 25,795 114,121 141,290
--------------- -------------- -------------------
Total assets $ 1,996,717 $ 1,934,147 $ 1,307,758
=============== ============== ===================
(1) Included in Corporate are restructuring charges of $125.0 million in fiscal
2000 and special charges of $9.2, $8.1 and $5.7 million in fiscal 2000,
1999 and 1998, respectively.
(2) Included in Corporate are net assets of discontinued operations of $85.9
and $113.2 million at January 29, 2000 and January 30, 1999, respectively.
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K. UNAUDITED QUARTERLY FINANCIAL INFORMATION
Unaudited quarterly financial information is as follows:
(In thousands, except per share data)
Fiscal Year (53 Weeks) Ended February 3, 2001
-------------------------------------------------------------------------------------
First Second Third Fourth Year
(13 Weeks) (13 Weeks) (13 Weeks) (14 Weeks) (53 Weeks)
------------- ------------ -------------- ------------------- ------------
Net sales $749,591 $819,543 $814,191 $1,133,787 $3,517,112
Gross margin 191,808 213,417 194,691 265,041 (4) 864,957
Earnings(loss) from continuing
Operations 562 5,155 (8,424) (47,268)(5) (49,975)
Net earnings(loss) 1,796 38,078 (3) (8,424) (47,268)(5) (15,818)
Basic and diluted earnings(loss)
from continuing operations
per common share 0.02 0.18 (0.29) (1.65)(5) (1.72)
Weighted average shares 29,585 29,075 28,698 28,699 29,014
Price range per common
Share (1) 20 3/4-161/4 21-14 5/16 14 7/16-5 7/8 10 99/100-3 3/8 21-3 3/8
------------- ------------ -------------- ------------------- -----------
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 $549,460 $665,486 $806,032 $1,027,092 $3,048,070
Gross margin 138,441 169,307 200,525 281,806 790,079
Earnings from continuing
operations 1,960 5,794 7,756 47,182 62,692
Net earnings 537 (2) 42,845 (3) 9,358 49,440 102,180
Basic earnings from continuing
operations per common
share 0.07 0.22 0.26 1.59 2.22
Weighted average shares 26,140 26,810 30,376 29,621 28,237
Diluted earnings from continuing
operations per common
share 0.07 0.21 0.25 1.58 2.19
Adjusted weighted average
shares 26,591 27,299 30,702 29,786 28,595
Price range per common
Share (1) 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
--------------- ------------ -------------- --------------- ---------------
(1) Price range per common share reflects the highest and lowest stock market
prices on the New York Stock exchange during each quarter.
(2) Includes extraordinary loss, net of income taxes, on retirement of debt of
$3.8 million.
(3) Includes gain, net of income taxes, on sale of discontinued business of
$32.6 and $34.5 million in fiscal 2000 and 1999, respectively.
(4) Includes restructuring charge of $10.4 million.
(5) Includes restructuring charge, net of income taxes, of $75.9 million ($2.65
per share).
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L. SUBSEQUENT EVENT
On March 12, 2001, the Company entered into a $600.0 million senior secured
revolving credit and term loan facility (the "Secured Credit Facility"). The
Secured Credit Facility, which terminates on March 12, 2004, provides for
revolving credit loans of up to $500.0 million and term loan of $100.0 million,
and may be extended for an additional year at the Company's option, subject to
certain conditions. Amounts available under the Senior Credit Facility are
limited based on a percentage of inventory and accounts receivable. Borrowings
under the facility are secured by accounts receivable and inventory and bear
interest at rates based on prime or Eurodollar rate plus an applicable margin
based on operating performance of the Company. This credit agreement contains
various affirmative and negative covenants and precludes the Company from paying
dividends.
As a result of obtaining the financing, the Company retired all outstanding
amounts due under its various short-term financing facilities and terminated
those facilities (see Note D).
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SHOPKO STORES, INC. AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
BALANCE CHARGES
AT TO BALANCE AT
BEGINNING COSTS & DEDUCTIONS END OF
OF YEAR EXPENSES (ADDITIONS) YEAR
------------ ------------ ------------- -------------
Year (52 weeks) ended January 30, 1999:
Allowance for losses $ 7,406 $ 426 $ 1,659 * $ 6,173
Inventory valuation reserves** 4,500 500 4,000
Year (52 weeks) ended January 29, 2000:
Allowance for losses $ 6,173 $ 397 $ 3,857 * $ 2,713
Inventory valuation reserves** 4,000 1,600 2,400
Year (53 weeks) ended February 3, 2001:
Allowance for losses $ 2,713 $ 618 $ 969 * $ 2,362
Inventory valuation reserves** 2,400 1,585 815
*Net of charges to accounts other than bad debt expense, primarily promotion and
advertising.
**Excludes amounts related to acquisitions.
Note: Schedule excludes accounts of discontinued operations
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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: May 2, 2001
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 May 2, 2001
---------------------- Chief Executive Officer
William J. Podany
/S/ BRIAN W. BENDER Senior Vice President, Chief May 2, 2001
-------------------- Financial Officer (Principal
Brian W. Bender Accounting Officer)
/S/ JACK W. EUGSTER* Director May 2, 2001
----------------------------
Jack W. Eugster
/s/ JEFFREY C. GIRARD* Director May 2, 2001
-------------------------
Jeffrey C. Girard
/S/ DALE P. KRAMER* Director May 2, 2001
--------------------
Dale P. Kramer
/s/ JOHN G. TURNER* Director May 2, 2001
---------------------
John G. Turner
/s/ STEPHEN E. WATSON* Director May 2, 2001
------------------------
Stephen E. Watson
/S/ GREGORY H. WOLF* Director May 2, 2001
----------------------
Gregory H. Wolf
*By Peter G. Vandenhouten pursuant to Powers of Attorney.
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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 Amended and Restated Bylaws of the Company, incorporated by
reference to the Company's Quarterly Report on Form 10-Q
for the 13 weeks ended July 29, 2000.
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.
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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* Loan and Security Agreement dated as of March 9, 2001
("Secured Credit Facility") among Shopko Stores, Inc., Pamida, Inc.,
subsidiaries of Shopko Stores, Inc., named therein, as guarantors,
the banks, named therein, and Fleet Retail Finance Inc.,
as Administrative Agent. (The exhibits and schedules to the
Secured Credit Facility have been omitted. Such exhibits and
schedules are described in the Secured Credit Facility. The
Company hereby agrees to furnish to the Securities and Exchange
Commission, upon its request, any or all of such omitted exhibits or
schedules.)
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)
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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)
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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 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.
10.10 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)
10.11 ShopKo Directors Deferred Compensation Plan,
incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration
No. 33-45833). (1)
10.12 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)
10.13 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)
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Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- ------ -------------------------------------------------------------- -------------------
10.14 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.
10.15 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)
10.16 ShopKo Stores, Inc. Executive Retirement Plan, dated February 1999,
incorporated by reference from the Registrant's Annual Report on
Form 10-K for the 52 weeks ended January 29, 2000. (1)
10.17 Independent Contractor Agreement between the Company and Mr. Kramer
dated January 30, 2000, incorporated by reference from the
Registrant's Annual Report on Form 10-K for the 52 weeks ended
January 29, 2000. (1)
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Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- ------ -------------------------------------------------------------- -------------------
10.18 Letter Agreements for consulting services between Girard Financial
Consulting and the Registrant dated September 29, 2000
and December 4, 2000, incorporated by reference from the
Registrant's Form 10-Q, Quarterly Report for the 13 weeks
ended October 28, 2000.
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.
*Filed herewith
(1) A management contract or compensatory plan or arrangement.
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