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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year (52 weeks) ended February 2, 2002
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
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
--------------------------------------- --------------------------
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 197 Exhibit index on page 65
(Cover page 1 of 2 pages)
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 March 29, 2002 was approximately $516,229,376.00 (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 March 29,
2002: 28,730,310.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference portions of the definitive Proxy Statement
for the Registrant's Annual Meeting of Shareholders to be held on May 29, 2002.
(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 2,
2002, the Company had 141 ShopKo retail stores operating in 15 Midwest, Pacific
Northwest and Western Mountain states. Pamida is a general merchandise discount
retailer serving smaller and more rural communities. As of February 2, 2002, the
Company had 225 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 2001.
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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
has developed and implemented a long-term strategic operating model which is
based upon creating market opportunities by serving time-strapped consumers'
changing shopping habits. This operating model is based upon four strategic
initiatives:
- a differentiation strategy;
- an integrated business planning process;
- execution by an experienced and well-trained management organization;
and
- delivery of comprehensive value.
Differentiation Strategy. ShopKo's differentiation strategy focuses on
accentuation of selected and targeted merchandise categories tied to changing
lifestyle needs. Within each of these merchandise categories, shoppers will find
a wide assortment. A strong national brand presence is combined with ShopKo's
private brands to offer a unique product mix.
Integrated Business Planning Process. ShopKo 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. 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.
Execution. ShopKo's operating committee is responsible for sustaining
ShopKo's performance-driven culture. ShopKo has 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. The
comprehensive value ShopKo delivers is also based on:
- ensuring that merchandise, particularly advertised merchandise, is
available for purchase,
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- providing clarity of merchandise offering,
- continually responding to customers' changing lifestyle needs,
- ensuring the speed of merchandise to the sales floor, and
- providing simplicity, speed and friendliness in the shopping experience.
MERCHANDISING AND SERVICES - SHOPKO RETAIL
The ShopKo Retail store net sales mix for the last three fiscal years was:
-------------------------- --------------- -------------- --------------
2001 2000 1999
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Hardlines 54% 55% 57%
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Softlines 22% 23% 23%
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Retail Health 24% 22% 20%
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ShopKo's retail stores carry a wide assortment of trend-correct branded and
private label softline goods, including:
- women's, men's and children's apparel,
- shoes,
- jewelry,
- cosmetics, and
- accessories.
ShopKo also carries a wide assortment of seasonal and everyday basic
categories of hardline goods such as:
- housewares, - music/videos,
- home textiles, - toys,
- household supplies, - sporting goods,
- health and beauty aids, - greeting cards and gift wrap,
- home entertainment products, - candy,
- small appliances, - snack foods, and
- furniture, - lawn and garden.
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 141 stores as of February 2, 2002, 140 include pharmacy
centers and optical centers.
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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 12.2 million prescriptions in fiscal 2001. 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 89 in-store finishing labs. In fiscal 2001, ShopKo dispensed over
679,000 eyewear prescriptions. The in-store finishing labs typically service
other ShopKo stores in the vicinity and provide customers with same day or next
day optical service for single vision lenses.
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 4.4 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 studios. In addition to the
newspaper circulars and direct mail advertisements, ShopKo uses television and
radio advertising as a secondary media to support key events.
ShopKo prices its merchandise so as to be competitive with its regional and
national discount competitors. In general, ShopKo uses its frequent advertising
of a large group of high demand items to reinforce its competitive value 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.
SHOPKO RETAIL STORE LAYOUT AND DESIGN
ShopKo stores are designed for simplicity, speed and ease of the shopping
experience. The stores present an exciting environment with emphasis on ShopKo's
customers' lifestyles and brand awareness. The stores feature competitive
assortments of softlines, home and hardlines products as well as professional
pharmacy and optical departments. The pharmacy and optical departments are
located in the front of the store for added convenience. Health and Beauty Aids
and Over The Counter product have been positioned adjacent to the pharmacy, in
most stores, to provide a total health care environment. ShopKo designs the
remainder of the store in a "racetrack" configuration which assists customers in
navigating easily throughout the store. ShopKo presents high impulse, high
volume promotional items prominently in main aisle positions and on fixture
endcaps.
ShopKo will continue its focus to enhance the customer experience through a
well-managed asset maintenance program. Stores are generally planned to be
remodeled every ten years. The Company's average ShopKo store size is over
90,000 square feet. Future store size may vary depending on the community and
the retail competition in the immediate area. The Company continues to evaluate
growth opportunities, however, it does not plan to open any new ShopKo stores in
fiscal 2002.
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SHOPKO RETAIL STORE OPERATIONS AND MANAGEMENT
ShopKo's store operations organization focuses on:
- leadership,
- performance,
- merchandising innovation, and
- excellence in execution.
ShopKo strives for continuous improvements in overall customer
satisfaction, which is measured by an independent research firm. The ShopKo
operating model has been integrated into store operations with significant
improvements in operating efficiency and dedication to customer service. The
store operations organization is now focusing on a framework of three leadership
planks: people, performance and profit.
People. The Company believes that it has improved teammate satisfaction and
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 research 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 an innovative automated labor management system
which provides on-line sales forecasting in 15 minute increments which ties
labor scheduling to customer traffic patterns.
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 2,600 vendors. ShopKo's ten
largest vendors accounted for approximately 35.1% of ShopKo's purchases during
fiscal 2001. 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. The
majority of ShopKo's vendors are linked to its electronic data interchange
purchase order systems as of February 2, 2002. 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
7
sales information they have received. In addition, the majority of ShopKo's
vendors are now electronically transmitting invoices directly into the Company's
automated invoice matching system.
ShopKo purchasing and distribution of merchandise is a critical aspect of
our business. The Company has implemented a program which focuses on continuous
improvement of the purchasing and distribution functions. This program has
resulted in improved in-stock positions and working capital through lower
inventory levels in our distribution centers and stores, and increased inventory
turnover. The Company uses centralized purchasing, replenishment and allocation
processes and information systems. These systems have been upgraded over the
last several years and additional upgrades are in-process. Allocation and
distribution management is closely tied to the merchandise buying organization
to effectively control and plan merchandise logistics.
Direct imports accounted for approximately 9.6% of ShopKo's purchases,
based upon cost of goods, during fiscal 2001. 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:
- purchase the majority of its merchandise directly from manufacturers
which reduces its cost of goods,
- reduce direct vendor-to-store deliveries, which reduces freight charges
and cost of goods through consolidated volume purchasing, and
- increase its pick and pull capabilities, enhancing the effectiveness and
efficiency of its store replenishment process.
ShopKo believes that these cost reductions help it remain price
competitive. During fiscal 2001, approximately 87% 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. These
expansions increased retail distribution center square footage by approximately
27% and have improved service to stores, reduced backroom congestion and will
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.
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MANAGEMENT INFORMATION SYSTEMS - SHOPKO RETAIL
ShopKo uses information technology to improve customer service, reduce
operating costs and provide useful information to help ShopKo make timely
decisions regarding merchandising. ShopKo uses modern point-of-sale terminal
systems for electronic price lookup and tracking sales information at store and
stock keeping unit level. ShopKo uses frame relay communications technology to
provide on-line credit card and check authorization. ShopKo uses portable
radio-frequency terminals extensively in its stores for merchandise receiving,
stocking, replenishment, pricing and label printing. ShopKo also makes extensive
use of automated labor scheduling systems within its stores.
The Company's merchandising systems provide for integrated 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
reporting 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 2001, ShopKo completed implementation of a number of systems
initiatives, including several major replenishment system enhancements which
contributed to reduced inventories and increased inventory turnover, a system to
track purchase orders for imported merchandise, a decision support system which
enables improved management of the Company's retail health business, and
initiated the rollout of a markdown optimization system. In addition, the
Company completed the consolidation of its financial, human resources, and
payroll systems for both operating divisions.
EXPANSION - SHOPKO RETAIL
The Company does not currently anticipate pursuing growth of the ShopKo
retail business through the addition of new stores in fiscal 2002. 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.
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COMPETITION - SHOPKO RETAIL
The discount general merchandise business is very competitive. ShopKo
competes in most of its markets with a variety of national, regional and local
discount stores, national category killers, specialty niche retailers, catalog
merchants and internet retailers. In addition, department stores compete in some
branded merchandise lines, discount specialty retail chains compete in some
merchandise lines such as 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:
- store location;
- differentiated merchandising;
- competitive pricing;
- quality of product selection;
- attractiveness and cleanliness of the stores;
- responsiveness to changing lifestyle needs and regional and local trends;
- customer service;
- in-stock availability of merchandise; and
- advertising.
ShopKo's principal national general merchandise discount chain competitors
are Wal-Mart, Kmart and Target, each of which is substantially larger than, and
has greater resources than, the Company. The percentage of stores where these
competitors are present is as follows:
- Wal-Mart 95%
- Kmart 93%
- Target 74%
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. In addition, ShopKo store sales are generally negatively
affected by a competitor's increased saturation through expansion, relocation
and additional stores in an existing market. The Company's efficiency measures
and distribution center expenditures are important
10
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.
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's 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
76 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
The Pamida Retail store net sales mix for the last three fiscal years was:
------------------------- --------------- -------------- --------------
2001 2000 1999
------------------------- --------------- -------------- --------------
Hardlines 69% 70% 70%
------------------------- --------------- -------------- --------------
Softlines 18% 19% 20%
------------------------- --------------- -------------- --------------
Pharmacy 13% 11% 10%
------------------------- --------------- -------------- --------------
Pamida's softlines division includes:
- men's, women's, children's and infant's clothing,
- men's and women's footwear,
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- jewelry and accessories, and
- cosmetics.
Pamida's hardlines division includes categories such as:
- home furnishings, - seasonal,
- hardware, - consumables,
- domestics, - health and beauty aids,
- electronics, - automotive, and
- lawn and garden, - toys
As of February 2, 2002, Pamida owned and operated pharmacies in 73 of its stores
with an additional three pharmacies 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 aggressively grow its pharmacy
base, looking to add 15 to 20 pharmacies per year for the next couple of years.
MARKETING AND ADVERTISING - PAMIDA RETAIL
Pamida's advertising primarily utilizes colorful weekly circulars
coordinated by an internal 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 8,000 to 50,000 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
and inventory management specialists to assist them in managing inventories,
effecting prompt reorders of popular items, eliminating slow-selling merchandise
and reducing markdowns.
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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 and Lebanon,
Indiana; both 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. Effective March, 2002, Pamida
closed a distribution center in Bethany, Missouri that was part of the Places
acquisition discussed below, in connection with efforts to streamline its
distribution operations. During fiscal 2001, approximately 68% of Pamida's
merchandise was distributed to the stores through these distribution centers,
while the remaining merchandise was supplied directly to the stores by
manufacturers or distributors.
The primary Omaha distribution facility consists of 336,000 square feet.
Pamida owns another distribution center in Omaha which is 135,000 square feet
and is used primarily as a cross-dock operation. The Lebanon distribution center
is 418,000 square feet and is used as a full-service operation providing both
full-case and less-than-case merchandise distribution, similar to the primary
Omaha facility.
MANAGEMENT INFORMATION SYSTEMS - PAMIDA RETAIL
Pamida employs an up-to-date suite of integrated retail information
systems, including merchandise procurement, inventory management, automated
replenishment, merchandise and space planning, warehouse management, pharmacy
management and point of sale.
In 2002, the Company plans to consolidate Pamida's data center and
technical support functions into the corporate headquarters in Green Bay,
Wisconsin. In addition to the consolidation, Pamida will be engaged in the final
phases of the installation of a new retail management system, upgrades to store
operating system applications and implementation of a pharmacy centralized
claims system.
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 2001, Pamida closed four stores, decreasing the total number
of Pamida stores to 225 as of February 2,2002.
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. The Company does not currently anticipate pursuing growth of
the Pamida retail business in fiscal 2002 through the addition of new stores
with the exception of expanding pharmacy locations in existing Pamida retail
stores.
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However, 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 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:
- Wal-Mart 12%
- Kmart 8%
- 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 29% of the
full year's sales and normally involve a greater proportion of higher margin
merchandise.
DISCONTINUED OPERATIONS
At the start of fiscal 2000, the Company maintained a 64.5% ownership
interest in ProVantage Health Services, Inc. ("ProVantage"). 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 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.
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CONSOLIDATED
EMPLOYEES
The Company employs approximately 19,400 persons in its ShopKo division,
of whom approximately 9,700 are full-time employees and 9,700 are part-time
employees. Pamida employs approximately 6,600 persons, of whom approximately
3,300 are full-time employees and 3,300 are part-time employees. 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.
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.
15
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 impact of recent accounting pronouncements as described
herein, (ii) the risk factors described below, and (iii) 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 2, 2002, the Company had
approximately $755.3 million of long-term debt and lease 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:
- makes it more difficult for the Company to obtain additional financing on
favorable terms,
- restricts capital expenditures,
- 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,
- limits the Company's ability to open new stores or to make acquisitions,
- limits the Company's ability to capitalize on significant business
opportunities,
16
- 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.
The Company finances a significant portion of its operations through vendor
financing. The credit terms provided by the Company's vendors are an important
source of financing for the Company's operations. Future operating performance
could negatively impact the favorable credit terms the Company now maintains
with these vendors. If the credit terms provided to the Company by a significant
portion of its vendors were to deteriorate, the Company would be materially
adversely effected.
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
to comply with the restrictions and limitations in the Secured Credit Facility,
the Company does not anticipate opening any new retail stores in fiscal 2002 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 to comply
with the restrictions and limitations in the Secured Credit Facility, the
Company has restricted its capital expenditure plans for fiscal 2002 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
17
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:
- 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,
- inventory imbalances caused by unanticipated fluctuations in consumer
demand or inefficiencies in the Company's distribution centers and
methods,
- margin rate compression resulting from competitive pricing pressure,
- increases and decreases in advertising and promotional expenses,
- changes in the Company's product mix,
- the ability to manage operating expenses, and
- 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.
The long-term economic effects of the September 2001 terrorist attacks on
the United States and an economic slowdown could negatively affect the Company's
financial condition. On September 11, 2001, New York City and Washington, D.C.
suffered serious terrorist attacks. The long-term economic impact of these acts
has yet to be determined, and the ultimate cost associated with these attacks
and related incidents may place significant burdens on the United States economy
as a whole. The potential for future terrorist attacks, the national and
international responses to terrorist attacks and other acts of war or hostility
have created many economic
18
uncertainties. These events could adversely affect the Company's business and
operating results in other ways that presently cannot be predicted. If these
prior acts or additional terrorist attacks or other factors cause an overall
economic decline, the Company's financial condition and operating results could
be materially adversely affected.
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.
The Company is dependent on the smooth functioning of its distribution
network. The Company relies upon the ability to replenish its depleted inventory
through deliveries to its distribution centers from vendors, and from the
distribution centers to its stores and, to a limited extent, direct-to-store
deliveries from vendors. Problems that cause delays or interruptions in the
distribution network could have a material adverse effect on the Company's
business and results of operations.
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
19
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.
20
ITEM 2. PROPERTIES
As of February 2, 2002, the Company operated 141 ShopKo retail stores in 15
Midwest, Western Mountain and Pacific Northwest states. The following table sets
forth the geographic distribution of these ShopKo stores as of the indicated
date:
# OF # OF
STATE STORES STATE STORES
---------------- ---------- ----------------------- -----------
California 1 Nebraska 11
Colorado 3 Nevada 3
Idaho 9 Oregon 4
Illinois 10 South Dakota 6
Iowa 5 Utah 15
Michigan 4 Washington 10
Minnesota 13 Wisconsin 42
Montana 5
Total 141
===========
Of the Company's 141 ShopKo retail stores at February 2, 2002 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
- ------------------------- ------------------------ ------------------------- ------------------------- -----------------------
ShopKo Stores 82 5 16 103
- ------------------------- ------------------------ ------------------------- ------------------------- -----------------------
Wholly-owned
subsidiaries 31* 3 4 38
- ------------------------- ------------------------ ------------------------- ------------------------- -----------------------
Total 113 8 20 141
- ------------------------- ------------------------ ------------------------- ------------------------- -----------------------
* 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 2002 through 2023.
21
As of February 2, 2002, the Company operated 225 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 14
Iowa 42 North Dakota 7
Kansas 5 Ohio 14
Kentucky 10 South Dakota 6
Michigan 19 Tennessee 4
Minnesota 26 Wisconsin 18
Missouri 28 Wyoming 9
Total 225
==============
Of the Company's 225 Pamida retail stores at February 2, 2002, the number
of stores owned and leased are listed below:
- ------------------------- ---------------------- ----------------------- ----------------------
Owns Store Premises Leases Store Premises
Total
- ------------------------- ---------------------- ----------------------- ----------------------
Pamida 57 120 177
- ------------------------- ---------------------- ----------------------- ----------------------
P.M. Place 7 41 48
- ------------------------- ---------------------- ----------------------- ----------------------
Total 64 161 225
- ------------------------- ---------------------- ----------------------- ----------------------
The leases expire at various dates ranging from 2002 through 2023.
22
As of February 2, 2002, 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
Wisconsin Rapids, WI Information Services Dept. Satellite Office 1,700 Leased
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
Omaha, NE Pamida Corporate Headquarters/Distribution
Center 215,000 Owned
Omaha, NE Pamida Distribution Center 336,000 Owned
Lebanon, IN Pamida Distribution Center 418,000 Leased
Bethany, MO Pamida Distribution Center* 53,000 Owned
Omaha, NE Pamida Return Center 40,000 Owned
Waukesha, WI Office building leased to third party** 60,000 Owned
* Closed in the first quarter of fiscal 2002.
** The Waukesha, Wisconsin building is owned by ShopKo and leased to ProVantage.
The building is currently held for sale.
23
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company has been named as a defendant
in various lawsuits. Some of these lawsuits involve claims for substantial
amounts. Although the ultimate outcome of these lawsuits cannot be ascertained
at this time, it is the opinion of management, after consultation with counsel,
that the resolution of such suits will not have a material adverse affect on the
consolidated financial statements of the Company.
In addition, the Company is involved in two purported class action
lawsuits. First, 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 "ProVantage Action"). The original complaint
evidencing the ProVantage 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 ProVantage 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 ProVantage 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.
Second, during fiscal 2001, alleged shareholders of the Company filed
purported class action securities lawsuits against the Company and its chief
executive officer containing substantially identical claims in the Federal
District Court for the Eastern District of Wisconsin (Farer, et al. v. ShopKo
Stores, Inc. and Podany, No 01-C-1034 (E.D. Wis.) (filed October 10, 2001);
Kastenbaum, et al. v. ShopKo Stores, Inc. and Podany, No 01-C-1059 (E.D. Wis.)
(filed Oct. 16, 2001); Fuller, et al. v. ShopKo Stores, Inc. and Podany, No
01-C-1070 (E.D. Wis.) (filed Oct. 18, 2001); Boysen, et al. v. ShopKo Stores,
Inc. and Podany, No 01-C-1191 (E.D. Wis.) (filed Oct. 28, 2001); Peterson, et
al. v. ShopKo Stores, Inc. and Podany, No 01-C-1224 (E.D. Wis.) (filed Dec. 6,
2001)). Motions to consolidate the separate class actions are pending. All the
suits allege that the Company and Mr. Podany made various misrepresentations and
omissions in public disclosures concerning the Company between March 9, 2000 and
November 9, 2000. Specifically, it is alleged that the Company failed to
disclose that the Company was experiencing significant shipping and inventory
control problems at the Pamida division distribution facility in Lebanon,
Indiana. The complaints request, among other things, that the court declare the
action is a proper class action and award compensatory monetary damages,
including reasonable attorneys' fees and experts' fees.
The Company believes the above described actions to be without merit and
the Company intends to contest all allegations set forth. There can be no
assurances, however, with regard to the outcome of the actions.
24
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 2001.
EXECUTIVE OFFICERS OF THE REGISTRANT
SERVED IN EMPLOYED
CURRENT BY THE
NAME AGE* POSITION COMPANY
POSITION** SINCE SINCE
- ------------------ ----- ------------------------------------------------- ----- -----
Jeffrey C. Girard 54 Vice Chairman, Finance and Administration, Interim
Chief Executive Officer 2002 2002
Brian W. Bender 53 Senior Vice President, Chief Financial Officer 2000 2000
Michael J. Bettiga 48 Senior Vice President, Stores/ Retail Health
Operations 1999 1977
Paul A. Burrows 53 Senior Vice President, Chief Information Officer 1998 1998
Kevin J. Easton 45 Senior Vice President, General Merchandise Manager,
Apparel and Accessories 2001 2001
Dennis C. Folz 54 Senior Vice President, Human Resources 1999 1998
Steven T. Harig 47 Senior Vice President, Planning, Replenishment
And Analysis, Distribution and Transportation 1993 1989
Gary A. Hillerman 53 Senior Vice President, General Merchandise
Manager, Hardlines 1997 1996
Michael J. Hopkins 51 President, Pamida 1999 1995
Rodney D. Lawrence 44 Senior Vice President, Store Marketing, Store
Planning, Construction and Real Estate 1996 1996
L. Terry McDonald 59 Senior Vice President, Marketing and Communications
1994 1994
Douglas N. Wurl 40 Senior Vice President, General Merchandise Manager,
Home 2001 2000
*as of February 2, 2002
**as of April 12, 2002
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.
25
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 Brian W. Bender, Paul A. Burrows,
Kevin J. Easton, Dennis C. Folz, Jeffrey C. Girard, and Douglas N. Wurl.
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. Easton has been Senior Vice President, General Merchandise Manager,
Apparel & Accessories since August 2001. Prior to joining the Company, he was
Senior Vice President, e-Commerce, Marketing & Sales for CIVISnet Corporation
from March 2000 to March 2001. From 1987 to 1999, Mr. Easton held various
positions with Target Stores, most-recently Vice President, Merchandise Manager,
Men's Division from 1993 to 1999. Prior to that, for nine years Mr. Easton held
various positions with divisions of Federated Department Stores.
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. Girard has been a director of the Company since June 1991. Effective
April 9, 2002, Mr. Girard became the Vice Chairman, Finance and Administration
and Interim Chief Executive Officer of the Company. Prior to joining the
Company, Mr. Girard was the President of Girard & Co. of Minneapolis, Minnesota,
a private consulting company, from 1999 to 2002 and from 1997 to 1999 was an
Adjunct Professor at the Carlson School of Management, University of Minnesota.
He served as Executive Vice President and Chief Financial Officer of SUPERVALU,
Inc. from October 1992 through July 1997; prior thereto, he held the positions
of Executive Vice President, Chief Financial Officer and Treasurer of
Supermarkets General Holdings Corporation and Senior Vice President and Chief
Financial Officer of SUPERVALU, Inc.
26
Mr. Wurl has been Senior Vice President, General Merchandise Manager, Home
since December 2001. He was Vice President, Division Merchandise Manager since
he joined the Company in May 2000. From 1998 to May 2000, Mr. Wurl served as
Vice President Merchandise Manager for Rich's Department Store, a division of
Federated Department Stores. Prior to that, Mr. Wurl was Director of Merchandise
and Product Development for Home Textiles for Federated Merchandising Group, a
division of Federated Department Stores from 1993-1998. From 1983 to 1993, Mr.
Wurl held various positions with divisions of May Department Stores.
27
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 29, 2002,
ShopKo's common shares were held by 2,629 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 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
Fiscal Year 2001
First Quarter (ended May 5, 2001) $10.7000 $7.35000
Second Quarter (ended August 4, 2001) $9.0000 $6.7900
Third Quarter (ended November 3, 2001) $9.7400 $7.2000
Fourth Quarter (ended February 2, 2002) $12.6800 $8.5600
The closing sales price of the Common Stock on the New York Stock Exchange
on March 29, 2002 was $18.10 per share.
The Company's Secured Credit Facility (see Note E of the Notes to the
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.
28
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS ENDED
-----------------------------------------------------------------------------------
Feb. 2, Feb. 3, Jan. 29, Jan. 30, Jan. 31,
2002 2001 2000 1999 1998(1)
(52 Wks) (53 Wks)(9) (52 Wks)(8) (52 Wks) (49 Wks)
- ------------------------------------------------------------------------------------------------------------------------------------
Summary of Operations (Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $3,374 $3,517 $3,048 $2,351 $2,002
Licensed department rentals and other income 13 13 14 12 11
Gross margin 806 865(2) 790 615 529
Selling, general and administrative expenses 612 674 568 447 385
Special charges(3) 9 8 6 3
Restructuring charge 115
Depreciation and amortization expenses 92 94 75 61 54
Interest expense - net 66 66 48 39 31
Earnings (loss) from continuing operations before
Income taxes 50 (79) 104 75 67
Earnings (loss) from continuing operations 28 (50) 63 46 41
Discontinued operations - net 34 43 9 8
Earnings (loss) before extraordinary item 28 (16) 106 56 49
Net earnings (loss) 28 (16) 102(4) 56 49
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share Data (Dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share from
continuing operations 0.98 ($1.72) $2.22 $1.77 $1.45
Basic net earnings (loss) per common share 0.98 (0.55) 3.62 2.14 1.73
Diluted earnings (loss) per common share from
continuing operations 0.98 (1.72) 2.19 1.74 1.43
Diluted net earnings (loss) per common share 0.98 (0.55) 3.57 2.10 1.71
Cash dividends declared per common share (10)
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Data (Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Working capital $113 $174 $88 $136 $130
Property and equipment-net 892 974 878 689 620
Total assets 1,820 2,027 1,953 1,328 1,220
Total debt(5) 639 871 699 472 440
Total shareholders' equity 690 662 695 459 396
Capital expenditures 17 196 133 91 28
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Ratios
- ------------------------------------------------------------------------------------------------------------------------------------
Current ratio 1.2 1.3 1.1 1.4 1.4
Return on beginning assets 1.4% (0.8)% 7.7% 4.6% 4.1%
Return on beginning shareholders' equity 4.3% (2.3)% 22.2% 14.0% 10.6%
Total debt as % of total capitalization(6) 47.3% 56.1% 48.7% 49.5% 51.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Other Year End Data
- ------------------------------------------------------------------------------------------------------------------------------------
ShopKo stores open at year end 141 164 160 147 149(7)
Average ShopKo store size-square feet 91,009 90,175 89,545 89,106 88,754
Pamida stores open at year end 225 229 157
Average Pamida store size-square feet 33,282 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
capital 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) Includes the results of the Pamida retail store chain acquired in July,
1999.
(9) Includes the results of P.M. Place stores acquired in June, 2000.
(10) The terms of the Company's Secured Credit Facility prohibit the Company
from paying dividends.
29
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
to close 23 ShopKo retail stores and a related distribution center serving those
stores and downsize its corporate workforce in the first quarter of fiscal 2001.
In connection with its reorganization plan, the Company incurred a total pretax
charge of $125.0 million in fiscal 2000.
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. 2, FEB. 3, JAN. 29,
2002 2001 2000
(52 WEEKS) (53 WEEKS) (52 WEEKS)
---------- ---------- ----------
Revenues:
Net sales 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.4 0.4 0.4
-------------------------------------------------
100.4 100.4 100.4
Costs and Expenses:
Cost of sales 76.1 75.1 74.1
Selling, general and administrative expenses 18.2 19.2 18.6
Special charges 0.3 0.3
Depreciation and amortization expenses 2.7 2.6 2.4
-------------------------------------------------
97.0 97.2 95.4
Earnings from operations 3.4 3.2 5.0
Interest expense - net 1.9 1.9 1.6
-------------------------------------------------
Earnings from continuing operations before
income taxes 1.5 1.3 3.4
Provision for income taxes 0.7 0.6 1.3
-------------------------------------------------
Earnings from continuing operations 0.8% 0.7% 2.1%
=================================================
30
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. 2, FEB. 3, JAN. 29,
2002 2001 2000
(52 WEEKS) (53 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 75.3 75.3 74.1
Selling, general and administrative expenses 16.6 18.2 17.8
Depreciation and amortization expenses 2.5 2.5 2.5
----------------------------------------------
94.4 96.0 94.4
Earnings from operations 6.0% 4.4% 6.1%
==============================================
PAMIDA RETAIL SEGMENT
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
(52 WEEKS) (53 WEEKS) (52 WEEKS)
---------- ---------- ----------
Revenues:
Net sales 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.2 0.2 0.3
-----------------------------------------------
100.2 100.2 100.3
Costs and Expenses:
Cost of sales 78.5 74.6 73.7
Selling, general and administrative expenses 20.0 20.0 19.2
Depreciation and amortization expenses 3.2 2.7 2.5
-----------------------------------------------
101.7 97.3 95.4
(Loss) earnings from operations (1.5)% 2.9% 4.9%
===============================================
31
FISCAL 2001 COMPARED TO FISCAL 2000
Fiscal 2001, which ended on February 2, 2002, covered 52 weeks, while
fiscal 2000, which ended on February 3, 2001, covered 53 weeks.
Continuing Operations
Consolidated net sales for fiscal 2001 decreased 4.1% to $3.4 billion,
compared with $3.5 billion for fiscal 2000. This decrease was due to store
closures in fiscal 2001 and an additional week of sales in the prior year.
ShopKo Retail Store sales for fiscal 2001 decreased 6.3% or $172.0 million
from fiscal 2000 to $2.5 billion. This decrease is due primarily to store
closures. Closed stores sales were $56.0 million and $208.9 million in fiscal
2001 and fiscal 2000, respectively. In addition, ShopKo Retail comparable store
sales (52 weeks versus 52 weeks) increased 0.1%, compared to a 0.9% increase in
the prior year. Changes in comparable store sales in fiscal 2001 by category
were as follows: Retail Health, 9.0%; Hardlines, (2.0)%; and Softlines, (3.6)%.
Pamida Retail Store sales have been included in consolidated net sales
since their acquisition in July, 1999 but they were not included in retail
comparable store sales until fiscal 2001. Pamida Retail store sales for the 52
weeks ended February 2, 2002 were $835.0 million and sales for the 53 weeks
ended February 3, 2001 were $806.2 million. The increase is due primarily to a
full year of sales from a net 72 new stores opened in fiscal 2000 which included
48 stores acquired in the acquisition of P.M. Place Stores Company ("Places").
Pamida Retail comparable store sales (52 weeks versus 52 weeks) decreased 3.0%.
Changes in comparable store sales in fiscal 2001 by category were as follows:
Retail Health, 19.1%; Hardlines, (5.0)%; and Softlines, (9.2)%.
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, as well as,
increased competition in certain of our markets and execution problems at our
Pamida segment.
Consolidated gross margin, as a percent of sales for fiscal 2001 was 23.9%
compared with 24.9% for fiscal 2000. ShopKo Retail gross margin as a percent of
sales for both fiscal 2001 and fiscal 2000 was 24.7%. ShopKo Retail gross
margins were favorably impacted by a reduction in the LIFO reserve of $11.1
million for fiscal 2001 and $7.2 million for fiscal 2000. The gross margin rate
was negatively impacted by an increase in third party sales in retail pharmacy
(which carry lower gross margin rates), clearance activity at reduced gross
margins for stores closed in the first quarter, offset by the favorable LIFO
adjustment. The Pamida Retail gross margin as a percent of sales was 21.5% for
fiscal 2001 compared to 25.4% last year. Pamida Retail gross margins were
favorably impacted by a reduction in the LIFO reserve of $5.1 million for fiscal
2001 and $2.6 million for fiscal 2000. The decrease in gross margin rate is
primarily attributable to increased inventory shrinkage and distribution costs
(including freight), partially offset by the favorable LIFO adjustment.
32
Consolidated selling, general and administrative expenses ("SG&A"), as a
percent of sales, were 18.2% in fiscal 2001 compared to 19.2% in fiscal 2000. In
fiscal 2001 SG&A includes a $2.7 million impairment charge related to the
closure and planned sale of Pamida's Bethany Distribution Center and a $2.1
million impairment charge for an office building held for sale. ShopKo Retail
selling, general and administrative expenses were 16.6% and 18.2% of net sales
in fiscal 2001 and fiscal 2000, respectively. Comparable amounts for Pamida
Retail were 20.0% for both fiscal 2001 and fiscal 2000. The improvement in the
ShopKo Retail segments and on a consolidated basis is primarily due to savings
related to corporate restructuring initiatives.
In fiscal 2000, the Company incurred special charges of $9.2 million
consisting of $4.8 million for integration and employee retention costs
associated with the Pamida acquisition and $4.4 million for store conversion
costs associated with the Places acquisition. In addition, the Company recorded
a $125.0 million restructuring charge in the fourth quarter of fiscal 2000 which
is further described in Critical Accounting Policies and Estimates and Note C of
the Notes to the Consolidated Financial Statements.
Net interest expense for the 52 weeks ended February 2, 2002 was $65.8
million, or 1.9% of net sales, compared to $66.0 million, or 1.9% of net sales,
last year.
FISCAL 2000 COMPARED TO FISCAL 1999
Consolidated net sales for fiscal 2000 (53 weeks) increased $469.0 million
or 15.4% over fiscal 1999 (52 weeks) to $3,517.1 million. ShopKo Retail Store
sales for fiscal 2000 increased 4.0% or $104.0 million from fiscal 1999 to
$2,710.9 million. This increase is due primarily to the 5 new ShopKo Retail
stores opened during the year, one of which was the relocation of an existing
store. ShopKo comparable Retail Store sales (52 weeks versus 52 weeks) increased
0.7% during fiscal 2000 and the changes by category were: Retail Health, 10.8%;
Hardlines, (1.6)%; and Softlines, (2.6)%.
Pamida Retail stores sales have been included in consolidated net sales
since their acquisition in July, 1999 but they were not included in retail
comparable store sales prior to fiscal 2001, 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 margins as percentages of sales were 24.9% and 25.9% for
fiscal 2000 and 1999, respectively. ShopKo Retail gross margins as percentages
of sales were 24.7% and 25.9% for fiscal 2000 and 1999, respectively. The 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.
Pamida Retail gross margin as a percent of sales was 25.4% for fiscal 2000
compared to 26.3% for the 30 weeks ended January 29, 2000. Pamida Retail gross
margins
33
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 Indiana distribution facility and an increase in clearance
activity at reduced margin rates, partially offset by the favorable LIFO
adjustment.
Consolidated selling, general and administrative expenses as a percentage
of net sales increased to 19.2% in fiscal 2000, compared with 18.6% in fiscal
1999. ShopKo Retail selling, general and administrative expenses were 18.2% and
17.8% of net sales for fiscal 2000 and 1999, respectively. Pamida Retail
selling, general and administrative expenses were 20.0% of net sales in fiscal
2000 and 19.2% of net sales for the 30 weeks ended January 29, 2000. 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.
In addition, the Company recorded a $125.0 million restructuring charge in the
fourth quarter of fiscal 2000 which is further described in Critical Accounting
Policies and Estimates and Note C of the Notes to the Consolidated Financial
Statements.
Net interest expense in fiscal 2000 increased by approximately $17.9
million from fiscal 1999, 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.
34
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the appropriate application of certain accounting policies, many of
which require management to make estimates and assumptions about future events
and their impact on amounts reported in our financial statements and related
notes. Since future events and their impact cannot be determined with certainty,
the actual results will inevitably differ from our estimates. Such differences
could be material to the financial statements.
Management believes application of accounting policies, and the estimates
inherently required therein, are reasonable. These accounting policies and
estimates are periodically reevaluated, and adjustments are made when facts and
circumstances dictate a change. We have identified certain critical accounting
policies which are described below.
Merchandise inventory. Our merchandise inventory is carried at the lower of
cost or market on a last-in, first-out (LIFO) basis. The valuation of
inventories at cost requires certain management judgements and estimates,
including among others, an assessment of any excess inventory levels, lower of
cost or market and shrinkage rates. These assumptions can have a significant
impact on current and future operating results and financial position.
Restructuring Reserve. In connection with the reorganization plan announced
in the fourth quarter of fiscal 2000 to close certain facilities, the Company
incurred a pretax charge of $125.0 million, including $57.2 million related to
fixed asset writedowns and $45.8 million related to lease termination and
property carrying costs. The amount of the asset writedowns and reserves for
lease termination and property carrying costs are based in part on management's
estimates as to the timing, sales proceeds, and disposition costs of the closed
facilities. Of the 24 properties included in the restructuring reserve, six were
disposed of in fiscal 2001. At this time, the Company believes it has adequately
provided for these costs, however, sales of owned stores and lease terminations
have been slower than anticipated and could negatively impact the reserve. If
interest rates or real estate leasing markets change, additional charges may be
required. Therefore, the Company continues to evaluate the adequacy of the
amounts provided as it proceeds with the disposition of the real estate and
termination of the leases.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements are met primarily by cash generated
from operations, with remaining funding requirements provided by short-term and
long-term borrowings. Cash provided from continuing operations was $237.7
million, $35.2 million and $67.8 million in fiscal 2001, 2000 and 1999,
respectively. The significant increase in 2001 was due to the Company's efforts
to significantly reduce inventory levels (decrease of $100.0 million in fiscal
2001, versus increases of $69.7 million and $29.3 million in fiscal 2000 and
fiscal 1999, respectively). The Company finances a significant portion of its
operations through vendor financing. As of February 2, 2002, accounts payable
totaled $255.6 million. The Company currently maintains favorable terms with its
vendors, however these terms could be impacted based on the Company's future
operating performance.
As of February 2, 2002, the Company had $342.5 million of Senior Unsecured
Notes outstanding. These Senior Unsecured Notes have maturity dates ranging from
March 2002 to
35
March 2022, with approximately $242.9 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. On March 15,
2002, the Company retired $70.2 million in Senior Unsecured Notes by accessing
its availability under the Secured Credit Facility. Payments due under the
Senior Unsecured Notes could be accelerated in the event the Company defaults on
any obligation in excess of $25 million.
In addition to the Senior Unsecured Notes, the Company had $147.8 million
outstanding under its Secured Credit Facility as of the end of fiscal 2001
compared to $341.3 million outstanding under its former bank credit facilities
as of the end of fiscal 2000.
On March 12, 2001, the Company closed on a $600.0 million senior secured
revolving credit and term loan facility ("Secured Credit Facility"), which is
secured by the Company's inventory and accounts receivable. 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 borrowing availability
under the loan and 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 terms
of the Secured Credit Facility prohibit the payment of dividends, repurchases of
common stock, set limits as to new indebtedness, and capital expenditures and
require the Company to meet financial performance covenants relating to minimum
operating cash flows and borrowing availability. The consequences of failing to
comply with the various covenants and maintaining availability range from
increasing the interest rate to restrictions on cash management to default and
acceleration of the debt. The indebtedness under the Secured Credit Facility can
be immediately due and payable in the event Company debt in excess of $10
million is accelerated. During fiscal 2001, the Company maintained compliance
with all covenants in the Secured Credit Facility.
The following schedule sets forth the Company's contractual obligations and
commercial commitments as of February 2, 2002:
(in thousands) Payments Due by Period
Less than After
Contractual Obligations Total 1 year 2 -3 years 4 - 5 years 5 years
------------------------------------------------------------------------------
Long-Term Debt $458,114 $ 74,360 $275,399 $ 1,270 $107,085
Capital Lease Obligations 235,211 17,894 33,886 31,336 152,095
Operating Leases 171,665 17,480 30,421 25,669 98,095
------------------------------------------------------------------------------
Total Contractual Cash Obligations $864,990 $109,734 $339,706 $ 58,275 $357,275
==============================================================================
The Company believes that the Secured Credit Facility and expected cash
from operations, together with continued favorable vendor credit terms, will
provide sufficient liquidity to finance continuing operations, including planned
capital expenditures, for fiscal 2002. However, if the Company's operating
results were to deteriorate significantly for whatever reason, or if the Company
36
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 $17.2 million on capital expenditures in fiscal 2001,
compared to $196.2 million in fiscal 2000 and $133.3 million in fiscal 1999. The
following table sets forth the components of capital expenditures and
acquisitions (in millions):
FISCAL YEARS ENDED
FEB. 2, FEB. 3, JAN. 29,
2002 2001 2000
(52 WEEKS) (53 WEEKS) (52 WEEKS)
---------- ---------- ----------
Capital Expenditures
New stores $ 0.9 $ 68.6 $ 57.2
Remodeling and refixturing 3.1 47.6 18.7
Distribution centers 2.8 57.8 25.9
Management information and point-of-sale
equipment and systems 5.8 20.9 17.8
Other 4.6 1.3 13.7
--- --- ----
Total $17.2 $196.2 $133.3
===== ====== ======
Acquisitions $ 2.1 $ 94.0
====== ======
The Company's projected capital expenditures for fiscal 2002 are $25.0 to $35.0
million.
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 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". SFAS 142 is effective for fiscal years beginning after
December 15, 2001 to all goodwill and other intangible assets recognized in an
entity's statement of financial position at that date, regardless of when those
assets were initially recognized. The Company is currently evaluating the
provisions of SFAS 142. Application of the non-amortization provisions of SFAS
No. 142 is
37
expected to result in a reduction in amortization expense of approximately $5.2
million per year. We will perform the first of the required impairment tests of
goodwill during fiscal year 2002, to evaluate existing goodwill for impairment
upon adoption of SFAS No. 142 and will record any transition impairment as a
cumulative effect of a change in accounting principle in the consolidated
statements of operations. Impairment testing for other intangible assets will be
completed in the first quarter of fiscal 2002. Because of the extensive effort
needed to comply with adopting SFAS No. 142, it is not possible to reasonably
estimate the impact of adopting the impairment requirements of this Statement on
our financial statements at the date of this report, including whether any
transitional impairment losses will be required to be recognized. It is possible
the Company could incur substantial impairment losses in the future as a result
of adopting this Statement. Intangible assets, net of accumulated amortization,
were $208.2 million at February 2, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144), which addresses financial accounting
and reporting for the impairment of long-lived assets and for long-lived assets
to be disposed of. SFAS 144 is effective for fiscal years beginning after
December 15, 2001, with early adoption permitted. Management does not believe
the adoption of SFAS 144 will have a material impact on the Company's 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 2, 2002, the Company had $147.8
million of variable rate debt with a weighted average interest rate of 4.95%.
This debt exposes the Company to changes in interest expense brought about by
changes in interest rates. During fiscal 2001, the monthly average amount
borrowed under the variable rate credit facilities was approximately $301.1
million, and the weighted average interest rate was 6.38%. If the weighted
average interest rate were to increase by 10.0% for fiscal 2001, net income
would have decreased by approximately $1.2 million.
At February 2, 2002, the Company had fixed-rate long-term debt totaling
$415.2 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
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 and financial statement schedule
together with the independent auditors' report are included on pages 43 to 63
and are incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10, as to Directors of the Registrant
and the information required by Items 401 and 405 of Regulation S-K, is
incorporated herein by reference to the Registrant's definitive Proxy Statement
dated April 29, 2002 filed with the Securities and Exchange Commission pursuant
to Regulation 14A in connection with the Registrant's 2002 Annual Meeting of
Shareholders. Information regarding executive officers is included in Part I
above.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference
to the Registrant's definitive Proxy Statement dated April 29, 2002 filed with
the Securities and Exchange Commission pursuant to Regulation 14A in connection
with the Registrant's 2002 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated herein by reference
to the Registrant's definitive Proxy Statement dated April 29, 2002 filed with
the Securities and Exchange Commission pursuant to Regulation 14A in connection
with the Registrant's 2002 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated herein by reference
to the Registrant's definitive Proxy Statement dated April 29, 2002 filed with
the Securities and Exchange Commission pursuant to Regulation 14A in connection
with the Registrant's 2002 Annual Meeting of Shareholders.
40
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 2001 as follows:
None
41
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 2, 2002.................. 44
Consolidated Balance Sheets as of February 2, 2002 and February 3, 2001 .................. 45
Consolidated Statements of Cash Flows
for each of the three years in the period ended February 2, 2002.................. 46
Consolidated Statements of Shareholders' Equity
for each of the three years in the period ended February 2, 2002.................. 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
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 2, 2002 and February 3, 2001, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year (52 weeks) ended February 2, 2002, the year (53 weeks) ended February
3, 2001 and the year (52 weeks) ended January 29, 2000. Our audits also included
the financial statement schedule listed in the Index at Item 14. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated 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 2, 2002 and February 3, 2001, and the results of
their operations and their cash flows for the year (52 weeks) ended February 2,
2002, the year (53 weeks) ended February 3, 2001 and the year (52 weeks) ended
January 29, 2000, 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 13, 2002
43
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
February 2, February 3, January 29,
2002 2001 2000
(52 Weeks) (53 Weeks) (52 Weeks)
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues:
Net sales $ 3,373,935 $ 3,517,112 $ 3,048,070
Licensed department rentals and other income 13,054 13,423 13,592
- ------------------------------------------------------------------------------------------------------------------------------------
3,386,989 3,530,535 3,061,662
Costs and Expenses:
Cost of sales, including restructuring charge of $10,447 in fiscal 2000 2,567,800 2,652,155 2,257,991
Selling, general and administrative expenses 611,930 673,542 568,220
Special charges 9,224 8,068
Restructuring charge 114,585
Depreciation and amortization expenses 91,662 94,079 75,414
- ------------------------------------------------------------------------------------------------------------------------------------
3,271,392 3,543,585 2,909,693
Earnings (loss) from operations 115,597 (13,050) 151,969
Interest expense - net 65,765 65,961 48,107
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations before income taxes 49,832 (79,011) 103,862
Provision (credit) for income taxes 21,615 (29,036) 41,170
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations 28,217 (49,975) 62,692
Discontinued operations:
Earnings from discontinued operations, net of income taxes of
$1,201 and $6,515, respectively 1,567 8,799
Gain on sale of discontinued business, net of income taxes of $14,496
and $22,295, respectively 32,590 34,465
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary item 28,217 (15,818) 105,956
Extraordinary (loss) on retirement of debt, net of income taxes of $2,443 (3,776)
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 28,217 $ (15,818) $ 102,180
====================================================================================================================================
Earnings (loss) per share of common stock:
Basic:
Earnings (loss) from continuing operations $ 0.98 $ (1.72) $ 2.22
Earnings from discontinued operations - 0.05 0.31
Gain on sale of discontinued business - 1.12 1.22
Extraordinary (loss) on retirement of debt - - (0.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 0.98 $ (0.55) $ 3.62
====================================================================================================================================
Diluted:
Earnings (loss) from continuing operations $ 0.98 $ (1.72) $ 2.19
Earnings from discontinued operations - 0.05 0.31
Gain on sale of discontinued business - 1.12 1.20
Extraordinary (loss) on retirement of debt - - (0.13)
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 0.98 $ (0.55) $ 3.57
====================================================================================================================================
Weighted average number of common shares outstanding - basic 28,699 29,014 28,237
Weighted average number of common shares outstanding - diluted 28,838 29,014 28,595
See notes to consolidated financial statements.
44
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
February 2, February 3,
2002 2001
- ------------------------------------------------------------------------------------------------------------
Assets
- ------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 30,169 $ 35,334
Receivables, less allowance for losses of
$3,220 and $2,362, respectively 48,738 57,581
Merchandise inventories 613,911 713,925
Other current assets 15,840 17,043
- ------------------------------------------------------------------------------------------------------------
Total current assets 708,658 823,883
Other assets and deferred charges 11,185 14,486
Intangible assets - net 208,171 214,091
Property and equipment - net 892,022 974,476
- ------------------------------------------------------------------------------------------------------------
Total assets $ 1,820,036 $ 2,026,936
============================================================================================================
- ------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- ------------------------------------------------------------------------------------------------------------
Current liabilities:
Short-term debt $ 47,808 $ 171,279
Accounts payable - trade 255,630 278,175
Accrued compensation and related taxes 45,145 42,336
Deferred taxes and other accrued liabilities 143,906 125,141
Accrued income and other taxes 23,249 25,682
Current portion of long-term obligations and leases 79,942 6,910
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 595,680 649,523
Long-term obligations and leases, less current portions 505,467 658,281
Other long-term obligations 6,199 34,810
Deferred income taxes 22,642 22,575
Shareholders' equity:
Preferred stock; none outstanding
Common stock; shares issued, 30,628 at February 2, 2002
and 30,603 at February 3, 2001 306 306
Additional paid-in capital 384,745 384,563
Retained earnings 345,247 317,128
Less treasury stock - at cost; 1,904 shares (40,250) (40,250)
- ------------------------------------------------------------------------------------------------------------
Total shareholders' equity 690,048 661,747
- ------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,820,036 $ 2,026,936
============================================================================================================
See notes to consolidated financial statements.
45
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
February 2, February 3, January 29,
2002 2001 2000
(52 Weeks) (53 Weeks) (52 Weeks)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Earnings (loss) from continuing operations $ 28,217 $ (49,975) $ 62,692
Adjustments to reconcile earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization 91,662 94,079 75,414
Provision for losses on receivables 394 618 397
Gain on the sale of property and
equipment (974) (306) (3,112)
Restructuring charge 125,032
Impairment charges 4,825
Deferred income taxes 23,425 (19,343) 19,052
Change in assets and liabilities (excluding
effects of business acquisitions):
Receivables 8,449 (1,739) (18,250)
Merchandise inventories 100,014 (69,657) (29,348)
Other current assets (2,630) 53 (3,164)
Other assets and intangibles 11,054 (15,393) (9,679)
Accounts payable (22,545) (51,196) 29,475
Accrued liabilities (4,170) 23,054 (55,690)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities of 237,721 35,227 67,787
continuing operations
Net cash flows from discontinued operations (28,061) (35,483)
Cash flows from investing activities:
Payments for property and equipment (17,198) (196,247) (133,269)
Proceeds from the sale of property and equipment 14,857 4,500 7,871
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 (2,341) (50,436) (113,476)
Cash flows from financing activities:
Net proceeds from debt borrowings 147,808 117,000 245,000
Net payments of debt and capital lease obligations (380,190) (58,582) (307,033)
Debt issuance costs (8,163) (924)
Change in common stock from stock options 2,892 3,974
Change in common stock from public offering 147,147
Purchase of treasury stock (20,222) (20,028)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities (240,545) 40,164 69,060
- -------------------------------------------------------------------------------------------------------------------
Net (decrease) in cash and cash equivalents (5,165) (3,106) (12,112)
Cash and cash equivalents at beginning of year 35,334 38,440 50,552
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 30,169 $ 35,334 $ 38,440
- -------------------------------------------------------------------------------------------------------------------
Supplemental cash flow information:
Noncash investing and financial activities -
Capital lease obligations incurred $ 78 $ 42,364 $ 3,568
Cash paid during the period for:
Interest $ 65,258 $ 66,147 $ 48,894
Income taxes $ 3,867 $ 24,473 $ 17,705
See notes to consolidated financial statements.
46
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Common Stock Additional Treasury Stock
----------------------- Paid-in Retained -----------------------
Shares Amount Capital Earnings Shares Amount
- ----------------------------------------------------------------------------------------------------------------------
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 4,025 40 147,107
offering
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)
Net earnings 28,217
Issuance of restricted stock 25 182 (182)
Restricted stock expense 84
- ------------------------------------------------------------------------------------------------------------------------
Balances at February 2, 2002 30,628 $ 306 $ 384,745 $ 345,247 (1,904) $ (40,250)
- ------------------------------------------------------------------------------------------------------------------------
47
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands)
Total
-----------------------
Shares Amount
- -----------------------------------------------------------------
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 1,797
options
Sale of common stock under public 4,025 147,147
offering
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 319
options
Restricted stock expense 74
Purchase of treasury stock (1,088) (20,222)
- ------------------------------------------------------------------
Balances at February 3, 2001 28,699 661,747
Net earnings 28,217
Issuance of restricted stock 25
Restricted stock expense 84
- ------------------------------------------------------------------
Balances at February 2, 2002 28,724 $ 690,048
==================================================================
48
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 an original maturity
of three months or less as cash equivalents.
Receivables
Receivables consist of amounts collectible from third party pharmacy
insurance carriers; from retail store customers for optical and pharmacy
purchases; and from merchandise vendors for promotional and advertising
allowances. 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 $2.9 million at February 2, 2002 and $19.1 million at February 3,
2001.
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
The components of property and equipment are:
Feb. 2, 2002 Feb. 3, 2001
(In Thousands)
Property and equipment at cost:
Land $ 128,347 $ 139,485
Buildings 675,079 687,237
Equipment 538,231 531,125
Leasehold improvements 71,497 98,730
Property under construction 1,133 26,512
Property under capital leases 142,932 144,209
------------------------------
1,557,219 1,627,298
Less accumulated depreciation and amortization:
Property and equipment 611,637 561,194
Property under capital leases 40,216 34,473
Less reserve for impairment on assets to be disposed 13,344 57,155
------------------------------
Net property and equipment $ 892,022 $ 974,476
==============================
Intangible Assets - Net
Intangible assets related to acquisitions (primarily goodwill) 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 $21.6 million
and $13.0 million at February 2, 2002 and February 3, 2001, 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 its fair value, determined based on appraised values or
as the present value of the cash flows using discounted rates that reflect the
inherent risks of the underlying business. In the fourth quarter of fiscal 2001,
the Company recorded in selling, general and administrative expense, an
impairment charge of $2.7 million associated with the decision to close the
Bethany Distribution Center in the first quarter of fiscal 2002, as well as a
charge of $2.1 million for the impairment of an office building held for sale.
Both of the facilities are expected to be disposed within one year. In the
opinion of management, except for assets identified herein and as disclosed in
Note C of the Notes to the Consolidated Financial Statements, no such impairment
existed as of February 2, 2002 or February 3, 2001.
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 estimated returns. Revenues from licensed departments are recorded at the net
amounts to be received from licensees.
50
Pre-opening Costs
The Company expenses pre-opening costs of retail stores as incurred.
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.
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 accounting
principles generally accepted in the United States of America 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.
51
The results of operations of ProVantage have been presented as discontinued
operations. 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
were $850.0 million.
Litigation
In the normal course of business, the Company has been named as a defendant
in various lawsuits. Some of these lawsuits involve claims for substantial
amounts. Although the ultimate outcome of these lawsuits cannot be ascertained
at this time, it is the opinion of management, after consultation with counsel,
that the resolution of such suits will not have a material adverse affect on the
consolidated financial statements of the Company.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". SFAS 142 is effective for fiscal years beginning after
December 15, 2001 to all goodwill and other intangible assets recognized in an
entity's statement of financial position at that date, regardless of when those
assets were initially recognized. The Company is currently evaluating the
provisions of SFAS 142. Application of the non-amortization provisions of SFAS
No. 142 is expected to result in a reduction in amortization expense of
approximately $5.2 million per year. We will perform the first of the required
impairment tests of goodwill during fiscal year 2002, to evaluate existing
goodwill for impairment upon adoption of SFAS No. 142 and will record any
transition impairment as a cumulative effect of a change in accounting principle
in the consolidated statements of operations. Impairment testing for other
intangible assets will be completed in the first quarter of fiscal 2002. Because
of the extensive effort needed to comply with adopting SFAS No. 142, it is not
possible to reasonably estimate the impact of adopting the impairment
requirements of this Statement on our financial statements at the date of this
report, including whether any transitional impairment losses will be required to
be recognized. It is possible the Company could incur substantial impairment
losses in the future as a result of adopting this Statement. Intangible assets
net of accumulated amortization were $208.2 million at February 2, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144), which addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of. SFAS 144 is effective for fiscal years
beginning after December 15, 2001, with early adoption permitted. Management
does not believe the adoption of SFAS 144 will have a material impact on the
Company's financial statements.
Extraordinary Loss
During fiscal 1999, the Company repurchased approximately $57.1 million of
the Senior Notes, resulting in an extraordinary loss of $3.8 million, net of
income tax benefit of $2.4 million.
52
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 discount stores in Missouri, Iowa, Kansas and Illinois.
The pro forma effect of this acquisition was 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 16 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 $198.7
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:
(in thousands, except per share data) Year to Date
(52 Weeks Ended)
January 29,
2000
-------------------
Net sales $3,331,547
Earnings from continuing operations 57,926
Net earnings 97,414
Diluted earnings per share from continuing operations 2.03
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 resulting from the acquisition of Pamida.
C. RESTRUCTURING RESERVE
In the fourth quarter of fiscal 2000, the Company announced a strategic
reorganization plan to close 23 ShopKo retail stores and a related distribution
center serving those stores and downsize its corporate workforce. The closings
took place in the first quarter of fiscal 2001, resulting in the termination of
approximately 2,500 employees, including approximately 180 employees at the
ShopKo and Pamida corporate headquarters. In connection with the reorganization
plan, the Company incurred a pre tax charge of $125.0 million, including $67.6
million related to inventory and property writedowns. For balance sheet
reporting, the lease termination, property carrying and other costs are reported
in accrued expenses as a current liability at February 2, 2002. If sales of
53
owned stores and lease terminations do not proceed as expected, some portion of
the reserve may exist at year end February 1, 2003. Following is an analysis of
the change in the restructuring reserve (in thousands) which includes primarily
cash payments ($1.2 million in fiscal 2000) and the disposal of inventory:
Balance as of Cash Other Balance as of
Feb. 3, 2001 Payments Adjustments Feb. 2, 2002
------------ -------- ----------- ------------
Lease termination and property carrying costs $45,752 $(13,691) $ 731 $32,792
Employee separation costs 9,134 (7,282) (1,852) 0
Other costs 1,300 (1,072) 0 228
Net sales of the stores closed totaled $56.0, $208.9, and $207.7 million in
fiscal 2001, 2000 and 1999, respectively.
D. SHORT-TERM DEBT
As of February 2, 2002, the Company had outstanding $47.8 million under the
revolving credit portion of its Secured Credit Facility (see Note E). As of
February 3, 2001, the Company had outstanding $341.3 million under various
unsecured short term credit facilities. The related weighted average interest
rates on borrowings outstanding at February 2, 2002 and February 3, 2001 were
4.2% and 6.9%, respectively. On March 12, 2001, the Company entered into a
secured financing arrangement whereby all amounts outstanding under the previous
short term facilities were paid off and the facilities terminated (see Note E).
At February 3, 2001, the Company classified as current that portion of the debt
outstanding that it expected 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 2, 2002 and February 3,
2001, the Company had outstanding letters of credit for $19.8 million and $40.7
million, respectively.
E. LONG-TERM OBLIGATIONS AND LEASES
(in thousands)
Feb. 2, 2002 Feb. 3, 2001
------------ ------------
Senior Unsecured Notes, 9.0% due November 15, 2004, less
Unamortized discount of $12 and $49, respectively $72,698 $ 72,661
Senior Unsecured Notes, 8.5% due March 15, 2002, less
Unamortized discount of $0 and $18, respectively $70,207 70,189
Senior Unsecured Notes, 9.25% due March 15, 2022, less
Unamortized discount of $386 and $405, respectively 99,614 99,595
Senior Unsecured Notes, 6.5% due August 15, 2003, less
Unamortized discount of $42 and $70, respectively 99,958 99,930
Secured Credit Facility - term loan, 5.3% at February 2, 2002 100,000
Mortgage and other obligations 15,637 19,919
Revolving credit facility 170,000
Capital lease obligations 127,295 132,897
-------------------------------
585,409 665,191
Less current portion 79,942 6,910
-------------------------------
Long-term obligations $505,467 $658,281
===============================
54
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.
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 a 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.
A total of $223.1 million is available as of February 2, 2002. 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.
The interest rates on the mortgage and other obligations range from 5.4% to
9.5% with maturities ranging from March 2004 to April 2009 and are
collateralized by property with a net book value of $44.5 million at February 2,
2002.
Amounts outstanding under the revolving credit facility represent amounts
due under short term credit facilities at February 3, 2001 that were refinanced
under the Secured Credit Facility entered into in March 2001 (see Note D ).
Approximate annual maturities of long-term obligations, excluding capital
leases, for the five years subsequent to the year ended February 2, 2002 are as
follows (in thousands):
LONG-TERM
YEAR OBLIGATIONS
---- -----------
2002 $74,360
2003 101,664
2004 173,735
2005 803
2006 467
Later 107,085
-------------------
Total maturities $ 458,114
===================
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.
55
Minimum future obligations under capital and operating leases in effect at
February 2, 2002 are as follows (in thousands):
Capital Lease Operating Lease
Year Obligations Obligations
---- ----------- (excluding
closed stores)
--------------
2002 $17,894 $17,480
2003 17,178 15,710
2004 16,708 14,711
2005 16,362 13,069
2006 14,974 12,600
Later 152,095 98,095
-----------------------------------------
Total minimum future obligations 235,211 $171,665
=====================
Less interest (107,916)
--------------------
Present value of minimum future obligations $127,295
====================
The present values of minimum future obligations shown above are calculated
based on interest rates ranging from 6.5% to 16.4% for capital leases determined
to be applicable at the inception of the capital leases.
Contingent rent expense, based primarily on sales performance, for capital
and operating leases was $0.8 million in fiscal 2001, $1.0 million in fiscal
2000 and $0.8 million in fiscal 1999. Total minimum rental expense, net of
sublease income, related to all operating leases with terms greater than one
year was $19.9, $26.1 and $19.7 million in fiscal 2001, 2000 and 1999,
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 are as follows (in thousands):
2001 2000
---- ----
Deferred tax liabilities:
Property and equipment $44,220 $51,405
Intangibles 10,535 10,950
Inventory valuation 36,020 35,122
Other 5,667 5,969
----------------------------------
Total deferred tax liabilities 96,442 103,446
----------------------------------
Deferred tax assets:
Reserves and allowances (24,298) (22,520)
Restructuring and impairment reserves (14,959) (47,654)
Capital leases (9,290) (9,866)
Compensation and benefits (5,413) (4,349)
----------------------------------
Total deferred tax assets (53,960) (84,389)
----------------------------------
Net deferred tax liability $42,482 $19,057
==================================
56
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):
2001 2000 1999
---- ---- ----
Current
Federal $ (967) $ (8,699) $16,088
State (843) (994) 6,030
Deferred 23,425 (19,343) 19,052
--------------------------------------
Total provision (credit) $21,615 $(29,036) $41,170
======================================
The effective tax rate related to continuing operations varies from the
statutory federal income tax rate for the following reasons:
2001 2000 1999
---- ---- ----
Statutory income tax rate 35.0% (35.0%) 35.0%
State income taxes, net of federal tax benefits 4.6 (3.7) 4.2
Goodwill 3.6 2.4 0.9
Other 0.2 (0.4) (0.5)
-------------------------------
Effective income tax rate (benefit) 43.4% (36.7%) 39.6%
===============================
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.
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 3,350,000 shares available for issuance under the plans as of
February 2, 2002. Options 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 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
Granted 807 7.30 - 10.10 8.61
Cancelled and forfeited (546) 5.31 - 37.63 17.55
-------------------------------------------------------
Outstanding February 2, 2002 3,067 $ 5.31 - $37.63 $16.37
=======================================================
57
Options Weighted Ave.
Exercisable Exercise Price
----------- --------------
February 2, 2002 1,347 $20.36
February 3, 2001 988 19.10
January 29, 2000 1,110 17.65
The following tables summarize information about stock options outstanding
at February 2, 2002 (shares in thousands):
Options Outstanding
--------------------------------------------------------------------------------------
Range of Exercise Shares Outstanding at Feb. 2, Weighted Average Remaining Weighted Average
Prices 2002 Contractual Life Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
$5.31 to $15.00 1,466 8.3 years $ 7.82
15.88 to 23.31 998 6.8 20.91
24.56 to 37.63 603 6.6 29.63
- ----------------------------------------------------------------------------------------------------------------------------
$5.31 to $37.63 3,067 7.5 $16.37
============================================================================================================================
Options Exercisable
----------------------------------------------------------------------
Range of Exercise Prices Shares Exercisable at Feb. 2, Weighted Average Exercise Price
2002
--------------------------------------------------------------------------------------------------------
$5.31 to $15.00 293 $ 9.92
15.88 to 23.31 683 20.28
24.56 to 37.63 371 28.75
--------------------------------------------------------------------------------------------------------
$5.31 to $37.63 1,347 $20.36
========================================================================================================
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, earnings (loss) and diluted earnings
(loss) per common share would have been reduced to the pro forma amounts
indicated below:
2001 2000 1999
---- ---- ----
Earnings (loss) from continuing operations
(in thousands)
As reported $28,217 $(49,975) $62,692
Pro forma 26,964 (51,056) 61,089
Diluted earnings (loss) from continuing operations
per common share
As reported 0.98 $ (1.72) $ 2.19
Pro forma 0.96 (1.76) 2.14
The weighted average fair value of options granted was $3.58, $3.50 and
$10.82 per share in fiscal 2001, 2000 and 1999, respectively.
58
The fair value of stock options used to compute pro forma earnings (loss)
from continuing operations and diluted earnings (loss) 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:
2001 2000 1999
---- ---- ----
Risk-free interest rate 4.3% 5.2% 6.4%
Expected volatility 59.3% 55.4% 36.0%
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
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. During fiscal 2001, the Company issued 25,000 shares of
restricted stock with a grant date fair value of $7.30 per share. There were
25,000 shares of restricted stock outstanding at both February 2, 2002 and
February 3, 2001.
H. EMPLOYEE BENEFITS
Substantially all employees of the Company are covered by a defined
contribution profit sharing plan. The plan for ShopKo and Pamida employees was
amended in fiscal 2001 and provides for two types of company contributions: an
amount determined annually by the Board of Directors and an employer matching
contribution equal to one hundred percent of the first 3 percent and fifty
percent of the next 2 percent of compensation contributed by participating
employees. The matching contribution in fiscal 2000 and fiscal 1999 was equal to
one-half of the first 6 percent of compensation for ShopKo employees and
one-half of the first 5 percent of compensation for Pamida employees.
Contributions were $7.4, $5.3 and $13.4 million for fiscal 2001, 2000 and 1999,
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.
59
I. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, 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 2, 2002 and February 3, 2001 are as
follows (amounts in thousands):
February 2, February 3,
2002 2001
---- ----
Carrying amount $458,114 $ 532,294
Fair value 399,652 426,727
60
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.
Summarized financial information concerning the Company's reportable
segments is shown in the following table (in thousands):
Fiscal Years
---------------------------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales
ShopKo Retail $ 2,538,920 $ 2,710,885 $ 2,606,883
Pamida Retail 835,015 806,227 441,187
- ----------------------------------------------------------------------------------------------------------------------------------
Total net sales $ 3,373,935 $ 3,517,112 $ 3,048,070
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from operations
ShopKo Retail $ 151,393 $ 118,735 $ 159,084
Pamida Retail (12,668) 23,150 21,467
Corporate (1) (23,128) (154,935) (28,582)
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from operations $ 115,597 $ (13,050) $ 151,969
- ----------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization expenses
ShopKo Retail $ 64,164 $ 70,602 $ 64,126
Pamida Retail 26,693 22,350 10,764
Corporate 805 1,127 524
- ----------------------------------------------------------------------------------------------------------------------------------
Total depreciation and amortization expenses $ 91,662 $ 94,079 $ 75,414
- ----------------------------------------------------------------------------------------------------------------------------------
Capital expenditures
ShopKo Retail $ 13,662 $ 110,089 $ 94,168
Pamida Retail 3,485 84,769 25,978
Corporate 51 1,389 13,123
- ----------------------------------------------------------------------------------------------------------------------------------
Total capital expenditures $ 17,198 $ 196,247 $ 133,269
- ----------------------------------------------------------------------------------------------------------------------------------
As of February 2, As of February 3, As of January 29,
2002 2001 2000
Assets
ShopKo Retail $ 1,148,847 $ 1,300,080 $ 1,285,007
Pamida Retail 653,492 704,202 554,350
Corporate (2) 17,697 22,654 113,445
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,820,036 $ 2,026,936 $ 1,952,802
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Included in Corporate are restructuring charges of $125.0 million in fiscal
2000 and special charges of $9.2 and $8.1 million in fiscal 2000 and 1999,
respectively.
(2) Included in Corporate are net assets of discontinued operations of $85.9
million at January 29, 2000.
61
K. UNAUDITED QUARTERLY FINANCIAL INFORMATION
Unaudited quarterly financial information is as follows:
(In thousands, except per share data)
Fiscal Year (52 Weeks) Ended February 2, 2002
----------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Year
(13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks) (52 Weeks)
----------------------------------------------------------------------------------------------------------------------------
Net sales $781,824 $791,181 $797,540 $1,003,390 $3,373,935
Gross margin 175,020 184,945 177,904 268,266 806,135
Earnings (loss) from continuing
operations (4,045) 2,594 (5,218) 34,886 28,217
Net earnings (loss) (4,045) 2,594 (5,218) 34,886 28,217
Basic (loss) earnings
from continuing operations
per common share (0.14) 0.09 (0.18) 1.22 0.98
Diluted (loss) earnings
from continuing operations
per common share (0.14) 0.09 (0.18) 1.21 0.98
Weighted average shares - diluted 28,699 28,808 28,699 28,869 28,838
Price range per common 10 7/10 - 9 - 9 37/50 - 12 17/25 - 12 17/25 -
share (1) 7 7/20 6 79/100 7 1/5 8 14/25 6 79/100
----------------------------------------------------------------------------------------------------------------------------
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 (3) 864,957
Earnings (loss) from continuing
operations 562 5,155 (8,424) (47,268) (4) (49,975)
Net earnings (loss) 1,796 38,078 (2) (8,424) (47,268) (4) (15,818)
Basic and diluted earnings (loss)
from continuing operations
per common share 0.02 0.18 (0.29) (1.65) (4) (1.72)
Weighted average shares - diluted 29,585 29,075 28,698 28,699 29,014
Price range per common
share (1) 20 3/4-16 1/4 21-14 5/16 14 7/16-5 7/8 10 99/100-3 3/8 21-3 3/8
----------------------------------------------------------------------------------------------------------------------------
(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 gain, net of income taxes, on sale of discontinued business of
$32.6 million.
(3) Includes restructuring charge of $10.4 million.
(4) Includes restructuring charge, net of income taxes, of $75.9 million ($2.65
per share).
62
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 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
Year (52 weeks) ended February 2, 2002:
Allowance for losses $ 2,362 $ 394 $ (464) * $ 3,220
Inventory valuation reserves 815 (1,765) 2,580
*Net of charges to accounts other than bad debt expense, primarily promotion
and advertising.
Note: Schedule excludes accounts of discontinued operations
63
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
ShopKo Stores, Inc. (Registrant)
Date: April 29, 2002
By: /S/ JEFFREY C. GIRARD
----------------------
Jeffrey C. Girard, Vice Chairman,
Finance and Administration,
Interim 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/ JACK W. EUGSTER* Chairman of the Board April 29, 2002
----------------------------
Jack W. Eugster
/S/ JEFFREY C. GIRARD Vice Chairman, Finance and April 29, 2002
----------------------- Administration, Interim Chief
Jeffrey C. Girard Executive Officer
/S/ BRIAN W. BENDER Senior Vice President, Chief April 29, 2002
--------------------- Financial Officer (Principal
Brian W. Bender Accounting Officer)
/S/ DALE P. KRAMER* Director April 29, 2002
--------------------
Dale P. Kramer
/S/ MARTHA A. MCPHEE* Director April 29, 2002
-----------------------
Martha A. McPhee
/s/ JOHN G. TURNER* Director April 29, 2002
---------------------
John G. Turner
/s/ STEPHEN E. WATSON* Director April 29, 2002
------------------------
Stephen E. Watson
/S/ GREGORY H. WOLF* Director April 29, 2002
----------------------
Gregory H. Wolf
*By Peter G. Vandenhouten pursuant to Powers of Attorney.
64
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 Registrant's Schedule 14D-1 filed May 17, 1999.
3.1 Amended and restated Articles of Incorporation of the Company,
incorporated by reference to the Registrant'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 Registrant'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, 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.
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 2022 Indenture, incorporated by reference to the May 1998
Form 8-K.
65
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- ------ ------- ---------------
4.1.3 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.
4.1.4 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, incorporated by
reference from the Registrant's Form 10-K, Annual Report to
the Securities and Exchange Commission for the 53 weeks ended
February 3, 2001.
...
4.4 Loan Agreement between ShopKo Stores, Inc. and Kimco Select
Investments, dated March 27, 2002, incorporated by reference
to Exhibit 99.1 to the Registrant's Current Report on Form 8-K
dated March 27, 2002.
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)
66
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 Amendment 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)
67
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- ------ ------- ---------------
10.6 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)
10.7 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.
10.8 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)
10.9 ShopKo Directors Deferred Compensation Plan, incorporated by
reference to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-45833). (1)
10.10 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)
10.11 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)
68
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- ------ ------- ---------------
10.12 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. (1)
10.13 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)
10.14 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)
10.15 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)
69
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- ------ ------- ---------------
10.16 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.
10.17 Shopko Stores, Inc. 2001 Stock Incentive Plan, incorporated by
reference to the Registrant's definitive Proxy Statement dated
May 1, 2001 filed in conjunction with the Registrant's 2001
Annual Meeting of Shareholders. (1)
10.18 Letter Agreement, dated May 15, 2001, between ShopKo Stores,
Inc. and Jack W. Eugster, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the 13 weeks
ended August 4, 2001. (1)
10.19* Form of Change of Control Severance Agreement between the
Company and Certain Officers and Employees of the Company. (1)
10.20* ShopKo Stores, Inc. Shared Savings Plan (2002 Restatement),
formerly known as ShopKo Stores, Inc. Profit Sharing and Super
Saver Plan Trust Agreement. (1)
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.
70