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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD (13 WEEKS) ENDED NOVEMBER 1, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________
Commission file number 1-10876
-------
SHOPKO STORES, INC.
(Exact name of registrant as specified in its Charter)
Wisconsin 41-0985054
- ----------------------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
700 Pilgrim Way, Green Bay, Wisconsin 54304
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (920) 429-2211
-----------------------
Former name, former address and former fiscal year, if changed since last
report:
N/A
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- --------
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
------- --------
The number of shares outstanding of each of the issuer's classes of Common Stock
as of November 28, 2003 is as follows:
Title of Each Class Shares Outstanding
------------------- ------------------
Common Shares 29,215,645
Exhibit Index Page 1 of Page 25
on Page 26
1
SHOPKO STORES, INC.
FORM 10-Q
FOR THE 13 WEEKS and 39 WEEKS ENDED NOVEMBER 1, 2003
INDEX
Part I Item 1 - Financial Statements Page
----
Condensed Consolidated Statements of Operations for the 3
13 weeks ended November 1, 2003 and November 2, 2002
Condensed Consolidated Statements of Operations for the 4
39 weeks ended November 1, 2003 and November 2, 2002
Condensed Consolidated Balance Sheets as of November 1, 5
2003, November 2, 2002 and February 1, 2003
Condensed Consolidated Statements of Cash Flows for 6
the 39 weeks ended November 1, 2003 and November 2, 2002
Condensed Consolidated Statement of Shareholders' 7
Equity for the 39 weeks ended November 1, 2003
Notes to Condensed Consolidated Financial Statements 8-12
Item 2 - Management's Discussion and Analysis of Financial 13-22
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 23
Item 4 - Controls and Procedures 23
Part II Item 6 - Exhibits and Reports on Form 8-K 24
Signatures 25
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SHOPKO STORES, INC. AND SUBSIDIARIES THIRD QUARTER (13 WEEKS) ENDED
- ------------------------------------ ------------------------------
(In thousands, except per share data)
NOVEMBER 1, NOVEMBER 2,
2003 2002
---------- ------------
(UNAUDITED) (UNAUDITED)
Revenues:
Net sales $758,543 $769,610
Licensed department rentals and other income 3,483 3,351
-------- --------
762,026 772,961
Costs and expenses:
Cost of sales 566,739 578,707
Selling, general and administrative expenses 165,165 158,799
Depreciation and amortization expenses 20,490 20,667
-------- --------
752,394 758,173
Earnings from operations 9,632 14,788
Interest expense - net 8,033 13,334
-------- --------
Earnings before income taxes 1,599 1,454
Provision for income taxes 635 577
-------- --------
Net Earnings $ 964 $ 877
======== ========
Net earnings per share of common stock:
Basic: $ 0.03 $ 0.03
======== ========
Diluted: $ 0.03 $ 0.03
======== ========
Weighted average number of common shares outstanding:
Basic: 29,034 28,827
Diluted: 29,379 29,267
See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SHOPKO STORES, INC. AND SUBSIDIARIES YEAR TO DATE (39 WEEKS) ENDED
- ------------------------------------ -----------------------------
(In thousands, except per share data)
NOVEMBER 1, NOVEMBER 2,
2003 2002
---------- -----------
(UNAUDITED) (UNAUDITED)
Revenues:
Net sales $2,231,152 $ 2,281,743
Licensed department rentals and other income 9,770 9,674
---------- -----------
2,240,922 2,291,417
Costs and expenses:
Cost of sales 1,654,953 1,706,448
Selling, general and administrative expenses 482,097 469,313
Depreciation and amortization expenses 62,068 62,276
---------- -----------
2,199,118 2,238,037
Earnings from operations 41,804 53,380
Interest expense - net 29,249 39,204
---------- -----------
Earnings before income taxes 12,555 14,176
Provision for income taxes 4,987 5,622
---------- -----------
Earnings before accounting change 7,568 8,554
Cumulative effect of accounting change -0- (186,052)
---------- -----------
Net earnings (loss) $ 7,568 $ (177,498)
========== ===========
Net earnings (loss) per share of common stock:
Basic:
Earnings before cumulative effect of accounting change $ 0.26 $ 0.30
Cumulative effect of accounting change -0- (6.46)
---------- -----------
Net earnings (loss) $ 0.26 $ (6.17)
========== ===========
Diluted:
Earnings before cumulative effect of accounting change $ 0.26 $ 0.29
Cumulative effect of accounting change -0- (6.36)
---------- -----------
Net earnings (loss) $ 0.26 $ (6.07)
========== ===========
Weighted average number of common shares outstanding:
Basic: 28,980 28,788
Diluted: 29,261 29,265
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED BALANCE SHEETS
SHOPKO STORES, INC. AND SUBSIDIARIES THIRD QUARTER AS OF FISCAL YEAR END
- ------------------------------------ ----------------------------- ---------------
(In thousands)
NOVEMBER 1, NOVEMBER 2, FEBRUARY 1,
ASSETS 2003 2002 2003*
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Current assets:
Cash and cash equivalents $ 58,453 $ 35,069 $ 33,753
Receivables, less allowance for losses of $2,692
$3,637 and $2,611, respectively 49,195 53,560 49,509
Merchandise inventories 708,312 718,637 562,731
Other current assets 11,597 15,915 13,745
----------- ----------- -----------
Total current assets 827,557 823,181 659,738
Other assets and deferred charges 12,087 10,897 12,570
Intangible assets - net 24,217 22,157 20,475
Property and equipment, net of accumulated
depreciation of $778,613, $710,603 and $723,550 780,664 829,465 812,184
----------- ----------- -----------
Total assets $ 1,644,525 $ 1,685,700 $ 1,504,967
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 205,048 $ 79,511 $ 40,022
Accounts payable - trade 333,502 335,349 241,166
Accrued compensation and related taxes 40,067 34,809 44,957
Deferred taxes and other accrued liabilities 127,953 133,967 128,809
Accrued income and other taxes 28,015 27,778 49,998
Current portion of long-term obligations and leases 6,890 96,910 95,554
----------- ----------- -----------
Total current liabilities 741,475 708,324 600,506
Long-term obligations and leases, less current portion 304,389 429,348 319,577
Other long-term obligations 15,793 3,365 16,744
Deferred income taxes 25,186 30,355 19,769
Shareholders' equity:
Common stock 311 308 310
Additional paid-in capital 390,680 387,787 389,177
Retained earnings 207,006 166,463 199,134
Less treasury stock (40,315) (40,250) (40,250)
----------- ----------- -----------
Total shareholders' equity 557,682 514,308 548,371
----------- ----------- -----------
Total liabilities and shareholders' equity $ 1,644,525 $ 1,685,700 $ 1,504,967
=========== =========== ===========
* Condensed from audited financial statements. See notes to condensed
consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SHOPKO STORES, INC. AND SUBSIDIARIES YEAR TO DATE (39 WEEKS) ENDED
- ------------------------------------ -----------------------------
(In thousands) NOVEMBER 1, NOVEMBER 2,
2003 2002
----------- ----------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Earnings before accounting change $ 7,568 $ 8,554
Adjustments to reconcile earnings before accounting change to net
cash provided by operating activities:
Depreciation and amortization 62,068 62,276
Provision for losses on receivables 225 258
Gain on sale of property and equipment (2,291) (1,980)
Deferred income taxes 2,125 8,900
Change in assets and liabilities:
Receivables 89 (5,081)
Merchandise inventories (145,581) (104,726)
Other current assets 2,148 2,473
Other assets and intangibles (4,977) 917
Accounts payable 92,336 79,719
Accrued liabilities (23,021) 3,781
--------- ---------
Net cash provided by (used in) operating activities (9,311) 55,091
--------- ---------
Cash flows from investing activities:
Payments for property and equipment (35,425) (19,913)
Proceeds from the sale of property and equipment 4,101 11,413
--------- ---------
Net cash used in investing activities (31,324) (8,500)
--------- ---------
Cash flows from financing activities:
Net proceeds from debt borrowings 166,687 37,471
Net payments of debt and capital lease obligations (102,249) (78,771)
Debt issuance costs 0 (1,380)
Purchase of Treasury Stock (65) 0
Change in common stock from stock options 962 989
--------- ---------
Net cash provided by (used in) financing activities 65,335 (41,691)
--------- ---------
Net increase in cash and cash equivalents 24,700 4,900
Cash and cash equivalents at beginning of period 33,753 30,169
--------- ---------
Cash and cash equivalents at end of period $ 58,453 $ 35,069
--------- ---------
Supplemental cash flow information:
Noncash investing and financial activities -
Capital lease obligations incurred $ 0 $ 18
Capital lease obligations terminated $ 3,989 $ 11,000
See notes to condensed consolidated financial statements
6
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SHOPKO STORES, INC. AND SUBSIDIARIES
(In thousands) (UNAUDITED)
Common Stock Additional Treasury Stock Total
-------------------- Paid-in Retained ------------------ -----------------
Shares Amount Capital Earnings Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------------------------------
BALANCES AT FEBRUARY 1, 2003 30,974 $ 310 $ 389,177 $ 199,134 (1,904) $ (40,250) 29,070 $ 548,371
Net earnings 7,568 7,568
Issuance of restricted stock 28 -0- 319 (319) 28 -0-
Sales of common stock under
option plans 109 1 961 109 962
Income tax benefit related to
stock options 223 223
Restricted stock expense 623 623
Purchase of Treasury Stock (4) (65) (4) (65)
---------------------------------------------------------------------------------------------
BALANCES AT NOVEMBER 1, 2003 31,111 $ 311 $ 390,680 $ 207,006 (1,908) $ (40,315) 29,203 $ 557,682
=============================================================================================
See notes to condensed consolidated financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. Interim Financial Statements
The Company operates on a 52-week fiscal year basis. The 2003 fiscal year will
end on January 31, 2004 and the 2002 fiscal year ended February 1, 2003. The
accompanying condensed consolidated financial statements have been prepared by
the Company without audit. However, the foregoing financial statements reflect
all adjustments (which include only normal recurring adjustments) which are, in
the opinion of Company management, necessary to present fairly the consolidated
financial position of the Company as of November 1, 2003 and November 2, 2002,
and the results of operations and cash flows for the periods then ended.
These interim results are not necessarily indicative of the results of the
fiscal years as a whole because the operations of the Company are highly
seasonal. The fourth fiscal quarter has historically contributed a significant
part of the Company's earnings due to the Christmas selling season.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission. The Company's
fiscal 2002 Annual Report on Form 10-K contains a summary of significant
accounting policies which includes the consolidated financial statements and the
notes to the consolidated financial statements. The same accounting policies are
followed in the preparation of interim reports, except for the implementation of
recent accounting pronouncements as described herein. The accompanying unaudited
condensed consolidated financial statements should be read in conjunction with
the Company's consolidated financial statements and notes thereto for the fiscal
year ended February 1, 2003.
B. Intangible Assets
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets",
effective February 3, 2002. Under SFAS No. 142, the Company no longer amortizes
goodwill and other intangible assets with indefinite useful lives. Instead, the
carrying value is evaluated for impairment on an annual basis, unless events
warrant more frequent review. During fiscal 2002, based on the analysis of an
independent appraiser, the Company completed its assessment of the impairment of
goodwill of the Pamida retail segment in accordance with the guidelines provided
by SFAS No. 142. The fair value of the Pamida retail segment was determined by
the appraiser based on a combination of a discounted cash flow analysis and an
analysis of market prices of other retail companies. The fair values of the
underlying assets and liabilities were determined using standard valuation
practices, including income capitalization, sales comparisons, market rent
analysis, relief from royalty and replacement cost. As a result of this
assessment, the Company recorded a charge of $186.1 million as of February 3,
2002 related to the write down of all goodwill recorded on the Company's balance
sheet, all of which related to the Pamida retail segment.
8
In fiscal 2002, an independent appraiser prepared a valuation of the Company's
intangible assets with indefinite lives, which primarily consist of a trademark
associated with the Pamida retail segment. No impairment was recorded as a
result of this assessment. In the first quarter of fiscal 2003, Company
management updated the valuation using a consistent methodology, which was
reviewed by the same appraiser, and concluded that no impairment of these assets
has occurred.
C. Restructuring Reserve
In the fourth quarter of fiscal 2000, the Company announced a strategic
reorganization plan to close 23 ShopKo retail stores, a distribution center, and
to downsize its corporate workforce. The inventory and fixed asset write-down
reserves were recorded in the fourth quarter of fiscal 2000. All stores and the
distribution center were closed and approximately 2,500 employees were
terminated in the first quarter of fiscal 2001. The Company utilized all of the
employee severance reserve prior to fiscal 2002. Of the 24 properties initially
covered by the restructuring reserve, six were disposed of in fiscal 2001 and
nine were disposed of in fiscal 2002. During the first three quarters of fiscal
2003, one additional owned property was sold. At the end of the third quarter of
2003, there were eight remaining properties covered by the restructuring
reserve.
The amount of the asset write-downs and reserves for lease termination and
property carrying costs are based in part on management's estimates as to the
timing for disposition of, sales proceeds from, and disposition costs of the
closed facilities. The Company's intention has been, and continues to be, to
relieve all obligations associated with the closed facilities. Due to continuing
softness in the retail real estate market, as well as a growing number of vacant
retail properties coming on the market as the Company's competitors continue to
restructure and downsize their operations, in fiscal 2002, the Company engaged a
real estate consulting firm to evaluate the obligations of the remaining four
leased closed stores and potential sales prices for the remaining five owned
closed store properties. Based on this evaluation, the Company lowered the
estimated valuations of the properties. Disposition of some properties has taken
longer than originally estimated. As a result, the Company took an additional
$5.6 million pre-tax impairment charge on the owned properties and an additional
$0.4 million charge for future lease obligations on the leased properties during
the fourth quarter of fiscal 2002.
As of November 1, 2003, the remaining reserve for lease termination and related
property carrying costs, as well as other costs, was $14.7 million and the
remaining property write-down reserve was $11.7 million. For balance sheet
reporting purposes, the portion of the reserve for the lease termination,
property carrying and other costs to be paid in the next 12 months is reported
in accrued expenses as a current liability and the remainder ($13.5 million) is
recorded in other long-term obligations at November 1, 2003. The Company
believes the reserves are adequate, and continues to negotiate lease
terminations with landlords and actively market closed stores for sale. However,
sales of owned stores and lease terminations have been slower than anticipated
due to the unfavorable retail real estate market described earlier. Accordingly,
the level of reserves could prove to be inadequate and additional charges may be
required. The Company will continue to evaluate the adequacy of the amounts
reserved as it proceeds with the disposition of the real estate and termination
of the leases.
9
Following is an analysis of the change in the restructuring reserve (in
thousands) during the first three quarters of fiscal 2003:
Balance as of Cash Other Balance as of
February 1, 2003 Payments Adjustments November 1, 2003
---------------- -------- ----------- ----------------
Lease termination and property
carrying costs $ 14,971 (396) 115 $14,690
Other costs 115 (115) $ 0
-------- ---- ------- -------
$ 15,086 (396) -0- $14,690
======== ==== ======= =======
D. Stock-Based Employee Compensation Plans
The Company has various stock-based employee compensation plans, which are
described more fully in Note G of the Notes to Consolidated Financial Statements
in the Company's 2002 Annual Report on Form 10-K. The Company accounts for those
plans under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. No
stock-based employee compensation cost is reflected in results of operations for
stock option awards, as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant. The expense related to the intrinsic value of restricted stock issued was
not significant to third quarter or year to date net earnings, cash flows or
financial position for fiscal years 2003 and 2002.
The following pro forma information illustrates the effect on net earnings and
earnings per share as if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
in accounting for its employee stock options.
THIRD QUARTER (13 WEEKS) ENDED YEAR TO DATE (39 WEEKS) ENDED
------------------------------ -----------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net earnings (loss) as reported $ 964 $ 877 $ 7,568 $ (177,498)
Add: Stock-based employee compensation expense
included in reported net income, net of
related tax effects 125 160 375 216
Deduct: Total stock-based employee compensation
expense determined under fair value
method for all option awards, net of
related tax effects (867) (633) (1,400) (1,539)
----------- ----------- ----------- -----------
Pro forma net earnings (loss) $ 222 $ 404 $ 6,543 $ (178,821)
=========== =========== =========== ===========
Net Earnings (loss) per share:
Basic - as reported $ 0.03 $ 0.03 $ 0.26 $ (6.17)
Basic - pro forma $ 0.01 $ 0.01 $ 0.23 $ (6.23)
Diluted - as reported $ 0.03 $ 0.03 $ 0.26 $ (6.07)
Diluted - pro forma $ 0.01 $ 0.01 $ 0.23 $ (6.12)
10
E. Business Segment Information
The Company's reportable segments are based on the Company's strategic business
operating units and include a ShopKo Retail segment and a Pamida Retail segment,
each of which includes the following product categories: hardlines/home,
softlines, and retail health services.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in the Company's fiscal 2002 Annual
Report on Form 10-K, except for the implementation of recent accounting
pronouncements as described herein. The Company evaluates performance based on
earnings from operations of the respective business segments.
Summary financial information concerning the Company's reportable segments is
shown in the following table (in thousands):
THIRD QUARTER (13 WEEKS) ENDED YEAR TO DATE (39 WEEKS) ENDED
------------------------------------- ----------------------------------------
NOVEMBER 1, 2003 NOVEMBER 2, 2002 NOVEMBER 1, 2003 NOVEMBER 2, 2002
---------------- ---------------- ---------------- ----------------
Net sales
ShopKo Retail $ 568,492 $ 584,099 $ 1,657,829 $ 1,719,852
Pamida Retail 190,051 185,511 573,323 561,891
----------------------------------------------------------------------------
Total net sales $ 758,543 $ 769,610 $ 2,231,152 $ 2,281,743
----------------------------------------------------------------------------
Earnings (loss) from operations
ShopKo Retail $ 17,878 $ 23,234 $ 58,549 $ 76,921
Pamida Retail (3,342) (1,310) 1,590 (338)
Corporate (4,904) (7,136) (18,335) (23,203)
----------------------------------------------------------------------------
Earnings (loss) from operations $ 9,632 $ 14,788 $ 41,804 $ 53,380
----------------------------------------------------------------------------
The Company's areas of operations are principally in the United States. No major
customer accounted for a significant amount of consolidated revenue during the
first three quarters of fiscal 2003 and fiscal 2002.
F. Commitments & Contingencies
The Company is contingently liable for the lease payments for two former retail
stores, which were assumed by an unrelated party. Total remaining lease
obligations for the stores are $10.4 million as of November 1, 2003.
G. Recent Accounting Pronouncements
In January 2003, the Emerging Issues Task Force ("EITF") issued EITF Consensus
No. 02-16, "Accounting By a Customer (Including a Reseller) for Certain
Consideration Received From a Vendor", applicable to fiscal years beginning
after December 15, 2002. EITF No. 02-16 provides accounting guidance on how a
customer, including a reseller, should characterize, measure and recognize
consideration received from a vendor. The Company adopted EITF No. 02-16 on a
prospective basis as of February 2, 2003. EITF No. 02-16, as it applies to the
Company, addresses the recognition of certain vendor allowances and requires
these allowances be treated as a reduction of inventory cost unless specifically
identified as reimbursement for services or other costs incurred. The adoption
of EITF No. 02-16 resulted in the deferral of certain vendor allowances into
inventory cost. There was no significant impact on earnings for the third
quarter. Adoption of this standard reduced net earnings by
11
approximately $2.3 million, or $0.08 per share, for the first three quarters of
fiscal 2003. The Company believes the fiscal 2003 impact on net earnings may
approximate $1.0 million to $2.0 million. Additionally, the adoption of EITF No.
02-16 impacted the classification of certain vendor allowances resulting in a
reclassification that increased net advertising expense included in the Selling,
General and Administrative expenses and, correspondingly, decreased Cost of
Sales by $5.8 million and $20.3 million for the third quarter and first three
quarters of fiscal 2003, respectively.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS
No. 123 to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
It amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. As of November 1, 2003, the Company has not elected to
expense stock options. The potential impact on consolidated financial statements
of expensing of stock options is disclosed in Note D of the Notes to Condensed
Consolidated Financial Statements.
12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth items from the Company's unaudited condensed
consolidated financial statements for the third quarter and first three quarters
of fiscal 2003 and 2002 as a percentage of net sales:
THIRD QUARTER YEAR TO DATE
(13 WEEKS) (39 WEEKS)
------------------- --------------------
FISCAL FISCAL FISCAL FISCAL
2003 2002 2003 2002
------ ----- ------ -----
Revenues:
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Licensed department rentals and other income 0.5 0.4 0.4 0.4
----- ----- ----- -----
100.5 100.4 100.4 100.4
Cost of sales 74.7 75.2 74.2 74.8
Gross margin 25.3 24.8 25.8 25.2
Selling, general and administrative expenses 21.8 20.6 21.6 20.6
Depreciation and amortization expenses 2.7 2.7 2.8 2.7
----- ----- ----- -----
24.5 23.3 24.4 23.3
----- ----- ----- -----
Earnings from operations 1.3 1.9 1.9 2.3
Interest expense - net 1.1 1.7 1.3 1.7
----- ----- ----- -----
Earnings before income taxes 0.2 0.2 0.6 0.6
Provision for income taxes 0.1 0.1 0.2 0.2
----- ----- ----- -----
Earnings before accounting change 0.1 % 0.1 % 0.3 % 0.4 %
Cumulative effect of accounting change -- -- -- (8.2)
----- ----- ----- -----
Net earnings (loss) 0.1 % 0.1 % 0.3 % (7.8)%
===== ===== ===== =====
13
The Company has two business segments: a ShopKo Retail segment and a Pamida
Retail segment. The following tables set forth items from the Company's business
segments as percentages of net sales:
THIRD QUARTER YEAR TO DATE
(13 WEEKS) (39 WEEKS)
--------------------- -----------------------
FISCAL FISCAL FISCAL FISCAL
2003 2002 2003 2002
----- ------ ------ ------
SHOPKO RETAIL SEGMENT
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Licensed department rentals and other income 0.5 0.5 0.5 0.5
----- ----- ----- -----
100.5 100.5 100.5 100.5
Cost of sales 74.3 75.4 74.1 74.7
Gross margin 25.7 24.6 25.9 25.3
Selling, general and administrative expenses 20.5 18.6 20.2 18.8
Depreciation and amortization expenses 2.6 2.5 2.7 2.6
----- ----- ----- -----
23.1 21.2 22.9 21.4
----- ----- ----- -----
Earnings from operations 3.1 % 4.0 % 3.5 % 4.5 %
===== ===== ===== =====
THIRD QUARTER YEAR TO DATE
(13 WEEKS) (39 WEEKS)
-------------------- --------------------
FISCAL FISCAL FISCAL FISCAL
2003 2002 2003 2002
----- ----- ----- -----
PAMIDA RETAIL SEGMENT
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Licensed department rentals and other income 0.2 0.2 0.2 0.2
----- ----- ----- -----
100.2 100.2 100.2 100.2
Cost of sales 75.9 74.6 74.4 75.2
Gross margin 24.1 25.4 25.6 24.8
Selling, general and administrative expenses 23.1 23.1 22.5 22.1
Depreciation and amortization expenses 2.9 3.1 3.0 3.0
----- ----- ----- -----
26.0 26.3 25.5 25.1
----- ----- ----- -----
Earnings (loss) from operations (1.7) % (0.7) % 0.3 % (0.1) %
===== ===== ===== =====
14
NET SALES:
The following table presents the Company's consolidated net sales for the third
quarter and first three quarters of fiscal 2003 and fiscal 2002 (dollars in
millions):
THIRD QUARTER % INCREASE/
(13 WEEKS) (DECREASE)
-------------------------- -------------------------
FISCAL FISCAL
2003 2002 TOTAL *** COMP**
------ ------ ------ ------
ShopKo Retail $568.5 $584.1 (2.7) (2.7)
Pamida Retail* 190.0 185.5 2.4 3.3
------ ------ ------ ------
Consolidated $758.5 $769.6 (1.4) (1.3)
====== ====== ====== ======
YEAR TO DATE % INCREASE/
(39 WEEKS) (DECREASE)
-------------------------- ---------------------------
FISCAL FISCAL
2003 2002 TOTAL *** COMP**
-------- -------- -------- --------
ShopKo Retail $1,657.8 $1,719.8 (3.6) (3.6)
Pamida Retail* 573.3 561.9 2.0 2.8
-------- -------- -------- --------
Consolidated $2,231.1 $2,281.7 (2.2) (2.0)
======== ======== ======== ========
* Changes in store sales are exclusive of layaway sales, which are
immaterial.
** Changes in comparable store sales are based upon those stores open for
the entire preceding fiscal year.
*** Pamida division reflects sales from seven closed locations which were
not replaced, and two new Pamida locations opened during the quarter.
The 2.7 percent decrease in ShopKo comparable store sales during the third
quarter was primarily the result of decreased general merchandise sales and
competitive store openings. General merchandise sales decreased as a result of
weakness in home entertainment, consumer electronics, and linens and domestics.
Furthermore, unseasonably warm weather adversely affected seasonal apparel
sales, and promotional sales were lower than anticipated. These decreases were
partially offset by strong sales in retail health services. Increases or
(decreases) in ShopKo comparable store sales in the third quarter of fiscal 2003
by category were as follows: Retail Health, 4.9%; Hardlines/Home, (8.7)% and
Softlines, (5.4)%. The 3.3 percent increase in Pamida comparable store sales was
driven by increased pharmacy sales (including sales at new pharmacy locations in
existing Pamida stores) and sales as a result of new convenience and value
merchandising and marketing efforts, which was offset by decreased sales of
apparel. Changes in Pamida comparable store sales in the third quarter of fiscal
2003 by category were as follows: Pharmacy, 23.3%; Hardlines, 1.2%; and
Softlines, (8.2)%.
The 3.6 percent decrease in ShopKo comparable store sales during the first three
quarters of fiscal 2003 was primarily related to decreased general merchandise
sales, as a result of lower promotional sales and competitive store openings,
partially offset by strong sales in retail health services. Changes in ShopKo
comparable store sales in the first three quarters of fiscal 2003 by category
were as follows: Retail Health, 4.7%; Hardlines/Home, (9.0)%; and Softlines,
15
(6.2)%. The 2.8 percent increase in Pamida comparable store sales during the
first three quarters of fiscal 2003 was driven by increased pharmacy and
advertised sales, as a result of new convenience and value merchandising and
marketing efforts. Changes in Pamida comparable store sales in the first three
quarters of fiscal 2003 by category were as follows: Pharmacy, 20.0%; Hardlines,
0.1%; and Softlines, (3.0)% The increase in Pharmacy sales for the Pamida
division is inclusive of new pharmacy openings in existing stores.
Generating sales growth is a Company priority. However, the Company expects to
be challenged by competitive store openings for the foreseeable future. To
address sales growth, the Company has initiated investments in the Company's
organizational and technological infrastructure as well as store remodeling
plans and is continuing store development plans to focus on our strong Retail
Health segment and to strengthen performance in Hardlines/Home and Softlines.
Store remodeling and development plans include the addition of pharmacies to
certain existing Pamida stores, the opening of new Pamida stores, and the
development and opening of ShopKo Express Rx(TM) stores. Moreover, the Company
will continue to refine and adjust merchandising and advertising strategies.
There can be no assurance that such efforts will succeed.
The Company's store activity is summarized below:
39 WEEKS ENDED YEAR ENDED
--------------------------------------- ----------------
NOVEMBER 1, 2003 NOVEMBER 2, 2002 FEBRUARY 1, 2003
---------------- ---------------- ----------------
SHOPKO STORES
Beginning number of stores 141 141 141
Openings 0 0 0
Closings 0 0 0
---------------- ---------------- ----------------
Ending number of stores 141 141 141
================ ================ ================
PAMIDA STORES
Beginning number of stores 223 225 225
Openings 2 0 0
Closings 5 2 2
---------------- ---------------- ----------------
Ending number of stores 220 223 223
================ ================ ================
EFFECT OF THE ADOPTION OF EITF NO. 02-16
EITF No. 02-16, as it applies to the Company, addresses the recognition of
certain vendor allowances and requires these allowances be treated as a
reduction of inventory cost unless specifically identified as reimbursement for
services or other costs incurred. The adoption of EITF No. 02-16 by the Company
resulted in a reclassification of certain vendor allowances that increased net
advertising expense included in Selling, General and Administrative expenses
and, correspondingly, decreased Cost of Sales, resulting in increased gross
margin. In addition, the adoption of EITF No. 02-16 resulted in the deferral of
certain vendor allowances into inventory cost that cannot be recognized until
the merchandise is sold, which has a resulting effect on earnings.
16
The following table presents the effects of adopting EITF No. 02-16 for the
third quarter and first three quarters of fiscal 2003 (dollars in millions):
THIRD QUARTER YEAR TO DATE
INCREASE/(DECREASE) (13 WEEKS) ENDED (39 WEEKS) ENDED
NOVEMBER 1, 2003 NOVEMBER 1, 2003
----------------------- --------------------------
PERCENT OF PERCENT OF
GROSS MARGIN $ NET SALES* $ NET SALES*
- ------------ ---- --------- ---- -----------
ShopKo Retail 6.9 1.22 18.4 1.11
Pamida Retail (0.9) (0.48) (2.0) (0.36)
---- ----
Consolidated 6.0 0.79 16.4 0.74
==== ==== =====
SELLING, GENERAL &
ADMINISTRATIVE PERCENT OF PERCENT OF
EXPENSES $ NET SALES* $ NET SALES*
- ------------ ---- --------- ---- -----------
ShopKo Retail 6.8 1.20 21.9 1.32
Pamida Retail (1.0) (0.53) (1.6) (.28)
---- ----
Consolidated 5.8 0.77 20.3 0.91
==== ==== ====
PRE-TAX EARNINGS $ $
- ---------------- --- ----
ShopKo Retail 0.1 (3.5)
Pamida Retail 0.1 (0.4)
--- ----
Consolidated 0.2 (3.9)
=== ====
* Percent of net sales represent the dollar amount shown as a percent of
ShopKo Retail and Pamida Retail business segments or consolidated net
sales, respectively. Thus, the percents are not cumulative.
GROSS MARGIN:
Consolidated gross margin, as a percent of net sales for the third quarter of
fiscal 2003, was 25.3 percent compared with 24.8 percent for the same period
last year. In addition to the effect of EITF No. 02-16, reduced shrinkage,
offset by lower merchandise margin rates, favorably affected gross margin. The
Company's consolidated gross margin as a percent of sales has been reduced as
the proportion of lower margin pharmacy and consumables sales has increased.
Consolidated gross margin dollars increased 0.5 percent to $191.8 million for
the same period.
ShopKo's gross margin as a percent of net sales was 25.7 percent in the third
quarter compared with 24.6 percent last year. Aside from the effect of EITF No.
02-16, ShopKo's gross margin as a percent of net sales was negatively affected
by lower pharmacy and merchandise margin rates, offset by reduced shrink
expense. ShopKo's gross margin dollars increased 1.5 percent to $145.9 million
for the same period. Pamida's gross margin as a percent of net sales was 24.1
percent in the third quarter of fiscal 2003 compared with 25.4 percent last
year. In addition to the effect of EITF No. 02-16, the reduction was primarily
attributable to lower merchandise and pharmacy margin rates due to a higher
penetration of pharmacy and consumables sales (which traditionally have lower
margin rates), offset by continued reductions in shrink expense. Pamida's gross
margin dollars decreased 2.6 percent to $45.9 million for the same period.
Consolidated gross margin, as a percent of net sales for the first three
quarters of fiscal 2003, was 25.8 percent compared with 25.2 percent for the
same period last year. Aside from the effect of EITF No. 02-16, the Company
experienced lower gross margin rates due to a higher penetration of pharmacy
sales and reduced merchandise and pharmacy margin rates, offset by
17
reduced shrink expense. Consolidated gross margin dollars increased 0.2 percent
to 576.2 million for the same period.
ShopKo's gross margin as a percent of net sales was 25.9 percent in the first
three quarters of fiscal 2003 compared with 25.3 percent last year. Aside from
the effect of EITF No. 02-16, ShopKo's gross margin rate was negatively affected
by a higher penetration of pharmacy sales and reduced pharmacy and merchandise
margin rates, offset by lower shrink expense. ShopKo's gross margin dollars
decreased 1.4 percent to $429.6 million for the same period. Pamida's gross
margin as a percent of net sales was 25.6 percent in the first three quarters of
fiscal 2003 compared with 24.8 percent last year. The improvement was primarily
attributable to continued reductions in shrink expense, offset by the effect of
EITF No. 02-16 and lower merchandise and pharmacy margin rates. Pamida's gross
margin dollars increased 5.1 percent to $146.6 million for the same period.
The Company uses the last-in, first-out (LIFO) method for substantially all
inventories. There was no LIFO charge or credit for the quarters ended November
1, 2003 and November 2, 2002. If the first-in, first-out (FIFO) method had been
used to determine cost of inventories, the Company's inventories would have been
$2.9 million higher at November 2, 2002. There was no difference between the
LIFO and FIFO cost methods at November 1, 2003 and February 1, 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Consolidated selling, general and administrative (SG&A) expenses, as a percent
of net sales for the third quarter, were 21.8 percent compared with 20.6 percent
last year. Excluding the effect of EITF No. 02-16, the Company's expense rate
would have increased by ten basis points over the same period last year. The
higher rate is primarily attributable to lower sales volume.
ShopKo's selling, general and administrative expenses as a percent of net sales
for the third quarter were 20.5 percent compared with 18.6 percent last year,
primarily attributable to the effect of EITF No. 02-16 and lower sales volume.
Pamida's selling, general and administrative expenses for the third quarter were
23.1 percent of net sales, compared with 23.1 percent for the third quarter of
last year. The expense rate remained unchanged due to the addition of pharmacies
(which are more payroll intensive), as well as expenses related to the store
remodeling program, offset by the effect of EITF No. 02-16.
Consolidated selling, general and administrative (SG&A) expenses as a percent of
net sales for the first three quarters of fiscal 2003 were 21.6 percent compared
with 20.6 percent last year. ShopKo's selling, general and administrative
expenses as a percent of net sales for the first three quarters of fiscal 2003
were 20.2 percent compared with 18.8 percent last year primarily attributable to
the effect of EITF No. 02-16. Pamida's selling, general and administrative
expenses for the first three quarters of fiscal 2003 were 22.5 percent of net
sales compared with 22.1 percent for the first three quarters of last year. The
increase is related to store closing costs, increased payroll costs associated
with pharmacy growth and increases in incentive compensation costs, offset by
the effect of EITF No. 02-16.
DEPRECIATION AND AMORTIZATION EXPENSE:
Consolidated depreciation and amortization expenses as a percent of net sales
for the third quarter were flat compared with last year at 2.7 percent. For the
first three quarters of fiscal 2003, depreciation and amortization expenses, as
a percent of net sales were 2.8 percent compared with 2.7 percent last year.
18
INTEREST EXPENSE - NET:
Net interest expense for the third quarter decreased 39.8 percent to $8.0
million and decreased 25.4 percent to $29.2 million for the first three
quarters, when compared with the same periods in the prior fiscal year. The
decrease in interest expense of $5.3 million for the third quarter and $10.0
million for the first three quarters was primarily due to reductions in debt
levels compared with the prior year.
INCOME TAXES:
The Company's effective tax rate for the third quarter and first three quarters
of fiscal 2003 was 39.7 percent which is consistent with the effective tax rate
for the third quarter and first three quarters of fiscal 2002.
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 that its application of applicable accounting policies, and
the estimates inherently required therein, are reasonable. Management
periodically reevaluates these accounting policies and estimates in the
preparation of our financial statements and makes adjustments 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 judgments and estimates,
including among others, an assessment of any excess inventory levels, lower of
cost or market value of merchandise inventory, 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 23 ShopKo retail stores,
a distribution center, and to downsize its corporate workforce, the Company
incurred a pre-tax charge of $125.0 million related to inventory and property
write-downs, lease termination and property carrying costs, and employee
separation and other costs. The inventory and fixed asset write-down reserves
were recorded in the fourth quarter of fiscal 2000, and the Company closed all
23 stores and the distribution center in fiscal 2001. The Company utilized all
of the employee severance reserve prior to fiscal 2002. Of the 24 properties
initially covered by the restructuring reserve, six were disposed of in fiscal
2001 and nine were disposed of in fiscal 2002. During the first three quarters
of fiscal 2003, one additional owned property was sold. At the end of the third
quarter of 2003, there were eight remaining properties covered by the
restructuring reserve.
The amount of the asset write-downs and reserves for lease termination and
property carrying costs are based in part on management's estimates as to the
timing for disposition of, sales proceeds from, and disposition costs of the
closed facilities. The Company's intention has been,
19
and continues to be, to relieve all obligations associated with the closed
facilities. Due to continuing softness in the retail real estate market, as well
as a growing number of vacant retail properties coming on the market as the
Company's competitors continue to restructure and downsize their operations, in
fiscal 2002, the Company engaged a real estate consulting firm to evaluate the
obligations of the remaining four leased closed stores and potential sales
prices for the remaining five owned closed store properties. Based on this
evaluation, the Company lowered the estimated valuations of the properties.
Disposition of some properties has taken longer than originally estimated. As a
result, the Company took an additional $5.6 million pre-tax impairment charge on
the owned properties and an additional $0.4 million charge for future lease
obligations on the leased properties during the fourth quarter of fiscal 2002.
The Company believes the reserves are adequate, and continues to negotiate lease
terminations with landlords and actively market closed stores for sale. However,
due to the unfavorable retail real estate market described earlier, sales of
owned stores and lease terminations have been slower than anticipated.
Accordingly, the level of reserves could prove to be inadequate and additional
charges may be required. The Company will continue to evaluate the adequacy of
the amounts reserved as it proceeds with the disposition of the real estate and
termination of the leases.
Vendor Allowances. The Company records vendor allowances and discounts
in the income statement when the purpose for which those monies were designated
is fulfilled. Allowances provided by vendors generally relate to inventory
recently sold and, accordingly, are reflected as reductions of cost of
merchandise sold. Vendor allowances received for advertising or fixturing
programs reduce the Company's expense for the related advertising or fixturing
program.
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 used in operating activities was $9.3 million for the
first three quarters of fiscal 2003 compared with cash provided by operating
activities of $55.1 million for the same period last year. The change in cash
used in operating activities in comparison to the first three quarters of 2002
was primarily due to larger increases in merchandise inventory levels, payments
of accrued income taxes and lower expense accruals. The Company finances a
significant portion of its operations through vendor financing. As of November
1, 2003, accounts payable totaled $333.5 million. The Company currently
maintains favorable terms with its vendors, however these terms could change
based on the Company's operating performance in the future.
As of November 1, 2003, the Company had $210.1 million of long term debt
outstanding, composed of $155.3 million of Senior Unsecured Notes and
approximately $55 million of mortgages and other long term obligations. On
August 15, 2003, the Company funded the retirement of $89.2 million in aggregate
principal amount of notes due August 2003. The remaining Senior Unsecured Notes
have maturity dates in November 2004 and March 2022, with approximately $55.3
million principal amount maturing in November 2004. Subject to certain
limitations set forth in our amended and restated senior secured revolving
credit facility (the "Amended Secured Credit Facility"), proceeds of the
facility or funds from other sources may be used to retire or repurchase those
Senior Unsecured Notes maturing during the term of the Amended Secured Credit
Facility. During the first three quarters of fiscal 2003, the Company purchased
a combined total of $4.6 million in principal amount of the outstanding Senior
Unsecured Notes due in November 2004. The Company anticipates funding the
retirement of the notes due November 2004 through a combination of operating
cash flow and available borrowings under the Amended Secured Credit Facility.
Payments due under the
20
Senior Unsecured Notes could be accelerated in the event the Company defaults on
any debt obligation in excess of $25.0 million.
In addition to the Senior Unsecured Notes, the Company had $205 million
outstanding under its Amended Secured Credit Facility at the end of the third
quarter of fiscal 2003 compared with $179.5 million outstanding under the
secured credit facility at the end of the third quarter of fiscal 2002. During
the third quarter of fiscal 2003, the Company entered into the Amended Secured
Credit Facility, which is secured by the Company's inventory and accounts
receivable. The Amended Secured Credit Facility provides for revolving credit
borrowings of up to $450 million, bearing interest at the bank's base rate plus
a margin of 0.0% to 0.25% or the Eurodollar rate plus a margin of 1.5% to 2.0%,
in both cases depending on borrowing availability under the facility.
The Amended Secured Credit Facility terminates August 19, 2007, limits the
payment of dividends, new indebtedness, repurchases of common stock, and capital
expenditures, and requires the Company to meet financial performance covenants
relating to borrowing availability and minimum operating cash flows as defined
therein. The consequences of failing to comply with the various covenants and
requirements range from increasing the interest rate to restrictions on cash
management to default and acceleration of the debt. The indebtedness under the
Amended Secured Credit Facility can be declared immediately due and payable in
the event other Company debt in excess of $10.0 million is accelerated. As of
November 1, 2003 and for the first three quarters of fiscal 2003, the Company
was in compliance with all covenants of the secured credit facilities in place
during the first three quarters of the year.
The following schedule sets forth the Company's contractual obligations and
commercial commitments as of November 1, 2003 (in thousands):
CONTRACTUAL OBLIGATIONS Less than After
Total 1 year 2-3 years 4-5 years 5 years
-------- --------- --------- --------- --------
Long-Term Debt $210,127 $ 2,785 $ 58,202 $ 5,858 $143,282
Capital Lease Obligations (1) 179,553 14,220 28,734 26,162 110,437
Operating Leases (2) 204,572 20,198 35,336 32,208 116,830
Total Contractual Cash Obligations $594,252 $37,203 $122,272 $64,228 $370,549
(1) Capital lease obligations represent the total minimum future
obligations including interest.
(2) Operating leases are the aggregate future payments for operating leases
as of November 1, 2003, including closed stores.
The Company believes that the Amended 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 2003 and fiscal 2004. However, if the Company's
operating results were to deteriorate significantly for any reason, or if the
Company were to require significant additional capital for unexpected events,
the Company could suffer liquidity problems, which would materially adversely
affect its results of operations and financial condition. Furthermore, as
described above, the Company has a significant amount of debt obligations
maturing in 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.
The Company spent $21.4 million in the third quarter and $35.4 million in the
first three quarters of fiscal 2003 on capital expenditures compared with $9.4
million and $19.9 million in the third quarter and first three quarters of
fiscal 2002, respectively. During the quarter, the Company
21
completed the remodeling of 17 Pamida stores and two ShopKo stores, began the
remodeling of a third ShopKo store, opened two new Pamida stores, and purchased
real estate related to the test of a freestanding drug store concept.
The Company's total capital expenditures for fiscal 2003 are anticipated to be
approximately $55.0 to $65.0 million. The expected expenditures during the
remainder of fiscal 2003 relate primarily to investments in technology
infrastructure, pharmacy growth, store remodels (including new merchandise
initiatives) and the test of a freestanding drug store concept. Such plans may
be reviewed and revised from time to time in light of changing conditions.
During the third quarter of fiscal 2003, the Company announced its intent to
expend approximately $100.0 million in fiscal 2004 on capital expenditures. The
planned capital expenditures include investments in technology infrastructure
and merchandise initiatives, expansion of the ShopKo distribution center in
Omaha, Nebraska to accommodate the consolidation of the Pamida distribution
operations also located in Omaha into one automated facility serving both
divisions, 10 ShopKo and 50 Pamida store remodels, 16 additional pharmacies in
existing Pamida stores, the remodeling of 22 ShopKo pharmacies, three new ShopKo
Express Rx(TM) freestanding drug stores and three new Pamida stores.
INFLATION:
Inflation has and is expected to have only a minor effect on the results of
operations of the Company and its internal and external sources of liquidity.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS:
Item 2 of this Form 10-Q, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward-looking statements within
the meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. All forward-looking statements involve risks and
uncertainties. Such forward-looking statements include, without limitation,
statements regarding earnings, growth and capital expenditure plans and capital
requirements. The information under the heading "Forward-Looking Statements and
Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended
February 1, 2003, which information is incorporated herein by reference,
provides cautionary statements identifying, for purposes of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995, important
factors that could cause our actual results to differ materially from those
contained in the forward-looking statements, including: a.) significant debt
levels; b.) continued availability of vendor financing; c.) failure to achieve
the expected benefits of current or future reorganizations; d.) inability to
execute future expansion plans; e.) failure to remodel existing stores on
schedule or within budget; f.) quarterly performance fluctuations - most notably
the highly seasonal nature of the Company's business; g.) competition; h.)
long-term economic effects of U.S. and international political unrest and an
extended economic slowdown; i.) general economic conditions and weather; j.)
smooth functioning of the Company's distribution network; k.) labor conditions;
l.) pending or future changes in federal, state or local laws and regulations
and m.) pending or future litigation.
In addition, the impact of recent accounting pronouncements described in Item 1
of this report could cause our actual results to differ materially from those
anticipated by the forward-looking statements. The Company undertakes no
obligation to update any forward-looking statements to reflect subsequent events
or circumstances.
22
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information as to the Company's Quantitative and Qualitative Disclosures
about Market Risk, please see the Company's Annual Report on Form 10-K for the
fiscal year ended February 1, 2003. There have been no material changes in the
Company's quantitative or qualitative exposure to market risk since the end of
fiscal 2002.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures
designed to ensure that information required to be disclosed by us in
the reports filed under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), is recorded, processed, summarized and reported
within the time periods specified by the SEC. The Company carried out
an evaluation, under the supervision and with the participation of the
Company's Disclosure Committee and the Company's management, including
the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-15 promulgated under the
Exchange Act. Based upon that evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective as of the end of the period
covered by this report.
(b) Changes in Internal Control
There have been no significant changes in the Company's internal
control over financial reporting identified in connection with the
evaluation discussed above that occurred during the quarter ended
November 1, 2003 that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over
financial reporting.
23
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31.1 Certification of Sam K. Duncan, Chief Executive Officer,
President, pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended.
31.2 Certification of Brian W. Bender, Senior Vice President,
Chief Financial Officer, pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.
32.1 Statement of Sam K. Duncan, Chief Executive Officer,
President, pursuant to 18 U.S.C. ss. 1350.
32.2 Statement of Brian W. Bender, Senior Vice President,
Chief Financial Officer, pursuant to 18 U.S.C. ss. 1350.
(b) Reports on Form 8-K.
The Company furnished two Current Reports on Form 8-K during the third
quarter of fiscal 2003 as follows:
1) Form 8-K with respect to Items 5 and 7 dated August
20, 2003, providing a press release announcing the
amendment and extension of the Company's senior
secured revolving credit agreement and retirement of
an unsecured note, as an Other Event.
2) Form 8-K with respect to Items 7 and 12 dated August
21, 2003, providing a press release containing its
financial results for the quarter ended August 2,
2003.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHOPKO STORES, INC. (Registrant)
Date: December 15, 2003 By: /s/ Sam K. Duncan
----------------------------------------------
Sam K. Duncan
Chief Executive Officer, President
(Duly Authorized Officer of Registrant)
Date: December 15, 2003 By: /s/ Brian W. Bender
----------------------------------------------
Brian W. Bender
Senior Vice President, Chief Financial Officer
(Principal Financial Officer and Duly
Authorized Officer of Registrant)
EXHIBIT INDEX
SHOPKO STORES, INC.
10-Q REPORT
Exhibit
Number Exhibit
- ------ -------
31.1 Certification of Sam K. Duncan, Chief Executive Officer, President,
pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934,
as amended.
31.2 Certification of Brian W. Bender, Senior Vice President, Chief
Financial Officer, pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended.
32.1 Statement of Sam K. Duncan, Chief Executive Officer, President,
pursuant to 18 U.S.C. ss. 1350.
32.2 Statement of Brian W. Bender, Senior Vice President, Chief Financial
Officer, pursuant to 18 U.S.C. ss. 1350.
26