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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR (52 WEEKS) ENDED JANUARY 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-10876
SHOPKO STORES, INC.
(Exact name of registrant as specified in its Charter)
Wisconsin 41-0985054
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
700 Pilgrim Way, Green Bay, Wisconsin 54304
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (920) 429-2211
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 [ ]
(Cover page 1 of 2 pages)
1
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 [ ].
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 aggregate market value of the voting stock held by non-affiliates
of the Registrant as of August 2, 2003 was approximately $388,818,693 (based
upon the closing price of Registrant's Common Stock on the New York Stock
Exchange on such date).
Number of shares of $0.01 par value Common Stock outstanding as of
April 2, 2004: 29,345,319.
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
26, 2004.
(Cover page 2 of 2 pages)
2
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's internet
website can be found at www.shopko.com. ShopKo's annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments
to such reports are available on this website as soon as reasonably practicable
after they have been filed with the Securities and Exchange Commission. In
addition, the Company makes information about quarterly web casts and recent
press releases available on its website.
The Company has two business segments: a ShopKo Retail segment and a
Pamida Retail segment. The ShopKo Retail segment consists of a multi-department
retailer operating under the "ShopKo" name, located primarily in mid-size and
larger communities. The ShopKo retail stores are committed to offering quality
merchandise, services and value to meet customers' needs for home, family
basics, casual apparel and seasonal products along with a special emphasis on
retail health, operating in-store pharmacies and optical centers. As of January
31, 2004, the Company had 141 ShopKo retail stores operating in 15 Midwest,
Pacific Northwest and Western Mountain states.
The Pamida Retail segment is a general merchandise retailer,
headquartered in Omaha, Nebraska, which serves smaller and more rural
communities, offering a convenient, one-stop shopping format. The Pamida Retail
segment was acquired in fiscal 1999. As of January 31, 2004, the Company had 218
Pamida retail stores operating in 16 Midwest, North Central and Rocky Mountain
states. Financial information about these two business segments is included in
Note I of the Notes to Consolidated Financial Statements for fiscal year 2003.
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 conveniently, and by anticipating the
needs of its customers' changing lifestyles.
ShopKo's strategy is to focus on selected merchandise categories tied
to its customers' changing lifestyle needs.
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ShopKo aims to deliver a superior customer experience in its retail
stores by:
- being a merchant-driven organization, responding to the wants and needs
of its customers,
- exceeding customers' expectations in terms of merchandise assortment,
service and value,
- ensuring that merchandise, particularly advertised merchandise, is
available for purchase, and
- providing simplicity, speed and friendliness in the shopping
experience.
ShopKo provides quality trend-correct, casual lifestyle merchandise at value
prices in an attractive, customer-friendly shopping environment.
MERCHANDISING AND SERVICES - SHOPKO RETAIL
The ShopKo Retail store net sales mix for the last three fiscal years
was:
2003 2002 2001
---- ---- ----
Hardlines 52% 53% 55%
Softlines 19% 20% 21%
Retail Health 29% 27% 24%
ShopKo Retail stores carry a wide assortment of 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. For example, in
2004 the Company is exploring expanding the beverage area to include beer and
wine. ShopKo's accommodating customer service policies provide customers with a
pleasant shopping experience.
ShopKo continually seeks to offer leading national brand names in its
merchandise lines. It concentrates on brands that have wide customer acceptance
and provide quality and value. In
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addition, ShopKo seeks to maintain the appropriate mix of private label goods
through its well-developed private label programs. In fiscal 2003, the Company
formed a strategic partnership with Daymon Worldwide Trading and with Topco
Associates, LLC to pursue private label development and procurement of
consumables, health and beauty aids and household commodities. 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 retail health services in most of its ShopKo
stores. Of the Company's 141 stores as of January 31, 2004, 140 include retail
pharmacies and optical centers. In addition to generating store traffic and
building customer loyalty, these services contribute significantly to the
Company's overall profitability and provide the opportunity for additional
growth. ShopKo's pharmacies filled over 12.7 million prescriptions in fiscal
2003 and fiscal 2002. 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 83 in-store finishing labs.
In fiscal 2003, ShopKo dispensed over 663,000 eyewear prescriptions, compared to
683,000 eyewear prescriptions in fiscal 2002. 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 week-end and mid-week newspaper circulars, which enables
ShopKo to reach a broad-based group of customers consisting largely of
middle-income families. The four-color week-end circulars average 24 pages,
supplemented with smaller mid-week circulars. The circulars 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 average 56 pages and have a
circulation of 5.8 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 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 RETAIL STORE LAYOUT AND DESIGN
ShopKo stores are designed for simplicity, speed and ease of the
shopping experience. The stores emphasize ShopKo's customers' lifestyles and
brand awareness. The stores feature competitive assortments of softlines, home
and hardlines products as well as pharmacy and optical centers. The pharmacy and
optical centers are located in the front of the store for added convenience.
Health and Beauty Aids and Over The Counter products 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 that assists customers in navigating easily throughout the store.
5
The Company is testing various store layouts, display techniques and
merchandise mixes in defining its evolving model format for both existing and
new stores. The Company introduced a new ShopKo store design in fiscal 2003
through the remodeling of three ShopKo stores during the year. The store model
will be continually modified and updated as the Company continues to test and
modify various merchandise presentation styles and lay-outs through the planned
remodels of 10 stores in fiscal 2004. The Company's current average ShopKo store
size is over 90,000 square feet. Future store size may vary depending on changes
to the Company's store design, the community in which the store is located, and
the retail competition in the immediate area.
SHOPKO RETAIL STORE OPERATIONS AND MANAGEMENT
ShopKo's store operations organization focuses on:
- Delivering a great customer experience
- Consistent, timely execution of merchandising plans
- Maximizing profitability of stores for today and in the future
ShopKo store operations group strives to drive profitable sales through
execution of the merchandising plans that will satisfy customers by having the
right item in stock at the right time. ShopKo's operating philosophy encourages
trust and empowerment of teammates to do what's right for the customer while
holding each other accountable for the results. The store operations
organization framework is based on three key components: customers, financial
performance and teammates.
Customers. The Company has focused on serving our customers at a level
that will exceed their expectations. ShopKo has developed and implemented a
customer service program that rewards our teammates for the great service they
provide. This program is monitored by an outside company to ensure that ShopKo
is meeting the ever changing needs of the customer.
Financial performance. The Company is committed to maximizing its
financial performance by improving productivity through use of technology,
training and by developing best practices.
Teammates. The Company believes in providing all teammates with the
training necessary for them to perform their jobs with excellence. ShopKo
encourages individual thinking while rewarding teammates for high performance
and serving its customers with excellence.
ShopKo holds its store operations management teams accountable for
execution of merchants' plans, operational objectives and achievement of
financial goals. ShopKo emphasizes ongoing development of its management teams
to ensure that they have the skills necessary to meet these objectives. In
fiscal 2003, ShopKo reorganized the store operations functions at the general
office and in the field level store operations resulting in expense savings and
focus on achievement of financial goals.
6
PURCHASING AND DISTRIBUTION - SHOPKO RETAIL
ShopKo purchases merchandise from more than 1,800 vendors. ShopKo's ten
largest vendors accounted for approximately 39.8% of ShopKo's purchases during
fiscal 2003. 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. Select vendors electronically receive point-of-sale
information from ShopKo, which allows them to respond to changing inventory
levels in the stores. In addition, the majority of ShopKo's vendors are
electronically transmitting invoices directly into the Company's automated
invoice matching system.
Purchasing and distribution of merchandise is a critical aspect of
ShopKo's business. The Company controls the flow of main store and optical
merchandise through the use of centralized purchasing, replenishment and
allocation processes and information systems. Allocation and distribution
management is closely tied to the merchandise buying organization to effectively
control and plan merchandise logistics. ShopKo's pharmacy merchandise is
replenished primarily through the use of a distributor. Pharmacies are
electronically linked to the distributor and place orders as product is needed.
Direct imports accounted for approximately 6.7% of ShopKo's purchases,
based upon cost of goods, during fiscal 2003. ShopKo buys its imported goods
principally in the Far East and ships the goods to its distribution centers for
distribution to the stores.
ShopKo has three distribution centers strategically located throughout
the United States to efficiently support its retail operations. 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 expense
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 2003, approximately 90% of the merchandise sold
by ShopKo, excluding optical and pharmaceutical products, flowed through its
distribution centers.
The Company operates a fleet of tractors and trailers to transport
merchandise from the distribution centers to the ShopKo stores. This provides
control over the timing of inventory deliveries, resulting in store labor
savings. Third party transportation companies are utilized as needed.
Expansion of the ShopKo distribution center in Omaha, Nebraska is
scheduled for completion in July 2004. The expansion of the current ShopKo
facility will add 135,000 square feet and accommodate the consolidation of the
Pamida distribution operations located in Omaha into the automated ShopKo
facility, through investments in conveyors, fixtures, and systems. The
operations of ShopKo's other distribution centers are not expected to be
affected by this project.
7
In fiscal 2003, ShopKo's reverse logistics operations, consisting of
vendor returns and non-saleable salvage returns from stores, were consolidated
into its distribution centers in an effort to provide more efficient reverse
logistics processing. The vacant returns processing facility is for sale.
Pursuant to a license agreement, Payless ShoeSource, Inc. operates a
shoe department (other than certain nationally-branded athletic shoes) in every
ShopKo store. ShopKo retains a percentage of the gross proceeds collected as
rent.
MANAGEMENT INFORMATION SYSTEMS - SHOPKO RETAIL
ShopKo uses information technology to improve customer service, reduce
operating costs and provide useful information to help ShopKo make timely
decisions regarding merchandising. In order to support these objectives, the
Company expects to make significant investments over the next several years to
enhance, replace or add new management information systems.
ShopKo uses point-of-sale terminal systems for electronic price lookup
and tracking sales information at store and Stock Keeping Unit (SKU) level.
ShopKo uses a high-speed, private, frame relay communications network to provide
real-time, on-line credit card and check authorization as well as pharmacy
adjudication. ShopKo uses portable radio-frequency terminals extensively in its
stores for merchandise receiving, stocking, replenishment, pricing and label
printing. ShopKo operates self checkout units in ten stores, with additional
installations under consideration for 2004.
ShopKo's merchandising systems provide for integrated perpetual
inventory management, automated replenishment, promotional planning, space
planning, merchandise financial planning and assortment planning. ShopKo
assimilates daily customer sales transactions into actionable information and
decision support tools for the Company's management. The Company expects that a
substantial portion of future information technology investments, particularly
in fiscal 2004, will be made in support of these systems.
ShopKo's pharmacy and optical businesses are supported by integrated
systems built to support customer prescription and eye care needs. These systems
provide automation for prescription fulfillment, insurance claims processing,
and the manufacture and delivery of prescription eyeglasses.
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 integrated with the Company's central information systems through its data
communications network, thereby ensuring up-to-date perpetual inventory records,
as well as facilitating merchandise allocation and distribution decisions.
ShopKo uses electronic commerce technology to support supply chain
management. This includes integrated replenishment systems, vendor-managed
inventories, scan-based-trading, and electronic data interchange.
EXPANSION - SHOPKO RETAIL
The Company's growth plans include the previously announced test of
three new freestanding drug stores during fiscal 2004, along with the planned
remodels of 10 existing ShopKo stores. Pending the evaluation of the fiscal 2003
and fiscal 2004 remodels, the Company expects to
8
increase the number of remodels to approximately 20 per year, beginning in
fiscal 2005. In addition to the remodels, the Company plans to invest in
merchandise initiatives in key categories, based on customer acceptance of the
fiscal 2003 remodels. The Company does not currently anticipate the addition of
any new full-size ShopKo stores in the upcoming fiscal year. See Item 7-
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources. Costs for conversion of existing
stores to a remodeled design concept, as well as the timing of renovations of
existing stores, will depend on a variety of factors, including the success of
the stores remodeled in the 2003 fiscal year. The Company's plans with respect
to new store growth are subject to change, and there can be no assurances that
the Company will achieve its plans.
COMPETITION - SHOPKO RETAIL
The discount general merchandise business is very competitive. ShopKo
competes in most of its markets with a variety of national, regional and local
discount stores, national category killers, specialty niche retailers, catalog
merchants and Internet retailers. In addition, department stores compete with
some branded merchandise lines, discount specialty retail chains compete with
some merchandise lines such as health and beauty aids, household and cleaning
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 ShopKo stores where these competitors are present
within the applicable market is as follows:
- - Wal-Mart 96%
- - Kmart 72%
- - 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.
9
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, although not necessarily to
previous levels. 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.
SEASONALITY - SHOPKO RETAIL
ShopKo's retail general merchandise operations are highly seasonal.
Historically, ShopKo's second and fourth fiscal quarters have contributed a
significant part of the Company's earnings, with the latter due to the Christmas
selling season.
PAMIDA RETAIL
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 softlines and hardlines merchandise, including consumables, and
in 2003 Pamida began to expand the beverage area to include alcohol. Pamida also
has retail pharmacies in 103 of its 218 stores.
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:
2003 2002 2001
---- ---- ----
Hardlines 65% 67% 69%
Softlines 16% 17% 18%
Pharmacy 19% 16% 13%
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Pamida's softlines division includes:
- men's, women's, children's and infant's clothing,
- men's and women's footwear,
- 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.
Pamida added 16 new pharmacies in fiscal 2003. The pharmacies have
proven to be effective in building customer loyalty and attracting customers who
are likely to purchase other items in addition to prescription drugs. Pamida
intends to continue its aggressive growth of its pharmacy base for at least the
next couple of years.
MARKETING AND ADVERTISING - PAMIDA RETAIL
Pamida's advertising primarily utilizes four-color 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 remodeled 17 stores in 2003 after the completion of concept
tests using various layouts and merchandising mixes, as well as 17 smaller
remodeling projects in low sales volume and smaller sized stores. Customer
response to the remodels which emphasize convenience, value and selection, has
been positive. The Company intends to remodel approximately 50 stores in the
next fiscal year, using both the larger and smaller scale remodeling concepts.
Pamida's stores average approximately 33,500 gross square feet and
range in size from approximately 8,000 to 50,000 square feet of sales area.
Pamida continues to make adjustments to its model as it identifies new
strategies and trends.
PAMIDA RETAIL STORE OPERATIONS AND MANAGEMENT
The methods Pamida employs to build customer loyalty and satisfaction
are weekly advertised specials, competitive pricing, clean and orderly stores
and friendly, well-trained personnel.
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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
equipment 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.
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 control
merchandise costs.
Pamida purchases merchandise from more than 1,600 vendors. Pamida's ten
largest vendors accounted for approximately 33.9% of Pamida's purchases during
fiscal 2003. Pamida believes that most merchandise, other than branded goods, is
available from a variety of sources. Pamida is working with its entire supply
chain to link its vendors into Pamida's general merchandise business planning
process to reduce costs and to replenish its inventory more efficiently. The
majority of Pamida's vendors are linked to its electronic data interchange
purchase order systems. Select vendors electronically receive point-of-sale
information from Pamida, which allows them to respond to changing inventory
levels in the stores. In addition, the majority of Pamida's vendors are
electronically transmitting invoices directly into the Company's automated
invoice matching system.
Pamida has an agreement with Payless ShoeSource, Inc. to be the primary
vendor within the shoe category.
Purchasing and distribution of merchandise is a critical aspect of
Pamida's business. The Company controls the flow of main store merchandise
through the use of centralized computerized purchasing, replenishment and
allocation processes. Allocation and distribution management is closely tied to
the merchandise buying organization to effectively control and plan merchandise
logistics. Pamida's pharmacy merchandise is replenished primarily through the
use of a distributor. Pharmacies are electronically linked to the distributor
and place orders, as product is needed.
Direct imports accounted for approximately 5.3% of Pamida's purchases,
based upon cost of goods, during fiscal 2003. Pamida buys its imported goods
principally in the Far East and ships the goods to its distribution centers for
distribution to the stores.
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. During fiscal 2003, approximately
84% of Pamida's merchandise, excluding pharmaceutical products, was distributed
to the stores through these distribution centers, while the remaining
merchandise was supplied directly to the stores by manufacturers or
distributors.
The Pamida Omaha distribution facility is 336,000 square feet. 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.
Expansion of the ShopKo distribution center in Omaha, Nebraska is
scheduled for completion in July 2004. The expansion of the current ShopKo
facility will add 135,000 square feet and accommodate the consolidation of the
Pamida distribution operations located in Omaha into the automated ShopKo
facility. This move will include investment in expanding conveyors, fixtures,
and
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systems. Most importantly, however, the move will help the company better serve
its customers in a much more efficient manner. After the transfer of
distribution activities to the newly expanded distribution facility the Company
plans to close the Pamida Omaha facility and offer it for sale. The operation of
Pamida's Lebanon, Indiana distribution center is not expected to be affected by
this project.
Pamida's reverse logistics operations, consisting of vendor returns and
non-saleable salvage returns from stores, were consolidated into the Pamida
distribution centers to provide more efficient reverse logistics processing. The
vacant returns processing facility is for sale.
MANAGEMENT INFORMATION SYSTEMS - PAMIDA RETAIL
Similar to ShopKo, Pamida employs integrated retail information
systems, including merchandise procurement, inventory management, automated
replenishment, merchandise and space planning, warehouse management, pharmacy
management and point of sale.
In fiscal 2002, the Company consolidated Pamida's data center and
selected information technology support functions into the corporate
headquarters in Green Bay, Wisconsin. In addition, during fiscal 2002, Pamida
completed a major upgrade of its core buying system and is in the process of
implementing a centralized pharmacy claims management system. Pamida will
continue to upgrade and enhance its existing information systems, while seeking
opportunities to leverage future technology investments in conjunction with the
ShopKo division.
EXPANSION - PAMIDA RETAIL
On June 29, 2000, the Company acquired the retail chain, P.M. Place
Stores Company ("Places"), which operated 49 discount stores in Missouri, Iowa,
Kansas, and Illinois. Forty-eight of these stores were reopened as Pamida
stores, and one Places store, located in an existing Pamida location, was
closed. During fiscal 2000, Pamida opened 76 new stores, including the 48
converted Places stores, and closed four stores. Between fiscal 2001 and fiscal
2003, the Company opened two new stores and closed 13 stores, decreasing the
total number of Pamida stores to 218 as of January 31, 2004.
The Company has announced plans to open three new Pamida stores and
relocate an existing Pamida store in fiscal 2004. In addition, the Company plans
to acquire pharmacy customer lists to expand its retail pharmacy business or may
acquire pharmacy locations to expand the Pamida store base. Pamida is using an
inexpensive alternative of leasing existing vacant retail locations for
expansion and growth. The risks associated with this alternative will be
minimized through the negotiation of shorter lease terms and options for lease
extensions.
The Company has identified certain communities as potential sites for
Pamida stores and in which it believes it can achieve an attractive market
position. There is, however, no assurance that the Company will open stores in
such communities or on any particular time schedule. Pamida will also continue
to evaluate other merchandise mix and store formats.
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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
little direct local competition from another major general merchandise retailer
in the town, 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 percentage of Pamida stores where national general merchandise
discount chains are present (within 10 miles) is as follows:
- - Wal-Mart 13%
- - Kmart 7%
- - Target 3%
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 second and fourth quarter sales have
contributed a significant part of the segment's earnings, with the latter due to
the Christmas selling season.
CONSOLIDATED
EMPLOYEES
The Company employs approximately 19,000 persons in its ShopKo
division, of whom approximately 7,800 are full-time employees and 11,200 are
part-time employees and approximately 6,500 persons in its Pamida division, of
whom approximately 3,200 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. No employees of the Company are covered
by collective bargaining agreements.
14
GOVERNMENT REGULATION
The Company's pharmacy and optical services businesses are 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.
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, store layouts and evolving prototypes, financing plans and
projected sales, revenues, earnings, costs and capital expenditures, 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, store layouts and evolving
prototypes, financing plans and projected sales, revenues, earnings, costs and
capital expenditures. The Company's actual results may differ materially from
those contained in the forward-looking statements identified
15
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 January 31, 2004, the Company had
approximately $393.1 million of total debt and lease obligations, including
$82.3 million outstanding on an amended and restated senior secured revolving
credit facility (the "Amended Secured Credit Facility"). The restrictions and
limitations in the Amended Secured Credit Facility, as well as the significant
amount of debt in general, could have material adverse effects on the Company's
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,
- 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 affected.
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
charge to earnings of approximately $125 million. The Company believes that
implementation of the plan has resulted in an increase in the Company's
profitability and efficiency. However, the analysis underlying this plan
involved many variables and uncertainties. Based on the overall softness in the
real estate market and an independent valuation analysis, the Company determined
that an additional $6.0 million should be added to the reserve in the fourth
quarter of 2002. The Company may not achieve all of the expected benefits of its
plan and additional charges may be necessary in the future. There can be no
assurances 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.
16
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, in one format or another, to be an integral part of its plan to
achieve projected operating results in future years. 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 the identification of new store
designs to fit its customers' changing lifestyles and preferences and the
remodeling of its stores is a necessary aspect of its growth plans. The failure
to upgrade the Company's existing retail stores could have a material adverse
effect on the Company's anticipated sales and profitability. To the extent the
Company is able to upgrade its existing stores, the associated expenses could
result in a significant impact on our net income in the future and there can be
no assurance that these upgrades will generate any of the anticipated benefits.
The Company's quarterly performance fluctuates, which may cause
volatility or a decline in the price of its securities. Fluctuations in the
Company's quarterly operating results have occurred in the past and may occur in
the future based on a variety of factors, including:
- 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
17
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. There can be no assurance the Company will be
able to continue to compete successfully.
The long-term economic effects of U.S. and international political
unrest and an extended economic slowdown could negatively affect the Company's
financial condition. The ongoing military operations in Iraq, terrorist attacks,
the national and international responses to terrorist attacks and other acts of
war or hostility have created many economic uncertainties. These events could
adversely affect the Company's business and operating results in ways that
presently cannot be predicted. If terrorist attacks, political unrest,
international conflict or other factors cause further 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 affected 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.
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 shareholder rights agreement (See Exhibit 4.2) may deter
unfriendly offers or other efforts to obtain control of the Company. This could
make the
18
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 changes in federal, state or local laws or
regulations could negatively impact the Company. Various aspects of the
Company's operations are subject to federal, state and local laws, rules and
regulations. Any of these laws, rules or regulations could change at any time.
Such changes could have the effect of increasing the Company's exposure to
liabilities, increasing the cost of operations or restricting the ability to set
prices. This is especially true with respect to our pharmacy business, which
could be subject to any number of legislative proposals regarding prescription
drugs.
Pending or future litigation could subject the Company to significant
monetary damages. If the Company becomes subject to liability claims that are in
excess of its insurance coverage or are not covered by its insurance policies,
the Company may be liable for damages and other expenses which could have a
material adverse effect on its business, operating results and financial
condition. In addition, any claims against the Company, regardless of merit or
eventual outcome, may have a material adverse effect on its reputation and
business. The sale of retail merchandise and provision of in-store pharmacy and
optical services entail a risk of litigation and liability. The Company is
currently subject to a number of lawsuits, and expects that from time to time it
will be subject to similar suits in the ordinary course of business. The Company
currently maintains insurance intended to cover a majority of liability claims,
subject to a $250,000 deductible for general liability claims and for liability
claims arising from prescription dispensing errors. The Company believes that
its insurance coverage is 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.
19
ITEM 2. PROPERTIES
As of January 31, 2004, 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
STATE STORES
----- ------
California 1
Colorado 3
Idaho 9
Illinois 10
Iowa 5
Michigan 4
Minnesota 13
Montana 5
Nebraska 11
Nevada 3
Oregon 4
South Dakota 6
Utah 15
Washington 10
Wisconsin 42
TOTAL 141
===
As of January 31, 2004, the Company operated 218 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
STATE STORES
----- ------
Illinois 8
Indiana 10
Iowa 41
Kansas 5
Kentucky 9
Michigan 19
Minnesota 26
Missouri 23
Montana 6
Nebraska 14
North Dakota 7
Ohio 13
South Dakota 6
Tennessee 4
Wisconsin 18
Wyoming 9
TOTAL 218
===
Of the Company's 359 ShopKo and Pamida retail stores at January 31,
2004 the number of stores owned and leased are listed below:
OWNS BUILDING SUBJECT
OWNS LAND AND TO GROUND LEASES LAND
BUILDING OUTRIGHT LEASE AND BUILDING TOTAL
----------------- --------------------- ------------ -----
ShopKo Stores 113 * 7 21 141
Pamida Stores 63 1 154 218
Total 176 8 175 359
* Fifteen of which are subject to mortgages.
The ground leases expire at various dates ranging from 2006 through
2018 and the other leases expire at various dates ranging from 2004 through
2038.
20
As of January 31, 2004, 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 Vacant / Available for Sale 114,300 Owned
De Pere, WI ShopKo Distribution Center / Return Center 494,000 Owned
Boise, ID ShopKo Distribution Center 347,000 Owned
Omaha, NE ShopKo Distribution Center 394,000 Owned
Ashwaubenon, WI ShopKo Optical Lab 29,000 Owned
Omaha, NE Pamida Corporate Headquarters 215,000 Owned
Omaha, NE Pamida Distribution Center * 336,000 Owned
Lebanon, IN Pamida Distribution Center 418,000 Leased
Omaha, NE Vacant / Available for Sale 40,000 Owned
* After the consolidation of distribution activities to the newly expanded
ShopKo distribution facility in Omaha, the Company plans to close the
Pamida Omaha facility and offer it for sale.
21
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
effect on the consolidated financial statements of the Company.
In addition, the Company has been involved in two purported class
action lawsuits. First, during fiscal 2000, the Company was added as a defendant
in a purported class action (the "ProVantage 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 original complaint in
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 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. This matter was settled by all parties and the Court
issued its Notice of Entry of Final Judgment and Order of Dismissal on January
26, 2004. Settlement of the matter was not material to the Company's results of
operations.
Second, during fiscal 2001, alleged shareholders of the Company filed
purported class action securities lawsuits against the Company and its then
chief executive officer containing substantially identical claims in the Federal
District Court for the Eastern District of Wisconsin. The suits were
consolidated into one action (In Re ShopKo's Securities Litigation No. 01-C-1034
(E.D. Wis.)). The action alleges that the Company and its former chief executive
officer, William 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 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. On or about February 5, 2003, the Court granted, in part, the
Company's motion to dismiss the action, ruling that all allegations are
dismissed except those based on statements made in connection with an earnings
warning on October 5, 2000. The plaintiffs' Third Amended Complaint seeks to
expand the class period from August 10 - November 9, 2000. Discovery in this
matter continues, following which the defendants will file motions in response
to the Third Amended Complaint and certain other matters. The Company believes
this matter 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 matter.
22
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 2003.
EXECUTIVE OFFICERS OF THE REGISTRANT
SERVED IN EMPLOYED
CURRENT BY THE
POSITION COMPANY
NAME AGE* POSITION** SINCE SINCE
---- ---- ---------- ----- -----
Sam K. Duncan 52 President and Chief Executive Officer 2002 2002
Jeffrey C. Girard 56 Vice Chairman, Finance and Administration 2002 2002
Steven R. Andrews 51 Senior Vice President, Law & Human 2003 2002
Resources, General Counsel
Brian W. Bender 55 Senior Vice President, Chief Financial Officer 2000 2000
Michael J. Bettiga 50 Senior Vice President, Retail Health Operations 2003 1977
Dan J. Bolstad 51 Senior Vice President, Store Operations and 2003 2003
Logistics
Michael J. Hopkins 53 President, Pamida Division 1999 1995
Rodney D. Lawrence 46 Senior Vice President, Property Development 1996 1996
Matthew J. Lynch 44 Senior Vice President, Chief Information Officer 2003 1998
Paul G. White 47 Senior Vice President, General Merchandise
Manager - Softlines 2003 2003
Douglas N. Wurl 42 Senior Vice President, General Merchandise
Manager - Hardlines and Home 2003 2000
* as of January 31, 2004
** as of March 28, 2004
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.
There are no arrangements or understandings between any of the
executive officers of the Company and any other person (not an officer or
director of the Company acting as such) pursuant to which any of the executive
officers were selected as an officer of the Company.
23
Each of the executive officers of the Company has been in the employ of
the Company for more than five years, except for Sam K. Duncan, Steven R.
Andrews, Brian W. Bender, Dan J. Bolstad, Jeffrey C. Girard, Matthew J. Lynch,
Paul G. White and Douglas N. Wurl.
Mr. Duncan has been President, Chief Executive Officer since October
2002. Prior to joining ShopKo, Mr. Duncan most recently served as President of
Fred Meyer Corporation, a large general merchandise and food retailer and a
division of Kroger, Inc., from February 2001 to October 2002. From 1969 to 1991,
Mr. Duncan served in numerous roles for Albertson's, eventually being named
Albertson's director of operations in 1991. He joined Fred Meyer in 1992 as Vice
President Grocery department and was promoted through the executive
merchandising ranks. Mr. Duncan was named Executive Vice President of Fred
Meyer's food division in 1997. In 1998, Fred Meyer Corporation acquired Ralph's
Super Markets and Mr. Duncan was named President of Ralph's Super Markets,
serving in that position from 1998 to 2001.
Mr. Andrews was promoted to Senior Vice President, Law and Human
Resources and General Counsel in June 2003. He had been Senior Vice President,
General Counsel since joining the Company in October 2002. Prior to joining
ShopKo, Mr. Andrews was Senior Vice President, General Counsel and Secretary of
PepsiAmericas, Inc. (formerly Whitman Corporation) from May 1999 to August 2001.
Before joining Whitman, Mr. Andrews was the interim President and Chief
Executive Officer of Multigraphics, Inc. from February to May of 1999 and Vice
President, General Counsel and Secretary of Multigraphics from 1994 to 1999.
Multigraphics was a worldwide manufacturer and distributor of graphic arts and
printing products.
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. Bolstad joined ShopKo Stores in March 2003 as Senior Vice
President, Store Operations and Logistics. Prior to joining ShopKo, Mr. Bolstad
most recently served as Senior Vice President, Operations Group of Fred Meyer
Corporation, a large general merchandise and food retailer and a division of
Kroger, Inc., from October 2000 to February 2003. He joined Fred Meyer in 1976
as a store management trainee and was promoted to local, district, regional and
corporate store operations leadership positions. In 2000, he assumed
responsibility for logistics management of all Fred Meyer businesses.
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, a role he
held until Mr. Duncan joined the Company in October 2002. Mr. Girard continues
in the role of Vice Chairman, Finance and Administration. 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
24
General Holdings Corporation and Senior Vice President and Chief Financial
Officer of Supervalu, Inc.
Mr. Lynch has been Senior Vice President, Chief Information Officer
since October, 2003. Mr. Lynch joined the Company in 1998 as Vice President,
Operations and Technology Services. From 1993 to 1998, Mr. Lynch served as Vice
President, Information and Technology Services for Runzheimer International.
Prior to that, Mr. Lynch held various information systems management positions
since 1985 with Air Wisconsin Airlines, America West Airlines and Honeywell,
Aerospace Electronics Systems.
Mr. White has been Senior Vice President, General Merchandise Manager -
Softlines since October, 2003. Prior to joining the Company, Mr. White was with
the Famous-Barr division of May Department Stores from 1995 to 2003. Most
recently he was Senior Vice President, Advertising and Sales Promotion from
August, 1998 to June, 2003. Prior to that, Mr. White held several senior
management and merchandising positions since 1985 with The May Department
Stores, Federated Department Stores and Elder Beerman Department Stores.
Mr. Wurl is currently Senior Vice President, General Merchandise
Manager - Hardlines and Home. He has had responsibility for the Home segment
since December 2001, and in January 2003, he assumed responsibility for the
Hardlines segment as well. 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.
25
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 April
02, 2004, ShopKo's common shares were held by 2,472 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 2002
First Quarter (ended May 4, 2002) $ 22.4800 $ 12.5100
Second Quarter (ended August 3, 2002) $ 21.4600 $ 15.1500
Third Quarter (ended November 2, 2002) $ 17.0000 $ 11.0000
Fourth Quarter (ended February 1, 2003) $ 16.2100 $ 10.7600
FISCAL YEAR 2003
First Quarter (ended May 3, 2003) $ 12.2000 $ 10.0800
Second Quarter (ended August 2, 2003) $ 14.2300 $ 11.0800
Third Quarter (ended November 1, 2003) $ 16.6700 $ 12.1900
Fourth Quarter (ended January 31, 2004) $ 17.0100 $ 14.0000
The closing sales price of the Common Stock on the New York Stock
Exchange on April 02, 2004 was $14.58 per share.
The Company's Amended Secured Credit Facility (see Note D of the Notes
to the Consolidated Financial Statements) has a restrictive covenant that limits
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 future
growth and expansion of its business and the payment of debt, and not to declare
or pay any cash dividends. Management will continue to evaluate the use of
dividends and stock repurchase practices.
Equity Compensation Plan Information
------------------------------------------------------------------------------
(a) (b) (c)
--- --- ---
Number of securities Number of securities remaining
to be issued upon Weighted-average available for future issuance
exercise of exercise price of under equity compensation
outstanding options, outstanding options, plans (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
- ---------------------------------- -------------------- -------------------- ------------------------------
Equity compensation plans approved
by security holders 2,511,869 $16.29 861,305
Equity compensation plans not
approved by security holders - 0 - - 0 - - 0 -
-------------------- -------------------- ------------------------------
Total 2,511,869 $16.29 861,305
==================== ==================== ==============================
26
ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEARS ENDED
-----------------------------------------------------------------
Jan. 31 Feb. 1, Feb. 2, Feb. 3, Jan. 29,
2004 2003 2002 2001 2000
(52 Wks) (52 Wks) (52 Wks) (53 Wks) (2) (52 Wks) (1)
-------- -------- -------- ------------ ------------
Summary of Operations (Millions)
Net sales $ 3,184 $ 3,240 $ 3,374 $ 3,517 $ 3,048
Licensed department rentals and other income 13 13 13 13 14
Gross margin 818(10) 833 806 865(3) 790
Selling, general and administrative expenses 645(10) 636 612 674 568
Special charges -0- -0- -0- 9(4) 8(4)
Restructuring charge -0- 6 -0- 115(3) -0-
Depreciation and amortization expenses 83 83 92 94 75
Interest expense - net 38 52 66 66 54(5)
Earnings (loss) from continuing operations before
income taxes 64 68 50 (79) 98
Earnings (loss) from continuing operations 39 41 28 (50) 59
Discontinued operations - net -0- -0- -0- 34 43
Earnings (loss) before accounting change 39 41 28 (16) 102
Net earnings (loss) 39 (145)(6) 28 (16) 102
Per Share Data (Dollars)
Basic earnings (loss) per common share from
continuing operations $ 1.35 $ 1.43 $ 0.98 $ (1.72) $ 2.22
Basic net earnings (loss) per common share 1.35 (5.03) 0.98 (0.55) 3.62
Diluted earnings (loss) per common share from
continuing operations 1.33 1.41 0.98 (1.72) 2.19
Diluted net earnings (loss) per common share 1.33 (4.95) 0.98 (0.55) 3.57
Cash dividends declared per common share (7) -0- -0- -0- -0- -0-
Financial Data (Millions)
Working capital $ 73 $ 69 $ 121 $ 182 $ 95
Property and equipment-net 781 812 892 974 878
Total assets 1,478 1,505 1,820 2,027 1,953
Long-term debt & capital lease obligations 311 415 585 665 454
Total debt (8) 393 455 633 836 699
Total shareholders' equity 591 548 690 662 695
Capital expenditures 61 31 17 196 133
Financial Ratios
Current ratio 1.1 1.1 1.2 1.3 1.1
Return on beginning assets 2.6% -8.0% 1.4% (0.8)% 7.7%
Return on beginning shareholders' equity 7.1% -21.0% 4.3% (2.3)% 22.2%
Total debt as % of total capitalization (9) 39.0% 44.5% 47.0% 55.0% 48.6%
Other Year End Data
ShopKo stores open at year end 141 141 141 164 160
Average ShopKo store size-square feet 91,009 91,009 91,009 90,175 89,545
Pamida stores open at year end 218 223 225 229 157
Average Pamida store size-square feet 33,468 33,311 33,282 33,232 36,055
(1) Includes the results of the Pamida retail store chain acquired in July,
1999.
(2) Includes the results of P.M. Place stores acquired in June, 2000.
(3) The total restructuring charge of $125 million was recorded as inventory
liquidation charges of $10.4 million shown in the Gross margin line and
Restructuring charge of $115 million shown separately.
(4) Special charges relates to various costs incurred in connection with
business acquisitions, including process and system integration, employee
retention and store conversions.
(5) Includes loss on retirement of debt of $6.2 million.
(6) Includes cumulative effect of accounting change of $186.1 million ($6.36
per dilutive share).
(7) The terms of the Company's Amended Secured Credit Facility limit the
Company's ability to pay dividends, based on availability.
(8) Total debt includes short-term debt, total long-term debt obligations and
capital leases.
(9) Total capitalization includes shareholders' equity, total debt and
non-current deferred income taxes.
(10) Includes effect of adoption of EITF No. 02-16, which resulted in an
increase to gross margin of $14.4 million, an increase to selling, general
& administrative expense of $19.2 million, and a decrease to pre-tax
earnings of $4.8 million.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE SUMMARY
For fiscal 2003, diluted earnings per share were $1.33 compared with
earnings per share in fiscal 2002 of $1.41, before cumulative effect of an
accounting change related to the adoption of SFAS No. 142. In fiscal year 2003,
the adoption of Emerging Issues Task Force ("EITF") Issue No. 02-16, "Accounting
By a Customer (Including a Reseller) for Certain Consideration Received From a
Vendor" had a $2.9 million, or $0.10 per share, unfavorable impact on full year
net earnings.
Consolidated sales were $3,184.1 million compared with $3,240.2 million
last year. Consolidated comparable store sales decreased 1.6% from the prior
year. While the financial results were below last year, the Company made
important progress in several areas, including the implementation of store
remodeling programs, increased investment in technology and a reduction in debt
of $62.1 million, or 13.6%. The decline in debt resulted in $14.3 million lower
interest expense. For the year, consolidated gross margin as a percent of sales
was 25.7%, the same as last year and selling, general and administrative (SG&A)
expense as a percent of sales was 20.3% compared with 19.6% last year. The
capital expenditures for the year were $60.4 million compared with $30.9 million
last year.
The retail industry is highly competitive and the ShopKo division
competes in most of its markets with a variety of national and regional
retailers. Pamida's competition varies by market. The Retail Health category has
become an increasing percentage of the Company's sales. In fiscal 2003, retail
health sales made up 29.0% and 18.8% of ShopKo retail segment sales and Pamida
retail segment sales, respectively.
Generating sales growth is a Company priority. However, the Company
expects to be challenged by competitor 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 category 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 freestanding drug stores. Moreover, the
Company will continue to refine and adjust merchandising and advertising
strategies. There can be no assurance that such efforts will succeed.
Notwithstanding margin management and expense controls, operating profit has
been adversely affected by the decline in sales in recent years, making
continued focus on margin and expenses a management priority as well.
28
RESULTS OF OPERATIONS
The following table sets forth items from our Consolidated Statements
of Operations as percentages of consolidated net sales:
FISCAL YEARS ENDED
---------------------------------------------
JAN. 31, 2004 FEB. 1, 2003 FEB. 2, 2002
(52 WEEKS) (52 WEEKS) (52 WEEKS)
------------- ------------ ------------
Revenues:
Net sales 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.4 0.4 0.4
------------- ------------ ------------
100.4 100.4 100.4
Costs and Expenses:
Cost of sales 74.3 74.3 76.1
Selling, general and administrative expenses 20.3 19.6 18.2
Restructuring charge 0.0 0.2 0.0
Depreciation and amortization expenses 2.6 2.6 2.7
------------- ------------ ------------
97.2 96.7 97.0
------------- ------------ ------------
Earnings from operations 3.2 3.7 3.4
Interest expense - net 1.2 1.6 1.9
------------- ------------ ------------
Earnings before income taxes 2.0 2.1 1.5
Provision for income taxes 0.8 0.8 0.7
------------- ------------ ------------
Earnings before accounting change 1.2% 1.3% 0.8%
============= ============ ============
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/pharmacy.
The following tables set forth items from the Company's business
segments as percentages of net sales:
SHOPKO RETAIL SEGMENT
FISCAL YEARS ENDED
---------------------------------------------
JAN. 31, 2004 FEB. 1, 2003 FEB. 2, 2002
(52 WEEKS) (52 WEEKS) (52 WEEKS)
------------- ------------ ------------
Revenues:
Net sales 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.5 0.4 0.4
------------- ------------ ------------
100.5 100.4 100.4
Costs and Expenses:
Cost of sales 74.4 74.3 75.3
Selling, general and administrative expenses 18.9 17.7 16.6
Depreciation and amortization expenses 2.5 2.4 2.5
------------- ------------ ------------
95.8 94.4 94.4
Earnings from operations 4.7% 6.0% 6.0%
============= ============ ============
29
PAMIDA RETAIL SEGMENT
FISCAL YEARS ENDED
--------------------------------------
JAN. 31, FEB. 1, FEB. 2,
2004 2003 2002
(52 WEEKS) (52 WEEKS) (52 WEEKS)
---------- ---------- ----------
Revenues:
Net sales 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.2 0.2 0.2
---------- ---------- ----------
100.2 100.2 100.2
Costs and Expenses:
Cost of sales 74.2 74.2 78.5
Selling, general and administrative expenses 21.6 21.7 20.0
Depreciation and amortization expenses 2.9 2.9 3.2
---------- ---------- ----------
98.7 98.8 101.7
Earnings (loss) from operations 1.5% 1.4% (1.5)%
========== ========== ==========
FISCAL 2003 COMPARED TO FISCAL 2002
NET SALES
---------------------------------------------
% INCREASE/
FISCAL YEAR (DECREASE)
---------------------- -------------------
2003 2002 TOTAL ** COMP *
--------- --------- -------- -------
ShopKo Retail $ 2,383.5 $ 2,456.1 (3.0%) (3.0%)
Pamida Retail 800.6 784.1 2.1% 2.8%
--------- --------- -------- -------
Consolidated $ 3,184.1 $ 3,240.2 (1.7%) (1.6%)
========= ========= ======== =======
* Comparable store sales represent sales of those stores open during both fiscal
years.
** Pamida division total sales variance reflects sales in the prior year periods
from nine locations, which have been closed and not replaced, and two new Pamida
locations opened in September 2003.
The 3.0 percent decrease in ShopKo comparable store sales during fiscal
2003 was primarily related to the decreased general merchandise sales, as a
result of lower promotional sales and competitive store openings, partially
offset by increased sales in retail health services. Changes in ShopKo
comparable store sales in fiscal 2003 by category were as follows: Retail
Health, 4.5%; Hardlines, (7.5)%; and Softlines, (6.0)%. The 2.8 percent increase
in Pamida comparable store sales during 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
fiscal 2003 by category were as follows: Pharmacy, 21.7%; Hardlines, (0.1)%; and
Softlines, (4.6)%. The increase in Pharmacy sales for the Pamida division is
inclusive of new pharmacy openings in existing stores and the purchase of
pharmacy customer lists in existing pharmacies.
30
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 to 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 resulted in a negative effect on earnings.
The following table presents the effects of adopting EITF No. 02-16 for
fiscal 2003 (dollars in millions):
FISCAL YEAR ENDED
JANUARY 31, 2004
--------------------------
$ INCREASE / PERCENT OF
GROSS MARGIN (DECREASE) NET SALES*
- ------------- ------------ ----------
ShopKo Retail 17.8 .75
Pamida Retail (3.4) (.42)
------------
Consolidated 14.4 .45
============
SELLING, GENERAL &
ADMINISTRATIVE $ INCREASE / PERCENT OF
EXPENSES (DECREASE) NET SALES*
- ------------------ ------------ ----------
ShopKo Retail 22.1 .93
Pamida Retail (2.9) (.35)
------------
Consolidated 19.2 .61
============
$ INCREASE /
PRE-TAX EARNINGS (DECREASE)
- ---------------- ------------
ShopKo Retail (4.3)
Pamida Retail (0.5)
------------
Consolidated (4.8)
============
* 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.
Consolidated gross margin as a percent of net sales was 25.7 percent
for both fiscal 2003 and fiscal 2002. Aside from the effect of EITF No. 02-16,
the Company's gross margin, as a percent of net sales, declined primarily due to
lower merchandise and pharmacy margins (77 basis points) and higher distribution
expense (17 basis points), offset by reduced shrink expense (48 basis points).
Consolidated gross margin dollars decreased 1.9 percent to $817.6 million for
the same period.
ShopKo's gross margin as a percent of net sales was 25.6 percent for
fiscal 2003 compared with 25.7 percent for fiscal 2002. Aside from the effect of
EITF No. 02-16, ShopKo's gross margin, as a percent of net sales, declined
primarily due to lower merchandise and pharmacy margins (90 basis points) and
increased distribution expense (23 basis points), offset by reduced
31
shrink expense. ShopKo's gross margin dollars decreased 3.2 percent to $610.8
million for the same period. Pamida's gross margin as a percent of net sales was
25.8 percent in fiscal 2003 and fiscal 2002. The gross margin rate was primarily
impacted by the negative effect of EITF No. 02-16 (42 basis points) and lower
merchandise and pharmacy margins (46 basis points), offset by reduced shrink
expense (101 basis points). Pamida's gross margin dollars increased 2.1 percent
to $206.7 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 fiscal 2003. There was
no difference between the LIFO and first-in, first-out (FIFO) cost methods at
January 31, 2004 and February 1, 2003. In fiscal 2002, the Company's LIFO
reserve was reduced by $2.9 million to zero, as a result of price index
deflation for various products in ending inventory.
Consolidated selling, general and administrative expenses as a percent
of net sales for fiscal 2003 were 20.3 percent compared with 19.6 percent in
fiscal 2002. ShopKo's selling, general and administrative expenses as a percent
of net sales for fiscal 2003 were 18.9 percent compared with 17.7 percent for
last year primarily attributable to the effect of EITF No. 02-16. Pamida's
selling, general and administrative expenses for fiscal 2003 were 21.6 percent
of net sales compared with 21.7 percent in fiscal 2002. The decrease is
primarily related to sales leveraging (45 basis points), the effect of EITF No.
02-16 (35 basis points) and lower insurance costs (31 basis points), offset by
increased payroll costs associated with pharmacy growth (60 basis points) and
additional costs associated with store closings, impairments and remodels (47
basis points).
Consolidated depreciation and amortization expenses as a percent of net
sales were 2.6 percent in both fiscal 2003 and fiscal 2002.
Interest expense for fiscal 2003 decreased 27.4 percent to $37.9
million when compared with fiscal 2002. The decrease was primarily due to lower
debt levels. The Company does not anticipate further significant reductions in
interest expense in future periods.
The Company's effective tax rate for fiscal 2003 was 38.9 percent
compared with 39.7 percent for fiscal 2002.
FISCAL 2002 COMPARED TO FISCAL 2001
The 1.1 percent decrease in ShopKo comparable store sales during fiscal
2002 was primarily the result of decreased general merchandise sales and
adjustments to the advertising calendar, partially offset by continued strong
sales in retail health services. Changes in ShopKo comparable store sales in
fiscal 2002 by category were as follows: Retail Health, 9.0%; Hardlines, (4.7)%;
and Softlines, (3.4)%. The 4.8 percent decrease in Pamida comparable store sales
reflected lower general merchandise sales, partially offset by strong pharmacy
sales. Changes in Pamida comparable store sales in fiscal 2002 by category were
as follows: Pharmacy, 17.5%; Hardlines, (8.1)%; and Softlines, (7.8)%. The
Company believes the soft retail environment, a decline in consumer confidence
and increased competition in certain markets, as well as an increasingly
promotional environment, especially in the fourth quarter, negatively affected
sales.
Consolidated gross margin as a percent of net sales for fiscal 2002 was
25.7 percent compared with 23.9 percent for fiscal 2001. Consolidated gross
margin dollars increased 3.4 percent to $833.3 million for the same period.
ShopKo's gross margin as a percent of net sales was
32
25.7 percent for fiscal 2002 compared with 24.7 percent for fiscal 2001. ShopKo
gross margins were favorably impacted by a reduction in the LIFO reserve of $1.9
million for fiscal 2002 and $11.1 million for fiscal 2001. The decrease in the
LIFO reserve resulted from significant deflation experienced in the price index
for various inventory products. ShopKo's gross margin dollars increased 0.7
percent to $630.8 million for the same period. The improvement in gross margin
as a percent of net sales was a result of a 63 basis point improvement in
merchandise margin rates, partially offset by the lower LIFO reserve reduction.
Pamida's gross margin as a percent of net sales was 25.8 percent for
fiscal 2002 compared with 21.5 percent for fiscal 2001. Pamida's gross margin
dollars increased 12.7 percent to $202.5 million for the same period. Pamida
Retail gross margins were favorably impacted by a reduction in the LIFO reserve
of $1.0 million for fiscal 2002 and $5.1 million for fiscal 2001. The decrease
in the LIFO reserve resulted from significant deflation experienced in the price
index for various inventory products. The 429 basis point improvement in
Pamida's gross margin as a percent of net sales was primarily attributable to
reduced shrink expense (204 basis points), better merchandise margin rates (200
basis points) and reduced distribution expense (44 basis points), partially
offset by lower vendor allowances (34 basis points) and a lower LIFO reserve
reduction. The Company believes that better inventory management improved gross
margin in both divisions during fiscal 2002, which helped to offset the sales
decline.
Consolidated selling, general and administrative expenses as a percent
of net sales for fiscal 2002 were 19.6 percent compared with 18.2 percent in
fiscal 2001. ShopKo's selling, general and administrative expenses as a percent
of net sales for fiscal 2002 were 17.7 percent compared with 16.6 percent for
fiscal 2001. Pamida's selling, general and administrative expenses as a percent
of net sales were 21.7 percent for fiscal 2002 compared with 20.0 percent in
fiscal 2001. The increases at both divisions were primarily attributable to a
lack of sales leverage (56 and 130 basis points at ShopKo and Pamida,
respectively) and increases in employee incentive plans and liability insurance
costs (33 and 75 basis points at ShopKo and Pamida, respectively).
Consolidated depreciation and amortization expenses as a percent of net
sales for fiscal 2002 were 2.6 percent compared with 2.7 percent in fiscal 2001.
The decrease for fiscal 2002 was attributable to the Company no longer
amortizing goodwill and to a significant reduction of assets placed in service
during 2001 compared with prior years.
During fiscal 2002, the Company recorded an additional pre-tax charge
of $6.0 million associated with nine remaining stores included in the original
reorganization plan, that have not yet been disposed of by the Company.
Interest expense for fiscal 2002 decreased 20.5 percent to $52.3
million when compared with fiscal 2001. The decrease was primarily due to lower
debt levels.
The Company's effective tax rate for fiscal 2002 was 39.7 percent
compared with 43.4 percent for fiscal 2001. The decrease in the effective rate
was primarily due to the discontinuation of goodwill amortization as a result of
our adoption of SFAS No. 142. In fiscal 2001, a substantial amount of our
goodwill amortization was non-deductible for tax purposes.
33
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 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 utilizing the
average cost method of accounting. The valuation of inventories at cost requires
certain management judgments and estimates, including among others, the
assessment of shrinkage rates, obsolescence and the impact on inventory values
of using the lower of cost or market valuation method. In valuing the inventory,
the Company undertakes physical inventories at least annually at its stores and
distribution centers and adjusts inventory values regularly to reflect market
conditions and business trends. The Company estimates losses of inventory due to
shrinkage based upon historical experience by store and by merchandise
department, which are then verified by physical inventory counts. The Company's
experience has been that there is little fluctuation or risk in the estimate of
obsolescence or lower of cost or market reserve because (i) of the Company's
inventory turnover rate, (ii) a large percentage of our inventory is returnable
to our vendors for cost and (iii) the Company is able to receive vendor support
monies if product is sold below expected prices. The non-returnable inventory
goes through a markdown process that liquidates the inventory, generally at
prices in excess of cost.
Goodwill & Intangible Assets - Net. 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.
During fiscal 2002, 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. Management considered several factors in
making its assessment, including an independent appraisal of the Pamida Retail
segment. 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 related to the write
down of all goodwill recorded on the Company's balance sheet, all of which
related to the Pamida Retail segment.
The Company has received a report from an independent appraiser
containing an analysis of 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.
34
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 a 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. One additional property was sold
in fiscal 2003, leaving eight remaining properties covered by the restructuring
reserve. There are four leased properties; one lease expires in 2012 and three
leases expire in 2018.
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 January 31, 2004, the remaining reserve for lease termination and
related property carrying costs was $14.5 million and the remaining property
write-down reserve was $11.7 million. 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 sales as
merchandise is sold. Vendor allowances received for advertising or fixturing
programs reduce the Company's expense or cost for the related advertising or
fixturing program. As discussed previously, the Company recognizes vendor
allowances based on the provisions of EITF No. 02-16, which was adopted by the
Company in fiscal year 2003.
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 by operating activities was
$107.0 million, $209.7 million and $234.1 million in fiscal 2003, 2002 and 2001,
respectively. The decreases in fiscal 2003 and 2002 resulted primarily from
changes in inventory levels (an increase of $6.6 million in fiscal 2003 compared
with a decrease of
35
$51.2 million in fiscal 2002 and a decrease of $100.0 million in 2001). The
Company finances a significant portion of its operations through vendor
financing. As of January 31, 2004, accounts payable totaled $253.3 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 January 31, 2004, the Company had $210.1 million of long-term
debt outstanding, comprising $154.9 million of Senior Unsecured Notes and
approximately $55.2 million of long- term notes payable. During fiscal 2003, the
Company funded the retirement of $89.2 million in aggregate principal amount of
Senior Unsecured 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 of Senior Unsecured Notes maturing in November 2004. A
more detailed description of these notes is contained in Note D of the Notes to
the Consolidated Financial Statements. Subject to certain limitations set forth
in our Amended Secured Credit Facility (described below), proceeds of the
facility or funds from other sources may be used to retire or repurchase Senior
Unsecured Notes. During 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
Senior Unsecured Notes could be accelerated in the event the Company defaults on
any obligation in excess of $25.0 million.
In addition to the Senior Unsecured Notes, the Company had $82.3
million outstanding under its Amended Secured Credit Facility as of the end of
fiscal 2003 compared with $40.0 million outstanding as of the end of fiscal
2002. On March 12, 2001, the Company entered into a $600.0 million senior
secured revolving credit and term loan facility. During fiscal 2002, the Company
voluntarily terminated the term loan portion of this facility, reducing the
overall commitment under the facility from $600.0 million to $500.0 million as
of the end of fiscal 2002. During the third quarter of fiscal 2003, the Company
entered into the Amended Secured Credit Facility, which is also secured by the
Company's inventory and accounts receivable. The Amended Secured Credit Facility
provides for revolving credit borrowings of up to $450.0 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%, 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. During fiscal 2003 and 2002, the Company was in
compliance with all covenants of the secured credit facilities in place during
each fiscal year.
During the first quarter of fiscal 2002, the Company closed on a $50.0
million private placement mortgage financing. The loan has a term of 10 years at
an interest rate of 11 percent and is secured by 13 ShopKo stores and one
distribution center. Principal payments are based on a 25-year amortization
schedule with a balloon payment due March 2012. Prepayments are permitted
subject to certain penalties. The loan was used to retire five lease liabilities
associated with closed stores controlled by affiliates of the lender, to provide
additional liquidity, and to add a layer of longer term debt to the Company's
capital structure.
36
The following schedule sets forth the Company's contractual obligations
and commercial commitments as of January 31, 2004:
(in thousands) Payments Due by Period
- ------------------------------------------------------------------------------------------------------
Less than After
Contractual Obligations (1) Total 1 year 2 -3 years 4 - 5 years 5 years
- ------------------------------------------------------------------------------------------------------
Long-Term Debt $ 210,106 $ 58,458 $ 3,175 $ 5,668 $ 142,805
- ------------------------------------------------------------------------------------------------------
Capital Lease Obligations (2) 100,681 6,312 12,339 12,454 69,576
- ------------------------------------------------------------------------------------------------------
Operating Leases (3) 200,597 19,726 35,145 31,908 113,818
- ------------------------------------------------------------------------------------------------------
Total Contractual Cash Obligations $ 511,384 $ 84,496 $ 50,659 $ 50,030 $ 326,199
- ------------------------------------------------------------------------------------------------------
(1) The schedule excludes obligations of $82.3 million outstanding under the
Amended Secured Credit Facility, which are classified on the balance sheet
as short-term debt, as well as $15.9 million of outstanding documentary
letters of credit as of January 31, 2004.
(2) Capital lease obligations represent the total minimum future obligations,
net of $76.1 million of interest.
(3) Operating leases are the aggregate future payments for operating leases as
of January 31, 2004, 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 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.
CAPITAL EXPENDITURES
The Company spent $60.4 million on capital expenditures in fiscal 2003,
compared with $30.9 million in fiscal 2002 and $17.2 million in fiscal 2001. The
following table sets forth the components of capital expenditures (in millions):
37
FISCAL YEARS ENDED
--------------------------------------
JAN. 31 FEB. 1, FEB. 2,
2004 2003 2002
(52 WEEKS) (52 WEEKS) (52 WEEKS)
---------- ---------- ----------
Capital Expenditures
New stores $ 2.4 $ 0.0 $ 0.5
Remodeling and refixturing 16.2 6.0 3.8
Distribution centers 3.3 0.3 2.8
Management information and point-of-sale
equipment and systems 23.9 11.3 5.8
Repairs and Replacement 14.2 12.7 4.0
Other 0.4 0.6 0.3
---------- ---------- ----------
Total $ 60.4 $ 30.9 $ 17.2
========== ========== ==========
During 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,
Neb. to accommodate the consolidation of the Pamida distribution operations also
located in Omaha into one automated facility serving both divisions, 10 ShopKo
and approximately 50 Pamida store remodels, three new freestanding drug stores,
three new Pamida stores and the relocation of a fourth Pamida store. The plans
also call for up to 11 additional pharmacies in Pamida stores.
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.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 January 31, 2004, the Company had $82.3
million of variable rate debt outstanding with a weighted average interest rate
of 3.9%. This debt exposes the Company to changes in interest expense brought
about by changes in interest rates. During fiscal 2003, the monthly average
amount borrowed under the variable rate credit facilities was approximately
$88.1 million, and the weighted average interest rate was 3.0%. If the weighted
average interest rate were to increase by 10.0% for fiscal 2003, net income
would have decreased by approximately $0.2 million.
At January 31, 2004, the Company had fixed-rate, long-term debt
totaling $210.1 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
38
maturity. Management continually monitors the interest rate environment with the
objective of lowering borrowing costs without subjecting the Company to
excessive exposure to fluctuating interest rates.
ITEM 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 64
and are incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 fiscal year ended
January 31, 2004 that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over
financial reporting.
39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding executive officers is included in Part I above.
The information called for by Item 10, as to Directors of the Registrant and the
information required by Items 401 and 405 and 406 of Regulation S-K, is
incorporated herein by reference to the Registrant's definitive Proxy Statement
dated April 26, 2004 filed with the Securities and Exchange Commission pursuant
to Regulation 14A in connection with the Registrant's 2004 Annual Meeting of
Shareholders.
The Company has adopted a Code of Business Ethics that applies to its
directors, officers and employees, including the principal executive officer,
principal financial officer, principal accounting officer and controller. The
Code of Business Ethics is filed as an exhibit to this Annual Report on Form
10-K and is posted on the Company's Internet website at www.shopko.com. The
Company intends to satisfy the disclosure requirement under Item 10 of Form 8-K
by posting such information on its internet website.
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 26, 2004
filed with the Securities and Exchange Commission pursuant to Regulation 14A in
connection with the Registrant's 2004 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 26, 2004
filed with the Securities and Exchange Commission pursuant to Regulation 14A in
connection with the Registrant's 2004 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 26, 2004
filed with the Securities and Exchange Commission pursuant to Regulation 14A in
connection with the Registrant's 2004 Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
During the fourth quarter, the Audit Committee of the Board of
Directors of the Company approved the following non-audit services performed or
to be performed for us by our independent accountants, Deloitte & Touche LLP:
tax consulting and tax compliance services. The remaining information called for
by Item 14 is incorporated herein by reference to the Registrant's definitive
Proxy Statement dated April 26, 2004 filed with the Securities and Exchange
Commission pursuant to Regulation 14A in connection with the Registrant's 2004
Annual Meeting of Shareholders.
40
PART IV
ITEM 15. 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 69, 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 or furnished Current Reports on Form 8-K with
respect to the fourth fiscal quarter of fiscal 2003 as follows:
1. Form 8-K dated November 20, 2003, furnished with respect to
Item 7. Financial Statements and Exhibits and Item 12. Results
of Operations and Financial Condition, relating to the
announcement of the Registrant's results of operations and
financial condition for the quarter ended November 1, 2003.
2. Form 8-K dated December 22, 2003, filed with respect to Item
5. Other Events and Item 7. Financial Statements and Exhibits,
regarding a revised earnings outlook for the fourth quarter
and fiscal year ending January 31, 2004.
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 January 31, 2004................. 44
Consolidated Balance Sheets as of January 31, 2004 and February 1, 2003 ................ 45
Consolidated Statements of Cash Flows
for each of the three years in the period ended January 31, 2004................. 46
Consolidated Statements of Shareholders' Equity
for each of the three years in the period ended January 31, 2004................. 47
Notes to Consolidated Financial Statements ............................................. 48-62
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 accompanying consolidated balance sheets of ShopKo
Stores, Inc. and subsidiaries as of January 31, 2004 and February 1, 2003, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the years (52 weeks) ended January 31, 2004, February 1, 2003 and
February 2, 2002. Our audits also included the financial statement schedule
listed in the Index at Item 15. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of ShopKo Stores, Inc. and
subsidiaries as of January 31, 2004 and February 1, 2003, and the results of
their operations and their cash flows for the years (52 weeks) ended January 31,
2004, February 1, 2003 and February 2, 2002, 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.
As discussed in Note A to the consolidated financial statements, in
fiscal 2003, the Company adopted Emerging Issues Task Force Issue No. 02-16,
"Accounting By a Customer (Including a Reseller) for Certain Consideration
Received From a Vendor". Also, as discussed in Note A, effective February 3,
2002, the Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets."
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
March 31, 2004
43
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
January 31, February 1, February 2,
2004 2003 2002
(52 Weeks) (52 Weeks) (52 Weeks)
---------- ---------- ----------
Revenues:
Net sales $ 3,184,088 $ 3,240,187 $ 3,373,935
Licensed department rentals and other income 12,821 12,622 13,054
------------ ------------ ------------
3,196,909 3,252,809 3,386,989
Costs and Expenses:
Cost of sales 2,366,513 2,406,887 2,567,800
Selling, general and administrative expenses 645,225 635,909 611,930
Restructuring charge -0- 6,030 -0-
Depreciation and amortization expenses 83,241 83,337 91,662
------------ ------------ ------------
3,094,979 3,132,163 3,271,392
Earnings from operations 101,930 120,646 115,597
Interest expense 37,920 52,264 65,765
------------ ------------ ------------
Earnings before income taxes 64,010 68,382 49,832
Provision for income taxes 24,890 27,149 21,615
------------ ------------ ------------
Earnings before accounting change 39,120 41,233 28,217
Cumulative effect of accounting change -0- (186,052) -0-
------------ ------------ ------------
Net earnings (loss) $ 39,120 $ (144,819) $ 28,217
============ ============ ============
Net earnings (loss) per share of common stock:
Basic:
Earnings before cumulative effect of accounting change $ 1.35 $ 1.43 $ 0.98
Cumulative effect of accounting change -0- (6.46) -0-
------------ ------------ ------------
Net earnings (loss) $ 1.35 $ (5.03) $ 0.98
============ ============ ============
Diluted:
Earnings before cumulative effect of accounting change $ 1.33 $ 1.41 $ 0.98
Cumulative effect of accounting change -0- (6.36) -0-
------------ ------------ ------------
Net earnings (loss) $ 1.33 $ (4.95) $ 0.98
============ ============ ============
Weighted average number of common shares outstanding - basic 29,018 28,791 28,699
Weighted average number of common shares outstanding - diluted 29,317 29,218 28,838
See notes to consolidated financial statements.
44
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
January 31, February 1,
2004 2003
---- ----
Assets
Current assets:
Cash and cash equivalents $ 22,786 $ 33,753
Receivables, less allowance for losses of
$2,705 and $2,611, respectively 62,808 49,509
Merchandise inventories 569,315 562,731
Other current assets 10,874 13,745
------------- -------------
Total current assets 665,783 659,738
Other assets and deferred charges 7,584 12,570
Intangible assets - net 23,629 20,475
Property and equipment - net 781,428 812,184
------------- -------------
Total assets $ 1,478,424 $ 1,504,967
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt $ 82,270 $ 40,022
Accounts payable - trade 253,313 241,166
Accrued compensation and related taxes 35,509 44,957
Deferred taxes and other accrued liabilities 112,291 119,162
Accrued income and other taxes 45,543 49,998
Current portion of long-term obligations and leases 63,797 95,554
------------- -------------
Total current liabilities 592,723 590,859
Long-term obligations and leases, less current portions 246,990 319,577
Other long-term obligations 25,206 26,391
Deferred income taxes 22,803 19,769
Shareholders' equity:
Preferred stock; none outstanding -0- -0-
Common stock; shares issued, 31,225 at
January 31, 2004 and 30,974 at February 1, 2003 312 310
Additional paid-in capital 391,976 389,177
Retained earnings 238,729 199,134
Less treasury stock - at cost; 1,908 shares at January 31,
2004 and 1,904 shares at February 1, 2003 (40,315) (40,250)
------------- -------------
Total shareholders' equity 590,702 548,371
------------- -------------
Total liabilities and shareholders' equity $ 1,478,424 $ 1,504,967
============= =============
See notes to consolidated financial statements.
45
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
January 31, February 1, February 2,
2004 2003 2002
(52 Weeks) (52 Weeks) (52 Weeks)
---------- ---------- ----------
Cash flows from operating activities:
Earnings before accounting change $ 39,120 $ 41,233 $ 28,217
Adjustments to reconcile earnings before accounting change
to net cash provided by operating activities:
Depreciation and amortization 83,241 83,337 91,662
(Gain) / Loss on the sale of property and equipment (1,873) 2,188 (974)
Restructuring charge -0- 6,030 -0-
Impairment charges 1,566 147 4,825
Deferred income taxes 2,856 7,079 23,425
Change in assets and liabilities:
Receivables (13,299) (771) 8,843
Merchandise inventories (6,584) 51,180 100,014
Other current assets 2,871 2,095 (2,630)
Other assets 5,402 2,880 13,057
Accounts payable 12,147 (14,464) (22,545)
Accrued liabilities (17,241) 16,310 (4,170)
Other long-term obligations (1,185) 12,475 (5,617)
-------------- ------------- -------------
Net cash provided by operating activities 107,021 209,719 234,107
Cash flows from investing activities:
Payments for property and equipment (60,432) (30,880) (17,198)
Proceeds from the sale of property and equipment 5,476 11,876 14,857
Payments for pharmacy customer lists (4,069) (2,257) (2,003)
-------------- ------------- -------------
Net cash used in investing activities (59,025) (21,261) (4,344)
Cash flows from financing activities:
Net proceeds (payments) from short-term financing 42,248 (107,786) (23,489)
Proceeds from debt borrowings 2,761 37,471 -0-
Payments of debt and capital lease obligations (103,456) (115,005) (203,276)
Debt issuance costs (2,312) (1,380) (8,163)
Change in common stock from stock options 1,861 1,826 -0-
Purchase of treasury stock (65) -0- -0-
-------------- ------------- -------------
Net cash used in financing activities (58,963) (184,874) (234,928)
-------------- ------------- -------------
Net increase / (decrease) in cash and cash equivalents (10,967) 3,584 (5,165)
Cash and cash equivalents at beginning of year 33,753 30,169 35,334
-------------- ------------- -------------
Cash and cash equivalents at end of year $ 22,786 $ 33,753 $ 30,169
-------------- ------------- -------------
Supplemental cash flow information:
Noncash investing and financial activities -
Capital lease obligations incurred $ -0- $ 18 $ 78
Capital lease obligations terminated $ 3,924 $ 11,000 $ -0-
Cash paid (refunds received) during the period for:
Interest $ 39,345 $ 49,661 $ 65, 258
Income taxes $ (541) $ (4,410) $ 3,867
See notes to consolidated financial statements.
46
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Common Stock Additional Treasury Stock Total
-------------- Paid-in Retained ---------------- ----------------
Shares Amount Capital Earnings Shares Amount Shares Amount
------ ------ ------- -------- ------ ------ ------ ------
Balances at February 3, 2001 30,603 $ 306 $ 384,563 $ 317,128 (1,904) $(40,250) 28,699 $ 661,747
Net earnings 28,217 28,217
Issuance of restricted stock 25 182 (182) 25 -0-
Restricted stock expense 84 84
------ ------ --------- --------- ------ -------- ------ ---------
Balances at February 2, 2002 30,628 306 384,745 345,247 (1,904) (40,250) 28,724 690,048
Net loss (144,819) (144,819)
Sale of common stock under option plans 229 3 1,823 229 1,826
Income tax benefit related to stock options 774 774
Issuance of restricted stock 117 1 1,835 (1,836) 117 -0-
Restricted stock expense 542 542
------ ------ --------- --------- ------ -------- ------ ---------
Balances at February 1, 2003 30,974 310 389,177 199,134 (1,904) (40,250) 29,070 548,371
Net earnings 39,120 39,120
Sale of common stock under option plans 221 2 1,859 221 1,861
Income tax benefit related to stock options
583 583
Issuance of restricted stock 30 357 (357) 30 -0-
Restricted stock expense 832 832
Purchase of treasury stock (4) (65) (4) (65)
------ ------ --------- --------- ------ -------- ------ ---------
Balances at January 31, 2004 31,225 $ 312 $ 391,976 $ 238,729 (1,908) $(40,315) 29,317 $ 590,702
====== ====== ========= ========= ====== ======== ====== =========
See notes to consolidated financial statements.
47
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
retail health services through its two retail store chains. ShopKo Retail stores
are operated in the Midwest, Western Mountain and Pacific Northwest states.
Pamida, Inc. ("Pamida") Retail stores are operated in the Midwest, North Central
and Rocky Mountain states.
The Company operates on a 52/53-week fiscal year basis. The 2003, 2002
and 2001 fiscal years were all 52-week periods and ended on January 31, 2004,
February 1, 2003 and February 2, 2002, respectively.
Cash and Cash Equivalents
The Company records all highly liquid investments with an original
maturity at the date of purchase 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. There was no difference between the LIFO and first-in,
first-out (FIFO) cost methods at January 31, 2004 and February 1, 2003.
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.
48
The components of property and equipment are:
JAN. 31, FEB. 1,
2004 2003
---- ----
(in thousands)
Property and equipment at cost:
Land $ 126,774 $ 125,505
Buildings 673,381 667,783
Equipment 585,086 551,325
Leasehold improvements 74,473 72,482
Property under construction 7,644 3,057
Property under capital leases 124,187 132,711
---------- ----------
1,591,545 1,552,863
Less accumulated depreciation and amortization:
Property and equipment 747,654 677,487
Property under capital leases 48,431 46,063
Less reserve for impairment on assets to be disposed 14,032 17,129
---------- ----------
Net property and equipment $ 781,428 $ 812,184
========== ==========
Goodwill and Intangible Assets - Net
Prior to the adoption of SFAS No. 142, "Goodwill and Other Intangible
Assets", as discussed below, goodwill and trademarks were amortized using the
straight-line method over 15 to 40 years. The Company's intangible assets are
composed of assets with finite and indefinite lives. Intangible assets with
finite lives are amortized using the straight-line method. Underwriting and
issuance costs of long-term obligations are amortized over the term of the
obligations. Customer lists are generally amortized over 15 years.
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, and any excess in carrying value over the
estimated fair value is charged to results of operations.
During fiscal 2002, 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. Management considered various data in
making its assessment, including an independent appraisal of the Pamida Retail
segment. The fair value of the Pamida Retail segment was determined 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 related to the write down of all goodwill recorded on the
Company's balance sheet, all of which related to the Pamida Retail segment.
The decline in value was attributed to the fact that during fiscal 2000
and 2001, the retail environment had softened considerably from the prior years.
Consumer confidence had declined and the Pamida Retail segment was forced to
offer significant promotions and discounts to attract customers, eroding margins
and profitability. In addition, the Company experienced worse than anticipated
operating performance at the Pamida Retail segment, further affecting
profitability.
49
The Company had previously evaluated recoverability of goodwill using
an undiscounted cash flow methodology in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". Due to the extended period of considering cash flows under that
methodology, no impairment was required. However, when required to assess
recoverability of goodwill using the fair value methodology of SFAS No. 142, an
impairment charge was required. This was attributable to the decline in the
value of the Pamida Retail segment as discussed above, and to the two step
method of evaluating impairment required under SFAS No. 142. Accordingly, while
the fair value of the Pamida unit declined as a whole, the fair value of the
remaining assets equaled or exceeded their carrying values, further reducing the
residual value attributable to goodwill.
During fiscal 2003 and 2002, the Company also performed an impairment
analysis of intangible assets with indefinite lives, which primarily consist of
a trademark associated with the Pamida Retail segment. No impairment was
required as a result of this analysis.
The results for periods prior to adoption of SFAS No. 142 have not been
restated. The following table reflects consolidated results from operations for
fiscal 2001 as if the adoption of SFAS No. 142 had occurred on January 30, 2000.
FISCAL YEAR ENDED
(In thousands, except per share data) FEBRUARY 2, 2002
----------------
Net earnings:
Reported net earnings $28,217
Goodwill and trademark amortization, net of tax 5,082
-------
Pro forma $33,299
=======
Basic earnings per share:
Reported net earnings $ 0.98
Goodwill and trademark amortization, net of tax 0.18
-------
Pro forma $ 1.16
=======
Diluted earnings per share:
Reported net earnings $ 0.98
Goodwill and trademark amortization, net of tax 0.18
-------
Pro forma $ 1.16
=======
The following table summarizes goodwill and intangible assets by major
asset class as of January 31, 2004 and February 1, 2003:
January 31, 2004 February 1, 2003
---------------- ----------------
Gross Gross
Carrying Accumulated Carrying Accumulated
(in thousands) Amount Amortization Amount Amortization
------ ------------ ------ ------------
Intangible assets with indefinite lives:
Trademark $ 7,294 $ -0- $ 7,294 $ -0-
======== =========== ======= ==========
Intangible assets with finite lives:
Debt issuance costs $ 6,302 $ (1,488) $10,609 $ (6,071)
Customer lists and other* 20,804 (9,283) 16,735 (8,092)
-------- ----------- ------- ----------
$ 27,106 $ (10,771) $27,344 $ (14,163)
======== =========== ======= ==========
50
* Customer lists and other is principally composed of lists of
prescription drug customers that the Company has acquired through its retail
health operations.
Amortization expense was $3.2 million, $5.3 million and $9.3 million
for fiscal 2003, 2002 and 2001, respectively. Estimated fiscal year amortization
expense will be as follows: 2004 - $2.3 million; 2005 - $2.3 million; 2006 -
$2.2 million; 2007 - $1.7 million; 2008 - $1.1 million.
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 were disposed in the first
quarter of fiscal 2002. The Company recorded impairment charges of $1.6 million
related to underperforming stores in the fourth quarter of fiscal 2003. In the
opinion of management, except for assets identified herein and as disclosed in
Note B of the Notes to the Consolidated Financial Statements, no such impairment
existed as of January 31, 2004 or February 1, 2003.
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, which are based on historical experience. Revenues from
licensed departments are recorded at the net amounts to be received from
licensees.
Vendor Allowances
The Company records vendor allowances and discounts in the Statements
of Operations 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 sales as
merchandise is sold. Vendor allowances received for advertising or fixturing
programs reduce the Company's expense or cost for the related advertising or
fixturing program.
In January 2003, the Emerging Issues Task Force ("EITF"), issued EITF
Issue No. 02-16, "Accounting By a Customer (Including a Reseller) for Certain
Consideration Received From a Vendor", which is applicable to agreements entered
into after December 15, 2002. Issue No. 02-16 provides accounting guidance on
how a customer, including a reseller, should characterize, measure and recognize
consideration received from a vendor.
EITF No. 02-16 first became applicable to the Company in fiscal 2003.
EITF No. 02-16, as it applies to the Company, addresses the recognition of
certain vendor allowances and requires the allowances to be accounted for as a
reduction of inventory cost, unless specifically identified as reimbursement for
services or other costs incurred. The impact of adoption of EITF No. 02-16 was
to reduce net earnings in fiscal 2003 by $2.9 million or $0.10 per share. The
pro- forma effect of EITF No. 02-16 on prior years is not determinable.
51
Additionally, the adoption of EITF No. 02-16 impacted the
classification of certain vendor allowances resulting in increased net
advertising expense included in Selling, General and Administrative Expense in
the Statement of Operations and correspondingly, decreased cost of sales by
approximately $19.3 million in fiscal 2003.
Advertising
The Company expenses advertising costs, net of vendor reimbursements,
in the period incurred. Advertising expense was $43.9 million, $26.0 million and
$18.3 million in fiscal 2003, 2002 and 2001, respectively. The increase in
advertising expense for fiscal 2003 is a result of adopting EITF No. 02-16.
Stock-based Employee Compensation Plans
The Company has various stock-based employee compensation plans, which
are described more fully in Note F. 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.
Pre-tax expense related to the intrinsic value of restricted stock issued was
$0.8 million, $0.5 million and $0.1 million for fiscal years 2003, 2002 and
2001, respectively.
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.
YEAR ENDED
----------
January 31, February 1, February 2,
2004 2003 2002
---- ---- ----
Net earnings (loss) as reported $39,120 $ (144,819) $ 28,217
Add: Stock-based employee compensation expense included in reported net
income, net of related tax effects 503 329 51
Deduct: Total stock-based employee compensation expense determined under
fair value method for all option awards, net of related tax
effects (1,579) (1,669) (1,304)
------- ---------- --------
Pro forma net earnings (loss) $38,044 $ (146,159) $ 26,964
======= ========== ========
Net Earnings (loss) per share:
Basic - as reported $ 1.35 $ (5.03) $ 0.98
Basic - pro forma $ 1.31 $ (5.08) $ 0.94
Diluted - as reported $ 1.33 $ (4.95) $ 0.98
Diluted - pro forma $ 1.30 $ (5.00) $ 0.96
Pre-opening Costs
The Company expenses pre-opening costs of retail stores as incurred.
52
Net Earnings (Loss) Per Common Share
Basic net earnings (loss) per common share is computed by dividing net
earnings (loss) by the weighted average number of common shares outstanding.
Diluted net earnings (loss) per common share is 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. During fiscal 2003, 2002 and 2001, options to purchase 1,454,669 shares,
1,654,646 shares and 2,071,525 shares, respectively, were excluded from the
diluted earnings per share computation as the effects of such options would have
been anti-dilutive.
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.
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
effect on the consolidated financial statements of the Company.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
B. 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 all 23 stores and a distribution center were closed
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 during
fiscal 2002. One additional owned property was sold during fiscal 2003, leaving
eight remaining properties covered by the restructuring reserve.
The amount of the asset write-downs and reserves for lease terminations 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
53
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 recorded 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 January 31, 2004, the remaining reserve for lease terminations
and related property carrying costs was $14.5 million and the remaining property
write-down reserve was $11.7 million. There are four leased properties; one
lease expires in 2012 and three leases expire in 2018. For balance sheet
reporting, 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 ($13.3 million) is recorded in
other long-term obligations at January 31, 2004. 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.
Following is an analysis of the change in the restructuring reserve (in
thousands) during fiscal 2001, 2002 and 2003:
Lease Termination Employee
and Property Separation Other
Carrying Costs Costs Costs
-------------- ----- -----
Balance as of Feb. 3, 2001 $ 45,752 $9,134 $ 1,300
Additions -0- -0- -0-
Cash Payments (13,691) (7,282) (1,072)
Other Adjustments 731 (1,852) -0-
-------- ------ -------
Balance as of Feb. 2, 2002 32,792 $ -0- 228
Additions 439 -0-
Cash Payments (18,260) (113)
Other Adjustments -0- -0-
-------- ------ -------
Balance as of Feb. 1, 2003 14,971 -0- 115
Additions -0- -0- -0-
Cash Payments (581) -0-
Other Adjustments 115 (115)
-------- ------ -------
Balance as of Jan. 31, 2004 $ 14,505 $ -0- $ -0-
======== ====== =======
Net sales of the stores closed totaled $56.0 million in fiscal 2001.
C. SHORT-TERM DEBT
The Company had outstanding $82.3 million and $40.0 million under the
revolving credit portion of its secured credit facilities (see Note D), as of
January 31, 2004 and February 1, 2003, respectively. The related weighted
average interest rates on borrowings outstanding at January 31, 2004 and
February 1, 2003 were 3.9% and 3.5%, respectively.
54
The Company also authorizes letters of credit to be issued during
the ordinary course of business as required by foreign vendors. As of January
31, 2004 and February 1, 2003, the Company had outstanding letters of credit for
$15.9 million and $15.8 million, respectively.
D. LONG-TERM OBLIGATIONS AND LEASES (in thousands)
Jan. 31, 2004 Feb. 1, 2003
------------- ------------
Senior Unsecured Notes, 9.0% due November 15, 2004, less
unamortized discount of $4 and $8, respectively $ 55,251 $ 59,797
Senior Unsecured Notes, 9.25% due March 15, 2022, less
unamortized discount of $347 and $366, respectively 99,653 99,634
Senior Unsecured Notes, 6.5% due August 15, 2003, less
unamortized discount of $0 and $13, respectively -0- 89,182
Mortgage and other obligations 55,202 55,062
Capital lease obligations 100,681 111,456
--------- ---------
310,787 415,131
Less current portion 63,797 95,554
--------- ---------
Long-term obligations $ 246,990 $ 319,577
========= =========
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. Payments due under the Senior
Unsecured Notes could be accelerated in the event the Company defaults on any
obligation in excess of $25.0 million.
On March 12, 2001, the Company entered into a $600.0 million senior
secured revolving credit and term loan facility, which was cancelled in fiscal
2003 when the Company entered into the amended and restated senior secured
revolving credit facility (the "Amended Secured Credit Facility"). The Amended
Secured Credit Facility, which terminates on August 19, 2007, provides for
revolving credit loans of up to $450.0 million. Amounts available under the
Amended Secured Credit Facility are limited based on a percentage of inventory
and accounts receivable. A total of $311.8 million of borrowings were available
as of January 31, 2004. Borrowings under the facility are secured by accounts
receivable and inventory and bear 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 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.
During the first quarter of fiscal 2002, the Company closed on a $50.0
million private placement mortgage financing. The loan has a term of 10 years at
an interest rate of 11 percent and is secured by 13 ShopKo stores and one
distribution center. Principal payments are based on a 25-year amortization
schedule with a balloon payment due March 2012. Prepayments are permitted
subject to certain penalties. The loan was used to retire five lease liabilities
associated with closed stores controlled by affiliates of the lender, to provide
additional liquidity, and to add a layer of longer term debt to the Company's
capital structure.
The interest rates on the mortgage and other obligations range from
3.14% to 11.0% with maturities ranging from September 2004 to March 2012 and are
collateralized by property with a net book value of $64.0 million at January 31,
2004.
55
Approximate annual maturities of long-term obligations, excluding
capital leases, for the five years subsequent to the year ended January 31, 2004
are as follows (in thousands):
FISCAL LONG-TERM
YEAR OBLIGATIONS
---- -----------
2004 $ 58,458
2005 1,504
2006 1,671
2007 4,136
2008 1,532
Later 142,805
--------
Total maturities $210,106
========
The Company leases certain stores and equipment under capital leases.
Many of these leases include renewal options, and occasionally, include options
to purchase. In addition to its capital leases, the Company is obligated under
operating leases, primarily for land, buildings and computer equipment.
Minimum future obligations under capital and operating leases in effect
at January 31, 2004 are as follows (in thousands):
CAPITAL LEASE OPERATING LEASE
FISCAL YEAR OBLIGATIONS OBLIGATIONS (1)
------ ---- ----------- ---------------
2004 $ 15,246 $ 17,331
2005 14,820 15,485
2006 13,429 14,921
2007 13,139 14,528
2008 12,865 13,294
Later 107,241 95,558
--------- ----------
Total minimum future obligations 176,740 $ 171,117
==========
Less interest (76,059)
---------
Present value of minimum future obligations $ 100,681
=========
(1) Operating lease obligations excluding closed stores.
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 2003, $0.8 million in
fiscal 2002 and $0.8 million in fiscal 2001. Total minimum rental expense, net
of sublease income, related to all operating leases with terms greater than one
year was $17.8, $17.8 and $19.9 million in fiscal 2003, 2002 and 2001,
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.
The Company is contingently liable on the lease payments for two former
retail stores, which were assumed by an unrelated party. Total remaining lease
obligations for the stores are $10.2 million as of January 31, 2004.
56
E. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. For balance
sheet reporting purposes, the current deferred tax liability of $29.6 million
and $29.8 million at January 31, 2004 and February 1, 2003, respectively, is
included in deferred taxes and other accrued liabilities.
Components of the Company's net deferred tax liability are as follows
(in thousands):
2003 2002
---- ----
Deferred tax liabilities:
Property and equipment $ 48,675 $ 41,743
Intangibles 4,566 8,441
Inventory valuation 43,327 48,431
Other 4,595 5,337
---------- ----------
Total deferred tax liabilities 101,163 103,952
---------- ----------
Deferred tax assets:
Reserves and allowances (17,114) (26,308)
Restructuring and impairment reserves (11,397) (9,332)
Capital leases (9,876) (10,416)
Compensation and benefits (10,359) (8,335)
---------- ----------
Total deferred tax assets (48,746) (54,391)
---------- ----------
Net deferred tax liability $ 52,417 $ 49,561
========== ==========
Long-term deferred tax liability $ 22,803 $ 19,769
========== ==========
Short term deferred tax liability portion $ 29,614 $ 29,792
========== ==========
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):
2003 2002 2001
---- ---- ----
Current
Federal $ 19,953 $ 17,892 $ (967)
State 2,081 2,178 (843)
Deferred 2,856 7,079 23,425
--------- --------- ---------
Total provision $ 24,890 $ 27,149 $ 21,615
========= ========= =========
The effective tax rate related to continuing operations varies from the
statutory federal income tax rate for the following reasons:
2003 2002 2001
---- ---- ----
Statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefits 3.0 4.1 4.6
Goodwill 0.0 0.0 3.6
Other 0.9 0.6 0.2
---- ---- ----
Effective income tax rate 38.9% 39.7% 43.4%
==== ==== ====
57
F. PREFERRED AND COMMON STOCK
The Company has 20,000,000 shares of $0.01 preferred stock authorized
but unissued. There are 75,000,000 shares of $0.01 par value common stock
authorized.
The Company has a shareholder rights plan pursuant to which one right
to purchase one one-thousandth of a share of Series B junior participating
preferred stock is attached to each outstanding share of common stock. The
rights are exercisable only if a person or group acquires 15% or more of
outstanding common stock or commences a tender offer for 15% or more of
outstanding common stock. Each right entitles the holder thereof to purchase
from the Company one one-thousandth share of the Company's Series B junior
participating preferred stock at an initial exercise price of $100 per one
one-thousandth of a share or upon the occurrence of certain events, common stock
of an acquiring company having a market value equivalent to two times the
exercise price. Subject to certain conditions, the rights are redeemable by the
Board of Directors for $.01 per right or they can be replaced with new rights at
any time. The rights expire on September 27, 2007.
The Company's Stock Option Plans and Stock Incentive Plans 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 861,305 shares available for issuance under the plans as of January
31, 2004. Options and restricted stock vest generally over two to five years.
Most stock options vest immediately upon a change of control.
Option activity is summarized as follows (shares/options in thousands):
Weighted Ave.
Shares Price Range Exercise Price
------ ----------- --------------
Outstanding, February 3, 2001 2,806 $ 5.31 - 37.63 $18.83
Granted 807 7.30 - 10.10 8.61
Exercised 0 N/A N/A
Cancelled and forfeited (546) 5.31 - 37.63 17.55
----- --------------- ------
Outstanding, February 2, 2002 3,067 5.31 - 37.63 16.37
Granted 684 11.70 - 19.85 14.29
Exercised (229) 5.31 - 17.06 16.49
Cancelled and forfeited (412) 5.31 - 36.44 16.17
----- --------------- ------
Outstanding, February 1, 2003 3,110 5.31 - 37.63 16.55
Granted 146 11.24 - 15.32 13.26
Exercised (221) 5.31 - 13.78 8.43
Cancelled and forfeited (524) 5.31 - 37.63 20.31
----- --------------- ------
Outstanding January 31, 2004 2,511 $ 5.31 - $37.63 $16.29
===== =============== ======
Options Weighted Ave.
Exercisable Exercise Price
----------- --------------
January 31, 2004 1,672 $18.16
February 1, 2003 1,729 $19.32
February 2, 2002 1,347 $20.36
58
The following tables summarize information about stock options
outstanding at January 31, 2004 (shares in thousands):
OPTIONS OUTSTANDING
--------------------------------------------------------------------
Weighted Average
Range of Exercise Shares Outstanding Remaining Contractual Weighted Average
Prices at Jan. 31, 2004 Life Exercise Price
------ ---------------- ---- --------------
$ 5.31 -$14.88 1,325 7.9 years $ 10.20
15.32 - 23.31 822 5.5 20.12
24.56 - 37.63 364 4.5 29.86
- --------------- ----- --------- -------
$ 5.31 -$37.63 2,511 6.6 years $ 16.29
=============== ===== ========= =======
OPTIONS EXERCISABLE
--------------------------------------------
Range of Exercise Shares Exercisable at Weighted Average
Prices Jan. 31, 2004 Exercise Price
------ ------------- --------------
$ 5.31 - $14.88 630 $ 9.53
15.32 - 23.31 699 20.37
24.56 - 37.63 343 29.54
- --------------- ----- -------
$ 5.31 - $37.63 1,672 $ 18.16
=============== ===== =======
The weighted average fair value of options granted was $6.91, $7.54 and
$3.58 per share in fiscal 2003, 2002 and 2001, respectively. The fair value of
stock options is computed as the estimated present value at grant date using the
Black-Scholes option-pricing model with weighted average assumptions as follows:
2003 2002 2001
---- ---- ----
Risk-free interest rate 2.9% 3.2% 4.3%
Expected volatility 65.5% 66.6% 59.3%
Dividend yield 0.0% 0.0% 0.0%
Expected option life, standard option (years) 4.0 4.0 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, if any, and to vote
their respective shares. Restrictions limit the sale or transfer of the shares
during a restricted period. During fiscal 2003, 2002 and 2001, the Company
issued 30,500, 117,500 and 25,000 shares, respectively, of restricted stock with
a fair value as of the grant date between $11.24 and $15.32 per share in fiscal
2003, between $11.70 and $19.60 per share in fiscal 2002 and $7.30 per share in
fiscal 2001. There were 135,500 shares and 142,500 shares of restricted stock
outstanding at January 31, 2004 and February 1, 2003, respectively.
G. 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 100 percent of the first three percent and 50 percent of
the next two percent of compensation contributed by participating employees.
Contributions were $10.7, $14.3 and $7.4 million for fiscal 2003, 2002 and 2001,
respectively.
The Company also provides certain supplemental retirement and
postretirement benefits, other than pensions. Costs associated with these
benefits are accrued during the employee's
59
service period. The annual cost and accumulated benefit obligation associated
with these benefits are not material.
H. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of cash 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 January 31, 2004 and February 1, 2003
are as follows (amounts in thousands):
January 31, February 1,
2004 2003
---- ----
Carrying amount $ 210,106 $303,675
Fair value 216,358 299,832
I. BUSINESS SEGMENT INFORMATION
The Company's reportable segments are based on the Company's strategic
business operating units, and include a ShopKo Retail segment (which includes
ShopKo stores hardlines and softlines merchandise and retail health operations,
comprised of pharmacy and optical centers) and a Pamida Retail segment (which
includes Pamida stores hardlines and softlines 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.
60
Summarized financial information concerning the Company's reportable
segments is shown in the following table (in thousands):
Fiscal Years
------------
2003 2002 2001
---- ---- ----
Net sales
ShopKo Retail $ 2,383,473 $ 2,456,094 $ 2,538,920
Pamida Retail 800,615 784,093 835,015
------------- -------------- --------------
Total net sales $ 3,184,088 $ 3,240,187 $ 3,373,935
============= ============== ==============
Earnings (loss) from operations
ShopKo Retail $ 111,751 $ 147,075 $ 151,393
Pamida Retail 11,894 11,256 (12,668)
Corporate (1) (21,715) (37,685) (23,128)
------------- -------------- --------------
Earnings from operations $ 101,930 $ 120,646 $ 115,597
============= ============== ==============
Depreciation and amortization expenses
ShopKo Retail $ 59,647 $ 60,051 $ 64,164
Pamida Retail 23,079 22,641 26,693
Corporate 515 645 805
------------- -------------- --------------
Total depreciation and amortization expenses $ 83,241 $ 83,337 $ 91,662
============= ============== ==============
Capital expenditures
ShopKo Retail $ 49,291 $ 22,742 $ 13,662
Pamida Retail 10,092 8,073 3,485
Corporate 1,049 65 51
------------- -------------- --------------
Total capital expenditures $ 60,432 $ 30,880 $ 17,198
============= ============== ==============
CATEGORY SALES ANALYSIS:
ShopKo Retail
Hardlines $ 1,227,164 $ 1,302,926 $ 1,397,252
Softlines 465,031 491,918 521,310
Retail Health 691,278 661,250 620,358
------------- -------------- --------------
Total net sales $ 2,383,473 $ 2,456,094 $ 2,538,920
============= ============== ==============
Pamida Retail
Hardlines $ 520,230 $ 523,423 $ 579,080
Softlines 130,150 137,201 150,822
Retail Pharmacy 150,235 123,469 105,113
------------- -------------- --------------
Total net sales $ 800,615 $ 784,093 $ 835,015
============= ============== ==============
As of January 31, As of February 1, As of February 2,
2004 2003 2002
---- ---- ----
Assets
ShopKo Retail $ 1,060,986 $ 1,075,964 $ 1,148,847
Pamida Retail 400,351 410,634 653,492
Corporate 17,087 18,369 17,697
------------- -------------- --------------
Total assets $ 1,478,424 $ 1,504,967 $ 1,820,036
============= ============== ==============
(1) Included in Corporate are restructuring charges of $6.0 million in fiscal
2002.
61
J. UNAUDITED QUARTERLY FINANCIAL INFORMATION
Unaudited quarterly financial information is as follows:
(In thousands, except per share data)
FISCAL YEAR ENDED JANUARY 31, 2004
----------------------------------
First Second Third Fourth Year
(13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks) (52 Weeks)
---------- ---------- ---------- ---------- ----------
Net sales $707,917 $764,692 $758,543 $952,936 $3,184,088
Gross margin 182,663 201,732 191,804 241,376 817,575
Net earnings (loss) (4) (1,095) 7,699 964 31,552 39,120
Basic earnings
per common share $ (0.04) $ 0.27 $ 0.03 $ 1.08 $ 1.35
Diluted earnings
per common share $ (0.04) $ 0.26 $ 0.03 $ 1.07 $ 1.33
Weighted average
shares - diluted 29,155 29,249 29,379 29,487 29,317
Price range per common $ 10.08 $ 11.08 $ 12.19 $ 14.00 $ 10.08
Share (2) -$ 12.20 -$ 14.23 -$ 16.67 -$ 17.01 -$ 17.01
--------- --------- --------- --------- -----------
FISCAL YEAR ENDED FEBRUARY 1, 2003
----------------------------------
First Second Third Fourth Year
(13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks)(3) (52 Weeks)
---------- ---------- ---------- ---------- ----------
Net sales $ 728,764 $783,369 $769,610 $ 958,444 $3,240,187
Gross margin 184,925 199,467 190,903 258,005 833,300
Earnings before accounting
change 472 7,205 877 32,679 (3) 41,233 (3)
Net earnings (loss) (185,580) (1) 7,205 877 32,679 (3) (144,819)(1), (3)
Basic earnings before
accounting change
per common share $ 0.02 $ 0.25 $ 0.03 $ 1.13 (3) $ 1.43 (3)
Diluted earnings before
accounting change
per common share $ 0.02 $ 0.25 $ 0.03 $ 1.12 (3) $ 1.41 (3)
Weighted average
shares - diluted 29,210 29,320 29,267 29,253 29,218
Price range per common $ 22.48 $ 21.46 $ 17.00 $ 16.21 $ 22.48
Share (2) -$ 12.51 -$ 15.15 -$ 11.00 -$ 10.76 -$ 10.76
---------- --------- --------- ---------- -----------
(1) Includes cumulative effect of a change in accounting principle for
goodwill of $186,052 ($6.36 per dilutive share).
(2) Price range per common share reflects the highest and lowest closing
stock market prices on the New York Stock exchange during each quarter.
(3) Includes pre-tax restructuring charge of $6.0 million.
(4) Includes increase / (decrease) of net earnings due to adoption of EITF
No. 02-16 of: First Quarter - ($0.9) million, Second Quarter - ($1.6)
million, Third Quarter - $0.1 million and Fourth Quarter - ($0.5)
million.
62
SHOPKO STORES, INC. AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
BALANCE CHARGES
AT TO BALANCE
BEGINNING COSTS & DEDUCTIONS AT END OF
OF YEAR EXPENSES (ADDITIONS) YEAR
--------- -------- ----------- ---------
Year ended February 2, 2002:
Allowance for losses on receivables $ 2,362 $ 973 $ 115 $ 3,220
Inventory valuation reserves 815 1,868 103 2,580
Year ended February 1, 2003:
Allowance for losses on receivables $ 3,220 $ 578 $ 1,187 $ 2,611
Inventory valuation reserves 2,580 582 864 2,298
Year ended January 31, 2004
Allowance for losses on receivables $ 2,611 $ 335 $ 241 $ 2,705
Inventory valuation reserves 2,298 2,257 2,298 2,257
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 9, 2004 By: /S/ SAM K. DUNCAN
---------------------------------
Sam K. Duncan,
Chief Executive Officer, President
(Duly Authorized Officer of Registrant)
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/ SAM K. DUNCAN Chief Executive Officer, President April 9, 2004
- ------------------------- and Director
Sam K. Duncan
/S/ JEFFREY C. GIRARD Vice Chairman, Finance and April 9, 2004
- ----------------------- Administration and Director
Jeffrey C. Girard
/S/ BRIAN W. BENDER Senior Vice President, Chief April 9, 2004
- --------------------- Financial Officer
Brian W. Bender
/S/ PETER J. O'DONNELL Principal Accounting Officer April 9, 2004
- ------------------------
Peter J. O'Donnell
/S/ JACK W. EUGSTER* Chairman of the Board April 9, 2004
- --------------------------
Jack W. Eugster
/S/ DALE P. KRAMER* Director April 9, 2004
- --------------------
Dale P. Kramer
/S/ MARTHA A. MCPHEE* Director April 9, 2004
- -----------------------
Martha A. McPhee
/s/ JOHN G. TURNER* Director April 9, 2004
- ---------------------
John G. Turner
/s/ STEPHEN E. WATSON* Director April 9, 2004
- ------------------------
Stephen E. Watson
/S/ GREGORY H. WOLF* Director April 9, 2004
- ----------------------
Gregory H. Wolf
/S/ RICHARD A. ZONA* Director April 9, 2004
- ----------------------
Richard A. Zona
*By Steven R. Andrews pursuant to Powers of Attorney.
64
EXHIBIT INDEX
SHOPKO STORES, INC.
10-K REPORT
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- ------ ------- ---------------
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.
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.
65
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- ------ ------- ---------------
4.2.1 Rights Agreement Amendment, incorporated by reference to May 1998 Form
8-K.
4.3 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.
4.4 Amended and Restated Loan and Security Agreement dated as of August 19,
2003 ("Amended Secured Credit Facility"), incorporated by reference to
the Registrant's Quarterly Report on Form 10-Q for the 13 weeks ended
August 2, 2003.
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)
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)
66
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, amended and restated
effective August 21, 2002, incorporated by reference from the
Registrant's Form 10-Q, Quarterly Report to the Securities and Exchange
Commission for the 13 weeks ended November 2, 2002. (1)
10.9 ShopKo Directors Deferred Compensation Plan, amended and restated
effective August 21, 2002, incorporated by reference to the
Registrant's Form 10-Q, Quarterly Report to the Securities and Exchange
Commission for the 13 weeks ended November 2, 2002. (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)
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)
67
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- ------ ------- ---------------
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 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)
10.16 Form of Change of Control Severance Agreement between the Company and
Certain Officers and Employees of the Company, incorporated by
reference to the Registrant's Annual Report on Form 10-K for the 52
weeks ended February 2, 2002. (1)
10.17 ShopKo Stores, Inc. Shared Savings Plan (2002 Restatement), formerly
known as ShopKo Stores, Inc. Profit Sharing and Super Saver Plan Trust
Agreement, incorporated by reference to the Registrant's Annual Report
on Form 10-K for the 52 weeks ended February 2, 2002. (1)
10.18 Employment Agreement, dated April 9, 2002 between ShopKo Stores, Inc.
and Jeffrey C. Girard, incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the 13 weeks ended May 4, 2002. (1)
10.19 Employment Agreement, dated October 28, 2002 between ShopKo Stores,
Inc. and Sam K. Duncan, incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the 13 weeks ended November 2, 2002.
(1)
14 * ShopKo Stores, Inc. Code of Business Ethics
68
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- ------ ------- ---------------
21.1* Subsidiaries of the Registrant.
23.1* Consent of Deloitte & Touche LLP.
24.1* Directors' Powers of Attorney.
31.1* Certification of Sam K. Duncan, Chief Executive Officer, President
pursuant to Rule 13a -14(a) of 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) of 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
* Filed herewith
** Furnished herewith
(1) A management contract or compensatory plan or arrangement.
69