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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD (13 WEEKS) ENDED JULY 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 ____________________
Commission file number 1-10876
SHOPKO STORES, INC.
(Exact name of registrant as specified in its Charter)
Wisconsin 41-0985054
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
700 Pilgrim Way, Green Bay, Wisconsin 54304
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (920) 429-2211
Former name, former address and former fiscal year, if changed since last
report: N/A
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes of Common Stock
as of September 3, 2004 is as follows:
Title of Each Class Shares Outstanding
Common Shares 29,446,358
Exhibit Index Page 1 of Page 44
on Page 26
1
SHOPKO STORES, INC.
FORM 10-Q
FOR THE 13 WEEKS and 26 WEEKS ENDED JULY 31, 2004
INDEX
Page
----
Part I Item 1 - Financial Statements
Condensed Consolidated Statements of Operations for the
13 weeks ended July 31, 2004 and August 2, 2003 3
Condensed Consolidated Statements of Operations for the
26 weeks ended July 31, 2004 and August 2, 2003 4
Condensed Consolidated Balance Sheets as of July 31,
2004, August 2, 2003 and January 31, 2004 5
Condensed Consolidated Statements of Cash Flows for
the 26 weeks ended July 31, 2004 and August 2, 2003 6
Condensed Consolidated Statement of Shareholders'
Equity for the 26 weeks ended July 31, 2004 7
Notes to Condensed Consolidated Financial Statements 8-10
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-21
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 21
Item 4 - Controls and Procedures 21-22
Part II Item 1 - Legal Proceedings 23
Item 4 - Submission of Matters to a Vote of Security Holders 23-24
Item 6 - Exhibits and Reports on Form 8-K 24-25
Signatures 25
2
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SHOPKO STORES, INC. AND SUBSIDIARIES SECOND QUARTER (13 WEEKS)
ENDED
JULY 31, AUGUST 2,
2004 2003
---- ----
(In thousands, except per share data) (UNAUDITED) (UNAUDITED)
Revenues:
Net sales $775,576 $764,692
Licensed department rentals and other income 3,254 3,240
-------- --------
778,830 767,932
Costs and expenses:
Cost of sales 572,282 562,960
Selling, general and administrative expenses 163,208 161,010
Depreciation and amortization expenses 21,157 20,608
-------- --------
756,647 744,578
Earnings from operations 22,183 23,354
Interest expense 8,577 10,581
-------- --------
Income before income taxes 13,606 12,773
Income tax provision 5,306 5,074
-------- --------
Net income $ 8,300 $ 7,699
======== ========
Net income per share of common stock:
Basic $ 0.28 $ 0.27
======== ========
Diluted $ 0.28 $ 0.26
======== ========
Weighted average number of common shares outstanding:
Basic 29,291 28,975
Diluted 29,514 29,249
See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SHOPKO STORES, INC. AND SUBSIDIARIES YEAR TO DATE (26 WEEKS)
ENDED
JULY 31, AUGUST 2,
2004 2003
---- ----
(In thousands, except per share data) (UNAUDITED) (UNAUDITED)
Revenues:
Net sales $1,510,609 $1,472,609
Licensed department rentals and other income 6,349 6,287
---------- ----------
1,516,958 1,478,896
Costs and expenses:
Cost of sales 1,123,504 1,088,214
Selling, general and administrative expenses 323,946 316,931
Depreciation and amortization expenses 42,658 41,579
---------- ----------
1,490,108 1,446,724
Earnings from operations 26,850 32,172
Interest expense 17,145 21,216
---------- ----------
Income before income taxes 9,705 10,956
Income tax provision 3,786 4,352
---------- ----------
Net income $ 5,919 $ 6,604
========== ==========
Net income per share of common stock:
Basic $ 0.20 $ 0.23
========== ==========
Diluted $ 0.20 $ 0.23
========== ==========
Weighted average number of common shares outstanding:
Basic 29,251 28,953
Diluted 29,491 29,202
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED BALANCE SHEETS
SHOPKO STORES, INC. AND SUBSIDIARIES SECOND QUARTER AS OF FISCAL YEAR END
JULY 31, AUGUST 2, JANUARY 31,
2004 2003 2004 *
---- ---- ------
(In thousands) (UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 32,819 $ 36,507 $ 22,786
Receivables, less allowance for losses of $2,464
$2,749 and $2,705, respectively 51,714 48,744 62,808
Merchandise inventories 613,364 585,141 569,315
Other current assets
9,595 11,528 10,874
----------- ----------- -----------
Total current assets 707,493 681,920 665,783
Other assets and deferred charges 7,697 10,970 7,584
Intangible assets, net of accumulated amortization of $12,551, $15,438 25,985 20,389 23,629
and $10,771 respectively
Property and equipment, net of accumulated
depreciation of $831,294, $758,679 and
$796,083; impairment reserve of $8,005, $16,943
and $14,032, respectively
761,827 780,651 781,428
----------- ----------- -----------
Total assets $ 1,503,001 $ 1,493,930 $ 1,478,424
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 118,825 $ 53,159 $ 82,270
Accounts payable - trade 260,010 250,988 253,313
Accrued compensation and related taxes 35,920 38,648 35,509
Deferred taxes and other accrued liabilities 102,028 107,692 112,291
Accrued income and other taxes 36,744 34,542 45,543
Current portion of long-term obligations and leases 62,473 94,343 63,797
----------- ----------- -----------
Total current liabilities 616,000 579,372 592,723
Long-term obligations and leases, less current portion 242,876 309,214 246,990
Other long-term obligations 23,740 26,306 25,206
Deferred income taxes 22,803 23,201 22,803
Shareholders' equity:
Common stock 313 310 312
Additional paid-in capital 392,871 389,943 391,976
Retained earnings 244,964 205,834 238,729
Less treasury stock
(40,566) (40,250) (40,315)
----------- ----------- -----------
Total shareholders' equity 597,582 555,837 590,702
----------- ----------- -----------
Total liabilities and shareholders' equity $ 1,503,001 $ 1,493,930 $ 1,478,424
=========== =========== ===========
* Condensed from audited financial statements.
See notes to condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SHOPKO STORES, INC. AND SUBSIDIARIES YEAR TO DATE (26 WEEKS) ENDED
JULY 31, AUGUST 2,
(In thousands) 2004 2003
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income $ 5,919 $ 6,604
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 42,658 41,579
Impairment charges 704 0
Gain on sale of property and equipment (2,733) (2,007)
Deferred income taxes -0- 187
Change in assets and liabilities:
Receivables 11,094 765
Merchandise inventories (44,049) (22,410)
Other current assets 1,279 2,217
Other assets 786 1,882
Accounts payable 6,697 9,822
Accrued liabilities (18,548) (27,940)
Other long-term obligations (1,466) (513)
-------- --------
Net cash provided in operating activities 2,341 10,186
-------- --------
Cash flows from investing activities:
Payments for property and equipment (31,416) (13,978)
Proceeds from the sale of property and equipment 11,171 2,540
Payments for pharmacy customer lists (3,630) (1,901)
-------- --------
Net cash used in investing activities (23,875) (13,339)
-------- --------
Cash flows from financing activities:
Proceeds from short-term borrowings 36,555 13,137
Payments of debt and capital lease obligations (5,576) (7,593)
Sale of common stock due to exercise of stock options 839 363
Purchase of treasury stock (251) -0-
-------- --------
Net cash provided by financing activities 31,567 5,907
-------- --------
Net increase in cash and cash equivalents 10,033 2,754
Cash and cash equivalents at beginning of period 22,786 33,753
Cash and cash equivalents at end of period $ 32,819 $ 36,507
-------- --------
Supplemental cash flow information:
Noncash investing and financial activities -
Capital lease obligations incurred $ - $ -
Capital lease obligations terminated $ - $ 3,989
See notes to condensed consolidated financial statements
6
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SHOPKO STORES, INC. AND SUBSIDIARIES
(UNAUDITED)
Common Stock Additional Treasury Stock Total
---------------- Paid-in Retained -------------------- ------------------
(In thousands) Shares Amount Capital Earnings Shares Amount Shares Amount
- -------------- ------ ------ ------- -------- ------ ------ ------ ------
BALANCES AT JANUARY 31, 2004 31,225 $ 312 $ 391,976 $ 238,729 (1,908) $ (40,315) 29,317 $ 590,702
Net income 5,919 5,919
Forfeiture of restricted stock (10) (117) 78 (10) (39)
Sales of common stock under
option plans 92 1 838 92 839
Income tax benefit related to
stock options 174 174
Restricted stock expense 238 238
Purchase of treasury stock (17) (251) (17) (251)
------ ------- --------- --------- ------ ---------- ------ ---------
BALANCES AT July 31, 2004 31,307 $ 313 $ 392,871 $ 244,964 (1,925) $ (40,566) 29,382 $ 597,582
====== ======= ========= ========= ====== ========== ====== =========
See notes to condensed consolidated financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. Interim Financial Statements
The Company operates on a 52/53-week fiscal year basis. The 2004 fiscal year
will end on January 29, 2005 and the 2003 fiscal year ended January 31, 2004.
The accompanying condensed consolidated financial statements have been prepared
by the Company without audit. However, the foregoing financial statements
reflect all adjustments (which include only normal recurring adjustments) which
are, in the opinion of Company management, necessary to present fairly the
consolidated financial position of the Company as of July 31, 2004 and August 2,
2003, and the results of operations and cash flows for the then ended periods.
These interim results are not necessarily indicative of the results of the
fiscal years as a whole because the operations of the Company are highly
seasonal. The fourth fiscal quarter has historically contributed a significant
part of the Company's earnings due to the Christmas selling season.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission. The Company's
fiscal 2003 Annual Report on Form 10-K contains a summary of significant
accounting policies and includes the consolidated financial statements and the
notes to the consolidated financial statements. The same accounting policies are
followed in the preparation of interim reports. The accompanying unaudited
condensed consolidated financial statements should be read in conjunction with
the Company's consolidated financial statements and notes thereto for the fiscal
year ended January 31, 2004.
B. Restructuring Reserve
In the fourth quarter of fiscal 2000, the Company announced a strategic
reorganization plan to close 23 ShopKo retail stores, a distribution center, and
to downsize its corporate workforce. The inventory and fixed asset write-down
reserves were recorded in the fourth quarter of fiscal 2000. All stores and the
distribution center were closed and related employee terminations were made in
the first quarter of fiscal 2001. The Company utilized all of the employee
severance reserve prior to fiscal 2002. Of the 24 properties initially covered
by the restructuring reserve, sixteen were disposed of in subsequent years,
leaving eight remaining properties covered by the restructuring reserve as of
the beginning of fiscal 2004.
During the first half of fiscal 2004, the Company sold two owned reserve
properties and no additional leases were terminated. The Company has signed
contracts to sell the remaining two owned reserve properties in the third
quarter of fiscal 2004. If the sales occur, the net proceeds will be less than
previously anticipated. Thus, an additional charge of $0.7 million was recorded
to increase the property write-down reserve. As of July 31, 2004, the remaining
property write-down reserve was $6.5 million and the remaining reserve for lease
termination and related property carrying costs, as well as other costs, was
$13.9 million. For balance sheet reporting purposes, the portion of the reserve
for the lease termination, property carrying and other costs to be paid in the
next 12 months is reported in accrued expenses as a current liability and the
remainder ($12.4 million) is recorded in other long-term obligations at July 31,
2004. The Company believes the reserves are adequate, and continues to negotiate
lease terminations with landlords. However, lease terminations have been slower
than anticipated. Accordingly, the level of reserves could prove to be
inadequate and additional charges may be required. The
8
Company will continue to evaluate the adequacy of the amounts reserved as it
proceeds with the termination of the leases.
Activity in the restructuring reserve (in thousands) during the first half of
fiscal 2004:
Lease termination and
property carrying costs
-----------------------
Balance as of January 31, 2004 $14,505
Cash Payments 615
-------
Balance as of July 31, 2004 $13,890
=======
C. Stock-Based Employee Compensation Plans
The Company has various stock-based employee compensation plans, which are
described more fully in Note F of the Notes to Consolidated Financial Statements
in the Company's fiscal 2003 Annual Report on Form 10-K. The Company accounts
for those plans under the recognition and measurement principles of APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and related Interpretations.
No stock-based employee compensation cost is reflected in results of operations
for stock option awards, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant.
The 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 (in thousands):
SECOND QUARTER YEAR TO DATE
(13 WEEKS) ENDED (26 WEEKS) ENDED
------------------------ -----------------------
July 31, August 2, July 31, August 2,
-------- --------- -------- ---------
2004 2003 2004 2003
---- ---- ---- ----
Net income as reported $8,300 $7,699 $5,919 $6,604
Add: Stock-based employee compensation expense included
in reported net income, net of related tax
effects 121 123 195 250
Deduct: Total stock-based employee compensation expense
determined under fair value method for all option
awards, net of related tax effects (1,074) (416) (1,515) (533)
------ ------ ------ ------
Pro forma net income $7,347 $7,406 $4,599 $6,321
====== ====== ====== ======
Net income per share:
Basic - as reported $ 0.28 $ 0.27 $ 0.20 $ 0.23
Basic - pro forma $ 0.25 $ 0.26 $ 0.16 $ 0.22
Diluted - as reported $ 0.28 $ 0.26 $ 0.20 $ 0.23
Diluted - pro forma $ 0.25 $ 0.25 $ 0.16 $ 0.22
9
D. Business Segment Information
The Company's reportable segments are based on the Company's strategic business
operating units and include a ShopKo Retail segment and a Pamida Retail segment,
each of which includes the following product categories: hardlines/home,
softlines, and retail health services.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in the Company's fiscal 2003 Annual
Report on Form 10-K. The Company evaluates performance based on earnings from
operations of the respective business segments.
Summary financial information concerning the Company's reportable segments is
shown in the following table (in thousands).
SECOND QUARTER (13 WEEKS) ENDED YEAR TO DATE (26 WEEKS) ENDED
------------------------------------ ---------------------------------
JULY 31, 2004 AUGUST 2, 2003 JULY 31, 2004 AUGUST 2, 2003
Net sales
ShopKo Retail $ 568,801 $ 558,810 $ 1,121,600 $ 1,089,337
Pamida Retail 206,775 205,882 389,009 383,272
---------- ---------- ----------- ------------
Total net sales $ 775,576 $ 764,692 $ 1,510,609 $ 1,472,609
---------- ---------- ----------- ------------
Earnings from operations
ShopKo Retail $ 23,314 $ 24,858 $ 37,159 $ 40,671
Pamida Retail 6,166 6,304 3,728 4,932
Corporate (7,297) (7,808) (14,037) (13,431)
---------- ---------- ----------- ------------
Earnings from operations $ 22,183 $ 23,354 $ 26,850 $ 32,172
---------- ---------- ----------- ------------
The Company's areas of operations are principally in the United States. No major
customer accounted for a significant amount of consolidated revenue during the
second quarter and first half of fiscal 2004 and fiscal 2003.
E. Commitments & Contingencies
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 $9.9 million as of July 31, 2004.
10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE SUMMARY:
ShopKo Stores, Inc. is a customer-driven retailer of quality goods and services
in two distinct market environments. Headquartered in Green Bay, Wisconsin, the
company operates 357 stores in 23 states throughout the Midwest, Western
Mountain and Pacific Northwest. One hundred forty multi-department ShopKo stores
are located in mid-sized to larger cities and 217 convenient one-stop Pamida
stores provide Hometown Value to customers in smaller communities of rural
America.
The Company remains focused on generating positive sales growth, improving
profitability, and reducing debt levels. In addition, fiscal year 2004 capital
expenditures are planned to increase in support of the Company's business goals
and are primarily associated with store remodels, consolidation of the Omaha
Distribution Centers, expanding the Company's retail health business, and
improving its information technology infrastructure.
In the second quarter of fiscal 2004, consolidated sales increased 1.4 percent
to $775.6 million compared with $764.7 million last year. Consolidated
comparable store sales for the second quarter increased 1.7 percent. The ShopKo
division's comparable store sales increased 2.1 percent primarily due to a 3.2
percent increase in the home/hardlines category, as well as increased
promotional sales efforts. For the sixth consecutive quarter, Pamida had
positive comparable store sales. For the second quarter of fiscal 2004,
comparable store sales increased 0.7 percent, primarily due to a significant
increase in the retail health category, partially offset by declines in general
merchandise sales.
In the first half of fiscal 2004, consolidated sales increased 2.6 percent to
$1,510.6 million compared with $1,472.6 million last year. Consolidated
comparable store sales increased 2.8 percent. The ShopKo division's comparable
store sales increased 3.1 percent primarily due to a 4.4 percent increase in the
home/hardlines category, as well as increased promotional sales efforts. Pamida
comparable store sales increased 1.9 percent, primarily due to a significant
increase in the retail health category, partially offset by declines in general
merchandise sales.
The retail health category has become an increasing percentage of the Company's
sales. In the second quarter of fiscal 2004, retail health sales made up 30.3
percent and 21.2 percent of ShopKo and Pamida retail segment sales,
respectively. In the first half of fiscal 2004, retail health sales made up 31.0
percent and 22.1 percent of ShopKo and Pamida segment sales, respectively.
Consolidated gross margin as a percent of net sales was 26.2 percent for the
second quarter compared with 26.4 percent last year. In the first half of fiscal
2004, gross margin as a percent of net sales was 25.6 percent compared with 26.1
percent last year. The decrease in gross margin as a percent of net sales for
the second quarter and first half of fiscal 2004 was primarily attributable to
increased promotional sales mix in the ShopKo division.
Consolidated selling, general and administrative expenses (SG&A) as a percent of
net sales for the second quarter were 21.0 percent compared with 21.1 percent
last year. In the first half of fiscal 2004, SG&A as a percent of net sales were
21.4 percent compared with 21.5 percent last year. The slight decrease in SG&A
as a percent of net sales for the second quarter and first half of fiscal 2004
was primarily attributable to sales leveraging, partially offset by increased
payroll expenses.
11
Interest expense for the second quarter of the fiscal 2004 decreased 18.9
percent to $8.6 million and decreased 19.2 percent to $17.1 million for the
first half of fiscal 2004 primarily due to lower debt balances.
Net income for the second quarter was $8.3 million compared with $7.7 million
last year. Diluted income per share was $0.28 compared with $0.26 last year. In
the first half of fiscal 2004, net income was $5.9 million compared with $6.6
million last year. Diluted income per share was $0.20 compared with $0.23 last
year. Although the Company's increased promotional efforts generated additional
customer traffic and sales, these efforts had a negative impact on gross margin
dollars which contributed to the decline in net income.
Capital expenditures for the second quarter of fiscal 2004 were $21.0 million
compared with $11.1 million last year. In the first half of fiscal 2004, capital
expenditures were $31.4 million compared with $14.0 million last year. The
increase in the second quarter and first half of fiscal 2004 capital
expenditures are related to the completion of the Omaha distribution center
expansion and the remodeling activity in both divisions. Service to the stores
was maintained during the expansion and consolidation of the Omaha distribution
center which is now complete.
During the second quarter of fiscal 2004, inventory levels increased by $28.2
million, or 4.8 percent, compared with the second quarter of last year,
principally due to expanded merchandising assortments and deeper in-stock levels
to support the merchandising and sales growth initiatives, as well as planned
extended selling seasons for seasonal goods. Inventory management continues to
be a focus in an effort to maintain the appropriate inventory levels while
maximizing sales and inventory turnover.
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, which includes other general merchandise
retailers, supermarkets, drug and specialty stores, and mail order merchants.
The Company continues to focus on achieving profitable sales growth through a
mix of promotional sales strategies and gross margin improvement initiatives.
The Company expects to continue to be challenged by competitor store openings
for the foreseeable future. The Company has undertaken and continues to take
actions to contend with the competition and to increase sales. Such actions
include merchandising initiatives and advertising strategies as well as
investments in remodeling and development plans, which include the addition of
pharmacies to certain existing Pamida stores, the opening of new Pamida stores,
and the development and opening of Shopko freestanding drug stores. While there
can be no assurance that such efforts will succeed, the Company is encouraged by
the positive sales growth and increased store traffic experienced in the first
half of fiscal 2004.
The following table sets forth items from the Company's unaudited condensed
consolidated financial statements for the second quarter and year to date of
fiscal 2004 and fiscal 2003 as a percentage of net sales:
12
SECOND QUARTER YEAR TO DATE
(13 WEEKS) (26 WEEKS)
-------------------- -------------------
FISCAL FISCAL FISCAL FISCAL
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
Net sales 100.0% 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.4 0.4 0.4 0.4
----- ----- ----- -----
100.4 100.4 100.4 100.4
Cost of sales 73.8 73.6 74.4 73.9
Gross margin 26.2 26.4 25.6 26.1
Selling, general and administrative expenses 21.0 21.1 21.4 21.5
Depreciation and amortization expenses 2.7 2.7 2.8 2.8
----- ----- ----- -----
23.7 23.8 24.2 24.3
Earnings from operations 2.9 3.1 1.8 2.2
Interest expense 1.1 1.4 1.1 1.4
----- ----- ----- -----
Earnings before income taxes 1.8 1.7 0.7 0.7
Income tax provision 0.7 0.7 0.3 0.3
----- ----- ----- -----
Net income 1.1% 0.9% 0.4% 0.5%
===== ===== ===== =====
The Company has two business segments: a ShopKo Retail segment and a Pamida
Retail segment. The following tables set forth items from the Company's business
segments as percentages of net sales:
SECOND QUARTER YEAR TO DATE
(13 WEEKS) (26 WEEKS)
-------------------- -------------------
FISCAL FISCAL FISCAL FISCAL
2004 2003 2004 2003
----- ----- ----- -----
SHOPKO RETAIL SEGMENT
Net sales 100.0% 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.5 0.5 0.5 0.5
----- ----- ----- -----
100.5 100.5 100.5 100.5
Cost of sales 74.0 73.6 74.5 74.0
Gross margin 26.0 26.4 25.5 26.0
Selling, general and administrative expenses 19.8 19.8 19.9 20.1
Depreciation and amortization expenses 2.7 2.6 2.7 2.7
----- ----- ----- -----
22.5 22.4 22.6 22.8
Earnings from operations 4.0% 4.5% 3.4% 3.7%
===== ===== ===== =====
13
SECOND QUARTER YEAR TO DATE
(13 WEEKS) (26 WEEKS)
-------------------- -------------------
FISCAL FISCAL FISCAL FISCAL
2004 2003 2004 2003
---- ---- ---- ----
PAMIDA RETAIL SEGMENT
Net sales 100.0% 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.2 0.2 0.2 0.2
----- ----- ----- -----
100.2 100.2 100.2 100.2
Cost of sales 73.3 73.5 73.9 73.7
Gross margin 26.7 26.5 26.1 26.3
Selling, general and administrative expenses 21.1 20.8 22.2 22.1
Depreciation and amortization expenses 2.8 2.8 3.1 3.0
----- ----- ----- -----
23.9 23.6 25.3 25.1
Income from operations 3.0% 3.1% 1.0% 1.4%
===== ===== ===== =====
NET SALES:
The following table presents the Company's consolidated net sales for the second
quarter and year to date of fiscal 2004 and fiscal 2003:
SECOND QUARTER
(13 WEEKS) % INCREASE
----------------------- ---------------------
FISCAL FISCAL
2004 2003 TOTAL ** COMP*
---- ---- -------- -----
ShopKo Retail $ 568.8 $ 558.8 1.8% 2.1%
Pamida Retail 206.8 205.9 0.4% 0.7%
------- ------- --- ---
Consolidated $ 775.6 $ 764.7 1.4% 1.7%
======= ======= === ===
YEAR TO DATE
(26 WEEKS) % INCREASE
------------------------ ---------------------
FISCAL FISCAL
2004 2003 TOTAL ** COMP*
---- ---- -------- -----
ShopKo Retail $1,121.6 $ 1,089.3 3.0% 3.1%
Pamida Retail 389.0 383.3 1.5% 1.9%
-------- --------- --- ---
Consolidated $1,510.6 $ 1,472.6 2.6% 2.8%
======== ========= === ===
* Comparable store sales represent sales of those stores open during both
fiscal years and do not include sales from the ShopKo wholesale optical
lab.
** ShopKo division total sales variance reflects sales from one ShopKo closed
location in fiscal 2004. Pamida division total sales variance reflects
sales in the prior year periods from seven locations which have been
closed and not replaced, and two new Pamida locations opened in fiscal
2003. Sales variance also reflects sales from two closed Pamida locations
and one new location in fiscal 2004.
14
The 2.1 percent increase in ShopKo comparable store sales during the second
quarter of fiscal 2004 was primarily the result of increased sales in the
hardlines/home category, as well as increased promotional sales efforts. Changes
in ShopKo comparable store sales in the second quarter of fiscal 2004 by
category were as follows: Hardlines/Home, 3.2%; Softlines, 0.5%; and Retail
Health, 1.2%. The 0.7 percent increase in Pamida comparable store sales was
attributable to increased pharmacy sales, which were aided by the purchase of
customer pharmacy files and pharmacy installations in existing stores, offset by
weak sales in apparel. Changes in Pamida comparable store sales in the second
quarter of fiscal 2004 by category were as follows: Pharmacy, 20.9%; Hardlines,
(2.7)%; and Softlines, (7.9)%.
The 3.1 percent increase in ShopKo comparable store sales during the first half
of fiscal 2004 was primarily related to increased sales in the hardlines/home
category, as well as increased promotional sales. Changes in ShopKo comparable
store sales in the first half of fiscal 2004 by category were as follows:
Hardlines/Home, 4.4%; Softlines, 1.9%; and Retail Health, 1.7%. The 1.9 percent
increase in Pamida comparable store sales was attributable to increased pharmacy
sales, which were aided by the purchase of customer pharmacy files and pharmacy
installations in existing stores. Changes in Pamida comparable store sales in
the first half of fiscal 2004 by category were as follows: Pharmacy, 22.3%;
Hardlines, (1.3)%; and Softlines, (8.3)%.
The Company's store activity is summarized below:
13 Weeks Ended Year Ended
-------------------- -----------
July 31, August 2, January 31,
2004 2003 2004
---- ---- ----
SHOPKO STORES
Beginning number of stores 141 141 141
Openings 0 0 0
Closings 1 0 0
--- --- ---
Ending number of stores 140 141 141
=== === ===
PAMIDA STORES
Beginning number of stores 218 223 223
Openings 1 0 2
Closings 2 4 7
--- --- ---
Ending number of stores 217 219 218
=== === ===
GROSS MARGIN:
Consolidated gross margin dollars increased 0.8 percent to $203.3 million in the
second quarter of fiscal 2004 from $201.7 million for the same period last year.
Consolidated gross margin, as a percent of net sales for the second quarter of
fiscal 2004, was 26.2 percent compared with 26.4 percent for the same period
last year. This decrease was primarily attributable to increased promotional
sales mix (i.e. promotional sales as a percentage of the total sales) in the
ShopKo division.
ShopKo's gross margin dollars increased 0.6 percent to $148.1 million in the
second quarter of fiscal 2004 from $147.3 million for the same period last year.
ShopKo's gross margin, as a percent of net sales, was 26.0 percent compared with
26.4 percent for the same period last year. The rate decrease was primarily due
to lower merchandise margins net of allowances (33 basis points) due to higher
promotional sales mix partially offset by reduced freight and distribution costs
(27 basis points). Pamida's gross margin dollars increased 1.3 percent to $55.2
million in the second quarter of fiscal 2004 from $54.5 million for the same
period last year. As a percent of sales, Pamida's gross margin was 26.7 percent
in the second quarter of fiscal 2004 compared
15
with 26.5 percent for the same period last year. The increase was primarily due
to an improved merchandise margin rate, resulting from a reduction in clearance
markdowns.
Consolidated gross margin dollars increased 0.7 percent to $387.1 million in the
first half of fiscal 2004 from $384.4 million for the same period last year.
Consolidated gross margin, as a percent of net sales for the first half of
fiscal 2004, was 25.6 percent compared with 26.1 percent for the same period
last year. The decrease in percent of sales was primarily attributable to
increased promotional sales mix in the ShopKo division.
ShopKo's gross margin dollars increased 0.7 percent to $285.7 million in the
first half of fiscal 2004 from $283.7 million for the same period last year.
ShopKo's gross margin, as a percent of net sales, was 25.5 percent compared with
26.0 percent for the same period last year. The percent of sales decrease was
primarily due to lower merchandise margins net of allowances (69 basis points)
attributable to increased promotional sales partially offset by reduced
inventory shrinkage expense (11 basis points). Pamida's gross margin dollars
increased 0.7 percent to $101.4 million in the first half of fiscal 2004 from
$100.7 million for the same period last year. As a percent of sales, Pamida's
gross margin was 26.1 percent in the first half of fiscal 2004 compared with
26.3 percent for the same period last year. The decrease was primarily due to a
reduction in inventory shrinkage provision in the first quarter of fiscal 2003.
The Company uses the last-in, first-out (LIFO) method for substantially all
inventories. There was no LIFO charge or credit for the quarters ended July 31,
2004 and August 2, 2003. There was no difference between the LIFO and FIFO cost
methods at July 31, 2004, August 2, 2003 and January 31, 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Consolidated selling, general and administrative (SG&A) expense dollars
increased 1.4 percent, but expenses as a percent of net sales for the second
quarter of fiscal 2004 were 21.0 percent compared with 21.1 percent for the same
period last year. The rate improvement was primarily attributable to sales
leveraging, i.e., sales increasing at a faster rate than the increase in expense
dollars (30 basis points), partially offset by increased store payroll expenses
(31 basis points).
ShopKo's SG&A expenses as a percent of net sales for the second quarter of
fiscal 2004 were 19.8 percent, the same as the second quarter of fiscal 2003
primarily due to sales leveraging (35 basis points), partially offset by higher
store payroll (27 basis points). Pamida's SG&A expenses for the second quarter
of fiscal 2004 were 21.1 percent of net sales compared with 20.8 percent for the
second quarter last year. The increase was driven by higher pharmacy payroll (40
basis points), and pre-opening expense related to remodeling (17 basis points),
partially offset by the gain on a lease termination for a closed location (30
basis points).
Consolidated SG&A expense dollars increased but expenses as a percent of net
sales for the first half of fiscal 2004 were 21.4 percent compared with 21.5
percent for the second quarter of fiscal 2003. The decrease in SG&A as a percent
of sales for the second quarter and first half of fiscal 2004 was primarily
attributable to sales leveraging (54 basis points), partially offset by
increased store payroll expenses (23 basis points) and other various
individually immaterial expense variations that on the aggregate comprise the
remainder of the difference.
ShopKo's SG&A expenses as a percent of net sales for the first half of fiscal
2004 were 19.9 percent compared with 20.1 percent last year. The decrease was
primarily due to sales leveraging (58 basis points), partially offset by higher
store payroll (19 basis points) and other various individually immaterial
expense variations that on the aggregate comprise the remainder of the
difference. Pamida's SG&A expenses as a percent of net sales for the first half
of fiscal 2004 were 22.2 percent compared with 22.1 percent last year. The
increase was driven by higher pharmacy payroll (38 basis points), and
pre-opening expense related to remodeling (31 basis points), partially offset by
16
sales leveraging (33 basis points) and by the gain on a lease termination for a
closed location (16 basis points).
DEPRECIATION AND AMORTIZATION EXPENSE:
Consolidated depreciation and amortization expenses were $21.2 million for the
second quarter of fiscal 2004 compared with $20.6 million for the same period
last year. For the first half of fiscal 2004, depreciation and amortization
expenses were $42.7 million compared with $41.6 million for the same period last
year. As a percent of net sales, consolidated depreciation and amortization
expenses were flat in fiscal 2004 from comparable fiscal 2003 periods.
INTEREST EXPENSE:
Interest expense for the second quarter of the fiscal 2004 decreased by $2.0
million, or 18.9 percent, to $8.6 million compared with the same period last
year. The $2.0 million decrease was primarily due to a $32.5 million reduction
in debt levels compared to the second quarter of last year. For the first half
of fiscal 2004, interest expense decreased 19.2 percent to $17.1 million
compared with the same period last year.
INCOME TAXES:
The Company's effective tax rate for the second quarter and first half of fiscal
2004 was 39.0 percent compared with 39.7 percent for the second quarter and
first half of fiscal 2003. The decrease in the Company's effective tax rate is
due to a lower state income tax rate, net of federal tax benefits.
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 the financial statements and related
notes. Since future events and their impact cannot be determined with certainty,
the actual results will inevitably differ from the Company's estimates. Such
differences could be material to the financial statements.
Management believes that its application of applicable accounting policies, and
the estimates inherently required therein, are reasonable. Management
periodically reevaluates these accounting policies and estimates in the
preparation of the financial statements and makes adjustments when facts and
circumstances dictate a change. The Company has identified certain critical
accounting policies, which are described below.
Merchandise inventory. 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
17
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 the inventory is returnable to 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.
Restructuring Reserve. In connection with the reorganization plan
announced in the fourth quarter of fiscal 2000 to close 23 ShopKo retail stores,
a distribution center, and to downsize its corporate workforce, the Company
incurred a pre-tax charge of $125.0 million related to inventory and property
write-downs, lease termination and property carrying costs, and employee
separation and other costs. The inventory and fixed asset write-down reserves
were recorded in the fourth quarter of fiscal 2000, and the Company closed all
23 stores and the distribution center in fiscal 2001. The Company utilized all
of the employee severance reserve prior to fiscal 2002. Of the 24 properties
initially covered by the restructuring reserve, sixteen were disposed of in
subsequent years, leaving eight remaining properties covered by the
restructuring reserve as of the beginning of fiscal 2004. During the first half
of fiscal 2004, two owned properties were sold and no additional leases were
terminated. As of the end of the second quarter of 2004, there were six
remaining properties (two owned reserve and four leased properties) covered by
the restructuring reserve. The Company has signed contracts to sell the
remaining two owned reserve properties in the third quarter of 2004. If the
sales occur the net proceeds will be less than previously anticipated. Thus, an
additional charge of $0.7 million was recorded in the second quarter of fiscal
2004 to increase the property write-down reserve.
The Company believes the reserves are adequate, and continues to negotiate lease
terminations with landlords. However, lease terminations have been slower than
anticipated and 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 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. The Company recognizes vendor allowances based on the
provisions of EITF No. 02-16, which was adopted by the Company in fiscal year
2003.
Stock Based Compensation. As discussed in the Company's fiscal 2003 Annual
Report on Form 10-K, the Company follows Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees", which does not require
recognition of expense for stock options when the exercise price of an option
equals, or exceeds, the fair market value of the common stock on the date of
grant.
The Financial Accounting Standards Board has released for comment an Exposure
Draft entitled, "Share-Based Payment - An Amendment to FASB Statements No. 123
and 95", which revises the rules governing stock option accounting. The exposure
draft requires expense recognition of stock options and certain employee stock
purchase plans in a company's statement of operations. The comment period ended
June 30, 2004. The effective date for this statement would be fiscal 2005. The
Company will adopt any new rules required by the FASB when they are effective.
The pro forma impact on the second quarter of fiscal 2004 of expensing unvested
stock options is
18
disclosed, as required under FASB Statement No. 123, "Accounting for
Stock-Based Compensation" in Note C to the unaudited Condensed Consolidated
Financial Statements. The impact of the exposure draft is not expected to be
materially different than the impact of FASB Statement No. 123.
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 $2.3 million for
the first half of fiscal 2004 compared with cash provided by operating
activities of $10.2 million for the same period last year. The change in cash
used in operating activities in comparison to the first half of fiscal 2003 was
primarily due to a $21.6 million increase in the change in merchandise
inventories, partially offset by a $12.4 million decrease in accrued liabilities
from their respective year-end balances. The decrease in accrued liabilities was
primarily due to reduced accrued compensation and income tax liabilities. The
Company finances a significant portion of its operations through vendor
financing. As of July 31, 2004, accounts payable totaled $260.0 million, an
increase of $9.0 million compared with last year due to the higher levels of
inventory and the timing of payments related to certain pharmacy payables,
relative to the quarter end date. The Company currently maintains favorable
terms with its vendors, however these terms could change based on the Company's
future operating performance.
As of July 31, 2004, the Company had $207.8 million of long-term debt
outstanding, consisting of $155.3 million of Senior Unsecured Notes and
approximately $52.5 million of long-term notes payable. The Senior Unsecured
Notes have maturity dates in November 2004 and March 2022, with approximately
$55.3 million in principal amount of the Senior Unsecured Notes maturing
November 2004. The Company anticipates funding the $55.3 million principal
payment of the Senior Unsecured Notes through operating cash flow and
availability under the Amended Secured Credit Facility (as described below). A
more detailed description of these Senior Unsecured Notes is contained in Note D
of the Notes to Consolidated Financial Statements in the Company's fiscal 2003
Annual Report on Form 10-K. Subject to certain limitations set forth in our
Amended Secured Credit Facility, proceeds of the Facility or funds from other
sources may be used to retire or repurchase Senior Unsecured Notes. Payments due
under the Senior Unsecured Notes could be accelerated in the event the Company
defaults on any debt obligation in excess of $25.0 million.
In addition, the Company had $118.8 million outstanding under its Amended
Secured Credit Facility at the end of the second quarter of fiscal 2004 compared
with $53.2 million outstanding at the end of the second quarter of fiscal 2003.
During the third quarter of fiscal 2003, the Company entered into the Amended
Secured Credit Facility, which is secured by the Company's inventory and
accounts receivable. The Amended Secured Credit Facility provides for revolving
credit borrowings of up to $450.0 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 Company had
$270.4 million in availability at the end of the second quarter.
The Amended Secured Credit Facility terminates August 19, 2007, and limits the
payment of dividends, new indebtedness, repurchases of common stock, and capital
expenditures, and requires the Company to meet financial performance covenants
relating to borrowing availability and minimum operating cash flows as defined
therein. The consequences of failing to comply with the various covenants and
requirements range from increasing the interest rate, to restrictions on cash
management, to default and acceleration of the debt. The indebtedness under the
Amended Secured Credit Facility can be declared immediately due and payable in
the event other Company debt in excess of $10.0 million is accelerated. As of
July 31, 2004 and for
19
the second quarter of fiscal 2004, the Company was in compliance with all
covenants in the Amended Secured Credit Facility.
The following schedule sets forth the Company's contractual obligations and
commercial commitments as of July 31, 2004 (in thousands):
CONTRACTUAL OBLIGATIONS (1) Less than 1 After
Total year 2-3 years 4-5 years 5 years
----- ---- --------- --------- -------
Long-Term Debt $ 207,806 $ 56,783 $ 6,044 $ 2,925 $ 142,054
Capital Lease Obligations (2) 97,543 6,412 12,078 12,719 66,334
Operating Leases (3) 193,165 19,542 36,357 31,990 105,276
--------- ---------- --------- -------- ---------
Total Contractual Cash Obligations 498,514 82,737 54,479 47,634 313,664
--------- ---------- --------- -------- ---------
(1) The schedule excludes obligations of $118.8 million outstanding
under the Amended Secured Credit Facility, which are classified on
the balance sheet as short-term debt, as well as $38.9 million of
outstanding documentary letters of credit and $21.5 million of
standby letters of credit as of July 31, 2004 (which reduce
availability under the Amended Secured Credit Facility)
(2) Capital lease obligations represent the total minimum future
obligations, net of $71.5 million of interest.
(3) Operating leases are the aggregate future payments for operating
leases as of July 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.
The Company spent $21.0 million in the second quarter and $31.4 million in the
first half of fiscal 2004 on capital expenditures compared with $11.1 million
and $14.0 million in the second quarter and first half of fiscal 2003,
respectively. The increase is related to the Omaha distribution center expansion
and consolidation and remodeling activity in both divisions. The Company's total
capital expenditures for the fiscal year ending January 29, 2005 are anticipated
to be up to $100.0 million, which is within the restrictions on capital
expenditures in the Amended Secured Credit Facility. The planned capital
expenditures include investments in technology infrastructure and merchandise
initiatives, expansion of the ShopKo distribution center in Omaha, Nebraska to
accommodate the consolidation of the Pamida distribution operations also located
in Omaha into one automated facility serving both divisions, 10 ShopKo and
approximately 50 Pamida store remodels, six new Pamida stores, and up to three
ShopKo freestanding drug stores. The plans also call for up to 11 additional
pharmacies in Pamida stores. The Company completed the expansion of the Omaha
distribution center in the second quarter of fiscal 2004 and consolidated the
operations of the Pamida distribution center without disruption to stores. The
vacant Pamida distribution center is being marketed for sale.
INFLATION:
Inflation has had only a minor effect on the results of operations of the
Company and its internal and external sources of liquidity. The recent increases
in fuel costs have not significantly impacted the Company's expenses, but
further increases could adversely impact the Company's distribution and freight
expenses, as well as raise the purchase price of petroleum-based merchandise
items. To the extent inflation results in changes in interest rates, the
Company's
20
future interest expense will be affected. At this time, the Company is not
anticipating a significant financial impact on the fiscal 2004 results of
operation due to inflation.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS:
Certain statements contained in Item 2, "Management's Discussion and
Analysis" and elsewhere in this Form 10-Q are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements discuss, among other things, expected growth, future revenues,
product development, debt reduction, capital expenditures and deployment plans
and future operating and financial performance. The forward-looking statements
are subject to risks and uncertainties, which could cause actual results to
differ materially from those discussed in such forward-looking statements. These
risks and uncertainties include, but are not limited to: 1.) the impact of
accounting pronouncements as described herein; and 2.) the following which are
more fully discussed in our Annual Report on Form 10-K for the fiscal year ended
January 31, 2004: a.) significant debt levels; b.) continued availability of
vendor financing; c.) failure to achieve the expected benefits of
reorganizations; d.) inability to execute future expansion plans; e.) failure to
remodel existing stores on schedule or within budget; f.) quarterly performance
fluctuations - most notably the highly seasonal nature of the business; g.)
competition; h.) U.S. and international political unrest and extended economic
slow down; i.) general economic conditions and weather; j.) smooth functioning
distribution network; k.) labor conditions; l.) anti-takeover provisions in the
Company's organizational documents; m.); pending or future changes in laws or
regulations and n.) pending or future litigation. These and other risks and
uncertainties as may be indicated in subsequent filings with the Securities and
Exchange Commission, are incorporated herein by reference. These forward-looking
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions, which may, or may not come to fruition. In
addition, the Company does not undertake any obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information as to the Company's Quantitative and Qualitative Disclosures
about Market Risk, please see the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 2004. There have been no material changes in the
Company's quantitative or qualitative exposure to market risk since the end of
fiscal 2003.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed
to ensure that information required to be disclosed by us in the reports
filed under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), is recorded, processed, summarized and reported within the time
periods specified by the SEC. The Company carried out an evaluation, under
the supervision and with the participation of the Company's Disclosure
Committee and the Company's management, including the Chief Executive
Officer and the Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15 promulgated under the Exchange Act. Based upon
that evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that the Company's disclosure controls and procedures
are effective as of the end of the period covered by this report.
21
(b) Changes in Internal Control
There have been no significant changes in the Company's internal control
over financial reporting identified in connection with the evaluation
discussed above that occurred during the quarter ended July 31, 2004 that
have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
22
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
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 the Company and its former chief executive officer, William
Podany, made various misrepresentations and omissions in public disclosures
concerning the Company between August 10, 2000 and November 9, 2000.
This matter was settled by all parties and the Court issued its Notice of Entry
of Final Judgment and Order of Dismissal on August 20, 2004. Settlement of the
matter was not material to the Company's results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its 2004 Annual Meeting of Shareholders on May 26, 2004.
(b) Votes cast for the election of directors at the 2004 Annual Meeting were
as follows:
Jeffrey C. Girard:
For 26,809,419
Withheld Authority 464,268
Dale P. Kramer:
For 26,809,241
Withheld Authority 464,446
John G. Turner:
For 26,841,400
Withheld Authority 432,287
The terms of office as directors for Messrs. Duncan, Wolf, Eugster, Watson, Zona
and Ms. McPhee continued after the 2004 Annual Meeting of Shareholders.
Effective July 30, 2004, Mr. Girard resigned from the Board of Directors.
(c) Votes cast to approve the Company's 2004 Stock Incentive Plan were as
follows:
For 20,122,224
Against 4,340,871
Abstain 43,173
Broker Non-Vote 2,767,418
23
(d) Votes cast to ratify the appointment of Deloitte & Touche LLP to audit the
financial statements of the Company for the fiscal year ending January 29,
2005 were as follows:
For 26,965,347
Against 269,646
Abstain 38,693
Broker Non-Vote 0
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Agreement between the Company and Jeffrey C. Girard dated
July 30, 2004.
10.2 Form of Stock Option Agreement pursuant to the Company's
2004 Stock Incentive Plan.
10.3 Form of Restricted Stock Agreement pursuant to the
Company's 2004 Stock Incentive Plan.
31.1 Certification of Sam K. Duncan, Chief Executive Officer,
President, pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended.
31.2 Certification of Brian W. Bender, Senior Vice President,
Chief Financial Officer, pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.
32.1 Statement of Sam K. Duncan, Chief Executive Officer,
President, pursuant to 18 U.S.C. Section 1350.
32.2 Statement of Brian W. Bender, Senior Vice President,
Chief Financial Officer, pursuant to 18 U.S.C. Section 1350.
(b) Reports on Form 8-K.
The Company furnished or filed two Current Reports on Form 8-K during the
second quarter of fiscal 2004 as follows:
24
1) Form 8-K furnished with respect to Items 7 and 12 dated May
20, 2004, providing a press release containing its financial
results for the quarter ended May 1, 2004.
2) Form 8-K filed with respect to Item 11 dated June 10, 2004,
providing notice of a temporary suspension of trading in an
employee benefit plan as a result of a change in the plan's
administrator and recordkeeper.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHOPKO STORES, INC. (Registrant)
Date: September 9, 2004 By: /s/ Sam K. Duncan
-----------------
Sam K. Duncan
Chief Executive Officer, President
(Duly Authorized Officer of Registrant)
Date: September 9, 2004 By: /s/ Brian W. Bender
-------------------
Brian W. Bender
Senior Vice President, Chief Financial
Officer
(Principal Financial Officer and Duly
Authorized Officer of Registrant)
25
EXHIBIT INDEX
SHOPKO STORES, INC.
10-Q REPORT
Exhibit
Number Exhibit
- ------ -------
10.1 Agreement between the Company and Jeffrey C. Girard dated July
30, 2004. (1)
10.2 Form of Stock Option Agreement pursuant to the Company's 2004
Stock Incentive Plan. (1)
10.3 Form of Restricted Stock Agreement pursuant to the Company's 2004
Stock Incentive Plan. (1)
31.1 Certification of Sam K. Duncan, Chief Executive Officer,
President, pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended.
31.2 Certification of Brian W. Bender, Senior Vice President, Chief
Financial Officer, pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended.
32.1 Statement of Sam K. Duncan, Chief Executive Officer, President,
pursuant to 18 U.S.C. Section 1350.
32.2 Statement of Brian W. Bender, Senior Vice President, Chief
Financial Officer, pursuant to 18 U.S.C. Section 1350.
(1) A Management contract or compensatory plan or arrangement.
26