<PAGE> 1
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 August 1, 1998
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) 497-2211
---------------
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
------ ------
The number of shares outstanding of each of the issuer's classes of Common Stock
as of September 4, 1998 is as follows:
Title of Each Class Shares Outstanding
------------------- ------------------
Common Shares 26,094,520
Exhibit Index Page 1 of 32
on Page 24
1
<PAGE> 2
SHOPKO STORES, INC.
FORM 10-Q
FOR THE 13 WEEKS AND 26 WEEKS ENDED AUGUST 1, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I Item 1 - Financial Statements
Consolidated Statements of Earnings for the 13 weeks 3
ended August 1, 1998 and August 2, 1997
Consolidated Statements of Earnings for the 26 weeks 4
ended August 1, 1998 and August 2, 1997
Consolidated Balance Sheets as of August 1, 1998, 5
August 2, 1997 and January 31, 1998
Consolidated Statements of Cash Flows for the 26 6
weeks ended August 1, 1998 and August 2, 1997
Consolidated Statements of Shareholders' Equity for 7
the 26 weeks ended August 1, 1998 and for the period
ended January 31, 1998
Notes to Consolidated Financial Statements 8-9
Item 2 - Management's Discussion and Analysis of Financial 10-19
Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosure About 19
Market Risk (not applicable)
Part II Item 2 - Changes in Securities and Use of Proceeds 20
Item 4 - Submission of Matters to Vote of Security Holders 20-21
Item 6 - Exhibits and Reports on Form 8-K 22-23
Signatures 23
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Second Quarter (13 Weeks) Ended
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
August 1, August 2, % Increase/
1998 1997 (Decrease)
- ------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Net sales $ 678,453 $ 590,941 14.8
Licensed department rentals and other income 2,826 3,150
---------- ----------
681,279 594,091 14.7
Costs and expenses:
Cost of sales 526,516 457,299
Selling, general and administrative expenses 115,743 101,817
Nonrecurring charge 2,241 -
Depreciation and amortization expenses 17,797 15,297
---------- ----------
662,297 574,413 15.3
Income from operations 18,982 19,678 (3.5)
Interest expense - net 9,266 8,050
---------- ----------
Earnings before income taxes 9,716 11,628 (16.4)
Provision for income taxes 3,816 4,568
---------- ----------
Net earnings $ 5,900 $ 7,060 (16.4)
========== ==========
Basic net earnings per common share $ 0.23 $ 0.24
========== ==========
Weighted average number of common shares
outstanding 26,067 29,963
Diluted net earnings per common share $ 0.22 $ 0.23
========== ==========
Adjusted average number of common shares
outstanding 26,626 30,713
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Year To Date (26 Weeks) Ended
- -------------------------------------------------------------------------------------------
(In thousands, except per share data)
August 1, August 2, % Increase/
1998 1997 (Decrease)
- -------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Net sales $1,324,254 $1,152,809 14.9
Licensed department rentals and other income 5,769 5,885
---------- ----------
1,330,023 1,158,694 14.8
Costs and expenses:
Cost of sales 1,033,085 893,195
Selling, general and administrative expenses 226,577 203,722
Nonrecurring charge 3,937 2,800
Depreciation and amortization expenses 34,870 30,513
---------- ----------
1,298,469 1,130,230 14.9
Income from operations 31,554 28,464 10.9
Interest expense - net 18,295 15,172
---------- ----------
Earnings before income taxes 13,259 13,292 (0.2)
Provision for income taxes 5,208 5,221
---------- ----------
Net earnings $ 8,051 $ 8,071 (0.2)
========== ==========
Basic net earnings per common share $ 0.31 $ 0.26
========== ==========
Weighted average number of common shares
outstanding 25,968 31,079
Diluted net earnings per common share $ 0.30 $ 0.26
========== ==========
Adjusted average number of common shares
outstanding 26,486 31,627
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Second Quarter as of Fiscal Year End
- -----------------------------------------------------------------------------------------------
(In thousands)
August 1, August 2, January 31,
ASSETS 1998 1997 1998
- -----------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 5,834 $ 8,446 $ 54,344
Receivables, less allowance for losses of
$9,139, $6,423 and $8,637, respectively 96,463 78,881 97,812
Merchandise inventories 440,323 363,715 376,568
Other current assets 10,534 22,573 13,508
----------- ---------- ----------
Total current assets 553,154 473,615 542,232
Other assets and deferred charges 6,770 6,047 7,202
Intangible assets - net 72,116 58,595 71,668
Property and equipment at cost:
Land 119,903 107,983 118,723
Buildings 536,095 492,242 522,732
Equipment 378,562 322,159 348,817
Leasehold improvements 57,112 50,022 53,932
Property under construction 2,741 440 456
Property under capital leases 26,419 26,419 26,419
----------- ---------- ----------
1,120,832 999,265 1,071,079
Less accumulated depreciation and amortization:
Property and equipment 461,751 405,822 430,293
Property under capital leases 12,285 9,741 11,053
----------- ---------- ----------
Net property and equipment 646,796 583,702 629,733
----------- ---------- ----------
Total assets $ 1,278,836 $1,121,959 $1,250,835
=========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------
Current liabilities:
Short-term debt $ 30,000 $ - $ -
Accounts payable - trade 203,420 164,246 193,646
Accrued compensation and related taxes 29,921 34,583 39,964
Accrued other liabilities 136,407 110,857 135,522
Accrued income and other taxes 8,596 20,134 24,502
Current portion of long-term obligations 4,852 2,014 4,174
----------- ---------- ----------
Total current liabilities 413,196 331,834 397,808
Long-term obligations 433,103 417,874 436,125
Deferred income taxes 21,933 23,510 20,906
Shareholders' equity:
Common stock 261 338 339
Additional paid-in capital 227,730 277,572 283,520
Retained earnings 182,613 222,981 264,316
Less treasury stock - (152,150) (152,179)
----------- ---------- ----------
Total shareholders' equity 410,604 348,741 395,996
----------- ---------- ----------
Total liabilities and shareholders' equity $ 1,278,836 $1,121,959 $1,250,835
=========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries Year to Date (26 weeks) Ended
- --------------------------------------------------------------------------------------
(In thousands)
August 1, August 2,
1998 1997
- --------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 8,051 $ 8,071
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 34,870 30,513
Provision for losses on receivables 302 241
Gain on sale of property and equipment (822) (247)
Deferred income taxes 6,755 (1,131)
Change in assets and liabilities:
Receivables 1,047 19,297
Merchandise inventories (69,638) (25,546)
Other current assets (2,748) (5,538)
Other assets and intangibles (1,845) (566)
Accounts payable 9,774 (25,955)
Accrued liabilities (22,619) 854
- --------------------------------------------------------------------------------------
Net cash (used in) operating activities (36,873) (7)
- --------------------------------------------------------------------------------------
Cash flows from investing activities:
Payments for property and equipment (44,118) (11,896)
Proceeds from the sale of property and equipment 769 717
Business acquisitions, net of cash acquired (8,874)
- --------------------------------------------------------------------------------------
Net cash (used in) investing activities (43,349) (20,053)
- --------------------------------------------------------------------------------------
Cash flows from financing activities:
Change in short-term debt 30,000
Change in common stock from stock options 4,113 8,892
Change in common stock from public offering 23,419
Purchase of treasury stock (152,150)
Reduction in debt and capital leases (2,401) (985)
- --------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 31,712 (120,824)
- --------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (48,510) (140,884)
Cash and cash equivalents at beginning of year 54,344 149,330
- --------------------------------------------------------------------------------------
Cash and cash equivalents at end of second quarter $ 5,834 $ 8,446
======================================================================================
Supplemental cash flow information:
Noncash investing and financial activities -
Retirement of treasury stock $152,179
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
ShopKo Stores, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
(In thousands, except per share data)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
--------------- Paid-In Retained ------------------
Shares Amount Capital Earnings Shares Amount
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT FEBRUARY 22, 1997 32,167 $322 $245,137 $215,405
Net earnings 48,845
Sale of common stock under option plans 780 7 10,900
Income tax benefit related to stock options 3,658
Sale of common stock in public offering 984 10 23,409
Issuance of restricted stock 10 246 (246)
Remeasurement of restricted stock 170 (170)
Restricted stock expense 482
Purchase of treasury stock (8,174) $(152,179)
-----------------------------------------------------------
BALANCES AT JANUARY 31, 1998 33,941 339 283,520 264,316 (8,174) (152,179)
Net earnings 8,051
Sale of common stock under option plans 324 4 4,109
Income tax benefit related to stock options 2,145
Restricted stock expense 299
Retirement of treasury stock (8,174) (82) (62,044) (90,053) 8,174 152,179
-----------------------------------------------------------
BALANCES AT AUGUST 1, 1998 26,091 $261 $227,730 $182,613 - $ -
===========================================================
</TABLE>
Interim data subject to year end audit.
See notes to consolidated financial statements.
7
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Change in Fiscal Year:
The Company changed its fiscal year end from the last Saturday in February to
the Saturday nearest January 31, effective with the fiscal year ended January
31, 1998. This change was made in order to coincide the Company's fiscal year
with the calendar predominantly used by the retail industry. The current year
consolidated balance sheet and statements of earnings, cash flows and
shareholders' equity are presented for the quarter and 26 weeks ended August 1,
1998. The consolidated balance sheet, statements of earnings and cash flows for
the preceding fiscal year are presented for the comparable quarter and 26 weeks
ended August 2, 1997.
Accounting Policies:
The Company's 1997 Annual Report on Form 10-K (the Transition Report for the
period ending January 31, 1998) contains a summary of significant accounting
policies which includes the consolidated financial statements and the notes to
the consolidated financial statements. The same accounting policies are followed
in the preparation of interim reports.
In 1997, Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" were issued. In February 1998, SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits" was
issued. These statements had to be adopted by the Company beginning February 1,
1998.
SFAS N0. 130, "Reporting Comprehensive Income," which specifies how to report
and display comprehensive income and its components, has no impact on the
Company's consolidated financial statements.
The Company will adopt SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information" and SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" this fiscal year. It is not
anticipated that these SFAS's will significantly impact the Company's annual
financial statements.
Inventories:
The Company uses the LIFO method for substantially all inventories. If the
first-in, first-out (FIFO) method had been used, these inventories would have
been $40.6 million and $43.7 million higher at August 1, 1998 and at August 2,
1997, respectively.
Intangible Assets:
The excess of cost over fair value of the net assets of businesses acquired is
amortized using the straight-line method over 20 to 22 years. Accumulated
amortization for these costs was $7.5 million and $3.6 million at August 1, 1998
and August 2, 1997, respectively.
8
<PAGE> 9
Income Taxes:
The provision for income tax expense for the first half of fiscal 1998 was $5.2
million, of which $6.8 million in deferred tax expense is offset by a $1.6
million current credit. 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.
Net Earnings Per Common Share:
Basic net earnings per common share are computed by dividing net earnings by the
weighted average number of common shares outstanding. Diluted net earnings per
common share are computed by dividing net earnings by the weighted average
number of common shares outstanding increased by the number of dilutive
potential common shares based on the treasury stock method.
Statement of Registrant:
The data presented herein is unaudited, but in the opinion of management,
includes all adjustments (which consist only of normal recurring accruals)
necessary for a fair presentation of the consolidated financial position of the
Company and its subsidiaries at August 1, 1998 and August 2, 1997 and the
results of their operations and cash flows for the periods then ended. These
interim results are not necessarily indicative of the results of the fiscal
years as a whole because the operations of the Company are highly seasonal. The
fourth fiscal quarter contributes a significant part of the Company's earnings
due to the Christmas selling season.
9
<PAGE> 10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth items from the Company's unaudited consolidated
financial statements for the second quarter and first half of fiscal 1998 and
1997 as a percentage of net sales:
<TABLE>
<CAPTION>
Second Quarter First Half
Fiscal Fiscal Fiscal Fiscal
1998 1997 1998 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Licensed department rentals and other
income 0.4 0.5 0.4 0.5
----------- ---------- ----------- -----------
100.4 100.5 100.4 100.5
Costs and expenses
Cost of sales 77.6 77.4 78.0 77.5
Selling, general and administrative
expenses 17.1 17.2 17.1 17.7
Nonrecurring charge 0.3 0.0 0.3 0.2
Depreciation and amortization expenses 2.6 2.6 2.6 2.6
----------- ---------- ----------- -----------
97.6 97.2 98.0 98.0
Income from operations 2.8 3.3 2.4 2.5
Interest expense 1.4 1.3 1.4 1.3
----------- ---------- ----------- -----------
Earnings before income taxes 1.4 2.0 1.0 1.2
Provision for income taxes 0.5 0.8 0.4 0.5
----------- ---------- ----------- -----------
Net earnings 0.9 % 1.2 % 0.6 % 0.7 %
=========== ========== =========== ===========
</TABLE>
The Company has two business segments: a Retail Store segment (which includes
general merchandise, retail pharmacy and retail optical operations) and a
ProVantage segment (which includes prescription benefit management, mail service
pharmacy, vision benefit management and health information technology).
Intercompany sales, which consist of prescriptions that were both sold at a
ShopKo pharmacy and processed by ProVantage, have been eliminated.
10
<PAGE> 11
The following tables set forth items from the Company's business segments as
percentages of net sales:
<TABLE>
<CAPTION>
RETAIL STORE SEGMENT
Second Quarter First Half
-------------- ----------
Fiscal Fiscal Fiscal Fiscal
1998 1997 1998 1997
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Licensed departmental rentals and other
income 0.5 0.6 0.5 0.6
----------- ---------- ---------- ----------
100.5 100.6 100.5 100.6
Costs and expenses
Cost of sales 73.5 73.8 74.0 73.6
Selling, general and administrative
expenses 19.9 19.3 19.8 19.9
Depreciation and amortization expenses 3.0 3.0 3.0 3.1
----------- ---------- ---------- ----------
96.4 96.1 96.8 96.6
Income from operations 4.1 % 4.6 % 3.7 % 4.0 %
</TABLE>
<TABLE>
<CAPTION>
PROVANTAGE SEGMENT
Second Quarter First Half
-------------- ----------
Fiscal Fiscal Fiscal Fiscal
1998 1997 1998 1997
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Licensed department rentals and other
income 0.1 0.1 0.1 0.1
----------- ---------- ---------- ----------
100.1 100.1 100.1 100.1
Costs and expenses
Cost of sales 92.9 92.8 93.0 93.1
Selling, general and administrative
expenses 3.9 4.0 3.9 4.0
Depreciation and amortization expenses 1.2 0.8 1.1 0.8
----------- ---------- ---------- ----------
98.0 97.6 98.0 97.9
Income from operations 2.1 % 2.5 % 2.1 % 2.2 %
</TABLE>
11
<PAGE> 12
Net Sales:
The following table presents the Company's consolidated net sales for the
second quarter and first half of fiscal 1998 and fiscal 1997:
<TABLE>
<CAPTION>
SECOND QUARTER % INCREASE
-------------- ----------
FISCAL FISCAL
1998 1997 TOTAL COMP
---- ---- ----- ----
<S> <C> <C> <C> <C>
Retail Store $532.0 $476.8 11.6 6.0
ProVantage 154.9 120.8 28.3 N/A
Intercompany (8.4) (6.7) N/A N/A
------ ------ ---- ---
Consolidated $678.5 $590.9 14.8
====== ====== ====
</TABLE>
<TABLE>
<CAPTION>
FIRST HALF % INCREASE
---------- ----------
FISCAL FISCAL
1998 1997 TOTAL COMP
---- ---- ----- ----
<S> <C> <C> <C> <C>
Retail Store $1,036.2 $922.7 12.3 5.7
ProVantage 304.8 242.7 25.6 N/A
Intercompany (16.7) (12.6) N/A N/A
-------- -------- ---- ---
Consolidated $1,324.3 $1,152.8 14.9
======== ======== ====
</TABLE>
The 6.0% increase in second quarter retail comparable store sales are derived
from the following categories: Retail Health increased 13.4%, Hardlines/Home
increased 5.2% and Apparel increased 0.8%. The 5.7% increase in first half
retail comparable store sales are derived from the following categories: Retail
Health increased 11.5%, Hardlines/Home increased 5.5% and Apparel remained flat.
Changes in retail comparable store sales are based upon those stores which were
open for the entire preceding fiscal year.
On December 19, 1997, ShopKo acquired the retail chain Penn-Daniels,
Incorporated ("Penn-Daniels"), which operated 18 Jacks discount stores and one
Lots-A-Deals close-out store in Iowa, Illinois and Missouri. The Lots-A-Deals
store in Moline, Illinois was closed in March 1998, and the Iowa City, Iowa
store was closed in May 1998. The Company converted the remaining 17 of the
Jacks retail locations to ShopKo stores, including the addition of in-store
pharmacies and optical centers in 16 of those stores. These new ShopKo stores
had their grand opening in July 1998. The Jacks stores sales are included in
ShopKo's net sales since their acquisition but they are not included in
comparable store sales since they were not owned by ShopKo for the entire
preceding fiscal year.
12
<PAGE> 13
The increase in ProVantage sales in the second quarter and first half is due
primarily to internally generated growth. Included in ProVantage sales are the
following: (i) amounts billed to insurance companies, third party administrators
and self-funded medical plan sponsors for retail and mail service pharmacy
prescription claims (including drug ingredient costs, dispensing fees and
applicable administrative and processing fees); (ii) amounts billed to
pharmaceutical manufacturers and third party formulary administrators for
formulary fees; and (iii) contract and license fees for health information
technology services.
Gross Margin:
The following table sets forth gross margin as a percent of net sales:
<TABLE>
<CAPTION>
Second Quarter
--------------
Retail Store ProVantage Consolidated
------------ ---------- ------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross margin percent 26.5 % 26.2 % 7.1 % 7.2 % 22.4 % 22.6 %
Gross margin percent prior to
LIFO charge 26.7 % 26.5 % N/A N/A 22.6 % 22.8 %
</TABLE>
<TABLE>
<CAPTION>
First Half
----------
Retail Store ProVantage Consolidated
------------ ---------- ------------
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gross margin percent 26.0 % 26.4 % 7.0 % 6.9 % 22.0 % 22.5 %
Gross margin percent prior to
LIFO charge 26.3 % 26.6 % N/A N/A 22.2 % 22.7 %
</TABLE>
13
<PAGE> 14
The increase in the retail store gross margin rate in the second quarter is
primarily attributable to a nonrecurring adjustment to cost of goods sold under
purchase accounting pertaining to the acquisition of Penn-Daniels. This
nonrecurring purchase accounting adjustment relates to the valuation reserves
established on the acquisition of Penn-Daniels for the disposal of
pre-acquisition inventory. Excluding the results of the 17 new stores, FIFO
retail gross margin as a percent of sales was 26.0 percent, a decrease of 0.5
percent compared with the prior year. This decrease is primarily attributable to
planned lower gross margins in the retail pharmacy due to increased third-party
sales and lower third-party gross margin rates. The decrease in the retail store
gross margin rate in the first half is also primarily attributable to planned
lower gross margin rates in retail pharmacy due to the increased third-party
business and lower gross margin rates in general merchandise due to increased
promotional sales. ProVantage's decrease in the second quarter is primarily
attributable to increased sales volume coming from the lower gross margin claims
processing activities. ProVantage's increase in the first half is primarily due
to increased sales in the higher gross margin health information technology and
clinical services. The retail store and consolidated gross margin percentages
for the second quarter and first half reflect LIFO charges of $1.3 million and
$2.5 million, respectively. This is compared to the prior year's LIFO expense of
$1.1 million in the second quarter and $2.1 million in the first half.
Selling, General and Administrative Expenses:
Consolidated selling, general and administrative expense as a percent of sales
for the second quarter decreased to 17.1 percent from 17.2 percent in the prior
year. Second quarter retail selling, general and administrative expense as a
percent of sales was 19.9 percent compared with 19.3 percent last year. This
increase is primarily due to the 17 new stores. Excluding the results of the 17
new stores, retail selling, general and administrative expenses as a percent of
sales was 19.2 percent for the second quarter. For the first half, consolidated
selling, general and administrative expenses decreased to 17.1 percent of sales
from 17.7 percent of sales last year. The decrease is primarily due to expense
control initiatives and increased ProVantage sales. Retail selling, general and
administrative expenses for the first half were 19.8 percent of net sales
compared with 19.9 percent last year. Excluding the results of the 17 new
stores, retail selling, general and administrative expenses as a percent of
sales was 19.3 percent for the first half. The decrease is primarily due to
continued expense control initiatives at store level. ProVantage's selling,
general and administrative expense as a percent of sales was 3.9 percent
compared with 4.0 percent last year in both the second quarter and first half.
This decrease is primarily due to leveraging expenses over the increased sales
volume.
Interest Expense:
Consolidated interest expense for the current year's second quarter and first
half was 1.4 percent of sales compared to 1.3 percent of sales for the same time
period last year. Consolidated interest expense, net of interest income,
increased primarily due to a decrease in interest income this year compared to
last year. This decrease in interest income is a result of two simultaneous
transactions which were completed on July 2, 1997. The first transaction was a
$150.0 million stock buyback, whereby the Company repurchased 8,174,387 shares
of its common stock from Supervalu Inc. ("Supervalu"). The second transaction
was a secondary public offering of Supervalu's 6,557,280 remaining shares.
14
<PAGE> 15
Liquidity and Capital Resources:
The Company relies primarily on cash generated from its operations, with its
remaining funding requirements being met from short-term and long-term
borrowings. Cash provided from net earnings before depreciation and amortization
was $42.9 million for the first half of fiscal 1998 compared to $38.6 million
for the same period last year. The Company had $30.0 million outstanding under
its revolving credit agreement at the end of the first half of fiscal 1998 and
no borrowings outstanding under its revolving credit agreement at the end of the
first half of fiscal 1997.
The Company entered into a new $200.0 million revolving credit facility on July
8, 1997. The new facility is with a consortium of banks, is unsecured and is
effective through January 31, 2002. Funds generated from operations, and if
necessary, the revolving credit facility are expected to fund the projected
working capital needs and total capital expenditures through fiscal 1998 except
for possible acquisitions described below.
The Company's principal use of cash is for the purchase of property, equipment
and systems technology. During the first half of fiscal 1998, additional cash
was used for increases in inventory levels in the newly acquired Penn-Daniels
locations. The Company spent $44.1 million on capital expenditures in the first
half of fiscal 1998, compared to $11.9 million on capital expenditures
(excluding acquisitions) for the same period last year.
On September 8, 1998, the Company announced plans to open 13 new stores in 1999.
Ten of the new stores are former Venture store locations which will be remodeled
including the addition of in-store pharmacies and optical centers. Three
additional locations will be new stores. All 13 stores will be leased.
The Company's total capital expenditures for the fiscal year ending January 30,
1999 are anticipated to approximate $110.0 to $120.0 million, the majority of
which would relate to remodeling the recently acquired Penn-Daniels stores and
leased Venture store locations, supporting the existing retail business for
merchandise initiatives and ongoing store equipment and fixturing replacements
and continuing investments in systems technology. Such plans may be reviewed and
revised from time to time in light of changing conditions.
The Company expects to pursue growth of its Retail Store business through new
store construction or acquisition of existing retail stores or businesses. The
Company may also consider the acquisition of health services businesses. Such
plans may be reviewed and revised from time to time in light of changing
conditions. Depending upon the size and structure of any such acquisitions, the
Company may require additional capital resources. The Company believes that
adequate sources of capital will be available.
15
<PAGE> 16
On August 20, 1997, ProVantage acquired The Mikalix Group, Inc. and its
subsidiaries ("Mikalix"), an international privately held group of companies
based in Alexandria, Virginia. Mikalix's primary subsidiary is PharMark
Corporation ("PharMark"), a software and database development company providing
information driven strategies for optimizing medical and pharmaceutical
outcomes. The purchase price for Mikalix was approximately $15.3 million, of
which $13.3 million was paid in cash and $2.0 million is due over the next two
years. The sellers of Mikalix may also be entitled to contingent payments of up
to $8.0 million in the aggregate based on future increases in the market value
of ProVantage's outstanding common stock (the "Contingent Payments"). The
Contingent Payments, if any, will be due on the first to occur of August 20,
2002 and certain liquidity events related to ProVantage. The Contingent Payments
may be made, at the Company's election, in either cash, Company common stock, or
ProVantage common stock; provided, however, that any stock used for such
payments must be traded in a public market.
On December 19, 1997, ShopKo bought the outstanding stock of Penn-Daniels, a
retail chain headquartered in Quincy, Illinois for approximately $16.4 million
in cash and $42.5 million of assumed debt, of which approximately $21.0 million
was retired at the time of the closing. The Company utilized cash and borrowings
under its revolving credit facility to fund the acquisition and the retirement
of a portion of Penn-Daniels' outstanding debt. The acquisition was accounted
for under the purchase method of accounting. The results of Penn-Daniels'
operations since the date of acquisition have been included in the Company's
consolidated statements of earnings.
In connection with the Penn-Daniels acquisition, ShopKo expects to incur
nonrecurring pre-tax costs of approximately $5.0 to $6.0 million for duplicate
operations at the Penn-Daniels administrative office and warehouse until they
are consolidated with ShopKo's operations and for other transaction related
items. The Company incurred $3.9 million in nonrecurring pre-tax costs in the
first half of fiscal 1998, and the remainder of these estimated costs are
expected to be incurred in the third quarter of fiscal 1998. The Company expects
to fund these costs from available cash and, if necessary, borrowing under the
Company's revolving credit facility. The Penn-Daniels acquisition is expected to
be slightly accretive to fiscal 1998 earnings per share excluding the
nonrecurring pre-tax costs described above, and to be slightly dilutive to
fiscal 1998 earnings when such costs are factored into fiscal 1998 results.
The Company has been testing a stand alone optical store format with four stores
in Ohio. The results were mixed and it was decided to end the test and close the
stores. The stores were closed in August 1998. The closings will not have a
material financial impact on the Company.
16
<PAGE> 17
Year 2000:
State of Readiness
In order to address Year 2000 compliance, the Company has initiated a
comprehensive project designed to eliminate or minimize any business disruption
associated with potential date processing problems in its information technology
("IT") systems, as well as its non-IT systems (e.g., HVAC systems, building
security systems, etc.). The project consists of five phases: company awareness,
assessment, strategy and work plan development, renovation and testing. The
Company has completed the first three phases for both IT and non-IT systems and
is actively engaged in completing the fourth phase (i.e., renovation).
With respect to IT systems, approximately 64.0 percent of the Company's critical
business systems are currently compliant, approximately 9.0 percent of them will
be retired and approximately 27.0 percent are in the process of being renovated.
With respect to non-IT systems, the assessment phase indicated a need for only
minor renovation work. For both IT and non-IT systems, the renovation phase
currently underway is expected to be completed in the second quarter of fiscal
1999. The testing phase for both IT and non-IT systems is planned to be
completed in the third quarter of fiscal 1999.
As part of its Year 2000 project, the Company has initiated communications with
all of its merchandise vendors and services suppliers to assess their state of
Year 2000 readiness. A significant percentage of its vendors have responded in
writing to the Company's Year 2000 readiness inquiries. The Company plans to
continue assessment of its third party business partners, including face-to-face
meetings with management and/or onsite visits as deemed appropriate. Despite the
Company's diligence, there can be no guarantee that the systems of other
companies which the Company relies upon to conduct its day-to-day business will
be compliant.
Costs
As a result of the significant investment made by the Company in both hardware
and software over the past several years, the majority of its IT systems do not
require renovation. The Company estimates that it will incur internal and
external expenses of $4.0 to $6.0 million in conjunction with the Year 2000
compliance project. These costs will be spread throughout the course of this
project, and are not expected to have a material effect on the Company's
financial results.
Risks
With respect to the risks associated with its IT and non-IT systems, the Company
believes that the most reasonably likely worst case scenario is that the Company
will experience a number of minor system malfunctions and errors in the early
days and weeks of the Year 2000 that were not detected during its renovation and
testing efforts. The Company also believes that these problems will not be
overwhelming and will not have a material effect on the Company's operations or
financial results.
17
<PAGE> 18
With respect to the risks associated with third parties, the Company believes
that the most reasonably likely worst case scenario is that some of the
Company's merchandise vendors will not be compliant and will have difficulty
filling orders and flowing goods. Management also believes that the number of
such vendors will have been minimized by the Company's program of identifying
non-compliant vendors and replacing or jointly developing alternative supply or
delivery solutions prior to the Year 2000.
The Company also designs and sells software products to third parties through
its ProVantage subsidiary. While the Company has taken appropriate steps to
ensure the readiness of this software and believes it to be compliant, the
Company cannot be certain that the software will operate error free, or that the
Company will not be subject to litigation, whether the software operates error
free or not. However, the Company believes that based on its efforts to ensure
compliance, and the terms and conditions of its software licensing contracts, it
is not reasonably likely that the Company will be subject to such litigation.
The Company has limited the scope of its risk assessment to those factors which
it can reasonably be expected to have an influence upon. For example, the
Company has made the assumption that government agencies, utility companies, and
national telecommunications providers will continue to operate. Obviously, the
lack of such services could have a material effect on the Company's ability to
operate, but the Company has little if any ability to influence such an outcome,
or to reasonably make alternative arrangements in advance for such services in
the event they are unavailable.
Contingency Plans
The Company has not yet completed its planning and preparations to handle the
most reasonably likely worst case scenarios described above. The Company intends
to develop contingency plans for these scenarios during the second quarter of
fiscal 1999. The Company believes that this is the appropriate timeframe for
developing such plans and that efforts prior to that time should be focused on
renovation, testing and verification of vendor compliance.
Treasury Stock Retirement:
In the first quarter of fiscal 1998, the Company retired all 8,174,387 shares of
common stock held as treasury stock for accounting purposes, and such shares
were returned to the status of authorized but unissued shares. As a result, the
$152.2 million assigned to treasury stock was eliminated with a corresponding
decrease in par value, additional paid-in capital and retained earnings.
Stock Repurchase Program:
On March 26, 1998, the Company announced that the Board of Directors had
authorized the repurchase of up to $20.0 million of the Company's Common Stock.
Repurchased shares will be used for stock-based employee benefit plans and other
corporate purposes. As of the end of the first half, no shares of Common Stock
had been repurchased under this program.
18
<PAGE> 19
Inflation:
Inflation has and is expected to have only a minor effect on the results of
operations of the Company and its internal and external sources of liquidity.
Forward-Looking Statements:
Item 2 of this Form 10-Q, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward-looking statements within
the meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements include, without limitation,
statements regarding earnings, growth, capital expenditure plans, capital
requirements and statements related to "Year 2000" issues. Such statements are
subject to important factors which could cause the Company's actual results to
differ materially from those anticipated by the forward-looking statements.
These factors include those referenced in the Company's Annual Report on Form
10-K (the Transition Report for the period ending January 31, 1998) or as may be
described from time to time in the Company's subsequent SEC filings.
Item 3: Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
19
<PAGE> 20
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) On May 22, 1998, the Company reincorporated from Minnesota to Wisconsin as
more fully described in the Company's Current Report on Form 8-K dated May 22,
1998 which is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its 1998 Annual Meeting of Shareholders on May 13, 1998.
(b) Votes cast for the election of directors at the 1998 Annual Meeting were as
follows:
Mr. Kramer:
For 16,335,880
Withheld Authority 150,854
Mr. Girard:
For 16,332,059
Withheld Authority 154,675
Dr. Reinertsen, M. D.
For 16,331,922
Withheld Authority 154,812
Messrs. Podany, Eugster, Tyrrell and Watson terms of office as directors
continued after the 1998 Annual Meeting of Shareholders.
Votes cast to change the Company's state of incorporation from Minnesota to
Wisconsin by approval and adoption of an agreement and plan of merger.
For 14,089,685
Against 831,083
Abstain 63,194
Broker Non-Vote 1,502,772
20
<PAGE> 21
Votes cast to approve the Company's 1998 Stock Incentive Plan.
For 15,425,714
Against 968,370
Abstain 92,650
Broker Non-Vote 0
Votes cast to ratify the appointment of Deloitte & Touche LLP as the Company's
auditors for the fiscal year ending January 30, 1999 were as follows:
For 16,433,846
Against 17,168
Abstain 35,720
Broker Non-Vote 0
21
<PAGE> 22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3.1 Amended and Restated Articles of Incorporation of the
Company.
3.2 By-laws of the Company.
4.1 First Supplemental Indenture, dated as of May 22,
1998, between the Company and U.S. Bank Trust N.A. (f/k/a
First Trust National Association), as Trustee, ("U.S.
Bank Trust"), to the Indenture dated as of March 12, 1992,
with respect to the Senior Notes due March 15, 2002 (the
"2002 Indenture").
4.2 First Supplemental Indenture dated as of May 22, 1998,
between the Company and U.S. Bank Trust, as Trustee, to the
Indenture dated as of March 12, 1992, with respect to
the Senior Notes due March 15, 2022 (the "2022 Indenture").
4.3 First Supplemental Indenture, dated as of May 22,
1998, between the Company and U.S. Bank Trust, as Trustee,
to the Indenture dated as of July 15, 1993 (the "Senior
Debt Indenture").
4.4 Rights Agreement Amendment dated as of May 22, 1998 by and
between the Company and Norwest Bank Minnesota, N.A., as
Rights Agent (the "Rights Agreement Amendment").
4.5 Assumption Agreement dated as of May 22, 1998, by the
Company for the benefit of the Agent and Banks named in the
Credit Agreement dated as of July 8, 1997 (the "Assumption
Agreement").
10.1 Effective as of May 22, 1998, members of the Company's
Board of Directors and its Executive Officers entered into
Indemnification Agreements with the Company. The form of
Indemnification Agreement is attached as Exhibit 10.1 hereto.
11 Computation of Earnings Per Common and Common Equivalent
Share.
12 Statements Re Computation of Ratios.
27 Financial Data Schedule.
22
<PAGE> 23
(b) Reports on Form 8-K.
The Company filed Current Reports on Form 8-K in the second quarter of
fiscal 1998 as follows:
Date of Report Items Reported
May 22, 1998 Items 5,7 - The Company changed its
state of incorporation from
Minnesota to Wisconsin.
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 14, 1998 By: /s/ Richard D. Schepp
-------------------------------
Richard D. Schepp
Senior Vice President General
Counsel and Secretary
(Duly Authorized Officer of
Registrant)
Date: September 14, 1998 By: /s/ Jeffery R. Simons
-------------------------------
Jeffery R. Simons
Vice President and Controller
(Chief Accounting Officer and
Duly Authorized Officer of
Registrant)
23
<PAGE> 24
EXHIBIT INDEX
SHOPKO STORES, INC.
10-Q REPORT
Exhibit Sequential
Number Exhibit Page Number
- ------- -------- -----------
3.1 Amended and Restated Articles of Incorporation of
the Company, incorporated by reference to the
Company's Current Report on Form 8-K dated
May 22, 1998 (the "May Form 8-K").
3.2 By-laws of the Company, incorporated by reference
to the Company's definitive Proxy Statement dated
April 10, 1998 filed in connection with the Company's
1998 Annual Meeting of shareholders.
4.1 First Supplemental Indenture, dated as of May 22, 1998,
between the Company and U.S. Bank Trust, as Trustee,
with respect to the 2002 Indenture, incorporated by
reference to the May Form 8-K.
4.2 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 Form 8-K.
4.3 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 Form 8-K.
4.4 Rights Agreement Amendment, incorporated by reference
to the May Form 8-K.
4.5 Assumption Agreement, incorporated by reference
to the May Form 8-K.
24
<PAGE> 25
Exhibit Sequential
Number Exhibit Page Number
- ------ ------- -----------
10.1 Effective as of May 22, 1998, members of the
Company's Board of Directors and its Executive
Officers entered into Indemnification Agreements
with the Company, the form of which
Indemnification Agreement is attached hereto.
11 Computation of Earnings Per Common and
Common Equivalent Share.
12 Statements Re Computation of Ratios.
27 Financial Data Schedule.
25
<PAGE> 1
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT, is made as of May 22, 1998 by and
between ShopKo Stores, Inc., a Wisconsin corporation (the "Company"), and
Richard D. Schepp ("Indemnitee").
WHEREAS, Indemnitee is a member of the Board of Directors and/or an
executive officer of the Company; and
WHEREAS, it will be difficult to retain directors and executive
officers of the Company unless such persons are adequately indemnified against
liabilities incurred and claims made in performance of their duties as directors
and/or executive officers of the Company; and
WHEREAS, Article VII of the Company's By-laws (the "By-laws") provides
for the indemnification by the Company of the officers and directors of the
Company and, as additional consideration for the services of Indemnitee, the
Company has obtained at its expense directors' and officers' liability insurance
("D & O Insurance") covering Indemnitee with respect to Indemnitee's position
with the Company; and
WHEREAS, to induce Indemnitee to continue to serve as a member of the
Board of Directors and/or as an executive officer of the Company, the Company
has determined that it is in its best interests to assure Indemnitee of the
protection currently provided by the By-laws and D & O Insurance and to
indemnify Indemnitee to the fullest extent permitted by the Wisconsin Business
Corporation Law (the "WBCL").
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Company and Indemnitee do hereby covenant and agree as
follows:
1. Indemnification. The Company agrees to indemnify and hold Indemnitee
harmless from and against any and all claims, liabilities, damages, judgments,
penalties, fines, settlements, disbursements or expenses of any type whatsoever
(including, without limitation, reasonable attorneys' fees) incurred by
Indemnitee in or arising out of (A) the status, capacities or activities of
Indemnitee as a director and/or an executive officer of the Company, or (B) the
status, capacities or activities of Indemnitee with any Subsidiary (as
hereinafter defined) which status, capacities or activities with such Subsidiary
were undertaken in connection with the Indemnitee's position with the Company as
a director and/or an executive officer, in each case to the maximum extent
permitted under Subchapter VIII of the WBCL and Article VII of the By-laws as in
effect on the date hereof and as either may be amended to provide more
advantageous rights to the Indemnitee. For purposes hereof, "Subsidiary" means
any corporation, joint venture, limited liability company, or other business
entity in which the Company has a significant direct or indirect equity
interest.
2. Advances of Expenses. Upon written request by Indemnitee and subject
to the requirements of the WBCL, the Company shall advance all expenses incurred
by Indemnitee
26
<PAGE> 2
in connection with the investigation, defense, settlement or appeal of any
proceeding, action or investigation to which Indemnitee is a party or is
threatened to be made a party arising out of any matter for which the Indemnitee
is entitled to indemnification pursuant to Section 1 hereof to the maximum
extent permitted under Subchapter VIII of the WBCL and Article VII of the
By-laws as in effect on the date of this Agreement and as either may be amended
to provide more advantageous rights to the Indemnitee. The indemnification
provisions contained in Subchapter VIII of the WBCL and Article VII of the
By-laws, as in effect on the date hereof and as either may be amended to provide
more advantageous indemnification rights to Indemnitee, shall be deemed to be a
contract between the Company and Indemnitee and any amendment, modification,
revocation or repeal of any such provisions of Subchapter VIII of the WBCL or
Article VII of the By-laws shall not limit any rights of Indemnitee hereunder to
indemnification or the allowance of expenses.
3. Other Rights of Indemnitee. The right of Indemnitee to
indemnification or advance of expenses pursuant to this Agreement shall not be
exclusive of other rights Indemnitee may have (i) under applicable law, (ii)
pursuant to other agreements between the Company and Indemnitee or the By-laws
(subject to Section 16 hereof), or (iii) pursuant to any agreement with a third
party (by way of insurance, indemnification or otherwise).
4. Absolute Right to Indemnification and Advancement of Expenses. The
Company agrees that it shall not, and the Company hereby waives all rights that
it has or may have to refuse to indemnify, or withhold payment of amounts for
which Indemnitee is indemnified hereunder, based on any breach or alleged breach
of any of the provisions of this Agreement by Indemnitee or for any other reason
whatsoever; provided, however, that the Agreement shall not require the Company
to make any payment prohibited by law, or to advance expenses contrary to the
provisions hereof. In the event Indemnitee is required to bring any action to
enforce Indemnitee's rights or to collect monies due to Indemnitee under this
Agreement, and is successful in such action, the Company shall reimburse
Indemnitee for all of Indemnitee's legal fees and expenses in bringing and
pursuing such action.
5. Amendments to Wisconsin WBCL or Company's Articles or By-laws. The
Company shall not amend its Articles of Incorporation ("Articles") or By-laws to
reduce or eliminate the Indemnitee's right to indemnification or advances
provided for under this Agreement. Any amendments to the Articles or By-laws
made subsequent to the date of this Agreement which reduce or eliminate rights
of persons entitled to indemnification or advances under such Articles or
By-laws shall not limit the rights of Indemnitee pursuant to this Agreement. If
the WBCL, the Articles or the By-laws are amended so as to provide for greater
indemnification rights or benefits, Indemnitee shall be entitled to such greater
rights and benefits immediately upon such amendment. Subsequent amendments to
the WBCL or other applicable law shall in no way reduce Indemnitee's rights
under this Agreement.
6. Maintenance of Insurance. The Company represents that it presently
has in force and effect directors and officers insurance under a directors' and
officers' liability insurance policy covering certain liabilities which may be
incurred by its officers and directors. The Company agrees to purchase and
maintain in effect, for the benefit of Indemnitee, D & O Insurance providing, in
all respects, coverage not less favorable than that presently provided pursuant
to said policy for so long as Indemnitee shall serve as director and/or
executive officer and until the later of (i) three years after Indemnitee ceases
to be a director and/or executive officer, as the case may be, for any reason,
or (ii) for so long as Indemnitee shall
27
<PAGE> 3
be subject to any possible claim or threatened, pending or completed action,
suit or proceeding, whether civil, criminal or investigative, by reason of the
fact that Indemnitee was a member of the Board of Directors and/or an executive
officer, as the case may be. The unavailability or subsequent exclusions,
limitations or deductibles contained in coverage provided by such D & O
Insurance shall in no way limit the obligations of the Company to insure and
indemnify Indemnitee to the full extent required by this Agreement.
7. Effect of Certain Proceedings. The termination of any proceeding or
of any claim, issue or matter therein, by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, does not of
itself adversely affect the right of Indemnitee to indemnification hereunder or
create a presumption that indemnification is not required. The knowledge and/or
actions, or failure to act, of any director, officer, agent or employee of the
Company shall not be imputed to Indemnitee for purposes of determining the right
to indemnification under this Agreement.
8. Notification. Promptly after receipt by Indemnitee or the Company of
any notice or document respecting the commencement of any action, suit,
proceeding or investigation naming or involving Indemnitee and relating to any
matter concerning which Indemnitee may be entitled to indemnification or
advances pursuant to this Agreement, the party receiving notice will notify the
other of the receipt of same, but the failure by Indemnitee to so notify the
Company shall not relieve the Company from any obligation under this Agreement
or otherwise.
9. Amendment. This Agreement may be amended at any time by written
instrument executed by the Company and Indemnitee.
10. Notices. All notices and other communications between the parties
with respect to this Agreement must be made in writing and shall be deemed to
have been fully delivered as of the date on which they are hand delivered or
deposited in the United States mail for delivery by registered or certified
mail, postage and fees prepaid.
11. Binding Effect. Due to the personal nature of the services to be
rendered by Indemnitee, Indemnitee may not assign this Agreement. Subject to the
foregoing, the provisions of this Agreement are binding upon and inure to the
benefit of (i) Indemnitee and Indemnitee's respective heirs, legal
representatives and administrators, and (ii) the Company and its successors,
transferees and assigns.
12. Term of Agreement. This Agreement shall continue and terminate upon
the later of: (i) 10 years after the date that Indemnitee shall have ceased to
serve as a director and/or executive officer of the Company; or (ii) the final
termination of all pending proceedings in respect of which Indemnitee is granted
rights of indemnification or advancement of expenses hereunder and of any
proceeding commenced by Indemnitee pursuant to Section 14 of this Agreement
relating thereto.
13. Validity. The invalidity or unenforceability of any provision of
the Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
28
<PAGE> 4
14. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be discussed between the parties in a good
faith effort to arrive at a mutual settlement of any such controversy. If,
notwithstanding the parties' good faith efforts, a dispute remains unresolved
for a period of 45 days after initial notice from one party to the other of the
dispute, the parties shall submit such dispute to arbitration in accordance with
the rules of the American Arbitration Association, and judgment upon the award
may be entered in any court having jurisdiction over the controversy. The costs
of the proceedings shall be paid by the Company. Unless otherwise agreed upon,
the place of arbitration proceedings shall be Brown County, Wisconsin.
15. Subrogation. In the event of payment by the Company to Indemnitee
under this Agreement, the Company shall be subrogated to the extent of such
payment to all of the rights of recovery of Indemnitee, and Indemnitee shall
execute all documents and shall do all things necessary to enable the Company
effectively to bring suit to enforce such rights.
16. Effectiveness. The provisions of this Agreement (i) shall supersede
the provisions of any Indemnification Agreement between the Indemnitee and the
Company's predecessor corporation which was incorporated under Minnesota law,
and (ii) shall be retroactive to cover any and all matters which may have taken
place prior to the date hereof for which the Indemnitee is entitled to
indemnification pursuant to Section 1 hereof. By way of example but not of
limitation, this Agreement shall apply to matters for which the Indemnitee is
entitled to indemnification pursuant to Section 1 hereof, regardless of whether
such matters relate to activities of Indemnitee or the Company preceding or
subsequent to the date of this Agreement.
17. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Wisconsin.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
SHOPKO STORES, INC.
By:
- ----------------------------- --------------------
Indemnitee Its
29
<PAGE> 1
SHOPKO STORES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST HALF AS OF FISCAL YEARS ENDED
=======================================================
AUGUST 1, AUGUST 2, JANUARY 31, FEBRUARY 1,
1998 1997 1998 1997
(26 WEEKS) (26 WEEKS) (52 WEEKS) (52 WEEKS)
=======================================================
<S> <C> <C> <C> <C>
BASIC:
Net earnings $ 8,051 $ 8,071 $ 49,382 $ 45,669
========== ========== ========== ==========
Weighted average number of
outstanding common shares 25,968 31,079 28,398 32,090
========== ========== ========== ==========
Net earnings per common
share - basic (1) $ 0.31 $ 0.26 $ 1.74 $ 1.42
========== ========== ========== ==========
DILUTED:
Net earnings $ 8,051 $ 8,071 $ 49,382 $ 45,669
========== ========== ========== ==========
Weighted average number of
outstanding common shares 25,968 31,079 28,398 32,090
Number of common shares
issuable assuming exercise
of stock options 518 548 377 473
---------- ---------- ---------- ----------
Weighted average number of
outstanding common and
common equivalent shares -
assuming full dilution 26,486 31,627 28,775 32,563
========== ========== ========== ==========
Net earnings per common
share - diluted (1) $ 0.30 $ 0.26 $ 1.72 $ 1.40
========== ========== ========== ==========
</TABLE>
(1) Earnings per share are computed by dividing net earnings by the weighted
average number of outstanding common and common equivalent shares.
30
<PAGE> 1
SHOPKO STORES, INC. AND SUBSIDIARIES
EXHIBIT 12 - STATEMENTS RE COMPUTATION OF RATIOS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST HALF AS OF FISCAL YEARS ENDED
======================================================================
AUGUST 1, AUGUST 2, JANUARY 31, FEBRUARY 1,
1998 1997 1998 1997
(26 WEEKS) (26 WEEKS) (52 WEEKS) (52 WEEKS)
======================================================================
<S> <C> <C> <C> <C>
RATIO OF EARNINGS TO FIXED CHARGES
==================================
COMPUTATION OF EARNINGS
1 Pretax Income $ 13,259 $ 13,292 $ 81,326 $ 75,215
2 Add previously capitalized interest
amortized during the period 278 277 550 548
3 Less interest capitalized during
the period 17 0 0 128
----------- --------- ----------- -----------
4 Total earnings (sum of lines 1 to 3) 13,520 13,569 81,876 75,635
COMPUTATION OF FIXED CHARGES
5 Interest (1) 18,312 15,172 32,239 32,128
6 Interest factor in rental expense 2,175 1,369 2,691 2,657
----------- --------- ----------- -----------
7 Total fixed charges (sum of lines
5 and 6) 20,487 16,541 34,930 34,785
8 TOTAL EARNINGS AND
FIXED CHARGES (LINE 4
PLUS LINE 7) $ 34,007 $ 30,110 $ 116,806 $ 110,420
=========== ========= =========== ===========
9 Ratio (line 8 divided by line 7) 1.7 1.8 3.3 3.2
</TABLE>
(1) Includes capitalized interest
31
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> MAY-03-1998
<PERIOD-END> AUG-01-1998
<CASH> 5,834
<SECURITIES> 0
<RECEIVABLES> 105,602
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0
0
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</TABLE>
