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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year (52 weeks) ended February 22, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the transition period from to
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Commission file number 1-10876
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SHOPKO STORES, INC.
(Exact name of registrant as specified in its Charter)
Minnesota 41-0985054
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
700 Pilgrim Way, Green Bay, Wisconsin 54304
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (414) 497-2211
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------------------- -------------------------
Common Stock, par value $0.01 New York Stock Exchange
per share
Securities registered pursuant to Section 12 (g) of the Act: None.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Page 1 of 74 Exhibit index on page 62
(Cover page 1 of 2 pages)
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 24, 1997 was approximately $331,664,437 (based upon the
closing price of Registrant's Common Stock on the New York Stock Exchange on
such date).
Number of shares of $0.01 par value Common Stock outstanding as of April 24,
1997: 32,223,650.
DOCUMENTS INCORPORATED BY REFERENCE
None.
(Cover page 2 of 2 pages)
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PART I
ITEM 1. BUSINESS
GENERAL
ShopKo Stores, Inc., a Minnesota corporation ("ShopKo" or the "Company"),
was founded in 1961 and was acquired by Supervalu Inc. ("Supervalu") in 1971.
In October 1991, the Company completed the initial public offering of its
common stock. The Company's principal executive offices are located at 700
Pilgrim Way, Green Bay, Wisconsin 54304, and its telephone number is (414)
497-2211. Effective July 26, 1997, the telephone number will be (920)
497-2211.
The Company is a leading regional retailer which operates 130 general
merchandise stores and four free-standing optical centers in 16 Upper Midwest,
Pacific Northwest and Western Mountain states. ShopKo is also engaged in the
business of providing health services in its retail stores and through its
subsidiary, ProVantage, which provides, among other things, prescription
benefit management, mail service pharmacy, vision benefit management and
healthcare information technology. The ProVantage businesses are conducted
throughout the United States. ShopKo has also recently launched a free standing
optical center strategy by opening four Vision Advantage stores in Ohio in
fiscal 1997. The Company's annual sales in its fiscal year ended February 22,
1997 were $2.3 billion.
In fiscal 1997, the Company redefined its business segments from the
classifications of General Merchandise and Health Services (which had included
ProVantage's operations and ShopKo's retail pharmacy and optical departments),
to 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 healthcare information technology). Intercompany sales, which
consist of prescriptions that were both sold at a ShopKo pharmacy and processed
by ProVantage, have been eliminated. Financial information about these segments
is included in Note K of the Notes to Consolidated Financial Statements for
fiscal year 1997.
The Company's Retail Store net sales derived from sales of softline goods
were approximately 25% in fiscal year 1997, 24% in fiscal year 1996 and 23% in
fiscal year 1995. Net sales derived from sales of hardline/home goods, as a
percentage of Retail Store net sales, were approximately 54%, 56% and 58% in
fiscal years 1997, 1996 and 1995, respectively. The Company's net sales derived
from retail health services, as a percentage of Retail Store net sales, were
approximately 21%, 20% and 19% in fiscal years 1997, 1996 and 1995,
respectively. The above sales percentages have been restated to reflect how the
Company currently manages its merchandise assortment.
The Company's fiscal year ends on the last Saturday of February. For
example, fiscal 1997 was the period from February 25, 1996 to February 22,
1997.
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MERCHANDISING PHILOSOPHY - MANAGEMENT
ShopKo is committed to offering quality merchandise and service in its
stores to meet customers' lifestyle requirements for casual apparel, home,
health and family, selling products at prices which communicate value. The
Company strives to differentiate itself from its competition.
With a focus on serving the customer and building customer loyalty, ShopKo
has over the last few years undergone a significant strategic repositioning
under its Vision 2000 program. That strategy combined a new, upscale image
with an increased emphasis on customer service. Continuous improvement and
enhancement of the Vision 2000 concept is accomplished through ShopKo's
multidisciplinary Senior Merchandising and Marketing Team ("SMMT"). Headed by
the Chief Operating Officer, the SMMT consists of ShopKo's senior executives
from the areas of merchandising, logistics and replenishment, advertising,
in-store marketing and store operations. The SMMT seeks to create a
performance-driven culture predicated on fast, friendly customer service. The
SMMT has recently completed an intensive reengineering of the work processes of
the Company's central organization and store operations. The reengineered work
processes require centralized decisions with respect to product selection,
pricing, space utilization and marketing to allow store personnel to focus
solely on overall customer satisfaction through inventory in-stock position,
creation of a friendly shopping environment and simplification of the shopping
experience to allow customers to complete their shopping as quickly as they
desire.
With respect to general merchandise, ShopKo's goal is to improve
performance by meeting customer needs more quickly and having more of what
people expect as their lifestyle needs change. ShopKo merchandise has been
reorganized into stratified categories that are defined and driven by customer
lifestyles and end usage. This stratification process has allowed ShopKo to
identify and prioritize growth potentials based on the changing lifestyle needs
of its customers. Through an "infrastructural funding process", ShopKo
management allocates store shelf space, inventory commitments and external
advertising space among the various categories of merchandise. Heavier
infrastructure commitments are given to those categories in which ShopKo has
achieved market dominance and other categories believed by ShopKo management to
have the potential to become categories of dominance. Regular and systematic
analysis of category stratification is performed at various levels as part of
the Company's business planning process.
MERCHANDISING AND SERVICES - RETAIL STORE
The Company carries a wide selection of branded and private label
"softline" goods such as women's, men's and children's apparel, shoes,
jewelry, cosmetics and accessories and "hardline/home" goods such as
housewares, home textiles, household supplies, health and beauty aids, home
entertainment products, small appliances, furniture, music/videos, toys,
sporting goods, social occasion products, candy, snack foods, seasonal and
everyday basic categories. The Company's stores carry a broad assortment of
merchandise, thus providing customers with a convenient one-stop shopping
source for everyday items. The Company's accommodating customer service
policies provide customers with a pleasant shopping experience.
The Company believes that it offers leading brand names in its merchandise
lines, concentrating on brands which have wide customer acceptance and provide
quality and value. In addition, ShopKo has well-developed private label
programs. ShopKo subjects its private label merchandise and direct imports to
independent testing and certification for product performance,
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safety and fit. In addition, the Company's in-house quality assurance and
technical design team analyzes and develops the quality of its fashion
offerings. This allows the Company to deliver a better and more consistent
product, with greater control and efficiency.
The Company also provides professional healthcare services in most of its
stores. Of the Company's 130 stores as of February 22, 1997, 129 include
pharmacy centers and 128 include optical centers. In addition to generating
store traffic and building customer loyalty, these services contribute
significantly to the Company's overall profitability and provide the
opportunity for additional growth. Each store with pharmacy and optical centers
employs or contracts with an average of approximately three licensed
pharmacists, one licensed optometrist and six opticians. The Company's
optometrists perform in-store eye exams and prescribe correctional lenses, most
of which are fabricated in the Company's centralized optical laboratory and in
approximately 77 in-store finishing labs which, in fiscal 1997, dispensed over
617,000 eyewear prescriptions. The in-store finishing labs typically service
other stores in the vicinity and provide customers with same day or next day
optical service for single vision lenses.
In addition, the Company opened four new free-standing optical centers,
Vision Advantage, during the third and fourth quarters of fiscal 1997. This
format focuses on providing value-priced, high quality eye wear that can be
manufactured in about an hour. Convenience to the customer, price and quality
will be the primary driving points of this business, which will leverage
heavily off of the Company's 18 years of retail optical experience.
MERCHANDISING AND SERVICES - PROVANTAGE
In fiscal 1994, the Company expanded its traditional retail pharmacy
services by developing ProVantage Mail Service, a prescription management and
mail service pharmacy that was offered to healthcare plan sponsors throughout
the United States. Because of the success of this service, management decided
to expand it, and acquired a prescription claims processing firm, Bravell,
Inc., in January 1995. This acquisition enabled the Company to develop
ProVantage into a full service PBM; providing custom prescription benefit
management, benefit plan design, a network of over 46,000 retail pharmacies,
program administration, formulary administration, clinical services, and claims
and benefit processing services to insurance companies, third party
administrators and self-funded healthcare plan sponsors. More recently, the
Company acquired CareStream Scrip Card, a PBM firm that provides services
similar to those provided by ProVantage. Healthcare plan sponsors are
increasingly utilizing PBM firms in order to reduce their costs. The sponsors
direct or encourage plan participants to utilize managed care pharmacy benefit
programs that are developed and administered by PBM firms. These programs
control pharmacy costs by monitoring decisions regarding the usage of, for
example, generic drugs instead of brand name drugs. As healthcare sponsors seek
yet further ways to contain costs, PBM companies such as ProVantage will have
greater importance in the effort to produce the best medical results at the
lowest cost.
Another initiative recently launched is the ProVantage Vision Benefit
Management Service ("VBM"). Similar to a PBM, VBM provides benefit management
services to client plan sponsors offering vision benefits to their plan
participants. ProVantage VBM was formed to leverage the Company's expertise in
retail optical services and PBM. VBM's operations are very similar to those of
the PBM. VBM has established a growing national network (currently at 4,500) of
retail optical chains and private ophthalmologists, optometrists and opticians.
In August 1996, VBM completed the acquisition of United Wisconsin Insurance
Company's vision benefit management business.
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This acquisition gave VBM an immediate market presence in the vision benefit
managment industry. Unlike the PBM, VBM offers insured as well as uninsured
services. The insured products are sold by licensed independent and employee
sales agents, and are underwritten by a licensed insurance company. VBM's
arrangement with this insurance company requires VBM to market the insurer's
vision products and to perform various administrative services, such as
maintenance of eligibility records, network maintenance, claims processing, and
certain accounting services. The insurer underwrites all insured contracts and
provides other insurance-related services such as actuarial review. In
consideration of VBM's services, VBM receives a commission equal to the
insurer's profits derived from the business. In consideration of the insurer's
insurance services, the insurer receives an underwriting fee plus certain other
insurance services fees, which in part are based on losses derived from the
business.
Another component of ProVantage is healthcare information technology.
ProVantage has developed two separate uses for this technology and is currently
commercializing this technology. The first is a separate division called
ProVMed. ProVMed focuses on turning enterprise-wide data of managed care
organizations, other purchasers, payers, and providers of healthcare, and
pharmaceutical companies into useful, actionable information using a concept
called decision support services ("DSS"). Using ShopKo's IBM SP2 massively
parallel processing computer, Oracle database technology and DSS tools, ProVMed
can extract actionable information from huge data bases much more efficiently
than most companies. For example, ProVMed will enable users to quickly access
data bases to identify physicians and healthcare providers performing outside
the norm, or patients that are candidates for case management with a view to
managing and lowering costs. The second use for this technology is for a PBM
product - ProVRx. ProVRx applies the same principles and tools as ProVMed, but
focuses on the pharmacy claims data of ProVantage's PBM customers. ProVMed is a
joint venture between ProVantage and American Medical Security Holdings, Inc.
("AMS"). ProVantage and AMS are in the process of negotiating definitive
joint venture agreements, but a memorandum of understanding between the parties
allocates 80% ownership of ProVMed to ProVantage and 20% ownership to AMS.
MARKETING AND ADVERTISING
The Company markets its general merchandise and retail pharmacy and
optical services via weekly newspaper circulars to reach a broad based customer
segment consisting largely of middle income families. These full-color
circulars average 24 pages and feature values in all departments of the stores
and have a circulation of more than 3.5 million. Direct mail vehicles are used
selectively at key promotional periods and have a circulation of more than 5.0
million. All printed advertising materials are designed by the Company's
in-house graphic design team and photographed in the Company's own photography
studio. In addition to the newspaper circulars, the Company uses television and
radio advertising to support the image that ShopKo stores offer quality
merchandise to meet the customer's casual lifestyle needs at prices that
communicate real value.
The Company prices its merchandise so as to be competitive with its
discount retail competitors both regional and national. In general, the Company
utilizes its frequent advertising of a large group of high demand items to
reinforce its competitive price image and to generate store traffic, rather
than attempting to meet the lowest available price on every item. The Company
believes it provides its customers with quality brands, focused assortments and
trend-right apparel at competitive prices in an attractive shopping
environment.
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The Company's prescription benefit management division focuses its
marketing efforts on self-funded medical plan sponsors, third party
administrators and insurance companies. The Company markets its services
through an internal sales force and a network of independent brokers. This
national sales team customizes each program to meet each client's needs and
cost containment goals.
STORE LAYOUT AND DESIGN
ShopKo stores are designed for customer convenience and for effective
merchandise presentation. The "Vision 2000" format features a fashion stage
at the store entrance to create the upscale image of the store. The stores also
feature full assortments of softlines, hard/home lines and professional
pharmacy and optical departments. Every ShopKo store now features Vision 2000
merchandising, fixturing and product assortments. The optical and pharmacy
departments are placed near the front of the store with the remainder of the
store being laid out in a "racetrack" configuration which takes customers
between and around departments. Current promotionally priced items are
prominently displayed.
The Company has substantially remodeled its stores using the Vision 2000
format. In fiscal 1997, the Company opened two new stores (one of which was a
relocation) and remodeled seven stores under this format. The Company expects
to continue to explore and test alternative store layout and display techniques
and merchandise mixes. Depending on the cost of land acquisition, size of store
and site preparation work, the Company expects that a typical new store's cost
for land acquisition, site preparation, building and fixturing will generally
approximate $6.0 to $11.0 million. The Company believes that opportunities to
lower the initial capital outlay for new stores exist through leasing, sale and
leaseback, or other financing alternatives. Remodels, which generally take
place approximately every seven to ten years, usually cost from $0.4 to $1.5
million per store. A store renovation, where the square footage is expanded or
more extensive remodeling is needed, usually costs from $1.6 to $3.0 million
per store.
The Company's average store size is approximately 90,000 square feet with
approximately 84% of the stores greater than 74,000 square feet. The Company's
traditional new stores are based on one of three standard prototypes; a 99,000
square foot store, an 88,000 square foot store or a 74,000 square foot store.
The prototype selected depends on the community and the retail competition in
the immediate area. In comparison to old versions, the Company's current
prototypes feature a greater portion of store square footage dedicated to
selling space and less space dedicated to the storage of inventory.
STORE OPERATIONS AND MANAGEMENT
The Company's store operations is driven by its focus on leadership,
performance, merchandising, innovation and excellence in execution, striving
for continual improvements in customer satisfaction. The successful Vision 2000
operating model based on ShopKo's vision, mission and merchandising and
marketing principles has been integrated into store operations with significant
improvements in operating efficiency and dedication to customer service.
During fiscal 1997, the Company's Store Operations Division developed a
comprehensive strategic plan geared toward improved customer service, enhanced
store execution and reduced
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costs. These initiatives identified non-value-added activities which were
eliminated to simultaneously increase productivity and enhance associate
availability to help customers. The Company's unique Customer Satisfaction
Monitor process continues to indicate that a significant majority of the
Company's customers surveyed give the Company top marks for overall
satisfaction.
The Company has also undertaken an intensive management and associate
development program to ensure commitment to the company mission and principles.
This education sharpened management's focus and ability to drive sales through
integrated partnership with the central organization.
Committed to its belief that associate satisfaction drives customer
satisfaction, the Company believes it has improved associate satisfaction
despite a challenging environment characterized by low unemployment and intense
competition for quality associates.
Technological innovation to support store operations included multi-media
computer based training as well as an innovative resource management system
which provides on-line sales forecasting in 15 minute increments, ties labor
scheduling to customer traffic patterns and eliminates duplication of human
resources and payroll processes by the stores and the general office.
These achievements are founded on the Company's consistent focus on
leadership and performance among its management team. Operations management is
held accountable to aggressive plans, comprehensive goals, performance
exceptions and ongoing development to ensure the Company has the competencies
required for continued success.
PURCHASING AND DISTRIBUTION
ShopKo purchases merchandise from more than 3,500 vendors with its ten
largest vendors accounting for approximately 27% of the Company's purchases
during fiscal 1997. The Company believes that most merchandise, other than
branded goods, is available from a variety of sources. ShopKo is working with
its entire supply chain to link its vendors into ShopKo's general merchandise
business planning process to reduce costs and make the replenishment function
more efficient. More than 750 vendors were linked to the Company's EDI purchase
order systems as of February 22, 1997. Vendors are now electronically receiving
point-of-sale information, allowing them to respond to changing inventory
levels in the stores. The Company has also implemented the use of electronic
purchase order acknowledgments issued by vendors based on the sales information
they have received. In addition, approximately 280 vendors are now
electronically transmitting invoices directly into the Company's automated
invoice matching system.
The Company continues to upgrade its merchandise planning, allocation and
control systems. In addition, SKU level physical inventories continue to
significantly improve perpetual inventory accuracy. Management believes these
upgrades and improvements in the physical inventory process will allow the
Company to more effectively manage in-stock positions and better manage
merchandise assortment.
Direct imports accounted for approximately 6% of the Company's purchases
during fiscal 1997. The Company buys its imported goods, principally in the Far
East, and ships the goods to its distribution centers for distribution to the
stores.
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Recent expansions of the three distribution centers have enabled the
Company to increase the proportion of its merchandise purchased directly from
manufacturers (thus reducing its cost of goods), to reduce direct
vendor-to-store deliveries (thus reducing freight charges and cost of goods
through consolidated volume purchasing) and to increase the pick and pull
capabilities allowing the Company to enhance the effectiveness and efficiency
of its store replenishment process. The Company anticipates that these cost
reductions will help it remain price competitive. During fiscal 1997,
approximately 88% of the merchandise sold by the Company (excluding optical and
pharmaceutical products) flowed through its distribution centers.
ShopKo's shoe department (other than athletic shoes) is in every store and
is the principal department operated by a third party under license. The
Company retains a percentage of the gross proceeds collected as rent.
MANAGEMENT INFORMATION SYSTEMS
ShopKo uses information technology to improve customer service, reduce
operating costs and provide information for management decision support. The
Company utilizes modern point-of-sale terminal systems for electronic price
lookup and tracking sales information at store and SKU level. Integrated earth
satellite communications systems are used to provide on-line credit card and
check authorization. Portable radio-frequency terminals are used extensively in
the stores for merchandise receiving, stocking, replenishment, pricing and
label printing. The Company also makes extensive use of automated labor
scheduling systems within the stores.
The Company's pharmacy and optical systems provide business and
record-keeping efficiencies and enhance the Company's ability to pursue third
party contracts. The Company's prescription benefit management division
operates an electronic network tying in approximately 46,000 retail pharmacies
to process third-party claims. In fiscal 1997, the Company developed systems to
support the VBM business similar to the systems developed for the PBM.
ShopKo's warehouse management system is a state-of-the-art software
package. The warehouse management system operates in a distributed processing
environment, providing complete warehouse functionality such as conveyor
control and direction of picking and putaway processes via portable
radio-frequency terminals. The warehouse management system communicates back to
the central computers over the earth satellite network to update perpetual
inventory records and accounting systems.
The Company also utilizes integrated replenishment systems which provide
higher customer service levels, optimized inventory productivity and reduced
manual efforts. In fiscal 1997, the Company installed a space planning system
that links sales volume to space allocation.
The Company is aggressively moving from a purely mainframe computer
environment to a networked client/server architecture. All stores, distribution
centers and corporate offices are now electronically connected for transaction
processing, electronic mail and multi-media training.
The Company is in the process of replacing its merchandise applications
with new, open architecture client/server applications running on a massively
parallel processor. Utilizing world-class technology, these new applications
are the result of a large scale retail systems integration
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strategy. Several of these new applications were completed within the last
year, with the remainder to be completed during fiscal 1998 and thereafter.
Many of the Company's merchandising and health service applications are
highly data intensive. ShopKo has implemented advanced data warehousing and
decision support applications running on the parallel processor to provide
timely and actionable information to decision makers within ShopKo, and to
health services clients over the Internet. The use of the parallel processor
enables ShopKo to use data mining tools to analyze data for Market Basket
Analysis to test effectiveness of promotional campaigns.
The Company also utilizes a Merchandise Financial Planning System which
integrates the planning of dollars and units by season. This system also
facilitates the ongoing monitoring of actual results to plans and forecasts
which is used to increase purchases for uptrending categories and reduce
purchases for downtrending categories.
EXPANSION
The Company opened two new stores in fiscal 1997, one of which was a
relocation. New store construction was affected by competitive pressures and
the proposed combination with Phar-Mor, Inc. and Cabot Noble, Inc. ShopKo also
opened four Vision Advantage free-standing optical centers as part of a new
retail format. Two Vision Advantage Stores were opened during the third quarter
and another two were opened during the fourth quarter of fiscal 1997. This
format will focus on providing value-priced, high quality eye wear that can be
manufactured in about an hour. Convenience to the customer, price and quality
will be the primary driving points of this business, which will leverage
heavily off of the Company's 18 years of retail optical experience.
With respect to store remodels, the Company completed seven remodels
during fiscal 1997. The rate of remodeling activity in fiscal years 1997 and
1996 was substantially reduced compared to fiscal 1995 and is expected to
approximate the future annual level of major remodels based on a seven to ten
year cycle. There are no plans to complete any major remodels or to construct
any new stores in fiscal 1998; however, the Company plans to reallocate store
space and modernize fixturing throughout the chain for certain merchandise
categories.
The Company's current growth plan for the retail business is to increase
the number of retail stores to achieve economies of scale and to capitalize on
the Company's existing infrastructure. The Company intends to consider the
acquisition of existing stores, either as specific sites, in clusters, or as
part of an existing business. The Company believes that selective and
opportunistic acquisitions of retail stores or sites will allow the Company to
achieve economies of scale, improve the Company's profitability, and maintain
its financial strength. The Company may also consider new store construction
utilizing leases, sale and leaseback, or other financing alternatives to
improve the expected financial performance of new stores. The Company's plans
with respect to new store growth are subject to change, and there can be no
assurance that the Company will achieve its plans.
In reviewing possible retail store acquisitions, the Company intends to
take a disciplined approach to ensure the Company's competitive position and
financial integrity. The key elements of such an approach are: avoiding
excessive debt and maintaining a balance sheet which will exhibit the Company's
financial strength to the vendor and creditor communities; leveraging the
Company's
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existing infrastructure, including the Company's advanced management
information and distribution systems; maintaining adequate liquidity for the
Company's operations; and critically evaluating the competitive environment for
all new stores.
ProVantage anticipates continued growth in the number of plan participants
during fiscal 1998. At the end of fiscal 1997, ProVantage had over 4.1 million
plan participants under management. This is compared to the 1.7 million plan
participants under management at the end of fiscal 1996 and 0.6 million plan
participants under management at the end of fiscal 1995. Plan participants are
persons who are enrolled in or are entitled to company managed prescription
benefits under a health plan. Going forward, the Company expects that
ProVantage will grow through internal and external initiatives. Internal
initiatives will emanate from additional marketing efforts by the present sales
force to obtain new customers, and to obtain additional revenues through the
implementation of new products to existing customers. External initiatives will
be pursued opportunistically through acquisitions. ProVantage's managed
healthcare operations are distinct from the Company's retail operations, and
the Company may, at some point in the future, consider monetizing all or part
of its investment through one or more public or private transactions. However,
there can be no assurance if or when any such transaction will occur.
ProVantage also anticipates continued growth in its VBM product line and
will intensify its marketing efforts with regards to its Healthcare Information
Technology and its ProVMed products.
COMPETITION
The discount general merchandise business is very competitive. ShopKo
competes in most of its markets with a variety of national, regional and local
discount stores and national category killers and specialty niche retailers. In
addition, department stores compete in some branded merchandise lines, discount
specialty retail chains compete in some merchandise lines such as electronics,
bed and bath, housewares, casual furniture and toys, and pharmaceutical and
optical operations compete with some of ShopKo's pharmacy and optical centers.
The Company believes that the principal competitive factors in its markets
include store location; pricing; breadth and quality of product selection;
attractiveness and cleanliness; responsiveness to changing customer tastes and
regional and local trends; customer service; in-stock availability of
merchandise; and advertising.
The Company's principal national general merchandise discount chain
competitors are Wal-Mart, Kmart and Target, each of which is substantially
larger than, and has greater resources than, the Company. Kmart stores directly
compete with approximately 92% of the Company's stores and Target stores
directly compete with approximately 52% of its stores. In addition, the Company
estimates that at the end of fiscal 1997, approximately 82% of its stores were
either in direct competition with or indirectly impacted by the presence of a
Wal-Mart store. The Company also competes with regional chains in some markets
in the Upper Midwest and the Pacific Northwest. It appears Wal-Mart intrusions
have slowed as the number of openings in fiscal 1998 will be less than fiscal
1997. However, the Company will experience an increase in Target intrusion as
Target potentially will be opening nine new units in ShopKo markets in fiscal
1998. Some of the Wal-Marts and Targets that will be opening in fiscal 1998 in
ShopKo's markets will be super centers, stores containing a wider selection of
general merchandise and grocery items.
Historically, the entry of one of these chains into an area served by one
of the Company's stores generally has had an adverse effect on the affected
ShopKo store's sales growth for approximately
<PAGE> 12
12 months. After the 12 month time period, the ShopKo store generally has
resumed a positive growth trend. Such entry often has resulted in permanently
intensified price competition. The Company's efficiency measures and
distribution center expenditures are important aspects of its efforts to
maintain or improve operating margins and market share in these markets.
The prescription benefit management industry is a dynamic growing
marketplace and very competitive. The Company believes that its primary
competitive advantages are advanced technologies which allow it to be a low
cost operator able to offer flexibility in plan design and its high quality of
service. ProVantage competes for healthcare clients with a number of
prescription benefit management companies including PCS Health Systems, Inc. (a
subsidiary of Eli Lilly and Co.), Merck-Medco Managed Care, Inc. (a subsidiary
of Merck & Co., Inc.), Express Scripts, Inc., Caremark International, Inc., (a
subsidiary of Med Partners, Inc.), TDI, Inc. (a subsidiary of Thrift Drug
Company, Inc.), Value Rx (a former subsidiary of Value Health, Inc. which was
recently sold to Columbia/HCA) and Diversified Pharmaceutical Services, Inc. (a
subsidiary of SmithKline Beecham), many of which are substantially larger than
ProVantage and each of which has considerable resources.
SEASONALITY
The retail general merchandise operations of the Company are highly
seasonal, with the third and fourth fiscal quarters contributing a significant
part of the Company's earnings due to the Christmas selling season. Because the
Company's fiscal year ends on the last Saturday in February, the Christmas
selling season impacts both the third and fourth fiscal quarters.
EMPLOYEES
As of February 22, 1997, the Company employed approximately 18,800
persons, of whom approximately 9,300 were full-time employees and 9,500 were
part-time employees. During the Christmas shopping season, the Company
typically employs approximately 2,000 additional persons on a temporary basis.
None of the Company's employees are covered by collective bargaining
agreements.
GOVERNMENT REGULATION
The Company's health services business is subject to extensive federal and
state laws and regulations governing, among other things:
Licensure and Regulation of Retail Pharmacies and Optical Centers
There are extensive federal and state regulations applicable to the
practice of pharmacy and optometry at the retail level. Most states have laws
and regulations governing the operation and licensing of pharmacies and optical
centers, and regulate standards of professional practice by pharmacy and
optical service providers. These regulations are issued by an administrative
body in each state (typically, a pharmacy board or board of optometry), which
is empowered to impose sanctions for non-compliance.
<PAGE> 13
Licensure and Regulation of Mail Service Pharmacy
The Company's mail service pharmacy is duly licensed and in good standing,
in accordance with the laws and regulations of the State of Wisconsin.
Additionally, many of the states into which the Company delivers
pharmaceuticals have laws and regulations that require out-of-state mail
service pharmacies to register with the board of pharmacy or similar regulatory
body in the state. These states generally permit the mail service pharmacy to
follow the laws of the state within which the mail service pharmacy is located.
The Company has registered in every state in which, to the Company's knowledge,
such registration is required. In addition, various pharmacy associations and
boards of pharmacy have promoted enactment of laws and regulations directed at
restricting or prohibiting the operation of out-of-state mail service
pharmacies by, among other things, requiring compliance with all laws of
certain states into which the mail service pharmacy dispenses medications
whether or not those laws conflict with the laws of the state in which the
pharmacy is located. To the extent such laws or regulations are found to be
applicable to the Company, the Company would be required to comply with them.
Other statutes and regulations impact the Company's mail service operations.
Federal statutes and regulations govern the labeling, packaging, advertising
and adulteration of prescription drugs and the dispensing of controlled
substances. The Federal Trade Commission requires mail order sellers of goods
generally to engage in truthful advertising, to stock a reasonable supply of
the product to be sold, to fill mail orders within thirty days, and to provide
customers with refunds when appropriate. The United States Postal Service has
statutory authority to restrict the transmission of drugs and medicines through
the mail to a degree that could have an adverse effect on ShopKo's mail service
operations. The United States Postal Service has exercised such statutory
authority only with respect to controlled substances. Alternative means of
delivery are available to the Company.
Regulation of Prescription Benefit Management Services
Various forms of government regulations affect or could affect providers
of prescription benefit management services. Among the most prominent forms of
such regulation are the following:
Many states have licensure or registration laws governing certain types of
ancillary healthcare organizations, including Preferred Provider Organizations,
Third Party Administrators and Utilization Review Organizations. These laws
differ significantly from state to state, and the application of such laws to
the activities of pharmacy benefit managers is often unclear. The Company has
registered under such laws in those states in which the Company has concluded
such registration is required.
Numerous states have also adopted "any willing provider" legislation,
which requires pharmacy network sponsors to admit for network participation any
retail pharmacy willing to meet a healthcare plan's price and other terms. The
Company has not been materially affected by these statutes because it
administers a network of over 46,000 retail pharmacies and will admit any
qualified, licensed pharmacy that agrees to comply with the terms of its plans.
"Anti-kickback" statutes at the federal and state level prohibit an
entity from paying or receiving any remuneration to induce the referral of
healthcare plan beneficiaries or the purchase of items or services for which
payment may be made under such healthcare plans. Additionally, most states have
consumer protection laws that have been the basis for investigations and
multi-state settlements relating to financial incentives provided by
pharmaceutical manufacturers to retail pharmacies in connection with
pharmaceutical switching programs. At the federal level, such regulations
pertain to beneficiaries of Medicare, Medicaid or other federally-funded
healthcare
<PAGE> 14
programs. State regulations typically pertain to beneficiaries of any
healthcare plan. Under the federal regulations, safe harbors exist for certain
properly disclosed payments made by vendors to group purchasing organizations.
To the Company's knowledge, these anti-kickback laws have not been applied to
prohibit PBMs from receiving amounts from pharmaceutical manufacturers in
connection with pharmaceutical purchasing and formulary management programs, to
therapeutic substitution programs conducted by independent PBMs, or to the
contractual relationships such as those the Company has with certain of its
customers.
Regulation of Vision Benefit Management Services
The Company's vision benefit management services are subject to the same
or similar state and federal regulation as the prescription benefit management
services described above.
Applicability of Insurance Laws
The Company's prescription pharmaceutical plans currently offered or
administered by the Company are on a fee-for-service basis, and are therefore
not generally subject to state insurance laws. The insured vision benefit plans
administered by the Company are underwritten by an unaffiliated licensed
insurer, and the Company believes it is in material compliance with all
applicable insurance laws.
Legislative and regulatory initiatives pertaining to such healthcare
related issues as reimbursement policies, payment practices, therapeutic
substitution programs, and other healthcare cost containment issues are
frequently introduced at both state and federal level. The Company is unable to
predict accurately whether or when legislation may be enacted or regulations
may be adopted relating to the Company's health services operations or what the
effect of such legislation or regulations may be.
The Company's management believes the Company is in substantial compliance
with, or is in the process of complying with, all existing statutes and
regulations material to the operation of the Company's health services business
and, to date, no state or federal agency has taken enforcement action against
the Company for any material non-compliance, and to the Company's knowledge, no
such enforcement against the Company is presently contemplated.
FORWARD-LOOKING STATEMENTS
In accordance with the Private Securities Litigation Reform Act of 1995,
the Company can obtain a "safe-harbor" for forward-looking statements by
identifying those statements and by accompanying those statements with
cautionary statements which identify factors that could cause actual results to
differ from those in the forward-looking statements. Accordingly, the
following information contains or may contain forward-looking statements: (1)
information included or incorporated by reference in this Annual Report on Form
10-K, including, without limitation, statements made under Item 1, Business,
including statements made under the subheadings "Merchandising and Services -
Retail Store," "Merchandising and Services - ProVantage," "Store Operations and
Management," "Purchasing and Distribution," "Management Information Systems,"
"Expansion," and "Competition," and under Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, (2) information
included or incorporated by reference in future filings by the Company with the
Securities and Exchange Commission including, without
<PAGE> 15
limitation, statements with respect to growth and expansion plans, projected
sales, revenues, earnings, costs and capital expenditures, and product
development and product roll-out plans, and (3) information contained in
written material, releases and oral statements issued by, or on behalf of, the
Company including, without limitation, statements with respect to growth and
expansion plans, projected sales, revenues, earnings, costs and capital
expenditures, and product development and product roll-out plans. The
Company's actual results may differ materially from those contained in the
forward-looking statements identified above. Factors which may cause such a
difference to occur include, but are not limited to, (i) heightened
competition, including specifically increased price competition from national
and regional discount stores, specialty stores, and prescription benefit
management companies, (ii) adverse weather conditions in the Company's retail
markets, (iii) changes in the prescription drug industry regarding pricing,
formulary use, or reimbursement practices, (iv) minimum wage legislation, (v)
regulatory and litigation matters affecting healthcare services, particularly
prescription benefit managers, (vi) interest rates, (vii) real estate costs and
construction and development costs, (viii) inventory imbalances caused by
unanticipated fluctuations in consumer demand, (ix) trends in the economy which
affect consumer confidence and consumer demand for the Company's goods,
particularly trends affecting the Company's markets, (x) possible termination
of prescription benefit management contracts with key clients or pharmaceutical
manufacturers, (xi) the availability of suitable retail real estate which can
be acquired on terms which are acceptable to the Company and (xii) the factors
mentioned under "Risk Factors" in the Company's Registration Statement on Form
S-3 (Reg. No. 333-26615).
ITEM 2. PROPERTIES
As of February 22, 1997, the Company operated 130 retail stores and four
stand alone optical centers in 16 Upper Midwest, Western Mountain and Pacific
Northwest states. The following table sets forth the geographic distribution of
the Company's present stores:
# OF # OF
STATE STORES STATE STORES
---------------------------------------------
California 1 Nebraska 11
Colorado 3 Nevada 3
Idaho 8 Oregon 4
Illinois 3 South Dakota 6
Iowa 3 Utah 15
Michigan 4 Washington 10
Minnesota 13 Wisconsin 41
Montana 5 ------
Subtotal 130
------
Ohio (1) 4
------
Total 134
======
- ---------
(1) Vision Advantage Optical Centers
Of the Company's 130 ShopKo stores, the Company owns the land and building
outright with respect to 84 stores, owns the building subject to a ground lease
with respect to five stores and leases the land and building with respect to 10
stores. The Company's wholly-owned subsidiary, ShopKo Properties, Inc., owns
the land and building outright with respect to 27 stores, owns the building
subject to a ground lease with respect to three stores and leases the land and
building with
<PAGE> 16
respect to one store. The ground leases expire at various dates ranging from
2012 through 2038 and the other leases expire at various dates ranging from
1997 through 2020. All four Vision Advantage stores are leased. The size of a
typical Vision Advantage store is approximately 2,500 square feet.
The Company's other principal properties are as follows:
SQ. FT OF
BUILDING
LOCATION USE SPACE TITLE
- ------------------------------------------------------------------------------
Green Bay, WI Corporate Headquarters 228,000 Owned
Wisconsin Rapids, WI Information Services Dept. 1,300 Leased
Satellite Office
De Pere, WI Distribution Center 265,000 Owned
Boise, ID Distribution Center 210,000 Owned
Omaha, NE Distribution Center 50,000 Owned
Green Bay, WI ProVantage Mail Service 10,000 Leased
Brookfield, WI ProVantage Claims Processing 14,400 Leased
Facility
Lawrence, WI Corporate Headquarters - South 114,300 Owned
Annex/Return Center
Elm Grove, WI ProVantage Claims Processing/ 5,300 Leased
Administrative Office Annex
Salt Lake City, UT ProVantage Regional Office 1,250 Leased
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various litigation matters arising in the
ordinary course of its business. Management believes that none of this
litigation will have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no matter submitted during the fourth quarter of fiscal year
1997 to a vote of the security holders of Registrant.
EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning executive officers of the Registrant is
contained in Item 10 hereof and is incorporated herein by reference.
<PAGE> 17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
ShopKo Stores, Inc. common shares are listed on the New York Stock
Exchange under the symbol "SKO" and in the newspapers as "ShopKo." As of May
7, 1997, ShopKo's common shares were held by 1,184 record owners.
The following table sets forth the high and low reported closing sales
prices for the Common Stock for the last two fiscal years as reported on the
New York Stock Exchange Composite Tape.
<TABLE>
<CAPTION>
HIGH LOW DIVIDEND
------- -------- --------
<S> <C> <C> <C>
Fiscal Year 1996
First Quarter (ended June 17, 1995) $11.750 $8.750 $.11
Second Quarter (ended September 9, 1995) 14.000 10.250 .11
Third Quarter (ended December 2, 1995) 13.250 10.250 .11
Fourth Quarter (ended February 24, 1996) 11.750 10.875 .11
Fiscal Year 1997
First Quarter (ended June 15, 1996) $16.500 $11.250 $.11
Second Quarter (ended September 7, 1996) 16.250 13.500 .11
Third Quarter (ended November 30, 1996) 16.250 15.000 --
Fourth Quarter (ended February 22, 1997) 16.125 14.375 --
</TABLE>
The closing sales price of the Common Stock on the New York Stock Exchange
on May 13, 1997 was $20.75 per share.
As a result of the proposed transaction with Phar-Mor, Inc. and Cabot
Noble, Inc., the Company was prohibited from declaring or paying any dividends.
Upon termination of such transaction, the Company determined to retain
earnings, if any, for the growth and expansion of its business and not declare
or pay any cash dividends. The Company intends to reconsider its dividend
policy after completion of the secondary offering and stock repurchase
contemplated in the Stock Buyback and Secondary Offering Agreement dated April
24, 1997 between the Company and Supervalu. See Note L of the Notes to the
Consolidated Financial Statements included herein. Future dividends will be
subject to the discretion of the Company's Board of Directors and will depend
upon the Company's results of operations, financial condition, capital
expenditure program, debt repayment requirements and other factors, some of
which are beyond the Company's control. There can be no assurance as to whether
or when the Company's Board of Directors will change the current policy
regarding dividends.
The Registrant's revolving credit agreement has a restrictive covenant
which requires maintenance of a minimum net worth. This covenant may
potentially limit the payment of dividends. As of February 22, 1997, the
Company was in compliance with this covenant; having a net worth balance of
$460.9 million compared to a required balance of $391.6 million.
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------------------------------------------------
FEB. 22, FEB. 24, FEB. 25, FEB. 26, FEB. 27
1997 1996 1995 1994(1) 1993
(52 WKS) (52 WKS) (52 WKS) (52 WKS) (52 WKS)
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS (MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $2,333 $1,968 $1,853 $1,739 $1,683
Licensed department rentals and other income 13 14 12 12 11
Gross margin 550 501 488 453 457
Selling, general and administrative expenses 397 361 356 344 326
Depreciation and amortization expenses 60 56 53 47 43
Interest expense 32 34 29 21 18
Earnings before income taxes 74 63 62 53 81
Net earnings 45 38 38 32 50
- ------------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (DOLLARS)
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings per common share $1.40 $1.20 $1.18 $1.00 $1.56
Cash dividends declared per common share(2) 0.22 0.44 0.44 0.44 0.44
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL DATA (MILLIONS)
- ------------------------------------------------------------------------------------------------------------------------------------
Working capital $232 $215 $187 $119 $ 82
Property and equipment-net 603 617 618 578 493
Total assets 1,234 1,118 1,110 953 792
Total debt(3) 421 416 429 337 225
Total shareholders' equity 461 422 397 374 355
Capital expenditures 39 53 95 134 91
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
- ------------------------------------------------------------------------------------------------------------------------------------
Current ratio 1.7 1.8 1.7 1.5 1.4
Return on beginning assets 4.0 % 3.5 % 4.0 % 4.1 % 7.1 %
Return on beginning shareholders' equity 10.7 % 9.7 % 10.1 % 9.0 % 15.7 %
Total debt as % of total capitalization(4) 46.6 % 48.5 % 50.9 % 46.2 % 37.9 %
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER YEAR END DATA
- ------------------------------------------------------------------------------------------------------------------------------------
Stores open at year end 130 129 124 117 111
Average store size-square feet 89,840 89,945 90,260 90,440 89,500
</TABLE>
(1) The effect of adopting Statement of Financial Accounting Standards
("SFAS") No. 106, "Employers' Accounting for Postreitrement Benefits Other
Than Pensions," resulted in a decrease in net earnings of $0.6 million
($0.02 per share). Adoption of SFAS No. 109, "Accounting for Income Taxes,"
had no effect on reported net earnings or financial position.
(2) In the third quarter of fiscal 1997, the Company entered into a Plan of
Reorganization with Phar-Mor and Cabot Noble that prohibited the
declaration or payment of dividends.
(3) Total debt includes short-term debt, current portion of long-term
obligations and long-term obligations.
(4) Total capitalization includes shareholders' equity, total debt and
non-current deferred income taxes.
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth items from the Company's Consolidated
Statements of Earnings as percentages of consolidated net sales:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------
FEB. 22, FEB. 24, FEB. 25,
1997 1996 1995
(52 WEEKS) (52 WEEKS) (52 WEEKS)
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Net sales 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.6 0.7 0.7
---------- ---------- ----------
100.6 100.7 100.7
Costs and expenses:
Cost of sales 76.4 74.5 73.7
Selling, general and administrative expenses 17.0 18.4 19.2
Depreciation and amortization expenses 2.6 2.9 2.9
---------- ---------- ----------
96.0 95.8 95.8
Income from operations 4.6 4.9 4.9
Interest expense 1.4 1.7 1.6
---------- ---------- ----------
Earnings before income taxes 3.2 3.2 3.3
Provision for income taxes 1.3 1.2 1.3
---------- ---------- ----------
Net earnings 1.9% 2.0% 2.0%
========== ========== ==========
</TABLE>
The Company has redefined its business segments from the classifications
of General Merchandise and Health Services (which had included ProVantage's
managed healthcare operations and ShopKo's retail pharmacy and optical
departments), to 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 healthcare information technology). The new segment reporting
will provide better information for shareholders and business analysts.
Intercompany sales, which consist of prescriptions that were both sold at a
ShopKo pharmacy and processed by ProVantage, have been eliminated.
<PAGE> 20
The following tables set forth items from the Company's business segments
as percentages of net sales:
RETAIL STORE SEGMENT
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------
FEB. 22, FEB. 24, FEB. 25,
1997 1996 1995
(52 WEEKS) (52 WEEKS) (52 WEEKS)
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Net sales 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.6 0.7 0.7
---------- ---------- ----------
100.6 100.7 100.7
Costs and expenses:
Cost of sales 73.8 73.8 73.6
Selling, general and administrative expenses 18.3 18.3 18.6
Depreciation and amortization expenses 2.8 2.9 2.9
---------- ---------- ----------
94.9 95.0 95.1
Income from operations 5.7% 5.7% 5.6%
========== ========== ==========
</TABLE>
PROVANTAGE SEGMENT
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------
FEB. 22, FEB. 24, FEB. 25,
1997 1996 1995
(52 WEEKS) (52 WEEKS) (52 WEEKS)
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Net sales 100.0% 100.0% 100.0%
Licensed department rentals and other income 0.2 0.5 0.4
---------- ---------- ----------
100.2 100.5 100.4
Costs and expenses:
Cost of sales 93.1 91.0 78.0
Selling, general and administrative expenses 3.8 5.5 10.0
Depreciation and amortization expenses 0.6 1.1 1.8
---------- ---------- ----------
97.5 97.6 89.8
Income from operations 2.7% 2.9% 10.6%
========== ========== ==========
</TABLE>
FISCAL 1997 COMPARED TO FISCAL 1996
Consolidated net sales for fiscal 1997 (52 weeks) increased 18.6% or
$365.4 million over fiscal 1996 (52 weeks) to $2,333.4 million.
Retail Store sales increased 6.6% or $124.7 million over fiscal 1996 to
$2,005.7 million. Comparable Retail Store sales increased 6.0%. The Comparable
Retail Store increases by category were as follows: Apparel - 12%, Retail
Health - 8% and Hardline/Home goods - 3%. The Company attributes these
increases in large part to the success of its merchandising operations and
marketing initiatives. Changes in retail comparable store sales for a fiscal
year are based upon those stores which were open for the entire preceding
fiscal year.
<PAGE> 21
ProVantage sales increased 271.7% or $254.9 million over fiscal 1996 to
$348.8 million. Management attributes this increase primarily to internally
generated growth and supplementally to the acquisition of CareStream Scrip Card
in August 1996. Included in ProVantage sales are amounts billed to insurance
companies, third party administrators and self-funded medical plan sponsors and
the amounts billed to pharmaceutical manufacturers and third party formulary
administrators for formulary fees. The formulary fees included in ProVantage
sales were $16.7 million and $5.7 million for fiscal years 1997 and 1996,
respectively. On a per claim basis, net formulary fees were $0.51 and $0.79 for
fiscal years 1997 and 1996, respectively. Management expects the net formulary
fees per claim to decrease in fiscal 1998.
Consolidated gross margins as percentages of sales were 23.6% and 25.5%
for fiscal 1997 and 1996, respectively. Retail Store gross margins as
percentages of sales were 26.2% for both fiscal years and include LIFO charges
of $2.6 million and $2.2 million for fiscal 1997 and 1996, respectively. Retail
Store gross margins, before LIFO expense, were 26.3% in fiscal 1997 and fiscal
1996. ProVantage gross margins as percentages of sales were 6.9% and 9.0% for
fiscal 1997 and 1996, respectively. This decrease is attributable to a larger
percentage of the sales coming from the lower gross margin claims processing
activities and to an increase in the percentage of formulary fees shared with
clients. Management anticipates that this downward trend in gross margin
percent for ProVantage will continue.
Consolidated selling, general and administrative expenses decreased 1.4%
of net sales to 17.0% compared with 18.4% in fiscal 1996. The decrease is due
to increased sales related to ProVantage. Retail Store selling, general and
administrative expenses were 18.3% of net sales for both fiscal years.
ProVantage selling, general and administrative expenses decreased 1.7% of net
sales to 3.8% compared with 5.5% in fiscal 1996. This decrease is primarily due
to leveraging costs against increasing sales volumes.
The Company's operating earnings (earnings before interest and income
taxes) increased 8.6% to $105.8 million in fiscal 1997 from $97.4 million in
fiscal 1996. Retail Store operating earnings (earnings before corporate
expenses, interest and income taxes) increased 6.0% to $113.7 million in fiscal
1997 compared to $107.2 million in fiscal 1996. This increase is primarily due
to increased sales. ProVantage operating earnings increased in fiscal 1997 to
$9.5 million compared to $2.7 million in fiscal 1996. This increase is
primarily due to growth in prescription benefit management services and
business acquisitions.
Net interest expense in fiscal 1997 decreased from the prior year by 0.3%
of net sales to 1.4% of net sales. This decrease is primarily due to increased
sales and increased interest income. Interest income increased to $4.3 million
in fiscal 1997 compared with $1.8 million in fiscal 1996.
FISCAL 1996 COMPARED TO FISCAL 1995
Consolidated net sales for fiscal 1996 (52 weeks) increased 6.2% or $115.1
million over fiscal 1995 (52 weeks) to $1,968.0 million.
Retail Store sales increased 2.2% or $41.1 million over fiscal 1995 to
$1,881.0 million. Management attributes this sales increase to the opening of
five new stores and increased business in the Company's retail pharmacy and
optical centers. Comparable Retail Store sales decreased
<PAGE> 22
0.5%. Management believes Retail Store sales were negatively impacted by a
difficult retail environment, planned contraction of several departments and
increased competitive entries.
ProVantage sales increased 567.5% or $79.8 million over fiscal 1995 to
$93.8 million. In fiscal 1995, ProVantage sales only included prescription
benefit management sales for the eight week period from the date of the
Company's acquisition of Bravell, Inc. (''Bravell'') to the end of the fiscal
year, in addition to mail service revenues. Of the increase, $53.4 million or
380.1% is due to fiscal 1995 including only a partial year of Bravell sales.
Management attributes the rest of the increase to growth in prescription
benefit management services business.
Consolidated gross margins as percentages of sales were 25.5% and 26.3%
for fiscal 1996 and 1995, respectively. Retail Store gross margins as
percentages of sales were 26.2% and 26.4% for fiscal 1996 and 1995,
respectively. The Retail Store gross margin for fiscal 1996 includes a LIFO
charge of $2.2 million and for fiscal 1995 includes a LIFO credit of $2.0
million and a $5.5 million charge to reduce certain inventories to market
value. Retail Store gross margin before LIFO expense was 26.3% in fiscal 1996
and 26.2% in fiscal 1995. ProVantage gross margins as percentages of sales were
9.0% and 22.0% for fiscal 1996 and 1995, respectively. This decrease is
attributable to an increase in the percentage of formulary fees shared with
clients and a larger portion of the sales coming from the lower gross margin
claims processing activities.
Consolidated selling, general and administrative expenses decreased 0.8%
of net sales to 18.4% compared with 19.2% in fiscal 1995. Retail Store selling,
general and administrative expenses were 18.3% and 18.6% for fiscal 1996 and
1995, respectively. This improvement is primarily due to expense control
initiatives. ProVantage selling, general and administrative expenses decreased
to 5.5% of net sales from 10.0% of net sales in fiscal 1995. This decrease is
primarily due to leveraging costs against increased sales volumes.
The Company's operating earnings (earnings before interest and income
taxes) increased 6.5% to $97.4 million in fiscal 1996 from $91.5 million in
fiscal 1995. Retail Store operating earnings (earnings before corporate
expenses, interest and income taxes) increased 4.4% to $107.2 million in fiscal
1996 compared to $102.7 million in fiscal 1995. This increase is primarily due
to increased sales and expense control initiatives. ProVantage operating
earnings increased in fiscal 1996 to $2.7 million compared to $1.5 million in
fiscal 1995. The increase is due to growth in prescription benefit management
services.
Net interest expense in fiscal 1996 increased from the prior year by 0.1%
of net sales to 1.7% of net sales. The increase reflects a full year of
interest charges on fiscal 1995's issuance of long-term debentures.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies on cash generated from its operations, with the
remaining needs being met by short-term and long-term borrowings. Cash provided
from operating activities was $111.7 million, $155.6 million and $40.9 million
in fiscal years 1997, 1996 and 1995, respectively.
On November 9, 1994, the Company issued $100 million 9.0% senior unsecured
notes due November 15, 2004. The net proceeds of $98.9 million, after
underwriting and issuance costs, were
<PAGE> 23
used to reduce the Company's short-term borrowings and to provide for working
capital needs and other general corporate purposes.
Funds generated from operations, and if necessary, the existing $125
million revolving credit agreement are expected to fund the projected working
capital needs and total capital expenditures through fiscal 1998, including the
stock repurchase from Supervalu. See Note L of the Notes to the Consolidated
Financial Statements included herein. The revolving credit agreement expires
October 4, 1997. The Company anticipates being able to replace this agreement
with a revolving credit agreement based on current market terms.
CAPITAL EXPENDITURES AND ACQUISITIONS
The Company's principal use of cash was for capital expenditures and
business acquisitions. The Company spent $38.9 million on capital expenditures
(excluding acquisitions) in fiscal 1997, compared to $53.0 million in fiscal
1996 and $94.6 million in fiscal 1995. The following table sets forth the
components of the Company's capital expenditures and acquisitions:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------
FEB. 22, FEB. 24, FEB. 25,
1997 1996 1995
(52 WEEKS) (52 WEEKS) (52 WEEKS)
---------- ---------- ----------
(Millions)
<S> <C> <C> <C>
Capital Expenditures
New stores $ 2.5 $ 14.9 $ 31.3
Remodeling and refixturing 14.6 24.7 45.2
Distribution centers 1.3 0.7 2.8
Management information and point-of-sale equipment
and systems 18.8 11.7 14.8
Other 1.7 1.0 0.5
------ ------ ------
Total $ 38.9 $ 53.0 $ 94.6
====== ====== ======
Acquisitions $ 30.5 -- $ 15.9
====== ====== ======
</TABLE>
In fiscal 1997, the Company opened two new stores under the Vision 2000
format (one of which was a relocation) and four Vision Advantage stores, which
are stand alone optical centers. With respect to store remodels, the Company
completed seven remodels under the Vision 2000 format in fiscal 1997. The rate
of remodeling activity in fiscal years 1997 and 1996 was substantially reduced
compared to fiscal 1995 and is expected to approximate the future annual level
of major remodels based on a seven to ten year cycle. There are no plans to
complete any major remodels or to construct any new stores in fiscal 1998;
however, the Company plans to reallocate store space and modernize fixturing
throughout the chain for certain merchandise categories. Expansion and remodel
plans for fiscal 1999 and after are under review.
The Company's total capital expenditures for fiscal 1998 for management
information systems and other expenditures are anticipated to approximate $40
to $50 million, the majority of which would relate to existing retail business
to support ongoing replacements, merchandise initiatives and continued
investment in systems technology, excluding capital required for acquisitions
of businesses or real estate. Such plans may be reviewed and revised from time
to time in light of changing conditions.
<PAGE> 24
The Company expects to pursue growth of its retail store business through
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. See
"Business - Expansion." 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.
On August 2, 1996, the Company completed the acquisition of CareStream
Scrip Card from Avatex Corporation, formerly known as FoxMeyer Health
Corporation ("Avatex"). CareStream Scrip Card is a prescription benefit
management company which is being integrated with the Company's ProVantage
subsidiary. The purchase price was $30.5 million in cash, with a supplemental
cash payment of between $2.5 million and $5.0 million due between six months
and five years after August 2, 1996. The purchase price was funded from the
Company's available cash.
On October 4, 1996, the Company and the founders of Bravell entered into
an agreement whereby the Company (i) acquired the remaining 3% of the common
stock of Bravell which the Company did not acquire in January 1995, (ii)
extinguished all remaining contingent payment obligations to the founders, and
(iii) terminated the founders' employment agreements. On April 10, 1997, the
Company satisfied its obligations under this agreement by making a payment of
approximately $8.9 million to the founders.
TERMINATION OF PLAN OF REORGANIZATION
On September 7, 1996, the Company entered into an Agreement and Plan of
Reorganization, as amended as of October 9, 1996, (the "Plan of
Reorganization") with Phar-Mor, Inc. ("Phar-Mor") and Cabot Noble, Inc.
("Cabot Noble"). Pursuant to the Plan of Reorganization, the Company and
Phar-Mor would have become subsidiaries of Cabot Noble.
The planned business combination was terminated on April 2, 1997 by mutual
agreement between the Company, Cabot Noble and Phar-Mor. The Company
anticipates recording a one-time pre-tax charge of approximately $2.8 million
($0.05 per share), during the first quarter of fiscal 1998 to cover costs
associated with the proposed combination.
DIVIDEND POLICY
As a result of the proposed transaction with Phar-Mor and Cabot Noble, the
Company was prohibited from declaring or paying any dividends. Upon termination
of such transaction, the Company determined to retain earnings, if any, for the
growth and expansion of its business and not declare or pay any cash dividends.
The Company intends to reconsider its dividend policy after completion of the
secondary offering and the stock repurchase contemplated in the Stock Buyback
and Secondary Offering Agreement dated April 24, 1997 between ShopKo and
Supervalu. See Note L to the Notes to Consolidated Financial Statements
included herein. Future dividends will be subject to the discretion of the
Company's Board of Directors and will depend upon the Company's results of
operations, financial condition, capital expenditure program, debt repayment
requirements and other factors, some of which are beyond the Company's control.
There can be no assurance as to whether or when the Company's Board of
Directors will change the current policy regarding dividends.
<PAGE> 25
INFLATION
Inflation has not had a significant effect on the results of operations of
the Company or its internal and external sources of liquidity.
RECENT PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share," and SFAS No. 129, "Disclosure of Information
about Capital Structure," were issued. SFAS No. 128 specifies the computation,
presentation and disclosure requirements for earnings per share. SFAS No. 129
requires an entity to explain the pertinent rights and privileges of the
various securities outstanding. Both Statements must be adopted no later than
fiscal 1998. The Company is in the process of evaluating the impact of SFAS No.
128 and SFAS No. 129 on its financial statements.
STOCK BUYBACK AGREEMENT
On April 24, 1997, the Company and Supervalu (the "Selling Shareholder")
entered into a Stock Buyback and Secondary Offering Agreement pursuant to which
the Company has agreed to repurchase 8,174,387 shares of Common Stock from the
Selling Shareholder for $18.35 per share. The obligation of the Company and
the Selling Shareholder to consummate the Stock Buyback is conditioned upon
completion of a secondary public offering of the Selling Shareholder's
remaining 6,557,280 shares of Common Stock (the "Offering"). Depending upon
the price to the public of the Common Stock in the Offering, the expenses of
the Offering to be borne by the Company could result in a one-time charge of up
to approximately $8.5 million ($0.37 per share) at the time the Offering and
the Stock Buyback are completed. The Stock Buyback and the Offering are
expected to be significantly accretive to the Company's earnings, excluding
one-time charges in fiscal 1998 related to the termination of the Phar-Mor
transaction and the Offering. See Note L of the Notes to the Consolidated
Financial Statements included herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated financial statements are included on pages 42 to 59 and
are incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE> 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
SERVED IN EMPLOYED
CURRENT BY THE CURRENT
POSITION COMPANY MEMBER OF BOARD OF TERM
NAME AGE* POSITION SINCE SINCE DIRECTORS SINCE EXPIRES
- ------------------ ---- ---------------------------------------------- --------- -------- -------------------- -------
<S> <C> <C> <C> <C> <C> <C>
Michael W. Wright 58 Chairman and Director 1980 1999
William J. Tyrrell 67 Vice Chairman and Director 1974 1999
Jack W. Eugster 51 Director 1991 1997
Jeffrey C. Girard 49 Director 1991 1998
Dale P. Kramer 57 President, Chief Executive Officer and a 1991 1971 1991 1998
Director
William J. Podany 50 Executive Vice President and Chief Operating 1996 1994
Officer
Michael J. Bettiga 43 Senior Vice President, Health Services 1995 1977
Roger J. Chustz 46 Senior Vice President, General Merchandise, 1993 1993
Manager, Apparel
Steven T. Harig 42 Senior Vice President, Planning, Replenishment 1993 1989
and Analysis, Distribution, Transportation
Thomas D. Hendra 50 Senior Vice President, Special Tactical 1997 1970
Initiatives
Gary A. Hillerman 48 Senior Vice President, General Merchandise 1997 1996
Manager, Hardlines
Michael J. Hopkins 46 Senior Vice President, General Merchandise 1995 1995
Manager, Hardlines/Home
Jeffrey A. Jones 50 Senior Vice President and Chief Financial 1993 1993
Officer
Rodney D. Lawrence 39 Senior Vice President, Store Marketing, 1996 1996
Store Planning
David A. Liebergen 51 Senior Vice President, Human Resources, 1993 1973
Quality Assurance, Legal Affairs, Internal
Communication
L. Terry McDonald 54 Senior Vice President, Marketing 1994 1994
James F. Tucker 52 Senior Vice President and Chief Information 1995 1994
Officer
</TABLE>
*as of February 22, 1997
<PAGE> 27
There are no family relationships between or among any of the directors or
executive officers of the Company.
The term of office of each executive officer is from one annual meeting of
the directors until the next annual meeting of directors or until a successor
for each is selected.
There are no arrangements or understandings between any of the executive
officers of the Registrant and any other person (not an officer or director of
the Registrant acting as such) pursuant to which any of the executive officers
were selected as an officer of the Registrant.
Upon the closing of the public offering and the stock buyback contemplated
in the Stock Buyback and Secondary Offering Agreement dated April 24, 1997
between the Company and Supervalu, Michael W. Wright, Chairman of Supervalu,
and the Company, and Jeffrey C. Girard, Executive Vice President and Chief
Financial Officer of Supervalu, will resign from the Company's Board of
Directors. At that time it is also expected that Dale P. Kramer, the Company's
President and Chief Executive Officer, will be named Chairman of the Company's
Board of Directors and that William J. Podany, the Company's Executive Vice
President and Chief Operating Officer, will be nominated as an additional
director. A search is currently underway for new independent directors to
replace Messrs. Wright and Girard.
Each of the executive officers of the Company has been in the employ of
the Company for more than five years, except for William J. Podany, Roger J.
Chustz, Gary A. Hillerman, Michael J. Hopkins, Jeffrey A. Jones, Rodney D.
Lawrence, L. Terry McDonald and James F. Tucker.
Mr. Wright has been a director of the Company since February 1980;
Chairman of the Board since August 1991, and previously served as a Vice
President of the Company from March 1978 to August 1991. Mr. Wright is the
Chairman of the Board, President and Chief Executive Officer of Supervalu. He
has held several other executive level positions since joining Supervalu in
1977. In addition to his position on the board of directors of the Company and
Supervalu, Mr. Wright also serves on the boards of Norwest Corporation,
Honeywell, Inc., Cargill, Inc., and Musicland Stores Corporation. He is
Chairman of the board of directors of Food Marketing Institute and is a member
of the board of directors of Food Distributors International (formerly the
National American Wholesale Grocers Association), and the Food Business Forum
(CIES). He serves as a Trustee Emeritus of the University of Minnesota
Foundation and is on the University of Minnesota Carlson School of Management
Board of Overseers and the St. Thomas Academy Board of Trustees.
Mr. Tyrrell has been a director of the Company since March 1974; Vice
Chairman of the Board since August 1991, and previously served as the President
of the Company from March 1973 to February 1991 and Chairman of the Company
from February 1991 to August 1991.
Mr. Eugster has been a director of the Company since September, 1991; he
has been the Chairman, President and Chief Executive Officer of The Musicland
Group, Inc., a retail music and home video company, since 1980 and has held the
same positions with its parent company, Musicland Stores Corp., since 1988.
Mr. Eugster is also a director of Damark Inc., MidAmerican Energy Corporation,
Donaldson Co., and Jostens, Inc.
Mr. Girard has been a director of the Company since June 1991; Executive
Vice President and Chief Financial Officer of Supervalu since October 1992;
prior thereto, he held the positions of Executive Vice President, Chief
Financial Officer and Treasurer of Supermarkets General Holdings
<PAGE> 28
Corporation (a supermarket company not affiliated with the Company) and Senior
Vice President and Chief Financial Officer of Supervalu.
Mr. Kramer has been a director of the Company since August 1991; President
and Chief Executive Officer of the Company since February 1991; prior thereto,
he served as the Company's Executive Vice President from April 1983 to February
1986 and as its Executive Vice President and Chief Operating Officer from
February 1986 to February 1991. Mr. Kramer has been employed by the Company in
various other positions since 1971.
Mr. Podany has been Executive Vice President and Chief Operating Officer
since May 1996. Mr. Podany served as Executive Vice President of ShopKo from
November 1994 to May 1996. He has held senior merchandising executive officer
positions with Allied Stores, May Department Stores and Carter Hawley Hale
since 1978. From 1992 to 1994, Mr. Podany was Executive Vice President -
Merchandising, Planning and Distribution of Carter Hawley Hale, a federation of
four department store chains. From 1987 to 1992, he was Senior Vice President
and General Merchandise Manager of Thalhimer's and Sibley's, both divisions of
May Department Stores. Mr. Podany has held a broad range of other retail
merchandising positions since beginning his career in 1969.
Mr. Chustz has been Senior Vice President - General Merchandise Manager,
Apparel of ShopKo since October 1993. Mr. Chustz also served as Vice President
- - General Merchandise Manager, Apparel from March 1993 to October 1993. Mr.
Chustz was employed by Maison Blanche in various positions from 1975 through
1992, most recently as Senior Vice President - General Merchandising Manager.
Mr. Chustz also served as President of Brocato immediately prior to joining the
Company.
Mr. Hillerman has been Senior Vice President - General Merchandise
Manager, Hardlines since March 1997. Mr. Hillerman also served as Vice
President - Divisional Merchandise Manager from March 1996 to March 1997. Prior
he was Divisional Merchandise Manager at Dillards since 1991. Mr. Hillerman
also served as Vice President of Buying at Tuesday Morning and Senior Vice
President - General Merchandise Manager of Hardlines and Home at Cleveland May
Company.
Mr. Hopkins has been Senior Vice President - General Merchandise Manager,
Hardlines/Home since November 1995. From 1992 to 1995, Mr. Hopkins was Senior
Vice President - Merchandise Planning and Distribution at Carter Hawley Hale.
Prior thereto, Mr. Hopkins served as Senior Vice President and General
Merchandise Manager of Home with Broadway Southwest division of Carter Hawley
Hale from 1985 to 1992.
Mr. Jones has been Senior Vice President and Chief Financial Officer of
the Company since November 1993. Mr. Jones was Senior Vice President and Chief
Financial Officer for Trans World Music Corporation from 1990 through 1993. Mr.
Jones also held various executive positions at Household Merchandising, Inc.
and Lane Bryant, Inc., a subsidiary of The Limited, Inc.
Mr. Lawrence has been Senior Vice President - Store Marketing and Store
Planning since May 1996. Prior he was Vice President - Store Planning with
Broadway Stores, Inc. from 1994 to 1996. Mr. Lawrence was Director of Store
Planning with Carter Hawley Hale Stores, Inc. from 1992 to 1994 and Vice
President - Visual Merchandising with Broadway from 1989 to 1992.
Mr. McDonald has been Senior Vice President - Marketing of the Company
since July 1994. Mr. McDonald was Senior Vice President - Marketing with
Payless Shoe Source from 1988 to 1994 and
<PAGE> 29
Senior Vice President - Advertising & Sales Promotion with M. O'Neil Co., from
1986 to 1988. Payless Shoe Source and M. O'Neil Co. are both divisions of May
Department Stores. Mr. McDonald also held various merchandising and marketing
positions with Cain-Sloan Co., an Allied Stores Division, including Vice
President - General Merchandise Manager, Home and Vice President Advertising and
Sales Promotion.
Mr. Tucker has been Senior Vice President - Chief Information Officer of
the Company since February 1995 and served as Vice President - Management
Information Services from January 1994 to February 1995. Mr. Tucker was Vice
President of Management Information Services with Trans World Music Corporation
from 1991 through 1993. Mr. Tucker was also Vice President of Management
Information Services with Chess King, Division of Melville Corporation, from
1984 until 1991.
ITEM 11. EXECUTIVE COMPENSATION
The following table (the "Summary Compensation Table") sets forth the
compensation paid by the Company for each of the last three fiscal years to the
Company's Chief Executive Officer and its other four most highly compensated
executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- -------------------
SECURITIES
NAME OTHER RESTRICTED UNDERLYING
AND ANNUAL STOCK OPTIONS/ ALL OTHER
PRINCIPAL COMPENSATION AWARDS SARS COMPENSATION
POSITION YEAR SALARY($) BONUS($)(1) ($) (3) ($) (4) (#) ($)
- ---------- ---- --------- ----------- ------------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dale P. Kramer 1997 500,000 500,000 5,271 595,000 0 22,332 (5)
President & CEO 1996 430,000 174,150 1,131 - 100,000 20,336
1995 401,700 169,919 1,799 - 0 22,957
William J. Podany 1997 390,793 312,635 2,750 371,875 0 47,445 (6)
Executive Vice 1996 340,000 121,569 - - 50,000 15,391
President & COO 1995 (2) 78,115 0 - - 75,000 -
Jeffrey A. Jones 1997 285,000 228,000 15 - 0 12,537 (7)
Sr. Vice President 1996 285,000 93,641 15 - 45,000 9,212
& CFO 1995 227,616 74,886 - - 0 12,200
Roger J. Chustz 1997 220,000 154,000 10 - 0 11,359 (8)
Sr. Vice President 1996 202,215 63,698 10 - 30,000 10,582
GMM/Apparel 1995 187,349 61,638 - - 0 24,501
Thomas D. Hendra 1997 212,000 148,400 20 - 0 12,471 (9)
Sr. Vice President 1996 206,272 64,976 25 - 30,000 7,985
Special Tactical 1995 194,732 64,067 - - 0 10,001
Initiatives
</TABLE>
<PAGE> 30
(1) Represents bonuses earned with respect to the indicated fiscal year
pursuant to the Company's Executive Incentive Plan although all or a
portion of the bonus may have been paid during the subsequent fiscal year.
(2) Mr. Podany's employment with the Company commenced November 7, 1994.
(3) Represents above market interest earned under the Deferred Compensation
Plan and, with respect to Messrs. Kramer and Podany, dividends on
restricted stock in the following amounts: Mr. Kramer: $4,400; and Mr.
Podany: $2,750.
(4) On April 17, 1996, Mr. Kramer and Mr. Podany were granted 40,000 and
25,000 shares of restricted stock, respectively, pursuant to the Company's
1993 Restricted Stock Plan. The dollar amount shown equals the number of
restricted shares granted, multiplied by $14.875, the per-share closing
price of the Company's common stock on the date of grant. The dollar
values of these restricted shares based upon the February 21, 1997
per-share closing price of $15.50 were: Mr. Kramer, $620,000; and Mr.
Podany, $387,500. These valuations do not take into account the
diminution in value attributable to the restrictions applicable to the
shares. Mr. Podany's shares vest in full on April 17, 2001. Mr. Kramer's
shares vest upon the first to occur of: (i) achievement of a targeted
fair market value of ProVantage; or (ii) the per-share closing price of
the Company's common stock being above a targeted level for 20 consecutive
trading days. Pursuant to the 1993 Restricted Stock Plan, the restricted
stock awards will also vest on certain change of control events. On April
25, 1997, Mr. Kramer waived vesting pursuant to the Company stock price
criteria. Dividends are paid on all shares of restricted stock at the same
rate as on unrestricted shares.
(5) All Other Compensation for Mr. Kramer includes the following: Company
paid portion of individual life insurance policy: $1,275; 401(k) Company
match: $4,500; and Profit Sharing Plan contributions: $16,557.
(6) All Other Compensation for Mr. Podany includes the following: Company
paid portion of individual life insurance policy: $129; 401(k) Company
match: $4,500; Profit Sharing Plan contributions: $9,485; and relocation
expenses and tax adjustments in connection therewith: $33,331.
(7) All Other Compensation for Mr. Jones includes the following: Company paid
portion of individual life insurance policy: $129; 401(k) Company match:
$3,573; and Profit Sharing Plan contributions: $8,835.
(8) All Other Compensation for Mr. Chustz includes the following: Company
paid portion of individual life insurance policy: $129; 401(k) Company
match: $4,016; and Profit Sharing Plan contributions: $7,214.
(9) All Other Compensation for Mr. Hendra includes the following: Company
paid portion of individual life insurance policy: $813; 401(k) Company
match: $4,500; and Profit Sharing Plan contributions: $7,158.
<PAGE> 31
OPTION EXERCISE AND FISCAL YEAR END VALUE TABLE
The following table sets forth information with respect to the five
executive officers named in the Summary Compensation Table concerning stock
options exercised during the last fiscal year and the number and value of
options outstanding at the end of fiscal 1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FISCAL YEAR-END(#) OPTIONS/SARS AT FISCAL YEAR-END ($)
---------------------------------- -----------------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------- ------------ ------------ ----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Dale P. Kramer 0 0 168,000 112,000 158,160 542,440
William J. Podany 0 0 30,000 95,000 165,000 491,000
Jeffrey A. Jones 0 0 21,000 59,000 112,875 292,600
Thomas D. Hendra 0 0 69,000 36,000 71,580 173,820
Roger J. Chustz 6,000 31,500 27,000 52,000 25,860 181,820
</TABLE>
<PAGE> 32
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Bylaws provide for the indemnification of directors and
officers of the Company to the full extent permitted by the Minnesota Statutes.
The Company has entered into agreements to indemnify its directors, and may
enter into agreements to indemnify certain officers, in addition to the
indemnification provided for in the Bylaws. These agreements will, among other
things, indemnify the Company's directors and certain of its officers to the
full extent permitted by the Minnesota Statutes for any claims, liabilities,
damages, judgments, penalties, fines, settlements, disbursements or expenses
(including attorneys' fees) incurred by such person in any action or
proceeding, including any action by or in the right of the Company, on account
of services as a director or officer of the Company. The Company believes that
these provisions and agreements are necessary to attract and retain qualified
persons as directors and officers.
SEVERANCE AGREEMENTS
The Company has entered into change of control severance agreements (the
"Severance Agreements") with certain officers of the Company, including those
officers identified in the Summary Compensation Table above. The Severance
Agreements provide that, if, within two years after a "Change of Control" (as
defined below), the Company terminates the individual's employment other than
for "Cause" (as defined below) or disability, or the individual terminates the
individual's employment for "Good Reason" (as defined below), then the
individual will be entitled to a lump-sum cash payment equal to (1) a multiple
of one, two or three times the individual's annual base salary, plus (2) a
multiple of one, two or three times the individual's average annual bonus for
the three fiscal years immediately preceding the date of termination. The
multiple referred to in this paragraph is three for Mr. Kramer and two for each
of Mr. Podany, Mr. Jones, Mr. Hendra and Mr. Chustz. Each individual would
also receive his salary through the date of termination and all other amounts
owed to the individual at the date of termination under the Company's benefit
plans. In addition, under such circumstances, the individual will be entitled
to continued health and dental coverage for the individual and the individual's
family for a one, two or three year period after the date of termination. The
Severance Agreements provide that if certain amounts to be paid thereunder
constitute "parachute payments," as defined in Section 280(G) of the Internal
Revenue Code of 1986, as amended (the "Code"), the severance benefits owed to
the individual may be decreased, but only if the result is to give the
individual a larger after-tax benefit than if the payments are not reduced.
The individual is permitted to elect the payments to be reduced.
A "Change of Control" is defined as occurring if (1) any person or group
acquires 20% or more of the Company's outstanding common stock or voting
securities, (2) the incumbent directors cease to constitute at least a majority
of the Board of Directors, (3) the shareholders approve a merger,
consolidation, liquidation, dissolution or reorganization of the Company, or
(4) the shareholders approve a complete liquidation or dissolution of the
Company. For purposes of the Severance Agreements, "Cause" means (a) personal
dishonesty by the individual intended to result in his substantial personal
enrichment at the expense of the Company, (b) repeated, willful violations by
the individual of his obligation to devote reasonable time and efforts to carry
out his responsibilities to the Company, or (c) the conviction of the
individual of a felony. "Good Reason" as used in the Severance Agreements
means (i) any reduction of the individual's authority, responsibilities or
compensation (excluding for this purpose specified actions by the Company not
taken in bad faith and which are promptly remedied by the Company upon receipt
of notice), (ii) any required relocation of the individual to a place of
business more than 35 miles from where the individual works at the time of the
Change of Control, (iii) any purported termination of the individual other than
for Cause, or (iv) any failure of a
<PAGE> 33
successor to the Company, by merger or otherwise, to assume the Company's
obligations under the Severance Agreements.
OTHER COMPENSATION
The Company provides certain personal benefits and other noncash
compensation to its executive officers. For the fiscal year ended February 22,
1997, the incremental cost of providing such compensation did not exceed the
minimum amounts required to be disclosed under current Securities and Exchange
Commission rules for each person named in the Summary Compensation Table.
BOARD OF DIRECTORS MEETINGS/COMMITTEES
The Board of Directors held 12 meetings in fiscal 1997. Each incumbent
director attended 75 percent or more of the total number of the meetings of the
Board and those of the committees of which such director is a member.
The Company's Board of Directors has established a Compensation and Stock
Option Committee that currently is comprised of Messrs. Wright and Eugster.
The duties of the Compensation and Stock Option Committee are to provide a
general review of the Company's compensation and benefit plans to ensure that
they meet corporate objectives. The Compensation and Stock Option Committee
has the authority to administer the 1991 Stock Option Plan, as amended, and the
1995 Stock Option Plan (collectively the "Stock Option Plans") and the 1993
Restricted Stock Plan. In addition, the Compensation and Stock Option
Committee reviews the President's recommendations on (i) compensation of all
corporate officers, (ii) granting of awards under the Company's compensation
and benefit plans other than the Stock Option Plans and the 1993 Restricted
Stock Plan and (iii) adopting and changing major corporate compensation
policies and practices, and reports its recommendations to the full Board of
Directors for approval and to authorize action. The Compensation and Stock
Option Committee met two times in fiscal 1997.
The Company's Board of Directors has established an Audit Committee that
is currently comprised of Mr. Eugster. The duties of the Audit Committee are
to recommend to the full Board of Directors the selection of independent
certified public accountants, to audit annually the financial statements of the
Company, to review the activities and the reports of the independent certified
public accountants and to report the results of such review to the full Board
of Directors. The Audit Committee also monitors the internal audit controls of
the Company. The Audit Committee met two times in fiscal 1997.
The Company does not have a standing nominating committee.
DIRECTOR COMPENSATION
Each director who is not an employee of the Company or Supervalu receives
an annual retainer fee of $25,000, a fee of $1,000 for each board meeting
attended and a fee of $1,000 for each committee meeting attended if such
committee meeting is not held on the same day as a board meeting. The Company
also reimburses all such directors for travel and related expenses incurred in
connection with board and committee meetings.
The Stock Option Plans provide that each non-employee director will be
granted as of the date of such director's first election to the Board, an
option to purchase that number of shares of Common Stock having a fair market
value as of such date equal to $50,000, which will be exercisable 60% on
<PAGE> 34
the second anniversary of the date of grant and an additional 20% on the third
and fourth anniversary of the date of grant.
The Stock Option Plans provide that in addition to the above-referenced
initial stock option grants, each non-employee director will be granted as of
the date of each annual meeting of the Company's shareholders held during the
term of the Stock Option Plans, if such director's term of office continues
after such annual meeting, an option to purchase that number of shares of
Common Stock having a fair market value as of such date equal to $15,000, which
shall become exercisable in full on the second anniversary of the date of
grant. On June 19, 1996, Mr. Tyrrell and Mr. Eugster were each granted options
to purchase 945 shares of Common Stock at $15.875 per share pursuant to these
provisions.
The Company has adopted a deferred compensation plan for non-employee
directors that allows non-employee directors to elect to defer for the next
four years their annual retainers and other fees. This Plan provides that (i)
the participating director must defer 100% (minus applicable tax withholding
and social security tax) of the director's fees under the Plan; (ii) amounts
deferred under the Plan will, at the election of the participating director,
earn interest either at a rate equal to 120% of the 120-month rolling average
of 10-year U.S. Treasury Notes or at a rate equal to the rate earned under one
or more equity portfolios described in the Plan; and (iii) amounts deferred
under the Plan will be payable in ten equal annual installments commencing upon
the earlier of the participating director's termination as a director for any
reason (including death) or the participating director's reaching age 70 1/2
(extended for up to five years for a director's initial deferral under the
Plan). As of April 1, 1997, no current non-employee directors have elected to
participate in this Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation and Stock Option Committee consists of Messrs. Wright and
Eugster. From March 1978 to August 1991, Mr. Wright was a Vice President of
the Company. See also "Relationship between the Company and Supervalu".
<PAGE> 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth in the table below is information regarding the beneficial
ownership of shares of the Common Stock by (i) each person or entity known by
the Company to beneficially own 5% or more of the total number of outstanding
shares of the Common Stock, (ii) each director of the Company, (iii) the
Company's Chief Executive Officer and four most highly compensated executive
officers other than the Chief Executive Officer, and (iv) the directors and
executive officers of the Company as a group (17 persons). Except as otherwise
noted, information with respect to directors and executive officers is as of
April 4, 1997.
AMOUNT AND NATURE
NAME OF OF BENEFICIAL
BENEFICIAL OWNER OWNERSHIP(1)(2) PERCENT
---------------- ----------------- -------
Supervalu Inc. (3)(4) 14,731,667 45.8%
11840 Valley View Road
Eden Prairie, Minnesota 55244
Heartland Advisors, Inc. (5) 1,914,700 6.0%
790 Milwaukee Street
Milwaukee, Wisconsin 53202
Jack W. Eugster 16,000 *
Jeffrey C. Girard (4) 1,000 *
Dale P. Kramer (6) 198,000 *
William J. Tyrrell 15,000 *
Michael W. Wright (4) -- *
William J. Podany (6) 30,000 *
Roger J. Chustz (6) 41,000 *
Thomas D. Hendra (6) 69,060 *
Jeffrey A. Jones (6) 27,000 *
All directors and executive officers
as a group (17 persons) 560,360 1.7%
- -----------------------
*Less than 1%
(1) Except as otherwise noted, the persons named in the above table have sole
voting and investment power with respect to all shares shown as
beneficially owned by them.
(2) Includes shares which may be acquired within 60 days pursuant to stock
options as follows: Mr. Kramer 168,000 shares, Mr. Hendra 69,000 shares,
Mr. Chustz 41,000 shares, Mr. Eugster 15,000 shares, Mr. Tyrrell 15,000
shares, Mr. Jones 27,000 shares and all directors and executive officers
as a group, 524,400 shares.
(3) These shares are held by a wholly-owned subsidiary of Supervalu,
Supermarket Operators of America, Inc.
(4) Messrs. Wright and Girard are executive officers of Supervalu and Mr.
Wright is also a director of Supervalu.
(5) Based on a Schedule 13G filed on February 14, 1997. Heartland Advisors,
Inc. has sole voting power with respect to 1,636,200 shares and sole
dispositive power with respect to 1,781,100 shares.
(6) The number of shares shown with respect to the Company's executive
officers does not reflect funds from their respective Profit Sharing and
401(k) Plans invested in Common Stock through the ShopKo Stock Fund. As
of April 4, 1997, such executive officers' approximate ShopKo Stock Fund
account balances were as follows: Mr. Kramer $261,206, Mr. Podany
$10,157, Mr. Hendra $86,360, Mr. Chustz $24,863 and Mr. Jones $39,973.
<PAGE> 36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP BETWEEN THE COMPANY AND SUPERVALU
The following is a summary of the material features of certain agreements,
arrangements and transactions between the Company and Supervalu. The summaries
of each of the following agreements are qualified in their entirety by
reference to the full text of such agreement, a copy of which has been filed
with the Securities and Exchange Commission and the New York Stock Exchange.
These agreements may be modified and additional agreements, arrangements and
transactions may be entered into by the Company and Supervalu. Any such future
modifications, agreements, arrangements and transactions will be determined
through negotiation between the Company and Supervalu.
INITIAL PUBLIC OFFERING AGREEMENTS
The following agreements were developed in connection with the Company's
initial public offering in October 1991 ("Initial Public Offering") when the
Company was a wholly owned subsidiary of Supervalu, and, therefore, were not
the result of arms-length negotiations between independent parties. As a
result, while it has been the intention of the Company and Supervalu that such
agreements and the transactions provided for therein, taken as a whole, would
accommodate the parties' interests in a manner that is fair to the parties
while continuing certain mutually beneficial arrangements, there can be no
assurance that each of such agreements, or the transactions provided for
therein, has been or will be effected on terms at least as favorable to the
Company as could have been obtained from unaffiliated third parties.
FOOD PRODUCTS SUPPLY AGREEMENT
The Company and Supervalu have entered into a Food Products Supply
Agreement dated as of October 8, 1991 (the "Supply Agreement") whereby the
Company has agreed, under certain conditions, to purchase from Supervalu
all of the Company's requirements for certain products purchased from a
wholesaler and sold in any food store owned or operated by the Company
which is located within the geographic areas serviced by Supervalu until
October 16, 1998. The type of stores covered by the Supply Agreement are
any "supercenter" retail store involving the sale of food, any retail
store which could be reasonably deemed to be a "food-driven concept" or
any retail store offering at least two categories of perishable food
items. The Company does not presently own or operate any such stores,
although it may decide to do so in the future. The categories of products
covered by the Supply Agreement include grocery, produce, frozen food,
dairy, meat, deli, bakery, fish, health and beauty aids, housewares and
cigarettes. The Company will not be required to purchase a category of
food products from Supervalu if it can purchase such category from another
full-service grocery wholesaler on a continuing basis upon terms which are
materially superior with respect to price, payment terms, variety, quality
and service.
INDEMNIFICATION AGREEMENT
The Company and Supervalu have entered into an Indemnification, Tax
Matters and Guarantee Fee Agreement dated as of October 8, 1991 (the
"Indemnification Agreement") with respect to certain liabilities which may
arise after the Initial Public Offering. In general, the
<PAGE> 37
Indemnification Agreement provides that the Company and Supervalu will each
indemnify the other party and that party's directors, officers, employees
and agents against certain liabilities arising from or based upon the
operation of their own respective businesses prior to and following such
offering. Since the Company is no longer eligible to participate in
Supervalu's consolidated income tax returns, the Indemnification Agreement
also contains certain agreements by the parties intended to clarify
responsibilities and procedures for the filing of returns, the payment of
taxes and the resolution of disputes regarding taxes following such
offering. The Company has provided standby letters of credit in lieu of
agreed to fees associated with Supervalu guaranteeing certain
obligations of the Company.
The Company was previously a member of the Supervalu consolidated group
for federal income tax purposes. The Company may be held liable for any
unpaid federal income tax liabilities of the Supervalu consolidated group
for each taxable year in which the Company was a member of the Supervalu
consolidated group during any part of such taxable year. The
Indemnification Agreement between the Company and Supervalu provides that,
subject to the limitation set forth below, Supervalu will indemnify the
Company for any income tax liability of the Company for any taxable year
ending on or before October 16, 1991. Supervalu shall not be required to
indemnify the Company against any taxes attributable to the Company for
any tax periods ending on or before October 16, 1991 to the extent that
such taxes result, directly or indirectly, from any adjustment made by a
taxing authority to the tax liability of the Company for any period ending
after October 16, 1991. Notwithstanding the above limitation, the
Indemnification Agreement also provides that Supervalu will indemnify the
Company for all income tax liabilities attributable to any member of the
Supervalu consolidated group other than the Company for any taxable year.
INSURANCE MATTERS AGREEMENT
Prior to the Initial Public Offering, insurance coverage for the Company
was provided under various insurance policies maintained by Supervalu. As
a result of such offering, coverage for the Company ceased under such
policies for certain claims made and occurrences arising after October 16,
1991. The Company has since obtained its own insurance policies. The
Company and Supervalu have entered into an Insurance Matters Agreement
dated as of October 8, 1991 (the "Insurance Matters Agreement") which
provides for the allocation of premiums and premium adjustments under the
Supervalu policies after October 16, 1991 in accordance with Supervalu's
normal annual allocation process. The Insurance Matters Agreement also
provides that Supervalu and the Company will cooperate in good faith on
the handling of claims by the Company under the Supervalu policies after
October 16, 1991, with Supervalu retaining decision-making authority in
connection with any such policies that are liability policies.
<PAGE> 38
REGISTRATION RIGHTS AGREEMENT
The Company and Supermarket Operators of America, Inc. ("SOA"), a wholly
owned subsidiary of Supervalu, have entered into a Registration Rights
Agreement dated as of October 8, 1991 (the "Registration Rights
Agreement") pursuant to which the Company has granted certain demand and
"piggyback" registration rights to SOA (and to certain affiliates of
Supervalu) with respect to shares of Common Stock owned by SOA (or such
affiliates) following the Initial Public Offering. Pursuant to the
Registration Rights Agreement, SOA has the right to require the Company
to file up to three registration statements under the Securities Act of
1933, as amended (the "Securities Act") (which may be increased by an
additional 2 registrations if effected on Form S-3) covering SOA's shares
exclusively. SOA also has the right, if the Company files a registration
statement, to require the Company to register its shares of Common Stock
for sale under the Securities Act. The Company's obligations under the
Registration Rights Agreement are subject to certain limitations relating
to the minimum amount of Common Stock required for registration, the
timing of registration and other similar matters. The Company has agreed
to pay all costs and expenses relating to the exercise of SOA's
registration rights, except for underwriting commissions and filing fees
relating to shares sold by SOA, any special or extraordinary auditing
expenses, SOA's legal expenses, and, in the case of demand registration
rights, printing fees. The Company will indemnify SOA for certain
liabilities, including liabilities under the Securities Act, in
connection with any such registration. The Registration Rights Agreement
will terminate at such time that SOA (or its affiliates) owns less than
4.5% of the Company's outstanding Common Stock.
STOCK BUYBACK AND SECONDARY OFFERING AGREEMENT.
On April 24, 1997, the Company and Supervalu entered into a Stock Buyback
and Secondary Offering Agreement pursuant to which the Company has agreed to
repurchase 8,174,387 shares of Common Stock from Supervalu for $18.35 per share
(the "Stock Buyback"). The obligation of the Company and Supervalu to
consummate the Stock Buyback is conditioned upon completion of a secondary
public offering of Supervalu's remaining 6,557,280 shares of Common Stock (the
"Offering"). Supervalu is obligated to go forward with the Offering if the
offering price of the Common Stock is equal to or greater than $18.35 per
share. Supervalu may choose to go forward with the Offering if the offering
price of the Common Stock is less than $18.35 per share, in which case the
Offering price per share will be less than the Stock Buyback price per share.
Upon the closing of the Offering and the Stock Buyback, Michael W. Wright,
Chairman of Supervalu and the Company, and Jeffrey C. Girard, Executive Vice
President and Chief Financial Officer of Supervalu, will resign from the
Company's Board of Directors.
Supervalu will bear the underwriting discount and certain other expenses
of the Offering estimated in the aggregate at $8,500,000, up to an amount equal
to the excess of the aggregate public offering price over $123,604,728 ($18.85
per share). The Company will pay the underwriting discount to Supervalu and
such expenses only to the extent not borne by Supervalu. At an offering price
per share of approximately $20.25 or greater, Supervalu will bear the entire
underwriting discount and such expenses. However, the Company and Supervalu
have each agreed to bear the costs and expenses of its own counsel and the
Company has agreed to bear certain marketing costs.
<PAGE> 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Consolidated Financial Statements:
See "Index to Consolidated Financial Statements and Financial Statement
Schedules" on page 40, the Independent Auditors' Report on page 41 and
the Consolidated Financial Statements on pages 42 to 59, all of which are
incorporated herein by reference.
2. Financial Statement Schedules:
See "Index to Consolidated Financial Statements and Financial Statement
Schedules" on page 40 and the Financial Statement Schedule on page 60,
all of which are incorporated herein by reference.
3. Exhibits:
See "Exhibit Index" on pages 62 to 66.
Pursuant to Regulation S-K, Item 601(b) (4) (iii), the Registrant hereby
agrees to furnish to the Commission, upon request, a copy of each
instrument and agreement with respect to long-term debt of the
Registrant and its consolidated subsidiaries which does not exceed 10
percent of the total assets of the Registrant and its subsidiaries on a
consolidated basis.
(b) Reports on Form 8-K:
No report on Form 8-K was filed during the fourth fiscal quarter of fiscal
year 1997 ended February 22, 1997.
<PAGE> 40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
-----
Index to Consolidated Financial Statements of ShopKo Stores, Inc. and Subsidiaries
- ----------------------------------------------------------------------------------
<S> <C>
Independent Auditors' Report........................................................................ 41
Consolidated Statements of Earnings
for each of the three years in the period ended February 22, 1997................................ 42
Consolidated Balance Sheets as of February 22, 1997 and February 24, 1996........................... 43
Consolidated Statements of Cash Flows
for each of the three years in the period ended February 22, 1997................................ 44
Consolidated Statements of Shareholders' Equity
for each of the three years in the period ended February 22, 1997................................ 45
Notes to Consolidated Financial Statements ......................................................... 46-59
Index to Financial Statement Schedules
- --------------------------------------
Schedule VIII-Valuation and Qualifying Accounts .................................................... 60
</TABLE>
All other schedules are omitted because they are not applicable or not
required.
<PAGE> 41
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
ShopKo Stores, Inc.:
We have audited the consolidated balance sheets of ShopKo Stores, Inc. and
Subsidiaries as of February 22, 1997 and February 24, 1996 and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years (52 weeks) in the period ended February 22, 1997. Our
audits also included the consolidated financial statement schedule listed in the
Index at Item 14. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of ShopKo Stores, Inc. and
Subsidiaries as of February 22, 1997 and February 24, 1996, and the results of
their operations and their cash flows for each of the three years (52 weeks) in
the period ended February 22, 1997 in conformity with generally accepted
accounting principles. Also, in our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
April 24, 1997
<PAGE> 42
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------------
FEBRUARY 22, FEBRUARY 24, FEBRUARY 25,
1997 1996 1995
(52 WEEKS) (52 WEEKS) (52 WEEKS)
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Net sales $2,333,407 $1,968,016 $1,852,929
Licensed department rentals & other income 13,058 13,924 12,433
---------- ---------- ----------
2,346,465 1,981,940 1,865,362
Costs and expenses:
Cost of sales 1,783,741 1,466,733 1,364,913
Selling, general and administrative expenses 397,092 361,402 355,515
Depreciation and amortization expenses 59,833 56,383 53,474
---------- ---------- ----------
2,240,666 1,884,518 1,773,902
Income from operations 105,799 97,422 91,460
Interest expense--net 31,777 34,282 29,042
---------- ---------- ----------
Earnings before income taxes 74,022 63,140 62,418
Provision for income taxes 29,076 24,701 24,628
---------- ---------- ----------
Net earnings $ 44,946 $ 38,439 $ 37,790
========== ========== ==========
Net earnings per common share $1.40 $1.20 $1.18
Weighted average number of common shares outstanding 32,092 32,005 32,014
</TABLE>
See notes to consolidated financial statements.
<PAGE> 43
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 22, FEBRUARY 24,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 124,550 $ 89,469
Receivables, less allowance for losses of $5,585 and $3,212,
respectively 95,178 55,514
Merchandise inventories 334,962 322,433
Other current assets 10,482 8,775
---------- ----------
Total current assets 565,172 476,191
Other assets and deferred charges 5,558 4,618
Intangible assets--net 60,330 20,003
Property and equipment--net 602,832 617,148
---------- ----------
Total assets $1,233,892 $1,117,960
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable--trade $ 165,712 $ 144,638
Accrued compensation and related taxes 34,861 25,290
Accrued other liabilities 113,064 72,943
Accrued income and other taxes 17,664 16,797
Current portion of long-term obligations 2,014 1,127
---------- ----------
Total current liabilities 333,315 260,795
Long-term obligations 418,714 415,138
Deferred income taxes 20,999 20,396
Shareholders' equity:
Preferred stock; none outstanding
Common stock; Shares outstanding, 32,167 in 1997 and 32,005
in 1996 322 320
Additional paid-in capital 245,137 242,843
Retained earnings 215,405 178,468
---------- ----------
Total shareholders' equity 460,864 421,631
---------- ----------
Total liabilities and shareholders' equity $1,233,892 $1,117,960
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 44
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------
FEBRUARY 22, FEBRUARY 24, FEBRUARY 25,
1997 1996 1995
(52 WEEKS) (52 WEEKS) (52 WEEKS)
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 44,946 $ 38,439 $ 37,790
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 59,833 56,383 53,474
Provision for losses on receivables 1,200 23 287
(Gain) loss on the sale of property and equipment (2,140) (2,739) 421
Deferred income taxes (1,620) 5,206 (3,764)
Change in assets and liabilities (excluding effects of
business acquisitions):
Receivables (40,636) (13,470) (5,611)
Merchandise inventories (12,529) 78,190 (71,769)
Other current assets 523 2,448 (1,504)
Other assets and intangibles (13,062) (2,879) (2,059)
Accounts payable 21,074 (4,655) 2,142
Accrued liabilities 54,133 (1,395) 31,486
---------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 111,722 155,551 40,893
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment (38,899) (53,012) (94,600)
Proceeds from the sale of property and equipment 3,275 4,171 6,982
Business acquisitions, net of cash acquired (30,500) (15,885)
---------- --------- ---------
NET CASH (USED IN) INVESTING ACTIVITIES (66,124) (48,841) (103,503)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from long term obligations 98,939
Change in short-term debt (15,000) (11,200)
Change in common stock 1,249 (135)
Dividends paid (10,583) (14,083) (14,087)
Reduction in capital lease obligations (1,183) (756) (879)
---------- --------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (10,517) (29,839) 72,638
---------- --------- ---------
Net increase in cash and cash equivalents 35,081 76,871 10,028
Cash and cash equivalents at beginning of year 89,469 12,598 2,570
---------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 124,550 $ 89,469 $ 12,598
========== ========= =========
Supplemental cash flow information:
Noncash investing and financial activities -
Capital lease obligations incurred $ 5,533 $ 2,573 $ 4,992
Restricted stock issued $ 1,012
Purchase of remaining interest in Bravell $ 8,874
Cash paid during the period for:
Interest $ 31,663 $ 34,803 $ 27,734
Income taxes $ 30,086 $ 33,062 $ 12,910
</TABLE>
See notes to consolidated financial statements.
<PAGE> 45
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
-------------------------- ---------- --------
<S> <C> <C> <C> <C>
Balances at February 26, 1994 32,016 $320 $242,978 $130,408
Net earnings 37,790
Cancellation of common stock (16) (185)
Issuance of common stock 5 50
Cash dividends declared on common stock - $0.44 per
share (14,086)
------------------------------------------------------
Balances at February 25, 1995 32,005 320 242,843 154,112
Net earnings 38,439
Cash dividends declared on common stock - $0.44 per
share (14,083)
------------------------------------------------------
Balances at February 24, 1996 32,005 320 242,843 178,468
Net earnings 44,946
Sale of common stock under option plans 97 1 1,248
Income tax benefit related to stock options 35
Issuance of restricted stock 65 1 1,011 (1,012)
Restricted stock expense 63
Cash dividends declared on common stock - $0.22 per
share (7,060)
------------------------------------------------------
Balances at February 22, 1997 32,167 $322 $245,137 $215,405
====== ==== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 46
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation:
The consolidated financial statements include the accounts of ShopKo
Stores, Inc. and all its subsidiaries ("ShopKo" or the "Company"). All
significant intercompany accounts and transactions have been eliminated. The
Company, which is a Minnesota corporation, was incorporated in 1961. On October
16, 1991, the Company sold 17,250,000 common shares or 54% of equity ownership
in an initial public offering. Prior to completion of the offering, the Company
was a wholly owned subsidiary of Supermarket Operators of America, Inc.,
("SOA") which, in turn, is wholly owned by Supervalu Inc. ("Supervalu"). As
of February 22, 1997, 46% of the Company's common stock was owned by Supervalu.
ShopKo is engaged in the business of providing general merchandise and
health services through its retail stores. The Company also provides
prescription benefit management services; vision benefit management services;
pharmacy mail service and claims processing activities through its ProVantage
subsidiary. Retail stores are operated in the Upper Midwest, Western Mountain
and Pacific Northwest states. All other business is conducted throughout the
United States.
Cash and Cash Equivalents:
The Company records all highly liquid investments with a maturity of three
months or less as cash equivalents. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," these investments are classified as trading
securities and are reported at fair value.
Receivables:
Receivables consist of amounts collectible from merchandise vendors for
promotional and advertising allowances, from third party pharmacy insurance
carriers and self-funded medical plan sponsors for medical claims, from
pharmaceutical manufacturers and third party formulary administrators for
formulary fees and from retail store customers for optical, main store layaway
and pharmacy purchases. Substantially all amounts are expected to be collected
within one year.
Merchandise Inventories:
Merchandise inventories are stated at the lower of cost or market. Cost,
which includes certain distribution and transportation costs, is determined
through use of the last-in, first-out (LIFO) method for substantially all
inventories. If the first-in, first-out (FIFO) method had been used to
determine cost of inventories, the Company's inventories would have been higher
by approximately
<PAGE> 47
$41.8 million at February 22, 1997, $39.2 million at February 24, 1996 and
$37.0 million at February 25, 1995.
Property and Equipment:
Property and equipment are carried at cost. The cost of buildings and
equipment is depreciated over the estimated useful lives of the assets.
Buildings and certain equipment (principally computer and retail store
equipment) are depreciated using the straight-line method. Remaining properties
are depreciated on an accelerated basis. Useful lives generally assigned are:
buildings-25 to 50 years; retail store equipment-8 to 10 years; warehouse,
transportation and other equipment-3 to 10 years. Costs of leasehold
improvements are amortized over the period of the lease or the estimated useful
life of the asset, whichever is shorter, using the straight-line method.
Property under capital leases is amortized over the related lease term using
the straight-line method. Interest on property under construction of $0.1, $0.2
and $1.3 million was capitalized in fiscal years 1997, 1996 and 1995,
respectively.
The components of property and equipment are:
<TABLE>
<CAPTION>
FEB. 22, 1997 FEB. 24, 1996
------------- -------------
(in thousands)
<S> <C> <C>
Property & equipment at cost:
Land $107,982 $107,915
Buildings 492,001 479,124
Equipment 313,505 286,763
Leadhold improvements 49,929 49,306
Property under construction 2,219 10,585
Property under capital leases 26,419 21,968
-------- --------
992,055 955,661
Less accumulated depreciation & amortization:
Property & equipment 380,643 331,541
Property under capital leases 8,580 6,972
-------- --------
Net property & equipment $602,832 $617,148
======== ========
</TABLE>
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 $2.5 million and $0.9 million at
February 22, 1997 and February 24, 1996, respectively.
Impairment of Long Lived Assets:
The Company evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of long lived assets may warrant
revision or that the remaining balance of an asset may not be recoverable. The
measurement of possible impairment is based on the ability to recover the
balance of assets from expected future operating cash flows on an undiscounted
basis. In the opinion of management, no such impairment existed as of February
22, 1997 or February 24, 1996.
<PAGE> 48
Accrued Other Liabilities:
Accrued other liabilities include amounts related to ProVantage for
medical claims and formulary rebate sharing and other current liabilities not
related to compensation or taxes. As of February 22, 1997 and February 24,
1996, the amounts payable by ProVantage for medical claims and formulary rebate
sharing included in the accrued other liabilities were $39.8 million and $11.6
million, respectively.
ProVantage Accounting:
ProVantage records as sales the amounts billed to insurance companies,
third party administrators and self-funded medical plan sponsors and the
amounts billed to pharmaceutical manufacturers and third party formulary
administrators for formulary fees. Cost of sales includes the amounts paid to
network pharmacies and optical centers for medical claims and the amounts paid
to plan sponsors for shared formulary fees.
Pre-opening Costs:
Pre-opening costs of retail stores are charged against earnings in the
year of the store openings.
Net Earnings Per Common Share:
Net earnings per common share are computed by dividing net earnings by the
weighted average number of common shares outstanding. Outstanding stock options
do not have a significant dilutive effect on earnings per share.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reporting period. Actual results could differ from those
estimates.
Reclassifications:
Certain reclassifications have been made to the fiscal 1996 and 1995
consolidated financial statements to conform to those used in fiscal 1997.
B. ACQUISITIONS:
On August 2, 1996, the Company completed the acquisition of CareStream
Scrip Card from Avatex Corporation, formerly known as Foxmeyer Health
Corporation. CareStream Scrip Card is a
<PAGE> 49
prescription benefit management company which is being integrated with the
Company's ProVantage subsidiary. The purchase price was $30.5 million in cash,
with a supplemental cash payment of between $2.5 million and $5.0 million due
between six months and five years after August 2, 1996. The purchase price was
funded from the Company's available cash.
On January 3, 1995, the Company completed the acquisition of Bravell, Inc.
("Bravell"). The transaction was accounted for as a purchase, whereby the
Company acquired 97% of the outstanding common stock of Bravell for
approximately $17.3 million. The Company was also required to make additional
payments which were contingent upon future results of Bravell's operations. In
fiscal 1997, $0.7 million was paid based on the results of fiscal 1996. Bravell
is a pharmacy benefit management firm that provides custom prescription benefit
plan design, program administration and claims and benefit processing services
to insurance companies, third party administrators and self-funded medical plan
sponsors.
On October 4, 1996, the Company and the founders of Bravell entered into
an agreement whereby the Company (i) acquired the remaining 3% of the common
stock of Bravell which the Company did not acquire in January 1995, (ii)
extinguished all remaining contingent payment obligations to the founders and
(iii) terminated the founders' employment agreements. On April 10, 1997, the
Company satisfied its obligations under this agreement by making a payment of
approximately $8.9 million to the founders.
The allocation of the purchase prices of Bravell and CareStream ScripCard
were based on fair values at the dates of acquisition. The excess of the
purchase prices over the fair value of the net assets acquired ("goodwill")
of approximately $57.3 million is being amortized on a straight-line basis over
20 to 22 years. The results of Bravell's and Carestream ScripCard's operations
since the dates of acquisition have been included in the consolidated statement
of earnings.
C. SHORT-TERM DEBT:
As of February 22, 1997, the Company had a $125.0 million revolving credit
agreement with a consortium of banks. The credit agreement is unsecured and
will expire October 4, 1997. The Company pays an annual facility and commitment
fee of 1/4 of one percent. As of February 22, 1997 and February 24, 1996, the
Company had no amounts outstanding under this agreement. There were no
borrowings under the credit agreement during fiscal 1997. The Company
anticipates being able to replace this agreement with a revolving credit
agreement based on current market terms.
The Company also issues letters of credit during the ordinary course of
business as required by foreign vendors. As of February 22, 1997 and February
24, 1996, the Company had issued letters of credit for $33.4 million and $19.8
million, respectively.
<PAGE> 50
D. LONG-TERM OBLIGATIONS AND LEASES
<TABLE>
<CAPTION>
FEB. 22, 1997 FEB. 24, 1996
------------- -------------
<S> <C> <C>
Senior Unsecured Notes, 9.0% due November 15, 2004, less
unamortized discount of $227 and $257, respectively $ 99,773 $ 99,743
Senior Unsecured Notes, 8.5% due March 15, 2002, less
unamortized discount of $184 and $221, respectively 99,816 99,779
Senior Unsecured Notes, 9.25% due March 15, 2022, less
unamortized discount of $480 and $499, respectively 99,520 99,501
Senior Unsecured Notes, 6.5% due August 15, 2003, less
unamortized discount of $182 and $209, respectively 99,818 99,791
Industrial Revenue Bond, 6.4% due May 1, 2008 1,000 1,000
Capital lease obligations 20,801 16,451
--------- --------
420,728 416,265
Less current portion 2,014 1,127
--------- --------
Long-term obligations $ 418,714 $415,138
========= ========
</TABLE>
The notes contain certain covenants which, among other things, restrict
the ability of the Company to consolidate, merge or convey, transfer or lease
its properties and assets substantially as an entirety, to create liens or to
enter into sale and leaseback transactions.
The underwriting and issuance costs of all the long-term obligations are
being amortized over the terms of the notes using the straight-line method. At
February 22, 1997 and February 24, 1996, $2.6 million and $2.9 million remained
to be amortized over future periods. Amortization expense for these costs was
$0.3, $0.3 and $0.2 million in fiscal years 1997, 1996 and 1995, respectively.
The Company leases certain stores and computer equipment under capital
leases. Many of these leases include renewal options, and occasionally, include
options to purchase.
Amortization of property under capital leases was $2.7, $1.1 and $0.9
million in fiscal years 1997, 1996 and 1995, respectively. Minimum future
obligations under capital leases in effect at February 22, 1997 are as follows
(in thousands):
LEASE
YEAR OBLIGATIONS
---- -----------
1998 $ 4,112
1999 3,968
2000 2,689
2001 2,492
2002 2,492
Later 27,297
--------
Total minimum future obligations 43,050
Less interest 22,249
--------
Present value of minimum future obligations $ 20,801
========
The present values of minimum future obligations shown above are
calculated based on interest rates ranging from 7.4% to 13.4%, with a weighted
average of 11.8%, determined to be applicable at the inception of the leases.
Interest expense on the outstanding obligations under capital leases was
$2.2, $1.7 and $1.2 million in fiscal years 1997, 1996 and 1995, respectively.
<PAGE> 51
Contingent rent expense, based primarily on sales performance, for capital
and operating leases was $0.5 million in each of the fiscal years 1997, 1996
and 1995.
In addition to its capital leases, the Company is obligated under
operating leases, primarily for land and buildings. Minimum future obligations
under operating leases in effect at February 22, 1997 are as follows (in
thousands):
LEASE
YEAR OBLIGATIONS
---- -----------
1998 $ 4,037
1999 3,951
2000 3,765
2001 3,625
2002 3,383
Later 48,066
--------
Total minimum obligations $ 66,827
========
Total minimum rental expense, net of sublease income, related to all
operating leases with terms greater than one year was $4.6, $3.5 and $2.9
million in fiscal years 1997, 1996 and 1995, respectively.
Certain operating leases require payments to be made on an escalating
basis. The accompanying consolidated statements of earnings reflect rent
expense on a straight-line basis over the term of the leases. An obligation of
$1.8 million and $1.4 million, representing pro-rata future payments, is
reflected in the accompanying consolidated balance sheets at February 22, 1997
and February 24, 1996, respectively.
<PAGE> 52
E. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Components of the
Company's net deferred tax liability are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment $ 25,812 $ 22,556
LIFO inventory valuation 6,518 6,415
Other 2,418 2,181
-------- --------
Total deferred tax liabilities 34,748 31,152
-------- --------
Deferred tax assets:
Reserves and allowances (15,155) (11,239)
Capital leases (2,033) (733)
-------- --------
Total deferred tax assets (17,188) (11,972)
-------- --------
Net deferred tax liability $ 17,560 $ 19,180
======== ========
</TABLE>
The amounts reflected in the provision for income taxes are based on
applicable federal statutory rates, adjusted for permanent differences between
financial and taxable income. The provision for federal and state income taxes
includes the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current
Federal $25,858 $16,163 $24,379
State 4,838 3,332 4,488
General business and other tax credits -- -- (475)
Deferred (1,620) 5,206 (3,764)
------- ------- -------
Total provision $29,076 $24,701 $24,628
======= ======= =======
</TABLE>
The effective tax rate varies from the statutory federal income tax rate
for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Statutory income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefits 4.0 4.0 4.1
Other 0.3 0.1 0.3
----- ----- -----
Effective income tax rate 39.3% 39.1% 39.4%
===== ===== =====
</TABLE>
Provision is made for deferred income taxes and future income tax benefits
applicable to temporary differences between financial and tax reporting. The
sources of these differences and the effects of each are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ----------
<S> <C> <C>
Depreciation $ 3,256 $2,804 $ (247)
Inventory and LIFO valuation reserves (212) 2,544 (3,631)
Bad debt and return reserves (685) 241 (806)
Insurance accurals & valuation reserves (1,625) (537) (315)
Other property related items (707) 117 432
Deferred compensation (433) (329) (224)
Other (1,214) 366 1,027
------- ------ -------
Total deferred tax (benefit) expense $(1,620) $5,206 $(3,764)
======= ====== =======
</TABLE>
<PAGE> 53
Other temporary differences between financial and tax reporting include
amortization and interest relating to capital leases and certain provisions for
expenses which are not deducted for tax purposes until paid.
F. PREFERRED AND COMMON STOCK
The Company has 20,000,000 shares of $0.01 preferred stock authorized but
unissued.
There are 75,000,000 shares of $0.01 par value common stock authorized
with 32,166,720 and 32,005,000 shares issued and outstanding at February 22,
1997 and February 24, 1996, respectively.
The Company's Stock Option Plans allow the granting of stock options to
various officers, directors and other employees of the Company at prices not
less than 100 percent of fair market value, determined by the closing price on
the date of grant. The Company has reserved 2,400,000 and 1,200,000 shares for
issuance under the 1991 and 1995 Stock Option Plans. The majority of these
options vest at the rate of 40% on the second anniversary of the grant date and
20% annually thereafter for officers and employees and at the rate of 60% on
the second anniversary of the date of grant and 20% annually thereafter for
non-employee directors. All stock options vest immediately upon a change of
control. Changes in the options are as follows (shares in thousands):
<TABLE>
<CAPTION>
WEIGHTED AVE.
SHARES PRICE RANGE EXERCISE PRICE
------ ---------------- --------------
<S> <C> <C> <C> <C>
Outstanding, February 26, 1994 1,924 $10.13 - $16.25 $ 13.99
Granted 250 10.00 - 11.00 10.31
Canceled and forfeited (238) 10.00 - 16.25 (13.80)
------ --------------- --------
Outstanding, February 25, 1995 1,936 10.00 - 16.25 13.54
Granted 576 10.50 - 10.75 10.64
Canceled and forfeited (139) 10.00 - 16.25 (13.77)
------ --------------- --------
Outstanding, February 26, 1996 2,373 10.00 - 16.25 12.82
Granted 542 10.63 - 16.25 11.59
Exercised (97) 10.00 - 15.00 (12.91)
Canceled and forfeited (182) 10.00 - 16.25 (11.84)
------ --------------- --------
Outstanding, February 22, 1997 2,636 10.00 - 16.25 12.63
====== =============== ========
Exercisable, February 22, 1997 1,305 10.00 - 16.25 14.14
====== =============== ========
</TABLE>
The weighted average remaining contractual life for options outstanding at
February 22, 1997 was 6.7 years.
In October 1995, SFAS No. 123 "Accounting for Stock-Based Compensation"
was issued. SFAS No. 123 establishes a fair value based method of accounting
for stock-based compensation; however, it allows entities to continue
accounting for employee stock-based compensation under the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." SFAS No. 123 requires certain disclosures,
including pro forma net income and earnings per share as if the fair value
based accounting method had been used for employee stock-based compensation
cost. The Company has decided to adopt SFAS No. 123 through disclosure with
respect to employee stock-based compensation.
<PAGE> 54
If the Company had elected to recognize compensation cost for the Stock
Option Plans based on the fair value at the grant dates for awards under those
plans, consistent with the method prescribed by SFAS No. 123, net earnings and
net earnings per common share would have been changed to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net earnings (in thousands)
As reported $44,946 $38,439
Pro forma 44,228 38,316
-------- -------
Net earnings per common share
As reported $ 1.40 $ 1.20
Pro forma 1.38 1.20
-------- -------
</TABLE>
The fair value of stock options used to compute pro forma net earnings and
net earnings per common share disclosures is the estimated present value at
grant date using the Black-Scholes option-pricing model with weighted average
assumptions for fiscal years 1997 and 1996 as follows:
Risk-free interest rate 7.0%
Expected volatility 29.0%
Dividend yield 0.0%
Expected option life, standard option 5.0 years
Expected option life, performance vested option 2.5 years
In fiscal 1994, the Company adopted a Restricted Stock Plan which provides
awards of up to 200,000 shares of common stock to key employees of the Company.
Plan participants are entitled to cash dividends and to vote their respective
shares. Restrictions limit the sale or transfer of the shares during a
restricted period. There were 70,000 and 5,000 shares of restricted stock
outstanding at February 22, 1997 and February 24, 1996, respectively.
G. EMPLOYEE BENEFITS
Substantially all employees of the Company are covered by a defined
contribution profit sharing plan. The plan provides for two types of company
contributions; an amount determined annually by the Board of Directors and an
employer matching contribution equal to one-half of the first 6 percent of
compensation contributed by participating employees. Contributions were $11.8,
$7.7 and $6.7 million for fiscal years 1997, 1996 and 1995, respectively.
The Company also has change of control severance agreements with certain
key officers. Under these agreements, the officers are entitled to a lump-sum
cash payment equal to a multiple of one, two or three times their annual salary
plus a multiple of one, two or three times their average annual bonus for the
three fiscal years immediately preceding the date of termination, if, within
two years after a "change of control" (as defined in such agreements) the
Company terminates the individual's employment without cause.
<PAGE> 55
In accordance with SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," the Company accrues the
estimated cost of retiree benefits, other than pensions, during employees'
credited service period. The net periodic costs for postretirement benefits
include the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Service cost for benefits accumulated during the year $ 98 $ 98 $ 78
Interest cost on accumulated benefit obligation 95 96 60
---- ---- ----
Net periodic postretirement benefit cost $193 $194 $138
==== ==== ====
</TABLE>
The Company's postretirement healthcare plans currently are not funded.
The accumulated postretirement benefit obligations are as follows (in
thousands):
<TABLE>
<CAPTION>
FEB. 22, FEB. 24,
1997 1996
--------- --------
<S> <C> <C>
Retirees $ 423 $ 371
Active plan participants 1,163 1,022
-------- -------
Total accumulated postretirement obligations $ 1,586 $ 1,393
======== =======
</TABLE>
The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.3% in both fiscal 1997 and fiscal 1996.
The assumed healthcare cost trend rate used in measuring the accumulated
postretirement benefit obligation was 8.3% for fiscal 1997 decreasing each
successive year until it reaches 5.5% in fiscal 2015 after which it remains
constant. A 1% increase in the healthcare trend rate would have an immaterial
effect on the accumulated postretirement benefit obligation at the end of
fiscal 1997 and fiscal 1996 and on the net periodic cost for the fiscal years.
H. RELATED PARTY TRANSACTIONS
As a result of the initial public offering, the Company and Supervalu
entered into certain agreements of which the following are still in effect:
A food products supply agreement under which the Company has agreed to
purchase from Supervalu, through October 16, 1998, all of the Company's
requirements for certain products sold in any food store owned or operated
by the Company and located within the geographic areas serviced by
Supervalu.
A registration rights agreement under which SOA (and certain other
affiliates of Supervalu) has the right to require the Company to file up to
three registration statements under the Securities Act of 1933.
The Company's purchases of inventory from Supervalu were $1.9, $1.0 and
$2.7 million for the fiscal years 1997, 1996 and 1995, respectively.
<PAGE> 56
I. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure is made in accordance with the requirements of
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." The
following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments.
Short-term debt and long-term obligations: The carrying amounts, if any,
of the Company's borrowings under its short-term revolving credit agreement
approximate their fair value. The fair values of the Company's long-term
obligations are estimated using discounted cash flow analysis based on interest
rates that are currently available to the Company for issuance of debt with
similar terms and remaining maturities.
The carrying amounts and fair values of the Company's financial
instruments at February 22, 1997 are as follows (amounts in thousands):
CARRYING FAIR
AMOUNT VALUE
-------- --------
Long-term obligations:
Senior Unsecured Notes, due November 15, 2004 $99,773 $108,916
Senior Unsecured Notes, due March 15, 2002 99,816 105,595
Senior Unsecured Notes, due March 15, 2022 99,520 112,661
Senior Unsecured Notes, due August 15, 2003 99,818 95,355
Industrial Revenue Bond, due May 1, 2008 1,000 1,000
Capital lease obligations 20,801 23,425
<PAGE> 57
J. UNAUDITED QUARTERLY FINANCIAL INFORMATION
Unaudited quarterly financial information is as follows:
<TABLE>
<CAPTION>
(In thousands, except per share data)
FISCAL YEAR (52 WEEKS) ENDED FEBRUARY 22, 1997
-------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
(16 WKS) (12 WKS) (12 WKS) (12 WKS) (52 WKS)
------------ ------------ -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $610,911 $498,517 $ 591,208 $ 632,771 $2,333,407
Gross margins 146,391 112,974 131,258 159,043 549,666
Net earnings 5,759 3,922 10,936 24,329 44,946
Net earnings per common share 0.18 0.12 0.34 0.76 1.40
Weighted average shares 32,020 32,052 32,073 32,092 32,092
Dividends declared per common
share $ 0.11 $ 0.11 $ -- $ -- $ 0.22
Price range per common share* 16 1/2-11 1/4 16 1/4-13 1/2 16 1/4-15 16 1/8-14 3/8 16 1/2-11 1/4
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR (52 WEEKS) ENDED FEBRUARY 24, 1996
-------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
(16 WKS) (12 WKS) (12 WKS) (12 WKS) (52 WKS)
------------ ------------ -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales $560,472 $ 418,165 $ 491,019 $ 498,360 $ 1,968,016
Gross margins 143,359 103,745 122,670 131,509 501,283
Net earnings 5,368 1,869 10,132 21,070 38,439
Net earnings per common share 0.17 0.06 0.32 0.66 1.20
Weighted average shares 32,005 32,005 32,005 32,005 32,005
Dividends declared per common
share $ 0.11 $ 0.11 $ 0.11 $ 0.11 $ 0.44
Price range per common share* 11 3/4-8 3/4 14-10 1/4 13 1/4-10 1/4 11 3/4-10 7/8 14-8 3/4
</TABLE>
* Price range per common share reflects the highest and lowest stock market
prices on the New York Stock Exchange during the quarter.
<PAGE> 58
K. BUSINESS SEGMENT INFORMATION
The Company has redefined its business segments from the classifications
of General Merchandise and Health Services (which had included ProVantage's
managed healthcare operations and ShopKo's retail pharmacy and optical
departments), to 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 healthcare decision support services).
Information about the Company's operations in the different businesses is
as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net sales
Retail Store $ 2,005,731 $1,881,038 $1,839,908
ProVantage 348,780 93,845 14,060
Intercompany* (21,104) (6,867) (1,039)
----------- ---------- ----------
Total net sales $ 2,333,407 $1,968,016 $1,852,929
=========== ========== ==========
Earnings before income taxes
Retail Store $ 113,683 $ 107,216 $ 102,691
ProVantage 9,533 2,713 1,494
Corporate (17,417) (12,507) (12,725)
Interest expense (31,777) (34,282) (29,042)
----------- ---------- ----------
Earnings before income taxes $ 74,022 $ 63,140 $ 62,418
=========== ========== ==========
Assets
Retail Store $ 985,374 $ 991,285 $1,066,156
ProVantage 123,847 38,981 27,267
Corporate 124,671 87,694 16,328
----------- ---------- ----------
Total assets $ 1,233,892 $1,117,960 $1,109,751
=========== ========== ==========
Depreciation and amortization expenses
Retail Store $ 57,036 $ 54,982 $ 52,727
ProVantage 2,312 1,009 254
Corporate 485 392 493
----------- ---------- ----------
Total depreciation and amortization
expenses $ 59,833 $ 56,383 $ 53,474
=========== ========== ==========
Capital expenditures
Retail Store $ 34,258 $ 51,915 $ 93,466
ProVantage 2,953 136 620
Corporate 1,688 961 514
----------- ---------- ----------
Total capital expenditures $ 38,899 $ 53,012 $ 94,600
=========== ========== ==========
</TABLE>
* Intercompany sales consist of prescriptions that were both sold at a
ShopKo pharmacy and processed by ProVantage.
<PAGE> 59
L. SUBSEQUENT EVENT
Termination of Combination:
On September 7, 1996, the Company entered into a Plan of Reorganization
with Phar-Mor, Inc. ("Phar-Mor") and Cabot Noble, Inc. ("Cabot Noble").
Pursuant to the Plan of Reorganization, the Company and Phar-Mor would have
become subsidiaries of Cabot Noble. On April 2, 1997, the Company, Cabot Noble
and Phar-Mor mutually agreed to terminate this planned business combination.
The Company anticipates recording a one-time pre-tax charge of approximately
$2.8 million ($0.05 per share) during the first quarter of fiscal 1998 to cover
costs associated with the terminated business combination.
Common Stock Buyback and Secondary Offering:
On April 24, 1997, the Company and Supervalu entered into an agreement
pursuant to which Supervalu will exit its 46% investment in the Company. Under
the terms of the agreement, the companies will enter into two simultaneous
transactions. The first transaction is a secondary public offering of 6,557,280
shares of the Company's common stock. The second transaction is a stock buyback
of $150.0 million representing 8,174,387 shares of its common stock held by
Supervalu. Supervalu will pay the underwriting discount and certain other
expenses related to the secondary offering up to an amount equal to the excess
of the aggregate public offering price over $123.6 million ($18.85 per share).
The Company will pay the underwriting discount and such expenses to the extent
not paid by Supervalu. Should the Company be required to pay all of the cost,
it may incur a one-time charge of approximately $8.5 million ($0.37 per share)
at the time of closing.
<PAGE> 60
SHOPKO STORES, INC. AND SUBSIDIARIES
SCHEDULE VIII. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(In thousands)
BALANCE CHG. TO
AT BEG. OF COSTS & DEDUCTIONS BALANCE AT
YEAR EXP. (ADDITIONS) END OF YEAR
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year (52 weeks) ended February 25,
1995:
Allowance for losses $ 2,133 $ 287 $ (1,170) * $ 3,590
Inventory valuation reserves 0 5,500 5,500
---------------------------------------------------------------------
Total $ 2,133 $ 5,787 $ (1,170) $ 9,090
=====================================================================
Year (52 weeks) ended February 24,
1996:
Allowance for losses $ 3,590 $ 23 $ 401 * $ 3,212
Inventory valuation reserves 5,500 (3,500) 2,000
---------------------------------------------------------------------
Total $ 9,090 $(3,477) $ 401 $ 5,212
=====================================================================
Year (52 weeks) ended February 22,
1997:
Allowance for losses $ 3,212 $ 1,200 $ (1,173) * $ 5,585
Inventory valuation reserves 2,000 1,000 3,000
---------------------------------------------------------------------
Total $ 5,212 $ 2,200 $ (1,173) $ 8,585
=====================================================================
</TABLE>
*Net of charges to accounts other than bad debt expense, primarily
promotion and advertising.
<PAGE> 61
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
ShopKo Stores, Inc. (Registrant)
Date: May 21, 1997
By: /s/ DALE P. KRAMER*
-------------------
Dale P. Kramer
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
- ------------------------- ------------------------------- ------------
/S/ DALE P. KRAMER* President, Chief Executive May 21, 1997
- --------------------- Officer and a Director
Dale P. Kramer
/S/ JEFFREY A. JONES Senior Vice President and Chief May 21, 1997
- --------------------- Financial Officer
Jeffrey A. Jones
/S/ MICHAEL W. WRIGHT* Chairman and Director May 21, 1997
- ------------------------
Michael W. Wright
/S/ WILLIAM J. TYRRELL* Vice Chairman and Director May 21, 1997
- -------------------------
William J. Tyrrell
/S/ JACK W. EUGSTER* Director May 21, 1997
- ----------------------
Jack W. Eugster
/S/ JEFFREY C. GIRARD* Director May 21, 1997
- -----------------------
Jeffrey C. Girard
*By Richard D. Schepp pursuant to Powers of Attorney attached hereto as
Exhibit 24.
<PAGE> 62
EXHIBIT INDEX
SHOPKO STORES, INC.
10-K REPORT
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- ------- ------- ------------------
3.1 Restated Articles of Incorporation of the
Company, incorporated by reference to the
Registrant's Registration Statement on Form
S-1 (Registration No. 33-42283).
3.2 Bylaws of the Company, as amended, incorporated
by reference to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-42283).
4.1.1 Indenture dated as of March 12, 1992 between
the Company and First Trust National Association,
as trustee, with respect to senior notes due
March 15, 2002, incorporated by reference from
the Registrant's Form 10-K, Annual Report to the
Securities and Exchange Commission for the 53
weeks ended February 29, 1992.
4.1.2 Indenture dated as of March 12, 1992 between the
Company and First Trust National Association, as
trustee, with respect to senior notes due March 15,
2022, incorporated by reference from the
Registrant's Form 10-K, Annual Report to the
Securities and Exchange Commission for the 53
weeks ended February 29, 1992.
4.1.3 Indenture dated as of July 15, 1993 between the
Company and First Trust National Association, as
trustee, incorporated by reference from the
Registrant's Form 10-K, Annual Report to the
Securities and Exchange Commission for the 52
weeks ended February 26, 1994.
<PAGE> 63
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- ------- ------- ------------------
4.2 Form of Rights Agreement between the Company
and Norwest Bank Minnesota, National Association
(including form of preferred stock designation),
incorporated by reference from the Registrant's
Form 10-Q, Quarterly Report to the Securities and
Exchange Commission for the 16 weeks ended
June 20, 1992.
4.3 Credit Agreement dated as of October 4, 1993,
("Credit Agreement") among the Company, the
banks listed there in and Morgan Guaranty Trust
Company of New York, as agent, incorporated by
reference from the Registrant's Form 10-Q,
Quarterly Report to the Securities and Exchange
Commission for the 12 weeks ended September 11,
1993.
4.4 Amendment No. 1 to Credit Agreement dated as of
October 4, 1996 among the Company and the Banks
named therein, incorporated by reference from the
Registrant's Form 10-Q, Quarterly Report to the
Securities and Exchange Commission for the 12 weeks
ended September 7, 1996.
10.1.1 ShopKo Stores, Inc. 1991 Stock Option Plan,
incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration
No. 33-42283). (1)
10.1.2 Amendment to Section 11 of ShopKo Stores, Inc.
1991 Stock Option Plan, incorporated by reference
to the Registrant's definitive Proxy Statement dated
May 9, 1995 filed in connection with the Registrant's
1995 Annual Meeting of Shareholders. (1)
10.1.3 Form of Stock Option Agreement and First Amend-
ment thereto between the Company and certain
Officers and Employees of the Company pursuant
to the ShopKo Stores, Inc. 1991 Stock Option Plan,
incorporated by reference from the Registrant's
Form 10-K, Annual Report to the Securities and
Exchange Commission for the 52 weeks ended
February 25, 1995. (1)
<PAGE> 64
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- ------- ------- ------------------
10.1.4 Alternative Form of Stock Option Agreement between
the Company and certain Officers and Employees
of the Company pursuant to the ShopKo Stores, Inc.
1991 Stock Option Plan, incorporated by reference
from the Registrant's Form 10-K, Annual Report to
the Securities and Exchange Commission for the 52
weeks ended February 25, 1995. (1)
10.1.5 ShopKo Stores, Inc. 1995 Stock Option Plan,
incorporated by reference from the Registrant's
Form 10-Q, Quarterly Report to the Securities and
Exchange Commission for the 12 weeks ended
December 2, 1995. (1)
10.3 ShopKo Stores, Inc. Profit Sharing and Super
Saver Plan Trust Agreement (1989 Restatement),
as amended, incorporated by reference to the
Registrant's Registration Statement on Form S-1
(Registration No. 33-42283). (1)
10.4 First and second amendments to ShopKo Stores,
Inc. Profit Sharing and Super Saver Plan Trust
Agreement, incorporated by reference from the
Registrant's Form 10-K, Annual Report to the
Securities and Exchange Commission for the 52
weeks ended February 27, 1993. (1)
10.5 Form of Change of Control Severance Agreement
between the Company and Certain Officers and
Employees of the Company, incorporated by
reference from the Registrant's Form 10-K, Annual
Report to the Securities and Exchange
Commission for the 52 weeks ended February 25,
1995. (1)
10.12 Registration Rights Agreement dated as of October
8, 1991 between the Company and Supermarket
Operators of America, Inc., incorporated by reference
to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-45833).
<PAGE> 65
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- ------- ------- ------------------
10.16 Supply Agreement (Food Products) dated as of
October 8, 1991 between the Company and
Supervalu Inc., incorporated by reference to
the Registrant's Registration Statement on Form
S-1 (Registration No. 33-45833).
10.17 Indemnification, Tax Matters and Guarantee Fee
Agreement dated as of October 8, 1991 between
the Company and Supervalu Inc.,
incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration
No. 33-45833).
10.19 Insurance Matters Agreement dated as of October
8, 1991 between the Company and Supervalu
Inc., incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration
No. 33-45833).
10.20 Form of Indemnification Agreement between the
Company and directors and certain officers of
the Company, incorporated by reference to the
Registrant's Registration Statement on Form S-1
(Registration No. 33-42283). (1)
10.21 ShopKo Senior Officers Deferred Compensation
Plan, incorporated by reference from the
Registrant's Form 10-K, Annual Report to the
Securities and Exchange Commission for the 53
weeks ended February 29, 1992. (1)
10.22 ShopKo Directors Deferred Compensation Plan,
incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration
No. 33-45833). (1)
<PAGE> 66
Sequential Page
Exhibit Number In Manually
Number Exhibit Signed Original
- ------- ------- ------------------
10.24 ShopKo Stores, Inc. 1993 Restricted Stock Plan,
as amended, incorporated by reference to the
Registrant's definitive Proxy Statement dated
May 19, 1994 filed in connection with the
Registrant's 1994 Annual Meeting of
Shareholders. (1)
10.25 Stock Buyback and Secondary Offering Agreement
dated April 24, 1997 among the Company, Supervalu
Inc. and Supermarket Operators of America, Inc.,
incorporated by reference to the Registrant's Current
Report on Form 8-K dated April 24, 1997.
11* Computation of Earnings Per Common and
Common Equivalent Share.
12* Statements Re Computation of Ratios.
21.1 Subsidiaries of the Registrant, incorporated by
reference from the Registrant's Form 10-K, Annual
Report to the Securities and Exchange Commission
for the 52 weeks ended February 24, 1996.
23.1* Consent of Deloitte & Touche LLP.
24* Directors Powers of Attorney
*Filed herewith
(1) A management contract or compensatory plan or arrangement.
<PAGE> 1
SHOPKO STORES, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
(IN THOUSANDS, EXPECT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------------
FEB. 22, 1997 FEB. 24, 1996 FEB. 25, 1995
(52 WKS) (52 WKS) (52 WKS)
----------------------------------------------
<S> <C> <C> <C>
PRIMARY:
Net earnings $44,946 $38,439 $37,790
========================================
Weighted average number of
outstanding common shares 32,092 32,005 32,014
Number of common shares
issuable assuming exercise
of stock options 278 51 4
----------------------------------------
Weighted average number of
outstanding common and
common equivalent shares -
assuming primary 32,370 32,056 32,018
========================================
Net earnings per common
share - primary (1) $ 1.39 $ 1.20 1.18
========================================
FULLY DILUTED:
Net earnings $44,946 $38,439 $37,790
========================================
Weighted average number of
outstanding common shares 32,092 32,005 32,014
Number of common shares
issuable assuming exercise
of stock options 353 73 4
----------------------------------------
Weighted average number of
outstanding common and
common equivalent shares -
assuming full dilution 32,445 32,078 32,018
========================================
Net earnings per common
share - assuming full dilution (1) $ 1.39 $ 1.20 $ 1.18
========================================
</TABLE>
(1) Earnings per share are computed by dividing net earnings by the weighted
average number of outstanding common and common equivalent shares.
<PAGE> 1
SHOPKO STORES, INC. AND SUBSIDIARIES
EXHIBIT 12 - STATEMENTS RE COMPUTATION OF RATIOS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------------------------------------
FEB. 22, FEB. 24, FEB. 25, FEB. 26, FEB. 27,
1997 1996 1995 1994 1993
(52 WKS) (52 WKS) (52 WKS) (52 WKS) (52 WKS)
-------- -------- -------- -------- --------
Ratio of Earnings to Fixed Charges
----------------------------------
COMPUTATION OF EARNINGS
<S> <C> <C> <C> <C> <C> <C>
1 Pretax Income $ 74,022 $ 63,140 $62,418 $52,889 $ 81,453
2 Add previously capitalized interest 548 540 503 418 338
amortized during the period
3 Less interest capitalized during 128 249 1,309 2,140 1,061
the period -------- -------- ------- ------- --------
4 Total earnings (sum of lines 1 to 3) 74,442 63,431 61,612 51,167 80,730
COMPUTATION OF FIXED CHARGES
5 Interest (1) 31,905 34,531 30,351 23,557 19,335
6 Interest factor in rental expense 2,657 2,689 2,403 1,908 1,838
-------- -------- ------- ------- --------
7 Total fixed charges (sum of lines 5 34,562 37,220 32,754 25,465 21,173
and 6)
8 TOTAL EARNINGS AND FIXED CHARGES $109,004 $100,651 $94,366 $76,632 $101,903
(LINE 4 PLUS LINE 7) ======== ======== ======= ======= ========
9 Ratio (line 8 divided by line 7) 3.2 2.7 2.9 3.0 4.8
</TABLE>
(1) Includes capitalized interest.
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-43952, No. 33-58584, No. 33-70666, No. 33-81902 and No. 333-948, all on Form
S-8, and in Registration Statement No. 333-26615 on Form S-3,of ShopKo Stores,
Inc. of our report dated April 24, 1997, appearing in the Annual Report on
Form 10-K of ShopKo Stores, Inc. and Subsidiaries for the year (52 weeks) ended
February 22, 1997.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
May 21, 1997
<PAGE> 1
DIRECTOR'S POWER OF ATTORNEY
The undersigned director of ShopKo Stores, Inc. (the "Company") hereby
constitutes and appoints Richard D. Schepp, the undersigned's true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign for the undersigned and in the undersigned's name in
the capacity as a director of the Company the Annual Report on Form 10-K for
the Company's fiscal year ended February 22, 1997 to which this Power of
Attorney is filed as an exhibit, including any amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission and any other regulatory
authority, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or the undersigned's
substitute, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney,
on this 21st day of April, 1997.
/s/ Jeffrey C. Girard
---------------------
Jeffrey C. Girard
<PAGE> 2
DIRECTOR'S POWER OF ATTORNEY
The undersigned director of ShopKo Stores, Inc. (the "Company") hereby
constitutes and appoints Richard D. Schepp, the undersigned's true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign for the undersigned and in the undersigned's name in
the capacity as a director of the Company the Annual Report on Form 10-K for
the Company's fiscal year ended February 22, 1997 to which this Power of
Attorney is filed as an exhibit, including any amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission and any other regulatory
authority, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or the undersigned's
substitute, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney,
on this 21st day of April, 1997.
/s/ Jack W. Eugster
-------------------
Jack W. Eugster
<PAGE> 3
DIRECTOR'S POWER OF ATTORNEY
The undersigned director of ShopKo Stores, Inc. (the "Company") hereby
constitutes and appoints Richard D. Schepp, the undersigned's true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign for the undersigned and in the undersigned's name in
the capacity as a director of the Company the Annual Report on Form 10-K for
the Company's fiscal year ended February 22, 1997 to which this Power of
Attorney is filed as an exhibit, including any amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission and any other regulatory
authority, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or the undersigned's
substitute, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney,
on this 21st day of April, 1997.
/s/ Michael W. Wright
---------------------
Michael W. Wright
<PAGE> 4
DIRECTOR'S POWER OF ATTORNEY
The undersigned director of ShopKo Stores, Inc. (the "Company") hereby
constitutes and appoints Richard D. Schepp, the undersigned's true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign for the undersigned and in the undersigned's name in
the capacity as a director of the Company the Annual Report on Form 10-K for
the Company's fiscal year ended February 22, 1997 to which this Power of
Attorney is filed as an exhibit, including any amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission and any other regulatory
authority, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or the undersigned's
substitute, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney,
on this 21st day of April, 1997.
/s/ Dale P. Kramer
------------------
Dale P. Kramer
<PAGE> 5
DIRECTOR'S POWER OF ATTORNEY
The undersigned director of ShopKo Stores, Inc. (the "Company") hereby
constitutes and appoints Richard D. Schepp, the undersigned's true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for the undersigned and in the undersigned's name, place and stead, in any and
all capacities, to sign for the undersigned and in the undersigned's name in
the capacity as a director of the Company the Annual Report on Form 10-K for
the Company's fiscal year ended February 22, 1997 to which this Power of
Attorney is filed as an exhibit, including any amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission and any other regulatory
authority, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or the undersigned's
substitute, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney,
on this 21st day of April, 1997.
/s/ William J. Tyrrell
----------------------
William J. Tyrrell
