<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 1997.
REGISTRATION NO. 333-26615
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
SHOPKO STORES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-0985054
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
700 PILGRIM WAY
P.O. BOX 19060
GREEN BAY, WISCONSIN 54307-9060
(414) 497-2211
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
DALE P. KRAMER
700 PILGRIM WAY
P.O. BOX 19060
GREEN BAY, WISCONSIN 54307-9060
(414) 497-2211
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
RANDALL J. ERICKSON MITCHELL L. HOLLINS
GODFREY & KAHN, S.C. SONNENSCHEIN NATH & ROSENTHAL
780 NORTH WATER STREET 8000 SEARS TOWER
MILWAUKEE, WISCONSIN 53202 CHICAGO, ILLINOIS 60606
(414) 273-3500 (312) 876-8000
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two separate prospectuses. The first
prospectus relates to a public offering in the United States of an aggregate
of 5,245,824 shares of Common Stock (the "U.S. Offering"). The second
prospectus relates to a concurrent offering outside the United States of an
aggregate of 1,311,456 shares of Common Stock (the "International Offering").
The prospectuses for the U.S. Offering and the International Offering will be
identical with the exception of the following alternate pages for the
International Offering: a front cover page, an "Available Information"
section, an "Incorporation by Reference" section, a "Certain U.S. Tax
Consequences to Non-U.S. Stockholders" section, an "Underwriting" section and
a back cover page. Such alternate pages appear in this Registration Statement
immediately following the complete prospectus for the U.S. Offering.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 10, 1997
6,557,280 SHARES
LOGO SHOPKO STORES, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
-----------
Of the 6,557,280 shares of Common Stock offered, 5,245,824 are being offered
hereby in the United States (the "U.S. Offering") and 1,311,456 are being
offered in a concurrent international offering outside the United States (the
"International Offering") (together, the "Offerings"). The initial public
offering price and the aggregate underwriting discount per share will be
identical for both Offerings. See "Underwriting."
All of the shares of Common Stock offered are being sold by a wholly owned
subsidiary of Supervalu Inc. (such subsidiary and Supervalu Inc. are referred
to herein as the "Selling Shareholder" or "Supervalu") other than the shares,
if any, sold in connection with the exercise by the Underwriters of the over-
allotment option, which will be sold by ShopKo Stores, Inc. (the "Company" or
"ShopKo"). The Offerings are a condition for the Company's repurchase of
8,174,387 shares of Common Stock from the Selling Shareholder at $18.35 per
share (the "Stock Buyback"), and all of such transactions are expected to be
consummated simultaneously. The Selling Shareholder currently holds 14,731,667
shares of Common Stock, which represents approximately 46% of the outstanding
Common Stock. After the Offerings and the Stock Buyback, the Selling
Shareholder will not beneficially own any Common Stock of the Company. See
"Selling Shareholder." The Company will not receive any of the proceeds from
the sale of the shares of Common Stock offered hereby or pursuant to the
concurrent International Offering, other than proceeds from the sale of shares
of Common Stock, if any, sold in connection with the exercise by the
Underwriters of the over-allotment options.
The last reported sale price of the Common Stock, which is listed under the
symbol "SKO," on the New York Stock Exchange on June 9, 1997 was $24.50 per
share. See "Price Range of Common Stock and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
<TABLE>
<CAPTION>
INITIAL
PUBLIC
OFFERING UNDERWRITING PROCEEDS TO
PRICE DISCOUNT(1)(2) SELLING SHAREHOLDER(2)
----------- -------------- ----------------------
<S> <C> <C> <C>
Per Share..................... $ $ $
Total(3)...................... $ $ $
</TABLE>
- -----
(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) The Selling Shareholder will bear the underwriting discount and pay certain
other expenses of the Offerings estimated 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 the Selling Shareholder and such expenses only to the extent
not borne by the Selling Shareholder.
(3) The Company has granted the U.S. Underwriters an option for 30 days to
purchase up to an additional 786,874 shares of Common Stock at the initial
public offering price per share, less the underwriting discount, solely to
cover over-allotments. Additionally, the Company has granted the
International Underwriters a similar option with respect to an additional
196,718 shares as part of the concurrent International Offering. If such
options are exercised in full, the total initial public offering price,
underwriting discount, proceeds to Selling Shareholder and proceeds to
Company will be $ , $ , $ and $ ,
respectively. See "Underwriting."
-----------
The shares offered hereby are offered severally by the U.S. Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about , 1997, against payment therefor in immediately
available funds.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
SALOMON BROTHERS INC
-----------
The date of this Prospectus is , 1997.
<PAGE>
[Inside front cover to include photographs of the exterior and interior of a
ShopKo store.]
ShopKo(R) and ProVantage(R) are registered servicemarks of the Company. All
other trademarks, servicemarks and trade names referred to in this Prospectus
are the property of their respective owners.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERINGS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, 7th Floor, New York, New
York 10048. Copies of such materials may be obtained from the web site that
the Commission maintains at http://www.sec.gov. In addition, such material may
also be inspected and copied at the offices of the New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 1-10876 pursuant
to the Exchange Act) are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
February 22, 1997;
2. The Company's Current Reports on Form 8-K dated April 2 and April 24,
1997;
3. The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A, and any report or amendment
filed for the purpose of updating such description; and
4. All other documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the shares of
Common Stock.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any or all of the documents
which are incorporated herein by reference, other than exhibits to such
information (unless such exhibits are specifically incorporated by reference
into such documents). Requests should be directed to ShopKo Stores, Inc., 700
Pilgrim Way, P.O. Box 19060, Green Bay, Wisconsin 54307-9060, Attention:
Investor Relations (telephone: (414) 497-2211).
----------------
Any statement contained in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified shall not be deemed
to constitute a part of this Prospectus except as so modified, and any
statement so superseded shall not be deemed to constitute part of this
Prospectus.
3
<PAGE>
CAUTIONARY NOTE: This Prospectus, certain of the documents incorporated
herein by reference, and other written materials, future filings, releases and
oral statements issued by or on behalf of the Company contain certain forward-
looking statements, including, but not limited to, statements about the future
performance of the Company and the Company's plans, objectives, expectations,
or intentions. These forward-looking statements are based on management's
assumptions and beliefs in light of information currently available to it and
are subject to risks and uncertainties. The Company's actual results may
differ significantly and materially from those projected or suggested in the
forward-looking statements. Factors that might cause such differences 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) changes in minimum wage legislation, (v)
regulatory and litigation matters affecting healthcare service providers,
particularly prescription benefit managers, (vi) interest rates, (vii) real
estate, 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."
4
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements contained or incorporated by reference in
the Prospectus. The Company's fiscal year ends on the last Saturday of
February.
THE COMPANY
ShopKo is a leading regional retailer which operates 130 retail 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 specializes in prescription benefit management, mail service pharmacy,
vision benefit management and health 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.
RETAIL STRATEGY
In response to the growing competition from national discount stores,
ShopKo's management recognized the need for a new strategy to differentiate the
Company from its competitors. 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, which
strengthened the Company's market position, was built on four guiding
principles:
. Establish an enhanced merchandising strategy in concert with customers'
needs, primarily focused on certain core business segments: health-
related products including retail pharmacy and optical services, casual
apparel, leisure products and home products;
. Remodel and re-merchandise the store base to create a more customer-
friendly shopping environment;
. Design an organizational structure which enables superior store
execution by closely linking the Company's merchandising, marketing, and
logistics functions to respond quickly and effectively to changing
customer demands; and
. Improve the Company's infrastructure, merchandising, and distribution
systems to enable the Company to be more responsive to its customers and
suppliers.
To execute this strategy, the Company centralized its merchandising
operations to allow store management to focus on providing customers with a
customer-friendly shopping environment defined by simplicity, speed and
convenience of service.
The Company is continuously changing and updating its merchandising strategy
to ensure continued differentiation from its competitors and to reflect
changing consumer preferences. ShopKo's current merchandising strategy is
focused on enhancing its product offering by adding new product segments to its
core product offerings. Such product segments have been identified and include:
casual furniture for the home and home office; bed and bath products;
housewares and small appliances; and special, plus-sized and intimate apparel
for women. In addition to emphasizing branded and private label products in
these segments, management intends to be category dominant in specific casual
lifestyle related product categories.
5
<PAGE>
The Company prices its merchandise to be competitive with its discount retail
competitors, both regional and national. In general, the Company uses 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.
The Company's strategy has been implemented in stages over the last several
years throughout the Company's 130 stores. During this period, substantially
all stores have been remodeled, all three distribution centers expanded,
management information systems upgraded, and merchandising centralized and
linked to marketing and logistics all with a view to enhancing customer service
and building customer loyalty. The Company intends to continue to make
investments of this type to enhance the Company's infrastructure. These
infrastructure changes, when combined with an organization and management team
able to deal with continuous change, provide the necessary platform for the
Company to improve its competitive position and to grow its general merchandise
retail business going forward. The results of the Company's retail strategy
have recently been demonstrated by the Company's accelerating comparable store
sales growth which, at 6.0% for fiscal 1997, was among the strongest in the
highly competitive discount retail industry.
Growth Strategy for the Retail Business
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 maintain 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 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.
The Company currently anticipates that new stores will be refurbished or
constructed to generally mirror existing ShopKo stores to benefit from its
merchandising strategies. The Company also plans to expand the practice of
purchasing existing pharmacy businesses in the market where a new ShopKo store
opens and transferring the business to the new store to generate customer
traffic and to improve the financial performance of the store in its initial
years.
The Company opened only one new store (excluding relocations) in fiscal 1997
and does not plan to construct any new stores in the traditional ShopKo format
in fiscal 1998. New store construction was affected by competitive pressures
and the proposed combination with Phar-Mor, Inc. See "Recent Developments."
6
<PAGE>
HEALTH SERVICES STRATEGY
Retail
Almost all of the Company's 130 stores provide professional healthcare
services through pharmacy and optical centers. In addition to generating
increased store traffic through more frequent store visits and building
customer loyalty, these services contribute significantly to the Company's
overall profitability and provide the opportunity for additional growth. The
Company estimates that its pharmacies dispense on average 60% more
prescriptions than the average drugstore and produce on average over $2 million
in revenues per pharmacy. 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 independent optometrists
perform in-store eye exams and prescribe corrective lenses. In fiscal 1997, the
Company's central optical lab and 77 in-store finishing labs dispensed over
617,000 eyewear prescriptions.
ProVantage
As an extension of the Company's retail business, which includes the sale of
pharmaceutical and optical products and services, the Company operates
ProVantage, Inc., which is its health services subsidiary that provides:
prescription benefit management, vision benefit management, and healthcare
information technology for businesses. The ProVantage operations have provided
significant and growing revenues to the Company's operating base. ProVantage
currently has 4.1 million lives under management, compared to 1.7 million lives
at the end of fiscal year 1996.
Prescription Benefit Management (PBM). 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.
Vision Benefit Management (VBM). 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. This acquisition gave VBM an immediate market presence in
the vision benefit management 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 currently provides services for approximately 190,000
plan participants.
Health Information Technology. Another component of ProVantage is health
information technology. ProVantage has developed two separate uses for this
technology and is currently
7
<PAGE>
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). ProVMed has made use of ShopKo's
investment in leading-edge technology. Using an 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. 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.
ProVantage Operating Results (in millions).
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------
FEB. 22, 1997 FEB. 24, 1996 FEB. 25, 1995
(52 WEEKS) (52 WEEKS) (52 WEEKS)
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales............................. $348.8 $93.8 $14.1
Operating Earnings.................... 9.5 2.7 1.5
PBM lives............................. 4.1 1.7 0.6
</TABLE>
Growth Strategy for ProVantage. 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 in ProVantage through one or more public or private
transactions. However, there can be no assurance if or when any such
transaction will occur.
STOCK BUYBACK AND SECONDARY OFFERING AGREEMENT
On April 24, 1997, the Company and the Selling Shareholder entered into a
Stock Buyback and Secondary Offering Agreement, as amended (the "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 the Offerings. The Selling Shareholder is
obligated to go forward with the Offerings if the offering price of the Common
Stock is equal to or greater than $18.35 per share. The Selling Shareholder may
choose to go forward with the Offerings 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. The Stock Buyback and the
Offerings are expected to be significantly accretive to the Company's earnings
per share, excluding one-time charges in fiscal 1998 related to the termination
of the Phar-Mor transaction and the Offerings, due to the fact that the
reduction of the number of shares outstanding (even if the over-allotment
options are exercised in full) more than offsets the impact of the additional
interest expense to be incurred as a result of the Stock Buyback and the
Offerings. See "Recent Developments" and "Summary Historical and Pro Forma
Statements of Earnings."
It is anticipated that upon the closing of the Offerings and the Stock
Buyback, Dale P. Kramer, the Company's President and Chief Executive Officer,
will be named Chairman of the Company's Board of Directors. The Agreement
provides that 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 upon the Company's
selection of replacements, but not later than October 1, 1997. A search is
currently underway for new independent directors to
8
<PAGE>
replace Messrs. Wright and Girard. In addition, William J. Podany, the
Company's Executive Vice President and Chief Operating Officer, and Stephen E.
Watson, former President and member of the Board of Directors of the Dayton
Hudson Corporation, will be named as additional directors prior to or shortly
after the closing of the Offerings and the Stock Buyback, increasing the number
of directors on the Company's Board to seven. See "Management--Expansion of
Board of Directors."
The Selling Shareholder will bear the underwriting discount and certain other
expenses of the Offerings 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 the Selling Shareholder and such expenses only to the extent not borne by
the Selling Shareholder. At an offering price per share of approximately $20.25
or greater, the Selling Shareholder will bear the entire underwriting discount
and certain other expenses of the Offerings under the terms of the Agreement.
However, the Company and the Selling Shareholder have each agreed to bear the
costs and expenses of its own counsel and the Company has agreed to bear
certain marketing costs.
After completion of the Offerings and the Stock Buyback, the Selling
Shareholder will not beneficially own any of the outstanding shares of Common
Stock. See "Selling Shareholder--Stock Buyback Agreement." There are currently
no material supply, financial or operational agreements between the Company and
the Selling Shareholder. Other than as described in this Prospectus, the
Company does not anticipate any material changes in its business or operations
as a result of the Selling Shareholder ceasing to hold an investment in the
Company.
TERMINATION OF PROPOSED PHAR-MOR TRANSACTION
On April 2, 1997, the Company, Cabot Noble, Inc. ("Cabot Noble") and Phar-
Mor, Inc. ("Phar-Mor") mutually agreed to terminate the Agreement and Plan of
Reorganization dated as of September 7, 1996, as amended, which agreement
provided for the combination of the Company and Phar-Mor under a new holding
company, Cabot Noble. The Company expects to take a one-time pre-tax charge of
approximately $2.8 million ($0.05 per share) in the first quarter of fiscal
1998, representing costs and expenses incurred in connection with the proposed
combination. See "Recent Developments."
9
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA STATEMENTS OF EARNINGS
The following unaudited pro forma statement of earnings presents the
estimated effect of the Stock Buyback from Supervalu (8,174,387 shares at
$18.35 per share plus investment banking and other professional fees associated
with the Stock Buyback). The pro forma statement of earnings assumes that this
event occurred on February 25, 1996 and accordingly includes the following
adjustment: increased interest expense of $9,677,000 due to an estimated
reduction of interest income of $4,158,000 and increased interest expense of
$5,519,000 due to additional borrowings needed under the revolving credit
agreement. The pro forma statement of earnings assumes no exercise of the
Underwriters' over-allotment options and does not give the effect of the
possible payment by the Company of the underwriting discounts and commissions
in connection with the Offerings. The "Historical and Pro Forma Statements of
Earnings" should be read in conjunction with the historical financial
statements, including the notes thereto, and other financial information
including the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FIFTY-TWO WEEKS ENDED FEBRUARY 22, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACTUAL PRO FORMA(1)
---------- ------------
<S> <C> <C>
Revenues:
Net sales............................................. $2,333,407 $2,333,407
Licensed department rentals and other income.......... 13,058 13,058
---------- ----------
2,346,465 2,346,465
Costs and expenses:
Cost of sales......................................... 1,783,741 1,783,741
Selling, general and administrative expenses.......... 397,092 397,092
Depreciation and amortization expenses................ 59,833 59,833
---------- ----------
2,240,666 2,240,666
Income from operations.................................. 105,799 105,799
Interest expense--net................................... 31,777 41,454
---------- ----------
Earnings before income taxes............................ 74,022 64,345
Provision for income taxes.............................. 29,076 25,275
---------- ----------
Net earnings............................................ $ 44,946 $ 39,070
========== ==========
Net earnings per common share........................... $ 1.40 $ 1.63
Weighted average number of common shares outstanding.... 32,092 23,918
</TABLE>
- --------
(1) The Pro Forma Statement of Earnings does not include the effect of the
possible payment by the Company of the underwriting discounts and certain
other expenses estimated at $8.5 million. If these expenses were recorded,
earnings per share would be $1.26. See "Selling Shareholder--Stock Buyback
Agreement."
10
<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data in the following table for each of
the five years in the period ended February 22, 1997 have been derived from the
Company's consolidated financial statements which have been audited by Deloitte
& Touche LLP, independent auditors. The selected consolidated financial data
should be read in conjunction with the Company's consolidated financial
statements and notes thereto included or incorporated by reference in this
Prospectus.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------------------------
FEB. 22, FEB. 24, FEB. 25, FEB. 26, FEB. 27,
1997 1996 1995 1994(1) 1993
(52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS)
---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
DATA DERIVED FROM
CONSOLIDATED FINANCIAL
STATEMENTS:
Summary of Operations
(millions except per
share data)
Net sales
Retail Store......... $2,005 $1,881 $1,840 $1,739 $1,683
ProVantage .......... 349 94 14 -- --
Intercompany(2)...... (21) (7) (1) -- --
------ ------ ------ ------ ------
Total................ 2,333 1,968 1,853 1,739 1,683
Gross margin........... 550 501 488 453 457
Operating income....... 106 97 91 74 100
Net income............. 45 38 38 32 50
Earnings per share..... 1.40 1.20 1.18 1.00 1.56
Balance Sheet Data
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
Cash Flow Data
Provided (used) by
Operations............. 112 156 41 34 75
Investing Activities... (66) (49) (104) (129) (91)
Financing Activities... (11) (30) 73 95 16
Other Data
Gross margin-Retail
Store................. 526 493 485 453 457
Gross margin-
ProVantage............ 24 8 3 -- --
EBITDA(4).............. 166 154 145 122 143
Capital expenditures... $ 39 $ 53 $ 95 $ 134 $ 91
Total debt as % of
total
capitalization(5)..... 46.6% 48.5% 50.9% 46.2% 37.9%
Ratio of Earnings to
Fixed Charges(6)...... 3.2 2.7 2.9 3.0 4.8
OTHER OPERATING DATA:
Same Retail Store
sales growth.......... 6.0% (0.5)% 0.7% 1.2% 1.5%
Stores at year end..... 130 129 124 117 111
Retail Store sales per
gross selling square
foot(7)............... $ 218 $ 210 $ 216 $ 217 $ 216
ProVantage lives
(thousands)(8)........ 4,116 1,665 627 -- --
</TABLE>
- --------
(1) The effect of adopting Statement of Financial Accounting Standards ("SFAS")
No. 106, "Employers' Accounting for Postretirement 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) Intercompany sales consist of prescriptions that were both sold at a ShopKo
pharmacy and processed by ProVantage.
(3) Total debt includes short-term debt, current portion of long-term
obligations and long-term obligations.
(4) EBITDA--Earnings before interest, taxes, depreciation and amortization.
EBITDA is used by the Company for the purpose of analyzing its operating
performance, leverage and liquidity. Such data are not a measure of
financial performance under generally accepted accounting principles and
should not be considered as an alternative to net income as an indicator of
the Company's operating performance or as an alternative to cash flows as a
measure of liquidity.
(5) Total capitalization includes shareholders' equity, total debt and non-
current deferred income taxes.
(6) For purposes of computing the ratio of earnings to fixed charges, earnings
are divided by fixed charges. For this purpose, earnings consist of net
earnings plus income taxes, interest expense, such portion of rent expense
as is representative of the interest factor thereon and amortization
expense of capitalized interest. Fixed charges consist of interest expense,
such portion of rent expense and capitalized interest. Such portion of rent
expense, capitalized interest and amortization of capitalized interest
amounted to $2.7 million, $0.1 million and $0.5 million in fiscal 1997,
$2.7 million, $0.2 million and $0.5 million in fiscal 1996, $2.4 million,
$1.3 million and $0.5 million in fiscal 1995, $1.9 million, $2.1 million
and $0.4 million in fiscal 1994, and $1.8 million, $1.1 million and $0.3
million in fiscal 1993.
(7) Sales per square foot for each period are based on both Company owned and
leased retail sales of all stores open the entire fiscal year preceding
such period, divided by such stores' total square feet of total selling
space at the end of such period. Leased sales represent sales by retail
vendors that lease store space (primarily a shoe vendor) and ranged from
1.9% to 2.2% of total owned and leased retail sales during the periods
presented.
(8) Lives are derived from the plan eligibility files and exclude long-term
care lives for which ProVantage provides formulary management services
only.
11
<PAGE>
RISK FACTORS
In addition to the other information contained or incorporated by reference
in this Prospectus, prospective investors should carefully consider the
following risk factors in evaluating an investment in the Common Stock.
COMPETITION
The discount retail merchandise business is highly competitive and subject
to excess capacity. Certain competitors of the Company are much larger and
have substantially greater resources than the Company. The competition for
customers has intensified in recent years as larger competitors, such as Wal-
Mart, Kmart and Target, have moved into the Company's geographic markets. In
addition, stores recently opened by the Company have been less successful than
established stores as a result of competitive pressures from larger national
retail chains and the difficulty in attracting a sufficient customer base in
new market areas. Although the Company has performed well notwithstanding this
intensified competition, there is no assurance that the Company will be able
to continue to compete successfully.
The prescription benefit management industry is dynamic, growing and very
competitive. ProVantage competes for health services 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.
REDUCED FINANCIAL FLEXIBILITY AND INCREASED LEVERAGE
All or substantially all of the Company's available cash will be used to
fund the Stock Buyback. Depending upon the timing of the Stock Buyback, the
Company may incur a nominal amount of additional short-term debt to complete
the Stock Buyback and the Offerings, and to fund its operations. Use of the
Company's available cash to fund the Stock Buyback will reduce the Company's
financial flexibility and increase its leverage ratio. The Company's increased
leverage ratio could have adverse effects on the Company, including the
following: (i) additional financing may not be available to the Company upon
terms as favorable as those currently available to the Company, (ii) a portion
of cash flow from operations must be dedicated to the payment of the principal
of and interest on debt, and (iii) the leverage may make the Company more
vulnerable to economic downturns and may limit its ability to withstand
competitive pressures and any adverse changes in government regulation.
AVAILABILITY OF RETAIL STORE SITES
The Company's plans to increase its number of retail stores will depend in
part upon the availability of existing retail stores or store sites. There can
be no assurance that such stores or sites will be available, or that they will
be available on terms acceptable to the Company.
LITIGATION
The sale of retail merchandise and provision of health services entails an
inherent risk of liability. The Company is currently subject to a number of
lawsuits, and it is expected that the Company from time to time will be
subject to similar suits in the ordinary course of business. The Company
currently maintains insurance intended to cover a majority of such claims,
subject to a $250,000 deductible for general liability claims and a $500,000
deductible for liability claims arising from prescription dispensing errors,
and management believes that its respective insurance programs are adequate.
There can be no assurance, however, that claims in excess of insurance
coverage or claims not
12
<PAGE>
covered by insurance coverage will not arise. There can be no assurance that
the Company will be able to obtain insurance coverage in the future on
acceptable terms, if at all. A successful claim against the Company
substantially in excess of its insurance coverage, or for claims which are not
covered by such insurance, could have a material adverse effect on its
financial condition and results of operations. In addition, claims against the
Company, regardless of merit or eventual outcome, may have a material adverse
effect upon its reputation and business.
Additionally, groups of retail pharmacies have filed lawsuits throughout the
United States against pharmaceutical manufacturers and certain pharmacy
benefit managers challenging certain brand pharmaceutical pricing practices
under various state and federal antitrust laws. The suits allege, among other
things, that the manufacturers have offered, and certain parties have
knowingly accepted, discounts and rebates on pharmaceutical purchases that
violate the U.S. Robinson-Patman Act. ProVantage is not a party to any of
these proceedings. However, if certain pricing practices now prevalent in the
pharmaceutical industry are determined to be violative of any laws, then the
availability to ProVantage of certain discounts, rebates and fees that
ProVantage presently receives in connection with its drug purchasing and
formulary management programs could be adversely affected.
SEASONALITY OF GENERAL MERCHANDISE BUSINESS
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.
DEPENDENCE ON KEY MANAGEMENT AND DIRECTORS
The Company believes that its continued success will depend to a significant
extent upon the continued services of its senior management and a seasoned
Board of Directors. The loss of the services of key senior management and
Board members could have a material adverse effect on the Company's business.
Messrs. Wright and Girard will resign from the Board of Directors when
replacements are selected by the Company, but not later than October 1, 1997.
See "Selling Shareholder--Stock Buyback Agreement".
EFFECTS OF ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Restated Articles of Incorporation, as
amended (the "Restated Articles"), and Bylaws, the existence of authorized but
unissued capital stock, certain provisions of Minnesota law and the Company's
Rights Plan may tend to deter unfriendly offers or other efforts to obtain
control of the Company that are not approved by the Company's Board of
Directors or a committee of the Board of Directors and thereby render the
Company less attractive to a potential acquirer and deprive the Company's
shareholders of opportunities to sell their shares of Common Stock at prices
higher than prevailing market prices. See "Certain Anti-Takeover Provisions".
ADDITIONAL RISK FACTORS PARTICULAR TO PROVANTAGE
PBM Industry Margin Erosion
Over the last several years, PBM's have experienced significant erosion in
the prices they have been able to charge for their services. Additionally,
competitive pressures have caused PBM's to increase client revenue sharing
opportunities. The combination of such lower prices and increased revenue
sharing have caused margin erosion. Such margin erosion is expected to
continue.
13
<PAGE>
Ability to Retain Clients
ProVantage's business is largely built upon contractual relationships with
its clients. These client contracts have various expiration dates and, in some
instances, are terminable by the client upon relatively short notice. There
can be no assurance that ProVantage's client contracts will continue unchanged
beyond their stated terms. Loss of accounts with large clients or with clients
which, in the aggregate account for a significant portion of ProVantage's
revenues, would adversely affect the Company's financial condition and results
of operations.
Ability to Maintain Growth Rate
A significant portion of the growth of ProVantage has been attributable to
acquisitions. There can be no assurance that ProVantage will be able to
consummate similar acquisitions to supplement ProVantage's internally
generated growth in the future.
Continuance of Formulary Revenues
A significant portion of ProVantage's earnings are attributable to its
formulary management service programs. Revenues derived from these services
include payments from pharmaceutical manufacturers and third party formulary
administrators for volume discounts, rebates and other fees. ProVantage has
secured contractual commitments from pharmaceutical manufacturers and third
party formulary administrators with regard to payment of such discounts,
rebates and fees, but there is no assurance that such contractual
relationships will continue unchanged beyond their stated terms, which are
typically one or two years.
Ability to Manage Growth
ProVantage's business has grown rapidly in the last three fiscal years, with
total revenues increasing from $14 million in fiscal year 1995 to $349 million
in fiscal year 1997. This recent rapid growth has placed, and if such growth
continues will increasingly place, a significant strain on ProVantage's
management and operations. Accordingly, ProVantage's future operating results
will depend on the ability of its officers and other key employees to continue
implementing and improving its operations, customer support and financial
control systems, and to effectively expand, train and manage its employee
base. There can be no assurance that ProVantage will be able to manage any
future expansion successfully or provide the necessary management resources to
successfully manage its business, and any inability to do so would have a
material adverse effect on the Company's business, operating results and
financial condition.
Government Regulation
The PBM industry is subject to extensive federal and state laws and
regulations, and compliance with such laws and regulations imposes significant
operational requirements for ProVantage. The regulatory requirements with
which ProVantage must comply in conducting its business vary from state to
state. Management believes that ProVantage is in substantial compliance with
all existing statutes and regulations material to the operation of its
business. The impact of future legislation and regulatory changes affecting
ProVantage's business cannot be predicted, and there can be no assurance that
ProVantage will be able to obtain or maintain the regulatory approvals
required to operate its business.
14
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is traded on the New York Stock Exchange under the symbol
"SKO". The following table sets forth the high and low reported closing sales
prices for the Common Stock for the fiscal periods indicated 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 --
Fiscal Year 1998
First Quarter (through June 9, 1997)................. $ 24.50 $14.500 --
</TABLE>
The last closing sales price of the Common Stock on the New York Stock
Exchange on June 9, 1997 was $24.50 per share.
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 Offerings and the Stock Buyback. 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.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
February 22, 1997 and pro forma to give effect to the Offerings and the Stock
Buyback and the short-term bank borrowings which may be used to finance the
Stock Buyback. The Company will not receive any of the proceeds from the sale
of the shares of Common Stock in the Offerings (other than proceeds from the
sale of shares of Common Stock, if any, sold in connection with the exercise
by the Underwriters of the over-allotment options). This table should be read
in conjunction with the consolidated financial statements and related notes
and the other financial information contained or incorporated by reference in
this Prospectus.
<TABLE>
<CAPTION>
FEBRUARY 22, 1997
----------------------
ACTUAL PRO FORMA(1)
-------- ------------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
Cash(2)................................................. $124,550 $ 2,776
======== ========
Current liabilities:
Short-term debt(2).................................... $ -- $ 30,526
Current portion of long-term obligations.............. 2,014 2,014
Long-term obligations, less current maturities.......... 418,714 418,714
-------- --------
Total Debt............................................ 420,728 451,254
Deferred Income Tax................................... 20,999 20,999
Shareholders' Equity:
Common Stock, $.01 par value; 75,000,000 shares
authorized;
32,166,720 shares issued............................. 322 322
Additional Paid In Capital............................ 245,137 245,137
Retained Earnings..................................... 215,405 215,405
Less cost of treasury stock (8,174,387 shares as
adjusted)(2)......................................... -- (152,300)
-------- --------
Total Shareholders' Equity.......................... 460,864 308,564
-------- --------
Total capitalization.................................... $902,591 $780,817
======== ========
Total debt to total capitalization...................... 46.6% 57.8%
======== ========
</TABLE>
- --------
(1) Assumes no exercise of the Underwriters' over-allotment options. Does not
give effect to the possible payment by the Company of the underwriting
discounts and commissions in connection with the Offerings. If these
expenses were recorded, the pro forma total debt to total capitalization
ratio would have increased to 58.9%. See "Selling Shareholder--Stock
Buyback Agreement."
(2) Reflects the Stock Buyback of 8,174,387 shares of Common Stock from the
Selling Shareholder and related costs, including estimated investment
banking and professional fees associated with the Stock Buyback.
16
<PAGE>
HISTORICAL AND PRO FORMA STATEMENTS OF EARNINGS
The following unaudited pro forma statement of earnings presents the
estimated effect of the Stock Buyback from Supervalu (8,174,387 shares at
$18.35 per share plus investment banking and other professional fees
associated with the Stock Buyback). The pro forma statement of earnings
assumes that this event occurred on February 25, 1996 and accordingly includes
the following adjustment: increased interest expense of $9,677,000 due to an
estimated reduction of interest income of $4,158,000 and increased interest
expense of $5,519,000 due to additional borrowings needed under the revolving
credit agreement. The pro forma statement of earnings assumes no exercise of
the Underwriters' over-allotment options and does not give the effect of the
possible payment by the Company of the underwriting discounts and commissions
in connection with the Offerings. The "Historical and Pro Forma Statements of
Earnings" should be read in conjunction with the historical financial
statements, including the notes thereto, and other financial information
including the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
FIFTY-TWO WEEKS ENDED FEBRUARY 22, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACTUAL PRO FORMA(1)
---------- ------------
<S> <C> <C>
Revenues:
Net sales............................................. $2,333,407 $2,333,407
Licensed department rentals and other income.......... 13,058 13,058
---------- ----------
2,346,465 2,346,465
Costs and expenses:
Cost of sales......................................... 1,783,741 1,783,741
Selling, general and administrative expenses.......... 397,092 397,092
Depreciation and amortization expenses................ 59,833 59,833
---------- ----------
2,240,666 2,240,666
Income from operations.................................. 105,799 105,799
Interest expense--net................................... 31,777 41,454
---------- ----------
Earnings before income taxes............................ 74,022 64,345
Provision for income taxes.............................. 29,076 25,275
---------- ----------
Net earnings............................................ $ 44,946 $ 39,070
========== ==========
Net earnings per common share........................... $ 1.40 $ 1.63
Weighted average number of common shares outstanding.... 32,092 23,918
</TABLE>
- --------
(1) The Pro Forma Statement of Earnings does not include the effect of the
possible payment by the Company of the underwriting discounts and certain
other expenses estimated at $8.5 million. If these expenses were recorded,
earnings per share would be $1.26. See "Selling Shareholder--Stock Buyback
Agreement."
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data in the following table for each of
the five years in the period ended February 22, 1997 have been derived from
the Company's consolidated financial statements which have been audited by
Deloitte & Touche LLP, independent auditors. The selected consolidated
financial data should be read in conjunction with the Company's consolidated
financial statements and notes thereto included or incorporated by reference
in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------------------------------------------
FEB. 22, FEB. 24, FEB. 25, FEB. 26, FEB. 27,
1997 1996 1995 1994(1) 1993
(52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS)
---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
DATA DERIVED FROM
CONSOLIDATED FINANCIAL
STATEMENTS:
Summary of Operations
(millions except per
share data)
Net sales
Retail Store......... $2,005 $1,881 $1,840 $1,739 $1,683
ProVantage .......... 349 94 14 -- --
Intercompany(2)...... (21) (7) (1) -- --
------ ------ ------ ------ ------
Total................ 2,333 1,968 1,853 1,739 1,683
Gross margin........... 550 501 488 453 457
Operating income....... 106 97 91 74 100
Net income............. 45 38 38 32 50
Earnings per share..... 1.40 1.20 1.18 1.00 1.56
Balance Sheet Data
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
Cash Flow Data
Provided (used) by
Operations........... 112 156 41 34 75
Investing Activities. (66) (49) (104) (129) (91)
Financing Activities. (11) (30) 73 95 16
Other Data
Gross margin-Retail
Store................. 526 493 485 453 457
Gross margin-
ProVantage............ 24 8 3 -- --
EBITDA(4).............. 166 154 145 122 143
Capital expenditures... $ 39 $ 53 $ 95 $ 134 $ 91
Total debt as % of
total
capitalization(5)..... 46.6% 48.5% 50.9% 46.2% 37.9%
Ratio of Earnings to
Fixed Charges(6)...... 3.2 2.7 2.9 3.0 4.8
OTHER OPERATING DATA:
Same Retail Store
sales growth.......... 6.0% (0.5)% 0.7% 1.2% 1.5%
Stores at year end..... 130 129 124 117 111
Retail Store sales per
gross selling square
foot(7)............... $ 218 $ 210 $ 216 $ 217 $ 216
ProVantage lives
(thousands)(8)........ 4,116 1,665 627 -- --
</TABLE>
- --------
(1) The effect of adopting Statement of Financial Accounting Standards
("SFAS") No. 106, "Employers' Accounting for Postretirement 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) Intercompany sales consist of prescriptions that were both sold at a
ShopKo pharmacy and processed by ProVantage.
(3) Total debt includes short-term debt, current portion of long-term
obligations and long-term obligations.
(4) EBITDA--Earnings before interest, taxes, depreciation and amortization.
EBITDA is used by the Company for the purpose of analyzing its operating
performance, leverage and liquidity. Such data are not a measure of
financial performance under generally accepted accounting principles and
should not be considered as an alternative to net income as an indicator
of the Company's operating performance or as an alternative to cash flows
as a measure of liquidity.
(5) Total capitalization includes shareholders' equity, total debt and non-
current deferred income taxes.
(6) For purposes of computing the ratio of earnings to fixed charges, earnings
are divided by fixed charges. For this purpose, earnings consist of net
earnings plus income taxes, interest expense, such portion of rent expense
as is representative of the interest factor thereon and amortization
expense of capitalized interest. Fixed charges consist of interest
expense, such portion of rent expense and capitalized interest. Such
portion of rent expense, capitalized interest and amortization of
capitalized interest amounted to $2.7 million, $0.1 million, and $0.5
million in fiscal 1997, $2.7 million, $0.2 million and $0.5 million in
fiscal 1996, $2.4 million, $1.3 million and $0.5 million in fiscal 1995,
$1.9 million, $2.1 million, and $0.4 million in fiscal 1994, and $1.8
million, $1.1 million, and $0.3 million in fiscal 1993.
(7) Sales per square foot for each period are based on both Company owned and
leased retail sales of all stores open the entire fiscal year preceding
such period, divided by such stores' total square feet of total selling
space at the end of such period. Leased sales represent sales by retail
vendors that lease store space (primarily a shoe vendor) and ranged from
1.9% to 2.2% of total owned and leased retail sales during the periods
presented.
(8) Lives are derived from the plan eligibility files and exclude long-term
care lives for which ProVantage provides formulary management services
only.
18
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the Offerings, other than
proceeds from the sale of shares of Common Stock, if any, sold in connection
with the exercise by the Underwriters of the over-allotment options. If the
over-allotment options are exercised, the Company intends to use the net
proceeds from such sales for general corporate purposes.
RECENT DEVELOPMENTS
On April 24, 1997, the Company and the Selling Shareholder entered into the
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 the Offerings. Depending upon the
price to the public of the Common Stock in the Offerings, the expenses of the
Offerings 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 Offerings and
the Stock Buyback are completed. The Stock Buyback and the Offerings are
expected to be significantly accretive to the Company's earnings per share,
excluding one-time charges in fiscal 1998 related to the termination of the
Phar-Mor transaction and the Offerings, due to the fact that the reduction of
the number of shares outstanding (even if the over-allotment options are
exercised in full) more than offsets the impact of the additional interest
expense to be incurred as a result of the Stock Buyback and the Offerings. See
"Selling Shareholder--Stock Buyback Agreement" and "Summary Historical and
ProForma Statements of Earnings."
On April 2, 1997, the Company, Cabot Noble and Phar-Mor mutually agreed to
terminate the Agreement and Plan of Reorganization dated as of September 7,
1996, as amended, which agreement provided for the combination of the Company
and Phar-Mor under a new holding company, Cabot Noble. The Company expects to
take a one-time pre-tax charge of approximately $2.8 million ($0.05 per share)
in the first quarter of fiscal 1998, representing costs and expenses incurred
in connection with the proposed combination.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion of results of operations that follows is based upon, and
should be read in conjunction with the Company's consolidated financial
statements, including notes thereto, appearing elsewhere herein.
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.
20
<PAGE>
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.
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
21
<PAGE>
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 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
22
<PAGE>
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 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
Buyback. 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.
23
<PAGE>
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.
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.
24
<PAGE>
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 and Cabot Noble. Pursuant to the Plan of
Reorganization, the Company and Phar-Mor would have become subsidiaries of
Cabot Noble (the "Reorganization").
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 Offerings and the Stock Buyback. 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.
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.
25
<PAGE>
BUSINESS
GENERAL
ShopKo Stores, Inc., a Minnesota corporation, was founded in 1961 and was
acquired by Supervalu Inc. 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
health 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.
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.
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
26
<PAGE>
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, 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 127 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
27
<PAGE>
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. 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 health 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
28
<PAGE>
ProVantage and American Medical Security Holdings, Inc. ("AMS"). ProVantage
has an 80% ownership interest in ProVMed and AMS has a 20% ownership interest
in ProVMed.
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.
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
29
<PAGE>
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 are 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 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.
30
<PAGE>
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.
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 push 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.
31
<PAGE>
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 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. 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 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.
32
<PAGE>
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 Health 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 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-
33
<PAGE>
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.
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.
34
<PAGE>
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 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.
35
<PAGE>
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:
<TABLE>
<CAPTION>
# OF
STATE STORES
- ----- ------
<S> <C>
California.............. 1
Colorado................ 3
Idaho................... 8
Illinois................ 3
Iowa.................... 3
Michigan................ 4
Minnesota............... 13
Montana................. 5
</TABLE>
<TABLE>
<CAPTION>
# OF
STATE STORES
- ----- ------
<S> <C>
Nebraska.................. 11
Nevada.................... 3
Oregon.................... 4
South Dakota.............. 6
Utah...................... 15
Washington................ 10
Wisconsin................. 41
---
Sub-Total............... 130
---
Ohio(1)................... 4
---
Total................... 134
===
</TABLE>
- --------
(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 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:
<TABLE>
<CAPTION>
SQ. FT.
OF
BUILDING
LOCATION USE SPACE TITLE
-------- ------------------------------------- -------- ------
<S> <C> <C> <C>
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 Facility 14,400 Leased
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
</TABLE>
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.
36
<PAGE>
MANAGEMENT
<TABLE>
<CAPTION>
SERVED IN EMPLOYED
CURRENT BY THE
POSITION COMPANY
NAME AGE* POSITION SINCE SINCE
---- ---- -------- --------- --------
<S> <C> <C> <C> <C>
Dale P. Kramer 57 President, Chief Executive Officer and a 1991 1971
Director
William J. Podany 50 Executive Vice President and Chief 1996 1994
Operating 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, 1993 1989
Replenishment 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
</TABLE>
- --------
*as of February 22, 1997
There are no family relationships between or among any of the executive
officers of the Company.
The term of office of each executive officer is from one annual meeting of
the directors until the next annual meeting of directors or until a successor
for each is selected.
There are no arrangements or understandings between any of the executive
officers of the Company and any other person (not an officer or director of
the Company acting as such) pursuant to which any of the executive officers
were selected as an officer of the Company.
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 and L. Terry McDonald.
Mr. Kramer has been a director of ShopKo 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.
37
<PAGE>
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. Bettiga has been Senior Vice President, Health Services since February
1995. Prior to this promotion, he was Vice President, Health Services, a
position he held since October 1993. Mr. Bettiga is responsible for all of the
Company's pharmacy and optical operations. He also oversees all managed care
business and is actively involved in merchandising responsibilities. Prior to
that, he has held the position of Vice President of Pharmacy as well as
various other positions since 1977.
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. Harig has been Senior Vice President, Planning, Replenishment and
Analysis, Distribution and Transportation since October 1993. Prior thereto,
he was Vice President, Inventory, Merchandise Forecasts, Replenishment and EDI
of the Company since February 1990 and served as its Vice President, Special
Projects from May 1989 to February 1990. Mr. Harig was employed by Wal-Mart
Stores, Inc. in various positions from 1978 to May 1989, most recently as Vice
President--International Merchandising.
Mr. Hendra has been Senior Vice President, Special Tactical Initiatives
since March 1997. Prior to that, he was Senior Vice President, Hardlines from
March 1991 to March 1997 and served as its Vice President, Hardlines
Merchandising from January 1986 to March 1991. Mr. Hendra has been employed by
the Company in various other positions since 1970.
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 thereto 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.
38
<PAGE>
Mr. Liebergen has been Senior Vice President, Human Resources/Quality
Assurance/Legal Affairs/Internal Communication since October 1993. Mr.
Liebergen served as Secretary of the Company from August 1991 to October 1995.
Prior thereto, he was Vice President, Human Resources, Government Affairs,
Loss Prevention of the Company since 1986 and has been employed by the Company
in various other positions since 1973.
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 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.
EXPANSION OF BOARD OF DIRECTORS
William J. Podany and Stephen E. Watson have agreed to join the Company's
Board of Directors prior to or shortly after the closing of the Offerings and
the Stock Buyback, raising the number of Directors from five to seven.
Mr. Podany, whose biography is set forth above, is the Company's Executive
Vice President, Chief Operating Officer.
Mr. Watson retired from Dayton Hudson Corporation in March 1996 after 24
years of service. He joined Dayton's in 1973 as a merchandising trainee and
advanced through various management positions. In 1982, he was named Executive
Vice President for merchandising and marketing. He became President of
Hudson's in 1984. He was named Chairman and Chief Executive Officer of Dayton
Hudson Department Stores in 1985. He was appointed Executive Vice President of
the Dayton Hudson Corporation in 1989, and became President and a member of
the Dayton Hudson Board of Directors in 1991. Mr. Watson has served as a
member of the Board of Directors of Norwest Bank Corporation and the Visiting
Committee of Harvard Business School. He served as Chairman of the Board of
the Associated Merchandising Corporation and the Minneapolis Downtown Council.
He is a Trustee of the Walker Art Center.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Restated Articles and Bylaws, the
existence of authorized but unissued capital stock, certain provisions of
Minnesota law and the rights plan described below may tend to deter unfriendly
offers or other efforts to obtain control of the Company that are not approved
by the Company's Board of Directors or a committee of the Board of Directors
and thereby render the Company less attractive to a potential acquirer and
deprive the Company's shareholders of opportunities to sell their shares of
Common Stock at prices higher than prevailing market prices.
RESTATED ARTICLES AND BYLAWS
The Company's Restated Articles provide that if Supervalu's beneficial
ownership of shares of the Company's Common Stock is reduced to less than 15%
through a public distribution effected by a sale, dividend or other
distribution, a supermajority vote will be required for certain business
combinations involving the Company. The completion of the Offerings will cause
these provisions to come into effect. Under such provisions, the Restated
Articles require, with certain exceptions, the affirmative vote of 75% of the
Company's voting stock to effect a merger, sale or lease of substantially all
of the assets of the Company, the issuance or transfer of securities of the
Company or certain other transactions,
39
<PAGE>
where the other party to the transaction is the beneficial owner of 5% or more
of the Company's outstanding voting stock. In addition, each such covered
transaction, with certain exceptions, must be approved by a majority of the
outstanding voting stock of the Company, excluding the voting stock
beneficially owned by the other party to the transaction. Any amendment,
change or repeal of this provision of the Restated Articles would require the
affirmative vote of 75% of the outstanding voting stock, and a majority of the
outstanding shares of voting stock excluding voting stock beneficially owned
by any party which is the beneficial owner of 5% or more of the outstanding
voting stock.
Pursuant to the Restated Articles and Bylaws, the Board of Directors of the
Company is divided into three classes serving staggered three-year terms. As a
result, at least two shareholders' meetings will generally be required for
shareholders to effect a change in control of the Board of Directors. Any
directors, or the entire Board of Directors, may be removed from office at any
time, with or without cause, but only by the affirmative vote of the holders
of not less than 75% of the outstanding shares of the capital stock of the
Company entitled to vote generally in the election of directors, voting
together as a single class.
The foregoing description of the Company's Restated Articles and Bylaws is a
summary and is qualified in its entirety by the provisions of the Company's
Restated Articles and Bylaws, which are incorporated by reference in the
Registration Statement.
MINNESOTA BUSINESS CORPORATION ACT
Section 302A.671 of the Minnesota Statutes applies, with certain exceptions,
to any acquisition of voting stock of the Company (from a person other than
the Company, and other than in connection with certain mergers and exchanges
to which the Company is a party) resulting in the beneficial ownership of 20%
or more of the voting stock then outstanding. Section 302A.671 requires
approval of any such acquisitions by a vote of the holders of a majority of
all of the Company's voting shares, including shares held by the acquiring
person, and of a majority of the Company's voting shares held by disinterested
shareholders in order for the acquiring person to have full voting rights with
respect to the acquired shares. In general, shares in excess of 20% of the
outstanding voting stock acquired in the absence of such approval are denied
voting rights and are redeemable at their then market value by the Company if
called by the Company for redemption within 30 days after the acquiring person
has failed to give a timely information statement to the Company or the date
the shareholders voted not to grant full voting rights to the acquiring
person's shares. Similar shareholder approvals are required at the 33 1/3% and
majority stock ownership thresholds.
Section 302A.673 of the Minnesota Statutes generally prohibits any business
combination by the Company, or any subsidiary of the Company, with any
shareholder which purchases 10% or more of the Company's voting shares (an
"Interested Shareholder") within four years following such Interested
Shareholder's acquisition of such 10% or greater interest, unless the business
combination is approved by a committee of all of the disinterested members of
the Board of Directors of the Company before the Interested Shareholder's
acquisition of such 10% or greater interest.
Section 302A.675 of the Minnesota Statutes generally prohibits an offeror
from acquiring shares of a publicly held Minnesota corporation such as the
Company within two years following the offeror's last purchase of the
corporation's shares pursuant to a takeover offer with respect to that class,
unless the corporation's shareholders are able to sell their shares to the
offeror upon substantially equivalent terms as those provided in the earlier
takeover offer. This statute will not apply if the acquisition of shares is
approved by a committee of all of the disinterested members of the Board of
Directors of the Company before the purchase of any shares by the offeror
pursuant to a takeover offer.
40
<PAGE>
RIGHTS PLAN
The Company has entered into a Rights Agreement with Norwest Bank Minnesota,
N.A. as agent, dated as of July 3, 1992 (the "Rights Agreement"), pursuant to
which rights ("Rights") to purchase one one-thousandth of a share of newly
created Series B Junior Participating Preferred Stock, par value $0.01 per
share, of the Company (the "Series B Preferred Stock") will be issuable on the
terms and subject to the conditions set forth therein. No Rights will be
issued under the Rights Agreement until Supervalu's beneficial ownership of
shares of Common Stock is reduced to less than 15% through the Offerings. One
Right will be issued as a dividend for each share of Common Stock of the
Company outstanding on the date the Offerings are completed or as soon
thereafter as is practicable. Each Right, when exercisable, will represent the
right to purchase one one-thousandth of a share of Series B Preferred Stock at
a specified price. The Rights will become exercisable ten days after a person
or group acquires 20% or more of the outstanding Common Stock (other than
certain persons who own more than 20% of the outstanding Common Stock as a
result of the receipt of Common Stock pursuant to such public distribution by
Supervalu, and certain transferees of such persons, provided any such person
or transferee does not thereafter acquire ownership of an additional 1% of the
Common Stock) or commences or announces a tender or exchange offer which would
result in such ownership.
If, after the Rights become exercisable, the Company were to be acquired
through a merger or other business combination transaction or 50% or more of
its assets or earning power were sold, each Right would permit the holder to
purchase, for the exercise price, common stock of the acquiring company having
a market value of twice the exercise price of $65. In addition, if any person
acquires 30% or more of the outstanding shares of Common Stock, each Right not
owned by such person would permit the purchase, for the exercise price, of a
share of Common Stock having a market value of twice the exercise price of
$65. At any time after a person acquires 30% or more of the shares of Common
Stock and prior to the time any person acquires 50% or more of the shares of
Common Stock, the Company's Board of Directors could elect to exchange all or
part of the then exercisable Rights not owned by such person at an exchange
ratio of one share of Common Stock, or one one-thousandth share of Series B
Preferred Stock, for each Right, subject to adjustment.
The Rights expire on April 15, 2002, unless earlier redeemed by the Company
in accordance with the terms of the Rights Agreement. The purchase price
payable and the shares of Series B Preferred Stock issuable upon exercise of
the Rights would be subject to adjustment from time to time as specified in
the Rights Agreement. In addition, the Board of Directors would retain the
authority to redeem (at $0.01 per Right) and replace the Rights with new
rights at any time, provided that no such redemption could occur after a
person or group acquires 20% or more of the outstanding shares of Common
Stock.
Shares of Series B Preferred Stock, when issued upon exercise of the Rights,
will be nonredeemable and will rank junior to all series of any other class of
Preferred Stock. Each share of Series B Preferred Stock will be entitled to a
cumulative preferential quarterly dividend payment equal to the greater of (1)
$10 per share or (2) 1,000 times the dividend declared per share of Common
Stock. In the event of liquidation, the holders of shares of Series B
Preferred Stock will be entitled to a preferential liquidation payment equal
to the greater of (a) $1,000 per share or (b) 1,000 times the payment made per
share of Common Stock. Each share of Series B Preferred Stock will entitle the
holder to 1,000 votes, voting together with the Common Stock. Finally, in the
event of any merger, consolidation or other transaction in which shares of
Common Stock are exchanged, each share of Series B Preferred Stock will be
entitled to receive 1,000 times the amount received per share of Common Stock.
The foregoing rights would be subject to antidilution adjustments. The number
of shares constituting the series of Series B Preferred Stock will be 100,000.
41
<PAGE>
SELLING SHAREHOLDER
The following table sets forth the name of the Selling Shareholder, the
number of shares of Common Stock owned beneficially by the Selling Shareholder
at the commencement of the Offerings, the number of shares of Common Stock
offered for sale by the Selling Shareholder pursuant to this Prospectus and
the number of shares of Common Stock to be repurchased by the Company. After
giving effect to the Offerings and the Stock Buyback, the Selling Shareholder
will not beneficially own any of the outstanding shares of Common Stock. See
"Selling Shareholder--Stock Buyback Agreement."
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK BENEFICIALLY OWNED SHARES TO SHARES TO BE
NAME BEFORE THE OFFERINGS BE REPURCHASED SOLD IN THE OFFERINGS
- ---- ------------------------ -------------- ---------------------
<S> <C> <C> <C>
Supervalu Inc.(1)....... 14,731,667 8,174,387 6,557,280
</TABLE>
- --------
(1) These shares are held of record by Supervalu's wholly-owned subsidiary,
Supermarket Operators of America, Inc.
Michael W. Wright and Jeffrey C. Girard are executive officers of Supervalu
and Mr. Wright is also Chairman of the Board of Directors of Supervalu.
Messrs. Wright and Girard are also directors of the Company and Mr. Wright is
Chairman of the Board of the Company.
STOCK BUYBACK AGREEMENT
On April 24, 1997, the Company and Supervalu entered into the Stock Buyback
and Secondary Offering Agreement, as amended (the "Agreement"), a copy of
which has been filed as an exhibit to the Registration Statement. The
following is a description of certain terms of the Agreement. This description
does not purport to be complete and is qualified in its entirety by references
to such exhibit. The Company expects that the Stock Buyback and the Offerings
will be significantly accretive to the Company's earnings per share, excluding
one-time charges in fiscal 1998 related to the termination of the Phar-Mor
transaction and the Offerings, due to the fact that the reduction of the
number of shares outstanding (even if the over-allotment options are exercised
in full) more than offsets the impact of the additional interest expense to be
incurred as a result of the Stock Buyback and the Offerings.
Pursuant to the Agreement, 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 subject to the satisfaction or waiver of the condition that the
Offerings shall have been consummated and that the Stock Buyback is in
compliance with applicable Minnesota law. The obligation of the Company to
consummate the Stock Buyback is further subject to the satisfaction or waiver
of the conditions that: there shall not have occurred any material adverse
change in the U.S. financial markets; the trading of Common Stock shall not
have been suspended or materially limited by the Commission or the New York
Stock Exchange; trading generally on the New York Stock Exchange shall not
have been suspended, limited or restricted by order of the New York Stock
Exchange, the Commission or any other governmental body; or a banking
moratorium shall not have been declared by Federal or New York authorities.
Pursuant to the Agreement, the Selling Shareholder has agreed to certain
"standstill" provisions with respect to the Company, including, among other
things, that the Selling Shareholder will not take certain actions, or assist
or encourage others to take certain actions, with respect to an acquisition of
any securities of the Company, including soliciting proxies or making
shareholder proposals, forming a "group" within the meaning of Section
13(d)(3) of the Exchange Act with respect to any securities of the Company,
depositing any of the securities of the Company into a voting trust or
entering into any
42
<PAGE>
similar arrangement, influencing or controlling the Company, or seeking
modification or amendment of any such "standstill" provisions. Such
"standstill" provisions will remain in effect for the ten-year period
commencing with the closing of the Stock Buyback.
Pursuant to the Agreement, the Company has agreed to file the Registration
Statement and to use all reasonable efforts to cause such Registration
Statement to be declared effective as soon as possible after such filing and
has also agreed to grant the Underwriters over-allotment options of up to
983,592 shares of Common Stock. The Selling Shareholder is obligated to go
forward with the Offerings if the public offering price of the Common Stock is
equal to or greater than $18.35 per share. The Selling Shareholder may choose
to go forward with the Offerings if the 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.
It is anticipated that upon the closing of the Offerings and the Stock
Buyback, Dale P. Kramer, the Company's President and Chief Executive Officer,
will be named Chairman of the Company's Board of Directors. The Agreement
provides that 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 upon the
Company's selection of replacements, but not later than October 1, 1997. A
search is currently underway for new independent directors to replace Messrs.
Wright and Girard. In addition, William J. Podany, the Company's Executive
Vice President and Chief Operating Officer, and Stephen E. Watson, former
President and member of the Board of Directors of the Dayton Hudson
Corporation, will be named as additional directors prior to or shortly after
the closing of the Offerings and the Stock Buyback, increasing the number of
directors on the Company's Board to seven. See "Management--Expansion of Board
of Directors."
Both the Company and the Selling Shareholder have agreed not to solicit or
take any other action or disclose any confidential information which would
facilitate a third party's offer for or proposal to acquire a substantial
equity interest in or a substantial portion of the assets of the Company,
whether through merger, consolidation or other business consolidation or other
transaction. The Company and the Selling Shareholder have also agreed to
notify each other in the event such an offer or proposal is received.
The Agreement also provides for an allocation of expenses of the Offerings.
The Selling Shareholder will bear the underwriting discount and pay the
expenses of the Offerings (other than for the Company's counsel and certain
marketing costs) to the extent that the total initial offering price to the
public exceeds $123.6 million (i.e., $18.85 per share). The Company will pay
the Selling Shareholder an amount equal to the underwriting discount and will
pay such expenses to the extent not borne or paid by the Selling Shareholder.
The total amount of such discount and expenses is estimated at $8.5 million.
At an offering price per share of approximately $20.25 or greater, the Selling
Shareholder will bear the entire underwriting discount and certain other
expenses of the Offerings.
43
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Selling Shareholder has agreed to sell to each of the U.S. Underwriters named
below, and each of such U.S. Underwriters, for whom Goldman, Sachs & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Salomon Brothers Inc
are acting as representatives, has severally agreed to purchase from the
Selling Shareholder, the respective number of shares of Common Stock set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Goldman, Sachs & Co..........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................
Salomon Brothers Inc.........................................
---------
Total.................................................... 5,245,824
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The U.S. Underwriters may
allow, and such dealers may reallow, a concession not in excess of $
per share to certain brokers and dealers. After the shares of Common Stock are
released for sale to the public, the offering price and other selling terms
may from time to time be varied by the representatives.
The Company and the Selling Shareholder have entered into an underwriting
agreement (the "International Underwriting Agreement") with the underwriters
of the International Offering (the "International Underwriters") providing for
the concurrent offer and sale of 1,311,456 shares of Common Stock in an
international offering outside the United States. The offering price and
aggregate underwriting discounts and commissions per share for the Offerings
are identical. The closing of the Offering made hereby is a condition to the
closing of the International Offering, and vice versa. The representatives of
the International Underwriters are Goldman Sachs International, Merrill Lynch
International and Salomon Brothers International.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the Offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution
of the shares offered hereby and subject to certain exceptions, it will offer,
sell or deliver the shares of Common Stock, directly or indirectly, only in
the United States of America (including the States and the District of
Columbia), its territories, its possessions and other areas subject to its
jurisdiction (the "United States") and to U.S. persons, which term shall mean,
for purposes of this paragraph: (a) any individual who is a resident of the
United States or (b) any corporation, partnership or other entity organized in
or under the laws of the United States or any political subdivision thereof
and whose office most directly involved with the purchase is located in the
United States. Each of the International Underwriters has agreed pursuant to
the Agreement Between that, as a part of the distribution of the shares
offered as a part of the International Offering, and subject to certain
exceptions, it will (i) not, directly or indirectly, offer, sell or deliver
shares of Common Stock (a) in the United States or to any U.S. persons or (b)
to any person who it believes intends to reoffer, resell or deliver the shares
in the United States or to any U.S. persons, and (ii) cause any dealer to whom
it may sell such shares at any concession to agree to observe a similar
restriction.
44
<PAGE>
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall
be the initial public offering price, less an amount not greater than the
selling concession.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of
786,874 additional shares of Common Stock solely to cover over-allotments, if
any. If the U.S. Underwriters exercise their over-allotment option, the U.S.
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the foregoing table, bears to the
5,245,824 shares of Common Stock offered hereby. The Company has granted the
International Underwriters a similar option to purchase up to an aggregate of
196,718 additional shares of Common Stock.
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 90 days after the
date of this Prospectus, it will not offer, sell, contract to sell or
otherwise dispose of, or file a registration statement under the Securities
Act with respect to, any shares of Common Stock, any securities of the Company
which are substantially similar to the Common Stock or which are convertible
into or exchangeable for, or that represent the right to receive, Common Stock
or securities which are substantially similar to the shares of Common Stock
(other than pursuant to employee stock plans existing, or on the conversion or
exchange of convertible or exchangeable securities outstanding, on the date of
this Prospectus) without the prior written consent of the representatives of
the Underwriters, except for the shares of Common Stock offered in connection
with the concurrent U.S. and International Offerings.
The Company and the Selling Shareholder have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
In connection with the Offerings, the Underwriters may purchase and sell
shares of Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offerings. Stabilizing
transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Common Stock; and
syndicate short positions involve the sale by the Underwriters of a greater
number of shares of Common Stock than they are required to purchase in the
Offerings. The Underwriters may also impose a penalty bid whereby selling
concessions allowed to syndicate members or other broker-dealers in respect of
the shares of Common Stock sold in the Offerings for their account may be
reclaimed by the syndicate if such securities are repurchased by the syndicate
in stabilizing or covering transactions. These activities may stabilize,
maintain or otherwise affect the market price of the Common Stock which may be
higher than the price that might otherwise prevail in the open market; and
these activities, if commenced, may be discontinued at any time. These
transactions may be effected on the New York Stock Exchange, in the over-the-
counter market or otherwise.
Salomon Brothers Inc advised the Company in connection with the Stock
Buyback. If the Stock Buyback is completed, Salomon Brothers Inc will receive
a fee of approximately $2,150,000.
45
<PAGE>
LEGAL MATTERS
Certain legal matters relating to the securities offered hereby will be
passed upon for the Company by Godfrey & Kahn, S.C., Milwaukee, Wisconsin, and
by Richard D. Schepp, Esq., Vice President--Legal Affairs of the Company, for
the Selling Shareholder by David L. Boehnen, Esq., Senior Vice President--Law
and External Relations of Supervalu Inc., and for the Underwriters by
Sonnenschein Nath & Rosenthal, Chicago, Illinois.
EXPERTS
The consolidated financial statements and related financial statement
schedules of the Company and its subsidiaries included herein and incorporated
by reference in this Prospectus, and elsewhere in the Registration Statement
from the Company's Annual Report on Form 10-K have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports, which are
included and incorporated herein by reference, and have been so included and
incorporated herein in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
46
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ShopKo Stores, Inc.
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets as of February 22, 1997 and February 24,
1996................................................................... F-3
Consolidated Statements of Earnings for each of the three years in the
period ended February 22, 1997......................................... F-4
Consolidated Statements of Cash Flows for each of the three years in the
period ended February 22, 1997......................................... F-5
Consolidated Statements of Shareholders' Equity for each of the three
years in the period ended February 22, 1997............................ F-6
Notes to Consolidated Financial Statements.............................. F-7
</TABLE>
F-1
<PAGE>
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.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
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.
Deloitte & Touche LLP
Milwaukee, Wisconsin
April 24, 1997
F-2
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 22, 1997
----------------------
AS PRO FORMA FEBRUARY
REPORTED (UNAUDITED) 24, 1996
---------- ----------- ----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................. $ 124,550 $ 2,776 $ 89,469
Receivables, less allowance for losses of
$5,585 and $3,212, respectively........... 95,178 95,178 55,514
Merchandise inventories.................... 334,962 334,962 322,433
Other current assets....................... 10,482 10,482 8,775
---------- ---------- ----------
Total current assets..................... 565,172 443,398 476,191
Other assets and deferred charges............ 5,558 5,558 4,618
Intangible assets--net....................... 60,330 60,330 20,003
Property and equipment--net.................. 602,832 602,832 617,148
---------- ---------- ----------
Total assets................................. $1,233,892 $1,112,118 $1,117,960
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt............................ $ -- $ 30,526 $ --
Accounts payable--trade.................... 165,712 165,712 144,638
Accrued compensation and related taxes..... 34,861 34,861 25,290
Accrued other liabilities.................. 113,064 113,064 72,943
Accrued income and other taxes............. 17,664 17,664 16,797
Current portion of long-term obligations... 2,014 2,014 1,127
---------- ---------- ----------
Total current liabilities................ 333,315 363,841 260,795
Long-term obligations........................ 418,714 418,714 415,138
Deferred income taxes........................ 20,999 20,999 20,396
Shareholders' equity:
Preferred stock; none outstanding
Common stock; Shares outstanding, 32,167 in
1997 and 32,005 in 1996................... 322 322 320
Additional paid-in capital................. 245,137 245,137 242,843
Retained earnings.......................... 215,405 215,405 178,468
Less cost of treasury stock (8,174 shares). -- (152,300) --
---------- ---------- ----------
Total shareholders' equity............... 460,864 308,564 421,631
---------- ---------- ----------
Total liabilities and shareholders' equity... $1,233,892 $1,112,118 $1,117,960
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------
FEBRUARY FEBRUARY FEBRUARY
22, 1997 24, 1996 25, 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 and 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.
F-4
<PAGE>
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.
F-5
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------ ------ ---------- --------
<S> <C> <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.
F-6
<PAGE>
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 $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
F-7
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, FEB. 24,
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Property and equipment at cost:
Land................................................. $107,982 $107,915
Buildings............................................ 492,001 479,124
Equipment............................................ 313,505 286,763
Leasehold 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 and amortization:
Property and equipment............................... 380,643 331,541
Property under capital leases........................ 8,580 6,972
-------- --------
Net property and 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.
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.
F-8
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Pro Forma Balance Sheet:
The unaudited pro forma consolidated balance sheet assumes the Common Stock
Buyback and Secondary Offering (See Note L) had occurred on February 22, 1997
and that available cash and short-term debt were used to finance the Stock
Buyback. It assumes no exercise of the Underwriters' over-allotment options
and does not give effect to the possible payment by the Company of the
underwriting discounts and commissions in connection with the Offerings.
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 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.
F-9
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
D. LONG-TERM OBLIGATIONS AND LEASES
<TABLE>
<CAPTION>
FEB. 22, FEB. 24,
1997 1996
-------- --------
(IN THOUSANDS)
<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.
F-10
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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):
<TABLE>
<CAPTION>
LEASE
YEAR OBLIGATIONS
---- -----------
<S> <C>
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
=======
</TABLE>
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.
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):
<TABLE>
<CAPTION>
LEASE
YEAR OBLIGATIONS
---- -----------
<S> <C>
1998.......................................................... $ 4,037
1999.......................................................... 3,951
2000.......................................................... 3,765
2001.......................................................... 3,625
2002.......................................................... 3,383
Later......................................................... 48,066
-------
Total minimum obligations..................................... $66,827
=======
</TABLE>
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.
F-11
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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>
F-12
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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> <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 accruals & 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>
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.
PRICE EXERCISE
SHARES RANGE PRICE
------ --------------- -------------
<S> <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
===== =============== ======
</TABLE>
F-13
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
at February 22, 1997 (shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
SHARES SHARES
OUTSTANDING WEIGHTED-AVERAGE EXERCISABLE
RANGE OF AT FEB. 22, REMAINING WEIGHTED-AVERAGE AT FEB. 22, WEIGHTED AVERAGE
EXERCISE PRICES 1997 CONTRACTUAL LIFE EXERCISE PRICE 1997 EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$10.00 to $12.00 1,451 8.1 years $10.62 263 $10.64
12.01 to 14.00 -- -- -- -- --
14.01 to 16.25 1,185 5.1 15.09 1,042 15.03
----- -----
$10.00 to $16.25 2,636 6.7 $12.63 1,305 $14.14
===== =====
</TABLE>
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.
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:
<TABLE>
<S> <C>
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
</TABLE>
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.
F-14
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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. FEB.
22, 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.
F-15
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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):
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- --------
<S> <C> <C>
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
</TABLE>
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
<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.
F-16
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 health information technology).
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.
F-17
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
L. SUBSEQUENT EVENT
Termination of Combination:
On September 7, 1996, the Company entered into a Plan of Reorganization with
Phar-Mor and 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 and Phar-Mor mutually agreed to terminate the planned business
combination of the two companies. 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. 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. 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.
F-18
<PAGE>
[Inside back cover to include a map of the United States indicating: (i)
location of ShopKo stores; (ii) location of ShopKo distribution centers; (iii)
location of ProVantage processing center and regional offices; (iv) ShopKo's
headquarters; and (v) states covered by ProVantage's operations,
differentiating between states with more and less than 10,000 resident lives
under contract.]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 3
Incorporation of Certain Documents by Reference........................... 3
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 12
Price Range of Common Stock and Dividend Policy........................... 15
Capitalization............................................................ 16
Historical and Pro Forma Statements of Earnings........................... 17
Selected Consolidated Financial Data...................................... 18
Use of Proceeds........................................................... 19
Recent Developments....................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 26
Management................................................................ 37
Certain Anti-Takeover Provisions.......................................... 39
Selling Shareholder....................................................... 42
Underwriting.............................................................. 44
Legal Matters............................................................. 46
Experts................................................................... 46
Financial Statements...................................................... F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6,557,280 SHARES
SHOPKO STORES, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
------------
LOGO
------------
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
SALOMON BROTHERS INC
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION, DATED JUNE 10, 1997
6,557,280 SHARES
LOGO SHOPKO STORES, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
-----------
Of the 6,557,280 shares of Common Stock offered, 1,311,456 are being offered
hereby in an international offering outside the United States (the
"International Offering") and 5,245,824 are being offered in a concurrent
United States offering (the "U.S. Offering") (together, the "Offerings"). The
initial public offering price and the aggregate underwriting discount per share
will be identical for both Offerings. See "Underwriting."
All of the shares of Common Stock offered are being sold by a wholly owned
subsidiary of Supervalu Inc. (such subsidiary and Supervalu Inc. are referred
to herein as the "Selling Shareholder" or "Supervalu") other than the shares,
if any, sold in connection with the exercise by the Underwriters of the over-
allotment options, which will be sold by ShopKo Stores, Inc. (the "Company" or
"ShopKo"). The Offerings are a condition for the Company's repurchase of
8,174,387 shares of Common Stock from the Selling Shareholder at $18.35 per
share (the "Stock Buyback"), and both such transactions are expected to be
consummated simultaneously. The Selling Shareholder currently holds 14,731,667
shares of Common Stock, which represents approximately 46% of the outstanding
Common Stock. After the Offering and the Stock Buyback, the Selling Shareholder
will not beneficially own any Common Stock of the Company. See "Selling
Shareholder." The Company will not receive any of the proceeds from the sale of
the shares of Common Stock offered hereby, other than proceeds from the sale of
shares of Common Stock, if any, sold in connection with the exercise by the
Underwriters of the over-allotment options.
The last reported sale price of the Common Stock, which is listed under the
symbol "SKO," on the New York Stock Exchange on June 9, 1997 was $24.50 per
share. See "Price Range of Common Stock and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
<TABLE>
<CAPTION>
INITIAL
PUBLIC
OFFERING UNDERWRITING PROCEEDS TO
PRICE DISCOUNT(1)(2) SELLING SHAREHOLDER(2)
----------- -------------- ----------------------
<S> <C> <C> <C>
Per Share..................... $ $ $
Total(3)...................... $ $ $
</TABLE>
- -----
(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) The Selling Shareholder will bear the underwriting discount and pay certain
other expenses of the Offerings estimated 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 the Selling Shareholder and such expenses only to the extent
not borne by the Selling Shareholder.
(3) The Company has granted the International Underwriters an option for 30
days to purchase up to an additional 196,718 shares of Common Stock at the
initial public offering price per share, less the underwriting discount,
solely to cover over-allotments. Additionally, the Company has granted the
U.S. Underwriters a similar option with respect to an additional 786,874
shares as part of the concurrent U.S. Offering. If such options are
exercised in full, the total initial public offering price, underwriting
discount, proceeds to Selling Shareholder and proceeds to Company will be
$ , $ , $ and $ , respectively. See
"Underwriting."
-----------
The shares offered hereby are offered severally by the International
Underwriters, as specified herein, subject to receipt and acceptance by them
and subject to their right to reject any order in whole or in part. It is
expected that certificates for the shares will be ready for delivery in New
York, New York, on or about , 1997, against payment therefor in
immediately available funds.
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
SALOMON BROTHERS INTERNATIONAL
-----------
The date of this Prospectus is , 1997.
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
[Inside front cover to include photographs of the exterior and interior of a
ShopKo store.]
In this Prospectus, reference to "dollars", "U.S.$" and "$" are to United
States dollars.
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
Alternate Page 2
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional
Offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, 7th Floor, New York, New
York 10048. Copies of such materials may be obtained from the web site that
the Commission maintains at http://www.sec.gov. In addition, such material may
also be inspected and copied at the offices of the New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 1-10876 pursuant
to the Exchange Act) are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
February 22, 1997;
2. The Company's Current Reports on Form 8-K dated April 2 and April 24,
1997;
3. The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A, and any report or amendment
filed for the purpose of updating such description; and
4. All other documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the shares of
Common Stock.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any or all of the documents
which are incorporated herein by reference, other than exhibits to such
information (unless such exhibits are specifically incorporated by reference
into such documents). Requests should be directed to ShopKo Stores, Inc., 700
Pilgrim Way, P.O. Box 19060, Green Bay, Wisconsin 54307-9060, Attention:
Investor Relations (telephone: (414) 497-2211).
----------------
Any statement contained in a document all or a portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified shall not be deemed
to constitute a part of this Prospectus except as so modified, and any
statement so superseded shall not be deemed to constitute part of this
Prospectus.
Alternate Page 3
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
This Prospectus does not constitute an offer to sell or the solicitation of
an offer to buy the shares in any jurisdiction in which such offer or
solicitation is unlawful. There are restrictions on the offer and sale of the
shares in the United Kingdom. All applicable provisions of the Financial
Services Act 1986 and the Public Offers of Securities Regulations 1995 with
respect to anything done by any person in relation to the shares, in, from or
otherwise involving the United Kingdom must be complied with. See
"Underwriting."
----------------
CAUTIONARY NOTE: This Prospectus, certain of the documents incorporated
herein by reference, and other written materials, future filings, releases and
oral statements issued by or on behalf of the Company contain certain forward-
looking statements, including, but not limited to, statements about the future
performance of the Company and the Company's plans, objectives, expectations,
or intentions. These forward-looking statements are based on management's
assumptions and beliefs in light of information currently available to it and
are subject to risks and uncertainties. The Company's actual results may
differ significantly and materially from those projected or suggested in the
forward-looking statements. Factors that might cause such differences 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) changes in minimum wage legislation, (v)
regulatory and litigation matters affecting healthcare service providers,
particularly prescription benefit managers, (vi) interest rates, (vii) real
estate, 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."
Alternate Page 4
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
CERTAIN U.S. TAX CONSEQUENCES TO NON-U.S. SHAREHOLDERS
The following is a general discussion of certain U.S. Federal tax
consequences of the ownership and disposition of a share of Common Stock by a
beneficial owner of such shares that is not a U.S. person (a "non-U.S.
holder"). For purposes of this discussion, a "U.S. person" means a citizen or
resident of the United States, a corporation or partnership created or
organized in the United States or under the laws of the United States or of
any State or political subdivision of the foregoing, or any estate whose
income is includible in gross income for U.S. Federal income tax purposes
regardless of its source or any trust if a court within the United States is
able to exercise primary supervision over the administration of such trust and
one or more United States fiduciaries have the authority to control all
substantial decisions of such trust. This discussion does not deal with all
aspects of U.S. Federal income and estate taxation that may be relevant to
non-U.S. holders in light of their particular circumstances, and does not
address state, local or non-U.S. tax considerations. Furthermore, the
following discussion is based on current provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the regulations promulgated thereunder
and administrative and judicial interpretations as of the date hereof, all of
which are subject to change, possibly with retroactive effect. Each
prospective investor is urged to consult its own tax adviser with respect to
the U.S. Federal, state and local consequences of owning and disposing of a
share of Common Stock, as well as any tax consequences arising under the laws
of any other taxing jurisdiction.
U.S. INCOME AND ESTATE TAX CONSEQUENCES
It is not currently contemplated that the Company will pay dividends on the
Common Stock in the foreseeable future. If the Company were to pay a dividend
in the future, such a dividend paid to a non-U.S. holder would be subject to
U.S. withholding tax at a 30% rate, or if applicable, a lower treaty rate,
unless the dividend is effectively connected with the conduct of a trade or
business in the United States by a non-U.S. holder (and, if certain tax
treaties apply, is attributable to a United States permanent establishment
maintained by such non-U.S. holder). A dividend that is effectively connected
with the conduct of a trade or business in the United States by the non-U.S.
holder (and, if certain tax treaties apply, is attributable to a United States
permanent establishment maintained by such non-U.S. holder) will be exempt
from the withholding tax described above and subject instead (i) to the U.S.
Federal income tax on net income that applies to U.S. persons and (ii) with
respect to corporate holders under certain circumstances, an additional 30%
(or, if applicable, lower treaty rate) branch profits tax that in general is
imposed on its "dividend equivalent amount" (within the meaning of the Code).
Under current Treasury Regulations, dividends paid to an address in a
foreign country are presumed to be paid to a resident of that country (unless
the payor has knowledge to the contrary) for purposes of the withholding
discussed above, and under the current interpretation of the Treasury
Regulations, for purposes of determining the applicability of a tax treaty
rate. Under proposed Treasury Regulations, not currently in effect, however, a
non-U.S. holder of Common Stock who wishes to claim the benefit of an
applicable treaty rate would be required to satisfy applicable certification
and other requirements. A non-U.S. holder that is eligible for a reduced rate
of U.S. withholding tax pursuant to an income tax treaty may obtain a refund
of any excess amounts withheld by filing an appropriate claim for refund with
the Internal Revenue Service (the "IRS").
Under current law, a non-U.S. holder generally will not be subject to U.S.
Federal income tax on any gain recognized on a sale or other disposition of a
share of Common Stock unless (i) the Company is or has been during the five-
year period ending on the date of disposition (the "trading period") a "United
States real property holding corporation" for U.S. Federal income tax purposes
(which the Company does not believe that it has been or is currently and does
not anticipate becoming), and assuming that the Common Stock is and will
continue to be "regularly traded" on an established securities market within
the meaning of Section 897(c)(3) of the Code and Treasury Regulations
thereunder, the non-U.S. holder owned more than 5% of the Company on any day
during the testing period, (ii) the gain is effectively connected with the
conduct of a trade or business within the United States of the non-U.S. holder
and, if certain tax treaties apply, is attributable to a United States
permanent establishment maintained by the non-U.S. holder, (iii) the gain is
not described in clause (ii) above, the non-U.S. holder is an individual who
holds the share as a capital asset, is present in the
Alternate Page 5
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
United States for 183 days or more in the taxable year of the disposition and
either (a) such individual has a "tax home" (as defined for U.S. Federal
income tax purposes) in the United States or (b) the gain is attributable to
an office or other fixed place of business maintained in the United States by
such individual, or (iv) the non-U.S. holder is subject to tax pursuant to the
Code provisions applicable to certain U.S. expatriates. In the case of a non-
U.S. holder that is described under clause (ii) above, its gain will be
subject to the U.S. Federal income tax on net income that applies to U.S.
persons and, in addition, if such non-U.S. holder is a foreign corporation, it
may be subject to the branch profits tax as described in the preceding
paragraph. An individual non-U.S. holder that is described under clause (iii)
above will be subject to a flat 30% tax on the gain derived from the sale,
which may be offset by U.S. capital losses (notwithstanding the fact that he
or she is not considered a resident of the United States). Thus, individual
non-U.S. holders who have spent 183 days or more in the United States in the
taxable year in which they contemplate a sale of the Common Stock are urged to
consult their tax advisers as to the tax consequences of such sale.
Shares of Common Stock owned at the time of his or her death by an
individual non-U.S. holder will be includible in his or her gross estate for
U.S. Federal estate tax purposes unless an applicable estate tax treaty
provides otherwise.
BACK-UP WITHHOLDING AND INFORMATION REPORTING
Dividends
Except as provided below, the Company must report annually to the IRS and to
each non-U.S. holder the amount of dividends paid to and the tax withheld with
respect to such holder. These information reporting requirements apply
regardless of whether withholding was reduced or eliminated by an applicable
tax treaty. Copies of these information returns may also be available under
the provisions of a specific treaty or agreement with the tax authorities in
the country in which the non-U.S. holder resides. In general, back-up
withholding at a rate of 31% and additional information reporting will apply
to dividends paid on shares of Common Stock to holders that are not "exempt
recipients" and that fail to provide in the manner required certain
identifying information (such as the holder's name, address and taxpayer
identification number). Generally, individuals are not exempt recipients,
whereas corporations and certain other entities generally are exempt
recipients. However, dividends that are subject to U.S. withholding tax at the
30% statutory rate or at a reduced tax treaty rate are exempt from backup
withholding of U.S. Federal income tax and such additional reporting.
Broker Sales
If a non-U.S. holder sells shares of Common Stock through a U.S. office of a
U.S. or foreign broker, the broker is required to file an information return
and is required to withhold 31% of the sale proceeds unless the non-U.S.
holder is an exempt recipient or has provided the broker with the information
and statements, under penalties of perjury, necessary to establish an
exemption from back-up withholding. If payment of the proceeds of the sale of
a share by a non-U.S. holder is made to or through the foreign office of a
broker, that broker will not be required to back-up withhold or, except as
provided in the next sentence, to file information returns. In the case of
proceeds from a sale of a share by a non-U.S. holder paid to or through the
foreign office of a U.S. broker or a foreign office of a foreign broker that
is (i) a "controlled foreign corporation" for U.S. tax purposes or (ii) a
person 50% or more of whose gross income for the three-year period ending with
the close of the taxable year preceding the year of payment (or for the part
of that period that the broker has been in existence) is effectively connected
with the conduct of a trade or business within the United States (a "Foreign
U.S. Connected Broker"), information reporting is required unless the broker
had documentary evidence in its files that the payee is not a U.S. person and
certain other conditions are met. In addition, the Treasury Department has
indicated that it is studying the possible application of back-up withholding
in the case of such foreign offices of U.S. and Foreign U.S. Connected
Brokers.
Refunds
Any amounts withheld under the back-up withholding rules from a payment to a
non-U.S. holder may be refunded or credited against the non-U.S. holder's U.S.
Federal income tax liability, provided that the required information is
furnished to the IRS.
Alternate Page 6
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
Subject to the terms and conditions of the International Underwriting
Agreement, the Selling Shareholder has agreed to sell to each of the
International Underwriters named below, and each of such International
Underwriters, for whom Goldman Sachs International, Merrill Lynch
International and Salomon Brothers International are acting as
representatives, have severally agreed to purchase from the Selling
Shareholder, the respective number of shares of Common Stock set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
INTERNATIONAL UNDERWRITERS COMMON
-------------------------- STOCK
---------
<S> <C>
Goldman Sachs International....................................
Merrill Lynch International ...................................
Salomon Brothers International.................................
---------
Total...................................................... 1,311,456
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
International Underwriters are committed to take and pay for all of the shares
offered hereby, if any are taken.
The International Underwriters propose to offer the shares of Common Stock
in part directly to the public at the initial public offering price set forth
on the cover page of this Prospectus, and in part to certain securities
dealers at such price less a concession of $ per share. The International
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain brokers and dealers. After the shares of
Common Stock are released for sale to the public, the offering price and other
selling terms may from time to time be varied by the representatives.
The Company and the Selling Shareholder have entered into an underwriting
agreement (the "U.S. Underwriting Agreement") with the underwriters of the
U.S. Offering (the "U.S. Underwriters") providing for the concurrent offer and
sale of 5,245,824 shares of Common Stock in a U.S. Offering in the United
States. The offering prices and aggregate underwriting discounts and
commissions per share for the Offerings are identical. The closing of the
Offerings made hereby is a condition to the closing of the U.S. Offering, and
vice versa. The representatives of the U.S. Underwriters are Goldman, Sachs &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Salomon Brothers,
Inc.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the Offerings, each of the
U.S. Underwriters has agreed that, as a part of the distribution of the shares
offered hereby and subject to certain exceptions, it will offer, sell or
deliver the shares of Common Stock, directly or indirectly, only in the United
States of America (including the States and the District of Columbia), its
territories, its possessions and other areas subject to its jurisdiction (the
"United States") and to U.S. persons, which term shall mean, for purposes of
this paragraph: (a) any individual who is a resident of the United States or
(b) any corporation, partnership or other entity organized in or under the
laws of the United States or any political subdivision thereof and whose
office most directly involved with the purchase is located in the United
States. Each of the International Underwriters named herein has agreed
pursuant to the Agreement Between that, as a part of the distribution of the
shares offered as a part of the International Offering, and subject to certain
exceptions, it will (i) not, directly or indirectly, offer, sell or deliver
shares of Common Stock (a) in the United States or to any U.S. persons or (b)
to any person who it believes intends to reoffer, resell or deliver the shares
in the United States or to any U.S. persons, and (ii) cause any dealer to whom
it may sell such shares at any concession to agree to observe a similar
restriction.
Alternate Page 7
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall
be the initial public offering price, less an amount not greater than the
selling concession.
The Company has granted the International Underwriters an option exercisable
up to 30 days after the date of this Prospectus to purchase up to an aggregate
of 196,718 additional shares of Common Stock solely to cover over-allotments,
if any. If the International Underwriters exercise their over-allotment
option, the International Underwriters have severally agreed, subject to
certain conditions, to purchase approximately the same percentage thereof that
the number of shares to be purchased by each of them, as shown in the
foregoing table, bears to the 1,311,456 shares of Common Stock offered. The
Company has granted the U.S. Underwriters a similar option to purchase up to
an aggregate of 786,874 additional shares of Common Stock.
The Company has agreed that during the period beginning from the date of
this Prospectus and continuing to and including the date 90 days after the
date of the Prospectus, it will not offer, sell, contract to sell or otherwise
dispose of, or file a registration statement under the Securities Act with
respect to, any shares of Common Stock, any securities of the Company which
are substantially similar to the Common Stock or which are convertible into or
exchangeable for, or that represent the right to receive, Common Stock or
securities which are substantially similar to the shares of the Common Stock
(other than pursuant to employee stock option plans existing, or on the
conversion or exchange of convertible or exchangeable securities outstanding,
on the date of this Prospectus) without the prior written consent of the
representatives of the International Underwriters, except for the shares of
the Common Stock offered in connection with the concurrent U.S. and
International Offerings.
Each International Underwriter has also agreed that (a) it has not offered
or sold and prior to the date six months after the date of issue of the shares
of Common Stock will not offer or sell any shares of Common Stock to persons
in the United Kingdom except to persons whose ordinary activities involve them
in acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which have not resulted and will not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995, (b) it has complied, and will comply, with all applicable
provisions of the Financial Services Act 1986 of Great Britain with respect to
anything done by it in relation to the shares of Common Stock in, from or
otherwise involving the United Kingdom, and (c) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received
by it in connection with the issuance of the shares of Common Stock to a
person who is of a kind described in Article 11(3) of the Financial Services
Act of 1986 (Investment Advertisements) (Exemptions) Order 1996 of Great
Britain or is a person to whom the document may otherwise lawfully be issued
or passed on.
Buyers of shares of Common Stock offered hereby may be required to pay stamp
taxes and other charges in accordance with the laws and practice of the
country of purchase in addition to the initial public offering price.
The Company and the Selling Shareholder have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
In connection with the Offerings, the Underwriters may purchase and sell
shares of Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offerings. Stabilizing
transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in
Alternate Page 8
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
the market price of the Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of shares of Common Stock
than they are required to purchase in the Offerings. The Underwriters may also
impose a penalty bid whereby selling concessions allowed to syndicate members
or other broker-dealers in respect of the shares of Common Stock sold in the
Offerings for their account may be reclaimed by the syndicate if such
securities are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Common Stock which may be higher than the price that might
otherwise prevail in the open market; and these activities, if commenced, may
be discontinued at any time. These transactions may be effected on the New
York Stock Exchange, in the over-the-counter market or otherwise.
Salomon Brothers Inc advised the Company in connection with the Stock
Buyback. If the Stock Buyback is completed, Salomon Brothers Inc will receive
a fee of approximately $2,150,000.
Alternate Page 9
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITA-
TION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT
RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURI-
TIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 3
Incorporation of Certain Documents by Reference........................... 3
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 12
Price Range of Common Stock and Dividend Policy........................... 15
Capitalization............................................................ 16
Historical and Pro Forma Statements of Earnings........................... 17
Selected Consolidated Financial Data...................................... 18
Use of Proceeds........................................................... 19
Recent Developments ...................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations .............................................................. 20
Business.................................................................. 26
Management................................................................ 37
Certain Anti-Takeover Provisions.......................................... 39
Selling Shareholder....................................................... 42
Certain U.S. Tax Consequences to Non-U.S. Shareholders.................... 44
Underwriting.............................................................. 46
Legal Matters............................................................. 48
Experts................................................................... 48
Index to Financial Statements............................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,557,280 SHARES
SHOPKO STORES, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
-----------
LOGO
-----------
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
SALOMON BROTHERS INTERNATIONAL
REPRESENTATIVES OF THE UNDERWRITERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company estimates that expenses payable by it in connection with the
Offerings described in this Registration Statement (other than the
underwriting discount) will be as follows:
<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 46,274
Printing Expenses............................................... 200,000
Accounting Fees and Expenses.................................... 75,000
Legal Fees and Expenses......................................... 200,000
Blue Sky, NYSE and NASD fees.................................... 75,000
Miscellaneous................................................... 50,000
--------
Total......................................................... $646,274
</TABLE>
All amounts except the registration fee are estimated. All of such expenses
will be borne by the Company if the Offerings price per share is less than or
equal to $18.85. If the Offerings price per share is greater than $18.85,
Supervalu Inc. will pay certain of the foregoing expenses to the extent of the
per share excess over $18.85.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 302A.521, and subd.2, of the Minnesota Statutes requires the Company
to indemnify a person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of the person with respect
to the Company, against judgments, penalties, fines, including, without
limitation, excise taxes assessed against the person with respect to an
employee benefit plan, settlements, and reasonable expenses, including
attorneys' fees and disbursements, incurred by the person in connection with
the proceeding with respect to the same acts or omissions of such person (1)
has not been indemnified by another organization or employee benefit plan for
the same judgments, penalties or fines; (2) acted in good faith; (3) received
no improper personal benefit, and statutory procedure has been followed in the
case of any conflict of interest by a director; (4) in the case of a criminal
proceeding, had no reasonable cause to believe the conduct was unlawful; and
(5) in the case of acts or omissions occurring in the person's performance in
the official capacity of director or, for a person not a director, in the
official capacity of officer, board committee member or employee, reasonably
believed that the conduct was in the best interests of the Company, or, in the
case of performance by a director, officer or employee of the Company
involving service as a director, officer, partner, trustee, employee or agent
or another organization or employee benefit plan, reasonably believed that the
conduct was not opposed to the best interests of the Company. In addition,
Section 302A.521, subd.3, requires payment by the Company, upon written
request, of reasonable expenses in advance of final disposition of the
proceeding in certain instances. A decision as to required indemnifications
made by a disinterested majority of the Board of Directors present at a
meeting at which a disinterested quorum is present, or by a designated
committee of the Board consisting solely of two or more disinterested
directors, by special legal counsel, by a disinterested majority shareholders
present at a meeting at which a disinterested quorum is present, or by a
court. Provisions regarding indemnification of the officers and directors of
the Company are contained in Article IX of the Company's Bylaws, as amended.
The Company's officers and directors currently are covered by officers' and
directors' liability insurance.
The Company has entered into an Indemnification Agreement with each of its
directors. Each Indemnification Agreement provides, as a contractual
obligation, that the Company will indemnify the director to the maximum extent
permissible under Section 302A.521 of the Minnesota Statutes as in effect on
the date of the Agreement, and to advance expenses as required under Section
302A.521 as in effect on the date of the Agreement. Each Indemnification
Agreement further provides that the
II-1
<PAGE>
Company waives all rights to refuse indemnification or advancements of
expenses for which the director is indemnified thereunder, agrees not to amend
its Articles of Incorporation or By-Laws to reduce the right to
indemnification or advancements of expenses, and agrees to maintain directors'
and officers' liability insurance for the benefit of its directors. To the
extent the Minnesota Statutes or the Company's Articles of Incorporation or
By-Laws are amended to provide greater indemnification rights to directors,
each Indemnification Agreement provides that the director shall be entitled to
such greater rights and benefits immediately upon such amendment. Pursuant to
the Underwriting Agreements to be entered into between the Company and the
Underwriters, the officers and directors are indemnified for certain
liabilities incurred under the Securities Act. Reference is made to the form
of U.S. Underwriting Agreement and International Underwriting Agreement filed
as Exhibits 1.1 and 1.2 hereto, respectively.
ITEM 16. EXHIBITS.
<TABLE>
<C> <S>
1.1 Form of U.S. Underwriting Agreement.*
1.2 Form of International Underwriting Agreement.*
4.1 Rights Agreement between ShopKo Stores, Inc. and Norwest Bank
Minnesota, N.A. (including the Form of Certification of
Designation, Preferences and Rights of Series B Junior
Participating Preferred Stock and Form of Rights Certificate)
(incorporated by reference to the Company's Form 10-Q, Quarterly
Report for the 16 weeks ended June 20, 1992).
5 Opinion of Godfrey & Kahn, S.C.*
10.1 Stock Buyback and Secondary Offering Agreement (the "Stock
Buyback Agreement") dated April 24, 1997 among ShopKo Stores,
Inc., Supervalu Inc. and Supermarket Operators of America, Inc.
(incorporated by reference to the Company's Current Report on
Form 8-K dated April 24, 1997).
10.2 Amendment to Stock Buyback Agreement dated June 9, 1997.
12 Statements Re Computation of Ratios (incorporated by reference
to the Company's Annual Report on Form 10-K for the fiscal year
ended February 22, 1997).
23.1 Consent of Godfrey & Kahn, S.C. (included in Exhibit 5).*
23.2 Consent of Deloitte & Touche LLP.
24 Powers of Attorney.*
27 Financial Data Schedule.*
99.1 Consent of William J. Podany.*
99.2 Consent of Stephen E. Watson.
</TABLE>
- --------
* Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-2
<PAGE>
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(3)(i) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) and 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS AMENDMENT NO. 1
TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED IN THE CITY OF GREEN BAY, STATE OF WISCONSIN, ON
JUNE 9, 1997.
Shopko Stores, Inc.
/s/ Dale P. Kramer*
By: _________________________________
Dale P. Kramer
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Dale P. Kramer* President, Chief Executive June 9, 1997
____________________________________ Officer and a Director
Dale P. Kramer
/s/ Jeffrey A. Jones* Senior Vice President and June 9, 1997
____________________________________ Chief Financial Officer
Jeffrey A. Jones
/s/ Michael W. Wright* Chairman and Director June 9, 1997
____________________________________
Michael W. Wright
/s/ William J. Tyrrell* Vice Chairman and Director June 9, 1997
____________________________________
William J. Tyrrell
/s/ Jack W. Eugster* Director June 9, 1997
____________________________________
Jack W. Eugster
/s/ Jeffrey C. Girard* Director June 9, 1997
____________________________________
Jeffrey C. Girard
</TABLE>
*By Richard D. Schepp pursuant to Powers of Attorney.
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1 Form of U.S. Underwriting Agreement.*
1.2 Form of International Underwriting Agreement.*
4 Rights Agreement between ShopKo Stores, Inc. and Norwest Bank
Minnesota, N.A. (including the Form of Certification of Designation,
Preferences and Rights of Series B Junior Participating Preferred
Stock and Form of Rights Certificate) (incorporated by reference to
the Company's Form 10-Q, Quarterly Report for the 16 weeks ended
June 20, 1992).
5 Opinion of Godfrey & Kahn, S.C.*
10.1 Stock Buyback and Secondary Offering Agreement (the "Stock Buyback
Agreement") dated April 24, 1997 among ShopKo Stores, Inc.,
Supervalu Inc. and Supermarket Operators of America, Inc.
(incorporated by reference to the Company's Current Report on Form
8-K dated April 24, 1997).
10.2 Amendment to Stock Buyback Agreement dated June 9, 1997.
12 Statements Re Computation of Ratios (incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal year ended
February 22, 1997).
23.1 Consent of Godfrey & Kahn, S.C. (included in Exhibit 5).*
23.2 Consent of Deloitte & Touche LLP.
24 Powers of Attorney.*
27 Financial Data Schedule.*
99.1 Consent of William J. Podany.*
99.2 Consent of Stephen E. Watson.
</TABLE>
- --------
* Previously filed.
<PAGE>
EXHIBIT 10.2
AMENDMENT TO
STOCK BUYBACK AND
SECONDARY OFFERING AGREEMENT
----------------------------
AMENDMENT dated June 9, 1997 to AGREEMENT dated April 24, 1997, among ShopKo
Stores, Inc., a Minnesota corporation ("SK"), SUPERVALU INC., a Delaware
Corporation ("SV"), and Supermarket Operators of America, Inc., a Delaware
corporation and wholly-owned subsidiary of SV ("SOA").
The parties hereby agree that existing Section 3.B. of the Agreement is
deleted, existing Section 3.C. is renumbered Section 3.B. and the reference in
existing Section 3.C. to "this Section 3.C." is amended to read "this Section
3.B."
This Amendment shall be effective upon the receipt by SK of signed
Resignations in the forms attached as Attachments I and II.
IN WITNESS WHEREOF, this Amendment to the Agreement has been signed on
behalf of each of the parties as of the date first above written by its duly
authorized officer.
ShopKo Stores, Inc.
By: /s/ DALE P. KRAMER
----------------------------------
SUPERVALU INC.
By: /s/ MICHAEL W. WRIGHT
----------------------------------
Supermarket Operators of America, Inc.
By: /s/ JEFFREY C. GIRARD
----------------------------------
<PAGE>
ATTACHMENT I
RESIGNATION
-----------
I, Michael Wright, hereby submit my resignation from the Board of Directors
of ShopKo Stores, Inc. ("SK"), effective upon the earlier of (i) the date of a
notification to me that the Board of Directors of SK has recruited a substitute
director to succeed me and (ii) October 1, 1997; provided, however, that such
resignation shall be without force or effect unless on or prior to the earlier
of such dates there shall have occurred the Closing (as defined in the Stock
Buyback and Secondary Offering Agreement dated April 24, 1997 among SK,
SUPERVALU INC. and Supermarket Operators of America, Inc.). I also hereby
submit my resignation as Chairman of the Board of SK, effective upon said
Closing.
/s/ Michael W. Wright
----------------------------------
Michael W. Wright
Date of Execution: June 9, 1997
<PAGE>
ATTACHMENT II
RESIGNATION
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I, Jeffrey Girard, hereby submit my resignation from the Board of
Directors of ShopKo Stores, Inc. ("SK"), effective upon the earlier of (i) the
date of a notification to me that the Board of Directors of SK has recruited a
substitute director to succeed me and (ii) October 1, 1997; provided, however,
that such resignation shall be without force or effect unless on or prior to the
earlier of such dates there shall have occurred the Closing (as defined in the
Stock Buyback and Secondary Offering Agreement dated April 24, 1997 among SK,
SUPERVALU INC. and Supermarket Operators of America, Inc.).
/s/ Jeffrey C. Girard
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Jeffrey C. Girard
Date of Execution: June 9, 1997
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EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to the Registration Statement of
Shopko Stores, Inc. on Form S-3 of our reports dated April 24, 1997, included
and incorporated by reference in the Prospectus, which is part of the
Registration Statement and included in the Annual Report on Form 10-K of ShopKo
Stores, Inc. for the year (52 weeks) ended February 22, 1997.
We also consent to the reference to us under the headings "Summary Selected
Consolidated Financial Data", "Selected Consolidated Financial Data" and
"Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
June 9, 1997
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EXHIBIT 99.2
Consent of Director Designee
June 7, 1997
The undersigned hereby consents, pursuant to Rule 438 under the Securities
Act of 1933, as amended, to the references to him as a future director of ShopKo
Stores, Inc., in the Prospectus included in this Registration Statement.
Signed: /s/ Stephen E. Watson
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Stephen E. Watson