<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1997.
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
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. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH MAXIMUM AGGREGATE AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING PRICE REGISTRATION
TO BE REGISTERED REGISTERED PER UNIT (1) (1) FEE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................. 7,540,872 $20.25 $152,702,638 $46,274
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee based on
the average of the high and low prices of the Common Stock on May 2, 1997.
--------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 MAY 7, 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. 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 May 6, 1997 was $20.875 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 SECURITIESAND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HASTHE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSIONPASSED 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, a photograph of ProVantage's operations, and 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.]
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 24, 1996;
2. The Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended June 15, September 7 and November 30, 1996;
3. The Company's Current Reports on Form 8-K dated September 7 and
October 11, 1996, and April 2 and April 24, 1997;
4. 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
5. 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's 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 over 193,000 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 (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,
excluding one-time charges in fiscal 1998 related to the termination of the
Phar-Mor transaction and the Offerings. See "Recent Developments."
Upon the closing of the Offerings and the Stock Buyback, Michael W. Wright,
Chairman of Supervalu, and the Company, and Jeffrey C. Girard, Executive Vice
President and Chief Financial Officer of Supervalu, will resign from the
Company's Board of Directors. At that time it is also expected that Dale P.
Kramer, the Company's President and Chief Executive Officer, will be named
Chairman of the Company's Board of Directors and that William J. Podany, the
Company's Executive Vice President and Chief Operating Officer, will be
nominated as an additional director. A search is currently underway for new
independent directors to replace Messrs. Wright and Girard.
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
8
<PAGE>
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. See "Selling Shareholder--Stock Buyback Agreement."
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
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%
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(6).............. $ 218 $ 210 $ 216 $ 217 $ 216
ProVantage lives
(thousands)(7)....... 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.
(5) Total capitalization includes shareholders' equity, total debt and non-
current deferred income taxes.
(6) 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.
(7) 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.
LEVERAGE
The Company may incur up to $25 million of short-term debt to complete the
Stock Buyback and the Offerings. The degree to which the Company is leveraged
could have adverse effects on the Company, including the following: (i) the
ability of the Company to obtain additional financing may be impaired, (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.
RETAIL STORE GROWTH
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 AND INSURANCE
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 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 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.
12
<PAGE>
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
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
The Company believes that its continued success will depend to a significant
extent upon the continued services of its senior management. The loss of the
services of key senior management members could have a material adverse effect
on the Company's business.
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 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.
Client Retention
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.
ProVantage Growth
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.
13
<PAGE>
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.
Management of 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 May 6, 1997).................. $20.875 $14.500 --
</TABLE>
The last reported sale price of the Common Stock on the New York Stock
Exchange on May 6, 1997 was $20.875 per share.
As a result of the proposed transaction with Phar-Mor, Inc. and Cabot Noble,
Inc., the Company was prohibited from declaring or paying any dividends. Upon
termination of such transaction, the Company determined to retain earnings, if
any, for the growth and expansion of its business and not declare or pay any
cash dividends. The Company intends to reconsider its dividend policy after
completion of the 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
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%
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(6).............. $ 218 $ 210 $ 216 $ 217 $ 216
ProVantage lives
(thousands)(7)....... 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.
(5) Total capitalization includes shareholders' equity, total debt and non-
current deferred income taxes.
(6) 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.
(7) 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 a
Stock Buyback and Secondary Offering Agreement pursuant to which the Company
has agreed to repurchase 8,174,387 shares of Common Stock from the Selling
Shareholder for $18.35 per share. The obligation of the Company and the
Selling Shareholder to consummate the Stock Buyback is conditioned upon
completion of 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, excluding one-time charges
in fiscal 1998 related to the termination of the Phar-Mor transaction and the
Offerings. See "Selling Shareholder--Stock Buyback Agreement."
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.
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.
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 128 include optical centers. In addition to generating
store traffic and building customer loyalty, these services contribute
significantly to the Company's overall profitability and provide the
opportunity for additional growth. Each store with pharmacy and optical
centers employs or contracts with an average of approximately three licensed
pharmacists, one licensed optometrist and six opticians. The Company's
optometrists perform in-store eye exams and prescribe correctional lenses,
most of which are fabricated in the Company's centralized optical laboratory
and in approximately 77 in-store finishing labs which, in fiscal 1997,
dispensed over 617,000 eyewear prescriptions. The in-store finishing labs
typically service other stores in the vicinity and provide customers with same
day or next day optical service for single vision lenses.
In addition, the Company opened four new free-standing optical centers,
Vision Advantage, during the third and fourth quarters of fiscal 1997. This
format focuses on providing value-priced, high quality eye wear that can be
manufactured in about an hour. Convenience to the customer, price and quality
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 and
AMS are in the process of negotiating definitive joint venture agreements, but
a memorandum of understanding between the parties allocates 80% ownership of
ProVMed to ProVantage and 20% ownership to AMS.
MARKETING AND ADVERTISING
The Company markets its general merchandise and retail pharmacy and optical
services via weekly newspaper circulars to reach a broad based customer segment
consisting largely of middle income families. These full-color circulars
average 24 pages and feature values in all departments of the stores and have a
circulation of more than 3.5 million. Direct mail vehicles are used selectively
at key promotional periods and have a circulation of more than 5.0 million. All
printed advertising materials are designed by the Company's in-house graphic
design team and photographed in the Company's own photography studio. In
addition to the newspaper circulars, the Company uses television and radio
advertising to support the image that ShopKo stores offer quality merchandise
to meet the customer's causal 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 system 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 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 former subsidiary of Merck & Co., Inc.), Express
Scripts, Inc., Caremark International, Inc., (a former subsidiary of Med
Partners, Inc. which was recently sold to Columbia/HCA) 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, Home
Jeffrey A. Jones 50 Senior Vice President and Chief Financial 1993 1993
Officer
Rodney D. Lawrence 39 Senior Vice President, Store Marketing, 1996 1996
Store Planning
David A. Liebergen 51 Senior Vice President, Human Resources, 1993 1973
Quality Assurance, Legal Affairs, Internal
Communication
L. Terry McDonald 54 Senior Vice President, Marketing 1994 1994
James F. Tucker 52 Senior Vice President and Chief Information 1995 1994
Officer
</TABLE>
- --------
*as of February 22, 1997
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, Jeffrey A.
Jones, Roger J. Chustz, L. Terry McDonald, James F. Tucker, Michael J.
Hopkins, Gary A. Hillerman and Rodney D. Lawrence.
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 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 May Company.
Mr. Hopkins has been Senior Vice President--General Merchandise Manager,
Home since November, 1995. From 1992 to 1995, Mr. Hopkins was Senior Vice
President--Merchandise Planning and Distribution at Carter Hawley Hale. Prior
thereto, Mr. Hopkins served as Senior Vice President and General Merchandise
Manager of Home with Broadway Southwest division of Carter Hawley Hale from
1985 to 1992.
Mr. Jones has been Senior Vice President and Chief Financial Officer of the
Company since November 1993. Mr. Jones was Senior Vice President and Chief
Financial Officer for Trans World Music Corporation from 1990 through 1993.
Mr. Jones also held various executive positions at Household Merchandising,
Inc. and Lane Bryant, Inc., a subsidiary of The Limited, Inc.
Mr. Lawrence has been Senior Vice President--Store Marketing and Store
Planning since May 1996. Prior he was Vice President--Store Planning with
Broadway Stores, Inc. from 1994 to 1996. Mr. Lawrence was Director of Store
Planning with Carter Hawley Hale Stores, Inc. from 1992 to 1994 and Vice
President--Visual Merchandising with Broadway from 1989 to 1992.
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.
Mr. Tucker has been Senior Vice President--Chief Information Officer of the
Company since February 1995 and served as Vice President--Management
Information Services from January 1994 to February 1995. Mr. Tucker was Vice
President of Management Information Services with Trans World Music Corporation
from 1991 through 1993. Mr. Tucker was also Vice President of Management
Information Services with Chess King, Division of Melville Corporation, from
1984 until 1991.
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 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, 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 the 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
39
<PAGE>
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 majority vote of the shareholders of
the Company prior to its consummation. In general, shares acquired in the
absence of such approval are denied voting rights and are redeemable at their
then fair market value by the Company 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 voting rights to the acquiring
person's shares.
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 share acquisition date, 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 share acquisition
date.
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
40
<PAGE>
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.
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. Messrs. Wright and Girard will resign
from the Company's Board of Directors upon completion of the Offerings.
STOCK BUYBACK AND SECONDARY OFFERING AGREEMENT
On April 24, 1997, the Company and Supervalu entered into the Stock Buyback
and Secondary Offering Agreement (the "Agreement"), a copy of which has been
filed as an exhibit to the Registration
41
<PAGE>
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 exhibits. The Stock Buyback and the Offerings
are expected to be significantly accretive to the Company's earnings,
excluding one-time charges in fiscal 1998 related to the termination of the
Phar-Mor transaction and the 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 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.
Upon the closing of the Offerings and the Stock Buyback, Michael W. Wright,
Chairman of Supervalu and the Company, and Jeffrey C. Girard, Executive Vice
President and Chief Financial Officer, will resign from the Company's Board of
Directors. At that time, it is also expected that Dale P. Kramer, the
President and Chief Executive Officer of the Company, will be named Chairman
of the Company's Board of Directors and that William J. Podany, the Executive
Vice President and Chief Operating Officer of the Company, will be nominated
as an additional director. A search is currently underway for new independent
directors to replace Messrs. Wright and Girard.
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
42
<PAGE>
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.
Pursuant to the Agreement, the Selling Shareholder may elect to make a gift
of 275,000 shares of Common Stock to the Supervalu Foundation. If the Selling
Shareholder so elects, the Supervalu Foundation may become a Selling
Shareholder with respect to the Offerings.
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
43
<PAGE>
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.
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.
44
<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, for
the Selling Shareholder by David L. Boehnen, Esq., Senior Vice President--Law
and External Relations of Supervalu Inc., Minneapolis, Minnesota 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.
45
<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 FEBRUARY
22, 1997 24, 1996
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 124,550 $ 89,469
Receivables, less allowance for losses of $5,585 and
$3,212, respectively.................................. 95,178 55,514
Merchandise inventories................................ 334,962 322,433
Other current assets................................... 10,482 8,775
---------- ----------
Total current assets................................. 565,172 476,191
Other assets and deferred charges........................ 5,558 4,618
Intangible assets--net................................... 60,330 20,003
Property and equipment--net.............................. 602,832 617,148
---------- ----------
Total assets............................................. $1,233,892 $1,117,960
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable--trade................................ $ 165,712 $ 144,638
Accrued compensation and related taxes................. 34,861 25,290
Accrued other liabilities.............................. 113,064 72,943
Accrued income and other taxes......................... 17,664 16,797
Current portion of long-term obligations............... 2,014 1,127
---------- ----------
Total current liabilities............................ 333,315 260,795
Long-term obligations.................................... 418,714 415,138
Deferred income taxes.................................... 20,999 20,396
Shareholders' equity:
Preferred stock; none outstanding
Common stock; Shares outstanding, 32,167 in 1997 and
32,005 in 1996........................................ 322 320
Additional paid-in capital............................. 245,137 242,843
Retained earnings...................................... 215,405 178,468
---------- ----------
Total shareholders' equity........................... 460,864 421,631
---------- ----------
Total liabilities and shareholders' equity............... $1,233,892 $1,117,960
========== ==========
</TABLE>
See notes to consolidated financial statements.
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.
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.
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
F-9
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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>
F-10
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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>
F-11
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amounts reflected in the provision for income taxes are based on
applicable federal statutory rates, adjusted for permanent differences between
financial and taxable income. The provision for federal and state income taxes
includes the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current
Federal....................................... $25,858 $16,163 $24,379
State......................................... 4,838 3,332 4,488
General business and other tax credits........ -- -- (475)
Deferred........................................ (1,620) 5,206 (3,764)
------- ------- -------
Total provision................................. $29,076 $24,701 $24,628
======= ======= =======
</TABLE>
The effective tax rate varies from the statutory federal income tax rate for
the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory income tax rate............................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefits......... 4.0 4.0 4.1
Other................................................... 0.3 0.1 0.3
---- ---- ----
Effective income tax rate............................... 39.3% 39.1% 39.4%
==== ==== ====
</TABLE>
Provision is made for deferred income taxes and future income tax benefits
applicable to temporary differences between financial and tax reporting. The
sources of these differences and the effects of each are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ -------
<S> <C> <C> <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,
F-12
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
===== =============== ======
Exercisable, February 22, 1997......... 1,305 10.00 - 16.25 14.14
===== =============== ======
</TABLE>
The weighted average remaining contractual life for options outstanding at
February 22, 1997 was 6.7 years.
In October 1995, SFAS No. 123 "Accounting for Stock-Based Compensation" was
issued. SFAS No. 123 establishes a fair value based method of accounting for
stock-based compensation; however, it allows entities to continue accounting
for employee stock-based compensation under the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS No. 123 requires certain disclosures,
including pro forma net income and earnings per share as if the fair value
based accounting method had been used for employee stock-based compensation
cost. The Company has decided to adopt SFAS No. 123 through disclosure with
respect to employee stock-based compensation.
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>
F-13
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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>
F-14
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 affiliates
of Supervalu) has the right to require the Company to file up to three
registration statements under the Securities Act.
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>
F-15
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
K. BUSINESS SEGMENT INFORMATION
The Company has redefined its business segments from the classifications of
General Merchandise and Health Services (which had included ProVantage's
managed healthcare operations and ShopKo's retail pharmacy and optical
departments), to a Retail Store segment (which includes general merchandise,
retail pharmacy and retail optical operations) and a ProVantage segment (which
includes prescription benefit management, mail service pharmacy, vision
benefit management and healthcare decision support services).
F-16
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
F-17
<PAGE>
SHOPKO STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
companies will enter into two simultaneous transactions. The first transaction
is a secondary public offering of 6,557,280 shares of the Company's common
stock. The second transaction is a stock buyback of $150.0 million
representing 8,174,387 shares of its common stock held by Supervalu. Supervalu
will pay the underwriting discount and certain other expenses related to the
secondary offering up to an amount equal to the excess of the aggregate public
offering price over $123.6 million ($18.85 per share). The Company will pay
the underwriting discount and such expenses to the extent not paid by
Supervalu. Should the Company be required to pay all of the cost, it may incur
a one-time charge of approximately $8.5 million ($0.37 per share) at the time
of closing.
F-18
<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....................................................... 41
Underwriting.............................................................. 43
Legal Matters............................................................. 45
Experts................................................................... 45
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 MAY 7, 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"). 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. 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 May 6, 1997 was $20.875 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.
-----------
THIS INTERNATIONAL PROSPECTUS IS INTENDED FOR USE ONLY IN CONNECTION WITH
OFFERS AND SALES OF THE COMMON STOCK OUTSIDE THE UNITED STATES AND IS NOT TO
BE SENT OR GIVEN TO ANY PERSON WITHIN THE UNITED STATES. THE COMMON STOCK
OFFERED HEREBY IS NOT BEING REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933 FOR THE PURPOSE OF SALES OUTSIDE THE UNITED STATES.
-----------
<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]
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 24, 1996;
2. The Company's Quarterly Reports on Form 10-Q for the fiscal quarters
ended June 15, September 7 and November 30, 1996;
3. The Company's Current Reports on Form 8-K dated September 7 and
October 11, 1996, and April 2 and April 24, 1997;
4. 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
5. 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 2
<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 3
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
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 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, not to offer, sell, contract to sell or otherwise
dispose of any shares of Common Stock, any securities of the Company which are
substantially similar to the shares of Common Stock or which are convertible
or exchangeable into Common Stock or securities which are substantially
similar to the shares of the Common Stock (other than pursuant to employee
stock option plans existing 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
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.
Alternate Page 8
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
The Company and the Selling Shareholder have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
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.
Alternate Page 9
<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....................................................... 41
Certain U.S. Tax Consequences to Non-U.S. Shareholders.................... 44
Underwriting.............................................................. 46
Legal Matters............................................................. 50
Experts................................................................... 50
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.
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.
</TABLE>
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.
(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
II-2
<PAGE>
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 REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED IN THE CITY OF GREEN BAY, STATE OF WISCONSIN, ON MAY 7, 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
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 May 7, 1997
____________________________________ Officer and a Director
Dale P. Kramer
/s/ Jeffrey A. Jones* Senior Vice President and May 7, 1997
____________________________________ Chief Financial Officer
Jeffrey A. Jones
/s/ Michael W. Wright* Chairman and Director May 7, 1997
____________________________________
Michael W. Wright
/s/ William J. Tyrrell* Vice Chairman and Director May 7, 1997
____________________________________
William J. Tyrrell
/s/ Jack W. Eugster* Director May 7, 1997
____________________________________
Jack W. Eugster
/s/ Jeffrey C. Girard* Director May 7, 1997
____________________________________
Jeffrey C. Girard
</TABLE>
*By Richard D. Schepp pursuant to Powers of Attorney attached hereto as
Exhibit 24.
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.
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.
</TABLE>
<PAGE>
Exhibit 1.1
ShopKo Stores, Inc.
Common Stock
(par value $.01 per share)
Underwriting Agreement
(U.S. Version)
____________, 1997
Goldman, Sachs & Co.
Salomon Brothers Inc
Merrill Lynch, Pierce, Fenner &
Smith Incorporated
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
Supermarket Operators of America, Inc., a Delaware corporation (the
"Selling Shareholder"), proposes, subject to the terms and conditions stated
herein, to sell to the Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of 5,245,824 shares (the "Firm Shares") of Common
Stock, par value $.01 per share (the "Stock"), of ShopKo Stores, Inc. (the
"Company") and the Company proposes, subject to the terms and conditions stated
herein, to sell to the Underwriters, at the election of the Underwriters, up to
786,874 additional shares (the "Optional Shares") of Stock (the Firm Shares and
the Optional Shares that the Underwriters elect to purchase pursuant to Section
2 hereof being collectively called the "Shares"). Supervalu Inc., a Delaware
corporation ("Parent"), owns 100% of the capital stock of the Selling
Shareholder.
It is understood and agreed to by all parties that the Company, the Parent
and the Selling Shareholder are concurrently entering into an agreement (the
"International Underwriting Agreement") providing for the sale by the Company
and the Selling Shareholder of up to a total of 1,508,174 shares of Stock (the
"International Shares"), including the overallotment option thereunder, through
arrangements with certain underwriters outside the United States (the
"International Underwriters"), for whom Goldman Sachs International, Salomon
Brothers International and Merrill Lynch International are acting as lead
managers. Anything herein or therein to the contrary notwithstanding, the
respective closings under this Agreement and the International Agreement are
hereby expressly made conditional on one another. The Underwriters hereunder and
the International Underwriters are simultaneously entering into an Agreement
between U.S. and International Underwriting Syndicates (the "Agreement between
Syndicates") which provides, among other things, for the transfer of shares of
Stock between the two syndicates. Two forms of prospectus are to be used in
connection with the offering and sale of shares of Stock contemplated by the
foregoing, one relating to the Shares
<PAGE>
hereunder and the other relating to the International Shares. The latter form of
prospectus will be identical to the former except for certain substitute pages
as included in the registration statement and amendments thereto as mentioned
below. Except as used in Sections 2, 3, 4, 9 and 11 herein, and except as the
context may otherwise require, references hereinafter to the Shares shall
include all the shares of Stock which may be sold pursuant to either this
Agreement or the International Underwriting Agreement, and references herein to
any prospectus whether in preliminary or final form, and whether as amended or
supplemented, shall include both the U.S. and the international versions
thereof.
The Company has adopted a Shareholder Rights Agreement, pursuant to which
the Stock, including the Shares and the International Shares, will have attached
thereto rights ("Rights"), promptly following the closing hereof, to purchase
additional equity securities under certain specified circumstances. None of the
Rights are currently exercisable. All references to the Shares and International
Shares herein shall be deemed to include the related Rights attached thereto.
The Company, the Parent and the Selling Shareholder have entered into a
Stock Buyback and Secondary Offering Agreement ("Stock Buyback and Secondary
Offering Agreement") pursuant to which the Company has agreed to repurchase
8,174,387 shares of Stock from the Selling Shareholder (such transaction is
herein referred to as the "Stock Repurchase Transaction"). The obligation of the
Company, the Parent and the Selling Shareholder to consummate the Stock
Repurchase Transaction is subject to completion of the transactions contemplated
hereby and by the International Underwriting Agreement.
1. (a) The Company represents and warrants to, and agrees with, each of
the Underwriters that:
(i) A registration statement on Form S-3 (File No. 333-_____) (the
"Initial Registration Statement") in respect of the Shares has been
filed with the Securities and Exchange Commission (the "Commission");
the Initial Registration Statement, as amended by pre-effective
amendments numbers ____ and __ and any post-effective amendment
thereto, each in the form heretofore delivered to you, and, excluding
exhibits thereto but including all documents incorporated by reference
in the prospectus contained therein, to you for each of the other
Underwriters, have been declared effective by the Commission in such
form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement"), filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended
(the "Act"), which became effective upon filing, no other document
with respect to the Initial Registration Statement or document
incorporated by reference therein has heretofore been filed with the
Commission; and no stop order suspending the effectiveness of the
Initial Registration Statement, any post-effective amendment thereto
or the Rule 462(b) Registration Statement, if any, has been issued and
no proceeding for that purpose has been initiated or threatened by the
Commission (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant to Rule
424(a) of the rules and regulations of the Commission under the Act is
hereinafter called a "Preliminary Prospectus"; the various parts of
the Initial Registration Statement and the Rule 462(b) Registration
Statement, if any, including all exhibits thereto and including (i)
the information contained in the form of final prospectus filed with
the Commission pursuant to Rule 424(b) under the Act in
2
<PAGE>
accordance with Section 5(a) hereof and deemed by virtue of Rule 430A
under the Act to be part of the Initial Registration Statement at the
time it was declared effective and (ii) the documents incorporated by
reference in the prospectus contained in the Initial Registration
Statement at the time such part of the registration statement became
effective, or such part of the Rule 462(b) Registration Statement, if
any, at the time it became or hereafter becomes effective, each as
amended at the time such part of the registration statement became
effective, are hereinafter collectively called the "Registration
Statement"; such final prospectus, in the form first filed pursuant to
Rule 424(b) under the Act, is hereinafter called the "Prospectus");
any reference herein to any Preliminary Prospectus or the Prospectus
shall be deemed to refer to and include the documents incorporated by
reference therein pursuant to Item 12 of Form S-3 under the Act, as of
the date of such Preliminary Prospectus or Prospectus, as the case may
be; any reference to any amendment or supplement to any Preliminary
Prospectus or the Prospectus shall be deemed to refer to and include
any documents filed after the date of such Preliminary Prospectus or
Prospectus, as the case may be, under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and incorporated by reference
in such Preliminary Prospectus or Prospectus, as the case may be; and
any reference to any amendment to the Registration Statement shall be
deemed to refer to and include any annual report of the Company filed
pursuant to Section 13(a) or 15(d) of the Exchange Act after the
effective date of the Initial Registration Statement that is
incorporated by reference in the Registration Statement;
(ii) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission, and each
Preliminary Prospectus, at the time of filing thereof, conformed in
all material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder, and did not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in
reliance upon and in conformity with information furnished in writing
to the Company by an Underwriter through Goldman, Sachs & Co.
expressly for use therein or by the Parent or the Selling Shareholder
expressly for use therein;
(iii) The documents incorporated by reference in the
Prospectus,when they become effective or were filed with the
Commission, as the case may be, conformed in all material respects to
the requirements of the Act or the Exchange Act, as applicable, and
the rules and regulations of the Commission thereunder, and none of
such documents contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and any
further documents so filed and incorporated by reference in the
Prospectus or any further amendment or supplement thereto, when such
documents become effective or are filed with the Commission, as the
case may be, will conform in all material respects to the requirements
of the Act or the Exchange Act, as applicable, and the rules and
regulations of the Commission thereunder and will not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this representation
and warranty shall not apply
3
<PAGE>
to any statements or omissions made in reliance upon and in conformity
with information furnished in writing to the Company by an Underwriter
through Goldman, Sachs & Co. expressly for use therein;
(iv) The Registration Statement conforms, and the Prospectus and
any further amendments or supplements to the Registration Statement or
the Prospectus will conform, in all material respects to the
requirements of the Act and the rules and regulations of the
Commission thereunder and do not and will not, as of the applicable
effective date as to the Registration Statement and any amendment
thereto and as of the applicable filing date as to the Prospectus and
any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided, however, that this representation and warranty shall not
apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein or
by the Selling Shareholder or the Parent expressly for use therein;
there is no material document of a character required to be described
in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement which is not described or filed
as required;
(v) Neither the Company nor any of its subsidiaries (as defined
in Section 14) has sustained since the date of the latest audited
financial statements included or incorporated by reference in the
Prospectus any loss or interference with its business, whether or not
covered by insurance, which is material to the Company and its
subsidiaries, taken as a whole, otherwise than as set forth or
contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries (other than
changes pursuant to employee stock plans outstanding on the date of
this Agreement, changes in the current portion of long-term debt of
the Company which, individually or in the aggregate, are not material
to the Company and its subsidiaries, taken as a whole, changes in the
amount of capital lease obligations of the Company which, individually
or in the aggregate, are not material to the Company and its
subsidiaries taken as a whole, and changes in the capital stock of
ProVantage, Inc. pursuant to an operating agreement dated
___________, 1997 to issue 4% of its capital stock to ProVMed, LLC
in exchange for a 20% interest in ProVMed, LLC (the "ProVantage
Transaction")) and there has not been any material adverse change, or
any development which the Company has reason to believe will involve a
prospective material adverse change, in or affecting the general
affairs, management, financial position, shareholders' equity or
results of operations of the Company and its subsidiaries, taken as a
whole, otherwise than as set forth or contemplated in the Prospectus;
(vi) The Company and its subsidiaries have good and marketable
title to all real property and good and marketable title to all
personal property owned by them, in each case free and clear of all
liens, encumbrances and defects except such as are described in the
Prospectus or such as do not have, and would not reasonably be
expected to have, a Material Adverse Effect (as defined below), and do
not interfere with the use made and proposed to be made of such
property by the Company and its subsidiaries; and any real property
and buildings held under lease by the Company and its subsidiaries are
held by them under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company
and its subsidiaries;
4
<PAGE>
(vii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the state
of Minnesota, with power and authority (corporate and other) to own
its properties and conduct its business as described in the
Prospectus, and has been duly qualified as a foreign corporation for
the transaction of business and is in good standing under the laws of
each other jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification, other than
where the failure to be so qualified and in good standing would not
have, or reasonably be expected to have, a Material Adverse Effect on
the Company and its subsidiaries, taken as a whole; and each
subsidiary of the Company has been duly incorporated or organized, as
the case may be, and is validly existing as a corporation or other
entity, as the case may be, in good standing under the laws of its
jurisdiction of incorporation or organization, with power and
authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified
for the transaction of business and is in good standing under the laws
of each other jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification, other than
where the failure to be so qualified and in good standing would not
have, or reasonably be expected to have, a Material Adverse Effect (as
defined below);
(viii) All consents, approvals, authorizations, orders, licenses,
certificates, permits, registrations or qualifications required to be
obtained by the Company in connection with the Stock Repurchase
Transaction have been obtained, other than such consents, approvals,
authorizations, orders, licenses, certificates, permits, registrations
or qualifications which, individually or in the aggregate, would not
have a material adverse effect upon the current or future condition
(financial or otherwise), business, assets, results of operations or
prospects of the Company and its subsidiaries taken as a whole, upon
the ability of the Company to perform its obligations under this
Agreement or the International Underwriting Agreement or upon the
validity or consummation of the transactions contemplated hereby or
thereby (including consummation of the Stock Repurchase Transaction)
(a "Material Adverse Effect"); the consummation of the Stock
Repurchase Transaction will not (i) conflict with or result in a
breach or violation of any of terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument to which the Company or any of its
subsidiaries was or is bound or to which any of the property or assets
of the Company or any of its subsidiaries was or is subject, (ii)
result in any violation of the provisions of the Certificate of
Incorporation or By-laws of the Company or any of its subsidiaries or
(iii) result in any violation of the provisions of any statute or any
order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries or any
of their properties, other than, in the case of clauses (i) and (iii)
above, such conflicts, breaches, violations or defaults that,
individually or in the aggregate, would not have a Material Adverse
Effect;
(ix) The Company has an authorized and outstanding
capitalization as set forth in the Prospectus (other than changes to
its capitalization pursuant to employee stock plans outstanding on the
date of this Agreement, changes in the current portion of its long-
term debt of the Company since the date of the Prospectus, which,
individually or in the aggregate, are not material to the Company and
its subsidiaries taken as a
5
<PAGE>
whole, and changes in the amount of capital lease obligations of the
Company which, individually or in the aggregate, are not material to
the Company and its subsidiaries taken as a whole), and all of the
issued shares of capital stock of the Company have been duly and
validly authorized and issued, are fully paid and non-assessable,
subject to Wisconsin Statute Section 180.0622(2)(b); and all of the
issued shares of capital stock or other equity interests of each
subsidiary of the Company have been duly and validly authorized and
issued, in the case of each subsidiary of the Company that is a
corporation are fully paid and non-assessable, subject to Wisconsin
Statute Section 180.0622(2)(b), and (except as set forth in the
Prospectus) are owned directly or indirectly by the Company;
(x) The Firm Shares to be sold by the Selling Shareholder and the
unissued Optional Shares to be issued and sold by the Company, if
necessary, to the Underwriters hereunder and under the International
Underwriting Agreement have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein and
in the International Underwriting Agreement, will be duly and validly
issued and fully paid and non-assessable, subject to Wisconsin Statute
Section 180.0622(2)(b); the Company has not agreed, orally or in
writing, to issue or sell any shares of its capital stock to any
person, other than pursuant to this Agreement or the International
Underwriting Agreement or as set forth in the Prospectus (and other
than pursuant to employee stock plans outstanding as of the date of
this Agreement);
(xi) This Agreement and the International Underwriting Agreement
have each been duly authorized, executed and delivered by the Company.
The issue and sale of the Option Shares by the Company, if necessary,
hereunder and under the International Underwriting Agreement and the
compliance by the Company with all of the provisions of this Agreement
and the International Underwriting Agreement and the consummation of
the transactions herein and therein contemplated (including the Stock
Repurchase Transaction) will not (A) conflict with or result in a
breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company
or any of its subsidiaries is a party or by which the Company or any
of its subsidiaries is bound or to which any of the property or assets
of the Company or any of its subsidiaries is subject, (B) result in
any violation of the provisions of the Certificate of Incorporation or
By-laws of the Company or any of its subsidiaries, or (C) result in
the violation of the provisions of any statute or any order, rule or
regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of
their properties, other than, in the case of clauses (A) and (C)
above, such conflicts, breaches, violations or defaults that,
individually or in the aggregate, do not have and would not reasonably
be expected to have a Material Adverse Effect; and no consent,
approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for the
issue and sale of the Option Shares, if necessary, or the consummation
by the Company of the transactions contemplated by this Agreement and
the International Underwriting Agreement (including the Stock
Repurchase Transaction), except the registration under the Act of the
Shares and such consents, approvals, authorizations, registrations or
qualifications as may be required under state or foreign securities or
Blue Sky laws in connection with the purchase and distribution of the
Shares by the Underwriters and the International Underwriters;
(xii) Neither the Company nor any of its subsidiaries is (A) in
violation of its Certificate of Incorporation or By-laws or (B) in
default in the performance or
6
<PAGE>
observance of any obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust, loan agreement,
lease or other agreement or instrument to which it is a party or by
which it or any of its properties may be bound other than such
defaults that, individually or in the aggregate, do not have and would
not reasonably be expected to have a Material Adverse Effect;
(xiii) The statements set forth in the Prospectus under the
captions "Certain Anti-Takeover Provisions," "Underwriting," and
"Certain U.S. Tax Consequences to Non-U.S. Shareholders" insofar as
they purport to describe the provisions of the laws and documents
referred to therein, are accurate, complete and fair;
(xiv) Neither the Company nor any of its subsidiaries have taken
or will take, directly or indirectly, any action designed to, or that
might reasonably be expected to, cause or result in the stabilization
or manipulation of the price of the Stock in violation of federal or
state securities or Blue Sky laws;
(xv) Other than as set forth or contemplated in the Prospectus,
there are no legal or governmental proceedings pending to which the
Company or any of its subsidiaries is a party or of which any property
of the Company or any of its subsidiaries is the subject which could
individually or in the aggregate have, or reasonably be expected to
have, a Material Adverse Effect; and, to the Company's knowledge, no
such proceedings are threatened or contemplated by governmental
authorities or threatened by others;
(xvi) The Company is not and, after giving effect to the
offering and sale of the Shares, will not be an "investment company"
or an entity "controlled" by an "investment company", as such terms
are defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act");
(xvii) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate
located in Cuba within the meaning of Section 517.075, Florida
Statutes;
(xviii) The consummation by the Company of the Stock Repurchase
Transaction will not result in any violation of the federal securities
laws, the state Blue Sky laws or the Minnesota Business Corporation
Act;
(xix) Deloitte & Touche LLP, who have certified certain
financial statements of the Company and its subsidiaries, are
independent public accountants as required by the Act and the rules
and regulations of the Commission thereunder;
(xx) The consolidated financial statements and schedules of the
Company included in the Registration Statement present fairly the
consolidated financial position of the Company as of the respective
dates of such financial statements, and the consolidated results of
operations and cash flows of the Company for the respective periods
covered thereby, all in conformity with generally accepted accounting
principles consistently applied throughout the periods involved,
except as disclosed in the
7
<PAGE>
Prospectus, and the supporting schedules included in the Registration
Statement present fairly the information required to be stated
therein. The financial information set forth in the Prospectus under
the captions "Summary Consolidated Financial Data" and "Selected
Consolidated Financial Data" presents fairly on the basis stated in
the Prospectus, the information set forth therein. The pro forma
information included in the Prospectus presents fairly the information
shown therein, has been prepared in accordance with the Commission's
rules and guidelines with respect to pro forma information, has been
properly compiled on the pro forma basis described therein, and, in
the opinion of the Company, the assumptions used in the preparation
thereof are reasonable and the adjustments used therein are
appropriate under the circumstances;
(xxi) The Company and its subsidiaries (A) are in compliance in
all respects with applicable federal, state, local and foreign laws
and regulations, except where the failure to be in compliance would
not have a Material Adverse Effect; and (B) possess and are in
compliance with the terms and conditions of such licenses, permits,
consents, orders, certificates or authorizations issued by the
appropriate federal, state, foreign or local regulatory agencies or
bodies necessary to conduct the businesses now operated by each of
them, except for licenses, permits, consents, orders, certificates or
authorizations, the absence of which, individually or in the
aggregate, would not have a Material Adverse Effect; neither the
Company nor any of its subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such
licenses, permits, consents, orders, certificates or authorizations;
(xxii) The Company and each of its subsidiaries has filed all
necessary federal and state income, franchise, sales and use tax
returns and has paid all taxes shown as due thereon, other than such
filings or payments which would if not made have, or could reasonably
be expected to have, a Material Adverse Effect, and there is no tax
deficiency that has been asserted, or to the knowledge of the Company
threatened, against the Company, any of its subsidiaries, or any of
their respective properties or assets that would or could be expected
to have a Material Adverse Effect; and
(xxiii) The Company and its subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as is adequate
for the conduct of their businesses and the value of their properties
and as is customary for companies engaged in similar businesses in
similar industries.
(b) Each of the Parent and the Selling Shareholder, jointly and severally,
represents and warrants to, and agrees with, each of the Underwriters that:
(i) The Parent has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware; the Selling Shareholder has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the State of Delaware; and all of the issued shares of capital stock
of the Selling Shareholder have been duly and validly issued and are
fully paid and non-assessable;
(ii) All consents, approvals, authorizations and orders necessary
for the execution and delivery by the Parent and Selling Shareholder
of this Agreement and the
8
<PAGE>
International Underwriting Agreement, and for the sale and delivery of
the Shares to be sold by the Selling Shareholder hereunder and under
the International Underwriting Agreement, have been obtained, except
for consents, approvals, authorizations or orders which may be
required under state or foreign securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the
Underwriters and the International Underwriters; and the Parent and
the Selling Shareholder each has full right, power and authority to
enter into this Agreement and the International Underwriting
Agreement, and the Selling Shareholder has full right, power and
authority to sell, assign, transfer and deliver the Shares to be sold
by the Selling Shareholder hereunder and under the International
Underwriting Agreement;
(iii) The sale of the Shares to be sold by the Selling
Shareholder hereunder and under the International Underwriting
Agreement and the compliance by the Company, the Parent and the
Selling Shareholder with all of the provisions of this Agreement and
the International Underwriting Agreement and the consummation of the
transactions herein and therein contemplated (including the Stock
Repurchase Transaction) have in each case been duly authorized by all
necessary corporate and stockholder action on the part of the Parent
and the Selling Shareholder, will not conflict with or result in a
breach or violation of any of the terms or provisions of, or
constitute a default under, any material indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the
Parent and the Selling Shareholder is a party or by which the Parent
and the Selling Shareholder is bound, or to which any of the property
or assets of the Parent and the Selling Shareholder is subject, nor
will the action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of the Parent and the Selling
Shareholder or any statute or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over the
Parent and the Selling Shareholder or any of their respective
properties, except that the Parent and the Selling Shareholder make no
representation in this clause (iii) with respect to the registration
under the Act of the Shares and the requirements under state or
foreign securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the Underwriters and the
International Underwriters;
(iv) The Selling Shareholder has, and immediately prior to the
Time of Delivery (as defined in Section 4 hereof) the Selling
Shareholder will have, good and valid title to the Shares to be sold
by the Selling Shareholder hereunder and under the International
Underwriting Agreement, free and clear of all liens, encumbrances,
equities or claims; and, upon delivery of such Shares and payment
therefor pursuant hereto and thereto, good and valid title to such
Shares, free and clear of all liens, encumbrances, equities or claims,
will pass to the several Underwriters or the International
Underwriters, as the case may be;
(v) Neither the Parent, the Selling Shareholder nor any of their
subsidiaries has taken nor will take, directly or indirectly, any
action which is designed to or which has constituted or which might
reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company, to
facilitate the sale or resale of the Shares;
9
<PAGE>
(vi) The consummation by the Parent and the Selling Shareholder
of the Stock Repurchase Transaction will not result in any violation
of the federal securities laws or the state Blue Sky laws;
(vii) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or
any amendment or supplement thereto are made in reliance upon and in
conformity with written information furnished to the Company by the
Parent or the Selling Shareholder expressly for use therein, such
Preliminary Prospectus and the Registration Statement did, and the
Prospectus and any further amendments or supplements to the
Registration Statement and the Prospectus, when they become effective
or are filed with the Commission, as the case may be, will conform in
all material respects to the requirements of the Act and the rules and
regulations of the Commission thereunder and will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading;
(viii) To the knowledge of the Parent and the Selling
Shareholder, the Registration Statement and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus do not and will not, as of the applicable effective date as
to the Registration Statement and any amendment thereto and as of the
applicable filing date as to the Prospectus and any amendment or
supplement thereto, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter
through Goldman, Sachs & Co. expressly for use therein or by the
Parent or the Selling Shareholder expressly for use therein; to the
knowledge of the Parent and the Selling Shareholder, there is no
material document of a character required to be described in the
Registration Statement or the Prospectus which is not described as
required; and
(ix) In order to document the Underwriters' compliance with the
reporting and withholdings provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, the Selling Shareholder will deliver to you prior to or
at the First Time of Delivery (as hereinafter defined) a properly
completed and executed United States Treasury Department Form W-9 (or
other applicable form or statement specified by Treasury Department
regulations in lieu thereof).
2. Subject to the terms and conditions herein set forth, (a) the Selling
Shareholder agrees to issue and sell to each of the Underwriters, and each of
the Underwriters agrees, severally and not jointly, to purchase from the Selling
Shareholder, at a purchase price per share of $__________, the number of Firm
Shares set forth opposite the name of such Underwriter in Schedule I hereto and
(b) in the event and to the extent that the Underwriters shall exercise the
election to purchase Optional Shares as provided below, the Company agrees to
issue and sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company, at the purchase price
per share set forth in clause (a)
10
<PAGE>
of this Section 2, that portion of the number of Optional Shares as to which
such election shall have been exercised (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying such number of Optional
Shares by a fraction, the numerator of which is the maximum number of Optional
Shares which such Underwriter is entitled to purchase as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the maximum number of Optional Shares that all of the Underwriters are entitled
to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 786,874 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement,
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company, shall be delivered by the Company, on behalf of the
Selling Shareholder or the Company, as the case may be, to Goldman, Sachs & Co.,
through the facilities of the Depository Trust Company, ("DTC") for the account
of such Underwriter, against payment by or on behalf of such Underwriter of the
purchase price therefor by certified or official bank check or checks, payable
to the order of the Selling Shareholder or the Company, as the case may be, in
Federal (same day) funds. The Company will cause the certificates representing
the Shares to be made available for checking and packaging at least twenty-four
hours prior to the Time of Delivery (as defined below) with respect thereto at
the office of DTC or its designated custodian (the "Designated Office"). The
time and date of such delivery and payment shall be, with respect to the Firm
Shares, 9:30 a.m., New York City time, on _____________, 1997 or such other time
and date as Goldman, Sachs & Co. and the Selling Shareholder may agree upon in
writing, and, with respect to the Optional Shares, 9:30 a.m., New York City
time, on the date specified by Goldman, Sachs & Co. in the written notice given
by Goldman, Sachs & Co. of the Underwriters' election to purchase such Optional
Shares, or such other time and date as Goldman, Sachs & Co. and the Company may
agree upon in writing. Such time and date for delivery of the Firm Shares is
herein called the "First Time of Delivery", such time and date for delivery of
the Optional Shares, if not the First Time of Delivery, is herein called the
"Second Time of Delivery", and each such time and date for delivery is herein
called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on behalf
of the parties hereto pursuant to Section 7 hereof, including the cross receipt
for the Shares and any additional documents requested by the Underwriters
pursuant to Section 7(k) hereof, will be
11
<PAGE>
delivered at the offices of Sonnenschein Nath & Rosenthal, 8000 Sears Tower,
Chicago, Illinois 60606 (the "Closing Location"), and the Shares will be
delivered at the Designated Office, all at such Time of Delivery. A meeting will
be held at the Closing Location at 4:00 p.m., New York City time, on the New
York Business Day next preceding such Time of Delivery, at which meeting the
final drafts of the documents to be delivered pursuant to the preceding sentence
will be available for review by the parties hereto. For the purposes of this
Section 4, "New York Business Day" shall mean each Monday, Tuesday, Wednesday,
Thursday and Friday which is not a day on which banking institutions in New York
are generally authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later
than the Commission's close of business on the second business day
following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3)
under the Act; to make no further amendment or any supplement to the
Registration Statement or Prospectus prior to the last Time of
Delivery which shall be disapproved by you after reasonable notice
thereof; to advise you, promptly after it receives notice thereof, of
the time when any amendment to the Registration Statement has been
filed or becomes effective or any supplement to the Prospectus or any
amended Prospectus has been filed and to furnish you with copies
thereof; to promptly file all reports and any definitive proxy or
information statements required to be filed by the Company with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of the Prospectus and for so long
as the delivery of a prospectus is required in connection with the
offering or sale of the Shares; to advise you, promptly after it
receives notice thereof, of the issuance by the Commission of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus, of the suspension of the
qualification of the Shares for offering or sale in any jurisdiction,
of the initiation or threatening of any proceeding for any such
purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for
additional information; and, in the event of the issuance of any stop
order or of any order preventing or suspending the use of any
Preliminary Prospectus or prospectus or suspending any such
qualification, promptly to use its best efforts to obtain the
withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under
the securities laws of such jurisdictions as you may request and to
comply with such laws so as to permit the continuance of sales and
dealings therein in such jurisdictions for as long as may be necessary
to complete the distribution of the Shares, provided that in
connection therewith the Company shall not be required to qualify as a
foreign corporation, or to file a general consent to service of
process in any jurisdiction, or be obligated to subject itself to any
material additional tax or other liabilities;
(c) Prior to 10:00 a.m., New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time
to time, to furnish the
12
<PAGE>
Underwriters with copies of the Prospectus in New York City in such
quantities as you may reasonably request, and, if the delivery of a
prospectus is required at any time prior to the expiration of nine
months after the time of issue of the Prospectus in connection with
the offering or sale of the Shares and if at such time any event shall
have occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made when such Prospectus is delivered, not misleading, or, if
for any other reason it shall be necessary during such period to amend
or supplement the Prospectus or to file under the Exchange Act any
document incorporated by reference in the Prospectus in order to
comply with the Act or the Exchange Act, to notify you and upon your
request to file such document and to prepare and furnish without
charge to each Underwriter and to any dealer in securities as many
copies as you may from time to time reasonably request of an amended
Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance, and in case any
Underwriter is required to deliver a prospectus in connection with
sales of any of the Shares at any time nine months or more after the
time of issue of the Prospectus, upon your request but at the expense
of such Underwriter, to prepare and deliver to such Underwriter as
many copies as you may request of an amended or supplemented
Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon
as practicable, but in any event not later than eighteen months after
the effective date of the Registration Statement (as defined in Rule
158(c) under the Act), an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with Section 11(a)
of the Act and the rules and regulations thereunder (including, at the
option of the Company, Rule 158);
(e) During the period beginning from the date hereof and
continuing to and including the date 90 days after the date of the
Prospectus, not to (i) offer, sell, contract to sell or otherwise
dispose of, except as provided hereunder and under the International
Underwriting Agreement, any securities of the Company that are
substantially similar to the Shares, including but not limited to any
securities that are convertible into or exchangeable for, or that
represent the right to receive, Stock or any such substantially
similar securities (other than pursuant to employee stock plans
existing on the date of this Agreement or upon the conversion or
exchange of convertible or exchangeable securities outstanding on the
date of this Agreement) or (ii) file any registration statement under
the Act with respect to Stock, securities convertible into or
exchangeable for Stock, rights or warrants to acquire Stock, or any
other securities substantially similar to Stock (other than with
respect to the aforementioned employee stock plans or convertible or
exchangeable securities), in each case without your prior written
consent;
(f) To furnish to its shareholders as soon as practicable after
the end of each fiscal year an annual report (including a balance
sheet and statements of income, shareholders' equity and cash flows of
the Company and its consolidated subsidiaries certified by independent
public accountants) and, as soon as practicable after the end
13
<PAGE>
of each of the first three quarters of each fiscal year (beginning
with the fiscal quarter ending after the effective date of the
Registration Statement), consolidated summary financial information of
the Company and its subsidiaries for such quarter in reasonable
detail;
(g) During a period of three years from the effective date of
the Registration Statement, to furnish to you copies of all reports or
other communications (financial or other) furnished to stockholders,
and to deliver to you (i) as soon as they are available, copies of any
reports and financial statements furnished to or filed with the
Commission or any national securities exchange on which any class of
securities of the Company is listed; and (ii) such additional
information concerning the business and financial condition of the
Company as you may from time to time reasonably request (such
financial statements to be on a consolidated basis to the extent the
accounts of the Company and its subsidiaries are consolidated in
reports furnished to its shareholders generally or to the Commission),
provided that you keep any nonpublic information received by you under
this clause (g) confidential, unless otherwise required by law;
(h) If the Company elects to rely on Rule 462(b), the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) by 10:00 p.m., Washington, D.C. time, on
the date of this Agreement, and the Company shall at the time of
filing either pay to the Commission the filing fee for the Rule 462(b)
Registration Statement or give irrevocable instructions for the
payment of such fee pursuant to Rule 111(b) under the Act;
(i) To use the net proceeds received by it from the sale of the
Optional Shares pursuant to this Agreement and the International
Underwriting Agreement in the manner specified in the Prospectus under
the caption "Use of Proceeds"; and
(j) To use its best efforts to list the Shares on the New York
Stock Exchange.
6. The Company, the Parent and the Selling Shareholder covenant and agree
with one another and with the several Underwriters that (a) the Company, the
Parent and the Selling Shareholder will pay or cause to be paid, in accordance
with Section 5A of the Stock Buyback and Secondary Offering Agreement, the
following: (i) the fees, disbursements and expenses of the Company's counsel and
accountants in connection with the registration of the Shares under the Act and
all other expenses in connection with the preparation, printing and filing of
the Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the International Underwriting
Agreement, the Agreement between Syndicates, the Selling Agreement, the Blue Sky
Memorandum, closing documents (including compilations thereof) and any other
documents in connection with the offering, purchase, sale and delivery of the
Shares; (iii) all expenses in connection with the qualification of the Shares
for offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey;
(iv) all fees and expenses in connection with listing the Shares on the New York
Stock Exchange; (v) the filing fees
14
<PAGE>
incident to, and the fees and disbursements of counsel for the Underwriters in
connection with, securing any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the Shares; (b) the Company
will pay or cause to be paid (i) the cost of preparing stock certificates; (ii)
the cost and charges of any transfer agent or registrar; (iii) all expenses and
taxes incident to the sale and delivery of the Shares by the Selling Shareholder
to the Underwriters hereunder; and (iv) all other costs and expenses incident to
the performance of the Company's obligations hereunder which are not otherwise
specifically provided for in this Section; (c) the Selling Shareholder will pay
or cause to be paid all costs and expenses incident to the performance of the
Parent's and the Selling Shareholder's obligations hereunder; and (d) each of
the Company, on the one hand, and the Parent and the Selling Shareholder, on the
other hand, will pay or cause to be paid any fees and expenses of their
respective counsel. It is understood, however, that, except as provided in this
Section, and Sections 8 and 11 hereof, the Underwriters will pay all of their
own costs and expenses, including the fees of their counsel, stock transfer
taxes on resale of any of the Shares by them, and any advertising expenses
connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company, the Parent and the Selling Shareholder herein are, at and as of
such Time of Delivery, true and correct, the condition that the Company, the
Parent and the Selling Shareholder shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing
by the rules and regulations under the Act and in accordance with Section
5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have become effective by 10:00 p.m.,
Washington, D.C. time, on the date of this Agreement; no stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose shall
have been initiated or threatened by the Commission; and all requests for
additional information on the part of the Commission shall have been
complied with to your reasonable satisfaction;
(b) Sonnenschein Nath & Rosenthal, counsel for the Underwriters,
shall have furnished to you such opinion or opinions, dated such Time of
Delivery, with respect to the incorporation of the Company, the validity of
the Shares being delivered at such Time of Delivery, the Registration
Statement, the Prospectus, and such other related matters as you may
reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon such
matters;
(c) (i) Godfrey & Kahn, S.C., counsel for the Company, shall have
furnished to you their written opinion, dated such Time of Delivery, in
form and substance satisfactory to you, to the effect that:
(A) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, with corporate power and authority to
own its properties and conduct its business as described in the
Prospectus;
15
<PAGE>
(B) The Company has an authorized and outstanding capitalization
as set forth in the Prospectus, and all of the issued shares of
capital stock of the Company (including the Shares being delivered at
such Time of Delivery) have been duly and validly authorized and
issued and are fully paid and nonassessable, subject to Wisconsin
Statute Section 180.0622(2)(b); and the Shares conform to the
description of the Stock contained in the Prospectus;
16
<PAGE>
(C) This Agreement and the International Underwriting
Agreement have been duly authorized, executed and delivered by the
Company;
17
<PAGE>
(D) No consent, approval, authorization, order, filing,
registration or qualification of or with any such court or
governmental agency or body is required for the issue and sale of the
Shares, if any, or the consummation by the Company of the transactions
contemplated by this Agreement and the International Underwriting
Agreement, other than consents, approvals, authorizations, orders,
filings, registrations or qualifications which if not obtained would
not have, and would not reasonably be expected to have, a Material
Adverse Effect and except for registration under the Act of the
Shares, and except for such consents, approvals, authorizations,
filings, registrations or qualifications as may be required under
state or foreign securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriters and the
International Underwriters;
(E) The statements set forth in the Prospectus under the
captions "Certain Anti-Takeover Provisions" and "Certain U.S. Tax
Consequences to Non-U.S. Shareholders," insofar as they purport to
describe the provisions of the laws and documents referred to therein,
are accurate, complete and fair;
(F) The Company is not an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in
the Investment Company Act;
(G) The consummation by the Company of the Stock Repurchase
Transaction will not result in any violation of Regulation M under the
Exchange Act, the state Blue Sky laws or the Minnesota Business
Corporation Act.
18
<PAGE>
(H) The documents incorporated by reference in the Prospectus
or any amendment or supplement thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion),
when they became effective or were filed with the Commission, as the
case may be, complied as to form in all material respects with the
requirements of the Act or the Exchange Act, as applicable, and the
rules and regulations of the Commission thereunder; and he has no
reason to believe that any of such documents, when such documents
became effective or were so filed, as the case may be, contained, in
the case of a registration statement which became effective under the
Act, an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or, in the case of other documents
which were filed under the Exchange Act with the Commission, an untrue
statement, of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such documents were so
filed, not misleading; and
(I) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior
to such Time of Delivery (other than the financial statements and
related schedules therein, as to which such counsel need express no
opinion) comply as to form in all material respects with the
requirements of the Act and the rules and regulations thereunder,
although they do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement or the Prospectus, except for those referred to
in the opinion in subsection (E) of this Section 7(c)(i); they have no
reason to believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company prior
to such Time of Delivery (other than the financial statements and
related statements and related schedules therein, as to which such
counsel need express no opinion) contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading or that, as of its date, the Prospectus or any further
amendment or supplement thereto made by the Company prior to such Time
of Delivery (other than the financial statements and related schedules
therein, as to which such counsel need express no opinion) contained
an untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or that, as
of such Time of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial
statements and related schedules therein, as to which such counsel
need express no opinion) contains an untrue statement of a material
fact or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; and they do not know of any amendment to
the Registration Statement required to be filed or of any contracts or
other documents of a character required to be filed as an
19
<PAGE>
exhibit to the Registration Statement or required to be incorporated
by reference into the Prospectus or required to be described in the
Registration Statement or the Prospectus which are not filed or
incorporated by reference or described as required.
In rendering such opinion, such counsel may state that they
express no opinion as to the laws of any jurisdiction outside the
United States.
(ii) Richard D. Schepp, Esq., Vice President - Legal Affairs of
the Company, acting as counsel for the Company, shall have furnished
to you his written opinion dated the Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(A) The Company has been duly qualified as a foreign corporation
for the transaction of business and is in good standing under the laws
of each other jurisdiction in which it owns or leases properties or
conducts any business so as to require such qualification, other than
where the failure to be so qualified and in good standing would not
have, or would not reasonably be expected to have, a Material Adverse
Effect;
(B) Each subsidiary of the Company has been duly incorporated and
is validly existing as a corporation or limited liability company, as
the case may be, in good standing under the laws of its jurisdiction
of incorporation, with corporate power and authority to own its
properties and conduct its business as described in the Prospectus;
and all of the issued shares of capital stock or unit ownership
interests, as the case may be, of each such subsidiary have been duly
and validly authorized and issued, are fully paid and non-assessable,
subject to Wisconsin Statute Section 180.0622(2)(b), and (except as
otherwise set forth in the Prospectus) are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims, other than such liens, encumbrances, equities or
claims which, individually or in the aggregate, would not have, or
would not reasonably be expected to have, a Material Adverse
Effect (it being expressly understood that American Medical Security
Holdings, Inc. will hold a 20% unit ownership interest in ProVMed,
LLC, and will have conversion rights to acquire up to 4% of the
capital stock of ProVantage, Inc.);
(C) All consents, approvals, authorizations, orders, licenses,
certificates, permits, registrations or qualifications required to be
obtained in connection with the Stock Repurchase Transaction have been
obtained, other than such consents, approvals, authorizations, orders,
licenses, certificates, permits, registrations or qualifications
which, individually or in the aggregate, would not have a Material
Adverse Effect; the Stock Repurchase Transaction did not and will not
(i) conflict with or result in a breach or violation of any of terms
or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries was or is
bound or to which any of the property or assets of the Company or any
of its subsidiaries was or is subject, (ii) result in any violation of
the provisions of the Certificate of Incorporation or By-laws of the
Company or any of its subsidiaries or (iii) result in any violation of
the provisions of any statute or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties, other
than, in the case of clauses (i) and (iii) above, such conflicts,
breaches, violations or defaults that, individually or in the
aggregate, would not have a Material Adverse Effect;
(D) The Company and its subsidiaries have good and marketable
title to all real property owned by them, in each case free and clear
of all liens, encumbrances and defects except such as are described in
the Prospectus or such as do not have, and would not reasonably be
expected to have, a Material Adverse Effect, and do not interfere with
the use currently made and proposed to be made of such property by the
Company and its subsidiaries; and any real property and buildings held
under lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as do
not interfere with the current use made and proposed to be made of
such property and buildings by the Company and its subsidiaries (in
giving the opinion in this clause, such counsel may state that no
examination of record titles for the purpose of such opinion has been
made, and that they are relying upon a general review of the titles of
the Company and its subsidiaries, upon opinions of local counsel and
abstracts, reports and policies of title companies rendered or issued
at or subsequent to the time of acquisition of such property by the
Company or its subsidiaries, upon opinions of counsel to the lessors
of such property and, in respect to matters of fact, upon certificates
of officers of the Company or its subsidiaries, provided that such
counsel shall state that they believe that both you and they are
justified in relying upon such opinions, abstracts, reports, policies
and certificates);
(E) To such counsel's knowledge and other than as
set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries is
a party or of which any property of the Company or any of its
subsidiaries is the subject which could individually or in the
aggregate have a Material Adverse Effect on the current or future
consolidated financial position, shareholders' equity or results of
operations of the Company and its subsidiaries; and, to such counsel's
actual knowledge, no such proceedings are threatened or contemplated
by governmental authorities or threatened by others;
(F) The issue and sale of the Shares, if any, being delivered at
such Time of Delivery by the Company and the compliance by the Company
with all of the provisions of this Agreement and the International
Underwriting Agreement and the consummation of the transactions herein
and therein contemplated will not conflict with or result in a breach
or violations of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument known to such counsel to which the
Company or any of its subsidiaries is a party or by which the Company
or any of its subsidiaries is bound or to which any of the property or
assets of the Company or any of its subsidiaries is subject, or any
statute or any order, rule or regulation known to such counsel of any
court or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties, in each
case other than such breaches, conflicts, violations or defaults
which, individually or in the aggregate, would not have a Material
Adverse Effect; nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the
Company or any or its subsidiaries; and
(G) Neither the Company nor any of its subsidiaries, is (i) in
violation of its Certificate of Incorporation or By-laws or (ii) in
default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture, mortgage,
deed of trust, loan agreement, lease or other agreement or instrument
to which it is a party or by which it or any of its properties may be
bound other than such defaults that, individually or in the aggregate,
do not have and would not reasonably be expected to have a Material
Adverse Effect.
In rendering such opinion, such counsel may state that they
express no opinion as to the laws of any jurisdiction outside the
United States;
(d) David L. Boehnen, Esq., Senior Vice President--Law and External
Relations of Parent, acting as counsel for the Parent and the Selling
Shareholder, shall have furnished to you his written opinion dated the Time
of Delivery, in form and substance satisfactory to you, to the effect that:
(i) Each of the Parent and the Selling Shareholder has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the State of Delaware; all of the issued shares of
capital stock of the Selling Shareholder have been duly and validly
issued and are fully paid and non-assessable;
(ii) This Agreement and the International Underwriting Agreement
have been duly executed and delivered by or on behalf of the Parent
and the Selling Shareholder; and the sale of the Shares to be sold by
the Selling Shareholder hereunder and thereunder and the compliance by
the Parent and the Selling Shareholder with all of the provisions of
this Agreement and the International Underwriting Agreement and the
consummation of the transactions herein and therein contemplated
(including the Stock Repurchase Transaction) will not conflict with or
result in a breach or violation of any terms or provisions of, or
constitute a default under, any material indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument known to such
counsel to which the Parent or the Selling Shareholder is a party or
by which the Parent or the Selling Shareholder is bound, to or which
any of the property or assets of the Parent or the Selling Shareholder
is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the
Parent or the Selling Shareholder or any order, rule or regulation
known to such counsel of any court or governmental agency or body
having jurisdiction over the Parent or the Selling Shareholder or
their respective properties (in rendering the opinion in this clause
(ii), such counsel may state that it is not opining on the
registration under the Act of the Shares and the requirements under
state or foreign securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriters and the
International Underwriters);
(iii) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement and the International
Underwriting Agreement in connection with the Shares to be sold by
such Selling Shareholder hereunder or thereunder, except such as have
been obtained under the Act and such as may be required under state or
foreign securities or Blue
20
<PAGE>
Sky laws in connection with the purchase and distribution of such
Shares by the Underwriters or the International Underwriters;
(iv) Immediately prior to the First Time of Delivery such Selling
Shareholder had good and valid title to the Shares to be sold at the
First Time of Delivery by such Selling Shareholder under this
Agreement and the International Underwriting Agreement, free and clear
of all liens, encumbrances, equities or claims, and full right, power
and authority to sell, assign, transfer and deliver the Shares to be
sold by such Selling Shareholder hereunder and thereunder;
(v) Upon delivery to the Underwriters by the Selling Shareholder
of a certificate or certificates for the Shares to be sold by it
against receipt of the purchase price therefor as provided in this
Agreement and the International Underwriting Agreement, good and valid
title to such Shares, free and clear of all liens, encumbrances,
equities or claims, will have been transferred to each of the several
Underwriters or International Underwriters, as the case may be, who
will have purchased such Shares in good faith and without notice of
any such lien, encumbrance, equity or claim or any other adverse claim
within the meaning of the Uniform Commercial Code; and
(vi) The consummation by the Parent and the Selling Shareholder of
the Stock Repurchase Transaction will not result in any violation of
the federal securities laws or state Blue Sky laws.
In rendering such opinion, such counsel may state that they express
no opinion as to the laws of any jurisdiction outside the United
States;
(e) On the date of the Prospectus at a time prior to the execution
of this Agreement, at 9:30 a.m., New York City time, on the effective
date of any post-effective amendment to the Registration Statement
filed subsequent to the date of this Agreement and also at each Time of
Delivery, Deloitte & Touche LLP shall have furnished to you a letter or
letters, dated the respective dates of delivery thereof, in form and
substance satisfactory to you, to the effect set forth in Annex I
hereto;
(f)(i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included or incorporated by reference in the Prospectus any loss or
interference with its business, whether or not covered by insurance,
otherwise than as set forth or contemplated in the Prospectus, and (ii)
since the respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital stock
(except for changes pursuant to employee stock plans outstanding on the
date of this Agreement) or increase in long-term debt of the Company or
any of its subsidiaries, or there shall not have occurred any change,
or any development involving a prospective change, in or affecting the
general affairs, management, financial position, shareholders' equity
or results of operations of the Company
21
<PAGE>
and its subsidiaries, taken as a whole, otherwise than as set forth or
contemplated in the Prospectus, the effect of which, in any such case
described in Clause (i) or (ii), is in the judgment of the
Representatives so material and adverse as to make it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(g) On or after the date hereof no downgrading shall have occurred
in the rating accorded any of the Company's debt securities or
preferred stock by any "nationally recognized statistical rating
organization", as that term is defined by the Commission for purposes
of Rule 436(g)(2) under the Act, below "investment grade" as that term
is defined by any "nationally recognized statistical rating
organization";
(h) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange; (ii) a general
moratorium on commercial banking activities declared by either Federal,
New York or Illinois authorities; or (iii) the outbreak or escalation
of hostilities involving the United States or the declaration by the
United States of a national emergency or war, if the effect of any such
event specified in this Clause (iii) in the judgment of the
Representatives makes it impracticable or inadvisable to proceed with
the public offering or the delivery of the Shares being delivered at
such Time of Delivery on the terms and in the manner contemplated in
the Prospectus;
(i) The Shares to be sold by the Company and the Selling Shareholder
at such Time of Delivery shall have been duly listed, subject to notice
of issuance, on the New York Stock Exchange;
(j) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New
York Business Day next succeeding the date of this Agreement; and
(k) Each of the Company, the Parent and the Selling Shareholder
shall have furnished or caused to be furnished to you at such Time of
Delivery certificates of officers of the Company, the Parent and the
Selling Shareholder satisfactory to you as to the accuracy of the
representations and warranties of the Company and the Selling
Shareholder, respectively, herein at and as of such Time of Delivery,
as to the performance by the Company, the Parent and the Selling
Shareholder, respectively, of all of its obligations hereunder to be
performed by it at or prior to such Time of Delivery, as to the matters
set forth in subsections (a) and (e) of this Section and as to such
other matters as you may reasonably request.
8. (a) The Company will indemnify and hold harmless each Underwriter and the
Selling Shareholder against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a
22
<PAGE>
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein or by the Selling
Shareholder expressly for use therein. The indemnification by the Company of the
Selling Shareholder under this clause (a) and under Section 8(a) of the
International Underwriting Agreement shall supersede and replace the Company's
indemnification obligations set forth in that certain Registration Rights
Agreement dated October 8, 1991 by and between the Company and the Selling
Shareholder.
(b) The Parent and the Selling Shareholder, jointly and severally, will
indemnify and hold harmless the Company and the Underwriters against any losses,
claims, damages or liabilities to which the Company or the Underwriters, as the
case may be, may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case in which such untrue statement or alleged
omission was made in any Preliminary Prospectus, the Registration Statement or
the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by the Parent or
the Selling Shareholder, as the case may be, expressly for use therein to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was so made in reliance upon and in
conformity with such information, and in each other case to the extent, but only
to the extent that, to the Parent's or the Selling Shareholder's knowledge, as
the case may be, at the time that such untrue statement or alleged untrue
statement or omission or alleged omission was so made, such statement was untrue
or such omission had occurred; and will reimburse the Company and the
Underwriters for any legal or other expenses reasonably incurred by the Company
and the Underwriters in connection with investigating or defending any action or
claim as such expenses are incurred.
(c) Each Underwriter will indemnify and hold harmless the Company, the
Parent and the Selling Shareholder against any losses, claims, damages or
liabilities to which the Company, the Parent or the Selling Shareholder, as the
case may be, may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in any Preliminary Prospectus, the Registration Statement or
the Prospectus or any such amendment or supplement in reliance upon and in
conformity with
23
<PAGE>
written information furnished to the Company by such Underwriter through
Goldman, Sachs & Co. expressly for use therein; and will reimburse the Company,
the Parent and the Selling Shareholder for any legal or other expenses
reasonably incurred by the Company, the Parent and the Selling Shareholder in
connection with investigating or defending any such action or claim as such
expenses are incurred.
(d) Promptly after receipt by an indemnified party under subsection (a),
(b) or (c) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
(e) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a),
(b) or (c) above in respect of any losses, claims, damages or liabilities (or
actions in respect thereof) referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company, the Parent and/or the Selling Shareholder on the one
hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (d) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company, the Parent and/or the Selling Shareholder on
the one hand and the Underwriters on the other in connection with the statements
or omissions which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company, the Parent and/or
the Selling Shareholder on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total net proceeds from the
offering of the Shares purchased under
24
<PAGE>
this Agreement (before deducting expenses) received by the Company, the Parent
and/or the Selling Shareholder bear to the total underwriting discounts and
commissions received by the Underwriters with respect to the Shares purchased
under this Agreement, in each case as set forth in the table on the cover page
of the Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company, the Parent and/or the Selling Shareholder
on the one hand or the Underwriters on the other and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company, the Parent and the Selling Shareholder
and the Underwriters agree that it would not be just and equitable if
contributions pursuant to this subsection (e) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this subsection (e). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions in respect thereof) referred to above in this
subsection (e) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this subsection (e),
no Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (e) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(f) The obligations of the Company, the Parent and the Selling Shareholder
under this Section 8 shall be in addition to any liability which the Company,
the Parent and the Selling Shareholder may otherwise have and shall extend, upon
the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and to each
person, if any, who controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase
the Shares which it has agreed to purchase hereunder at a Time of Delivery, you
may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company and the Selling Shareholder shall be entitled to a
further period of thirty-six hours within which to procure another party or
other parties satisfactory to you to purchase such Shares on such terms. In the
event that, within the respective prescribed periods, you notify the Company and
the Selling Shareholder that you have so arranged for the purchase of such
Shares, or the Company and the Selling Shareholder notifies you that it has so
arranged for the purchase of such Shares, you or the Company and the Selling
Shareholder shall have the right to postpone such Time of Delivery for a period
of not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
25
<PAGE>
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Shareholder as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-eleventh of
the aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company and the Selling Shareholder shall have the right to require
each non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Shareholder as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased exceeds one-eleventh of the
aggregate number of all the Shares to be purchased at such Time of Delivery, or
if the Company and the Selling Shareholder shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to the Second Time of Delivery, the obligations of the
Underwriters to purchase and of the Company to sell the Optional Shares) shall
thereupon terminate, without liability on the part of any non-defaulting
Underwriter or the Company or the Selling Shareholder, except for the expenses
to be borne by the Company and the Selling Shareholder and the Underwriters as
provided in Section 6 hereof and the indemnity and contribution agreements in
Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from
liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company, the Parent and the Selling Shareholder and
the several Underwriters, as set forth in this Agreement or made by or on behalf
of them, respectively, pursuant to this Agreement, shall remain in full force
and effect, regardless of any investigation (or any statement as to the results
thereof) made by or on behalf of any Underwriter or any controlling person of
any Underwriter, or the Company, the Parent or the Selling Shareholder or any
officer or director or controlling person of the Company, the Parent or the
Selling Shareholder and shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Shareholder shall then be under any
liability to any Underwriter except as provided in Sections 6 and 8 hereof; but,
if for any other reason, any Shares are not delivered by or on behalf of the
Company and/or the Selling Shareholder as provided herein, the Company and the
Selling Shareholder pro rata (based on the number of Shares to be sold by the
Company and the Selling Shareholder hereunder) will reimburse the Underwriters
through you for all out-of-pocket expenses approved in writing by you, including
fees and disbursements of counsel, reasonably incurred by the Underwriters in
making preparations for the purchase, sale and delivery of the Shares not so
delivered, but the
26
<PAGE>
Company and the Selling Shareholder shall then be under no further liability to
any Underwriter in respect of the Shares not so delivered except as provided in
Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 85 Broad Street, New York, New York 10004, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Secretary; and if to the Parent and the
Selling Shareholder, to Supervalu Inc., 11840 Valley View Road, P.O. Box 990,
Eden Prairie, Minnesota 55440, Attention: Secretary; provided, however, that any
notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered or
sent by mail, telex or facsimile transmission to such Underwriter at its address
set forth in its Underwriters' Questionnaire, or telex constituting such
Questionnaire, which address will be supplied to the Company by you upon
request. Any such statements, requests, notices or agreements shall take effect
at the time of receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company, the Parent and the Selling Shareholder and,
to the extent provided in Sections 8 and 10 hereof, the officers and directors
of the Company and each person who controls the Company, the Selling Shareholder
or any Underwriter, and their respective heirs, executors, administrators,
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. No purchaser of any of the Shares from any
Underwriter shall be deemed a successor or assign by reason merely of such
purchase.
14. All references herein to a "subsidiary" of a corporation shall mean
each corporation, limited liability company, partnership or other entity which
such corporation beneficially owns, directly or indirectly, capital stock or
other equity interests representing in the aggregate 50% or more of the total
combined voting power of such entity.
15. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
16. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
17. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign and
return to us six counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof shall
constitute a binding agreement among each of the Underwriters, the Company and
the Selling Shareholder. It is understood that your acceptance of this letter
on behalf of each of the Underwriters is pursuant to the
27
<PAGE>
authority set forth in a form of Agreement among Underwriters (U.S. Version),
the form of which shall be submitted to the Company and the Selling Shareholder
for examination upon request, but without warranty on your part as to the
authority of the signers thereof.
Very truly yours,
SHOPKO STORES, INC.
By:.........................................
Name:
Title:
SUPERMARKET OPERATORS OF AMERICA, INC.
By:.........................................
Name:
Title:
SUPERVALU INC.
By:.........................................
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
Salomon Brothers Inc
Merrill Lynch, Pierce, Fenner
& Smith Incorporated
By:..........................
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
1274451.03
28
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares Maximum Option
Underwriter to be Purchased Exercised
-----------
<S> <C> <C>
Goldman, Sachs & Co......................
Salomon Brothers Inc.....................
Merrill Lynch, Pierce, Fenner
& Smith Incorporated...................
--------- -------
Total.......................... 5,245,824 786,874
========= =======
</TABLE>
29
<PAGE>
ANNEX I
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to
the Company and its subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial
forecasts and/or pro forma financial information) examined by them and
included in the Prospectus or the Registration Statement comply as to form
in all material respects with the applicable accounting requirements of the
Act or the Exchange Act, as applicable, and the related published rules and
regulations thereunder; and, if applicable, they have made a review in
accordance with standards established by the American Institute of
Certified Public Accountants of the consolidated interim financial
statements, selected financial data, pro forma financial information,
financial forecasts and/or condensed financial statements derived from
audited financial statements of the Company for the periods specified in
such letter, as indicated in their reports thereon, copies of which have
been furnished to the representatives of the Underwriters (the
"Representatives");
(iii) They have made a review in accordance with standards established
by the American Institute of Certified Public Accountants of the unaudited
condensed consolidated statements of income, consolidated balance sheets
and consolidated statements of cash flows included in the Prospectus and/or
included in the Company's Quarterly Report on Form 10-Q incorporated by
reference into the Prospectus as indicated in their reports thereon copies
of which have been separately furnished to the Representatives and on the
basis of specified procedures including inquiries of officials of the
Company who have responsibility for financial and accounting matters
regarding whether the unaudited condensed consolidated financial statements
referred to in paragraph (vi)(A)(i) below comply as to form in all material
respects with the applicable accounting requirements of the Act and the
Exchange Act and the related published rules and regulations, nothing came
to their attention that caused them to believe that the unaudited condensed
consolidated financial statements do not comply as to form in all material
respects with the applicable accounting requirements of the Act and the
Exchange Act and the related published rules and regulations;
(iv) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company
for the five most recent fiscal years included in the Prospectus and
included or incorporated by reference in Item 6 of the Company's Annual
Report on Form 10-K for the most recent fiscal year agrees with the
corresponding amounts (after restatements where applicable) in the audited
consolidated financial statements for such five fiscal years which were
included or incorporated by reference in the Company's Annual Reports on
Form 10-K for such fiscal years;
30
<PAGE>
(v) They have compared the information in the Prospectus under selected
captions with the disclosure requirements of Regulation S-K and on the
basis of limited procedures specified in such letter nothing came to their
attention as a result of the foregoing procedures that caused them to
believe that this information does not conform in all material respects
with the disclosure requirements of Items 301, 302, 402 and 503(d),
respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an examination
in accordance with generally accepted auditing standards, consisting of a
reading of the unaudited financial statements and other information
referred to below, a reading of the latest available interim financial
statements of the Company and its subsidiaries, inspection of the minute
books of the Company and its subsidiaries since the date of the latest
audited financial statements included in the Prospectus, inquiries of
officials of the Company and its subsidiaries responsible for financial and
accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them
to believe that:
(A) (i) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash
flows included in the Prospectus and/or included or incorporated by
reference in the Company's Quarterly Reports on Form 10-Q
incorporated by reference in the Prospectus do not comply as to
form in all material respects with the applicable accounting
requirements of the Act or the Exchange Act and the related
published rules and regulations, or (ii) any material modifications
should be made to the unaudited condensed consolidated statements
of income, consolidated balance sheets and consolidated statements
of cash flows included in the Prospectus and/or included or
incorporated by reference in the Company's Quarterly Reports on
Form 10-Q incorporated by reference in the Prospectus for them to
be in conformity with generally accepted accounting principles;
(B) any other unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial
statements from which such data and items were derived, and any
such unaudited data and items were not determined on a basis
substantially consistent with the basis for the corresponding
amounts in the audited consolidated financial statements included
or incorporated by reference in the Company's Annual Report on Form
10-K for the most recent fiscal year;
(C) the unaudited financial statements which were not included
in the Prospectus but from which were derived any unaudited
condensed financial statements referred to in Clause (A) and any
unaudited income statement data and balance sheet items included in
the Prospectus and referred to in Clause (B) were not determined on
a basis substantially consistent with the basis for the audited
consolidated financial statements included or incorporated by
reference in the Company's Annual Report on Form 10-K for the most
recent fiscal year;
31
<PAGE>
(D) any unaudited pro forma consolidated condensed financial
statements included in the Prospectus do not comply as to form in
all material respects with the applicable accounting requirements
of the Act or the Exchange Act and the published rules and
regulations thereunder or the pro forma adjustments have not been
properly applied to the historical amounts in the compilation of
those statements;
(E) as of a specified date not more than five days prior to the
date of such letter, there have been any changes in the
consolidated capital stock (other than issuances of capital stock
upon exercise of options and stock appreciation rights, upon earn-
outs of performance shares and upon conversions of convertible
securities, in each case which were outstanding on the date of the
latest financial statements included in the Prospectus) or any
increase in the consolidated long-term debt of the Company and its
subsidiaries, or any decreases in consolidated net current assets
or stockholders' equity or other items specified by the
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with amounts shown in the
latest balance sheet included in the Prospectus, except in each
case for changes, increases or decreases which the Prospectus
discloses have occurred or may occur or which are described in such
letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date
referred to in Clause (E) there were any decreases in consolidated
net revenues or operating profit or the total or per share amounts
of consolidated net income or other items specified by the
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with the comparable
period of the preceding year and with any other period of
corresponding length specified by the Representatives, except in
each case for decreases or increases which the Prospectus discloses
have occurred or may occur or which are described in such letter;
and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and
(vi) above, they have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the
general accounting records of the Company and its subsidiaries, which
appear in the Prospectus, or in Part II of, or in exhibits and schedules
to, the Registration Statement specified by the Representatives, and have
compared certain of such amounts, percentages and financial information
with the accounting records of the Company and its subsidiaries and have
found them to be in agreement.
32
<PAGE>
Exhibit 1.2
Shopko Stores, Inc.
Common Stock
(Par Value $.01 Per Share)
Underwriting Agreement
(International Version)
___________, 1997
Goldman Sachs International
Salomon Brothers International
Merrill Lynch International
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman Sachs International,
Peterborough Court,
133 Fleet Street,
London EC4A 2BB, England
Ladies and Gentlemen:
Supermarket Operators of America, Inc., a Delaware corporation (the "Selling
Shareholder"), proposes, subject to the terms and conditions stated herein, to
sell to the Underwriters named in Schedule I hereto (the "Underwriters") an
aggregate of 1,311,456 shares (the "Firm Shares") of Common Stock, par value
$.01 per share (the "Stock"), of ShopKo Stores, Inc. (the "Company") and the
Company proposes, subject to the terms and conditions stated herein, to sell to
the Underwriters, at the election of the Underwriters, up to 196,718 additional
shares (the "Optional Shares") of Stock (the Firm Shares and the Optional Shares
which the Underwriters elect to purchase pursuant to Section 2 hereof being
collectively called the "Shares"). Supervalu, Inc., a Delaware corporation
("Parent"), owns 100% of the capital stock of the Selling Shareholder.
It is understood and agreed to by all parties that the Company, the Parent
and the Selling Shareholder are concurrently entering into an agreement, a copy
of which is attached hereto (the "U.S. Underwriting Agreement"), providing for
the offering by the Company and the Selling Shareholder of up to a total of
6,032,698 shares of Stock (the "U.S. Shares") including the overallotment option
thereunder through arrangements with certain underwriters in the United States
(the "U.S. Underwriters"), for whom Goldman, Sachs & Co., Salomon Brothers Inc
and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as
representatives. Anything herein and therein to the contrary notwithstanding,
the respective closing under this Agreement and the U.S. Underwriting Agreement
are hereby expressly made conditional on one another. The Underwriters hereunder
and the U.S. Underwriters are simultaneously entering into an Agreement between
U.S. and International Underwriting Syndicates (the "Agreement between
Syndicates") which provides, among other things, for the transfer of shares of
Stock between the two syndicates and for consultation by the Lead Managers
hereunder with Goldman, Sachs &
<PAGE>
two syndicates and for consultation by the Lead Managers hereunder with Goldman,
Sachs & Co. prior to exercising the rights of the Underwriters under Section 7
hereof. Two forms of prospectus are to be used in connection with the offering
and sale of shares of Stock contemplated by the foregoing, one relating to the
Shares hereunder and the other relating to the U.S. Shares. The latter form of
prospectus will be identical to the former except for certain substitute pages
as included in the registration statement and amendments thereto as mentioned
below. Except as used in Sections 2, 3, 4, 9 and 11 herein, and except as the
context may otherwise require, references hereinafter to the Shares shall
include all of the shares of Stock which may be sold pursuant to either this
Agreement or the U.S. Underwriting Agreement, and references herein to any
prospectus whether in preliminary or final form, and whether as amended or
supplemented, shall include both of the U.S. and the international versions
thereof.
In addition, this Agreement incorporates by reference certain provisions
from the U.S. Underwriting Agreement (including the related definitions of
terms, which are also used elsewhere herein) and, for purposes of applying the
same, references (whether in these precise words or their equivalent) in the
incorporated provisions to the "Underwriters" shall be to the Underwriters
hereunder, to the "Shares" shall be to the Shares as defined hereunder, to "this
Agreement" (meaning therein the U.S. Underwriting Agreement) shall be to this
Agreement (except where this Agreement is already referred to or as the context
may otherwise require) and to the representatives of the Underwriters or to
Goldman, Sachs & Co. shall be to the addressees of this Agreement and to Goldman
Sachs International ("GSI"), and, in general, all such provisions and defined
terms shall be applied mutatis mutandis as if the incorporated provisions were
set forth in full herein having regard to their context in this Agreement as
opposed to the U.S. Underwriting Agreement.
The Company has adopted a Stockholder Rights Agreement, pursuant to which
the Stock, including the Shares and the U.S. Shares, will have attached thereto
rights ("Rights"), promptly following the closing hereof, to purchase additional
equity securities under certain specified circumstances. None of the Rights are
currently exercisable. All references to the Shares and U.S. Shares herein shall
be deemed to include the related Rights attached thereto.
1. (a) The Company hereby makes to the Underwriters the same
representations, warranties and agreements as are set forth in Section 1(a) of
the U.S. Underwriting Agreement, which Section 1(a) is incorporated herein by
this reference and (b) the Parent and the Selling Shareholder hereby makes to
the Underwriters the same representations, warranties and agreements as are set
forth in Section 1(b) of the U.S. Underwriting Agreement, which Section 1(b) is
incorporated herein by this reference.
2. Subject to the terms and conditions herein set forth, (a) the Selling
Shareholder agrees to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Selling
Shareholder, at a purchase price per share of $_____, the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I hereto and (b) in
the event and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, the Company agrees to issue and sell
to each of the Underwriters, and each of the Underwriters agrees, severally and
not jointly, to purchase from the Company, at the purchase price per share set
forth in clause (a) of this Section 2, that portion of the number of Optional
Shares as to which such election shall have been exercised (to be adjusted by
you so as to eliminate fractional shares) determined by multiplying such number
of Optional Shares by a fraction the numerator of which is the maximum number of
Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name
-2-
<PAGE>
of such Underwriter in Schedule I hereto and the denominator of which is the
maximum number of Optional Shares that all of the Underwriters are entitled to
purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to 196,718 Optional Shares, at the purchase price per share
set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election to purchase
Optional Shares may be exercised only by written notice from you to the Company,
given within a period of 30 calendar days after the date of this Agreement,
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you but
in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless you and the Company otherwise agree in writing, earlier than
two or later than ten business days after the date of such notice.
3. Upon the authorization by GSI of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus and in the forms of Agreement among
Underwriters (International Version) and Selling Agreements, which have been
previously submitted to the Company and the Selling Shareholder by you. Each
Underwriter hereby makes to and with the Company and the Selling Shareholder the
representations and agreements of such Underwriter as a member of the selling
group contained in Sections 3(d) and 3(e) of the form of Selling Agreements.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as GSI may request upon at least forty-eight hours' prior notice to the
Company, shall be delivered by the Company, on behalf of the Selling Shareholder
or the Company, as the case may be, to GSI, for the account of such Underwriter,
against payment by or on behalf of such Underwriter of the purchase price
therefor by certified or official bank check or checks, payable to the order of
the Selling Shareholder or the Company, as the case may be, in Federal (same
day) funds. The Company will cause the certificates representing the Shares to
be made available for checking and packaging at least twenty-four hours prior to
the Time of Delivery (as defined below) with respect thereto at the office of
GSI, 85 Broad Street, New York, New York 10004 (the "Designated Office"). The
time and date of such delivery and payment shall be, with respect to the Firm
Shares, 9:30 a.m., New York City time, on _________, 1997 or such other time and
date as GSI and the Selling Shareholder may agree upon in writing, and, with
respect to the Optional Shares, 9:30 a.m., New York City time, on the date
specified by GSI in the written notice given by GSI of the Underwriters'
election to purchase such Optional Shares, or such other time and date as GSI
and the Company may agree upon in writing. Such time and date for delivery of
the Firm Shares is herein called the "First Time of Delivery", such time and
date for delivery of the Optional Shares, if not the First Time of Delivery, is
herein called the "Second Time of Delivery", and each such time and date for
delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or on behalf
of the parties hereto pursuant to Section 7 of the U.S. Underwriting Agreement,
including the cross receipt for the Shares and any additional documents
requested by the Underwriters pursuant to Section 7(k) of the U.S. Underwriting
Agreement hereof, will be delivered at the offices of Sonnenschein Nath &
Rosenthal, 8000 Sears Tower, Chicago, Illinois 60606 (the "Closing Location"),
and the Shares will be delivered at the Designated Office, all at such Time of
Delivery. A meeting will be held at the Closing Location at 4:00 p.m., New York
City time, on the New York Business Day next preceding such Time of Delivery, at
which meeting the final drafts of the documents to be delivered pursuant to the
preceding sentence will be available for review by the parties hereto.
-3-
<PAGE>
For the purposes of this Section 4, "New York Business Day" shall mean each
Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which
banking institutions in New York are generally authorized or obligated by law or
executive order to close.
5. The Company hereby makes to the Underwriters the same agreements as are
set forth in Section 5 of the U.S. Underwriting Agreement, which Section 5(a) is
incorporated herein by this reference.
6. The Company, the Parent and the Selling Shareholder and the
Underwriters hereby agree with respect to certain expenses on the same terms as
are set forth in Section 6 of the U.S. Underwriting Agreement, which Section is
incorporated herein by this reference.
7. Subject to the provisions of the Agreement between Syndicates, the
obligations of the Underwriters hereunder shall be subject, in their discretion,
at each Time of Delivery, to the condition that all representations and
warranties and other statements of the Company, the Parent and the Selling
Shareholder herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company, the Parent and the Selling Shareholder shall
have performed all of its obligations hereunder theretofore to be performed, and
additional conditions identical to those set forth in Section 7 of the U.S.
Underwriting Agreement, which Section is incorporated herein by this reference.
8. (a) The Company will indemnify and hold harmless each Underwriter and
the Selling Shareholder against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Underwriter for
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as such case
to the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through GSI expressly for use therein or by the Selling Shareholder expressly
for use therein. The Indemnification by the Company of the Selling Shareholder
under this clause (a) and Section 8(a) of the U.S. Underwriting Agreement shall
supersede and replace the Company's indemnification obligations set forth in
that certain Registration Rights Agreement dated October 8, 1991 by and between
the Company and the Selling Shareholder.
(b) The Parent and the Selling Shareholder, jointly and severally,
will indemnify and hold harmless the Company and the Underwriters against any
losses, claims, damages or liabilities to which the Company or the Underwriters,
as the case may be, may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or
-4-
<PAGE>
necessary to make the statements therein not misleading, in each case in which
such untrue statement or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by the Parent or the Selling Shareholder, as the case
may be, expressly for use therein to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was so made in reliance upon and in conformity with such information,
and in each other case to the extent, but only to the extent that, to the best
of the Parent's or the Selling Shareholder's knowledge, as the case may be, at
the time that such untrue statement or alleged untrue statement or omission or
alleged omission was so made, such statement was untrue or such omission had
occurred; and will reimburse the Company and the Underwriters for any legal or
other expenses reasonably incurred by the Company and the Underwriters in
connection with investigating or defending any action or claim as such expenses
are incurred.
(c) Each Underwriter will indemnify and hold harmless the Company, the
Parent and the Selling Shareholder against any losses, claims, damages or
liabilities to which the Company, the Parent or the Selling Shareholder, as the
case may be, may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in any Preliminary Prospectus, the Registration Statement or
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through GSI expressly for use therein; and will reimburse the Company, the
Parent and the Selling Shareholder for any legal or other expenses reasonably
incurred by the Company, the Parent and the Selling Shareholder in connection
with investigating or defending any such action or claim as such expenses are
incurred.
(d) Promptly after receipt by an indemnified party under subsection (a),
(b) or (c) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve such indemnifying party from any liability
which it may have to any indemnified party otherwise than under such subsection.
In case any such action shall be brought against any indemnified party and it
shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein and, to the extent
that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party), and, after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under such subsection for any legal expenses of other counsel or any other
expenses, in each case subsequently incurred by such indemnified party, in
connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the written consent of the
indemnified party, effect the settlement or compromise of, or consent to the
entry of any judgment with respect to, any pending or threatened action or claim
in respect of which indemnification or contribution may
-5-
<PAGE>
be sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
(e) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a),
(b) or (c) above in respect of any losses, claims, damages or liabilities (or
actions in respect thereof) referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company, the Parent and/or the Selling Shareholder on the one
hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (c) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company, the Parent and/or the Selling Shareholder on
the one hand and the Underwriters on the other in connection with the statements
or omissions which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company, the Parent and/or
the Selling Shareholder on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total net proceeds from the
offering of the Shares purchased under this Agreement (before deducting
expenses) received by the Company, the Parent and/or the Selling Shareholder
bear to the total underwriting discounts and commissions received by the
Underwriters with respect to the Shares purchased under this Agreement, in each
case as set forth in the table on the cover page of the Prospectus relating to
such Shares. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company, the Parent and/or the Selling Shareholder on the one
hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company, the Parent and the Selling Shareholder and
the Underwriters agree that it would not be just and equitable if contributions
pursuant to this subsection (e) were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable considerations
referred to above in this subsection (e). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this subsection (e) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (e), no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this subsection
-6-
<PAGE>
(e) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company, the Parent and the Selling Shareholder
under this Section 8 shall be in addition to any liability which the Company,
the Parent and the Selling Shareholder may otherwise have and shall extend, upon
the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and to each
person, if any, who controls the Company or any Selling Shareholder within the
meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase the
Shares which it has agreed to purchase hereunder at a Time of Delivery, you may
in your discretion arrange for you or another party or other parties to purchase
such Shares on the terms contained herein. If within thirty-six hours after
such default by any Underwriter you do not arrange for the purchase of such
Shares, then the Company and the Selling Shareholder shall be entitled to a
further period of thirty-six hours within which to procure another party or
other parties reasonably satisfactory to you to purchase such Shares on such
terms. In the event that, within the respective prescribed periods, you notify
the Company and the Selling Shareholder that you have so arranged for the
purchase of such Shares, or the Company and the Selling Shareholder notifies you
that it has so arranged for the purchase of such Shares, you or the Company and
the Selling Shareholder shall have the right to postpone such Time of Delivery
for a period of not more than seven days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus,
or in any other documents or arrangements, and the Company and the Selling
Shareholder agree to file promptly any amendments to the Registration Statement
or the Prospectus which in your opinion may thereby be made necessary. The term
"Underwriter" as used in this Agreement shall include any person substituted
under this Section with like effect as if such person had originally been a
party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Shareholder as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-eleventh of
the aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company and the Selling Shareholder shall have the right to require
each non-defaulting Underwriter to purchase the number of shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Shareholder as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased exceeds one-eleventh of the
aggregate number of all the Shares to be purchased at such Time of Delivery, or
if the Company and the Selling Shareholder shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to the Second Time of
-7-
<PAGE>
Delivery, the obligation of the Underwriters to purchase and of the Company to
sell the Optional Shares) shall thereupon terminate, without liability on the
part of any non-defaulting Underwriter or the Company or the Selling
Shareholder, except for the expenses to be borne by the Company and the Selling
Shareholder and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company, the Parent, the Selling Shareholder and the
several Underwriters, as set forth in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement, shall remain in full force and
effect, regardless of any investigation (or any statement as to the results
thereof) made by or on behalf of any Underwriter or any controlling person of
any Underwriter, or the Company, the Parent or the Selling Shareholder, or any
officer or director or controlling person of the Company, the Parent or the
Selling Shareholder, and shall survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Shareholder shall not then be under any
liability to any Underwriter except as provided in Section 6 and Section 8
hereof, but, if for any other reason any Shares are not delivered by or on
behalf of the Company and/or the Selling Shareholder as provided herein, the
Company and the Selling Shareholder pro rata (based on the number of Shares to
be sold by the Company and the Selling Shareholder hereunder) will reimburse the
Underwriters through GSI for all out-of-pocket expenses approved in writing by
GSI, including fees and disbursements of counsel, reasonably incurred by the
Underwriters in making preparations for the purchase, sale and delivery of the
Shares not so delivered, but the Company shall then be under no further
liability to any Underwriter in respect of the Shares not so delivered except as
provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by GSI on behalf of you as the representatives of the
Underwriters.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to the Underwriters in care of GSI, Peterborough Court,
133 Fleet Street, London EC4A 2BB, England, Attention: Equity Capital Markets,
Telex No. 94012165, facsimile transmission No. (071) 774-1550; and if to the
Company shall be delivered or sent by registered mail, telex or facsimile
transmission to the address of the Company set forth in the Registration
Statement, Attention: Secretary; and if to the Parent and the Selling
Shareholders to Supervalu Inc., 11840 Valley View Road, P.O. Box 990, Eden
Prairie, Minnesota 55440, Attention: Secretary; provided, however, that any
notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered or
sent by mail, telex or facsimile transmission to such Underwriter at its address
set forth in its Underwriters' Questionnaire, or telex constituting such
Questionnaire, which address will be supplied to the Company by GSI upon
request. Any such statements, requests, notices or agreements shall take effect
upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company, the Parent and the Selling Shareholder and,
to the extent provided in Sections 8 and 10 hereof, the officers and directors
of the Company and each person who
-8-
<PAGE>
controls the Company or any Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
14. Time shall be of the essence of this Agreement.
15. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, United States of America.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign and
return to us six counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof shall
constitute a binding agreement among each of the Underwriters, the Company and
the Selling Shareholder. It is understood that your acceptance of this letter
on behalf of each of the Underwriters is pursuant to the authority set forth in
a form of Agreement among Underwriters (International Version), the form of
which shall be furnished to the Company and the Selling Shareholder for
examination upon request, but without warranty on your part as to the authority
of the signers thereof.
Very truly yours,
SHOPKO STORES, INC.
By: _______________________________
Name:
Title:
SUPERMARKET OPERATORS OF AMERICA, INC.
By: _______________________________
Name:
Title:
SUPERVALU INC.
By: _______________________________
Name:
Title:
Accepted as of the date hereof:
Goldman Sachs International
Salomon Brothers International
Merrill Lynch International
-9-
<PAGE>
By: Goldman Sachs International
By: ________________________________
(Attorney-in-fact)
On behalf of each of the Underwriters
-10-
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares Maximum Option
Underwriter to be Purchased Exercised
-----------
<S> <C> <C>
Goldman, Sachs International ...
Salomon Brothers International..
Merrill Lynch International.....
--------------- ------------------
Total.............. 1,311,456 196,718
=============== ==================
</TABLE>
-11-
<PAGE>
Exhibit 5
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53203-3590
May 7, 1997
ShopKo Stores, Inc.
700 Pilgrim Way
Green Bay, Wisconsin 54307
Ladies and Gentlemen:
In connection with the registration of 7,540,872 shares of common stock,
par value $0.01 per share (the "Shares"), of ShopKo Stores, Inc., a Minnesota
corporation (the "Company"), under the Securities Act of 1933, as amended (the
"Securities Act") on Form S-3 to be filed with the Securities and Exchange
Commission (the "Commission") on or about May 7, 1997 ( the "Registration
Statement"), you have requested our opinion with respect to the following
matters.
Of the Shares being registered, (i) 6,557,280 Shares are presently issued
and outstanding (the "Outstanding Shares") and are being sold by a certain
shareholder named in the Registration Statement (the "Selling Shareholder") and
(ii) 983,592 Shares will be subject to options to be granted by the Company to
the underwriters named in the Registration Statement to cover over-allotments
(the "Option Shares") pursuant to underwriting agreements in the from attached
as exhibits to the Registration Statement (the "Underwriting Agreements").
In our capacity as your counsel in connection with such registration, we
are familiar with the proceedings taken and proposed to be taken by the Company
in connection with the authorization, issuance and sale of the Shares, and, for
purposes of this opinion, have assumed such proceedings will be timely completed
in the manner presently proposed. In addition, we have made such legal and
factual examinations and inquiries, including an examination of originals or
copies certified or otherwise identified to our satisfaction of such documents,
records and papers as we have deemed necessary or appropriate for purposes of
this opinion. We have, with your consent, relied as to factual matters on
certificates or other documents furnished by the Company and upon such other
documents and data that we have deemed appropriate and, for purposes of this
opinion, have assumed that the certificates and other documents to be furnished
in connection with the closing of the sale of the Shares will be delivered in
the manner presently proposed. We have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals and
the conformity to original documents of all documents submitted to us as copies.
<PAGE>
ShopKo Stores, Inc.
May 7, 1997
Page 2
With your consent, we are opining herein only on the Minnesota Business
Corporation Act and the laws of the State of Wisconsin. We express no opinion
with respect to the applicability thereto, or the effect thereon, of any other
laws or the laws of any other jurisdiction.
Based on such examination and review, and subject to the foregoing, we are
of the opinion that:
1. The Outstanding Shares have been duly authorized and validly issued and
are fully paid and non-assessable, subject to Wis. Stats.
Sec. 180.0622(2)(b).
2. The Option Shares have been duly authorized, and, upon issuance,
delivery and payment therefor in the manner contemplated by the
Underwriting Agreements, will be validly issued, fully paid and non-
assessable, subject to Wis. Stats. Sec. 180.0622(2)(b).
Section 180.0622(2)(b) of the Wisconsin Statutes provides that shareholders
of a corporation may be assessed up to the par value of their shares to satisfy
the obligations of such corporation to its employees for services rendered, but
not exceeding six months service in the case of any individual employee. Certain
Wisconsin courts have interpreted "par value" to mean the full amount paid by
the purchaser of shares upon issuance thereof. The Supreme Court of the State of
Wisconsin has interpreted the substantially similar predecessor to (S)
180.0622(2)(b) of the Wisconsin Statutes to apply to foreign corporations
licensed to do business in Wisconsin.
We hereby consent to the use of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the prospectuses that are a part of the Registration Statement. In
giving such consent, we do not admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act.
Very truly yours,
GODFREY & KAHN, S.C.
LDL:ica
MWI-75351-1
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Shopko Stores, Inc. on
Form S-3 of our reports dated April 2, 1996, included and incorporated by
reference in the Annual Report on Form 10-K of ShopKo Stores, Inc. for the year
(52 weeks) ended February 24, 1996 and to the use of our report dated April 24,
1997, appearing in the Prospectus, which is part of this Registration Statement.
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
May 5, 1997
<PAGE>
Exhibit 24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
The undersigned director of Shopko Stores, Inc. (the "Company") hereby
constitutes and appoints Jeffrey A. Jones and Richard D. Schepp, the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for the undersigned and in the undersigned's
name, place and stead, in any and all capacities, to sign for the undersigned
and in the undersigned's name in the capacity as a director of the Company the
Registration Statement on Form S-3, to which this Power of Attorney is filed as
an exhibit, including any amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission and any other regulatory authority, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or the undersigned's substitute, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney, on this 30th day of April, 1997.
/s/ Dale P. Kramer
--------------------------
Dale P. Kramer
<PAGE>
Exhibit 24
POWER OF ATTORNEY
-----------------
The undersigned Senior Vice President and Chief Financial Officer of
Shopko Stores, Inc. (the "Company") hereby constitutes and appoints Richard D.
Schepp, the undersigned's true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for the undersigned and in the
undersigned's name, place and stead, in any and all capacities, to sign for the
undersigned and in the undersigned's name the Registration Statement on Form
S-3, to which this Power of Attorney is filed as an exhibit, including any
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission
and any other regulatory authority, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as the undersigned might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or the
undersigned's substitute, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney, on this 30th day of April, 1997.
/s/ Jeffrey A. Jones
--------------------------
Jeffrey A. Jones
<PAGE>
Exhibit 24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
The undersigned director of Shopko Stores, Inc. (the "Company") hereby
constitutes and appoints Jeffrey A. Jones and Richard D. Schepp, the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for the undersigned and in the undersigned's
name, place and stead, in any and all capacities, to sign for the undersigned
and in the undersigned's name in the capacity as a director of the Company the
Registration Statement on Form S-3, to which this Power of Attorney is filed as
an exhibit, including any amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission and any other regulatory authority, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or the undersigned's substitute, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney, on this 1st day of May, 1997.
/s/ Michael W. Wright
--------------------------
Michael W. Wright
<PAGE>
Exhibit 24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
The undersigned director of Shopko Stores, Inc. (the "Company") hereby
constitutes and appoints Jeffrey A. Jones and Richard D. Schepp, the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for the undersigned and in the undersigned's
name, place and stead, in any and all capacities, to sign for the undersigned
and in the undersigned's name in the capacity as a director of the Company the
Registration Statement on Form S-3, to which this Power of Attorney is filed as
an exhibit, including any amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission and any other regulatory authority, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or the undersigned's substitute, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney, on this 30th day of April, 1997.
/s/ William J. Tyrrell
--------------------------
William J. Tyrrell
<PAGE>
Exhibit 24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
The undersigned director of Shopko Stores, Inc. (the "Company") hereby
constitutes and appoints Jeffrey A. Jones and Richard D. Schepp, the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for the undersigned and in the undersigned's
name, place and stead, in any and all capacities, to sign for the undersigned
and in the undersigned's name in the capacity as a director of the Company the
Registration Statement on Form S-3, to which this Power of Attorney is filed as
an exhibit, including any amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission and any other regulatory authority, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or the undersigned's substitute, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney, on this 30th day of April, 1997.
/s/ Jack W. Eugster
--------------------------
Jack W. Eugster
<PAGE>
Exhibit 24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
The undersigned director of Shopko Stores, Inc. (the "Company") hereby
constitutes and appoints Jeffrey A. Jones and Richard D. Schepp, the
undersigned's true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for the undersigned and in the undersigned's
name, place and stead, in any and all capacities, to sign for the undersigned
and in the undersigned's name in the capacity as a director of the Company the
Registration Statement on Form S-3, to which this Power of Attorney is filed as
an exhibit, including any amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission and any other regulatory authority, granting
unto said attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or the undersigned's substitute, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of
Attorney, on this 1st day of May, 1997.
/s/ Jeffrey C. Girard
--------------------------
Jeffrey C. Girard
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-22-1997
<PERIOD-START> FEB-25-1996
<PERIOD-END> FEB-22-1997
<CASH> 124,550
<SECURITIES> 0
<RECEIVABLES> 100,763
<ALLOWANCES> 5,585
<INVENTORY> 334,962
<CURRENT-ASSETS> 565,172
<PP&E> 992,055
<DEPRECIATION> 389,223
<TOTAL-ASSETS> 1,233,892
<CURRENT-LIABILITIES> 333,315
<BONDS> 418,714
0
0
<COMMON> 322
<OTHER-SE> 460,542
<TOTAL-LIABILITY-AND-EQUITY> 1,233,892
<SALES> 2,333,407
<TOTAL-REVENUES> 2,346,465
<CGS> 1,783,741
<TOTAL-COSTS> 2,240,666
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,777
<INCOME-PRETAX> 74,022
<INCOME-TAX> 29,076
<INCOME-CONTINUING> 44,946
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,946
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.40
</TABLE>
<PAGE>
EXHIBIT 99.1
Consent of Director Designee
April 30, 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/ William J. Podany
---------------------
William J. Podany
