<PAGE>
As filed with the Securities and Exchange Commission on April 19, 1999
Registration No. 333-71743
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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ProVantage Health Services, Inc.
(Exact name of Registrant as specified in its charter)
--------------
Delaware 8099 54-1508848
(tate or other jurisdiction S (Primary Standard (I.R.S. Employer
of incorporation or Industrial Identification No.)
organization) Classification Code
Number)
13555 Bishops Court, Suite 201
Brookfield, Wisconsin 53005
(414) 784-4600
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
--------------
Jeffrey A. Jones
President and Chief Executive Officer
ProVantage Health Services, Inc.
13555 Bishops Court, Suite 201
Brookfield, Wisconsin 53005
(414) 784-4600
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Copies to:
Randall J. Erickson Donald J. Murray
Godfrey & Kahn, S.C. Dewey Ballantine LLP
780 N. Water Street 1301 Avenue of the Americas
Milwaukee, Wisconsin 53202 New York, New York 10019
(414) 273-3500 (212) 259-8000
--------------
Approximate date of commencement of proposed sale to the public: As soon as
is practicable after the effective date of this Registration Statement.
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,
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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus Dated April 19, 1999
Prospectus
5,300,000 Shares
[Logo of ProVantage--"ProVantage The Healthcare Knowledge Company"--Appears
Here]
Common Stock
-----------
This is ProVantage Health Services, Inc.'s initial public offering of
common stock.
We currently expect the public offering price to be between $16.00 and
$18.00 per share. Currently, no public market exists for the common stock. We
have applied to have the common stock included for listing on the New York
Stock Exchange under the symbol "PHS."
Prior to this offering, ShopKo Stores, Inc., our parent company, owned all
of the common stock. Following this offering, ShopKo will beneficially own
70.3% of the common stock and will continue to control ProVantage.
Investing in the common stock involves risks which are described in the
"Risk Factors" section beginning on page 7.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price.................................... $ $
Underwriting Discount.................................... $ $
Proceeds, before expenses, to ProVantage................. $ $
</TABLE>
The underwriters may also purchase from ShopKo up to an additional 795,000
shares of common stock at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus to cover over-
allotments. We will not receive any proceeds from the sale of the additional
shares by ShopKo.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
-----------
Merrill Lynch & Co.
Bear, Stearns & Co. Inc.
William Blair & Company
Lehman Brothers
-----------
The date of this prospectus is , 1999.
<PAGE>
ProVantage Health Services
Our goal is to be the leading third-party supplier of
products and services designed to optimize the quality
and minimize the cost of healthcare services.
Health
Benefit HBM
Management Healthcare
HIT Information
Technology
Cycle of
Healthcare
Knowledge
ATI
Advanced Therapeutic
Intervention
[LOGO OF PROVANTAGE]
ProVantage(R), RationalMed(R), Bravell Claims Management(R),
ProVQuery(TM), PharMark(R), DOCFormulary(R) and ProVMed(R) are trademarks or
servicemarks of ProVantage or ProVantage's subsidiaries. ShopKo(R) is a
trademark and a servicemark of ShopKo Stores, Inc. All other trademarks,
servicemarks and trade names referred to in this prospectus are the property of
their respective owners.
<PAGE>
Health Benefit Management
Patients Health Plan
Sponsors
Information Quality Care Reduced Fees
Costs
[LOGO OF PROVANTAGE]
Information Reimbursement Information Market Share
Rebates
Pharmacies Pharmaceutical
Manufacturers
[LOGO OF PROVANTAGE]
The integration of two interlocking rings symbolizes ProVantage's
differentiation in the healthcare industry...one ring represents Health
Benefit Management, the other represents Health Information Technology. The
intersection illustrates our ability to integrate medical diagnosis and medical
claims information with pharmaceutical data and then analyze it with our 7,800
rules. Our products are designed to optimize the quality and minimize the cost
of healthcare services.
<TABLE>
<CAPTION>
Health Benefit Management Clinical Services
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<S> <C> <C>
INDUSTRY . Increased pharmaceutical utilization . Need for clinical programs to:
TRENDS . Significant hospital costs induced - Combat rising healthcare costs
by inappropriate drug therapies - Improve patient treatments
. Payors struggling to control costs
- ---------------------------------------------------------------------------------------------------
PROVANTAGE . Prescription and Vision Benefit . Advanced Therapeutic Intervention
PRODUCTS Management . Drug Utilization Review
. National Pharmacy and Optical Retail . Disease Management Programs:
Networks - Clinically based
. Mail Order Pharmacy - Quantitatively measured
. Formulary Management
- ---------------------------------------------------------------------------------------------------
PROVANTAGE . Self-insured Employers . Self-insured Employers
MARKETS . Insurance Companies . Insurance Companies
. HMOs . HMOs
. Third-Party Administrators . Third-Party Administrators
. State Governments and Agencies . State and Federal Governments and Agencies
- ---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Health Information Technology
Sales & Plan Member & Pharmacy, Medical,
Design Data Provider Data & Laboratory Data
Data Warehouse
ProVantage Products
ProVMed ProVQuery
ProVCOR RationalMed
pager voice mail
e-mail internet
mail fax
Clients
<TABLE>
<CAPTION>
Decision Support Healthcare Outcomes Research
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<S> <C> <C>
INDUSTRY . Need for integrated clinical information . Need for integrated clinical information
TRENDS . Growing importance of accurately . Importance of patient confidentiality
measured healthcare outcomes . Need to determine appropriate drug therapies
- ---------------------------------------------------------------------------------------------------------
PROVANTAGE . Internet-accessible decision support . Healthcare outcomes assessment software
PRODUCTS based on our database: providing access to healthcare database with
. One of the largest integrated healthcare medical and drug data for 13 million people
information data warehouses of its kind
. Healthcare outcomes measurement tools
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PROVANTAGE . Pharmaceutical Manufacturers . Health Care Providers
MARKETS . Self-insured Employers . State and Federal Governments and Agencies
. Insurance Companies . Pharmaceutical Manufacturers
. HMOs
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</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 7
Forward-Looking Statements............................................... 16
The Reorganization....................................................... 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Historical Consolidated Financial Data.......................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 29
Management............................................................... 43
Relationship With ShopKo................................................. 51
Certain Transactions..................................................... 53
Principal and Selling Stockholder........................................ 55
Description of Capital Stock............................................. 56
Shares Eligible for Future Sale.......................................... 59
Underwriting............................................................. 61
Legal Matters............................................................ 63
Experts.................................................................. 64
Where You Can Find More Information...................................... 64
Index To Consolidated Financial Statements............................... 65
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
<PAGE>
PROSPECTUS SUMMARY
Unless otherwise indicated, information in this prospectus:
l assumes no exercise of the underwriters' option to purchase from
ShopKo up to 795,000 additional shares of common stock to cover
over-allotments, if any, and
l gives effect to a corporate reorganization of ProVantage which will
be completed prior to completion of the offering. See "The
Reorganization."
ProVantage uses the same fiscal year as ShopKo. ProVantages' fiscal year
conforms to the National Retail Federation calendar and ends on the Saturday
closest to the end of January. ProVantage has adopted a convention of referring
to a fiscal year by the year in which the fiscal year begins. For example, the
fiscal year which began on February 1, 1998 and ended on January 30, 1999 is
referred to as "fiscal 1998." Unless the context requires otherwise, all
references to "ProVantage," "we" or "our" refers to ProVantage Health Services,
Inc. and its subsidiaries. ShopKo holds its ProVantage common stock indirectly
through a wholly-owned subsidiary. All references to "ShopKo" in this
prospectus include this wholly-owned subsidiary.
Our Company
We are a leading health benefit management company providing pharmacy
benefit management and health information technology products and services to
our customers. Our goal is to be the leading third-party supplier of products
and services designed to optimize the quality and minimize the cost of
healthcare services. As of January 1999, we provided services to over 3,500
customers, including pharmacy benefit management services covering
approximately 4.5 million individuals and vision benefit management services
covering approximately 500,000 individuals. In addition, our licensed products,
which are designed to improve the quality of healthcare, are being used by our
clients in programs covering over 13 million people. Our customers include
healthcare payors, self-funded employers, third party health plan
administrators, state and federal agencies and pharmaceutical manufacturers.
Pharmacy benefit management companies address the pressing need of health
plan sponsors to manage costs and to better understand the effect of
pharmaceutical utilization on their membership. Our traditional pharmacy
benefit management products and services include plan design, administration of
a network of over 50,000 retail pharmacies, electronic point-of-sale claims
processing, mail pharmacy services, formulary administration/management,
physician profiling and clinical services. In addition, our products go beyond
commonly available pharmacy benefit management offerings to include clinical
services and information-based products which are used to track medical
treatment and results. These services give our customers the ability to assess
the safety and effectiveness of healthcare practices and to identify the most
effective treatments, potentially lowering overall costs.
Our Industry
Prescription drug costs represent the fastest growing component of
healthcare costs according to an industry publication. Pharmaceutical sales in
the United States are expected to increase at a compound annual growth rate of
14.5% and to reach approximately $173 billion in the year 2002. The major
factors contributing to this trend include:
. a substantial increase in the number of major new product launches due to
a shorter FDA approval cycle,
. premium prices for new or branded products,
. increased expenditures for new drug development,
. an aging population, and
. increased demand driven by direct-to-consumer advertising.
4
<PAGE>
Health benefit providers, such as insurance companies, HMOs and self-
funded employers, are searching for ways to better understand and control their
drug costs. Pharmacy benefit management companies help health benefit providers
provide a cost effective drug benefit and better understand the impact of
pharmaceutical use.
Our Strategy
Our goal is to be the leading third-party supplier of products and
services designed to optimize the quality and minimize the cost of healthcare
services. To accomplish this goal, we intend to:
. continue to grow our pharmacy benefit management operations and expand
our client base by increasing the number of people to whom we provide
services,
. leverage our information-based clinical expertise to develop and enhance
products and services that help manage healthcare treatment and results,
and
. selectively pursue acquisitions or alliances through which we can
realize additional scale benefits in our pharmacy benefit management
offerings or augment our advanced clinical and health information
technology capabilities.
Our Address
Our principal executive offices are located at 13555 Bishops Court, Suite
201, Brookfield, Wisconsin 53005. Our telephone number is (414) 784-4600, and
our web site is www.provantageinc.com.
The Offering
<TABLE>
<S> <C>
Common stock being offered....... 5,300,000 shares
Common stock outstanding after
the offering.................... 17,850,000 shares, excluding approximately 650,000
shares subject to options to be granted as of the
closing of the offering under our stock incentive
plan at an exercise price equal to the offering
price.
Use of Proceeds.................. We will retain $20 million of the net proceeds of
the offering. We intend to use these net proceeds
for working capital, capital expenditures, and other
general corporate purposes. The balance of the net
proceeds of the offering will be paid to ShopKo as
payment on a demand promissory note held by ShopKo
in the principal amount of $115 million. This note
will be issued prior to the offering as a dividend
to return a portion of ShopKo's equity investment in
ProVantage. Any balance remaining on the note will
be contributed to ProVantage by ShopKo as a capital
contribution. In this case that means that ShopKo
will forgive the debt represented by the balance of
the note without receiving any common stock or other
consideration in return. We will not receive any
proceeds from the exercise of the underwriters'
over-allotment option.
Proposed New York Stock Exchange
Symbol.......................... PHS
Control by ShopKo................ ProVantage is currently a wholly-owned subsidiary of
ShopKo. After the offering, ShopKo will beneficially
own approximately 70.3% of the common stock and will
continue to control the business and affairs of
ProVantage. If the underwriters' over-allotment
option is exercised in full, ShopKo will
beneficially own approximately 65.9% of the common
stock.
</TABLE>
5
<PAGE>
Summary Historical Consolidated Financial Data
For all periods presented below, ProVantage was a wholly-owned subsidiary
of ShopKo. See Note A of the Notes to Consolidated Financial Statements.
The pro forma basic net earnings per share of common stock are computed
by dividing net earnings by 16,244,118 shares of common stock. This number
represents the 12,550,000 shares of common stock outstanding after the
reorganization plus that number of shares of common stock that must be sold by
ProVantage at an assumed price of $17.00 per share to generate proceeds
sufficient to repay a $62.8 million portion of the demand promissory note to be
issued to ShopKo. See "Use of Proceeds."
The pro forma balance sheet data gives pro forma effect to the corporate
reorganization of ProVantage which will be completed prior to the completion of
the offering. The pro forma balance sheet data also gives effect to a stock
split effected through a stock dividend, converting the existing 10,100 shares
of outstanding common stock into 12,550,000 shares of common stock. In
addition, the pro forma balance sheet data includes the portion of the demand
promissory note which is to be paid to ShopKo and which is estimated to be
$62.8 million. See "Dividend Policy." The pro forma as adjusted balance sheet
data gives effect to the sale of the shares of common stock, the application of
the proceeds as described in "Use of Proceeds" and the contribution of the
unpaid balance on the demand promissory note to ProVantage as a capital
contribution.
<TABLE>
<CAPTION>
Fiscal Years (52 Weeks) Ended
------------------------------------------------------------------
Feb. 4, 1995 Feb. 3, 1996 Feb. 1, 1997 Jan. 31, 1998 Jan. 30, 1999
------------ ------------ ------------ ------------- -------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Earnings
Data:
Net sales............... $5,424 $87,155 $330,048 $500,891 $666,154
Costs and expenses:
Cost of sales.......... 4,666 78,250 306,760 463,069 618,308
Selling, general and
administrative
expenses.............. 214 4,836 11,828 19,990 24,910
Depreciation and
amortization
expenses.............. 69 1,170 2,233 4,779 6,776
------ ------- -------- -------- --------
4,949 84,256 320,821 487,838 649,994
Income from operations.. 475 2,899 9,227 13,053 16,160
Interest income......... -- 207 353 364 543
------ ------- -------- -------- --------
Earnings before income
taxes.................. 475 3,106 9,580 13,417 16,703
Provision for income
taxes.................. 220 1,553 4,164 5,883 7,221
------ ------- -------- -------- --------
Net earnings............ $ 255 $ 1,553 $ 5,416 $ 7,534 $ 9,482
Basic net earnings per
share of common stock
....................... $ 0.02 $ 0.12 $ 0.43 $ 0.60 $ 0.76
Average number of shares
outstanding............ 12,550 12,550 12,550 12,550 12,550
Pro forma basic net
earnings per share of
common stock........... $ 0.58
Pro forma average shares
outstanding............ 16,244
Supplemental Data:
Pharmacy network claims
processed.............. 265 3,667 16,097 24,744 28,809
Mail pharmacy
prescriptions filled... -- 126 264 454 715
</TABLE>
<TABLE>
<CAPTION>
January 30, 1999
----------------------------------
Pro Forma As
Actual Pro Forma Adjusted
--------- --------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash.................... $ 24,680 $ 24,680 $ 44,680
Working capital......... 34,009 (28,791) 54,009
Total assets............ 200,777 200,777 220,777
Total debt.............. 968 63,768 968
Total liabilities....... 87,540 150,340 87,540
Stockholder's equity.... 113,237 (50,437) 133,237
</TABLE>
6
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors before deciding
to purchase shares of our common stock. We have separated the risks into three
categories:
lbusiness risks inherent in our operations and our industry,
lrisks relating to ProVantage's relationship with ShopKo, and
lrisks relating to the offering of common stock.
Business Risks
If we cannot respond adequately to competition in our industry, then our
profitability could be reduced
We compete in the health benefit management and health information
technology businesses. These businesses are very competitive. This competitive
environment subjects us to the risk of reduced profitability. Our competitors
include companies which are or are owned by large, profitable and well-
established companies with substantially greater purchasing power and
financial, marketing and other resources than we have. For example, Merck-Medco
Managed Care, LLC is owned by a large pharmaceutical manufacturer. PCS Health
Systems, Inc. is owned by a national drug store chain. A large insurance
company is a major investor in Express Scripts, Inc. We may also experience
competition from other sources in the future, such as Internet-based drug
stores. Furthermore, both businesses are subject to consolidation pressures,
meaning that they are or may be dominated by a few large companies with
significant resources. The health benefit management business is relatively
consolidated, and additional consolidation is likely. Consolidation is leading
to increased competition among a smaller number of large companies.
Over the last several years, the competitive pressures described above
have caused health benefit management companies, including us, to reduce the
prices charged to clients for core services. Additionally, competitive
pressures have caused us and other health benefit management companies to share
with their clients a greater portion of formulary revenues, which are payments
received from pharmaceutical manufacturers in the form of discounts, rebates
and other fees. A significant portion of our earnings are derived from these
formulary revenues.
While our addition of higher-margin clinical services and information
technology products has offset in large part the effects of price reductions
and increased formulary revenue sharing, our gross margin--that is, the
difference between revenues and the cost of services--could be materially and
adversely affected by these competitive pressures. Our gross margins may also
decline as we implement our business strategy of marketing to larger clients,
which typically have greater bargaining power than our traditional clients, and
may require us to sell our services for less than they are currently sold.
If we lose a significant number of short-term contracts with our clients, then
our business could be adversely affected
We and the other companies in our industry typically do not have long-
term contracts with our clients, our network pharmacies or our pharmaceutical
manufacturers. Loss of contracts with a significant number of our clients or
network pharmacies could adversely affect our financial condition. Consistent
with industry practice, many of these contracts are terminable by either party
on relatively short notice. Others are renewable annually on a year-to-year
basis, unless the other party gives notice to us of its intention not to renew
the contract.
We also have contracts, typically with terms of one or two years, with
pharmaceutical manufacturers entitling us to certain discounts, rebates and
other fees. These arrangements are often terminable by either party on
relatively short notice. If several of these contracts are terminated or
materially altered, our business could be materially adversely affected.
7
<PAGE>
If the market fails to accept our health information technology products, then
our financial results could suffer
We have recently added and continue to develop health information
technology products and services. However, to date these products and services,
such as ProVQuery, ProVMed and ProVCor, have achieved only limited market
acceptance. If these products and services fail to achieve market acceptance,
then our financial results could suffer. We have committed in the past, and
intend to commit in the future, substantial financial and management resources
to developing and marketing these products and services. We are relying on our
health information technology products and services to play a significant role
in our growth strategy. In particular, our strategy involves using our health
information technology products and services to distinguish our pharmacy
benefit management services from those of our competitors. Our products and
services may fail to achieve market acceptance or to differentiate our overall
product and service offering from our competitors' product and service
offerings in a way that is important to our current and potential customers and
for which they are willing to pay. The market may fail to accept our new
products and services due to the customer's assessment of their cost relative
to the benefit received. In addition, the health information technology
business is experiencing rapid technological change, which could render our
products or services obsolete. Our products and services may also fail to
achieve market acceptance due to errors and defects, especially when first
introduced or introduced as new versions. If so, our strategy to compete on the
basis of these products would be adversely affected. If we decide to
discontinue a product because it is not well received in the market or for
other reasons, we may need to write-off any investment we may have in the
product, which could adversely affect our financial results.
If our business continues to grow rapidly and we are unable to manage this
growth, then our business, operating results and financial condition could
suffer
Our business has grown rapidly in the last three fiscal years, with total
revenues increasing from approximately $87.2 million in fiscal 1995 to
approximately $666.2 million in fiscal 1998. We intend to pursue a strategy of
aggressive growth. If we are unable to manage future expansion successfully or
unable to hire and retain the personnel needed to manage our business
successfully, then our business, operating results and financial condition
would be materially and adversely affected. Recent growth has placed, and if
such growth continues will increasingly place, a significant strain on our
management and operations. Specifically, we will need to invest in new
information systems and additional personnel to service a larger customer base.
Also, our senior management team is significantly involved in our marketing
efforts which leaves less time for necessary administrative duties.
Accordingly, our future operating results will depend in part on the
availability of necessary capital and the ability of our officers and other key
employees to continue implementing and improving our operations, customer
support and financial control systems and to effectively expand, train and
manage our employee base.
If we are unable to overcome the potential problems and inherent risks related
to our acquisition and alliance strategy, then our business, operating results,
financial condition and future growth prospects could suffer
We have completed several acquisitions and plan to acquire complementary
products, technologies or businesses and to enter into strategic alliances.
Acquisitions and alliances are subject to potential problems and inherent
risks. If we cannot overcome these potential problems and risks, then our
business, operating results and financial condition could suffer or we may not
be able to carry out our acquisition and alliance strategy which could have a
material adverse effect on our future growth prospects. We have encountered
problems in some of our acquisitions. At the time we acquired CareStream
ScripCard in 1996, a significant number of its customers were not satisfied
with their prior services. This resulted in customer attrition and required us
to expend substantially more resources retaining customers than we had
initially expected. Also, the short-term nature of the contracts in our
industry means that when we acquire a company, there can be no assurance that
we will retain those customers for any significant period of time. In addition,
our experiences with prior acquisitions lead us to believe that the following
factors are also material risks to our acquisition and alliance strategy:
l difficulties in identifying, financing and completing viable
acquisitions or alliances,
8
<PAGE>
l difficulties in integrating the acquired company, retaining the
acquired company's customers and achieving the expected benefits,
l the diversion of our management's attention from current
operations,
l lack of experience in new products or markets,
l the loss of key employees of the acquired company,
l the assumption of undisclosed liabilities,
l potential dilution of current stockholders, and
l the amortization or accelerated write-off of expenses related to
goodwill and intangible assets which could reduce earnings.
These risks associated with acquisitions and alliances could have a
material adverse effect on us.
If we lose contracts with one or more of our significant customers, then our
business and results of operations will be materially adversely affected
We rely on a small number of customers to produce a disproportionate
amount of our revenues. The expiration or termination of our contracts with
one or more significant customers would have a material adverse effect on our
business and results of operations. Our ten largest customers accounted for
approximately 42.8% of our revenues in fiscal 1996, 37.1% of our revenues in
fiscal 1997 and approximately 35.2% of our revenues in fiscal 1998. In
addition, one of those ten customers, American Medical Security, Inc.,
accounted for approximately 17.9% of our revenues in fiscal 1996, 11.7% of our
revenues in fiscal 1997, and 11.4% of our revenues in fiscal 1998. Our
contract with American Medical Security, Inc. terminates on July 1, 2000. We
generally do not have long-term contracts with our customers. In most cases,
our contracts automatically renew at the end of the initial term on a one-year
basis, unless the customer gives notice to us of its intention not to renew
the contract. In other cases, customers may terminate contracts with us at any
time for any reason. Additionally, many participants in the healthcare
industry, including our customers, are under severe financial pressures due to
rising claims and costs. An adverse change in the financial condition of any
of our significant customers, including an adverse change as a result of a
change in governmental or private reimbursement programs, could have a
material adverse effect on us.
If government regulations are interpreted and enforced in a manner adverse to
our business, then we may be subject to enforcement actions and material
limitations on our business operations
The healthcare industry is subject to extensive laws and regulations. We
and other companies in our industry are subject to the interpretation and
enforcement of these laws and regulations. Because the interpretation and
enforcement of these regulations is uncertain, our compliance efforts may be
inadequate, which may subject us to enforcement actions and materially limit
our business operations. Compliance with such laws and regulations imposes
significant operational requirements on us. The regulatory requirements we
must comply with in conducting our business vary from state to state, and are
not always clear as to meaning or consistently enforced. Although we believe
that we substantially comply with all existing statutes and regulations
material to the operation of our business, regulatory authorities may disagree
and take enforcement or other actions against us. These actions may result in
fines or other penalties, or suspend, restrict or preclude us from engaging in
certain business practices in the relevant jurisdiction. In addition, we
cannot predict the impact of future legislation and regulatory changes on our
business or assure you that we will be able to obtain or maintain the
regulatory approvals required to operate our business. For example, formulary
fees, discounts and rebates are currently a topic of discussion and debate in
federal and state legislatures. Changes in existing laws or regulations,
changes in interpretations of laws or regulations, or adoption of new laws or
regulations
9
<PAGE>
relating to these discounts, rebates and fees may have adverse effects on our
ability to generate formulary revenues in the future.
If there are changes in the financing and reimbursement practices in the
healthcare industry, then acceptance of our products may be delayed or
prevented
We have designed our services and products to compete within the current
payment and reimbursement structure of the U.S. healthcare system. However,
changing political, economic and regulatory influences may affect healthcare
financing and reimbursement practices. We and other companies in our industry
could be adversely affected by changes in the financing and reimbursement
practices in the healthcare industry. If the current healthcare financing and
reimbursement system changes significantly, then our products and services
could be less competitive. As a result, we could be materially and adversely
affected. Congress is currently considering proposals to reform the U.S.
healthcare system, such as the proposal to overhaul Medicare. These proposals
may increase governmental involvement in healthcare and pharmacy benefit
management services and otherwise change the way our customers do business.
Healthcare organizations may react to these proposals and the uncertainty
surrounding such proposals by cutting back or delaying investments in the
healthcare cost control tools and related technology which we provide. We
cannot predict what effect, if any, these proposals might have on our business,
operating results and financial condition. Other legislative or market-driven
reforms that we cannot anticipate could affect our business, operating results
and financial condition in unpredictable ways.
If regulatory initiatives restrict our ability to use confidential patient
medical information, then our health information technology products and
services and our business growth strategy based on these products and services
could be adversely affected
Most of our activities involve the receipt or use by us of confidential
patient medical information which our customers provide to us. Our inability to
use patient medical information could render our health information technology
products and services, and our business growth strategy based on these products
and services, obsolete. Federal and state legislation has been proposed to
restrict the use and disclosure of confidential medical information. To our
knowledge, no legislation has been enacted that adversely impacts our ability
to provide our current services. Even if such legislation is not enacted,
however, individual customers could prohibit us from including their patients'
medical information in our various databases of medical data, or from using
such information in providing services to our other customers.
If our quarterly operating results fluctuate significantly, then the price of
our common stock may be volatile
Our operating results have in the past and are likely in the future to
vary significantly from quarter to quarter. Fluctuations in our results make it
harder to identify and understand trends in our business and may lead to
volatility in our stock price. For example, in August 1996 we acquired
CareStream ScripCard, which was a significant factor in causing our revenues to
increase by 55% for the full fiscal quarter after the acquisition compared to
the fiscal quarter in which the acquisition occurred. In addition, our
experience over the last several years leads us to believe that the following
factors are also material risks which could cause our quarterly operating
results to fluctuate significantly:
l the expiration or termination of contracts with significant
customers,
l the size and timing of new contracts and product orders, whether
through acquisitions or otherwise,
l the number of covered lives in our customers' benefit plans,
l the timing of new service and product announcements,
l changes in our pricing policies or in our competitors' pricing
policies,
10
<PAGE>
l market acceptance of our services and new products, such as
ProVMed, ProVCor and ProVQuery,
l the length of our sales cycles,
l the timing of revenue recognition from the sale of our services
and products,
l the impairment or obsolescence of our products or other assets due
to technological changes or other factors,
l changes in operating expenses,
l personnel changes, and
l conditions in the healthcare industry and the economy generally.
Our revenues are not predictable with any significant degree of certainty
because of these factors and because the market for our services and products
is rapidly evolving. Based upon the factors listed above, we believe that our
quarterly revenues, expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of our operating
results are not necessarily meaningful and that, in any event, such comparisons
should not be relied upon as indications of our future performance.
Furthermore, it is possible that in some future quarters, our operating results
will fall below our expectations or the expectations of market analysts and
investors. If we do not meet these expectations, the price of the common stock
may decline significantly.
The period of time required to sell our products and services to a new
customer can be up to a year or more. Our long sales cycle adds to the
unpredictability of our revenues, which could cause substantial volatility in
the price of the common stock. Our sales cycle varies substantially from
customer to customer because of a number of factors over which we have little
or no control. These factors include our customers' budgetary constraints, the
timing of budget cycles, changes in our customers' budgetary or purchasing
priorities, concerns about the introduction of new or updated services and
products by us or our competitors and potential downturns in general economic
conditions, which may be associated with reductions in demand for health
management information systems.
If we become subject to liability claims which are not covered by our insurance
policies, then we may be liable for damages and other expenses which could have
a material adverse effect on our business, operating results and financial
condition
Various aspects of our business, including the dispensing of
pharmaceutical products, performing drug utilization review and providing
information to physicians about drug therapy, which we refer to as our
therapeutic intervention services, entail a risk of litigation and liability
relating to product and professional liability claims. A successful product or
professional liability claim not covered by our insurance policies or in excess
of our insurance coverage could have a material adverse effect upon our
business, operating results and financial condition. We cannot assure you that
we will be able to maintain appropriate types or levels of insurance in the
future, that adequate replacement policies will be available on acceptable
terms, or that insurance will cover all claims against us. Our software
products are also internally complex and may contain errors or defects,
especially when first introduced or when new versions are released. Errors in
products or versions could result in liability claims, which could adversely
affect our business, operating results and financial condition.
If we lose key employees on whom we depend, in particular Jeffrey A. Jones,
then our business could be adversely affected
Our future performance will depend, in part, upon the efforts and
abilities of our key management, sales, marketing and technical personnel, in
particular Jeffrey A. Jones, our chief executive officer. We do not
11
<PAGE>
have employment agreements with any of our executive officers, and so they are
not contractually obligated to continue to work for us. If we cannot attract,
motivate and retain key personnel, our business could be materially and
adversely affected.
If the heathcare industry continues to consolidate, then we may lose existing
and potential customers and our bargaining power
Consolidation in the healthcare industry may cause us to lose existing
and potential customers and suffer a reduction in our bargaining power. Over
the past several years, the overall number of insurance companies, health
maintenance organizations, managed care companies and other clients and
potential clients of ours has decreased as a result of mergers, acquisitions
and similar transactions. Our customers have been and may continue to be
subject to these consolidation pressures. We may lose existing and potential
customers due to consolidation in the healthcare industry. Consolidation could
also create larger customers capable of exerting greater bargaining power than
our traditional clients. As we implement our business strategy of marketing to
these larger customers in response to this consolidation and other competitive
pressures, the prices we are able to charge for our products and services may
decline. The loss of existing and potential customers and/or price declines due
to consolidation could have a material adverse effect on us.
If our intellectual property is inadequately protected or subject to claims
that it infringes on another person's intellectual property, then we may be
unable to prevent others from using our intellectual property or we may be
required to enter into expensive royalty arrangements or become subject to
costly litigation
We have no patents or registered copyrights. We rely primarily on a
combination of statutory and common law copyright, trademark and trade secret
laws, customer licensing agreements, nondisclosure agreements and other methods
to protect our intellectual property rights. These laws and contractual
provisions may not provide effective protection of our rights, which could
subject us to the risks of costly litigation and loss of our rights and have a
material adverse effect on our business. We and other companies which need to
develop or purchase intellectual property are subject to these kinds of risks.
Another person may copy or otherwise obtain and use our technology without
authorization or develop similar technology independently. If other people or
companies copy our products without our permission or misuse our products, then
our business, results of operations and financial condition could be materially
adversely affected. Furthermore, another person may claim that our technology
infringes on their rights. As the number of software products made by our
competitors and offered to our target market increases, software developers
like us may become increasingly subject to infringement claims. Any such
claims, whether with or without merit, can be time consuming and expensive to
defend. If another person successfully asserts infringement claims against us,
then we may need to enter into royalty arrangements, which could reduce
profitability, or become subject to litigation which could have a material
adverse effect on us.
If we do not adequately address Year 2000 issues, then our business may be
adversely affected
Our state of readiness for Year 2000. Many currently installed computer
systems and software products accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish years after 1999 from years before 1999. As a result, computer
systems that cannot accept four-digit entries in the date field as of January
1, 2000 may not function properly. We have designed our products to be capable
of handling four digit dates, and therefore we believe that the direct impact
of the Year 2000 problem on our products will not be significant. We have
initiated a comprehensive project designed to eliminate or minimize any
business disruption associated with potential Year 2000 date processing
problems in our systems. We have completed the first three phases of this
project. We are nearly complete with the fourth phase of systems renovation. We
are actively engaged in the last phase of testing our systems, which we expect
to complete in the third quarter of 1999. We have also initiated communications
with our vendors and suppliers regarding their state of Year 2000 readiness. We
plan to continue our assessment of our third party business partners' Year 2000
readiness.
12
<PAGE>
Our costs to address Year 2000 issues. We estimate that we will incur
expenses of $0.6 to $0.8 million in conjunction with our Year 2000 compliance
project, of which $0.4 million has been spent through January 30, 1999.
Risks of our Year 2000 issues. We may be adversely affected by non-
compliant systems used by other companies, including our clients, with which we
do business. Year 2000 issues may significantly affect the purchasing patterns
of customers and potential customers. Many companies are spending large amounts
of money to correct their systems for Year 2000 compliance. These expenditures
may result in a smaller amount of money available to our customers and
potential customers to purchase our products and services. These factors could
result in a material adverse effect on our business, operating results and
financial condition.
Our contingency plans for Year 2000 malfunctions. We believe that the
most reasonably likely worst case scenario related to Year 2000 is that we will
experience a number of minor systems malfunctions and errors in early Year 2000
that we did not detect during our renovation and testing process, and that some
of our customers and vendors will not be Year 2000 compliant. We have begun
planning preparations to handle these most reasonably likely worst case
scenarios. We intend to complete our contingency plans during the second
quarter of fiscal 1999. However, despite our compliance program we may have
overlooked or otherwise not remedied Year 2000 issues which may have a material
adverse effect on us.
For additional information regarding Year 2000 Issues, please refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
Risks Relating to ProVantage's Relationship with ShopKo
If ShopKo continues to control of ProVantage, then the price of the common
stock could be adversely affected
ShopKo beneficially owns all of the outstanding common stock. After the
offering, ShopKo will own approximately 70.3% of the outstanding common stock.
As a consequence of this ownership, the market price of the common stock could
be adversely affected because it is unlikely to reflect any "takeover premium."
As a majority stockholder, ShopKo will be able to control the business and
affairs of ProVantage, including:
l the election of the entire board of directors,
l any determinations with respect to mergers or other business
combinations, and
l the payment of dividends with respect to the common stock.
For a more complete description of the aspects of ProVantage's business
and affairs which ShopKo will be able to control through its stock ownership,
see "Relationship With ShopKo."
If ShopKo uses its control position as a party to the intercompany agreements
to act in a manner adverse to ProVantage and its stockholders, then our
business may be adversely affected
We currently have a variety of contractual relationships with ShopKo and
its affiliates. We cannot assure you that each of such agreements, or the
transactions provided for therein, has been or will be effected on terms at
least as favorable to us as could have been obtained from unaffiliated third
parties. ShopKo's interests under these agreements are adverse to and diverge
from our interests based on a variety of factors, including:
l fees and other payments,
l quality and quantity of services received, and
l rights in the event of nonperformance.
13
<PAGE>
As a party to these contracts, ShopKo could use its control position to
act in a manner adverse to the other stockholders of ProVantage. For a
description of the intercompany agreements with ShopKo, see "Relationship With
ShopKo--Intercompany Agreements." In addition, ShopKo may be unwilling or
unable to amend these agreements to accommodate our future operating needs.
When our intercompany agreements with ShopKo expire or are terminated, it may
be more expensive for us to obtain substitute services from third parties. This
increased expense could negatively affect our financial performance.
If we remain a subsidiary of ShopKo, then the terms of ShopKo's credit
agreement may adversely affect our ability to raise capital and take other
strategic actions
Under ShopKo's existing credit agreement, we are considered a
"subsidiary" of ShopKo. This means that ShopKo is obligated to cause us to
comply with various covenants in the credit agreement, which may not always be
in our best interests and may materially limit our future growth prospects. For
example, these covenants may limit or prohibit our ability to sell our common
stock and the stock of our subsidiaries to finance our growth strategy and to
make acquisitions unless ShopKo meets financial tests, to pledge particular
categories of assets, to incur debt to third parties beyond specified limits
and to enter into agreements which restrict our ability to pay dividends. The
restriction on the sale of stock provides that we cannot sell our common stock
or the common stock or other equity interests of our subsidiaries unless at the
time of such sale ShopKo can demonstrate that the minimum consolidated net
worth test, the leverage ratio test, and the interest coverage ratio test can
be met on a pro forma basis assuming the proposed sale had occurred one year
earlier. This restriction will not limit this offering or the sale of stock
pursuant to our stock incentive plan. However, in the future this restriction
could limit our ability to sell our common stock or the common stock or other
equity interests of our subsidiaries. The extent of such limit will depend on a
number of factors, including the size of the proposed sale and ShopKo's
financial results over the preceding year. Likewise, our ability to incur debt
to third parties is limited under a formula contained in ShopKo's credit
agreement. At January 30, 1999, we could have borrowed approximately $190.0
million from third parties under this formula. This formula is impacted by
ShopKo's financial results and operating activities, including the amount of
debt incurred by other ShopKo subsidiaries. Our credit agreement with ShopKo
restricts us from borrowing funds from parties other than ShopKo without
ShopKo's consent. These limitations could prevent us from borrowing additional
funds. These covenants will apply after this offering is completed and may
cause ShopKo to force us to act inconsistently with our best interests.
ShopKo's credit agreement has been filed by ShopKo as an exhibit to ShopKo's
Securities Exchange Act reports. "Principal and Selling Stockholder" explains
how you can obtain these reports.
If we experience potential conflicts of interest with ShopKo over the
allocation of capital and other resources, then we cannot assure you that they
will be resolved in our favor, which could have a material adverse effect on
our business
We cannot assure you that any conflicts that may arise between ShopKo and
us over the allocation of resources will be resolved in our favor, which could
have a material adverse effect in our business. Upon consummation of this
offering and the election of two independent directors, who are not affiliated
with ShopKo, we will have a board of directors consisting of seven members.
Four of the members of our board of directors also serve on the ShopKo board of
directors. As these individuals perform their duties to ShopKo and to us,
conflicts of interest and conflicting demands on the amount of time these
individuals will have available for our affairs may arise. Because ShopKo, a
specialty discount retailer, and ProVantage have substantially different
businesses, we do not expect these conflicts to arise over the allocation of
corporate opportunities. Conflicts may arise over the allocation of capital and
other resources. We have not adopted any policies regarding the allocation of
corporate opportunities or other conflicts, aside from a policy to approve
related party transactions and except as set forth in the intercompany
agreements. In addition, ShopKo will have the ability to change the size and
composition of our board of directors and its committees.
14
<PAGE>
Risks Relating to the Offering of Common Stock
If we are unsuccessful as a stand-alone company, then you may lose part or all
of your investment in our common stock
To date, we have been operated as a subsidiary of ShopKo. After this
offering, we will continue to be a majority-owned subsidiary of ShopKo, but
will operate as a stand-alone company. ShopKo will have no obligation to
provide assistance to us except as provided in our agreements with ShopKo. We
cannot assure you that we will be viable as a stand-alone company or that this
change will not have an adverse effect on us and lead to a partial or complete
loss of your investment in our common stock. Because the financial information
included in this prospectus relates to periods during which we were wholly-
owned by ShopKo, it is not necessarily indicative of our future results of
operations, financial position and cash flows.
If shares of common stock eligible for future sale are sold, then the market
price of the common stock could be adversely affected
Sales of substantial amounts of common stock, or the perception that such
sales could occur, could adversely affect prevailing market prices for the
common stock. Upon completion of this offering, there will be 17,850,000 shares
of common stock outstanding. The common stock sold in this offering will be
freely tradable without restrictions by persons other than "affiliates" of
ProVantage, as such term is defined in the Securities Act of 1933. In addition,
ShopKo has the right to have its ProVantage common stock registered under the
federal securities laws for sale to the public. Once it is registered, ShopKo
may sell it. We cannot predict the effect, if any, that future sales of shares
of common stock, or the availability of shares of common stock for future
sales, will have on the market price of the shares of common stock.
If you purchase the common stock, then you will incur immediate and substantial
dilution in the book value of your shares
The assumed initial public offering price of $17.00 per share is
substantially higher than the net tangible book value of $(5.49) per share of
the common stock at January 30, 1999, giving pro forma effect to the
reorganization of ProVantage's corporate structure. Accordingly, purchasers in
this offering will incur immediate and substantial net tangible book value
dilution of $13.30 per share.
If an active and continuous trading market for the common stock does not
develop after the offering, then a decline in the price for the common stock or
price volatility may result
Prior to this offering, there has been no public market for the common
stock, and an active, continuous trading market for the common stock may not
develop. This means that you may not be able to sell shares of common stock you
acquire in this offering easily, if at all. Furthermore, the market price for
the common stock could decline below the price you pay for it. ProVantage and
the representatives of the underwriters will determine the initial public
offering price based on the factors described under "Underwriting." Their
determination may not necessarily equal the intrinsic value or the market value
of the common stock. The trading prices of the common stock could be subject to
wide fluctuations in response to quarter-to-quarter variations in our operating
results, governmental or other regulatory action, general conditions in the
healthcare industry, changes in earnings estimates or recommendations by
research analysts and other events or factors, many of which are beyond our
control. In addition, the stock market recently has experienced a high level of
price and volume volatility, and market prices for the stock of many companies,
particularly small and emerging growth companies like ProVantage, have
experienced wide price fluctuations which have not necessarily been related to
their operating performance. These broad market fluctuations could have a
material adverse effect on the market price of the common stock.
15
<PAGE>
If another person or company attempts a takeover of ProVantage, then anti-
takeover provisions in our organizational documents and agreements with our
executive officers could delay or prevent a change in control of ProVantage at
a premium price
Certain provisions of ProVantage's restated certificate of incorporation
and amended and restated bylaws, a stockholders rights plan, and change of
control severance agreements which have been entered into with certain of
ProVantage's executive officers could have an anti-takeover effect. These
provisions include:
la staggered board of directors,
lsupermajority amendment provisions,
lpreferred stock purchase rights which may deter offers for the common
stock, and
llarge severance payments.
This anti-takeover effect could delay, defer or prevent a change of
control of ProVantage without further action by the stockholders, could
discourage potential investors from bidding for the common stock at a premium
over the market price of the common stock and could adversely affect the
market price of, and the voting and other rights of the holders of, the common
stock. In addition, provisions of the Delaware General Corporation Law
restrict the ability of stockholders to cause a merger or business combination
or obtain control of ProVantage. These provisions may prevent a takeover of
ProVantage at a premium price. See "Management--Change of Control Severance
Agreements" and "Description of Capital Stock."
FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements regarding the
operations and business of ProVantage. Statements in this document that are
not historical facts are "forward-looking statements." Such forward-looking
statements include those relating to:
lProVantage's future business prospects,
lprojected or anticipated product development or introduction,
lpossible acquisitions,
lprojected revenues, working capital, liquidity, capital needs,
interest costs and income, and
lstatements regarding ProVantage's Year 2000 readiness.
The words "estimate," "project," "intend," "expect" and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements are found at various places throughout this
prospectus. Wherever they occur in this prospectus or in other statements
attributable to ProVantage,
forward-looking statements are necessarily estimates reflecting our best
judgment. However, these statements still involve a number of risks and
uncertainties that could cause actual results to differ materially from those
suggested by the forward-looking statements. Discussions in this prospectus
under the captions "Prospectus Summary," "Risk Factors," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" are particularly susceptible to risks and
uncertainties. Such forward-looking statements should, therefore, be
considered in light of various important factors, including those set forth in
this prospectus and other factors set forth from time to time in ProVantage's
reports and registration statements filed with the SEC. You are cautioned not
to place undue reliance on these forward-looking statements, which speak only
as of the date hereof. ProVantage disclaims any intent or obligation to update
forward-looking statements. Moreover, ProVantage, through senior management,
may from time to time make forward-looking statements about the matters
described herein or other matters concerning ProVantage.
16
<PAGE>
THE REORGANIZATION
In connection with this offering, ShopKo and ProVantage reorganized
ProVantage's corporate structure. This reorganization consisted of
reincorporating ProVantage in Delaware through a merger with an affiliated
corporation, the transfer of certain assets and liabilities from affiliated
corporations to ProVantage, the amendment and restatement of ProVantage's
charter and bylaws, a 1,243 for 1 stock split effected through a stock
dividend, and the declaration of a dividend to ShopKo in the form of a demand
promissory note in the principal amount of $115.0 million in order to return
to ShopKo a portion of ShopKo's investment in ProVantage. See "Dividend
Policy." This reorganization was accounted for as a tax-free reorganization
among commonly controlled entities. All of the assets and liabilities
transferred in the reorganization retained their historical cost basis.
USE OF PROCEEDS
The net proceeds from the sale of shares of common stock offered hereby,
assuming a public offering price of $17.00 per share, are estimated to be
$82.8 million. These net proceeds will be applied as follows:
. we will retain the first $20.0 million of net proceeds from the
offering and use these proceeds for working capital, capital
expenditures and other general corporate purposes, including
contingent payments for previous acquisitions, and
. the balance of the net proceeds will be paid to ShopKo as a
repayment on the demand promissory note and any remaining balance
on the note will be contributed to ProVantage by ShopKo as a
capital contribution.
The demand promissory note will have a principal amount of $115.0
million, will bear interest at 5.0% per annum and will be due on demand. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We will not receive any proceeds from the exercise of the underwriters'
over-allotment option.
DIVIDEND POLICY
We do not intend to pay cash dividends on the common stock in the
foreseeable future, but rather intend to use future earnings principally to
support operations and to finance expansion and possible acquisitions. The
payment of cash dividends in the future will be at the discretion of our board
of directors and will depend on a number of factors, including our financial
condition, capital requirements, future business prospects, contractual
restrictions and such other factors as our board of directors may deem
relevant. See "Description of Capital Stock."
Prior to the offering, we will declare a dividend to ShopKo in the form
of a demand promissory note in the principal amount of $115.0 million to
return to ShopKo a portion of its equity investment in ProVantage. Holders of
common stock will not receive any portion of the payment on the note held by
ShopKo. See "Relationship With ShopKo."
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<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of ProVantage
at January 30, 1999 on an historical basis, on a pro forma basis giving effect
to the reorganization of Pro Vantage's corporate structure which will be
completed prior to the completion of the offering, and on a pro forma as
adjusted basis to give effect to the sale of the shares of common stock offered
by this prospectus, at an assumed initial public offering price of $17.00 per
share, and the use of the estimated net proceeds as described in the "Use of
Proceeds" section.
<TABLE>
<CAPTION>
January 30, 1999
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Cash....................................... $ 24,680 $24,680 $ 44,680
======== ======= ========
Stockholders' equity:
Preferred Stock, $.01 par value;
5,000,000 shares authorized and none
issued or outstanding actual, pro forma
and pro forma as adjusted............... $ 0 $ 0 $ 0
Common Stock, $.01 par value; 50,000,000
shares authorized, 12,550,000 shares
issued and outstanding, actual;
50,000,000 shares authorized, 12,550,000
shares issued and outstanding, pro
forma; and 50,000,000 shares authorized,
17,850,000 shares issued and
outstanding, pro forma as adjusted...... 126 126 179
Additional paid-in capital............... 88,997 50,311 133,058
Retained earnings........................ 24,114 0 0
-------- ------- --------
Total stockholders' equity............. 113,237 50,437 133,237
-------- ------- --------
Total capitalization................... $113,237 $50,437 $133,237
======== ======= ========
</TABLE>
18
<PAGE>
DILUTION
Our pro forma net tangible book value at January 30, 1999 was
$(68,890,000), or $(5.49) per share of common stock. Pro forma net tangible
book value per share is determined by dividing our net tangible book value--
that is, total tangible assets less total liabilities--by the number of shares
of common stock outstanding, after giving effect to the reorganization of
ProVantage's corporate structure which is to be completed prior to the
completion of the offering. Without taking into account any changes in our pro
forma net tangible book value after January 30, 1999, other than to give effect
to the sale of the shares of common stock offered hereby, assuming an initial
public offering price of $17.00 per share, and the receipt of the net proceeds
therefrom, our adjusted pro forma net tangible book value at January 30, 1999
would have been $66,110,000, or $3.70 per share of common stock. This
represents an immediate dilution in pro forma net tangible book value of $13.30
per share to new investors purchasing shares in this offering and an immediate
increase in pro forma net tangible book value of $9.19 per share to ShopKo. The
following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......... $ 17.00
-------
Pro forma net tangible book value per share at January
30, 1999................................................ $(1.33)
------
Increase per share attributable to new investors (1)..... 5.03
------
Pro forma net tangible book value after the offering..... 3.70
-------
Dilution per share to new investors (2).................. $ 13.30
=======
</TABLE>
- --------
(1) After deduction of underwriting discounts and estimated offering expenses
to be paid by us.
(2) Determined by subtracting the adjusted pro forma net tangible book value
per share after the offering from the amount of cash paid by a new investor
for one share of common stock.
The following table summarizes on a pro forma basis as of January 30,
1999 the differences in the total cash consideration paid and the average price
per share paid by ShopKo, our sole stockholder prior to this offering, with
respect to the 12,550,000 shares of common stock issued by us to ShopKo and by
the new investors, assuming an initial public offering price of $17.00 per
share, with respect to the 5,300,000 shares of common stock to be issued by us
in this offering:
<TABLE>
<CAPTION>
Shares of Common
Stock Purchased Total Consideration
------------------- ---------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C>
ShopKo........... 12,550,000 70.3% $ 89,123,000 49.7% $ 7.10
New investors.... 5,300,000 29.7 90,100,000 50.3 17.00
---------- ----- ------------- -----
Total........ 17,850,000 100.0% $ 179,223,000 100.0%
========== ===== ============= =====
</TABLE>
The foregoing tables do not give effect to the issuance of an aggregate
of approximately 650,000 shares of common stock subject to options to be
granted under our stock incentive plan at an exercise price equal to the
offering price. See "Management--Compensation of Directors" and "Executive
Compensation--Stock Incentive Plan."
19
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
The following table sets forth certain of our historical consolidated
financial data as of and for each of the five years in the period ended January
30, 1999. The historical consolidated financial data for the four years in the
period ended January 30, 1999 and as of January 30, 1999, January 31, 1998 and
February 1, 1997 were derived from our financial statements which have been
audited by Deloitte & Touche LLP, independent auditors. The remaining financial
data presented below were derived from our accounting records and have not been
audited. Nevertheless, in the opinion of management, this unaudited data
include all adjusting entries, consisting only of normal recurring adjustments,
necessary to present fairly the information set forth therein. The historical
consolidated financial data presented herein are not necessarily indicative of
the results of operations for any future period. The financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our financial statements
and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year (52 Weeks) Ended
---------------------------------------------------------------------------
Feb. 4, 1995(1) Feb. 3, 1996 Feb. 1, 1997(2) Jan. 31, 1998(3) Jan. 30, 1999
--------------- ------------ --------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Earnings
Data:
Net sales............... $ 5,424 $87,155 $330,048 $500,891 $666,154
Costs and expenses:
Cost of sales.......... 4,666 78,250 306,760 463,069 618,308
Selling, general and
administrative
expenses.............. 214 4,836 11,828 19,990 24,910
Depreciation and
amortization
expenses.............. 69 1,170 2,233 4,779 6,776
------- ------- -------- -------- --------
4,949 84,256 320,821 487,838 649,994
Income from operations.. 475 2,899 9,227 13,053 16,160
Interest income......... -- 207 353 364 543
------- ------- -------- -------- --------
Earnings before income
taxes.................. 475 3,106 9,580 13,417 16,703
Provision for income
taxes.................. 220 1,553 4,164 5,883 7,221
------- ------- -------- -------- --------
Net earnings............ $ 255 $ 1,553 $ 5,416 $ 7,534 $ 9,482
======= ======= ======== ======== ========
Basic net earnings per
share of common stock.. $ 0.02 $ 0.12 $ 0.43 $ 0.60 $ 0.76
Average number of shares
outstanding............ 12,550 12,550 12,550 12,550 12,550
Pro forma basic net
earnings per share of
common stock(4)........ $ 0.58
Pro forma average number
of shares
outstanding(4)......... 16,244
<CAPTION>
Feb. 4, 1995 Feb. 3, 1996 Feb. 1, 1997 Jan. 31, 1998 Jan. 30, 1999
--------------- ------------ --------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash.................... $ 2,092 $ 5,001 $ 5,946 $ 12,533 $ 24,680
Working capital......... 1,628 7,634 4,253 15,480 34,009
Total assets............ 25,823 33,181 118,993 155,037 200,777
Total debt.............. -- -- -- 1,880 968
Total liabilities....... 7,770 9,057 56,310 63,757 87,540
Stockholder's equity.... 18,053 24,124 62,683 91,280 113,237
</TABLE>
- --------
(1) On January 3, 1995, Pro Vantage completed the acquisition of Bravell, Inc.,
a pharmacy benefit management company. The results of Bravell's operations
since the date of acquisition have been included in ProVantage's
consolidated statements of earnings.
(2) On August 2, 1996, ProVantage completed the acquisition of CareStream
ScripCard from Avatex Corporation. CareStream ScripCard is a pharmacy
benefit management company and its operations have been integrated into
ProVantage. The results of CareStream ScripCard's operations since the date
of acquisition have been included in ProVantage's consolidated statement of
earnings.
(3) On August 20, 1997, ProVantage acquired PharMark, a software and database
development company providing information driven strategies for optimizing
medical and pharmaceutical outcomes. The results of PharMark's operations
since the date of acquisition have been included in ProVantage's
consolidated statement of earnings.
(4) The pro forma basic net earnings per share of common stock are computed by
dividing net earnings by 16,244 shares of common stock. This number
represents the 12,550 shares of common stock outstanding after the
reorganization plus that number of shares of common stock that must be sold
by ProVantage at an assumed offering price of $17.00 per share to generate
proceeds sufficient to repay a $62,800 portion of the demand promissory
note to be issued to ShopKo. The unpaid balance of the demand promissory
note will be contributed to ProVantage as a capital contribution.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with ProVantage's
historical consolidated financial statements and notes and the unaudited
consolidated financial statements and notes included elsewhere herein.
ProVantage uses the same fiscal year as ShopKo. ProVantage's fiscal year
conforms to the National Retail Federation calendar and ends on the Saturday
closest to the end of January. ProVantage has adopted a convention of referring
to a fiscal year by the year in which the fiscal year begins. For example, the
fiscal year which began on February 1, 1998 and ended on January 30, 1999 is
referred to as "fiscal 1998."
Overview
ProVantage is a leading health benefit management company providing
pharmacy benefit management and health information technology products and
services to our customers. ProVantage conducts its business principally
throughout the United States. Prior to this offering, ProVantage was wholly-
owned by ShopKo. After this offering, ShopKo will own 70.3% of ProVantage's
outstanding common stock, continue to provide to ProVantage a variety of
services and control ProVantage's board of directors, business and affairs.
The financial statements and data included in this prospectus, and this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, covers periods when ProVantage operated as a wholly-owned
subsidiary of ShopKo. For the periods presented, certain general,
administrative and other expenses reflected in the consolidated financial
statements include allocations of certain corporate expenses from ShopKo which
took into consideration estimates of personnel time spent to provide services
or other appropriate bases. These allocations include services and expenses for
general management, information systems management, treasury, tax, financial
reporting, benefits administration, insurance, legal, communications and other
miscellaneous services. Management believes the foregoing allocations were made
on a reasonable basis. Although these allocations do not necessarily represent
the costs which would have been incurred by ProVantage on a stand-alone basis,
management believes that any variance in costs would not be material to
ProVantage's consolidated financial results. After the offering is completed,
the charges for the services provided by ShopKo to ProVantage will be governed
by the intercompany agreements described under "Relationship With ShopKo."
ProVantage derives its revenues from the sale of pharmacy benefit
management services, pharmacy mail services, vision benefit management services
and health information technology and clinical support services. ProVantage's
net sales include:
l administrative and dispensing fees plus the cost of
pharmaceuticals dispensed by pharmacies participating in the
network maintained by ProVantage or by ProVantage's mail service
pharmacy to members of health benefit plans sponsored by
ProVantage's clients,
l amounts billed to pharmaceutical manufacturers and third party
formulary administrators for formulary fees,
l administrative fees plus the cost of sales of eyeglasses and
contact lenses relating to vision benefit management services, and
l license and service fees for health information technology and
clinical support services.
Revenues from the dispensing of pharmaceuticals from ProVantage's mail
service pharmacy are recognized when the prescription is shipped. Revenues from
claim processing fees and sales of prescription drugs and vision benefits by
pharmacies and vision providers in ProVantage's network are recognized when the
claims are processed. When ProVantage provides pharmacy and vision benefits to
members in health benefit
21
<PAGE>
plans sponsored by ProVantage's clients and has an independent contractual
obligation to pay its network pharmacy and vision providers for benefits
provided to members in ProVantage's clients' health benefit plans, ProVantage
includes payments from plan sponsors for these benefits as net sales. If
ProVantage is only administering the plan sponsors' pharmacy benefit contract,
ProVantage records only the administrative fees derived from the contract as
revenue. Formulary, clinical and health information technology revenues are
recognized as the services are performed and earned in accordance with
contractual agreements.
ProVantage primarily derives its revenues from the sales of pharmacy
benefit management services, mail pharmacy services and vision benefit
management services. The combined revenue percentages for these three
categories were 99.2% in fiscal 1998, 99.7% in fiscal 1997 and 100.0% in fiscal
1996.
Cost of sales includes the amounts paid to network pharmacies and optical
centers for pharmaceutical and vision claims, the cost of prescriptions sold
through the mail service pharmacy and the amounts paid to plan sponsors for
shared formulary fees.
As a result of the competitive environment, ProVantage is continuously
subject to margin pressures when measured as a percent of net sales. In recent
years, competing pharmacy benefit management providers owned by large
companies, including pharmaceutical manufacturers, began pricing their products
and services more aggressively. This aggressive pricing resulted in reduced
margins for ProVantage's traditional prescription benefit management services.
Management expects this competitive environment to prevail for the foreseeable
future. In recent years, we have been able to offset in large part these
reduced margins by selling higher margin advanced clinical services and health
information technology products. In order to maintain our margins as a
percentage of sales, we will need to continue to increase sales of these higher
margin services and products.
In recent years, ProVantage has invested heavily to build its clinical
and health information technology capabilities. These investments include
technology, professional staff, and marketing and service personnel. Management
expects to continue to invest to build these capabilities.
During the periods presented, ProVantage completed acquisitions of
several companies which contributed to ProVantage's growth. Of the health plan
members as of January 30, 1999, approximately 25% were acquired through
acquisitions. Acquisitions make period to period comparisons of the
ProVantage's financial statements less meaningful. Please see "--Acquisitions."
Results of Operations
The following table sets forth certain items from ProVantage's
consolidated statement of earnings as percentages of consolidated net revenue:
<TABLE>
<CAPTION>
Year (52 weeks) Ended
----------------------------------------
Feb. 1, 1997 Jan. 31, 1998 Jan. 30, 1999
------------ ------------- -------------
<S> <C> <C> <C>
Net sales............................. 100.0% 100.0% 100.0%
Costs and expenses
Cost of sales....................... 92.9 92.4 92.8
Selling, general and administrative
expenses........................... 3.6 4.0 3.8
Depreciation and amortization
expenses........................... 0.7 1.0 1.0
----- ----- -----
97.2 97.4 97.6
Income from operations................ 2.8 2.6 2.4
Interest income....................... 0.1 0.1 0.1
----- ----- -----
Earnings before income taxes.......... 2.9 2.7 2.5
Provision for income taxes............ 1.3 1.2 1.1
----- ----- -----
Net earnings.......................... 1.6% 1.5% 1.4%
===== ===== =====
</TABLE>
22
<PAGE>
Fiscal 1998 Compared to Fiscal 1997
Net sales for fiscal 1998 increased $165.3 million, or 33.0%, to $666.2
million. This increase is attributable to internally generated growth in claims
processing, mail pharmacy and formulary fees. Sales from pharmacy claims
processing increased $122.5 million, or 27.8%. This increase reflects a 16.4%
increase in the number of claims processed and a 9.8% increase in the average
revenue per claim processed. Sales from ProVantage's mail pharmacy increased
$29.8 million, or 79.1%, reflecting a 56.5% increase in the number of
prescriptions dispensed and a 14.5% increase in the average revenue per
prescription dispensed. Formulary fees increased $8.1 million, or 55.0%, to
$22.9 million. This increase is attributable to increased claims subject to
formulary fees and increased participation of pharmaceutical manufacturers in
ProVantage's formulary program. Revenues attributable to vision benefit
management services were immaterial in both periods.
Gross profit, calculated as net sales less cost of sales, for fiscal 1998
increased $10.0 million, or 26.5%, compared to fiscal 1997. This increase is
partially attributable to the sales growth in formulary fees, resulting in a
$4.2 million increase in gross profit over the prior year, sales growth in mail
pharmacy, resulting in a $2.8 million increase in gross profit over the prior
year, and sales growth in claims processing, resulting in a $1.7 million
increase in gross profit over the prior year. As a percentage of net sales,
ProVantage's gross margins were 7.2% for fiscal 1998 and 7.6% for fiscal 1997.
This decline was due to increasing prescription costs and the addition of
larger clients with lower average transaction fees, offset in part by the
addition of higher margin clinical services and information technology
products.
Selling, general and administrative expenses for fiscal 1998 increased
$4.9 million, or 24.6%, to $24.9 million. This increase relates to additional
investments in information technology of $3.0 million, in clinical programs of
$0.5 million and in infrastructure support of $1.4 million related to continued
growth. As a percentage of net sales, selling, general and administrative
expenses were 3.8% in fiscal 1998 compared to 4.0% in fiscal 1997.
Depreciation and amortization expenses for fiscal 1998 increased $2.0
million, or 41.8%, to $6.8 million. This increase is attributable to increased
depreciation and goodwill amortization related to ProVantage's business
acquisitions. As a percentage of net sales, depreciation and amortization
expenses were 1.0% for both fiscal 1998 and fiscal 1997.
The change in interest income during the periods was immaterial.
The effective tax rate for fiscal 1998 was 43.2% compared to 43.8% in
fiscal 1997.
Fiscal 1997 Compared to Fiscal 1996
Net sales for fiscal 1997 increased $170.8 million, or 51.8%, to $500.9
million. This increase is primarily attributable to growth in claims processing
and mail pharmacy. Sales from pharmacy claims processing increased $151.4
million, or 52.3%. This increase reflects a 53.7% increase in the number of
claims processed. Sales from ProVantage's mail pharmacy increased $16.4
million, or 77.1%, reflecting a 73.1% increase in the number of prescriptions
dispensed and a 2.3% increase in the average revenue per prescription
dispensed. Formulary fees decreased $1.9 million, or 11.3%, to $14.8 million.
This decrease is primarily attributable to the expiration of a contract with a
third party formulary administrator. This contract, which included a favorable
formulary revenue guarantee for fiscal 1996, was not renewed for fiscal 1997
because the terms proposed by the third party administrator for fiscal 1997
were less favorable than the terms ProVantage negotiated directly with
pharmaceutical manufacturers. Revenues attributable to vision benefit
management services were immaterial in both periods.
Gross profit for fiscal 1997 increased $14.5 million, or 62.4%, compared
to fiscal 1996. This increase is primarily attributable to the sales growth in
claims processing resulting in a $7.1 million increase in gross
23
<PAGE>
profit over the prior year, and improved gross margin rates in ProVantage's
formulary business resulting in a $3.2 million increase in gross profit over
the prior year and sales growth in mail pharmacy, resulting in a $2.2 million
increase in gross profit over the prior year. As a percentage of net sales,
ProVantage's gross margins were 7.6% for fiscal 1997 and 7.1% for fiscal 1996.
Selling, general and administrative expenses for fiscal 1997 increased
$8.2 million, or 69.0%, to $20.0 million. The increase is primarily
attributable to increased operating costs subsequent to the acquisition of
PharMark of $2.0 million and additional investments in infrastructure support
related to continued growth, including information technology, of $6.2 million.
As a percentage of net sales, selling, general and administrative expenses were
4.0% in fiscal 1997 compared to 3.6% in fiscal 1996.
Depreciation and amortization expenses for fiscal 1997 increased $2.5
million, or 114.0%, to $4.8 million. This increase is primarily attributable to
goodwill amortization related to ProVantage's business acquisitions. As a
percentage of sales, depreciation and amortization expenses were 1.0% in fiscal
1997 and 0.7% in fiscal 1996.
The change in interest income during these periods was immaterial.
The effective tax rate for fiscal 1997 was 43.8% compared to 43.5% in
fiscal 1996.
Liquidity and Capital Resources
Prior to the offering, ProVantage's cash needs in excess of cash flow
provided by operations have been met principally by additional capital
contributions by ShopKo and any excess cash has been distributed to ShopKo.
Cash provided from operating activities was $9.5 million in fiscal 1998, $12.0
million in fiscal 1997 and $3.4 million in fiscal 1996. ShopKo's capital
contributions were $12.5 million in fiscal 1998, $21.1 million in fiscal 1997
and $33.1 million in fiscal 1996.
ProVantage's principal uses of cash are for capital expenditures and
acquisitions. ProVantage spent $8.9 million on capital expenditures in fiscal
1998, $4.2 million on capital expenditures in fiscal 1997 and $2.1 million in
fiscal 1996. Capital expenditures relate primarily to continuing investments in
systems technology.
ProVantage's total capital expenditures are expected to approximate $15.0
to $20.0 million for the fiscal year ending January 29, 2000. The expected
increase in capital expenditures is primarily due to replacement of
ProVantage's retail network processing system and continued enhancements and
development in its suite of health information technology products. The
foregoing capital expenditure plans are based on current facts and
circumstances known to management and assumptions believed by management to be
reasonable. Such plans may be reviewed and revised from time to time in light
of changing conditions. Any such revisions could be material.
In addition, ProVantage has contingent payment obligations of up to $5.0
million with respect to the CareStream Scrip Card acquisition and up to $8.0
million with respect to the PharMark acquisition. Payments, if any, made under
these arrangements would be recorded as additional purchase price. For a more
detailed description, see "--Acquisitions."
ProVantage has entered into a credit agreement with ShopKo which provides
that ProVantage may borrow up to $25.0 million from ShopKo on a revolving
basis. The credit agreement is unsecured, has a term that expires on January
31, 2001, provides that borrowings will bear interest at various market rates
at the time of borrowing and has an annual commitment fee of 1/5 of one percent
of the total commitment amount. ProVantage may terminate the credit agreement
at any time without penalty and may replace it with financing from banks or
other financial institutions. ShopKo may terminate the credit agreement at any
time after it no longer owns a majority of ProVantage's voting stock. This
agreement may negatively affect the future
24
<PAGE>
operating results of ProVantage by increasing interest expense. Prior to the
offering, any additional cash needs in excess of cash flows provided by
operations have been met by capital contributions by ShopKo. After the
offering, any additional cash needs will be met through borrowings under our
credit agreement with ShopKo.
Under ShopKo's existing credit agreement, ProVantage is considered a
"subsidiary" of ShopKo which means that ShopKo is obligated to cause ProVantage
to comply with certain covenants in the credit agreement. These covenants
include prohibitions on ProVantage selling its common stock and the stock of
its subsidiaries unless ShopKo meets financial tests, prohibitions on the
pledging of particular categories of assets, limitations on ProVantage's
ability to incur debt to third parties beyond specified limits, and a
prohibition on ProVantage entering into agreements which restrict ProVantage's
ability to pay dividends. These covenants will continue to apply after this
offering is completed. ProVantage does not expect these covenants to impose any
material impediment on ProVantage's existing operations. There can be no
assurance, however, that circumstances will not arise wherein such covenants
could limit ProVantage's ability to enter into certain transactions.
ProVantage believes that its cash needs, other than for significant
acquisitions, will be met through fiscal 1999 through the proceeds from this
offering, cash generated from operations and borrowings from ShopKo or third-
party sources.
In addition to the credit agreement, ProVantage and ShopKo have entered
into or will enter into a number of other agreements to define and formalize
our ongoing relationship and the conduct of our businesses. These agreements
include a tax matters agreement, an administrative services agreement, an I.
T., or information technology, support agreement, a lease agreement, an
indemnification and hold-harmless agreement, and a registration rights
agreement. In comparison to prior years, these agreements will not have a
material effect on future operating results because they formalize arrangements
on substantially the same financial basis as presented in the historical
financial statements included in this prospectus. See "Relationship with
ShopKo--Intercompany Agreements" for a description of the agreements described
above. When our intercompany agreements with ShopKo expire or are terminated,
it may be more expensive for us to obtain substitute services from third
parties. This increased expense could negatively effect our financial
performance.
Acquisitions
On January 3, 1995, ProVantage completed the acquisition of Bravell,
Inc., a pharmacy benefit management firm that provides custom prescription
benefit plan design, program administration and claims benefit processing
services to insurance companies, third party administrators and self-funded
medical plan sponsors. The transaction was accounted for as a purchase, whereby
ProVantage acquired 97% of the outstanding common stock of Bravell for
approximately $17.3 million. ProVantage was also required to make additional
payments which were contingent upon future results of Bravell's operations. In
fiscal 1996, $0.7 million was paid based on the results of fiscal 1995. On
April 10, 1997, ProVantage made a payment of approximately $8.9 million to the
founders of Bravell to:
l acquire the remaining 3% of the common stock of Bravell which
ProVantage did not acquire in January 1995,
l extinguish all remaining contingent payment obligations to the
founders, and
l terminate the founders' employment agreements.
On August 2, 1996, ProVantage completed the acquisition of CareStream
ScripCard from Avatex Corporation, formerly known as FoxMeyer Health
Corporation. CareStream ScripCard is a prescription benefit management company
and its operations have been integrated with ProVantage. The initial purchase
price was $30.5 million in cash, plus a supplemental cash payment. If Avatex
exercises its right to the supplemental cash payment within the prescribed time
frame after the close of the offering, the supplemental cash payment will be
25
<PAGE>
an amount equal to 1.5% of ProVantage's market value subject to a minimum of
$2.5 million and a maximum of $5.0 million. The right of Avatex to the
supplemental cash payment expires on August 2, 2001. Such supplemental payment
will be capitalized as additional purchase price and amortized over a period of
15 to 18 years. We expect that a substantial portion of the supplemental
payment will be capitalized as additional purchase price upon completion of the
offering.
On August 20, 1997, ProVantage acquired PharMark, a software and database
development company providing information driven strategies for optimizing
medical and pharmaceutical outcomes, based in Arlington, Virginia, from M. Lee
Morse and Aida A. LeRoy. Mr. Morse and Dr. LeRoy were employed by ProVantage
from August 20, 1997 to January 31, 1999 pursuant to employment agreements
entered into in conjunction with the acquisition. The purchase price for
PharMark was approximately $15.2 million, of which $14.2 million has been paid
in cash and a total of $1.0 million is due in 1999. The sellers of PharMark may
also be entitled to contingent payments of up to $8.0 million in the aggregate
based on the fair market value of ProVantage's outstanding common stock. No
payment will be due if the fair market value is $250.0 million or less at the
measurement date; the full $8.0 million will be due if the value equals or
exceeds $500.0 million at the measurement date; and a pro rata portion of the
$8.0 million contingent payment will be due if the value is between $250.0
million and $500.0 million at the measurement date. Based on the expected
market price of the common stock at the closing of this offering, we expect to
capitalize as additional purchase price upon the closing contingent payments of
between $1.0 million and $2.0 million. The contingent payments, if any, will be
due, and the ultimate amount of the payment calculated, on the first to occur
of August 20, 2002 or certain liquidity events, such as the sale or change of
control of ProVantage excluding an initial public offering and subsequent
equity offerings to the public, related to ProVantage. The offering will not be
a liquidity event. The contingent payments, if any, will be capitilized as
additional purchase price and amortized over a period of 15 to 19 years.
The contingent payments may be made, at ProVantage's election, in either
cash, ShopKo common stock, ProVantage common stock or any combination thereof;
provided, however, that any stock used for such payments must be traded on a
national securities exchange or the Nasdaq National Market. If the contingent
payments are made in ShopKo or ProVantage common stock, the sellers have the
right to require the issuer of the stock to register the stock for sale under
the Securities Act. The sellers also have the right to have the shares of
common stock they receive as contingent payment included in registration
statements filed under the Securities Act by the issuer. The employment
agreements entered into in conjunction with the acquisition of PharMark were
mutually terminated as of January 31, 1999. Payments of approximately $1.1
million were paid to Mr. Morse and Dr. LeRoy at the time of termination.
ProVantage expects to continue its internal growth and may also consider
the acquisition of health services businesses. Such plans may be reviewed and
revised from time to time in light of changing conditions. Depending upon the
size and structure of any such acquisition, ProVantage may require additional
capital resources. ProVantage believes that adequate sources of capital will be
available.
Year 2000
State of Readiness. In order to address Year 2000 compliance, ProVantage
has initiated a comprehensive project designed to eliminate or minimize any
business disruption associated with potential date processing problems in its
information technology systems, as well as its non-information technology
systems. The project consists of five phases: company awareness, assessment,
strategy and work plan development, renovation and testing. ProVantage has
completed the first three phases for both information technology and non-
information technology systems, is nearly complete with the fourth phase, that
is, renovation, and is actively engaged in the fifth stage of testing.
With respect to information technology systems, approximately 80% of
ProVantage's critical business systems are currently compliant, approximately
5% of them will be retired and approximately 15% are in the process of being
renovated. With respect to non-information technology systems, the assessment
phase
26
<PAGE>
indicated a need for only minor renovation work. For both information
technology and non-information technology systems, the renovation phase
currently underway is expected to be completed in the second quarter of fiscal
1999. The testing phase for both information technology and non-information
technology systems is planned to be completed in the third quarter of fiscal
1999.
As part of its Year 2000 project, ProVantage has initiated communications
with all of its vendors and service suppliers to assess their state of Year
2000 readiness. A significant percentage of its important vendors have
responded in writing to ProVantage's Year 2000 readiness inquiries. ProVantage
plans to continue assessment of its third party business partners, including
face-to-face meetings with management and/or onsite visits as deemed
appropriate. Despite ProVantage's diligence, there can be no guarantee that the
systems of other companies which ProVantage relies upon to conduct its day-to-
day business will be compliant.
Costs. ProVantage estimates that it will incur internal and external
expenses of $0.6 to $0.8 million in conjunction with the Year 2000 compliance
project of which $0.4 million have been incurred as of January 30, 1999. The
remaining costs will be incurred in fiscal 1999.
Risks. With respect to the risks associated with its information
technology and non-information technology systems, ProVantage believes that the
most reasonably likely worst case scenario is that ProVantage will experience a
number of minor systems malfunctions and errors in the early days and weeks of
the Year 2000 that were not detected during its renovation and testing efforts.
ProVantage also believes that these problems will not be overwhelming and will
not have a material effect on ProVantage's operations or financial results.
However, despite our compliance program we may have overlooked or otherwise not
remedied Year 2000 issues which may have a material adverse effect on us.
With respect to the risks associated with third parties, ProVantage
believes that the most reasonably likely worst case scenario is that some of
ProVantage's vendors will not be compliant. Management also believes that the
number of such vendors will have been minimized by ProVantage's program of
identifying non-compliant vendors and replacing or jointly developing
alternative supply or delivery solutions prior to the Year 2000.
ProVantage also designs, licenses and sells software products to third
parties. While ProVantage has taken steps to ensure the readiness of this
software and believes it to be compliant, ProVantage cannot be certain that the
software will operate error free, or that ProVantage will not be subject to
litigation, whether the software operates error free or not. However,
ProVantage believes that based on its efforts to ensure compliance, and the
terms and conditions of its software licensing contracts, it is not reasonably
likely that ProVantage will be subject to such litigation.
ProVantage has limited the scope of its risk assessment to those factors
which it can reasonably be expected to have an influence upon. For example,
ProVantage has made the assumption that our customers, government agencies,
utility companies and national telecommunications providers will continue to
operate. Their failure to remedy their Year 2000 problems could have a material
adverse effect on ProVantage's results of operations and ability to operate,
but ProVantage has little, if any, ability to influence such an outcome.
Contingency Plans. ProVantage has recently begun planning preparations to
handle the most reasonably likely worst case scenarios described above.
ProVantage intends to complete the contingency plans for these scenarios during
the second quarter of fiscal 1999.
Year 2000 Readiness Statements. To allow its customers and suppliers an
opportunity to assess ProVantage's state of readiness for the Year 2000,
ProVantage maintains a Year 2000 web page at www.provantageinc.com. Statements
made or contained in this prospectus or on our web page or any past statements
made or contained in this prospectus or on our web page are deemed Year 2000
Readiness Statements and are subject to the Year 2000 Information and Readiness
Disclosure Act (P.L. 105-271), to the fullest extent permitted by law.
27
<PAGE>
Recent Pronouncements
In 1997, Statement of Financial Accounting Standards, SFAS, No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," were issued. Both statements have
been adopted by ProVantage. SFAS No. 130 "Reporting Comprehensive Income"
requires non-cash changes in stockholders' equity be combined with net income
and reported in a new financial statement category entitled "comprehensive
income." Currently, ProVantage's only component of comprehensive income is net
income. SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" requires ProVantage to report certain information if specific
requirements are met about services, geographic areas of operation and major
types of customers. ProVantage provides integrated health benefit management
services to its customers, and these services account for substantially all of
ProVantage's net sales. As a result, ProVantage's operations will be reported
in one segment.
In 1998, SFAS No. 132, "Employers' Disclosures about Pensions and other
Post-retirement Benefits," and SFAS No. 133, "Accounting for Derivative
Investments and Hedging Activities," were issued. SFAS No. 132 was adopted by
ProVantage and will have no impact on ProVantage's annual financial statements.
SFAS 133 must be adopted by June 15, 1999. ProVantage is currently evaluating
the impact of this statement, but it is not anticipated to have a significant
impact on ProVantage's annual financial statements.
Inflation
Inflation has not had a significant effect on the results of operations
of ProVantage or its internal and external sources of liquidity.
Market Risk
ProVantage has not historically been subject to material market risk,
such as interest rate risk or foreign currency exchange risk. In the future,
the rate of interest paid by ProVantage under its credit agreement with Shopko
will generally be subject to changes in interest rates.
28
<PAGE>
BUSINESS
Overview
We are a leading health benefit management company providing pharmacy
benefit management and health information technology products and services to
our customers. Our goal is to be the leading third-party supplier of products
and services designed to optimize the quality and minimize the cost of
healthcare services. As of January 1999, we provided services to over 3,500
customers, including pharmacy benefit management services covering
approximately 4.5 million individuals and vision benefit management services
covering approximately 500,000 individuals. In addition, our licensed products,
which are designed to improve the quality of healthcare, are being used by our
clients in programs covering over 13 million people. We have experienced
significant growth since fiscal 1995, increasing revenues from $87.2 million to
$666.2 million in fiscal 1998, representing a compound annual growth rate of
approximately 97%. Approximately 75% of our growth in the number of people who
use our pharmacy benefit management services during this period has been
generated internally rather than through acquisitions.
Pharmaceuticals are the fastest growing component of healthcare
expenditures and are generally recognized as being the most difficult for
payors to control. According to IMS Health, U.S. pharmaceutical expenditures
are expected to grow by a compound annual growth rate of 14.5% through 2002. We
believe this market should provide us with opportunities for substantial
growth.
We believe that we are differentiated from most of our competitors by:
l our ability to integrate medical claim, diagnosis and
pharmaceutical data and to analyze this data with our 7,800 rules
that are used to identify improper, ineffective or dangerous drug
use,
l our ability to provide useful data which our clients can use to
reduce drug-related hospitalization and other medical costs,
l our expertise and experience acquired in developing an integrated
database of pharmaceutical and medical claims data on over 13
million people, which we believe is one of the largest databases
of its kind, and
l our ability to offer more comprehensive solutions to our customers
to optimize the quality and minimize the cost of healthcare
services.
We believe that only a small number of our competitors are capable of
offering clients the combination of products, expertise and experience that we
can.
Pharmacy benefit management companies address the pressing need of health
plan sponsors to manage costs and to better understand the effect of
pharmaceutical utilization on their membership. Our traditional pharmacy
benefit management products and services include plan design, administration of
a network of over 50,000 retail pharmacies, electronic point-of-sale claims
processing, mail pharmacy services, formulary administration/management,
physician profiling and clinical services. In addition, our products go beyond
commonly available pharmacy benefit management offerings to include clinical
services and information-based products which are used to track medical
treatment and a patient's response to that treatment. These services give our
customers the ability to assess the safety and effectiveness of healthcare
practices and to identify the most effective treatments, potentially lowering
overall costs.
Our customers include healthcare payors, self-funded employers, third
party health plan administrators, state and federal agencies and pharmaceutical
manufacturers. We believe that our customers are increasingly seeking health
management vendors that can help them reduce medical costs by identifying
opportunities to improve outcomes. While pharmacy benefit management companies
are in a unique position to fulfill this need, we believe that few of them are
able to organize and analyze payor specific data regarding pharmaceutical
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<PAGE>
use and medical encounters. We believe that our ability to integrate patient
pharmacy and medical data allows our clients and us to assess overall
healthcare results.
One of our principal information-based services, which was launched in
mid-1998, is our Advanced Therapeutic Intervention program. This program is
designed to:
l review a client's pharmaceutical utilization and medical
diagnosis, claims and prescription data on an integrated basis,
. indentify prescribing patterns that exceed recommended periods of
use, unnecessary drug duplication and over- and under-utilization,
l identify specific patients who have been prescribed drugs that
significantly increase the risk of hospitalization or other
adverse medical events due to underlying medical conditions and
multiple diseases, and
l intervene with the treating physicians to identify significant
drug therapy related risks.
We believe this program provides a measurable return on investment to our
clients. The core of our Advanced Therapeutic Intervention program is
RationalMed, our clinical outcomes assessment software that analyzes our
clients' medical and pharmaceutical data to identify problematic prescribing
patterns. Under the direction of our physicians, our staff clinicians review
the risk assessments generated by RationalMed, and intervene with the treating
physicians. We believe the specific information provided by our Advanced
Therapeutic Intervention program can be used to reduce medical costs and allow
us to increase sales to larger and more sophisticated customers.
In addition to our pharmacy benefit management products and services, we
have developed and continue to develop Internet-accessible health information
technology products designed to assist in management of healthcare results.
Certain of these products access our integrated database of pharmaceutical and
medical claims data on over 13 million people, which we believe is one of the
largest databases of its kind. We intend to broaden our product offering and
cross-sell more advanced health information technology products to our more
sophisticated clients. We believe that we have a competitive advantage over
stand-alone healthcare information system companies because of our pharmacy
benefit management relationships with payors, self-funded employers and third
party health plan administrators.
Background
We are a wholly-owned subsidiary of ShopKo Stores, Inc., a leading
specialty discount retailer with pharmacies and optical centers in most of its
retail stores. Capitalizing on its expertise in pharmacy operations, in 1993
ShopKo launched ProVantage as a mail service pharmacy. We have grown primarily
through internal growth but have also expanded through acquisitions and
strategic alliances. In 1995, we acquired Bravell, Inc., a full-service
pharmacy claims adjudication company. In 1996, we acquired CareStream ScripCard
and also began to offer vision benefit management services. In 1997, we
expanded significantly our clinical expertise and added to our databases with
the acquisition of PharMark.
Industry Overview
The Healthcare Financing Administration projects that healthcare
expenditures will rise from $1.15 trillion in 1998 to $2.13 trillion by 2007, a
compound annual growth rate of 7.1%. The managed care industry in the United
States has experienced rapid growth in response to historical increases in
healthcare costs. Payors have sought to minimize certain of these expenses by
capturing economies of scale, controlling utilization and developing risk
sharing strategies. Prescription drug costs represent the fastest growing
component of healthcare costs according to an industry publication.
Pharmaceutical sales in the United States are expected to increase at a
compound annual growth rate of 14.5% and to reach approximately $173 billion in
the year 2002. The major factors contributing to this trend include:
l a substantial increase in the number of major new product launches
due to a shorter FDA approval cycle,
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<PAGE>
l premium prices for new or branded products,
l increased expenditures for new drug development,
l an aging population, and
l increased demand driven by direct-to-consumer advertising.
In response to increasing demand for pharmaceuticals, health benefit
providers, such as payors and employers, have been searching for ways to better
understand and control drug costs. Pharmacy benefit management companies help
health benefit providers provide a cost effective drug benefit and better
understand the impact of pharmaceutical use on total healthcare expenditures.
In their most basic role as cost savers, pharmacy benefit management
companies provide access to a network of retail pharmacies which have
contractually agreed to provide pharmaceuticals at discounted rates.
Pharmaceutical claims are electronically processed by the pharmacy benefit
management companies from the point of sale, providing operating efficiencies.
Pharmacy benefit management companies also secure volume discounts, rebates and
other formulary revenues from pharmaceutical manufacturers, lowering their
clients' pharmaceutical costs. Pharmacy benefit management companies also seek
to influence behavior patterns by encouraging the substitution of generic
products for more costly branded alternatives and by developing and managing
formularies. Formularies are lists of approved drugs available to health plan
participants.
These cost reduction strategies have become widely used in the healthcare
industry in recent years, however, and payors are now seeking a more
sophisticated approach to managing pharmaceutical expenditures which
incorporates a focus on the quality and efficiency of care as opposed to solely
on cost cutting. Rather than viewing pharmaceutical expenditures as discrete
cost items, payors are beginning to seek an understanding of the effect that
pharmaceutical treatment has on overall healthcare costs and patient care.
We believe that prospective customers are increasingly selecting pharmacy
benefit management companies based on their ability to identify both favorable
and harmful prescribing patterns and to selectively intervene with physicians
and patients to provide information resulting in improved healthcare outcomes
and significantly lower costs. Pharmacy benefit management companies with the
ability to access and derive meaningful conclusions from medical,
pharmaceutical and diagnostic information will have a competitive advantage.
While both payors and providers are intently focused on disease management,
many do not have the scale, expertise and/or resources to internally develop
the data warehouse, decision support tools and clinical therapeutic
capabilities necessary to effectively manage overall healthcare results.
Therefore, we believe that there is a substantial opportunity for organizations
capable of providing information technology based solutions to this market.
Strategy
Overview
Our goal is to be the leading third-party supplier of products and
services designed to optimize the quality and minimize the cost of healthcare
services. To accomplish this goal, we intend to:
l continue to grow our pharmacy benefit management business and
expand our client base by increasing the number of people to whom
we provide services,
l leverage our information-based clinical expertise to develop and
enhance products and services that help manage healthcare
treatment and results, and
l selectively pursue acquisitions and alliances through which we can
realize additional scale benefits in our pharmacy benefit
management offerings or augment our advanced clinical and health
information technology capabilities.
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Grow Pharmacy Benefit Management Business. We intend to aggressively grow
our pharmacy benefit management business by increasing the number of people to
whom we provide pharmacy benefit management services and continuing to expand
the breadth of our product offerings. We have built a leading franchise in the
small group market based on our ability to provide individually tailored
products to fit the unique needs of our clients. We believe that we are able to
provide these customers with a level of flexibility in benefit design not
offered by our competitors. Additionally, we have focused intensively on
service, quality and responsiveness and we believe that our clients value this
difference.
While the small group market remains a major focus for us, we believe
that the mid-sized market offers a substantial growth opportunity. As part of
our efforts to penetrate this market, we are building a comprehensive marketing
program targeting larger clients. We believe that we are well positioned to
serve these larger and generally more sophisticated customers which are often
looking for partners who can provide them with healthcare treatment and results
information that enables them to reduce costs. Our sales efforts to this market
are designed to demonstrate that our advanced clinical products and services go
beyond those offered by our competitors by enabling our clients to:
l meaningfully reduce overall healthcare costs, not just pharmacy
costs,
l quantify cost savings, and
l improve healthcare treatment and results.
These products and services include our Advanced Therapeutic Intervention
programs, therapeutic and disease management programs, and a variety of
information-based consultative services including physician profiling and
formulary design. The basis for many of our advanced, clinical products and
services is our database of integrated pharmaceutical and medical claims data
on over 13 million people. Since 1997, our marketing efforts to more
sophisticated clients, both small and mid-sized, have resulted in the addition
of new clients representing a commitment of approximately 900,000 people to
whom we will provide pharmacy benefit management services, including Wausau
Insurance, Security Health Plan and American National Insurance.
In addition to attracting a larger client base, we intend to leverage our
relationships and clinical expertise in managing pharmaceutical benefits to
market a broader array of products. These products can be sold alone or in
bundled form, based on our client's needs. We plan to use our more
sophisticated clinical services to gain access to new customers which might not
be looking to make a change in their provider of traditional pharmacy benefit
management services. Once we have established a relationship with a client and
demonstrated our capabilities, we believe that we have the opportunity to
cross-sell additional offerings to the customer. Furthermore, we believe that
sales of our more advanced, clinically focused products can help mitigate
margin pressure currently being experienced in traditional pharmacy benefit
management services.
Develop Healthcare Management Products. We have leveraged our
information-based clinical expertise in managing pharmaceutical benefits to
develop health information technology products which focus on the broader goal
of analyzing various factors which influence total health outcomes. These
products provide analytical tools which we believe are valuable to payors,
pharmaceutical manufacturers and physicians. These products benefit from
algorithms developed through analyzing millions of patient-years of health
claims in our database. Our algorithms are sets of rules we use to predict the
probability of various results. We believe that this gives us a strong platform
on which to build a reputation as a company with sophisticated health
information technology products capable of identifying clinical practices that
reduce costs and improve the quality of healthcare.
Pursue Acquisitions and Alliances. We intend to selectively pursue
acquisitions or alliances with companies that either provide us with the
opportunity to realize additional scale benefits in our pharmacy benefit
management business or augment our advanced clinical and health information
technology capabilities. During the past five years, we have acquired four
companies, each of which has added either critical mass to
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our pharmacy benefit management business or a new core competency which we can
offer to our clients. For example, in 1997 we acquired PharMark, which had
sophisticated software tools and a large database. PharMark's database has
served as the springboard for marketing a number of health information
technology-based products to payors and pharmaceutical manufacturers.
In addition to acquisitions, we are seeking corporate alliances to expand
our health information technology capabilities. For example, in a joint venture
with our largest pharmacy benefit management client, American Medical Security,
Inc., we have acquired a minority interest in ThinkMed, LLC, a developer of
medical decision support software. ThinkMed's software identifies and
categorizes high risk patients for case management. We are currently exploring
methods of integrating ThinkMed software into our current product offerings.
These types of alliances allow us to gain access to new technology and data
without committing the level of financial and management resources associated
with a major acquisition.
Products and Services
We provide prescription and vision benefit management services and
healthcare information-based products and clinical services. We believe that
our pharmacy benefit management services, in combination with our information-
based products and services, result in a highly differentiated product offering
with the potential to assess the effectiveness of healthcare services, identify
ways of improving healthcare results, and lower pharmaceutical and, more
importantly, overall medical costs.
Revenues from the dispensing of pharmaceuticals from our mail service
pharmacy are recognized when the prescription is shipped. Revenues from claim
processing fees and sales of prescription drugs and vision benefits by
pharmacies and vision providers in our network are recognized when the claims
are processed. When we provide pharmacy and vision benefits to members in
health benefit plans sponsored by our clients and have an independent
contractual obligation to pay our network pharmacy and vision providers for
benefits provided to members in our clients' health benefit plans, we include
payments from plan sponsors for these benefits as net sales. If we are only
administering the plan sponsors' pharmacy benefit contract, we record only the
administrative fees derived from the contract as revenue. Formulary, clinical,
and health information technology revenues are recognized as the services are
performed and earned in accordance with contractual agreements.
We primarily derive our revenues from the sales of pharmacy benefit
management services, mail pharmacy services and vision benefit management
services. The combined revenue percentages for these three categories as a
percent of net sales were 99.2% in fiscal 1998, 99.7% in fiscal 1997 and 100.0%
in fiscal 1996.
Healthcare Benefit Management Services
We provide high quality, cost efficient pharmacy benefit management
services to health plan sponsors. As of January 1999, we provided pharmacy
benefit management services to approximately 4.5 million people and vision
benefit management services to approximately 500,000 people through more than
3,500 customers. Our core client base has historically been small to mid-size
employers, insurance companies, third party administrators, health maintenance
organizations, HMOs, and self-funded healthcare plan sponsors. We increasingly
are marketing our pharmacy benefit management services to larger organizations
based on our advanced clinical and information-based products and services.
Pharmacy Benefit Management Services. Our pharmacy benefit management
services include national retail pharmacy network administration, claims
adjudication services, mail pharmacy service, formulary development and
management and benefit plan design consultation. We manage a network of over
50,000 retail pharmacies to provide prescription drugs to health plan members.
We contract with these pharmacies to fill prescriptions at predetermined,
negotiated rates, which are significantly more favorable than typical retail
prices, in exchange for designating them as network pharmacies. Health plan
members can fill prescriptions at a
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network pharmacy in all 50 states, Puerto Rico and the Virgin Islands. We use
on-line point-of-sale electronic claims processing with pharmacies for swift
adjudication of pharmacy claims. When a member presents his or her
identification card at any one of our network pharmacies, the pharmacist sends
encrypted information electronically to us for processing. Before the
prescription is filled, we provide to the pharmacist all pertinent member,
health plan and payment information necessary to fill the prescription. The
information we provide to the pharmacist includes:
l an analysis of whether the member is eligible for benefits,
l the prescription benefits the member's health plan has selected,
l the member's co-payment obligation,
l the amount the pharmacy can expect to receive as reimbursement for
its services, and
l a medication profile with information to warn the pharmacist of
possible interactions, including drug-drug, drug-food, drug-age,
and drug-pregnancy interactions.
We are compensated for pharmacy benefit management services through
processing fees, clinical service fees, formulary administration fees and
reimbursement of the cost of the pharmaceuticals dispensed. In addition,
various ancillary and information management fees may be charged.
Our mail service pharmacy offers health plans and their members a cost
effective way to receive maintenance prescription drugs to treat chronic
illnesses. Members mail their prescriptions, which typically provide for up to
a three month supply, to our mail service pharmacy, where we process and mail
their prescriptions, typically within two business days of receipt. Our mail
service pharmacy helps control prescription costs for health plan sponsors by
buying drugs at volume discounts and dispensing generic drug products when
appropriate. Our mail service pharmacy helps control overall healthcare costs
with compliance programs such as calling the members when they neglect to
refill important prescriptions. As of February 1999, our mail service pharmacy
in Green Bay, Wisconsin, dispensed and mailed approximately 75,000
prescriptions per month. Currently customers representing over 50% of the
number of people to whom we provide pharmacy benefit management services
contract with us for access to pharmaceuticals through both our retail pharmacy
network and our mail service pharmacy. In addition to our profits from the sale
of the pharmaceuticals themselves, we are compensated for providing our mail
service pharmacy program by charging our clients a fee per prescription order.
Our Advanced Therapeutic Intervention program is one of the key
differentiating features of our pharmacy benefit management services. We began
providing this service in mid-1998. According to industry sources, a
significant amount of in-patient medical costs are induced by inappropriate
prescription drug therapy. Most pharmacy benefit management companies use
traditional drug utilization review programs to reduce drug-induced adverse
effects caused by drug-on-drug conflicts, duplication of prescriptions and
similar problems. However, these programs are of limited effectiveness because
they are administered without reference to a patient's specific medical profile
and consequently must assume the lowest drug tolerance for each patient. We
believe that as a result, pharmacists typically receive numerous drug
utilization review warnings per day, many of which are not applicable to any
given patient and are often ignored.
Our Advanced Therapeutic Intervention program analyzes the prescription
drug and medical encounter data of each of our participating clients. Using our
RationalMed software, this data is analyzed to identify specific patients who
have been prescribed drugs that significantly increase the patient's risk of
hospitalization due to the underlying medical condition and multiple diseases.
A clinical pharmacist reviews the results and determines those patients for
whom intervention is appropriate. Our clinical staff, under the direction of
our physicians, intervenes by issuing alerts for these patients to the treating
physicians. These alerts inform the treating physicians of the medical
condition, prescribing pattern or other factors that create the increased
hospitalization risk. We are compensated for Advanced Therapeutic Intervention
program services through
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fixed fees, per member per month fees, a percentage-of-savings sharing program
or some combination of these arrangements. Three clients, representing
approximately 690,000 people, have been enrolled in our Advanced Therapeutic
Intervention program since August 1998.
Our pharmacy benefit management services also include plan design
consultation intended to reduce drug costs while promoting clinically
appropriate drug use. The most common plan design features we offer are co-pay
options, incentives for substituting generic for branded drugs, limitations of
the number of days per prescription and requirements that maintenance drugs be
filled by the mail service pharmacy. We assign an account executive to work
closely with each customer to determine the appropriate plan design features
based on the customer's specific benefit requirements.
We also offer and manage formularies for clients. Our formulary is a list
of drugs which are reviewed for safety and efficacy using our DOC Formulary
analytical tool. Formularies reduce costs through generic substitution,
therapeutic substitution and other techniques. Formulary compliance can be
encouraged by plan design features, including financial incentives and
prescriber education programs.
Working with clients and the pharmaceutical industry, we have been able
to conduct many disease management initiatives that support patient education
and self-management of specific diseases. Through these efforts, we are able to
implement treatment protocols that result in improved overall health and fewer
incidents of unnecessary treatments.
Vision Benefit Management Services. We provide benefit management
services to client plan sponsors offering vision benefits. As of January 1999,
our vision benefit management business covered approximately 500,000 people
through a national network of approximately 4,500 retail optical chains and
private ophthalmologists, optometrists and opticians. Unlike the pharmacy
benefit management business, the vision benefit management business offers
self-insured as well as fully insured products. The self-insured products we
offer are similar to our pharmacy benefit management product and service
offering. The insured products are sold by licensed independent and employee
sales agents and are underwritten by a licensed insurance company, a subsidiary
of American International Group. Our arrangement with AIG requires us to market
the insurer's vision products and to perform various administrative services,
such as maintenance of eligibility records, network maintenance, and claims
processing. AIG underwrites all insured contracts and provides other insurance-
related services such as actuarial review. In consideration for our services,
we receive administrative fees and have the potential for profit sharing based
on improved operating results. In consideration of AIG's insurance services AIG
receives the entire premium amount collected, from which it pays claims and all
other expenses.
Healthcare Information Technology Products and Services
Our healthcare information technology allows us to add value to our
pharmacy benefit management services. We have gained a core competency in
developing, maintaining, and analyzing large repositories of integrated
pharmaceutical and health claims information. This was demonstrated by our
development of a database containing integrated claims data on over 5 million
patients in the United Kingdom. We developed and maintained this database,
which contained millions of patient-years of data, as a consultant for a major
pharmaceutical manufacturer.
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We have acquired or developed a number of healthcare information products
and services over the last several years. These products include RationalMed,
ProVQuery, ProVMed, and ProVCOR. The following table sets forth certain
information with respect to our principal healthcare information technology
products as of January 1999:
<TABLE>
<CAPTION>
Number of
Number People
Product of Covered by
Product Target Market Rollout Clients Product
----------- ------------------------------------------- ---------- ------- ----------
<S> <C> <C> <C> <C>
RationalMed Pharmacy Benefit Management Providers, 1993 14(1) 13 million
Health Insurers and State and Federal
Agencies
ProVQuery Pharmacy Benefit Management Providers and 1998 6 770,000(2)
Pharmacy Benefit Management Clients
ProVMed Health Insurers and Payors Early 1999 1(3) 600,000(3)
ProVCOR Pharmaceutical Manufacturers 1999 -- --
</TABLE>
--------
(1) RationalMed users, excluding ProVantage.
(2) In addition to customers which have contracted for ProVQuery, ProVantage
uses the product to support all of its pharmacy benefit management
clients.
(3) The beta site customer.
RationalMed. RationalMed is our clinical outcomes assessment software
that integrates the clients' medical claim, diagnosis, and pharmaceutical data
to identify problematic prescribing patterns and quantify the resulting
increased risk of patient hospitalization or other adverse medical events.
RationalMed uses therapeutic criteria for disease categories and over 7,800
rules that are based on medical research to analyze the integrated medical data
for drug-drug, drug-disease, over- and under-utilization, duplication and
duration conflicts. The physician can therefore determine whether treating the
condition is worth this added risk. In addition, by comparing historical data
on the percentage of patients who were hospitalized the previous year to the
percentage in the intervention year, RationalMed is able to quantify both the
reduction in drug and medical costs and in drug-therapy related
hospitalizations, thereby validating the return on the product. RationalMed won
the Smithsonian Award for Information Technology in Medicine in 1995.
Our target market for RationalMed is pharmacy benefit management
providers, health insurers and state and federal agencies. RationalMed was
first marketed in 1993 on a license basis and is currently used in ten states
for their Medicaid programs and for other customers, representing approximately
13 million covered people.
ProVQuery. ProVQuery is an Internet-accessible pharmaceutical decision
support software system. The system provides clients with desk-top access to
their prescription claims detail for profiling, national comparisons, drug
category breakdown and demographic analyses. This information is provided in
user-friendly pre-designed graphs and reports. Customers' data is loaded into
our centralized data warehouse. The central warehouse currently contains
prescription claims detail on virtually all of the 4.5 million people to whom
we provide pharmacy benefit management services.
With access to our national data, clients can compare their experience to
peer data to better determine where plan changes are necessary and are most
likely to have the greatest impact. The information is provided through user-
friendly, Windows-based systems. For patient confidentiality reasons, all
identifiers of patients are removed prior to loading the data into the
ProVQuery system. Our target market for ProVQuery is pharmacy benefit
management providers and our pharmacy benefit management clients, and this
product is often packaged with our traditional pharmacy benefit management
services and Advanced Therapeutic Intervention program in client proposals. We
currently provide ProVQuery to five clients representing approximately
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770,000 people. In addition, in January 1999 Systems Xcellence USA, Inc.
purchased three ProVQuery licenses for resale to end users. We offer ProVQuery
on the basis of an upfront license fee with annual service fee or on a per-
claim basis.
ProVMed. ProVMed is an administrative, financial and clinical decision
support tool that provides direct and easy access to company-wide data
traditionally contained in the customer's separate databases. Our IBM SP2
technology and Oracle databases give quick and easy access to all pertinent
information. It offers organized workbenches and hundreds of standard queries.
As with ProVQuery, a client provides us with its data, which is loaded into our
centralized data warehouse. The client then has access to its own data as well
as other data for comparison purposes.
ProVMed gives clients the ability to access their medical and
pharmaceutical data as well as to view that data relative to national norms.
For example, ProVMed will enable users to quickly access databases 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. This information can be used to support plan benefit design changes,
restrict or encourage protocol usage, perform provider profiling, enhance
provider contracting and adjust product pricing decisions throughout an
organization.
ProVMed was developed as a joint venture with American Medical Security,
Inc., one of our principal pharmacy benefit management clients. We own 80% of
this joint venture. American Medical Security, Inc. is currently our only
subscriber to ProVMed. We believe the principal market for this product will be
large insurance companies, and we intend to offer the product on the basis of
an up-front license fee and an annual service fee.
ProVCOR. ProVCOR is a healthcare decision support product currently under
development. ProVCOR is designed to help study the effects of pharmaceutical
and clinical interventions on healthcare treatment and results in specific
disease areas. It is also being designed to offer disease-specific "datamarts,"
which can be accessed by the customer to create or support disease management
programs. It is intended to be an analytical tool to support drug purchasing
and dispensing, disease treatment protocol design and cost assessment, and
intervention outcomes analysis. We intend to market ProVCOR principally to
pharmaceutical manufacturers. We expect to commence marketing of ProVCOR in
1999, offering it on the basis of an up-front license fee with an annual
service fee.
Acquisitions
Beyond internal growth, we intend to selectively pursue the acquisition
of companies that either increase the size of our pharmacy benefit management
business or augment our advanced clinical and health information technology
capabilities. We have extensive experience in identifying acquisition
candidates, completing acquisitions and integrating acquired companies into our
business. Since 1994, we have acquired and integrated four companies.
<TABLE>
<CAPTION>
Company Date Strategic Purpose
---------------------------- ------------ ------------------------------------------------
<S> <C> <C>
Bravell, Inc. January 1995 To acquire claims processing capability and
obtain access to approximately 40,000 retail
pharmacies
Vision Program and Related April 1996 To offer vision benefit management services
Assets of the United
Wisconsin Insurance Company
CareStream ScripCard July 1996 To grow core pharmacy benefit management
business
PharMark August 1997 To acquire healthcare information products and
obtain access to millions of patient-years of
health claims data
</TABLE>
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Sales and Marketing
We market our pharmacy benefit management services on the basis of our
high quality customer service, our advanced clinical capabilities, including
our Advanced Therapeutic Intervention program, and our healthcare information
products. We have a nationwide sales force of 12 regional sales managers and
one director.
Sales of our healthcare information products tend to require marketing
support by our senior executives and approval at senior levels in a client's
organization and tend to have a long sales cycle. Our sales strategy in these
circumstances is to differentiate ourselves with these products and then to
cross-sell our traditional pharmacy benefit management and other services to
health information technology customers.
We have sales offices in:
l Charlotte, North Carolina l Atlanta, Georgia
l Dallas, Texas l Omaha, Nebraska
l Salt Lake City, Utah l Chicago, Illinois
l Scottsdale, Arizona l Arlington, Virginia
l Green Bay, Wisconsin l Milwaukee, Wisconsin
We also use a national network of independent agents and brokers who
market our products. For certain healthcare information products, we may in the
future use strategic partners or other distribution channels for product
marketing.
Clients
We currently provide health benefit management services for over 3,500
health benefit plan customers, covering over 5.0 million plan members. Our
health benefit management client base is comprised of health maintenance
organizations, third party administrators, insurance companies, self-funded
healthcare plan sponsors and government agencies. Our ten largest customers
accounted for approximately 42.8% of our revenues in fiscal 1996, approximately
37.1% of our revenues in fiscal 1997 and approximately 35.2% of our revenues in
fiscal 1998. In addition, one of those ten customers, American Medical
Security, Inc., accounted for approximately 17.9% of our revenues in fiscal
1996, 11.7% of our revenues in fiscal 1997, and 11.4% of our revenues in fiscal
1998. Our health information technology clients include federal and state
agencies, third party health plan administrators, health maintenance
organizations, insurance companies and pharmaceutical manufacturers. Ten states
currently use our health information technology for the operation of their
state Medicaid programs.
Competition
We face direct competition in both the pharmacy benefit management and
vision benefit management businesses. The pharmacy benefit management industry
is relatively consolidated and dominated by large companies with significant
resources. Many of the large pharmacy benefit management companies are owned by
large companies, including pharmaceutical manufacturers, which can provide them
with significant purchasing power and other advantages which we do not have.
Competitors in this industry include other pharmacy benefit management
companies, drug retailers, physician practice management companies, and
insurance companies/HMOs. In addition to many smaller companies, our six
primary competitors for pharmacy benefit management customers are:
l PCS Health Systems, Inc., a subsidiary of Rite-Aid Corp.
38
<PAGE>
l Merck-Medco Managed Care, LLC, a subsidiary of Merck & Co., Inc.
l Express Scripts, Inc.
l Caremark International, Inc., a subsidiary of MedPartners, Inc.
l Advance Paradigm, Inc.
l Diversified Pharmaceutical Services, Inc., a subsidiary of
SmithKline Beecham, which has announced that it will be acquired
by Express Scripts, Inc.
We may also experience competition from other sources in the future, such
as Internet-based drug stores. Pharmacy benefit management companies compete
primarily on the basis of price, service, reporting capabilities and clinical
services. The primary competitor for vision benefit management services is
Vision Service Plan, which is the largest vision benefit management provider in
the nation. Vision benefit management companies compete principally on the
basis of size and scope of network, service and price. In most cases, the
competitors listed above are large, profitable and well-established companies
with substantially greater financial and marketing resources than us.
Our competitive strengths include the ability to help customers lower
hospitalization and other medical costs, our reputation for client service, our
database of integrated medical and pharmaceutical data, the use of cutting-edge
technology, and clinical capabilities that leverage our database and technology
strengths. We believe that pharmacy benefit management companies which are
unaffiliated with pharmaceutical manufacturers will be in a competitively
advantaged position; due to our independence, we are able to use our products
and an independent pharmacy and therapeutics committee to ensure that decisions
are primarily based on drug efficacy rather than on economics alone.
Suppliers
We have a large number of suppliers for goods and services. However, only
a few are significant in terms of sustaining our daily business. McKesson HBOC,
Inc. is our current wholesaler of pharmaceuticals for our mail service
pharmacy. International Business Machines Corporation, Oracle Corporation and
MicroStrategy Incorporated provide key computer systems that we use to manage
our internal databases and decision support tools. Commencing in 2000, we plan
to use the claims processing programs of Systems Xcellence USA, Inc. to process
pharmacy claims in the retail network.
Government Regulation
Our business is subject to extensive federal and state laws and
regulations including:
Regulation of Pharmacy and Vision Benefit Management Services
Various forms of legislation and government regulations affect or could
affect providers of pharmacy and vision benefit management services. Among the
most prominent forms of such regulation are the following:
Open Network Legislation. Numerous states have 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. We have not been materially affected by these statutes
because we administer a network of almost 50,000 retail pharmacies and will
admit any qualified, licensed pharmacy that agrees to comply with the terms of
our plans.
Anti-Remuneration Legislation. "Anti-kickback" statutes at the federal
and state level prohibit an entity from paying or receiving any compensation 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
39
<PAGE>
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, certain payments made by
vendors to group purchasing organizations are protected from characterization
as improper or illegal if they are properly disclosed. To our knowledge, these
anti-kickback laws have not been applied to prohibit pharmacy benefit
management companies from receiving amounts from pharmaceutical manufacturers
in connection with pharmaceutical purchasing and formulary management programs,
to therapeutic substitution programs conducted by independent pharmacy benefit
management companies, or to the contractual relationships such as those we have
with certain of our customers.
Some states have enacted legislation that prohibits the plan sponsor from
implementing certain restrictive design features, and many states have
introduced legislation to regulate various aspects of managed care plans,
including provisions relating to the pharmacy benefit. For example, "freedom of
choice" legislation in some states provides that members of the plan may not be
required to use network providers, but must instead be provided with benefits
even if they choose to use non-network providers. Other states have enacted
legislation purporting to prohibit the health plan from offering members
financial incentives for use of mail order pharmacies. Legislation has been
introduced in some states to prohibit or restrict therapeutic substitution, or
to require coverage of all FDA approved drugs. Other states mandate coverage of
certain benefits or conditions. Such legislation does not generally apply to
us, but it may apply to certain of our customers, such as HMOs and health
insurers. If such legislation were to become widespread and broad in scope, it
could have the effect of limiting the economic benefits achievable through
pharmacy benefit management and consequently make our services less attractive.
Consumer Protection Legislation. Most states have consumer protection
laws that have been the basis for investigations and multi-state settlements
relating to financial incentives provided by drug manufacturers to retail
pharmacies in connection with drug switching programs. In addition, pursuant to
a settlement agreement entered into with seventeen states on October 25, 1995,
Merck-Medco Managed Care, LLC, the pharmacy benefit management subsidiary of
pharmaceutical manufacturer Merck & Co., agreed to have pharmacists affiliated
with Merck-Medco Managed Care, LLC mail service pharmacies disclose to
physicians and patients the financial relationships between Merck & Co., Merck-
Medco Managed Care, LLC, and the mail service pharmacy when such pharmacists
contact physicians seeking to change a prescription from one drug to another.
We believe that its contractual relationships with drug manufacturers and
retail pharmacies do not include the features that were viewed by enforcement
authorities as problematic in these settlement agreements. However, no
assurance can be given that we will not be subject to scrutiny or challenge
under one or more of these laws.
Legislation Affecting Drug Prices. Some states have adopted "most favored
nation" legislation providing that a pharmacy participating in the state
Medicaid program must give the state the best price that the pharmacy makes
available to any third party plan. Such legislation may adversely affect our
ability to negotiate discounts in the future from network pharmacies. Other
states have enacted "unitary pricing" legislation, which mandates that all
wholesale purchasers of drugs within the state be given access to the same
discounts and incentives.
Professional Licensure Regulations. All states regulate the practice of
medicine and the practice of nursing. We do not believe that our clinical
counseling or disease management activities constitute either the practice of
medicine or the practice of nursing. However, there can be no assurance that a
regulatory agency in one or more states may not assert a contrary position, and
there is no controlling legal precedent for services of this kind.
Comprehensive Pharmacy Benefit Management Legislation. Although no state
or the federal government has passed legislation regulating pharmacy benefit
management activities in a comprehensive manner, such legislation has been
introduced on several occasions. Such legislation, if enacted in any state in
40
<PAGE>
which we have a significant concentration of business or if enacted by the
federal government, could adversely impact our operations.
Regulation of Mail Service Pharmacy
Licensure. Our mail service pharmacy is duly licensed and in good
standing, in accordance with the laws and regulations of the State of
Wisconsin.
Other Regulation. Many of the states into which we deliver
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.
We have registered in every state in which, to our 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 us, we would be
required to comply with them. Other statutes and regulations impact our 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
our 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 us.
Other Governmental Regulation
Licensure/Registration Requirements. 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. We have registered
under such laws in those states in which we have concluded such registration is
required.
Privacy and Confidentiality Legislation. Most of our activities involve
the receipt or use by us of confidential, medical information concerning
individual members, including the transfer of the confidential information to
the member's health benefit plan. In addition, we use aggregated data--that is,
data from which information which identifies specific patients is removed--for
research and analysis purposes. Legislation has been proposed at the federal
level and in several states to restrict the use and disclosure of confidential
medical information. To date, no such legislation has been enacted that
adversely impacts our ability to provide our services, but there can be no
assurance that federal or state governments will not enact legislation, impose
restrictions or adopt interpretations of existing laws that could have a
material adverse effect on our operations.
Applicability of Insurance Laws. The prescription pharmaceutical plans
currently offered or administered by us are provided on a fee-for-service
basis, and are therefore not generally subject to state insurance laws. The
insured vision benefit plans administered by us are underwritten by an
unaffiliated licensed insurer.
Employee Retirement Income Security Act Preemption. Many of the state
laws described above may be preempted in whole or in part by ERISA, which
provides for comprehensive federal regulation of employee benefit plans.
However, the scope of ERISA preemption is uncertain and is subject to
conflicting court rulings, and in any event we provide services to certain
customers, such as governmental entities, that are not subject to
41
<PAGE>
the preemption provisions of ERISA. Other state laws may be invalid in whole or
in part as an unconstitutional attempt by a state to regulate interstate
commerce, but the outcome of challenges to these laws on this basis is
uncertain. Accordingly, compliance with state laws and regulations is a
significant operational requirement for us.
Future Legislative Initiatives. 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 the state and federal
level. We are unable to predict accurately whether or when legislation may be
enacted or regulations may be adopted relating to our health services
operations or what the effect of such legislation or regulations may be.
Substantial Compliance. We believe that we are in substantial compliance
with, or are in the process of complying with, all existing statutes and
regulations material to the operation of our health services business. To date,
no state or federal agency has taken enforcement action against us for any
material non-compliance, and to our knowledge, no such enforcement against us
is presently contemplated.
Facilities
We operate a number of leased locations:
<TABLE>
<CAPTION>
Use Location Sq. Ft. of Building Space
------------------------------------ --------------------- -------------------------
<S> <C> <C>
Pharmacy Benefit Management/Vision
Benefit Management/Claims
Processing/ Administrative Office Brookfield, Wisconsin 14,100
Pharmacy Benefit Management/Vision
Benefit Management/Claims
Processing/ Administrative Office
Annex Elm Grove, Wisconsin 15,700
Regional Office Salt Lake City, Utah 1,250
Regional Office Dallas, Texas 500
Mail Service Green Bay, Wisconsin 10,000
ProVMed Offices Green Bay, Wisconsin 7,200
PharMark Offices Arlington, Virginia 15,500
</TABLE>
In addition, construction is underway on a new 60,000 square foot
corporate headquarters for us in Pewaukee, Wisconsin to replace the Elm Grove
and Brookfield facilities. This facility will be owned by ShopKo and leased to
us. This new building is expected to be available for occupancy in the Summer
of 1999.
Legal Proceedings
We are involved in various legal proceedings incidental to the conduct of
its business. While there can be no assurance, we do not expect that any such
proceedings will have a material adverse effect on us.
Employees
As of January 30, 1999, we employed 391 people, 27 of whom are licensed
pharmacists and two of whom are physicians. In the opinion of management, we
have good relations with our employees.
Other
ShopKo provides us with certain administrative assistance in accounting,
finance, human resources, facilities management, and information services.
Costs for these services are allocated to us proportionately. We believe that
over time we will become less reliant on ShopKo to provide these services. See
"Relationship With ShopKo" and "Certain Transactions."
42
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information with respect to our
director and executive officers as of January 30, 1999 and those individuals
who will be appointed to our board of directors prior to or concurrently with
completion of the offering. In addition, after the completion of the offering,
we will add two independent directors, who are unaffiliated with ShopKo, to our
board of directors.
<TABLE>
<CAPTION>
Name Age Position
------------------------- --- -------------------------------------------
<S> <C> <C>
Dale P. Kramer, RPh...... 59 Chairman of the Board
Jeffrey A. Jones......... 52 President and Chief Executive Officer and a
Director
George M. Barlow......... 52 Senior Vice President, Healthcare
Information Technology
Joseph A. Coffini, RPh... 51 Senior Vice President, Business Development
and Marketing
Peter F. Hoffman, M.D., Senior Vice President and Chief Medical
PhD..................... 54 Officer
Glen C. Laschober........ 48 Executive Vice President, HBM
Jeffrey C. Girard........ 51 Director
William J. Podany........ 52 Director
Gregory H. Wolf.......... 42 Director
</TABLE>
Mr. Kramer is currently our sole director. We will expand our board of
directors concurrently with the completion of the offering, adding Messrs.
Jones, Girard, Podany and Wolf.
Our directors are elected at the annual stockholders' meeting and serve
until their successors are duly elected and qualified or until their earlier
resignation or removal. The terms of directors will be staggered, with Mr.
Jones serving a term expiring in 2000, Messrs. Girard and Wolf serving terms
expiring in 2001, and Messrs. Kramer and Podany serving terms expiring in 2002.
Executive officers are appointed by and serve at the discretion of the board of
directors.
Dale P. Kramer, RPh, has served as our director and Chairman of the Board
since January 1998; a director and Chairman of the Board of our various
affiliates and predecessors in interest since 1993; a director of ShopKo since
August 1991; Chairman of the Board of ShopKo since July 1997; and President and
Chief Executive Officer of ShopKo from February 1991 to March 1999. From April
1983 to February 1991, he served as ShopKo's Executive Vice President, and from
February 1986 to February 1991, he served as its Executive Vice President and
Chief Operating Officer. Mr. Kramer has been employed by ShopKo in various
other positions since 1971.
Jeffrey A. Jones has served as our Executive Vice President and Chief
Operating Officer since November 1997. He will be named as our President and
Chief Executive Officer and will join our board of directors prior to or upon
completion of the offering. Mr. Jones was Senior Vice President and Chief
Financial Officer of ShopKo from November 1993 until August 1998. Mr. Jones had
11 years of executive and chief financial officer experience and 11 years of
experience with Arthur Andersen & Co. Mr. Jones is a director of Pharmacy Care
Management Association and Boys and Girls Club of Green Bay.
George M. Barlow has served as our Senior Vice President, Healthcare
Information Technology since January 1999. He served as the Vice President,
General Manager of ProVMed from December 1997 to January
43
<PAGE>
1999. From 1995 to 1997, Mr. Barlow was Senior Director of Corporate Marketing
with HealthVision, Inc. He was the President of Distributed Micro Systems, Inc.
from 1980 to 1995.
Joseph A. Coffini, RPh, has served as our Senior Vice President, Business
Development and Marketing since January 1999. He served as our Vice President,
Managed Care Services from November 1994 to January 1999. From February 1993 to
November 1994, he held the position of Director of Managed Care. Prior to
joining us, Mr. Coffini had 26 years of experience in the pharmaceutical
healthcare industry with Geriatric and Medical Companies, Inc., last serving as
Pharmacy Division President from 1990 to 1993, and Thrift Drug Company, Inc.,
last serving as National Sales Manager of Third Party Programs from 1986 to
1990.
Peter F. Hoffman, M.D., PhD, has served as our Senior Vice President and
the Chief Medical Officer since January 1999. He served as the Vice President
and the Chief Medical Officer of PharMark from January 1998 to January 1999.
From June 1996 to January 1998, Dr. Hoffman was the Chief Medical Officer of
Wang Healthcare Information Systems, an electronic medical records company.
From 1966 until his retirement in 1996, Dr. Hoffman served as a Medical Corps
Officer in the United States Air Force. He commanded a wide range of medical
treatment facilities, served as the Command Surgeon of three commands and was
the Director of Programs and Resources in the Office of the Surgeon General of
the Air Force. He retired as a Brigadier General.
Glen C. Laschober has served as our Executive Vice President of our
health benefit management operations since he joined us in March 1997. From
1989 to 1997, Mr. Laschober was with Caremark International, Inc., where his
most recent position was Vice President and General Manger of Caremark's
prescription service division. Mr. Laschober also served in senior management
positions at the NutraSweet and GD Searle divisions of Monsanto Company.
Jeffrey C. Girard has served as a director of ShopKo since June 1991. Mr.
Girard is the President of Girard & Co. of Minneapolis, Minnesota, a private
consulting company, and an Adjunct Professor at the Carlson School of
Management, University of Minnesota. He served as the Executive Vice President
and Chief Financial Officer of Supervalu, Inc. from October 1992 to July 1997
and, prior thereto, held the positions of Executive Vice President, Chief
Financial Officer and Treasurer of Supermarkets General Holdings Corporation
and Senior Vice President and Chief Financial Officer of Supervalu, Inc.
William J. Podany has served as a director of ShopKo since July 1997 and
as President and Chief Operating Officer of ShopKo's retail stores division
from November 1997 to March 1999, and as President and Chief Executive Officer
of ShopKo since March 1999. From November 1994 to November 1997, he held the
position of Chief Operating Officer/Executive Vice President of ShopKo's retail
stores division. From 1992 to 1994, Mr. Podany was Executive Vice President--
Merchandise of Carter Hawley Hale, a federation of four department store
chains. He has held senior merchandising executive officer positions with
Allied Stores, May Department Stores and Carter Hawley Hale since 1978.
Gregory H. Wolf has been a director of ShopKo since November 1998. He has
been an officer of Humana, Inc. since October 1995, having first served as
Senior Vice President of Sales and Marketing; as Chief Operating Officer from
July 1996 to September 1996; President from September 1996 through November
1997; and President, Chief Executive Officer and Director since December 1997.
Humana, Inc. provides managed healthcare products and services through the
operation of health maintenance organizations and preferred provider
organizations. Prior to joining Humana, Mr. Wolf had been employed by EMPHESYS
Financial Group, Inc. and its affiliates since 1988 where he most recently
served as President. In October 1995, EMPHESYS was acquired by Humana. Mr. Wolf
is also a director of National City Bank of Kentucky, Boys and Girls Club of
Green Bay, Greater Louisville, Inc. and the Louisville Downtown Development
Corporation.
44
<PAGE>
Committees of the Board of Directors
After the offering, the board of directors will establish three standing
committees: an audit committee, a compensation committee and an executive
committee.
The functions of the audit committee will include making recommendations
to the board of directors as to the selection of the firm of independent
public accountants to examine the financial statements and our books and
accounts for each fiscal year, the proposed engagement arrangements for the
independent public accountants and the advisability of having the independent
public accountants make specified studies and reports regarding auditing
matters, accounting procedures, tax or other matters. The audit committee will
also review the results of the audit for each fiscal year. The audit committee
will also be responsible for reviewing all related party transactions and for
monitoring corporate policies and procedures with respect to our ethics and
compliance program. Each member of the audit committee will be an "independent
director" within the meaning of the rules of the New York Stock Exchange.
The functions of the compensation committee will include considering and
recommending to the board of directors our overall compensation programs,
reviewing and approving the compensation payable to our senior management
personnel and reviewing and monitoring our executive development efforts to
assure development of a pool of management and executive personnel adequate
for our operations. The committee will also review significant changes in
employee benefit plans and stock related plans and serve as the "committee"
under our stock incentive plan. A majority of the members of the compensation
committee will be "non-employee directors" within the meaning of Rule 16b-3
under the Exchange Act and "outside directors" within the meaning of Section
162(m) of the Internal Revenue Code of 1986.
The functions of the executive committee will include such functions as
may be delegated by the board of directors from time to time. The members of
the executive committee will be Messrs. Podany, Kramer and Jones. Mr. Podany
will chair the executive committee.
The board of directors may, from time to time, establish certain other
committees to facilitate its work.
With respect to material transactions between ShopKo and us after the
offering is completed, our board of directors has established a policy that
all such transactions will be submitted for review, approval and authorization
to our directors who are not affiliated with ShopKo.
Compensation of Directors
Each director who is not one of our employees and who is not an employee
of ShopKo will receive an annual retainer fee of $10,000, a fee of $1,000 for
each board meeting in which the director participates and a fee of $1,000 for
each committee meeting in which the director participates, if the committee
meeting is not held on the same day as a board meeting. We will also reimburse
all directors for travel and related expenses incurred in connection with
board and committee meetings.
Directors are eligible to receive stock options under our stock incentive
plan. See "Executive Compensation--Stock Incentive Plan."
45
<PAGE>
Executive Compensation
Summary Compensation Table
The following table summarizes compensation paid by us for services
rendered in all capacities to us during our fiscal year ended January 30, 1999,
to our chief executive officer and our four other most highly compensated
executive officers.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
----------------------- -------------------
Securities
Name and Principal Underlying All Other
Position Salary ($) Bonus ($)(1) Options/SARs (#)(2) Compensation ($)
- ------------------ ---------- ------------ ------------------- ----------------
<S> <C> <C> <C> <C>
Jeffrey A. Jones........ 340,000 255,000 0 232,030(3)
President and Chief
Executive Officer
Glen C. Laschober....... 192,115 67,240 0 5,284(4)
Executive Vice
President, HBM
Peter F. Hoffman........ 163,000 40,750 3,000 38,750(5)
Senior Vice President,
Chief Medical Officer
Joseph A. Coffini....... 152,696 30,539 0 73,686(6)
Senior Vice President,
Business Development
and Marketing
George M. Barlow........ 150,000 30,000 2,000 6,275(7)
Senior Vice President,
Healthcare
Information Technology
</TABLE>
- --------
(1) Represents bonuses earned with respect to the indicated fiscal year
pursuant to the ShopKo's executive incentive plan, although all or a
portion of the bonus may have been paid during the subsequent fiscal year.
(2) All securities referenced are options to purchase shares of ShopKo's common
stock.
(3) "All Other Compensation" for Mr. Jones includes the following: ProVantage-
paid portion of individual life insurance policy: $1,802; 401(k) ProVantage
match: $5,819; ShopKo profit sharing plan contributions: $30,392;
relocation expenses and associated tax adjustments: $33,303; and retention
bonus: $160,714.
(4) "All Other Compensation" for Mr. Laschober includes the following:
ProVantage-paid portion of individual life insurance policy: $524; and
401(k) ProVantage match: $4,760.
(5) "All Other Compensation" for Dr. Hoffman consists of a signing bonus he
received at the time he joined ProVantage.
(6) "All Other Compensation" for Mr. Coffini includes the following:
ProVantage-paid portion of individual life insurance policy: $1,802; 401(k)
ProVantage match: $4,709; ShopKo profit sharing plan contributions:
$13,604; and retention bonus: $53,571.
(7) "All Other Compensation" for Mr. Barlow includes the following: ProVantage-
paid portion of individual life insurance policy: $707; and relocation
expenses and associated tax adjustments: $5,568.
46
<PAGE>
Option Grants Table
The following table sets forth information about ShopKo stock option
grants during the fiscal year ended January 30, 1999 to our chief executive
officer and our four other most highly compensated executive officers.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Appreciation For Option
Individual Grants(1) Term
---------------------------------------------- ------------------------
% of Total
Number of Options/SARs
Securities Granted to Exercise
Underlying ShopKo or Base
Options/SARs Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- ---- ------------ ------------ --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey A. Jones........ 0 -- -- -- -- --
Glen C. Laschober....... 0 -- -- -- -- --
Peter F. Hoffman........ 3,000 * 28.1875 3-11-08 70,590 162,488
Joseph A. Coffini....... 0 -- -- -- -- --
George M. Barlow........ 2,000 * 28.1875 3-11-08 47,060 108,325
</TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- --------
* Less than 1%
(1) Forty percent (40%) of these stock options vest and become exercisable on
the second anniversary of the date of grant, with an additional twenty
percent (20%) of the options vesting and becoming exercisable on each
successive anniversary of the date of grant. All stock options vest
immediately upon a "change of control" of ShopKo, as defined in ShopKo's
stock option plans.
Option Exercise and Fiscal Year End Value Table
The following table sets forth information with respect to our chief
executive officer and our four other most highly compensated executive officers
concerning stock options to purchase ShopKo common stock that were exercised
during the last fiscal year and the number and value of options outstanding on
January 30, 1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at Fiscal In-the-Money Options/SARs
Shares Year-End (#) at Fiscal Year-End ($)
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey A. Jones........ 0 0 23,000 86,000 491,750 802,250
Glen C. Laschober....... 0 0 0 35,000 0 452,038
Peter F. Hoffman........ 0 0 0 3,000 0 10,688
Joseph A. Coffini....... 5,300 73,119 200 11,200 4,174 126,125
George M. Barlow........ 0 0 0 2,000 0 7,125
</TABLE>
47
<PAGE>
Indemnification of Directors and Officers
Our amended and restated bylaws provide for the indemnification, or
reimbursement for losses and expenses incurred in litigation relating to
corporate affairs, of our directors and officers to the full extent permitted
by the Delaware General Corporation Law. We have entered into agreements to
indemnify, or reimburse, our directors and certain officers, in addition to the
indemnification provided for in the amended and restated bylaws. These
agreements will, among other things, indemnify our directors and certain of our
officers to the full extent permitted by Delaware law for any claims,
liabilities, damages, judgments, penalties, fines, settlements, disbursements
or expenses, including attorneys' fees, incurred by such person in any action
or proceeding, including any action by or in our right, on account of services
as one of our directors or officers. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and officers.
Change of Control Severance Agreements
ShopKo has entered into change of control severance agreements with
certain of our officers, including Messrs. Jones, Laschober, Hoffman, Barlow
and Coffini. The ShopKo severance agreements provide that, if, within two years
after a "change of control," as defined in the agreement, ShopKo terminates the
individual's employment other than for "cause," as defined in the agreement, or
disability, or the individual terminates the individual's employment for "good
reason," as defined in the agreement, then the individual will be entitled to a
lump-sum cash payment equal to a multiple of one and one half or two times the
individual's annual base salary, plus a multiple of one, one and one half or
two times the individual's average annual bonus for the three fiscal years
immediately preceding the date of termination. The multiple referred to in this
paragraph is two for Mr. Jones and one and one half for Messrs. Laschober,
Hoffman, Barlow and Coffini. Each individual would also receive his salary
through the date of termination and all other amounts owed to the individual at
the date of termination under ShopKo's and our benefit plans. In addition,
under such circumstances, the individual will be entitled to continued health
and dental coverage for the individual and the individual's family for a one or
two year period after the date of termination. The ShopKo severance agreements
provide that if certain amounts to be paid thereunder constitute "parachute
payments," as defined in Section 280(G) of the Internal Revenue Code, the
severance benefits owed to the individual may be decreased, but only if the
result is to give the individual a larger after-tax benefit than if the
payments are not reduced. The individual is permitted to elect the payments to
be reduced. Pursuant to the terms of the ProVantage severance agreements
described below, the ShopKo severance agreements will terminate upon completion
of the offering.
We have entered into change of control severance agreements with certain
of our officers, including Messrs. Jones, Laschober, Hoffman, Barlow and
Coffini. The ProVantage severance agreements provide that, if, within two years
after a "change of control," as defined below, we terminate the individual's
employment other than for "cause," as defined below, or disability, or the
individual terminates the individual's employment for "good reason," as defined
below, then the individual will be entitled to a lump-sum cash payment equal to
a multiple of one, one and one-half or two times the individual's annual base
salary, plus a multiple of one, one and one-half or two times the lesser of (A)
the individual's average annual bonus for the three fiscal years immediately
preceding the date of termination or (B) the average of the individual's annual
bonus "norm" for the three fiscal years immediately preceding the date of
termination. The multiple referred to in this paragraph is two for Mr. Jones
and one and one-half for Messrs. Laschober, Hoffman, Barlow and Coffini. Each
individual would also receive his salary through the date of termination and
all other amounts owed to the individual at the date of termination under our
benefit plans. In addition, under such circumstances, the individual will be
entitled to continued health and dental coverage for the individual and the
individual's family for a one, one and one-half or two year period after the
date of termination. The ProVantage severance agreements provide that if
certain amounts to be paid thereunder constitute "parachute payments," as
defined in Section 280(G) of the Internal Revenue Code, the severance benefits
owed to the individual may be decreased, but only if the result is to give the
individual a larger after-tax benefit than if the payments are not reduced. The
individual is permitted to elect the payments to be reduced.
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<PAGE>
A "change of control" is defined in the ProVantage severance agreements
as occurring if:
l the incumbent directors or their permitted successors cease to
constitute at least a majority of our board of directors,
l our stockholders approve certain mergers, consolidations,
liquidations, dissolutions or reorganizations of ProVantage, or
l our stockholders approve a complete liquidation or dissolution of
ProVantage.
For purposes of the ProVantage severance agreements, "cause" means:
l personal dishonesty by the individual intended to result in his or
her substantial personal enrichment at our expense,
l repeated, willful violations by the individual of his or her
obligation to devote reasonable time and efforts to carry out his
or her responsibilities to us, or
l the conviction of the individual of a felony.
"Good reason" as used in the ProVantage severance agreements means any
materially adverse reduction of the individual's authority, responsibilities or
compensation, excluding for this purpose specified actions by us not taken in
bad faith and which are promptly remedied by us upon receipt of notice, or any
required relocation of the individual to a place of business more than 50 miles
from where the individual works at the time of the change of control.
Other Compensation
We provide certain personal benefits and other noncash compensation to
our executive officers. For the fiscal year ended January 30, 1999, the
incremental cost of providing such compensation did not exceed the minimum
amounts required to be disclosed under current SEC rules for each person named
in the Summary Compensation Table.
Compensation Committee Interlocks and Insider Participation
The compensation committee is expected to consist of Messrs. Kramer,
Girard and Wolf. All of these individuals are members of ShopKo's board of
directors. Mr. Kramer is chairman of that board and is ShopKo's former
president and chief executive officer. We are a party to various agreements
with ShopKo described below in "Relationship With ShopKo." Additionally, ShopKo
was our sole stockholder prior to this offering, and upon completion of the
offering, will own a substantial majority of our common stock. See "Principal
Stockholder" and "Description of Capital Stock."
Stock Incentive Plan
Prior to the offering, our board of directors plans to approve our stock
incentive plan. The purpose of the stock incentive plan is to provide a means
to attract and retain high quality individuals, to motivate key personnel to
achieve our long-term goals, to provide incentive compensation opportunities to
our key personnel that are competitive with those of similar companies and to
further align the interests of key personnel who participate in the stock
incentive plan with those of our stockholders through compensation that is
based on the value of our common stock.
The board of directors plans to delegate administration of the stock
incentive plan to the compensation committee. Under the stock incentive plan,
the compensation committee may grant:
l incentive stock options within the meaning of Section 422 of the
Internal Revenue Code,
l non-qualified stock options, and
l shares of stock or the right to receive shares of stock in the
future
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Options and stock awards are collectively referred to as "awards." Awards
may be made to our directors and certain of our key personnel and the directors
and the key personnel of our "related companies". Our "related companies"
include any corporation, joint venture, limited liability company or other
business entity in which we have a significant direct or indirect equity
interest or which has a significant direct or indirect equity interest in
ProVantage. The compensation committee will have final authority, subject to
the express provisions of the stock incentive plan, to determine to whom awards
shall be granted; to determine the types of awards and the numbers of shares
covered by the awards; to determine the terms, conditions, performance
criteria, restrictions and other provisions of each award, and to cancel or
suspend awards; to determine the terms and provisions of any agreements made
pursuant to the stock incentive plan; and to make all other determinations that
may be necessary or advisable for the administration of the stock incentive
plan. In making such award determinations, the stock option committee may take
into account the nature of the services rendered by the respective personnel,
their present and potential contribution to our success and such other factors
as the compensation committee deems relevant. The board of directors has the
non-exclusive power to exercise the authority of the compensation committee
with respect to awards to our non-employee directors and our "related
companies". The stock incentive plan provides for accelerated vesting of awards
upon the occurrence of certain "change of control" transactions as described in
the stock incentive plan.
Incentive stock options may be granted under the stock incentive plan to
full or part-time employees, including officers and directors who are also
employees, of ours or our "related companies". In addition,
non-qualified stock options and stock awards may be granted to employees and
non-employee directors of ProVantage or our related companies."
Subject to the compensation committee's authority to adjust the number
and kind of shares subject to each outstanding award and the exercise price in
the event of certain corporate transactions involving us, the aggregate number
of shares of common stock which may be issued under the stock incentive plan is
1,750,000 shares. Award limits established under the stock incentive plan are
as follows: the maximum number of shares of common stock which may be issued
pursuant to incentive stock options is 500,000; the maximum number of shares of
common stock covered by options granted to any one individual is 500,000 in any
one calendar year; and the maximum value of stock awards granted to any one
person is $5,000,000.
The period during which incentive stock options may be granted under the
stock incentive plan will expire on the tenth anniversary of the date the stock
incentive plan is adopted, and the term of each option granted under the stock
incentive plan will expire not more than ten years from the date of grant. Each
option granted will specify an exercise price or prices; provided, however,
that no option may be granted with a per share exercise price less than the
fair market value per share of common stock on the date of grant. The fair
market value per share on a particular date is the last reported sale price per
share of common stock on that date on the New York Stock Exchange. At the
discretion of the compensation committee, options may be exercised in full at
any time, from time to time or in installments, or upon the occurrence of
specified events. An option may be exercised as to any or all of the shares
covered by the option by delivering written notice of exercise to our corporate
secretary, accompanied by full payment of the exercise price for such shares.
Payment of the exercise price must be made in cash, by tendering previously
owned shares of common stock or by authorizing a third party to sell shares of
the common stock acquired upon exercise of an option and remitting the purchase
price to us.
The stock incentive plan may be terminated or amended by our board of
directors. The board of directors may not, without approval of our
stockholders, increase the number of shares of common stock which may be
delivered pursuant to Awards granted under the stock incentive plan, except for
increases resulting from certain corporate transactions involving us.
ProVantage intends to grant options over approximately 650,000 shares of common
stock under the stock incentive plan effective as of the closing date of the
offering. The exercise price of these options will be the public offering price
in the offering.
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RELATIONSHIP WITH SHOPKO
Intercompany Agreements
We have entered into a number of agreements with ShopKo for the purpose
of defining our ongoing relationship and the conduct of our respective
businesses. These agreements were developed in connection with this offering
while we were a wholly-owned subsidiary of ShopKo, and, therefore, such
agreements were not the result of arm's-length negotiations--that is,
negotiations between independent and unrelated parties each acting in its own
self-interest. As a result, there can be no assurance that each of these
agreements, or the transactions provided for in these agreements, has been or
will be effected on terms at least as favorable to us as could have been
obtained from parties other than ShopKo.
These agreements may be modified and additional agreements, arrangements
and transactions may be entered into between us after completion of this
offering. Any such future modifications, agreements, arrangements and
transactions will be determined through negotiation between us. With respect to
material transactions between us after the offering is completed, our board of
directors has established a policy that all such transactions will be submitted
for review, approval and authorization to our directors who are not affiliated
with ShopKo.
The following is a summary of the material features of certain
agreements, arrangements and transactions between us. The summaries of each of
the following agreements are qualified in their entirety by reference to the
full text of such agreement, a copy of which has been filed as an exhibit to
the registration statement of which this prospectus is a part.
Credit Agreement. As a wholly-owned subsidiary of ShopKo, we participated
in ShopKo's funding and cash management system. Prior to this offering, our
cash needs in excess of cash flow provided by operations have been met
principally by additional capital contributions by ShopKo, and excess cash has
been distributed to ShopKo. In connection with this offering, we have entered
into a credit agreement with ShopKo to provide us with a revolving line of
credit commencing on the closing date of this offering and expiring on January
31, 2001. Pursuant to the credit agreement, ShopKo has agreed, subject to
certain conditions, to make advances to us on a revolving basis in an aggregate
amount not to exceed $25.0 million. Borrowings under the credit agreement will
bear interest at various market rates at the time of borrowing. The credit
agreement provides for an annual commitment fee of 1/5 of one percent of the
total commitment amount. The credit agreement is unsecured, and we may
terminate the credit agreement at any time without penalty. We may at any time
replace the credit agreement with borrowings from banks or other financial
institutions or in the private or public markets. The credit agreement
restricts us from borrowing funds from parties other than ShopKo without
ShopKo's consent, and prohibits us from selling our common stock unless ShopKo
meets certain financial tests, pledging certain of our assets and entering into
agreements which restrict our ability to pay dividends. Our interest expense in
the future will depend on the amount, timing and maturity of borrowings, market
rates and negotiations with lenders. The interest rate and other terms provided
by third-party lenders may not be as favorable to us as those provided by
ShopKo under the credit agreement.
Indemnification and Hold Harmless Agreement. We have entered into an
indemnification and hold harmless agreement with ShopKo with respect to the
allocation of responsibility for certain liabilities. In general, the
indemnification agreement provides that we and ShopKo will each indemnify the
other party and that party's directors, officers, employees and agents against
certain liabilities arising from or based upon the operation of their own
respective businesses prior to and following the offering, including, but not
limited to, liabilities arising under securities, environmental and contract
law.
Tax Matters Agreement. We have entered into a tax matters agreement with
ShopKo which provides that ShopKo will prepare all returns and, generally, have
liability for all income taxes attributable to all tax periods ending on or
before the offering. We have entered into an administrative services agreement,
described
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<PAGE>
below, pursuant to which ShopKo will continue to prepare tax returns for us
after the offering, however, we have liability for all taxes for tax periods
beginning after the offering. For tax periods which begin before the offering
but end after the offering, ShopKo has liability for income taxes attributable
to income allocable to the period ending with the offering and we have
liability for the remainder. ShopKo will determine the method for allocating
income in the tax year in which the offering occurs. By law, we are liable for
the entire federal income tax of ShopKo and other companies included in the
consolidated return for all periods in which we are included in the
consolidated group. In the tax matters agreement, however, ShopKo agrees to
indemnify us against this liability except to the extent it relates to us and
our subsidiaries, if any, after the offering. If our employees exercise ShopKo
stock options or otherwise receive compensation from ShopKo nonqualified plans
after the offering, the tax matters agreement provides that we will reimburse
ShopKo for the tax benefit, if any, that we receive from deducting compensation
attributable thereto and the employer's share of any employment taxes arising
in connection with such compensation which is paid by ShopKo.
Administrative Services Agreement. We have entered into an administrative
services agreement with ShopKo pursuant to which ShopKo will make available and
provide certain administrative, support and consultation services to us,
including employee benefits, payroll processing, insurance, tax compliance,
treasury, and accounts payable processing. The administrative services
agreement has an initial term which expires January 31, 2001, subject to
automatic renewal for successive one-year terms. At any time during the term of
the administrative services agreement, either party may terminate existing
categories of services upon 120 days' prior written notice. ShopKo is obligated
to provide us transition assistance, at our request and expense, upon the
termination of any service provided pursuant to the agreement. We anticipate
that we will pay ShopKo a total of $0.4 million in the first twelve months
following this offering for such services.
I.T. support agreement. Certain components of our computer systems are
located in ShopKo's corporate headquarters. We have entered into an I.T.
support agreement with ShopKo pursuant to which ShopKo has agreed to provide us
with:
l access to ShopKo's computer facilities,
l certain support services to be performed by ShopKo's systems
personnel, and
l the shared use of ancillary computer hardware and operating
software.
The I.T. support agreement has a term which expires on January 31, 2001.
At any time during the term of the I.T. support agreement, either party may
terminate existing categories of services upon 120 days' prior written notice.
In addition, ShopKo has agreed to provide transition assistance to us if any
services are terminated as a result of expiration or termination of the
agreement or otherwise. We anticipate that we will pay ShopKo between $0.7
million and $1.3 million in the first twelve months after the offering under
this agreement. The I.T. support agreement also contains confidentiality
provisions relating to our patient data and proprietary software.
Lease Agreement. Upon ShopKo's completion of construction of our new
corporate headquarters, we expect to enter into a long term triple net lease
with ShopKo, whereby we will lease the building from ShopKo upon terms and
conditions to be determined. While the lease agreement has not been finalized,
we expect that the lease will have a term of 15 years with four options to
renew for 5 years each, will have annual rental payments of $200,000, and will
provide that we will have the option to purchase the facility at fair market
value or increase the rental payments to fair market rates at the time when
ShopKo ceases to beneficially own at least 51% of the outstanding common stock.
Registration Rights Agreement. We have entered into a registration rights
agreement with ProVantage Holdings, Inc., a wholly-owned subsidiary of ShopKo,
pursuant to which we have granted demand and "piggyback" registration rights to
ProVantage Holdings and its affiliates, including ShopKo, with respect to
shares of common stock owned by ProVantage Holdings and its affiliates,
including ShopKo, following the offering. Pursuant to the registration rights
agreement, ProVantage Holdings has the right to require us to file
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up to three registration statements under the Securities Act, which may be
increased by an unlimited number of registration statements if effected on Form
S-3, covering ProVantage Holdings' shares. ProVantage Holdings also has the
right, if we file a registration statement, to require us to include its shares
in such registration statement. Our obligations under the registration rights
agreement are subject to certain limitations relating to the minimum amount of
common stock to be included in a registration statement, the timing of the
exercise of registration rights and other similar matters. We have agreed to
pay all costs and expenses relating to the exercise of ProVantage Holdings'
registration rights, except for underwriting commissions and filing fees
relating to the shares sold by ProVantage Holdings, any special or
extraordinary auditing expenses, ProVantage Holdings' legal expenses and, in
the case of demand registration rights, printing fees. We and ProVantage
Holdings will each indemnify the other party for certain liabilities, including
liabilities under the Securities Act, in connection with any registration under
the registration rights agreement. The registration rights agreement will
terminate when ProVantage Holdings or its affiliates owns less than 5% of our
outstanding common stock. ShopKo has agreed with the underwriters, however, not
sell or otherwise dispose of any common stock or our related securities for a
period of 180 days after the closing of this offering without the prior written
consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated. See "Shares
Eligible for Future Sale."
Control by ShopKo
After the offering is completed, ShopKo will own approximately 70.3% of
the common stock. As a majority stockholder, ShopKo will be able to control our
business and affairs, including:
l the election of our entire board of directors,
l any determinations with respect to mergers or other business
combinations,
l the amendment of our restated certificate of incorporation or
amended and restated bylaws,
l the acquisition or disposition of material assets,
l the incurrence of indebtedness,
l the issuance of additional common stock or other equity
securities,
l the payment of dividends with respect to the common stock,
l the power to determine all matters submitted to a vote of
stockholders,
l the power to delay, defer or prevent a change in control, and
l the ability to take other actions that might be favorable to
ShopKo but not to our stockholders generally.
CERTAIN TRANSACTIONS
We have in the past entered into intercompany transactions and
arrangements with ShopKo and its affiliates incidental to our businesses.
General administrative and other expenses have in the past been allocated to us
from ShopKo for the types of services described in the administrative services
agreement and the information technology services agreement. The allocation for
the last three fiscal years is as follows:
<TABLE>
<CAPTION>
Fiscal Year
--------------
1996 1997 1998
---- ---- ----
(in millions)
<S> <C> <C> <C>
Selling, general and administrative expenses............... $0.4 $1.1 $1.2
</TABLE>
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In addition to the allocations described above, we have entered into
various transactions with ShopKo in the ordinary course of our businesses. The
payments for these activities for the last three fiscal years are as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------------
1996 1997 1998
----- ----- -----
(in millions)
<S> <C> <C> <C>
Our payment to ShopKo for prescription costs............ $21.0 $25.8 $35.7
Our payment to ShopKo for shared formulary fees......... 0.2 0.1 0.0
Our purchase of pharmaceutical inventory from ShopKo.... 1.0 0.8 0.3
ShopKo payment to us for claims processing.............. 1.6 1.6 2.1
</TABLE>
For a further description of recent transactions between ShopKo and us,
please see Note H of the Notes to the Consolidated Financial Statements
included elsewhere in this prospectus.
We receive a benefit in the form of lower prices when purchasing various
goods and services when such purchases are made through or in conjunction with
ShopKo. Such benefits may not be available in all cases in the future.
We will continue to engage in various transactions with ShopKo on a
contractual and non-contractual basis after the offering is completed. See
"Relationship With ShopKo."
In connection with the PharMark acquisition, we entered into five-year
employment agreements with each of M. Lee Morse and Aida A. LeRoy. These
agreements were extinguished as of January 31, 1999, at which time they entered
into agreements to provide certain consulting services to us. At that time, we
entered into several new agreements with Mr. Morse and Dr. LeRoy:
l a mutual settlement agreement and release of specified claims,
whereby the parties mutually agreed to release all claims
associated with the employment agreements;
l a trademark license agreement, whereby Mr. Morse and Dr. LeRoy
license the trademark "Mikalix" from us;
l a sublease, whereby Mr. Morse and Dr. LeRoy sublease certain
office space from us; and
l non-disclosure, non-interference and non-competition agreements
containing certain confidentiality, non-interference and non-
competition provisions which are effective for a term of two
years.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Acquisitions."
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PRINCIPAL AND SELLING STOCKHOLDER
Prior to this offering, our only stockholder was ShopKo, whose address is
700 Pilgrim Way, Green Bay, Wisconsin 54304. ShopKo is subject to the
requirements of the Securities Exchange Act of 1934 and as a result files
reports, proxy statements and other information with the SEC on a periodic
basis. You can read and make copies of these materials at the offices of the
SEC, or by means of the SEC's website, in each case at the addresses listed
under the caption "Where You Can Find More Information."
As of the date of this prospectus, ShopKo owns beneficially and of record
12,550,000 shares of common stock, representing all of the shares of common
stock outstanding prior to this offering. Upon the sale by us of the 5,300,000
shares of common stock offered hereby, ShopKo will own beneficially and of
record 70.3% of the outstanding common stock. ShopKo will own 65.9% of the
common stock if the underwriters' over-allotment option is exercised in full.
The following table sets forth as of January 30, 1999 the number of
shares of ShopKo common stock owned by our director, by our chief executive
officer, our four other most highly compensated executive officers, by each
individual who will be appointed as a member of our board of directors prior to
or concurrently with the offering and by our director, individuals who will be
appointed as our directors and executive officers as a group. Except as
otherwise noted, the persons named in the below table have sole voting and
investment power with respect to all shares shown as beneficially owned by
them. The column entitled "Amount and Nature of Beneficial Ownership" includes
shares which may be acquired within 60 days pursuant to stock options as
follows: Mr. Kramer, 180,000 shares; Mr. Podany, 15,000 shares; Mr. Jones,
23,000 shares; Mr. Coffini, 200 shares; and all directors and executive
officers as a group, 218,200 shares.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial
Name of Beneficial Owner Ownership Percent
------------------------ ----------------- -------
<S> <C> <C>
Dale P. Kramer (1)(2).......................... 270,000 1.0%
Jeffrey C. Girard (3).......................... 1,000 *
Gregory H. Wolf................................ -- *
William J. Podany (2)(4)....................... 40,000 *
Jeffrey A. Jones (2)........................... 23,000 *
Glen C. Laschober.............................. -- *
Peter F. Hoffman............................... 0 *
Joseph A. Coffini (2).......................... 275 *
George M. Barlow............................... 0 *
All directors and executive officers as a group
(9 persons)................................... 334,275 1.3%
</TABLE>
- --------
* Less than 1%
(1) Includes 50,000 shares of restricted stock granted pursuant to ShopKo's
restricted stock plan.
(2) The number of shares shown with respect to Messrs. Kramer, Podany and Jones
does not reflect funds from their respective deferred compensation plan
accounts and profit sharing/401(k) plan accounts invested in ShopKo common
stock through the ShopKo stock fund. As of January 30, 1999, such executive
officers' approximate ShopKo stock fund account balances were as follows:
Mr. Kramer, $363,943; Mr. Podany, $49,326; Mr. Jones, $204,348; and Mr.
Coffini, $58,756.
(3) Mr. Girard is a former executive officer of Supervalu. Prior to July 2,
1997, Supervalu and a wholly-owned subsidiary of Supervalu, Supermarket
Operators of America, Inc., beneficially owned 14,731,667 shares of
ShopKo's common stock.
(4) Includes 25,000 shares of restricted stock granted pursuant to ShopKo's
restricted stock plan.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Prior to the completion of this offering, we will file a restated
certificate of incorporation and adopt amended and restated bylaws. The
following description gives effect to the adoption and filing of these
documents.
Authorized Capital Stock
Our authorized capital stock consists of 50,000,000 shares of common
stock, par value $.01 per share, and 5,000,000 shares of preferred stock, par
value $.01 per share. 12,550,000 shares of common stock and no shares of
preferred stock are outstanding as of the date hereof. 5,300,000 shares of
common stock are being offered in the offering and 1,750,000 shares have been
reserved for issuance pursuant to certain employee and non-employee director
benefit and option plans. See "Executive Compensation." All of such shares are
validly issued, fully paid and non-assessable, and upon completion of the
offering all of the outstanding shares of common stock will be validly issued,
fully paid and non-assessable under the laws of the state of Delaware, the
state in which we are incorporated. We are qualified as a foreign corporation
in the state of Wisconsin, and Wisconsin courts have held the predecessor to
Section 180.0622(2)(b) of the Wisconsin Business Corporation Law to be
applicable to foreign corporations. Under Section 180.0622(2)(b), holders of
common stock are liable up to the amount equal to the par value of the common
stock owned by such holder for all debt owing to employees for services
performed, but not exceeding six months' service in any one case. Some
Wisconsin courts have interpreted "par value" to mean the full amount paid by
the holders to purchase the common stock. The following summary description of
our capital stock is qualified in its entirety by reference to our form of
restated certificate of incorporation and our amended and restated bylaws, a
copy of each of which is filed as an exhibit to the registration statement of
which this prospectus is a part.
Common Stock
Voting Rights. The holders of common stock are entitled to one vote per
share on all matters to be voted on by stockholders. The holders of common
stock are not entitled to cumulative voting rights. Generally, all matters to
be voted on by stockholders must be approved by a majority, or, in the case of
election of directors, by a plurality, of the votes entitled to be cast by all
shares of common stock present in person or represented by proxy, subject to
any voting rights granted to holders of any preferred stock.
Dividends. Holders of common stock are entitled to receive dividends
when, as and if declared by the board of directors out of funds legally
available therefor, subject to any preferential rights of any outstanding
preferred stock.
Other Rights. In the event of a voluntary or involuntary liquidation,
dissolution or winding up of ProVantage, the holders of shares of common stock
would be entitled to share ratably in all assets remaining after payment of
liabilities subject to prior distribution rights and payment of any
distributions owing to holders of shares of preferred stock then outstanding,
if any. Holders of the shares of common stock have no preemptive rights, and
the shares of common stock are not subject to further calls or assessment by
us. There are no redemption provisions or provisions setting aside particular
assets to enable us to retire the common stock, commonly referred to as sinking
fund provisions, which are applicable to the shares of common stock.
Preferred Stock
The board of directors has the authority, without further action by the
stockholders, to issue preferred stock in one or more series and to fix the
rights, designation, preferences, privileges, limitations and restrictions
thereof, including dividend rights, conversion rights, terms and rights of
redemption, liquidation preferences and sinking fund terms, any or all of which
may be greater than the rights of the common stock. The board of
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<PAGE>
directors, without stockholder approval, may issue shares of preferred stock
with conversion, voting and other rights which could adversely affect the
rights of the holders of shares of common stock.
Authorized but Unissued Shares
Delaware law does not require stockholder approval for any issuance of
authorized shares. These additional shares may be used for a variety of
corporate purposes, including future public or private offerings to raise
additional capital or to facilitate corporate acquisitions. One of the effects
of the existence of unissued and unreserved shares may be to enable the board
of directors to issue shares to persons friendly to current management, which
issuance could render more difficult or discourage an attempt to obtain control
of ProVantage by means of a merger, tender offer, proxy contest or otherwise,
and thereby protect the continuity of our management and possibly deprive the
stockholders of opportunities to sell their shares of common stock at prices
higher than prevailing market prices.
Delaware Law and Certain Charter and Bylaw Provisions; Anti-Takeover Measures
Upon the completion of this offering, we will be subject to the
provisions of Section 203 of the Delaware General Corporation Law, the DGCL. In
general, Section 203 prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is, or the
transaction in which the person became an interested stockholder was, approved
in a prescribed manner or another exception applies. For purposes of Section
203, a "business combination" is defined broadly to include a merger, asset
sale or other transaction resulting in financial benefit to the interested
stockholder, and subject to certain exceptions, an "interested stockholder" is
a person who, together with affiliates and associates, owns (or within the
three prior years, did own) 15% or more of the corporation's voting stock.
Our restated certificate of incorporation provides that our board of
directors is divided into three classes serving staggered three-year terms. As
a result, at least two stockholders' meetings will generally be required for
stockholders to change a majority of the directors. The board of directors is
authorized to create new directorships and to fill such positions so created.
The board of directors, or its remaining members, even though less than a
quorum, is also empowered to fill vacancies on the board of directors occurring
for any reason. Any director appointed to fill a vacancy or to a newly created
directorship will hold office until the next election for the class of
directors to which the new director has been appointed. Directors may only be
removed for cause by the affirmative vote of two-thirds of the outstanding
common stock entitled to vote at a meeting called for this purpose. Our
restated certificate of incorporation and amended and restated by-laws provide
that stockholders may not act by written consent in place of an annual or
special meeting. Our restated certificate of incorporation and amended and
restated by-laws provide that special meetings of stockholders may only be
called by the chairman of the board or the president, or by a majority of the
board of directors.
The provisions in our restated certificate of incorporation relating to
amendment of our bylaws, the structure of our board of directors and
prohibiting action by written consent of our stockholders may only be amended
by a vote of 75% of our outstanding common stock.
Our amended and restated bylaws provide that, for nominations to the
board of directors or for other business to be properly brought by a
stockholder before an annual meeting of stockholders, the stockholder must
first have given timely notice thereof in writing to our corporate secretary.
To be timely, a stockholder's notice generally must be delivered not less than
120 days prior to the anniversary date of the annual meeting in the immediately
preceding year. The notice by a stockholder must contain, among other things,
certain information about the stockholder delivering the notice and, as
applicable, background information about the nominee or a description of the
proposed business to be brought before the meeting. Our amended and restated
57
<PAGE>
bylaws may only be amended by a vote of 75% of our outstanding common stock or
by majority vote of our board of directors.
Certain of the provisions of our amended and restated certificate of
incorporation and amended and restated bylaws discussed above could make more
difficult or discourage a proxy contest or other change in our management or
the acquisition or attempted acquisition of control by a holder of a
substantial block of our stock. It is possible that such provisions could make
it more difficult to accomplish, or could deter, transactions which
stockholders may otherwise consider to be in their best interests.
As permitted by the DGCL, the restated certificate of incorporation
provides that our directors shall not be personally liable to us or our
stockholders for monetary damages for breach of their fiduciary duties as
directors, except for liability:
l for any breach of their duty of loyalty to us or our stockholders,
l for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law,
l for unlawful payments of dividends or unlawful stock repurchases
or redemptions, as provided in Section 174 or successor provisions
of the DGCL, or
l for any transaction from which the director derived an improper
personal benefit.
The amended and restated bylaws provide that we shall indemnify our
directors, officers and employees to the fullest extend permitted by the DGCL,
except in some circumstances, with respect to suits initiated by the director,
officer or employee, and advance expenses to such directors, officers or
employees to defend any action for which rights of indemnification are
provided. In addition, the amended and restated bylaws permit us to grant such
rights to our agents. The amended and restated bylaws also provide that we may
purchase insurance on behalf of any director, officer, employee or agent
against certain expenses, liabilities and losses, whether or not we would have
the power to indemnify such person against such expenses, liabilities or
losses. We believe that these provisions will assist us in attracting and
retaining qualified individuals to serve as directors, officers and employees.
Rights Plan
Prior to the closing of this offering, the board of directors will adopt
a stockholders rights plan pursuant to which one right to purchase one one-
thousandth of a share of our newly created Series B junior participating
preferred stock, par value $0.01 per share, would be issued as a dividend for
each outstanding share of common stock. Each right, when exercisable, would
represent the right to purchase one one-thousandth of a share of Series B
junior participating preferred stock at a specified price. The rights would
become exercisable ten days after a person or group acquires 15% or more of the
outstanding common stock, other than certain persons who own more than 15% of
the outstanding common stock as a result of the purchase of common stock from
ShopKo or its affiliates, or commences or announces a tender or exchange offer
which would result in such ownership.
If, after the rights become exercisable, we were to be acquired through a
merger or other business combination transaction or 50% or more of our 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. In addition, if any person acquires 15% or more of
the outstanding common stock, each right not owned by such person would permit
the purchase, for the exercise price of $120.00, of common stock having a
market value of twice the exercise price.
The rights would expire ten years after the adoption of the rights plan,
unless earlier redeemed by us in accordance with the terms of the rights plan.
The purchase price payable and the shares of Series B junior
58
<PAGE>
participating preferred stock issuable upon exercise of the rights would be
subject to adjustment from time to time as specified in the rights plan. 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 15% or more of the
outstanding common stock.
Shares of Series B junior participating 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 junior
participating preferred stock will be entitled to a cumulative preferential
quarterly dividend payment equal to the greater of $10 per share or 1,000 times
the dividend declared per share of common stock. In the event of liquidation,
the holders of shares of Series B junior participating preferred stock will be
entitled to a preferential liquidation payment equal to the greater of $1,000
per share or 1,000 times the payment made per share of common stock. Each share
of Series B junior participating 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 common stock is
exchanged, each share of Series B junior participating 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 junior participating preferred
stock will be 100,000.
Transfer Agent
The transfer agent for the common stock is Norwest Shareowner Services.
SHARES ELIGIBLE FOR FUTURE SALE
The 5,300,000 shares of common stock sold in this offering, 6,095,000
shares of common stock if the underwriters exercise their over-allotment option
in full, will be freely tradable without restriction under the Securities Act,
except for any such shares which may be acquired by our "affiliates," as that
term is defined in Rule 144 promulgated under the Securities Act, which shares
will remain subject to the resale limitations of Rule 144.
The 12,550,000 shares of common stock that will continue to be held by
ShopKo after the offering will constitute "restricted securities" within the
meaning of Rule 144, and will be eligible for sale in the open market after the
offering, subject to certain contractual lockup provisions and to the
applicable requirements of Rule 144, both of which are described below. We have
entered into a registration rights agreement with ShopKo relating to ShopKo's
rights to have us register under the Securities Act all or a portion of the
common stock owned by it. See "Relationship With ShopKo." In addition, we have
the option to satisfy certain contingent obligations to the sellers of the
PharMark business with shares of common stock. If we issue shares of common
stock to the PharMark sellers, they have the right to require us to register
those shares for sale under the Securities Act. They also have the right to
have those shares included in registration statements we file under the
Securities Act. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Acquisitions" for a more complete
description of the contingent payments due to the PharMark sellers.
Generally, Rule 144 provides that a person who has beneficially owned
"restricted securities" for at least one year will be entitled to sell on the
open market in broker's transactions within any three-month period a number of
shares that does not exceed the greater of 1% of the then outstanding shares,
or the average weekly trading volume on the open market during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain notice requirements and the availability of current public information
about us. Shares properly sold in reliance upon Rule 144 to persons who are not
"affiliates" are thereafter freely tradable without the restriction or
registration under the Securities Act. Ninety days after completion of this
59
<PAGE>
offering, ShopKo will be able to sell in the public market its shares of common
stock, subject to the volume and manner of sale restrictions described above
and subject to the lock-up provisions described below.
We and our executive officers and directors and Shopko have agreed,
subject to certain exceptions, not to directly or indirectly offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant for the sale of,
lend or otherwise dispose of or transfer any shares of our common stock or
securities convertible into or exchangeable or exercisable for or repayable
with our common stock, whether now owned or thereafter acquired by the person
executing the agreement or with respect to which the person executing the
agreement thereafter acquires the power of disposition, or file a registration
statement under the Securities Act with respect to the foregoing, or enter into
any swap or other agreement that transfers, in whole or in part, the economic
consequence of ownership of our common stock whether any such swap or
transaction is to be settled by delivery of our common stock or other
securities, in cash or otherwise, without the prior written consent of Merrill
Lynch, Pierce, Fenner & Smith Incorporated on behalf of the underwriters for a
period of 180 days after the date of this prospectus.
Sales of substantial amounts of common stock in the open market, or the
availability of such shares for sale, could adversely affect prevailing market
prices.
60
<PAGE>
UNDERWRITING
General
We intend to offer our common stock in the United States and Canada
through a number of underwriters. Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Bear, Stearns & Co. Inc., William Blair & Company, L.L.C. and
Lehman Brothers Inc. are acting as representatives of each of the underwriters
named below. Subject to the terms and conditions set forth in the purchase
agreement among us, Shopko and the underwriters, we have agreed to sell to the
underwriters, and each of the underwriters severally and not jointly has agreed
to purchase from us, the number of shares of common stock set forth opposite
its name below.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................
Bear, Stearns & Co. Inc..........................................
William Blair & Company, L.L.C...................................
Lehman Brothers Inc. ............................................
Total....................................................... 5,300,000
=========
</TABLE>
In the purchase agreement, the several underwriters have agreed, subject
to the terms and conditions set forth in that agreement, to purchase all of the
shares of common stock being sold under the terms of such agreement if any of
the shares of common stock being sold under the terms of that agreement are
purchased. In the event of a default by an underwriter, the purchase agreement
provides that, in certain circumstances, the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.
We and ShopKo have agreed to indemnify the underwriters against some
liabilities, including some liabilities under the Securities Act, or to
contribute to payments the underwriters may be required to make in respect of
those liabilities.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and
certain other conditions. The underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part.
Omissions and Discounts
The representatives have advised us and ShopKo that the underwriters
propose initially to offer the shares of common stock to the public at the
initial public offering price set forth on the cover page of this prospectus,
and to certain dealers at such price less a concession not in excess of $ per
share of common stock. The underwriters may allow, and such dealers may
reallow, a discount not in excess of $ per share of common stock on sales to
certain other dealers. After the initial public offering, the public offering
price, concession and discount may change.
61
<PAGE>
The following table shows the per share and total public offering price,
underwriting discount to be paid by us and ShopKo to the underwriters and the
proceeds before expenses to us and ShopKo. This information is presented
assuming either no exercise or full exercise by the underwriters of their over-
allotment option.
<TABLE>
<CAPTION>
Per
Share Without Option With Option
-------- -------------- -----------
<S> <C> <C> <C>
Public Offering Price............... $ $ $
Underwriting Discount............... $ $ $
Proceeds, before expenses, to us.... $ $ $
Proceeds to ShopKo.................. $ $ $
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $1,000,000 and are payable entirely by us. These expenses will not
reduce the $20.0 million of net proceeds of the offering which we will retain.
See "Use of Proceeds."
Over-allotment Option
ShopKo has granted an option to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of 795,000
additional shares of common stock at the initial public offering price set
forth on the cover page of this prospectus, less the underwriting discount. The
underwriters may exercise this option solely to cover over-allotments, if any,
made on the sale of common stock offered hereby. To the extent that the
underwriters exercise this option, each underwriter will be obligated, subject
to certain conditions, to purchase a number of additional shares of our common
stock proportionate to such underwriter's initial amount reflected in the
foregoing table.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 265,000 of the shares offered hereby to be sold to
directors and employees of ProVantage, ShopKo and their affiliates. The number
of shares of our common stock available for sale to the general public will be
reduced to the extent that those persons purchase the reserved shares. Any
reserved shares which are not orally confirmed for purchase within one day of
the pricing of the offering will be offered by the underwriters to the general
public on the same terms as the other shares offered by this prospectus.
No Sales of Similar Securities
We and our executive officers and directors and ShopKo and all existing
stockholders have agreed, with certain exceptions, without the prior written
consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of the
underwriters for a period of 180 days after the date of this prospectus, not to
directly or indirectly:
. offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any
option, right or warrant for the sale of, lend or otherwise dispose
of or transfer any shares of our common stock or securities
convertible into or exchangeable or exercisable for or repayable
with our common stock, whether now owned or later acquired by the
person executing the agreement or with respect to which the person
executing the agreement later acquires the power of disposition, or
file a registration statement under the Securities Act relating to
any shares of our common stock; or
. enter into any swap or other agreement that transfers, in whole or
in part, the economic consequence of ownership of our common stock
whether any such swap or transaction is to be settled by delivery of
our common stock or other securities, in cash or otherwise.
New York Stock Exchange Listing
We expect our common stock to be approved for listing on the New York
Stock Exchange under the symbol "PHS." In order to meet the requirements for
listing of our common stock on that exchange, the underwriters have undertaken
to sell lots of 100 or more shares to a minimum of 2,000 beneficial owners.
62
<PAGE>
Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through
negotiations between us and the representatives. The factors to be considered
in determining the initial public offering price, in addition to prevailing
market conditions, are the valuation multiples of publicly traded companies
that the representatives believe to be comparable to us, certain of our
financial information, our history and our prospects and the industry in which
we compete, and an assessment of our management, its past and present
operations, the prospects for, and timing of, our future revenues, the present
state of our development, and the above factors in relation to market values
and various valuation measures of other companies engaged in activities similar
to ours. There can be no assurance that an active trading market will develop
for our common stock or that our common stock will trade in the public market
subsequent to the offering at or above the initial public offering price.
The underwriters do not expect sales of the common stock to any accounts
over which they exercise discretionary authority to exceed 5% of the number of
shares being offered in this offering.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of our common stock is completed, rules of the SEC
may limit the ability of the underwriters and certain selling group members to
bid for and purchase the common stock. As an exception to these rules, the
representatives are permitted to engage in certain transactions that stabilize
the price of our common stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of our common
stock.
If the underwriters create a short position in our common stock in
connection with the offering, i.e., if they sell more shares of our common
stock than are set forth on the cover page of this prospectus, the
representatives may reduce that short position by purchasing our common stock
in the open market. The representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described
above.
The representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares
of common stock in the open market to reduce the underwriters' short position
or to stabilize the price of the common stock, they may reclaim the amount of
the selling concession from the underwriters and selling group members who sold
those shares.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of the common stock to the extent
that it discourages resales of our common stock.
Neither our company nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of our common stock. In
addition, neither our company nor any of the underwriters makes any
representation that the representatives will engage in the transactions
described above or that these transactions, if commenced, will not be
discontinued without notice.
Some of the underwriters or their affiliates have provided investment or
commercial banking services to us and to ShopKo in the past and may do so in
the future. They receive customary fees and commissions for these services.
LEGAL MATTERS
Certain legal matters relating to the legality of the issuance of the
shares of common stock being offered hereby will be passed upon for us by
Godfrey & Kahn, S.C., Milwaukee, Wisconsin. Certain legal matters will be
passed upon for the underwriters by Dewey Ballantine LLP, New York, New York.
63
<PAGE>
EXPERTS
The Consolidated Financial Statements of ProVantage Health Services, Inc.
and subsidiaries as of January 30, 1999, January 31, 1998 and February 1, 1997
and for each of the four years in the period ended January 30, 1999 included in
the registration statement of which this prospectus forms a part and the
related financial statement schedule included elsewhere in the registration
statement have been so included in reliance on the report of Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein and
elsewhere in the registration statement, and have been so included in reliance
upon the reports of such firm, given upon their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock offered hereby. This
prospectus, which constitutes part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits thereto. For further information with respect to us and the common
stock, you should refer to the registration statement and the exhibits thereto.
Statements contained in this prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the registration statement, each such statement being qualified in
all respects by such reference. You may inspect and copy the registration
statement and its exhibits at the public reference facilities of the SEC
located at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as at the regional offices of the SEC located at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, and Seven World Trade Center, Suite 1300, New
York, New York 10048. You may obtain copies of these materials for a fee by
writing to the SEC's Public Reference Section at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and you can access this information electronically by
means of the SEC's website on the Internet at http://www.sec.gov. You may
obtain information about the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330.
As a result of the offering, we will be subject to the requirements of
the Exchange Act, which means that we will file reports, proxy statements and
other information with the SEC on a periodic basis. You can read and copy these
reports, proxy statements and other information we file with the SEC at the
offices of the SEC, and at the website listed above.
We intend to furnish its stockholders with annual reports containing
audited financial statements examined by its independent accountants for each
fiscal year.
64
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................ F-1
Consolidated Statements of Earnings for each of the three fiscal years
in the period ended January 30, 1999................................... F-2
Consolidated Balance Sheets at January 31, 1998 and January 30, 1999.... F-3
Consolidated Statements of Cash Flows for each of the three fiscal years
in the period ended January 30, 1999................................... F-4
Consolidated Statements of Stockholder's Equity for each of the three
years in the period ended January 30, 1999.............................. F-5
Notes to Consolidated Financial Statements.............................. F-6
</TABLE>
65
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
ProVantage Health Services, Inc.:
We have audited the consolidated balance sheets of ProVantage Health
Services, Inc. and subsidiaries, formerly known as ProVantage, Inc. (an
indirect, wholly-owned subsidiary of ShopKo Stores, Inc.), as of January 30,
1999 and January 31, 1998 and the related consolidated statements of earnings,
stockholder's equity and cash flows for each of the three years in the period
ended January 30, 1999. 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 ProVantage Health Services,
Inc. and subsidiaries as of January 30, 1999 and January 31, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended January 30, 1999 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Milwaukee, Wisconsin
March 12, 1999
F-1
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Year (52 weeks) Ended
----------------------------------------
Feb. 1, 1997 Jan. 31, 1998 Jan. 30, 1999
------------ ------------- -------------
<S> <C> <C> <C>
Net sales............................ $330,048 $500,891 $666,154
Costs and expenses:
Cost of sales...................... 306,760 463,069 618,308
Selling, general and administrative
expenses.......................... 11,828 19,990 24,910
Depreciation and amortization
expenses.......................... 2,233 4,779 6,776
-------- -------- --------
320,821 487,838 649,994
Income from operations............... 9,227 13,053 16,160
Interest income...................... 353 364 543
-------- -------- --------
Earnings before income taxes......... 9,580 13,417 16,703
Provision for income taxes........... 4,164 5,883 7,221
-------- -------- --------
Net earnings......................... $ 5,416 $ 7,534 $ 9,482
======== ======== ========
Basic net earnings per share of
common stock........................ $ 0.43 $ 0.60 $ 0.76
======== ======== ========
Average number of shares of common
stock outstanding................... 12,550 12,550 12,550
======== ======== ========
Pro forma basic net earnings per
share of common stock............... $ 0.58
========
Pro forma average number of shares of
common stock outstanding............ 16,244
========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
Pro Forma
January 31, 1998 January 30, 1999 January 30, 1999
---------------- ---------------- ----------------
(unaudited)
Assets
<S> <C> <C> <C>
Current assets:
Cash and cash
equivalents.............. $ 12,533 $ 24,680 $ 24,680
Receivables, less
allowance for losses of
$976 and $1,314,
respectively............. 59,662 84,935 84,935
Pharmaceutical
inventories.............. 1,312 3,121 3,121
Other current assets...... 1,054 2,343 2,343
-------- -------- --------
Total current assets.... 74,561 115,079 115,079
Goodwill--net............... 67,926 67,127 67,127
Other assets--net........... 3,119 3,295 3,295
Property and equipment--
net........................ 9,431 15,276 15,276
-------- -------- --------
Total assets............ $155,037 $200,777 $200,777
======== ======== ========
<CAPTION>
Liabilities and
Stockholder's Equity
<S> <C> <C> <C>
Current liabilities:
Demand promissory note
payable to ShopKo........ $ -- $ -- $ 62,800
Short-term debt........... 967 968 968
Accounts payable trade.... 46,481 66,077 66,077
Accrued liabilities....... 11,633 14,025 14,025
-------- -------- --------
Total current
liabilities............ 59,081 81,070 143,870
Long-term obligations....... 913 -- --
Deferred income taxes....... 1,448 3,521 3,521
Minority interest........... 2,315 2,949 2,949
Stockholder's equity:
Common Stock; $.01 par
value, 50,000 shares
authorized, 12,550 shares
outstanding.............. 126 126 126
Additional paid-in
capital.................. 76,522 88,997 50,311
Retained earnings......... 14,632 24,114 --
-------- -------- --------
Total stockholder's
equity................. 91,280 113,237 50,437
-------- -------- --------
Total liabilities and
stockholder's equity... $155,037 $200,777 $200,777
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year (52 weeks)
Ended
----------------------------
Feb. 1, Jan. 31, Jan. 30,
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.................................... $ 5,416 $ 7,534 $ 9,482
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization.................. 2,233 4,779 6,776
Provision for losses on receivables............ 878 38 185
Deferred income taxes.......................... 63 305 1,715
Change in assets and liabilities excluding the
effect of business acquisitions:
Receivables.................................. (42,031) (6,314) (24,824)
Pharmaceutical inventories................... (746) (62) (1,809)
Other current assets......................... (162) 151 (932)
Other assets................................. (258) (1,500) (635)
Accounts payable............................. 29,653 11,385 19,596
Accrued liabilities.......................... 8,344 (4,330) (77)
-------- -------- --------
Net cash provided by operating activities.. 3,390 11,986 9,477
Cash flows used in investing activities:
Payments for property and equipment............ (2,057) (4,198) (8,863)
Business acquisitions, net of cash acquired.... (33,531) (22,390) --
-------- -------- --------
Net cash used in investing activities...... (35,588) (26,588) (8,863)
Cash flows from financing activities:
Change in short-term debt...................... -- 967 1
Capital contribution........................... 33,143 21,063 12,475
Reduction in debt.............................. -- (841) (943)
-------- -------- --------
Net cash provided by financing activities.. 33,143 21,189 11,533
Net increase in cash and cash equivalents....... 945 6,587 12,147
Cash and cash equivalents at beginning of
period......................................... 5,001 5,946 12,533
-------- -------- --------
Cash and cash equivalents at end of period...... $ 5,946 $ 12,533 $ 24,680
======== ======== ========
Supplemental cash flow information:
Cash paid during the period for:
Income taxes................................. $ 4,044 $ 5,585 $ 6,793
Accrued supplemental contingent payment........ -- -- $ 2,500
During fiscal 1997 and 1996, the Company
acquired companies. In conjunction with these
acquisitions, the purchase price consisted of
the following:
Cash paid...................................... $ 33,531 $ 22,390 $ --
Notes payable issued........................... -- 1,833 --
Liabilities assumed............................ -- 4,030 --
-------- -------- --------
Total fair value of acquisitions........... $ 33,531 $ 28,253 $ --
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional
------------- Paid-In Retained
Shares Amount Capital Earnings
------ ------ ---------- --------
<S> <C> <C> <C> <C>
Balances at February 3, 1996.................. 12,550 126 $22,316 $ 1,682
Capital contribution.......................... 33,143
Net earnings.................................. 5,416
------ ---- ------- -------
Balances at February 1, 1997.................. 12,550 126 55,459 7,098
Capital contribution.......................... 21,063
Net earnings.................................. 7,534
------ ---- ------- -------
Balances at January 31, 1998.................. 12,550 126 76,522 14,632
Capital contribution.......................... 12,475
Net earnings.................................. 9,482
------ ---- ------- -------
Balances at January 30, 1999.................. 12,550 $126 $88,997 $24,114
====== ==== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PROVANTAGE HEALTH SERVICES, 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 ProVantage
Health Services, Inc. and all its subsidiaries, formerly known as ProVantage,
Inc. ("ProVantage" or the "Company"). ProVantage consolidates all subsidiaries
in which it has a majority voting interest. All significant intercompany
accounts and transactions have been eliminated. ProVantage is a Delaware
corporation. ProVantage is a wholly-owned subsidiary of ProVantage Holdings,
Inc., which in turn is wholly-owned by ShopKo Stores, Inc. ("ShopKo").
ProVantage uses the same fiscal year as ShopKo. ProVantage's fiscal year
conforms to the National Retail Federation calendar and ends on the Saturday
closest to the end of January. ProVantage has adopted a convention of referring
to a fiscal year by the year in which the fiscal year begins. For example, the
fiscal year which began on February 1, 1998 and ended on January 30, 1999 is
referred to as "fiscal 1998."
ProVantage, which conducts its business principally throughout the United
States, provides health benefit management services, pharmacy mail services,
vision benefit management services and health information technology and
clinical support services.
For the periods presented, certain general, administrative and other
expenses reflected in the consolidated financial statements include allocations
of certain corporate expenses from ShopKo which took into consideration
personnel, space, estimates of time spent to provide services or other
appropriate bases. These allocations include services and expenses for general
management, information systems management, treasury, tax, financial reporting,
benefits administration, insurance, legal, communications and other
miscellaneous services.
Management believes the foregoing allocations were made on a reasonable
basis. Although these allocations do not necessarily represent the costs which
would have been or may be incurred by ProVantage on a stand alone basis,
management believes that any variance in costs would not be material.
Revenues and Costs of Revenues:
ProVantage's net sales include (i) administrative and dispensing fees
plus the cost of pharmaceuticals dispensed by pharmacies participating in the
network maintained by ProVantage or by ProVantage's mail service pharmacy to
members of health benefit plans sponsored by ProVantage's clients; (ii) amounts
billed to pharmaceutical manufacturers and third party formulary administrators
for formulary fees, which are discounts, rebates and fees earned from
pharmaceutical manufacturers; (iii) the sale of eyeglasses and contact lenses
and related administrative fees relating to vision benefit management services;
and (iv) license and service fees for health information technology and
clinical support services. Revenues from the dispensing of pharmaceuticals from
ProVantage's mail service pharmacy are recognized when the prescription is
shipped. Revenues from claim processing fees and sales of prescription drugs
and vision benefits by pharmacies and vision providers in ProVantage's network
are recognized when the claims are processed. When ProVantage provides pharmacy
and vision benefits to members in health benefit plans sponsored by
ProVantage's clients and has an independent contractual obligation to pay its
network pharmacy and vision providers for benefits provided to members in
ProVantage's clients' health benefit plans, ProVantage includes payments from
plan sponsors for these benefits as net sales. If ProVantage is only
administering the plan sponsors' pharmacy benefit contract, ProVantage records
only the administrative fee derived from the contract as revenue. Formulary,
clinical, and health information technology revenues are recognized as the
services are performed and earned in accordance with contractual agreements.
Cost of sales includes the amounts paid to network
F-6
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
pharmacies and optical centers for medical claims, the cost of prescription
medications sold through the mail service pharmacy and the amounts paid to plan
sponsors for shared formulary fees.
Cash and Cash Equivalents:
ProVantage records all highly liquid investments with a maturity of three
months or less as cash equivalents.
Receivables:
Receivables consist primarily of amounts collectible from (i) insurance
companies, third party administrators and self-funded medical plan sponsors for
pharmaceutical claims and claim processing fees, (ii) pharmaceutical
manufacturers and third party formulary administrators for formulary fees and
(iii) customers for license and service fees for health information technology
and clinical support services. Substantially all amounts are expected to be
collected within one year.
Pharmaceutical Inventories:
Pharmaceutical inventories are stated at the lower of cost or market.
Cost, which includes certain distribution and transportation costs, is
determined through use of the first-in, first-out (FIFO) method.
Property and Equipment:
Property and equipment are carried at cost. The cost of equipment is
depreciated over the estimated useful life of the assets using the straight-
line method. Useful lives generally assigned are 3 to 10 years. Costs of
leasehold improvements are amortized over the period of the lease or the
estimated useful life of the asset, whichever is shorter, using the straight-
line method.
Expenditures relating to the development of software to be marketed to
clients, or to be used for internal purposes, are charged to expense until
technological feasibility is established. Thereafter, the remaining software
production costs up to the date of general release to customers or to the date
placed into production are capitalized and included as property and equipment.
During fiscal years 1996, 1997 and 1998, $1.4 million, $2.1 million and $4.6
million in software development costs were capitalized, respectively.
Capitalized software development costs amounted to $3.8 million and $8.4
million at January 31, 1998 and January 30, 1999, respectively. Amortization of
capitalized amounts commences on the date of general release to customers or
the date placed into production using the straight-line method over estimated
economic life of the product but not more than five years. Total amortization
expense of capitalized software costs was $0.1 million, $1.0 million and $1.9
million in fiscal years 1996, 1997 and 1998, respectively.
The components of property and equipment are (in thousands):
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
----------- -----------
<S> <C> <C>
Property and equipment at cost:
Software........................................ $8,058 $13,834
Equipment....................................... 3,670 6,441
Leasehold improvements.......................... 353 668
------ -------
12,081 20,943
Less accumulated depreciation and amortization.... 2,650 5,667
------ -------
Net property and equipment........................ $9,431 $15,276
====== =======
</TABLE>
F-7
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Goodwill:
The excess of cost over fair value of the net assets of businesses
acquired (goodwill) is amortized using the straight-line method over 18 to 22
years. Accumulated amortization for these costs was $5.7 million and $9.4
million at January 31, 1998 and January 30, 1999, respectively.
Impairment of Long Lived Assets:
ProVantage 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 January
30, 1999.
Net Earnings Per Common Share:
In 1997, SFAS No. 128, "Earnings Per Share" was issued. SFAS No. 128
replaces the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Basic net earnings per common share
is computed by dividing net earnings by the weighted average number of common
shares outstanding. Diluted net earnings per common share is computed by
dividing net earnings by the weighted average number of common shares
outstanding increased by the number of dilutive potential common shares based
on the treasury stock method.
Income Taxes:
ProVantage's results are included in ShopKo's consolidated U. S. federal
income tax return. All income tax payments are made by ShopKo on behalf of its
subsidiaries, a portion of which are allocated to ProVantage. 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. In effect, the income tax provision is computed on a separate
return basis.
The financial statements reflect the application of SFAS No. 109,
"Accounting for Income Taxes."
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.
B. Acquisitions
On January 3, 1995, ProVantage completed the acquisition of Bravell,
Inc. ("Bravell"), a pharmacy benefit management firm that provides custom
prescription benefit plan design, program administration and claims benefit
processing services to insurance companies, third party administrators and
self-funded medical plan sponsors. The transaction was accounted for as a
purchase, whereby ProVantage acquired 97% of the outstanding common stock of
Bravell for approximately $17.3 million. ProVantage was also required to make
additional payments which were contingent upon future results of Bravell's
operations. In fiscal 1996, $0.7
F-8
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
million was paid based on the results of fiscal 1995. On April 10, 1997,
ProVantage made a payment of approximately $8.9 million to the founders of
Bravell to (i) acquire the remaining 3% of the common stock of Bravell which
ProVantage did not acquire in January 1995, (ii) extinguish all remaining
contingent payment obligations to the founders and (iii) terminate the
founders' employment agreements. This $8.9 million payment was capitalized as
additional purchase price and amortized over 20 years.
On August 2, 1996, ProVantage completed the acquisition of CareStream
ScripCard from Avatex Corporation, formerly known as FoxMeyer Health
Corporation. CareStream ScripCard is a prescription benefit management company
and its operations have been integrated with ProVantage. The initial purchase
price was $30.5 million in cash, with the obligation to make an additional
contingent cash payment equal to 1.5% of ProVantage's market value, subject to
a minimum of $2.5 million and a maximum of $5.0 million. Based upon meeting the
minimum requirement, ProVantage has accrued $2.5 million as of January 30,
1999. Avatex has a right to receive the additional contingent cash payment at
its election without further condition at any time prior to August 2, 2001. The
supplemental payment will be capitalized as additional purchase price and
amortized over a period of 15 to 18 years.
On August 20, 1997, ProVantage acquired The Mikalix Group, Inc. and its
subsidiaries, an international privately held group of companies based in
Arlington, Virginia. Mikalix's primary subsidiary is PharMark Corporation, a
software and database development company providing information driven
strategies for optimizing medical and pharmaceutical outcomes. The purchase
price for Mikalix was approximately $15.2 million, of which $14.2 million has
been paid in cash and $1.0 million is due in 1999. The sellers of Mikalix may
also be entitled to contingent payments of up to $8.0 million in the aggregate
based on future increases in the market value of ProVantage's outstanding
common stock (the "Contingent Payments"). The Contingent Payment amounts of up
to $8.0 million are calculated based upon the market value of ProVantage's
outstanding common stock ranging from $250.0 million to $500.0 million. The
Contingent Payments, if any, will be due on the first to occur of August 20,
2002 or certain liquidity events, such as the sale or change of control of
ProVantage, but excluding an initial public offering and subsequent equity
offerings to the public, related to ProVantage and will be capitalized as
additional purchase price and amortized over a period of 15 to 19 years. The
Contingent Payments may be made, at ProVantage's election, in either cash,
ShopKo common stock or ProVantage common stock; provided, however, that any
stock used for such payments must be traded in a public market.
The allocation of the purchase prices of ProVantage's acquisitions were
based on fair values at the dates of acquisition. The excess of the purchase
price over the fair value of the net assets acquired of approximately $76.5
million is being amortized on a straight-line basis over 18 to 22 years. The
results of the acquired companies' operations since the dates of acquisition
have been included in the consolidated statements of earnings of ProVantage.
C. Debt
ProVantage's short-term debt consists of two promissory notes due to the
former owners of PharMark. The promissory notes, which are due August 20, 1999,
bear interest at 6%.
F-9
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
D. Leases
ProVantage is obligated under operating leases, primarily for buildings
and computer hardware. Minimum future obligations under operating leases in
effect at January 30, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Lease
Year Obligations
---- -----------
<S> <C>
1999.................................. $1,708
2000.................................. 1,322
2001.................................. 1,056
2002.................................. 418
Thereafter............................ 251
------
Total minimum obligations............. $4,755
======
</TABLE>
Total minimum rental expense related to all operating leases with terms
greater than one year was $0.4 million, $0.9 million and $1.9 million in fiscal
years 1996, 1997 and 1998, respectively.
E. Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Components of
ProVantage's net deferred tax liability are as follows (in thousands):
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Goodwill......................................... $ 1,795 $ 1,948
Property and equipment........................... -- 1,573
Inventory valuation.............................. 202 --
------- -------
Total deferred tax liabilities................. 1,997 3,521
Deferred tax assets:
Property and equipment........................... (345) --
Reserves and allowances.......................... (1,106) (1,260)
------- -------
Total deferred tax assets...................... (1,451) (1,260)
------- -------
Net deferred tax liabilities....................... $ 546 $ 2,261
======= =======
</TABLE>
The amounts reflected in the provision for income taxes are based on
applicable federal statutory rates, adjusted for permanent differences between
financial and taxable income. The provision for federal and state income taxes
includes the following (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Current:
Federal............................................. $3,294 $4,537 $4,428
State............................................... 807 1,041 1,078
Deferred............................................ 63 305 1,715
------ ------ ------
Total provision................................... $4,164 $5,883 $7,221
====== ====== ======
</TABLE>
F-10
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The effective tax rate varies from the statutory federal income tax rate
for the following reasons:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Statutory income tax..................................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefits.......... 5.0 5.0 5.1
Goodwill................................................. 3.5 3.6 2.9
Other.................................................... -- 0.2 0.2
---- ---- ----
Effective income tax rate................................ 43.5% 43.8% 43.2%
==== ==== ====
</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>
1996 1997 1998
----- ---- ------
<S> <C> <C> <C>
Depreciation and amortization.......................... $ 569 $131 $2,072
Reserves and allowances................................ (494) 166 (118)
Other.................................................. (12) 8 (239)
----- ---- ------
$ 63 $305 $1,715
===== ==== ======
</TABLE>
F. Stockholder's Equity
ProVantage has 50,000,000 shares of $0.01 par value of common stock
authorized with 12,550,000 shares issued and outstanding as of January 31,
1998 and 12,550,000 shares issued and outstanding as of January 30, 1999. The
stockholder's equity section of the balance sheet is adjusted to show the
retroactive effect of a stock split effected through a stock dividend. The
stock split, which will be made immediately prior to the public sale of the
shares, is required to convert the existing 10,100 shares of outstanding
common stock into 12,550,000 shares of common stock.
G. Employee Benefits
Substantially all employees of ProVantage are covered by a defined
contribution profit sharing plan sponsored by ShopKo. 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% of compensation contributed by participating employees. ProVantage
contributions were $0.1 million, $0.1 million and $0.2 million for fiscal
years 1996, 1997 and 1998, respectively.
H. Related Party Transactions
ProVantage provided claims processing services for ShopKo. ProVantage
bills ShopKo for the cost of the prescription claim plus processing fees.
These amounts were $1.6 million, $1.6 million and $2.1 million for fiscal
years 1996, 1997 and 1998, respectively, and were included in ProVantage's
sales. Receivables include amounts due from ShopKo of $0.1 million at both
January 31, 1998 and January 30, 1999.
A portion of ProVantage's payments made to network pharmacies are made
to pharmacies owned by ShopKo. The payments reflect the cost of the
prescription claim less an on-line remittance fee. These amounts were $21.0
million, $25.8 million and $35.7 million for fiscal years 1996, 1997 and 1998,
respectively, and
F-11
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
were included in ProVantage's cost of sales. Accounts payable include amounts
payable to ShopKo for claims of $1.3 million at January 31, 1998 and $1.7
million at January 30, 1999, respectively.
ProVantage receives formulary fees from pharmaceutical manufacturers. A
portion of these fees are shared with and paid to the network pharmacies owned
by ShopKo. These amounts were $0.2 million and $0.1 million for fiscal years
1996 and 1997, respectively, and were included in ProVantage's cost of sales.
Purchases of inventory from ShopKo were $1.0 million, $0.8 million and
$0.3 million for fiscal years 1996, 1997 and 1998, respectively.
General, administrative and other expenses were allocated to ProVantage
from ShopKo. These allocations took into consideration personnel, space,
estimates of time spent to provide services or other appropriate bases and
included amounts for general management, tax, financial reporting, benefits
administration, insurance, legal, communications and other miscellaneous
services. Amounts charged for these services reflect amounts historically
incurred by ShopKo and were $0.4 million, $1.1 million and $1.2 million for
fiscal years 1996, 1997 and 1998, respectively.
Management believes the foregoing allocations were made on a reasonable
basis. Although these allocations do not necessarily represent the costs which
would have been or may be incurred by ProVantage on a stand alone basis,
management believes that any variance in costs would not be material.
I. Major Customers
For fiscal 1996, one customer represented $59.1 million, or 17.9%, of net
sales, for fiscal year 1997, this customer represented $58.6 million, or 11.7%,
of net sales, and for fiscal year 1998, this customer represented $76.1
million, or 11.4%, of net sales.
J. Subsequent Events (unaudited)
ProVantage has filed a registration statement with the Securities and
Exchange Commission under which a portion of its shares of common stock will be
sold. The average number of shares of common stock is adjusted to show the
retroactive effect of a stock split through a stock dividend. The stock split,
which will be made prior to the public sale of shares, is required to convert
the existing 10,100 shares of outstanding common stock into 12,550,000 shares
of common stock. After the offering, 17,850,000 shares of common stock will be
outstanding, excluding the underwriters' over-allotment option. In addition,
ProVantage will declare a dividend to ShopKo of $115.0 million in the form of a
demand promissory note. The demand promissory note will be paid with the
proceeds of the offering and to the extent that the proceeds of the offering
are less than $115.0 million, the remainder of the demand promissory note will
be contributed to ProVantage by ShopKo.
Also pursuant to this offering of common stock, ProVantage will enter
into agreements which call for ShopKo to provide credit, administrative and
information technology services to ProVantage. All of these agreements expire
on January 31, 2001 and are subject to automatic one year renewal terms and
earlier termination under certain circumstances. In addition, ProVantage will
lease its corporate headquarters building, currently under construction, from
ShopKo at terms to be determined.
The credit agreement provides ProVantage with an unsecured, revolving
line of credit of up to $25.0 million at market rates. ProVantage will pay an
annual facility fee of 1/5 of one percent of the total commitment amount.
F-12
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The administrative services agreement provides ProVantage with certain
administrative, support and consultation services including employee benefits,
payroll processing, insurance, tax compliance, treasury and accounts payable
processing.
The information technology services agreement provides ProVantage with
the use and the personnel to manage and maintain certain hardware, software and
computer facilities.
Also, as a result of this offering, the contingent payment related to The
Mikalix Group, Inc. acquisition can now be estimated. Based on an estimated
fair market value of ProVantage's outstanding common stock, ProVantage expects
that approximately $1.0-$2.0 million of the contingent payments will be
capitalized as additional purchase price upon completion of the offering.
Pro Forma Basic Net Earnings Per Share of Common Stock:
Pro forma basic net earnings per share of common stock are computed by
dividing net earnings by 16,244,118, which represents the total number of
shares of common stock which will be outstanding after completion of the
reorganization of ProVantage's corporate structure, plus 3,694,118 shares of
common stock which, when multiplied by an assumed offering price of $17.00 per
share, would be sufficient to repay the portion of the demand promissory note
to be issued to ShopKo prior to the offering, which payment is estimated to be
$62.8 million.
Pro Forma Balance Sheet:
The unaudited pro forma balance sheet presented gives effect to the
dividend declared to ShopKo as if such transaction had occurred on January 30,
1999 and reflects the portion of the demand promissory note to be paid to
ShopKo, which is estimated to be $62.8 million. The remaining balance of the
demand promissory note will be contributed to ProVantage as a capital
contribution. The unaudited pro forma balance sheet should be read in
conjunction with the historical statements and related notes of ProVantage
included elsewhere in this Prospectus.
F-13
<PAGE>
ProVantage's
Advanced Therapeutic Intervention Program
Medical Pharmaceutical Medical
Diagnosis Data Claims Data Claims Data
Identify
Quantify
Prioritize
Physician and Patient
Alert
Reduce Hospital Improve Quality Platform for
& Drug Costs of Healthcare Research
Our Advanced Therapeutic Intervention Program analyzes our clients' medical
diagnosis, claims and prescription data on an integrated basis, thereby
providing the capability to: identify patients at risk for drug-induced illness,
quantify medical risk using statistical measures, and prioritize patients at
risk.
Our clinical staff, under the direction of our physicians, intervene by issuing
alerts for these patients to the treating physicians. Alerts inform the treating
physicians of the medical condition, prescribing pattern or other factors that
create the increased hospitalization risk.
This program allows clients to measure their return on investment by quantifying
healthcare cost savings. The program is designed to improve the quality of
healthcare, and provides a platform for future research.
[LOGO OF PROVANTAGE]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 1999 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
5,300,000 Shares
ProVantage Health Services, Inc.
Common Stock
[COMPANY LOGO]
----------------------
P R O S P E C T U S
----------------------
Merrill Lynch & Co.
Bear, Stearns & Co. Inc.
William Blair & Company
Lehman Brothers
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the issuance and
distribution of the Common Stock being registered hereunder, other than
underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC registration fee........................................... $ 30,500
New York Stock Exchange listing fee............................ 129,500
NASD filing fee................................................ 11,500
Blue Sky fees and expenses (including fees of counsel)......... 7,500
Accounting fees and expenses................................... 290,000
Legal fees and expenses........................................ 250,000
Printing and engraving expenses................................ 225,000
Transfer Agent and Registrar fees.............................. 5,000
Miscellaneous.................................................. 51,000
----------
Total...................................................... $1,000,000
==========
</TABLE>
All amounts except the SEC registration fee, New York Stock Exchange
listing fee and NASD filing fee are estimated.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DGCL") permits
a Delaware corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe such person's conduct was unlawful.
In the case of an action by or in the right of the corporation, Section
145 permits the corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that such person is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interest of the corporation. No indemnification may be
made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Delaware Court of Chancery or the court in which such action or
suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and
II-1
<PAGE>
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper.
To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in the preceding two paragraphs, Section
145 requires that such person be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith.
Section 145 provides that expenses (including attorneys' fees) incurred
by an officer or director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the corporation as authorized in Section 145.
The Registrant's Restated Certificate of Incorporation provides that an
officer or director of the Registrant will not be personally liable to the
Registrant or its stockholders for monetary damages for any breach of his
fiduciary duty as an officer or director, except in certain cases where
liability is mandated by the DGCL. The provision has no effect on any non-
monetary remedies that may be available to the Registrant or its stockholders,
nor does it relieve the Registrant or its officers or directors from compliance
with federal or state securities laws.
The Registrant's Amended and Restated Bylaws generally provide that the
Registrant shall indemnify, to the fullest extent permitted by the DGCL, each
person who was or is made a party to or is threatened to be made a party to or
is involved in any threatened, pending or completed action, suit or proceeding
(each, a "Proceeding") by reason of the fact that such person is or was a
director, officer or employee of the Registrant, or is or was serving at the
request of the Registrant as a director, officer or employee of another entity,
against all expenses, liabilities and losses reasonably incurred or suffered by
such person in connection with such Proceeding.
An officer or director shall not be entitled to indemnification by the
Registrant if (i) the officer or director did not act in good faith and in a
manner reasonably believed to be in, or not opposed to, the best interests of
the Registrant, or (ii) with respect to any criminal action or proceeding, the
officer or director had reasonable cause to believe his conduct was unlawful.
The Purchase Agreement filed herewith as Exhibit 1.1 provides for
indemnification of the directors, certain officers and controlling persons of
the Registrant by the Underwriters against certain civil liabilities, including
liabilities under the Securities Act.
The Registrant has entered into agreements to indemnify its directors and
certain officers, in addition to the indemnification provided for in the
Amended and Restated Bylaws. These agreements will, among other things,
indemnify the Registrant's directors and certain of its officers to the full
extent permitted by Delaware law for any claims, liabilities, damages,
judgments, penalties, fines, settlements, disbursements or expenses (including
attorneys' fees) incurred by such person in any action or proceeding, including
any action by or in the right of the Registrant, on account of services as a
director or officer of the Registrant.
In addition, the Registrant has directors' and officers' liability
insurance that insures against certain liabilities, including liabilities under
the Securities Act, subject to applicable restrictions.
Item 15. Recent Sales of Unregistered Securities
The following information is furnished as to securities of the Registrant
sold within the past three years that were not registered under the Securities
Act:
II-2
<PAGE>
On August 20, 1997, the Registrant acquired The Mikalix Group, Inc. as
described under "Management's Discussion and Analysis of Financial Condition
and Results of Operation" in the prospectus contained in this Registration
Statement which description is incorporated by reference herein. The securities
which may be issued to the sellers of The Mikalix Group, Inc. were sold in
reliance on Section 4(2) of the Securities Act of 1933, as amended. The
securities were sold in a private offering to purchasers who represented that
they were purchasing such securities with investment intent and not with a view
to the distribution thereof.
Item 16. Exhibits and Financial Schedules
(a) Exhibits
The list of exhibits is incorporated by reference to the "Index to
Exhibits" located after the signature page of this Registration Statement.
(b) Financial Statement Schedules
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholder of ProVantage Health
Services, Inc.:
We have audited the consolidated financial statements of ProVantage
Health Services, Inc. (formerly ProVantage, Inc.) as of January 30, 1999 and
January 31, 1998, and for each of the three years in the period ended January
30, 1999, and have issued our report thereon dated March 12, 1999 (included
elsewhere in this Registration Statement). Our audits also included the
consolidated financial statement schedule listed in Item 16(b) of this
Registration Statement. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
March 12, 1999
II-3
<PAGE>
ProVantage Health Services, Inc. and Subsidiaries
Schedule VIII--Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
Additions
---------------------
Balance at Charged to Charged to Balance at
beginning bad debt other Deductions/ end
of year expense accounts* Writeoffs of year
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year (52 weeks) ended
February 1, 1997:
Allowance for losses
on receivables....... $ 40 $878 $800 $1,718
Year (52 weeks) ended
January 31, 1998:
Allowance for losses
on receivables....... $1,718 $ 38 $101 $881 $ 976
Year (52 weeks) ended
January 30, 1999:
Allowance for losses
on receivables....... $ 976 $185 $207 $ 54 $1,314
</TABLE>
- --------
* Charges to other accounts include charges against net sales for formulary
fee billing variances and account reclassifications.
All other schedules are omitted because the required information is not
present or is not present in amounts sufficient to require submission of a
schedule or because the information required is included in the consolidated
financial statements of the Registrant or the notes thereto or the schedules
are not required or inapplicable under the related instructions.
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes that:
(1) 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) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the
time it was declared effective.
(2) 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.
(b) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(c) 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 Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has caused this Amendment No. 2 to the Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Milwaukee, State of Wisconsin, on April 16, 1999.
Provantage Health Services, Inc.
/s/ Jeffrey A. Jones*
By: _________________________________
Jeffrey A. Jones,
Executive Vice President
and Chief Operating 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 below.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Dale P. Kramer* Chairman of the Board April 16, 1999
____________________________________
Dale P. Kramer
/s/ Jeffrey A. Jones* Executive Vice President and April 16, 1999
____________________________________ Chief Operating Officer
Jeffrey A. Jones (Principal Executive
Officer and Principal
Financial Officer)
/s/ Peter J. Beste* Vice President and April 16, 1999
____________________________________ Controller (Principal
Peter J. Beste Accounting Officer)
</TABLE>
/s/ Richard D. Schepp
- -------------------------------
*By Richard D. Schepp pursuant
to Powers of Attorney
previously filed.
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S> <C>
1.1 Form of Purchase Agreement
3.1 Form of Restated Certificate of Incorporation of the Registrant*
3.2 Form of Amended and Restated Bylaws of the Registrant*
4.1 Form of Stock Certificate*
4.2 Form of Rights Agreement between the Registrant and Norwest Bank
Minnesota, N.A. (including the Form of Certificate of
Designation, Preferences and Rights of Senior B Junior
Participating Preferred Stock and Form of Rights Certificate)*
4.3 Form of Demand Promissory Note issued by the Registrant to
ProVantage Holdings, Inc.*
5.1 Opinion of Godfrey & Kahn, S.C.
10.1 Form of Administrative Services Agreement between the Registrant
and ShopKo Stores, Inc.*
10.2 Form of I.T. Support Agreement between the Registrant and ShopKo
Stores, Inc.
10.3 Form of Credit Agreement between the Registrant and ShopKo
Stores, Inc.*
10.4 Form of Indemnification and Hold Harmless Agreement between the
Registrant and ShopKo Stores, Inc.*
10.5 Form of Registration Rights Agreement between the Registrant and
ProVantage Holdings, Inc.*
10.6 Form of Tax Matters Agreement between the Registrant and ShopKo
Stores, Inc.*
10.7 Form of Indemnification Agreement between the Registrant and the
directors and certain officers of the Registrant*
10.8 Form of Change of Control Severance Agreement between the
Registrant and certain officers of the Registrant*
10.9(a) First Amended and Restated Prescription Benefit Management
Agreement between ProVantage Prescription Benefit Management,
Inc. and American Medical Security, Inc. dated as of March 14,
1996*
10.9(b) First Amendment to the First Amended and Restated Prescription
Benefit Management Agreement between ProVantage Prescription
Benefit Management, Inc. and American Medical Security, Inc.*
10.10 Registrant's 1999 Stock Incentive Plan*
10.11 Prescription Benefit Management Agreement between the Registrant
and ShopKo Stores, Inc. dated as of January 27, 1999*
10.12 System Agreement between Systems Xcellence USA, Inc. and the
Registrant dated as of January 27, 1999*
10.13 Vision Benefit Group Insurance Policy*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Godfrey & Kahn, S.C. (contained in Exhibit 5.1).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S> <C>
24.1 Powers of Attorney*
27.1 Financial Data Schedule*
99.1 Consent of Jeffrey C. Girard*
99.2 Consent of William J. Podany*
99.3 Consent of Gregory H. Wolf*
99.4 Consent of Jeffrey A. Jones
</TABLE>
- --------
*Previously filed.
2
<PAGE>
PROVANTAGE HEALTH SERVICES, INC.
(a Delaware corporation)
5,300,000 Shares of Common Stock
PURCHASE AGREEMENT
------------------
Dated: April ., 1999
<PAGE>
Table of Contents
Page
----
SECTION 1. REPRESENTATIONS AND WARRANTIES..................................2
(a) Representations and Warranties by the Company......................2
(i) Compliance with Registration Requirements..................3
(ii) Independent Accountants....................................4
(iii) Financial Statements.......................................4
(iv) No Material Adverse Change in Business.....................4
(v) Good Standing of the Company...............................4
(vi) Good Standing of Subsidiaries..............................4
(vii) Capitalization...........................................5
(viii) Authorization of Agreement...............................5
(ix) Authorization and Description of Securities................5
(x) Absence of Defaults and Conflicts..........................5
(xi) Absence of Labor Dispute...................................6
(xii) Absence of Proceedings...................................6
(xiii) Accuracy of Exhibits.....................................7
(xiv) Possession of Intellectual Property......................7
(xv) Absence of Further Requirements............................7
(xvi) Possession of Licenses and Permits.......................7
(xvii) Title to Property........................................8
(xviii) Compliance with Cuba Act.................................8
(xix) Environmental Laws.......................................8
(xx) Registration Rights........................................9
(b) Representations and Warranties by ShopKo...........................9
(i) Compliance with Registration Requirements..................9
(ii) Accurate Disclosure........................................9
(iii) Authorization of Agreement.................................9
(iv) Absence of Further Requirements............................9
(v) Absence of Defaults and Conflicts.........................10
(vi) Good and Marketable Title.................................10
(vii) Absence of Manipulation.................................10
(viii) No Association with NASD................................11
(c) Officer's Certificates............................................11
SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING.....................11
(a) Initial Securities................................................11
(b) Option Securities.................................................11
(c) Payment...........................................................11
(d) Denominations; Registration.......................................12
SECTION 3. COVENANTS......................................................12
(a) Compliance with Securities Regulations and Commission Requests....12
(b) Filing of Amendments..............................................13
(c) Delivery of Registration Statements...............................13
i
<PAGE>
(d) Delivery of Prospectuses............................................13
(e) Continued Compliance with Securities Laws...........................13
(f) Blue Sky Qualifications.............................................14
(g) Rule 158............................................................14
(h) Use of Proceeds.....................................................14
(i) Listing.............................................................14
(j) Restriction on Sale of Securities...................................14
(k) Reporting Requirements..............................................15
(l) Compliance with NASD Rules..........................................15
(m) Compliance with Rule 463............................................15
(a) Effectiveness.......................................................15
(b) Conditions Precedent................................................15
(c) Restriction on Sale of Securities...................................15
SECTION 4.PAYMENT OF EXPENSES.................................................16
(a) Expenses............................................................16
(b) Expenses of ShopKo..................................................16
(c) Termination of Agreement............................................17
(d) Allocation of Expenses..............................................17
SECTION 5.CONDITIONS OF UNDERWRITERS' OBLIGATIONS.............................17
(a) Effectiveness of Registration Statement.............................17
(b) Opinions of Counsel for Company and ShopKo..........................17
(c) Opinion of Counsel for Underwriters.................................17
(d) Officers' Certificates..............................................18
(e) Accountant's Comfort Letter.........................................18
(f) Bring-down Comfort Letter...........................................18
(g) Approval of Listing.................................................18
(h) No Objection........................................................18
(i) Lock-up Agreements..................................................18
(j) Corporate Transactions..............................................19
(k) Conditions to Purchase of Option Securities.........................19
(i) Officers' Certificates........................................19
(ii) Opinions of Counsel for Company and ShopKo....................19
(iii) Opinion of Counsel for Underwriters...........................19
(iv) Bring-down Comfort Letter.....................................19
(l) Additional Documents................................................19
(m) Termination of Agreement............................................20
SECTION 6. INDEMNIFICATION..................................................20
(a) Indemnification of Underwriters.....................................20
(b) Indemnification of Company, Directors and Officers and ShopKo.......21
(c) Actions against Parties; Notification...............................21
(d) Settlement without Consent if Failure to Reimburse..................22
(e) Indemnification for Reserved Securities.............................22
(f) Other Agreements With Respect to Indemnification....................22
ii
<PAGE>
SECTION 7. CONTRIBUTION.................................................... 22
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.. 24
SECTION 9. TERMINATION OF AGREEMENT........................................ 24
(a) Termination; General............................................... 24
(b) Liabilities........................................................ 24
SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS...................... 24
SECTION 11. NOTICES......................................................... 25
SECTION 12. PARTIES......................................................... 25
SECTION 13. GOVERNING LAW AND TIME.......................................... 26
SECTION 14. EFFECT OF HEADINGS.............................................. 26
SCHEDULES
Schedule A - List of Underwriters..............................Sch A-1
Schedule B - Pricing Information...............................Sch B-1
EXHIBITS
Exhibit A-1 Form of Opinion of Godfrey & Kahn, S.C. ..............A-1
Exhibit A-2 Form of Opinion of Richard D. Schepp..................A-4
Exhibit A-3 Form of Opinion of Patricia Nussle
Exhibit B- Form of Lock-up Letter.................................B-1
iii
<PAGE>
Draft of April 7, 1999
PROVANTAGE HEALTH SERVICES, INC.
(a Delaware corporation)
5,300,000 Shares of Common Stock
(Par Value $.01 Per Share)
PURCHASE AGREEMENT
April __, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Bear, Stearns & Co. Inc.
William Blair & Company, L.L.C.
Lehman Brothers Inc.
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Provantage Health Services, Inc., a Delaware corporation (the "Company")
and a wholly- owned indirect subsidiary of ShopKo Stores, Inc., a Wisconsin
corporation ("ShopKo"), and ShopKo confirm their agreement with Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and
each of the other Underwriters named in Schedule A hereto (collectively, the
"Underwriters", which term shall also include any underwriter substituted as
hereinafter provided in Section 10 hereof), for whom Merrill Lynch, Bear,
Stearns & Co. Inc., William Blair & Company, L.L.C. and Lehman Brothers Inc. are
acting as representatives (in such capacity, the "Representatives"), with
respect to the issue and sale by the Company and the purchase by the
Underwriters, acting severally and not jointly, of the respective numbers of
shares of Common Stock, par value $.01 per share, of the Company ("Common
Stock") set forth in said Schedule A, and with respect to the grant by ShopKo to
the Underwriters, acting severally and not jointly, of the option described in
Section 2(b) hereof to purchase all or any part of 795,000 additional shares of
Common Stock to cover over-allotments, if any. The aforesaid 5,300,000 shares
of Common Stock (the "Initial Securities") to be purchased by the Underwriters
and all or any part of the 795,000 shares of Common Stock subject to the option
described in Section 2(b) hereof (the "Option Securities") are hereinafter
called, collectively, the "Securities".
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deem advisable after
this Agreement has been executed and delivered.
<PAGE>
The Company and the Underwriters agree that up to 265,000 shares of the
Securities to be purchased by the Underwriters (the "Reserved Securities") shall
be reserved for sale by the Underwriters to employees and directors of the
Company, ShopKo and their affiliates, as part of the distribution of the
Securities by the Underwriters, subject to the terms of this Agreement, the
applicable rules, regulations and interpretations of the National Association of
Securities Dealers, Inc. and all other applicable laws, rules and regulations.
To the extent that such Reserved Securities are not orally confirmed for
purchase by such eligible employees and directors of the Company, ShopKo and
their affiliates by the end of the first business day after the date of this
Agreement, such Reserved Securities may be offered to the public as part of the
public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-71743) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b).
The information included in such prospectus or in such Term Sheet, as the case
may be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to the
Underwriters for use in connection with the offering of the Securities is herein
called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall
refer to the preliminary prospectus dated _____, 1999 together with the Term
Sheet and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. For purposes of this Agreement, all references
to the Registration Statement, any preliminary prospectus, the Prospectus or any
Term Sheet or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company represents
and warrants to each Underwriter as of the date hereof, as of the Closing Time
referred to in Section
2
<PAGE>
2(c) hereof, and as of each Date of Delivery (if any) referred to in Section
2(b) hereof, and agrees with each Underwriter, as follows:
(i) Compliance with Registration Requirements. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the part of
the Commission for additional information has been complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any Option Securities are
purchased, at the Date of Delivery), the Registration Statement, the Rule
462(b) Registration Statement and any amendments and supplements thereto
complied and will comply in all material respects with the requirements of
the 1933 Act and the 1933 Act Regulations and did not 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, and the Prospectus, any preliminary prospectus and any
supplement thereto or prospectus wrapper prepared in connection therewith,
at their respective times of issuance and at the Closing Time, complied and
will comply in all material respects with any applicable laws or
regulations of foreign jurisdictions in which the Prospectus and such
preliminary prospectus, as amended or supplemented, if applicable, are
distributed in connection with the offer and sale of Reserved Securities.
Neither the Prospectus nor any amendments or supplements thereto (including
any prospectus wrapper), at the time the Prospectus or any such amendment
or supplement was issued and at the Closing Time (and, if any Option
Securities are purchased, at the Date of Delivery), included or will
include an untrue statement of a material fact or omitted or will omit to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
If Rule 434 is used, the Company will comply with the requirements of Rule
434 and the Prospectus shall not be "materially different", as such term is
used in Rule 434, from the prospectus included in the Registration
Statement at the time it became effective. The representations and
warranties in this subsection shall not apply to statements in or omissions
from the Registration Statement or Prospectus made in reliance upon and in
conformity with information furnished to the Company in writing by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement or Prospectus.
Each preliminary prospectus and the prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectus delivered to the Underwriters for
use in connection with this offering was identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T.
3
<PAGE>
(ii) Independent Accountants. The accountants who certified the
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act
and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements included in the
Registration Statement and the Prospectus, together with the related
schedules and notes, present fairly the financial position of the Company
and its consolidated subsidiaries at the dates indicated and the statement
of operations, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries for the periods specified; said financial
statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods involved. The supporting schedules included in the Registration
Statement present fairly in accordance with GAAP the information required
to be stated therein. The selected financial data and the summary financial
information included in the Prospectus present fairly the information shown
therein and have been compiled on a basis consistent with that of the
audited financial statements included in the Registration Statement.
(iv) No Material Adverse Change in Business. Since the respective
dates as of which information is given in the Registration Statement and
the Prospectus, except as otherwise stated or described therein, (A) there
has been no material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of
the Company and its subsidiaries considered as one enterprise, whether or
not arising in the ordinary course of business (a "Material Adverse
Effect"), (B) there have been no transactions entered into by the Company
or any of its subsidiaries other than those in the ordinary course of
business, which are material with respect to the Company and its
subsidiaries considered as one enterprise and (C) there has been no
dividend or distribution of any kind declared, paid or made by the Company
on any class of its capital stock.
(v) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the State of Delaware and has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its obligations
under this Agreement; and the Company is duly qualified as a foreign
corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not result
in a Material Adverse Effect.
(vi) Good Standing of Subsidiaries. Each subsidiary of the Company
(each a "Subsidiary" and, collectively, the "Subsidiaries") has been duly
organized and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of
4
<PAGE>
property or the conduct of business, except where the failure so to qualify
or to be in good standing would not result in a Material Adverse Effect;
except as otherwise disclosed in the Registration Statement, all of the
issued and outstanding capital stock of each such Subsidiary has been duly
authorized and validly issued, is fully paid and non-assessable is owned by
the Company, directly or through subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim or equity;
none of the outstanding shares of capital stock of any Subsidiary was
issued in violation of the preemptive or similar rights of any
securityholder of such Subsidiary. The only subsidiaries of the Company are
the subsidiaries listed on Exhibit 21 to the Registration Statement.
(vii) Capitalization. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Prospectus in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities or options
referred to in the Prospectus). The shares of issued and outstanding
capital stock of the Company have been duly authorized and validly issued
and are fully paid and non-assessable; none of the outstanding shares of
capital stock of the Company was issued in violation of the preemptive or
other similar rights of any securityholder of the Company.
(viii) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by the Company.
(ix) Authorization and Description of Securities. The Securities
have been duly authorized for issuance and sale to the Underwriters
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement against payment of the consideration set forth
herein, will be validly issued and fully paid and non-assessable; the
Common Stock conforms to all statements relating thereto contained in the
Prospectus and such description conforms to the rights set forth in the
instruments defining the same; no holder of the Securities will be subject
to personal liability by reason of being such a holder (except by reason of
Wisconsin Statute (S)180.0622(2)(b) to the extent that such section is held
applicable to foreign corporations); and the issuance of the Securities is
not subject to the preemptive or other similar rights of any securityholder
of the Company.
(x) Absence of Defaults and Conflicts. Neither the Company nor
any of its subsidiaries is in violation of its charter or by-laws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage, deed
of trust, loan or credit agreement, note, lease or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which it or any of them may be bound, or to which any of the property or
assets of the Company or any subsidiary is subject (collectively,
"Agreements and Instruments") except for such defaults that would not
result in a Material Adverse Effect; and the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated herein and in the Registration Statement (including the
issuance and sale of the Securities and the use of the proceeds from the
sale of the
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Securities as described in the Prospectus under the caption "Use of
Proceeds" and the transactions described in the Prospectus under
"Relationship with ShopKo--Intercompany Agreements" and "The
Reorganization") and compliance by the Company with its obligations
hereunder have been duly authorized by all necessary corporate action and
do not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or
default or (except as disclosed in the Registration Statement) Repayment
Event (as defined below) under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the Company
or any subsidiary pursuant to, the Agreements and Instruments (except for
such conflicts, breaches or defaults or liens, charges or encumbrances that
would not result in a Material Adverse Effect), nor will such action result
in any violation of the provisions of the charter or by-laws of the Company
or any subsidiary or any applicable law, statute, rule, regulation,
judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the
Company or any subsidiary or any of their assets, properties or operations.
As used herein, a "Repayment Event" means any event or condition which
gives the holder of any material note, debenture or other evidence of
material indebtedness (or any person acting on such holder's behalf) the
right to require the repurchase, redemption or repayment of all or a
portion of such indebtedness by the Company or any subsidiary.
(xi) Absence of Labor Dispute. No labor dispute with the employees
of the Company or any subsidiary exists or, to the knowledge of the
Company, is imminent, and the Company is not aware of any existing or
imminent labor disturbance by the employees of any of its or any
subsidiary's principal suppliers, manufacturers, customers or contractors,
which, in either case, may reasonably be expected to result in a Material
Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit, proceeding,
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company or any
subsidiary, which is required to be disclosed in the Registration Statement
(other than as disclosed therein), or which might reasonably be expected to
result in a Material Adverse Effect, or which might reasonably be expected
to materially and adversely affect (A) the properties or assets of the
Company or any subsidiary, (B) the consummation of the transactions
contemplated by the Company or the performance of the Company's obligations
under the Purchase Agreement or (C) the consummation of any of the
transactions contemplated by, or the performance of any of the Company's
obligations as set forth under, the sections titled "Relationship with
ShopKo--Intercompany Agreements" or "The Reorganization" in the Prospectus;
the aggregate of all pending legal or governmental proceedings to which the
Company or any subsidiary is a party or of which any of their respective
property or assets is the subject which are not described in the
Registration Statement, including ordinary routine litigation incidental to
the business, could not reasonably be expected to result in a Material
Adverse Effect.
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<PAGE>
(xiii) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits thereto which have not been so
described and filed as required.
(xiv) Possession of Intellectual Property. The Company and its
subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the business
now operated by them, and neither the Company nor any of its subsidiaries
has received any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or any of its subsidiaries therein, and which infringement or
conflict (if the subject of any unfavorable decision, ruling or finding) or
invalidity or inadequacy, singly or in the aggregate, would result in a
Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities hereunder or the consummation of the transactions
contemplated by this Agreement or the consummation of any of the
transactions contemplated by, or the performance of any of the Company's
obligations as set forth under, the sections titled "Relationship with
ShopKo--Intercompany Agreements" or "The Reorganization" in the Prospectus,
except (i) such as have been already obtained or as may be required under
the 1933 Act or the 1933 Act Regulations and will be obtained in a timely
manner or as may be required under state securities laws and (ii) such as
have been obtained under the laws and regulations of jurisdictions outside
the United States in which the Reserved Securities are offered.
(xvi) Possession of Licenses and Permits. The Company and its
subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them and the absence of
which, singly or in aggregate, would result in a Material Adverse Effect;
the Company and its subsidiaries are in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure so
to comply would not, singly or in the aggregate, have a Material Adverse
Effect; all of the Governmental Licenses are valid and in full force and
effect, except when the invalidity of such Governmental Licenses or the
failure of such Governmental Licenses to be in full force and effect would
not, singly or in the aggregate, have a Material Adverse Effect; and
neither the Company nor any of its subsidiaries has received any notice of
proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, would result in a Material
Adverse Effect.
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(xvii) Title to Property. The Company and its subsidiaries have good
and marketable title to all real property owned by the Company and its
subsidiaries and good title to all other properties owned by them, in each
case, free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind except such as (a) are
described in the Registration Statement or (b) do not, singly or in the
aggregate, affect the value of such property or interfere with the use made
and proposed to be made of such property by the Company or any of its
subsidiaries in a manner that would have a Material Adverse Effect; and all
of the leases and subleases material to the business of the Company and its
subsidiaries, considered as one enterprise, and under which the Company or
any of its subsidiaries holds properties described in the Prospectus, are
in full force and effect, and neither the Company nor any subsidiary has
any notice of any material claim of any sort that has been asserted by
anyone adverse to the rights of the Company or any subsidiary under any of
the leases or subleases mentioned above, or affecting or questioning the
rights of the Company or such subsidiary to the continued possession of the
leased or subleased premises under any such lease or sublease.
(xviii) Compliance with Cuba Act. The Company has complied with, and
is and will be in compliance with, the provisions of that certain Florida
act relating to disclosure of doing business with Cuba, codified as Section
517.075 of the Florida statutes, and the rules and regulations thereunder
(collectively, the "Cuba Act") or is exempt therefrom.
(xix) Environmental Laws. Except as described in the Registration
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any of its
subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of common
law or any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent, decree or judgment, relating to
pollution or protection of human health, the environment (including,
without limitation, ambient air, surface water, groundwater, land surface
or subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Hazardous Materials") or to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and its subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements, (C)
there are no pending or threatened administrative, regulatory or judicial
actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigation or proceedings relating to any
Environmental Law against the Company or any of its subsidiaries and (D)
there are no events or circumstances that might reasonably be expected to
form the basis of an order for clean-up or remediation, or an action, suit
or proceeding by any private party or governmental body or agency, against
or affecting the Company or any of its subsidiaries relating to Hazardous
Materials or any Environmental Laws.
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<PAGE>
(xx) Registration Rights. Except as disclosed in the Registration
Statement, there are no persons with registration rights or other similar
rights to have any securities registered pursuant to the Registration
Statement or otherwise registered by the Company under the 1933 Act.
The representations in paragraphs (vi), (vii) and (ix) regarding the
non-assessability of securities are subject to the possible applicability
of Wisconsin Statute (S) 180.0622(2)(b).
(b) Representations and Warranties by ShopKo. ShopKo represents and
warrants to each Underwriter as of the date hereof, as of the Closing Time
referred to in Section 2(c) hereof, and as of each Date of Delivery (if any)
referred to in Section 2(b) hereof, and agrees with each Underwriter, as
follows:
(i) Compliance with Registration Requirements. At the respective
times the Registration Statement, any Rule 462(b) Registration Statement
and any post-effective amendments thereto became effective and at the
Closing Time (and, if any Option Securities are purchased, at the Date of
Delivery), the Registration Statement, the Rule 462(b) Registration
Statement and any amendments and supplements thereto did not 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. Neither the Prospectus nor any amendments or
supplements thereto (including any prospectus wrapper), at the time the
Prospectus or any such amendment or supplement was issued and at the
Closing Time (and, if any Option Securities are purchased, at the Date of
Delivery), included or will include an untrue statement of a material fact
or omitted or will omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading. The representations and warranties in this
subsection shall not apply to statements in or omissions from the
Registration Statement or Prospectus made in reliance upon and in
conformity with information furnished to the Company in writing by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement or Prospectus.
(ii) Accurate Disclosure. To the best knowledge of ShopKo, the
representations and warranties of the Company contained in Section 1(a)
hereof are true and correct; ShopKo is not prompted to sell the Option
Securities to be sold by ShopKo hereunder by any information concerning the
Company or any subsidiary of the Company which is not set forth in the
Prospectus.
(iii) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by ShopKo.
(iv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by ShopKo of its obligations
hereunder, in connection with the offering, issuance or sale of the
Securities hereunder or the consummation of the transactions contemplated
by this Agreement or the consummation of any of the transactions
contemplated by, or the
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<PAGE>
performance of any of ShopKo's obligations as set forth under, the sections
titled "Relationship with ShopKo--Intercompany Agreements" or "The
Reorganization" in the Prospectus, except (i) such as have been already
obtained or as may be required under the 1933 Act or the 1933 Act
Regulations and will be obtained in a timely manner or as may be required
under state securities laws and (ii) such as have been obtained under the
laws and regulations of jurisdictions outside the United States in which
the Reserved Securities are offered.
(v) Absence of Defaults and Conflicts. The execution, delivery and
performance of this Agreement by ShopKo and the sale and delivery of the
Option Securities to be sold by ShopKo and the consummation by ShopKo of
the transactions contemplated herein and in the Registration Statement
(including the transactions described in the Prospectus under "Relationship
with ShopKo--Intercompany Agreements" and "The Reorganization") and
compliance by ShopKo with its obligations hereunder have been duly
authorized by all necessary corporate action and do not and will not,
whether with or without the giving of notice or passage of time or both,
conflict with or constitute a breach of, or default or Repayment Event
under, or result in the creation or imposition of any lien, charge or
encumbrance upon the Option Securities to be sold by ShopKo or upon any
property or assets of ShopKo or any subsidiary pursuant to, any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note, lease
or other agreement or instrument to which ShopKo or any of its subsidiaries
is a party or by which it or any of them may be bound, or to which any of
the property or assets of ShopKo or any subsidiary is subject (except for
such conflicts, breaches or defaults or liens, charges or encumbrances that
would not result in a Material Adverse Effect or materially adversely
affect ShopKo's ability to consummate the transactions contemplated herein
and in the Registration Statement), nor will such action result in any
violation of the provisions of the charter or by-laws of ShopKo or any
subsidiary or any applicable law, statute, rule, regulation, judgment,
order, writ or decree of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over ShopKo or any
subsidiary or any of their assets, properties or operations.
(vi) Good and Marketable Title. ShopKo has and will on each Date of
Delivery (if any) have good and marketable title to the Option Securities
to be sold by ShopKo hereunder, free and clear of any security interest,
mortgage, pledge, lien, charge, claim or encumbrance of any kind, other
than pursuant to this Agreement; and upon delivery of such Option
Securities and payment of the purchase price thereof as herein
contemplated, assuming each such Underwriter has no notice of any adverse
claim, each of the Underwriters will receive good and marketable title to
the Option Securities purchased by it from ShopKo, free and clear of any
security interest, mortgage, pledge, lien, charge, claim, equity or
encumbrance of any kind.
(vii) Absence of Manipulation. ShopKo has not taken, and will not
take, directly or indirectly, any action that is designed to or that 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 Securities.
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(viii) No Association with NASD. Neither ShopKo nor any of its
affiliates, directly, or indirectly through one or more intermediaries, control,
or is controlled by, or is under common control with, or has any other
association with (within the meaning of Article I of the By-laws of the National
Association of Securities Dealers, Inc.), any member firm of the National
Association of Securities Dealers, Inc.
(c) Officer's Certificates. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Representatives or to
counsel for the Underwriters shall be deemed a representation and warranty by
the Company to each Underwriter as to the matters covered thereby; and any
certificate signed by or on behalf of ShopKo as such and delivered to the
Representatives or to counsel for the Underwriters pursuant to the terms of this
Agreement shall be deemed a representation and warranty of ShopKo to the
Underwriters as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) Initial Securities. On the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company agrees to sell to each Underwriter, severally and not jointly, and each
Underwriter, severally and not jointly, agrees to purchase from the Company, at
the price per share set forth in Schedule B, the number of Initial Securities
set forth in Schedule A opposite the name of such Underwriter, plus any
additional number of Initial Securities which such Underwriter may become
obligated to purchase pursuant to the provisions of Section 10 hereof.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, ShopKo hereby grants an option to the Underwriters, severally and not
jointly, to purchase up to an additional 795,000 shares of Common Stock at the
price per share set forth in Schedule B, less an amount per share equal to any
dividends or distributions declared by the Company and payable on the Initial
Securities but not payable on the Option Securities. The option hereby granted
will expire 30 days after the date hereof and may be exercised in whole or in
part from time to time only for the purpose of covering over-allotments which
may be made in connection with the offering and distribution of the Initial
Securities upon notice by the Representatives to ShopKo setting forth the number
of Option Securities as to which the several Underwriters are then exercising
the option and the time and date of payment and delivery for such Option
Securities. Any such time and date of delivery (a "Date of Delivery") shall be
determined by the Representatives, but shall not be later than seven full
business days after the exercise of said option, nor in any event prior to the
Closing Time, as hereinafter defined. If the option is exercised as to all or
any portion of the Option Securities, each of the Underwriters, acting severally
and not jointly, will purchase that proportion of the total number of Option
Securities then being purchased which the number of Initial Securities set forth
in Schedule A opposite the name of such Underwriter bears to the total number of
Initial Securities, subject in each case to such adjustments as the
Representatives in their discretion shall make to eliminate any sales or
purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Dewey
Ballantine LLP, 1301 Avenue of the Americas, New York, New York, or at such
other place as shall be agreed upon by the
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<PAGE>
Representatives and the Company, at 9:00 A.M. (Eastern time) on the third
(fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day)
business day after the date hereof (unless postponed in accordance with the
provisions of Section 10), or such other time not later than ten business days
after such date as shall be agreed upon by the Representatives and the Company
(such time and date of payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and ShopKo, on each Date of Delivery as specified in the notice from the
Representatives to ShopKo.
Payment shall be made to the Company with respect to the Initial Securities
and ShopKo with respect to the Option Securities by wire transfer of immediately
available funds to a bank account designated by the Company or ShopKo, as the
case may be, against delivery to the Representatives for the respective accounts
of the Underwriters of certificates for the Securities to be purchased by them.
It is understood that each Underwriter has authorized the Representatives, for
its account, to accept delivery of, receipt for, and make payment of the
purchase price for, the Initial Securities and the Option Securities, if any,
which it has agreed to purchase. Merrill Lynch, individually and not as
representative of the Underwriters, may (but shall not be obligated to) make
payment of the purchase price for the Initial Securities or the Option
Securities, if any, to be purchased by any Underwriter whose funds have not been
received by the Closing Time or the relevant Date of Delivery, as the case may
be, but such payment shall not relieve such Underwriter from its obligations
hereunder.
(d) Denominations; Registration. Certificates for the Initial Securities
and the Option Securities, if any, shall be in such denominations and registered
in such names as the Representatives may request in writing at least one full
business day before the Closing Time or the relevant Date of Delivery, as the
case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
SECTION 3. Covenants (1) Covenants of the Company. The Company covenants
with each Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(1)(b), will comply with the requirements of Rule
430A or Rule 434, as applicable, and will notify the Representatives
immediately, and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement shall become effective, or any
supplement to the Prospectus or any amended Prospectus shall have been filed,
(ii) of the receipt of any comments from the Commission, (iii) of any request by
the Commission for any amendment to the Registration Statement or any amendment
or supplement to the Prospectus or for additional information, and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of any
preliminary prospectus, or of the suspension of the qualification of the
Securities for offering or sale in any jurisdiction, or of the initiation or
threatening of any
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<PAGE>
proceedings for any of such purposes. The Company will promptly effect the
filings necessary pursuant to Rule 424(b) and will take such steps as it deems
necessary to ascertain promptly whether the form of prospectus transmitted for
filing under Rule 424(b) was received for filing by the Commission and, in the
event that it was not, it will promptly file such prospectus. The Company will
make every reasonable effort to prevent the issuance of any stop order and, if
any stop order is issued, to obtain the lifting thereof at the earliest possible
moment.
(b) Filing of Amendments. The Company will give the Representatives
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), any Term Sheet or any
amendment, supplement or revision to either the prospectus included in the
Registration Statement at the time it became effective or to the Prospectus and
will furnish the Representatives with copies of any such documents a reasonable
amount of time prior to such proposed filing or use, as the case may be, and
will not file or use any such document to which the Representatives or counsel
for the Underwriters shall object.
(c) Delivery of Registration Statements. The Company has furnished or will
deliver to the Representatives and counsel for the Underwriters, without charge,
signed copies of the Registration Statement as originally filed and of each
amendment thereto (including exhibits filed therewith or incorporated by
reference therein) and signed copies of all consents and certificates of
experts, and will also deliver to the Representatives, without charge, a
conformed copy of the Registration Statement as originally filed and of each
amendment thereto (without exhibits) for each of the Underwriters. The copies of
the Registration Statement and each amendment thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus as
such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934 (the "1934 Act"), such number of copies of the Prospectus
(as amended or supplemented) as such Underwriter may reasonably request. The
Prospectus and any amendments or supplements thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply
with the 1933 Act and the 1933 Act Regulations so as to permit the completion of
the distribution of the Securities as contemplated in this Agreement and in the
Prospectus. If at any time when a prospectus is required by the 1933 Act to be
delivered in connection with sales of the Securities, any event shall occur or
condition shall exist as a result of which it is necessary, in the opinion of
counsel for the Underwriters or for the Company, to amend the Registration
Statement or amend or supplement the Prospectus in order that the Prospectus
will not include any untrue statements of a material fact or omit to state a
material fact necessary in order to make the statements therein not misleading
in the light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of such counsel, at any
such time to amend the
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<PAGE>
Registration Statement or amend or supplement the Prospectus in order to comply
with the requirements of the 1933 Act or the 1933 Act Regulations, the Company
will promptly prepare and file with the Commission, subject to Section 3(1)(b),
such amendment or supplement as may be necessary to correct such statement or
omission or to make the Registration Statement or the Prospectus comply with
such requirements, and the Company will furnish to the Underwriters such number
of copies of such amendment or supplement as the Underwriters may reasonably
request.
(f) Blue Sky Qualifications. The Company will use its best efforts, in
cooperation with the Underwriters, to qualify the Securities for offering and
sale under the applicable securities laws of such states and other jurisdictions
(domestic or foreign) as the Representatives may designate and to maintain such
qualifications in effect for a period of not less than one year from the later
of the effective date of the Registration Statement and any Rule 462(b)
Registration Statement; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify as a
foreign corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the Company will
file such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of not less
than one year from the effective date of the Registration Statement and any Rule
462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of Section
11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received by it
from the sale of the Securities in the manner specified in the Prospectus under
"Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect the inclusion
of the Common Stock (including the Securities) for listing on the New York Stock
Exchange.
(j) Restriction on Sale of Securities. During a period of 180 days from
the date of the Prospectus, the Company will not, without the prior written
consent of Merrill Lynch, (i) directly or indirectly, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of any share of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or file any registration
statement under the 1933 Act with respect to any of the foregoing or (ii) enter
into any swap or any other agreement or any transaction that transfers, in whole
or in part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise; provided, however, that the Company may (A)
file a registration statement on Form S-8 under the 1933 Act with respect to the
Company's 1999 Stock Incentive Plan, (B) grant options pursuant to the Company's
1999 Stock Incentive Plan subject to the last sentence of this section 3(j), (C)
issue Common Stock pursuant to the Company's 1999 Stock Incentive Plan to
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<PAGE>
individuals who have executed a lock-up agreement in the form of Exhibit B
hereto, (D) issue Common Stock pursuant to obligations to Avatex Corp. disclosed
in the Registration Statement, (E) contract to sell, sell and file registration
statements under the 1933 Act with respect to Common Stock issued in connection
with acquisitions by the Company of businesses, assets or contractual rights so
long as the aggregate of such issuance does not exceed 446,250 shares of Common
Stock (as adjusted to give effect to any stock split, stock dividend or stock
combination effected after the Closing Time), and (F) sell to the Underwriters
the Initial Securities to be sold hereunder in the manner specified herein. In
the event that the Company issues Common Stock to satisfy obligations to Avatex
Corp., the Company will use reasonable best efforts to have Avatex Corp. execute
a lock-up agreement in the form of Exhibit B hereto. The Company has not and
will not grant any option to any person or entity which is or becomes
exercisable within 180 days of the date of the Prospectus other than options
which become automatically exercisable due to the death or disability of the
optionholder or a change of control of the Company.
(k) Reporting Requirements. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will
file all documents required to be filed with the Commission pursuant to the 1934
Act within the time periods required by the 1934 Act and the rules and
regulations of the Commission thereunder.
(l) Compliance with NASD Rules. The Company hereby agrees that it will
ensure that the Reserved Securities will be restricted as required by the
National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules
from sale, transfer, assignment, pledge or hypothecation for a period of three
months following the date of this Agreement. The Underwriters will notify the
Company as to which persons will need to be so restricted. At the request of the
Underwriters, the Company will direct the transfer agent to place a stop
transfer restriction upon such securities for such period of time. Should the
Company release, or seek to release, from such restrictions any of the Reserved
Securities, the Company agrees to reimburse the Underwriters for any reasonable
expenses (including, without limitation, legal expenses) they incur in
connection with such release.
(m) Compliance with Rule 463. The Company will file with the Commission
the information as required pursuant to Rule 463 of the 1933 Act Regulations.
(2) Covenants of ShopKo. ShopKo covenants with each Underwriter as
follows:
(a) Effectiveness. ShopKo will make every reasonable effort to cause the
Registration Statement to become effective on a timely basis.
(b) Conditions Precedent. ShopKo will do and perform all things to be done
or performed by ShopKo prior to Closing Time to satisfy all conditions precedent
to the delivery of the Securities pursuant to this Agreement.
(c) Restriction on Sale of Securities. During a period of 180 days from
the date of the Prospectus, ShopKo will not without the prior written consent of
Merrill Lynch, (i) directly or indirectly, offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase
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any option or contract to sell, grant any option, right or warrant to purchase
or otherwise transfer or dispose of any share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or cause the
filing of any registration statement under the 1933 Act with respect to any of
the foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
shall not prohibit the sale of the Option Securities subject to sale hereunder
in the manner specified herein.
SECTION 4. Payment of Expenses.
(a) Expenses. The Company and ShopKo will pay all expenses incident to the
performance of their obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriters of this
Agreement, any Agreement among Underwriters and such other documents as may be
required in connection with the offering, purchase, sale, issuance or delivery
of the Securities, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Underwriters, including any stock or
other transfer taxes and any stamp or other duties payable upon the sale,
issuance or delivery of the Securities to the Underwriters, (iv) the fees and
disbursements of the Company's outside counsel, accountants and other advisors,
(v) the qualification of the Securities under securities laws in accordance with
the provisions of Section 3(1)(f) hereof, including filing fees and the
reasonable fees and disbursements of outside counsel for the Underwriters in
connection therewith and in connection with the preparation of the Blue Sky
Survey and any supplement thereto, (vi) the printing and delivery to the
Underwriters of copies of each preliminary prospectus, any Term Sheets and of
the Prospectus and any amendments or supplements thereto, (vii) the preparation,
printing and delivery to the Underwriters of copies of the Blue Sky Survey and
any supplement thereto, (viii) the fees and expenses of any transfer agent or
registrar for the Securities and (ix) the filing fees incident to, and the
reasonable fees and disbursements of outside counsel to the Underwriters in
connection with, the review by the National Association of Securities Dealers,
Inc. (the "NASD") of the terms of the sale of the Securities and (x) the fees
and expenses incurred in connection with the listing of the Securities on the
New York Stock Exchange and (xi) all costs and expenses of the Underwriters,
including the fees and disbursements of outside counsel for the Underwriters, in
connection with matters related to the Reserved Securities which are designated
by the Company for sale to employees and others having a business relationship
with the Company; provided, that the aggregate amount of expenses payable by the
Company to counsel for the Underwriters pursuant to (v) and (ix) above shall not
exceed $15,000.
(b) Expenses of ShopKo. ShopKo will pay all expenses incident to the
performance of its obligations under, and the consummation of the transactions
contemplated by this Agreement, including (1) any stamp duties, capital duties
and stock transfer taxes, if any, payable upon the sale of the Option Securities
to the Underwriters, and their transfer between the Underwriters pursuant to an
agreement between such Underwriters, and (ii) the fees and disbursements of its
counsel and accountants.
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(c) Termination of Agreement. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company and ShopKo shall reimburse the Underwriters for all
of their out-of-pocket expenses, including the reasonable fees and disbursements
of counsel for the Underwriters.
(d) Allocation of Expenses. The provisions of this Section shall not
affect any agreement that the Company and ShopKo may make for the sharing of
such costs and expenses.
SECTION 5. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company and ShopKo contained in Section 1
hereof or in certificates of any officer of the Company or any subsidiary of the
Company or ShopKo delivered pursuant to the provisions hereof, to the
performance by each of the Company and ShopKo of its covenants and other
obligations hereunder, and to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration Statement,
including any Rule 462(b) Registration Statement, has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the Underwriters. A prospectus containing
the Rule 430A Information shall have been filed with the Commission in
accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434,
a Term Sheet shall have been filed with the Commission in accordance with Rule
424(b).
(b) Opinions of Counsel for Company and ShopKo. At Closing Time, the
Representatives shall have received the favorable opinions, dated as of Closing
Time, of Godfrey & Kahn, S.C., counsel for the Company and ShopKo in the form
set forth in Exhibit A-1 hereto, Richard D. Schepp, Esq., General Counsel of
ShopKo in the form set forth in Exhibit A-2 hereto and Patricia Nussle, Esq.,
Vice President-Legal Affairs of the Company, in the form set forth in Exhibit
A-3 hereto. Such letters shall be in form and substance satisfactory to counsel
for the Underwriters. The Representatives shall receive signed or reproduced
copies of such letters for each of the other Underwriters.
(c) Opinion of Counsel for Underwriters. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Dewey Ballantine LLP, counsel for the Underwriters, together with
signed or reproduced copies of such letter for each of the other Underwriters
with respect to the matters set forth in clauses (i), (ii), (iv), (v) (solely as
to preemptive or other similar rights arising by operation of law or under the
charter or by-laws of the Company), (vii) through (ix), inclusive, (xi), (xii)
(solely as to the information in the Prospectus under "Description of Capital
Stock--Common Stock") and the penultimate paragraph of Exhibit A-1 hereto. In
giving such opinion such counsel may rely, as to all matters governed by the
laws of jurisdictions other than the law of the State of New York, the federal
law of the United States and the General Corporation Law of the State of
Delaware, upon the opinions of counsel satisfactory to the Representatives. Such
counsel may also state that, insofar
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as such opinion involves factual matters, they have relied, to the extent they
deem proper, upon certificates of officers of the Company and its subsidiaries
and certificates of public officials.
(d) Officers' Certificates. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, and the Representatives shall have
received a certificate of the President, the Executive Vice President or a Vice
President of the Company and of the chief financial or chief accounting officer
of the Company, dated as of Closing Time, to the effect that (i) there has been
no such material adverse change, (ii) the representations and warranties in
Section 1(a) hereof are true and correct with the same force and effect as
though expressly made at and as of Closing Time, (iii) the Company has complied
with all agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to Closing Time, and (iv) no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or are contemplated by the
Commission. The Representatives shall have received a certificate from the
President or a Vice President of ShopKo and of the chief financial officer or
chief accounting officer of ShopKo, dated as of the Closing Time, to the effect
that (i) the representations and warranties in Section 1(b) hereof are true and
correct with the same force and effect as though expressly made at and as of the
Closing Time and (ii) ShopKo has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to the Closing
Time.
(e) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Representatives shall have received from Deloitte & Touche LLP a
letter dated such date, in form and substance satisfactory to the
Representatives, together with signed or reproduced copies of such letter for
each of the other Underwriters containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(f) Bring-down Comfort Letter. At Closing Time, the Representatives shall
have received from Deloitte & Touche LLP a letter, dated as of Closing Time, to
the effect that they reaffirm the statements made in the letter furnished
pursuant to subsection (e) of this Section, except that the specified date
referred to shall be a date not more than three business days prior to Closing
Time.
(g) Approval of Listing. At Closing Time, the Securities shall have been
approved for listing on the New York Stock Exchange, subject only to official
notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the Representatives
shall have received an agreement substantially in the form of Exhibit B hereto
signed by all of the Company's executive officers, directors and all of the
holders of the Common Stock and
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securities convertible into and exchangeable for Common Stock, and individuals
identified in the Registration Statement as prospective directors.
(j) Corporate Transactions. As of the date of this Agreement, the Company
shall have consummated the transactions contemplated under the sections entitled
"Relationship with ShopKo--Intercompany Agreements" or "The Reorganization" in
the Prospectus and shall have provided to the Representatives reasonably
satisfactory evidence of the completion of such transactions as of such date.
(k) Conditions to Purchase of Option Securities. In the event that the
Underwriters exercise their option provided in Section 2(b) hereof to purchase
all or any portion of the Option Securities, the representations and warranties
of the Company and ShopKo contained herein and the statements in any
certificates furnished by the Company, any subsidiary of the Company and ShopKo
hereunder shall be true and correct as of each Date of Delivery and, at the
relevant Date of Delivery, the Representatives shall have received:
(i) Officers' Certificates. Certificates, dated such Date of
Delivery, of the President, the Executive Vice President or a Vice
President of each of the Company and ShopKo and of the chief financial or
chief accounting officer of each of the Company and ShopKo confirming that
the certificates delivered at the Closing Time pursuant to Section 5(d)
hereof remain true and correct as of such Date of Delivery.
(ii) Opinions of Counsel for Company and ShopKo. The favorable
opinion of Godfrey & Kahn, S.C., counsel for the Company and ShopKo, in the
form of Exhibit A-1 hereto, the favorable opinion of Richard D. Schepp,
Esq., General Counsel of ShopKo, in the form of Exhibit A-2 hereto and the
favorable opinion of Patricia Nussle, Esq., Vice President-Legal Affairs of
the Company, in the form of Exhibit A-3 hereto, and in each case in form
and substance satisfactory to counsel for the Underwriters, dated such Date
of Delivery, relating to the Option Securities to be purchased on such Date
of Delivery and otherwise to the same effect as the opinions required by
Section 5(b) hereof.
(iii) Opinion of Counsel for Underwriters. The favorable opinion
of Dewey Ballantine LLP, counsel for the Underwriters, dated such Date of
Delivery, relating to the Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion required by
Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from Deloitte & Touche
LLP, in form and substance satisfactory to the Representatives and dated
such Date of Delivery, substantially in the same form and substance as the
letter furnished to the Representatives pursuant to Section 5(f) hereof,
except that the "specified date" in the letter furnished pursuant to this
paragraph shall be a date not more than five days prior to such Date of
Delivery.
(l) Additional Documents. At Closing Time and at each Date of Delivery,
counsel for the Underwriters shall have been furnished with such documents and
opinions as they may require for the purpose of enabling them to pass upon the
issuance and sale of the Securities as herein contemplated, or in order to
evidence the accuracy of any of the representations or
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warranties, or the fulfillment of any of the conditions, herein contained; and
all proceedings taken by the Company in connection with the issuance and sale of
the Securities as herein contemplated shall be satisfactory in form and
substance to the Representatives and counsel for the Underwriters.
(m) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option
Securities, on a Date of Delivery which is after the Closing Time, the
obligations of the several Underwriters to purchase the relevant Option
Securities, may be terminated by the Representatives by notice to the Company at
any time at or prior to Closing Time or such Date of Delivery, as the case may
be, and such termination shall be without liability of any party to any other
party except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of Underwriters. The Company and ShopKo, jointly and
severally, agree to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), including the Rule 430A Information
and the Rule 434 Information, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of
any untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus or the Prospectus (or any amendment
or supplement thereto), or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of (A) the violation of any
applicable laws or regulations of foreign jurisdictions where Reserved
Securities have been offered and (B) any untrue statement or alleged untrue
statement of a material fact included in the supplement or prospectus
wrapper material distributed in connection with the reservation and sale of
the Reserved Securities to employees and directors of the Company, ShopKo
or their affiliates or the omission or alleged omission therefrom of a
material fact necessary to make the statements therein, when considered in
conjunction with the Prospectus or preliminary prospectus, not misleading;
(iii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount paid
in settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission or in connection with any
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violation of the nature referred to in Section 6(a)(ii)(A) hereof; provided
that (subject to Section 6(d) below) any such settlement is effected with
the written consent of the Company or ShopKo; and
(iv) against any and all expense whatsoever, as incurred (including
the reasonable fees and disbursements of counsel chosen by Merrill Lynch),
reasonably incurred in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency
or body, commenced or threatened, or any claim whatsoever based upon any
such untrue statement or omission, or any such alleged untrue statement or
omission or in connection with any violation of the nature referred to in
Section 6(a)(ii)(A) hereof, to the extent that any such expense is not paid
under (i), (ii) or (iii) above;
provided, however, that this indemnity agreement shall not apply to
any loss, liability, claim, damage or expense to the extent arising out of
any untrue statement or omission or alleged untrue statement or omission
made in reliance upon and in conformity with written information furnished
to the Company by any Underwriter through Merrill Lynch expressly for use
in the Registration Statement (or any amendment thereto), including the
Rule 430A Information and the Rule 434 Information, if applicable, or any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(b) Indemnification of Company, Directors and Officers and ShopKo. Each
Underwriter severally agrees to indemnify and hold harmless the Company and
ShopKo, and their respective directors, each of their respective officers who
signed the Registration Statement, and each person, if any, who controls the
Company or ShopKo within the meaning of Section 15 of the 1933 Act or Section 20
of the 1934 Act against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a) of this Section, as
incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto) in reliance upon and in conformity with
written information furnished to the Company by such Underwriter through Merrill
Lynch expressly for use in the Registration Statement (or any amendment thereto)
or such preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of
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the indemnified party) also be counsel to the indemnified party. In no event
shall the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances. No indemnifying party shall, without the
prior written consent of the indemnified parties, settle or compromise or
consent to the entry of any judgment with respect to any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever in respect of which indemnification or
contribution could be sought under this Section 6 or Section 7 hereof (whether
or not the indemnified parties are actual or potential parties thereto), unless
such settlement, compromise or consent (i) includes an unconditional release of
each indemnified party from all liability arising out of such litigation,
investigation, proceeding 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.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(iii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
(e) Indemnification for Reserved Securities. In connection with the offer
and sale of the Reserved Securities, the Company agrees, promptly upon a request
in writing, to indemnify and hold harmless the Underwriters from and against any
and all losses, liabilities, claims, damages and expenses incurred by them as a
result of the failure of employees and directors of the Company, ShopKo or their
affiliates to pay for and accept delivery of Reserved Securities which, by the
end of the first business day following the date of this Agreement, were subject
to a properly confirmed agreement to purchase.
(f) Other Agreements With Respect to Indemnification. The provisions of
this Section shall not affect any agreement among the Company and ShopKo with
respect to indemnification.
SECTION 7. Contribution. If the indemnification provided for in Section 6
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company and ShopKo
on the one hand and the Underwriters on the other hand from the offering of the
Securities pursuant to this Agreement or (ii) if the allocation provided by
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and ShopKo on the one hand and
of the Underwriters on the other hand in connection with the statements or
omissions, or in connection with any violation of the
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nature referred to in Section 6(a)(ii)(A) hereof, which resulted in such losses,
liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
The relative benefits received by the Company and ShopKo on the one hand
and the Underwriters on the other hand in connection with the offering of the
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the Underwriters, in
each case as set forth on the cover of the Prospectus, or, if Rule 434 is used,
the corresponding location on the Term Sheet, bear to the aggregate initial
public offering price of the Securities as set forth on such cover.
The relative fault of the Company and ShopKo on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or ShopKo on the one hand or by the Underwriters on the
other hand and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission or any
violation of the nature referred to in Section 6(a)(ii)(A) hereof.
The Company, ShopKo and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 7 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 Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities 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 any 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 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act
(including ShopKo) shall have the same rights to contribution as the Company.
The
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Underwriters' respective obligations to contribute pursuant to this Section 7
are several in proportion to the number of Initial Securities set forth opposite
their respective names in Schedule A hereto and not joint.
The provisions of this Section shall not affect any agreement among the
Company and ShopKo with respect to contribution.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company or any of its subsidiaries or ShopKo
submitted pursuant hereto shall remain operative and in full force and effect,
regardless of any investigation made by or on behalf of any Underwriter or
controlling person, or by or on behalf of the Company or ShopKo, and shall
survive delivery of the Securities to the Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Representatives may terminate this
Agreement, by notice to the Company and ShopKo, at any time at or prior to
Closing Time (i) if there has been, since the time of execution of this
Agreement or since the respective dates as of which information is given in the
Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Representatives, impracticable to market the Securities or to
enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or materially limited by the
Commission or the New York Stock Exchange, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or in the Nasdaq National
Market has been suspended or materially limited, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices have been required, by
any of said exchanges or by such system or by order of the Commission, the
National Association of Securities Dealers, Inc. or any other governmental
authority, or (iv) if a banking moratorium has been declared by either Federal
or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 6,
7 and 8 shall survive such termination and remain in full force and effect.
SECTION 10. Default by One or More of the Underwriters. If one or more of
the Underwriters shall fail at Closing Time or a Date of Delivery to purchase
the Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms
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herein set forth; if, however, the Representatives shall not have completed such
arrangements within such 24-hour period, then:
(i) if the number of Defaulted Securities does not exceed 10% of the
number of Securities to be purchased on such date, each of the non-
defaulting Underwriters shall be obligated, severally and not jointly, to
purchase the full amount thereof in the proportions that their respective
underwriting obligations hereunder bear to the underwriting obligations of
all non-defaulting Underwriters, or
(ii) if the number of Defaulted Securities exceeds 10% of the number
of Securities to be purchased on such date, this Agreement or, with respect
to any Date of Delivery which occurs after the Closing Time, the obligation
of the Underwriters to purchase and of ShopKo to sell the Option Securities
to be purchased and sold on such Date of Delivery, shall terminate without
liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the
Underwriters to purchase and ShopKo to sell the relevant Option Securities, as
the case may be, either the Representatives or the Company (together with
ShopKo, in the case of a Date of Delivery which is after the Closing Time) shall
have the right to postpone the Closing Time or the relevant Date of Delivery, as
the case may be, for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements. As used herein, the term "Underwriter" includes any
person substituted for an Underwriter under this Section 10.
SECTION 11. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at North Tower, World
Financial Center, New York, New York 10281-1201, attention of James D. Forbes;
and notices to the Company shall be directed to the Company at 13555 Bishops
Court, Suite 201, Brookfield, Wisconsin 53005, attention of Mr. Jeffrey A.
Jones, President and Chief Executive Officer with a copy to Patricia Nussle,
Esq., counsel and notices to ShopKo shall be directed to ShopKo at ShopKo
Stores, Inc., 700 Pilgrim Way, P.O. Box 19060, Green Bay, WI 54307, attention of
Mr. Paul H. Freischlag, Jr., Senior Vice President and Chief Financial Officer,
with a copy to Richard D. Schepp, Esq., Senior Vice President and General
Counsel.
SECTION 12. Parties. This Agreement shall each inure to the benefit of and
be binding upon the Underwriters, the Company and ShopKo and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters, the Company and ShopKo and their respective successors and the
controlling persons and officers and directors referred to in Sections 6 and 7
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in
25
<PAGE>
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the Underwriters, the Company and ShopKo and their
respective successors, and said controlling persons and officers and directors
and their heirs and legal representatives, and for the benefit of no other
person, firm or corporation. No purchaser of Securities from any Underwriter
shall be deemed to be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
26
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriters, the Company and ShopKo in accordance with its terms.
Very truly yours,
PROVANTAGE HEALTH SERVICES, INC.
By:
------------------------------------
Title:
SHOPKO STORES, INC.
By:
------------------------------------
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
BEAR, STEARNS & CO. INC.
WILLIAM BLAIR & COMPANY, L.L.C.
LEHMAN BROTHERS INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
-------------------------------
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
27
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial Securities
Name of Underwriter -------------------
-------------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................................................
Bear, Stearns & Co. Inc...................................................
William Blair & Company, L.L.C............................................
Lehman Brothers Inc.......................................................
---------
Total..................................................................... 5,300,000
=========
</TABLE>
Sch A-1
<PAGE>
SCHEDULE B
PROVANTAGE HEALTH SERVICES, INC.
5,300,000 Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $..
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $., being an amount equal to the initial
public offering price set forth above less $. per share; provided that the
purchase price per share for any Option Securities purchased upon the
exercise of the over-allotment option described in Section 2(b) shall be
reduced by an amount per share equal to any dividends or distributions
declared by the Company and payable on the Initial Securities but not
payable on the Option Securities.
Sch B-1
<PAGE>
Exhibit A-1
FORM OF OPINION OF GODFREY & KAHN, S.C.
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus; and the Company and ShopKo each has corporate power and authority to
enter into and perform their respective obligations under the Purchase
Agreement.
(iii) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus in the column entitled "Actual" under the
caption "Capitalization" (except for subsequent issuances, if any, pursuant to
the Purchase Agreement or pursuant to reservations, agreements or employee
benefit plans referred to in the Prospectus or pursuant to the exercise of
convertible securities or options referred to in the Prospectus); the shares of
issued and outstanding capital stock of the Company, including the Securities to
be purchased by the Underwriters from ShopKo, have been duly authorized and
validly issued and are fully paid and non-assessable; and none of the
outstanding shares of capital stock of the Company was issued in violation of
the preemptive rights of any securityholder of the Company arising from any law,
statute, rule, regulation or the Company's charter or bylaws or, to our best
knowledge, other similar rights of any securityholder of the Company.
(iv) The Securities have been duly authorized for issuance and sale to the
Underwriters pursuant to the Purchase Agreement and, when issued and delivered
by the Company pursuant to the Purchase Agreement against payment of the
consideration set forth in the Purchase Agreement, will be validly issued and
fully paid and non-assessable and no holder of the Securities is or will be
subject to personal liability by reason of being such a holder.
(v) The issuance and sale of the Securities by the Company and the sale
of the Option Securities by ShopKo is not subject to preemptive rights of any
securityholder of the Company arising from any law, statute, rule, regulation or
the Company's charter or bylaws or, to our best knowledge, other similar rights
of any securityholder of the Company.
(vi) Each Subsidiary has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus; except as
otherwise disclosed in the Registration Statement, all of the issued and
outstanding capital stock of each Subsidiary has been duly authorized and
validly issued, is fully paid and non-assessable and, to the best of our
knowledge, is owned by the Company, directly or through subsidiaries, free and
clear of any security interest, mortgage, pledge, lien, encumbrance, claim or
equity; none of the outstanding shares of capital stock of any Subsidiary was
issued in violation of the preemptive rights of any securityholder of such
A-1
<PAGE>
Subsidiary arising from any law, statute, rule, regulation or the Company's
charter or bylaws or, to our best knowledge, similar rights of any
securityholder of such Subsidiary.
(vii) The Purchase Agreement has been duly authorized, executed and
delivered by each of the Company and ShopKo.
(viii) The Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the 1933 Act; any required filing
of the Prospectus pursuant to Rule 424(b) has been made in the manner and within
the time period required by Rule 424(b); and, to the best of our knowledge, no
stop order suspending the effectiveness of the Registration Statement or any
Rule 462(b) Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or threatened
by the Commission.
(ix) The Registration Statement, including any Rule 462(b) Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectus and each amendment or supplement to the Registration
Statement and Prospectus as of their respective effective or issue dates (other
than the financial statements and supporting schedules included therein or
omitted therefrom, as to which we need express no opinion) complied as to form
in all material respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
(x) If Rule 434 has been relied upon, the Prospectus was not "materially
different," as such term is used in Rule 434, from the prospectus included in
the Registration Statement at the time it became effective.
(xi) The form of certificate used to evidence the Common Stock complies
in all material respects with all applicable statutory requirements, with any
applicable requirements of the charter and by-laws of the Company and the
requirements of the New York Stock Exchange.
(xii) The information in the Prospectus under "Description of Capital
Stock," and in the Registration Statement under Item 14, to the extent that it
constitutes matters of law, summaries of legal matters, the Company's charter
and bylaws or legal proceedings, or legal conclusions, has been reviewed by us
and is correct in all material respects.
(xiii) All descriptions in the Registration Statement of contracts and
other documents to which the Company or any of its subsidiaries is a party are
accurate in all material respects.
(xiv) To our knowledge, neither the Company nor any subsidiary is in
violation of its charter or by-laws and no default by the Company or any
subsidiary exists in the due performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture, mortgage,
loan agreement, note, lease or other agreement or instrument that is filed or
incorporated by reference as an exhibit to the Registration Statement, other
than such defaults which, singly or in the aggregate, would not result in a
Material Adverse Effect.
(xv) No filing with, or authorization, approval, consent, license, order,
registration, qualification or decree of, any court or governmental authority or
agency, domestic or foreign (other than under the 1933 Act and the 1933 Act
Regulations, which have been obtained, or as may be required under the
securities or blue sky laws of the various states, as to which we need
A-2
<PAGE>
express no opinion) is necessary or required in connection with the due
authorization, execution and delivery of the Purchase Agreement or for the
offering, issuance or sale of the Securities.
(xvi) The execution, delivery and performance by each of the Company and
ShopKo of the Purchase Agreement and the consummation by each of the Company and
ShopKo of the transactions contemplated in the Purchase Agreement and in the
Registration Statement (including the issuance and sale of the Securities and
the use of the proceeds from the sale of the Securities as described in the
Prospectus under the caption "Use Of Proceeds" and the transactions described in
the Prospectus under "Relationship with ShopKo--Intercompany Agreements" and
"The Reorganization") and compliance by each of the Company and ShopKo with its
respective obligations under the Purchase Agreement do not and will not, whether
with or without the giving of notice or lapse of time or both, conflict with or
constitute a breach of, or default or (except as disclosed in the Registration
Statement) Repayment Event (as defined in Section 1(a)(x) of the Purchase
Agreement) under or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any subsidiary or
ShopKo pursuant to any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease or any other agreement or instrument, known to us,
to which the Company or any subsidiary or ShopKo is a party or by which it or
any of them may be bound, or to which any of the property or assets of the
Company or any subsidiary or ShopKo is subject (except for such conflicts,
breaches or defaults or liens, charges or encumbrances that would not, singly or
in the aggregate, have a Material Adverse Effect), nor will such action result
in any violation of the provisions of the charter or by-laws of the Company or
any subsidiary or ShopKo or any applicable law, statute, rule or regulation
known to us.
(xvii) The Rights under the Company's Shareholder Rights Plan to which
holders of the Securities will be entitled have been duly authorized and validly
issued.
(xviii) To the best of our knowledge, ShopKo has valid and marketable title
to the Securities to be sold by ShopKo pursuant to the Purchase Agreement, free
and clear of any pledge, lien, security interest, charge, claim, equity or
encumbrance of any kind, and has full right, power and authority to sell,
transfer and deliver such Securities pursuant to the Purchase Agreement. By
delivery of a certificate or certificates therefor, ShopKo will transfer to the
Underwriters who have purchased such Securities pursuant to the Purchase
Agreement (without notice of any defect in the title of ShopKo and who are
otherwise bona fide purchasers for purposes of the Uniform Commercial Code)
valid and marketable title to such Securities, free and clear of any pledge,
lien, security interest, charge, claim, equity or encumbrance of any kind.
Nothing has come to our attention that would lead us to believe that the
Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which I need make no statement), at the time such Registration
Statement or any such amendment became effective, 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 the
Prospectus or any amendment or supplement thereto (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which I need make no statement), at the time the Prospectus was
issued, at the time any such amended or supplemented prospectus was issued or
A-3
<PAGE>
at the Closing Time, included or includes an untrue statement of a material fact
or omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
In rendering such opinion, such counsel may rely as to matters of fact (but
not as to legal conclusions), to the extent they deem proper, on certificates of
responsible officers of the Company, ShopKo and public officials and such
opinions shall have such other customary limitations and qualifications as are
acceptable to counsel for the Underwriters. Such opinion shall not state that it
is to be governed or qualified by, or that it is otherwise subject to, any
treatise, written policy or other document relating to legal opinions,
including, without limitation, the Legal Opinion Accord of the ABA Section of
Business Law (1991). The opinion will state that all opinions as to the non-
assessability of securities will be subject to the possible applicability of
Wisconsin Statute (S)180.0622(2)(b) to foreign corporations doing business in
Wisconsin.
A-4
<PAGE>
Exhibit A-2
FORM OF OPINION OF RICHARD D. SCHEPP
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) To the best of my knowledge, there is not pending or threatened
any action, suit, proceeding, inquiry or investigation, to which ShopKo is
a party, or to which the property of ShopKo is subject, before or brought
by any court or governmental agency or body, domestic or foreign, of the
type required to be disclosed in the Registration Statement which is not so
disclosed, or which might reasonably be expected to result in a Material
Adverse Effect or which might reasonably be expected to materially and
adversely affect (A) the consummation of the transactions contemplated by
ShopKo or the performance of ShopKo's obligations under the Purchase
Agreement or (B) the consummation of any of the transactions contemplated
by, or the performance of any of ShopKo's obligations as set forth under,
the sections titled "Relationship with ShopKo--Intercompany Agreements" or
"The Reorganization" in the Prospectus.
(ii) The execution, delivery and performance of the Purchase Agreement
and the consummation of the transactions contemplated in the Purchase
Agreement and in the Registration Statement (including the issuance and
sale of the Securities and the use of the proceeds from the sale of the
Securities as described in the Prospectus under the caption "Use Of
Proceeds" and the transactions described in the Prospectus under
"Relationship with ShopKo--Intercompany Agreements" and "The
Reorganization") and compliance by ShopKo with its obligations under the
Purchase Agreement, do not and will not, whether with or without the giving
of notice or lapse of time or both, conflict with or constitute a breach
of, or default under or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of ShopKo pursuant to any
judgment, order, writ or decree, known to me, of any government
instrumentality or court, domestic or foreign, having jurisdiction over
ShopKo or any of its properties, assets or operations.
Nothing has come to my attention that would lead me to believe that
the Registration Statement or any amendment thereto, including the Rule
430A Information and Rule 434 Information (if applicable), (except for
financial statements and schedules and other financial data included
therein or omitted therefrom, as to which I need make no statement), at the
time such Registration Statement or any such amendment became effective,
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 the Prospectus or any amendment
or supplement thereto (except for financial statements and schedules and
other financial data included therein or omitted therefrom, as to which I
need make no statement), at the time the Prospectus was issued, at the time
any such amended or supplemented prospectus was issued or at the Closing
Time, included or includes an untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
In rendering such opinion, such counsel may rely as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the
A-2-1
<PAGE>
Company and ShopKo and public officials and such opinions shall have such
other customary limitations and qualifications as are acceptable to counsel
for the Underwriters. Such opinion shall not state that it is to be
governed or qualified by, or that it is otherwise subject to, any treatise,
written policy or other document relating to legal opinions, including,
without limitation, the Legal Opinion Accord of the ABA Section of Business
Law (1991).
A-2-2
<PAGE>
Exhibit A-3
FORM OF OPINION OF PATRICIA NUSSLE
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) To the best of my knowledge, there is not pending or threatened
any action, suit, proceeding, inquiry or investigation, to which the
Company or any subsidiary is a party, or to which the property of the
Company or any subsidiary is subject, before or brought by any court or
governmental agency or body, domestic or foreign, of the type required to
be disclosed in the Registration Statement which is not so disclosed, or
which might reasonably be expected to result in a Material Adverse Effect,
or which might reasonably be expected to materially and adversely affect
(A) the consummation of the transactions contemplated by the Company or the
performance of the Company's obligations under the Purchase Agreement or
(B) the consummation of any of the transactions contemplated by, or the
performance of any of the Company's obligations as set forth under, the
sections titled "Relationship with ShopKo--Intercompany Agreements" or "The
Reorganization" in the Prospectus.
(ii) The information in the Prospectus under the sections entitled
"Risk Factors--Uncertainty Regarding Regulatory Matters; Privacy Concerns,"
"--Risks Associated with Intellectual Property," "The Reorganization,"
"Business--Government Regulation," "Business--Facilities," "Business--Legal
Proceedings," to the extent that it constitutes matters of law, summaries
of legal matters, the Company's charter and bylaws or legal proceedings,
has been reviewed by us and is correct in all material respects.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure so
to qualify or to be in good standing would not result in a Material Adverse
Effect.
(iv) Each corporate Subsidiary is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not result
in a Material Adverse Effect.
(v) To the best of my knowledge, there are no statutes or regulations
that are required to be described in the Prospectus that are not described
as required.
(vi) To the best of my knowledge, there are no franchises, contracts,
indentures, mortgages, loan agreements, notes, leases or other instruments
required to be described or referred to in the Registration Statement or to
be filed as exhibits thereto other than those described or referred to
therein or filed as exhibits thereto, and the descriptions thereof or
references thereto are correct in all material respects.
(vii) To the best of my knowledge, except as described in the
Registration Statement, there are no persons with registration rights or
other similar rights to have any securities
A-3-1
<PAGE>
registered pursuant to the Registration Statement or otherwise registered
by the Company under the 1933 Act.
(viii) The execution, delivery and performance of the Purchase
Agreement and the consummation of the transactions contemplated in the
Purchase Agreement and in the Registration Statement (including the
issuance and sale of the Securities and the use of the proceeds from the
sale of the Securities as described in the Prospectus under the caption
"Use Of Proceeds" and the transactions described in the Prospectus under
"Relationship with ShopKo--Intercompany Agreements" and "The
Reorganization") and compliance by the Company with its obligations under
the Purchase Agreement, do not and will not, whether with or without the
giving of notice or lapse of time or both, conflict with or constitute a
breach of, or default under or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or
any subsidiary pursuant to any applicable law, statute, rule, regulation,
judgment, order, writ or decree, known to me, of any government
instrumentality or court, domestic or foreign, having jurisdiction over the
Company or any subsidiary or any of their respective properties, assets or
operations.
(ix) To my knowledge, no default by the Company nor any subsidiary
exists in the due performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other agreement or instrument that is described
or referred to in the Registration Statement or the Prospectus, other than
such defaults, which, singly or in the aggregate, would not result in a
Material Adverse Effect.
Nothing has come to my attention that would lead me to believe that
the Registration Statement or any amendment thereto, including the Rule
430A Information and Rule 434 Information (if applicable), (except for
financial statements and schedules and other financial data included
therein or omitted therefrom, as to which we need make no statement), at
the time such Registration Statement or any such amendment became
effective, 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 the Prospectus or any
amendment or supplement thereto (except for financial statements and
schedules and other financial data included therein or omitted therefrom,
as to which we need make no statement), at the time the Prospectus was
issued, at the time any such amended or supplemented prospectus was issued
or at the Closing Time, included or includes an untrue statement of a
material fact or omitted or omits to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
In rendering such opinion, such counsel may rely as to matters of fact
(but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and ShopKo and public
officials and such opinions shall have such other customary limitations and
qualifications as are acceptable to counsel for the Underwriters. Such
opinion shall not state that it is to be governed or qualified by, or that
it is otherwise subject to, any treatise, written policy or other document
relating to legal opinions, including, without limitation, the Legal
Opinion Accord of the ABA Section of Business Law (1991).
A-3-2
<PAGE>
Exhibit B
Form of lock-up from directors, officers or other stockholders pursuant to
Section 5(i)
., 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
Bear, Stearns & Co. Inc.
William Blair & Company, L.L.C.
Lehman Brothers Inc.
as Representatives of the several
Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by Provantage Health Services, Inc.
------------------------------------------------------------
Dear Sirs:
The undersigned, a stockholder, officer and/or director of Provantage
Health Services, Inc., a Delaware corporation (the "Company"), understands that
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") Bear, Stearns & Co. Inc., William Blair & Company, L.L.C. and
Lehman Brothers Inc. propose to enter into a Purchase Agreement (the "Purchase
Agreement") with the Company and ShopKo Stores, Inc. providing for the public
offering of shares (the "Securities") of the Company's common stock, par value
$.01 per share (the "Common Stock"). In recognition of the benefit that such an
offering will confer upon the undersigned as a stockholder, officer and/or
director of the Company, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the undersigned agrees
with each underwriter to be named in the Purchase Agreement that, during a
period of 180 days from the date of the Purchase Agreement, the undersigned will
not, without the prior written consent of Merrill Lynch, directly or indirectly,
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant for the sale of, or otherwise dispose of or transfer any shares of the
Company's Common Stock or any securities convertible into or exchangeable or
exercisable for Common Stock, whether now owned or hereafter acquired by the
undersigned or with respect to which the undersigned has or hereafter acquires
the power of disposition, or file any registration statement under the
Securities Act of 1933, as amended, with
<PAGE>
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap or transaction is to be settled by delivery of Common Stock or
other securities, in cash or otherwise. This provision does not prohibit the
undersigned from causing the Company to issue and sell Common Stock as permitted
by Section 3(1)(j) of the Purchase Agreement. This provision also does not
purport to prohibit any transaction over which the undersigned does not have
sole or shared dispositive power within the meaning of Rule 13d-3 under the
Exchange Act.
Very truly yours,
Signature:
--------------------------
Print Name:
B-2
<PAGE>
EXHIBIT 5.1
GODFREY & KAHN, S.C.
ATTORNEYS AT LAW
780 NORTH WATER STREET
MILWAUKEE, WI 53202-3590
WWW.GKLAW.COM
PHONE: 414-273-3500 FAX: 414-273-5198
April 16, 1999
VIA EDGAR
- ---------
ProVantage Health Services, Inc.
13555 Bishops Court, Suite 201
Brookfield, Wisconsin 53005
Ladies and Gentlemen:
In connection with the registration of 6,095,000 shares of common stock,
par value $0.01 per share (the "Shares"), of ProVantage Health Services, Inc., a
Delaware corporation (the "Company"), under the Securities Act of 1933, as
amended (the "Securities Act"), on Form S-1 which was initially filed with the
Securities and Exchange Commission (the "Commission") on February 4, 1999 (the
"Registration Statement"), you have requested our opinion with respect to the
following matters.
Of the Shares being registered, (i) 5,300,000 Shares are being sold by the
Company (the "Primary Shares") and (ii) 795,000 Shares are presently issued and
outstanding and will be subject to options to be granted by a certain
stockholder named in the Registration Statement to the underwriters named in the
Registration Statement to cover over-allotments (the "Option Shares") pursuant
to a purchase agreement in the form to be attached as an exhibit to the
Registration Statement (the "Purchase Agreement").
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
<PAGE>
ProVantage Health Services, Inc.
April 16, 1999
Page 2
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.
We are not members of the Bar of any jurisdiction other than the State of
Wisconsin, and, with your consent, we are opining herein only on the General
Corporation Law of the State of Delaware 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 Primary Shares have been duly authorized, and, upon issuance,
delivery and payment therefor in the manner contemplated by the
Purchase Agreement, will be validly issued, fully paid and
non-assessable, subject to Wis. Stat. (S)180.0622(2)(b).
2. The Option Shares have been duly authorized and validly issued and are
fully paid and non-assessable, subject to Wis. Stat.
(S)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 prospectus that is 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,
/s/ Godfrey & Kahn, S.C.
GODFREY & KAHN, S.C.
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Exhibit 10.2
I. T. SUPPORT AGREEMENT
THIS I. T. SUPPORT AGREEMENT ("Agreement") dated as of
____________________, 1999, is entered into by SHOPKO STORES, INC., a Wisconsin
corporation ("ShopKo"), and PROVANTAGE HEALTH SERVICES, INC., a Delaware
corporation ("ProVantage").
RECITALS
WHEREAS, ShopKo, through its indirect, wholly-owned subsidiary ProVantage,
provides health benefit management and health information technology products
and services to the health care industry (the "ProVantage Business"); and
WHEREAS, this Agreement is entered into in conjunction with an initial
public offering of ProVantage's Class A common stock, $.01 par value per share
(the "ProVantage IPO"); and
WHEREAS, after the ProVantage IPO, ProVantage will continue to need certain
information technology services, products and support to be provided by ShopKo
to ProVantage with respect to the operation of the ProVantage Business for a
period of time from and after the Closing Date (as hereafter defined); and
WHEREAS, the parties desire to enter into an agreement to provide for such
services.
NOW, THEREFORE, in consideration of the premises and the mutual promises of
the parties contained herein, the parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the indicated
meanings:
"Affiliate" means, with respect to a specified Person, any Person that,
directly or indirectly, through one or more intermediaries, controls, or is
controlled by, or is under common control with, the specified Person.
"Base Fee" means the amount identified on Exhibit A attached hereto. The
Base Fee shall be paid for the Services described hereunder, exclusive of any
Service Upgrades.
"Closing Date" means the date the ProVantage IPO is consummated.
"Data" means all data used in the ProVantage Business, whether owned by
ProVantage or by a ProVantage customer, which is provided to ShopKo in
connection with the Services.
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"FTE" means the equivalent of a full time employee. For purposes of this
Agreement, an FTE shall be equal to 154 work hours per month.
"Person" means any individual, partnership, joint venture, corporation,
trust, unincorporated organization, limited liability company or other business
entity.
"ProVantage Confidential Information" means Data and other confidential
data provided by ProVantage or ProVantage's customers to ShopKo in accordance
with this Agreement; and any information with respect to ProVantage's
information systems operations, including without limitation all information
with respect to the ProVantage Hardware and the ProVantage Software.
"ProVantage Hardware" means the computer equipment and telecommunications
equipment owned or leased by ProVantage from time to time during the term of
this Agreement and used by ShopKo to provide the Services to ProVantage.
"ProVantage Software" means the software owned or licensed by ProVantage
from time to time during the term of this Agreement and used by ShopKo to
provide the Services to ProVantage.
"Services" means those data processing and related information technology
services to be conducted by ShopKo on behalf of ProVantage as set forth on
Exhibit B attached hereto, and as the same may be amended and revised from time
to time.
"ShopKo Confidential Information" means any and all information with
respect to ShopKo's information systems operations, including without limitation
all information with respect to the ShopKo Hardware and the ShopKo Software.
"ShopKo Hardware" means the computer equipment and telecommunications
equipment owned or leased by ShopKo from time to time during the term of this
Agreement and used to provide the Services to ProVantage. The current ShopKo
Hardware is identified on Exhibit A attached hereto.
"ShopKo I.S. Employees" means the computer operators, operating systems
technicians, help desk staff, end user support staff, LAN administrators,
telecom analysts and other individuals who are employed or contracted by ShopKo
and who are made available to provide the Services to ProVantage. The number of
ShopKo I.S. Employees in the various areas who will provide Services hereunder
for and in consideration of the Base Fee are identified on Exhibit A attached
hereto.
"ShopKo Software" means the software owned or licensed by ShopKo from time
to time during the term of this Agreement and used to provide the Services to
ProVantage. The current ShopKo Software is identified on Exhibit A attached
hereto.
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"Transition Period" means the 180 day period following the date on which
(i) this Agreement expires or is terminated, or (ii) any of the Services are
terminated pursuant to Section 15.1(c) of this Agreement.
ARTICLE II
TERM
The initial term of this Agreement shall commence on the Closing Date and,
except as otherwise provided below, continue until January 31, 2001. This
Agreement shall be renewed automatically thereafter for successive one-year
terms unless either ProVantage or ShopKo elects not to renew this Agreement by
giving the other party written notice of its intention not to renew the
Agreement not less than one hundred eighty (180) days prior to the end of the
then current term. Either party may terminate any specified Service under the
prior notice provision in Section 15.1(c).
ARTICLE III
SERVICES
Section 3.1. Provision of Services. In consideration of the Base Fee,
ShopKo agrees to provide to ProVantage the Services during the term of this
Agreement. The entire Base Fee shall be charged regardless of whether all of the
Services have been utilized in any given period.
Section 3.2 Hardware and Software. In providing the Services to ProVantage,
ShopKo shall utilize the ProVantage Hardware, ShopKo Hardware, ProVantage
Software, and ShopKo Software to the same extent such hardware and the software
have been utilized prior to the date of this Agreement; provided, however, that
ShopKo may provide the Services with different or additional computer equipment
and/or software.
Section 3.3 ShopKo I.S. Employees. ShopKo shall make the ShopKo I.S.
Employees available to provide the Services to ProVantage to the same extent
such employees were made available to ProVantage prior to the date of this
Agreement provided, however, that ShopKo shall only be required to provide the
number of FTEs of each of these ShopKo I.S. Employees as set forth on Exhibit A.
ShopKo and ProVantage acknowledge that the employees constituting the "ShopKo
I.S. Employees" are likely to change from time to time, and that at certain
times it is possible that staffing shortages may exist. ProVantage acknowledges
that some of the ShopKo I.S. employees may be independent contractors or
subcontractors.
Section 3.4. Access. ProVantage shall provide ShopKo and its employees and
agents access to ProVantage's facilities as necessary to provide ProVantage with
the Services. ShopKo shall provide ProVantage and its employees and agents
access to ShopKo's facilities on a basis consistent with past practices.
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Section 3.5. Modifications, Upgrades, etc. The parties acknowledge that
modifications, upgrades, and additions to the ShopKo Hardware, the ProVantage
Hardware, the ShopKo Software and the ProVantage Software and additional ShopKo
I.S. Employees may be necessary to adequately service the ProVantage Business
due to additional customers, new services, acquisitions, technological changes,
competitive pressures or otherwise (collectively, "Service Upgrades"). Charges
for Service Upgrades are not included in the Base Fee. The parties agree to
negotiate in good faith regarding any Service Upgrades. It is the intention of
the parties that to the extent practicable, ShopKo will use reasonable efforts
to provide ProVantage with any reasonable Service Upgrades requested by
ProVantage, and that the parties will negotiate reasonable fees, reimbursement
rates or other charges to adequately compensate ShopKo for the Service Upgrades.
The rates and fees listed on Exhibit A as components of the Base Fee were
derived as incremental costs to ShopKo only, and many of these rates and fees do
not reflect capitalization, or other amortization allocation of significant
initial investments made by ShopKo. Accordingly, rates and fees for Service
Upgrades could vary significantly from those set forth on Exhibit A.
Unless otherwise expressly agreed by ProVantage and ShopKo, ProVantage
shall have sole financial responsibility for any modifications, upgrades or
additions to the ProVantage Hardware and the ProVantage Software.
Section 3.6. Subsidiaries. The parties hereto agree that (i) the Services
to be provided to ProVantage under this Agreement will, at ProVantage's request,
be provided to subsidiaries of ProVantage and (ii) ShopKo may satisfy its
obligation to provide or procure the Services hereunder by causing one or more
of its subsidiaries to provide or procure such Services. With respect to
Services provided to, or procured on behalf of, any subsidiary of ProVantage,
(i) ProVantage agrees to pay on behalf of such subsidiary all amounts payable by
or in respect of such Services and (ii) references in this Agreement to
ProVantage shall be deemed to include such subsidiary.
ARTICLE IV
PERFORMANCE
Section 4.1. Standard of Performance; Remedies; Consequential Damages. In
performing its obligations under this Agreement, ShopKo represents that it will
use the same standard of care and good faith as it uses in performing services
for its own account. ShopKo agrees to exercise reasonable diligence to correct
errors or deficiencies in the Services provided by it hereunder. EXCEPT AS
EXPRESSLY SET FORTH IN THIS AGREEMENT, SHOPKO MAKES NO REPRESENTATION OR
WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY
REPRESENTATION OR WARRANTY AS TO MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, ARISING OUT OF THIS AGREEMENT AND THE SERVICES TO BE PROVIDED
HEREUNDER. The sole remedy of ProVantage for any claim relating to the
performance or nonperformance of the Services shall be a refund by ShopKo to
ProVantage of any charges or fees paid for the applicable Services. In addition,
in no event shall either party be
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liable to the other for special, punitive, incidental or consequential damages
arising out of this Agreement.
Section 4.2. Annual and Interim Reviews. On or about the first anniversary
of the Closing Date and annually thereafter until termination, ShopKo and
ProVantage agree that they will review the scope and pricing of the Services
being provided as of the applicable annual review date. Interim reviews may also
be scheduled by either party upon providing 30 days advance written notice. Each
such review and any resulting amendment of the Services and the fees therefor
will be undertaken in good faith and with as much advance notification, lead
time and discussion as is reasonable under the circumstances, in the spirit of
providing appropriate services to ProVantage at a fair cost and without undue
burden to ShopKo. Accordingly, before any termination or significant alteration
of the scope of Services is made, the parties shall take into account all
elements of cost, inconvenience and other direct and indirect impact on both
parties of terminating or altering the Services. Consent to terminate or alter
the scope of the Services will not be unreasonably withheld by either party.
ARTICLE V
SUBCONTRACTING
Section 5.1. Subcontractors. ShopKo may hire or engage one or more
subcontractors to perform any or all of its obligations under this Agreement.
ShopKo shall promptly notify ProVantage of its intent to enter into any
subcontract. ShopKo is responsible for monitoring and managing the performance
of all subcontractors. ShopKo shall require such subcontractors, as a condition
to their engagement, to agree to be bound by the provisions substantially
identical to those included in this Agreement. Subject to Section 4.1 hereof,
ShopKo shall in all cases remain primarily responsible for all obligations
undertaken by it in this Agreement with respect to the scope, quality and nature
of the Services provided to ProVantage. If, as the result of ShopKo's
subcontracting any Service, the performance of that Service falls below the
level of ShopKo's previous actual, typical performance, then ShopKo shall work
with the subcontractor to restore the performance of that Service to such
previous actual, typical performance level. Even if an inadequacy in a
subcontractor's performance does not amount to a breach of this Agreement or
inadequate performance, if ProVantage is dissatisfied with the performance of
any subcontractor, ProVantage shall promptly notify ShopKo and ShopKo and
ProVantage shall discuss means to resolve ProVantage's dissatisfaction.
ARTICLE VI
FEES
Section 6.1. Payment. ProVantage agrees that in consideration of the
Services described in this Agreement, ProVantage shall pay ShopKo the Base Fee
as amended and revised from time to time by mutual agreement. ProVantage shall
also pay ShopKo for all Service Upgrades in accordance with agreed upon rates
and fees. In addition, ProVantage shall reimburse ShopKo for all direct and
identifiable costs and third-party disbursements incurred by ShopKo in
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performing the Services, provided ProVantage has approved any such costs and
disbursements in advance. In the event that any Services are terminated during a
fiscal year, payments shall be made for such Services through the effective date
of cancellation, said payments to be a pro rata portion of the charges for such
Services. ProVantage shall also pay ShopKo for any pre-approved costs or
disbursements, plus costs associated with ShopKo Hardware or ShopKo Software
purchases or other long-term commitments or investments made by ShopKo in
reliance upon this Agreement, provided ProVantage has approved any such costs,
commitments or investments in advance. The parties acknowledge that no such
costs, commitments or investments exist as of the date of this Agreement.
Section 6.2. Payments For Third Party Software Upon Disaffiliation. If
ProVantage and ShopKo cease to be Affiliates, ProVantage shall pay such license
fees, and any applicable or related taxes, for the Software as are required by
the third party to enable ShopKo to continue to provide the Services.
ARTICLE VII
INVOICES AND PAYMENT
Section 7.1. Billing and Payment. ProVantage shall pay the Base Fee for
Services rendered within each month during the term of this Agreement within
thirty (30) calendar days after the end of each such month. No invoices for the
Base Fee shall be sent, and no backup documentation shall be required for the
Services included in the Base Fee.
The fees for Service Upgrades shall be invoiced monthly by the thirtieth
(30th) calendar day of the calendar month next following the calendar month in
which the Service Upgrades were performed. Such invoices shall specify the value
of Service Upgrades determined in accordance with the agreed upon arrangements,
and shall be accompanied by supporting detail, and shall be due and payable
thirty (30) days from receipt thereof.
ARTICLE VIII
TRANSFER AND PROPERTY TAXES
Section 8.1. Allocation Of Responsibility For Certain Taxes. ProVantage
will reimburse ShopKo for all sales, use or excise taxes levied on amounts
payable by ProVantage to ShopKo pursuant to this Agreement, provided that
ProVantage shall not be responsible for remittance of such taxes to applicable
tax authorities. ProVantage shall not be responsible for any ad valorem, income,
franchise, privilege, value added or occupational taxes of ShopKo. ShopKo shall
cooperate with ProVantage's efforts to identify taxable and nontaxable portions
of amounts payable pursuant to this Agreement (including segregation of such
portions on invoices) and to obtain refunds of taxes paid, where appropriate.
ProVantage may furnish ShopKo with certificates or other evidence supporting
applicable exemptions from sales, use or excise taxation.
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ARTICLE IX
OWNERSHIP OF DATA
Section 9.1. Ownership Of Data. The Data is the exclusive property of
ProVantage or its customers. Any data about which there is an ambiguity as to
ownership shall be treated as Data and subject to the provisions of this
Agreement until its ownership is resolved. This Agreement does not purport to
address the ownership of any data other than Data.
Section 9.2. Use of Data. ShopKo shall use the Data only in providing
Services pursuant to this Agreement. Except as otherwise expressly agreed in
writing, ShopKo shall not and shall not attempt to sell, license, provide,
disclose, use, pledge, hypothecate, and/or in any other way transfer the Data.
All such attempts shall be void and without legal effect. ShopKo may use the
Data for such other purposes as ProVantage and ShopKo may agree in writing.
Section 9.3. Risk of Data Loss. When Data is in ShopKo's possession or
under ShopKo's control and an event occurs that prevents or hinders the access
to or reliable use of such data, ShopKo shall use reasonable efforts to cure and
re-create or restore such data as promptly as practicable.
Section 9.4. Data Security. ShopKo shall maintain safeguards for protecting
against the loss and disclosure of the Data no less rigorous than such
safeguards as are in effect on the Closing Date. ShopKo acknowledges that as a
holder or recipient of health care claims information, ProVantage is and shall
continue to be subject to special restrictions regarding the treatment and
handling of the data. ShopKo agrees to comply with all reasonable requests made
by ProVantage in this regard, provided that any incremental costs incurred by
ShopKo associated with such requests shall be billed to ProVantage as costs of
Service Upgrades.
Section 9.5. Media Containing Data. As between ProVantage and ShopKo,
ProVantage is the exclusive owner of all Data recorded on any media irrespective
of which party owns the media.
ARTICLE X
SOFTWARE PROTECTION
Section 10.1. Protection of Software Rights Against Third Parties. If
either party to this Agreement shall become aware of any infringement or
misappropriation by any third party of the intellectual property rights of the
other party, it shall promptly give notice to the other party of such
infringement or misappropriation. The owner of such intellectual property may,
at its expense, institute suit against such third party, and the other party
shall fully cooperate with the owner to enjoin such infringement or
misappropriation and if reasonably necessary, shall, if requested, join with the
owner as a party to any action brought by the owner for such purpose. The owner
shall bear all expenses connected with such suit, provided, however, that if the
other party desires to retain its own counsel, it shall do so at its own cost
and expense. Each party hereby agrees to defend, indemnify and hold harmless the
other party for any costs, losses, or
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expenses related to any claim of infringement or misappropriation of the
indemnifying party's intellectual property.
ARTICLE XI
SOFTWARE OWNERSHIP
Section 11.1. Software Ownership. ShopKo acknowledges that is has no
ownership interest in the ProVantage Software. ProVantage acknowledges that it
has no ownership interest in the ShopKo Software. If during the term of this
Agreement ShopKo or ProVantage develops, purchases or licenses software which is
utilized by ShopKo to provide the Services to ProVantage, such software shall be
the property of ShopKo or ProVantage, respectively and shall be considered
"ShopKo Software" or "ProVantage Software", respectively for purposes of this
Agreement unless ShopKo and ProVantage agree otherwise in writing.
ARTICLE XII
CONFIDENTIAL INFORMATION
Section 12.1. Confidential Information. Except as otherwise provided in
this Agreement, the ProVantage Confidential Information and the ShopKo
Confidential Information (collectively, the "Confidential Information") is
proprietary to ProVantage and ShopKo, respectively, and may not be used by the
other party hereto except to carry out the parties' respective obligations under
this Agreement.
Section 12.2. Excluded Information. Information is not considered
Confidential Information to the extent that such information:
(a) is or becomes publicly available other than as a result of any
breach of this Agreement;
(b) is or becomes available to a party from a source that, to that
party's knowledge, is lawfully in possession of that information and is not
subject to a duty of confidentiality, which is violated by that disclosure;
or
(c) is independently developed without reference to the Confidential
Information.
Section 12.3. Standard Of Care. Except as otherwise set herein, each party
shall use at least the same degree of care in maintaining the confidentiality of
the other party's Confidential Information as is normally used with respect to
its own proprietary or confidential information.
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Section 12.4. Permitted Disclosures. Either party may disclose Confidential
Information to its respective employees or agents, on a need-to-know basis, in
order to fulfill its obligations under this Agreement.
Section 12.5. Required Disclosures. Either party may disclose Confidential
Information in response to a request for disclosure by a court or another
governmental authority, including a subpoena, court order, or audit-related
request by a taxing authority. Either party may also make disclosures of
Confidential Information as may be required under applicable securities laws or
the rules and regulations of each party's respective stock exchange. Prior to
any disclosure of Confidential Information pursuant to this Section, however,
the disclosing party shall make a good faith attempt to notify the other party
in advance to allow the non-disclosing party the opportunity to seek a
protective order or other injunctive relief.
Section 12.6. Confidentiality And Third Parties. If ShopKo engages a
subcontractor to perform any of its obligations under this Agreement and such
subcontractor has access to ProVantage Confidential Information, ShopKo shall
advise such subcontractor of the confidentiality requirements of this Agreement.
Section 12.7. Irreparable Harm. The parties acknowledge that any disclosure
or misappropriation of Confidential Information in violation of this Agreement
could cause irreparable harm, the amount of which may be extremely difficult to
estimate, thus making any remedy at law or in damages inadequate. Each party
therefore agrees that the other party shall have the right to apply to any court
of competent jurisdiction for a temporary or provisional order restraining any
breach or impending breach of this Article XII. This right shall be in addition
to any other remedy available under this Agreement.
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ARTICLE XIII
KEY EMPLOYEES
Section 13.1 Employees. During the term of this Agreement and for a period
of two years thereafter:
(a) neither ProVantage nor any of its direct or indirect subsidiaries
(whether now owned or hereafter acquired) shall solicit for hire any
employees of ShopKo or any of ShopKo's direct or indirect subsidiaries
(other than ProVantage and its subsidiaries), and
(b) neither ShopKo nor any of its direct or indirect subsidiaries
(other than ProVantage and its subsidiaries) shall solicit for hire any
employees of ProVantage or any of its direct or indirect subsidiaries.
This covenant may be waived only with the prior written consent of the other
party.
Nothing in this Article XIII shall be deemed or construed to prevent
solicitation, recruitment or hiring of any employee of the other party who first
initiates contact with the soliciting, recruiting or hiring party, provided that
neither party shall engage in any activity intended to encourage the other
party's employees to initiate such contact. General advertisements shall not be
deemed violative of this restriction.
ARTICLE XIV
FORCE MAJEURE AND DISASTER RECOVERY
Section 14.1. Force Majeure. Each party shall be excused for failure to
perform any part of this Agreement due to events beyond its control, including
but not limited to fire, storm, flood, earthquake, explosion, accident, riots
and other civil disturbances, sabotage, strikes or other labor disturbances,
injunctions, transportation embargoes or delays, failure of performance of third
parties necessary for the parties' performance under this Agreement (other than
third parties engaged by ShopKo pursuant to Article V), or the laws or
regulations of the federal, state or local government or breach or agency
thereof; provided, however, no force majeure event shall excuse the obligation
of the party claiming the benefit of a force majeure event from paying the
applicable fees for any services provided by the other party.
ARTICLE XV
TERMINATION
Section 15.1. Termination. This Agreement and the scope of the Services may
be reduced, suspended, or terminated as follows:
(a) Either party hereto may terminate this Agreement immediately upon
written notice to the other party (i) in the event of the other party's
voluntary bankruptcy or
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insolvency, (ii) in the event that the other party shall make an assignment
for the benefit of creditors, or (iii) in the event that a petition shall
have been filed against the other party under a bankruptcy law, a corporate
reorganization law or any other law for relief of debtors (or other law
similar in purpose or effect).
(b) If either party hereto (the "Defaulting Party") shall fail
adequately to perform in any material respect any of its material
obligations under this Agreement, whether voluntarily or involuntarily or
as a result of any law or regulation or otherwise, the other party hereto
shall have the option to terminate this Agreement upon sixty (60) days'
written notice (which shall be reduced to thirty (30) days' written notice
in the event of a failure to make payment in accordance with the terms
hereof) to the Defaulting Party specifying the respects in which the
Defaulting Party has so failed to perform its obligations under this
Agreement, unless during such period the Defaulting Party shall have
substantially remedied the default therein specified.
(c) Either party may, at any time prior to the expiration of this
Agreement or any extension thereof, terminate any of the Services upon one
hundred twenty (120) days' prior written notice from the party desiring
such termination. For purposes of this Section 15.1(c), Services may only
be terminated to the extent such Services can reasonably be discontinued
without additional cost to ShopKo. If this Agreement is terminated by
ProVantage pursuant to this Section 15.1(c), ProVantage shall reimburse
ShopKo for any costs associated with ShopKo Hardware or ShopKo Software
purchases or other long-term commitments made by ShopKo in reliance upon
the existence of this Agreement. Additionally, ProVantage shall be
responsible for all costs related to any commitments made by ShopKo with
respect to all previously agreed upon Service Upgrades.
ARTICLE XVI
TRANSITION ASSISTANCE; SURVIVAL
Section 16.1. Transition Assistance By ShopKo. Upon expiration or
termination of this Agreement for any reason whatsoever, or upon termination of
any of the Services pursuant to Section 15.1(c) above, ProVantage and ShopKo
agree that ShopKo shall provide assistance to ProVantage to obtain services to
replace the affected Services in accordance with this Section 16.1.
A. During the Transition Period, ShopKo shall provide to ProVantage
all assistance reasonably requested by ProVantage to allow the Services to
continue without interruption or adverse effect and to facilitate the
orderly transfer of responsibility for the Services. Services provided
during the Transition Period will be provided by ShopKo at the rates then
in effect pursuant to this Agreement.
B. ShopKo may provide transition assistance after the Transition
Period at market rates. ShopKo shall endeavor to utilize any existing
ShopKo resources and personnel to provide this assistance and the services
in Subsection C below, to the extent reasonably
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possible. If the assistance requires resources in addition to those
regularly used in the daily performance of Services, ProVantage will pay
ShopKo for such assistance on a time and materials basis.
C. Upon expiration or termination of this Agreement or with respect
to any particular Data, on such earlier date that the same shall be no
longer required by ShopKo in order for it to render the Services hereunder,
such Data shall be, at ProVantage's election and expense, (i) erased from
the data files maintained by ShopKo, or (ii) returned to ProVantage by
ShopKo in a form reasonably requested by ProVantage.
Section 16.2. Survival. Articles IX, X, XI, XII and XVI of this Agreement
shall survive the termination or expiration of this Agreement.
ARTICLE XVII
AUDITING RIGHTS
Section 17.1. Operational Audit. ProVantage and its representatives, at
ProVantage's expense and upon reasonable notice to ShopKo, shall have the right
to conduct an audit of ShopKo's operations used in providing the Services (i) on
an annual basis and (ii) more frequently as reasonably requested by ProVantage
to the extent that such audit will not unreasonably disrupt the operations of
ShopKo, in order to verify that ShopKo is exercising reasonable operational
procedures in accordance with the customary standards of the health benefit
management and healthcare information technology industries in its performance
of the Services. ShopKo will provide ProVantage and its representatives access
to the ShopKo facilities at which ShopKo is performing the Services, to ShopKo's
personnel engaged in performing the Services, to existing Data and work product
located at ShopKo facilities and to reasonably related documentation. ShopKo
will provide to ProVantage and its representatives any assistance that they
reasonably require in connection therewith at no additional charge to
ProVantage, provided, however, that ProVantage shall pay ShopKo, at rates then
in effect pursuant to this Agreement, for any technical resources and
application development time used by ShopKo and any other reasonable additional
costs of ShopKo necessary for the audit and not otherwise provided to ProVantage
hereunder.
Section 17.2. Record-Keeping Audits of Charges. ShopKo shall maintain
complete and accurate books, records and accounts to support and document all
charges to ProVantage for Service Upgrades. ShopKo shall retain such records for
three (3) years after creation, or for such longer period as required to comply
with government requirements, as directed in writing by ProVantage. ShopKo shall
permit ProVantage or its representatives access to ShopKo's facilities to
perform an audit of ShopKo's records to the extent necessary to verify ShopKo's
charges billed to ProVantage (i) on an annual basis and (ii) more frequently as
reasonably requested by ProVantage if and to the extent that such audit will not
unreasonably disrupt the operations of ShopKo.
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ARTICLE XVIII
NOTICES AND OTHER COMMUNICATIONS
Section 18.1. Notice. Any notice, request, designation, direction, demand,
election, acceptance or other communication shall be in writing and shall be
effective and deemed to have been given when it is (i) mailed postage prepaid,
by certified first class mail, return receipt requested, addressed to a party
and received by such party; (ii) hand or courier delivered; or (iii) sent by
telecopy with receipt confirmed, as follows:
If to ShopKo,
ShopKo Stores, Inc.
700 Pilgrim Way
Green Bay, WI 54307
Telecopy: (920) 429-4225
Attention: Chief Information Officer
cc: General Counsel
If to ProVantage,
ProVantage Health Services, Inc.
13555 Bishops Court, Suite 201
Brookfield, WI 53005
Telecopy: (414) 641-3770
Attention: Chief Information Officer
cc: Legal Department
Any party may from time to time designate another address to which notice
or other communication shall be addressed or delivered to such party and such
new designation shall be effective on the later of (i) the date specified in the
notice or (ii) receipt of such notice by the intended recipient.
ARTICLE XIX
MISCELLANEOUS PROVISIONS
Section 19.1. Independent Parties. ShopKo shall perform the Services
hereunder as an independent contractor. Nothing in this Agreement shall
constitute or be deemed to constitute a partnership or joint venture between the
parties hereto, constitute or be deemed to constitute any party as the agent or
employee of the other party for any purpose whatsoever and neither party shall
have authority or power to bind the other or to contract in the name of, or
create a liability against, the other in any way or for any purpose. Each party
shall be responsible for any injury or death to its own employees, including all
workers' compensation claims or liabilities resulting
13
<PAGE>
therefrom, and each such party shall remain responsible for reporting its income
and paying its own taxes.
Section 19.2. Assignment. Except as otherwise provided in this Section
19.2, neither party may assign any of its rights or delegate any of its duties
or obligations under this Agreement without the other party's consent.
ProVantage may assign its rights and delegate its duties and obligations under
this Agreement as a whole or as part of the sale or transfer of all or
substantially all of its assets and business, including by merger or
consolidation, to a Person (i) that assumes and has the ability to perform
ProVantage's duties and obligations under this Agreement; and (ii) the core or a
principal part of the business of which is not competitive with the core or a
principal part of the business of ShopKo. ShopKo may assign its rights and
delegate its duties and obligations under this Agreement as a whole or as part
of the sale or transfer of all or substantially all of its assets and business
involved in any manner in providing Services, including by merger or
consolidation, to a Person (a) that assumes and has the ability to perform
ShopKo's duties and obligations under this Agreement; and (b) the core or a
principal part of the business of which is not competitive with the core or a
principal part of the business of ProVantage. Any attempted assignment or
delegation of any rights, duties, or obligations in violation of this Section
19.2 shall be void and without effect. Nothing in this Section 19.2, however,
precludes ShopKo from subcontracting the performance of any of the Services as
permitted by this Agreement or precludes ProVantage from extending the right to
receive the Services to its Affiliates.
Section 19.3. Amendment And Waiver. This Agreement may be amended,
modified, superseded, canceled, renewed or extended, and the terms and
conditions hereof may be waived, only by a written instrument signed by the
parties, or in the case of a waiver, by the party waiving compliance. Any waiver
by either party hereto of any condition, or of the breach of any provision or
term in any one or more instances shall not be deemed to be nor construed as a
further or continuing waiver of any such condition, or of the breach of any
other provision or term of this Agreement.
Section 19.4. Integration. This Agreement supersedes any and all prior or
contemporaneous oral agreements or understandings between the parties regarding
the subject matter of this Agreement.
Section 19.5. Severability. If any term or condition of this Agreement
shall be held invalid in any respect, such invalidity shall not affect the
validity of any other term or condition hereof.
Section 19.6. Successors. This Agreement binds and inures to the benefit of
the parties and their respective legal representatives, successors, and
permitted assigns.
Section 19.7. Applicable Law. This Agreement shall be construed under the
laws of the State of Wisconsin and the rights and obligations of the parties
shall be determined under the substantive law of Wisconsin, without giving
effect to Wisconsin's conflict of law rules or principles.
14
<PAGE>
Section 19.8. Reasonableness. As concerns every provision of this
Agreement, ShopKo and ProVantage agree to act reasonably and in good faith
unless a provision expressly states that ProVantage or ShopKo may act in its
sole discretion.
Section 19.9. Counterparts. This Agreement may be executed in two
counterparts, each of which shall constitute an original, and both of which,
when taken together, shall constitute one and the same instrument.
Section 19.10. Further Assurances. Each party shall take such actions, upon
request of the other party and in addition to the actions specified in this
Agreement, as may be necessary or reasonably appropriate to implement or give
effect to this Agreement.
Section 19.11. No Third Party Beneficiaries. Each of the provisions of this
Agreement is for the sole and exclusive benefit of the parties hereto
respectively, as their interests may appear, and shall not be deemed for the
benefit of any other person or entity or group of persons or entities.
Section 19.12. Construction. Descriptive headings to sections and
paragraphs are for convenience only and shall not control or affect the meaning
or construction of any provisions in this Agreement.
Section 19.13. Look-Back. The parties acknowledge that the intent of this
Agreement is to accurately capture the scope and nature of the information
technology services being performed as of the date hereof, so that such services
may continue uninterrupted for the term of this Agreement. Both parties have
made a good faith attempt to identify all of the information technology services
provided to ProVantage by ShopKo. If, however, it is later determined that the
parties unintentionally omitted a description of services or charges therefor,
both parties shall negotiate in good faith to amend this Agreement to include
such services and charges, and charges and credits for such additional services
shall be retroactive back to the commencement date of this Agreement.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties as of the date first written above.
15
<PAGE>
SHOPKO STORES, INC.
By:
-----------------------
William J. Podany
President and Chief
Executive Officer
Attest:
-------------------
Richard D. Schepp,
Sr. Vice President,
General Counsel/Secretary
PROVANTAGE HEALTH SERVICES, INC.
By:
-----------------------
Jeffrey A. Jones
Executive Vice
President and Chief
Operating Officer
Attest:
-------------------
Richard D. Schepp,
Secretary
16
<PAGE>
Exhibit A
Base Fee
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Monthly Annual
Fee in $'s Fee in $'s
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ShopKo IS Employees
Job Category FTE
--------------------------------------------------------------------------------------------------------
Telecommunications 0.50 2,684 32,213
Technical Services - MVS 0.15 930 11,165
Technical Services - RS/6000 SP 1.00 6,906 78,082
Technical Services - AS/400 2.00 9,375 112,503
Technical Services - Internet/Intranet 0.50 3,253 39,041
Technical Services - Security 0.30 1,287 15,439
Production Control & Operations 0.75 2,198 26,372
Help Desk 0.25 698 8,372
End User Service Analyst 0.50 2,453 29,436
--------------------------------------------------------------------------------------------------------
Total ShopKo IS Employees $29,784 $352,623
------------------------
ShopKo Hardware Description
- -------------------------------------------------------------------------------------------------------------
IBM RS/6000 43P External Firewall 4 44
IBM RS/6000 E20 Primary public webserver 4 44
IBM RS/6000 360 Internal Firewall 4 44
IBM RS/6000 360 Internal ACEServer 56 678
Nortel Option 81C GO/ProVantage-North telephone system 56 667
Centigram Series 6 Model 640 GO/ProVantage-North voice mail system 35 417
MultiLink System 70 Audio conference bridge 69 833
Cisco 7000 Client router 1,333 16,000
Cisco 2501 GO Internet router 1 10
Cisco 7513 Core router 192 2,300
IBM 9672-R44 Mainframe 156 1,878
Proliant 1600 Netware file server 42 500
---------------------------------------------------------------------------------------------------------
Total ShopKo Hardware $ 1,951 $ 23,415
-------------------------
ShopKo Software
---------------------------------------------------------------------------------------------------------
Computer Associates
- CA-Prevail/XP-Jobtrac remote AIX - SP2 9 102
- CA-Prevail/XP-Jobtrac remote AIX - 370 0 6
- CA-View VTAM interface 1 17
- CA-View - ERO option 3 40
- CA-Deliver MVS 11 134
- CA-Deliver VTAM interface 1 17
- CA-View MVS 7 87
VPS
- VPS base 5 58
- VPS VMCF/VTAM 1 14
- VPS Report Browse 2 19
- VPS PC 0 6
- VPS/TCPIP 3 33
Oracle
- Oracle DB 3,750 45,000
- Oracle 7.1 development 4 45
Others
- Security Dynamics - Secur-id 47 563
- Walker 280 3,360
- Integral 33 394
- Ab initio 41 495
- SQL Backtrac 482 5,781
- MicroStrategy DSS Agent/Server/Web 2,667 32,000
- IBM Operating System Software 353 4,230
- Groupwise 2,479 29,750
- Netware 4,083 49,000
---------------------------------------------------------------------------------------------------------
Total ShopKo Software $14,263 $171,151
-------------------------
Other Services
---------------------------------------------------------------------------------------------------------
Tape Vaulting 210 2,520
1.S Disaster Recovery Services 5,100 61,200
AIX Support line 3,333 40,000
---------------------------------------------------------------------------------------------------------
Total Other Services $ 8,643 $103,720
-------------------------
- --------------------------------------------------------------------------------------------------------------
Base Fee TBD TBD
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT B
Operating, Monitoring, And Communicating The Status Of Systems
. Monitor claims processing
. 1st shift daily sign on to AS/400 and AMS to verify communication
. Ping ProVantage benefits, 1st shift each day
. Verify ProVantage mail order programs are running
. Track disk usage
. Track system up time
. Verify on-line systems are up
. Execute production schedule for ProVmed, ProVRx and other HIT systems
. Operate Data Center hardware
. Operate BBS for ProVantage
Administering Information, Systems, And Services
. Maintain shrink wrapped/turnkey applications
. Maintain AS/400 & OS/400
. Maintain DOS with VPS-PC
. Maintain Openview
. Work with vendors to apply fixes to OS and turnkey software
. Maintain long distance dialing plan and access codes
. Loaner PC checkout/administration
. Loaner pager checkout/administration
. Loaner cell phone checkout/administration
. Administer operations inventory IS equipment
. Order, distribute, and maintain calling cards
B-1
<PAGE>
. Crystal information administration
. Provide call detail reporting on request
. Track and verify accuracy of Telecom billings
. Track software licenses
. Report/audit calling card usage
. Voice system administration
. Maintain NOS Novell
. Maintain OS/390
. Maintain Windows NT-NOS
. Maintain AIX Unix
. Maintain BBS for ProVantage
. Maintain SNA software, VTAM, NCP, and SNA/server
Securing Information Assets
. Backup file servers
. Tape library administration
. Restore files
. Manage firewalls
. Security setup
. Audit security access to data and systems
. Protect data access control
. User ID administration
. Performance of Y2K Activities substantially as outlined and detailed in
ShopKo's and ProVantage's respective Year 2000 Charters
. Maintain disaster recovery capability in accordance with past practices, but
in no event less reliable than those disaster recovery capabilities in place
to protect ShopKo's own systems.
Tracking, Escalating, And Resolving IT Problems
. 2nd level support for ProVantage Support Desk
. Trouble shoot remote client access
. Support ProVantage mail services IVR
. Troubleshoot communications problems
. Support ProVantage vision IVR
. Respond to on-call pages and calls
. Identify production problems, escalate or fix
. Support all IS hardware in all locations. Assume responsibility until
problems are resolved. (All equipment whether in-house supported or
contracted)
. Trouble shoot hardware/software problems
B-2
<PAGE>
Managing IS Fixed Assets
. Dispose of obsolete equipment
. Manage UPS and dual power feed
. Dispose of hardware
Installing And Maintaining Equipment
. Install data communication facilities
. Install voice communication facilities
. Install data communication equipment
. Install voice communication equipment
. Install Routers
. Install file servers
. Install Data Center equipment
. Install firewall
. Install Internet/Intranet
. Install shrink-wrapped turnkey applications
. Install AS/400, AIX Unix, OS/390, and other OS utilities or software packages
as needed
. Order printers, file servers, workstations, software, data center supplies,
paging service and equipment, and cellular service and equipment
. Order data communication equipment
. Order data communication facilities
. Order voice communication facilities
. Order voice communication equipment
. VPS administration setup printers
. Define terminals, printers to system software
. Manage technical hardware/software for optimal use
. Maintain paging service and equipment
. Maintain cellular service and equipment
. Maintain wiring
. Maintain voice equipment
. Maintain data communications equipment
. File server maintenance
. Maintain data center environmental equipment
. Maintain firewall
Planning For System Capacity Growth And Technological Change
. Capacity planning for voice network
. Capacity planning for data network
B-3
<PAGE>
. Recommend capacity or configurations of hardware/software to applications and
business
Defining And Engineering Information Technology Platforms
. Consult with applications development on design and implementation of
software
. Provide solutions to business
. Specify voice communication facilities
. Specify voice communication equipment
. Design technical architectures
. Design Intranet/Internet
. Specify data communications equipment
. Specify data communications facilities
B-4
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement No. 333-71743 relating to
5,300,000 shares of Common Stock of ProVantage Health Services, Inc. (formerly
ProVantage, Inc.) on Form S-1 of our report dated March 12, 1999, appearing in
the Prospectus, which is part of this Registration Statement, and of our report
dated March 12, 1999 relating to the financial statement schedule appearing
elsewhere in this Registration Statement.
We also consent to the reference to us under the heading "Selected Historical
Consolidated Financial Data" and "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
April 15, 1999
<PAGE>
Exhibit 99.4
Consent of Director Designee
March 22, 1999
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
ProVantage Health Services, Inc., in the Prospectus included in this
Registration Statement.
Signed: /s/ Jeffrey A. Jones
-----------------------
Jeffrey A. Jones
