<PAGE>
As filed with the Securities and Exchange Commission on February 4, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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)
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54-1508848
Delaware 8099 (I.R.S. Employer
(tate or other jurisdiction S (Primary Standard Identification No.)
of incorporation or Industrial
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)
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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
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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. [_]
CALCULATION OF REGISTRATION FEE
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Proposed
Title of each class of maximum Amount of
securities to be aggregate registration
registered offering price(1) fee
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Common Stock, $.01 par
value..................... $100,000,000 $27,800
Preferred Share Purchase
Rights.................... (2) (2)
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</TABLE>
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933. Includes shares subject to
sale pursuant to the underwriters' over-allotment option.
(2) One Preferred Share Purchase Right is attached to and issued with each
share of Common Stock. The value of the Preferred Share Purchase Right is
reflected in the Common Stock.
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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 FEBRUARY 4, 1999
PROSPECTUS
[ProVantage Logo]
Shares
ProVantage Health Services, Inc.
Common Stock
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This is ProVantage Health Services, Inc.'s initial public offering of
Common Stock.
We currently expect the public offering price to be between $ and
$ per share. Currently, no public market exists for the Common Stock. We
will apply to have the Common Stock included for quotation on the Nasdaq
National Market under the symbol "PVHS."
Prior to this offering, ShopKo Stores, Inc., our parent company, owned all
of the Common Stock. Following this offering, ShopKo will beneficially own %
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 4.
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<CAPTION>
Per Share Total
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Public Offering Price.................................... $ $
Underwriting Discount.................................... $ $
Proceeds, before expenses, to ProVantage................. $ $
</TABLE>
The underwriters may also purchase from us up to an additional
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.
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
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The date of this prospectus is , 1999.
<PAGE>
Pictures, diagrams, etc. of representative products and services
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>
TABLE OF CONTENTS
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Page
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Prospectus Summary....................................................... 1
Risk Factors............................................................. 4
The Reorganization....................................................... 11
Use of Proceeds.......................................................... 11
Dividend Policy.......................................................... 11
Capitalization........................................................... 12
Dilution................................................................. 13
Selected Historical Consolidated Financial Data.......................... 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 15
Business................................................................. 22
Management............................................................... 35
Relationship With ShopKo................................................. 45
Certain Transactions..................................................... 47
Principal Stockholder.................................................... 49
Description of Capital Stock............................................. 50
Shares Eligible for Future Sale.......................................... 53
Underwriting............................................................. 54
Legal Matters............................................................ 56
Experts.................................................................. 56
Available Information.................................................... 56
Index To Consolidated Financial Statements............................... 58
</TABLE>
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DISCLOSURE REGARDING 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
document. Wherever they occur in this prospectus or in other statements
attributable to ProVantage,
<PAGE>
forward-looking statements are necessarily estimates reflecting the best
judgment of ProVantage's senior management and 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 Securities and Exchange
Commission (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.
----------------
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
ProVantage up to additional shares of Common Stock to
cover over-allotments, if any, and
l gives effect to a reorganization of ProVantage which will be
completed prior to completion of the offering (the
"Reorganization"). See "The Reorganization."
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 2, 1997 and ended on January 31, 1998 is referred to as "fiscal
1997." 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.
See "Risk Factors" for a discussion of certain factors you should
consider before deciding to purchase shares of our Common Stock.
Our Company
We are a leading health benefit management company providing pharmacy
benefit management ("PBM") and health information technology ("HIT") products
and services to our customers. Our goal is to provide knowledge-based products
and services that allow our clients to make more informed healthcare decisions,
thereby optimizing the quality and minimizing the cost of care. As of January
1999, we provided traditional PBM and vision benefit management ("VBM")
services to over 3,500 customers covering approximately 4.5 million PBM lives
and approximately 500,000 VBM lives. Our customers include healthcare payors,
self-funded employers, at-risk providers, state and federal agencies and
pharmaceutical manufacturers.
PBMs 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 PBM 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. However,
our products go beyond traditional PBM offerings to include information-based
health outcomes products and clinical services. These services give our
customers the ability to assess the safety and effectiveness of healthcare
practices and to identify the most effective treatment pathways, potentially
lowering overall costs.
Our Industry
Prescription drug costs represent the fastest growing component of
healthcare costs; North American pharmaceutical sales are expected to increase
at a compound annual growth rate of 9.8% and to reach approximately $169
billion in the year 2002. The major factors contributing to this trend include:
(i) a substantial increase in the number of major new product launches due to a
shorter FDA approval cycle, (ii) full drug development pipelines, (iii) premium
prices for new or branded products, (iv) increased R&D expenditures, (v) an
aging population, and (vi) increased demand driven by direct-to-consumer
advertising.
1
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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. PBMs help these health benefit providers to
provide a cost effective drug benefit and to better understand the impact of
pharmaceutical utilization on total healthcare expenditures.
Our Strategy
Our goal is to be the leading third-party supplier of health outcomes
products and services to payors and providers. To accomplish this goal, we
intend to (i) continue to grow our PBM and expand our client base by adding
covered lives and expanding the breadth of our product offerings, (ii) leverage
our information-based clinical expertise to lead in the development of next
generation health outcomes management products and services, and (iii)
selectively pursue acquisitions or alliances that provide us with the
opportunity to realize additional scale benefits in our PBM or augment our
advanced clinical and HIT 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
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Common Stock being offered....... shares
Common Stock outstanding after
the offering.................... shares
Use of Proceeds.................. $15 million of the net proceeds of the offering will
be used by ProVantage for working capital, capital
expenditures, and other general corporate purposes.
The balance of the net proceeds of the offering
(including the proceeds from the exercise of the
over-allotment option, if any) will be used to pay a
portion of a demand promissory note held by ShopKo
(the "Dividend Note"). The Dividend Note will be
issued immediately prior to the offering as a
dividend to return a portion of ShopKo's equity
investment in ProVantage. Any balance remaining on
the Dividend Note after the expiration or exercise
of the over-allotment option will be contributed to
ProVantage by ShopKo as a capital contribution.
Proposed Nasdaq Symbol........... PVHS
Control by ShopKo................ ProVantage is currently a wholly-owned subsidiary of
ShopKo. After the offering, ShopKo will beneficially
own approximately % of the Common Stock and will
continue to control the business and affairs of
ProVantage.
</TABLE>
2
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Summary Historical Consolidated Financial Data
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Quarters (39 Weeks)
Fiscal Years (52 Weeks) Ended Ended
---------------------------------------------------- --------------------------
Feb. 4, 1995 Feb. 3, 1996 Feb. 1, 1997 Jan. 31, 1998 Nov. 1, 1997 Oct. 31, 1998
------------ ------------ ------------ ------------- ------------ -------------
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Statement of Earnings
Data(1):
Net sales............... $5,424 $87,155 $330,048 $500,891 $367,495 $474,396
Costs and expenses:
Cost of sales.......... 4,666 78,250 306,760 463,069 341,586 441,317
Selling, general and
administrative
expenses.............. 214 4,836 11,828 19,990 14,215 18,067
Depreciation and
amortization
expenses.............. 69 1,170 2,233 4,779 3,215 4,933
------ ------- -------- -------- -------- --------
4,949 84,256 320,821 487,838 359,016 464,317
Income from operations.. 475 2,899 9,227 13,053 8,479 10,079
Interest income......... -- 207 353 364 269 212
------ ------- -------- -------- -------- --------
Earnings before income
taxes.................. 475 3,106 9,580 13,417 8,748 10,291
Provision for income
taxes.................. 220 1,553 4,164 5,883 3,884 4,512
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Net earnings............ $ 255 $ 1,553 $ 5,416 $ 7,534 $ 4,864 $ 5,779
====== ======= ======== ======== ======== ======== ===
Pro forma earnings per
share(2)............... $ $
-------- --------
Pro forma weighted
average shares
outstanding(2).........
-------- --------
Supplemental Data:
Pharmacy network claims
processed.............. 195 3,593 13,758 21,410 18,148 20,305
Mail pharmacy
prescriptions filled... -- 120 264 457 322 504
</TABLE>
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October 31, 1998
---------------------------------------------
Pro Forma As
Actual Pro Forma(2)(4) Adjusted(2)(3)(4)
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Balance Sheet Data:
Cash.................... $ 380 $ 380
Working capital......... 32,000
Total assets............ 160,526 160,526
Total debt.............. 954
Total liabilities....... 50,705
Stockholder's equity.... 109,821
</TABLE>
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(1) For all periods presented, ProVantage was a wholly-owned subsidiary of
ShopKo. See Note A of Notes to Consolidated Financial Statements.
(2) Gives pro forma effect to the Reorganization.
(3) As adjusted to give effect to the sale of the shares of Common Stock
offered hereby (assuming a public offering price of $ per share) and
the use of the net proceeds as described in the "Use of Proceeds" section.
(4) Includes the Dividend Note in the principal amount of $ .
3
<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
Consolidating Industry and Formidable Competitors
We compete in the health benefit management and health information
technology businesses. These businesses are very competitive for several
reasons. The health benefit management business is relatively consolidated,
meaning that it is dominated by a few large companies with significant
resources. Additional consolidation is likely. Several of our competitors in
this business are owned by large companies, including pharmaceutical
manufacturers, which may give them strong purchasing power and other advantages
which we do not have. In addition to consolidation, the health information
technology business is experiencing rapid technological change, which could
render our products or services obsolete before we can recover our investment
in them or obtain a meaningful return. In both businesses, our competitors
include large, profitable and well-established companies with substantially
greater financial, marketing and other resources. Additionally, there are
relatively few barriers to entry in the areas of health benefit management and
health information technology. Competitive pressures can drive down our
profitability and otherwise adversely impact our business. We cannot assure you
that we will be able to compete effectively.
Pharmacy Benefit Management Margin Erosion
Over the last several years, competitive pressures have caused ProVantage
and other pharmacy benefit management companies to experience a decline in the
prices they have been able to charge for their core services. Additionally,
such competitive pressures have caused pharmacy benefit management companies to
share with their customers a larger portion of formulary fees and related
revenues received from pharmaceutical manufacturers and third party formulary
administrators. The combination of lower prices and increased revenue sharing
have caused the gross margin (that is, the difference between revenues and the
cost of services) to decline. We expect pharmacy benefit management margins in
general to continue to decline, which could result in independent pharmacy
benefit management companies, including ProVantage, becoming significantly less
profitable. Our margins may also decline as we implement our business strategy
of marketing to larger clients. In order to sell our services to these clients,
which typically have greater bargaining power than our traditional clients, we
may be required to sell our services for less than they are currently sold.
Reduced Formulary Revenues
A significant portion of our earnings are derived from payments we
receive in the form of discounts, rebates and fees from pharmaceutical
manufacturers. We have contracts, typically with terms of one or two years,
with pharmaceutical manufacturers with regard to payment of such discounts,
rebates and fees. If these relationships and practices were terminated or
changed, we could become significantly less profitable. Formulary fees,
discounts and rebates are 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
relating to these discounts, rebates and fees may have adverse effects on our
formulary revenues in the future.
4
<PAGE>
Uncertainty of Market Acceptance of Health Information Technology Products;
Potential Defects
We have recently added and continue to develop health information
technology products and services to our offerings. 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, both on a
stand-alone basis and in combination with our health benefit management
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. However, to date these products and services have achieved only
limited market acceptance. 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. If
so, our strategy to compete on the basis of these products would be adversely
affected.
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 new products or releases could result in liability claims, loss of
revenue or further delay in market acceptance, which could adversely affect our
business, operating results and financial condition.
Ability to Manage Growth
Our business has grown rapidly in the last three fiscal years, with total
revenues increasing from approximately $5 million in fiscal 1994 to
approximately $500 million in fiscal 1997. We intend to pursue a strategy of
aggressive growth. Recent growth has placed, and if such growth continues will
increasingly place, a significant strain on our management and operations.
Accordingly, our future operating results will depend in part on 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 manage future
expansion successfully or 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.
Risks Associated with Acquisition and Alliance Strategy
We have completed several acquisitions and plan to acquire complementary
products, technologies or businesses in the future. We also intend to enter
into strategic alliances with complementary businesses. Factors which may
affect our ability to expand successfully through acquisitions and alliances
include:
l difficulties in identifying viable acquisition or alliance
candidates,
l the significant competition for acquisition and alliance
opportunities, particularly from other companies with greater
resources,
l difficulties in integrating the acquired company and achieving the
expected benefits,
l the diversion of management's attention from current operations,
l lack of experience in new geographic or product markets,
l the loss of key employees of the acquired company,
l the assumption of undisclosed liabilities,
l potential dilution of current stockholders,
l limitations on our ability to incur additional debt, and
5
<PAGE>
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.
Concentration of Customers; Short-Term Contracts
We rely on a small number of our best customers to produce a
disproportionate amount of our revenues. Our ten largest customers accounted
for approximately 37.1% of our revenues in fiscal 1997 and approximately 34.9%
of our revenues in the 39 weeks ended October 31, 1998. In addition, one of
those ten customers, American Medical Security, Inc., accounted for
approximately 13.6% of our revenues in fiscal 1995, 17.9% of our revenues in
fiscal 1996, 11.7% of our revenues in fiscal 1997, and 11.1% of our revenues
for the 39 weeks ended October 31, 1998. Our contract with American Medical
Security, Inc. terminates on July 1, 2000 and may be renewed for one-year
terms thereafter. Because we follow industry custom, 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. 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. 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.
Uncertainty Regarding Regulatory Matters; Privacy Concerns
The healthcare industry is subject to extensive laws and regulations,
and 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.
Most of our activities involve the receipt or use by us of confidential
patient medical information which our customers provide to us. In addition, we
use this data, after the patients' names have been removed, for research and
analysis purposes. 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 ProVantage's various databases of medical data, or from using
such information in providing services to our other customers. In either
event, we could be materially and adversely affected under such circumstances.
Potential Fluctuations in Quarterly Operating Results
Our operating results have in the past and are likely in the future to
vary significantly from quarter to quarter as a result of a number of factors,
including:
l the expiration or termination of contracts with significant
customers,
6
<PAGE>
l the size and timing of new contracts and product orders,
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,
l market acceptance of our services and products,
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.
Long Sales Cycle
The period of time required to sell our products and services to a new
customer can be up to a year or more. 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. Our long sales cycle adds to the
unpredictability of our revenues.
Developments in the Healthcare Industry
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. If the current healthcare financing and
reimbursement system changes significantly, then we could be materially and
adversely affected. Congress is currently considering proposals to reform the
U.S. healthcare system. 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.
7
<PAGE>
Potential Liability and Insurance
Various aspects of our business, including the dispensing of
pharmaceutical products and performing drug utilization review and therapeutic
intervention services, entail a risk of litigation and liability relating to
product and professional liability claims. We believe that we have adequate
insurance coverage. Nevertheless, 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 such insurance in the future, that adequate replacement
policies will be available on acceptable terms, or that such insurance will
cover all losses associated with claims against us.
Dependence on Key Employees
Our future performance will depend, in part, upon the efforts and
abilities of our key management, sales, marketing and technical personnel. We
do not have employment agreements with any of our executive officers. The loss
of key personnel or the inability to attract, motivate and retain these people
could have a material adverse effect on our business.
Consolidation Among Customers
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 such consolidation. Consolidation could also create larger
customers capable of exerting greater bargaining power, which could lead to
declines in the prices we are able to charge for our products and services. The
loss of existing and potential customers and/or price declines due to
consolidation could have a material adverse effect on us.
Risks Associated with Intellectual Property
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 proprietary rights.
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 proprietary rights. As the number of software products made
by our competitors and offered to our target market increases, we believe that
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 or
litigation that could have a material adverse effect on us.
Year 2000 Issues; Potential Impact on Customers
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. Nonetheless, we may be adversely affected by non-compliant
systems used by other companies,
8
<PAGE>
including our clients, with which we do business. Additionally, 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 current software 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.
Risks Relating to ProVantage's Relationship with ShopKo
Relationship with and Benefits to ShopKo
Control. ShopKo beneficially owns all of the outstanding Common Stock.
After the offering, ShopKo will own approximately % of the outstanding
Common Stock. As a majority stockholder, ShopKo will be able to control the
business and affairs of ProVantage, including (i) the election of the entire
Board of Directors, (ii) any determinations with respect to mergers or other
business combinations, and (iii) 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." The market price for the Common
Stock is likely to be adversely affected by factors listed above because the
market price is not likely to reflect any "takeover premium."
Dividend Note. Immediately prior to the offering, we will declare a
dividend to ShopKo in the form of a demand promissory note in the principal
amount of $ . The purpose of the dividend is to return a portion of
ShopKo's equity investment in ProVantage. We intend to use a portion of the net
proceeds of the offering to repay a portion of the Dividend Note. Any balance
remaining on the Dividend Note after the expiration or exercise of the over-
allotment option will be contributed to ProVantage by ShopKo as a capital
contribution.
Intercompany Agreements. We currently have, and will continue to have, a
variety of contractual relationships with ShopKo and its affiliates. ShopKo's
interests under these contracts may be adverse to our interests. As a party to
these contracts, ShopKo could use its control position to act in a manner
adverse to the other stockholders of ProVantage. While it has been the
intention of ProVantage and ShopKo that such agreements and the transactions
provided for therein, taken as a whole, should accommodate both our and
ShopKo's interests in a manner that is fair to us and to ShopKo while
continuing certain mutually beneficial arrangements, 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. For a further description of our
contractual relationships with ShopKo, see "Relationship With ShopKo--
Intercompany Agreements."
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 certain covenants in the credit agreement. These covenants include
limitations and prohibitions on our ability to sell our Common Stock unless
ShopKo meets certain financial tests, to pledge certain assets, to incur debt
to third parties beyond certain limits and to enter into agreements which
restrict our ability to pay dividends. These covenants will continue to apply
after this offering is completed and may cause ShopKo to force us to act
inconsistently with our best interests.
Potential Conflicts of Interest with ShopKo
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, and two of these
directors, including ShopKo's Chairman of the Board, are executive officers of
ShopKo. 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. We cannot assure you
that any such conflicts will be resolved in our
9
<PAGE>
favor. In addition, ShopKo will have the ability to change the size and
composition of our Board of Directors and its committees.
Risks Relating to the Offering of Common Stock
Absence of History as a Stand-Alone Company; Limited Relevance of Historical
Financial Information
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. 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.
Potential Adverse Effect of Shares Eligible for Future Sale
Upon completion of this offering, there will be 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, as amended (the
"Securities Act"). 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. 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. ProVantage, its officers
and directors and ShopKo have agreed, subject to certain exceptions, not to
offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock, or any securities convertible into or exercisable or exchangeable for
shares of Common Stock, for a period of 180 days after the date of this
prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated.
Substantial Dilution
The proposed initial public offering price of $ is substantially
higher than the book value of $ per share of the Common Stock at October
31, 1998 (giving pro forma effect to the Reorganization). Accordingly,
purchasers in this offering will incur immediate and substantial book value
dilution of $ per share.
Absence of Prior Public Market; Possible Volatility of Stock Price
Prior to this offering, there has been no public market for the Common
Stock. Although ProVantage has applied to list the Common Stock on the Nasdaq
National Market, 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 public offering price set forth on
the cover page of this prospectus. 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
10
<PAGE>
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.
Adverse Impact of Anti-Takeover Provisions
Certain provisions of ProVantage's Restated Certificate of Incorporation
and Amended and Restated Bylaws, a Rights Plan which ProVantage expects to
adopt prior to completion of the offering, and change of control severance
agreements which have been entered into with certain of ProVantage's executive
officers could have certain anti-takeover effects. These anti-takeover effects
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, certain provisions of the
Delaware General Corporation Law, among other things, restrict the ability of
stockholders to cause a merger or business combination or obtain control of
ProVantage. These provisions may be considered disadvantageous by a
stockholder. See "Management--Change of Control Severance Agreements" and
"Description of Capital Stock."
THE REORGANIZATION
In connection with this offering, ShopKo and ProVantage reorganized
ProVantage's corporate structure (the "Reorganization"). The Reorganization
consists of reincorporating ProVantage in Delaware through a merger with an
affiliated corporation, the amendment and restatement of ProVantage's charter
and bylaws, a stock split effected through a stock dividend, and the
declaration of a dividend to ShopKo in the form of the Dividend Note in order
to return to ShopKo a portion of ShopKo's investment in ProVantage. See
"Dividend Policy."
USE OF PROCEEDS
We intend to use $15.0 million of the net proceeds of the offering for
working capital, capital expenditures and other general corporate purposes. The
balance of the net proceeds of the offering (including the proceeds from the
exercise of the over-allotment option, if any) will be used by ProVantage to
pay a portion of the Dividend Note. The Dividend Note will have a principal
amount of $ , will bear interest at % per annum and will be due on demand.
Any balance remaining on the Dividend Note after the expiration or exercise of
the over-allotment option will be contributed to ProVantage by ShopKo as a
capital contribution. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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."
Immediately prior to the offering, we will declare a dividend to ShopKo
in the form of the Dividend Note 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 Dividend Note. See "Relationship With ShopKo."
11
<PAGE>
CAPITALIZATION
The following table sets forth the cash, short-term debt and
capitalization of ProVantage at October 31, 1998 (i) on an historical basis,
(ii) on a pro forma basis giving effect to the Reorganization, and (iii) pro
forma as adjusted to give effect to the sale of the shares of Common Stock
offered by this prospectus (at an assumed initial public offering price of
$ per share) and the use of the estimated net proceeds as described in the
"Use of Proceeds" section.
<TABLE>
<CAPTION>
October 31, 1998
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Cash....................................... $ 380 $380 $
======== ==== =====
Dividend Note.............................. $ $ $
Other short-term debt...................... 954 954 954
-------- ---- -----
Total debt............................. $ 954 $ $
======== ==== =====
Stockholders' equity:
Preferred Stock, $.01 par value;
shares authorized; none issued or
outstanding............................. $ 0 $ $
Common Stock, $.01 par value; 20,000,000
shares authorized, 100 shares issued and
outstanding, actual; 50,000,000 shares
authorized, shares issued and
outstanding, pro forma; and 50,000,000
shares authorized, shares issued
and outstanding, pro forma as adjusted.. 0
Additional paid-in capital............... 89,284
Retained earnings........................ 20,537
-------- ---- -----
Total stockholders' equity............. 109,821
-------- ---- -----
Total capitalization................... $110,775 $ $
======== ==== =====
</TABLE>
12
<PAGE>
DILUTION
Our pro forma net tangible book value at October 31, 1998 was
$ , or $ per share of Common Stock. Pro forma net tangible book
value per share is determined by dividing our net tangible book value (total
tangible assets less total liabilities) by the number of shares of Common Stock
outstanding, after giving effect to the Reorganization. Without taking into
account any changes in our pro forma net tangible book value after October 31,
1998, other than to give effect to the sale of the shares of Common Stock
offered hereby (assuming an initial public offering price of $ per share)
and the receipt of the net proceeds therefrom, our adjusted pro forma net
tangible book value at October 31, 1998 would have been $ , or $
per share of Common Stock. This represents an immediate dilution in pro forma
net tangible book value of $ per share to new investors purchasing shares
in this offering and an immediate increase in pro forma net tangible book value
of $ per share to ShopKo. The following table illustrates this per share
dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
-----
Pro forma net tangible book value per share at October 31,
1998....................................................... $
------
Increase per share attributable to new investors (1)........
------
Pro forma net tangible book value after the offering........
-----
Dilution per share to new investors (2)..................... $
=====
</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 October 31,
1998 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 shares of Common Stock issued by us to ShopKo and by
the new investors (assuming an initial public offering price of $ per
share) with respect to the shares of Common Stock to be issued by us
in this offering:
<TABLE>
<CAPTION>
Shares of Common Total
Stock Purchased Consideration
----------------- --------------- Average Price
Number Percent Amount Percent Per Share
-------- -------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
ShopKo................... % $ % $
New investors............
-------- ------- ------ -----
Total................ 100% $ 100%
======== ======= ====== =====
</TABLE>
The foregoing tables do not give effect to the issuance of an aggregate
of shares of Common Stock reserved for issuance under our Stock
Incentive Plan. See "Management--Compensation of Directors" and "Executive
Compensation--Stock Incentive Plan."
13
<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 four years in the period ended January
31, 1998. Also presented are certain of our historical consolidated financial
data as of the 39 weeks ended November 1, 1997 and October 31, 1998. The
historical consolidated financial data for the three years in the period ended
January 31, 1998 and as of January 31, 1998 and February 1, 1997 were derived
from our financial statements included elsewhere in this prospectus and have
been audited by Deloitte & Touche LLP, independent auditors, as indicated in
their report included elsewhere herein. 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>
Three Quarters
Year (52 Weeks) Ended (39 Weeks) Ended
---------------------------------------------------- ------------------------------
Feb. 4, 1995 Feb. 3, 1996 Feb. 1, 1997 Jan. 31, 1998 Nov. 1, 1997 Oct. 31, 1998
------------ ------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Earnings
Data:
Net sales............... $ 5,424 $87,155 $330,048 $500,891 $367,495 $474,396
Costs and expenses:
Cost of sales.......... 4,666 78,250 306,760 463,069 341,586 441,317
Selling, general and
administrative
expenses.............. 214 4,836 11,828 19,990 14,215 18,067
Depreciation and
amortization
expenses.............. 69 1,170 2,233 4,779 3,215 4,933
------- ------- -------- -------- -------- --------
4,949 84,256 320,821 487,838 359,016 464,317
Income from operations.. 475 2,899 9,227 13,053 8,479 10,079
Interest income......... -- 207 353 364 269 212
------- ------- -------- -------- -------- --------
Earnings before income
taxes.................. 475 3,106 9,580 13,417 8,748 10,291
Provision for income
taxes.................. 220 1,553 4,164 5,883 3,884 4,512
------- ------- -------- -------- -------- --------
Net earnings............ $ 255 $ 1,553 $ 5,416 $ 7,534 $ 4,864 $ 5,779
======= ======= ======== ======== ======== ========
Pro forma earnings per
share(1)............... $ $
-------- --------
Pro forma weighted
average shares
outstanding(1).........
-------- --------
<CAPTION>
Feb. 4, 1995 Feb. 3, 1996 Feb. 1, 1997 Jan. 31, 1998 Oct. 31, 1998
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash.................... $ 2,092 $ 5,001 $ 5,946 $ 12,533 $ 380
Working capital......... 1,628 7,634 4,253 15,480 32,000
Total assets............ 25,823 33,181 118,993 155,037 160,526
Total debt.............. -- -- -- 1,880 954
Total liabilities....... 7,770 9,057 56,310 63,757 50,705
Stockholder's equity.... 18,053 24,124 62,683 91,280 109,821
</TABLE>
- --------
(1) Gives pro forma effect to the Reorganization.
14
<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.
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 % 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
audit, 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 health benefit
management services, pharmacy mail services, vision benefit management services
and health information technology and clinical support services. 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, (iii) administrative fees plus the cost of sales of eyeglasses
and contact lenses relating to vision benefit management services and (iv)
contract, license and service fees for health information technology and
clinical support services. 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 PBM 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, 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.
15
<PAGE>
During the periods presented, ProVantage completed acquisitions of
several companies which contributed to ProVantage's growth. Of the health plan
members as of October 31, 1998, 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>
Three Quarters
Year (52 weeks) Ended (39 Weeks) Ended
--------------------------------------- --------------------------
Feb. 3, 1996 Feb. 1, 1997 Jan. 31, 1998 Nov. 1, 1997 Oct. 31, 1998
------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses
Cost of sales......... 89.8 92.9 92.4 92.9 93.0
Selling, general and
administrative
expenses............. 5.5 3.6 4.0 3.9 3.8
Depreciation and
amortization
expenses............. 1.3 0.7 1.0 0.9 1.1
----- ----- ----- ----- -----
96.6 97.2 97.4 97.7 97.9
Income from operations.. 3.4 2.8 2.6 2.3 2.1
Interest income......... 0.2 0.1 0.1 0.1 0.1
----- ----- ----- ----- -----
Earnings before income
taxes.................. 3.6 2.9 2.7 2.4 2.2
Provision for income
taxes.................. 1.8 1.3 1.2 1.1 1.0
----- ----- ----- ----- -----
Net earnings............ 1.8% 1.6% 1.5% 1.3% 1.2%
===== ===== ===== ===== =====
</TABLE>
Thirty-Nine Weeks Ended October 31, 1998 Compared to Thirty-Nine Weeks Ended
November 1, 1997
Net sales for the first three quarters of fiscal 1998 increased $106.9
million or 29.1% to $474.4 million. This increase is primarily attributable to
internally generated growth in claims processing, mail pharmacy services and
formulary fees. Sales from pharmacy claims processing increased $77.4 million
or 23.7%. This increase reflects an 11.9% increase in the number of claims
processed and a 13.9% increase in the average revenue per claim processed.
Sales from ProVantage's mail pharmacy services increased $20.4 million or
77.4%, reflecting a 56.5% increase in the number of prescriptions dispensed and
a 13.3% increase in the average revenue per prescription dispensed. Formulary
fees increased $5.5 million, or 58.3%, to $15.1 million. This increase is
attributable to increased claims subject to formulary fees and increased
participation of pharmaceutical manufacturers in ProVantage's formulary
program.
Gross profit for the first three quarters of fiscal 1998 increased $7.2
million or 27.7% compared to the first three quarters of fiscal 1997. This
increase is primarily attributable to the sales growth in formulary fees,
claims processing and mail pharmacy services. As a percentage of net sales,
ProVantage's gross margins were 7.0% for the first three quarters of fiscal
1998 and 7.1% for the first three quarters of fiscal 1997.
Selling, general and administrative expenses for the first three quarters
of fiscal 1998 increased $3.9 million, or 27.1%, to $18.1 million. This
increase relates to additional investments in information technology, clinical
programs and investments in infrastructure support. As a percentage of net
sales, selling, general and administrative expenses were 3.8% for the first
three quarters of fiscal 1998 compared to 3.9% for the first three quarters of
fiscal 1997.
16
<PAGE>
Depreciation and amortization expenses, measured as a percentage of net
sales, increased from 0.9% in the first three quarters of fiscal 1997 to 1.1%
in the first three quarters of fiscal 1998. This increase is attributable to
increased goodwill amortization related to ProVantage's business acquisitions.
The effective tax rate for the first three quarters of fiscal 1998
decreased to 43.8% compared to 44.4% for the first three quarters of fiscal
1997. The overall decline in the effective tax rate was primarily due to the
decrease in the nondeductible goodwill amortization as a percentage of earnings
before income taxes.
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 services. Sales from pharmacy claims processing increased
$151.4 million, or 52.3%. This increase reflects a 55.6% increase in the number
of claims processed. Sales from ProVantage's mail pharmacy services 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
formulary administration 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.
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 and mail pharmacy services and improved gross margin rates in
ProVantage's formulary business. 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 and additional investments in information technology and
infrastructure support related to continued growth. 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, measured as a percentage of net
sales, increased from 0.7% in fiscal 1996 to 1.0% in fiscal 1997. This increase
is primarily attributable to goodwill amortization related to ProVantage's
business acquisitions.
The effective tax rate for fiscal 1997 was 43.8% compared to 43.5% in
fiscal 1996.
Fiscal 1996 Compared to Fiscal 1995
Net sales for fiscal 1996 increased $242.9 million, or 278.7%, to $330.0
million. This increase is primarily attributable to growth in claims processing
and mail pharmacy services. Sales from pharmacy claims processing increased
$217.4 million, or 301.8%. This increase reflects a 282.9% increase in the
number of claims processed. Management attributes this increase primarily to
internally generated growth and supplementally to the acquisition of CareStream
Scrip Card. Sales from ProVantage's mail pharmacy services increased $12.2
million, or 133.4%, reflecting a 109.5% increase in the number of prescriptions
dispensed and a 11.4% increase in the average revenue per prescription
dispensed. Formulary fees increased $10.7 million, or 177.8%, to $16.7 million.
In fiscal 1996, ProVantage's contract with a third-party formulary
administrator included a favorable formulary revenue guarantee, allowing the
Company to receive significant formulary dollars.
Gross profit for fiscal 1996 increased $14.4 million, or 161.5%, compared
to fiscal 1995. This increase is primarily due to the sales growth in claims
processing and mail pharmacy services. ProVantage's gross
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margins as percentages of sales were 7.1% for fiscal 1996 and 10.2% for fiscal
1995. This decrease is attributable to a larger percentage of sales coming from
the lower gross margins claims processing activities and an increase in the
percentage of formulary fees shared with clients.
Selling, general and administrative expenses for fiscal 1996 increased
$7.0 million, or 144.6%, to $11.8 million. As a percentage of net sales,
selling, general and administrative expenses decreased from 5.5% in fiscal 1995
to 3.6% for fiscal 1996. This decrease is primarily due to leveraging costs
against increasing sales volume.
Depreciation and amortization expenses decreased from 1.3% of net sales
in fiscal 1995 to 0.7% of net sales in fiscal 1996. This decrease is primarily
due to leveraging costs against increasing sales volume.
The effective tax rate for fiscal 1996 decreased to 43.5% of earnings
before income taxes compared to 50.0% for fiscal 1995. The overall decline in
the effective tax rate was primarily due to the decrease in the non-deductible
goodwill amortization as a percentage of earnings before income taxes.
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 $12.0 million in fiscal 1997 and
$3.4 million in fiscal 1996 and cash used in operating activities was $0.6
million in fiscal 1995. In addition, cash used in operating activities in the
first three quarters of fiscal 1998 was $17.0 million and cash provided from
operating activities in the first three quarters of fiscal 1997 was $2.4
million. This increase in cash usage is primarily due to increased working
capital needs. ShopKo's capital contributions were $21.1 million in fiscal
1997, $33.1 million in fiscal 1996 and $4.5 million in fiscal 1995, and $12.8
million in the first three quarters of fiscal 1998 and $19.1 million in the
first three quarters of fiscal 1997.
ProVantage's principal uses of cash are for capital expenditures and
acquisitions. ProVantage spent $6.0 million on capital expenditures for the
first three quarters of fiscal 1998, $4.2 million on capital expenditures in
fiscal 1997, $2.1 million in fiscal 1996 and $1.0 million in fiscal 1995.
Capital expenditures relate primarily to continuing investments in systems
technology.
ProVantage's total capital expenditures are expected to approximate $8.0
to $10.0 million for the fiscal year ending January 30, 1999 and $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 claims
adjudication 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
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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.
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 unless ShopKo meets
certain financial tests, prohibitions on the pledging of certain assets of
ProVantage, limitations on ProVantage's ability to incur debt to third parties
beyond certain 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 operations in
the foreseeable future. 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.
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 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.
On February 26, 1995, ShopKo contributed to ProVantage the net assets of
ProVantage Mail Services, Inc. which had a net book value of approximately $1.3
million and which was recorded as a contribution of capital.
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 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 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 "Employment Agreements").
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
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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 (the "Contingent Payments"). The Contingent Payments,
if any, will be due on the first to occur of August 20, 2002 or certain
liquidity events related to ProVantage. The offering will not be a liquidity
event. 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. The Contingent
Payments, if any, will be capitalized as additional purchase price and
amortized over a period of 15 to 19 years. We expect that a portion of the
Contingent Payments will be capitalized as additional purchase price upon
completion of the offering. The Employment Agreements 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 ("IT") systems, as well as its non-IT 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 IT and non-IT systems, is nearly complete with the
fourth phase (i.e., renovation), and is actively engaged in the fifth stage of
testing.
With respect to IT 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-IT systems, the assessment phase indicated a need for only minor
renovation work. For both IT and non-IT systems, the renovation phase currently
underway is expected to be completed in the second quarter of fiscal 1999. The
testing phase for both IT and non-IT systems is planned to be completed in the
third quarter of fiscal 1999.
As part of its Year 2000 project, 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 high impact 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. These costs will be spread throughout the course of this project.
Risks. With respect to the risks associated with its IT and non-IT
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.
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
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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 government agencies, utility companies
and national telecommunications providers will continue to operate. Obviously,
the lack of such services could have a material effect on ProVantage's ability
to operate, but ProVantage has little, if any, ability to influence such an
outcome, or to make alternative arrangements in advance for such services in
the event they are unavailable.
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. ProVantage believes that this is the
appropriate time frame for developing such plans and that efforts prior to that
time should be focused on renovation, testing and verification of vendor
compliance.
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 herein or therein or any past statements made or contained
herein or therein 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.
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 HBM 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.
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BUSINESS
Overview
We are a leading health benefit management company providing pharmacy
benefit management ("PBM") and health information technology ("HIT") products
and services to our customers. Our goal is to provide knowledge-based products
and services that allow our clients to make more informed healthcare decisions,
thereby optimizing the quality and minimizing the cost of care. As of January
1999, we provided traditional PBM and vision benefit management ("VBM")
services to over 3,500 customers covering approximately 4.5 million PBM lives
and approximately 500,000 VBM lives. We have experienced significant growth
since fiscal 1995, increasing revenues from $87.2 million to $ million in
fiscal 1998, representing a compound annual growth rate of %. Approximately
75% of our growth in covered lives 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
were projected to be $118 billion in 1998 and are expected to grow by a
compound annual growth rate of 9.8% during the next five years. We believe this
market should provide us with opportunities for substantial growth. We have the
ability to integrate medical claim, diagnosis and pharmaceutical data, and to
analyze this data with our 7,800 therapeutic expert rules. This ability allows
us to help our customers reduce drug-related hospitalization and other medical
costs. We believe that this ability significantly differentiates us from our
competitors.
PBMs 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 PBM 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. However,
our products go beyond traditional PBM offerings to include information-based
health outcomes products and clinical services. These services give our
customers the ability to assess the safety and effectiveness of healthcare
practices and to identify the most effective treatment pathways, potentially
lowering overall costs.
Our customers include healthcare payors, self-funded employers, at-risk
providers, 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. PBMs are in a unique position to fulfill this need, however we
believe that few of them are able to organize and analyze payor specific data
regarding pharmaceutical utilization and medical encounters. We believe that
our ability to integrate patient pharmacy and medical data allows our clients
and us to assess overall heath outcomes. We believe this significantly
differentiates us from many other companies offering PBM services.
One of our principal information-based services, which was launched in
mid-1998, is our Advanced Therapeutic Intervention program (our "ATI program").
Our ATI program is designed to (i) review a client's pharmaceutical utilization
and medical diagnosis, claims and prescription data on an integrated basis,
(ii) 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 various co-morbidity factors,
and (iii) 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 ATI program is RationalMed, our
proprietary 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 ATI program can
be used to reduce medical costs and allow us to increase sales to larger and
more sophisticated customers.
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In addition to its PBM products and services, we have developed and
continue to develop web-enabled HIT products designed to assist in health
outcomes management. Certain of these products access our proprietary
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.
In the near future, we intend to broaden our product offering and cross-sell
more advanced HIT products to our more sophisticated clients. We believe that
we have a competitive advantage over stand-alone healthcare information system
("HCIS") companies because of our PBM relationships with payors, self-funded
employers and at-risk providers. We believe that these relationships provide us
with access to medical and pharmacy data and thus differentiates us from HCIS
companies with more limited data access.
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 Scrip
Card and also began to offer VBM services. In 1997, we expanded significantly
our clinical expertise and added to our proprietary databases with the
acquisition of PharMark.
Industry Overview
The Healthcare Financing Administration ("HCFA") 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; North American pharmaceutical sales are expected
to increase at a compound annual growth rate of 9.8% and to reach approximately
$169 billion in the year 2002. The major factors contributing to this trend
include: (i) a substantial increase in the number of major new product launches
due to a shorter FDA approval cycle, (ii) full drug development pipelines,
(iii) premium prices for new or branded products, (iv) increased R&D
expenditures, (v) an aging population, and (vi) 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. PBMs help these health benefit providers to
provide a cost effective drug benefit and to better understand the impact of
pharmaceutical utilization on total healthcare expenditures.
In their most basic role as cost savers, PBMs 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
PBM from the point of sale, providing operating efficiencies. PBMs also secure
volume discounts, rebates and other formulary revenues from pharmaceutical
manufactures, lowering PBM clients' pharmaceutical costs. PBMs also seek to
influence behavior patterns by encouraging the substitution of generic products
for more costly branded alternatives and by developing and managing formularies
(lists of approved drugs available to health plan participants). Basic or
standard drug utilization review ("DUR") programs identify a limited number of
problematic prescribing patterns.
These cost reduction strategies have become widely utilized in the
healthcare industry in recent years, however, and payors are now seeking a more
sophisticated approach to pharmaceutical expenditures which incorporates a
focus on the quality and efficiency of care as opposed to solely on cost
cutting. Rather than
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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 PBMs
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. PBMs with the ability to access and derive meaningful conclusions from
medical, pharmaceutical and diagnostic information will be competitively
advantaged. 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
outcomes. 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 health outcomes
products and services to payors and providers. To accomplish this goal, we
intend to (i) continue to grow our PBM and expand our client base, (ii) lead in
the development of next generation health outcomes management products and
services, and (iii) selectively pursue acquisitions or alliances with other
companies that help us achieve our goal.
Grow PBM. We intend to aggressively grow our PBM business by adding
covered lives 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 its
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.
In the past, our primary market for PBM services has been the small group
market. While the small group market remains a major focus, we believe that the
mid-sized market offers a substantial growth opportunity. As part of our
efforts to penetrate this market, we began to build a comprehensive marketing
program that addresses the needs of 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 health outcomes
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 (i)
meaningfully reduce overall healthcare costs, not just pharmacy costs, (ii)
quantify cost savings, and (iii) improve health outcomes. These products and
services include our ATI 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 proprietary 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 over one million
lives, including Wausau Insurance, Security Health Plan, Snap-On Tools 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 vendor arrangement for traditional PBM
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
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customer. Furthermore, we believe that sales of our more advanced, clinically
focused products can help mitigate margin pressure currently being experienced
in traditional PBM services and result in an improved pricing dynamic.
Develop Outcomes Management Products. We have leveraged our information-
based clinical expertise in managing pharmaceutical benefits to develop HIT
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 proprietary database. We believe that
this gives us a strong platform on which to build a reputation as a company
with knowledge-based 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 PBM or augment our
advanced clinical and HIT capabilities. During the past five years, we have
acquired four companies, each of which has added either critical mass to our
PBM 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 proprietary database. PharMark's database has served as the
springboard for marketing a number of HIT-based products to payors and
pharmaceutical manufacturers.
In addition to acquisitions, alliances are likely to be a critical
component of our strategy to expand our HIT capabilities. For example, in a
joint venture with our largest PBM 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 PBM services, in combination with our information-based health outcomes
products and services, result in a highly differentiated product offering with
the potential to assess the effectiveness of healthcare services, identify ways
of improving health outcomes, and lower pharmaceutical and, more importantly,
overall medical costs.
Healthcare Benefit Management Services
We provide high quality, cost efficient PBM services to health plan
sponsors. As of January 1999, we provided PBM services to approximately 4.5
million lives and VBM services to approximately 500,000 lives through more than
3,500 customers. Our core client base has historically been small to mid-size
employers, insurance companies, TPAs, health maintenance organizations ("HMOs")
and self-funded healthcare plan sponsors. We increasingly are marketing our PBM
services to larger organizations based on our advanced clinical and
information-based products and services.
PBM Services. Our PBM 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 network pharmacy in all 50
states, Puerto Rico and
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the Virgin Islands. We use on-line point-of-sale electronic claims processing
with our 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 the pharmacist all pertinent
member, health plan and payment information necessary to fill the prescription.
Such information includes an analysis of whether the member is eligible for
benefits, what prescription benefits the member's health plan has selected,
what the member's co-payment obligation is, what the pharmacy can expect to
receive as reimbursement for its services, and 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 PBM services through processing fees, clinical service fees, and formulary
administration fees. 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. Our highly automated mail service pharmacy,
located in Green Bay, Wisconsin, dispenses and mails approximately 65,000
prescriptions per month. Currently customers representing approximately 50% of
our covered lives 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 ATI program is one of the key differentiating features of our PBM
services. We began providing this service in mid-1998. We believe that a
significant amount of in-patient medical costs are induced by inappropriate
prescription drug therapy. Although most PBMs utilize traditional DUR programs
to reduce drug-induced adverse effects caused by drug-on-drug conflicts,
duplication of prescriptions and similar problems, 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 DUR warnings per day, many of which are not applicable to any
given patient and are often ignored.
Our ATI program analyzes the prescription drug and medical encounter data
of each of our participating clients. Using our proprietary 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 co-morbidity
factors. 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 ATI program services
through any combination of a fixed fee, per member per month fees, or through a
percentage-of-savings sharing program. Three clients, representing
approximately 690,000 covered lives, have been enrolled in our ATI program
since August 1998.
Our PBM 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.
26
<PAGE>
We also offer and manage formularies for clients. Our formulary is a list
of drugs which are reviewed for safety and efficacy using our proprietary 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 tiered co-
payments 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 a
reduced need for unnecessary treatments.
VBM Services. We provide benefit management services to client plan
sponsors offering vision benefits. As of January 1999, the VBM covered
approximately 550,000 lives through a national network of approximately 4,500
retail optical chains and private ophthalmologists, optometrists and opticians.
Unlike the PBM, the VBM offers self-insured as well as fully insured products.
The self-insured products we offer are similar to our PBM 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 ("AIG"). 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 favorable loss ratios. In consideration of AIG's insurance
services AIG receives the entire premium amount collected, from which they pay
claims and all other expenses.
Healthcare Information Technology Products and Services
We believe that one of our primary differentiating factors from a
traditional PBM provider is our ability to measure health outcomes, thereby
assisting in the management of medical and pharmaceutical costs. Our healthcare
information technology allows us to add value to our PBM 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.
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
Product/ Product of Number of Lives
Service Target Market Rollout Clients in Database
----------- ------------------------------- ---------- ------- ---------------
<S> <C> <C> <C> <C>
RationalMed PBMs, Health Insurers and State 1993 14(1) 13 million
and Federal Agencies
ProVQuery PBMs and PBM Clients 1998 6 770,000(2)
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 PBM clients.
(3) The beta site customer.
27
<PAGE>
RationalMed. RationalMed is our proprietary 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 therapeutic expert 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 compromised
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 PBMs, 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 lives.
ProVQuery. ProVQuery is a web-enabled 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 our 4.5 million PBM lives.
Users have access to prescription claims detail for profiling, comparison
to normative data, drug category breakdowns and demographic analyses, complete
with pre-designed graphs and reports. With access to our national data, clients
can compare their experience to true normative 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 interfaces. 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 our PBM clients, and this product is often packaged with our traditional PBM
services and ATI program in client proposals. We currently provide ProVQuery to
five clients representing approximately 770,000 covered lives. 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 our enterprise-wide healthcare data warehousing
solution. ProVMed is an administrative, financial and clinical decision support
tool that provides direct and easy access to enterprise-wide data contained in
disparate information systems. 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. ("AMS"), one of our principal PBM clients. We own 80% of this joint
venture. AMS 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.
28
<PAGE>
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 outcomes 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 PBM business or augment our
advanced clinical and HIT capabilities. We have extensive experience in
identifying acquisition candidates, completing acquisitions and integrating
acquired companies into our infrastructure. Since 1994, we have acquired and
integrated four companies.
<TABLE>
<CAPTION>
Company Date Strategic Purpose
---------------------------- ------------ ------------------------------------------------
<S> <C> <C>
Bravell, Inc. January 1995 To acquire a retail pharmacy network and claims
processing capability
Vision Program and Related April 1996 To offer vision benefit management services
Assets of the United
Wisconsin Insurance Company
CareStream Scrip Card July 1996 To grow core PBM business
PharMark August 1997 To acquire healthcare information products and
obtain millions of patient-years of health
claims data
</TABLE>
Sales and Marketing
We market our PBM services on the basis of our high quality customer
service, our advanced clinical capabilities (including our ATI 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 PBM and other services to HIT customers.
We have sales offices in Charlotte, North Carolina; Atlanta, Georgia;
Dallas, Texas; Omaha, Nebraska; Salt Lake City, Utah; Chicago, Illinois;
Scottsdale, Arizona; Arlington, Virginia; Green Bay, Wisconsin; and 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 HBM services for over 3,500 health benefit plan
customers, covering over 5.0 million plan members enrolled in our programs. Our
HBM client base is comprised of health maintenance organizations, third party
administrators, insurance companies and self-funded healthcare plan sponsors
and
29
<PAGE>
government agencies. Our ten largest customers accounted for approximately
37.1% of our revenues in fiscal 1997 and approximately 34.9% of our revenues in
the 39 weeks ended October 31, 1998. In addition, one of those ten customers,
American Medical Security, Inc., accounted for approximately 13.6% of our
revenues in fiscal 1995, 17.9% of our revenues in fiscal 1996, 11.7% of our
revenues in fiscal 1997, and 11.1% of our revenues for the 39 weeks ended
October 31, 1998. Our HIT clients include federal and state agencies, third
party administrators, health maintenance organizations, insurance companies and
pharmaceutical manufacturers. Ten states currently use our HIT technology for
the operation of their state Medicaid programs.
Competition
We face direct competition in both the PBM and VBM businesses. The PBM
industry is relatively consolidated and dominated by large companies with
significant resources. Many of the large PBMs 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 PBMs, drug retailers, physician practice management
companies, and insurance companies/HMOs. Our six primary competitors for PBM
customers are PCS Health Systems, Inc. (a subsidiary of Rite-Aid Corp.), Merck-
Medco Managed Care, Inc. (a subsidiary of Merck & Co., Inc.), Express Scripts,
Inc., Caremark International, Inc. (a subsidiary of MedPartners, Inc.), Advance
Paradigm, Inc. and Diversified Pharmaceutical Services, Inc. (a subsidiary of
SmithKline Beecham). PBMs compete primarily on the basis of price, service,
reporting capabilities and clinical services. The primary competitor for VBM
services is Vision Service Plan, which is the largest VBM provider in the
nation. VBMs 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, its reputation for client service, its
database of 13 million lives 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 PBMs 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 Prescription and Vision Benefit Management Services
Various forms of legislation and government regulations affect or could
affect providers of prescription 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
30
<PAGE>
healthcare plan's price and other terms. We have not been materially affected
by these statutes because it administers a network of almost 50,000 retail
pharmacies and will admit any qualified, licensed pharmacy that agrees to
comply with the terms of its plans.
Anti-Remuneration Legislation. "Anti-kickback" statutes at the federal
and state level prohibit an entity from paying or receiving any remuneration to
induce the referral of healthcare plan beneficiaries or the purchase of items
or services for which payment may be made under such healthcare plans.
Additionally, most states have consumer protection laws that have been the
basis for investigations and multi-state settlements relating to financial
incentives provided by pharmaceutical manufacturers to retail pharmacies in
connection with pharmaceutical switching programs. At the federal level, such
regulations pertain to beneficiaries of Medicare, Medicaid or other federally-
funded healthcare programs. State regulations typically pertain to
beneficiaries of any healthcare plan. Under the federal regulations, safe
harbors exist for certain properly disclosed payments made by vendors to group
purchasing organizations. To our knowledge, these anti-kickback laws have not
been applied to prohibit PBMs from receiving amounts from pharmaceutical
manufacturers in connection with pharmaceutical purchasing and formulary
management programs, to therapeutic substitution programs conducted by
independent PBMs, or to the contractual relationships such as those 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, some states
provide 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 ("freedom of choice" legislation). 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 (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.
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, Inc. ("Medco"), the PBM subsidiary of pharmaceutical
manufacturer Merck & Co., agreed to have pharmacists affiliated with Medco mail
service pharmacies disclose to physicians and patients the financial
relationships between Merck, Medco, 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 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 ("most favored nation" legislation). 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.
31
<PAGE>
Professional Licensure Regulations. All states regulate the practice of
medicine and the practice of nursing. We do not believe its 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 PBM Legislation. Although no state or the federal
government has passed legislation regulating PBM activities in a comprehensive
manner, such legislation has been introduced on several occasions. Such
legislation, if enacted in any state in 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 (anonymized)
data 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 its 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.
32
<PAGE>
Applicability of Insurance Laws. The prescription pharmaceutical plans
currently offered or administered by us are 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, and we believe it is in material compliance with all applicable
insurance laws.
ERISA 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 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. Our management believes that we are in
substantial compliance with, or is in the process of complying with, all
existing statutes and regulations material to the operation of our health
services business and, 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>
PBM/VBM Claims Processing/
Administrative Office Brookfield, Wisconsin 14,100
PBM/VBM 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.
33
<PAGE>
Employees
As of October 31, 1998, we employed 387 people, 25 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.
However, for the foreseeable future, we expect to continue to utilize these
services. See "Relationship With ShopKo" and "Certain Transactions."
34
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information with respect to our
director and executive officers as of January 31, 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............ 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......... 51 Senior Vice President, Business Development
and Marketing
Peter F. Hoffman, M.D..... 54 Senior Vice President and Chief Medical
Officer
Vice President and Chief Information
Thomas J. Knapp........... 48 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>
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 are staggered, with Messrs.
, , and serving terms expiring
in 2000, Messrs. , , and
serving terms expiring in 2001, and Messrs. , ,
and serving terms expiring in 2002. Executive officers are
appointed by and serve at the discretion of the Board of Directors.
Mr. Kramer is currently our sole director. We will expand our Board of
Directors prior to or concurrently with the completion of the offering, adding
Messrs. Jones, Girard, Podany and Wolf.
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 since February 1991. 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.
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<PAGE>
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 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.
Thomas J. Knapp has served as our Vice President and the Chief
Information Officer since June 1997. From January 1993 to June 1997, Mr. Knapp
served as Vice President--Chief Information Officer at United Wisconsin
Services, Inc./Blue Cross & Blue Shield United of Wisconsin. From July 1988 to
January 1993, he served as Senior Manager of the information technology
consulting practice of Deloitte & Touche LLP.
Glen C. Laschober has served as our Executive Vice President and the
Chief Operating Officer of our PBM and VBM 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
since November 1997. 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.
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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 1998 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, Humana, Inc., Boys and
Girls Club of Green Bay, Greater Louisville, Inc. and the Louisville Downtown
Development Corporation.
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 Nasdaq National Market.
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. 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, as amended (the "Code").
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.
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Compensation of Directors
Each director who is not one of our employees or an employee of ShopKo
will receive an annual retainer fee of $ , a fee of $ for each
Board meeting attended and a fee of $ for each Committee meeting
attended, if such Committee meeting is not held on the same day as a Board
meeting. Committee chairpersons receive an additional annual retainer fee of
$ . We 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."
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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 31, 1998,
to our Chief Executive Officer and each of our other most highly compensated
executive officers whose total annual salary and bonus exceeded $100,000, based
on salary and bonus earned during the fiscal year (the "Named Executive
Officers").
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
------------------------- -------------------
Securities
Name and Principal Underlying All Other
Position Salary ($) Bonus ($)(1) Options/SARs (#)(2) Compensation ($)(3)
- ------------------ ---------- ------------ ------------------- -------------------
<S> <C> <C> <C> <C>
Jeffrey A. Jones........ 321,923 325,000 80,000 150,431(4)
President and Chief
Executive Officer
Glen C. Laschober....... 156,539(5) 53,365 35,000 --
Executive Vice
President, HBM
Joseph A. Coffini....... 139,608 35,230 11,400 130,620(6)
Senior Vice President,
Business Development
and Marketing
</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 the listed individuals includes one or more of
the following: ProVantage-paid portion of individual life insurance
policies; 401(k) ShopKo match; ShopKo Profit Sharing Plan contributions;
relocation expenses and tax adjustments in connection therewith; and
retention bonuses authorized by ShopKo's Board of Directors.
(4) "All Other Compensation" for Mr. Jones includes the following: ProVantage-
paid portion of individual life insurance policy: $1,802; 401(k) ShopKo
match: $5,927; ShopKo Profit Sharing Plan contributions: $22,166; and
retention bonus: $120,536.
(5) Represents a partial year portion of Mr. Laschober's salary. Mr.
Laschober's employment by ProVantage began in March 1997.
(6) "All Other Compensation" for Mr. Coffini includes the following: 401(k)
ShopKo match: $2,598; ShopKo Profit Sharing Plan contributions: $6,753;
relocation expenses $6,090; retention bonus: $115,179.
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Option Grants Table
The following table sets forth information about ShopKo stock option
grants during the fiscal year ended January 31, 1998 to the Named Executive
Officers.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Appreciation For Option
Individual Grants Term
---------------------------------------------- -----------------------
% of Total
Number of Options/SARs
Securities Granted to Exercise
Underlying ShopKo or Base
Options/SARs Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- ---- ------------ ------------ --------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey A. Jones (3).... 30,000(1) 2.43 20.00 4-29-07 377,400 956,100
30,000(2) 2.43 25.75 7-02-07 485,700 1,231,200
20,000(2) 1.62 24.5625 11-12-07 309,000 782,950
Glen C. Laschober....... 30,000(2) 2.43 17.88 4-14-07 337,200 855,000
5,000(2) * 24.5625 11-12-07 77,250 195,750
Joseph A. Coffini (4)... 10,000(1) * 20.00 4-29-07 125,800 318,700
1,200(2) * 24.6325 11-12-07
</TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- --------
* Less than 1%
(1) These ShopKo stock options vest and become exercisable on the second
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.
(2) 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.
(3) On April 25, 1997, Mr. Jones canceled and surrendered performance vested
options to purchase 30,000 shares of ShopKo Common Stock.
(4) On April 25, 1997, Mr. Coffini canceled and surrendered performance vested
options to purchase 10,000 shares of ShopKo Common Stock.
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Option Exercise and Fiscal Year End Value Table
The following table sets forth information with respect to the Named
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 31, 1998.
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........ 21,000 412,125 13,000 96,000 196,125 424,125
Glen C. Laschober....... -0- -0- -0- 35,000 -0- 233,288
Joseph A. Coffini....... 2,500 26,250 3,900 5,000 44,246 73,749
</TABLE>
Indemnification of Directors and Officers
Our Amended and Restated Bylaws provide for the indemnification of our
directors and officers to the full extent permitted by the Delaware General
Corporation Law. We have 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 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 (the
"ShopKo Severance Agreements") with certain of our officers, including Messrs.
Jones, Laschober and Coffini. The ShopKo Severance Agreements provide that, if,
within two years after a "Change of Control" (as defined therein), ShopKo
terminates the individual's employment other than for "Cause" (as defined
therein) or disability, or the individual terminates the individual's
employment for "Good Reason" (as defined therein), then the individual will be
entitled to a lump-sum cash payment equal to (i) a multiple of one, two or
three times the individual's annual base salary, plus (ii) a multiple of one 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 for Messrs. Laschober and Coffini. Each
individual would also receive his or her 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, two or three 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 of 1986, as amended (the
"Code"), the severance benefits owed to the individual may be decreased, but
only if the result is to give the individual a larger after-tax benefit than if
the payments are not reduced. The individual is permitted to elect the payments
to be reduced. Pursuant to the terms of the ProVantage Severance Agreements
described below, the ShopKo Severance Agreements will terminate upon completion
of the offering.
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We have entered into change of control severance agreements (the
"ProVantage Severance Agreements") with certain of our officers, including
Messrs. Jones, Laschober 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 (i) a multiple of one, one and
one-half or two times the individual's annual base salary, plus (ii) 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 and Coffini. Each individual would also receive his
or her 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
Code, the severance benefits owed to the individual may be decreased, but only
if the result is to give the individual a larger after-tax benefit than if the
payments are not reduced. The individual is permitted to elect the payments to
be reduced.
A "Change of Control" is defined in the ProVantage Severance Agreements
as occurring if (i) the incumbent directors or their permitted successors cease
to constitute at least a majority of our Board of Directors, (ii) our
stockholders approve certain mergers, consolidations, liquidations,
dissolutions or reorganizations of ProVantage or (iii) our stockholders approve
a complete liquidation or dissolution of ProVantage. For purposes of the
ProVantage Severance Agreements, "Cause" means (i) personal dishonesty by the
individual intended to result in his or her substantial personal enrichment at
our expense, (ii) 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 (iii) the conviction of the individual of a felony.
"Good Reason" as used in the ProVantage Severance Agreements means (i) 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 (ii)
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 31, 1998, 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 consists of Messrs. ,
and . 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 "Plan"). The purpose of the 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
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<PAGE>
participate in the 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 Plan to
the Stock Option Committee (the "Committee"). Under the Plan, the Committee may
grant (i) incentive stock options within the meaning of Section 422 of the
Code, (ii) non-qualified stock options and (iii) shares of stock or the right
to receive shares of stock in the future (or their cash equivalent or a
combination of both) ("Stock Awards") (options and Stock Awards are
collectively referred to as "Awards"), to certain of our key personnel and its
related companies (defined to include any corporation, joint venture, limited
liability company or other business entity in which we have a significant
direct or indirect equity interest). The Committee will have final authority,
subject to the express provisions of the 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 Plan; and to make all other determinations that may be
necessary or advisable for the administration of the Plan. In making such Award
determinations, the 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 Committee deems relevant. The
Board of Directors has the non-exclusive power to exercise the authority of the
Committee with respect to Awards to our non-employee directors and our related
companies. The Plan provides for accelerated vesting of Awards upon the
occurrence of certain "change of control" transactions as described in the
Plan.
Incentive stock options may be granted under the Plan to full or part-
time employees, including officers and directors who are also employees, of
ours and our related companies (as defined above) (together, the "Employees").
There are presently approximately 387 employees who could be selected by the
Committee for participation in the Plan. In addition, non-qualified stock
options and Stock Awards may be granted to Employees and non-employee
directors.
Subject to the 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 Plan is shares. Award
limits established under the 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
Plan will expire on , and the term of each option granted under
the 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 Plan does
not allow the repricing of options after grant except in the event of stock
splits, stock dividends and similar transactions. At the discretion of the
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 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 Plan may be terminated or amended by our Board of Directors. The
Board of Directors may not, without approval of our shareholders, increase the
number of shares of Common Stock which may be delivered
43
<PAGE>
pursuant to Awards granted under the Plan, except for increases resulting from
certain corporate transactions involving us. Awards to be granted under the
Plan are not determinable as of the date of this prospectus.
44
<PAGE>
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 between independent
parties. As a result, while it has been our intention and ShopKo's intention
that such agreements and the transactions provided for therein, taken as a
whole, should accommodate both of our interests in a manner that is fair to the
parties while continuing certain mutually beneficial arrangements, there can be
no assurance that each of such agreements, or the transactions provided for
therein, has been or will be effected on terms at least as favorable to us as
could have been obtained from unaffiliated third parties.
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.
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<PAGE>
Tax Sharing Agreement. We have entered into a Tax Sharing 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 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
severally liable for the 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 Sharing 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 Sharing 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 it will pay ShopKo a total of $0.4 million in the first twelve months
following this offering for such services.
Information Technology Services Agreement. We have entered into an
Information Technology Services Agreement with ShopKo pursuant to which ShopKo
has agreed to provide us with (i) the use of certain computer hardware and
software, (ii) access to certain computer facilities and (iii) personnel to
operate, manage and maintain computer hardware, software and data. The
Information Technology Services Agreement has a term which expires on January
31, 2001. At any time during the term of the Information Technology Services
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 $1.3 million in the first twelve months after the offering
under this agreement. The Information Technology Services 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.
Registration Rights Agreement. We have entered into a Registration Rights
Agreement with ProVantage Holdings, Inc., a wholly-owned subsidiary of ShopKo
("ProVantage Holdings"), pursuant to which we have granted certain demand and
"piggyback" registration rights to ProVantage Holdings (and to certain
affiliates of ProVantage Holdings, including ShopKo) with respect to shares of
Common Stock owned by ProVantage Holdings (or such affiliates) following the
offering. Pursuant to the Registration Rights Agreement, ProVantage Holdings
has the right to require us to file 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
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<PAGE>
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 such registration. The Registration
Rights Agreement will terminate at such time that ProVantage Holdings (or its
affiliates) owns less than 5% of our outstanding Common Stock. ShopKo has
agreed with the underwriters, however, not to offer, sell, contract to sell or
otherwise dispose of any Common Stock or our other securities that are
substantially similar to the Common Stock (or any securities convertible into
or exchangeable for, or any options or other rights to acquire, any Common
Stock or our other securities that are substantially similar to the Common
Stock) 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 % of
the Common Stock. As a majority stockholder, ShopKo will be able to control our
business and affairs, including: (i) the election of our entire Board of
Directors, (ii) any determinations with respect to mergers or other business
combinations, (iii) the amendment of our Certificate of Incorporation or
Bylaws, (iv) the acquisition or disposition of material assets, (v) the
incurrence of indebtedness, (vi) the issuance of additional Common Stock or
other equity securities, (vii) the payment of dividends with respect to the
Common Stock, (viii) the power to determine all matters submitted to a vote of
stockholders, (ix) the power to delay, defer or prevent a change in control,
and (x) 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 incident 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
--------------
1995 1996 1997
---- ---- ----
(in millions)
<S> <C> <C> <C>
Selling, general and administrative expenses............... $0.4 $0.4 $1.1
</TABLE>
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
----------------
1995 1996 1997
---- ----- -----
(in millions)
<S> <C> <C> <C>
Our payment to ShopKo for prescription costs............. $6.8 $21.0 $25.8
Our payment to ShopKo for shared formulary fees.......... 0.2 0.2 0.1
Our purchase of pharmaceutical inventory from ShopKo..... 0.7 1.0 0.8
ShopKo payment to us for claims processing............... 0.2 1.6 1.6
</TABLE>
For a further description of recent transactions between ShopKo and us,
please see Note G of the Notes to the Consolidated Financial Statements
included elsewhere in this prospectus.
47
<PAGE>
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: (i) a Mutual
Settlement Agreement and Release of Specified Claims, whereby the parties
mutually agreed to release all claims associated with the employment
agreements; (ii) a Trademark License Agreement, whereby Mr. Morse and Dr. LeRoy
license the trademark "Mikalix" from us; (iii) a Sublease, whereby Mr. Morse
and Dr. LeRoy sublease certain office space from us; and (iv) 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."
48
<PAGE>
PRINCIPAL STOCKHOLDER
Prior to this offering, our only stockholder was ShopKo, whose address is
700 Pilgrim Way, Green Bay, Wisconsin 54304. As of the date of this prospectus,
ShopKo owns beneficially and of record shares of Common Stock,
representing all of the shares of Common Stock outstanding prior to this
offering. Upon the sale by us of the shares of Common Stock offered
hereby, ShopKo will own beneficially and of record % of the outstanding
Common Stock ( % if the underwriters' over-allotment option is exercised in
full).
The following table sets forth as of January 31, 1998 the number of
shares of ShopKo Common Stock owned by our director, by each of the Named
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.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial
Name of Beneficial Owner Ownership(1)(2) Percent
------------------------ ----------------- -------
<S> <C> <C>
Dale P. Kramer (3)(4).......................... 264,000 1.0%
Jeffrey C. Girard (5).......................... 1,000 *
Gregory H. Wolf................................ -- *
William J. Podany (4)(6)....................... 70,000 *
Jeffrey A. Jones (4)........................... 13,000 *
Glen C. Laschober.............................. -- *
Joseph A. Coffini.............................. 75 *
All directors and executive officers as a group
(9 persons)................................... [ ] [ ]%
</TABLE>
- --------
* Less than 1%
(1) Except as otherwise noted, the persons named in the above table have sole
voting and investment power with respect to all shares shown as
beneficially owned by them.
(2) Includes shares which may be acquired within 60 days pursuant to stock
options as follows: Mr. Kramer, 174,000 shares; Mr. Podany, 45,000 shares;
Mr. Jones, 13,000 shares; and all directors and executive officers as a
group, [ ] shares.
(3) Includes 50,000 shares of restricted stock granted pursuant to ShopKo's
1993 Restricted Stock Plan, as amended.
(4) The number of shares shown with respect to Messrs. Kramer, Podany and Jones
does not reflect funds from their respective profit sharing and 401(k)
plans invested in ShopKo Common Stock through the ShopKo Stock Fund. As of
January 31, 1998, such executive officers' approximate ShopKo Stock Fund
account balances were as follows: Mr. Kramer, $290,278; Mr. Podany,
$29,434; and Mr. Jones, $616.
(5) 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.
(6) Includes 25,000 shares of restricted stock granted pursuant to ShopKo's
1993 Restricted Stock Plan, as amended.
49
<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 million shares of Common
Stock, par value $.01 per share, and million shares of Preferred Stock,
par value $.01 per share. shares of Common Stock and no shares of
Preferred Stock are outstanding as of the date hereof. shares of Common
Stock are being offered in the offering ( shares if the underwriters'
over-allotment option is exercised in full), and 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. 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 or sinking fund provisions 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 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
50
<PAGE>
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 ("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 its 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.
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 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.
Certain of the provisions of the 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 (i) for any breach of their duty of loyalty to
us or our stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases or redemptions, as
provided in Section 174 or successor provisions of the DGCL or (iv) for any
transaction from which the director derived an improper personal benefit.
The Amended and Restated Bylaws provide that we shall indemnify its
directors, officers and employees to the fullest extend permitted by the DGCL
(except in some circumstances, with respect to suits
51
<PAGE>
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 its 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, it is anticipated that the Board
of Directors will adopt a rights plan (the "Rights Agreement") pursuant to
which one right (a "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 (the "Series B Preferred Stock"), 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
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 Right becomes exercisable, we were to be acquired through a
merger or other business combination transaction or 50% or more of its assets
or earning power were sold, each Right would permit the holder to purchase, for
the exercise price, common stock of the acquiring company having a market value
of twice the exercise price. 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 Common Stock having a market value of
twice the exercise price.
The Rights would expire ten years after the adoption of the Rights
Agreement, unless earlier redeemed by us in accordance with the terms of the
Rights Agreement. The purchase price payable and the shares of Series B
Preferred Stock issuable upon exercise of the Rights would be subject to
adjustment from time to time as specified in the Rights Agreement. In addition,
the Board of Directors would retain the authority to redeem (at $0.01 per
Right) and replace the Rights with new rights at any time, provided that no
such redemption could occur after a person or group acquires 15% or more of the
outstanding Common Stock.
Shares of Series B Preferred Stock, when issued upon exercise of the
Rights, will be nonredeemable and will rank junior to all series of any other
class of Preferred Stock. Each share of Series B Preferred Stock will be
entitled to a cumulative preferential quarterly dividend payment equal to the
greater of (1) $10 per share or (2) 1,000 times the dividend declared per share
of Common Stock. In the event of liquidation, the holders of shares of Series B
Preferred Stock will be entitled to a preferential liquidation payment equal to
the greater of (a) $1,000 per share or (b) 1,000 times the payment made per
share of Common Stock. Each share of Series B Preferred Stock will entitle the
holder to 1,000 votes, voting together with the Common Stock. Finally, in the
event of any merger, consolidation or other transaction in which Common Stock
is exchanged, each share of Series B Preferred Stock will be entitled to
receive 1,000 times the amount received per share of Common Stock. The
foregoing rights would be subject to antidilution adjustments. The number of
shares constituting the series of Series B Preferred Stock will be 100,000.
Transfer Agent
The transfer agent for the Common Stock is Norwest Shareholder Services.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The shares of Common Stock sold in this offering (
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" (each an "Affiliate") 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 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."
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 (i) 1% of the then outstanding
shares or (ii) 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
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 officers and directors and Shopko have agreed, subject to
certain exceptions, not to 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, 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 (ii) 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.
53
<PAGE>
UNDERWRITING
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 a purchase agreement (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.......................................................
======
</TABLE>
In the Purchase Agreement, the several underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the shares of
Common Stock being sold pursuant to such agreement if any of such shares are
purchased. Under certain circumstances, the commitments of non-defaulting
underwriters under the Purchase Agreement may be increased.
The representatives have advised us 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 be changed.
We have granted an option to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of
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 the 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 Common
Stock proportionate to such underwriter's initial amount reflected in the
foregoing table.
The following table shows the per share and total underwriting discounts
and commissions to be paid by us to the underwriters. 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 expense, to us....... $ $ $
</TABLE>
54
<PAGE>
The expenses of the offering (exclusive of the underwriting discount) are
estimated at $ and are payable entirely by us.
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.
We and our officers and directors and Shopko have agreed, subject to
certain exceptions, not to 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, 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 (ii) 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. See "Shares Eligible for
Future Sale."
Prior to the 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 will be prevailing market
conditions, 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.
We have applied to have our Common Stock approved for listing on the
Nasdaq National Market under the symbol "PVHS."
We and Shopko have agreed to indemnify the underwriters against certain
liabilities, including certain liabilities under the Securities Act, or to
contribute to payments the underwriters may be required to make in respect
thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission 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 the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.
If the underwriters create a short position in the Common Stock in
connection with the offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this prospectus, the representatives
may reduce that short position by purchasing 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.
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<PAGE>
The representatives may also impose a penalty bid on certain 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 as part of the offering.
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 the Common Stock.
Neither we 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 the Common Stock. In addition, neither
we nor any of the underwriters makes any representation that the
representatives will engage in such transactions or that such transactions,
once 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.
EXPERTS
The Consolidated Financial Statements of ProVantage, Inc. (the
predecessor of ProVantage Health Services, Inc.) and subsidiaries as of January
31, 1998 and February 1, 1997 and for each of the three years in the period
ended January 31, 1998 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.
AVAILABLE 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, reference is made 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. The registration statement and the
exhibits thereto may be inspected and copied at the public reference facilities
maintained by 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
56
<PAGE>
10048. Copies of such material can also be obtained at prescribed rates by
writing to the SEC's Public Reference Section at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Such information may also be accessed electronically by
means of the SEC's website on the Internet at http://www.sec.gov.
As a result of the offering, we will be subject to the requirements of
the Exchange Act and, in accordance therewith, will file reports, proxy
statements and other information with the SEC on a periodic basis. Such
reports, proxy statements and other information filed by us with the SEC can be
inspected and copied at the offices of the SEC, at the website listed above and
at the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
We intend to furnish its stockholders with annual reports containing
audited financial statements examined by its independent accountants for each
fiscal year.
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<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 31, 1998 and (unaudited) for the 39 weeks ended
November 1, 1997 and October 31, 1998.................................... F-2
Consolidated Balance Sheets at February 1, 1997, January 31, 1998 and
(unaudited) for the 39 weeks ended October 31, 1998...................... F-3
Consolidated Statements of Cash Flows for each of the three fiscal years
in the period ended January 31, 1998 and (unaudited) for the 39 weeks
ended November 1, 1997 and October 31, 1998.............................. F-4
Consolidated Statements of Stockholder's Equity for each of the three
years in the period ended January 31, 1998 and (unaudited) for the 39
weeks ended October 31, 1998............................................. F-5
Notes to Consolidated Financial Statements................................ F-6
</TABLE>
58
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
ProVantage, Inc.:
We have audited the consolidated balance sheets of ProVantage, Inc. and
subsidiaries (an indirect, wholly-owned subsidiary of ShopKo Stores, Inc.) as
of January 31, 1998 and February 1, 1997 and the related consolidated
statements of earnings, stockholder's equity and cash flows for each of the
three years in the period ended January 31, 1998. 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, Inc. and
subsidiaries as of January 31, 1998 and February 1, 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended January 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Milwaukee, Wisconsin
December 18, 1998
F-1
<PAGE>
PROVANTAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands)
<TABLE>
<CAPTION>
Three Quarters
Fiscal Year (52 weeks) Ended (39 weeks) Ended
--------------------------------------- --------------------------
Feb. 3, 1996 Feb. 1, 1997 Jan. 31, 1998 Nov. 1, 1997 Oct. 31, 1998
------------ ------------ ------------- ------------ -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales............... $87,155 $330,048 $500,891 $367,495 $474,396
Costs and expenses:
Cost of sales......... 78,250 306,760 463,069 341,586 441,317
Selling, general and
administrative
expenses............. 4,836 11,828 19,990 14,215 18,067
Depreciation and
amortization
expenses............. 1,170 2,233 4,779 3,215 4,933
------- -------- -------- -------- --------
84,256 320,821 487,838 359,016 464,317
Income from operations.. 2,899 9,227 13,053 8,479 10,079
Interest income......... 207 353 364 269 212
------- -------- -------- -------- --------
Earnings before income
taxes.................. 3,106 9,580 13,417 8,748 10,291
Provision for income
taxes.................. 1,553 4,164 5,883 3,884 4,512
------- -------- -------- -------- --------
Net earnings............ $ 1,553 $ 5,416 $ 7,534 $ 4,864 $ 5,779
======= ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
PROVANTAGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
February 1, 1997 January 31, 1998 October 31, 1998
---------------- ---------------- ----------------
(unaudited)
Assets
<S> <C> <C> <C>
Current assets:
Cash and cash
equivalents.............. $ 5,946 $ 12,533 $ 380
Receivables, less
allowance for losses of
$1,718, $976 and $1,816,
respectively............. 52,234 59,662 72,940
Pharmaceutical
inventories.............. 1,250 1,312 2,222
Other current assets...... 564 1,054 2,959
-------- -------- --------
Total current assets.... 59,994 74,561 78,501
Goodwill--net............... 56,375 67,926 65,555
Other assets--net........... 212 3,119 3,150
Property and equipment--
net........................ 2,412 9,431 13,320
-------- -------- --------
Total assets............ $118,993 $155,037 $160,526
======== ======== ========
<CAPTION>
Liabilities and
Stockholder's Equity
<S> <C> <C> <C>
Current liabilities:
Short-term debt........... $ -- $ 967 $ 954
Accounts payable trade.... 35,162 46,481 35,909
Accrued liabilities....... 20,579 11,633 9,638
-------- -------- --------
Total current
liabilities............ 55,741 59,081 46,501
Long-term obligations....... -- 913 --
Deferred income taxes....... 569 1,448 1,449
Minority interest........... -- 2,315 2,755
Stockholder's equity:
Common Stock; $.01 par
value 20,000,000 shares
authorized, 100 shares
outstanding.............. -- -- --
Additional paid-in
capital.................. 55,459 76,522 89,284
Retained earnings......... 7,224 14,758 20,537
-------- -------- --------
Total stockholder's
equity................. 62,683 91,280 109,821
-------- -------- --------
Total liabilities and
stockholder's equity... $118,993 $155,037 $160,526
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PROVANTAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year (52 weeks) Three Quarters
Ended (39 weeks) Ended
--------------------------- ------------------
Feb. 3, Feb. 1, Jan. 31, Nov. 1, Oct. 31,
1996 1997 1998 1997 1998
------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net earnings................. $ 1,553 $ 5,416 $ 7,534 $ 4,864 $ 5,779
Adjustments to reconcile net
earnings to net cash
provided by (used in)
operating activities:
Depreciation and
amortization............... 1,170 2,233 4,779 3,215 4,933
Provision for losses on
receivables................ 43 878 38 (289) 430
Deferred income taxes....... 253 63 305 -- 1
Change in assets and
liabilities excluding the
effect of business
acquisitions:
Receivables............... (3,678) (42,031) (6,314) (3,809) (13,268)
Pharmaceutical
inventories.............. (504) (746) (62) (279) (910)
Other current assets...... (226) (162) 151 198 (1,905)
Other assets.............. (395) (258) (1,500) (169) (480)
Accounts payable.......... 2,385 29,653 11,385 644 (10,572)
Accrued liabilities....... (1,234) 8,344 (4,330) (2,000) (1,052)
------- -------- -------- -------- --------
Net cash (used in)
provided by operating
activities............. (633) 3,390 11,986 2,375 (17,044)
Cash flows from investing
activities:
Payments for property and
equipment.................. (976) (2,057) (4,198) (3,617) (6,002)
Business acquisitions, net
of cash acquired........... -- (33,531) (22,390) (22,089) (943)
------- -------- -------- -------- --------
Net cash (used in)
investing activities... (976) (35,588) (26,588) (25,706) (6,945)
Cash flows from financing
activities:
Change in short-term debt... -- -- 967 -- (13)
Capital contribution........ 4,518 33,143 21,063 19,141 12,762
Reduction in debt........... -- -- (841) (1,754) (913)
------- -------- -------- -------- --------
Net cash provided by
financing activities... 4,518 33,143 21,189 17,387 11,836
Net (decrease) increase in
cash and cash equivalents... 2,909 945 6,587 (5,944) (12,153)
Cash and cash equivalents at
beginning of period......... 2,092 5,001 5,946 5,946 12,533
------- -------- -------- -------- --------
Cash and cash equivalents at
end of period............... $ 5,001 $ 5,946 $ 12,533 $ 2 $ 380
======= ======== ======== ======== ========
SUPPLEMENTAL CASH FLOW
INFORMATION
Supplemental cash flow
information:
Cash paid during the period
for:
Income taxes.............. $ 1,426 $ 4,044 $ 5,585 $ 3,884 $ 4,511
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 $ 22,089 $ 943
Notes payable issued........ -- -- 1,833 -- --
Liabilities assumed......... -- -- 4,030 1,002 --
------- -------- -------- -------- --------
Total fair value of
acquisitions........... -- $ 33,531 $ 28,253 $ 23,091 $ 943
======= ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PROVANTAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional
-------------- Paid-In Retained
Shares Amount Capital Earnings
------ ------- ---------- --------
<S> <C> <C> <C> <C>
Balances at February 4, 1995................ 100 $ -- $17,798 $ 255
Capital contribution........................ 4,518
Net earnings................................ 1,553
--- ------- ------- -------
Balances at February 3, 1996................ 100 -- 22,316 1,808
Capital contribution........................ 33,143
Net earnings................................ 5,416
--- ------- ------- -------
Balances at February 1, 1997................ 100 -- 55,459 7,224
Capital contribution........................ 21,063
Net earnings................................ 7,534
--- ------- ------- -------
Balances at January 31, 1998................ 100 -- 76,522 14,758
Capital contribution........................ 12,762
Net earnings (for the period ended)......... 5,779
--- ------- ------- -------
Balances at October 31, 1998................ 100 $ -- $89,284 $20,537
=== ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PROVANTAGE, 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,
Inc. and all its subsidiaries ("ProVantage" or the "Company"). 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, 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, estimates of time spent to provide service or other appropriate
bases. These allocations include services and expenses for general management,
information systems management, treasury, tax, financial audit, 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.
The 39 week data presented in the financial statements is unaudited but
in the opinion of management, includes all adjustments (which consist only of
normal recurring accruals) necessary for a fair presentation of the
consolidated financial position of the Company and its subsidiaries at November
1, 1997 and October 31, 1998 and the results of their operations and cash flows
for the periods then ended.
Revenues and Costs of Revenues:
ProVantage's net sales include (i) administrative and dispensing fees
plus ingredient 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; (iii) the sale of eyeglasses and contact
lenses and related administrative fees relating to vision benefit management
services; and (iv) contract and license fees for health information technology
and clinical support services. Cost of sales includes the amounts paid to
network 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.
F-6
<PAGE>
PROVANTAGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Receivables:
Receivables consist primarily of amounts collectible from (i) insurance
companies, third party administrators and self-funded medical plan sponsors for
medical claims and claim processing fees, (ii) pharmaceutical manufacturers and
third party formulary administrators for formulary fees and (iii) customers for
contract and license 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 1995, 1996 and 1997, $0.0 million, $1.4 million and $2.1 million
in software development costs were capitalized, respectively. Capitalized
software development costs amounted to $1.8 million and $3.8 million at and
February 1, 1997 and January 31, 1998, 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.
The components of property and equipment are (in thousands):
<TABLE>
<CAPTION>
February 1, January 31,
1997 1998
----------- -----------
<S> <C> <C>
Property and equipment at cost:
Software........................................ $1,098 $8,058
Equipment....................................... 2,268 3,670
Leasehold improvements.......................... 248 353
------ ------
3,614 12,081
Less accumulated depreciation and amortization.... 1,202 2,650
------ ------
Net property and equipment........................ $2,412 $9,431
====== ======
</TABLE>
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 $2.4 million and $5.7
million at February 1, 1997 and January 31, 1998, respectively.
F-7
<PAGE>
PROVANTAGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
31, 1998.
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 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.
F-8
<PAGE>
PROVANTAGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On February 26, 1995, ShopKo contributed the net assets of ProVantage
Mail Services, Inc. with a net book value of approximately $1.3 million, which
was recorded as a contribution of capital.
On August 2, 1996, ProVantage completed the acquisition of CareStream
Scrip Card from Avatex Corporation, formerly known as FoxMeyer Health
Corporation. CareStream Scrip Card is a prescription benefit management company
and its operations have been integrated with ProVantage. The purchase price was
$30.5 million in cash, with a supplemental 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. The right of Avatex to the supplemental cash payment expires
on August 2, 2001.
On August 20, 1997, ProVantage acquired The Mikalix Group, Inc. and its
subsidiaries ("Mikalix"), an international privately held group of companies
based in Arlington, Virginia. Mikalix's primary subsidiary is PharMark
Corporation ("PharMark"), a software and database development company providing
information driven strategies for optimizing medical and pharmaceutical
outcomes. The purchase price for Mikalix was approximately $15.2 million, of
which $14.2 million has been paid in cash and $1.0 million is due over two
years. The sellers of Mikalix may also be entitled to contingent payments of up
to $8.0 million in the aggregate based on future increases in the market value
of ProVantage's outstanding common stock (the "Contingent Payments"). The
Contingent Payments, if any, will be due on the first to occur of August 20,
2002 or certain liquidity events related to ProVantage. The Contingent Payments
may be made, at ShopKo'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 Company expects to finalize the
initial purchase price allocation during the fiscal year ending January 30,
1999.
The allocation of the purchase prices of Bravell, CareStream Scrip Card
and Mikalix 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
("goodwill") of approximately $73.6 million is being amortized on a straight-
line basis over 18 to 22 years. The results of Bravell's, CareStream Scrip
Card's and Mikalix's operations since the dates of acquisition have been
included in the consolidated statements of earnings of ProVantage.
C. Debt
ProVantage's short-term debt and long-term obligations consist of four
promissory notes due to the former owners of PharMark. The promissory notes,
which are due August 20, 1998 and August 20, 1999, bear interest at 6%.
D. Leases
ProVantage is obligated under operating leases, primarily for buildings
and computer hardware. Minimum future obligations under operating leases in
effect at January 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Lease
Year Obligations
---- -----------
<S> <C>
1998.................................. $840
1999.................................. 690
2000.................................. 420
2001.................................. 370
------
Total minimum obligations............. $2,320
======
</TABLE>
F-9
<PAGE>
PROVANTAGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total minimum rental expense related to all operating leases with terms
greater than one year was $0.2 million, $0.4 million and $0.9 million in fiscal
years 1995, 1996 and 1997, 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>
February 1, January 31,
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Goodwill......................................... $ 397 $ 1,795
Property and equipment........................... 290 --
Inventory valuation.............................. 193 202
----- -------
Total deferred tax liabilities................. 880 1,997
Deferred tax assets:
Property and equipment........................... -- (345)
Reserves and allowances.......................... (633) (1,106)
----- -------
Total deferred tax assets...................... (633) (1,451)
----- -------
Net deferred tax liabilities....................... $ 247 $ 546
===== =======
</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>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal............................................. $1,048 $3,294 $4,537
State............................................... 252 807 1,041
Deferred............................................ 253 63 305
------ ------ ------
Total provision................................... $1,553 $4,164 $5,883
====== ====== ======
</TABLE>
The effective tax rate varies from the statutory federal income tax rate
for the following reasons:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<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 5.0
Goodwill................................................. 10.0 3.5 3.6
Other.................................................... -- -- 0.2
---- ---- ----
Effective income tax rate................................ 50.0% 43.5% 43.8%
==== ==== ====
</TABLE>
F-10
<PAGE>
PROVANTAGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Provision is made for deferred income taxes and future income tax
benefits applicable to temporary differences between financial and tax
reporting. The sources of these differences and the effects of each are as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---- ----- ----
<S> <C> <C> <C>
Depreciation and amortization............................ $159 $ 569 $131
Reserves and allowances.................................. 94 (494) 166
Other.................................................... -- (12) 8
---- ----- ----
$253 $ 63 $305
==== ===== ====
</TABLE>
F. Employee Benefits
Substantially all employees of ProVantage are covered by a defined
contribution profit sharing plan. The plan provides for two types of Company
contributions: an amount determined annually by the Board of Directors and an
employer matching contribution equal to one-half of the first 6% of
compensation contributed by participating employees. ProVantage contributions
were $0.1 million for fiscal years 1995, 1996 and 1997.
G. 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 $0.2 million, $1.6 million and $1.6 million for fiscal years 1995,
1996 and 1997, respectively, and were included in ProVantage's sales.
Receivables include amounts due from ShopKo of $0.1 million at both February 1,
1997 and January 31, 1998, respectively.
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 $6.8 million, $21.0
million and $25.8 million for fiscal years 1995, 1996 and 1997, respectively,
and were included in ProVantage's cost of sales. Accounts payable include
amounts payable to ShopKo for claims of $1.5 million at February 1, 1997 and
$1.3 million at January 31, 1998, 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, $0.2 million and $0.1 million for
fiscal years 1995, 1996 and 1997, respectively, and were included in
ProVantage's cost of sales.
Purchases of inventory from ShopKo were $0.7 million, $1.0 million and
$0.8 million for fiscal years 1995, 1996 and 1997, respectively.
General, administrative and other expenses were allocated to ProVantage
from ShopKo. Allocations were made using procedures deemed appropriate to the
nature of the expenses involved. These allocations included amounts for general
management, tax, financial reporting, real estate management, accounting,
purchasing and other miscellaneous services. Amounts charged by ShopKo for
these services were $0.4 million, $0.4 million and $1.1 million for fiscal
years 1995, 1996 and 1997, respectively.
F-11
<PAGE>
PROVANTAGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
H. Major Customers
For fiscal 1995, one customer represented $11.9 million, or 13.6%, of net
sales, for fiscal year 1996, this customer represented $59.1 million, or 17.9%,
of net sales, and for fiscal year 1997, this customer represented $58.6
million, or 11.7%, of net sales.
I. Subsequent Events
ProVantage plans to file a registration statement with the Securities and
Exchange Commission under which a portion of its shares of common stock will be
sold.
F-12
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all
dealers that buy, sell or trade the Common Stock, 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.
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.............................................. $27,800
Nasdaq National Market listing fee................................ *
NASD filing fee................................................... 10,500
Blue Sky fees and expenses (including fees of counsel)............ *
Accounting fees and expenses...................................... *
Legal fees and expenses........................................... *
Printing and engraving expenses................................... *
Transfer Agent and Registrar fees................................. *
Miscellaneous..................................................... *
-------
Total......................................................... $ *
=======
</TABLE>
- --------
*To be completed by amendment.
All amounts except the SEC registration fee, Nasdaq National Market
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 Underwriting 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
Schedule II--Valuation and Qualifying Accounts
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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Milwaukee, State of
Wisconsin, on February 4, 1999.
Provantage Health Services, Inc.
/s/ Jeffrey A. Jones
By: _________________________________
Jeffrey A. Jones,
Executive Vice President
and Chief Operating Officer
Each person whose signature appears below hereby constitutes and appoints
Richard D. Schepp and Patricia Nussle, and each of them, his or her true and
lawful attorney-in-fact and agent, with full power of substitution, to sign on
his or her behalf individually and in the capacity stated below and to perform
any acts necessary to be done in order to file all amendments and post-
effective amendments to this Registration Statement (and to file any and all
registration statements relating to the same offering of securities as this
Registration Statement that are filed pursuant to Rule 462(b) of the Securities
Act), and any and all instruments or documents filed as part of or in
connection with this Registration Statement or the amendments thereto (or any
registration statement filed pursuant to Rule 462(b) of the Securities Act),
and each of the undersigned does hereby ratify and confirm all that said
attorney-in-fact and agent, or his substitutes, shall do or cause to be done by
virtue hereof.
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 February 4, 1999
____________________________________
Dale P. Kramer
/s/ Jeffrey A. Jones Executive Vice President and February 4, 1999
____________________________________ Chief Operating Officer
Jeffrey A. Jones (Principal Executive
Officer and Principal
Financial Officer)
/s/ Peter J. Beste Vice President and February 4, 1999
____________________________________ Controller (Principal
Peter J. Beste Accounting Officer)
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement*
3.1 Restated Certificate of Incorporation of the Registrant*
3.2 Amended and Restated Bylaws of the Registrant*
5.1 Opinion of Godfrey & Kahn, S.C.*
10.1 Administrative Services Agreement between the Registrant and
ShopKo Stores, Inc. dated as of , 1999*
10.2 Information Technology Services Agreement between the Registrant
and ShopKo Stores, Inc. dated as of , 1999*
10.3 Credit Agreement between the Registrant and ShopKo Stores, Inc.
dated as of , 1999*
10.4 Indemnification and Hold Harmless Agreement between the
Registrant and ShopKo Stores, Inc. dated as of ,
1999*
10.5 Registration Rights Agreement between the Registrant and
ProVantage Holdings, Inc. dated as of , 1999*
10.6 Tax Sharing Agreement between the Registrant and ShopKo Stores,
Inc. dated as of , 1999*
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 Agreement between ShopKo Stores, Inc.
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 First Amended and Restated Prescription
Benefit Management Agreement between ProVantage Prescription
Benefit Management, Inc. and American Medical Security, Inc.
dated as of *
10.10 Registrant's Stock Incentive Plan*
10.11 Prescription Benefit Management Agreement between the Registrant
and ShopKo Stores, Inc.*
10.12 System Agreement between Systems Xcellence USA, Inc. and the
Registrant*
11.1 Computation of Pro Forma Earnings Per Share*
16.1 Schedule II--Valuation and Qualifying Accounts
21.1 Subsidiaries of the Registrant
23.1 Consent and Report on Schedule of Deloitte & Touche LLP
23.2 Consent of Godfrey & Kahn, S.C. (contained in Exhibit 5.1)*
24.1 Powers of Attorney (included on signature page)
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
</TABLE>
- --------
*To be filed by amendment.
<PAGE>
EXHIBIT 16.1
ProVantage Health Services, Inc. and Subsidiaries
Schedule II-Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Balance Charged
at to costs Balance at
beginning and Deductions end of
Description of year expenses (Additions) year
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year (52 weeks) ended February 1, 1997--
Allowance for losses $ 40 $878 $(800)* $1,718
Year (52 weeks) ended January 31, 1998--
Allowance for losses $1,718 $ 38 $ 780 * $ 976
</TABLE>
*Net of charges to accounts other than bad debt expense.
<PAGE>
EXHIBIT 21.1
Subsidiaries of Registrant
PharMark Corporation--DE
PVHS, Inc.--DE
ProVantage Prescription Management Services, L.L.C.--WI
Bravell, Inc.--WI
ProVantage Mail Services, Inc.--MN
ProVantage Vision Management Services, Inc.--MN
ProVMed, L.L.C.--WI
euroPharMark Limited--U.K.
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Stockholder of
ProVantage Health Services, Inc.:
We consent to the use in this Registration Statement relating to Common Stock of
ProVantage Health Services, Inc. (formerly ProVantage, Inc.) on Form S-1 of our
report dated December 18, 1998, appearing in the Prospectus, which is a part of
this Registration Statement, and to the references to us under the headings
"Selected Historical Consolidated Financial Data" and "Experts" in such
Prospectus.
Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedule listed in Item 16(b). 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
February 3, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from ProVantage
Health Services, Inc. and is qualified in its entirety by reference to such
financial statements.</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR OTHER
<FISCAL-YEAR-END> JAN-31-1998 JAN-30-1999
<PERIOD-START> FEB-02-1997 FEB-01-1998
<PERIOD-END> JAN-31-1998 OCT-31-1998
<CASH> 12,533 380
<SECURITIES> 0 0
<RECEIVABLES> 60,638 74,756
<ALLOWANCES> 976 1,816
<INVENTORY> 1,312 2,222
<CURRENT-ASSETS> 74,561 78,501
<PP&E> 12,081 18,084
<DEPRECIATION> 2,650 4,764
<TOTAL-ASSETS> 155,037 160,526
<CURRENT-LIABILITIES> 59,081 46,501
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 91,280 109,821
<TOTAL-LIABILITY-AND-EQUITY> 155,037 160,526
<SALES> 500,891 474,396
<TOTAL-REVENUES> 500,891 474,396
<CGS> 463,069 441,317
<TOTAL-COSTS> 487,838 464,317
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (364) (212)
<INCOME-PRETAX> 13,417 10,291
<INCOME-TAX> 5,883 4,512
<INCOME-CONTINUING> 7,534 5,779
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,534 5,779
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<PAGE>
Exhibit 99.1
CONSENT OF DIRECTOR DESIGNEE
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.
/s/ Jeffrey C. Girard
---------------------------------------
Jeffrey C. Girard
<PAGE>
Exhibit 99.2
CONSENT OF DIRECTOR DESIGNEE
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.
/s/ William J. Podany
---------------------------------------
William J. Podany
<PAGE>
Exhibit 99.3
CONSENT OF DIRECTOR DESIGNEE
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.
/s/ Gregory H. Wolf
--------------------
Gregory H. Wolf
