<PAGE>
As filed with the Securities and Exchange Commission on June 24, 1999
Registration No. 333-71743
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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ProVantage Health Services, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware 8099 54-1508848
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Identification No.)
organization) Classification Code
Number)
13555 Bishops Court, Suite 201
Brookfield, Wisconsin 53005
(414) 784-4600
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
--------------
Jeffrey A. Jones
President and Chief Executive Officer
ProVantage Health Services, Inc.
13555 Bishops Court, Suite 201
Brookfield, Wisconsin 53005
(414) 784-4600
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Copies to:
Randall J. Erickson Donald J. Murray
Godfrey & Kahn, S.C. Dewey Ballantine LLP
780 N. Water Street 1301 Avenue of the Americas
Milwaukee, Wisconsin 53202 New York, New York 10019
(414) 273-3500 (212) 259-8000
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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. [_]
--------------
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 June 24, 1999
Prospectus
5,300,000 Shares
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 $16.00 and
$18.00 per share. Currently, no public market exists for the common stock. The
common stock has been approved for listing on the New York Stock Exchange under
the symbol "PHS," subject to official notice of issuance.
Prior to this offering, ShopKo Stores, Inc., our parent company, owned all
of the common stock. Following this offering, ShopKo will beneficially own
70.3% of the common stock and will continue to control ProVantage.
Investing in the common stock involves risks which are described in the
"Risk Factors" section beginning on page 7.
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<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price.................................... $ $
Underwriting Discount.................................... $ $
Proceeds, before expenses, to ProVantage................. $ $
</TABLE>
The underwriters may also purchase from ShopKo up to an additional 795,000
shares of common stock at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus to cover over-
allotments. We will not receive any proceeds from the sale of the additional
shares by ShopKo.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
-----------
Merrill Lynch & Co.
Bear, Stearns & Co. Inc.
William Blair & Company
Lehman Brothers
-----------
The date of this prospectus is , 1999.
<PAGE>
ProVantage(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.
2
<PAGE>
Health Benefit Management
Patients Health Plan
Sponsors
Information Quality Care Reduced Fees
Costs
[LOGO OF PROVANTAGE]
Information Reimbursement Information Market Share
Rebates
Pharmacies Pharmaceutical
Manufacturers
[LOGO OF PROVANTAGE]
The integration of two interlocking rings symbolizes ProVantage's
differentiation in the healthcare industry...one ring represents Health
Benefit Management, the other represents Health Information Technology. The
intersection illustrates our ability to integrate medical diagnosis and medical
claims information with pharmaceutical data and then analyze it with our 7,800
rules. Our products are designed to optimize the quality and minimize the cost
of healthcare services.
<TABLE>
<CAPTION>
Health Benefit Management Clinical Services
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<S> <C> <C>
INDUSTRY . Increased pharmaceutical utilization . Need for clinical programs to:
TRENDS . Significant hospital costs induced - Combat rising healthcare costs
by inappropriate drug therapies - Improve patient treatments
. Payors struggling to control costs
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PROVANTAGE . Prescription and Vision Benefit . Advanced Therapeutic Intervention
PRODUCTS Management . Drug Utilization Review
. National Pharmacy and Optical Retail . Disease Management Programs:
Networks - Clinically based
. Mail Order Pharmacy - Quantitatively measured
. Formulary Management
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PROVANTAGE . Self-insured Employers . Self-insured Employers
MARKETS . Insurance Companies . Insurance Companies
. HMOs . HMOs
. Third-Party Administrators . Third-Party Administrators
. State Governments and Agencies . State and Federal Governments and Agencies
- ---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Health Information Technology
Sales & Plan Member & Pharmacy, Medical,
Design Data Provider Data & Laboratory Data
Data Warehouse
ProVantage Products
ProVMed ProVQuery
ProVCOR RationalMed
pager voice mail
e-mail internet
mail fax
Clients
<TABLE>
<CAPTION>
Decision Support Healthcare Outcomes Research
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<S> <C> <C>
INDUSTRY . Need for integrated clinical information . Need for integrated clinical information
TRENDS . Growing importance of accurately . Importance of patient confidentiality
measured healthcare outcomes . Need to determine appropriate drug therapies
- ---------------------------------------------------------------------------------------------------------
PROVANTAGE . Internet-accessible decision support . Healthcare outcomes assessment software
PRODUCTS based on our database: providing access to healthcare database with
. One of the largest integrated healthcare medical and drug data for 13 million people
information data warehouses of its kind
. Healthcare outcomes measurement tools
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PROVANTAGE . Pharmaceutical Manufacturers . Health Care Providers
MARKETS . Self-insured Employers . State and Federal Governments and Agencies
. Insurance Companies . Pharmaceutical Manufacturers
. HMOs
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</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 7
Forward-Looking Statements............................................... 16
The Reorganization....................................................... 17
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Historical Consolidated Financial Data.......................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 31
Management............................................................... 46
Relationship With ShopKo................................................. 54
Certain Transactions..................................................... 56
Principal and Selling Stockholder........................................ 58
Description of Capital Stock............................................. 59
Shares Eligible for Future Sale.......................................... 62
Underwriting............................................................. 64
Legal Matters............................................................ 67
Experts.................................................................. 67
Where You Can Find More Information...................................... 67
Index To Consolidated Financial Statements............................... 68
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
3
<PAGE>
PROSPECTUS SUMMARY
Unless otherwise indicated, information in this prospectus:
<TABLE>
<C> <S>
. assumes no exercise of the underwriters' option to purchase from ShopKo
up to 795,000 additional shares of common stock to cover over-
allotments, if any, and
. gives effect to a corporate reorganization of ProVantage which will be
completed prior to completion of the offering. See "The Reorganization."
</TABLE>
ProVantage uses the same fiscal year as ShopKo. ProVantages' fiscal year
conforms to the National Retail Federation calendar and ends on the Saturday
closest to the end of January. ProVantage has adopted a convention of referring
to a fiscal year by the year in which the fiscal year begins. For example, the
fiscal year which began on February 1, 1998 and ended on January 30, 1999 is
referred to as "fiscal 1998." Unless the context requires otherwise, all
references to "ProVantage," "we" or "our" refers to ProVantage Health Services,
Inc. and its subsidiaries. ShopKo holds its ProVantage common stock indirectly
through a wholly-owned subsidiary. All references to "ShopKo" in this
prospectus include this wholly-owned subsidiary.
Our Company
We are a leading health benefit management company providing pharmacy
benefit management and health information technology products and services to
our customers. Our goal is to be the leading third-party supplier of products
and services designed to optimize the quality and minimize the cost of
healthcare services. As of January 1999, we provided services to over 3,500
customers, including pharmacy benefit management services covering
approximately 4.5 million individuals and vision benefit management services
covering approximately 500,000 individuals. In addition, our licensed products,
which are designed to improve the quality of healthcare, are being used by our
clients in programs covering over 13 million people. Our customers include
healthcare payors, self-funded employers, third party health plan
administrators, state and federal agencies and pharmaceutical manufacturers.
Pharmacy benefit management companies address the pressing need of health
plan sponsors to manage costs and to better understand the effect of
pharmaceutical utilization on their membership. Our traditional pharmacy
benefit management products and services include plan design, administration of
a network of over 50,000 retail pharmacies, electronic point-of-sale claims
processing, mail pharmacy services, formulary administration/management,
physician profiling and clinical services. In addition, our products go beyond
commonly available pharmacy benefit management offerings to include clinical
services and information-based products which are used to track medical
treatment and results. These services give our customers the ability to assess
the safety and effectiveness of healthcare practices and to identify the most
effective treatments, potentially lowering overall costs.
Our Industry
Prescription drug costs represent the fastest growing component of
healthcare costs according to an industry publication. Pharmaceutical sales in
the United States are expected to increase at a compound annual growth rate of
14.5% and to reach approximately $173 billion in the year 2002. The major
factors contributing to this trend include:
. a substantial increase in the number of major new product launches due to
a shorter FDA approval cycle,
. premium prices for new or branded products,
. increased expenditures for new drug development,
. an aging population, and
. increased demand driven by direct-to-consumer advertising.
4
<PAGE>
Health benefit providers, such as insurance companies, HMOs and self-
funded employers, are searching for ways to better understand and control their
drug costs. Pharmacy benefit management companies help health benefit providers
provide a cost effective drug benefit and better understand the impact of
pharmaceutical use.
Our Strategy
Our goal is to be the leading third-party supplier of products and
services designed to optimize the quality and minimize the cost of healthcare
services. To accomplish this goal, we intend to:
. continue to grow our pharmacy benefit management operations and expand
our client base by increasing the number of people to whom we provide
services,
. leverage our information-based clinical expertise to develop and enhance
products and services that help manage healthcare treatment and results,
and
. selectively pursue acquisitions or alliances through which we can
realize additional scale benefits in our pharmacy benefit management
offerings or augment our advanced clinical and health information
technology capabilities.
Our Address
Our principal executive offices are located at 13555 Bishops Court, Suite
201, Brookfield, Wisconsin 53005. Our telephone number is (414) 784-4600, and
our web site is www.provantageinc.com.
The Offering
<TABLE>
<S> <C>
Common stock being offered....... 5,300,000 shares
Common stock outstanding after
the offering.................... 17,850,000 shares, excluding approximately 650,000
shares subject to options to be granted as of the
closing of the offering under our stock incentive
plan at an exercise price equal to the offering
price.
Use of Proceeds.................. We will retain $20 million of the net proceeds of
the offering. We intend to use these net proceeds
for working capital, capital expenditures, and other
general corporate purposes. The balance of the net
proceeds of the offering will be paid to ShopKo as
payment on a demand promissory note held by ShopKo
in the principal amount of $115 million. This note
will be issued prior to the offering as a dividend
to return a portion of ShopKo's equity investment in
ProVantage. Any balance remaining on the note will
be contributed to ProVantage by ShopKo as a capital
contribution. In this case that means that ShopKo
will forgive the debt represented by the balance of
the note without receiving any common stock or other
consideration in return. We will not receive any
proceeds from the exercise of the underwriters'
over-allotment option.
New York Stock Exchange Symbol... PHS
Control by ShopKo................ ProVantage is currently a wholly-owned subsidiary of
ShopKo. After the offering, ShopKo will beneficially
own approximately 70.3% of the common stock and will
continue to control the business and affairs of
ProVantage. If the underwriters' over-allotment
option is exercised in full, ShopKo will
beneficially own approximately 65.9% of the common
stock.
</TABLE>
5
<PAGE>
Summary Historical Consolidated Financial Data
For all periods presented below, ProVantage was a wholly-owned subsidiary
of ShopKo. See Note A of the Notes to Consolidated Financial Statements. The
statement of earnings data for the years ended February 1, 1997 and January 31,
1998 are restated. See Note K of the Notes to Consolidated Financial
Statements.
The pro forma basic net earnings per share of common stock are computed
by dividing net earnings by 16,244,118 shares of common stock. This number
represents the 12,550,000 shares of common stock outstanding after the
reorganization plus that number of shares of common stock that must be sold by
ProVantage at an assumed price of $17.00 per share to generate proceeds
sufficient to repay a $62.8 million portion of the demand promissory note to be
issued to ShopKo. See "Use of Proceeds."
The pro forma balance sheet data gives pro forma effect to the corporate
reorganization of ProVantage which will be completed prior to the completion of
the offering. The pro forma balance sheet data also gives effect to a stock
split effected through a stock dividend, converting the existing 10,100 shares
of outstanding common stock into 12,550,000 shares of common stock. In
addition, the pro forma balance sheet data includes the portion of the demand
promissory note which is to be paid to ShopKo and which is estimated to be
$62.8 million. See "Dividend Policy." The pro forma as adjusted balance sheet
data gives effect to the sale of the shares of common stock, the application of
the proceeds as described in "Use of Proceeds" and the contribution of the
unpaid balance on the demand promissory note to ProVantage as a capital
contribution.
<TABLE>
<CAPTION>
Quarter
Fiscal Years (52 Weeks) Ended (13 Weeks) Ended
------------------------------------------ -----------------
Feb. 4, Feb. 3, Feb. 1, Jan. 31, Jan. 30, May 2, May 1,
1995 1996 1997 1998 1999 1998 1999
------- ------- -------- -------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Earnings
Data:
Net sales............... $4,518 $81,158 $313,390 $486,121 $643,260 $145,773 $214,949
Costs and expenses:
Cost of sales.......... 3,760 72,253 290,477 448,865 595,414 135,370 201,181
Selling, general and
administrative
expenses.............. 214 4,836 12,633 19,990 24,910 5,778 7,778
Depreciation and
amortization
expenses.............. 69 1,170 2,282 4,857 6,776 1,400 2,061
------ ------- -------- -------- -------- -------- --------
4,043 78,259 305,392 473,712 627,100 142,548 211,020
Income from operations.. 475 2,899 7,998 12,409 16,160 3,225 3,929
Interest income......... -- 207 282 293 543 15 174
------ ------- -------- -------- -------- -------- --------
Earnings before income
taxes.................. 475 3,106 8,280 12,702 16,703 3,240 4,103
Provision for income
taxes.................. 220 1,553 3,640 5,581 7,221 1,428 1,750
------ ------- -------- -------- -------- -------- --------
Net earnings............ $ 255 $ 1,553 $ 4,640 $ 7,121 $ 9,482 $ 1,812 $ 2,353
Basic net earnings per
share of common stock
....................... $ 0.02 $ 0.12 $ 0.37 $ 0.57 $ 0.76 $ 0.14 $ 0.19
Average number of shares
outstanding............ 12,550 12,550 12,550 12,550 12,550 12,550 12,550
Pro forma basic net
earnings per share of
common stock........... $ 0.58 $ 0.14
Pro forma average shares
outstanding............ 16,244 16,244
Supplemental Data:
Pharmacy network claims
processed.............. 265 3,667 16,097 24,744 28,809 6,722 8,827
Mail pharmacy
prescriptions filled... -- 126 264 454 715 153 244
</TABLE>
<TABLE>
<CAPTION>
May 1, 1999
--------------------------------
Pro Forma As
Actual Pro Forma Adjusted
-------- --------- ------------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash............................................ $ 2 $ 2 $ 20,002
Working capital................................. 27,928 (34,872) 47,928
Total assets.................................... 185,351 185,351 205,351
Total debt...................................... 982 63,782 982
Total liabilities............................... 77,347 140,147 77,347
Stockholder's equity............................ 108,004 45,204 128,004
</TABLE>
6
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors before deciding
to purchase shares of our common stock. We have separated the risks into three
categories:
.business risks inherent in our operations and our industry,
.risks relating to ProVantage's relationship with ShopKo, and
.risks relating to the offering of common stock.
Business Risks
If we cannot respond adequately to competition in our industry, then our
profitability could be reduced
We compete in the health benefit management and health information
technology businesses. These businesses are very competitive. This competitive
environment subjects us to the risk of reduced profitability. Our competitors
include companies which are or are owned by large, profitable and well-
established companies with substantially greater purchasing power and
financial, marketing and other resources than we have. For example, Merck-Medco
Managed Care, LLC is owned by a large pharmaceutical manufacturer. PCS Health
Systems, Inc. is owned by a national drug store chain. A large insurance
company is a major investor in Express Scripts, Inc. We may also experience
competition from other sources in the future, such as Internet-based drug
stores. Furthermore, both businesses are subject to consolidation pressures,
meaning that they are or may be dominated by a few large companies with
significant resources. The health benefit management business is relatively
consolidated, and additional consolidation is likely. Consolidation is leading
to increased competition among a smaller number of large companies.
Over the last several years, the competitive pressures described above
have caused health benefit management companies, including us, to reduce the
prices charged to clients for core services. Additionally, competitive
pressures have caused us and other health benefit management companies to share
with their clients a greater portion of formulary concessions, which are
payments received from pharmaceutical manufacturers. Most of our net earnings
are derived from administrative fees and the portion of formulary concessions
which we retain. Our formulary concessions retained in fiscal 1998 were $13.9
million. If formulary concessions decline because of reductions or eliminations
of concessions by pharmaceutical manufacturers or because of increased sharing
of concessions with our clients, then ProVantage's earnings could be
significantly and negatively impacted.
While our addition of higher-margin clinical services and information
technology products has offset in large part the effects of price reductions
and increased formulary concession sharing, our gross margin--that is, the
difference between revenues and the cost of services--could be materially and
adversely affected by these competitive pressures. Our gross margins may also
decline as we implement our business strategy of marketing to larger clients,
which typically have greater bargaining power than our traditional clients, and
may require us to sell our services for less than they are currently sold.
If we lose a significant number of short-term contracts with our clients, then
our business could be adversely affected
We and the other companies in our industry typically do not have long-
term contracts with our clients, our network pharmacies or our pharmaceutical
manufacturers. Loss of contracts with a significant number of our clients or
network pharmacies could adversely affect our financial condition. Consistent
with industry practice, many of these contracts are terminable by either party
on relatively short notice. Others are renewable annually on a year-to-year
basis, unless the other party gives notice to us of its intention not to renew
the contract.
We also have contracts, typically with terms of one or two years, with
pharmaceutical manufacturers entitling us to certain formulary concessions.
These arrangements are often terminable by either party on relatively short
notice. If several of these contracts are terminated or materially altered, our
business could be materially adversely affected.
7
<PAGE>
If the market fails to accept our health information technology products, then
our financial results could suffer
We have recently added and continue to develop health information
technology products and services. However, to date these products and services,
such as ProVQuery, ProVMed and ProVCor, have achieved only limited market
acceptance. If these products and services fail to achieve market acceptance,
then our financial results could suffer. We have committed in the past, and
intend to commit in the future, substantial financial and management resources
to developing and marketing these products and services. We are relying on our
health information technology products and services to play a significant role
in our growth strategy. In particular, our strategy involves using our health
information technology products and services to distinguish our pharmacy
benefit management services from those of our competitors. Our products and
services may fail to achieve market acceptance or to differentiate our overall
product and service offering from our competitors' product and service
offerings in a way that is important to our current and potential customers and
for which they are willing to pay. The market may fail to accept our new
products and services due to the customer's assessment of their cost relative
to the benefit received. In addition, the health information technology
business is experiencing rapid technological change, which could render our
products or services obsolete. Our products and services may also fail to
achieve market acceptance due to errors and defects, especially when first
introduced or introduced as new versions. If so, our strategy to compete on the
basis of these products would be adversely affected. If we decide to
discontinue a product because it is not well received in the market or for
other reasons, we may need to write-off any investment we may have in the
product, which could adversely affect our financial results.
If our business continues to grow rapidly and we are unable to manage this
growth, then our business, operating results and financial condition could
suffer
Our business has grown rapidly in the last three fiscal years, with total
revenues increasing from approximately $81.2 million in fiscal 1995 to
approximately $643.3 million in fiscal 1998. We intend to pursue a strategy of
aggressive growth. If we are unable to manage future expansion successfully or
unable to hire and retain the personnel needed to manage our business
successfully, then our business, operating results and financial condition
would be materially and adversely affected. Recent growth has placed, and if
such growth continues will increasingly place, a significant strain on our
management and operations. Specifically, we will need to invest in new
information systems and additional personnel to service a larger customer base.
Also, our senior management team is significantly involved in our marketing
efforts which leaves less time for necessary administrative duties.
Accordingly, our future operating results will depend in part on the
availability of necessary capital and the ability of our officers and other key
employees to continue implementing and improving our operations, customer
support and financial control systems and to effectively expand, train and
manage our employee base.
If we are unable to overcome the potential problems and inherent risks related
to our acquisition and alliance strategy, then our business, operating results,
financial condition and future growth prospects could suffer
We have completed several acquisitions and plan to acquire complementary
products, technologies or businesses and to enter into strategic alliances.
Acquisitions and alliances are subject to potential problems and inherent
risks. If we cannot overcome these potential problems and risks, then our
business, operating results and financial condition could suffer or we may not
be able to carry out our acquisition and alliance strategy which could have a
material adverse effect on our future growth prospects. We have encountered
problems in some of our acquisitions. At the time we acquired CareStream
ScripCard in 1996, a significant number of its customers were not satisfied
with their prior services. This resulted in customer attrition and required us
to expend substantially more resources retaining customers than we had
initially expected. Also, the short-term nature of the contracts in our
industry means that when we acquire a company, there can be no assurance that
we will retain those customers for any significant period of time. In addition,
our experiences with prior acquisitions lead us to believe that the following
factors are also material risks to our acquisition and alliance strategy:
<TABLE>
<C> <S>
difficulties in identifying, financing and completing viable
. acquisitions or alliances,
</TABLE>
8
<PAGE>
<TABLE>
<C> <S>
. difficulties in integrating the acquired company, retaining the
acquired company's customers and achieving the expected benefits,
. the diversion of our management's attention from current operations,
. lack of experience in new products or markets,
. the loss of key employees of the acquired company,
. the assumption of undisclosed liabilities,
. potential dilution of current stockholders, and
. the amortization or accelerated write-off of expenses related to
goodwill and intangible assets which could reduce earnings.
</TABLE>
These risks associated with acquisitions and alliances could have a
material adverse effect on us.
If we lose contracts with one or more of our significant customers, then our
business and results of operations will be materially adversely affected
We rely on a small number of customers to produce a disproportionate
amount of our revenues. The expiration or termination of our contracts with
one or more significant customers would have a material adverse effect on our
business and results of operations. Our ten largest customers accounted for
approximately 45.1% of our revenues in fiscal 1996, 38.2% of our revenues in
fiscal 1997, 36.5% of our revenues in fiscal 1998 and 39.9% of our revenues in
the first quarter of fiscal 1999. In addition, one of those ten customers,
American Medical Security, Inc., accounted for approximately 18.9% of our
revenues in fiscal 1996, 12.1% of our revenues in fiscal 1997, 11.8% of our
revenues in fiscal 1998 and 10.7% of our revenues in the first quarter of
fiscal 1999. Our contract with American Medical Security, Inc. terminates on
July 1, 2000. American Medical Security has requested that we and other
interested parties submit bids to assume the business after our contract
expires. We generally do not have long-term contracts with our customers. In
most cases, our contracts automatically renew at the end of the initial term
on a one-year basis, unless the customer gives notice to us of its intention
not to renew the contract. In other cases, customers may terminate contracts
with us at any time for any reason. Additionally, many participants in the
healthcare industry, including our customers, are under severe financial
pressures due to rising claims and costs. An adverse change in the financial
condition of any of our significant customers, including an adverse change as
a result of a change in governmental or private reimbursement programs, could
have a material adverse effect on us.
If government regulations are interpreted and enforced in a manner adverse to
our business, then we may be subject to enforcement actions and material
limitations on our business operations
The healthcare industry is subject to extensive laws and regulations. We
and other companies in our industry are subject to the interpretation and
enforcement of these laws and regulations. Because the interpretation and
enforcement of these regulations is uncertain, our compliance efforts may be
inadequate, which may subject us to enforcement actions and materially limit
our business operations. Compliance with such laws and regulations imposes
significant operational requirements on us. The regulatory requirements we
must comply with in conducting our business vary from state to state, and are
not always clear as to meaning or consistently enforced. Although we believe
that we substantially comply with all existing statutes and regulations
material to the operation of our business, regulatory authorities may disagree
and take enforcement or other actions against us. These actions may result in
fines or other penalties, or suspend, restrict or preclude us from engaging in
certain business practices in the relevant jurisdiction. In addition, we
cannot predict the impact of future legislation and regulatory changes on our
business or assure you that we will be able to obtain or maintain the
regulatory approvals required to operate our business. For example, formulary
concessions, discounts and rebates are currently a topic of discussion and
debate in federal and state legislatures. Changes in existing laws or
regulations, changes in interpretations of laws or regulations, or adoption of
new laws or
9
<PAGE>
regulations relating to these discounts, rebates and concessions may have
adverse effects on our ability to generate formulary concessions in the future.
If there are changes in the financing and reimbursement practices in the
healthcare industry, then acceptance of our products may be delayed or
prevented
We have designed our services and products to compete within the current
payment and reimbursement structure of the U.S. healthcare system. However,
changing political, economic and regulatory influences may affect healthcare
financing and reimbursement practices. We and other companies in our industry
could be adversely affected by changes in the financing and reimbursement
practices in the healthcare industry. If the current healthcare financing and
reimbursement system changes significantly, then our products and services
could be less competitive. As a result, we could be materially and adversely
affected. Congress is currently considering proposals to reform the U.S.
healthcare system, such as the proposal to overhaul Medicare. These proposals
may increase governmental involvement in healthcare and pharmacy benefit
management services and otherwise change the way our customers do business.
Healthcare organizations may react to these proposals and the uncertainty
surrounding such proposals by cutting back or delaying investments in the
healthcare cost control tools and related technology which we provide. We
cannot predict what effect, if any, these proposals might have on our business,
operating results and financial condition. Other legislative or market-driven
reforms that we cannot anticipate could affect our business, operating results
and financial condition in unpredictable ways.
If regulatory initiatives restrict our ability to use confidential patient
medical information, then our health information technology products and
services and our business growth strategy based on these products and services
could be adversely affected
Most of our activities involve the receipt or use by us of confidential
patient medical information which our customers provide to us. Our inability to
use patient medical information could render our health information technology
products and services, and our business growth strategy based on these products
and services, obsolete. Federal and state legislation has been proposed to
restrict the use and disclosure of confidential medical information. To our
knowledge, no legislation has been enacted that adversely impacts our ability
to provide our current services. Even if such legislation is not enacted,
however, individual customers could prohibit us from including their patients'
medical information in our various databases of medical data, or from using
such information in providing services to our other customers.
If our quarterly operating results fluctuate significantly, then the price of
our common stock may be volatile
Our operating results have in the past and are likely in the future to
vary significantly from quarter to quarter. Fluctuations in our results make it
harder to identify and understand trends in our business and may lead to
volatility in our stock price. For example, in August 1996 we acquired
CareStream ScripCard, which was a significant factor in causing our revenues to
increase by over 50% for the full fiscal quarter after the acquisition compared
to the fiscal quarter in which the acquisition occurred. In addition, our
experience over the last several years leads us to believe that the following
factors are also material risks which could cause our quarterly operating
results to fluctuate significantly:
. the expiration or termination of contracts with significant
customers,
. the size and timing of new contracts and product orders, whether
through acquisitions or otherwise,
. the number of covered lives in our customers' benefit plans,
. the timing of new service and product announcements,
. changes in our pricing policies or in our competitors' pricing
policies,
10
<PAGE>
. market acceptance of our services and new products, such as ProVMed,
ProVCor and ProVQuery,
. the length of our sales cycles,
. the timing of revenue recognition from the sale of our services and
products,
. the impairment or obsolescence of our products or other assets due to
. changes in operating expenses,
. personnel changes, and
. conditions in the healthcare industry and the economy generally.
Our revenues are not predictable with any significant degree of certainty
because of these factors and because the market for our services and products
is rapidly evolving. Based upon the factors listed above, we believe that our
quarterly revenues, expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of our operating
results are not necessarily meaningful and that, in any event, such comparisons
should not be relied upon as indications of our future performance.
Furthermore, it is possible that in some future quarters, our operating results
will fall below our expectations or the expectations of market analysts and
investors. If we do not meet these expectations, the price of the common stock
may decline significantly.
The period of time required to sell our products and services to a new
customer can be up to a year or more. Our long sales cycle adds to the
unpredictability of our revenues, which could cause substantial volatility in
the price of the common stock. Our sales cycle varies substantially from
customer to customer because of a number of factors over which we have little
or no control. These factors include our customers' budgetary constraints, the
timing of budget cycles, changes in our customers' budgetary or purchasing
priorities, concerns about the introduction of new or updated services and
products by us or our competitors and potential downturns in general economic
conditions, which may be associated with reductions in demand for health
management information systems.
If we become subject to liability claims which are not covered by our insurance
policies, then we may be liable for damages and other expenses which could have
a material adverse effect on our business, operating results and financial
condition
Various aspects of our business, including the dispensing of
pharmaceutical products, performing drug utilization review and providing
information to physicians about drug therapy, which we refer to as our
therapeutic intervention services, entail a risk of litigation and liability
relating to product and professional liability claims. A successful product or
professional liability claim not covered by our insurance policies or in excess
of our insurance coverage could have a material adverse effect upon our
business, operating results and financial condition. We cannot assure you that
we will be able to maintain appropriate types or levels of insurance in the
future, that adequate replacement policies will be available on acceptable
terms, or that insurance will cover all claims against us. Our software
products are also internally complex and may contain errors or defects,
especially when first introduced or when new versions are released. Errors in
products or versions could result in liability claims, which could adversely
affect our business, operating results and financial condition.
If we lose key employees on whom we depend, in particular Jeffrey A. Jones,
then our business could be adversely affected
Our future performance will depend, in part, upon the efforts and
abilities of our key management, sales, marketing and technical personnel, in
particular Jeffrey A. Jones, our chief executive officer. We do not
11
<PAGE>
have employment agreements with any of our executive officers, and so they are
not contractually obligated to continue to work for us. If we cannot attract,
motivate and retain key personnel, our business could be materially and
adversely affected.
If the heathcare industry continues to consolidate, then we may lose existing
and potential customers and our bargaining power
Consolidation in the healthcare industry may cause us to lose existing
and potential customers and suffer a reduction in our bargaining power. Over
the past several years, the overall number of insurance companies, health
maintenance organizations, managed care companies and other clients and
potential clients of ours has decreased as a result of mergers, acquisitions
and similar transactions. Our customers have been and may continue to be
subject to these consolidation pressures. We may lose existing and potential
customers due to consolidation in the healthcare industry. Consolidation could
also create larger customers capable of exerting greater bargaining power than
our traditional clients. As we implement our business strategy of marketing to
these larger customers in response to this consolidation and other competitive
pressures, the prices we are able to charge for our products and services may
decline. The loss of existing and potential customers and/or price declines due
to consolidation could have a material adverse effect on us.
If our intellectual property is inadequately protected or subject to claims
that it infringes on another person's intellectual property, then we may be
unable to prevent others from using our intellectual property or we may be
required to enter into expensive royalty arrangements or become subject to
costly litigation
We have no patents or registered copyrights. We rely primarily on a
combination of statutory and common law copyright, trademark and trade secret
laws, customer licensing agreements, nondisclosure agreements and other methods
to protect our intellectual property rights. These laws and contractual
provisions may not provide effective protection of our rights, which could
subject us to the risks of costly litigation and loss of our rights and have a
material adverse effect on our business. We and other companies which need to
develop or purchase intellectual property are subject to these kinds of risks.
Another person may copy or otherwise obtain and use our technology without
authorization or develop similar technology independently. If other people or
companies copy our products without our permission or misuse our products, then
our business, results of operations and financial condition could be materially
adversely affected. Furthermore, another person may claim that our technology
infringes on their rights. As the number of software products made by our
competitors and offered to our target market increases, software developers
like us may become increasingly subject to infringement claims. Any such
claims, whether with or without merit, can be time consuming and expensive to
defend. If another person successfully asserts infringement claims against us,
then we may need to enter into royalty arrangements, which could reduce
profitability, or become subject to litigation which could have a material
adverse effect on us.
If we do not adequately address Year 2000 issues, then our business may be
adversely affected
Our state of readiness for Year 2000. Many currently installed computer
systems and software products accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish years after 1999 from years before 1999. As a result, computer
systems that cannot accept four-digit entries in the date field as of January
1, 2000 may not function properly. We have designed our products to be capable
of handling four digit dates, and therefore we believe that the direct impact
of the Year 2000 problem on our products will not be significant. We have
initiated a comprehensive project designed to eliminate or minimize any
business disruption associated with potential Year 2000 date processing
problems in our systems. We have completed the first three phases of this
project. We are nearly complete with the fourth phase of systems renovation. We
are actively engaged in the last phase of testing our systems, which we expect
to complete in the third quarter of 1999. We have also initiated communications
with our vendors and suppliers regarding their state of Year 2000 readiness. We
plan to continue our assessment of our third party business partners' Year 2000
readiness.
12
<PAGE>
Our costs to address Year 2000 issues. We estimate that we will incur
expenses of $0.8 to $1.0 million in conjunction with our Year 2000 compliance
project, of which approximately $0.6 million had been incurred as of May 1,
1999. Of this amount, $0.4 million was incurred in fiscal 1998, and $0.2
million was incurred in the first quarter of fiscal 1999.
Risks of our Year 2000 issues. We may be adversely affected by non-
compliant systems used by other companies, including our clients, with which we
do business. Year 2000 issues may significantly affect the purchasing patterns
of customers and potential customers. Many companies are spending large amounts
of money to correct their systems for Year 2000 compliance. These expenditures
may result in a smaller amount of money available to our customers and
potential customers to purchase our products and services. These factors could
result in a material adverse effect on our business, operating results and
financial condition.
Our contingency plans for Year 2000 malfunctions. We believe that the
most reasonably likely worst case scenario related to Year 2000 is that we will
experience a number of minor systems malfunctions and errors in early Year 2000
that we did not detect during our renovation and testing process, and that some
of our customers and vendors will not be Year 2000 compliant. We have begun
planning preparations to handle these most reasonably likely worst case
scenarios. We intend to complete our contingency plans during the second
quarter of fiscal 1999. However, despite our compliance program we may have
overlooked or otherwise not remedied Year 2000 issues which may have a material
adverse effect on us.
For additional information regarding Year 2000 Issues, please refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
Risks Relating to ProVantage's Relationship with ShopKo
If ShopKo continues to control of ProVantage, then the price of the common
stock could be adversely affected
ShopKo beneficially owns all of the outstanding common stock. After the
offering, ShopKo will own approximately 70.3% of the outstanding common stock.
As a consequence of this ownership, the market price of the common stock could
be adversely affected because it is unlikely to reflect any "takeover premium."
As a majority stockholder, ShopKo will be able to control the business and
affairs of ProVantage, including:
. the e.ectio. of the e.tire .oard of directors,
. a.y determi.atio.s with respect to mer.ers or other .usi.ess
com.i.atio.s, a.d
. the payme.t of divide.ds with respect to the commo. stock.
For a more complete description of the aspects of ProVantage's business
and affairs which ShopKo will be able to control through its stock ownership,
see "Relationship With ShopKo."
If ShopKo uses its control position as a party to the intercompany agreements
to act in a manner adverse to ProVantage and its stockholders, then our
business may be adversely affected
We currently have a variety of contractual relationships with ShopKo and
its affiliates. We cannot assure you that each of such agreements, or the
transactions provided for therein, has been or will be effected on terms at
least as favorable to us as could have been obtained from unaffiliated third
parties. ShopKo's interests under these agreements are adverse to and diverge
from our interests based on a variety of factors, including:
. fees a.d other payme.ts,
. qua.ity a.d qua.tity of services received, a.d
. ri.hts i. the eve.t of .o.performa.ce.
13
<PAGE>
As a party to these contracts, ShopKo could use its control position to
act in a manner adverse to the other stockholders of ProVantage. For a
description of the intercompany agreements with ShopKo, see "Relationship With
ShopKo--Intercompany Agreements." In addition, ShopKo may be unwilling or
unable to amend these agreements to accommodate our future operating needs.
When our intercompany agreements with ShopKo expire or are terminated, it may
be more expensive for us to obtain substitute services from third parties. This
increased expense could negatively affect our financial performance.
If we remain a subsidiary of ShopKo, then the terms of ShopKo's credit
agreement may adversely affect our ability to raise capital and take other
strategic actions
Under ShopKo's existing credit agreement, we are considered a
"subsidiary" of ShopKo. This means that ShopKo is obligated to cause us to
comply with various covenants in the credit agreement, which may not always be
in our best interests and may materially limit our future growth prospects. For
example, these covenants may limit or prohibit our ability to sell our common
stock and the stock of our subsidiaries to finance our growth strategy and to
make acquisitions unless ShopKo meets financial tests, to pledge particular
categories of assets, to incur debt to third parties beyond specified limits
and to enter into agreements which restrict our ability to pay dividends. The
restriction on the sale of stock provides that we cannot sell our common stock
or the common stock or other equity interests of our subsidiaries unless at the
time of such sale ShopKo can demonstrate that the minimum consolidated net
worth test, the leverage ratio test, and the interest coverage ratio test can
be met on a pro forma basis assuming the proposed sale had occurred one year
earlier. This restriction will not limit this offering or the sale of stock
pursuant to our stock incentive plan. However, in the future this restriction
could limit our ability to sell our common stock or the common stock or other
equity interests of our subsidiaries. The extent of such limit will depend on a
number of factors, including the size of the proposed sale and ShopKo's
financial results over the preceding year. Likewise, our ability to incur debt
to third parties is limited under a formula contained in ShopKo's credit
agreement. At May 1, 1999, we could have borrowed approximately $210.0 million
from third parties under this formula. This formula is impacted by ShopKo's
financial results and operating activities, including the amount of debt
incurred by other ShopKo subsidiaries. Our credit agreement with ShopKo
restricts us from borrowing funds from parties other than ShopKo without
ShopKo's consent. These limitations could prevent us from borrowing additional
funds. These covenants will apply after this offering is completed and may
cause ShopKo to force us to act inconsistently with our best interests.
ShopKo's credit agreement has been filed by ShopKo as an exhibit to ShopKo's
Securities Exchange Act reports. "Principal and Selling Stockholder" explains
how you can obtain these reports.
If we experience potential conflicts of interest with ShopKo over the
allocation of capital and other resources, then we cannot assure you that they
will be resolved in our favor, which could have a material adverse effect on
our business
We cannot assure you that any conflicts that may arise between ShopKo and
us over the allocation of resources will be resolved in our favor, which could
have a material adverse effect in our business. Upon consummation of this
offering and the election of two independent directors, who are not affiliated
with ShopKo, we will have a board of directors consisting of seven members.
Four of the members of our board of directors also serve on the ShopKo board of
directors. As these individuals perform their duties to ShopKo and to us,
conflicts of interest and conflicting demands on the amount of time these
individuals will have available for our affairs may arise. Because ShopKo, a
specialty discount retailer, and ProVantage have substantially different
businesses, we do not expect these conflicts to arise over the allocation of
corporate opportunities. Conflicts may arise over the allocation of capital and
other resources. We have not adopted any policies regarding the allocation of
corporate opportunities or other conflicts, aside from a policy to approve
related party transactions and except as set forth in the intercompany
agreements. In addition, ShopKo will have the ability to change the size and
composition of our board of directors and its committees.
14
<PAGE>
Risks Relating to the Offering of Common Stock
If we are unsuccessful as a stand-alone company, then you may lose part or all
of your investment in our common stock
To date, we have been operated as a subsidiary of ShopKo. After this
offering, we will continue to be a majority-owned subsidiary of ShopKo, but
will operate as a stand-alone company. ShopKo will have no obligation to
provide assistance to us except as provided in our agreements with ShopKo. We
cannot assure you that we will be viable as a stand-alone company or that this
change will not have an adverse effect on us and lead to a partial or complete
loss of your investment in our common stock. Because the financial information
included in this prospectus relates to periods during which we were wholly-
owned by ShopKo, it is not necessarily indicative of our future results of
operations, financial position and cash flows.
If shares of common stock eligible for future sale are sold, then the market
price of the common stock could be adversely affected
Sales of substantial amounts of common stock, or the perception that such
sales could occur, could adversely affect prevailing market prices for the
common stock. Upon completion of this offering, there will be 17,850,000 shares
of common stock outstanding. The common stock sold in this offering will be
freely tradable without restrictions by persons other than "affiliates" of
ProVantage, as such term is defined in the Securities Act of 1933. In addition,
ShopKo has the right to have its ProVantage common stock registered under the
federal securities laws for sale to the public. Once it is registered, ShopKo
may sell it. We cannot predict the effect, if any, that future sales of shares
of common stock, or the availability of shares of common stock for future
sales, will have on the market price of the shares of common stock.
If you purchase the common stock, then you will incur immediate and substantial
dilution in the book value of your shares
The assumed initial public offering price of $17.00 per share is
substantially higher than the net tangible book value of $(1.58) per share of
the common stock at May 1, 1999, giving pro forma effect to the reorganization
of ProVantage's corporate structure. Accordingly, purchasers in this offering
will incur immediate and substantial net tangible book value dilution of $13.47
per share.
If an active and continuous trading market for the common stock does not
develop after the offering, then a decline in the price for the common stock or
price volatility may result
Prior to this offering, there has been no public market for the common
stock, and an active, continuous trading market for the common stock may not
develop. This means that you may not be able to sell shares of common stock you
acquire in this offering easily, if at all. Furthermore, the market price for
the common stock could decline below the price you pay for it. ProVantage and
the representatives of the underwriters will determine the initial public
offering price based on the factors described under "Underwriting." Their
determination may not necessarily equal the intrinsic value or the market value
of the common stock. The trading prices of the common stock could be subject to
wide fluctuations in response to quarter-to-quarter variations in our operating
results, governmental or other regulatory action, general conditions in the
healthcare industry, changes in earnings estimates or recommendations by
research analysts and other events or factors, many of which are beyond our
control. In addition, the stock market recently has experienced a high level of
price and volume volatility, and market prices for the stock of many companies,
particularly small and emerging growth companies like ProVantage, have
experienced wide price fluctuations which have not necessarily been related to
their operating performance. These broad market fluctuations could have a
material adverse effect on the market price of the common stock.
15
<PAGE>
If another person or company attempts a takeover of ProVantage, then anti-
takeover provisions in our organizational documents and agreements with our
executive officers could delay or prevent a change in control of ProVantage at
a premium price
Certain provisions of ProVantage's restated certificate of incorporation
and amended and restated bylaws, a stockholders rights plan, and change of
control severance agreements which have been entered into with certain of
ProVantage's executive officers could have an anti-takeover effect. These
provisions include:
.a sta..ered .oard of directors,
.supermajority ame.dme.t provisio.s,
.preferred stock purchase ri.hts which may deter offers for the commo.
stock, a.d
..ar.e severa.ce payme.ts.
This anti-takeover effect could delay, defer or prevent a change of
control of ProVantage without further action by the stockholders, could
discourage potential investors from bidding for the common stock at a premium
over the market price of the common stock and could adversely affect the
market price of, and the voting and other rights of the holders of, the common
stock. In addition, provisions of the Delaware General Corporation Law
restrict the ability of stockholders to cause a merger or business combination
or obtain control of ProVantage. These provisions may prevent a takeover of
ProVantage at a premium price. See "Management--Change of Control Severance
Agreements" and "Description of Capital Stock."
FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements regarding the
operations and business of ProVantage. Statements in this document that are
not historical facts are "forward-looking statements." Such forward-looking
statements include those relating to:
.ProVa.ta.e's future .usi.ess prospects,
.projected or a.ticipated product deve.opme.t or i.troductio.,
.possi..e acquisitio.s,
.projected reve.ues, worki.. capita., .iquidity, capita. .eeds,
i.terest costs a.d i.come, a.d
.stateme.ts re.ardi.. ProVa.ta.e's Year 2000 readi.ess.
The words "estimate," "project," "intend," "expect" and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements are found at various places throughout this
prospectus. Wherever they occur in this prospectus or in other statements
attributable to ProVantage,
forward-looking statements are necessarily estimates reflecting our best
judgment. However, these statements still involve a number of risks and
uncertainties that could cause actual results to differ materially from those
suggested by the forward-looking statements. Discussions in this prospectus
under the captions "Prospectus Summary," "Risk Factors," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" are particularly susceptible to risks and
uncertainties. Such forward-looking statements should, therefore, be
considered in light of various important factors, including those set forth in
this prospectus and other factors set forth from time to time in ProVantage's
reports and registration statements filed with the SEC. You are cautioned not
to place undue reliance on these forward-looking statements, which speak only
as of the date hereof. ProVantage disclaims any intent or obligation to update
forward-looking statements. Moreover, ProVantage, through senior management,
may from time to time make forward-looking statements about the matters
described herein or other matters concerning ProVantage.
16
<PAGE>
THE REORGANIZATION
In connection with this offering, ShopKo and ProVantage reorganized
ProVantage's corporate structure. This reorganization consisted of
reincorporating ProVantage in Delaware through a merger with an affiliated
corporation, the transfer of certain assets and liabilities from affiliated
corporations to ProVantage, the amendment and restatement of ProVantage's
charter and bylaws, a 1,243 for 1 stock split effected through a stock
dividend, and the declaration of a dividend to ShopKo in the form of a demand
promissory note in the principal amount of $115.0 million in order to return
to ShopKo a portion of ShopKo's investment in ProVantage. See "Dividend
Policy." This reorganization was accounted for as a tax-free reorganization
among commonly controlled entities. All of the assets and liabilities
transferred in the reorganization retained their historical cost basis.
USE OF PROCEEDS
The net proceeds from the sale of shares of common stock offered hereby,
assuming a public offering price of $17.00 per share, are estimated to be
$82.8 million. These net proceeds will be applied as follows:
. we will retain the first $20.0 million of net proceeds from the
offering and use these proceeds for working capital, capital
expenditures and other general corporate purposes, including
contingent payments for previous acquisitions, and
. the balance of the net proceeds will be paid to ShopKo as a
repayment on the demand promissory note and any remaining balance
on the note will be contributed to ProVantage by ShopKo as a
capital contribution.
The demand promissory note will have a principal amount of $115.0
million, will bear interest at 5.0% per annum and will be due on demand. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We will not receive any proceeds from the exercise of the underwriters'
over-allotment option.
DIVIDEND POLICY
We do not intend to pay cash dividends on the common stock in the
foreseeable future, but rather intend to use future earnings principally to
support operations and to finance expansion and possible acquisitions. The
payment of cash dividends in the future will be at the discretion of our board
of directors and will depend on a number of factors, including our financial
condition, capital requirements, future business prospects, contractual
restrictions and such other factors as our board of directors may deem
relevant. See "Description of Capital Stock."
Prior to the offering, we will declare a dividend to ShopKo in the form
of a demand promissory note in the principal amount of $115.0 million to
return to ShopKo a portion of its equity investment in ProVantage. Holders of
common stock will not receive any portion of the payment on the note held by
ShopKo. See "Relationship With ShopKo."
17
<PAGE>
CAPITALIZATION
The following table sets forth the cash and capitalization of ProVantage
at May 1, 1999 on an historical basis, on a pro forma basis giving effect to
the reorganization of ProVantage's corporate structure which will be completed
prior to the completion of the offering, and on a pro forma as adjusted basis
to give effect to the sale of the shares of common stock offered by this
prospectus, at an assumed initial public offering price of $17.00 per share,
and the use of the estimated net proceeds as described in the "Use of Proceeds"
section.
<TABLE>
<CAPTION>
May 1, 1999
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Cash....................................... $ 2 $ 2 $ 20,002
======== ======= ========
Stockholders' equity:
Preferred Stock, $.01 par value;
5,000,000 shares authorized and none
issued or outstanding actual, pro forma
and pro forma as adjusted............... $ 0 $ 0 $ 0
Common Stock, $.01 par value; 50,000,000
shares authorized, 12,550,000 shares
issued and outstanding, actual;
50,000,000 shares authorized, 12,550,000
shares issued and outstanding, pro
forma; and 50,000,000 shares authorized,
17,850,000 shares issued and
outstanding, pro forma as adjusted...... 126 126 179
Additional paid-in capital............... 82,600 45,078 127,825
Retained earnings........................ 25,278 0 0
-------- ------- --------
Total stockholders' equity............. 108,004 45,204 128,004
-------- ------- --------
Total capitalization................... $108,004 $45,204 $128,004
======== ======= ========
</TABLE>
18
<PAGE>
DILUTION
Our pro forma net tangible book value at May 1, 1999 was $(19,850,000),
or $(1.58) per share of common stock. Pro forma net tangible book value per
share is determined by dividing our net tangible book value--that is, total
tangible assets less total liabilities--by the number of shares of common stock
outstanding, after giving effect to the reorganization of ProVantage's
corporate structure which is to be completed prior to the completion of the
offering. Without taking into account any changes in our pro forma net tangible
book value after May 1, 1999, other than to give effect to the sale of the
shares of common stock offered hereby, assuming an initial public offering
price of $17.00 per share, and the receipt of the net proceeds therefrom, our
adjusted pro forma net tangible book value at May 1, 1999 would have been
$62,950,000, or $3.53 per share of common stock. This represents an immediate
dilution in pro forma net tangible book value of $13.47 per share to new
investors purchasing shares in this offering and an immediate increase in pro
forma net tangible book value of $5.11 per share to ShopKo. The following table
illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......... $ 17.00
-------
Pro forma net tangible book value per share at May 1,
1999.................................................... $(1.58)
------
Increase per share attributable to new investors (1)..... 5.11
------
Pro forma net tangible book value after the offering..... 3.53
-------
Dilution per share to new investors (2).................. $ 13.47
=======
</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 May 1, 1999 the
differences in the total cash consideration paid and the average price per
share paid by ShopKo, our sole stockholder prior to this offering, with respect
to the 12,550,000 shares of common stock issued by us to ShopKo and by the new
investors, assuming an initial public offering price of $17.00 per share, with
respect to the 5,300,000 shares of common stock to be issued by us in this
offering:
<TABLE>
<CAPTION>
Shares of Common
Stock Purchased Total Consideration
------------------- ---------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C>
ShopKo........... 12,550,000 70.3% $ 82,726,000 47.9% $ 6.59
New investors.... 5,300,000 29.7 90,100,000 52.1 17.00
---------- ----- ------------- -----
Total........ 17,850,000 100.0% $ 172,826,000 100.0%
========== ===== ============= =====
</TABLE>
The foregoing tables do not give effect to the issuance of an aggregate
of approximately 650,000 shares of common stock subject to options to be
granted under our stock incentive plan at an exercise price equal to the
offering price. See "Management--Compensation of Directors" and "Executive
Compensation--Stock Incentive Plan."
19
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
The following table sets forth certain of our historical consolidated
financial data as of and for each of the five years in the period ended January
30, 1999 and the first quarters of fiscal 1998 and 1999. The historical
consolidated financial data for the four years in the period ended January 30,
1999 and as of January 30, 1999, January 31, 1998 and February 1, 1997 were
derived from our financial statements which have been audited by Deloitte &
Touche LLP, independent auditors. The remaining financial data presented below
were derived from our accounting records and have not been audited.
Nevertheless, in the opinion of management, this unaudited data include all
adjusting entries, consisting only of normal recurring adjustments, necessary
to present fairly the information set forth therein. The historical
consolidated financial data presented herein are not necessarily indicative of
the results of operations for any future period. The financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our financial statements
and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Quarter
Year (52 Weeks) Ended (13 Weeks) Ended
------------------------------------------------------------------------------------ -----------------------
Feb. 4, 1995(1) Feb. 3, 1996 Feb. 1, 1997(2)(5) Jan. 31, 1998(3)(5) Jan. 30, 1999 May 2, 1998 May 1, 1999
--------------- ------------ ------------------ ------------------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of
Earnings Data:
Net sales........ $ 4,518 $81,158 $313,390 $486,121 $643,260 $145,773 $214,949
Costs and
expenses:
Cost of sales... 3,760 72,253 290,477 448,865 595,414 135,370 201,181
Selling, general
and
administrative
expenses....... 214 4,836 12,633 19,990 24,910 5,778 7,778
Depreciation and
amortization
expenses....... 69 1,170 2,282 4,857 6,776 1,400 2,061
------- ------- -------- -------- -------- -------- --------
4,043 78,259 305,392 473,712 627,100 142,548 211,020
Income from
operations...... 475 2,899 7,998 12,409 16,160 3,225 3,929
Interest income.. -- 207 282 293 543 15 174
------- ------- -------- -------- -------- -------- --------
Earnings before
income taxes.... 475 3,106 8,280 12,702 16,703 3,240 4,103
Provision for
income taxes.... 220 1,553 3,640 5,581 7,221 1,428 1,750
------- ------- -------- -------- -------- -------- --------
Net earnings..... $ 255 $ 1,553 $ 4,640 $ 7,121 $ 9,482 $ 1,812 $ 2,353
======= ======= ======== ======== ======== ======== ========
Basic net
earnings per
share of common
stock........... $ 0.02 $ 0.12 $ 0.37 $ 0.57 $ 0.76 $ 0.14 $ 0.19
Average number of
shares
outstanding..... 12,550 12,550 12,550 12,550 12,550 12,550 12,550
Pro forma basic
net earnings per
share of common
stock(4)........ $ 0.58 $ 0.14
Pro forma average
number of shares
outstanding(4).. 16,244 16,244
<CAPTION>
Feb. 4, 1995 Feb. 3, 1996 Feb. 1, 1997(5) Jan. 31, 1998(5) Jan. 30, 1999(5) May 1, 1999
--------------- ------------ ------------------ ------------------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet
Data:
Cash............. $ 2,092 $ 5,001 $ 5,946 $ 12,533 $ 24,680 $ 2
Working capital.. 1,628 7,634 1,973 12,865 33,894 27,928
Total assets..... 25,823 33,181 119,838 155,010 198,251 185,351
Total debt....... -- -- -- 1,880 968 982
Total
liabilities..... 7,770 9,057 57,931 64,919 86,203 77,347
Stockholder's
equity.......... 18,053 24,124 61,907 90,091 112,048 108,004
</TABLE>
- --------
(1) On January 3, 1995, Pro Vantage completed the acquisition of Bravell, Inc.,
a pharmacy benefit management company. The results of Bravell's operations
since the date of acquisition have been included in ProVantage's
consolidated statements of earnings.
(2) On August 2, 1996, ProVantage completed the acquisition of CareStream
ScripCard from Avatex Corporation. CareStream ScripCard is a pharmacy
benefit management company and its operations have been integrated into
ProVantage. The results of CareStream ScripCard's operations since the date
of acquisition have been included in ProVantage's consolidated statement of
earnings.
20
<PAGE>
(3) On August 20, 1997, ProVantage acquired PharMark, a software and database
development company providing information driven strategies for optimizing
medical and pharmaceutical outcomes. The results of PharMark's operations
since the date of acquisition have been included in ProVantage's
consolidated statement of earnings.
(4) The pro forma basic net earnings per share of common stock are computed by
dividing net earnings by 16,244 shares of common stock. This number
represents the 12,550 shares of common stock outstanding after the
reorganization plus that number of shares of common stock that must be sold
by ProVantage at an assumed offering price of $17.00 per share to generate
proceeds sufficient to repay a $62,800 portion of the demand promissory
note to be issued to ShopKo. The unpaid balance of the demand promissory
note will be contributed to ProVantage as a capital contribution.
(5) As restated. See Note K to the Notes to Consolidated Financial Statements.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with ProVantage's
historical consolidated financial statements and notes and the unaudited
consolidated financial statements and notes included elsewhere herein.
ProVantage uses the same fiscal year as ShopKo. ProVantage's fiscal year
conforms to the National Retail Federation calendar and ends on the Saturday
closest to the end of January. ProVantage has adopted a convention of referring
to a fiscal year by the year in which the fiscal year begins. For example, the
fiscal year which began on February 1, 1998 and ended on January 30, 1999 is
referred to as "fiscal 1998."
Overview
ProVantage is a leading health benefit management company providing
pharmacy benefit management and health information technology products and
services to our customers. ProVantage conducts its business principally
throughout the United States. Prior to this offering, ProVantage was wholly-
owned by ShopKo. After this offering, ShopKo will own 70.3% of ProVantage's
outstanding common stock, continue to provide to ProVantage a variety of
services and control ProVantage's board of directors, business and affairs.
The financial statements and data included in this prospectus, and this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, covers periods when ProVantage operated as a wholly-owned
subsidiary of ShopKo. For the periods presented, certain general,
administrative and other expenses reflected in the consolidated financial
statements include allocations of certain corporate expenses from ShopKo which
took into consideration estimates of personnel time spent to provide services
or other appropriate bases. These allocations include services and expenses for
general management, information systems management, treasury, tax, financial
reporting, benefits administration, insurance, legal, communications and other
miscellaneous services. Management believes the foregoing allocations were made
on a reasonable basis. Although these allocations do not necessarily represent
the costs which would have been incurred by ProVantage on a stand-alone basis,
management believes that any variance in costs would not be material to
ProVantage's consolidated financial results. After the offering is completed,
the charges for the services provided by ShopKo to ProVantage will be governed
by the intercompany agreements described under "Relationship With ShopKo."
ProVantage derives its revenues from the sale of pharmacy benefit
management products and services, pharmacy mail products, vision benefit
management products and services and health information technology and clinical
support services. ProVantage's net sales include:
<TABLE>
<C> <S>
. 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,
. administrative fees plus the cost of sales of eyeglasses and contact
lenses relating to vision benefit management services, and
. license and service fees for health information technology and
clinical support services.
</TABLE>
A majority of our revenues are derived from product sales. We do not take
possession of eyewear or pharmaceuticals dispensed by the retail network. Other
than with respect to the pharmaceuticals dispensed by our mail pharmacy, we do
not maintain inventory. Our product revenues derived from eyewear or
pharmaceuticals dispensed by the retail network basically represent a pass-
through of the cost of the pharmaceuticals or eyewear dispensed. However, we
assume the financial risk for these transactions since we generally pay the
retail network providers prior to remittance by our clients.
Subsequent to the issuance of ProVantage's January 30, 1999 financial
statements, ProVantage's management determined that ProVantage's financial
statements should be restated to adjust the timing of recognition and the
classification of formulary concessions and to adjust certain amounts related
to the Avatex
22
<PAGE>
and Bravell acquisitions. Previously, formulary concessions were recognized
based on the estimated amount to be realized on a fiscal quarter basis and
included in net sales. Formulary concessions should have been recognized at the
conclusion of the calendar quarter when the stipulated changes in minimum sales
volume were achieved and should have been reflected as a reduction of cost of
sales. As a result, net sales were decreased by $16.7 million in fiscal 1996
and by $14.8 million in fiscal 1997, and cost of sales was decreased by $16.3
million in fiscal 1996 and by $14.2 million in fiscal 1997. Additionally, the
present value of the minimum supplemental contingent cash payment, amounting to
$2.4 million, related to the Avatex acquisition, should have been recorded as
additional purchase price at the time of acquisition in 1996, resulting in
additional amortization and interest expense of $0.1 million in fiscal 1996 and
$0.2 million in fiscal 1997. Also, $0.8 million of the final settlement related
to the Bravell acquisition should have been allocated to the founders'
employment agreements and charged to expense upon termination of the employment
agreements in fiscal 1996. As a result, the financial statements as of January
30, 1999 and January 31, 1998, and for the years ended January 31, 1998 and
February 1, 1997, have been restated from amounts previously reported to
include the effects of the adjustments discussed above. The results of
operations for the year ended January 30, 1999 have not been restated because
any adjustments would not have been material. Receivables and accounts payable
trade were impacted by this restatement because of the timing of revenue
recognition and the amounts due under formulary sharing arrangements. Accrued
liabilities were impacted by this restatement because ProVantage recorded the
$2.4 million supplemental contingent cash payment and the income tax effect on
all relevant adjustments. The effects of the restatement are presented in Note
K of the Notes to Consolidated Financial Statements and the effects have been
reflected herein.
The following table sets forth ProVantage's product and service revenues
as percentages of consolidated net revenues. Product revenues include the cost
of pharmaceuticals dispensed by pharmacies participating in the network
maintained by ProVantage, sales from ProVantage's mail service pharmacy and the
cost of eyeglasses and contact lenses dispensed by optical centers
participating in ProVantage's vision benefit management network. Service
revenues include administrative and dispensing fees associated with
ProVantage's pharmacy and vision benefit management services, and license and
service fees for health information technology and clinical support services.
<TABLE>
<CAPTION>
Quarter (13
Year (52 weeks) Ended weeks) Ended
---------------------------------------- -----------------------
Feb. 1, 1997 Jan. 31, 1998 Jan. 30, 1999 May 2, 1998 May 1, 1999
------------ ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Products................ 95.9% 95.4% 95.6% 95.0% 96.1%
Services................ 4.1% 4.6% 4.4% 5.0% 3.9%
----- ----- ----- ----- -----
Total Revenues...... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
Revenues from the dispensing of pharmaceuticals from ProVantage's mail
service pharmacy are recognized when the prescription is shipped. Revenues from
claim processing fees and sales of prescription drugs and vision benefits by
pharmacies and vision providers in ProVantage's network are recognized when the
claims are processed. When ProVantage provides pharmacy and vision benefits to
members in health benefit plans sponsored by ProVantage's clients and has an
independent contractual obligation to pay its network pharmacy and vision
providers for benefits provided to members in ProVantage's clients' health
benefit plans, ProVantage includes payments from plan sponsors for these
benefits as net sales. If ProVantage is only administering the plan sponsors'
pharmacy benefit contract, ProVantage records only the administrative fees
derived from the contract as revenue. Clinical and health information
technology revenues are recognized as the services are performed and earned in
accordance with contractual agreements.
Cost of sales includes the amounts paid to network pharmacies and optical
centers for pharmaceutical and vision claims, and the cost of prescriptions
sold through the mail service pharmacy. In addition, ProVantage receives
payments under formulary agreements from pharmaceutical manufacturers.
Generally, the payment amounts vary based on the changes in sales volume of
specified products sold through ProVantage's network and mail service
pharmacies. Most of these agreements stipulate that in order to receive
payments,
23
<PAGE>
minimum changes in sales volumes are required for specified pharmaceutical
products. Currently, almost all of these agreements require these minimum
changes in sales volumes to be achieved on a quarterly basis before ProVantage
is entitled to payment. The amounts due to ProVantage under these agreements
are recorded as reductions to cost of sales upon achieving the stipulated
minimum changes in sales levels. While many of these agreements also require
ProVantage to perform certain activities, including maintaining formulary
lists, marketing support with the manufacturer, recordkeeping, and reporting,
ProVantage generally does not consider them to be revenue producing activities
for accounting purposes. These contracts stipulate the frequency with which
ProVantage can bill the manufacturers, which generally is either monthly or
quarterly.
As a result of the competitive environment, ProVantage is continuously
subject to margin pressures when measured as a percent of net sales. In recent
years, competing pharmacy benefit management providers owned by large
companies, including pharmaceutical manufacturers, began pricing their products
and services more aggressively, including greater sharing of formulary
concessions with clients. This aggressive pricing resulted in reduced margins
for ProVantage's traditional prescription benefit management services.
Management expects this competitive environment to prevail for the foreseeable
future. In recent years, we have been able to offset in large part these
reduced margins by selling higher margin advanced clinical services and health
information technology products. In order to maintain our margins as a
percentage of sales, we will need to continue to increase sales of these higher
margin services and products.
Most of ProVantage's net earnings are derived from administrative fees
and the portion of formulary concessions which ProVantage retains. Competitive
pressures have caused us to share a greater portion of our formulary
concessions with ProVantage's clients. ProVantage's formulary concessions
retained in fiscal 1998 were $13.9 million. If formulary concessions decline
because of reductions or eliminations of concessions by pharmaceutical
manufacturers or because of increased sharing of concessions with ProVantage's
clients, then ProVantage's earnings could be significantly and negatively
impacted.
In recent years, ProVantage has invested heavily to build its clinical
and health information technology capabilities. These investments include
technology, professional staff, and marketing and service personnel. Management
expects to continue to invest to build these capabilities.
During the periods presented, ProVantage completed acquisitions of
several companies which contributed to ProVantage's growth. Of the health plan
members as of January 30, 1999, approximately 25% were acquired through
acquisitions. Acquisitions make period to period comparisons of the
ProVantage's financial statements less meaningful. Please see "--Acquisitions."
Results of Operations
The following table sets forth certain items from ProVantage's
consolidated statement of earnings as percentages of consolidated net revenue:
<TABLE>
<CAPTION>
First Quarter
Year (52 weeks) Ended (13 weeks) Ended
------------------------------------------------ -----------------------
Feb. 1, 1997 (1) Jan. 31, 1998 (1) Jan. 30, 1999 May 2, 1998 May 1, 1999
---------------- ----------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses
Cost of sales......... 92.7 92.3 92.6 92.9 93.6
Selling, general and
administrative
expenses............. 4.0 4.1 3.9 3.9 3.6
Depreciation and
amortization
expenses............. 0.7 1.0 1.0 1.0 1.0
----- ----- ----- ----- -----
97.4 97.4 97.5 97.8 98.2
Income from operations.. 2.6 2.6 2.5 2.2 1.8
Interest income......... 0.1 0.0 0.1 0.0 0.1
----- ----- ----- ----- -----
Earnings before income
taxes.................. 2.7 2.6 2.6 2.2 1.9
Provision for income
taxes.................. 1.2 1.1 1.1 1.0 0.8
----- ----- ----- ----- -----
Net earnings............ 1.5% 1.5% 1.5% 1.2% 1.1%
===== ===== ===== ===== =====
</TABLE>
- --------
(1)As restated. See Note K of the Notes to Consolidated Financial Statements.
24
<PAGE>
Thirteen Weeks Ended May 1, 1999 Compared to Thirteen Weeks Ended May 1, 1998
Net sales for the first quarter of fiscal 1999 increased $69.2 million,
or 47.5%, to $214.9 million. This increase is due primarily to internally
generated growth in claims processing and mail pharmacy. Sales from pharmacy
claims processing increased $58.2 million, or 31.2%. This increase reflects a
31.3% increase in the number of claims processed and a 13.2% increase in the
average revenue per claim processed. Sales from ProVantage's mail pharmacy
services increased $10.9 million, or 77.0%, reflecting a 59.5% increase in the
number of prescriptions dispensed and an 11.0% increase in the average revenue
per prescription dispensed.
Gross profit, calculated as net sales less cost of sales, for the first
quarter of fiscal 1999 increased $3.4 million, or 32.4%, compared to the first
quarter of fiscal 1998. This increase over the prior year is principally
attributable to a $1.7 million increase in net formulary concessions, and a
$1.1 million increase in gross profit associated with claims processing. As a
percentage of net sales, ProVantage's gross margins were 6.4% for the first
quarter of fiscal 1999 and 7.1% for the first quarter of fiscal 1998.
Increasing prescription drug costs accounted for 0.5% of this decline and the
addition of larger clients with lower average transaction fees accounted for
the other 0.2% decrease.
Selling, general and administrative expenses for the first quarter of
fiscal 1999 increased $2.0 million, or 34.6%, to $7.8 million. This increase
relates to additional personnel to support transaction growth. As a percentage
of net sales, selling, general and administrative expenses were 3.6% in the
first quarter of fiscal 1999 compared to 3.9% in the first quarter of fiscal
1998. This decrease as a percentage of sales is primarily due to the leveraging
of fixed costs against increased sales volume.
Depreciation and amortization expenses for the first quarter of fiscal
1999 increased $0.7 million, or 47.2%, to $2.1 million. This increase is
attributable to increased goodwill amortization related to ProVantage's
business acquisitions and increased software amortization. As a percentage of
net sales, depreciation and amortization expenses were 1.0% for the first
quarter of both fiscal 1999 and fiscal 1998.
The change in interest income during these periods was immaterial.
The effective tax rate for the first quarter of fiscal 1999 decreased to
42.7% compared to 44.1% for the first quarter of fiscal 1998. 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 1998 Compared to Fiscal 1997
Net sales for fiscal 1998 increased $157.1 million, or 32.3%, to $643.3
million. This increase is attributable to internally generated growth in claims
processing and mail pharmacy. Sales from pharmacy claims processing increased
$122.5 million, or 27.8%. This increase reflects a 16.4% increase in the number
of claims processed and a 9.8% increase in the average revenue per claim
processed. Sales from ProVantage's mail pharmacy increased $29.8 million, or
79.1%, reflecting a 56.5% increase in the number of prescriptions dispensed and
a 14.5% increase in the average revenue per prescription dispensed. Revenues
attributable to vision benefit management services were immaterial in both
periods.
Gross profit for fiscal 1998 increased $10.6 million, or 28.4%, compared
to fiscal 1997. This increase over the prior year is principally attributable
to a $4.7 million increase in net formulary concessions, a $2.8 million
increase in gross profit associated with mail pharmacy, and a $1.7 million
increase in gross profit associated with claims processing. The increase in
formulary concessions is attributable to increased claims subject to formulary
concessions and increased participation of pharmaceutical manufacturers in
ProVantage's formulary program. As a percentage of net sales, ProVantage's
gross margins were 7.4% for fiscal 1998 and 7.7% for fiscal 1997. This decline
was due to increasing prescription costs and the addition of larger clients
with lower average transaction fees, offset in part by the addition of higher
margin clinical services and information technology products.
25
<PAGE>
Selling, general and administrative expenses for fiscal 1998 increased
$4.9 million, or 24.6%, to $24.9 million. This increase relates to additional
investments in information technology of $3.0 million, in clinical programs of
$0.5 million and in infrastructure support of $1.4 million related to continued
growth. As a percentage of net sales, selling, general and administrative
expenses were 3.9% in fiscal 1998 compared to 4.1% in fiscal 1997.
Depreciation and amortization expenses for fiscal 1998 increased $1.9
million, or 39.5%, to $6.8 million. This increase is attributable to increased
depreciation and goodwill amortization related to ProVantage's business
acquisitions. As a percentage of net sales, depreciation and amortization
expenses were 1.0% for both fiscal 1998 and fiscal 1997.
The change in interest income during the periods was immaterial.
The effective tax rate for fiscal 1998 was 43.2% compared to 43.9% in
fiscal 1997.
Fiscal 1997 Compared to Fiscal 1996
Net sales for fiscal 1997 increased $172.7 million, or 55.1%, to $468.1
million. This increase is primarily attributable to growth in claims processing
and mail pharmacy. Sales from pharmacy claims processing increased $151.4
million, or 52.3%. This increase reflects a 53.7% increase in the number of
claims processed. Sales from ProVantage's mail pharmacy increased $16.4
million, or 77.1%, reflecting a 73.1% increase in the number of prescriptions
dispensed and a 2.3% increase in the average revenue per prescription
dispensed. Revenues attributable to vision benefit management services were
immaterial in both periods.
Gross profit for fiscal 1997 increased $14.3 million, or 62.6%, compared
to fiscal 1996. This increase over the prior year is principally attributable
to a $7.1 million increase in gross profit associated with claims processing, a
$3.2 million increase in net formulary concessions and a $2.1 million increase
in gross profit associated with mail pharmacy. As a percentage of net sales,
ProVantage's gross margins were 7.7% for fiscal 1997 and 7.3% for fiscal 1996.
Selling, general and administrative expenses for fiscal 1997 increased
$7.4 million, or 58.2%, to $20.0 million. The increase is primarily
attributable to increased operating costs subsequent to the acquisition of
PharMark of $2.0 million and additional investments in infrastructure support
related to continued growth, including information technology, of $5.4 million.
As a percentage of net sales, selling, general and administrative expenses were
4.1% in fiscal 1997 compared to 4.0% in fiscal 1996.
Depreciation and amortization expenses for fiscal 1997 increased $2.6
million, or 112.8%, to $4.9 million. This increase is primarily attributable to
goodwill amortization related to ProVantage's business acquisitions. As a
percentage of sales, depreciation and amortization expenses were 1.0% in fiscal
1997 and 0.7% in fiscal 1996.
The change in interest income during these periods was immaterial.
The effective tax rate for fiscal 1997 was 43.9% compared to 44.0% in
fiscal 1996.
Liquidity and Capital Resources
Prior to the offering, ProVantage's cash needs in excess of cash flow
provided by operations have been met principally by additional capital
contributions by ShopKo and any excess cash has been distributed to ShopKo.
Cash provided from operating activities was $9.5 million in fiscal 1998, $12.0
million in fiscal 1997 and $3.4 million in fiscal 1996. In addition, cash used
in operating activities in the first quarter of fiscal 1999 was $14.5 million
compared to $15.6 million in the first quarter of fiscal 1998. ShopKo's capital
contributions were $12.5 million in fiscal 1998, $21.1 million in fiscal 1997
and $33.1 million in fiscal 1996. In the first quarter of fiscal 1999, excess
cash of $6.4 million was distributed to ShopKo. In the first quarter of fiscal
1998, capital contributions from ShopKo were $4.8 million.
26
<PAGE>
ProVantage's principal uses of cash are for capital expenditures and
acquisitions. ProVantage spent $3.8 million on capital expenditures in the
first quarter of fiscal 1999, $8.9 million on capital expenditures in fiscal
1998, $4.2 million on capital expenditures in fiscal 1997 and $2.1 million in
fiscal 1996. Capital expenditures relate primarily to continuing investments in
systems technology.
ProVantage's total capital expenditures are expected to approximate $15.0
to $20.0 million for the fiscal year ending January 29, 2000. The expected
increase in capital expenditures is primarily due to replacement of
ProVantage's retail network processing system and continued enhancements and
development in its suite of health information technology products. The
foregoing capital expenditure plans are based on current facts and
circumstances known to management and assumptions believed by management to be
reasonable. Such plans may be reviewed and revised from time to time in light
of changing conditions. Any such revisions could be material.
In addition, ProVantage has contingent payment obligations of up to $5.0
million with respect to the CareStream ScripCard acquisition and up to $8.0
million with respect to the PharMark acquisition. ProVantage expects that based
on assumed public offering price of $17.00 per share that approximately $4.6
million would be due with respect to the CareStream ScripCard acquisition upon
completion of this offering if the seller exercises its option. A portion from
the proceeds of this offering may be used to make this payment. For a more
detailed description, see "--Acquisitions."
ProVantage has entered into a credit agreement with ShopKo which provides
that ProVantage may borrow up to $25.0 million from ShopKo on a revolving
basis. The credit agreement is unsecured, has a term that expires on January
31, 2001, provides that borrowings will bear interest at various market rates
at the time of borrowing and has an annual commitment fee of 1/5 of one percent
of the total commitment amount. ProVantage may terminate the credit agreement
at any time without penalty and may replace it with financing from banks or
other financial institutions. ShopKo may terminate the credit agreement at any
time after it no longer owns a majority of ProVantage's voting stock. This
agreement may negatively affect the future operating results of ProVantage by
increasing interest expense. Prior to the offering, any additional cash needs
in excess of cash flows provided by operations have been met by capital
contributions by ShopKo. After the offering, any additional cash needs will be
met through borrowings under our credit agreement with ShopKo.
Under ShopKo's existing credit agreement, ProVantage is considered a
"subsidiary" of ShopKo which means that ShopKo is obligated to cause ProVantage
to comply with certain covenants in the credit agreement. These covenants
include prohibitions on ProVantage selling its common stock and the stock of
its subsidiaries unless ShopKo meets financial tests, prohibitions on the
pledging of particular categories of assets, limitations on ProVantage's
ability to incur debt to third parties beyond specified limits, and a
prohibition on ProVantage entering into agreements which restrict ProVantage's
ability to pay dividends. These covenants will continue to apply after this
offering is completed. ProVantage does not expect these covenants to impose any
material impediment on ProVantage's existing operations. There can be no
assurance, however, that circumstances will not arise wherein such covenants
could limit ProVantage's ability to enter into certain transactions.
ProVantage believes that its cash needs, other than for significant
acquisitions, will be met through fiscal 1999 through the proceeds from this
offering, cash generated from operations and borrowings from ShopKo or third-
party sources.
In addition to the credit agreement, ProVantage and ShopKo have entered
into or will enter into a number of other agreements to define and formalize
our ongoing relationship and the conduct of our businesses. These agreements
include a tax matters agreement, an administrative services agreement, an I.
T., or information technology, support agreement, a lease agreement, an
indemnification and hold-harmless agreement, and a registration rights
agreement. In comparison to prior years, these agreements will not have a
material effect on future operating results because they formalize arrangements
on substantially the same financial basis as presented in the historical
financial statements included in this prospectus. See "Relationship with
ShopKo--Intercompany Agreements" for a description of the agreements described
above. When our intercompany agreements with ShopKo expire or are terminated,
it may be more expensive for us to obtain substitute services from third
parties. This increased expense could negatively effect our financial
performance.
27
<PAGE>
Acquisitions
On January 3, 1995, ProVantage completed the acquisition of Bravell,
Inc., a pharmacy benefit management firm that provides custom prescription
benefit plan design, program administration and claims benefit processing
services to insurance companies, third party administrators and self-funded
medical plan sponsors. The transaction was accounted for as a purchase, whereby
ProVantage acquired 97% of the outstanding common stock of Bravell for
approximately $17.3 million. ProVantage was also required to make additional
payments which were contingent upon future results of Bravell's operations. In
fiscal 1996, $0.7 million was paid based on the results of fiscal 1995. On
April 10, 1997, ProVantage made a payment of approximately $8.9 million to the
founders of Bravell to:
. acquire the remaining 3% of the common stock of Bravell which
ProVantage did not acquire in January 1995,
. extinguish all remaining contingent payment obligations to the
founders, and
. terminate the founders' employment agreements.
On August 2, 1996, ProVantage completed the acquisition of CareStream
ScripCard from Avatex Corporation, formerly known as FoxMeyer Health
Corporation. CareStream ScripCard is a prescription benefit management company
and its operations have been integrated with ProVantage. The initial purchase
price was $30.5 million in cash, plus a supplemental cash payment. At the date
of acquisition, the present value of the minimum supplemental cash payment,
$2.4 million, was recorded as additional purchase price. 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. Avatex is entitled to $5.0 million if
ShopKo sells a majority of ProVantage's common stock, other than in a public
offering or public distribution, or if ShopKo buys a competing business or if
ProVantage disposes of a substantial portion of its business. The right of
Avatex to the supplemental cash payment expires on August 2, 2001. Upon
completion of this offering, ProVantage expects to capitalize approximately
$2.1 million as additional purchase price based on an assumed public offering
price of $17.00 per share. Such additional purchase price will be amortized
over a period of 15 to 18 years. As the market value of ProVantage fluctuates
and prior to the exercise by Avatex of its supplemental cash payment right,
ProVantage will adjust the liability to Avatex at the end of each accounting
period based on ProVantage's market value. This adjustment will be reflected on
ProVantage's statement of earnings for such accounting period.
On August 20, 1997, ProVantage acquired PharMark, a software and database
development company providing information driven strategies for optimizing
medical and pharmaceutical outcomes, based in Arlington, Virginia, from M. Lee
Morse and Aida A. LeRoy. Mr. Morse and Dr. LeRoy were employed by ProVantage
from August 20, 1997 to January 31, 1999 pursuant to employment agreements
entered into in conjunction with the acquisition. The purchase price for
PharMark was approximately $15.2 million, of which $14.2 million has been paid
in cash and a total of $1.0 million is due in 1999. The sellers of PharMark may
also be entitled to contingent payments of up to $8.0 million in the aggregate
based on the fair market value of ProVantage's outstanding common stock. No
payment will be due if the fair market value is $250.0 million or less at the
measurement date; the full $8.0 million will be due if the value equals or
exceeds $500.0 million at the measurement date; and a pro rata portion of the
$8.0 million contingent payment will be due if the value is between $250.0
million and $500.0 million at the measurement date. The contingent payments, if
any, will be due, and the ultimate amount of the payment calculated, on the
first to occur of August 20, 2002 and the date on which ShopKo and its
affiliates cease to own at least a majority of ProVantage's outstanding common
stock, which will not happen in the offering. The contingent payments, if any,
will be capitalized as additional purchase price and amortized over a period of
15 to 19 years.
The contingent payments may be made, at ProVantage's election, in either
cash, ShopKo common stock, ProVantage common stock or any combination thereof;
provided, however, that any stock used for such payments must be traded on a
national securities exchange or the Nasdaq National Market. If the contingent
payments are made in ShopKo or ProVantage common stock, the sellers have the
right to require the issuer of
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the stock to register the stock for sale under the Securities Act. The sellers
also have the right to have the shares of common stock they receive as
contingent payment included in registration statements filed under the
Securities Act by the issuer. The employment agreements entered into in
conjunction with the acquisition of PharMark were mutually terminated as of
January 31, 1999. Payments of approximately $1.1 million were paid to Mr. Morse
and Dr. LeRoy at the time of termination.
ProVantage's intangible assets are amortized over a period of 18-22
years. This period was determined based on ProVantage's estimates of its
retention rates of its customers.
ProVantage expects to continue its internal growth and may also consider
the acquisition of health services businesses. Such plans may be reviewed and
revised from time to time in light of changing conditions. Depending upon the
size and structure of any such acquisition, ProVantage may require additional
capital resources. ProVantage believes that adequate sources of capital will be
available.
Year 2000
State of Readiness. In order to address Year 2000 compliance, ProVantage
has initiated a comprehensive project designed to eliminate or minimize any
business disruption associated with potential date processing problems in its
information technology systems, as well as its non-information technology
systems. The project consists of five phases: company awareness, assessment,
strategy and work plan development, renovation and testing. ProVantage has
completed the first three phases for both information technology and non-
information technology systems, is nearly complete with the fourth phase, that
is, renovation, and is actively engaged in the fifth stage of testing.
With respect to information technology systems, approximately 80% of
ProVantage's critical business systems are currently compliant, approximately
5% of them will be retired and approximately 15% are in the process of being
renovated. With respect to non-information technology systems, the assessment
phase indicated a need for only minor renovation work. For both information
technology and non-information technology systems, the renovation phase
currently underway is expected to be completed in the second quarter of fiscal
1999. The testing phase for both information technology and non-information
technology systems is planned to be completed in the third quarter of fiscal
1999.
As part of its Year 2000 project, ProVantage has initiated communications
with all of its vendors and service suppliers to assess their state of Year
2000 readiness. A significant percentage of its important vendors have
responded in writing to ProVantage's Year 2000 readiness inquiries. ProVantage
plans to continue assessment of its third party business partners, including
face-to-face meetings with management and/or onsite visits as deemed
appropriate. Despite ProVantage's diligence, there can be no guarantee that the
systems of other companies which ProVantage relies upon to conduct its day-to-
day business will be compliant.
Costs. ProVantage estimates that it will incur internal and external
expenses of $0.8 to $1.0 million in conjunction with the Year 2000 compliance
project of which approximately $0.6 million had been incurred as of May 1,
1999. Of this amount, $0.4 million was incurred in fiscal 1998, and $0.2
million was incurred in the first quarter of fiscal 1999.
Risks. With respect to the risks associated with its information
technology and non-information technology systems, ProVantage believes that the
most reasonably likely worst case scenario is that ProVantage will experience a
number of minor systems malfunctions and errors in the early days and weeks of
the Year 2000 that were not detected during its renovation and testing efforts.
ProVantage also believes that these problems will not be overwhelming and will
not have a material effect on ProVantage's operations or financial results.
However, despite our compliance program we may have overlooked or otherwise not
remedied Year 2000 issues which may have a material adverse effect on us.
With respect to the risks associated with third parties, ProVantage
believes that the most reasonably likely worst case scenario is that some of
ProVantage's vendors will not be compliant. Management also believes that the
number of such vendors will have been minimized by ProVantage's program of
identifying
29
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non-compliant vendors and replacing or jointly developing alternative supply or
delivery solutions prior to the Year 2000.
ProVantage also designs, licenses and sells software products to third
parties. While ProVantage has taken steps to ensure the readiness of this
software and believes it to be compliant, ProVantage cannot be certain that the
software will operate error free, or that ProVantage will not be subject to
litigation, whether the software operates error free or not. However,
ProVantage believes that based on its efforts to ensure compliance, and the
terms and conditions of its software licensing contracts, it is not reasonably
likely that ProVantage will be subject to such litigation.
ProVantage has limited the scope of its risk assessment to those factors
which it can reasonably be expected to have an influence upon. For example,
ProVantage has made the assumption that our customers, government agencies,
utility companies and national telecommunications providers will continue to
operate. Their failure to remedy their Year 2000 problems could have a material
adverse effect on ProVantage's results of operations and ability to operate,
but ProVantage has little, if any, ability to influence such an outcome.
Contingency Plans. ProVantage has recently begun planning preparations to
handle the most reasonably likely worst case scenarios described above.
ProVantage intends to complete the contingency plans for these scenarios during
the second quarter of fiscal 1999.
Year 2000 Readiness Statements. To allow its customers and suppliers an
opportunity to assess ProVantage's state of readiness for the Year 2000,
ProVantage maintains a Year 2000 web page at www.provantageinc.com. Statements
made or contained in this prospectus or on our web page or any past statements
made or contained in this prospectus or on our web page are deemed Year 2000
Readiness Statements and are subject to the Year 2000 Information and Readiness
Disclosure Act (P.L. 105-271), to the fullest extent permitted by law.
Recent Pronouncements
In 1997, Statement of Financial Accounting Standards, SFAS, No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," were issued. Both statements have
been adopted by ProVantage. SFAS No. 130 "Reporting Comprehensive Income"
requires non-cash changes in stockholders' equity be combined with net income
and reported in a new financial statement category entitled "comprehensive
income." Currently, ProVantage's only component of comprehensive income is net
income. SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" requires ProVantage to report certain information if specific
requirements are met about services, geographic areas of operation and major
types of customers. ProVantage provides integrated health benefit management
services to its customers, and these services account for substantially all of
ProVantage's net sales. As a result, ProVantage's operations will be reported
in one segment.
In 1998, SFAS No. 132, "Employers' Disclosures about Pensions and other
Post-retirement Benefits," and SFAS No. 133, "Accounting for Derivative
Investments and Hedging Activities," were issued. SFAS No. 132 was adopted by
ProVantage and will have no impact on ProVantage's annual financial statements.
SFAS 133 must be adopted by June 15, 1999. ProVantage is currently evaluating
the impact of this statement, but it is not anticipated to have a significant
impact on ProVantage's annual financial statements.
Inflation
Inflation has not had a significant effect on the results of operations
of ProVantage or its internal and external sources of liquidity.
Market Risk
ProVantage has not historically been subject to material market risk,
such as interest rate risk or foreign currency exchange risk. In the future,
the rate of interest paid by ProVantage under its credit agreement with ShopKo
will generally be subject to changes in interest rates.
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BUSINESS
Overview
We are a leading health benefit management company providing pharmacy
benefit management and health information technology products and services to
our customers. Our goal is to be the leading third-party supplier of products
and services designed to optimize the quality and minimize the cost of
healthcare services. As of January 1999, we provided services to over 3,500
customers, including pharmacy benefit management services covering
approximately 4.5 million individuals and vision benefit management services
covering approximately 500,000 individuals. In addition, our licensed products,
which are designed to improve the quality of healthcare, are being used by our
clients in programs covering over 13 million people. We have experienced
significant growth since fiscal 1995, increasing revenues from $81.2 million to
$643.3 million in fiscal 1998, representing a compound annual growth rate of
approximately 99%. Approximately 75% of our growth in the number of people who
use our pharmacy benefit management services during this period has been
generated internally rather than through acquisitions.
Pharmaceuticals are the fastest growing component of healthcare
expenditures and are generally recognized as being the most difficult for
payors to control. According to IMS Health, U.S. pharmaceutical expenditures
are expected to grow by a compound annual growth rate of 14.5% through 2002. We
believe this market should provide us with opportunities for substantial
growth.
We believe that we are differentiated from most of our competitors by:
. our ability to integrate medical claim, diagnosis and
pharmaceutical data and to analyze this data with our 7,800 rules
that are used to identify improper, ineffective or dangerous drug
use,
. our ability to provide useful data which our clients can use to
reduce drug-related hospitalization and other medical costs,
. our expertise and experience acquired in developing an integrated
database of pharmaceutical and medical claims data on over 13
million people, which we believe is one of the largest databases
of its kind, and
. our ability to offer more comprehensive solutions to our customers
to optimize the quality and minimize the cost of healthcare
services.
We believe that only a small number of our competitors are capable of
offering clients the combination of products, expertise and experience that we
can.
Pharmacy benefit management companies address the pressing need of health
plan sponsors to manage costs and to better understand the effect of
pharmaceutical utilization on their membership. Our traditional pharmacy
benefit management products and services include plan design, administration of
a network of over 50,000 retail pharmacies, electronic point-of-sale claims
processing, mail pharmacy services, formulary administration/management,
physician profiling and clinical services. In addition, our products go beyond
commonly available pharmacy benefit management offerings to include clinical
services and information-based products which are used to track medical
treatment and a patient's response to that treatment. These services give our
customers the ability to assess the safety and effectiveness of healthcare
practices and to identify the most effective treatments, potentially lowering
overall costs.
Our customers include healthcare payors, self-funded employers, third
party health plan administrators, state and federal agencies and pharmaceutical
manufacturers. We believe that our customers are increasingly seeking health
management vendors that can help them reduce medical costs by identifying
opportunities to improve outcomes. While pharmacy benefit management companies
are in a unique position to fulfill this need, we believe that few of them are
able to organize and analyze payor specific data regarding pharmaceutical
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use and medical encounters. We believe that our ability to integrate patient
pharmacy and medical data allows our clients and us to assess overall
healthcare results.
One of our principal information-based services, which was launched in
mid-1998, is our Advanced Therapeutic Intervention program. This program is
designed to:
. review a client's pharmaceutical utilization and medical
diagnosis, claims and prescription data on an integrated basis,
. indentify prescribing patterns that exceed recommended periods of
use, unnecessary drug duplication and over- and under-utilization,
. identify specific patients who have been prescribed drugs that
significantly increase the risk of hospitalization or other
adverse medical events due to underlying medical conditions and
multiple diseases, and
. intervene with the treating physicians to identify significant
drug therapy related risks.
We believe this program provides a measurable return on investment to our
clients. The core of our Advanced Therapeutic Intervention program is
RationalMed, our clinical outcomes assessment software that analyzes our
clients' medical and pharmaceutical data to identify problematic prescribing
patterns. Under the direction of our physicians, our staff clinicians review
the risk assessments generated by RationalMed, and intervene with the treating
physicians. We believe the specific information provided by our Advanced
Therapeutic Intervention program can be used to reduce medical costs and allow
us to increase sales to larger and more sophisticated customers.
In addition to our pharmacy benefit management products and services, we
have developed and continue to develop Internet-accessible health information
technology products designed to assist in management of healthcare results.
Certain of these products access our integrated database of pharmaceutical and
medical claims data on over 13 million people, which we believe is one of the
largest databases of its kind. We intend to broaden our product offering and
cross-sell more advanced health information technology products to our more
sophisticated clients. We believe that we have a competitive advantage over
stand-alone healthcare information system companies because of our pharmacy
benefit management relationships with payors, self-funded employers and third
party health plan administrators.
Background
We are a wholly-owned subsidiary of ShopKo Stores, Inc., a leading
specialty discount retailer with pharmacies and optical centers in most of its
retail stores. Capitalizing on its expertise in pharmacy operations, in 1993
ShopKo launched ProVantage as a mail service pharmacy. We have grown primarily
through internal growth but have also expanded through acquisitions and
strategic alliances. In 1995, we acquired Bravell, Inc., a full-service
pharmacy claims adjudication company. In 1996, we acquired CareStream ScripCard
and also began to offer vision benefit management services. In 1997, we
expanded significantly our clinical expertise and added to our databases with
the acquisition of PharMark.
Industry Overview
The Healthcare Financing Administration projects that healthcare
expenditures will rise from $1.15 trillion in 1998 to $2.13 trillion by 2007, a
compound annual growth rate of 7.1%. The managed care industry in the United
States has experienced rapid growth in response to historical increases in
healthcare costs. Payors have sought to minimize certain of these expenses by
capturing economies of scale, controlling utilization and developing risk
sharing strategies. Prescription drug costs represent the fastest growing
component of healthcare costs according to an industry publication.
Pharmaceutical sales in the United States are expected to increase at a
compound annual growth rate of 14.5% and to reach approximately $173 billion in
the year 2002. The major factors contributing to this trend include:
. a substantial increase in the number of major new product launches
due to a shorter FDA approval cycle,
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<TABLE>
<C> <S>
. premium prices for new or branded products,
. increased expenditures for new drug development,
. an aging population, and
. increased demand driven by direct-to-consumer advertising.
</TABLE>
In response to increasing demand for pharmaceuticals, health benefit
providers, such as payors and employers, have been searching for ways to better
understand and control drug costs. Pharmacy benefit management companies help
health benefit providers provide a cost effective drug benefit and better
understand the impact of pharmaceutical use on total healthcare expenditures.
In their most basic role as cost savers, pharmacy benefit management
companies provide access to a network of retail pharmacies which have
contractually agreed to provide pharmaceuticals at discounted rates.
Pharmaceutical claims are electronically processed by the pharmacy benefit
management companies from the point of sale, providing operating efficiencies.
Pharmacy benefit management companies also secure volume discounts and rebates
and formulary concessions from pharmaceutical manufacturers, which they
generally share with their clients thereby lowering their clients'
pharmaceutical costs. Such discounts, rebates and concessions are typically
paid directly by the pharmacy benefit management companies to their clients.
Formularies are lists of approved drugs available to health plan participants.
Pharmacy benefit management companies also seek to influence behavior patterns
by encouraging the substitution of generic products for more costly branded
alternatives by lowering the copayments from the plan member for generic
products when available.
These cost reduction strategies have become widely used in the healthcare
industry in recent years, however, and payors are now seeking a more
sophisticated approach to managing pharmaceutical expenditures which
incorporates a focus on the quality and efficiency of care as opposed to solely
on cost cutting. Rather than viewing pharmaceutical expenditures as discrete
cost items, payors are beginning to seek an understanding of the effect that
pharmaceutical treatment has on overall healthcare costs and patient care.
We believe that prospective customers are increasingly selecting pharmacy
benefit management companies based on their ability to identify both favorable
and harmful prescribing patterns and to selectively intervene with physicians
and patients to provide information resulting in improved healthcare outcomes
and significantly lower costs. Pharmacy benefit management companies with the
ability to access and derive meaningful conclusions from medical,
pharmaceutical and diagnostic information will have a competitive advantage.
While both payors and providers are intently focused on disease management,
many do not have the scale, expertise and/or resources to internally develop
the data warehouse, decision support tools and clinical therapeutic
capabilities necessary to effectively manage overall healthcare results.
Therefore, we believe that there is a substantial opportunity for organizations
capable of providing information technology based solutions to this market.
Strategy
Overview
Our goal is to be the leading third-party supplier of products and
services designed to optimize the quality and minimize the cost of healthcare
services. To accomplish this goal, we intend to:
<TABLE>
<C> <S>
. continue to grow our pharmacy benefit management business and expand
our client base by increasing the number of people to whom we provide
services,
. leverage our information-based clinical expertise to develop and
enhance products and services that help manage healthcare treatment
and results, and
. selectively pursue acquisitions and alliances through which we can
realize additional scale benefits in our pharmacy benefit management
offerings or augment our advanced clinical and health information
technology capabilities.
</TABLE>
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Grow Pharmacy Benefit Management Business. We intend to aggressively grow
our pharmacy benefit management business by increasing the number of people to
whom we provide pharmacy benefit management services and continuing to expand
the breadth of our product offerings. We have built a leading franchise in the
small group market based on our ability to provide individually tailored
products to fit the unique needs of our clients. We believe that we are able to
provide these customers with a level of flexibility in benefit design not
offered by our competitors. Additionally, we have focused intensively on
service, quality and responsiveness and we believe that our clients value this
difference.
While the small group market remains a major focus for us, we believe
that the mid-sized market offers a substantial growth opportunity. As part of
our efforts to penetrate this market, we are building a comprehensive marketing
program targeting larger clients. We believe that we are well positioned to
serve these larger and generally more sophisticated customers which are often
looking for partners who can provide them with healthcare treatment and results
information that enables them to reduce costs. Our sales efforts to this market
are designed to demonstrate that our advanced clinical products and services go
beyond those offered by our competitors by enabling our clients to:
<TABLE>
<C> <S>
. meaningfully reduce overall healthcare costs, not just pharmacy
costs,
. quantify cost savings, and
. improve healthcare treatment and results.
</TABLE>
These products and services include our Advanced Therapeutic Intervention
programs, therapeutic and disease management programs, and a variety of
information-based consultative services including physician profiling and
formulary design. The basis for many of our advanced clinical products and
services is our database of integrated pharmaceutical and medical claims data
on over 13 million people. Since 1997, our marketing efforts to more
sophisticated clients, both small and mid-sized, have resulted in the addition
of new clients representing a commitment of approximately 900,000 people to
whom we will provide pharmacy benefit management services, including Wausau
Insurance, Security Health Plan and American National Insurance.
In addition to attracting a larger client base, we intend to leverage our
relationships and clinical expertise in managing pharmaceutical benefits to
market a broader array of products. These products can be sold alone or in
bundled form, based on our client's needs. We plan to use our more
sophisticated clinical services to gain access to new customers which might not
be looking to make a change in their provider of traditional pharmacy benefit
management services. Once we have established a relationship with a client and
demonstrated our capabilities, we believe that we have the opportunity to
cross-sell additional offerings to the customer. Furthermore, we believe that
sales of our more advanced, clinically focused products can help mitigate
margin pressure currently being experienced in traditional pharmacy benefit
management services.
Develop Healthcare Management Products. We have leveraged our
information-based clinical expertise in managing pharmaceutical benefits to
develop health information technology products which focus on the broader goal
of analyzing various factors which influence total health outcomes. These
products provide analytical tools which we believe are valuable to payors,
pharmaceutical manufacturers and physicians. These products benefit from
algorithms developed through analyzing millions of patient-years of health
claims in our database. Our algorithms are sets of rules we use to predict the
probability of various results. We believe that this gives us a strong platform
on which to build a reputation as a company with sophisticated health
information technology products capable of identifying clinical practices that
reduce costs and improve the quality of healthcare.
Pursue Acquisitions and Alliances. We intend to selectively pursue
acquisitions or alliances with companies that either provide us with the
opportunity to realize additional scale benefits in our pharmacy benefit
management business or augment our advanced clinical and health information
technology capabilities. During the past five years, we have acquired four
companies, each of which has added either critical mass to
34
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our pharmacy benefit management business or a new core competency which we can
offer to our clients. For example, in 1997 we acquired PharMark, which had
sophisticated software tools and a large database. PharMark's database has
served as the springboard for marketing a number of health information
technology-based products to payors and pharmaceutical manufacturers.
In addition to acquisitions, we are seeking corporate alliances to expand
our health information technology capabilities. For example, in a joint venture
with our largest pharmacy benefit management client, American Medical Security,
Inc., we have acquired a minority interest in ThinkMed, LLC, a developer of
medical decision support software. ThinkMed's software identifies and
categorizes high risk patients for case management. We are currently exploring
methods of integrating ThinkMed software into our current product offerings.
These types of alliances allow us to gain access to new technology and data
without committing the level of financial and management resources associated
with a major acquisition.
Products and Services
We provide prescription and vision benefit management services and
healthcare information-based products and clinical services. We believe that
our pharmacy benefit management services, in combination with our information-
based products and services, result in a highly differentiated product offering
with the potential to assess the effectiveness of healthcare services, identify
ways of improving healthcare results, and lower pharmaceutical and, more
importantly, overall medical costs.
The following table sets forth ProVantage's product and service revenues
as percentages of consolidated net revenues. A majority of our revenues are
derived from product sales. Product revenues include the cost of
pharmaceuticals dispensed by pharmacies participating in the network maintained
by ProVantage, sales from ProVantage's mail service pharmacy and the cost of
eyeglasses and contact lenses dispensed by optical centers participating in
ProVantage's vision benefit management network. Service revenues include
administrative and dispensing fees associated with ProVantage's pharmacy and
vision benefit management services, and license and service fees for health
information technology and clinical support services.
<TABLE>
<CAPTION>
Year (52 Weeks) Ended Quarter (13 Weeks) Ended
---------------------------------------- -----------------------------
Feb. 1, 1997 Jan. 31, 1998 Jan. 30, 1999 May 2, 1998 May 1, 1999
------------ ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Products................ 95.9% 95.4% 95.6% 95.0% 96.1%
Services................ 4.1 4.6 4.4 5.0 3.9
----- ----- ----- ------------ ------------
Total Revenues...... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ============ ============
</TABLE>
Revenues from the dispensing of pharmaceuticals from our mail service
pharmacy are recognized when the prescription is shipped. Revenues from claim
processing fees and sales of prescription drugs and vision benefits by
pharmacies and vision providers in our network are recognized when the claims
are processed. When we provide pharmacy and vision benefits to members in
health benefit plans sponsored by our clients and have an independent
contractual obligation to pay our network pharmacy and vision providers for
benefits provided to members in our clients' health benefit plans, we include
payments from plan sponsors for these benefits as net sales. If we are only
administering the plan sponsors' pharmacy benefit contract, we record only the
administrative fees derived from the contract as revenue. Clinical and health
information technology revenues are recognized as the services are performed
and earned in accordance with contractual agreements.
Most of our net earnings are derived from administrative fees and the
portion of formulary concessions which we retain. Competitive pressures have
caused us to share a greater portion of our formulary concessions with our
clients. Our formulary concessions retained in fiscal 1998 were $13.9 million.
If formulary concessions decline because of reductions or eliminations of
concessions by pharmaceutical manufacturers or because of increased sharing of
concessions with our clients, then ProVantage's earnings could be significantly
and negatively impacted.
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Healthcare Benefit Management Services
We provide high quality, cost efficient pharmacy benefit management
services to health plan sponsors. As of January 1999, we provided pharmacy
benefit management services to approximately 4.5 million people and vision
benefit management services to approximately 500,000 people through more than
3,500 customers. Our core client base has historically been small to mid-size
employers, insurance companies, third party administrators, health maintenance
organizations, HMOs, and self-funded healthcare plan sponsors. We increasingly
are marketing our pharmacy benefit management services to larger organizations
based on our advanced clinical and information-based products and services.
Pharmacy Benefit Management Services. Our pharmacy benefit management
services include national retail pharmacy network administration, claims
adjudication services, mail pharmacy service, formulary development and
management and benefit plan design consultation. We manage a network of over
50,000 retail pharmacies to provide prescription drugs to health plan members.
We contract with these pharmacies to fill prescriptions at predetermined,
negotiated rates, which are significantly more favorable than typical retail
prices, in exchange for designating them as network pharmacies. Health plan
members can fill prescriptions at a network pharmacy in all 50 states, Puerto
Rico and the Virgin Islands. We use on-line point-of-sale electronic claims
processing with pharmacies for swift adjudication of pharmacy claims. When a
member presents his or her identification card at any one of our network
pharmacies, the pharmacist sends encrypted information electronically to us for
processing. Before the prescription is filled, we provide to the pharmacist all
pertinent member, health plan and payment information necessary to fill the
prescription. The information we provide to the pharmacist includes:
<TABLE>
<C> <S>
. an analysis of whether the member is eligible for benefits,
. the prescription benefits the member's health plan has selected,
. the member's co-payment obligation,
. the amount 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.
</TABLE>
We are compensated for pharmacy benefit management services through
processing fees, clinical service fees, formulary administration fees and
reimbursement of the cost of the pharmaceuticals dispensed. In addition,
various ancillary and information management fees may be charged.
Our mail service pharmacy offers health plans and their members a cost
effective way to receive maintenance prescription drugs to treat chronic
illnesses. Members mail their prescriptions, which typically provide for up to
a three month supply, to our mail service pharmacy, where we process and mail
their prescriptions, typically within two business days of receipt. Our mail
service pharmacy helps control prescription costs for health plan sponsors by
buying drugs at volume discounts and dispensing generic drug products when
appropriate. Our mail service pharmacy helps control overall healthcare costs
with compliance programs such as calling the members when they neglect to
refill important prescriptions. As of February 1999, our mail service pharmacy
in Green Bay, Wisconsin, dispensed and mailed approximately 75,000
prescriptions per month. Currently customers representing over 50% of the
number of people to whom we provide pharmacy benefit management services
contract with us for access to pharmaceuticals through both our retail pharmacy
network and our mail service pharmacy. In addition to our profits from the sale
of the pharmaceuticals themselves, we are compensated for providing our mail
service pharmacy program by charging our clients a fee per prescription order.
Our Advanced Therapeutic Intervention program is one of the key
differentiating features of our pharmacy benefit management services. We began
providing this service in mid-1998. According to industry sources, a
significant amount of in-patient medical costs are induced by inappropriate
prescription drug therapy. Most pharmacy benefit management companies use
traditional drug utilization review programs to reduce drug-
36
<PAGE>
induced adverse effects caused by drug-on-drug conflicts, duplication of
prescriptions and similar problems. However, these programs are of limited
effectiveness because they are administered without reference to a patient's
specific medical profile and consequently must assume the lowest drug tolerance
for each patient. We believe that as a result, pharmacists typically receive
numerous drug utilization review warnings per day, many of which are not
applicable to any given patient and are often ignored.
Our Advanced Therapeutic Intervention program analyzes the prescription
drug and medical encounter data of each of our participating clients. Using our
RationalMed software, this data is analyzed to identify specific patients who
have been prescribed drugs that significantly increase the patient's risk of
hospitalization due to the underlying medical condition and multiple diseases.
A clinical pharmacist reviews the results and determines those patients for
whom intervention is appropriate. Our clinical staff, under the direction of
our physicians, intervenes by issuing alerts for these patients to the treating
physicians. These alerts inform the treating physicians of the medical
condition, prescribing pattern or other factors that create the increased
hospitalization risk. We are compensated for Advanced Therapeutic Intervention
program services through fixed fees, per member per month fees, a percentage-
of-savings sharing program or some combination of these arrangements. Three
clients, representing approximately 690,000 people, have been enrolled in our
Advanced Therapeutic Intervention program since August 1998.
Our pharmacy benefit management services also include plan design
consultation intended to reduce drug costs while promoting clinically
appropriate drug use. The most common plan design features we offer are co-pay
options, incentives for substituting generic for branded drugs, limitations on
the number of days per prescription and requirements that maintenance drugs be
filled by the mail service pharmacy. We assign an account executive to work
closely with each customer to determine the appropriate plan design features
based on the customer's specific benefit requirements.
We also offer and manage formularies for clients. Our formulary is a list
of drugs which are reviewed for safety and efficacy using our DOC Formulary
analytical tool. Formularies reduce costs through generic substitution,
therapeutic substitution and other techniques. Formulary compliance can be
encouraged by plan design features, including financial incentives and
prescriber education programs.
We receive payments under formulary agreements from pharmaceutical
manufacturers. Generally, the payment amounts vary based on the changes in
sales volume of specified products sold through our network and mail service
pharmacies. Most of these agreements stipulate that in order to receive
payments, minimum changes in sales volumes are required for specified
pharmaceutical products. Currently, almost all of these agreements require
these minimum changes in sales volumes to be achieved on a quarterly basis
before we are entitled to payment. The amounts due to us under these agreements
are recorded as reductions to cost of sales upon achieving the stipulated
minimum changes in sales levels. While many of these agreements also require us
to perform certain activities, including maintaining formulary lists, marketing
support with the manufacturer, recordkeeping, and reporting, we generally do
not consider them to be revenue producing activities for accounting purposes.
These contracts stipulate the frequency with which we can bill the
manufacturers, which generally is either monthly or quarterly.
Working with clients and the pharmaceutical industry, we have been able
to conduct many disease management initiatives that support patient education
and self-management of specific diseases. Through these efforts, we are able to
implement treatment protocols that result in improved overall health and fewer
incidents of unnecessary treatments.
Vision Benefit Management Services. We provide benefit management
services to client plan sponsors offering vision benefits. As of January 1999,
our vision benefit management business covered approximately 500,000 people
through a national network of approximately 4,500 retail optical chains and
private ophthalmologists, optometrists and opticians. Unlike the pharmacy
benefit management business, the vision benefit management business offers
self-insured as well as fully insured products. The self-insured products we
37
<PAGE>
offer are similar to our pharmacy benefit management product and service
offering. The insured products are sold by licensed independent and employee
sales agents and are underwritten by a licensed insurance company, a subsidiary
of American International Group. Our arrangement with AIG requires us to market
the insurer's vision products and to perform various administrative services,
such as maintenance of eligibility records, network maintenance, and claims
processing. AIG underwrites all insured contracts and provides other insurance-
related services such as actuarial review. In consideration for our services,
we receive administrative fees and have the potential for profit sharing based
on improved operating results. In consideration of AIG's insurance services AIG
receives the entire premium amount collected, from which it pays claims and all
other expenses.
Healthcare Information Technology Products and Services
Our healthcare information technology allows us to add value to our
pharmacy benefit management services. We have gained a core competency in
developing, maintaining, and analyzing large repositories of integrated
pharmaceutical and health claims information. This was demonstrated by our
development of a database containing integrated claims data on over 5 million
patients in the United Kingdom. We developed and maintained this database,
which contained millions of patient-years of data, as a consultant for a major
pharmaceutical manufacturer.
We have acquired or developed a number of healthcare information products
and services over the last several years. These products include RationalMed,
ProVQuery, ProVMed, and ProVCOR. The following table sets forth certain
information with respect to our principal healthcare information technology
products as of January 1999:
<TABLE>
<CAPTION>
Number of
Number People
Product of Covered by
Product Target Market Rollout Clients Product
----------- ------------------------------------------- ------- ------- ----------
<S> <C> <C> <C> <C>
RationalMed Pharmacy Benefit Management Providers, 1993 14(1) 13 million
Health Insurers and State and Federal
Agencies
ProVQuery Pharmacy Benefit Management Providers and 1998 6 770,000(2)
Pharmacy Benefit Management Clients
ProVMed Health Insurers and Payors 1999 1(3) 600,000(3)
ProVCOR Pharmaceutical Manufacturers 1999 -- --
</TABLE>
--------
(1) RationalMed users, excluding ProVantage.
(2) In addition to customers which have contracted for ProVQuery, ProVantage
uses the product to support all of its pharmacy benefit management
clients.
(3) The beta site customer.
RationalMed. RationalMed is our clinical outcomes assessment software
that integrates the clients' medical claim, diagnosis, and pharmaceutical data
to identify problematic prescribing patterns and quantify the resulting
increased risk of patient hospitalization or other adverse medical events.
RationalMed uses therapeutic criteria for disease categories and over 7,800
rules that are based on medical research to analyze the integrated medical data
for drug-drug, drug-disease, over- and under-utilization, duplication and
duration conflicts. The physician can therefore determine whether treating the
condition is worth this added risk. In addition, by comparing historical data
on the percentage of patients who were hospitalized the previous year to the
percentage in the intervention year, RationalMed is able to quantify both the
reduction in drug and medical costs and in drug-therapy related
hospitalizations, thereby validating the return on the product. RationalMed won
the Smithsonian Award for Information Technology in Medicine in 1995.
Our target market for RationalMed is pharmacy benefit management
providers, health insurers and state and federal agencies. RationalMed was
first marketed in 1993 on a license basis and is currently used in ten states
for their Medicaid programs and for other customers, representing approximately
13 million covered people.
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<PAGE>
ProVQuery. ProVQuery is an Internet-accessible pharmaceutical decision
support software system. The system provides clients with desk-top access to
their prescription claims detail for profiling, national comparisons, drug
category breakdown and demographic analyses. This information is provided in
user-friendly pre-designed graphs and reports. Customers' data is loaded into
our centralized data warehouse. The central warehouse currently contains
prescription claims detail on virtually all of the 4.5 million people to whom
we provide pharmacy benefit management services.
With access to our national data, clients can compare their experience to
peer data to better determine where plan changes are necessary and are most
likely to have the greatest impact. The information is provided through user-
friendly, Windows-based systems. For patient confidentiality reasons, all
identifiers of patients are removed prior to loading the data into the
ProVQuery system. Our target market for ProVQuery is pharmacy benefit
management providers and our pharmacy benefit management clients, and this
product is often packaged with our traditional pharmacy benefit management
services and Advanced Therapeutic Intervention program in client proposals. We
currently provide ProVQuery to five clients representing approximately 770,000
people. In addition, in January 1999 Systems Xcellence USA, Inc. purchased
three ProVQuery licenses for resale to end users. We offer ProVQuery on the
basis of an upfront license fee with annual service fee or on a per-claim
basis.
ProVMed. ProVMed is an administrative, financial and clinical decision
support tool that provides direct and easy access to company-wide data
traditionally contained in the customer's separate databases. Our IBM SP2
technology and Oracle databases give quick and easy access to all pertinent
information. It offers organized workbenches and hundreds of standard queries.
As with ProVQuery, a client provides us with its data, which is loaded into our
centralized data warehouse. The client then has access to its own data as well
as other data for comparison purposes.
ProVMed gives clients the ability to access their medical and
pharmaceutical data as well as to view that data relative to national norms.
For example, ProVMed will enable users to quickly access databases to identify
physicians and healthcare providers performing outside the norm, or patients
that are candidates for case management with a view to managing and lowering
costs. This information can be used to support plan benefit design changes,
restrict or encourage protocol usage, perform provider profiling, enhance
provider contracting and adjust product pricing decisions throughout an
organization.
ProVMed was developed as a joint venture with American Medical Security,
Inc., one of our principal pharmacy benefit management clients. We own 80% of
this joint venture. American Medical Security, Inc. is currently our only
subscriber to ProVMed. We believe the principal market for this product will be
large insurance companies, and we intend to offer the product on the basis of
an up-front license fee and an annual service fee.
ProVCOR. ProVCOR is a healthcare decision support product currently under
development. ProVCOR is designed to help study the effects of pharmaceutical
and clinical interventions on healthcare treatment and results in specific
disease areas. It is also being designed to offer disease-specific "datamarts,"
which can be accessed by the customer to create or support disease management
programs. It is intended to be an analytical tool to support drug purchasing
and dispensing, disease treatment protocol design and cost assessment, and
intervention outcomes analysis. We intend to market ProVCOR principally to
pharmaceutical manufacturers. We expect to commence marketing of ProVCOR in
1999, offering it on the basis of an up-front license fee with an annual
service fee.
39
<PAGE>
Acquisitions
Beyond internal growth, we intend to selectively pursue the acquisition
of companies that either increase the size of our pharmacy benefit management
business or augment our advanced clinical and health information technology
capabilities. We have extensive experience in identifying acquisition
candidates, completing acquisitions and integrating acquired companies into our
business. Since 1994, we have acquired and integrated four companies.
<TABLE>
<CAPTION>
Company Date Strategic Purpose
---------------------------- ------------ ------------------------------------------------
<S> <C> <C>
Bravell, Inc. January 1995 To acquire claims processing capability and
obtain access to approximately 40,000 retail
pharmacies
Vision Program and Related April 1996 To offer vision benefit management services
Assets of the United
Wisconsin Insurance Company
CareStream ScripCard July 1996 To grow core pharmacy benefit management
business
PharMark August 1997 To acquire healthcare information products and
obtain access to millions of patient-years of
health claims data
</TABLE>
Sales and Marketing
We market our pharmacy benefit management services on the basis of our
high quality customer service, our advanced clinical capabilities, including
our Advanced Therapeutic Intervention program, and our healthcare information
products. We have a nationwide sales force of 12 regional sales managers and
one director.
Sales of our healthcare information products tend to require marketing
support by our senior executives and approval at senior levels in a client's
organization and tend to have a long sales cycle. Our sales strategy in these
circumstances is to differentiate ourselves with these products and then to
cross-sell our traditional pharmacy benefit management and other services to
health information technology customers.
We have sales offices in:
. Charlotte, North Carolina . Atlanta, Georgia
. Dallas, Texas . Omaha, Nebraska
. Salt Lake City, Utah . Chicago, Illinois
. Scottsdale, Arizona . Arlington, Virginia
. Green Bay, Wisconsin . Milwaukee, Wisconsin
We also use a national network of independent agents and brokers who
market our products. For certain healthcare information products, we may in the
future use strategic partners or other distribution channels for product
marketing.
Clients
We currently provide health benefit management services for over 3,500
health benefit plan customers, covering over 5.0 million plan members. Our
health benefit management client base is comprised of health maintenance
organizations, third party administrators, insurance companies, self-funded
healthcare plan sponsors and government agencies. Our ten largest customers
accounted for approximately 45.1% of our
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<PAGE>
revenues in fiscal 1996, 38.2% of our revenues in fiscal 1997, 36.5% of our
revenues in fiscal 1998 and 39.9% of our revenues in the first quarter of
fiscal 1999. In addition, one of those ten customers, American Medical
Security, Inc., accounted for approximately 18.9% of our revenues in fiscal
1996, 12.1% of our revenues in fiscal 1997, 11.8% of our revenues in fiscal
1998 and 10.7% of our revenues in the first quarter of fiscal 1999. Our
contract with American Medical Security terminates on July 1, 2000. American
Medical Security has requested that we and other interested parties submit bids
to assume the business after our contract expires. Our health information
technology clients include federal and state agencies, third party health plan
administrators, health maintenance organizations, insurance companies and
pharmaceutical manufacturers. Ten states currently use our health information
technology for the operation of their state Medicaid programs.
Competition
We face direct competition in both the pharmacy benefit management and
vision benefit management businesses. The pharmacy benefit management industry
is relatively consolidated and dominated by large companies with significant
resources. Many of the large pharmacy benefit management companies are owned by
large companies, including pharmaceutical manufacturers, which can provide them
with significant purchasing power and other advantages which we do not have.
Competitors in this industry include other pharmacy benefit management
companies, drug retailers, physician practice management companies, and
insurance companies/HMOs. In addition to many smaller companies, our six
primary competitors for pharmacy benefit management customers are:
<TABLE>
<C> <S>
. PCS Health Systems, Inc., a subsidiary of Rite-Aid Corp.
. Merck-Medco Managed Care, LLC, a subsidiary of Merck & Co., Inc.
. Express Scripts, Inc.
. Caremark International, Inc., a subsidiary of MedPartners, Inc.
. Advance Paradigm, Inc.
. Diversified Pharmaceutical Services, Inc., a subsidiary of SmithKline
Beecham, which has announced that it will be acquired by Express
Scripts, Inc.
</TABLE>
We may also experience competition from other sources in the future, such
as Internet-based drug stores. Pharmacy benefit management companies compete
primarily on the basis of price, service, reporting capabilities and clinical
services. The primary competitor for vision benefit management services is
Vision Service Plan, which is the largest vision benefit management provider in
the nation. Vision benefit management companies compete principally on the
basis of size and scope of network, service and price. In most cases, the
competitors listed above are large, profitable and well-established companies
with substantially greater financial and marketing resources than us.
Our competitive strengths include the ability to help customers lower
hospitalization and other medical costs, our reputation for client service, our
database of integrated medical and pharmaceutical data, the use of cutting-edge
technology, and clinical capabilities that leverage our database and technology
strengths. We believe that pharmacy benefit management companies which are
unaffiliated with pharmaceutical manufacturers will be in a competitively
advantaged position; due to our independence, we are able to use our products
and an independent pharmacy and therapeutics committee to ensure that decisions
are primarily based on drug efficacy rather than on economics alone.
Suppliers
We have a large number of suppliers for goods and services. However, only
a few are significant in terms of sustaining our daily business. McKesson HBOC,
Inc. is our current wholesaler of pharmaceuticals for our mail service
pharmacy. International Business Machines Corporation, Oracle Corporation and
MicroStrategy Incorporated provide key computer systems that we use to manage
our internal databases and decision support tools. Commencing in 2000, we plan
to use the claims processing programs of Systems Xcellence USA, Inc. to process
pharmacy claims in the retail network.
41
<PAGE>
Government Regulation
Our business is subject to extensive federal and state laws and
regulations including:
Regulation of Pharmacy and Vision Benefit Management Services
Various forms of legislation and government regulations affect or could
affect providers of pharmacy and vision benefit management services. Among the
most prominent forms of such regulation are the following:
Open Network Legislation. Numerous states have adopted "any willing
provider" legislation, which requires pharmacy network sponsors to admit for
network participation any retail pharmacy willing to meet a healthcare plan's
price and other terms. We have not been materially affected by these statutes
because we administer a network of almost 50,000 retail pharmacies and will
admit any qualified, licensed pharmacy that agrees to comply with the terms of
our plans.
Anti-Remuneration Legislation. "Anti-kickback" statutes at the federal
and state level prohibit an entity from paying or receiving any compensation to
induce the referral of healthcare plan beneficiaries or the purchase of items
or services for which payment may be made under such healthcare plans.
Additionally, most states have consumer protection laws that have been the
basis for investigations and multi-state settlements relating to financial
incentives provided by pharmaceutical manufacturers to retail pharmacies in
connection with pharmaceutical switching programs. At the federal level, such
regulations pertain to beneficiaries of Medicare, Medicaid or other federally-
funded healthcare programs. State regulations typically pertain to
beneficiaries of any healthcare plan. Under the federal regulations, certain
payments made by vendors to group purchasing organizations are protected from
characterization as improper or illegal if they are properly disclosed. To our
knowledge, these anti-kickback laws have not been applied to prohibit pharmacy
benefit management companies from receiving amounts from pharmaceutical
manufacturers in connection with pharmaceutical purchasing and formulary
management programs, to therapeutic substitution programs conducted by
independent pharmacy benefit management companies, or to the contractual
relationships such as those we have with certain of our customers.
Some states have enacted legislation that prohibits the plan sponsor from
implementing certain restrictive design features, and many states have
introduced legislation to regulate various aspects of managed care plans,
including provisions relating to the pharmacy benefit. For example, "freedom of
choice" legislation in some states provides that members of the plan may not be
required to use network providers, but must instead be provided with benefits
even if they choose to use non-network providers. Other states have enacted
legislation purporting to prohibit the health plan from offering members
financial incentives for use of mail order pharmacies. Legislation has been
introduced in some states to prohibit or restrict therapeutic substitution, or
to require coverage of all FDA approved drugs. Other states mandate coverage of
certain benefits or conditions. Such legislation does not generally apply to
us, but it may apply to certain of our customers, such as HMOs and health
insurers. If such legislation were to become widespread and broad in scope, it
could have the effect of limiting the economic benefits achievable through
pharmacy benefit management and consequently make our services less attractive.
Consumer Protection Legislation. Most states have consumer protection
laws that have been the basis for investigations and multi-state settlements
relating to financial incentives provided by drug manufacturers to retail
pharmacies in connection with drug switching programs. In addition, pursuant to
a settlement agreement entered into with seventeen states on October 25, 1995,
Merck-Medco Managed Care, LLC, the pharmacy benefit management subsidiary of
pharmaceutical manufacturer Merck & Co., agreed to have pharmacists affiliated
with Merck-Medco Managed Care, LLC mail service pharmacies disclose to
physicians and patients the financial relationships between Merck & Co., Merck-
Medco Managed Care, LLC, and the mail service pharmacy when such pharmacists
contact physicians seeking to change a prescription from one drug to another.
42
<PAGE>
We believe that its contractual relationships with drug manufacturers and
retail pharmacies do not include the features that were viewed by enforcement
authorities as problematic in these settlement agreements. However, no
assurance can be given that we will not be subject to scrutiny or challenge
under one or more of these laws.
Legislation Affecting Drug Prices. Some states have adopted "most favored
nation" legislation providing that a pharmacy participating in the state
Medicaid program must give the state the best price that the pharmacy makes
available to any third party plan. Such legislation may adversely affect our
ability to negotiate discounts in the future from network pharmacies. Other
states have enacted "unitary pricing" legislation, which mandates that all
wholesale purchasers of drugs within the state be given access to the same
discounts and incentives.
Professional Licensure Regulations. All states regulate the practice of
medicine and the practice of nursing. We do not believe that our clinical
counseling or disease management activities constitute either the practice of
medicine or the practice of nursing. However, there can be no assurance that a
regulatory agency in one or more states may not assert a contrary position, and
there is no controlling legal precedent for services of this kind.
Comprehensive Pharmacy Benefit Management Legislation. Although no state
or the federal government has passed legislation regulating pharmacy benefit
management activities in a comprehensive manner, such legislation has been
introduced on several occasions. Such legislation, if enacted in any state in
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
43
<PAGE>
application of such laws to the activities of pharmacy benefit managers is
often unclear. We have registered under such laws in those states in which we
have concluded such registration is required.
Privacy and Confidentiality Legislation. Most of our activities involve
the receipt or use by us of confidential, medical information concerning
individual members, including the transfer of the confidential information to
the member's health benefit plan. In addition, we use aggregated data--that is,
data from which information which identifies specific patients is removed--for
research and analysis purposes. Legislation has been proposed at the federal
level and in several states to restrict the use and disclosure of confidential
medical information. To date, no such legislation has been enacted that
adversely impacts our ability to provide our services, but there can be no
assurance that federal or state governments will not enact legislation, impose
restrictions or adopt interpretations of existing laws that could have a
material adverse effect on our operations.
Applicability of Insurance Laws. The prescription pharmaceutical plans
currently offered or administered by us are provided on a fee-for-service
basis, and are therefore not generally subject to state insurance laws. The
insured vision benefit plans administered by us are underwritten by an
unaffiliated licensed insurer.
Employee Retirement Income Security Act. 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. In addition,
certain of our customers may be subject to ERISA fiduciary and other
requirements. Such requirements may cause us to be subject to ERISA oversight.
Future Legislative Initiatives. Legislative and regulatory initiatives
pertaining to such healthcare related issues as reimbursement policies, payment
practices, therapeutic substitution programs, and other healthcare cost
containment issues are frequently introduced at both the state and federal
level. We are unable to predict accurately whether or when legislation may be
enacted or regulations may be adopted relating to our health services
operations or what the effect of such legislation or regulations may be.
Substantial Compliance. We believe that we are in substantial compliance
with, or are in the process of complying with, all existing statutes and
regulations material to the operation of our health services business. To date,
no state or federal agency has taken enforcement action against us for any
material non-compliance, and to our knowledge, no such enforcement against us
is presently contemplated.
44
<PAGE>
Facilities
We operate a number of leased locations:
<TABLE>
<CAPTION>
Use Location Sq. Ft. of Building Space
------------------------------------ --------------------- -------------------------
<S> <C> <C>
Pharmacy Benefit Management/Vision
Benefit Management/Claims
Processing/ Administrative Office Brookfield, Wisconsin 14,100
Pharmacy Benefit Management/Vision
Benefit Management/Claims
Processing/ Administrative Office
Annex Elm Grove, Wisconsin 15,700
Regional Office Salt Lake City, Utah 1,250
Regional Office Dallas, Texas 500
Mail Service Green Bay, Wisconsin 10,000
ProVMed Offices Green Bay, Wisconsin 7,200
PharMark Offices Arlington, Virginia 15,500
</TABLE>
In addition, construction is underway on a new 60,000 square foot
corporate headquarters for us in Pewaukee, Wisconsin to replace the Elm Grove
and Brookfield facilities. This facility will be owned by ShopKo and leased to
us. This new building is expected to be available for occupancy in the Summer
of 1999.
Legal Proceedings
We are involved in various legal proceedings incidental to the conduct of
our business. While there can be no assurance, we do not expect that any such
proceedings will have a material adverse effect on us.
In August 1998, the U.S. Department of Labor requested information from
us concerning our contractual relationship with one employer group health plan
governed by ERISA. We acquired this contract when we acquired the CareStream
ScripCard business. We provided the requested information to the U.S.
Department of Labor, and have exchanged correspondence regarding additional
information. The U.S. Department of Labor has given no indication as to its
disposition of this matter, and we cannot provide any assurance as to the
ultimate outcome of this matter or what effect, if any, it will have on our
business.
Employees
As of January 30, 1999, we employed 391 people, 27 of whom are licensed
pharmacists and two of whom are physicians. In the opinion of management, we
have good relations with our employees.
Backlog
We have not historically operated with any significant backlog.
Other
ShopKo provides us with certain administrative assistance in accounting,
finance, human resources, facilities management, and information services.
Costs for these services are allocated to us proportionately. We believe that
over time we will become less reliant on ShopKo to provide these services. See
"Relationship With ShopKo" and "Certain Transactions."
45
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information with respect to our
director and executive officers as of January 30, 1999 and those individuals
who will be appointed to our board of directors prior to or concurrently with
completion of the offering. In addition, after the completion of the offering,
we will add two independent directors, who are unaffiliated with ShopKo, to our
board of directors.
<TABLE>
<CAPTION>
Name Age Position
------------------------- --- -------------------------------------------
<S> <C> <C>
Dale P. Kramer, RPh...... 59 Chairman of the Board
Jeffrey A. Jones......... 52 President and Chief Executive Officer and a
Director
George M. Barlow......... 52 Senior Vice President, Healthcare
Information Technology
Joseph A. Coffini, RPh... 51 Senior Vice President, Business Development
and Marketing
Peter F. Hoffman, M.D., Senior Vice President and Chief Medical
PhD..................... 54 Officer
Glen C. Laschober........ 48 Executive Vice President, HBM
Jeffrey C. Girard........ 51 Director
William J. Podany........ 52 Director
Gregory H. Wolf.......... 42 Director
</TABLE>
Mr. Kramer is currently our sole director. We will expand our board of
directors concurrently with the completion of the offering, adding Messrs.
Jones, Girard, Podany and Wolf.
Our directors are elected at the annual stockholders' meeting and serve
until their successors are duly elected and qualified or until their earlier
resignation or removal. The terms of directors will be staggered, with Mr.
Jones serving a term expiring in 2000, Messrs. Girard and Wolf serving terms
expiring in 2001, and Messrs. Kramer and Podany serving terms expiring in 2002.
Executive officers are appointed by and serve at the discretion of the board of
directors.
Dale P. Kramer, RPh, has served as our director and Chairman of the Board
since January 1998; a director and Chairman of the Board of our various
affiliates and predecessors in interest since 1993; a director of ShopKo since
August 1991; Chairman of the Board of ShopKo since July 1997; and President and
Chief Executive Officer of ShopKo from February 1991 to March 1999. From April
1983 to February 1991, he served as ShopKo's Executive Vice President, and from
February 1986 to February 1991, he served as its Executive Vice President and
Chief Operating Officer. Mr. Kramer has been employed by ShopKo in various
other positions since 1971.
Jeffrey A. Jones has served as our Executive Vice President and Chief
Operating Officer since November 1997. He will be named as our President and
Chief Executive Officer and will join our board of directors prior to or upon
completion of the offering. Mr. Jones was Senior Vice President and Chief
Financial Officer of ShopKo from November 1993 until August 1998. Mr. Jones had
11 years of executive and chief financial officer experience and 11 years of
experience with Arthur Andersen & Co. Mr. Jones is a director of Pharmacy Care
Management Association and Boys and Girls Club of Green Bay.
George M. Barlow has served as our Senior Vice President, Healthcare
Information Technology since January 1999. He served as the Vice President,
General Manager of ProVMed from December 1997 to January
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<PAGE>
1999. From 1995 to 1997, Mr. Barlow was Senior Director of Corporate Marketing
with HealthVision, Inc. He was the President of Distributed Micro Systems, Inc.
from 1980 to 1995.
Joseph A. Coffini, RPh, has served as our Senior Vice President, Business
Development and Marketing since January 1999. He served as our Vice President,
Managed Care Services from November 1994 to January 1999. From February 1993 to
November 1994, he held the position of Director of Managed Care. Prior to
joining us, Mr. Coffini had 26 years of experience in the pharmaceutical
healthcare industry with Geriatric and Medical Companies, Inc., last serving as
Pharmacy Division President from 1990 to 1993, and Thrift Drug Company, Inc.,
last serving as National Sales Manager of Third Party Programs from 1986 to
1990.
Peter F. Hoffman, M.D., PhD, has served as our Senior Vice President and
the Chief Medical Officer since January 1999. He served as the Vice President
and the Chief Medical Officer of PharMark from January 1998 to January 1999.
From June 1996 to January 1998, Dr. Hoffman was the Chief Medical Officer of
Wang Healthcare Information Systems, an electronic medical records company.
From 1966 until his retirement in 1996, Dr. Hoffman served as a Medical Corps
Officer in the United States Air Force. He commanded a wide range of medical
treatment facilities, served as the Command Surgeon of three commands and was
the Director of Programs and Resources in the Office of the Surgeon General of
the Air Force. He retired as a Brigadier General.
Glen C. Laschober has served as our Executive Vice President of our
health benefit management operations since he joined us in March 1997. From
1989 to 1997, Mr. Laschober was with Caremark International, Inc., where his
most recent position was Vice President and General Manger of Caremark's
prescription service division. Mr. Laschober also served in senior management
positions at the NutraSweet and GD Searle divisions of Monsanto Company.
Jeffrey C. Girard has served as a director of ShopKo since June 1991. Mr.
Girard is the President of Girard & Co. of Minneapolis, Minnesota, a private
consulting company, and an Adjunct Professor at the Carlson School of
Management, University of Minnesota. He served as the Executive Vice President
and Chief Financial Officer of Supervalu, Inc. from October 1992 to July 1997
and, prior thereto, held the positions of Executive Vice President, Chief
Financial Officer and Treasurer of Supermarkets General Holdings Corporation
and Senior Vice President and Chief Financial Officer of Supervalu, Inc.
William J. Podany has served as a director of ShopKo since July 1997 and
as President and Chief Operating Officer of ShopKo's retail stores division
from November 1997 to March 1999, and as President and Chief Executive Officer
of ShopKo since March 1999. From November 1994 to November 1997, he held the
position of Chief Operating Officer/Executive Vice President of ShopKo's retail
stores division. From 1992 to 1994, Mr. Podany was Executive Vice President--
Merchandise of Carter Hawley Hale, a federation of four department store
chains. He has held senior merchandising executive officer positions with
Allied Stores, May Department Stores and Carter Hawley Hale since 1978.
Gregory H. Wolf has been a director of ShopKo since November 1998. He has
been an officer of Humana, Inc. since October 1995, having first served as
Senior Vice President of Sales and Marketing; as Chief Operating Officer from
July 1996 to September 1996; President from September 1996 through November
1997; and President, Chief Executive Officer and Director since December 1997.
Humana, Inc. provides managed healthcare products and services through the
operation of health maintenance organizations and preferred provider
organizations. Prior to joining Humana, Mr. Wolf had been employed by EMPHESYS
Financial Group, Inc. and its affiliates since 1988 where he most recently
served as President. In October 1995, EMPHESYS was acquired by Humana. Mr. Wolf
is also a director of National City Bank of Kentucky, Boys and Girls Club of
Green Bay, Greater Louisville, Inc. and the Louisville Downtown Development
Corporation.
47
<PAGE>
Committees of the Board of Directors
After the offering, the board of directors will establish three standing
committees: an audit committee, a compensation committee and an executive
committee.
The functions of the audit committee will include making recommendations
to the board of directors as to the selection of the firm of independent
public accountants to examine the financial statements and our books and
accounts for each fiscal year, the proposed engagement arrangements for the
independent public accountants and the advisability of having the independent
public accountants make specified studies and reports regarding auditing
matters, accounting procedures, tax or other matters. The audit committee will
also review the results of the audit for each fiscal year. The audit committee
will also be responsible for reviewing all related party transactions and for
monitoring corporate policies and procedures with respect to our ethics and
compliance program. Each member of the audit committee will be an "independent
director" within the meaning of the rules of the New York Stock Exchange.
The functions of the compensation committee will include considering and
recommending to the board of directors our overall compensation programs,
reviewing and approving the compensation payable to our senior management
personnel and reviewing and monitoring our executive development efforts to
assure development of a pool of management and executive personnel adequate
for our operations. The committee will also review significant changes in
employee benefit plans and stock related plans and serve as the "committee"
under our stock incentive plan. A majority of the members of the compensation
committee will be "non-employee directors" within the meaning of Rule 16b-3
under the Exchange Act and "outside directors" within the meaning of Section
162(m) of the Internal Revenue Code of 1986.
The functions of the executive committee will include such functions as
may be delegated by the board of directors from time to time. The members of
the executive committee will be Messrs. Podany, Kramer and Jones. Mr. Podany
will chair the executive committee.
The board of directors may, from time to time, establish certain other
committees to facilitate its work.
With respect to material transactions between ShopKo and us after the
offering is completed, our board of directors has established a policy that
all such transactions will be submitted for review, approval and authorization
to our directors who are not affiliated with ShopKo.
Compensation of Directors
Each director who is not one of our employees and who is not an employee
of ShopKo will receive an annual retainer fee of $10,000, a fee of $1,000 for
each board meeting in which the director participates and a fee of $1,000 for
each committee meeting in which the director participates, if the committee
meeting is not held on the same day as a board meeting. We will also reimburse
all directors for travel and related expenses incurred in connection with
board and committee meetings.
Directors are eligible to receive stock options under our stock incentive
plan. See "Executive Compensation--Stock Incentive Plan."
48
<PAGE>
Executive Compensation
Summary Compensation Table
The following table summarizes compensation paid by us for services
rendered in all capacities to us during our fiscal year ended January 30, 1999,
to our chief executive officer and our four other most highly compensated
executive officers.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
----------------------- -------------------
Securities
Name and Principal Underlying All Other
Position Salary ($) Bonus ($)(1) Options/SARs (#)(2) Compensation ($)
- ------------------ ---------- ------------ ------------------- ----------------
<S> <C> <C> <C> <C>
Jeffrey A. Jones........ 340,000 255,000 0 232,030(3)
President and Chief
Executive Officer
Glen C. Laschober....... 192,115 67,240 0 5,284(4)
Executive Vice
President, HBM
Peter F. Hoffman........ 163,000 40,750 3,000 38,750(5)
Senior Vice President,
Chief Medical Officer
Joseph A. Coffini....... 152,696 30,539 0 73,686(6)
Senior Vice President,
Business Development
and Marketing
George M. Barlow........ 150,000 30,000 2,000 6,275(7)
Senior Vice President,
Healthcare
Information Technology
</TABLE>
- --------
(1) Represents bonuses earned with respect to the indicated fiscal year
pursuant to the ShopKo's executive incentive plan, although all or a
portion of the bonus may have been paid during the subsequent fiscal year.
(2) All securities referenced are options to purchase shares of ShopKo's common
stock.
(3) "All Other Compensation" for Mr. Jones includes the following: ProVantage-
paid portion of individual life insurance policy: $1,802; 401(k) ProVantage
match: $5,819; ShopKo profit sharing plan contributions: $30,392;
relocation expenses and associated tax adjustments: $33,303; and retention
bonus: $160,714.
(4) "All Other Compensation" for Mr. Laschober includes the following:
ProVantage-paid portion of individual life insurance policy: $524; and
401(k) ProVantage match: $4,760.
(5) "All Other Compensation" for Dr. Hoffman consists of a signing bonus he
received at the time he joined ProVantage.
(6) "All Other Compensation" for Mr. Coffini includes the following:
ProVantage-paid portion of individual life insurance policy: $1,802; 401(k)
ProVantage match: $4,709; ShopKo profit sharing plan contributions:
$13,604; and retention bonus: $53,571.
(7) "All Other Compensation" for Mr. Barlow includes the following: ProVantage-
paid portion of individual life insurance policy: $707; and relocation
expenses and associated tax adjustments: $5,568.
49
<PAGE>
Option Grants Table
The following table sets forth information about ShopKo stock option
grants during the fiscal year ended January 30, 1999 to our chief executive
officer and our four other most highly compensated executive officers.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Appreciation For Option
Individual Grants(1) Term
---------------------------------------------- ------------------------
% of Total
Number of Options/SARs
Securities Granted to Exercise
Underlying ShopKo or Base
Options/SARs Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- ---- ------------ ------------ --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey A. Jones........ 0 -- -- -- -- --
Glen C. Laschober....... 0 -- -- -- -- --
Peter F. Hoffman........ 3,000 * 28.1875 3-11-08 70,590 162,488
Joseph A. Coffini....... 0 -- -- -- -- --
George M. Barlow........ 2,000 * 28.1875 3-11-08 47,060 108,325
</TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- --------
* Less than 1%
(1) Forty percent (40%) of these stock options vest and become exercisable on
the second anniversary of the date of grant, with an additional twenty
percent (20%) of the options vesting and becoming exercisable on each
successive anniversary of the date of grant. All stock options vest
immediately upon a "change of control" of ShopKo, as defined in ShopKo's
stock option plans.
Option Exercise and Fiscal Year End Value Table
The following table sets forth information with respect to our chief
executive officer and our four other most highly compensated executive officers
concerning stock options to purchase ShopKo common stock that were exercised
during the last fiscal year and the number and value of options outstanding on
January 30, 1999.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at Fiscal In-the-Money Options/SARs
Shares Year-End (#) at Fiscal Year-End ($)
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey A. Jones........ 0 0 23,000 86,000 491,750 802,250
Glen C. Laschober....... 0 0 0 35,000 0 452,038
Peter F. Hoffman........ 0 0 0 3,000 0 10,688
Joseph A. Coffini....... 5,300 73,119 200 11,200 4,174 126,125
George M. Barlow........ 0 0 0 2,000 0 7,125
</TABLE>
50
<PAGE>
Indemnification of Directors and Officers
Our amended and restated bylaws provide for the indemnification, or
reimbursement for losses and expenses incurred in litigation relating to
corporate affairs, of our directors and officers to the full extent permitted
by the Delaware General Corporation Law. We have entered into agreements to
indemnify, or reimburse, our directors and certain officers, in addition to the
indemnification provided for in the amended and restated bylaws. These
agreements will, among other things, indemnify our directors and certain of our
officers to the full extent permitted by Delaware law for any claims,
liabilities, damages, judgments, penalties, fines, settlements, disbursements
or expenses, including attorneys' fees, incurred by such person in any action
or proceeding, including any action by or in our right, on account of services
as one of our directors or officers. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and officers.
Change of Control Severance Agreements
ShopKo has entered into change of control severance agreements with
certain of our officers, including Messrs. Jones, Laschober, Hoffman, Barlow
and Coffini. The ShopKo severance agreements provide that, if, within two years
after a "change of control," as defined in the agreement, ShopKo terminates the
individual's employment other than for "cause," as defined in the agreement, or
disability, or the individual terminates the individual's employment for "good
reason," as defined in the agreement, then the individual will be entitled to a
lump-sum cash payment equal to a multiple of one and one half or two times the
individual's annual base salary, plus a multiple of one, one and one half or
two times the individual's average annual bonus for the three fiscal years
immediately preceding the date of termination. The multiple referred to in this
paragraph is two for Mr. Jones and one and one half for Messrs. Laschober,
Hoffman, Barlow and Coffini. Each individual would also receive his salary
through the date of termination and all other amounts owed to the individual at
the date of termination under ShopKo's and our benefit plans. In addition,
under such circumstances, the individual will be entitled to continued health
and dental coverage for the individual and the individual's family for a one or
two year period after the date of termination. The ShopKo severance agreements
provide that if certain amounts to be paid thereunder constitute "parachute
payments," as defined in Section 280(G) of the Internal Revenue Code, the
severance benefits owed to the individual may be decreased, but only if the
result is to give the individual a larger after-tax benefit than if the
payments are not reduced. The individual is permitted to elect the payments to
be reduced. Pursuant to the terms of the ProVantage severance agreements
described below, the ShopKo severance agreements will terminate upon completion
of the offering.
We have entered into change of control severance agreements with certain
of our officers, including Messrs. Jones, Laschober, Hoffman, Barlow and
Coffini. The ProVantage severance agreements provide that, if, within two years
after a "change of control," as defined below, we terminate the individual's
employment other than for "cause," as defined below, or disability, or the
individual terminates the individual's employment for "good reason," as defined
below, then the individual will be entitled to a lump-sum cash payment equal to
a multiple of one, one and one-half or two times the individual's annual base
salary, plus a multiple of one, one and one-half or two times the lesser of (A)
the individual's average annual bonus for the three fiscal years immediately
preceding the date of termination or (B) the average of the individual's annual
bonus "norm" for the three fiscal years immediately preceding the date of
termination. The multiple referred to in this paragraph is two for Mr. Jones
and one and one-half for Messrs. Laschober, Hoffman, Barlow and Coffini. Each
individual would also receive his salary through the date of termination and
all other amounts owed to the individual at the date of termination under our
benefit plans. In addition, under such circumstances, the individual will be
entitled to continued health and dental coverage for the individual and the
individual's family for a one, one and one-half or two year period after the
date of termination. The ProVantage severance agreements provide that if
certain amounts to be paid thereunder constitute "parachute payments," as
defined in Section 280(G) of the Internal Revenue Code, the severance benefits
owed to the individual may be decreased, but only if the result is to give the
individual a larger after-tax benefit than if the payments are not reduced. The
individual is permitted to elect the payments to be reduced.
51
<PAGE>
A "change of control" is defined in the ProVantage severance agreements
as occurring if:
<TABLE>
<C> <S>
. the incumbent directors or their permitted successors cease to
constitute at least a majority of our board of directors,
. our stockholders approve certain mergers, consolidations,
liquidations, dissolutions or reorganizations of ProVantage, or
. our stockholders approve a complete liquidation or dissolution of
ProVantage.
</TABLE>
For purposes of the ProVantage severance agreements, "cause" means:
<TABLE>
<C> <S>
. personal dishonesty by the individual intended to result in his or
her substantial personal enrichment at our expense,
. 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
. the conviction of the individual of a felony.
</TABLE>
"Good reason" as used in the ProVantage severance agreements means any
materially adverse reduction of the individual's authority, responsibilities or
compensation, excluding for this purpose specified actions by us not taken in
bad faith and which are promptly remedied by us upon receipt of notice, or any
required relocation of the individual to a place of business more than 50 miles
from where the individual works at the time of the change of control.
Other Compensation
We provide certain personal benefits and other noncash compensation to
our executive officers. For the fiscal year ended January 30, 1999, the
incremental cost of providing such compensation did not exceed the minimum
amounts required to be disclosed under current SEC rules for each person named
in the Summary Compensation Table.
Compensation Committee Interlocks and Insider Participation
Prior to the offering, the compensation of our executive officers was
determined by ShopKo's compensation committee. The compensation committee is
expected to consist of Messrs. Kramer, Girard and Wolf. All of these
individuals are members of ShopKo's board of directors. Mr. Kramer is chairman
of that board and is ShopKo's former president and chief executive officer. We
are a party to various agreements with ShopKo described below in "Relationship
With ShopKo." Additionally, ShopKo was our sole stockholder prior to this
offering, and upon completion of the offering, will own a substantial majority
of our common stock. See "Principal Stockholder" and "Description of Capital
Stock."
Stock Incentive Plan
Prior to the offering, our board of directors plans to approve our stock
incentive plan. The purpose of the stock incentive plan is to provide a means
to attract and retain high quality individuals, to motivate key personnel to
achieve our long-term goals, to provide incentive compensation opportunities to
our key personnel that are competitive with those of similar companies and to
further align the interests of key personnel who participate in the stock
incentive plan with those of our stockholders through compensation that is
based on the value of our common stock.
The board of directors plans to delegate administration of the stock
incentive plan to the compensation committee. Under the stock incentive plan,
the compensation committee may grant:
<TABLE>
<C> <S>
. incentive stock options within the meaning of Section 422 of the
Internal Revenue Code,
. non-qualified stock options, and
. shares of stock or the right to receive shares of stock in the
future.
</TABLE>
52
<PAGE>
Options and stock awards are collectively referred to as "awards." Awards
may be made to our directors and certain of our key personnel and the directors
and the key personnel of our "related companies". Our "related companies"
include any corporation, joint venture, limited liability company or other
business entity in which we have a significant direct or indirect equity
interest or which has a significant direct or indirect equity interest in
ProVantage. The compensation committee will have final authority, subject to
the express provisions of the stock incentive plan, to determine to whom awards
shall be granted; to determine the types of awards and the numbers of shares
covered by the awards; to determine the terms, conditions, performance
criteria, restrictions and other provisions of each award, and to cancel or
suspend awards; to determine the terms and provisions of any agreements made
pursuant to the stock incentive plan; and to make all other determinations that
may be necessary or advisable for the administration of the stock incentive
plan. In making such award determinations, the stock option committee may take
into account the nature of the services rendered by the respective personnel,
their present and potential contribution to our success and such other factors
as the compensation committee deems relevant. The board of directors has the
non-exclusive power to exercise the authority of the compensation committee
with respect to awards to our non-employee directors and our "related
companies". The stock incentive plan provides for accelerated vesting of awards
upon the occurrence of certain "change of control" transactions as described in
the stock incentive plan.
Incentive stock options may be granted under the stock incentive plan to
full or part-time employees, including officers and directors who are also
employees, of ours or our "related companies". In addition,
non-qualified stock options and stock awards may be granted to employees and
non-employee directors of ProVantage or our "related companies."
Subject to the compensation committee's authority to adjust the number
and kind of shares subject to each outstanding award and the exercise price in
the event of certain corporate transactions involving us, the aggregate number
of shares of common stock which may be issued under the stock incentive plan is
1,750,000 shares. Award limits established under the stock incentive plan are
as follows: the maximum number of shares of common stock which may be issued
pursuant to incentive stock options is 500,000; the maximum number of shares of
common stock covered by options granted to any one individual is 500,000 in any
one calendar year; and the maximum value of stock awards granted to any one
person is $5,000,000.
The period during which incentive stock options may be granted under the
stock incentive plan will expire on the tenth anniversary of the date the stock
incentive plan is adopted, and the term of each option granted under the stock
incentive plan will expire not more than ten years from the date of grant. Each
option granted will specify an exercise price or prices; provided, however,
that no option may be granted with a per share exercise price less than the
fair market value per share of common stock on the date of grant. The fair
market value per share on a particular date is the last reported sale price per
share of common stock on that date on the New York Stock Exchange. At the
discretion of the compensation committee, options may be exercised in full at
any time, from time to time or in installments, or upon the occurrence of
specified events. An option may be exercised as to any or all of the shares
covered by the option by delivering written notice of exercise to our corporate
secretary, accompanied by full payment of the exercise price for such shares.
Payment of the exercise price must be made in cash, by tendering previously
owned shares of common stock or by authorizing a third party to sell shares of
the common stock acquired upon exercise of an option and remitting the purchase
price to us.
The stock incentive plan may be terminated or amended by our board of
directors. The board of directors may not, without approval of our
stockholders, increase the number of shares of common stock which may be
delivered pursuant to Awards granted under the stock incentive plan, except for
increases resulting from certain corporate transactions involving us.
ProVantage intends to grant options over approximately 650,000 shares of common
stock under the stock incentive plan effective as of the closing date of the
offering. The exercise price of these options will be the public offering price
in the offering.
53
<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--that is,
negotiations between independent and unrelated parties each acting in its own
self-interest. As a result, there can be no assurance that each of these
agreements, or the transactions provided for in these agreements, has been or
will be effected on terms at least as favorable to us as could have been
obtained from parties other than ShopKo.
These agreements may be modified and additional agreements, arrangements
and transactions may be entered into between us after completion of this
offering. Any such future modifications, agreements, arrangements and
transactions will be determined through negotiation between us. With respect to
material transactions between us after the offering is completed, our board of
directors has established a policy that all such transactions will be submitted
for review, approval and authorization to our directors who are not affiliated
with ShopKo.
The following is a summary of the material features of certain
agreements, arrangements and transactions between us. The summaries of each of
the following agreements are qualified in their entirety by reference to the
full text of such agreement, a copy of which has been filed as an exhibit to
the registration statement of which this prospectus is a part.
Credit Agreement. As a wholly-owned subsidiary of ShopKo, we participated
in ShopKo's funding and cash management system. Prior to this offering, our
cash needs in excess of cash flow provided by operations have been met
principally by additional capital contributions by ShopKo, and excess cash has
been distributed to ShopKo. In connection with this offering, we have entered
into a credit agreement with ShopKo to provide us with a revolving line of
credit commencing on the closing date of this offering and expiring on January
31, 2001. Pursuant to the credit agreement, ShopKo has agreed, subject to
certain conditions, to make advances to us on a revolving basis in an aggregate
amount not to exceed $25.0 million. Borrowings under the credit agreement will
bear interest at various market rates at the time of borrowing. The credit
agreement provides for an annual commitment fee of 1/5 of one percent of the
total commitment amount. The credit agreement is unsecured, and we may
terminate the credit agreement at any time without penalty. We may at any time
replace the credit agreement with borrowings from banks or other financial
institutions or in the private or public markets. The credit agreement
restricts us from borrowing funds from parties other than ShopKo without
ShopKo's consent, and prohibits us from selling our common stock unless ShopKo
meets certain financial tests, pledging certain of our assets and entering into
agreements which restrict our ability to pay dividends. Our interest expense in
the future will depend on the amount, timing and maturity of borrowings, market
rates and negotiations with lenders. The interest rate and other terms provided
by third-party lenders may not be as favorable to us as those provided by
ShopKo under the credit agreement.
Indemnification and Hold Harmless Agreement. We have entered into an
indemnification and hold harmless agreement with ShopKo with respect to the
allocation of responsibility for certain liabilities. In general, the
indemnification agreement provides that we and ShopKo will each indemnify the
other party and that party's directors, officers, employees and agents against
certain liabilities arising from or based upon the operation of their own
respective businesses prior to and following the offering, including, but not
limited to, liabilities arising under securities, environmental and contract
law.
Tax Matters Agreement. We have entered into a tax matters agreement with
ShopKo which provides that ShopKo will prepare all returns and, generally, have
liability for all income taxes attributable to all tax periods ending on or
before the offering. We have entered into an administrative services agreement,
described
54
<PAGE>
below, pursuant to which ShopKo will continue to prepare tax returns for us
after the offering, however, we have liability for all taxes for tax periods
beginning after the offering. For tax periods which begin before the offering
but end after the offering, ShopKo has liability for income taxes attributable
to income allocable to the period ending with the offering and we have
liability for the remainder. ShopKo will determine the method for allocating
income in the tax year in which the offering occurs. By law, we are liable for
the entire federal income tax of ShopKo and other companies included in the
consolidated return for all periods in which we are included in the
consolidated group. In the tax matters agreement, however, ShopKo agrees to
indemnify us against this liability except to the extent it relates to us and
our subsidiaries, if any, after the offering. If our employees exercise ShopKo
stock options or otherwise receive compensation from ShopKo nonqualified plans
after the offering, the tax matters agreement provides that we will reimburse
ShopKo for the tax benefit, if any, that we receive from deducting compensation
attributable thereto and the employer's share of any employment taxes arising
in connection with such compensation which is paid by ShopKo.
Administrative Services Agreement. We have entered into an administrative
services agreement with ShopKo pursuant to which ShopKo will make available and
provide certain administrative, support and consultation services to us,
including employee benefits, payroll processing, insurance, tax compliance,
treasury, and accounts payable processing. The administrative services
agreement has an initial term which expires January 31, 2001, subject to
automatic renewal for successive one-year terms. At any time during the term of
the administrative services agreement, either party may terminate existing
categories of services upon 120 days' prior written notice. ShopKo is obligated
to provide us transition assistance, at our request and expense, upon the
termination of any service provided pursuant to the agreement. We anticipate
that we will pay ShopKo a total of $0.4 million in the first twelve months
following this offering for such services.
I.T. support agreement. Certain components of our computer systems are
located in ShopKo's corporate headquarters. We have entered into an I.T.
support agreement with ShopKo pursuant to which ShopKo has agreed to provide us
with:
<TABLE>
<C> <S>
. access to ShopKo's computer facilities,
. certain support services to be performed by ShopKo's systems
personnel, and
. the shared use of ancillary computer hardware and operating software.
</TABLE>
The I.T. support agreement has a term which expires on January 31, 2001.
At any time during the term of the I.T. support agreement, either party may
terminate existing categories of services upon 120 days' prior written notice.
In addition, ShopKo has agreed to provide transition assistance to us if any
services are terminated as a result of expiration or termination of the
agreement or otherwise. We anticipate that we will pay ShopKo between $0.7
million and $1.3 million in the first twelve months after the offering under
this agreement. The I.T. support agreement also contains confidentiality
provisions relating to our patient data and proprietary software.
Lease Agreement. Upon ShopKo's completion of construction of our new
corporate headquarters, we expect to enter into a long term triple net lease
with ShopKo, whereby we will lease the building from ShopKo upon terms and
conditions to be determined. While the lease agreement has not been finalized,
we expect that the lease will have a term of 15 years with four options to
renew for 5 years each, will have annual rental payments of $200,000, and will
provide that we will have the option to purchase the facility at fair market
value or increase the rental payments to fair market rates at the time when
ShopKo ceases to beneficially own at least 51% of the outstanding common stock.
Registration Rights Agreement. We have entered into a registration rights
agreement with ProVantage Holdings, Inc., a wholly-owned subsidiary of ShopKo,
pursuant to which we have granted demand and "piggyback" registration rights to
ProVantage Holdings and its affiliates, including ShopKo, with respect to
shares of common stock owned by ProVantage Holdings and its affiliates,
including ShopKo, following the offering. Pursuant to the registration rights
agreement, ProVantage Holdings has the right to require us to file
55
<PAGE>
up to three registration statements under the Securities Act, which may be
increased by an unlimited number of registration statements if effected on Form
S-3, covering ProVantage Holdings' shares. ProVantage Holdings also has the
right, if we file a registration statement, to require us to include its shares
in such registration statement. Our obligations under the registration rights
agreement are subject to certain limitations relating to the minimum amount of
common stock to be included in a registration statement, the timing of the
exercise of registration rights and other similar matters. We have agreed to
pay all costs and expenses relating to the exercise of ProVantage Holdings'
registration rights, except for underwriting commissions and filing fees
relating to the shares sold by ProVantage Holdings, any special or
extraordinary auditing expenses, ProVantage Holdings' legal expenses and, in
the case of demand registration rights, printing fees. We and ProVantage
Holdings will each indemnify the other party for certain liabilities, including
liabilities under the Securities Act, in connection with any registration under
the registration rights agreement. The registration rights agreement will
terminate when ProVantage Holdings or its affiliates owns less than 5% of our
outstanding common stock. ShopKo has agreed with the underwriters, however, not
sell or otherwise dispose of any common stock or our related securities for a
period of 180 days after the closing of this offering without the prior written
consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated. See "Shares
Eligible for Future Sale."
Control by ShopKo
After the offering is completed, ShopKo will own approximately 70.3% of
the common stock. As a majority stockholder, ShopKo will be able to control our
business and affairs, including:
<TABLE>
<C> <S>
. the election of our entire board of directors,
. any determinations with respect to mergers or other business
combinations,
. the amendment of our restated certificate of incorporation or amended
and restated bylaws,
. the acquisition or disposition of material assets,
. the incurrence of indebtedness,
. the issuance of additional common stock or other equity securities,
. the payment of dividends with respect to the common stock,
. the power to determine all matters submitted to a vote of
stockholders,
. the power to delay, defer or prevent a change in control, and
. the ability to take other actions that might be favorable to ShopKo
but not to our stockholders generally.
</TABLE>
CERTAIN TRANSACTIONS
We have in the past entered into intercompany transactions and
arrangements with ShopKo and its affiliates incidental to our businesses.
General administrative and other expenses have in the past been allocated to us
from ShopKo for the types of services described in the administrative services
agreement and the information technology services agreement. The allocation for
the last three fiscal years is as follows:
<TABLE>
<CAPTION>
Fiscal Year
--------------
1996 1997 1998
---- ---- ----
(in millions)
<S> <C> <C> <C>
Selling, general and administrative expenses............... $0.4 $1.1 $1.2
</TABLE>
56
<PAGE>
In addition to the allocations described above, we have entered into
various transactions with ShopKo in the ordinary course of our businesses. The
payments for these activities for the last three fiscal years are as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------------
1996 1997 1998
----- ----- -----
(in millions)
<S> <C> <C> <C>
Our payment to ShopKo
for prescription
costs.................. $21.0 $25.8 $35.7
Our payment to ShopKo
for shared formulary
concessions............ 0.2 0.1 0.0
Our purchase of
pharmaceutical
inventory from ShopKo.. 1.0 0.8 0.3
ShopKo payment to us for
claims processing...... 1.6 1.6 2.1
</TABLE>
For a further description of recent transactions between ShopKo and us,
please see Note H of the Notes to the Consolidated Financial Statements
included elsewhere in this prospectus.
We receive a benefit in the form of lower prices when purchasing various
goods and services when such purchases are made through or in conjunction with
ShopKo. Such benefits may not be available in all cases in the future.
We will continue to engage in various transactions with ShopKo on a
contractual and non-contractual basis after the offering is completed. See
"Relationship With ShopKo."
In connection with the PharMark acquisition, we entered into five-year
employment agreements with each of M. Lee Morse and Aida A. LeRoy. These
agreements were extinguished as of January 31, 1999, at which time they entered
into agreements to provide certain consulting services to us. At that time, we
entered into several new agreements with Mr. Morse and Dr. LeRoy:
<TABLE>
<C> <S>
. a mutual settlement agreement and release of specified claims,
whereby the parties mutually agreed to release all claims associated
with the employment agreements;
. a trademark license agreement, whereby Mr. Morse and Dr. LeRoy
license the trademark "Mikalix" from us;
. a sublease, whereby Mr. Morse and Dr. LeRoy sublease certain office
space from us; and
. 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.
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Acquisitions."
57
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDER
Prior to this offering, our only stockholder was ShopKo, whose address is
700 Pilgrim Way, Green Bay, Wisconsin 54304. ShopKo is subject to the
requirements of the Securities Exchange Act of 1934 and as a result files
reports, proxy statements and other information with the SEC on a periodic
basis. You can read and make copies of these materials at the offices of the
SEC, or by means of the SEC's website, in each case at the addresses listed
under the caption "Where You Can Find More Information."
As of the date of this prospectus, ShopKo owns beneficially and of record
12,550,000 shares of common stock, representing all of the shares of common
stock outstanding prior to this offering. Upon the sale by us of the 5,300,000
shares of common stock offered hereby, ShopKo will own beneficially and of
record 70.3% of the outstanding common stock. ShopKo will own 65.9% of the
common stock if the underwriters' over-allotment option is exercised in full.
The following table sets forth as of January 30, 1999 the number of
shares of ShopKo common stock owned by our director, by our chief executive
officer, our four other most highly compensated executive officers, by each
individual who will be appointed as a member of our board of directors prior to
or concurrently with the offering and by our director, individuals who will be
appointed as our directors and executive officers as a group. Except as
otherwise noted, the persons named in the below table have sole voting and
investment power with respect to all shares shown as beneficially owned by
them. The column entitled "Amount and Nature of Beneficial Ownership" includes
shares which may be acquired within 60 days pursuant to stock options as
follows: Mr. Kramer, 180,000 shares; Mr. Podany, 15,000 shares; Mr. Jones,
23,000 shares; Mr. Coffini, 200 shares; and all directors and executive
officers as a group, 218,200 shares.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial
Name of Beneficial Owner Ownership Percent
------------------------ ----------------- -------
<S> <C> <C>
Dale P. Kramer (1)(2).......................... 270,000 1.0%
Jeffrey C. Girard (3).......................... 1,000 *
Gregory H. Wolf................................ -- *
William J. Podany (2)(4)....................... 40,000 *
Jeffrey A. Jones (2)........................... 23,000 *
Glen C. Laschober.............................. -- *
Peter F. Hoffman............................... -- *
Joseph A. Coffini (2).......................... 275 *
George M. Barlow............................... -- *
All directors and executive officers as a group
(9 persons)................................... 334,275 1.3%
</TABLE>
- --------
* Less than 1%
(1) Includes 50,000 shares of restricted stock granted pursuant to ShopKo's
restricted stock plan.
(2) The number of shares shown with respect to Messrs. Kramer, Podany and Jones
does not reflect funds from their respective deferred compensation plan
accounts and profit sharing/401(k) plan accounts invested in ShopKo common
stock through the ShopKo stock fund. As of January 30, 1999, such executive
officers' approximate ShopKo stock fund account balances were as follows:
Mr. Kramer, $363,943; Mr. Podany, $49,326; Mr. Jones, $204,348; and Mr.
Coffini, $58,756.
(3) Mr. Girard is a former executive officer of Supervalu. Prior to July 2,
1997, Supervalu and a wholly-owned subsidiary of Supervalu, Supermarket
Operators of America, Inc., beneficially owned 14,731,667 shares of
ShopKo's common stock.
(4) Includes 25,000 shares of restricted stock granted pursuant to ShopKo's
restricted stock plan.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Prior to the completion of this offering, we will file a restated
certificate of incorporation and adopt amended and restated bylaws. The
following description gives effect to the adoption and filing of these
documents.
Authorized Capital Stock
Our authorized capital stock consists of 50,000,000 shares of common
stock, par value $.01 per share, and 5,000,000 shares of preferred stock, par
value $.01 per share. 12,550,000 shares of common stock and no shares of
preferred stock are outstanding as of the date hereof. 5,300,000 shares of
common stock are being offered in the offering and 1,750,000 shares have been
reserved for issuance pursuant to certain employee and non-employee director
benefit and option plans. See "Executive Compensation." All of such shares are
validly issued, fully paid and non-assessable, and upon completion of the
offering all of the outstanding shares of common stock will be validly issued,
fully paid and non-assessable under the laws of the state of Delaware, the
state in which we are incorporated. We are qualified as a foreign corporation
in the state of Wisconsin, and Wisconsin courts have held the predecessor to
Section 180.0622(2)(b) of the Wisconsin Business Corporation Law to be
applicable to foreign corporations. Under Section 180.0622(2)(b), holders of
common stock are liable up to the amount equal to the par value of the common
stock owned by such holder for all debt owing to employees for services
performed, but not exceeding six months' service in any one case. Some
Wisconsin courts have interpreted "par value" to mean the full amount paid by
the holders to purchase the common stock. The following summary description of
our capital stock is qualified in its entirety by reference to our form of
restated certificate of incorporation and our amended and restated bylaws, a
copy of each of which is filed as an exhibit to the registration statement of
which this prospectus is a part.
Common Stock
Voting Rights. The holders of common stock are entitled to one vote per
share on all matters to be voted on by stockholders. The holders of common
stock are not entitled to cumulative voting rights. Generally, all matters to
be voted on by stockholders must be approved by a majority, or, in the case of
election of directors, by a plurality, of the votes entitled to be cast by all
shares of common stock present in person or represented by proxy, subject to
any voting rights granted to holders of any preferred stock.
Dividends. Holders of common stock are entitled to receive dividends
when, as and if declared by the board of directors out of funds legally
available therefor, subject to any preferential rights of any outstanding
preferred stock.
Other Rights. In the event of a voluntary or involuntary liquidation,
dissolution or winding up of ProVantage, the holders of shares of common stock
would be entitled to share ratably in all assets remaining after payment of
liabilities subject to prior distribution rights and payment of any
distributions owing to holders of shares of preferred stock then outstanding,
if any. Holders of the shares of common stock have no preemptive rights, and
the shares of common stock are not subject to further calls or assessment by
us. There are no redemption provisions or provisions setting aside particular
assets to enable us to retire the common stock, commonly referred to as sinking
fund provisions, which are applicable to the shares of common stock.
Preferred Stock
The board of directors has the authority, without further action by the
stockholders, to issue preferred stock in one or more series and to fix the
rights, designation, preferences, privileges, limitations and restrictions
thereof, including dividend rights, conversion rights, terms and rights of
redemption, liquidation preferences and sinking fund terms, any or all of which
may be greater than the rights of the common stock. The board of
59
<PAGE>
directors, without stockholder approval, may issue shares of preferred stock
with conversion, voting and other rights which could adversely affect the
rights of the holders of shares of common stock.
Authorized but Unissued Shares
Delaware law does not require stockholder approval for any issuance of
authorized shares. These additional shares may be used for a variety of
corporate purposes, including future public or private offerings to raise
additional capital or to facilitate corporate acquisitions. One of the effects
of the existence of unissued and unreserved shares may be to enable the board
of directors to issue shares to persons friendly to current management, which
issuance could render more difficult or discourage an attempt to obtain control
of ProVantage by means of a merger, tender offer, proxy contest or otherwise,
and thereby protect the continuity of our management and possibly deprive the
stockholders of opportunities to sell their shares of common stock at prices
higher than prevailing market prices.
Delaware Law and Certain Charter and Bylaw Provisions; Anti-Takeover Measures
Upon the completion of this offering, we will be subject to the
provisions of Section 203 of the Delaware General Corporation Law, the DGCL. In
general, Section 203 prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is, or the
transaction in which the person became an interested stockholder was, approved
in a prescribed manner or another exception applies. For purposes of Section
203, a "business combination" is defined broadly to include a merger, asset
sale or other transaction resulting in financial benefit to the interested
stockholder, and subject to certain exceptions, an "interested stockholder" is
a person who, together with affiliates and associates, owns (or within the
three prior years, did own) 15% or more of the corporation's voting stock.
Our restated certificate of incorporation provides that our board of
directors is divided into three classes serving staggered three-year terms. As
a result, at least two stockholders' meetings will generally be required for
stockholders to change a majority of the directors. The board of directors is
authorized to create new directorships and to fill such positions so created.
The board of directors, or its remaining members, even though less than a
quorum, is also empowered to fill vacancies on the board of directors occurring
for any reason. Any director appointed to fill a vacancy or to a newly created
directorship will hold office until the next election for the class of
directors to which the new director has been appointed. Directors may only be
removed for cause by the affirmative vote of two-thirds of the outstanding
common stock entitled to vote at a meeting called for this purpose. Our
restated certificate of incorporation and amended and restated by-laws provide
that stockholders may not act by written consent in place of an annual or
special meeting. Our restated certificate of incorporation and amended and
restated by-laws provide that special meetings of stockholders may only be
called by the chairman of the board or the president, or by a majority of the
board of directors.
The provisions in our restated certificate of incorporation relating to
amendment of our bylaws, the structure of our board of directors and
prohibiting action by written consent of our stockholders may only be amended
by a vote of 75% of our outstanding common stock.
Our amended and restated bylaws provide that, for nominations to the
board of directors or for other business to be properly brought by a
stockholder before an annual meeting of stockholders, the stockholder must
first have given timely notice thereof in writing to our corporate secretary.
To be timely, a stockholder's notice generally must be delivered not less than
120 days prior to the anniversary date of the annual meeting in the immediately
preceding year. The notice by a stockholder must contain, among other things,
certain information about the stockholder delivering the notice and, as
applicable, background information about the nominee or a description of the
proposed business to be brought before the meeting. Our amended and restated
60
<PAGE>
bylaws may only be amended by a vote of 75% of our outstanding common stock or
by majority vote of our board of directors.
Certain of the provisions of our amended and restated certificate of
incorporation and amended and restated bylaws discussed above could make more
difficult or discourage a proxy contest or other change in our management or
the acquisition or attempted acquisition of control by a holder of a
substantial block of our stock. It is possible that such provisions could make
it more difficult to accomplish, or could deter, transactions which
stockholders may otherwise consider to be in their best interests.
As permitted by the DGCL, the restated certificate of incorporation
provides that our directors shall not be personally liable to us or our
stockholders for monetary damages for breach of their fiduciary duties as
directors, except for liability:
<TABLE>
<C> <S>
. for any breach of their duty of loyalty to us or our stockholders,
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
. for unlawful payments of dividends or unlawful stock repurchases or
redemptions, as provided in Section 174 or successor provisions of
the DGCL, or
. for any transaction from which the director derived an improper
personal benefit.
</TABLE>
The amended and restated bylaws provide that we shall indemnify our
directors, officers and employees to the fullest extend permitted by the DGCL,
except in some circumstances, with respect to suits initiated by the director,
officer or employee, and advance expenses to such directors, officers or
employees to defend any action for which rights of indemnification are
provided. In addition, the amended and restated bylaws permit us to grant such
rights to our agents. The amended and restated bylaws also provide that we may
purchase insurance on behalf of any director, officer, employee or agent
against certain expenses, liabilities and losses, whether or not we would have
the power to indemnify such person against such expenses, liabilities or
losses. We believe that these provisions will assist us in attracting and
retaining qualified individuals to serve as directors, officers and employees.
Rights Plan
Prior to the closing of this offering, the board of directors will adopt
a stockholders rights plan pursuant to which one right to purchase one one-
thousandth of a share of our newly created Series B junior participating
preferred stock, par value $0.01 per share, would be issued as a dividend for
each outstanding share of common stock. Each right, when exercisable, would
represent the right to purchase one one-thousandth of a share of Series B
junior participating preferred stock at a specified price. The rights would
become exercisable ten days after a person or group acquires 15% or more of the
outstanding common stock, other than certain persons who own more than 15% of
the outstanding common stock as a result of the purchase of common stock from
ShopKo or its affiliates, or commences or announces a tender or exchange offer
which would result in such ownership.
If, after the rights become exercisable, we were to be acquired through a
merger or other business combination transaction or 50% or more of our assets
or earning power were sold, each right would permit the holder to purchase, for
the exercise price, common stock of the acquiring company having a market value
of twice the exercise price. In addition, if any person acquires 15% or more of
the outstanding common stock, each right not owned by such person would permit
the purchase, for the exercise price of $120.00, of common stock having a
market value of twice the exercise price.
The rights would expire ten years after the adoption of the rights plan,
unless earlier redeemed by us in accordance with the terms of the rights plan.
The purchase price payable and the shares of Series B junior
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<PAGE>
participating preferred stock issuable upon exercise of the rights would be
subject to adjustment from time to time as specified in the rights plan. In
addition, the board of directors would retain the authority to redeem (at $0.01
per right) and replace the rights with new rights at any time, provided that no
such redemption could occur after a person or group acquires 15% or more of the
outstanding common stock.
Shares of Series B junior participating preferred stock, when issued upon
exercise of the rights, will be nonredeemable and will rank junior to all
series of any other class of preferred stock. Each share of Series B junior
participating preferred stock will be entitled to a cumulative preferential
quarterly dividend payment equal to the greater of $10 per share or 1,000 times
the dividend declared per share of common stock. In the event of liquidation,
the holders of shares of Series B junior participating preferred stock will be
entitled to a preferential liquidation payment equal to the greater of $1,000
per share or 1,000 times the payment made per share of common stock. Each share
of Series B junior participating preferred stock will entitle the holder to
1,000 votes, voting together with the common stock. Finally, in the event of
any merger, consolidation or other transaction in which common stock is
exchanged, each share of Series B junior participating preferred stock will be
entitled to receive 1,000 times the amount received per share of common stock.
The foregoing rights would be subject to antidilution adjustments. The number
of shares constituting the series of Series B junior participating preferred
stock will be 100,000.
Transfer Agent
The transfer agent for the common stock is Norwest Shareowner Services.
SHARES ELIGIBLE FOR FUTURE SALE
The 5,300,000 shares of common stock sold in this offering, 6,095,000
shares of common stock if the underwriters exercise their over-allotment option
in full, will be freely tradable without restriction under the Securities Act,
except for any such shares which may be acquired by our "affiliates," as that
term is defined in Rule 144 promulgated under the Securities Act, which shares
will remain subject to the resale limitations of Rule 144.
The 12,550,000 shares of common stock that will continue to be held by
ShopKo after the offering will constitute "restricted securities" within the
meaning of Rule 144, and will be eligible for sale in the open market after the
offering, subject to certain contractual lockup provisions and to the
applicable requirements of Rule 144, both of which are described below. We have
entered into a registration rights agreement with ShopKo relating to ShopKo's
rights to have us register under the Securities Act all or a portion of the
common stock owned by it. See "Relationship With ShopKo." In addition, we have
the option to satisfy certain contingent obligations to the sellers of the
PharMark business with shares of common stock. If we issue shares of common
stock to the PharMark sellers, they have the right to require us to register
those shares for sale under the Securities Act. They also have the right to
have those shares included in registration statements we file under the
Securities Act. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Acquisitions" for a more complete
description of the contingent payments due to the PharMark sellers.
Generally, Rule 144 provides that a person who has beneficially owned
"restricted securities" for at least one year will be entitled to sell on the
open market in broker's transactions within any three-month period a number of
shares that does not exceed the greater of 1% of the then outstanding shares,
or the average weekly trading volume on the open market during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain notice requirements and the availability of current public information
about us. Shares properly sold in reliance upon Rule 144 to persons who are not
"affiliates" are thereafter freely tradable without the restriction or
registration under the Securities Act. Ninety days after completion of this
62
<PAGE>
offering, ShopKo will be able to sell in the public market its shares of common
stock, subject to the volume and manner of sale restrictions described above
and subject to the lock-up provisions described below.
We and our executive officers and directors and Shopko have agreed,
subject to certain exceptions, not to directly or indirectly offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant for the sale of,
lend or otherwise dispose of or transfer any shares of our common stock or
securities convertible into or exchangeable or exercisable for or repayable
with our common stock, whether now owned or thereafter acquired by the person
executing the agreement or with respect to which the person executing the
agreement thereafter acquires the power of disposition, or file a registration
statement under the Securities Act with respect to the foregoing, or enter into
any swap or other agreement that transfers, in whole or in part, the economic
consequence of ownership of our common stock whether any such swap or
transaction is to be settled by delivery of our common stock or other
securities, in cash or otherwise, without the prior written consent of Merrill
Lynch, Pierce, Fenner & Smith Incorporated on behalf of the underwriters for a
period of 180 days after the date of this prospectus.
Sales of substantial amounts of common stock in the open market, or the
availability of such shares for sale, could adversely affect prevailing market
prices.
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<PAGE>
UNDERWRITING
General
We intend to offer our common stock in the United States and Canada
through a number of underwriters. Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Bear, Stearns & Co. Inc., William Blair & Company, L.L.C. and
Lehman Brothers Inc. are acting as representatives of each of the underwriters
named below. Subject to the terms and conditions set forth in the purchase
agreement among us, Shopko and the underwriters, we have agreed to sell to the
underwriters, and each of the underwriters severally and not jointly has agreed
to purchase from us, the number of shares of common stock set forth opposite
its name below.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................
Bear, Stearns & Co. Inc..........................................
William Blair & Company, L.L.C...................................
Lehman Brothers Inc. ............................................
---------
Total....................................................... 5,300,000
=========
</TABLE>
In the purchase agreement, the several underwriters have agreed, subject
to the terms and conditions set forth in that agreement, to purchase all of the
shares of common stock being sold under the terms of such agreement if any of
the shares of common stock being sold under the terms of that agreement are
purchased. In the event of a default by an underwriter, the purchase agreement
provides that, in certain circumstances, the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.
We and ShopKo have agreed to indemnify the underwriters against some
liabilities, including some liabilities under the Securities Act, or to
contribute to payments the underwriters may be required to make in respect of
those liabilities.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and
certain other conditions. The underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part.
Commissions and Discounts
The representatives have advised us and ShopKo that the underwriters
propose initially to offer the shares of common stock to the public at the
initial public offering price set forth on the cover page of this prospectus,
and to certain dealers at such price less a concession not in excess of $ per
share of common stock. The underwriters may allow, and such dealers may
reallow, a discount not in excess of $ per share of common stock on sales to
certain other dealers. After the initial public offering, the public offering
price, concession and discount may change.
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<PAGE>
The following table shows the per share and total public offering price,
underwriting discount to be paid by us and ShopKo to the underwriters and the
proceeds before expenses to us and ShopKo. This information is presented
assuming either no exercise or full exercise by the underwriters of their over-
allotment option.
<TABLE>
<CAPTION>
Per
Share Without Option With Option
-------- -------------- -----------
<S> <C> <C> <C>
Public Offering Price................. $ $ $
Underwriting Discount................. $ $ $
Proceeds, before expenses, to us...... $ $ $
Proceeds to ShopKo.................... $ $ $
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $1,000,000 and are payable entirely by us. These expenses will not
reduce the $20.0 million of net proceeds of the offering which we will retain.
See "Use of Proceeds."
Over-allotment Option
ShopKo has granted an option to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of 795,000
additional shares of common stock at the initial public offering price set
forth on the cover page of this prospectus, less the underwriting discount. The
underwriters may exercise this option solely to cover over-allotments, if any,
made on the sale of common stock offered hereby. To the extent that the
underwriters exercise this option, each underwriter will be obligated, subject
to certain conditions, to purchase a number of additional shares of our common
stock proportionate to such underwriter's initial amount reflected in the
foregoing table.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 265,000 of the shares offered hereby to be sold to
directors and employees of ProVantage, ShopKo and their affiliates. The number
of shares of our common stock available for sale to the general public will be
reduced to the extent that those persons purchase the reserved shares. Any
reserved shares which are not orally confirmed for purchase within one day of
the pricing of the offering will be offered by the underwriters to the general
public on the same terms as the other shares offered by this prospectus.
No Sales of Similar Securities
We and our executive officers and directors and ShopKo and all existing
stockholders have agreed, with certain exceptions, without the prior written
consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated on behalf of the
underwriters for a period of 180 days after the date of this prospectus, not to
directly or indirectly:
. offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any
option, right or warrant for the sale of, lend or otherwise dispose
of or transfer any shares of our common stock or securities
convertible into or exchangeable or exercisable for or repayable
with our common stock, whether now owned or later acquired by the
person executing the agreement or with respect to which the person
executing the agreement later acquires the power of disposition, or
file a registration statement under the Securities Act relating to
any shares of our common stock; or
. enter into any swap or other agreement that transfers, in whole or
in part, the economic consequence of ownership of our common stock
whether any such swap or transaction is to be settled by delivery of
our common stock or other securities, in cash or otherwise.
New York Stock Exchange Listing
Our common stock has been approved for listing on the New York Stock
Exchange under the symbol "PHS," subject to official notice of issuance. In
order to meet the requirements for listing of our common stock on that
exchange, the underwriters have undertaken to sell lots of 100 or more shares
to a minimum of 2,000 beneficial owners.
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Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through
negotiations between us and the representatives. The factors to be considered
in determining the initial public offering price, in addition to prevailing
market conditions, are the valuation multiples of publicly traded companies
that the representatives believe to be comparable to us, certain of our
financial information, our history and our prospects and the industry in which
we compete, and an assessment of our management, its past and present
operations, the prospects for, and timing of, our future revenues, the present
state of our development, and the above factors in relation to market values
and various valuation measures of other companies engaged in activities similar
to ours. There can be no assurance that an active trading market will develop
for our common stock or that our common stock will trade in the public market
subsequent to the offering at or above the initial public offering price.
The underwriters do not expect sales of the common stock to any accounts
over which they exercise discretionary authority to exceed 5% of the number of
shares being offered in this offering.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of our common stock is completed, rules of the SEC
may limit the ability of the underwriters and certain selling group members to
bid for and purchase the common stock. As an exception to these rules, the
representatives are permitted to engage in certain transactions that stabilize
the price of our common stock. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of our common
stock.
If the underwriters create a short position in our common stock in
connection with the offering, i.e., if they sell more shares of our common
stock than are set forth on the cover page of this prospectus, the
representatives may reduce that short position by purchasing our common stock
in the open market. The representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described
above.
The representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares
of common stock in the open market to reduce the underwriters' short position
or to stabilize the price of the common stock, they may reclaim the amount of
the selling concession from the underwriters and selling group members who sold
those shares.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of the common stock to the extent
that it discourages resales of our common stock.
Neither our company nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of our common stock. In
addition, neither our company nor any of the underwriters makes any
representation that the representatives will engage in the transactions
described above or that these transactions, if commenced, will not be
discontinued without notice.
Other Relationships
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.
Merrill Lynch & Co. is acting as the dealer manager for ShopKo's tender offer
for the outstanding common stock of Pamida Holdings Corporation. Merrill Lynch
also rendered a fairness opinion in connection with the acquisition of Pamida.
Merrill Lynch is also acting as the lead underwriter in a secondary offering of
ShopKo common stock.
66
<PAGE>
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 Health Services, Inc.
and subsidiaries as of January 30, 1999 and January 31, 1998 and for each of
the three years in the period ended January 30, 1999 included in the
registration statement of which this prospectus forms a part and the related
financial statement schedule included elsewhere in the registration statement
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports appearing herein and elsewhere in the registration statement
(which report expresses an unqualified opinion and includes an explanatory
paragraph related to the restatement of the consolidated financial statements),
and have been so included in reliance upon the reports of such firm, given upon
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock offered hereby. This
prospectus, which constitutes part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits thereto. For further information with respect to us and the common
stock, you should refer to the registration statement and the exhibits thereto.
Statements contained in this prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the registration statement, each such statement being qualified in
all respects by such reference. You may inspect and copy the registration
statement and its exhibits at the public reference facilities of the SEC
located at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as at the regional offices of the SEC located at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, and Seven World Trade Center, Suite 1300, New
York, New York 10048. You may obtain copies of these materials for a fee by
writing to the SEC's Public Reference Section at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and you can access this information electronically by
means of the SEC's website on the Internet at http://www.sec.gov. You may
obtain information about the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330.
As a result of the offering, we will be subject to the requirements of
the Exchange Act, which means that we will file reports, proxy statements and
other information with the SEC on a periodic basis. You can read and copy these
reports, proxy statements and other information we file with the SEC at the
offices of the SEC, and at the website listed above.
We intend to furnish its stockholders with annual reports containing
audited financial statements examined by its independent accountants for each
fiscal year.
67
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................. F-1
Consolidated Statements of Earnings for the fiscal years ended January
30, 1999, January 31, 1998 (restated) and February 1, 1997 (restated)
and for the first fiscal quarters ended May 1, 1999 and May 2, 1998
(unaudited)............................................................. F-2
Consolidated Balance Sheets at January 31, 1998 (restated) and January
30, 1999 (restated) and at May 1, 1999 (unaudited)...................... F-3
Consolidated Statements of Cash Flows for the fiscal years ended January
30, 1999 (restated), January 31, 1998 (restated) and February 1, 1997
(restated) and for the first fiscal quarters ended May 1, 1999 and
May 2, 1998 (unaudited)................................................. F-4
Consolidated Statements of Stockholder's Equity for each of the years
ended January 30, 1999 (restated), January 31, 1998 (restated) and
February 1, 1997 (restated) and for the first fiscal quarter ended
May 1, 1999 (unaudited)................................................ F-5
Notes to Consolidated Financial Statements............................... F-6
</TABLE>
68
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder
ProVantage Health Services, Inc.:
We have audited the consolidated balance sheets of ProVantage Health
Services, Inc. and subsidiaries, formerly known as ProVantage, Inc. (an
indirect, wholly-owned subsidiary of ShopKo Stores, Inc.), as of January 30,
1999 and January 31, 1998 and the related consolidated statements of earnings,
stockholder's equity and cash flows for each of the three years in the period
ended January 30, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of ProVantage Health
Services, Inc. and subsidiaries as of January 30, 1999 and January 31, 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended January 30, 1999 in conformity with generally
accepted accounting principles.
As discussed in Note K, the accompanying consolidated financial
statements have been restated.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Milwaukee, Wisconsin
March 12, 1999
(June 21, 1999 as to the effects of the matters discussed in Note K)
F-1
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
First Quarter
Fiscal Year (52 weeks) Ended (13 Weeks) Ended
---------------------------------------- -----------------
May 2, May 1,
Feb. 1, 1997 Jan. 31, 1998 Jan. 30, 1999 1998 1999
------------ ------------- ------------- -------- --------
As restated, see Note K (unaudited)
<S> <C> <C> <C> <C> <C>
Net sales............... $313,390 $486,121 $643,260 $145,773 $214,949
Costs and expenses:
Cost of sales......... 290,477 448,865 595,414 135,370 201,181
Selling, general and
administrative
expenses............. 12,633 19,990 24,910 5,778 7,778
Depreciation and
amortization
expenses............. 2,282 4,857 6,776 1,400 2,061
-------- -------- -------- -------- --------
305,392 473,712 627,100 142,548 211,020
Income from operations.. 7,998 12,409 16,160 3,225 3,929
Interest income--net.... 282 293 543 15 174
-------- -------- -------- -------- --------
Earnings before income
taxes.................. 8,280 12,702 16,703 3,240 4,103
Provision for income
taxes.................. 3,640 5,581 7,221 1,428 1,750
-------- -------- -------- -------- --------
Net earnings............ $ 4,640 $ 7,121 $ 9,482 $ 1,812 $ 2,353
======== ======== ======== ======== ========
Basic net earnings per
share of common stock.. $ 0.37 $ 0.57 $ 0.76 $ 0.14 $ 0.19
======== ======== ======== ======== ========
Average number of shares
of common stock
outstanding............ 12,550 12,550 12,550 12,550 12,550
======== ======== ======== ======== ========
Pro forma basic net
earnings per share of
common stock
(unaudited)............ $ 0.58 $ 0.14
======== ========
Pro forma average number
of shares of common
stock outstanding...... 16,244 16,244
======== ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
Pro Forma
January 31, 1998 January 30, 1999 May 1, 1999 May 1, 1999
---------------- ---------------- ----------- -----------
As restated, see Note K (unaudited) (unaudited)
Assets
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents.......... $ 12,533 $ 24,680 $ 2 $ 2
Receivables, less
allowance for losses
of $976, $1,314 and
$1,203,
respectively......... 58,209 83,483 93,441 93,441
Pharmaceutical
inventories.......... 1,312 3,121 2,375 2,375
Other current assets.. 1,054 2,343 2,899 2,899
-------- -------- -------- --------
Total current
assets............. 73,108 113,627 98,717 98,717
Intangibles--net........ 69,352 66,053 65,054 65,054
Other assets--net....... 3,119 3,295 3,556 3,556
Property and equipment--
net.................... 9,431 15,276 18,024 18,024
-------- -------- -------- --------
Total assets........ $155,010 $198,251 $185,351 $185,351
======== ======== ======== ========
<CAPTION>
Liabilities and
Stockholder's Equity
<S> <C> <C> <C> <C>
Current liabilities:
Demand promissory note
payable to ShopKo.... $ -- $ -- $ -- $ 62,800
Short-term debt....... 967 968 982 982
Accounts payable
trade................ 45,969 65,566 55,685 55,685
Accrued liabilities... 13,307 13,199 14,122 14,122
-------- -------- -------- --------
Total current
liabilities........ 60,243 79,733 70,789 133,589
Long-term obligations... 913 -- -- --
Deferred income taxes... 1,448 3,521 3,521 3,521
Minority interest....... 2,315 2,949 3,037 3,037
Stockholder's equity:
Common Stock; $.01 par
value, 50,000 shares
authorized, 12,550
shares outstanding... 126 126 126 126
Additional paid-in
capital.............. 76,522 88,997 82,600 45,078
Retained earnings..... 13,443 22,925 25,278 --
-------- -------- -------- --------
Total stockholder's
equity............. 90,091 112,048 108,004 45,204
-------- -------- -------- --------
Total liabilities
and stockholder's
equity............. $155,010 $198,251 $185,351 $185,351
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Year (52 weeks) First Quarter
Ended (13 weeks) Ended
---------------------------- ------------------
Feb. 1, Jan. 31, Jan. 30, May 2, May 1,
1997 1998 1999 1998 1999
-------- -------- -------- -------- --------
As restated, see Note K (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net earnings................ $ 4,640 $ 7,121 $ 9,482 $ 1,812 $ 2,353
Adjustments to reconcile net
earnings to net cash
provided by operating
activities:
Depreciation and
amortization.............. 2,282 4,857 6,776 1,400 2,061
Provision for losses on
receivables............... 1,678 139 392 51 172
Deferred income taxes...... 63 305 1,715 1 --
Change in assets and
liabilities excluding the
effect of business
acquisitions:
Receivables.............. (42,172) (5,621) (25,032) (7,333) (10,565)
Pharmaceutical
inventories............. (746) (62) (1,809) (342) 746
Other current assets..... (162) 151 (932) (316) (556)
Other assets............. (1,811) (1,500) 1,992 (311) 2,888
Accounts payable......... 29,369 11,157 19,597 (9,278) (9,880)
Accrued liabilities...... 10,249 (4,561) (2,704) (1,244) (1,704)
-------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities............ 3,390 11,986 9,477 (15,560) (14,485)
Cash flows used in investing
activities:
Payments for property and
equipment................. (2,057) (4,198) (8,863) (1,829) (3,810)
Business acquisitions, net
of cash acquired.......... (33,531) (22,390) -- -- --
-------- -------- -------- -------- --------
Net cash used in
investing activities.. (35,588) (26,588) (8,863) (1,829) (3,810)
Cash flows from financing
activities:
Change in short-term
debt...................... -- 967 1 14 14
Capital contribution....... 33,143 21,063 12,475 4,830 (6,397)
Change in long-term debt... -- (841) (943) 14 --
-------- -------- -------- -------- --------
Net cash provided by
(used in) financing
activities............ 33,143 21,189 11,533 4,858 (6,383)
Net increase (decrease) in
cash and cash equivalents.. 945 6,587 12,147 (12,531) (24,678)
Cash and cash equivalents at
beginning of period........ 5,001 5,946 12,533 12,533 24,680
-------- -------- -------- -------- --------
Cash and cash equivalents at
end of period.............. $ 5,946 $ 12,533 $ 24,680 $ 2 $ 2
======== ======== ======== ======== ========
Supplemental cash flow
information:
Cash paid during the
period for:
Income taxes............. $ 4,044 $ 5,585 $ 6,793 $ 1,429 $ 1,750
Accrued supplemental
contingent payment...... $ 2,358 -- -- -- --
During fiscal 1997 and 1996,
the Company acquired
companies. In conjunction
with these acquisitions,
the purchase price
consisted of the following:
Cash paid.................. $ 33,531 $ 22,390 $ -- $ -- $ --
Notes payable issued....... -- 1,833 -- -- --
Liabilities assumed........ -- 4,030 -- -- --
-------- -------- -------- -------- --------
Total fair value of
acquisitions.......... $ 33,531 $ 28,253 $ -- $ -- $ --
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional
------------- Paid-In Retained
Shares Amount Capital Earnings
------ ------ ---------- --------
<S> <C> <C> <C> <C>
Balances at February 3, 1996................ 12,550 $126 $22,316 $ 1,682
Capital contribution........................ 33,143
Net earnings, as restated, see Note K....... 4,640
------ ---- ------- -------
Balances at February 1, 1997, as restated,
see Note K................................. 12,550 126 55,459 6,322
Capital contribution........................ 21,063
Net earnings, as restated, see Note K....... 7,121
------ ---- ------- -------
Balances at January 31, 1998, as restated,
see Note K................................. 12,550 126 76,522 13,443
Capital contribution........................ 12,475
Net earnings................................ 9,482
------ ---- ------- -------
Balances at January 30, 1999, as restated,
see Note K................................. 12,550 126 88,997 22,925
Capital contribution (reduction)............ (6,397)
Net earnings (for the period)............... 2,353
------ ---- ------- -------
Balances at May 1, 1999..................... 12,550 $126 $82,600 $25,278
====== ==== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies
Organization and Basis of Presentation:
The consolidated financial statements include the accounts of ProVantage
Health Services, Inc. and all its subsidiaries, formerly known as ProVantage,
Inc. ("ProVantage" or the "Company"). ProVantage consolidates all subsidiaries
in which it has a majority voting interest. All significant intercompany
accounts and transactions have been eliminated. ProVantage is a Delaware
corporation. ProVantage is a wholly-owned subsidiary of ProVantage Holdings,
Inc., which in turn is wholly-owned by ShopKo Stores, Inc. ("ShopKo").
ProVantage uses the same fiscal year as ShopKo. ProVantage's fiscal year
conforms to the National Retail Federation calendar and ends on the Saturday
closest to the end of January. ProVantage has adopted a convention of referring
to a fiscal year by the year in which the fiscal year begins. For example, the
fiscal year which began on February 1, 1998 and ended on January 30, 1999 is
referred to as "fiscal 1998."
ProVantage, which conducts its business principally throughout the United
States, provides health benefit management services, pharmacy mail services,
vision benefit management services and health information technology and
clinical support services.
For the periods presented, certain general, administrative and other
expenses reflected in the consolidated financial statements include allocations
of certain corporate expenses from ShopKo which took into consideration
personnel, space, estimates of time spent to provide services or other
appropriate bases. These allocations include services and expenses for general
management, information systems management, treasury, tax, financial reporting,
benefits administration, insurance, legal, communications and other
miscellaneous services.
Management believes the foregoing allocations were made on a reasonable
basis. Although these allocations do not necessarily represent the costs which
would have been or may be incurred by ProVantage on a stand alone basis,
management believes that any variance in costs would not be material.
Revenues and Costs of Revenues:
ProVantage's net sales include (i) administrative and dispensing fees
plus the cost of pharmaceuticals dispensed by pharmacies participating in the
network maintained by ProVantage or by ProVantage's mail service pharmacy to
members of health benefit plans sponsored by ProVantage's clients; (ii) the
sale of eyeglasses and contact lenses and related administrative fees relating
to vision benefit management services; and (iii) license and service fees for
health information technology and clinical support services. Revenues from the
dispensing of pharmaceuticals from ProVantage's mail service pharmacy are
recognized when the prescription is shipped. Revenues from claim processing
fees and sales of prescription drugs and vision benefits by pharmacies and
vision providers in ProVantage's network are recognized when the claims are
processed. When ProVantage provides pharmacy and vision benefits to members in
health benefit plans sponsored by ProVantage's clients and has an independent
contractual obligation to pay its network pharmacy and vision providers for
benefits provided to members in ProVantage's clients' health benefit plans,
ProVantage includes payments from plan sponsors for these benefits as net
sales. If ProVantage is only administering the plan sponsors' pharmacy benefit
contract, ProVantage records only the administrative fee derived from the
contract as revenue. Clinical and health information technology revenues are
recognized as the services are performed and earned in accordance with
contractual agreements.
Cost of sales includes the amounts paid to network pharmacies and optical
centers for medical claims and the cost of prescription medications sold
through the mail service pharmacy. Cost of sales is reduced by
F-6
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
formulary concessions received from pharmaceutical manufacturers. Generally,
the agreements with these pharmaceutical manufacturers stipulate that in order
to receive payments minimum changes in sales volume required for specified
pharmaceutical products must be achieved. Currently, almost all of these
agreements require these minimum changes in sales volumes to be achieved on a
calendar quarter basis. The amounts due to ProVantage under these agreements
are recorded as reductions to cost of sales upon achieving the stipulated
minimum changes in sales levels. Rebates and discounts for purchases through
ProVantage's mail service facility are recorded as adjustments to cost of
sales. ProVantage does not take possession or legal ownership of eyewear or
pharmaceutical drugs dispensed by the retail pharmacy network, although
ProVantage assumes the legal liability and financial risk for these
transactions.
Cash and Cash Equivalents:
ProVantage records all highly liquid investments with a maturity of three
months or less as cash equivalents.
Receivables:
Receivables consist primarily of amounts collectible from (i) insurance
companies, third party administrators and self-funded medical plan sponsors for
pharmaceutical claims and claim processing fees, (ii) pharmaceutical
manufacturers and third party formulary administrators for formulary
concessions and (iii) customers for license and service fees for health
information technology and clinical support services. Substantially all amounts
are expected to be collected within one year.
Pharmaceutical Inventories:
Pharmaceutical inventories are stated at the lower of cost or market.
Cost, which includes certain distribution and transportation costs, is
determined through use of the first-in, first-out (FIFO) method.
Property and Equipment:
Property and equipment are carried at cost. The cost of equipment is
depreciated over the estimated useful life of the assets using the straight-
line method. Useful lives generally assigned are 3 to 10 years. Costs of
leasehold improvements are amortized over the period of the lease or the
estimated useful life of the asset, whichever is shorter, using the straight-
line method.
Expenditures relating to the development of software to be marketed to
clients, or to be used for internal purposes, are charged to expense until
technological feasibility is established. Thereafter, the remaining software
production costs up to the date of general release to customers or to the date
placed into production are capitalized and included as property and equipment.
During fiscal years 1996, 1997 and 1998, $1.4 million, $2.1 million and $4.6
million in software development costs were capitalized, respectively.
Capitalized software development costs amounted to $3.8 million and $8.4
million at January 31, 1998 and January 30, 1999, respectively. Amortization of
capitalized amounts commences on the date of general release to customers or
the date placed into production using the straight-line method over estimated
economic life of the product but not more than five years. Total amortization
expense of capitalized software costs was $0.1 million, $1.0 million and $1.9
million in fiscal years 1996, 1997 and 1998, respectively.
F-7
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of property and equipment are (in thousands):
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
----------- -----------
<S> <C> <C>
Property and equipment at cost:
Software........................................ $8,058 $13,834
Equipment....................................... 3,670 6,441
Leasehold improvements.......................... 353 668
------ -------
12,081 20,943
Less accumulated depreciation and amortization.... 2,650 5,667
------ -------
Net property and equipment........................ $9,431 $15,276
====== =======
</TABLE>
Intangibles:
Intangibles, net consist of the following (in thousands):
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
----------- -----------
<S> <C> <C>
Customer relationships.................................. $ 8,549 $ 8,549
Retail pharmacy network................................. 12,500 12,500
Goodwill................................................ 54,086 54,497
------- -------
75,135 75,546
Less accumulated amortization........................... 5,783 9,493
------- -------
Net intangibles......................................... $69,352 $66,053
======= =======
</TABLE>
The intangibles are amortized using the straight-line method over 18 to
22 years. Amortization related to these intangibles was $1.6 million, $3.3
million and $3.7 million in fiscal years 1996, 1997 and 1998, respectively.
Impairment of Long Lived Assets:
ProVantage evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of long lived assets may warrant
revision or that the remaining balance of an asset may not be recoverable. The
identification of possible impairment is based on the ability to recover the
balance of assets from expected future operating cash flows on an undiscounted
basis. Impairment losses, if any, would be measured by comparing the carrying
amount of the asset to the present value of the cash flows using discounted
rates that reflect the inherent risks of the underlying business. In the
opinion of management, no such impairment existed as of January 30, 1999.
Net Earnings Per Common Share:
In 1997, SFAS No. 128, "Earnings Per Share" was issued. SFAS No. 128
replaces the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Basic net earnings per common share
is computed by dividing net earnings by the weighted average number of common
shares outstanding. There are no potentially dilutive common stock equivalents.
F-8
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. Of this $8.9 million
payment, $8.1 million was capitalized as additional purchase price and
amortized over 20 years and the remaining $0.8 million was expensed as
severance cost.
On August 2, 1996, ProVantage completed the acquisition of CareStream
ScripCard from Avatex Corporation, formerly known as FoxMeyer Health
Corporation. CareStream ScripCard is a prescription benefit management company
and its operations have been integrated with ProVantage. The initial purchase
price was $30.5 million in cash. In addition, as a result of the acquisition
ProVantage assumed approximately $0.8 million in liabilities for employee
severance. These amounts were paid by December 1996. Avatex has a right to
receive one additional contingent cash payment at its election without further
condition at any time prior to August 2, 2001. Before August 2, 1997, the
additional cash payment would have been $1.5 million. On and after August 2,
1997, the minimum additional cash payment is equal to $2.5 million. At the
date of acquisition, the present value of the minimum supplemental cash
payment, $2.4 million, was recorded as additional purchase price. The present
value was based on a discount rate of 6.0%. If ProVantage's common stock is
publicly traded, the additional contingent cash payment will be equal to 1.5%
of ProVantage's market value, subject to a minimum of $2.5 million and a
maximum of $5.0 million. As the market value of ProVantage fluctuates and
prior to the exercise by Avatex of its supplemental cash payment right,
ProVantage will adjust the liability at the end of each accounting period
based on ProVantage's market value. This adjustment will be reflected on
ProVantage's statement of earnings for such accounting period. Avatex is
entitled to $5.0 million if ShopKo sells a majority of ProVantage's common
stock, other than in a public offering or public distribution, or if ShopKo
buys a competing business or if ProVantage disposes of a substantial portion
of its business. The supplemental payment will be capitalized as additional
purchase price and amortized over a period of 15 to 18 years.
F-9
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On August 20, 1997, ProVantage acquired The Mikalix Group, Inc. and its
subsidiaries, an international privately held group of companies based in
Arlington, Virginia. Mikalix's primary subsidiary is PharMark Corporation, a
software and database development company providing information driven
strategies for optimizing medical and pharmaceutical outcomes. The purchase
price for Mikalix was approximately $15.2 million, of which $14.2 million has
been paid in cash and $1.0 million is due in 1999. The sellers of Mikalix may
also be entitled to contingent payments of up to $8.0 million in the aggregate
based on future increases in the market value of ProVantage's outstanding
common stock (the "Contingent Payments"). The Contingent Payment amounts of up
to $8.0 million are calculated based upon the market value of ProVantage's
outstanding common stock ranging from $250.0 million to $500.0 million. The
Contingent Payments, if any, will be due on the first to occur of August 20,
2002 and the date on which ShopKo and its affiliates cease to own at least a
majority of ProVantage's common stock. The Contingent Payments, if any, will be
capitalized as additional purchase price and amortized over a period of 15 to
19 years. The Contingent Payments may be made, at ProVantage's election, in
either cash, ShopKo common stock or ProVantage common stock; provided, however,
that any stock used for such payments must be traded in a public market.
The allocation of the purchase prices of ProVantage's acquisitions were
based on fair values at the dates of acquisition. The results of the acquired
companies' operations since the dates of acquisition have been included in the
consolidated statements of earnings of ProVantage.
C. Debt
ProVantage's short-term debt consists of two promissory notes due to the
former owners of PharMark. The promissory notes, which are due August 20, 1999,
bear interest at 6%.
D. Leases
ProVantage is obligated under operating leases, primarily for buildings
and computer hardware. Minimum future obligations under operating leases in
effect at January 30, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Lease
Year Obligations
---- -----------
<S> <C>
1999.................................. $1,708
2000.................................. 1,322
2001.................................. 1,056
2002.................................. 418
Thereafter............................ 251
------
Total minimum obligations............. $4,755
======
</TABLE>
Total minimum rental expense related to all operating leases with terms
greater than one year was $0.4 million, $0.9 million and $1.9 million in fiscal
years 1996, 1997 and 1998, respectively.
F-10
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
E. Income Taxes
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Components of ProVantage's net deferred tax liability are as follows (in
thousands):
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Goodwill......................................... $ 1,795 $ 1,948
Property and equipment........................... -- 1,573
Inventory valuation.............................. 202 --
------- -------
Total deferred tax liabilities................. 1,997 3,521
Deferred tax assets:
Property and equipment........................... (345) --
Reserves and allowances.......................... (1,106) (1,260)
------- -------
Total deferred tax assets...................... (1,451) (1,260)
------- -------
Net deferred tax liabilities....................... $ 546 $ 2,261
======= =======
</TABLE>
The amounts reflected in the provision for income taxes are based on
applicable federal statutory rates, adjusted for permanent differences between
financial and taxable income. The provision for federal and state income taxes
includes the following (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Current:
Federal............................................. $2,874 $4,292 $4,428
State............................................... 703 984 1,078
Deferred............................................ 63 305 1,715
------ ------ ------
Total provision................................... $3,640 $5,581 $7,221
====== ====== ======
</TABLE>
The effective tax rate varies from the statutory federal income tax rate
for the following reasons:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Statutory income tax..................................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefits.......... 5.0 5.0 5.1
Goodwill................................................. 4.0 3.7 2.9
Other.................................................... -- 0.2 0.2
---- ---- ----
Effective income tax rate................................ 44.0% 43.9% 43.2%
==== ==== ====
</TABLE>
Provision is made for deferred income taxes and future income tax
benefits applicable to temporary differences between financial and tax
reporting. The sources of these differences and the effects of each are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
----- ---- ------
<S> <C> <C> <C>
Depreciation and amortization.......................... $ 569 $131 $2,072
Reserves and allowances................................ (494) 166 (118)
Other.................................................. (12) 8 (239)
----- ---- ------
$ 63 $305 $1,715
===== ==== ======
</TABLE>
F-11
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
F. Stockholder's Equity
ProVantage has 50,000,000 shares of $0.01 par value of common stock
authorized with 12,550,000 shares issued and outstanding as of January 31, 1998
and 12,550,000 shares issued and outstanding as of January 30, 1999. The
stockholder's equity section of the balance sheet is adjusted to show the
retroactive effect of a stock split effected through a stock dividend.
G. Employee Benefits
Substantially all employees of ProVantage are covered by a defined
contribution profit sharing plan sponsored by ShopKo. The plan provides for two
types of Company contributions: an amount determined annually by the Board of
Directors and an employer matching contribution equal to one-half of the first
6% of compensation contributed by participating employees. ProVantage
contributions were $0.1 million, $0.1 million and $0.2 million for fiscal years
1996, 1997 and 1998, respectively.
H. Related Party Transactions
ProVantage provided claims processing services for ShopKo. ProVantage
bills ShopKo for the cost of the prescription claim plus processing fees. These
amounts were $1.6 million, $1.6 million and $2.1 million for fiscal years 1996,
1997 and 1998, respectively, and were included in ProVantage's sales.
Receivables include amounts due from ShopKo of $0.1 million at both January 31,
1998 and January 30, 1999.
A portion of ProVantage's payments made to network pharmacies are made to
pharmacies owned by ShopKo. The payments reflect the cost of the prescription
claim less an on-line remittance fee. These amounts were $21.0 million, $25.8
million and $35.7 million for fiscal years 1996, 1997 and 1998, respectively,
and were included in ProVantage's cost of sales. Accounts payable include
amounts payable to ShopKo for claims of $1.3 million at January 31, 1998 and
$1.7 million at January 30, 1999, respectively.
ProVantage receives formulary concessions from pharmaceutical
manufacturers. A portion of these concessions are shared with and paid to the
network pharmacies owned by ShopKo. These amounts were $0.2 million and $0.1
million for fiscal years 1996 and 1997, respectively, and were included in
ProVantage's cost of sales.
Purchases of inventory from ShopKo were $1.0 million, $0.8 million and
$0.3 million for fiscal years 1996, 1997 and 1998, respectively.
General, administrative and other expenses were allocated to ProVantage
from ShopKo. These allocations took into consideration personnel, space,
estimates of time spent to provide services or other appropriate bases and
included amounts for general management, tax, financial reporting, benefits
administration, insurance, legal, communications and other miscellaneous
services. Amounts charged for these services reflect amounts historically
incurred by ShopKo and were $0.4 million, $1.1 million and $1.2 million for
fiscal years 1996, 1997 and 1998, respectively.
Management believes the foregoing allocations were made on a reasonable
basis. Although these allocations do not necessarily represent the costs which
would have been or may be incurred by ProVantage on a stand alone basis,
management believes that any variance in costs would not be material.
F-12
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
I. Major Customers
For fiscal 1996, one customer represented $59.1 million, or 18.9%, of net
sales, for fiscal year 1997, this customer represented $58.6 million, or 12.1%,
of net sales, and for fiscal year 1998, this customer represented $76.1
million, or 11.8%, of net sales.
J. Subsequent Events (unaudited)
ProVantage has filed a registration statement with the Securities and
Exchange Commission under which a portion of its shares of common stock will be
sold. The average number of shares of common stock is adjusted to show the
retroactive effect of a stock split through a stock dividend. The stock split,
which will be made prior to the public sale of shares, is required to convert
the existing 10,100 shares of outstanding common stock into 12,550,000 shares
of common stock. After the offering, 17,850,000 shares of common stock will be
outstanding, excluding the underwriters' over-allotment option. In addition,
ProVantage will declare a dividend to ShopKo of $115.0 million in the form of a
demand promissory note. The demand promissory note will be paid with the
proceeds of the offering and to the extent that the proceeds of the offering
are less than $115.0 million, the remainder of the demand promissory note will
be contributed to ProVantage by ShopKo.
Also pursuant to this offering of common stock, ProVantage will enter
into agreements which call for ShopKo to provide credit, administrative and
information technology services to ProVantage. All of these agreements expire
on January 31, 2001 and are subject to automatic one year renewal terms and
earlier termination under certain circumstances. In addition, ProVantage will
lease its corporate headquarters building, currently under construction, from
ShopKo at terms to be determined.
The credit agreement provides ProVantage with an unsecured, revolving
line of credit of up to $25.0 million at market rates. ProVantage will pay an
annual facility fee of 1/5 of one percent of the total commitment amount.
The administrative services agreement provides ProVantage with certain
administrative, support and consultation services including employee benefits,
payroll processing, insurance, tax compliance, treasury and accounts payable
processing.
The information technology services agreement provides ProVantage with
the use and the personnel to manage and maintain certain hardware, software and
computer facilities.
Pro Forma Basic Net Earnings Per Share of Common Stock:
Pro forma basic net earnings per share of common stock are computed by
dividing net earnings by 16,244,118, which represents the total number of
shares of common stock which will be outstanding after completion of the
reorganization of ProVantage's corporate structure, plus 3,694,118 shares of
common stock which, when multiplied by an assumed offering price of $17.00 per
share, would be sufficient to repay the portion of the demand promissory note
to be issued to ShopKo prior to the offering, which payment is estimated to be
$62.8 million.
Pro Forma Balance Sheet:
The unaudited pro forma balance sheet presented gives effect to the
dividend declared to ShopKo as if such transaction had occurred on May 1, 1999
and reflects the portion of the demand promissory note to be
F-13
<PAGE>
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
paid to ShopKo, which is estimated to be $62.8 million. The remaining balance
of the demand promissory note will be contributed to ProVantage as a capital
contribution. The unaudited pro forma balance sheet should be read in
conjunction with the historical statements and related notes of ProVantage
included elsewhere in this Prospectus.
Note K. Restatement
Subsequent to the issuance of the Company's January 30, 1999 financial
statements, the Company's management determined that the Company's financial
statements should be restated to adjust the timing of recognition and the
classification of formulary concessions and to adjust certain amounts related
to the Avatex and Bravell acquisitions. A summary of the significant effects of
the restatement is as follows:
<TABLE>
<CAPTION>
As previously As As previously As
reported restated reported restated
------------- -------- ------------- --------
Jan. 31, 1998 Jan. 30, 1999
---------------------- ----------------------
(in thousands)
<S> <C> <C> <C> <C>
At year end:
Receivables.................... $ 59,662 $ 58,209 $ 84,935 $ 83,483
Intangibles--net............... 67,926 69,352 67,127 66,053
Accounts payable trade......... 46,481 45,969 66,077 65,566
Accrued liabilities............ 11,633 13,307 14,025 13,199
Retained earnings.............. 14,632 13,443 24,114 22,925
<CAPTION>
Feb. 1, 1997 Jan. 31, 1998
---------------------- ----------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
For the year ended:
Net sales...................... $330,048 $313,390 $500,891 $486,121
Cost of sales.................. 306,760 290,477 463,069 448,865
Selling, general and
administrative expenses....... 11,828 12,633 19,990 19,990
Depreciation and amortization
expenses...................... 2,233 2,282 4,779 4,857
Interest income--net........... 353 282 364 293
Earnings before income taxes... 9,580 8,280 13,417 12,702
Provision for income taxes..... 4,164 3,640 5,883 5,581
Net earnings................... 5,416 4,640 7,534 7,121
Basic net earnings per share of
common stock.................. 0.43 0.37 0.60 0.57
</TABLE>
Previously, formulary concessions were recognized based on the estimated
amount to be realized on a fiscal quarter basis and included in net sales.
Formulary concessions should have been recognized at the conclusion of the
calendar quarter when the stipulated changes in minimum sales volume were
achieved and should have been reflected as a reduction of cost of sales. As a
result, net sales were decreased by $16.7 million in fiscal 1996 and by $14.8
million in fiscal 1997, and cost of sales was decreased by $16.3 million in
fiscal 1996 and by $14.2 million in fiscal 1997. Additionally, the present
value of the minimum supplemental contingent cash payment, amounting to $2.4
million, related to the Avatex acquisition, should have been recorded as
additional purchase price at the time of acquisition in 1996, resulting in
additional amortization and interest expense of $0.1 million in fiscal 1996 and
$0.2 million in fiscal 1997. Also, $0.8 million of the final settlement related
to the Bravell acquisition should have been allocated to the founders'
employment agreements and charged to expense upon termination of the employment
agreements in fiscal 1996. As a result, the financial statements as of January
30, 1999 and January 31, 1998, and for the years ended January 31, 1998 and
February 1, 1997, have been restated from amounts previously reported to
include the effects of the adjustments discussed above. The results of
operations for the year ended January 30, 1999 have not been restated because
any adjustments would not have been material. Receivables and accounts payable
trade were impacted by this restatement because of the timing of revenue
recognition and the amounts due under formulary sharing arrangements. Accrued
liabilities were impacted by this restatement because the Company recorded the
$2.4 million supplemental contingent cash payment and the income tax effect on
all relevant adjustments.
F-14
<PAGE>
ProVantage's
Advanced Therapeutic Intervention Program
Medical Pharmaceutical Medical
Diagnosis Data Claims Data Claims Data
Identify
Quantify
Prioritize
Physician and Patient
Alert
Reduce Hospital Improve Quality Platform for
& Drug Costs of Healthcare Research
Our Advanced Therapeutic Intervention Program analyzes our clients' medical
diagnosis, claims and prescription data on an integrated basis, thereby
providing the capability to: identify patients at risk for drug-induced illness,
quantify medical risk using statistical measures, and prioritize patients at
risk.
Our clinical staff, under the direction of our physicians, intervene by issuing
alerts for these patients to the treating physicians. Alerts inform the treating
physicians of the medical condition, prescribing pattern or other factors that
create the increased hospitalization risk.
This program allows clients to measure their return on investment by quantifying
healthcare cost savings. The program is designed to improve the quality of
healthcare, and provides a platform for future research.
[LOGO OF PROVANTAGE]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Through and including , 1999 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
5,300,000 Shares
ProVantage Health Services, Inc.
Common Stock
[PROVANTAGE LOGO]
----------------------
P R O S P E C T U S
----------------------
Merrill Lynch & Co.
Bear, Stearns & Co. Inc.
William Blair & Company
Lehman Brothers
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the issuance and
distribution of the Common Stock being registered hereunder, other than
underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC registration fee........................................... $ 30,500
New York Stock Exchange listing fee............................ 129,500
NASD filing fee................................................ 11,500
Blue Sky fees and expenses (including fees of counsel)......... 7,500
Accounting fees and expenses................................... 290,000
Legal fees and expenses........................................ 250,000
Printing and engraving expenses................................ 225,000
Transfer Agent and Registrar fees.............................. 5,000
Miscellaneous.................................................. 51,000
----------
Total...................................................... $1,000,000
==========
</TABLE>
All amounts except the SEC registration fee, New York Stock Exchange
listing fee and NASD filing fee are estimated.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law (the "DGCL") permits
a Delaware corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe such person's conduct was unlawful.
In the case of an action by or in the right of the corporation, Section
145 permits the corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that such person is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interest of the corporation. No indemnification may be
made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the
extent that the Delaware Court of Chancery or the court in which such action or
suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and
II-1
<PAGE>
reasonably entitled to indemnity for such expenses which the Delaware Court of
Chancery or such other court shall deem proper.
To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in the preceding two paragraphs, Section
145 requires that such person be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith.
Section 145 provides that expenses (including attorneys' fees) incurred
by an officer or director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the corporation as authorized in Section 145.
The Registrant's Restated Certificate of Incorporation provides that an
officer or director of the Registrant will not be personally liable to the
Registrant or its stockholders for monetary damages for any breach of his
fiduciary duty as an officer or director, except in certain cases where
liability is mandated by the DGCL. The provision has no effect on any non-
monetary remedies that may be available to the Registrant or its stockholders,
nor does it relieve the Registrant or its officers or directors from compliance
with federal or state securities laws.
The Registrant's Amended and Restated Bylaws generally provide that the
Registrant shall indemnify, to the fullest extent permitted by the DGCL, each
person who was or is made a party to or is threatened to be made a party to or
is involved in any threatened, pending or completed action, suit or proceeding
(each, a "Proceeding") by reason of the fact that such person is or was a
director, officer or employee of the Registrant, or is or was serving at the
request of the Registrant as a director, officer or employee of another entity,
against all expenses, liabilities and losses reasonably incurred or suffered by
such person in connection with such Proceeding.
An officer or director shall not be entitled to indemnification by the
Registrant if (i) the officer or director did not act in good faith and in a
manner reasonably believed to be in, or not opposed to, the best interests of
the Registrant, or (ii) with respect to any criminal action or proceeding, the
officer or director had reasonable cause to believe his conduct was unlawful.
The Purchase Agreement filed herewith as Exhibit 1.1 provides for
indemnification of the directors, certain officers and controlling persons of
the Registrant by the Underwriters against certain civil liabilities, including
liabilities under the Securities Act.
The Registrant has entered into agreements to indemnify its directors and
certain officers, in addition to the indemnification provided for in the
Amended and Restated Bylaws. These agreements will, among other things,
indemnify the Registrant's directors and certain of its officers to the full
extent permitted by Delaware law for any claims, liabilities, damages,
judgments, penalties, fines, settlements, disbursements or expenses (including
attorneys' fees) incurred by such person in any action or proceeding, including
any action by or in the right of the Registrant, on account of services as a
director or officer of the Registrant.
In addition, the Registrant has directors' and officers' liability
insurance that insures against certain liabilities, including liabilities under
the Securities Act, subject to applicable restrictions.
Item 15. Recent Sales of Unregistered Securities
The following information is furnished as to securities of the Registrant
sold within the past three years that were not registered under the Securities
Act:
II-2
<PAGE>
On August 20, 1997, the Registrant acquired The Mikalix Group, Inc. as
described under "Management's Discussion and Analysis of Financial Condition
and Results of Operation" in the prospectus contained in this Registration
Statement which description is incorporated by reference herein. The securities
which may be issued to the sellers of The Mikalix Group, Inc. were sold in
reliance on Section 4(2) of the Securities Act of 1933, as amended. The
securities were sold in a private offering to purchasers who represented that
they were purchasing such securities with investment intent and not with a view
to the distribution thereof.
Item 16. Exhibits and Financial Schedules
(a) Exhibits
The list of exhibits is incorporated by reference to the "Index to
Exhibits" located after the signature page of this Registration Statement.
(b) Financial Statement Schedules
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholder of ProVantage Health
Services, Inc.:
We have audited the consolidated financial statements of ProVantage
Health Services, Inc. (formerly ProVantage, Inc.) as of January 30, 1999 and
January 31, 1998, and for each of the three years in the period ended January
30, 1999, and have issued our report thereon dated March 12, 1999 (included
elsewhere in this Registration Statement). Our audits also included the
consolidated financial statement schedule listed in Item 16(b) of this
Registration Statement. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
March 12, 1999
II-3
<PAGE>
ProVantage Health Services, Inc. and Subsidiaries
Schedule VIII--Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at
beginning bad debt Deductions/ end
of year expense Writeoffs of year
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Year (52 weeks) ended February 1,
1997:
Allowance for losses on
receivables................... $ 40 $1,678 -- $1,718
Year (52 weeks) ended January 31,
1998:
Allowance for losses on
receivables................... $1,718 $ 139 $881 $ 976
Year (52 weeks) ended January 30,
1999:
Allowance for losses on
receivables................... $ 976 $ 392 $ 54 $1,314
</TABLE>
All other schedules are omitted because the required information is not
present or is not present in amounts sufficient to require submission of a
schedule or because the information required is included in the consolidated
financial statements of the Registrant or the notes thereto or the schedules
are not required or inapplicable under the related instructions.
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the
time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(b) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has caused this Amendment No. 4 to the Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Milwaukee, State of Wisconsin, on June 23, 1999.
Provantage Health Services, Inc.
/s/ Jeffrey A. Jones*
By: _________________________________
Jeffrey A. Jones,
Executive Vice President
and Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Dale P. Kramer* Chairman of the Board June 23, 1999
____________________________________
Dale P. Kramer
/s/ Jeffrey A. Jones* Executive Vice President and June 23, 1999
____________________________________ Chief Operating Officer
Jeffrey A. Jones (Principal Executive
Officer and Principal
Financial Officer)
/s/ Peter J. Beste* Vice President and June 23, 1999
____________________________________ Controller (Principal
Peter J. Beste Accounting Officer)
</TABLE>
/s/ Richard D. Schepp
- -------------------------------
*By Richard D. Schepp pursuant
to Powers of Attorney
previously filed.
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S>
1.1 Form of Purchase Agreement*
3.1 Form of Restated Certificate of Incorporation of the Registrant*
3.2 Form of Amended and Restated Bylaws of the Registrant*
4.1 Form of Stock Certificate*
4.2 Form of Rights Agreement between the Registrant and Norwest Bank
Minnesota, N.A. (including the Form of Certificate of
Designation, Preferences and Rights of Senior B Junior
Participating Preferred Stock and Form of Rights Certificate)*
4.3 Form of Demand Promissory Note issued by the Registrant to
ProVantage Holdings, Inc.*
5.1 Opinion of Godfrey & Kahn, S.C.*
10.1 Form of Administrative Services Agreement between the Registrant
and ShopKo Stores, Inc.*
10.2 Form of I.T. Support Agreement between the Registrant and ShopKo
Stores, Inc.*
10.3 Form of Credit Agreement between the Registrant and ShopKo
Stores, Inc.*
10.4 Form of Indemnification and Hold Harmless Agreement between the
Registrant and ShopKo Stores, Inc.*
10.5 Form of Registration Rights Agreement between the Registrant and
ProVantage Holdings, Inc.*
10.6 Form of Tax Matters Agreement between the Registrant and ShopKo
Stores, Inc.*
10.7 Form of Indemnification Agreement between the Registrant and the
directors and certain officers of the Registrant*
10.8 Form of Change of Control Severance Agreement between the
Registrant and certain officers of the Registrant*
10.9(a) First Amended and Restated Prescription Benefit Management
Agreement between ProVantage Prescription Benefit Management,
Inc. and American Medical Security, Inc. dated as of March 14,
1996*
10.9(b) First Amendment to the First Amended and Restated Prescription
Benefit Management Agreement between ProVantage Prescription
Benefit Management, Inc. and American Medical Security, Inc.*
10.10 Registrant's 1999 Stock Incentive Plan*
10.11 Prescription Benefit Management Agreement between the Registrant
and ShopKo Stores, Inc. dated as of January 27, 1999*
10.12 System Agreement between Systems Xcellence USA, Inc. and the
Registrant dated as of January 27, 1999*
10.13 Vision Benefit Group Insurance Policy*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Godfrey & Kahn, S.C. (contained in Exhibit 5.1).*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Document Description
------- --------------------
<C> <S>
24.1 Powers of Attorney*
27.1 Financial Data Schedule
99.1 Consent of Jeffrey C. Girard*
99.2 Consent of William J. Podany*
99.3 Consent of Gregory H. Wolf*
99.4 Consent of Jeffrey A. Jones*
</TABLE>
- --------
*Previously filed.
2
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 4 to Registration Statement No. 333-
71743 relating to 5,300,000 shares of Common Stock of ProVantage Health
Services, Inc. (formerly ProVantage, Inc.) on Form S-1 of our report dated March
12, 1999, June 21, 1999, as to Note K (which expresses an unqualified opinion
and includes an explanatory paragraph related to the restatement as described in
Note K), appearing in the Prospectus, which is a part of this Registration
Statement, and of our report dated March 12, 1999 relating to the financial
statement schedule appearing elsewhere in this Registration Statement.
We also consent to the reference to us under the headings "Selected Historical
Consolidated Financial Data" and "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
June 21, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAY-01-1999
<CASH> 2
<SECURITIES> 0
<RECEIVABLES> 94,644
<ALLOWANCES> 1,203
<INVENTORY> 2,375
<CURRENT-ASSETS> 98,717
<PP&E> 25,157
<DEPRECIATION> 7,133
<TOTAL-ASSETS> 185,351
<CURRENT-LIABILITIES> 70,789
<BONDS> 0
0
0
<COMMON> 126
<OTHER-SE> 107,878
<TOTAL-LIABILITY-AND-EQUITY> 185,351
<SALES> 214,949
<TOTAL-REVENUES> 214,949
<CGS> 201,181
<TOTAL-COSTS> 211,020
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (174)
<INCOME-PRETAX> 4,103
<INCOME-TAX> 1,750
<INCOME-CONTINUING> 2,353
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,353
<EPS-BASIC> 0.19
<EPS-DILUTED> 0.19
</TABLE>
