<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year (52 weeks) ended January 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- -------------------------
Commission file number 1-14923
PROVANTAGE HEALTH SERVICES, INC.
(Exact name of registrant as specified in its Charter)
Delaware 54-1508848
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
N19 W24130 Riverwood Drive, Waukesha Wisconsin 53188
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (262) 312-3000
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
-------------------------------------- ---------------------------
Common Stock, par value $0.01 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
(Cover page 1 of 2 pages)
1
<PAGE> 2
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 31, 2000 was approximately $139,528,125 (based upon the
closing price of Registrant's Common Stock on the New York Stock Exchange on
such date).
Number of shares of $0.01 par value Common Stock outstanding as of March 31,
2000: 18,150,000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference portions of the definitive Proxy Statement
for the Registrant's Annual Meeting of Shareholders to be held on May 23, 2000.
- --------------------------------------------------------------------------------
(Cover page 2 of 2 pages)
2
<PAGE> 3
PART I
Item 1. BUSINESS
GENERAL
Background
ProVantage was launched as a mail service pharmacy in 1993 by ShopKo
Stores, Inc. ShopKo Stores, Inc. is a specialty discount retailer with
pharmacies and optical centers in most of its retail stores. 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
significantly expanded our clinical expertise and added to our databases with
the acquisition of PharMark.
ProVantage remained a wholly owned indirect subsidiary of ShopKo Stores,
Inc. ("ShopKo") until July 19, 1999. ProVantage on July 19, 1999 sold shares of
its common stock as part of an initial public offering. ShopKo's ownership
interest was reduced to 64.5% as a result of the shares sold.
Company Overview
We are a leading health benefit management company providing pharmacy
benefit management and health information technology products. 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 2000, we
provided services to over 3,000 customers, covering over 19 million people
throughout the United States. Our pharmacy benefit management services cover
approximately 5.0 million individuals and vision benefit management services
cover approximately 542,000 individuals. Our healthcare information management
and analytics intelligence products, which are designed to improve the quality
of healthcare while reducing cost, are being used by our clients in programs
covering over 13.6 million people. We have experienced significant growth since
fiscal 1995, increasing revenues from $81.2 million to $902.4 million in fiscal
1999, representing a compound annual growth rate of approximately 83%.
Pharmacy benefit management companies address the need of health plan
sponsors to manage costs and to better understand the effect of pharmaceutical
utilization on their membership. Our 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.
More importantly, 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.
3
<PAGE> 4
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 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
1998, is our Internet based Advanced Therapeutic Intervention ("ATI") program.
This program is designed to:
- review a client's pharmaceutical utilization and medical diagnosis,
claims and prescription data on an integrated basis,
- identify 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 physician or physicians to identify
significant drug therapy related risks.
The core of our ATI 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 demonstrate that our
ATI program can be used to reduce medical errors and costs. These differentiated
services 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.
Our principal executive offices are located at N19 W24130 Riverwood Drive,
Waukesha, WI 53188. Our telephone number is (262) 312-3000.
4
<PAGE> 5
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,
- 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.
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 rebate
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 co-payments 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.
5
<PAGE> 6
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.
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 our 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 us, sales
from our mail service pharmacy and the cost of eyeglasses and contact lenses
dispensed by optical centers participating in our vision benefit management
network. Service revenues include administrative and dispensing fees associated
with our pharmacy and vision benefit management services, and license and
service fees for health information technology and clinical support services.
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------
January 29, January 30, January 31,
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Products 96.4% 95.6% 95.4%
Services 3.6% 4.4% 4.6%
-------------- -------------- --------------
Total Revenues 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
6
<PAGE> 7
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 revenues. 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 that we retain. Competitive pressures have
caused us to share a greater portion of our formulary concessions with our
clients. Formulary concessions retained in fiscal 1999 were $19.6 million. If
formulary concessions decline because of reductions or the elimination of
concessions by pharmaceutical manufacturers or because of increased sharing of
concessions with our clients, then our earnings could be significantly and
negatively impacted.
Healthcare Benefit Management Services
We provide high quality, cost efficient pharmacy benefit management
services to health plan sponsors. As of January 2000, we provided pharmacy
benefit management services to approximately 5.0 million people and vision
benefit management services to approximately 542,000 people for more than 3,000
customers. Our core client base has historically been small to mid-size
employers, insurance companies, third party administrators, health maintenance
organizations, 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: 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.
We are compensated for pharmacy benefit management services through
processing fees, clinical service fees, formulary administration fees and
reimbursement of the cost of the
7
<PAGE> 8
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 January 2000, our mail service pharmacy in Green
Bay, Wisconsin dispensed and mailed approximately 100,000 prescriptions per
month. Currently, customers representing over 65% 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.
During the fourth quarter of fiscal 1999, we entered into a strategic
relationship with drugstore.com, an Internet provider of prescription
fulfillment. Members of clients of ProVantage will have the opportunity
beginning in fiscal 2000 to transmit their prescriptions to drugstore.com
through the Internet. Our mail service pharmacy will fill and deliver all
prescriptions of a thirty-day or greater supply processed through drugstore.com.
All prescriptions processed by drugstore.com for less than thirty days will be
filled and delivered by drugstore.com.
Our Internet based Advanced Therapeutic Intervention ("ATI") program is one
of the key differentiating features of our pharmacy benefit management services.
We began providing this service in mid-1998. According to industry sources, a
significant amount of in-patient medical costs are induced by inappropriate
prescription drug therapy. Most pharmacy benefit management companies use
traditional drug utilization review programs to reduce drug-induced adverse
effects caused by drug-on-drug conflicts, duplication of prescriptions and
similar problems. However, these programs are of limited effectiveness because
they are administered without reference to a patient's specific medical profile
and consequently must assume the lowest drug tolerance for each patient. We
believe that as a result, pharmacists typically receive numerous drug
utilization review warnings per day, many of which do not contain specific
enough patient information to be meaningful and are thus often ignored.
Our ATI 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
8
<PAGE> 9
risk. We are compensated for ATI program services through fixed fees, per member
per month fees, a percentage-of-savings sharing program or some combination of
these arrangements.
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 that are reviewed for safety and efficacy using our advanced analytical
intelligence tools. 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, record keeping, 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 2000, our vision
benefit management business covered approximately 542,000 people through a
national network of approximately 10,500 retail optical chains and private
ophthalmologists, optometrists and opticians. In January 2000 we signed a vision
network access agreement with Block Vision, Inc. which expanded the network of
vision providers to in excess of 10,500 currently and targeted to reach 15,000
locations by the end of fiscal 2000. Unlike the pharmacy benefit management
business, the vision benefit management business offers self-insured as well as
fully insured products. The self-insured products we offer are similar to our
pharmacy benefit management product and service offering. The insured products
are sold by licensed independent and employee sales agents and are underwritten
by a licensed insurance company, a subsidiary of American
9
<PAGE> 10
International Group ("AIG"). Our arrangement with AIG requires us to market the
insurer's vision products and to perform various administrative services, such
as maintenance of eligibility records, network maintenance, and claims
processing. AIG underwrites all insured contracts and provides other
insurance-related services such as actuarial review. In consideration for our
services, we receive administrative fees and have the potential for profit
sharing based on 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
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.
Our ability to integrate patient pharmacy, medical and lab data allows our
customers to assess overall healthcare results by identifying opportunities to
improve outcomes. One of our principal information-based services is our
Advanced Therapeutic Intervention ("ATI") Program. This program is designed to:
- review a customer's pharmaceutical utilization and medical diagnosis,
claims and prescription data on an integrated basis
- identify 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
- intervene with the treating physicians to identify significant drug
therapy related risks
We believe that our ATI program provides a measurable return on investment
to our customers. The core of our ATI program is RationalMed. RationalMed is our
clinical outcomes assessment software that integrates our customers' 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 7,900 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.
10
<PAGE> 11
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 13.6
million covered people.
We have also developed or acquired over recent years a number of other
healthcare information products designed to improve healthcare results and
promote more cost-effective treatment of patients. These products provide
customers with the capability to do the following with information contained in
their databases:
- Provide Internet-accessible desk-top access to their prescription
claims detail for profiling, national comparisons, drug category
breakdown and demographic analyses, all in user-friendly pre-designed
graphs and reports. A customer's data is loaded into our centralized
data warehouse that currently contains non-patient identifiable
prescription claims detail on approximately 5.0 million people. With
access to our national data, customers 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.
- Provide direct and easy access to company-wide data traditionally
contained in the customer's separate databases using our
administrative, financial and clinical decision support tool. 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. A customer will typically provide us with its data,
which is then loaded into our centralized data warehouse. The customer
then has access to its own data as well as other data for comparison
purposes. Customers then have the ability to access their medical and
pharmaceutical data as well as to view that data relative to national
norms. For example, we 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.
- Provide healthcare decision support designed to help study the effects
of pharmaceutical and clinical interventions on healthcare treatment
and results in specific disease areas. We also offer disease-specific
"datamarts," which can be accessed by the customer to create or
support disease management programs. These products are intended to be
analytical tools to support drug purchasing and dispensing, disease
treatment protocol design and cost assessment, and intervention
outcomes analysis and are principally marketed to pharmaceutical
manufacturers.
CLIENTS
We currently provide health benefit management services for over 3,000
health benefit plan customers, covering approximately 5.5 million plan members.
Our health benefit management client base is comprised of health maintenance
organizations, third party administrators, insurance
11
<PAGE> 12
companies, self-funded healthcare plan sponsors and government agencies. Our ten
largest customers accounted for approximately 41.4% of our revenues in fiscal
1999, approximately 36.5% of our revenues in fiscal 1998 and approximately 38.2%
of our revenues in fiscal 1997. In addition, one of those ten customers,
American Medical Security, Inc., accounted for approximately 11.2% of revenues
in fiscal 1999, 11.8% of revenues in fiscal 1998 and 12.1% of revenues in fiscal
1997. 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.
SALES AND MARKETING
We market our pharmacy benefit management services on the basis of high
quality customer service, advanced clinical capabilities, including the Advanced
Therapeutic Intervention program and healthcare information products. We have a
nationwide sales force of eight regional sales managers, one general agent and
two regional vice presidents.
Sales of the 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 the Company with these products and then to
cross-sell the traditional pharmacy benefit management and other services to the
health information technology customers.
We have sales offices in the following locations:
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 to market
our products. For certain healthcare information products, we may in the future
use strategic partners or other distribution channels for product marketing.
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 late in fiscal
2000, we plan to begin converting our current claims adjudication system to the
claims processing programs of Systems Xcellence USA, Inc. to process pharmacy
claims in the retail network.
12
<PAGE> 13
MANAGEMENT INFORMATION SYSTEMS
We operate an electronic network tying in approximately 50,000 retail
pharmacies to process third-party claims. We also utilize similar systems to
support our vision benefit management business. We have developed proprietary
software to perform database enhancement and querying essential to our clinical
services.
ACQUISITIONS, ALLIANCES AND STRATEGIC INITIATIVES
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.
In addition to acquisitions, we are seeking corporate alliances to expand
our health information technology capabilities. 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. For
example, during the fourth quarter of fiscal 1999, we entered into a strategic
relationship with drugstore.com to provide prescription fulfillment through the
Internet.
We may also pursue other strategic initiatives in order to better position
our business in the marketplace in which we compete, to provide our business
with greater resources, or to otherwise enhance our business prospects and
stockholder value.
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/health maintenance organizations. In addition to many
smaller companies, our five primary competitors for pharmacy benefit management
customers are:
- 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 Rx, Inc.
- Advance Paradigm, Inc.
We may also experience competition from other sources in the future.
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 our resources.
13
<PAGE> 14
BACKLOG
While we have historically signed agreements with new clients for pharmacy
benefits management services for which we have phased-in implementation over
subsequent months, we have not generally operated with any significant backlog.
EMPLOYEES
As of January 29, 2000, we employed a total of 458 associates. None of
these associates are represented by a labor union. We believe that relations
with our associates are good.
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 over 50,000 retail pharmacies and will admit
any qualified, licensed pharmacy that agrees to comply with the terms of our
contracts.
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.
14
<PAGE> 15
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 prohibit therapeutic substitution programs
conducted by independent pharmacy benefit management companies, or to prohibit
contractual relationships such as those we have with certain of our customers.
It was recently reported that the U.S. Attorney's Office in Philadelphia issued
subpoenas to Merck-Medco Managed Care, LLC and PCS Health Systems, Inc., both
pharmacy benefit management companies, and Schering-Plough Corp., a
pharmaceutical manufacturer. As of April 17, 2000, we have not been served with
any such subpoena, and we do not have information regarding the scope of
information being requested by these subpoenas. However, the U.S. Attorney's
Office was quoted to the effect that one of the issues it is investigating is
whether certain practices engaged in by Merck-Medco Managed Care, LLC and PCS
Health Systems, Inc. violate certain anti-kickback laws. We believe that we are
in substantial compliance with these laws, and that there are material
differences between pharmaceutical switching programs that have been
historically challenged under these laws and the programs we offer to our
clients. However, there can be no assurance that we will not be subject to
scrutiny or challenge under these laws, which could have a material adverse
effect on us.
Legislation Affecting Plan Design. Some states have enacted legislation
that prohibits the plan sponsor from implementing certain restrictive design
features, and many states have introduced legislation to regulate various
aspects of managed care plans, including provisions relating to the pharmacy
benefit. For example, "freedom of choice" legislation in some states provides
that members of the plan may not be required to use network providers, but must
instead be provided with benefits even if they choose to use non-network
providers. Other states have enacted legislation purporting to prohibit the
health plan from offering members financial incentives for use of mail order
pharmacies. Legislation has been introduced in some states to prohibit or
restrict therapeutic substitution, or to require coverage of all FDA approved
drugs. Other states mandate coverage of certain benefits or conditions. Such
legislation does not generally apply to us, but it may apply to certain of our
customers, such as HMOs and health insurers. If such legislation were to become
widespread and broad in scope, it could have the effect of limiting the economic
benefits achievable through pharmacy benefit management and consequently make
our services less attractive.
Consumer Protection Legislation. Most states have consumer protection laws
that have been the basis for investigations and multi-state settlements relating
to financial incentives provided by drug manufacturers to retail pharmacies in
connection with drug switching programs. In addition, pursuant to a settlement
agreement entered into with seventeen states on October 25, 1995, Merck-Medco
Managed Care, LLC, the pharmacy benefit management subsidiary of pharmaceutical
manufacturer Merck & Co., agreed to have pharmacists affiliated with Merck-Medco
Managed Care, LLC mail service pharmacies disclose to physicians and patients
the financial relationships between Merck & Co., Merck-Medco Managed Care, LLC,
and the mail service pharmacy when such pharmacists contact physicians seeking
to change a prescription from one drug to another. We believe that its
contractual relationships with drug manufacturers and retail pharmacies do not
include the features that were viewed by enforcement authorities as problematic
in these settlement agreements. However, no assurance can be given that we will
not be subject to scrutiny or challenge under one or more of these laws.
15
<PAGE> 16
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.
16
<PAGE> 17
Other Governmental Regulation
Licensure/Registration Requirements. Many states have licensure or
registration laws governing certain types of ancillary healthcare organizations,
including preferred provider organizations, third party administrators and
utilization review organizations. These laws differ significantly from state to
state, and the application of such laws to the activities of pharmacy benefit
managers is often unclear. We have registered under such laws in those states in
which we have concluded such registration is required.
Privacy and Confidentiality Legislation. Most of our activities involve the
receipt or use by us of confidential, medical information concerning individual
members, including the transfer of the confidential information to the member's
health benefit plan. In addition, we use aggregated data--that is, data from
which information which identifies specific patients is removed--for research
and analysis purposes. Legislation has been proposed at the federal level and in
several states to restrict the use and disclosure of confidential medical
information. To date, no such legislation has been enacted that adversely
impacts our ability to provide our services, but there can be no assurance that
federal or state governments will not enact legislation, impose restrictions or
adopt interpretations of existing laws that could have a material adverse effect
on our operations.
In November 1999, the Department of Health and Human Services ("HHS")
issued draft privacy regulations, pursuant to the Health Insurance Portability
and Accountability Act of 1996, which impose extensive restrictions on the use
and disclosure of individually identifiable health information. HHS has received
comments on the proposed regulations and it is not known when they will be
finalized. When the regulations are finalized, we expect that there will be a
two-year implementation period within which we must comply. We are unable to
predict accurately what effect the final regulations may have on us, and there
can be no assurance that the restrictions and duties imposed by the regulations
will not have a material adverse effect on our business, results of operations
or financial condition.
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
17
<PAGE> 18
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.
ITEM 2. PROPERTIES
Our principal properties are as follows:
<TABLE>
<CAPTION>
Sq. Ft of
Building
Location Use Space Title
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Waukesha, WI Corporate Headquarters Office 60,000 Leased
Green Bay, WI Mail Service Facility 10,000 Leased
Arlington, VA Regional Office 15,500 Leased
Green Bay, WI Regional Office 7,200 Leased
Salt Lake City, UT Regional Office 1,250 Leased
Dallas, TX Regional Office 500 Leased
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
We are involved in various litigation matters arising in the ordinary
course of our business. While there can be no assurance, management believes
that none of this litigation will have a material adverse effect on our
financial condition or results of operations.
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 provided additional information pursuant to a subsequent subpoena.
In July 1999 and February 2000, we also received subpoenas from the U.S.
Department of Labor requesting general information about our Vision Benefit
Management business. The U.S. Department of Labor has given no indication as to
its disposition of these matters, and we cannot provide any assurance as to the
ultimate outcome of these matters or what effect, if any, they will have on our
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders of the
Company during the fourth quarter of fiscal year 1999.
18
<PAGE> 19
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Served in Employed
Current by the
Position Company
Name Age* Position** Since Since
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jeffrey A. Jones 53 President and Chief Executive Officer and a Director 1999 1997
Robert J. Abramowski, CPA 49 Senior Vice President of Finance, Chief Financial 1999 1999
Officer
George M. Barlow 53 Senior Vice President, Healthcare Information 1999 1997
Technology
Joseph A. Coffini, RPh 52 Senior Vice President, Business Development and 1999 1993
Marketing
Peter F. Hoffman, M.D., PhD 55 Senior Vice President and Chief Medical Officer 1999 1998
Glen C. Laschober 49 Executive Vice President, Health Benefit Management 1997 1997
</TABLE>
* As of January 29, 2000
** As of April 19, 2000
There are no family relationships between or among any of the directors or
executive officers of the Company.
The term of office of each executive officer is from one annual meeting of
the directors until the next annual meeting of directors or until a successor
for each is selected.
There are no arrangements or understandings between any of the executive
officers of the Company and any other person (not an officer or director of the
Company acting as such) pursuant to which any of the executive officers were
selected as an officer of the Company.
Each of the executive officers of the Company has been in the employ of the
Company for more than five years, except for Mr. Jones, Mr. Abramowski, Mr.
Barlow, Mr. Hoffman and Mr. Laschober.
Jeffrey A. Jones has served as our President and Chief Executive Officer
and a member of our Board of Directors since July 1999. Prior to his current
position, Mr. Jones served as our Chief Financial Officer from 1993 to November
1997 and since November 1997 as our Executive Vice President and Chief Operating
Officer. Mr. Jones was Senior Vice President and Chief Financial Officer of
ShopKo Stores, Inc. from November 1993 until August 1998. Previously, 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 and Chairman-elect
of Pharmacy Care Management Association and a director of the Boys and Girls
Club of Green Bay.
Robert J. Abramowski, CPA, has served as our Senior Vice President of
Finance and Chief Financial Officer since October 1999. Mr. Abramowski served as
Vice President and Controller with Extendicare Health Services from October 1983
to December 1989 and as Vice President of Finance and Chief Financial Officer
from January 1990 to March 1998. Following his tenure
19
<PAGE> 20
with Extendicare, Mr. Abramowski served as Chief Financial Advisor to Americor
Management Services, L.L.C. Mr. Abramowski spent eleven years with Arthur
Andersen & Co.
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, L.L.C. from December 1997 to January 1999. From 1995
to 1997, Mr. Barlow was Senior Director of Corporate Marketing with
HealthVision, Inc. He was the President of Distributed Micro Systems, Inc. from
1980 to 1995.
Joseph A. Coffini, RPh, has served as our Senior Vice President, Business
Development and Marketing since January 1999. He served as our Vice President,
Managed Care Services from November 1994 to January 1999. From February 1993 to
November 1994, he held the position of Director of Managed Care. Mr. Coffini
served as Pharmacy Division President from 1990 to 1993 of Geriatric and Medical
Companies, Inc. and as National Sales Manager of Third Party Programs from 1986
to 1990 for Thrift Drug Company, Inc.
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 as a Brigadier General 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.
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 Manager of Caremark's prescription
service division. Mr. Laschober also served in senior management positions at
the NutraSweet and GD Searle divisions of Monsanto Company.
FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
In accordance with the Private Securities Litigation Reform Act of 1995, we
can obtain a "safe-harbor" for forward-looking statements by identifying those
statements and by accompanying those statements with cautionary statements which
identify factors that could cause actual results to differ from those in the
forward-looking statements. Accordingly, the following information contains or
may contain forward-looking statements: (1) information included or incorporated
by reference in this Annual Report on Form 10-K, including, without limitation,
statements made under Item 1, Business, and under Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, (2)
information included or incorporated by reference in future filings by us with
the Securities and Exchange Commission ("SEC") including, without limitation,
statements with respect to growth, acquisition and expansion plans, projected
sales, revenues, earnings, costs and capital expenditures, and product
development and product roll-out plans, and (3) information contained in written
materials, releases and oral statements issued by us or on our behalf,
including, without limitation, statements with respect to growth, acquisition
20
<PAGE> 21
and expansion, projected sales, revenues, earnings, costs and capital
expenditures, and product development and product roll-out plans. Our actual
results may differ materially from those contained in the forward-looking
statements identified above. Factors which may cause such a difference to occur
include, but are not limited to, (i) the risk factors described below, and (ii)
other risks described from time to time in our SEC filings. We do not undertake
any obligation to release publicly any revisions to such forward-looking
statements to reflect events or circumstances occurring after the date hereof or
to reflect the occurrence of unanticipated events.
An investment in our Common Stock or other securities carries certain
risks. Investors should carefully consider the risks described below, and other
risks which may be disclosed from time to time in our filings with the SEC
before investing in our securities. The occurrence of any of the following
risks, among others, could materially adversely affect our business, results of
operations and financial condition.
Highly Competitive Industry
We compete in the health benefit management business. This business is 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, including
Internet-based drug stores or Internet-based connectivity companies.
Furthermore, the business is 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 currently 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 1999 were $19.6 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 our earnings could be significantly and
negatively impacted.
While the 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 -
21
<PAGE> 22
is under pressure and could be further 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.
Dependence on Short-Term Contracts with Clients
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.
Market Acceptance of Health Information Technology Products
We have recently added and continue to develop health information
technology products and services. However, to date these products and services
have achieved only limited market acceptance. If these products and services
fail to achieve market acceptance, then our financial results will 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.
Management of Growth
Our business has grown rapidly in the last three fiscal years, with total
revenues increasing from approximately $313.4 million in fiscal 1996 to
approximately $902.4 million in fiscal 1999. 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
22
<PAGE> 23
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.
Risks Related to Acquisition and Alliance Strategy
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. 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:
- difficulties in identifying, financing and completing viable
acquisitions or alliances,
- 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.
These risks associated with acquisitions and alliances could have a
material adverse effect on us.
Reliance on Significant Customers
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
41.4% of our revenues in fiscal 1999, 36.5% of our revenues in fiscal 1998 and
38.2% of our revenues in fiscal 1997. In addition, one of those ten
23
<PAGE> 24
customers, American Medical Security, Inc., accounted for approximately 11.2% of
our revenues in fiscal 1999, 11.8% of our revenues in fiscal 1998 and 12.1% of
our revenues in fiscal 1997. 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.
Government Regulation
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 regulations
relating to these discounts, rebates and concessions may have adverse effects on
our ability to generate formulary concessions in the future.
Reliance on Current Financing and Reimbursement Practices in the Healthcare
Industry
We have designed our services and products to compete within the current
payment and reimbursement structure of the U.S. healthcare system. However,
changing political, economic and regulatory influences may affect healthcare
financing and reimbursement practices. 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,
24
<PAGE> 25
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.
Reliance on Ability to Use Confidential Patient Medical Information
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. Although
the Department of Health and Human Services recently issued draft privacy
regulations which would impose extensive restrictions on the use and disclosure
of individually identifiable health information, 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.
Fluctuations in Quarterly Performance
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. Our experience over the last several years leads
us to believe that the following factors are material risks which could cause
our quarterly operating results to fluctuate significantly:
- the expiration or termination or renewal of contracts with significant
customers,
- the size and timing of new or renewal 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,
- market acceptance of our services and new products,
- 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
technological changes or other
factors,
- changes in operating expenses,
- personnel changes, and
- conditions in the healthcare industry and the economy generally.
25
<PAGE> 26
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.
Risk of Product or Professional Liability
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.
Dependence on Key Personnel
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 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.
Healthcare Industry Consolidation
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,
26
<PAGE> 27
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.
Limited Protection of Intellectual Property Rights
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.
ShopKo's Control of ProVantage
ShopKo owns approximately 64.5% of the outstanding common stock of
ProVantage. 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 election of the entire board of directors,
- any determinations with respect to mergers or other business
combinations, and
- the payment of dividends with respect to the common stock.
ShopKo May Use its Control Position to Act in a Manner Adverse to ProVantage
and its Stockholders
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
27
<PAGE> 28
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 and other payments,
- quality and quantity of services received, and
- rights in the event of nonperformance.
As a party to these contracts, ShopKo could use its control position to act
in a manner adverse to the other stockholders of ProVantage. 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.
Restrictions of ShopKo's Credit Agreement
Under ShopKo's existing credit agreements, we are considered a "subsidiary"
of ShopKo. This means that ShopKo is obligated to cause us to comply with
various covenants in the credit agreements, 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 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 agreements. At December 31, 1999, we could have borrowed approximately
$229.6 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 may cause ShopKo to force us to act inconsistently with
our best interests.
Potential Conflicts of Interest with ShopKo
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. Four of the six 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
28
<PAGE> 29
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.
Shares of Common Stock Eligible for Future Sale
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. The common stock is 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.
Share Price Volatility
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.
Possible Anti-Takeover Effects of Our Organizational Documents and Agreements
with Our Executive Officers
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 staggered board of directors,
- supermajority amendment provisions,
- preferred stock purchase rights which may deter offers for the
common stock, and
- large severance payments.
This anti-takeover effect could delay, defer or prevent a change of control
of ProVantage without further action by the stockholders, could discourage
potential investors from bidding for the common stock at a premium over the
market price of the common stock and could adversely affect the market price of,
and the voting and other rights of the holders of, the
29
<PAGE> 30
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.
30
<PAGE> 31
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
ProVantage Health Services, Inc. common shares are listed on the New York
Stock Exchange under the symbol "PHS" and in the newspapers as "ProVantage." As
of March 31, 2000, ProVantage's common shares were held by 978 record owners.
The following table sets forth the high and low reported closing sales
prices for the Common Stock since July 14, 1999, the date of the Company's
initial public offering, as reported on the New York Stock Exchange Composite
Tape.
<TABLE>
<CAPTION>
FISCAL YEAR 1999 HIGH LOW
---------------------------------------------------------------------------------------
<S> <C> <C>
Second Quarter (July 14 to July 31, 1999) 21 3/16 17 7/8
Third Quarter (ended October 30, 1999) 18 8 3/16
Fourth Quarter (ended January 29, 2000) 12 1/16 7 1/4
</TABLE>
The closing sales price of the Common Stock on the New York Stock Exchange
on April 17, 2000 was $7 3/16 per share.
The Company has not paid regular cash dividends in the last two fiscal
years. The Company currently intends to retain earnings for the growth and
expansion of its business and not to declare or pay any cash dividends. Future
dividends, if any, will be determined by the Company's Board of Directors in
light of circumstances existing from time to time, including the Company's
growth, profitability, financial condition, results of operations, and other
factors deemed relevant by the Board of Directors.
The net proceeds to the Company from its initial public offering of its
Common Stock pursuant to a Registration Statement on Form S-1 (Reg. No.
333-71743) which was declared effective on July 12, 1999 were $93,744,000. From
July 19, 1999 through January 29, 2000, the Company used the net proceeds of the
offering as follows:
(i) approximately $73,744,000 was used to repay a portion of a demand
promissory note issued to ShopKo;
(ii) $5,000,000 was used to make payment on a supplemental cash payment
right exercised by Avatex in connection with the Company's acquisition
of CareStream ScripCard;
(iii) $1,000,000 was used to make a payment due in connection with the
Company's acquisition of PharMark;
(iv) approximately $5,000,000 was used to acquire the remaining minority
interest in ProVMed LLC; and
(v) the balance of the net proceeds was invested in high grade short-term
securities.
31
<PAGE> 32
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-----------------------------------------------------------
JAN. 29, JAN. 30, JAN. 31, FEB. 1, FEB. 3,
2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS (MILLIONS)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $902,390 $643,260 $486,121 $313,390 $81,158
Costs of revenues 842,045 595,414 448,865 290,477 72,253
Selling, general and administrative expenses 32,937 24,910 19,990 12,633 4,836
Depreciation and amortization expenses 9,024 6,776 4,857 2,282 1,170
Income from operations 18,384 16,160 12,409 7,998 2,889
Interest income - net 1,213 543 293 282 207
Earnings before income taxes 19,597 16,703 12,702 8,280 3,106
Provision for income taxes 8,335 7,221 5,581 3,640 1,553
Net earnings $11,262 $9,482 $7,121 $4,640 $1,553
- -------------------------------------------------------------------------------------------------------------------
PER SHARE DATA (DOLLARS)
- -------------------------------------------------------------------------------------------------------------------
Basic net earnings per common share $ .72 $ .76 $ .57 $ .37 $ .12
Diluted net earnings per common share $ .72 $ .76 $ .57 $ .37 $ .12
Weighted average shares outstanding -
Basic 15,644 12,550 12,550 12,550 12,550
Diluted 15,645 12,550 12,550 12,550 12,550
Cash dividends declared per common share $-- $-- $-- $-- $--
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL DATA (MILLIONS)
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $39,895 $24,680 $12,533 $5,946 $5,000
Working capital 57,616 33,894 12,865 1,973 7,634
Property and equipment-net 28,916 15,276 9,431 2,412 801
Total assets 257,249 198,251 155,010 119,838 33,181
Debt obligations-
Short-term 826 968 967 -- --
Long-term 2,006 -- 913 -- --
Total shareholders' equity 145,042 112,048 90,091 61,907 24,124
Capital expenditures 15,872 8,863 4,198 2,057 976
- -------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA (MILLIONS)
- -------------------------------------------------------------------------------------------------------------------
Pharmacy network claims processed 35,767 28,809 24,744 16,097 3,667
Mail pharmacy prescriptions filled 1,070 715 454 264 126
</TABLE>
32
<PAGE> 33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ProVantage was a wholly owned subsidiary of ShopKo Stores, Inc. ("Shopko")
until July 19, 1999. ProVantage on July 19, 1999 sold shares of its common stock
as part of an initial public offering. ShopKo's ownership interest was reduced
to 64.5% as a result of the shares sold.
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 January 31, 1999 and ended on January 29, 2000 is
referred to as "fiscal 99."
RESULTS OF OPERATIONS
ProVantage operates in one business segment, health benefit management. The
following table sets forth items from ProVantage's Consolidated Statements of
Net Earnings as percentages of revenues:
<TABLE>
<CAPTION>
Fiscal Years (52 Weeks) Ended
--------------------------------------------------
January 29, January 30, January 31,
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost and Expenses:
Cost of revenues 93.3 92.6 92.3
Selling, general and
administrative expenses 3.6 3.9 4.1
Depreciation and amortization
expenses 1.0 1.0 1.0
-------------- -------------- --------------
98.0 97.5 97.4
-------------- -------------- --------------
Earnings from operations 2.0 2.5 2.6
Interest income - net 0.1 0.1 -
-------------- -------------- --------------
Earnings before income taxes 2.2 2.6 2.6
Provision for income taxes 0.9 1.1 1.1
-------------- -------------- --------------
Net earnings 1.2% 1.5% 1.5%
============== ============== ==============
</TABLE>
33
<PAGE> 34
FISCAL 1999 COMPARED TO FISCAL 1998
Revenues for fiscal 1999 increased $259.1 million, or 40.3% to $902.4
million. This increase is due primarily to internally generated growth in claims
processing and mail pharmacy. Revenues from pharmacy claims processing increased
$212.9 million, or 37.7%. This increase reflects a 24.2% increase in the number
of claims processed and a 10.9% increase in the average revenue per claim
processed. Revenues from mail pharmacy services increased $44.8 million, or
67.1%, reflecting a 49.7% increase in the number of prescriptions dispensed and
a 11.7% increase in the average revenue per prescription dispensed.
Gross margin, calculated as revenues less cost of revenues, in fiscal 1999
increased $12.5 million, or 26.1%, compared to fiscal 1998. This increase is
principally attributable to a $5.6 million increase in net formulary
concessions, a $4.1 million increase in gross margin associated with mail
pharmacy services and a $3.8 million increase in gross margin 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. The gross margin
percentage was 6.7% in fiscal 1999 and 7.4% in fiscal 1998. The decrease in
gross margin as a percentage of revenues is primarily attributable to increasing
prescription drug costs and the addition of larger clients with lower average
transaction fees.
Selling, general and administrative expenses in fiscal 1999 increased $8.0
million, or 32.2% to $32.9 million. This increase relates to additional
personnel to support transaction growth and continued investment in health
information technology and clinical products and services. Selling, general and
administrative expenses, as a percentage of revenues, were 3.6% in fiscal 1999
compared to 3.9% in fiscal 1998. This decrease as a percentage of revenues is
primarily due to the leveraging of fixed costs against increased revenue volume.
Depreciation and amortization expenses in fiscal 1999 increased $2.2
million, or 33.2% to $9.0 million. This increase is attributable to increased
goodwill amortization related to ProVantage's business acquisitions and
increased amortization of capitalized software costs. Depreciation and
amortization expenses as a percentage of revenues was 1.0% in both fiscal 1999
and fiscal 1998.
Interest income in fiscal 1999 was $1.2 million, an increase of $0.7
million between fiscal years.
The effective tax rate in fiscal 1999 was 42.5% compared to 43.2% in fiscal
1998.
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues in 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. Revenues 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. Revenues from mail pharmacy services increased
34
<PAGE> 35
$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.
Gross margin in 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 margin associated with mail pharmacy, and a $1.7 million increase in gross
margin 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 revenues, gross margins were 7.4% in
fiscal 1998 and 7.7% in fiscal 1997. This decline was due to increasing
prescription costs and the addition of larger clients with lower average
transaction fees, offset in part by the addition of higher margin clinical
services and information technology products.
Selling, general and administrative expenses in 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 revenues, selling, general and administrative
expenses were 3.9% in fiscal 1998 compared to 4.1% in fiscal 1997.
Depreciation and amortization expenses in 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 business acquisitions. As a
percentage of revenues, depreciation and amortization expenses were 1.0% in both
fiscal 1998 and fiscal 1997.
The effective tax rate in fiscal 1998 was 43.2% compared to 43.9% in fiscal
1997.
LIQUIDITY AND CAPITAL RESOURCES
Prior to ProVantage's initial public offering, its cash needs in excess of
cash flow provided by operations have been met principally by additional capital
contributions from ShopKo with any excess cash distributed to ShopKo. Capital
contributions from ShopKo during fiscal 1999 through the date of the initial
public offering of ProVantage's common shares were $3.1 million. Capital
contributions from ShopKo were $12.5 million and $21.1 million in fiscal years
1998 and 1997, respectively.
ProVantage retained net cash proceeds of $20.0 million from the sale of
5,600,000 of its shares on July 19, 1999. In addition, on July 19, 1999
ProVantage entered into a credit agreement with ShopKo which allows ProVantage
to 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 any
borrowing and has an annual commitment fee of 1/5 of 1% of the total commitment
amount. ProVantage may terminate the credit agreement at any time and may
replace it with financing available to it based on market terms and conditions
at the time of termination. ShopKo may terminate the credit agreement at any
time after it no longer owns a majority of ProVantage's voting stock. There were
no amounts outstanding under the credit agreement with ShopKo during fiscal
1999.
35
<PAGE> 36
Under ShopKo's credit agreement with its banks, 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
from entering into agreements which restrict ProVantage's ability to pay
dividends. ProVantage does not expect these covenants to impose any significant
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.
Capital Expenditures and Acquisitions
ProVantage's principal uses of cash are for capital expenditures,
acquisitions and working capital purposes. ProVantage spent $15.9 million in
fiscal 1999, $8.9 million in fiscal 1998 and $4.2 million in fiscal 1997 on
capital expenditures. In addition, ProVantage incurred capital lease obligations
of $3.1 million in fiscal 1999. Capital expenditures and capital lease
obligations relate primarily to continuing investments in systems technology and
hardware.
ProVantage's total capital expenditures are expected to approximate $14.0
to $15.0 million for the fiscal year ending February 3, 2001. The expected
capital expenditures are primarily to continue work with respect to the
replacement of ProVantage's retail network processing system and continued
enhancements and development of its suite of health information technology
products. The estimated capital expenditures in fiscal 2000 exclude any capital
required for potential business acquisitions. Such plans may be reviewed and
revised from time-to-time in consideration of changing conditions.
In addition, ProVantage has contingent payment obligations of up to $8.0
million with respect to an acquisition made in fiscal 1997. Based upon
ProVantage's common stock price of $9.00 per share as of January 28, 2000, no
portion of the contingent purchase price would be payable. For a more detailed
description see footnote (2) to the accompanying financial statements.
Cash provided by operating activities in fiscal 1999 was $20.6 million.
Cash provided by operating activities was $9.5 million in fiscal 1998 and $12.0
million in fiscal 1997.
ProVantage believes that its cash needs, other than for significant
acquisitions, will be met in fiscal 2000 through the use of its existing
available cash, cash generated from operations and borrowings under the ShopKo
credit agreement or third-party sources.
ACQUISITIONS
On December 31, 1999, ProVantage acquired for $5.0 million the remaining
minority interest held in ProVMed LLC. ProVMed LLC performs advanced data
warehousing, clinical and administration information support services. The
purchase price included an allocation to goodwill of $3.4 million that will be
amortized over a period of 20 years.
36
<PAGE> 37
On August 20, 1997, ProVantage acquired PharMark, a software and database
development company providing information driven strategies for optimizing
medical and pharmaceutical outcomes. The purchase price for PharMark was
approximately $15.2 million, of which $14.2 million was paid in cash at the time
of acquisition with an additional $1.0 million paid in August 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 million or less
at the measurement date. The full $8.0 million will be due if the value equals
or exceeds $500 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 million
and $500 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 or the date on which ShopKo and its affiliates cease to own
at least a majority of the ProVantage outstanding common stock. The contingent
payments, if any, will be capitalized as additional purchase price and amortized
over a period of 15 to 18 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.
In fiscal 1996, ProVantage acquired CareStream ScripCard from Avatex
Corporation ("Avatex"). CareStream ScripCard was a prescription benefit
management company. The initial purchase price of $30.5 million was paid in
cash. ProVantage also assumed approximately $0.8 million in liabilities for
employee severance costs. Avatex had a right to receive one additional
contingent cash payment at its election without further condition at any time
prior to August 2, 2001. The present value of the minimum supplemental cash
payment of $2.4 million at the date of acquisition was recorded as additional
purchase price. Avatex in August 1999 exercised its right to the supplemental
cash payment in the amount of $5.0 million which ProVantage paid in August 1999.
Such additional purchase price is being amortized over a period of 18 years.
In fiscal 1994, ProVantage acquired 97% of the outstanding common stock of
Bravell, Inc. ("Bravell"), a pharmacy benefits management firm for approximately
$17.3 million. ProVantage was also required to make additional payments which
were contingent upon the future results of Bravell's operations. In fiscal 1996,
$0.7 million was paid based on the financial results for fiscal 1995. ProVantage
made a payment of approximately $8.9 million to the founders of Bravell in
fiscal 1997 to (i) acquire the remaining 3% of the common stock of Bravell which
ProVantage did not acquire in fiscal 1995, (ii) extinguish all remaining
contingent payment obligations to the founders and (iii) terminate the founders'
employment agreements. The $8.9 million payment included $8.1 million which was
capitalized as additional purchase price amortized over 20 years and the
remaining $0.8 million was expensed as severance cost.
YEAR 2000
ProVantage did not experience any significant Year 2000 disruptions, nor
did we experience any significant Year 2000 problems related to any of our
vendors or customers. While no Year 2000 related disruptions have been
experienced to date, there are some remaining Year 2000 risks. Based on
currently available information, management believes that Year 2000 related
37
<PAGE> 38
disruptions or other problems, if any, will not have a significantly adverse
effect on the Company's financial condition or results of operations.
ProVantage incurred internal and external expenses of $1.1 million in
conjunction with the Year 2000 compliance project. $0.7 million of such costs
were incurred in fiscal 1999 and $0.4 million were incurred in fiscal 1998.
ProVantage was not directly responsible for these costs since the costs for Year
2000 compliance were included in the payments to ShopKo under an information
technology services agreement.
Statements were made or contained herein or therein or any past statements
made or contained herein or therein are deemed Year 2000 Readiness Statements
and are subject to the Year 2000 Information and Readiness Disclosure Act (P.L.
105-271), to the fullest extent permitted by law.
INFLATION
Inflation has and is expected to have only a minor effect on the results of
operations of ProVantage and its internal and external sources of liquidity.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standard ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", was issued. In
June 1999, SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133 - an Amendment to
SFAS No. 133", was issued, approving a delay in the effective date of SFAS No.
133 until January 2001. ProVantage believes this statement will have no
significant impact on its consolidated financial statements.
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". SAB No. 101 is effective for financial statements for the first
fiscal quarter of the fiscal year beginning after December 15, 1999. ProVantage
anticipates that the annual impact on its financial statements of adopting SAB
No. 101 will not be significant.
MARKET RISK
ProVantage has not historically been subject to material market risk, such
as interest rate risk or foreign currency exchange risk. To the extent
ProVantage borrows money pursuant to its credit agreement with ShopKo,
ProVantage will be subject to changes in interest rates.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by Item 7a, as to Quantitative and Qualitative
Disclosures about Market Risk is included on page 38 and is incorporated by
reference herein.
38
<PAGE> 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated financial statements and supplementary data are included
on pages 44 to 62 and are incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
39
<PAGE> 40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10, as to Directors of the Registrant
and the information required by Items 401 and 405 of Regulation S-K, is
incorporated herein by reference to the Registrant's definitive Proxy Statement
dated April 19, 2000 filed with the Securities and Exchange Commission pursuant
to Regulation 14A in connection with the Registrant's 2000 Annual Meeting of
Shareholders. Information regarding executive officers is included in Part I
above.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference
to the Registrant's definitive Proxy Statement dated April 19, 2000 filed with
the Securities and Exchange Commission pursuant to Regulation 14A in connection
with the Registrant's 2000 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated herein by reference
to the Registrant's definitive Proxy Statement dated April 19, 2000 filed with
the Securities and Exchange Commission pursuant to Regulation 14A in connection
with the Registrant's 2000 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated herein by reference
to the Registrant's definitive Proxy Statement dated April 19, 2000 filed with
the Securities and Exchange Commission pursuant to Regulation 14A in connection
with the Registrant's 2000 Annual Meeting of Shareholders.
40
<PAGE> 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Consolidated Financial Statements:
See "Index to Consolidated Financial Statements and Financial
Statement Schedule" on page 42, the Independent Auditors'
Report on page 43 and the Consolidated Financial Statements
and Notes to Consolidated Financial Statements on pages 44 to
62, all of which are incorporated herein by reference.
2. Financial Statement Schedule:
See "Index to Consolidated Financial Statements and Financial
Statement Schedule" on page 42 and the Financial Statement
Schedule on page 63, all of which are incorporated herein by
reference.
3. Exhibits:
See "Index to Exhibits" on pages 65 to 67 which is
incorporated herein by reference.
Pursuant to Regulation S-K, Item 601(b) (4) (iii), the Company
hereby agrees to furnish to the Commission, upon request, a
copy of each instrument and agreement with respect to
long-term obligations of the Company and its consolidated
subsidiaries which does not exceed 10 percent of the total
assets of the Company and its subsidiaries on a consolidated
basis.
(b) Reports on Form 8-K:
The Company filed Current Reports on Form 8-K in the fourth
fiscal quarter of fiscal 1999 as follows:
Date of Report Items Reported
January 4, 2000 Items 5 and 7. The Company issued a press release
regarding a new three-year agreement to continue to
provide comprehensive pharmacy benefit management
services to certain operating subsidiaries of the
American Medical Security Group, Inc. and related
matters.
41
<PAGE> 42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
Page
----
<S> <C>
Index to Consolidated Financial Statements of ProVantage Health Services, Inc. and Subsidiaries
Independent Auditors' Report................................................................. 43
Consolidated Statements of Net Earnings
for each of the three years in the period ended January 29, 2000.................... 44
Consolidated Balance Sheets as of January 29, 2000 and January 30, 1999...................... 45
Consolidated Statements of Cash Flows
for each of the three years in the period ended January 29, 2000.................... 46
Consolidated Statements of Shareholders' Equity
for each of the three years in the period ended January 29, 2000.................... 48
Notes to Consolidated Financial Statements ................................................... 49
Index to Financial Statement Schedule
Schedule VIII-Valuation and Qualifying Accounts ............................................ 63
All other schedules are omitted because they are not applicable or not required.
</TABLE>
42
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors of
ProVantage Health Services, Inc.:
We have audited the accompanying consolidated balance sheets of ProVantage
Health Services, Inc. and subsidiaries as of January 29, 2000 and January 30,
1999 and the related consolidated statements of net earnings, shareholders'
equity and cash flows for each of the three years in the period ended January
29, 2000. Our audits also included the consolidated financial statement schedule
listed in the index at Item 14. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 29, 2000 and January 30, 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended January 29, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
March 8, 2000
43
<PAGE> 44
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF NET EARNINGS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Fiscal Years (52 Weeks) Ended
--------------------------------------------------
January 29, January 30, January 31,
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues $ 902,390 $ 643,260 $ 486,121
Cost and Expenses:
Cost of revenues 842,045 595,414 448,865
Selling, general and
administrative expenses 32,937 24,910 19,990
Depreciation and amortization
expenses 9,024 6,776 4,857
-------------- -------------- --------------
884,006 627,100 473,712
-------------- -------------- --------------
Earnings from operations 18,384 16,160 12,409
Interest income - net 1,213 543 293
-------------- -------------- --------------
Earnings before income taxes 19,597 16,703 12,702
Provision for income taxes 8,335 7,221 5,581
-------------- -------------- --------------
Net earnings $ 11,262 $ 9,482 $ 7,121
============== ============== ==============
Basic net earnings per share
of common stock $ 0.72 $ 0.76 $ 0.57
============== ============== ==============
Weighted average number of shares
of common stock outstanding 15,644 12,550 12,550
============== ============== ==============
Diluted net earnings per share of
common stock outstanding $ 0.72 $ 0.76 $ 0.57
============== ============== ==============
Adjusted weighted average
number of shares of
common stock outstanding 15,645 12,550 12,550
============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
44
<PAGE> 45
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
January 29, January 30,
Assets 2000 1999
--------------- ---------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 39,895 $ 24,680
Receivables, less allowance for losses of $1,213
and $1,314, respectively 114,456 83,483
Pharmaceutical inventories 3,713 3,121
Deferred tax benefits 650 1,260
Other current assets 1,620 1,083
--------------- ---------------
Total current assets 160,334 113,627
Intangibles - net 67,978 66,053
Other assets - net 21 3,295
Property and equipment - net 28,916 15,276
--------------- ---------------
Total Assets $ 257,249 $ 198,251
=============== ===============
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term obligations $ 826 $ 968
Accounts payable 89,881 65,566
Accrued liabilities 12,011 13,199
--------------- ---------------
Total current liabilities 102,718 79,733
Long-term obligations 2,006 --
Deferred income taxes 7,483 3,521
Minority interest -- 2,949
Shareholders' Equity:
Common stock, 18,150 shares issued at 182 126
January 29, 2000 and 12,550 at January 30, 1999
Additional paid-in capital 137,918 88,997
Retained earnings 6,942 22,925
--------------- ---------------
Total Shareholders' Equity 145,042 112,048
--------------- ---------------
Total Liabilities and Shareholders' Equity $ 257,249 $ 198,251
=============== ===============
</TABLE>
See notes to consolidated financial statements.
45
<PAGE> 46
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Years (52 Weeks) Ended
------------------------------------------------------
January 29, January 30, January 31,
2000 1999 1998
--------------- ---------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings $ 11,262 $ 9,482 $ 7,121
Adjustment to reconcile net earnings to
net cash provided by operating
activities:
Depreciation and amortization 9,024 6,776 4,857
Provision for losses on receivables 859 392 139
Deferred income taxes 4,572 1,715 305
Change in assets and liabilities
excluding the effect of business
acquisitions:
Receivables (32,079) (25,032) (5,621)
Pharmaceutical inventories (592) (1,809) (62)
Other current assets (259) (932) 151
Other assets 1,763 1,992 (1,500)
Accounts payable 24,315 19,597 11,157
Accrued liabilities 1,713 (2,704) (4,561)
--------------- ---------------- ----------------
Net cash provided by operating
activities 20,578 9,477 11,986
CASH FLOWS USED IN INVESTING
ACTIVITIES:
Payments for property and
equipment (15,872) (8,863) (4,198)
Business acquisitions, net of cash
acquired (10,000) -- (22,390)
--------------- ---------------- ----------------
Net cash used in investing
activities (25,872) (8,863) (26,588)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments of short-term obligations (1,222) 1 967
Issuance of common stock 92,369 -- --
Dividend paid to parent (73,744) -- --
Capital contributions 3,106 12,475 21,063
Payments of long-term obligations -- (943) (841)
--------------- ---------------- ----------------
Net cash provided by financing
activities 20,509 11,533 21,189
--------------- ---------------- ----------------
</TABLE>
46
<PAGE> 47
<TABLE>
<S> <C> <C> <C>
Net increase in cash and cash
equivalents 15,215 12,147 6,587
Cash and cash equivalents at
beginning of period 24,680 12,533 5,946
--------------- ---------------- ----------------
Cash and cash equivalents at end of
period $ 39,895 $ 24,680 $ 12,533
=============== ================ ================
SUPPLEMENTAL CASH FLOW
INFORMATION:
Non-cash financial activities:
Capital lease obligations
incurred $ 3,086 $ -- $ --
Cash paid during the period for:
Income taxes $ 4,529 $ 6,793 $ 5,585
The purchase price of acquisitions
consisted of the following:
Cash paid $ 10,000 $ -- $ 22,390
Notes payable issued -- -- 1,833
Liabilities assumed -- -- 4,030
--------------- ---------------- ----------------
Total fair value of acquisitions $ 10,000 $ -- $ 28,253
=============== ================ ================
</TABLE>
See notes to consolidated financial statements.
47
<PAGE> 48
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional
--------------------------------- Paid-In Retained
Shares Amount Capital Earnings
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Balances at February 1, 1997 12,550 $ 126 $ 55,459 $ 6,322
Capital contribution -- -- 21,063 --
Net earnings -- -- -- 7,121
--------------- ---------------- --------------- ----------------
Balances at January 31, 1998 12,550 126 76,522 13,443
Capital contribution -- -- 12,475 --
Net earnings -- -- -- 9,482
--------------- ---------------- --------------- ----------------
Balances at January 30, 1999 12,550 126 88,997 22,925
Capital contribution -- -- 3,106 --
Dividend paid to parent -- -- (46,498) (27,245)
Sale of common stock under public
offering 5,600 56 92,313 --
Net earnings -- -- -- 11,262
--------------- ---------------- --------------- ----------------
Balances at January 29, 2000 18,150 $ 182 $ 137,918 $ 6,942
=============== ================ =============== ================
</TABLE>
See notes to consolidated financial statements.
48
<PAGE> 49
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) 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 ("ProVantage"). ProVantage
consolidates all subsidiaries in which it has a majority voting interest. All
significant intercompany accounts and transactions have been eliminated.
ProVantage was a wholly owned subsidiary of ShopKo Stores, Inc. ("ShopKo")
until July 19, 1999. ProVantage on July 19, 1999 sold shares of its common stock
as part of an initial public offering. ShopKo's ownership interest was reduced
to 64.5% as a result of the shares sold.
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 January 30, 1999 and ended on January 29, 2000 is
referred to as "fiscal 1999".
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 fiscal years 1997 and 1998 and the portion of fiscal year 1999 prior to
July 19, 1999, 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. Since July
19, 1999, ShopKo has continued to provide certain services under contractual
agreements for such items. See Note (11).
Management believes the allocations for costs associated with services
provided by ShopKo for fiscal periods prior to July 19, 1999 were made on a
reasonable basis. Although these allocations may not have necessarily
represented the costs which would have been or may have been incurred by
ProVantage on a stand-alone basis, management believes that any such variance in
costs would not have been significant.
49
<PAGE> 50
Revenues and Cost of Revenues:
ProVantage's revenues 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 revenues.
If ProVantage is only administering the plan sponsor's 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 revenues 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 revenues is reduced by formulary
concessions received from pharmaceutical manufacturers. Generally, the
agreements with these pharmaceutical manufacturers stipulate that in order to
receive payments, minimum changes in market share must be achieved for specified
pharmaceutical products. Currently, almost all of these agreements require these
minimum changes in market share levels to be achieved on a calendar quarter
basis. The amounts due to ProVantage under these agreements are recorded as
reductions to cost of revenues upon achieving the stipulated minimum changes in
market share levels. Rebates and discounts for purchases through ProVantage's
mail service facility are recorded as adjustments to cost of revenues.
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
50
<PAGE> 51
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 1999 and 1998, $10.0 million and $4.6 million in software
development costs were capitalized, 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 the estimated economic life
of the product.
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. No such
impairment existed as of January 29, 2000 in the opinion of management.
Net Earnings Per Common Share:
Basic net earnings per common share are computed by dividing net earnings
by the weighted average number of common shares outstanding. Diluted net
earnings per common share are computed by dividing net earnings by the weighted
average number of common shares outstanding increased by the number of potential
dilutive common shares based on the treasury stock method.
51
<PAGE> 52
Income Taxes:
ProVantage's financial results were included in ShopKo's consolidated U.S.
federal income tax return for fiscal periods through the date of ProVantage's
initial public offering. ProVantage's provisions for income taxes for periods
prior to July 19, 1999 were computed as if ProVantage were, in effect, a
separate company. ProVantage is responsible for filing its own U.S. federal
income tax return for the period July 19, 1999 through January 29, 2000 and for
subsequent fiscal years. The amounts reflected in the provision for income taxes
for all fiscal periods are based on applicable federal statutory rates, adjusted
for permanent differences between financial and taxable income.
The financial statements reflect the application of SFAS No. 109,
"Accounting for Income Taxes".
Fair Value of Financial Instruments:
For certain of ProVantage's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities, the
carrying amounts approximate fair value due to their short maturities. The
carrying amounts of ProVantage's short-term obligations and long-term
obligations reasonably approximate the quoted market values for the same or
similar issues.
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.
(2) ACQUISITIONS
ProVantage on December 31, 1999 acquired for $5.0 million the remaining
minority interest in ProVMed LLC. ProVMed LLC performs advanced data
warehousing, clinical and administration information support services. The
purchase price included an allocation to goodwill of $3.4 million that is being
amortized over a period of 20 years.
ProVantage on August 20, 1997 acquired PharMark, a software and database
development company providing information driven strategies for optimizing
medical and pharmaceutical outcomes. The purchase price for PharMark was
approximately $15.2 million, of which $14.2 million was paid in cash at the time
of acquisition with an additional $1.0 million paid in August 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 million or less
at the measurement date. The full $8.0 million will be due if the value equals
or exceeds $500 million at the measurement date; and a pro rata portion of the
$8.0 million contingent payment will be
52
<PAGE> 53
due if the value is between $250 million and $500 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 or the date on
which ShopKo and its affiliates cease to own at least a majority of the
ProVantage outstanding common stock. The contingent payments, if any, will be
capitalized as additional purchase price and amortized over a period of 15 to 18
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.
ProVantage in fiscal 1996 acquired CareStream ScripCard from Avatex
Corporation ("Avatex"). CareStream ScripCard was a prescription benefit
management company. The initial purchase price of $30.5 million was paid in
cash. ProVantage also assumed approximately $0.8 million in liabilities for
employee severance costs. Avatex had a right to receive one additional
contingent cash payment at its election without further condition at any time
prior to August 2, 2001. The present value of the minimum supplemental cash
payment of $2.4 million at the date of acquisition was recorded as additional
purchase price. Avatex in August 1999 exercised its right to the supplemental
cash payment in the amount of $5.0 million which ProVantage paid in August 1999.
Such additional purchase price is being amortized over a period of 18 years.
ProVantage in fiscal 1994 acquired 97% of the outstanding common stock of
Bravell, Inc. ("Bravell"), a pharmacy benefits management firm for approximately
$17.3 million. ProVantage was also required to make additional payments that
were contingent upon the future results of Bravell's operations. In fiscal 1996,
$0.7 million was paid based on the financial results for fiscal 1995. ProVantage
made a payment of approximately $8.9 million to the founders of Bravell in
fiscal 1997 to (i) acquire the remaining 3% of the common stock of Bravell which
ProVantage did not acquire in fiscal 1995, (ii) extinguish all remaining
contingent payment obligations to the founders and (iii) terminate the founders'
employment agreements. The $8.9 million payment included $8.1 million which was
capitalized as additional purchase price amortized over 20 years and the
remaining $0.8 million was expensed as severance cost.
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 net earnings of ProVantage.
53
<PAGE> 54
(3) INTANGIBLES - NET
Intangibles, net consists of the following:
<TABLE>
<CAPTION>
(In Thousands)
-----------------------------------
January 29, January 30,
2000 1999
-------------- -----------------
<S> <C> <C>
Customer relationships $ 8,549 $ 8,549
Retail pharmacy network 12,500 12,500
Goodwill 60,369 54,497
-------------- -----------------
81,418 75,546
Less accumulated amortization 13,440 9,493
-------------- -----------------
Intangibles, net $ 67,978 $ 66,053
============== =================
</TABLE>
Intangibles are amortized using the straight-line method over 18 to 22
years. Amortization expense related to these intangibles was $3.9 million, $3.7
million and $3.3 million in fiscal years 1999, 1998 and 1997, respectively.
(4) PROPERTY AND EQUIPMENT - NET
Property and equipment and related accumulated depreciation and
amortization consists of the following:
<TABLE>
<CAPTION>
(In Thousands)
----------------------------------
January 29, January 30,
2000 1999
-------------- ----------------
<S> <C> <C>
Property and equipment at cost:
Software $ 25,504 $ 13,834
Equipment 10,524 6,441
Equipment under capital leases 3,086 -
Leasehold improvements 909 668
-------------- ----------------
40,023 20,943
Less accumulated depreciation and amortization 11,107 5,667
-------------- ----------------
Property and equipment, net $ 28,916 $ 15,276
============== ================
</TABLE>
Total amortization expense of capitalized software costs was $3.0 million,
$1.9 million and $1.0 million in fiscal years 1999, 1998 and 1997, respectively.
Total amortization expense of equipment under capital leases was $0.2 million in
fiscal 1999.
54
<PAGE> 55
(5) SHORT-TERM OBLIGATIONS
ProVantage's short-term obligations as of January 29, 2000 consisted of
current amounts due under long-term capital lease obligations. ProVantage's
short-term obligations at January 30, 1999 consisted of two promissory notes due
to the former owners of PharMark. The promissory notes were repaid in fiscal
1999.
(6) LONG-TERM OBLIGATIONS AND LEASES
ProVantage's long-term obligations consist of capital leases related to
equipment. ProVantage is also obligated under non-cancelable operating leases,
primarily for buildings and computer hardware. Minimum future obligations under
capital and operating leases in effect at January 29, 2000 are as follows:
<TABLE>
<CAPTION>
(In Thousands)
--------------------------------------
Capital Operating
Lease Lease
Year Obligations Obligations
--------------------- ---------------- ------------------
<S> <C> <C>
2000 $ 1,026 $ 1,185
2001 1,004 961
2002 824 677
2003 362 455
2004 -- 200
Subsequent to 2004
-- 1,900
---------------- ------------------
Total Minimum
Future Obligations
3,216 $ 5,378
==================
Less Interest 384
----------------
Present Value of
Minimum Future
Obligations 2,832
Less Short-Term
Portion 826
----------------
Long-Term
Portion $ 2,006
================
</TABLE>
Operating lease costs with terms greater than one year were $1.6 million,
$1.9 million and $0.9 million in fiscal years 1999, 1998 and 1997, respectively.
55
<PAGE> 56
Interest expense on the outstanding obligations under capital leases was
$0.1 million in fiscal 1999.
(7) INCOME TAXES:
The provisions for income taxes in the accompanying financial statements
have been calculated as if ProVantage was a separately taxed entity for each of
the periods presented. The provisions for income taxes include the following:
<TABLE>
<CAPTION>
(In Thousands)
-----------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Current:
Federal $ 3,190 $ 4,428 $ 4,292
State 573 1,078 984
Deferred 4,572 1,715 305
--------------- --------------- ---------------
Total Provision $ 8,335 $ 7,221 $ 5,581
=============== =============== ===============
</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:
<TABLE>
<CAPTION>
(In Thousands)
-------------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Depreciation and
amortization $ 3,962 $ 2,072 $ 131
Reserves and
allowances 557 (118) 166
Other 53 (239) 8
--------------- --------------- ---------------
$ 4,572 $ 1,715 $ 305
=============== =============== ===============
</TABLE>
The effective tax rates vary from the statutory federal income tax rate as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- -----------------
<S> <C> <C> <C>
Statutory income tax 35.0% 35.0% 35.0%
State income taxes, net
of federal tax benefit 4.6 5.1 5.0
Goodwill 2.7 2.9 3.7
Other 0.2 0.2 0.2
--------------- --------------- -----------------
42.5% 43.2% 43.9%
=============== =============== =================
</TABLE>
56
<PAGE> 57
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:
<TABLE>
<CAPTION>
(In Thousands)
--------------------------------------------
January 29, January 30,
2000 1999
------------------- -------------------
<S> <C> <C>
Deferred tax liabilities:
Goodwill $ $2,078 $ 1,948
Property and equipment 5,405 1,573
------------------- -------------------
Total deferred tax liabilities 7,483 3,521
Deferred tax assets:
Reserves and allowances (650) (1,260)
------------------- -------------------
Total deferred tax assets (650) (1,260)
------------------- -------------------
Net deferred tax liabilities $ 6,833 $ 2,261
=================== ===================
</TABLE>
(8) SHAREHOLDERS' EQUITY
ProVantage has 50,000,000 shares of $.01 par value of common stock
authorized of which 12,550,000 shares were issued and outstanding as of January
30, 1999. ProVantage issued an additional 5,600,000 shares of common stock on
July 19, 1999 at a public offering price of $18.00 per share in its initial
public offering. ProVantage has a total of 18,150,000 shares of its common stock
issued and outstanding as of January 29, 2000.
ProVantage retained $20.0 million of the net proceeds from the initial
public share offering proceeds for use for working capital purposes, capital
expenditures and other general corporate purposes. The remaining proceeds from
the initial public offering of $73.7 million were paid to ShopKo as payment of a
dividend declared prior to the offering.
ProVantage has not paid any regular cash dividends during the periods
presented in the accompanying consolidated financial statements.
(9) STOCK OPTIONS
ProVantage's Stock Incentive Plan allows the granting of stock options and
other equity-based awards to various officers, directors and other employees of
ProVantage at prices not less than 100 percent of fair market value, determined
by the closing price on the date of grant. ProVantage has reserved 1,750,000
shares for issuance under the 1999 Stock Incentive Plan. The options vest at the
rate of 40% on the second anniversary of the grant date and 20%
57
<PAGE> 58
annually thereafter for officers and employees and at the rate of 100% on the
second anniversary of the date of grant for non-employee directors.
All stock options vest immediately upon a change of control. Changes in the
options are as follows (shares in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price Range Price
------------ ------------------ ----------------
<S> <C> <C> <C>
Outstanding, prior to July 14, 1999 - $ - $ -
Granted 559 8.875-18.00 17.57
Cancelled and forfeited (7) 18.00 18.00
------------ ------------------ ----------------
Outstanding, January 29, 2000 552 $ 8.875-18.00 $ 17.57
============ ================== ================
</TABLE>
The following table summarizes information about stock options outstanding
at January 29, 2000 (shares in thousands):
<TABLE>
<CAPTION>
Weighted Average
Shares Outstanding Remaining Weighted Average
Exercise Prices at January 29, 2000 Contractual Life Exercise Price
----------------------- --------------------- -------------------- ---------------------
<S> <C> <C> <C>
$8.00 to 13.00 32 9.7 $ 10.44
13.01 to 18.00 520 9.5 18.00
--------------------- -------------------- ---------------------
552 9.5 $ 17.57
===================== ==================== =====================
</TABLE>
There are no options that are exercisable as of January 29, 2000.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the Company's stock incentive plan. If the Company had
elected to recognize compensation cost based on the fair value of the options
granted at grant date as prescribed by SFAS No. 123, net earnings and diluted
net earnings per common share for 1999 would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
Net earnings
As reported $ 11,262
Pro forma 10,911
Diluted net earnings per common share (in dollars)
As reported $ 0.72
Pro forma 0.70
</TABLE>
The weighted average fair value of options granted was $9.47 per share in
fiscal 1999.
58
<PAGE> 59
The fair value of stock options used to compute pro forma net earnings and
diluted net earnings per common share disclosures for 1999 is the estimated
present value at grant date using the Black-Scholes option-pricing model with
weighted average assumptions as follows:
<TABLE>
<S> <C>
Risk-free interest rate 6.6%
Expected volatility 56.0%
Dividend yield 0.0%
Expected option life (years) 4.5
</TABLE>
(10) 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 employer 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's
contributions were $0.7 million, $0.2 million and $0.1 million for fiscal years
1999, 1998 and 1997, respectively.
ProVantage also has change of control severance agreements with certain key
officers. Under these agreements, the officers are entitled to a lump-sum cash
payment equal to a multiple of one, one and one half or two times their annual
salary plus a multiple of one, one and one half times or two times their average
annual bonus for the three fiscal years immediately preceding the date of
termination, if, within two years after a "change of control" (as defined in
such agreements), the individual's employment is terminated by ProVantage
without cause.
(11) RELATED PARTY TRANSACTIONS
ProVantage, in conjunction with its initial public offering, entered into
agreements on July 19, 1999 which require 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. ProVantage
also began leasing its new corporate headquarters building from ShopKo effective
August 1, 1999. The initial term for the building lease extends for fifteen
years and includes renewal options thereafter.
The credit agreement provides ProVantage with an unsecured, revolving line
of credit of up to $25.0 million at market rates. ProVantage pays 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,
insurance, tax compliance, treasury and accounts payable and payroll processing.
59
<PAGE> 60
The information technology services agreement provides ProVantage with the
use of the personnel to manage and maintain certain hardware, software and
computer facilities.
The total cost incurred by ProVantage under the aforementioned credit and
services agreements with ShopKo from July 19, 1999 through the end of fiscal
1999 was $0.6 million. In addition, ProVantage also paid ShopKo rent expense for
its office building totaling $0.1 million in fiscal 1999.
General administrative and other expenses were allocated to ProVantage from
ShopKo for fiscal periods prior to July 19, 1999. 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 $0.5 million, $1.2 million and
$1.1 million for fiscal years 1999, 1998 and 1997, respectively.
Management believes the foregoing allocations were made on a reasonable
basis. Although these allocations do not necessarily represent the costs that
would have been or may be incurred by ProVantage on a stand-alone basis,
management believes that any variance in costs would not be significant.
ProVantage in conjunction with its initial public offering also entered
into an indemnification and hold harmless agreement with ShopKo which included,
among other things, an indemnification against any loss related to a minority
interest position investment held by ProVantage in a startup healthcare
development software company. Subsequent to the date of the initial public
offering, ProVantage, as a result of the software company's failure to achieve a
commercially successful product, its significant operating losses and its
inability to secure additional financing, concluded that its investment of $1.5
million in the software company was impaired. As a result of the decision that
the investment was impaired, ProVantage asserted its position under the ShopKo
indemnification and hold harmless agreement and ShopKo agreed to reimburse
ProVantage for its impairment loss.
ProVantage provides claims processing services for ShopKo. ProVantage bills
ShopKo for the cost of the prescription claim plus processing fees. These
amounts were $2.6 million, $2.1 million and $1.6 million for fiscal years 1999,
1998 and 1997, respectively, and were included in ProVantage's revenues.
A portion of ProVantage's payments made to network pharmacies is made to
pharmacies owned by ShopKo. The payments reflect the cost of the prescription
claim less an on-line remittance fee. These amounts were $52.1 million, $35.7
million and $25.8 million for fiscal years 1999, 1998 and 1997, respectively,
and were included in ProVantage's cost of revenues. Accounts payable include
amounts payable to ShopKo for claims of $4.5 million at January 29, 2000 and
$1.7 million at January 30, 1999, respectively.
ProVantage sold to ShopKo in fiscal 1999 an end user license for
ProVantage's pharmaceutical data warehouse product for $350,000.
60
<PAGE> 61
ProVantage receives formulary concessions from pharmaceutical
manufacturers. $0.1 million of these concessions were shared with and paid to
the network pharmacies owned by ShopKo in 1997 and were included in ProVantage's
cost of revenues.
Purchases of inventory from ShopKo were $0.3 million, $0.3 million and $0.8
million for fiscal years 1999, 1998 and 1997, respectively.
During fiscal 1998, ShopKo entered into an agreement to acquire certain
Internet infrastructure, development and user interface products from
Microstrategy, Inc. ("Microstrategy"). As part of the agreement, Microstrategy
also granted ShopKo a warrant to purchase shares of Microstrategy. ShopKo
anticipated when entering into the agreement that both ProVantage and ShopKo
would be utilizing the products and services provided by Microstrategy. During
fiscal 1999, $600,000 of realized value from the exercise of vested warrants was
allocated to ProVantage based on actual utilization of the products and services
under the agreement in fiscal 1999 and planned utilization contemplated over the
life of the agreement.
The total payable to ShopKo as of January 29, 2000 was $11.2 million.
(12) MAJOR CUSTOMERS
One customer represented $101.1 million, or 11.2% of revenues in fiscal
1999, $76.1 million, or 11.8% of revenues in fiscal 1998 and $58.6 million, or
12.1% of revenues in fiscal 1997.
(13) UNAUDITED QUARTERLY FINANCIAL INFORMATION
Unaudited quarterly financial information is as follows (amounts in
thousands, except per share data):
61
<PAGE> 62
<TABLE>
<CAPTION>
Fiscal Year (52 Weeks) Ended January 29, 2000
--------------------------------------------------------------------------------------
First Second Third Fourth Year
------------- -------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Net revenues $214,949 $214,894 $225,872 $246,675 $902,390
Gross margin 13,768 13,845 14,560 18,172 60,345
Net earnings 2,353 2,387 2,605 3,917 11,262
Basic net earnings
per common share 0.19 0.17 0.14 0.22 0.72
Weighted average
shares 12,550 13,688 18,150 18,150 15,644
Diluted net earnings
per common share 0.19 0.17 0.14 0.22 0.72
Adjusted weighted
average shares 12,550 13,689 18,150 18,151 15,645
Price range per
common share* - 21 3/16-17 7/8 18-8 3/16 12 1/16-7 1/4 21 3/16-7 1/4
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year (52 Weeks) Ended January 30, 1999
--------------------------------------------------------------------------------------
First Second Third Fourth Year
--------------- -------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Net revenues $145,773 $148,987 $164,785 $183,715 $643,260
Gross margin 10,403 11,042 11,634 14,767 47,846
Net earnings 1,812 1,924 2,044 3,702 9,482
Basic net earnings
per common share 0.14 0.15 0.16 0.30 0.76
Weighted average
shares 12,550 12,550 12,550 12,550 12,550
Diluted net earnings
per common share 0.14 0.15 0.16 0.30 0.76
Adjusted weighted
average shares 12,550 12,550 12,550 12,550 12,550
</TABLE>
*Price range per common share reflects the highest and lowest stock market
prices on the New York Stock Exchange during each quarter since ProVantage's
initial public offering date of July 14, 1999.
62
<PAGE> 63
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
SCHEDULE VIII. VALUATION AND QUALIFYING ACCOUNTS - ALLOWANCE FOR RECEIVABLES
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF BALANCE AT
YEAR ADDITIONS DEDUCTIONS END OF YEAR
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended January 31, 1998 $1,718 $139 $881 $ 976
=============== ============== ============== ==============
Year ended January 30, 1999 $ 976 $392 $ 54 $1,314
=============== ============== ============== ==============
Year ended January 29, 2000 $1,314 $859 $960 $1,213
=============== ============== ============== ==============
</TABLE>
63
<PAGE> 64
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
ProVantage Health Services, Inc. (Registrant)
Date: April 20, 2000
By: /S/ Jeffrey A. Jones
--------------------
Jeffrey A. Jones, President and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------ ------------------------------- --------------
<S> <C> <C>
/s/ William J. Podany* Chairman of the Board April 20, 2000
------------------------
William J. Podany
/s/ Robert J. Abramowski Senior Vice President and Chief April 20, 2000
------------------------- Financial Officer
Robert J. Abramowski
/s/ Peter J. Beste Chief Accounting Officer April 20, 2000
-------------------
Peter J. Beste
/s/ Jeffrey C. Girard * Director April 20, 2000
------------------------
Jeffrey C. Girard
/s/ Jeffrey A. Jones* Director April 20, 2000
----------------------
Jeffrey A. Jones
/s/ Dale P. Kramer* Director April 20, 2000
--------------------
Dale P. Kramer
/s/ Terry R. Thompson* Director April 20, 2000
-----------------------
Terry R. Thompson
/s/ Gregory H. Wolf* Director April 20, 2000
----------------------
Gregory H. Wolf
/s/ Patricia A. Nussle
-----------------------
Patricia A. Nussle
</TABLE>
*By Patricia A. Nussle pursuant to Powers of Attorney.
64
<PAGE> 65
INDEX TO EXHIBITS
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
3.1 Restated Certificate of Incorporation of
the Registrant, incorporated by reference
from the Registrant's Registration
Statement on Form S-1 (Reg. No. 333-71743)
3.2 Amended and Restated Bylaws of the
Registrant, incorporated by reference from
the Registrant's Registration Statement on
Form S-1 (Reg. No. 333-71743)
4.1 Form of Stock Certificate, incorporated by
reference from the Registrant's
Registration Statement on Form S-1 (Reg.
No. 333-71743)
4.2 Rights Agreement between the Registrant
and Norwest Bank Minnesota, N.A. dated as
of March 12, 1999 (including the Form of
Certificate of Designation, Preferences
and Rights of Senior B Junior
Participating Preferred Stock and Form of
Rights Certificate), incorporated by
reference from the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter
ended July 31, 1999 (File No. 1-14923)
10.1 Administrative Services Agreement dated
as of July 19, 1999 between the Registrant
and ShopKo Stores, Inc., incorporated by
reference from the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter
ended July 31, 1999 (File No. 1-14923)
10.2 I.T. Support Agreement dated as of
July 19, 1999 between the Registrant and
ShopKo Stores, Inc., incorporated by
reference from the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter
ended July 31, 1999 (File No. 1-14923)
10.3 Credit Agreement dated as of July 19, 1999
between the Registrant and ShopKo Stores,
Inc., incorporated by reference from the
Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended July 31, 1999
(File No. 1-14923)
10.4 Indemnification and Hold Harmless
Agreement dated as of July 19, 1999
between the Registrant and ShopKo Stores,
Inc., incorporated by reference from the
Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended July 31, 1999
(File No. 1-14923)
65
<PAGE> 66
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
10.5 Registration Rights Agreement dated as of
July 19, 1999 between the Registrant and
ShopKo Holdings, Inc., incorporated by
reference from the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter
ended July 31, 1999 (File No. 1-14923)
10.6 Tax Matters Agreement dated as of July
19, 1999 between the Registrant and ShopKo
Stores, Inc., incorporated by reference
from the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended
July 31, 1999 (File No. 1-14923)
10.7 Lease Agreement dated as of August 1, 1999
between the Registrant and ShopKo Stores,
Inc. *
10.8 End User License Agreement dated as of
January 29, 2000 between the Registrant
and ShopKo Stores, Inc. *
10.9 Form of Indemnification Agreement between
the Registrant and the directors and
certain officers of the Registrant,
incorporated by reference from the
Registrant's Registration Statement on
Form S-1 (Reg. No. 333-71743)
10.10 Form of Change of Control Severance
Agreement between the Registrant and
certain officers of the Registrant,
incorporated by reference from the
Registrant's Registration Statement on
Form S-1 (Reg. No. 333-71743) **
10.11 Prescription Benefit Management Agreement
between ProVantage Prescription Benefit
Management, Inc. and American Medical
Security, Inc. dated as of December 31,
1999 *
10.12 Registrant's 1999 Stock Incentive Plan,
incorporated by reference from the
Registrant's Registration Statement on
Form S-1 (Reg. No. 333-71743) **
10.13 Prescription Benefit Management Agreement
between the Registrant and ShopKo Stores,
Inc. dated as of January 27, 1999,
incorporated by reference from the
Registrant's Registration Statement on
Form S-1 (Reg. No. 333-71743)
10.14 System Agreement between Systems
Xcellence USA, Inc. and the Registrant
dated as of January 27, 1999, incorporated
by reference from the Registrant's
Registration Statement on Form S-1 (Reg.
No. 333-71743)
66
<PAGE> 67
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
------ --------------------
10.15 Vision Benefit Group Insurance Policy,
incorporated by reference from the
Registrant's Registration Statement on
Form S-1 (Reg. No. 333-71743)
11.0 Statement Regarding Computation of
Earnings per Common and Common Equivalent
Share *
21.1 Subsidiaries of the Registrant *
23.1 Consent of Deloitte & Touche LLP *
24.1 Directors Powers of Attorney *
27.1 Financial Data Schedule *
-----------------------
* Filed herewith.
** A management contract or compensatory plan or arrangement.
67
<PAGE> 1
EXHIBIT 10.7
LEASE AGREEMENT
THIS LEASE, is entered into as of the 1st day of August, 1999 by and
between Shopko Stores, Inc., a Wisconsin corporation, whose mailing address is
P.O. Box 19060, Green Bay, Wisconsin, 54307-9060 ("Lessor"), and ProVantage
Health Services, Inc., a Delaware corporation, whose mailing address is P.O. Box
846, Brookfield, Wisconsin 53008-0846 ("Lessee").
AGREEMENT:
In consideration of the rents, mutual covenants and agreements set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Lessor and Lessee agree as
follows:
1. PREMISES
In consideration of the rents, covenants and agreements hereinafter set
forth, Lessor hereby leases to Lessee and Lessee hereby leases from Lessor,
the real property situated in the City of Pewaukee, County of Waukesha,
Wisconsin, which property is legally described as:
Parcel 4D of Certified Survey Map No. 8670, recorded on November 11,
1998 in Volume 76 of Certified Survey Maps on pages 303 to 306, as
Document No. 2386314, being a re-division of Parcel 4A of Certified
Survey Map No. 6565, being a part of the Northeast 1/4, Northwest 1/4,
Southeast 1/4 and Southwest 1/4 of the Northeast 1/4 of Section 22,
Town 7 North, Range 19 East, Town of Pewaukee, County of Waukesha,
State of Wisconsin.
along with the building (the "Building") and all other improvements located
thereon (hereinafter collectively referred to as the "Premises").
2. TERM
A. Initial Term. The initial term of this Lease shall commence on the
earlier to occur of (i) the date a permanent certificate of occupancy for the
Building shall be issued (the "Certificate of Occupancy") or (ii) the date
Lessee takes possession of the Premises (in either case, the "Commencement
Date") and shall extend for a period ending fifteen (15) years from the last day
of the month containing the Commencement Date.
B. Options to Extend. Provided that Lessee is not then in default
under this Lease at the time of exercise of the option and that Lessee continues
in possession of the Premises pursuant to the terms of this Lease at such time,
Lessee shall have the option to extend the term of this Lease for four (4)
additional terms of five (5) years (each referred to as an "Extended Term"),
upon the terms and conditions set forth herein (other than the option to
extend), subject to any increase in the Base Rent as set forth in Section 4C and
commencing upon the expiration of the then current term. If Lessee desires to
exercise its option to extend, Lessee shall give written notice to Lessor no
later than ninety (90) days prior to the expiration of the then current
1
<PAGE> 2
term. Any reference in the Lease to the "term" of the Lease shall be deemed to
include the initial term and any Extended Term for which Lessee has exercised
the option granted under this Section, unless it is expressly provided
otherwise.
3. RENT
Lessee agrees to lease the Premises for the term herein indicated and
to pay Lessor as Rent therefor:
A. Base Rent. Beginning on the Commencement Date an annual Base Rent
of Two Hundred Thousand Dollars ($200,000) in equal monthly installments of
Sixteen Thousand Six Hundred Sixty-six Dollars and Sixty-seven Cents
($16,666.67) in advance on or before the first day of each calendar month during
the term of this Lease. If the Commencement Date is other than the first day of
a calendar month, Lessee shall pay pro rata rent, in advance, for the period
from the Commencement Date to the first day of the following calendar month. The
annual Base Rent may be increased in accordance with Section 4C.
B. Additional Rent. The parties intend that the Base Rent specified
above shall be on an absolutely net basis to Lessor in each year during the term
and that this Lease be so construed. As requested by Lessor, Lessee shall timely
pay as Additional Rent payable hereunder, all costs, assessments, taxes,
impositions, expenses and obligations of every kind relating to the Premises
("Costs") incurred by Lessor, except only (i) amortization of any of Lessor's
mortgage(s) and (ii) as provided for in Section 6C below. Lessee shall indemnify
and hold Lessor harmless against all such Costs.
C. Payment of Rent. The Base Rent and Additional Rent due hereunder
shall be paid to Lessor at 700 Pilgrim Way, Green Bay, WI 54304, ATTN: Vice
President, Real Estate or to such other place as Lessor may designate in
writing. Lessee shall pay such rent to Lessor without notice or demand and
without abatement, deduction or set-off.
4. OPTION TO PURCHASE AND BASE RENT INCREASE
In the event Lessor ceases to own directly or beneficially at least
fifty-one percent (51%) of the outstanding common stock of Lessee (a "Change in
Control"), Lessee shall have the right and the option to purchase the Premises
in accordance with this Section 4.
A. Determination of Fair market Value and Rent. Within thirty (30)
days of a Change of Control, Lessee shall give Lessor written notice thereof
indicating in such notice whether Lessee desires to exercise its option to
purchase the Premises. Within thirty (30) days of its receipt of such notice,
Lessor shall notify Lessee in writing what it considers to be (i) the Fair
Market Value of the Premises and (ii) the Fair Market Rent for the Premises. For
purposes of this Agreement, the "Fair Market Value" shall mean the highest
purchase price a third party would be willing to pay for the Premises in an arms
length transaction and "Fair Market Rent" shall mean the highest annual rental
rate a third party would be willing to pay for the Premises in an arms length
transaction. If Lessee objects to the Fair Market Value or Fair Market Rent
delivered by Lessor, Lessee shall notify Lessor within thirty (30) days after
receipt of Lessor's notice to Lessee, together with an appraisal, from an
appraiser bearing MAI designation, as to the
2
<PAGE> 3
such appraiser's conclusions regarding Fair Market Value and/or Fair Market
Rent. If Lessee does not object within such time, the Fair Market Value and the
Fair Market Rent shall be as specified in Lessor's notice. If Lessee notifies
Lessor within such time of an objection, Lessor, at its sole option, may accept
the conclusions of Lessee's appraiser or appoint another appraiser, in which
case the two appraisers shall promptly meet and attempt to agree on the disputed
amount or amounts. If they are able to agree, they shall jointly notify each of
the parties of the conclusions they have reached, and the amount so agreed upon
shall be deemed the Fair Market Value and Fair Market Rent, as applicable. If
they are unable to agree within twenty (20) days of the appointment by Lessor,
the average of the appraisers' final conclusions with respect to any disputed
amount shall be deemed the Fair Market Value and Fair Market Rent, as
applicable.
B. Option to Purchase. Within thirty (30) days after final
determination of the Fair Market Value, Lessee shall give Lessor written notice
if it desires to exercise its option to purchase the Premises. If Lessee timely
notifies Lessor that it is exercising the option hereunder, the parties shall
reasonably agree on and promptly enter into a Purchase Agreement with respect to
the Premises, with a purchase price equal to the Fair Market Value (as
determined in accordance with Section 4A), upon commercially reasonable terms
and conditions, and with a closing date to be no later than sixty (60) days
after final determination of the Fair Market Value.
C. Base Rent Increases. In the event of a Change of Control, the
annual Base Rent due under this Lease be adjusted as follows:
(1) The annual Base Rent shall automatically be adjusted as of
the date of the Change of Control to reflect the Fair Market Rent (as
determined in accordance with Section 4A). During the determination of
the Fair Market Rent as set forth in Section 4A, Lessee shall continue
to pay the then current Base Rent as it becomes due; provided, however,
that upon final determination of the Fair Market Rent, Lessee shall pay
to Lessor within thirty (30) days, any Base Rent amount that may be in
arrears due to the retroactive adjustment of the annual Base Rent back
to the date of the Change of Control.
(2) If a Change of Control occurs and Lessee does not exercise
its right to purchase the Premises, the annual Base Rent due under this
Lease for any future Extended Term shall be adjusted each time Lessee
exercises its option to extend the Lease pursuant to Section 2B to
reflect the then current Fair Market Rent determined in the same manner
set forth in Section 4A.
5. UTILITIES
Lessee shall be responsible for and shall pay, as they become due and
payable and before they become delinquent, all charges for natural gas, oil,
electrical, water, sewer, telephone, snow removal, refuse removal and any and
all other utilities services provided to the Premises during the term of this
Lease. All applications and connections for necessary utility services on the
Premises shall be made only in the name of Lessee.
3
<PAGE> 4
6. TAXES AND ASSESSMENTS
A. Lessee agrees to pay to the appropriate governmental agencies all
real property taxes, assessments, impositions, or all other claims or charges
(herein collectively called the "Taxes") which may constitute or may be reduced
to a lien upon the Premises, including but not limited to water charges and
sewer charges, before the same shall become delinquent. All such payments for
the first and last year of the term shall be prorated between Lessor and Lessee,
so that Lessee shall be responsible for that portion of the Taxes which is
attributable to the term of this Lease. At least twenty (20) days prior to the
applicable due date, Lessor shall furnish Lessee a written statement showing the
amount of the Taxes due, together with a copy of the tax bill. Lessee shall
remit to Lessor the full amount of the Taxes due no later than ten (10) days
prior to the due date of such Taxes.
B. Lessee shall have the right in its own name, or in Lessor's name
where appropriate, but at its own cost and expense, to contest the amount or
legality of any Taxes which it is obligated to pay hereunder and make
application for the reduction thereof, or any assessment upon which the same may
be based, and the Lessor agrees at the request of the Lessee to execute or join
in the execution with such contest or application. If the Lessee shall contest
such tax assessment or other imposition, the time within which the Lessee shall
be required to pay the same shall be extended until such contest or application
shall have been finally determined, except that Lessee shall be responsible for
any penalty imposed by the taxing authority resulting from late payment of Taxes
due to said contest.
C. Lessee shall also pay any sales or use tax relating to the rents
being charged hereunder, except that in no event shall Lessee be liable for any
income taxes which Lessor is obligated to pay by virtue of its receipt of rent
hereunder unless such income taxes shall be levied, assessed or imposed
partially or totally in lieu of or as a substitute for any Taxes, in which case
Lessee shall pay such taxes.
7. USE AND COMPLIANCE WITH LAW
A. Lessee shall continuously occupy and use the Premises during the
term of this Lease. Lessee may use the Premises for general business office
purposes and uses directly related thereto and for no other purpose without
Lessor's prior written consent, which consent shall not be unreasonably
withheld.
B. Lessee covenants and agrees to obey, observe and comply promptly
with all rules, regulations, ordinances, and laws which shall be applicable, now
or at any time during the term of this Lease, to the Premises and Lessee's
operations thereon and comply promptly with all orders, rules, rulings, and
directives of any governmental authority or agency having jurisdiction over the
Premises, or of the fire insurance carrier. Lessee further covenants and agrees
at all times during the term of this Lease to maintain in full force and effect
all permits and approvals relating to the Premises necessary for the proper
operation of its business.
C. Lessee shall not at any time install, store, use, place or
generate in or about the Premises any hazardous substance or any pollutant or
any contaminant as such may from time to
4
<PAGE> 5
time be regulated by or defined as such in any state or federal law, rule or
regulation pertaining to environmental matters ("Environmental Laws"), or any
other hazardous, toxic, or dangerous waste, substance, or material ("Hazardous
Materials"), except in full compliance with all requirements of Environmental
Laws and in such a manner that will not cause any environmental harm or concern.
Upon learning of any violation, or suspected violation, of any Environmental
Law, Lessee shall notify Lessor within three (3) days. Lessee shall indemnify,
defend, and hold harmless Lessor from and against any penalty, fine, claim,
demand, expense, liability, cost, judgment, loss, attorneys' fees, consultant or
expert fees, and any charge whatsoever that Lessor shall incur, or which would
otherwise incur, by reason of (i) the presence or suspected presence of
Hazardous Materials on or about the Premises and (ii) Lessee's failure to comply
with the terms of this Lease. The provisions of this Section 6C shall survive
the expiration or termination of this Lease.
8. CONSTRUCTION AND MAINTENANCE
A. Construction. Lessor agrees to have a business office facility and
related improvements (the "Improvements") constructed on the real property that
is the subject of this Lease in accordance with the plans and specifications and
a construction budget (collectively, the "Plans") developed in conjunction with
Lessee. All construction shall be completed in a good and workmanlike manner in
accordance with the Plans, as amended from time to time, and in accordance with
all laws, rules, regulations and orders of all applicable governing bodies and
utility districts, fire marshals and the like pursuant to validly issued and
outstanding permits, approvals and consents. Lessor covenants and agrees that
its construction contract requires that all contractors and subcontractors
involved in constructing the Improvements shall maintain adequate comprehensive
general liability and workers compensation insurance. Lessor shall, promptly
upon completion of construction, provide Lessee with the Certificate of
Occupancy and Lessee may immediately take possession of the Premises upon
receipt of the Certificate of Occupancy, or upon an earlier date if Lessor and
Lessee agree and if such early occupancy is permitted by applicable ordinances.
Lessee's rental obligation shall commence upon the earlier of its receipt of the
Certificate of Occupancy or its taking of possession of the Premises, and Lessee
shall, from and after the earlier of such dates be responsible for all other
amounts owing hereunder, such as for utilities, real estate taxes and insurance,
and for all other covenants and obligations contained in this Lease.
B. Repairs. Lessor agrees to keep the foundation, roof and structural
supports of the Building in good condition and repair throughout the term of
this Lease. With the exception of Lessor's responsibility set forth in the
preceding sentence, Lessee agrees to perform all necessary repairs and
maintenance to the interior and exterior of the Premises, including all
electrical, plumbing and mechanical systems, landscaping, parking and other
improvements to the grounds, and to keep all equipment, fixtures and other
building components in a good and safe operating condition, and to comply with
all orders issued by, and building or other codes of, any public body having
jurisdiction over the Premises and to make any alterations or modifications at
any time required to bring the Premises into compliance. In addition, Lessee
shall be specifically responsible for monitoring and maintenance of the
automatic sprinkler system in the Building. All repairs and replacements shall
be made in a good and workmanlike manner using materials of like kind and equal
or greater quality than those in the Premises as of the commencement of the
initial term of this Lease.
5
<PAGE> 6
C. Maintenance. Lessee shall maintain the Premises in a clean,
presentable and safe condition, provide for general daily maintenance and use
all reasonable precaution to prevent waste, damage or injury to the Premises
during the term of this Lease. Lessee agrees to return the Premises, including
all fixtures and equipment and other items provided at the commencement of this
Lease to Lessor at the expiration or termination of this Lease in clean
condition and in as good condition as at the commencement of the initial term,
ordinary wear and tear and damage by fire or other casualty for which insurance
proceeds have actually been received by Lessor excepted.
D. Government Regulations. Lessee shall be responsible for complying
with the Americans With Disabilities Act, 42 U.S.C. 12101 et. seq., as amended
from time to time, and shall conform, at its own cost and expense, its
operations and facilities to comply with all requirements of the Americans With
Disabilities Act, including but not limited to Titles I and III. Further, Lessee
shall comply with all applicable governmental regulations relating to the
Premises and Lessee's operations, including without limitation, Wisconsin's Safe
Place Statute, Section 101.11, Stats.
E. Section 704.07(2) and (4), Wis. Stats. (1997-98), or any successor
provisions, shall not apply to this Lease.
9. ALTERATIONS, ADDITIONS AND IMPROVEMENTS
A. Provided that Lessee has not defaulted under any of the terms,
covenants, provisions or other conditions contained in this Lease, and subject
to the limitation that no substantial portion of the Building shall be
demolished or removed without prior written consent of Lessor and if necessary
any mortgagee, Lessee shall have the right to make, at its sole cost and
expense, additions, alterations, and improvements (hereinafter sometimes
referred to as "Alterations") in or to the Building or the Premises at any time
during the Lease term, subject to the conditions set forth below. The provisions
of this Section 9 shall not apply to such items ordinarily designated as trade
fixtures, temporary partitions or similar installations which may be, from time
to time, installed on or in the Premises.
B. Conditions with respect to alterations, additions, or improvements
are as follows:
(1) No Alterations of any kind shall be made without the prior
written consent of Lessor, if such Alterations would materially reduce
or impair the value, rental, rental value, rentability, or usefulness
of the Premises, or any part thereof;
(2) No Alterations shall be undertaken until Lessee shall have
procured and paid for, so far as the same may be required from time to
time, all permits and authorizations of all municipal departments and
governmental subdivisions having jurisdiction over the Premises and
have complied with all other legal requirements relating to the
Alterations;
(3) Any Alterations involving in the aggregate an estimated cost
of more than $10,000.00 shall be conducted under the supervision of an
architect or engineer selected
6
<PAGE> 7
by Lessee and approved in writing by Lessor, and no structural
Alterations shall be made, except in accordance with detailed plans and
specifications and cost estimates prepared and approved in writing by
such architect or engineer and by Lessor;
(4) Any Alterations shall be completed promptly, in a good and
workmanlike manner, and in compliance with any underlying mortgage or
other security interest affecting the Premises and all legal
requirements and insurance requirements;
(5) The cost of any Alterations shall be promptly paid in full by
Lessee, in cash or its equivalent, so that the Premises shall at all
times be free of liens for labor and materials supplied or claimed to
have been supplied to or in connection with the Premises;
(6) In no event shall Lessee be considered an agent of Lessor in
connection with the construction or completion of any Alterations; and
(7) All Alterations on or in the Premises that may be erected or
installed during the term of this Lease shall become part of the
Premises and the sole property of the Lessor, except that all movable
trade fixtures installed by Lessee shall be and remain the property of
Lessee.
10. INSURANCE
A. Lessee's Insurance. Lessee hereby covenants and agrees at all
times during the term of this Lease to maintain and keep the following
insurances in full force and effect for the mutual benefit of Lessor and Lessee:
(1) Comprehensive general liability insurance policy or policies
satisfactory to Lessor covering Lessee's operations at the Premises
against all claims for the personal injury, death and property damage
with combined single limit of at least Two Million Dollars
($2,000,000.00). Lessor shall be an additional named insured on the
policy. In the event Lessor reasonably deems such coverage inadequate,
Lessee shall, upon written request of Lessor, increase such insurance
to amounts reasonably requested by Lessor.
(2) "All Risk" insurance, including fire and extended coverage,
sprinkler leakage, vandalism and malicious mischief, and such other
endorsements as Lessor may from time to time require, covering property
of every description and kind owned by Lessee and located in or on the
Premises, or for which Lessee is legally liable or installed by or on
behalf of Lessee, including, without limitation, furniture, fixtures,
equipment and any other personal property, in an amount not less than
the full replacement cost thereof.
B. Lessor's Insurance. Lessor, at Lessee's expense, shall keep the
Building and other Improvements now or hereafter located on the Premises insured
against loss by fire or other casualty in an amount determined by Lessor but not
to exceed one hundred percent of the replacement cost of the Building. Lessor,
at Lessee's expense, may also obtain and maintain
7
<PAGE> 8
rental loss insurance in an amount equal to twelve months rent. Lessee shall pay
Lessor the cost of all such insurance with ten (10) days after Lessor provides
Lessee a statement showing the cost of all such insurance.
C. All insurance provided by Lessee as required in this Section shall
(i) be in a form and have a deductible amount reasonably satisfactory to Lessor;
(ii) name Lessor as a named insured and carried in favor of Lessor and Lessee as
their respective interests may appear; (iii) provide that such insurance shall
be primary and that any insurance carried by Lessor shall be excess and
non-contributing; (iv) be written with responsible companies that Lessor shall
approve; and (v) require thirty (30) days notice by registered mail to Lessor of
any cancellation or change affecting any interest of Lessor.
D. All insurance policies for liability, fire and casualty shall bear
an endorsement waiving the right of subrogation first against the Lessor for any
acts or omissions on its part, and secondly, against the Lessee for any acts or
omissions on its part.
11. INDEMNIFICATION; WAIVER OF LIABILITY
A. Except to the extent solely and directly caused by Lessor's
negligence or willful misconduct, Lessee shall indemnify, defend and hold Lessor
harmless from and against any and all loss, cost, damage, claim, liability and
expense of any kind whatsoever (including liabilities for personal injury,
death, and property damage, reasonable attorneys' fees, experts' fees, court
costs, costs of investigation, and settlement costs) incurred by Lessor, its
agents or any officer, director, employee, contractor or assign of Lessor,
arising out of, resulting from or relating to (i) a failure by Lessee to perform
any of the terms or conditions of this Lease; (ii) any damage, accident, or
injury to or death of persons or loss of or damage to property occurring during
the term of this Lease at, on or about the Premises; (iii) failure to comply
with any law or any governmental authority; (iv) any claim for a construction or
mechanic's lien or security interest filed against the Premises for work
performed or materials furnished after the commencement of this Lease. The
foregoing indemnification shall survive the termination of this Lease, whether
by expiration, termination or otherwise.
B. Whenever (a) any loss, cost, damage, or expense resulting,
directly or indirectly, from fire, explosion, or any other casualty, accident,
or occurrence is incurred by either Lessor or Lessee in connection with the
Premises, and (b) such party is then covered in whole or in part by insurance
with respect to such loss, cost, damage, or expense, then the party so insured
hereby releases the other party from any liability it may have on account of
such loss, cost, damage, or expense to the extent of any amount recovered by
reason of such insurance and hereby waives any right of subrogation which might
otherwise exist in or accrue to any person on account thereof; provided,
however, that such release of liability and waiver of the right of subrogation
shall not be operative in any case where the effect thereof is to invalidate or
reduce such insurance coverage.
12. CASUALTY LOSS
A. Substantial Destruction. If the Premises or the Building is
destroyed or so damaged by fire, explosion, or any other casualty, cause or
condition whatsoever as to be wholly
8
<PAGE> 9
or substantially untenantable in Lessor's judgment, then Lessor may: (i)
terminate this Lease as of the date of the damage by written notice to Lessee
within ninety (90) days after such date or (ii) proceed with due diligence to
repair, restore and rebuild the Premises and the Building at Lessor's expense,
to the same condition in which Lessor furnished the Premises to Lessee at the
commencement of this Lease. Lessor shall be under no obligation to restore any
alterations, improvements or additions to the Premises made by Lessee. Lessee
acknowledges that Lessor shall be entitled to the full proceeds of any insurance
coverage carried by Lessor or Lessee for damage to those items provided by
Lessor either directly or through an allowance to Lessee which Lessor is
obligated to or elects to restore as provided in this Section.
B. Partial Destruction. If, as a result of fire, explosion, or any
other casualty, cause or condition whatsoever, the Premises or the Building are
damaged but are not made wholly or substantially untenantable in Lessor's
reasonable judgment, Lessor shall be obligated to restore the same to the
condition in which Lessor furnished the Premises at the commencement of this
Lease. Lessor shall be under no obligation to restore any alterations,
improvements or additions to the Premises made by Lessee. Lessor shall not be
obligated to expend in restoration an amount in excess of the proceeds of
insurance recovered by Lessor with respect to such damage and are usable by
Lessor for such restoration.
C. Reconstruction Period. If Lessor elects or is mandated under this
Section 12 to restore, repair or rebuild all or any part of the Premises and if
Lessor, within 270 days after the damage occurs, fails to eliminate substantial
interference with Lessee's use of the Premises or substantially to restore the
same, Lessee may terminate this Lease as of the end of such 270 day period by
notice to Lessor given not later than five (5) days after expiration of such
period. Such 270 day period shall be extended for reasonable delay caused by
adjustment of insurance loss or force majeure. In any event, Lessee shall be
responsible for removal (or restoration, at Lessee's election) of all its
damaged property and debris from the Premises upon request by Lessor, or must
reimburse Lessor for the reasonable cost of removal.
D. Rent Abatement. If the Premises are rendered totally untenantable
but this Lease is not terminated, the rent due under this Lease shall abate from
the date of the damage until the restoration of the Premises required of the
Lessor is substantially completed but only to the extent Lessor directly
receives rental interruption proceeds. If a portion of the Premises is
untenantable, the rent due under this Lease shall be prorated on a per diem
basis and apportioned in accordance with the portion of the Premises which is
usable by Lessee until the restoration of the Premises required of Lessor is
substantially completed.
13. DAMAGED OR STOLEN PROPERTY
Lessor shall in no way be responsible to Lessee, its agents, officers,
directors, employees, contractors, licensees, invitees or guests for any
property damaged on or stolen from the Premises, however occurring.
9
<PAGE> 10
14. CONDEMNATION
A. Complete Condemnation. If the whole of the Premises, or such
portion thereof as will make the Premises unsuitable for the purpose herein
leased, is condemned pursuant to eminent domain for any public or quasi-public
use or purpose by any legally constituted authority or transferred in lieu
thereof, then this Lease shall terminate upon, and not before, the date of the
taking of possession by the condemning authority, and without apportionment of
the condemnation award, except that Lessee shall be entitled to a share of such
award allocable to any Alterations to the Building made by Lessee prior to the
date of such award. Rent shall be apportioned as of the date of such
termination.
B. Partial Condemnation. If some other portion of the Premises, which
does not qualify under Section 13A, is condemned pursuant to eminent domain for
any public or quasi-public use or purpose by any legally constituted authority
or transferred in lieu thereof, then this Lease shall not terminate but Lessor
and Lessee shall agree upon a reasonable abatement and adjustment of Rent in
proportion to the loss of use of the Premises occasioned by such condemnation.
Lessee shall have no right or claim to any part of any award made to or received
by Lessor for any taking (except with respect to any Alterations to the Building
made by Tenant) and no right or claim for any alleged value of the unexpired
portion of this Lease.
C. Except as specified above, in the event of a condemnation of all
or any part of the Premises, Lessee shall not be prevented from making a claim
against the condemning authority (but not against Lessor) for any moving
expenses, loss of profits, or taking of Lessee's personal property to which
Lessee may be entitled.
15. DEFAULT; REMEDIES
A. The occurrence of any one or more of the following events shall
constitute a default or breach of this Lease by Lessee:
(1) Failure by Lessee to pay any portion of the Base Rent or
Additional Rent or to make any other payment required to be made by
Lessee hereunder within ten (10) days after receipt of written notice
from Lessor that Lessor has not received such payment when due;
(2) Any of the following: (i) the making by Lessee of any general
assignment for the benefit of creditors; (ii) the filing by Lessee of a
petition for reorganization, liquidation, dissolution, consent or
arrangement under any present or future law, code or regulation
relating to bankruptcy, insolvency or other relief for debtors
generally or the filing of an involuntary petition in bankruptcy or
similar law against Lessee (unless, in the case of a petition filed
against Lessee, such petition is dismissed with 60 days); (iii) the
appointment of a trustee or receiver to take possession of all or
substantially all of Lessee's assets or of Lessee's interest in this
Lease; (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets; or (v) the liquidation,
dissolution or termination of Lessee;
10
<PAGE> 11
(3) Failure by Lessee to observe, comply with or perform any
provision of this Lease, where such failure shall continue for a period
of thirty (30) days after notice thereof by Lessor to Lessee or, if the
performance cannot be reasonably had within the thirty (30) day period,
Lessee shall not in good faith have commenced performance within the
thirty (30) day period and shall not diligently proceed to completion
of performance.
(4) Lessee abandons or vacates the Premises for more than thirty
(30) days or surrenders the Premises.
B. Upon the occurrence of any default described in this Section,
Lessor may with or without demand whatsoever, in addition to any other lawful
right or remedy that Lessor may have, do any one or more of the following:
(1) Immediately or at any time thereafter terminate this Lease
(without demand to vacate the Premises) upon written notice to Lessee
and upon such termination, Lessee shall immediately vacate the Premises
(or Lessor may remove all persons and property using such force and
assistance in effecting and protecting such removal as Lessor may deem
reasonably necessary to recover full and exclusive possession of the
Premises ) and Lessor shall have and recover from Lessee all damages
Lessor may suffer by reason of such termination including, without
limitation, the inability of Lessor to relet the Premises, the cost
(including reasonable attorneys' fees) of recovering possession of the
Premises, and the cost of any repairs to the Premises which are
necessary or proper to prepare the same for reletting;
(2) Reenter and take possession of the Premises in the manner
provided in subparagraph (1) without such reentry constituting a
cancellation or termination of this Lease or a forfeiture of any
amounts due hereunder or of the covenants, agreements and conditions to
be kept and performed by Lessee for and during the remainder of the
term;
(3) Lessor may elect, but shall not be obligated, to make any
payment required of Lessee herein or comply with any agreement, term,
or condition required hereby to be performed by Lessee, and Lessor
shall have the right to enter the Premises for the purpose of
correcting or remedying any such default and to remain until the
default has been corrected or remedied, but any expenditure for the
correction by Lessor shall not be deemed to waive or release the
default of Lessee or the right of Lessor to take any action as may be
otherwise permissible hereunder in the case of any default.
(4) Reenter the Premises immediately and remove the property and
personnel of Lessee, and store the property in a public warehouse or at
a place selected by Lessor, at the expense of Lessee.
(5) After reentry, Lessor may relet the Premises or any part
thereof for any term without terminating the Lease, at the rent and on
the terms as Lessor may choose. Lessor may make alterations and repairs
to the Premises. The duties and liabilities of the parties if the
Premises are relet as provided herein shall be as follows:
11
<PAGE> 12
(a) In addition to Lessee's liability to Lessor for breach of the
Lease, Lessee shall be liable for all expenses of the reletting,
for the alterations and repairs made, and for the difference
between the rent received by Lessor under the new lease agreement
and the rent installments that are due for the same period under
this Lease.
(b) Lessor shall have the right, but shall not be required, to
apply the rent received form reletting the Premises (i) to reduce
the indebtedness of Lessee to Lessor under the Lease, not
including indebtedness for rent, (ii) to expenses of the reletting
and alterations and repairs made, (iii) to rent due under this
Lease, or (iv) to payment of future rent under this Lease as it
becomes due.
16. SIGNAGE
Lessee, at its own expense, may install, affix and maintain on the
Premises signs of such size, color and esign as Lessee elects, provided Lessee
complies with local sign ordinances and Lessee obtains all necessary
governmental permits and approvals relating to such signs.
17. ESTOPPEL CERTIFICATES
Lessor and Lessee shall, within fifteen (15) days after written notice
has been sent to the other, requiring a statement of the status of the Lease,
give such statement accurately in writing, indicating whether the Lease is in
good standing or in default and such other information as may reasonably be
requested. If the Lease is in default, the particulars of the default shall be
specified. Failure to give such written reply within fifteen (15) days after
receipt of such request shall constitute a representation that the Lease is in
good standing and is not in default, which representation any person or entity
may rely upon as being true and correct.
18. SURRENDER OF PREMISES
At the expiration of this Lease or earlier termination, Lessee shall
surrender possession of the Premises to Lessor in substantially as good
condition as when Lessee received the Premises from Landlord, reasonable wear
and tear, damage by fire or other casualty, and Alterations made by Lessee
excepted. Any damage caused as a result of the removal of Lessee's fixtures or
other personal property shall be repaired by Lessee, at Lessee's sole cost and
expense. If Lessee does not remove its property from the Premises prior to the
termination or expiration of this Lease, the such property shall be deemed
abandoned by Lessee and shall, at Lessor's option, become the property of
Lessor, or may be removed from the Premises by Lessor at the expense of Lessee.
19. HOLDING OVER
In the event Lessee remains in possession of the Premises after the
expiration or termination of this Lease, Lessee shall be deemed to be occupying
the Premises as a tenant from month-to-month on the same terms and conditions
herein provided, except that the Base Rent shall be equal to 150% of the monthly
installment of Base Rent in effect in the last month of the term of this Lease.
12
<PAGE> 13
20. QUIET ENJOYMENT; ACCESS BY LESSOR
Lessor hereby covenants and agrees that if Lessee shall perform all the
covenants and agreements herein stipulated to be performed by Lessee, Lessee's
quiet and peaceable enjoyment and possession of the Premises will not be
disturbed or interfered with by Lessor. Notwithstanding the foregoing, Lessor
shall be permitted reasonable access to the Premises at all reasonable times
upon reasonable advance notice for the purposes of viewing, examining and
inspecting the same, or for any other lawful purpose including showing the
Premises to prospective purchasers, tenants or lenders.
20. SUBORDINATION AND NON-DISTURBANCE
This Lease shall be subject and subordinate to the lien of any mortgage
which the Lessor may place upon the Premises and to all terms, conditions and
provisions thereof, to all advances made, and to any renewal, extensions,
modifications or replacement thereof. Within ten (10) days of written request by
Lessor, Lessee shall execute and deliver to Lessor a document in form reasonably
satisfactory to Lessor acknowledging the subordination of this Lease to any
mortgage. Lessor shall use its best efforts to cause any mortgagee to execute a
non-disturbance and attornment agreement providing that this Lease shall not
terminate (so long as Lessee is not in default) as a result of the foreclosure
of such mortgage, or conveyance in lieu thereof, and Lessee's rights under this
Lease shall continue in full force and effect and its possession shall be
undisturbed, except in accordance with the provisions of this Lease, and
providing further that if such mortgagee succeeds to the interest of the Lessor,
Lessee shall recognize such mortgagee (or the successor in interest or title)
and attorn to it as lessor under this Lease.
21. NOTICES
All notices, requests, demands, and other communications required or
permitted under this Lease shall be in writing and shall be sent by: (a) United
States certified mail, postage prepaid, return receipt requested, or (b) for
delivery on the next business day with a nationally-recognized express courier.
All such notices shall be sent to the following addresses, until such addresses
are changed by thirty (30) days' notice:
LESSEE: ProVantage Health Services, Inc.
N19 W24130 Riverwood Dr. Waukesha, WI 53188
ATTN: Chief Financial Officer
with copy to: Provantage Health Services, Inc.
N19 W24130 Riverwood Dr.
Waukesha, WI 53188
ATTN: Vice President, Legal Services
LESSOR: Shopko Stores, Inc.
700 Pilgrim Way
Green Bay, WI 54307
ATTN: Vice President, Real Estate
13
<PAGE> 14
With a copy to: Shopko Stores, Inc.
700 Pilgrim Way
Green Bay, WI 54307
ATTN: General Counsel
Notices shall be deemed given three (3) business days after the date
such notice is postmarked, if sent by certified mail, or on the next business
day following the date placed with the express courier, if sent by express
courier. If the last day for giving any notice or taking any action required or
permitted under this Lease would otherwise fall on a Saturday, Sunday, or legal
holiday, that last day shall be postponed until the next legal business day.
24. ASSIGNMENT; SUBLETTING
A. Lessee shall not assign, sell, mortgage, pledge or in any manner
transfer this Lease or any right, title, or interest of Lessee hereunder, by
operation of law or otherwise, or any part or parts thereof, nor may Lessee
sublet all or any portion of the Premises, without the Lessor's consent which
shall not be unreasonably withheld. If consent is granted, Lessee shall remain
fully and directly responsible for all covenants and obligations hereunder
during the entire Lease Term.
B. Lessor shall have the right to transfer, assign and convey in
whole or in part, any and all of the rights of Lessor under this Lease.
25. MISCELLANEOUS
A. This Lease is binding upon and shall inure to the benefit of the
parties hereto and their successors and assigns, subject, however, to the
limitations on assignment contained herein.
B. This Lease contains the entire agreement between the parties and
supersedes any prior negotiations, arrangements, agreements and understandings
with respect to the subject matter hereof. This Lease may not be amended except
in writing signed by the party against whom enforcement is sought.
C. The agreements contained in this Lease are not intended, nor shall
they be deemed or construed, to create a partnership between Lessor and Lessee,
to make them joint venturers, or to make either party in any way responsible for
the debts, liabilities, or losses of the other.
D. Failure of either party to enforce any rights or remedies under
this Lease shall not constitute a waiver of the violation giving rise to the
rights or remedies nor prevent such party from exercising the rights or remedies
for any subsequent violation by the other party.
E. Time is of the essence with respect to all matters, dates, and
times provided in this Lease.
F. This Lease shall be interpreted and enforced in accordance with
the laws of the State of Wisconsin. If any provision of this Lease is declared
invalid or unenforceable, the
14
<PAGE> 15
remainder of the Lease shall continue in full force and effect. The section
numbers and captions of this Lease are for convenience only and are not to be
construed as defining or limiting in any way the scope or intent of the
provisions of this Lease.
G. At the request of either party, the parties agree to execute a
short form memorandum of this Lease for recording purposes.
IN WITNESS WHEREOF, the parties have caused the execution and
delivery of this Lease under seal effective the date first written above.
PROVANTAGE HEALTH SHOPKO STORES, INC.
SERVICES, INC.
By: /s/ Jeffrey A. Jones By: /s/ William S. Podany
------------------------ --------------------------
Jeffrey A. Jones, President William J. Podany, President
By: /s/ Patricia A. Nussle By: /s/ Richard D. Schepp
------------------------ --------------------------
Patricia A. Nussle, Secretary Richard D. Schepp, Secretary
15
<PAGE> 1
EXHIBIT 10.8
PROVANTAGE HEALTH SERVICES, INC.
END USER LICENSE AGREEMENT FOR PROVANTAGE PRODUCTS
This ProVantage Health Services, Inc. End User License Agreement (the
"Agreement") is entered into as of this 29th day of January, 2000, by and
between ProVantage Health Services, Inc. ("ProVantage"), having its principal
place of business at N19 W24130 Riverwood Drive, Waukesha, WI 53188, and ShopKo
Stores, Inc., including any subsidiaries and affiliates of ShopKo Stores, Inc.
("End User"), having its principal place of business at 700 Pilgrim Way, Green
Bay, WI 54307.
1. DEFINITIONS. For the purposes of this Agreement, the following terms shall
have the definitions provided:
1.1 "Confidential Information" means any information disclosed by one
party to the other party marked "confidential" or disclosed under circumstances
that would lead a reasonable person to conclude that the information was
confidential. Notwithstanding the foregoing, regardless of whether they are
marked "confidential" and regardless of the circumstances under which they are
disclosed, the following: (1) when disclosed by ProVantage to End User, shall be
considered ProVantage's Confidential Information: the Products, User
Documentation, inventions, technical specifications, technical know-how, product
development plans, program flowcharts, file layouts, educational materials,
pricing, marketing plans and customer lists or leads; and (2) when disclosed by
End User to ProVantage, shall be considered End User's Confidential Information:
DESCRIPTIONS OF SHOPKO'S STRATEGIC PLANS, DESCRIPTIONS OF SHOPKO'S AND OTHER
ENTITIES' BUSINESS OPERATIONS, FINANCIAL PERFORMANCE FIGURES, FINANCIAL
PROJECTIONS, BUSINESS, CUSTOMERS, COMPUTER SYSTEMS, INVENTORY SYSTEMS,
DISTRIBUTION NETWORKS, STRATEGIES, STORE OPERATIONS, BILLING AND RECEIVABLE
OPERATIONS, HEALTHCARE INFORMATION INCLUDING CLAIMS, STRATEGIES, SYSTEMS
DEVELOPMENT, AND SOFTWARE, TECHNICAL SYSTEMS AND PRODUCT DEVELOPMENT
METHODOLOGIES AND STRATEGIES, MARKETING AND OPERATIONAL PROCEDURES AND
STRATEGIES, FINANCIAL INFORMATION AND PROJECTIONS, BUSINESS PLANS AND CLIENT
LISTS AND OTHER SIMILAR INFORMATION.
1.2 "End User" means any customer that purchases or may purchase one or
more Product or Special Product licenses for use in accordance with this End
User License Agreement. Typically, the End User will be a corporation or other
similar entity.
1.3 "Product(s)" means the designated source, object, script or text form
of the software products as listed in Exhibit A on the platforms specified in
Exhibit A. ProVantage may add to the Products listed in Exhibit A from time to
time.
1.4 "Special Product" means the combination of additional goods or
services and any Product as an integrated solution or application as listed in
Exhibit B.
1.5 "ProVantage Product License Sales Order Form" shall mean the
ProVantage document by which End User orders Product licenses and Technical
Support Services. To be effective, the ProVantage Product License Sales Order
Form must reference this Agreement and its Effective Date and be signed and
dated by both parties.
1.6 "Technical Support Services" shall mean the maintenance and support
provided by ProVantage in accordance with ProVantage's then-current technical
support policies and procedures for the applicable Product(s).
1.7 "User Documentation" means the ProVantage user manual(s) and other
on-line or written materials on the proper installation and use of the Products
or Special Products that are normally distributed with the Products.
2. RIGHTS GRANTED AND RESTRICTIONS.
2.1 License Grant. Subject to the Fees payable hereunder, ProVantage
hereby grants End-User a non-exclusive, perpetual, non-transferable license to
install and use the Product solely for End User's own internal data processing
operations, and to use the User Documentation in support of such use of the
Product. Use of the Product must be consistent with the type of license grant
specified in the ProVantage Product License Sales Order Form. End User shall not
use the Product except as specified in this Agreement and the applicable
ProVantage Product License Sales Order Form. End User shall assign each Server a
unique identification number.
2.2 License Restrictions. The rights granted in Section 2.1 of this
Agreement are expressly limited to and restricted by the following:
a. Use of the Product is restricted to designated source, object, script or
text form for End User's own internal purposes.
b. Except as explicitly authorized by this Agreement, End User may not
transfer copy, or duplicate the Product except for temporary transfer in
the event of computer malfunction and duplication as part of End User's
routine back-up procedures. End-User shall have no right to
1/00 Page 1
PROVANTAGE CONFIDENTIAL AND PROPRIETARY
UNAUTHORIZED USE, DISCLOSURE OR DUPLICATION IS STRICTLY PROHIBITED.
<PAGE> 2
manufacture, modify or copy User Documentation unless explicitly set forth
herein.
c. End User may not assign the license to use the Product without the
prior, written consent of ProVantage, which shall not be unreasonably
withheld.
d. End User may not use the Product outside of the scope of this Agreement.
e. End User may not, either directly or through a third party, cause or
permit the reverse engineering, disassembly or decompilation of the
Product.
f. End User may not pass title to the Product.
g. For Product licensed outside the United States, End User must comply
fully with all relevant export laws and regulations of the United States to
ensure that the Product is not exported, directly or indirectly, in
violation of United States law.
h. End User must use a commercially reasonable degree of care to protect
the Confidential Information of ProVantage and prohibit the End User
employees from, directly or indirectly: (1) using any Confidential
Information of ProVantage to create any computer software program or user
documentation that is substantially similar to the Product, or (2) using or
disclosing Confidential Information of ProVantage, except as authorized by
this Agreement.
i. End User must notify ProVantage promptly of any unauthorized use or
disclosure of ProVantage Confidential Information, and provide reasonable
assistance to ProVantage in the investigation and prosecution of any such
unauthorized use or disclosure.
j. End-User shall not, either directly or through a third party, use the
Products, the associated source code, or a derivative thereof, or any
Confidential Information of ProVantage, to create, modify or enhance any
computer software programs or user documentation unless explicitly set
forth herein.
k. End-User shall take all reasonable precautions against unauthorized
disclosure or copying of Product and further exercise commercially
reasonable efforts to ensure the security of the Product.
l. End-User shall not use the Product in a timeshare or service bureau
environment unless explicitly set forth herein.
3. RESERVATION OF RIGHTS AND REMEDIES. ProVantage reserves all rights not
expressly granted in this Agreement. Use of the terms "sell," "purchase" and
"price" shall not connote transfer of title or ownership.
4. PAYMENT AND PRICING.
4.1 Initial Fees. Upon execution of this Agreement, End-User shall become
obligated to pay to ProVantage the license fee(s) for the Product pursuant to
the schedule set forth in Exhibit A.
4.2 Change in Support Fees. ProVantage may change the annual fees for Technical
Support Services by providing written notice of such change to End User at least
sixty (60) days prior to the expiration of the then current annual renewal term;
provided that in no event shall the annual fee be increased by more than five
percent (5%). End User shall have thirty (30) days after receipt of such notice
to terminate the Technical Support Services.
4.3 Payment Terms.
a. All payments by End-User under this Agreement shall be made to
ProVantage in United States dollars and drawn on a United States bank. No
payment is refundable, except as provided herein.
b. Except as expressly provided herein or agreed to in writing by
ProVantage and End-User, payment is due upon receipt by End-User of the
ProVantage invoice, which invoice shall be sent concurrently with Product
shipment. Payment is late if received by ProVantage more than thirty (30)
days after the date of the ProVantage invoice. If payment is late, End-User
shall pay a late fee on the unpaid balance of one and one-half percent
(1.5%) per month or the maximum percentage permitted by law, whichever is
less. End-User agrees to reimburse ProVantage for any and all reasonable
costs incurred by ProVantage in the collection of any fees due under this
Agreement and/or repossession of Product, including reasonable attorneys'
fees.
c. ProVantage's license fees do not include any national, state or local
sales, use, value-added or other taxes, customs duties or similar tariffs
and fees that ProVantage may be required to pay upon delivery of the
Products or upon collection of the license fees or otherwise. Should any
tax, levy or other fees be assessed, End-User agrees to pay such tax or
levy and indemnify ProVantage for any claim for such tax or levy demanded.
End-User shall provide ProVantage with copies of all End-User certificates.
5. ORDER FULFILLMENT AND DELIVERY.
5.1 Placement of Orders. End-User shall submit ProVantage Sales Order Forms to
the attention of SALES DEPARTMENT at the address OF PROVANTAGE HEALTH SERVICES,
INC., 1499 SIXTH STREET, GREEN BAY, WI, 54304. Each order shall specify the
Product, name and address of the End User for whose use Product is being
ordered.
5.2 ProVantage Acceptance. All orders for Product by End-User shall be
considered accepted unless ProVantage notifies End-User in writing of the
reason(s) for non-acceptance of such order within ten (10) business days of
receipt of the order. The provisions of End-User's purchase order or other
ordering document shall not apply to any order, notwithstanding ProVantage's
acknowledgment or acceptance of such order.
1/00 Page 2
PROVANTAGE CONFIDENTIAL AND PROPRIETARY
UNAUTHORIZED USE, DISCLOSURE OR DUPLICATION IS STRICTLY PROHIBITED.
<PAGE> 3
5.3 Shipment. All Products will be shipped by ProVantage in the manner
requested by End-User to the End-User's identified facility. End-User shall be
responsible for and pay all packing, freight, and insurance charges for any
shipments made under this Agreement, which charges ProVantage may require
End-User to pay in advance.
5.4 Cancellation. ProVantage reserves the right to cancel any order placed by
End-User and accepted by ProVantage as set forth above, or to refuse or delay
shipment thereof, if End-User fails to make any payment or other obligations as
provided in this Agreement.
6. REPRESENTATIONS AND OBLIGATIONS.
6.1 End-User's Obligations.
a. Compliance with Law. End-User shall comply with all applicable
international, national, state, regional and local laws and regulations in
performing its duties hereunder and in any of its undertakings with respect
to the Products and Special Products. End-User acknowledges that all
ProVantage Products and other technical data may be subject to export
controls imposed by the U.S. Export Administration Act of 1979, as amended
(the "Act"), and the applicable regulations. End-User shall not export or
re-export (directly or indirectly) any Products or Special Products without
complying with the Act and the regulations thereunder.
b. Costs and Expenses. Except as expressly provided herein or agreed to in
writing by ProVantage and End-User, End-User shall pay all costs and
expenses incurred in the performance of End-User's obligations under this
Agreement.
c. Product Alteration. End User shall not adopt, alter, create derivative
works based on, modify or translate the Product in whole or in part.
6.2 End-User Covenants. End-User shall: (i) refrain from deceptive, misleading
or unethical practices related to the Product; (ii) make no false or misleading
representations with regard to the Product; (iii) refrain from publishing or
employing, or cooperating in the publication or employment of, any misleading or
deceptive advertising material with regard to the Product; and (iv) End User
shall not disclose or publish any results of any benchmark tests run of the
Product. End-User shall not knowingly take any action in conflict with the terms
of this Agreement or its obligations hereunder.
6.3 ProVantage Representations. ProVantage represents and warrants that its
hardware, software and firmware utilized in providing services hereunder shall
accurately process date data (including without limitation calculating,
comparing and sequencing), within, from, into and between centuries (including,
but not limited to, the twentieth and twenty-first centuries), including leap
year calculation. The hardware, software and firmware will be reviewed to ensure
compliance with the foregoing and shall include, without limitation, date data
century recognition, calculations that accommodate same century and
multi-century formula and date values and date data interface values to reflect
the century. In the event that the hardware, software and firmware are unable to
process date data within, from, into and between centuries, ProVantage shall
repair or replace noncompliant components of its systems at no cost to End-User
within a commercially reasonable time period after written notice from End-User
to ProVantage. If ProVantage determines, in it sole discretion, that it is
unable to repair its systems, End-User shall be entitled to a pro-rata reduction
in the Fees based on a 3-year useful life as set forth in Exhibit A, or End-User
may terminate this Agreement within ten (10) days of receipt of notice of
ProVantage's inability to repair its systems.
7. INTENTIONALLY LEFT BLANK.
8. MAINTENANCE.
8.1 ProVantage's Technical Support Services. ProVantage shall offer renewable,
year-long Technical Support Service agreements for the Product while the Product
is under license to the End User. The initial technical support period shall
begin upon shipment of the Products to End-User and be provided at no charge for
the first year. Such Technical Support Services shall be provided in accordance
with ProVantage's then-current Technical Support Policies and Procedures.
ProVantage's Technical Support Policies and Procedures shall be reflective and
consistent with those offered to other customers of ProVantage. End-User shall
abide by only those Technical Support Policies and Procedures of which they have
been informed. Thereafter, End-User may elect to contract for additional, yearly
Technical Support Services.
8.2 Support Services in the Event of Termination. In the case of termination of
this Agreement, so long as End-User has paid for Technical Support Services,
ProVantage shall continue to provide Technical Support Services for the balance
of any existing technical support period.
8.3 Enhancements and Updates. ProVantage may, from time to time, release
updates or enhancements. ProVantage will notify and provide End User with
updates and enhancements when such updates and enhancements have been released.
Updates will be available at no charge, provided that if any update will need to
be customized for End User, ProVantage will notify End User and the parties will
negotiate an appropriate customization fee. End User acknowledges that
ProVantage is under no obligation to issue updates or enhancements under this
Agreement and that the obligation to make available any updates or enhancements
to End-User applies only to those updates
1/00 Page 3
PROVANTAGE CONFIDENTIAL AND PROPRIETARY
UNAUTHORIZED USE, DISCLOSURE OR DUPLICATION IS STRICTLY PROHIBITED.
<PAGE> 4
and enhancements which have been commercially released by ProVantage to its
customers.
8.4 Maintenance and Support Limitations. ProVantage's obligations under this
Agreement apply only to the Product and only for the current version of the
Product and only if End User has paid ProVantage the Technical Support Service
fees specified in Exhibit A for the then-current annual period.
8.5 Incidental Expenses. For any on-site services requested by End User, End
User shall reimburse ProVantage for all reasonable, actual travel and
out-of-pocket expenses incurred by ProVantage, its employees and consultants in
connection with such services.
9. FEES, RECORDS, AND AUDIT.
9.1 Notification. End-User shall report promptly to ProVantage all claimed or
suspected defects in the Product.
9.2 Audit. ProVantage may, at its expense, upon reasonable advance written
notice, audit and inspect End User's use of the Product to verify compliance
with the terms of this Agreement. Any such audit shall be conducted during
regular business hours at End User's facilities and shall not unreasonably
interfere with End User's business activities.
10. LIMITATION OF WARRANTY AND LIABILITY.
10.1 LIMITED WARRANTY.
a. ProVantage warrants to End-User that the media containing the
Products is free from defects in material and workmanship for a period of six
(6) months from the date of receipt by the End-User. For any breach of this
warranty, End-User's exclusive remedy and ProVantage's entire liability shall
be replacement of defective media returned within the warranty period.
b. ProVantage warrants to End-User for a period of ninety (90) days
from the date of installation of the Products that each unmodified Product
will perform in substantial conformance with the functions described in the
User Documentation.
c. THE WARRANTIES ABOVE ARE EXCLUSIVE AND IN LIEU OF ALL
OTHER WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
PROVANTAGE DOES NOT WARRANT THAT END-USER'S USE OF PRODUCTS WILL BE
UNINTERRUPTED OR ERROR FREE, OR THAT THE FUNCTIONS CONTAINED IN PRODUCTS
WILL MEET END-USER'S REQUIREMENTS.
10.2 LIMITATION OF LIABILITY. PROVANTAGE'S LIABILITY FOR DAMAGES UNDER THIS
AGREEMENT (EXCEPT FOR LIABILITY FOR DAMAGES AS SET FORTH IN SECTION 11, BELOW)
SHALL BE LIMITED TO MONETARY DAMAGES, AND THE AGGREGATE AMOUNT THEREOF FOR ALL
CLAIMS RELATING TO ANY PARTICULAR PRODUCT OR SPECIAL PRODUCT SHALL IN NO EVENT
EXCEED $700,000.00. THE WARRANTIES GRANTED TO END-USER HEREIN ARE PERSONAL TO
END-USER AND SHALL NOT ACCRUE TO ANY THIRD PARTY INCLUDING ANY END USER. UNDER
NO CIRCUMSTANCES SHALL PROVANTAGE BE LIABLE FOR WARRANTIES GRANTED BY END-USER
IN EXCESS OF THOSE GRANTED TO END-USER HEREIN. NOR SHALL EITHER PARTY BE LIABLE
TO THE OTHER OR TO ANY THIRD PARTY FOR INDIRECT, INCIDENTAL, SPECIAL, OR
CONSEQUENTIAL DAMAGES, OR DAMAGES FOR LOSS OF PROFITS, REVENUE, DATA OR USE,
WHETHER IN AN ACTION IN CONTRACT OR TORT, EVEN IF THE PARTY HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES.
10.3 Reliance on Disclaimers. End-User acknowledges that ProVantage has set
its prices and entered into this Agreement in reliance on the disclaimers of
liability, the disclaimers of warranty and the limitations of liability set
forth in this Agreement and that the same form an essential basis of the bargain
between the parties.
11. INDEMNIFICATION.
11.1 Indemnification of End-User. In the event that the Products infringe a
patent or copyright or other intellectual property right of a third party, such
claims shall be subject to the terms and conditions of the Indemnification and
Hold Harmless Agreement dated July 19, 1999 between ProVantage Health Services,
Inc. and ShopKo Stores, Inc. ("Indemnification Agreement") and shall be
considered Indemnifiable Losses as defined therein. In the event a Product is
held or believed to infringe, ProVantage may choose, at its sole option, to
either: (i) obtain for End-User a license to continue using the Product or (ii)
replace or modify the Product so that it becomes noninfringing while retaining
substantially similar functionality. If neither (i) nor (ii) can be reasonably
effected by ProVantage, the parties may proceed as set forth in the
Indemnification Agreement.
11.2 Excluded Claims. Notwithstanding Section 11.1 above, ProVantage shall
not be liable to End-User for any claim arising from or based upon the
combination, operation or use of any Product with End-User's equipment, data or
programming or arising from any alteration or modification of the ProVantage
Products.
11.3 Limitation. THE PROVISIONS OF THIS SECTION SET FORTH THE ENTIRE LIABILITY
OF PROVANTAGE AND THE SOLE REMEDIES OF END-USER WITH
1/00 Page 4
PROVANTAGE CONFIDENTIAL AND PROPRIETARY
UNAUTHORIZED USE, DISCLOSURE OR DUPLICATION IS STRICTLY PROHIBITED.
<PAGE> 5
RESPECT TO INFRINGEMENT AND ALLEGATIONS OF INFRINGEMENT OF INTELLECTUAL PROPERTY
RIGHTS OR OTHER PROPRIETARY RIGHTS OF ANY KIND IN CONNECTION WITH THE
INSTALLATION, OPERATION, DESIGN, DISTRIBUTION OR USE OF PROVANTAGE PRODUCTS.
11.4 Indemnification of ProVantage. End-User agrees to indemnify, defend and
hold ProVantage harmless (including paying all reasonable attorneys' fees and
costs of litigation) against and hold ProVantage harmless from, any and all
claims by any other party resulting from End-User's negligent or tortious acts,
omissions or misrepresentations relating to the misuse of the Product,
regardless of the form of action provided that ProVantage: (i) promptly notifies
End-User in writing days of any such claim; (ii) allows End-User to have sole
control of the defense and all related settlement negotiations; and (iii)
provides End-User with the information, authority and assistance necessary to
perform End-User's obligations under this Section. Nothing in this subsection
shall be construed to imply that End User shall indemnify, defend or hold
ProVantage harmless from any claims of Product infringement from third parties
arising as a result of End User's use of the Product in accordance with this
Agreement and applicable law.
12. CONFIDENTIAL AND PROPRIETARY INFORMATION.
12.1 Confidentiality. The parties agree to hold each other's Confidential
Information in confidence during the term of this Agreement and for a period of
five (5) years after termination of this Agreement. The parties agree that,
unless required by law, they shall not make each other's Confidential
Information available in any form to any third party or use each other's
Confidential Information for any purpose other than the implementation of this
Agreement. End-User shall not use any Confidential Information of ProVantage to
create, modify or enhance any computer software program or user documentation
which is substantially similar to any Product. The obligation of the parties not
to disclose information shall not apply to information that: (i) is or becomes a
part of the public domain through no act or omission of the other party; (ii)
was in the other party's lawful possession prior to the disclosure and had not
been obtained by the other party either directly or indirectly from the
disclosing party; (iii) is lawfully disclosed to the other party by a third
party without restriction on disclosure; or (iv) is independently developed by
the other party. In the event that End-User becomes aware of an unauthorized use
or disclosure of ProVantage Confidential Information, End-User shall promptly
inform ProVantage and provide reasonable assistance to ProVantage, at
ProVantage's expense, in the investigation and prosecution of any such
unauthorized use or disclosure.
12.2 Authorized Disclosure. Either party may disclose the existence of this
Agreement, but not its content, without the prior, written consent of the other
party.
12.3 Copyright and Trademark Notices. End-User shall display all proprietary
legends included with the Product on each copy of the Products that it
distributes, and on all containers and storage media therefor. The use of
ProVantage trademark(s), brand-names and other notices of proprietary rights
shall be in the manner reasonably specified by ProVantage from time to time.
End-User agrees not to alter, erase, deface or overprint any such notice on
anything provided by ProVantage. End-User shall also include the appropriate
trademark notices when referring to any ProVantage Product in advertising and
promotional materials.
12.4 Limited Trademark License. Subject to the restrictions herein, ProVantage
hereby grants to End-User a limited, revocable license to use the trade names,
trademarks, service marks, logos and designations associated with the Products
solely in connection with the activities of End-User that are permitted under
this Agreement. End-User shall submit to ProVantage for approval, prior to use,
distribution or disclosure, any previously unused advertising, promotion or
publicity in which the trade names, trademarks, service marks, logos or
designations of ProVantage are used. ProVantage shall have the right to require,
at its sole discretion, the correction or deletion of any misleading, false or
objectionable material from any such advertising, promotion or publicity.
12.5 No Proprietary Rights. End-User has paid no consideration for the use of
ProVantage's trade names, trademarks, service marks, logos or designations, and
nothing contained in this Agreement will give End-User any ownership right,
title or interest in any of them other than as explicitly set forth in Section.
End-User acknowledges that ProVantage owns and retains all trade names,
trademarks, service marks, logos, designations, copyrights, patent and moral
rights in or associated with the Product, and agrees that it will not at any
time during or after this Agreement assert or claim any interest in or do
anything that may adversely affect the validity of any trade name, trademark,
logo, designation, copyright, patent or moral right belonging to or licensed to
ProVantage (including, without limitation, any act or assistance to any act,
which may infringe or lead to the infringement of any of ProVantage's
proprietary rights). End-User will not have or acquire by virtue of this
Agreement or otherwise any vested, proprietary or other right in the promotion
of ProVantage Products or in "goodwill" relating to the use of ProVantage's
trademarks created by its efforts hereunder. All such "goodwill" shall accrue to
ProVantage.
12.6 No Continuing Rights. Upon expiration or termination of this Agreement,
End-User shall, within ten
1/00 Page 5
PROVANTAGE CONFIDENTIAL AND PROPRIETARY
UNAUTHORIZED USE, DISCLOSURE OR DUPLICATION IS STRICTLY PROHIBITED.
<PAGE> 6
(10) days of the effective date of such expiration or termination, cease all
display, advertising and use of all ProVantage trademarks, trade names, logo or
designations and shall not thereafter use, advertise or display any trademark,
trade name, logo or designation that is, or any part of which is, similar to or
confusing with any trade name, trademark, service mark, logo, designation,
patent and moral rights associated with ProVantage.
12.7 Obligation to Protect. Each party agrees to use commercially reasonable
efforts to protect the other party's proprietary rights and to cooperate with
the other party in that party's efforts to protect its proprietary rights. Each
party agrees to notify the other party promptly of any known or suspected breach
or infringement of the other party's proprietary rights that comes to a party's
attention.
12.8 ProVantage's Use of Personal Medical Information. End User acknowledges
that ProVantage may obtain access to personal medical information of the End
User's customers, employees or enrollees. ProVantage represents and warrants
that it reasonably needs such information for the purpose of conducting a review
or audit of its operations, or ProVantage has another legal right to receive
such information. ProVantage acknowledges the confidential nature of this
information, warrants that it will not use it any illegal purpose or for any
purpose other than to fulfill ProVantage's obligations set forth herein, or
disclose it to any other party, unless required to do so by law. ProVantage
shall indemnify, defend and hold End-User harmless from ProVantage's receipt and
use of the information, including any claims, loss, costs, or expenses
(including attorney's fees) arising from ProVantage's request and use of the
information. ProVantage shall not utilize any personal medical information,
End-User data or other Confidential Information as part of any normative
database or in any other data source for any purpose.
12.9 End User's Use of Personal Medical Information. End User acknowledges
that End User may obtain access to personal medical information of the End
User's customers, employees or enrollees. End User represents and warrants that
it reasonably needs such information for the purpose of conducting a review or
audit of its operations, or End User has another legal right to receive such
information. End User acknowledges the confidential nature of this information,
warrants that it will not use it for any illegal purpose or disclose it to any
other party, unless required to do so by law. End User shall indemnify, defend
and hold ProVantage harmless from End User's receipt and use of the information,
including any claims, loss, costs, or expenses (including attorney's fees)
arising from End User's request and use of the information.
13. TERM AND TERMINATION.
13.1 Term. This Agreement shall remain in effect until it is terminated in
accordance with the provisions of this Section 13. If not otherwise specified in
the ProVantage Product License Sales Order Form, each Product license granted
under this Agreement shall remain in effect perpetually .
13.2 Termination for Cause. A party may terminate this Agreement upon written
notice at any time prior to the expiration of its stated term if: (i) a receiver
is appointed for the other party or any of its property; (ii) the other party
makes an assignment for the benefit of its creditors; (iii) any proceedings are
commenced by, for or against the other party under any bankruptcy, insolvency or
debtor's relief law; (iv) the other party is liquidated or dissolved; or (v) the
other party is in default with respect to any material term or condition of this
Agreement or any other agreement between the parties and such failure or default
continues unremedied for a period of thirty (30) days following written notice
of such failure or default.
13.3 Orders After Termination Notice. If any notice of termination of this
Agreement is given, ProVantage shall be entitled to reject all or part of any
orders received from End-User after notice but prior to the effective date of
termination.
13.4 Effect of Termination or Expiration. Upon termination of this Agreement,
End-User and ProVantage shall return to the other party, or destroy and certify
in writing to the other party the destruction of, all of the other party's
Confidential Information.
13.5 No Damages for Termination or Expiration. EXCEPT IN THE EVENT OF
TERMINATION FOR CAUSE, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR DAMAGES OF
ANY KIND, INCLUDING INCIDENTAL OR CONSEQUENTIAL DAMAGES. End-User acknowledges
that End-User has no expectation and has received no assurances that any
investment by End-User in the promotion of ProVantage Product will be recovered
or recouped or that End-User will obtain any anticipated amount of profits by
virtue of this Agreement. THE PARTIES ACKNOWLEDGE THAT THIS SECTION HAS BEEN
INCLUDED AS A MATERIAL INDUCEMENT FOR PROVANTAGE TO ENTER INTO THIS AGREEMENT
AND THAT PROVANTAGE WOULD NOT HAVE ENTERED INTO THIS AGREEMENT BUT FOR THE
LIMITATIONS OF LIABILITY AS SET FORTH HEREIN.
13.6 Survival. ProVantage's rights to, and End-User's obligations to pay
ProVantage, all amounts due hereunder, as well as the party's obligations under
Sections 2.1, 6.1(c), 6.2, 11, 12, 13 and 14 shall survive termination or
expiration of this Agreement.
1/00 Page 6
PROVANTAGE CONFIDENTIAL AND PROPRIETARY
UNAUTHORIZED USE, DISCLOSURE OR DUPLICATION IS STRICTLY PROHIBITED.
<PAGE> 7
14. GENERAL.
14.1 Source Code Escrow. In the event that ProVantage is merged, consolidated,
sells all or substantially all of its assets or implements or suffers any
substantial change in management or control, ProVantage shall deposit with an
independent escrow agent (reasonably acceptable to End-User) with experience and
knowledge of handling source code escrows, the then current version of the
source program/code of the Product and any updates and new releases from time to
time. In addition, at that time, ProVantage and End-User shall enter into a
source code escrow agreement that requires the escrow agent to release the
source program/code of the Product and a single copy of the documentation
associated therewith, to End-User for its own and sole use in the event that,
whether directly or through a successor or affiliate ProVantage ceases to be in
the Health Information Technology or software business, if ProVantage should
breach any maintenance, support or professional service obligations of the
Product, or if ProVantage should be declared bankrupt and insolvent by a court
of competent jurisdiction.
14.2 Independent Contractors. Both parties to this Agreement are independent
contractors, and shall so represent themselves to all other parties. There is no
partnership, agency, employment, franchise or joint venture relationship between
the parties. Neither party has any express or implied right or authority to bind
the other or incur any obligation on behalf of the other. In particular, nothing
herein shall be interpreted as making End-User the commercial agent of
ProVantage.
14.3 Assignment. This Agreement shall not be assigned by either party without
the prior, written consent of the other party; provided, however, that neither
party shall unreasonably withhold its consent to the assignment of this
Agreement to any successor-in-interest of the other party.
14.4 Force Majeure. Neither party shall be responsible for failure of
performance due to causes beyond its control, including, but not limited to,
acts of God or nature, labor disputes, actions of any government agency and
shortage of materials. This provision shall not apply to any obligation to pay
money under this Agreement.
14.5 Notices. Any and all notices required or permitted to be given hereunder
shall be in writing and shall be deemed to have been given two (2) business days
after deposit in the United States mail, certified or registered, postage
prepaid, or one (1) business day after deposit with an overnight delivery
service of national reputation, and in any case addressed as follows:
To ProVantage:
ProVantage Health Services, Inc.
N19 W24130 Riverwood Drive
Waukesha, WI 53188
ATTN: Sr. Vice President, HIT
with copies to:
ProVantage Health Services, Inc.
N19W24130 Riverwood Drive
Waukesha, WI 53188
ATTN: General Counsel
To End-User:
ShopKo Stores, Inc.
700 Pilgrim Way
Green Bay, WI 54307
ATTN: General Counsel
14.6 Waiver. The waiver by either party of any default by the other shall not
waive subsequent defaults of the same or different kind.
14.7 Severability. In the event that any of the provisions of this Agreement
are held invalid by a court or other tribunal of competent jurisdiction, such
provision shall be enforced to the maximum extent permissible and the remaining
portions of this Agreement shall remain in full force and effect.
14.8 Entire Agreement. This Agreement is the complete and exclusive statement
of the understanding of the parties, and supersedes all other prior
representations between them, whether oral or written, relating to the subject
matter of this Agreement. This Agreement may not be modified except in a writing
signed by an officer of ProVantage and a duly-authorized representative of
End-User. In the event of conflict between this Agreement and any other
agreement, including a statement of work, the terms and conditions set forth in
this Agreement shall control.
14.9 Construction. It is expressly agreed that the terms of this Agreement and
any ProVantage Product License Sales Order Form shall supersede the terms in any
End User purchase order or other ordering document. This Agreement shall also
supersede all terms of any unsigned or "shrink-wrap" license included in any
package, media or electronic version of ProVantage-furnished software and any
such software shall be licensed under the terms of this Agreement. When executed
and dated by both parties, any ProVantage Sales Order Forms that reference this
Agreement and its Effective Date shall be incorporated herein.
14.10 Section Headings. Section headings are for purposes of convenience and
shall not be considered part of this Agreement.
14.11 Execution of Agreement, Governing Law. This Agreement will become
effective only after it has been
1/00 Page 7
PROVANTAGE CONFIDENTIAL AND PROPRIETARY
UNAUTHORIZED USE, DISCLOSURE OR DUPLICATION IS STRICTLY PROHIBITED.
<PAGE> 8
signed by End-User and has been accepted by ProVantage. It shall be governed by
and construed in accordance with the laws of the State of Wisconsin, excluding
that body of law known as conflict of laws. Any suit hereunder will be brought
in a state or federal court in the State of Wisconsin and End-User hereby
submits to the personal jurisdiction thereof.
14.12 Due Execution. The party executing this Agreement on behalf of End-User
represents and warrants that he or she has been duly-authorized under End-User's
charter documents and applicable law to do so.
14.13 Insurance. Both parties agree to obtain and maintain during the term of
this Agreement and the term of any maintenance and support agreement, general
liability insurance coverage against claims for personal injury and advertising
injury claims which may arise during the term of this Agreement in an amount not
less than $1,000,000 per person or per organization and bodily injury and
property damage liability claims which may arise during this Agreement in an
amount not less than $1,000,000 per occurrence. Each party's general liability
insurance coverage shall also include a products/completed operations component
with an aggregate limit of not less than $1,000,000 and have a general aggregate
limit of not less than $2,000,000, and shall name the other party as an
additional insured. Both parties shall give the other party at least thirty (30)
days advance written notice of any non-renewal, cancellation or modification of
coverage.
IN WITNESS WHEREOF, THE PARTIES EXECUTE THIS AGREEMENT.
SHOPKO STORES, INC. PROVANTAGE HEALTH SERVICES, INC.
BY: /s/ Paul Burrows BY: /s/ George M. Barlow
---------------------------- -------------------------
ITS: Senior Vice President / CIO ITS: Senior Vice President HIT
---------------------------- -------------------------
DATE: January 29, 2000 DATE: January 29, 2000
-------------------------- -----------------------
1/00 Page 8
PROVANTAGE CONFIDENTIAL AND PROPRIETARY
UNAUTHORIZED USE, DISCLOSURE OR DUPLICATION IS STRICTLY PROHIBITED.
<PAGE> 9
EXHIBIT A
1. PRODUCT(S) DEFINITION: PROVQUERY - PHARMACEUTICAL DATA WAREHOUSE PRODUCT
PHYSICAL DATA MODEL
DataWarehouse
Metadata
Data Staging
DATA LOADING
Sync Sort Scripts
C - Programs
SQL - Loaders
AIX Scripts
SECURITY
Security Module
DSS OBJECTS
DSS Agent Reports
DSS WEB Reports DSS
Monitor Reports
DSS Templates
DSS Filters
DSS Metrics
PROVANTAGE NORMATIVE PHARMACY DATABASE LICENSE (NO LESS THAN _____ LIVES)
MICROSTRATEGY PRODUCT LICENSES
DSS Development
DSS Architect
DSS Executive
DSS Administrator
DSS Server
DSS WEB Server
Interfaces
DSS Agent
DSS Objects
DSS WEB
2. END USER FEES:
<TABLE>
<S> <C>
A. License Fees:
ProVQuery Product: $350,000.00 (one-time fee)
MicroStrategy Product: $0.00 (End User has already acquired license)
Pharmacy Normative Database: no charge
</TABLE>
B. Maintenance/Technical Support Service Fees:
<TABLE>
<CAPTION>
PROVQUERY TECHNICAL SUPPORT SERVICES (AFTER YEAR 1) ANNUAL FEE
<S> <C> <C>
SILVER LEVEL SUPPORT - 5 DAYS X 8 HOURS 18% of ProVQuery license fee
GOLD LEVEL SUPPORT - 5 DAYS X 24 HOURS 24% of ProVQuery license fee
PLATINUM LEVEL SUPPORT - 5 DAYS X 24 HOURS + 2 DAYS X 8 30% of ProVQuery license fee
HOURS
</TABLE>
1/00 Page 9
PROVANTAGE CONFIDENTIAL AND PROPRIETARY
UNAUTHORIZED USE, DISCLOSURE OR DUPLICATION IS STRICTLY PROHIBITED.
<PAGE> 10
EXHIBIT B
END-USER SPECIAL PRODUCTS
1. END-USER SPECIAL PRODUCTS DEFINITION. None.
1/00 Page 10
PROVANTAGE CONFIDENTIAL AND PROPRIETARY
UNAUTHORIZED USE, DISCLOSURE OR DUPLICATION IS STRICTLY PROHIBITED.
<PAGE> 11
PROVANTAGE PRODUCT LICENSE SALES ORDER FORM
The following Products are licensed under the terms and conditions specified in
the PROVANTAGE HEALTH SERVICES, INC. END USER LICENSE AGREEMENT FOR PROVANTAGE
PRODUCTS between ProVantage Health Services, Inc. ("ProVantage") and ShopKo
Stores, Inc. ("End User").
PRODUCT: PROVQUERY(TM)
END USER NAME: SHOPKO STORES, INC.
END USER ADDRESS: 700 PILGRIM WAY
GREEN BAY, WI 54307
<TABLE>
<CAPTION>
PROVQUERY PRODUCT LICENSE COMPONENTS LICENSE FEE FOR 1
<S> <C>
PHYSICAL DATA MODEL
Data Warehouse Tables, indexes and views
Metadata Tables, indexes and views
Data Staging Tables, indexes and views
DATA LOADING
Sync Sort Scripts
C - Programs
SQL - Loaders
AIX Scripts
SECURITY
Security Module
DSS OBJECTS
DSS Agent Reports
DSS WEB Reports
DSS Monitor Reports
DSS Templates
DSS Filters
DSS Metrics
</TABLE>
<TABLE>
<CAPTION>
PROVQUERY PRODUCT LICENSE FEE - 1 LICENSE $350,000 U.S.
PROVQUERY TECHNICAL SUPPORT SERVICES ANNUAL FEE
<S> <C>
FIRST YEAR SUPPORT (1/29/2000 THROUGH 1/28/2001) Included
- 5 DAYS X 8 HOURS
PROVQUERY TECHNICAL SUPPORT SERVICES FEE - FIRST YEAR INCLUDED
PROVANTAGE PHARMACY NORMATIVE DATABASE- NO CHARGE
PROVQUERY PRODUCT AND SUPPORT FEE - ORDER TOTAL $350,000 U.S.
</TABLE>
TERMS OF THIS SALES ORDER
1. This constitutes a sales order by End User for the Products listed at the
prices listed above.
2. Technical Support Services provided under this Agreement are for a period
of one year from the date of the invoice issued at product delivery.
3. Products licensed under this sales order are subject to the software
license terms and conditions of the PROVANTAGE HEALTH SERVICES, INC. END
USER LICENSE AGREEMENT FOR PROVANTAGE PRODUCTS.
4. The price quotation contained herein shall expire thirty (30) days from the
date of this quotation.
5. Prices exclude taxes and shipping charges. End User is responsible for
taxes and shipping charges.
6. The terms and pricing under this Agreement are considered Confidential
Information.
7. Data provided by ShopKo will not be included in the normative data that
ProVantage accumulates or sells.
12/99 -1-
PROVANTAGE CONFIDENTIAL AND PROPRIETARY
UNAUTHORIZED USE, DISCLOSURE OR DUPLICATION IS STRICTLY PROHIBITED.
<PAGE> 12
IN WITNESS WHEREOF, the parties execute this SALES ORDER.
SHOPKO STORES, INC.
BY:_____________________________________
ITS:_____________________________________
DATE:___________________________________
PROVANTAGE HEALTH SERVICES, INC.
BY:_______________________________________
ITS:_______________________________________
DATE:____________________________________
12/99 -2-
PROVANTAGE CONFIDENTIAL AND PROPRIETARY
UNAUTHORIZED USE, DISCLOSURE OR DUPLICATION IS STRICTLY PROHIBITED.
<PAGE> 1
EXHIBIT 10.11
PRESCRIPTION BENEFIT MANAGEMENT AGREEMENT
THIS PRESCRIPTION BENEFIT MANAGEMENT AGREEMENT ("Agreement") is made by
and between PROVANTAGE HEALTH SERVICES, INC., a Delaware corporation, with its
principal place of business at N19 W24130 Riverwood Drive, Waukesha, Wisconsin
53188, hereinafter referred to as "PROVANTAGE", and AMERICAN MEDICAL SECURITY
HOLDINGS, INC., a Wisconsin corporation ("Holdings") and its present and future
wholly-owned insurance company subsidiaries with active business (which as of
the date hereof includes United Wisconsin Life Insurance Company, a Wisconsin
insurance company, ("UWLIC") Unity HMO of Illinois, Inc., an Illinois health
maintenance organization ("Unity) and American Medical Security Health Plan,
Inc. d/b/a American Medical Healthcare, a Florida health maintenance
organization ("AMH") with their principal places of business at 3100 AMS
Boulevard, Green Bay, Wisconsin 54313, Holdings, UWLIC, Unity and AMH
hereinafter collectively referred to as "AMS."
WHEREAS, AMS has adopted various prescription drug programs referenced
on EXHIBIT A attached hereto (the "Plans") for various clients' eligible
employees and their eligible dependents (the "Plan Participants"). A description
of each Plan (the "Plan Parameters") will be communicated by AMS to PROVANTAGE
either electronically or in written hard copy format prior to the effective date
of this Agreement. Additional Plans may be added to EXHIBIT A from time to time
during the term of this Agreement. Such additions shall be evidenced by a
written Addendum to this Agreement which is signed by AMS and PROVANTAGE. The
Plan Parameters of any such additional Plans shall be communicated to PROVANTAGE
prior to the effective date thereof.
WHEREAS, PROVANTAGE is a prescription benefit manager, and maintains a
computerized claims processing system, a prescription drug mail service, and a
network of retail pharmacies (the "Participating Pharmacies") who have agreed to
provide prescription services for PROVANTAGE's clients including AMS, and
WHEREAS, additional information with respect to AMS and the Plans is
set forth on the AMS Data Sheet attached to this Agreement as EXHIBIT B (the
"Data Sheet"); and
WHEREAS, PROVANTAGE and AMS' affiliate, American Medical Security, Inc.
("AMS, Inc."), have entered into that certain Prescription Benefit Management
Agreement dated June 28, 1995 (the "1995 Agreement"), whereby PROVANTAGE has
agreed to provide prescription benefit management services to AMS upon the terms
and conditions set forth herein; and
WHEREAS, PROVANTAGE and AMS, Inc. amended the 1995 Agreement pursuant
to the First Amended and Restated Prescription Benefit Management Agreement
dated March 16, 1996 (the "1996 Agreement"); and
WHEREAS, PROVANTAGE and AMS desire to terminate the 1996 Agreement and
enter into the following agreement for the provision of Prescription Benefit
Management services, effective January 1, 2000; and
WHEREAS, PROVANTAGE and AMS have agreed to enter into the following
agreement.
I. GENERAL APPOINTMENT
1. PROVANTAGE shall be AMS' exclusive prescription benefit manager with respect
to the Plans during the Initial Term (as hereinafter defined), provided, however
that such exclusivity shall not apply to business that is acquired by AMS as a
result of an acquisition of another companies' stock, assets or block of
business, through reinsurance or otherwise (the "Acquired Business") so long as
AMS uses its
<PAGE> 2
good faith, diligent and commercially reasonable efforts to transition such
prescription business to PROVANTAGE as soon as reasonably possible, including
exercising any termination rights at the earliest possible time without
incurring any material financial penalty. As the prescription benefit manager of
the Plans, PROVANTAGE shall diligently assist AMS in establishing and
implementing prescription benefit management programs designed to lower the
total cost of Plan Participants' health care. Toward this end, PROVANTAGE shall
manage all prescription claim processes for AMS by implementing an optimal mix
of cost reduction strategies which may include, but are not limited to:
- Programs designed to increase mail service utilization;
- Formulary management services;
- Drug utilization evaluation programs, including:
- Drug utilization review programs (prospective, concurrent and
retrospective)
- Educational programs (as such programs may be developed by
PROVANTAGE from time to time)
- Disease state management processes (as such processes may be
jointly developed by PROVANTAGE and AMS from time to time)
PROVANTAGE's services, which shall be provided subject to and in accordance with
the terms and conditions of this Agreement, shall initially be prescription
claims processing, prescription drug mail services, and formulary management
services described in this Agreement, and shall include such other functions as
may be mutually agreed upon in writing by AMS and PROVANTAGE from time to time
during the term of this Agreement. AMS and PROVANTAGE agree to work together in
good faith to develop and implement mutually acceptable programs, procedures and
policies to more effectively and efficiently manage the prescription benefits
available to Participants under the Plans.
II. PRESCRIPTION CLAIMS PROCESSING
2. APPOINTMENT. Except as provided herein, AMS hereby appoints PROVANTAGE as its
exclusive Prescription Claims Processor during the Initial Term for all existing
and new business written pursuant to the Plans, and PROVANTAGE hereby accepts
such appointment.
3. AUTHORITY. PROVANTAGE hereby agrees to perform all of the following claims
processing functions with respect to the Plans, and AMS hereby grants PROVANTAGE
the authority and empowers PROVANTAGE to perform such functions:
A. To process all claims received from Participating Pharmacies
and/or eligible Plan Participants in accordance with the Plan
Parameters and this Agreement;
B. To reject or otherwise deny claims which are incomplete,
ineligible, outside the dates specified by this Agreement or
invalid for any other reason;
C. To issue checks to Participating Pharmacies for the payment of
claims;
D. To issue checks directly to Plan Participants for covered items
under the Plans if they are unable to have a Participating
Pharmacy submit the claims on their behalf at the retail and mail
reimbursement rates set forth herein;
E. To audit Participating Pharmacies as deemed necessary or
appropriate by PROVANTAGE for compliance with the specific Plan
parameters as well as for fraudulent or incorrectly submitted
claims;
F. To generate reports for AMS, Participating Pharmacies and for
PROVANTAGE's own uses;
<PAGE> 3
G. To maintain hard copy and/or computerized records of all
transactions completed hereunder for a reasonable period of time
as may be required by law;
H. To adjust the amount paid on a submitted claim so that it
accurately reflects:
i. The correct ingredient cost at the time the benefit was
received as determined by First Data Bank current drug
pricing database.
ii. The correct dispensing fee, if any.
iii. The correct sales tax, if any, for the State in which the
benefit was rendered.
iv. The correct deductible or copayment, if any, that should
have been collected.
v. To provide such other functions as may be indicated on the
Data Sheet.
I. To process prior authorizations to Plan Participants within an
average of 24 hours once all information has been received for
certain Pharmaceuticals (as hereinafter defined) where
appropriate pursuant to the terms of the Plan Parameters.
If the processing of prior authorizations by PROVANTAGE exceeds the 24 hour
guarantee set forth in subsection I, above, PROVANTAGE shall pay AMS $500 for
each instance, up to a maximum annual penalty of $5,000.
Any error by PROVANTAGE in claims processing or administration will result in
PROVANTAGE paying a financial penalty to AMS equal to the excess claim cost
incurred by Plan Participants. Additionally, PROVANTAGE guarantees that it will
have a 95% accuracy rate for claims processing and administration. Should the
processing of claims by PROVANTAGE fall below a 95% accuracy rate, PROVANTAGE
shall pay to AMS a penalty of $200 for each full percentage point that the
processing accuracy level is below the guaranteed level, up to a maximum annual
penalty of $5,000. In addition, if PROVANTAGE is below the 95% accuracy level,
PROVANTAGE shall also pay all reasonable costs incurred by AMS in auditing
PROVANTAGE's performance hereunder.
PROVANTAGE will also guarantee resolution of 95% of Plan Participant-submitted
claims within 35 days of receipt of the claim. It is understood that resolution
of the claims is dependent upon the timing of the receipt of the claims and the
next semi-monthly processing cycle. Based upon when the claim was received, the
payment or notice of denial will be mailed between five and 35 days of receipt.
PROVANTAGE's failure to meet this provision will result in PROVANTAGE paying AMS
a $500 penalty for each full day that the performance level is below the
guaranteed level up to a maximum annual penalty of $5,000. In addition,
PROVANTAGE guarantees that its claims processing system shall be available 99.5%
of the time (assuming 24 hours a day, 7 days a week) except for scheduled normal
system maintenance for which AMS has been notified; PROVANTAGE's failure to meet
such availability will result in a penalty of $1,000 per day up to a maximum
annual penalty of $5,000.
These penalties shall be in addition to any other rights, remedies or recoveries
AMS may have under this Agreement or available at law or in equity.
4. IDENTIFICATION CARDS. AMS will issue identification cards for eligible Plan
Participants containing the following information:
A. AMS' NAME*
B. PARTICIPANT'S NAME*
C. PARTICIPANT'S IDENTIFICATION NUMBER*
D. GROUP NUMBER
E. CO-PAY (IF ANY)*
F. EFFECTIVE DATES OR THE WORDS "ON-LINE ELIGIBILITY"
G. SPECIAL NOTES PERTAINING TO THE PLAN (IF APPLICABLE)
H. PROVANTAGE NAME AND LOGO
<PAGE> 4
Each single Plan Participant will be issued one card. Each Plan Participant that
has dependent coverage will be issued two cards. If a card is lost or stolen,
AMS will issue a replacement card.
5. PAYMENT OF CLAIMS. AMS assumes all financial responsibility and shall pay
for all reimbursable claims pursuant to the Plan Parameters submitted to
PROVANTAGE, whether by Participating Pharmacies or Plan Participants. AMS
further acknowledges the right of any Participating Pharmacy to proceed directly
against AMS to collect any legitimate claim which AMS has failed to pay to the
Participating Pharmacy through PROVANTAGE. This is a waiver of any claim of lack
of privity of contract between AMS and the Participating Pharmacy.
AMS shall transfer funds for the payment of valid prescription drug claims under
the Plan to PROVANTAGE pursuant to the banking arrangement between the parties
as specified in this Agreement.
6. DRUG COST CALCULATION. PROVANTAGE shall use prescription drug pricing
information and clinical databases supplied by First Data Bank, or any other
nationally recognized database. AMS agrees to hold PROVANTAGE harmless from
liability for any claim or payment arising out of inaccurate information
supplied to and used by PROVANTAGE in good faith.
7. DRUG UTILIZATION REVIEW (DUR). PROVANTAGE shall, as part of the electronic
claim adjudication process, perform Drug Utilization Review (DUR). DUR includes
drug interaction screening and other informational messages. The information
generated and provided in connection with DUR is intended as a supplement to,
and not a substitute for, the knowledge, expertise, skill, and judgment of
physicians, pharmacists and other health care providers. PROVANTAGE disclaims
all responsibility for any and all actions or interventions, taken or not taken
as a result of providing this information. AMS understands and authorizes
PROVANTAGE to inform providers that the information provided should not be
relied upon as a substitute for their professional judgment and AMS acknowledges
that DUR shall not prevent providers from dispensing prescriptions or providing
other goods and services in opposition to the information they receive under
PROVANTAGE's DUR Program. Providers are individually responsible for acting or
not acting upon the information provided through PROVANTAGE's DUR Program, and
for performing services in each jurisdiction consistent with the scope of their
professional licenses.
PROVANTAGE relies upon outside databases and software provided by other vendors
to provide information used by PROVANTAGE in its DUR Program. PROVANTAGE's
performance is limited by the information sought and received by and from these
vendors. PROVANTAGE will attempt to update these databases on a reasonable basis
to reflect changes in the standards of pharmaceutical prescribing, however, no
database will contain all currently available information. In most cases the
vendors limit or exclude warranties regarding the information provided to
PROVANTAGE for use in its DUR Program. Such limitations and exclusions shall be
communicated by PROVANTAGE to AMS, and after such communication, shall be
incorporated herein by this reference.
Further, PROVANTAGE may not have all the relevant information necessary for the
purposes of providing DUR information including, but is not limited to, patient
diagnoses, utilization of drugs obtained without using PROVANTAGE's claims
processing system or not included in the patient's active profile, patient's
medical history, and any other idiosyncrasies of a patient. PROVANTAGE shall
have no obligation to acquire information concerning any patient where
sufficient information is at any time unavailable to enable PROVANTAGE's DUR
Program to determine whether or not intervention is indicated.
PROVANTAGE's DUR Program is dependent upon the accurate transmission and
processing of data by electronic means. AMS agrees to hold PROVANTAGE harmless
from liability for any intervention or non-intervention resulting from any
interruption in the electronic processing regardless of the reason for said
interruption, except if PROVANTAGE is directly responsible for said
interruption. Because of the large number of computer systems and software in
use by providers, PROVANTAGE cannot and does not guarantee that a provider is
technically capable of receiving DUR information.
<PAGE> 5
Except as provided herein, PROVANTAGE disclaims all express and implied
warranties of any kind, including but not limited to, any warranty as to the
quality, accuracy or suitability for any particular purpose of the information
generated and provided through DUR. PROVANTAGE disclaims any liability for
consequential, incidental, exemplary, punitive or special damages incurred
directly or indirectly in connection with PROVANTAGE's performance of or
omission to perform, DUR services or resulting from reliance on or use of
information furnished under PROVANTAGE's DUR program.
8. REPORTS AND STATEMENTS. PROVANTAGE shall provide AMS with a detailed report
on all claims paid or rejected on its behalf. In addition PROVANTAGE shall
provide a claim tape to AMS within seven business days following the end of a
payment cycle. PROVANTAGE shall provide all standard management reports to AMS
within 15 calendar days from the end of any relevant reporting period.
PROVANTAGE shall pay to AMS $250 per business day for each claim tape or batch
of reports that is not delivered within the number of days guaranteed, up to a
maximum annual penalty of $5,000. This penalty shall be in addition to any other
rights, remedies or recoveries AMS may have under this Agreement or available at
law or in equity.
AMS shall be permitted to review at PROVANTAGE's premises the quarterly reports
generated and maintained by PROVANTAGE evidencing PROVANTAGE's performance under
this Agreement with respect to the various performance guarantees set forth
herein.
PROVANTAGE shall provide all Participating Pharmacies which submit claims for
reimbursement with a remittance report.
9. AUDIT. PROVANTAGE will perform audits of Plan Participants' claims or
Participating Pharmacies at its own discretion to ensure the integrity and
validity of the claims it receives and processes on behalf of AMS, provided,
however that PROVANTAGE guarantees (i) routine statistical audits of at least 2%
of the Participating Pharmacies on an annual basis, and (ii) if after a review
of statistical audit results, an on-site audit is justified, PROVANTAGE will
perform an on-site audit of 1% or more of Participating Pharmacies on an annual
basis. Should PROVANTAGE fail to perform the statistical or onsite audits of the
Participating Pharmacies in accordance with this Paragraph, PROVANTAGE shall pay
to AMS a penalty of $500 for each Participating Pharmacy that it did not audit,
up to an annual maximum penalty of $5,000. This penalty shall be in addition to
any other rights, remedies or recoveries AMS may have under this Agreement or
available at law or in equity.
AMS may receive copies of these summarized audits on an annual basis. In
addition, AMS can review all results of the audits on PROVANTAGE's premises upon
request and after providing advance notice. If PROVANTAGE finds grounds for
denying or charging back any claims AMS will be notified. In the event that an
audit of a Participating Pharmacy by PROVANTAGE results in additional funds due
to AMS, AMS shall receive 90% of such funds and PROVANTAGE shall retain 10%.
AMS may also request an audit of a specific claim or Participating Pharmacy, to
be conducted at AMS' expense. In the event that an audit of a Participating
Pharmacy by AMS results in additional funds due to AMS, AMS shall receive 100%
of such funds.
PROVANTAGE's own books and files will be available for AMS' inspection during
regular business hours. However, AMS may only inspect PROVANTAGE's books and
files as they pertain to AMS' Plans and PROVANTAGE's compliance with this
Agreement in accordance with ProVantage's External Account Audit Policy (the
"Policy"). While AMS agrees to follow all audit procedures in the Policy, in the
event there is a direct conflict between specific terms in this Agreement and
specific terms in the Policy relating to fees and scope of auditing, this
Agreement shall control.
In accordance with Section 3(A) above, PROVANTAGE agrees that 100% of the claims
that are administered and processed by PROVANTAGE will be in accordance with the
terms of the Plan Parameters and this Agreement including, but not limited to,
EXHIBIT B. AMS, at its own cost and
<PAGE> 6
expense, shall have the right to audit PROVANTAGE's books and records to ensure
compliance with this provision. If an outside auditing firm is utilized by AMS
to audit the accuracy of the claims administered and processed by PROVANTAGE
hereunder, PROVANTAGE shall share in the cost of such outside auditing firm
provided that PROVANTAGE has had input in the selection of such outside auditing
firm.
10. COMPENSATION. AMS agrees to pay to PROVANTAGE such compensation as
indicated on the Data Sheet. PROVANTAGE will provide AMS an itemized monthly
bill. PROVANTAGE shall have the right after the initial term of this Agreement
to change the level of compensation PROVANTAGE receives hereunder upon sixty
(60) days written notice to AMS. AMS may object to any increase in such
compensation by giving written notice to PROVANTAGE at least thirty (30) days
prior to the expiration of the sixty (60) day period. In the event the parties
cannot agree on an appropriate level of compensation, this Agreement shall
terminate at the end of the sixty (60) day period or at such later date as may
be mutually agreed to by the parties.
11. BILLING CYCLE AND PAYMENTS. AMS hereby authorizes PROVANTAGE to debit the
account indicated on the Data Sheet for prescription drug claims and other
charges authorized hereunder. Such debits shall be made via Automated Clearing
House ("ACH"). PROVANTAGE will bill AMS or AMS' designee on a semi-monthly basis
to enable payment of valid claims submitted to PROVANTAGE in a timely manner.
The first billing statement of every month will include charges for all claims
submitted by Participating Pharmacies and for all mail services rendered between
the first (1st) and the fifteenth (15th) of the month. The second billing
statement of every month will include charges for all claims submitted by
Participating Pharmacies and all mail services rendered between the sixteenth
(16th) and the last day of the month. The first billing statement of each month
will be mailed on the sixteenth (16th) of each month, or the first business day
thereafter. The second billing statement of each month will be mailed on the
first (1st) day of the following month, or the first business day thereafter.
AMS' account will be debited via ACH on the twenty second (22nd) of each month,
or the first business day thereafter, for the first monthly billing statement.
AMS' account will be debited via ACH on the seventh (7th) day of the following
month, or the first business day thereafter, for the second monthly billing
statement.
AMS warrants to PROVANTAGE that it shall make available for debit sufficient
funds to meet the full amount of each invoice submitted to AMS by PROVANTAGE.
All bills shall be deemed to have been received by AMS on the third (3rd) day
after the date said bill was mailed, or by the end of the next business day if
sent by facsimile or express mail. Payments more than 7 days past due shall be
subject to interest at the rate of one half of one percent per semi-monthly
billing period (twelve percent (12%) per annum) or the maximum portion thereof
allowed by law.
12. OPTIONAL PROGRAMS. AMS may participate in any one or more of PROVANTAGE's
Optional Programs, as described in the Plan Parameters.
13. NEW STANDARD CLINICAL PROGRAMS. At no additional cost to AMS, PROVANTAGE
shall offer to AMS its new standard program offerings including (i) its
enhancements to formulary management services, (ii) drug conflict surveillance,
(iii) price parity, (iv) quantity/length of therapy edits, (v) non-clinical
prior authorization, (vi) utilization analysis/review and recommendations, (vii)
concurrent DUR. Such programs are further described in Section 2 of a certain
December 1, 1999 proposal by PROVANTAGE to AMS (the "Standard Clinical
Programs"), a copy of which is attached hereto as EXHIBIT C and made a part
hereof. PROVANTAGE and AMS shall work cooperatively in the implementation of
such additional programs and services to be performed by PROVANTAGE. In
addition, PROVANTAGE agrees to offer to AMS any other relevant services or
programs that it makes available to PROVANTAGE's other clients at terms to be
agreed upon by the parties.
<PAGE> 7
III. PRESCRIPTION DRUG MAIL SERVICE
14. APPOINTMENT. Except as provided herein, AMS hereby appoints PROVANTAGE as
its exclusive Prescription Drug Mail Service provider for the Plans during the
Initial Term, and PROVANTAGE hereby accepts such appointment.
15. AUTHORITY. PROVANTAGE hereby agrees to perform all of the following
services with respect to the Plans, and AMS hereby grants PROVANTAGE the
authority and empowers PROVANTAGE to perform such services:
A. To provide and dispense all prescribed legend drugs, insulin
and insulin syringes, (collectively referred to herein as
"Pharmaceuticals"), as set forth in the Plan Parameters,
subject to availability. Such Pharmaceuticals shall be
supplied in amounts prescribed by a physician, or as indicated
in the Plan Parameters. Whenever possible, and subject to
state guidelines and the dispensing pharmacist's professional
discretion, PROVANTAGE agrees to dispense the generic drug or
the lowest cost equivalent item currently available to
PROVANTAGE. In addition, at the request of a Plan Participant,
PROVANTAGE shall also dispense Pharmaceuticals not covered by
the Plan Parameters at the expense of Plan Participants in
accordance with EXHIBIT B.
B. To label and package the Pharmaceuticals as required by
applicable State and Federal Laws and Regulations and as is
consistent with industry practices and procedures.
C. To provide prepaid delivery of Pharmaceuticals to Plan
Participants' residences by U.S. Mail, UPS or an overnight
service in accordance with applicable regulations and industry
practices and procedures.
D. To provide, at PROVANTAGE's expense, toll free telephone lines
from 7:00 am - Midnight Central Time, Monday through Friday
and 8:00 am - 4:30 pm Central Time, Saturday, computer
services, informational brochures and similar administrative
services as PROVANTAGE shall determine to be appropriate for
the provision of the Prescription Drug Mail Services described
herein.
16. GUARANTEED TIMELINESS OF MAIL SERVICE. PROVANTAGE shall use its reasonable
best efforts to dispense Pharmaceuticals within 48 hours of PROVANTAGE's receipt
of an acceptable prescription. Weekends and holidays are not to be included
within this 48 hour period. If a prescription requires intervention by
PROVANTAGE, PROVANTAGE shall use its reasonable best efforts to dispense
Pharmaceuticals within 120 hours of PROVANTAGE's receipt of such prescription.
AMS acknowledges that PROVANTAGE shall not be responsible for causes and
circumstances beyond the reasonable control of PROVANTAGE and that PROVANTAGE
shall have no liability to AMS or its Plan Participants as a result of any delay
in preparation or delivery of Pharmaceuticals beyond the reasonable control of
PROVANTAGE. PROVANTAGE shall provide AMS with a quarterly report detailing the
timeliness of PROVANTAGE's processing of the Pharmaceuticals. In the event that
the actual turnaround time of performance in any one calendar year is less than
that which was guaranteed by PROVANTAGE hereunder, PROVANTAGE shall pay AMS $300
for each full percentage point required to meet the guaranteed turnaround time
up to a maximum annual penalty of $5,000.
These penalties shall be in addition to any other rights, remedies or recoveries
AMS may have under this Agreement or available at law or in equity.
PROVANTAGE shall have no obligation to provide Pharmaceuticals to any Plan
Participant until PROVANTAGE receives from such Plan Participant any applicable
copayment charges. In the event that PROVANTAGE receives a request from a Plan
Participant to dispense Pharmaceuticals on an expedited basis, PROVANTAGE shall
collect such additional expedited costs from the Plan Participant.
<PAGE> 8
17. PRESCRIPTIONS. PROVANTAGE assumes no liability or responsibility for the
accuracy, efficacy or timely receipt of prescriptions, orders or other
directions by physicians to supply Pharmaceuticals to Plan Participants.
PROVANTAGE reserves the right to refuse to fill any prescription that
professional judgment dictates should not be dispensed. Notwithstanding the
foregoing., PROVANTAGE guarantees a 99.99% accuracy rate for dispensing
Pharmaceuticals hereunder and shall reimburse AMS for the drug cost and
dispensing fee of any inaccurately dispensed Pharmaceutical. In the event that
the accuracy ratio falls below that which was guaranteed in any one calendar
year, PROVANTAGE will pay to AMS $300 for each tenth of a percent required to
meet the guaranteed rate up to a maximum annual penalty of $5,000. AMS shall be
permitted to review at PROVANTAGE's premises the quarterly reports generated and
maintained by PROVANTAGE detailing the accuracy of PROVANTAGE's processing of
the Pharmaceuticals.
These penalties shall be in addition to any other rights, remedies or recoveries
AMS may have under this Agreement or available at law or in equity.
18. BILLING AND REIMBURSEMENT. With respect to each prescription filled by
PROVANTAGE, AMS shall pay PROVANTAGE the charges set forth in the Data Sheet
attached hereto or the applicable Plan Parameters plus any applicable state or
federal sales or use taxes.
19. REPORTS. PROVANTAGE shall furnish to AMS a monthly report reflecting the
Pharmaceuticals dispensed pursuant to this Agreement, the details of which AMS
agrees to treat as confidential under applicable federal and state guidelines.
IV. FORMULARY MANAGEMENT
20. APPOINTMENT. Except as provided herein, AMS hereby appoints PROVANTAGE as
its exclusive formulary management agent for the Plans during the Initial Term,
and PROVANTAGE hereby accepts such appointment.
21. AUTHORITY. PROVANTAGE hereby agrees to perform various formulary management
services with respect to the Plans, and AMS hereby grants PROVANTAGE the
authority and empowers PROVANTAGE to perform those formulary management services
as described herein, and as may be agreed to in writing from time to time by AMS
and PROVANTAGE. In addition, PROVANTAGE shall offer to AMS those formulary
management services as described in Paragraph 1 of the Standard Clinical
Programs as set forth on EXHIBIT C. PROVANTAGE and AMS shall work cooperatively
in the implementation of such services to be performed by PROVANTAGE. In
addition, PROVANTAGE agrees to offer to AMS any other relevant formulary
management services or programs that it makes available to PROVANTAGE's other
clients at terms to be agreed upon by the parties.
22. PROVANTAGE FORMULARY. The PROVANTAGE formulary (the "Formulary") is a
prescription drug formulary containing a listing of preferred medications in the
most commonly prescribed therapeutic categories. The Formulary has been prepared
by licensed clinical pharmacists, and is based upon evaluation of the quality,
efficacy, safety and cost of various pharmaceutical products. The list of drugs
on the Formulary may be modified from time to time as a result of PROVANTAGE's
continuing evaluation of the Formulary, based upon factors including but not
limited to medical appropriateness, manufacturer rebate arrangements and patent
expirations.
PROVANTAGE and AMS agree to implement the Formulary with respect to the Plans
and hereby grants AMS the right to use, during the term of this Agreement,
PROVANTAGE's Formulary. AMS shall distribute copies of the Formulary to all Plan
Participants at the time identification cards are sent out. With AMS' full
cooperation and assistance, PROVANTAGE may implement various Formulary
compliance programs and cost containment initiatives, which may include
communication with Plan Participants, Participating Pharmacies and/or treating
physicians. The parties will work together in good faith to develop innovative
products, including products utilizing restrictive drug formularies and/or
<PAGE> 9
restrictive pharmacy networks. PROVANTAGE agrees to provide to AMS updates to
the Formulary at least quarterly and agrees to cooperate with AMS in AMS'
suggested modifications to such Formulary.
AMS understands and agrees that AMS' right to utilize the Formulary is limited
solely to AMS' own use in connection with the Plans. AMS further understands and
agrees that, except in connection with such limited use, AMS shall at no time
copy, distribute, sell or otherwise provide the Formulary to any third party
without PROVANTAGE's prior written approval. On or prior to termination of this
Agreement, AMS shall cease all use of the Formulary and shall return to
PROVANTAGE all copies in its possession. Plan Participants and any other parties
to whom AMS has provided the Formulary shall be instructed by AMS to discontinue
use of the Formulary and to destroy all copies on or before the effective date
of termination. Upon PROVANTAGE's request, AMS shall provide proof to PROVANTAGE
that it has complied with all of the terms and conditions set forth in this
paragraph.
If PROVANTAGE implements a program that causes a Plan Participant's prescription
to be changed from one chemical entity to another without first gaining the
consent of AMS, PROVANTAGE shall pay AMS a penalty of $1,000. PROVANTAGE shall
also reimburse AMS for any excess amount paid by the Plan Participant for a
higher cost drug. ProVantage understands and agrees to this provision up to a
maximum penalty of $5,000 per year.
This penalty shall be in addition to any other rights, remedies or recoveries
AMS may have under this Agreement or available at law or in equity.
23. PHARMACEUTICAL MANUFACTURER'S INCENTIVE PAYMENTS. Incentive payments may be
received from certain pharmaceutical manufacturers as a result of the inclusion
of such manufacturers' products on the Formulary ("Incentive Payments").
PROVANTAGE will provide AMS with the amount of Incentive Payments received by
PROVANTAGE on behalf of AMS or the Plans, based upon the utilization of
participating manufacturers' Formulary included drugs to Plan Participants, as
described in Part 6 of the Data Sheet.
AMS agrees that during the term of this Agreement, neither AMS nor the Plans
will directly or indirectly negotiate or arrange or contract in any way with any
entity for Incentive Payments related to the purchase of prescription drugs from
any pharmaceutical manufacturer during the Initial Term of this Agreement. In
the event AMS or any of the Plans negotiate or arrange with a pharmaceutical
manufacturer or any other entity for Incentive Payments related to the purchase
of prescription drugs or services during the Initial Term of this Agreement,
PROVANTAGE may, in addition to any other remedy available at law or in equity,
immediately terminate AMS' and the Plans' participation in the PROVANTAGE
Formulary program, and PROVANTAGE shall be entitled to retain 100% of any and
all Incentive Payments due to AMS under this Agreement which have not been paid
to AMS as of the date AMS' participation so terminates. The parties acknowledge
and agree however that AMS reserves the right to submit requests for proposals
to other prescription benefit managers nine months prior to the end of the
Initial Term of this Agreement, and PROVANTAGE shall not consider such activity
to be a violation of this Section or the Agreement as long as PROVANTAGE remains
the exclusive provider of services hereunder in accordance with the terms of
this Agreement.
V. GENERAL TERMS AND CONDITIONS
24. APPLICABLE PLAN. AMS authorizes PROVANTAGE to fill prescriptions and
reimburse Participating Pharmacies or Plan Participants in accordance with this
Agreement, including the Plan Parameters and the Data Sheet. The Plan Parameters
are expressly incorporated into this Agreement and must be completed prior to
PROVANTAGE providing any services hereunder. The Plans shall be in effect for
the term of this Agreement unless modified by AMS. AMS may elect to amend the
Plans, with sufficient written notice to PROVANTAGE.
<PAGE> 10
25. TERM OF AGREEMENT. Subject to the terms and conditions of the following
paragraph, the initial term and commencement date of this Agreement shall be
three (3) years commencing January 1, 2000, as indicated on the Data Sheet, and
ending at the close of business on December 31, 2002 (the "Initial Term"). At
the end of the Initial Term, and on each anniversary thereafter, the term of
this Agreement shall automatically renew for successive one (1) year terms,
unless either party notifies the other party of its intent to terminate this
Agreement at the end of the then-current term, which notice shall be given at
least ninety (90) days prior to the expiration of the then-current term.
26. TERMINATION. This Agreement may be terminated by either party as of the
date written notice of such termination is received by the other party in the
event that:
A. any law or regulation becomes effective after the date of this
Agreement which would render the services provided by PROVANTAGE under
this Agreement in violation of such law or regulation; or
B. any law or regulation becomes effective after the date of this
Agreement which would render the Plans provided by AMS under this
Agreement in violation of such law or regulation; or
C. the non-terminating party fails to make any of the payments referred
to in this Agreement or breaches any of the other terms and provisions
of this Agreement, and such payment is not made (in the absence of a
bona fide dispute) or such breach is not cured within 30 days after
the date the terminating party has given written notice to the other
of such late payment or breach; or
D. the non-terminating party shall make an assignment for the benefit of
creditors, is adjudicated insolvent, has a receiver or trustee
appointed for a substantial part of its property, or has a proceeding
commenced against it which will substantially impair its ability to
perform hereunder.
In addition, AMS shall have the right to terminate this Agreement in the event
that PROVANTAGE does not allow a Regulator (as hereinafter defined) or AMS or
its designated outside auditing firm access to PROVANTAGE and its books and
records for auditing purposes in connection with Paragraphs 9 and 33 of this
Agreement, provided AMS has provided reasonable notice of such audit, agrees to
the reasonable audit procedures in PROVANTAGE'S External Account Audit Policy
and the requested audit procedure would not have a disruptive effect on the
normal service levels provided by PROVANTAGE to its other clients.
AMS is responsible for all of PROVANTAGE's post termination processing charges
in accordance with the terms of this Agreement. Claims that are received and
processed by PROVANTAGE after termination will be subject to the rate so
specified on the Data Sheet for a period of NINETY (90) days after the effective
date of termination of this Agreement. AMS remains responsible for the payment
of all claims submitted to PROVANTAGE with a date of service prior to the
effective date of termination, as well as all of PROVANTAGE's administrative
charges during the NINETY (90) day period after termination.
PROVANTAGE shall have the right to advise Participating Pharmacies that
effective on the termination date, AMS' Plan Participants are not eligible to
receive benefits under the Plan. The post-termination fees indicated on the Data
Sheet will apply. The termination of this Agreement by either party shall not
affect any liabilities of AMS for the payments and charges due PROVANTAGE or its
Participating Pharmacies. These rights shall be in addition to all other rights
and remedies of PROVANTAGE as allowed by law or in equity. In addition, the
termination of this Agreement by either party shall not relieve PROVANTAGE or
its Participating Pharmacies of its/their post termination responsibilities.
These rights shall be in addition to all other rights and remedies of AMS as
allowed by law or in equity.
<PAGE> 11
27. CHANGE OF CONTROL. In the event that AMS experiences a Change of Control
(as hereinafter defined) and either (i) this Agreement is terminated following
such Change of Control during the Initial Term, except in accordance with
Section 26, or (ii) AMS loses an amount equal to or greater than one-third of
its total Plan Participants as compared to its total Plan Participants as of the
date hereof (a "Substantial Loss of Lives"), the parties acknowledge that
PROVANTAGE will suffer a material adverse impact on its business which may not
be susceptible of precise determination. In such event, AMS shall pay to
PROVANTAGE the sum of $100,000 per month for every full calendar month between
the date of AMS' termination and December 31, 2002. AMS acknowledges and agrees
that the foregoing amounts are a reasonable approximation of the damages
PROVANTAGE will suffer due to a Change of Control that results in an early
termination by AMS or a Substantial Loss of Lives and shall be deemed liquidated
damages and not a penalty. This Section 27 shall apply to any successor or
assignee of AMS permitted under this Agreement.
For purposes of this Paragraph, a "Change of Control" shall be deemed to have
occurred if, after the Commencement Date of the Agreement a majority of
Directors of American Medical Security Group, Inc. ("AMSG") cease to continue to
serve as Directors of AMSG as the direct or indirect result of, or in connection
with the occurrence of: (a) any person, including a "group" as defined in
Section 13(d)(3) of the Securities Exchange Act of 1934, becoming, directly or
indirectly, the beneficial owner of securities of the Company, or any other
subsidiary, representing more than fifty percent (50%) of the combined voting
power of the then outstanding securities of AMSG that may be cast for the
election of Directors of the Company; or (b) a cash tender or exchange offer, a
merger or other business combination, a contested election of directors, or any
combination of these transactions.
28. RELATIONSHIP BETWEEN PARTIES. Nothing in this Agreement shall be construed
to constitute either party a partner, joint venturer, employee or agent of the
other, nor shall either party have authority to bind the other in any respect,
it being intended that each shall remain an independent contractor solely
responsible for its own actions. No employee or agent of one party hereto shall
be considered an employee or agent of the other party hereto. The Participating
Pharmacies which provide services to the Plan Participants shall also do so as
independent contractors.
29. LIST OF ELIGIBLE PLAN PARTICIPANTS. The parties acknowledge that PROVANTAGE
has a list of all eligible Plan Participants and the current Plan Parameters.
AMS is responsible for providing PROVANTAGE with any changes to such list or
parameters, (additions, deletions and/or terminations) in writing as soon as
reasonably possible after they occur. Provided AMS has provided PROVANTAGE with
accurate and complete eligibility data, PROVANTAGE shall update its eligibility
records within one business day after receipt from AMS. PROVANTAGE agrees that
its failure to process batch eligibility data within this timeframe due to
errors by PROVANTAGE or failures within PROVANTAGE's system will result in
PROVANTAGE paying to AMS a penalty of 4% of PROVANTAGE's electronic claims
administrative fee for the then current billing period for each incident for
which PROVANTAGE has a failure hereunder, up to a maximum annual penalty of
$5,000. This penalty shall be in addition to any other rights, remedies or
recoveries AMS may have under this Agreement or available at law or in equity.
In the event of a Plan Participant's termination, such Plan Participant(s) and
their dependents will be considered eligible for up to one full business day
after notification has been received by PROVANTAGE. Until such time, AMS will be
responsible for all liabilities incurred by the terminated Plan Participant(s)
and their dependents. AMS shall hold PROVANTAGE harmless and without liability
for any errors or omissions, or any related problems that may result from AMS'
failure to provide an accurate, updated listing of eligible Plan Participants.
30. COMMUNICATION TO PLAN PARTICIPANTS.PROVANTAGE recognizes the relationship
between AMS and Plan Participants. As such, PROVANTAGE shall not communicate
directly with Plan Participants except in its performance of its services
hereunder. PROVANTAGE shall provide AMS with a draft of all written non-standard
communications to be sent to Plan Participants for AMS' prior review.
<PAGE> 12
31. NON-LIABILITY. Without limiting any other indemnification set forth
elsewhere in this Agreement, AMS agrees to indemnify, defend, and hold
PROVANTAGE harmless from liability for any claim, injury, demand or judgment
based on contract, tort, or other grounds (including warranty of
merchantability) arising directly or indirectly out of:
A. PROVANTAGE's providing Drug Utilization Review (DUR) services
described herein; and
B. Payment of fraudulent claims or filling of fraudulent prescriptions if
the fraud is committed by AMS, a Plan Participant or any party other
than PROVANTAGE. "Fraudulent claims" shall include: (i) the
unauthorized, illegal or wrongful use of any card issued by AMS to any
of AMS' Plan Participants, and (ii) the wrongful use of any card that
is lost or stolen until notification is received by PROVANTAGE.
AMS acknowledges that the Participating Pharmacies have been chosen by
PROVANTAGE based on their willingness to provide pharmacy services to the Plan
Participants. In addition, PROVANTAGE has contractually required that the
Participating Pharmacies have met the following minimum required enrollment
criteria:
U. State and federal pharmacy licenses;
V. Possession of individual practitioner's malpractice insurance;
W. Possession of pharmacy's malpractice insurance;
X. Federal tax identification number;
Y. Proof of individual pharmacist's licensing; and
Z. Acceptable disciplinary history.
PROVANTAGE has not performed any other investigation or review of any
Participating Pharmacy's operations.
In addition, and without limiting the generality of the foregoing, each party
agrees to indemnify, defend and hold harmless the other party and its directors,
officers and employees acting in the scope and course of their employment and
not as Plan Participants against all claims, lawsuits, settlements, judgments,
costs, penalties and expenses, including attorney's fees, with respect to this
Agreement and the acts of the indemnifying party or its employees, acting alone
or in collusion with others, if it determined that the indemnified party's
liability therefor was the direct consequence of negligence, criminal conduct or
fraud on the part of the indemnifying party or its directors, officers or
employees.
32. NOTICES. All notices provided for in this Agreement shall be in writing and
shall be sent by registered or certified mail, express mail, facsimile, or
delivered in person to the other party at the address above or indicated on the
Data Sheet or such other address as may be provided to the other party in the
same manner as that provided for giving of any notice. All notices shall be
deemed to have been received on the third (3rd) day after the date said notice
was mailed; or twenty four (24) hours following the time of said notice if sent
by facsimile, or immediately upon personal delivery.
33. COOPERATION WITH REGULATORY AUDITS. PROVANTAGE acknowledges that AMS is
involved in the business of insurance, and as such, AMS is subject to certain
laws related to the business of insurance. PROVANTAGE also acknowledges that the
services provided by PROVANTAGE hereunder are related to AMS' providing its
insurance services to Plan Participants. In the event that it is requested by a
state's insurance regulator or its agent or representative (collectively a
"Regulator") that
<PAGE> 13
the Plans or the related services provided by PROVANTAGE be examined, audited or
inspected, PROVANTAGE shall make its books and records and all other aspects of
its operations related to this Agreement available to such Regulator for such
examination, inspection or audit, as required by applicable law.
34. MAINTENANCE OF RECORDS. PROVANTAGE shall maintain such records with regard
to services provided hereunder as it shall determine to be necessary and
appropriate under the circumstances and as may be required under applicable
laws, rules and regulations. PROVANTAGE shall have no responsibility for the
maintenance of any records by or which are the obligation of AMS. Records kept
by PROVANTAGE with respect to AMS' Plan Participants may be reviewed by AMS
during regular business hours, at AMS' expense provided, however, that no such
review shall relate to records for prescriptions dispensed more than two (2)
years prior to the date such review is requested, except if requested by a
Regulator.
35. OWNERSHIP OF INFORMATION. AMS shall be the owner of administration and
claims processing information in accordance with applicable state laws,
including insurance regulations and rules. Upon termination of this Agreement,
at AMS' option, such information shall be forwarded to AMS at AMS' sole cost and
expense. PROVANTAGE shall have the right to use all such information for
purposes of this Agreement.
36. ACCESS TO PROLINK AND PROVQUERY. Subject to a separate license agreement(s)
to be negotiated by the parties, at no fee, PROVANTAGE will grant to AMS a
personal, non-transferable, non-exclusive license to use PROVANTAGE's ProLink
and ProVQuery programs in connection with this Agreement.
37. CLIENT SERVICE TEAM. PROVANTAGE shall establish an AMS Account Service Team
("AMS Service Team") during the term of this Agreement. Initially the team
should be headed up by Glen Laschober. In addition, PROVANTAGE will have
representatives from its Benefit Design and Analysis, National Accounts,
Information Systems, Marketing, Trade Relations, Clinical and Operations
Departments. The AMS Service Team shall meet with representatives from AMS for a
full day each month during the term of this Agreement to identify cost
reductions, service level improvements and sales and marketing opportunities
that positively impact AMS. Should PROVANTAGE change AMS' primary contact in
Client Relations without AMS' consent as to such contacts replacement, which
consent shall not be unreasonably withheld, PROVANTAGE shall pay AMS a $5,000
penalty. In addition, should PROVANTAGE fail to meet with AMS within two weeks
of any scheduled meeting in accordance with this Paragraph for reasons unrelated
to AMS, PROVANTAGE shall pay AMS a penalty of $500 per occurrence up to a
maximum annual penalty of $5,000. These penalties shall be in addition to any
other rights, remedies or recoveries AMS may have under this Agreement or
available at law or in equity.
38. CONFIDENTIALITY. Each party to this Agreement agrees that it shall receive
and hold in confidence any knowledge or information (including this Agreement
and all compensation, terms and conditions thereof) concerning the affairs or
business of the other party, and the other party's programs, procedures, or
systems and will not, during or after the term hereof, disclose same to any
third party or use same for the benefit of itself or any other person, firm or
corporation related to or associated with it in any way, except as may be
required for the performance of this Agreement or as may be required by law.
Each party agrees to hold the other party harmless from liability for any claim,
injury, demand or action based on the unauthorized release of any of the
above-described confidential information.
In the performance of its obligations under this Agreement, PROVANTAGE will
receive private and confidential information concerning the Plan Participants.
PROVANTAGE is sensitive to the confidential nature of the files it maintains and
warrants that it shall hold all such information confidential and shall not
disclose such information to any entity other than AMS, unless required by law
or to enable its performance under this Agreement.
<PAGE> 14
39. NO THIRD PARTY BENEFICIARIES. Except as set forth in Paragraph 3 above, no
individual person, Plan Participant, insurance company, third party payer or
other entity, other than PROVANTAGE and AMS (except governmental authorities to
the extent required by law), is or shall be entitled to bring any action to
enforce any provision of this Agreement against either of the parties hereto,
and that the covenants, undertakings, and agreements set forth in this Agreement
shall be solely for the benefit of, and shall be enforceable only by, the
parties hereto, or their respective successors and assignees as permitted
hereunder.
40. EXCLUSIVITY. With respect to each Plan, PROVANTAGE shall be the sole and
exclusive provider of the services described in this Agreement to AMS during the
Initial Term of this Agreement. In the event that this Agreement automatically
renews for successive one (1) year terms after the Initial Term, PROVANTAGE
shall no longer be the exclusive provider of any of the services described in
this Agreement. However, nothing in this Agreement shall prohibit PROVANTAGE
from contracting with any other person, firm, corporation or other entity for
any purpose whatsoever for the providing or delivery of the same or similar
services as those described in this Agreement. In limitation of the foregoing,
PROVANTAGE recognizes and agrees to the exclusivity limitation in Section 1 of
this Agreement.
41. NON-DISCRIMINATION. PROVANTAGE shall not discriminate against any AMS or
Plan Participant on the basis of race, color, sexual orientation, marital
status, disability, national origin, creed, sex or age.
42. ASSIGNMENT. This Agreement shall not be assignable by either party to any
other person or entity, and any attempted assignment shall be void and of no
force and effect, unless the written consent of the non-assigning party shall
have first been obtained, which consent shall not be unreasonably withheld.
PROVANTAGE acknowledges and agrees that AMS has affiliate corporations
including, but not limited to, AMS, Inc., that perform administrative services
to Holdings, UWLIC, Unity and AMH in connection with this Agreement.
43. REGULATORY COMPLIANCE. AMS acknowledges that the Plans are or may be
"employee welfare benefit plans" as defined in the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), 29 U.S.C. ss. 1001 et seq., and the
regulations promulgated under that act. PROVANTAGE will provide AMS with any
information in PROVANTAGE's possession necessary for AMS and the Plans to comply
with any laws or regulations applicable to Plans, but AMS' compliance with any
such laws and regulations shall be the sole responsibility of AMS and/or the
Plans and AMS shall comply and ensure that the Plans comply with all such laws
and regulations. PROVANTAGE will obtain and maintain any licenses or regulatory
approvals necessary for it to perform PROVANTAGE's services under the Agreement.
AMS shall not name PROVANTAGE or represent that PROVANTAGE is, and PROVANTAGE
shall not be, a Plan Administrator or a named fiduciary of the Plan as those
terms are used in ERISA. AMS shall have complete discretionary, binding and
final authority to construe the terms of the Plan, to interpret ambiguous Plans
language, to make factual determinations regarding the payment of claims or
provisions of benefits, to review denied claims and to resolve complaints by
Plan Participants.
44. PRIOR AGREEMENTS. This Agreement is intended to supplant, replace and
supersede the 1996 Agreement, the 1995 Agreement and that certain Maintenance
Prescription Drug Plan Agreement between AMS and PROVANTAGE dated September 2,
1994 (collectively the "Prior Agreements"). As of the commencement date of this
Agreement, said Prior Agreements shall be null and void, except with respect to
any obligations which arose prior to the commencement date of the term of this
Agreement.
45. EMPLOYEES. AMS agrees that during the term of this Agreement, and for a
period of one (1) year thereafter, AMS and AMS' affiliates will not, directly or
indirectly, hire or employ, or solicit or offer employment to any employee of
ShopKo Stores, Inc. ("ShopKo") or any of ShopKo's subsidiaries, including
without limitation, PROVANTAGE, without ShopKo's prior written consent. The
foregoing limitation shall apply only with respect to ShopKo employees who,
during the term of their employment
<PAGE> 15
with ShopKo, held a management level position or any position within ShopKo's
MIS/computer systems departments.
PROVANTAGE agrees that during the term of this Agreement, and for a period of
one (1) year thereafter, PROVANTAGE and PROVANTAGE's affiliates including, but
not limited to ShopKo Stores, Inc., will not, directly or indirectly, hire or
employ, or solicit or offer employment to any employee of American Medical
Security Group, Inc., or any of American Medical Security Group, Inc.'s
subsidiaries, including without limitation, AMS, without American Medical
Security Group, Inc.'s prior written consent. The foregoing limitation shall
apply only with respect to AMS employees who, during the term of their
employment with AMS, held a management level position or any position within
AMS' IT/computer systems departments.
46. NETWORK MAINTENANCE AND ACCESS. PROVANTAGE guarantees that no more that 15%
of the Participating Pharmacies shall voluntarily terminate their agreements
with PROVANTAGE during any one calendar year during the term of this Agreement.
If more than 15% terminate in any one calendar year, PROVANTAGE shall pay AMS up
to $500 per year. In addition, PROVANTAGE will guarantee AMS access to a custom
national network of retail Participating Pharmacies that will process at least
95% of the prescription claims that would have been processed in ProVantage's
standard national network of Participating Pharmacies and further guarantees
that number of Participating Pharmacies in urban, suburban and rural categories
through GeoAccess reporting on an annual basis to ensure the following:
A. 98% of the Plan Participants living in urban areas shall have at least
one Participating Pharmacy within two miles of their home; and
B. 99.3% of the Plan Participants living in suburban areas shall have at
least one Participating Pharmacy within five miles of their home; and
C. 97.8% of the Plan Participants living in rural areas shall have at
least one Participating Pharmacy within 15 miles of their home.
Should any of the above percentages of access for the Plan Participants fall
below the levels outlined above for the access standards specified, PROVANTAGE
shall pay to AMS a $250 penalty for each percentage point by which the guarantee
is not met, up to a maximum annual penalty of $5,000.
These penalties shall be in addition to any other rights, remedies or recoveries
AMS may have under this Agreement or in accordance with applicable law.
47. INSURANCE. During the term of this Agreement, PROVANTAGE shall maintain in
effect errors and omissions insurance, and such other coverages as AMS may
reasonably request, covering PROVANTAGE and the performance of the services
hereunder, such insurance to be obtained in such amounts and from insurance
companies reasonably acceptable to AMS, and shall provide AMS with certificates
of insurance evidencing such coverage from the companies providing the same.
48. MOST FAVORED NATION STATUS. During the Initial Term of this Agreement,
PROVANTAGE agrees that its compensation package to AMS for the products and
services covered by this Agreement shall be the most favorable as PROVANTAGE
offers to any other similarly situated customer. PROVANTAGE will warrant to AMS
compliance with this provision each year during the Initial Term of this
Agreement; however, nothing in this provision or this Agreement shall obligate
PROVANTAGE to make available to AMS its agreements with other PROVANTAGE
customers.
49. FILE FORMATTING. The parties acknowledge that PROVANTAGE provided services
to AMS prior to the effective date of this Agreement utilizing file formats that
are compatible to AMS' current formats. In the event that PROVANTAGE makes any
system changes which causes the existing AMS file formats to not be compatible
with PROVANTAGE's system, AMS shall provide PROVANTAGE with its
<PAGE> 16
cost of making such file formatting change. PROVANTAGE will have the option to
either: a) have AMS make such changes and reimburse AMS for its cost, or b)
accept existing AMS file formatting and translate it at PROVANTAGE'S cost to a
file format which meets PROVANTAGE'S new requirements.
50. MISCELLANEOUS PROVISIONS. The provisions of this Agreement shall bind and
inure to the benefit of the parties hereto and their heirs, legal
representatives and successors. Failure to exercise any of the rights granted
hereunder for any one default shall not be a waiver of the right to exercise any
of these rights for subsequent default. Neither this Agreement nor any term
hereof may be changed, waived, discharged, or terminated orally, but only by an
instrument in writing signed on behalf of both parties. Time is of the essence
in the performance of each and every obligation herein imposed. This Agreement
and all Exhibits attached hereto when executed by all parties constitutes the
entire understanding between the parties hereto. In the event any provision or
part thereof contained in this Agreement shall be determined by a court of
competent jurisdiction to be invalid or unenforceable, such invalidity or
unenforceability shall not affect the validity or enforceability of any other
provision or part thereof contained herein. The headings in this Agreement are
used solely for the purpose of convenience and shall not be deemed to list the
subject of any provision or be considered in the construction thereof. This
Agreement shall be construed and enforced according to the laws of the State of
Wisconsin, without regard to principles of conflict of law, and ERISA, where
applicable . Both parties understand that it is their respective obligation to
comply with all applicable state, federal and local laws, regulations and
guidelines.
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to
begin as noted in the Data Sheet.
AMERICAN MEDICAL SECURITY HOLDINGS, INC.
By: /s/ James C. Modaff Date: January 7, 2000
--------------------------------------------- ---------------
Title: Executive Vice President, Chief Actuary
-----------------------------------------
Attest: /s/ Julie Van Straton Date: January 7, 2000
----------------------------------------- ---------------
PROVANTAGE HEALTH SERVICES, INC.
By: /s/ Glen C. Laschober Date: January 4, 2000
-------------------------------------------- ---------------
Title: Executive Vice President
-----------------------------------------
Attest: /s/ Michelle H. Fullerton Date: January 4, 2000
------------------------------------------ ---------------
(Exhibits to this agreement have been omitted and will be furnished
supplementally to the SEC upon request)
<PAGE> 1
PROVANTAGE HEALTH SERVICES, INC. AND SUBSIDIARIES
EXHIBIT 11.0 - COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
---------------------------------------------
JAN. 29, 2000 JAN. 30, 1999 JAN. 31, 1998
---------------------------------------------
<S> <C> <C> <C>
BASIC:
Net earnings $11,262 $9,482 $7,121
=============================================
Weighted average number of 15,644 12,550 12,550
outstanding common shares
Net earnings per common share -
basic (1) $ .72 $ .76 $ .57
---------------------------------------------
DILUTED:
Net earnings $11,262 $9,482 $7,121
=============================================
Weighted average number of 15,644 12,550 12,550
outstanding common shares
Number of common shares
issuable assuming exercise 1 -- --
of stock options
---------------------------------------------
Adjusted weighted average number
of outstanding common and
common equivalent shares - 15,645 12,550 12,550
assuming dilution
---------------------------------------------
Net earnings per common
share - diluted (1) $ .72 $ .76 $ .57
---------------------------------------------
</TABLE>
(1) Earnings per share are computed by dividing net earnings by the weighted
average number of outstanding common and common equivalent shares.
<PAGE> 1
EXHIBIT 21.1 - SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION
- ---- ----------------------
<S> <C>
PVHS, Inc. Delaware
ProVantage Prescription Management Services L.L.C. Wisconsin
Bravell, Inc. Wisconsin
ProVantage Mail Services, Inc. Minnesota
ProVantage Vision Management Services, Inc. Minnesota
PharMark Corporation Delaware
ProVMed, LLC Wisconsin
</TABLE>
<PAGE> 1
EXHIBIT 23.1 - INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-85495 of ProVantage Health Services, Inc. on Form S-8 of our report dated
March 8, 2000, appearing in this Annual Report on Form 10-K of ProVantage Health
Services, Inc. for the year ended January 29, 2000.
/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
April 18, 2000
<PAGE> 1
EXHIBIT 24.1 - DIRECTORS' POWERS OF ATTORNEY
DIRECTOR'S POWER OF ATTORNEY
The undersigned director of ProVantage Health Services, Inc. designates
Patricia A. Nussle with the power of substitution, as his true and lawful
attorney-in-fact for the purpose of: (i) executing his name and on his behalf
the ProVantage Health Services, Inc. Form 10-K for the fiscal year ended January
29, 2000 and any related amendments and/or supplements; (ii) generally doing all
things in his name and on his behalf in his capacity as a director to enable
ProVantage Health Services, Inc. to comply with the provisions of the Securities
Exchange Act of 1934, as amended, and all requirements of the Securities and
Exchange Commission; and (iii) ratifying and confirming his signature as it may
be signed by the attorney-in-fact to the Form 10-K and any related amendments
and/or supplements thereto.
Dated this 29th day of February, 2000.
/s/ William J. Podany
--------------------
William J. Podany
1
<PAGE> 2
DIRECTOR'S POWER OF ATTORNEY
The undersigned director of ProVantage Health Services, Inc. designates
Patricia A. Nussle with the power of substitution, as his true and lawful
attorney-in-fact for the purpose of: (i) executing his name and on his behalf
the ProVantage Health Services, Inc. Form 10-K for the fiscal year ended January
29, 2000 and any related amendments and/or supplements; (ii) generally doing all
things in his name and on his behalf in all his capacities with ProVantage
Health Services, Inc. to enable ProVantage Health Services, Inc. to comply with
the provisions of the Securities Exchange Act of 1934, as amended, and all
requirements of the Securities and Exchange Commission; and (iii) ratifying and
confirming his signature as it may be signed by the attorney-in-fact to the Form
10-K and any related amendments and/or supplements thereto.
Dated this 29th day of February, 2000.
/s/ Jeffrey C. Girard
--------------------
Jeffrey C. Girard
2
<PAGE> 3
DIRECTOR'S POWER OF ATTORNEY
The undersigned director of ProVantage Health Services, Inc. designates
Patricia A. Nussle with the power of substitution, as his true and lawful
attorney-in-fact for the purpose of: (i) executing his name and on his behalf
the ProVantage Health Services, Inc. Form 10-K for the fiscal year ended January
29, 2000 and any related amendments and/or supplements; (ii) generally doing all
things in his name and on his behalf in his capacity as a director to enable
ProVantage Health Services, Inc. to comply with the provisions of the Securities
Exchange Act of 1934, as amended, and all requirements of the Securities and
Exchange Commission; and (iii) ratifying and confirming his signature as it may
be signed by the attorney-in-fact to the Form 10-K and any related amendments
and/or supplements thereto.
Dated this 29th day of February, 2000.
/s/ Jeffrey A. Jones
---------------------
Jeffrey A. Jones
3
<PAGE> 4
DIRECTOR'S POWER OF ATTORNEY
The undersigned director of ProVantage Health Services, Inc. designates
Patricia A. Nussle with the power of substitution, as his true and lawful
attorney-in-fact for the purpose of: (i) executing his name and on his behalf
the ProVantage Health Services, Inc. Form 10-K for the fiscal year ended January
29, 2000 and any related amendments and/or supplements; (ii) generally doing all
things in his name and on his behalf in his capacity as a director to enable
ProVantage Health Services, Inc. to comply with the provisions of the Securities
Exchange Act of 1934, as amended, and all requirements of the Securities and
Exchange Commission; and (iii) ratifying and confirming his signature as it may
be signed by the attorney-in-fact to the Form 10-K and any related amendments
and/or supplements thereto.
Dated this 29th day of February, 2000.
/s/ Dale P. Kramer
------------------
Dale P. Kramer
4
<PAGE> 5
DIRECTOR'S POWER OF ATTORNEY
The undersigned director of ProVantage Health Services, Inc. designates
Patricia A. Nussle with the power of substitution, as his true and lawful
attorney-in-fact for the purpose of: (i) executing his name and on his behalf
the ProVantage Health Services, Inc. Form 10-K for the fiscal year ended January
29, 2000 and any related amendments and/or supplements; (ii) generally doing all
things in his name and on his behalf in his capacity as a director to enable
ProVantage Health Services, Inc. to comply with the provisions of the Securities
Exchange Act of 1934, as amended, and all requirements of the Securities and
Exchange Commission; and (iii) ratifying and confirming his signature as it may
be signed by the attorney-in-fact to the Form 10-K and any related amendments
and/or supplements thereto.
Dated this 29th day of February, 2000.
/s/ Terry R. Thompson
--------------------
Terry R. Thompson
5
<PAGE> 6
DIRECTOR'S POWER OF ATTORNEY
The undersigned director of Provantage Health Services, Inc. designates
Patricia A. Nussle with the power of substitution, as his true and lawful
attorney-in-fact for the purpose of: (i) executing his name and on his behalf
the ProVantage Health Services, Inc. Form 10-K for the fiscal year ended January
29, 2000 and any related amendments and/or supplements; (ii) generally doing all
things in his name and on his behalf in his capacity as a director to enable
ProVantage Health Services, Inc. to comply with the provisions of the Securities
Exchange Act of 1934, as amended, and all requirements of the Securities and
Exchange Commission; and (iii) ratifying and confirming his signature as it may
be signed by the attorney-in-fact to the Form 10-K and any related amendments
and/or supplements thereto.
Dated this 29th day of February, 2000.
/s/ Gregory H. Wolf
------------------
Gregory H. Wolf
6
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JAN-29-2000
<CASH> 39,895
<SECURITIES> 0
<RECEIVABLES> 115,664
<ALLOWANCES> 1,213
<INVENTORY> 3,713
<CURRENT-ASSETS> 160,334
<PP&E> 40,023
<DEPRECIATION> 11,107
<TOTAL-ASSETS> 257,249
<CURRENT-LIABILITIES> 102,718
<BONDS> 0
0
0
<COMMON> 182
<OTHER-SE> 144,860
<TOTAL-LIABILITY-AND-EQUITY> 257,249
<SALES> 902,390
<TOTAL-REVENUES> 902,390
<CGS> 842,045
<TOTAL-COSTS> 884,006
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,213
<INCOME-PRETAX> 19,597
<INCOME-TAX> 8,335
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,262
<EPS-BASIC> .72
<EPS-DILUTED> .72
</TABLE>
