<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1996.
REGISTRATION NO. 333-06931
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
ADVANCE PARADIGM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8099 75-2493381
(State or other jurisdiction (Primary standard industrial (I.R.S. Employer
of classification code number) Identification
incorporation or organization) No.)
</TABLE>
545 EAST JOHN CARPENTER FREEWAY
SUITE 1900
IRVING, TEXAS 75062
TELEPHONE: (214) 830-6199
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
DAVID D. HALBERT
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
545 EAST JOHN CARPENTER FREEWAY
SUITE 1900
IRVING, TEXAS 75062
TELEPHONE: (214) 830-6199
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
COPIES TO:
<TABLE>
<S> <C>
J. KENNETH MENGES, JR., P.C. CARMELO M. GORDIAN
AKIN, GUMP, STRAUSS, HAUER & FELD, S. MICHAEL DUNN
L.L.P.
SUITE 4100 BROBECK, PHLEGER & HARRISON LLP
1700 PACIFIC AVENUE 301 CONGRESS AVENUE, SUITE 1200
DALLAS, TX 75201-4618 AUSTIN, TX 78701
(214) 969-2800 (512) 477-5495
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED (1) PER SHARE (2) OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value................ 2,973,196 Shares $13.00 $38,651,548 $13,328(3)
<FN>
(1) Includes 387,800 shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a).
(3) Includes $11,897 paid on June 26, 1996 and an additional $1,451 paid on
September 10, 1996.
</TABLE>
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ADVANCE PARADIGM, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION IN FORM S-1 LOCATION OR CAPTION IN PROSPECTUS
----------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus....................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................... Inside Front Cover Page
3. Summary Information and Risk Factors................. Prospectus Summary; The Company; Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page; Underwriting
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Principal and Selling Stockholders
8. Plan of Distribution................................. Outside Front Cover Page; Underwriting
9. Description of Securities to be Registered........... Description of Capital Stock
10. Interests of Named Experts and Counsel............... Legal Matters; Experts
11. Information with Respect to the Registrant........... Prospectus Summary; The Company; Risk Factors;
Dividend Policy; Capitalization; Selected
Consolidated Financial Data; Management's Discussion
and Analysis of Financial Condition and Results of
Operations; Business; Management; Certain
Transactions; Principal and Selling Stockholders;
Description of Capital Stock; Shares Eligible for
Future Sale; Consolidated Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities....................... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 1996
PROSPECTUS
2,585,336 SHARES
[LOGO]
COMMON STOCK
Of the 2,585,336 shares of Common Stock offered hereby, 2,000,000 shares are
being sold by the Company and 585,336 shares are being sold by the Selling
Stockholders. The Company will not receive any proceeds from the sale of shares
by the Selling Stockholders. See "Principal and Selling Stockholders."
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $11.00 and $13.00 per share. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price. Application has been made to have the Common Stock approved for quotation
on the Nasdaq National Market under the symbol ADVP.
--------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON
PAGE 5.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total (3)..................... $ $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $500,000. Of
the proceeds to the Company, approximately $7.0 million will be used to
repay indebtedness to an affiliate of a principal stockholder of the
Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
387,800 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public set forth above. If all
such shares are purchased, the total Price to Public, Underwriting Discount
and Proceeds to Company will be $ , $ and $ , respectively. See
"Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1996 at the offices of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST
MONTGOMERY SECURITIES
J.P. MORGAN & CO.
, 1996
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Common Stock
offered hereby. This Prospectus, which constitutes part of the Registration
Statement, omits certain of the information contained in the Registration
Statement and the exhibits and schedules thereto on file with the Commission
pursuant to the Securities Act and the rules and regulations of the Commission
thereunder. The Registration Statement, including exhibits and schedules
thereto, may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 and at the Commission's regional offices at 7 World
Trade Center, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, and copies may be obtained at
prescribed rates from the Public Reference Section of the Commission at its
principal office in Washington, D.C. Such documents may also be obtained through
the Web Site maintained by the Commission at http://www.sec.gov. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference.
The Company intends to furnish its stockholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing consolidated unaudited financial information.
------------------------
"Advance Rx-Registered Trademark-" and "ApotheQuery-Registered Trademark-"
are registered trademarks of the Company. All other trademarks and trade names
referred to in this Prospectus are the property of their respective owners.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Advance ParadigM, Inc. (the "Company") is a leading independent provider of
pharmacy benefit management ("PBM") services to health benefit plan sponsors,
based on the over nine million health plan members enrolled in the Company's
programs. The Company's primary focus is on the delivery of cost-effective, high
quality, integrated PBM services. In addition, the Company has developed and is
expanding its clinical expertise and disease management services to meet the
specialized needs of its plan members, particularly those requiring costly,
long-term and recurring therapies. These services are designed to inform and
educate health benefit plan sponsors, their members and participating physicians
of nationally recognized practice guidelines for various disease states. This
encourages physician and member conformance, improves compliance with recognized
standards and, in turn, improves member health while reducing cost of care.
The Company's PBM services include clinical and benefit design consultation,
formulary and rebate administration, electronic point-of-sale pharmacy claims
processing, mail pharmacy distribution, pharmacy network management, drug
utilization review ("DUR") and data information reporting. The Company
administers a pharmacy network that includes over 46,000 retail pharmacies
throughout the United States. In 1994, in response to increasing
cost-containment pressures from payors, the Company began to utilize its
clinical and information systems capabilities to develop health benefit
management ("HBM") services. The Company's HBM services include disease
management, recommendation of clinical guidelines, patient and physician
profiling, case finding and compliance and outcome measurement. In 1995, the
Company began marketing its HBM services to health benefit plan sponsors,
pharmaceutical manufacturers and contract research organizations, and as a
result, initiated programs with selected customers. In addition, the Company
intends to leverage its existing capabilities and relationships by acquiring
companies which have, or are developing, innovative HBM services in order to
provide a centralized care management alternative for its customers.
It is currently estimated that annual outpatient pharmaceutical expenditures
account for approximately 7% or $70 billion, of the $1 trillion health care
market, and that third-party prescriptions managed by PBMs represent a steadily
increasing proportion of this amount. In response to escalating health care
costs, cost containment efforts have led to rapid growth in managed care.
Despite these efforts, continued advances in medical technology and new drug
development have led to significant increases in drug utilization and related
costs, creating a need for more efficient, cost-effective, drug delivery
mechanisms. In addition, there is rapidly growing demand among payors for
comprehensive disease management programs as cost containment becomes more
dependent on improvements in the quality of care. According to industry sources,
approximately 77% of large employers said they would likely adopt some form of
disease management program over the next two years. HBM services are being
developed to address this demand through the use of traditional PBM services
combined with clinical expertise and sophisticated information systems.
The Company believes its clinical expertise and information systems combined
with its PBM services provide the Company with a competitive advantage in the
evolving market for HBM services. The Company's strategy is to maintain its
position as a leading independent provider of PBM services and expand its
presence as a provider of HBM services by (i) expanding its core PBM customer
base, (ii) expanding its HBM services, (iii) pursuing strategic acquisitions and
(iv) continuing to establish strategic relationships with its major customers
and suppliers.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............................ 2,000,000 shares
Common Stock offered by the Selling Stockholders............... 585,336 shares
Common Stock to be outstanding after the Offering.............. 7,396,750 shares(1)
Use of proceeds................................................ For retirement of debt, capital expenditures,
possible acquisitions, working capital and
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol......................... ADVP
</TABLE>
------------------------------
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................................................... $ 34,970 $ 91,306 $ 125,333 $ 25,692 $ 49,809
Cost of revenues.............................................. 32,612 85,532 117,788 24,445 47,454
Selling, general and administrative expenses.................. 2,330 4,963 6,158 1,442 1,714
Operating income.............................................. 28 811 1,387 (195) 641
Net income (loss)............................................. $ (395) $ 24 $ 1,037 $ (335) $ 669
Pro forma:(2)
Net income per share........................................ $ .25 $ .12
Weighted average shares outstanding......................... 6,941 6,941
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA (3) AS ADJUSTED (4)
--------- ------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................ $ 10,432 $ 10,432 $ 25,252
Total assets........................................................... 72,091 72,091 86,911
Long-term debt to related parties...................................... 7,000 7,000 --
Series A redeemable preferred stock.................................... 12,099 -- --
Stockholders' equity................................................... 8,966 21,065 42,885
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
SUPPLEMENTAL DATA:(5)
Pharmacy network claims processed................................................. 816 1,527 9,375
Mail pharmacy prescriptions filled................................................ 228 383 536
Estimated health plan members (at period end)..................................... 3,745 5,208 9,040
</TABLE>
- ------------------------------
(1) Excludes (i) 1,044,250 shares of Common Stock reserved for future issuance
pursuant to options outstanding under the Company's stock option plans with
a weighted average exercise price of $4.19 per share, (ii) 392,750 shares of
Common Stock underlying outstanding warrants with a weighted average
exercise price of $4.29 per share and (iii) 833,333 shares of Common Stock
issuable upon conversion of the outstanding shares of Series B Preferred
Stock, assuming an initial public offering price of $12.00 per share. See
"Management--Stock Option Plans" and "Description of Capital Stock."
(2) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.
(3) Gives effect to the automatic conversion of each share of the Series A
Preferred Stock into 250 shares of Common Stock immediately prior to the
closing of this Offering.
(4) Adjusted to give effect to the sale of Common Stock offered hereby at an
assumed initial public offering price of $12.00 and the application of the
net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
(5) This data has not been audited.
------------------------------
EXCEPT AS OTHERWISE NOTED HEREIN, ALL INFORMATION IN THIS PROSPECTUS (I)
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) REFLECTS A
250-FOR-ONE STOCK SPLIT OF THE COMMON STOCK, PAR VALUE $.01 PER SHARE, OF THE
COMPANY (THE "COMMON STOCK"), AND A CORRESPONDING ADJUSTMENT IN THE CONVERSION
RATES OF THE SERIES A PREFERRED STOCK, PAR VALUE $.01 PER SHARE (THE "SERIES A
PREFERRED STOCK"), AND THE SERIES B PREFERRED STOCK, PAR VALUE $.01 PER SHARE
(THE "SERIES B PREFERRED STOCK", AND TOGETHER WITH THE SERIES A PREFERRED STOCK,
THE "PREFERRED STOCK"), TO BE EFFECTED PRIOR TO THE CLOSING OF THIS OFFERING,
(III) GIVES EFFECT TO THE MERGER OF ADVANCE HEALTH CARE, INC. WITH AND INTO THE
COMPANY, WITH THE COMPANY AS THE SURVIVING CORPORATION (THE "MERGER"), WHICH
WILL OCCUR IMMEDIATELY PRIOR TO THE CLOSING OF THIS OFFERING AND (IV) REFLECTS
THE CONVERSION OF ALL OF THE COMPANY'S OUTSTANDING SHARES OF SERIES A PREFERRED
STOCK INTO SHARES OF COMMON STOCK, WHICH WILL OCCUR UPON THE CLOSING OF THIS
OFFERING. SEE "THE COMPANY," "CAPITALIZATION," "DESCRIPTION OF CAPITAL STOCK"
AND "UNDERWRITING." REFERENCES TO "FISCAL YEAR 1994," "FISCAL YEAR 1995" AND
"FISCAL YEAR 1996" REFER TO THE COMPANY'S FISCAL YEARS ENDED MARCH 31, 1994,
1995 AND 1996, RESPECTIVELY.
4
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS. SEE
"DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS."
LIMITED OPERATING HISTORY; RECENT LOSSES. The Company has a limited
operating history, as its predecessors began offering mail pharmacy services in
1987, clinical and formulary management services in 1991 and retail pharmacy
network and claims adjudication services in 1992. Through fiscal year 1994, the
Company incurred net operating losses of $2.1 million. As of March 31, 1996, the
Company had an accumulated deficit (consisting of net operating losses and
accrued cumulative dividends on preferred stock) of approximately $3.0 million.
Although the Company was profitable in fiscal years 1995 and 1996, there can be
no assurance that such profitability will continue in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PRICE EROSION. Over the last several years, the PBM industry has
experienced significant erosion in the reimbursement for services. During 1994
and 1995, PBMs affiliated with pharmaceutical companies began to aggressively
price their services, thereby exacerbating the decreasing margins for the
industry. There can be no assurance that price erosion will not continue or that
the Company can adequately respond to such price erosion. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; LENGTHY SALES CYCLE; FUTURE
RESULTS UNCERTAIN. The Company has experienced and may in the future experience
significant fluctuations in revenue and operating results from quarter to
quarter and from year to year due to a combination of factors, including: demand
for the Company's services; the size, timing of contract signings and
recognition of revenues from significant customer additions and losses;
increased competition; the Company's success in, and expense associated with,
developing and introducing new services; the availability of rebates from
pharmaceutical manufacturers; the length of the Company's sales cycles; the
Company's ability to increase staff to meet demand; economic conditions
generally or in specific industry segments; and other factors outside of the
control of the Company. As a result of all of these factors, there can be no
assurance that the Company will be profitable on a quarterly or annual basis.
Due to the foregoing, it is possible that the Company's operating results in
some future quarters will be below analysts' expectations, which in turn could
adversely affect the Company's stock price. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
GROWTH OF HBM SERVICES. The Company is presently expending significant
resources to develop and expand its HBM services, and the Company anticipates
that it will continue to expend significant resources in the foreseeable future.
The Company historically has experienced expense increases when introducing new
services. In addition, the Company's strategy for expanding its HBM services
entails the acquisition of HBM services providers, or other transactions with
such providers to acquire HBM services capabilities. Because the HBM services
market is in an emerging stage, there can be no assurance that the Company will
be able to consummate such acquisitions or other transactions. Moreover, there
can be no assurance that HBM services developed or acquired by the Company will
be profitable or that the demand for such services will exist in the future. See
"--Risk of Acquisitions."
EFFECTS OF CERTAIN PRICING AND REBATE LITIGATION. Groups of retail
pharmacies have filed several lawsuits against drug manufacturers and certain
PBMs in federal and state court challenging certain drug pricing practices that
they allege violate state and federal antitrust laws. The suits allege, among
other things, that certain drug manufacturers have offered, and certain PBMs
have accepted, discounts and rebates on purchases of drugs in violation of
federal antitrust laws. The federal judge overseeing the litigation recently
approved a $351 million settlement agreed to by the groups of retail pharmacies
and 11 drug manufacturers. Under the settlement, the drug manufacturers must
make the same discounts available to any institution, whether a managed care
group or a retail pharmacy, provided that such institution can cause market
share increases. The
5
<PAGE>
judge's decision does not affect the retail pharmacies' continuing lawsuits
against several other drug manufacturers who opted not to be included in the
settlement. This settlement or an adverse outcome in one or more of these cases
may result in drug manufacturers increasing the price of drugs for companies
such as the Company or the reduction or termination of drug rebate programs.
Although the Company and most of its competitors have not been named as a party
in any such lawsuits, there can be no assurance that in the future the Company
will not be named as a defendant in these or similar lawsuits challenging
pricing, rebates or other aspects of the Company's business.
MANAGEMENT OF GROWTH. The Company's business has grown rapidly in the last
three years, with total revenues increasing approximately 258% from $35.0
million in fiscal year 1994 to $125.3 million in fiscal year 1996. The Company's
recent expansion has resulted in substantial growth in the number of its
employees (from 117 at March 31, 1994 to 312 at August 31, 1996), the scope of
its operating and financial systems and the geographic distribution of its
operations and customers. This recent rapid growth has placed, and if such
growth continues will increasingly place, a significant strain on the Company's
management and operations. Accordingly, the Company's future operating results
will depend on the ability of its officers and other key employees to continue
implementing and improving its operations, customer support and financial
control systems, and to effectively expand, train and manage its employee base.
There can be no assurance that the Company will be able to manage any future
expansion successfully or provide the necessary management resources to
successfully manage its business, and any inability to do so would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" and "Management--Executive
Officers and Directors."
DEPENDENCE ON CERTAIN KEY CUSTOMERS. The Company depends on a limited
number of large customers for a significant portion of its consolidated
revenues. During fiscal year 1996, the Company's two largest customers, Blue
Cross & Blue Shield of Texas, Inc. ("BCBS of Texas") and United Insurance
Company, Inc., accounted for approximately 8% and 18%, respectively, of the
Company's consolidated revenues. During this period, the Company's five largest
customers accounted for approximately 44% of the Company's revenues. Loss of the
Company's accounts with BCBS of Texas or United Insurance Company, Inc., or of
any other customers which account for a substantial portion of the Company's
business, could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business-- Customers."
POTENTIAL DECLINE IN REVENUE. More than 20% of the Company's consolidated
revenues is attributable to arrangements with drug manufacturers relating to
volume-based rebate payments as well as fees charged for other products and
services. The loss of the Company's account with any of the major drug
manufacturers under such arrangements or the failure of the Company to meet
certain conditions under such arrangements could have a material adverse effect
upon the Company's business, operating results and financial condition. See
"Business--Services--Pharmaceutical Benefit Management." Over the next few years
as patents expire covering many brand name drugs that currently have substantial
market share, generic products will be introduced that may substantially reduce
the market share of the brand name drugs. Historically, manufacturers of generic
drugs have not offered rebates on their drugs. In addition, the Company is
unable to predict the effect on rebate arrangements that might result if the
recent trend of consolidations and alliances in the drug and managed care
industry continues, particularly between pharmaceutical manufacturers and PBMs,
or that might result from an adverse outcome in the lawsuits filed by retail
pharmacies against drug manufacturers and PBMs. See "--Effects of Certain
Pricing and Rebate Litigation." The Company provides rebate contracting services
for approximately two million lives on behalf of other PBMs. If these other PBMs
choose to perform these services for themselves or seek alternative suppliers,
the Company's revenues with respect to rebate contracting services would decline
which could have a material adverse effect on the Company's business, operating
results and financial condition. There can be no assurance that the PBMs for
whom the Company provides rebate contracting services will not soon seek
alternative suppliers or acquire the capabilities to perform these services for
themselves.
CONSOLIDATION AMONG CUSTOMERS. Over the past several years, insurance
companies, HMOs and managed care companies have experienced significant
consolidation. The Company's managed care customers have been and may continue
to be subject to consolidation pressures. Although the Company may benefit from
certain consolidations in the industry, there can be no assurance that
additional customers will not be lost as a result of
6
<PAGE>
acquisitions and no assurance that such activity will not have a material
adverse effect upon the Company's business, operating results and financial
condition. Consolidation, strategic alliances and in general continued intense
competition in the PBM industry have resulted in the past, and may result in the
future, in the loss of certain of the Company's customers. There can be no
assurance that new and renewal contracts will offset the revenues lost from
customers electing not to renew their contracts with the Company. The Company's
contracts with its customers typically provide for three-year terms, with
automatic 12-month renewals thereafter unless terminated by either party to any
given contract upon written notice delivered prior to the annual renewal date.
See "--Dependence on Certain Key Customers" and "Business--Competition."
COMPETITION. The PBM industry has become very competitive. The Company's
competitors include large, profitable and well established companies with
substantially greater financial, marketing and other resources than the Company.
Several competitors in the PBM business are owned by pharmaceutical
manufacturers and may possess purchasing and other advantages over the Company
by virtue of such ownership. Price competition in the PBM market is increasing
and has resulted in reduced margins for many PBMs, including the Company. The
Company believes that the primary competitive factors include: independence from
drug manufacturers and payors; the quality, scope and costs of products and
services offered to insurance companies, HMOs, employers and other sponsors of
health benefit plans ("plan sponsors" or "customers") and plan participants;
responsiveness to customers' demands; the ability to negotiate favorable rebates
and volume discounts from drug manufacturers; the ability to identify and apply
effective cost containment programs utilizing clinical strategies; the ability
to develop formularies; the ability to market PBM and HBM services to health
benefit plan sponsors; a strong managed care customer base which supports the
development of HBM products and services; and the commitment to providing
flexible, clinically oriented services to customers. There can be no assurance
that the Company will continue to remain competitive with respect to the
foregoing factors or successfully market integrated PBM or HBM services to new
customers. There can be no assurance that consolidation and alliances within the
PBM industry will not adversely impact the operations and prospects for
independent PBMs such as the Company. See "Business--Competition."
RISK OF ACQUISITIONS. Part of the Company's strategy for growth includes
acquisitions of complementary services, technologies or businesses that could
allow the Company to offer a set of integrated services, in addition to PBM
services, to better serve the needs of health benefit plan sponsors. The
Company's ability to expand successfully through acquisitions depends on many
factors, including the successful identification and acquisition of services,
technologies or businesses and management's ability to effectively integrate and
operate the acquired services, technologies or businesses. There is significant
competition for acquisition opportunities in the PBM and HBM industries. The
Company may compete for acquisition opportunities with other companies that have
significantly greater financial and management resources. There can be no
assurance that the Company will be successful in acquiring or integrating any
such services, technologies or businesses or once acquired, that the Company
will be successful in selling or integrating such services, technologies or
businesses. See "Business--Strategy."
DEPENDENCE ON KEY MANAGEMENT. The Company believes that its continued
success will depend to a significant extent upon the continued services of its
senior management, in particular David D. Halbert, Chairman of the Board, Chief
Executive Officer and President of the Company. The loss of the services of Mr.
D. Halbert or other persons in senior management could have a material adverse
effect on the Company's business. The Company maintains a key-person life
insurance policy on Mr. D. Halbert. The Company has entered into an employment
agreement with each of Drs. Filipek and Wright and Messrs. Sattler and
Cinquegrana. See "Management--Employment Agreements."
INTANGIBLE ASSETS. At June 30, 1996, approximately $13.0 million, or 18%
(approximately 15% after giving pro forma effect to this Offering), of the
Company's total assets consisted of intangible assets. These intangible assets
are being amortized over a period of 40 years. In the event of any sale or
liquidation of the Company, there can be no assurance that the value of such
intangible assets will be realized. In addition, any significant decrease in the
value of such intangible assets could have a material adverse effect on the
Company's business, operating results and financial condition. See Note 2 of
Notes to Consolidated Financial Statements.
7
<PAGE>
GOVERNMENT REGULATION. The PBM industry is subject to extensive federal and
state laws and regulations and compliance with such laws and regulations imposes
significant operational requirements for the Company. The regulatory
requirements with which the Company must comply in conducting its business vary
from state to state. Management believes that the Company is in substantial
compliance with all existing statutes and regulations material to the operation
of its business. The impact of future legislation and regulatory changes on the
Company's business cannot be predicted, and there can be no assurance that the
Company will be able to obtain or maintain the regulatory approvals required to
operate its business. From time to time, retail pharmacists have expressed
opposition to mail order pharmacies. Retail pharmacies, state pharmacy
associations or state boards of pharmacies in some states have attempted to
secure the enactment or promulgation of statutes or regulations that could have
the effect of hindering or in some cases prohibiting the delivery of
prescription drugs into such state by a mail service pharmacy. The Company is
also aware of a Federal Trade Commission investigation relating to the
acquisition of companies in the PBM industry, although the Company is not, to
its knowledge, the subject of any such investigation. There can be no assurance
that such legislation or regulation, if subsequently adopted, or investigation,
if commenced, would not have a material adverse effect on the Company's
business, operating results and financial condition. See "Business--Government
Regulation."
DEVELOPMENTS IN THE HEALTH CARE INDUSTRY. The health care industry is
subject to changing political, economic and regulatory influences that may
affect the procurement practices and operation of health care organizations. The
Company's services are designed to function within the structure of the health
care financing and reimbursement system currently being used in the United
States. The Company believes that the commercial value and appeal of its
services may be adversely affected if the current health care financing and
reimbursement system were to be materially changed. During the past several
years, the United States health care industry has been subject to an increase in
governmental regulation of, among other things, reimbursement rates. Certain
proposals to reform the United States health care system are currently under
consideration by Congress. These proposals may increase governmental involvement
in health care and otherwise change the operating environment for the Company's
customers. Health care organizations may react to these proposals and the
uncertainty surrounding such proposals by curtailing or deferring investments in
cost containment tools and related technology such as the Company's services.
The Company cannot predict what effect, if any, such factors might have on its
business, operating results and financial condition. In addition, many health
care providers are consolidating to create integrated health care delivery
systems with greater regional market power. As a result, these emerging systems
could have greater bargaining power, which may lead to price erosion of the
Company's services. The failure of the Company to maintain adequate price levels
would have a material adverse effect on the Company's business, operating
results and financial condition. Other legislative or market-driven reforms
could have unpredictable effects on the Company's business, operating results
and financial condition. See "Business--Government Regulation."
PROFESSIONAL AND GENERAL LIABILITY INSURANCE. Various aspects of the
Company's business, including the dispensing of pharmaceutical products, may
subject it to litigation and liability for damages. While the Company maintains
and intends to maintain professional and general liability insurance coverage,
there can be no assurance that the Company will be able to maintain such
insurance in the future or that such insurance will be available on acceptable
terms or will be adequate to cover any or all potential product or professional
liability claims. A successful product or professional liability claim in excess
of the Company's insurance coverage could have a material adverse effect upon
the Company's business, operating results and financial condition. See
"Business--Liability Insurance."
TAX RISKS ASSOCIATED WITH THE MERGER. Immediately prior to the Offering,
Advance Health Care, Inc. and the Company will consummate the Merger. Although
the Merger will be structured as a tax free event, if the Company were to be
audited, there can be no assurance that the Internal Revenue Service would not
successfully challenge the tax free treatment, which could have a material
adverse effect upon the Company's business, operating results and financial
condition. See "The Company."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; DETERMINATION OF OFFERING PRICE;
POSSIBLE VOLATILITY OF STOCK PRICE. Prior to this Offering, there has been no
public market for the Company's Common Stock, and there can be no assurance that
following this Offering an active trading market will develop or be sustained.
The initial public offering price will be determined by negotiations between the
Company and the Representatives of the
8
<PAGE>
Underwriters. For a description of the factors considered in determining the
initial public offering price, see "Underwriting." In addition, the stock market
historically has experienced volatility which has particularly affected the
market prices of securities of many companies in the health care industry.
ANTI-TAKEOVER EFFECT OF CHARTER PROVISIONS AND SERIES B PREFERRED
STOCK. Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the "Restated Certificate") and Bylaws, certain sections of the
Delaware General Corporation Law, the ability of the Board of Directors to issue
shares of Preferred Stock and to establish the voting rights, preferences and
other terms thereof without further action by the stockholders, the division of
the Board of Directors into three classes and the voting terms of the Series B
Preferred Stock may be deemed to have an anti-takeover effect and may discourage
takeover attempts not first approved by the Board of Directors and also could
delay or frustrate the removal of incumbent directors, even if such takeover or
removal would be beneficial to stockholders. These provisions also could
discourage or make more difficult a merger, tender offer or proxy contest, even
if such events would be beneficial to the interests of stockholders. The
Delaware General Corporation Law imposes restrictions upon certain acquirors
(including their affiliates and associates) of 15% or more of the Company's
Common Stock. See "Management--Board of Directors and Committees of the Board"
and "Description of Capital Stock--Preferred Stock."
CERTAIN EFFECTS OF SERIES B PREFERRED STOCK. Following completion of this
Offering the Series B Preferred Stock will remain outstanding. The holders of
the Series B Preferred Stock are entitled to certain preferential distributions
which are not available to the holders of Common Stock. The holders of the
Series B Preferred Stock are entitled to receive, out of funds legally available
therefor, cumulative dividends, calculated without compounding, equal to $60.00
per share per annum. Such cumulative dividends accrue and accumulate from the
date of issuance and are payable on March 31 of each year. Upon the liquidation,
dissolution or winding up of the Company, the holders of the Series B Preferred
Stock have the right, prior to any existing or future classes of capital stock
to receive $10.0 million plus all accrued and unpaid dividends on the Series B
Preferred Stock and to participate equally and ratably with the holders of the
Common Stock in the distribution of the net assets of the Company available for
distribution thereafter to stockholders. On or after June 25, 1998, the Company,
in its sole discretion, may redeem any or all of the Series B Preferred Stock at
a price equal to the original price paid per share, plus accrued and unpaid
dividends. The Company has the right to convert the Series B Preferred Stock
into Common Stock at any time after the fifth anniversary of issuance. If the
Company forces a conversion, the holders of the Series B Preferred Stock will be
entitled to piggy-back registration rights in connection with future registered
offerings of shares of Common Stock. To the extent that the holders of the
Series B Preferred Stock receive any distributions from the Company, the funds
available for distributions to the holders of the Common Stock will be reduced.
See "Description of Capital Stock -- Preferred Stock."
SHARES ELIGIBLE FOR FUTURE SALE. Future sales of Common Stock in the public
market could adversely affect the prevailing market price of the Common Stock.
Of the 7,396,750 shares of Common Stock outstanding following completion of this
Offering, the 2,585,336 shares being sold hereby have been registered under the
Securities Act, and will be freely tradeable without restriction or registration
under the Securities Act, except for shares that may be acquired by "affiliates"
of the Company. The remaining 4,811,414 shares of Common Stock were issued and
sold by the Company in private transactions and may be publicly sold only if
registered under the Securities Act or sold in accordance with an exemption from
registration such as Rule 144 under the Securities Act. Beginning on ,
upon expiration of 180-day lock-up agreements entered into in connection with
this Offering, all of such shares of restricted Common Stock will be eligible
for sale. The 833,333 shares of Common Stock issuable upon the conversion of the
Series B Preferred Stock (assuming an initial public offering price of $12.00
per share) will become eligible for sale under Rule 144 on June 25, 1998, and
392,750 shares of Common Stock issuable upon the exercise of outstanding
warrants will be eligible for sale under Rule 144 following the effective date
of this Offering. In addition, of the 1,044,250 shares of Common Stock issuable
upon the exercise of outstanding options, approximately 609,850 shares of Common
Stock are immediately issuable upon the exercise of vested options and will
become eligible for sale, if such options are exercised, after the date of this
Prospectus. The holders of such options will enter into 180-day lock-up
agreements in connection with this Offering. Substantially all of the Company's
current securities holders have
9
<PAGE>
the right to include in any registration, subject to certain restrictions, a
total of 6,617,250 shares of Common Stock for offer and sale to the public at
any time commencing six months after the date of this Prospectus. See "Shares
Eligible for Future Sale."
BENEFIT OF THE OFFERING TO AFFILIATES. Certain parties affiliated with the
Company will receive immediate and substantial financial benefits as a result of
the Offering. Common Stock beneficially owned by the Company's executive
officers and directors and their respective affiliates would have a market value
of approximately $51.0 million based upon an assumed initial public offering
price of $12.00 per share. In addition, Halbert & Associates, Inc., a company
owned by Messrs. David D. Halbert and Jon S. Halbert who are also executive
officers and directors of the Company, will receive proceeds from the sale of
shares of Common Stock in this Offering of $748,000, after deducting
underwriting discounts and commissions. As members of the Board of Directors of
the Company, Messrs. D. Halbert and J. Halbert participated in the deliberations
of the Board of Directors with respect to various matters concerning the
Offering. Of the net proceeds of this Offering, approximately $7.0 million will
be used to retire the note payable to Whitney Subordinated Debt Fund, L.P., an
affiliate of J.H. Whitney & Co., the largest stockholder of the Company (the
"Whitney Note"). See "Use of Proceeds," "Management," "Certain Transactions" and
"Principal and Selling Stockholders."
CONTROL BY EXISTING STOCKHOLDERS. After this Offering, officers and
directors of the Company and their affiliates will own beneficially
approximately 46.4% of the Company's outstanding Common Stock (approximately
44.5% if the Underwriters' over-allotment option is exercised in full). As a
result, these stockholders may have the ability to control the Company and
influence its affairs and the conduct of its business. Such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of the Company. See "Principal and Selling Stockholders" and
"Description of Capital Stock--Voting Agreement."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of Common Stock in this
Offering will experience immediate and substantial dilution in net tangible book
value of $7.95 per share, assuming an initial public offering price of $12.00
per share. See "Dilution."
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical facts included in this Prospectus, including without limitation,
statements under "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" regarding the
Company's financial position, the Company's business strategy and the plans and
objectives of management of the Company for future operations, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations are disclosed under "Risk Factors" and elsewhere in this
Prospectus, including without limitation in conjunction with the forward-looking
statements included in this Prospectus. All subsequent written and oral
forwarding-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by this section. Section
27A of the Securities Act and Section 21E of the Exchange Act are not applicable
to initial public offerings, including this Offering.
10
<PAGE>
THE COMPANY
The Company was incorporated in Delaware in July 1993 as a wholly owned
subsidiary of Advance Health Care, Inc. ("Advance Health Care"). Currently, the
Company has three wholly owned subsidiaries, Advance ParadigM Mail Services,
Inc. ("Advance Mail"), Advance ParadigM Data Services, Inc. ("Advance Data") and
Advance ParadigM Clinical Services, Inc., formerly known as ParadigM Pharmacy
Management, Inc. ("Advance Clinical"). Advance Mail was incorporated in 1986 and
began operations in early 1987 as a mail order pharmacy. In 1992, Advance Data
was incorporated to provide plan participants an alternative for purchasing
prescriptions through a network of retail pharmacies and to provide claims
adjudication services. In August 1993, Advance Health Care contributed all of
the capital stock of Advance Data and Advance Mail to the Company. In December
1993, the Company acquired Advance Clinical, formerly a wholly owned subsidiary
of BCBS of Maryland, Inc. ("BCBS of Maryland"). Immediately prior to the
Offering, Advance Health Care will merge with and into the Company, with the
Company being the surviving corporation. Immediately prior to the Merger,
Advance Health Care will repay certain indebtedness held by several of its
stockholders by issuing shares of its common stock to the holders of such
indebtedness. In addition, immediately prior to the Merger, Advance Health Care
will distribute to its stockholders its assets and liabilities, none of which
are related to the business of the Company. After the repayment of its
outstanding indebtedness and the spin-off of its other assets and liabilities,
Advance Health Care will have no operations, or known liabilities or assets of
its own other than its investment in the Company. The Merger will have no effect
on the Company's financial position or results of operations and is intended to
qualify as a tax free reorganization. See "Certain Transactions -- Merger of
Advance Health Care With and Into the Company." The Company's executive offices
are located at 545 East John Carpenter Freeway, Suite 1900, Irving, Texas 75062,
and its phone number is (214) 830-6199.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby are estimated to be $21,820,000 ($26,147,852 if the
Underwriters exercise the over-allotment option in full), at an assumed initial
public offering price per share of $12.00, after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company. Of the net proceeds of this Offering, approximately $7.0 million will
be used to retire the Whitney Note, $2.9 million will be used to provide further
automation of the Company's Richardson, Texas facility, including capital
improvements and equipment, and $1.8 million will be used to expand the
Company's claims processing system. The Whitney Note was issued by the Company
on December 8, 1993 in the original principal amount of $7.0 million to finance
the acquisition of Advance Clinical and has a term of seven years with a fixed
rate of interest of 10.1% per annum. See "Certain Transactions." The balance of
the net proceeds, approximately $10.1 million, will be used to fund possible
acquisitions of similar or complementary businesses and general corporate
purposes. Although the Company has had preliminary discussions from time to time
regarding possible acquisition opportunities, the Company has no agreements,
understandings or commitments with respect to any such opportunity, nor has the
Company allocated any portion of the net proceeds for any specific acquisition.
There can be no assurance that any future acquisitions will be consummated.
Pending such uses, the Company intends to invest the net proceeds in short-term
U.S. government securities, high-grade commercial paper, short-term, interest
bearing securities, money market funds and bank deposits or other similar
instruments.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common Stock.
The Company currently intends to retain future earnings, if any, to fund
development and growth of its business and does not anticipate paying any
dividends on its Common Stock in the foreseeable future.
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1996, (i) on an actual basis, adjusted to reflect the 250-for-one stock split to
be effected prior to the Offering, (ii) on a pro forma basis to reflect the
automatic conversion of each share of Series A Preferred Stock into 250 shares
of Common Stock and the consummation of the Merger, both of which will occur
immediately prior to or concurrently with the closing of the Offering and (iii)
on a pro forma as adjusted basis to reflect the application of the estimated net
proceeds from the sale of the 2,000,000 shares of Common Stock offered hereby at
an assumed initial public offering price of $12.00 per share. This table should
be read in conjunction with the Company's Consolidated Financial Statements and
the Notes thereto, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt to related parties............................................. $ 7,000 $ 7,000 $ --
Series A redeemable preferred stock, $.01 par value, 10,000 shares authorized,
10,000 shares issued and outstanding, none outstanding pro forma or pro forma
as adjusted.................................................................. 12,099 -- --
Stockholders' equity:
Series B Preferred Stock, $.01 par value, 3,000 shares authorized, 2,597
shares issued and outstanding.............................................. -- -- --
Common Stock, $.01 par value, 7,500,000 shares authorized, 3,130,500 shares
outstanding, 5,396,750 shares outstanding pro forma, 7,396,750 shares
outstanding pro forma as adjusted (1)...................................... -- -- --
Additional paid-in capital.................................................. 11,518 23,617 45,437
Accumulated deficit......................................................... (2,552) (2,552) (2,552)
--------- ----------- -----------
Total stockholders' equity................................................ 8,966 21,065 42,885
--------- ----------- -----------
Total capitalization.................................................... $ 28,065 $ 28,065 $ 42,885
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------
(1) Outstanding shares exclude (i) 1,044,250 shares of Common Stock reserved for
future issuance pursuant to options outstanding under the Company's stock
option plans with a weighted average exercise price of $4.19 per share, (ii)
392,750 shares of Common Stock underlying outstanding warrants with a
weighted average exercise price of $4.29 per share and (iii) 833,333 shares
of Common Stock issuable upon conversion of the outstanding shares of Series
B Preferred Stock, assuming an initial public offering price of $12.00 per
share. See "Management--Stock Option Plans," "Description of Capital Stock"
and Note 10 of Notes to Consolidated Financial Statements.
(2) The number of shares outstanding on a pro forma as adjusted basis gives
effect to the cancellation of shares held by Advance Health Care and the
distribution of Common Stock to Advance Health Care stockholders based upon
the Advance Health Care stockholders fully diluted proportionate ownership
interests in Advance Health Care. See Notes 1 and 15 of the Notes to
Consolidated Financial Statements.
12
<PAGE>
DILUTION
The pro forma net tangible book value of the Common Stock of the Company as
of June 30, 1996, after giving effect to the 250-for-one stock split of the
Common Stock, the automatic conversion of the Series A Preferred Stock to Common
Stock and the consummation of the Merger, all of which will occur immediately
prior to or concurrently with the closing of this Offering, was $8,106,000, or
$1.50 per share. "Pro forma net tangible book value" per share of Common Stock
represents the amount of the Company's total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the sale of the 2,000,000 shares of Common Stock offered hereby
at an assumed initial public offering price of $12.00 per share resulting in
estimated net proceeds to the Company of approximately $21,820,000, the pro
forma net tangible book value of the Company as of June 30, 1996, would have
been $29,926,000, or $4.05 per share. This represents an immediate increase in
pro forma net tangible book value of $2.55 per share to the existing
stockholders and an immediate dilution of $7.95 per share to new investors
purchasing shares in the Offering. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $ 12.00
Pro forma net tangible book value per common share prior to the
Offering........................................................ $ 1.50
Increase per share attributable to new investors................. 2.55
---------
Pro forma net tangible book value per common share after the
Offering.......................................................... 4.05
---------
Dilution per share to new investors................................ $ 7.95
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1996,
the number of shares purchased from the Company, the total consideration paid
and the average price per share paid by the existing stockholders and by new
investors purchasing shares in the Offering (at an assumed initial public
offering price of $12.00 per share) before deduction of underwriting discounts
and estimated expenses related to the Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 5,396,750 73.0% $ 13,617,000 36.2% $ 2.53
New investors........................... 2,000,000 27.0 24,000,000 63.8 12.00
---------- ----- ------------- -----
Total............................... 7,396,750 100.0% $ 37,617,000 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>
The foregoing computations assume no exercise of the Underwriters'
over-allotment option or of any outstanding options granted pursuant to the
Company's existing stock option plans, no exercise of outstanding warrants, and
no conversion of the Series B Preferred Stock. To the extent such options and
warrants are exercised, there will be further dilution to the new investors. As
of June 30, 1996, there were outstanding (i) options to purchase 1,044,250
shares of Common Stock with a weighted average exercise price of $4.19 per share
and (ii) warrants to purchase 392,750 shares of Common Stock with a weighted
exercise price of $4.29 per share. See "Management--Stock Option Plans" and
"Shares Eligible for Future Sale."
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables summarize certain selected consolidated financial data,
which should be read in conjunction with the Company's Consolidated Financial
Statements, and the Notes related thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," included elsewhere
herein. The selected consolidated financial data of the Company as of and for
each of the years in the three-year period ended March 31, 1996, have been
derived from the Consolidated Financial Statements that have been audited by
Arthur Andersen LLP, independent public accountants, which are included
elsewhere in this Prospectus and are qualified by reference to such Consolidated
Financial Statements. The selected consolidated financial data as of and for
each of the years ended March 31, 1992 and March 31, 1993 are derived from
consolidated financial statements of the Company that have been audited by
Arthur Andersen LLP and which have not been included in this Prospectus. The
selected consolidated financial data as of and for the three months ended June
30, 1995 and 1996 have been derived from the Company's unaudited consolidated
financial statements and, in the opinion of management, include all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of the financial position and results of operations for these
periods. The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------------------------------ --------------------
1992 1993 1994 1995 1996 1995 1996
--------- --------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 7,045 $ 11,867 $ 34,970 $ 91,306 $ 125,333 $ 25,692 $ 49,809
Cost of operations:
Cost of revenues................. 6,761 11,196 32,612 85,532 117,788 24,445 47,454
Selling, general and
administrative expenses......... 616 1,091 2,330 4,963 6,158 1,442 1,714
--------- --------- --------- --------- ---------- --------- ---------
Total cost of operations....... 7,377 12,287 34,942 90,495 123,946 25,887 49,168
--------- --------- --------- --------- ---------- --------- ---------
Operating income (loss)............ (332) (420) 28 811 1,387 (195) 641
Interest income.................... -- -- -- 91 366 39 205
Interest expense................... (23) (26) (423) (878) (716) (179) (177)
--------- --------- --------- --------- ---------- --------- ---------
Net income (loss).................. $ (355) $ (446) $ (395) $ 24 $ 1,037 $ (335) $ 669
--------- --------- --------- --------- ---------- --------- ---------
--------- --------- --------- --------- ---------- --------- ---------
Pro forma: (1).....................
Net income per share............. $ .25 $ .12
Weighted average shares
outstanding..................... 6,941 6,941
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................. $ 220 $ (465) $ 769 $ (453) $ 316 $ 10,432
Total assets..................................... 1,296 1,761 29,152 37,288 58,905 72,091
Long-term debt to related parties................ -- -- 6,928 7,000 7,000 7,000
Redeemable preferred stock....................... -- -- 10,256 11,076 11,896 12,099
Stockholders' equity (deficit)................... 436 (9) (936) (1,732) (1,498) 8,966
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
SUPPLEMENTAL DATA: (2)
Pharmacy network claims processed.................................................. 816 1,527 9,375
Mail pharmacy prescriptions filled................................................. 228 383 536
Estimated health plan members (at period end)...................................... 3,745 5,208 9,040
</TABLE>
- ------------------------
(1) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.
(2) This data has not been audited and is unavailable for fiscal years 1992 and
1993.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Advance ParadigM is a leading independent provider of PBM services to health
benefit plan sponsors, with over nine million health plan members enrolled in
the Company's programs. The Company's primary focus is on the delivery of
cost-effective, high quality, integrated PBM services. In addition, the Company
has developed and is expanding its clinical expertise and disease management
services to meet the specialized needs of its plan members, particularly those
requiring costly, long-term and recurring therapies.
The Company has historically generated revenues from a number of sources
including its mail pharmacy, its retail pharmacy network and claims adjudication
services and its clinical services. In addition, during the fiscal year ended
March 31, 1996 ("fiscal year 1996"), the Company began to generate revenues from
its newly developed HBM services.
The Company derives mail pharmacy revenues from the sale of pharmaceuticals
to members of health benefit plans sponsored by the Company's customers. These
revenues include ingredient costs plus a dispensing fee. In 1992, the Company
established a retail pharmacy network which currently consists of over 46,000
retail pharmacies nationwide, and began to provide on-line claims adjudication
services. The Company records administrative fees as revenues derived from
claims adjudication services, and includes as revenues the ingredient costs of
the pharmaceuticals dispensed through its network. In 1993, the Company acquired
Advance Clinical, formerly ParadigM Pharmacy Management, Inc., a subsidiary of
BCBS of Maryland, and began to offer clinical services to its customers. The
Company's clinical services revenues have historically been derived primarily
from direct rebate and volume discounts from pharmaceutical manufacturers. Cost
of revenues includes product costs and other direct costs associated with the
dispensing of prescription drugs through the mail pharmacy, retail pharmacy
network and claims adjudication services and clinical services.
The acquisition of Advance Clinical has provided the Company with access to
large managed care organizations creating an opportunity for the Company to
cross-sell its mail and claims processing services. In addition, the Company has
continued to add additional managed care accounts. In order to accommodate the
large volume and complex reporting requirements of its managed care customers,
the Company acquired a highly sophisticated, state-of-the-art claims processing
system, which management believes will accommodate volume levels significantly
higher than those currently maintained by the Company.
In response to the growing demand among payors for comprehensive disease
management programs, the Company recently established its HBM services. The
Company has developed a comprehensive health care database, integrating its
customers' pharmacy claims with applicable medical and laboratory claims data,
in order to perform meaningful outcomes studies to develop disease management
programs. These programs have served as an additional source of revenue for the
Company in fiscal year 1996. Management believes that the Company will be able
to cross-sell these and other services to its existing customers, and that HBM
services will constitute a significantly increased proportion of the Company's
total revenues in the future.
As a result of its competitive environment, the Company is continuously
susceptible to margin pressures. In recent years, competing PBM providers owned
by large pharmaceutical manufacturers began aggressively pricing their products
and services. This aggressive pricing resulted in reduced margins for the
Company's traditional PBM services. While the environment for the provision of
traditional services remains competitive, margins realized for the provision of
these services have stabilized in recent quarters.
Except for the historical information contained herein, the discussion in
this Prospectus contains certain forward-looking statements that involve risks
and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed under "Risk Factors," as
well as those discussed elsewhere herein.
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RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data of the
Company, for the periods indicated, as a percentage of revenues.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------------- -----------------------
1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues......................................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0%
Cost of operations:
Cost of revenues............................... 93.2 93.7 94.0 95.1 95.3
Selling, general and administrative expenses... 6.7 5.4 4.9 5.6 3.5
----- ----- ----- ----- -----
Total cost of operations..................... 99.9 99.1 98.9 100.7 98.8
----- ----- ----- ----- -----
Operating income (loss).......................... 0.1 0.9 1.1 (0.7) 1.2
Interest income (expense)........................ (1.2) (0.9) (0.3) (0.6) 0.1
----- ----- ----- ----- -----
Net income (loss)................................ (1.1)% 0.0 % 0.8 % (1.3)% 1.3%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
REVENUES. Revenues for the three months ended June 30, 1996 increased by
$24.1 million, or 94%, compared to revenues for the three months ended June 30,
1995. Approximately 66% of the increase in revenues was attributable to an
eight-fold increase in the number of pharmacy claims processed during the
period. Approximately 20% of the increase was attributable to additional sales
of the Company's mail pharmacy services, resulting from a 44% increase in the
number of mail prescriptions dispensed. Approximately 14% of the increase in
revenues resulted from an increase in clinical services revenues derived from
formulary and disease management services.
COST OF REVENUES. Cost of revenues for the three months ended June 30, 1996
increased by $23.0 million, or 94%, compared to the same period in 1995. This
increase was attributable primarily to the expanded volume in the Company's mail
pharmacy and the additional costs associated with the Company's claims
processing growth. As a percentage of revenues, cost of revenues remained
relatively constant at 95%.
SELLING, GENERAL AND ADMINSTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended June 30, 1996 increased by
$272,000, or 19%, compared to the same period in 1995. This increase was the
result of the Company's expansion of its sales and marketing capabilities, as
well as increases in administrative and support staff levels and salaries and
benefits in response to volume growth in all services. As a percentage of
revenues, selling, general and administrative expenses decreased from 6% for the
three months ended June 30, 1995 to 4% in the same period in 1996 as the result
of greater economies of scale. The Company believes that if revenues continue to
increase at the rate experienced to date, selling, general and administrative
expenses will generally decrease as a percentage of revenues in the future.
INTEREST INCOME AND INTEREST EXPENSE. Interest expense, net of interest
income, for the three months ended June 30, 1996 decreased by $168,000 compared
to the same period in 1995. The decline resulted from cash management programs
which utilized the Company's short-term excess cash to generate interest income
through investment in money market funds.
INCOME TAXES (BENEFITS). The Company had income tax loss carryforwards
available to offset income generated for the three months ended June 30, 1996,
and as a result, incurred no federal income tax expense.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
REVENUES. Revenues for fiscal year 1996 increased by $34.0 million, or 37%,
compared to revenues for the fiscal year ended March 31, 1995 ("fiscal year
1995"). Approximately 39% of the increase was attributable to additional sales
of the Company's mail pharmacy services, resulting from a 40% increase in the
number of mail prescriptions dispensed. Approximately 40% of the increase in
revenues was attributable to a six-fold increase in
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<PAGE>
the number of pharmacy claims processed during the fiscal year. Approximately
21% of the increase in revenues resulted from an increase in clinical services
revenues derived from formulary and disease management services.
COST OF REVENUES. Cost of revenues for fiscal year 1996 increased by $32.3
million, or 38%, compared to the prior fiscal year. This increase was
attributable primarily to the expanded volume in the Company's mail pharmacy and
the additional costs associated with the Company's claims processing growth. As
a percentage of revenues, cost of revenues remained relatively constant at
approximately 94% for both fiscal year periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal year 1996 increased by $1.2 million, or 24%,
compared to fiscal year 1995. This increase was the result of the Company's
expansion of its sales and marketing activities, as well as increases in
administrative and support staff levels and salaries and benefits in response to
volume growth in all services. As a percentage of revenues, selling, general and
administrative expenses remained relatively constant at approximately 5% for
both fiscal year periods.
INTEREST INCOME AND INTEREST EXPENSE. Interest expense, net of interest
income, for fiscal year 1996 declined by $437,000, or 56%, compared to fiscal
year 1995. The decline resulted from cash management programs which utilized the
Company's short-term excess cash to generate interest income through investment
in money market funds.
INCOME TAXES (BENEFITS). The Company had income tax loss carryforwards as
of March 31, 1996 of approximately $1.9 million, and as a result, incurred no
federal income tax expense. The Company anticipates an effective tax rate of
approximately 39% once the tax carryforwards are fully utilized.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
REVENUES. Revenues for fiscal year 1995 increased by $56.3 million, or
161%, compared to revenues for the fiscal year ended March 31, 1994 ("fiscal
year 1994"). Approximately 51% of the increase resulted from the increase in
clinical services revenue attributable to a full year of operations from the
acquisition of Advance Clinical, and increased enrollment of lives under
formulary management programs. Approximately 26% of the increase in revenues was
attributable to an 87% increase in the number of pharmacy claims processed
during the fiscal year. The remaining 23% of the increase was attributable to
additional sales of the Company's mail pharmacy services. This increase in mail
pharmacy revenue resulted from a 68% increase in the number of mail
prescriptions dispensed. Revenues for fiscal year 1994 included four months of
Advance Clinical revenue compared with twelve months in fiscal year 1995.
COST OF REVENUES. Cost of revenues for fiscal year 1995 increased by $52.9
million, or 162%, compared to fiscal year 1994. This increase was attributable
primarily to the expanded volume in the Company's mail pharmacy and claims
processing services, plus the additional costs associated with the inclusion of
a full year of operations from the acquisition of Advance Clinical. As a
percentage of revenues, cost of revenues increased from 93% in fiscal year 1994
to 94% in fiscal year 1995. This increase resulted primarily from the Company's
relocation of its mail pharmacy operations from a 6,000 square foot facility to
a 38,000 square foot dispensing facility in December 1993. In addition, the
Company expanded its claims processing capabilities to accommodate additional
growth from its managed care customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal year 1995 increased by $2.6 million, or 113%,
compared to fiscal year 1994. This increase was the result of the Company's
expansion of its sales and marketing capabilities, as well as increases in
administrative and support staff levels and salaries and benefits in response to
volume growth in all product and service areas. Selling, general and
administrative expenses in fiscal year 1995 also include a full year of clinical
operations of Advance Clinical. As a percentage of revenues, selling, general
and administrative expenses decreased from 7% in fiscal year 1994 to 5% in
fiscal year 1995 as the result of greater economies of scale.
INTEREST INCOME AND INTEREST EXPENSE. Interest expense, net of interest
income, for fiscal year 1995 increased by $364,000, or 86%, compared to fiscal
year 1994. The increase resulted from indebtedness incurred in December 1993 in
connection with the acquisition of Advance Clinical.
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<PAGE>
SELECTED QUARTERLY FINANCIAL RESULTS
The following table represents unaudited selected quarterly statement of
operations data for each of the quarters indicated and, in the opinion of
management, includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such data. The Company has
experienced fluctuations in revenue and operating results from quarter to
quarter and from year to year due to a combination of factors, including demand
for the Company's services and the size, timing of contract signings and
recognition of revenues from significant customer additions and losses. Future
quarterly results may fluctuate, depending on these and other factors. See "Risk
Factors--Fluctuations in Quarterly Operating Results; Lengthy Sales Cycle;
Future Results Uncertain." Results of operations for any particular quarter are
not necessarily indicative of results of operations for any future quarters.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1996 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................. $ 25,692 $ 28,958 $ 33,370 $ 37,313 $ 49,809
Cost of operations:
Cost of revenues....................................... 24,445 27,074 31,283 34,986 47,454
Selling, general and administrative expenses........... 1,442 1,481 1,516 1,719 1,714
--------- --------- --------- --------- ---------
Total cost of operations............................. 25,887 28,555 32,799 36,705 49,168
--------- --------- --------- --------- ---------
Operating income (loss).................................. (195) 403 571 608 641
Interest (expense) income, net........................... (140) (134) (83) 7 28
--------- --------- --------- --------- ---------
Net income (loss)........................................ $ (335) $ 269 $ 488 $ 615 $ 669
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996 and June 30, 1996, the Company had working capital of
$316,000 and $10.4 million, respectively. The increase in working capital at
June 30, 1996 as compared to March 31, 1996 resulted principally from the $10.0
million of proceeds received by the Company on June 25, 1996 from the sale of
its Series B Preferred Stock. The Company's net cash provided by operating
activities was $1.0 million, $3.7 million and $15.7 million for the years ended
March 31, 1994, 1995 and 1996, respectively, and $1.1 million and $127,000 for
the three months ended June 30, 1995 and 1996, respectively. The significant
increases in net cash provided by operating activities were due primarily to the
timing of receivables and payables resulting from the Company's continued
growth. Cash used in investing activities was $15.4 million, $2.2 million and
$1.6 million for the years ended March 31, 1994, 1995 and 1996, respectively,
and $216,000 and $935,000 for the three months ended June 30, 1995 and 1996,
respectively. For the year ended March 31, 1994, the Company used cash in the
amount of $14.1 million to purchase Advance Clinical with the remaining $1.3
million used for purchases of property, plant and equipment. In all other
periods presented, cash used in investing activities was primarily used for
purchases of property, plant and equipment associated with growth and expansion
of the Company's facilities. For the year ended March 31, 1994, the Company
received $9.9 million from the sale of its Series A Preferred Stock and proceeds
of $6.6 million from the issuance of long term debt. For the three months ended
June 30, 1996, the Company received $10.0 million from the sale of its Series B
Preferred Stock. Cash used in financing activities consisted primarily of
scheduled debt repayments.
During fiscal year 1996, the Company's continued growth resulted in net cash
provided by operating activities of $15.7 million. Historically, the Company has
been able to fund its operations and continued growth through cash from
operations. During fiscal year 1996, the Company's operating cash flow funded
its capital expenditures of $1.6 million, and its short term excess cash was
invested in money market funds. The Company anticipates its capital expenditures
of approximately $4.7 million for the year ending March 31, 1997 will primarily
consist of additional enhancements to the Company's claims processing systems,
and further automation of the Company's mail service facility. The Company
anticipates that cash from operations, combined with the proceeds received from
the sale of the Series B Preferred Stock and the net proceeds to be received
from the sale of the shares of Common Stock offered hereby, will be sufficient
to meet the Company's operating
18
<PAGE>
requirements and expansion programs, including capital expenditures, for at
least the next 18 months. Upon consummation of the Offering, the Company plans
to pay off all of its outstanding debt with the exception of capital lease
obligations. The Company anticipates that cash from operations will be
sufficient to meet its internal operating requirements for at least the next 18
months; however, the Company expects that additional funds may be required in
the future to successfully continue its expansion and acquisition plans. The
Company may be required to raise additional funds through sales of its equity or
debt securities or seek financing from financial institutions. Currently, the
Company has no borrowings from financial institutions, and none of its assets
are pledged as collateral. There can be no assurance, however, that credit
financing will be available on terms that are favorable to the Company or, if
obtained, will be sufficient for the Company's expansion needs.
RECENT PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
123, "Accounting for Stock-Based Compensation" (SFAS 123). The Company will
adopt the provisions of SFAS 123 with respect to options granted to employees
through disclosure only, effective with the Company's fiscal year ending March
31, 1997. SFAS 123 also requires that all stock and warrants issued to
nonemployees be accounted for based upon the fair value of the consideration
received or the fair value of the equity instruments issued. During fiscal year
1996, the Company agreed to issue warrants to purchase shares of its Common
Stock to a customer contingent upon future expansion of member lives. As of June
30, 1996, no stock was issued and no warrants were earned under the agreement.
In management's opinion, the fair value of the warrants at the date of the
agreement was not material and therefore had no material impact on the Company's
financial position or results of operations.
IMPACT OF INFLATION
Changes in prices charged by manufacturers and wholesalers for
pharmaceuticals dispensed by the Company affects its cost of revenues.
Historically, the Company has been able to pass the effect of such price changes
to its customers under the terms of its agreements. As a result, changes in
pharmaceutical prices due to inflation have not adversely affected the Company.
19
<PAGE>
BUSINESS
OVERVIEW
Advance ParadigM is a leading independent provider of PBM services to health
benefit plan sponsors, based on the over nine million health plan members
enrolled in the Company's programs. The Company's primary focus is on the
delivery of cost-effective, high quality, integrated PBM services. In addition,
the Company has developed and is expanding its clinical expertise and disease
management services to meet the specialized needs of its plans' members,
particularly those requiring costly, long-term and recurring therapies. These
services are designed to inform and educate health benefit plan sponsors, their
members and participating physicians of nationally recognized practice
guidelines for various disease states. This encourages physician and member
conformance, improves compliance with recognized standards and, in turn,
improves member health while reducing cost of care.
The Company's PBM services include clinical and benefit design consultation,
formulary and rebate administration, electronic point-of-sale pharmacy claims
processing, mail pharmacy distribution, pharmacy network management, drug
utilization review ("DUR") and data information reporting services. The Company
administers a pharmacy network that includes over 46,000 retail pharmacies
throughout the United States. In 1994, in response to increasing
cost-containment pressures from payors, the Company began to utilize its
clinical and information systems capabilities to develop HBM services. The
Company's HBM services include disease management, recommendation of clinical
guidelines, patient and physician profiling, case finding and compliance and
outcome measurement. In 1995, the Company began marketing its HBM services to
health benefit plan sponsors, pharmaceutical manufacturers and contract research
organizations, and as a result, initiated programs with selected customers. In
addition, the Company intends to leverage its existing capabilities and
relationships by acquiring companies which have, or are developing, innovative
HBM services which will enable the Company to provide a centralized care
management alternative for its customers.
The Company was incorporated in Delaware in July 1993 as a wholly owned
subsidiary of Advance Health Care. Currently, the Company has three wholly owned
subsidiaries, Advance Mail, Advance Data and Advance Clinical. Advance Mail was
incorporated in 1986 and began operations in early 1987 as a mail order
pharmacy. In 1992, Advance Data was incorporated to provide plan participants an
alternative for purchasing prescriptions through a network of retail pharmacies
and to provide claims adjudication services. In August 1993, Advance Health Care
contributed all of the capital stock of Advance Data and Advance Mail to the
Company. In December 1993, the Company acquired Advance Clinical, formerly a
wholly owned subsidiary of BCBS of Maryland. See "The Company."
INDUSTRY BACKGROUND
In response to escalating health care costs, cost containment efforts in the
health care industry have led to rapid growth in managed care. Despite these
efforts, continued advances in medical technology and new drug development have
led to significant increases in drug utilization and related costs, creating a
need for more efficient, cost effective drug delivery mechanisms. PBM services
evolved to address this need. Through volume discounts, retail pharmacy
networks, mail pharmacy services, formulary administration, claims processing
and DUR, PBMs created an opportunity for health benefit plan sponsors to deliver
drugs to their members in a cost-effective manner while improving patient
compliance with recommended guidelines. It is currently estimated that annual
outpatient pharmaceutical expenditures account for approximately 7%, or $70
billion, of the $1 trillion health care market, and that third-party
prescriptions managed by PBMs represent a steadily increasing proportion of this
amount.
Traditionally, PBMs focused primarily on cost containment by (i) generating
volume rebates from pharmaceutical companies, (ii) encouraging substitution of
generics for branded medications and (iii) obtaining price discounts through the
retail pharmacy network and mail distribution. Over the last several years, in
response to increasing payor demand, PBMs have begun to develop sophisticated
formulary management capabilities and comprehensive, on-line customer decision
support tools in an attempt to better manage the delivery of health care and
ultimately costs. Simultaneously, health benefit plan sponsors have begun to
focus on the quality and efficiency of care, emphasizing disease prevention, or
wellness, and care management. There is rapidly growing
20
<PAGE>
demand among payors for comprehensive disease management programs as cost
containment becomes more dependent on improvements in the quality of care.
According to industry sources, approximately 77% of large employers said they
would likely adopt some form of disease management program over the next two
years. HBM services are being developed to address this demand through the use
of traditional PBM services combined with clinical expertise and sophisticated
information systems.
THE ADVANCE PARADIGM SOLUTION
As a leading independent PBM, the Company provides benefit design, formulary
and rebate administration, point-of-sale pharmacy claims processing, mail
pharmacy, pharmacy network management, DUR and data information reporting
services. The Company believes its clinical expertise and information systems
combined with its PBM services provide the Company with a competitive advantage
in the evolving market for HBM services. Through its HBM services, the Company
utilizes its expertise in development of formulary designs, recommends "best
practices" guidelines, and has created patient and physician profiling, clinical
intervention strategies and proprietary case finding techniques. The Company's
proprietary decision support systems provide a platform for the delivery of
outcomes-based HBM services. As part of its HBM services, which integrate the
Company's decision support systems with its core clinical expertise, the Company
currently provides disease management programs that address cardiovascular risk,
congestive heart failure and diabetes, and has under development disease
management programs which address asthma, dyspepsia and otitis media (middle ear
infection).
STRATEGY
The Company's mission is to improve the quality of care delivered to plan
members while assisting plan sponsors in reducing overall health benefit costs.
The Company's strategy is to maintain its position as a leading provider of PBM
services and expand its presence as a provider of HBM services. Key elements of
this strategy include:
EXPAND CORE PBM CUSTOMER BASE. The Company believes that it will continue
to benefit from growth in the PBM market. From 1994 to 1996, the number of lives
for which the Company provided PBM services increased from approximately 3.7
million to 9.0 million. Of the nine million lives, the Company provides rebate
contracting services for approximately two million lives on behalf of other
PBMs. The Company intends to expand its market share by focusing on larger, more
sophisticated customers, such as Blue Cross and Blue Shield ("BCBS") plans,
insurance companies and large employer groups.
EXPAND HBM SERVICES. The Company believes that HBM services provide
significant opportunities for future growth. As a result, the Company is
presently integrating its PBM services, information systems and medical care
guidelines to create comprehensive HBM programs. The Company believes that it
can cross-sell HBM services to its existing customer base. In addition, the
Company intends to leverage its existing capabilities and relationships by
acquiring companies which have, or are developing, innovative HBM services in
order to provide a centralized, care management alternative for its customers.
PURSUE STRATEGIC ACQUISITIONS. The Company intends to continue pursuing
acquisition opportunities to expand the scope of its services and increase its
market share. For example, in December 1993, the Company complemented its mail
service and retail network pharmacy management services with the acquisition of
ParadigM Pharmacy Management Inc., a provider of sophisticated formulary
management services. Due to increasing competition within the PBM and HBM
services markets, the Company believes that there are significant opportunities
to acquire or consolidate businesses that will complement its existing service
offerings and allow it to realize additional economies of scale.
ESTABLISH STRATEGIC RELATIONSHIPS. The Company has successfully established
strategic relationships with certain pharmaceutical manufacturers and major
customers. In its strategic relationships with drug manufacturers, the Company
strives to create collaborative relationships whereby the Company provides the
manufacturers with consulting and related services that permit the manufacturers
to benefit from the Company's expertise in disease management and pharmacy and
medical claims data analysis, while the Company benefits from the marketing and
financial resources of the manufacturers. In its strategic relationships with
certain major customers, the customers assume equity positions in the Company
which fosters the development of long-term
21
<PAGE>
strategic alliances. To date, the Company has established strategic
collaborative relationships with five pharmaceutical companies and strategic
customer alliances with BCBS of Maryland, BCBS of Texas and VHA Inc. and has
entered into a letter of intent to enter into such an alliance with Principal
Health Care, Inc.
SERVICES
PHARMACEUTICAL BENEFIT MANAGEMENT. The Company's PBM services include
clinical and benefit design consultation, formulary and rebate administration,
electronic point-of-sale pharmacy claims processing, mail pharmacy distribution,
pharmacy network management, DUR and data information reporting. The Company
administers a pharmacy network which includes over 46,000 retail pharmacies
throughout the United States. The Company currently provides PBM services to
over 200 health plan benefit sponsors covering over nine million plan members
enrolled in the Company's programs, which includes rebate contracting services
for approximately two million lives on behalf of other PBMs. The Company's PBM
services are divided among three divisions: Clinical Services, Data Services and
Mail Pharmacy Services.
CLINICAL SERVICES. The Company develops and implements customized programs
of clinical and formulary management services to reduce drug benefit costs while
promoting clinically appropriate drug usage. The Company works closely with each
customer to determine the desired features of a benefit plan, such as which
drugs are covered, extent of generic substitution and co-payment levels. The
Company also develops customized formularies which recommend the most clinically
appropriate, cost-effective drugs to be prescribed. Formularies are listings of
drugs and treatment protocols to be followed by the prescribing physician that
are intended to reduce the costs of prescription drugs under a particular health
plan. Formularies reduce cost through the use of generic substitution,
therapeutic substitution and other techniques and may also generate leverage for
the Company to negotiate more favorable rebates and other volume discounts from
drug manufacturers.
Formulary compliance can be encouraged by (i) plan design features such as
tiered co-payments, which require the member to pay a higher amount for the
non-preferred drug, (ii) prescriber education programs in which the Company or
the managed care customer actively seek to educate the prescribers about the
formulary preferences and (iii) therapeutic substitution programs that target
certain high-cost therapies for concentrated formulary compliance efforts. The
Company continually monitors the efficacy and therapeutic applications of
pharmaceutical products, the availability of new drugs and generic substitutes
and rebate and other pricing arrangements with drug manufacturers. The Company
works closely with each customer to develop a customized formulary based on the
customer's drug utilization patterns and member and physician populations.
The Company employs several intervention strategies to promote formulary
compliance by altering physician prescribing patterns. The Company utilizes its
decision support software to analyze data and present reports to plan sponsors
or physicians that compare a physician's formulary compliance against his or her
peers in the plan. The Company provides proprietary educational materials to
plan physicians, pharmacists or the plan sponsor to promote general education
and formulary compliance.
DATA SERVICES. The Company's retail pharmacy network and claims
adjudication services provide plan sponsors an efficient, automated claims
processing network that permits point-of-sale adjudication and data collection.
The Company administers a network of approximately 46,000 retail pharmacies
which are preferred providers of prescription drugs to members of the pharmacy
benefit plans managed by the Company (the "Advance Pharmacies"). The Advance
Pharmacies have agreed to accept payments at predetermined negotiated rates,
which the Company believes to be generally more favorable than typical retail
prices. The Company's claims adjudication services division is its most rapidly
growing division with the number of claims processed increasing from
approximately 816,000 claims in fiscal year 1994 to over 9.3 million claims
processed in fiscal year 1996, with over 5.1 million claims processed in the
quarter ended June 30, 1996.
The Advance Pharmacies are linked to the Company's Advance Rx-Registered
Trademark- on-line claims adjudication and processing system, which contains
patient medication history, plan enrollment and eligibility data. The Advance
Rx-Registered Trademark- on-line system provides pharmacists with point-of-sale
information including plan design, drugs covered, negotiated price and
co-payment requirements, as well as extensive drug utilization evaluation
capabilities. The Advance Rx-Registered Trademark- system performs on-line
concurrent drug utilization evaluation at the point of sale including
22
<PAGE>
verification of eligibility, and identifies potential drug interactions,
frequency of refills and other matters. Within seconds of submitting a
prescription to the Advance Rx-Registered Trademark- system, the pharmacist
receives a computerized message as to whether the prescription will be accepted
by the Company for payment. In addition, the Company can alert the pharmacist
that the prescribed drug is not the preferred formulary drug, that therapeutic
or generic substitution opportunities are available, or as to the need to comply
with prior authorization programs.
MAIL PHARMACY SERVICES. The Company's mail pharmacy services enable plan
sponsors to realize further cost savings on maintenance medications, while
benefiting from the Company's automated claims adjudication and data collection
capabilities. Cost savings to plan sponsors result from promotion of formulary
compliance by the Company's in-house pharmacy, and price discounts to the
Company from volume purchases. The mail pharmacy typically dispenses up to
100-day supplies of medications for chronic conditions, thereby reducing
repetitive dispensing fees. The Company believes that its mail pharmacy services
reduce costs to plan sponsors because the Company's role as pharmacist allows
for direct enforcement of the formulary, generic and therapeutic substitution,
volume purchasing discounts, and lower dispensing fees than are typically
available through retail pharmacies. In addition, the Company's control over the
dispensing process permits it to ensure that formulary compliance programs are
followed, to perform DUR on each prescription and to reduce the potential for
submission of fraudulent, incorrect or ineligible claims. Plan sponsors also
benefit from the drug utilization review capabilities of the Company's
management information system, which assist in preventing potential abuse by
plan participants and help identify areas to be targeted for further cost
reductions.
The Company's mail service pharmacy is located in approximately 38,000
square feet of leased space in Richardson, Texas and currently dispenses
approximately 13,000 prescriptions per week. The mail service dispensing process
is highly automated, featuring bar code and scanning technology to route and
track orders, computerized dispensing of many medications and computer-generated
mailing labels and invoices. To ensure accurate dispensing of prescriptions, the
mail service system is equipped with automated quality control features, and
each prescription is inspected by a registered pharmacist.
HEALTH BENEFIT MANAGEMENT. The Company's HBM services include disease
management, recommendation of clinical guidelines, patient and physician
profiling, case finding and compliance and outcomes measurement. The Company has
developed disease management programs covering cardiovascular risk, congestive
heart failure and diabetes and has under development disease management programs
which address asthma, dyspepsia and otitis media. By analyzing patients' medical
and pharmacy claim patterns, the Company can assist payors and health care
providers in the early identification of patients whose care might be improved
through additional or alternative treatment or medication.
The Company's disease management programs incorporate clinical protocols
based on specific medical treatments and "best treatment practices" from the
medical community. These protocols are represented as a series of algorithms or
rules contained in the Company's decision support systems. These algorithms are
updated continually by the Company based upon changes in nationally recognized
best treatment practices, clinical experience and review of current medical
literature.
Upon identifying an "at-risk" patient, the Company, working closely with the
medical staff of its customer, recommends treatment protocols for the identified
disease. The Company's staff monitors the identified patient's compliance with
the suggested program, including prescription usage. If it appears, based upon
the staff's analysis of the patient's treatment, that the recommended protocol
is not being applied, the Company's staff will coordinate with its customers to
initiate direct telephone contact with the patient or physician, suggesting
additional treatment or testing.
In addition to identifying targeted patients for the physician, the
Company's case-finding algorithms are also designed to recognize trends in the
treatments and drugs prescribed by health care providers. Once a provider is
identified through the algorithm, the Company's staff prepares a physician
journal letter communicating the recommended clinical protocols for the
treatment of the identified disease. Physician performance and compliance with
the recommended protocols are monitored utilizing the Company's integrated
health care database, and additional communications such as "dear doctor"
letters and physician report cards are sent to physicians who would benefit from
intervention strategies. The Company has found physician response to these
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materials to be positive. In general, the physicians appreciate the comparison
of their treatment activities to the latest practices in the treatment of the
targeted disease. This "clinical credibility" allows the Company's customers to
more ably influence physician treatment patterns.
DECISION SUPPORT SYSTEMS. In connection with the monitoring, analysis and
evaluation of drug utilization for its PBM customers and following years of
development, the Company introduced proprietary decision support systems. The
Company's extensive database repository incorporates a series of interrelated
databases consisting of patient profiles, provider profiles, payor information,
and medical and pharmacy dictionaries of diagnosis codes, treatment codes, and
prescription drug information. One of the Company's proprietary decision support
systems, ApotheQuery-Registered Trademark-, enables the Company to identify
cost-saving opportunities arising from the possible overuse or inappropriate use
of drugs, the use of high cost drugs and the use of drugs not on the formulary.
ApotheQuery-Registered Trademark- organizes and analyzes data by drug, physician
specialty and/or various other criteria, or a combination of criteria, enabling
the Company to identify patient populations and physicians who would benefit
from intervention strategies and measures the effectiveness of such strategies
through outcomes and utilization review. The Company's decision support systems
have been developed using commercially available technology and are not
protected by any patents. The Company protects its decision support systems
through physical security measures as well as access security procedures.
In 1994, the Company began to integrate its customers' pharmacy claims with
applicable medical and laboratory claims and patient survey data, when
available. This integrated health care database complements the capabilities of
ApotheQuery-Registered Trademark- by including data points for diagnosis and
treatment codes. This integrated health care database facilitates querying
capability for not only pharmacy data but integrated pharmacy, medical, and lab
data as well. This allows the Company and its customers to identify problem
areas for the health plan and implement timely clinical solutions. It further
enhances the Company's ability to complete meaningful outcomes studies and to
develop effective disease management programs. The Company's medical staff has
incorporated algorithms based on nationally recognized "best practice"
guidelines for chronic and acute diseases into its proprietary databases. This
integrated health care database integrates medical, lab and pharmacy claims
data, and allows the Company to perform sophisticated outcomes analysis,
detailed physician and pharmacy provider profiling and utilization and
formulary/rebate analysis.
CUSTOMERS
The Company currently provides PBM services for over 200 health plan benefit
sponsors covering over nine million plan members enrolled in the Company's
programs, which includes rebate contracting services for approximately two
million lives on behalf of other PBMs. The Company's customer base is comprised
of BCBS plans, HMOs, health insurers, TPAs and self-insured employers. Some of
the Company's customers include the following insurance companies and HMOs:
<TABLE>
<CAPTION>
INSURANCE COMPANIES HMOS
- --------------------------------------------------- ---------------------------------------------------
<S> <C>
Arkansas BCBS Capital Health Plan
BCBS of Maryland CFS Health Group, Inc.
BCBS of the Rochester (New York) Area George Washington University Health Plan
BCBS of Texas HealthGuard of Lancaster, Inc.
Blue Cross of Northeastern Pennsylvania HMO Partners, Inc.
National Health Insurance Company Lifeguard Health Plan
Southwestern Life Insurance Company SelectCare Networks, Inc.
United Insurance Company, Inc.
</TABLE>
STRATEGIC ALLIANCES
The Company has successfully established strategic relationships with
certain large pharmaceutical manufacturers and major customers. In its strategic
relationships with drug manufacturers, the Company strives to create
collaborative relationships whereby the Company provides the manufacturers with
products and services that permit the manufacturers to benefit from the
Company's expertise in disease management and pharmacy and medical claims data
analysis, while the Company benefits from the marketing and financial resources
of the manufacturers. Through this type of relationship, the Company licenses
selected disease management programs to the manufacturers and provides other
related services. In its strategic relationships with certain major
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customers, the customers assume equity positions in the Company, which fosters
the development of long-term strategic alliances. This arrangement allows for
increased information flow between the Company and customers to facilitate the
progressive development of solutions to meet the customers' unique PBM and HBM
service needs. To date, the Company has established strategic collaborative
relationships with five pharmaceutical companies and strategic customer
alliances with BCBS of Maryland and BCBS of Texas, and has entered into a letter
of intent to enter into such an alliance with Principal Health Care, Inc. The
Company is implementing its cardiovascular risk reduction disease management
program on behalf of BCBS of Maryland and George Washington University Health
Plan. The Company has also licensed several of these programs to certain
pharmaceutical companies. See "Certain Transactions."
SALES, MARKETING AND CUSTOMER SERVICE
The Company markets and sells its services through a direct sales force
consisting of four national sales and marketing representatives located in
Baltimore, Cleveland, Minneapolis and Dallas. Sales and marketing
representatives are supported by a staff of customer service representatives in
the Company's facilities located in the Baltimore and Dallas areas. The
Company's proposal development group and marketing staff also work closely with
the sales representatives. The typical sales cycle takes approximately six to
nine months.
The Company offers a toll-free telephone line staffed with trained customer
service representatives and pharmacists 14 hours each day and on-call 24 hours
each day. The Company continually monitors the member service phone desk to
ensure that incoming calls from members are answered in a timely and appropriate
manner. Further, the Company monitors the quality standards of its mail
services, including the dispensing of prescription orders through the mail
within two business days of receipt under ordinary circumstances.
COMPETITION
The Company competes with a number of larger, national companies, including
Caremark International Inc., Diversified Pharmaceutical Services, Inc. (a
subsidiary of SmithKline Beecham Corporation), Express Scripts, Inc., Merck
Medco Managed Care, Inc., (a subsidiary of Merck & Co., Inc.), PCS Health
Systems, Inc. (a subsidiary of Eli Lilly & Company), and Value Health, Inc.
(which recently announced a 50-50 joint venture with Baxter Healthcare
Corporation). These competitors are significantly larger than the Company and
possess greater financial, marketing and other resources than the Company. To
the extent that competitors are owned by pharmaceutical manufacturers, they may
have pricing advantages that are unavailable to the Company and other
independent PBMs.
The Company believes that the primary competitive factors in the PBM and HBM
industries include: independence from drug manufacturers and payors; the
quality, scope and costs of products and services offered to insurance
companies, HMOs, employers and other sponsors of health benefit plans and plan
participants; responsiveness to customers' demands; the ability to negotiate
favorable rebate and volume discounts from drug manufacturers; the ability to
identify and apply effective cost containment programs utilizing clinical
strategies; the ability to develop formularies; the ability to market PBM and
HBM services to health benefit plan sponsors; a strong managed care customer
base which supports the development of HBM products and services; and the
commitment to providing flexible, clinically oriented services to customers. The
Company believes that its larger competitors offer comprehensive PBM services
and some form of HBM services. The Company considers its principal competitive
advantages to be its independence from drug manufacturers and payors, strong
managed care customer base which supports the development of HBM services, and
commitment to providing flexible, clinically oriented services to its customers.
LIABILITY INSURANCE
Certain aspects of the Company's operations, including the dispensing of
pharmaceuticals, may subject the Company to claims for personal injuries,
including those resulting from dispensing errors, package tampering and product
defects. The Company carries the types of insurance customary in its industry,
including professional liability and general and product liability insurance.
The Company believes that its insurance protection is adequate for its present
business operations. Although pharmacies in general have not, as yet,
experienced any unusual difficulty in obtaining insurance at an affordable cost,
there can be no assurance that the Company will be able to maintain its coverage
at acceptable costs in the future or, if it does, that the amount of such
coverage would be sufficient to cover all potential claims.
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<PAGE>
GOVERNMENT REGULATION
Various aspects of the Company's businesses are governed by federal and
state laws and regulations and compliance is a significant operational
requirement for the Company. The Company believes that it is in substantial
compliance with all existing legal requirements material to the operation of its
business.
Certain federal and related state laws and regulations affect aspects of the
Company's pharmacy benefit management business. Among these are the following:
FDA REGULATION. The U.S. Food and Drug Administration ("FDA") generally has
authority to regulate drug promotional materials that are disseminated "by or on
behalf of" a drug manufacturer. In October 1995, the FDA held hearings to
determine whether and to what extent the activities of PBM companies should be
subject to FDA regulation. At this hearing, FDA officials expressed concern
about the efforts of PBMs that are owned by drug manufacturers to engage in
therapeutic switching programs and about the criteria used by such PBMs that
govern the inclusion and exclusion of particular drugs in formularies. Although
the FDA has not published any proposed rules to date on the regulation of PBMs,
there can be no assurance that the FDA will not seek to increase regulation
pertaining to the PBM industry, including with respect to companies that are not
owned by drug manufacturers.
ANTI-REMUNERATION LAWS. Medicare and Medicaid law prohibits, among other
things, an entity from paying or receiving, subject to certain exceptions and
"safe harbors," any remuneration to induce the referral of Medicare or Medicaid
beneficiaries or the purchase (or the arranging for or recommending of the
purchase) of items or services for which payment may be made under Medicare,
Medicaid or other federally-funded health care programs. Several states also
have similar laws which are not limited to services for which Medicare or
Medicaid payment may be made. State laws vary and have been infrequently
interpreted by courts or regulatory agencies. Sanctions for violating these
federal and state anti-remuneration laws may include imprisonment, criminal and
civil fines, and exclusion from participation in the Medicare and Medicaid
programs.
The federal statute has been interpreted broadly by courts, the Office of
Inspector General ("OIG") within the Department of Health and Human Services
("HHS"), and administrative bodies. Because of the federal statute's broad
scope, federal regulations establish certain "safe harbors" from liability. Safe
harbors exist for certain properly reported discounts received from vendors,
certain investment interests, and certain properly disclosed payments made by
vendors to group purchasing organizations. A practice that does not fall within
a safe harbor is not necessarily unlawful, but may be subject to scrutiny and
challenge. In the absence of an applicable statutory exception or safe harbor, a
violation of the statute may occur even if only one of the purposes of a payment
arrangement is to induce patient referrals or purchases. Among the practices
that have been identified by the OIG as potentially improper under the statute
are certain "product conversion programs" in which benefits are given by drug
manufacturers to pharmacists or physicians for changing a prescription (or
recommending or requesting such a change) from one drug to another. Such laws
have been cited as a partial basis, along with the state consumer protection
laws discussed below, for investigations and multi-state settlements relating to
financial incentives provided by drug manufacturers to retail pharmacists in
connection with such programs.
To the Company's knowledge, these anti-remuneration laws have not been
applied to prohibit PBMs from receiving amounts from drug manufacturers in
connection with drug purchasing and formulary management programs, to
therapeutic substitution programs conducted by independent PBMs, or to the
contractual relationships such as those the Company has with certain of its
customers. The Company believes that it is in substantial compliance with the
legal requirements imposed by such laws and regulations, and the Company
believes that there are material differences between drug-switching programs
that have been challenged under these laws and the programs offered by the
Company to its customers. However, there can be no assurance that the Company
will not be subject to scrutiny or challenge under such laws and regulations, or
that any such challenge would not have a material adverse effect upon the
Company.
OIG STUDY. The OIG Office of Evaluation and Inspections (which is not
responsible for investigations of potential violations of anti-remuneration
laws, but which seeks to improve the effectiveness and efficiency of
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<PAGE>
HHS programs) currently is conducting a study of PBM arrangements particularly
with regard to the concerns and implications for Medicaid beneficiaries. The
Company cannot predict the outcome of the study or the impact, if any, that such
study might have on its business.
ERISA REGULATION. The Employee Retirement Income Security Act of 1974
("ERISA") regulates certain aspects of employee pension and health benefit
plans, including self-funded corporate health plans with which the Company has
agreements to provide PBM services. There can be no assurance that the U.S.
Department of Labor, which is the agency that enforces ERISA, would not assert
that the fiduciary obligations imposed by the statute apply to certain aspects
of the Company's operations.
CONSUMER PROTECTION LAWS. 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 17 states on October 25, 1995, Merck Medco Managed
Care, Inc. ("Medco"), the PBM subsidiary of pharmaceutical manufacturer Merck &
Co., agreed to require pharmacists affiliated with Medco mail service pharmacies
to disclose to physicians and patients the financial relationships between Merck
& Co., Medco and the mail service pharmacy when such pharmacists contact
physicians seeking to change a prescription from one drug to another. The
Company believes 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 the Company will not be subject to scrutiny or challenge under
one or more of these laws.
NETWORK ACCESS LEGISLATION. A majority of states have adopted some form of
legislation affecting the ability of the Company to limit access to pharmacy
provider networks or from removing network providers. Such legislation may
require the Company or its customers to admit any retail pharmacy willing to
meet the plan's price and other terms for network participation; this
legislation is sometimes referred to as "any willing provider" legislation. The
Company has not been materially affected by these statutes because it
administers a large network of over 46,000 retail pharmacies and will admit any
licensed pharmacy that meets the Company's credentialling criteria, involving
such matters as adequate insurance coverage, minimum hours of operation, and the
absence of disciplinary actions by the relevant state agencies.
LEGISLATION IMPOSING PLAN DESIGN RESTRICTIONS. Some states have legislation
that prohibits the plan sponsor from implementing certain restrictive design
features. For example, some states provide that members of the plan may not be
required to use network providers, but must also be provided with benefits even
if they choose to use non-network providers; this legislation is sometimes
referred to as "freedom of choice" legislation. Other states mandate coverage of
certain benefits or conditions. Such legislation does not generally apply to the
Company, but it may apply to certain of the Company's customers such as HMOs and
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.
LICENSURE LAWS. Many states have licensure or registration laws governing
certain types of ancillary health care organizations, including PPOs, TPAs, and
companies that provide utilization review services. The scope of these laws
differs significantly from state to state, and the application of such laws to
the activities of pharmacy benefit managers is often unclear. The Company has
registered under such laws in those states in which the Company has concluded,
after discussion with the appropriate state agency, that such registration is
required.
LEGISLATION AFFECTING DRUG PRICES. In the past, some states have adopted
legislation providing that a pharmacy participating in the state's Medicaid
program must give the state the best price that the pharmacy makes available to
any third party plan; this legislation is sometimes referred to as "most favored
nation" legislation. Such legislation, if enacted in any state, may adversely
affect the Company's 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.
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<PAGE>
REGULATION OF FINANCIAL RISK PLANS. Fee-for-service prescription drug plans
are not generally subject to financial regulation by the states. However, if the
PBM offers to provide prescription drug coverage on a capitated basis or
otherwise accepts material financial risk in providing the benefit, laws in
various states may regulate the plan. Such laws may require that the party at
risk establish reserves or otherwise demonstrate financial responsibility. Laws
that may apply in such cases include insurance laws, HMO laws or limited prepaid
health service plan laws. Many of these state laws 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. 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 the Company.
MAIL PHARMACY REGULATION. The Company's mail service pharmacy is located in
Richardson, Texas and the Company is licensed to do business as a pharmacy in
Texas. Many of the states into which the Company delivers pharmaceuticals have
laws and regulations that require out-of-state mail service pharmacies to
register with the board of pharmacy or similar regulatory body in the state.
These states generally permit the mail service pharmacy to follow the laws of
the state within which the mail service pharmacy is located. The Company has
registered in every state in which, to the Company's knowledge, such
registration is required. In addition, various pharmacy associations and boards
of pharmacy have promoted enactment of laws and regulations directed at
restricting or prohibiting the operation of out-of-state mail service pharmacies
by, among other things, requiring compliance with all laws of certain states
into which the mail service pharmacy dispenses medications whether or not those
laws conflict with the laws of the state in which the pharmacy is located. To
the
extent that such laws or regulations are found to be applicable to the Company,
the Company would be required to comply with them.
Other statutes and regulations impact the Company's mail service operations.
Federal statutes and regulations govern the labeling, packaging, advertising and
adulteration of prescription drugs and the dispensing of controlled substances.
The Federal Trade Commission requires mail order sellers of goods generally to
engage in truthful advertising, to stock a reasonable supply of the product to
be sold, to fill mail orders within thirty days, and to provide customers with
refunds when appropriate. The United States Postal Service has statutory
authority to restrict the transmission of drugs and medicines through the mail
to a degree that could have an adverse effect on the Company's mail service
operations. The U.S. Postal Service has exercised such statutory authority only
with respect to controlled substances. Alternative means of delivery are
available to the Company.
EMPLOYEES
As of August 31, 1996, the Company had 312 employees. None of the employees
are represented by a labor union. In the opinion of management, the Company's
relationship with its employees is good.
FACILITIES
The Company's corporate headquarters are located in approximately 8,000
square feet of leased space in Irving, Texas. This lease expires November 30,
1997. The Company's clinical division is located in approximately 11,600 square
feet of leased space in Hunt Valley, Maryland. This lease expires March 31, 1999
with an option to renew for an additional five-year term. The Company's data
services division is located in approximately 23,000 square feet of leased space
in Dallas, Texas. This lease expires November 30, 1999. The Company's mail
service pharmacy is located in approximately 38,000 square feet of leased space
in Richardson, Texas. This lease expires May 31, 2001 and has a five-year fixed
rate renewal option and an option to purchase at any time during the term of the
lease. See Note 6 of Notes to Consolidated Financial Statements.
LITIGATION
The Company is party to routine legal and administrative proceedings arising
in the ordinary course of its business. The proceedings now pending are not, in
the Company's opinion, material either individually or in the aggregate.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- --- --------------------------------------------------------------
<S> <C> <C>
David D. Halbert...................... 40 Chairman of the Board, President and Chief Executive Officer
Jon S. Halbert........................ 36 Executive Vice President, Chief Operating Officer and Director
Joseph J. Filipek, Jr. ............... 41 Executive Vice President
T. Danny Phillips..................... 37 Senior Vice President, Chief Financial Officer, Secretary and
Treasurer
John H. Sattler....................... 44 Senior Vice President, Sales and Marketing
Robert L. Cinquegrana................. 43 Senior Vice President, Strategic Planning and Business
Development
Alan T. Wright, M.D. ................. 39 Vice President and Chief Medical Officer
Peter M. Castleman (2)................ 39 Director
Rogers K. Coleman, M.D................ 64 Director
Mikel D. Faulkner (1), (2)............ 47 Director
Stephen L. Green (2).................. 45 Director
Jeffrey R. Jay, M.D. (1).............. 38 Director
Michael D. Ware (1), (2).............. 50 Director
</TABLE>
- ------------------------
(1) Audit Committee Member
(2) Compensation Committee Member
DAVID D. HALBERT founded the Company in 1986. Mr. Halbert has continuously
served as Chairman of the Board, President and Chief Executive Officer of the
Company. From 1981 to 1985, Mr. Halbert served as Vice President of Finance and
Marketing for LaJet Energy Company, an energy company, and prior to 1981 he
served as Vice President and Chief Operating Officer of Sabian Corporation, a
metal fabrication company. David D. Halbert is the brother of Jon S. Halbert.
JON S. HALBERT joined the Company in January 1988 and has continuously
served as a director and as an executive officer of the Company since such date.
Mr. Halbert currently serves as Executive Vice President and Chief Operating
Officer of the Company. Prior to joining the Company, he worked as a registered
representative of Bear, Stearns & Co. Inc., an investment banking firm. Jon S.
Halbert is the brother of David D. Halbert.
JOSEPH J. FILIPEK, JR., P.D., currently serves as the Executive Vice
President of the Company. Prior to joining the Company in December 1993, Dr.
Filipek founded Advance Clinical in 1991 as a wholly owned subsidiary of BCBS of
Maryland and has continuously served as its Chief Executive Officer and
President. From 1985 to 1990, he served as Director of Pharmacy for FreeState
Health Plan, and from 1982 to 1984, he held various managerial positions in the
Department of Pharmacy, University of Maryland.
T. DANNY PHILLIPS joined the Company in February 1992, and currently serves
as Senior Vice President, Chief Financial Officer, Secretary and Treasurer of
the Company and its subsidiaries. Prior to joining the Company, Mr. Phillips
served as Chief Financial Officer of Aloha Petroleum, Ltd., a retail gasoline
company, from April 1991 to February 1992. From 1985 to April 1991, Mr. Phillips
served in various financial management positions for Harken Energy Corporation,
a publicly held company, and its then wholly owned subsidiary E-Z Serve, Inc.
Prior to 1985, Mr. Phillips, a certified public accountant, was with the
accounting firm of Condley and Company.
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JOHN H. SATTLER, R.PH., joined the Company in 1994, and serves as the Senior
Vice President, Sales and Marketing of the Company. Prior to joining the
Company, Mr. Sattler served as Vice President, Sales and Marketing for Health
Care Pharmacy Providers, Inc. from September 1992 to November 1994. Prior to
1992, he served as Manager of Third Party Marketing for American Drug Stores,
Inc.
ROBERT L. CINQUEGRANA currently serves as the Senior Vice President,
Strategic Planning and Business Development of the Company. Prior to joining the
Company in December 1993, Mr. Cinquegrana served as Chief Operating Officer and
Vice President of Advance Clinical since its inception in 1991. From 1987 to
1991, Mr. Cinquegrana was associated with BCBS of Maryland, including service as
Vice President of Strategic Planning and Chief Financial Officer for Columbia
FreeState Health System, a managed care subsidiary of BCBS of Maryland.
ALAN T. WRIGHT, M.D., M.P.H., joined the Company in April 1994 and currently
serves as Vice President and Chief Medical Officer of the Company. Dr. Wright
has been serving as the Vice President and Chief Medical Officer of the Company
since February 15, 1996. From 1992 to April 1994, he served as Associate
Corporate Medical Director at BCBS of Maryland. Prior to 1992, he served as
Medical Director for Aetna Health Plans of the Mid-Atlantic Region. Dr. Wright
practices emergency medicine on a part time basis at Carr County General
Hospital in Westminister, Maryland. He currently serves as a diplomat to the
American Board of Internal Medicine and the National Board of Medical Examiners.
PETER M. CASTLEMAN has served as a director of the Company since August
1993. Mr. Castleman has been a General Partner of J.H. Whitney & Co., a private
investment firm, since January 1989, and has served as the Managing Partner of
J.H. Whitney & Co. since December 1992. He is also a director of a number of
private companies and the following public companies: The North Face, Inc.,
UtiliMed, Inc. and Brothers Gourmet Coffees, Inc.
ROGERS K. COLEMAN, M.D., was appointed as a director of the Company in
September 1996. Dr. Coleman has been employed by BCBS of Texas since 1976, and
has served in various executive capacities for BCBS of Texas since 1986,
including as its President and Chief Executive Officer since January 1991. In
addition, since January 1991, Dr. Coleman has served as a director of the BCBS
Association, the national association of BCBS plans.
MIKEL D. FAULKNER has served as a director of the Company since August 1993.
Since 1982, Mr. Faulkner has served as Chief Executive Officer of Harken Energy
Corporation, a publicly held company. He has been a director of Harken Energy
Corporation since 1982, serving as Chairman of the Board since February 1991.
From 1982 until February 1993, he served as President of Harken Energy
Corporation.
STEPHEN L. GREEN has served as a director of the Company since August 1993.
Mr. Green currently serves as a General Partner of Canaan Partners, a venture
capital firm. Prior to joining Canaan Partners in November 1991, Mr. Green
served as Managing Director in GE Capital's Corporate Finance Group for more
than five years. Mr. Green currently serves on the Board of Directors of the
following public companies: CapMAC Holdings Inc., Chartwell Re Corporation and
Suiza Foods Corporation.
JEFFREY R. JAY, M.D., has served as a director of the Company since August
1993. Since 1993, he has been a General Partner of J.H. Whitney & Co., a private
investment firm. From 1988 to 1993, Dr. Jay was employed by Canaan Partners, a
venture capital firm. Dr. Jay currently is a national advisory member of the
American Medical Association's Physician Capital Source Committee and is a
director of the following public companies: CRA Managed Care, Inc., UtiliMed,
Inc. and Nitinol Medical Technologies.
MICHAEL D. WARE has served as a director of the Company since August 1993.
Mr. Ware is a co-founder of Advance Capital Markets, Inc., a private investment
firm, and has served as its Managing Director since January 1989. Prior to
founding Advance Capital Markets, Inc., Mr. Ware was the President of Reliance
Energy Services, Inc.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Board of Directors of the Company consists of ten members, divided into
three classes as nearly equal in number as possible. Messrs. Faulkner, Green and
Ware serve in the class whose term expires in 1996; Dr. Jay and Mr. Castleman in
the class whose term expires in 1997; Messrs. D. Halbert and J. Halbert and Dr.
Coleman
30
<PAGE>
serve in the class whose term expires in 1998; and two vacancies currently
exist. The directors of each class elected after the expiration of the above
terms of office for such class will serve a term of three years. See
"Description of Capital Stock--Certain Provisions of the Company's Restated
Certificate and Bylaws." Officers serve at the discretion of the Board of
Directors.
The Board of Directors has a compensation committee (the "Compensation
Committee") consisting of Messrs. Castleman (Chairman), Faulkner, Green and
Ware. The functions of the Compensation Committee are to review executive
compensation and approve grants of options to Company officers and employees, as
well as renew, approve and recommend to the Board of Directors the terms and
conditions of all stock option plans or changes thereto.
The Board of Directors has an audit committee (the "Audit Committee")
composed of directors who are neither employees nor affiliates of the Company.
Messrs. Faulkner (Chairman) and Ware and Dr. Jay currently comprise the Audit
Committee. The Audit Committee recommends to the Board (for approval by the
stockholders) a public accounting firm to conduct the annual audit of the
accounts of the Company. The Audit Committee meets with the Chief Financial
Officer and the accounting firm at the conclusion of the audit to review the
audited financial statements, and to discuss the results of the audit, any
significant recommendations by the accounting firm for improvement of the
Company's accounting systems and controls, and the quality and depth of staffing
in the accounting and financial departments of the Company.
DIRECTORS COMPENSATION
Directors do not currently receive compensation for serving as directors of
the Company. The Company reimburses directors for out-of-pocket expenses
incurred in connection with attending Board and Committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDE PARTICIPATION
In fiscal year 1996, decisions with respect to the compensation of the
Company's executive officers and other employees were made by a Compensation
Committee consisting of Messrs. Castleman, Faulkner, Green and Ware. None of the
members of the Compensation Committee have ever been officers of the Company.
Mr. D. Halbert, Chairman of the Board, Chief Executive Officer and President
of the Company, serves on the Board of Directors of Advance Capital Markets
("ACM"). Mr. Ware, a member of the Company's Board of Directors and the
Compensation and Audit Committees, is the Managing Director of ACM. Each of
Messrs. D. Halbert and Ware participates in the determination of ACM's executive
officer compensation.
31
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the compensation
paid or awarded by the Company to the Chief Executive Officer and the four most
highly compensated executive officers whose cash compensation exceeded $100,000
(the "Named Executives") for services rendered in all capacities for fiscal year
1996.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS (#)
- ---------------------------------------------------------------------------- ---------- ----------- -------------
<S> <C> <C> <C>
David D. Halbert............................................................ $ 150,000 $ 52,500 --
Chairman of the Board, President and Chief Executive Officer
Jon S. Halbert.............................................................. 140,000 46,200 --
Executive Vice President and Chief Operating Officer
Joseph J. Filipek, Jr....................................................... 124,200 39,306 --
Executive Vice President
John H. Sattler............................................................. 125,000 37,500 56,250
Senior Vice President, Sales and Marketing
Alan T. Wright.............................................................. 124,200 32,755 18,750
Vice President and Chief Medical Officer
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding the stock option grants
made by the Company to the Named Executives during fiscal year 1996.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (4)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED (1) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ------------------------------------------ ----------- ------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
David D. Halbert.......................... -- -- -- -- -- --
Jon S. Halbert............................ -- -- -- -- -- --
Joseph J. Filipek, Jr..................... -- -- -- -- -- --
John H. Sattler (2)....................... 56,250 28.8% $ 11.00 11/14/04 $ 389,129 $ 986,128
Alan T. Wright (3)........................ 18,750 9.6% $ 11.00 02/15/06 $ 129,709 $ 328,709
</TABLE>
- ------------------------
(1) The options reflected in this table were all granted under the Company's
1993 Incentive Stock Option Plan. The date of grant is 10 years prior to the
expiration date listed. For additional material terms of the incentive
option, see "--Stock Option Plans."
(2) Mr. Sattler's option is partially vested and exercisable as to 11,250
shares, and will vest and become exercisable in cumulative installments of
11,250 shares on each of the next four anniversaries of the date of grant so
long as Mr. Sattler remains an employee of the Company or its affiliates on
such anniversaries.
(3) Dr. Wright's option vests and becomes exercisable in cumulative installments
of one-fifth of the number of shares of Common Stock upon the first five
anniversaries of the date of grant so long as Dr. Wright remains an employee
of the Company or its affiliates on such anniversaries.
(4) These amounts represent only certain assumed rates of appreciation based on
the grant date value of $11.00 per share in accordance with the Commission's
executive compensation rules. Actual gains, if any, on stock option
exercises will depend on future performance of the Common Stock. No
assurance can be given that the values reflected in these columns will be
achieved.
32
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table summarizes pertinent information concerning the number
and value of any options held by the Named Executives at March 31, 1996. No
options were exercised by the Named Executives in fiscal year 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR END IN-THE-MONEY OPTIONS
(#) AT FISCAL YEAR END ($)
---------------------------- --------------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
(1) (2)
---------------------------- --------------------------
<S> <C> <C>
David D. Halbert........................................ 68,250/102,500 $ 600,600/$902,000
Jon S. Halbert.......................................... 68,500/102,500 602,800/902,000
Joseph J. Filipek, Jr................................... 30,000/45,000 264,000/396,000
John H. Sattler......................................... 11,250/45,000 11,250/45,000
Alan T. Wright.......................................... 2,500/28,750 2,500/28,750
</TABLE>
- ------------------------
(1) Upon the occurrence of the following events, the vesting of the options will
accelerate: (i) as to the options held by Messrs. D. Halbert and J. Halbert,
upon the consummation of any transaction in which an outside entity gains
more than 50% ownership of the Company, the options will vest immediately
prior to such transaction and (ii) as to the options held by Dr. Filipek,
Mr. Sattler and Dr. Wright, upon a sale of substantially all of the Common
Stock or assets of the Company or a merger in which the Company is not the
surviving entity, the options will vest immediately prior to such
transaction.
(2) The value of the options is based upon the difference between the exercise
price and an assumed market value of $12.00 per share, the midpoint of the
range of the estimated initial public offering price set forth on the cover
of this Prospectus.
EMPLOYMENT AGREEMENTS
On August 4, 1993, each of Messrs. D. Halbert, J. Halbert and Phillips
entered into nondisclosure/ noncompetition agreements with the Company pursuant
to which each agreed during the term of his employment, and for two years
thereafter, not to compete with the Company in the continental United States
and, for the one-year period following termination, not to solicit or interfere
with the Company's relationship with any person or entity doing business with
the Company, or offer employment to any of the Company's employees.
In connection with the Advance Clinical acquisition, Advance Clinical
entered into three-year employment agreements with each of Dr. Filipek and Mr.
Cinquegrana. Dr. Filipek, employed as President and Chief Executive Officer of
Advance Clinical, is entitled to an annual base salary of $120,000, subject to
annual increases in the discretion of the Advance Clinical Board of Directors.
Mr. Cinquegrana, employed as Vice President and Chief Operating Officer of
Advance Clinical, is entitled to an annual base salary of $110,000, subject to
annual increases in the discretion of the Advance Clinical Board of Directors.
In addition, the employment agreements provide that each of Dr. Filipek and Mr.
Cinquegrana are entitled to participate in any bonus, insurance, 401(k) or other
plans generally available to Advance Clinical's employees. See "--Incentive
Compensation Plan." Further, the respective employment agreements grant 75,000
qualified stock options to each of Dr. Filipek and Mr. Cinquegrana, which vest
at a rate of 15,000 options on each of the first five anniversaries of the
respective employment agreements. See "--Stock Option Plans." The employment
agreements contain confidentiality, noncompetition and non-solicitation
provisions effective during the term of employment and for one year after
employment has terminated, unless employment is terminated for cause, in which
case the noncompetition provision will survive for two years.
Effective as of November 14, 1994, the Company entered into a two-year
employment agreement with Mr. Sattler to serve as the Company's Senior Vice
President, Sales and Marketing. Mr. Sattler is entitled to receive an annual
base salary of $125,000, subject to annual increases at the discretion of the
Company's Board of Directors. In addition, the employment agreement provides
that Mr. Sattler is entitled to participate in any bonus and benefit plans of
the Company. Further, the employment agreement grants 56,250 qualified stock
options to Mr. Sattler which will vest at a rate of 20% of the total options on
each of the first five anniversaries of
33
<PAGE>
the employment agreement. See "--Stock Option Plans." The employment agreement
contains confidentiality, noncompetition and non-solicitation provisions
effective during the term of employment and for one year after employment has
terminated.
Effective as of February 15, 1996, the Company entered into a three-year
employment agreement with Dr. Wright to serve as Vice President and Chief
Medical Officer of the Company. Dr. Wright is entitled to an annual base salary
of $165,000 for the fiscal year ending March 31, 1997, $175,000 for the fiscal
year ending March 31, 1998 and $185,000 for the fiscal year ending March 31,
1999. In addition, the employment agreement provides that Dr. Wright is entitled
to participate in any bonus or benefit plans of the Company. Further, the
employment agreement grants 18,750 qualified stock options to Dr. Wright, which
will vest at a rate of 20% of the total options on each of the first five
anniversaries of his employment agreement. See "--Stock Option Plans." The
employment agreement contains confidentiality, noncompetition and
non-solicitation provisions effective during the term of employment and for one
year after employment has terminated, unless employment is terminated for cause,
in which case the noncompetition provision will survive for two years.
STOCK OPTION PLANS
On July 30, 1993, the Board of Directors and the stockholders of the Company
adopted the 1993 Incentive Stock Option Plan (the "Plan") which provides for the
grant of qualified stock options to officers and key employees of the Company.
The purpose of the Plan is to assist the Company in attracting and retaining key
employees. A total of 1,608,000 shares of Common Stock has been reserved for
issuance under the Plan. As of August 31, 1996, options to purchase 1,044,250
shares of Common Stock have been granted thereunder. The options granted under
the Plan are incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986.
The Plan is administered by the Compensation Committee of the Board of
Directors, which is comprised of directors who are not participants in the Plan.
Subject to the provisions of the Plan, the Compensation Committee has the
authority to administer the Plan and determine, among other things, the
interpretation of any provision of the Plan, the eligible employees who are to
be granted stock options, the number of shares which may be issued and the
option exercise price. In no event will options be granted at prices less than
the greater of (i) $3.20 per share (as adjusted) and (ii) the fair market value
of the Common Stock on the date of grant. No option can be granted for a term of
more than ten years. The Company has not granted any outstanding options at less
than fair market value.
In addition, on December 1, 1993, in connection with the Advance Clinical
acquisition, the Board of Directors of the Company adopted a second incentive
stock option plan, the terms and provisions of which are identical to those of
the Plan. A total of 178,750 shares of Common Stock were reserved for issuance
under this second incentive stock option plan, all of which have been issued to
employees of Advance Clinical.
At the meeting of the Board of Directors of the Company held on February 15,
1996, the Board of Directors, after review of relevant financial analysis,
indication of interest for sale of the Common Stock and comparisons of similarly
situated companies, determined that the fair market value of the Common Stock
was $11.00 per share. Accordingly, the Board of Directors determined that it
would be in the best interest of the Company to cancel the 151,750 options that
had been granted to employees at a higher exercise price. The Board of Directors
canceled these options and re-issued, effective as of February 15, 1996, the
same number of options to each employee, with a strike price of $11.00 per
share.
In connection with the Merger, the Plan will be amended to increase the
number of shares reserved for issuance thereunder and the Advance Health Care
incentive stock option plan will be merged with and into the Plan. Holders of
options under the Advance Health Care incentive stock option plan will receive
options to purchase Common Stock under the Plan. See "Certain
Transactions--Merger of Advance Health Care With and Into the Company."
Options are not transferable other than by will or under the laws of descent
and distribution, and are exercisable during the lifetime of the optionee only
by the optionee or his guardian or legal representative. Upon termination of the
optionee's employment with the Company, the period of time during which the
stock options are exercisable is restricted to three months. The Board of
Directors has the right to amend, suspend or
34
<PAGE>
terminate the Plan at any time, but no such action after the Plan becomes
effective can affect or impair the rights of any optionee under any options
granted prior to such action. Certain amendments must be approved by the holders
of Common Stock.
INCENTIVE COMPENSATION PLAN
Employees of the Company who hold director-level positions or higher are
eligible to receive annual incentive-based bonus payments if the Company meets
or exceeds certain predetermined annual performance goals. The bonuses payable
under the incentive compensation plan are based on a percentage of each
employee's salary. One-half of the bonus is payable upon the Company meeting the
predetermined performance goals, with the other one-half subject to the
satisfaction of certain performance goals as determined by management for such
individual.
401(K) PLAN
The Company has established a tax-qualified employee savings and retirement
plan (the "401(k) Plan"). All employees who have been employed by the Company
for at least three months are eligible to participate. Employees may contribute
to the 401(k) Plan subject to a statutorily prescribed annual limit. The Company
is required to make contributions to the 401(k) Plan of at least 50% of the
first 6% of salary deferral contributed by each participant.
35
<PAGE>
CERTAIN TRANSACTIONS
WHITNEY DEBT FUND FINANCING
On December 8, 1993, the Company and an affiliate of J.H. Whitney & Co.,
Whitney Subordinated Debt Fund L.P. (the "Whitney Debt Fund"), entered into a
Note and Warrant Purchase Agreement pursuant to which the Whitney Debt Fund paid
the Company $7.0 million in exchange for the Whitney Note and a warrant (the
"Whitney Warrant") to purchase shares of Common Stock. The Whitney Note bears
interest at the rate of 10.1% per annum, payable quarterly. Although the Whitney
Note has a seven-year term, the Company is obligated to prepay the indebtedness,
without penalty or premium, upon consummation of a public offering. See "Use of
Proceeds." The Whitney Warrant grants the Whitney Debt Fund the right to
purchase an aggregate of 336,500 shares of Common Stock at an exercise price of
$4.00 per share until December 8, 2003. The warrant contains certain demand and
piggy-back registration rights with respect to the underlying Common Stock. See
"Share Eligible for Future Sale--Registration Rights."
TRANSACTION FEES RELATING TO THE ADVANCE CLINICAL ACQUISITION
In connection with the acquisition of Advance Clinical in 1993, the Company
agreed to pay a fee of $250,000 each to two officers of Advance Clinical for
services relating to the acquisition. The total $500,000 fee is included as part
of the Advance Clinical purchase price. The Company paid $100,000 of this fee
upon closing of the acquisition and $200,000 in each of February 1995 and
February 1996.
MANAGEMENT RELATIONSHIP WITH ADVANCE HEALTH CARE
Prior to the consummation of the Merger of Advance Health Care and the
Company, as described below, certain management employees of the Company
provided administrative and management services to Advance Health Care. During
fiscal year 1994, the Company paid fees to Advance Health Care for such services
and the use of the office space. See Note 12 of Notes to Consolidated Financial
Statements. Each of Mr. D. Halbert, the Chairman of the Board, President and
Chief Executive Officer of the Company, and Mr. J. Halbert, Executive Vice
President and Chief Operating Officer of the Company, served in the same
positions for Advance Health Care. Additionally, Mr. Phillips, the Company's
Senior Vice President, Chief Financial Officer, Secretary and Treasurer served
as Chief Financial Officer and Vice President of Accounting for Advance Health
Care. Further, Messrs. D. Halbert, J. Halbert, Faulkner and Ware served on the
Board of Directors of Advance Health Care.
As of August 1, 1993, the Company and Advance Health Care entered into an
agreement for the provision of mail pharmacy and claims adjudication services
for the benefit of employees of certain subsidiaries of Advance Health Care.
During fiscal year 1996, Advance Health Care paid the Company approximately
$56,000 (the fair market value as determined by the Board of Directors) for
these services. This agreement had an initial one-year term and renews
automatically for 12-month periods unless terminated by either party upon
written notice delivered 90 days prior to the expiration of any term. This
agreement will terminate as of the effective date of the Merger.
WARRANTS TO BCBS OF TEXAS
On November 25, 1995, the Company granted to BCBS of Texas the right to earn
up to four warrants, each representing the right to acquire 66,750 shares of
Common Stock, in consideration of BCBS of Texas causing additional lives to be
enrolled in the Company's PBM programs (the "BCBS of Texas Warrants"). BCBS of
Texas' right to earn the BCBS of Texas Warrants expires November 25, 2000. Each
BCBS of Texas Warrant will not be exercisable until the first annual anniversary
of its issuance. At such time, the BCBS of Texas Warrant will be exercisable in
whole during a four-year term at an exercise price of $11.00 per share. See
"Description of Capital Stock--Warrants to Purchase Common Stock." As of the
date of this Prospectus, none of the BCBS of Texas Warrants has been earned or
issued.
MERGER OF ADVANCE HEALTH CARE WITH AND INTO THE COMPANY
Immediately prior to the consummation of the Offering, Advance Health Care
will merge with and into the Company. Such Merger will be consummated as a means
of simplifying the corporate structure of the Company and is intended to qualify
as a tax free reorganization. Advance Health Care currently holds 3,125,000
shares of Common Stock. In the Merger, the Company will cancel the shares held
by Advance Health Care and issue shares of Common Stock directly to the Advance
Health Care stockholders based upon their fully-diluted
36
<PAGE>
proportionate ownership interests in Advance Health Care (collectively referred
to as the "AHC Stockholders"). Immediately prior to the Merger, the indebtedness
owed by Advance Health Care to certain of its stockholders will be repaid
through the issuance of additional shares of common stock in Advance Health Care
as follows: Advance Health Care currently owes approximately $750,000 to Halbert
& Associates, Inc. (which will be repaid through the issuance of 1,435 shares of
Advance Health Care common stock); approximately $350,000 to Dr. David S.
Halbert (which will be repaid through the issuance of 667 shares of Advance
Health Care common stock); and approximately $1,320,000 to Dr. Worley, which
includes approximately $900,000 of Advance Health Care indebtedness assumed by
Dr. Worley (which will be repaid through the issuance of 2,533 shares of Advance
Health Care common stock). Halbert & Associates, Inc. and Dr. Worley are among
the Selling Stockholders in this Offering. See "Principal and Selling
Stockholders." Following the repayment of its indebtedness, Advance Health Care
will distribute the stock of certain subsidiaries of Advance Health Care,
operating in businesses unrelated to the Company, to the AHC Stockholders. After
the spin-off and the repayment of indebtedness referred to above are effected,
Advance Health Care will have no operations or known liabilities, or assets of
its own other than its investment in the Company. The spin-off and the repayment
of indebtedness will not impact the number of outstanding shares of the
Company's Common Stock. In connection with the Merger, the Advance Health Care
incentive stock option plan will be merged with the Plan, and holders of options
under the Advance Health Care incentive stock option plan will receive options
to purchase Common Stock under the Plan.
ISSUANCE OF SERIES B PREFERRED STOCK
On June 25, 1996, the Company and BCBS of Texas entered into a stock
purchase agreement (the "Series B Stock Purchase Agreement") pursuant to which
BCBS of Texas purchased an aggregate of 2,597 shares of the Series B Preferred
Stock at an effective purchase price of $3,850 per share. Upon consummation of
this Offering (and assuming an initial public offering price of $12.00 per
share), the number of shares of Series B Preferred Stock will be adjusted to
3,333 shares (at an effective purchase price of $3,000 per share). BCBS of Texas
has certain registration rights in connection with its shares. As of the date of
sale, the conversion rate of the Series B Preferred Stock was one-to-one.
Following the stock split of the Common Stock in connection with this Offering,
each share of Series B Preferred Stock will be convertible into 250 shares of
Common Stock.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions between the Company and its
officers, directors, principal stockholders and affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will be on terms
no less favorable to the Company than could be obtained from unaffiliated third
parties.
37
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of June 30, 1996 adjusted on a pro forma basis to
reflect (i) the 250-for-one stock split of the Common Stock, (ii) the automatic
conversion of each share of Series A Preferred Stock into 250 shares of Common
Stock, (iii) consummation of the Merger of Advance Health Care with and into the
Company and (iv) as adjusted to reflect the sale of the shares offered hereby
for (a) each person who is known to own more than 5% of any voting class of
capital stock, (b) each director and each Named Executive and (c) all executive
officers and directors of the Company as a group. Except as otherwise indicated
below, each of the entities or persons named in the table has sole voting and
investment power with respect to all shares of Common Stock beneficially owned.
No effect has been given to shares reserved for issuance under outstanding stock
options except where otherwise indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING (1) NUMBER OFFERING (2)
----------------------- OF SHARES -----------------------
NUMBER PERCENT OFFERED NUMBER PERCENT
---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
J.H. Whitney & Co. (3).................................. 1,586,500 27.7% -- 1,586,500 20.5%
630 Fifth Avenue
Suite 3200
New York, NY 10111
Canaan Capital Partners L.P. (4)........................ 1,090,750 20.2 -- 1,090,750 14.7
105 Rowayton Avenue
Rowayton, CT 06853
Assicurazioni Generali S.p.A............................ 856,750 15.9 400,000 456,750 6.2
117 Fenchurch Street
London, EC3M 5DY
United Kingdom
David R. Worley (5)..................................... 502,750 9.3 118,280** 384,470 5.2
7103 Valburn Drive
Austin, TX 78731
Halbert & Associates, Inc. (6).......................... 86,750 1.6 67,056** 19,694 *
545 E. John Carpenter Freeway
Suite 1900
Irving, TX 75062
David D. Halbert (7).................................... 617,950 11.0 -- 550,894 7.2
Jon S. Halbert (8)...................................... 436,600 7.8 -- 369,544 4.9
Joseph J. Filipek (9)................................... 45,000 * -- 45,000 *
John H. Sattler (10).................................... 22,500 * -- 22,500 *
Alan T. Wright (11)..................................... 5,000 * -- 5,000 *
Michael D. Ware......................................... 26,000 * 26,000 *
Mikel D. Faulkner....................................... 111,000 2.1 111,000 1.5
Peter M. Castleman (12)................................. 1,586,500 27.7 -- 1,586,500 20.5
Stephen L. Green (13)................................... 1,106,250 20.5 -- 1,106,250 15.0
Jeffrey R. Jay (14)..................................... 1,605,250 28.0 -- 1,605,250 20.8
Rogers K. Coleman (15).................................. 833,333 13.4 -- 833,333 10.1
All directors and executive officers as a group
(14 persons) (16)...................................... 4,831,683 67.5% -- 4,246,347 46.4%
</TABLE>
- --------------------------
* Less than 1%
** The number of shares offered by the stockholder assumes an initial public
offering price of $12.00 per share. If the initial public offering price is
less than $12.00 per share, then the number of shares offered by this
stockholder will be increased, and if the initial public offering price is
greater than $12.00 per share, then the number of shares offered will be
reduced. The final number of shares to be sold by this stockholder will be
identified in and registered pursuant to Rules 430A(a) and 462(b) of the
Securities Act.
(1) Pursuant to the rules of the Commission, certain shares of the Company's
Common Stock which a person has the right to acquire within 60 days of
October 1, 1996, the assumed effective date of the Offering (the "Assumed
38
<PAGE>
Effective Date"), pursuant to the exercise of options or warrants are deemed
to be outstanding for the purposes of computing the percentage ownership of
such person but are not deemed outstanding for the purposes of computing the
percentage ownership of any other person.
(2) Assumes that the Underwriters' over-allotment option is not exercised.
(3) Includes 250,000 shares of Common Stock owned by J.H. Whitney & Co.,
1,000,000 shares of Common Stock owned by the Whitney 1990 Equity Fund, L.P.
(the "Whitney Fund") and 336,500 shares of Common Stock issuable upon
exercise of the Whitney Warrant held by the Whitney Debt Fund. The General
Partners of J.H. Whitney & Co., who are also the General Partners of the
Whitney Fund, exercise sole investment and voting power with respect to the
shares of Common Stock owned by such entities. Mr. Castleman and Dr. Jay,
each a director of the Company, serve as Managing Partner and General
Partner, respectively, of J.H. Whitney & Co.
(4) Includes 117,000 shares of Common Stock owned by Canaan L.P. and 973,750
shares of Common Stock owned by Canaan Capital Offshore Limited Partnership
C.V. ("Canaan Offshore"). Canaan Capital Limited Partnership ("Canaan L.P.")
exercises sole investment and voting power with respect to the shares of
Common Stock owned by such entities. Mr. Green, a director of the Company,
is a General Partner of Canaan L.P. Does not include 125,000 shares held by
Quai Ltd., as to which Canaan L.P. disclaims beneficial ownership.
(5) Includes 27,750 shares of Common Stock held for the benefit of Dr. Worley's
minor children as to which Dr. Worley disclaims beneficial ownership.
(6) David D. Halbert and Jon S. Halbert are the only executive officers and
directors of Halbert & Associates, Inc. and each owns 50% of the outstanding
capital stock of Halbert & Associates, Inc. David D. Halbert and Jon S.
Halbert may be deemed to share beneficial ownership of the shares held by
Halbert & Associates, Inc.
(7) Includes 206,450 shares issuable pursuant to options which are exercisable
within 60 days of the Assumed Effective Date. Includes 86,750 shares held by
Halbert & Associates, Inc. David D. Halbert may be deemed to beneficially
own all of the shares held by Halbert & Associates, Inc. Also includes
27,750 shares of Common Stock held for the benefit of Mr. D. Halbert's minor
children, as to which Mr. D. Halbert disclaims beneficial ownership.
(8) Includes 206,600 shares issuable pursuant to options which are exercisable
within 60 days of the Assumed Effective Date. Includes 86,750 shares held by
Halbert & Associates, Inc. Jon S. Halbert may be deemed to beneficially own
all of the shares held by Halbert & Associates, Inc. Also includes 27,750
shares of Common Stock held for the benefit of Mr. J. Halbert's minor
children, as to which Mr. J. Halbert disclaims beneficial ownership.
(9) Includes 45,000 shares issuable pursuant to options which are exercisable
within 60 days of the Assumed Effective Date.
(10) Includes 22,500 shares issuable pursuant to options which are exercisable
within 60 days of the Assumed Effective Date.
(11) Includes 5,000 shares issuable pursuant to options which are exercisable
within 60 days of the Assumed Effective Date.
(12) Includes no shares held directly by Mr. Castleman. Mr. Castleman, a
director of the Company, is a General Partner of J.H. Whitney & Co., the
General Partner of the Whitney Fund and the Whitney Debt Fund and therefore
may be deemed to share beneficial ownership of the shares held by the
Whitney Investors. J.H. Whitney, the Whitney Fund and the Whitney Debt Fund
are collectively referred to as the "Whitney Investors."
(13) Includes 15,500 shares held directly by Mr. Green. Mr. Green, a director of
the Company, is a General Partner of Canaan Partners, the General Partner of
Canaan L.P. and Canaan Offshore and therefore may be deemed to share
beneficial ownership of the shares held by the Canaan Investors other than
125,000 shares held by Quai Ltd., as to which Mr. Green disclaims beneficial
ownership. Canaan L.P., Canaan Offshore, Quai Ltd., Dr. Jay and Mr. Green
are collectively referred to as the "Canaan Investors."
(14) Includes 18,750 shares held directly by Dr. Jay. Dr. Jay, a director of the
Company, is a General Partner of J.H. Whitney & Co., the General Partner of
the Whitney Fund and the Whitney Debt Fund and therefore may be deemed to
share beneficial ownership of the shares held by the Whitney Investors.
(15) Represents 833,333 shares issuable upon the conversion of the Series B
Preferred Stock held by BCBS of Texas, assuming an initial public offering
price of $12.00 per share. Dr. Coleman is the President and Chief Executive
Officer of BCBS of Texas. Dr. Coleman disclaims beneficial ownership of
these shares.
(16) Includes 2,427,500 shares held by entities affiliated with certain
directors and includes 588,600 shares subject to stock options held by
directors and officers exercisable within 60 days of the Assumed Effective
Date. See footnotes (7)-(11).
39
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of (i) 7,500,000 shares of
Common Stock, (ii) 10,000 shares of Series A Preferred Stock and (iii) 3,000
shares of Series B Preferred Stock. After giving effect to the Offering and the
consummation of the Merger, 7,396,750 shares of Common Stock, no shares of
Series A Preferred Stock and 3,333 shares of Series B Preferred Stock will be
outstanding. Assuming the underwriters' over-allotment option is exercised in
full, upon consummation of the Offering, 7,784,550 shares of Common Stock will
be outstanding.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, the Restated Certificate of the Company and the Bylaws of
the Company that are included as exhibits to the registration statement of which
this Prospectus forms a part and by the provisions of applicable law.
COMMON STOCK
After giving effect to the Merger as if it had occurred on June 30, 1996,
there were 5,396,750 shares of Common Stock outstanding which were held of
record by 53 stockholders, as adjusted to reflect (i) the 250-for-one stock
split, (ii) the conversion of the Series A Preferred Stock and (iii) the
consummation of the Merger all of which will occur immediately prior to or
concurrently with the closing of this Offering. Common Stock is not redeemable,
does not have any conversion rights and is not subject to call. Holders of
shares of Common Stock have no preemptive, redemption, conversion or other
subscription rights. Holders of shares of Common Stock are entitled to one vote
per share on any matter submitted to a vote of stockholders of the Company.
Cumulative voting is prohibited in the election of directors. The holders of
Common Stock are entitled to receive dividends, if any, as and when declared
from time to time by the Board of Directors of the Company out of funds legally
available therefor. See "Dividend Policy." Subject to the rights of the holders
of Preferred Stock, upon liquidation, dissolution or winding up of the affairs
of the Company, the holders of Common Stock will be entitled to participate
equally and ratably, in proportion to the number of shares held, in the net
assets of the Company available for distribution to holders of Common Stock. The
shares of Common Stock currently outstanding are, and the shares of Common Stock
offered hereby when issued will be, validly issued, fully paid and
nonassessable.
PREFERRED STOCK
Upon consummation of this Offering, all shares of the Series A Preferred
Stock will convert automatically into shares of Common Stock at a 250-for-one
conversion rate. All of the shares of the Series A Preferred Stock issued and
outstanding are held by the Canaan Investors and the Whitney Investors. The
holders of the Series A Preferred Stock are entitled to one vote per share on
matters submitted to a vote of the stockholders and, except as otherwise
provided by law, vote together with the holders of Common Stock as a single
class.
Holders of the Series A Preferred Stock are entitled to receive, out of
funds legally available therefor, cumulative dividends, calculated without
compounding, equal to $80 per share per annum. Such cumulative dividends accrue
and accumulate from the date of issuance and are payable if, as and when
declared by the Board of Directors of the Company. Further, the holders of the
Series A Preferred Stock are entitled to any dividends that the Board of
Directors may declare to be payable on shares of Common Stock as if the shares
of the Series A Preferred Stock had been converted into shares of Common Stock.
Upon the liquidation, dissolution or winding up of the Company, the holders of
the Series A Preferred Stock have the right, prior to any existing or future
classes of capital stock, to receive $1,000 plus all accrued and unpaid
dividends for each outstanding share of Series A Preferred Stock and to
participate equally and ratably with the holders of the Common Stock in the net
assets of the Company available for distribution to stockholders. On or after
August 4, 1999, the holders of 60% of the outstanding shares of Series A
Preferred Stock may require the Company to redeem any or all of such holders'
shares at a price equal to the greater of (i) the original price paid per share,
plus accrued and unpaid dividends, and (ii) the fair market value of such
shares. The payment of the redemption price, if any, will be made in three
equal, annual installments. Upon the consummation of this Offering and the
conversion of all outstanding shares of Series A Preferred Stock into Common
Stock, all accrued but unpaid dividends on the Series A Preferred Stock
dividends will be forfeited.
40
<PAGE>
Holders of the Series B Preferred Stock are not entitled to vote on any
matter. The holders of the Series B Preferred Stock are entitled to receive, out
of funds legally available therefor, cumulative dividends, calculated without
compounding, equal to $60.00 per share per annum. Such cumulative dividends
accrue and accumulate from the date of issuance and are payable on March 31 of
each year. Further, the holders of the Series B Preferred Stock are entitled to
any dividends that the Board of Directors may declare to be payable on shares of
Common Stock as if the shares of Series B Preferred Stock had been converted
into shares of Common Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of the Series B Preferred Stock have the right, prior
to any existing or future classes of capital stock, but after the Series A
Preferred Stock, to receive $10.0 million plus all accrued and unpaid dividends
of Series B Preferred Stock and to participate equally and ratably with the
holders of the Common Stock in the net assets of the Company available for
distribution to stockholders. On or after June 25, 1998, the Company, in its
sole discretion, may redeem any or all of such holders' shares at a price equal
to the original price paid per share, plus accrued and unpaid dividends. The
Company has the right to convert the Series B Preferred Stock into Common Stock
at any time after the fifth anniversary of issuance. The conversion rate for the
Series B Preferred Stock will be proportionately adjusted for the 250-for-one
stock split. If the Company forces such a conversion, the holders of the Series
B Preferred Stock will be entitled to piggy-back registration rights in
connection with future registered offerings of shares of Common Stock.
WARRANTS TO PURCHASE COMMON STOCK
Effective December 8, 1993, in connection with the Advance Clinical
acquisition, the Company issued to the Whitney Debt Fund a warrant to purchase
336,500 shares of Common Stock, exercisable in whole or in part during a
ten-year term, at an exercise price of $4.00 per share. In addition, in
connection with the Advance Clinical acquisition, effective December 8, 1993,
the Company issued to BCBS of Maryland a warrant to purchase 56,250 shares of
Common Stock, exercisable in whole during a four-year term at an aggregate
exercise price of $337,500. The warrants contain certain demand and piggy-back
registration rights relating to the Common Stock underlying the warrants. See
"Shares Eligible for Future Sale--Registration Rights."
On November 25, 1995, the Company granted to BCBS of Texas the right to earn
up to four BCBS of Texas Warrants, each representing the right to acquire 66,750
shares of Common Stock, in consideration of BCBS of Texas causing additional
lives to be enrolled in the Company's PBM programs. BCBS of Texas' right to earn
up to four BCBS of Texas Warrants expires November 25, 2000. Each BCBS of Texas
Warrant will not be exercisable until the first anniversary of its issuance. At
such time, the BCBS of Texas Warrant will be exercisable in whole during a
four-year term at a per share exercise price of $11.00. As of the date of the
Prospectus, none of the BCBS of Texas Warrants has been earned or issued.
In addition, prior to the end of September 1996, the Company anticipates
entering into an agreement with VHA Inc. pursuant to which, among other things,
the Company will grant to VHA Inc. the right to earn up to ten warrants, each
representing the right to acquire 28,125 shares of Common Stock in consideration
of VHA Inc. causing additional lives to be enrolled in the Company's PBM
programs (the "VHA Warrants"). VHA Inc.'s right to earn the VHA Warrants will
expire five years after the date of issuance. Each VHA Warrant earned will be
exercisable in whole beginning on the first anniversary of its issuance and
ending on the fifth anniversary of the issuance at an estimated exercise price
equal to 90% of the initial public offering price per share in this Offering.
The Company has agreed pursuant to a letter of intent to issue a warrant
representing the right to acquire 84,500 shares of Common Stock to Principal
Health Care, Inc. ("PHC") upon execution of a definitive agreement pursuant to
which the Company is the provider of PBM services for PHC and its wholly owned
subsidiaries (the "PHC Warrant"). The PHC Warrant will be exercisable in whole
beginning on the first anniversary of its issuance and ending on the fifth
anniversary of its issuance at an exercise price equal to 90% of the initial
public offering price per share in this Offering.
The foregoing description of the warrants issued by the Company is qualified
in its entirety by reference to such warrants which have been filed as exhibits
to the Registration Statement of which this Prospectus constitutes a part.
41
<PAGE>
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Chase Mellon
Shareholder Services, L.L.C.
VOTING AGREEMENTS
In connection with the Canaan and Whitney capital investment, Advance Health
Care, the Canaan Investors, the Whitney Investors and Messrs. D. Halbert, J.
Halbert and Phillips entered into a Voting, Co-Sale and Right of First Refusal
Agreement dated as of August 4, 1993 (the "Voting Agreement"). In the Voting
Agreement, the stockholders agreed to vote all of their shares in favor of a
nine member Board of Directors consisting of two persons designated by the
Whitney Investors, two persons designated by the Canaan Investors and five
additional persons, at least two of whom may not be employees or officers of the
Company, designated by Advance Health Care and the Company. Further, the
stockholders agreed to establish an Audit Committee consisting of three members,
at least one of whom will be a director nominated by the Canaan Investors and
the Whitney Investors, and a Compensation Committee consisting of four members,
at least two of whom will be directors nominated by the Canaan Investors and the
Whitney Investors. The parties to the Voting Agreement have agreed to terminate
such agreement effective upon consummation of this Offering (the "Termination
Agreement.")
Holders of the Series B Preferred Stock are not entitled to vote on any
matter. Pursuant to the Series B Stock Purchase Agreement, the holders of the
Series B Preferred Stock (or the holders of Common Stock obtained upon
conversion of the Series B Preferred Stock) agree to consent to and execute any
documents in connection with any proposed merger of the Company where the
Company would not be the surviving entity, the sale of a majority of the capital
stock of the Company, or the sale of all or substantially all of its assets.
The foregoing descriptions of the Voting Agreement, Termination Agreement
and Series B Stock Purchase Agreement are qualified in their entirety by
reference to the Voting Agreement and Termination Agreement which have been
filed as exhibits to the Registration Statement of which this Prospectus
constitutes a part.
CERTAIN PROVISIONS OF THE COMPANY'S RESTATED CERTIFICATE AND BYLAWS
Pursuant to the Restated Certificate, the members of the Board of Directors
are divided into three classes of directors serving staggered three-year terms,
with the number of directors in each class to be as nearly equal as possible.
The term of office of the members in the first class will expire at the next
annual meeting of the stockholders, the second class will expire one year
thereafter, and the third class will expire one year thereafter. The Board of
Directors has no current plans to formulate or effect additional measures that
could have an anti-takeover effect.
Section 102(b)(7) of the Delaware General Corporation Law provides that a
Delaware corporation may include in its certificate of incorporation a provision
eliminating or limiting the personal liability of directors to the corporation
or its stockholders for monetary damages for breach of their fiduciary duty
including acts constituting gross negligence, except under certain
circumstances, including breach of the director's duty of loyalty, acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law or any transaction from which the director derived improper
personal benefit. The Company's Restated Certificate provides that the Company's
directors are not liable to the Company or its stockholders for monetary damages
for breach of their fiduciary duties, subject to the exceptions specified by
Delaware law.
The Company's Restated Certificate and Bylaws also provide that the Company
will indemnify its directors and officers to the fullest extent permitted by
Delaware law. The Company is generally required to indemnify its directors and
officers for all judgments, fines, loss, liability, settlements, legal fees and
other expenses incurred in connection with pending or threatened legal
proceedings because of the director's or officer's position with the Company or
another entity that the director or officer serves at the Company's request,
subject to certain conditions, and to advance funds to its directors and
officers to enable them to defend against such proceedings. To receive
indemnification, the director or officer must have been successful in the legal
proceeding or acted in good faith and in what he reasonably believed to be a
lawful manner and the Company's best interest.
42
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 7,396,750 shares of
Common Stock outstanding, assuming no exercise of options after August 31, 1996
and after giving effect to (i) the 250-for-one stock split, and (ii) the
issuance of 2,500,000 shares of Common Stock upon automatic conversion of all
shares of Series A Preferred Stock and (iii) the consummation of the Merger, all
of which will occur immediately prior to or concurrently with the closing of
this Offering. Of these shares, the 2,585,336 shares of Common Stock sold in
this Offering will be freely tradeable without restriction or further
registration under the Securities Act except for any shares purchased by
"affiliates" of the Company as that term is defined in the Securities Act. The
remaining 4,811,414 shares of Common Stock outstanding upon completion of this
Offering are restricted securities as that term is defined in Rule 144 under the
Securities Act ("Rule 144"). All of these shares will be subject to "lock-up"
agreements which prohibit their sale for a period of 180 days following the date
of this Prospectus without the prior consent of Hambrecht & Quist LLC.
Upon expiration of the 180-day lock-up period, an aggregate of 3,073,250
shares of Common Stock will be eligible for sale without restriction pursuant to
Rule 144(k) (as described below), and 1,738,164 shares will be eligible for sale
subject to the volume, manner of sale and other applicable restrictions of Rule
144. In addition, of the 1,044,250 shares of Common Stock issuable upon the
exercise of outstanding options, approximately 609,850 shares of Common Stock
are immediately issuable upon the exercise of vested options and will become
eligible for sale, if such options are exercised, after the date of this
Prospectus. The holders of such options are expected to enter into 180-day
lock-up agreements in connection with this Offering.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) whose restricted securities have
been outstanding for at least two years, including a person who may be deemed an
"affiliate" of the Company, may only sell a number of shares within any
three-month period which does not exceed the greater of (i) one percent of the
then outstanding shares of the Company's Common Stock (approximately 73,968
shares after this Offering) or (ii) the average weekly trading volume in the
Company's Common Stock in the four calendar weeks immediately preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice and the availability of current public information about
the Company. A person who is not an affiliate of the issuer, has not been an
affiliate within three months prior to the sale and has owned the restricted
securities for at least three years is entitled to sell such shares under Rule
144(k) without regard to any of the limitations described above.
Beginning 90 days after the date of this Prospectus, certain shares issued
or issuable upon the exercise of options granted by the Company or acquired
pursuant to the Plan prior to the date of this Prospectus will also be eligible
for sale in the public market pursuant to Rule 701 under the Securities Act. In
general, Rule 701 permits resales of shares issued pursuant to certain
compensatory benefit plans and contracts commencing 90 days after the issuer
becomes subject to the reporting requirements of the Exchange Act, in reliance
upon Rule 144, but without compliance with certain restrictions of Rule 144,
including the holding period requirements. As of August 31, 1996 and after
giving effect to the Merger, the Company had options outstanding covering
434,400 shares which become exercisable at various times in the future as such
options vest. Any shares of Common Stock issued upon the exercise of these
options will be eligible for sale pursuant to Rule 701.
Prior to this Offering, there has been no market for the Common Stock and no
prediction can be made as to the effect, if any, that market sales of shares or
the availability of such shares for sale will have on the market price of the
Common Stock. Nevertheless, sales of substantial amounts of Common Stock in the
public market may adversely affect the market price and may impair the Company's
future ability to raise capital through the public sale of its Common Stock.
REGISTRATION RIGHTS
Substantially all of the current stockholders of the Company, as well as
BCBS of Maryland and the Whitney Debt Fund upon exercise of their warrants, and
BCBS of Texas, as the holder of Series B Preferred Stock and the BCBS of Texas
Warrants (collectively, the "Rights Holders"), are entitled to include in any
registration of the Company's Common Stock in a public offering, whether for its
own account or for the account of another security holder up to a total of
approximately 6,617,250 shares of outstanding Common Stock, assuming conversion
of all outstanding Preferred Stock into Common Stock and the full exercise of
the outstanding
43
<PAGE>
warrants (the "Registrable Shares"). Subject to certain limitations, the holders
of at least 60% of the shares currently held by the Canaan Investors, the
Whitney Investors and Advance Health Care and their assigns may require, at any
time commencing six months after the date of this Prospectus, on two occasions,
that the Company cause their shares to be registered under the Securities Act.
Such a demand by the Canaan Investors and the Whitney Investors must include at
least 50% of the outstanding shares issued to them. The managing underwriter of
any offering in which Rights Holders participate may limit the number of
Registrable Shares to be included in the registration; provided that the Canaan
Investors and Whitney Investors will be entitled to register on a pro-rata basis
among such holders two shares for every one share held by Advance Health Care
that is included in a registration. In addition, the holders of at least 60% of
the shares held by the Canaan Investors, the Whitney Investors and Advance
Health Care and their assigns may require the Company, on three occasions, to
cause their shares to be registered on a Form S-3 registration statement (or
other form with similar requirements) under the Securities Act at any time such
form is available to the Company, but in no event more than seven years after
the date of this Prospectus. In connection with the Merger, the registration
rights of Advance Health Care will be assigned to the stockholders of Advance
Health Care. All of the Rights Holders entitled to registration rights, other
than the Selling Stockholders, have waived such rights in connection with this
Offering.
44
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC,
Montgomery Securities and J.P. Morgan Securities Inc., have severally agreed to
purchase from the Company and the Selling Stockholders the following respective
numbers of shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- ----------
<S> <C>
Hambrecht & Quist LLC.............................................................
Montgomery Securities.............................................................
J.P. Morgan Securities Inc........................................................
----------
Total......................................................................... 2,585,336
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and the Selling
Stockholders, their counsel and the Company's independent auditors. The nature
of the Underwriters' obligation is such that they are committed to purchase all
shares of Common Stock offered hereby if any such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. The
Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority. After the initial public offering of the shares, the
offering price and other selling terms may be changed by the Representatives of
the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 387,800
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of Common Stock offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
45
<PAGE>
Under certain agreements between the Representatives and the stockholders of
the Company (or their respective predecessors-in-interest), the existing
stockholders of the Company and of Advance Health Care, including the Selling
Stockholders and the Company's directors and executive officers, who will own in
the aggregate 4,811,414 shares of Common Stock after the Offering, may not,
without the prior written consent of Hambrecht & Quist LLC, directly or
indirectly, sell, offer, contract to sell, transfer the economic risk of
ownership in, make any short sale, pledge or otherwise dispose of any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for or any other rights to purchase or acquire Common Stock beneficially owned
by them during the 180 day period following the effective date of the
Registration Statement. In addition, the Company has agreed that, without the
prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters,
the Company will not, directly or indirectly, sell, offer, contract to sell,
make any short sale, pledge, sell any option or contract to purchase, purchase
any option or contract to sell, grant any option, right or warrant to purchase
or otherwise transfer or dispose of any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for or any rights to purchase or
acquire Common Stock, or enter into any swap or other agreement that transfers,
in whole or in part, any of the economic consequences or ownership of Common
Stock, during the 180 day period following the effective date of the
Registration Statement, except that the Company may issue, and grant options to
purchase, shares of Common Stock under its current stock option plans and may
issue shares of Common Stock in connection with certain acquisition
transactions, provided such shares are subject to the 180-day lock-up agreement.
Sales of such shares in the future could adversely affect the market price of
the Common Stock. Hambrecht & Quist LLC may, in its sole discretion, release any
of the shares subject to the lock-up agreements at any time without notice.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation among the Company, the Selling Stockholders and the Representatives.
Among the factors to be considered in determining the initial public offering
price will be prevailing market and economic conditions, revenues and earnings
of the Company, market valuations of other companies engaged in activities
similar to those of the Company, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors deemed relevant.
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for the Company by Akin, Gump, Strauss, Hauer & Feld, L.L.P. Certain legal
matters in connection with this Offering will be passed upon for the
Underwriters by Brobeck, Phleger & Harrison LLP, Austin, Texas.
EXPERTS
The Consolidated Financial Statements as of March 31, 1995 and 1996 and for
each of the three years in the period ended March 31, 1996, included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.
46
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets--March 31, 1995 and 1996 and June 30, 1996 (unaudited).... F-3
Consolidated Statements of Operations for the Years Ended March 31, 1994, 1995 and
1996 and for the Three Months Ended June 30, 1995 and 1996 (unaudited)............... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years ended March
31, 1994, 1995 and 1996 and for the Three Months Ended June 30, 1996 (unaudited)..... F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 1994, 1995 and
1996 and for the Three Months Ended June 30, 1995 and 1996 (unaudited)............... F-6
Notes to Consolidated Financial Statements............................................ F-7
PARADIGM PHARMACY MANAGEMENT, INC.
Report of Independent Public Accountants.............................................. F-16
Statement of Operations for the Eleven Months Ended November 30, 1993................. F-17
Statement of Stockholder's Equity for the Eleven Months Ended November 30, 1993....... F-18
Statement of Cash Flows for the Eleven Months Ended November 30, 1993................. F-19
Notes to Financial Statements......................................................... F-20
</TABLE>
F-1
<PAGE>
After the 250-for-one stock split discussed in Note 15 to the Company's
Consolidated Financial Statements is effected, we expect to be in a position to
render the following audit report.
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Advance ParadigM, Inc.:
We have audited the accompanying consolidated balance sheets of Advance
ParadigM, Inc. (a Delaware corporation formerly known as Advance Pharmacy
Services, Inc.) and subsidiaries as of March 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended March 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Advance ParadigM, Inc. and
subsidiaries as of March 31, 1995 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1996, in conformity with generally accepted accounting principles.
As explained in Note 2 to the financial statements, the Company has given
retroactive effect to the change in accounting for network claim costs.
Dallas, Texas,
May 6, 1996 (except with respect to the
matters discussed in Note 15, as to which
the date is , 1996)
F-2
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1995 1996
------------- ------------- JUNE 30, 1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 2,625,000 $ 16,457,000 $ 25,637,000
Accounts receivable, net of allowance for doubtful accounts of
$141,000, $130,000 and $130,000, respectively.................... 15,997,000 23,078,000 26,470,000
Inventories....................................................... 1,231,000 1,598,000 1,483,000
Prepaid expenses and other........................................ 400,000 449,000 627,000
------------- ------------- -------------
Total current assets............................................ 20,253,000 41,582,000 54,217,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization of $980,000, $1,935,000 and $2,236,000,
respectively....................................................... 3,442,000 4,080,000 4,714,000
INTANGIBLE ASSETS, net of accumulated amortization of $461,000,
$808,000 and $895,000, respectively................................ 13,392,000 13,045,000 12,959,000
OTHER ASSETS, net of accumulated amortization of $136,000, $49,000
and $2,000, respectively........................................... 201,000 198,000 201,000
------------- ------------- -------------
Total assets.................................................... $ 37,288,000 $ 58,905,000 $ 72,091,000
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.................................................. $ 19,080,000 $ 39,000,000 $ 41,923,000
Accrued salaries and benefits..................................... 873,000 1,283,000 689,000
Other accrued expenses............................................ 509,000 934,000 1,136,000
Current portion of other noncurrent liabilities................... 244,000 49,000 37,000
------------- ------------- -------------
Total current liabilities....................................... 20,706,000 41,266,000 43,785,000
NONCURRENT LIABILITIES:
Long-term debt to related parties................................. 7,000,000 7,000,000 7,000,000
Other noncurrent liabilities, less current portion................ 238,000 241,000 241,000
------------- ------------- -------------
Total liabilities............................................... 27,944,000 48,507,000 51,026,000
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK:
Series A cumulative convertible preferred stock, $.01 par value;
10,000 shares authorized, issued, and outstanding at March 31,
1995 and 1996 and June 30, 1996, with aggregate liquidation
preference of $11,159,000, $11,959,000 and $12,159,000,
respectively..................................................... 11,076,000 11,896,000 12,099,000
------------- ------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT):
Series B preferred stock, $.01 par value; 3,000 shares authorized,
0, 0 and 2,597 shares issued and outstanding at March 31, 1995
and 1996 and June 30, 1996, respectively.........................
Common stock, $.01 par value; 7,500,000 shares authorized,
3,125,000, 3,130,500 and 3,130,500 shares issued and outstanding
at March 31, 1995 and 1996 and June 30, 1996, respectively....... -- -- --
Additional paid-in capital........................................ 1,501,000 1,518,000 11,518,000
Accumulated deficit............................................... (3,233,000) (3,016,000) (2,552,000)
------------- ------------- -------------
Total stockholders' equity (deficit)............................ (1,732,000) (1,498,000) 8,966,000
------------- ------------- -------------
Total liabilities and stockholders' equity (deficit)............ $ 37,288,000 $ 58,905,000 $ 72,091,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, THREE MONTHS ENDED JUNE 30,
-------------------------------------------- ----------------------------
1994 1995 1996 1995 1996
------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
REVENUES............................ $ 34,970,000 $ 91,306,000 $ 125,333,000 $ 25,692,000 $ 49,809,000
------------- ------------- -------------- ------------- -------------
COST OF OPERATIONS:
Cost of revenues.................. 32,612,000 85,532,000 117,788,000 24,445,000 47,454,000
Selling, general, and
administrative expenses.......... 2,330,000 4,963,000 6,158,000 1,442,000 1,714,000
------------- ------------- -------------- ------------- -------------
Total cost of operations........ 34,942,000 90,495,000 123,946,000 25,887,000 49,168,000
------------- ------------- -------------- ------------- -------------
Operating income (loss)......... 28,000 811,000 1,387,000 (195,000) 641,000
INTEREST INCOME..................... -- 91,000 366,000 39,000 205,000
INTEREST EXPENSE.................... (423,000) (878,000) (716,000) (179,000) (177,000)
------------- ------------- -------------- ------------- -------------
NET INCOME (LOSS)................... $ (395,000) $ 24,000 $ 1,037,000 (335,000) $ 669,000
------------- ------------- -------------- ------------- -------------
------------- ------------- -------------- ------------- -------------
PRO FORMA NET INCOME PER SHARE...... $ .25 $ .12
-------------- -------------
-------------- -------------
PRO FORMA WEIGHTED AVERAGE SHARES
OUTSTANDING........................ 6,941,240 6,941,240
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
SERIES B PREFERRED
COMMON STOCK STOCK
---------------------- ---------------------- ADDITIONAL
NUMBER OF NUMBER OF PAID-IN ACUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ---------- ----------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1993.............. 3,125,000 $ -- -- $ -- $ 1,661,000 $ (1,670,000) $ (9,000)
Assumption of note payable in
conjunction with the formation of
API............................... -- -- -- -- (500,000) -- (500,000)
Capital contribution from Parent... -- -- -- -- 173,000 -- 173,000
Issuance of 1,346 Common Stock
warrants valued at $124 per
warrant........................... -- -- -- -- 167,000 -- 167,000
Net loss........................... -- -- -- -- -- (395,000) (395,000)
Dividends ($35.90 per share) and
accretion on Redeemable Preferred
Stock............................. -- -- -- -- -- (372,000) (372,000)
---------- ---------- ----- --------- ------------- ------------ -------------
BALANCE, March 31, 1994.............. 3,125,000 -- -- -- 1,501,000 (2,437,000) (936,000)
Net income......................... -- -- -- -- -- 24,000 24,000
Dividends ($80.00 per share) and
accretion on Redeemable Preferred
Stock............................. -- -- -- -- -- (820,000) (820,000)
---------- ---------- ----- --------- ------------- ------------ -------------
BALANCE, March 31, 1995.............. 3,125,000 -- -- -- 1,501,000 (3,233,000) (1,732,000)
Net income......................... -- -- -- -- -- 1,037,000 1,037,000
Dividends ($80.00 per share) and
accretion on Redeemable Preferred
Stock............................. -- -- -- -- -- (820,000) (820,000)
Issuance of Common Stock in
connection with the exercise of
employee stock options............ 5,500 -- -- -- 17,000 -- 17,000
---------- ---------- ----- --------- ------------- ------------ -------------
BALANCE, March 31, 1996.............. 3,130,500 -- -- -- 1,518,000 (3,016,000) (1,498,000)
Net Income......................... -- -- -- -- -- 669,000 669,000
Issuance of 2,597 shares of Series
B Preferred Stock................. -- -- 2,597 -- 10,000,000 -- 10,000,000
Dividends ($20.00 per share) and
accretion on Redeemable Preferred
Stock............................. -- -- -- -- -- (205,000) (205,000)
---------- ---------- ----- --------- ------------- ------------ -------------
BALANCE, June 30, 1996............... 3,130,500 $ -- 2,597 $ -- $ 11,518,000 $ (2,552,000) $ 8,966,000
---------- ---------- ----- --------- ------------- ------------ -------------
---------- ---------- ----- --------- ------------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30
----------------------------------- ---------------------
1994 1995 1996 1995 1996
----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ (395,000) $ 24,000 $1,037,000 $(335,000) $ 669,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities--
Depreciation and amortization............................ 319,000 969,000 1,313,000 306,000 388,000
Noncash interest expense................................. 215,000 162,000 -- -- --
Provision for doubtful accounts.......................... 27,000 58,000 23,000 18,000 --
Change in certain assets and liabilities, net of effects
from acquisition of subsidiary--
(Increase) decrease in accounts receivable............. 204,000 (5,333,000) (7,104,000) 381,000 (3,392,000)
Increase in inventories................................ (697,000) (183,000) (367,000) (190,000) 114,000
(Increase) decrease in prepaid expenses and other
assets................................................ (172,000) (324,000) (58,000) 50,000 (182,000)
Increase in accounts payable, accrued expenses, and
other noncurrent liabilities.......................... 1,535,000 8,285,000 20,809,000 853,000 2,530,000
----------- ---------- ---------- --------- ----------
Net cash provided by operating activities.............. 1,036,000 3,658,000 15,653,000 1,083,000 127,000
----------- ---------- ---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................ (1,270,000) (2,245,000) (1,594,000) (216,000) (935,000)
Acquisition of subsidiary, net of cash received............ (14,134,000) -- -- -- --
----------- ---------- ---------- --------- ----------
Net cash used in investing activities.................. (15,404,000) (2,245,000) (1,594,000) (216,000) (935,000)
----------- ---------- ---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock.................. 9,884,000 -- -- -- 10,000,000
Net proceeds from issuance of long-term debt............... 6,623,000 -- -- -- --
Net proceeds from issuance of Common Stock and warrants.... 167,000 -- 17,000 17,000 --
Net payments on line of credit and long-term obligations... (359,000) (245,000) (244,000) (11,000) (12,000)
Payment of note payable transferred from AHC............... (500,000) -- --
----------- ---------- ---------- --------- ----------
Net cash provided by (used in) financing activities.... 15,815,000 (245,000) (227,000) 6,000 9,988,000
----------- ---------- ---------- --------- ----------
NET INCREASE IN CASH......................................... 1,447,000 1,168,000 13,832,000 873,000 9,180,000
CASH AND CASH EQUIVALENTS, beginning of year................. 10,000 1,457,000 2,625,000 2,625,000 16,457,000
----------- ---------- ---------- --------- ----------
CASH AND CASH EQUIVALENTS, end of year....................... $ 1,457,000 $2,625,000 $16,457,000 $3,498,000 $25,637,000
----------- ---------- ---------- --------- ----------
----------- ---------- ---------- --------- ----------
</TABLE>
SUPPLEMENTARY INFORMATION:
Cash paid for interest totaled approximately $208,000, $716,000, $716,000,
$179,000 and $177,000
in 1994, 1995, 1996, and June 30, 1995 and 1996 respectively.
The Company made no income tax payments in 1994, 1995, 1996 or as of June
30, 1996.
The Company incurred a capital lease obligation of $138,000 in 1994.
The Company received noncash capital contributions from AHC of $173,000 in
1994. It also assumed a
$500,000 note payable in conjunction with the formation of API in 1994.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL:
Advance ParadigM, Inc. (API), a Delaware corporation formerly named Advance
Pharmacy Services, Inc., was formed as a wholly owned subsidiary of Advance
Health Care, Inc. (AHC) in July 1993. The accompanying consolidated financial
statements include the accounts of API and its three wholly owned subsidiaries,
Advance ParadigM Mail Services, Inc. (Advance Mail), Advance ParadigM Data
Services, Inc. (Advance Data), and Advance ParadigM Clinical Services, Inc.
(Advance Clinical), which are collectively referred to as the Company.
API was formed when AHC contributed its wholly owned subsidiaries Advance
Mail and Advance Data subject to a $500,000 note payable (see Note 12) in
exchange for all of the then outstanding shares of API's Common Stock. The
transaction was accounted for as a reorganization of entities under common
control in a manner similar to a pooling of interests. Accordingly, the accounts
of Advance Mail and Advance Data are based on historical cost, and operations of
Advance Mail and Advance Data are included from the date of their formation by
AHC. In December 1993, API acquired all of the outstanding stock of Advance
Clinical in a business combination accounted for as a purchase (see Note 8). The
operating results for Advance Clinical are included for the period since its
acquisition by API.
The Company offers an integrated program of pharmacy benefit management.
Clinical, rebate, and formulary services are provided through Advance Clinical.
Claims processing for prescription drugs purchased at the Company's network of
retail pharmacies is provided through Advance Data. The dispensing of
prescription drugs through the mail is provided through Advance Mail.
In the year ended March 31, 1996, the Company began marketing health benefit
management services (HBM Services) to certain health plans, pharmaceutical
manufacturers, and other research and managed care organizations, and began
programs for disease management services with selected customers.
The Company is currently in the process of an initial public offering (the
Offering) of its $.01 par value Common Stock. The Company plans to use the net
proceeds from the Offering (i) to retire the note payable to Whitney
Subordinated Debt Fund, L.P., an affiliate of a principal stockholder of the
Company, in the amount of $7.0 million, (ii) to provide further automation of
the Company's Richardson, Texas facility, including capital improvements and
equipment (which are estimated to be approximately $2.9 million), and (iii) to
expand the Company's claims processing system (which are estimated to be
approximately $1.8 million). The balance of the net proceeds, approximately
$10.1 million, will be used to fund possible acquisitions of similar or
complementary businesses and general corporate purposes.
In connection with the Offering, the Company's redeemable Series A Preferred
Stock will automatically be converted into 2,500,000 shares of Common Stock. The
pro forma information below gives effect to such conversion and the merger of
AHC with and into API (see Note 15).
<TABLE>
<CAPTION>
JUNE 30, 1996 (UNAUDITED)
----------------------------------------------------
AS STATED PRO FORMA
------------------------- -------------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Redeemable Series A Preferred Stock..................... 10,000 $ 12,099,000 -- $ --
Stockholders' equity (deficit)--
Series B Preferred Stock.............................. 2,597 $ -- 2,597 $ --
Common stock.......................................... 3,130,500 -- 5,396,750 --
Additional paid-in capital............................ -- 11,518,000 -- 23,617,000
Accumulated deficit................................... -- (2,552,000) -- (2,552,000)
------------- -------------
Total stockholders' equity (deficit).................. $ 8,966,000 $ 21,065,000
------------- -------------
------------- -------------
</TABLE>
F-7
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION
The accompanying financial statements include the accounts of API and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
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 reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements have been prepared
by the Company in accordance with generally accepted accounting principles for
interim financial information and substantially in the form prescribed by the
Securities and Exchange Commission in instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company's management, the June 30,
1995 and 1996 unaudited interim financial statements include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
results for this interim period. The results of operations for the three months
ended June 30, 1995 and 1996 are not necessarily indicative of the results to be
expected for the full year or for any future period.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include overnight investments and money market
accounts.
INVENTORIES
Inventories consist of pharmaceuticals stated at the lower of cost or market
under the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed on the straight-line method over
estimated useful lives ranging from three to ten years. Amortization of
leasehold improvements is computed over the lives of the assets or the lease
terms, whichever is shorter. Major renewals and betterments are added to the
property and equipment accounts while costs of repairs and maintenance are
charged to operating expenses in the period incurred. The cost of assets
retired, sold or otherwise disposed of and the applicable accumulated
depreciation are removed from the accounts, and the resultant gain or loss, if
any, is reflected in the statement of operations.
INTANGIBLE ASSETS
Intangible assets represent the excess of cost over the fair value of
tangible net assets acquired (goodwill) in connection with the acquisition of
Advance Clinical (see Note 8). Goodwill is amortized on a straight-line basis
over 40 years. The Company continually evaluates whether events and
circumstances have occurred that indicate the remaining balance of goodwill may
not be recoverable or the useful life may be impaired. Amortization expense was
$115,000, $346,000, and $347,000 in 1994, 1995, and 1996, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of long-lived assets may warrant
revision or that the remaining balance of an asset may not be recoverable. The
measurement of possible impairment is based on the ability to recover the
balance of assets from expected future operating cash flows on an undiscounted
basis. In the opinion of management, no such impairment existed as of March 31,
1995 or 1996.
F-8
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash, receivables, payables, and accrued liabilities
approximate the fair values of these instruments because of their short-term
maturities. The carrying value of the Company's debt also approximates fair
value as interest rates on the Company's existing debt approximates market.
REVENUE RECOGNITION
Revenues from the dispensing of pharmaceuticals from the Company's mail
service pharmacy are recognized when each prescription is shipped. Revenue from
sales of prescription drugs by pharmacies in the Company's nationwide network
and claims processing service fees are recognized when the claims are
adjudicated. Clinical, formulary, rebate, and disease management service
revenues are recognized as the services are performed and rebates earned in
accordance with contractual agreements.
FEDERAL INCOME TAXES
Prior to the formation of API in July 1993, Advance Mail and Advance Data
were included in the consolidated tax return of AHC. For activities subsequent
to the formation of API, the Company has filed consolidated federal income tax
returns separate from AHC. The Company has calculated its tax provision on a
stand-alone basis for all reported periods.
PRO FORMA NET INCOME PER SHARE
Pro forma net income per share gives effect to (i) the conversion of the
redeemable Series A Preferred Stock to Common Stock, (ii) the issuance of
627,240 shares of Common Stock in the Offering, the net proceeds of which are
intended to be used to retire the $7.0 million note payable to Whitney
Subordinated Debt Fund, L.P., (iii) a reduction of interest expense by the
amount of interest on the $7.0 million note payable and (iv) the impact to
shares and options outstanding of the merger of AHC with and into API (see Note
15). Pro forma net income per share is computed using the weighted average
number of common and common equivalents shares outstanding during the year which
include stock options and warrants. As required by the Commission rules, all
warrants, options, and shares issued during the year immediately preceding the
initial public offering are assumed to be outstanding for purposes of
calculating pro forma net income per share. The primary and fully diluted per
share amounts were the same as the effect of potentially dilutive securities was
antidilutive.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with current
year presentation.
RESTATEMENT OF NETWORK CLAIM COSTS
The Company has restated its financial statements for the three months ended
June 30, 1996, and for all prior periods presented. When the Company has an
independent obligation to pay its network pharmacy providers, the Company now
includes payments from plan sponsors for these benefits as revenues and payments
to its pharmacy providers as cost of revenues. If the Company is only
administering plan sponsors' network pharmacy contracts, the Company will
continue to record as net revenues the claims processing service fees. In prior
periods, the Company recorded as net revenues only the fees for administering
claims from network pharmacy providers. The restatement increased revenues and
cost of revenues as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, THREE MONTHS ENDED JUNE 30,
- ------------------------------------------- ---------------------------
1994 1995 1996 1995 1996
- ------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
$ 11,598,000 $ 25,715,000 $ 37,611,000 $ 8,009,000 $ 22,900,000
</TABLE>
F-9
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Machinery and equipment..................................................... $ 651,000 $ 709,000
Computer equipment and software............................................. 2,668,000 3,963,000
Furniture and equipment..................................................... 707,000 924,000
Leasehold improvements...................................................... 396,000 419,000
------------ ------------
4,422,000 6,015,000
Less--Accumulated depreciation and amortization............................. (980,000) (1,935,000)
------------ ------------
$ 3,442,000 $ 4,080,000
------------ ------------
------------ ------------
</TABLE>
4. DEBT:
Long-term debt at March 31, 1995 and 1996, consisted of a balance due under
a $7,000,000 Note and Warrant Purchase Agreement (the Agreement) dated December
8, 1993. The note is unsecured, bears interest at 10.101% per annum, payable
quarterly, and is due December 8, 2000. The Agreement obligates the Company to
prepay the indebtedness, without penalty or premium, upon the consummation of a
public offering of any of the Company's securities pursuant to a registration
statement filed with the Commission.
The note carries certain restrictive covenants which, among other things,
limit the ability of the Company to incur additional indebtedness, create liens,
pay dividends, sell assets, make acquisitions, engage in mergers,
consolidations, or reorganizations, or enter into transactions with certain
related parties, including holders of 10% or more of any capital stock of the
Company or its affiliates. Additionally, the Company is required to maintain
certain net worth and interest coverage ratios. The Company was in compliance
with all covenants of the Agreement at March 31, 1996.
In connection with the Agreement, the Company granted the holder of the note
warrants to purchase 336,500 shares of the Company's Common Stock (see Note 10).
The warrants are exercisable for a period of 10 years.
5. OTHER NONCURRENT LIABILITIES:
Other noncurrent liabilities consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Capital lease obligation............................................. $ 93,000 $ 49,000
Other liabilities.................................................... 389,000 241,000
---------- ----------
482,000 290,000
Less--Current portion................................................ (244,000) (49,000)
---------- ----------
$ 238,000 $ 241,000
---------- ----------
---------- ----------
</TABLE>
The Company's capital lease obligation bears interest at 9.5%, and is
payable in monthly installments. The lease is collateralized by the leased
equipment. The lease terminates in March 1997 (see Note 6).
Other liabilities is comprised of deposits held for the benefit of certain
customers in connection with pharmacy benefit contracts, and, at March 31, 1995,
included amounts due to certain officers of Advance Clinical (see Note 12).
F-10
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LEASES:
The Company leases office and dispensing facility space, equipment, and
automobiles under various operating and capital leases. The Company was
obligated to make future minimum payments under capital lease obligations and
noncancelable operating lease agreements as of March 31, 1996, as follows:
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
MARCH 31, LEASES LEASES
- -------------------------------------------------------- --------- ---------
<S> <C> <C>
1997.................................................. $ 51,000 $1,063,000
1998.................................................. -- 732,000
1999.................................................. -- 255,000
2000.................................................. -- --
2001.................................................. -- --
--------- ---------
Total minimum lease payments........................ 51,000 $2,050,000
--------- ---------
---------
Less--Amounts representing interest................. (2,000)
---------
Present value of future minimum lease payments (see
Note 5)............................................ $ 49,000
---------
---------
</TABLE>
Total rent expense incurred in 1994, 1995, and 1996 was $221,000, $714,000,
and $1,135,000, respectively.
7. COMMITMENTS AND CONTINGENCIES:
The Company entered into three-year employment agreements with certain
management employees of Advance Clinical. These employment agreements, which
expire in December 1996, provide for certain minimum payments should the
agreements be terminated.
The pharmacy industry is governed by extensive federal and state laws and
regulations. The regulatory requirements with which the Company must comply in
conducting its business vary from state to state. Management believes the
Company is in substantial compliance with, or is in the process of complying
with, all existing laws and regulations material to the operation of its
business. In management's opinion, any existing noncompliance will not have a
material adverse effect on the results of operations or financial condition of
the Company.
8. ACQUISITION OF ADVANCE CLINICAL:
In December 1993, the Company acquired the outstanding stock of Advance
Clinical, formerly Paradigm Pharmacy Management, Inc., for a total consideration
of $16,748,000. Assuming the Advance Clinical acquisition had occurred at the
beginning of fiscal year 1994, condensed unaudited pro forma combined results of
operations for the year ended March 31, 1994, are as follows:
<TABLE>
<S> <C>
Revenues....................................................... $45,726,000
Net income..................................................... 197,000
</TABLE>
9. CONCENTRATION OF BUSINESS:
One customer accounted for approximately 18.3% of the Company's 1996
revenues. One customer accounted for approximately 26.5% of the Company's 1995
revenues. No other customer accounted for over 10% of the Company's 1996 or 1995
revenues. Two customers accounted for approximately 54.8% of the Company's 1994
revenues. On a pro forma basis, assuming the Advance Clinical acquisition had
occurred on April 1, 1993, these two customers would have accounted for
approximately 49.5% of the Company's 1994 revenues.
10. REDEEMABLE PREFERRED STOCK AND COMMON STOCK:
REDEEMABLE SERIES A PREFERRED STOCK
In August and December 1993, the Company issued a total of 10,000 shares of
$.01 par value, redeemable Series A Preferred Stock under a Preferred Stock
Purchase Agreement. The holders of the Series A Preferred Stock are entitled to
certain rights, as described below:
F-11
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. REDEEMABLE PREFERRED STOCK AND COMMON STOCK: (CONTINUED)
CUMULATIVE DIVIDENDS--Holders of the redeemable Series A Preferred Stock are
entitled to cumulative dividends calculated at an annual rate of 8% per
share of the original issuance price of $1,000, or $80 per share. Such
cumulative dividends accrue and accumulate day to day from the date of
original issuance whether or not earned or declared. As of March 31, 1996,
the cumulative undeclared and unpaid dividends were $1,959,000 and are
included in redeemable Series A Preferred Stock in the accompanying balance
sheet. Upon conversion of the redeemable Series A Preferred Stock to Common
Stock, all such accrued and unpaid cumulative dividends shall be forfeited.
RIGHT OF FIRST OFFER--The Company must first offer to the holders of
preferred shares, and any holder of more than 3% of the capital stock of the
Company, any future offering of equity securities, convertible securities,
or debt-equity security combinations. This right does not apply to any stock
dividends, conversion share issuances, stock grants of up to 569,500 shares
pursuant to the stock option plan, or stock grants of up to 415,500 shares
in connection with the acquisition of another entity.
CONVERSION RIGHTS--The redeemable Series A Preferred Stock is convertible at
any time at the option of the holder into fully paid and nonassessable
shares of Common Stock at a conversion rate equal to the issuance price
divided by the Applicable Conversion Value, as defined, giving effect to any
adjustments. At March 31, 1996, the conversion rate was 250-for-one.
The redeemable Series A Preferred Stock is automatically convertible
immediately prior to the closing of an underwritten public offering on a
firm commitment basis filed on Form S-1 of the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock for which proceeds (net
of underwriters' discounts and commissions but before calculation of
expenses) equal or exceed $10,000,000 and at a price per share greater than
twice the original issuance price of the redeemable Series A Preferred
Stock, as adjusted for dilutive issuances of capital stock, stock dividends,
stock splits, and reverse stock splits.
PARTICIPATING DIVIDENDS--The redeemable Series A Preferred Stock has a
participating feature whereby if dividends, other than stock dividends, are
declared on the Common Stock, the holders of the redeemable Series A
Preferred Stock are entitled to receive an amount of dividends equal to that
which would be payable on the number of common shares into which the
redeemable Series A Preferred Stock is then convertible.
REDEMPTION RIGHTS--If on or after August 4, 1999, the Company has earnings
after interest, but before taxes, of at least $1,500,000 for the 12-month
period preceding the month of the request for redemption, the holders of 60%
of the then outstanding shares of redeemable Series A Preferred Stock may
request the Company to redeem such number of shares of stock outstanding.
The redemptions shall be made in three equal annual installments at a price
which is the greater of (1) the original issue price of the redeemable
Series A Preferred Stock, as adjusted, plus all accrued and unpaid
dividends, or (2) the fair market value, as defined.
COMMON STOCK
The Company is authorized to issue 7,500,000 shares of $.01 par value Common
Stock, of which 3,125,000 and 3,130,500 shares are issued and outstanding at
March 31, 1995 and 1996, respectively. The holders of the Company's Common Stock
are entitled to a right of first offer consistent with holders of the redeemable
Series A Preferred Stock. The Company has reserved shares of Common Stock at
March 31, 1996, for the following:
<TABLE>
<S> <C>
Conversion of Series A Preferred Stock........................... 2,500,000
Exercise of stock options........................................ 858,000
Exercise of warrants............................................. 659,750
---------
4,017,750
---------
---------
</TABLE>
F-12
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. REDEEMABLE PREFERRED STOCK AND COMMON STOCK: (CONTINUED)
During the year ended March 31, 1994, the Company issued warrants to
purchase 336,500 and 56,250 shares of its Common Stock at prices per share of
$4.00 and $6.00, respectively. During the year ended March 31, 1996, the Company
agreed to issue warrants to purchase 267,000 shares of its Common Stock at a
price of $11.00 per share to a customer contingent upon future expansion of
member lives. As of March 31, 1996, no warrants have been earned. In
management's opinion, the fair value of the warrants at the date of the
agreement was not material.
11. STOCK OPTION PLAN:
During 1993, the Board of Directors and the stockholders of the Company
adopted the 1993 Incentive Stock Option Plan and the Incentive Stock Option Plan
(the "Plans"), which provide for the granting of qualified stock options and
incentive options to officers and key employees of the Company. The options must
be granted with exercise prices which equal or exceed the market value of the
common stock at the date of grant. As of March 31, 1996, the number of shares of
Common Stock issuable under the Plans may not exceed 858,000 shares. The Company
has reserved 858,000 shares of Common Stock for such issuance. The Plans are
administered by a compensation committee appointed by the Board of Directors of
the Company.
The stock options generally vest over 5-year periods. In the event of the
sale or merger with an outside corporation gaining 50% or greater ownership,
options granted to certain employees become 100% vested. The options are
exercisable for a period not to exceed 10 years from the date of grant. As of
March 31, 1996, 276,750 options were vested at exercise prices of $3.20 to
$11.00 per share.
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Options outstanding at March 31, 1993............................ -- -
Options granted.................................................. 636,750 $ 3.20-$ 4.80
---------
Options outstanding at March 31, 1994............................ 636,750 $ 3.20-$ 4.80
Options granted.................................................. 146,750 $10.80-$30.00
---------
Options outstanding at March 31, 1995............................ 783,500 $ 3.20-$30.00
Options granted.................................................. 195,500 $11.00-$30.00
Options exercised................................................ (5,500) $3.20
Options terminated............................................... (163,000) $ 3.20-$30.00
---------
Options outstanding at March 31, 1996............................ 810,500 $ 3.20-$11.00
---------
---------
</TABLE>
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123
establishes a fair value-based method of accounting for stock-based
compensation. The Company has decided to adopt SFAS 123 through disclosure with
respect to employee stock-based compensation. Such disclosure requirements are
effective beginning with the Company's 1997 fiscal year.
12. RELATED PARTY TRANSACTIONS:
The long-term debt of the Company is payable to an affiliate of certain
holders of Preferred Stock. In connection with the issuance of this debt, the
Company paid a placement fee of $210,000 to a preferred stockholder.
Prior to 1995, the Company occupied space in an office facility leased by
AHC. In addition, certain management employees of AHC provided administrative
and management services to the Company. In connection with the use of the
facility and the services provided, AHC charged the Company $607,000 during
1994. No such amounts were charged in 1995 and 1996. In July 1993, as part of
the formation of API, AHC transferred a debt obligation of $500,000 to API. API
retired this obligation in August 1993.
F-13
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RELATED PARTY TRANSACTIONS: (CONTINUED)
In connection with the acquisition of Advance Clinical, the Company agreed
to pay a fee of $250,000 each to two officers of Advance Clinical for services
relating to the acquisition. The total fee of $500,000 is included as part of
the Advance Clinical purchase price. The Company paid $100,000 of this fee upon
closing of the acquisition and $200,000 in February 1995 and February 1996.
The Company entered into an agreement with Advance Capital Markets (ACM) in
October 1993, pursuant to which ACM agreed to use its reasonable best efforts to
secure financing for the Company and to act as financial advisor and investment
banker for the acquisition of Advance Clinical. In exchange for these
professional services, the Company paid ACM a fee of $150,000, which is
equivalent to or less than similar fees incurred in arm's-length transactions.
The Chief Executive Officer and President of the Company also serves on the
board of directors of ACM.
13. RETIREMENT PLAN AND POSTRETIREMENT BENEFITS:
The Company sponsors a retirement plan for all eligible employees. The plan
is qualified under Section 401(k) of the Internal Revenue Code. Compensation
expense associated with the Company's plan amounted to approximately $0 in 1994,
$50,000 in 1995, and $102,000 in 1996. Effective in 1995, the Company is
required to contribute at least 50% of the first 6% of salary deferral
contributed by each participant.
14. INCOME TAXES:
The Company's net income in 1996 was offset by net operating loss
carryforwards. The Company had losses for tax purposes in 1994 and 1995 and had
remaining net operating loss carryforwards for both financial reporting and
federal income tax purposes. The Company had approximately $1,918,000 in net
operating loss carryforwards for federal income tax purposes at March 31, 1996.
The net operating loss carryforwards will expire in the years 2002 through 2010
if not previously utilized.
Deferred income taxes reflect the tax consequences on future years of
temporary differences between the tax bases of assets and liabilities and their
financial reporting bases and the potential benefits of certain tax
carryforwards. The significant deferred tax assets and liabilities and the
changes in those assets and liabilities are as follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1995 CHANGES 1996
---------- ---------- ----------
<S> <C> <C> <C>
Gross deferred tax asset:
Net operating loss carryforwards.......................................... $ 836,000 $ (184,000) $ 652,000
Other accruals............................................................ 47,000 95,000 142,000
Other..................................................................... 48,000 (4,000) 44,000
---------- ---------- ----------
931,000 (93,000) 838,000
Gross deferred tax liability:
Amortization of goodwill.................................................. (261,000) (197,000) (458,000)
Depreciation.............................................................. (95,000) (98,000) (193,000)
---------- ---------- ----------
575,000 (388,000) 187,000
Valuation allowance....................................................... (575,000) 388,000 (187,000)
---------- ---------- ----------
Net deferred tax asset.................................................... $ -- $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Because of the uncertainty of the realization of the net deferred tax asset
caused by historical operating losses, the Company recorded a valuation reserve
equal to its net deferred tax asset at March 31, 1995 and 1996. Management will
evaluate the appropriateness of the valuation reserve in the future based upon
historical and anticipated operating results of the Company. The deferred tax
assets arising from the Advance Clinical acquisition, if subsequently
recognized, will be allocated to reduce the goodwill attributable to the
acquisition.
F-14
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS (UNAUDITED):
On June 25, 1996, the Company sold an aggregate of 2,597 shares at its
Series B Preferred Stock to a customer at a price of $3,850 per share. The
number of shares issued is subject to potential adjustment depending upon the
price of the Offering.
On , 1996, the stockholders of the Company approved a 250-for-one
stock split of the Company's Common Stock. Accordingly, all share and per share
amounts have been adjusted to reflect the stock split as though it had occurred
at the beginning of the initial period presented.
Immediately prior to the consummation of the Offering, AHC will merge with
and into the Company (the "Merger"). Such Merger will be consummated as a means
of simplifying the corporate structure of the Company and is intended to qualify
as a tax free reorganization. AHC currently holds 3,125,000 shares of Common
Stock. In connection with the Merger, the Advance Health Care incentive stock
option plan will be merged with the Company's Incentive Stock Option Plan, and
holders of options under the Advance Health Care incentive stock option plan
will receive options to purchase Common Stock under the Company's Incentive
Stock Option Plan. In the Merger, the Company will cancel the shares held by AHC
and issue shares of Common Stock directly to the AHC stockholders based upon
their fully-diluted proportionate ownership interests in AHC (collectively
referred to as the "AHC Stockholders") after giving consideration to the new
shares of AHC to be issued in repayment of debt as indicated below. After the
Merger, there will be 2,896,750 shares of Company common stock outstanding and
233,750 additional options outstanding at exercise prices of $0.60 to $2.50 per
share. Immediately prior to the Merger, AHC will distribute the stock of certain
subsidiaries of AHC, operating in businesses unrelated to the Company, to the
AHC Stockholders. Prior to such spin-off, certain indebtedness owed by AHC to
several of its stockholders (including some indebtedness of AHC payable to an
affiliate of a preferred stockholder of the Company which will be assumed by an
AHC stockholder) will be exchanged for additional shares of AHC common stock.
The spin-off and exchange of indebtedness will not impact the number of shares
of the Company's common stock outstanding. After the spin-off and exchange of
indebtedness referred to above are effected, Advance Health Care will have no
operations, known liabilities, or assets of its own other than its investment in
the Company.
F-15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of
ParadigM Pharmacy Management, Inc.:
We have audited the accompanying statements of operations, stockholder's
equity, and cash flows of ParadigM Pharmacy Management, Inc. (a Maryland
corporation whose name was subsequently changed to Advance ParadigM Clinical
Services, Inc.) for the eleven months ended November 30, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of its operations and its cash flows of
ParadigM Pharmacy Management, Inc. for the eleven months ended November 30,
1993, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
April 15, 1994
F-16
<PAGE>
PARADIGM PHARMACY MANAGEMENT, INC.
STATEMENT OF OPERATIONS
FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1993
<TABLE>
<S> <C>
REVENUES....................................................................... $14,312,000
COST OF OPERATIONS:
Cost of revenues............................................................. 10,553,000
Selling, general and administrative expenses................................. 1,945,000
----------
Total cost of operations................................................... 12,498,000
Operating income........................................................... 1,814,000
INTEREST INCOME................................................................ 69,000
----------
Income before provision for income taxes................................... 1,883,000
PROVISION FOR INCOME TAXES..................................................... 750,000
----------
Net income................................................................. $1,133,000
----------
----------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-17
<PAGE>
PARADIGM PHARMACY MANAGEMENT, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1993
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1992................................... $ -- $ 654,000 $ 840,000 $1,494,000
Net income................................................. -- -- 1,133,000 1,133,000
Additional capitalization from Parent...................... -- 593,000 -- 593,000
--- ------------ ------------ ------------
BALANCE, November 30, 1993................................... $ -- $ 1,247,000 $ 1,973,000 $3,220,000
--- ------------ ------------ ------------
--- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-18
<PAGE>
PARADIGM PHARMACY MANAGEMENT, INC.
STATEMENT OF CASH FLOWS
FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1993
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $1,133,000
Adjustments to reconcile net income to net cash (used in) provided by
operating activities--
Depreciation expense........................................................ 36,000
Increase in receivables..................................................... (5,847,000)
Decrease in due from/to affiliates, net..................................... 248,000
Increase in prepaid expenses and other current assets....................... (3,000)
Increase in deferred income taxes........................................... (20,000)
Increase in accounts payables............................................... 3,926,000
Increase in accrued salaries and benefits................................... 480,000
Increase in other accrued expenses.......................................... 313,000
Decrease in deferred revenue................................................ (473,000)
----------
Net cash used in operating activities....................................... (207,000)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................................... (212,000)
----------
Net cash used in investing activities....................................... (212,000)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional capitalization from Parent......................................... 593,000
----------
Net cash provided by financing activities................................... 593,000
----------
NET INCREASE IN CASH AND CASH EQUIVALENTS....................................... 174,000
CASH AND CASH EQUIVALENTS, beginning of period.................................. 1,840,000
----------
CASH AND CASH EQUIVALENTS, end of period........................................ $2,014,000
----------
----------
SUPPLEMENTAL DISCLOSURE OF INCOME TAXES PAID.................................... $ 113,000
----------
----------
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-19
<PAGE>
PARADIGM PHARMACY MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
ParadigM Pharmacy Management, Inc. (PPM), a Maryland corporation (name
subsequently changed to Advance ParadigM Clinical Services, Inc.), provides
pharmacy management services to a variety of healthcare companies including
Health Maintenance Organizations, Preferred Provider Organizations and other
employee benefit plans.
PPM began operations on January 1, 1991. During the period from January 1,
1991, through November 30, 1993, PPM was a wholly owned subsidiary of Blue Cross
and Blue Shield of Maryland, Inc. (Parent) and operated under common management
with CFS Health Group, Inc. (CFS), another wholly owned subsidiary of Blue Cross
and Blue Shield of Maryland, Inc.
Effective after the close of business on November 30, 1993, Advance Pharmacy
Services, Inc. (APS), whose name has been subsequently changed to Advance
ParadigM, Inc., acquired all of the outstanding capital stock of PPM. The
accompanying financial statements do not include any accounting to reflect the
purchase transaction.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include overnight investments and short-term notes
with maturities of 60 days or less.
REVENUE RECOGNITION
Clinical, formulary, and rebate service revenues are recognized as the
services are performed and rebates earned in accordance with contractual
agreements. A portion of the rebates earned is shared with the Company's
customers in accordance with contractual agreements. Such amounts are included
in cost of revenues in the accompanying financial statements.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. PPM depreciates property and
equipment on a straight-line basis over the following estimated useful lives:
<TABLE>
<S> <C>
Computer equipment and software............................ 3 years
Furniture and fixtures..................................... 5 years
</TABLE>
DEFERRED REVENUE
Deferred revenue represents the unamortized portion of one-time payments to
PPM by pharmaceutical suppliers during 1992 as an incentive for PPM to obtain a
specific customer in a new line of business. This incentive was deferred and is
being amortized over the 24 months of the initial customer's contract through
June 30, 1994. The amortization of this payment is included in revenues in the
accompanying statements of operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In connection with the acquisition of PPM by APS, PPM agreed to pay $195,000
of the legal and underwriting costs related to the transaction. These costs are
included in selling, general and administrative expenses in the accompanying
statement of operations for the eleven months ended November 30, 1993.
3. INCOME TAXES:
The results of PPM's operations are included in the consolidated tax return
of the Parent for federal income tax purposes. PPM files a separate Maryland
state income tax return and records its tax provision or benefit accordingly.
A provision for income taxes of $750,000 has been provided for financial
reporting purposes for the eleven months ended November 30, 1993. The provision
for income taxes includes deferred taxes resulting from temporary differences in
income for financial accounting and tax purposes, using the liability method.
F-20
<PAGE>
PARADIGM PHARMACY MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES: (CONTINUED)
The provision (benefit) for income taxes consists of the following:
<TABLE>
<S> <C>
Current--
Federal......................................................... $ 671,000
State, net of federal income tax effect......................... 99,000
Deferred--
Federal......................................................... (17,000)
State, net of federal income tax effect......................... (3,000)
---------
$ 750,000
---------
---------
</TABLE>
The differences between the recorded income tax provision and the "expected"
tax provision based on statutory federal income tax rates is as follows:
<TABLE>
<S> <C>
Computed federal tax provision at statutory rates................. $ 640,000
State income taxes, net of federal income tax effect.............. 94,000
Other............................................................. 16,000
---------
$ 750,000
---------
---------
</TABLE>
PPM maintained a federal tax sharing agreement with its Parent. Under this
agreement, the Parent allocated federal tax expense of $39,000 to PPM for the
eleven months ended November 30, 1993. PPM's income tax provision has been
recorded as if it were a stand-alone company. The differences between the
federal tax allocations from its Parent and the federal tax provision recorded
in the accompanying statement of operations have been recorded as additional
capitalization from its Parent in the accompanying statement of stockholder's
equity.
4. CONCENTRATION OF BUSINESS:
During the eleven months ended November 30, 1993, the Parent and CFS
collectively constituted 32% of PPM's revenues. A non-related customer
constituted approximately 18% of PPM's revenues during the eleven months ended
November 30, 1993.
During the eleven months ended November 30, 1993, two pharmaceutical
suppliers constituted approximately 27% of rebates.
Between November 30, 1993 and January 1, 1994, four customers constituting
approximately 38% of revenues for the eleven months ended November 30, 1993, did
not renew their contracts with PPM. Beginning January 1994, PPM contracted with
three new customers. These new customers represented approximately 37% of the
recorded revenues for the quarter ended March 31, 1994. One of the new customers
is APS, PPM's new parent. APS represented approximately 17% of the recorded
revenues for the quarter ended March 31, 1994. Management believes that the
impact of the customer terminations, when coupled with the impact of new
customers, will not have a material adverse effect on PPM's financial position
or results of operations.
5. RELATED-PARTY TRANSACTIONS:
Through November 30, 1993, PPM had an operating relationship with CFS,
whereby CFS paid certain administrative costs and performed certain
administrative services on behalf of PPM. PPM reimbursed CFS for the costs paid
on PPM's behalf.
PPM provided clinical, administrative and various reporting services to its
Parent during the eleven months ended November 30, 1993. Charges for these
services were approximately $307,000. This amount is included in revenues in the
accompanying statement of operations.
F-21
<PAGE>
PARADIGM PHARMACY MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. RELATED-PARTY TRANSACTIONS: (CONTINUED)
PPM leases administrative office facilities from CFS. Rent expense for the
eleven months ended November 30, 1993, was approximately $85,000. The lease
expired on June 30, 1994, unless sooner terminated pursuant to terms of the
lease. Total remaining payments under this lease at November 30, 1993, are
approximately $54,000.
Through November 30, 1993, PPM participated in its Parent's noncontributory
retirement plan and defined contribution savings and retirement plan. The
allocated expense for both plans was not material to PPM.
6. POSTRETIREMENT BENEFITS:
Until November 30, 1993, PPM's employees participated in its Parent's
postretirement benefits. Substantially all employees subject to certain
requirements became eligible for those benefits when they reached normal
retirement age while working for PPM and had at least ten years of service.
In December 1990, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 106 (SFAS 106) "Employer's Accounting for
Postretirement Benefits Other Than Pensions". This standard requires that the
expected cost of these benefits must be charged to expense during the years that
the employees render service. PPM adopted the standard, effective January 1,
1993, on a prospective basis, as permitted. The effect of this adoption was not
material to the accompanying financial statements.
7. COMMITMENTS AND CONTINGENCIES:
Effective with the sale of PPM by Blue Cross and Blue Shield of Maryland,
Inc. on November 30, 1993, PPM's employees no longer participated in its
retirement, defined contribution and postretirement benefit plans. Management of
PPM intends to implement new benefit plans which will also cover the employees'
unvested benefits under the former Blue Cross and Blue Shield of Maryland, Inc.
plans. Accordingly, management has provided a reserve on the balance sheet
related to the assumption of the unvested accumulated benefits as of November
30, 1993.
8. SUBSEQUENT EVENT:
Effective December 1, 1993, the Company entered into employment agreements
with two key executives, through November 1996, aggregating base compensation of
$690,000 over their term. The contracts also provide for additional incentive
payments, subject to performance standards.
F-22
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR
THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Additional Information............................... 2
Prospectus Summary................................... 3
Risk Factors......................................... 5
Disclosure Regarding Forward-Looking Statements...... 10
The Company.......................................... 11
Use of Proceeds...................................... 11
Dividend Policy...................................... 11
Capitalization....................................... 12
Dilution............................................. 13
Selected Consolidated Financial Data................. 14
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 15
Business............................................. 20
Management........................................... 29
Certain Transactions................................. 36
Principal and Selling Stockholders................... 38
Description of Capital Stock......................... 40
Shares Eligible for Future Sale...................... 43
Underwriting......................................... 45
Legal Matters........................................ 46
Experts.............................................. 46
Index to Financial Statements........................ F-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,589,029 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
MONTGOMERY SECURITIES
J.P. MORGAN & CO.
, 1996
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the issuance and distribution of
the securities being registered, other than underwriting discounts and
commissions, are set forth in the following table. All of such expenses will be
borne by Advance ParadigM, Inc. (the "Company").
<TABLE>
<S> <C>
SEC registration fees................................................... $ 13,328
NASD filing fees........................................................ 4,421
Nasdaq National Market System application and listing fees.............. *
Printing and engraving expenses......................................... *
Legal fees and expenses................................................. *
Accounting fees and expenses............................................ *
Blue sky fees and expenses.............................................. *
Transfer agent and registrar fees and expenses.......................... *
Miscellaneous........................................................... *
---------
Total................................................................. $ 500,000
---------
---------
</TABLE>
- ------------------------
*To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company, a Delaware corporation, is empowered by Section 145 of the
Delaware General Corporation Law (the "Delaware Act"), subject to the procedures
and limitations stated therein, to indemnify certain parties. Section 145 of the
Delaware Act provides in part that a corporation shall have the power to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (other than
an action by or in the right of the corporation) by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. Similar indemnity is authorized for such persons against
expenses (including attorneys' fees) actually and reasonably incurred in defense
or settlement of any threatened, pending or completed action or suit by or in
the right of the corporation, if such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and provided further that (unless a court of competent jurisdiction
otherwise provides) such person shall not have been adjudged liable to the
corporation. Any such indemnification may be made only as authorized in each
specific case upon a determination by the stockholders or disinterested
directors that indemnification is proper because the indemnitee has met the
applicable standard of conduct. Where an officer or a director is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually or reasonably incurred. Section 145 provides further that
indemnification pursuant to its provisions is not exclusive of other rights of
indemnification to which a person may be entitled under any bylaw, agreement,
vote of stockholders or disinterested directors or otherwise.
Article 10 of the Company's Certificate of Incorporation, as amended (the
"Certificate") provides that the Company shall indemnify any and all persons
whom it has the power to indemnify under Section 145 of the Delaware Act to the
fullest extent permitted under such section, and such indemnity shall continue
as to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and administrators of such a
person.
Article 9 of the Company's Certificate eliminates the personal liability of
the Company's directors to the fullest extent permitted under Section 102(b)(7)
of the Delaware Act, as amended. Such section permits a
II-1
<PAGE>
company's certificate of incorporation to eliminate or limit the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) under Section 174 of the Delaware Act (which
addresses director liability for unlawful payment of a dividend or unlawful
stock purchase or redemption) or (iv) for any transaction from which the
director derived an improper personal benefit.
As set forth below, Article 8 of the bylaws of the Company (the "Bylaws")
provides for indemnification of directors and officers, and Section 8.8 of the
Bylaws provides for the authority to purchase insurance with respect to
indemnification of directors and officers.
Article 8 of the Bylaws provides that the Company shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Company) by reason of the fact that he is or was a director, officer, employee
or agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding to the
fullest extent permitted by Delaware law.
The right to indemnification under Article 8 of the Bylaws is a contract
right which includes, with respect to directors, officers, employees and agents,
the right to be paid by the Company the expenses incurred in defending a civil
or criminal action, suit or proceeding in advance of its disposition; provided,
however, that (i) the payment of such expenses incurred by a director or officer
in advance of the final disposition of such action, suit or proceeding shall be
made only upon delivery to the Company of an undertaking, by or on behalf of
such director or officer, to repay all amounts so advanced if it shall
ultimately be determined that such director or officer is not entitled to be
indemnified under Article 8 of the Bylaws or otherwise and (ii) advances for
expenses incurred by other employees and agents may be paid upon such terms and
conditions that the Board of Directors of the Company deems appropriate.
Section 7 of the Underwriting Agreement among the Company, the Underwriters
and the Selling Stockholders, a copy of which is filed herein as Exhibit 1,
provides for the indemnification by the Company of the Underwriters and each
person, if any, who controls any Underwriter against certain liabilities and
expenses, as stated therein, which may include liabilities under the Securities
Act of 1933, as amended. The Underwriting Agreement also provides that the
Underwriters shall similarly indemnify the Company, its directors, officers and
controlling persons, as set forth therein.
The Company intends to apply for a directors and officers insurance policy.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company issued 3,125,000 shares of its Common Stock to Advance Health
Care, Inc. ("Advance Health Care") in July 1993 in exchange for all of the
issued and outstanding common stock of and certain debt attributable to Advance
ParadigM Mail Services, Inc. ("Advance Mail") and Advance ParadigM Data
Services, Inc. ("Advance Data").
In a two-step transaction, the Company sold an aggregate of 10,000 shares of
its Series A Preferred Stock in a private financing at an effective price of
$1,000 per share (collectively, the "Canaan/Whitney Capital Investment") as
follows: On August 4, 1993, the Company sold (i) a total of 1,945 shares of
Series A Preferred Stock to Canaan Capital Limited Partnership ("Canaan LP"),
Canaan Capital Offshore Limited Partnership C.V. ("Canaan Offshore") and Quai
Ltd., (ii) a total of 2,000 shares of Series A Preferred Stock to J.H. Whitney &
Co. ("J.H. Whitney") and Whitney 1990 Equity Fund, L.P. ("Whitney Fund"), (iii)
30 shares of Series A Preferred Stock to Jeffrey R. Jay, M.D., and (iv) 25
shares of Series A Preferred Stock to Stephen L. Green; and on December 7, 1993,
in contemplation of the closing of the Advance ParadigM Clinical Services, Inc.
("Advance Clinical") acquisition, the Canaan Investors, the Whitney Investors,
Dr. Jay and Mr. Green purchased an additional 2,918 shares, 3,000 shares, 45
shares and 37 shares, respectively, of the Company's Series A Preferred
II-2
<PAGE>
Stock. Both Dr. Jay and Mr. Green are members of the Board of Directors. The
Canaan and Whitney Investors have certain registration rights in connection with
their shares. For purposes of this Registration Statement and the descriptions
of the Company's related parties contained herein, (i) Canaan LP, Canaan
Offshore, Quai Ltd., Dr. Jay and Mr. Green are collectively referred to as the
"Canaan Investors" and (ii) J.H. Whitney, the Whitney Fund and the Whitney Debt
Fund (as defined below) are collectively referred to as the "Whitney Investors".
All shares of the Preferred Stock issued in the Canaan/Whitney Capital
Investment automatically convert into shares of Common Stock upon the
consummation of this Offering. Upon consummation of this Offering, the
conversion rate will be one share of Series A Preferred Stock for 250 shares of
the common stock, par value $0.01 per share (the "Common Stock"). There was no
advertising or solicitation made in connection with Canaan/ Whitney capital
investment. The seven purchasers are accredited investors and were the sole
offerees. The purchasers had access to the type of information in this
registration statement.
On December 8, 1993, the Company and Whitney Subordinated Debt Fund L.P.
(the "Whitney Debt Fund") entered into a Note and Warrant Purchase Agreement
pursuant to which the Whitney Debt Fund paid the Company $7 million in exchange
for a note payable to the Whitney Debt Fund, in the original principal amount of
$7.0 million (the "Whitney Note") and a warrant to purchase up to 336,500 shares
of Common Stock, (the "Whitney Warrant"). The Whitney Note bears interest on its
original principal amount of $7 million at the rate of 10.1% per annum, payable
quarterly. Although the Whitney Note has a seven-year term, the Company is
obligated to prepay the indebtedness, without penalty or premium, upon
consummation of a public offering filed with the Commission. The Whitney Warrant
grants the Whitney Debt Fund the right to purchase an aggregate of 336,500
shares of Common Stock at an exercise price of $4.00 per share until December 8,
2003. The warrant contains certain demand and piggy-back registration rights
relating to the Common Stock underlying it. The Whitney Debt Fund, an accredited
investor, was the sole offeree and purchaser of the Whitney Note and the Whitney
Warrant. The Whitney Debt Fund had access to the type of information in this
registration statement. There was no advertising or solicitation made in
connection with the grant of the Whitney Note and the Whitney Warrant.
Effective December 8, 1993, in connection with the Advance Clinical
acquisition, the Company sold to Blue Cross and Blue Shield of Maryland ("BCBS
of Maryland") a warrant to purchase 56,250 shares of Common Stock, exercisable
in whole during a four-year term at an aggregate exercise price of $337,500. The
warrant contains certain piggy-back registration rights relating to the Common
Stock underlying it. BCBS of Maryland was the sole offeree and purchaser of this
warrant and had access to the type of information in this registration
statement. There was no advertising or solicitation made in connection with the
grant of this warrant.
In June 1995 an option holder exercised his stock option and purchased 5,500
shares of Common Stock for an aggregate purchase price of $17,600. In July 1996
an option holder exercised her stock option and purchased 1,500 shares of Common
Stock for an aggregate purchase price of $7,200. Each option holder was the sole
offeree and purchaser of their respective options. There was no advertising or
solicitation made in connection with this issuance of Common Stock.
On November 25, 1995, in connection with the Warrant Agreement by and
between the Company and BCBS of Texas, the Company granted to BCBS of Texas the
right to earn up to four warrants, each representing the right to acquire 66,750
shares of Common Stock, in consideration of BCBS of Texas causing additional
lives to be enrolled in the Company's PBM programs, which the Company has
estimated the value to be less than $100,000 (the "BCBS of Texas Warrants").
BCBS of Texas' right to earn up to four BCBS of Texas Warrants expires November
25, 2000. Each BCBS of Texas Warrant will not be exercisable until the first
anniversary of its issuance. At such time, the BCBS of Texas Warrant will be
exercisable in whole during a four-year term at an exercise price of $11.00 per
share. As of the date of the Prospectus, none of the BCBS of Texas Warrants has
been earned or issued. There was no advertising or solicitation made in
connection with the grant of the right to receive the warrants. BCBS of Texas
was the sole offeree of the right to earn the BCBS of the Texas Warrants.
On September 12, 1996, the Company entered into an agreement with VHA Inc.
pursuant to which, among other things, the Company granted to VHA Inc. the right
to earn up to ten warrants, each representing the right to acquire 28,125 shares
of Common Stock, in consideration of VHA Inc. causing additional lives to be
enrolled in the Company's PBM programs (the "VHA Warrants"). VHA Inc.'s right to
earn the VHA Warrants will expire
II-3
<PAGE>
five years after the date of issuance. Each VHA Warrant earned will be
exercisable in whole beginning on the first anniversary of its issuance and
ending on the fifth anniversary of its issuance at an estimated exercise price
equal to 90% of the initial public offering price per share in this Offering.
There was no advertising or solicitation made in connection with the grant of
the right to receive the warrants. VHA was the sole offeree of the right to earn
the VHA Warrants.
The Company has agreed pursuant to a letter of intent to issue a warrant
representing the right to acquire 84,500 shares of Common Stock upon execution
of a definitive agreement pursuant to which the Company is the provider of PBM
services for PHC and its wholly owned subsidiaries (the "PHC Warrant"). The PHC
Warrant will be exercisable in whole beginning on the first anniversary of its
issuance and ending on the fifth anniversary of its issuance at an exercise
price equal to 90% of the initial public offering price per share in this
Offering. There was no advertising or solicitation made in connection with the
grant of the right to receive the warrant. PHC was the sole offeree of the PHC
Warrant.
On June 25, 1996, the Company sold an aggregate of 2,597 shares of its
Series B Preferred Stock, par value $.01 per share, in a private financing to
BCBS of Texas at an effective price of $3,850 per share. As of the date of this
registration statement, the conversion rate is one share of Series B Preferred
Stock for 250 shares of Common Stock. There was no advertising or solicitation
made in connection with the issuance of the Series B Preferred Stock. BCBS of
Texas was the sole offeree and purchaser of the Series B Preferred Stock. In the
Series B Preferred Stock purchase agreement, BCBS of Texas acknowledged
receiving all requested information regarding the Company.
Immediately prior to the consummation of the Offering, the Company intends
to issue shares of Common Stock to the stockholders of Advance Health Care in a
merger of Advance Health Care with and into the Company (the "Merger"). Prior to
the Merger, and assuming conversion of the Series A Preferred Stock into shares
of Common Stock, Advance Health Care held 3,125,000 shares of Common Stock,
representing 55.5% of the outstanding capital stock of the Company. The shares
of Common Stock will be issued in this Merger to the Advance Health Care
stockholders by the Company. The issuance of the Common Stock will not involve a
public offering for several reasons. First, there is a limited number of
offerees and "purchasers" of the shares. There are approximately 26 beneficial
owners of the outstanding common stock of Advance Health Care, of whom 20 are
accredited investors. No one except Advance Health Care stockholders was invited
to participate in the Merger, and no one except Advance Health Care stockholders
will receive shares of Common Stock in the Merger. Second, the Merger will be
consummated without any advertising or solicitation. Only the Advance Health
Care stockholders were contacted in order to obtain their consent for the
Merger. Each Advance Health Care stockholder received a copy of the draft
Registration Statement. Many of the Advance Health Care stockholders are
executive officers and directors of the Company, affiliates of such executive
officers and directors and employees of the Company. Consequently, in addition
to receiving a draft copy of this registration statement, these stockholders
could obtain, or would already have, sufficient information regarding ownership
of shares of Common Stock.
Immediately prior to the Merger, Advance Health Care will issue shares of
Advance Health Care common stock to certain persons in repayment of indebtedness
of Advance Health Care to such persons. This issuance is exempt from
registration under Section 4(2) of the Securities Act for the following reasons:
First, the shares of Advance Health Care common stock will be issued by
Advance Health Care, the issuer of such shares. Second, the issuance of such
shares will not involve a public offering for several reasons. There is a
limited number of offerees and "purchasers" of the shares. There are only three
debt holders who will be repaid with shares of Advance Health Care common stock,
and all three debt holders are accredited investors. No one except these three
debt holders was invited to receive, and no one except these three debt holders
will receive, Advance Health Care common stock in lieu of cash in repayment of
the indebtedness owed them by Advance Health Care. The repayment of indebtedness
with shares of Advance Health Care common stock will occur without any
advertising or solicitation. Only the three debt holders were contacted and were
offered the opportunity to have their indebtedness repaid with shares of Advance
Health Care common stock.
Each of the foregoing issuances is exempt from registration under Regulation
D of rules promulgated of the Securities Act of 1933, as amended.
II-4
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
- ---------- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
1* -- Form of Underwriting Agreement.
3.1** -- Amended and Restated Certificate of Incorporation of the Company.
3.2** -- Amended and Restated Bylaws of the Company.
4.1*** -- Specimen Certificate for shares of Common Stock, $.01 par value, of the Company.
4.2* -- Preferred Stock Purchase Agreement dated as of August 4, 1993, among the Company and Canaan LP,
Canaan Offshore, Stephen L. Green, Jeffrey R. Jay, Quai Ltd., J.H. Whitney, and Whitney Fund.
4.3* -- Amendment No. 1 to Preferred Stock Purchase Agreement dated as of December 7, 1993, by and among
Advance Data and the Purchasers.
4.4* -- Amendment No. 2 to Preferred Stock Purchase Agreement dated as of December 8, 1993, by and among
APS, the Purchasers and Whitney Debt Fund.
4.5* -- Voting, Co-Sale and Right of First Refusal Agreement dated as of August 4, 1993, among the Company,
Advance Health Care, David D. Halbert, Jon S. Halbert, Danny Phillips and the Purchasers.
4.6* -- Amendment No. 1 to Voting, Co-Sale and Right of First Refusal Agreement dated as of December 8,
1993, among the Company, Advance Health Care, David D. Halbert, Jon Halbert, Danny Phillips, the
Purchasers and Whitney Debt Fund.
4.7* -- Note and Warrant Purchase Agreement dated December 8, 1993, between the Company and Whitney Debt
Fund.
4.8* -- Promissory Note dated December 8, 1993, made by the Company payable to the order of Whitney Debt
Fund in the original principal amount of $7,000,000.
4.9* -- Common Stock Purchase Warrant dated December 8, 1993, made by the Company in favor of Whitney Debt
Fund.
4.10*** -- Termination Agreement dated as of September , 1996, among the Company, Advance Health Care, David
D. Halbert, Jon S. Halbert, Danny Phillips, the Purchasers and Whitney Debt Fund.
4.11* -- Warrant for Purchase of Shares of Common Stock of the Company dated December 8, 1993, in favor of
BCBS of Maryland.
4.12* -- Stock Purchase Agreement dated as of June 25, 1996, by and between the Company and BCBS of Texas.
4.13** -- Warrant Agreement dated as of November 25, 1995, by and between the Company and BCBS of Texas.
4.14*** -- Amended and Restated Incentive Stock Option Plan.
4.15*** -- Incentive Stock Option Plan.
4.16** -- Warrant Agreement dated as of September 12, 1996, by and between the Company and VHA, Inc.
5*** -- Opinion and Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10.1** -- Managed Pharmaceutical Agreement dated November 1, 1993, by and between Advance Data and the Mega
Life & Health Insurance Company.
10.2* -- Nondisclosure/Noncompetition Agreement dated August 4, 1993, between the Company, Advance Data,
Advance Mail and David D. Halbert.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
- ---------- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
10.3* -- Nondisclosure/Noncompetition Agreement dated August 4, 1993, between the Company, Advance Mail,
Advance Data and Jon S. Halbert.
10.4* -- Nondisclosure/Noncompetition Agreement dated August 4, 1993, between the Company, Advance Mail,
Advance Data and Danny Phillips.
10.5* -- Employment Agreement effective as of December 1, 1993 by and between Advance Clinical (formerly
ParadigM) and Joseph J. Filipek, Jr. and, for the limited purposes of Sections 3(d), 3(g) and 3(h)
thereof, the Company.
10.6* -- Employment Agreement effective as of December 1, 1993, by and between Advance Clinical (formerly
ParadigM) and Robert L. Cinquegrana and for the limited purposes of Sections 3(d), 3(g) and 3(h)
thereof, the Company.
10.7* -- Employment Agreement effective as of November 14, 1994, by and between the Company and John H.
Sattler.
10.8* -- Employment Agreement effective as of February 15, 1996, by and between the Company and Alan T.
Wright.
10.9** -- Form of Health Benefit Management Services Agreement.
10.10* -- Sublease dated May 2, 1996, between Lincoln National Life Insurance Company and Advance Data.
10.11* -- Lease dated March 16, 1994, by and between Hill Management Services, Inc. and Advance Clinical
(formerly ParadigM).
10.12* -- Lease Agreement dated as of February 24, 1989, as amended November 30, 1992, and December , 1992,
by and between TRST Las Colinas, Inc. and Advance Health Care.
10.13* -- Assignment, Assumption, Bill of Sale and Consent Agreement dated as of October 20, 1993, between
Medco Containment Services, Inc., the Company and Trinity Properties, Ltd.
10.14** -- Managed Pharmacy Benefit Services Agreement dated September 1, 1995, between the Company and BCBS of
Texas.
11** -- Statement re computation of per share earnings.
23.1** -- Consent of Arthur Andersen LLP.
23.2*** -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in its opinion filed as Exhibit 5
hereto).
27* -- Financial Data Schedule.
</TABLE>
- ------------------------
*Previously filed.
** Filed herewith.
*** To be filed by amendment.
II-6
<PAGE>
(b) Financial Statement Schedules
The following financial statement schedule is included in Part II of the
registration statement:
Schedule II--Valuation and Qualifying Accounts
All other schedules have been omitted because they are not required, are not
applicable or the information is included in the Consolidated Financial
Statements or Notes thereto.
ITEM 17. UNDERTAKINGS
(a) Undertaking related to equity offerings of nonreporting registrants:
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
(b) Undertaking related to acceleration of effectiveness:
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) Undertaking related to Rule 430A:
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of a registration
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective.
(2) For purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the Offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 3 to the Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Dallas, State of Texas, on September 30, 1996.
ADVANCE PARADIGM, INC.
By: /s/ DAVID D. HALBERT
-----------------------------------
David D. Halbert
CHIEF EXECUTIVE OFFICER, CHAIRMAN
OF THE BOARD AND PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to Registration Statement on Form S-1 has been signed by the following
persons in the capacities indicated on September 30, 1996.
NAME TITLE
- ----------------------------------- -----------------------------------
/s/ DAVID D. HALBERT Chief Executive Officer, Chairman
- ----------------------------------- of the Board and President
David D. Halbert (Principal Executive Officer)
JON S. HALBERT*
- ----------------------------------- Chief Operating Officer, Executive
Jon S. Halbert Vice President and Director
Chief Financial Officer, Senior
/s/ DANNY PHILLIPS Vice President, Secretary and
- ----------------------------------- Treasurer (Principal Financial and
Danny Phillips Accounting Officer)
PETER M. CASTLEMAN*
- ----------------------------------- Director
Peter M. Castleman
MIKEL D. FAULKNER*
- ----------------------------------- Director
Mikel D. Faulkner
STEPHEN L. GREEN*
- ----------------------------------- Director
Stephen L. Green
JEFFREY R. JAY*
- ----------------------------------- Director
Jeffrey R. Jay
MICHAEL D. WARE*
- ----------------------------------- Director
Michael D. Ware
/s/ ROGERS K. COLEMAN, M.D.*
- ----------------------------------- Director
Rogers K. Coleman, M.D.
*By: /s/ DAVID D. HALBERT
--------------------------------
David D. Halbert
ATTORNEY IN FACT
II-8
<PAGE>
After the 250-for-one stock split discussed in Note 15 to the Company's
Consolidated Financial Statements is effected, we expect to be in a position to
render the following report.
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Advance ParadigM, Inc. and subsidiaries
included in this registration statement and have issued our report thereon dated
May 6, 1996 (except with respect to the matters discussed in Note 15, as to
which the date is , 1996). Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. Schedule II is
presented for purposes of complying with the Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Dallas, Texas
May 6, 1996
S-1
<PAGE>
ADVANCE PARADIGM, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO (1) END OF
YEAR EXPENSES DEDUCTIONS YEAR
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended March 31, 1994:
Allowance for doubtful accounts receivable................... $ 75,000 $ 27,000 $ (11,000) $ 91,000
Year ended March 31, 1995:
Allowance for doubtful accounts receivable................... $ 91,000 $ 58,000 $ (8,000) $ 141,000
Year ended March 31, 1996:
Allowance for doubtful accounts receivable................... $ 141,000 $ 23,000 $ (34,000) $ 130,000
</TABLE>
- ------------------------
(1) Uncollectible accounts written off, net of recoveries
S-2
<PAGE>
FORM OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ADVANCE PARADIGM, INC.
Pursuant to the provisions of Section 245 of the General Corporation Law
of the State of Delaware, the undersigned corporation, hereby adopts the
following Amended and Restated Certificate of Incorporation for such
corporation. The corporation was originally incorporated under the name
Advance Pharmacy Services, Inc. and filed its original Certificate of
Incorporation with the Secretary of State of Delaware on July 27, 1993. A
Certificate of Merger, whereby Advance Health Care, Inc. merged with and into
the Company, was filed on _____________, 1996.
ARTICLE I
The name of the corporation is Advance ParadigM, Inc. (the "Company").
ARTICLE II
The street address of the initial registered office of the Company is 32
Lockerman Square, Suite L-100, City of Dover, County of Kent, Delaware 19901,
and the name of its initial registered agent at such address is The
Prentice-Hall Corporation System, Inc.
ARTICLE III
The purpose for which the Company is organized is the transaction of any
or all lawful acts and activities for which corporations may be incorporated
under the General Corporation Law of the State of Delaware.
ARTICLE IV
The aggregate number of shares of capital stock which the Company shall
have authority to issue is 30,000,000 shares of capital stock, consisting of
25,000,000 shares of Common Stock, par value $.01 per share and five million
(5,000,000) shares of which is Preferred Stock, par value of $0.01 per share.
Unless specifically provided otherwise herein, the holders of such shares
shall be entitled to one vote for each share held in any stockholder vote in
which any of such holders is entitled to participate.
All shares of Preferred Stock which are not designated as shares of
Series B Preferred Stock may be issued, from time to time, with such powers,
designations, preferences and relative, participating, optional or other
special rights, including voting rights, and qualifications, limitations or
restrictions thereof as shall be stated and expressed in the resolution or
resolutions providing for the issue of such series adopted by the Board of
Directors, pursuant to the authority herein given.
The description and designation of the Series B Preferred Stock is as
set forth below:
1. DESIGNATION. Up to 4,000 shares of the Company's Preferred Stock
shall be designated the "SERIES B PREFERRED STOCK". All numbers relating to
the calculation of cumulative dividends, liquidation preference per share, or
redemption price per share of the Series B Preferred Stock shall be subject
to equitable adjustment in the event of any
1
<PAGE>
stock dividend, stock split, combination, reorganization, recapitalizations,
reclassification or other similar event involving a change in the capital
structure of the Series B Preferred Stock.
2. Dividends.
(a) CUMULATIVE. The holder of the outstanding shares of Series B
Preferred Stock shall be entitled to receive, out of funds legally available
therefor, cumulative dividends calculated without compounding, at the annual
rate of two percent (2%) of the Original Issue Price per share (as defined in
SECTION 3(a)). Such cumulative dividends shall accrue and accumulate from the
date of original issuance. Such dividends on the Series B Preferred Stock
shall be cumulative so that if such dividends in respect of any previous or
current annual dividend period, at the annual rate specified above, shall not
have been paid or declared, the deficiency shall first be fully paid before
any dividend or other distribution shall be paid or declared and set apart
for the Common Stock.
(b) PAYMENTS OF DIVIDENDS. Cumulative dividends on the Series B
Preferred Stock shall be payable annually on the 31st day of March, commencing
March 31, 1997 and shall be payable, whether or not earned or declared, upon
liquidation or redemption. Upon conversion of the Series B Preferred Stock
pursuant to Section 5 hereof, all such accrued and unpaid cumulative dividends
on the Series B Preferred Stock to and until the date of such conversion shall
not be due and payable and shall be forfeited.
3. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) PREFERENCE. In the event of any liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, or in the event
of its insolvency, before any distribution or other payment is made to any
holders of any shares of any class or series of capital stock of the Company
designated to be junior to the Series B Preferred Stock, including the Common
Stock, and subject to the liquidation rights and preferences of the Company's
Series A Convertible Preferred Stock, par value $0.01 per share (the "SERIES
A PREFERRED STOCK") or any future class or series of preferred stock designated
to be senior to, or on a parity with, the Series A Preferred Stock, the holders
of each share of Series B Preferred Stock shall be entitled to be paid first
out of the assets of the Company available for distribution to holders of the
Company's capital stock of all classes whether such assets are capital,
surplus or earnings, an amount equal to the greater of:
(i) $3,850 per share of Series B Preferred Stock (as adjusted
from time to time in accordance with SECTION 5 hereof, the "ORIGINAL ISSUE
PRICE"), PLUS all declared or accrued and unpaid dividends thereon, whether
or not earned or declared, up to and including the date full payment shall
be tendered to the holders of the Series B Preferred Stock with respect to
such liquidation, dissolution or winding up; or
(ii) such amount per share of Series B Preferred Stock as would
have been payable had each such share been converted to Common Stock
immediately prior to such event of liquidation, dissolution or winding up
pursuant to the provisions of Section 5 hereof.
If, upon liquidation, dissolution or winding up of the Company, the assets of
the Company available for distribution to its stockholders shall be insufficient
to pay the
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holders of the Series B Preferred Stock the full amounts to which they
otherwise would be entitled, the holders of Series B Preferred Stock shall
share ratably in any distribution of available assets according to the
respective amounts which would otherwise be payable with respect to the
shares of Series B Preferred Stock held by them upon such liquidating
distribution if all amounts payable on or with respect to said shares were
paid in full, based upon the aggregate liquidation value of the Series B
Preferred Stock.
(b) REMAINING ASSETS. After payment shall have been made in full to
the holders of the Series B Preferred Stock, or funds necessary for such
payment shall have been set aside by the Company in trust for the account of
holders of the Series B Preferred Stock so as to be available for such payment,
the remaining assets available for distribution shall be distributed ratably
among the holders of the Common Stock.
(c) TREATMENT OF REORGANIZATIONS, CONSOLIDATIONS, MERGERS, AND SALES OF
ASSETS. A Reorganization (as defined in SECTION 5(d)) shall be regarded as a
liquidation, dissolution or winding up of the affairs of the Company within
the meaning of this SECTION 3; PROVIDED, HOWEVER, that the holders of more
than fifty percent (50%) of the outstanding shares of Series B Preferred Stock
shall have the right to elect the benefits of the provisions of SECTION 5(d)
hereof in lieu of receiving payment in liquidation, dissolution or winding up
of the Company pursuant to this SECTION 3. The holders of more than fifty
percent (50%) of the outstanding shares of Series B Preferred Stock have the
right to bind the holders of all outstanding shares of Series B Preferred
Stock under this SECTION 3(b) or SECTION 5(d).
The provisions of this SECTION 3(b) and SECTION 5(d) shall not apply to
any reorganization, merger or consolidation involving (1) only a change in
the state of incorporation of the Company, (2) a merger of the Company with
or into a wholly-owned subsidiary of the Company that is incorporated in the
United States of America, or (3) an acquisition by merger, reorganization or
consolidation, of which the Company is substantively the surviving corporation
and operates as a going concern.
4. VOTING RIGHTS. The holders of shares of Series B Preferred Stock
shall not be entitled to vote on any matter.
5. CONVERSION RIGHTS. The holders of the Series B Preferred Stock shall
have the following rights with respect to the conversion of such shares into
shares of Common Stock:
(a) CONVERSION. Subject to and in compliance with the provisions
of this SECTION 5, all shares of the Series B Preferred Stock may be
converted into fully-paid and non-assessable shares of Common Stock. Each
share of Series B Preferred Stock shall be initially convertible into one
share of Common Stock.
(b) UPON EXTRAORDINARY COMMON STOCK EVENTS. Upon the occurrence
of an Extraordinary Common Stock Event (as hereinafter defined), the Series B
Preferred Stock shall automatically become, and thereafter be, convertible
into that number of shares of Common Stock obtained by multiplying (i) the
number of shares of Series B Preferred Stock issued and outstanding as of the
closing date of the Extraordinary Common Stock Event by (ii) a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately after such Extraordinary Common Stock Event and the denominator
of which shall be the number of shares of Common
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Stock outstanding immediately prior to such Extraordinary Common Stock Event.
Upon the occurrence of an Extraordinary Common Stock Event, the Original Issue
Price shall automatically become, and thereafter be, the price per share of
issued and outstanding Series B Preferred Stock obtained by multiplying
(i) the Original Issue Price as of the date of the Extraordinary Common Stock
Event by (ii) a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such Extraordinary
Common Stock Event and the denominator of which shall be the number of shares
of Common Stock outstanding immediately after such Extraordinary Common Stock
Event. An "EXTRAORDINARY COMMON STOCK EVENT" shall mean (i) the issue of
additional shares of Common Stock as a dividend or other distribution on
outstanding shares of Common Stock, (ii) a subdivision of outstanding shares
of Common Stock into a greater number of shares of Common Stock, or (iii) a
combination or reverse stock split of outstanding shares of Common Stock into
a smaller number of shares of the Common Stock.
(c) DIVIDENDS. In the event the Company shall make or issue, or
shall fix a record date for the determination of holders of Common Stock
entitled to receive a dividend or other distribution (other than a distribution
in liquidation or other distribution otherwise provided for herein) with
respect to the Common Stock payable in (i) securities of the Company other
than shares of Common Stock, or (ii) other assets (excluding cash dividends
or distributions), then, and in each such event, provision shall be made so
that the holders of the Series B Preferred Stock shall receive upon conversion
thereof in addition to the number of shares of Common Stock receivable
thereupon, the number of securities or such other assets of the Company which
they would have received had their Series B Preferred Stock been converted
into Common Stock on the date of such event and had they thereafter, during
the period from the date of such event to and including the Conversion Date
(as that term is hereafter defined in SECTION 5(f)), retained such securities
or such other assets receivable by them during such period, giving application
to all other adjustments called for during such period under this SECTION 5
with respect to the rights of the holders of the Series B Preferred Stock.
(d) REORGANIZATION. Subject to the Company's rights under SECTION
5(i) hereof, if at any time or from time to time there shall be a capital
reorganization of the Common Stock (other than an Extraordinary Common Stock
Event or dividend provided for elsewhere in this SECTION 5) or a merger or
consolidation of the Company with or into another corporation, or the sale of
all or substantially all of the Company's capital stock or assets to any other
person, or any other form of business combination, acquisition or reorganization
in which control of the Company is transferred (a "REORGANIZATION"), then, as
a part of and a condition to such Reorganization, provision shall be made so
that the holders of the Series B Preferred Stock shall thereafter be entitled
to receive upon conversion of the Series B Preferred Stock the same kind and
amount of stock or other securities or property (including cash) of the Company,
or the successor corporation resulting from such Reorganization, to which such
holder would have received if such holder had converted its shares of Series B
Preferred Stock into shares of Common Stock immediately prior to the effective
time of such Reorganization. In any such case, appropriate adjustment shall be
made in the application of the provisions of this SECTION 5 so that the
provisions of this SECTION 5 (including the number of shares of Common
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Stock or other securities issuable upon conversion of such shares of Series B
Preferred Stock) shall be applicable after that event in as nearly equivalent
a manner as may be practicable. A "Reorganization" as defined in this SECTION
5(d) shall not include any reorganization, merger or consolidation involving
(1) only a change in the state of incorporation of the Company, (2) a merger
of the Company with or into a wholly-owned subsidiary of the Company that is
incorporated in the United States of America, or (3) an acquisition by merger,
reorganization or consolidation in which the Company is substantively the
surviving corporation and operates as a going concern.
(e) CERTIFICATE TO ADJUSTMENTS; NOTICE BY COMPANY. In each case
of an adjustment or readjustment of the number of shares into which the
Preferred Stock is convertible, the Company at its expense will furnish each
holder of Series B Preferred Stock with a certificate showing such adjustment
or readjustment, and stating in detail the facts upon which such adjustment
or readjustment is based.
(f) EXERCISE OF CONVERSION PRIVILEGE. To exercise its conversion
privilege, each holder of Series B Preferred Stock shall surrender the
certificate(s) representing all of such holder's shares of the Series B
Preferred Stock to the Company at its principal office, and shall give
written notice to the Company at that office that such holder elects to
convert such shares. The certificates for shares of Series B Preferred Stock
surrendered for conversion shall be accompanied by proper assignment thereof
to the Company or in blank. The date when such written notice is received by
the Company, together with the certificate(s) representing the shares of
Series B Preferred Stock being converted, shall be the "CONVERSION DATE". As
promptly as practicable after the Conversion Date, the Company shall issue
and shall deliver to the holder of the shares of Series B Preferred Stock
being converted, or on its written order, such certificate(s) as it may
request for the number of whole shares of Common Stock issuable upon the
conversion of such shares of Series B Preferred Stock in accordance with the
provisions of this SECTION 5. Such conversion shall be deemed to have been
effected immediately prior to the close of business on the Conversion Date,
and at such time the rights of the holder as holder of the converted shares
of Series B Preferred Stock shall cease and the person(s) in whose name(s)
any certificate(s) for shares of Common Stock shall be issuable upon such
conversion shall be deemed to have become the holder or holders of record of
the shares of Common Stock represented thereby.
(g) RESERVATION OF COMMON STOCK. The Company shall at all times
reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the conversion of the
shares of the Series B Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of
all outstanding shares of the Series B Preferred Stock, and if at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Series B Preferred Stock, the Company shall take such action as may be
necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purpose.
(h) NO REISSUANCE OF SERIES B PREFERRED STOCK. No share or shares
of Series B Preferred Stock acquired by the Company by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such shares
shall be cancelled, retired
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and eliminated from the shares which the Company shall be authorized to
issue. The Company shall from time to time take such appropriate corporate
action as may be necessary to reduce the authorized number of shares of
Series B Preferred Stock.
(i) COMPANY'S CONVERSION OF PREFERRED STOCK. Subject to and in
compliance with the provisions of this SECTION 5, the Company may, upon
written notice to the holders of the Series B Preferred Stock ("Company's
Conversion Notice"), cause all shares of the Series B Preferred Stock to be
converted into Common Stock:
(i) immediately prior to the consummation of any Reorganization; and
(ii) at any time after the fifth anniversary of the date of issuance
so long as the fair market value of the Common Stock is equal to or exceeds
the Original Issue Price.
For purposes of this SECTION 5(i), the "fair market value" shall be, if the
Company is publicly traded, the average closing sale price of the Common
Stock for the twenty (20) consecutive trading days immediately preceding the
Conversion Effective Date, and if the Company is not publicly traded, shall
be determined by the Board of Directors of the Company in good faith.
The Company's Conversion Notice shall specify which of the above two
events is precipitating the conversion and shall identify the effective date
of the conversion (the "Conversion Effective Date"). Upon receipt of the
Company's Conversion Notice, the holders of the Series B Preferred Stock
shall surrender the certificates representing such shares at the office of
the Company or of its transfer agent. The certificates for shares of Series B
Preferred Stock surrendered for conversion shall be accompanied by proper
assignment thereof to the Company or in blank. As promptly as practicable
after the Conversion Effective Date, the Company shall issue and shall
deliver to the holder of the shares of Series B Preferred Stock being
converted the number of shares of Common Stock issuable upon the conversion
of such shares of Series B Preferred Stock in accordance with the provisions
of this SECTION 5. If the Company's Conversion Notice is duly given, then
notwithstanding that the certificates evidencing any of the shares of Series
B Preferred Stock so called for conversion have not been surrendered, all
rights with respect to such shares shall forthwith after the Conversion
Effective Date cease and terminate, except only the right of holders to
receive the shares of Common Stock in such conversion.
6. REDEMPTION RIGHTS OF THE COMPANY.
(a) REDEMPTION. Beginning on the second anniversary of the date of
issuance of the Series B Preferred Stock, upon delivery of written notice in
accordance with SECTION 6(c) hereof, the Company may redeem such number of
shares of Series B Preferred Stock then as shall be specified in the Redemption
Notice. If the Company desires to redeem fewer than all of the shares of
Series B Preferred Stock outstanding, then the holders of the shares of Series B
Preferred Stock will tender their proportionate number of shares.
(b) REDEMPTION PRICE. The redemption price for each share of Series B
Preferred Stock redeemed pursuant to this Section 6 shall be the Original
Issue Price per share plus all accrued and unpaid dividends, whether or not
earned or declared, on such shares up to and including the date fixed for
redemption (the "REDEMPTION PRICE").
(c) REDEMPTION NOTICE. At least 30 days prior to the Redemption Date,
written notice
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(the "REDEMPTION NOTICE") shall be mailed, first class or certified mail,
postage prepaid, or express, overnight courier service by the Company to each
holder of record of Series B Preferred Stock which is to be redeemed, at its
address shown on the records of the Company. The Redemption Notice shall
contain the following information:
(i) the number of shares of Series B Preferred Stock held by the
holder which shall be redeemed by the Company and the total
number of shares of Series B Preferred Stock held by all holders
to be so redeemed;
(ii) the Redemption Price;
(iii) the Redemption Dates; and
(iv) that the holder is to surrender to the Company, at the place
designated therein, its certificate or certificates representing
the shares of Series B Preferred Stock to be redeemed.
(d) SURRENDER OF CERTIFICATES. Each holder of shares of Series B
Preferred Stock to be redeemed shall surrender the certificate(s) representing
such shares to the Company at the place designated in the Redemption Notice,
and thereupon the Redemption Price for such shares shall be paid to the order
of the person whose name appears on such certificates) and each surrendered
certificate shall be cancelled and retired. In the event some but not all of
the shares of Series B Preferred Stock represented by a certificate(s)
surrendered by a holder are being redeemed, the Company shall execute and
deliver to or on the order of the holder, at the expense of the Company, a new
certificate representing the number of shares of Series B Preferred Stock which
were not redeemed.
(e) DIVIDENDS AND CONVERSION AFTER REDEMPTION. No shares of Series B
Preferred Stock subject to redemption shall be entitled to any further
dividends pursuant to SECTION 2 hereof or to the conversion provisions set
forth in SECTION 5 hereof.
7. NOTICES OF RECORD DATE. In the event of
(a) any taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend or other distribution, or any right to subscribe for,
purchase or otherwise acquire any shares of capital stock of any class or any
other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, any merger or
consolidation of the Company, or any transfer of all or substantially all of
the assets of the Company to any other corporation, or any other entity or
person, or
(c) any voluntary or involuntary dissolution, liquidation or winding up
of the Company, then and in each such event the Company shall mail or cause to
be mailed to each holder of Series B Preferred Stock a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right and a description of such dividend, distribution or
right, (ii) the date on which any such
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reorganization reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding up is expected to become effective,
and (iii) the time, if any, that is to be fixed, as to when the holders of
record of Common Stock (or other securities) shall be entitled to exchange
their shares of Common Stock (or other securities) for securities or other
property deliverable upon such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation
or winding up. Such notice shall be mailed by first class mail, postage prepaid,
or express overnight courier service, at least twenty (20) days prior to the
date specified in such notice on which such action is to be taken.
ARTICLE V
The Company is to have perpetual existence.
ARTICLE VI
Whenever a compromise or arrangement is proposed between this Company
and its creditors or any class of them and/or between this Company and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this Company
or of any creditor or stockholder thereof or on the application of any
receiver or receivers appointed for this Company under the provisions of
Section 291 of Title 8 of the Delaware Code, or on the application of
trustees in dissolution or of any receiver or receivers appointed for this
Company under the provisions of Section 279 of Title 8 of the Delaware Code,
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Company, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this Company, as the
case may be, agree to any compromise or arrangement and to any reorganization
of this Company as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Company, as the case may be, and also on this Company.
ARTICLE VII
For the management of the business and for the conduct of the affairs of
the Company, and in further definition, limitation and regulation of the
powers of the Company and of its directors and of its stockholders or any
class thereof, as the case may be, it is further provided:
1. The management of the business and the conduct of the affairs of the
Company shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed by, or in
the manner provided in, the Bylaws. The phrase "whole Board" and the phrase
"total number of directors" shall be deemed to have the same meaning, to wit,
the total number of directors which the Company would have if there were no
vacancies. No election of directors need be by written ballot.
2. After the original or other Bylaws of the Company have been adopted,
amended, or repealed, as the case may be, in accordance with the provisions
of Section 109 of the General Corporation Law of the State of Delaware, and,
after the Company has received any payment for any of its stock, the power to
adopt, amend, or repeal the Bylaws
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of the Company may be exercised by the Board of Directors of the Company;
provided, however, that any provision for the classification of directors of
the Company for staggered terms pursuant to the provisions of subsection (d)
of Section 141 of the General Corporation Law of the State of Delaware shall
be set forth in an initial Bylaw or in a Bylaw adopted by the stockholders
entitled to vote of the Company unless provisions for such classification
shall be set forth in this certificate of incorporation.
3. Whenever the Company shall be authorized to issue only one class of
stock, each outstanding share shall entitle the holder thereof to notice of,
and the right to vote at, any meeting of stockholders. Whenever the Company
shall be authorized to issue more than one class of stock, no outstanding
share of any class of stock which is denied voting power under the provisions
of the certificate of incorporation shall entitle the holder thereof to the
right to vote at any meeting of stockholders except as the provisions of
paragraph (2) of subsection (b) of Section 242 of the General Corporation Law
of the State of Delaware shall otherwise require; provided, that no share of
any such Class which is otherwise denied voting power shall entitle the holder
thereof to vote upon the increase or decrease in the number of authorized shares
of said class.
ARTICLE VIII
To the fullest extent permitted by the General Corporation Law of the
State of Delaware, as the same exists or may hereafter be amended, a director
of the Company shall not be liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director. Any repeal or
amendment of this Article VIII by the stockholders of the Company or by
changes in applicable law shall, to the extent permitted by applicable law,
be prospective only, and shall not adversely affect any limitation on the
personal liability of any director of the Company at the time of such repeal
or amendment.
ARTICLE IX
The Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative, arbitrative or
investigative, any appeal in such an action, suit or proceeding and any
inquiry or investigation that could lead to such an action, suit or proceeding
(whether or not by or in the right of the Company), by reason of the fact
that such person is or was a director, officer, employee or agent of the
Company or is or was serving at the request of the Company as a director,
officer, partner, venturer, proprietor, trustee, employee, agent or similar
functionary of another corporation, partnership, joint venture, sole
proprietorship, trust, nonprofit entity, employee benefit plan or other
enterprise, against all judgments, penalties (including excise and similar
taxes), fines, settlements and expenses (including attorneys' fees and court
costs) actually and reasonably incurred by such person in connection with
such action, suit or proceeding to the fullest extent permitted by any
applicable law, and such indemnity shall inure to the benefit of the heirs,
executors and administrators of any such person so indemnified pursuant to
this Article IX. The right to indemnification under this Article IX shall be
a contract right and shall include, with respect to directors and officers,
the right to be paid by the Company the expenses incurred in defending any
such proceeding in advance of its disposition; provided, however, that, if
the General Corporation Law of the State of Delaware requires, the payment of
such expenses incurred by a director or officer in advance of the final
disposition of a proceeding shall be made only upon delivery to the Company
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director
or officer is not entitled to be indemnified under this Article IX or
otherwise. The Company may, by action of its board of directors, pay such
expenses incurred by employees and agents of the
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Company upon such terms as the board of directors deems appropriate. The
indemnification and advancement of expenses provided by, or granted pursuant
to, this Article IX shall not be deemed exclusive of any other right to which
those seeking indemnification may be entitled under any law, bylaw, agreement,
vote of stockholders or disinterested directors or otherwise, both as to
action in his official capacity and as to action in another capacity while
holding such office. Any repeal or amendment of this Article IX by the
stockholders of the Company or by changes in applicable law shall, to the
extent permitted by applicable law, be prospective only, and not adversely
affect the indemnification of any person who may be indemnified at the time
of such repeal or amendment.
ARTICLE X
No contract or other transaction between the Company and any other
corporation and no other acts of the Company with relation to any other
corporation shall, in the absence of fraud, in any way be invalidated or
otherwise affected by the fact that any one or more of the directors or
officers of the Company are pecuniarily or otherwise interested in, or are
directors or officers of, such other corporation. Any director or officer of
the Company individually, or any firm or association of which any director or
officer may be a member, may be a party to, or may be pecuniarily or
otherwise interested in, any contract or transaction of the Company, provided
that the fact that such person individually, or as a member of such firm or
association, is such a party or is so interested shall be disclosed or shall
have been known to the board of directors or a majority of such members
thereof as shall be present at any meeting of the board of directors at which
action upon any such contract or transaction shall be taken; and any director
of the Company who is also a director or officer of such other corporation or
who is such a party or so interested may be counted in determining the
existence of a quorum at any meeting of the board of directors which shall
authorize any such contract or transaction and may vote thereat to authorize
any such contract or transaction, with like force and effect as if such
person were not such a director or officer of such other corporation or not
so interested. Any director of the Company may vote upon any contract or any
other transaction between the Company and any subsidiary or affiliated
corporation without regard to the fact that such person is also a director or
officer of such subsidiary or affiliated corporation.
Any contract, transaction, act of the Company or of the directors, which
shall be ratified at any annual meeting of the stockholders of the Company,
or at any special meeting of the stockholders of the Company, or at any special
meeting called for such purpose, shall, insofar as permitted by law, be as
valid and as binding as though ratified by every stockholder of the Company;
provided, however, that any failure of the stockholders to approve or ratify
any such contract, transaction or act, when and if submitted, shall not be
deemed in any way to invalidate the same or deprive the Company, its
directors, officers or employees, of its or their right to proceed with such
contract, transaction or act.
Subject to any express agreement which may from time to time be in effect,
the stockholders, directors or officers of the Company may carry on and conduct
in their own right and for their own personal accounts, or as a partner in any
partnership, or as a joint venturer in any joint venture, or as an officer,
director or stockholder of any corporation, or as a participant in any
syndicate, pool, trust or association, any business which competes with the
business of the Company and shall be free in all such capacities to make
investments in any kind of property in which the Company may make investments.
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ARTICLE XI
The number of directors will be determined in accordance with the Bylaws
of the Company. The directors shall be divided into three classes as nearly
equal in number as possible and one class shall be elected at each annual
meeting of shareholders to hold office for a three-year term.
ARTICLE XII
Election of directors need not be by written ballot. Any director or
the entire board of directors may be removed, with or without cause, by the
holders of a majority of the shares then entitled to vote at an election of
directors, except as otherwise provided by law. In furtherance and not in
limitation of the powers conferred by statute, the board of directors of the
Company is expressly authorized to adopt the original bylaws of the Company,
to amend or repeal the bylaws or to adopt new bylaws, subject to any
limitations which may be contained in such bylaws.
ARTICLE XIII
From time to time any of the provisions of this certificate of
incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and
all rights at any time conferred upon the stockholders of the Company by this
certificate of incorporation are granted subject to the provisions of this
Article XII.
IN WITNESS WHEREOF, said Advance ParadigM, Inc. caused this Amended and
Restated Certificate of Incorporation to be signed by David D. Halbert, its
Chairman, Chief Executive Officer and President and attested to by Danny
Phillips, its Chief Financial Officer, Senior Vice President, Secretary and
Treasurer, this _____ day of _________________, 1996.
ADVANCE PARADIGM, INC.
By:
-----------------------------------
David D. Halbert
Chairman, Chief Executive Officer
and President
Attest:
- ------------------------------------
Danny Phillips
Chief Financial Officer, Senior Vice
President, Secretary and Treasurer
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AMENDED AND RESTATED
BYLAWS
OF
ADVANCE PARADIGM, INC.
a Delaware corporation
(the "Company")
(As adopted on September 3, 1996)
<PAGE>
TABLE OF CONTENTS
OFFICES 1
1.1. Registered Office 1
1.2. Additional Offices 1
STOCKHOLDERS MEETINGS 1
2.1. Annual Meetings 1
2.2. Special Meetings 1
2.3. Notices 1
2.4. Quorum 1
2.5. Voting of Shares 2
2.5.1 Voting Lists 2
2.5.2. Votes Per Share 2
2.5.3. Proxies 2
2.5.4. Required Vote 2
2.5.5. Consents in Lieu of Meeting 3
DIRECTORS 3
3.1. Purpose 3
3.2. Number 3
3.3. Election 3
3.4. Vacancies 3
3.5. Removal 4
3.6. Compensation 4
3.7. Directors Emeritus and Advisory Directors 4
BOARD MEETINGS 4
4.1. Annual Meetings 4
4.2. Regular Meetings 4
4.3. Special Meetings 4
4.4. Quorum, Required Vote 5
4.5. Consent In Lieu of Meeting 5
COMMITTEES OF DIRECTORS 5
5.1. Establishment; Standing Committees 5
5.1.1. Finance Committee 5
5.1.2. Audit Committee 5
5.1.3. Compensation Committee 6
5.2. Available Powers 6
5.3. Unavailable Powers 6
5.4. Alternate Members 6
5.5. Procedures 6
OFFICERS 7
6.1. Elected Officers 7
6.1.1. Chairman of the Board 7
6.1.2. President 7
6.1.3. Vice Presidents 7
6.1.4. Secretary 8
6.1.5. Assistant Secretaries 8
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6.1.6. Treasurer 8
6.1.7. Assistant Treasurers 8
6.1.8. Divisional Officers 8
6.2. Election 9
6.3. Appointed Officers 9
6.4. Multiple Officeholders, Stockholder and
Director Officers 9
6.5. Compensation, Vacancies 9
6.6. Additional Powers and Duties 9
6.7. Removal 9
SHARE CERTIFICATES 9
7.1. Entitlement to Certificates 9
7.2. Multiple Classes of Stock 9
7.3. Signatures 10
7.4. Issuance and Payment 10
7.5. Lost Certificates 10
7.6. Transfer of Stock 10
7.7. Registered Stockholders 10
INDEMNIFICATION 11
8.1. General 11
8.2. Actions by or in the Right of the Company 11
8.3. Indemnification Against Expenses 11
8.4. Board Determinations 11
8.5. Advancement of Expenses 12
8.6. Nonexclusive 12
8.7. Insurance 12
8.8. Certain Definitions 12
8.9. Change in Governing Law 13
INTERESTED DIRECTORS, OFFICERS AND STOCKHOLDERS 13
9.1. Validity 13
9.2. Disclosure, Approval 13
9.3. Nonexclusive 13
MISCELLANEOUS 14
10.1. Place of Meetings 14
10.2. Fixing Record Dates 14
10.3. Means of Giving Notice 15
10.4. Waiver of Notice 15
10.5. Attendance via Communications Equipment 15
10.6. Dividends 15
10.7. Reserves 15
10.8. Reports to Stockholders 15
10.9. Contracts and Negotiable Instruments 15
10.10. Fiscal Year 16
10.11. Seal 16
10.12. Books and Records 16
10.13. Resignation 16
10.14. Surety Bonds 16
10.15. Proxies in Respect of Securities of
Other-Corporations 16
10.16. Amendments 17
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BYLAWS
ARTICLE I
OFFICES
Section 1.1 REGISTERED OFFICE. The registered office of the
Company within the State of Delaware shall be located at either (i) the
principal place of business of the Company in the State of Delaware or (ii)
the office of the corporation or individual acting as the Company's
registered agent in Delaware.
Section 1.2 ADDITIONAL OFFICES. The Company may, in addition
to its registered office in the State of Delaware, have such other offices
and places of business, both within and without the State of Delaware, as the
Board of Directors of the Company (the "Board") may from time to time
determine or as the business and affairs of the Company may require.
ARTICLE II
STOCKHOLDERS MEETINGS
Section 2.1 ANNUAL MEETINGS. Annual meetings of stockholders
shall be held at a place and time on any weekday which is not a holiday as shall
be designated by the Board and stated in the notice of the meeting, at which
the stockholders shall elect the directors of the Company and transact such
other business as may properly be brought before the meeting.
Section 2.2 SPECIAL MEETINGS. Special meetings of the
stockholders, for any purpose or purposes, unless otherwise prescribed by law
or by the certificate of incorporation, (i) may be called by the chairman of
the board, the president or any two directors and (ii) shall be called by the
president or secretary at the request in writing of a majority of the Board
or stockholders owning capital stock of the Company representing a majority
of the votes of all capital stock of the Company entitled to vote thereat.
Such request of the Board or the stockholders shall state the purpose or
purposes of the proposed meeting.
Section 2.3 NOTICES. Written notice of each stockholders'
meeting stating the place, date and hour of the meeting shall be given to
each stockholder entitled to vote thereat by or at the direction of the
officer calling such meeting not less than ten (10) nor more than sixty (60)
days before the date of the meeting. If said notice is for a stockholders
meeting other than an annual meeting, it shall in addition state the purpose
or purposes for which said meeting is called, and the business transacted at
such meeting shall be limited to the matters so stated in said notice and any
matters reasonably related thereto.
Section 2.4 QUORUM. The presence at a stockholders' meeting of
the holders, present in person or represented by proxy, of capital stock of
the Company representing a majority of the votes of all capital stock of the
Company entitled to vote thereat shall constitute a quorum at such meeting
for the transaction of business except as otherwise provided by law, the
certificate of incorporation or these Bylaws. If a quorum shall not be
present or represented at any meeting of the stockholders, a majority of the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to
<PAGE>
adjourn the meeting from time to time, without notice other than announcement
at the meeting, until a quorum shall be present or represented. At such
reconvened meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. If the adjournment is for more than thirty (30) days,
or if after the adjournment a new record date is fixed for the reconvened
meeting, a notice of said meeting shall be given to each stockholder entitled
to vote at said meeting. The stockholders present at a duly convened meeting
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
Section 2.5 VOTING OF SHARES.
Section 2.5.1. VOTING LISTS. The officer or agent who has
charge of the stock ledger of the Company shall prepare, at least ten (10)
days before every meeting of stockholders, a complete list of the
stockholders entitled to vote thereat arranged in alphabetical order and
showing the address and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any such
stockholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten (10) days prior to the meeting, either at
a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present. The original stock transfer
books shall be prima facie evidence as to who are the stockholders entitled
to examine such list or transfer books or to vote at any meeting of
stockholders. Failure to comply with the requirements of this section shall
not affect the validity of any action taken at said meeting.
Section 2.5.2 VOTES PER SHARE. Unless otherwise provided
in the certificate of incorporation, each stockholder shall be entitled to
one vote in person or by proxy at every stockholders meeting for each share
of capital stock held by such stockholder.
Section 2.5.3 PROXIES. Every stockholder entitled to vote
at a meeting or to express consent or dissent without a meeting or a
stockholder's duly authorized attorney-in-fact may authorize another person
or persons to act for him by proxy. Each proxy shall be in writing, executed
by the stockholder giving the proxy or by his duly authorized attorney. No
proxy shall be voted on or after three (3) years from its date, unless the
proxy provides for a longer period. Unless and until voted, every proxy
shall be revocable at the pleasure of the person who executed it, or his
legal representatives or assigns, except in those cases where an irrevocable
proxy permitted by statute has been given.
Section 2.5.4 REQUIRED VOTE. When a quorum is present at
any meeting, the vote of the holders, present in person or represented by
proxy, of capital stock of the Company representing a majority of the votes
of all capital stock of the Company entitled to vote thereat shall decide any
question brought before such meeting, unless the question is one upon which,
by express provision of law or the certificate of incorporation or these
Bylaws, a different vote is required, in which case such express provision
shall govern and control the decision of such question.
Section 2.5.5 CONSENTS IN LIEU OF MEETING. Any action
required to be or which may be taken at any meeting of stockholders may be
taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted. Prompt,
<PAGE>
written notice of the action taken by means of any such consent which is
other than unanimous shall be given to those stockholders who have not
consented in writing.
ARTICLE III
DIRECTORS
Section 3.1 PURPOSE. The business of the Company shall be
managed by or under the direction of the Board, which may exercise all such
powers of the Company and do all such lawful acts and things as are not by
law, the certificate of incorporation or these Bylaws directed or required to
be exercised or done by the stockholders. Directors need not be stockholders
or residents of the State of Delaware.
Section 3.2 NUMBER. The number of directors constituting the
Board shall never be less than one and shall be determined by resolution of
the Board.
Section 3.3 ELECTION. The directors shall be divided into
three classes as nearly equal in number as possible and one class of
directors shall be elected by plurality vote at each annual meeting of
stockholders to hold office for a three-year term. Each director, including
a director elected to fill a vacancy, shall hold office until the expiration
of the term for which elected and until a successor has been elected and
qualified. No decrease in the number of directors shall have the effect of
shortening the term of any incumbent director.
Section 3.4 VACANCIES. Vacancies and newly-created
directorships resulting from any increase in the authorized number of
directors may be filled by a majority of the directors then in office, though
less than a quorum, or by a sole remaining director, and the directors so
chosen shall hold office until their successors are duly elected and
qualified. If there are no directors in office, then an election of
directors may be held in the manner provided by law. If, at the time of
filling any vacancy or any newly-created directorship, the directors then in
office shall constitute less than a majority of the whole Board (as
constituted immediately prior to any such increase), the Court of Chancery
may, upon application of any stockholder or stockholders holding at least ten
percent (10%) of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to
be held to fill any such vacancies or newly-created directorships, or to
replace the directors chosen by the directors then in office. No decrease in
the size of the Board shall serve to shorten the term of an incumbent
director.
Section 3.5 REMOVAL. Unless otherwise restricted by law, the
certificate of incorporation or these Bylaws, any director or the entire
Board may be removed, with or without cause, by a majority vote of the shares
entitled to vote at an election of directors, if notice of the intention to
act upon such matter shall have been given in the notice calling such meeting.
Section 3.6 COMPENSATION. Unless otherwise restricted by the
certificate of incorporation or these Bylaws, the Board shall have the
authority to fix the compensation of directors. The directors may be
reimbursed their expenses, if any, of attendance at each meeting of the Board
and may be paid either a fixed sum for attendance at each meeting of the
Board or a stated salary as director. No such payment shall preclude any
director from serving the Company in any other capacity and receiving
compensation therefor. Members of committees of the Board may be allowed like
compensation for attending committee meetings.
Section 3.7 DIRECTORS EMERITUS AND ADVISORY DIRECTORS. The
Board may from time to time elect one or more non-voting directors to serve
as directors emeritus or
<PAGE>
advisory directors. The directors elected pursuant to this Section shall be
invited to attend all meetings of the Board, but shall not be entitled to
vote on any matters, nor shall their presence be used for establishing a
quorum. Directors emeritus and advisory directors shall be prominent members
of the health care field and shall provide the Board with insights into
strategic issues affecting the Company. To induce prominent members of the
health care field to serve as directors emeritus or advisory directors, the
Board may determine to pay a fee to such directors.
ARTICLE IV
BOARD MEETINGS
Section 4.1 ANNUAL MEETINGS. The Board shall meet as soon as
practicable after the adjournment of each annual stockholders' meeting at the
place of the stockholders' meeting. No notice to the directors shall be
necessary to legally convene this meeting, provided a quorum is present.
Section 4.2 REGULAR MEETINGS. Regularly scheduled, periodic
meetings of the Board may be held without notice at such times and places as
shall from time to time be determined by resolution of the Board and
communicated to all directors.
Section 4.3 SPECIAL MEETINGS. Special meetings of the Board
(i) may be called by the chairman of the board or president and (ii) shall be
called by the president or secretary on the written request of two directors
or the sole director, as the case may be. Notice of each special meeting of
the Board shall be given, either personally or as hereinafter provided, to
each director at least 24 hours before the meeting if such notice is
delivered personally or by means of telephone, telegram, telex or facsimile
transmission and delivery; two days before the meeting if such notice is
delivered by a recognized express delivery service; and three days before the
meeting if such notice is delivered through the United States mail. Any and
all business may be transacted at a special meeting which may be transacted
at a regular meeting of the Board. Except as may be otherwise expressly
provided by law, the certificate of incorporation or these Bylaws, neither
the business to be transacted at, nor the purpose of, any special meeting
need be specified in the notice or waiver of notice of such meeting.
Section 4.4 QUORUM, REQUIRED VOTE. A majority of the directors
shall constitute a quorum for the transaction of business at any meeting of
the Board, and the act of a majority of the directors present at any meeting
at which there is a quorum shall be the act of the Board, except as may be
otherwise specifically provided by law, the certificate of incorporation or
these Bylaws. If a quorum shall not be present at any meeting, a majority of
the directors present may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
Section 4.5 CONSENT IN LIEU OF MEETING. Unless otherwise
restricted by the certificate of incorporation or these Bylaws, any action
required or permitted to be taken at any meeting of the Board or any
committee thereof may be taken without a meeting, if all members of the Board
or committee, as the case may be, consent thereto in writing, and the writing
or writings are filed with the minutes of proceedings of the Board or
committee.
<PAGE>
ARTICLE V
COMMITTEES OF DIRECTORS
Section 5.1 ESTABLISHMENT; STANDING COMMITTEES. The Board may
by resolution establish, name or dissolve one or more committees, each
committee to consist of one or more of the directors. Each committee shall
keep regular minutes of its meetings and report the same to the Board when
required. There shall exist the following standing committees, which
committees shall have and may exercise the following powers and authority:
Section 5.1.1 FINANCE COMMITTEE. The Finance Committee
shall, from time to time, meet to review the Company's consolidated operating
and financial affairs, both with respect to the Company and all of its
subsidiaries, and to report its findings and recommendations to the Board of
Directors for final action. The Finance Committee shall not be empowered to
approve any corporate action, of whatever kind or nature, and the
recommendations of the Finance Committee shall not be binding on the Board of
Directors, except when, pursuant to the provisions of Section 5.2 of these
Bylaws, such power and authority have been specifically delegated to such
committee by the Board of Directors by resolution. In addition to the
foregoing, the specific duties of the Finance Committee shall be determined
by the Board of Directors by resolution.
Section 5.1.2 AUDIT COMMITTEE. The Audit Committee shall,
from time to time, but no less than two times per year, meet to review and
monitor the financial and cost accounting practices and procedures of the
Company all of its subsidiaries and to report its findings and
recommendations to the Board of Directors for final action. The Audit
Committee shall not be empowered to approve any corporate action, of whatever
kind or nature, and the recommendations of the Audit Committee shall not be
binding on the Board of Directors, except when, pursuant to the provisions of
Section 5.2 of these Bylaws, such power and authority have been specifically
delegated to such committee by the Board of Directors by resolution. In
addition to the foregoing, the specific duties of the Audit Committee shall
be determined by the Board of Directors by resolution.
Section 5.1.3 COMPENSATION COMMITTEE. The Compensation
Committee shall, from time to time, meet to review the various compensation
plans, policies and practices of the Company and all of its subsidiaries and
to report its findings and recommendations to the Board of Directors for
final action. The Compensation Committee shall not be empowered to approve
any corporate action, of whatever kind or nature, and the recommendations of
the Compensation Committee shall not be binding on the Board of Directors,
except when, pursuant to the provisions of Section 5.2 of these Bylaws, such
power and authority have been specifically delegated to such committee by the
Board of Directors by resolution. In addition to the foregoing, the specific
duties of the Compensation Committee shall be determined by the Board of
Directors by resolution.
Section 5.2 AVAILABLE POWERS. Any committee established
pursuant to Section 5.1 of these Bylaws, including the Finance Committee, the
Audit Committee and the Compensation Committee, but only to the extent
provided in the resolution of the Board establishing such committee or
otherwise delegating specific power and authority to such committee and as
limited by law, the certificate of incorporation and these Bylaws, shall have
and may exercise all the powers and authority of the Board in the management
of the business and affairs of the Company, and may authorize the seal of the
Company to be affixed to all papers which may require it. Without limiting
the foregoing, such committee may, but only to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock
adopted by the Board as provided in Section 151(a) of the General Corporation
Law of the State of Delaware, fix any of the preferences or rights of
<PAGE>
such shares relating to dividends, redemption, dissolution, any distribution
of assets of the Company or the conversion into, or the exchange of such
shares for, shares of any other class or classes or any other series of the
same or any other class or classes of stock of the Company.
Section 5.3 UNAVAILABLE POWERS. No committee of the Board
shall have the power or authority to amend the certificate of incorporation
(except in connection with the issuance of capital stock as provided in the
previous section); adopt an agreement of merger or consolidation; recommend
to the stockholders the sale, lease or exchange of all or substantially all
of the Company's property and assets, a dissolution of the Company or a
revocation of such a dissolution; amend the Bylaws of the Company; or, unless
the resolution establishing such committee or the certificate of
incorporation expressly so provides, declare a dividend, authorize the
issuance of stock or adopt a certificate of ownership and merger.
Section 5.4 ALTERNATE MEMBERS. The Board may designate one or
more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of such committee. In the
absence or disqualification of a member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or
not he or they constitute a quorum, may unanimously appoint another member of
the Board to act at the meeting in the place of any such absent or
disqualified member.
Section 5.5 PROCEDURES. Time, place and notice, if any, of
meetings of a committee shall be determined by such committee. At meetings
of a committee, a majority of the number of members designated by the Board
shall constitute a quorum for the transaction of business. The act of a
majority of the members present at any meeting at which a quorum is present
shall be the act of the committee, except as otherwise specifically provided
by law, the certificate of incorporation or these Bylaws. If a quorum is not
present at a meeting of a committee, the members present may adjourn the
meeting from time to time, without notice other than an announcement at the
meeting, until a quorum is present.
ARTICLE VI
OFFICERS
Section 6.1 ELECTED OFFICERS. The Board shall elect a chairman
of the board, a president, a treasurer and a secretary (collectively, the
"Required Officers") having the respective duties enumerated below and may
elect such other officers having the titles and duties set forth below which
are not reserved for the Required Officers or such other titles and duties as
the Board may by resolution from time to time establish:
Section 6.1.1 CHAIRMAN OF THE BOARD. The chairman of the
board shall be the ranking chief executive officer of the Company, shall have
general supervision of the affairs of the Company and general control of all
of its business and shall see that all orders and resolutions of the Board
are carried into effect. The chairman of the board, or in his absence, the
president, shall preside when present at all meetings of the shareholders and
the Board. The chairman of the board may execute bonds, mortgages and other
contracts requiring a seal under the seal of the Company, except where
required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board to some other officer or agent of the Company.
<PAGE>
The chairman of the board may delegate all or any of his powers or duties to
the president, if and to the extent deemed by the chairman of the board to be
desirable or appropriate.
Section 6.1.2 PRESIDENT. The president shall be the chief
operating officer of the Company and shall, subject to the supervision of the
chairman of the board and the Board, have general management and control of
the day-to-day business operations of the Company. The president shall put
into operation the business policies of the Company as determined by the
chairman of the board and the Board and as communicated to him by such
officer and bodies. He shall make recommendations to the chairman of the
board on all matters which would normally be reserved for the final executive
responsibility of the chairman of the board. In the absence of the chairman
of the board or in the event of his inability or refusal to act, the
president shall perform the duties and exercise the powers of the chairman of
the board.
Section 6.1.3 VICE PRESIDENTS. In the absence of the
president or in the event of his inability or refusal to act, the vice
president (or in the event there be more than one vice president, the vice
presidents in the order designated by the Board, or in the absence of any
designation, then in the order of their election or appointment) shall
perform the duties of the president, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the president. The
vice presidents shall perform such other duties and have such other powers as
the Board may from time to time prescribe.
Section 6.1.4 SECRETARY. The secretary shall attend all
meetings of the stockholders, the Board and (as required) committees of the
Board and shall record all the proceedings of such meetings in books to be
kept for that purpose. He shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board and shall
perform such other duties as may be prescribed by the Board or the president.
He shall have custody of the corporate seal of the Company and he, or an
assistant secretary, shall have authority to affix the same to any instrument
requiring it, and when so affixed, it may be attested by his signature or by
the signature of such assistant secretary. The Board may give general
authority to any other officer to affix the seal of the Company and to attest
the affixing thereof by his signature.
Section 6.1.5 ASSISTANT SECRETARIES. The assistant
secretary, or if there be more than one, the assistant secretaries in the
order determined by the Board (or if there be no such determination, then in
the order of their election or appointment) shall, in the absence of the
secretary or in the event of his inability or refusal to act, perform the
duties and exercise the powers of the secretary and shall perform such other
duties and have such other powers as the Board may from time to time
prescribe.
Section 6.1.6 TREASURER. Unless the Board by resolution
otherwise provides, the treasurer shall be the chief accounting and financial
officer of the Company. The Treasurer shall have the custody of the
corporate funds and securities, shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Company and shall
deposit all moneys and other valuable effects in the name and to the credit
of the Company in such depositories as may be designated by the Board. He
shall disburse the funds of the Company as may be ordered by the Board,
taking proper vouchers for such disbursements, and shall render to the
president and the Board, at its regular meetings, or when the Board so
requires, an account of all his transactions as treasurer and of the
financial condition of the Company.
Section 6.1.7 ASSISTANT TREASURERS OR CONTROLLER. The
assistant treasurer or controller, or if there shall be more than one, the
assistant treasurers in the order determined by the Board (or if there be no
such determination, then in the order of their election or
<PAGE>
appointment) shall, in the absence of the treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of
the treasurer and shall perform such other duties and have such other powers
as the Board may from time to time prescribe.
Section 6.1.8 DIVISIONAL OFFICERS. Each division of the
Company, if any, may have a president, secretary, treasurer or controller and
one or more vice presidents, assistant secretaries, assistant treasurers and
other assistant officers. Any number of such offices may be held by the same
person. Such divisional officers will be appointed by, report to and serve
at the pleasure of the Board and such other officers that the Board may place
in authority over them. The officers of each division shall have such
authority with respect to the business and affairs of that division as may be
granted from time to time by the Board, and in the regular course of business
of such division may sign contracts and other documents in the name of the
division where so authorized; provided that in no case and under no
circumstances shall an officer of one division have authority to bind any
other division of the Company except as necessary in the pursuit of the
normal and usual business of the division of which he is an officer.
Section 6.2 ELECTION. All elected officers shall serve until
their successors are duly elected and qualified or until their earlier death,
disqualification, retirement, resignation or removal from office.
Section 6.3 APPOINTED OFFICERS. The Board may also appoint or
delegate the power to appoint such other officers, assistant officers and
agents, and may also remove such officers and agents or delegate the power to
remove same, as it shall from time to time deem necessary, and the titles and
duties of such appointed officers may be as described in Section 6.1 for
elected officers; provided that the officers and any officer possessing
authority over or responsibility for any functions of the Board shall be
elected officers.
Section 6.4 MULTIPLE OFFICEHOLDERS, STOCKHOLDER AND DIRECTOR
OFFICERS. Any number of offices may be held by the same person, unless the
certificate of incorporation or these Bylaws otherwise provide. Officers need
not be stockholders or residents of the State of Delaware. Officers, such as
the chairman of the board, possessing authority over or responsibility for
any function of the Board must be directors.
Section 6.5 COMPENSATION, VACANCIES. The compensation of
elected officers shall be set by the Board. The Board shall also fill any
vacancy in an elected office. The compensation of appointed officers and the
filling of vacancies in appointed offices may be delegated by the Board to
the same extent as permitted by these Bylaws for the initial filling of such
offices.
Section 6.6 ADDITIONAL POWERS AND DUTIES. In addition to the
foregoing especially enumerated powers and duties, the several elected and
appointed officers of the Company shall perform such other duties and
exercise such further powers as may be provided by law, the certificate of
incorporation or these Bylaws or as the Board may from time to time determine
or as may be assigned to them by any competent committee or superior officer.
Section 6.7 REMOVAL. Any officer may be removed, either with
or without cause, by a majority of the directors at the time in office, at
any regular or special meeting of the Board.
<PAGE>
ARTICLE VII
SHARE CERTIFICATES
Section 7.1 ENTITLEMENT TO CERTIFICATES. Every holder of the
capital stock of the Company, unless and to the extent the Board by
resolution provides that any or all classes or series of stock shall be
uncertificated, shall be entitled to have a certificate, in such form as is
approved by the Board and conforms with applicable law, certifying the number
of shares owned by him.
Section 7.2 MULTIPLE CLASSES OF STOCK. If the Company shall be
authorized to issue more than one class of capital stock or more than one
series of any class, a statement of the powers, designations, preferences and
relative, participating, optional or other special rights of each class of
stock or series thereof and the qualification, limitations or restrictions of
such preferences and/or rights shall, unless the Board shall by resolution
provide that such class or series of stock shall be uncertificated, be set
forth in full or summarized on the face or back of the certificate which the
Company shall issue to represent such class or series of stock; provided
that, to the extent allowed by law, in lieu of such statement, the face or
back of such certificate may state that the Company will furnish a copy of
such statement without charge to each requesting stockholder.
Section 7.3 SIGNATURES. Each certificate representing capital
stock of the Company shall be signed by or in the name of the Company by (1)
the chairman of the board, the president or a vice president; and (2) the
treasurer, an assistant treasurer, the secretary or an assistant secretary of
the Company. The signatures of the officers of the Company may be
facsimiles. In case any officer who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to hold such office
before such certificate is issued, it may be issued by the Company with the
same effect as if he held such office on the date of issue.
Section 7.4 ISSUANCE AND PAYMENT. Subject to the provisions of
the law, the certificate of incorporation or these Bylaws, shares may be
issued for such consideration and to such persons as the Board may determine
from time to time. Shares may not be issued until the full amount of the
consideration has been paid, unless upon the face or back of each certificate
issued to represent any partly paid shares of capital stock there shall have
been set forth the total amount of the consideration to be paid therefor and
the amount paid thereon up to and including the time said certificate is
issued.
Section 7.5 LOST CERTIFICATES. The Board may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Company alleged to have been lost,
stolen or destroyed upon the making of an affidavit of that fact by the
person claiming the certificate of stock to be lost, stolen or destroyed.
When authorizing such issue of a new certificate or certificates, the Board
may, in its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such
manner as it shall require and/or to give the Company a bond in such sum as
it may direct as indemnity against any claim that may be made against the
Company with respect to the certificate alleged to have been lost, stolen or
destroyed.
Section 7.6 TRANSFER OF STOCK. Upon surrender to the Company
or its transfer agent, if any, of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer and of the payment of all taxes applicable to the transfer of said
shares, the Company shall be obligated to issue a new certificate to the
person entitled thereto, cancel the old certificate and record the
transaction upon its
<PAGE>
books; provided, however, that the Company shall not be so obligated unless
such transfer was made in compliance with applicable state and federal
securities laws.
Section 7.7 REGISTERED STOCKHOLDERS. The Company shall be
entitled to recognize the exclusive right of a person registered on its books
as the owner of shares to receive dividends, vote and be held liable for
calls and assessments and shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any person
other than such registered owner, whether or not it shall have express or
other notice thereof, except as otherwise provided by law.
ARTICLE VIII
INDEMNIFICATION
Section 8.1 GENERAL. The Company shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the Company), by reason of the fact that he is or was a director, officer,
employee or agent of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit
or proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Company, and,
with respect to any criminal action or proceeding, have reasonable cause to
believe that his conduct was unlawful.
Section 8.2 ACTIONS BY OR IN THE RIGHT OF THE COMPANY. The
Company shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or
in the right of the Company to procure a judgment in its favor by reason of
the fact that he is or was a director, officer, employee or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture
or trust or other enterprise, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Company and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Company unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
Section 8.3 INDEMNIFICATION AGAINST EXPENSES. To the extent
that a director, officer, employee or agent of the Company has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in sections 8.1 and 8.2, or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
<PAGE>
Section 8.4 BOARD DETERMINATIONS. Any indemnification under
sections 8.1 and 8.2 (unless ordered by a court) shall be made by the Company
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth
in sections 8.1 and 8.2. Such determination shall be made (1) by a majority
vote of the directors who were not parties to such action, suit or
proceeding, even though less than a quorum, or (2) if there are no such
disinterested directors or if such directors so direct, by independent legal
counsel in a written opinion, or (3) by the stockholders.
Section 8.5 ADVANCEMENT OF EXPENSES. Expenses incurred by an
officer or director in defending a civil or criminal action, suit or
proceeding may be paid by the Company in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
Company as authorized by law or in this section. Such expenses incurred by
other employees and agents may be so paid upon such terms and conditions, if
any, as the Board of Directors deems appropriate.
Section 8.6 NONEXCLUSIVE. The indemnification and advancement
of expenses provided by, or granted pursuant to, this section shall not be
deemed exclusive of any other rights to which any director, officer, employee
or agent of the Company seeking indemnification or advancement of expenses
may be entitled under any other Bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall, unless otherwise provided when authorized or ratified, continue as to
a person who has ceased to be a director, officer, employee or agent of the
Company and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Section 8.7 INSURANCE. The Company may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the Company, or is or was serving at the request of the Company
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, or other enterprise, against any liability
asserted against him and incurred by him in any such capacity or arising out
of his status as such, whether or not the Company would have the power to
indemnify him against such liability under the provisions of the statutes,
the Certificate of Incorporation or this section.
Section 8.8 CERTAIN DEFINITIONS. For purposes of this section,
(a) references to "the Company" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers and employees or agents, so that any person who is or was
a director, officer, employee or agent of such constituent corporation, or is
or was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under
the provisions of this section with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if
its separate existence had continued; (b) references to "other enterprises"
shall include employee benefit plans; (c) references to "fines" shall include
any excise taxes assessed on a person with respect to an employee benefit
plan; and (d) references to "serving at the request of the Company" shall
include any service as a director, officer, employee or agent of the Company
which imposes duties on, or involves services by, such director, officer,
employee, or agent with respect to any employee benefit plan, its
participants, or
<PAGE>
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Company" as referred to in
this section.
Section 8.9 CHANGE IN GOVERNING LAW. In the event of any
amendment or addition to Section 145 of the General Corporation Law of the
State of Delaware or the addition of any other section to such law which
shall limit indemnification rights thereunder, the Company shall, to the
extent permitted by the General Corporation Law of the State of Delaware,
indemnify to the fullest extent authorized or permitted hereunder, any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (including an action by or in the right of
the corporation), by reason of the fact that he is or was a director,
officer, employee or agent of the Company or is or was serving at the request
of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding.
ARTICLE IX
INTERESTED DIRECTORS, OFFICERS AND STOCKHOLDERS
Section 9.1 VALIDITY. Any contract or other transaction
between the Company and any of its directors, officers or stockholders (or
any corporation or firm in which any of them are directly or indirectly
interested) shall be valid for all purposes notwithstanding the presence of
such director, officer or stockholder at the meeting authorizing such
contract or transaction, or his participation or vote in such meeting or
authorization.
Section 9.2 DISCLOSURE, APPROVAL. The foregoing shall,
however, apply only if the material facts of the relationship or the interest
of each such director, officer or stockholder is known or disclosed:
1. to the Board and it nevertheless in good faith
authorizes or ratifies the contract or transaction by a majority of the
directors present, each such interested director to be counted in determining
whether a quorum is present but not in calculating the majority necessary to
carry the vote; or
2. to the stockholders and they nevertheless in good faith
authorize or ratify the contract or transaction by a majority of the shares
present, each such interested person to be counted for quorum and voting
purposes.
Section 9.3 NONEXCLUSIVE. This provision shall not be
construed to invalidate any contract or transaction which would be valid in
the absence of this provision.
ARTICLE X
MISCELLANEOUS
Section 10.1 PLACE OF MEETINGS. All stockholders, directors and
committee meetings shall be held at such place or places, within or without
the State of Delaware, as shall be designated from time to time by the Board
or such committee and stated in the notices thereof. If no such place is so
designated, said meetings shall be held at the principal business office of
the Company.
<PAGE>
Section 10.2 FIXING RECORD DATES.
(a) In order that the Company may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, the Board may fix, in advance, a record date,
which shall not precede the date upon which the resolution fixing the record
date is adopted by the Board, and which record date shall not be more than
sixty (60) nor less than ten (10) days prior to any such action. If no record
date is fixed by the Board, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day notice is given or, if
notice is waived, at the close of business on the day next preceding the day
on which the meeting is held. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to
any adjournment of the meeting; provided, however, that the Board may fix a
new record date for the adjourned meeting.
(b) In order that the Company may determine the
stockholders entitled to consent to corporate action in writing without a
meeting, the Board may fix a record date, which record date shall not precede
the date upon which the resolution fixing the record date is adopted by the
Board, and which date shall not be more than ten days after the date upon
which the resolution fixing the record date is adopted by the Board. If no
record date has been fixed by the Board, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board is otherwise required, shall be
the first date on which a signed written consent setting forth the action
taken or proposed to be taken is delivered to the Company by delivery to its
registered office in the State of Delaware, its principal place of business,
or an officer or agent of the Company having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to the
Company's registered office shall be by hand or by certified or registered
mail, return receipt requested. If no record date has been fixed by the
Board and prior action by the Board is required, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the day on which the
Board adopts the resolution taking such prior action.
(c) In order that the Company may determine the
stockholders entitled to receive payment of any dividend or other
distribution or allotment of any rights or the stockholders entitled to
exercise any rights in respect of any change, conversion or exchange of
stock, or for the purpose of any other lawful action, the Board may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted, and which record date shall be
not more than sixty (60) days prior to such action. If no record date is
fixed, the record date for determining stockholders for any such purpose
shall be at the close of business on the day on which the Board adopts the
resolution relating thereto.
Section 10.3 MEANS OF GIVING NOTICE. Whenever under law, the
certificate of incorporation or these Bylaws, notice is required to be given
to any director or stockholder, such notice may be given in writing and
delivered personally, through the United States mail, by a recognized express
delivery service (such as Federal Express) or by means of telegram, telex or
facsimile transmission, addressed to such director or stockholder at his
address or telex or facsimile transmission number, as the case may be,
appearing on the records of the Company, with postage and fees thereon
prepaid. Such notice shall be deemed to be given at the time when the same
shall be deposited in the United States mail or with an express delivery
service or when transmitted, as the case may be. Notice of any
<PAGE>
meeting of the Board may be given to a director by telephone and shall be
deemed to be given when actually received by the director.
Section 10.4 WAIVER OF NOTICE. Whenever any notice is required
to be given under law, the certificate of incorporation or these bylaws, a
written waiver of such notice, signed before or after the date of such
meeting by the person or persons entitled to said notice, shall be deemed
equivalent to such required notice. All such waivers shall be filed with the
corporate records. Attendance at a meeting shall constitute a waiver of
notice of such meeting, except where a person attends for the express purpose
of objecting to the transaction of any business on the ground that the
meeting is not lawfully called or convened.
Section 10.5 ATTENDANCE VIA COMMUNICATIONS EQUIPMENT. Unless
otherwise restricted by law, the certificate of incorporation or these
Bylaws, members of the Board, any committee thereof or the stockholders may
hold a meeting by means of conference telephone or other communications
equipment by means of which all persons participating in the meeting can
effectively communicate with each other. Such participation in a meeting
shall constitute presence in person at the meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
Section 10.6 DIVIDENDS. Dividends on the capital stock of the
Company, paid in cash, property, or securities of the Company and as may be
limited by applicable law and applicable provisions of the certificate of
incorporation (if any), may be declared by the Board at any regular or
special meeting.
Section 10.7 RESERVES. Before payment of any dividend, there
may be set aside out of any funds of the Company available for dividends such
sum or sums as the Board from time to time, in its absolute discretion, think
proper as a reserve or reserves to meet contingencies, for equalizing
dividends, for repairing or maintaining any property of the Company, or for
such other purpose as the Board shall determine to be in the best interest of
the Company; and the Board may modify or abolish any such reserve in the
manner in which it was created.
Section 10.8 REPORTS TO STOCKHOLDERS. The Board shall present
at each annual meeting of stockholders, and at any special meeting of
stockholders when called for by vote of the stockholders, a statement of the
business and condition of the Company.
Section 10.9 CONTRACTS AND NEGOTIABLE INSTRUMENTS. Except as
otherwise provided by law or these Bylaws, any contract or other instrument
relative to the business of the Company may be executed and delivered in the
name of the Company and on its behalf by the chairman of the board or the
president; and the Board may authorize any other officer or agent of the
Company to enter into any contract or execute and deliver any contract in the
name and on behalf of the Company, and such authority may be general or
confined to specific instances as the Board may by resolution determine. All
bills, notes, checks or other instruments for the payment of money shall be
signed or countersigned by such officer, officers, agent or agents and in
such manner as are permitted by these Bylaws and/or as, from time to time,
may be prescribed by resolution (whether general or special) of the Board.
Unless authorized so to do by these Bylaws or by the Board, no officer, agent
or employee shall have any power or authority to bind the Company by any
contract or engagement, or to pledge its credit, or to render it liable
pecuniarily for any purpose or to any amount.
<PAGE>
Section 10.10 FISCAL YEAR. The fiscal year of the Company shall
be fixed by resolution of the Board.
Section 10.11 SEAL. The seal of the Company shall be in such
form as shall from time to time be adopted by the Board. The seal may be
used by causing it or a facsimile thereof to be impressed, affixed or
otherwise reproduced.
Section 10.12 BOOKS AND RECORDS. The Company shall keep correct
and complete books and records of account and shall keep minutes of the
proceedings of its
<PAGE>
stockholders, Board and committees and shall keep at its registered office or
principal place of business, or at the office of its transfer agent or
registrar, a record of its stockholders, giving the names and addresses of
all stockholders and the number and class of the shares held by each.
Section 10.13 RESIGNATION. Any director, committee member,
officer or agent may resign by giving written notice to the chairman of the
board, the president or the secretary. The resignation shall take effect at
the time specified therein, or immediately if no time is specified. Unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
Section 10.14 SURETY BONDS. Such officers and agents of the
Company (if any) as the president or the Board may direct, from time to time,
shall be bonded for the faithful performance of their duties and for the
restoration to the Company, in case of their death, resignation, retirement,
disqualification or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in their possession or under their
control belonging to the Company, in such amounts and by such surety
companies as the president or the Board may determine. The premiums on such
bonds shall be paid by the Company, and the bonds so furnished shall be in
the custody of the Secretary.
Section 10.15 PROXIES IN RESPECT OF SECURITIES OF
OTHER-CORPORATIONS. The chairman of the board, the president, any vice
president or the secretary may from time to time appoint an attorney or
attorneys or an agent or agents for the Company to exercise, in the name and
on behalf of the Company, the powers and rights which the Company may have as
the holder of stock or other securities in any other corporation to vote or
consent in respect of such stock or other securities, and the chairman of the
board, the president, any vice president or the secretary may instruct the
person or persons so appointed as to the manner of exercising such powers and
rights; and the chairman of the board, the president, any vice president or
the secretary may execute or cause to be executed, in the name and on behalf
of the Company and under its corporate seal or otherwise, all such written
proxies or other instruments as he may deem necessary or proper in order that
the Company may exercise such powers and rights.
Section 10.16. AMENDMENTS. These Bylaws may be altered, amended,
repealed or replaced by the stockholders, or by the Board when such power is
conferred upon the Board by the certificate of incorporation, at any annual
stockholders meeting or annual or regular meeting of the Board, or at any
special meeting of the stockholders or of the Board if notice of such
alteration, amendment, repeal or replacement is contained in the notice of
such special meeting. If the power to adopt, amend, repeal or replace these
Bylaws is conferred upon the Board by the certificate of incorporation, the
power of the stockholders to so adopt, amend, repeal or replace these Bylaws
shall not be divested or limited thereby.
<PAGE>
CONFIDENTIAL TREATMENT
REQUESTED FOR BRACKETED
PORTIONS ON PAGE 1 OF THIS
EXHIBIT
EXHIBIT 4.13
ADVANCE PARADIGM, INC.
WARRANT AGREEMENT
This Warrant Agreement dated as of November 25, 1995, is entered into by
and between Advance ParadigM, Inc., a Delaware corporation (the "COMPANY"), and
Blue Cross and Blue Shield of Texas, Inc., a Texas non-profit group hospital
service corporation ("BCBS-Tx").
TERMS OF AGREEMENT
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the Company and BCBS-Tx hereby agree as follows:
Section 1. GRANT OF THE RIGHT TO PURCHASE COMMON STOCK. Upon
confirmation by the Company that the aggregate numbers of lives that BCBS-Tx
has enrolled exclusively in the Company's [....] services ([....]) equals or
exceeds the number of lives set forth below (the "Lives Thresholds"), the
Company shall grant to BCBS-Tx the right, and BCBS-Tx shall be entitled,
subject to the terms and conditions hereinafter set forth, to purchase from
the Company the number of fully paid and non-assessable shares of its common
stock, par value $0.01 per share (the "COMMON STOCK") set forth below (which
number is referred to herein as the "INITIAL EXERCISE NUMBER") at an exercise
price of $2,750 per share (the "EXERCISE PRICE").
Lives Number of Shares
Threshold Covered by Warrant
---------------- ------------------
[....] 267
[....] 267
[....] 267
[....] 267
The right to purchase such shares shall be evidenced by a warrant
certificate in substantially the form of Exhibit A hereto (each a "WARRANT").
The Initial Exercise Number and Exercise Price of such shares are subject to
adjustment as provided in Section 4 hereof.
Section 2. TERM OF THE WARRANT AGREEMENT. BCBS-Tx's right to earn
Warrants as granted herein shall commence on the date hereof (the "EFFECTIVE
DATE") and continue for a period of five (5) years from the date hereof. Except
as otherwise provided for herein, the term of each Warrant and the right to
purchase Common Stock as granted therein shall commence on the first anniversary
of its date of issuance and will end on the fifth anniversary of its date of
issuance (the "EXERCISE PERIOD"). If at any time prior to the first anniversary
of the date of issuance of each Warrant, the aggregate number of lives falls
below the corresponding Lives Threshold, then the Warrant issued upon achieving
such Lives Threshold will be void, subject to revival (at the same exercise
price and expiring on the same date) in the event the aggregate number of lives
again equals or exceeds the corresponding Lives Threshold.
Section 3. EXERCISE OF WARRANT. The purchase rights represented by
each Warrant are exercisable for all shares covered by such Warrant at the
option of the holder thereof at any time during the Exercise Period; provided
that the Warrant holder has executed the Stockholders
<PAGE>
CONFIDENTIAL TREATMENT
Agreement attached hereto as Exhibit C (the "STOCKHOLDERS AGREEMENT"). Shares
of Common Stock purchased upon exercise of each Warrant shall at the time of
purchase be paid for in full. To the extent that the right to purchase shares
has accrued hereunder, the Warrant may be exercised by written notice to the
Company in the form of Exhibit I to the Warrant, which specifies an exercise
date (the "DATE OF EXERCISE"), accompanied by full payment for the shares by
wire transfer or certified or official bank check or the equivalent thereof
acceptable to Company.
At the time of delivery, the Company shall, without stock transfer tax to
the holder, deliver to holder (or to such other person) at the principal office
of the Company, or such other place as shall be mutually agreed upon, a
certificate or certificates for such shares, provided, however, that the time of
delivery may be postponed by the Company for such period as may be required for
it with reasonable diligence to comply with any requirements of law. The
Company at the time of exercise will require in addition that the registered
owner deliver an investment representation in form acceptable to the Company,
and the Company will place a legend on the certificate for such Common Stock
restricting the transfer of same. At no time shall the Company have any
obligation or duty to register under the Securities Act of 1933 (the "1933
ACT") the Common Stock issuable upon exercise of Warrant.
Section 4. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SHARES. The
Exercise Price and number of shares of Common Stock purchasable pursuant to the
exercise of each Warrant shall be subject to adjustment from time to time as
follows:
(a) ADJUSTMENT FOR COMBINATIONS OR CONSOLIDATIONS OF COMMON STOCK. In the
event the Company, at any time or from time to time after the Effective Date,
effects a subdivision or combination of its outstanding Common Stock for a
greater or lesser number of shares, then and in each such event the Initial
Exercise Number and the Exercise Price shall be adjusted proportionately such
that the holder of the Warrant (the "WARRANTHOLDER") is entitled to purchase the
same percentage of all shares of the Company's outstanding capital stock then
issued and issuable for the same aggregate consideration as such Warrantholder
was entitled to purchase immediately prior to such event.
(b) ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. In the event the
Company at any time or from time to time after the Effective Date shall pay a
dividend payable in Common Stock of the Company, or otherwise make a
distribution of Common Stock to its stockholders, then the Exercise Price shall
be adjusted, from and after the record date of such dividend or the date of such
distribution, to that price determined by multiplying the Exercise Price by a
fraction,
(i) the numerator of which shall be the total number of shares of
capital stock issued and outstanding or deemed to be issued and
outstanding immediately prior to the time of such issuance or the
close of business on such record date; and
(ii) the denominator of which shall be the number of shares of capital
stock issued and outstanding or deemed to be issued and outstanding
immediately prior to the time of such issuance or the close of
business on such record date plus the number of shares of capital
stock to be issued;
provided, however, that if such record date shall have been fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefor, the Exercise Price shall be recomputed accordingly as of the
close of business on such record date and thereafter the Exercise Price shall be
adjusted pursuant to this Section 4(b) as of the time of actual payment of such
dividend or distribution. The Warrantholder shall thereafter be entitled to
purchase, at the Exercise Price resulting from such adjustment, the number of
shares of Common Stock (calculated to the nearest whole share) obtained by
multiplying the Exercise Price in effect immediately prior to such adjustment by
the number of shares of Common Stock issuable upon the exercise hereof
2
<PAGE>
CONFIDENTIAL TREATMENT
immediately prior to such adjustment and dividing the product thereof by the
Exercise Price resulting from such adjustment.
(c) NUMBER OF SHARES. Upon any adjustment of the Exercise Price, the
holder of each Warrant shall thereafter (until another such adjustment) be
entitled to purchase, at the new Exercise Price, the number of shares,
calculated to the nearest full share, obtained by multiplying the Exercise Price
in effect immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment and dividing
the product thereof by the new Exercise Price resulting from such adjustment.
Section 5. RESERVATION AND AUTHORIZATION OF COMMON STOCK. The Company
shall at all times reserve and keep available, free from preemptive rights, out
of its authorized but unissued Common Stock, solely for the purposes of
effecting the exercise of all outstanding Warrants, the full number of shares of
Common Stock issuable upon the exercise of all outstanding Warrants. For the
purpose of this Section 5, the full number of shares of Common Stock issuable
upon the exercise of all outstanding Warrants shall be computed as if at the
time of computation of such number of shares of Common Stock all outstanding
Warrants were held by a single holder. The Company shall from time to time, in
accordance with applicable law, increase the authorized amount of its Common
Stock if at any time the authorized amount of its Common Stock remaining
unissued shall not be sufficient to permit the exercise of all Warrants at the
time outstanding.
Section 6. TRANSFERABILITY.
(a) The Warrant is not transferable by the Warrantholder except to the
Company or affiliates of BCBS-Tx. Any permitted transfer of a Warrant shall be
recorded on the books of the Company upon receipt by the Company of a notice of
transfer in the form attached hereto as Exhibit B, at its principal offices and
the payment to the Company of all transfer taxes and other governmental charges
imposed on such transfer. The shares of Common Stock purchased by the
Warrantholders are not transferable except as provided in the Stockholders
Agreement.
(b) Unless and until otherwise permitted by this Section and the
Stockholders Agreement, each certificate representing Common Stock initially
issued upon the exercise of each Warrant (a "STOCK CERTIFICATE"), and each
certificate for Common Stock issued to any subsequent transferee of any such
certificate, shall be stamped or otherwise imprinted with a legend in
substantially the following form:
"THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY BE
REOFFERED AND SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER,
CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN A
STOCKHOLDERS AGREEMENT BETWEEN THE COMPANY AND BCBS-TX, DATED AS OF
NOVEMBER 25, 1995, A COPY OF WHICH MAY BE OBTAINED BY THE HOLDER
HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
Prior to any permitted transfer of any Stock Certificate, the holder
thereof shall furnish, at the expense of such holder, to the Company an opinion
of counsel, reasonably satisfactory in form and substance to the Company, to the
effect that such transfer is exempt from registration under the Securities Act.
Upon any exercise of any Warrant for shares of Common Stock to be registered in
the name of a person other than the Warrantholder thereof, such
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CONFIDENTIAL TREATMENT
Warrantholder shall furnish, at the expense of such Warrantholder, to the
Company an opinion of counsel, reasonably satisfactory in form and substance to
the Company, to the effect that the issuance of the shares of Common Stock to
such other person upon exercise of the Warrant is exempt from registration under
the Securities Act.
Section 7. FRACTIONAL SHARES. The Company shall not be required to
issue a fractional share of stock upon any exercise of any Warrant. As to any
final fraction of a share which the holder of one or more Warrants, the rights
under which are exercised in the same transaction, would otherwise be entitled
to purchase upon such exercise, the Company shall, if it does not issue a
fractional share, pay a cash adjustment in respect of such final fraction in an
amount equal to the same fraction of the Exercise Price per share of Common
Stock.
Section 8. EXCHANGE AND REPLACEMENT OF WARRANT. In the event of loss,
theft or destruction of a Warrant, the Company will make and deliver a new
warrant of like tenor, in lieu of such Warrant, upon receipt by the Company of
evidence reasonably satisfactory to it of such loss, theft, or destruction and
indemnity or security reasonably satisfactory to it, and reimbursement to the
Company of all reasonable expense incidental thereto. In the case of mutilation
of a Warrant and upon surrender and cancellation of such Warrant, the Company
will make and deliver a new Warrant of like tenor, in lieu of such Warrant.
Section 9. RIGHTS PRIOR TO EXERCISE OF WARRANT. Prior to the exercise
of this Warrant, the Warrantholder shall not be entitled to any rights of a
stockholder of the Company with respect to the Common Stock for which such
Warrant may then be exercisable, including without limitation the right to vote,
to receive dividends or other distributions or to exercise any preemptive rights
and shall not be entitled to receive any notice of any proceedings of the
Company except as provided herein.
Section 10. AUTHORIZATION AND ISSUANCE. The Company represents and
warrants to BCBS-Tx and any Warrantholder that it has the corporate power and
authority to issue the Warrants; the Warrants have been duly authorized,
executed and delivered and are duly and validly issued, fully paid and
nonassessable; the issuance of each Warrant, and the shares of Common Stock
issuable upon its exercise, are not prohibited or restricted by the Certificate
of Incorporation or Bylaws of the Company or any material agreement to which the
Company is a party; except for those agreements for which the Company has
received the requisite consents or waivers; and the shares of Common Stock
issuable upon exercise of each Warrant, when issued upon exercise of such
Warrant pursuant to the terms hereof, will be duly and validly issued, fully
paid and nonassessable.
Section 11. REPRESENTATIONS AND COVENANTS OF BCBS-TX. This Warrant
Agreement has been entered into by the Company in reliance upon the following
representations and covenants of the Warrantholder:
(a) INVESTMENT PURPOSE. The right to acquire the Common Stock issuable
upon exercise of BCBS-Tx's rights contained herein will be acquired for
investment and not with a view to the sale or distribution of any part thereof,
and BCBS-Tx has no present intention of selling or engaging in any public
distribution of the same except pursuant to a registration or exemption.
(b) PRIVATE ISSUE. BCBS-Tx understands (i) that the Common Stock issuable
upon exercise of this Warrant is not registered under the 1933 Act or qualified
under applicable state securities laws on the ground that the issuance
contemplated by this Warrant Agreement will be exempt from the registration and
qualifications requirements thereof, and (ii) that the Company's reliance on
such exemption is predicated on the representations set forth in this Section
11.
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CONFIDENTIAL TREATMENT
(c) FINANCIAL RISK. BCBS-Tx has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of its investment, and has the ability to bear the economic risks of its
investment.
(d) RISK OF NO REGISTRATION. BCBS-Tx understands that if the Company does
not register with the Securities and Exchange Commission pursuant to Section 12
of the 1933 Act, or file reports pursuant to Section 15(d) of the Securities
Exchange Act of 1934 (the "1934 Act"), or if a registration statement covering
the securities under the 1933 Act is not in effect when it desires to sell the
Common Stock issuable upon exercise of the right to purchase, it may be required
to hold such securities for an indefinite period. BCBS-Tx also understands that
any sale of its rights to purchase Common Stock which might be made by it in
reliance upon Rule 144 under the 1933 Act may be made only in accordance with
the terms and conditions of that Rule.
(e) STOCKHOLDERS AGREEMENT. Prior to the exercise of any Warrant, BCBS-Tx
agrees to, and to cause any permitted transferee to, enter into, execute and
perform the Stockholders Agreement.
Section 12. GENERAL.
(a) EXPENSES. Each party shall bear and pay all costs and expenses
incurred by them respecting the transactions contemplated herein and all
investigations and proceedings in connection therewith, including, without
limitation, fees, commissions or expenses of their respective counsel,
accountants and financial advisors.
(b) NOTICE. Any notice required to be given pursuant to the terms and
provisions of this Agreement shall be in writing and shall be sent by certified
mail, return receipt requested, or by overnight delivery service to the parties
at the addresses below or such other address as shall be specified by the
parties by like notice
to the Company at:
Advance ParadigM, Inc.
Attn: Vice President - Legal Affairs
545 E. John Carpenter Freeway, Suite 1900
Irving, Texas 75062
and to BCBS-Tx at:
Blue Cross and Blue Shield of Texas
Attn: General Counsel
P.O. Box 655924
Dallas, TX 75265-5924
(c) BINDING NATURE AND ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their successors and assigns.
Neither party may assign this Agreement without the prior written consent of the
other; PROVIDED, however, that either party may transfer or assign its rights
and obligations under this Agreement, to any affiliate, and PROVIDED further
that no such assignment shall have the effect of releasing such party from any
of its obligations under this Agreement.
(d) HEADINGS AND INTERPRETATION. The headings of the various sections of
this Agreement are inserted for convenience only and do not, expressly or by
implication, limit, define or extend the specific terms of the section so
designated.
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CONFIDENTIAL TREATMENT
(e) GOVERNING LAW. The validity, enforceability, and interpretation of
this Agreement shall be determined and governed by the internal laws of the
State of Texas (and not the law of conflicts).
(f) ENTIRE AGREEMENT. This Agreement contains all the terms and
conditions agreed upon by the parties, and supersedes all prior understandings,
writings, proposals, representations, or communications, oral or written, of the
parties hereto.
(g) AUTHORITY. Company and BCBS-Tx warrant that each has full power and
authority to enter into and perform this Agreement, and the person signing this
Agreement on behalf of each party certifies that such person has been properly
authorized and empowered to enter into this Agreement on behalf of such party.
(h) NON-WAIVER. The failure of either party to insist, in any one or more
instances, upon performance of any of the terms, covenants or conditions of this
Agreement shall not be construed as a waiver or a relinquishment of any right or
claim granted or arising hereunder or of the future performance of any such
term, covenant, or condition, and such failure shall in no way affect the
validity of this Agreement or the rights and obligations of the parties
hereunder.
(i) SURVIVAL. Should any part, term or condition of this Agreement be
declared illegal or unenforceable or in conflict with any other laws, the
remaining provisions shall be valid and not affected thereby.
(j) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which taken
together shall constitute one and the same instrument.
(k) FURTHER ASSURANCES. From time to time upon request and without
further consideration, the parties hereto shall, and shall cause their
subsidiaries and affiliates, to execute, deliver or acknowledge such documents
and do such further acts as the other party hereto may reasonably require to
effectuate its obligations contemplated by this Agreement.
(l) NON-AFFILIATION WITH BCBSA. Company understands that this Agreement
constitutes a contract between Company and BCBS-Tx, that BCBS-Tx is an
independent corporation operating under a license from the Blue Cross Blue
Shield Association, an association of independent Blue Cross and Blue Shield
Plans (the "BCBSA"), permitting BCBS-Tx to use the Blue Cross Blue Shield
Service Marks in Texas, and that BCBS-Tx is not contracting as the agent of
BCBSA. Company acknowledges that it has not entered into this Agreement based
upon representations by any person other than BCBS-Tx and that no person, entity
or organization other than BCBS-Tx shall be held accountable or liable to
Company for any of BCBS-Tx's obligations to Company created under this
Agreement. This Section 12(l) shall not create any additional obligations
whatsoever on the part of BCBS-Tx other than those obligations created under
other provisions of this Agreement.
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CONFIDENTIAL TREATMENT
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their proper and duly authorized officers on the date first
above written. By executing the Agreement, the undersigned individuals hereby
warrant and represent that they have read this Agreement in its entirety and
agree to all its terms.
ADVANCE PARADIGM, INC.
By: /s/ David D. Halbert
------------------------------------
David D. Halbert
Chairman of the Board and Chief
Executive Officer
BLUE CROSS AND BLUE SHIELD OF TEXAS,
INC.
By: /s/ Rogers K. Coleman, M.D.
------------------------------------
Rogers K. Colemena, M.D.
President and Chief Executive
Officer
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CONFIDENTIAL TREATMENT
EXHIBITS
Exhibit A Warrant Certificate
Exhibit B Assignment
Exhibit C Stockholders Agreement
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CONFIDENTIAL TREATMENT
EXHIBIT A
THIS WARRANT AND THE UNDERLYING SHARES HEREOF HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR TRANSFERRED UNLESS THERE IS AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES OR THE
COMPANY RECEIVES AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY)
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
WARRANT NO. ___
For Purchase of Shares of Common Stock
of
ADVANCE PARADIGM, INC.
(DATE OF ISSUE)
THIS CERTIFIES THAT Blue Cross and Blue Shield of Texas, Inc., a Texas non-
profit corporation ("BCBS-TX"), or registered transferees or assigns, is
entitled, subject to the terms and conditions set forth in this Warrant, to
purchase from Advance ParadigM, Inc., a Delaware corporation (the "COMPANY"),
267 (the "Exercise Number") fully paid and nonassessable shares of Common
Stock, $0.01 par value per share, of the Company (the "COMMON STOCK") at any
time during the Exercise Period upon payment in full of the Exercise Price. The
Initial Exercise Number and Exercise Price shall be subject to adjustment as set
forth in the Warrant Agreement referred to below. This Warrant is issued
pursuant to a Warrant Agreement between BCBS-Tx and the Company dated as of
November 25, 1995 (the "WARRANT AGREEMENT"), and is subject to all the terms
thereof, including the limitations on transferability set forth therein.
Capitalized terms used herein as defined terms but not otherwise defined shall
have the meaning assigned to such term in the Warrant Agreement.
This Warrant may be exercised, by the holder hereof, for all shares of
Common Stock covered hereby, by the presentation and surrender of this Warrant
together with the duly executed Election to Purchase in the form attached hereto
as Exhibit I, at the principal office of the Company (or at such other address
as the Company may designate by notice in writing to the holder hereof at the
address of such holder appearing on the books of the Company), and upon payment
to the Company of the Exercise Price as set forth in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
and delivered by its duly authorized officer as an instrument under seal as of
the date of first above written.
ADVANCE PARADIGM, INC.
By:
------------------------------------
David D. Halbert
Chairman of the Board and
Chief Executive Officer
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CONFIDENTIAL TREATMENT
EXHIBIT I
TO WARRANT CERTIFICATE
ELECTION TO PURCHASE
TO: ADVANCE PARADIGM, INC. (the "Company")
The undersigned, owner of the accompanying Warrant hereby irrevocably
exercises the option to purchase 267 shares of Common Stock in accordance
with the terms of such Warrant, directs that the shares issuable and deliverable
upon such purchase (together with any check for a fractional interest) be issued
in the name of and delivered to the undersigned, and makes payment in full
therefor at the Exercise Price provided or referenced in such Warrant.
COMPLETE FOR REGISTRATION OF SHARES OF COMMON STOCK ON THE STOCK TRANSFER
RECORDS MAINTAINED BY THE COMPANY:
- --------------------------------------------------------------------------------
Name of Warrant Holder
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
Federal ID Tax Number or Social Security Number
- --------------------------------------------------------------------------------
Date of Exercise (must be at least fifteen days after the date of this Notice)
---------------------------------------
Signature
---------------------------------------
Title
---------------------------------------
Date
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CONFIDENTIAL TREATMENT
EXHIBIT B
ASSIGNMENT
FOR VALUE RECEIVED hereby assigns and
transfers all of the rights of the undersigned under the Warrant Certificate, a
copy of which is attached hereto, with respect to the 267 shares of Common
Stock covered thereby, unto
Name of Assignee Address
- ---------------- -------
Dated:
--------------
Signature:
-------------------------
Title:
-----------------------------
Address:
---------------------------
- -----------------------------------
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CONFIDENTIAL TREATMENT
EXHIBIT C
STOCKHOLDER AGREEMENT
This Stockholder Agreement dated as of ___________, by and among Blue Cross
and Shield of Texas, Inc., a Texas non-profit group hospital service corporation
(the "STOCKHOLDER"), and Advance ParadigM, Inc., a Delaware corporation (the
"COMPANY").
PRELIMINARY STATEMENTS
Pursuant to the terms and conditions of the Warrant Agreement, dated
as of November 25, 1995, by and between the Company and Stockholder, the Company
agreed to issue warrants to acquire shares of the Company's common stock, par
value $.01 per share (the "COMMON STOCK"). Pursuant to the terms of the Warrant
Agreement, the Stockholder agreed to execute and enter into this Agreement prior
to the issuance of any shares of Common Stock thereunder.
NOW THEREFORE, in consideration of the premises and the mutual agreements
contained herein and for other good, valuable and binding consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
STATEMENT OF AGREEMENT
1. RESTRICTED STOCK. The terms and conditions of this Agreement shall apply
to all shares of Common Stock issued to Stockholder pursuant to the Warrant
Agreement and any shares of Common Stock otherwise acquired by Stockholder
(collectively the "STOCK").
2. RESTRICTIONS ON TRANSFERS.
2.1 TRANSFERS TO AFFILIATE.
(a) TRANSFERS TO AFFILIATES. Stockholder shall be entitled to transfer
the Stock held by it to entities that directly or indirectly control, are
controlled by, or are under common control with Stockholder (each, a
"AFFILIATE"), provided that any such Affiliates first deliver to the Company
their written acknowledgment of, and agreement to be bound by, the terms and
provisions contained in this Agreement; and the Stockholder delivers to the
Company an opinion of counsel, reasonably acceptable in form and substance to
the Company and its counsel, that registration under the Securities Act is not
required in connection with such transfer. The foregoing notwithstanding,
Stockholder shall not, without the prior written consent of the Company which
consent will not be unreasonably withheld, transfer any shares of Stock to any
Affiliate, nor any officer, director, employee or holder of debt or equity in
any Affiliate that is engaged in the business, or has an Affiliate engaged in
the business of pharmacy benefit management services, pharmacy network
management, pharmacy claims adjudication, mail service pharmacy, clinical
services, disease state management, case management and/or outcomes management,
or the manufacture of drugs, biotech products or biologicals.
(b) AFFILIATES' PROXY. In the event that Stockholder transfers less than
all of its Stock pursuant to SECTION 2.1(a), Stockholder shall exercise all of
the rights inuring under this Agreement with respect to such transferred Stock
and the transferees shall grant such Investor proxies to
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<PAGE>
CONFIDENTIAL TREATMENT
exercise such rights. In the event that Stockholder transfers all of its Stock
pursuant to SECTION 2.1(a), one such transferee reasonably acceptable to the
Company shall be designated by Stockholder to exercise all rights inuring under
this Agreement with respect to such Stock and the other transferees shall grant
such designated transferee proxies to exercise such rights.
2.2 RESTRICTIONS ON THIRD PARTY TRANSFERS OF THE STOCK.
(a) GENERAL. During the first two years following the date the Stock is
issued the ("ISSUANCE DATE"), Stockholder agrees that it will not sell, pledge
or otherwise transfer any interest in any shares of the Stock, without the prior
written consent of the Company. At any time after the second anniversary of the
Issuance Date, the Stockholder may sell, pledge or otherwise transfer shares of
the Stock to third parties ("THIRD PARTY TRANSFER"); provided that such transfer
is in accordance with this SECTION 2.2, and provided further that the
transferring Stockholder delivers to the Company an opinion of counsel,
reasonably acceptable in form and substance to the Company and its counsel, that
registration under the Securities Act is not required in connection with such
transfer. The foregoing notwithstanding, Stockholder agrees that it shall not
transfer any shares of Stock to any person or entity, nor any officer, director,
employee or holder of debt or equity in any entity that is engaged in the
business, or has an affiliate engaged in the business of pharmacy benefit
management services, pharmacy network management, pharmacy claims adjudication,
mail service pharmacy, clinical services, disease state management, case
management and/or outcomes management, or the manufacture of drugs, biotech
products or biologicals.
(b) SALE NOTICE. At least 60 days prior to making any Third Party
Transfer under SECTION 2.2(a), the transferring Stockholder will deliver a
written notice (the "SALE NOTICE") to the Company. The Sale Notice will
disclose in reasonable detail the identity of the prospective transferee(s) and
the terms and conditions of the proposed transfer. Stockholder agrees not to
consummate any such transfer until 60 days after the Sale Notice has been
delivered to the Company.
(c) FIRST REFUSAL RIGHTS. The Company may elect to purchase some or all
of the Stock to be transferred upon the same terms and conditions as those set
forth in the Sale Notice by delivering a written notice of such election to
Stockholder within 30 days after the receipt of the Sale Notice by the Company.
If the Company elects to purchase any shares of Stock, the Company shall
consummate such purchase within 30 days of delivery of notice of intent to
purchase. If the Company has not elected to purchase all of the Stock specified
in the Sale Notice, Stockholder may transfer the Stock specified in the Sale
Notice at a price and on terms no more favorable to the transferee(s) thereof
than specified in the Sale Notice during the 60-day period immediately following
notice of the Company's election not to purchase such shares. Any shares of
Stock not transferred within such 60-day period will be subject to the
provisions of this SECTION 2.2(c) upon subsequent transfer.
(d) NON-CASH CONSIDERATION. In the event the consideration for the Stock
as disclosed in the Sale Notice is other than cash, a promissory note or a
combination thereof, the price for the Stock shall be the value of that
consideration as agreed to by the transferring Stockholder and the Company, or,
if no agreement can be reached as to the valuation of such consideration, the
fair market value of such consideration as determined by two appraisers (one
appointed by the Stockholder and one appointed by the Company). In the event
the two appraisers are unable to agree on a fair market value within 20 days
after they are appointed, the fair market value of the consideration shall be
the average of the appraised values of the two appraisers; provided, however,
that if the appraised values of the two appraisers differ by more than ten
percent (10%) of the higher of the two appraised values, the two respective
appointed appraisers shall select a third appraiser who shall independently,
within 20 days after this appointment, make a determination of the value of the
consideration and the average of the appraised values of the three
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CONFIDENTIAL TREATMENT
appraisers shall be the purchase price and shall be binding on the parties
hereto. The transferring Stockholder and the Company shall each bear the cost
of their respective appraisers and shall share the cost equally of the third
appraiser, if any. Notwithstanding anything herein to the contrary, if an
appraisal is used to determine the value of the consideration pursuant to this
SECTION 2.2(d), the time periods provided for in SECTIONS 2.2(b) and 2.2(c)
shall be tolled from the time of the initial appointment of the two appraisers
until a final appraised value is determined pursuant to this SECTION 2.2(d).
(e) PUBLIC SALE. At any time after the second anniversary of the Issuance
Date, if the Company has consummated its first underwritten public offering
pursuant to an effective registration statement covering the offering and sale
of the Common Stock for the account of the Company on a firm commitment basis
(the "INITIAL PUBLIC OFFERING"), the Stockholder may sell, pledge or otherwise
transfer shares of the Stock to the public in a market transaction without
complying with the restrictions set forth in SECTION 2.2(b), (c) and (d).
2.3 LEGEND. The certificates representing the Stock will bear the
following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND MAY BE REOFFERED AND SOLD ONLY IF
SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO
ADDITIONAL RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE OPTIONS AND
CERTAIN OTHER AGREEMENTS SET FORTH IN A STOCKHOLDER AGREEMENT BETWEEN
THE COMPANY AND BLUE CROSS AND BLUE SHIELD OF TEXAS, INC., DATED AS OF
NOVEMBER 25, 1995, A COPY OF WHICH MAY BE OBTAINED BY THE HOLDER
HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
Any legend endorsed on a certificate pursuant to SECTION 2.3 hereof and the
stop transfer instructions and record notations with respect thereto shall be
removed and the Company shall issue a certificate without such legend to the
holder thereof at such time as the securities evidenced thereby cease to be
restricted securities
2.4 EXTRAORDINARY TRANSACTION. In the event of a merger of the Company
with a third party where the Company is not the surviving entity, sale of a
majority of the capital stock of the Company, or the sale of all or
substantially all of its assets ("EXTRAORDINARY TRANSACTION"), the Stock shall
be entitled to receive the same benefits as the holders of the Common Stock will
receive in the Extraordinary Transaction. The Stockholder agrees to consent to
and execute all required documents in connection with the Extraordinary
Transaction.
3. REGISTRATION OF STOCK; LIMITATIONS ON STOCKHOLDINGS.
3.1 PIGGY-BACK REGISTRATION RIGHTS. If the Company shall determine to
register for its own account or the account of others under the Securities Act
any of its equity securities, it shall send to the Stockholder, written notice
of such determination and, if within fifteen (15) days after receipt of such
notice, the Stockholder shall so request in writing, the Company shall include
in such registration statement all or any part of the Stock Stockholder requests
to be registered. The obligations of the Company under this SECTION 3.1 may be
waived at any time upon the written consent of the Stockholder.
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<PAGE>
CONFIDENTIAL TREATMENT
(a) CUT-BACK. If, in connection with any offering involving an
underwriting of Common Stock to be issued by the Company, the managing
underwriter shall impose a limitation on the number of shares of such Common
Stock which may be included in the registration statement because, in its
judgment, such limitation is necessary to effect an orderly public distribution,
then the Company shall be obligated to include in such registration statement
only such limited portion of the Stock with respect to which Stockholder has
requested inclusion hereunder; PROVIDED, HOWEVER, Stockholder agrees that
Advance Health Care, Inc. (or the successors to its registration rights) and the
holders of the Series A Preferred Stock (or the common stock obtained upon
conversion of such Series A Preferred Stock) shall be entitled to include in
such registration statement all registrable shares held by such person BEFORE
any of the Stockholder's Stock shall be included. Any exclusion of Stock shall
be made pro rata among the Stockholder and the holders of the Series B Preferred
Stock (or the common stock obtained upon conversion of such Series B Preferred
Stock) seeking to include such securities in proportion to the number of shares
of common stock held by such holder (or their assigns).
(b) REGISTRATION PROCEDURES. The Company will use good faith efforts to
maintain the effectiveness for up to 90 days of any registration statement
pursuant to which the Stock are being offered, and from time to time will amend
or supplement such registration statement and the prospectus contained therein
to the extent necessary to comply with the Securities Act and any applicable
State security statute or regulation. The Company will also provide Stockholder
with as many copies of the prospectus contained in any such registration
statement as it may reasonably require. After consummation of the Initial
Public Offering, the Company will timely file with the Commission such
information as the Commission requires under the Exchange Act of 1934, as
amended. Beginning after the second anniversary of the Issuance Date and after
consummation of the Initial Public Offering, the Company agrees, upon request
from an Stockholder, to cooperate in transfers of the Conversion Stock pursuant
to Rule 144 under the Securities Act.
(c) INDEMNIFICATION. The Company and Stockholder agree to provide
standard indemnification to the other relating to the disclosures in the
registration statement made by the Company or the Stockholder, as the case may
be.
(d) EXPENSES. In the event the Stockholder exercises its rights under
this SECTION 3.1, Stockholder shall bear its proportionate share of the cost and
expenses of such registration.
(e) EXPIRATION. The obligations of the Company under this SECTION 3.1
shall expire on the fifth anniversary of the Company's Initial Public Offering.
This SECTION 3.1 shall not apply to a registration of Securities of Common
Stock on Form S-8 or Form S-4 or their then equivalents relating to an offering
of shares of Common Stock to be issued solely in connection with any acquisition
of any entity or business or otherwise issuable in connection with any stock
option or employee benefit plan.
3.2 MARKET STANDSTILL. Stockholder agrees that in the event the Company
proposes to offer for sale to the public any of its equity securities in any
public offering (whether for its own account or the account of others), and if
requested in writing by the Company and an underwriter of the proposed offering
of Common Stock or other securities of the Company, then the Stockholder will
agree to a restriction whereby Stockholder and any other holder of Stock will
not sell, grant any option or right to buy or sell, or otherwise transfer or
dispose of in any manner, to the public in any open market transactions, any
Common Stock or other securities of the Company held by it for 180 days (the
"LOCK-UP PERIOD") following the effective date of the registration statement of
the Company filed under the Securities Act. Such agreements shall be in writing
and in form and substance pursuant to customary and prevailing terms and
conditions for such lock-up agreements. The Company may impose stop-transfer
instructions with respect to the securities subject to the foregoing
restrictions until the end of the Lock-Up Period.
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CONFIDENTIAL TREATMENT
3.3 LIMITATION ON STOCK HOLDINGS. The Stockholder agrees that in no
event, shall it, either independently or together with its Affiliates, own
Common Stock or rights to acquire Common Stock, that represent, or if converted
to Common Stock would represent, more than twenty percent (20%) of the Company's
issued and outstanding Common Stock.
4. NOTICES.
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if delivered personally, mailed by
certified mail (return receipt requested) or sent by express delivery service,
or facsimile transmission to the parties at the following addresses or at such
other addresses as shall be specified by the parties by like notice:
if to the Company:
545 E. John Carpenter Freeway
Suite 1900
Irving, TX 75062
Attention: Chief Executive Officer
Fax No.: (214) 830-6196
if to Stockholder:
Blue Cross and Blue Shield of Texas, Inc.
P.O. Box 655924
Dallas, TX 75265-5924
Attention: General Counsel
Fax No.:
Notice so given shall, in the case of notice so given by mail, be deemed to
be given and received on the fourth calendar day after posting, in the case of
notice so given by express delivery service, on the date of actual delivery and,
in the case of notice so given by facsimile transmission or personal delivery,
on the date of actual transmission or personal delivery, as the case may be.
5. SEVERABILITY.
If any provision of this Agreement shall be held to be illegal, invalid or
unenforceable under any applicable law, then such contravention or invalidity
shall not invalidate the entire Agreement. Such provision shall be deemed to be
modified to the extent necessary to render it legal, valid and enforceable, and
if no such modification shall render it legal, valid and enforceable, then this
Agreement shall be construed as if not containing the provision held to be
invalid, and the rights and obligations of the parties shall be construed and
enforced accordingly.
6. COMPLETE AGREEMENT.
This Agreement and those documents expressly referred to herein and of even
date herewith, embody the complete agreement and understanding among the parties
and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way.
7. COUNTERPARTS.
This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, with the same effect as if
all parties had signed the same document. All such counterparts shall be deemed
an original, shall be construed together and shall constitute
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CONFIDENTIAL TREATMENT
one and the same instrument.
8. SUCCESSORS AND ASSIGNS.
This Agreement is intended to bind and inure to the benefit of and be
enforceable by and against the Stockholder and the Company, and their respective
heirs, successors and assigns. Stockholder hereby agrees not to transfer or
assign, directly or indirectly, any of the Stock unless such transferee or
assignee agrees in writing (i) to be bound by the provisions of this Agreement
and (ii) not to make subsequent assignments or transfers other than in
accordance with this Agreement. Notwithstanding the foregoing, any holder of
the Stock shall be bound by the provisions of this Agreement even if such holder
is not a party hereto or otherwise agreed in writing to be bound by the
provisions hereof.
9. CHOICE OF LAW.
THE INTERNAL LAW OF THE STATE OF TEXAS (AND NOT THE LAW OF CONFLICTS) WILL
GOVERN THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT.
10. REMEDIES.
Each of the parties to this Agreement will be entitled to enforce its
rights under this Agreement specifically, to recover damages by reason of any
breach of any provision of this Agreement and to exercise all other rights
existing in its favor. The parties hereto agree and acknowledge that money
damages may not be an adequate remedy for any breach of the provisions of this
Agreement and that any party may in its sole discretion apply to any court of
law or equity of competent jurisdiction for specific performance and/or
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement. In the event a party hereto brings an action
under this agreement, the prevailing party in such dispute shall be entitled to
recover from the losing party all fees, costs and expenses of enforcing any
right of such prevailing party under or with respect to this Agreement,
including without limitation such reasonable fees and expenses of attorneys and
accountants, which shall include, without limitation, all fees, costs and
expenses of appeals.
11. AMENDMENTS AND WAIVERS.
Any provision of this Agreement may be amended or waived only with the
prior written consent of each of the parties hereto.
12. CONFIDENTIALITY.
Each of the parties hereto agrees to hold in the strictest confidence the
existence of this Agreement and the terms and conditions hereof. Specifically,
but without limiting the generality of the foregoing, each of the parties hereto
agrees not to disclose the existence of this Agreement or any of its terms to
any third party without the prior written consent of every other party hereto
(unless such disclosure is required by law).
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CONFIDENTIAL TREATMENT
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first above written.
ADVANCE PARADIGM, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
BLUE CROSS AND BLUE SHIELD OF
TEXAS, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
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CONFIDENTIAL TREATMENT
REQUESTED FOR THE BRACKETED
PORTIONS ON THIS PAGE
Pages where confidential treatment has been requested are marked with the
legend "Confidential Treatment requested for the bracketed portions on this
page."
ADVANCE PARADIGM, INC.
WARRANT AGREEMENT
This Warrant Agreement (this "AGREEMENT") dated as of September ___, 1996
is entered into by and between Advance ParadigM, Inc., a Delaware corporation
(the "COMPANY"), VHA Inc., a Delaware corporation ("VHA").
TERMS OF AGREEMENT
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the Company and VHA hereby agree as follows:
Section 1. MANAGED PHARMACY BENEFIT SERVICES AGREEMENT. Reference is
made to that certain VHA/API Managed Pharmacy Benefit Services Master Agreement
dated as of the date hereof entered into by and between the Company and VHA on
even date herewith (the "MASTER AGREEMENT"). Capitalized terms not otherwise
defined herein shall have the meanings given to them in the Master Agreement.
Section 2. GRANT OF THE RIGHT TO PURCHASE COMMON STOCK.
(a) Upon confirmation by the Company that the aggregate number of
Equivalent Lives for which the Company is providing PBM Products and Services
equals or exceeds the number of lives set forth below (the "LIVES THRESHOLDS"),
the Company shall grant to VHA the right, and VHA shall be entitled, subject to
the terms and conditions hereinafter set forth, to purchase from the Company the
number of fully paid and non-assessable shares of its common stock, par value
$0.01 per share (the "COMMON STOCK") set forth below (which number is referred
to herein as the "INITIAL EXERCISE NUMBER") at a per share exercise price equal
to $3,850 per share; PROVIDED, however, that if the Company consummates an
underwritten, public offering of its Common Stock prior to December 31, 1996
(the "IPO"), then the per share exercise price will be adjusted to equal 90% of
the per share price offered to the public in such IPO (the "EXERCISE PRICE").
An "EQUIVALENT LIFE" means [.....]. The right to purchase such shares shall be
evidenced by a warrant certificate in substantially the form of EXHIBIT A hereto
(each a "WARRANT"). The Initial Exercise Number and Exercise Price of such
shares are subject to adjustment as provided in Section 5 hereof.
(b) On the last day of each calendar quarter, API will determine the
aggregate number of Equivalent Lives for which the Company is providing PBM
Products and Services (the "EQUIVALENT LIVES SNAPSHOT"). The first time that
the Equivalent Lives Snapshot equals or exceeds the corresponding Lives
Threshold, the applicable Warrant will be issued. For example, the first
Warrant will be issued as of the date that the Equivalent Lives Snapshot
reflects an aggregate Lives
<PAGE>
CONFIDENTIAL TREATMENT
REQUESTED FOR THE BRACKETED
PORTIONS ON THIS PAGE
Threshold of at least [.....] Equivalent Lives, the second Warrant will be
issued as of the date that the Equivalent Lives Snapshot reflects an
aggregate Lives Threshold of at least [.....] Equivalent Lives, and so on.
Aggregate Cumulative No. of Shares
Warrant Lives Threshold Covered by Warrants
------- ---------------- ------------------------
No. 1 [....] 112.5
No. 2 [....] 225.0
No. 3 [....] 337.5
No. 4 [....] 450.0
No. 5 [....] 562.5
No. 6 [....] 675.0
No. 7 [....] 787.5
No. 8 [....] 900.0
No. 9 [....] 1012.5
No. 10 [....] 1125.0
Section 3. TERM OF THE WARRANT AGREEMENT. VHA's right to earn Warrants
as granted herein shall commence on the date hereof (the "EFFECTIVE DATE") and
continue for a period of five (5) years from the date hereof. Except as
otherwise provided for herein, the term of each Warrant and the right to
purchase Common Stock as granted therein shall commence on the first anniversary
of its date of issuance and will end on the fifth anniversary of its date of
issuance (the "EXERCISE PERIOD").
Section 4. EXERCISE OF WARRANT. The purchase rights represented by
each Warrant are exercisable for all shares covered by such Warrant at the
option of the holder thereof at any time during the Exercise Period; provided
that the Warrant holder has executed the Stockholders Agreement attached hereto
as Exhibit B (the "STOCKHOLDERS AGREEMENT"); and provided further that the
purchase rights represented by each Warrant are only exercisable so long as the
VHA obligations under the Master Agreement remain in full force and effect;
provided however that if API terminates the Master Agreement, each outstanding
will remain exercisable for the sixty (60) day period following the effective
date of termination. Shares of Common Stock purchased upon exercise of each
Warrant shall at the time of purchase be paid for in full. To the extent that
the right to purchase shares has accrued hereunder, the Warrant may be exercised
by written notice to the Company in the form attached to the Warrant, which
specifies an exercise date (the "DATE OF EXERCISE"), accompanied by full payment
for the shares by wire transfer or certified or official bank check or the
equivalent thereof acceptable to Company.
At the time of delivery, the Company shall, without stock transfer tax to
the holder, deliver to holder (or to such other person) at the principal office
of the Company, or such other place as shall be mutually agreed upon, a
certificate or certificates for such shares, provided, however, that the time of
delivery may be postponed by the Company for such period as may be required for
it with reasonable diligence to comply with any requirements of law. The
Company at the time of exercise will require in addition that the registered
owner execute and enter into the Stockholders Agreement and deliver investment
representations similar form and substance to those representations of VHA set
forth in Section 12 of this Agreement, and the Company will place a legend on
the certificate for such Common Stock restricting the transfer of same. At no
time shall the Company have any obligation or duty to register under the
Securities Act of 1933 (the "1933 ACT") the Common Stock issuable upon exercise
of Warrant.
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CONFIDENTIAL TREATMENT
Section 5. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SHARES. The
Exercise Price and number of shares of Common Stock purchasable pursuant to the
exercise of each Warrant shall be subject to adjustment from time to time as
follows:
(a) ADJUSTMENT FOR COMBINATIONS OR CONSOLIDATIONS OF COMMON STOCK. In the
event the Company, at any time or from time to time after the Effective Date,
effects a subdivision or combination of its outstanding Common Stock for a
greater or lesser number of shares, then and in each such event the Initial
Exercise Number and the Exercise Price shall be adjusted proportionately such
that the holder of the Warrant (the "WARRANTHOLDER") is entitled to purchase the
same percentage of all shares of the Company's outstanding capital stock then
issued and issuable for the same aggregate consideration as such Warrantholder
was entitled to purchase immediately prior to such event.
(b) ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. In the event the
Company at any time or from time to time after the Effective Date shall pay a
dividend payable in Common Stock of the Company, or otherwise make a
distribution of Common Stock to its stockholders, then the Exercise Price shall
be adjusted, from and after the record date of such dividend or the date of such
distribution, to that price determined by multiplying the Exercise Price by a
fraction,
(i) the numerator of which shall be the total number of shares of
capital stock issued and outstanding or deemed to be issued and
outstanding immediately prior to the time of such issuance or the
close of business on such record date; and
(ii) the denominator of which shall be the number of shares of capital
stock issued and outstanding or deemed to be issued and outstanding
immediately prior to the time of such issuance or the close of
business on such record date plus the number of shares of capital
stock to be issued;
provided, however, that if such record date shall have been fixed and such
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefor, the Exercise Price shall be recomputed accordingly as of the
close of business on such record date and thereafter the Exercise Price shall be
adjusted pursuant to this Section 5(b) as of the time of actual payment of such
dividend or distribution. The Warrantholder shall thereafter be entitled to
purchase, at the Exercise Price resulting from such adjustment, the number of
shares of Common Stock (calculated to the nearest whole share) obtained by
multiplying the Exercise Price in effect immediately prior to such adjustment by
the number of shares of Common Stock issuable upon the exercise hereof
immediately prior to such adjustment and dividing the product thereof by the
Exercise Price resulting from such adjustment.
(c) NUMBER OF SHARES. Upon any adjustment of the Exercise Price, the
holder of each Warrant shall thereafter (until another such adjustment) be
entitled to purchase, at the new Exercise Price, the number of shares,
calculated to the nearest full share, obtained by multiplying the Exercise Price
in effect immediately prior to such adjustment by the number of shares
purchasable pursuant hereto immediately prior to such adjustment and dividing
the product thereof by the new Exercise Price resulting from such adjustment.
Section 6. RESERVATION AND AUTHORIZATION OF COMMON STOCK. The Company
shall at all times reserve and keep available, free from preemptive rights, out
of its authorized but unissued Common Stock, solely for the purposes of
effecting the exercise of all outstanding Warrants, the full number of shares of
Common Stock issuable upon the exercise of all outstanding Warrants. For the
purpose of this Section 6, the full number of shares of Common Stock issuable
upon the exercise of all outstanding Warrants shall be computed as if at the
time of computation of such number of shares of Common Stock all outstanding
Warrants were held by a single holder. The Company shall from time to time, in
accordance with applicable law, increase
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CONFIDENTIAL TREATMENT
the authorized amount of its Common Stock if at any time the authorized
amount of its Common Stock remaining unissued shall not be sufficient to
permit the exercise of all Warrants at the time outstanding.
Section 7. TRANSFERABILITY.
(a) The Warrant is not transferable by the Warrantholder except to the
Company or affiliates of VHA. Any permitted transfer of a Warrant shall be
recorded on the books of the Company upon receipt by the Company of a notice of
transfer, at its principal offices and the payment to the Company of all
transfer taxes and other governmental charges imposed on such transfer. The
shares of Common Stock purchased by the Warrantholders are not transferable
except as provided in the Stockholders Agreement.
(b) Unless and until otherwise permitted by this Section and the
Stockholders Agreement, each certificate representing Common Stock initially
issued upon the exercise of each Warrant (a "STOCK CERTIFICATE"), and each
certificate for Common Stock issued to any subsequent transferee of any such
certificate, shall be stamped or otherwise imprinted with a legend in
substantially the following form:
"THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY BE
REOFFERED AND SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER,
CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN
A STOCKHOLDERS AGREEMENT BETWEEN THE COMPANY AND VHA, DATED AS OF
SEPTEMBER __, 1996, A COPY OF WHICH MAY BE OBTAINED BY THE HOLDER
HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
Prior to any permitted transfer of any Stock Certificate, the holder
thereof shall furnish, at the expense of such holder, to the Company an opinion
of counsel, reasonably satisfactory in form and substance to the Company, to the
effect that such transfer is exempt from registration under the Securities Act.
Upon any exercise of any Warrant for shares of Common Stock to be registered in
the name of a person other than the Warrantholder thereof, such Warrantholder
shall furnish, at the expense of such Warrantholder, to the Company an opinion
of counsel, reasonably satisfactory in form and substance to the Company, to the
effect that the issuance of the shares of Common Stock to such other person upon
exercise of the Warrant is exempt from registration under the Securities Act.
Section 8. FRACTIONAL SHARES. The Company shall not be required to
issue a fractional share of stock upon any exercise of any Warrant. As to any
final fraction of a share which the holder of one or more Warrants, the rights
under which are exercised in the same transaction, would otherwise be entitled
to purchase upon such exercise, the Company shall, if it does not issue a
fractional share, pay a cash adjustment in respect of such final fraction in an
amount equal to the same fraction of the Exercise Price per share of Common
Stock.
Section 9. EXCHANGE AND REPLACEMENT OF WARRANT. In the event of loss,
theft or destruction of a Warrant, the Company will make and deliver a new
warrant of like tenor, in lieu of such Warrant, upon receipt by the Company of
evidence reasonably satisfactory to it of such loss, theft, or destruction and
indemnity or security reasonably satisfactory to it, and reimbursement to the
Company of all reasonable expense incidental thereto. In the case of mutilation
of a Warrant
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CONFIDENTIAL TREATMENT
and upon surrender and cancellation of such Warrant, the Company will make
and deliver a new Warrant of like tenor, in lieu of such Warrant.
Section 10. RIGHTS PRIOR TO EXERCISE OF WARRANT. Prior to the exercise
of this Warrant, the Warrantholder shall not be entitled to any rights of a
stockholder of the Company with respect to the Common Stock for which such
Warrant may then be exercisable, including without limitation the right to vote,
to receive dividends or other distributions or to exercise any preemptive rights
and shall not be entitled to receive any notice of any proceedings of the
Company except as provided herein.
Section 11. AUTHORIZATION AND ISSUANCE. The Company represents and
warrants to VHA and any Warrantholder that it has the corporate power and
authority to issue the Warrants; the Warrants have been duly authorized,
executed and delivered and are duly and validly issued, fully paid and
nonassessable; the issuance of each Warrant, and the shares of Common Stock
issuable upon its exercise, are not prohibited or restricted by the Certificate
of Incorporation or Bylaws of the Company or any material agreement to which the
Company is a party; except for those agreements for which the Company has
received the requisite consents or waivers; and the shares of Common Stock
issuable upon exercise of each Warrant, when issued upon exercise of such
Warrant pursuant to the terms hereof, will be duly and validly issued, fully
paid and nonassessable.
Section 12. REPRESENTATIONS AND COVENANTS OF VHA. This Warrant
Agreement has been entered into by the Company in reliance upon the following
representations and covenants of the Warrantholder:
(a) INVESTMENT PURPOSE. The right to acquire the Common Stock issuable
upon exercise of VHA's rights contained herein will be acquired for investment
and not with a view to the sale or distribution of any part thereof, and VHA has
no present intention of selling or engaging in any public distribution of the
same except pursuant to a registration or exemption.
(b) PRIVATE ISSUE. VHA understands (i) that the Common Stock issuable
upon exercise of this Warrant is not registered under the 1933 Act or qualified
under applicable state securities laws on the ground that the issuance
contemplated by this Warrant Agreement will be exempt from the registration
and qualifications requirements thereof, and (ii) that the Company's reliance
on such exemption is predicated on the representations set forth in this
Section 12.
(c) FINANCIAL RISK. VHA has such knowledge and experience in financial
and business matters as to be capable of evaluating the merits and risks of its
investment, and has the ability to bear the economic risks of its investment.
(d) RISK OF NO REGISTRATION. VHA understands that if the Company does not
register with the Securities and Exchange Commission pursuant to Section 12 of
the 1933 Act, or file reports pursuant to Section 15(d) of the Securities
Exchange Act of 1934 (the "1934 Act"), or if a registration statement covering
the securities under the 1933 Act is not in effect when it desires to sell the
Common Stock issuable upon exercise of the right to purchase, it may be required
to hold such securities for an indefinite period. VHA also understands that any
sale of its rights to purchase Common Stock which might be made by it in
reliance upon Rule 144 under the 1933 Act may be made only in accordance with
the terms and conditions of that Rule.
(e) STOCKHOLDERS AGREEMENT. Prior to the exercise of any Warrant, VHA
agrees to, and to cause any permitted transferee to, enter into, execute and
perform the Stockholders Agreement.
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<PAGE>
CONFIDENTIAL TREATMENT
Section 13. GENERAL.
(a) EXPENSES. Each party shall bear and pay all costs and expenses
incurred by them respecting the transactions contemplated herein and all
investigations and proceedings in connection therewith, including, without
limitation, fees, commissions or expenses of their respective counsel,
accountants and financial advisors.
(b) NOTICE. Any notice required to be given pursuant to the terms and
provisions of this Agreement shall be in writing and shall be sent by certified
mail, return receipt requested, or by overnight delivery service to the parties
at the addresses below or such other address as shall be specified by the
parties by like notice
to the Company at:
Advance ParadigM, Inc.
Attn: Vice President - Legal Affairs
545 E. John Carpenter Freeway, Suite 1900
Irving, Texas 75062
and to VHA at:
VHA Inc.
Attn: General Counsel
220 East Las Colinas Blvd.
Irving, TX 75039-5500
(c) BINDING NATURE AND ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their successors and assigns.
Neither party may assign this Agreement without the prior written consent of the
other; PROVIDED, however, that either party may transfer or assign its rights
and obligations under this Agreement, to any affiliate, and PROVIDED further
that no such assignment shall have the effect of releasing such party from any
of its obligations under this Agreement.
(d) HEADINGS AND INTERPRETATION. The headings of the various sections of
this Agreement are inserted for convenience only and do not, expressly or by
implication, limit, define or extend the specific terms of the section so
designated.
(e) GOVERNING LAW. The validity, enforceability, and interpretation of
this Agreement shall be determined and governed by the internal laws of the
State of Texas (and not the law of conflicts).
(f) ENTIRE AGREEMENT. This Agreement contains all the terms and
conditions agreed upon by the parties, and supersedes all prior understandings,
writings, proposals, representations, or communications, oral or written, of the
parties hereto.
(g) AUTHORITY. Company and VHA warrant that each has full power and
authority to enter into and perform this Agreement, and the person signing this
Agreement on behalf of each party certifies that such person has been properly
authorized and empowered to enter into this Agreement on behalf of such party.
(h) NON-WAIVER. The failure of either party to insist, in any one or more
instances, upon performance of any of the terms, covenants or conditions of this
Agreement shall not be construed as a waiver or a relinquishment of any right or
claim granted or arising hereunder or of
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<PAGE>
CONFIDENTIAL TREATMENT
the future performance of any such term, covenant, or condition, and such
failure shall in no way affect the validity of this Agreement or the rights
and obligations of the parties hereunder.
(i) SURVIVAL. Should any part, term or condition of this Agreement be
declared illegal or unenforceable or in conflict with any other laws, the
remaining provisions shall be valid and not affected thereby.
(j) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which taken
together shall constitute one and the same instrument.
(k) FURTHER ASSURANCES. From time to time upon request and without
further consideration, the parties hereto shall, and shall cause their
subsidiaries and affiliates, to execute, deliver or acknowledge such documents
and do such further acts as the other party hereto may reasonably require to
effectuate its obligations contemplated by this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their proper and duly authorized officers on the date first
above written. By executing the Agreement, the undersigned individuals hereby
warrant and represent that they have read this Agreement in its entirety and
agree to all its terms.
ADVANCE PARADIGM, INC.
By: /s/ David D. Halbert
-------------------------------------------------
David D. Halbert
Chairman of the Board and Chief Executive Officer
VHA INC.
By: /s/ Jeff Hayes
-------------------------------------------------
Name: Jeff Hayes
-----------------------------------------------
Title: Vice President
----------------------------------------------
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CONFIDENTIAL TREATMENT
EXHIBITS
Exhibit A Warrant Certificate
Exhibit B Stockholders Agreement
8
<PAGE>
CONFIDENTIAL TREATMENT
EXHIBIT A
THIS WARRANT AND THE UNDERLYING SHARES HEREOF HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR TRANSFERRED UNLESS THERE IS AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES OR THE
COMPANY RECEIVES AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY)
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
WARRANT NO. ___
For Purchase of Shares of Common Stock
of
ADVANCE PARADIGM, INC.
[DATE OF ISSUE]
THIS CERTIFIES THAT VHA Inc., a Delaware corporation ("VHA"), or registered
transferees or assigns, is entitled, subject to the terms and conditions set
forth in this Warrant, to purchase from Advance ParadigM, Inc., a Delaware
corporation (the "COMPANY"), 112.5 (the "EXERCISE NUMBER") fully paid and
nonassessable shares of Common Stock, $0.01 par value per share, of the Company
(the "COMMON STOCK") at any time during the Exercise Period upon payment in full
of the Exercise Price. The Initial Exercise Number and Exercise Price shall be
subject to adjustment as set forth in the Warrant Agreement referred to below.
This Warrant is issued pursuant to a Warrant Agreement between VHA and the
Company dated as of September __, 1996 (the "WARRANT AGREEMENT"), and is subject
to all the terms thereof, including the limitations on transferability set forth
therein. Capitalized terms used herein as defined terms but not otherwise
defined shall have the meaning assigned to such term in the Warrant Agreement.
This Warrant may be exercised, by the holder hereof, for all shares of
Common Stock covered hereby, by the presentation and surrender of this Warrant
together with the duly executed Election to Purchase in the form attached
hereto, at the principal office of the Company (or at such other address as the
Company may designate by notice in writing to the holder hereof at the address
of such holder appearing on the books of the Company), and upon payment to the
Company of the Exercise Price as set forth in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed
and delivered by its duly authorized officer as an instrument under seal as of
the date of first above written.
ADVANCE PARADIGM, INC.
By:
------------------------------------
David D. Halbert
Chairman of the Board and
Chief Executive Officer
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CONFIDENTIAL TREATMENT
ELECTION TO PURCHASE
TO: ADVANCE PARADIGM, INC. (the "Company")
The undersigned, owner of the accompanying Warrant hereby irrevocably
exercises the option to purchase 112.5 shares of Common Stock in accordance with
the terms of such Warrant, directs that the shares issuable and deliverable upon
such purchase (together with any check for a fractional interest) be issued in
the name of and delivered to the undersigned, and makes payment in full therefor
at the Exercise Price provided or referenced in such Warrant.
COMPLETE FOR REGISTRATION OF SHARES OF COMMON STOCK ON THE STOCK TRANSFER
RECORDS MAINTAINED BY THE COMPANY:
- ------------------------------------------------------------------------------
Name of Warrant Holder
- ------------------------------------------------------------------------------
Address
- ------------------------------------------------------------------------------
Federal ID Tax Number or Social Security Number
- ------------------------------------------------------------------------------
Date of Exercise (must be at least fifteen days after the date of this Notice)
---------------------------------------
Signature
---------------------------------------
Title
---------------------------------------
Date
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CONFIDENTIAL TREATMENT
EXHIBIT B
STOCKHOLDER AGREEMENT
This Stockholder Agreement dated as of ___________, by and among VHA Inc.,
a Delaware corporation (the "STOCKHOLDER"), and Advance ParadigM, Inc., a
Delaware corporation (the "COMPANY").
PRELIMINARY STATEMENTS
Pursuant to the terms and conditions of the Warrant Agreement, dated as
of September __, 1996, by and between the Company and Stockholder, the Company
agreed to issue warrants to acquire shares of the Company's common stock, par
value $.01 per share (the "COMMON STOCK"). Pursuant to the terms of the Warrant
Agreement, the Stockholder agreed to execute and enter into this Agreement prior
to the issuance of any shares of Common Stock thereunder.
NOW THEREFORE, in consideration of the premises and the mutual agreements
contained herein and for other good, valuable and binding consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound, hereby agree as follows:
STATEMENT OF AGREEMENT
1. RESTRICTED STOCK. The terms and conditions of this Agreement shall apply
to all shares of Common Stock issued to Stockholder pursuant to the Warrant
Agreement and any shares of Common Stock otherwise acquired by Stockholder
(collectively the "STOCK").
2. RESTRICTIONS ON TRANSFERS.
2.1 TRANSFERS TO AFFILIATE.
(a) TRANSFERS TO AFFILIATES. Stockholder shall be entitled to transfer
the Stock held by it to entities that directly or indirectly control, are
controlled by, or are under common control with Stockholder (each, an
"AFFILIATE"), provided that any such Affiliates first deliver to the Company
their written acknowledgment of, and agreement to be bound by, the terms and
provisions contained in this Agreement; and the Stockholder delivers to the
Company an opinion of counsel, reasonably acceptable in form and substance to
the Company and its counsel, that registration under the Securities Act is not
required in connection with such transfer. The foregoing notwithstanding,
Stockholder shall not, without the prior written consent of the Company which
consent will not be unreasonably withheld, transfer any shares of Stock to any
Affiliate, nor any officer, director, employee or holder of debt or equity in
any Affiliate that is engaged in the business (except as otherwise permitted by
the Master Agreement dated September ___ , 1996, by and between Stockholder and
the Company) of pharmacy benefit management services, pharmacy network
management, pharmacy claims adjudication, mail service pharmacy, clinical
services, disease state management, case management and/or outcomes management,
or the manufacture of drugs, biotech products or biologicals;
(b) AFFILIATES' PROXY. In the event that Stockholder transfers less than
all of its Stock pursuant to SECTION 2.1(a), Stockholder shall exercise all of
the rights inuring under this Agreement with respect to such transferred Stock
and the transferees shall grant such Investor proxies to exercise such rights.
In the event that Stockholder transfers all of its Stock pursuant to SECTION
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CONFIDENTIAL TREATMENT
2.1(a), one such transferee reasonably acceptable to the Company shall be
designated by Stockholder to exercise all rights inuring under this Agreement
with respect to such Stock and the other transferees shall grant such designated
transferee proxies to exercise such rights.
2.2 RESTRICTIONS ON THIRD PARTY TRANSFERS OF THE STOCK.
(a) GENERAL. During the first two years following the date the Stock is
issued the ("ISSUANCE DATE"), Stockholder agrees that it will not sell, pledge
or otherwise transfer any interest in any shares of the Stock, without the prior
written consent of the Company. At any time after the second anniversary of the
Issuance Date, the Stockholder may sell, pledge or otherwise transfer shares of
the Stock to third parties ("THIRD PARTY TRANSFER"); provided that such transfer
is in accordance with this SECTION 2.2, and provided further that the
transferring Stockholder delivers to the Company an opinion of counsel,
reasonably acceptable in form and substance to the Company and its counsel, that
registration under the Securities Act is not required in connection with such
transfer. The foregoing notwithstanding, Stockholder agrees that it shall not
transfer any shares of Stock to any person or entity, nor any officer, director,
employee or holder of debt or equity in any entity that is engaged in the
business, or has an affiliate engaged in the business of pharmacy benefit
management services, pharmacy network management, pharmacy claims adjudication,
mail service pharmacy, clinical services, disease state management, case
management and/or outcomes management, or the manufacture of drugs, biotech
products or biologicals.
(b) SALE NOTICE. At least 60 days prior to making any Third Party
Transfer under SECTION 2.2(a), the transferring Stockholder will deliver a
written notice (the "SALE NOTICE") to the Company. The Sale Notice will
disclose in reasonable detail the identity of the prospective transferee(s) and
the terms and conditions of the proposed transfer. Stockholder agrees not to
consummate any such transfer until 60 days after the Sale Notice has been
delivered to the Company.
(c) FIRST REFUSAL RIGHTS. The Company may elect to purchase some or all
of the Stock to be transferred upon the same terms and conditions as those set
forth in the Sale Notice by delivering a written notice of such election to
Stockholder within 30 days after the receipt of the Sale Notice by the Company.
If the Company elects to purchase any shares of Stock, the Company shall
consummate such purchase within 30 days of delivery of notice of intent to
purchase. If the Company has not elected to purchase all of the Stock specified
in the Sale Notice, Stockholder may transfer the Stock specified in the Sale
Notice at a price and on terms no more favorable to the transferee(s) thereof
than specified in the Sale Notice during the 60-day period immediately following
notice of the Company's election not to purchase such shares. Any shares of
Stock not transferred within such 60-day period will be subject to the
provisions of this SECTION 2.2(c) upon subsequent transfer.
(d) NON-CASH CONSIDERATION. In the event the consideration for the Stock
as disclosed in the Sale Notice is other than cash, a promissory note or a
combination thereof, the price for the Stock shall be the value of that
consideration as agreed to by the transferring Stockholder and the Company, or,
if no agreement can be reached as to the valuation of such consideration, the
fair market value of such consideration as determined by two appraisers (one
appointed by the Stockholder and one appointed by the Company). In the event
the two appraisers are unable to agree on a fair market value within 20 days
after they are appointed, the fair market value of the consideration shall be
the average of the appraised values of the two appraisers; provided, however,
that if the appraised values of the two appraisers differ by more than five
percent (5%) of the higher of the two appraised values, the two respective
appointed appraisers shall select a third appraiser who shall independently,
within 20 days after this appointment, make a determination of the value of the
consideration and the average of the appraised values of the three appraisers
shall be the purchase price and shall be binding on the parties hereto. The
transferring Stockholder and
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CONFIDENTIAL TREATMENT
the Company shall each bear the cost of their respective appraisers and shall
share the cost equally of the third appraiser, if any. Notwithstanding
anything herein to the contrary, if an appraisal is used to determine the
value of the consideration pursuant to this SECTION 2.2(d), the time periods
provided for in SECTIONS 2.2(b) and 2.2(c) shall be tolled from the time of
the initial appointment of the two appraisers until a final appraised value
is determined pursuant to this SECTION 2.2(d).
(e) PUBLIC SALE. At any time after the second anniversary of the Issuance
Date, if the Company has consummated its first underwritten public offering
pursuant to an effective registration statement covering the offering and sale
of the Common Stock for the account of the Company on a firm commitment basis
(the "INITIAL PUBLIC OFFERING"), the Stockholder may sell, pledge or otherwise
transfer shares of the Stock to the public in a market transaction without
complying with the restrictions set forth in SECTION 2.2(b), (c) and (d).
2.3 LEGEND. The certificates representing the Stock will bear the
following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND MAY BE REOFFERED AND SOLD ONLY
IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO
SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE
OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN A STOCKHOLDER
AGREEMENT BETWEEN THE COMPANY AND BLUE CROSS AND BLUE SHIELD OF TEXAS,
INC., DATED AS OF SEPTEMBER __, 1996, A COPY OF WHICH MAY BE OBTAINED
BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS
WITHOUT CHARGE."
Any legend endorsed on a certificate pursuant to SECTION 2.3 hereof and the
stop transfer instructions and record notations with respect thereto shall be
removed and the Company shall issue a certificate without such legend to the
holder thereof at such time as the securities evidenced thereby cease to be
restricted securities
2.4 EXTRAORDINARY TRANSACTION. In the event of a merger of the Company
with a third party where the Company is not the surviving entity, sale of a
majority of the capital stock of the Company, or the sale of all or
substantially all of its assets ("EXTRAORDINARY TRANSACTION"), the Stock shall
be entitled to receive the same benefits as the holders of the Common Stock will
receive in the Extraordinary Transaction. The Stockholder agrees to consent to
and execute all required documents in connection with the Extraordinary
Transaction.
2.5 LIMITATION ON STOCK HOLDINGS. The Stockholder agrees that in no
event, shall it, either independently or together with its Affiliates, own
Common Stock or rights to acquire Common Stock, that represent, or if converted
to Common Stock would represent, more than ten percent (10%) of the Company's
issued and outstanding Common Stock, without the Company's prior written
consent.
3. NOTICES.
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if delivered personally, mailed by
certified mail (return receipt requested) or sent by express delivery service,
or facsimile transmission to the parties at the following addresses or at such
other addresses as shall be specified by the parties by like notice:
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CONFIDENTIAL TREATMENT
if to the Company:
545 E. John Carpenter Freeway
Suite 1900
Irving, TX 75062
Attention: Chief Executive Officer
Fax No.: (214) 830-6196
if to Stockholder:
VHA Inc.
220 East Las Colinas Blvd.
Irving, TX 75039-5500
Attention: General Counsel
Fax No.:
Notice so given shall, in the case of notice so given by mail, be deemed to
be given and received on the fourth calendar day after posting, in the case of
notice so given by express delivery service, on the date of actual delivery and,
in the case of notice so given by facsimile transmission or personal delivery,
on the date of actual transmission or personal delivery, as the case may be.
4. SEVERABILITY.
If any provision of this Agreement shall be held to be illegal, invalid or
unenforceable under any applicable law, then such contravention or invalidity
shall not invalidate the entire Agreement. Such provision shall be deemed to be
modified to the extent necessary to render it legal, valid and enforceable, and
if no such modification shall render it legal, valid and enforceable, then this
Agreement shall be construed as if not containing the provision held to be
invalid, and the rights and obligations of the parties shall be construed and
enforced accordingly.
5. COMPLETE AGREEMENT.
This Agreement and those documents expressly referred to herein and of even
date herewith, embody the complete agreement and understanding among the parties
and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way.
6. COUNTERPARTS.
This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, with the same effect as if
all parties had signed the same document. All such counterparts shall be deemed
an original, shall be construed together and shall constitute one and the same
instrument.
7. SUCCESSORS AND ASSIGNS.
This Agreement is intended to bind and inure to the benefit of and be
enforceable by and against the Stockholder and the Company, and their respective
heirs, successors and assigns. Stockholder hereby agrees not to transfer or
assign, directly or indirectly, any of the Stock unless such transferee or
assignee agrees in writing (i) to be bound by the provisions of this Agreement
and (ii) not to make subsequent assignments or transfers other than in
accordance with this Agreement. Notwithstanding the foregoing, any holder of
the Stock shall be bound by the provisions of this Agreement even if such holder
is not a party hereto or otherwise agreed in writing to be bound by the
provisions hereof.
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CONFIDENTIAL TREATMENT
8. CHOICE OF LAW.
THE INTERNAL LAW OF THE STATE OF TEXAS (AND NOT THE LAW OF CONFLICTS) WILL
GOVERN THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT.
9. REMEDIES.
Each of the parties to this Agreement will be entitled to enforce its
rights under this Agreement specifically, to recover damages by reason of any
breach of any provision of this Agreement and to exercise all other rights
existing in its favor. The parties hereto agree and acknowledge that money
damages may not be an adequate remedy for any breach of the provisions of this
Agreement and that any party may in its sole discretion apply to any court of
law or equity of competent jurisdiction for specific performance and/or
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement. In the event a party hereto brings an action
under this agreement, the prevailing party in such dispute shall be entitled to
recover from the losing party all fees, costs and expenses of enforcing any
right of such prevailing party under or with respect to this Agreement,
including without limitation such reasonable fees and expenses of attorneys and
accountants, which shall include, without limitation, all fees, costs and
expenses of appeals.
10. AMENDMENTS AND WAIVERS.
Any provision of this Agreement may be amended or waived only with the
prior written consent of each of the parties hereto.
11. CONFIDENTIALITY.
Each of the parties hereto agrees to hold in the strictest confidence the
existence of this Agreement and the terms and conditions hereof. Specifically,
but without limiting the generality of the foregoing, each of the parties hereto
agrees not to disclose the existence of this Agreement or any of its terms to
any third party without the prior written consent of every other party hereto
(unless such disclosure is required by law).
[Signature page follows]
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CONFIDENTIAL TREATMENT
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first above written.
ADVANCE PARADIGM, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
VHA INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
16
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Pages where confidential treatment has been requested are marked with the
legend "Confidential Treatment requested for the bracketed portions on this
page."
EXHIBIT 10.1
MANAGED PHARMACEUTICAL AGREEMENT
MAIL SERVICE AND CLAIM ADJUDICATION
THIS AGREEMENT is made and entered into as of NOVEMBER 1, 1993, by and
between ADVANCE PRESCRIPTION MANAGEMENT, INC., (hereinafter, "APM"), a Delaware
corporation maintaining its principal place of business at 545 E. John Carpenter
Freeway, Suite 1900, Irving, TX 75062, and THE MEGA LIFE & HEALTH INSURANCE
COMPANY, 4001 MCEWEN, SUITE 200, DALLAS, TX 75244 (hereinafter,
"Administrator"). APM and Administrator are hereinafter referred to jointly as
the "Parties" or singularly as a "Party".
DEFINITIONS
A. "Participants" ("Participants") shall mean those individuals and their
dependents included on a list of Participants furnished to APM by the
Administrator in a mutually agreeable form
B. "Primary Cardholder" shall mean that one individual through whom
eligibility of that individual and their dependents is determined.
C. "Mail Service Pharmacy" or "Mail Service" ("Mail Service Pharmacy" or
"Mail Service") shall mean the pharmaceutical dispensing facility which utilizes
the US Postal Service or common carriers to deliver product and which shall be a
facility owned by an APM affiliate or another facility designated by APM for
use under the terms of this agreement.
D. "Mail" shall mean to deliver to the United States Post Office for
first class delivery in a properly addressed envelope or package, with
sufficient postage paid, or to United Parcel Service or a similar carrier
selected by APM in its sole discretion.
E. "Prescription" or "Prescription Order" shall mean a valid and legal
order to dispense a prescription drug under all applicable statutes and
regulations of the United States, (including the Food and Drug Administration)
and the state and local jurisdiction in which the dispensing facility is
located, such order being authorized by a person legally qualified to do so.
Such terms shall not include (i) appliances, devices, bandages, heat lamps,
braces, splints, artificial appliances, health and beauty aids, cosmetics,
dietary supplements (ii) drugs required by law to be labeled: "Caution - Limited
By Federal Law To Investigational Use" and (iii) experimental drugs not approved
by the Food and Drug Administration.
F. "Prescription Drug" or "Medication" shall mean drugs and biologicals
which can be dispensed only pursuant to a Prescription Order and which, by law,
are required to bear the legend: "Caution - Federal Law Prohibits Dispensing
Without Prescription".
G. "Generic Drug" means the chemical and generic name as determined by
the United States Adopted Names Council (USANC) and accepted and rated "A" or
"AB" by the Federal Food and Drug Administration (FDA) of those drug products
having the same active ingredients as a drug product prescribed by its trade or
brand name.
H. "Advance Retail Network of Pharmacies" or "Providers" means the retail
pharmacies under contract with APM to participate in providing retail
prescription services to Participants on behalf of APM.
I. "Medi-Span Databases" means the data provided to APM by Medi-Span,
Inc. for use in the Company's pricing methods and/or Drug utilization review
programs.
RECITALS
A. Administrator desires to offer eligible Participants a Prescription Drug
program pursuant to a specified plan.
B. APM is in the business of administering prescription drug benefit plans,
including a Administrator-reimbursed claim indemnification and Mail Service
prescription drug programs, all collectively known as Advance
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CONFIDENTIAL TREATMENT
Pharmaceutical Management Program ("APMP"). Under the APMP, Participants
pay a portion of the cost of their Prescription Drugs according to a
benefit program defined by Administrator. Prescription drugs are obtained
via the Advance Mail Service Pharmacy or the Advance Retail Network of
Pharmacies ("Network Providers"), both collectively hereinafter referred
to the "Providers".
TERMS OF AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the Parties hereby agree as follows:
1. APM RESPONSIBILITIES
APM will administer, on Administrator's behalf, an APMP, as follows:
(a) Prior to the beginning of the Administrator's plan year for any
Participant enrolled by Administrator, APM will provide
Administrator with copies of informational material for
distribution to Participants, including but not limited to a
general description of the APMP, standard Prescription Drug I.D.
cards, Mail Service patient profiles & retail reimbursement claim
forms used to file out-of-network retail claims.
(b) APM will administer the APMP, and Participants will obtain their
Prescription Drugs, in the manner described in Exhibit A ("How It
Works"), attached hereto and incorporated herein. APM will
process and adjudicate all Participant's claims according to the
terms of specific drug benefit program selected by Administrator
pursuant to the form attached hereto as Exhibit C
("Administrator's Drug Benefit Program").
(c) APM will, on at least a weekly basis, advise Administrator of the
sum of the processed claims and the Mail Service Prescriptions
filled which have been processed by APM on behalf of
Participants.
(d) APM will, on at least a weekly basis, provide Administrator with
a summary invoice of all claims paid and Mail Service
prescriptions filled on its behalf.
2. MAIL SERVICE PHARMACY
(a) APM shall designate the Mail Service Pharmacy to fill
prescriptions with drugs or medications dispensed by licensed
pharmacies for Participants designated by the Administrator and
to mail such drugs or medications to Participants subject to the
terms and conditions set forth herein. APM will administer
delivery of Mail Service Prescriptions according to the
Administrator's Drug Benefit Program. APM's designated Mail
Service vendor will check for eligibility of the Participant and
whether the drug is covered under the Administrator's Drug
Benefit Program prior to processing the prescription.
(b) APM shall designate a Mail Service Pharmacy which to the best
knowledge of APM operates in accordance with all applicable
statutes and regulations of the jurisdiction in which the
dispensing facility is located and shall dispense only those
Prescription Drugs which, in its sole discretion, fulfill the
requirements of the Prescription writer and comply with
applicable legal requirements.
(c) APM will cause to be dispensed new or refill prescriptions upon
receipt of a valid Prescription or refill order for any
Participant and shall deposit the filled Prescription in the mail
in a suitable package, with postage prepaid, properly addressed
to Participant's address as last provided to APM by Administrator
or as appearing on the face of the Prescription Order. Valid
Participant Prescriptions will be filled and mailed within two
business days of receipt of APM or the Mail Service Pharmacy.
APM shall not be liable for any delay in delivery, either to
Administrator or Participant. If a Prescription allows, and the
patient agrees to the substitution of a less expensive Generic
Drug, the APM designated Mail Service Pharmacy will fill the
prescription with the Generic Drug as provided by law.
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CONFIDENTIAL TREATMENT
(d) The APM Mail Service Pharmacy will dispense drugs in quantities
up to the days supply as defined in Exhibit C, subject to
limitations imposed on controlled substances and to limitations
specified in the Prescription.
(e) The Mail Service Pharmacy shall maintain required information
("profiles") on all Participants, beginning with the first
Prescription received for each Participant. Such profiles will
include, but not be limited to, a history of all drugs dispensed
for a period to coincide with the then current term of this
Agreement, drug interaction and allergy information as provided
to APM by the Participant at the time the first Prescription is
filled or at any time thereafter, and any other information
deemed important by APM or mutually agreed upon by APM and the
Administrator. APM shall not assume any liability or obligation
to any person arising out of any inaccuracies or discrepancies in
the data supplied by the Administrator, Participant and/or
Databases. The Mail Service Pharmacy shall keep records of all
Prescriptions filled for Participants for three (3) years after
the date of filing such Prescriptions or such longer period as
may be required by Federal or State law.
(f) The Mail Service Pharmacy will have the right to refuse to fill
or renew a Prescription for any Participant when, in the
pharmacist's professional judgment, either filling or renewing
such prescription is not in the best medical interest of the
Participant or there is any doubt in the sole opinion of APM [or
the pharmacist] as to the authenticity of the Prescription.
(g) The pricing arrangement under which Administrator will be billed
by APM for Mail Service dispensing will be as defined on Exhibit
C.
3. ADMINISTRATOR RESPONSIBILITIES
(a) Administrator will provide APM with an eligibility tape, a
listing or application in a format mutually acceptable to the
Parties, which lists all Participants and dependents (where
known), and gives pertinent eligibility data (the "Eligibility
List"). The information provided will identify the line of
business and benefit package in which the Participant is
enrolled. Administrator will provide a complete updated
Eligibility List for APM on a monthly basis or more frequently as
is mutually acceptable to the Parties.
(b) Administrator shall notify Participants that they have been
enrolled in the APMP and explain its benefits. Administrator
shall distribute the APMP information material to all eligible
Participants.
(c) Subject to Section 6 hereof, Administrator will, in publications,
advertising and other personnel communications, endeavor to
communicate the APMP and its use. Administrator shall permit APM
to meet with or otherwise communicate directly with prospective
Participants concerning the APMP in a reasonable manner and at
various times to be mutually agreed upon by APM and the
Administrator, in order to promote the use of APM's service.
(d) Administrator is responsible to indemnify all prescription drug
claims pursuant to the design of the benefit plan, and will
provide funds to APM for any payable claims in accordance with
Section 4 hereof.
4. PAYMENT OF APPROVED CLAIMS
(a) APM shall submit to Administrator, on a weekly interval (or more
often as may be agreed upon by the Parties) a statement of
account (the "Statement of Account"), the total amount of claims
made by Participant and Providers under the APMP which have been
processed and approved for payment by APM (referred to as
"payable" claims) during the period of time specifically set
forth in such statement of account.
(b) Upon receipt of the Statement of Account, Administrator will
ensure that sufficient funds to pay the claims are deposited into
a bank account which APM will have access (the "Bank Account"),
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CONFIDENTIAL TREATMENT
and so notify APM. APM shall have no obligation to release or
mail payment of any claims until funds are received from
Administrator.
(c) Administrator hereby authorizes APM to draw upon the funds on
deposit in Administrator's Bank Account, by means of electronic
funds draw or such other means as shall be mutually agreed upon
by the Parties. Administrator shall maintain on an ongoing basis
a minimum deposit in the Bank Account in an amount approximately
equal to the average amount of the claims set forth in the
previous two Statements of Account. APM shall be entitled to
withdraw from the Bank Account the amount specified in the
Statement of Account on the second business day following
Administrator's receipt of such statement. Upon the request of
APM, Administrator shall execute and deliver any and all
documents and instruments as may be necessary in order to provide
for APM to be empowered to draw upon such finds in order to
effect such payments.
(d) Within three (3) working days after the withdrawal of such amount
from the Bank Account, APM shall mail to each Provider or Primary
Cardholder, drafts drawn on APM's own account, amounts which
equal the payable claims.
(e) Administrator shall pay APM for any Prescription dispensed to a
Participant provided the actual dispensing date precedes the
receipt of a revised Eligibility List of Participants from
Administrator deleting from the Eligibility List, or not
including, the name of the Participant for whom said prescription
was dispensed. Notwithstanding Section 14(b) hereof, receipt
means the earlier of actual receipt or five (5) business days
after mailing to APM, P.O. Box 819054, Dallas, Texas 75381-9054,
"Return Receipt Requested."
(f) Should Administrator, for any reason, persistently and
unreasonably fail to make timely payment or become insolvent, or
enter into voluntary or involuntary bankruptcy, APM shall be
entitled to cease adjudication of claims and/or the dispensing of
prescriptions under this Agreement, while maintaining all rights
hereunder.
5. ADMINISTRATIVE FEES
Administrator shall pay to APM a separate administrative fee per paid
claim which is manually processed and per each paid claim received
electronically via computerized link with the Providers as set forth
in Exhibit C. Administrator shall remit payment for all outstanding
administrative fee's to APM within fifteen (15) days of the date of
invoice which will occur on the first day of each month.
6. USE OF SERVICE MARKS
APM shall not refer to the terms "THE MEGA LIFE & HEALTH INSURANCE
COMPANY" in any advertising, customer marketing materials or any other
third-party communications without the express prior written consent
of Administrator.
Administrator agrees that the term "ADVANCE PHARMACEUTICAL MANAGEMENT
PROGRAM", the design of that program and the computer systems which
support it, as well as all other service marks currently in use or
claimed by APM, are the intellectual property of APM, and agrees not
to use any such service marks in any advertising, customer marketing
materials or any other third-party communication without the express
prior written consent of APM.
7. CUSTOMER SERVICE
A timely and positive response to any Participant complaint will be
provided by APM. APM will maintain, at its sole expense, toll-free
"800" numbers both outside and within the State of Texas for customer
inquiries or complaints. APM will endeavor to respond to any customer
complaint forwarded by Administrator within one business day of
receiving same.
8. RECORDS AND REPORTS
(a) MAINTENANCE OF RECORDS. APM shall maintain, in original form, on
microfilm or computer tape, documentation of all claims received
by APM and the manner of their processing. All such records
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CONFIDENTIAL TREATMENT
shall remain accessible to Administrator for examination and
audit by Administrator throughout the calendar year in which they
are created and for three calendar years thereafter. Such audit
may be conducted by Administrator, upon reasonable prior written
notice, at reasonable intervals during the regular business hours
of APM; provided, however, that in conducting any such audit,
Administrator shall not interfere with the business or operations
of APM. All claims processing and other records pertaining to
the administration of the APMP shall be and remain the property
of APM.
(b) MANAGEMENT INFORMATION REPORTS. APM shall mail or cause to be
mailed to Administrator within 5 working days after the end of
each month, an electronic summary of all claims paid and Mail
Service Prescriptions filled during the preceding month. Such
summary shall include the total of such payments made with
respect to each group or risk category where Administrator has
requested such a total, and shall contain such other data and be
in such form as may be agreed upon by the Parties. Additional
custom reporting which may be requested by Administrator and
agreed upon by the Parties will be billed at a rate of $100 per
programming hour.
(c) MUTUAL RIGHT TO AUDIT. In order to verify the amount of fees due
to APM hereunder, APM shall have the right to inspect and audit,
or cause to be inspected and audited the books and records of
Administrator relating to the existence and number of
Participants. Similarly, Administrator shall have the right to
audit the business records of APM which directly relate to
billings made to Administrator for claims reimbursement.
Administrator and APM shall fully cooperate with representatives
of Administrator and with independent accountants hired by
Administrator to conduct any such inspection or audit. Such
audits shall only be made at reasonable intervals, upon prior
written notice, during normal business hours, and without undue
interference to the Party's business activity. If any such audit
shall disclose that additional amounts are due to Administrator,
such amounts shall be paid within ten (10) days after receipt of
the audit report, plus interest on the terms specified in Section
14(e) hereof.
9. RELATIONSHIP OF THE PARTIES
It is understood and agreed by the Parties hereto that APM and
Administrator are independent contractors and that nothing in this
Agreement is intended to make either Party a general or special agent,
fiduciary, legal representative, joint venturer, or partner of the
other for any purpose.
10. INDEMNIFICATION
Each Party (First Party) shall be responsible for and shall indemnify,
defend and hold harmless the other Party from any and all damage,
claims, expenses, liabilities and losses, including reasonable
attorney's fees and court costs, to the extent arising out of this
Agreement and resulting from any act, negligence or fault of the First
Party or its employees, agents or representatives either incidental to
or in the performance of its duties or obligations under this
Agreement.
APM shall maintain, during the term of this Agreement, liability
insurance with limits not less than $1,000,000 per occurrence,
evidence of which shall be furnished to the Administrator upon written
request but which amount shall not serve to limit APM's obligation to
indemnify Administrator as described above.
11. TERM OF ENGAGEMENT
The initial term of this Agreement will be for one (1) year commencing
on the effective date hereof, unless earlier terminated in accordance
with the provisions of Section 12 below. This Agreement will
automatically be renewed for additional one (1) year terms unless
terminated in accordance with Section 12 below.
12. TERMINATION
This Agreement may be terminated as follows:
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CONFIDENTIAL TREATMENT
(a) Upon the mutual written consent of the Parties hereto; or
(b) This Agreement shall terminate one year from the date hereof. It
shall be renewed, however, for additional periods of 12 months,
provided that either party does not notify the other within 90
days of the end of a period that it wishes to terminate. In the
event either party so notifies, termination shall be effective
after the end of the then current period.
(c) At APM's option, if Administrator shall fail within thirty (30)
days of receipt of Statement of Account, to make sufficient funds
available in accordance with Section 4 hereof.
(d) Except as provided in paragraph (b) and (c) directly above, at
either Party's option, if the other Party fails to comply with
any provision of this Agreement and does not correct such failure
within thirty (30) days after written notice of such failure to
comply (which notice shall describe the action that the other
Party must take to correct such failure) is delivered to the
other Party.
Termination of this Agreement shall not relieve either Party of any
unfulfilled obligations hereunder, unless otherwise agreed to in
writing between the Parties.
13. CONFIDENTIALITY OF ELIGIBILITY DATA
APM agrees that all Eligibility Lists are the proprietary and
confidential information of the Administrator and agrees that it will
not disclose any such information to third parties, with the exception
of those parties directly involved in the processing and adjudication
of claims, without the express prior written consent of the
Administrator.
14. GENERAL PROVISIONS
(a) NOTICES. All notices and other communications required under
this Agreement shall be in writing and shall be deemed to have
been duly given upon receipt of registered or certified mail,
postage prepaid, return receipt requested or by facsimile
transmission, or delivered by hand or by overnight or similar
delivery service, fees prepaid, to the party to whom it is to be
given at the addresses set forth in the opening paragraph of this
Agreement.
(b) ENTIRE AGREEMENT. This Agreement contains the entire agreement
and understanding among the Parties hereto with respect to the
subject matter hereof, and supersedes all prior and
contemporaneous agreements, understandings, and conditions,
express or implied, oral or written, of any nature whatsoever
with respect to the subject matter hereof. This Agreement may
not be modified or amended other than by an agreement in writing.
(c) NON-WAIVER. The failure of either Party to insist, in any one or
more instances, upon performance of any of the terms, covenants
or conditions of this Agreement shall not be construed as a
waiver or a relinquishment of any right or claim granted or
arising hereunder or of the future performance of any such term,
covenant, or condition, and such failure shall in no way affect
the validity of this Agreement or the rights and obligations of
the Parties hereunder.
(d) ASSIGNMENT. This Agreement shall be binding upon and inure to
the benefit of the Parties hereto and their respective successors
and assigns. This Agreement and the rights and obligations of
the Parties hereunder may not be assigned by either Party, by
operation of law or otherwise without the written consent of the
other party, which consent will not be unreasonably withheld.
(e) INTEREST ON LATE PAYMENTS. All fees and other amounts which the
Administrator owes to APM shall bear interest from the date due
until they are fully paid, at the rate of one percent (1%), per
month unless such rate exceeds the maximum rate allowable by
applicable law, in which case such amounts shall bear interest at
the maximum legally allowable rate, which shall be deemed to be
the agreed upon rate of interest.
(f) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas without giving
effect to its conflict of laws rules or choice of laws rules.
6
<PAGE>
CONFIDENTIAL TREATMENT
(g) SURVIVAL. Should any part, term or condition of this Agreement
be declared illegal or unenforceable or in conflict with any
other laws, the remaining provisions shall be valid and not
affected thereby.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their proper and duly authorized officers on the date first
above written. By executing the Agreement, the undersigned individuals hereby
warrant and represent that they have read this Agreement in its entirety and
agree to all its terms.
APM: ADMINISTRATOR:
ADVANCE PRESCRIPTION MANAGEMENT, INC. THE MEGA LIFE & HEALTH INSURANCE COMPANY
By: /s/ Danny Phillips By: /s/ Richard Estell
Title: Vice President Title: President
Date: 6/3/94 Date: 6/10/94
7
<PAGE>
CONFIDENTIAL TREATMENT
EXHIBIT A
MANAGED PHARMACEUTICAL CARE
HOW IT WORKS
A. Administrator provides APM with an Eligibility List of all Participants.
B. APM prepares Participant information material and prescription order forms
and envelopes for the Mail Service segment of the APMP as well as Participant
information material on the APMP and a standard personalized plastic card
which explains how the APMP works from a Participant perspective and what the
Adminstrator's benefit program features are. APM will provide claim forms to
cardholders for processing out-of-network claims, if allowed by
Adminstrator's Drug Benefit Program.
C. Adminstrator distributes the entire package of information material to its
Participants, and adds its own descriptive materials explaining the
Participant's use of the APMP, as appropriate.
D. Retail Pharmacy Utilization:
(1) In-Network Pharmacy Utilization
(a) If a Network Provider pharmacy is used, the Participant presents
their identification card and pays the Network Provider pharmacy
in full. The Network Provider pharmacy will submit a claim
via On-line data transfer to APM for claims adjudication.
(b) APM adjudicates the claim based on Participant eligibility and the
terms of the Adminstrator's Drug Benefit Program, and determines the
amount that should be reimbursed to the Network Provider pharmacy for
that particular claim. This is now a "payable" claim.
(c) APM invoices Adminstrator, weekly (or more often at Adminstrator's
option), for the amount of all the payable claims ready for
reimbursement.
(2) Non-Network Pharmacy Utilization
(a) Participant will take their drug prescription to the retail
pharmacy of their choice and have the pharmacist fill the prescription
and complete the portion of the standard claim form that calls for
certain pharmacy/prescription data.
(b) The Participant adds personal data (name, address, etc.) to the claim
form and mails it to APM. Claims must be submitted in writing
to Advance Prescription Management, P.O. Box 819056, Dallas, TX
75381-9056. Claims must give proof of the nature and extent of the
expenses along with original pharmacy receipts. Claim forms are
available from Adminstrator or are sent with each written notice or
reimbursement from APM.
(c) APM adjudicates the claim based on Participant eligibility and
the terms of the Adminstrator's Drug Benefit Program, and determines
the amount that should be reimbursed to the Primary Cardholder for
that particular claim. This is now a "payable" claim.
If, however, the claim is missing data or is otherwise incorrect or
incomplete, APM will mail the Primary Cardholder or Participant a
written notice explaining the information needed in order to complete
processing of the claim. Such claims are called "rejected" claims.
A-i
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CONFIDENTIAL TREATMENT
E. For Prescriptions filled at an APM Mail Service Pharmacy:
(1) Participant mails his prescription or refill request to the Mail
Service Pharmacy. Participant encloses the appropriate per prescription
copayment (if any) as provided in the Adminstrator's Drug Benefit
Program.
(2) APM, on receipt of the prescription or refill request, will verify
eligibility.
(3) APM's Mail Service Pharmacy will rely on the Medi-Span Databases
and its records derived from the information submitted to it by the
Adminstrator and/or Participant to review for any potential drug/drug
interactions or drug/allergy interactions prior to dispensing the
prescription.
(4) APM will invoice Adminstrator for each prescription filled
according to the standard invoicing schedule as described above, at the
rates defined in Exhibit C less the Participant copayment.
(5) Prescriptions filled at the Mail Service Pharmacies will be
integrated with claim data for purposes of invoicing and reporting.
F. Adminstrator makes funds available to APM to release payment of invoiced
payable claims and prescriptions.
G. APM then prints and mails to the Network Provider pharmacies and/or
Primary Cardholders, a check for each payable claim for which electronic
funds transfer funding was received from Adminstrator.
H. If a claim for benefits is denied, the Primary Cardholder or Participant
will receive a written notice from APM stating why it was denied and the
provision of the Adminstrator's Drug Benefit Program supporting the denial.
The notice will also state what, if anything, the Participant may do to have
the claim approved.
I. APM then provides Adminstrator with timely management reports on all
claims paid and prescriptions filled.
A-ii
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CONFIDENTIAL TREATMENT
REQUESTED FOR THE BRACKETED
PORTIONS ON THIS PAGE
EXHIBIT B
PLAN/ADMINISTRATOR
IDENTIFICATION
Effective Date of Plan:...............November 1, 1993
Plan Name:............................The Mega Life & Health Insurance Company
Name of Plan Contact and..............Dick Estell
Address of Plan Administrator:........4001 McEwen, Suite 200
........Dallas, TX 75244
Agent for Legal Process:..............Administrator
Phone Number of Plan Administrator:...214/960-8497
Fax Number of Plan Administrator......214/851-9033
Tax I.D. Number:......................[.....]
Carrier Number:.......................AL
Plan Number:..........................[.....]
Group Number:.........................[.....]
Type of Administration:...............Advance Prescription Management is a
contractual, not a fiduciary Administrator
Plan Year:............................January 1 through December 31
Type of Plan:.........................Network Retail Claims Adjudication and
Mail Service Pharmacy Benefit.
Number of Participants:...............[.....]
State(s) Covered:.....................[.....]
<PAGE>
CONFIDENTIAL TREATMENT
REQUESTED FOR THE BRACKETED
PORTIONS ON THIS PAGE
BRAND VERSUS GENERIC DRUG PRESCRIPTION BENEFIT DISTINCTIONS
<TABLE>
NON- MAIL
NETWORK NETWORK SERVICE
"Br" = Brand Prescription
"Ge" = Generic Prescription Br Ge Br Ge Br Ge
-- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C>
Reimbursement Schedule:
B=Billed; A=AWP; M=MAC [....] [....] [....] [....] [....] [....]
Plan Specific Percent of Reimbursement: [....]
% of B/A/M (based on above choice)
Dispensing Fee Per Prescription: [....]
Maximum Allowed Amount Over [....]
Reimbursement Schedule:
Maximum Cap %
Prescription Limitations:
Days Supply: [....]
Metric Quantity (Number of Units): [....]
(B)oth or (E)ither: Both requires
prescription to meet both limitations
("the lesser of"). Either requires only
one limitation to be met ("the greater of"): [....]
Participant Co-payment Responsibility ($ or %): [....]
Number of Refills Allowed per Prescription
through Retail before Mail Service
Benefit becomes Mandatory for
continuation of benefit: [....]
Administrative Fee per Prescription Claim:
Electronic [....]
Manual [....]
Prescription Dollar Amount that Requires [....]
Prior Authorization:
Percent Last Prescription Must Age before
a Refill in Allowed: [....]
Does Prescription Aging Above Allow a
Grace Period Window: [....]
Option: Diabetic Supplies Reimbursement
Schedule as a Percent Billed Charges: [....]
</TABLE>
* Exceptions to the "Both" limitation include products dispensed in mls. and
gms., thyroid products, anticonvulsants, antidiabetics, nitroglycerin,
cardiac glycosides.
** 67% prescription aging is a general guide, not a set rule. System can be
overridden for reasonable considerations.
Reimbursement formula is [.....] or ("[.....]"), whichever is less.
B-ii
<PAGE>
CONFIDENTIAL TREATMENT
REQUESTED FOR THE BRACKETED
PORTIONS ON THIS PAGE
**** Mail Service Pharmacy Reimbursement Schedule is as follows:
Insured Level Fee Brand o% of AWP Generic % of AWP Dispensing
- ----------------- --------------- ---------------- ----------
[.....] [.....] [.....] [.....]
B-iii
<PAGE>
CONFIDENTIAL TREATMENT
REQUESTED FOR THE BRACKETED
PORTIONS ON THIS PAGE
EXHIBIT C
ADMINSTRATOR'S DRUG BENEFIT PROGRAM
A. "Average Wholesale Price" ("AWP") is the then current price for a
prescription drug as listed in a pharmaceutical industry pricing guide,
including but not limited to the MEDI-SPAN PRESCRIPTION PRICING GUIDE
including supplements based on units of 100 for tablets and capsules, pints
for liquids and actual package size for all other items.
B. "Co-Payment" ("Co-Payment") shall mean that portion of the cost of the
prescription paid directly by a Participant.
C. "Maximum Allowable Cost" ("MAC") means the then current price for a
prescription drug as listed as a drug available from more than one
manufacturer in a pharmaceutical MAC pricing formula, including but not
limited to formulas utilizing the MEDI-SPAN PRESCRIPTION PRICING GUIDE
including supplements based on units of 100 for tablets and capsules, pints
for liquids and actual package size for all other items.
OVERALL PRESCRIPTION BENEFIT
PLAN MAXIMUMS
Maximum Lifetime Benefit Per Participant Is: [.....]
- The limit payable during an Participant's lifetime,
- Applied separately to each covered family Participant,
- The amount that terminates all coverage when exhausted.
Maximum Annual Benefit Per Participant [.....]
DEDUCTIBLES AND OUT-OF-POCKET LIMITS
Annual Deductible (applies to each Participant once in every Plan Year)
Individual Deductible [.....]
Family Deductible: ([..] x Individual) [.....]
Separate Individuals - or - Accumulative [.....]
Out-of-Pocket Limit
Individual Out-of-Pocket Limit [.....]
Family Deductible Out-of-Pocket [.....]
Separate Individuals-or-Accumulative [.....]
Are there member payment exclusions which do not apply to the
Out-of-Pocket Limit?
<PAGE>
CONFIDENTIAL TREATMENT
REQUESTED FOR THE BRACKETED
PORTIONS ON THIS PAGE
Designated Co-Payments [.....]
Designated Deductibles [.....]
Prescription Benefit Exclusions [.....]
Other [.....]
<PAGE>
CONFIDENTIAL TREATMENT
REQUESTED FOR THE BRACKETED
PORTIONS ON THIS PAGE
EXHIBIT D
BENEFIT PROCESSING CLARIFICATION
PLAN YEAR
Plan Begins on: November 1, 1993
First "Plan Year" Begins November 1, 1993
First "Plan Year" Ends December 31, 1993
Thereafter, Plan Year End/Begins January 1/December 31
CLAIM SUBMISSION LIMITATIONS
Deadline for filing claims: [.....]
CLAIM FORM STOCKING DEPARTMENT AND CONTACT
Contact who will hold copies of claim forms Bill Nixon
Contact's Department Fulfillment Center
Contact's Address: 2113 Precinct Line Road
Hurst, TX 76054
Contact's Phone Number: 817/428-4476
ELIGIBLE CLASSES
Electronic or manual transmission of eligibility status will identify a
member as either "eligible" or "not eligible" and APM will process
claims for all members with "eligible" status. APM will not be
responsible for administering eligibility criteria that determines a
person's coverage (i.e., dependents past college age, active employment
criteria, grace period, etc.).
ASSIGNMENT OF BENEFITS
[.....]
CARRYOVER PROVISION
[.....]
D-i
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CONFIDENTIAL TREATMENT
REQUESTED FOR THE BRACKETED
PORTIONS ON THIS PAGE
EXHIBIT E
Yes - Covered Drug
DRUG COVERAGE OPTIONS No - Not a Covered Drug
YES NO
LEGEND DRUGS [.....]
ANABOLIC STEROIDS [.....]
ANOREXICS [.....]
ANTI-REJECTION DRUGS [.....]
ANTI-SMOKING AIDS (GUMS/PATCHES) [.....]
DRUGS USED TO TREAT AIDS AND AIDS RELATED CONDITIONS [.....]
DRUGS USED TO TREAT OR CURE BALDNESS [.....]
FERTILITY AGENTS [.....]
GROWTH HORMONES [.....]
INJECTABLE DRUGS [.....]
INSULIN [.....]
INSULIN SYRINGES & NEEDLES [.....]
INSULIN IN COMBINATION WITH NEEDLES/SYRINGES [.....]
INSULIN TEST STRIPS [.....]
LEGEND CONTRACEPTIVES (ORAL/IMPLANTABLE) [.....]
TRETINOIN PRODUCTS (RETIN-A) UP TO AGE [.....]
VITAMINS REQUIRING A PRESCRIPTION [..] [.....]
THERAPEUTIC DEVICES OR APPLIANCES, INCLUDING HYPODERMIC
NEEDLES, SYRINGES, SUPPORT GARMENTS, AND OTHER NON-MEDICINAL
SUBSTANCES REGARDLESS OF INTENDED USE. [.....]
IMMUNIZATION AGENTS, BIOLOGICAL SERA, BLOOD OR BLOOD
PRODUCTS ADMINISTERED ON AN OUT-PATIENT BASIS. [.....]
ANY CHARGE FOR THE ADMINISTRATION OF LEGEND
DRUGS OR INSULIN. [.....]
ANY PRESCRIPTION REFILLED IN EXCESS OF THE NUMBER SPECIFIED BY
THE PHYSICIAN, OR FOR ANY REFILL DISPENSED AFTER ONE YEAR FROM
THE PHYSICIAN'S ORIGINAL ORDER. [.....]
ANY MEDICINE, LEGEND OR NOT, WHICH IS CONSUMED OR
ADMINISTERED AT THE PLACE WHERE IT IS DISPENSED. [.....]
<PAGE>
CONFIDENTIAL TREATMENT
REQUESTED FOR THE BRACKETED
PORTIONS ON THIS PAGE
DRUGS COVERED UNDER WORKERS COMPENSATION, MEDICARE OR
MEDICAID PROGRAMS. [.....]
NOTE: For the Mail Services Pharmacy Program, we cannot accept or dispense
Class 2 prescriptions not written in the State of Texas.
<PAGE>
CONFIDENTIAL TREATMENT
EXHIBIT 10.14
PAGES WHERE CONFIDENTIAL TREATMENT HAS BEEN REQUESTED ARE MARKED WITH THE
LEGEND: "CONFIDENTIAL TREATMENT REQUESTED FOR THE BRACKETED PORTIONS ON THIS
PAGE."
ADVANCE PARADIGM, INC.
MANAGED PHARMACY BENEFIT SERVICES AGREEMENT
This Managed Pharmacy Benefit Services Agreement dated as of September 1,
1995, is entered into by and between Advance ParadigM, Inc. and Blue Cross and
Blue Shield of Texas, Inc.
PRELIMINARY STATEMENT
A. Client provides a pharmacy benefit to certain individuals enrolled and
entitled to benefits under the Client's benefit plans.
B. Pursuant to the terms and conditions of this Agreement, Client desires to
retain API to provide, and API desires to provide for Client, pharmacy benefit
management services including without limitation (i) mail service pharmacy
through which Eligible Members may receive Prescription Drugs through the mail,
(ii) claims processing, retail network management and payment of claims to
participating pharmacies for prescription drugs furnished to Eligible Members,
and (iii) clinical management, formulary and drug rebate services (collectively,
the "PBM SERVICES").
TERMS OF AGREEMENT
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. DEFINITIONS. Unless the context otherwise requires, the terms defined in
this SECTION 1 shall have the meanings herein specified for all purposes of
this Agreement, including singular and plural forms of any terms herein
defined.
"AGREEMENT" shall mean this Managed Pharmacy Benefit Services Agreement.
"API" shall mean Advance ParadigM, Inc., a Delaware corporation, together
with its wholly-owned subsidiaries.
"API NETWORK" shall mean the nationwide network of retail pharmacies
(including API's Advance Rx-Registered Trademark- network for Client's
Members First Program), excluding Texas under contract with API to dispense
Prescriptions to Eligible Members and custom networks developed to meet
specific Client needs.
"APOTHEQUERY-Registered Trademark- shall mean the proprietary relational
database developed by API to analyze drug and medical claims data.
"APPROVED CLAIMS" shall have the meaning assigned to such term in SECTION
3(d)(ii) hereof.
<PAGE>
CONFIDENTIAL TREATMENT
"AWP" shall mean the then current average wholesale price for a
prescription drug as listed in a pharmaceutical industry pricing guide,
including but not limited to the MEDI-SPAN PRESCRIPTION PRICING GUIDE.
"CLIENT" shall mean Blue Cross and Blue Shield of Texas, Inc., a Texas non-
profit group hospital service corporation and any of its wholly-owned or
partially-owned subsidiaries.
"DUR" shall mean drug utilization review.
"EFFECTIVE DATE" shall mean the day that PBM Services begin for each Plan
covered by this Agreement.
"ELIGIBILITY LIST" shall have the meaning assigned to such term in SECTION
3(a) hereof.
"ELIGIBLE MEMBER" shall mean each individual entitled to benefits under a
Plan.
"ENCRYPTED FORMAT" shall mean the process pursuant to which symbols are
assigned by computer to disguise specified information in a database.
"FORMULARY" shall have the meaning assigned to such term in SECTION 2(e)
hereof.
"GENERIC DRUG" means the chemical and generic name as determined by the
United States Adopted Names Council (USANC) and accepted by the Federal
Food and Drug Administration (FDA), of those drug products having the same
active ingredients as a drug product prescribed by its trade or brand name.
"GROUP" shall mean those employer groups or other plan sponsors for which
Client administers the pharmacy benefit.
"MAC" shall mean the then current maximum allowable cost for a prescription
drug listed as a drug available from more than one manufacturer in API's
pharmaceutical MAC pricing formula, including but not limited to formulas
utilizing the MEDI-SPAN PRESCRIPTION PRICING GUIDE.
"MEDI-SPAN DATABASES" means the data provided to API by Medi-Span, Inc. for
use in the Company's pricing methods and/or DUR programs.
"MEMBERS FIRST PROGRAM" is a value-added prescription drug discount program
offered by Client.
"NETWORK PHARMACY" shall mean each retail pharmacy participating in the
Primary Network and the API Network.
"PBM SERVICES" shall mean pharmacy benefit management services as defined
in the Preliminary Statements.
"PLANS" shall mean all of the Client's prescription drug benefit plans for
groups to which API will provide PBM services under this Agreement.
"PRESCRIPTION" shall mean a valid and legal order to dispense a drug
legally eligible for dispensing under the laws and regulations of the
United States, including the Food and Drug Administration and the state
laws in which the dispensing facility is located.
2
<PAGE>
CONFIDENTIAL TREATMENT
"PRESCRIPTION DRUG" shall mean drugs and biologicals which can be dispensed
only pursuant to a Prescription and which, by law, are required to bear the
legend: "Caution-Federal Law Prohibits Dispensing Without Prescription".
"PRIMARY NETWORK" shall mean the networks of retail pharmacies under
contract with Client to dispense Prescriptions to Eligible Participants.
"PROCESSED PRESCRIPTION DRUG CLAIM" shall mean a fully-adjudicated
reimbursable claim and does not include claims rejected by the on-line
system.
"QUARTER" shall mean each three month period of a calendar year commencing
on each January 1, April 1, July 1 and October 1.
"THERAPEUTIC INTERCHANGE" shall mean upon approval of the prescriber, a
process of substituting one drug for another drug that may be chemically
distinct, and can be expected to have the same clinical effect when
administered to patients under specified conditions.
2. PLAN INFORMATION. Client shall make best efforts to provide API with
certain Plan information not otherwise in the possession of API and
necessary for API to perform or provide the PBM Services, including without
limitation benefit certificates, eligible drugs, co-pays, deductibles,
maximum allowance benefits, investigational drug usage, generic drug usage,
and any drugs excluded under the Plan. The performance guarantees specified
in EXHIBIT D with respect to each Plan shall not be effective until the
thirty-first day following Client's delivery of the Plan information under
this SECTION 2.
3. PHARMACY BENEFIT MANAGEMENT SERVICES. API shall provide pharmacy benefit
management services for the benefit of the Plan in accordance with the
terms and conditions of this SECTION 3.
(a) ELIGIBILITY LIST AND UPDATES. As early as practicable for each Group
to which API will provide PBM Services hereunder, Client shall
provide API with a complete and final eligibility tape or list in an
agreed upon format which shall list all Eligible Members and set forth
all pertinent eligibility data (the "ELIGIBILITY LIST"). The
performance guarantees specified in EXHIBIT D with respect to a Group
shall not be effective until the eighth day following Client's
delivery to API of a complete and final Eligibility List for such
Group in a format consistent with API's requirements. Client shall
provide a complete and updated Eligibility List to API as frequently
as mutually agreed to by the parties hereto. For purposes of this
Agreement, an individual will be deemed an Eligible Member during the
period beginning on the third business day following delivery to API
of a revised Eligibility List which includes such individual and
ending on the third business day following delivery of a revised
Eligibility List which excludes such individual.
(b) NOTIFICATION AND PROGRAM PROMOTION. Client shall notify Eligible
Members that API has been selected to provide PBM Services. Client
shall use its best efforts to promote utilization of the PBM Services
to Eligible Members. As mutually agreed upon by API and Client, API
shall be permitted to meet with or otherwise communicate directly with
prospective Eligible Members concerning the PBM Services in a
reasonable manner and at various times.
(c) MAIL SERVICE. API shall fill Prescriptions for Eligible Members and
shall mail such drugs or medications to such Eligible Members subject
to the following terms and conditions:
3
<PAGE>
CONFIDENTIAL TREATMENT
(i) DISTRIBUTION OF INFORMATION. API shall provide Client with
copies of informational material explaining the mail service and
an adequate number forms necessary for Eligible Members to
utilize mail service. Client shall distribute the mail service
informational materials and forms to all Eligible Members.
(ii) DELIVERY AND DISPENSING. API shall dispense through its mail
service pharmacy new or refill Prescription orders upon receipt
from an Eligible Member of (i) a valid Prescription order or a
completed refill order form and (ii) the applicable co-payment,
if any. API shall cause the filled Prescriptions to be mailed to
each Eligible Member via common carrier at the address set forth
in the Eligibility List or as appearing on the face of the
Prescription. API shall not be liable to either Client or
Eligible Member for any delay in delivery resulting from
circumstances beyond API's control as set forth in SECTION 16(k)
of the Agreement.
(iii)MAIL SERVICE PHARMACY. API shall operate its mail service
pharmacy in compliance with state and federal pharmaceutical laws
and regulations and shall dispense only those prescription drugs
which, in its sole discretion, fulfill the requirements of the
prescription writer and comply with applicable law. The licensed
pharmacists employed by API in the mail service pharmacy shall
have the right to refuse to fill or renew a Prescription for any
Eligible Member when, in the pharmacist's professional judgment,
the filling or renewing of such Prescription is not in the best
interest of the Eligible Member or the pharmacist has reason to
doubt the authenticity of the Prescription.
(iv) GENERIC SUBSTITUTION. If a Prescription allows, and the patient
agrees to the substitution of a less expensive Generic Drug,
API's mail service pharmacy will fill the Prescription with a
Generic Drug which, in the professional judgment of the
dispensing pharmacist, fulfills the requirements of the
Prescription and applicable laws.
(v) THERAPEUTIC INTERCHANGE. API shall from time to time implement
Therapeutic Interchange programs through its mail service
pharmacy to promote Formulary products in accordance with the
procedure for implementing Formulary strategy set forth in
EXHIBIT E attached hereto.
(vi) PATIENT PROFILES AND DUR. API shall request information from
each Eligible Member to submit with his or her first mail order
Prescription a form containing information regarding, among other
things, any drug allergies of such Eligible Member. API shall
utilize this information to develop a patient profile on each
Eligible Member which will include the information submitted by
such member as well as a history of Prescription Drugs dispensed
to such member during the term of this Agreement. Each mail
order Prescription will be subject to DUR based on the patient
profiles and mail service utilization history as well as
concurrent DUR through the Advance Rx-Registered Trademark-
claims adjudication system (as further explained in SECTION
3(d)(iii) hereof). API shall not be liable for any indirect,
special or consequential damages arising from the use or lack of
use of such DUR services in accordance with SECTION 10 of this
Agreement.
(vii)QUANTITIES. API shall provide the quantity of the drug
specified by a Prescription or refill order in quantities of up
to a 90 day supply; PROVIDED, that API shall dispense the drugs
under any Prescription or refill order in accordance
4
<PAGE>
CONFIDENTIAL TREATMENT
with Plan design. API shall comply with all limitations imposed
on controlled substances.
(viii)TOLL FREE CLIENT SERVICE. API shall maintain, at its sole
expense, toll free "800" numbers for patient counseling for
Eligible Members, Client inquiries and other Client service or
informational needs.
(ix) BILLING FOR MAIL SERVICE. Approved Claims for Prescriptions
filled by the mail service pharmacy shall be included in the
Statement of Account as further described in SECTION 5 hereof.
(d) RETAIL PHARMACY NETWORK SERVICES AND CLAIMS ADJUDICATION. API shall
adjudicate claims for Prescription Drugs furnished by pharmacies under
the Plan in accordance with the following terms and conditions:
(i) PHARMACY NETWORKS.
(A) PRIMARY NETWORKS. The parties acknowledge that Client has
entered into agreements with certain retail pharmacies
located in the State of Texas which pharmacies constitute
the Primary Networks (as defined herein). The Eligible
Members will continue to utilize the Primary Networks to
obtain their Prescription Drugs in the State of Texas. API
shall process, and Client shall pay, the claims submitted by
the pharmacies participating in the Primary Network in
accordance with Client's agreements with such pharmacies.
(B) API NETWORK. In addition to the Primary Networks, the
Eligible Members shall have access to the nationwide API
Network outside of Texas and, as a Group specific option,
may have access to the API mail service pharmacy to obtain
Prescription Drugs. API shall process claims submitted by
the API Network in accordance with API's agreements with
such pharmacies. API shall provide, in a format mutually
agreed upon by Client and API a method for identification of
pharmacies participating in the API Network from a national,
state and local basis.
(C) CUSTOM NETWORK. API shall work with Client to develop
custom networks to meet specific Client needs.
(D) RELEASE OF INFORMATION. API shall furnish to each Network
Pharmacy such information regarding the applicable Plan and
Eligible Members as is necessary for the operation of the
Advance Rx-Registered Trademark- claims adjudication system.
Client hereby authorizes API to release such information to
the Network Pharmacies as API, in its sole discretion, deems
necessary regarding the applicable Plan and Eligible Members
to the Network Pharmacies.
(ii) CLAIMS ADJUDICATION. Through its Advance Rx-Registered
Trademark- claims adjudication system, API shall (A) process
electronic or manual claims submitted by pharmacies; (B) process
API claim forms submitted by Eligible Members; (C) determine
whether the claim qualifies for reimbursement in accordance with
the terms of the applicable Plan and the Eligibility List; and
(D) calculate the payment of such claims pursuant to the
applicable Plan (each such claim an "APPROVED CLAIM"). API shall
notify the submitting Network Pharmacy or Eligible Member of
nonreimburseable claims.
5
<PAGE>
CONFIDENTIAL TREATMENT REQUESTED
FOR THE BRACKETED PORTIONS
ON THIS PAGE
(iii) CONCURRENT DRUG UTILIZATION REVIEW. Through its Advance
Rx-Registered Trademark- system, API shall provide on-line
concurrent DUR messaging to the Network Pharmacies and will take
appropriate action based on Plan specifications. Concurrent DUR
shall include, but not be limited to, the following edits: (A)
duplicate therapy; (B) early refills and frequency limitations;
(C) duplicate drug; (D) potential drug interaction(s), in which
case the provider is notified on-line and the level of severity
would be indicated; (E) drug preference screening; and (F)
minimum/maximum dose range (which includes on-line alert of
pharmacist). API shall not be liable for any indirect, special
or consequential damages arising from the use or lack of use of
such concurrent DUR services in accordance with SECTION 10 of the
Agreement.
(e) FORMULARY SERVICES. API shall develop and maintain a formulary for
the benefit of the Plan (the "FORMULARY"). Copies of the Formulary
shall be distributed to (i) those physicians included in a Plan's
physician network (at a rate of one physician Formulary per 100
enrolled lives) or (ii) in the case of a non-physician managed Plan,
to those Eligible Members of such Plan. Client agrees to pay postage
and packaging in connection with all Formulary distributions. API
agrees to work directly with Client to institute Formulary steerage
controls at the point-of-sale, including without limitation, hard edit
blocks, differential patient copays, soft edits (e.g. on-line
formulary messages), promoting Formulary compliance to pharmacists and
therapeutic interchange programs.
(f) CLINICAL SERVICES. API and Client's Clinical Pharmacy Department
shall work together to develop programs and initiatives which promote
appropriate and cost-effective pharmacotherapy. API shall, upon
request of and at no additional cost to Client:
(i) produce monographs for new agents;
(ii) provide drug/medical information services;
(iii) design drug use evaluation (DUE) programs, including criteria
development, validation by Clients's prescribers, data
collection, intervention and follow-up assessments;
(iv) analyze prescription claims data (and medical claims data when
available) to target areas for intervention;
(v) produce and deliver to Client a quarterly newsletter
customized to Client topics and initiatives. API shall bear up
to $3,000 per Quarter of the expenses associated with such
newsletter; and
(vi) provide P&T Committee support.
(g) REBATE SERVICES. Beginning October 1, 1995, API will obtain rebates
from drug manufacturers (the "REBATES") based on the Plans' drug
utilization for each calendar quarter.
(i) PAYMENT OF REBATES. The parties agree that Rebates will amount
to not less than [.....] per paid, rebatable claim calculated on an
annualized basis; provided that such amount shall be contingent upon Client
implementing Formulary strategies recommended by API, in accordance with the
procedure for implementing Formulary strategy set forth in EXHIBIT E attached
hereto. API will pay Client the guaranteed Rebate payment on a [.....] basis
beginning [.....] days after the end of the first full calendar quarter of
processing. Payment adjustments representing amounts in excess of the
guaranteed amount, drug price changes, etc. will be made as mutually agreed
upon by the parties.
(ii) MEDICAID/MEDICARE ELIGIBLE MEMBERS. No Rebates shall be obtained
for drug utilization which has been submitted by any entity other
than API, specifically including Medicaid, Medicare or other
state or federal health care program which receives Rebates
directly from drug manufacturers, to drug manufacturers for
discounts, rebates or other price reduction. Client shall
clearly identify to API those Eligible Members whose drug
utilization has been otherwise submitted to drug manufacturers or
whose claims have been or will be filed for reimbursement with
Medicaid, Medicare or any other state or federal health care
program. If Client fails to identify such members or claims and
any drug manufacturer's audit
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CONFIDENTIAL TREATMENT REQUESTED
FOR THE BRACKETED PORTIONS
ON THIS PAGE.
of its rebate program reveals improperly calculated rebates
involving such members and claims, then Client shall be solely
responsible for the reimbursement of any Rebates improperly made
based on such drug utilization. Notwithstanding the foregoing,
this provision shall not be construed to prohibit Client from
participating in Medicare risk contracting.
(h) APOTHEQUERY-Registered Trademark- SERVICES. Subject to the terms and
conditions hereof, Client shall be entitled to utilize the
ApotheQuery-Registered Trademark- system. API will provide Client
with training for use of ApotheQuery-Registered Trademark- and
[......] hours per month of on-line query access in accordance with
EXHIBIT F attached hereto. The parties will mutually agree upon a
management report to reflect Client's utilization of the
ApotheQuery-Registered Trademark- system.
(i) CLAIMS ADJUDICATION SYSTEM ACCESS. During the term of this Agreement,
API agrees to provide Client with reasonable on-line access to the
data maintained by API on behalf of Client. API shall consult with
Client regarding the hardware and software necessary to access API's
claims adjudication system. API shall provide Client with training
and support to obtain access to API's claims adjudication system.
Client agrees to cooperate with API in the development of an efficient
means of access. All reasonable costs associated with Client's
connectivity to API's current claims adjudication system, as it exists
on the commencement date of this Agreement as specified in SECTION 7,
shall be borne by Client.
4. PAYMENT FOR SERVICES.
(a) ADMINISTRATIVE FEE. Client agrees to pay API a monthly
administrative fee in consideration of the claims adjudication,
clinical management and formulary/rebate services rendered by API
in an amount equal to
[.....]
[.....]
(b) MAIL SERVICE REIMBURSEMENT RATE. Client agrees to pay the claims
submitted for prescriptions dispensed by the mail service
pharmacy at the following rates:
Brand Drugs: [......] plus a [ ......] dispensing fee
Generic Drugs: [......] plus a [...... ] dispensing fee.
(c) NETWORK PHARMACY REIMBURSEMENT RATE. Client agrees to pay the
approved claims of the pharmacies participating in the API
Network outside of the State of Texas or custom networks at
either the following rates or, with respect to any custom
networks, those negotiated rates mutually agreed upon by API and
Client:
Brand Drugs: [......] plus a [......] dispensing fee
Generic Drugs: [......] plus [......] dispensing fee;
PROVIDED, however, that the approved claims of those pharmacies
participating in the Primary Networks shall be paid at the rates set
forth in the Client's contract with such pharmacies.
(d) APOTHEQUERY-Registered Trademark- FEE. Client agrees to pay API
a monthly fee for the utilization of the ApotheQuery-Registered
Trademark- system in an amount equal to [......]. Each such
claim shall be stored on-line for up to a maximum of [......] of
rolling data.
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CONFIDENTIAL TREATMENT REQUESTED
FOR THE BRACKETED PORTIONS
ON THIS PAGE.
5. PAYMENT OF APPROVED CLAIMS.
(a) STATEMENT OF ACCOUNT. API shall submit to Client on a weekly
basis a statement of account (the "STATEMENT OF ACCOUNT") that
reflects the total number and dollar amounts of the Approved
Claims.
(b) PAYMENT OF STATEMENT OF ACCOUNT. Client agrees to pay the amount
of the Approved Claims reflected on the Statement of Account
within two (2) business days of receipt of the Statement of
Account by wire or electronic funds transfer to an account
designated by API.
(c) PAYMENT OF APPROVED CLAIMS. API shall mail drafts drawn on an
account of API to each pharmacy or Eligible Member in the amount
of their respective Approved Claims within three (3) business
days of receipt of payment of the Statement of Account. API
shall have no obligation to release or mail payment of any
Approved Claims until payment of the Statement of Account is
received by API.
(d) CESSATION OF SERVICES. Should Client, for any reason, fail to
pay timely any Statement of Account in accordance with SECTION
5(B) hereof, or become insolvent or generally unable to pay its
creditors when due, API shall notify Client of such default and,
if such default remains uncured for five (5) days following such
notice, API shall be entitled to cease adjudication of claims
and/or the dispensing of Prescriptions under this Agreement while
maintaining all of API's rights hereunder.
6. RECORDS, REPORTS AND PROFILES.
(a) MAINTENANCE OF RECORDS. API shall maintain, in original form, on
microfilm or computer tape, documentation of all claims processed
and Prescriptions filled via mail service for five (5) years.
All such records shall remain accessible to Client for
examination and audit by Client throughout the calendar year in
which they are created and for such additional period as may be
required by Federal or State law. In addition, API shall
maintain, in original form, on microfilm or computer tape, a copy
of this Agreement in accordance with applicable law. API
understands that documentation of each claim processed is
proprietary and confidential information of Client and shall be
treated as such in accordance with SECTION 13 of this Agreement;
provided however that the foregoing shall not limit API's right
to use such data so long as patients' name and address and
Client's identity are in an Encrypted Format.
(b) MANAGEMENT INFORMATION REPORTS. API shall provide Client with
the reports specified in EXHIBIT B hereto in accordance with the
schedule set forth in EXHIBIT B.
(c) SPECIAL REPORTS. Any reports which are not set forth in EXHIBIT
B shall be considered "Special Reports." Client agrees that for
each Special Report, Client shall pay API for the programming
necessary to produce such Special Reports at a rate of (i)
[......] per in-house man-hour of programming time, or, (ii) in
the event API must outsource such programming services to a
programmer from its software vendor, [......], provided that API
agrees to comply with the following procedure:
(i) API must receive a request for a Special Report from an
employee in Client's Pharmacy Programs Department who has
been identified by Client in writing as a "designated
person" for purposes of this SECTION 6(c);
(ii) API must deliver an estimated cost of programming the
Special Report to such designated person; and
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<PAGE>
CONFIDENTIAL TREATMENT
(iii)API must receive authorization from such designated person
prior to programming and running the Special Report.
API shall be entitled to rely on Client's representations
regarding the authority of any employee who acts as a "designated
person" under this SECTION 6(c).
7. TERM AND RENEWAL.
Unless otherwise terminated in accordance with SECTION 8 herein, or
otherwise extended, this Agreement shall commence on September 1,
1995 and end on September 30, 1997; provided that the parties
acknowledge that the Formulary/Rebate Services shall not commence
until October 1, 1995. This Agreement shall automatically renew
for a twelve-month period on October 1, 1997, and on each October 1
thereafter (each a "renewal date"), unless either party notifies
the other in writing within ninety (90) days prior to the renewal
date of such year of its intent to terminate this Agreement.
8. TERMINATION AND DEFAULT.
(a) TERMINATION. In addition to API's and Client's right under
SECTION 5(d) hereof, this Agreement may be terminated as follows:
(i) Upon the mutual written consent of the parties hereto;
(ii) At either party's option, if the other party fails to comply
with any provision of this Agreement and fails to correct
such failure within thirty (30) days of receipt of written
notice of such failure to comply (which notice shall
describe the action that the other party must take to
correct such failure);
(iii) At either party's option, if the other party becomes
insolvent or seeks protection voluntarily or involuntarily,
under any bankruptcy laws;
(iv) At Client's option, if API accepts a bona fide offer to sell
substantially all of the assets or stock of API; provided
that, within thirty (30) days of the effective date of such
sale, Client gives API thirty (30) days written notice of
intention to terminate; or
(v) At either party's option, without cause, upon one hundred
twenty (120) days written notice of intention to terminate.
Client agrees that if it exercises this option during the
initial term of this Agreement, Client will pay to API an
early termination penalty according to the following
schedule:
Date on which Termination Occurs Early Termination Penalty
-------------------------------- -------------------------
09/01/95 through 12/31/95 $300,000
01/01/96 through 03/31/96 250,000
04/01/96 through 06/30/96 200,000
07/01/96 through 09/30/96 150,000
10/01/96 through 12/31/96 100,000
01/01/97 through 03/31/97 50,000
After 04/01/97 -0-
(b) DEFAULT, PAYMENT OBLIGATIONS AND INTEREST.
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<PAGE>
CONFIDENTIAL TREATMENT
(i) UNFULFILLED PAYMENT OBLIGATIONS. In the event either API or
Client terminate this Agreement in accordance with the terms
of SECTION 8(a), all unfulfilled payment obligations for any
of the services provided herein shall be paid within thirty
(30) days of the effective date of such termination;
provided that all Rebates shall be payable to the Client
within thirty (30) days of receipt from the manufacturer.
(ii) INTEREST ON LATE PAYMENTS. If Client or API fails to pay
any amounts due under this Agreement within fourteen (14)
days of the due date, such amount shall bear interest from
the date due until paid in full, at the rate of interest
determined by Texas Commerce Bank National Association as
its prime rate.
9. INDEMNIFICATION.
Each party and its officers, directors, employees, agents, successors
and assigns (each an "INDEMNITEE") shall be indemnified and held
harmless by the other party (the "INDEMNIFYING PARTY") against any and
all claims, loss, damage, costs and expenses ("LOSS"), including,
without limitation, attorneys' fees and expenses, actually incurred by
any Indemnitee arising out of or resulting from the actions or
omissions of the Indemnifying Party. Client further agrees to
indemnify and hold API, its officers, directors, employees, agents,
successors and assigns harmless from any Loss actually suffered or
incurred arising out or resulting from any claim or demand by current
or previous Eligible Members relating to this Agreement, including
without limitation any disclosures made by API, its officers,
directors, employees, agents, successors and assigns in accordance
with the terms and conditions hereof.
10. LIMITATION OF LIABILITY.
IN NO EVENT SHALL API BE LIABLE TO CLIENT OR ANY ELIGIBLE MEMBER FOR
ANY INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES OR LOST PROFITS,
ARISING OUT OF OR RELATED TO API'S PERFORMANCE UNDER THIS AGREEMENT OR
BREACH HEREOF, EVEN IF API HAS BEEN ADVISED OF THE POSSIBILITY
THEREOF. API'S LIABILITY TO CLIENT UNDER THIS AGREEMENT, IF ANY,
SHALL IN NO EVENT EXCEED THE TOTAL AMOUNT OF COMPENSATION DUE API FOR
THE PRIOR TWELVE (12) MONTHS OF THIS AGREEMENT.
API RELIES ON MEDI-SPAN OR INDUSTRY COMPARABLE DATABASES IN PROVIDING
CLIENT AND ELIGIBLE MEMBERS WITH DRUG UTILIZATION REVIEW SERVICES.
API HAS UTILIZED DUE DILIGENCE IN COLLECTING AND REPORTING THE
INFORMATION CONTAINED IN THE DATABASES AND HAS OBTAINED SUCH
INFORMATION FROM SOURCES BELIEVED TO BE RELIABLE. API, HOWEVER, DOES
NOT WARRANT THE ACCURACY OF REPORTS, ALERTS, CODES, PRICES OR OTHER
DATA CONTAINED IN THE DATABASES. THE CLINICAL INFORMATION CONTAINED IN
THE DATABASES AND THE FORMULARY IS INTENDED AS A SUPPLEMENT TO, AND
NOT A SUBSTITUTE FOR, THE KNOWLEDGE, EXPERTISE, SKILL, AND JUDGMENT OF
PHYSICIANS, PHARMACISTS, OR OTHER HEALTH-CARE PROFESSIONALS IN
ELIGIBLE MEMBERS' CARE. THE ABSENCE OF A WARNING FOR A GIVEN DRUG OR
DRUG COMBINATION SHALL NOT BE CONSTRUED TO INDICATE THAT THE DRUG OR
DRUG COMBINATION IS SAFE, APPROPRIATE OR EFFECTIVE IN ANY ELIGIBLE
MEMBER.
11. AUDIT.
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CONFIDENTIAL TREATMENT
(a) AUDITS OF ELIGIBLE MEMBERS AND BUSINESS RECORDS. Client shall
have the right to audit the business records of API which
directly relate to billings made to Client for claims
reimbursement. Client and API shall fully cooperate with
representatives of each other and with independent accountants
hired by either party to conduct any such inspection or audit.
Such audits shall be at the auditing party's sole expense and
shall only be made during normal business hours, following
fifteen (15) days written notice, and without undue interference
to the audited party's business activity. If, after completion
of the audit under this SECTION 11(a), the audit reveals a
discrepancy in the results of the audit and the previous
calculations of the audited party, then the auditing party shall
deliver written notice which sets forth in reasonable detail the
basis of such discrepancy. The parties shall use reasonable
efforts to resolve the discrepancy within 30 days following
delivery of such notice, and such resolution shall be final,
binding and conclusive upon the parties hereto. If API and
Client are unable to reach a resolution within such 30-day
period, the parties shall resolve such dispute in accordance with
SECTION 14 hereof.
(b) RIGHT TO AUDIT REBATES. Client, at its sole expense, shall have
the right to audit the Rebates, including the contracts with drug
manufacturers applicable thereto, once in each twelve-month
period (following fifteen (15) days written notice to API) for
the purpose of validating the accuracy of the Rebate amounts
distributed to Client by API. Client and API agree that an
independent accounting firm agreeable to the parties hereto shall
conduct such audit, and that such firm will sign a
confidentiality statement with API insuring that all details and
terms of all manufacturers rebate contracts with API (except the
total aggregate amount due to Client) will be treated as
confidential to API and will not be revealed in any manner or
form by or to any person or entity. The report and determination
of the independent accounting firm under this SECTION 11(b) shall
be final, binding and conclusive on API and Client.
(c) PAYMENT OF DISCREPANCIES. Upon a final and conclusive
determination of a discrepancy revealed by an audit procedure
under this SECTION 11, the party which owes money shall pay such
sums to the other party within fifteen (15) days of the delivery
of the conclusive audit findings.
12. EXCLUSIVITY.
Client hereby grants API during the term of this Agreement, and any
renewals hereof, the exclusive right to provide PBM Services to those
Groups for which Client underwrites the pharmacy benefit; provided
that should any Group specifically request a PBM Services vendor other
than API, then, subject to API consent, which consent shall not be
unreasonably withheld, Client may utilize such vendor for purposes of
providing PBM Service to that Group. In addition, Client agrees that
it will promote API to all Groups as Client's preferred provider of
pharmacy benefit services and shall recommend that all Groups select
API as their vendor of pharmacy benefit management services. Client
agrees that, during the term of this Agreement, and any renewals
hereof, it will not negotiate, contract, or agree with any drug
manufacturer for the purpose of obtaining drug rebates unless
otherwise approved by API, which approval shall not be unreasonably
withheld. Client also agrees to cancel any existing agreement or
contracts with any drug manufacturers related to such drug rebates as
of the Effective Date of this Agreement unless otherwise approved by
API, which approval shall not be unreasonably withheld.
13. CONFIDENTIALITY.
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CONFIDENTIAL TREATMENT
(a) CONFIDENTIAL AND PROPRIETARY INFORMATION. Client and API each
recognize and acknowledge that, by receipt and possession of
certain information of the other, each will discover certain of
the other's confidential and proprietary information, skills,
know-how, technical expertise, and methods. This confidential and
proprietary information includes, but is not limited to: (a) the
terms of this Agreement, (b) the content and format of all
reports generated by the parties under this Agreement, (c)
details of the operation of the PBM Services and (d) the
Formulary. Each party acknowledges and agrees that such
information is confidential, valuable and proprietary to the
business of each party, and that each party's success and ability
to compete depends on keeping such information confidential.
Each party hereto covenants and agrees not to, directly or
indirectly, and agrees to cause its officers, directors,
employees, agents and affiliates not to, use, publish,
disseminate or otherwise disclose, any of the other party's
confidential or proprietary information now or later possessed by
each, without prior written consent of the other party.
(b) CONFIDENTIALITY OF ELIGIBILITY LISTS. API agrees that all
Eligibility Lists are the proprietary and confidential
information of the Client and agrees that, subject to SECTION
3(d)(i) hereof, it will not disclose any such information to
third parties, without the prior written consent of the Client;
provided that upon receipt of a request for information
pertaining to an Eligible Member that is signed by such Eligible
Member, API shall be entitled to release such information in
accordance with the request. API shall be entitled to assume the
genuiness of all signatures, the authenticity of all such
requests, the conformity of copies of such requests to the
original and that the persons executing such requests have full
power and authority to deliver such request.
(c) BREACH OF CONFIDENTIALITY COVENANT. API and Client acknowledge
that any violation or breach of confidentiality would cause
irreparable harm and that such harm cannot be adequately
compensated in money damages. API and Client agree that any such
violation or breach may be enjoined by any court of competent
jurisdiction, without waiver of any other right to claim damages
incurred by either API or Client in connection with such a
violation.
14. NOTICE UPON SALE.
API shall notify Client at least fifteen (15) days prior
to API accepting a third party's offer to purchase substantially
all of its assets or stock (the "First 15-Day Period"). During the
First 15-Day Period, Client may notify API of its intent to make a
good faith offer to purchase substantially all of the assets or
stock of API and, for the fifteen (15) day period following such
notice (the "Second 15-Day Period"), API agrees not to accept the
third party's offer. API agrees to consider in good faith any offer
extended by Client. Should API make a good faith determination not
to accept Client's offer, API shall be free to accept the original,
third-party offer at the conclusion of the Second 15-Day Period.
15. ARBITRATION.
Any controversy or claim arising out of or relating to this Agreement,
or the breach hereof, shall be settled by arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration
Association. The award rendered in such arbitration may provide for
equitable remedies, reimbursement for attorney's or accountant's fees,
and/or pre-award interest as the arbitrators shall see fit. Such
award shall be final, and judgment on it may be entered in or enforced
by any court, state or federal, having jurisdiction thereover. This
provision shall not preclude the impleading or joining of one of the
parties hereto by another party in an action brought by a third party.
Any party may apply to an appropriate court of law for a preliminary
injunction, attachment or other similar remedy available to it in aid
of the arbitration proceedings provided for herein. The arbitrators
shall have the
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CONFIDENTIAL TREATMENT
power and may render awards in support thereof, to require any party
to an arbitration proceeding hereunder to produce relevant documents
for inspection and copying by any other party to such arbitration
proceedings.
16. GENERAL.
(a) NOTICE. Any notice required to be given pursuant to the terms
and provisions of this Agreement shall be in writing and shall be
sent by certified mail, return receipt requested, or by overnight
delivery service to the parties at the addresses below or such
other address as shall be specified by the parties by like notice
to API at:
Advance ParadigM, Inc.
Attn: Vice President - Legal Affairs
P.O. Box 542906
Dallas, Texas 75354-2906
and to Client at:
Blue Cross and Blue Shield of Texas
Attn: Mr. Lyndol Cypert
P.O. Box 655924
Dallas, TX 75265-5924
(b) BINDING NATURE AND ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their
successors and assigns. Neither party may assign this Agreement
without the prior written consent of the other; PROVIDED,
however, that either party may transfer or assign its rights and
obligations under this Agreement, to any affiliate, and PROVIDED
further that no such assignment shall have the effect of
releasing such party from any of its obligations under this
Agreement.
(c) HEADINGS AND INTERPRETATION. The headings of the various
sections of this Agreement are inserted for convenience only and
do not, expressly or by implication, limit, define or extend the
specific terms of the section so designated.
(d) GOVERNING LAW. The validity, enforceability, and interpretation
of this Agreement shall be determined and governed by the
internal laws of the State of Texas (and not the law of
conflicts).
(e) ENTIRE AGREEMENT. This Agreement contains all the terms and
conditions agreed upon by the parties, and supersedes all prior
understandings, writings, proposals, representations, or
communications, oral or written, of the parties hereto.
(f) AUTHORITY. API and Client warrant that each has full power and
authority to enter into and perform this Agreement, and the
person signing this Agreement on behalf of each party certifies
that such person has been properly authorized and empowered to
enter into this Agreement on behalf of such party.
(g) NON-COMPETITION IN HIRING. During the term of this Agreement,
and for a period of one (1) year thereafter, neither Client nor
API shall, without the prior written consent of the other party,
knowingly employ or solicit for hire, or knowingly allow its
officers, directors, agents or affiliates to employ or solicit
for hire, any employees of the other party.
13
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(h) NON-WAIVER. The failure of either party to insist, in any one or
more instances, upon performance of any of the terms, covenants
or conditions of this Agreement shall not be construed as a
waiver or a relinquishment of any right or claim granted or
arising hereunder or of the future performance of any such term,
covenant, or condition, and such failure shall in no way affect
the validity of this Agreement or the rights and obligations of
the parties hereunder.
(i) OFFSET. In the event of a payment default by Client which
remains uncured for a period of fourteen (14) days from the date
due, API shall be entitled, and Client hereby authorizes API, to
offset the amount of such payment defaults against any Rebates
payable to Client hereunder; provided, that nothing in this
SECTION 6(i) shall in anyway limit the performance guarantees
specified in EXHIBIT D.
(j) RELATIONSHIP OF PARTIES. This Agreement shall not constitute or
otherwise imply a joint venture, pooling arrangement, partnership
or formal business organization of any kind. Both parties shall
be considered independent contractors and neither party shall be
considered an agent of the other. Under no circumstances shall
employees of one party be deemed the employees of the other
party.
(k) FORCE MAJEURE. Neither API nor Client shall be liable for any
failure or delay in performing all or part of their respective
obligations under the terms of this Agreement resulting from
unavailability of pharmaceuticals, failure of drug manufacturers
to pay Rebates, legislative action, war, acts of any person
engaged in a subversive activity, sabotage, riot, strikes, slow-
downs, lock-outs, or labor stoppage, freight embargoes, fires,
explosions, flood, earthquake or other acts of God, or by reason
of the judgment, filing or order of any court or agency of
competent jurisdiction occurring subsequent to the signing of
this Agreement, or any other similar circumstances beyond their
control.
(l) SURVIVAL. Should any part, term or condition of this Agreement
be declared illegal or unenforceable or in conflict with any
other laws, the remaining provisions shall be valid and not
affected thereby.
(m) COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all
of which taken together shall constitute one and the same
instrument.
(n) DEPARTMENTS OF INSURANCE. The parties acknowledge that each
party is subject to the statutes and regulations in the states in
which this Agreement will be performed. The parties acknowledge
that the laws and regulations of several states permit
Departments of Insurance to have access to API's books and
records relating to this Agreement for purpose of examination,
audit and inspection, subject to confidentiality obligations.
[APPLICABLE ONLY IF ANY ELIGIBLE MEMBERS RESIDE IN ARIZONA: API
shall provide at least fifteen (15) days' written notice of the
termination, cancellation or any other change in the terms of
this Agreement to those Departments of Insurance identified in
EXHIBIT C hereto.]
(o) FURTHER ASSURANCES. From time to time upon request and without
further consideration, the parties hereto shall, and shall cause
their subsidiaries, to execute, deliver or acknowledge such
documents and do such further acts as the other party hereto may
reasonably require to effectuate its obligations contemplated by
this Agreement.
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(p) NON-AFFILIATION WITH BCBSA. API understands that this Agreement
constitutes a contract between API and Blue Cross Blue Shield of
Texas, Inc. (BCBSTX) as "Client", that BCBSTX is an independent
corporation operating under a license from the Blue Cross Blue
Shield Association, an association of independent Blue Cross and
Blue Shield Plans (the "Association"), permitting BCBSTX to use
the Blue Cross Blue Shield Service Marks in Texas, and that
BCBSTX is not contracting as the agent of the Association. API
acknowledges that it has not entered into this Agreement based
upon representations by any person other than BCBSTX and that no
person, entity or organization other than BCBSTX shall be held
accountable or liable to API for any of BCBSTX's obligations to
API created under this Agreement. This Paragraph 7.15(c) shall
not create any additional obligations whatsoever on the part of
BCBSTX other than those obligations created under other
provisions of this Agreement.
(q) SERVICE MARKS. Client retains the exclusive right to any
distinctive trademarks or service marks (collectively referred to
herein as "marks") that may presently exist or may hereafter be
adopted, including, but not limited to, the Blue Cross Blue
Shield trade name and service marks. API agrees not to use the
marks in any manner without the prior written consent of Client
and upon the termination of its obligations under this Agreement,
API shall immediately discontinue the use of such marks and
forthwith destroy or return to Client any tangible materials
bearing such marks.
(r) PERFORMANCE GUARANTEES. Subject to the terms and conditions of
this Agreement, API shall adhere to and comply with all
performance guarantees as described in EXHIBIT D.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their proper and duly authorized officers on the date
first above written. By executing the Agreement, the undersigned individuals
hereby warrant and represent that they have read this Agreement in its entirety
and agree to all its terms.
ADVANCE PARADIGM, INC.
/s/ David D. Halbert
By:
------------------------------------
David D. Halbert
Chief Executive Officer
BLUE CROSS AND BLUE SHIELD OF TEXAS
/s/ Lyndol J. Cypert
By:
------------------------------------
Name: Lyndol J. Cypert
Title: Vice President
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CONFIDENTIAL TREATMENT
EXHIBIT A
[Intentionally Left Blank]
1
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CONFIDENTIAL TREATMENT
EXHIBIT B
MANAGEMENT INFORMATION REPORTS
STANDARD REPORTS AND FREQUENCY
REPORT # & NAME FREQUENCY & FORMAT
--------------- ------------------
1013/Financial Util Summary Weekly/paper
2010/Mbr Util Detail Monthly & quarterly/tape*
2020/Grp Util Summary Request/paper
2022/Grp Util Summary PMPM Request/paper
2030 Age/Sex Util Summary Annual/paper
3030/Brand/Generic Util Monthly/paper
3070/Drug Rank - Cost Request & quarterly/paper
3080/Drug Rank - GPI Request & quarterly/paper
3140/Therapeutic Class Rank Quarterly/paper
4040/Pharm Provider Performance Request/paper
4050/Pharmacy Error Summary Weekly/paper
Rebate Performance Summary Quarterly/paper
Paper Claim Report Weekly/paper (17 & 18)
National Network Utilization Monthly/paper (17 & 18)
Savings from DUR Quarterly/paper (17 & 18)
Measurement of Performance Monthly/paper
Members First Savings Monthly/paper
STANDARD EDIT REPORTS
NAME OF REPORT FREQUENCY & FORMAT
-------------- ------------------
1. Group Preload, Stage, Load Weekly/paper
(Summary & Detail)
2. Eligibility Preload, Stage, Load Weekly/paper
(Summary & Detail)
3. Members active in 2 groups Weekly/paper
* Reports required via tape media will be provided by Advance ParadigM on
9 track, 1/2 inch reel, EBCDIC format tapes, to be formatted by BCBS-Tx
for on-line availability to its personnel.
THE PARTIES UNDERSTAND THAT CLIENT'S REPORTING NEEDS ARE SUBJECT TO CHANGE
AND AGREE THAT THIS EXHIBIT B SHALL BE AMENDED FROM TIME TO TIME TO REFLECT
CLIENT'S CHANGING REPORTING NEEDS. THE PARTIES ACKNOWLEDGE THAT THIS EXHIBIT
B COVERS ONLY API'S STANDARD REPORTS.
2
<PAGE>
CONFIDENTIAL TREATMENT
EXHIBIT C
DEPARTMENTS OF INSURANCE
Arizona Department of Insurance
Corporate and Financial Affairs Division
2910 North 44th Street, Suite 210
Phoenix, AZ 85018-7256
3
<PAGE>
CONFIDENTIAL TREATMENT
REQUESTED FOR THE BRACKETED
PORTIONS ON THIS PAGE
EXHIBIT D
PERFORMANCE GUARANTEES
The Performance Guarantees below will be measured by averaging
API's performance in each category during each [.....]. If API
fails to meet a Performance Guarantee for [.....], it will pay
Client an amount equal to that portion of the [.....] paid by
Client during that [.....] (the "[.....]") as set forth in the
"Penalty" column below. The aggregate "Penalties" paid by API for
any [.....] shall not exceed [.....].
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
CRITERIA GUARANTY PENALTY
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Claim Processing Accuracy Claims will be processed within [.....] for each
[.....]% overall accuracy. percentage point below target accuracy rate, up to
[.....]% of claims will be paid in to a maximum of [.....].
accordance with Plan design.
- ---------------------------------------------------------------------------------------------------------------------------------
System Availability The system will be available for claim [.....] for each
adjudication [.....]% of the scheduled [.....] point the system is unavailable, up to a
up-time. maximum of [.....].
- ---------------------------------------------------------------------------------------------------------------------------------
Prescription Turnaround Time Where no intervention is necessary, [.....] for each
(Mail) necessary, [.....]% of the prescriptions day below standard turnaround time, up to a
will be filled and mailed within [.....] time, up to a maximum of [.....].
business days.
- ---------------------------------------------------------------------------------------------------------------------------------
Customer Service
Call Response Time Average response time will not be [.....] for each
more than [.....]. [.....] over that level, up to a maximum
of [.....].
Abandonment Rate Abandonment rate will average less [.....] for
than or equal to [.....]%. each [.....] percentage points over that amount
up to a maximum of [.....].
- ---------------------------------------------------------------------------------------------------------------------------------
Eligibility Loads Eligibility provided on tape in an [.....] for each
approved format will be loaded [.....] over that level, up to a maximum
within [.....]* of receipt. of [.....].
- ---------------------------------------------------------------------------------------------------------------------------------
Production Reports Monthly Reports will be mailed [.....] each
w/in [.....]days of month-end; [.....] over that level, up to a maximum of
Quarterly Reports will be mailed w/in [.....].
[.....] days of each calendar quarter-end.
- ---------------------------------------------------------------------------------------------------------------------------------
Claims Payment Tapes Tapes will be shipped within [.....] [.....] for each
of close of cycle. [.....] beyond the [.....] time frame, up to a
maximum of [.....].
- ---------------------------------------------------------------------------------------------------------------------------------
Inquiries [.....]% of Eligible Members' inquiries [.....] for each
regarding API's service will be [.....] past that level, up to a maximum of [.....].
responded to w/in [.....] of receipt of
such inquiry.
[.....]% of such inquiries will be
responded to within [.....] of receipt
of such inquiry.
[.....]% of such inquiries will be
responded to within [.....] of receipt
of such inquiry.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The time period for this guarantee shall be tolled in the event the delay
is attributable to Client's actions or omissions.
<PAGE>
CONFIDENTIAL TREATMENT
REQUESTED FOR THE BRACKETED
PORTIONS ON THIS PAGE
EXHIBIT E
PROCEDURE FOR IMPLEMENTING FORMULARY STRATEGY
1. From time to time during the term of this Agreement, API shall
deliver to Client in writing any new Formulary strategies (the
"Formulary Strategies") determined by API's clinical staff to be
advisable to implement in Client's market. The Formulary Strategies
will generally be categorized as (a) the specific products determined by
API's clinical staff to be appropriate for inclusion and/or promotion
(the "Restricted Formulary") and (b) the processes necessary to
effectively implement the promotion of preferred, clinically appropriate
Formulary drugs (the "Steerage Strategies"). For each contract year of
this Agreement, API will provide Client with a general description of
the Formulary Strategies anticipated for the upcoming twelve months.
2. API acknowledges that Client may develop Formulary Strategies from
time to time that are designed to achieve substantially similar results
to the Formulary Strategies recommended by API; provided that any
products introduced by Client to be included on the Restrictive
Formulary shall be clinically appropriate. Client's recommended
strategies may be adopted in lieu of API's Formulary Strategies upon the
mutual agreement of the parties; provided that, if the parties agree to
adopt a strategy recommended by Client that conflicts with, inhibits, or
otherwise limits, the Rebate potential of the Restricted Formulary, then
the Rebate guarantee specified in Section 3(g)(i) of this Agreement will
no longer be in effect.
3. Client and its P&T Committee will review the Formulary Strategies
and will notify API within thirty days of its approval of the strategies
or any concerns Client may have with respect to the implementation of
any Formulary Strategy; provided that, subject to the consent of API
which will not be unreasonably withheld, Client may request an
additional thirty day period. The parties shall work together to
implement the Formulary Strategies approved by Client.
4. API's obligation to meet the [.....] Rebate guarantee on an
annualized basis as specified in Section 3(g)(i) of this Agreement shall
not be in effect until such time as the Formulary Compliance Rate (as
defined below) increases by at least [.....] from the Formulary
Compliance Benchmark (as defined below).
"FORMULARY COMPLIANCE RATE" shall be (i) the number of
prescriptions dispensed to Eligible Members that were written for a
Restrictive Formulary drug during each calendar quarter DIVIDED BY
(ii) the number of total prescriptions dispensed to Eligible
Members during each calendar quarter.
"FORMULARY COMPLIANCE BENCHMARK" shall refer to the [..]% Formulary
Compliance Rate for Client's claims data [.....], as further
described in the letter dated December 12, 1995 to Lyndol Cypert,
Client's Vice President Health Industry Relations and Development,
from Joseph J. Filipek, Jr., P.D., Executive Vice President of API.
The "prototype formulary" referred to in such letter is API's
Restricted Formulary as of the date of the letter.
5
<PAGE>
CONFIDENTIAL TREATMENT
REQUESTED FOR THE BRACKETED
PORTIONS ON THIS PAGE
If Client's Formulary Compliance Rate for the [.....] and [.....]
is at least [..]%, then the Rebate guarantee amount will be due
Client for the period beginning October 1, 1995 through and
including June 30, 1996. Nothing herein shall be construed as
limiting API's obligation to pass-through to Client all Rebates
attributable to Client's drug spend that are received by API from
drug manufacturers. For purposes of determining API's continued
obligation to meet the Rebate guarantee, Client's Formulary
Compliance Rate will be measured on a quarterly basis. In
addition, a negotiated tiered approach will be taken when new drugs
are added to the formulary, allowing BCBS-TX to roll in the
negative effect of a new product to the market class without
tolling API's obligation to meet the Rebate guarantee.
6
<PAGE>
CONFIDENTIAL TREATMENT
REQUESTED FOR THE BRACKETED
PORTIONS ON THIS PAGE
EXHIBIT F
APOTHEQUERY-Registered Trademark- ACCESS
1. In the first month of any Quarter, Client shall be entitled to [.....]
hours of on-line access to the ApotheQuery-Registered Trademark- system.
In the event Client utilizes less than [.....] hours of such access in
the first month of any Quarter, Client may carry-forward up to a maximum
of [.....] such unused hours into the second month of such Quarter
(referred to as the "FIRST MONTH CARRY-FORWARD").
2. In the second month of any Quarter, Client shall be entitled to (i)
[.....] hours of on-line access to the ApotheQuery-Registered Trademark-
system PLUS (ii) up to [.....] additional hours as a result of the First
Month Carry-Forward. In the event Client utilizes less than the [.....]
hours of its access time in the second month of any Quarter, Client may
carry-forward up to a maximum of [.....] such unused hours (referred to
as the "SECOND MONTH CARRY-FORWARD") PLUS the hours attributable to the
First Month Carry-Forward into the third month of such Quarter .
3. In the third month of any Quarter, Client shall be entitled to (i) [.....]
hours of on-line access to the ApotheQuery-Registered Trademark- system
PLUS (ii) up to [.....] additional hours as a result of the First Month
Carry-Forward PLUS (iii) up to [.....] additional hours as a result of
the Second Month Carry-Forward. For example, if Client has utilized
less than [.....] hours of on-line access time in each of the first two
months of any Quarter, then in the third month of such Quarter, Client
shall be entitled to a maximum of [.....] of on-line access to the
ApotheQuery-Registered Trademark- system. After the third month of each
Quarter, Client shall not be entitled to carry-forward any unused access
time.
4. In the event, in any month, Client desires on-line access to the
ApotheQuery-Registered Trademark- system in excess of the number of
hours out-lined above, Client agrees to pay for such additional time at
a rate of [.....] per hour.
7
<PAGE>
EXHIBIT 11
Statement Regarding Computation of Per Share Earnings
For the Quarter Ended June 30, 1996
COMPUTATION OF EARNINGS PER SHARE
Shares outstanding giving effect to the merger
and stock split 2,896,750
Conversion of Series A Preferred Stock 2,500,000
Impact of options and warrants using the
treasury stock method 917,250
Shares issued in offering to retire debt 627,240
---------
Weighted average shares outstanding 6,941,240
---------
---------
Net income for the quarter ended June 30, 1996 669,000
Pro forma reduction of interest expense on
debt retired 177,000
---------
Adjusted net income 846,000
---------
---------
Pro forma net income per share $0.12
---------
---------
<PAGE>
EXHIBIT 11
Statement Regarding Computation of Per Share Earnings
For the Year Ended March 31, 1996
COMPUTATION OF EARNINGS PER SHARE
Shares outstanding giving effect to the merger
and stock split 2,896,750
Conversion of Series A Preferred Stock 2,500,000
Impact of options and warrants using the
treasury stock method 917,250
Shares issued in offering to retire debt 627,240
---------
Weighted average shares outstanding 6,941,240
---------
---------
Net income for the year ended March 31, 1996 1,037,000
Pro forma reduction of interest expense
on debt retired 707,000
---------
Adjusted net income 1,744,000
---------
---------
Pro forma net income per share $0.25
---------
---------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of
Amendment No. 3 to Registration Statement No. 333-06931 on Form S-1.
ARTHUR ANDERSEN LLP
Dallas, Texas
September 27, 1996
