<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 1996.
REGISTRATION NO. 333-06931
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 4
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................ 3,044,181 Shares $11.00 $33,485,991 $11,547(3)
<FN>
(1) Includes 397,067 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) The registrant paid $11,897 on June 26, 1996 and an additional $1,451 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 OCTOBER 8, 1996
PROSPECTUS
2,647,114 SHARES
[LOGO]
COMMON STOCK
Of the 2,647,114 shares of Common Stock offered hereby, 2,000,000 shares are
being sold by the Company and 647,114 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 $8.00 and $11.00 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
397,067 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............... 647,114 shares
Common Stock to be outstanding after the Offering.............. 7,403,750 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......................... 7,037 7,037
</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 $ 19,672
Total assets........................................................... 72,091 72,091 81,331
Long-term debt to related parties...................................... 7,000 7,000 --
Series A redeemable preferred stock.................................... 12,099 -- --
Stockholders' equity................................................... 8,966 21,065 37,305
</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) 1,310,250 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 $5.21 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) 1,111,111 shares of Common Stock
issuable upon conversion of the outstanding shares of Series B Preferred
Stock, assuming an initial public offering price of $9.00 per share.
Includes 3,000 shares of Common Stock issued subsequent to June 30, 1996,
pursuant to the exercise of stock options. 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 $9.00 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 16% 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."
POTENTIAL LIABILITY FOR RESCISSION OF PRIVATE SALES AND UNDER SECTION 5 OF
THE SECURITIES ACT. Certain recent private sales of the Company's securities
may be required to be integrated with the offering of securities in this
Offering. If so integrated, the purported private sales would constitute an
unregistered public offering in violation of Section 5 of the Securities Act.
Such a violation would entitle the subscribers in such private sales to
rescission and would subject the Company to liability under said Section 5.
Management does not believe that rescission of any of such private sales would
have a material adverse effect on the Company.
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
8
<PAGE>
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 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 $45.00
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 7,403,750 shares of Common Stock outstanding following completion of this
Offering, the 2,647,114 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 4,756,636 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 1,111,111 shares of Common Stock issuable upon the conversion of
the Series B Preferred Stock (assuming an initial public offering price of $9.00
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
9
<PAGE>
under Rule 144 following the effective date of this Offering. In addition, of
the 1,310,250 shares of Common Stock issuable upon the exercise of outstanding
options, approximately 602,850 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 the
right to include in any registration, subject to certain restrictions, a total
of 6,899,000 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 $40.2 million based upon an assumed initial public offering
price of $9.00 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 47.4% of the Company's outstanding Common Stock (approximately
45.5% 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 $5.71 per share, assuming an initial public offering price of $9.00 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 "Risk Factors" and "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 $16,240,000 ($19,563,452 if the
Underwriters exercise the over-allotment option in full), at an assumed initial
public offering price per share of $9.00, 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 $4.5 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 $9.00 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 and 2,597
shares issued and outstanding actual and pro forma, 5,000 shares authorized
and 4,444 shares issued and outstanding pro forma as adjusted.............. -- -- --
Common Stock, $.01 par value, 7,500,000 shares authorized and 3,130,500
shares issued and outstanding actual, 7,500,000 shares authorized and
5,400,750 shares issued and outstanding pro forma, 25,000,000 shares
authorized and 7,400,750 shares issued and outstanding pro forma as
adjusted (1)(2)............................................................ -- -- --
Additional paid-in capital.................................................. 11,518 23,617 39,857
Accumulated deficit......................................................... (2,552) (2,552) (2,552)
--------- ----------- -----------
Total stockholders' equity................................................ 8,966 21,065 37,305
--------- ----------- -----------
Total capitalization.................................................... $ 28,065 $ 28,065 $ 37,305
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------
(1) Outstanding shares exclude (i) 1,040,250 shares of Common Stock reserved for
future issuance pursuant to options outstanding as of June 30, 1996, under
the Company's stock option plans with a weighted average exercise price of
$4.22 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)
1,111,111 shares of Common Stock issuable upon conversion of the outstanding
shares of Series B Preferred Stock, assuming an initial public offering
price of $9.00 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 and 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. The number of shares of Common
Stock to be outstanding will be reduced by 229,750 shares after the Merger
and the merger of the stock plan of AHC with and into the Company's stock
option plan. 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 $9.00 per share resulting in
estimated net proceeds to the Company of approximately $16,240,000, the pro
forma net tangible book value of the Company as of June 30, 1996, would have
been $24,346,000, or $3.29 per share. This represents an immediate increase in
pro forma net tangible book value of $1.79 per share to the existing
stockholders and an immediate dilution of $5.71 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....................... $ 9.00
Pro forma net tangible book value per common share prior to the
Offering........................................................... $ 1.50
Increase per share attributable to new investors.................... 1.79
---------
Pro forma net tangible book value per common share after the
Offering............................................................. 3.29
---------
Dilution per share to new investors................................... $ 5.71
---------
---------
</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 $9.00 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................... 5,400,750 73.0% $ 13,617,000 43.1% $ 2.52
New investors........................... 2,000,000 27.0 18,000,000 56.9 9.00
---------- ----- ------------- -----
Total............................... 7,400,750 100.0% $ 31,617,000 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</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 1,040,250
shares of Common Stock with a weighted average exercise price of $4.22 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..................... 7,037 7,037
</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.
15
<PAGE>
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
16
<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.
17
<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
24
<PAGE>
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
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<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 $ 395,850/$594,500
Jon S. Halbert.......................................... 68,500/102,500 397,300/594,500
Joseph J. Filipek, Jr................................... 30,000/45,000 174,000/261,000
John H. Sattler......................................... 11,250/45,000 0/0
Alan T. Wright.......................................... 2,500/28,750 0/0
</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 $9.00 per share, the assumed initial
public offering price.
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 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.
33
<PAGE>
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 1,859,000 shares of Common Stock has been reserved for
issuance under the Plan. As of September 30, 1996, options to purchase 1,032,750
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 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.
34
<PAGE>
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 1,947 shares of
Advance Health Care common stock); approximately $350,000 to Dr. David S.
Halbert (which will be repaid through the issuance of 906 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 3,434 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. See "Risk Factors -- Potential
Liability for Rescission of Private Sales and under Section 5 of the Securities
Act."
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 $9.00 per
share), the number of shares of Series B Preferred Stock will be adjusted to
4,444 shares (at an effective purchase price of $2,250 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 27.6% -- 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............................ 842,000 15.6 400,000 442,000 6.0
117 Fenchurch Street
London, EC3M 5DY
United Kingdom
David R. Worley (5)..................................... 536,000 9.9 157,706** 378,294 5.1
7103 Valburn Drive
Austin, TX 78731
Halbert & Associates, Inc. (6).......................... 109,000 2.0 89,408** 19,592 *
545 E. John Carpenter Freeway
Suite 1900
Irving, TX 75062
David D. Halbert (7).................................... 633,450 11.3 -- 544,042 7.2
Jon S. Halbert (8)...................................... 455,100 8.1 -- 365,692 4.8
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......................................... 25,500 * 25,500 *
Mikel D. Faulkner....................................... 109,000 2.0 109,000 1.5
Peter M. Castleman (12)................................. 1,586,500 27.6 -- 1,586,500 20.5
Stephen L. Green (13)................................... 1,106,250 20.5 -- 1,106,250 14.9
Jeffrey R. Jay (14)..................................... 1,605,250 28.0 -- 1,605,250 20.7
Rogers K. Coleman (15).................................. 1,111,111 17.1 -- 1,111,111 13.0
All directors and executive officers as a group
(14 persons) (16)...................................... 5,118,211 68.8% -- 4,471,097 47.4%
</TABLE>
- --------------------------
* Less than 1%
** The number of shares offered by the stockholder assumes an initial public
offering price of $9.00 per share. If the initial public offering price is
less than $9.00 per share, then the number of shares offered by this
stockholder will be increased, and if the initial public offering price is
greater than $9.00 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
individual General Partners of J.H. Whitney & Co., who are also General
Partners of the Whitney Fund and Whitney Debt Fund, share 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 204,700 shares issuable pursuant to options which are exercisable
within 60 days of the Assumed Effective Date. Includes 109,000 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 204,850 shares issuable pursuant to options which are exercisable
within 60 days of the Assumed Effective Date. Includes 109,000 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
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 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 1,111,111 shares issuable upon the conversion of the Series B
Preferred Stock held by BCBS of Texas, assuming an initial public offering
price of $9.00 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 2,449,750 shares held by entities affiliated with certain
directors and includes 584,850 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) 25,000,000 shares of
Common Stock and (ii) 5,000,000 shares of Preferred Stock, 5,000 shares of which
are designated Series B Preferred Stock. After giving effect to the Offering and
the consummation of the Merger, 7,403,750 shares of Common Stock, no shares of
Series A Preferred Stock and 4,444 shares of Series B Preferred Stock will be
outstanding. Assuming the underwriters' over-allotment option is exercised in
full, upon consummation of the Offering, 7,800,817 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 5,400,750 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 $45.00 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 7,403,750 shares of
Common Stock outstanding, assuming no exercise of options after September 30,
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 2,647,114 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 4,756,636 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 3,085,750
shares of Common Stock will be eligible for sale without restriction pursuant to
Rule 144(k) (as described below), and 1,670,886 shares will be eligible for sale
subject to the volume, manner of sale and other applicable restrictions of Rule
144. In addition, of the 1,310,250 shares of Common Stock issuable upon the
exercise of outstanding options, approximately 602,850 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 74,038
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 September 30, 1996 and after
giving effect to the Merger, the Company had options outstanding covering
707,400 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 6,899,000 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......................................................................... 2,647,114
----------
----------
</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 397,067
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 4,756,636 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>
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.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 6, 1996 (except with respect to the
matters discussed in Note 15, as to which
the date is October 8, 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
------------- ------------- -------------- ------------- -------------
(UNAUDITED)
<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........................ 7,036,507 7,036,507
-------------- -------------
-------------- -------------
</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 a warrant to purchase
336,500 shares of Common Stock.... -- -- -- -- 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 (unaudited)... 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
----------- ---------- ---------- --------- ----------
(UNAUDITED)
<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 $4.5
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 -- 5,400,750 --
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
836,320 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:
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 October 8, 1996, the Company effected 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 2,903,750 shares of Company common stock outstanding and
229,750 additional options outstanding at exercise prices of $0.67 to $2.71 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.
2,647,114 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.......................................................... 4,365
Nasdaq National Market System application and listing fees................ 35,949
Printing and engraving expenses........................................... 117,000
Legal fees and expenses................................................... 200,000
Accounting fees and expenses.............................................. 100,000
Blue sky fees and expenses................................................ 15,000
Transfer agent and registrar fees and expenses............................ 11,000
Miscellaneous............................................................. 3,358
---------
Total................................................................... $ 500,000
---------
---------
</TABLE>
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 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
II-1
<PAGE>
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 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
II-2
<PAGE>
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. In September 1996 an option
holder exercised her stock option and purchased 1,500 shares of Common Stock for
an aggregate purchase price of $4,800. 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 five years after the date of issuance. Each
VHA Warrant earned will be exercisable in whole beginning on the
II-3
<PAGE>
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.
3.3** -- Certificate of Incorporation of Advance Pharmacy Services, Inc.
3.4** -- Certificate of Amendment to the Certificate of Incorporation of Advance Pharmacy Services, Inc.
3.5** -- Certificate of Correction to the Certificate of Amendment to the Certificate of Incorporation of
Advance Pharmacy Services, Inc.
3.6** -- Certificate of Amendment of Certificate of Incorporation of Advance Pharmacy Services, Inc.
3.7** -- Certificate of Amendment to the Certificate of Incorporation of Advance ParadigM, Inc.
3.8** -- Certificate of Correction to the Amendment to the Certificate of Incorporation of Advance ParadigM,
Inc.
3.9** -- Bylaws of Advance Pharmacy Services, Inc.
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.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
- ---------- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
4.15* -- Incentive Stock Option Plan.
4.16* -- Warrant Agreement dated as of September 12, 1996, by and between the Company and VHA, Inc.
4.17** -- Form of Agreement and Plan of Merger.
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.
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.
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. 4 to the Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Dallas, State of Texas, on October 8, 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. 4 to Registration Statement on Form S-1 has been signed by the following
persons in the capacities indicated on October 8, 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
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
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>
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 October 8, 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.
ARTHUR ANDERSEN LLP
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>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. EXHIBITS NUMBERED PAGE
- ---------- --------------------------------------------------------------------------------------- -------------------
<S> <C> <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.
3.3** -- Certificate of Incorporation of Advance Pharmacy Services, Inc.
3.4** -- Certificate of Amendment to the Certificate of Incorporation of Advance Pharmacy
Services, Inc.
3.5** -- Certificate of Correction to the Certificate of Amendment to the Certificate of
Incorporation of Advance Pharmacy Services, Inc.
3.6** -- Certificate of Amendment of Certificate of Incorporation of Advance Pharmacy Services,
Inc.
3.7** -- Certificate of Amendment to the Certificate of Incorporation of Advance ParadigM, Inc.
3.8** -- Certificate of Correction to the Amendment to the Certificate of Incorporation of
Advance ParadigM, Inc.
3.9** -- Bylaws of Advance Pharmacy Services, Inc.
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. EXHIBITS NUMBERED PAGE
- ---------- --------------------------------------------------------------------------------------- -------------------
<S> <C> <C> <C>
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.
4.17** -- Form of Agreement and Plan of Merger.
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.
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.
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 07/27/1993
753208088
CERTIFICATE OF INCORPORATION
OF
ADVANCE PHARMACY SERVICES, INC.
-----------
The undersigned, a natural person, for the purpose of organizing
a corporation for conducting the business and promoting the purposes
hereinafter stated, under the provisions and subject to the requirements of
the laws of the State of Delaware (particularly Chapter 1, Title 8 of the
Delaware Code and the acts amendatory thereof and supplemental thereto, and
known, identified and referred to as the "General Corporation Law of the
State of Delaware"), hereby certifies that:
FIRST: The name of the corporation (hereinafter called the
"corporation") is
Advance Pharmacy Services, Inc.
SECOND: The address, including street, number, city, and
county, of the registered office of the corporation in the State of
Delaware is 32 Loockerman Square, Suite L-100, City of Dover, County of
Kent; and the name of the registered agent of the corporation in the State
of Delaware is The Prentice-Hall Corporation System, Inc.
THIRD: The purpose of the corporation is to engage in any
lawful act or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware.
FOURTH: The total number of shares of stock which the
corporation shall have authority to issue is Thirty-Five Thousand (35,000),
consisting of Twenty-Five Thousand (25,000) shares of Common Stock, all of
a par value of One Cent ($.01) each, and Ten Thousand (10,000) shares of
Series A Preferred Stock, all of a par value of One Cent ($.01) each.
The Preferred Stock may be issued, from time to time, in one or
more series, with such designations, preferences and relative,
participating, optional or other rights, qualifications, limitations or
restrictions thereof as shall be stated and expressed in the resolution or
<PAGE>
resolutions providing for the issue of such series adopted by the Board of
Directors from time to time, pursuant to the authority herein given, a copy
of which resolution or resolutions shall have been set forth in a
Certificate made, executed, acknowledged, filed and recorded in the manner
required by the laws of the State of Delaware in order to make the same
effective. Each series shall consist of such number of shares as shall be
stated and expressed in such resolution or resolutions providing for the
issuance of the stock of such series.
FIFTH: The name and the mailing address of the incorporator
are as follows:
NAME MAILING ADDRESS
---- ---------------
N.S. Truax 32 Loockerman Square, Suite L-100
Dover, Delaware 19901
SIXTH: The corporation is to have perpetual existence.
SEVENTH: Whenever a compromise or arrangement is proposed
between this corporation and its creditors or any class of them and/or
between this corporation 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 corporation or of any creditor or
stockholder thereof or on the application of any receiver or receivers
appointed for this corporation 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 corporation 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 corporation, 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 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 corporation, as the case
may be, agree to any compromise or arrangement and to any reorganization of
this corporation as 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
-2-
<PAGE>
corporation, as the case may be, and also on this corporation.
EIGHTH: For the management of the business and for the conduct
of the affairs of the corporation, and in further definition, limitation
and regulation of the powers of the corporation 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 corporation 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 By-
Laws. 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 corporation would have if there were no
vacancies. No election of directors need be by written ballot.
2. After the original or other By-Laws of the corporation 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 corporation has received any
payment for any of its stock, the power to adopt, amend, or repeal the
By-Laws of the corporation may be exercised by the Board of Directors
of the corporation; provided, however, that any provision for the
classification of directors of the corporation for staggered terms
pursuant to the provisions of staggered (d) of Section 141 of the
General Corporation Law of the State of Delaware shall be set forth in
an initial By-Law or in a By-Law adopted by the stockholders entitled
to vote of the corporation unless provisions for such classification
shall be set forth in this certificate of incorporation.
3. Whenever the corporation 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 corporation 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
-3-
<PAGE>
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.
NINTH: The personal liability of the directors of the
corporation is hereby eliminated to the fullest extent permitted by the
provisions of paragraph (7) of subsection (b) of Section 102 of the General
Corporation Law of the State of Delaware, as the same may be amended and
supplemented.
TENTH: The corporation shall, to the fullest extent permitted
by the provisions of Section 145 of the General Corporation Law of the
State of Delaware, as the same may be amended and supplemented, indemnify
any and all persons whom it shall have power to indemnify under said
section from and against any and all of the expenses, liabilities or other
matters referred to in or covered by said section, and the indemnification
provided for herein shall not be deemed exclusive of any other rights to
which those indemnified may be entitled under any By-Law, 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 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.
ELEVENTH: 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 corporation by this certificate of incorporation are granted subject to
the provisions of this Article ELEVENTH.
Signed on July 27, 1993.
/s/ N.S. Truax
----------------------------
N.S. Truax
Incorporator
-4-
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE CERTIFICATE OF INCORPORATION OF
ADVANCE PHARMACY SERVICES, INC.
Pursuant to the provisions of Section 242 of the General Corporation Law of
the State of Delaware, the undersigned corporation adopts the following
Certificate of Amendment to its Certificate of Incorporation;
I.
The name of the corporation is Advance Pharmacy Services, Inc.
II.
The following amendment to the Certificate of Incorporation was adopted by
the stockholders of the corporation on July 29, 1993. The amendment amends and
restates Article 4 of the original Certificate of Incorporation and the full
text of such provision is amended to read as follows:
FOURTH: The Company is authorized to issue a total of forty
thousand (40,000) shares of capital stock, consisting of thirty-five
thousand (35,000) shares of Common Stock, all of a par value of $0.01
each, and ten thousand shares of Series A Preferred Stock (10,000),
all of a par value of $0.01.
A. DESCRIPTION AND DESIGNATION OF SERIES A PREFERRED STOCK
1. DESIGNATION. A total of ten thousand (10,000) shares of the Company's
Preferred Stock shall be designated the "SERIES A PREFERRED STOCK". All numbers
relating to the calculation of cumulative dividends, liquidation preference per
share, or redemption price per share of the Series A Preferred Stock shall be
subject to equitable adjustment in the event of any stock dividend, stock split,
combination, reorganization, recapitalization, reclassification or other similar
event involving a change in the capital structure of the Series A Preferred
Stock.
2. DIVIDENDS.
(a) CUMULATIVE DIVIDENDS. The holders of the outstanding shares of
Series A Preferred Stock shall be entitled to receive, out of funds legally
available therefor, cumulative dividends calculated without compounding, at the
annual rate of eight percent (8%) per share of the Original Issue Price of the
Series A Preferred Stock, or $80.00 per share. Such cumulative dividends shall
accrue and accumulate from the date of original issuance. Cumulative dividends
on the Series A Preferred Stock shall be payable if, as and when declared by the
Board of Directors of the Company, and shall be payable, whether or not earned
or
<PAGE>
declared, only upon a liquidation as provided in Section 3 or upon a redemption
as provided in Section 6.
Dividends on the Series A Preferred Stock shall accrue from day to day
on each share of Series A Preferred Stock from the date of original issuance of
such share, whether or not earned or declared, and shall accrue until paid upon
liquidation or redemption. Such dividends on the Series A 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 any class or
series of capital stock of the Company junior to the Series A Preferred Stock,
including the Common Stock.
Upon conversion of the Series A Preferred Stock pursuant to Section 5
hereof, all such accrued and unpaid cumulative dividends on the Series A
Preferred Stock to and until the date of such conversion shall not be due and
payable and shall be forfeited.
(b) PARTICIPATING DIVIDENDS. The Company shall not pay any cash
dividends on its Common Stock without the consent or approval of two-thirds of
the members of the Board of Directors. In the event that the Board of Directors
of the Company shall declare a dividend payable upon the then outstanding shares
of Common Stock (other than a stock dividend on the Common Stock distributed
solely in the form of additional shares of Common Stock), each holder of Series
A Preferred Stock shall be entitled, in addition to any cumulative dividends to
which it may be entitled under Section 2(a) hereof, to receive the amount of
dividends as would be declared payable on the largest number of whole shares of
Common Stock into which such holder's shares of Series A Preferred Stock could
be converted, such number determined as of the record date for the determination
of holders of Common Stock entitled to receive such dividend.
3. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) TREATMENT AT LIQUIDATION, DISSOLUTION OR WINDING UP. 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
A Preferred Stock, including the Common Stock, and subject to the liquidation
rights and preferences of 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 A 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) $1,000 per share of Series A Preferred Stock (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
-2-
<PAGE>
to the holders of the Series A Preferred Stock with respect to such
liquidation, dissolution or winding up; or
(ii) such amount per share of Series A 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 holders of the Series A Preferred Stock the full amounts
to which they otherwise would be entitled, the holders of Series A 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 A 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 A Preferred
Stock.
After such payment shall have been made in full to the holders of
Series A 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 A
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.
(b) TREATMENT OF REORGANIZATIONS, CONSOLIDATIONS, MERGERS, AND SALES
OF ASSETS. A Reorganization (as defined in Section 5(i)) 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 at least sixty
percent (60%) of the outstanding shares of Series A Preferred Stock shall have
the right to elect the benefits of the provisions of Section 5(i) hereof in lieu
of receiving payment in liquidation, dissolution or winding up of the Company
pursuant to this Section 3. The holders of sixty percent (60%) of the
outstanding shares of Series A Preferred Stock have the right to bind the
holders of all outstanding shares of Series A Preferred Stock under this Section
3(b) or Section 5(i).
The provisions of this Section 3(b) and Section 5(i) 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, of another corporation that is engaged in a business similar or
related to or complementary with the business of the Company and which does not
involve a recapitalization or reorganization of the Series A Preferred Stock or
Common Stock.
(c) DISTRIBUTION OTHER THAN CASH. Whenever the distribution provided
for in Section 2 or this Section 3 shall be payable in property other than cash,
the value of such
-3-
<PAGE>
distribution shall be the fair market value of such property as determined in
good faith by the Board of Directors of the Company. In the event of any
dispute between the holders of the Series A Preferred Stock and the Company
regarding the determination of the fair market value of non-cash distributions,
at the election of the holders of sixty percent (60%) of the outstanding shares
of Series A Preferred Stock, the Company shall engage a consulting or investment
banking firm selected by the Board of Directors and approved by the holders of
sixty percent (60%) of the outstanding shares of Series A Preferred Stock (such
approval not to be unreasonably withheld) to prepare an independent appraisal of
the fair market value of such property to be distributed. The costs of such
valuation shall be borne by the Company.
4. VOTING POWER. Except as otherwise expressly provided in this
instrument under Section 7 or as otherwise required by law, the holders of
shares of Series A Preferred Stock and Common Stock shall vote together (or
render written consents in lieu of a vote) as a single class on all matters
submitted to the stockholders of the Company. Except as otherwise expressly
provided in this Section 4 or Section 7 hereof, or as otherwise required by law,
each holder of Series A Preferred Stock shall be entitled to vote on all matters
and shall be entitled to that number of votes equal to the largest number of
whole shares of Common Stock into which such holder's shares of Series A
Preferred Stock could be converted, pursuant to the provisions of Section 5
hereof, at the record date for the determination of stockholders entitled to
vote on such matter or, if no such record date is established, at the date such
vote is taken or any written consent of stockholders is solicited.
5. CONVERSION RIGHTS. The holders of the Series A Preferred Stock shall
have the following rights with respect to the conversion of such shares into
shares of Common Stock:
(a) GENERAL. Subject to and in compliance with the provisions of
this Section 5, any shares of the Series A Preferred Stock may, at the option of
any holder, be converted at any time and from time to time into fully-paid and
non-assessable shares of Common Stock. The number of shares of Common Stock to
which a holder of Series A Preferred Stock shall be entitled to receive upon
conversion shall be the product obtained by multiplying the Applicable
Conversion Rate (determined as provided in Section 5(b)) by the number of shares
of Series A Preferred Stock being converted at any time.
(b) APPLICABLE CONVERSION RATE. The conversion rate in effect at any
time for the Series A Preferred Stock (the "APPLICABLE CONVERSION RATE") shall
be the quotient obtained by dividing the Original Issue Price by the Applicable
Conversion Value, calculated as provided in Section 5(c) below.
(c) APPLICABLE CONVERSION VALUE. The Applicable Conversion Value in
effect from time to time, except as adjusted in accordance with Section 5(d)
hereof, shall be the Original Issue Price ($1,000) with respect to the Series A
Preferred Stock (the "APPLICABLE CONVERSION VALUE").
-4-
<PAGE>
(d) ADJUSTMENTS TO APPLICABLE CONVERSION VALUE.
(A) UPON DILUTIVE ISSUANCES OF COMMON STOCK OR CONVERTIBLE
SECURITIES. If the Company shall, while there are any shares of Series A
Preferred Stock outstanding, issue or sell any shares of its Common Stock or
Common Stock Equivalents (as defined below) without consideration or at a price
per share LESS THAN the Applicable Conversion Value in effect immediately prior
to such issuance or sale, then in each such case such Applicable Conversion
Value, except as hereinafter provided, shall be lowered so as to be equal to the
lowest Net Consideration Per Share (as hereinafter determined) received for each
additional share upon such issuance of Common Stock or Common Stock Equivalents.
The provisions of this Section 5(d)(A) may be waived in any instance
(without the necessity of convening any meeting of stockholders of the Company)
upon the written approval of the holders of sixty percent (60%) of the
outstanding shares of Series A Preferred Stock.
(B) UPON DILUTIVE ISSUANCES OF WARRANTS, OPTIONS AND PURCHASE
RIGHTS TO COMMON STOCK OR CONVERTIBLE SECURITIES.
(1) COMMON STOCK EQUIVALENTS. For the purposes of this Section
5(d), the issuance of any warrants, options, subscription or purchase
rights with respect to shares of Common Stock and the issuance of any
securities convertible into or exchangeable for shares of Common
Stock, or the issuance of any warrants, options, subscription or
purchase rights with respect to such convertible or exchangeable
securities (collectively, "COMMON STOCK EQUIVALENTS" and individually,
a "COMMON STOCK EQUIVALENT"), shall be deemed an issuance of Common
Stock with respect to adjustments in the Applicable Conversion Value
if the Net Consideration Per Share (as hereinafter determined) which
may be received by the Company for such Common Stock or Common Stock
Equivalents shall be less than the Applicable Conversion Value in
effect at the time of such issuance.
Any obligation, agreement or undertaking to issue Common Stock or
Common Stock Equivalents at any time in the future shall be deemed to
be an issuance at the time such obligation, agreement or undertaking
is made or arises. No adjustment of the Applicable Conversion Value
shall be made under this Section 5(d)(B) upon the issuance of any
shares of Common Stock which are issued pursuant to the exercise,
conversion or exchange of any Common Stock Equivalents if any
adjustment shall previously have been made upon the original issuance
of any such Common Stock Equivalents as above provided.
(2) DECREASES IN NET CONSIDERATION PER SHARE AND RETROACTIVE
ADJUSTMENT UPON EXPIRATION OF COMMON STOCK EQUIVALENTS. Should the
Net Consideration Per Share of any such Common Stock or Common Stock
Equivalents (even if issued or granted and outstanding as of the date
of filing of this instrument or hereafter) be decreased from time to
time, then, upon the effectiveness of each such
-5-
<PAGE>
change, the Applicable Conversion Value will be that which would have
been obtained (1) had the adjustments made upon the issuance of such
Common Stock Equivalents been made upon the basis of the actual Net
Consideration Per Share of such securities, and (2) had the
adjustments made to the Applicable Conversion Value since the date of
issuance of such Common Stock Equivalents been made to such Applicable
Conversion Value as adjusted pursuant to clause (1) above. Any
adjustment of the Applicable Conversion Value with respect to this
paragraph which relates to any Common Stock Equivalents shall be
disregarded if, as, and when such Common Stock Equivalents expire or
are cancelled without being exercised, so that the Applicable
Conversion Value effective immediately upon such cancellation or
expiration shall be equal to the Applicable Conversion Value for
the Series A Preferred Stock that would have been in effect had
the expired or cancelled Common Stock Equivalents not been issued.
(3) DEFINITION OF NET CONSIDERATION PER SHARE. For purposes of
this paragraph, the "NET CONSIDERATION PER SHARE" which may be
received by the Company shall be determined as follows:
(a) The "NET CONSIDERATION PER SHARE" shall mean the amount
equal to the total amount of consideration, if any, received by the
Company for the issuance of such Common Stock Equivalents, plus the
minimum amount of consideration, if any, payable to the Company upon
exercise, or conversion or exchange thereof, divided by the aggregate
number of shares of Common Stock that would be issued if all such
Common Stock Equivalents were exercised, exchanged or converted.
(b) The "NET CONSIDERATION PER SHARE" which may be received
by the Company shall be determined in each instance as of the date of
issuance of Common Stock Equivalents without giving effect to any
possible future upward pricing adjustments or rate adjustments which
may be applicable with respect to such Common Stock Equivalents.
(C) STOCK DIVIDENDS FOR HOLDERS OF CAPITAL STOCK OTHER THAN
COMMON STOCK. In the event that the Company shall make or issue, or shall fix a
record date for the determination of holders of any capital stock of the Company
(other than holders of Common Stock) entitled to receive a dividend or other
distribution payable in Common Stock or securities of the Company convertible
into or otherwise exchangeable for shares of Common Stock of the Company, then
such Common Stock or other securities issued in payment of such dividend shall
be deemed to have been issued for a consideration of $.01, except for (i)
dividends payable in shares of Common Stock payable pro rata to holders of
Series A Preferred Stock and to holders of any other class of stock (whether or
not paid to holders of any other class of stock), or (ii) with respect to the
Series A Preferred Stock, dividends payable in shares of Series A Preferred
Stock; PROVIDED, HOWEVER, that holders of any shares of Series A Preferred Stock
shall be entitled to receive in place of such Series A Preferred Stock the
shares of Common Stock for which the shares of Series A Preferred Stock are then
convertible.
-6-
<PAGE>
(D) CONSIDERATION OTHER THAN CASH. For purposes of this Section
5(d), if a part or all of the consideration received by the Company in
connection with the issuance of shares of the Common Stock or Common Stock
Equivalents consists of property other than cash, such consideration shall be
deemed to have a fair market value as is reasonably determined in good faith by
the Board of Directors of the Company. In the event of any dispute between the
holders of the Series A Preferred Stock and the Company regarding the
determination of fair market value, at the option of the holders of sixty
percent (60%) of the outstanding shares of Series A Preferred Stock, the Company
shall engage a consulting firm or investment banking firm, selected by the Board
of Directors and approved by the holders of sixty percent (60%) of the
outstanding shares of Series A Preferred Stock (such approval not to be
unreasonably withheld), to prepare an independent appraisal of the fair market
value of such property to be distributed. The costs of such valuation shall be
borne by the Company.
(E) EXCEPTIONS TO ANTI-DILUTION ADJUSTMENTS; BASKET FOR RESERVED
EMPLOYEE SHARES. This Section 5(d) shall not apply under any of the
circumstances which would constitute an Extraordinary Common Stock Event (as
described below). Further, the anti-dilution protection provisions of this
Section 5(d) shall not apply with respect to:
(1) the grant, issuance or sale of up to a maximum of such
number of shares of Common Stock, or the grant of options, warrants or other
rights exercisable therefor, issued or issuable after the original issue date of
the Series A Preferred Stock to directors, officers, employees, consultants and
others pursuant to any incentive or non-qualified stock option plan or
agreement, stock purchase plan or agreement, stock issuance or restricted
stock agreement, stock ownership plan (ESOP), consulting agreement, or such
other options, issuances, arrangements, agreements or plans ("Employee
Options") approved by a majority of the members of the Board of Directors;
PROVIDED, HOWEVER, that such number of shares of Common
Stock available for issuance upon exercise of the Employee Options shall equal
1,833 shares of Common Stock as of the Initial Closing (as such term is defined
in the Purchase Agreement), or if a Second Closing (as such term is defined in
the Purchase Agreement) occurs, up to a maximum of 2,278 shares of Common Stock
following the Second Closing.
(2) shares of Common Stock (or options or warrants exercisable
therefor) issued solely to employees, consultants or others in connection with
the acquisition (whether by merger or otherwise) by the Company of all or
substantially all of the capital stock or assets of any other entity or business
organization, provided the issuance of such securities is approved by a majority
of the members of the Board of Directors and provided that the aggregate number
of such shares of Common Stock shall equal a maximum of 1,337 shares of Common
Stock as of the Initial Closing, or if a Second Closing occurs, 1,662 shares of
Common Stock following the Second Closing.
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The foregoing numbers of shares of Common Stock may be increased from time
to time (i) by a vote of two-thirds of the members of the Board of Directors of
the Company (including at least three (3) directors who serve as the designees
or nominees of the holders of the Series A Preferred Stock), or (ii) by the
written consent of the holders of at least sixty percent (60%) of the
outstanding shares of Series A Preferred Stock.
The foregoing numbers shall be subject to a proportionate adjustment in the
event of any stock dividend, stock split, combination, reorganization,
recapitalization, reclassification or other similar event involving a change in
the Common Stock.
(e) UPON EXTRAORDINARY COMMON STOCK EVENTS. Upon the happening of an
Extraordinary Common Stock Event (as hereinafter defined), the Applicable
Conversion Value (and all other conversion values set forth in Section 5(d)
above) shall, simultaneously with the happening of such Extraordinary Common
Stock Event, be adjusted by multiplying the Applicable Conversion Value by 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, and the product so
obtained shall thereafter be the Applicable Conversion Value. The Applicable
Conversion Value, as so adjusted, shall be readjusted in the same manner upon
the happening of any successive Extraordinary Common Stock Event or Events.
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.
(f) AUTOMATIC CONVERSION UPON PUBLIC OFFERING OR ELECTION OF SERIES A
PREFERRED STOCK.
(i) MANDATORY CONVERSION OF PREFERRED STOCK. Immediately
(A) prior to the closing of an underwritten public offering on a firm
commitment basis pursuant to an effective registration statement filed pursuant
to the Securities Act of 1933, as amended, on Form S-1 ( or its equivalent)
covering the offer and sale of Common Stock for the account of the Company in
which the Company actually receives net proceeds equal to or greater than
$10,000,000 (calculated after deducting underwriters' discounts and commissions
but before calculation of expenses), and at a price per share greater than twice
the Original Issue Price; or
(B) upon the approval, set forth in a written notice to the Company,
of the holders of sixty percent (60%) of the outstanding shares of Series A
Preferred Stock, of an election to convert Series A Preferred Stock into Common
Stock,
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then, all outstanding shares of Series A Preferred Stock shall be
converted automatically into the number of shares of Common Stock into which
such shares of Series A Preferred Stock are then convertible pursuant to Section
5 hereof, as of the closing and consummation of such underwritten public
offering, or the stated date of approval of such holders of Series A Preferred
Stock, without any further action by the holders of such shares and whether or
not the certificates representing such shares are surrendered to the Company or
its transfer agent.
(ii) SURRENDER OF CERTIFICATES UPON MANDATORY CONVERSION. Upon
the occurrence of the conversion events specified in the preceding paragraph
(i), the holders of the Series A Preferred Stock shall, upon notice from the
Company, surrender the certificates representing such shares at the office of
the Company or of its transfer agent for the Common Stock. Thereupon, there
shall be issued and delivered to such holder certificates for the number of
shares of Common Stock into which the shares of Series A Preferred Stock so
surrendered were convertible on the date on which such conversion occurred. The
Company shall not be obligated to issue such certificates unless certificates
evidencing the shares of Series A Preferred Stock being converted are either
delivered to the Company or any such transfer agent, or the holder notifies the
Company that such certificates have been lost, stolen or destroyed and executes
an agreement satisfactory to the Company to indemnify the Company from any loss
incurred by it in connection therewith.
(g) 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 A 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 A 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(k)), 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 A Preferred Stock.
(h) CAPITAL REORGANIZATION OR RECLASSIFICATION. If the Common Stock
issuable upon the conversion of the Series A Preferred Stock shall be changed
into the same or different number of shares of any class or classes of capital
stock, whether by capital reorganization, recapitalization, reclassification or
otherwise (OTHER THAN a subdivision or combination of shares or stock dividend
provided for elsewhere in this Section 5, or the sale of all or substantially
all of the Company's capital stock or assets to any other person), then and in
each such event the holder of each share of Series A Preferred Stock shall have
the right thereafter to convert such share into the kind and amount of shares of
capital stock and other securities and property
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receivable upon such reorganization, recapitalization, reclassification or
other change by the holders of the number of shares of Common Stock into
which such shares of Series A Preferred Stock might have been converted
immediately prior to such event, all subject to further adjustment as
provided herein.
(i) CAPITAL REORGANIZATION, MERGER OR SALE OF ASSETS. If at any
time or from time to time there shall be a capital reorganization of the
Common Stock (other than a subdivision, combination, recapitalization,
reclassification or exchange of shares 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 A
Preferred Stock shall thereafter be entitled to receive upon conversion of
the Series A 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 A 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 adjustment of the Applicable Conversion Value
then in effect and the number of shares of Common Stock or other securities
issuable upon conversion of such shares of Series A Preferred Stock) shall be
applicable after that event in as nearly equivalent a manner as may be
practicable.
The holders of sixty percent (60%), of the outstanding shares of
Series A Preferred Stock shall, upon the occurrence of a Reorganization, as
such events are more fully set forth in the first paragraph of this Section
5(i), have the option of electing treatment of the shares of Series A
Preferred Stock under either this Section 5(i) or Section 3 hereof, notice of
which election shall be submitted in writing to the Company at its principal
offices no later than five (5) days before the effective date of such event.
If no such written election shall be made, the provisions of Section 3(b),
and not this Section 5(i), shall apply. The holders of sixty percent (60%) of
the outstanding shares of Series A Preferred Stock have the right to bind the
holders of all outstanding shares of Series A Stock.
The provisions of this Section 5(i) 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, of another corporation that is
engaged in a business similar or related to or complementary with the
business of the Company and which does not involve a recapitalization or
reorganization of the Series A Preferred Stock or Common Stock.
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(j) CERTIFICATE TO ADJUSTMENTS; NOTICE BY COMPANY. In each case of
an adjustment or readjustment of the Applicable Conversion Rate, the Company
at its expense will furnish each holder of Series A Preferred Stock with a
certificate prepared by the Treasurer of Chief Financial Officer of the
corporation, showing such adjustment or readjustment, and stating in detail
the facts upon which such adjustment or readjustment is based.
(k) EXERCISE OF CONVERSION PRIVILEGE. To exercise its conversion
privilege, a holder of Series A Preferred Stock shall surrender the
certificate(s) representing the shares being converted 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. Such notice shall also state
the name or names (with address or addresses) in which the certificate(s) for
shares of Common Stock issuable upon such conversion shall be issued. The
certificate(s) for shares of Series A 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 A
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 A 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 A Preferred Stock in accordance with the provisions of
this Section 5, and cash, as provided in Section 5(l), in respect of any
fraction of a share of Common Stock issuable upon such conversion. 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 A Preferred Stock shall
cease and the person(s) in whose name(s) and 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.
(l) CASH IN LIEU OF FRACTIONAL SHARES. No fractional shares of
Common Stock or scrip representing fractional shares shall be issued upon the
conversion of shares of Series A Preferred Stock. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of
Series A Preferred Stock, the Company shall pay to the holder of the shares
of Series A Preferred Stock which were converted a cash adjustment in respect
of such fractional shares in an amount equal to the same fraction of the
market price per share of the Common Stock (as determined in a reasonable
manner prescribed by the Board of Directors) at the close of business on the
Conversion Date. The determination as to whether or not any fractional shares
are issuable shall be based upon the aggregate number of shares of Series A
Preferred Stock being converted at any one time by any holder thereof, not
upon each share of Series A Preferred Stock being converted.
(m) PARTIAL CONVERSION. In the event some but not all of the shares
of Series A Preferred Stock represented by a certificate(s) surrendered by a
holder are converted, the Company shall execute and deliver to or on the
order of the holder, at the expense of the
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Company, a new certificate representing the number of shares of Series A
Preferred Stock which were not converted.
(n) 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 A 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 A Preferred Stock (including any shares
of Series A Preferred Stock represented by any warrants, options,
subscription or purchase rights for Series A 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 A Preferred Stock (including any shares of Series A Preferred Stock
represented by any warrants, options, subscriptions or purchase rights for
such Series A 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.
(o) NO REISSUANCE OF SERIES A PREFERRED STOCK. No share or shares
of Series A 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 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 A Preferred Stock.
(p) SPECIAL MANDATORY CONVERSION.
(i) PLAY OR LOSE PROVISION. When any holder of shares of
Series A Preferred Stock is entitled to exercise its right of first offer as
set forth in Article VI of the Purchase Agreement (the "RIGHT OF FIRST
OFFER") with respect to any equity financing (the "EQUITY FINANCING") of the
Company which would result in a reduction of the Applicable Conversion Value,
and (i) the Company has fully complied in all material respects with its
obligations pursuant to Article VI of the Purchase Agreement in respect
thereof, and (ii) the provisions of the Right of First Offer have not been
waived or eliminated by the holders of sixty percent (60%) of the outstanding
shares of Series A Preferred Stock, if such holder (a "NON-PARTICIPATING
HOLDER") does not, by exercise of such holder's Right of First Offer, acquire
at least his Special Proportionate Percentage (as hereinafter defined) of the
Allocated Offered Securities (as hereinafter defined) offered to all holders
of the Series A Preferred Stock in such Equity Financing (a "MANDATORY
OFFERING"), then, in the case of holders of Series A Preferred Stock, all of
such holder's shares of Series A Preferred Stock shall automatically and
without further action on the part of such holder be converted effective
subject to and concurrently with consummation of the Mandatory Offering (the
"MANDATORY OFFERING DATE") into the number of shares of Common Stock into
which such shares were convertible immediately prior to such Equity
Financing. Upon such conversion, the shares of Series A Preferred Stock so
converted shall be cancelled and not subject to reissuance. As used in this
subsection (p), the following terms shall have the following meanings:
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(A) "ALLOCATED OFFERED SECURITIES" shall
mean as to any holder of Series A Preferred
Stock that portion of the gross amount of offered
securities which has expressly been allocated for
purchase by the holders of the Series A Preferred Stock
as a group, it being understood that for purposes of this
subsection that Allocated Offered Securities may
represent an amount of offered securities that is less
(but in no event greater) than the amount of securities
which the Company is otherwise required to offer to the
holders of Series A Preferred Stock pursuant to the Right
of First Offer under the Purchase Agreement;
(B) "SPECIAL PROPORTIONATE PERCENTAGE" shall mean as
to any holder of Series A Preferred Stock, that
percentage figure which expresses the ratio which (x) the
number of shares of outstanding Series A Preferred Stock
then owned by such holder bears to (y) the aggregate
number of shares of Series A Preferred Stock held by all
holders of shares of Series A Preferred Stockholder. For
purposes of this Section 5(o), each holder of Series A
Preferred Stock which is a partnership shall be deemed to
be the owner of shares of capital stock of the Company
originally acquired by such partnership which have been
transferred to and are held by partners and retired
partners of such partnership, the spouse and members of
the family of any such partner and trusts for the benefit
of any such person.
(ii) SURRENDER OF CERTIFICATES. The holder of any shares of Series A
Preferred Stock converted pursuant to this Section 5(p) shall deliver to
the Company during regular business hours at the office of the
Company, or at such other place as may be designated by the Company, the
certificate or certificates for the shares so converted, duly endorsed or
assigned in blank to the Company. As promptly as practicable thereafter,
the Company shall issue and deliver to such holder, at the place designated
by such holder, a certificate or certificates for the number of full shares
of the Common Stock to which such holder is entitled. The person in whose
name the certificate for such Common Stock is to be issued shall be deemed
to have become a stockholder of record on the Mandatory Offering Date
unless the transfer books of the Company are closed on that date, in which
event he shall be deemed to have become a stockholder of record on the
next succeeding date on which the transfer books are open. If the
Non-Participating Holder fails to tender the shares of Series A Preferred
Stock, the Company may cancel the shares of Series A Preferred Stock not
so tendered on the books of the Company and reissue such number of shares
of Common Stock to be received upon conversion.
6. REDEMPTION RIGHTS OF SERIES A PREFERRED STOCK.
(a) OPTIONAL REDEMPTION. On the written request of the holders of
sixty percent (60%) of the then outstanding shares of Series A Preferred
Stock (the "REQUESTING HOLDERS"), delivered to the Company on or after
August 4, 1999 (the "REDEMPTION REQUEST"), the Company shall redeem such
number of shares of Series A Preferred Stock then held by each Requesting
Holder as shall be specified in such notice by such Requesting Holders. The
redemptions pursuant to this Section 6(a) shall be made in three equal,
annual installments, the
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first on a date to be specified in the Redemption Notice (which date shall be
not less than 45 days after the date of the Redemption Notice) (the "INITIAL
REDEMPTION DATE"), and the second and third installments on each of the first
and second anniversary dates of the Initial Redemption Date (collectively,
the "REDEMPTION DATES").
The redemption price for each share of Series A Preferred Stock redeemed
pursuant to this Section 6 shall be the greater of: (i) 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, or (ii) the Fair Market Value per share of the Series A Preferred
Stock (as defined below) (the "SERIES A REDEMPTION PRICE"). Each redemption
of shares of Series A Preferred Stock shall be made pro rata among all
holders of Series A Preferred Stock. No Redemption Request shall be initiated
unless the Company has earnings after interest charges but before taxes,
calculated in accordance with generally accepted accounting principles
consistently applied, of at least $1,500,000, as reflected on its statement
of operations for the twelve-month period preceding the month in which any
Redemption Request is initiated.
The Fair Market Value shall be calculated, as of each such date of
redemption, in the following manner:
(i) if the Company's Common Stock or Preferred Stock is then traded
on any nationally-recognized stock exchange (e.g., New York Stock Exchange,
American Stock Exchange or Pacific Stock Exchange) or quoted on the NASDAQ
National Market System, the average of the closing sale prices for the twenty
(20) consecutive trading days preceding the Redemption Date, as reported by
such exchange or system;
(ii) if the Company's Common Stock or Preferred Stock is then
traded on the NASDAQ over-the-counter market or Small-Cap market, the average
of the average of the closing bid and closing asked prices for the twenty
(20) consecutive trading days preceding the date of any Redemption Date, as
reported in THE WALL STREET JOURNAL or by any market maker; or
(iii) if the Company's Common Stock or Preferred Stock is not so
quoted or publicly traded, then as determined by an independent investment
banking firm acceptable to the holders of sixty percent (60%) of the
outstanding shares of Series A Preferred Stock, upon a review of all relevant
factors, including, without limitation, the price at which shares of the
Company's Common Stock could reasonably be expected to be sold in an
arms'-length transaction, for cash, other than on an installment basis, to a
person not employed by, controlled by, in control of or under common control
with the Company, which determination by the disinterested members of the
Board of Directors shall give due consideration to recent transactions
involving shares of the Common Stock or Preferred Stock, if any; revenues,
operating cash flow and earnings of the Company to the date of such
determination; projected revenues, operating cash flow and earnings of the
Company for the twelve-month period following the date of any determination;
determined on the basis of the value of the Company
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as a going concern, on the basis of the shares of Series A Preferred Stock
being free of all restrictions on transfer imposed by any agreement or
relevant securities laws, but including any reduction in such value due to
the illiquidity or absence of any established trading market for the Common
Stock; on the basis of discounted cash flow analysis, a comparison of
price/earnings and revenue multiples of comparable, publicly-traded companies
within the same industry, and comparisons of market value and market
capitalization of comparable companies within the same industry; on the basis
of an evaluation of the strength of the Company's products, markets,
management and distribution channels; and such other matters as the
disinterested members of the Board of Directors deem pertinent.
(b) REDEMPTION NOTICE. At least 30 days prior to the
Redemption Date, written notice (hereinafter referred to as the
"REDEMPTION NOTICE") shall be mailed, first class or certified
mail, postage prepaid, by the Company to each holder of record of
Series A Preferred Stock which is to be redeemed, at its address
shown on the records of the Company; PROVIDED, HOWEVER, that the
Company's failure to give such Redemption Notice shall in no way
affect its obligation to redeem the shares of Series A Preferred
Stock as provided in Section 6(a) hereof. The Redemption Notice
shall contain the following information:
(i) the number of shares of Series A Preferred Stock held by the
holder which shall be redeemed by the Company and the total number
of shares of Series A Preferred Stock held by all holders to be so
redeemed;
(ii) the Redemption Dates and the Series A Redemption Price; and
(iii) that the holder is to surrender to the Company, at the place
designated therein, its certificate or certificates representing
the shares of Series A Preferred Stock to be redeemed.
(c) SURRENDER OF CERTIFICATES. Each holder of shares of
Series A 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 Series A
Redemption Price for such shares as set forth in this Section 6
shall be paid to the order of the person whose name appears on such
certificate(s) and each surrendered certificate shall be cancelled
and retired. In the event some but not all of the shares of Series
A 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 A Preferred
Stock which were not redeemed.
(d) DIVIDENDS AND CONVERSION AFTER REDEMPTION. No shares of
Series A 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; provided,
however, that the Company has duly paid the Series A Redemption
Price therefor.
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(e) INSUFFICIENT FUNDS FOR REDEMPTION.
(i) PARTIAL REDEMPTION. If the funds of the Company legally available
for redemption of the Series A Preferred Stock on the Redemption Date are
insufficient to redeem the number of shares of Series A Preferred Stock to
be so redeemed on such Redemption Date, the holders of shares of Series A
Preferred Stock shall share ratably in any funds legally available for
redemption of such shares according to the respective amounts which would
be payable with respect to the number of shares owned by them if the shares
to be so redeemed on such Redemption Date were redeemed in full. The
shares of Series A Preferred Stock not redeemed shall remain outstanding
and entitled to all rights and preferences provided herein, notwithstanding
Section 6(d) above. Furthermore, the rights of the holders of the Series A
Preferred Stock under Section 4(c)(i)(a) shall have been automatically
triggered.
(ii) REMEDIES FOR DEFAULT. At any time thereafter when additional
funds of the Company are legally available for the redemption of such
shares of Series A Preferred Stock, such funds will be used, as soon as
practicable but no later than the end of the next succeeding fiscal
quarter, to redeem the balance of such shares, or such portion thereof for
which funds are then legally available, on the basis set forth above,
except that the redemption price for each share of Series A Preferred Stock
shall be the Series A Redemption Price PLUS that amount which represents
interest on the Series A Redemption Price, calculated from the Redemption
Date to the date of actual redemption, compounded on a monthly basis, based
on an interest rate equal to eight percent (8%) per annum (such interest
rate to apply to the forthcoming calendar month, or portion thereof).
(iii) CONVERSION OF PREFERRED STOCK INTO PROMISSORY NOTE. The holders
of sixty percent (60%) of the outstanding shares of Series A Preferred
Stock shall be entitled, at their sole discretion, to compel the Company to
convert the Redemption Price of any or all of such unredeemed shares of
Series A Preferred Stock into unsecured promissory notes with a principal
amount equal to such Redemption Price of the unredeemed shares (for each
holder of Series A Preferred Stock) and bearing interest at eight percent
(8%) per annum (such interest rate to apply to the forthcoming
calendar month, or portion thereof). Principal and interest under such
promissory note shall be payable semi-annually in six (6) equal
installments based upon a 36-month principal and interest amortization
schedule in equal installments of principal and interest.
7. RESTRICTIONS AND LIMITATIONS.
(a) RIGHTS OF SERIES A PREFERRED STOCK WITH RESPECT TO COMPANY
ACTION; AMENDMENTS TO CHARTER. The Company shall not take any corporate action
or otherwise amend its Certificate of Incorporation or By-Laws without the
approval by vote or written consent of the holders of at least sixty percent
(60%) of the then outstanding shares of Series A Preferred Stock, voting as a
separate class, each share of Series A Preferred Stock to be entitled to one
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vote in each instance, if such corporate action or amendment would change any of
the rights, preferences, privileges of or limitations provided for herein for
the benefit of any shares of Series A Preferred Stock or otherwise adversely
affect the rights and preferences of the Series A Preferred Stock. Without
limiting the generality of the preceding sentence, the Company will not amend
its Certificate of Incorporation or take any corporate action without the
approval by the holders of at least sixty percent (60%) of the then outstanding
shares of Series A Preferred Stock, voting as a single class, if such amendment
or corporate action would:
(i) authorize, create or issue, or obligate the Company to authorize,
create or issue, additional shares of Series A Preferred Stock or any
class of stock ranking senior to or on a parity with the Series A Preferred
Stock with respect to liquidation preferences, dividends rights or
redemption rights, except for the designation and issuance of shares of
preferred stock approved in any instance by all Directors who serve as the
designees or nominees of the holders of the Series A Preferred Stock; or
(ii) reduce the amount payable to the holders of Series A Preferred
Stock upon the voluntary or involuntary liquidation, dissolution or winding
up of the Company; or
(iii) adversely effect the liquidation preferences, dividends rights,
voting rights or redemption rights of the Series A Preferred Stock; or
(iv) cancel or modify the conversion rights of the Series A Preferred
Stock provided for in Section 5 herein; or
(v) provide for the voluntary liquidation, dissolution,
recapitalization, reorganization or winding up of the Company; or
(vi) cause or authorize any Reorganization or sale, lien encumbrance,
mortgage or other disposition of all, of substantially all, of the assets
of the Company (except for security interests, license or encumbrances
given as security or collateral securing indebtedness to commercial banks
or other institutional lenders or for sales of assets accomplished in the
ordinary course of business).
8. NO DILUTION OR IMPAIRMENT. Subject to the immediately preceding
paragraph, the Company will not, by amendment of its Certificate of
Incorporation or through any reorganization, transfer of capital stock or
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms of the Series A Preferred Stock set forth herein, but will at
all times in good faith assist in the carrying out of all such terms and in the
taking of all such reasonable action as may be necessary or appropriate in order
to protect the rights of the holders of the Series A Preferred Stock against
dilution or other impairment. Without limiting the generality of the foregoing,
the Company (a) will not increase the par value of any shares of stock
receivable on the conversion of the Series A Preferred Stock above the amount
payable therefor on such conversion, and (b) will take all such action as may
be necessary or appropriate
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in order that the Company may validly and legally issue fully paid and
nonassessable shares of stock on the conversion of all Series A Preferred Stock
from time to time outstanding.
9. 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 A 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
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.
III.
The number of shares of the Company outstanding at the time of such
adoption was twelve thousand five hundred (12,500); and the number of shares
entitled to vote thereon was twelve thousand five hundred (12,500).
IV.
Pursuant to the provisions of Section 228 of the General Corporation Law of
the State of Delaware, (i) the holders of shares of outstanding stock of the
Company having not less than the minimum number of votes that would be necessary
to authorize this amendment at a meeting at which all shares entitled to vote
thereon were present and voted have signed a consent in writing adopting said
amendment and (ii) written notice has been given to those stockholders of the
Company who have not so consented in writing.
-18-
<PAGE>
Executed as of the 4th day of August, 1993.
ADVANCE PHARMACY SERVICES, INC.
By: /s/ David D. Halbert
-----------------------------
David D. Halbert, Chairman
ATTEST:
/s/ Dan Phillips
- -----------------------------
Dan Phillips, Secretary
-19-
<PAGE>
CERTIFICATE OF CORRECTION
TO THE CERTIFICATE OF AMENDMENT
TO THE CERTIFICATE OF INCORPORATION OF
ADVANCE PHARMACY SERVICES, INC.
Pursuant to the provisions of Section 103(f) of the General Corporation Law
of the State of Delaware, the undersigned corporation hereby certifies that:
I.
The name of the corporation is Advance Pharmacy Services, Inc. (the
"Company").
II.
The Certificate of Amendment to the Certificate of Incorporation of the
Company (the "Amendment") which was filed with the Secretary of the State of
Delaware on August 4, 1993 is hereby corrected.
III.
The inaccuracy to be corrected in the Amendment is as follows:
FOURTH: The Company is authorized to issue a total of forty
thousand (40,000) shares of capital stock, consisting of thirty-five
(35,000) shares of Common Stock, all of a par value of $0.01 each, and
ten thousand shares of Series A Preferred Stock (10,000), all of a par
value of $0.01 per share.
IV.
The first paragraph of Article IV of the Certificate of Incorporation is
hereby corrected to read in its entirety as follows:
FOURTH: The Company is authorized to issue a total of forty
thousand (40,000) shares of capital stock; consisting of thirty
thousand (30,000) shares of Common Stock, par value of $0.01 per
share, and ten thousand (10,000) shares of Series A Preferred
Stock, par value of $0.01 per share.
<PAGE>
Executed and attested to on the 9th day of August, 1993.
ADVANCE PHARMACY SERVICES, INC.
By: /s/ Jon S. Halbert
------------------------------------
Jon S. Halbert, President
ATTEST:
/s/ Dan Phillips
- ------------------------------
Dan Phillips, Secretary
-2-
<PAGE>
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION
- --------------------------------------------------------------------------------
Advance Pharmacy Services, Inc.
- - ---------------------------------------------------------------------------
a corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
- - FIRST. That at a meeting of the Board of Directors of Advance Pharmacy
-------------------
Services, Inc.
---------------------------------------------------------------------------
resolutions were duly adopted setting forth a proposed amendment of the
Certificate of Incorporation of said corporation, declaring said amendment
to be advisable and calling a meeting of the stockholders of said
corporation for consideration thereof. The resolution setting forth the
proposed amendment is as follows:
RESOLVED, that the Certificate of Incorporation of this corporation be
amended by changing the Article thereof numbered Article I "so that,
as amended, said Article shall be and read as follows:
The name of the corporation is Advance ParadigM, Inc."
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
- - SECOND: That thereafter, pursuant to resolution of its Board of Directors,
a special meeting of the stockholders of said corporation was duly called
and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware at which meeting necessary number
of shares as required by statute were voted in favor of the amendment.
- - THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
- - FOURTH: That the capital of said corporation shall not be reduced under or
by reason of said amendment.
- - IN WITNESS WHEREOF, said Advance Pharmacy Services, Inc.
--------------------------------------------------
has caused this certificate to be signed by
Jon S. Halbert ,its President,
------------------------------------------------------------
and Danny Phillips , its Secretary,
-------------------------------------------------------
this 9th day of September 1994.
------ ----------- --
By: /s/ Jon S. Halbert
-------------------------------------
President
ATTEST: /s/ Danny Phillips
---------------------------------
Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
ADVANCE PARADIGM, INC.
Advance ParadigM, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY THAT:
FIRST: The date on which its original Certificate of Incorporation was
filed with the Secretary of State of Delaware is July 27, 1993. Certificates of
Amendment to the Certificate of Incorporation were filed on August 4, 1993 and
October 14, 1994. A Certificate of Correction was filed on August 11, 1993.
SECOND: The first paragraph of Article IV of the Certificate of
Incorporation, as amended, is deleted in its entirety and replaced with the
following:
"FOURTH: The Company is authorized to issue a total of 43,000
shares of capital stock, consisting of thirty thousand (30,000) shares
of Common Stock, par value of $0.01 per share, and thirteen thousand
(13,000) shares of Preferred Stock, ten thousand (10,000) shares of
which shall be Series A Preferred Stock, par value of $0.01 per share,
and three thousand (3,000) shares of which shall be Series B Preferred
Stock, par value of $0.01 per share.
The 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 A Preferred Stock is as set
forth below:"
THIRD: The foregoing amendment was declared advisable and proposed to the
corporation's stockholders by resolutions adopted by a meeting of the Board of
Directors held on May 9, 1996.
FOURTH: The stockholders of said corporation approved the amendment by
resolutions adopted by written consent of the stockholders holding a majority of
the outstanding capital stock of the corporation effective as of June 17, 1996.
FIFTH: Said amendment was duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, said Advance ParadigM, Inc. has caused this certificate
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 17th day of June, 1996.
ADVANCE PARADIGM, INC.
By: /s/ David D. Halbert
--------------------------------------
David D. Halbert
Chairman, Chief Executive Officer
and President
Attest: /s/ Danny Phillips,
--------------------------------------
Danny Phillips,
Chief Financial Officer, Senior
Vice President, Secretary and
Treasurer
2
<PAGE>
CERTIFICATE OF CORRECTION
TO THE AMENDMENT TO THE
CERTIFICATE OF INCORPORATION
OF
ADVANCE PARADIGM, INC.
Advance ParadigM, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the "Company"),
DOES HEREBY CERTIFY THAT:
I
On June 17, 1996, the Company filed with the Secretary of State of Delaware
a Certificate of Amendment to the Certificate of Incorporation (the
"Amendment"). In addition to authorizing the Series B Preferred Stock set forth
in the Amendment, the description and designations of the Series B Preferred
Stock should have been included in the Amendment.
II
The inaccuracy in the Amendment is hereby corrected by adding the following
in its entirety to the end of Article IV of the Certificate of Incorporation:
"B. DESCRIPTION AND DESIGNATION OF SERIES B PREFERRED STOCK.
1. DESIGNATION. Up to 3,000 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 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
1
<PAGE>
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 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
2
<PAGE>
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 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
3
<PAGE>
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 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)
4
<PAGE>
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 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
5
<PAGE>
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 (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.
6
<PAGE>
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 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.
IN WITNESS WHEREOF, said Advance ParadigM, Inc. has caused this certificate
to be duly executed this 13th day of September 1996.
ADVANCE PARADIGM, INC.
By: /s/ Laura I. Johansen
-----------------------------------------
Laura I. Johansen
Vice President Legal Affairs
Attest: /s/ Danny Phillips
-------------------------------------
Danny Phillips
Chief Financial Officer, Senior
Vice President, Secretary and
Treasurer
7
<PAGE>
BYLAWS
OF
ADVANCE PHARMACY SERVICES, INC.
A DELAWARE CORPORATION
(the "Company")
(As adopted on July 27, 1993)
<PAGE>
TABLE OF CONTENTS
I. OFFICES............................................................ 1
1.1. Registered Office.......................................... 1
1.2. Additional Offices......................................... 1
II. STOCKHOLDERS MEETINGS.............................................. 1
2.1. Annual Meetings............................................ 1
2.2. Special Meetings........................................... 1
2.3. Notices.................................................... 1
2.4. Quroum..................................................... 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
III. 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
IV. BOARD MMETINGS..................................................... 4
4.1. Annual Meetings............................................ 4
4.2. Regular Meetings........................................... 4
4.3. Special Meetings........................................... 4
4.4. Quorum, Required Vote...................................... 4
4.5. Consent in Lieu of Meeting................................. 5
V. COMMITTIES 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............................. 5
5.2. Available Powers........................................... 6
5.3. Unavailable Powers......................................... 6
5.4. Alternate Members.......................................... 6
5.5. Procedures................................................. 6
VI. OFFICERS........................................................... 7
6.1. Elected Officers........................................... 7
6.1.1. Chairman of the Board.............................. 7
(i)
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6.1.2. President.......................................... 7
6.1.3. Vice Presidents.................................... 7
6.1.4. Secretary.......................................... 7
6.1.5. Assistant Secretaries.............................. 8
6.1.6. Treasurer.......................................... 8
6.1.7. Assistant Treasurers............................... 8
6.1.8. Divisional Officers................................ 8
6.2. Election................................................... 8
6.3. Appointed Officers......................................... 8
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
VII. SHARE CERTIFICATES................................................. 9
7.1. Entitlement to Certificates................................ 9
7.2. Multiple Classes of Stock.................................. 9
7.3. Signatures................................................. 9
7.4. Issuance and Payment....................................... 10
7.5. Lost Certificates.......................................... 10
7.6. Transfer of Stock.......................................... 10
7.7. Registered Stockholders.................................... 10
VIII. 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.................................... 11
8.6. Nonexclusive............................................... 12
8.7. Insurance.................................................. 12
8.8. Certain Definitions........................................ 12
8.9. Change in Governing Law.................................... 12
IX. INTERESTED DIRECTORS, OFFICERS AND STOCKHOLDERS.................... 13
9.1. Validity................................................... 13
9.2. Disclosure, Approval....................................... 13
9.3. Nonexclusive............................................... 13
X. MISCELLANEOUS...................................................... 13
10.1. Place of Meetings.......................................... 13
10.2. Fixing Record Dates........................................ 14
10.3. Means of Giving Notice..................................... 14
10.4. Waiver of Notice........................................... 15
10.5. Attendance via Communications Equipment.................... 15
10.6. Dividends.................................................. 15
10.7. Reserves................................................... 15
(ii)
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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................................................. 16
(iii)
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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 (i) may be
called by the chairman of the board, the president, any two directors or any
holder(s) of at least 25% of the outstanding shares of Series A Preferred
Stock 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
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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 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, 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
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,
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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, 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 at least be one (1) and shall be determined by resolution of the Board.
Section 3.3. ELECTION. Directors shall be elected by the stockholders
by plurality vote at an annual stockholders meeting as provided in the
certificate of incorporation, except as hereinafter provided, and each
director shall hold office until his successor has been duly elected and
qualified.
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.
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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.
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, president, any two directors or any
holder(s) of at least 25% of the outstanding shares of Series A Preferred
Stock 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
(provided that at least two directors nominated by holder(s) of Series A
Preferred Stock are present) 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
4
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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.
ARTICLE V.
COMMITTEE 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
committee 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 to report its
findings and recommendations to the Board of Directors for the 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 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
5
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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 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
(provided that at least one director nominated by holder(s) of Series A
Preferred Stock is present) 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.
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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 time establish:
Section 6.1.1. CHAIRMAN OF THE BOARD. The chairman of the board,
or in his absence, the president, shall preside when present at all meetings
of the stockholders and the Board. The chairman of the board shall advise
and counsel the president and other officers and shall exercise such powers
and perform such duties as shall be assigned to or required of him from time
to time by the Board or these Bylaws. 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. 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 have general and
active management of the business of the Company and shall see that all
orders and resolutions of the Board are carried into effect. 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.
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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 TREASURER. The assistant treasurer, 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 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.
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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.
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
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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 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
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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.
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 the Board of Directors
by a majority vote of a quorum consisting of directors who were not parties
to such action, suit or proceeding, or (2) if such a quorum is not obtainable,
or, even if obtainable a quorum of disinterested directors so directs, 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
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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 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
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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 of places, within or without
the State of Delaware, as shall be designed 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.
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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
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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
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
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these Bylaws or by the Board, no officer, agent or employees 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.
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 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 any 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
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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; provided, however that if an
alteration, amendment, repeal or replacement of these Bylaws changes any
rights, preferences, privileges of or limitations of the Series A Preferred
Stock, then such alteration, amendment, repeal or replacement shall require
the approval of at least sixty percent (60%) of the then outstanding shares
of Series A Preferred Stock, voting as a separate class. 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.
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ADVANCE PHARMACY SERVICES, INC.
INCENTIVE STOCK OPTION PLAN
1. PURPOSE. The purpose of this Incentive Stock Option Plan (the "Plan")
is to provide a means by which certain employees of Advance Pharmacy Services,
Inc. (the "Company") and its Affiliates (as defined below) may be given an
opportunity to purchase common stock of the Company ("Common Stock") and to
qualify such options as "incentive stock options" as such term is defined in
Section 422 of the Internal Revenue Code of 1986 (the "Code"). The Plan is
intended to advance the interests of the Company by encouraging stock ownership
on the part of certain employees, by enabling the Company and its Affiliates to
secure and retain the services of highly qualified persons, and by providing
employees with an additional incentive to advance the success of the Company and
its Affiliates. For purposes of this Plan, an "Affiliate" shall mean any parent
or subsidiary corporation of the Company as defined in Sections 424(e) and (f)
respectively of the Code.
2. STOCK SUBJECT TO OPTION. Subject to adjustment as provided in Section
4(g) hereof, options may be granted by the Company from time to time to purchase
up to an aggregate of 715 shares of the Company's authorized but unissued Common
Stock; provided, however, that the number of shares that may be granted to any
employee under the Plan shall be reasonable in relation to the purpose of the
Plan. Shares that by reason of the expiration of an option or otherwise are no
longer subject to purchase pursuant to an option granted under the Plan may be
reoptioned under the Plan. The Company shall not be required upon the exercise
of any option, to issue or deliver any shares of stock prior to the completion
of such registration or other qualification of such shares under any state or
Federal law, rule or regulation as the Company shall determine to be necessary
or desirable.
3. PARTICIPANTS. All employees of the Company and its Affiliates may be
granted options under the Plan. A director who is not otherwise employed by the
Company (or an Affiliate) may not be granted an option. A person who holds an
option granted hereunder that has not expired is referred to as an optionee.
4. TERMS AND CONDITIONS OF OPTIONS. The Committee (as that term is
defined in Section 5) may grant options from time to time pursuant to the Plan.
Such options shall be evidenced by written agreements substantially in the form
of the Stock Option Agreement, which is attached hereto as Appendix A, and shall
not be inconsistent with this Plan. Shares of stock that may be purchased under
an option granted pursuant to this Plan shall sometimes hereinafter be referred
to as "Option Shares." Nothing in this Plan or an option granted hereunder
shall govern the employment rights and duties between the optionee and the
Company or an Affiliate. Neither this Plan, nor any grant or exercise pursuant
hereto, shall constitute an employment agreement among such parties.
(a) OPTION PRICE. The option price for each Option Share shall not
be less than the fair market value of a share of the Common Stock on the
date the option is
<PAGE>
granted; provided, however, the foregoing notwithstanding, the option price
for options granted to any employee owning stock (using the attribution of
stock ownership rules of Section 424(d) of the Code) possessing more than
10% of the total combined voting power of all classes of stock of the
Company or any of its Affiliates on the date such option is granted (a "10%
Shareholder"), shall be at least 110% of the fair market value of the
Common Stock on the date the option is granted. The Committee shall, in
good faith, determine the fair market value of the Common Stock on the date
the option is granted, and the fair market value may be more or less than
the book value of the Common Stock.
(b) TERM OF OPTION. Any other provision of this Plan
notwithstanding, unless otherwise provided in an optionee's Stock Option
Agreement, each option granted under this Plan shall expire not more than
ten years from the date the option is granted, except that under the
circumstances described in Section 4(i), options may expire and terminate
at an earlier date.
(c) EXERCISE OF OPTION. Unless otherwise provided in an optionee's
Stock Option Agreement, each option shall be exercisable as to 20% of the
total shares covered by such option as of the first anniversary of the date
of grant, and the right to exercise with respect to an additional 20% of
the total shares shall accrue on each of the next four anniversaries of the
date of grant and shall be cumulative. The date of grant shall be the date
set forth in any option as the Date of Grant. Further, where an optionee's
employment by the Company and its Affiliates is terminated for any reason,
no option shall give an optionee (or his successor) a right to acquire any
greater number of shares than he had rights to acquire on the date of his
termination. The Committee may accelerate the time at which an option may
be exercised.
(d) MANNER OF EXERCISE.
(1) Shares of Common Stock purchased upon exercise of options
shall at the time of purchase be paid for in full. To the extent that
the right to purchase Option Shares has accrued hereunder, options may
be exercised from time to time by written notice to the Company
stating the full number of Option Shares with respect to which the
option is being exercised and the time of delivery thereof, which
shall be at least fifteen days after the giving of such notice unless
an earlier date shall have been mutually agreed upon, accompanied by
full payment for the shares which may be paid in cash, by check or in
shares of Common Stock having a fair market value (as determined by
the Committee in good faith) on the date of surrender equal to the
aggregate exercise price of the Option Shares as to which the Option
is exercised, or any combination of such methods of payment, or such
other consideration and method of payment for the issuance of Option
Shares as is permitted under Delaware General Corporation Law.
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(2) At the time of delivery, the Company shall, without stock
transfer or issue tax to the optionee (or other person entitled to
exercise the option), deliver to the optionee (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
Option 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. If
the Option Shares are not registered under the Securities Act of 1933
(the "Act"), then the Company at the time of exercise will require in
addition that the registered owner deliver investment representations
in form acceptable to the Company and its counsel, and the Company
will place a legend on the certificate for such Option Shares
restricting the transfer of same. At no time shall the Company have
any obligation or duty to register under the Act the Option Shares.
(3) The Company shall have the right to deduct from any
settlement of an award made under the Plan, including the delivery of
shares, an amount sufficient to cover withholding required by law for
any federal, state or local taxes or to take such other action as may
be necessary to satisfy any such withholding obligations. The
Committee may permit shares to be used to satisfy required tax
withholding and such shares shall be valued at the fair market value
as of the settlement date of the applicable award.
(e) NON-ASSIGNABILITY OF OPTION RIGHTS. No option shall be
assignable or transferable otherwise than by will or by the laws of descent
and distribution. During the lifetime of an optionee, the option is
exercisable only by the optionee.
(f) TERMINATION OF EMPLOYMENT. In the event that optionee's
employment by the Company and its Affiliates shall terminate for any
reason, the options granted to optionee pursuant to this Plan shall
terminate on the three-month anniversary of such termination. Should the
optionee elect to exercise an option granted hereunder during the three-
month period beginning on the date of termination, the Company shall have the
right to purchase and, upon written notice from the Company of its intention to
exercise such right, the optionee shall sell to the Company, all Option Shares
acquired during such three-month period. If the Company elects to purchase any
or all of such shares, the Company shall provide written notice thereof and
shall pay to the optionee the fair market value of such shares as determined in
good faith by the Board of Directors as of the date of the termination of
optionee's employment. The Company shall not have the right to purchase any
shares under this Section 4(f) if the Common Stock has been registered under the
Act and has been listed or admitted to trading on one or more national
securities exchanges or is listed on the Nasdaq National Market.
(g) ADJUSTMENT OF OPTIONS ON RECAPITALIZATION. The aggregate number
of shares of Common Stock for which options may be granted to persons
participating under
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the Plan, the number of shares covered by each outstanding option, and the
exercise price per share for each such option shall be proportionately
adjusted for any increase or decrease in the number of issued shares of
Common Stock of the Company resulting from the subdivision or consolidation
of shares, or the payment of a stock dividend after the date of grant of
the option, or other increase in such shares effected without receipt of
consideration by the Company, provided, however, that any options to
purchase fractional shares resulting from any such adjustment shall be
eliminated, and provided further, that any such adjustment shall be made in
a manner so as not to constitute a modification as defined in Section
424(h)(3) of the Code.
(h) ADJUSTMENT OF OPTIONS UPON REORGANIZATION.
(1) With respect to options to acquire stock of an Affiliate of
optionee's then present employer, if optionee's then present employer
ceases to be affiliated with the other member(s) of the Affiliation,
then the option shall expire and terminate thirty (30) days after the
date on which optionee's employer ceases to be an Affiliate.
Notwithstanding the foregoing, the provisions of this Section 4(h)
shall be subject to Section 4(b) and shall be subject to Section 4(i)
if the optionee receives notice under Section 4(i) at a time earlier
than the notice provided for herein.
(2) Excluding for purposes of this Section 4(h)(2) any
transactions between the Company and any Affiliate of the Company, in
the event of (i) a sale of substantially all of the Common Stock, (ii)
a sale of substantially all of the assets of the Company, or (iii) a
merger in which the Company is not to be the surviving corporation
(each a "Vesting Transaction"), the options of an optionee granted
hereunder may, in the sole discretion of the Board of Directors, vest
immediately prior to the closing of a Vesting Transaction and, to the
extent such Vesting Transaction does not occur, the vesting shall be
deemed rescinded and optionee shall again only be entitled to exercise
the options in accordance the terms of the optionee's Stock Option
Agreement. The Company shall give each optionee written notice of any
Vesting Transaction at least fifteen (15) days prior to the closing of
any such transaction, and each optionee shall notify the Company of
its intent to exercise any or all of its options immediately prior to
the closing of such Vesting Transaction; provided, however, that any
options not exercised prior to the closing of such Vesting Transaction
shall expire on the closing of such Vesting Transaction. The
foregoing notwithstanding, the provisions of this Section 4(h)(2)
shall be subject to Sections 4(b) and 4(d).
(i) DISSOLUTION OF ISSUER OF OPTION STOCK. In the event of the
proposed dissolution or liquidation of the Company, the options granted
hereunder shall terminate as of a date to be fixed by the Committee,
provided that not less than thirty (30) days prior written notice of the
date so fixed shall be given to the optionee, and the optionee
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shall have the right, during the period of thirty (30) days preceding such
termination, to exercise his option. The foregoing notwithstanding, the
provisions of this Section 4(i) shall be subject to Section 4(b) and shall
be subject to Section 4(h) if the optionee receives notice under Section
4(h) at a time earlier than the notice provided for herein.
(j) RIGHTS AS A SHAREHOLDER. The optionee shall have no rights as a
shareholder with respect to any shares of Common Stock of the Company held
under option until the date of issuance of the stock certificates to him
for such shares. Except as provided in Section 4(g), no adjustment shall
be made for dividends or other rights for which the record date is prior to
the date of such issuance.
5. ADMINISTRATION.
(a) The Plan shall be administered by a Compensation Committee (the
"Committee") consisting of one or more directors to be appointed by the
Board of Directors of the Company. The Board of Directors may, from time
to time, remove members from or add members to the Committee. Vacancies in
the Committee, however caused, shall be filled by the Board of Directors.
The Committee shall select one of its members as chairman and shall hold
meetings at such times and places as it may determine. The Committee may
appoint a secretary and, subject to the provisions of the Plan and to
policies determined by the Board of Directors, may make such rules and
regulations for the conduct of its business as it shall deem advisable.
All action of the Committee shall require the affirmative vote of 75% of
its members. Any action may be taken by a written instrument signed by all
of the members, and action so taken shall be fully as effective as if it
had been taken by a vote of all of the members at a meeting duly called and
held. The Board of Directors may act in lieu of the Committee and shall
act in lieu of a Committee at any time such a Committee is not instituted.
(b) Subject to the express terms and conditions of the Plan, the
Committee shall have full power to grant options under the Plan, to
construe or interpret the Plan, to prescribe, amend and rescind rules and
regulations relating to it and to make all other determinations necessary
or advisable for its administration.
(c) Subject to the provisions of Sections 3 and 4 hereof, the
Committee may, from time to time, determine which employees of the Company
or its Affiliates shall be granted options under the Plan, the number of
Option Shares subject to each option, and the time or times at which
options shall be granted, and the Company may grant such options under the
Plan.
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(d) The Committee shall report to the Board of Directors the names of
employees granted options, the number of Option Shares subject to, and the
terms and conditions of each option.
(e) No member of the Board of Directors or of the Committee shall be
liable for any action or determination made in good faith with respect to
the Plan or to any option.
6. EFFECTIVE DATE AND TERMINATION.
(a) The effective date of the Plan is December 1, 1993.
(b) The Plan shall terminate on December 1, 2003 but the Board of
Directors may terminate the Plan at any time prior to ten years from the
effective date of the Plan. Termination of the Plan shall not alter or
impair, without the consent of the optionee, any of the rights or
obligations and any option theretofore granted under the Plan.
7. AMENDMENTS. The Board of Directors of the Company may, from time to
time, alter, amend, suspend, or discontinue the Plan, or alter or amend any and
all option agreements granted thereunder, provided, however, that no such action
of the Board of Directors, without the approval of the shareholders of Company,
may alter the provisions of the Plan so as to:
(a) decrease the minimum option price;
(b) extend the term of the Plan beyond ten years or the maximum term
of the options granted beyond ten years;
(c) alter any outstanding option agreement to the detriment of the
optionee without his consent; or
(d) decrease, directly or indirectly (by cancellation and
substitution of options or otherwise), the option price applicable to any
option granted under this Plan.
The foregoing notwithstanding, (i) the Board of Directors may amend the
Plan in any respect in order to qualify the options granted pursuant hereto as
Incentive Stock Options as defined in Section 422 of the Code, and (ii) no
amendment may be made to this Plan (or any option granted hereunder without the
consent of the optionee) which could constitute a modification of any option
outstanding under Section 424(h) of the Code or which would adversely affect an
outstanding option's status as an incentive stock option under Section 422 of
the Code.
8. STATUS OF OPTIONS. Options granted pursuant to this Plan are intended
to qualify as Incentive Stock Options within the meaning of Section 422 of the
Code, and the terms of this
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Plan and options granted hereunder shall be so construed, provided, however,
that nothing in this Plan shall be interpreted as a representation, guarantee or
other undertaking on the part of the Company that the options granted pursuant
to this Plan are, or will be, determined to be Incentive Stock Options, within
the meaning of Section 422 of the Code.
9. USE OF PROCEEDS. The proceeds from the sale of Common Stock pursuant
to the exercise of options will be used for the Company's general corporate
purposes.
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APPENDIX A
INCENTIVE STOCK OPTION AGREEMENT
Advance Pharmacy Services, Inc. (the "Company"), in consideration of the
value of the continuing services of ("Optionee"), which continuing
services the grant of this option is designed to secure, and in consideration of
the undertakings made herein by Optionee, and pursuant to its Incentive Stock
Option Plan (the "Plan"), hereby grants to Optionee an option, evidenced by this
option agreement, exercisable for the period and upon the terms hereinafter set
out, to purchase ____________ (___) shares of common stock ("Common Stock") of
the Company upon exercise of the option.
1. EXERCISE PRICE. The exercise price of the option shall be $______ per
share, which price represents at least 100% of the fair market value of a share
of the Common Stock at the Date of Grant (as hereinafter defined).
2. TERM OF OPTION. This option is granted and dated as of
(sometimes hereinafter called the "Date of Grant"), and will terminate and
expire, to the extent not previously exercised, ten (10) years after the Date of
Grant, or at such earlier time as may be specified in Section 4 of the Plan.
Except as otherwise provided in this Option Agreement or in the Plan, this
option is exercisable as to 20% of the total shares covered by such option as of
the first anniversary of the Date of Grant, and the right to exercise with
respect to an additional 20% of the total shares shall accrue on each of the
next four anniversaries of the Date of Grant and shall be cumulative.
3. MANNER OF EXERCISE. The Optionee (or other person entitled to
exercise the option) shall purchase shares of Common Stock subject hereto in the
manner and in accordance with the rules set forth in the Plan.
4. TERMINATION OF EMPLOYMENT. As provided in the Plan, if Optionee's
employment with the Company and its Affiliates (as defined in the Plan) is
terminated for any reason, (i) any portion of the option not vested on the date
of termination will be forfeited, and (ii) at any time within three months of
the date of such termination, the Optionee shall have the right to exercise any
or all of the options vested in such Optionee immediately prior to such
termination; PROVIDED, however, that, if the Common Stock has not been
registered in accordance with the Securities Act of 1933 and has not been listed
or admitted to trading on one or more national securities exchanges or is not
quoted by the NASD Automated Quotation System, any shares of Common Stock
acquired upon exercise of the option following such termination, will be subject
to purchase by the Company at the fair market value of such shares as determined
in good faith by the Board of Directors.
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5. ADJUSTMENTS ON RECAPITALIZATION. The number of shares of Common Stock
subject hereto and the option price per share shall be proportionately adjusted
for any increase or decrease in the number of issued shares of the Common Stock
resulting from the subdivision or consolidation of shares, or the payment of a
stock dividend after the Date of Grant, or other decrease or increase in the
shares of Common Stock outstanding effected without receipt of consideration by
the Company, provided, however, that any options to purchase fractional shares
resulting from such adjustments shall be eliminated.
6. SUBJECT TO PLAN. This option is subject to all the terms and
conditions of the Plan, and specifically to the power of the Compensation
Committee of the Board of Directors of the Company to make interpretations of
the Plan and of options granted thereunder, and of the Board of Directors of the
Company to alter, amend, suspend, or discontinue the Plan subject to the
limitations expressed in the Plan. By acceptance hereof, Optionee acknowledges
receipt of a copy of the Plan and recognizes and agrees that all determinations,
interpretations, or other actions respecting the Plan may be made by a majority
of the Board of Directors of the Company or of the Compensation Committee, and
that such determinations, interpretations, or other actions are final,
conclusive and biding upon all parties, including Optionee.
IN WITNESS WHEREOF, this Option Agreement is executed as of the (DATE OF
GRANT).
ADVANCE PHARMACY SERVICES, INC.
By:
----------------------------------------
Name:
-----------------------------------
Title:
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The undersigned Optionee hereby accepts the benefits of the foregoing
Incentive Stock Option Agreement.
---------------------------------------------
, Optionee
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FORM OF AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is made as of this _____ day of October,
1996, by and between ADVANCE HEALTH CARE, INC., a Delaware corporation ("AHC")
and ADVANCE PARADIGM, INC., a Delaware corporation ("API") and subsidiary of
AHC.
RECITALS
A. API is engaged in the business of pharmacy benefit management.
B. AHC is a holding company, which holds, among other things,
approximately 55% of the outstanding capital stock of API, on a fully diluted
basis.
C. The Board of Directors of AHC and API deem it advisable and in the
best interest of such corporations and their respective stockholders that AHC be
merged with and into API on the terms and conditions set forth in this
Agreement.
D. The Boards of Directors of AHC and API have approved this Agreement,
AHC as the majority stockholder of API has approved this Agreement, and the
Board of Directors of AHC has resolved to recommend to its stockholders to vote
in favor of adoption of this Agreement.
Accordingly, in consideration of the mutual covenants contained herein, the
parties agree as follows:
ARTICLE I
THE MERGER
1.1 AGREEMENT AND PLAN OF MERGER. At the Effective Time (as defined
below), AHC shall be merged with and into API (the "Merger") in accordance with
the terms of this Agreement and the Agreement of Merger and Articles of Merger
referred to in Section 2.2 below. API and AHC are sometimes referred to herein
as the "Constituent Corporations."
1.2 EFFECT OF THE MERGER. At the Effective Time, the separate corporate
existence of AHC shall cease and API shall be the surviving corporation (the
"Surviving Corporation"). The Surviving Corporation shall thereupon succeed,
without other transfer, to all the rights and property of AHC and shall be
subject to all the debts and liabilities of AHC in the same manner as if the
Surviving Corporation had itself incurred them. All rights of creditors and all
liens upon the property of each of the Constituent Corporations shall be
preserved unimpaired, provided that such liens upon property of AHC shall be
limited to the property affected thereby immediately prior to the Effective
Time. Any action or proceeding pending by or against AHC may be prosecuted to
judgment, which shall bind the Surviving Corporation, or the Surviving
Corporation may be proceeded against or substituted in its place.
1.3 CHARTER DOCUMENTS OF API. The Certificate of Incorporation and Bylaws
of API, as amended to and including the Effective Time, shall be the Certificate
of Incorporation and Bylaws of the Surviving Corporation following the Effective
Time until changed as provided by law and their respective provisions. The name
of the Surviving Corporation shall from and after the Effective Time be and
continue to be Advance ParadigM, Inc. until changed in accordance with
applicable law.
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1.4 CONVERSION OF SECURITIES
(a) At the Effective Time, subject to the provisions of Section 1.5,
each outstanding share of common stock of AHC (the "AHC Capital Stock") shall by
virtue of the Merger and without any action on the part of the holder thereof,
be converted into the right to receive an equal number of shares (the "Closing
Shares") of Common Stock of API (the "API Common Stock").
(b) No fractional shares of API Common Stock will be issued, but the
holder who would otherwise be entitled to such fractional share shall be
entitled to receive in cash an amount equal to the value of such fractional
interest.
(c) The shares of API capital stock issued and outstanding
immediately prior to the Effective Time shall remain outstanding and shall not
be affected by the Merger.
(d) Any shares of AHC Capital Stock held in the treasury of AHC shall
be cancelled at the Effective Time.
(e) All options or other rights to purchase AHC Capital Stock or
other securities of AHC shall be converted into options to purchase an equal
number of shares of API Common Stock and shall be subject to the terms and
conditions of the 1993 Incentive Stock Option Plan of API (the "Plan"). API
shall reserve such additional number of shares of API Common Stock under the
Plan for which the options converted pursuant to this Section 1.4(e) shall be
exercisable.
(f) Subject to Section 6.2(b), each outstanding share of AHC Capital
Stock held by a holder who has demanded and perfected dissenters' rights in
accordance with Section 262 of the Delaware General Corporation Law (the
"Dissenting Shares") and who has not effectively withdrawn or lost such right
shall not be converted into or represent the right to receive shares of API
Common Stock, but the holder thereof shall be entitled only to such rights as
are granted by Section 262 of the Delaware General Corporation Law. If any
holder of AHC Capital Stock who notifies AHC of his or her intention to demand
payment for his or her shares in accordance with Section 262 of Delaware General
Corporation Law Act does not demand payment or otherwise perfect his or her
dissenters' rights, each share or AHC Capital Stock held by such holder shall
automatically be converted into the right to receive shares of API Common Stock
pursuant to Section 1.4(a) above.
1.5 EXCHANGE OF SECURITIES
(a) At the Closing (as defined below), API will issue shares of API
Common Stock to the stockholders of record of AHC calculated in the manner set
forth in Section 1.4(b).
(b) If substantially all of the assets or shares of API are purchased
or acquired in a reorganization, other than a reorganization in which the
ownership interest of the API stockholders are substantially the same before and
after such reorganization, then all contingent shares due Transferors (but for
their contingent nature) at the closing of such transaction shall be transferred
to them free of any contingency if, and only if, all of those Transferors then
subject to an employment agreement or noncompetition covenant sign such
documents as may be reasonably required to assure that their obligations of
employment and noncompetition shall be available to the purchasing or acquiring
party to the same degree and for the same period as if such purchase or
acquisition had not occurred.
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1.6 NO TRANSFERS. After the Effective Time, no transfer of shares of AHC
Capital Stock theretofore outstanding shall thereafter be made on its stock
transfer books. If, after the Effective Time, certificates which, immediately
prior to the Effective Time, represented shares of AHC Capital Stock are
presented to API, they shall be cancelled and exchanged for shares of API Common
Stock as provided in Sections 1.4 and 1.5. No shares of AHC stock shall be
issued between the date of this Agreement and the Effective Time.
1.7 OFFICERS AND DIRECTORS. The officers and directors of API immediately
prior to the Effective Time shall continue as officers and directors of the
Surviving Corporation following the Effective Time, continuing in office in
accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation.
ARTICLE II
CLOSING
2.1 TIME AND PLACE OF CLOSING. The closing of the transactions
contemplated by this Agreement (the "Closing") shall occur at the offices of
API, 545 E. John Carpenter Freeway, Suite 1900, Irving, Texas, at ____ a.m.,
local time on October __, 1996, or on such other date or at such other time as
API and AHC may agree (the "Closing Date").
2.2 EXECUTION OF MERGER AGREEMENTS. Prior to the Closing, AHC and API as
applicable, shall execute and deliver to the other this Agreement in a form to
be agreed upon for filing with the Delaware Secretary of State. The Certificate
of Merger shall be duly filed with the Delaware Secretary of State in accordance
with the Delaware General Corporation Law. The date of filing the Certificate
of Merger with the Delaware Secretary of State is sometimes referred to herein
as the "Effective Time."
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF TRANSFERORS
Transferors hereby, jointly and severally, represent and warrant to API as
follows, except as otherwise specifically disclosed in the schedules hereto:
3.1 ORGANIZATION, STANDING, AND QUALIFICATION OF AHC. AHC is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Delaware, and has all necessary corporate powers to own its
properties and to carry on its business as now owned and operated by it.
3.2 AUTHORIZATION. Each Transferor has full power and authority to
execute and deliver this Agreement and the documents and instruments to be
executed and delivered pursuant to this Agreement and to consummate the
transactions and perform the obligations contemplated herein and therein. This
Agreement has been duly executed and delivered on behalf of each Transferor and
all corporate proceedings on the part of any Transferor that is a corporation
necessary to authorize such execution and delivery have been completed.
3.3 RESTRICTED SECURITIES. Transferors are aware of and understanding the
following:
(a) That the shares of API Common Stock acquired by the AHC
Stockholders hereunder have not been registered for sale under the Securities
Act of 1933 (the "Securities Act") or any state blue sky law, based upon (among
other things) the bona fide nature of
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Transferors' investment intent as expressed herein and the accuracy and
completeness of Transferors' representations and warranties contained in this
Agreement;
(b) That, unless and until the shares of API Common Stock acquired by
the AHC Stockholders hereunder are registered for sale under the Securities Act
and any applicable state blue sky law, there will be substantial restrictions on
the transferability of the shares of common stock acquired by the AHC
Stockholders hereunder; there is no public market for the shares of API Common
Stock acquired by the AHC Stockholders hereunder and none is expected to develop
in the foreseeable future; and the AHC Stockholders will not be able to avail
themselves of the provisions of Rule 144 adopted by the Securities and Exchange
Commission (the "SEC") under the Securities Act, unless all of the conditions of
Rule 144 are met; and
3.4 LEGEND. The AHC Stockholders understand and agree that, until
registered under all applicable securities laws, all certificates evidencing any
of the shares of API Common Stock acquired by Transferors hereunder, whether
upon initial issuance or any transfer thereof, shall bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. THESE SECURITIES
HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED, SOLD,
TRANSFERRED, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933 OR AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT.
FURTHER, UPON THE FILING OF AN EFFECTIVE REGISTRATION STATEMENT
FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, THE
SECURITIES REPRESENTED BY THIS CERTIFICATE SHALL BE SUBJECT TO A
LOCK-UP PERIOD OF 180 DAYS AS MORE FULLY DESCRIBED IN THAT
CERTAIN AGREEMENT AND PLAN OF MERGER DATED OCTOBER __, 1996,
DURING WHICH LOCK-UP PERIOD THE SECURITIES MAY NOT BE OFFERED,
SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED.
3.5 FULL DISCLOSURE. None of the information provided API by Transferors
in connection with the Merger or this Agreement or made in any certificate or
memorandum furnished or to be furnished by any of them or on their behalf
pursuant to this Agreement, contains or will contain any untrue statement of a
material fact, or omits to state a material fact necessary to make the
statements made, in the light of the circumstances under which they were made,
not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF API
API hereby represents and warrants to AHC as follows, except as otherwise
specifically disclosed in the Schedules hereto:
4.1 ORGANIZATION AND RELATED MATTERS. API is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. API is qualified to do business in each jurisdiction in which the
transaction of business by API makes such qualification
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necessary except where the failure to be so qualified would not have a material
adverse effect on API.
4.2 AUTHORIZATION. API has full power and authority to execute and
deliver this Agreement and the documents and instruments to be executed and
delivered pursuant to this Agreement and to consummate the transactions and
perform the obligations contemplated herein and therein. This Agreement has
been duly executed and delivered on behalf of API and all corporate proceedings
on the part of API necessary to authorize such execution and delivery have been
completed in the case of API.
4.3 FULL DISCLOSURE. None of the informaion provided AHC or the
Transferors by API or made in connection with the Merger or this Agreement or
made in any certificate or memorandum furnished or to be furnished by API
contains or will contain any untrue statement of a material fact, or omits to
state a material fact necessary to make the statements made, in the light of the
circumstances under which they were made, not misleading.
ARTICLE V
COVENANTS OF THE PARTIES
5.1 JOINT ACTION; COOPERATION
(a) Subject to the terms and conditions of this Agreement, each of
the parties shall use its respective reasonable best efforts, and shall
cooperate with each of the other parties, to take, or cause to be taken, all
action and to do, or cause to be done, all things necessary, proper or
advisable, including furnishing any necessary information or copies of
documentation, to cause the Merger to be completed, and the other transactions
contemplated by this Agreement to be consummated, as expeditiously as reasonably
practicable in accordance with the provisions of this Agreement. In the event
that an action, suit, proceeding or investigation relating to this Agreement or
the transactions contemplated hereby is commenced at any time, each of the
parties shall cooperate and use its reasonable best efforts to defend against
the same.
(b) Without limitation on the generality of Section 5.1, the parties
shall cooperate with one another in: (i) determining whether (1) any filings
are required to be made, or any consents, approvals, permits or authorizations
are required to be obtained, under any law or regulation in connection with the
consummation of the Merger than as expressly provided for elsewhere in this
Agreement, and (2) any consents, approvals or waivers are required to be
obtained from third parties to contracts in connection with the consummation of
the Merger; and (ii) timely making any such filings, and seeking timely to
obtain any such consents, approvals, permits, authorizations or waivers.
5.2 LOCK-UP AGREEMENT.
(a) Each AHC Stockholder acknowledges that API is in the process of
registering shares of API Common Stock pursuant to a registration statement on
Form S-1 (the "Registration Statement") transmitted for filing with the
Securities and Exchange Commission on June 26, 1996.
(b) Each AHC Stockholder hereby irrevocably agrees that it will not,
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 API Common Stock or any securities convertible into or exchangeable or
exercisable for or any other rights to purchase or acquire
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API Common Stock, without the prior written consent of Hambrecht & Quist LLC,
acting alone or in its capacity as representative of the underwriters in the
registration, for a period of 180 days from the effective date of the
Registration Statement.
(c) If the AHC Stockholder is an individual, he or she may transfer
any shares of API Common stock or securities convertible into or exchangeable or
exercisable for the API Common Stock either during his or her lifetime or on
death by will or intestacy to his or her immediate family or to a trust the
beneficiaries of which are exclusively the undersigned and/or a member or
members of his or her immediate family; provided, however, that prior to any
such transfer each transferee shall execute an agreement, satisfactory to
Hambrecht & Quist LLC, acting along or in its capacity as the representative of
the API Common Stock, or securities convertible into or exchangeable or
exercisable for API Common Stock, subject to the provisions hereof, and there
shall be no further transfer except in accordance with the provision hereof.
For the puproses of this paragraph, "immediately family" shall mean spouse,
lineal descendant, father, mother, brother or sister of the transferor.
(d) Each AHC Stockholder hereby waives any rights of such AHC
Stockholder to sell shares of API Common Stock or any other security issued by
API pursuant to the Registration Statement, and acknowledges and agrees that for
a period of 180 days from the effective date of the Registration Statement such
AHC Stockholder has no right to require API to register under the Securities Act
of 1933 such API Common Stock or other securities issued by such AHC Stockholder
under this Section 5.2 and beneficially owned by such AHC Stockholder.
(e) The agreements of AHC Stockholder under this Section 5.2 are
irrevocable and shall be binding upon such AHC Stockholder's heirs, legal
representatives, successors and assigns. The AHC Stockholder agrees and
consents to the entry of stop transfer instructions with API's transfer agent
against the transfer of API Common Stock or other securities of API held by the
undersigned except in compliance with this Section 5.2.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS
6.1 CONDITIONS PRECEDENT FOR ALL PARTIES. The obligations of all parties
to consummate the transactions contemplated by this Agreement shall be subject
to fulfillment of each of the following conditions precedent on or prior to the
Closing Date (any of which amy be waived in writing in whole or in part by the
parties):
(a) CORPORATE APPROVAL. All corporate actions necessary to authorize
the execution, delivery and performance of this Agreement shall have been duly
and validly taken by each of API and AHC.
(b) COMPLIANCE WITH LAW. Each party shall be reasonably satisfied
with the steps taken for compliance with applicable requirements of all
applicable laws and with all other legal matters.
(c) NO INJUNCTIONS; ORDERS. No preliminary or permanent injunction
or other order shall have been issued by any court or governmental entity nor
shall any statute, rule, regulation, or executive order be promulgated or
enacted by any governmental entity that prevents the consummation of the
transactions contemplated by this Agreement.
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(d) CONSENTS AND APPROVALS. All authorizations, consents, orders, or
approvals of, or declarations or filings with, any governmental entity necessary
for the consummation of the transactions contemplated by this Agreement shall
have been filed or been obtained.
6.2 CONDITIONS PRECEDENT FOR API. The obligations of API to consummate
the transactions contemplated by this Agreement shall be subject to fulfillment
of each of the following conditions precedent on or prior to the Closing Date
(any of which may be waived in writing in whole or in part by API):
(a) IN GOOD STANDING. On the Closing Date, API shall have received a
Certificate of Good Standing, dated the date of closing, and a review of the
Articles, Bylaws, minutes books and stock books of AHC shall reveal no
impediment to the closing of this transaction in accordance with its terms.
(b) STOCKHOLDER APPROVAL. The holders of at least a majority of the
outstanding shares of AHC shall have voted in favor of this Agreement, the Plan
of Merger and the Merger, and no AHC Stockholder shall have the right to demand
payment pursuant to Section 262 of the Delaware General Corporation Law.
6.3 CONDITIONS PRECEDENT FOR THE TRANSFERORS. The obligations of
Transferors to consummate the transactions contemplated by this Agreement shall
be subject to fulfillment of each of the following conditions precedent on or
prior to the Closing Date (any of which may be waived in writing in whole or in
part by the Transferors):
(a) IN GOOD STANDING. On the Closing Date, API shall have received a
Certificate of Good Standing, dated the date of closing, and a review of the
Articles, Bylaws, minute books and stock books of AHC shall reveal no impediment
to the closing of this transaction in accordance with its terms.
(b) STOCKHOLDER APPROVAL. The holders of at least a majority of the
outstanding shares of AHC shall have voted in favor of this Agreement, the Plan
of Merger and the Merger.
ARTICLE VII
SURVIVAL AND INDEMNIFICATION
7.1 SURVIVAL. All representations, warranties, covenants and agreements
made by API and Transferors in this Agreement (including statements contained in
any certificate, Schedule, Exhibit, statement, report or other documents
delivered by or on behalf of any party hereto pursuant to this Agreement) shall
survive the execution, delivery and performance of this Agreement and any
investigations, inspections, examinations, or audits made by or on behalf of any
of the parties, for so long as claims for indemnification can be made under this
Agreement.
7.2 INDEMNITY. Transferors, jointly and severally, indemnify, defend, and
hold harmless API, and API, indemnifies, defend, and holds harmless Transferors,
against and in respect of any and all claims, demands, losses, costs, expenses,
obligations, liabilities, damages, recoveries, and deficiencies, including
interest, penalties, and reasonable attorneys' fees, that the indemnified party
shall incur or suffer, that arise, result from, or relate to any breach of, or
failure by the indemnifying party to perform, any of their representations,
warranties, covenants, or agreements in this Agreement or in any schedule,
certificate, exhibit, or other instrument furnished or to be furnished by them
under this Agreement. Notwithstanding any other provision of this Agreement, no
party shall be liable to any other party on any warranty,
7
<PAGE>
representation, or covenant made by them in this Agreement, or under any of
their indemnities in this Agreement, regarding any single claim, loss, expense,
obligation, or other liability that does not exceed $5,000; provided, however,
that when the aggregate amount of all such claims, losses, expenses,
obligations, and liabilities not exceeding $5,000 each reaches $15,000, they
shall, subject to the above limitation on their maximum aggregate liability,
thereafter be liable in full for all those breaches and indemnities and
regarding all those claims, losses, expenses, obligations, and liabilities.
7.3 INDEMNIFICATION PROCEDURES; DEFENSE. As soon as reasonably practical
after obtaining knowledge thereof, the party or parties indemnified hereunder
(the "Indemnitee") shall promptly notify the indemnifying party (the
"Indemnitor") of the existence of any claim, demand, loss, liability, cause of
action or other matter involving liability or potential liability to which the
Indemnitor's indemnification obligations would or might apply. Such notice
shall specify the representation, warranty, covenant, commitment or obligation
with respect to which the claim is made, the facts giving rise to the claim and
the alleged basis therefor, and the amount (to the extent then determinable) of
liability for which indemnity is asserted. In the event of any claim, action,
suit or proceeding by a third party (a "Third Party Claim") with respect to
which there may be indemnity hereunder, the Indemnitee shall give the Indemnitor
20 business days (or such shorter period as required by the exigencies of such
Third Party Claim) in which to elect to conduct the defense of the same at its
own expense and with counsel of its own selection (who shall be approved by the
Indemnitee, which approval shall not be unreasonably withheld); provided that
the Indemnitee shall at all times also have the right to fully participate in
the defense at its own expense. If the Indemnitor fails to commence or continue
such defense, the Indemnitee shall have the right, but not the obligation, to
undertake the defense of, and to compromise or settle (exercising reasonable
business judgment) the Third Party Claim on behalf, for the account, and at the
risk and expense of the Indemnitor. Notwithstanding the foregoing, if the
matter might have an effect on the ongoing business of API or its affiliates, or
their respective relationships with clients, API or its designee shall have
first right to defend the same on the basis set forth in the preceding sentence.
Except as provided above, the Indemnitee shall not compromise or settle a Third
Party Claim without the written consent of the Indemnitor, which consent shall
not be unreasonably withheld. If a Third Party Claim is one that cannot by its
nature be defended solely by the Indemnitor, the Indemnitee shall make available
all information and assistance that the Indemnitor may reasonably request,
provided that any associated, expenses shall be paid by the Indemnitor.
7.4 REPRESENTATIVE. Transferors hereby appoint David D. Halbert as their
representative and agent ("Representative") through whom all actions by AHC and
the Transferors relating to this Agreement generally, and this indemnity
specifically, are to be taken and to whom all communications to AHC and the
Transferors are to be directed until his replacement by a majority in interest
of the Transferors. The Representative and any successor shall have full power
and authority to act in the name and on behalf of AHC and the Transferors in all
matters relating to this Agreement and the transactions contemplated by this
Agreement, and all such actions taken by the Representative shall be binding
upon AHC and the Transferors.
ARTICLE VIII
TERMINATION
This Agreement may be terminated and the proposed Merger abandoned at any
time prior to the Effective Time by the mutual agreement of the parties
(authorized, in the case of API and AHC, by their respective Boards of
Directors).
8
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ARTICLE IX
GENERAL
9.1 AMENDMENT. Subject to applicable law, this Agreement may be amended,
modified or supplemented, with respect to any of its provisions, but only by
written agreement of the parties to this Agreement (authorized, in the case of
AHC, by its Board of Directors).
9.2 WAIVER OF COMPLIANCE; CONSENTS. Except insofar as any provision of
this Agreement is expressly provided to be nonwaivable, any failure of any party
to this agreement to comply with any obligation, covenant, agreement or
condition in this Agreement may be waived in writing by the other parties, but
such waiver shall not bind any non-waiving party nor shall it operate against
the waiving party as a waiver of, or estoppel, with respect to, any subsequent
to other failure of compliance. Whenever this Agreement requires or permits
consent by or on behalf of any party to this Agreement, such consent shall be
given in writing.
9.3 GOVERNING LAW. This Agreement and the legal relations between the
parties to this Agreement shall be governed in all respects, including validity,
interpretation, effect and performance, by the internal laws of the State of
Delaware, without giving effect to the principles of conflict of laws thereof.
9.4 PARTIES IN INTEREST. This Agreement, and the rights, interests and
obligations created by this Agreement, shall bind and insure to the benefit of
the parties to this Agreement and their respective successors and assigns, and
shall confer no right, benefit or interest upon any other Person, except that
the stockholders of AHC shall be deemed to be third party beneficiaries with
respect to Articles I and VII.
9.5 NOTICES. All notices or other communications required or permitted
under this Agreement shall be in writing and shall be deemed to have been duly
given if delivered personally or by courier guaranteeing delivery within the
next two days, or by telecopier, addressed as follows or such other address as
the party to be notified has furnished in writing by a notice given in
accordance with this Section 9.5:
If to API, to:
Advance ParadigM, Inc.
545 E. John Carpenter Freeway
Suite 1900
Irving, Texas 75062
Attention: David D. Halbert
Fax: (972) 830-6196
With a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1700 Pacific Avenue
Suite 4100
Dallas, Texas 75201-4675
Attention: J. Kenneth Menges, Jr., P.C.
Fax: (214) 969-4343
9
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If to AHC, to:
Advance Health Care, Inc.
545 East John Carpenter Freeway
Suite 1900
Irving, Texas 75062
Attention: David D. Halbert
Fax: (972) 830-6916
with a copy to:
Laura I. Johansen
545 East John Carpenter Freeway
Suite 1900
Irving, Texas 75062
Fax: (972) 830-6916
If to the Representative, to:
David D. Halbert
545 East John Carpenter Freeway
Suite 1900
Irving, Texas 75062
Fax: (972) 830-6916
Any such notice or communication shall be deemed given as of the date of
delivery, if delivered personally, on the second day after the sending thereof,
if by courier, and when transmission is acknowledged, if telecopied (except that
a notice of change of address for receipt of notice under this Section 9.5 shall
not itself be deemed to have been given until actually received by the
addressee).
9.6 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
shall be considered one and the same agreement.
9.7 RECOVERY OF LITIGATION COSTS. If any legal action or any arbitration
or other proceeding is brought for the enforcement of this Agreement, or because
of all alleged dispute, breach, default, or misrepresentation in connection with
any of the provisions of this Agreement, the successful or prevailing party or
parties shall be entitled to recover reasonable attorneys' fees and other costs
incurred in that action or proceeding, in addition to any other relief to which
it or they may be entitled.
9.8 ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding between the parties pertaining to the subject matter of this
Agreement, and supersede all prior agreements, understandings, negotiations,
representations and discussions, whether written or oral.
9.9 SEVERABLE PROVISIONS. If any of the provisions of this Agreement may
be determined to be illegal or otherwise unenforceable, in whole or in part, the
remaining provisions and any partially enforceable provisions to the extent
enforceable, shall nevertheless be binding and enforceable.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives as of the day and year first above
written.
ADVANCE PARADIGM, INC.
a Delaware corporation
By:
------------------------------------------
Print Name:
----------------------------------
Print Title:
---------------------------------
ADVANCE HEALTH CARE, INC.
a Delaware corporation
By:
------------------------------------------
Print Name:
----------------------------------
Print Title:
---------------------------------
The undersigned, being the Representative designated in Section 7.4 of
the foregoing Agreement and Plan of Merger, agrees to serve as Representative
and to bound by the terms of such Agreement pertaining thereto.
---------------------------------------------
David D. Halbert
11
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Exhibit 5
[LETTERHEAD]
October 7, 1996
Advance ParadigM, Inc.
545 E. John Carpenter Freeway
Irving, Texas 75062
Gentlemen:
We have acted as counsel to Advance ParadigM, Inc., a Delaware corporation
(the "Company"), in connection with the proposed public offering of up to
2,973,196 shares of the Company's Common Stock, par value $.01 per share (the
"Common Stock"), as described in Registration Statement No. 333-06931 on Form
S-1 (the "Registration Statement") filed with the Securities and Exchange
Commission.
We have, as counsel, examined such corporate records, certificates and
other documents and reviewed such questions of law as we have deemed necessary,
relevant or appropriate to enable us to render the opinions listed below. In
rendering such opinions, we have assumed the genuineness of all signatures and
the authenticity of all documents examined by us. As to various questions of
fact material to such opinions, we have relied upon representations of the
Company.
Based upon such examination and representations, we advise you that, in our
opinion:
A. The shares of Common Stock which are to be sold and delivered by the
Company and certain selling stockholders of the Company (the "Selling
Stockholders") as contemplated by the Underwriting Agreement (the "Underwriting
Agreement"), the form of which is filed as Exhibit 1 to the Registration
Statement, have been duly and validly authorized by the Company.
B. The shares of Common Stock which are to be sold and delivered by the
Company as contemplated by the Underwriting Agreement will, when issued and
delivered in accordance with the terms of the Underwriting Agreement, be validly
issued, fully paid and non-assessable.
<PAGE>
Advanced ParadigM, Inc.
October 7, 1996
Page 2
C. The shares of Common Stock which are currently held by the Selling
Stockholders and which are to be sold and delivered by the Selling Stockholders
as contemplated by the Underwriting Agreement, have been validly issued and are
fully paid and non-assessable.
D. The shares of Common Stock which are to be issued by the Company to
the Selling Stockholders upon the merger of Advance Health Care, Inc., a
Delaware corporation, with and into the Company as described in the Registration
Statement and which are to be sold and delivered by the Selling Stockholders as
contemplated by the Underwriting Agreement will, when received, be validly
issued, fully paid and non-
assessable.
We consent to the filing of this opinion as Exhibit 5 to the Registration
Statement and to the reference to this firm under the caption "Legal Matters" in
the Prospectus contained therein.
Sincerely,
/s/ Akin, Gump, Strauss, Hauer & Feld, L.L.P.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
<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 2,900,750
Conversion of Series A Preferred Stock 2,500,000
Impact of options and warrants using the
treasury stock method 799,436
Shares issued in offering to retire debt 836,320
---------
Weighted average shares outstanding 7,036,507
---------
---------
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 2,900,750
Conversion of Series A Preferred Stock 2,500,000
Impact of options and warrants using the
treasury stock method 799,436
Shares issued in offering to retire debt 836,320
---------
Weighted average shares outstanding 7,036,507
---------
---------
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. 4 to Registration Statement No. 333-06931 on Form S-1.
ARTHUR ANDERSEN LLP
Dallas, Texas
October 8, 1996
