<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---- ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-21447
ADVANCE PARADIGM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2493381
(State or other jurisdiction of (I.R.S. employer
incorporation of organization) Identification No.)
545 E. JOHN CARPENTER FREEWAY, SUITE 1900, IRVING, TX 75062
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972)830-6199
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on May 30,
1997 as reported on the Nasdaq National Market, was approximately $80,077,000.
As of May 30, 1997, Registrant had outstanding 7,800,817 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 1997 Annual Meeting of
Stockholders are incorporated by reference in Part III.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
ITEM 1. BUSINESS
OVERVIEW
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 ten 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.
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
50,000 retail pharmacies throughout the United States. In 1994, as a 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 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 ("AHC"). Immediately prior to the Company's
initial public offering in October 1996, AHC was merged with and into the
Company, with the Company being the surviving corporation. 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. ("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 Blue Cross and Blue
Shield of Maryland.
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.
1
<PAGE>
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
growing demand among payors for comprehensive disease management programs as
cost containment becomes more dependent on improvements in the quality of
care. 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
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.
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 various disease states.
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
50,000 retail pharmacies throughout the United States. The Company currently
provides PBM services to over 300 health plan benefit sponsors covering over
ten million plan members enrolled in the Company's programs. 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
2
<PAGE>
products, the availability of new drugs and generic equivalents 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 50,000 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 26.6 million claims processed in fiscal year 1997, including over 8.3
million claims processed in the quarter ended March 31, 1997.
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 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 15,000 prescriptions per week.
3
<PAGE>
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. 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.
In January 1997, the Company announced a multi-year distribution,
licensing and development agreement with National Health. Under the
agreement, the Company will work with National Health to jointly develop
fully integrated personal care management products for the managed care
marketplace. In addition, the Company will license and distribute personal
health management services from National Health's Call Center Services
division, allowing the Company to expand its health benefit management
product offering immediately. With National Health, the Company's primary
focus was selecting a strategic partner in the development of technology and
information products and services designed to improve health and promote
wellness. With over 700 clients nationwide, National Health provides Medical
Call Center-based products and services to help improve consumer use of and
satisfaction with health care resources.
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.
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. 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 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 disease management programs.
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
4
<PAGE>
analysis, while the Company and its clients benefit 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 customers, certain customers have assumed 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.
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, Scottsdale and Irving. 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.
COMPETITION
The Company competes with a number of larger, national companies,
including Caremark International Inc. (a subsidiary of MedPartners, Inc.),
Diversified Pharmaceutical Services, Inc. (a subsidiary of SmithKline Beecham
Corporation), Express Scripts, Inc. (an affiliate of NYLIFE HealthCare
Management, 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 it would be acquired by
Columbia/HCA 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
5
<PAGE>
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.
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 PBM 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. Further, the Clinton
administration has proposed that anti-remuneration laws also be applied to
services for which Medicare or Medicaid payments are not made.
State anti-remuneration 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 courts
in several recent cases have ruled that contracts that violate anti-remuneration
laws are voidable.
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.
6
<PAGE>
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 HHS
programs) issued a report on PBM arrangements on April 15, 1997. The report
was based primarily on a nationwide survey of HMOs that use PBMs, and
examined the benefits of, and concerns raised by, the HMOs' relationships
with PBMs.
The report identified two major concerns: (1) the potential for bias
resulting from alliances of PBMs and drug manufacturers and (2) the lack of
oversight by HMOs regarding the performance of PBMs in delivering quality
services to beneficiaries. The report makes two main recommendations. First,
the Health Care Financing Administration (HCFA) and state Medicaid programs
should include stronger oversight provisions in their risk contracts with
HMOs by requiring HMOs to review the performance of the PBMs with which they
contract. Second, HCFA, FDA and the Health Resources and Services
Administration (HRSA), working with outside organizations, should develop
quality measures for pharmacy practices that can be used in managed care
settings.
While the named agencies generally concurred with the report's
conclusions, as of yet they have not taken any formal actions with respect to
the report. The Company intends to closely monitor whether any such actions
are taken and whether such actions would have any impact 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.
7
<PAGE>
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 50,000 retail
pharmacies and will admit any licensed pharmacy that meets the Company's
credentialing 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.
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
8
<PAGE>
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. The Health Care Financing Administration requires mail order
pharmacies to provide toll-free numbers for patient counseling of Medicaid
recipients residing out of state. Congressionally mandated goals to provide
useful information on prescription drugs to the American consumer may involve
participation by mail order pharmacies in assisting in the dissemination of
such information. 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 May 31, 1997, the Company had 336 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.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K 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 Form 10-K, including
without limitation, statements under "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", as well as
elsewhere in this Form 10-K. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by this section.
RISK FACTORS
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
9
<PAGE>
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.
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."
MANAGEMENT OF GROWTH. The Company's business has grown rapidly in the
last three years, with total revenues increasing approximately 618% from
$35.0 million in fiscal year 1994 to $251.6 million in fiscal year 1997. The
Company's recent expansion has resulted in substantial growth in the number
of its employees (from 117 at March 31, 1994 to 336 at May 31, 1997), 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.
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 1997, the Company's two largest customers,
Arkansas Blue Cross & Blue Shield ("Arkansas BCBS") and the State of
Oklahoma, accounted for approximately 18% and 14%, respectively, of the
Company's consolidated revenues. During this period, the Company's five
largest customers accounted for approximately 55% of the Company's revenues.
Loss of the Company's accounts with Arkansas BCBS or the State of Oklahoma,
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 REBATE REVENUE. Approximately 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. 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
10
<PAGE>
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. 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
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 has increased 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
11
<PAGE>
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.
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.
INTANGIBLE ASSETS. At March 31, 1997, approximately $12.7 million, or
12% 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.
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 board 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
12
<PAGE>
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-driver reforms could have unpredictable
effects on the Company's business, operating results and financial condition.
See "Business-Government Regulation."
PROFESSIONAL AND GENERAL LIABILITY INSURANCE. Various aspects of the
Company's business, including the dispensing of pharmaceutical products, may
subject it to litigation and liability for damages. While the Company
maintains and intends to maintain professional and general liability
insurance coverage, there can be no assurance that the Company will be able
to maintain such insurance in the future or that such insurance will be
available on acceptable terms or will be adequate to cover any or all
potential product or professional liability claims. A successful product or
professional liability claim in excess of the Company's insurance coverage
could have a material adverse effect upon the Company's business, operating
results and financial condition. See "Business-Liability Insurance."
TAX RISKS ASSOCIATED WITH THE MERGER. Immediately prior to the
Offering, AHC was merged (the "Merger") with and into the Company. Although
the Merger was structured as a tax free event, if the Company were to be
audited, there can be no assurance that the Internal Revenue Service would
not successfully challenge the tax free treatment, which could have a
material adverse effect upon the Company's business, operating results and
financial condition.
CONTROL BY EXISTING STOCKHOLDERS. Officers and directors of the
Company and their affiliates own beneficially approximately 37.0% of the
Company's outstanding Common Stock. 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.
ITEM 2. PROPERTIES
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 18,260
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. The Company has entered into
negotiations to purchase this pharmacy building.
ITEM 3. LEGAL PROCEEDING
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.
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On October 8, 1996 the Company sold 2,397,067 shares of its Common
Stock at $9.00 per share in an initial public offering. Prior to that time,
there was no public market for the Company's Common Stock.
The Company's Common Stock is traded on the Nasdaq National Market tier
of the Nasdaq Stock Market under the Symbol "ADVP". The following table sets
forth for the periods indicated the high and low sale prices for the
Company's Common Stock as reported by NASDAQ.
Fiscal Year 1997 High Low
---------------- ---- ---
First Quarter N/A N/A
Second Quarter N/A N/A
Third Quarter $20 3/4 $7 3/4
Fourth Quarter $25 1/4 $12 7/8
The Company's Common Stock was held by 122 stockholders of record as of
May 30, 1997. The Company estimates that its shares were held by
approximately 4,100 beneficial stockholders.
The Company intends to retain its earnings, if any, to finance the
growth and development of its business and does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The payment of any
future dividends will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the future earnings,
operations, capital requirements and financial condition of the Company.
ITEM 6. 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 five-year period ended March
31, 1997, have been derived from the Consolidated Financial Statements that
have been audited by Arthur Andersen LLP, independent public accountants.
14
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues $11,867 $34,970 $91,306 $125,333 $251,562
Cost of operations:
Cost of revenues..................... 11,196 32,612 85,532 117,788 240,810
Selling, general and
administrative expenses........... 1,091 2,330 4,963 6,158 7,309
-------- -------- -------- -------- -------
Total cost of operations.......... 12,287 34,942 90,495 123,946 248,119
-------- -------- -------- -------- -------
Operating income (loss)................. (420) 28 811 1,387 3,443
Interest income......................... -- -- 91 366 1,560
Interest expense........................ (26) (423) (878) (716) (379)
Provision for income taxes............. -- -- -- -- (1,486)
-------- -------- -------- -------- -------
Net income (loss)....................... $ (446) $ (395) $ 24 $ 1,037 $3,138
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
Pro forma: (1)
Net income per share................. $ .25 $ .39
Weighted average shares
outstanding...................... 7,037 8,718
Historical:
Net income (loss) per share.......... $ (.08) $ (.07) $ -- $ .17 $ .38
Weighted average shares
outstanding........................ 5,625 5,625 6,200 6,200 8,300
</TABLE>
<TABLE>
<CAPTION>
March 31,
--------------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In thousands)
BALANCE SHEET DATA:
<C> <C> <C> <C> <C>
Working capital......................... $ (465) $ 769 $ (453) $ 316 $24,864
Total assets............................ 1,761 29,152 37,288 58,905 107,473
Long-term debt to related
parties............................... -- 6,928 7,000 7,000 --
Redeemable preferred stock.............. -- 10,256 11,076 11,896 --
Stockholders' equity (deficit).......... (9) (936) (1,732) (1,498) 42,528
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------------------------------------
1994 1995 1996 1997
---- ---- ---- ----
(In thousands)
SUPPLEMENTAL DATA: (2)
<S> <C> <C> <C> <C>
Pharmacy network claims
processed.............................. 816 1,527 9,375 26,579
Mail pharmacy prescriptions
filled................................. 228 383 536 677
Estimated health plan
members (at period end)................ 3,745 5,208 9,040 10,200
</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 year 1993.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Advance Paradigm, Inc. is a leading independent provider of PBM services to
health benefit plan sponsors, with over ten 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, 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 50,000
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 which created 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 the years ended March 31,1996 and 1997, and management believes that
the Company will be able to cross-sell these and other services to its existing
customers.
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.
16
<PAGE>
Except for the historical information contained herein, the discussion in
this Form 10-K 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 Form 10-K
should be read as being applicable to all related forward-looking statements
wherever they appear in this Form 10-K. The Company's actual results could
differ materially from those discussed here.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data of the
Company, for the periods indicated, as a percentage of revenues.
Year Ended March 31,
----------------------------------------
1995 1996 1997
---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues. . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of operations:
Cost of revenues. . . . . . . . . 93.7 94.0 95.7
Selling, general and
administrative expenses . . . . 5.4 4.9 2.9
----- ----- -----
Total cost of operations . . 99.1 98.9 98.6
----- ----- -----
Operating income. . . . . . . . . . 0.9 1.1 1.4
Interest income (expense), net (0.9) (0.3) 0.4
Provision for income taxes. . . . . -- -- 0.6
----- ----- -----
Net income. . . . . . . . . . . . . 0.0% 0.8% 1.2%
----- ----- -----
----- ----- -----
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
REVENUES. Revenues for the year ended March 31, 1997 ("fiscal year 1997")
increased by $126.2 million, or 101%, compared to revenues for the fiscal year
ended March 31, 1996 ("fiscal year 1996"). Approximately 80% of the increase in
revenues was attributable to a 183% increase in the number of pharmacy claims
processed during the fiscal year. Approximately 13% of the increase was
attributable to additional sales of the Company's mail pharmacy services. This
increase in mail pharmacy revenue resulted from a 26% increase in the number of
mail prescriptions dispensed. Approximately 7% 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 1997 increased by
$123.0 million, or 104%, compared to the prior fiscal year. This increase was
attributable primarily to the additional costs associated with the Company's
claims processing growth. As a percentage of revenues, cost of revenues
increased from 94% in fiscal year 1996 to 96% in fiscal year 1997. This increase
resulted primarily from the increase in the Company's claims processing revenues
generated by new customers utilizing the Company's pharmacy network. In cases in
which the Company has an independent obligation to pay its network pharmacy
providers, the Company includes payments from its plan sponsors for these
benefits as revenues and payments to its pharmacy providers as cost of revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal year 1997 increased by $1.2 million, or 19%,
compared to fiscal year 1996. This increase was the result of the Company's
expansion of its administrative and support staff levels and salaries and
benefits in response to volume growth in all services. In spite of the increase,
selling, general and administrative expenses as a percentage of revenues
decreased from
17
<PAGE>
5% in fiscal year 1996 to 3% in fiscal year 1997 as the result of greater
economies of scale and due to the increase in revenues associated with the
Company's claims processing services. Additional revenues generated by clients
utilizing the Company's network pharmacy providers do not result in an increase
in selling, general and administrative expenses.
INTEREST INCOME AND INTEREST EXPENSE. Interest income, net of interest
expense, for fiscal year 1997 increased $1.5 million compared to fiscal year
1996. The increase resulted from cash management programs which utilized the
Company's short-term excess cash to generate interest income through investment
in money market funds and high grade commercial paper. In addition, the
Company's cash balance in fiscal year 1997 included the $10 million proceeds
from the June 1996 issuance of its Series B Preferred Stock and the $19.1
million proceeds from the October 1996 initial public offering. A portion of the
proceeds were 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") and, as a result, interest expense decreased $337,000.
INCOME TAXES. The Company had income tax loss carryforwards available to
offset income generated for fiscal year 1996 and, as a result, incurred no
federal income tax expense. For fiscal year 1997 the Company recorded income tax
expense of $1.5 million resulting from fully utilizing its remaining net
operating loss carryforwards in fiscal year 1997.
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 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.
18
<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. Results
of operations for any particular quarter are not necessarily indicative of
results of operations for any future quarters.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31
1996 1996 1996 1996 1997
---- ---- ---- ---- ----
(In thousands)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues $37,313 $49,809 $58,019 $70,025 $73,709
Cost of operations:
Cost of revenues 34,986 47,454 55,540 67,186 70,630
Selling, general and adminis-
trative expenses 1,719 1,714 1,781 1,890 1,924
------- ------- ------- ------- -------
Total cost of operations 36,705 49,168 57,321 69,076 72,554
------- ------- ------- ------- -------
Operating income 608 641 698 949 1,155
Interest income, net of expense 7 28 120 467 566
Net income before taxes $ 615 $ 669 $818 $1,416 $1,721
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997 the Company had working capital of $24.9 million. The
increase in working capital at March 31, 1997 as compared to March 31, 1996
resulted primarily from two equity offerings completed in fiscal year 1997. In
June 1996, the Company received $10.0 million from the sale of its Series B
Preferred Stock in a private placement. In October 1996, the Company completed
an initial public offering of its Common Stock. The Company received net
proceeds of approximately $19.1 million, after deducting underwriting discount
and expenses. The Company used $7.0 million to repay the Whitney Note, and the
balance of the funds were invested in money market funds and high-grade
commercial paper.
The Company's net cash provided by operating activities was $3.7 million,
$15.7 million and $15.4 million for the years ended March 31, 1995, 1996 and
1997, 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 $2.2 million, $1.6 million and $2.9 million for the years ended March 31,
1995, 1996 and 1997, respectively. Cash used in investing activities was used
for purchases of property, plant and equipment associated with growth and
expansion of the Company's facilities. For the year ended March 31, 1997, the
Company received $10.0 million from the sale of its Series B Preferred Stock and
approximately $19.1 million from the sale of Common Stock. Of the proceeds from
the sale of Common Stock, $7.0 million was used to retire debt.
During fiscal year 1997, the Company's continued growth resulted in net
cash provided by operating activities of $15.4 million. Historically, the
Company has been able to fund its operations and continued growth through cash
from operations. During fiscal year 1997, the Company's operating cash flow
funded its capital expenditures of $2.9 million, and its short-term
19
<PAGE>
excess cash was invested in money market funds and high grade commercial
paper. The Company anticipates its capital expenditures of approximately $6
million for the year ending March 31, 1998 will primarily consist of
additional enhancements to the Company's claim processing systems, and
further automation of the Company's mail service facility. In addition, the
Company has the opportunity to purchase its mail service building which has
previously been leased under a long-term arrangement. The Company anticipates
that cash from operations, combined with the proceeds remaining from its
initial public offering will be sufficient to meet the Company's internal
operating requirements and expansion programs, including capital
expenditures, 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 has
adopted 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 years
1996 and 1997, the Company agreed to issue warrants to purchase shares of its
Common Stock to two customers contingent upon future expansion of member lives.
As of March 31, 1997, no stock was issued and no warrants were earned under the
agreements. In management's opinion, the fair value of the warrants at the date
of the agreements was not material and therefore had no material impact on the
Company's financial position or results of operations.
In February 1997, the Financial Accounting Standards Board issued
Statement 128, "Earnings Per Share" (SFAS 128). SFAS 128 is effective for
financial statements for both interim and annual periods ending after
December 31, 1997, with early application prohibited. The computation of
fully diluted earnings per share under SFAS 128 will not be significantly
different than the Company's historical earnings per share computation.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is found on pages F-1 through F-19
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be incorporated by reference
from the Company's definitive Proxy Statement for its 1997 Annual Meeting of
Stockholders to be filed with the Commission not later than 120 days following
the Company's fiscal year pursuant to Regulation 14A (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be incorporated by reference
from the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be incorporated by reference
from the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be incorporated by reference
from the Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The response to this portion of Item 14 is submitted as a separate
section of this report on page F-1.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended March 31, 1997.
(c) Exhibits Required by Item 601 of S-K: See index to exhibits on pages
22-24.
21
<PAGE>
Exhibits and Financial Statement Schedules
EXHIBIT NO. EXHIBITS
- ----------- --------
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 to the 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, $0.01 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 S. 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.
22
<PAGE>
EXHIBIT NO. EXHIBITS
- ----------- --------
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 October 8, 1996, among the
Company, Advance Health Care, David D. Halbert, Jon S. Halbert,
Danny Phillips, the Purchasers and Whitney Debt Fund.
4.11* --- Warrant for Purchase of Shares of Common Stock of the Company
dated December 8, 1993, in favor of BCBS of Maryland.
4.12* --- Stock Purchase Agreement dated as of June 25, 1996, by and
between the Company and BCBS of Texas.
4.13* --- Warrant Agreement dated as of November 25, 1995, by and between
the Company and BCBS of Texas.
4.14** --- Amended and Restated Incentive Stock Option Plan.
4.15* --- Incentive Stock Option Plan.
4.16* --- Warrant Agreement dated as of September 12, 1996, by and between
the Company and VHA, Inc.
4.17* --- Form of Agreement and Plan of Merger.
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, 1996, 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, 1996, 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, 1996, by and
between the Company and John H. Sattler.
10.8** --- Employment Agreement effective as of June 17, 1996, by and
between the Company and Ernest Buys.
23
<PAGE>
10.9* --- Employment Agreement effective as of February 15, 1996, by and
between the Company and Alan T. Wright.
10.10* --- Form of Health Benefit Management Services Agreement.
10.11* --- Sublease dated May 2, 1996, between Lincoln National Life
Insurance Company and Advance Data.
10.12* --- Lease dated March 6, 1994, by and between Hill Management
Services, Inc. and Advance Clinical (formerly ParadigM).
10.13* --- 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.
10.14* --- 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.
10.15* --- Managed Pharmacy Benefit Services Agreement dated September 1,
1995, between the Company and BCBS of Texas.
11** --- Statement regarding computation of per share earnings.
27** --- Financial Data Schedule.
- ---------------
* Previously filed in connection with the Company's Registration
Statement on Form S-1 filed October 8, 1996 (No. 333-06931).
** Filed herewith.
24
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
June 24, 1997 on its behalf by the undersigned, thereunto duly authorized.
ADVANCE PARADIGM, INC.
By: /s/ David D. Halbert
--------------------
David D. Halbert
Chairman of the
Board, President and
Chief Executive
Officer
Each person whose signature appears below hereby authorizes David D.
Halbert and Danny Phillips or either of them, as attorneys-in-fact to sign on
his behalf, individually, and in each capacity stated below and to file
amendments and/or supplements to the Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dated indicated.
Signature Title Date
--------- ----- ----
/s/ David D. Halbert Chairman of the Board, President June 24, 1997
- -------------------- -------
David D. Halbert and Chief Executive Officer
(Principal Executive Officer)
/s/ Jon S. Halbert Executive Vice President, Chief June 24, 1997
- -------------------- -------
Jon S. Halbert Operating Officer and Director
/s/ T. Danny Phillips Senior Vice President, Chief June 24, 1997
- -------------------- -------
T. Danny Phillips Financial Officer, Secretary and
Treasurer (Principal Financial
and Accounting Officer)
/s/ Peter M. Castleman Director June 24, 1997
- -------------------- -------
Peter M. Castleman
/s/ Rogers K. Coleman Director June 24, 1997
- -------------------- -------
Rogers K. Coleman, M.D.
25
<PAGE>
/s/ Stephen L. Green Director June 24, 1997
- -------------------- -------
Stephen L. Green
/s/ Jeffrey R. Jay Director June 24, 1997
- -------------------- -------
Jeffrey R. Jay, M.D.
/s/ Kenneth J. Linde Director June 24, 1997
- -------------------- -------
Kenneth J. Linde
/s/ Michael D. Ware Director June 24, 1997
- -------------------- -------
Michael D. Ware
26
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets--March 31, 1996 and 1997...................... F-3
Consolidated Statements of Operations for the Years Ended March 31,
1995, 1996 and 1997.................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
Years ended March 31, 1995, 1996 and 1997.............................. F-5
Consolidated Statements of Cash Flows for the Years Ended March 31,
1995, 1996 and 1997.................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Report of Independent Public Accountants on Financial Statement Schedule.. S-1
Schedule II. Valuation and Qualifying Accounts and Reserves for the
years ended March 31, 1995, 1996 and 1997.............................. S-2
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, 1996 and 1997, 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, 1997. 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, 1996 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas,
May 12, 1997
F-2
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
------------------------
1996 1997
---- ----
CURRENT ASSETS:
Cash and cash equivalents $16,457,000 $ 51,086,000
Accounts receivable, net of allowance for
doubtful accounts of $130,000 and $142,000,
respectively 23,078,000 35,343,000
Inventories 1,598,000 1,859,000
Prepaid expenses and other 449,000 426,000
----------- -----------
Total current assets 41,582,000 88,714,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $1,935,000
and $3,292,000, respectively 4,080,000 5,576,000
INTANGIBLE ASSETS, net of accumulated amortization
of $808,000 and $1,154,000, respectively 13,045,000 12,699,000
OTHER ASSETS, net of accumulated amortization of
$49,000 and $0, respectively 198,000 484,000
----------- -----------
Total assets $58,905,000 $107,473,000
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $39,000,000 $ 59,782,000
Accrued salaries and benefits 1,283,000 1,991,000
Income taxes payable ---- 712,000
Other accrued expenses 934,000 1,365,000
Current portion of other noncurrent liabilities 49,000 ----
----------- -----------
Total current liabilities 41,266,000 63,850,000
NONCURRENT LIABILITIES:
Long-term debt to related parties 7,000,000 ----
Deferred income taxes ---- 755,000
Other noncurrent liabilities, less current
portion 241,000 340,000
----------- -----------
Total liabilities 48,507,000 64,945,000
----------- -----------
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, 1996,
converted in October 1996 11,896,000 ----
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Series B convertible preferred stock,
$.01 par value; 5,000 shares authorized,
0 and 4,444 shares issued and outstanding
at March 31,1996 and 1997, respectively ---- ----
Common stock, $.01 par value; 25,000,000 shares
authorized,3,130,500 and 7,800,817 shares
issued and outstanding at
March 31, 1996 and 1997, respectively ---- 78,000
Additional paid-in capital 1,518,000 42,891,000
Accumulated deficit (3,016,000) (441,000)
----------- -----------
Total stockholders' equity (deficit) (1,498,000) 42,528,000
----------- -----------
Total liabilities and stockholders' equity
(deficit) $58,905,000 $107,473,000
----------- -----------
----------- -----------
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,
------------------------------------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES $91,306,000 $125,333,000 $251,562,000
----------- ------------ -------------
COST OF OPERATIONS:
Cost of revenues 85,532,000 117,788,000 240,810,000
Selling, general and
administrative expenses 4,963,000 6,158,000 7,309,000
----------- ------------ -------------
Total cost of operations 90,495,000 123,946,000 248,119,000
----------- ------------ -------------
Operating income 811,000 1,387,000 3,443,000
INTEREST INCOME 91,000 366,000 1,560,000
INTEREST EXPENSE (878,000) (716,000) (379,000)
----------- ------------ -------------
INCOME BEFORE INCOME TAXES 24,000 1,037,000 4,624,000
PROVISION FOR INCOME TAXES ---- ---- 1,486,000
----------- ------------ -------------
NET INCOME $ 24,000 $ 1,037,000 $ 3,138,000
----------- ------------ -------------
----------- ------------ -------------
PRO FORMA:
NET INCOME PER SHARE $0.25 $0.39
------------ -------------
------------ -------------
WEIGHTED AVERAGE SHARES OUTSTANDING 7,036,507 8,718,209
HISTORICAL:
NET INCOME PER SHARE $ ---- $ 0.17 $ 0.38
----------- ------------ -------------
----------- ------------ -------------
WEIGHTED AVERAGE SHARES OUTSTANDING 6,200,187 6,200,187 8,300,049
----------- ------------ -------------
----------- ------------ -------------
</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, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
Series B Preferred
Common Stock Stock Additional
---------------------- ----------------------
Number of Number of Paid In Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- ------- --------- ------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1994 3,125,000 $ -- -- $ -- $1,501,000 $(2,437,000) $(936,000)
Net income -- -- -- -- -- 24,000 24,000
Dividends and accretion on
Series A 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 and accretion on
Series A 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 -- -- -- -- -- 3,138,000 3,138,000
Issuance of Common Stock
in connection with the
exercise of employee
stock options 3,000 -- -- -- 12,000 -- 12,000
Issuance of Series B
Preferred Stock -- -- 4,444 -- 10,000,000 -- 10,000,000
Dividends and accretion on
Series A Preferred Stock -- -- -- -- -- (410,000) (410,000)
Issuance of Common Stock
in connection with an initial
public offering 2,397,067 24,000 -- -- 19,111,000 -- 19,135,000
Effect of stock split -- 31,000 -- -- (31,000) -- --
Issuance of Common Stock
in connection with the
conversion of Series A
Preferred Stock 2,500,000 25,000 -- -- 12,279,000 -- 12,304,000
Reduction of Common Stock
outstanding in connection
with the merger with AHC (229,750) (2,000) -- -- 2,000 -- --
Dividends on Series B
Preferred Stock -- -- -- -- -- (153,000) (153,000)
---------- ------- -------- -------- ---------- ----------- -----------
BALANCE, March 31, 1997 7,800,817 $78,000 4,444 $ -- $42,891,000 $(441,000) $42,528,000
---------- ------- -------- -------- ---------- ----------- -----------
---------- ------- -------- -------- ---------- ----------- -----------
</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>
Year Ended March 31,
-----------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 24,000 $ 1,037,000 $ 3,138,000
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation and amortization 969,000 1,313,000 1,704,000
Noncash interest expense 162,000 -- --
Provision for doubtful accounts 58,000 23,000 12,000
Change in certain assets and liabilities--
Accounts receivable (5,333,000) (7,104,000) (12,277,000)
Inventories (183,000) (367,000) (261,000)
Prepaid expenses and other assets (324,000) (58,000) (265,000)
Accounts payable, accrued expenses
and other noncurrent liabilities 8,285,000 20,809,000 23,387,000
----------- ------------ ------------
Net cash provided by operating activities 3,658,000 15,653,000 15,438,000
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,245,000) (1,594,000) (2,853,000)
----------- ------------ ------------
Net cash used in investing activities (2,245,000) (1,594,000) (2,853,000)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock -- -- 10,000,000
Net proceeds from issuance of Common Stock -- 17,000 19,147,000
Net payments on long-term obligations (245,000) (244,000) (6,950,000)
Payment of preferred stock dividend -- -- (153,000)
----------- ------------ ------------
Net cash provided by (used in) financing
activities (245,000) (227,000) 22,044,000
NET INCREASE IN CASH 1,168,000 13,832,000 34,629,000
CASH AND CASH EQUIVALENTS, beginning of year 1,457,000 2,625,000 16,457,000
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 2,625,000 $ 16,457,000 $ 51,086,000
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
SUPPLEMENTARY INFORMATION:
Cash paid for interest totaled approximately $716,000, $716,000 and
$379,000 in 1995, 1996 and 1997, respectively.
The Company made no income tax payments in 1995 and 1996.
The Company made income tax payments of $19,000 in 1997.
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 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.
In October 1996, AHC was merged with and into the Company. This merger was
consummated as a means of simplifying the corporate structure of the Company and
was intended to qualify as a tax free reorganization (see Note 9).
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.
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.
F-7
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include overnight investments, money market
accounts and high-grade commercial paper with original maturities of three
months or less.
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. 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 $346,000 in the years
ended March 31, 1995, 1996 and 1997, respectively.
F-8
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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, 1996 or 1997.
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.
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. When the Company has an independent obligation to pay its network
pharmacy providers, the Company 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 records the claims processing service fees as net revenues.
Clinical, formulary, rebate and disease management service revenues are
recognized as the services are performed and the rebates are 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.
F-9
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 Company's October 1996 initial public
offering (the "Offering"), the net proceeds of which were 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 9). As required by the Securities Exchange
Commission (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
Company's Series B Preferred Stock is considered to be a common stock equivalent
and is included in the weighted average shares outstanding for the year ended
March 31, 1997.
Historical net income per share gives effect to the conversion of the
redeemable Series A preferred stock to Common Stock and the impact to shares and
options outstanding of the merger of AHC with and into API. Net income per share
is computed using the weighted average number of common and common equivalent
shares outstanding during the year which include stock options and warrants. As
the effect of potentially dilutive securities was antidilutive, there was no
difference between primary and fully diluted net income per share.
In February 1997, the Financial Accounting Standards Board issued
Statement 128, "Earnings Per Share" (SFAS 128). SFAS 128 is effective for
financial statements for both interim and annual periods ending after
December 31, 1997, with early application prohibited. The computation of fully
diluted earnings per share under SFAS 128 will not be significantly different
than the Company's historical earnings per share computation.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with current
year presentation.
F-10
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
March 31,
--------------------------
1996 1997
----------- -----------
Machinery and equipment. . . . . . . . . . . . $ 709,000 $ 834,000
Computer equipment and software. . . . . . . . 3,963,000 6,232,000
Furniture and equipment. . . . . . . . . . . . 924,000 1,071,000
Leasehold improvements . . . . . . . . . . . . 419,000 731,000
----------- -----------
6,015,000 8,868,000
Less--Accumulated depreciation and amortization (1,935,000) (3,292,000)
----------- -----------
$ 4,080,000 $ 5,576,000
----------- -----------
----------- -----------
4. DEBT:
Long-term debt at March 31, 1996, consisted of a balance due under a
$7,000,000 Note and Warrant Purchase Agreement (the "Agreement") dated December
8, 1993. The Agreement obligated 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 balance due was paid during the year ended March 31, 1997.
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
9). The warrants are exercisable for a period of 10 years.
F-11
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OTHER NONCURRENT LIABILITIES:
Other noncurrent liabilities consisted of the following:
March 31,
----------------------
1996 1997
--------- ---------
Capital lease obligation . . . . . . . . . . . . $ 49,000 $ ----
Other liabilities. . . . . . . . . . . . . . . . 241,000 340,000
--------- ---------
290,000 340,000
Less--Current portion. . . . . . . . . . . . . . (49,000) ----
--------- ---------
$ 241,000 $ 340,000
--------- ---------
--------- ---------
The Company's capital lease terminated in March 1997. Other liabilities is
comprised of deposits held for the benefit of certain customers in connection
with pharmacy benefit contracts.
6. LEASES:
The Company leases office and dispensing facility space, equipment, and
automobiles under various operating leases. The Company was obligated to make
future minimum payments under noncancelable operating lease agreements as of
March 31, 1997, as follows:
Years Ending Operating
March 31, Leases
------------ ----------
1998 . . . . . . . . . . . . . . . . . . $2,393,000
1999 . . . . . . . . . . . . . . . . . . 2,228,000
2000 . . . . . . . . . . . . . . . . . . 1,847,000
2001 . . . . . . . . . . . . . . . . . . 560,000
2002 . . . . . . . . . . . . . . . . . . 81,000
----------
Total minimum lease payments. . . . . . $7,109,000
----------
----------
Total rent expense incurred in the years ended March 31, 1995, 1996 and
1997 was $714,000, $1,135,000 and $2,204,000, respectively.
F-12
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES:
The Company has entered into long-term employment agreements with certain
management employees. These employment agreements 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. CONCENTRATION OF BUSINESS:
One customer accounted for approximately 26.5% and 18.3% of the Company's
revenues for the years ended March 31, 1995 and 1996, respectively. Two
customers accounted for approximately 32.5% of the Company's revenues for the
year ended March 31, 1997. No other customer accounted for over 10% of the
Company's revenues in fiscal years 1995, 1996 or 1997.
9. STOCK TRANSACTIONS:
SERIES B PREFERRED STOCK
On June 25, 1996, the Company issued a total of 4,444 shares of $.01 par
value, Series B convertible preferred stock ("Series B Preferred Stock") to a
customer at a price of $2,250 per share. Shares of the Series B Preferred Stock
may be converted by the holder into 250 fully-paid and non-assessable shares of
Common Stock. Holders of the Series B Preferred Stock are not entitled to vote
on any matter. 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. Furthermore, 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, holders of the Series B Preferred
F-13
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK TRANSACTIONS: (CONTINUED)
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 of Series B
Preferred Stock and to participate equally and ratably with holders of the
Common Stock in the net assets of the Company available for distribution to
stockholders. 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. If the Company forces such a conversion, 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.
COMMON STOCK
On October 7, 1996, the Company amended and restated its Certificate of
Incorporation to, among other things, increase the number of authorized shares
of its $.01 par value common stock ("Common Stock") to 25,000,000 and the number
of shares of its preferred stock to 5,000,000, of which 5,000 shares are
designated as Series B Preferred Stock. 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.
On October 8, 1996 the Company completed the Offering of its Common Stock.
On November 7, 1996 the Underwriters exercised the over-allotment option of the
Offering. Including the over-allotment option, the Company sold 2,397,067 shares
of its Common Stock at a price of $9.00 per share, prior to underwriting
discount and other offering expenses. In connection with the Offering, the
Company's redeemable Series A cumulative convertible preferred stock ("Series A
Preferred Stock") automatically converted into 2,500,000 shares of Common Stock.
F-14
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK TRANSACTIONS: (CONTINUED)
Immediately prior to the consummation of the Offering, AHC was merged with
and into the Company (the "Merger"). Prior to the Merger, AHC held 3,125,000
shares of the Company's Common Stock. In connection with the Merger, the AHC
incentive stock option plan was merged with the Company's Incentive Stock Option
Plan, and holders of options under the AHC incentive stock option plan received
options to purchase Common Stock under the Company's Incentive Stock Option
Plan. In the Merger, the Company canceled the shares held by AHC and issued
shares of Common Stock directly to the AHC stockholders (the "AHC Stockholders")
based upon their fully-diluted proportionate ownership interests in AHC after
giving consideration to the new shares of AHC to be issued in repayment of debt
as indicated below. After the Merger, there were 2,903,750 shares of Common
Stock outstanding and 229,750 additional options outstanding at exercise prices
ranging from $0.65 to $2.71 per share. Immediately prior to the Merger, AHC
distributed 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
certain indebtedness of AHC payable to an affiliate of a preferred stockholder
of the Company which was assumed by an AHC stockholder) was exchanged for
additional shares of AHC common stock. The spin-off and exchange of indebtedness
did not impact the number of shares of the Company's Common Stock outstanding.
The Common Stock outstanding as of March 31, 1997 resulted from the
following transactions:
Shares outstanding after the Merger. . . . . . . . . . . . . 2,903,750
Shares sold in the offering. . . . . . . . . . . . . . . . . 2,397,067
Shares issued from the conversion of Series A Preferred Stock 2,500,000
---------
7,800,817
---------
---------
The Company has 3,130,500 and 7,800,817 shares of Common Stock issued and
outstanding at March 31, 1996 and 1997, respectively. The Company has reserved
shares of Common Stock at March 31, 1997, for the following:
Conversion of Series B Preferred Stock . . . . . . . . . . . 1,111,111
Exercise of stock options. . . . . . . . . . . . . . . . . . 2,037,750
Exercise of warrants . . . . . . . . . . . . . . . . . . . . 1,025,500
---------
4,174,361
---------
---------
F-15
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK TRANSACTIONS: (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, 1997, the Company
agreed to issue to a customer warrants to purchase 84,500 shares of its Common
Stock at a price of $8.10 per share. During the years ended March 31, 1996 and
1997, the Company agreed to issue warrants to purchase 548,250 shares of its
Common Stock at prices ranging from $8.10 to $11.00 per share to two customers
contingent upon future expansion of member lives. As of March 31, 1997, no
warrants have been earned or issued. In management's opinion, the fair value of
the warrants at the date of the agreements was not material.
10. 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, 1997, the number of shares of
Common Stock issuable under the Plans may not exceed 2,037,750 shares. The
Company has reserved 2,037,750 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, 1997, 632,850 options were vested at exercise prices of $.65 to $19.75
per share.
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. The following table summarizes the
Company's stock option activity.
F-16
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLAN: (CONTINUED)
<TABLE>
<CAPTION>
1995 1996 1997
----------------------------------------------------------------------------
Shares Wtd. Avg. Shares Wtd. Avg. Shares Wtd. Avg.
Ex. Price Ex. Price Ex. Price
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 636,750 $ 3.28 783,500 $ 7.80 810,500 $ 5.15
Granted 146,750 27.38 195,500 12.82 445,000 10.34
Transferred from AHC -- -- -- -- 229,750 1.12
Exercised -- -- (5,500) 3.20 (3,000) 3.20
Canceled -- -- (163,000) 27.12 (24,500) 10.75
-------- ------ -------- ------ --------- ------
Outstanding at end of year 783,500 7.80 810,500 5.15 1,457,750 6.02
-------- ------ -------- ------ --------- ------
-------- ------ -------- ------ --------- ------
Exercisable at end of year 127,500 3.28 276,500 5.84 632,850 2.95
Price range $3.20 to $30.00 $3.20 to $11.00 $.65 to $19.75
Weighted average fair value
of options granted $-- $3.88 $3.31
</TABLE>
The following table reflects the weighted average exercise price and
weighted average contractual life of various exercise price ranges of the
1,457,750 options outstanding as of March 31, 1997.
Weighted Avg. Wtd. Avg. Contractual
Exercise Price Range Shares Exercise Price Life (yrs.)
- --------------------------------------------------------------------------------
$ .65 to $ 2.71 229,750 $ 1.12 4.1
$ 3.20 to $ 4.80 610,000 $ 3.29 6.5
$ 9.00 to $ 12.50 608,000 $ 10.37 7.1
$18.75 to $ 19.75 10,000 $ 19.25 9.8
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
ranges of assumptions for the years ended March 31, 1996 and 1997, respectively:
risk-free interest rates of 4.8% to 5.0%; expected lives of three to five years;
expected volatility of 30% to 50%. The Company continues to account for stock
based compensation under APB No. 25, "Accounting for Stock Issued to Employees",
as allowed by SFAS 123. Had compensation cost for these plans been determined
consistent with SFAS 123, the Company's net income and earnings per share would
have been reduced to the following pro forma amounts:
F-17
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLAN: (CONTINUED)
1996 1997
---- ----
Net income:
As reported $1,037,000 $3,138,000
Pro forma 1,021,000 2,977,000
Historical net income per share:
As reported $0.17 $0.38
Pro forma 0.16 0.36
Because SFAS 123 method of accounting has not been applied to options granted
prior to April 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
11. RETIREMENT PLAN BENEFITS:
The Company sponsors a retirement plan for all eligible employees, as
defined in the plan document. The plan is qualified under Section 401(k) of the
Internal Revenue Code. Compensation expense associated with the Company's plan
amounted to approximately $50,000, $102,000 and $129,000 for the years ended
March 31, 1995, 1996 and 1997, respectively. The Company is required to
contribute at least 50% of the first 6% of salary deferral contributed by each
participant.
F-18
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES:
The provision for income taxes for the year ended March 31, 1997 differed
from the amounts computed by applying the U.S. federal tax rate of 34 percent to
pretax earnings as a result of the following:
1995 1996 1997
-------- ---------- -----------
Tax at U.S. federal $ 8,000 $ 353,000 $ 1,572,000
income tax rate
Benefit of operating (16,000) (382,000) (89,000)
loss carryforwards
Other, net 8,000 29,000 3,000
-------- ---------- -----------
Provision for income taxes $ --- $ --- $ 1,486,000
-------- ---------- -----------
-------- ---------- -----------
Of the $1,486,000 provision for income taxes in 1997, $755,000 represents
deferred income taxes, $19,000 has been paid in the current year, with the
remainder of $712,000 currently due.
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:
March 31, March 31,
1996 Changes 1997
-------- --------- ---------
Gross deferred tax asset:
Net operating loss carryforwards. $652,000 $(652,000) $ --
Other accruals. . . . . . . . . . 142,000 (3,000) 139,000
Other . . . . . . . . . . . . . . 44,000 4,000 48,000
-------- --------- ---------
838,000 (651,000) 187,000
Gross deferred tax liability:
Amortization of goodwill. . . . . (458,000) (196,000) (654,000)
Depreciation. . . . . . . . . . . (193,000) (95,000) (288,000)
-------- --------- ---------
(651,000) (291,000) (942,000)
Valuation allowance (187,000) 187,000 --
-------- --------- ---------
Net deferred tax liability. . . . $ -- $(755,000) $(755,000)
-------- --------- ---------
-------- --------- ---------
F-19
<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 Form 10-K and have issued our report thereon dated May 12,
1997. 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.
/s/ ARTHUR ANDERSEN LLP
Dallas, Texas
May 12, 1997
S-1
<PAGE>
ADVANCE PARADIGM, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning Charged to (1) End of
of Year Expenses Deductions Year
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
Year ended March 31, 1997:
Allowance for doubtful accounts receivable. . . . $130,000 $12,000 $ --- $142,000
</TABLE>
- -----------------------
(1) Uncollectible accounts written off, net of recoveries.
S-2
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. EXHIBITS
- ----------- --------
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 to the 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, $0.01 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 S. 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.
<PAGE>
EXHIBIT NO. EXHIBITS
- ----------- --------
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 October 8, 1996, among the
Company, Advance Health Care, David D. Halbert, Jon S. Halbert,
Danny Phillips, the Purchasers and Whitney Debt Fund.
4.11* --- Warrant for Purchase of Shares of Common Stock of the Company
dated December 8, 1993, in favor of BCBS of Maryland.
4.12* --- Stock Purchase Agreement dated as of June 25, 1996, by and
between the Company and BCBS of Texas.
4.13* --- Warrant Agreement dated as of November 25, 1995, by and between
the Company and BCBS of Texas.
4.14** --- Amended and Restated Incentive Stock Option Plan.
4.15* --- Incentive Stock Option Plan.
4.16* --- Warrant Agreement dated as of September 12, 1996, by and between
the Company and VHA, Inc.
4.17* --- Form of Agreement and Plan of Merger.
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, 1996, 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, 1996, 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, 1996, by and
between the Company and John H. Sattler.
10.8** --- Employment Agreement effective as of June 17, 1996, by and
between the Company and Ernest Buys.
<PAGE>
10.9* --- Employment Agreement effective as of February 15, 1996, by and
between the Company and Alan T. Wright.
10.10* --- Form of Health Benefit Management Services Agreement.
10.11* --- Sublease dated May 2, 1996, between Lincoln National Life
Insurance Company and Advance Data.
10.12* --- Lease dated March 6, 1994, by and between Hill Management
Services, Inc. and Advance Clinical (formerly ParadigM).
10.13* --- 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.
10.14* --- 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.
10.15* --- Managed Pharmacy Benefit Services Agreement dated September 1,
1995, between the Company and BCBS of Texas.
11** --- Statement regarding computation of per share earnings.
27** --- Financial Data Schedule.
- ---------------
* Previously filed in connection with the Company's Registration
Statement on Form S-1 filed October 8, 1996 (No. 333-06931).
** Filed herewith.
<PAGE>
<TABLE>
<S> <C> <C>
- -----------------------------------
INCORPORATED UNDER THE LAWS COMMON STOCK
OF THE STATE OF DELAWARE $.01 PAR VALUE
NUMBER SHARES
---------------------- -----------------------
C ADVANCE PARADIGM, INC.
---------------------- -----------------------
THIS CERTIFICATE IS TRANSFERABLE IN CUSIP 007491 10 3
DALLAS, TEXAS AND NEW YORK, NEW YORK SEE REVERSE FOR CERTAIN
DEFINITIONS
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK OF
Advance Paradigm, Inc., a Delaware corporation (hereinafter referred to as the "Corporation"),
transferable on the books of the Corporation in person or by duly authorized attorney upon
surrender of this certificate properly endorsed. This certificate is not valid unless
countersigned by the transfer agent and registered by the registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of its duly
authorized officers.
[SIGCUT] Dated:
PRESIDENT
[SEAL] COUNTERSIGNED AND REGISTERED:
[SIGCUT] ChaseMellon Shareholder Services, L.L.C.
TRANSFER AGENT
SECRETARY AND REGISTRAR
BY
AUTHORIZED SIGNATURE
- -----------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ADVANCE PARADIGM, INC.
The Corporation will furnish without charge to each stockholder who so requests, a copy of the designations, powers,
preferences and relative, participating, optional or other special rights of each class of stock or series thereof of the
Corporation and the qualifications, limitations or restrictions of such preferences and/or rights. Such requests may be
made to the Secretary of the Corporation.
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as
though they were written out in full according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- .......... Custodian ..........
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ............................
in common (State)
Additional abbreviations may also be used though not in the above list.
For value received, _______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------
--------------------------------
------------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
----------------------------------------------------------------------------- shares
of the common stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint
--------------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises.
Dated
----------------------------
---------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE GUARANTEED:
BY
---------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
</TABLE>
<PAGE>
TERMINATION AGREEMENT
THIS TERMINATION AGREEMENT (this "Agreement") is made this 8th day of
October, 1996 by and among Advance ParadigM, Inc., a Delaware corporation
formerly known as Advance Pharmacy Services, Inc. (the "COMPANY"); Advance
Health Care, Inc., a Delaware corporation ("AHC"); Canaan Capital Limited
Partnership, Canaan Capital Offshore Limited Partnership, C.V., Quai Ltd.,
Stephen L. Green, Dr. Jeffrey R. Jay, J. H. Whitney & Co., Whitney 1990 Equity
Fund, L.P. and Whitney Subordinated Debt Fund, L.P. (collectively, the
"INVESTORS"); David D. Halbert, Jon S. Halbert and Dan Phillips (collectively,
the "EXECUTIVE STOCKHOLDERS"). Each of the Executive Stockholders, AHC and any
other holders of at least 5% of the outstanding capital stock of the Company
(who is also not an Investor) shall be referred to herein as a "STOCKHOLDER".
RECITALS:
A. The Company, AHC, the Investors and the Executive Stockholders are
parties to that certain Voting Co-Sale and Right of First Refusal Agreement
dated as of August 4, 1993 and amended by Amendment No. 1 thereto dated
December 8, 1993 (as amended, the "VOTING RIGHTS AGREEMENT").
B. The Company has filed a registration statement on Form S-1 (No.
333-06931) (the "Registration Statement") with the Securities and Exchange
Commission (the "Commission") on June 26, 1996, as amended, in order to register
shares of the Company's common stock, par value $.01 per share, in an
underwritten public offering, with Hambrecht & Quist LLC, Montgomery Securities
and J.P. Morgan Securities Inc. serving as the representatives of the
underwriters thereunder (the "Public Offering").
C. In connection with the Public Offering, the parties to the Voting
Rights Agreement desire to terminate the Voting Rights Agreement and all rights
and obligations of the parties thereunder.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. TERMINATION. The Voting Rights Agreement, including without
limitation the voting provisions contained therein, as well as all other
understandings, agreements and representations by and among the parties, written
or oral, which may relate to the subject matter thereof, are revoked and
terminated and shall be of no further force and effect as of the date that the
Commission declares the Registration Statement effective. In the event that the
Registration Statement is not declared effective by the Commission, the Voting
Rights Agreement shall remain in full force and effect until terminated in
accordance with the terms thereof.
2. COMPLETE AGREEMENT. This Agreement embodies the complete agreement
and understanding between the parties with respect to the subject matter hereof
and supersedes and preempts any and all prior understandings, agreements or
representations by or among the parties, written or oral, which may be related
to the subject matter hereof in any way.
3. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, with the
same effect as if all parties had
<PAGE>
signed the same document. All such counterparts shall be deemed an original,
shall be construed together and shall constitute one and the same instrument.
4. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of,
and shall be binding upon, the parties hereto and their respective heirs,
personal representatives, successors and assigns.
5. GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY
AND INTERPRETATION OF THIS AGREEMENT WILL BE GOVERNED BY THE INTERNAL LAW, AND
NOT THE LAW OF CONFLICTS OF THE STATE OF TEXAS.
[Signature page follows]
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
ADVANCE PARADIGM, INC. INVESTORS:
WHITNEY SUBORDINATED DEBT
By: /s/ David D. Halbert FUND, L.P.
--------------------------
Title: President
--------------------------
INVESTORS: By: /s/ (signature illegible)
------------------------------------
Title: General Partner
---------------------------------
CANAAN CAPITAL LIMITED PARTNERSHIP
QUAI LTD.
By: Canaan Capital Management
Limited Partnership,
General Partner By: /s/ (signature illegible)
------------------------------------
Title: Attorney-in-fact
---------------------------------
By: Canaan Capital Partners L.P.,
General Partner
/s/ Jeffrey R. Jay
--------------------------------------
DR. JEFFREY R. JAY
--------------------------------------
By: /s/ Stephen L. Green
--------------------------
General Partner /s/ Stephen L. Green
---------------------------------------
STEPHEN L. GREEN
CANAAN CAPITAL OFFSHORE LIMITED
PARTNERSHIP C.V.
STOCKHOLDERS:
-------------
By: Canaan Capital Management
Limited Partnership, ADVANCE HEALTH CARE, INC.
General Partner
By: Canaan Capital Partners, L.P., By: /s/ David D. Halbert
------------------------------------
General Partner Title: President
---------------------------------
By: /s/ Stephen L. Green
----------------------------
General Partner /s/ David D. Halbert
----------------------------------------
DAVID D. HALBERT
J.H. WHITNEY & CO.
By: /s/ (signature illegible) /s/ Jon S. Halbert
---------------------------- ---------------------------------------
Title: General Partner JON S. HALBERT
WHITNEY 1990 EQUITY FUND, L.P.
/s/ Danny Phillips
----------------------------------------
By: /s/ (signature illegible) DANNY PHILLIPS
----------------------------
Title: General Partner
- -------------------------------
3
<PAGE>
ADVANCE PARADIGM, INC.
AMENDED AND RESTATED
INCENTIVE STOCK OPTION PLAN
1. PURPOSE. The purpose of this Amended and Restated Incentive Stock
Option Plan (the "Plan") is to provide a means by which certain employees of
Advance ParadigM, 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, Affiliate shall mean any
parent or subsidiary corporation of the Company as defined in Sections 424(e)
and (f) respectively of the Code. Affiliation shall refer to a group of
Affiliates.
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 1,859,000 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 Affiliate. Neither this Plan, nor any grant or exercise pursuant
hereto, shall constitute an employment agreement among such parties.
<PAGE>
(a) OPTION PRICE. The option price for each Option Share shall not
be less than the the fair market value of a share of the Common Stock on
the date the option is 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
-2-
<PAGE>
issuance of Option Shares as is permitted under Delaware General
Corporation Law.
(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
quoted by the NASD Automated Quotation System.
-3-
<PAGE>
(g) ADJUSTMENT OF OPTIONS ON RECAPITALIZATION. The aggregate number
of shares of Common Stock for which options may be granted to persons
participating under 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,
automatically 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 holding vested options or entitled to accelerated vesting
written notice of any Vesting Transaction at least fifteen (15) days
prior to the closing of any such transaction, and each such 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).
-4-
<PAGE>
(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 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.
(k) ADJUSTMENT OF OPTIONS ON RECAPITALIZATION. The aggregate number
of shares of Common Stock for which options may be granted to persons
participating under 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.
(l) 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
-5-
<PAGE>
surviving corporation (each a "Vesting Transaction"), the options
of an optionee granted hereunder may, in the sole discretion of the
Board of Directors, automatically 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 holding vested options or
entitled to accelerated vesting written notice of any Vesting
Transaction at least fifteen (15) days prior to the closing of any
such transaction, and each such 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).
(m) 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 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.
(n) 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
-6-
<PAGE>
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.
(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 August 1, 1993.
(b) The Plan shall terminate on August 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;
-7-
<PAGE>
(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 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.
-8-
<PAGE>
APPENDIX A
INCENTIVE STOCK OPTION AGREEMENT
Advance ParadigM, Inc. (the "Company"), in consideration of the value of
the continuing services of [NAME] ("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 1993 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 [DATE OF
GRANT] (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.
-9-
<PAGE>
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 PARADIGM, INC.
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
The undersigned Optionee hereby accepts the benefits of the foregoing
Incentive Stock Option Agreement.
----------------------------------------
[NAME], Optionee
-10-
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is effective as of December 1,
1996 (the "Effective Date"), by and between Advance ParadigM, Inc. (the
"Company"), and Joseph J. Filipek, Jr. (the "Employee").
WHEREAS, Employee is a senior manager of the Company and is expected to
make significant contributions to the profitability, growth and financial
strength of the Company;
WHEREAS, the Company desire to assure both the present and future
continuity of management of the Company and desire to establish certain minimum
compensation rights of the Employee; and
WHEREAS, the Company and Employee desire to enter into this Agreement
pursuant to which the Company will employ Employee in the capacity, for the
period and on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and mutual covenants and
agreements herein contained, the parties hereto hereby agree as follows:
1. EMPLOYMENT AND DUTIES. The Company hereby employs Employee and
Employee hereby accepts such employment in the capacity of Executive Vice
President of the Company and as President and Chief Executive Officer of Advance
ParadigM Clinical Services, Inc., the Company's wholly-owned subsidiary, to act
in accordance with the terms and conditions hereinafter set forth. During the
term of this Agreement, Employee agrees that these positions will be his full-
time employment, that he will devote his best efforts and all of his business
time, attention and skills to the business of the Company and that he will
perform such duties, functions, responsibilities and authority in connection
with the foregoing as are from time to time delegated to Employee by the Board
of Directors of the Company.
2. TERM. The employment of Employee shall commence on the date hereof
and shall end on the third anniversary hereof (the "Term").
3. COMPENSATION. In consideration of the services to be rendered by
Employee to the Company hereunder, the Company hereby agrees to pay or otherwise
provide Employee the following compensation and benefits, it being understood
that the Company shall have the right to deduct therefrom all taxes which may be
required to be deducted or withheld therefrom under any provision of applicable
law (including but not limited to Social Security payments, income tax
withholding and other required deductions now in effect or which may become
effective by law any time during the Term):
(a) SALARY. Employee shall receive an annual salary of One Hundred
Seventy-Five Thousand Dollars ($175,000), with such increases therein as may be
determined by the Board from time to time in its sole discretion ("Base
Salary"), to be paid in equal installments not less frequently than monthly in
accordance with the Company's salary payment practices in effect from time to
time for senior managers of the Company. The Base Salary may be reviewed by the
Board from time to determine any increases to the Base Salary; provided that the
annual increase shall be, at a minimum $10,000.
(b) BONUS PAYMENTS. In addition to the Base Salary, Employee shall
be entitled to receive, and the Company shall pay, bonuses to the Employee under
the Company's executive incentive compensation plan as approved by the Board of
Directors.
1
<PAGE>
(c) BENEFIT PLANS. Employee shall be entitled to participate in any
health, accident, disability and life insurance programs, and any other fringe
benefit program (including a 401(k) savings plan), which the Company has adopted
or may adopt and implement for the benefit of the Company's employees.
Notwithstanding the foregoing, however, nothing contained herein shall be
construed as an obligation of the Company to implement any such program, or, if
implemented, to maintain any such program for any period of time for any
employee.
(d) FRINGE BENEFITS. The Company shall provide Employee with an
automobile allowance of $700 per month and shall provide a country club
membership at a country club that is mutually acceptable to the Employee and the
Company.
(e) EXPENSES. Employee shall be entitled to receive reimbursement
for all reasonable expenses incurred by him in connection with the fulfillment
of his duties hereunder; PROVIDED, HOWEVER, that Employee has complied with all
policies and procedures relating to the reimbursement of such expenses as shall,
from time to time, be established by the Company.
(f) VACATION AND SICK LEAVE. During the Term of employment, Employee
shall be permitted to take vacations with such frequency and of such duration as
are consistent with the executive vacation policies of the Company in effect on
the date of this Agreement so long as the absence of Employee does not interfere
in any material respect with the performance by Employee of Employee's duties
hereunder. In any event, Employee shall be entitled to not less than 20
business days of vacation during each of the fiscal years ending during the Term
of employment. Employee shall also be entitled to sick leave according to the
sick leave policy which the Company may adopt from time to time.
(g) QUALIFIED STOCK OPTION TO EMPLOYEE. As further consideration for
Employee's continuing employment by the Company under the terms of this
Agreement, subject to the terms and conditions of the Company's 1993 Incentive
Stock Option Plan ("ISOP"), the Company has granted to Employee an options set
forth below:
(i) On October 7, 1996, Employee was granted an incentive option to
purchase 37,500 shares of the Common Stock of the Company with an exercise price
of $9.00 per share. The option is subject to and granted under the ISOP. The
option shall vest and become exercisable as to twenty percent (20%) of the total
shares on each of the first five anniversaries of the date of grant; provided,
however, that immediately prior to the consummation of any sale to or merger
with an outside entity gaining 50% or greater ownership of the Company, the
options shall become, without further act or deed, exercisable as to 100% of the
shares.
(ii) On December 23, 1996, Employee was granted an incentive option to
purchase 20,000 shares of the Common Stock of the Company with an exercise price
of $12.75 per share. The option is subject to and granted under the ISOP. The
option shall vest and become exercisable as to 33-1/3% of the total shares
represented thereby on each of the first three anniversaries of the date of
grant; provided however that immediately prior to the consummation of any sale
to or merger with an outside entity gaining 50% or greater ownership of the
Company, the option shall become without further act or deed exercisable as to
100% of the shares.
2
<PAGE>
4. TERMINATION
(a) DEATH OR DISABILITY. This Agreement shall terminate automatically
upon the Employee's death. If the Company determines in good faith that the
Disability of the Employee has occurred (pursuant to the definition of
"Disability" set forth below), it may give to the Employee written notice of its
intention to terminate the Employee's employment. In such event, the Employee's
employment with the Company shall terminate effective on the 30th day after
receipt of such notice by the Employee (the "Disability Effective Date"),
provided that, within the 30 days after such receipt, the Employee shall not
have returned to full-time performance of the Employee's duties. For purposes
of this Agreement, "Disability" means disability which, at least 26 weeks after
its commencement, is determined to be total and permanent by a physician
selected by the Company or its insurers and acceptable to the Employee or the
Employee's legal representative (such agreement as to acceptability not to be
withheld unreasonably).
(b) CAUSE. The Company may terminate the Employee's employment for
"Cause." For purposes of this Agreement, "Cause" means:
(i) an act or acts of personal dishonesty taken by the Employee at
the expense of the Company,
(ii) a material violation or repeated violations by the Employee of
the Employee's obligations under Section 1 of this Agreement which are
demonstrably willful or deliberate on the Employee's part and which are not
remedied in a reasonable period of time after receipt of written notice
from the Company, or
(iii) the conviction of the Employee of a felony.
(c) GOOD REASON. The Employee's employment may be terminated by the
Employee for Good Reason. For purposes of this Agreement, "Good Reason" means:
(i) the assignment to the Employee of any duties inconsistent in any
respect with the Employee's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities as
contemplated by Section 1 of this Agreement, or any other action by the
Company which results in a diminution in such position, authority, duties
or responsibilities, excluding for this purpose an isolated, insubstantial
and inadvertent action not taken in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Employee;
(ii) any material failure by the Company to comply with any of the
provisions of Section 3 of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and which
is remedied by the Company promptly after receipt of notice thereof given
by the Employee;
(iii) the Company's requiring the Employee's services to be
performed at any office or location more than thirty-five (35) miles from
the location where the Employee was employed immediately preceding the
Effective Date, except for travel reasonably required in the performance of
the Employee's responsibilities;
(iv) any purported termination by the Company of the Employee's
employment otherwise than as expressly permitted by this Agreement.
(d) NOTICE OF TERMINATION. Any termination by the Company for Cause or by
the Employee for Good Reason shall be communicated by Notice of Termination to
the other
3
<PAGE>
party hereto given in accordance with Section 10 of this Agreement. For
purposes of this Agreement, a "Notice of Termination" means a written notice
which
(i) indicates the specific termination provision in this Agreement
relied upon,
(ii) sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Employee's employment
under the provision so indicated, and
(iii) if the Date of Termination (as defined below) is other than
the date of receipt of such notice, specifies the termination date (which
date shall be not more than fifteen (15) days after the giving of such
notice).
(e) DATE OF TERMINATION. "Date of Termination" means the date of
receipt of the Notice of Termination or any later date specified therein, as the
case may be; PROVIDED, HOWEVER, that
(i) if the Employee's employment is terminated by the Company other
than for Cause or Disability, the Date of Termination shall be the date on
which the Company notifies the Employee is such termination, and
(ii) if the Employee's employment is terminated by reason of death or
Disability, the Date of Termination shall be the date of death of the
Employee or the Disability Effective Date, as the case may be.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION
(a) DEATH. If the Employee's employment is terminated by reason of
the Employee's death, this Agreement shall terminate without further obligations
to the Employee's legal representatives under this Agreement, other than those
obligations accrued or earned and vested (if applicable) by the Employee as of
the Date of Termination, including, for this purpose
(i) the Employee's full Base Salary through the Date of
Termination at the rate in effect on the Date of Termination or, if
higher, at the highest rate in effect at any time from the 90-day
period preceding the Date of Termination (the "Highest Base Salary"),
(ii) the product of the Annual Bonus paid to the Employee for
the last full fiscal year and a fraction, the numerator of which is
the number of days in the current fiscal year through the Date of
Termination, and the denomination of which is 365, and
(iii) any compensation previously deferred by the Employee
(together with any accrued interest thereon) and not yet paid
by the Company and any accrued vacation pay not yet paid by the
Company (such amounts specified in clauses (i), (ii) and (iii) are
hereinafter referred to as "Accrued Obligations").
All such Accrued Obligations shall be paid to the Employee's estate or
beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of
Termination. Anything in this Agreement to the contrary notwithstanding, the
Employee's family shall be entitled to receive benefits at least equal to the
most favorable benefits provided by the Company to surviving families of
employees of the Company under such plans, programs, practices
4
<PAGE>
and policies relating to family death benefits, if any, in effect at the time
of Employee's death.
(b) DISABILITY. If the Employee's employment is terminated by reason of
the Employee's Disability, this Agreement shall terminate without further
obligations to the Employee, other than those obligations accrued or earned and
vested (if applicable) by the Employee as of the Date of Termination, including
for this purpose, all Accrued Obligations. All such Accrued Obligations shall
be paid to the Employee in lump sum in cash within 30 days of the Date of
Termination. Anything in this Agreement to the contrary notwithstanding, the
Employee shall be entitled after the Disability Effective Date to receive
disability and other benefits at least equal to the most favorable of those
provided by the Company to disabled employees or their families in accordance
with such plans, programs, practices and policies of the Company in effect at
any time during the 90-day period immediately preceding the Effective Date or,
if more favorable to the Employee and the Employee's family, as in effect at any
time thereafter with respect to other key employees of the Company and their
families.
(c) CAUSE; OTHER THAN FOR GOOD REASON. If the Employee's employment shall
be terminated for Cause, the Company's obligations to the Employee shall
terminate other than the obligation to pay to the Employee the Highest Base
Salary through the Date of Termination plus the amount of any compensation
previously deferred by the Employee (together with accrued interest thereon).
If the Employee terminates employment other than for Good Reason, the Company's
obligations to the Employee shall terminate, other than those obligations
accrued or earned and vested (if applicable) by the Employee through the Date of
Termination, including for this purpose, all Accrued Obligations. All such
Accrued Obligations shall be paid to the Employee in a lump sum in cash within
30 days of the Date of Termination.
(d) GOOD REASON; OTHER THAN FOR CAUSE OR DISABILITY. If, during the Term,
the Company shall terminate the Employee's employment other than for Cause,
Disability, or death or if the Employee shall terminate his employment for Good
Reason, the Company shall continue in accordance with the Company's normal
payroll procedures to pay Employee his Highest Base Salary for a period of one-
year from the Date of Termination or for the remaining term of this Agreement,
whichever period is shorter (the "Severance Period"). Any amounts payable to
Employee under this Section 5(d) shall be reduced and offset by the amount of
any compensation received by Employee for other employment during the Severance
Period. During the Severance Period Employee shall use his best efforts to find
employment consistent with the covenants of Employee in Sections 8 and 9
hereof. During the Severance Period, or such longer period as any plan,
program, practice or policy may provide, the Company shall continue benefits to
the Employee and the Employee's family at least equal to those which would have
been provided to them in accordance with the plans, programs, practices and
policies described in Section 3(c) of this Agreement if the Employee's
employment had not been terminated.
6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or
limit the Employee's continuing or future participation in any benefit, bonus,
incentive or other plans, programs, policies or practices, provided by the
Company and for which the Employee may qualify, nor shall anything herein limit
or otherwise affect such rights as the Employee may have under any stock option
or other agreement with the Company. Amounts which are vested benefits or which
the Employee is otherwise entitled to receive under any plan, policy, practice
or program of the Company at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program.
5
<PAGE>
7. FULL SETTLEMENT. Except as provided in Section 5(d) hereof, the
Employee shall not be obligated to seek other employment or take any other
action by way of mitigation of the amounts payable to the Employee under any of
the provisions of this Agreement. The Company agrees to pay, to the full extent
permitted by law, all legal fees and expenses which the employee may reasonably
incur as a result of any contest (regardless of the outcome thereof) by the
Company or others of the validity or enforceability of, or liability under, any
provision of this Agreement or any guarantee of performance thereof, plus in
each case interest at the applicable Federal rate provided for in Section
7872(f)(2) of the Internal Revenue Code of 1986, as amended.
8. RESTRICTIVE COVENANTS. Employee and the Company agree that the
Company would suffer irreparable harm and incur substantial damage if Employee
were to enter into Competition (as defined herein) with the Company. Therefore,
in order for the Company to protect its legitimate business interests, Employee
agrees as follows:
(a) Without the prior written consent of the Company, Employee shall
not during the period of employment with the Company, directly or indirectly,
invest or engage in any business that is Competitive (as defined herein) with
the pharmacy benefit management business (including without limitation clinical,
formulary/rebate, mail order or claim processing services), disease management,
telephonic case management or demand management or other business in which the
Company has been actively engaged during the Term of Employee's employment (the
"Business") or accept employment or render services to a Competitor (as defined
herein) of the Company as a director, officer, agent, employee, independent
contractor or consultant, or solicit or attempt to solicit or accept business
that is Competitive with the Business of the Company, except that Employee may
own up to one percent (1%) of any outstanding class of securities of any company
registered under Section 12 of the Securities and Exchange Act of 1934.
(b) Without the prior written consent of the Company, for a period of
two (2) years from the Date of Termination for Cause or for a period of one (1)
year from the Date of Termination for any reason other than Cause, Employee
shall not, either directly or indirectly, (i) invest or engage in any business
that is Competitive with the Business of the Company, except that Employee may
own up to one percent (1%) of any outstanding class of securities of any company
registered under Section 12 of the Securities and Exchange Act of 1934, as
amended, (ii) accept employment with or render services to a Competitor of the
Company as a director, officer, agent, employee, independent contractor or
consultant or (iii) solicit, attempt to solicit or accept business competitive
with the Business of the Company from any of the customers of the Company at the
time of his termination or within twelve (12) months prior thereto or from any
person or entity whose business the Company was soliciting at such time. In the
event the Company is obligated to make payments to Employee during the Severance
Period pursuant to Section 5(d) hereof, on the day immediately following the
termination of the Company's obligation to make such payments, clauses (i) and
(ii) of this Section 8(b) shall be without further force and effect.
(c) Upon termination of his employment with the Company, and for a
period of twelve (12) months thereafter, Employee shall not, either directly or
indirectly, solicit business, directly or indirectly from any person or entity
to whom the Company has sold its services, nor shall the Employee contact,
communicate with, or solicit in any manner whatsoever the employment of an
employee of the Company.
(d) The Company and Employee agree that the consideration for
Employee's post-employment covenant not to compete is the overall consideration
provided for the benefit of Employee pursuant to this Agreement, including but
not limited to the continued employment of Employee. The primary purpose of
this covenant is the Company
6
<PAGE>
legitimate interest in protecting its economic welfare and business goodwill.
The Company and Employee further agree that this covenant shall in no way be
construed as a mere limitation on competition nor shall it be construed as a
restraint on Employee's right to engage in a common calling.
(e) Employee acknowledges that the foregoing limitations are
reasonable and properly required for the adequate protection of the Business of
the Company and that in the event any such limitation is found to be
unreasonable by a court of competent jurisdiction, Employee agrees to the
reduction of such limitation to the extent it shall appear reasonable to such
court.
(f) For purposes of this Agreement, a business or activity is in
"Competition" or "Competitive" with the Business of the Company if it involves,
and a person or entity is a "Competitor," if that person or entity is engaged
in, or about to become engaged in, the same business as the Business of the
Company or any segments thereof in the continental United States of America.
9. CONFIDENTIALITY. For purposes of this Agreement, "Confidential
Information and Trade Secrets" shall mean all information, ideas, know how,
trade secrets, processes, computer software or programs and related
documentation, methods, practices, fabricated techniques, technical plans,
customer lists, pricing techniques, marketing plans, financial information and
all other compilations of information which relate to the Business of, and are
owned by, the Company, which were not known generally to others engaged in the
Business of the Company and which the Company has taken affirmative actions to
protect from public disclosure or which do not exist in the public domain.
Employee acknowledges that, during his term of employment with the Company, he
shall have access to and become familiar with Confidential Information and Trade
Secrets that are owned by the Company. Employee shall not use, in any way, or
disclose any of the Confidential Information and Trade Secrets, directly or
indirectly, either during the term of his employment or at anytime thereafter,
except as required in the course of his employment. All files, records,
documents, information, data and similar items and documentation relating to the
Business of the Company, whether prepared by Employee or otherwise, coming into
Employee's possession, shall remain the exclusive property of the Company unless
owned by Employee. The obligations of this Section 9 are continuous and shall
survive the termination of Employee's employment with the Company.
10. NOTICES. Any notice or other communication required or permitted to
be given hereunder shall be in writing and deemed to have been given when
delivered in person or when dispatched by telegram or electronic facsimile
transfer (confirmed in writing by mail, registered or certified, return receipt
requested, postage prepaid, simultaneously dispatched) to the addresses at the
addresses specified below:
If to Employee: Joseph J. Filipek, Jr.
4000 St. Paul Street
Baltimore, MD 21218
With a copy to: Frank R. Goldstein
Morgan, Lewis & Bockius
1800 M Street, N.W.
Washington, D.C. 20036
Phone No.: 202/467-7382
Fax No.: 202/467-7176
7
<PAGE>
If to the Company: Advance ParadigM, Inc.
545 E. John Carpenter Freeway
Suite 1900
Irving, TX 75062
Attention: David D. Halbert
Phone No.: 972/830-6199
Fax No.: 972/830-6196
or to such other address or fax number as either party may from time to time
designate in writing to the other.
11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto relating to the subject matter hereof, and supersedes
all prior agreements and understandings, whether oral or written, with respect
to the same. No modification, alteration, amendment or recision of or
supplement to this Agreement shall be valid or effective unless the same is in
writing and signed by the parties hereto.
12. GOVERNING LAW. This Agreement and the rights and duties of the
parties hereunder shall be governed by, construed under and enforced in
accordance with the laws of the State of Maryland.
13. ASSIGNMENT. This Agreement shall inure to the benefit or and be
binding upon the parties hereto and their respective heirs, personal
representatives, successors and permitted assigns. Subject to the prior written
consent of Employee, the rights, duties and obligations under this Agreement are
assignable by the Company to a successor of all or substantially all of the
business or assets of the Company. The rights, duties and obligations of
Employee under this Agreement shall not be assignable.
14. SEVERABILITY. The parties hereto further agree that if at any time it
shall be determined that the restrictions contained in Section 8 or 9 are
unreasonable as to time or area, or both, by any court of competent
jurisdiction, the Company shall be entitled to enforce this Agreement for such
period of time and within such area as may be determined to be reasonable by
such court and the court shall have the authority to construe reform and enforce
the terms of this Agreement for the benefit of the Company to a maximum extent
possible. It is the intent of the parties hereto that the provisions hereof be
enforceable to the fullest extent permitted by applicable law. This Agreement
may be enforced by the Company or any of its affiliates engaged in the Business.
15. SURVIVAL. No termination of Employee's employment by any of the
parties hereto shall reduce or terminate Employee's covenants and agreements in
Section 8 and 9 hereto.
16. REMEDIES. Employee and the Company recognize that the services to be
rendered under this Agreement by Employee are special, unique, and of
extraordinary character, and that in the event of a breach by Employee of the
terms and conditions of Sections 8 and 9 hereof, the Company shall be entitled,
if it so elects, to institute and prosecute proceedings in any court of
competent jurisdiction, either in law or in equity, to obtain damages for any
breach thereof or to enforce the specific performance thereof by Employee, or to
enjoin Employee from performing services for any other person, firm, or
corporation engaged in activities Competitive with the Business of the Company.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
ADVANCE PARADIGM, INC.
By: /s/ David D. Halbert
--------------------
Name: David D. Halbert
Title: Chairman and CEO
EMPLOYEE
/s/ Joseph J. Filipek, Jr.
--------------------------
Joseph J. Filipek, Jr.
9
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is effective as of December
1, 1996 (the "Effective Date"), by and between Advance ParadigM, Inc. (the
"Company"), and Robert L. Cinquegrana (the "Employee").
WHEREAS, Employee is a senior manager of the Company and is expected to
make significant contributions to the profitability, growth and financial
strength of the Company;
WHEREAS, the Company desire to assure both the present and future
continuity of management of the Company and desire to establish certain
minimum compensation rights of the Employee; and
WHEREAS, the Company and Employee desire to enter into this Agreement
pursuant to which the Company will employ Employee in the capacity, for the
period and on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements herein contained, the parties hereto hereby agree as follows:
1. EMPLOYMENT AND DUTIES. The Company hereby employs Employee and
Employee hereby accepts such employment in the capacity of Senior Vice
President of the Company, the Company's wholly-owned subsidiary, to act in
accordance with the terms and conditions hereinafter set forth. During the
term of this Agreement, Employee agrees that this position will be his
full-time employment, that he will devote his best efforts and all of his
business time, attention and skills to the business of the Company and that
he will perform such duties, functions, responsibilities and authority in
connection with the foregoing as are from time to time delegated to Employee
by the Board of Directors of the Company.
2. TERM. The employment of Employee shall commence on the date hereof
and shall end on the second anniversary hereof (the "Term").
3. COMPENSATION. In consideration of the services to be rendered by
Employee to the Company hereunder, the Company hereby agrees to pay or
otherwise provide Employee the following compensation and benefits, it being
understood that the Company shall have the right to deduct therefrom all
taxes which may be required to be deducted or withheld therefrom under any
provision of applicable law (including but not limited to Social Security
payments, income tax withholding and other required deductions now in effect
or which may become effective by law any time during the Term):
(a) SALARY. Employee shall receive an annual salary of One
Hundred Forty-Five Thousand Dollars ($145,000), with such increases therein
as may be determined by the Board from time to time in its sole discretion
("Base Salary"), to be paid in equal installments not less frequently than
monthly in accordance with the Company's salary payment practices in effect
from time to time for senior managers of the Company. The Base Salary may be
reviewed by the Board from time to determine any increases to the Base
Salary; provided that the annual increase shall be, at a minimum $5,000.
(b) BONUS PAYMENTS. In addition to the Base Salary, Employee
shall be entitled to receive, and the Company shall pay, bonuses to the
Employee under the Company's executive incentive compensation plan as
approved by the Board of Directors.
1
<PAGE>
(c) BENEFIT PLANS. Employee shall be entitled to participate in
any health, accident, disability and life insurance programs, and any other
fringe benefit program (including a 401(k) savings plan), which the Company
has adopted or may adopt and implement for the benefit of the Company's
employees. Notwithstanding the foregoing, however, nothing contained herein
shall be construed as an obligation of the Company to implement any such
program, or, if implemented, to maintain any such program for any period of
time for any employee.
(d) FRINGE BENEFITS. The Company shall provide Employee with an
automobile allowance of $525 per month and shall provide a country club
membership at a country club that is mutually acceptable to the Employee and
the Company.
(e) EXPENSES. Employee shall be entitled to receive reimbursement
for all reasonable expenses incurred by him in connection with the
fulfillment of his duties hereunder; PROVIDED, HOWEVER, that Employee has
complied with all policies and procedures relating to the reimbursement of
such expenses as shall, from time to time, be established by the Company.
(f) VACATION AND SICK LEAVE. During the Term of employment,
Employee shall be permitted to take vacations with such frequency and of such
duration as are consistent with the executive vacation policies of the
Company in effect on the date of this Agreement so long as the absence of
Employee does not interfere in any material respect with the performance by
Employee of Employee's duties hereunder. In any event, Employee shall be
entitled to not less than 20 business days of vacation during each of the
fiscal years ending during the Term of employment. Employee shall also be
entitled to sick leave according to the sick leave policy which the Company
may adopt from time to time.
(g) QUALIFIED STOCK OPTION TO EMPLOYEE. As further consideration
for Employee's continuing employment by the Company under the terms of this
Agreement, subject to the terms and conditions of the Company's 1993
Incentive Stock Option Plan ("ISOP"), the Company has granted to Employee an
options set forth below:
(i) On October 7, 1996, Employee was granted an incentive option
to purchase 12,500 shares of the Common Stock of the Company with an exercise
price of $9.00 per share. The option is subject to and granted under the
ISOP. The option shall vest and become exercisable as to twenty percent
(20%) of the total shares on each of the first five anniversaries of the date
of grant; provided, however, that immediately prior to the consummation of
any sale to or merger with an outside entity gaining 50% or greater ownership
of the Company, the options shall become, without further act or deed,
exercisable as to 100% of the shares.
(ii) On December 23, 1996, Employee was granted an incentive option
to purchase 10,000 shares of the Common Stock of the Company with an exercise
price of $12.75 per share. The option is subject to and granted under the
ISOP. The option shall vest and become exercisable as to 33-1/3% of the
total shares represented thereby on each of the first three anniversaries of
the date of grant; provided however that immediately prior to the
consummation of any sale to or merger with an outside entity gaining 50% or
greater ownership of the Company, the option shall become without further act
or deed exercisable as to 100% of the shares.
2
<PAGE>
4. TERMINATION
(a) DEATH OR DISABILITY. This Agreement shall terminate
automatically upon the Employee's death. If the Company determines in good
faith that the Disability of the Employee has occurred (pursuant to the
definition of "Disability" set forth below), it may give to the Employee
written notice of its intention to terminate the Employee's employment. In
such event, the Employee's employment with the Company shall terminate
effective on the 30th day after receipt of such notice by the Employee (the
"Disability Effective Date"), provided that, within the 30 days after such
receipt, the Employee shall not have returned to full-time performance of the
Employee's duties. For purposes of this Agreement, "Disability" means
disability which, at least 26 weeks after its commencement, is determined to
be total and permanent by a physician selected by the Company or its insurers
and acceptable to the Employee or the Employee's legal representative (such
agreement as to acceptability not to be withheld unreasonably).
(b) CAUSE. The Company may terminate the Employee's employment for
"Cause." For purposes of this Agreement, "Cause" means:
(i) an act or acts of personal dishonesty taken by the Employee at
the expense of the Company,
(ii) a material violation or repeated violations by the Employee of
the Employee's obligations under Section 1 of this Agreement which are
demonstrably willful or deliberate on the Employee's part and which are not
remedied in a reasonable period of time after receipt of written notice
from the Company, or
(iii) the conviction of the Employee of a felony.
(c) GOOD REASON. The Employee's employment may be terminated by the
Employee for Good Reason. For purposes of this Agreement, "Good Reason"
means:
(i) the assignment to the Employee of any duties inconsistent in any
respect with the Employee's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities as
contemplated by Section 1 of this Agreement, or any other action by the
Company which results in a diminution in such position, authority, duties
or responsibilities, excluding for this purpose an isolated, insubstantial
and inadvertent action not taken in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Employee;
(ii) any material failure by the Company to comply with any of the
provisions of Section 3 of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and which
is remedied by the Company promptly after receipt of notice thereof given
by the Employee;
(iii) the Company's requiring the Employee's services to be
performed at any office or location more than thirty-five (35) miles from
the location where the Employee was employed immediately preceding the
Effective Date, except for travel reasonably required in the performance of
the Employee's responsibilities;
(iv) any purported termination by the Company of the Employee's
employment otherwise than as expressly permitted by this Agreement.
(d) NOTICE OF TERMINATION. Any termination by the Company for Cause or
by the Employee for Good Reason shall be communicated by Notice of
Termination to the other
3
<PAGE>
party hereto given in accordance with Section 10 of this Agreement. For
purposes of this Agreement, a "Notice of Termination" means a written notice
which
(i) indicates the specific termination provision in this Agreement
relied upon,
(ii) sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Employee's employment
under the provision so indicated, and
(iii) if the Date of Termination (as defined below) is other than
the date of receipt of such notice, specifies the termination date (which
date shall be not more than fifteen (15) days after the giving of such
notice).
(e) DATE OF TERMINATION. "Date of Termination" means the date of
receipt of the Notice of Termination or any later date specified therein, as
the case may be; PROVIDED, HOWEVER, that
(i) if the Employee's employment is terminated by the Company other
than for Cause or Disability, the Date of Termination shall be the date on
which the Company notifies the Employee is such termination, and
(ii) if the Employee's employment is terminated by reason of death or
Disability, the Date of Termination shall be the date of death of the
Employee or the Disability Effective Date, as the case may be.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION
(a) DEATH. If the Employee's employment is terminated by reason
of the Employee's death, this Agreement shall terminate without further
obligations to the Employee's legal representatives under this Agreement,
other than those obligations accrued or earned and vested (if applicable) by
the Employee as of the Date of Termination, including, for this purpose
(i) the Employee's full Base Salary through the Date of
Termination at the rate in effect on the Date of Termination or, if
higher, at the highest rate in effect at any time from the 90-day
period preceding the Date of Termination (the "Highest Base Salary"),
(ii) the product of the Annual Bonus paid to the Employee for the
last full fiscal year and a fraction, the numerator of which is the
number of days in the current fiscal year through the Date of
Termination, and the denomination of which is 365, and
(iii) any compensation previously deferred by the Employee
(together with any accrued interest thereon) and not yet paid by the
Company and any accrued vacation pay not yet paid by the Company (such
amounts specified in clauses (i), (ii) and (iii) are hereinafter
referred to as "Accrued Obligations").
All such Accrued Obligations shall be paid to the Employee's estate or
beneficiary, as applicable, in a lump sum in cash within 30 days of the Date
of Termination. Anything in this Agreement to the contrary notwithstanding,
the Employee's family shall be entitled to receive benefits at least equal to
the most favorable benefits provided by the Company to surviving families of
employees of the Company under such plans, programs, practices
4
<PAGE>
and policies relating to family death benefits, if any, in effect at the time
of Employee's death.
(b) DISABILITY. If the Employee's employment is terminated by reason
of the Employee's Disability, this Agreement shall terminate without further
obligations to the Employee, other than those obligations accrued or earned
and vested (if applicable) by the Employee as of the Date of Termination,
including for this purpose, all Accrued Obligations. All such Accrued
Obligations shall be paid to the Employee in lump sum in cash within 30 days
of the Date of Termination. Anything in this Agreement to the contrary
notwithstanding, the Employee shall be entitled after the Disability
Effective Date to receive disability and other benefits at least equal to the
most favorable of those provided by the Company to disabled employees or
their families in accordance with such plans, programs, practices and
policies of the Company in effect at any time during the 90-day period
immediately preceding the Effective Date or, if more favorable to the
Employee and the Employee's family, as in effect at any time thereafter with
respect to other key employees of the Company and their families.
(c) CAUSE; OTHER THAN FOR GOOD REASON. If the Employee's employment
shall be terminated for Cause, the Company's obligations to the Employee
shall terminate other than the obligation to pay to the Employee the Highest
Base Salary through the Date of Termination plus the amount of any
compensation previously deferred by the Employee (together with accrued
interest thereon). If the Employee terminates employment other than for Good
Reason, the Company's obligations to the Employee shall terminate, other than
those obligations accrued or earned and vested (if applicable) by the
Employee through the Date of Termination, including for this purpose, all
Accrued Obligations. All such Accrued Obligations shall be paid to the
Employee in a lump sum in cash within 30 days of the Date of Termination.
(d) GOOD REASON; OTHER THAN FOR CAUSE OR DISABILITY. If, during the
Term, the Company shall terminate the Employee's employment other than for
Cause, Disability, or death or if the Employee shall terminate his employment
for Good Reason, the Company shall continue in accordance with the Company's
normal payroll procedures to pay Employee his Highest Base Salary for a
period of one-year from the Date of Termination or for the remaining term of
this Agreement, whichever period is shorter (the "Severance Period"). Any
amounts payable to Employee under this Section 5(d) shall be reduced and
offset by the amount of any compensation received by Employee for other
employment during the Severance Period. During the Severance Period Employee
shall use his best efforts to find employment consistent with the covenants
of Employee in Sections 8 and 9 hereof. During the Severance Period, or such
longer period as any plan, program, practice or policy may provide, the
Company shall continue benefits to the Employee and the Employee's family at
least equal to those which would have been provided to them in accordance
with the plans, programs, practices and policies described in Section 3(c) of
this Agreement if the Employee's employment had not been terminated.
6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent
or limit the Employee's continuing or future participation in any benefit,
bonus, incentive or other plans, programs, policies or practices, provided by
the Company and for which the Employee may qualify, nor shall anything herein
limit or otherwise affect such rights as the Employee may have under any
stock option or other agreement with the Company. Amounts which are vested
benefits or which the Employee is otherwise entitled to receive under any
plan, policy, practice or program of the Company at or subsequent to the Date
of Termination shall be payable in accordance with such plan, policy,
practice or program.
5
<PAGE>
7. FULL SETTLEMENT. Except as provided in Section 5(d) hereof, the
Employee shall not be obligated to seek other employment or take any other
action by way of mitigation of the amounts payable to the Employee under any
of the provisions of this Agreement. The Company agrees to pay, to the full
extent permitted by law, all legal fees and expenses which the employee may
reasonably incur as a result of any contest (regardless of the outcome
thereof) by the Company or others of the validity or enforceability of, or
liability under, any provision of this Agreement or any guarantee of
performance thereof, plus in each case interest at the applicable Federal
rate provided for in Section 7872(f)(2) of the Internal Revenue Code of 1986,
as amended.
8. RESTRICTIVE COVENANTS. Employee and the Company agree that the
Company would suffer irreparable harm and incur substantial damage if
Employee were to enter into Competition (as defined herein) with the Company.
Therefore, in order for the Company to protect its legitimate business
interests, Employee agrees as follows:
(a) Without the prior written consent of the Company, Employee
shall not during the period of employment with the Company, directly or
indirectly, invest or engage in any business that is Competitive (as defined
herein) with the pharmacy benefit management business (including without
limitation clinical, formulary/rebate, mail order or claim processing
services), disease management, telephonic case management or demand
management or other business in which the Company has been actively engaged
during the Term of Employee's employment (the "Business") or accept
employment or render services to a Competitor (as defined herein) of the
Company as a director, officer, agent, employee, independent contractor or
consultant, or solicit or attempt to solicit or accept business that is
Competitive with the Business of the Company, except that Employee may own up
to one percent (1%) of any outstanding class of securities of any company
registered under Section 12 of the Securities and Exchange Act of 1934.
(b) Without the prior written consent of the Company, for a period
of two (2) years from the Date of Termination for Cause or for a period of
one (1) year from the Date of Termination for any reason other than Cause,
Employee shall not, either directly or indirectly, (i) invest or engage in
any business that is Competitive with the Business of the Company, except
that Employee may own up to one percent (1%) of any outstanding class of
securities of any company registered under Section 12 of the Securities and
Exchange Act of 1934, as amended, (ii) accept employment with or render
services to a Competitor of the Company as a director, officer, agent,
employee, independent contractor or consultant or (iii) solicit, attempt to
solicit or accept business competitive with the Business of the Company from
any of the customers of the Company at the time of his termination or within
twelve (12) months prior thereto or from any person or entity whose business
the Company was soliciting at such time. In the event the Company is
obligated to make payments to Employee during the Severance Period pursuant
to Section 5(d) hereof, on the day immediately following the termination of
the Company's obligation to make such payments, clauses (i) and (ii) of this
Section 8(b) shall be without further force and effect.
(c) Upon termination of his employment with the Company, and for a
period of twelve (12) months thereafter, Employee shall not, either directly
or indirectly, solicit business, directly or indirectly from any person or
entity to whom the Company has sold its services, nor shall the Employee
contact, communicate with, or solicit in any manner whatsoever the employment
of an employee of the Company.
(d) The Company and Employee agree that the consideration for
Employee's post-employment covenant not to compete is the overall
consideration provided for the benefit of Employee pursuant to this
Agreement, including but not limited to the continued employment of Employee.
The primary purpose of this covenant is the Company
6
<PAGE>
legitimate interest in protecting its economic welfare and business goodwill.
The Company and Employee further agree that this covenant shall in no way be
construed as a mere limitation on competition nor shall it be construed as a
restraint on Employee's right to engage in a common calling.
(e) Employee acknowledges that the foregoing limitations are
reasonable and properly required for the adequate protection of the Business
of the Company and that in the event any such limitation is found to be
unreasonable by a court of competent jurisdiction, Employee agrees to the
reduction of such limitation to the extent it shall appear reasonable to such
court.
(f) For purposes of this Agreement, a business or activity is in
"Competition" or "Competitive" with the Business of the Company if it
involves, and a person or entity is a "Competitor," if that person or entity
is engaged in, or about to become engaged in, the same business as the
Business of the Company or any segments thereof in the continental United
States of America.
9. CONFIDENTIALITY. For purposes of this Agreement, "Confidential
Information and Trade Secrets" shall mean all information, ideas, know how,
trade secrets, processes, computer software or programs and related
documentation, methods, practices, fabricated techniques, technical plans,
customer lists, pricing techniques, marketing plans, financial information
and all other compilations of information which relate to the Business of,
and are owned by, the Company, which were not known generally to others
engaged in the Business of the Company and which the Company has taken
affirmative actions to protect from public disclosure or which do not exist
in the public domain. Employee acknowledges that, during his term of
employment with the Company, he shall have access to and become familiar with
Confidential Information and Trade Secrets that are owned by the Company.
Employee shall not use, in any way, or disclose any of the Confidential
Information and Trade Secrets, directly or indirectly, either during the term
of his employment or at anytime thereafter, except as required in the course
of his employment. All files, records, documents, information, data and
similar items and documentation relating to the Business of the Company,
whether prepared by Employee or otherwise, coming into Employee's possession,
shall remain the exclusive property of the Company unless owned by Employee.
The obligations of this Section 9 are continuous and shall survive the
termination of Employee's employment with the Company.
10. NOTICES. Any notice or other communication required or permitted
to be given hereunder shall be in writing and deemed to have been given when
delivered in person or when dispatched by telegram or electronic facsimile
transfer (confirmed in writing by mail, registered or certified, return
receipt requested, postage prepaid, simultaneously dispatched) to the
addresses at the addresses specified below:
If to Employee: Robert L. Cinquegrana
10340 Congressional Court
Ellicott City, Maryland 21042
With a copy to: Frank R. Goldstein
Morgan, Lewis & Bockius
1800 M Street, N.W.
Washington, D.C. 20036
Phone No.: 202/467-7382
Fax No.: 202/467-7176
7
<PAGE>
If to the Company: Advance ParadigM, Inc.
545 E. John Carpenter Freeway
Suite 1900
Irving, TX 75062
Attention: David D. Halbert
Phone No.: 972/830-6199
Fax No.: 972/830-6196
or to such other address or fax number as either party may from time to time
designate in writing to the other.
11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto relating to the subject matter hereof, and
supersedes all prior agreements and understandings, whether oral or written,
with respect to the same. No modification, alteration, amendment or recision
of or supplement to this Agreement shall be valid or effective unless the
same is in writing and signed by the parties hereto.
12. GOVERNING LAW. This Agreement and the rights and duties of the
parties hereunder shall be governed by, construed under and enforced in
accordance with the laws of the State of Maryland.
13. ASSIGNMENT. This Agreement shall inure to the benefit or and be
binding upon the parties hereto and their respective heirs, personal
representatives, successors and permitted assigns. Subject to the prior
written consent of Employee, the rights, duties and obligations under this
Agreement are assignable by the Company to a successor of all or
substantially all of the business or assets of the Company. The rights,
duties and obligations of Employee under this Agreement shall not be
assignable.
14. SEVERABILITY. The parties hereto further agree that if at any time
it shall be determined that the restrictions contained in Section 8 or 9 are
unreasonable as to time or area, or both, by any court of competent
jurisdiction, the Company shall be entitled to enforce this Agreement for
such period of time and within such area as may be determined to be
reasonable by such court and the court shall have the authority to construe
reform and enforce the terms of this Agreement for the benefit of the Company
to a maximum extent possible. It is the intent of the parties hereto that
the provisions hereof be enforceable to the fullest extent permitted by
applicable law. This Agreement may be enforced by the Company or any of its
affiliates engaged in the Business.
15. SURVIVAL. No termination of Employee's employment by any of the
parties hereto shall reduce or terminate Employee's covenants and agreements
in Section 8 and 9 hereto.
16. REMEDIES. Employee and the Company recognize that the services to
be rendered under this Agreement by Employee are special, unique, and of
extraordinary character, and that in the event of a breach by Employee of the
terms and conditions of Sections 8 and 9 hereof, the Company shall be
entitled, if it so elects, to institute and prosecute proceedings in any
court of competent jurisdiction, either in law or in equity, to obtain
damages for any breach thereof or to enforce the specific performance thereof
by Employee, or to enjoin Employee from performing services for any other
person, firm, or corporation engaged in activities Competitive with the
Business of the Company.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
ADVANCE PARADIGM, INC.
By: /s/ David D. Halbert
-----------------------------------------
Name: David D. Halbert
Title: Chairman and CEO
EMPLOYEE
/s/ Robert L. Cinquegrana
--------------------------------------------
Robert L. Cinquegrana
9
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is effective as of November 14,
1996 (the "Effective Date"), by and between Advance ParadigM, Inc. (the
"Company") and John H. Sattler (the "Employee").
WHEREAS, the Company and Employee desire to enter into this Agreement pursuant
to which the Company will employ Employee in the capacity of Senior Vice
President-Sales and Marketing, for the period and on the terms and conditions
set forth herein;
NOW, THEREFORE, in consideration of the premises and mutual covenants and
agreements herein contained, the parties agree as follows:
1. EMPLOYMENT AND DUTIES. The Company hereby employs Employee, and
Employee hereby accepts such employment, in the capacity of Senior Vice
President-Sales and Marketing of the Company to act in accordance with the terms
and conditions hereinafter set forth. During the term of this Agreement,
Employee agrees (1) that this position will be his full-time employment; (2)
that through this position Employee will receive special training and have
access to confidential information and trade secrets more fully explained in
Section 7 which he agrees not to disclose or use adversely to Company's
interests; (3) that he will devote his reasonable best efforts and all of his
business time, attention and skills to the successful continuation of the
business heretofore conducted by the Company; and (4) that he will perform such
duties, functions, responsibilities and authority, as are commensurate with the
position of Senior Vice President-Sales and Marketing in connection with the
foregoing and as are from time to time delegated to Employee by the Board of
Directors of the Company (the "Board").
2. TERM. The employment of Employee shall commence on the Effective Date
and shall end on the third anniversary thereof (the "Term").
3. COMPENSATION. In consideration of the services to be rendered by
Employee to the Company hereunder including compliance with the covenants and
agreements herein, the Company hereby agrees to pay or otherwise provide
Employee the following compensation and benefits, it being understood that the
Company shall have the right to deduct all taxes which may be required to be
deducted or withheld under any provision of applicable law (including but not
limited to Social Security payments, income tax withholding and other required
deductions now in effect or which may become effective by law any time during
the Term):
(a) SALARY. Employee shall receive an annual salary of One Hundred Fifty-
Five Thousand Dollars ($155,000) ("Base Salary"), to be paid in biweekly
installments in accordance with the Company's salary payment practices in effect
from time to time for senior managers of the Company. The Base Salary may be
reviewed by the Board from time to time to determine the amount of any
increases; provided that during the Term, the Base Salary will be subject to
annual increases of at least $10,000.
(b) BONUS PAYMENTS. In addition to the Base Salary, Employee shall be
entitled to receive, and the Company shall pay, bonuses to the Employee under
the Company's executive incentive compensation plan as approved by the Board
of Directors.
(c) BENEFIT PLANS. Employee shall be entitled to participate in any
health, accident, disability and life insurance programs, and any other fringe
benefit program (including a 401(k) savings plan), which the Company may adopt
and implement for the benefit of the Company's employees.
<PAGE>
(d) FRINGE BENEFITS. The Company shall provide Employee with the fringe
benefits listed on Exhibit "A" attached hereto.
(e) EXPENSES. Employee shall be entitled to receive reimbursement for all
reasonable expenses incurred by him in connection with the fulfillment of his
duties hereunder; provided, however, that Employee has complied with all
policies and procedures relating to the reimbursement of such expenses as shall,
from time to time, be established by the Company.
(f) VACATION AND SICK LEAVE. During the Term of employment, Employee
shall be permitted to take vacations with such frequency and of such duration as
are consistent with the executive vacation policies of the Company in effect on
the date of this Agreement so long as the absence of Employee does not interfere
in any material respect with the performance by Employee of Employee's duties
hereunder. Employee shall also be entitled to sick leave according to the sick
leave policy which the Company may adopt from time to time.
4. TERMINATION.
(a) DEATH OR DISABILITY. This Agreement shall terminate automatically
upon the Employee's death. If the Company determines in good faith that the
Disability of the Employee has occurred (pursuant to the definition of
"Disability" set forth below), it may give to the Employee written notice of its
intention to terminate the Employee's employment. In such event, the Employee's
employment with the Company shall terminate effective on the 30th day after
receipt of such notice by the Employee (the "Disability Effective Date"),
provided that, within the 30 days after such receipt, the Employee shall not
have returned to full-time performance of the Employee's duties. For purposes of
this Agreement, "Disability" means disability which, at least 26 weeks after its
commencement, is determined to be total and permanent by a physician selected by
the Company or its insurers and acceptable to the Employee or the Employee's
legal representative (such agreement as to acceptability not to be withheld
unreasonably).
(b) CAUSE. The Company may terminate the Employee's employment for
"Cause." For purposes of this Agreement, "Cause" means:
(i) an act or acts of personal dishonesty taken by the Employee
at the expense of the Company;
(ii) a material violation or repeated violations by the Employee
of the Employee's obligations under Section 1 of this Agreement which are
demonstrably willful or deliberate on the Employee's part;
(iii) the conviction of the Employee of a felony or
misdemeanor that adversely affects the Company's business, reputation or
standing in the community;
(iv) repeated failure on the part of Employee to obey or carry
out reasonable directives from the Board of Directors or Employee's supervisor
which are consistent with this Agreement and pertain to Employee's employment
with the Company; or
(v) poor work performance and failure to cure such poor work
performance within three months from the date that the Chief Executive Officer
of the Company gives Employee written notice of the specific performance
criteria which Employee is failing to meet.
(c) EMPLOYEE'S RIGHT TO TERMINATE. The Employee's employment may be
terminated by the Employee for Good Reason. For purposes of this Agreement,
"Good Reason" means:
2
<PAGE>
(i) The Company causes Employee's position, authority, duties or
responsibilities to be reduced from the position described in Section 1 of this
Agreement;
(ii) Any material failure by the Company to comply with the provisions
of Section 3 of this Agreement other than immaterial or isolated failures that
do not occur in bad faith and are remedied by the Company promptly upon notice
given by the Employee;
(iii) Any termination by the Company of the Employee otherwise
than as expressly permitted by this Agreement.
(d) WITHOUT CAUSE. The Company may, at its option, terminate Employee's
employment without Cause at any time upon written notice to Employee.
(e) NOTICE OF TERMINATION. Any termination of Employee's employment by
the Company with or without Cause or by the Employee under Section 4(d) shall
be communicated by a Notice of Termination to the other party hereto given in
accordance with Section 11 of this Agreement. For purposes of this Agreement, a
"Notice of Termination" means any reasonable notice which:
(i) indicates the specific termination provision in this
Agreement relied upon;
(ii) in the event of termination for Cause, sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Employee's employment under the provision so indicated; and
(iii) if the Date of Termination (as defined below) is other than
the date of receipt of such notice, specifies the termination date.
(f) DATE OF TERMINATION. "Date of Termination" means the date of receipt
of the Notice of Termination or the date specified therein, as the case may be;
provided, however, that:
(i) if the Employee' s employment is terminated by the Company
other than for Cause or Disability, the Date of Termination shall be the date on
which the Company notifies the Employee of such termination,
(ii) if the Employee's employment is terminated by reason of
death or Disability, the Date of Termination shall be the date of death of the
Employee or the Disability Effective Date, as the case may be, and
(iii) if Employee terminates his employment under Section
4(d) hereof, the Date of Termination shall be a date not earlier than ninety
(90) calendar days following delivery of notice of such termination.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) DEATH. If the Employee's employment is terminated by reason of the
Employee's death, this Agreement shall terminate without further obligations to
the Employee's legal representatives under this Agreement, other than those
obligations accrued or earned and vested by the Employee as of the Date of
Termination, including, for this purpose
(i) the Employee's full Base Salary through the Date of Termination
at the rate in effect on the Date of Termination, and
3
<PAGE>
(ii) the amount of any bonus earned by the Employee for the fiscal
year through the Date of Termination, and
(iii) any compensation previously deferred by the Employee (together
with any accrued interest thereon) and not yet paid by the Company and any
accrued vacation pay not yet paid by the Company (such amounts specified in
clauses (i), (ii) and (iii) are hereinafter referred to as "Accrued
Obligations"), and
(iv) the right to exercise vested options to purchase the Company's
common stock in accordance with the terms and conditions of the applicable stock
option plan and stock option agreement.
All Accrued Obligations shall be paid to the Employee's estate or beneficiary,
as applicable, in a lump sum in cash within 30 days of the Date of Termination.
Notwithstanding anything in this Agreement to the contrary, the Employee's
family shall be entitled to receive benefits at least equal to the most
favorable benefits provided by the Company to surviving families of employees of
the Company under such plans, programs, practices and policies relating to
family death benefits, if any, in effect at the time of Employee's death.
(b) DISABILITY. If the Employee's employment is terminated by reason of
the Employee's Disability, this Agreement shall terminate without further
obligations to the Employee, other than those obligations accrued or earned and
vested (if applicable) by the Employee as of the Date of Termination, including
for this purpose, all Accrued Obligations. All such Accrued Obligations shall be
paid to the employee in a lump sum in cash within 30 days of the Date of
Termination. Notwithstanding anything in this Agreement to the contrary, the
Employee shall be entitled after the Disability Effective Date to receive
disability and other benefits at least equal to the most favorable of those
provided by the Company to disabled employees or their families in accordance
with such plans, programs, practices and policies relating to disability, if
any, in effect at any time after the Effective Date.
(c) CAUSE. If the Employee's employment shall be terminated for Cause
under clause (i), (ii), (iii) or (iv) of Section 4(b) hereof, all obligations of
the Company hereunder shall terminate other than the obligation to pay to the
Employee the Base Salary through the Date of Termination plus the amount of any
compensation previously deferred by the Employee (together with accrued interest
thereon). If Employee's employment shall be terminated for Cause under clause
(v) of Section 4(b) hereof, all obligations of the Company hereunder shall
terminate other than the obligation to continue, in accordance with the
Company's normal payroll procedures, to pay Employee his Base Salary for a
period of six (6) months from the Date of Termination. Following termination
for Cause, Employee shall have three (3) months to exercise any vested but
unexercised options previously granted to Employees.
(d) GOOD REASON. If Employee shall terminate his employment under Section
4(c) hereof, (i) the Company's obligations to Employee shall terminate other
than the obligation to pay the Base Salary through the Date of Termination plus
the amount of any compensation previously deferred by the Employee, if any,
consistent with Company policy, and (ii) as of the date that notice of
termination is delivered to the Company under Section 4(c), Employee shall have
three (3) months to exercise any vested but unexercised options previously
granted to Employee to purchase shares of the Company's Common Stock.
(e) OTHER THAN FOR CAUSE OR DISABILITY. If, during the Term, the Company
shall terminate the Employee's employment other than for Cause, Disability, or
death, or Employee shall terminate
4
<PAGE>
for Good Reason the Company shall continue in accordance with the Company's
normal payroll procedures to pay Employee his Base Salary for a period of
twelve (12) months from the Date of Termination or for the remaining term of
this Agreement, whichever period is shorter (the "Severance Period");
provided, however, that in no event shall the severance period be shorter
than six (6) months. During the Severance Period, the Company shall continue
benefits to Employee and the Employee's family at least equal to those which
would have been provided to them in accordance with the plans, programs,
practices and policies described in Section 3(b) of this Agreement if the
Employee's employment had not been terminated or provide continuation
coverage as set forth under Part 6 of Title I of the Employee Retirement
Income Security Act of 1974, as amended, at the option of the Board of
Directors of the Company.
(f) CHANGE OF CONTROL. The foregoing notwithstanding, if the
Company shall terminate Employee's employment other than for Cause, disability
or death following a Change of Control (as defined below), the Company shall
continue in accordance with its normal payroll procedures to pay Employee his
Base Salary for a period of eighteen (18) months from the Date of
Termination. A "Change of Control" shall mean a sale of substantially all of
the common stock of the Company or a merger in which the Company is not the
surviving corporation.
6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or
limit the Employee's continuing or future participation in any benefit, bonus,
incentive or other plans, programs, policies or practices, provided by the
Company and for which the Employee may qualify. Amounts which are vested
benefits or which the Employee is otherwise entitled to receive under any plan,
policy, practice or program of the Company at or subsequent to the Date of
Termination shall be payable in accordance with such plan, policy, practice or
program.
7. CONFIDENTIALITY. Employee acknowledges that during the course of his
performance of services for the Company he will acquire knowledge with respect
to the Company's business operations, including, by way of illustration, the
Company's existing and contemplated services, products, trade secrets, ideas,
know how, formulas, models, compilations, processes, computer code generated or
developed, software or programs and related documentation, business and
financial methods or practices, plans, pricing, operating margins, marketing,
merchandising and selling techniques and information, customer lists and
purchasing habits, supplier lists, and other confidential information relating
to the Company's policy, operating strategy and/or business strategy (all of
such information herein referred to as the "Confidential Information");
provided, that the term Confidential Information shall not include information
which is generally known to the public or the industry other than as a result of
Employee's breach. Employee shall not use, in any way, or disclose any of the
Confidential Information, directly or indirectly, either during the term of his
employment or at anytime thereafter, except as required in the course of his
employment. Employee acknowledges that all computer code, programs, files,
records, documents, information, data and similar items and documentation
relating to the business of the Company (including all copies thereof), whether
prepared by Employee or otherwise, are the exclusive property of the Company
unless owned by Employee and, upon termination of Employee's employment with the
Company (for whatever reason), Employee shall not take with him, but shall leave
with the Company, all such computer code, programs, files, records,
documentation, information, data and similar items and documentation relating to
the business of the Company (including all copies thereof). The obligations of
this Section 7 are continuous and shall survive the termination of Employee's
employment with the Company.
8. INVENTIONS AND PATENTS. Employee agrees that all inventions, ideas,
innovations, improvements or discoveries relating to the business or the Company
of the Company's method of conducting business (including new contributions,
improvements, ideas
5
<PAGE>
and discoveries, whether patentable or copyrightable or not) conceived or
made by him during his employment with the Company shall be, and hereby are,
assigned to the Company. Employee will promptly disclose such inventions,
ideas, innovations or improvements to the Board of Directors or Chief
Executive Officer of the Company and perform all actions reasonably requested
by the Board or Chief Executive Officer to establish and confirm such
ownership. The expense of securing any such patents shall be borne by the
Company.
9. NO OTHER BUSINESS. During the term of Employee's employment, Employee
agrees that he will not, directly or indirectly, except with the express written
consent of the Board of Directors of the Company, become engaged in, render
services to, permit his name to be used in connection with, own, manage,
operate, control, be employed by, participate in, consult with, or be connected
in any manner (whether as an officer, director, employee, agent, consultant,
stockholder (other than as the holder of less than 2% of the aggregate
outstanding shares of a class of equity securities publicly traded on a national
securities exchange or quotation system or other capacity) with the ownership,
management, operation or control of, any business or enterprise other than the
business of the Company and its subsidiaries except that Employee may devote a
limited amount of time to assisting his spouse with her sailboat charter
business.
10. NONINTERFERENCE. Employee agrees that during the term of his
employment and for the one-year period following the termination of Employee's
employment by the Company or its subsidiaries, Employee shall not, directly or
indirectly, whether as principal, agent, officer, employee, investor,
consultant, stockholder, or otherwise, alone or in association with any other
person:
(a) Induce or attempt to influence any employee of the Company or any
subsidiary to terminate his or her employment with the Company or any subsidiary
of the Company,
(b) Disparage the good name or reputation of the Company, the Company's
affiliates, or business of the Company or engage in any conduct that brings the
Company, the Company's affiliates, or the Company's business into public
ridicule or disrepute; or
(c) Solicit, induce or encourage any customer, prospective customer,
consultant, independent contractor, drug manufacturer or supplier of the Company
to cease to do business with the Company. For purposes of this section,
"prospective customer" shall mean any party who has had contact with Company or
its subsidiaries within the four-month period immediately preceding termination
of employment hereunder.
11. NOTICES. Any notice or other communication required or permitted to
be given hereunder shall be in writing and deemed to have been given when
delivered in person or when dispatched by telegram or electronic facsimile
transfer (confirmed in writing by mail, registered or certified, return receipt
requested, postage prepaid, simultaneously dispatched) to the addressees at the
addresses specified below.
If to Employee: Mr. John H. Sattler
641 Hawthorn Circle
Highland Village, Texas 75067
Phone No.: (972) 318-0103
Fax No.: (972) 318-0243
6
<PAGE>
If to the Company: c/o Advance ParadigM, Inc.
545 E. John Carpenter Freeway
Suite 1900
Irving, Texas 75062
Attention: David D. Halbert
Phone No.: (972) 830-6199
Fax No.: (972) 830-6196
or to such other address or fax number as either party may from time to time
designate in writing to the other.
12. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto relating to the subject matter hereof, and supersedes
all prior agreements and understandings, whether oral or written, with respect
to the same. No modification, alteration, amendment or recision of or supplement
to this Agreement shall be valid or effective unless the same is in writing and
signed by the parties hereto.
13. GOVERNING LAW. This Agreement and the rights and duties of the
parties hereunder shall be governed by, construed under and enforced in
accordance with the laws of the State of Texas.
14. ASSIGNMENT. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, personal
representatives, successors and permitted assigns. Subject to the prior written
consent of Employee, the rights, duties and obligations under this Agreement are
assignable by the Company to a successor of all or substantially all of the
business or assets of the Company. The rights, duties and obligations of
Employee under this Agreement shall not be assignable.
15. SEVERABILITY. Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision in any other jurisdiction, but this Agreement will be
reformed. construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein except that
any court having jurisdiction shall have the power to reduce the duration, area
or scope of such invalid, illegal or unenforceable provision and, in its reduced
form, it shall be enforceable. It is the intent of the parties hereto that the
provisions hereof be enforceable to the fullest extent permitted by applicable
law. This Agreement may be enforced by the Company or any of its affiliates
engaged in the Business.
16. SURVIVAL. No termination of Employee's employment by any of the
parties hereto shall reduce or terminate Employee's covenants and agreements in
Sections 7, 8, 9 and 10 hereof.
17. REMEDIES. The parties to this Agreement shall be entitled to enforce
his or its rights under this Agreement specifically, to recover damages
(including, without limitation, reasonable fees and expenses of counsel) by
reason of any breach of any provision of this Agreement and to exercise all
other rights existing in his or its favor. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach or
threatened breach of the provisions of this Agreement and that any party may in
his or its sole discretion apply to any court of law or equity of competent
jurisdiction for specific performance and/or injunctive
7
<PAGE>
relief in order to enforce or prevent any violations of the provisions of
this Agreement. Such injunction or decree shall be available without the
posting of any bond or other security.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
ADVANCE PARADIGM, INC.
By: /s/ David D. Halbert
---------------------------
David D. Halbert, President
EMPLOYEE
By: /s/ John H. Sattler
---------------------------
John H. Sattler
8
<PAGE>
EXHIBIT 'A'
Fringe Benefits
1. STOCK OPTIONS. As further consideration for Employee's continued
employment by the Company, the Company has granted to Employee the following
incentive stock options:
(a) On October 7, 1996, Employee was granted an incentive option (the
"Option") to purchase 12,500 shares of the Common Stock of the Company with an
exercise price of $9.00 per share. The option shall be subject to and granted
under the Company's 1993 Incentive Stock Option Plan. The option shall vest and
become exercisable as to twenty percent (20%) of the total shares on each of the
first five anniversaries of the date of grant; provided, however, that
immediately prior to the consummation of any sale to or merger with an outside
entity gaining 50% or greater ownership of API, the Option shall become, without
further act or deed, exercisable as to 100% of the Shares.
(b) On December 23, 1996, Employee was granted an incentive option to
purchase 20,000 shares of the Common Stock of the Company. The option is
subject to and granted under the Company's 1993 Incentive Stock Option Plan.
The option shall vest and become exercisable as to 33-1/3% of the total shares
represented thereby on each of the first three anniversaries of the date of
grant; provided, however, that immediately prior to the consummation of any sale
to or merger with an outside entity gaining 50% or greater ownership of the
Company, the option shall become, without further act or deed, exercisable as to
100% of the shares. The exercise price of the option is $12.75 per share.
2. CAR ALLOWANCE. Employee shall be provided a $525 per month car allowance.
At year end, the value of this benefit will be reported as required by the IRS
regulations on Employee's Form W-2.
3. CLUB MEMBERSHIP. Employee shall be provided a court or racquet club
membership to the Las Colinas Sports Club. Cost of such membership shall be paid
by Company.
9
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is effective as of June 17,
1996 (the "Effective Date"), by and between Advance ParadigM, Inc. (the
"Company") and Ernest Buys (the "Employee").
WHEREAS, the Company and Employee desire to enter into this Agreement
pursuant to which the Company will employ Employee in the capacity, for the
period and on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements herein contained, the parties hereto hereby agree as follows:
1. EMPLOYMENT AND DUTIES. The Company hereby employs Employee, and
Employee hereby accepts such employment, in the capacity of Chief Operating
Officer of Advance ParadigM Data Services, Inc., the Company's wholly owned
subsidiary, and, effective December 1, 1996, as Chief Information Officer of
the Company, to act in accordance with the terms and conditions hereinafter
set forth. During the term of this Agreement, Employee agrees that this
position will be his full-time employment, except as set forth in the
Noninterference Agreement dated as of June 17, 1994, by and between the
parties hereto (the "Noninterference Agreement"), and that he will devote his
reasonable best efforts and all of his business time, attention and skills to
the successful continuation of the business heretofore conducted by the
Company and that he will perform such duties, functions, responsibilities and
authority, as are commensurate with the position of Chief Operating Officer,
in connection with the foregoing as are from time to time delegated to
Employee by the Board of Directors of the Company.
2. TERM. The employment of Employee shall commence on the Effective
Date and shall end on the third anniversary thereof (the "Term").
3. COMPENSATION. In consideration of the services to be rendered by
Employee to the Company hereunder, the Company hereby agrees to pay or
otherwise provide Employee the following compensation and benefits, it being
understood that the Company shall have the right to deduct therefrom all
taxes which may be required to be deducted or withheld therefrom under any
provision of applicable law (including but not limited to Social Security
payments, income tax withholding and other required deductions now in effect
or which may become effective by law any time during the Term):
(a) SALARY. Employee shall receive an annual salary of One
Hundred Fifty Thousand Dollars ($150,000), with such increases therein as may
be determined by the Board from time to time in its sole discretion ("Base
Salary"), to be paid in biweekly installments in accordance with the
Company's salary payment practices in effect from time to time for senior
managers of the Company.
(b) BENEFIT PLANS. Employee shall be entitled to participate in any
health, accident, disability and life insurance programs, and any other fringe
benefit program (includinga 401(k) savings plan), which the Company may adopt
and implement for the benefit of the Company's employees.
(c) FRINGE BENEFITS. The Company shall provide Employee with the
fringe benefits listed on Exhibit "A" attached hereto.
1
<PAGE>
(d) EXPENSES. Employee shall be entitled to receive reimbursement
for all reasonable expenses incurred by him in connection with the fulfillment
of his duties hereunder;
PROVIDED, HOWEVER, that Employee has complied with all policies and
procedures relating to the reimbursement of such expenses as shall, from time
to time, be established by the Company.
(e) VACATION AND SICK LEAVE. During the Term of employment,
Employee shall be permitted to take vacations with such frequency and of such
duration as are consistent with the executive vacation policies of the
Company in effect on the date of this Agreement so long as the absence of
Employee does not interfere in any material respect with the performance by
Employee of Employee's duties hereunder. Employee shall also be entitled to
sick leave according to the sick leave policy which the Company may adopt
from time to time.
4. TERMINATION.
(a) DEATH OR DISABILITY. This Agreement shall terminate
automatically upon the Employee's death. If the Company determines in good
faith that the Disability of the Employee has occurred (pursuant to the
definition of "Disability" set forth below), it may give to the Employee
written notice of its intention to terminate the Employee's employment. In
such event, the Employee's employment with the Company shall terminate
effective on the 30th day after receipt of such notice by the Employee (the
"Disability Effective Date"), provided that, within the 30 days after such
receipt, the Employee shall not have returned to full-time performance of the
Employee's duties. For purposes of this Agreement, "Disability" means
disability which, at least 26 weeks after its commencement, is determined to
be total and permanent by a physician selected by the Company or its insurers
and acceptable to the Employee or the Employee's legal representative (such
agreement as to acceptability not to be withheld unreasonably).
(b) CAUSE. The Company may terminate the Employee's employment
for "Cause." For purposes of this Agreement, "Cause" means:
(i) an act or acts of personal dishonesty taken by the Employee
at the expense of the Company,
(ii) a material violation or repeated violations by the Employee
of the Employee's obligations under Section 1 of this Agreement which are
demonstrably willful or deliberate on the Employee's part, or
(iii) the conviction of the Employee of a felony or
misdemeanor that adversely affects the Company's business, reputation or
standing in the community.
(c) NOTICE OF TERMINATION. Any termination by the Company for
Cause shall be communicated by Notice of Termination to the other party
hereto given in accordance with Section 9 of this Agreement. For purposes of
this Agreement, a "Notice of Termination" means a written notice which
(i) indicates the specific termination provision in this
Agreement relied upon,
(ii) sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Employee's employment
under the provision so indicated, and
(iii) if the Date of Termination (as defined below) is other
than the date of receipt of such notice, specifies the termination date
(which date shall be not more than fifteen (15) days after the giving of
such notice).
2
<PAGE>
(d) DATE OF TERMINATION. "Date of Termination" means the date of
receipt of the Notice of Termination or any later date specified therein, as
the case may be; PROVIDED, HOWEVER, that
(i) if the Employee's employment is terminated by the Company
other than for Cause or Disability, the Date of Termination shall be the
date on which the Company notifies the Employee of such termination, and
(ii) if the Employee's employment is terminated by reason of
death or Disability, the Date of Termination shall be the date of death of
the Employee or the Disability Effective Date, as the case may be.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) DEATH. If the Employee's employment is terminated by reason
of the Employee's death, this Agreement shall terminate without further
obligations to the Employee's legal representatives under this Agreement,
other than those obligations accrued or earned and vested (if applicable) by
the Employee as of the Date of Termination, including, for this purpose
(i) the Employee's full Base Salary through the Date of
Termination at the rate in effect on the Date of Termination or, if higher,
at the highest rate in effect at any time from the 90-day period preceding
the Effective Date through the Date of Termination (the "Highest Base
Salary"), and
(ii) the product of any bonus or incentive plan paid to the
Employee for the last full fiscal year and a fraction, the numerator of
which is the number of days in the current fiscal year through the Date of
Termination, and the denominator of which is 365, and
(iii) any compensation previously deferred by the Employee
(together with any accrued interest thereon) and not yet paid by the
Company and any accrued vacation pay not yet paid by the Company (such
amounts specified in clauses (i), (ii) and (iii) are hereinafter referred
to as "Accrued Obligations").
All such Accrued Obligations shall be paid to the employee's estate
or beneficiary, as applicable, in a lump sum in cash within 30 days of the
Date of Termination. anything in this Agreement to the contrary
notwithstanding, the Employee's family shall be entitled to receive benefits
at least equal to the most favorable benefits provided by the Company to
surviving families of employees of the Company under such plans, programs,
practices and policies relating to family death benefits, if any, in effect
at the time of Employee's death.
(b) DISABILITY. If the Employee's employment is terminated by
reason of the Employee's Disability, this Agreement shall terminate without
further obligations to the Employee, other than those obligations accrued or
earned and vested (if applicable) by the Employee as of the Date of
Termination, including for this purpose, all Accrued Obligations. All such
Accrued Obligations shall be paid to the employee in a lump sum in cash
within 30 days of the Date of Termination. Anything in this Agreement to the
contrary notwithstanding, the Employee shall be entitled after the Disability
Effective Date to receive disability and other benefits at least equal to the
most favorable of those provided by the Company to disabled employees or
their families in accordance with such plans, programs, practices and
policies relating to disability, if any, in accordance with the most
favorable plans, programs, practices and policies of the Company in effect at
any time during the 90-day period immediately preceding the Effective Date
or, if more favorable to the employee and the Employee's family, as in effect
at any time thereafter with respect to other key employees of the Company and
their families.
3
<PAGE>
(c) CAUSE. If the Employee's employment shall be terminated for
Cause, the Company's obligations to the Employee shall terminate other than
the obligation to pay to the Employee the Highest Base Salary through the
Date of Termination plus the amount of any compensation previously deferred
by the Employee (together with accrued interest thereon).
(D) OTHER THAN FOR CAUSE OR DISABILITY. If, during the Term, the
Company shall terminate the Employee's employment other than for Cause,
Disability, or death, the Company shall continue in accordance with the
Company's normal payroll procedures to pay Employee his Highest Base Salary
for a period of six (6) months from the Date of Termination or for the
remaining term of this Agreement, whichever period is shorter (the "Severance
Period"). In addition, upon such termination Employee shall receive (a) an
amount that equals the product of (i) the bonus paid to Employee for the last
fiscal year and (ii) a fraction, the numerator of which is the number of days
in the current fiscal year through the Date of Termination and the
denominator of which is 365; (b) any compensation previously deferred by
Employee (together with any accrued interest thereon) and not yet paid by the
Company; and (c) any accrued vacation pay not yet paid by the Company. Any
amounts payable to Employee under this Section 5(d) shall be reduced and
offset by the amount of any compensation received by Employee for other
employment during the Severance Period. During the Severance Period, Employee
shall use his best efforts to find employment consistent with the covenants
of Employee in the Noninterference Agreement and Sections 7 and 8 hereof.
During the Severance Period, or such longer period as any plan, program,
practice or policy may provide, the Company shall continue benefits to the
Employee and the Employee's family at least equal to those which would have
been provided to them in accordance with the plans, programs, practices and
policies described in Section 3(c) of this Agreement if the Employee's
employment had not been terminated or provide continuation coverage as set
forth under Part 6 of Title I of the Employee Retirement Income Security Act
of 1974, as amended, at the option of the Board of Directors of the Company.
6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent
or limit the Employee's continuing or future participation in any benefit,
bonus, incentive or other plans, programs, policies or practices, provided by
the Company and for which the Employee may qualify. Amounts which are vested
benefits or which the Employee is otherwise entitled to receive under any
plan, policy, practice or program of the Company at or subsequent to the Date
of Termination shall be payable in accordance with such plan, policy,
practice or program.
7. NONINTERFERENCE AGREEMENT. The terms and conditions of the
Noninterference Agreement entered into of even date herewith should be
incorporated herein and made part hereof by this reference. Employee and the
Company agree that the Company would suffer irreparable harm and incur
substantial damage if Employee were to breach the Noninterference Agreement.
8. CONFIDENTIALITY. For purposes of this Agreement, "Confidential
Information and Trade Secrets" shall mean all information, ideas, know how,
trade secrets, processes, computer code generated or developed, software or
programs and related documentation, methods, practices, fabricated
techniques, technical plans, customer lists, pricing techniques, marketing
plans, financial information and all other compilations of information which
relate to the Business of, and are owned by, the Company, which were not
known generally to others engaged in the Business of the Company and which
the Company has taken affirmative actions to protect from public disclosure
or which do not exist in the public domain. Employee acknowledges that,
during his term of employment with the Company, he shall have access to and
become familiar with Confidential Information and Trade Secrets that are
owned by the Company. Employee shall not use, in any way, or disclose any of
the Confidential Information and Trade Secrets, directly or indirectly,
either during the term of his employment or at anytime thereafter, except as
required in the course of his employment. All computer code, programs,
files, records, documents, information, data and similar items and
documentation relating to the Business of the Company, whether prepared by
Employee or otherwise, coming into Employee's possession, shall
4
<PAGE>
remain the exclusive property of the Company unless owned by Employee. The
obligations of this Section 8 are continuous and shall survive the
termination of Employee's employment with the Company.
9. NOTICES. Any notice or other communication required or permitted
to be given hereunder shall be in writing and deemed to have been given when
delivered in person or whendispatched by telegram or electronic facsimile
transfer (confirmed in writing by mail, registered or certified, return
receipt requested, postage prepaid, simultaneously dispatched) to the
addressees at the addresses specified below.
IF TO EMPLOYEE: Mr. Ernest Buys
4649 Hinton Drive
Plano, Texas 75024
IF TO THE COMPANY: 545 E. John Carpenter Freeway
Suite 1900
Irving, Texas 75062
Attention: Jon Halbert
Phone No.: (214) 830-6199
Fax No.: (214) 830-6196
or to such other address or fax number as either party may from time to time
designate in writing to the other.
10. ENTIRE AGREEMENT. Subject to Section 7 hereof, this Agreement
constitutes the entire agreement between the parties hereto relating to the
subject matter hereof, and supersedes all prior agreements and
understandings, whether oral or written, with respect to the same. No
modification, alteration, amendment or recision of or supplement to this
Agreement shall be valid or effective unless the same is in writing and
signed by the parties hereto.
11. GOVERNING LAW. This Agreement and the rights and duties of the
parties hereunder shall be governed by, construed under and enforced in
accordance with the laws of the State of Texas.
12. ASSIGNMENT. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their respective heirs, personal
representatives, successors and permitted assigns. Subject to the prior
written consent of Employee, the rights, duties and obligations under this
Agreement are assignable by the Company to a successor of all or
substantially all of the business or assets of the Company. The rights,
duties and obligations of Employee under this Agreement shall not be
assignable.
13. SEVERABILITY. The parties hereto further agree that if at any time
it shall be determined that the restrictions contained in Section 7 or 8 are
unreasonable as to time or area, or both, by any court of competent
jurisdiction, the Company shall be entitled to enforce this Agreement for
such period of time and within such area as may be determined to be
reasonable by such court and the court shall have the authority to construe
reform and enforce the terms of this Agreement for the benefit of the Company
to the maximum extent possible. It is the intent of the parties hereto that
the provisions hereof be enforceable to the fullest extent permitted by
applicable law. This Agreement may be enforced by the Company or any of its
affiliates engaged in the Business.
14. SURVIVAL. No termination of Employee's employment by any of the
parties hereto shall reduce or terminate Employee's covenants and agreements
in the Noninterference Agreement and Section 7 and 8 hereof.
5
<PAGE>
15. REMEDIES. Employee and the Company recognize that the services to
be rendered under this Agreement by Employee are special, unique, and of
extraordinary character, and that in the event of the breach by Employee of
the terms and conditions of the Noninterference Agreement and Sections 7 and
8 hereof, the Company shall be entitled, if it so elects, to institute and
prosecute proceedings in any court of competent jurisdiction, either in law
or in equity, to obtain damages for any breach thereof or to enforce the
specific performance thereof by Employee.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
ADVANCE PARADIGM, INC.
By: /s/ Jon S. Halbert
------------------------------------
Jon S. Halbert
Executive Vice President
EMPLOYEE
/s/ Ernest Buys
------------------------------------
Ernest Buys
6
<PAGE>
EXHIBIT "A"
FRINGE BENEFITS
1. INCENTIVE PLAN. The Employee shall be entitled to participate in the
annual executive incentive compensation plan. Subject to the discretion of
the Board of Directors of the Company or APS, the potential payout to the
Employee, if any, will be a subjective amount payable annually
2. CAR ALLOWANCE. Employee shall be provided a $500 per month car allowance.
At year end, the value of this benefit will be reported as required by the
IRS regulations on Employee's Form W-2.
7
<PAGE>
EXHIBIT 11
Statement Regarding Computation of Per Share Earnings
For the Year Ended March 31, 1995
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 799,437
---------
Weighted average shares outstanding 6,200,187
---------
---------
Net income for the year ended March 31, 1995 $ 24,000
-----------
-----------
Net income per share $ ----
-----------
-----------
<PAGE>
EXHIBIT 11
Statement Regarding Computation of Per Share Earnings
For the Year Ended March 31, 1996
COMPUTATION OF EARNINGS PER SHARE Pro Forma Historical
--------- ----------
Shares outstanding giving effect to the merger
and stock split 2,900,750 2,900,750
Conversion of Series A Preferred Stock 2,500,000 2,500,000
Impact of options and warrants using the
treasury stock method 799,437 799,437
Shares issued in offering to retire debt 836,320 ---
---------- ----------
Weighted average shares outstanding 7,036,507 6,200,187
---------- ----------
---------- ----------
Net income for the year ended March 31, 1996 $1,037,000 $1,037,000
Pro forma reduction of interest expense
on debt retired 707,000 ---
---------- ----------
Adjusted net income $1,744,000 $1,037,000
---------- ----------
---------- ----------
Net income per share $0.25 $0.17
---- -----
---- -----
<PAGE>
EXHIBIT 11
Statement Regarding Computation of Per Share Earnings
For the Year Ended March 31, 1997
COMPUTATION OF EARNINGS PER SHARE Pro Forma Historical
--------- ----------
Shares outstanding giving effect to the merger
and stock split 6,522,819 6,522,819
Conversion of Series B convertible preferred
stock (pro-rated) 833,333 833,333
Impact of options and warrants using the
treasury stock method 943,897 943,897
Shares issued in offering to retire debt 418,160 ---
---------- ----------
Weighted average shares outstanding 8,718,209 8,300,049
---------- ----------
---------- ----------
Net income for the year ended March 31, 1997 $3,138,000 $3,138,000
Pro forma reduction of interest expense
on debt retired 299,000 ---
---------- ----------
Adjusted net income $3,437,000 $3,138,000
---------- ----------
---------- ----------
Net income per share $0.39 $0.38
---------- ----------
---------- ----------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ADVANCE
PARADIGM INC. FORM 10-K FOR THE YEAR ENDED MARCH 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 51,086
<SECURITIES> 0
<RECEIVABLES> 35,485
<ALLOWANCES> 142
<INVENTORY> 1,859
<CURRENT-ASSETS> 88,714
<PP&E> 8,868
<DEPRECIATION> 3,292
<TOTAL-ASSETS> 107,473
<CURRENT-LIABILITIES> 63,850
<BONDS> 0
0
0
<COMMON> 78
<OTHER-SE> 42,450
<TOTAL-LIABILITY-AND-EQUITY> 107,473
<SALES> 0
<TOTAL-REVENUES> 251,562
<CGS> 0
<TOTAL-COSTS> 240,810
<OTHER-EXPENSES> 7,309
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,181)
<INCOME-PRETAX> 4,624
<INCOME-TAX> 1,486
<INCOME-CONTINUING> 3,138
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,138
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
</TABLE>
