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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, 1999
[ ] 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 1570, 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:
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Name of each exchange
Title of each class on which registered
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None None
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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 31,
1999 as reported on the Nasdaq National Market, was approximately $432,698,508.
As of May 31, 1999, Registrant had outstanding 10,559,859 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's 1999 Annual Meeting of
Stockholders are incorporated by reference in Part III.
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ITEM 1. BUSINESS
OVERVIEW
We are a leading independent provider of health benefit management services,
providing pharmacy benefit management, disease management and clinical research
programs. Our mission is to improve the quality of care delivered to health plan
members while helping health plan sponsors reduce overall health benefit costs.
We generate revenues from providing services to two primary customer groups:
health plan sponsors and pharmaceutical manufacturers. We support a broad range
of health plan sponsors, including managed care organizations, third-party
health plan administrators, insurance companies, government agencies, employer
groups and labor union-based trusts through our pharmacy benefit management and
disease management services. We currently serve an estimated 27 million
individuals enrolled in our customers' plans. We provide our clinical research
services primarily to pharmaceutical manufacturers. We also work closely with
pharmaceutical manufacturers in negotiating lower drug costs for our health plan
sponsor customers.
In the year ended March 31, 1999 ("fiscal year 1999"), we further enhanced
our health benefit management services with our acquisitions. On December 1,
1998, we acquired Baumel-Eisner Neuromedical Institute, Inc., a privately-held
clinical trials company based in South Florida. On March 31, 1999, we acquired
Foundation Health Pharmaceutical Services, Inc., the parent company of
Foundation Health Systems, Inc.'s pharmacy benefit management company,
Integrated Pharmaceutical Services.
INDUSTRY BACKGROUND
Health care expenditures are expected to grow at a compound annual growth
rate of approximately 7.1% from $1.1 trillion in 1998 to $2.1 trillion in 2007,
according to the Health Care Financing Administration. Prescription drug costs
are expected to be one of the fastest growing components of health care costs,
and the Health Care Financing Administration has estimated that prescription
drugs will account for approximately 8.0% of United States health care
expenditures by 2007, up from 6.5% today. As a result, prescription drug sales
in the United States are expected to increase at a compound annual growth rate
of approximately 9.7%, from approximately $74.3 billion in 1998 to approximately
$171.1 billion in 2007. We believe a number of factors will contribute to this
trend, including:
o increased expenditures on new drug development;
o an increase in new drug introductions as a result of shorter approval
cycles by the U.S. Food and Drug Administration;
o relatively higher prices for new drugs;
o an aging population;
o effective direct-to-consumer advertising by pharmaceutical manufacturers;
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o growing use of pharmaceuticals as first line of attack in disease
treatment; and
o increased availability of pharmacy benefits to health plan members.
The concept of managed care originally developed in response to escalating
health care costs. Health plan sponsors hoped that by exercising more control
over health care delivery, they could control costs. Pharmacy benefit managers
emerged to offer health plan sponsors a more efficient and less costly means of
managing their members' drug use. In recent years, managed care has begun to
evolve from a short-term, cost driven model to a long-term, medical
outcomes-based model, where the overall cost and quality of patient care is
considered by the health plan sponsor. Health benefit managers like us have
emerged to assist health plan sponsors with the challenges of this new model of
member care.
OUR STRATEGY
Our mission is to improve the quality of care delivered to health plan
members while helping plan sponsors reduce overall health benefit costs. Our
strategy is to develop and implement clinical programs that manage large patient
populations more efficiently and effectively than is possible for an individual
health plan. In order to implement our strategy, we plan to:
o Increase our core pharmaceutical benefit management customer base. We
believe that increased size will allow us to achieve economies of scale
and pass lower costs on to our customers. We have successfully increased
the number of individuals served by our programs from an estimated 5.2
million in 1995 to an estimated 27 million on April 1, 1999. We plan to
continue to grow this customer base by marketing our comprehensive
service offerings to a broader range of health plan sponsors.
o Expand our disease management services. We have two strategies for
growing these services. First, we have the opportunity to cross-sell
existing disease management services to our pharmacy benefit management
customers. Second, we plan to develop and market new disease management
programs, using our clinical expertise and information management
capabilities.
o Develop additional clinical research capabilities. We believe we have a
leading clinical trial operation in Alzheimer's studies. We also conduct
studies for several other central nervous system disorders. We plan to
expand our clinical research offerings by developing focused expertise
in a select number of additional diseases.
o Pursue strategic acquisitions and alliances. We plan to selectively
pursue acquisitions and alliances that either:
o increase the size of our core pharmacy benefit management business;
o enhance our disease management programs;
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o augment our clinical research capabilities; or
o expand our Internet offerings.
To date, we have successfully completed a number of acquisitions including
Innovative Medical Research, Inc., Baumel-Eisner Neuromedical Institute,
Inc. and Foundation Health Pharmaceutical Services.
o Develop our Internet capabilities. While we currently offer a basic set
of services on the Internet, we plan to dramatically broaden these
offerings and expand access to our Internet site. Our future Internet
initiatives may offer medical content to our health plan sponsor
customers for use on their Internet sites, empower consumers by
involving them more directly in their medical care and offer access to
an on-line drugstore.
HEALTH BENEFIT MANAGEMENT SERVICES
PHARMACY BENEFIT MANAGEMENT. We offer a broad range of clinical, data and
mail services to our customers through our pharmacy benefit management programs.
Our pharmacy benefit management customer base included over 1,000 health plan
sponsors at March 31, 1999. When the Foundation Health Pharmaceutical Services
acquisition is fully implemented, we expect to serve an estimated 27 million
individuals enrolled in our customers' health plans, and manage $5.0 billion in
gross drug expenditures and over 150 million pharmacy claims annually.
CLINICAL SERVICES. Our clinical services professionals work closely with
health plan sponsors to design and administer pharmacy benefit plans that,
through the use of formularies and other techniques, promote clinically
appropriate drug usage while reducing drug costs. Formularies are lists of a
health plan's preferred pharmaceutical products. The use of a formulary can
reduce drug costs while preserving the same medical effect through substitution
of brand-name drugs with a cost effective generic alternative -- known as
generic substitution -- or substitution of a brand-name drug with another, lower
cost brand-name drug in the same therapeutic class -- known as therapeutic
substitution.
We encourage formulary compliance by both patients and prescribing
physicians. Our customers' plans include features such as tiered copayments,
which require a health plan member to pay higher amounts for non-formulary drugs
in order to influence them to choose the drugs in the formulary. We attempt to
influence physician prescribing patterns by analyzing physicians' prescribing
behavior relative to physician peer groups and notifying them when their
practices differ from industry practice. We also provide our own educational
materials to plan physicians, pharmacists and health plan sponsors.
DATA SERVICES. Through our data services operations, we process the
prescription claims for health plan sponsors. We have increased the number of
claims processed from approximately 1.5 million claims in fiscal year 1995 to
over 50 million claims in fiscal year 1999. We currently process approximately 5
million claims per month.
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We administer a network of over 53,000 retail pharmacies that have agreed to
provide prescription drugs to individual members of our customers' health plans
at predetermined negotiated rates. Generally, we believe these rates are more
favorable than typical retail prices. The retail pharmacies in the network are
linked to us through our on-line claims processing system. Our on-line system
provides pharmacists with the following information:
o an analysis of whether the individual is eligible for benefits;
o the prescription benefits the individual's health plan has selected;
o the individual's co-payment obligation;
o the amount the pharmacy can expect to receive as reimbursement for its
services; and
o an alert message to warn the pharmacist of possible interactions,
including drug-drug, drug-food, drug-age, and drug-pregnancy
interactions.
MAIL SERVICES. Currently, our mail pharmacy operations dispense over 130,000
prescriptions per month, typically in the form of a three month supply of
medications for chronic conditions. We believe that our mail pharmacy reduces
costs to health plan sponsors by buying drugs at volume discounts and dispensing
generic and therapeutic drug substitutes when appropriate. In addition, our
control over the dispensing process allows us to improve patient compliance
through methods such as calling members when they neglect to refill important
prescriptions.
Our mail pharmacy operations are located in approximately 38,000 square feet
in a building we own in Richardson, Texas. Our 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, our
mail service system is equipped with automated quality control features, and
each prescription is inspected by a registered pharmacist.
While the vast majority of prescriptions are currently submitted by mail, we
are expanding our Internet capabilities to take advantage of the growth we
anticipate in this area. See "Internet strategy."
DISEASE MANAGEMENT. Our disease management programs are designed to help
health plan sponsors manage the cost and treatment of specific diseases. We
believe our disease management programs help improve medical outcomes and lower
the cost of health care delivery for our customers through our interaction with
patients and physicians. These programs are designed to monitor the entire
contracted population and intervene when individuals demonstrate symptoms of a
disease or high risk indications.
We currently provide disease programs for cardiovascular secondary risk
reduction, asthma, diabetes, h. pylori, compliance and heart failure. We have
completed and are marketing programs in depression, hypertension and
gastrointestinal preservation, and we are developing new programs for HIV,
migraine, polypharmacy and dementia. Our disease management programs
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have five principal elements:
o Data integration. We compile and analyze medical, pharmacy and other
relevant data for a particular group of health plan members.
o Case finding. We identify patients from this group who have the disease
specified by the particular study and who we believe are at high risk
for severe illness.
o Treatment assessment. We compare treatment received by identified
patients with nationally accepted treatment guidelines.
o Targeted intervention. We intervene with identified patients by
educating them about their disease and with physicians by providing
information about treatment guidelines.
o Outcomes analysis. We measure the results of the intervention by
tracking the identified patients' medical outcomes and monitoring
ongoing compliance with their treatment programs.
We differentiate our disease management programs from those of our
competitors with our outcomes assessment capabilities. We survey patients to
assess quality of life, quality of care and overall satisfaction with the
disease management program. We also assess the economic benefit of the program
to our customers. As recognition of our surveying expertise, we are certified to
administer HEDIS/CAHPS 2.OH member satisfaction surveys on behalf of health plan
sponsors. These surveys use a set of standardized measures that compare the
performance of health plans and allow consumers to draw comparisons across
health plans.
DECISION SUPPORT SYSTEMS. We use our decision support system to monitor,
analyze and evaluate drug utilization for our health benefit management
customers. One of our decision-support systems, ApotheQuery(R), allows us 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. Our decision support systems have been developed using
commercially available technology and are not protected by any patents.
We also integrate our 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(R) by including
data relating to diagnosis and treatment of patients. This allows us and our
customers to identify problem areas for the health plan sponsor and implement
timely clinical solutions. The database further enhances our ability to complete
medical outcomes studies and to develop disease management programs.
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CLINICAL RESEARCH. The two principal components of our current clinical
research capabilities are clinical trials and outcomes studies. We developed
these capabilities through our acquisition of Innovative Medical Research, Inc.
("IMR") in February 1998 and Baumel-Eisner Neuromedical Institute, Inc. in
December 1998. Our clinical research operations participated in 60 clinical
trials and 21 surveys during fiscal year 1999.
Through our clinical research operations, we assist pharmaceutical
manufacturers in moving new drugs, or new uses for existing drugs, through the
laborious clinical trials process and into the market quickly and efficiently.
We provide an established vehicle for conducting studies that can document a
drug's economic and clinical benefits in a real world environment. In addition,
our surveying capabilities permit us to evaluate the effectiveness of disease
management strategies.
We provide key functions in the clinical trials process including:
o recruiting patients and physicians to participate in trials;
o administering the trials as designed by the pharmaceutical manufacturers;
and
o measuring the patients' results.
We use a call center and medically appropriate surveys to identify patients
eligible to participate in our clinical trials. This patient enrollment method
is designed to reduce drug development time, which permits sponsors of clinical
trials to introduce their products into the market faster and to maximize the
economic return for such products.
Our current clinical trial initiatives are in the following areas:
Alzheimer's disease, analgesia and pain relief, migraine and tension headache,
mild cognitive impairment, major depressive orders, Parkinson's disease and
gastrointestinal motility.
We also provide outcomes studies services to pharmaceutical manufacturers.
These services include:
o conducting studies to further the understanding of the characteristics of
diseases;
o conducting studies to develop simple to use tools, such as questionnaires
and decision trees, for diagnosing diseases;
o developing measurements for monitoring patient medical outcomes;
o determining how to best influence the health status of individuals;
o conducting surveys to evaluate physician knowledge and behavior in order
to develop individualized educational materials for each physician; and
o evaluating the direct and indirect costs of health care.
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Our current outcomes studies initiatives are in the following areas: chronic
pain, dementia, impaired memory, urinary incontinence, irritable bowel syndrome,
asthma, vaccines, headache, osteoarthritis, gastrointestinal motility and
diabetes.
We believe we are a leader in clinical research and have received strong
recognition in the clinical research arena. As of April 30, 1999, we employ 30
Medical Doctors, 2 Ph.D's., and 13 PharmDs. Many of our employees are on the
staff of leading university-affiliated medical health centers. We believe we are
leaders in Alzheimer's disease prevention and treatment research and are the
largest enroller in Alzheimer's research. We were one of the lead investigators
for the Excedrin Migraine(C) Program, and we recently conducted an asthma
research program with the Robert Wood Johnson Foundation.
INTERNET STRATEGY
We are currently reviewing alternative approaches to enhance our existing
Internet-based services for covered individuals. Our current services include:
o ordering refills of pharmaceuticals;
o checking the status of pharmacy orders;
o locating network pharmacies; and
o reviewing formulary information.
We plan to develop our Internet capability beyond our current services for
covered individuals to support our customers and to enhance our program
offerings. Our future Internet initiatives may offer medical content to our
health plan sponsor customers for use on their Internet sites, empower consumers
by involving them more directly in their medical care and offer access to an
on-line drugstore. Our future Internet offerings may include some or all of the
following:
o on-line drug store;
o disease-specific chat rooms and information;
o patient and member surveys;
o personalized refill reminders;
o monitoring of patient drug use; and
o recruitment of patients and physicians for clinical trials.
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SALES, MARKETING AND CUSTOMER SERVICE
The sales process for health benefit management services usually lasts from
six to nine months, yet may take over a year. We initiate our sales process with
our large customers at the most senior levels of our company. A staff of seven
sales representatives with a local presence in offices across the United States
supports these senior level initiatives. We also have proposal development and
marketing groups that work with our team to prepare the analysis that supports
our person-to-person sales effort. With this team approach, we are able to work
with customers at multiple levels within their organizations and they have
multiple contacts within ours.
Once we have signed up the customer for our services, we commit to provide
them with the highest level of customer support. For example, our benefits
design group works with the customers to design the pharmacy benefits that the
customers will provide to individuals in their plans. Once the plans are
established, each customer has a dedicated representative who acts as the
primary contact for the customer to call if there are any questions, concerns or
suggestions regarding their plans. This representative will also lead the effort
within our company to respond to customer requests, such as analyzing potential
formulary adjustments, performing data analysis and addressing member
eligibility issues. Finally, we commit to our customers that the individuals
enrolled in their plans will receive high quality customer service. To fulfill
this promise, we manage our own advanced call center with employees available to
answer incoming calls 24 hours a day, seven days a week. As of March 31, 1999,
we employ approximately 142 customer service representatives in this call
center.
CUSTOMERS
A significant portion of our revenues result from contracts with customers.
These contracts typically provide for multi-year terms, with automatic 12-month
renewals unless either party terminates the contract by giving written notice
before the automatic renewal date. Some of our contracts are terminable by
either party on as little as 30 to 180 days notice. In fiscal year 1999, our top
five customers accounted for 52% of our revenues. One of our customers, the
United Mine Workers of America, accounted for approximately 18% of our revenues,
yet less than 8% of our total claims processed, in fiscal year 1999. No other
customer accounted for over 10% of our revenues in this period. We expect that
Foundation Health Systems will be our single largest customer in fiscal year
2000.
Some of our major customers hold equity positions in our company in the form
of common stock and warrants, which fosters the development of long-term
strategic alliances. We believe this arrangement strengthens our ties to these
customers.
COMPETITION
Many of our customers put their contracts out for competitive bidding prior
to renewal. We compete with a number of larger, national companies, including
Caremark International Inc., a subsidiary of MedPartners, Inc., Express Scripts,
Inc., an affiliate of NYLIFE HealthCare Management, Inc., Merck-Medco Managed
Care, LLC, a subsidiary of Merck & Co., Inc., a pharmaceutical manufacturer, and
PCS Health Systems, Inc., a subsidiary of Rite-Aid
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Corporation, a national pharmacy chain. These competitors are significantly
larger than we are and possess greater financial, marketing and other resources
than we do. These competitors may possess purchasing and other advantages over
us that may allow them to price competing services more aggressively than we can
because of their size or other aspects of their businesses.
We believe that the primary competitive factors in the health benefit
management industry include:
o independence from pharmaceutical manufacturers, retail pharmacies and
health plan sponsors;
o the quality, scope and costs of programs offered;
o the size and financial strength of the company;
o the ability to reduce customer costs by negotiating favorable rebates and
volume discounts from pharmaceutical manufacturers;
o the ability to use clinical strategies to improve patient outcomes and
reduce costs; and
o the ability to provide flexible, clinically oriented services to
customers.
We believe that all of our larger competitors offer comprehensive pharmacy
benefit management services and some form of disease management services. We
consider our principal competitive advantages to be our strong clinical
approach; our independence from pharmaceutical manufacturers, retail pharmacies
and health plan sponsors; and our strong managed care customer base, which
supports the development of health benefit management services.
GOVERNMENT REGULATION
Various aspects of our businesses are governed by federal and state laws and
regulations and compliance is a significant operational requirement for our
company. We believe that we are in substantial compliance with all existing
legal requirements material to the operation of our business.
Certain federal and state laws and regulations affect aspects of our
pharmacy benefit management business. Among these are the following:
FDA regulation. The U.S. Food and Drug Administration (the "FDA"), generally
has authority to regulate drug promotional materials that are disseminated "by
or on behalf" of a pharmaceutical manufacturer. In January 1998, the FDA issued
a Draft Guidance for Industry regarding the regulation of activities of pharmacy
benefit managers that are directly or indirectly controlled by pharmaceutical
manufacturers. In that draft guidance, the FDA purported to have the authority
to hold pharmaceutical manufacturers responsible for the promotional activities
of pharmacy benefit management companies, depending upon the nature and extent
of the relationship between the pharmaceutical manufacturer and the pharmacy
benefit management
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company. We and many other companies and associations commented to the FDA in
writing regarding its authority to regulate the promotional activities of
pharmacy benefit management companies that are not owned by pharmaceutical
manufacturers. On July 1, 1998, the FDA responded to these comments by
reconsidering the matter and announcing its attention to create a new draft
guidance. To date, the FDA has not issued a new guidance. Although it appears
that the FDA has changed its position regarding the ability to regulate the
promotional activities of pharmacy benefit management companies that are not
owned by pharmaceutical manufacturers, the FDA could still adopt the current
draft guidance or an alternative guidance in which the FDA continues to assert
the authority to regulate the promotional activities of such pharmacy benefit
management companies.
The conduct of clinical trials also is regulated by the FDA under the
authority of the Federal Food, Drug and Cosmetic Act and related regulations. In
general, the sponsor of the drug product which is being studied, or the
manufacturer which will have the right to market the drug product if it is
approved by the FDA, has the responsibility to comply with the laws and
regulations that apply to the conduct of the clinical trials. However, in
providing services related to the conduct of clinical trials, we may assume some
or all of the sponsor's or clinical investigator's obligations related to the
study of the drug. For example, in October 1998, the FDA announced that the
agency would give Institutional Review Boards, independent bodies that oversee
the conduct of clinical investigations, increased access to information pointing
to violative or potentially violative conduct on the part of clinical
investigators with whom they may be working. A clinical investigator is a
physician conducting a clinical trial. On February 2, 1999, a regulation that
requires clinical investigators to disclose certain financial information took
effect. If required financial information, such as the financial interest of
each investigator in the approval of the product, is not disclosed, or if any
investigator fails to properly certify that he or she has no financial interest
in the product under investigation, we could be subject to administrative, civil
or criminal penalties.
Because the interpretation and enforcement of laws and regulations relating
to the conduct of clinical trials is uncertain, the FDA may consider our
compliance efforts to be inadequate and initiate administrative enforcement
actions against us. If we fail to successfully defend against an administrative
enforcement action, it could result in an administrative order suspending,
restricting or eliminating our ability to participate in the clinical trial
process, which would materially limit our business operations. Moreover, some
violations of the Federal Food, Drug and Cosmetic Act are punishable by civil
and criminal penalties against both the violating company and responsible
individuals. If warranted by the facts, we and our employees involved in the
trials could face civil and criminal penalties which include fines and
imprisonment.
The FDA recently has expressed concern regarding the potential impact of the
failure of companies in the pharmaceutical industry to remedy year 2000 computer
problems. While the FDA appears most concerned with potential manufacturing
problems, the FDA has recognized that year 2000 problems could cause errors in
product distribution and in the gathering of data in clinical studies. For
example, the FDA has stated that, in the worst case scenario, a year 2000
problem could cause the computers on which companies conducting clinical studies
rely to generate flawed data. To date, the FDA has not required companies to
make any formal submissions regarding efforts to remedy year 2000 problems.
However, if a year 2000 problem
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caused a drug product that we distributed to be adulterated, or caused our data
gathered in connection with a clinical study to be flawed, our business could be
adversely affected and we could be subject to administrative, civil or criminal
liability.
Regulation of identifiable patient information. Increased government
regulation concerning the use of identifiable patient information may occur in
the near future. Through our disease management programs, we assist our health
plan sponsor customers in identifying individuals who will benefit most from the
programs and measuring the patients' improvement after enrollment in the
program. Government restrictions on the use of patient identifiable information
may adversely affect our ability to conduct disease management programs and
outcomes studies, as well as our business growth strategy based on these
programs. Federal and state legislation has been proposed, and some state laws
have been enacted, to restrict the use and disclosure of identifiable medical
information. To our knowledge, no legislation has been enacted that would
prohibit our ability to conduct our current disease management or clinical
research programs. However, under the Health Insurance Portability and
Accountability Act of 1996, Congress is required to establish standards to
govern the privacy of individually identifiable health information by August
1999. If Congress fails to act by that date, the Health Insurance Portability
and Accountability Act of 1996 requires that the Secretary of Health and Human
Services issue regulations by February 2000. Consequently, it appears likely
that federal legislation or regulations addressing the accessibility of
individually identifiable health information will be in place in the near
future.
Anti-remuneration laws. Subject to certain exceptions, federal law prohibits
the payment, offer, receipt or solicitation of any remuneration that is
knowingly and willfully intended to induce the referral of Medicare, Medicaid or
other federal health care program beneficiaries or the purchase, lease, ordering
or recommendation of the purchase, lease or ordering of items or services
reimbursable under federal health care programs. Several states also have
similar laws which are not limited to services for which federal health care
program 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. Sanctions for violating these federal and state
anti-remuneration laws may include imprisonment, criminal and civil fines, and
exclusion from participation in federal health care programs. State
anti-remuneration laws vary, and courts have not frequently interpreted such
laws. However, the courts in several cases have ruled that contracts that
violate anti-remuneration laws are voidable.
The federal anti-remuneration statute has been interpreted broadly by
courts; the Office of Inspector General, or OIG, within the Department of Health
and Human Services; and administrative bodies. Because of the federal statute's
broad scope, federal regulations establish some "safe harbors" from liability.
Safe harbors exist for, among other things, certain properly reported discounts
received from vendors, certain investment interests, certain properly disclosed
payments made by vendors to group purchasing organizations and certain managed
care risk-sharing arrangements. A practice that does not fall within a safe
harbor is not necessarily unlawful, but may be subject to scrutiny and
challenge. Courts have ruled that, 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
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"product conversion programs" in which benefits are given by pharmaceutical
manufacturers to pharmacists or physicians for changing a prescription, or
recommending or requesting such a change, from one drug to another. These 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 pharmaceutical manufacturers to retail
pharmacists in connection with such programs.
We believe that we are in substantial compliance with the legal requirements
imposed by these laws and regulations, and we believe that there are material
differences between the drug-switching programs that have been highlighted by
the OIG and the programs we offer to our customers. However, in June 1998, the
Philadelphia United States Attorney's office announced that it was investigating
rebates and other payments made by pharmaceutical manufacturers to pharmacy
benefit managers, including whether these payments may violate anti-remuneration
laws. To date, no specific prosecutions have been made public. We could be
subject to scrutiny or challenge under these laws and regulations, which could
have a material adverse effect upon us.
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 the
Department of Health and Human Services programs, issued a report on pharmacy
benefit management arrangements on April 15, 1997. The report was based
primarily on a nationwide survey of HMOs that use pharmacy benefit managers, and
examined the benefits of, and concerns raised by, the HMOs' relationships with
pharmacy benefit managers.
The report identified two major concerns, the potential for bias resulting
from alliances of pharmacy benefit managers and pharmaceutical manufacturers and
the lack of oversight by HMOs regarding the performance of pharmacy benefit
managers in delivering quality services to health plan members. The report makes
two main recommendations. First, the Health Care Financing Administration and
state Medicaid programs should include stronger oversight provisions in their
risk contracts with HMOs by requiring HMOs to review the performance of the
pharmacy benefit managers with which they contract. Second, the Health Care
Financing Administration, the FDA and the Health Resources and Services
Administration, working with outside organizations, should develop quality
measures for pharmacy practices that can be used in managed care settings. In
addition, legislation has been introduced in several states proposing to
specifically regulate pharmacy benefit management companies. To date, no such
legislation has passed. We intend to closely monitor these agency actions and
legislative proposals and whether these actions and proposals would have any
impact on our business.
Managed care reform. Legislation is being debated on both the federal and
state level, and has been enacted in some states, aimed at improving the quality
of care provided to individuals enrolled in managed care plans. Some of these
initiatives would, among other things, require that health plan members have
greater access to drugs not included on a plan's formulary and give health plan
members the right to sue their health plans for malpractice when they have been
denied care. The scope of the managed care reform proposals under consideration
by Congress and state legislatures and enacted by states to date vary greatly,
and the extent to which future
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legislation may be enacted is uncertain. However, these initiatives could
greatly impact the managed care and pharmaceutical industries and, therefore,
could have a material impact on our business.
ERISA regulation. The Employee Retirement Income Security Act of 1974, or
ERISA, regulates certain aspects of employee pension and health benefit plans,
including self-funded corporate health plans with which we have agreements to
provide pharmacy benefit management services. The U.S. Department of Labor,
which is the agency that enforces ERISA, could assert that the fiduciary
obligations imposed by the statute apply to certain aspects of our 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 pharmaceutical manufacturers to retail
pharmacies in connection with drug switching programs. In addition, under a
settlement agreement entered into with 17 states on October 25, 1995,
Merck-Medco Managed Care, the pharmacy benefit management subsidiary of
pharmaceutical manufacturer Merck & Co., agreed to require pharmacists
affiliated with Merck-Medco Managed Care mail service pharmacies to disclose to
physicians and patients the financial relationships between Merck & Co.,
Merck-Medco Managed Care and the mail service pharmacy when such pharmacists
contact physicians seeking to change a prescription from one drug to another. We
believe that our contractual relationships with pharmaceutical manufacturers and
retail pharmacies do not include the features that were viewed by enforcement
authorities as problematic in these settlement agreements. However, we could be
subject to scrutiny or challenge under one or more of these laws.
Network access legislation. A majority of states have adopted some form of
legislation affecting our ability to limit access to pharmacy provider networks
or from removing network providers. Such legislation may require our customers
and us 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. We have not been materially affected by
these statutes because we administer a large network of over 53,000 retail
pharmacies and will admit any licensed pharmacy that meets our 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 a health 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. This legislation does not generally
apply to us, but it may apply to some of our customers such as HMOs and
insurers. If similar legislation were to become widespread and broad in scope,
it could have the effect of limiting the economic benefits achievable through
health benefit management services.
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Licensure laws. Many states have licensure or registration laws governing
certain types of ancillary health care organizations, including preferred
provider organizations, third party administrators, and companies that provide
utilization review services. The scope of these laws differs significantly from
state to state, and the application of these laws to the activities of pharmacy
benefit managers is often unclear. We have registered under these laws in those
states in which we have 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 our ability to negotiate discounts in the future from network pharmacies.
Other states have enacted "unitary pricing" legislation, which mandates that all
wholesale purchasers of drugs within the state be given access to the same
discounts and incentives.
Additionally, Medicare reimbursement and coverage of prescription drugs may
change significantly in the near future. Medicare presently covers only a
limited number of outpatient prescription drugs, and reimbursement of covered
drugs is generally based on a percentage of the drug's average wholesale price.
Legislation has been proposed to reduce Medicare drug reimbursement amounts,
although the prospects for enactment of such legislation are uncertain. At the
same time, legislative initiatives are being considered to expand Medicare
coverage of drugs, in some instances as part of a broad reform of the Medicare
program. We cannot assess at this stage whether such legislation will be
approved or how it would address drug costs. Enactment of legislation to reduce
Medicare drug reimbursement or to expand Medicare drug coverage may have an
adverse impact upon our business.
Regulation of financial risk plans. Fee-for-service prescription drug plans
are not generally subject to financial regulation by the states. However, if a
pharmacy benefit manager 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. These 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 us.
Mail pharmacy regulation. Our mail pharmacy operations, located in
Richardson, Texas, distribute drugs throughout the country. Some of the drugs
that we distribute are classified as controlled substances, which are regulated
by federal and state drug enforcement authorities. We are licensed by both
United States and Texas authorities to do business as a pharmacy and distribute
controlled substances. Many of the states into which we deliver pharmaceuticals
and controlled substances also have laws and regulations that permit
out-of-state mail service pharmacies to distribute pharmaceuticals and
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controlled substances into the state so long as the pharmacy is registered with
that state's board of pharmacy, or similar regulatory body. We have registered
in every state, which, to our knowledge, requires such registration. 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 us, we would be required to comply
with them.
Other statutes and regulations also affect our mail pharmacy 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. However, we do not currently receive reimbursements from any Medicaid
programs. Congressionally mandated goals to provide useful information on
prescription drugs to consumers 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 our mail service operations.
The United States Postal Service historically has exercised this statutory
authority only with respect to controlled substances. Alternative means of
delivery are available to us.
EMPLOYEES
On May 31, 1999, we had 891 employees. None of our employees are represented
by a labor union. In the opinion of management, our relationship with our
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. 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 our financial position, our business
strategy and our management's plans and objectives for future operations, are
forward-looking statements. Although we believe that the expectations reflected
in such forward-looking statements are reasonable, we can give no assurance that
such expectations will prove to have been correct. 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. Our actual
results could differ materially from those discussed herein, and important
factors that could cause actual results to differ materially from our
expectations are disclosed under "Risk Factors", as well as
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elsewhere in this Form 10-K. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by this section.
RISK FACTORS
IF WE LOSE KEY HEALTH PLAN SPONSOR CUSTOMERS, OUR BUSINESS COULD BE ADVERSELY
AFFECTED
We depend on a limited number of large health plan sponsor customers for a
significant portion of our consolidated revenues. Our business, profitability
and growth prospects could be adversely affected if we were to lose one or more
of our significant customers. We could lose customers if we fail to win a
competitive bid at the time of contract renewal or if our customers are acquired
by companies who are not our customers. Our contracts with our customers
generally do not have terms of more than three years, and in some cases are
terminable by either party on as little as 30 to 180 days notice. Five customers
accounted for approximately 52% of our revenues in fiscal year 1999. During this
period, United Mine Workers of America accounted for approximately 18% of our
consolidated revenues, yet less than 8% of our total claims processed. In fiscal
2000, we expect that Foundation Health Services will become our largest
customer.
We cannot be sure that revenues from new customers will offset the revenues
which may be lost from customers who terminate contracts because they are
acquired by, or acquire, companies which are not our customers. Over the past
several years, insurance companies, health maintenance organizations, or HMOs,
and managed care companies have experienced significant consolidation. Our
customers have been, and may continue to be, subject to consolidation pressures.
We may lose some customers as a result of acquisitions, which could have a
material adverse effect on our business, profitability and growth prospects.
Many participants in the health care industry, including our customers, are
under severe financial pressures due to rising claims and costs. If the
financial condition of any of our significant customers deteriorates, which
could occur for many reasons including adverse changes in governmental or
private reimbursement programs, it could have an adverse effect on us.
IF WE CANNOT RESPOND ADEQUATELY TO COMPETITION IN OUR INDUSTRY, OUR
PROFITABILITY AND GROWTH PROSPECTS COULD BE REDUCED OR ELIMINATED
The health benefit management industry is very competitive. If we don't
compete effectively, our profitability and growth prospects could be reduced or
eliminated. Our competitors include large, profitable and well-established
companies which have substantially greater financial, marketing and other
resources than we do. Some of our competitors in the pharmacy benefit management
business, such as Merck-Medco Managed Care, LLC and PCS Health Systems, Inc.,
are owned by large, profitable and well-established pharmaceutical manufacturers
or national drug store chains. Many of our customers put their contracts out for
competitive bidding prior to renewal. Our competitors may possess purchasing and
other advantages over us that may allow them to price competing services more
aggressively than we can because of their size or
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other aspects of their business. We also expect to experience competition from
new sources in the future, such as Internet-based health care services
companies. We cannot be sure that we will continue to remain competitive, nor
can we be sure that we will be able to successfully market our health benefit
management services to customers at our current levels of profitability.
Over the last several years, the competitive pressures described above have
caused health benefit management companies, including us, to reduce the prices
charged to customers for basic pharmacy benefit management services and share a
larger portion of the rebate revenues received from pharmaceutical manufacturers
with our customers. Our gross margin may decline as we continue to attract
larger customers, which typically have greater bargaining power than smaller
customers and may require us to sell our services at decreased prices.
IF WE FAIL TO TRANSITION THE OPERATIONS OF FOUNDATION HEALTH PHARMACEUTICAL
SERVICES IN A TIMELY AND SUCCESSFUL MANNER, OUR BUSINESS, PROFITABILITY AND
GROWTH PROSPECTS COULD BE ADVERSELY AFFECTED
We acquired Foundation Health Pharmaceutical Services, a large pharmacy
benefit management company, on March 31, 1999. If we fail to transition this new
business in a timely and successful manner, our business, profitability and
growth prospects could be adversely affected. This acquisition, along with the
service agreement signed with Foundation Health Systems, Inc., approximately
doubled the number of individuals enrolled in our programs. We have begun to
implement a plan to address items such as:
o retaining the non-affiliated customers of Foundation Health Pharmaceutical
Services;
o transitioning the Foundation Health Systems, Inc. affiliated health plan
onto our system; and
o coordinating customer service between our two organizations.
We cannot be sure that we will successfully combine Foundation Health
Pharmaceutical Services' operations with our own, or that the transaction will
meet our financial expectations. The Foundation Health Pharmaceutical Services
customers who were not part of health benefit plans affiliated with Foundation
Health Systems have contracts which allow them to terminate their relationship
with us with 60 to 90 days' notice. We believe that about half of the estimated
12 million new plan members we acquired fall under this type of contract. If a
large number of customers terminate their relationship with us, we may not be
able to achieve our customer retention goals. Because we placed a significant
level of importance on Foundation Health Pharmaceutical Services' customer base
when we decided to purchase the company, the loss of customers would adversely
affect our future business plans. It is also possible that during our
investigation of Foundation Health Pharmaceutical Services we failed to uncover
or appropriately address material problems with Foundation Health Pharmaceutical
Services' operations or financial condition, or failed to discover contingent
liabilities.
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IF WE ARE UNABLE TO OVERCOME THE PROBLEMS AND RISKS RELATED TO OUR ACQUISITION
AND ALLIANCE STRATEGY, OUR BUSINESS, PROFITABILITY AND GROWTH PROSPECTS COULD
SUFFER
Part of our growth strategy includes acquisitions and/or alliances involving
complementary services, technologies and businesses. If we are unable to
overcome the potential problems and inherent risks related to acquisitions and
alliances, our business, profitability and growth prospects could suffer. We
completed three acquisitions in the past 15 months, and we continually review
future acquisition opportunities. Our ability to continue to expand successfully
through acquisitions and alliances depends on many factors, including our
ability to identify acquisition/alliance prospects and negotiate and close
transactions. If we complete future acquisitions or alliances:
o we could fail to successfully integrate the operations, services and
products of any acquired company;
o we could fail to select the best alliance partners or fail to effectively
plan and manage any alliance strategy;
o our management's attention could be diverted from other business concerns;
and
o we could lose key employees of the acquired company or alliance business.
Many companies compete for acquisition and alliance opportunities in the health
benefit management industry. Some of our competitors are companies that have
significantly greater financial and management resources than we do. This may
reduce the likelihood that we will be successful in completing acquisitions and
alliances necessary to the future success of our business.
IF OUR BUSINESS CONTINUES TO GROW RAPIDLY AND WE ARE UNABLE TO MANAGE THIS
GROWTH, OUR BUSINESS, PROFITABILITY AND GROWTH PROSPECTS COULD SUFFER
If we are unable to manage future expansion successfully or are unable to
hire and retain the personnel needed to manage our business successfully, then
our business, profitability and growth prospects could be adversely affected.
Our business has grown rapidly in the last five years, with total revenues
increasing from approximately $91.3 million in fiscal year 1995 to $774.8
million in fiscal year 1999. If we continue to grow rapidly, we will need to
hire additional senior and line management, increase our investment in employee
recruitment and training, and expand our information processing and financial
control systems. Our future operating results will depend in part on the ability
of our officers and other key employees to continue to expand, train and
effectively manage our employees as well as to improve our operations, customer
support and financial control systems. Our future growth will also depend on our
ability to access capital.
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IF OUR QUARTERLY REVENUES AND OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, THE
PRICE OF OUR COMMON STOCK MAY BE VOLATILE
Our revenues and operating results may in the future vary significantly from
quarter to quarter. If our quarterly results fluctuate, it may cause our stock
price to be volatile. We believe that a number of factors could cause these
fluctuations, including:
o the size and timing of our contract signings;
o the expiration or termination of our contracts with significant customers;
o changes in our revenues due to our entry into different types of customer
contracts;
o the number of covered individuals in our customers' health plans;
o costs associated with additional Internet services;
o the timing of our new service and program announcements;
o market acceptance of our services and new programs;
o changes in our pricing policies or in our competitors' pricing policies;
o the introduction by competitors of new services which make ours obsolete
or less valuable;
o changes in our operating expenses and our investment in infrastructure;
o personnel changes; and
o conditions in the health care industry and the economy in general.
It can take a year or more to sell our services to a new customer. Our long
sales cycle adds to the unpredictability of our revenues, which could cause
substantial volatility in the price of our common stock. Our sales cycle varies
substantially from customer to customer because of a number of factors over
which we have little or no control. These factors include:
o our customers' financial objectives or constraints;
o the timing of contract bids and renewals;
o changes in our customers' budgetary or purchasing priorities; and
o potential downturns in general economic conditions.
Because of the factors listed above, we believe that our quarterly revenues,
expenses and operating results may vary significantly in the future and that
period-to-period comparisons of
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our operating results are not necessarily meaningful. You should not rely on the
results of one quarter as a indication of our future performance. It is also
likely that in some future quarters, our operating results will fall below our
expectations or the expectations of market analysts and investors. If we do not
meet these expectations, the price of our common stock may decline
significantly.
IF THE PRICE OF OUR COMMON STOCK CONTINUES TO FLUCTUATE SIGNIFICANTLY,
INVESTMENTS COULD BE ADVERSELY AFFECTED
The closing price of our common stock has ranged from a low of $41.94 to a
high of $64.25 in the past three months, and has fluctuated as much as $14.25 in
five trading days. The quoted price of our common stock is subject to sudden and
material increases and decreases, and decreases could adversely affect
investments in our common stock. The quoted price of our common stock could
fluctuate widely in response to:
o our quarterly operating results;
o changes in earnings estimates by securities analysts;
o changes in our business;
o changes in the market's perception of the Internet component of our
business;
o changes in the businesses, earnings estimates or market perceptions of our
competitors; and
o changes in general market or economic conditions.
In addition, the stock market has experienced extreme price and volume
fluctuations in recent years that have significantly affected the quoted prices
of the securities of many companies. The changes often appear to occur without
regard to specific operating performance. The quoted price of our common stock
could increase or decrease based upon factors that have little or nothing to do
with our company and these fluctuations could materially reduce our quoted stock
price.
IF OUR INTERNET STRATEGY IS NOT SUCCESSFUL, OUR BUSINESS, PROFITABILITY AND
GROWTH PROSPECTS COULD BE ADVERSELY AFFECTED
If our Internet strategy is not successful, our business, profitability and
growth prospects could be adversely affected. We believe it is important for us
to further develop our Internet presence, and we are currently reviewing
alternative strategies to broaden our Internet-based services. Historically, we
have experienced expense increases when introducing or expanding services. We
anticipate that we will need to expend significant resources to develop our
Internet services in the future, which may adversely impact our profitability.
In addition, the structure of our Internet business is evolving and could
involve joint ventures, acquisitions, strategic alliances or other collaborative
arrangements. We cannot be certain that:
o we will be successful in developing Internet services;
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o we will select the best partners or will effectively plan and manage any
alliance or acquisition;
o the additional Internet services we develop will be profitable; or
o anyone will demand Internet services in the future.
IF WE LOSE RELATIONSHIPS WITH ONE OR MORE KEY PHARMACEUTICAL MANUFACTURERS, OUR
BUSINESS, PROFITABILITY AND GROWTH PROSPECTS COULD BE ADVERSELY AFFECTED
Approximately 15% of our consolidated revenues is attributable to our
arrangements with pharmaceutical manufacturers. They provide us with formulary
rebate payments based on drug use by health plan members, as well as fees for
other services. Although we pass a majority of these rebates on to our health
plan sponsor customers, we believe our business, profitability and growth
prospects may suffer if:
o we lose relationships with one or more key pharmaceutical manufacturers;
o we fail to meet volume-related conditions;
o legal restrictions are imposed on the ability of pharmaceutical
manufacturers to offer formulary rebates; or
o pharmaceutical manufacturers choose not to offer formulary rebates.
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 formulary rebates
on their drugs. If the use of newly-approved, brand name drugs added to our
formulary does not offset the use of brand name drugs whose patents expire, our
profitability could be reduced.
IF WE LOSE PHARMACY NETWORK AFFILIATIONS, OUR BUSINESS COULD BE ADVERSELY
AFFECTED
Our contracts with retail pharmacies, which are non-exclusive, are generally
terminable by either party on relatively short notice. If one or more of the top
pharmacy chains elects to terminate its relationship with us, our members'
access to retail pharmacies and our business could be significantly impaired. In
addition, Rite-Aid Corporation recently acquired one of our major pharmacy
benefit manager competitors, and other large retail pharmacy chains either own
pharmacy benefit managers today or could attempt to acquire a pharmacy benefit
manager in the future. Ownership of pharmacy benefit managers by retail pharmacy
chains could have material adverse effects on our relationships with these
pharmacy chains and on our business, profitability and growth prospects.
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IF WE LOSE KEY EMPLOYEES ON WHOM WE DEPEND, IN PARTICULAR DAVID D. HALBERT, OUR
BUSINESS COULD BE ADVERSELY AFFECTED
We believe that our continued success will depend to a significant extent
upon retaining the services of our senior management. Our business could be
materially and adversely affected if we were to lose the services of Mr. David
D. Halbert, who is our Chairman of the Board, Chief Executive Officer and
President, or other persons in senior management. Any of our senior management
could seek other employment at any time. If we cannot attract, motivate and
retain key employees, our business, profitability and growth prospects could
suffer.
IF WE DO NOT ADEQUATELY ADDRESS YEAR 2000 ISSUES, OUR BUSINESS MAY BE ADVERSELY
AFFECTED
We have incurred internal and external personnel costs as well as other
expenses related to our efforts to insure our internal computer systems and
software products will function in the year 2000 and beyond. We cannot be sure
that our efforts to address internal year 2000 issues will be entirely
successful. In addition, we cannot be sure that the computer systems and
software of other companies with which we do business will become year 2000
compliant before January 1, 2000. If we or any of these other companies fail to
become year 2000 compliant, our systems and operations could be disrupted and
our business, profitability and growth prospects could be harmed.
We have not developed a likely worst case year 2000 scenario. However, we
could experience a number of minor internal systems malfunctions and errors in
early year 2000 that we did not detect during our renovation and testing
process. In addition, some of our customers and vendors may not be year 2000
compliant. We have begun preparing contingency plans to handle these scenarios.
We intend to complete our contingency plans by the third quarter of calendar
year 1999. However, despite our compliance program, we may have overlooked or
otherwise not remedied year 2000 issues which may have a material adverse effect
on us.
For additional information regarding year 2000 issues, refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
IF THERE ARE CHANGES IN FEDERAL OR STATE FINANCING AND REGULATION OF THE HEALTH
CARE INDUSTRY, OUR CUSTOMERS MAY DELAY OR REDUCE THE PURCHASE OF OUR SERVICES
During the past several years, the U.S. health care industry has been
subject to an increase in governmental regulation, on both the federal and state
level. We cannot predict what effect, if any, these proposals might have on our
business, profitability and growth prospects. Congress is currently considering
proposals to change Medicare drug coverage and reimbursement policies, and both
Congress and the states are considering legislation to increase governmental
regulation of managed care plans. These proposals may increase governmental
involvement in health care and health benefit management services and otherwise
change the way our customers do business. Health care organizations may react to
these proposals and the uncertainty surrounding such proposals by cutting back
or delaying the purchase of our health benefit management services.
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IF LEGISLATIVE OR REGULATORY INITIATIVES RESTRICT OUR ABILITY TO USE PATIENT
IDENTIFIABLE MEDICAL INFORMATION, OUR CLINICAL PROGRAMS AND OUR BUSINESS GROWTH
STRATEGY BASED ON THESE SERVICES COULD BE ADVERSELY AFFECTED
Through our disease management programs, we help our health plan sponsor
customers identify individuals who will most benefit from the programs.
Governmental restrictions on the use of patient identifiable information may
hamper our ability to conduct disease management programs and medical outcomes
studies and could adversely affect our business growth strategy based on these
programs. Federal and state legislation has been proposed, and some state laws
have been enacted, to restrict the use and disclosure of patient identifiable
medical information. To our knowledge, no legislation has been enacted that
would prohibit our ability to conduct our current disease management or clinical
research programs. However, under the Health Insurance Portability and
Accountability Act of 1996, Congress is required to establish standards to
govern the privacy of individually identifiable health information by August
1999. If Congress fails to act by that date, the Health Insurance Portability
and Accountability Act requires that the Secretary of Health and Human Services
issue regulations by February 2000. Consequently, it appears likely that federal
legislation or regulations addressing the accessibility of individually
identifiable health information will be in place in the near future. Even if new
legislation or regulations are not approved, individual health plan sponsor
customers could prohibit us from including their patients' medical information
in our various databases of medical data, or they could prohibit us from
providing services to our customers that involve the compilation of such
information.
IF GOVERNMENT LAWS OR REGULATIONS RELATING TO THE FINANCIAL RELATIONSHIPS
BETWEEN PHARMACY BENEFIT MANAGERS AND PHARMACEUTICAL MANUFACTURERS ARE
INTERPRETED AND ENFORCED IN A MANNER ADVERSE TO OUR PHARMACY BENEFIT MANAGEMENT
AND DISEASE MANAGEMENT PROGRAMS, WE MAY BE SUBJECT TO ENFORCEMENT ACTIONS AND
OUR BUSINESS OPERATIONS COULD BE MATERIALLY LIMITED
In January 1998, the U.S. Food and Drug Administration, or the FDA, issued a
Draft Guidance for Industry regarding the regulation of activities of pharmacy
benefit managers that are directly or indirectly controlled by pharmaceutical
manufacturers. If the FDA adopts this guidance in this form, it could have a
material adverse effect on our business, profitability and growth prospects. In
that draft guidance, the FDA purported to have the authority to hold
pharmaceutical manufacturers responsible for the promotional activities of
pharmacy benefit management companies, depending upon the nature and extent of
the relationship between the pharmaceutical manufacturer and the pharmacy
benefit management company. We and many other companies and associations
commented to the FDA in writing regarding its authority to regulate the
promotional activities of pharmacy benefit management companies that are not
owned by pharmaceutical manufacturers. On July 1, 1998 the FDA responded to
these comments by reconsidering the matter and announcing its attention to
create a new draft guidance. To date, the FDA has not issued a new guidance.
Although it appears that the FDA has changed its position regarding the ability
to regulate the promotional activities of pharmacy benefit management companies
that are not owned by pharmaceutical manufacturers, the FDA could still adopt
the current draft guidance or an alternative guidance in which the FDA continues
to assert the authority to regulate the promotional activities of such pharmacy
benefit management companies.
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If our business arrangements are challenged under federal or state
anti-remuneration laws, it could have a material adverse effect upon our
business, profitability and growth prospects. Federal anti-remuneration laws
generally prohibit the receipt or solicitation of payment in return for
purchasing or ordering, or arranging for or recommending the purchasing or
ordering of, items and services reimbursable by federal health care programs. To
date, these laws have not been applied to prohibit the types of business
arrangements we have with pharmaceutical manufacturers. However, courts and
enforcement authorities that administer the anti-remuneration laws have
historically interpreted these laws broadly. Moreover, at least one United
States Attorney's office has announced that it is investigating whether rebates
and other payments made by pharmaceutical manufacturers to pharmacy benefit
managers may violate the anti-remuneration laws. In addition, anti-remuneration
laws have been used as a partial basis for investigations and lawsuits against
other pharmacy benefit managers relating to financial incentives provided by
pharmaceutical manufacturers.
IF GOVERNMENT LAWS OR REGULATIONS ARE INTERPRETED AND ENFORCED IN A MANNER
ADVERSE TO OUR CLINICAL RESEARCH PROGRAMS, WE MAY BE SUBJECT TO ADMINISTRATIVE
ENFORCEMENT ACTIONS, AS WELL AS CIVIL AND/OR CRIMINAL LIABILITY
The conduct of clinical trials is regulated by the FDA under the authority
of the Federal Food, Drug and Cosmetic Act and the related regulations. If
government laws or regulations are interpreted and enforced in a manner adverse
to our clinical research programs, we may be subject to administrative
enforcement actions, as well as civil and/or criminal liability. In general, the
sponsor of the drug product which is being studied, or the manufacturer which
will have the right to market the drug product if it is approved by the FDA, has
the responsibility to comply with the laws and regulations that apply to the
conduct of the clinical trials. However, in providing services related to the
conduct of clinical trials, we may assume some or all of the sponsor's or
clinical investigator's obligations related to the study of the drug. For
example, in October 1998, the FDA announced that the agency would give
Institutional Review Boards, which are independent bodies that oversee the
conduct of clinical investigations, increased access to information pointing to
violative or potentially violative conduct on the part of clinical investigators
with whom they may be working. A clinical investigator is a physician conducting
a clinical trial. On February 2, 1999, a regulation that requires clinical
investigators to disclose certain financial information took effect. If a
clinical investigator fails to disclose required financial information, such as
the financial interest of each investigator in the approval of the product, or
fails to properly certify that he or she has no financial interest in the
product under investigation, we could be subject to administrative, civil or
criminal penalties.
Because the interpretation and enforcement of these laws and regulations
relating to the conduct of clinical trials is uncertain, the FDA may consider
our compliance efforts to be inadequate and initiate administrative enforcement
actions against us. If we fail to successfully defend against an administrative
enforcement action, it could result in an administrative order suspending,
restricting or eliminating our ability to participate in the clinical trial
process, which would materially limit our business operations. Moreover, some
violations of the Federal Food, Drug and Cosmetic Act are punishable by civil
and criminal penalties against both the violating company and responsible
individuals. If warranted by the facts, we and our employees involved
24
<PAGE> 26
in the trials could face civil and criminal penalties which include fines and
imprisonment.
As a consequence of the severe penalties we and our employees potentially
could face, we must devote significant operational and managerial resources to
comply with these laws and regulations. Although we believe that we
substantially comply with all existing statutes and regulations material to the
operation of our business, regulatory authorities may disagree and initiate
enforcement or other actions against us. In addition, we cannot predict the
impact of future legislation and regulatory changes on our business or assure
you that we will be able to obtain or maintain the regulatory approvals required
to operate our business.
IF WE BECOME SUBJECT TO LIABILITY CLAIMS WHICH ARE NOT COVERED BY OUR INSURANCE
POLICIES, WE MAY BE LIABLE FOR DAMAGES AND OTHER EXPENSES WHICH COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, PROFITABILITY AND GROWTH PROSPECTS
A successful product or professional liability claim in excess of our
insurance coverage could have a material adverse effect on our business,
profitability and growth prospects. While we intend to maintain professional and
general liability insurance coverage at all times, we cannot assure you that we
will be able to maintain insurance in the future, that insurance will be
available on acceptable terms or that insurance will be adequate to cover any or
all potential product or professional liability claims.
Various aspects of our business, including the dispensing of pharmaceutical
products; the performance of clinical trials, pharmacy benefit management
services and disease management services; and the operation of our call center
and Internet site, may subject us to litigation and liability for damages. For
example, our clinical research services involve the risk of liability for
personal injury or death from unforeseen adverse side effects or improper
administration of a new drug. We could be materially and adversely affected if
we were required to pay damages, incur defense costs or face negative publicity
in connection with a claim that is outside the scope of our contractual
indemnity or insurance coverage, or if the indemnity, although applicable, is
not performed in accordance with its terms.
Since 1993, retail pharmacies have filed over 100 separate lawsuits against
pharmaceutical manufacturers, wholesalers and other pharmacy benefit managers.
We are not a party to any of these proceedings. However, at this time we cannot
assess whether we will be made a party to this type of lawsuit. Court decisions
or terms of any settlements relating to these lawsuits could materially and
adversely affect us in the future. These lawsuits challenge brand name drug
pricing practices under various state and federal antitrust laws. These suits
also allege in part that the pharmaceutical manufacturers offered, and some
pharmacy benefit managers accepted, rebates and discounts on brand name
prescription drugs that violate the federal Robinson-Patman Act and the federal
Sherman Act. Some pharmaceutical manufacturers have settled certain of these
actions.
IF WE SOLD OR LIQUIDATED OUR COMPANY, THE VALUE OF OUR INTANGIBLE ASSETS MAY NOT
BE REALIZED
At March 31, 1999, $105.0 million, or 38% of our total assets, consisted of
intangible assets, primarily goodwill. These intangible assets are being
amortized over an average period of 29
25
<PAGE> 27
years. If we were to face a sale or liquidation, we cannot be sure that the
value of our intangible assets will be realized. In addition, if the value of
our intangible assets were to decrease significantly, the resulting write-offs
could have a material adverse effect on our business, profitability and growth
prospects.
ITEM 2. PROPERTIES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
SQUARE
USE LOCATION FOOTAGE LEASE/OWN
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Mail Service Pharmacy Richardson, Texas 38,400 Own
- ---------------------------------------------------------------------------------------------------------------
Corporate Office Irving, Texas 14,047 Lease expires 12/02
- ---------------------------------------------------------------------------------------------------------------
Data Services Dallas, Texas 22,990 Lease expires 11/00
- ---------------------------------------------------------------------------------------------------------------
Call Center Richardson, Texas 52,000 Lease expires 10/09
- ---------------------------------------------------------------------------------------------------------------
Clinical Services Hunt Valley, Maryland 20,733 Lease expires 08/99
- ---------------------------------------------------------------------------------------------------------------
Corporate Office and Clinic Towson, Maryland 16,322 Lease expires 06/03
- ---------------------------------------------------------------------------------------------------------------
Sales Office Stamford, Connecticut 1,522 Lease expires 05/01
- ---------------------------------------------------------------------------------------------------------------
Clinic Philadelphia, Pennsylvania 3,613 Lease expires 04/05
- ---------------------------------------------------------------------------------------------------------------
Clinic Catonsville, Maryland 3,535 Lease expires 12/02
- ---------------------------------------------------------------------------------------------------------------
Clinic Atlanta, Georgia 3,262 Lease expires 03/03
- ---------------------------------------------------------------------------------------------------------------
Clinic Tamarac, Florida 3,367 Lease expires 06/02
- ---------------------------------------------------------------------------------------------------------------
Clinic Miami Beach, Florida 12,000 Lease expires 03/04
- ---------------------------------------------------------------------------------------------------------------
Clinic Boca Raton, Florida 3,129 Lease expires 05/03
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
We are a party to routine legal and administrative proceedings arising in
the ordinary course of our business. The proceedings currently pending are not,
in our opinion, material either individually or in the aggregate.
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 1999.
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.
26
<PAGE> 28
Our common stock has been traded on the Nasdaq National Market under the
symbol ADVP since October 8, 1996. The following table sets forth the range of
quarterly high and low sales prices per share of our common stock as quoted on
the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---------- --------
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1997:
Third Quarter (from October 8, 1996) $ 20 3/4 $ 7 3/4
Fourth Quarter................... 25 1/4 12 7/8
FISCAL YEAR ENDED MARCH 31, 1998:
First Quarter.................... $ 18 7/8 $ 10 7/8
Second Quarter................... 24 1/4 18
Third Quarter.................... 33 1/4 18 7/8
Fourth Quarter................... 40 3/4 26 3/8
FISCAL YEAR ENDED MARCH 31, 1999:
First Quarter.................... $ 43 1/2 $ 25 3/8
Second Quarter................... 37 17
Third Quarter.................... 35 1/4 21 1/4
Fourth Quarter................... 67 3/4 31 3/8
</TABLE>
On March 31, 1999, there were approximately 4,000 beneficial owners of our
common stock represented by 106 holders of record.
We have never paid any cash dividends on our common stock and do not expect
to pay cash dividends in the foreseeable future. In the past we have paid cash
dividends on our preferred stock; however, we no longer have any preferred stock
outstanding. We intend to retain future earnings to finance the ongoing
operations and growth of our business.
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, 1999, have
been derived from the Consolidated Financial Statements that have been audited
by Arthur Andersen LLP, independent public accountants.
27
<PAGE> 29
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ........................ $ 91,306 $ 127,871 $ 256,450 $ 476,664 $ 774,822
Cost of operations:
Cost of revenues .............. 85,532 120,334 245,466 455,847 743,084
Selling, general and
administrative expenses ..... 4,963 6,158 7,309 10,083 13,949
---------- ---------- ---------- ---------- ----------
Total cost of operations .... 90,495 126,492 252,775 465,930 757,033
---------- ---------- ---------- ---------- ----------
Operating income ................ 811 1,379 3,675 10,734 17,789
Interest income ................. 91 366 1,560 2,814 2,685
Interest expense ................ (878) (732) (445) (67) --
Merger costs (2) ................ -- -- -- (689) --
Provision for income taxes ..... -- -- (1,564) (4,861) (7,780)
---------- ---------- ---------- ---------- ----------
Net income ...................... $ 24 $ 1,013 $ 3,226 $ 7,931 $ 12,694
---------- ---------- ---------- ---------- ----------
Basic:
Net income (loss) per share ... $ (.19) $ .05 $ .43 $ .88 $ 1.24
Weighted average shares
outstanding ............... 4,007 4,007 6,265 8,756 10,252
Diluted:
Net income (loss) per share ... $ (.19) $ .05 $ .35 $ .70 $ 1.09
Weighted average shares
outstanding ................. 4,007 4,576 9,176 11,351 11,688
</TABLE>
<TABLE>
<CAPTION>
March 31,
------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ................. $ (453) $ 269 $ 24,575 $ 28,362 $ 1,111
Total assets .................... 37,288 59,861 108,914 154,909 276,833
Long-term debt .................. 7,000 7,000 -- -- 50,000
Redeemable preferred stock ...... 11,076 11,896 -- -- --
Stockholders' equity (deficit) .. (1,747) (1,537) 42,577 50,564 69,061
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA: (1)
Pharmacy network claims
processed .................. 1,527 9,375 26,579 38,319 50,588
Mail pharmacy prescriptions
filled ..................... 383 536 677 839 1,289
Estimated health plan
members (at period end) .... 5,208 9,040 10,200 12,500 15,000
</TABLE>
- ----------
(1) This data has not been audited.
(2) Merger costs relate to the acquisition of IMR.
28
<PAGE> 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We group the revenues from our health benefit management services into three
categories: data, mail and clinical services.
o Data services. In 1992, we established a retail pharmacy network, that
currently consists of over 53,000 retail pharmacies nationwide, and
began to provide on-line claims processing services. Under some of our
customer contracts, we contract directly with the retail pharmacies in
our national network. When we have an independent obligation to pay our
own network of retail pharmacy providers for the drugs dispensed,
meaning we are "at risk," we include payments from plan sponsors for the
drug cost and the claims processing fees as revenues. We record payments
we make to our retail pharmacy providers as cost of revenues. Under
other contracts, we manage a network of pharmacies that are under direct
contract with certain of our customers. For those plan sponsors that
have established their own pharmacy network, we administer the plan
sponsors' network pharmacy contracts. The plan sponsors have the
independent obligation to fund payment to those pharmacies under
contract and the plan sponsors are "at-risk" for the payment for drugs
dispensed; we record only the claims processing fees as revenues. New
customers that use our network, where we record both claims processing
fees and costs of drugs as revenues, will generate higher revenues than
new customers that use their own networks, where we only record claims
processing fees as revenues. Thus, while a customer who uses our network
may contribute the same gross profit in terms of dollars as a customer
that uses its own network, gross profit as a percentage of revenue will
be lower for customers using our network because of the higher level of
revenue we recognize.
o Mail services. We derive mail services revenues from the sale of
pharmaceuticals to members of our customers' health plans. These
revenues include the cost of the pharmaceuticals plus a dispensing fee.
o Clinical services. We have historically derived our clinical revenues
primarily from formulary rebates and volume discounts received from
pharmaceutical manufacturers. Some of these revenues are based on
estimates that are subject to final settlement with the manufacturer. In
addition, we generate clinical revenues from our comprehensive disease
management programs. We also include our newly acquired clinical trial
and medical outcomes research businesses in our clinical services
revenues.
Our cost of revenues includes product costs and other direct costs associated
with the dispensing of prescription drugs and the provision of claims processing
and clinical services.
29
<PAGE> 31
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as a
percentage of revenues.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Data services ........................ 55.2% 66.6% 67.2%
Mail services ........................ 23.4 16.4 16.4
Clinical services .................... 21.4 17.0 16.4
---------- ---------- ----------
Total revenues ............... 100.0 100.0 100.0
Cost of operations:
Cost of revenues ..................... 95.7 95.6 95.9
Selling, general and administrative
expenses ........................... 2.9 2.1 1.8
---------- ---------- ----------
Total cost of operations ..... 98.6 97.7 97.7
---------- ---------- ----------
Operating income ....................... 1.4 2.3 2.3
Interest income (expense), net ......... 0.5 0.6 0.3
Merger costs ........................... -- (0.2) --
Provision for income taxes ............. (0.6) (1.0) (1.0)
---------- ---------- ----------
Net income ............................. 1.3 % 1.7 % 1.6 %
========== ========== ==========
</TABLE>
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
REVENUES. Our revenues for fiscal year 1999 increased by $298.2 million, or
63%, compared to revenues for fiscal year 1998. The number of individuals we
managed continued to increase in fiscal year 1999 as we obtained new customers
and our current customers continued to increase their membership and utilization
levels. New customer contracts resulted from increased marketing efforts and the
expansion of our sales and marketing department. Contracts with new customers in
fiscal year 1999 generally included all pharmacy benefit management products we
offer, including claims processing, mail and clinical.
Our revenues from claims processing increased $203.5 million, or 64%,
compared to the prior year. The increase resulted from the addition of new
individuals and an increase in use of our services by existing customers. The
increase in new individuals resulted in an increase in pharmacy claims processed
from 38.3 million in fiscal year 1998 to 50.6 million in fiscal year 1999, a 32%
increase. Virtually all of the new fiscal year 1999 customer contracts use our
pharmacy network, which has shifted a larger percentage of our total revenues to
claims processing. Revenues from mail services increased $48.9 million, or 63%,
compared to the prior year. The increase resulted primarily from the new
individuals added during fiscal year 1999. The increase in new individuals
resulted in an increase in mail prescriptions dispensed from 839,000 in fiscal
year 1998 to 1.3 million in fiscal year 1999, a 54% increase. Revenues from
clinical services increased $45.8 million, or 57%, compared to the prior year.
The increase resulted primarily from the new individuals added and the
additional claims processed during fiscal year 1999 compared to the prior year.
30
<PAGE> 32
COST OF REVENUES. Our cost of revenues for fiscal year 1999 increased by
$287.2 million, or 63%, compared to the prior fiscal year. This increase
primarily resulted from the additional costs associated with our claims
processing growth and the new customers that are using our retail pharmacy
network. As a percentage of revenues, cost of revenues was 95.9% in fiscal year
1999 compared to 95.6% in fiscal year 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expense for fiscal year 1999 increased by $3.9 million, or 38%,
compared to fiscal year 1998. This increase was the result of our expansion of
our 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 programs. In spite of the increase, selling, general and administrative
expenses as a percentage of revenues decreased from 2.1% for in fiscal year 1998
to 1.8% in fiscal year 1999 as the result of greater economies of scale and due
to the increase in revenues associated with our claims processing services.
Additional revenues generated by customers using our network pharmacy providers
typically do not result in an increase in selling, general and administrative
expenses.
INTEREST INCOME AND INTEREST EXPENSE. Our interest income, net of interest
expense, was $2.7 million in both fiscal years 1999 and 1998. We incurred no
interest expense in fiscal year 1999 since we had no outstanding indebtedness
until March 31, 1999. We maintained higher cash balances during the first eight
months of fiscal year 1999 compared to fiscal year 1998. In December 1998, we
purchased Baumel-Eisner Neuromedical Institute for $25.0 million. Therefore,
interest income declined in the fourth quarter of fiscal year 1999 compared to
the first three quarters. We invest our excess cash in money market funds and
high-grade commercial paper.
INCOME TAXES. In fiscal years 1999 and 1998, our income tax expense
approximated an effective tax rate of 38%.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
REVENUES. Our revenues for fiscal year 1998 increased by $220.2 million, or
86%, compared to revenues for fiscal year 1997. The number of individuals we
managed continued to increase in fiscal year 1998 as we obtained new customers
and our current customers continued to increase their membership and utilization
levels. New customer contracts resulted from increased marketing efforts and the
expansion of our sales and marketing department. Contracts with new customers in
fiscal year 1998 generally included all pharmacy benefit management products we
offer, including claims processing, mail and clinical.
Our revenues from claims processing increased $175.8 million, or 124%,
compared to the prior year. The increase resulted from the addition of new
individuals and an increase in use of our services by existing customers. The
increase in new individuals resulted in an increase in pharmacy claims processed
from 26.6 million in fiscal year 1997 to 38.3 million in fiscal year 1998, a 44%
increase. Virtually all of the new fiscal year 1998 customer contracts use our
pharmacy network which has shifted a larger percentage of our total revenues to
claims processing. Revenues from mail services increased $18.4 million, or 31%,
compared to the prior
31
<PAGE> 33
year. The increase resulted primarily from the new individuals added during
fiscal year 1998. The increase in new individuals resulted in an increase in
mail prescriptions dispensed from 677,000 in fiscal year 1997 to 839,000 in
fiscal year 1998, a 24% increase. Revenues from clinical services increased
$26.1 million, or 48%, compared to the prior year. The increase resulted
primarily from the new individuals added and the additional claims processed
during fiscal year 1998 compared to the prior year.
COST OF REVENUES. Our cost of revenues for fiscal year 1998 increased by
$210.4 million, or 86%, compared to the prior fiscal year. This increase
primarily resulted from the additional costs associated with our claims
processing growth. As a percentage of revenues, cost of revenues was 95.6% in
fiscal year 1998 compared to 95.7% in fiscal year 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses for fiscal year 1998 increased by $2.8 million, or 38%,
compared to fiscal year 1997. This increase was the result of our expansion of
our sales and marketing capabilities, as well as increases in administrative and
support staff functions in response to volume growth in all programs. In spite
of the dollar increase, our selling, general and administrative expenses as a
percentage of revenues decreased from 2.9% in fiscal year 1997 to 2.1% in fiscal
year 1998 as the result of greater economies of scale and due to the increase in
revenues associated with our claims processing services. Additional revenues
generated by customers using our network pharmacy providers generally do not
result in an increase in selling, general and administrative expenses.
INTEREST INCOME AND INTEREST EXPENSE. Our interest income, net of interest
expense, for fiscal year 1998 increased $1.6 million compared to fiscal year
1997. The increase resulted from cash management programs which used our
short-term excess cash to generate interest income through investment in money
market funds and high grade commercial paper. In addition, our cash balance
throughout fiscal year 1998 included the $10.0 million proceeds from the June
1996 issuance of our Series B preferred stock and the $19.1 million net proceeds
from our October 1996 initial public offering. A portion of the proceeds was
used to retire debt and, as a result, interest expense decreased by $378,000. In
fiscal year 1997, the proceeds from the offerings were available for only a
portion of the year.
MERGER COSTS. In February 1998, we completed a merger with Innovative
Medical Research, Inc. and issued 876,078 shares and options to purchase 23,922
shares of our common stock in exchange for all the outstanding shares and
options of Innovative Medical Research, Inc. The merger was accounted for as a
pooling of interests and, accordingly, prior period consolidated financial
statements were restated to include the combined results of operations,
financial position and cash flows of Innovative Medical Research, Inc. as though
it had always been a part our company. In connection with the merger, we
recorded a charge to operating expenses of $689,000 -- $427,000 after taxes, or
$.04 per common share on a dilutive basis -- for professional fees and other
merger-related costs pertaining to the transaction.
INCOME TAXES. We had income tax loss carryforwards available to partially
offset income generated for fiscal year 1997 and, as a result, we recorded
income tax expense of $1.6 million or 33% of income before income taxes. For
fiscal 1998, we recorded tax expense of $4.9 million at
32
<PAGE> 34
a rate of 38% of income before income taxes. The tax loss carryforwards were
fully utilized prior to fiscal year 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, we had working capital of $1.1 million. While we have
$149.0 million of accounts payable, the majority of these obligations are not
due until cash is collected from our customers. Our net cash provided by
operating activities was $15.4 million, $14.5 million and $29.0 million for the
fiscal years ended 1997, 1998 and 1999, respectively. The significant increases
in net cash provided by operating activities resulted primarily from the income
we generated and due to the timing of receivables and payables resulting from
our continued growth. Cash we used in investing activities was $3.1 million,
$6.5 million and $97.3 million for the fiscal years ended 1997, 1998 and 1999,
respectively. Such investing activities included purchases of property, plant
and equipment associated with growth and expansion of our facilities, as well as
cash paid for acquisitions. In December 1998, we used $24.7 million, net of cash
acquired, for the acquisition of Baumel-Eisner Neuromedical Institute, Inc. In
March 1999, we used $65.0 million, net of $5.0 million cash acquired, for the
acquisition of Foundation Health Pharmaceutical Services.
Historically, we have been able to fund our operations and continued growth
through cash flow from operations. In fiscal years 1997, 1998 and 1999, our
operating cash flow funded our capital expenditures and our short-term excess
cash was invested in money market funds and high grade commercial paper. We
anticipate that cash flow from operations, combined with our current cash
balances and amounts available under our credit facility, will be sufficient to
meet our internal operating requirements and expansion programs, including
capital expenditures, for at least the next 18 months. However, if we
successfully continue our expansion, acquisition and alliance plans, we may be
required to seek additional debt or equity financing in order to achieve these
plans.
CREDIT FACILITY
On March 31, 1999, we entered into a senior revolving credit facility with a
group of lenders. The credit facility consists of a $75.0 million, three year
revolving credit facility. On March 31, 1999, we borrowed $50.0 million under
the credit facility to fund the acquisition of Foundation Health Pharmaceutical
Services. Each of our subsidiaries has guaranteed the credit facility. The
lenders received a first priority security interest in our subsidiaries' capital
stock and negative pledges on accounts receivable and other assets.
Interest on the credit facility accrues at a specified margin above the
London Interbank Offered Rate, or LIBOR, or an alternate base rate. The
alternate base rate is the bank's prime rate or the federal funds rate plus
0.5%. For LIBOR loans the applicable margin is 1.75% per annum as of April 1,
1999.
The credit facility contains usual and customary affirmative and negative
covenants, including limitations on liens, debts, dividends, capital
expenditures, mergers, acquisitions and sale of assets. Covenants also include a
specified minimum net worth, maximum leverage ratio and a
33
<PAGE> 35
minimum interest coverage ratio. The credit facility contains customary events
of default including:
o nonpayment of principal, interest, fees or other amounts;
o violation of covenants;
o inaccuracy of representations and warranties;
o default under other indebtedness;
o bankruptcy and other insolvency events;
o material judgements;
o ERISA matters; and
o change of control without the lender's prior written consent.
RECENT ACCOUNTING PRONOUNCEMENTS
We adopted Statement of Financial Accounting Standards ("SFAS") 130,
"Reporting Comprehensive Income," effective April 1, 1998. SFAS 130 established
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. Comprehensive income is
defined as the total of net income and all other non-owner changes in equity. We
do not have any non-owner changes in equity other than net income. Comprehensive
income will be reported in our consolidated statement of stockholders' equity.
We adopted SFAS 131, "Disclosure about Segments of an Enterprise and Related
Information," effective April 1, 1998. This pronouncement changes the
requirements under which public businesses must report segment information. The
objective of the pronouncement is to provide information about a company's
different types of business activities and different economic environments. SFAS
131 requires companies to select segments based on their internal reporting
system. We provide integrated health benefit management services to our
customers, and these services account for substantially all of our net revenues.
Such services are typically negotiated under one contract with the customer.
Therefore, our operations will continue to be reported in one segment.
We adopted SFAS 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," as of April 1, 1998. This pronouncement revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans; however, it does
require additional information on changes in the benefit obligations and fair
values of plan assets in order to facilitate financial analysis. Currently, we
do not have any pension or postretirement benefit plans; thus, the adoption of
SFAS 132 has not had a material impact on our disclosures.
34
<PAGE> 36
IMPACT OF INFLATION
Changes in prices charged by manufacturers and wholesalers for
pharmaceuticals we dispense affect our cost of revenues. Historically, we have
been able to pass the effect of such price changes to our customers under the
terms of our agreements. As a result, changes in pharmaceutical prices due to
inflation have not adversely affected our company.
YEAR 2000 READINESS DISCLOSURE
Our operations require our computer systems and information technology to
work effectively. In fiscal year 1998, we began addressing the year 2000 issue
by forming a year 2000 project team. The year 2000 issue is the result of
computer programs written using two digits rather than four digits to define
"date" fields. Information systems have time-sensitive operations that, as a
result of this date field limitation, could disrupt business activities in the
normal business cycle. For example, some computers that are not year 2000
compliant may interpret the year 2000 as the year 1900. This treatment could
result in significant miscalculations when processing critical date-sensitive
information relating to dates after December 31, 1999.
In the quarter ending June 30, 1998, we completed the "inventory" portion of
our year 2000 project. We documented all internal hardware, software or
equipment that was date-sensitive. In the quarter ending September 30, 1998, we
completed the second stage of the year 2000 project, which involved assessing
all of the items that had been "inventoried" to determine whether they were year
2000 compliant. This assessment stage also included surveying all external
vendors and customers with whom we transact business to determine whether their
systems were year 2000 compliant. In the quarter ending December 31, 1998, we
completed the third stage of the year 2000 project, which involved the
development of code to convert systems that are not year 2000 compliant to year
2000 compliant systems. We successfully completed the implementation phase on
March 31, 1999 via upgrade or replacement of all non-compliant systems. While
all core systems are currently considered to be compliant, further maintenance
testing and certifications will continue throughout 1999.
The potential impact of the year 2000 issue depends not only on the
corrective measures we have undertaken, but also on the ways in which the year
2000 issue is addressed by third parties with whom we interact or upon whom we
are dependent, including individual retail pharmacies, health plan sponsors and
pharmaceutical manufacturers. We believe that our greatest risk with respect to
year 2000 issues relates to failures by third parties to be year 2000 compliant.
We have received responses from approximately 25% of the over 20,000 third
parties we contacted. We cannot make any assurance that the software and systems
of other companies with which we transact business will become year 2000
compliant in a timely manner. Any such failures could have a material adverse
effect on our systems and operations. With respect to the systems we directly
use, we believe our greatest exposure to the year 2000 issue involves our claims
processing operations, which rely on computers to process prescription claims.
We have installed a vendor upgrade and have substantially completed compliance
testing on the upgrade. However, any failure of these systems to be year 2000
compliance may have a material adverse effect on us.
35
<PAGE> 37
Our costs, as of March 31, 1999, related to our year 2000 project and
related compliance efforts, total approximately $300,000. We have expensed these
costs as incurred in fiscal 1999. We expect our total costs, both internal and
external, associated with our year 2000 readiness process will range from
$500,000 to $600,000. We anticipate funding these costs with cash generated from
operations. We do not believe that these costs are or will be material to our
results of operations or financial condition.
Although we have substantially completed our compliance testing and
remediation, we have not developed a likely worst case year 2000 scenario. We
are, however, in the process of developing contingency plans for the risks of
our failure, or the failure of third parties, to be year 2000 compliant. We
intend to complete the contingency plans for the year 2000 issue during the
third quarter of calendar year 1999. Due to the inability to predict all of the
potential problems that may arise from the year 2000 issue, we cannot be sure
that we will be able to anticipate all contingencies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not engage in trading market risk sensitive instruments and do not
purchase as investments, as hedges, or for purposes "other than trading"
instruments that are likely to expose us to market risk, whether it be from
interest rate, foreign currency exchange, commodity price or equity price risk.
We have issued no debt instruments, entered into no forward or futures
contracts, purchased no options and entered into no swaps.
Our primary market risk exposure is that of interest rate risk. A change in
LIBOR or the Prime Rate as set by NationsBank, N.A. , would affect the rate at
which we could borrow funds under our credit facility.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is found on pages F-1 through F-20
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be incorporated by reference
from our definitive proxy statement for our 1999 annual meeting of stockholders
to be filed with the Securities and Exchange Commission not later than 120 days
following our fiscal year pursuant to Regulation 14A (the "Proxy Statement").
36
<PAGE> 38
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. We filed reports on
Form 8-K and Form 8-K/A dated March 31, 1999, relating to its acquisition of
Foundation Health Pharmaceutical Services, Inc. (c) Exhibits Required by Item
601 of S-K: See index to exhibits on pages 37 - 40.
Exhibits and Financial Statement Schedules
Exhibit No. Exhibits
2.1(a) --- Stock Purchase Agreement, dated effective as of
December 1, 1998, by and among Advance Paradigm, Inc.
(the "Company"), Baumel-Eisner Neuromedical
Institute, Inc., Barry Baumel, M.D. and Larry S.
Eisner, M.D.
2.2(b) --- Purchase Agreement, dated as of February 26, 1999,
among Foundation Health Systems, Inc., Foundation
Health Corporation, Foundation Health Pharmaceutical
Services, Inc., Integrated Pharmaceutical Services,
Inc. and the Company.
3.1(c) --- Amended and Restated Certificate of Incorporation of
the Company.
3.2(c) --- Certificate of Amendment to the Certificate of
Incorporation of the Company.
37
<PAGE> 39
3.3(c) --- Certificate of Correction to the Amendment to the
Certificate of Incorporation of the Company.
3.4(c) --- Amended and Restated Bylaws of the Company.
3.5(c) --- Certificate of Incorporation of Advance Pharmacy
Services, Inc.
3.6(c) --- Certificate of Amendment to the Certificate of
Incorporation of Advance Pharmacy Services, Inc.
3.7(c) --- Certificate of Correction to the Certificate of
Amendment to the Certificate of Incorporation of
Advance Pharmacy Services, Inc.
3.8(c) --- Certificate of Amendment to the Certificate of
Incorporation of Advance Pharmacy Services, Inc.
3.9(c) --- Bylaws of Advance Pharmacy Services, Inc.
4.1(d) --- Specimen Certificate for shares of Common Stock,
$0.01 par value, of the Company.
4.2(e) --- Amended and Restated Incentive Stock Option Plan.
4.3(e) --- Incentive Stock Option Plan.
4.4(c) --- Warrant Agreement, dated as of September 12, 1996,
by and between the Company and VHA, Inc.
4.5(c) --- Form of Agreement and Plan of Merger.
4.6(f) --- 1997 Nonstatutory Stock Option Plan.
4.7(b) --- Warrant Agreement, dated as of February 26, 1999,
by and between the Company and Foundation Health
Systems, Inc.
4.8(i) --- Warrant Agreement, dated as of February 25, 1999, by
and between the Company and Arkansas BlueCross
BlueShield
4.9(i) --- Warrant Agreement, dated as of June 12, 1998, by and
between the Company and Wellmark, Inc.
10.1(c) --- Managed Pharmaceutical Agreement, dated November 1,
1993, by and between Advance Data and the Mega Life &
Health Insurance Company.
10.2(c) --- Nondisclosure/Noncompetition Agreement, dated August
4, 1993, between the Company, Advance Data, Advance
Mail and David D. Halbert.
38
<PAGE> 40
10.3(c) --- Nondisclosure/Noncompetition Agreement, dated August
4, 1993, between the Company, Advance Mail, Advance
Data and Jon S. Halbert.
10.4(c) --- Nondisclosure/Noncompetition Agreement, dated August
4, 1993, between the Company, Advance Mail, Advance
Data and Danny Phillips.
10.5(d) --- 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(d) --- Employment Agreement, effective as of November 14,
1996, by and between the Company and John H. Sattler.
10.7(d) --- Employment Agreement, effective as of June 17, 1996,
by and between the Company and Ernest Buys.
10.8(c) --- Employment Agreement, effective as of February 15,
1996, by and between the Company and Alan T. Wright.
10.9(c) --- Form of Health Benefit Management Services Agreement.
10.10(c) --- Sublease, dated May 2, 1996, between Lincoln National
Life Insurance Company and Advance Data.
10.11(c) --- Lease, dated March 6, 1994, by and between Hill
Management Services, Inc. and Advance Clinical
(formerly ParadigM).
10.12(c) --- Lease Agreement, dated as of February 24, 1989, as
amended November 30, 1992, and December __, 1992, by
and between TRST Las Colinas, Inc. and Advance Health
Care.
10.13(c) --- Managed Pharmacy Benefit Services Agreement, dated
September 1, 1995, between the Company and BCBS of
Texas.
10.14(g) --- Agreement and Plan of Merger, dated February 9, 1998,
by and among the Company, IMR, Inc. and Innovative
Medical Research, Inc., Walter Stewart, Richard
Lipton, The Lianna Lipton Trust, The Justin Lipton
Trust, Stuart Bell, The Curren Bell Trust, The Kylie
Bell Trust and The Ian Bell Trust.
10.15(h) --- Consulting Agreement, effective as of December 15,
1998, by and between the Company and David A. George.
10.16(b) --- Pharmacy Benefit Services Agreement, effective as of
April 1, 1999, by and between the Company, Foundation
Health Systems, Inc. and Integrated Pharmaceutical
Services, Inc.
39
<PAGE> 41
10.17(b) --- Credit Agreement, dated as of March 31, 1999, among
the Company, the banks named in the Credit Agreement,
NationsBanc Montgomery Securities LLC and
NationsBank, N.A.
10.18(b) --- Guaranty, dated as of March 31, 1999, by each
subsidiary of the Company, in favor of NationsBank,
N.A.
10.19(i) --- Commercial Lease Agreement, commencing November 1,
1998, by and between Crin-Richardson I, L.P. and the
Company.
11.1(i) --- Statement regarding computation of per share
earnings.
21.1(i) --- Subsidiaries of the Company.
23.1(i) --- Consent of Arthur Andersen LLP.
27.1(i) --- Financial Data Schedule.
- ---------------
(a) Previously filed in connection with the Company's Current Report on
Form 8-K, dated December 29, 1998, and incorporated herein by
reference.
(b) Previously filed in connection with the Company's Current Report on
Form 8-K, dated April 12, 1999, and incorporated herein by reference.
(c) Previously filed in connection with the Company's Registration
Statement on Form S-1 filed October 8, 1996 (No. 333-06931), and
incorporated herein by reference.
(d) Previously filed in connection with the Company's Form 10-K for the
year ended March 31, 1997, and incorporated herein by reference.
(e) Previously filed in connection with the Company's Registration
Statement on Form S-8 filed September 5, 1997 (No. 333-34999), and
incorporated herein by reference.
(f) Previously filed in connection with the Company's Form 10-Q for the
three months ended June 30, 1997, and incorporated herein by reference.
(g) Previously filed in connection with the Company's Current Report on
Form 8-K, dated February 9, 1998, and incorporated herein by reference.
(h) Previously filed in connection with the Company's Form 10-Q for the
three months ended December 31, 1998, and incorporated herein by
reference.
(i) Filed herewith.
40
<PAGE> 42
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 23, 1999 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David D. Halbert Chairman of the Board, President June 23, 1999
- -------------------------------------- and Chief Executive Officer
David D. Halbert (Principal Executive Officer)
/s/ Jon S. Halbert Executive Vice President, Chief June 23, 1999
- -------------------------------------- Operating Officer and Director
Jon S. Halbert
/s/ David A. George Executive Vice President, June 23, 1999
- -------------------------------------- and Director
David A. George
/s/ T. Danny Phillips Senior Vice President, Chief June 23, 1999
- -------------------------------------- Financial Officer, Secretary and
T. Danny Phillips Treasurer (Principal Financial
and Accounting Officer)
</TABLE>
41
<PAGE> 43
<TABLE>
<S> <C> <C>
/s/ Rogers K. Coleman, M.D. Director June 23, 1999
- --------------------------------------
Rogers K. Coleman, M.D.
/s/ Stephen L. Green Director June 23, 1999
- --------------------------------------
Stephen L. Green
/s/ Jeffrey R. Jay, M.D. Director June 23, 1999
- --------------------------------------
Jeffrey R. Jay, M.D.
/s/ Kenneth J. Linde Director June 23, 1999
- --------------------------------------
Kenneth J. Linde
/s/ Michael D. Ware Director June 23, 1999
- --------------------------------------
Michael D. Ware
</TABLE>
42
<PAGE> 44
INDEX TO FINANCIAL STATEMENTS
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Report of Independent Public Accountants....................................................................F-2
Consolidated Balance Sheets--March 31, 1998 and 1999........................................................F-3
Consolidated Statements of Operations for the Years Ended March 31, 1997,
1998 and 1999............................................................................................F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
March 31, 1997, 1998 and 1999............................................................................F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 1997,
1998 and 1999............................................................................................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, 1997, 1998 and 1999................................................................S-2
</TABLE>
F-1
<PAGE> 45
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) and subsidiaries as of March 31, 1998
and 1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, 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, 1998 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
May 17, 1999
F-2
<PAGE> 46
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 58,342,000 $ 42,492,000
Accounts receivable, net of allowance for doubtful accounts of
$247,000 and $371,000, respectively ............................. 68,335,000 107,582,000
Inventories ....................................................... 2,887,000 4,015,000
Prepaid expenses and other ........................................ 1,487,000 1,651,000
------------ ------------
Total current assets ............................................ 131,051,000 155,740,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $5,574,000 and $8,540,000, respectively ....... 10,494,000 15,155,000
INTANGIBLE ASSETS, net of accumulated amortization of
$1,501,000 and $2,191,000, respectively ........................... 12,353,000 105,041,000
OTHER ASSETS ......................................................... 1,011,000 897,000
------------ ------------
Total assets .................................................... $154,909,000 $276,833,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 97,495,000 $148,979,000
Accrued salaries and benefits 2,966,000 3,780,000
Other accrued expenses 2,228,000 1,870,000
------------ ------------
Total current liabilities 102,689,000 154,629,000
NONCURRENT LIABILITIES:
Long-term debt -- 50,000,000
Deferred income taxes 1,285,000 2,597,000
Other noncurrent liabilities 371,000 546,000
------------ ------------
Total liabilities 104,345,000 207,772,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value;
4,995,000 shares authorized, none issued and outstanding -- --
Series B convertible preferred stock, $.01 par value; 5,000
shares authorized, 4,444 and 0 shares issued and outstanding
at March 31, 1998 and 1999, respectively -- --
Common stock, $.01 par value; 25,000,000 shares authorized,
8,904,472 and 10,528,449 shares issued and outstanding at
March 31, 1998 and 1999, respectively 89,000 105,000
Additional paid-in capital 43,142,000 48,928,000
Accumulated earnings 7,333,000 20,028,000
------------ ------------
Total stockholders' equity 50,564,000 69,061,000
------------ ------------
Total liabilities and stockholders' equity $154,909,000 $276,833,000
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 47
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES $ 256,450,000 $ 476,664,000 $ 774,822,000
-------------- -------------- --------------
COST OF OPERATIONS:
Cost of revenues 245,466,000 455,847,000 743,084,000
Selling, general and
administrative expenses
7,309,000 10,083,000 13,949,000
-------------- -------------- --------------
Total cost of operations 252,775,000 465,930,000 757,033,000
-------------- -------------- --------------
Operating income 3,675,000 10,734,000 17,789.000
INTEREST INCOME 1,560,000 2,814,000 2,685,000
INTEREST EXPENSE (445,000) (67,000) --
MERGER COSTS -- (689,000) --
-------------- -------------- --------------
INCOME BEFORE INCOME TAXES 4,790,000 12,792,000 20,474,000
PROVISION FOR INCOME TAXES 1,564,000 4,861,000 7,780,000
-------------- -------------- --------------
NET INCOME $ 3,226,000 $ 7,931,000 $ 12,694,000
============== ============== ==============
BASIC:
NET INCOME AVAILABLE
TO COMMON STOCKHOLDERS $ 2,673,000 $ 7,731,000 $ 12,694,000
NET INCOME PER SHARE $ 0.43 $ 0.88 $ 1.24
WEIGHTED AVERAGE SHARES OUTSTANDING 6,264,521 8,755,754 10,252,145
DILUTED:
NET INCOME AVAILABLE
TO COMMON STOCKHOLDERS $ 3,226,000 $ 7,931,000 $ 12,694,000
NET INCOME PER SHARE $ 0.35 $ 0.70 $ 1.09
WEIGHTED AVERAGE SHARES OUTSTANDING 9,176,127 11,350,919 11,688,101
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE> 48
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
Series B Preferred
Common Stock Stock
------------------------- -------------------- Additional Accumulated
Number of Number of Paid-In Earnings
Shares Amount Shares Amount Capital (Deficit) Total
----------- -------- --------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1996 ........... 4,006,578 $ 40,000 -- $ -- $ 1,484,000 $ (3,061,000) $ (1,537,000)
Comprehensive income:
Net income ..................... -- -- -- -- -- 3,226,000 3,226,000
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
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 ........... 8,676,895 87,000 4,444 -- 42,888,000 (398,000) 42,577,000
Comprehensive income:
Net income ..................... -- -- -- -- -- 7,931,000 7,931,000
Issuance of Common Stock
in connection with the
exercise of stock options
and warrants ................. 227,577 2,000 -- -- 254,000 -- 256,000
Dividends on Series B
Preferred Stock .............. -- -- -- -- -- (200,000) (200,000)
---------- -------- ------- ------ ------------ ------------ ------------
BALANCE, March 31,1998 ............ 8,904,472 89,000 4,444 -- 43,142,000 7,333,000 50,564,000
Comprehensive income:
Net income ..................... -- -- -- -- -- 12,694,000 12,694,000
Issuance of Common Stock
in connection with the
conversion of Series B
Preferred Stock ............. 1,111,111 11,000 (4,444) -- (11,000) -- --
Issuance of Common Stock
in connection with the
exercise of stock options
and warrants ................. 512,866 5,000 -- -- 2,420,000 -- 2,425,000
Tax benefit relating to exercise
of employee stock options
and other .................... -- -- -- -- 877,000 1,000 878,000
Issuance of warrants ......... -- -- -- -- 2,500,000 -- 2,500,000
---------- -------- ------- ------ ------------ ------------ ------------
BALANCE, March 31,1999 ............ 10,528,449 $105,000 -- $ -- $ 48,928,000 $ 20,028,000 $ 69,061,000
========== ======== ======= ====== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE> 49
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,226,000 $ 7,931,000 $ 12,694,000
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation and amortization 1,705,000 2,378,000 3,656,000
Provision for doubtful accounts 12,000 74,000 24,000
Deferred income taxes 844,000 441,000 1,312,000
Change in certain assets and liabilities--
Accounts receivable (12,612,000) (32,139,000) (38,391,000)
Inventories (261,000) (1,028,000) (1,128,000)
Prepaid expenses and other assets (256,000) (1,584,000) (922,000)
Accounts payable, accrued expenses
and other noncurrent liabilities 22,727,000 38,466,000 51,749,000
------------- ------------- -------------
Net cash provided by operating activities 15,385,000 14,539,000 28,994,000
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,147,000) (6,525,000) (7,568,000)
Purchase of subsidiaries, net of cash acquired -- -- (89,701,000)
------------- ------------- -------------
Net cash used in investing activities (3,147,000) (6,525,000) (97,269,000)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock 10,000,000 -- --
Net proceeds from issuance of Common Stock 19,147,000 256,000 2,425,000
Proceeds from borrowings 1,000,000 708,000 50,000,000
Payments on long-term obligations (7,650,000) (1,608,000) --
Payment of preferred stock dividend (153,000) (200,000) --
------------- ------------- -------------
Net cash provided by (used in) financing
activities 22,344,000 (844,000) 52,425,000
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 34,582,000 7,170,000 (15,850,000)
CASH AND CASH EQUIVALENTS, beginning of year 16,590,000 51,172,000 58,342,000
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 51,172,000 $ 58,342,000 $ 42,492,000
============= ============= =============
</TABLE>
SUPPLEMENTARY INFORMATION:
Cash paid for interest totaled approximately $445,000, $67,000 and $0 in
1997, 1998 and 1999, respectively.
The Company made income tax payments of $19,000, $5,100,000 and $5,900,000 in
1997, 1998 and 1999, respectively.
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE> 50
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL:
Advance Paradigm, Inc. (the "Company"), a Delaware corporation, is a
leading independent provider of health benefit management services, providing
integrated pharmacy benefit management, disease management and clinical research
programs. The Company markets its services to managed care organizations,
third-party health plan administrators, insurance companies, government
agencies, employer groups and labor union-based trusts. In addition, the Company
transacts business with pharmaceutical manufacturers as both suppliers and
customers. During the year ended March 31, 1999, the Company purchased two
companies for cash. Foundation Health Pharmaceutical Services, Inc. ("FHPS") was
acquired on March 31, 1999 for $70 million. FHPS was the pharmacy benefit
management business of Foundation Health Systems, Inc. On December 1, 1998,
Baumel-Eisner Neuromedical Institute ("Baumel-Eisner") was acquired for $25
million. Baumel-Eisner was a privately held clinical trials company based in
South Florida. (See Note 3)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Consolidation
The accompanying consolidated financial statements include the accounts of
API and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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.
F-7
<PAGE> 51
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Inventories
Inventories consist of purchased 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 twenty 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 consist of goodwill, customer contracts acquired and
non-compete agreements. Goodwill represents the excess of cost over the
estimated fair value of tangible net assets acquired. Goodwill is amortized on a
straight-line basis over periods from 25 to 40 years with a weighted average of
29 years. Customer contracts and non-compete agreements are amortized over 10 to
15 years. Amortization expense was $346,000 in each of the years ended March 31,
1997 and 1998 and $691,000 the year ended March 31, 1999 and is included in
selling, general and administrative expenses.
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, including
goodwill, may warrant revision or that the remaining balance of an asset may not
be recoverable. The assessment of possible impairment is based on the ability to
recover the carrying amount of the asset from expected future cash flows on an
undiscounted basis. If the assessment indicates that the carrying amount of the
asset exceeds the undiscounted cash flows, an impairment has occurred. The
impairment is calculated as the total by which the carrying amount of the asset
exceeds its fair value. The fair value of long-lived assets and goodwill is
estimated based on quoted market prices, if available, or the expected total
value of the cash flows, on a discounted basis. The Company recorded no
impairment charges in fiscal 1997, 1998 or 1999.
F-8
<PAGE> 52
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Fair Value of Financial Instruments
The carrying values of cash, receivables, payables and accrued liabilities
approximate the fair values of these instruments because of their short-term
maturities. The Company's bank debt was borrowed on March 31, 1999 and,
therefore, the estimated fair value and the carrying value is the same.
Other Noncurrent Liabilities
Other liabilities is comprised of deposits from certain customers in
connection with pharmacy benefit contracts.
Revenue Recognition
Revenues from the dispensing of pharmaceuticals from the Company's mail
service pharmacy are recognized when each prescription is shipped. Revenues from
sales of prescription drugs by pharmacies in the Company's nationwide network
and claims processing fees are recognized when the claims are adjudicated. At
the point-of-sale, the pharmacy claims are adjudicated using the Company's
on-line claims processing system. 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
revenues. Rebate revenues are recognized as they are earned in accordance with
contractual agreements. Certain of these revenues are based on estimates which
are subject to final settlement with the contract party. These estimates are
reviewed and revised as settled. Revenues from certain disease management and
health benefit management products are reimbursed at predetermined contractual
rates based on the achievement of certain milestones.
Cost of Revenues
Cost of revenues includes product costs, pharmacy claims payments and other
direct costs associated with the sale and dispensing of prescriptions. Certain
of these expenses are recognized based on estimates which are subject to final
settlement with the contract party. These estimates are reviewed and revised as
settled.
F-9
<PAGE> 53
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Net Income Per Share
Net income per share is computed using the weighted average number of
common and dilutive shares outstanding during the period. A reconciliation of
the numerators and denominators of the basic and diluted per-share computations
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------------
1997 1998 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
BASIC
Numerator:
Net income $ 3,226,000 $ 7,931,000 $ 12,694,000
Preferred stock dividends 553,000 200,000 ---
---------------- ---------------- ----------------
$ 2,673,000 $ 7,731,000 $ 12,694,000
================ ================ ================
Denominator:
Weighted average common
stock outstanding 6,264,521 8,755,754 10,252,145
================ ================ ================
Net income per share $ 0.43 $ 0.88 $ 1.24
================ ================ ================
DILUTED
Numerator:
Net income $ 3,226,000 $ 7,931,000 $ 12,694,000
================ ================ ================
Denominator:
Weighted average common 6,264,521 8,755,754 10,252,145
stock outstanding
Other Dilutive Securities:
Series A preferred stock 1,250,000 --- ---
Series B preferred stock 833,333 1,111,111 36,630
Options and warrants using the
treasury stock method 828,273 1,484,054 1,399,326
---------------- ---------------- ----------------
Weighted average shares outstanding 9,176,127 11,350,919 11,688,101
================ ================ ================
Net income per share $ 0.35 $ 0.70 $ 1.09
================ ================ ================
</TABLE>
F-10
<PAGE> 54
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Reclassification
Certain prior year amounts have been reclassified to conform with current
year presentation.
Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards ("SFAS")
130, "Reporting Comprehensive Income" effective April 1, 1998. SFAS 130
established standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
income is defined as the total of net income and all other non-owner changes in
equity. The Company does not have any non-owner changes in equity other than net
income. Comprehensive income has been reported in the consolidated statement of
stockholders' equity.
The Company has adopted SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information," effective April 1, 1998. This pronouncement
changes the requirements under which public businesses must report segment
information. The objective of the pronouncement is to provide information about
a company's different types of business activities and different economic
environments. SFAS 131 requires companies to select segments based on their
internal reporting system. The Company provides integrated health benefit
management services to our customers, and these services account for
substantially all of the Company's revenues. Such services are typically
negotiated under one contract with the customer. Therefore, the Company's
operations will continue to be reported in one segment.
The Company adopted SFAS 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," as of April 1, 1998. This pronouncement revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans, however, it does
require additional information on changes in the benefit obligations and fair
values of plan assets in order to facilitate financial analysis. The Company
does not have any pension or postretirement benefit plans, therefore the
adoption of SFAS 132 did not have a material impact on the Company's
disclosures.
3. ACQUISITIONS
In December 1998, the Company acquired the outstanding stock of
Baumel-Eisner for $25 million in cash. The acquisition has been accounted for
using the purchase method of accounting. Baumel-Eisner's results have been
included in the Company's consolidated statements of operations since December
1998. The purchase price was allocated to the net assets acquired, primarily
goodwill, based on their estimated fair values. The excess of the purchase price
over the fair value of the net assets acquired (goodwill) was approximately
$24.2 million and is being amortized on a straight-line basis over 25 years.
F-11
<PAGE> 55
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS: (CONTINUED)
On March 31, 1999, the Company acquired the outstanding stock of FHPS for
$70 million in cash and warrants to purchase 200,000 shares of its $0.01 par
value common stock ("Common Stock"). The Company valued such warrants at fair
market value based upon the Black Scholes valuation model. Such warrants are
valued at $2.5 million. The acquisition has been accounted for using the
purchase method of accounting. FHPS' results have not been included in the
Company's results because the transaction occurred on the last day of the
Company's fiscal year. The purchase price was allocated to Goodwill and other
intangible assets. Goodwill was valued at approximately $68.3 and is being
amortized on a straight-line basis over 30 years. The purchase price allocation
used in the preparation of the accompanying financial statements is preliminary.
The Company's management is assessing the net realizable value of certain
contracts acquired and reviewing the assets acquired for other intangible
assets. As a result, the purchase price allocation may be subsequently revised.
The following unaudited pro forma information presents the results of
operations of the Company as if the FHPS acquisition had taken place at the
beginning of the periods presented (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Revenues $ 530,016 $ 855,810
Net income $ 4,286 $ 12,783
Net income per share:
Basic $ 0.47 $ 1.25
Diluted $ 0.38 $ 1.09
Weighted average shares outstanding:
Basic 8,755,754 10,252,145
Diluted 11,350,919 11,688,101
</TABLE>
In February 1998, the Company completed a merger with IMR, a privately held
clinical trial and survey research firm based in Towson, Maryland. The Company
issued 876,078 shares and options to purchase 23,922 shares of its Common Stock
in exchange for all the outstanding shares and options of IMR. The merger
constituted a tax-free reorganization and has been accounted for as a pooling of
interests under Accounting Principles Board Opinion No. 16 ("APB 16").
Accordingly, all prior period consolidated financial statements presented have
been restated to include the combined results of operations, financial position
and cash flows of IMR as though it had always been a part of the Company.
F-12
<PAGE> 56
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS: (CONTINUED)
The results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements follow.
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------
1997 1998
------------- -------------
<S> <C> <C>
Revenues:
API $ 251,562,000 $ 468,287,000
IMR 4,888,000 8,377,000
------------- -------------
Combined $ 256,450,000 $ 476,664,000
------------- -------------
Net income:
API $ 3,138,000 $ 7,165,000
IMR 88,000 766,000
------------- -------------
Combined $ 3,226,000 $ 7,931,000
============= =============
</TABLE>
In connection with the merger, the Company recorded in the fourth quarter
of fiscal 1998 a charge to operating expenses of $689,000 ($427,000 after taxes,
or $.04 per common share on a dilutive basis) for professional fees and other
merger-related costs pertaining to the transaction.
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
March 31,
--------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
Machinery and equipment................................................... $ 3,521,000 $ 4,208,000
Computer equipment and software........................................... 8,591,000 12,840,000
Furniture and equipment................................................... 1,381,000 2,324,000
Leasehold improvements.................................................... 1,017,000 2,765,000
Land and buildings........................................................ 1,558,000 1,558,000
--------------- ---------------
16,068,000 23,695,000
Less--Accumulated depreciation and amortization........................... (5,574,000) (8,540,000)
--------------- ---------------
$ 10,494,000 $ 15,155,000
=============== ===============
</TABLE>
F-13
<PAGE> 57
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT:
On March 31, 1999, the Company entered into a senior credit facility with a
group of lenders. The credit facility consists of a $75 million, 3-year
revolving credit facility. On March 31, 1999, the Company borrowed $50 million
under the credit facility to fund the acquisition of FHPS. Outstanding
borrowings will mature on March 31, 2002. Each of the Company's subsidiaries has
guaranteed the credit facility. The lenders received a first priority security
interest in the subsidiaries' capital stock and negative pledges on accounts
receivable and other assets.
Interest on the credit facility accrues at a specified margin above the
London Interbank Offered Rate, or LIBOR, or an alternate base rate. The
alternate base rate is the bank's prime rate or the federal funds rate plus
0.5%. For LIBOR loans the applicable margin is 1.75% per annum as of April 1,
1999.
The credit facility contains usual and customary affirmative and negative
covenants, including limitations on liens, debts, dividends, capital
expenditures, mergers, acquisitions and sale of assets. Covenants also include a
specified minimum net worth, maximum leverage ratio and a minimum interest
coverage ratio.
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, 1999, as follows:
<TABLE>
<CAPTION>
Years Ending
March 31,
-------------
<S> <C>
2000................................................... $ 4,061,000
2001................................................... 3,585,000
2002................................................... 2,735,000
2003................................................... 1,419,000
2004................................................... 962,000
-----------
Total minimum lease payments...................... $12,762,000
===========
</TABLE>
Total rent expense incurred in the years ended March 31, 1997, 1998 and
1999 was approximately $2,313,000, $3,096,000 and $ 4,018,000, respectively.
7. COMMITMENTS AND CONTINGENCIES:
The Company has entered into long-term employment and non-compete
agreements with certain management employees. These employment agreements
provide for certain minimum payments should the agreements be terminated.
F-14
<PAGE> 58
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 events of noncompliance would not have a
material adverse effect on the results of operations or financial condition of
the Company.
8. CONCENTRATION OF BUSINESS:
A significant portion of the Company's revenues result from contracts with
customers. These contracts normally have terms from one to five years with
renewal options.
One customer of the Company accounted for approximately 21% and 18% of the
Company's revenues for the years ended March 31, 1998 and 1999, respectively.
Another customer accounted for approximately 15% of the Company's revenues for
the year ended March 31, 1998, but revenues from this customer did not exceed
10% of the Company's revenues for the year ended March 31, 1999. No other
customer accounted for over 10% of the Company's revenues in fiscal years 1998
or 1999. Effective April 1, 1999, the Company entered into a Pharmacy Benefit
Services Agreement with Foundation Health Systems, Inc. ("FHS"). Under the terms
of the Service Agreement the Company will provide pharmacy services to FHS'
affiliated health plans. In fiscal 2000, we expect that FHS will become the
Company's largest customer.
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
could be converted by the holder into 250 fully-paid and non-assessable shares
of Common Stock. On April 13, 1998, the holders of the Series B Preferred Stock
converted all of the shares into 1,111,111 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.
F-15
<PAGE> 59
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK TRANSACTIONS: (CONTINUED)
On October 8, 1996, the Company completed the offering ("Offering") of its
Common Stock. 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.
In connection with the IMR merger, the Company issued 876,078 shares of its
Common Stock in exchange for all the outstanding shares of IMR. Under the
provisions of APB 16, the shares are reflected as outstanding as though IMR had
always been a part of the Company.
Warrants to Purchase Common Stock
The Company has issued warrants to four of our key health plan sponsor
customers representing the right to purchase up to a total of 357,180 shares of
our Common Stock at prices per share ranging from $8.10 to $35.50. The right to
exercise each warrant vests in equal installments on the first five
anniversaries of the date of grant so long as the customer's service agreement
remains in effect. In addition, during the year ended March 31, 1997, the
Company agreed to issue warrants to purchase 281,250 shares of its Common Stock
to one customer contingent upon future expansion of member lives. As of March
31, 1999, none of these warrants have been earned or issued.
Prior to November of 1997, the Company accounted for these warrant
agreements under the provisions of SFAS 123 and the related Emerging Issues Task
Force ("EITF") 96-3. These pronouncements require that all stock issued to
non-employees be accounted for based on the fair value of the consideration
received or the fair value of equity instruments issued. In addition, they
require that the fair value be measured on the date the parties come to a
"mutual understanding of the terms of the arrangement and agree to a binding
contract" (i.e. the grant date). If the number of equity instruments is
contingent upon the outcome of future events, the number of instruments that
should be accounted for when determining the fair value of the transaction
should be based on the best available estimate of the number of instruments
expected to be issued. In management's opinion, the fair value of the warrants
at the date of the agreements was not material.
Subsequent to November 20, 1997, the Company follows the guidance of EITF
96-18, under which the measurement date is the earlier of the performance
commitment date or completed performance date. The Company chose not to
retroactively apply EITF 96-18 to the eligible warrants, but chose to apply this
EITF prospectively to new arrangements and any modifications of existing
arrangements.
F-16
<PAGE> 60
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK TRANSACTIONS: (CONTINUED)
The Company has reserved shares of Common Stock at March 31, 1999, for the
following:
<TABLE>
<S> <C>
Exercise of stock options.................................................. 2,430,432
Exercise of warrants....................................................... 638,430
-------------
3,068,862
=============
</TABLE>
10. STOCK OPTION PLAN:
At March 31, 1999, the Company has three stock-based compensation plans:
Incentive Stock Option Plan, Amended and Restated Incentive Stock Option Plan
and the 1997 Nonstatutory Stock Option Plan (the "Plans"). The Plans provide for
the granting of qualified stock options and incentive options to officers,
directors, advisors and 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, 1999, the number of shares of Common Stock
issuable under the Plans may not exceed 2,837,750 shares. 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, 1999, 907,600 options were vested at exercise prices of $.65 to $35.63
per share.
SFAS 123 establishes a fair value-based method of accounting for
stock-based compensation. The Company has elected to adopt SFAS 123 through
disclosure with respect to employee stock-based compensation. The following
table summarizes the Company's stock option activity.
<TABLE>
<CAPTION>
1997 1998 1999
------------------------------------------------------------------------------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
-------------- ---------- -------------- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,040,250 $ 4.26 1,457,750 $ 6.02 2,023,745 $ 10.54
Granted 445,000 10.34 614,375 21.25 525,500 31.42
Transferred from IMR -- -- 23,922 1.18 -- --
Exercised (3,000) 3.20 (43,052) 5.26 (355,766) 6.79
Canceled (24,500) 10.75 (29,250) 9.78 (90,896) 29.02
-------------- ---------- -------------- ------------ -------------- ----------
Outstanding at end of year 1,457,750 6.02 2,023,745 10.54 2,102,583 15.86
============== ========== ============== ============ ============== ==========
Exercisable at end of year 632,850 2.95 879,382 4.40 907,600 6.68
Price range $.65 to $19.75 $.65 to $33.13 $.65 to $41.38
Weighted average fair value
of options granted $ 3.31 $ 7.94 $ 14.64
</TABLE>
F-17
<PAGE> 61
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLAN: (CONTINUED)
The following table reflects the weighted average exercise price and
weighted average contractual life of various exercise price ranges of the
2,102,583 options outstanding as of March 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- -----------------------------
Weighted Wtd. Avg. Weighted
Avg. Exercise Contractual Avg. Exercise
Exercise Price Range Shares Price Life (yrs.) Shares Price
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .65 to $ 2.71 204,674 $ .98 2.5 196,700 $ .98
$ 3.20 to $ 4.80 424,850 $ 3.24 4.8 424,850 $ 3.24
$ 9.00 to $ 12.50 689,200 $ 11.26 7.4 225,667 $ 11.67
$ 16.63 to $ 23.75 54,670 $ 19.72 8.5 9,003 $ 19.33
$ 24.50 to $ 31.62 484,000 $ 29.80 9.1 6,000 $ 29.13
$ 33.13 to $ 41.38 245,189 $ 34.67 9.0 45,380 $ 33.34
</TABLE>
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, 1997, 1998 and 1999,
respectively: risk-free interest rates of 4.8% to 6.5%; expected lives of three
to five years; expected volatility of 30% to 50%. The Company continues to
account for stock based compensation under APB 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 net
income per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $3,226,000 $7,931,000 $12,694,000
Pro forma $3,065,000 $7,382,000 $11,121,000
Basic net income per share:
As reported $ 0.43 $ 0.88 $ 1.24
Pro forma $ 0.40 $ 0.82 $ 1.08
Diluted net income per share:
As reported $ 0.35 $ 0.70 $ 1.09
Pro forma $ 0.33 $ 0.65 $ 0.95
</TABLE>
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.
F-18
<PAGE> 62
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. RELATED PARTY TRANSACTIONS:
In fiscal 1998, the Company entered into an agreement with Advance Capital
Markets ("ACM") pursuant to which ACM agreed to act as financial advisor for the
Company. In exchange for these professional services, the Company paid ACM a fee
of $150,000 in 1998 in connection with the IMR transaction and $85,000 in
connection with the Baumel-Eisner transaction. The fees paid are equivalent to
or less than similar fees incurred in arm's-length transactions. The Managing
Director of ACM is also a Director of the Company.
12. 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. The Company is required to contribute at least 50% of the
first 6% of salary deferral contributed by each participant. The Company's
contributions to the plan amounted to approximately $129,000, $177,000 and
$268,000 for the years ended March 31, 1997, 1998 and 1999, respectively.
13. INCOME TAXES:
The provision for income taxes for the years ended March 31, 1997, 1998 and
1999 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:
<TABLE>
<CAPTION>
1997 1998 1999
--------------- ---------------- ---------------
<S> <C> <C> <C>
Tax at U.S. federal $ 1,629,000 $ 4,349,000 $ 6,961,000
income tax rate
State taxes --- 457,000 666,000
Benefit of operating (89,000) ---
loss carryforwards
Other, net 24,000 55,000 153,000
--------------- ---------------- ---------------
Provision for income taxes $ 1,564,000 $ 4,861,000 $7,780,000
=============== ================ ===============
</TABLE>
Of the $7,780,000 provision for income taxes in 1999, $1,312,000 represents
deferred income taxes and $6,468,000 represents the current portion.
F-19
<PAGE> 63
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the tax consequences on future years of
temporary differences between the tax bases of assets and liabilities and their
financial reporting bases and the potential benefits of certain tax
carryforwards. The significant deferred tax assets and liabilities and the
changes in those assets and liabilities are as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1998 Changes 1999
------------ ------------ ------------
<S> <C> <C> <C>
Gross deferred tax assets:
Accruals .......................... $ 57,000 $ 96,000 $ 153,000
Other ............................. 50,000 76,000 126,000
------------ ------------ ------------
107,000 172,000 279,000
------------ ------------ ------------
Gross deferred tax liabilities:
Amortization of goodwill .......... (850,000) (197,000) (1,047,000)
Depreciation ...................... (542,000) (158,000) (700,000)
Conversion from cash
basis of acquired entities .... -- (1,129,000) (1,129,000)
------------ ------------ ------------
(1,392,000) (1,484,000) (2,876,000)
------------ ------------ ------------
Net deferred tax liability ........ $ (1,285,000) $ (1,312,000) $ (2,597,000)
============ ============ ============
</TABLE>
F-20
<PAGE> 64
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
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 17, 1999. Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. Schedule II is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
May 17, 1999
S-1
<PAGE> 65
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, 1997:
Allowance for doubtful accounts receivable $ 180,000 $ 12,000 $ -- $ 192,000
Year ended March 31, 1998:
Allowance for doubtful accounts receivable $ 192,000 $ 74,000 $ 19,000 $ 247,000
Year ended March 31, 1999:
Allowance for doubtful accounts receivable $ 247,000 $ 124,000(2) $ -- $ 371,000
</TABLE>
- ------------------------------------
(1) Uncollectible accounts written off, net of recoveries
(2) Includes $100,000 reflected in the acquisition of Baumel-Eisner
S-2
<PAGE> 66
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C> <C>
2.1(a) --- Stock Purchase Agreement, dated effective as of
December 1, 1998, by and among Advance Paradigm, Inc.
(the "Company"), Baumel-Eisner Neuromedical
Institute, Inc., Barry Baumel, M.D. and Larry S.
Eisner, M.D.
2.2(b) --- Purchase Agreement, dated as of February 26, 1999,
among Foundation Health Systems, Inc., Foundation
Health Corporation, Foundation Health Pharmaceutical
Services, Inc., Integrated Pharmaceutical Services,
Inc. and the Company.
3.1(c) --- Amended and Restated Certificate of Incorporation of
the Company.
3.2(c) --- Certificate of Amendment to the Certificate of
Incorporation of the Company.
3.3(c) --- Certificate of Correction to the Amendment to the
Certificate of Incorporation of the Company.
3.4(c) --- Amended and Restated Bylaws of the Company.
3.5(c) --- Certificate of Incorporation of Advance Pharmacy
Services, Inc.
3.6(c) --- Certificate of Amendment to the Certificate of
Incorporation of Advance Pharmacy Services, Inc.
3.7(c) --- Certificate of Correction to the Certificate of
Amendment to the Certificate of Incorporation of
Advance Pharmacy Services, Inc.
3.8(c) --- Certificate of Amendment to the Certificate of
Incorporation of Advance Pharmacy Services, Inc.
3.9(c) --- Bylaws of Advance Pharmacy Services, Inc.
4.1(d) --- Specimen Certificate for shares of Common Stock,
$0.01 par value, of the Company.
4.2(e) --- Amended and Restated Incentive Stock Option Plan.
4.3(e) --- Incentive Stock Option Plan.
4.4(c) --- Warrant Agreement, dated as of September 12, 1996,
by and between the Company and VHA, Inc.
4.5(c) --- Form of Agreement and Plan of Merger.
4.6(f) --- 1997 Nonstatutory Stock Option Plan.
4.7(b) --- Warrant Agreement, dated as of February 26, 1999,
by and between the Company and Foundation Health
Systems, Inc.
4.8(i) --- Warrant Agreement, dated as of February 25, 1999, by
and between the Company and Arkansas BlueCross
BlueShield
4.9(i) --- Warrant Agreement, dated as of June 12, 1998, by and
between the Company and Wellmark, Inc.
10.1(c) --- Managed Pharmaceutical Agreement, dated November 1,
1993, by and between Advance Data and the Mega Life &
Health Insurance Company.
10.2(c) --- Nondisclosure/Noncompetition Agreement, dated August
4, 1993, between the Company, Advance Data, Advance
Mail and David D. Halbert.
</TABLE>
<PAGE> 67
<TABLE>
<S> <C> <C>
10.3(c) --- Nondisclosure/Noncompetition Agreement, dated August
4, 1993, between the Company, Advance Mail, Advance
Data and Jon S. Halbert.
10.4(c) --- Nondisclosure/Noncompetition Agreement, dated August
4, 1993, between the Company, Advance Mail, Advance
Data and Danny Phillips.
10.5(d) --- 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(d) --- Employment Agreement, effective as of November 14,
1996, by and between the Company and John H. Sattler.
10.7(d) --- Employment Agreement, effective as of June 17, 1996,
by and between the Company and Ernest Buys.
10.8(c) --- Employment Agreement, effective as of February 15,
1996, by and between the Company and Alan T. Wright.
10.9(c) --- Form of Health Benefit Management Services Agreement.
10.10(c) --- Sublease, dated May 2, 1996, between Lincoln National
Life Insurance Company and Advance Data.
10.11(c) --- Lease, dated March 6, 1994, by and between Hill
Management Services, Inc. and Advance Clinical
(formerly ParadigM).
10.12(c) --- Lease Agreement, dated as of February 24, 1989, as
amended November 30, 1992, and December __, 1992, by
and between TRST Las Colinas, Inc. and Advance Health
Care.
10.13(c) --- Managed Pharmacy Benefit Services Agreement, dated
September 1, 1995, between the Company and BCBS of
Texas.
10.14(g) --- Agreement and Plan of Merger, dated February 9, 1998,
by and among the Company, IMR, Inc. and Innovative
Medical Research, Inc., Walter Stewart, Richard
Lipton, The Lianna Lipton Trust, The Justin Lipton
Trust, Stuart Bell, The Curren Bell Trust, The Kylie
Bell Trust and The Ian Bell Trust.
10.15(h) --- Consulting Agreement, effective as of December 15,
1998, by and between the Company and David A. George.
10.16(b) --- Pharmacy Benefit Services Agreement, effective as of
April 1, 1999, by and between the Company, Foundation
Health Systems, Inc. and Integrated Pharmaceutical
Services, Inc.
</TABLE>
<PAGE> 68
<TABLE>
<S> <C> <C>
10.17(b) --- Credit Agreement, dated as of March 31, 1999, among
the Company, the banks named in the Credit Agreement,
NationsBanc Montgomery Securities LLC and
NationsBank, N.A.
10.18(b) --- Guaranty, dated as of March 31, 1999, by each
subsidiary of the Company, in favor of NationsBank,
N.A.
10.19(i) --- Commercial Lease Agreement, commencing November 1,
1998, by and between Crin-Richardson I, L.P. and the
Company.
11.1(i) --- Statement regarding computation of per share earnings.
21.1(i) --- Subsidiaries of the Company.
23.1(i) --- Consent of Arthur Andersen LLP.
27.1(i) --- Financial Data Schedule.
</TABLE>
- ---------------
(a) Previously filed in connection with the Company's Current Report on
Form 8-K, dated December 29, 1998, and incorporated herein by
reference.
(b) Previously filed in connection with the Company's Current Report on
Form 8-K, dated April 12, 1999, and incorporated herein by reference.
(c) Previously filed in connection with the Company's Registration
Statement on Form S-1 filed October 8, 1996 (No. 333-06931), and
incorporated herein by reference.
(d) Previously filed in connection with the Company's Form 10-K for the
year ended March 31, 1997, and incorporated herein by reference.
(e) Previously filed in connection with the Company's Registration
Statement on Form S-8 filed September 5, 1997 (No. 333-34999), and
incorporated herein by reference.
(f) Previously filed in connection with the Company's Form 10-Q for the
three months ended June 30, 1997, and incorporated herein by reference.
(g) Previously filed in connection with the Company's Current Report on
Form 8-K, dated February 9, 1998, and incorporated herein by reference.
(h) Previously filed in connection with the Company's Form 10-Q for the
three months ended December 31, 1998, and incorporated herein by
reference.
(i) Filed herewith.
<PAGE> 1
EXHIBIT 4.8
ADVANCE PARADIGM, INC.
WARRANT AGREEMENT
This Warrant Agreement (this "Agreement") dated as of February 25,
1999 is entered into by and between Advance Paradigm, Inc., a Delaware
corporation (the "Company") and Arkansas Blue Cross Blue Shield, a mutual
insurance company ("Client").
TERMS OF AGREEMENT
NOW THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and Client hereby agree as follows:
Section 1. SERVICES AGREEMENT. Reference is made to that certain First
Amendment dated as of the date hereof (the "First Amendment") to the Managed
Pharmacy Benefit Services Agreement dated as of the date hereof entered into by
and between the Company and Client (as amended, the "Services Agreement").
Capitalized terms not otherwise defined herein shall have the meanings given to
them in the Services Agreement.
Section 2. GRANT OF THE RIGHT TO PURCHASE COMMON STOCK. The Company
hereby grants to Client the right, and Client shall be entitled, subject to the
terms and conditions hereinafter set forth, to purchase from the Company 16,430
shares of its common stock, par value $0.01 per share (the "Common
Stock")(which number is referred to herein as the "Total Exercise Number") at a
per share exercise price equal to $35.125 (the "Exercise Price"). The right to
purchase such shares shall be evidenced by five (5) warrant certificates each
in the form of Exhibit A hereto (collectively, the "Warrant Certificates" and
each a "Warrant Certificate"). Subject to Section 3 hereof, each Warrant
Certificate shall be delivered to the Client following the Vesting Date (as
defined below) thereof. The Total Exercise Number and Exercise Price of such
shares are subject to adjustment as provided in Section 4 hereof.
Section 3. EXERCISE OF WARRANT CERTIFICATES. The purchase rights
granted hereunder will be exercisable as to twenty percent (20%) of the Total
Exercise Number as of the first anniversary of the effective date of the First
Amendment, and the right to exercise with respect to an additional twenty
percent (20%) of the Total Exercise Number will accrue on each of the next four
anniversaries of the effective date of the First Amendment (each a "Vesting
Date") and will be cumulative; provided, however, that if on any vesting date
the number of lives for which the Company is providing integrated pharmacy
benefit management services under the Services Agreement is less 260,000, then
the scheduled vesting for such date will be forfeited. The Warrant Certificates
may be exercised only so long as the Company is the exclusive vendor of
integrated pharmacy benefit management services for Client. Except as otherwise
provided for
<PAGE> 2
herein, the term of the Warrant Certificates and the right to purchase Common
Stock as described therein shall commence on the Vesting Date of such Warrant
Certificate and will end on the earlier of April 1, 2005 or three months
following the termination date of the Services Agreement (the "Exercise
Period"). Shares of Common Stock purchased upon exercise of each Warrant
Certificate shall at the time of purchase be paid for in full. To the extent
that the right to purchase shares has accrued hereunder, the Warrant
Certificates may be exercised by written notice to the Company in the form
attached to the Warrant Certificates, which specifies an exercise date (the
"Date of Exercise"), accompanied by full payment for the shares by wire
transfer or certified or official bank check or the equivalent thereof
acceptable to Company. Upon the initial exercise of a Warrant Certificate,
Client and the Company shall execute and enter into the Stockholders Agreement
attached hereto as Exhibit B (the "Stockholders Agreement").
At the time of delivery, the Company shall, without stock transfer tax
to the holder of the Warrant Certificate ("Holder"), deliver to the Holder (or
to such other person as the Holder directs) at the principal office of the
Company, or such other place as shall be mutually agreed upon, a certificate or
certificates for such shares, provided, however, that the time of delivery may
be postponed by the Company for such period as may be required for it with
reasonable diligence to comply with any requirements of law. The Company at the
time of exercise will require in addition that the registered owner of the
shares deliver an executed copy of the Stockholder Agreement, an investment
representation in form acceptable to the Company, and the Company will place a
legend on the certificate for such Common Stock restricting the transfer of
same. At no time shall the Company have any obligation or duty to register
under the Securities Act of 1933 (the "1933 Act") the Common Stock issuable
upon exercise of a Warrant Certificate.
Section 4. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SHARES. The
Exercise Price and number of shares of Common Stock purchasable pursuant to the
exercise of the Warrant Certificates shall be subject to adjustment from time
to time as follows:
(a) Adjustment for Combinations or Consolidations of Common Stock. In
the event the Company, at any time or from time to time after the date hereof,
effects a subdivision or capital reorganization of its outstanding Common Stock
for a greater or lesser number of shares, then and in each such event the Total
Exercise Number and the Exercise Price shall be adjusted proportionately such
that Client is entitled to purchase the same percentage of all shares of the
Company's outstanding capital stock then issued and issuable for the same
aggregate consideration as such Holder was entitled to purchase immediately
prior to such event.
(b) Adjustment for Certain Dividends and Distributions. In the event
the Company at any time or from time to time after the date hereof shall pay a
dividend payable in Common Stock of the Company, or otherwise make a
distribution of Common Stock to its stockholders, then the Exercise Price shall
be adjusted, from and after the record date of such dividend or the date of
such distribution, to that price determined by multiplying the Exercise Price
by a fraction,
(i) the numerator of which shall be the total number of shares of
capital stock issued and outstanding or deemed to be issued and
outstanding immediately prior to the time of such issuance or the
close of business on such record date; and
2
<PAGE> 3
(ii) the denominator of which shall be the number of shares of
capital stock issued and outstanding or deemed to be issued and
outstanding immediately prior to the time of such issuance or the
close of business on such record date plus the number of shares of
capital stock to be issued;
provided, however, that if such record date shall have been fixed and
such dividend is not fully paid or if such distribution is not fully made on
the date fixed therefor, the Exercise Price shall be recomputed accordingly as
of the close of business on such record date and thereafter the Exercise Price
shall be adjusted pursuant to this Section 4(b) as of the time of actual
payment of such dividend or distribution. Client shall thereafter be entitled
to purchase, at the Exercise Price resulting from such adjustment, the number
of shares of Common Stock (calculated to the nearest whole share) obtained by
multiplying the Exercise Price in effect immediately prior to such adjustment
by the number of shares of Common Stock issuable upon the exercise hereof
immediately prior to such adjustment and dividing the product thereof by the
Exercise Price resulting from such adjustment.
(c) Number of Shares. Upon any adjustment of the Exercise Price
pursuant to Section 4(b) hereof, Client shall thereafter (until another such
adjustment) be entitled to purchase, at the new Exercise Price, the number of
shares, calculated to the nearest full share, obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
shares purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the new Exercise Price resulting from such
adjustment.
Section 5. RESERVATION AND AUTHORIZATION OF COMMON STOCK. The Company
shall at all times reserve and keep available, free from preemptive rights, out
of its authorized but unissued Common Stock, solely for the purposes of
effecting the exercise of all outstanding Warrant Certificates, the full number
of shares of Common Stock issuable upon the exercise of all outstanding Warrant
Certificates. For the purpose of this Section 5, the full number of shares of
Common Stock issuable upon the exercise of all outstanding Warrant Certificates
shall be computed as if at the time of computation of such number of shares of
Common Stock all outstanding Warrant Certificates were held by a single holder.
The Company shall from time to time, in accordance with applicable law,
increase the authorized amount of its Common Stock if at any time the
authorized amount of its Common Stock remaining unissued shall not be
sufficient to permit the exercise of all Warrant Certificates at the time
outstanding.
Section 6. TRANSFERABILITY.
(a) The Warrant Certificates are not transferable by Client except to
the Company or affiliates of Client. Any permitted transfer of a Warrant
Certificate shall be recorded on the books of the Company upon receipt by the
Company of a notice of transfer in the form attached hereto as Exhibit B, at
its principal offices and the payment to the Company of all transfer taxes and
other governmental charges imposed on such transfer. The shares of Common Stock
purchased by Client are not transferable except as provided in the Stockholders
Agreement.
3
<PAGE> 4
(b) Unless and until otherwise permitted by this Section and the
Stockholders Agreement, each certificate representing Common Stock initially
issued upon the exercise of each Warrant Certificate (a "Stock Certificate"),
and each certificate for Common Stock issued to any subsequent transferee of
any such certificate, shall be stamped or otherwise imprinted with a legend in
substantially the following form:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY BE REOFFERED
AND SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER, CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS
SET FORTH IN A STOCKHOLDERS AGREEMENT BETWEEN THE COMPANY AND
ARKANSAS BLUE CROSS BLUE SHIELD, A MUTUAL INSURANCE COMPANY, DATED
AS OF ______________, A COPY OF WHICH MAY BE OBTAINED BY THE
HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT
CHARGE."
Prior to any permitted transfer of a Warrant Certificate or any
Stock Certificate, the holder thereof shall furnish, at the expense of such
holder, to the Company an opinion of counsel, reasonably satisfactory in form
and substance to the Company, to the effect that such transfer is exempt from
registration under the Securities Act. Upon any exercise of any Warrant
Certificate for shares of Common Stock to be registered in the name of a person
other than Client, Client shall furnish, at the expense of Client, to the
Company an opinion of the General Counsel of Client, reasonably satisfactory in
form and substance to the Company, to the effect that the issuance of the
shares of Common Stock to such other person upon exercise of the Warrant is
exempt from registration under the Securities Act.
Section 7. FRACTIONAL SHARES. The Company shall not be required to
issue a fractional share of stock upon any exercise of a Warrant Certificate.
As to any final fraction of a share that Client would otherwise be entitled to
purchase upon exercise of a Warrant Certificate, the Company shall, if it does
not issue a fractional share, pay a cash adjustment in respect of such final
fraction in an amount equal to the same fraction of the Exercise Price per
share of Common Stock.
Section 8. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES. In the
event of loss, theft or destruction of a Warrant Certificate, the Company will
make and deliver a new Warrant Certificate of like tenor, in lieu of such
Warrant Certificate, upon receipt by the Company of evidence reasonably
satisfactory to it of such loss, theft, or destruction and indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expense incidental thereto. In the case of mutilation of a Warrant
Certificate and upon surrender and cancellation of such Warrant Certificate,
the Company will make and deliver a new Warrant Certificate of like tenor, in
lieu of such Warrant Certificate.
4
<PAGE> 5
Section 9. RIGHTS PRIOR TO EXERCISE OF WARRANT CERTIFICATES. Prior to
the exercise of a Warrant Certificate, Client shall not be entitled to any
rights of a stockholder of the Company with respect to the Common Stock for
which such Warrant Certificate may then be exercisable, including without
limitation the right to vote, to receive dividends or other distributions or to
exercise any preemptive rights and shall not be entitled to receive any notice
of any proceedings of the Company except as provided herein.
Section 10. AUTHORIZATION AND ISSUANCE. The Company represents and
warrants to Client that it has the corporate power and authority to issue the
Warrant Certificates; this Warrant Agreement has been duly authorized, executed
and delivered and the Warrant Certificates, when delivered, will be duly and
validly issued, fully paid and nonassessable; the issuance of the Warrant
Certificates, and the shares of Common Stock issuable upon their exercise, are
not prohibited or restricted by the Certificate of Incorporation or Bylaws of
the Company or any material agreement to which the Company is a party; except
for those agreements for which the Company has received the requisite consents
or waivers; and the shares of Common Stock issuable upon exercise of the
Warrant Certificates, when issued upon exercise of the Warrant Certificates
pursuant to the terms hereof, will be duly and validly issued, fully paid and
nonassessable.
Section 11. REPRESENTATIONS AND COVENANTS OF CLIENT. This Warrant
Agreement has been entered into by the Company in reliance upon the following
representations and covenants of Client:
(a) Investment Purpose. The right to acquire the Common Stock issuable
upon exercise of Client's rights contained herein will be acquired for
investment and not with a view to the sale or distribution of any part thereof,
and Client has no present intention of selling or engaging in any public
distribution of the same except pursuant to a registration or exemption.
(b) Private Issue. Client understands (i) that the Common Stock
issuable upon exercise of the Warrant Certificates is not registered under the
1933 Act or qualified under applicable state securities laws on the ground that
the issuance contemplated by this Warrant Agreement will be exempt from the
registration and qualifications requirements thereof, and (ii) that the
Company's reliance on such exemption is predicated on the representations set
forth in this Section 11.
(c) Financial Risk. Client has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of its investment, and has the ability to bear the economic risks of its
investment.
(d) Risk of No Registration. Client understands that if the Company
does not register with the Securities and Exchange Commission pursuant to
Section 11 of the 1933 Act, or file reports pursuant to Section 15(d) of the
Securities Exchange Act of 1934 (the "1934 Act"), or if a registration
statement covering the securities under the 1933 Act is not in effect when it
desires to sell the Common Stock issuable upon exercise of the right to
purchase, it may be required to hold such securities for an indefinite period.
Client also understands that any sale of its rights to
5
<PAGE> 6
purchase Common Stock which might be made by it in reliance upon Rule 144 under
the 1933 Act may be made only in accordance with the terms and conditions of
that Rule.
(e) Stockholders Agreement. Prior to the exercise of any Warrant
Certificate, Client agrees to, and to cause any permitted transferee to, enter
into, execute and perform the Stockholders Agreement.
Section 12. GENERAL.
(a) Expenses. Each party shall bear and pay all costs and expenses
incurred by them respecting the transactions contemplated herein and all
investigations and proceedings in connection therewith, including, without
limitation, fees, commissions or expenses of their respective counsel,
accountants and financial advisors.
(b) Notice. Any notice required to be given pursuant to the terms and
provisions of this Agreement shall be in writing and shall be sent by certified
mail, return receipt requested, or by overnight delivery service, or facsimile
transmission confirmed by telephone and followed by overnight delivery to the
parties at the addresses below or such other address as shall be specified by
the parties by like notice
to the Company at:
Advance Paradigm, Inc.
Attn: General Counsel
545 E. John Carpenter Freeway, Suite 1570
Irving, Texas 75062
Fax No.: 972/830-6196
and to Client at:
Arkansas Blue Cross and Blue Shield, a mutual insurance company
Attn: General Counsel
601 S. Gaines St.
Little Rock, AR 72203
Fax No: 501/378-3366
Notice so given shall, in the case of notice so given by mail, be
deemed to be given and received on the fourth calendar day after posting, in
the case of notice so given by express delivery service, on the date of actual
delivery and, in the case of notice so given by facsimile transmission or
personal delivery, on the date of actual transmission or personal delivery, as
the case may be.
(c) Binding Nature and Assignment. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their successors and
assigns. Neither party may assign this Agreement without the prior written
consent of the other; provided, however, that either party may transfer or
assign its rights and obligations under this Agreement, to any affiliate, and
6
<PAGE> 7
provided further that no such assignment shall have the effect of releasing
such party from any of its obligations under this Agreement.
(d) Headings and Interpretation. The headings of the various sections
of this Agreement are inserted for convenience only and do not, expressly or by
implication, limit, define or extend the specific terms of the section so
designated.
(e) Governing Law. The validity, enforceability, and interpretation of
this Agreement shall be determined and governed by the internal laws of the
State of Texas (and not the law of conflicts).
(f) Entire Agreement. This Agreement contains all the terms and
conditions agreed upon by the parties, and supersedes all prior understandings,
writings, proposals, representations, or communications, oral or written, of
the parties hereto.
(g) Authority. Company and Client warrant that each has full power and
authority to enter into and perform this Agreement, and the person signing this
Agreement on behalf of each party certifies that such person has been properly
authorized and empowered to enter into this Agreement on behalf of such party.
(h) Non-Waiver. The failure of either party to insist, in any one or
more instances, upon performance of any of the terms, covenants or conditions
of this Agreement shall not be construed as a waiver or a relinquishment of any
right or claim granted or arising hereunder or of the future performance of any
such term, covenant, or condition, and such failure shall in no way affect the
validity of this Agreement or the rights and obligations of the parties
hereunder.
(i) Survival. Should any part, term or condition of this Agreement be
declared illegal or unenforceable or in conflict with any other laws, the
remaining provisions shall be valid and not affected thereby.
(j) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which taken
together shall constitute one and the same instrument.
(k) Further Assurances. From time to time upon request and without
further consideration, the parties hereto shall, and shall cause their
subsidiaries and affiliates, to execute, deliver or acknowledge such documents
and do such further acts as the other party hereto may reasonably require to
effectuate its obligations contemplated by this Agreement.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their proper and duly authorized officers on the date
first above written. By executing the Agreement, the undersigned individuals
hereby warrant and represent that they have read this Agreement in its entirety
and agree to all its terms.
ADVANCE PARADIGM, INC.
By: /s/ DAVID D. HALBERT
-------------------------------------
David D. Halbert
Chairman of the Board and Chief
Executive Officer
ARKANSAS BLUE CROSS AND BLUE SHIELD,
A MUTUAL INSURANCE COMPANY
By: /s/ RANDY L. SPICER
-------------------------------------
Name: Randy L. Spicer
Title: Vice President of Marketing,
Underwriting And Product Development
8
<PAGE> 9
EXHIBITS
<TABLE>
<S> <C>
Exhibit A Warrant Certificate
Exhibit B Stockholders Agreement
</TABLE>
9
<PAGE> 10
EXHIBIT A
THIS WARRANT AND THE UNDERLYING SHARES HEREOF HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR TRANSFERRED UNLESS THERE IS
AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES OR
THE COMPANY RECEIVES AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE
COMPANY) STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
WARRANT NO. 1
For Purchase of Shares of Common Stock
of
ADVANCE PARADIGM, INC.
APRIL 1, 2000
THIS CERTIFIES THAT Arkansas Blue Cross Blue Shield, a mutual
insurance company ("Client"), or registered transferees or assigns, is
entitled, subject to the terms and conditions set forth in this Warrant, to
purchase from Advance Paradigm, Inc., a Delaware corporation (the "Company"),
3,286 (the "Exercise Number") fully paid and nonassessable shares of Common
Stock, $0.01 par value per share, of the Company (the "Common Stock"), at any
time during the Exercise Period upon payment in full of the Exercise Price. The
Total Exercise Number and Exercise Price shall be subject to adjustment as set
forth in the Warrant Agreement referred to below. This Warrant is issued
pursuant to a Warrant Agreement between Client and the Company dated as of
February 25, 1999 (the "Warrant Agreement"), and is subject to all the terms
thereof, including the limitations on transferability set forth therein.
Capitalized terms used herein as defined terms but not otherwise defined shall
have the meaning assigned to such term in the Warrant Agreement.
This Warrant may be exercised, by the holder hereof, for all shares of
Common Stock covered hereby, by the presentation and surrender of this Warrant
together with the duly executed Election to Purchase in the form attached as
hereto, at the principal office of the Company (or at such other address as the
Company may designate by notice in writing to the holder hereof at the address
of such holder appearing on the books of the Company), and upon payment to the
Company of the Exercise Price and execution of the Stockholders Agreement as
set forth in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed and delivered by its duly authorized officer as an instrument under
seal as of the date of first above written.
ADVANCE PARADIGM, INC.
By:
-------------------------------------
David D. Halbert
Chairman of the Board and
Chief Executive Officer
10
<PAGE> 11
ELECTION TO PURCHASE
TO: ADVANCE PARADIGM, INC. (the "Company")
The undersigned, owner of the accompanying Warrant hereby irrevocably
exercises the option to purchase ____ shares of Common Stock in accordance with
the terms of such Warrant, directs that the shares issuable and deliverable
upon such purchase (together with any check for a fractional interest) be
issued in the name of and delivered to the undersigned, and makes payment in
full therefor at the Exercise Price provided or referenced in such Warrant.
COMPLETE FOR REGISTRATION OF SHARES OF COMMON STOCK ON THE STOCK TRANSFER
RECORDS MAINTAINED BY THE COMPANY:
- --------------------------------------------------------------------------------
Name of Warrant Holder
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
Federal ID Tax Number or Social Security Number
- --------------------------------------------------------------------------------
Date of Exercise (must be at least fifteen days after the date of this Notice)
-----------------------------------------
Signature
-----------------------------------------
Title
-----------------------------------------
Date
11
<PAGE> 12
EXHIBIT B
STOCKHOLDER AGREEMENT
This Stockholder Agreement dated as of ___________, by and among
Arkansas Blue Cross Blue Shield, a mutual insurance company (the
"STOCKHOLDER"), and Advance Paradigm, Inc., a Delaware corporation (the
"COMPANY").
PRELIMINARY STATEMENTS
Pursuant to the terms and conditions of the Warrant
Agreement, dated as of February 25, 1999, by and between the Company and
Stockholder, the Company agreed to issue a warrant to acquire shares of the
Company's common stock, par value $.01 per share (the "COMMON STOCK"). Pursuant
to the terms of the Warrant Agreement, the Stockholder agreed to execute and
enter into this Agreement prior to the issuance of any shares of Common Stock
thereunder.
NOW THEREFORE, in consideration of the premises and the mutual
agreements contained herein and for other good, valuable and binding
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto, intending to be legally bound, hereby agree as follows:
STATEMENT OF AGREEMENT
1. Restricted Stock. The terms and conditions of this Agreement shall apply to
all shares of Common Stock issued to Stockholder pursuant to the Warrant
Agreement and any shares of Common Stock otherwise acquired by Stockholder
(collectively the "STOCK").
2. Restrictions on Transfers.
2.1 Transfers to Affiliate.
(a) Transfers to Affiliates. Stockholder shall be entitled to transfer the
Stock held by it to entities that directly or indirectly control, are
controlled by, or are under common control with Stockholder (each, an
"AFFILIATE"), provided that any such Affiliates first deliver to the Company
their written acknowledgment of, and agreement to be bound by, the terms and
provisions contained in this Agreement; and the Stockholder delivers to the
Company an opinion of counsel, reasonably acceptable in form and substance to
the Company and its counsel, that registration under the Securities Act is not
required in connection with such transfer. The foregoing notwithstanding,
Stockholder shall not, without the prior written consent of the Company which
consent will not be unreasonably withheld, transfer any shares of Stock to any
Affiliate, nor any officer, director, employee or holder of debt or equity in
any Affiliate that is primarily engaged in the business of pharmacy benefit
management services, pharmacy network management, pharmacy claims adjudication,
mail service pharmacy, pharmacy clinical services,
12
<PAGE> 13
and/or pharmacy outcomes management, or the manufacture of drugs, biotech
products or biologicals.
(b) Affiliates' Proxy. In the event that Stockholder transfers less
than all of its Stock pursuant to Section 2.1(a), Stockholder shall exercise
all of the rights inuring under this Agreement with respect to such transferred
Stock and the transferees shall grant Stockholder proxies to exercise such
rights. In the event that Stockholder transfers all of its Stock pursuant to
Section 2.1(a), one such transferee reasonably acceptable to the Company shall
be designated by Stockholder to exercise all rights inuring under this
Agreement with respect to such Stock and the other transferees shall grant such
designated transferee proxies to exercise such rights.
2.2 Restrictions on Third Party Transfers of the Stock.
(a) General. During the first two years following the date the Stock
is issued the ("ISSUANCE DATE"), Stockholder agrees that it will not sell,
pledge or otherwise transfer any interest in any shares of the Stock in a
private sale without the prior written consent of the Company. At any time
after the second anniversary of the Issuance Date, the Stockholder may sell,
pledge or otherwise transfer shares of the Stock to any third party. ("THIRD
PARTY TRANSFER"); provided that such transfer is in accordance with this
Section 2.2, and provided further that the transferring Stockholder delivers to
the Company an opinion of counsel, reasonably acceptable in form and substance
to the Company and its counsel, that registration under the Securities Act is
not required in connection with such transfer. The foregoing notwithstanding,
Stockholder agrees that it shall not transfer any shares of Stock to any person
or entity, nor any officer, director, employee or holder of debt or equity in
any entity that is engaged in the business, or has an affiliate engaged in the
business of pharmacy benefit management services, pharmacy network management,
pharmacy claims adjudication, mail service pharmacy, pharmacy clinical
services, and/or pharmacy outcomes management, or the manufacture of drugs,
biotech products or biologicals.
(b) Sale Notice. At least 30 days prior to making any Third Party
Transfer under Section 2.2(a), the transferring Stockholder will deliver a
written notice (the "SALE NOTICE") to the Company. The Sale Notice will
disclose in reasonable detail the identity of the prospective transferee(s) and
the terms and conditions of the proposed transfer. Stockholder agrees not to
consummate any such transfer until 30 days after the Sale Notice has been
delivered to the Company.
(c) First Refusal Rights. The Company may elect to purchase some or
all of the Stock to be transferred upon the same terms and conditions as those
set forth in the Sale Notice by delivering a written notice of such election to
Stockholder within 30 days after the receipt of the Sale Notice by the Company.
If the Company elects to purchase any shares of Stock, the Company shall
consummate such purchase within 45 days of delivery of notice of intent to
purchase. If the Company has not elected to purchase all of the Stock specified
in the Sale Notice, Stockholder may transfer the Stock specified in the Sale
Notice at a price and on terms no more favorable to the transferee(s) thereof
than specified in the Sale Notice during the 60-day period immediately
following notice of the Company's election not to purchase such shares. Any
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<PAGE> 14
shares of Stock not transferred within such 60-day period will be subject to
the provisions of this Section 2.2(c) upon subsequent transfer.
(d) Non-Cash Consideration. In the event the consideration for the
Stock as disclosed in the Sale Notice is other than cash, a promissory note or
a combination thereof, the price for the Stock shall be the value of that
consideration as agreed to by the transferring Stockholder and the Company, or,
if no agreement can be reached as to the valuation of such consideration, the
fair market value of such consideration as determined by two appraisers (one
appointed by the Stockholder and one appointed by the Company). In the event
the two appraisers are unable to agree on a fair market value within 20 days
after they are appointed, the fair market value of the consideration shall be
the average of the appraised values of the two appraisers; provided, however,
that if the appraised values of the two appraisers differ by more than five
percent (5%) of the higher of the two appraised values, the two respective
appointed appraisers shall select a third appraiser who shall independently,
within 20 days after this appointment, make a determination of the value of the
consideration and the average of the appraised values of the three appraisers
shall be the purchase price and shall be binding on the parties hereto. The
transferring Stockholder and the Company shall each bear the cost of their
respective appraisers and shall share the cost equally of the third appraiser,
if any. Notwithstanding anything herein to the contrary, if an appraisal is
used to determine the value of the consideration pursuant to this Section
2.2(d), the time periods provided for in Sections 2.2(b) and 2.2(c) shall be
tolled from the time of the initial appointment of the two appraisers until a
final appraised value is determined pursuant to this Section 2.2(d).
(e) Public Sale. Notwithstanding the foregoing, at any time after the
first anniversary of the Issuance Date, the Stockholder may sell, pledge or
otherwise transfer shares of the Stock to the public in a market transaction
without complying with the restrictions set forth in Section 2.2(b), (c) and
(d); provided that the transferring Stockholder delivers to the Company an
opinion of counsel, reasonably acceptable in form and substance to the Company
and its counsel, that registration under the Securities Act is not required in
connection with such transfer.
2.3 Legend. The certificates representing the Stock will bear the
following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY BE REOFFERED
AND SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER, CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS
SET FORTH IN A STOCKHOLDER AGREEMENT BETWEEN THE COMPANY AND
ARKANSAS BLUE CROSS BLUE SHIELD, A MUTUAL INSURANCE COMPANY, DATED
AS OF ______________, A COPY OF WHICH MAY BE OBTAINED BY THE
HOLDER HEREOF AT THE
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<PAGE> 15
COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
Any legend endorsed on a certificate pursuant to Section 2.3 hereof
and the stop transfer instructions and record notations with respect thereto
shall be removed and the Company shall issue a certificate without such legend
to the holder thereof at such time as the securities evidenced thereby cease to
be restricted securities
2.4 Extraordinary Transaction. In the event of a merger of the Company
with a third party where the Company is not the surviving entity, sale of a
majority of the capital stock of the Company, or the sale of all or
substantially all of its assets ("EXTRAORDINARY TRANSACTION"), the Stock shall
be entitled to receive the same benefits as the holders of the Common Stock
will receive in the Extraordinary Transaction. The Stockholder agrees to
consent to and execute all required documents in connection with the
Extraordinary Transaction.
2.5 Limitation on Stock Holdings. The Stockholder agrees that in no
event, shall it, either independently or together with its Affiliates, own
Common Stock or rights to acquire Common Stock, that represent, or if converted
to Common Stock would represent, more than ten percent (10%) of the Company's
issued and outstanding Common Stock, without the Company's prior written
consent.
3. Notices.
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if delivered personally, mailed by
certified mail (return receipt requested) or sent by express delivery service,
or facsimile transmission (confirmed by telephone conversation and followed by
overnight delivery) to the parties at the following addresses or at such other
addresses as shall be specified by the parties by like notice:
if to the Company:
Advance Paradigm, Inc.
Attn: General Counsel
545 E. John Carpenter Freeway
Suite 1570
Irving, TX 75062
Fax No.: (972) 830-6196
if to Stockholder:
Arkansas Blue Cross Blue Shield, a mutual insurance company
Attn: General Counsel
----------------------
----------------------
Fax No.:
--------------
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<PAGE> 16
Notice so given shall, in the case of notice so given by mail, be
deemed to be given and received on the fourth calendar day after posting, in
the case of notice so given by express delivery service, on the date of actual
delivery and, in the case of notice so given by facsimile transmission or
personal delivery, on the date of actual transmission or personal delivery, as
the case may be.
4. Severability.
If any provision of this Agreement shall be held to be illegal,
invalid or unenforceable under any applicable law, then such contravention or
invalidity shall not invalidate the entire Agreement. Such provision shall be
deemed to be modified to the extent necessary to render it legal, valid and
enforceable, and if no such modification shall render it legal, valid and
enforceable, then this Agreement shall be construed as if not containing the
provision held to be invalid, and the rights and obligations of the parties
shall be construed and enforced accordingly.
5. Complete Agreement.
This Agreement and those documents expressly referred to herein and of
even date herewith, embody the complete agreement and understanding among the
parties and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have
related to the subject matter hereof in any way.
6. Counterparts.
This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, with the same effect as if
all parties had signed the same document. All such counterparts shall be deemed
an original, shall be construed together and shall constitute one and the same
instrument.
7. Successors and Assigns.
This Agreement is intended to bind and inure to the benefit of and be
enforceable by and against the Stockholder and the Company, and their
respective heirs, successors and assigns. Stockholder hereby agrees not to
transfer or assign, directly or indirectly, any of the Stock unless such
transferee or assignee agrees in writing (i) to be bound by the provisions of
this Agreement and (ii) not to make subsequent assignments or transfers other
than in accordance with this Agreement. Notwithstanding the foregoing, any
holder of the Stock (other than a holder who purchases the stock through a
market sale) shall be bound by the provisions of this Agreement even if such
holder is not a party hereto or otherwise agreed in writing to be bound by the
provisions hereof.
8. CHOICE OF LAW.
THE INTERNAL LAW OF THE STATE OF TEXAS (AND NOT THE LAW OF CONFLICTS)
WILL GOVERN THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT.
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<PAGE> 17
9. Remedies.
Each of the parties to this Agreement will be entitled to enforce its
rights under this Agreement specifically, to recover damages by reason of any
breach of any provision of this Agreement and to exercise all other rights
existing in its favor. The parties hereto agree and acknowledge that money
damages may not be an adequate remedy for any breach of the provisions of this
Agreement and that any party may in its sole discretion apply to any court of
law or equity of competent jurisdiction for specific performance and/or
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement. In the event a party hereto brings an action
under this agreement, the prevailing party in such dispute shall be entitled to
recover from the losing party all fees, costs and expenses of enforcing any
right of such prevailing party under or with respect to this Agreement,
including without limitation such reasonable fees and expenses of attorneys and
accountants, which shall include, without limitation, all fees, costs and
expenses of appeals.
10. Amendments and Waivers.
Any provision of this Agreement may be amended or waived only with the
prior written consent of each of the parties hereto.
11. Confidentiality.
Each of the parties hereto agrees to hold in the strictest confidence
the existence of this Agreement and the terms and conditions hereof.
Specifically, but without limiting the generality of the foregoing, each of the
parties hereto agrees not to disclose the existence of this Agreement or any of
its terms to any third party without the prior written consent of every other
party hereto (unless such disclosure is required by law).
[Signature page follows]
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<PAGE> 18
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first above written.
ADVANCE PARADIGM, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
ARKANSAS BLUE CROSS BLUE SHIELD,
A MUTUAL INSURANCE COMPANY
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
18
<PAGE> 1
Exhibit 4.9
ADVANCE PARADIGM, INC.
WARRANT AGREEMENT
This Warrant Agreement (this "Agreement") dated as of June 12, 1998 is
entered into by and between Advance Paradigm, Inc., a Delaware corporation (the
"Company") and Wellmark Inc., an Iowa mutual insurance company ("Client").
TERMS OF AGREEMENT
NOW THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and Client hereby agree as follows:
Section 1. PHARMACEUTICAL SERVICE AGREEMENT. Reference is made to that
certain Managed Pharmacy Benefit Services Agreement dated January 1, 1998
entered into by and between the Company and Client (the "Services Agreement").
Capitalized terms not otherwise defined herein shall have the meanings given to
them in the Services Agreement.
Section 2. GRANT OF THE RIGHT TO PURCHASE COMMON STOCK. The Company
hereby grants to Client the right, and Client shall be entitled, subject to the
terms and conditions hereinafter set forth, to purchase from the Company
Fifty-Six Thousand Two Hundred Fifty (56,250) shares of its common stock, par
value $0.01 per share (the "Common Stock") set forth below (which number is
referred to herein as the "Initial Exercise Number") at a per share exercise
price equal to the $32 5/8 per share (the "Exercise Price"). The right to
purchase such shares shall be evidenced by five (5) warrant certificates in the
form of Exhibit A hereto with each warrant certificate representing the right to
purchase 20% of the Initial Exercise Number. The Initial Exercise Number and
Exercise Price of such shares are subject to adjustment as provided in Section 4
hereof.
Section 3. EXERCISE OF WARRANT. The purchase rights represented by the
warrant certificate shall vest in consecutive years, with the right to exercise
the first warrant certificate vesting on January 1, 1999 and the right to
exercise each of the other warrant certificates vesting on each January 1
thereafter (each a "vesting date") and will be cumulative; provided, however,
that if on any vesting date the number of lives for which the Company is
providing pharmacy benefit management services under the Services Agreement is
less than one million lives, then the scheduled vesting of the warrant
certificate for such date will be forfeited. Any such forfeiture shall not
affect any previously vested rights or the prospective vesting of rights
hereunder. Each warrant certificate may be exercised only so long as the Company
is the exclusive vendor of pharmacy benefit management services for Client.
Except as otherwise provided for herein, the term of this Warrant Agreement and
the right to purchase Common Stock as described herein shall commence on January
1, 1999 and will end on December 31, 2003 (the "Exercise Period"). No warrant
certificate shall be exercisable after the expiration of the Exercise Period.
Shares of Common Stock purchased upon exercise of each warrant certificate shall
at the time of purchase be paid for in full. To the extent that the right to
purchase shares under any warrant certificate has vested hereunder, such warrant
certificate may be
<PAGE> 2
exercised by written notice to the Company in the form attached to such warrant
certificate, which specifies an exercise date (the "Date of Exercise"),
accompanied by full payment for the shares by wire transfer or certified or
official bank check or the equivalent thereof acceptable to Company. Upon the
exercise of the initial warrant certificate, Client and the Company shall
execute and enter into the Stockholders Agreement attached hereto as Exhibit B
(the "Stockholders Agreement").
At the time of delivery, the Company shall, without stock transfer tax
to the warrant certificate holder, deliver to such holder (or to such other
person) at the principal office of the Company, or such other place as shall be
mutually agreed upon, a certificate or certificates for such shares, provided,
however, that the time of delivery may be postponed by the Company for such
period as may be required for it with reasonable diligence to comply with any
requirements of law. The Company at the time of exercise will require in
addition that the registered owner of the Common Stock deliver an executed copy
of the Stockholder Agreement, an investment representation in form acceptable to
the Company, and the Company will place a legend on the certificate for such
Common Stock restricting the transfer of same. At no time shall the Company have
any obligation or duty to register under the Securities Act of 1933 (the "1933
Act") the Common Stock issuable upon exercise of warrant.
Section 4. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SHARES. The
Exercise Price and number of shares of Common Stock purchasable pursuant to the
exercise of each warrant certificate shall be subject to adjustment from time to
time as follows:
(a) Adjustment for Combinations or Consolidations of Common Stock. In
the event the Company, at any time or from time to time after the date hereof,
effects a subdivision or capital reorganization of its outstanding Common Stock
for a greater or lesser number of shares, then and in each such event the
Initial Exercise Number and the Exercise Price shall be adjusted proportionately
such that Client is entitled to purchase the same percentage of all shares of
the Company's outstanding capital stock then issued and issuable for the same
aggregate consideration as such warrant certificate holder was entitled to
purchase immediately prior to such event.
(b) Adjustment for Certain Dividends and Distributions. In the event
the Company at any time or from time to time after the date hereof shall pay a
dividend payable in Common Stock of the Company, or otherwise make a
distribution of Common Stock to its stockholders, then the Exercise Price shall
be adjusted, from and after the record date of such dividend or the date of such
distribution, to that price determined by multiplying the Exercise Price by a
fraction,
(i) the numerator of which shall be the total number of shares
of capital stock issued and outstanding or deemed to be issued
and outstanding immediately prior to the time of such issuance
or the close of business on such record date; and
(ii) the denominator of which shall be the number of shares of
capital stock issued and outstanding or deemed to be issued
and outstanding immediately prior to the time of such issuance
or the close of business on such record date plus the number
of shares of capital stock to be issued;
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<PAGE> 3
provided, however, that if such record date shall have been fixed and
such dividend is not fully paid or if such distribution is not fully made on the
date fixed therefor, the Exercise Price shall be recomputed accordingly as of
the close of business on such record date or date of distribution and thereafter
the Exercise Price shall be adjusted pursuant to this Section 4(b) as of the
time of actual payment of such dividend or distribution. Client shall thereafter
be entitled to purchase, at the Exercise Price resulting from such adjustment,
the number of shares of Common Stock (calculated to the nearest whole share)
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of shares of Common Stock issuable upon the exercise
hereof immediately prior to such adjustment and dividing the product thereof by
the Exercise Price resulting from such adjustment.
(c) Number of Shares. Upon any adjustment of the Exercise Price in
accordance with Section 4(b), Client shall thereafter (until another such
adjustment) be entitled to purchase, at the new Exercise Price, the number of
shares, calculated to the nearest full share, obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
shares purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the new Exercise Price resulting from such
adjustment.
Section 5. RESERVATION AND AUTHORIZATION OF COMMON STOCK. The Company
shall at all times reserve and keep available, free from preemptive rights, out
of its authorized but unissued Common Stock, solely for the purposes of
effecting the exercise of all outstanding warrant certificates, the full number
of shares of Common Stock issuable upon the exercise of all outstanding warrant
certificates. For the purpose of this Section 5, the full number of shares of
Common Stock issuable upon the exercise of all outstanding warrant certificates
shall be computed as if at the time of computation of such number of shares of
Common Stock all outstanding warrant certificates were held by a single holder.
The Company shall from time to time, in accordance with applicable law, increase
the authorized amount of its Common Stock if at any time the authorized amount
of its Common Stock remaining unissued shall not be sufficient to permit the
exercise of all warrant certificates at the time outstanding.
Section 6. TRANSFERABILITY.
(a) The warrant certificates are not transferable by Client except to
the Company or affiliates of Client. Any permitted transfer of a warrant
certificate shall be recorded on the books of the Company upon receipt by the
Company of a notice of transfer in the form attached hereto as Exhibit B, at its
principal offices and the payment to the Company of all transfer taxes and other
governmental charges imposed on such transfer. The shares of Common Stock
purchased by Client are not transferable except as provided in the Stockholders
Agreement.
(b) Unless and until otherwise permitted by this Section and the
Stockholders Agreement, each certificate representing Common Stock initially
issued upon the exercise of each warrant certificate (a "Stock Certificate"),
and each certificate for Common Stock issued to any subsequent transferee of any
such certificate, shall be stamped or otherwise imprinted with a legend in
substantially the following form:
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<PAGE> 4
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY BE
REOFFERED AND SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION
FROM SUCH REGISTRATION IS AVAILABLE. THE SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL
RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE OPTIONS AND
CERTAIN OTHER AGREEMENTS SET FORTH IN A STOCKHOLDER AGREEMENT
BETWEEN THE COMPANY AND CLIENT, DATED AS OF [DATE], A COPY OF
WHICH MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S
PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
Prior to any permitted transfer of a warrant certificate or
any Stock Certificate, the holder thereof shall furnish, at the expense of such
holder, to the Company an opinion of counsel, reasonably satisfactory in form
and substance to the Company, to the effect that such transfer is exempt from
registration under the Securities Act. Upon any exercise of any warrant
certificate for shares of Common Stock to be registered in the name of a person
other than Client, Client shall furnish, at the expense of Client, to the
Company an opinion of counsel (which may be the General Counsel of Client),
reasonably satisfactory in form and substance to the Company, to the effect that
the issuance of the shares of Common Stock to such other person upon exercise of
the warrant certificate is exempt from registration under the Securities Act.
Section 7. FRACTIONAL SHARES. The Company shall not be required to
issue a fractional share of stock upon any exercise of a warrant certificate. As
to any final fraction of a share that Client would otherwise be entitled to
purchase upon exercise of a warrant certificate, the Company shall, if it does
not issue a fractional share, pay a cash adjustment in respect of such final
fraction in an amount equal to the same fraction of the Exercise Price per share
of Common Stock.
Section 8. EXCHANGE AND REPLACEMENT OF WARRANT. In the event of loss,
theft or destruction of a warrant certificate, the Company will make and deliver
a new warrant certificate of like tenor, in lieu of such warrant certificate,
upon receipt by the Company of evidence reasonably satisfactory to it of such
loss, theft, or destruction and indemnity or security reasonably satisfactory to
it, and reimbursement to the Company of all reasonable expense incidental
thereto. In the case of mutilation of a warrant certificate and upon surrender
and cancellation of such warrant certificate, the Company will make and deliver
a new warrant certificate of like tenor, in lieu of such warrant certificate.
Section 9. RIGHTS PRIOR TO EXERCISE OF WARRANT. Prior to the initial
exercise of a warrant certificate, Client shall not be entitled to any rights of
a stockholder of the Company with respect to the Common Stock for which such
warrant certificate may then be exercisable, including without limitation the
right to vote, to receive dividends or other distributions or to exercise any
preemptive rights and shall not be entitled to receive any notice of any
proceedings of the Company except as provided herein.
Section 10. AUTHORIZATION AND ISSUANCE. The Company represents and
warrants to Client that it has the corporate power and authority to issue the
warrant certificates; the
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<PAGE> 5
warrant certificates have been duly authorized, executed and delivered and are
duly and validly issued, fully paid and nonassessable; the issuance of the
warrant certificates, and the shares of Common Stock issuable upon their
exercise, are not prohibited or restricted by the Certificate of Incorporation
or Bylaws of the Company or any material agreement to which the Company is a
party; except for those agreements for which the Company has received the
requisite consents or waivers; and the shares of Common Stock issuable upon
exercise of the warrant certificates, when issued upon exercise of the warrant
certificates pursuant to the terms hereof, will be duly and validly issued,
fully paid and nonassessable. The Company will not, by amendment to its Articles
of Incorporation or Bylaws or through reorganization, merger, sale of assets or
otherwise, avoid or seek to avoid its performance hereunder.
Section 11. REPRESENTATIONS AND COVENANTS OF CLIENT. This Warrant
Agreement has been entered into by the Company in reliance upon the following
representations and covenants of Client:
(a) Investment Purpose. The right to acquire the Common Stock issuable
upon exercise of Client's rights contained herein will be acquired for
investment and not with a view to the sale or distribution of any part thereof,
and Client has no present intention of selling or engaging in any public
distribution of the same except pursuant to a registration or exemption.
(b) Private Issue. Client understands (i) that the Common Stock
issuable upon exercise of the warrant certificates is not registered under the
1933 Act or qualified under applicable state securities laws on the ground that
the issuance contemplated by this Warrant Agreement will be exempt from the
registration and qualifications requirements thereof, and (ii) that the
Company's reliance on such exemption is predicated on the representations set
forth in this Section 11.
(c) Financial Risk. Client has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of its investment, and has the ability to bear the economic risks of its
investment.
(d) Risk of No Registration. Client understands that if the Company
does not register with the Securities and Exchange Commission pursuant to
Section 11 of the 1933 Act, or file reports pursuant to Section 15(d) of the
Securities Exchange Act of 1934 (the "1934 Act"), or if a registration statement
covering the securities under the 1933 Act is not in effect when it desires to
sell the Common Stock issuable upon exercise of the right to purchase, it may be
required to hold such securities for an indefinite period. Client also
understands that any sale of its rights to purchase Common Stock which might be
made by it in reliance upon Rule 144 under the 1933 Act may be made only in
accordance with the terms and conditions of that Rule.
(e) Stockholders Agreement. Prior to the exercise of any warrant
certificate, Client agrees to, and to cause any permitted transferee to, enter
into, execute and perform the Stockholders Agreement.
Section 12. GENERAL.
(a) Expenses. Each party shall bear and pay all costs and expenses
incurred by them respecting the transactions contemplated herein and all
investigations and proceedings in
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<PAGE> 6
connection therewith, including, without limitation, fees, commissions or
expenses of their respective counsel, accountants and financial advisors.
(b) Notice. Any notice required to be given pursuant to the terms and
provisions of this Agreement shall be in writing and shall be sent by certified
mail, return receipt requested, or by overnight delivery service, or facsimile
transmission confirmed by telephone and followed by overnight delivery to the
parties at the addresses below or such other address as shall be specified by
the parties by like notice
to the Company at:
Advance Paradigm, Inc.
Attn: General Counsel
545 E. John Carpenter Freeway, Suite 1570
Irving, Texas 75062
Fax No.: 972/830-6196
and to Client at:
Wellmark, Inc.
Attn. Linda Sufficool
636 Grand Avenue
Des Moines, Iowa 50309
Fax No.: 515/245-6000
Notice so given shall, in the case of notice so given by mail, be
deemed to be given and received on the fourth calendar day after posting, in the
case of notice so given by express delivery service, on the date of actual
delivery and, in the case of notice so given by facsimile transmission or
personal delivery, on the date of actual transmission or personal delivery, as
the case may be.
(c) Binding Nature and Assignment. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their successors and assigns.
Neither party may assign this Agreement without the prior written consent of the
other; provided, however, that either party may transfer or assign its rights
and obligations under this Agreement, to any affiliate, and provided further
that no such assignment shall have the effect of releasing such party from any
of its obligations under this Agreement.
(d) Headings and Interpretation. The headings of the various sections
of this Agreement are inserted for convenience only and do not, expressly or by
implication, limit, define or extend the specific terms of the section so
designated.
(e) Governing Law. The validity, enforceability, and interpretation of
this Agreement shall be determined and governed by the internal laws of the
State of Texas (and not the law of conflicts).
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<PAGE> 7
(f) Entire Agreement. This Agreement and those documents expressly
referred to herein contain all the terms and conditions agreed upon by the
parties, and supersedes all prior understandings, writings, proposals,
representations, or communications, oral or written, of the parties hereto.
(g) Authority. Company and Client warrant that each has full power and
authority to enter into and perform this Agreement, and the person signing this
Agreement on behalf of each party certifies that such person has been properly
authorized and empowered to enter into this Agreement on behalf of such party.
(h) Non-Waiver. The failure of either party to insist, in any one or
more instances, upon performance of any of the terms, covenants or conditions of
this Agreement shall not be construed as a waiver or a relinquishment of any
right or claim granted or arising hereunder or of the future performance of any
such term, covenant, or condition, and such failure shall in no way affect the
validity of this Agreement or the rights and obligations of the parties
hereunder.
(i) Survival. Should any part, term or condition of this Agreement be
declared illegal or unenforceable or in conflict with any other laws, the
remaining provisions shall be valid and not affected thereby.
(j) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which taken
together shall constitute one and the same instrument.
(k) Further Assurances. From time to time upon request and without
further consideration, the parties hereto shall, and shall cause their
subsidiaries and affiliates, to execute, deliver or acknowledge such documents
and do such further acts as the other party hereto may reasonably require to
effectuate its obligations contemplated by this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their proper and duly authorized officers on the date
first above written. By executing the Agreement, the undersigned individuals
hereby warrant and represent that they have read this Agreement in its entirety
and agree to all its terms.
ADVANCE PARADIGM, INC.
By:
David D. Halbert
Chairman of the Board and Chief Executive Officer
WELLMARK, INC.
By:
----------------------------------------------
Name:
--------------------------------------------
Title:
-------------------------------------------
7
<PAGE> 8
EXHIBITS
<TABLE>
<S> <C>
Exhibit A Warrant Certificate
Exhibit B Stockholders Agreement
</TABLE>
8
<PAGE> 9
EXHIBIT A
THIS WARRANT CERTIFICATE AND THE UNDERLYING SHARES HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD OR TRANSFERRED
UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH
SECURITIES OR THE COMPANY RECEIVES AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL
FOR THE COMPANY) STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.
For Purchase of Shares of Common Stock
of
ADVANCE PARADIGM, INC.
June 12, 1998
THIS CERTIFIES THAT Wellmark, Inc. ("Client"), or registered
transferees or assigns, is entitled, subject to the terms and conditions set
forth in this warrant certificate, to purchase from Advance Paradigm, Inc., a
Delaware corporation (the "Company"), 11,250 (the "Exercise Number") fully paid
and nonassessable shares of Common Stock, $0.01 par value per share, of the
Company (the "Common Stock"), at any time during the Exercise Period upon
payment in full of the Exercise Price. The Initial Exercise Number and Exercise
Price shall be subject to adjustment as set forth in the Warrant Agreement
referred to below. This warrant certificate is issued pursuant to a Warrant
Agreement between Client and the Company dated as of June 12, 1998 (the "Warrant
Agreement"), and is subject to all the terms thereof, including the limitations
on transferability set forth therein. Capitalized terms used herein as defined
terms but not otherwise defined shall have the meaning assigned to such term in
the Warrant Agreement.
This warrant certificate may be exercised, by the holder hereof, for
all shares of Common Stock covered hereby, by the presentation and surrender of
this warrant certificate together with the duly executed Election to Purchase in
the form attached as hereto, at the principal office of the Company (or at such
other address as the Company may designate by notice in writing to the holder
hereof at the address of such holder appearing on the books of the Company), and
upon payment to the Company of the Exercise Price and execution of the
Stockholders Agreement as set forth in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this warrant certificate to
be duly executed and delivered by its duly authorized officer as an instrument
under seal as of the date of first above written.
ADVANCE PARADIGM, INC.
By:
-----------------------------------
David D. Halbert
Chairman of the Board and
Chief Executive Officer
<PAGE> 10
ELECTION TO PURCHASE
TO: ADVANCE PARADIGM, INC. (the "Company")
The undersigned, owner of the accompanying warrant certificate hereby
irrevocably exercises the option to purchase ____ shares of Common Stock in
accordance with the terms of such warrant certificate, directs that the shares
issuable and deliverable upon such purchase (together with any check for a
fractional interest) be issued in the name of and delivered to the undersigned,
and makes payment in full therefor at the Exercise Price provided or referenced
in such warrant certificate.
COMPLETE FOR REGISTRATION OF SHARES OF COMMON STOCK ON THE STOCK TRANSFER
RECORDS MAINTAINED BY THE COMPANY:
- --------------------------------------------------------------------------------
Name of Warrant Certificate Holder
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
Federal ID Tax Number or Social Security Number
- --------------------------------------------------------------------------------
Date of Exercise (must be at least fifteen days after the date of this Notice)
Wellmark, Inc.
-----------------------------------------------
Signature
-----------------------------------------------
Title
-----------------------------------------------
Date
10
<PAGE> 11
EXHIBIT B
STOCKHOLDER AGREEMENT
This Stockholder Agreement dated as of ___________, by and among
Wellmark, Inc. an Iowa mutual insurance company (the "STOCKHOLDER"), and Advance
Paradigm, Inc., a Delaware corporation (the "COMPANY").
PRELIMINARY STATEMENTS
Pursuant to the terms and conditions of the Warrant Agreement, dated as
of June 12, 1998, by and between the Company and Stockholder, the Company agreed
to issue five (5) warrant certificates to acquire shares of the Company's common
stock, par value $.01 per share (the "COMMON STOCK"). Pursuant to the terms of
the Warrant Agreement, the Stockholder agreed to execute and enter into this
Agreement prior to the issuance of any shares of Common Stock thereunder.
NOW THEREFORE, in consideration of the premises and the mutual
agreements contained herein and for other good, valuable and binding
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree as follows:
STATEMENT OF AGREEMENT
1. Restricted Stock. The terms and conditions of this Agreement shall
apply to all shares of Common Stock issued to Stockholder pursuant to the
Warrant Agreement (the "STOCK").
2. Restrictions on Transfers.
2.1 Transfers to Affiliate.
(a) Transfers to Affiliates. Stockholder shall be entitled to transfer
the Stock held by it to entities that directly or indirectly control, are
controlled by, or are under common control with Stockholder (each, an
"AFFILIATE"), provided that any such Affiliates first deliver to the Company
their written acknowledgment of, and agreement to be bound by, the terms and
provisions contained in this Agreement; and the Stockholder delivers to the
Company an opinion of counsel, reasonably acceptable in form and substance to
the Company and its counsel, that registration under the Securities Act is not
required in connection with such transfer. The foregoing notwithstanding,
Stockholder shall not, without the prior written consent of the Company which
consent will not be unreasonably withheld, transfer any shares of Stock to any
Affiliate, nor any officer, director, employee or holder of debt or equity in
any Affiliate that is primarily engaged in the business of pharmacy benefit
management services, pharmacy network management, pharmacy claims adjudication,
mail service pharmacy, pharmacy clinical services and/or the manufacture of
drugs, biotech products or biologicals.
11
<PAGE> 12
(b) Affiliates' Proxy. In the event that Stockholder transfers less
than all of its Stock pursuant to Section 2.1(a), Stockholder shall exercise all
of the rights inuring under this Agreement with respect to such transferred
Stock and the transferees shall grant Stockholder proxies to exercise such
rights. In the event that Stockholder transfers all of its Stock pursuant to
Section 2.1(a), one such transferee reasonably acceptable to the Company shall
be designated by Stockholder to exercise all rights inuring under this Agreement
with respect to such Stock and the other transferees shall grant such designated
transferee proxies to exercise such rights.
2.2 Restrictions on Third Party Transfers of the Stock.
(a) General. During the first two years following the date the Stock is
issued the ("ISSUANCE DATE"), Stockholder agrees that it will not sell, pledge
or otherwise transfer any interest in any shares of the Stock to any party that
is not an Affiliate, without the prior written consent of the Company. At any
time after the second anniversary of the Issuance Date, the Stockholder may
sell, pledge or otherwise transfer shares of the Stock to third parties ("THIRD
PARTY TRANSFER"); provided that such transfer is in accordance with this Section
2.2, and provided further that the transferring Stockholder delivers to the
Company an opinion of counsel, reasonably acceptable in form and substance to
the Company and its counsel, that registration under the Securities Act is not
required in connection with such transfer. The foregoing notwithstanding,
Stockholder agrees that it shall not transfer any shares of Stock to any person
or entity, nor any officer or director in any entity that is primarily engaged
in the business, or has an affiliate engaged in the business of pharmacy benefit
management services, pharmacy network management, pharmacy claims adjudication,
mail service pharmacy, pharmacy clinical services, and/or pharmacy outcomes
management, or the manufacture of drugs, biotech products or biologicals without
the prior written consent of the Company.
(b) Sale Notice. At least 30 days prior to making any Third Party
Transfer under Section 2.2(a), the transferring Stockholder will deliver a
written notice (the "SALE NOTICE") to the Company. The Sale Notice will disclose
in reasonable detail the identity of the prospective transferee(s) and the terms
and conditions of the proposed transfer. Stockholder agrees not to consummate
any such transfer until 30 days after the Sale Notice has been delivered to the
Company.
(c) First Refusal Rights. The Company may elect to purchase all of the
Stock to be transferred upon the same terms and conditions as those set forth in
the Sale Notice by delivering a written notice of such election to Stockholder
within 15 days after the receipt of the Sale Notice by the Company. If the
Company elects to purchase such shares of Stock, the Company shall consummate
such purchase within 15 days of delivery of notice of election to purchase. If
the Company has not elected to purchase all of the Stock specified in the Sale
Notice, Stockholder may transfer the Stock specified in the Sale Notice at a
price and on terms no more favorable to the transferee(s) thereof than specified
in the Sale Notice during the 60-day period immediately following notice of the
Company's election not to purchase such shares. Any shares of Stock not
transferred within such 60-day period will be subject to the provisions of this
Section 2.2(c) upon subsequent transfer.
12
<PAGE> 13
(d) Non-Cash Consideration. In the event the consideration for the
Stock as disclosed in the Sale Notice is other than cash, a promissory note or a
combination thereof, the price for the Stock shall be the value of that
consideration as agreed to by the transferring Stockholder and the Company, or,
if no agreement can be reached as to the valuation of such consideration, the
fair market value of such consideration as determined by two appraisers (one
appointed by the Stockholder and one appointed by the Company). In the event the
two appraisers are unable to agree on a fair market value within 10 days after
they are appointed, the fair market value of the consideration shall be the
average of the appraised values of the two appraisers; provided, however, that
if the appraised values of the two appraisers differ by more than five percent
(5%) of the higher of the two appraised values, the two respective appointed
appraisers shall select a third appraiser who shall independently, within 10
days after this appointment, make a determination of the value of the
consideration and the average of the appraised values of the three appraisers
shall be the purchase price and shall be binding on the parties hereto. The
transferring Stockholder and the Company shall each bear the cost of their
respective appraisers and shall share the cost equally of the third appraiser,
if any. Notwithstanding anything herein to the contrary, if an appraisal is used
to determine the value of the consideration pursuant to this Section 2.2(d), the
time periods provided for in Sections 2.2(b) and 2.2(c) shall be tolled from the
time of the initial appointment of the two appraisers until a final appraised
value is determined pursuant to this Section 2.2(d).
(e) Public Sale. Notwithstanding the foregoing, at any time after the
first anniversary of the Issuance Date, the Stockholder may sell, pledge or
otherwise transfer shares of the Stock to the public in a market transaction
without complying with the restrictions set forth in Section 2.2(b), (c) and
(d).
2.3 Legend. The certificates representing the Stock will bear the
following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY BE
REOFFERED AND SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION
FROM SUCH REGISTRATION IS AVAILABLE. THE SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL
RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE OPTIONS AND
CERTAIN OTHER AGREEMENTS SET FORTH IN A STOCKHOLDER AGREEMENT
BETWEEN THE COMPANY AND WELLMARK, INC., DATED AS OF
[DATE], A COPY OF WHICH MAY BE OBTAINED BY THE HOLDER HEREOF
AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
Any legend endorsed on a certificate pursuant to Section 2.3 hereof and
the stop transfer instructions and record notations with respect thereto shall
be removed and the Company shall issue a certificate without such legend to the
holder thereof at such time as the securities evidenced thereby cease to be
restricted securities
13
<PAGE> 14
2.4 Extraordinary Transaction. In the event of a merger of the Company
with a third party where the Company is not the surviving entity, sale of a
majority of the capital stock of the Company, or the sale of all or
substantially all of its assets ("EXTRAORDINARY TRANSACTION"), the Stock shall
be entitled to receive the same benefits as the holders of the Common Stock will
receive in the Extraordinary Transaction. The Stockholder agrees to consent to
and execute all required documents in connection with the Extraordinary
Transaction.
2.5 Limitation on Stock Holdings. The Stockholder agrees that in no
event, shall it, either independently or together with its Affiliates, own
Common Stock or rights to acquire Common Stock, that represent, or if converted
to Common Stock would represent, more than ten percent (10%) of the Company's
issued and outstanding Common Stock, without the Company's prior written
consent.
3. Notices.
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if delivered personally, mailed by
certified mail (return receipt requested) or sent by express delivery service,
or facsimile transmission (confirmed by telephone conversation and followed by
overnight delivery) to the parties at the following addresses or at such other
addresses as shall be specified by the parties by like notice:
if to the Company:
Advance Paradigm, Inc.
Attn: General Counsel
545 E. John Carpenter Freeway
Suite 1570
Irving, Texas 75062
Fax No.: (972) 830-6196
if to Stockholder:
Wellmark, Inc.
Attn: Linda Sufficool
636 Grand Avenue
Des Moines, Iowa 50309
Fax No.: (515) 245-6000
Notice so given shall, in the case of notice so given by certified
mail, be deemed to be given and received on the date of actual delivery, in the
case of notice so given by express delivery service, on the date of actual
delivery and, in the case of notice so given by facsimile transmission or
personal delivery, on the date of actual transmission or personal delivery, as
the case may be.
14
<PAGE> 15
4. Severability.
If any provision of this Agreement shall be held to be illegal, invalid
or unenforceable under any applicable law, then such contravention or invalidity
shall not invalidate the entire Agreement. Such provision shall be deemed to be
modified to the extent necessary to render it legal, valid and enforceable, and
if no such modification shall render it legal, valid and enforceable, then this
Agreement shall be construed as if not containing the provision held to be
invalid, and the rights and obligations of the parties shall be construed and
enforced accordingly.
5. Complete Agreement.
This Agreement and those documents expressly referred to herein and of
even date herewith, embody the complete agreement and understanding among the
parties and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way.
6. Counterparts.
This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, with the same effect as if
all parties had signed the same document. All such counterparts shall be deemed
an original, shall be construed together and shall constitute one and the same
instrument.
7. Successors and Assigns.
This Agreement is intended to bind and inure to the benefit of and be
enforceable by and against the Stockholder and the Company, and their respective
heirs, successors and assigns. Stockholder hereby agrees not to transfer or
assign, directly or indirectly, any of the Stock (other than through a market
sale) unless such transferee or assignee agrees in writing (i) to be bound by
the provisions of this Agreement and (ii) not to make subsequent assignments or
transfers other than in accordance with this Agreement. Notwithstanding the
foregoing, any holder of the Stock (other than a holder who purchases the Stock
through a market sale) shall be bound by the provisions of this Agreement even
if such holder is not a party hereto or otherwise agreed in writing to be bound
by the provisions hereof.
8. CHOICE OF LAW.
THE INTERNAL LAW OF THE STATE OF TEXAS (AND NOT THE LAW OF CONFLICTS)
WILL GOVERN THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT.
9. Remedies.
Each of the parties to this Agreement will be entitled to enforce its
rights under this Agreement specifically, to recover damages by reason of any
breach of any provision of this Agreement and to exercise all other rights
existing in its favor. The parties hereto agree and
15
<PAGE> 16
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction for specific
performance and/or injunctive relief in order to enforce or prevent any
violations of the provisions of this Agreement. In the event a party hereto
brings an action under this agreement, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
of enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
16
<PAGE> 17
10. Amendments and Waivers.
Any provision of this Agreement may be amended or waived only with the
prior written consent of each of the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.
ADVANCE PARADIGM, INC.
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
WELLMARK, INC.
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
17
<PAGE> 1
EXHIBIT 10.19
COMMERCIAL LEASE AGREEMENT
CRIN - RICHARDSON I, L.P.
(LANDLORD)
AND
ADVANCE PARADIGM, INC.
(TENANT)
----------------------------------------
Address: 1300 East Campbell Road
Richardson, TX 75081
----------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
1. PREMISES, TERM, AND EXISTING IMPROVEMENTS................................................................1
2. BASE RENT AND ADDITIONAL RENT............................................................................1
3. TAXES....................................................................................................3
4. LANDLORD'S MAINTENANCE...................................................................................3
5. TENANT'S MAINTENANCE AND REPAIR OBLIGATIONS..............................................................4
7. WINDOW TREATMENTS........................................................................................5
8. UTILITIES................................................................................................5
9. INSURANCE................................................................................................6
10. CASUALTY DAMAGE..........................................................................................6
11. LIABILITY, INDEMNIFICATION...............................................................................6
12. USE......................................................................................................7
13. INSPECTION...............................................................................................7
14. ASSIGNMENT AND SUBLETTING................................................................................7
15. CONDEMNATION.............................................................................................9
16. SURRENDER OF PREMISES; HOLDING OVER......................................................................9
17. QUIET ENJOYMENT.........................................................................................10
18. EVENTS OF DEFAULT.......................................................................................10
19. REMEDIES................................................................................................10
20. LANDLORD'S DEFAULT......................................................................................12
21. MORTGAGES...............................................................................................12
22. ENCUMBRANCES............................................................................................12
23. MISCELLANEOUS...........................................................................................12
24. NOTICES.................................................................................................14
25. HAZARDOUS WASTE.........................................................................................14
26. LANDLORD'S LIEN.........................................................................................15
27. NO OFFER................................................................................................15
28. NO WARRANTIES...........................................................................................15
29. EXHIBITS................................................................................................15
30. SPECIAL PROVISIONS......................................................................................16
</TABLE>
i
<PAGE> 3
LIST OF DEFINED TERMS
<TABLE>
<CAPTION>
Page No.
<S> <C>
AAA.................................................................7
Abatement Period....................................................1
Additional Rent.....................................................1
Additional Space..................................................E-1
Affiliate...........................................................9
Base Rent...........................................................1
Building............................................................1
Building Structure..................................................3
Claimant ...........................................................9
Commencement Date...................................................1
Construction Allowance..............................................4
Environmental Law..................................................11
Event of Default....................................................7
Existing Improvements...............................................1
Extension Notice..................................................C-1
Generator..........................................................12
Hazardous Substances...............................................11
HVAC System.........................................................3
including..........................................................10
Initial Improvements...............................................4
Land................................................................1
Landlord............................................................1
Landlord's Mortgagee................................................9
Landlord's Proposal...............................................D-1
Law.................................................................9
Laws................................................................9
Lease...............................................................1
Lease Month.........................................................2
Legal Requirements.................................................12
Loss................................................................5
Mortgage............................................................9
MSDS...............................................................11
Need................................................................3
New Parking Area Construction Costs..............................D-1
New Parking Area.................................................D-1
Offer Notice......................................................E-1
Operating Expenses..................................................1
Parking Area Construction Financing...............................D-1
Permitted Activities...............................................11
Permitted Materials................................................11
Permitted Transfer..................................................6
Permitted Transferee................................................6
Possession Date.....................................................1
Premises............................................................1
Primary Lease.......................................................9
Rent................................................................2
Repair Allowance..................................................F-1
Repair Period.......................................................5
Sign...............................................................12
Sign Requirements..................................................12
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
Taking..............................................................7
Tangible Net Worth..................................................6
Taxes...............................................................2
Tenant..............................................................1
Tenant Party.......................................................10
Term................................................................1
Third Party Offer.................................................E-1
Total Construction Costs............................................4
Transfer............................................................6
Vacation Date.......................................................5
Work..............................................................B-1
Working Drawings..................................................B-1
</TABLE>
iii
<PAGE> 5
LEASE AGREEMENT
This Lease Agreement (this "LEASE") is entered into by CRIN-RICHARDSON I,
L.P., a Delaware limited partnership ("LANDLORD"), and ADVANCE PARADIGM, INC., a
Delaware corporation ("TENANT").
1. PREMISES, TERM, AND EXISTING IMPROVEMENTS
(a) Landlord leases to Tenant, and Tenant leases from Landlord, the
real property described on Exhibit A (the "PREMISES"), which includes the
approximately 52,000 rentable square foot building (the "BUILDING") located on
the real property described on Exhibit A1 (the "LAND"), subject to the terms and
conditions in this Lease. The calculation of rentable square feet contained
within the Premises shall be subject to measurement and verification by
Landlord's and Tenant's architects according to BOMA Standards, and in the event
of a variation, Landlord and Tenant agree to amend this Lease accordingly.
(b) The Lease term shall be 132 months, beginning on the Commencement
Date (defined below) (the "TERM", which defined term shall include all renewals
and extensions of the Term); however, if the Commencement Date is not the first
day of a calender month, then the Term shall end on the last day of the
132-month period that begins with the first day of the first full calendar month
of the Term. The "POSSESSION DATE" shall mean the date that the current tenant
of the Building has vacated the Premises. Landlord shall provide Tenant
immediate written notice of the Possession Date and amount of prepaid Rent due
in accordance with this section and Section 2(d). The "COMMENCEMENT DATE" shall
be the earlier to occur of (i) the date on which Tenant occupies more than 3,500
square feet on of the Premises and begins conducting business therein, or (ii)
90 days after the Possession Date; provided, however, that if the Possession
Date has not occurred by August 15, 1998, then Landlord shall abate Base Rent
and additional Rent under Section 2 (b) from the date Tenant would otherwise be
obligated to commence paying Rent hereunder, for a period (the "ABATEMENT
PERIOD") equal to one day for each day after August 15, 1998 that possession of
the Premises is not so tendered to Tenant; provided further, however, that if
the Possession Date has not occurred by September 30, 1998, either Landlord or
Tenant may terminate this Lease by delivering written notice thereof to the
other. If either party terminates this Lease pursuant to this Section 1.(b),
Landlord shall reimburse Tenant for Tenant's out-of-pocket expenses relating to
this Lease.
(c) Tenant may during the Term, at its sole risk and expense, use any
existing fixtures, improvements or equipment in the Premises (the "EXISTING
IMPROVEMENTS"). Unless expressly stated otherwise in this section, Landlord
makes no representation or warranties regarding the Existing Improvements,
including without limitation that the Existing Improvements comply with any Laws
(defined below). Landlord shall not be required to perform any repairs other
than those outlined on Exhibit F attached hereto or maintenance of the Existing
Improvements. By occupying the Premises, Tenant shall have accepted the Premises
in their "As-Is" condition, subject to Exhibit F. Landlord warrants that on the
Possession Date Landlord will own all Existing Improvements constituting
non-trade fixtures then in the Premises.
2. BASE RENT AND ADDITIONAL RENT
(a) Tenant shall pay to Landlord "BASE RENT", in advance, without
demand, deduction or set off, unless otherwise specified herein, equal to the
following amounts for the following months of the term:
<TABLE>
<CAPTION>
===========================================================
Lease Month Monthly Base Rent
- -----------------------------------------------------------
<S> <C>
1 through 12 $36,250.00
- -----------------------------------------------------------
13 through 72 $60,812.50
- -----------------------------------------------------------
73 through 132 $66,879.16
===========================================================
</TABLE>
1
<PAGE> 6
(b) Tenant shall pay, as Additional Rent, all costs incurred in
owning, managing, operating and maintaining the Premises and the facilities and
services provided for the use of Tenant (collectively, "OPERATING EXPENSES"),
including the following items: (1) Taxes (defined below) and the cost of any tax
consultant employed to assist Landlord in determining the fair tax valuation of
the Premises; (2) the cost of insurance; (3) the cost of management fees and
expenses; (4) the cost of dues actually incurred by Landlord, assessments, and
other charges applicable to the Premises payable to any property or community
owner association under restrictive covenants or deed restrictions to which the
Premises are subject; and (5) alterations, additions, and improvements made by
Landlord to comply with Law (defined below). Additional Rent under this Section
2.(b) shall be payable by Tenant to Landlord in monthly installments equal to
1/12 of Landlord's estimate of the annual Operating Expenses. The initial
monthly payments are based upon Landlord's estimate of the Operating Expenses
for the year in question, and shall be increased or decreased annually to
reflect the projected actual Operating Expenses for that year. Within 90 days
after each calendar year or as soon thereafter as is reasonably practicable,
Landlord shall deliver to Tenant a statement setting forth the actual Operating
Expenses for such year. If Tenant's total payments in respect of Operating
Expenses for any year are less than the Operating Expenses for that year, Tenant
shall pay the difference to Landlord within ten business days after receipt of
Landlord's written request therefor; if such payments are more than such
Operating Expenses, Landlord shall retain such excess and credit it against
Tenant's future annual payments. Operating Expenses shall not include the
following: (A) any costs for interest, amortization, or other payments on loans
to Landlord; (B) federal income taxes imposed on or measured by the income of
Landlord from the operation of the Building; (C) rents under ground leases; (D)
costs incurred in selling, syndicating, financing, mortgaging, or hypothecating
any of Landlord's interests in the Premises; and (E) overhead and profit
increment paid to Affiliates of Landlord or its partners for services (including
insurance) on or to the Building, to the extent that the costs of such services
exceed competitive costs for such services rendered by persons or entities of
similar skill, competence and experience, other than an Affiliate of Landlord or
its partners. There shall be no duplication of costs for reimbursements in
calculating Operating Expenses. The amounts of the initial monthly installments
of Base Rent and Operating Expenses (and the portion thereof attributable to
Taxes) are as follows:
<TABLE>
<S> <C>
Base Rent (Section 2.(a)).............................. $36,250.00
Operating Expenses, excluding Taxes (Section 2.(b)).... $ 1,511.88
Taxes (Sections 2.(b) and 3.(a))....................... $ 5,416.67
Total initial monthly payment.......................... $43,178.55
=========
</TABLE>
(c) All payments and reimbursements required to be made by Tenant
under this Lease shall constitute "RENT" (herein so called) and shall be payable
without demand, deduction or set off, unless otherwise specified.
(d) As used herein, the term "LEASE MONTH" shall mean each calendar
month during the Term. If the Commencement Date does not occur on the first day
of a calendar month, the Rent for the period from the Commencement Date through
the last day of such calendar month shall be included in the second full Lease
Month, and Tenant shall pay as monthly Rent an amount for such partial month
equal to $43,178.55 multiplied by a fraction whose numerator is the number of
days in the Term which falls within such month and whose denominator is the
number of days in such month. The Rent for the first full Lease Month shall be
prepaid within three (3) business days of receipt of Landlord's written notice
of the Possession Date; thereafter, monthly installments of Rent and additional
rent shall be due on the first day of each calendar month following the
Commencement Date. Any abatement amount accrued under Section 1.(b) not deducted
from the first full Lease Month Rent shall be deducted by Tenant from the second
full Lease Month Rent.
(e) All payments required of Tenant hereunder shall bear interest from
the date due until paid at the maximum lawful rate. Alternatively, after
Landlord has twice delivered to Tenant written notice of its failure to pay Rent
when due, then Landlord may, without delivering to Tenant notice of such
delinquency, charge Tenant a fee equal to 5% of any future delinquency payment
during the 12-month period following such delinquency to reimburse
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Landlord for its cost and inconvenience as a consequence of Tenant's
delinquency. In no event, however, shall the charges permitted under this
Section 2.(e) or elsewhere in this Lease, to the extent they are considered to
be interest under applicable law, exceed the maximum lawful rate of interest.
3. TAXES.
(a) Landlord shall pay all taxes, assessments and governmental charges
whether federal, state, county, or municipal and whether they are imposed by
taxing or management districts or authorities presently existing or hereafter
created (collectively, "TAXES") that accrue against the Premises. If, during the
Term, there is levied, assessed or imposed on Landlord a capital levy or other
tax directly on the Rent or a franchise tax, assessment, levy or charge measured
by or based, in whole or in part, upon Rent, then all such taxes, assessments,
levies or charges, or the part thereof so measured or based, shall be included
within the term "Taxes". "Taxes" shall not include any corporate income tax
levied on Landlord.
(b) Tenant shall (1) before delinquency pay all taxes levied or
assessed against any personal property, fixtures or alterations placed in the
Premises and (2) upon the request of Landlord, deliver to Landlord receipts from
the applicable taxing authority or other evidence acceptable to Landlord to
verify that such taxes have been paid. If any such taxes are levied or assessed
against Landlord or Landlord's property and (A) Landlord pays them or (B) the
assessed value of Landlord's property is increased thereby and Landlord pays the
increased taxes, then Tenant shall pay to Landlord such taxes within 10 business
days after receipt of Landlord's written request therefor; however, Landlord
shall not pay such amounts if Tenant notifies Landlord that it will contest the
validity or amount of such taxes and thereafter diligently proceeds with such
contest in accordance with applicable Law and the non-payment thereof does not
pose a threat of loss or seizure of the Building or interest of Landlord
therein. If Tenant notifies Landlord that it will contest the validity or amount
of taxes, Landlord shall cooperate with Tenant, at Tenant's request, in such
contest. Tenant hereby agrees to reimburse Landlord for any reasonable costs
incurred in contesting the taxes.
4. LANDLORD'S MAINTENANCE.
(a) This Lease is intended to be a net lease; accordingly, Landlord's
maintenance obligations are limited to the repair and replacement of the
Building's roof as provided in Section 4.(b) and maintenance of the foundation
and structural members of the exterior walls; however, subject to Section 4.(b)
Landlord shall not be responsible (1) for any such work until Tenant delivers to
Landlord written notice of the need therefor and Landlord agrees such work is
necessary or (2) for alterations to the Building's Structure required by Law
because of Tenant's use of the Premises (which alterations shall be performed by
Tenant). The Building's Structure does not include skylights, windows, glass or
plate glass, doors, special store fronts or office entries, all of which shall
be maintained by Tenant. Subject to Section 11.(a), Landlord's liability for any
defects, repairs, replacement or maintenance for which Landlord is responsible
hereunder shall be limited to the cost of performing such work.
(b) Landlord shall repair and maintain the Building's roof throughout
the term of this Lease.
Landlord shall complete replacement of the roof during the first half of the
fourth year of the term of this Lease or earlier if, despite repeated repair,
leaks or instability in the roof pose a risk to the safety and security of
Tenant's employees and business invitees and/or personal property or repeated
repairs unduly interfere with Tenant's business operations ("NEED"); provided,
however, that in the event a reputable third party engineer who is mutually
agreed upon by both Landlord and Tenant certifies the Need for roof replacement
prior to the commencement of the first half of the fourth year of the term of
this Lease, then Landlord shall commence replacement of the roof within thirty
(30) days of receipt of such third party engineer's report. Landlord's approval
of the third party engineer shall not be unreasonably withheld, delayed, or
conditioned, and Landlord shall reimburse Tenant for its costs incurred in
connection with the third party engineer. To the extent possible, Landlord shall
repair and replace the roof with minimal interference with Tenant's business
operations.
(c) If (1) Tenant fails to commence any of Tenant's maintenance,
repair and replacement obligations or any other items that are Tenant's
obligation pursuant to Section 5 within fifteen business days after receipt of
written notice by Landlord of the occurrence of damage or the need for repair
and thereafter diligently to pursue the
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completion thereof or (2) notwithstanding such diligence, Tenant fails to
complete such repairs or replacements within 60 days of receipt of notice, then
Landlord shall make the same at Tenant's cost. If any such damage is considered
an emergency, in Landlord's sole determination then Landlord may elect to repair
such damage at Tenant's expense, rather than having Tenant repair such damage.
The cost of all replacement or repair work performed by Landlord under this
Section 4.(c) shall be paid by Tenant to Landlord within 10 business days after
Tenant receives Landlord's invoice.
5. TENANT'S MAINTENANCE AND REPAIR OBLIGATIONS.
(a) Tenant shall maintain all parts of the Premises (except for
maintenance work which Landlord is expressly responsible for under Section
5.(d)) in good condition and promptly make all necessary repairs and
replacements to the Premises. Tenant shall repair and pay for any damage caused
by a Tenant Party (defined below) or caused by Tenant's default hereunder.
(b) Tenant shall maintain the parking areas, sidewalks, driveways,
alleys and grounds located on the Land in a clean and sanitary condition,
consistent with the operation of a first-class office/warehouse building,
including, without limitation, prompt maintenance, repairs and replacements of
(1) the exterior of the Building (including painting), (2) landscaping, (3)
sprinkler systems and sewage lines, four (4) parking areas and any other items
normally associated with the foregoing. Tenant may request Landlord to perform
any or all Tenant's repair, replacement, and maintenance obligations and if
Landlord does so, then Tenant shall reimburse Landlord for the cost thereof
within ten (10) business days after Tenant receives an invoice therefor.
(c) Tenant shall maintain the hot water equipment and the heating, air
condition, and ventilation equipment and system (the "HVAC SYSTEM") in good
repair and condition and in accordance with all Laws and with such equipment
manufacturers' suggested operation/maintenance service program to the extent
Landlord provides Tenant with notice thereof. Such obligation shall include
repair and replacement of all equipment necessary to maintain such equipment and
system in good working order. Within 30 days after the Commencement Date, Tenant
shall enter into regularly scheduled preventive maintenance/service contracts
for such equipment, in a form and substance and with a contractor reasonably
acceptable to Landlord, and deliver copies thereof to Landlord. At least 14 days
before the end of the Term, Tenant shall deliver to Landlord a certificate from
an engineer mutually acceptable to Landlord and Tenant certifying that the hot
water equipment and the HVAC System are then in good repair and working order.
(d) Tenant shall be responsible for all pest control in the Premises.
If requested by Landlord (such request must be in writing and be accompanied by
the recommendation of an independent pest control expert), Tenant shall enter
into a regularly scheduled termite control contract with a contractor reasonably
acceptable to Landlord. At Landlord's election and with advance written notice
to Tenant, Landlord may perform the work required under this Section 5.(d), at
Tenant's expense.
6. ALTERATIONS. (a) Tenant shall not make any alterations, additions or
improvements to the Premises which affect the Building's Structure (defined
below) without the prior written consent of Landlord. Landlord shall not be
required to notify Tenant of whether it consents to any such alteration,
addition or improvements until it (1) has received plans and specifications
thereof which are sufficiently detailed to allow construction of the work
depicted thereon to be performed in a good and workmanlike manner and (2) has
had a reasonable opportunity, not to exceed 10 business days, to review them. If
the alteration, addition or improvement will affect the Building's roof,
foundation and structural elements (the roof, foundation, and structural
elements herein collectively called the "BUILDING STRUCTURE"), HVAC System, or
mechanical, electrical, or plumbing systems, then the plans and specifications
therefor must be prepared by a licensed engineer reasonably acceptable to
Landlord. Landlord's approval of any plans and specifications shall not be a
representation that the plans or the work depicted thereon will comply with Law
or be adequate for any purpose, but shall merely be Landlord's consent to
performance of the work. Upon completion of any alteration, addition, or
improvement, Tenant shall deliver to Landlord accurate, reproducible as-built
plans therefor. Unless Landlord specifies in writing otherwise, all alterations,
additions, improvements, and fixtures shall be Landlord's property when
installed in the Premises, except for furniture and equipment of Tenant which is
not affixed to the Premises so as to become a fixture (i.e., unattached items
and items which are temporarily attached by bolts and screws, but not items
which are built-in or incorporated into the Building or the electrical,
plumbing, or mechanical systems therein). In addition, Tenant may erect shelves,
bins, and trade fixtures provided that such items (A) do not alter
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the basic character of the Premises; (B) do not overload or damage the Premises;
and (C) may be removed without damage to the Premises (normal wear and tear
excepted). All work performed by a Tenant Party in the Premises (including that
relating to the installations, repair, replacement, or removal of any item)
shall be performed in accordance with all Laws and with Landlord's
specifications and requirements, in a good and workmanlike manner, and so as not
to damage or alter the Building's Structure or the Premises, provided, however,
that Tenant may make non-structural alterations, additions or improvements to
the Premises at an estimated cost of up to $25,000 without Landlord's prior
written consent, specifications and requirements.
(b) INITIAL TENANT IMPROVEMENTS. Tenant shall construct the initial
tenant improvements following the Possession Date and during the first 18 months
of the Term (those improvements completed during such period are herein called
the "INITIAL IMPROVEMENTS") in accordance with Exhibit B, at Tenant's expense,
except as provided below.
(1) Tenant shall bear the entire cost of performing the Work
(defined below) relating to the Initial Improvements (including,
without limitation, design of the Initial Improvements and preparation
of the Working Drawings, costs of construction labor and materials,
electrical usage during construction, additional janitorial services,
general tenant signage, related taxes and insurance costs relating
thereto, all of which are herein collectively called the ("TOTAL
CONSTRUCTION COSTS") in excess of the Construction Allowance. Upon the
approval of the Working Drawings for the Initial Improvements and
selection of a contractor, Tenant shall promptly execute a mutually
agreeable work order agreement prepared by Landlord which identifies
such drawings, itemizes the Total Construction Costs and sets forth
the Construction Allowance.
(2) Provided no Event of Default exists, Landlord shall
provide to Tenant a construction allowance for the Initial
Improvements the "CONSTRUCTION ALLOWANCE") equal to the lesser of (A)
the Total Construction Costs incurred for the Initial Improvements or
(B) $624,000, of which a minimum of $520,000 of the Construction
Allowance must be utilized to improve the Premises. The Construction
Allowance shall be disbursed in monthly advances based on the cost of
work incurred. Tenant shall submit to Landlord (but not more
frequently than once per month) Construction Allowance requests
accompanied by all invoices from contractors, subcontractors, and
suppliers evidencing the cost of performing the Work for which the
request is being submitted, together with lien waivers from such
parties. Provided that no Event of Default exists, Landlord shall make
advances of the Construction Allowance within 30 days after its
receipt of the advance request accompanied by the appropriate
documentation; however, the final draw of the amount of the applicable
allowance utilized to improve the Premises, which shall be 10% of the
amount of such allowance allocated to improvement, shall not be
disbursed until Landlord has received final lien waivers from all
persons performing work or supplying materials for the Initial
Improvements and certificate of occupancy from the appropriate
governmental authority, if applicable to the Work for the Initial
Improvements or, if applicable, evidence of governmental inspection
and approval of the Work for the Initial Improvements. Any amount of
the Construction Allowance above the minimum which must be utilized to
improve the Premises shall be credited against Tenant's Rent during
the first year of the Term.
7. WINDOW TREATMENTS. Tenant shall not place, install or attach any
decorations, advertising media, blinds, draperies, window treatments, bars, or
security installations to the Premises or the Building which are visible from
the outside of the Building without Landlord's prior written approval which
approval may be withheld in Landlord's sole discretion, provided that Landlord
shall not unreasonably delay notifying Tenant of its decision. Tenant shall not
(a) make any changes to the exterior of the Premises or the Building, (b)
install any exterior lights, decorations, balloons, flags, pennants, banners or
paintings, or (c) erect or install any signs, windows or door lettering, decals,
window or storefront stickers, placards, decorations or advertising media of any
type that is visible from the exterior of the Premises without Landlord's prior
written consent.
8. UTILITIES. Tenant shall obtain and pay for all water, gas,
electricity, heat, telephone, sewer, sprinkler charges and other utilities and
services used at the Premises, together with any taxes, penalties, surcharges,
maintenance charges, and the like pertaining to the Tenant's use of the
Premises. Landlord shall not be liable for any interruption or failure of
utility service to the Premises. If Tenant fails to pay any such amounts when
due, Landlord
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may, after notifying Tenant in writing of the amounts due, and giving Tenant 10
business days to pay such amount, to do so, in which case, Tenant shall
reimburse Landlord for all amounts paid by Landlord within 10 business days
after Tenant receives Landlord's invoice therefor. Landlord agrees it will not
pay any amounts due in the event Tenant, in good faith, is disputing any charges
from such providers.
9. INSURANCE. Tenant shall maintain (a) workers' compensation insurance
(with a waiver of subrogation endorsement reasonably acceptable to Landlord) and
commercial general liability insurance (with contractual liability endorsement),
including personal injury and property damage in the amount of $1,000,000 per
occurrence combined single limit for personal injuries and death of persons and
property damage occurring in or about the Premises, plus umbrella coverage of at
least $3,000,000 per occurrence, (b) fire and extended coverage insurance
covering (1) the replacement cost of all alterations, additions, partitions and
improvements installed in the Premises, (2) the replacement cost of all of
Tenant's personal property in the Premises, and (3) loss of profits in the event
of an insured peril damaging the Premises, and (c) such other insurance as
Landlord may reasonably require. Such policies, other than worker's
compensation, shall (A) name Landlord, Landlord's Mortgagee, Landlord's agents,
and their respective Affiliates (defined below), as additional insureds (and as
loss payees on the fire and extended coverage insurance), (B) be issued by an
insurance company rated "A-X" or better as established by Best's Rating Guide or
(C) provided that Landlord shall receive 30 days' prior written notice of
cancellation, (D) be delivered to Landlord by Tenant before the Commencement
Date and at least 15 days before each renewal thereof, and (E) provide primary
coverage to Landlord when any policy issued to Landlord is similar or duplicate
in coverage, in which case Landlord's policy shall be excess over Tenant's
policies.
10. CASUALTY DAMAGE.
(a) Tenant immediately shall give written notice to Landlord of any
damage to the Premises. If the Premises are totally destroyed by an insured
peril or so damaged by an insured peril that, in Landlord's estimation ,
rebuilding or repairs cannot be substantially completed within 210 days after
the date of Landlord's actual knowledge of such damage, then Landlord shall
immediately notify Tenant in writing of its intent not to rebuild. Landlord or
(if a Tenant Party did not intentionally cause such damage) Tenant may terminate
this Lease by delivering to the other written notice thereof within 30 days
after Tenant's receipt of Landlord's notice of intent not to rebuild, in which
case, the Rent shall be abated during the unexpired portion of this Lease,
effective upon the date such damage occurred. Time is of the essence with
respect to the delivery of such notices.
(b) Subject to Section 10.(c), if this Lease is not terminated under
Section 10.(a), then Landlord shall restore the Premises to substantially its
previous condition, except that Landlord shall not be required to rebuild,
repair or replace any part of the partitions, fixtures, additions and other
improvements or personal property required to be covered by Tenant's insurance
under Section 9. If the Premises are untenantable, in whole or in part, during
the period beginning on the date such damage occurred and ending on the date of
substantial completion of Landlord's repair or restoration work (the "REPAIR
PERIOD"), then the Rent for such period shall be reduced to such extent as may
be fair and reasonable under the circumstances and the Term shall be extended by
the number of days in the Repair Period.
(c) If the Premises are destroyed or substantially damaged by any
peril not covered by the insurance maintained by Landlord or any Landlord's
Mortgagee (defined below) requires that insurance proceeds be applied to the
indebtedness secured by its Mortgage (defined below) or to the Primary Lease
(defined below) obligations, Landlord may terminate this Lease by delivering
written notice of termination to Tenant within 15 days after such destruction or
damage or such requirement is made known by any such Landlord's Mortgagee, as
applicable, whereupon all rights and obligations hereunder shall cease and
terminate, except for any liabilities of, Landlord and Tenant which accrued
before this Lease is terminated.
11. LIABILITY, INDEMNIFICATION, WAIVER OF SUBROGATION AND NEGLIGENCE
CLAIMS.
(a) Subject to Section 11.(b) Tenant shall defend, indemnify, and hold
harmless Landlord and its agents from and against all claims, demands,
liabilities, causes of action, suits, judgments, and expenses (including
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attorneys' fees) for any injury to or death of any person or persons or the
damage to or theft, destruction, loss, or loss of use of any property or
inconvenience (A "LOSS") (other than a Loss arising from the ordinary or gross
negligence or willful misconduct of Landlord or its agents or employees),
arising from any occurrence on the Premises. Subject to Section 11.(b),
Landlord shall indemnify, defend, and hold harmless Tenant, its successors,
assigns, agents, employees, contractors, partners, directors, officers,
subsidiaries and affiliates from and against all fines, suits, losses, costs,
liabilities, claims, demands, actions and judgments of every kind and character
arising out of the ordinary or gross negligence or willful misconduct of
Landlord or any of its duly authorized agents or employees. These indemnity
provisions shall survive termination or expiration of this Lease.
(b) Landlord and Tenant each waives any claim it might have against
the other for any damage to or theft, destruction, loss, or loss of use of any
property, to the extent the same is insured against under any insurance policy
maintained by it that covers the Premises, Landlord's or Tenant's fixtures,
personal property, leasehold improvements, or business, or is required to be
insured against by the waiving party under the terms hereof, REGARDLESS OF
WHETHER THE NEGLIGENCE OR FAULT OF THE OTHER PARTY CAUSED SUCH LOSS; HOWEVER,
LANDLORD'S WAIVER SHALL NOT APPLY TO ANY DEDUCTIBLE AMOUNTS MAINTAINED BY
LANDLORD UNDER ITS INSURANCE. Each party shall cause its insurance carrier to
endorse all applicable policies waiving the carrier's rights of recovery under
subrogation or otherwise against the other party. The deductible amount shall
not exceed $25,000 without Tenant's prior written consent.
12. USE. Tenant shall continuously occupy and use the Premises only for
general office use and shall comply with all laws, orders, rules, and
regulations relating to the use, condition, and occupancy of the Premises. The
Premises shall not be used for any use which is disreputable or creates
extraordinary fire hazards or results in an increased rate of insurance on the
Building or its contents or the storage of any hazardous materials or
substances. If, because of Tenant's acts, the rate of insurance on the Building
or its contents increases, failing Tenant's cure of such condition within 10
business days of receipt of Landlord's written notice of such condition, then
Tenant shall pay to Landlord the amount of such increase within 10 business days
after receipt of a written notice thereof, and acceptance of such payment shall
not constitute a waiver of any of Landlord's other rights. Tenant shall conduct
its business and control its agents, employees, and invitees in such a manner as
not to create any nuisance or interfere with other tenants or Landlord in its
management of the Building.
13. INSPECTION. Upon reasonable advance written notice, which, excluding
emergencies (in which case no notice is required), shall be one business day,
Landlord and Landlord's agents and representatives may enter the Premises during
business hours to inspect the Premises; to make such repairs as may be required
or permitted under this Lease; to perform any unperformed obligations of Tenant
hereunder; and to show the Premises to prospective purchasers, mortgagees,
ground lessors, and (during the last 12 months of the Term) tenants. During the
last 12 months of the Term, Landlord may erect a sign on the Premises indicating
that the Premises are available. Tenant shall notify Landlord in writing of its
intention to vacate the Premises at least 60 days before Tenant will vacate the
Premises; such notice shall specify the date on which Tenant intends to vacate
the Premises (the "VACATION DATE"). At least 30 days before the Vacation Date,
Tenant shall arrange to meet with Landlord for a joint inspection of the
Premises. After such inspection, Landlord shall prepare a list of items that,
subject to Paragraph 16, Tenant must perform before the Vacation Date. If Tenant
intentionally or in bad faith fails to arrange for such inspection, then
Landlord may conduct such inspection and Landlord's determination of the work
Tenant is required to perform before the Vacation Date shall be conclusive. If
Tenant fails to perform such work before the Vacation Date, then Landlord may
perform such work at Tenant's cost. Tenant shall pay all reasonable costs
incurred by Landlord in performing such work within 10 business days after
receipt of Landlord's written request therefor.
14. ASSIGNMENT AND SUBLETTING. (a) Tenant shall not, without prior written
consent of Landlord, (1) assign, transfer, or encumber this Lease or any estate
or interest herein, whether directly or by operation of law, (2) permit any
other entity to become Tenant hereunder by merger, consolidation, or other
reorganization, except as provided in Section 14.(c), (3) if Tenant is an entity
other than a corporation whose stock is publicly traded, permit the transfer of
the ownership interest in Tenant, (4) sublet any portion of the Premises, (5)
grant any licence, concession, or other right of occupancy of any portion of the
Premises, or (6) permit the use of the Premises by any parties other than Tenant
(any of the events listed in Sections 14.(a)(1) through 14.(a)(6) being a
"Transfer"). Provided that (A) the proposed assignment or sublease is for the
entire Premises, Landlord shall not unreasonably withhold, delay or condition
its consent to any assignment or subletting of the Premises to a party which may
reasonably be expected to
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fulfill the obligations of Tenant hereunder, and (B) will use the Premises for
the purposes herein stated. Without limiting the foregoing, Landlord may
withhold its consent to any such assignment or subletting of the Premises to (i)
any governmental agency, (ii) any party which will use Hazardous Substances in
the Premises, or (iii) any party to whom Landlord's Mortgagee objects. If Tenant
requests Landlord's consent to a Transfer, then Tenant shall provide Landlord
with a written description of all relevant terms and conditions of the proposed
Transfer, copies of the proposed documentation, and the following information
about the proposed transferee: name and address, reasonably satisfactory
information about its business and business history; its proposed use of the
Premises; banking, financial, and other credit information; and general
references sufficient to enable Landlord to determine the proposed transferee's
creditworthiness and character. Tenant shall reimburse Landlord for its
reasonable attorney's fees and other expenses incurred in connection with
considering any request for its consent to a Transfer. Landlord shall, within 10
business days of receipt of such information from Tenant, approve such Transfer
or notify Tenant in writing of Landlord's reason for not approving such proposed
Transfer. Landlord will use commercially reasonable efforts to obtain the
consent of Landlords' Mortgagee to any proposed assignee or subtenant of which
Landlord approves. If Landlord fails to so notify Tenant within such period,
then the proposed Transfer shall be deemed approved. If Landlord consents to a
proposed Transfer, then the proposed transferee shall deliver to Landlord a
written agreement whereby it expressly assumes the Tenant's obligations
hereunder (however, any transferee of less than all of the space in the Premises
shall be liable only for obligations under this Lease, that are properly
allocable to the space subject to the Transfer, and only to the extent of the
Rent it has agreed to pay Tenant therefor). No transfer shall release Tenant
from performing the obligations of the "Tenant" under this Lease, but rather
Tenant and its transferee shall be jointly and severally liable therefor.
Landlord's consent to any Transfer shall not waive Landlord's rights as to any
subsequent Transfers. If an Event of Default occurs while the Premises or any
part thereof are subject to a Transfer, then Landlord, in addition to its other
remedies, may collect directly from such transferee all rents becoming due to
Tenant and apply such rents against Tenant's Rent obligations. Tenant authorizes
its transferees to make payments of Rent directly to Landlord upon receipt of
notice from Landlord to do so.
(b) Tenant hereby assigns, transfers and conveys all consideration
(less reasonable costs and expenses actually incurred by Tenant directly
relating to such Transfer) received by Tenant under any Transfer, which are in
excess of the rents payable by Tenant under this Lease, and Tenant shall hold
such amounts in trust for Landlord and pay them to Landlord within 10 business
days after receipt.
(c) Notwithstanding the foregoing, Tenant may Transfer all or part of
its interest in this Lease or all or part of the Premises to the following types
of entities (a "PERMITTED TRANSFEREE") without the written consent of Landlord
(a "PERMITTED TRANSFER").
(1) a subsidiary or an Affiliate of Tenant;
(2) any corporation in which or with which Tenant, or its
corporation successors or assigns, is merged or consolidated, in
accordance with applicable statutory provisions governing merger and
consolidation of corporations, so long as (A) Tenant's obligations
hereunder are assumed by the corporation surviving such merger or
created by such consolidation; and (B) the Tangible Net Worth of
surviving or created corporation is not less than the Tangible Net
Worth of Tenant as of the date hereof; or
(3) any corporation acquiring all or substantially all of
Tenant's assets, if such corporation's Tangible Net Worth after such
acquisition is not less than the Tangible Net Worth of Tenant as of
the date hereof.
Tenant shall promptly notify Landlord of any such Permitted Transfer. As a
condition precedent to any Permitted Transfer, the proposed Permitted Transferee
must deliver to Landlord a written agreement whereby it expressly assumes the
Tenant's obligations hereunder. As used herein, "TANGIBLE NET WORTH" shall mean
the excess of total assets over total liabilities (in each case, determined in
accordance with GAAP) excluding from the determination of total assets all
assets which would be classified as intangible assets under GAAP, including,
without limitation, goodwill, licenses, patents, trademarks, trade names,
copyrights, and franchises. Any subsequent Transfer by a Permitted Transferee
shall be subject to the provisions of this Section 14. Notwithstanding any
assignment or subletting, Tenant shall at all times
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remain fully responsible and liable for the payment of Rent and for compliance
with all of Tenant's other obligations under this Lease (regardless of whether
Landlord's approval has been obtained for any such assignments or sublettings).
(d) With respect to any written request by Tenant to Landlord for
Landlord's consent to a Transfer (other than a Permitted Transfer), if such
Transfer is for more than fifty percent (50%) of the Premises or for more than
five years, Landlord may, within 10 business days after submission of such
request, cancel this Lease (or, as to a subletting or assignment, cancel as to
the portion of the Premises proposed to be sublet or assigned) as of the date of
the proposed Transfer was to be effective. If, pursuant to the exercise of this
right, Landlord cancels this Lease as to any portion of the Premises, then this
Lease shall cease for such portion of the Premises and Tenant shall pay to
Landlord all Rent accrued through the cancellation date relating to the portion
of the Premises covered by the proposed Transfer. Thereafter, Landlord may lease
such portion of the Premises to the prospective transferee (or to any other
person) without liability to Tenant.
(e) If Tenant believes Landlord has unreasonably withheld its consent,
then, as Tenant's exclusive remedy therefor, Tenant may notify Landlord in
writing of such dispute, whereupon the following shall occur. Within 10 business
days of Landlord's receipt of such notice, Landlord and Tenant shall jointly
appoint a person to resolve such dispute, who shall have at least 3-years'
experience in commercial real estate matters. If Landlord and Tenant are unable
to agree on such person within such ten-day period, then either party may ask
the Dallas office of the American Arbitration Association ("AAA") to select such
person. The AAA's selection of the arbitrator shall be binding on Landlord and
Tenant. The parties shall bear equally any appointment fee charged by AAA. The
arbitration shall be conducted in accordance with the expedited version of the
AAA Commercial Arbitration Rules and shall take place in Dallas, Texas. The
determination of the arbitrator shall be final and binding on Landlord and
Tenant. The non-prevailing party shall pay the fees of the arbitrator. Each
party shall bear its own expenses.
15. CONDEMNATION. If 50% or more of the Land or Premises is taken for any
public or quasi-public use by right of eminent domain or private purchase in
lieu thereof (a "TAKING"), and the Taking prevents or materially interferes with
the use of the remainder of the Premises for the purpose for which they were
leased to Tenant, either party may terminate this Lease by delivering to the
other written notice thereof within 30 days after the Taking, in which case Rent
shall be abated during the unexpired portion of the Term, effective on the date
of such Taking. If (a) less than 50% of the Land or Premises are subject to a
Taking or (b) 50% or more of the Land or Premises are subject to a Taking, but
the Taking does not prevent or materially interfere with the use of the
remainder of the Premises for the purpose for which they were leased to Tenant,
then neither party may terminate this Lease, but the Rent payable during the
unexpired portion of the Term shall be reduced to such extent as may be fair and
reasonable under the circumstances. If any Taking occurs, then Landlord shall
receive the entire award or other compensation for the Land, the Building, and
other improvements taken, and Tenant may separately pursue a contemporaneous
claim against the condemner for the value of Tenant's personal property which
Tenant is entitled to remove under this Lease, moving costs, loss of business,
and other claims it may have.
16. SURRENDER OF PREMISES; HOLDING OVER.
(a) No act by Landlord shall be an acceptance of a surrender of the
Premises, and no agreement to accept a surrender of the Premises shall be valid
unless it is in writing and signed by Landlord. At the end of the Term or the
termination of Tenant's right to possess the Premises, Tenant shall (1) deliver
to Landlord the Premises with all improvements located thereon in good repair
and condition, reasonable wear and tear (subject however to Tenant's maintenance
obligations) excepted, and with the HVAC System and hot water equipment, light
and light fixtures (including ballasts), and overhead doors and related
equipment in good working order, (2) deliver to Landlord all keys to the
Premises, and (3) remove all signage placed on the Premises by or at Tenant's
request. All fixtures, alterations, additions, and improvements shall be
Landlord's property and shall remain on the Premises except as provided in the
next two sentences. Tenant may remove all unattached trade fixtures, furniture,
and personal property placed in the Premises by Tenant (but Tenant shall not
remove any such item which was paid for, in whole or in part, by Landlord).
Additionally, Tenant shall remove such alterations, additions, improvements,
fixtures, equipment, wiring, furniture, and other property not previously
approved by Landlord, as Landlord may request, provided such request is made
within one month after the end of the Term; however, Tenant shall not be
required to remove any addition or improvements to the Premises unless Landlord
has specifically required in writing at the time of approval in accordance with
Section
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6 or Exhibit B that the improvement or addition in question must be
removed. All items not so removed shall, at the option of Landlord, be deemed
abandoned by Tenant and may be appropriated, sold, stored, destroyed, or
otherwise disposed of by Landlord without notice to Tenant and without any
obligation to account for such items and Tenant shall pay for the costs incurred
by Landlord in connection therewith. All work required of Tenant under this
Section 16 shall be coordinated with Landlord and be done in a good and
workmanlike manner, in accordance with all Laws, and so as not to damage the
Building. Tenant shall, at its expense, repair all damage caused by any work
performed by Tenant under this Section 16.(a).
(b) If Tenant fails to vacate the Premises at the end of the Term,
then Tenant shall be a Tenant at will and Tenant shall pay, in addition to the
other Rent due hereunder, a daily base rental equal to 150% of the daily Base
Rent payable during the last month of the Term, even if Landlord consents to
such holdover, unless Landlord agrees otherwise in writing. Additionally, Tenant
shall defend, indemnify, and hold harmless Landlord from any damage, liability
and expense (including attorneys' fees and expenses) incurred because of such
holding over. No payments of money by Tenant to Landlord after the Term shall
reinstate, continue or extend the Term, and no extension of the Term shall be
valid unless it is in writing and signed by Landlord and Tenant.
17. QUIET ENJOYMENT. Provided Tenant has substantially performed its
obligations under this Lease, Tenant shall peaceably and quietly hold and enjoy
the Premises for the Term, without hindrance from Landlord or any party claiming
by, through, or under Landlord, but not otherwise.
18. EVENTS OF DEFAULT. Each of the following events shall constitute an
"EVENT OF DEFAULT" under this Lease:
(a) Tenant's failure to pay Rent within ten (10) business days after
Landlord has delivered written notice to Tenant that the same is due; however,
an Event of Default shall occur hereunder without any obligation of Landlord to
give any notice if Landlord has given Tenant written notice under this Section
18.(a) more than twice during the twelve (12) month interval preceding such
failure by Tenant;
(b) The filing of a petition by or against Tenant or any guarantor of
Tenant's obligations hereunder (1) in any bankruptcy or other insolvency
proceeding; (2) seeking in any relief under any debtor relief Law; (3) for the
appointment of a liquidator, receiver, trustee, custodian, or similar official
for all or substantially all of Tenant's property or for Tenant's interest in
this Lease; or (4) for reorganization or modification of Tenant's capital
structure (however, if any such petition is filed against Tenant, then the
filing of such petition shall not constitute an Event of Default, unless it is
not dismissed within 45 days after the filing thereof).
(c) Tenant fails to discharge any lien placed upon the Premises in
violation of Section 22 within ten (10) days after Tenant receives written
notice that any such lien or encumbrance is filed against the Premises.
(d) Tenant fails to comply with any term, provision or covenant of
this Lease (other than those listed in this Section 18), and such failure
continues for 30 days after written notice thereof to Tenant.
19. REMEDIES.
(a) Upon any Event of Default, Landlord may, in addition to all other
rights and remedies afforded Landlord hereunder or by Law, take any of the
following actions:
(1) Terminate this Lease by giving Tenant written notice
thereof, in which event, Tenant shall pay to Landlord the sum of (A)
all Rent accrued hereunder through the date of termination, (B) all
amounts due under Section 19.(b), and (C) an amount equal to (i) the
total Rent that Tenant would have been required to pay for the
remainder of the Term discounted to present value at a per annum rate
equal to the rate of interest set forth for 26-week U.S. governmental
bills sold at a discount from face value in units of $10,000 to
$1,000,000 as published on the date this Lease is terminated by The
Wall Street Journal, Southwest Edition, in its listing of "Money
Rates" under the heading "Treasury Bills" (or, if no such rate is
published, the
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<PAGE> 15
"Discount Rate" as published on such date under the "Money Rate"
listing), minus (ii) the then present fair rental value of the
Premises for such period, similarly discounted; or
(2) Terminate Tenant's right to possess the Premises without
terminating this Lease by giving written notice thereof to Tenant, in
which event Tenant shall pay to Landlord (A) all Rent and other
amounts accrued hereunder to the date of termination of possession,
(B) all amounts due from time to time under Section 19.(b), and (C)
all Rent and other sums required hereunder to be paid by Tenant during
the remainder of the Term, diminished by any net sums thereafter
received by Landlord through reletting the Premises during such
period. Landlord shall use reasonable efforts to relet the Premises on
such terms and conditions as Landlord, in its sole discretion, may
determine (including a term different than the Term, rental
concessions, alterations to, and improvement of, the Premises);
Landlord shall use commercially reasonable efforts to relet the
Premises. Landlord shall not be liable for, nor shall Tenant's
obligations hereunder be diminished because of, Landlord's failure to
relet the Premises or to collect Rent due for a reletting. Tenant
shall not be entitled to the excess of any consideration obtained by
reletting over the Rent due hereunder. Reentry by Landlord in the
Premises shall not affect Tenant's obligations hereunder for the
unexpired Term; rather, Landlord may, from time to time, bring action
against Tenant to collect amounts due by Tenant, without the necessity
of Landlord's waiting until the Term ends. Unless Landlord delivers
written notice to Tenant expressly stating that it has elected to
terminate this Lease, all actions taken by Landlord to exclude or
dispossess Tenant of the Premises shall be deemed to be taken under
this Section 19.(a)(2). If Landlord elects to proceed under this
Section 19.(a)(2), it may at any time elect to terminate this Lease
under Section 19.(a)(1).
Additionally, Landlord may perform Tenant's unperformed obligations hereunder
and, without notice, Landlord may alter locks or other security devices at the
Premises to deprive Tenant of access thereto, and Landlord shall not be required
to provide a new key or right of access to Tenant; provided, however, that
Landlord shall provide Tenant written notice and a reasonable opportunity to
remove all of its temporary and/or unattached trade fixtures, furniture, and
personal property placed on the Premises by Tenant (but Tenant shall not remove
any such item which was paid for, in whole or in part, by Landlord) in
accordance with Section 16.(a).
(b) Tenant shall pay to Landlord all costs incurred by Landlord
(including court costs and reasonable attorneys' fees and expenses) in (1)
obtaining possession of the Premises, (2) removing and storing Tenant's or any
other occupant's property, (3) repairing, restoring, altering, remodeling, or
otherwise putting the Premises into condition acceptable to a new tenant, (4) if
Tenant is dispossessed of the Premises and this Lease is not terminated,
reletting all or any part of the Premises (including brokerage commissions, cost
of tenant finish work, and other costs incidental to such reletting), (5)
performing Tenant's obligations which Tenant failed to perform, and (6)
enforcing, or advising Landlord of, its rights, remedies, and recourses.
Landlord's acceptance of Rent following an Event of Default shall not waive
Landlord's rights regarding such Event of Default. Landlord's receipt of Rent
with knowledge of any default by Tenant hereunder shall not be a waiver of such
default, and no waiver by Landlord of any provision of this Lease shall be
deemed to have been made unless set forth in writing and signed by Landlord. No
waiver by Landlord of any violation or breach of any of the terms contained
herein shall waive Landlord's rights regarding any future violation of such term
or violation of any other term. If Landlord repossesses the Premises pursuant to
the authority herein granted, then Landlord shall have the right to (A) keep in
place or (B) remove and store, at Tenant's expense, all of the furniture,
fixtures, equipment and other property in the Premises, including that which is
owned by or leased to Tenant at all times before any repossession thereof by any
lessor thereof or third party having a lien thereon. Landlord may relinquish
possession of all or any portion of such furniture, fixtures, equipment and
other property to any person (a "CLAIMANT") who presents to Landlord a copy of
any instrument represented by Claimant to have been executed by Tenant (or any
predecessor of Tenant) granting Claimant the right under various circumstances
to take possession of such furniture, fixtures, equipment or other property,
without the necessity on the part of Landlord to inquire into the authenticity
or legality of the instrument, but with reasonable advance written notice to
Tenant. Landlord may, at its option and without prejudice to or waiver of any
rights it may have, (i) escort Tenant to the Premises to retrieve any personal
belongings of Tenant and/or its employees or (ii) obtain a list from Tenant of
the personal property of Tenant and/or its employees and make such property
available to Tenant and/or Tenant's employees; however, Tenant first shall pay
in cash all costs and estimated expenses to be incurred, if any, in connection
with the removal of such property and making it available. The rights of
Landlord herein stated are in addition to any
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and all other rights that Landlord has or may hereafter have at law or in
equity, unless otherwise expressly waived in this Lease.
20. LANDLORD'S DEFAULT. If Landlord fails to perform any of its
obligations hereunder within 30 days after written notice from Tenant specifying
such failure, Tenant's exclusive remedy shall be an action for damages. Unless
Landlord fails to so cure such default after such notice, Tenant shall not have
any remedy or cause of action by reason thereof. Liability of Landlord to Tenant
for any default by Landlord, shall be limited to actual, direct, but not
consequential, damages therefor and shall be recoverable only from the interest
of Landlord in the Building and the Land, and neither Landlord nor Landlord's
owners shall have any personal liability therefor.
21. MORTGAGES.
(a) Upon receipt of a non-disturbance, attornment and subordination
agreement, this Lease shall be subordinate to any deed of trust, mortgage or
other security instrument (a "MORTGAGE"), and any ground lease, master lease, or
primary lease (a "PRIMARY LEASE") that now or hereafter covers any portion of
the Premises (the mortgagee under any Mortgage or the lessor under any Primary
Lease is referred to herein as "LANDLORD'S MORTGAGEE"), and to increases,
renewals, modifications, consolidations, replacements, and extensions thereof.
However, any Landlord's Mortgagee may elect to subordinate its Mortgage or
Primary Lease (as the case may be) to this Lease by delivering written notice
thereof to Tenant. Landlord shall use reasonable efforts to obtain a
non-disturbance, attornment and subordination agreement from the current
Landlord's Mortgagee, substantially in the form of Exhibit G attached hereto,
within 10 business days from the date hereof.
(b) Tenant shall attorn to any party succeeding to Landlord's interest
in the Premises, whether by purchase, foreclosure, deed in lieu of foreclosure,
power of sale, termination of lease, or otherwise, upon such party's request,
and Tenant's receipt of documentation confirming such party's interest in the
Premises and shall execute such agreements confirming such attornment as such
party may reasonably request. Tenant's obligation to attorn to any future
Landlord's Mortgagee under this Section 21 shall be conditioned upon such future
Landlord's Mortgagee's execution and delivery of a non-disturbance, attornment
and subordination agreement substantially in the form of the non-disturbance,
attornment and subordination agreement executed in connection with the execution
of this Lease attached hereto as Exhibit G. Tenant shall execute and deliver any
such non-disturbance, attornment and subordination agreement within ten (10)
days after Landlord's request therefor.
22. ENCUMBRANCES. Tenant has no authority, express or implied, to create
or place any lien or encumbrance of any kind or nature whatsoever upon, or in
any manner to bind Landlord's property or the interest of Landlord or Tenant in
the Premises or to deduct from the Rent for any claim in favor of any person
dealing with Tenant, including those who may furnish materials or perform labor
for any construction or repairs. Tenant shall pay or cause to be paid all sums
due for any labor performed or materials furnished in connection with any work
performed on the Premises by or at the request of Tenant. Tenant shall give
Landlord immediate written notice of the placing of any lien or encumbrance
against the Premises.
23. MISCELLANEOUS.
(a) Words of any gender used in this Lease shall include any other
gender, and words in the singular shall include the plural, unless the context
otherwise requires. The captions inserted in this Lease are for convenience only
and in no way affect the interpretation of this Lease. The following terms shall
have the following meanings: "LAWS" means all federal, state, and local laws,
rules, and regulations; all court orders, governmental directives, and
governmental orders; and all restrictive covenants affecting the Property (of
which Landlord has notified Tenant in writing), "LAW" means any of the
foregoing; "AFFILIATE" means any person or entity which, directly or indirectly,
controls, is controlled by, or is under common control with the party in
question; "TENANT PARTY" shall include Tenant, any assignees claiming by,
through, or under Tenant, any subtenants claiming by, through, or under Tenant,
and any of their respective agents, contractors, employees, and invitees; and
"INCLUDING" means "including, without limitation."
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(b) Landlord may transfer and assign, in whole or in part, its rights
and obligations in the Premises, in which case Landlord shall have no further
liability hereunder for all obligations expressly assumed in writing by
transferee or assignee. Each party represents and warrants that it has full
power and authority to enter into this Lease.
(c) Whenever a period of time is herein prescribed for action to be
taken by either party, such party shall not be liable or responsible for, and
there shall be excluded from the computation for any such period of time, any
delays due to strikes, riots, acts of God, shortages of labor or materials, war,
governmental Laws, regulations, or restrictions, or any other causes of any kind
whatsoever which are beyond the reasonable control of such party.
(d) Tenant shall, from time to time, within 10 business days after
receipt of written request of Landlord, or as soon thereafter as is practicable
in the event such document is unavailable due in whole or in part to the action
or inaction of a non-related third party, deliver to Landlord, or Landlord's
designee, a certificate of occupancy for the Premises, financial statements for
itself and any guarantor of its obligations hereunder, evidence reasonably
satisfactory to Landlord that Tenant has performed its obligations under this
Lease, and an estoppel certificate stating that this Lease is in full effect,
the date to which Rent has been paid, the unexpired Term and such other factual
matters pertaining to this Lease as may be requested by Landlord. Consolidated
quarterly financial statements shall satisfy the requirement of this Section
23.(d). Tenant's obligation to furnish the above-described items in a timely
fashion is a material inducement for Landlord's execution of this Lease. If
Tenant fails to execute any such estoppel certificate within such 10
business-day period, Landlord may do so as attorney-in-fact for Tenant.
(e) This Lease, together with its Exhibits, constitutes the entire
agreement of the Landlord and Tenant with respect to the subject matter of this
Lease, and contains all of the covenants and agreements of Landlord and Tenant
with respect thereto. Landlord and Tenant each acknowledge that no
representations, inducements, promises or agreements, oral or written, have been
made by Landlord or Tenant, or anyone acting on behalf of Landlord or Tenant,
which are not contained herein, and any prior agreements, promises,
negotiations, or representations not expressly set forth in this Lease are of no
effect. This Lease may not be altered, changed or amended except by an
instrument in writing signed by both parties hereto.
(f) All obligations of the parties hereunder not fully performed by
the end of the Term shall survive, including, without limitation, all payment
obligations with respect to Taxes and insurance and all obligations concerning
the condition and repair of the Premises. Subject to Section 16, upon the end of
the Term and before Tenant vacates the Premises, Tenant shall pay to Landlord
any amount reasonably estimated by Landlord as necessary to put the Premises in
good condition and repair, reasonable wear and tear excluded. Tenant shall also,
prior to vacating the Premises, pay to Landlord the amount, as estimated by
Landlord, of Tenant's obligation hereunder for Operating Expenses for that
portion of the year in which the Term ends. All such amounts shall be used and
held by Landlord for payment of such obligations of Tenant hereunder, with
Tenant being liable for any additional costs therefor upon demand by Landlord or
with any excess to be returned to Tenant after all such obligations have been
determined and satisfied as the case may be.
(g) If any provision of this Lease is illegal, invalid or
unenforceable, then the remainder of this Lease shall not be affected thereby,
and in lieu of each such provision, there shall be added, as a part of this
Lease, a provision as similar in terms to such illegal, invalid or unenforceable
clause or provision as may be possible and be legal, valid and enforceable.
(h) All references in this Lease to "the date hereof" or similar
references shall be deemed to refer to the last date, in point of time, on which
all parties hereto have executed this Lease.
(i) Landlord and Tenant each warrant to the other that it has not
dealt with any broker or agent in connection with this Lease other than The
Staubach Company. Landlord shall pay any amounts due to The Staubach Company as
a real estate brokerage commission as agreed upon by a separate document. Tenant
and Landlord shall each indemnify the other against all costs, attorneys' fees,
and other liabilities for commissions or other compensation claimed by any
broker or agent claiming the same by, through, or under the indemnifying party.
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(j) Subject to Section 24.(c) requiring duplicate notice to Tenant, if
and when included within the term "Tenant," as used in this instrument, there is
more than one person, firm or corporation, all shall jointly arrange among
themselves for their joint execution of a notice specifying an individual at a
specific address within the continental United States for the receipt of notices
and payments to Tenant. All parties included within the terms "Landlord" and
"Tenant," respectively, shall be bound by notices given in accordance with the
provisions of Section 24 to the same effect as if each had received such notice.
(k) The terms and conditions of this Lease are confidential and Tenant
shall not disclose the terms of this Lease to any third party except as may be
required by Law as necessary or to enforce its rights hereunder or in the course
of discussions or negotiations preceding a potential corporate transaction.
(l) Subject to Section 2.(b) of this Lease, Tenant shall pay interest
on all past-due Rent from the date due until paid at the maximum lawful rate. In
no event, however, shall the charges permitted under this Section 23.(l) or
elsewhere in this Lease, to the extent they are considered to be interest under
applicable Law, exceed the maximum lawful rate of interest.
24. NOTICES. Each provision of this instrument or of any applicable Laws
and other requirements with reference to the sending, mailing or delivering of
notice or the making of any payment hereunder shall be deemed to be complied
with when and if the following steps are taken:
(a) All Rent shall be payable to Landlord at the address for Landlord
set forth below or at such other address as Landlord may specify from time to
time by written notice delivered in accordance herewith. Tenant's obligation to
pay Rent shall not be deemed satisfied until such Rent has been actually
received by Landlord.
(b) All payments required to be made by Landlord to Tenant hereunder
shall be payable to Tenant at the address set forth below, or at such other
address within the continental United States as Tenant may specify from time to
time by written notice delivered in accordance herewith.
(c) Unless otherwise provided herein, any written notice or document
required or permitted to be delivered hereunder shall be deemed to be delivered
upon the earlier to occur of (1) actual of delivery (in the case of a
hand-delivered or overnight mail or courier notice), (2) five days following
deposit in the United States Mail, postage prepaid, Certified Mail, or (3)
receipt by facsimile transmission confirmed by telephone conversation (recorded
message is insufficient), in each case, addressed to the parties hereto at the
respective addresses set out below, or at such other address as they have
theretofore specified by written notice delivered in accordance herewith;
provided, however, that a duplicate notice shall be delivered for Tenant to: Sr.
Vice President and General Counsel, 545 E. John Carpenter Freeway, Suite 1570,
Irving, Texas 75062, Phone: 972/830-6199, Fax: 972/830-6196. If Landlord has
attempted to deliver notice to Tenant at Tenant's address reflected on
Landlord's books but such notice was returned or acceptance thereof was refused,
then Landlord may post such notice in or on the Premises, which notice shall be
deemed delivered to Tenant upon the posting thereof.
25. HAZARDOUS WASTE. The term "HAZARDOUS SUBSTANCES," as used in this
Lease shall mean pollutants, contaminants, toxic or hazardous wastes, or any
other substances, the removal of which is required or the use of which is
restricted, prohibited or penalized by any "ENVIRONMENTAL LAW," which term shall
mean any Law relating to health, pollution or protection of the environment.
Tenant shall not be responsible for the cleanup of any Hazardous Substances that
existed on the Property prior to the date hereof. Tenant hereby agrees that (a)
no activity will be conducted on the Premises that will produce any Hazardous
Substances, except for such activities that are part of the ordinary course of
Tenant's business activities (the "PERMITTED ACTIVITIES") provided such
Permitted Activities are conducted in accordance with all Environmental Laws and
have been approved in advance in writing by Landlord; (b) the Premises will not
be used in any manner for the storage of any Hazardous Substances except for any
temporary storage of such materials that are used in the ordinary course of
Tenant's business (the "PERMITTED MATERIALS") provided such Permitted Materials
are properly stored in a manner and location satisfying all Environmental Laws
and approved in advance in writing by Landlord; (c) no portion of the Premises
will be used as a landfill or a dump; (d) Tenant will not install any
underground tanks of any type; (e) Tenant will not allow any surface or
subsurface conditions to exist or come into existence that constitute, or with
the passage of time may constitute a public or private nuisance; and (f)
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Tenant will not permit any Hazardous Substances to be brought onto the Premises,
except for the Permitted Materials, and if so brought or found located thereon,
the same shall be immediately removed by Tenant, with proper disposal, and all
required cleanup procedures shall be diligently undertaken pursuant to all
Environmental Laws. If at any time during or after the Term, the Premises are
found to be so contaminated or subject to such conditions, Tenant shall defend,
indemnify and hold Landlord harmless from all claims, demands, actions,
liabilities, costs, expenses, damages and obligations of any nature arising from
or as a result of the use of the Premises by Tenant. Tenant will maintain on the
Premises a list of all materials stored at the Premises for which a material
safety data sheet (an "MSDS") was issued by the producers or manufacturers
thereof, together with copies of the MSDS's for such materials and shall deliver
such lists and MSDS copies to Landlord upon Landlord's request therefor. Tenant
shall remove all Permitted Materials from the Premises in a manner acceptable to
Landlord before Tenant's right to possess the Premises ends. Unless expressly
identified on an addendum to this Lease, as of the date hereof there are no
"Permitted Activities" or "Permitted Materials" for purposes of the foregoing
provision and none shall exist unless and until approved in writing by the
Landlord. Provided Landlord has delivered to Tenant at least ten (10) business
days prior written notice thereof (except in an emergency, in which case no
prior notice will be required), Landlord may enter the Premises and conduct
environmental inspections and tests therein as it may require from time to time,
provided that Landlord shall use reasonable efforts to minimize the interference
with Tenant's business. Such inspections and tests shall be conducted at
Landlord's expense, unless they reveal the presence of Hazardous Substances
(other than Permitted Materials) or that Tenant has not complied with the
requirements set forth in this Section 25, in which case Tenant shall reimburse
Landlord for the cost thereof within ten business days after receipt of
Landlord's written request therefor.
26. LANDLORD'S LIEN. Landlord hereby waives any and all lien or other
security interest, statutory or otherwise, it may have in all goods inventory,
equipment, fixtures, furniture, improvements, chattel paper, accounts, and
general intangibles, and other personal property of Tenant now or hereafter
situated on or relating to Tenant's use of the Premises, other than any liens
Landlord may obtain to secure a judgment obtained against Tenant.
27. NO OFFER. The submission of this Lease to Tenant shall not be
construed as an offer to enter into this Lease. Tenant shall have no rights
under this Lease or in or to the Premises, unless and until Landlord has
executed a copy of this Lease and delivered it to Tenant.
28. NO WARRANTIES. EXCEPT AS EXPRESSLY PROVIDED OTHERWISE IN THIS
AGREEMENT, TENANT ACKNOWLEDGES THAT (1) IT HAS INSPECTED AND ACCEPTS THE
PREMISES IN AN "AS IS, WHERE IS" CONDITION, (2) THE BUILDINGS AND IMPROVEMENTS
COMPRISING THE SAME ARE SUITABLE FOR THE PURPOSE FOR WHICH THE PREMISES ARE
LEASED AND LANDLORD HAS MADE NO WARRANTY, REPRESENTATION, COVENANT, OR AGREEMENT
WITH RESPECT TO THE MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF THE
PREMISES, (3) SUBJECT TO SECTION 1 (C), THE PREMISES ARE IN GOOD AND
SATISFACTORY CONDITION, (4) NO REPRESENTATIONS AS TO THE REPAIR OF THE PREMISES,
NOR PROMISES TO ALTER, REMODEL OR IMPROVE THE PREMISES HAVE BEEN MADE BY
LANDLORD (UNLESS AND EXCEPT AS MAY BE SET FORTH IN EXHIBIT B ATTACHED TO THIS
LEASE, IF ONE SHALL BE ATTACHED, OR AS IS OTHERWISE EXPRESSLY SET FORTH IN THIS
LEASE), AND (5) THERE ARE NO REPRESENTATIONS OR WARRANTIES, EXPRESSED, IMPLIED
OR STATUTORY, THAT EXTEND BEYOND THE DESCRIPTION OF THE PREMISES.
29. EXHIBITS. The following exhibits hereto are incorporated herein by
this reference:
<TABLE>
<S> <C>
Exhibit A Outline of Premises
Exhibit A1 Legal Description of Land
Exhibit B Tenant Work
Exhibit C Extension Options
Exhibit D Parking
Exhibit D -1 New Parking Area
Exhibit E Tenant Preferential Right to Lease
Exhibit F Repair Allowance
Exhibit F - 1 List of Repair Items
Exhibit G Non-disturbance, subordination and attornment agreement
</TABLE>
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30. SPECIAL PROVISIONS
(a) ROOF. Tenant shall have the right of access to and upon the roof
of the Building for Tenant uses approved by Landlord, which approval shall not
be unreasonably withheld, delayed or conditioned. Any installations or
improvements made in or upon the roof of the Building shall be made only in
accordance with plans and specifications which have been previously approved by
Landlord and shall be removed by Tenant prior to the end of the Term (and Tenant
shall repair all damage caused thereby if requested by Landlord). All
improvements shall be constructed, maintained and used by Tenant, at its risk
and expense in accordance with all Laws; Landlord's approvals of the plans and
specifications therefor shall not be a representation by Landlord that such
improvements comply with any Law.
(b) SIGNAGE. Subject to Landlord's prior approval (which shall not be
unreasonably withheld, delayed or conditioned) of the location, design, size,
color, material composition, and plans and specifications therefor, Tenant may,
at its sole risk and expense, construct a monument and/or Building sign (the
"SIGN") on the grounds or the Building. If Landlord grants its approval, Tenant
shall erect the Sign in accordance with the approved plans and specifications,
in a good and workmanlike manner, in accordance with all Laws, regulations,
restrictions (governmental or otherwise), and architectural guidelines in effect
for the area in which the Building is located and has received all requisite
approvals thereunder (the "SIGN REQUIREMENTS"), and in a manner so as not to
unreasonably interfere with the use of the Building grounds or the Building
while such construction is taking place; thereafter, Tenant shall maintain the
Sign in a good, clean, and safe condition in accordance with the Sign
Requirements. After Tenant's right to possess the Premises has been terminated,
Landlord may require that Tenant remove the Sign by delivering to Tenant written
notice thereof within 30 days after the end of the Term. If Landlord so requests
(but only with a Building sign), Tenant shall remove the Sign, repair all damage
caused thereby, and return that portion of the Building on which the Sign was
located to their condition before the installation of the Sign within 30 days
after after receipt of Landlord's written request therefor. If Tenant fails to
timely do so, Landlord may, without compensation to Tenant, at Tenant's expense,
remove the Sign, perform the related restoration and repair work and dispose of
the Sign in any manner Landlord deems appropriate. Tenant shall defend,
indemnify, and hold harmless Landlord from all losses, claims, costs and
liabilities arising in connection with or relating to the construction,
installation, maintenance and use during the Term of the Lease, or removal of
the Sign, INCLUDING THOSE ARISING FROM LANDLORD'S NEGLIGENCE. The rights granted
to Tenant under this Section 30.(b) may not be assigned to any party, except as
to a Permitted Transferee.
(c) GENERATOR. Tenant may install, operate, and maintain generators
reasonably necessary for Tenant's business operations in the Premises for
emergency back-up purposes (the "GENERATOR", which defined term shall also refer
to all related equipment) at a location on the Building grounds acceptable to
Landlord, provided that the installation, maintenance, use, and operation
thereof complies with all Laws and architectural guidelines in effect for the
area in which the Building is located as they may be amended from time to time
(the "LEGAL REQUIREMENTS"), and Tenant receives all approvals, consents, and
permits required under the Legal Requirements before the installation,
maintenance, use, and operation thereof. Before beginning the installation of
the Generator, Tenant shall deliver to Landlord final plans and specifications
therefor prepared by an engineer reasonably approved by Landlord and setting
forth in detail the design, location, size, and method of installation
(including, without limitation, separation walls and ventilation system) for
Landlord's review and approval, together with evidence reasonably satisfactory
to Landlord that all Legal Requirements have been satisfied. Landlord's approval
of any such plans and specifications shall not constitute a representation or
warranty by Landlord that such plans and specifications comply with the Legal
Requirements; such compliance shall be the sole responsibility of Tenant. The
Generator shall be installed and screened in a manner acceptable to Landlord,
and no underground storage tanks may be installed or used in connection
therewith. Additionally, the generator model, size and weight shall be subject
in all respects to Landlord's prior written approval, not to be unreasonably
withheld, delayed or conditioned. Upon approval of the plans and specifications
therefor and the size and location thereof, Tenant may install the Generator
provided that such work is performed in a good and workmanlike manner, in
accordance with all Legal Requirements and the plans and specifications therefor
and in a manner so as not to damage the Building; thereafter, Tenant shall use,
maintain, and operate the Generator in a good, clean, and safe condition and in
accordance with all Legal Requirements. Tenant shall repair all damage caused by
the installation, use, maintenance, operation, or removal of the Generator and,
upon its removal, restore the portion of the Building or grounds where it was
located to its condition immediately before the installation thereof. If Tenant
fails
16
<PAGE> 21
to do so within 30 days after receipt Landlord's written request, Landlord may
perform such work and Tenant shall pay to Landlord all reasonable costs incurred
in connection therewith within 30 days after receipt of Landlord's written
request therefor or Landlord may deem the Generator abandoned by Tenant and, at
Landlord's sole risk and expense, use such Generator without compensation to
Tenant. Tenant shall properly fuel and immediately remove from the area
surrounding the Generator any spills or other leaks of fluid from the Generator.
Additionally, Tenant shall ensure that the Generator is properly exhausted at
all times so no odors emanate therefrom. The Generator shall be installed, used,
maintained, operated, and removed at Tenant's risk and expense and Tenant shall
maintain insurance in respect thereof reasonably satisfactory to Landlord,
listing Landlord as an additional insured. IT IS THE INTENTION OF THE PARTIES
THAT TENANT BEAR ALL RISKS RELATING TO THE INSTALLATION, REMOVAL AND TENANT'S
USE, MAINTENANCE, AND OPERATION DURING THE TERM, AND REMOVAL OF THE GENERATOR;
THEREFORE, TENANT SHALL DEFEND, INDEMNIFY, AND HOLD HARMLESS LANDLORD, ITS
AGENTS, AND THEIR RESPECTIVE AFFILIATES FROM ALL LOSSES, CLAIMS, COSTS, AND
LIABILITIES ARISING IN CONNECTION WITH OR RELATING TO THE INSTALLATION, REMOVAL
AND TENANT'S USE, MAINTENANCE, AND OPERATION DURING THE TERM OF THE GENERATOR,
INCLUDING, WITHOUT LIMITATION, THAT ARISING FROM LANDLORD'S NEGLIGENCE (OTHER
THAN ITS SOLE OR GROSS NEGLIGENCE OR WILLFUL MISCONDUCT).
Executed by Tenant on July 14, 1998.
TENANT: ADVANCE PARADIGM, INC., a Delaware corporation
By:
---------------------------------------------------------
Jon S. Halbert, Executive Vice President,
Chief Operating Officer
Address: 545 E. John Carpenter Frwy., Suite 1570
Irving, Texas 75062
Telephone: 972-830-6057
Fax: 972-830-6196
By:
---------------------------------------------------------
Name: David D. Halbert
Title: President & Chief Executive Officer
Address: 545 E. John Carpenter Frwy., Suite
Irving, Texas 75062
Telephone: 972-830-6199
Fax: 972-830-6197
Executed by Landlord on July 14, 1998.
LANDLORD: CRIN-RICHARDSON I, L.P., a ______ limited partnership
By: CRIN-Campbell I, L.L.C., as general partner
By: InvestCrow I, L.L.C., its Managing Member
By:
---------------------------------------------------------
Name: P. Jonathan Draces
Title: Chairman of the Executive Committee
Address: 1300 Campbell Road Associates Ltd.
C/o Trammel Crow
P.O. Box 971122, Dallas, TX 75397
Telephone: (972) 715-1666
Fax: (972) 991-7461
A-1
<PAGE> 22
EXHIBIT A
Outline of Premises
[Description of Premises and Land]
A-2
<PAGE> 23
EXHIBIT B
TENANT WORK
1. Except as provided in Section 1.(c) of the Lease, Tenant hereby
accepts the Premises in their "AS-IS" condition, and Landlord shall have no
obligation to perform any work therein (including, without limitation,
demolition of any improvements existing therein or construction of any tenant
finish-work or other improvements therein), and, except as provided in Section
6.(b) of the Lease shall not be obligated to reimburse Tenant or provide an
allowance for any costs related to the demolition or construction of
improvements therein. Before Tenant may occupy the Premises to conduct its
business therein, Tenant shall, at its expense, obtain and deliver to Landlord a
certificate of occupancy or equivalent form from the appropriate governmental
authority for the Premises.
2. Before commencing any Work, Tenant shall provide to Landlord for its
approval final working drawings or partial drawings sufficient to begin Work,
prepared by an architect that has been approved by Landlord (which approval
shall not unreasonably be withheld, delayed, or conditioned), of all
improvements that Tenant proposes to install in the Premises; such working
drawings shall include the partition layout, ceiling plan, electrical outlets
and switches, telephone outlets, drawings for any modifications to the
mechanical and plumbing systems of the Building, and detailed plans and
specifications for the construction of the improvements called for under this
Exhibit in accordance with all Laws. Further, if any of Tenant's proposed
construction work will affect the Building's Structure, the Building's HVAC,
electrical, mechanical, or plumbing systems, then the working drawings
pertaining thereto shall be prepared by a licensed engineer selected by Tenant
and reasonably acceptable to Landlord, whom Tenant shall at its cost engage for
such purpose. Landlord's approval of such working drawings shall not be
unreasonably withheld, delayed, or conditioned and shall be given in writing
within 5 days of receipt by Landlord or such drawings shall be deemed approved
by Landlord. The Working Drawings shall (a) comply with all Laws, (b) be
sufficiently detailed to allow construction of the improvements in a good and
workmanlike manner, and (c) the improvements depicted thereon conform to the
rules and regulations promulgated from time to time by the Landlord for the
construction of tenant improvements (a copy of which has been delivered to
Tenant). As used herein, "WORKING DRAWINGS shall mean the final working drawings
approved by Landlord, as amended from time to time by any approved changes
thereto, and "WORK" shall mean all improvements to be constructed in accordance
with and as indicated on the Working Drawings. Approval by Landlord of the
Working Drawings shall not be a representation or warranty of Landlord that such
drawings are adequate for any use, purpose, or condition, or that such drawings
comply with any applicable law or code, but shall merely be the consent of
Landlord to the performance of the Work. Landlord shall, at Tenant's request,
sign the Working Drawings to evidence its review and approval thereof. All
changes in the Work must receive the prior written approval of Landlord, and in
the event of any such approved change Tenant shall, upon completion of the Work,
furnish Landlord with an accurate, reproducible "as-built" plan (e.g., sepia) of
the improvements as constructed, which plan shall be incorporated into this
Lease by this reference for all purposes.
3. All Work shall be performed only by contractors and subcontractors
approved in writing by Landlord, which approval shall not be unreasonably
withheld, delayed, or conditioned. Tenant shall have the right to competitive
bid all the work to reputable contractors. Landlord or an affiliate shall
perform construction management services in connection with the Work. Tenant
shall pay such entity a construction management fee of $5,000. All contractors
and subcontractors shall be required to procure and maintain insurance against
such risks, in such amounts, and with such companies as Landlord may reasonably
require and Certificates of such insurance, with paid receipts thereof, must be
received by Landlord before the Work is commenced. The Work shall be performed
in a good and workmanlike manner that is free of defects and is in strict
conformance with the Working Drawings. At Landlord's request, Tenant shall
deliver suitable evidence of timely and complete payment of all contractors
performing any part of the Work, together with lien waivers relating to such
work.
4. Landlord or its affiliate shall have the right to supervise all Work
and coordinate the relationship between the Work, the Building, and the
Building's systems.
B-1
<PAGE> 24
5. To the extent not inconsistent with this Exhibit, Section 6 of this
Lease shall govern the performance of all Work and the Landlord's and Tenant's
respective rights and obligations regarding the improvements installed pursuant
thereto.
6. After Landlord tenders possession of the Premises to Tenant, Tenant
may enter the Premises to perform the Work, provided that (a) Landlord is given
prior written notice of any such entry, (b) such entry shall be coordinated with
Landlord, and (c) Tenant shall deliver to Landlord evidence that the insurance
required under this Lease has been obtained. Any such entry shall be on the
terms of this Lease, but no Rent shall accrue in respect of Base Rent or
Operating Expenses during the period before the Commencement Date that Tenant so
enters the Premises.
B-2
<PAGE> 25
EXHIBIT C
EXTENSION OPTIONS
Provided no Event of Default exists and Tenant is occupying the entire
Premises at the time election, Tenant may renew this Lease for two additional
periods of five years each on the same terms provided in the Lease (except as
set forth below). If Tenant wishes to renew the Lease, Tenant shall deliver to
Landlord written notice thereof (an "EXTENSION NOTICE") no later than 9 months
before the expiration of the Term. Landlord shall then have a period of thirty
days after receipt of the Extension Notice to provide Tenant with the Fair
Market Rental Rate (defined below) for the extended Term. Tenant shall notify
Landlord in writing whether Tenant elects to extend the Term at the Fair Market
Rental Rate within 60 days after receipt of Landlord's notice. As used herein,
the term Fair Market Rental Rate shall mean the rate (including tenant
improvements, inducements and allowances) then being charged to new tenants in
comparable buildings (within a one mile radius of the Building), at the
commencement of such extended Term, for space of comparable quality, size, and
utility. If Tenant elects to extend the Term, on or before the Commencement Date
of extended Term in question, Landlord and Tenant shall execute an amendment to
this Lease extending the Term on the same terms provided in this Lease, except
as follows:
(1) The Basic Rental payable for each month during each such
extended Term shall be the Fair Market Rental Rate for the extended
Term;
(2) Tenant shall have no further options for additional
parking;
(3) Tenant shall have no further renewal options or
expansion options (except as otherwise provided herein) unless
expressly granted by Landlord in writing; and
(4) Landlord shall lease to Tenant the Premises in their
then-current condition, and Landlord shall provide to Tenant all
allowances and other tenant inducements available in the market for
comparable office buildings within a 1-mile radius of the Building.
Tenant's right under this Exhibit shall terminate if (A) this Lease of
Tenant's right to possession of the Premises is terminated, (B) Tenant assigns
any of its interest in this Lease or sublets any portion of the Premises, except
to a Permitted Transferee , or (C) Tenant fails to timely exercise its option
under this Exhibit, time being of the essence with respect to Tenant's exercise
thereof. Tenant may not assign its right under this Exhibit to any assignee or
subtenant other than to a Permitted Transferee of the entire Premises.
X-1
<PAGE> 26
EXHIBIT D
PARKING
Landlord shall provide Tenant 295 parking spaces as of the Lease
Commencement Date.
Landlord shall construct additional surface parking pursuant to the
plan attached hereto on the portion of the Land depicted on Exhibit D-1 (the
"NEW PARKING AREA"). Within 30 days from the date hereof, Landlord shall submit
a proposal to Tenant for Landlord's construction of the New Parking Area
("LANDLORD'S PROPOSAL") which proposal shall be subject to compliance with all
Laws and Landlord's agreement as to the size, location, design, color and
material composition therefor, the date by which the New Parking Area would be
complete, and estimates of all hard and soft costs incurred in connection with
the design and construction of the New Parking Area (the "NEW PARKING AREA
CONSTRUCTION COSTS"). However, in no event shall the New Parking Area
Construction Costs exceed $150,000 unless Landlord, in its sole discretion,
determines otherwise. Within 15 days from delivery of Landlord's Proposal,
Landlord and Tenant shall execute an agreement confirming whether Tenant accepts
Landlord's Proposal. If Tenant accepts Landlord's Proposal, Tenant shall
increase the annual per-rentable-square-foot Base Rent for the remainder of the
Term after the completion of the New Parking Area by an amount equal to the
amortization of the New Parking Area Construction Costs over the remaining Term
at an interest rate of ten percent (10%). If Tenant rejects Landlord's Proposal,
Tenant may at Tenant's sole cost and expense and with Landlord's consent,
construct the New Parking Area and Landlord shall have no further obligation to
construct the New Parking Area. Any such work to be performed by Tenant to
construct the New Parking Area which Landlord consents to shall be performed in
accordance with the terms of Exhibit B to the extent applicable and in a good
and workmanlike manner free of any liens.
Landlord's obligation to construct the New Parking Area shall be
subject to (a) all applicable Laws, (b) Landlord obtaining financing acceptable
to the Landlord in its sole discretion in all respects for the construction of
the New Parking Area (the "PARKING AREA CONSTRUCTION FINANCING") and (c) the
occurrence of no Event of Default. Landlord shall use reasonably diligent
efforts to obtain such financing. Accordingly, if any Law would prohibit the
Construction of the New Parking Area, or if Landlord cannot obtain Parking Area
Construction Financing on commercially reasonable terms acceptable to Landlord
in its sole discretion, or an Event of Default has occurred, Landlord shall have
no obligation to construct the New Parking Area.
D-1
<PAGE> 27
EXHIBIT E
TENANT'S PREFERENTIAL RIGHT TO LEASE
1. Provided no Event of Default exists, Landlord shall first offer to
lease to Tenant or a Permitted Transferee any new space constructed on the Land
which adds leasable square footage to the Building (the "ADDITIONAL SPACE")
before leasing such space to any third party. Such offer shall be in writing and
specify the lease terms for the Additional Space, including the Rent to be paid
for the Additional Space, the term therefor, and the date on which the
Additional Space shall be included in the Premises (the "OFFER NOTICE"). Tenant
or a Permitted Transferee shall notify Landlord in writing whether Tenant or a
Permitted Transferee elects to lease all of the Additional Space on the terms
set forth in the Offer Notice, within 10 business days after receipt by Tenant
or a Permitted Transferee of the Offer Notice. If Tenant or a Permitted
Transferee timely elects to lease all the Additional Space, then Landlord and
Tenant or a Permitted Transferee shall execute an amendment to this Lease,
effective as of the date the Additional Space is to be included in the Premises,
on the terms set forth in the Offer Notice and, to the extent not inconsistent
with the Offer Notice terms, the terms of this Lease; however, Tenant or a
Permitted Transferee shall accept all the Additional Space in an "AS-IS"
condition and Landlord shall not provide to Tenant or a Permitted Transferee any
allowances (e.g., moving allowance, construction allowance, and the like) or
other tenant inducements except as specifically provided in the Offer Notice.
Notwithstanding the foregoing, if prior to Landlord's delivery to Tenant or
Permitted Transferee of the Offer Notice, Landlord has received an offer to
lease all or part of the Additional Space from a third party (a "THIRD PARTY
OFFER"), Tenant or Permitted Transferee must exercise its rights hereunder. If
Tenant or Permitted Transferee fails or is unable to timely exercise its right
hereunder, then such right shall lapse, time being of the essence with respect
to the exercise thereof, and Landlord may lease all or a portion of the
Additional Space to the same third party on the terms and conditions of the
Third Party Offer provided such third party shall pay its proportionate share of
any common area and Operating Expenses. If Landlord does not lease the
Additional Space to such third party, then the preferential right to lease given
by this Exhibit shall remain in full force and effect for Tenant and Permitted
Transferees. In no event shall Landlord be required to construct Additional
Space.
2. Tenant's rights under this Exhibit shall terminate if this Lease or
Tenant's right to possession of the Premises is terminated.
E-1
<PAGE> 28
EXHIBIT F-1
F-1-1
<PAGE> 29
EXHIBIT F
REPAIR ALLOWANCE
Landlord shall within 180 days of the Commencement Date cause certain repairs
described on Exhibit F-1 attached hereto, to be made to the Building. In no
event shall Landlord pay more than $50,000 (the "REPAIR ALLOWANCE") to repair
such items. In the event the Repair Allowance is not adequate to repair the
entire list of repairs, Landlord shall notify Tenant, promptly following the
Possession Date, of the cost estimate of each item and Tenant shall thereafter
notify Landlord in writing of the priority of the items to be repaired; except
for items 18 through 23 on Exhibit F-1 which Landlord shall commence to repair
immediately after the Possession Date.
F-1
<PAGE> 1
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Net Income Per Share
Net income per share is computed using the weighted average number of
common and dilutive shares outstanding during the period. A reconciliation of
the numerators and denominators of the basic and diluted per-share computations
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------------------
1997 1998 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
BASIC
Numerator:
Net income $ 3,226,000 $ 7,931,000 $ 12,694,000
Preferred stock dividends 553,000 200,000 ---
---------------- ---------------- ----------------
$ 2,673,000 $ 7,731,000 $ 12,694,000
================ ================ ================
Denominator:
Weighted average common
stock outstanding 6,264,521 8,755,754 10,252,145
================ ================ ================
Net income per share $ 0.43 $ 0.88 $ 1.24
================ ================ ================
DILUTED
Numerator:
Net income $ 3,226,000 $ 7,931,000 $ 12,694,000
================ ================ ================
Denominator:
Weighted average common 6,264,521 8,755,754 10,252,145
stock outstanding
Other Dilutive Securities:
Series A preferred stock 1,250,000 --- ---
Series B preferred stock 833,333 1,111,111 36,630
Options and warrants using the
treasury stock method 828,273 1,484,054 1,399,326
---------------- ---------------- ----------------
Weighted average shares outstanding 9,176,127 11,350,919 11,688,101
================ ================ ================
Net income per share $ 0.35 $ 0.70 $ 1.09
================ ================ ================
</TABLE>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Advance Paradigm Mail Services, Inc.
Advance Paradigm Data Services, Inc.
Advance Paradigm Clinical Services, Inc.
Innovative Medical Research, Inc.
Baumel-Eisner Neuromedical Institute
Foundation Health Pharmaceutical Services, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed Form S-8
Registration Statement File No. 333-75351, Form S-8 Registration Statement File
No. 333-34999, and Form S-3 Registration Statement File No. 333-55837.
ARTHUR ANDERSEN LLP
Dallas, Texas,
June 16, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ADVANCE
PARADIGM, INC. FORM 10-K FOR THE YEAR ENDED MARCH 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 42,492
<SECURITIES> 0
<RECEIVABLES> 107,953
<ALLOWANCES> 371
<INVENTORY> 4,015
<CURRENT-ASSETS> 155,740
<PP&E> 23,695
<DEPRECIATION> 8,540
<TOTAL-ASSETS> 276,833
<CURRENT-LIABILITIES> 154,629
<BONDS> 0
0
0
<COMMON> 105
<OTHER-SE> 68,956
<TOTAL-LIABILITY-AND-EQUITY> 276,833
<SALES> 774,822
<TOTAL-REVENUES> 774,822
<CGS> 743,084
<TOTAL-COSTS> 743,084
<OTHER-EXPENSES> 13,949
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,685)
<INCOME-PRETAX> 20,474
<INCOME-TAX> 7,780
<INCOME-CONTINUING> 12,694
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,694
<EPS-BASIC> 1.24
<EPS-DILUTED> 1.09
</TABLE>
