-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NW0ZwLdG0bJIccr4ousiqmWb4jY+vcJ5paP/wmziushk0rShukAJIEepi2HBcnAr UEYwJTu7JwvQ0FvQBsyfmg== 0000912057-97-022165.txt : 19970630 0000912057-97-022165.hdr.sgml : 19970630 ACCESSION NUMBER: 0000912057-97-022165 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970627 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCE PARADIGM INC CENTRAL INDEX KEY: 0001012956 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 752493381 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-21447 FILM NUMBER: 97631279 BUSINESS ADDRESS: STREET 1: 545 E JOHN CARPENTER FREEWAY STREET 2: SUITE 1900 CITY: IRVING STATE: TX ZIP: 75062 BUSINESS PHONE: 2148306199 MAIL ADDRESS: STREET 1: 545 E JOHN CARPENTER FREEWAY SUITE 1900 STREET 2: 545 E JOHN CARPENTER FREEWAY SUITE 1900 CITY: IRVING STATE: TX ZIP: 75062 10-K405 1 FORM 10-K405 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - ---- ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1997 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - ---- EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-21447 ADVANCE PARADIGM, INC. (Exact name of registrant as specified in its charter) DELAWARE 75-2493381 (State or other jurisdiction of (I.R.S. employer incorporation of organization) Identification No.) 545 E. JOHN CARPENTER FREEWAY, SUITE 1900, IRVING, TX 75062 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972)830-6199 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of each exchange Title of each class on which registered ------------------- --------------------- None None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.01 PAR VALUE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on May 30, 1997 as reported on the Nasdaq National Market, was approximately $80,077,000. As of May 30, 1997, Registrant had outstanding 7,800,817 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant's 1997 Annual Meeting of Stockholders are incorporated by reference in Part III. - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ ITEM 1. BUSINESS OVERVIEW Advance Paradigm, Inc. (the "Company") is a leading independent provider of pharmacy benefit management ("PBM") services to health benefit plan sponsors, based on the over ten million health plan members enrolled in the Company's programs. The Company's primary focus is on the delivery of cost-effective, high quality, integrated PBM services. In addition, the Company has developed and is expanding its clinical expertise and disease management services to meet the specialized needs of its plans' members, particularly those requiring costly, long-term and recurring therapies. These services are designed to inform and educate health benefit plan sponsors, their members and participating physicians of nationally recognized practice guidelines for various disease states. The Company's PBM services include clinical and benefit design consultation, formulary and rebate administration, electronic point-of-sale pharmacy claims processing, mail pharmacy distribution, pharmacy network management, drug utilization review ("DUR") and data information reporting services. The Company administers a pharmacy network that includes over 50,000 retail pharmacies throughout the United States. In 1994, as a response to increasing cost-containment pressures from payors, the Company began to utilize its clinical and information systems capabilities to develop health benefit management ("HBM") services. The Company's HBM services include disease management, recommendation of clinical guidelines, patient and physician profiling, case finding and compliance and outcome measurement. In 1995, the Company began marketing its HBM services to health benefit plan sponsors, pharmaceutical manufacturers and contract research organizations, and initiated programs with selected customers. In addition, the Company intends to leverage its existing capabilities and relationships by acquiring companies which have, or are developing, innovative HBM services which will enable the Company to provide a centralized care management alternative for its customers. The Company was incorporated in Delaware in July 1993 as a wholly owned subsidiary of Advance Health Care ("AHC"). Immediately prior to the Company's initial public offering in October 1996, AHC was merged with and into the Company, with the Company being the surviving corporation. Currently, the Company has three wholly owned subsidiaries, Advance Paradigm Mail Services, Inc. ("Advance Mail"), Advance Paradigm Data Services, Inc. ("Advance Data") and Advance Paradigm Clinical Services, Inc. ("Advance Clinical"). Advance Mail was incorporated in 1986 and began operations in early 1987 as a mail order pharmacy. In 1992, Advance Data was incorporated to provide plan participants an alternative for purchasing prescriptions through a network of retail pharmacies and to provide claims adjudication services. In August 1993, Advance Health Care contributed all of the capital stock of Advance Data and Advance Mail to the Company. In December 1993, the Company acquired Advance Clinical, formerly a wholly owned subsidiary of Blue Cross and Blue Shield of Maryland. INDUSTRY BACKGROUND In response to escalating health care costs, cost containment efforts in the health care industry have led to rapid growth in managed care. Despite these efforts, continued advances in medical technology and new drug development have led to significant increases in drug utilization and related costs, creating a need for more efficient, cost effective drug delivery mechanisms. PBM services evolved to address this need. Through volume discounts, retail pharmacy networks, mail pharmacy services, formulary administration, claims processing and DUR, PBMs created an opportunity for health benefit plan sponsors to deliver drugs to their members in a cost-effective manner while improving patient compliance with recommended guidelines. 1 Traditionally, PBMs focused primarily on cost containment by (i) generating volume rebates from pharmaceutical companies, (ii) encouraging substitution of generics for branded medications and (iii) obtaining price discounts through the retail pharmacy network and mail distribution. Over the last several years, in response to increasing payor demand, PBMs have begun to develop sophisticated formulary management capabilities and comprehensive, on-line customer decision support tools in an attempt to better manage the delivery of health care and ultimately costs. Simultaneously, health benefit plan sponsors have begun to focus on the quality and efficiency of care, emphasizing disease prevention, or wellness, and care management. There is growing demand among payors for comprehensive disease management programs as cost containment becomes more dependent on improvements in the quality of care. HBM services are being developed to address this demand through the use of traditional PBM services combined with clinical expertise and sophisticated information systems. THE ADVANCE PARADIGM SOLUTION The Company provides benefit design, formulary and rebate administration, point-of-sale pharmacy claims processing, mail pharmacy, pharmacy network management, DUR and data information reporting services. Through its HBM services, the Company utilizes its expertise in development of formulary designs, recommends "best practices" guidelines, and has created patient and physician profiling, clinical intervention strategies and proprietary case finding techniques. The Company's proprietary decision support systems provide a platform for the delivery of outcomes-based HBM services. As part of its HBM services, which integrate the Company's decision support systems with its core clinical expertise, the Company currently provides disease management programs that address various disease states. SERVICES PHARMACEUTICAL BENEFIT MANAGEMENT. The Company's PBM services include clinical and benefit design consultation, formulary and rebate administration, electronic point-of-sale pharmacy claims processing, mail pharmacy distribution, pharmacy network management, DUR and data information reporting. The Company administers a pharmacy network which includes over 50,000 retail pharmacies throughout the United States. The Company currently provides PBM services to over 300 health plan benefit sponsors covering over ten million plan members enrolled in the Company's programs. The Company's PBM services are divided among three divisions: Clinical Services, Data Services and Mail Pharmacy Services. CLINICAL SERVICES. The Company develops and implements customized programs of clinical and formulary management services to reduce drug benefit costs while promoting clinically appropriate drug usage. The Company works closely with each customer to determine the desired features of a benefit plan, such as which drugs are covered, extent of generic substitution and co-payment levels. The Company also develops customized formularies which recommend the most clinically appropriate, cost-effective drugs to be prescribed. Formularies are listings of drugs and treatment protocols to be followed by the prescribing physician that are intended to reduce the costs of prescription drugs under a particular health plan. Formularies reduce cost through the use of generic substitution, therapeutic substitution and other techniques and may also generate leverage for the Company to negotiate more favorable rebates and other volume discounts from drug manufacturers. Formulary compliance can be encouraged by (i) plan design features such as tiered co-payments, which require the member to pay a higher amount for the non-preferred drug, (ii) prescriber education programs in which the Company or the managed care customer actively seek to educate the prescribers about the formulary preferences and (iii) therapeutic substitution programs that target certain high-cost therapies for concentrated formulary compliance efforts. The Company continually monitors the efficacy and therapeutic applications of pharmaceutical 2 products, the availability of new drugs and generic equivalents and rebate and other pricing arrangements with drug manufacturers. The Company works closely with each customer to develop a customized formulary based on the customer's drug utilization patterns and member and physician populations. The Company employs several intervention strategies to promote formulary compliance by altering physician prescribing patterns. The Company utilizes its decision support software to analyze data and present reports to plan sponsors or physicians that compare a physician's formulary compliance against his or her peers in the plan. The Company provides proprietary educational materials to plan physicians, pharmacists or the plan sponsor to promote general education and formulary compliance. DATA SERVICES. The Company's retail pharmacy network and claims adjudication services provide plan sponsors an efficient, automated claims processing network that permits point-of-sale adjudication and data collection. The Company administers a network of approximately 50,000 retail pharmacies which are preferred providers of prescription drugs to members of the pharmacy benefit plans managed by the Company (the "Advance Pharmacies"). The Advance Pharmacies have agreed to accept payments at predetermined negotiated rates, which the Company believes to be generally more favorable than typical retail prices. The Company's claims adjudication services division is its most rapidly growing division with the number of claims processed increasing from approximately 816,000 claims in fiscal year 1994 to over 26.6 million claims processed in fiscal year 1997, including over 8.3 million claims processed in the quarter ended March 31, 1997. The Advance Pharmacies are linked to the Company's Advance Rx-Registered Trademark- on-line claims adjudication and processing system, which contains patient medication history, plan enrollment and eligibility data. The Advance Rx-Registered Trademark- on-line system provides pharmacists with point-of-sale information including plan design, drugs covered, negotiated price and co-payment requirements, as well as extensive drug utilization evaluation capabilities. The Advance Rx-Registered Trademark- system performs on-line concurrent drug utilization evaluation at the point of sale including verification of eligibility, and identifies potential drug interactions, frequency of refills and other matters. Within seconds of submitting a prescription to the Advance Rx-Registered Trademark- system, the pharmacist receives a computerized message as to whether the prescription will be accepted by the Company for payment. In addition, the Company can alert the pharmacist that the prescribed drug is not the preferred formulary drug, that therapeutic or generic substitution opportunities are available, or as to the need to comply with prior authorization programs. MAIL PHARMACY SERVICES. The Company's mail pharmacy services enable plan sponsors to realize further cost savings on maintenance medications, while benefiting from the Company's automated claims adjudication and data collection capabilities. Cost savings to plan sponsors result from promotion of formulary compliance by the Company's in-house pharmacy, and price discounts to the Company from volume purchases. The mail pharmacy typically dispenses up to 100-day supplies of medications for chronic conditions, thereby reducing repetitive dispensing fees. The Company believes that its mail pharmacy services reduce costs to plan sponsors because the Company's role as pharmacist allows for direct enforcement of the formulary, generic and therapeutic substitution, volume purchasing discounts, and lower dispensing fees than are typically available through retail pharmacies. In addition, the Company's control over the dispensing process permits it to ensure that formulary compliance programs are followed, to perform DUR on each prescription and to reduce the potential for submission of fraudulent, incorrect or ineligible claims. Plan sponsors also benefit from the drug utilization review capabilities of the Company's management information system, which assist in preventing potential abuse by plan participants and help identify areas to be targeted for further cost reductions. The Company's mail service pharmacy is located in approximately 38,000 square feet of leased space in Richardson, Texas and currently dispenses approximately 15,000 prescriptions per week. 3 The mail service dispensing process is highly automated, featuring bar code and scanning technology to route and track orders, computerized dispensing of many medications and computer-generated mailing labels and invoices. To ensure accurate dispensing of prescriptions, the mail service system is equipped with automated quality control features, and each prescription is inspected by a registered pharmacist. HEALTH BENEFIT MANAGEMENT. The Company's HBM services include disease management, recommendation of clinical guidelines, patient and physician profiling, case finding and compliance and outcomes measurement. By analyzing patients' medical and pharmacy claim patterns, the Company can assist payors and health care providers in the early identification of patients whose care might be improved through additional or alternative treatment or medication. The Company's disease management programs incorporate clinical protocols based on specific medical treatments and "best treatment practices" from the medical community. These protocols are represented as a series of algorithms or rules contained in the Company's decision support systems. These algorithms are updated continually by the Company based upon changes in nationally recognized best treatment practices, clinical experience and review of current medical literature. In January 1997, the Company announced a multi-year distribution, licensing and development agreement with National Health. Under the agreement, the Company will work with National Health to jointly develop fully integrated personal care management products for the managed care marketplace. In addition, the Company will license and distribute personal health management services from National Health's Call Center Services division, allowing the Company to expand its health benefit management product offering immediately. With National Health, the Company's primary focus was selecting a strategic partner in the development of technology and information products and services designed to improve health and promote wellness. With over 700 clients nationwide, National Health provides Medical Call Center-based products and services to help improve consumer use of and satisfaction with health care resources. DECISION SUPPORT SYSTEMS. In connection with the monitoring, analysis and evaluation of drug utilization for its PBM customers and following years of development, the Company introduced proprietary decision support systems. One of the Company's proprietary decision support systems, ApotheQuery-Registered Trademark-, enables the Company to identify cost-saving opportunities arising from the possible overuse or inappropriate use of drugs, the use of high cost drugs and the use of drugs not on the formulary. The Company's decision support systems have been developed using commercially available technology and are not protected by any patents. The Company protects its decision support systems through physical security measures as well as access security procedures. In 1994, the Company began to integrate its customers' pharmacy claims with applicable medical and laboratory claims and patient survey data, when available. This integrated health care database complements the capabilities of ApotheQuery-Registered Trademark- by including data points for diagnosis and treatment codes. This allows the Company and its customers to identify problem areas for the health plan and implement timely clinical solutions. It further enhances the Company's ability to complete meaningful outcomes studies and to develop disease management programs. STRATEGIC ALLIANCES The Company has successfully established strategic relationships with certain large pharmaceutical manufacturers and major customers. In its strategic relationships with drug manufacturers, the Company strives to create collaborative relationships whereby the Company provides the manufacturers with products and services that permit the manufacturers to benefit from the Company's expertise in disease management and pharmacy and medical claims data 4 analysis, while the Company and its clients benefit from the marketing and financial resources of the manufacturers. Through this type of relationship, the Company licenses selected disease management programs to the manufacturers and provides other related services. In its strategic relationships with certain major customers, certain customers have assumed equity positions in the Company, which fosters the development of long-term strategic alliances. This arrangement allows for increased information flow between the Company and customers to facilitate the progressive development of solutions to meet the customers' unique PBM and HBM service needs. SALES, MARKETING AND CUSTOMER SERVICE The Company markets and sells its services through a direct sales force consisting of four national sales and marketing representatives located in Baltimore, Cleveland, Scottsdale and Irving. Sales and marketing representatives are supported by a staff of customer service representatives in the Company's facilities located in the Baltimore and Dallas areas. The Company's proposal development group and marketing staff also work closely with the sales representatives. The typical sales cycle takes approximately six to nine months. COMPETITION The Company competes with a number of larger, national companies, including Caremark International Inc. (a subsidiary of MedPartners, Inc.), Diversified Pharmaceutical Services, Inc. (a subsidiary of SmithKline Beecham Corporation), Express Scripts, Inc. (an affiliate of NYLIFE HealthCare Management, Inc.), Merck Medco Managed Care, Inc., (a subsidiary of Merck & Co., Inc.), PCS Health Systems, Inc. (a subsidiary of Eli Lilly & Company), and Value Health, Inc. (which recently announced it would be acquired by Columbia/HCA Healthcare Corporation). These competitors are significantly larger than the Company and possess greater financial, marketing and other resources than the Company. To the extent that competitors are owned by pharmaceutical manufacturers, they may have pricing advantages that are unavailable to the Company and other independent PBMs. The Company believes that the primary competitive factors in the PBM and HBM industries include: independence from drug manufacturers and payors; the quality, scope and costs of products and services offered to insurance companies, HMOs, employers and other sponsors of health benefit plans and plan participants; responsiveness to customers' demands; the ability to negotiate favorable rebate and volume discounts from drug manufacturers; the ability to identify and apply effective cost containment programs utilizing clinical strategies; the ability to develop formularies; the ability to market PBM and HBM services to health benefit plan sponsors; a strong managed care customer base which supports the development of HBM products and services; and the commitment to providing flexible, clinically oriented services to customers. The Company believes that its larger competitors offer comprehensive PBM services and some form of HBM services. The Company considers its principal competitive advantages to be its independence from drug manufacturers and payors, strong managed care customer base which supports the development of HBM services, and commitment to providing flexible, clinically oriented services to its customers. LIABILITY INSURANCE Certain aspects of the Company's operations, including the dispensing of pharmaceuticals, may subject the Company to claims for personal injuries, including those resulting from dispensing errors, package tampering and product defects. The Company carries the types of insurance customary in its industry, including professional liability and general and product liability insurance. The Company believes that its insurance protection is adequate for its present business operations. Although pharmacies in general have not, as yet, experienced any unusual difficulty in obtaining insurance at an affordable cost, there can be no assurance that the Company will be able 5 to maintain its coverage at acceptable costs in the future or, if it does, that the amount of such coverage would be sufficient to cover all potential claims. GOVERNMENT REGULATION Various aspects of the Company's businesses are governed by federal and state laws and regulations and compliance is a significant operational requirement for the Company. The Company believes that it is in substantial compliance with all existing legal requirements material to the operation of its business. Certain federal and related state laws and regulations affect aspects of the Company's PBM business. Among these are the following: FDA REGULATION. The U.S. Food and Drug Administration ("FDA") generally has authority to regulate drug promotional materials that are disseminated "by or on behalf of" a drug manufacturer. In October 1995, the FDA held hearings to determine whether and to what extent the activities of PBM companies should be subject to FDA regulation. At this hearing, FDA officials expressed concern about the efforts of PBMs that are owned by drug manufacturers to engage in therapeutic switching programs and about the criteria used by such PBMs that govern the inclusion and exclusion of particular drugs in formularies. Although the FDA has not published any proposed rules to date on the regulation of PBMs, there can be no assurance that the FDA will not seek to increase regulation pertaining to the PBM industry, including with respect to companies that are not owned by drug manufacturers. ANTI-REMUNERATION LAWS. Medicare and Medicaid law prohibits, among other things, an entity from paying or receiving, subject to certain exceptions and "safe harbors", any remuneration to induce the referral of Medicare or Medicaid beneficiaries or the purchase (or the arranging for or recommending of the purchase) of items or services for which payment may be made under Medicare, Medicaid or other federally-funded health care programs. Several states also have similar laws which are not limited to services for which Medicare or Medicaid payment may be made. Further, the Clinton administration has proposed that anti-remuneration laws also be applied to services for which Medicare or Medicaid payments are not made. State anti-remuneration laws vary and have been infrequently interpreted by courts or regulatory agencies. Sanctions for violating these federal and state anti-remuneration laws may include imprisonment, criminal and civil fines, and exclusion from participation in the Medicare and Medicaid programs. The courts in several recent cases have ruled that contracts that violate anti-remuneration laws are voidable. The federal statute has been interpreted broadly by courts, the Office of Inspector General ("OIG") within the Department of Health and Human Services ("HHS"), and administrative bodies. Because of the federal statute's broad scope, federal regulations establish certain "safe harbors" from liability. Safe harbors exist for certain properly reported discounts received from vendors, certain investment interests, and certain properly disclosed payments made by vendors to group purchasing organizations. A practice that does not fall within a safe harbor is not necessarily unlawful, but may be subject to scrutiny and challenge. In the absence of an applicable statutory exception or safe harbor, a violation of the statute may occur even if only one of the purposes of a payment arrangement is to induce patient referrals or purchases. Among the practices that have been identified by the OIG as potentially improper under the statute are certain "product conversion programs" in which benefits are given by drug manufacturers to pharmacists or physicians for changing a prescription (or recommending or requesting such a change) from one drug to another. Such laws have been cited as a partial basis, along with the state consumer protection laws discussed below, for investigations and multi-state settlements relating to financial incentives provided by drug manufacturers to retail pharmacists in connection with such programs. 6 To the Company's knowledge, these anti-remuneration laws have not been applied to prohibit PBMs from receiving amounts from drug manufacturers in connection with drug purchasing and formulary management programs, to therapeutic substitution programs conducted by independent PBMs, or to the contractual relationships such as those the Company has with certain of its customers. The Company believes that it is in substantial compliance with the legal requirements imposed by such laws and regulations, and the Company believes that there are material differences between drug-switching programs that have been challenged under these laws and the programs offered by the Company to its customers. However, there can be no assurance that the Company will not be subject to scrutiny or challenge under such laws and regulations, or that any such challenge would not have a material adverse effect upon the Company. OIG STUDY. The OIG Office of Evaluation and Inspections (which is not responsible for investigations of potential violations of anti-remuneration laws, but which seeks to improve the effectiveness and efficiency of HHS programs) issued a report on PBM arrangements on April 15, 1997. The report was based primarily on a nationwide survey of HMOs that use PBMs, and examined the benefits of, and concerns raised by, the HMOs' relationships with PBMs. The report identified two major concerns: (1) the potential for bias resulting from alliances of PBMs and drug manufacturers and (2) the lack of oversight by HMOs regarding the performance of PBMs in delivering quality services to beneficiaries. The report makes two main recommendations. First, the Health Care Financing Administration (HCFA) and state Medicaid programs should include stronger oversight provisions in their risk contracts with HMOs by requiring HMOs to review the performance of the PBMs with which they contract. Second, HCFA, FDA and the Health Resources and Services Administration (HRSA), working with outside organizations, should develop quality measures for pharmacy practices that can be used in managed care settings. While the named agencies generally concurred with the report's conclusions, as of yet they have not taken any formal actions with respect to the report. The Company intends to closely monitor whether any such actions are taken and whether such actions would have any impact on its business. ERISA REGULATION. The Employee Retirement Income Security Act of 1974 ("ERISA") regulates certain aspects of employee pension and health benefit plans, including self-funded corporate health plans with which the Company has agreements to provide PBM services. There can be no assurance that the U.S. Department of Labor, which is the agency that enforces ERISA, would not assert that the fiduciary obligations imposed by the statute apply to certain aspects of the Company's operations. CONSUMER PROTECTION LAWS. Most states have consumer protection laws that have been the basis for investigations and multi-state settlements relating to financial incentives provided by drug manufacturers to retail pharmacies in connection with drug switching programs. In addition, pursuant to a settlement agreement entered into with 17 states on October 25, 1995, Merck Medco Managed Care, Inc. ("Medco"), the PBM subsidiary of pharmaceutical manufacturer Merck & Co., agreed to require pharmacists affiliated with Medco mail service pharmacies to disclose to physicians and patients the financial relationships between Merck & Co., Medco and the mail service pharmacy when such pharmacists contact physicians seeking to change a prescription from one drug to another. The Company believes that its contractual relationships with drug manufacturers and retail pharmacies do not include the features that were viewed by enforcement authorities as problematic in these settlement agreements. However, no assurance can be given that the Company will not be subject to scrutiny or challenge under one or more of these laws. 7 NETWORK ACCESS LEGISLATION. A majority of states have adopted some form of legislation affecting the ability of the Company to limit access to pharmacy provider networks or from removing network providers. Such legislation may require the Company or its customers to admit any retail pharmacy willing to meet the plan's price and other terms for network participation; this legislation is sometimes referred to as "any willing provider" legislation. The Company has not been materially affected by these statutes because it administers a large network of over 50,000 retail pharmacies and will admit any licensed pharmacy that meets the Company's credentialing criteria, involving such matters as adequate insurance coverage, minimum hours of operation, and the absence of disciplinary actions by the relevant state agencies. LEGISLATION IMPOSING PLAN DESIGN RESTRICTIONS. Some states have legislation that prohibits the plan sponsor from implementing certain restrictive design features. For example, some states provide that members of the plan may not be required to use network providers, but must also be provided with benefits even if they choose to use non-network providers; this legislation is sometimes referred to as "freedom of choice" legislation. Other states mandate coverage of certain benefits or conditions. Such legislation does not generally apply to the Company, but it may apply to certain of the Company's customers such as HMOs and insurers. If such legislation were to become widespread and broad in scope, it could have the effect of limiting the economic benefits achievable through pharmacy benefit management. LICENSURE LAWS. Many states have licensure or registration laws governing certain types of ancillary health care organizations, including PPOs, TPAs, and companies that provide utilization review services. The scope of these laws differs significantly from state to state, and the application of such laws to the activities of pharmacy benefit managers is often unclear. The Company has registered under such laws in those states in which the Company has concluded, after discussion with the appropriate state agency, that such registration is required. LEGISLATION AFFECTING DRUG PRICES. In the past, some states have adopted legislation providing that a pharmacy participating in the state's Medicaid program must give the state the best price that the pharmacy makes available to any third party plan; this legislation is sometimes referred to as "most favored nation" legislation. Such legislation, if enacted in any state, may adversely affect the Company's ability to negotiate discounts in the future from network pharmacies. Other states have enacted "unitary pricing" legislation, which mandates that all wholesale purchasers of drugs within the state be given access to the same discounts and incentives. REGULATION OF FINANCIAL RISK PLANS. Fee-for-service prescription drug plans are not generally subject to financial regulation by the states. However, if the PBM offers to provide prescription drug coverage on a capitated basis or otherwise accepts material financial risk in providing the benefit, laws in various states may regulate the plan. Such laws may require that the party at risk establish reserves or otherwise demonstrate financial responsibility. Laws that may apply in such cases include insurance laws, HMO laws or limited prepaid health service plan laws. Many of these state laws may be preempted in whole or in part by ERISA, which provides for comprehensive federal regulation of employee benefit plans. However, the scope of ERISA preemption is uncertain and is subject to conflicting court rulings. Other state laws may be invalid in whole or in part as an unconstitutional attempt by a state to regulate interstate commerce, but the outcome of challenges to these laws on this basis is uncertain. Accordingly, compliance with state laws and regulations is a significant operational requirement for the Company. MAIL PHARMACY REGULATION. The Company's mail service pharmacy is located in Richardson, Texas and the Company is licensed to do business as a pharmacy in Texas. Many of the states into which the Company delivers pharmaceuticals have laws and regulations that require out-of-state mail service pharmacies to register with the board of pharmacy or similar regulatory body in the state. These states generally permit the mail service pharmacy to follow the laws of the 8 state within which the mail service pharmacy is located. The Company has registered in every state in which, to the Company's knowledge, such registration is required. In addition, various pharmacy associations and boards of pharmacy have promoted enactment of laws and regulations directed at restricting or prohibiting the operation of out-of-state mail service pharmacies by, among other things, requiring compliance with all laws of certain states into which the mail service pharmacy dispenses medications whether or not those laws conflict with the laws of the state in which the pharmacy is located. To the extent that such laws or regulations are found to be applicable to the Company, the Company would be required to comply with them. Other statutes and regulations impact the Company's mail service operations. The Health Care Financing Administration requires mail order pharmacies to provide toll-free numbers for patient counseling of Medicaid recipients residing out of state. Congressionally mandated goals to provide useful information on prescription drugs to the American consumer may involve participation by mail order pharmacies in assisting in the dissemination of such information. Federal statutes and regulations govern the labeling, packaging, advertising and adulteration of prescription drugs and the dispensing of controlled substances. The Federal Trade Commission requires mail order sellers of goods generally to engage in truthful advertising, to stock a reasonable supply of the product to be sold, to fill mail orders within thirty days, and to provide customers with refunds when appropriate. The United States Postal Service has statutory authority to restrict the transmission of drugs and medicines through the mail to a degree that could have an adverse effect on the Company's mail service operations. The U.S. Postal Service has exercised such statutory authority only with respect to controlled substances. Alternative means of delivery are available to the Company. EMPLOYEES As of May 31, 1997, the Company had 336 employees. None of the employees are represented by a labor union. In the opinion of management, the Company's relationship with its employees is good. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This Form 10-K includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts included in this Form 10-K, including without limitation, statements under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" regarding the Company's financial position, the Company's business strategy and the plans and objectives of management of the Company for future operations, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations are disclosed under "Risk Factors", as well as elsewhere in this Form 10-K. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by this section. RISK FACTORS FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; LENGTHY SALES CYCLE; FUTURE RESULTS UNCERTAIN. The Company has experienced and may in the future experience significant fluctuations in revenue and operating results from quarter to quarter and from year to year due to a combination of factors, including: demand for the Company's services; the size, timing of contract signings and recognition of revenues from significant customer additions and losses; increased competition; the Company's success in, and expense associated with, developing and introducing 9 new services; the availability of rebates from pharmaceutical manufacturers; the length of the Company's sales cycles; the Company's ability to increase staff to meet demand; economic conditions generally or in specific industry segments; and other factors outside of the control of the Company. As a result of all of these factors, there can be no assurance that the Company will be profitable on a quarterly or annual basis. Due to the foregoing, it is possible that the Company's operating results in some future quarters will be below analysts' expectations, which in turn could adversely affect the Company's stock price. GROWTH OF HBM SERVICES. The Company is presently expending significant resources to develop and expand its HBM services, and the Company anticipates that it will continue to expend significant resources in the foreseeable future. The Company historically has experienced expense increases when introducing new services. In addition, the Company's strategy for expanding its HBM services entails the acquisition of HBM services providers, or other transactions with such providers to acquire HBM services capabilities. Because the HBM services market is in an emerging stage, there can be no assurance that the Company will be able to consummate such acquisitions or other transactions. Moreover, there can be no assurance that HBM services developed or acquired by the Company will be profitable or that the demand for such services will exist in the future. See "-Risk of Acquisitions." MANAGEMENT OF GROWTH. The Company's business has grown rapidly in the last three years, with total revenues increasing approximately 618% from $35.0 million in fiscal year 1994 to $251.6 million in fiscal year 1997. The Company's recent expansion has resulted in substantial growth in the number of its employees (from 117 at March 31, 1994 to 336 at May 31, 1997), the scope of its operating and financial systems and the geographic distribution of its operations and customers. This recent rapid growth has placed, and if such growth continues will increasingly place, a significant strain on the Company's management and operations. Accordingly, the Company's future operating results will depend on the ability of its officers and other key employees to continue implementing and improving its operations, customer support and financial control systems, and to effectively expand, train and manage its employee base. There can be no assurance that the Company will be able to manage any future expansion successfully or provide the necessary management resources to successfully manage its business, and any inability to do so would have a material adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON CERTAIN KEY CUSTOMERS. The Company depends on a limited number of large customers for a significant portion of its consolidated revenues. During fiscal year 1997, the Company's two largest customers, Arkansas Blue Cross & Blue Shield ("Arkansas BCBS") and the State of Oklahoma, accounted for approximately 18% and 14%, respectively, of the Company's consolidated revenues. During this period, the Company's five largest customers accounted for approximately 55% of the Company's revenues. Loss of the Company's accounts with Arkansas BCBS or the State of Oklahoma, or of any other customers which account for a substantial portion of the Company's business, could have a material adverse effect on the Company's business, operating results and financial condition. See "Business- Customers." POTENTIAL DECLINE IN REBATE REVENUE. Approximately 20% of the Company's consolidated revenues is attributable to arrangements with drug manufacturers relating to volume-based rebate payments as well as fees charged for other products and services. The loss of the Company's account with any of the major drug manufacturers under such arrangements or the failure of the Company to meet certain conditions under such arrangements could have a material adverse effect upon the Company's business, operating results and financial condition. Over the next few years as patents expire covering many brand name drugs that currently have substantial market share, generic products will be introduced that may substantially reduce the market share of the brand name drugs. Historically, manufacturers of generic drugs have not offered rebates on their drugs. In addition, the Company is unable to predict the effect on rebate arrangements that 10 might result if the recent trend of consolidations and alliances in the drug and managed care industry continues, particularly between pharmaceutical manufacturers and PBMs, or that might result from an adverse outcome in the lawsuits filed by retail pharmacies against drug manufacturers and PBMs. The Company provides rebate contracting services for approximately two million lives on behalf of other PBMs. If these other PBMs choose to perform these services for themselves or seek alternative suppliers, the Company's revenues with respect to rebate contracting services would decline which could have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that the PBMs for whom the Company provides rebate contracting services will not soon seek alternative suppliers or acquire the capabilities to perform these services for themselves. CONSOLIDATION AMONG CUSTOMERS. Over the past several years, insurance companies, HMOs and managed care companies have experienced significant consolidation. The Company's managed care customers have been and may continue to be subject to consolidation pressures. Although the Company may benefit from certain consolidations in the industry, there can be no assurance that additional customers will not be lost as a result of acquisitions and no assurance that such activity will not have a material adverse effect upon the Company's business, operating results and financial condition. Consolidation, strategic alliances and in general continued intense competition in the PBM industry have resulted in the past, and may result in the future, in the loss of certain of the Company's customers. There can be no assurance that new and renewal contracts will offset the revenues lost from customers electing not to renew their contracts with the Company. The Company's contracts with its customers typically provide for three-year terms, with automatic 12-month renewals thereafter unless terminated by either party to any given contract upon written notice delivered prior to the annual renewal date. See "-Dependence on Certain Key Customers" and "Business-Competition." COMPETITION. The PBM industry has become very competitive. The Company's competitors include large, profitable and well established companies with substantially greater financial, marketing and other resources than the Company. Several competitors in the PBM business are owned by pharmaceutical manufacturers and may possess purchasing and other advantages over the Company by virtue of such ownership. Price competition in the PBM market has increased and has resulted in reduced margins for many PBMs, including the Company. The Company believes that the primary competitive factors include: independence from drug manufacturers and payors; the quality, scope and costs of products and services offered to insurance companies, HMOs, employers and other sponsors of health benefit plans ("plan sponsors" or "customers") and plan participants; responsiveness to customers' demands; the ability to negotiate favorable rebates and volume discounts from drug manufacturers; the ability to identify and apply effective cost containment programs utilizing clinical strategies; the ability to develop formularies; the ability to market PBM and HBM services to health benefit plan sponsors; a strong managed care customer base which supports the development of HBM products and services; and the commitment to providing flexible, clinically oriented services to customers. There can be no assurance that the Company will continue to remain competitive with respect to the foregoing factors or successfully market integrated PBM or HBM services to new customers. There can be no assurance that consolidation and alliances within the PBM industry will not adversely impact the operations and prospects for independent PBMs such as the Company. See "Business-Competition." RISK OF ACQUISITIONS. Part of the Company's strategy for growth includes acquisitions of complementary services, technologies or businesses that could allow the Company to offer a set of integrated services, in addition to PBM services, to better serve the needs of health benefit plan sponsors. The Company's ability to expand successfully through acquisitions depends on many factors, including the successful identification and acquisition of services, technologies or businesses and management's ability to effectively integrate and operate the acquired services, technologies or businesses. There is significant competition for acquisition opportunities in the PBM and HBM industries. The Company may compete for acquisition opportunities with other 11 companies that have significantly greater financial and management resources. There can be no assurance that the Company will be successful in acquiring or integrating any such services, technologies or businesses or once acquired, that the Company will be successful in selling or integrating such services, technologies or businesses. DEPENDENCE ON KEY MANAGEMENT. The Company believes that its continued success will depend to a significant extent upon the continued services of its senior management, in particular David D. Halbert, Chairman of the Board, Chief Executive Officer and President of the Company. The loss of the services of Mr. D. Halbert or other persons in senior management could have a material adverse effect on the Company's business. The Company maintains a key-person life insurance policy on Mr. D. Halbert. INTANGIBLE ASSETS. At March 31, 1997, approximately $12.7 million, or 12% of the Company's total assets consisted of intangible assets. These intangible assets are being amortized over a period of 40 years. In the event of any sale or liquidation of the Company, there can be no assurance that the value of such intangible assets will be realized. In addition, any significant decrease in the value of such intangible assets could have a material adverse effect on the Company's business, operating results and financial condition. See Note 2 of Notes to Consolidated Financial Statements. GOVERNMENT REGULATION. The PBM industry is subject to extensive federal and state laws and regulations, and compliance with such laws and regulations imposes significant operational requirements for the Company. The regulatory requirements with which the Company must comply in conducting its business vary from state to state. Management believes that the Company is in substantial compliance with all existing statutes and regulations material to the operation of its business. The impact of future legislation and regulatory changes on the Company's business cannot be predicted, and there can be no assurance that the Company will be able to obtain or maintain the regulatory approvals required to operate its business. From time to time, retail pharmacists have expressed opposition to mail order pharmacies. Retail pharmacies, state pharmacy associations or state board of pharmacies in some states have attempted to secure the enactment or promulgation of statutes or regulations that could have the effect of hindering or in some cases prohibiting the delivery of prescription drugs into such state by a mail service pharmacy. The Company is also aware of a Federal Trade Commission investigation relating to the acquisition of companies in the PBM industry, although the Company is not, to its knowledge, the subject of any such investigation. There can be no assurance that such legislation or regulation, if subsequently adopted, or investigation, if commenced, would not have a material adverse effect on the Company's business, operating results and financial condition. See "Business-Government Regulation." DEVELOPMENTS IN THE HEALTH CARE INDUSTRY. The health care industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operation of health care organizations. The Company's services are designed to function within the structure of the health care financing and reimbursement system currently being used in the United States. The Company believes that the commercial value and appeal of its services may be adversely affected if the current health care financing and reimbursement system were to be materially changed. During the past several years, the United States health care industry has been subject to an increase in governmental regulation of, among other things, reimbursement rates. Certain proposals to reform the United States health care system are currently under consideration by Congress. These proposals may increase governmental involvement in health care and otherwise change the operating environment for the Company's customers. Health care organizations may react to these proposals and the uncertainty surrounding such proposals by curtailing or deferring investments in cost containment tools and related technology such as the Company's services. The Company cannot predict what effect, if any, such factors might have on its business, operating results and financial condition. In addition, many health care providers are 12 consolidating to create integrated health care delivery systems with greater regional market power. As a result, these emerging systems could have greater bargaining power, which may lead to price erosion of the Company's services. The failure of the Company to maintain adequate price levels would have a material adverse effect on the Company's business, operating results and financial condition. Other legislative or market-driver reforms could have unpredictable effects on the Company's business, operating results and financial condition. See "Business-Government Regulation." PROFESSIONAL AND GENERAL LIABILITY INSURANCE. Various aspects of the Company's business, including the dispensing of pharmaceutical products, may subject it to litigation and liability for damages. While the Company maintains and intends to maintain professional and general liability insurance coverage, there can be no assurance that the Company will be able to maintain such insurance in the future or that such insurance will be available on acceptable terms or will be adequate to cover any or all potential product or professional liability claims. A successful product or professional liability claim in excess of the Company's insurance coverage could have a material adverse effect upon the Company's business, operating results and financial condition. See "Business-Liability Insurance." TAX RISKS ASSOCIATED WITH THE MERGER. Immediately prior to the Offering, AHC was merged (the "Merger") with and into the Company. Although the Merger was structured as a tax free event, if the Company were to be audited, there can be no assurance that the Internal Revenue Service would not successfully challenge the tax free treatment, which could have a material adverse effect upon the Company's business, operating results and financial condition. CONTROL BY EXISTING STOCKHOLDERS. Officers and directors of the Company and their affiliates own beneficially approximately 37.0% of the Company's outstanding Common Stock. As a result, these stockholders may have the ability to control the Company and influence its affairs and the conduct of its business. Such concentration of ownership may have the effect of delaying, deferring or preventing a change in control of the Company. ITEM 2. PROPERTIES The Company's corporate headquarters are located in approximately 8,000 square feet of leased space in Irving, Texas. This lease expires November 30, 1997. The Company's clinical division is located in approximately 18,260 square feet of leased space in Hunt Valley, Maryland. This lease expires March 31, 1999 with an option to renew for an additional five-year term. The Company's data services division is located in approximately 23,000 square feet of leased space in Dallas, Texas. This lease expires November 30, 1999. The Company's mail service pharmacy is located in approximately 38,000 square feet of leased space in Richardson, Texas. This lease expires May 31, 2001 and has a five-year fixed rate renewal option and an option to purchase at any time during the term of the lease. The Company has entered into negotiations to purchase this pharmacy building. ITEM 3. LEGAL PROCEEDING The Company is party to routine legal and administrative proceedings arising in the ordinary course of its business. The proceedings now pending are not, in the Company's opinion, material either individually or in the aggregate. 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS On October 8, 1996 the Company sold 2,397,067 shares of its Common Stock at $9.00 per share in an initial public offering. Prior to that time, there was no public market for the Company's Common Stock. The Company's Common Stock is traded on the Nasdaq National Market tier of the Nasdaq Stock Market under the Symbol "ADVP". The following table sets forth for the periods indicated the high and low sale prices for the Company's Common Stock as reported by NASDAQ. Fiscal Year 1997 High Low ---------------- ---- --- First Quarter N/A N/A Second Quarter N/A N/A Third Quarter $20 3/4 $7 3/4 Fourth Quarter $25 1/4 $12 7/8 The Company's Common Stock was held by 122 stockholders of record as of May 30, 1997. The Company estimates that its shares were held by approximately 4,100 beneficial stockholders. The Company intends to retain its earnings, if any, to finance the growth and development of its business and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. The payment of any future dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other things, the future earnings, operations, capital requirements and financial condition of the Company. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following tables summarize certain selected consolidated financial data, which should be read in conjunction with the Company's Consolidated Financial Statements and the Notes related thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations", included elsewhere herein. The selected consolidated financial data of the Company as of and for each of the years in the five-year period ended March 31, 1997, have been derived from the Consolidated Financial Statements that have been audited by Arthur Andersen LLP, independent public accountants. 14
Year Ended March 31, ---------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- (In thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues $11,867 $34,970 $91,306 $125,333 $251,562 Cost of operations: Cost of revenues..................... 11,196 32,612 85,532 117,788 240,810 Selling, general and administrative expenses........... 1,091 2,330 4,963 6,158 7,309 -------- -------- -------- -------- ------- Total cost of operations.......... 12,287 34,942 90,495 123,946 248,119 -------- -------- -------- -------- ------- Operating income (loss)................. (420) 28 811 1,387 3,443 Interest income......................... -- -- 91 366 1,560 Interest expense........................ (26) (423) (878) (716) (379) Provision for income taxes............. -- -- -- -- (1,486) -------- -------- -------- -------- ------- Net income (loss)....................... $ (446) $ (395) $ 24 $ 1,037 $3,138 -------- -------- -------- -------- ------- -------- -------- -------- -------- ------- Pro forma: (1) Net income per share................. $ .25 $ .39 Weighted average shares outstanding...................... 7,037 8,718 Historical: Net income (loss) per share.......... $ (.08) $ (.07) $ -- $ .17 $ .38 Weighted average shares outstanding........................ 5,625 5,625 6,200 6,200 8,300
March 31, -------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- (In thousands) BALANCE SHEET DATA: Working capital......................... $ (465) $ 769 $ (453) $ 316 $24,864 Total assets............................ 1,761 29,152 37,288 58,905 107,473 Long-term debt to related parties............................... -- 6,928 7,000 7,000 -- Redeemable preferred stock.............. -- 10,256 11,076 11,896 -- Stockholders' equity (deficit).......... (9) (936) (1,732) (1,498) 42,528
Year Ended March 31, -------------------------------------------------------------------------------- 1994 1995 1996 1997 ---- ---- ---- ---- (In thousands) SUPPLEMENTAL DATA: (2) Pharmacy network claims processed.............................. 816 1,527 9,375 26,579 Mail pharmacy prescriptions filled................................. 228 383 536 677 Estimated health plan members (at period end)................ 3,745 5,208 9,040 10,200
- --------------- (1) Computed on the basis described in Note 2 of Notes to Consolidated Financial Statements. (2) This data has not been audited and is unavailable for fiscal year 1993. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Advance Paradigm, Inc. is a leading independent provider of PBM services to health benefit plan sponsors, with over ten million health plan members enrolled in the Company's programs. The Company's primary focus is on the delivery of cost-effective, high quality, integrated PBM services. In addition, the Company has developed and is expanding its clinical expertise and disease management services to meet the specialized needs of its plan members, particularly those requiring costly, long-term and recurring therapies. The Company has historically generated revenues from a number of sources including its mail pharmacy, its retail pharmacy network and claims adjudication services and its clinical services. In addition, during the fiscal year ended March 31, 1996, the Company began to generate revenues from its newly developed HBM services. The Company derives mail pharmacy revenues from the sale of pharmaceuticals to members of health benefit plans sponsored by the Company's customers. These revenues include ingredient costs plus a dispensing fee. In 1992, the Company established a retail pharmacy network which currently consists of over 50,000 retail pharmacies nationwide, and began to provide on-line claims adjudication services. The Company records administrative fees as revenues derived from claims adjudication services, and includes as revenues the ingredient costs of the pharmaceuticals dispensed through its network. In 1993, the Company acquired Advance Clinical, formerly Paradigm Pharmacy Management, Inc., a subsidiary of BCBS of Maryland, and began to offer clinical services to its customers. The Company's clinical services revenues have historically been derived primarily from direct rebate and volume discounts from pharmaceutical manufacturers. Cost of revenues includes product costs and other direct costs associated with the dispensing of prescription drugs through the mail pharmacy, retail pharmacy network and claims adjudication services and clinical services. The acquisition of Advance Clinical has provided the Company with access to large managed care organizations which created an opportunity for the Company to cross-sell its mail and claims processing services. In addition, the Company has continued to add additional managed care accounts. In order to accommodate the large volume and complex reporting requirements of its managed care customers, the Company acquired a highly sophisticated, state-of-the-art claims processing system, which management believes will accommodate volume levels significantly higher than those currently maintained by the Company. In response to the growing demand among payors for comprehensive disease management programs, the Company recently established its HBM services. The Company has developed a comprehensive health care database, integrating its customers' pharmacy claims with applicable medical and laboratory claims data, in order to perform meaningful outcomes studies to develop disease management programs. These programs have served as an additional source of revenue for the Company in the years ended March 31,1996 and 1997, and management believes that the Company will be able to cross-sell these and other services to its existing customers. As a result of its competitive environment, the Company is continuously susceptible to margin pressures. In recent years, competing PBM providers owned by large pharmaceutical manufacturers began aggressively pricing their products and services. This aggressive pricing resulted in reduced margins for the Company's traditional PBM services. While the environment for the provision of traditional services remains competitive, margins realized for the provision of these services have stabilized in recent quarters. 16 Except for the historical information contained herein, the discussion in this Form 10-K contains certain forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Form 10-K should be read as being applicable to all related forward-looking statements wherever they appear in this Form 10-K. The Company's actual results could differ materially from those discussed here. RESULTS OF OPERATIONS The following table sets forth certain consolidated financial data of the Company, for the periods indicated, as a percentage of revenues. Year Ended March 31, ---------------------------------------- 1995 1996 1997 ---- ---- ---- STATEMENT OF OPERATIONS DATA: Revenues. . . . . . . . . . . . . . 100.0% 100.0% 100.0% Cost of operations: Cost of revenues. . . . . . . . . 93.7 94.0 95.7 Selling, general and administrative expenses . . . . 5.4 4.9 2.9 ----- ----- ----- Total cost of operations . . 99.1 98.9 98.6 ----- ----- ----- Operating income. . . . . . . . . . 0.9 1.1 1.4 Interest income (expense), net (0.9) (0.3) 0.4 Provision for income taxes. . . . . -- -- 0.6 ----- ----- ----- Net income. . . . . . . . . . . . . 0.0% 0.8% 1.2% ----- ----- ----- ----- ----- ----- FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996 REVENUES. Revenues for the year ended March 31, 1997 ("fiscal year 1997") increased by $126.2 million, or 101%, compared to revenues for the fiscal year ended March 31, 1996 ("fiscal year 1996"). Approximately 80% of the increase in revenues was attributable to a 183% increase in the number of pharmacy claims processed during the fiscal year. Approximately 13% of the increase was attributable to additional sales of the Company's mail pharmacy services. This increase in mail pharmacy revenue resulted from a 26% increase in the number of mail prescriptions dispensed. Approximately 7% of the increase in revenues resulted from an increase in clinical services revenues derived from formulary and disease management services. COST OF REVENUES. Cost of revenues for fiscal year 1997 increased by $123.0 million, or 104%, compared to the prior fiscal year. This increase was attributable primarily to the additional costs associated with the Company's claims processing growth. As a percentage of revenues, cost of revenues increased from 94% in fiscal year 1996 to 96% in fiscal year 1997. This increase resulted primarily from the increase in the Company's claims processing revenues generated by new customers utilizing the Company's pharmacy network. In cases in which the Company has an independent obligation to pay its network pharmacy providers, the Company includes payments from its plan sponsors for these benefits as revenues and payments to its pharmacy providers as cost of revenues. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for fiscal year 1997 increased by $1.2 million, or 19%, compared to fiscal year 1996. This increase was the result of the Company's expansion of its administrative and support staff levels and salaries and benefits in response to volume growth in all services. In spite of the increase, selling, general and administrative expenses as a percentage of revenues decreased from 17 5% in fiscal year 1996 to 3% in fiscal year 1997 as the result of greater economies of scale and due to the increase in revenues associated with the Company's claims processing services. Additional revenues generated by clients utilizing the Company's network pharmacy providers do not result in an increase in selling, general and administrative expenses. INTEREST INCOME AND INTEREST EXPENSE. Interest income, net of interest expense, for fiscal year 1997 increased $1.5 million compared to fiscal year 1996. The increase resulted from cash management programs which utilized the Company's short-term excess cash to generate interest income through investment in money market funds and high grade commercial paper. In addition, the Company's cash balance in fiscal year 1997 included the $10 million proceeds from the June 1996 issuance of its Series B Preferred Stock and the $19.1 million proceeds from the October 1996 initial public offering. A portion of the proceeds were used to retire the note payable to Whitney Subordinated Debt Fund, L.P., an affiliate of J.H. Whitney & Co., the largest stockholder of the Company (the "Whitney Note") and, as a result, interest expense decreased $337,000. INCOME TAXES. The Company had income tax loss carryforwards available to offset income generated for fiscal year 1996 and, as a result, incurred no federal income tax expense. For fiscal year 1997 the Company recorded income tax expense of $1.5 million resulting from fully utilizing its remaining net operating loss carryforwards in fiscal year 1997. FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995 REVENUES. Revenues for fiscal year 1996 increased by $34.0 million, or 37%, compared to revenues for the fiscal year ended March 31, 1995 ("fiscal year 1995"). Approximately 39% of the increase was attributable to additional sales of the Company's mail pharmacy services, resulting from a 40% increase in the number of mail prescriptions dispensed. Approximately 40% of the increase in revenues was attributable to a six-fold increase in the number of pharmacy claims processed during the fiscal year. Approximately 21% of the increase in revenues resulted from an increase in clinical services revenues derived from formulary and disease management services. COST OF REVENUES. Cost of revenues for fiscal year 1996 increased by $32.3 million, or 38%, compared to the prior fiscal year. This increase was attributable primarily to the expanded volume in the Company's mail pharmacy and the additional costs associated with the Company's claims processing growth. As a percentage of revenues, cost of revenues remained relatively constant at approximately 94% for both fiscal year periods. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for fiscal year 1996 increased by $1.2 million, or 24%, compared to fiscal year 1995. This increase was the result of the Company's expansion of its sales and marketing activities, as well as increases in administrative and support staff levels and salaries and benefits in response to volume growth in all services. As a percentage of revenues, selling, general and administrative expenses remained relatively constant at approximately 5% for both fiscal year periods. INTEREST INCOME AND INTEREST EXPENSE. Interest expense, net of interest income, for fiscal year 1996 declined by $437,000, or 56%, compared to fiscal year 1995. The decline resulted from cash management programs which utilized the Company's short-term excess cash to generate interest income through investment in money market funds. INCOME TAXES (BENEFITS). The Company had income tax loss carryforwards as of March 31, 1996 of approximately $1.9 million, and as a result, incurred no federal income tax expense. 18 SELECTED QUARTERLY FINANCIAL RESULTS The following table represents unaudited selected quarterly statement of operations data for each of the quarters indicated and, in the opinion of management, includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such data. The Company has experienced fluctuations in revenue and operating results from quarter to quarter and from year to year due to a combination of factors, including demand for the Company's services and the size, timing of contract signings and recognition of revenues from significant customer additions and losses. Future quarterly results may fluctuate, depending on these and other factors. Results of operations for any particular quarter are not necessarily indicative of results of operations for any future quarters.
Three Months Ended ----------------------------------------------------------------------- Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 1996 1996 1996 1996 1997 ---- ---- ---- ---- ---- (In thousands) STATEMENT OF OPERATIONS DATA: Revenues $37,313 $49,809 $58,019 $70,025 $73,709 Cost of operations: Cost of revenues 34,986 47,454 55,540 67,186 70,630 Selling, general and adminis- trative expenses 1,719 1,714 1,781 1,890 1,924 ------- ------- ------- ------- ------- Total cost of operations 36,705 49,168 57,321 69,076 72,554 ------- ------- ------- ------- ------- Operating income 608 641 698 949 1,155 Interest income, net of expense 7 28 120 467 566 Net income before taxes $ 615 $ 669 $818 $1,416 $1,721 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LIQUIDITY AND CAPITAL RESOURCES As of March 31, 1997 the Company had working capital of $24.9 million. The increase in working capital at March 31, 1997 as compared to March 31, 1996 resulted primarily from two equity offerings completed in fiscal year 1997. In June 1996, the Company received $10.0 million from the sale of its Series B Preferred Stock in a private placement. In October 1996, the Company completed an initial public offering of its Common Stock. The Company received net proceeds of approximately $19.1 million, after deducting underwriting discount and expenses. The Company used $7.0 million to repay the Whitney Note, and the balance of the funds were invested in money market funds and high-grade commercial paper. The Company's net cash provided by operating activities was $3.7 million, $15.7 million and $15.4 million for the years ended March 31, 1995, 1996 and 1997, respectively. The significant increases in net cash provided by operating activities were due primarily to the timing of receivables and payables resulting from the Company's continued growth. Cash used in investing activities was $2.2 million, $1.6 million and $2.9 million for the years ended March 31, 1995, 1996 and 1997, respectively. Cash used in investing activities was used for purchases of property, plant and equipment associated with growth and expansion of the Company's facilities. For the year ended March 31, 1997, the Company received $10.0 million from the sale of its Series B Preferred Stock and approximately $19.1 million from the sale of Common Stock. Of the proceeds from the sale of Common Stock, $7.0 million was used to retire debt. During fiscal year 1997, the Company's continued growth resulted in net cash provided by operating activities of $15.4 million. Historically, the Company has been able to fund its operations and continued growth through cash from operations. During fiscal year 1997, the Company's operating cash flow funded its capital expenditures of $2.9 million, and its short-term 19 excess cash was invested in money market funds and high grade commercial paper. The Company anticipates its capital expenditures of approximately $6 million for the year ending March 31, 1998 will primarily consist of additional enhancements to the Company's claim processing systems, and further automation of the Company's mail service facility. In addition, the Company has the opportunity to purchase its mail service building which has previously been leased under a long-term arrangement. The Company anticipates that cash from operations, combined with the proceeds remaining from its initial public offering will be sufficient to meet the Company's internal operating requirements and expansion programs, including capital expenditures, for at least the next 18 months; however, the Company expects that additional funds may be required in the future to successfully continue its expansion and acquisition plans. The Company may be required to raise additional funds through sales of its equity or debt securities or seek financing from financial institutions. Currently, the Company has no borrowings from financial institutions, and none of its assets are pledged as collateral. There can be no assurance, however, that credit financing will be available on terms that are favorable to the Company or, if obtained, will be sufficient for the Company's expansion needs. RECENT PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board issued Statement 123, "Accounting for Stock-Based Compensation" (SFAS 123). The Company has adopted the provisions of SFAS 123 with respect to options granted to employees through disclosure only, effective with the Company's fiscal year ending March 31, 1997. SFAS 123 also requires that all stock and warrants issued to nonemployees be accounted for based upon the fair value of the consideration received or the fair value of the equity instruments issued. During fiscal years 1996 and 1997, the Company agreed to issue warrants to purchase shares of its Common Stock to two customers contingent upon future expansion of member lives. As of March 31, 1997, no stock was issued and no warrants were earned under the agreements. In management's opinion, the fair value of the warrants at the date of the agreements was not material and therefore had no material impact on the Company's financial position or results of operations. In February 1997, the Financial Accounting Standards Board issued Statement 128, "Earnings Per Share" (SFAS 128). SFAS 128 is effective for financial statements for both interim and annual periods ending after December 31, 1997, with early application prohibited. The computation of fully diluted earnings per share under SFAS 128 will not be significantly different than the Company's historical earnings per share computation. IMPACT OF INFLATION Changes in prices charged by manufacturers and wholesalers for pharmaceuticals dispensed by the Company affects its cost of revenues. Historically, the Company has been able to pass the effect of such price changes to its customers under the terms of its agreements. As a result, changes in pharmaceutical prices due to inflation have not adversely affected the Company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is found on pages F-1 through F-19 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item will be incorporated by reference from the Company's definitive Proxy Statement for its 1997 Annual Meeting of Stockholders to be filed with the Commission not later than 120 days following the Company's fiscal year pursuant to Regulation 14A (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information required by this item will be incorporated by reference from the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item will be incorporated by reference from the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item will be incorporated by reference from the Proxy Statement. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The response to this portion of Item 14 is submitted as a separate section of this report on page F-1. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended March 31, 1997. (c) Exhibits Required by Item 601 of S-K: See index to exhibits on pages 22-24. 21 Exhibits and Financial Statement Schedules EXHIBIT NO. EXHIBITS - ----------- -------- 3.1* --- Amended and Restated Certificate of Incorporation of the Company. 3.2* --- Amended and Restated Bylaws of the Company. 3.3* --- Certificate of Incorporation of Advance Pharmacy Services, Inc. 3.4* --- Certificate of Amendment to the Certificate of Incorporation of Advance Pharmacy Services, Inc. 3.5* --- Certificate of Correction to the Certificate of Amendment to the Certificate of Incorporation of Advance Pharmacy Services, Inc. 3.6* --- Certificate of Amendment to the Certificate of Incorporation of Advance Pharmacy Services, Inc. 3.7* --- Certificate of Amendment to the Certificate of Incorporation of Advance Paradigm, Inc. 3.8* --- Certificate of Correction to the Amendment to the Certificate of Incorporation of Advance Paradigm, Inc. 3.9* --- Bylaws of Advance Pharmacy Services, Inc. 4.1** --- Specimen Certificate for shares of Common Stock, $0.01 par value, of the Company. 4.2* --- Preferred Stock Purchase Agreement dated as of August 4, 1993, among the Company and Canaan LP, Canaan Offshore, Stephen L. Green, Jeffrey R. Jay, Quai Ltd., J.H. Whitney, and Whitney Fund. 4.3* --- Amendment No. 1 to Preferred Stock Purchase Agreement dated as of December 7, 1993, by and among Advance Data and the Purchasers. 4.4* --- Amendment No. 2 to Preferred Stock Purchase Agreement dated as of December 8, 1993, by and among APS, the Purchasers and Whitney Debt Fund. 4.5* --- Voting, Co-Sale and Right of First Refusal Agreement dated as of August 4, 1993, among the Company, Advance Health Care, David D. Halbert, Jon S. Halbert, Danny Phillips and the Purchasers. 4.6* --- Amendment No. 1 to Voting, Co-Sale and Right of First Refusal Agreement dated as of December 8, 1993, among the Company, Advance Health Care, David D. Halbert, Jon S. Halbert, Danny Phillips, the Purchasers and Whitney Debt Fund. 4.7* --- Note and Warrant Purchase Agreement dated December 8, 1993, between the Company and Whitney Debt Fund. 4.8* --- Promissory Note dated December 8, 1993, made by the Company payable to the order of Whitney Debt Fund in the original principal amount of $7,000,000. 22 EXHIBIT NO. EXHIBITS - ----------- -------- 4.9* --- Common Stock Purchase Warrant dated December 8, 1993, made by the Company in favor of Whitney Debt Fund. 4.10** --- Termination Agreement dated as of October 8, 1996, among the Company, Advance Health Care, David D. Halbert, Jon S. Halbert, Danny Phillips, the Purchasers and Whitney Debt Fund. 4.11* --- Warrant for Purchase of Shares of Common Stock of the Company dated December 8, 1993, in favor of BCBS of Maryland. 4.12* --- Stock Purchase Agreement dated as of June 25, 1996, by and between the Company and BCBS of Texas. 4.13* --- Warrant Agreement dated as of November 25, 1995, by and between the Company and BCBS of Texas. 4.14** --- Amended and Restated Incentive Stock Option Plan. 4.15* --- Incentive Stock Option Plan. 4.16* --- Warrant Agreement dated as of September 12, 1996, by and between the Company and VHA, Inc. 4.17* --- Form of Agreement and Plan of Merger. 10.1* --- Managed Pharmaceutical Agreement dated November 1, 1993, by and between Advance Data and the Mega Life & Health Insurance Company. 10.2* --- Nondisclosure/Noncompetition Agreement dated August 4, 1993, between the Company, Advance Data, Advance Mail and David D. Halbert. 10.3* --- Nondisclosure/Noncompetition Agreement dated August 4, 1993, between the Company, Advance Mail, Advance Data and Jon S. Halbert. 10.4* --- Nondisclosure/Noncompetition Agreement dated August 4, 1993, between the Company, Advance Mail, Advance Data and Danny Phillips. 10.5** --- Employment Agreement effective as of December 1, 1996, by and between Advance Clinical (formerly ParadigM) and Joseph J. Filipek, Jr. and, for the limited purposes of Sections 3(d), 3(g) and 3(h) thereof, the Company. 10.6** --- Employment Agreement effective as of December 1, 1996, by and between Advance Clinical (formerly ParadigM) and Robert L. Cinquegrana and, for the limited purposes of Sections 3(d), 3(g) and 3(h) thereof, the Company. 10.7** --- Employment Agreement effective as of November 14, 1996, by and between the Company and John H. Sattler. 10.8** --- Employment Agreement effective as of June 17, 1996, by and between the Company and Ernest Buys. 23 10.9* --- Employment Agreement effective as of February 15, 1996, by and between the Company and Alan T. Wright. 10.10* --- Form of Health Benefit Management Services Agreement. 10.11* --- Sublease dated May 2, 1996, between Lincoln National Life Insurance Company and Advance Data. 10.12* --- Lease dated March 6, 1994, by and between Hill Management Services, Inc. and Advance Clinical (formerly ParadigM). 10.13* --- Lease Agreement dated as of February 24, 1989, as amended November 30, 1992, and December __, 1992, by and between TRST Las Colinas, Inc. and Advance Health Care. 10.14* --- Assignment, Assumption, Bill of Sale and Consent Agreement dated as of October 20, 1993, between Medco Containment Services, Inc., the Company and Trinity Properties, Ltd. 10.15* --- Managed Pharmacy Benefit Services Agreement dated September 1, 1995, between the Company and BCBS of Texas. 11** --- Statement regarding computation of per share earnings. 27** --- Financial Data Schedule. - --------------- * Previously filed in connection with the Company's Registration Statement on Form S-1 filed October 8, 1996 (No. 333-06931). ** Filed herewith. 24 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on June 24, 1997 on its behalf by the undersigned, thereunto duly authorized. ADVANCE PARADIGM, INC. By: /s/ David D. Halbert -------------------- David D. Halbert Chairman of the Board, President and Chief Executive Officer Each person whose signature appears below hereby authorizes David D. Halbert and Danny Phillips or either of them, as attorneys-in-fact to sign on his behalf, individually, and in each capacity stated below and to file amendments and/or supplements to the Annual Report on Form 10-K. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dated indicated. Signature Title Date --------- ----- ---- /s/ David D. Halbert Chairman of the Board, President June 24, 1997 - -------------------- ------- David D. Halbert and Chief Executive Officer (Principal Executive Officer) /s/ Jon S. Halbert Executive Vice President, Chief June 24, 1997 - -------------------- ------- Jon S. Halbert Operating Officer and Director /s/ T. Danny Phillips Senior Vice President, Chief June 24, 1997 - -------------------- ------- T. Danny Phillips Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) /s/ Peter M. Castleman Director June 24, 1997 - -------------------- ------- Peter M. Castleman /s/ Rogers K. Coleman Director June 24, 1997 - -------------------- ------- Rogers K. Coleman, M.D. 25 /s/ Stephen L. Green Director June 24, 1997 - -------------------- ------- Stephen L. Green /s/ Jeffrey R. Jay Director June 24, 1997 - -------------------- ------- Jeffrey R. Jay, M.D. /s/ Kenneth J. Linde Director June 24, 1997 - -------------------- ------- Kenneth J. Linde /s/ Michael D. Ware Director June 24, 1997 - -------------------- ------- Michael D. Ware 26 INDEX TO FINANCIAL STATEMENTS ADVANCE PARADIGM, INC. AND SUBSIDIARIES Report of Independent Public Accountants.................................. F-2 Consolidated Balance Sheets--March 31, 1996 and 1997...................... F-3 Consolidated Statements of Operations for the Years Ended March 31, 1995, 1996 and 1997.................................................... F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the Years ended March 31, 1995, 1996 and 1997.............................. F-5 Consolidated Statements of Cash Flows for the Years Ended March 31, 1995, 1996 and 1997.................................................... F-6 Notes to Consolidated Financial Statements................................ F-7 Report of Independent Public Accountants on Financial Statement Schedule.. S-1 Schedule II. Valuation and Qualifying Accounts and Reserves for the years ended March 31, 1995, 1996 and 1997.............................. S-2 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Advance Paradigm, Inc.: We have audited the accompanying consolidated balance sheets of Advance Paradigm, Inc. (a Delaware corporation formerly known as Advance Pharmacy Services, Inc.) and subsidiaries as of March 31, 1996 and 1997, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Advance Paradigm, Inc. and subsidiaries as of March 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1997, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Dallas, Texas, May 12, 1997 F-2 ADVANCE PARADIGM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS March 31, ------------------------ 1996 1997 ---- ---- CURRENT ASSETS: Cash and cash equivalents $16,457,000 $ 51,086,000 Accounts receivable, net of allowance for doubtful accounts of $130,000 and $142,000, respectively 23,078,000 35,343,000 Inventories 1,598,000 1,859,000 Prepaid expenses and other 449,000 426,000 ----------- ----------- Total current assets 41,582,000 88,714,000 PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $1,935,000 and $3,292,000, respectively 4,080,000 5,576,000 INTANGIBLE ASSETS, net of accumulated amortization of $808,000 and $1,154,000, respectively 13,045,000 12,699,000 OTHER ASSETS, net of accumulated amortization of $49,000 and $0, respectively 198,000 484,000 ----------- ----------- Total assets $58,905,000 $107,473,000 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable $39,000,000 $ 59,782,000 Accrued salaries and benefits 1,283,000 1,991,000 Income taxes payable ---- 712,000 Other accrued expenses 934,000 1,365,000 Current portion of other noncurrent liabilities 49,000 ---- ----------- ----------- Total current liabilities 41,266,000 63,850,000 NONCURRENT LIABILITIES: Long-term debt to related parties 7,000,000 ---- Deferred income taxes ---- 755,000 Other noncurrent liabilities, less current portion 241,000 340,000 ----------- ----------- Total liabilities 48,507,000 64,945,000 ----------- ----------- COMMITMENTS AND CONTINGENCIES REDEEMABLE PREFERRED STOCK: Series A cumulative convertible preferred stock, $.01 par value, 10,000 shares authorized, issued and outstanding at March 31, 1996, converted in October 1996 11,896,000 ---- ----------- ----------- STOCKHOLDERS' EQUITY (DEFICIT): Series B convertible preferred stock, $.01 par value; 5,000 shares authorized, 0 and 4,444 shares issued and outstanding at March 31,1996 and 1997, respectively ---- ---- Common stock, $.01 par value; 25,000,000 shares authorized,3,130,500 and 7,800,817 shares issued and outstanding at March 31, 1996 and 1997, respectively ---- 78,000 Additional paid-in capital 1,518,000 42,891,000 Accumulated deficit (3,016,000) (441,000) ----------- ----------- Total stockholders' equity (deficit) (1,498,000) 42,528,000 ----------- ----------- Total liabilities and stockholders' equity (deficit) $58,905,000 $107,473,000 ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these consolidated financial statements. F-3 ADVANCE PARADIGM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31, ------------------------------------------------------------------------ 1995 1996 1997 ---- ---- ---- REVENUES $91,306,000 $125,333,000 $251,562,000 ----------- ------------ ------------- COST OF OPERATIONS: Cost of revenues 85,532,000 117,788,000 240,810,000 Selling, general and administrative expenses 4,963,000 6,158,000 7,309,000 ----------- ------------ ------------- Total cost of operations 90,495,000 123,946,000 248,119,000 ----------- ------------ ------------- Operating income 811,000 1,387,000 3,443,000 INTEREST INCOME 91,000 366,000 1,560,000 INTEREST EXPENSE (878,000) (716,000) (379,000) ----------- ------------ ------------- INCOME BEFORE INCOME TAXES 24,000 1,037,000 4,624,000 PROVISION FOR INCOME TAXES ---- ---- 1,486,000 ----------- ------------ ------------- NET INCOME $ 24,000 $ 1,037,000 $ 3,138,000 ----------- ------------ ------------- ----------- ------------ ------------- PRO FORMA: NET INCOME PER SHARE $0.25 $0.39 ------------ ------------- ------------ ------------- WEIGHTED AVERAGE SHARES OUTSTANDING 7,036,507 8,718,209 HISTORICAL: NET INCOME PER SHARE $ ---- $ 0.17 $ 0.38 ----------- ------------ ------------- ----------- ------------ ------------- WEIGHTED AVERAGE SHARES OUTSTANDING 6,200,187 6,200,187 8,300,049 ----------- ------------ ------------- ----------- ------------ -------------
The accompanying notes are an integral part of these consolidated financial statements. F-4 ADVANCE PARADIGM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997
Series B Preferred Common Stock Stock Additional ---------------------- ---------------------- Number of Number of Paid In Accumulated Shares Amount Shares Amount Capital Deficit Total ----------- ------- --------- ------ ----------- ------------ ---------- BALANCE, March 31, 1994 3,125,000 $ -- -- $ -- $1,501,000 $(2,437,000) $(936,000) Net income -- -- -- -- -- 24,000 24,000 Dividends and accretion on Series A Preferred Stock -- -- -- -- -- (820,000) (820,000) ---------- ------- -------- -------- ---------- ----------- ----------- BALANCE, March 31, 1995 3,125,000 -- -- -- 1,501,000 (3,233,000) (1,732,000) Net income -- -- -- -- -- 1,037,000 1,037,000 Dividends and accretion on Series A Preferred Stock -- -- -- -- -- (820,000) (820,000) Issuance of Common Stock in connection with the exercise of employee stock options 5,500 -- -- -- 17,000 -- 17,000 ---------- ------- -------- -------- ---------- ----------- ----------- BALANCE, March 31, 1996 3,130,500 -- -- -- 1,518,000 (3,016,000) (1,498,000) Net income -- -- -- -- -- 3,138,000 3,138,000 Issuance of Common Stock in connection with the exercise of employee stock options 3,000 -- -- -- 12,000 -- 12,000 Issuance of Series B Preferred Stock -- -- 4,444 -- 10,000,000 -- 10,000,000 Dividends and accretion on Series A Preferred Stock -- -- -- -- -- (410,000) (410,000) Issuance of Common Stock in connection with an initial public offering 2,397,067 24,000 -- -- 19,111,000 -- 19,135,000 Effect of stock split -- 31,000 -- -- (31,000) -- -- Issuance of Common Stock in connection with the conversion of Series A Preferred Stock 2,500,000 25,000 -- -- 12,279,000 -- 12,304,000 Reduction of Common Stock outstanding in connection with the merger with AHC (229,750) (2,000) -- -- 2,000 -- -- Dividends on Series B Preferred Stock -- -- -- -- -- (153,000) (153,000) ---------- ------- -------- -------- ---------- ----------- ----------- BALANCE, March 31, 1997 7,800,817 $78,000 4,444 $ -- $42,891,000 $(441,000) $42,528,000 ---------- ------- -------- -------- ---------- ----------- ----------- ---------- ------- -------- -------- ---------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. F-5 ADVANCE PARADIGM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31, ----------------------------------------- 1995 1996 1997 ----------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 24,000 $ 1,037,000 $ 3,138,000 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 969,000 1,313,000 1,704,000 Noncash interest expense 162,000 -- -- Provision for doubtful accounts 58,000 23,000 12,000 Change in certain assets and liabilities-- Accounts receivable (5,333,000) (7,104,000) (12,277,000) Inventories (183,000) (367,000) (261,000) Prepaid expenses and other assets (324,000) (58,000) (265,000) Accounts payable, accrued expenses and other noncurrent liabilities 8,285,000 20,809,000 23,387,000 ----------- ------------ ------------ Net cash provided by operating activities 3,658,000 15,653,000 15,438,000 ----------- ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (2,245,000) (1,594,000) (2,853,000) ----------- ------------ ------------ Net cash used in investing activities (2,245,000) (1,594,000) (2,853,000) ----------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of preferred stock -- -- 10,000,000 Net proceeds from issuance of Common Stock -- 17,000 19,147,000 Net payments on long-term obligations (245,000) (244,000) (6,950,000) Payment of preferred stock dividend -- -- (153,000) ----------- ------------ ------------ Net cash provided by (used in) financing activities (245,000) (227,000) 22,044,000 NET INCREASE IN CASH 1,168,000 13,832,000 34,629,000 CASH AND CASH EQUIVALENTS, beginning of year 1,457,000 2,625,000 16,457,000 ----------- ------------ ------------ CASH AND CASH EQUIVALENTS, end of year $ 2,625,000 $ 16,457,000 $ 51,086,000 ----------- ------------ ------------ ----------- ------------ ------------
SUPPLEMENTARY INFORMATION: Cash paid for interest totaled approximately $716,000, $716,000 and $379,000 in 1995, 1996 and 1997, respectively. The Company made no income tax payments in 1995 and 1996. The Company made income tax payments of $19,000 in 1997. The accompanying notes are an integral part of these consolidated financial statements. F-6 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL: Advance Paradigm, Inc. ("API"), a Delaware corporation formerly named Advance Pharmacy Services, Inc., was formed as a wholly owned subsidiary of Advance Health Care, Inc. ("AHC") in July 1993. The accompanying consolidated financial statements include the accounts of API and its three wholly owned subsidiaries, Advance Paradigm Mail Services, Inc. ("Advance Mail"), Advance Paradigm Data Services, Inc. ("Advance Data"), and Advance Paradigm Clinical Services, Inc. ("Advance Clinical"), which are collectively referred to as the Company. API was formed when AHC contributed its wholly owned subsidiaries Advance Mail and Advance Data subject to a $500,000 note payable in exchange for all of the then outstanding shares of API's Common Stock. The transaction was accounted for as a reorganization of entities under common control in a manner similar to a pooling of interests. Accordingly, the accounts of Advance Mail and Advance Data are based on historical cost, and operations of Advance Mail and Advance Data are included from the date of their formation by AHC. In December 1993, API acquired all of the outstanding stock of Advance Clinical in a business combination accounted for as a purchase. In October 1996, AHC was merged with and into the Company. This merger was consummated as a means of simplifying the corporate structure of the Company and was intended to qualify as a tax free reorganization (see Note 9). The Company offers an integrated program of pharmacy benefit management. Clinical, rebate and formulary services are provided through Advance Clinical. Claims processing for prescription drugs purchased at the Company's network of retail pharmacies is provided through Advance Data. The dispensing of prescription drugs through the mail is provided through Advance Mail. In the year ended March 31, 1996, the Company began marketing health benefit management services ("HBM Services") to certain health plans, pharmaceutical manufacturers, and other research and managed care organizations, and began programs for disease management services with selected customers. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CONSOLIDATION The accompanying financial statements include the accounts of API and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. F-7 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include overnight investments, money market accounts and high-grade commercial paper with original maturities of three months or less. INVENTORIES Inventories consist of pharmaceuticals stated at the lower of cost or market under the first-in, first-out method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on the straight-line method over estimated useful lives ranging from three to ten years. Amortization of leasehold improvements is computed over the lives of the assets or the lease terms, whichever is shorter. Major renewals and betterments are added to the property and equipment accounts while costs of repairs and maintenance are charged to operating expenses in the period incurred. The cost of assets retired, sold or otherwise disposed of and the applicable accumulated depreciation are removed from the accounts, and the resultant gain or loss, if any, is reflected in the statement of operations. INTANGIBLE ASSETS Intangible assets represent the excess of cost over the fair value of tangible net assets acquired (goodwill) in connection with the acquisition of Advance Clinical. Goodwill is amortized on a straight-line basis over 40 years. The Company continually evaluates whether events and circumstances have occurred that indicate the remaining balance of goodwill may not be recoverable or the useful life may be impaired. Amortization expense was $346,000 in the years ended March 31, 1995, 1996 and 1997, respectively. F-8 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) IMPAIRMENT OF LONG-LIVED ASSETS The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets may warrant revision or that the remaining balance of an asset may not be recoverable. The measurement of possible impairment is based on the ability to recover the balance of assets from expected future operating cash flows on an undiscounted basis. In the opinion of management, no such impairment existed as of March 31, 1995, 1996 or 1997. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of cash, receivables, payables and accrued liabilities approximate the fair values of these instruments because of their short-term maturities. REVENUE RECOGNITION Revenues from the dispensing of pharmaceuticals from the Company's mail service pharmacy are recognized when each prescription is shipped. Revenue from sales of prescription drugs by pharmacies in the Company's nationwide network and claims processing service fees are recognized when the claims are adjudicated. When the Company has an independent obligation to pay its network pharmacy providers, the Company includes payments from plan sponsors for these benefits as revenues and payments to its pharmacy providers as cost of revenues. If the Company is only administering plan sponsors' network pharmacy contracts, the Company records the claims processing service fees as net revenues. Clinical, formulary, rebate and disease management service revenues are recognized as the services are performed and the rebates are earned in accordance with contractual agreements. FEDERAL INCOME TAXES Prior to the formation of API in July 1993, Advance Mail and Advance Data were included in the consolidated tax return of AHC. For activities subsequent to the formation of API, the Company has filed consolidated federal income tax returns separate from AHC. The Company has calculated its tax provision on a stand-alone basis for all reported periods. F-9 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) NET INCOME PER SHARE Pro forma net income per share gives effect to (i) the conversion of the redeemable Series A preferred stock to Common Stock, (ii) the issuance of 836,320 shares of Common Stock in the Company's October 1996 initial public offering (the "Offering"), the net proceeds of which were used to retire the $7.0 million note payable to Whitney Subordinated Debt Fund, L.P., (iii) a reduction of interest expense by the amount of interest on the $7.0 million note payable, and (iv) the impact to shares and options outstanding of the merger of AHC with and into API (see Note 9). As required by the Securities Exchange Commission (the "Commission") rules, all warrants, options, and shares issued during the year immediately preceding the initial public offering are assumed to be outstanding for purposes of calculating pro forma net income per share. The Company's Series B Preferred Stock is considered to be a common stock equivalent and is included in the weighted average shares outstanding for the year ended March 31, 1997. Historical net income per share gives effect to the conversion of the redeemable Series A preferred stock to Common Stock and the impact to shares and options outstanding of the merger of AHC with and into API. Net income per share is computed using the weighted average number of common and common equivalent shares outstanding during the year which include stock options and warrants. As the effect of potentially dilutive securities was antidilutive, there was no difference between primary and fully diluted net income per share. In February 1997, the Financial Accounting Standards Board issued Statement 128, "Earnings Per Share" (SFAS 128). SFAS 128 is effective for financial statements for both interim and annual periods ending after December 31, 1997, with early application prohibited. The computation of fully diluted earnings per share under SFAS 128 will not be significantly different than the Company's historical earnings per share computation. RECLASSIFICATION Certain prior year amounts have been reclassified to conform with current year presentation. F-10 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following: March 31, -------------------------- 1996 1997 ----------- ----------- Machinery and equipment. . . . . . . . . . . . $ 709,000 $ 834,000 Computer equipment and software. . . . . . . . 3,963,000 6,232,000 Furniture and equipment. . . . . . . . . . . . 924,000 1,071,000 Leasehold improvements . . . . . . . . . . . . 419,000 731,000 ----------- ----------- 6,015,000 8,868,000 Less--Accumulated depreciation and amortization (1,935,000) (3,292,000) ----------- ----------- $ 4,080,000 $ 5,576,000 ----------- ----------- ----------- ----------- 4. DEBT: Long-term debt at March 31, 1996, consisted of a balance due under a $7,000,000 Note and Warrant Purchase Agreement (the "Agreement") dated December 8, 1993. The Agreement obligated the Company to prepay the indebtedness, without penalty or premium, upon the consummation of a public offering of any of the Company's securities pursuant to a registration statement filed with the Commission. The balance due was paid during the year ended March 31, 1997. In connection with the Agreement, the Company granted the holder of the note warrants to purchase 336,500 shares of the Company's Common Stock (see Note 9). The warrants are exercisable for a period of 10 years. F-11 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. OTHER NONCURRENT LIABILITIES: Other noncurrent liabilities consisted of the following: March 31, ---------------------- 1996 1997 --------- --------- Capital lease obligation . . . . . . . . . . . . $ 49,000 $ ---- Other liabilities. . . . . . . . . . . . . . . . 241,000 340,000 --------- --------- 290,000 340,000 Less--Current portion. . . . . . . . . . . . . . (49,000) ---- --------- --------- $ 241,000 $ 340,000 --------- --------- --------- --------- The Company's capital lease terminated in March 1997. Other liabilities is comprised of deposits held for the benefit of certain customers in connection with pharmacy benefit contracts. 6. LEASES: The Company leases office and dispensing facility space, equipment, and automobiles under various operating leases. The Company was obligated to make future minimum payments under noncancelable operating lease agreements as of March 31, 1997, as follows: Years Ending Operating March 31, Leases ------------ ---------- 1998 . . . . . . . . . . . . . . . . . . $2,393,000 1999 . . . . . . . . . . . . . . . . . . 2,228,000 2000 . . . . . . . . . . . . . . . . . . 1,847,000 2001 . . . . . . . . . . . . . . . . . . 560,000 2002 . . . . . . . . . . . . . . . . . . 81,000 ---------- Total minimum lease payments. . . . . . $7,109,000 ---------- ---------- Total rent expense incurred in the years ended March 31, 1995, 1996 and 1997 was $714,000, $1,135,000 and $2,204,000, respectively. F-12 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES: The Company has entered into long-term employment agreements with certain management employees. These employment agreements provide for certain minimum payments should the agreements be terminated. The pharmacy industry is governed by extensive federal and state laws and regulations. The regulatory requirements with which the Company must comply in conducting its business vary from state to state. Management believes the Company is in substantial compliance with, or is in the process of complying with, all existing laws and regulations material to the operation of its business. In management's opinion, any existing noncompliance will not have a material adverse effect on the results of operations or financial condition of the Company. 8. CONCENTRATION OF BUSINESS: One customer accounted for approximately 26.5% and 18.3% of the Company's revenues for the years ended March 31, 1995 and 1996, respectively. Two customers accounted for approximately 32.5% of the Company's revenues for the year ended March 31, 1997. No other customer accounted for over 10% of the Company's revenues in fiscal years 1995, 1996 or 1997. 9. STOCK TRANSACTIONS: SERIES B PREFERRED STOCK On June 25, 1996, the Company issued a total of 4,444 shares of $.01 par value, Series B convertible preferred stock ("Series B Preferred Stock") to a customer at a price of $2,250 per share. Shares of the Series B Preferred Stock may be converted by the holder into 250 fully-paid and non-assessable shares of Common Stock. Holders of the Series B Preferred Stock are not entitled to vote on any matter. Holders of the Series B Preferred Stock are entitled to receive, out of funds legally available therefor, cumulative dividends, calculated without compounding, equal to $45.00 per share per annum. Such cumulative dividends accrue and accumulate from the date of issuance and are payable on March 31 of each year. Furthermore, holders of the Series B Preferred Stock are entitled to any dividends that the Board of Directors may declare to be payable on shares of Common Stock as if the shares of Series B Preferred Stock had been converted into shares of Common Stock. Upon the liquidation, dissolution or winding up of the Company, holders of the Series B Preferred F-13 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. STOCK TRANSACTIONS: (CONTINUED) Stock have the right, prior to any existing or future classes of capital stock, to receive $10.0 million plus all accrued and unpaid dividends of Series B Preferred Stock and to participate equally and ratably with holders of the Common Stock in the net assets of the Company available for distribution to stockholders. The Company, in its sole discretion, may redeem any or all of such holders' shares at a price equal to the original price paid per share, plus accrued and unpaid dividends. The Company has the right to convert the Series B Preferred Stock into Common Stock at any time after the fifth anniversary of issuance. If the Company forces such a conversion, holders of the Series B Preferred Stock will be entitled to piggy-back registration rights in connection with future registered offerings of shares of Common Stock. COMMON STOCK On October 7, 1996, the Company amended and restated its Certificate of Incorporation to, among other things, increase the number of authorized shares of its $.01 par value common stock ("Common Stock") to 25,000,000 and the number of shares of its preferred stock to 5,000,000, of which 5,000 shares are designated as Series B Preferred Stock. On October 8, 1996, the Company effected a 250-for-one stock split of the Company's Common Stock. Accordingly, all share and per share amounts have been adjusted to reflect the stock split as though it had occurred at the beginning of the initial period presented. On October 8, 1996 the Company completed the Offering of its Common Stock. On November 7, 1996 the Underwriters exercised the over-allotment option of the Offering. Including the over-allotment option, the Company sold 2,397,067 shares of its Common Stock at a price of $9.00 per share, prior to underwriting discount and other offering expenses. In connection with the Offering, the Company's redeemable Series A cumulative convertible preferred stock ("Series A Preferred Stock") automatically converted into 2,500,000 shares of Common Stock. F-14 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. STOCK TRANSACTIONS: (CONTINUED) Immediately prior to the consummation of the Offering, AHC was merged with and into the Company (the "Merger"). Prior to the Merger, AHC held 3,125,000 shares of the Company's Common Stock. In connection with the Merger, the AHC incentive stock option plan was merged with the Company's Incentive Stock Option Plan, and holders of options under the AHC incentive stock option plan received options to purchase Common Stock under the Company's Incentive Stock Option Plan. In the Merger, the Company canceled the shares held by AHC and issued shares of Common Stock directly to the AHC stockholders (the "AHC Stockholders") based upon their fully-diluted proportionate ownership interests in AHC after giving consideration to the new shares of AHC to be issued in repayment of debt as indicated below. After the Merger, there were 2,903,750 shares of Common Stock outstanding and 229,750 additional options outstanding at exercise prices ranging from $0.65 to $2.71 per share. Immediately prior to the Merger, AHC distributed the stock of certain subsidiaries of AHC, operating in businesses unrelated to the Company, to the AHC Stockholders. Prior to such spin-off, certain indebtedness owed by AHC to several of its stockholders (including certain indebtedness of AHC payable to an affiliate of a preferred stockholder of the Company which was assumed by an AHC stockholder) was exchanged for additional shares of AHC common stock. The spin-off and exchange of indebtedness did not impact the number of shares of the Company's Common Stock outstanding. The Common Stock outstanding as of March 31, 1997 resulted from the following transactions: Shares outstanding after the Merger. . . . . . . . . . . . . 2,903,750 Shares sold in the offering. . . . . . . . . . . . . . . . . 2,397,067 Shares issued from the conversion of Series A Preferred Stock 2,500,000 --------- 7,800,817 --------- --------- The Company has 3,130,500 and 7,800,817 shares of Common Stock issued and outstanding at March 31, 1996 and 1997, respectively. The Company has reserved shares of Common Stock at March 31, 1997, for the following: Conversion of Series B Preferred Stock . . . . . . . . . . . 1,111,111 Exercise of stock options. . . . . . . . . . . . . . . . . . 2,037,750 Exercise of warrants . . . . . . . . . . . . . . . . . . . . 1,025,500 --------- 4,174,361 --------- --------- F-15 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. STOCK TRANSACTIONS: (CONTINUED) During the year ended March 31, 1994, the Company issued warrants to purchase 336,500 and 56,250 shares of its Common Stock at prices per share of $4.00 and $6.00, respectively. During the year ended March 31, 1997, the Company agreed to issue to a customer warrants to purchase 84,500 shares of its Common Stock at a price of $8.10 per share. During the years ended March 31, 1996 and 1997, the Company agreed to issue warrants to purchase 548,250 shares of its Common Stock at prices ranging from $8.10 to $11.00 per share to two customers contingent upon future expansion of member lives. As of March 31, 1997, no warrants have been earned or issued. In management's opinion, the fair value of the warrants at the date of the agreements was not material. 10. STOCK OPTION PLAN: During 1993, the Board of Directors and the stockholders of the Company adopted the 1993 Incentive Stock Option Plan and the Incentive Stock Option Plan (the "Plans"), which provide for the granting of qualified stock options and incentive options to officers and key employees of the Company. The options must be granted with exercise prices which equal or exceed the market value of the Common Stock at the date of grant. As of March 31, 1997, the number of shares of Common Stock issuable under the Plans may not exceed 2,037,750 shares. The Company has reserved 2,037,750 shares of Common Stock for such issuance. The Plans are administered by a compensation committee appointed by the Board of Directors of the Company. The stock options generally vest over 5-year periods. In the event of the sale or merger with an outside corporation gaining 50% or greater ownership, options granted to certain employees become 100% vested. The options are exercisable for a period not to exceed 10 years from the date of grant. As of March 31, 1997, 632,850 options were vested at exercise prices of $.65 to $19.75 per share. In October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 establishes a fair value-based method of accounting for stock-based compensation. The Company has decided to adopt SFAS 123 through disclosure with respect to employee stock-based compensation. The following table summarizes the Company's stock option activity. F-16 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. STOCK OPTION PLAN: (CONTINUED)
1995 1996 1997 ---------------------------------------------------------------------------- Shares Wtd. Avg. Shares Wtd. Avg. Shares Wtd. Avg. Ex. Price Ex. Price Ex. Price ---------------------------------------------------------------------------- Outstanding at beginning of year 636,750 $ 3.28 783,500 $ 7.80 810,500 $ 5.15 Granted 146,750 27.38 195,500 12.82 445,000 10.34 Transferred from AHC -- -- -- -- 229,750 1.12 Exercised -- -- (5,500) 3.20 (3,000) 3.20 Canceled -- -- (163,000) 27.12 (24,500) 10.75 -------- ------ -------- ------ --------- ------ Outstanding at end of year 783,500 7.80 810,500 5.15 1,457,750 6.02 -------- ------ -------- ------ --------- ------ -------- ------ -------- ------ --------- ------ Exercisable at end of year 127,500 3.28 276,500 5.84 632,850 2.95 Price range $3.20 to $30.00 $3.20 to $11.00 $.65 to $19.75 Weighted average fair value of options granted $-- $3.88 $3.31
The following table reflects the weighted average exercise price and weighted average contractual life of various exercise price ranges of the 1,457,750 options outstanding as of March 31, 1997. Weighted Avg. Wtd. Avg. Contractual Exercise Price Range Shares Exercise Price Life (yrs.) - -------------------------------------------------------------------------------- $ .65 to $ 2.71 229,750 $ 1.12 4.1 $ 3.20 to $ 4.80 610,000 $ 3.29 6.5 $ 9.00 to $ 12.50 608,000 $ 10.37 7.1 $18.75 to $ 19.75 10,000 $ 19.25 9.8 The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average ranges of assumptions for the years ended March 31, 1996 and 1997, respectively: risk-free interest rates of 4.8% to 5.0%; expected lives of three to five years; expected volatility of 30% to 50%. The Company continues to account for stock based compensation under APB No. 25, "Accounting for Stock Issued to Employees", as allowed by SFAS 123. Had compensation cost for these plans been determined consistent with SFAS 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts: F-17 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. STOCK OPTION PLAN: (CONTINUED) 1996 1997 ---- ---- Net income: As reported $1,037,000 $3,138,000 Pro forma 1,021,000 2,977,000 Historical net income per share: As reported $0.17 $0.38 Pro forma 0.16 0.36 Because SFAS 123 method of accounting has not been applied to options granted prior to April 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. 11. RETIREMENT PLAN BENEFITS: The Company sponsors a retirement plan for all eligible employees, as defined in the plan document. The plan is qualified under Section 401(k) of the Internal Revenue Code. Compensation expense associated with the Company's plan amounted to approximately $50,000, $102,000 and $129,000 for the years ended March 31, 1995, 1996 and 1997, respectively. The Company is required to contribute at least 50% of the first 6% of salary deferral contributed by each participant. F-18 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. INCOME TAXES: The provision for income taxes for the year ended March 31, 1997 differed from the amounts computed by applying the U.S. federal tax rate of 34 percent to pretax earnings as a result of the following: 1995 1996 1997 -------- ---------- ----------- Tax at U.S. federal $ 8,000 $ 353,000 $ 1,572,000 income tax rate Benefit of operating (16,000) (382,000) (89,000) loss carryforwards Other, net 8,000 29,000 3,000 -------- ---------- ----------- Provision for income taxes $ --- $ --- $ 1,486,000 -------- ---------- ----------- -------- ---------- ----------- Of the $1,486,000 provision for income taxes in 1997, $755,000 represents deferred income taxes, $19,000 has been paid in the current year, with the remainder of $712,000 currently due. Deferred income taxes reflect the tax consequences on future years of temporary differences between the tax bases of assets and liabilities and their financial reporting bases and the potential benefits of certain tax carryforwards. The significant deferred tax assets and liabilities and the changes in those assets and liabilities are as follows: March 31, March 31, 1996 Changes 1997 -------- --------- --------- Gross deferred tax asset: Net operating loss carryforwards. $652,000 $(652,000) $ -- Other accruals. . . . . . . . . . 142,000 (3,000) 139,000 Other . . . . . . . . . . . . . . 44,000 4,000 48,000 -------- --------- --------- 838,000 (651,000) 187,000 Gross deferred tax liability: Amortization of goodwill. . . . . (458,000) (196,000) (654,000) Depreciation. . . . . . . . . . . (193,000) (95,000) (288,000) -------- --------- --------- (651,000) (291,000) (942,000) Valuation allowance (187,000) 187,000 -- -------- --------- --------- Net deferred tax liability. . . . $ -- $(755,000) $(755,000) -------- --------- --------- -------- --------- --------- F-19 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Advance Paradigm, Inc. and subsidiaries included in this Form 10-K and have issued our report thereon dated May 12, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. Schedule II is presented for purposes of complying with the Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Dallas, Texas May 12, 1997 S-1 ADVANCE PARADIGM, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Additions Balance at Beginning Charged to (1) End of of Year Expenses Deductions Year ---------- ---------- ---------- ---------- Year ended March 31, 1995: Allowance for doubtful accounts receivable. . . . $91,000 $58,000 $(8,000) $141,000 Year ended March 31, 1996: Allowance for doubtful accounts receivable. . . . $141,000 $23,000 $(34,000) $130,000 Year ended March 31, 1997: Allowance for doubtful accounts receivable. . . . $130,000 $12,000 $ --- $142,000
- ----------------------- (1) Uncollectible accounts written off, net of recoveries. S-2 INDEX TO EXHIBITS EXHIBIT NO. EXHIBITS - ----------- -------- 3.1* --- Amended and Restated Certificate of Incorporation of the Company. 3.2* --- Amended and Restated Bylaws of the Company. 3.3* --- Certificate of Incorporation of Advance Pharmacy Services, Inc. 3.4* --- Certificate of Amendment to the Certificate of Incorporation of Advance Pharmacy Services, Inc. 3.5* --- Certificate of Correction to the Certificate of Amendment to the Certificate of Incorporation of Advance Pharmacy Services, Inc. 3.6* --- Certificate of Amendment to the Certificate of Incorporation of Advance Pharmacy Services, Inc. 3.7* --- Certificate of Amendment to the Certificate of Incorporation of Advance Paradigm, Inc. 3.8* --- Certificate of Correction to the Amendment to the Certificate of Incorporation of Advance Paradigm, Inc. 3.9* --- Bylaws of Advance Pharmacy Services, Inc. 4.1** --- Specimen Certificate for shares of Common Stock, $0.01 par value, of the Company. 4.2* --- Preferred Stock Purchase Agreement dated as of August 4, 1993, among the Company and Canaan LP, Canaan Offshore, Stephen L. Green, Jeffrey R. Jay, Quai Ltd., J.H. Whitney, and Whitney Fund. 4.3* --- Amendment No. 1 to Preferred Stock Purchase Agreement dated as of December 7, 1993, by and among Advance Data and the Purchasers. 4.4* --- Amendment No. 2 to Preferred Stock Purchase Agreement dated as of December 8, 1993, by and among APS, the Purchasers and Whitney Debt Fund. 4.5* --- Voting, Co-Sale and Right of First Refusal Agreement dated as of August 4, 1993, among the Company, Advance Health Care, David D. Halbert, Jon S. Halbert, Danny Phillips and the Purchasers. 4.6* --- Amendment No. 1 to Voting, Co-Sale and Right of First Refusal Agreement dated as of December 8, 1993, among the Company, Advance Health Care, David D. Halbert, Jon S. Halbert, Danny Phillips, the Purchasers and Whitney Debt Fund. 4.7* --- Note and Warrant Purchase Agreement dated December 8, 1993, between the Company and Whitney Debt Fund. 4.8* --- Promissory Note dated December 8, 1993, made by the Company payable to the order of Whitney Debt Fund in the original principal amount of $7,000,000. EXHIBIT NO. EXHIBITS - ----------- -------- 4.9* --- Common Stock Purchase Warrant dated December 8, 1993, made by the Company in favor of Whitney Debt Fund. 4.10** --- Termination Agreement dated as of October 8, 1996, among the Company, Advance Health Care, David D. Halbert, Jon S. Halbert, Danny Phillips, the Purchasers and Whitney Debt Fund. 4.11* --- Warrant for Purchase of Shares of Common Stock of the Company dated December 8, 1993, in favor of BCBS of Maryland. 4.12* --- Stock Purchase Agreement dated as of June 25, 1996, by and between the Company and BCBS of Texas. 4.13* --- Warrant Agreement dated as of November 25, 1995, by and between the Company and BCBS of Texas. 4.14** --- Amended and Restated Incentive Stock Option Plan. 4.15* --- Incentive Stock Option Plan. 4.16* --- Warrant Agreement dated as of September 12, 1996, by and between the Company and VHA, Inc. 4.17* --- Form of Agreement and Plan of Merger. 10.1* --- Managed Pharmaceutical Agreement dated November 1, 1993, by and between Advance Data and the Mega Life & Health Insurance Company. 10.2* --- Nondisclosure/Noncompetition Agreement dated August 4, 1993, between the Company, Advance Data, Advance Mail and David D. Halbert. 10.3* --- Nondisclosure/Noncompetition Agreement dated August 4, 1993, between the Company, Advance Mail, Advance Data and Jon S. Halbert. 10.4* --- Nondisclosure/Noncompetition Agreement dated August 4, 1993, between the Company, Advance Mail, Advance Data and Danny Phillips. 10.5** --- Employment Agreement effective as of December 1, 1996, by and between Advance Clinical (formerly ParadigM) and Joseph J. Filipek, Jr. and, for the limited purposes of Sections 3(d), 3(g) and 3(h) thereof, the Company. 10.6** --- Employment Agreement effective as of December 1, 1996, by and between Advance Clinical (formerly ParadigM) and Robert L. Cinquegrana and, for the limited purposes of Sections 3(d), 3(g) and 3(h) thereof, the Company. 10.7** --- Employment Agreement effective as of November 14, 1996, by and between the Company and John H. Sattler. 10.8** --- Employment Agreement effective as of June 17, 1996, by and between the Company and Ernest Buys. 10.9* --- Employment Agreement effective as of February 15, 1996, by and between the Company and Alan T. Wright. 10.10* --- Form of Health Benefit Management Services Agreement. 10.11* --- Sublease dated May 2, 1996, between Lincoln National Life Insurance Company and Advance Data. 10.12* --- Lease dated March 6, 1994, by and between Hill Management Services, Inc. and Advance Clinical (formerly ParadigM). 10.13* --- Lease Agreement dated as of February 24, 1989, as amended November 30, 1992, and December __, 1992, by and between TRST Las Colinas, Inc. and Advance Health Care. 10.14* --- Assignment, Assumption, Bill of Sale and Consent Agreement dated as of October 20, 1993, between Medco Containment Services, Inc., the Company and Trinity Properties, Ltd. 10.15* --- Managed Pharmacy Benefit Services Agreement dated September 1, 1995, between the Company and BCBS of Texas. 11** --- Statement regarding computation of per share earnings. 27** --- Financial Data Schedule. - --------------- * Previously filed in connection with the Company's Registration Statement on Form S-1 filed October 8, 1996 (No. 333-06931). ** Filed herewith. EX-4.1 2 EXHIBIT 4.1 - ----------------------------------- INCORPORATED UNDER THE LAWS COMMON STOCK OF THE STATE OF DELAWARE $.01 PAR VALUE NUMBER SHARES ---------------------- ----------------------- C ADVANCE PARADIGM, INC. ---------------------- ----------------------- THIS CERTIFICATE IS TRANSFERABLE IN CUSIP 007491 10 3 DALLAS, TEXAS AND NEW YORK, NEW YORK SEE REVERSE FOR CERTAIN DEFINITIONS THIS CERTIFIES THAT IS THE RECORD HOLDER OF FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK OF Advance Paradigm, Inc., a Delaware corporation (hereinafter referred to as the "Corporation"), transferable on the books of the Corporation in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid unless countersigned by the transfer agent and registered by the registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. [SIGCUT] Dated: PRESIDENT [SEAL] COUNTERSIGNED AND REGISTERED: [SIGCUT] ChaseMellon Shareholder Services, L.L.C. TRANSFER AGENT SECRETARY AND REGISTRAR BY AUTHORIZED SIGNATURE - -----------------------------------
ADVANCE PARADIGM, INC. The Corporation will furnish without charge to each stockholder who so requests, a copy of the designations, powers, preferences and relative, participating, optional or other special rights of each class of stock or series thereof of the Corporation and the qualifications, limitations or restrictions of such preferences and/or rights. Such requests may be made to the Secretary of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common UNIF GIFT MIN ACT -- .......... Custodian .......... TEN ENT -- as tenants by the entireties (Cust) (Minor) JT TEN -- as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act ............................ in common (State) Additional abbreviations may also be used though not in the above list. For value received, _______________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE -------------------------------- -------------------------------- ------------------------------------------------------------------------------------ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------ ----------------------------------------------------------------------------- shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint --------------------------------------------------------------------------- Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated ---------------------------- --------------------------------------------------- NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. SIGNATURE GUARANTEED: BY --------------------------------------------------------------- THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
EX-4.10 3 EXHIBIT 4.10 TERMINATION AGREEMENT THIS TERMINATION AGREEMENT (this "Agreement") is made this 8th day of October, 1996 by and among Advance ParadigM, Inc., a Delaware corporation formerly known as Advance Pharmacy Services, Inc. (the "COMPANY"); Advance Health Care, Inc., a Delaware corporation ("AHC"); Canaan Capital Limited Partnership, Canaan Capital Offshore Limited Partnership, C.V., Quai Ltd., Stephen L. Green, Dr. Jeffrey R. Jay, J. H. Whitney & Co., Whitney 1990 Equity Fund, L.P. and Whitney Subordinated Debt Fund, L.P. (collectively, the "INVESTORS"); David D. Halbert, Jon S. Halbert and Dan Phillips (collectively, the "EXECUTIVE STOCKHOLDERS"). Each of the Executive Stockholders, AHC and any other holders of at least 5% of the outstanding capital stock of the Company (who is also not an Investor) shall be referred to herein as a "STOCKHOLDER". RECITALS: A. The Company, AHC, the Investors and the Executive Stockholders are parties to that certain Voting Co-Sale and Right of First Refusal Agreement dated as of August 4, 1993 and amended by Amendment No. 1 thereto dated December 8, 1993 (as amended, the "VOTING RIGHTS AGREEMENT"). B. The Company has filed a registration statement on Form S-1 (No. 333-06931) (the "Registration Statement") with the Securities and Exchange Commission (the "Commission") on June 26, 1996, as amended, in order to register shares of the Company's common stock, par value $.01 per share, in an underwritten public offering, with Hambrecht & Quist LLC, Montgomery Securities and J.P. Morgan Securities Inc. serving as the representatives of the underwriters thereunder (the "Public Offering"). C. In connection with the Public Offering, the parties to the Voting Rights Agreement desire to terminate the Voting Rights Agreement and all rights and obligations of the parties thereunder. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. TERMINATION. The Voting Rights Agreement, including without limitation the voting provisions contained therein, as well as all other understandings, agreements and representations by and among the parties, written or oral, which may relate to the subject matter thereof, are revoked and terminated and shall be of no further force and effect as of the date that the Commission declares the Registration Statement effective. In the event that the Registration Statement is not declared effective by the Commission, the Voting Rights Agreement shall remain in full force and effect until terminated in accordance with the terms thereof. 2. COMPLETE AGREEMENT. This Agreement embodies the complete agreement and understanding between the parties with respect to the subject matter hereof and supersedes and preempts any and all prior understandings, agreements or representations by or among the parties, written or oral, which may be related to the subject matter hereof in any way. 3. COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, with the same effect as if all parties had signed the same document. All such counterparts shall be deemed an original, shall be construed together and shall constitute one and the same instrument. 4. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of, and shall be binding upon, the parties hereto and their respective heirs, personal representatives, successors and assigns. 5. GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT WILL BE GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS OF THE STATE OF TEXAS. [Signature page follows] 2 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. ADVANCE PARADIGM, INC. INVESTORS: WHITNEY SUBORDINATED DEBT By: /s/ David D. Halbert FUND, L.P. -------------------------- Title: President -------------------------- INVESTORS: By: /s/ (signature illegible) ------------------------------------ Title: General Partner --------------------------------- CANAAN CAPITAL LIMITED PARTNERSHIP QUAI LTD. By: Canaan Capital Management Limited Partnership, General Partner By: /s/ (signature illegible) ------------------------------------ Title: Attorney-in-fact --------------------------------- By: Canaan Capital Partners L.P., General Partner /s/ Jeffrey R. Jay -------------------------------------- DR. JEFFREY R. JAY -------------------------------------- By: /s/ Stephen L. Green -------------------------- General Partner /s/ Stephen L. Green --------------------------------------- STEPHEN L. GREEN CANAAN CAPITAL OFFSHORE LIMITED PARTNERSHIP C.V. STOCKHOLDERS: ------------- By: Canaan Capital Management Limited Partnership, ADVANCE HEALTH CARE, INC. General Partner By: Canaan Capital Partners, L.P., By: /s/ David D. Halbert ------------------------------------ General Partner Title: President --------------------------------- By: /s/ Stephen L. Green ---------------------------- General Partner /s/ David D. Halbert ---------------------------------------- DAVID D. HALBERT J.H. WHITNEY & CO. By: /s/ (signature illegible) /s/ Jon S. Halbert ---------------------------- --------------------------------------- Title: General Partner JON S. HALBERT WHITNEY 1990 EQUITY FUND, L.P. /s/ Danny Phillips ---------------------------------------- By: /s/ (signature illegible) DANNY PHILLIPS ---------------------------- Title: General Partner - ------------------------------- 3 EX-4.14 4 EXHIBIT 4.14 ADVANCE PARADIGM, INC. AMENDED AND RESTATED INCENTIVE STOCK OPTION PLAN 1. PURPOSE. The purpose of this Amended and Restated Incentive Stock Option Plan (the "Plan") is to provide a means by which certain employees of Advance ParadigM, Inc. (the "Company") and its Affiliates (as defined below) may be given an opportunity to purchase common stock of the Company ("Common Stock") and to qualify such options as "incentive stock options" as such term is defined in Section 422 of the Internal Revenue Code of 1986 (the "Code"). The Plan is intended to advance the interests of the Company by encouraging stock ownership on the part of certain employees, by enabling the Company (and its Affiliates) to secure and retain the services of highly qualified persons, and by providing employees with an additional incentive to advance the success of the Company (and its Affiliates). For purposes of this Plan, Affiliate shall mean any parent or subsidiary corporation of the Company as defined in Sections 424(e) and (f) respectively of the Code. Affiliation shall refer to a group of Affiliates. 2. STOCK SUBJECT TO OPTION. Subject to adjustment as provided in Section 4(g) hereof, options may be granted by the Company from time to time to purchase up to an aggregate of 1,859,000 shares of the Company's authorized but unissued Common Stock; provided, however, that the number of shares that may be granted to any employee under the Plan shall be reasonable in relation to the purpose of the Plan. Shares that by reason of the expiration of an option or otherwise are no longer subject to purchase pursuant to an option granted under the Plan may be reoptioned under the Plan. The Company shall not be required upon the exercise of any option, to issue or deliver any shares of stock prior to the completion of such registration or other qualification of such shares under any state or Federal law, rule or regulation as the Company shall determine to be necessary or desirable. 3. PARTICIPANTS. All employees of the Company and its Affiliates may be granted options under the Plan. A director who is not otherwise employed by the Company (or an Affiliate) may not be granted an option. A person who holds an option granted hereunder that has not expired is referred to as an optionee. 4. TERMS AND CONDITIONS OF OPTIONS. The Committee (as that term is defined in Section 5) may grant options from time to time pursuant to the Plan. Such options shall be evidenced by written agreements substantially in the form of the Stock Option Agreement, which is attached hereto as Appendix A, and shall not be inconsistent with this Plan. Shares of stock that may be purchased under an option granted pursuant to this Plan shall sometimes hereinafter be referred to as "Option Shares." Nothing in this Plan or an option granted hereunder shall govern the employment rights and duties between the optionee and the Company or Affiliate. Neither this Plan, nor any grant or exercise pursuant hereto, shall constitute an employment agreement among such parties. (a) OPTION PRICE. The option price for each Option Share shall not be less than the the fair market value of a share of the Common Stock on the date the option is granted; provided, however, the foregoing notwithstanding, the option price for options granted to any employee owning stock (using the attribution of stock ownership rules of Section 424(d) of the Code) possessing more than 10% of the total combined voting power of all classes of stock of the Company or any of its Affiliates on the date such option is granted (a "10% Shareholder"), shall be at least 110% of the fair market value of the Common Stock on the date the option is granted. The Committee shall, in good faith, determine the fair market value of the Common Stock on the date the option is granted, and the fair market value may be more or less than the book value of the Common Stock. (b) TERM OF OPTION. Any other provision of this Plan notwithstanding, unless otherwise provided in an optionee's Stock Option Agreement, each option granted under this Plan shall expire not more than ten years from the date the option is granted, except that under the circumstances described in Section 4(i), options may expire and terminate at an earlier date. (c) EXERCISE OF OPTION. Unless otherwise provided in an optionee's Stock Option Agreement, each option shall be exercisable as to 20% of the total shares covered by such option as of the first anniversary of the date of grant, and the right to exercise with respect to an additional 20% of the total shares shall accrue on each of the next four anniversaries of the date of grant and shall be cumulative. The date of grant shall be the date set forth in any option as the Date of Grant. Further, where an optionee's employment by the Company and its Affiliates is terminated for any reason, no option shall give an optionee (or his successor) a right to acquire any greater number of shares than he had rights to acquire on the date of his termination. The Committee may accelerate the time at which an option may be exercised. (d) MANNER OF EXERCISE. (1) Shares of Common Stock purchased upon exercise of options shall at the time of purchase be paid for in full. To the extent that the right to purchase Option Shares has accrued hereunder, options may be exercised from time to time by written notice to the Company stating the full number of Option Shares with respect to which the option is being exercised and the time of delivery thereof, which shall be at least fifteen days after the giving of such notice unless an earlier date shall have been mutually agreed upon, accompanied by full payment for the shares which may be paid in cash, by check or in shares of Common Stock having a fair market value (as determined by the Committee in good faith) on the date of surrender equal to the aggregate exercise price of the Option Shares as to which the Option is exercised, or any combination of such methods of payment, or such other consideration and method of payment for the -2- issuance of Option Shares as is permitted under Delaware General Corporation Law. (2) At the time of delivery, the Company shall, without stock transfer or issue tax to the optionee (or other person entitled to exercise the option), deliver to the optionee (or to such other person) at the principal office of the Company, or such other place as shall be mutually agreed upon, a certificate or certificates for such Option Shares, provided, however, that the time of delivery may be postponed by the Company for such period as may be required for it with reasonable diligence to comply with any requirements of law. If the Option Shares are not registered under the Securities Act of 1933 (the "Act"), then the Company at the time of exercise will require in addition that the registered owner deliver investment representations in form acceptable to the Company and its counsel, and the Company will place a legend on the certificate for such Option Shares restricting the transfer of same. At no time shall the Company have any obligation or duty to register under the Act the Option Shares. (3) The Company shall have the right to deduct from any settlement of an award made under the Plan, including the delivery of shares, an amount sufficient to cover withholding required by law for any federal, state or local taxes or to take such other action as may be necessary to satisfy any such withholding obligations. The Committee may permit shares to be used to satisfy required tax withholding and such shares shall be valued at the fair market value as of the settlement date of the applicable award. (e) NON-ASSIGNABILITY OF OPTION RIGHTS. No option shall be assignable or transferable otherwise than by will or by the laws of descent and distribution. During the lifetime of an optionee, the option is exercisable only by the optionee. (f) TERMINATION OF EMPLOYMENT. In the event that optionee's employment by the Company and its Affiliates shall terminate for any reason, the options granted to optionee pursuant to this Plan shall terminate on the three-month anniversary of such termination. Should the optionee elect to exercise an option granted hereunder during the three- month period beginning on the date of termination, the Company shall have the right to purchase and, upon written notice from the Company of its intention to exercise such right, the optionee shall sell to the Company, all Option Shares acquired during such three-month period. If the Company elects to purchase any or all of such shares, the Company shall provide written notice thereof and shall pay to the optionee the fair market value of such shares as determined in good faith by the Board of Directors as of the date of the termination of optionee's employment. The Company shall not have the right to purchase any shares under this Section 4(f) if the Common Stock has been registered under the Act and has been listed or admitted to trading on one or more national securities exchanges or is quoted by the NASD Automated Quotation System. -3- (g) ADJUSTMENT OF OPTIONS ON RECAPITALIZATION. The aggregate number of shares of Common Stock for which options may be granted to persons participating under the Plan, the number of shares covered by each outstanding option, and the exercise price per share for each such option shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock of the Company resulting from the subdivision or consolidation of shares, or the payment of a stock dividend after the date of grant of the option, or other increase in such shares effected without receipt of consideration by the Company, provided, however, that any options to purchase fractional shares resulting from any such adjustment shall be eliminated, and provided further, that any such adjustment shall be made in a manner so as not to constitute a modification as defined in Section 424(h)(3) of the Code. (h) ADJUSTMENT OF OPTIONS UPON REORGANIZATION. (1) With respect to options to acquire stock of an Affiliate of optionee's then present employer, if optionee's then present employer ceases to be affiliated with the other member(s) of the Affiliation, then the option shall expire and terminate thirty (30) days after the date on which optionee's employer ceases to be an Affiliate. Notwithstanding the foregoing, the provisions of this Section 4(h) shall be subject to Section 4(b) and shall be subject to Section 4(i) if the optionee receives notice under Section 4(i) at a time earlier than the notice provided for herein. (2) Excluding for purposes of this Section 4(h)(2) any transactions between the Company and any Affiliate of the Company, in the event of (i) a sale of substantially all of the Common Stock, (ii) a sale of substantially all of the assets of the Company, or (iii) a merger in which the Company is not to be the surviving corporation (each a "Vesting Transaction"), the options of an optionee granted hereunder may, in the sole discretion of the Board of Directors, automatically vest immediately prior to the closing of a Vesting Transaction and, to the extent such Vesting Transaction does not occur, the vesting shall be deemed rescinded and optionee shall again only be entitled to exercise the options in accordance the terms of the optionee's Stock Option Agreement. The Company shall give each optionee holding vested options or entitled to accelerated vesting written notice of any Vesting Transaction at least fifteen (15) days prior to the closing of any such transaction, and each such optionee shall notify the Company of its intent to exercise any or all of its options immediately prior to the closing of such Vesting Transaction; provided, however, that any options not exercised prior to the closing of such Vesting Transaction shall expire on the closing of such Vesting Transaction. The foregoing notwithstanding, the provisions of this Section 4(h)(2) shall be subject to Sections 4(b) and 4(d). -4- (i) DISSOLUTION OF ISSUER OF OPTION STOCK. In the event of the proposed dissolution or liquidation of the Company, the options granted hereunder shall terminate as of a date to be fixed by the Committee, provided that not less than thirty (30) days prior written notice of the date so fixed shall be given to the optionee, and the optionee shall have the right, during the period of thirty (30) days preceding such termination, to exercise his option. The foregoing notwithstanding, the provisions of this Section 4(i) shall be subject to Section 4(b) and shall be subject to Section 4(h) if the optionee receives notice under Section 4(h) at a time earlier than the notice provided for herein. (j) RIGHTS AS A SHAREHOLDER. The optionee shall have no rights as a shareholder with respect to any shares of Common Stock of the Company held under option until the date of issuance of the stock certificates to him for such shares. Except as provided in Section 4(g), no adjustment shall be made for dividends or other rights for which the record date is prior to the date of such issuance. (k) ADJUSTMENT OF OPTIONS ON RECAPITALIZATION. The aggregate number of shares of Common Stock for which options may be granted to persons participating under the Plan, the number of shares covered by each outstanding option, and the exercise price per share for each such option shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock of the Company resulting from the subdivision or consolidation of shares, or the payment of a stock dividend after the date of grant of the option, or other increase in such shares effected without receipt of consideration by the Company, provided, however, that any options to purchase fractional shares resulting from any such adjustment shall be eliminated, and provided further, that any such adjustment shall be made in a manner so as not to constitute a modification as defined in Section 424(h)(3) of the Code. (l) ADJUSTMENT OF OPTIONS UPON REORGANIZATION. (1) With respect to options to acquire stock of an Affiliate of optionee's then present employer, if optionee's then present employer ceases to be affiliated with the other member(s) of the Affiliation, then the option shall expire and terminate thirty (30) days after the date on which optionee's employer ceases to be an Affiliate. Notwithstanding the foregoing, the provisions of this Section 4(h) shall be subject to Section 4(b) and shall be subject to Section 4(i) if the optionee receives notice under Section 4(i) at a time earlier than the notice provided for herein. (2) Excluding for purposes of this Section 4(h)(2) any transactions between the Company and any Affiliate of the Company, in the event of (i) a sale of substantially all of the Common Stock, (ii) a sale of substantially all of the assets of the Company, or (iii) a merger in which the Company is not to be the -5- surviving corporation (each a "Vesting Transaction"), the options of an optionee granted hereunder may, in the sole discretion of the Board of Directors, automatically vest immediately prior to the closing of a Vesting Transaction and, to the extent such Vesting Transaction does not occur, the vesting shall be deemed rescinded and optionee shall again only be entitled to exercise the options in accordance the terms of the optionee's Stock Option Agreement. The Company shall give each optionee holding vested options or entitled to accelerated vesting written notice of any Vesting Transaction at least fifteen (15) days prior to the closing of any such transaction, and each such optionee shall notify the Company of its intent to exercise any or all of its options immediately prior to the closing of such Vesting Transaction; provided, however, that any options not exercised prior to the closing of such Vesting Transaction shall expire on the closing of such Vesting Transaction. The foregoing notwithstanding, the provisions of this Section 4(h)(2) shall be subject to Sections 4(b) and 4(d). (m) DISSOLUTION OF ISSUER OF OPTION STOCK. In the event of the proposed dissolution or liquidation of the Company, the options granted hereunder shall terminate as of a date to be fixed by the Committee, provided that not less than thirty (30) days prior written notice of the date so fixed shall be given to the optionee, and the optionee shall have the right, during the period of thirty (30) days preceding such termination, to exercise his option. The foregoing notwithstanding, the provisions of this Section 4(i) shall be subject to Section 4(b) and shall be subject to Section 4(h) if the optionee receives notice under Section 4(h) at a time earlier than the notice provided for herein. (n) RIGHTS AS A SHAREHOLDER. The optionee shall have no rights as a shareholder with respect to any shares of Common Stock of the Company held under option until the date of issuance of the stock certificates to him for such shares. Except as provided in Section 4(g), no adjustment shall be made for dividends or other rights for which the record date is prior to the date of such issuance. 5. ADMINISTRATION. (a) The Plan shall be administered by a Compensation Committee (the "Committee") consisting of one or more directors to be appointed by the Board of Directors of the Company. The Board of Directors may, from time to time, remove members from or add members to the Committee. Vacancies in the Committee, however caused, shall be filled by the Board of Directors. The Committee shall select one of its members as chairman and shall hold meetings at such times and places as it may determine. The Committee may appoint a secretary and, subject to the provisions of the Plan and to policies determined by the Board of Directors, may make such rules and regulations for the conduct of its business as it shall deem advisable. All action of the -6- Committee shall require the affirmative vote of 75% of its members. Any action may be taken by a written instrument signed by all of the members, and action so taken shall be fully as effective as if it had been taken by a vote of all of the members at a meeting duly called and held. The Board of Directors may act in lieu of the Committee and shall act in lieu of a Committee at any time such a Committee is not instituted. (b) Subject to the express terms and conditions of the Plan, the Committee shall have full power to grant options under the Plan, to construe or interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it and to make all other determinations necessary or advisable for its administration. (c) Subject to the provisions of Sections 3 and 4 hereof, the Committee may, from time to time, determine which employees of the Company or its Affiliates shall be granted options under the Plan, the number of Option Shares subject to each option, and the time or times at which options shall be granted, and the Company may grant such options under the Plan. (d) The Committee shall report to the Board of Directors the names of employees granted options, the number of Option Shares subject to, and the terms and conditions of each option. (e) No member of the Board of Directors or of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or to any option. 6. EFFECTIVE DATE AND TERMINATION. (a) The effective date of the Plan is August 1, 1993. (b) The Plan shall terminate on August 1, 2003; but the Board of Directors may terminate the Plan at any time prior to ten years from the effective date of the Plan. Termination of the Plan shall not alter or impair, without the consent of the optionee, any of the rights or obligations and any option theretofore granted under the Plan. 7. AMENDMENTS. The Board of Directors of the Company may, from time to time, alter, amend, suspend, or discontinue the Plan, or alter or amend any and all option agreements granted thereunder, provided, however, that no such action of the Board of Directors, without the approval of the shareholders of Company, may alter the provisions of the Plan so as to: (a) decrease the minimum option price; (b) extend the term of the Plan beyond ten years or the maximum term of the options granted beyond ten years; -7- (c) alter any outstanding option agreement to the detriment of the optionee without his consent; or (d) decrease, directly or indirectly (by cancellation and substitution of options or otherwise), the option price applicable to any option granted under this Plan. The foregoing notwithstanding, (i) the Board of Directors may amend the Plan in any respect in order to qualify the options granted pursuant hereto as Incentive Stock Options as defined in Section 422 of the Code, and (ii) no amendment may be made to this Plan (or any option granted hereunder without the consent of the optionee) which could constitute a modification of any option outstanding under Section 424(h) of the Code or which would adversely affect an outstanding option's status as an incentive stock option under Section 422 of the Code. 8. STATUS OF OPTIONS. Options granted pursuant to this Plan are intended to qualify as Incentive Stock Options within the meaning of Section 422 of the Code, and the terms of this Plan and options granted hereunder shall be so construed, provided, however, that nothing in this Plan shall be interpreted as a representation, guarantee or other undertaking on the part of the Company that the options granted pursuant to this Plan are, or will be, determined to be Incentive Stock Options, within the meaning of Section 422 of the Code. 9. USE OF PROCEEDS. The proceeds from the sale of Common Stock pursuant to the exercise of options will be used for the Company's general corporate purposes. -8- APPENDIX A INCENTIVE STOCK OPTION AGREEMENT Advance ParadigM, Inc. (the "Company"), in consideration of the value of the continuing services of [NAME] ("Optionee"), which continuing services the grant of this option is designed to secure, and in consideration of the undertakings made herein by Optionee, and pursuant to its 1993 Incentive Stock Option Plan (the "Plan"), hereby grants to Optionee an option, evidenced by this option agreement, exercisable for the period and upon the terms hereinafter set out, to purchase [____________ (___)] shares of common stock ("Common Stock") of the Company upon exercise of the option. 1. EXERCISE PRICE. The exercise price of the option shall be [$______] per share, which price represents at least 100% of the fair market value of a share of the Common Stock at the Date of Grant (as hereinafter defined). 2. TERM OF OPTION. This option is granted and dated as of [DATE OF GRANT] (sometimes hereinafter called the "Date of Grant"), and will terminate and expire, to the extent not previously exercised, ten (10) years after the Date of Grant, or at such earlier time as may be specified in Section 4 of the Plan. Except as otherwise provided in this Option Agreement or in the Plan, this option is exercisable as to 20% of the total shares covered by such option as of the first anniversary of the Date of Grant, and the right to exercise with respect to an additional 20% of the total shares shall accrue on each of the next four anniversaries of the Date of Grant and shall be cumulative. 3. MANNER OF EXERCISE. The Optionee (or other person entitled to exercise the option) shall purchase shares of Common Stock subject hereto in the manner and in accordance with the rules set forth in the Plan. 4. TERMINATION OF EMPLOYMENT. As provided in the Plan, if Optionee's employment with the Company and its Affiliates (as defined in the Plan) is terminated for any reason, (i) any portion of the option not vested on the date of termination will be forfeited, and (ii) at any time within three months of the date of such termination, the Optionee shall have the right to exercise any or all of the options vested in such Optionee immediately prior to such termination; PROVIDED, however, that, if the Common Stock has not been registered in accordance with the Securities Act of 1933 and has not been listed or admitted to trading on one or more national securities exchanges or is not quoted by the NASD Automated Quotation System, any shares of Common Stock acquired upon exercise of the option following such termination, will be subject to purchase by the Company at the fair market value of such shares as determined in good faith by the Board of Directors. -9- 5. ADJUSTMENTS ON RECAPITALIZATION. The number of shares of Common Stock subject hereto and the option price per share shall be proportionately adjusted for any increase or decrease in the number of issued shares of the Common Stock resulting from the subdivision or consolidation of shares, or the payment of a stock dividend after the Date of Grant, or other decrease or increase in the shares of Common Stock outstanding effected without receipt of consideration by the Company, provided, however, that any options to purchase fractional shares resulting from such adjustments shall be eliminated. 6. SUBJECT TO PLAN. This option is subject to all the terms and conditions of the Plan, and specifically to the power of the Compensation Committee of the Board of Directors of the Company to make interpretations of the Plan and of options granted thereunder, and of the Board of Directors of the Company to alter, amend, suspend, or discontinue the Plan subject to the limitations expressed in the Plan. By acceptance hereof, Optionee acknowledges receipt of a copy of the Plan and recognizes and agrees that all determinations, interpretations, or other actions respecting the Plan may be made by a majority of the Board of Directors of the Company or of the Compensation Committee, and that such determinations, interpretations, or other actions are final, conclusive and biding upon all parties, including Optionee. IN WITNESS WHEREOF, this Option Agreement is executed as of the [DATE OF GRANT]. ADVANCE PARADIGM, INC. By: ------------------------------------- Name: -------------------------------- Title: ------------------------------- The undersigned Optionee hereby accepts the benefits of the foregoing Incentive Stock Option Agreement. ---------------------------------------- [NAME], Optionee -10- EX-10.5 5 EXHIBIT 10.5 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is effective as of December 1, 1996 (the "Effective Date"), by and between Advance ParadigM, Inc. (the "Company"), and Joseph J. Filipek, Jr. (the "Employee"). WHEREAS, Employee is a senior manager of the Company and is expected to make significant contributions to the profitability, growth and financial strength of the Company; WHEREAS, the Company desire to assure both the present and future continuity of management of the Company and desire to establish certain minimum compensation rights of the Employee; and WHEREAS, the Company and Employee desire to enter into this Agreement pursuant to which the Company will employ Employee in the capacity, for the period and on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements herein contained, the parties hereto hereby agree as follows: 1. EMPLOYMENT AND DUTIES. The Company hereby employs Employee and Employee hereby accepts such employment in the capacity of Executive Vice President of the Company and as President and Chief Executive Officer of Advance ParadigM Clinical Services, Inc., the Company's wholly-owned subsidiary, to act in accordance with the terms and conditions hereinafter set forth. During the term of this Agreement, Employee agrees that these positions will be his full- time employment, that he will devote his best efforts and all of his business time, attention and skills to the business of the Company and that he will perform such duties, functions, responsibilities and authority in connection with the foregoing as are from time to time delegated to Employee by the Board of Directors of the Company. 2. TERM. The employment of Employee shall commence on the date hereof and shall end on the third anniversary hereof (the "Term"). 3. COMPENSATION. In consideration of the services to be rendered by Employee to the Company hereunder, the Company hereby agrees to pay or otherwise provide Employee the following compensation and benefits, it being understood that the Company shall have the right to deduct therefrom all taxes which may be required to be deducted or withheld therefrom under any provision of applicable law (including but not limited to Social Security payments, income tax withholding and other required deductions now in effect or which may become effective by law any time during the Term): (a) SALARY. Employee shall receive an annual salary of One Hundred Seventy-Five Thousand Dollars ($175,000), with such increases therein as may be determined by the Board from time to time in its sole discretion ("Base Salary"), to be paid in equal installments not less frequently than monthly in accordance with the Company's salary payment practices in effect from time to time for senior managers of the Company. The Base Salary may be reviewed by the Board from time to determine any increases to the Base Salary; provided that the annual increase shall be, at a minimum $10,000. (b) BONUS PAYMENTS. In addition to the Base Salary, Employee shall be entitled to receive, and the Company shall pay, bonuses to the Employee under the Company's executive incentive compensation plan as approved by the Board of Directors. 1 (c) BENEFIT PLANS. Employee shall be entitled to participate in any health, accident, disability and life insurance programs, and any other fringe benefit program (including a 401(k) savings plan), which the Company has adopted or may adopt and implement for the benefit of the Company's employees. Notwithstanding the foregoing, however, nothing contained herein shall be construed as an obligation of the Company to implement any such program, or, if implemented, to maintain any such program for any period of time for any employee. (d) FRINGE BENEFITS. The Company shall provide Employee with an automobile allowance of $700 per month and shall provide a country club membership at a country club that is mutually acceptable to the Employee and the Company. (e) EXPENSES. Employee shall be entitled to receive reimbursement for all reasonable expenses incurred by him in connection with the fulfillment of his duties hereunder; PROVIDED, HOWEVER, that Employee has complied with all policies and procedures relating to the reimbursement of such expenses as shall, from time to time, be established by the Company. (f) VACATION AND SICK LEAVE. During the Term of employment, Employee shall be permitted to take vacations with such frequency and of such duration as are consistent with the executive vacation policies of the Company in effect on the date of this Agreement so long as the absence of Employee does not interfere in any material respect with the performance by Employee of Employee's duties hereunder. In any event, Employee shall be entitled to not less than 20 business days of vacation during each of the fiscal years ending during the Term of employment. Employee shall also be entitled to sick leave according to the sick leave policy which the Company may adopt from time to time. (g) QUALIFIED STOCK OPTION TO EMPLOYEE. As further consideration for Employee's continuing employment by the Company under the terms of this Agreement, subject to the terms and conditions of the Company's 1993 Incentive Stock Option Plan ("ISOP"), the Company has granted to Employee an options set forth below: (i) On October 7, 1996, Employee was granted an incentive option to purchase 37,500 shares of the Common Stock of the Company with an exercise price of $9.00 per share. The option is subject to and granted under the ISOP. The option shall vest and become exercisable as to twenty percent (20%) of the total shares on each of the first five anniversaries of the date of grant; provided, however, that immediately prior to the consummation of any sale to or merger with an outside entity gaining 50% or greater ownership of the Company, the options shall become, without further act or deed, exercisable as to 100% of the shares. (ii) On December 23, 1996, Employee was granted an incentive option to purchase 20,000 shares of the Common Stock of the Company with an exercise price of $12.75 per share. The option is subject to and granted under the ISOP. The option shall vest and become exercisable as to 33-1/3% of the total shares represented thereby on each of the first three anniversaries of the date of grant; provided however that immediately prior to the consummation of any sale to or merger with an outside entity gaining 50% or greater ownership of the Company, the option shall become without further act or deed exercisable as to 100% of the shares. 2 4. TERMINATION (a) DEATH OR DISABILITY. This Agreement shall terminate automatically upon the Employee's death. If the Company determines in good faith that the Disability of the Employee has occurred (pursuant to the definition of "Disability" set forth below), it may give to the Employee written notice of its intention to terminate the Employee's employment. In such event, the Employee's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Employee (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Employee shall not have returned to full-time performance of the Employee's duties. For purposes of this Agreement, "Disability" means disability which, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Employee or the Employee's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) CAUSE. The Company may terminate the Employee's employment for "Cause." For purposes of this Agreement, "Cause" means: (i) an act or acts of personal dishonesty taken by the Employee at the expense of the Company, (ii) a material violation or repeated violations by the Employee of the Employee's obligations under Section 1 of this Agreement which are demonstrably willful or deliberate on the Employee's part and which are not remedied in a reasonable period of time after receipt of written notice from the Company, or (iii) the conviction of the Employee of a felony. (c) GOOD REASON. The Employee's employment may be terminated by the Employee for Good Reason. For purposes of this Agreement, "Good Reason" means: (i) the assignment to the Employee of any duties inconsistent in any respect with the Employee's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 1 of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Employee; (ii) any material failure by the Company to comply with any of the provisions of Section 3 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Employee; (iii) the Company's requiring the Employee's services to be performed at any office or location more than thirty-five (35) miles from the location where the Employee was employed immediately preceding the Effective Date, except for travel reasonably required in the performance of the Employee's responsibilities; (iv) any purported termination by the Company of the Employee's employment otherwise than as expressly permitted by this Agreement. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause or by the Employee for Good Reason shall be communicated by Notice of Termination to the other 3 party hereto given in accordance with Section 10 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated, and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than fifteen (15) days after the giving of such notice). (e) DATE OF TERMINATION. "Date of Termination" means the date of receipt of the Notice of Termination or any later date specified therein, as the case may be; PROVIDED, HOWEVER, that (i) if the Employee's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Employee is such termination, and (ii) if the Employee's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Employee or the Disability Effective Date, as the case may be. 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION (a) DEATH. If the Employee's employment is terminated by reason of the Employee's death, this Agreement shall terminate without further obligations to the Employee's legal representatives under this Agreement, other than those obligations accrued or earned and vested (if applicable) by the Employee as of the Date of Termination, including, for this purpose (i) the Employee's full Base Salary through the Date of Termination at the rate in effect on the Date of Termination or, if higher, at the highest rate in effect at any time from the 90-day period preceding the Date of Termination (the "Highest Base Salary"), (ii) the product of the Annual Bonus paid to the Employee for the last full fiscal year and a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denomination of which is 365, and (iii) any compensation previously deferred by the Employee (together with any accrued interest thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (such amounts specified in clauses (i), (ii) and (iii) are hereinafter referred to as "Accrued Obligations"). All such Accrued Obligations shall be paid to the Employee's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. Anything in this Agreement to the contrary notwithstanding, the Employee's family shall be entitled to receive benefits at least equal to the most favorable benefits provided by the Company to surviving families of employees of the Company under such plans, programs, practices 4 and policies relating to family death benefits, if any, in effect at the time of Employee's death. (b) DISABILITY. If the Employee's employment is terminated by reason of the Employee's Disability, this Agreement shall terminate without further obligations to the Employee, other than those obligations accrued or earned and vested (if applicable) by the Employee as of the Date of Termination, including for this purpose, all Accrued Obligations. All such Accrued Obligations shall be paid to the Employee in lump sum in cash within 30 days of the Date of Termination. Anything in this Agreement to the contrary notwithstanding, the Employee shall be entitled after the Disability Effective Date to receive disability and other benefits at least equal to the most favorable of those provided by the Company to disabled employees or their families in accordance with such plans, programs, practices and policies of the Company in effect at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Employee and the Employee's family, as in effect at any time thereafter with respect to other key employees of the Company and their families. (c) CAUSE; OTHER THAN FOR GOOD REASON. If the Employee's employment shall be terminated for Cause, the Company's obligations to the Employee shall terminate other than the obligation to pay to the Employee the Highest Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Employee (together with accrued interest thereon). If the Employee terminates employment other than for Good Reason, the Company's obligations to the Employee shall terminate, other than those obligations accrued or earned and vested (if applicable) by the Employee through the Date of Termination, including for this purpose, all Accrued Obligations. All such Accrued Obligations shall be paid to the Employee in a lump sum in cash within 30 days of the Date of Termination. (d) GOOD REASON; OTHER THAN FOR CAUSE OR DISABILITY. If, during the Term, the Company shall terminate the Employee's employment other than for Cause, Disability, or death or if the Employee shall terminate his employment for Good Reason, the Company shall continue in accordance with the Company's normal payroll procedures to pay Employee his Highest Base Salary for a period of one- year from the Date of Termination or for the remaining term of this Agreement, whichever period is shorter (the "Severance Period"). Any amounts payable to Employee under this Section 5(d) shall be reduced and offset by the amount of any compensation received by Employee for other employment during the Severance Period. During the Severance Period Employee shall use his best efforts to find employment consistent with the covenants of Employee in Sections 8 and 9 hereof. During the Severance Period, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Employee and the Employee's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 3(c) of this Agreement if the Employee's employment had not been terminated. 6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Employee's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices, provided by the Company and for which the Employee may qualify, nor shall anything herein limit or otherwise affect such rights as the Employee may have under any stock option or other agreement with the Company. Amounts which are vested benefits or which the Employee is otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program. 5 7. FULL SETTLEMENT. Except as provided in Section 5(d) hereof, the Employee shall not be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Employee under any of the provisions of this Agreement. The Company agrees to pay, to the full extent permitted by law, all legal fees and expenses which the employee may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof, plus in each case interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Internal Revenue Code of 1986, as amended. 8. RESTRICTIVE COVENANTS. Employee and the Company agree that the Company would suffer irreparable harm and incur substantial damage if Employee were to enter into Competition (as defined herein) with the Company. Therefore, in order for the Company to protect its legitimate business interests, Employee agrees as follows: (a) Without the prior written consent of the Company, Employee shall not during the period of employment with the Company, directly or indirectly, invest or engage in any business that is Competitive (as defined herein) with the pharmacy benefit management business (including without limitation clinical, formulary/rebate, mail order or claim processing services), disease management, telephonic case management or demand management or other business in which the Company has been actively engaged during the Term of Employee's employment (the "Business") or accept employment or render services to a Competitor (as defined herein) of the Company as a director, officer, agent, employee, independent contractor or consultant, or solicit or attempt to solicit or accept business that is Competitive with the Business of the Company, except that Employee may own up to one percent (1%) of any outstanding class of securities of any company registered under Section 12 of the Securities and Exchange Act of 1934. (b) Without the prior written consent of the Company, for a period of two (2) years from the Date of Termination for Cause or for a period of one (1) year from the Date of Termination for any reason other than Cause, Employee shall not, either directly or indirectly, (i) invest or engage in any business that is Competitive with the Business of the Company, except that Employee may own up to one percent (1%) of any outstanding class of securities of any company registered under Section 12 of the Securities and Exchange Act of 1934, as amended, (ii) accept employment with or render services to a Competitor of the Company as a director, officer, agent, employee, independent contractor or consultant or (iii) solicit, attempt to solicit or accept business competitive with the Business of the Company from any of the customers of the Company at the time of his termination or within twelve (12) months prior thereto or from any person or entity whose business the Company was soliciting at such time. In the event the Company is obligated to make payments to Employee during the Severance Period pursuant to Section 5(d) hereof, on the day immediately following the termination of the Company's obligation to make such payments, clauses (i) and (ii) of this Section 8(b) shall be without further force and effect. (c) Upon termination of his employment with the Company, and for a period of twelve (12) months thereafter, Employee shall not, either directly or indirectly, solicit business, directly or indirectly from any person or entity to whom the Company has sold its services, nor shall the Employee contact, communicate with, or solicit in any manner whatsoever the employment of an employee of the Company. (d) The Company and Employee agree that the consideration for Employee's post-employment covenant not to compete is the overall consideration provided for the benefit of Employee pursuant to this Agreement, including but not limited to the continued employment of Employee. The primary purpose of this covenant is the Company 6 legitimate interest in protecting its economic welfare and business goodwill. The Company and Employee further agree that this covenant shall in no way be construed as a mere limitation on competition nor shall it be construed as a restraint on Employee's right to engage in a common calling. (e) Employee acknowledges that the foregoing limitations are reasonable and properly required for the adequate protection of the Business of the Company and that in the event any such limitation is found to be unreasonable by a court of competent jurisdiction, Employee agrees to the reduction of such limitation to the extent it shall appear reasonable to such court. (f) For purposes of this Agreement, a business or activity is in "Competition" or "Competitive" with the Business of the Company if it involves, and a person or entity is a "Competitor," if that person or entity is engaged in, or about to become engaged in, the same business as the Business of the Company or any segments thereof in the continental United States of America. 9. CONFIDENTIALITY. For purposes of this Agreement, "Confidential Information and Trade Secrets" shall mean all information, ideas, know how, trade secrets, processes, computer software or programs and related documentation, methods, practices, fabricated techniques, technical plans, customer lists, pricing techniques, marketing plans, financial information and all other compilations of information which relate to the Business of, and are owned by, the Company, which were not known generally to others engaged in the Business of the Company and which the Company has taken affirmative actions to protect from public disclosure or which do not exist in the public domain. Employee acknowledges that, during his term of employment with the Company, he shall have access to and become familiar with Confidential Information and Trade Secrets that are owned by the Company. Employee shall not use, in any way, or disclose any of the Confidential Information and Trade Secrets, directly or indirectly, either during the term of his employment or at anytime thereafter, except as required in the course of his employment. All files, records, documents, information, data and similar items and documentation relating to the Business of the Company, whether prepared by Employee or otherwise, coming into Employee's possession, shall remain the exclusive property of the Company unless owned by Employee. The obligations of this Section 9 are continuous and shall survive the termination of Employee's employment with the Company. 10. NOTICES. Any notice or other communication required or permitted to be given hereunder shall be in writing and deemed to have been given when delivered in person or when dispatched by telegram or electronic facsimile transfer (confirmed in writing by mail, registered or certified, return receipt requested, postage prepaid, simultaneously dispatched) to the addresses at the addresses specified below: If to Employee: Joseph J. Filipek, Jr. 4000 St. Paul Street Baltimore, MD 21218 With a copy to: Frank R. Goldstein Morgan, Lewis & Bockius 1800 M Street, N.W. Washington, D.C. 20036 Phone No.: 202/467-7382 Fax No.: 202/467-7176 7 If to the Company: Advance ParadigM, Inc. 545 E. John Carpenter Freeway Suite 1900 Irving, TX 75062 Attention: David D. Halbert Phone No.: 972/830-6199 Fax No.: 972/830-6196 or to such other address or fax number as either party may from time to time designate in writing to the other. 11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto relating to the subject matter hereof, and supersedes all prior agreements and understandings, whether oral or written, with respect to the same. No modification, alteration, amendment or recision of or supplement to this Agreement shall be valid or effective unless the same is in writing and signed by the parties hereto. 12. GOVERNING LAW. This Agreement and the rights and duties of the parties hereunder shall be governed by, construed under and enforced in accordance with the laws of the State of Maryland. 13. ASSIGNMENT. This Agreement shall inure to the benefit or and be binding upon the parties hereto and their respective heirs, personal representatives, successors and permitted assigns. Subject to the prior written consent of Employee, the rights, duties and obligations under this Agreement are assignable by the Company to a successor of all or substantially all of the business or assets of the Company. The rights, duties and obligations of Employee under this Agreement shall not be assignable. 14. SEVERABILITY. The parties hereto further agree that if at any time it shall be determined that the restrictions contained in Section 8 or 9 are unreasonable as to time or area, or both, by any court of competent jurisdiction, the Company shall be entitled to enforce this Agreement for such period of time and within such area as may be determined to be reasonable by such court and the court shall have the authority to construe reform and enforce the terms of this Agreement for the benefit of the Company to a maximum extent possible. It is the intent of the parties hereto that the provisions hereof be enforceable to the fullest extent permitted by applicable law. This Agreement may be enforced by the Company or any of its affiliates engaged in the Business. 15. SURVIVAL. No termination of Employee's employment by any of the parties hereto shall reduce or terminate Employee's covenants and agreements in Section 8 and 9 hereto. 16. REMEDIES. Employee and the Company recognize that the services to be rendered under this Agreement by Employee are special, unique, and of extraordinary character, and that in the event of a breach by Employee of the terms and conditions of Sections 8 and 9 hereof, the Company shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, either in law or in equity, to obtain damages for any breach thereof or to enforce the specific performance thereof by Employee, or to enjoin Employee from performing services for any other person, firm, or corporation engaged in activities Competitive with the Business of the Company. 8 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. ADVANCE PARADIGM, INC. By: /s/ David D. Halbert -------------------- Name: David D. Halbert Title: Chairman and CEO EMPLOYEE /s/ Joseph J. Filipek, Jr. -------------------------- Joseph J. Filipek, Jr. 9 EX-10.6 6 EXHIBIT 10.6 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is effective as of December 1, 1996 (the "Effective Date"), by and between Advance ParadigM, Inc. (the "Company"), and Robert L. Cinquegrana (the "Employee"). WHEREAS, Employee is a senior manager of the Company and is expected to make significant contributions to the profitability, growth and financial strength of the Company; WHEREAS, the Company desire to assure both the present and future continuity of management of the Company and desire to establish certain minimum compensation rights of the Employee; and WHEREAS, the Company and Employee desire to enter into this Agreement pursuant to which the Company will employ Employee in the capacity, for the period and on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements herein contained, the parties hereto hereby agree as follows: 1. EMPLOYMENT AND DUTIES. The Company hereby employs Employee and Employee hereby accepts such employment in the capacity of Senior Vice President of the Company, the Company's wholly-owned subsidiary, to act in accordance with the terms and conditions hereinafter set forth. During the term of this Agreement, Employee agrees that this position will be his full-time employment, that he will devote his best efforts and all of his business time, attention and skills to the business of the Company and that he will perform such duties, functions, responsibilities and authority in connection with the foregoing as are from time to time delegated to Employee by the Board of Directors of the Company. 2. TERM. The employment of Employee shall commence on the date hereof and shall end on the second anniversary hereof (the "Term"). 3. COMPENSATION. In consideration of the services to be rendered by Employee to the Company hereunder, the Company hereby agrees to pay or otherwise provide Employee the following compensation and benefits, it being understood that the Company shall have the right to deduct therefrom all taxes which may be required to be deducted or withheld therefrom under any provision of applicable law (including but not limited to Social Security payments, income tax withholding and other required deductions now in effect or which may become effective by law any time during the Term): (a) SALARY. Employee shall receive an annual salary of One Hundred Forty-Five Thousand Dollars ($145,000), with such increases therein as may be determined by the Board from time to time in its sole discretion ("Base Salary"), to be paid in equal installments not less frequently than monthly in accordance with the Company's salary payment practices in effect from time to time for senior managers of the Company. The Base Salary may be reviewed by the Board from time to determine any increases to the Base Salary; provided that the annual increase shall be, at a minimum $5,000. (b) BONUS PAYMENTS. In addition to the Base Salary, Employee shall be entitled to receive, and the Company shall pay, bonuses to the Employee under the Company's executive incentive compensation plan as approved by the Board of Directors. 1 (c) BENEFIT PLANS. Employee shall be entitled to participate in any health, accident, disability and life insurance programs, and any other fringe benefit program (including a 401(k) savings plan), which the Company has adopted or may adopt and implement for the benefit of the Company's employees. Notwithstanding the foregoing, however, nothing contained herein shall be construed as an obligation of the Company to implement any such program, or, if implemented, to maintain any such program for any period of time for any employee. (d) FRINGE BENEFITS. The Company shall provide Employee with an automobile allowance of $525 per month and shall provide a country club membership at a country club that is mutually acceptable to the Employee and the Company. (e) EXPENSES. Employee shall be entitled to receive reimbursement for all reasonable expenses incurred by him in connection with the fulfillment of his duties hereunder; PROVIDED, HOWEVER, that Employee has complied with all policies and procedures relating to the reimbursement of such expenses as shall, from time to time, be established by the Company. (f) VACATION AND SICK LEAVE. During the Term of employment, Employee shall be permitted to take vacations with such frequency and of such duration as are consistent with the executive vacation policies of the Company in effect on the date of this Agreement so long as the absence of Employee does not interfere in any material respect with the performance by Employee of Employee's duties hereunder. In any event, Employee shall be entitled to not less than 20 business days of vacation during each of the fiscal years ending during the Term of employment. Employee shall also be entitled to sick leave according to the sick leave policy which the Company may adopt from time to time. (g) QUALIFIED STOCK OPTION TO EMPLOYEE. As further consideration for Employee's continuing employment by the Company under the terms of this Agreement, subject to the terms and conditions of the Company's 1993 Incentive Stock Option Plan ("ISOP"), the Company has granted to Employee an options set forth below: (i) On October 7, 1996, Employee was granted an incentive option to purchase 12,500 shares of the Common Stock of the Company with an exercise price of $9.00 per share. The option is subject to and granted under the ISOP. The option shall vest and become exercisable as to twenty percent (20%) of the total shares on each of the first five anniversaries of the date of grant; provided, however, that immediately prior to the consummation of any sale to or merger with an outside entity gaining 50% or greater ownership of the Company, the options shall become, without further act or deed, exercisable as to 100% of the shares. (ii) On December 23, 1996, Employee was granted an incentive option to purchase 10,000 shares of the Common Stock of the Company with an exercise price of $12.75 per share. The option is subject to and granted under the ISOP. The option shall vest and become exercisable as to 33-1/3% of the total shares represented thereby on each of the first three anniversaries of the date of grant; provided however that immediately prior to the consummation of any sale to or merger with an outside entity gaining 50% or greater ownership of the Company, the option shall become without further act or deed exercisable as to 100% of the shares. 2 4. TERMINATION (a) DEATH OR DISABILITY. This Agreement shall terminate automatically upon the Employee's death. If the Company determines in good faith that the Disability of the Employee has occurred (pursuant to the definition of "Disability" set forth below), it may give to the Employee written notice of its intention to terminate the Employee's employment. In such event, the Employee's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Employee (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Employee shall not have returned to full-time performance of the Employee's duties. For purposes of this Agreement, "Disability" means disability which, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Employee or the Employee's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) CAUSE. The Company may terminate the Employee's employment for "Cause." For purposes of this Agreement, "Cause" means: (i) an act or acts of personal dishonesty taken by the Employee at the expense of the Company, (ii) a material violation or repeated violations by the Employee of the Employee's obligations under Section 1 of this Agreement which are demonstrably willful or deliberate on the Employee's part and which are not remedied in a reasonable period of time after receipt of written notice from the Company, or (iii) the conviction of the Employee of a felony. (c) GOOD REASON. The Employee's employment may be terminated by the Employee for Good Reason. For purposes of this Agreement, "Good Reason" means: (i) the assignment to the Employee of any duties inconsistent in any respect with the Employee's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 1 of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Employee; (ii) any material failure by the Company to comply with any of the provisions of Section 3 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Employee; (iii) the Company's requiring the Employee's services to be performed at any office or location more than thirty-five (35) miles from the location where the Employee was employed immediately preceding the Effective Date, except for travel reasonably required in the performance of the Employee's responsibilities; (iv) any purported termination by the Company of the Employee's employment otherwise than as expressly permitted by this Agreement. (d) NOTICE OF TERMINATION. Any termination by the Company for Cause or by the Employee for Good Reason shall be communicated by Notice of Termination to the other 3 party hereto given in accordance with Section 10 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated, and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than fifteen (15) days after the giving of such notice). (e) DATE OF TERMINATION. "Date of Termination" means the date of receipt of the Notice of Termination or any later date specified therein, as the case may be; PROVIDED, HOWEVER, that (i) if the Employee's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Employee is such termination, and (ii) if the Employee's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Employee or the Disability Effective Date, as the case may be. 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION (a) DEATH. If the Employee's employment is terminated by reason of the Employee's death, this Agreement shall terminate without further obligations to the Employee's legal representatives under this Agreement, other than those obligations accrued or earned and vested (if applicable) by the Employee as of the Date of Termination, including, for this purpose (i) the Employee's full Base Salary through the Date of Termination at the rate in effect on the Date of Termination or, if higher, at the highest rate in effect at any time from the 90-day period preceding the Date of Termination (the "Highest Base Salary"), (ii) the product of the Annual Bonus paid to the Employee for the last full fiscal year and a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denomination of which is 365, and (iii) any compensation previously deferred by the Employee (together with any accrued interest thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (such amounts specified in clauses (i), (ii) and (iii) are hereinafter referred to as "Accrued Obligations"). All such Accrued Obligations shall be paid to the Employee's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. Anything in this Agreement to the contrary notwithstanding, the Employee's family shall be entitled to receive benefits at least equal to the most favorable benefits provided by the Company to surviving families of employees of the Company under such plans, programs, practices 4 and policies relating to family death benefits, if any, in effect at the time of Employee's death. (b) DISABILITY. If the Employee's employment is terminated by reason of the Employee's Disability, this Agreement shall terminate without further obligations to the Employee, other than those obligations accrued or earned and vested (if applicable) by the Employee as of the Date of Termination, including for this purpose, all Accrued Obligations. All such Accrued Obligations shall be paid to the Employee in lump sum in cash within 30 days of the Date of Termination. Anything in this Agreement to the contrary notwithstanding, the Employee shall be entitled after the Disability Effective Date to receive disability and other benefits at least equal to the most favorable of those provided by the Company to disabled employees or their families in accordance with such plans, programs, practices and policies of the Company in effect at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Employee and the Employee's family, as in effect at any time thereafter with respect to other key employees of the Company and their families. (c) CAUSE; OTHER THAN FOR GOOD REASON. If the Employee's employment shall be terminated for Cause, the Company's obligations to the Employee shall terminate other than the obligation to pay to the Employee the Highest Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Employee (together with accrued interest thereon). If the Employee terminates employment other than for Good Reason, the Company's obligations to the Employee shall terminate, other than those obligations accrued or earned and vested (if applicable) by the Employee through the Date of Termination, including for this purpose, all Accrued Obligations. All such Accrued Obligations shall be paid to the Employee in a lump sum in cash within 30 days of the Date of Termination. (d) GOOD REASON; OTHER THAN FOR CAUSE OR DISABILITY. If, during the Term, the Company shall terminate the Employee's employment other than for Cause, Disability, or death or if the Employee shall terminate his employment for Good Reason, the Company shall continue in accordance with the Company's normal payroll procedures to pay Employee his Highest Base Salary for a period of one-year from the Date of Termination or for the remaining term of this Agreement, whichever period is shorter (the "Severance Period"). Any amounts payable to Employee under this Section 5(d) shall be reduced and offset by the amount of any compensation received by Employee for other employment during the Severance Period. During the Severance Period Employee shall use his best efforts to find employment consistent with the covenants of Employee in Sections 8 and 9 hereof. During the Severance Period, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Employee and the Employee's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 3(c) of this Agreement if the Employee's employment had not been terminated. 6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Employee's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices, provided by the Company and for which the Employee may qualify, nor shall anything herein limit or otherwise affect such rights as the Employee may have under any stock option or other agreement with the Company. Amounts which are vested benefits or which the Employee is otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program. 5 7. FULL SETTLEMENT. Except as provided in Section 5(d) hereof, the Employee shall not be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Employee under any of the provisions of this Agreement. The Company agrees to pay, to the full extent permitted by law, all legal fees and expenses which the employee may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof, plus in each case interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Internal Revenue Code of 1986, as amended. 8. RESTRICTIVE COVENANTS. Employee and the Company agree that the Company would suffer irreparable harm and incur substantial damage if Employee were to enter into Competition (as defined herein) with the Company. Therefore, in order for the Company to protect its legitimate business interests, Employee agrees as follows: (a) Without the prior written consent of the Company, Employee shall not during the period of employment with the Company, directly or indirectly, invest or engage in any business that is Competitive (as defined herein) with the pharmacy benefit management business (including without limitation clinical, formulary/rebate, mail order or claim processing services), disease management, telephonic case management or demand management or other business in which the Company has been actively engaged during the Term of Employee's employment (the "Business") or accept employment or render services to a Competitor (as defined herein) of the Company as a director, officer, agent, employee, independent contractor or consultant, or solicit or attempt to solicit or accept business that is Competitive with the Business of the Company, except that Employee may own up to one percent (1%) of any outstanding class of securities of any company registered under Section 12 of the Securities and Exchange Act of 1934. (b) Without the prior written consent of the Company, for a period of two (2) years from the Date of Termination for Cause or for a period of one (1) year from the Date of Termination for any reason other than Cause, Employee shall not, either directly or indirectly, (i) invest or engage in any business that is Competitive with the Business of the Company, except that Employee may own up to one percent (1%) of any outstanding class of securities of any company registered under Section 12 of the Securities and Exchange Act of 1934, as amended, (ii) accept employment with or render services to a Competitor of the Company as a director, officer, agent, employee, independent contractor or consultant or (iii) solicit, attempt to solicit or accept business competitive with the Business of the Company from any of the customers of the Company at the time of his termination or within twelve (12) months prior thereto or from any person or entity whose business the Company was soliciting at such time. In the event the Company is obligated to make payments to Employee during the Severance Period pursuant to Section 5(d) hereof, on the day immediately following the termination of the Company's obligation to make such payments, clauses (i) and (ii) of this Section 8(b) shall be without further force and effect. (c) Upon termination of his employment with the Company, and for a period of twelve (12) months thereafter, Employee shall not, either directly or indirectly, solicit business, directly or indirectly from any person or entity to whom the Company has sold its services, nor shall the Employee contact, communicate with, or solicit in any manner whatsoever the employment of an employee of the Company. (d) The Company and Employee agree that the consideration for Employee's post-employment covenant not to compete is the overall consideration provided for the benefit of Employee pursuant to this Agreement, including but not limited to the continued employment of Employee. The primary purpose of this covenant is the Company 6 legitimate interest in protecting its economic welfare and business goodwill. The Company and Employee further agree that this covenant shall in no way be construed as a mere limitation on competition nor shall it be construed as a restraint on Employee's right to engage in a common calling. (e) Employee acknowledges that the foregoing limitations are reasonable and properly required for the adequate protection of the Business of the Company and that in the event any such limitation is found to be unreasonable by a court of competent jurisdiction, Employee agrees to the reduction of such limitation to the extent it shall appear reasonable to such court. (f) For purposes of this Agreement, a business or activity is in "Competition" or "Competitive" with the Business of the Company if it involves, and a person or entity is a "Competitor," if that person or entity is engaged in, or about to become engaged in, the same business as the Business of the Company or any segments thereof in the continental United States of America. 9. CONFIDENTIALITY. For purposes of this Agreement, "Confidential Information and Trade Secrets" shall mean all information, ideas, know how, trade secrets, processes, computer software or programs and related documentation, methods, practices, fabricated techniques, technical plans, customer lists, pricing techniques, marketing plans, financial information and all other compilations of information which relate to the Business of, and are owned by, the Company, which were not known generally to others engaged in the Business of the Company and which the Company has taken affirmative actions to protect from public disclosure or which do not exist in the public domain. Employee acknowledges that, during his term of employment with the Company, he shall have access to and become familiar with Confidential Information and Trade Secrets that are owned by the Company. Employee shall not use, in any way, or disclose any of the Confidential Information and Trade Secrets, directly or indirectly, either during the term of his employment or at anytime thereafter, except as required in the course of his employment. All files, records, documents, information, data and similar items and documentation relating to the Business of the Company, whether prepared by Employee or otherwise, coming into Employee's possession, shall remain the exclusive property of the Company unless owned by Employee. The obligations of this Section 9 are continuous and shall survive the termination of Employee's employment with the Company. 10. NOTICES. Any notice or other communication required or permitted to be given hereunder shall be in writing and deemed to have been given when delivered in person or when dispatched by telegram or electronic facsimile transfer (confirmed in writing by mail, registered or certified, return receipt requested, postage prepaid, simultaneously dispatched) to the addresses at the addresses specified below: If to Employee: Robert L. Cinquegrana 10340 Congressional Court Ellicott City, Maryland 21042 With a copy to: Frank R. Goldstein Morgan, Lewis & Bockius 1800 M Street, N.W. Washington, D.C. 20036 Phone No.: 202/467-7382 Fax No.: 202/467-7176 7 If to the Company: Advance ParadigM, Inc. 545 E. John Carpenter Freeway Suite 1900 Irving, TX 75062 Attention: David D. Halbert Phone No.: 972/830-6199 Fax No.: 972/830-6196 or to such other address or fax number as either party may from time to time designate in writing to the other. 11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto relating to the subject matter hereof, and supersedes all prior agreements and understandings, whether oral or written, with respect to the same. No modification, alteration, amendment or recision of or supplement to this Agreement shall be valid or effective unless the same is in writing and signed by the parties hereto. 12. GOVERNING LAW. This Agreement and the rights and duties of the parties hereunder shall be governed by, construed under and enforced in accordance with the laws of the State of Maryland. 13. ASSIGNMENT. This Agreement shall inure to the benefit or and be binding upon the parties hereto and their respective heirs, personal representatives, successors and permitted assigns. Subject to the prior written consent of Employee, the rights, duties and obligations under this Agreement are assignable by the Company to a successor of all or substantially all of the business or assets of the Company. The rights, duties and obligations of Employee under this Agreement shall not be assignable. 14. SEVERABILITY. The parties hereto further agree that if at any time it shall be determined that the restrictions contained in Section 8 or 9 are unreasonable as to time or area, or both, by any court of competent jurisdiction, the Company shall be entitled to enforce this Agreement for such period of time and within such area as may be determined to be reasonable by such court and the court shall have the authority to construe reform and enforce the terms of this Agreement for the benefit of the Company to a maximum extent possible. It is the intent of the parties hereto that the provisions hereof be enforceable to the fullest extent permitted by applicable law. This Agreement may be enforced by the Company or any of its affiliates engaged in the Business. 15. SURVIVAL. No termination of Employee's employment by any of the parties hereto shall reduce or terminate Employee's covenants and agreements in Section 8 and 9 hereto. 16. REMEDIES. Employee and the Company recognize that the services to be rendered under this Agreement by Employee are special, unique, and of extraordinary character, and that in the event of a breach by Employee of the terms and conditions of Sections 8 and 9 hereof, the Company shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, either in law or in equity, to obtain damages for any breach thereof or to enforce the specific performance thereof by Employee, or to enjoin Employee from performing services for any other person, firm, or corporation engaged in activities Competitive with the Business of the Company. 8 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. ADVANCE PARADIGM, INC. By: /s/ David D. Halbert ----------------------------------------- Name: David D. Halbert Title: Chairman and CEO EMPLOYEE /s/ Robert L. Cinquegrana -------------------------------------------- Robert L. Cinquegrana 9 EX-10.7 7 EXHIBIT 10.7 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is effective as of November 14, 1996 (the "Effective Date"), by and between Advance ParadigM, Inc. (the "Company") and John H. Sattler (the "Employee"). WHEREAS, the Company and Employee desire to enter into this Agreement pursuant to which the Company will employ Employee in the capacity of Senior Vice President-Sales and Marketing, for the period and on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements herein contained, the parties agree as follows: 1. EMPLOYMENT AND DUTIES. The Company hereby employs Employee, and Employee hereby accepts such employment, in the capacity of Senior Vice President-Sales and Marketing of the Company to act in accordance with the terms and conditions hereinafter set forth. During the term of this Agreement, Employee agrees (1) that this position will be his full-time employment; (2) that through this position Employee will receive special training and have access to confidential information and trade secrets more fully explained in Section 7 which he agrees not to disclose or use adversely to Company's interests; (3) that he will devote his reasonable best efforts and all of his business time, attention and skills to the successful continuation of the business heretofore conducted by the Company; and (4) that he will perform such duties, functions, responsibilities and authority, as are commensurate with the position of Senior Vice President-Sales and Marketing in connection with the foregoing and as are from time to time delegated to Employee by the Board of Directors of the Company (the "Board"). 2. TERM. The employment of Employee shall commence on the Effective Date and shall end on the third anniversary thereof (the "Term"). 3. COMPENSATION. In consideration of the services to be rendered by Employee to the Company hereunder including compliance with the covenants and agreements herein, the Company hereby agrees to pay or otherwise provide Employee the following compensation and benefits, it being understood that the Company shall have the right to deduct all taxes which may be required to be deducted or withheld under any provision of applicable law (including but not limited to Social Security payments, income tax withholding and other required deductions now in effect or which may become effective by law any time during the Term): (a) SALARY. Employee shall receive an annual salary of One Hundred Fifty- Five Thousand Dollars ($155,000) ("Base Salary"), to be paid in biweekly installments in accordance with the Company's salary payment practices in effect from time to time for senior managers of the Company. The Base Salary may be reviewed by the Board from time to time to determine the amount of any increases; provided that during the Term, the Base Salary will be subject to annual increases of at least $10,000. (b) BONUS PAYMENTS. In addition to the Base Salary, Employee shall be entitled to receive, and the Company shall pay, bonuses to the Employee under the Company's executive incentive compensation plan as approved by the Board of Directors. (c) BENEFIT PLANS. Employee shall be entitled to participate in any health, accident, disability and life insurance programs, and any other fringe benefit program (including a 401(k) savings plan), which the Company may adopt and implement for the benefit of the Company's employees. (d) FRINGE BENEFITS. The Company shall provide Employee with the fringe benefits listed on Exhibit "A" attached hereto. (e) EXPENSES. Employee shall be entitled to receive reimbursement for all reasonable expenses incurred by him in connection with the fulfillment of his duties hereunder; provided, however, that Employee has complied with all policies and procedures relating to the reimbursement of such expenses as shall, from time to time, be established by the Company. (f) VACATION AND SICK LEAVE. During the Term of employment, Employee shall be permitted to take vacations with such frequency and of such duration as are consistent with the executive vacation policies of the Company in effect on the date of this Agreement so long as the absence of Employee does not interfere in any material respect with the performance by Employee of Employee's duties hereunder. Employee shall also be entitled to sick leave according to the sick leave policy which the Company may adopt from time to time. 4. TERMINATION. (a) DEATH OR DISABILITY. This Agreement shall terminate automatically upon the Employee's death. If the Company determines in good faith that the Disability of the Employee has occurred (pursuant to the definition of "Disability" set forth below), it may give to the Employee written notice of its intention to terminate the Employee's employment. In such event, the Employee's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Employee (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Employee shall not have returned to full-time performance of the Employee's duties. For purposes of this Agreement, "Disability" means disability which, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Employee or the Employee's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) CAUSE. The Company may terminate the Employee's employment for "Cause." For purposes of this Agreement, "Cause" means: (i) an act or acts of personal dishonesty taken by the Employee at the expense of the Company; (ii) a material violation or repeated violations by the Employee of the Employee's obligations under Section 1 of this Agreement which are demonstrably willful or deliberate on the Employee's part; (iii) the conviction of the Employee of a felony or misdemeanor that adversely affects the Company's business, reputation or standing in the community; (iv) repeated failure on the part of Employee to obey or carry out reasonable directives from the Board of Directors or Employee's supervisor which are consistent with this Agreement and pertain to Employee's employment with the Company; or (v) poor work performance and failure to cure such poor work performance within three months from the date that the Chief Executive Officer of the Company gives Employee written notice of the specific performance criteria which Employee is failing to meet. (c) EMPLOYEE'S RIGHT TO TERMINATE. The Employee's employment may be terminated by the Employee for Good Reason. For purposes of this Agreement, "Good Reason" means: 2 (i) The Company causes Employee's position, authority, duties or responsibilities to be reduced from the position described in Section 1 of this Agreement; (ii) Any material failure by the Company to comply with the provisions of Section 3 of this Agreement other than immaterial or isolated failures that do not occur in bad faith and are remedied by the Company promptly upon notice given by the Employee; (iii) Any termination by the Company of the Employee otherwise than as expressly permitted by this Agreement. (d) WITHOUT CAUSE. The Company may, at its option, terminate Employee's employment without Cause at any time upon written notice to Employee. (e) NOTICE OF TERMINATION. Any termination of Employee's employment by the Company with or without Cause or by the Employee under Section 4(d) shall be communicated by a Notice of Termination to the other party hereto given in accordance with Section 11 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means any reasonable notice which: (i) indicates the specific termination provision in this Agreement relied upon; (ii) in the event of termination for Cause, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated; and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date. (f) DATE OF TERMINATION. "Date of Termination" means the date of receipt of the Notice of Termination or the date specified therein, as the case may be; provided, however, that: (i) if the Employee' s employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Employee of such termination, (ii) if the Employee's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Employee or the Disability Effective Date, as the case may be, and (iii) if Employee terminates his employment under Section 4(d) hereof, the Date of Termination shall be a date not earlier than ninety (90) calendar days following delivery of notice of such termination. 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) DEATH. If the Employee's employment is terminated by reason of the Employee's death, this Agreement shall terminate without further obligations to the Employee's legal representatives under this Agreement, other than those obligations accrued or earned and vested by the Employee as of the Date of Termination, including, for this purpose (i) the Employee's full Base Salary through the Date of Termination at the rate in effect on the Date of Termination, and 3 (ii) the amount of any bonus earned by the Employee for the fiscal year through the Date of Termination, and (iii) any compensation previously deferred by the Employee (together with any accrued interest thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (such amounts specified in clauses (i), (ii) and (iii) are hereinafter referred to as "Accrued Obligations"), and (iv) the right to exercise vested options to purchase the Company's common stock in accordance with the terms and conditions of the applicable stock option plan and stock option agreement. All Accrued Obligations shall be paid to the Employee's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. Notwithstanding anything in this Agreement to the contrary, the Employee's family shall be entitled to receive benefits at least equal to the most favorable benefits provided by the Company to surviving families of employees of the Company under such plans, programs, practices and policies relating to family death benefits, if any, in effect at the time of Employee's death. (b) DISABILITY. If the Employee's employment is terminated by reason of the Employee's Disability, this Agreement shall terminate without further obligations to the Employee, other than those obligations accrued or earned and vested (if applicable) by the Employee as of the Date of Termination, including for this purpose, all Accrued Obligations. All such Accrued Obligations shall be paid to the employee in a lump sum in cash within 30 days of the Date of Termination. Notwithstanding anything in this Agreement to the contrary, the Employee shall be entitled after the Disability Effective Date to receive disability and other benefits at least equal to the most favorable of those provided by the Company to disabled employees or their families in accordance with such plans, programs, practices and policies relating to disability, if any, in effect at any time after the Effective Date. (c) CAUSE. If the Employee's employment shall be terminated for Cause under clause (i), (ii), (iii) or (iv) of Section 4(b) hereof, all obligations of the Company hereunder shall terminate other than the obligation to pay to the Employee the Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Employee (together with accrued interest thereon). If Employee's employment shall be terminated for Cause under clause (v) of Section 4(b) hereof, all obligations of the Company hereunder shall terminate other than the obligation to continue, in accordance with the Company's normal payroll procedures, to pay Employee his Base Salary for a period of six (6) months from the Date of Termination. Following termination for Cause, Employee shall have three (3) months to exercise any vested but unexercised options previously granted to Employees. (d) GOOD REASON. If Employee shall terminate his employment under Section 4(c) hereof, (i) the Company's obligations to Employee shall terminate other than the obligation to pay the Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Employee, if any, consistent with Company policy, and (ii) as of the date that notice of termination is delivered to the Company under Section 4(c), Employee shall have three (3) months to exercise any vested but unexercised options previously granted to Employee to purchase shares of the Company's Common Stock. (e) OTHER THAN FOR CAUSE OR DISABILITY. If, during the Term, the Company shall terminate the Employee's employment other than for Cause, Disability, or death, or Employee shall terminate 4 for Good Reason the Company shall continue in accordance with the Company's normal payroll procedures to pay Employee his Base Salary for a period of twelve (12) months from the Date of Termination or for the remaining term of this Agreement, whichever period is shorter (the "Severance Period"); provided, however, that in no event shall the severance period be shorter than six (6) months. During the Severance Period, the Company shall continue benefits to Employee and the Employee's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 3(b) of this Agreement if the Employee's employment had not been terminated or provide continuation coverage as set forth under Part 6 of Title I of the Employee Retirement Income Security Act of 1974, as amended, at the option of the Board of Directors of the Company. (f) CHANGE OF CONTROL. The foregoing notwithstanding, if the Company shall terminate Employee's employment other than for Cause, disability or death following a Change of Control (as defined below), the Company shall continue in accordance with its normal payroll procedures to pay Employee his Base Salary for a period of eighteen (18) months from the Date of Termination. A "Change of Control" shall mean a sale of substantially all of the common stock of the Company or a merger in which the Company is not the surviving corporation. 6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Employee's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices, provided by the Company and for which the Employee may qualify. Amounts which are vested benefits or which the Employee is otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program. 7. CONFIDENTIALITY. Employee acknowledges that during the course of his performance of services for the Company he will acquire knowledge with respect to the Company's business operations, including, by way of illustration, the Company's existing and contemplated services, products, trade secrets, ideas, know how, formulas, models, compilations, processes, computer code generated or developed, software or programs and related documentation, business and financial methods or practices, plans, pricing, operating margins, marketing, merchandising and selling techniques and information, customer lists and purchasing habits, supplier lists, and other confidential information relating to the Company's policy, operating strategy and/or business strategy (all of such information herein referred to as the "Confidential Information"); provided, that the term Confidential Information shall not include information which is generally known to the public or the industry other than as a result of Employee's breach. Employee shall not use, in any way, or disclose any of the Confidential Information, directly or indirectly, either during the term of his employment or at anytime thereafter, except as required in the course of his employment. Employee acknowledges that all computer code, programs, files, records, documents, information, data and similar items and documentation relating to the business of the Company (including all copies thereof), whether prepared by Employee or otherwise, are the exclusive property of the Company unless owned by Employee and, upon termination of Employee's employment with the Company (for whatever reason), Employee shall not take with him, but shall leave with the Company, all such computer code, programs, files, records, documentation, information, data and similar items and documentation relating to the business of the Company (including all copies thereof). The obligations of this Section 7 are continuous and shall survive the termination of Employee's employment with the Company. 8. INVENTIONS AND PATENTS. Employee agrees that all inventions, ideas, innovations, improvements or discoveries relating to the business or the Company of the Company's method of conducting business (including new contributions, improvements, ideas 5 and discoveries, whether patentable or copyrightable or not) conceived or made by him during his employment with the Company shall be, and hereby are, assigned to the Company. Employee will promptly disclose such inventions, ideas, innovations or improvements to the Board of Directors or Chief Executive Officer of the Company and perform all actions reasonably requested by the Board or Chief Executive Officer to establish and confirm such ownership. The expense of securing any such patents shall be borne by the Company. 9. NO OTHER BUSINESS. During the term of Employee's employment, Employee agrees that he will not, directly or indirectly, except with the express written consent of the Board of Directors of the Company, become engaged in, render services to, permit his name to be used in connection with, own, manage, operate, control, be employed by, participate in, consult with, or be connected in any manner (whether as an officer, director, employee, agent, consultant, stockholder (other than as the holder of less than 2% of the aggregate outstanding shares of a class of equity securities publicly traded on a national securities exchange or quotation system or other capacity) with the ownership, management, operation or control of, any business or enterprise other than the business of the Company and its subsidiaries except that Employee may devote a limited amount of time to assisting his spouse with her sailboat charter business. 10. NONINTERFERENCE. Employee agrees that during the term of his employment and for the one-year period following the termination of Employee's employment by the Company or its subsidiaries, Employee shall not, directly or indirectly, whether as principal, agent, officer, employee, investor, consultant, stockholder, or otherwise, alone or in association with any other person: (a) Induce or attempt to influence any employee of the Company or any subsidiary to terminate his or her employment with the Company or any subsidiary of the Company, (b) Disparage the good name or reputation of the Company, the Company's affiliates, or business of the Company or engage in any conduct that brings the Company, the Company's affiliates, or the Company's business into public ridicule or disrepute; or (c) Solicit, induce or encourage any customer, prospective customer, consultant, independent contractor, drug manufacturer or supplier of the Company to cease to do business with the Company. For purposes of this section, "prospective customer" shall mean any party who has had contact with Company or its subsidiaries within the four-month period immediately preceding termination of employment hereunder. 11. NOTICES. Any notice or other communication required or permitted to be given hereunder shall be in writing and deemed to have been given when delivered in person or when dispatched by telegram or electronic facsimile transfer (confirmed in writing by mail, registered or certified, return receipt requested, postage prepaid, simultaneously dispatched) to the addressees at the addresses specified below. If to Employee: Mr. John H. Sattler 641 Hawthorn Circle Highland Village, Texas 75067 Phone No.: (972) 318-0103 Fax No.: (972) 318-0243 6 If to the Company: c/o Advance ParadigM, Inc. 545 E. John Carpenter Freeway Suite 1900 Irving, Texas 75062 Attention: David D. Halbert Phone No.: (972) 830-6199 Fax No.: (972) 830-6196 or to such other address or fax number as either party may from time to time designate in writing to the other. 12. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto relating to the subject matter hereof, and supersedes all prior agreements and understandings, whether oral or written, with respect to the same. No modification, alteration, amendment or recision of or supplement to this Agreement shall be valid or effective unless the same is in writing and signed by the parties hereto. 13. GOVERNING LAW. This Agreement and the rights and duties of the parties hereunder shall be governed by, construed under and enforced in accordance with the laws of the State of Texas. 14. ASSIGNMENT. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, personal representatives, successors and permitted assigns. Subject to the prior written consent of Employee, the rights, duties and obligations under this Agreement are assignable by the Company to a successor of all or substantially all of the business or assets of the Company. The rights, duties and obligations of Employee under this Agreement shall not be assignable. 15. SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision in any other jurisdiction, but this Agreement will be reformed. construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein except that any court having jurisdiction shall have the power to reduce the duration, area or scope of such invalid, illegal or unenforceable provision and, in its reduced form, it shall be enforceable. It is the intent of the parties hereto that the provisions hereof be enforceable to the fullest extent permitted by applicable law. This Agreement may be enforced by the Company or any of its affiliates engaged in the Business. 16. SURVIVAL. No termination of Employee's employment by any of the parties hereto shall reduce or terminate Employee's covenants and agreements in Sections 7, 8, 9 and 10 hereof. 17. REMEDIES. The parties to this Agreement shall be entitled to enforce his or its rights under this Agreement specifically, to recover damages (including, without limitation, reasonable fees and expenses of counsel) by reason of any breach of any provision of this Agreement and to exercise all other rights existing in his or its favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach or threatened breach of the provisions of this Agreement and that any party may in his or its sole discretion apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive 7 relief in order to enforce or prevent any violations of the provisions of this Agreement. Such injunction or decree shall be available without the posting of any bond or other security. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. ADVANCE PARADIGM, INC. By: /s/ David D. Halbert --------------------------- David D. Halbert, President EMPLOYEE By: /s/ John H. Sattler --------------------------- John H. Sattler 8 EXHIBIT 'A' Fringe Benefits 1. STOCK OPTIONS. As further consideration for Employee's continued employment by the Company, the Company has granted to Employee the following incentive stock options: (a) On October 7, 1996, Employee was granted an incentive option (the "Option") to purchase 12,500 shares of the Common Stock of the Company with an exercise price of $9.00 per share. The option shall be subject to and granted under the Company's 1993 Incentive Stock Option Plan. The option shall vest and become exercisable as to twenty percent (20%) of the total shares on each of the first five anniversaries of the date of grant; provided, however, that immediately prior to the consummation of any sale to or merger with an outside entity gaining 50% or greater ownership of API, the Option shall become, without further act or deed, exercisable as to 100% of the Shares. (b) On December 23, 1996, Employee was granted an incentive option to purchase 20,000 shares of the Common Stock of the Company. The option is subject to and granted under the Company's 1993 Incentive Stock Option Plan. The option shall vest and become exercisable as to 33-1/3% of the total shares represented thereby on each of the first three anniversaries of the date of grant; provided, however, that immediately prior to the consummation of any sale to or merger with an outside entity gaining 50% or greater ownership of the Company, the option shall become, without further act or deed, exercisable as to 100% of the shares. The exercise price of the option is $12.75 per share. 2. CAR ALLOWANCE. Employee shall be provided a $525 per month car allowance. At year end, the value of this benefit will be reported as required by the IRS regulations on Employee's Form W-2. 3. CLUB MEMBERSHIP. Employee shall be provided a court or racquet club membership to the Las Colinas Sports Club. Cost of such membership shall be paid by Company. 9 EX-10.8 8 EXHIBIT 10.8 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is effective as of June 17, 1996 (the "Effective Date"), by and between Advance ParadigM, Inc. (the "Company") and Ernest Buys (the "Employee"). WHEREAS, the Company and Employee desire to enter into this Agreement pursuant to which the Company will employ Employee in the capacity, for the period and on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and mutual covenants and agreements herein contained, the parties hereto hereby agree as follows: 1. EMPLOYMENT AND DUTIES. The Company hereby employs Employee, and Employee hereby accepts such employment, in the capacity of Chief Operating Officer of Advance ParadigM Data Services, Inc., the Company's wholly owned subsidiary, and, effective December 1, 1996, as Chief Information Officer of the Company, to act in accordance with the terms and conditions hereinafter set forth. During the term of this Agreement, Employee agrees that this position will be his full-time employment, except as set forth in the Noninterference Agreement dated as of June 17, 1994, by and between the parties hereto (the "Noninterference Agreement"), and that he will devote his reasonable best efforts and all of his business time, attention and skills to the successful continuation of the business heretofore conducted by the Company and that he will perform such duties, functions, responsibilities and authority, as are commensurate with the position of Chief Operating Officer, in connection with the foregoing as are from time to time delegated to Employee by the Board of Directors of the Company. 2. TERM. The employment of Employee shall commence on the Effective Date and shall end on the third anniversary thereof (the "Term"). 3. COMPENSATION. In consideration of the services to be rendered by Employee to the Company hereunder, the Company hereby agrees to pay or otherwise provide Employee the following compensation and benefits, it being understood that the Company shall have the right to deduct therefrom all taxes which may be required to be deducted or withheld therefrom under any provision of applicable law (including but not limited to Social Security payments, income tax withholding and other required deductions now in effect or which may become effective by law any time during the Term): (a) SALARY. Employee shall receive an annual salary of One Hundred Fifty Thousand Dollars ($150,000), with such increases therein as may be determined by the Board from time to time in its sole discretion ("Base Salary"), to be paid in biweekly installments in accordance with the Company's salary payment practices in effect from time to time for senior managers of the Company. (b) BENEFIT PLANS. Employee shall be entitled to participate in any health, accident, disability and life insurance programs, and any other fringe benefit program (includinga 401(k) savings plan), which the Company may adopt and implement for the benefit of the Company's employees. (c) FRINGE BENEFITS. The Company shall provide Employee with the fringe benefits listed on Exhibit "A" attached hereto. 1 (d) EXPENSES. Employee shall be entitled to receive reimbursement for all reasonable expenses incurred by him in connection with the fulfillment of his duties hereunder; PROVIDED, HOWEVER, that Employee has complied with all policies and procedures relating to the reimbursement of such expenses as shall, from time to time, be established by the Company. (e) VACATION AND SICK LEAVE. During the Term of employment, Employee shall be permitted to take vacations with such frequency and of such duration as are consistent with the executive vacation policies of the Company in effect on the date of this Agreement so long as the absence of Employee does not interfere in any material respect with the performance by Employee of Employee's duties hereunder. Employee shall also be entitled to sick leave according to the sick leave policy which the Company may adopt from time to time. 4. TERMINATION. (a) DEATH OR DISABILITY. This Agreement shall terminate automatically upon the Employee's death. If the Company determines in good faith that the Disability of the Employee has occurred (pursuant to the definition of "Disability" set forth below), it may give to the Employee written notice of its intention to terminate the Employee's employment. In such event, the Employee's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Employee (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Employee shall not have returned to full-time performance of the Employee's duties. For purposes of this Agreement, "Disability" means disability which, at least 26 weeks after its commencement, is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Employee or the Employee's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) CAUSE. The Company may terminate the Employee's employment for "Cause." For purposes of this Agreement, "Cause" means: (i) an act or acts of personal dishonesty taken by the Employee at the expense of the Company, (ii) a material violation or repeated violations by the Employee of the Employee's obligations under Section 1 of this Agreement which are demonstrably willful or deliberate on the Employee's part, or (iii) the conviction of the Employee of a felony or misdemeanor that adversely affects the Company's business, reputation or standing in the community. (c) NOTICE OF TERMINATION. Any termination by the Company for Cause shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 9 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated, and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than fifteen (15) days after the giving of such notice). 2 (d) DATE OF TERMINATION. "Date of Termination" means the date of receipt of the Notice of Termination or any later date specified therein, as the case may be; PROVIDED, HOWEVER, that (i) if the Employee's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Employee of such termination, and (ii) if the Employee's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Employee or the Disability Effective Date, as the case may be. 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) DEATH. If the Employee's employment is terminated by reason of the Employee's death, this Agreement shall terminate without further obligations to the Employee's legal representatives under this Agreement, other than those obligations accrued or earned and vested (if applicable) by the Employee as of the Date of Termination, including, for this purpose (i) the Employee's full Base Salary through the Date of Termination at the rate in effect on the Date of Termination or, if higher, at the highest rate in effect at any time from the 90-day period preceding the Effective Date through the Date of Termination (the "Highest Base Salary"), and (ii) the product of any bonus or incentive plan paid to the Employee for the last full fiscal year and a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365, and (iii) any compensation previously deferred by the Employee (together with any accrued interest thereon) and not yet paid by the Company and any accrued vacation pay not yet paid by the Company (such amounts specified in clauses (i), (ii) and (iii) are hereinafter referred to as "Accrued Obligations"). All such Accrued Obligations shall be paid to the employee's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. anything in this Agreement to the contrary notwithstanding, the Employee's family shall be entitled to receive benefits at least equal to the most favorable benefits provided by the Company to surviving families of employees of the Company under such plans, programs, practices and policies relating to family death benefits, if any, in effect at the time of Employee's death. (b) DISABILITY. If the Employee's employment is terminated by reason of the Employee's Disability, this Agreement shall terminate without further obligations to the Employee, other than those obligations accrued or earned and vested (if applicable) by the Employee as of the Date of Termination, including for this purpose, all Accrued Obligations. All such Accrued Obligations shall be paid to the employee in a lump sum in cash within 30 days of the Date of Termination. Anything in this Agreement to the contrary notwithstanding, the Employee shall be entitled after the Disability Effective Date to receive disability and other benefits at least equal to the most favorable of those provided by the Company to disabled employees or their families in accordance with such plans, programs, practices and policies relating to disability, if any, in accordance with the most favorable plans, programs, practices and policies of the Company in effect at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the employee and the Employee's family, as in effect at any time thereafter with respect to other key employees of the Company and their families. 3 (c) CAUSE. If the Employee's employment shall be terminated for Cause, the Company's obligations to the Employee shall terminate other than the obligation to pay to the Employee the Highest Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Employee (together with accrued interest thereon). (D) OTHER THAN FOR CAUSE OR DISABILITY. If, during the Term, the Company shall terminate the Employee's employment other than for Cause, Disability, or death, the Company shall continue in accordance with the Company's normal payroll procedures to pay Employee his Highest Base Salary for a period of six (6) months from the Date of Termination or for the remaining term of this Agreement, whichever period is shorter (the "Severance Period"). In addition, upon such termination Employee shall receive (a) an amount that equals the product of (i) the bonus paid to Employee for the last fiscal year and (ii) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination and the denominator of which is 365; (b) any compensation previously deferred by Employee (together with any accrued interest thereon) and not yet paid by the Company; and (c) any accrued vacation pay not yet paid by the Company. Any amounts payable to Employee under this Section 5(d) shall be reduced and offset by the amount of any compensation received by Employee for other employment during the Severance Period. During the Severance Period, Employee shall use his best efforts to find employment consistent with the covenants of Employee in the Noninterference Agreement and Sections 7 and 8 hereof. During the Severance Period, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Employee and the Employee's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 3(c) of this Agreement if the Employee's employment had not been terminated or provide continuation coverage as set forth under Part 6 of Title I of the Employee Retirement Income Security Act of 1974, as amended, at the option of the Board of Directors of the Company. 6. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Employee's continuing or future participation in any benefit, bonus, incentive or other plans, programs, policies or practices, provided by the Company and for which the Employee may qualify. Amounts which are vested benefits or which the Employee is otherwise entitled to receive under any plan, policy, practice or program of the Company at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program. 7. NONINTERFERENCE AGREEMENT. The terms and conditions of the Noninterference Agreement entered into of even date herewith should be incorporated herein and made part hereof by this reference. Employee and the Company agree that the Company would suffer irreparable harm and incur substantial damage if Employee were to breach the Noninterference Agreement. 8. CONFIDENTIALITY. For purposes of this Agreement, "Confidential Information and Trade Secrets" shall mean all information, ideas, know how, trade secrets, processes, computer code generated or developed, software or programs and related documentation, methods, practices, fabricated techniques, technical plans, customer lists, pricing techniques, marketing plans, financial information and all other compilations of information which relate to the Business of, and are owned by, the Company, which were not known generally to others engaged in the Business of the Company and which the Company has taken affirmative actions to protect from public disclosure or which do not exist in the public domain. Employee acknowledges that, during his term of employment with the Company, he shall have access to and become familiar with Confidential Information and Trade Secrets that are owned by the Company. Employee shall not use, in any way, or disclose any of the Confidential Information and Trade Secrets, directly or indirectly, either during the term of his employment or at anytime thereafter, except as required in the course of his employment. All computer code, programs, files, records, documents, information, data and similar items and documentation relating to the Business of the Company, whether prepared by Employee or otherwise, coming into Employee's possession, shall 4 remain the exclusive property of the Company unless owned by Employee. The obligations of this Section 8 are continuous and shall survive the termination of Employee's employment with the Company. 9. NOTICES. Any notice or other communication required or permitted to be given hereunder shall be in writing and deemed to have been given when delivered in person or whendispatched by telegram or electronic facsimile transfer (confirmed in writing by mail, registered or certified, return receipt requested, postage prepaid, simultaneously dispatched) to the addressees at the addresses specified below. IF TO EMPLOYEE: Mr. Ernest Buys 4649 Hinton Drive Plano, Texas 75024 IF TO THE COMPANY: 545 E. John Carpenter Freeway Suite 1900 Irving, Texas 75062 Attention: Jon Halbert Phone No.: (214) 830-6199 Fax No.: (214) 830-6196 or to such other address or fax number as either party may from time to time designate in writing to the other. 10. ENTIRE AGREEMENT. Subject to Section 7 hereof, this Agreement constitutes the entire agreement between the parties hereto relating to the subject matter hereof, and supersedes all prior agreements and understandings, whether oral or written, with respect to the same. No modification, alteration, amendment or recision of or supplement to this Agreement shall be valid or effective unless the same is in writing and signed by the parties hereto. 11. GOVERNING LAW. This Agreement and the rights and duties of the parties hereunder shall be governed by, construed under and enforced in accordance with the laws of the State of Texas. 12. ASSIGNMENT. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, personal representatives, successors and permitted assigns. Subject to the prior written consent of Employee, the rights, duties and obligations under this Agreement are assignable by the Company to a successor of all or substantially all of the business or assets of the Company. The rights, duties and obligations of Employee under this Agreement shall not be assignable. 13. SEVERABILITY. The parties hereto further agree that if at any time it shall be determined that the restrictions contained in Section 7 or 8 are unreasonable as to time or area, or both, by any court of competent jurisdiction, the Company shall be entitled to enforce this Agreement for such period of time and within such area as may be determined to be reasonable by such court and the court shall have the authority to construe reform and enforce the terms of this Agreement for the benefit of the Company to the maximum extent possible. It is the intent of the parties hereto that the provisions hereof be enforceable to the fullest extent permitted by applicable law. This Agreement may be enforced by the Company or any of its affiliates engaged in the Business. 14. SURVIVAL. No termination of Employee's employment by any of the parties hereto shall reduce or terminate Employee's covenants and agreements in the Noninterference Agreement and Section 7 and 8 hereof. 5 15. REMEDIES. Employee and the Company recognize that the services to be rendered under this Agreement by Employee are special, unique, and of extraordinary character, and that in the event of the breach by Employee of the terms and conditions of the Noninterference Agreement and Sections 7 and 8 hereof, the Company shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, either in law or in equity, to obtain damages for any breach thereof or to enforce the specific performance thereof by Employee. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. ADVANCE PARADIGM, INC. By: /s/ Jon S. Halbert ------------------------------------ Jon S. Halbert Executive Vice President EMPLOYEE /s/ Ernest Buys ------------------------------------ Ernest Buys 6 EXHIBIT "A" FRINGE BENEFITS 1. INCENTIVE PLAN. The Employee shall be entitled to participate in the annual executive incentive compensation plan. Subject to the discretion of the Board of Directors of the Company or APS, the potential payout to the Employee, if any, will be a subjective amount payable annually 2. CAR ALLOWANCE. Employee shall be provided a $500 per month car allowance. At year end, the value of this benefit will be reported as required by the IRS regulations on Employee's Form W-2. 7 EX-11 9 EXHIBIT 11 EXHIBIT 11 Statement Regarding Computation of Per Share Earnings For the Year Ended March 31, 1995 COMPUTATION OF EARNINGS PER SHARE Shares outstanding giving effect to the merger and stock split 2,900,750 Conversion of Series A Preferred Stock 2,500,000 Impact of options and warrants using the treasury stock method 799,437 --------- Weighted average shares outstanding 6,200,187 --------- --------- Net income for the year ended March 31, 1995 $ 24,000 ----------- ----------- Net income per share $ ---- ----------- ----------- EXHIBIT 11 Statement Regarding Computation of Per Share Earnings For the Year Ended March 31, 1996 COMPUTATION OF EARNINGS PER SHARE Pro Forma Historical --------- ---------- Shares outstanding giving effect to the merger and stock split 2,900,750 2,900,750 Conversion of Series A Preferred Stock 2,500,000 2,500,000 Impact of options and warrants using the treasury stock method 799,437 799,437 Shares issued in offering to retire debt 836,320 --- ---------- ---------- Weighted average shares outstanding 7,036,507 6,200,187 ---------- ---------- ---------- ---------- Net income for the year ended March 31, 1996 $1,037,000 $1,037,000 Pro forma reduction of interest expense on debt retired 707,000 --- ---------- ---------- Adjusted net income $1,744,000 $1,037,000 ---------- ---------- ---------- ---------- Net income per share $0.25 $0.17 ---- ----- ---- ----- EXHIBIT 11 Statement Regarding Computation of Per Share Earnings For the Year Ended March 31, 1997 COMPUTATION OF EARNINGS PER SHARE Pro Forma Historical --------- ---------- Shares outstanding giving effect to the merger and stock split 6,522,819 6,522,819 Conversion of Series B convertible preferred stock (pro-rated) 833,333 833,333 Impact of options and warrants using the treasury stock method 943,897 943,897 Shares issued in offering to retire debt 418,160 --- ---------- ---------- Weighted average shares outstanding 8,718,209 8,300,049 ---------- ---------- ---------- ---------- Net income for the year ended March 31, 1997 $3,138,000 $3,138,000 Pro forma reduction of interest expense on debt retired 299,000 --- ---------- ---------- Adjusted net income $3,437,000 $3,138,000 ---------- ---------- ---------- ---------- Net income per share $0.39 $0.38 ---------- ---------- ---------- ---------- EX-27 10 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ADVANCE PARADIGM INC. FORM 10-K FOR THE YEAR ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS MAR-31-1997 APR-01-1996 MAR-31-1997 51,086 0 35,485 142 1,859 88,714 8,868 3,292 107,473 63,850 0 0 0 78 42,450 107,473 0 251,562 0 240,810 7,309 0 (1,181) 4,624 1,486 3,138 0 0 0 3,138 .39 .39
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