-----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, QlvB3EDHQQI3hLYtH1YKkfy/ED64HWMC9x4xqdR2U/is1c6AFSEQE0bT6QvblBLk eisYZwaUbxi3hTDtbTSkNA== 0000950134-98-005575.txt : 19980630 0000950134-98-005575.hdr.sgml : 19980630 ACCESSION NUMBER: 0000950134-98-005575 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980629 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: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21447 FILM NUMBER: 98656180 BUSINESS ADDRESS: STREET 1: 545 E JOHN CARPENTER FREEWAY STREET 2: STE 1570 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-K 1 FORM 10-K FOR YEAR ENDED MARCH 31, 1998 1 ================================================================================ 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, 1998 [ ] 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 Identification No.) incorporation of organization) 545 E. JOHN CARPENTER FREEWAY, SUITE 1570, IRVING, TX 75062 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972)830-6199 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: 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. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on May 31, 1998 as reported on the Nasdaq National Market, was approximately $278,139,000. As of May 31, 1998, Registrant had outstanding 10,020,680 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant's 1998 Annual Meeting of Stockholders are incorporated by reference in Part III. ================================================================================ 2 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 twelve 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 and to encourage compliance with these guidelines. 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 52,000 retail pharmacies throughout the United States. In response to increasing cost-containment pressures of its clients, the Company utilized 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, compliance and outcome measurement and survey research. The Company markets its HBM services to health benefit plan sponsors and pharmaceutical manufacturers, and has initiated several 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. In 1998, the Company further enhanced its HBM product offerings by merging with Innovative Medical Research, Inc. ("IMR"), a privately held clinical trial and survey research firm based in Towson, Maryland. The Company has four wholly owned subsidiaries, Advance Paradigm Mail Services, Inc. ("Advance Mail"), Advance Paradigm Data Services, Inc. ("Advance Data") Advance Paradigm Clinical Services, Inc. ("Advance Clinical") and IMR. Advance Mail operates as a mail order pharmacy. Advance Data offers plan participants an alternative for purchasing prescriptions through a network of retail pharmacies and provides claims adjudication services. Advance Clinical, formerly a wholly owned subsidiary of Blue Cross and Blue Shield of Maryland, provides clinical and benefit design consultation, and formulary and rebate administration. In February 1998, API merged with IMR, a privately held clinical trial and survey research firm. 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 PPO networks, 1 3 mail pharmacy services, formulary administration, claims processing and DUR, PBMs created an opportunity for health benefit plan sponsors to provide for drug delivery to their members in a cost-effective manner while improving patient compliance with recommended guidelines. 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 have been 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 services, 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 52,000 retail pharmacies throughout the United States. The Company currently provides PBM services to over 600 health plan benefit sponsors covering over twelve million plan members enrolled in the Company's programs. 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 2 4 use of generic substitution, therapeutic substitution and other techniques and may also generate leverage for the Company to negotiate more favorable rebates and other volume discounts from drug manufacturers. Formulary compliance can be encouraged by (i) plan design features such as tiered co-payments, which require the member to pay a higher amount for the non-preferred drug, (ii) prescriber education programs in which the Company or the managed care customer actively seek to educate the prescribers about the formulary preferences and (iii) therapeutic substitution programs that target certain high-cost therapies for concentrated formulary compliance efforts. The Company continually monitors the efficacy and therapeutic applications of pharmaceutical products, the availability of new drugs and generic 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 52,000 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 38.3 million claims processed in fiscal year 1998, including over 11.0 million claims processed in the quarter ended March 31, 1998. The Advance Pharmacies are linked to the Company's Advance Rx(TM) on-line claims adjudication and processing system, which contains patient medication history, plan enrollment and eligibility data. The Advance Rx(TM) 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(TM) 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(TM) 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. 3 5 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, in a building owned by the Company, in Richardson, Texas and currently dispenses over 20,000 prescriptions per week. The mail service dispensing process is highly automated, featuring bar code and scanning technology to route and track orders, computerized dispensing of many medications and computer-generated mailing labels and invoices. To ensure accurate dispensing of prescriptions, the mail service system is equipped with automated quality control features, and each prescription is inspected by a registered pharmacist. HEALTH BENEFIT MANAGEMENT. The Company's HBM services include disease management, recommendation of clinical guidelines, patient and physician profiling, case finding and compliance and outcomes measurement and clinical trials and survey research. 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 1998, the Company merged with IMR, a privately held clinical trials and survey research firm based in Towson, Maryland. IMR provides comprehensive clinical trial services which are the basis for obtaining regulatory approval for drugs and medical devices. In addition, IMR offers proprietary survey capabilities for biomedical and epidemiological studies with valuable applications within the managed care and pharmaceutical industries. IMR utilizes a call center and medically appropriate surveys to identify patients eligible to participate in its clinical trials. This patient enrollment method is designed to reduce drug development time which permits sponsors of clinical trials to get their products into the market faster and to maximize the 4 6 economic return for such products. Since the introduction of IMR's recruiting system, in 1993, IMR has undertaken studies from many of the major pharmaceutical companies in several therapeutic classes. Access to the Company's decision support systems presents an opportunity to enhance IMR's capability in surveying and trials recruiting. 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(R), 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(R) 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 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 seven national sales and marketing representatives located in Baltimore, Cleveland, New York, St. Louis, 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. 5 7 CUSTOMERS A significant portion of the Company's revenues result from contracts with customers. These contracts normally have terms from one to five years with renewal options. One customer of the Company accounted for approximately 14% and 15% of the Company's revenues for the years ended March 31, 1997 and 1998, respectively. Another customer accounted for approximately 21% of the Company's revenues for the year ended March 31, 1998. A third customer accounted for approximately 18% of the Company's revenues for the year ended March 31, 1997, but revenues from this customer did not exceed 10% of the Company's revenues for the year ended March 31, 1998. A fourth customer accounted for approximately 18% of the Company's revenues for the year ended March 31, 1996, but revenues from this customer did not exceed 10% of the Company's revenues in either the year ended March 31, 1997 or 1998. No other customer accounted for over 10% of the Company's revenues in fiscal years 1996, 1997, or 1998. 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.), and PCS Health Systems, Inc. (a subsidiary of Eli Lilly & Company). 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. 6 8 YEAR 2000 COMPLIANCE The Company has formed a Year 2000 project team to address the Year 2000 issue. The team is composed of both technical and non-technical individuals. The scope of the Year 2000 project includes the review of all technical systems such as hardware, software, programs, databases, phone systems, forms or any other document with a pre-printed century date. The goal of the team is to ensure Year 2000 compliance of all critical business systems of the Company and its electronic partners by March 1999. A Year 2000 compliant system will be able to accept, process, calculate, sort, store and report dates using the correct century and year; interface with other Year 2000 compliant systems; automatically cross into the Year 2000 without date-related failures; avoid premature expiration of security systems, licenses, or files due to Year 2000 crossover; and treat the Year 2000 as a leap year. The Company believes that conversion will be completed by March 1999 and will not pose significant operational problems. However, if such conversions are not completed in a timely manner by all parties, the Year 2000 issue could have a material adverse effect on the Company's systems and operations. LIABILITY INSURANCE Certain aspects of the Company's operations, including the dispensing of pharmaceuticals and health benefit management services, may subject the Company to claims for personal injuries, including those resulting from dispensing errors, package tampering, product defects and clinical trials. The Company carries the types of insurance customary in its industry, including professional, general, and product liability insurance. The Company believes that its insurance protection is adequate for its present business operations. Although PBM and HBM companies in general have not, as yet, experienced any unusual difficulty in obtaining insurance at an affordable cost, there can be no assurance that the Company will be able to maintain its coverage at acceptable costs in the future or, if it does, that the amount of such coverage would be sufficient to cover all potential claims. 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 (the "FDA") generally has authority to regulate drug promotional materials that are disseminated "by or on behalf" of a drug manufacturer. In January 1998, the FDA issued a draft guidance concerning promotional activities by PBM companies that are performed on behalf of sponsors of medical products. Because the guidance is in draft form, it does not represent official agency policy; however it does provide insight into the FDA's position on the issue. Under this draft guidance, the FDA would hold medical products sponsors responsible for promotional activities by subsidiary PBMs 7 9 when such activities violate the Food Drug and Cosmetic Act. The guidance also provides for product sponsor liability for the acts of certain nonsubsidiary PBMs, depending upon the nature and extent of the relationship between the sponsor and the PBM. Although serious questions surround the legal basis for the FDA's position on the PBM regulation, the publication of the draft guidance indicates increased agency interest in the area. In addition, the FDA has regulatory authority over the conduct of clinical research and studies. 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. 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 8 10 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. 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 9 11 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 52,000 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 PBM and HBM services. 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, 10 12 compliance with state laws and regulations is a significant operational requirement for the Company. MAIL PHARMACY REGULATION. The Company's mail service pharmacy is located in Richardson, Texas and the Company is licensed to do business as a pharmacy in Texas. Many of the states into which the Company delivers pharmaceuticals have laws and regulations that require out-of-state mail service pharmacies to register with the board of pharmacy or similar regulatory body in the state. These states generally permit the mail service pharmacy to follow the laws of the state within which the mail service pharmacy is located. The Company has registered in every state in which, to the Company's knowledge, such registration is required. In addition, various pharmacy associations and boards of pharmacy have promoted enactment of laws and regulations directed at restricting or prohibiting the operation of out-of-state mail service pharmacies by, among other things, requiring compliance with all laws of certain states into which the mail service pharmacy dispenses medications whether or not those laws conflict with the laws of the state in which the pharmacy is located. To the extent that such laws or regulations are found to be applicable to the Company, the Company would be required to comply with them. Other statutes and regulations impact the Company's mail service operations. 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, 1998, the Company had 697 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 11 13 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 In addition to the other information set forth and incorporated by reference in this Prospectus, prospective purchasers of the Shares should consider carefully the following risk factors in evaluating an investment in the Company. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; LENGTHY SALES CYCLE; FUTURE RESULTS UNCERTAIN. The Company has experienced and may in the future experience significant fluctuations in revenue and operating results from quarter to quarter and from year to year due to a combination of factors, including: demand for the Company's services; the size, timing of contract signings and recognition of revenues from significant customer additions and losses; increased competition; the Company's success in, and expense associated with, developing and introducing new services; the availability of rebates from pharmaceutical manufacturers; the length of the Company's sales cycles; the Company's ability to increase staff to meet demand; economic conditions generally or in specific industry segments; and other factors outside of the control of the Company. As a result of all of these factors, there can be no assurance that the Company will be profitable on a quarterly or annual basis. Due to the foregoing, it is possible that the Company's operating results in some future quarters will be below analysts' expectations, which in turn could adversely affect the Company's stock price. 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 four years, with total revenues increasing from $35.0 million in fiscal year 1994 to $476.7 million in fiscal year 1998. The Company's recent expansion has resulted in substantial growth in the number of its employees (from 117 at March 31, 1994 to 655 at March 31, 1998), 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 12 14 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 1998, the Company's two largest customers, United Mine Workers of America ("UMW") and the State of Oklahoma, accounted for approximately 21% and 15%, respectively, of the Company's consolidated revenues. During this period, the Company's five largest customers accounted for approximately 57% of the Company's revenues. Loss of the Company's accounts with UMW 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. POTENTIAL DECLINE IN REBATE REVENUE. Approximately 15% 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 might result if the recent trend of consolidations and alliances in the drug and managed care industry continues, particularly between pharmaceutical manufacturers and PBMs. 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 multi-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." 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 13 15 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 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. 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 completed the merger with IMR in February 1998 and will continue to review future acquisition opportunities. The Company's ability to expand successfully through acquisitions depends on many factors, including the successful identification and acquisition of services, technologies or businesses. In addition, acquisitions, once consummated, involve many risks including difficulties in the assimilation of the operations, services and products of the acquired company; the diversion of management's attention from other business concerns; and the potential loss of key employees of the acquired company. There is significant competition for acquisition opportunities in the PBM and HBM industries. The Company may compete for acquisition opportunities with other companies that have significantly greater financial and management resources. There can be no assurance that the Company will be successful in acquiring or integrating any such services, technologies or businesses or once acquired, that the Company will be successful in selling or integrating such services, technologies or businesses. 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. David D. Halbert or other persons in senior management could have a material adverse effect on the Company's business. INTANGIBLE ASSETS. At March 31, 1998, approximately $12.4 million, or 8% 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. 14 16 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. In January 1998, the U.S. Food and Drug Administration ("FDA") issued a Notice and Draft Guidance regarding the regulation of certain activities of PBMs that are directly or indirectly controlled by drug manufacturers. On April 6, 1998, the Company submitted written comments to the FDA wherein the Company stated its position that the proposed regulations should not apply to PBMs which are not owned by drug manufacturers. There can be no assurance that such legislation or regulation, if subsequently adopted, would not have a material adverse effect on the Company's business, operating results and financial condition. 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 pharmacy benefit management services and otherwise change the operating environment for the Company's customers. Health care organizations may react to these proposals and the uncertainty surrounding such proposals by curtailing or deferring investments in cost containment tools and related technology such as the Company's services. The Company cannot predict what effect, if any, such factors might have on its business, operating results and financial condition. In addition, many health care providers are consolidating which may result in greater bargaining power and lead to price erosion of the Company's services. The failure of the Company to maintain adequate price levels would have a material adverse effect on the Company's business, operating results and financial condition. Other legislative or market-driven reforms could have unpredictable effects on the Company's business, operating results and financial condition. POTENTIAL LIABILITY AND INSURANCE. Various aspects of the Company's business, including the dispensing of pharmaceutical products and performance of clinical trials and HBM services, may subject it to litigation and liability for damages. Clinical research services involve a risk of liability for personal injury or death due to, among other reasons, possible unforeseen adverse 15 17 side effects or improper administration of a new drug. Although the Company believes that its risk is reduced by contractual indemnification provisions and insurance maintained by the Company and the trial sponsors, the Company could be materially and adversely affected if it were required to pay damages or incur defense costs in connection with a claim that is outside the scope of its indemnity or insurance coverage, or if the indemnity, although applicable, is not performed in accordance with its terms. 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. RISKS ASSOCIATED WITH CLINICAL TRIALS BUSINESS. In February 1998, the Company completed the merger with IMR, a clinical trials and outcomes research business. IMR has derived, and may in the future derive a significant portion of its revenue from a relatively limited number of major projects or customers. Most of IMR's contracts are terminable upon 60 to 90 days notice by the trial/survey sponsor. The loss, delay or termination of any major project or customer could have a material adverse effect on this business. In addition, the clinical trials operations could be materially and adversely affected by a general economic decline in the pharmaceutical or biotechnology industries or by a reduction in the outsourcing of clinical trials expenditures. The clinical trials business is dependent upon the extensive governmental regulation of the drug development process, and the failure of IMR to comply with applicable regulations could result in the termination of ongoing clinical research or the disqualification of data for submission to regulatory authorities, either of which could have a material adverse effect on the clinical trials business. The continued success of IMR is dependent upon its founding executive officers, Richard B. Lipton, M.D. and Walter Stewart, Ph.D., M.P.H., the loss of whom could have a material adverse effect on IMR. TAX RISKS ASSOCIATED WITH 1996 MERGER. Immediately prior to the Company's initial public offering in October 1996, 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. Executive officers and directors of the Company and their affiliates own beneficially approximately 27% 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. VOLATILITY OF MARKET PRICE. The quoted price of the Common Stock could fluctuate widely in response to variations in the Company's quarterly operating results, changes in earnings estimates by securities analysts, changes in the Company's business and changes in general market or economic conditions. In addition, in recent years, the stock market has experienced extreme price and volume fluctuations which have significantly affected the quoted prices of the 16 18 securities of many growth companies without regard to their specific operating performance. Such market fluctuations could have a material adverse effect on the quoted price of the Common Stock. POSSIBLE ADVERSE EFFECT IN MARKET PRICE OF FUTURE SALES OF THE COMMON STOCK. Future sales of Common Stock, or the perception that such sales could occur, could adversely affect the market price of the Company's Common Stock. There can be no assurance as to when, and how many of, the Shares will be sold and the effect such sales may have on the market price of the Company's Common Stock. As of May 31, 1998, the Company has registered under the Securities Act an aggregate of 5,381,931 shares (including 2,337,750 shares issued or available for issuance under the Company's stock option plans). In addition, 4,938,195 shares of the Company's Common Stock, which includes shares issuable upon the exercise of certain warrants, may be sold to the public, subject to certain statutory and contractual resale restrictions. In the event of the issuance and subsequent resale of a substantial number of shares of the Company's Common Stock, or a perception that such sales could occur, there could be a material adverse effect on the prevailing market price of the Company's Common Stock. NO DIVIDENDS. The Company has never paid cash dividends on its Common Stock, and the Company's Board of Directors does not anticipate paying cash dividends in the foreseeable future. The Company currently intends to retain future earnings to finance the ongoing operations and growth of the business. The payment of dividends in the future will depend upon business decisions that will be made by the Board of Directors of the Company from time to time based upon the results of operations and financial condition of the Company and its subsidiaries and such other considerations as the Board of Directors considers relevant. ITEM 2. PROPERTIES The Company's corporate headquarters are located in approximately 11,400 square feet of leased space in Irving, Texas. This lease expires December 31, 2002. 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 in a building owned by the Company in Richardson, Texas. The Company's IMR subsidiary is located in approximately 13,800 square feet of leased space in Towson, Maryland. This lease expires June 30, 2003. 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. 17 19 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 1998. 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 Fiscal Year 1998 High Low ---------------- ---- --- First Quarter $18 7/8 $10 7/8 Second Quarter $24 1/4 $18 Third Quarter $33 1/4 $18 7/8 Fourth Quarter $40 3/4 $26 3/8 The Company's Common Stock was held by 111 stockholders of record as of May 31, 1998. The Company estimates that its shares were held by approximately 4,000 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, 1998, have been derived from the Consolidated Financial Statements that have been audited by Arthur Andersen LLP, independent public accountants. 18 20
Year Ended March 31, ------------------------------------------------------------------------- 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- (In thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues........................... $ 34,970 $ 91,306 $ 127,871 $ 256,450 $ 476,664 Cost of operations: Cost of revenues................. 32,612 85,532 120,334 245,466 455,847 Selling, general and administrative expenses........ 2,330 4,963 6,158 7,309 10,083 ----------- ----------- ----------- ----------- ----------- Total cost of operations....... 34,942 90,495 126,492 252,775 465,930 ----------- ----------- ----------- ----------- ----------- Operating income................... 28 811 1,379 3,675 10,734 Interest income.................... -- 91 366 1,560 2,814 Interest expense................... (423) (878) (732) (445) (67) Merger costs....................... -- -- -- -- (689) Provision for income taxes........ -- -- -- (1,564) (4,861) ----------- ----------- ------------ ----------- ----------- Net income (loss).................. $ (395) $ 24 $ 1,013 $ 3,226 $ 7,931 =========== =========== =========== =========== =========== Basic: Net income (loss) per share...... $ (.19) $ (.19) $ .05 $ .43 $ .88 Weighted average shares outstanding.................. 4,007 4,007 4,007 6,265 8,756 Diluted: Net income (loss) per share...... $ (.19) $ (.19) $ .05 $ .35 $ .70 Weighted average shares outstanding.................... 4,007 4,007 4,576 9,176 11,351 March 31, ----------- --------------- --------------------------------------------- 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- (In thousands) BALANCE SHEET DATA: Working capital.................... $ 769 $ (453) $ 269 $ 24,575 $ 28,362 Total assets....................... 29,152 37,288 59,861 108,914 154,909 Long-term debt to related parties.......................... 6,928 7,000 7,000 -- -- Redeemable preferred stock......... 10,256 11,076 11,896 -- -- Stockholders' equity (deficit) (936) (1,747) (1,537) 42,577 50,564
19 21
Year Ended March 31, ----------------------------------------------- 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- (In thousands) SUPPLEMENTAL DATA: (1) Pharmacy network claims processed........................ 816 1,527 9,375 26,579 38,319 Mail pharmacy prescriptions filled........................... 228 383 536 677 839 Estimated health plan members (at period end).......... 3,745 5,208 9,040 10,200 12,500
- ---------------------- (1) This data has not been audited. 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 twelve million health plan members enrolled in its 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, the Company markets HBM products to certain health plans, pharmaceutical manufacturers, Fortune 500 employers and managed care organizations. 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 52,000 retail pharmacies nationwide, and began to provide on-line claims adjudication services. The Company contracts directly with the retail pharmacies in its national network and is "at-risk" for the payment for drugs dispensed. In addition, the Company manages networks of pharmacies that are under direct contract with certain of its customers. When the Company has an independent obligation to pay its own network of retail pharmacy providers, the Company includes as revenues payments from plan sponsors for the drug cost and the claims processing fees. Payments made by the Company to its pharmacy providers are recorded as cost of revenues. For those plan sponsors which have established their own pharmacy network, the Company administers the plan sponsors' network pharmacy contracts. The plan sponsors have the independent obligation to fund payment to those pharmacies under contract and are "at-risk" for the payment for drugs dispensed, and the Company records as revenues only the claims processing fees. The Company also offers clinical 20 22 products to its customers. The Company's clinical revenues have historically been derived primarily from direct rebate and volume discounts from pharmaceutical manufacturers. Certain of these revenues are based on estimates which are subject to final settlement with the contract party. 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. In response to the growing demand among payors for comprehensive disease management programs, the Company established its HBM products. The Company has developed a comprehensive health care database, integrating its customers' pharmacy claims with applicable medical and laboratory claims data, in order to identify appropriate patients and perform meaningful outcomes studies for the Company's disease management programs. These programs have served as an additional source of revenue for the Company, and management believes that the Company will be able to cross-sell these and other products to its existing customers. The merger with IMR in February 1998 added to the Company's offerings of HBM products. IMR is a clinical trial and survey research firm based in Towson, Maryland. As a result of its competitive environment, the Company is continuously susceptible to margin pressures. In recent years, competing PBM providers owned by large pharmaceutical manufacturers began aggressively pricing their products and services. This aggressive pricing resulted in reduced margins for the Company's traditional PBM services. While the environment for the provision of traditional services remains competitive, margins realized for the provision of these services have stabilized in recent quarters. Except for the historical information contained herein, the discussion in this 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 herein. 21 23 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, --------------------------------- 1996 1997 1998 ---- ---- ---- STATEMENT OF OPERATIONS DATA: Revenues........................... 100.0% 100.0% 100.0% Cost of operations: Cost of revenues................. 94.1 95.7 95.6 Selling, general and administrative expenses........ 4.8 2.9 2.1 ----- ----- ----- Total cost of operations.... 98.9 98.6 97.7 ----- ----- ----- Operating income................... 1.1 1.4 2.3 Interest income (expense), net..... (0.3) 0.5 0.6 Merger costs....................... -- -- (0.2) Provision for income taxes......... -- (0.6) (1.0) ----- ----- ----- Net income......................... 0.8% 1.3% 1.7% ===== ===== =====
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997 REVENUES. Revenues for the year ended March 31, 1998 ("fiscal year 1998") increased by $220.2 million, or 86%, compared to revenues for the fiscal year ended March 31, 1997 ("fiscal year 1997"). The increase in revenues resulted from new contracts signed throughout the year with new customers. The number of lives managed by the Company continued to increase in fiscal year 1998 as new customers were obtained and the Company's current clients continued to increase their membership and utilization levels. New client contracts resulted from increased marketing efforts and the expansion of the Company's sales and marketing department. Contracts with new customers in fiscal year 1998 generally include all PBM products offered by the Company including claims processing, mail and clinical. Revenues from claims processing increased $175.8 million compared to the prior year. The increase resulted from new client lives and an increase in utilization from existing clients. The increase in new lives resulted in an increase in pharmacy claims processed from 26.6 million in fiscal year 1997 to 38.3 million in fiscal year 1998, a 44% increase. Virtually all of the new 1998 customer contracts utilize the Company's pharmacy network which has shifted a larger percentage of the Company's total revenues to claims processing. Revenues from mail pharmacy services increased $18.4 million compared to the prior year. The increase resulted primarily from the new member lives added during fiscal year 1998. The increase in new lives resulted in an increase in mail prescriptions dispensed from 677,000 in fiscal year 1997 to 839,000 in fiscal year 1998, a 24% increase. Revenues from clinical services increased $26.1 million compared to the prior year. The increase resulted primarily from the new member lives added and the additional claims processed during fiscal year 1998 compared to the prior year. 22 24 COST OF REVENUES. Cost of revenues for fiscal year 1998 increased by $210.4 million, or 86%, 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 was 96% in fiscal year 1998 and 1997. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for fiscal year 1998 increased by $2.8 million, or 38%, compared to fiscal year 1997. This increase was the result of the Company's expansion of its sales and marketing capabilities, as well as increases in administrative and support staff functions in response to volume growth in all product lines. In spite of the dollar increase, selling, general and administrative expenses as a percentage of revenues decreased from 3% in fiscal year 1997 to 2% in fiscal year 1998 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 generally 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 1998 increased $1.6 million compared to fiscal year 1997. 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 throughout fiscal year 1998 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 debt of the Company and, as a result, interest expense decreased by $378,000. In fiscal 1997, the proceeds from the offerings were available for only a portion of the year. MERGER COSTS. In February 1998, the Company completed a merger with IMR and issued 876,078 shares and options to purchase 23,922 shares of its Common Stock in exchange for all the outstanding shares and options of IMR. The merger has been accounted for as a pooling of interests and, accordingly, prior period consolidated financial statements have been restated to include the combined results of operations, financial position and cash flows of IMR as though it had always been a part of the Company. In connection with the merger, the Company recorded a charge to operating expenses of $689,000 ($427,000 after taxes, or $.04 per common share on a dilutive basis) for professional fees and other merger-related costs pertaining to the transaction. INCOME TAXES. The Company had income tax loss carryforwards available to partially offset income generated for fiscal year 1997 and, as a result, the Company recorded income tax expense of $1.6 million or 32.7% of income before income taxes. For fiscal 1998, the Company recorded tax expense of $4.9 million at a rate of 38.0% of income before income taxes. The tax loss carryforwards were fully utilized prior to fiscal year 1998. 23 25 FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996 REVENUES. Revenues for the year ended March 31, 1997 ("fiscal year 1997") increased by $128.6 million, or 101%, compared to revenues for the fiscal year ended March 31, 1996 ("fiscal year 1996"). The increase in revenues resulted from new contracts signed throughout the year with new customers. The number of lives managed by the Company continued to increase in fiscal year 1997 as new customers were obtained and the Company's current clients continued to increase their membership and utilization levels. New client contracts resulted from increased marketing efforts and the expansion of the Company's sales and marketing department. Contracts with new customers in fiscal year 1997 generally include all PBM products offered by the Company including claims processing, mail and clinical. Revenues from claims processing increased $101.0 million compared to the prior year. The increase resulted from new client lives and an increase in utilization from existing clients. The increase in new lives resulted in an increase in pharmacy claims processed from 9.4 million in fiscal year 1996 to 26.6 million in fiscal year 1997, a 183% increase. Virtually all of the new 1997 customer contracts utilize the Company's pharmacy network which has shifted a larger percentage of the Company's total revenues to claims processing. Revenues from mail pharmacy services increased $16.2 million compared to the prior year. The increase resulted primarily from the new member lives added during fiscal year 1997. The increase in new lives resulted in an increase in mail prescriptions dispensed from 536,000 in fiscal year 1996 to 677,000 in fiscal year 1997, a 26% increase. Revenues from clinical services increased $11.4 million compared to the prior year. The increase resulted primarily from the new member lives added and the additional claims processed during fiscal year 1997 compared to the prior year. COST OF REVENUES. Cost of revenues for fiscal year 1997 increased by $125.1 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 functions in response to volume growth in all services. In spite of the dollar increase, selling, general and administrative expenses as a percentage of revenues decreased from 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. 24 26 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 at that time (the "Whitney Note") and, as a result, interest expense decreased $287,000. 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 $1.6 million resulting from fully utilizing its remaining net operating loss carryforwards in fiscal year 1997. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 1998 the Company had working capital of $28.4 million. The increase in working capital at March 31, 1998 as compared to March 31, 1997 resulted primarily from the income generated by the Company in fiscal year 1998. The Company's net cash provided by operating activities was $15.4 million, $15.4 million and $14.5 million for the years ended March 31, 1996, 1997 and 1998, 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 $1.8 million, $3.1 million and $6.5 million for the years ended March 31, 1996, 1997 and 1998, 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. In particular, $2.1 million was used to expand the automation and capacity of the Company's mail pharmacy facility. In addition, the mail pharmacy facility, previously leased, was purchased for $1.5 million during the year. For the year ended March 31, 1998, the Company borrowed $708,000 under a line of credit associated with IMR and repaid $1.6 million during the year. During fiscal year 1998, the Company's continued growth resulted in net cash provided by operating activities of $14.5 million. Historically, the Company has been able to fund its operations and continued growth through cash flow from operations. During fiscal year 1998, the Company's operating cash flow funded its capital expenditures of $6.5 million, and its short-term 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, 1999 will primarily consist of additional enhancements to the Company's claim processing systems and further expansion of the Company's facilities. The Company anticipates that cash flow from operations, combined with its current cash balances, 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 25 27 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 The Company will adopt SFAS 130, "Reporting Comprehensive Income" effective April 1, 1998. SFAS 130 established standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as the total of net income and all other non-owner changes in equity. The Company does not have any non-owner changes in equity other than net income. Upon adoption, comprehensive income and the cumulative other comprehensive income will be reported in a consolidated statement of stockholders' equity. The Company will adopt SFAS 131, "Disclosure about Segments of an Enterprise and Related Information," effective April 1, 1998. This pronouncement changes the requirements under which public businesses must report segment information. The objective of the pronouncement is to provide information about a company's different types of business activities and different economic environments. SFAS 131 will require companies to select segments based on their internal reporting system. Management is currently assessing the requirements of this pronouncement and the effect it will have, if any, on the Company's disclosure. The Company will adopt SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," as of April 1, 1998. This pronouncement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans, however, it does require additional information on changes in the benefit obligations and fair values of plan assets in order to facilitate financial analysis. Currently, the Company does not have any pension or postretirement benefit plans, thus management does not expect that the adoption of SFAS 132 will have a material impact on the Company's disclosures. 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. YEAR 2000 ISSUES The Company has formed a Year 2000 project team to address the Year 2000 issue. The Company will incur internal costs as well as external consulting expenses in order to prepare its systems for the new century. The Company is still evaluating the magnitude of these costs, but the Company does not believe the costs associated with the Year 2000 project will be material to the Company's results of operations or financial condition. However, there can be no assurance that the Company's efforts to address the Year 2000 issue will be entirely successful. In addition, there can be no assurance that the software and systems of other companies from which 26 28 the Company transacts business will become Year 2000 compliant in a timely manner. Any such failures could have a material adverse effect on the Company's systems and operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is found on pages F-1 through F-21 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item will be incorporated by reference from the Company's definitive Proxy Statement for its 1998 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. The Company filed a report on Form 8-K dated February 9, 1998, relating to the merger with IMR. (c) Exhibits Required by Item 601 of S-K: See index to exhibits on pages 28-31. 27 29 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.
28 30
EXHIBIT NO. EXHIBITS - ----------- -------- 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. 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. 4.18**** --- 1997 Nonstatutory Stock Option Plan 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.
29 31
EXHIBIT NO. EXHIBITS - ----------- -------- 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. 10.16***** --- Agreement and Plan of Merger, dated February 9, 1998, by and among Advance Paradigm, Inc., IMR, Inc. and Innovative Medical Research, Inc., Walter Stewart, Richard Lipton, The Lianna Lipton Trust, The Justin Lipton Trust, Stuart Bell, The Curren Bell Trust, The Kylie Bell Trust and The Ian Bell Trust.
30 32 10.17****** --- Employment Agreement effective as of May 1, 1998, by and between the Company and Anthony J. Pino. 11****** --- Statement regarding computation of per share earnings. 21****** --- Subsidiaries of the Company. 23****** --- Consent of Arthur Andersen LLP. 27.1****** --- Financial Data Schedule. 27.2****** --- Restated Financial Data Schedule
- -------------- * Previously filed in connection with the Company's Registration Statement on Form S-1 filed October 8, 1996 (No. 333-06931), and incorporated herein by reference. ** Previously filed in connection with the Company's Form 10-K for the year ended March 31, 1997, and incorporated herein by reference. *** Previously filed in connection with the Company's Registration Statement on Form S-8 filed September 5, 1997 (No. 333-34999), and incorporated herein by reference. **** Previously filed in connection with the Company's Form 10-Q for the three months ended June 30, 1997, and incorporated herein by reference. ***** Previously filed in connection with the Company's Current Report on Form 8-K, dated February 9, 1998, and incorporated herein by reference. ******Filed herewith.
31 33 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 22, 1998 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 22, 1998 - -------------------------------------- and Chief Executive Officer David D. Halbert (Principal Executive Officer) /s/ Jon S. Halbert Executive Vice President, Chief June 22, 1998 - -------------------------------------- Operating Officer and Director Jon S. Halbert /s/ T. Danny Phillips Senior Vice President, Chief June 22, 1998 - -------------------------------------- Financial Officer, Secretary and T. Danny Phillips Treasurer (Principal Financial and Accounting Officer)
32 34 /s/ Peter M. Castleman Director June 22, 1998 - -------------------------------------- Peter M. Castleman /s/ Rogers K. Coleman Director June 22, 1998 - -------------------------------------- Rogers K. Coleman, M.D. /s/ Stephen L. Green Director June 22, 1998 - -------------------------------------- Stephen L. Green /s/ Jeffrey R. Jay Director June 22, 1998 - -------------------------------------- Jeffrey R. Jay, M.D. /s/ Kenneth J. Linde Director June 22, 1998 - -------------------------------------- Kenneth J. Linde /s/ Michael D. Ware Director June 22, 1998 - -------------------------------------- Michael D. Ware
33 35 INDEX TO FINANCIAL STATEMENTS Advance Paradigm, Inc. and Subsidiaries Report of Independent Public Accountants....................................................................F-2 Consolidated Balance Sheets--March 31, 1997 and 1998........................................................F-3 Consolidated Statements of Operations for the Years Ended March 31, 1996, 1997 and 1998.....................F-4 Consolidated Statements of Stockholders' Equity for the Years Ended March 31, 1996, 1997 and 1998...........F-5 Consolidated Statements of Cash Flows for the Years Ended March 31, 1996, 1997 and 1998.....................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, 1996, 1997 and 1998.............................................................................................S-2
F-1 36 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Advance Paradigm, Inc.: We have audited the accompanying consolidated balance sheets of Advance Paradigm, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended March 31, 1998. 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, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Dallas, Texas, May 15, 1998 F-2 37 ADVANCE PARADIGM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, -------------------------------- 1997 1998 ----------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $51,172,000 $ 58,342,000 Accounts receivable, net of allowance for doubtful accounts of $192,000 and $247,000, respectively 36,269,000 68,335,000 Inventories 1,859,000 2,887,000 Prepaid expenses and other 427,000 1,487,000 ------------ ------------ Total current assets 89,727,000 131,051,000 PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $3,540,000 and $5,574,000, respectively 6,001,000 10,494,000 INTANGIBLE ASSETS, net of accumulated amortization of $1,154, 000 and $1,501,000, respectively 12,699,000 12,353,000 OTHER ASSETS 487,000 1,011,000 ------------ ------------ Total assets $108,914,000 $154,909,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $59,857,000 $ 97,495,000 Accrued salaries and benefits 1,991,000 2,966,000 Income taxes payable 712,000 32,000 Other accrued expenses 1,692,000 2,196,000 Debt to related parties 900,000 -- ------------ ------------ Total current liabilities 65,152,000 102,689,000 NONCURRENT LIABILITIES: Deferred income taxes 844,000 1,285,000 Other noncurrent liabilities, less current portion 341,000 371,000 ------------ ------------ Total liabilities 66,337,000 104,345,000 ------------ ------------ COMMITMENTS AND CONTINGENCIES PREFERRED STOCK: Preferred stock, $.01 par value, 4,995,000 shares authorized, none issued and outstanding -- -- ------------ ------------ STOCKHOLDERS' EQUITY: Series B convertible preferred stock, $.01 par value; 5,000 shares authorized, 4,444 shares issued and outstanding -- -- Common stock, $.01 par value; 25,000,000 shares authorized, 8,676,895 and 8,904,472 shares issued and outstanding at March 31, 1997 and 1998, respectively 87,000 89,000 Additional paid-in capital 42,888,000 43,142,000 Accumulated earnings (deficit) (398,000) 7,333,000 ------------ ------------ Total stockholders' equity 42,577,000 50,564,000 ------------ ------------ Total liabilities and stockholders' equity $108,914,000 $154,909,000 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 38 ADVANCE PARADIGM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended March 31, ------------------------------------------------ 1996 1997 1998 ------------ ------------ ------------ REVENUES $127,871,000 $256,450,000 $476,664,000 ------------ ------------ ------------ COST OF OPERATIONS: Cost of revenues 120,334,000 245,466,000 455,847,000 Selling, general and administrative expenses 6,158,000 7,309,000 10,083,000 ------------ ------------ ------------ Total cost of operations 126,492,000 252,775,000 465,930,000 ------------ ------------ ------------ Operating income 1,379,000 3,675,000 10,734,000 INTEREST INCOME 366,000 1,560,000 2,814,000 INTEREST EXPENSE (732,000) (445,000) (67,000) MERGER COSTS -- -- (689,000) ------------ ------------ ------------ INCOME BEFORE INCOME TAXES 1,013,000 4,790,000 12,792,000 PROVISION FOR INCOME TAXES -- 1,564,000 4,861,000 ------------ ------------ ------------ NET INCOME $ 1,013,000 $ 3,226,000 $ 7,931,000 ============ ============ ============ BASIC: NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 213,000 $ 2,673,000 $ 7,731,000 NET INCOME PER SHARE $ 0.05 $ 0.43 $ 0.88 WEIGHTED AVERAGE SHARES OUTSTANDING 4,006,578 6,264,521 8,755,754 DILUTED: NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 213,000 $ 3,226,000 $ 7,931,000 NET INCOME PER SHARE $ 0.05 $ 0.35 $ 0.70 WEIGHTED AVERAGE SHARES OUTSTANDING 4,576,265 9,176,127 11,350,919
The accompanying notes are an integral part of these consolidated financial statements. F-4 39 ADVANCE PARADIGM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
Series B Preferred Common Stock Stock ------------------------ ------------------ Additional Accumulated Number of Number of Paid-In Earnings Shares Amount Shares Amount Capital (Deficit) Total --------- --------- --------- ------ ----------- ----------- ------------ BALANCE, March 31, 1995 4,001,078 $ 40,000 -- $ -- $ 1,467,000 $(3,254,000) $ (1,747,000) --------- --------- ----- ---- ----------- ----------- ------------ Net income -- -- -- -- -- 1,013,000 1,013,000 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 4,006,578 40,000 -- -- 1,484,000 (3,061,000) (1,537,000) Net income -- -- -- -- -- 3,226,000 3,226,000 Issuance of Common Stock in connection with the exercise of employee stock options 3,000 -- -- -- 12,000 -- 12,000 Issuance of Series B Preferred Stock -- -- 4,444 -- 10,000,000 -- 10,000,000 Dividends and accretion on Series A Preferred Stock -- -- -- -- -- (410,000) (410,000) Issuance of Common Stock in connection with an initial public offering 2,397,067 24,000 -- -- 19,111,000 -- 19,135,000 Issuance of Common Stock in connection with the conversion of Series A Preferred Stock 2,500,000 25,000 -- -- 12,279,000 -- 12,304,000 Reduction of Common Stock outstanding in connection with the merger with AHC (229,750) (2,000) -- -- 2,000 -- -- Dividends on Series B Preferred Stock -- -- -- -- -- (153,000) (153,000) --------- --------- ----- ---- ----------- ----------- ------------ BALANCE, March 31, 1997 8,676,895 87,000 4,444 -- 42,888,000 (398,000) 42,577,000 Net Income -- -- -- -- -- 7,931,000 7,931,000 Issuance of Common Stock in connection with the exercise of stock options and warrants 227,577 2,000 -- -- 254,000 -- 256,000 Dividends on Series B Preferred Stock (200,000) (200,000) --------- --------- ----- ---- ----------- ----------- ------------ BALANCE, March 31,1998 8,904,472 $ 89,000 4,444 $ -- $43,142,000 $ 7,333,000 $ 50,564,000 ========= ========= ===== ==== =========== =========== ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 40 ADVANCE PARADIGM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended March 31, ------------------------------------------------ 1996 1997 1998 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,013,000 $ 3,226,000 $ 7,931,000 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 1,313,000 1,705,000 2,378,000 Provision for doubtful accounts 23,000 12,000 74,000 Change in certain assets and liabilities-- Accounts receivable (7,543,000) (12,612,000) (32,139,000) Inventories (367,000) (261,000) (1,028,000) Prepaid expenses and other assets (70,000) (256,000) (1,584,000) Accounts payable, accrued expenses and other noncurrent liabilities 20,985,000 23,571,000 38,907,000 ------------ ------------ ------------ Net cash provided by operating activities 15,354,000 15,385,000 14,539,000 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (1,762,000) (3,147,000) (6,525,000) ------------ ------------ ------------ Net cash used in investing activities (1,762,000) (3,147,000) (6,525,000) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from sale of preferred stock -- 10,000,000 -- Net proceeds from issuance of Common Stock 17,000 19,147,000 256,000 Proceeds from borrowings 600,000 1,000,000 708,000 Payments on long-term obligations (244,000) (7,650,000) (1,608,000) Payment of preferred stock dividend -- (153,000) (200,000) ------------ ------------ ------------ Net cash provided by (used in) financing activities 373,000 22,344,000 (844,000) ------------ ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 13,965,000 34,582,000 7,170,000 CASH AND CASH EQUIVALENTS, beginning of year 2,625,000 16,590,000 51,172,000 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of year $ 16,590,000 $ 51,172,000 $ 58,342,000 ============ ============ ============
SUPPLEMENTARY INFORMATION: Cash paid for interest totaled approximately $732,000, $445,000 and $67,000 in 1996, 1997 and 1998, respectively. The Company made income tax payments of $0, $19,000 and $5,100,000 in 1996, 1997 and 1998, respectively. The accompanying notes are an integral part of these consolidated financial statements. F-6 41 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 four wholly owned subsidiaries, Advance Paradigm Mail Services, Inc. ("Advance Mail"), Advance Paradigm Data Services, Inc. ("Advance Data"), Advance Paradigm Clinical Services, Inc. ("Advance Clinical"), and Innovative Medical Research, Inc. ("IMR"), which collectively are referred to as "the Company". The Company offers an integrated program of pharmacy benefit management. Clinical, rebate and formulary products 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. The Company markets health benefit management services ("HBM Services") to certain health plans, pharmaceutical manufacturers, and other research and managed care organizations, and programs for disease management services with selected customers. In February 1998, API merged with IMR, a privately held clinical trial and survey research firm. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Consolidation The accompanying consolidated financial statements include the accounts of API and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include overnight investments, money market accounts and high-grade commercial paper with original maturities of three months or less. F-7 42 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) Inventories Inventories consist of purchased pharmaceuticals stated at the lower of cost or market under the first-in, first-out method. Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on the straight-line method over estimated useful lives ranging from three to twenty years. Amortization of leasehold improvements is computed over the lives of the assets or the lease terms, whichever is shorter. Major renewals and betterments are added to the property and equipment accounts while costs of repairs and maintenance are charged to operating expenses in the period incurred. The cost of assets retired, sold or otherwise disposed of and the applicable accumulated depreciation are removed from the accounts, and the resultant gain or loss, if any, is reflected in the statement of operations. Intangible Assets Intangible assets 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. Amortization expense was $346,000 in each of the years ended March 31, 1996, 1997 and 1998. Impairment of Long-Lived Assets The Company evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived assets, including goodwill, may warrant revision or that the remaining balance of an asset may not be recoverable. The assessment of possible impairment is based on the ability to recover the carrying amount of the asset from expected future cash flows on an undiscounted basis. If the assessment indicates that the carrying amount of the asset exceeds the undiscounted cash flows, an impairment has occurred. The impairment is calculated as the total by which the carrying amount of the asset exceeds its fair value. The fair value of long-lived assets and goodwill is estimated based on quoted market prices, if available, or the expected total value of the cash flows, on a discounted basis. F-8 43 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) Fair Value of Financial Instruments The carrying values of cash, receivables, payables and accrued liabilities approximate the fair values of these instruments because of their short-term maturities. Other Noncurrent Liabilities Other liabilities is comprised of deposits from certain customers in connection with pharmacy benefit contracts. Revenue Recognition Revenues from the dispensing of pharmaceuticals from the Company's mail service pharmacy are recognized when each prescription is shipped. Revenues from sales of prescription drugs by pharmacies in the Company's nationwide network and claims processing fees are recognized when the claims are adjudicated. At the point-of-sale, the pharmacy claims are adjudicated using the Company's on-line claims processing system. When the Company has an independent obligation to pay its network pharmacy providers, the Company includes payments from plan sponsors for these benefits as revenues and payments to its pharmacy providers as cost of revenues. If the Company is only administering plan sponsors' network pharmacy contracts, the Company records the claims processing service fees as revenues. Rebate revenues are recognized as they are earned in accordance with contractual agreements. Certain of these revenues are based on estimates which are subject to final settlement with the contract party. Revenues from certain disease management and health benefit management products are reimbursed at predetermined contractual rates based on the achievement of certain milestones. Revenues are recognized as billed and based on the completion of the milestone measurements. Cost of Revenues Cost of revenues includes product costs, pharmacy claims payments and other direct costs associated with the sale and dispensing of prescriptions. Federal Income Taxes The Company files a consolidated federal income tax return which includes the parent and all of its wholly owned subsidiaries. F-9 44 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) 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 15, 1997. SFAS 128 requires the calculation of "Basic" earnings per share which is computed by dividing net income by the weighted average number of shares of Common Stock outstanding during the period. In addition, SFAS 128 requires the calculation of "Diluted" earnings per common share which is computed using the weighted average number of shares of Common Stock and all other dilutive securities. Other dilutive securities include stock options, stock warrants and the Company's Series A and B preferred stock and are included in the "Diluted" calculation only if the result is dilutive. A reconciliation of the numerators and denominators of the basic and diluted per-share computations follows:
Year Ended March 31, ---------------------------------------------- 1996 1997 1998 ------------ ------------ ------------ BASIC Numerator: Net income $ 1,013,000 $ 3,226,000 $ 7,931,000 Preferred stock dividends 800,000 553,000 200,000 ------------ ------------ ------------ $ 213,000 $ 2,673,000 $ 7,731,000 ============ ============ ============ Denominator: Weighted average common stock outstanding 4,006,578 6,264,521 8,755,754 ============ ============ ============ Net income per share $ 0.05 $ 0.43 $ 0.88 ============ ============ ============ DILUTED Numerator: Net income $ 1,013,000 $ 3,226,000 $ 7,931,000 Preferred stock dividends 800,000 -- -- ------------ ------------ ------------ $ 213,000 $ 3,226,000 $ 7,931,000 ============ ============ ============ Denominator: Weighted average common 4,006,578 6,264,521 8,755,754 stock outstanding Other Dilutive Securities: Series A preferred stock -- 1,250,000 -- Series B preferred stock -- 833,333 1,111,111 Options and warrants using the treasury stock method 569,687 828,273 1,484,054 ------------ ------------ ------------ Weighted average shares outstanding 4,576,265 9,176,127 11,350,919 ============ ============ ============ Net income per share $ 0.05 $ 0.35 $ 0.70 ============ ============ ============
The conversion of the Series A preferred stock was anti-dilutive in 1996 and, therefore, was not an other dilutive security. F-10 45 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) Reclassification Certain prior year amounts have been reclassified to conform with current year presentation. Recent Accounting Pronouncements The Company will adopt SFAS 130, "Reporting Comprehensive Income" effective April 1, 1998. SFAS 130 established standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as the total of net income and all other non-owner changes in equity. The Company does not have any non-owner changes in equity other than net income. Upon adoption, comprehensive income and the cumulative other comprehensive income will be reported in a consolidated statement of stockholders' equity. The Company will adopt SFAS 131, "Disclosure about Segments of an Enterprise and Related Information," effective April 1, 1998. This pronouncement changes the requirements under which public businesses must report segment information. The objective of the pronouncement is to provide information about a company's different types of business activities and different economic environments. SFAS 131 will require companies to select segments based on their internal reporting system. Management is currently assessing the requirements of this pronouncement and the effect it will have, if any, on the Company's disclosure. The Company will adopt SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," as of April 1, 1998. This pronouncement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans, however, it does require additional information on changes in the benefit obligations and fair values of plan assets in order to facilitate financial analysis. Currently, the Company does not have any pension or postretirement benefit plans, thus management does not expect that the adoption of SFAS 132 will have a material impact on the Company's disclosures. 3. BUSINESS COMBINATION In February 1998, the Company completed a merger with IMR, a privately held clinical trial and survey research firm based in Towson, Maryland. The Company issued 876,078 shares and options to purchase 23,922 shares of its Common Stock in exchange for all the outstanding shares and options of IMR. F-11 46 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. BUSINESS COMBINATION: (CONTINUED) The merger constituted a tax-free reorganization and has been accounted for as a pooling of interests under Accounting Principles Board Opinion No. 16 ("APB 16"). Accordingly, all prior period consolidated financial statements presented have been restated to include the combined results of operations, financial position and cash flows of IMR as though it had always been a part of the Company. The results of operations for the separate companies and the combined amounts presented in the consolidated financial statements follow.
Year Ended March 31, 1996 1997 1998 --------- --------- --------- (000's) Revenues: API $ 125,333 $ 251,562 $ 468,287 IMR 2,538 4,888 8,377 --------- --------- --------- Combined $ 127,871 $ 256,450 $ 476,664 --------- --------- --------- Net income: API $ 1,037 $ 3,138 $ 7,165 IMR (24) 88 766 --------- --------- --------- Combined $ 1,013 $ 3,226 $ 7,931 ========= ========= =========
In connection with the merger, the Company recorded in the fourth quarter a charge to operating expenses of $689,000 ($427,000 after taxes, or $.04 per common share on a dilutive basis) for professional fees and other merger-related costs pertaining to the transaction. 4. PROPERTY AND EQUIPMENT: Property and equipment consisted of the following:
March 31, ---------------------------- 1997 1998 ------------ ------------ Machinery and equipment..................................... $ 1,033,000 $ 3,521,000 Computer equipment and software............................. 6,567,000 8,591,000 Furniture and equipment..................................... 1,149,000 1,381,000 Leasehold improvements...................................... 792,000 1,017,000 Land and buildings.......................................... -- 1,558,000 ------------ ------------ 9,541,000 16,068,000 Less--Accumulated depreciation and amortization............. (3,540,000) (5,574,000) ------------ ------------ $ 6,001,000 $ 10,494,000 ============ ============
F-12 47 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. DEBT: On July 1, 1996, IMR entered into a $1,000,000 line of credit agreement with an officer and shareholder of IMR. As of March 31, 1997, $900,000 was outstanding under the line of credit arrangement. Interest payments were due quarterly and accrued at the prime rate. In addition, other officers and shareholders of IMR made working capital loans to IMR during the periods presented. Interest expense was $16,000, $66,000 and $67,000 in the years ended March 31, 1996, 1997 and 1998, respectively. After the merger, the remaining balance of the line of credit was paid and the credit arrangement was terminated. 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, 1998, as follows: Years Ending March 31, ------------ 1999........................................... $3,016,000 2000........................................... 2,575,000 2001........................................... 1,996,000 2002........................................... 1,479,000 2003........................................... 239,000 ---------- Total minimum lease payments.............. $9,305,000 ========== Total rent expense incurred in the years ended March 31, 1996, 1997 and 1998 was $1,185,000, $2,313,000 and $3,096,000, respectively. 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. F-13 48 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES: (CONTINUED) The pharmacy industry is governed by extensive federal and state laws and regulations. The regulatory requirements with which the Company must comply in conducting its business vary from state to state. Management believes the Company is in substantial compliance with, or is in the process of complying with, all existing laws and regulations material to the operation of its business. In management's opinion, any events of noncompliance would not have a material adverse effect on the results of operations or financial condition of the Company. 8. CONCENTRATION OF BUSINESS: A significant portion of the Company's revenues result from contracts with customers. These contracts normally have terms from one to five years with renewal options. One customer of the Company accounted for approximately 14% and 15% of the Company's revenues for the years ended March 31, 1997 and 1998, respectively. Another customer accounted for approximately 21% of the Company's revenues for the year ended March 31, 1998. A third customer accounted for approximately 18% of the Company's revenues for the year ended March 31, 1997, but revenues from this customer did not exceed 10% of the Company's revenues for the year ended March 31, 1998. A fourth customer accounted for approximately 18% of the Company's revenues for the year ended March 31, 1996, but revenues from this customer did not exceed 10% of the Company's revenues in either the year ended March 31, 1997 or 1998. No other customer accounted for over 10% of the Company's revenues in fiscal years 1996, 1997, or 1998. 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 F-14 49 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. STOCK TRANSACTIONS: (CONTINUED) 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 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. On April 13, 1998, the Company was notified by the holders of the Series B Preferred Stock that they were electing to convert all of the shares into Common Stock. Subsequently, the shares were converted into 1,111,111 shares of Common Stock. Common Stock On October 7, 1996, the Company amended and restated its Certificate of Incorporation to, among other things, increase the number of authorized shares of its $.01 par value common stock ("Common Stock") to 25,000,000 and the number of shares of its preferred stock to 5,000,000, of which 5,000 shares are designated as Series B Preferred Stock. On October 8, 1996, the Company effected a 250-for-one stock split of the Company's Common Stock. Accordingly, all share and per share amounts have been adjusted to reflect the stock split as though it had occurred at the beginning of the initial period presented. 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 Accumulative convertible preferred stock ("Series A Preferred Stock") automatically converted into 2,500,000 shares of Common Stock. F-15 50 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 "AHC Merger"). The AHC Merger was accounted for as a reorganization of entities under common control in a manner similar to a pooling of interests. Accordingly, the accounts of the predecessor were based on historical cost, and its operations are included from the date of its formation. Prior to the AHC Merger, AHC held 3,125,000 shares of the Company's Common Stock. In connection with the AHC 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 AHC 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 AHC 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 AHC 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. In connection with the IMR merger, the Company issued 876,078 shares of its Common Stock in exchange for all the outstanding shares of IMR. Under the provisions of APB 16, the shares are reflected as outstanding as though IMR had always been a part of the Company. Therefore, the Company has 8,676,895 and 8,904,472 shares of Common Stock issued and outstanding at March 31, 1997 and 1998, respectively. Warrants 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, 1998, warrants to purchase 158,573 and 56,250 shares at prices per share of $4.00 and $6.00, respectively, were exercised. F-16 51 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. STOCK TRANSACTIONS: (CONTINUED) 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, 1998, no warrants have been earned or issued. In October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company accounted for these warrant agreements under the provisions of FASB 123 and the related Emerging Issues Task Force ("EITF") 96-3. These pronouncements require that all stock issued to non-employees be accounted for based on the fair value of the consideration received or the fair value of equity instruments issued. In addition, they require that the fair value be measured on the date the parties come to a "mutual understanding of the terms of the arrangement and agree to a binding contract" (i.e. the grant date). If the number of equity instruments is contingent upon the outcome of future events, the number of instruments that should be accounted for when determining the fair value of the transaction should be based on the best available estimate of the number of instruments expected to be issued. In management's opinion, the fair value of the warrants at the date of the agreements was not material. Subsequent to November 20, 1997, the Company follows the guidance of EITF 96-18, under which the measurement date is the earlier of the performance commitment date or completed performance date. The Company chose not to retroactively apply EITF 96-18 to the eligible warrants, but chose to apply this EITF prospectively to new arrangements and any modifications of existing arrangements. The Company has reserved shares of Common Stock at March 31, 1998, for the following: Conversion of Series B Preferred Stock............ 1,111,111 Exercise of stock options......................... 2,793,948 Exercise of warrants.............................. 810,677 --------- 4,715,736 ========= F-17 52 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. STOCK OPTION PLAN: At March 31, 1998 the Company has three stock-based compensation plans: Incentive Stock Option Plan, Amended and Restated Incentive Stock Option Plan and the 1997 Nonstatutory Stock Option Plan (the "Plans"). The Plans provide for the granting of qualified stock options and incentive options to officers, directors, advisors and employees of the Company. The options must be granted with exercise prices which equal or exceed the market value of the Common Stock at the date of grant. As of March 31, 1998, the number of shares of Common Stock issuable under the Plans may not exceed 2,837,750 shares. The Plans are administered by a compensation committee appointed by the Board of Directors of the Company. The stock options generally vest over 5-year periods. In the event of the sale or merger with an outside corporation gaining 50% or greater ownership, options granted to certain employees become 100% vested. The options are exercisable for a period not to exceed 10 years from the date of grant. As of March 31, 1998, 879,382 options were vested at exercise prices of $.65 to $19.75 per share. SFAS 123 establishes a fair value-based method of accounting for stock-based compensation. The Company has elected to adopt SFAS 123 through disclosure with respect to employee stock-based compensation. The following table summarizes the Company's stock option activity.
1996 1997 1998 -------------------------------------------------------------------------------- Shares Wtd. Avg. Shares Wtd. Avg. Shares Wtd. Avg. Ex. Price Ex. Price Ex. Price -------- --------- --------- --------- --------- --------- Outstanding at beginning of year 783,500 $ 7.80 810,500 $ 5.15 1,457,750 $ 6.02 Granted 195,500 12.82 445,000 10.34 614,375 21.25 Transferred from AHC -- -- 229,750 1.12 -- -- Transferred from IMR -- -- -- -- 23,922 1.18 Exercised (5,500) 3.20 (3,000) 3.20 (43,052) 5.26 Canceled (163,000) 27.12 (24,500) 10.75 (29,250) 9.78 -------- ------ --------- ------- --------- ------- Outstanding at end of year 810,500 5.15 1,457,750 6.02 2,023,745 10.54 ======== ====== ========= ======= ========= ======= Exercisable at end of year 276,500 5.84 632,850 2.95 879,382 4.40 Price range $3.20 to $11.00 $.65 to $19.75 $.65 to $33.13 Weighted average fair value of options granted $3.88 $3.31 $ 7.94
F-18 53 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. STOCK OPTION PLAN: (Continued) The following table reflects the weighted average exercise price and weighted average contractual life of various exercise price ranges of the 2,023,745 options outstanding as of March 31, 1998.
Options Outstanding Options Exercisable ----------------------------------------- ------------------------ Weighted Wtd. Avg. Weighted Avg. Exercise Contractual Avg. Exercise Exercise Price Range Shares Price Life (yrs.) Shares Price - ----------------------------------------------------------------------------------------------------- $ .65 to $ 2.71 248,670 $ 1.14 3.7 224,748 $ 1.13 $ 3.20 to $ 4.80 580,200 $ 3.26 5.4 460,500 $ 3.25 $ 9.00 to $ 12.50 877,875 $ 11.12 8.6 192,467 $10.84 $ 16.63 to $ 20.75 64,000 $ 19.55 9.3 1,667 19.75 $ 29.13 to $ 33.13 253,000 $ 32.21 9.9 -- --
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, 1997 and 1998, respectively: risk-free interest rates of 4.8% to 6.5%; expected lives of three to five years; expected volatility of 30% to 50%. The Company continues to account for stock based compensation under APB 25, "Accounting for Stock Issued to Employees", as allowed by SFAS 123. Had compensation cost for these plans been determined consistent with SFAS 123, the Company's net income and net income per share would have been reduced to the following pro forma amounts:
1996 1997 1998 ---- ---- ---- Net income: As reported $1,013,000 $3,226,000 $7,931,000 Pro forma $1,003,000 $3,065,000 $7,382,000 Basic net income per share: As reported $ 0.05 $ 0.43 $ 0.88 Pro forma $ 0.05 $ 0.40 $ 0.82 Diluted net income per share: As reported $ 0.05 $ 0.35 $ 0.70 Pro forma $ 0.04 $ 0.33 $ 0.65
Because SFAS 123 method of accounting has not been applied to options granted prior to April 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. F-19 54 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. RELATED PARTY TRANSACTIONS: In fiscal 1998, the Company entered into an agreement with Advance Capital Markets ("ACM") pursuant to which ACM agreed to act as financial advisor for the IMR transaction. In exchange for these professional services, the Company paid ACM a fee of $150,000, which is equivalent to or less than similar fees incurred in arm's-length transactions. The Managing Director of ACM is also a Director of the Company. 12. RETIREMENT PLAN BENEFITS: The Company sponsors a retirement plan for all eligible employees, as defined in the plan document. The plan is qualified under Section 401(k) of the Internal Revenue Code. The Company is required to contribute at least 50% of the first 6% of salary deferral contributed by each participant. The Company's contributions to the plan amounted to approximately $102,000, $129,000 and $177,000 for the years ended March 31, 1996, 1997 and 1998, respectively. 13. INCOME TAXES: The provision for income taxes for the year ended March 31, 1998 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:
1996 1997 1998 ---------- ---------- ---------- Tax at U.S. federal $ 344,000 $1,629,000 $4,349,000 income tax rate State taxes -- -- 457,000 Benefit of operating (382,000) (89,000) -- loss carryforwards Other, net 38,000 24,000 55,000 ---------- ---------- ---------- Provision for income taxes $ -- $1,564,000 $4,861,000 ========== ========== ==========
Of the $4,861,000 provision for income taxes in 1998, $441,000 represents deferred income taxes and $4,420,000 represents the current portion. F-20 55 ADVANCE PARADIGM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred income taxes reflect the tax consequences on future years of temporary differences between the tax bases of assets and liabilities and their financial reporting bases and the potential benefits of certain tax carryforwards. The significant deferred tax assets and liabilities and the changes in those assets and liabilities are as follows:
March 31, March 31, 1997 Changes 1998 ------------- ------------- ------------- Gross deferred tax asset: Other accruals.................................. $ 50,000 $ 7,000 $ 57,000 Other........................................... 48,000 2,000 50,000 ------------- ------------- ------------- 98,000 9,000 107,000 ------------- ------------- ------------- Gross deferred tax liability: Amortization of goodwill........................ (654,000) (196,000) (850,000) Depreciation.................................... (288,000) (254,000) (542,000) ------------- ------------- ------------- (942,000) (450,000) (1,392,000) ------------- ------------- ------------- Net deferred tax liability...................... $ (844,000) $ (441,000) $ (1,285,000) ============= ============= =============
F-21 56 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 15, 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. ARTHUR ANDERSEN LLP Dallas, Texas May 15, 1998 S-1 57 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, 1996: Allowance for doubtful accounts receivable............. $191,000 $23,000 $(34,000) $180,000 Year ended March 31, 1997: Allowance for doubtful accounts receivable............. $180,000 $12,000 $ -- $192,000 Year ended March 31, 1998: Allowance for doubtful accounts receivable............. $192,000 $74,000 $ 19,000 $247,000
- ---------- (1) Uncollectible accounts written off, net of recoveries. S-2 58 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ----------- 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.
59
EXHIBIT NO. DESCRIPTION - ----------- ----------- 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. 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. 4.18**** --- 1997 Nonstatutory Stock Option Plan 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.
60
EXHIBIT NO. DESCRIPTION - ----------- ----------- 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. 10.16***** --- Agreement and Plan of Merger, dated February 9, 1998, by and among Advance Paradigm, Inc., IMR, Inc. and Innovative Medical Research, Inc., Walter Stewart, Richard Lipton, The Lianna Lipton Trust, The Justin Lipton Trust, Stuart Bell, The Curren Bell Trust, The Kylie Bell Trust and The Ian Bell Trust.
61 10.17****** --- Employment Agreement effective as of May 1, 1998, by and between the Company and Anthony J. Pino. 11****** --- Statement regarding computation of per share earnings. 21****** --- Subsidiaries of the Company. 23****** --- Consent of Arthur Andersen LLP. 27.1****** --- Financial Data Schedule. 27.2****** --- Restated Financial Data Schedule
- -------------- * Previously filed in connection with the Company's Registration Statement on Form S-1 filed October 8, 1996 (No. 333-06931), and incorporated herein by reference. ** Previously filed in connection with the Company's Form 10-K for the year ended March 31, 1997, and incorporated herein by reference. *** Previously filed in connection with the Company's Registration Statement on Form S-8 filed September 5, 1997 (No. 333-34999), and incorporated herein by reference. **** Previously filed in connection with the Company's Form 10-Q for the three months ended June 30, 1997, and incorporated herein by reference. ***** Previously filed in connection with the Company's Current Report on Form 8-K, dated February 9, 1998, and incorporated herein by reference. ******Filed herewith.
EX-10.17 2 EMPLOYMENT AGREEMENT - ANTHONY J. PINO 1 EXHIBIT 10.17 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is effective as of May 1, 1998 (the "Effective Date"), by and between Advance Paradigm, Inc. (the "Company") and Anthony J. Pino (the "Executive"). WHEREAS, the Company and Executive desire to enter into this Agreement pursuant to which the Company will employ Executive in the capacity of Senior Vice President of Personal Care Management, 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 Executive, and Executive hereby accepts such employment, in the capacity of Senior Vice President of Personal Care Management of the Company to act in accordance with the terms and conditions hereinafter set forth. During the term of this Agreement, Executive agrees that this position shall be his full-time employment; he shall comply with the covenants of this Agreement; he shall devote his best efforts and all of his business time, attention and skills to the successful continuation of the business of the Company; and he shall perform such duties, functions, responsibilities and authority in connection with the foregoing as are from time to time delegated to Executive by the Chief Executive Officer or Board of Directors of the Company. 2. TERM. The employment of Executive 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 Executive to the Company hereunder, the Company hereby agrees to pay or otherwise provide Executive 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. Executive shall receive an annual salary of One Hundred Fifty Thousand and 00/100 dollars ($150,000.00) with such increases thereto as may be determined by the Company 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) ADDITIONAL COMPENSATION. In addition to the Base Salary, Executive shall be entitled to receive the compensation set forth in Exhibit A attached hereto. 1 2 (c) BENEFIT PLANS. Executive 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 Executives. The foregoing notwithstanding, Executive's coverage under the Company's health benefit program will begin on the Effective Date. (d) EXPENSES. Executive 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 Executive 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, Executive 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 Executive does not interfere in any material respect with the performance by Executive of Executive's duties hereunder. Executive 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 Executive's death. If the Company determines in good faith that the Disability of the Executive has occurred (pursuant to the definition of "Disability" set forth below), it may give to the Executive written notice of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" means Executive's incapacity due to physical or mental illness which is determined, by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably), to prevent Executive's substantial and continuous performance of his obligations hereunder for a period of more than 12 weeks after its commencement or for an aggregate of sixteen weeks in any 12-month period. (b) CAUSE. The Company may terminate the Executive's employment for "Cause." For purposes of this Agreement, "Cause" means: (i) an act or acts of personal dishonesty taken by the Executive at the expense of the Company, (ii) a violation by the Executive of the Executive's obligations under this Agreement, 2 3 (iii) the indictment of the Executive of (A) a misdemeanor (other than traffic violations or similar misdemeanors) that adversely affects the Company's business, reputation or standing in the community, or (B) a felony, (iv) failure on the part of Executive to obey or carry out reasonable directives from the Executive's supervisor which are consistent with this Agreement, or (v) failure to meet reasonable, written performance criteria for the Executive's position as established by the Company from time to time, or (vi) breach of Executive's representation set forth in Section 11 of this Agreement. (c) WITHOUT CAUSE. The Company may, at its option, terminate Executive's employment without Cause at any time upon written notice to Executive. (d) GOOD REASON. Executive may terminate his employment agreement upon thirty (30) days written notice to the Company if there occurs a material change by the Company in the functions, duties or title of the Executive's position which shall reduce the level, importance or dignity of such position. (e) NOTICE OF TERMINATION. Any termination by the Company shall be communicated by Notice of Termination to the Executive hereto given in accordance with Section 12 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 Executive'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 any later date specified therein, as the case may be; provided, however, that (i) if the Executive'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 Executive of such termination, and 3 4 (ii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 4 5 5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) DEATH. If the Executive's employment is terminated by reason of the Executive's death, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than those obligations accrued or earned and vested (if applicable) by the Executive as of the Date of Termination, including, for this purpose the obligation to pay the Executive (i) the Base Salary through the Date of Termination at the rate in effect on the Date of Termination (the "Base Salary"), (ii) the amount of any bonus earned by the Executive through the Date of Termination, and (iii) any compensation previously deferred by the Executive (together with accrued interest, if any, 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 Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. (b) DISABILITY. If the Executive's employment is terminated by reason of the Executive's Disability, this Agreement shall terminate without further obligations to the Executive, other than those obligations accrued or earned and vested (if applicable) by the Executive as of the Date of Termination, including for this purpose, all Accrued Obligations. All such Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. Executive shall be entitled after the Disability Effective Date to receive disability benefits provided by the Company to members of executive management or their families in accordance with such plans, programs, practices and policies relating to disability, if any, in effect on the Disability Effective Date. (c) CAUSE. If the Executive's employment shall be terminated for Cause, the Company's obligations to the Executive shall terminate other than the obligation to pay to the Executive the Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Executive, if any, consistent with Company policy. (d) OTHER THAN FOR CAUSE, DISABILITY OR DEATH. If, the Company terminates the Executive's employment without Cause (other than as a result of death or disability), or the Executive terminates employment under Section 4(d) hereof, the Company shall continue in accordance with the Company's normal payroll procedures to pay Executive his Base Salary for a period of one (1) year from the Date of Termination (the "Severance Period"). Any amounts payable to Executive under this Section 5(d) shall be reduced and offset by the amount of any compensation received by Executive for other employment during the Severance Period. During 5 6 the Severance Period, Executive shall use his best efforts to find employment consistent with the covenants of Executive in Section 6, 7 and 8 of this Agreement. (e) STOCK OPTIONS. Executive shall have three (3) months from the Date of Termination to exercise any vested but unexercised options previously granted to Executive to purchase shares of the Company's Common Stock. Any such exercise will be in accordance with the terms and conditions of the applicable stock option plan and stock option agreement. 6. CONFIDENTIALITY. Executive 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, research and development, 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, details of customer agreements, sources of supply, Executive compensation and benefit plans, patient records and data, and other confidential information relating to the Company's policy, operating strategy, expansion strategy 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 Executive's breach. Executive 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. Executive 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 Executive or otherwise, are the exclusive property of the Company and, upon termination of Executive's employment with the Company (for whatever reason), Executive shall not take with him, but shall leave with the Company, all such computer code, programs, files, records, documents, information, data and similar items and documentation relating to the business of the Company (including all copies thereof). The obligations of this Section 6 are continuous and shall survive the termination of Executive's employment with the Company. 7. RESTRICTIONS ON COMPETITIVE EMPLOYMENT. During the term of his employment and for the one year period following termination of Executive's employment, Executive will not (as an individual, principal, agent, Executive, consultant, or otherwise), directly or indirectly, in any territory in which the Company and/or any of its affiliates does business and/or markets its products and services, engage in activities competitive with, nor render services to any firm or business engaged or about to become engaged in the Business of the Company. The Business of the Company includes, but is not limited to, all those products and services that are presently or hereafter marketed by the Company, or that are in the development stage at the time of termination of Executive's employment and are actually marketed by the Company and/or it affiliates thereafter, as well as, the following businesses: (i) the third party prescription drug claims processing business; (ii) the organization and administration of retail pharmacy networks; (iii) the design, development or marketing of or consulting as to, prescription drug benefit plans; (iv) the provision of mail service pharmacy; 6 7 (v) the collection, analysis and/or sale of data relating to prescription drug utilization; (vi) formulary management and rebate administration services; (vii) disease state management, case management or demand management services; (viii) clinical trials and survey services; (ix) personal care management, utilization review or related services; and (x) any other business in which the Company and/or any of its affiliates is then engaged as to which Executive has involvement in the course of his employment hereunder and/or acquired or received Confidential Information. 8. NONINTERFERENCE. Executive agrees that during the term of his employment and for the one-year period following the termination of Executive's employment by the Company, Executive shall not, directly or indirectly, whether as principal, agent, officer, Executive, investor, consultant, stockholder, or otherwise, alone or in association with any other person: (a) Induce or attempt to influence, directly or indirectly, any Executive 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 or supplier of the Company for the purpose of offering products or services that, directly or indirectly, compete or interfere with the Business of the Company. For purposes of this section, "prospective customer" shall mean any party who has had contact with Company or its subsidiaries within the six-month period immediately preceding termination of employment hereunder. 9. INVENTIONS AND PATENTS. Executive 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 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. Executive will promptly disclose such inventions, ideas, innovations or improvements to his supervisor or Chief Executive Officer of the Company and perform all actions reasonably requested by his supervisor or Chief Executive Officer to establish and confirm such ownership. The expense of securing any such patents shall be borne by the Company. 10. NO OTHER BUSINESS. During the term of Executive's employment, Executive agrees that he will not, directly or indirectly, except with the express written consent of the Board of Directors or the Chief Executive Officer 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, Executive, agent, consultant, stockholder (other than as the holder of less than 7 8 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. 11. EXECUTIVE'S REPRESENTATION. Other than that certain Employment Agreement entered into by Executive and United Payors and United Providers, Inc. dated January 7, 1997, Executive represents to the Company that Executive has neither entered into nor is bound by any agreement or obligation, whether written or verbal, direct or indirect, that prohibits or impedes Executive's ability to perform his obligations hereunder, including without limitation any agreement not to compete or agreement to solicit health plan payors. 12. 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 EXECUTIVE: Mr. Anthony J. Pino 1703 Captiva Drive Oldsmar, Florida 34677 IF TO THE COMPANY: Advance Paradigm, Inc. 545 E. John Carpenter Freeway, Suite 1900 Irving, TX 75062 Attention: General Counsel 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. 13. SURVIVAL. No termination of Executive's employment (for whatever reason) shall reduce or terminate Executive's covenants and agreements in Sections 6, 7 and 8 hereof. 14. 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. 15. 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. 8 9 16. 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. 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 Executive under this Agreement shall not be assignable. 17. 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. 18. 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 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. 19. COUNTERPARTS. This Agreement may be executed by the parties hereto in separate counterparts, with the same effect as if the 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. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. ADVANCE PARADIGM, INC. By: ----------------------------------------- David D. Halbert, Chief Executive Officer 9 10 EXECUTIVE -------------------------------------------- Anthony J. Pino EXHIBIT "A" FRINGE BENEFITS 1. Stock Options. Executive shall be granted an incentive option (the "Option") to purchase 30,000 shares of the Common Stock (the "Shares") of the Company. The Option shall be subject to and granted under the Company's Amended and Restated Incentive Stock Option Plan. The Option shall be vested and become exercisable as to 20% of the total Shares on each of the first five anniversaries of the Effective Date. The exercise price shall be the fair market value of the Common Stock of the Company as of the Effective Date, as determined in good faith by the Compensation Committee of the Board of the Directors. Excluding for purposes of this paragraph 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, the Option shall automatically vest immediately prior to the occurrence of the transaction giving rise to the vesting and, to the extent such transaction does not occur, the vesting shall be deemed rescinded and Executive shall again only be entitled to exercise the Option as set forth above. 2. Signing Bonus. Upon execution of this Employment Agreement, the Company shall pay Executive a signing bonus in the amount of $15,000.00. 3. Incentive Plan. Executive will be entitled to participate in the Company's executive incentive compensation plan for an annual bonus based on the Company's audited financial performance for the fiscal year as well as Executive's individual contribution to the Company. Executive's targeted bonus payment for fiscal year ending 1999 is 34% of Base Salary. The maximum bonus payment is sixty-eight percent (68%) of Base Salary. The executive incentive plan is subject to the approval of the Board of Directors of the Company. 4. Performance Bonus. COMPENSATION ($60,000 MAXIMUM) PERFORMANCE GOALS AND TARGETS ----------------------------------------------------------------------- $15,000.00 Operationalize case management department and provide case management support for disease management programs 10 11 as necessary. Provide case management support for UMW or State of Oklahoma by January 1, 1999. $15,000.00 Provide 1-3 cents of earnings per share contribution to API as a result of case management operations for fiscal year 1999. $30,000.00 Provide 4-6 cents of earnings per share to API as a result of case management operations for fiscal year 1999. 5. Car Allowance. During the term of this Agreement, Executive shall be provided a $500.00 per month car allowance. At year end, the value of this benefit will be reported as required by the IRS regulations on Executive's Form W-2. 6. Moving Expenses and Storage. The Company shall pay for Executive's packing and shipping of Executive's household goods and personal belongings to a dwelling in the vicinity of Dallas, Texas. The Company will select the mover from three (3) proposals. The Company shall only pay for one pickup and one delivery of such goods. 7. Temporary Living Accommodations. Until such time as Executive moves into his dwelling in the Dallas, Texas vicinity, but for no longer than the one (1) year period following the Effective Date, the Company shall pay up to an aggregate maximum amount of $1,500 per month for temporary housing of Executive and his immediate family members. Executive shall be reimbursed for all reasonable and ordinary housing expenses, including rent, during that time not to exceed $1,500 per month in the aggregate. Any temporary living expenses beyond this amount shall be borne by Executive. 8. New Home Purchase Assistance. During the term of this Agreement, the Company shall reimburse Executive for any origination and loan fees not to exceed the greater of $10,000 or two and one-half percent (2.5%) of the amount of the loan incurred by Executive in connection with Executive's purchase of a home in the vicinity of Dallas, Texas. 9. Executive Commuting Expenses. The Company shall reimburse Executive for reasonable and ordinary travel expenses for up to two (2) round trip, coach-class tickets per month between Dallas, Texas and Tampa, Florida during the first year of the term of this Agreement. 11 EX-11 3 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.
YEAR ENDED MARCH 31, ----------------------------------------- 1996 1997 1998 ---------- ---------- ----------- BASIC Numerator: Net income $1,013,000 $3,226,000 $ 7,931,000 Preferred stock dividends 800,000 553,000 200,000 ---------- ---------- ----------- $ 213,000 $2,673,000 $ 7,731,000 ========== ========== =========== Denominator: Weighted average common stock outstanding 4,006,578 6,264,521 8,755,754 ========== ========== =========== Net income per share $ 0.05 $ 0.43 $ 0.88 ========== ========== =========== DILUTED Numerator: Net income $1,013,000 $3,226,000 $ 7,931,000 Preferred stock dividends 800,000 -- -- ---------- ---------- ----------- $ 213,000 $3,226,000 $ 7,931,000 ========== ========== =========== Denominator: Weighted average common 4,006,578 6,264,521 8,755,754 stock outstanding Other Dilutive Securities: Series A preferred stock -- 1,250,000 -- Series B preferred stock -- 833,333 1,111,111 Options and warrants using the treasury stock method 569,687 828,273 1,484,054 ---------- ---------- ----------- Weighted average shares outstanding 4,576,265 9,176,127 11,350,919 ========== ========== =========== Net income per share $ 0.05 $ 0.35 $ 0.70 ========== ========== ===========
The conversion of the Series A preferred stock was anti-dilutive in 1996 and, therefore, was not an other dilutive security. EX-21 4 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21. Subsidiaries of the Company (state of incorporation) Advance Paradigm Mail Services, Inc. (Delaware) Advance Paradigm Data Services, Inc. (Delaware) Advance Paradigm Clinical Services, Inc. (Maryland) Innovative Medical Research, Inc. (Maryland) EX-23 5 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23. CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Form S-8 Registration Statement File No. 333-34999. Dallas, Texas, ARTHUR ANDERSEN LLP June 22, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ADVANCE PARADIGM, INC. FORM 10-K FOR THE YEAR ENDED MARCH 31, 1998. 1,000 YEAR MAR-31-1998 APR-01-1997 MAR-31-1998 58,342 0 68,582 247 2,887 131,051 16,068 5,574 154,909 102,689 0 0 0 89 50,475 154,909 476,664 476,664 455,847 455,847 10,772 0 (2,747) 12,792 4,861 7,931 0 0 0 7,931 .88 .70
EX-27.2 7 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ADVANCE PARADIGM, INC. FORM 10-K FOR THE YEAR ENDED MARCH 31, 1998. 1,000 YEAR MAR-31-1997 APR-01-1996 MAR-31-1997 51,172 0 36,461 192 1,859 89,727 9,541 3,540 108,914 65,152 0 0 0 87 42,490 108,914 256,450 256,450 245,466 245,466 7,309 0 (1,115) 4,790 1,564 3,226 0 0 0 3,226 .43 .35
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