ADVANCE PARADIGM INC, S-1/A, 1996-09-11

ADVANCE PARADIGM INC
S-1/A, 1996-09-11
MISC HEALTH & ALLIED SERVICES, NEC

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1996.

REGISTRATION NO. 333-06931
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------

AMENDMENT NO. 2
TO
FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------

ADVANCE PARADIGM, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 8099 75-2493381
(State or other jurisdiction (Primary standard industrial (I.R.S. Employer
of classification code number) Identification
incorporation or organization) No.)
</TABLE>

545 EAST JOHN CARPENTER FREEWAY
SUITE 1900
IRVING, TEXAS 75062
TELEPHONE: (214) 830-6199
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

DAVID D. HALBERT
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
545 EAST JOHN CARPENTER FREEWAY
SUITE 1900
IRVING, TEXAS 75062
TELEPHONE: (214) 830-6199
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------

COPIES TO:

<TABLE>
<S> <C>
J. KENNETH MENGES, JR., P.C. CARMELO M. GORDIAN
AKIN, GUMP, STRAUSS, HAUER & FELD, S. MICHAEL DUNN
L.L.P.
SUITE 4100 BROBECK, PHLEGER & HARRISON LLP
1700 PACIFIC AVENUE 301 CONGRESS AVENUE, SUITE 1200
DALLAS, TX 75201-4618 AUSTIN, TX 78701
(214) 969-2800 (512) 477-5495
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED (1) PER SHARE (2) OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value................ 2,977,383 Shares $13.00 $38,705,979 $13,348(3)
<FN>
(1) Includes 388,354 shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a).
(3) Includes $11,897 paid on June 26, 1996.
</TABLE>

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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.

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<PAGE>
ADVANCE PARADIGM, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K

<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION IN FORM S-1 LOCATION OR CAPTION IN PROSPECTUS
----------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus....................... Outside Front Cover Page

2. Inside Front and Outside Back Cover Pages of
Prospectus........................................... Inside Front Cover Page

3. Summary Information and Risk Factors................. Prospectus Summary; The Company; Risk Factors

4. Use of Proceeds...................................... Use of Proceeds

5. Determination of Offering Price...................... Outside Front Cover Page; Underwriting

6. Dilution............................................. Dilution

7. Selling Security Holders............................. Principal and Selling Stockholders

8. Plan of Distribution................................. Outside Front Cover Page; Underwriting

9. Description of Securities to be Registered........... Description of Capital Stock

10. Interests of Named Experts and Counsel............... Legal Matters; Experts

11. Information with Respect to the Registrant........... Prospectus Summary; The Company; Risk Factors;
Dividend Policy; Capitalization; Selected
Consolidated Financial Data; Management's Discussion
and Analysis of Financial Condition and Results of
Operations; Business; Management; Certain
Transactions; Principal and Selling Stockholders;
Description of Capital Stock; Shares Eligible for
Future Sale; Consolidated Financial Statements

12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities....................... Not Applicable
</TABLE>

<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>

SUBJECT TO COMPLETION, DATED SEPTEMBER 11, 1996

PROSPECTUS

2,589,029 SHARES

[LOGO]

COMMON STOCK

Of the 2,589,029 shares of Common Stock offered hereby, 2,000,000 shares are
being sold by the Company and 589,029 shares are being sold by the Selling
Stockholders. The Company will not receive any proceeds from the sale of shares
by the Selling Stockholders. See "Principal and Selling Stockholders."

Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $11.00 and $13.00 per share. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price. Application has been made to have the Common Stock approved for quotation
on the Nasdaq National Market under the symbol ADVP.

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THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON
PAGE 5.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total (3)..................... $ $ $ $
</TABLE>

(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.

(2) Before deducting expenses payable by the Company estimated at $500,000. Of
the proceeds to the Company, approximately $7.0 million will be used to
repay indebtedness to an affiliate of a principal stockholder of the
Company.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
388,354 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public set forth above. If all
such shares are purchased, the total Price to Public, Underwriting Discount
and Proceeds to Company will be $ , $ and $ , respectively. See
"Underwriting."

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The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1996 at the offices of the agent of
Hambrecht & Quist LLC in New York, New York.

HAMBRECHT & QUIST

MONTGOMERY SECURITIES

J.P. MORGAN & CO.

, 1996
<PAGE>
ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Common Stock
offered hereby. This Prospectus, which constitutes part of the Registration
Statement, omits certain of the information contained in the Registration
Statement and the exhibits and schedules thereto on file with the Commission
pursuant to the Securities Act and the rules and regulations of the Commission
thereunder. The Registration Statement, including exhibits and schedules
thereto, may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 and at the Commission's regional offices at 7 World
Trade Center, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, and copies may be obtained at
prescribed rates from the Public Reference Section of the Commission at its
principal office in Washington, D.C. Such documents may also be obtained through
the Web Site maintained by the Commission at http://www.sec.gov. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference.

The Company intends to furnish its stockholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing consolidated unaudited financial information.

------------------------

"Advance Rx-Registered Trademark-" and "ApotheQuery-Registered Trademark-"
are registered trademarks of the Company. All other trademarks and trade names
referred to in this Prospectus are the property of their respective owners.

------------------------

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.

THE COMPANY

Advance ParadigM, Inc. (the "Company") is a leading independent provider of
pharmacy benefit management ("PBM") services to health benefit plan sponsors,
with over nine million health plan members enrolled in the Company's programs.
The Company's primary focus is on the delivery of cost-effective, high quality,
integrated PBM services. In addition, the Company has developed and is expanding
its clinical expertise and disease management services to meet the specialized
needs of its plan members, particularly those requiring costly, long-term and
recurring therapies. These services are designed to inform and educate health
benefit plan sponsors, their members and participating physicians of nationally
recognized practice guidelines for various disease states. This encourages
physician and member conformance, improves compliance with recognized standards
and, in turn, improves member health while reducing cost of care.

The Company's PBM services include clinical and benefit design consultation,
formulary and rebate administration, electronic point-of-sale pharmacy claims
processing, mail pharmacy distribution, pharmacy network management, drug
utilization review ("DUR") and data information reporting. The Company
administers a pharmacy network that includes over 46,000 retail pharmacies
throughout the United States. In 1994, in response to increasing
cost-containment pressures from payors, the Company began to utilize its
clinical and information systems capabilities to develop health benefit
management ("HBM") services. The Company's HBM services include disease
management, recommendation of clinical guidelines, patient and physician
profiling, case finding and compliance and outcome measurement. In 1995, the
Company began marketing its HBM services to health benefit plan sponsors,
pharmaceutical manufacturers and contract research organizations, and as a
result, initiated programs with selected customers. In addition, the Company
intends to leverage its existing capabilities and relationships by acquiring
companies which have, or are developing, innovative HBM services in order to
provide a centralized care management alternative for its customers.

It is currently estimated that annual outpatient pharmaceutical expenditures
account for approximately 7% or $70 billion, of the $1 trillion health care
market, and that third-party prescriptions managed by PBMs represent a steadily
increasing proportion of this amount. In response to escalating health care
costs, cost containment efforts have led to rapid growth in managed care.
Despite these efforts, continued advances in medical technology and new drug
development have led to significant increases in drug utilization and related
costs, creating a need for more efficient, cost-effective, drug delivery
mechanisms. In addition, there is rapidly growing demand among payors for
comprehensive disease management programs as cost containment becomes more
dependent on improvements in the quality of care. According to industry sources,
approximately 77% of large employers said they would likely adopt some form of
disease management program over the next two years. HBM services are being
developed to address this demand through the use of traditional PBM services
combined with clinical expertise and sophisticated information systems.

The Company believes its clinical expertise and information systems combined
with its PBM services provide the Company with a competitive advantage in the
evolving market for HBM services. The Company's strategy is to maintain its
position as a leading independent provider of PBM services and expand its
presence as a provider of HBM services by (i) expanding its core PBM customer
base, (ii) expanding its HBM services, (iii) pursuing strategic acquisitions and
(iv) continuing to establish strategic relationships with its major customers
and suppliers.

3
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THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company............................ 2,000,000 shares
Common Stock offered by the Selling Stockholders............... 589,029 shares
Common Stock to be outstanding after the Offering.............. 7,379,500 shares(1)
Use of proceeds................................................ For retirement of debt, capital expenditures,
possible acquisitions, working capital and
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol......................... ADVP
</TABLE>

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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------- --------------------
1994 1995 1996 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................................................... $ 34,970 $ 91,306 $ 125,333 $ 25,692 $ 49,809
Cost of revenues.............................................. 32,612 85,532 117,788 24,445 47,454
Selling, general and administrative expenses.................. 2,330 4,963 6,158 1,442 1,714
Operating income.............................................. 28 811 1,387 (195) 641
Net income (loss)............................................. $ (395) $ 24 $ 1,037 $ (335) $ 669
Pro forma:(2)
Net income per share........................................ $ .25 $ .12
Weighted average shares outstanding......................... 6,956 6,956
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA (3) AS ADJUSTED (4)
--------- ------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................ $ 10,432 $ 10,432 $ 25,252
Total assets........................................................... 72,091 72,091 86,911
Long-term debt to related parties...................................... 7,000 7,000 --
Series A redeemable preferred stock.................................... 12,099 -- --
Stockholders' equity................................................... 8,966 21,065 42,885
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
SUPPLEMENTAL DATA:(5)
Pharmacy network claims processed................................................. 816 1,527 9,375
Mail pharmacy prescriptions filled................................................ 228 383 536
Estimated health plan members (at period end)..................................... 3,745 5,208 9,040
</TABLE>

- ------------------------------

(1) Excludes (i) 1,061,500 shares of Common Stock reserved for future issuance
pursuant to options outstanding under the Company's stock option plans with
a weighted average exercise price of $4.14 per share, (ii) 392,750 shares of
Common Stock underlying outstanding warrants with a weighted average
exercise price of $4.29 per share and (iii) 833,333 shares of Common Stock
issuable upon conversion of the outstanding shares of Series B Preferred
Stock, assuming an initial public offering price of $12.00 per share. See
"Management--Stock Option Plans" and "Description of Capital Stock."

(2) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.

(3) Gives effect to the automatic conversion of each share of the Series A
Preferred Stock into 250 shares of Common Stock immediately prior to the
closing of this Offering.

(4) Adjusted to give effect to the sale of Common Stock offered hereby at an
assumed initial public offering price of $12.00 and the application of the
net proceeds therefrom. See "Use of Proceeds" and "Capitalization."

(5) This data has not been audited.

------------------------------

EXCEPT AS OTHERWISE NOTED HEREIN, ALL INFORMATION IN THIS PROSPECTUS (I)
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) REFLECTS A
250-FOR-ONE STOCK SPLIT OF THE COMMON STOCK, PAR VALUE $.01 PER SHARE, OF THE
COMPANY (THE "COMMON STOCK"), AND A CORRESPONDING ADJUSTMENT IN THE CONVERSION
RATES OF THE SERIES A PREFERRED STOCK, PAR VALUE $.01 PER SHARE (THE "SERIES A
PREFERRED STOCK"), AND THE SERIES B PREFERRED STOCK, PAR VALUE $.01 PER SHARE
(THE "SERIES B PREFERRED STOCK", AND TOGETHER WITH THE SERIES A PREFERRED STOCK,
THE "PREFERRED STOCK"), TO BE EFFECTED PRIOR TO THE CLOSING OF THIS OFFERING,
(III) GIVES EFFECT TO THE MERGER OF ADVANCE HEALTH CARE, INC. WITH AND INTO THE
COMPANY, WITH THE COMPANY AS THE SURVIVING CORPORATION (THE "MERGER"), WHICH
WILL OCCUR IMMEDIATELY PRIOR TO THE CLOSING OF THIS OFFERING AND (IV) REFLECTS
THE CONVERSION OF ALL OF THE COMPANY'S OUTSTANDING SHARES OF SERIES A PREFERRED
STOCK INTO SHARES OF COMMON STOCK, WHICH WILL OCCUR UPON THE CLOSING OF THIS
OFFERING. SEE "THE COMPANY," "CAPITALIZATION," "DESCRIPTION OF CAPITAL STOCK"
AND "UNDERWRITING." REFERENCES TO "FISCAL YEAR 1994," "FISCAL YEAR 1995" AND
"FISCAL YEAR 1996" REFER TO THE COMPANY'S FISCAL YEARS ENDED MARCH 31, 1994,
1995 AND 1996, RESPECTIVELY.

4
<PAGE>
RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS. SEE
"DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS."

LIMITED OPERATING HISTORY; RECENT LOSSES. The Company has a limited
operating history, as its predecessors began offering mail pharmacy services in
1987, clinical and formulary management services in 1991 and retail pharmacy
network and claims adjudication services in 1992. Through fiscal year 1994, the
Company incurred net operating losses of $2.1 million. As of March 31, 1996, the
Company had an accumulated deficit (consisting of net operating losses and
accrued cumulative dividends on preferred stock) of approximately $3.0 million.
Although the Company was profitable in fiscal years 1995 and 1996, there can be
no assurance that such profitability will continue in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

PRICE EROSION. Over the last several years, the PBM industry has
experienced significant erosion in the reimbursement for services. During 1994
and 1995, PBMs affiliated with pharmaceutical companies began to aggressively
price their services, thereby exacerbating the decreasing margins for the
industry. There can be no assurance that price erosion will not continue or that
the Company can adequately respond to such price erosion. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; LENGTHY SALES CYCLE; FUTURE
RESULTS UNCERTAIN. The Company has experienced and may in the future experience
significant fluctuations in revenue and operating results from quarter to
quarter and from year to year due to a combination of factors, including: demand
for the Company's services; the size, timing of contract signings and
recognition of revenues from significant customer additions and losses;
increased competition; the Company's success in, and expense associated with,
developing and introducing new services; the availability of rebates from
pharmaceutical manufacturers; the length of the Company's sales cycles; the
Company's ability to increase staff to meet demand; economic conditions
generally or in specific industry segments; and other factors outside of the
control of the Company. As a result of all of these factors, there can be no
assurance that the Company will be profitable on a quarterly or annual basis.
Due to the foregoing, it is possible that the Company's operating results in
some future quarters will be below analysts' expectations, which in turn could
adversely affect the Company's stock price. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

GROWTH OF HBM SERVICES. The Company is presently expending significant
resources to develop and expand its HBM services, and the Company anticipates
that it will continue to expend significant resources in the foreseeable future.
The Company historically has experienced expense increases when introducing new
services. In addition, the Company's strategy for expanding its HBM services
entails the acquisition of HBM services providers, or other transactions with
such providers to acquire HBM services capabilities. Because the HBM services
market is in an emerging stage, there can be no assurance that the Company will
be able to consummate such acquisitions or other transactions. Moreover, there
can be no assurance that HBM services developed or acquired by the Company will
be profitable or that the demand for such services will exist in the future. See
"--Risk of Acquisitions."

EFFECTS OF CERTAIN PRICING AND REBATE LITIGATION. Groups of retail
pharmacies have filed several lawsuits against drug manufacturers and certain
PBMs in federal and state court challenging certain drug pricing practices that
they allege violate state and federal antitrust laws. The suits allege, among
other things, that certain drug manufacturers have offered, and certain PBMs
have accepted, discounts and rebates on purchases of drugs in violation of
federal antitrust laws. The federal judge overseeing the litigation recently
approved a $351 million settlement agreed to by the groups of retail pharmacies
and 11 drug manufacturers. Under the settlement, the drug manufacturers must
make the same discounts available to any institution, whether a managed care
group or a retail pharmacy, provided that such institution can cause market
share increases. The

5
<PAGE>
judge's decision does not affect the retail pharmacies' continuing lawsuits
against several other drug manufacturers who opted not to be included in the
settlement. This settlement or an adverse outcome in one or more of these cases
may result in drug manufacturers increasing the price of drugs for companies
such as the Company or the reduction or termination of drug rebate programs.
Although the Company and most of its competitors have not been named as a party
in any such lawsuits, there can be no assurance that in the future the Company
will not be named as a defendant in these or similar lawsuits challenging
pricing, rebates or other aspects of the Company's business.

MANAGEMENT OF GROWTH. The Company's business has grown rapidly in the last
three years, with total revenues increasing approximately 275% from $23.4
million in fiscal year 1994 to $87.7 million in fiscal year 1996. The Company's
recent expansion has resulted in substantial growth in the number of its
employees (from 117 at March 31, 1994 to 312 at August 31, 1996), the scope of
its operating and financial systems and the geographic distribution of its
operations and customers. This recent rapid growth has placed, and if such
growth continues will increasingly place, a significant strain on the Company's
management and operations. Accordingly, the Company's future operating results
will depend on the ability of its officers and other key employees to continue
implementing and improving its operations, customer support and financial
control systems, and to effectively expand, train and manage its employee base.
There can be no assurance that the Company will be able to manage any future
expansion successfully or provide the necessary management resources to
successfully manage its business, and any inability to do so would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" and "Management--Executive
Officers and Directors."

DEPENDENCE ON CERTAIN KEY CUSTOMERS. The Company depends on a limited
number of large customers for a significant portion of its consolidated
revenues. During fiscal year 1996, the Company's two largest customers, Blue
Cross & Blue Shield of Texas, Inc. ("BCBS of Texas") and United Insurance
Company, Inc., accounted for approximately 11% and 16%, respectively, of the
Company's consolidated revenues. During this period, the Company's five largest
customers accounted for approximately 48% of the Company's revenues. Loss of the
Company's accounts with BCBS of Texas or United Insurance Company, Inc., or of
any other customers which account for a substantial portion of the Company's
business, could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business-- Customers."

POTENTIAL DECLINE IN REVENUE. More than 20% of the Company's consolidated
revenues is attributable to arrangements with drug manufacturers relating to
volume-based rebate payments as well as fees charged for other products and
services. The loss of the Company's account with any of the major drug
manufacturers under such arrangements or the failure of the Company to meet
certain conditions under such arrangements could have a material adverse effect
upon the Company's business, operating results and financial condition. See
"Business--Services--Pharmaceutical Benefit Management." Over the next few years
as patents expire covering many brand name drugs that currently have substantial
market share, generic products will be introduced that may substantially reduce
the market share of the brand name drugs. Historically, manufacturers of generic
drugs have not offered rebates on their drugs. In addition, the Company is
unable to predict the effect on rebate arrangements that might result if the
recent trend of consolidations and alliances in the drug and managed care
industry continues, particularly between pharmaceutical manufacturers and PBMs,
or that might result from an adverse outcome in the lawsuits filed by retail
pharmacies against drug manufacturers and PBMs. See "--Effects of Certain
Pricing and Rebate Litigation." The Company provides rebate contracting services
for approximately two million lives on behalf of other PBMs. If these other PBMs
choose to perform these services for themselves or seek alternative suppliers,
the Company's revenues with respect to rebate contracting services would decline
which could have a material adverse effect on the Company's business, operating
results and financial condition. There can be no assurance that the PBMs for
whom the Company provides rebate contracting services will not soon seek
alternative suppliers or acquire the capabilities to perform these services for
themselves.

CONSOLIDATION AMONG CUSTOMERS. Over the past several years, insurance
companies, HMOs and managed care companies have experienced significant
consolidation. The Company's managed care customers have been and may continue
to be subject to consolidation pressures. Although the Company may benefit from
certain consolidations in the industry, there can be no assurance that
additional customers will not be lost as a result of

6
<PAGE>

acquisitions and no assurance that such activity will not have a material
adverse effect upon the Company's business, operating results and financial
condition. Consolidation, strategic alliances and in general continued intense
competition in the PBM industry have resulted in the past, and may result in the
future, in the loss of certain of the Company's customers. There can be no
assurance that new and renewal contracts will offset the revenues lost from
customers electing not to renew their contracts with the Company. The Company's
contracts with its customers typically provide for three-year terms, with
automatic 12-month renewals thereafter unless terminated by either party to any
given contract upon written notice delivered prior to the annual renewal date.
See "--Dependence on Certain Key Customers" and "Business--Competition."

COMPETITION. The PBM industry has become very competitive. The Company's
competitors include large, profitable and well established companies with
substantially greater financial, marketing and other resources than the Company.
Several competitors in the PBM business are owned by pharmaceutical
manufacturers and may possess purchasing and other advantages over the Company
by virtue of such ownership. Price competition in the PBM market is increasing
and has resulted in reduced margins for many PBMs, including the Company. The
Company believes that the primary competitive factors include: independence from
drug manufacturers and payors; the quality, scope and costs of products and
services offered to insurance companies, HMOs, employers and other sponsors of
health benefit plans ("plan sponsors" or "customers") and plan participants;
responsiveness to customers' demands; the ability to negotiate favorable rebates
and volume discounts from drug manufacturers; the ability to identify and apply
effective cost containment programs utilizing clinical strategies; the ability
to develop formularies; the ability to market PBM and HBM services to health
benefit plan sponsors; a strong managed care customer base which supports the
development of HBM products and services; and the commitment to providing
flexible, clinically oriented services to customers. There can be no assurance
that the Company will continue to remain competitive with respect to the
foregoing factors or successfully market integrated PBM or HBM services to new
customers. There can be no assurance that consolidation and alliances within the
PBM industry will not adversely impact the operations and prospects for
independent PBMs such as the Company. See "Business--Competition."

RISK OF ACQUISITIONS. Part of the Company's strategy for growth includes
acquisitions of complementary services, technologies or businesses that could
allow the Company to offer a set of integrated services, in addition to PBM
services, to better serve the needs of health benefit plan sponsors. The
Company's ability to expand successfully through acquisitions depends on many
factors, including the successful identification and acquisition of services,
technologies or businesses and management's ability to effectively integrate and
operate the acquired services, technologies or businesses. There is significant
competition for acquisition opportunities in the PBM and HBM industries. The
Company may compete for acquisition opportunities with other companies that have
significantly greater financial and management resources. There can be no
assurance that the Company will be successful in acquiring or integrating any
such services, technologies or businesses or once acquired, that the Company
will be successful in selling or integrating such services, technologies or
businesses. See "Business--Strategy."

DEPENDENCE ON KEY MANAGEMENT. The Company believes that its continued
success will depend to a significant extent upon the continued services of its
senior management, in particular David D. Halbert, Chairman of the Board, Chief
Executive Officer and President of the Company. The loss of the services of Mr.
D. Halbert or other persons in senior management could have a material adverse
effect on the Company's business. The Company maintains a key-person life
insurance policy on Mr. D. Halbert. The Company has entered into an employment
agreement with each of Drs. Filipek and Wright and Messrs. Sattler and
Cinquegrana. See "Management--Employment Agreements."

INTANGIBLE ASSETS. At June 30, 1996, approximately $13.0 million, or 18%
(approximately 15% after giving pro forma effect to this Offering), of the
Company's total assets consisted of intangible assets. These intangible assets
are being amortized over a period of 40 years. In the event of any sale or
liquidation of the Company, there can be no assurance that the value of such
intangible assets will be realized. In addition, any significant decrease in the
value of such intangible assets could have a material adverse effect on the
Company's business, operating results and financial condition. See Note 2 of
Notes to Consolidated Financial Statements.

7
<PAGE>

GOVERNMENT REGULATION. The PBM industry is subject to extensive federal and
state laws and regulations and compliance with such laws and regulations imposes
significant operational requirements for the Company. The regulatory
requirements with which the Company must comply in conducting its business vary
from state to state. Management believes that the Company is in substantial
compliance with all existing statutes and regulations material to the operation
of its business. The impact of future legislation and regulatory changes on the
Company's business cannot be predicted, and there can be no assurance that the
Company will be able to obtain or maintain the regulatory approvals required to
operate its business. From time to time, retail pharmacists have expressed
opposition to mail order pharmacies. Retail pharmacies, state pharmacy
associations or state boards of pharmacies in some states have attempted to
secure the enactment or promulgation of statutes or regulations that could have
the effect of hindering or in some cases prohibiting the delivery of
prescription drugs into such state by a mail service pharmacy. The Company is
also aware of a Federal Trade Commission investigation relating to the
acquisition of companies in the PBM industry, although the Company is not, to
its knowledge, the subject of any such investigation. There can be no assurance
that such legislation or regulation, if subsequently adopted, or investigation,
if commenced, would not have a material adverse effect on the Company's
business, operating results and financial condition. See "Business--Government
Regulation."

DEVELOPMENTS IN THE HEALTH CARE INDUSTRY. The health care industry is
subject to changing political, economic and regulatory influences that may
affect the procurement practices and operation of health care organizations. The
Company's services are designed to function within the structure of the health
care financing and reimbursement system currently being used in the United
States. The Company believes that the commercial value and appeal of its
services may be adversely affected if the current health care financing and
reimbursement system were to be materially changed. During the past several
years, the United States health care industry has been subject to an increase in
governmental regulation of, among other things, reimbursement rates. Certain
proposals to reform the United States health care system are currently under
consideration by Congress. These proposals may increase governmental involvement
in health care and otherwise change the operating environment for the Company's
customers. Health care organizations may react to these proposals and the
uncertainty surrounding such proposals by curtailing or deferring investments in
cost containment tools and related technology such as the Company's services.
The Company cannot predict what effect, if any, such factors might have on its
business, operating results and financial condition. In addition, many health
care providers are consolidating to create integrated health care delivery
systems with greater regional market power. As a result, these emerging systems
could have greater bargaining power, which may lead to price erosion of the
Company's services. The failure of the Company to maintain adequate price levels
would have a material adverse effect on the Company's business, operating
results and financial condition. Other legislative or market-driven reforms
could have unpredictable effects on the Company's business, operating results
and financial condition. See "Business--Government Regulation."

PROFESSIONAL AND GENERAL LIABILITY INSURANCE. Various aspects of the
Company's business, including the dispensing of pharmaceutical products, may
subject it to litigation and liability for damages. While the Company maintains
and intends to maintain professional and general liability insurance coverage,
there can be no assurance that the Company will be able to maintain such
insurance in the future or that such insurance will be available on acceptable
terms or will be adequate to cover any or all potential product or professional
liability claims. A successful product or professional liability claim in excess
of the Company's insurance coverage could have a material adverse effect upon
the Company's business, operating results and financial condition. See
"Business--Liability Insurance."

TAX RISKS ASSOCIATED WITH THE MERGER. Immediately prior to the Offering,
Advance Health Care, Inc. and the Company will consummate the Merger. Although
the Merger will be structured as a tax free event, if the Company were to be
audited, there can be no assurance that the Internal Revenue Service would not
successfully challenge the tax free treatment, which could have a material
adverse effect upon the Company's business, operating results and financial
condition. See "The Company."

NO PRIOR PUBLIC MARKET FOR COMMON STOCK; DETERMINATION OF OFFERING PRICE;
POSSIBLE VOLATILITY OF STOCK PRICE. Prior to this Offering, there has been no
public market for the Company's Common Stock, and there can be no assurance that
following this Offering an active trading market will develop or be sustained.
The initial public offering price will be determined by negotiations between the
Company and the Representatives of the

8
<PAGE>
Underwriters. For a description of the factors considered in determining the
initial public offering price, see "Underwriting." In addition, the stock market
historically has experienced volatility which has particularly affected the
market prices of securities of many companies in the health care industry.

ANTI-TAKEOVER EFFECT OF CHARTER PROVISIONS AND SERIES B PREFERRED
STOCK. Certain provisions of the Company's Amended and Restated Certificate of
Incorporation (the "Restated Certificate") and Bylaws, certain sections of the
Delaware General Corporation Law, the ability of the Board of Directors to issue
shares of Preferred Stock and to establish the voting rights, preferences and
other terms thereof without further action by the stockholders, the division of
the Board of Directors into three classes and the voting terms of the Series B
Preferred Stock may be deemed to have an anti-takeover effect and may discourage
takeover attempts not first approved by the Board of Directors and also could
delay or frustrate the removal of incumbent directors, even if such takeover or
removal would be beneficial to stockholders. These provisions also could
discourage or make more difficult a merger, tender offer or proxy contest, even
if such events would be beneficial to the interests of stockholders. The
Delaware General Corporation Law imposes restrictions upon certain acquirors
(including their affiliates and associates) of 15% or more of the Company's
Common Stock. See "Management--Board of Directors and Committees of the Board"
and "Description of Capital Stock--Preferred Stock."

SHARES ELIGIBLE FOR FUTURE SALE. Future sales of Common Stock in the public
market could adversely affect the prevailing market price of the Common Stock.
Of the 7,379,500 shares of Common Stock outstanding following completion of this
Offering, the 2,589,029 shares being sold hereby have been registered under the
Securities Act, and will be freely tradeable without restriction or registration
under the Securities Act, except for shares that may be acquired by "affiliates"
of the Company. The remaining 4,790,471 shares of Common Stock were issued and
sold by the Company in private transactions and may be publicly sold only if
registered under the Securities Act or sold in accordance with an exemption from
registration such as Rule 144 under the Securities Act. Beginning on ,
upon expiration of 180-day lock-up agreements entered into in connection with
this Offering, all of such shares of restricted Common Stock will be eligible
for sale. The 833,333 shares of Common Stock issuable upon the conversion of the
Series B Preferred Stock (assuming an initial public offering price of $12.00
per share) will become eligible for sale under Rule 144 on June 25, 1998, and
392,750 shares of Common Stock issuable upon the exercise of outstanding
warrants will be eligible for sale under Rule 144 following the effective date
of this Offering. In addition, of the 1,061,500 shares of Common Stock issuable
upon the exercise of outstanding options, approximately 627,100 shares of Common
Stock are immediately issuable upon the exercise of vested options and will
become eligible for sale, if such options are exercised, after the date of this
Prospectus. The holders of such options will enter into 180-day lock-up
agreements in connection with this Offering. Substantially all of the Company's
current stockholders have the right to include in any registration, subject to
certain restrictions, a total of 6,600,000 shares of Common Stock for offer and
sale to the public at any time commencing six months after the date of this
Prospectus. See "Shares Eligible for Future Sale."

BENEFIT OF THE OFFERING TO AFFILIATES. Certain parties affiliated with the
Company will receive immediate and substantial financial benefits as a result of
the Offering. Common Stock beneficially owned by the Company's executive
officers and directors and their respective affiliates would have a market value
of approximately $51.7 million based upon an assumed initial public offering
price of $12.00 per share. In addition, Halbert & Associates, Inc., a company
owned by Messrs. David D. Halbert and Jon S. Halbert who are also executive
officers and directors of the Company, will receive proceeds from the sale of
shares of Common Stock in this Offering of $748,000, based on an assumed initial
public offering price of $12.00 per share and before deducting underwriting
discounts and commissions. As members of the Board of Directors of the Company,
Messrs. D. Halbert and J. Halbert participated in the deliberations of the Board
of Directors with respect to various matters concerning the Offering. Of the net
proceeds of this Offering, approximately $7.0 million will be used to retire the
note payable to Whitney Subordinated Debt Fund, L.P., an affiliate of J.H.
Whitney & Co., the largest stockholder of the Company (the "Whitney Note"). See
"Use of Proceeds," "Management," "Certain Transactions" and "Principal and
Selling Stockholders."

CONTROL BY EXISTING STOCKHOLDERS. After this Offering, officers and
directors of the Company and their affiliates will own beneficially
approximately 47.0% of the Company's outstanding Common Stock (approximately
45.1% if the Underwriters' over-allotment option is exercised in full). As a
result, these stockholders may

9
<PAGE>
have the ability to control the Company and influence its affairs and the
conduct of its business. Such concentration of ownership may have the effect of
delaying, deferring or preventing a change in control of the Company. See
"Principal and Selling Stockholders" and "Description of Capital Stock--Voting
Agreement."

IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of Common Stock in this
Offering will experience immediate and substantial dilution in net tangible book
value of $7.94 per share, assuming an initial public offering price of $12.00
per share. See "Dilution."

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical facts included in this Prospectus, including without limitation,
statements under "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" regarding the
Company's financial position, the Company's business strategy and the plans and
objectives of management of the Company for future operations, are
forward-looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations are disclosed under "Risk Factors" and elsewhere in this
Prospectus, including without limitation in conjunction with the forward-looking
statements included in this Prospectus. All subsequent written and oral
forwarding-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by this section.

10
<PAGE>
THE COMPANY

The Company was incorporated in Delaware in July 1993 as a wholly owned
subsidiary of Advance Health Care, Inc. ("Advance Health Care"). Currently, the
Company has three wholly owned subsidiaries, Advance ParadigM Mail Services,
Inc. ("Advance Mail"), Advance ParadigM Data Services, Inc. ("Advance Data") and
Advance ParadigM Clinical Services, Inc., formerly known as ParadigM Pharmacy
Management, Inc. ("Advance Clinical"). Advance Mail was incorporated in 1986 and
began operations in early 1987 as a mail order pharmacy. In 1992, Advance Data
was incorporated to provide plan participants an alternative for purchasing
prescriptions through a network of retail pharmacies and to provide claims
adjudication services. In August 1993, Advance Health Care contributed all of
the capital stock of Advance Data and Advance Mail to the Company. In December
1993, the Company acquired Advance Clinical, formerly a wholly owned subsidiary
of BCBS of Maryland, Inc. ("BCBS of Maryland"). Immediately prior to the
Offering, Advance Health Care will merge with and into the Company, with the
Company being the surviving corporation. Immediately prior to the Merger,
Advance Health Care will repay certain indebtedness held by several of its
stockholders by issuing shares of its common stock to the holders of such
indebtedness. In addition, immediately prior to the Merger, Advance Health Care
will distribute to its stockholders its assets and liabilities, none of which
are related to the business of the Company. After the repayment of its
outstanding indebtedness and the spin-off of its other assets and liabilities,
Advance Health Care will have no operations, or known liabilities or assets of
its own other than its investment in the Company. The Merger will have no effect
on the Company's financial position or results of operations and is intended to
qualify as a tax free reorganization. See "Certain Transactions -- Merger of
Advance Health Care With and Into the Company." The Company's executive offices
are located at 545 East John Carpenter Freeway, Suite 1900, Irving, Texas 75062,
and its phone number is (214) 830-6199.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby are estimated to be $21,820,000 ($26,154,035 if the
Underwriters exercise the over-allotment option in full), at an assumed initial
public offering price per share of $12.00, after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company. Of the net proceeds of this Offering, approximately $7.0 million will
be used to retire the Whitney Note, $2.9 million will be used to provide further
automation of the Company's Richardson, Texas facility, including capital
improvements and equipment, and $1.8 million will be used to expand the
Company's claims processing system. The Whitney Note was issued by the Company
on December 8, 1993 in the original principal amount of $7.0 million to finance
the acquisition of Advance Clinical and has a term of seven years with a fixed
rate of interest of 10.1% per annum. See "Certain Transactions." The balance of
the net proceeds, approximately $10.1 million, will be used to fund possible
acquisitions of similar or complementary businesses and general corporate
purposes. Although the Company has had preliminary discussions from time to time
regarding possible acquisition opportunities, the Company has no agreements,
understandings or commitments with respect to any such opportunity, nor has the
Company allocated any portion of the net proceeds for any specific acquisition.
There can be no assurance that any future acquisitions will be consummated.
Pending such uses, the Company intends to invest the net proceeds in short-term
U.S. government securities, high-grade commercial paper, short-term, interest
bearing securities, money market funds and bank deposits or other similar
instruments.

DIVIDEND POLICY

The Company has never declared or paid any dividends on its Common Stock.
The Company currently intends to retain future earnings, if any, to fund
development and growth of its business and does not anticipate paying any
dividends on its Common Stock in the foreseeable future.

11
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company at June 30,
1996, (i) on an actual basis, adjusted to reflect the 250-for-one stock split to
be effected prior to the Offering, (ii) on a pro forma basis to reflect the
automatic conversion of each share of Series A Preferred Stock into 250 shares
of Common Stock and the consummation of the Merger, both of which will occur
immediately prior to or concurrently with the closing of the Offering and (iii)
on a pro forma as adjusted basis to reflect the application of the estimated net
proceeds from the sale of the 2,000,000 shares of Common Stock offered hereby at
an assumed initial public offering price of $12.00 per share. This table should
be read in conjunction with the Company's Consolidated Financial Statements and
the Notes thereto, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt to related parties............................................. $ 7,000 $ 7,000 $ --
Series A redeemable preferred stock, $.01 par value, 10,000 shares authorized,
10,000 shares issued and outstanding, none outstanding pro forma or pro forma
as adjusted.................................................................. 12,099 -- --
Stockholders' equity:
Series B Preferred Stock, $.01 par value, 3,000 shares authorized, 2,597
shares issued and outstanding.............................................. -- -- --
Common Stock, $.01 par value, 7,500,000 shares authorized, 3,130,500 shares
outstanding, 5,379,500 shares outstanding pro forma, 7,379,500 shares
outstanding pro forma as adjusted (1)...................................... -- -- --
Additional paid-in capital.................................................. 11,518 23,617 45,437
Accumulated deficit......................................................... (2,552) (2,552) (2,552)
--------- ----------- -----------
Total stockholders' equity................................................ 8,966 21,065 42,885
--------- ----------- -----------
Total capitalization.................................................... $ 28,065 $ 28,065 $ 42,885
--------- ----------- -----------
--------- ----------- -----------
</TABLE>

- ------------------------

(1) Outstanding shares exclude (i) 1,061,500 shares of Common Stock reserved for
future issuance pursuant to options outstanding under the Company's stock
option plans with a weighted average exercise price of $4.14 per share, (ii)
392,750 shares of Common Stock underlying outstanding warrants with a
weighted average exercise price of $4.29 per share and (iii) 833,333 shares
of Common Stock issuable upon conversion of the outstanding shares of Series
B Preferred Stock, assuming an initial public offering price of $12.00 per
share. See "Management--Stock Option Plans," "Description of Capital Stock"
and Note 10 of Notes to Consolidated Financial Statements.

12
<PAGE>
DILUTION

The pro forma net tangible book value of the Common Stock of the Company as
of June 30, 1996, after giving effect to the 250-for-one stock split of the
Common Stock, the automatic conversion of the Series A Preferred Stock to Common
Stock and the consummation of the Merger, all of which will occur immediately
prior to or concurrently with the closing of this Offering, was $8,106,000, or
$1.51 per share. "Pro forma net tangible book value" per share of Common Stock
represents the amount of the Company's total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the sale of the 2,000,000 shares of Common Stock offered hereby
at an assumed initial public offering price of $12.00 per share resulting in
estimated net proceeds to the Company of approximately $21,820,000, the pro
forma net tangible book value of the Company as of June 30, 1996, would have
been $29,926,000, or $4.06 per share. This represents an immediate increase in
pro forma net tangible book value of $2.55 per share to the existing
stockholders and an immediate dilution of $7.94 per share to new investors
purchasing shares in the Offering. The following table illustrates the per share
dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $ 12.00
Pro forma net tangible book value per common share prior to the
Offering........................................................ $ 1.51
Increase per share attributable to new investors................. 2.55
---------
Pro forma net tangible book value per common share after the
Offering.......................................................... 4.06
---------
Dilution per share to new investors................................ $ 7.94
---------
---------
</TABLE>

The following table summarizes, on a pro forma basis as of June 30, 1996,
the number of shares purchased from the Company, the total consideration paid
and the average price per share paid by the existing stockholders and by new
investors purchasing shares in the Offering (at an assumed initial public
offering price of $12.00 per share) before deduction of underwriting discounts
and estimated expenses related to the Offering:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 5,379,500 72.9% $ 13,617,000 36.2% $ 2.53
New investors........................... 2,000,000 27.1 24,000,000 63.8 12.00
---------- ----- ------------- -----
Total............................... 7,379,500 100.0% $ 37,617,000 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>

The foregoing computations assume no exercise of the Underwriters'
over-allotment option or of any outstanding options granted pursuant to the
Company's existing stock option plans, no exercise of outstanding warrants, and
no conversion of the Series B Preferred Stock. To the extent such options and
warrants are exercised, there will be further dilution to the new investors. As
of June 30, 1996, there were outstanding (i) options to purchase 1,061,500
shares of Common Stock with a weighted average exercise price of $4.14 per share
and (ii) warrants to purchase 392,750 shares of Common Stock with a weighted
exercise price of $4.29 per share. See "Management--Stock Option Plans" and
"Shares Eligible for Future Sale."

13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following tables summarize certain selected consolidated financial data,
which should be read in conjunction with the Company's Consolidated Financial
Statements, and the Notes related thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," included elsewhere
herein. The selected consolidated financial data of the Company as of and for
each of the years in the three-year period ended March 31, 1996, have been
derived from the Consolidated Financial Statements that have been audited by
Arthur Andersen LLP, independent public accountants, which are included
elsewhere in this Prospectus and are qualified by reference to such Consolidated
Financial Statements. The selected consolidated financial data as of and for
each of the years ended March 31, 1992 and March 31, 1993 are derived from
consolidated financial statements of the Company that have been audited by
Arthur Andersen LLP and which have not been included in this Prospectus. The
selected consolidated financial data as of and for the three months ended June
30, 1995 and 1996 have been derived from the Company's unaudited consolidated
financial statements and, in the opinion of management, include all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of the financial position and results of operations for these
periods. The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto included elsewhere
in this Prospectus.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------------------------------ --------------------
1992 1993 1994 1995 1996 1995 1996
--------- --------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 7,045 $ 11,867 $ 34,970 $ 91,306 $ 125,333 $ 25,692 $ 49,809
Cost of operations:
Cost of revenues................. 6,761 11,196 32,612 85,532 117,788 24,445 47,454
Selling, general and
administrative expenses......... 616 1,091 2,330 4,963 6,158 1,442 1,714
--------- --------- --------- --------- ---------- --------- ---------
Total cost of operations....... 7,377 12,287 34,942 90,495 123,946 25,887 49,168
--------- --------- --------- --------- ---------- --------- ---------
Operating income (loss)............ (332) (420) 28 811 1,387 (195) 641
Interest income.................... -- -- -- 91 366 39 205
Interest expense................... (23) (26) (423) (878) (716) (179) (177)
--------- --------- --------- --------- ---------- --------- ---------
Net income (loss).................. $ (355) $ (446) $ (395) $ 24 $ 1,037 $ (335) $ 669
--------- --------- --------- --------- ---------- --------- ---------
--------- --------- --------- --------- ---------- --------- ---------
Pro forma: (1).....................
Net income per share............. $ .25 $ .12
Weighted average shares
outstanding..................... 6,956 6,956
</TABLE>

<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................. $ 220 $ (465) $ 769 $ (453) $ 316 $ 10,432
Total assets..................................... 1,296 1,761 29,152 37,288 58,905 72,091
Long-term debt to related parties................ -- -- 6,928 7,000 7,000 7,000
Redeemable preferred stock....................... -- -- 10,256 11,076 11,896 12,099
Stockholders' equity (deficit)................... 436 (9) (936) (1,732) (1,498) 8,966
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
SUPPLEMENTAL DATA: (2)
Pharmacy network claims processed.................................................. 816 1,527 9,375
Mail pharmacy prescriptions filled................................................. 228 383 536
Estimated health plan members (at period end)...................................... 3,745 5,208 9,040
</TABLE>

- ------------------------

(1) Computed on the basis described in Note 2 of Notes to Consolidated Financial
Statements.
(2) This data has not been audited and is unavailable for fiscal years 1992 and
1993.

14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company has historically generated revenues from a number of sources
including its mail pharmacy, its retail pharmacy network and claims adjudication
services and its clinical services. In addition, during the fiscal year ended
March 31, 1996 ("fiscal year 1996"), the Company began to generate revenues from
its newly developed HBM services.

The Company derives mail pharmacy revenues from the sale of pharmaceuticals
to members of health benefit plans sponsored by the Company's customers. These
revenues include ingredient costs plus a dispensing fee. In 1992, the Company
established a retail pharmacy network which currently consists of over 46,000
retail pharmacies nationwide, and began to provide on-line claims adjudication
services. The Company records administrative fees as revenues derived from
claims adjudication services, and excludes ingredient costs of the
pharmaceuticals dispensed through its network. In 1993, the Company acquired
Advance Clinical, formerly ParadigM Pharmacy Management, Inc., a subsidiary of
BCBS of Maryland, and began to offer clinical services to its customers. The
Company's clinical services revenues have historically been derived primarily
from direct rebate and volume discounts from pharmaceutical manufacturers. Cost
of revenues includes product costs and other direct costs associated with the
dispensing of prescription drugs through the mail pharmacy, retail pharmacy
network and claims adjudication services and clinical services.

The acquisition of Advance Clinical has provided the Company with access to
large managed care organizations creating an opportunity for the Company to
cross-sell its mail and claims processing services. In addition, the Company has
continued to add additional managed care accounts. In order to accommodate the
large volume and complex reporting requirements of its managed care customers,
the Company acquired a highly sophisticated, state-of-the-art claims processing
system, which management believes will accommodate volume levels significantly
higher than those currently maintained by the Company.

In response to the growing demand among payors for comprehensive disease
management programs, the Company recently established its HBM services. The
Company has developed a comprehensive health care database, integrating its
customers' pharmacy claims with applicable medical and laboratory claims data,
in order to perform meaningful outcomes studies to develop disease management
programs. These programs have served as an additional source of revenue for the
Company in fiscal year 1996. Management believes that the Company will be able
to cross-sell these and other services to its existing customers, and that HBM
services will constitute a significantly increased proportion of the Company's
total revenues in the future.

As a result of its competitive environment, the Company is continuously
susceptible to margin pressures. In recent years, competing PBM providers owned
by large pharmaceutical manufacturers began aggressively pricing their products
and services. This aggressive pricing resulted in reduced margins for the
Company's traditional PBM services. While the environment for the provision of
traditional services remains competitive, margins realized for the provision of
these services have stabilized in recent quarters.

Except for the historical information contained herein, the discussion in
this Prospectus contains certain forward-looking statements that involve risks
and uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed under "Risk Factors," as
well as those discussed elsewhere herein.

15
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth certain consolidated financial data of the
Company, for the periods indicated, as a percentage of revenues.

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------------- -----------------------
1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues......................................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0%
Cost of operations:
Cost of revenues............................... 93.2 93.7 94.0 95.1 95.3
Selling, general and administrative expenses... 6.7 5.4 4.9 5.6 3.5
----- ----- ----- ----- -----
Total cost of operations..................... 99.9 99.1 98.9 100.7 98.8
----- ----- ----- ----- -----
Operating income (loss).......................... 0.1 0.9 1.1 (0.7) 1.2
Interest income (expense)........................ (1.2) (0.9) (0.3) (0.6) 0.1
----- ----- ----- ----- -----
Net income (loss)................................ (1.1)% 0.0 % 0.8 % (1.3)% 1.3%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>

THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995

REVENUES. Revenues for the three months ended June 30, 1996 increased by
$24.1 million, or 94%, compared to revenues for the three months ended June 30,
1995. Approximately 66% of the increase in revenues was attributable to an
eight-fold increase in the number of pharmacy claims processed during the
period. Approximately 20% of the increase was attributable to additional sales
of the Company's mail pharmacy services, resulting from a 44% increase in the
number of mail prescriptions dispensed. Approximately 14% of the increase in
revenues resulted from an increase in clinical services revenues derived from
formulary and disease management services.

COST OF REVENUES. Cost of revenues for the three months ended June 30, 1996
increased by $23.0 million, or 94%, compared to the same period in 1995. This
increase was attributable primarily to the expanded volume in the Company's mail
pharmacy and the additional costs associated with the Company's claims
processing growth. As a percentage of revenues, cost of revenues remained
relatively constant at 95%.

SELLING, GENERAL AND ADMINSTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended June 30, 1996 increased by
$272,000, or 19%, compared to the same period in 1995. This increase was the
result of the Company's expansion of its sales and marketing capabilities, as
well as increases in administrative and support staff levels and salaries and
benefits in response to volume growth in all services. As a percentage of
revenues, selling, general and administrative expenses decreased from 6% for the
three months ended June 30, 1995 to 4% in the same period in 1996 as the result
of greater economies of scale. The Company believes that if revenues continue to
increase at the rate experienced to date, selling, general and administrative
expenses will generally decrease as a percentage of revenues in the future.

INTEREST INCOME AND INTEREST EXPENSE. Interest expense, net of interest
income, for the three months ended June 30, 1996 decreased by $168,000 compared
to the same period in 1995. The decline resulted from cash management programs
which utilized the Company's short-term excess cash to generate interest income
through investment in money market funds.

INCOME TAXES (BENEFITS). The Company had income tax loss carryforwards
available to offset income generated for the three months ended June 30, 1996,
and as a result, incurred no federal income tax expense.

FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995

REVENUES. Revenues for fiscal year 1996 increased by $34.0 million, or 37%,
compared to revenues for the fiscal year ended March 31, 1995 ("fiscal year
1995"). Approximately 39% of the increase was attributable to additional sales
of the Company's mail pharmacy services, resulting from a 40% increase in the
number of mail prescriptions dispensed. Approximately 40% of the increase in
revenues was attributable to a six-fold increase in

16
<PAGE>

the number of pharmacy claims processed during the fiscal year. Approximately
21% of the increase in revenues resulted from an increase in clinical services
revenues derived from formulary and disease management services.

COST OF REVENUES. Cost of revenues for fiscal year 1996 increased by $32.3
million, or 38%, compared to the prior fiscal year. This increase was
attributable primarily to the expanded volume in the Company's mail pharmacy and
the additional costs associated with the Company's claims processing growth. As
a percentage of revenues, cost of revenues remained relatively constant at
approximately 94% for both fiscal year periods.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal year 1996 increased by $1.2 million, or 24%,
compared to fiscal year 1995. This increase was the result of the Company's
expansion of its sales and marketing activities, as well as increases in
administrative and support staff levels and salaries and benefits in response to
volume growth in all services. As a percentage of revenues, selling, general and
administrative expenses remained relatively constant at approximately 5% for
both fiscal year periods.

INTEREST INCOME AND INTEREST EXPENSE. Interest expense, net of interest
income, for fiscal year 1996 declined by $437,000, or 56%, compared to fiscal
year 1995. The decline resulted from cash management programs which utilized the
Company's short-term excess cash to generate interest income through investment
in money market funds.

INCOME TAXES (BENEFITS). The Company had income tax loss carryforwards as
of March 31, 1996 of approximately $1.9 million, and as a result, incurred no
federal income tax expense. The Company anticipates an effective tax rate of
approximately 39% once the tax carryforwards are fully utilized.

FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994

REVENUES. Revenues for fiscal year 1995 increased by $56.3 million, or
161%, compared to revenues for the fiscal year ended March 31, 1994 ("fiscal
year 1994"). Approximately 51% of the increase resulted from the increase in
clinical services revenue attributable to a full year of operations from the
acquisition of Advance Clinical, and increased enrollment of lives under
formulary management programs. Approximately 26% of the increase in revenues was
attributable to an 87% increase in the number of pharmacy claims processed
during the fiscal year. The remaining 23% of the increase was attributable to
additional sales of the Company's mail pharmacy services. This increase in mail
pharmacy revenue resulted from a 68% increase in the number of mail
prescriptions dispensed. Revenues for fiscal year 1994 included four months of
Advance Clinical revenue compared with twelve months in fiscal year 1995.

COST OF REVENUES. Cost of revenues for fiscal year 1995 increased by $52.9
million, or 162%, compared to fiscal year 1994. This increase was attributable
primarily to the expanded volume in the Company's mail pharmacy and claims
processing services, plus the additional costs associated with the inclusion of
a full year of operations from the acquisition of Advance Clinical. As a
percentage of revenues, cost of revenues increased from 93% in fiscal year 1994
to 94% in fiscal year 1995. This increase resulted primarily from the Company's
relocation of its mail pharmacy operations from a 6,000 square foot facility to
a 38,000 square foot dispensing facility in December 1993. In addition, the
Company expanded its claims processing capabilities to accommodate additional
growth from its managed care customers.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for fiscal year 1995 increased by $2.6 million, or 113%,
compared to fiscal year 1994. This increase was the result of the Company's
expansion of its sales and marketing capabilities, as well as increases in
administrative and support staff levels and salaries and benefits in response to
volume growth in all product and service areas. Selling, general and
administrative expenses in fiscal year 1995 also include a full year of clinical
operations of Advance Clinical. As a percentage of revenues, selling, general
and administrative expenses decreased from 7% in fiscal year 1994 to 5% in
fiscal year 1995 as the result of greater economies of scale.

INTEREST INCOME AND INTEREST EXPENSE. Interest expense, net of interest
income, for fiscal year 1995 increased by $364,000, or 86%, compared to fiscal
year 1994. The increase resulted from indebtedness incurred in December 1993 in
connection with the acquisition of Advance Clinical.

17
<PAGE>
SELECTED QUARTERLY FINANCIAL RESULTS

The following table represents unaudited selected quarterly statement of
operations data for each of the quarters indicated and, in the opinion of
management, includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such data. The Company has
experienced fluctuations in revenue and operating results from quarter to
quarter and from year to year due to a combination of factors, including demand
for the Company's services and the size, timing of contract signings and
recognition of revenues from significant customer additions and losses. Future
quarterly results may fluctuate, depending on these and other factors. See "Risk
Factors--Fluctuations in Quarterly Operating Results; Lengthy Sales Cycle;
Future Results Uncertain." Results of operations for any particular quarter are
not necessarily indicative of results of operations for any future quarters.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1996 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................. $ 25,692 $ 28,958 $ 33,370 $ 37,313 $ 49,809
Cost of operations:
Cost of revenues....................................... 24,445 27,074 31,283 34,986 47,454
Selling, general and administrative expenses........... 1,442 1,481 1,516 1,719 1,714
--------- --------- --------- --------- ---------
Total cost of operations............................. 25,887 28,555 32,799 36,705 49,168
--------- --------- --------- --------- ---------
Operating income (loss).................................. (195) 403 571 608 641
Interest (expense) income, net........................... (140) (134) (83) 7 28
--------- --------- --------- --------- ---------
Net income (loss)........................................ $ (335) $ 269 $ 488 $ 615 $ 669
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 1996 and June 30, 1996, the Company had working capital of
$316,000 and $10.4 million, respectively. The increase in working capital at
June 30, 1996 as compared to March 31, 1996 resulted principally from the $10.0
million of proceeds received by the Company on June 25, 1996 from the sale of
its Series B Preferred Stock. The Company's net cash provided by operating
activities was $1.0 million, $3.7 million and $15.7 million for the years ended
March 31, 1994, 1995 and 1996, respectively, and $1.1 million and $127,000 for
the three months ended June 30, 1995 and 1996, respectively. The significant
increases in net cash provided by operating activities were due primarily to the
timing of receivables and payables resulting from the Company's continued
growth. Cash used in investing activities was $15.4 million, $2.2 million and
$1.6 million for the years ended March 31, 1994, 1995 and 1996, respectively,
and $216,000 and $935,000 for the three months ended June 30, 1995 and 1996,
respectively. For the year ended March 31, 1994, the Company used cash in the
amount of $14.1 million to purchase Advance Clinical with the remaining $1.3
million used for purchases of property, plant and equipment. In all other
periods presented, cash used in investing activities was primarily used for
purchases of property, plant and equipment associated with growth and expansion
of the Company's facilities. For the year ended March 31, 1994, the Company
received $9.9 million from the sale of its Series A Preferred Stock and proceeds
of $6.6 million from the issuance of long term debt. For the three months ended
June 30, 1996, the Company received $10.0 million from the sale of its Series B
Preferred Stock. Cash used in financing activities consisted primarily of
scheduled debt repayments.

During fiscal year 1996, the Company's continued growth resulted in net cash
provided by operating activities of $15.7 million. Historically, the Company has
been able to fund its operations and continued growth through cash from
operations. During fiscal year 1996, the Company's operating cash flow funded
its capital expenditures of $1.6 million, and its short term excess cash was
invested in money market funds. The Company anticipates its capital expenditures
of approximately $4.7 million for the year ending March 31, 1997 will primarily
consist of additional enhancements to the Company's claims processing systems,
and further automation of the Company's mail service facility. The Company
anticipates that cash from operations, combined with the proceeds received from
the sale of the Series B Preferred Stock and the net proceeds to be received
from the sale of the shares of Common Stock offered hereby, will be sufficient
to meet the Company's operating

18
<PAGE>

requirements and expansion programs, including capital expenditures, for the
next 12 months. Upon consummation of the Offering, the Company plans to pay off
all of its outstanding debt with the exception of capital lease obligations. The
Company anticipates that cash from operations will be sufficient in future
periods to meet its internal operating requirements; however, the Company
expects that additional funds may be required in the future to successfully
continue its expansion and acquisition plans. The Company may be required to
raise additional funds through sales of its equity or debt securities or seek
financing from financial institutions. Currently, the Company has no borrowings
from financial institutions, and none of its assets are pledged as collateral.
There can be no assurance, however, that credit financing will be available on
terms that are favorable to the Company or, if obtained, will be sufficient for
the Company's expansion needs.

RECENT PRONOUNCEMENTS

In October 1995, the Financial Accounting Standards Board issued Statement
123, "Accounting for Stock-Based Compensation" (SFAS 123). The Company will
adopt the provisions of SFAS 123 with respect to options granted to employees
through disclosure only, effective with the Company's fiscal year ending March
31, 1997. SFAS 123 also requires that all stock and warrants issued to
nonemployees be accounted for based upon the fair value of the consideration
received or the fair value of the equity instruments issued. During fiscal year
1996, the Company agreed to issue warrants to purchase shares of its Common
Stock to a customer contingent upon future expansion of member lives. As of June
30, 1996, no stock was issued and no warrants were earned under the agreement.
In management's opinion, the fair value of the warrants at the date of the
agreement was not material and therefore had no material impact on the Company's
financial position or results of operations.

IMPACT OF INFLATION

Changes in prices charged by manufacturers and wholesalers for
pharmaceuticals dispensed by the Company affects its cost of revenues.
Historically, the Company has been able to pass the effect of such price changes
to its customers under the terms of its agreements. As a result, changes in
pharmaceutical prices due to inflation have not adversely affected the Company.

19
<PAGE>
BUSINESS

OVERVIEW

Advance ParadigM is a leading independent provider of PBM services to health
benefit plan sponsors, with over nine million health plan members enrolled in
the Company's programs. The Company's primary focus is on the delivery of
cost-effective, high quality, integrated PBM services. In addition, the Company
has developed and is expanding its clinical expertise and disease management
services to meet the specialized needs of its plans' members, particularly those
requiring costly, long-term and recurring therapies. These services are designed
to inform and educate health benefit plan sponsors, their members and
participating physicians of nationally recognized practice guidelines for
various disease states. This encourages physician and member conformance,
improves compliance with recognized standards and, in turn, improves member
health while reducing cost of care.

The Company's PBM services include clinical and benefit design consultation,
formulary and rebate administration, electronic point-of-sale pharmacy claims
processing, mail pharmacy distribution, pharmacy network management, drug
utilization review ("DUR") and data information reporting services. The Company
administers a pharmacy network that includes over 46,000 retail pharmacies
throughout the United States. In 1994, in response to increasing
cost-containment pressures from payors, the Company began to utilize its
clinical and information systems capabilities to develop HBM services. The
Company's HBM services include disease management, recommendation of clinical
guidelines, patient and physician profiling, case finding and compliance and
outcome measurement. In 1995, the Company began marketing its HBM services to
health benefit plan sponsors, pharmaceutical manufacturers and contract research
organizations, and as a result, initiated programs with selected customers. In
addition, the Company intends to leverage its existing capabilities and
relationships by acquiring companies which have, or are developing, innovative
HBM services which will enable the Company to provide a centralized care
management alternative for its customers.

The Company was incorporated in Delaware in July 1993 as a wholly owned
subsidiary of Advance Health Care. Currently, the Company has three wholly owned
subsidiaries, Advance Mail, Advance Data and Advance Clinical. Advance Mail was
incorporated in 1986 and began operations in early 1987 as a mail order
pharmacy. In 1992, Advance Data was incorporated to provide plan participants an
alternative for purchasing prescriptions through a network of retail pharmacies
and to provide claims adjudication services. In August 1993, Advance Health Care
contributed all of the capital stock of Advance Data and Advance Mail to the
Company. In December 1993, the Company acquired Advance Clinical, formerly a
wholly owned subsidiary of BCBS of Maryland. See "The Company."

INDUSTRY BACKGROUND

In response to escalating health care costs, cost containment efforts in the
health care industry have led to rapid growth in managed care. Despite these
efforts, continued advances in medical technology and new drug development have
led to significant increases in drug utilization and related costs, creating a
need for more efficient, cost effective drug delivery mechanisms. PBM services
evolved to address this need. Through volume discounts, retail pharmacy
networks, mail pharmacy services, formulary administration, claims processing
and DUR, PBMs created an opportunity for health benefit plan sponsors to deliver
drugs to their members in a cost-effective manner while improving patient
compliance with recommended guidelines. It is currently estimated that annual
outpatient pharmaceutical expenditures account for approximately 7%, or $70
billion, of the $1 trillion health care market, and that third-party
prescriptions managed by PBMs represent a steadily increasing proportion of this
amount.

Traditionally, PBMs focused primarily on cost containment by (i) generating
volume rebates from pharmaceutical companies, (ii) encouraging substitution of
generics for branded medications and (iii) obtaining price discounts through the
retail pharmacy network and mail distribution. Over the last several years, in
response to increasing payor demand, PBMs have begun to develop sophisticated
formulary management capabilities and comprehensive, on-line customer decision
support tools in an attempt to better manage the delivery of health care and
ultimately costs. Simultaneously, health benefit plan sponsors have begun to
focus on the quality and efficiency of care, emphasizing disease prevention, or
wellness, and care management. There is rapidly growing

20
<PAGE>
demand among payors for comprehensive disease management programs as cost
containment becomes more dependent on improvements in the quality of care.
According to industry sources, approximately 77% of large employers said they
would likely adopt some form of disease management program over the next two
years. HBM services are being developed to address this demand through the use
of traditional PBM services combined with clinical expertise and sophisticated
information systems.

THE ADVANCE PARADIGM SOLUTION

As a leading independent PBM, the Company provides benefit design, formulary
and rebate administration, point-of-sale pharmacy claims processing, mail
pharmacy, pharmacy network management, DUR and data information reporting
services. The Company believes its clinical expertise and information systems
combined with its PBM services provide the Company with a competitive advantage
in the evolving market for HBM services. Through its HBM services, the Company
utilizes its expertise in development of formulary designs, recommends "best
practices" guidelines, and has created patient and physician profiling, clinical
intervention strategies and proprietary case finding techniques. The Company's
proprietary decision support systems provide a platform for the delivery of
outcomes-based HBM services. As part of its HBM services, which integrate the
Company's decision support systems with its core clinical expertise, the Company
currently provides disease management programs that address cardiovascular risk,
congestive heart failure and diabetes, and has under development disease
management programs which address asthma, dyspepsia and otitis media (middle ear
infection).

STRATEGY

The Company's mission is to improve the quality of care delivered to plan
members while assisting plan sponsors in reducing overall health benefit costs.
The Company's strategy is to maintain its position as a leading provider of PBM
services and expand its presence as a provider of HBM services. Key elements of
this strategy include:

EXPAND CORE PBM CUSTOMER BASE. The Company believes that it will continue
to benefit from growth in the PBM market. From 1994 to 1996, the number of lives
for which the Company provided PBM services increased from approximately 3.7
million to 9.0 million. Of the nine million lives, the Company provides rebate
contracting services for approximately two million lives on behalf of other
PBMs. The Company intends to expand its market share by focusing on larger, more
sophisticated customers, such as Blue Cross and Blue Shield ("BCBS") plans,
insurance companies and large employer groups.

EXPAND HBM SERVICES. The Company believes that HBM services provide
significant opportunities for future growth. As a result, the Company is
presently integrating its PBM services, information systems and medical care
guidelines to create comprehensive HBM programs. The Company believes that it
can cross-sell HBM services to its existing customer base. In addition, the
Company intends to leverage its existing capabilities and relationships by
acquiring companies which have, or are developing, innovative HBM services in
order to provide a centralized, care management alternative for its customers.

PURSUE STRATEGIC ACQUISITIONS. The Company intends to continue pursuing
acquisition opportunities to expand the scope of its services and increase its
market share. For example, in December 1993, the Company complemented its mail
service and retail network pharmacy management services with the acquisition of
ParadigM Pharmacy Management Inc., a provider of sophisticated formulary
management services. Due to increasing competition within the PBM and HBM
services markets, the Company believes that there are significant opportunities
to acquire or consolidate businesses that will complement its existing service
offerings and allow it to realize additional economies of scale.

ESTABLISH STRATEGIC RELATIONSHIPS. The Company has successfully established
strategic relationships with certain pharmaceutical manufacturers and major
customers. In its strategic relationships with drug manufacturers, the Company
strives to create collaborative relationships whereby the Company provides the
manufacturers with consulting and related services that permit the manufacturers
to benefit from the Company's expertise in disease management and pharmacy and
medical claims data analysis, while the Company benefits from the marketing and
financial resources of the manufacturers. In its strategic relationships with
certain major customers, the customers assume equity positions in the Company
which fosters the development of long-term

21
<PAGE>
strategic alliances. To date, the Company has established strategic
collaborative relationships with five pharmaceutical companies and strategic
customer alliances with BCBS of Maryland and BCBS of Texas, and has entered into
a letter of intent to enter into such an alliance with Principal Health Care,
Inc.

SERVICES

PHARMACEUTICAL BENEFIT MANAGEMENT. The Company's PBM services include
clinical and benefit design consultation, formulary and rebate administration,
electronic point-of-sale pharmacy claims processing, mail pharmacy distribution,
pharmacy network management, DUR and data information reporting. The Company
administers a pharmacy network which includes over 46,000 retail pharmacies
throughout the United States. The Company currently provides PBM services to
over 200 health plan benefit sponsors covering over nine million plan members
enrolled in the Company's programs, which includes rebate contracting services
for approximately two million lives on behalf of other PBMs. The Company's PBM
services are divided among three divisions: Clinical Services, Data Services and
Mail Pharmacy Services.

CLINICAL SERVICES. The Company develops and implements customized programs
of clinical and formulary management services to reduce drug benefit costs while
promoting clinically appropriate drug usage. The Company works closely with each
customer to determine the desired features of a benefit plan, such as which
drugs are covered, extent of generic substitution and co-payment levels. The
Company also develops customized formularies which recommend the most clinically
appropriate, cost-effective drugs to be prescribed. Formularies are listings of
drugs and treatment protocols to be followed by the prescribing physician that
are intended to reduce the costs of prescription drugs under a particular health
plan. Formularies reduce cost through the use of generic substitution,
therapeutic substitution and other techniques and may also generate leverage for
the Company to negotiate more favorable rebates and other volume discounts from
drug manufacturers.

Formulary compliance can be encouraged by (i) plan design features such as
tiered co-payments, which require the member to pay a higher amount for the
non-preferred drug, (ii) prescriber education programs in which the Company or
the managed care customer actively seek to educate the prescribers about the
formulary preferences and (iii) therapeutic substitution programs that target
certain high-cost therapies for concentrated formulary compliance efforts. The
Company continually monitors the efficacy and therapeutic applications of
pharmaceutical products, the availability of new drugs and generic substitutes
and rebate and other pricing arrangements with drug manufacturers. The Company
works closely with each customer to develop a customized formulary based on the
customer's drug utilization patterns and member and physician populations.

The Company employs several intervention strategies to promote formulary
compliance by altering physician prescribing patterns. The Company utilizes its
decision support software to analyze data and present reports to plan sponsors
or physicians that compare a physician's formulary compliance against his or her
peers in the plan. The Company provides proprietary educational materials to
plan physicians, pharmacists or the plan sponsor to promote general education
and formulary compliance.

DATA SERVICES. The Company's retail pharmacy network and claims
adjudication services provide plan sponsors an efficient, automated claims
processing network that permits point-of-sale adjudication and data collection.
The Company administers a network of approximately 46,000 retail pharmacies
which are preferred providers of prescription drugs to members of the pharmacy
benefit plans managed by the Company (the "Advance Pharmacies"). The Advance
Pharmacies have agreed to accept payments at predetermined negotiated rates,
which the Company believes to be generally more favorable than typical retail
prices. The Company's claims adjudication services division is its most rapidly
growing division with the number of claims processed increasing from
approximately 816,000 claims in fiscal year 1994 to over 9.3 million claims
processed in fiscal year 1996, with over 5.1 million claims processed in the
quarter ended June 30, 1996.

The Advance Pharmacies are linked to the Company's Advance Rx-Registered
Trademark- on-line claims adjudication and processing system, which contains
patient medication history, plan enrollment and eligibility data. The Advance
Rx-Registered Trademark- on-line system provides pharmacists with point-of-sale
information including plan design, drugs covered, negotiated price and
co-payment requirements, as well as extensive drug utilization evaluation
capabilities. The Advance Rx-Registered Trademark- system performs on-line
concurrent drug utilization evaluation at the point of sale including

22
<PAGE>
verification of eligibility, and identifies potential drug interactions,
frequency of refills and other matters. Within seconds of submitting a
prescription to the Advance Rx-Registered Trademark- system, the pharmacist
receives a computerized message as to whether the prescription will be accepted
by the Company for payment. In addition, the Company can alert the pharmacist
that the prescribed drug is not the preferred formulary drug, that therapeutic
or generic substitution opportunities are available, or as to the need to comply
with prior authorization programs.

MAIL PHARMACY SERVICES. The Company's mail pharmacy services enable plan
sponsors to realize further cost savings on maintenance medications, while
benefiting from the Company's automated claims adjudication and data collection
capabilities. Cost savings to plan sponsors result from promotion of formulary
compliance by the Company's in-house pharmacy, and price discounts to the
Company from volume purchases. The mail pharmacy typically dispenses up to
100-day supplies of medications for chronic conditions, thereby reducing
repetitive dispensing fees. The Company believes that its mail pharmacy services
reduce costs to plan sponsors because the Company's role as pharmacist allows
for direct enforcement of the formulary, generic and therapeutic substitution,
volume purchasing discounts, and lower dispensing fees than are typically
available through retail pharmacies. In addition, the Company's control over the
dispensing process permits it to ensure that formulary compliance programs are
followed, to perform DUR on each prescription and to reduce the potential for
submission of fraudulent, incorrect or ineligible claims. Plan sponsors also
benefit from the drug utilization review capabilities of the Company's
management information system, which assist in preventing potential abuse by
plan participants and help identify areas to be targeted for further cost
reductions.

The Company's mail service pharmacy is located in approximately 38,000
square feet of leased space in Richardson, Texas and currently dispenses
approximately 13,000 prescriptions per week. The mail service dispensing process
is highly automated, featuring bar code and scanning technology to route and
track orders, computerized dispensing of many medications and computer-generated
mailing labels and invoices. To ensure accurate dispensing of prescriptions, the
mail service system is equipped with automated quality control features, and
each prescription is inspected by a registered pharmacist.

HEALTH BENEFIT MANAGEMENT. The Company's HBM services include disease
management, recommendation of clinical guidelines, patient and physician
profiling, case finding and compliance and outcomes measurement. The Company has
developed disease management programs covering cardiovascular risk, congestive
heart failure and diabetes and has under development disease management programs
which address asthma, dyspepsia and otitis media. By analyzing patients' medical
and pharmacy claim patterns, the Company can assist payors and health care
providers in the early identification of patients whose care might be improved
through additional or alternative treatment or medication.

The Company's disease management programs incorporate clinical protocols
based on specific medical treatments and "best treatment practices" from the
medical community. These protocols are represented as a series of algorithms or
rules contained in the Company's decision support systems. These algorithms are
updated continually by the Company based upon changes in nationally recognized
best treatment practices, clinical experience and review of current medical
literature.

Upon identifying an "at-risk" patient, the Company, working closely with the
medical staff of its customer, recommends treatment protocols for the identified
disease. The Company's staff monitors the identified patient's compliance with
the suggested program, including prescription usage. If it appears, based upon
the staff's analysis of the patient's treatment, that the recommended protocol
is not being applied, the Company's staff will coordinate with its customers to
initiate direct telephone contact with the patient or physician, suggesting
additional treatment or testing.

In addition to identifying targeted patients for the physician, the
Company's case-finding algorithms are also designed to recognize trends in the
treatments and drugs prescribed by health care providers. Once a provider is
identified through the algorithm, the Company's staff prepares a physician
journal letter communicating the recommended clinical protocols for the
treatment of the identified disease. Physician performance and compliance with
the recommended protocols are monitored utilizing the Company's integrated
health care database, and additional communications such as "dear doctor"
letters and physician report cards are sent to physicians who would benefit from
intervention strategies. The Company has found physician response to these

23
<PAGE>
materials to be positive. In general, the physicians appreciate the comparison
of their treatment activities to the latest practices in the treatment of the
targeted disease. This "clinical credibility" allows the Company's customers to
more ably influence physician treatment patterns.

DECISION SUPPORT SYSTEMS. In connection with the monitoring, analysis and
evaluation of drug utilization for its PBM customers and following years of
development, the Company introduced proprietary decision support systems. The
Company's extensive database repository incorporates a series of interrelated
databases consisting of patient profiles, provider profiles, payor information,
and medical and pharmacy dictionaries of diagnosis codes, treatment codes, and
prescription drug information. One of the Company's proprietary decision support
systems, ApotheQuery-Registered Trademark-, enables the Company to identify
cost-saving opportunities arising from the possible overuse or inappropriate use
of drugs, the use of high cost drugs and the use of drugs not on the formulary.
ApotheQuery-Registered Trademark- organizes and analyzes data by drug, physician
specialty and/or various other criteria, or a combination of criteria, enabling
the Company to identify patient populations and physicians who would benefit
from intervention strategies and measures the effectiveness of such strategies
through outcomes and utilization review. The Company protects its decision
support systems through physical security measures as well as access security
procedures.

In 1994, the Company began to integrate its customers' pharmacy claims with
applicable medical and laboratory claims and patient survey data, when
available. This integrated health care database complements the capabilities of
ApotheQuery-Registered Trademark- by including data points for diagnosis and
treatment codes. This integrated health care database facilitates querying
capability for not only pharmacy data but integrated pharmacy, medical, and lab
data as well. This allows the Company and its customers to identify problem
areas for the health plan and implement timely clinical solutions. It further
enhances the Company's ability to complete meaningful outcomes studies and to
develop effective disease management programs. The Company's medical staff has
incorporated algorithms based on nationally recognized "best practice"
guidelines for chronic and acute diseases into its proprietary databases. This
integrated health care database integrates medical, lab and pharmacy claims
data, and allows the Company to perform sophisticated outcomes analysis,
detailed physician and pharmacy provider profiling and utilization and
formulary/rebate analysis.

CUSTOMERS

The Company currently provides PBM services for over 200 health plan benefit
sponsors covering over nine million plan members enrolled in the Company's
programs, which includes rebate contracting services for approximately two
million lives on behalf of other PBMs. The Company's customer base is comprised
of BCBS plans, HMOs, health insurers, TPAs and self-insured employers. Some of
the Company's customers include the following insurance companies and HMOs:

<TABLE>
<CAPTION>
INSURANCE COMPANIES HMOS
- --------------------------------------------------- ---------------------------------------------------
<S> <C>
Arkansas BCBS Capital Health Plan
BCBS of Maryland CFS Health Group, Inc.
BCBS of the Rochester (New York) Area George Washington University Health Plan
BCBS of Texas HealthGuard of Lancaster, Inc.
Blue Cross of Northeastern Pennsylvania HMO Partners, Inc.
National Health Insurance Company Lifeguard Health Plan
Southwestern Life Insurance Company SelectCare Networks, Inc.
United Insurance Company, Inc.
</TABLE>

STRATEGIC ALLIANCES

The Company has successfully established strategic relationships with
certain large pharmaceutical manufacturers and major customers. In its strategic
relationships with drug manufacturers, the Company strives to create
collaborative relationships whereby the Company provides the manufacturers with
products and services that permit the manufacturers to benefit from the
Company's expertise in disease management and pharmacy and medical claims data
analysis, while the Company benefits from the marketing and financial resources
of the manufacturers. Through this type of relationship, the Company licenses
selected disease management programs to the manufacturers and provides other
related services. In its strategic relationships with certain major customers,
the customers assume equity positions in the Company, which fosters the
development of long-term

24
<PAGE>

strategic alliances. This arrangement allows for increased information flow
between the Company and customers to facilitate the progressive development of
solutions to meet the customers' unique PBM and HBM service needs. To date, the
Company has established strategic collaborative relationships with five
pharmaceutical companies and strategic customer alliances with BCBS of Maryland
and BCBS of Texas, and has entered into a letter of intent to enter into such an
alliance with Principal Health Care, Inc. The Company is implementing its
cardiovascular risk reduction disease management program on behalf of BCBS of
Maryland and George Washington University Health Plan. The Company has also
licensed several of these programs to certain pharmaceutical companies. See
"Certain Transactions."

SALES, MARKETING AND CUSTOMER SERVICE

The Company markets and sells its services through a direct sales force
consisting of four national sales and marketing representatives located in
Baltimore, Cleveland, Minneapolis and Dallas. Sales and marketing
representatives are supported by a staff of customer service representatives in
the Company's facilities located in the Baltimore and Dallas areas. The
Company's proposal development group and marketing staff also work closely with
the sales representatives. The typical sales cycle takes approximately six to
nine months.

The Company offers a toll-free telephone line staffed with trained customer
service representatives and pharmacists 14 hours each day and on-call 24 hours
each day. The Company continually monitors the member service phone desk to
ensure that incoming calls from members are answered in a timely and appropriate
manner. Further, the Company monitors the quality standards of its mail
services, including the dispensing of prescription orders through the mail
within two business days of receipt under ordinary circumstances.

COMPETITION

The Company competes with a number of larger, national companies, including
Caremark International Inc., Diversified Pharmaceutical Services, Inc. (a
subsidiary of SmithKline Beecham Corporation), Express Scripts, Inc., Merck
Medco Managed Care, Inc., (a subsidiary of Merck & Co., Inc.), PCS Health
Systems, Inc. (a subsidiary of Eli Lilly & Company), and Value Health, Inc.
(which recently announced a 50-50 joint venture with Baxter Healthcare
Corporation). These competitors are significantly larger than the Company and
possess greater financial, marketing and other resources than the Company. To
the extent that competitors are owned by pharmaceutical manufacturers, they may
have pricing advantages that are unavailable to the Company and other
independent PBMs.

The Company believes that the primary competitive factors in the PBM and HBM
industries include: independence from drug manufacturers and payors; the
quality, scope and costs of products and services offered to insurance
companies, HMOs, employers and other sponsors of health benefit plans and plan
participants; responsiveness to customers' demands; the ability to negotiate
favorable rebate and volume discounts from drug manufacturers; the ability to
identify and apply effective cost containment programs utilizing clinical
strategies; the ability to develop formularies; the ability to market PBM and
HBM services to health benefit plan sponsors; a strong managed care customer
base which supports the development of HBM products and services; and the
commitment to providing flexible, clinically oriented services to customers. The
Company believes that its larger competitors offer comprehensive PBM services
and some form of HBM services. The Company considers its principal competitive
advantages to be its independence from drug manufacturers and payors, strong
managed care customer base which supports the development of HBM services, and
commitment to providing flexible, clinically oriented services to its customers.

LIABILITY INSURANCE

Certain aspects of the Company's operations, including the dispensing of
pharmaceuticals, may subject the Company to claims for personal injuries,
including those resulting from dispensing errors, package tampering and product
defects. The Company carries the types of insurance customary in its industry,
including professional liability and general and product liability insurance.
The Company believes that its insurance protection is adequate for its present
business operations. Although pharmacies in general have not, as yet,
experienced any unusual difficulty in obtaining insurance at an affordable cost,
there can be no assurance that the Company will be able to maintain its coverage
at acceptable costs in the future or, if it does, that the amount of such
coverage would be sufficient to cover all potential claims.

25
<PAGE>
GOVERNMENT REGULATION

Various aspects of the Company's businesses are governed by federal and
state laws and regulations and compliance is a significant operational
requirement for the Company. The Company believes that it is in substantial
compliance with all existing legal requirements material to the operation of its
business.

Certain federal and related state laws and regulations affect aspects of the
Company's pharmacy benefit management business. Among these are the following:

FDA REGULATION. The U.S. Food and Drug Administration ("FDA") generally has
authority to regulate drug promotional materials that are disseminated "by or on
behalf of" a drug manufacturer. In October 1995, the FDA held hearings to
determine whether and to what extent the activities of PBM companies should be
subject to FDA regulation. At this hearing, FDA officials expressed concern
about the efforts of PBMs that are owned by drug manufacturers to engage in
therapeutic switching programs and about the criteria used by such PBMs that
govern the inclusion and exclusion of particular drugs in formularies. Although
the FDA has not published any proposed rules to date on the regulation of PBMs,
there can be no assurance that the FDA will not seek to increase regulation
pertaining to the PBM industry, including with respect to companies that are not
owned by drug manufacturers.

ANTI-REMUNERATION LAWS. Medicare and Medicaid law prohibits, among other
things, an entity from paying or receiving, subject to certain exceptions and
"safe harbors," any remuneration to induce the referral of Medicare or Medicaid
beneficiaries or the purchase (or the arranging for or recommending of the
purchase) of items or services for which payment may be made under Medicare,
Medicaid or other federally-funded health care programs. Several states also
have similar laws which are not limited to services for which Medicare or
Medicaid payment may be made. State laws vary and have been infrequently
interpreted by courts or regulatory agencies. Sanctions for violating these
federal and state anti-remuneration laws may include imprisonment, criminal and
civil fines, and exclusion from participation in the Medicare and Medicaid
programs.

The federal statute has been interpreted broadly by courts, the Office of
Inspector General ("OIG") within the Department of Health and Human Services
("HHS"), and administrative bodies. Because of the federal statute's broad
scope, federal regulations establish certain "safe harbors" from liability. Safe
harbors exist for certain properly reported discounts received from vendors,
certain investment interests, and certain properly disclosed payments made by
vendors to group purchasing organizations. A practice that does not fall within
a safe harbor is not necessarily unlawful, but may be subject to scrutiny and
challenge. In the absence of an applicable statutory exception or safe harbor, a
violation of the statute may occur even if only one of the purposes of a payment
arrangement is to induce patient referrals or purchases. Among the practices
that have been identified by the OIG as potentially improper under the statute
are certain "product conversion programs" in which benefits are given by drug
manufacturers to pharmacists or physicians for changing a prescription (or
recommending or requesting such a change) from one drug to another. Such laws
have been cited as a partial basis, along with the state consumer protection
laws discussed below, for investigations and multi-state settlements relating to
financial incentives provided by drug manufacturers to retail pharmacists in
connection with such programs.

To the Company's knowledge, these anti-remuneration laws have not been
applied to prohibit PBMs from receiving amounts from drug manufacturers in
connection with drug purchasing and formulary management programs, to
therapeutic substitution programs conducted by independent PBMs, or to the
contractual relationships such as those the Company has with certain of its
customers. The Company believes that it is in substantial compliance with the
legal requirements imposed by such laws and regulations, and the Company
believes that there are material differences between drug-switching programs
that have been challenged under these laws and the programs offered by the
Company to its customers. However, there can be no assurance that the Company
will not be subject to scrutiny or challenge under such laws and regulations, or
that any such challenge would not have a material adverse effect upon the
Company.

OIG STUDY. The OIG Office of Evaluation and Inspections (which is not
responsible for investigations of potential violations of anti-remuneration
laws, but which seeks to improve the effectiveness and efficiency of

26
<PAGE>
HHS programs) currently is conducting a study of PBM arrangements particularly
with regard to the concerns and implications for Medicaid beneficiaries. The
Company cannot predict the outcome of the study or the impact, if any, that such
study might have on its business.

ERISA REGULATION. The Employee Retirement Income Security Act of 1974
("ERISA") regulates certain aspects of employee pension and health benefit
plans, including self-funded corporate health plans with which the Company has
agreements to provide PBM services. There can be no assurance that the U.S.
Department of Labor, which is the agency that enforces ERISA, would not assert
that the fiduciary obligations imposed by the statute apply to certain aspects
of the Company's operations.

CONSUMER PROTECTION LAWS. Most states have consumer protection laws that
have been the basis for investigations and multi-state settlements relating to
financial incentives provided by drug manufacturers to retail pharmacies in
connection with drug switching programs. In addition, pursuant to a settlement
agreement entered into with 17 states on October 25, 1995, Merck Medco Managed
Care, Inc. ("Medco"), the PBM subsidiary of pharmaceutical manufacturer Merck &
Co., agreed to require pharmacists affiliated with Medco mail service pharmacies
to disclose to physicians and patients the financial relationships between Merck
& Co., Medco and the mail service pharmacy when such pharmacists contact
physicians seeking to change a prescription from one drug to another. The
Company believes that its contractual relationships with drug manufacturers and
retail pharmacies do not include the features that were viewed by enforcement
authorities as problematic in these settlement agreements. However, no assurance
can be given that the Company will not be subject to scrutiny or challenge under
one or more of these laws.

NETWORK ACCESS LEGISLATION. A majority of states have adopted some form of
legislation affecting the ability of the Company to limit access to pharmacy
provider networks or from removing network providers. Such legislation may
require the Company or its customers to admit any retail pharmacy willing to
meet the plan's price and other terms for network participation; this
legislation is sometimes referred to as "any willing provider" legislation. The
Company has not been materially affected by these statutes because it
administers a large network of over 46,000 retail pharmacies and will admit any
licensed pharmacy that meets the Company's credentialling criteria, involving
such matters as adequate insurance coverage, minimum hours of operation, and the
absence of disciplinary actions by the relevant state agencies.

LEGISLATION IMPOSING PLAN DESIGN RESTRICTIONS. Some states have legislation
that prohibits the plan sponsor from implementing certain restrictive design
features. For example, some states provide that members of the plan may not be
required to use network providers, but must also be provided with benefits even
if they choose to use non-network providers; this legislation is sometimes
referred to as "freedom of choice" legislation. Other states mandate coverage of
certain benefits or conditions. Such legislation does not generally apply to the
Company, but it may apply to certain of the Company's customers such as HMOs and
insurers. If such legislation were to become widespread and broad in scope, it
could have the effect of limiting the economic benefits achievable through
pharmacy benefit management.

LICENSURE LAWS. Many states have licensure or registration laws governing
certain types of ancillary health care organizations, including PPOs, TPAs, and
companies that provide utilization review services. The scope of these laws
differs significantly from state to state, and the application of such laws to
the activities of pharmacy benefit managers is often unclear. The Company has
registered under such laws in those states in which the Company has concluded,
after discussion with the appropriate state agency, that such registration is
required.

LEGISLATION AFFECTING DRUG PRICES. In the past, some states have adopted
legislation providing that a pharmacy participating in the state's Medicaid
program must give the state the best price that the pharmacy makes available to
any third party plan; this legislation is sometimes referred to as "most favored
nation" legislation. Such legislation, if enacted in any state, may adversely
affect the Company's ability to negotiate discounts in the future from network
pharmacies. Other states have enacted "unitary pricing" legislation, which
mandates that all wholesale purchasers of drugs within the state be given access
to the same discounts and incentives.

27
<PAGE>

REGULATION OF FINANCIAL RISK PLANS. Fee-for-service prescription drug plans
are not generally subject to financial regulation by the states. However, if the
PBM offers to provide prescription drug coverage on a capitated basis or
otherwise accepts material financial risk in providing the benefit, laws in
various states may regulate the plan. Such laws may require that the party at
risk establish reserves or otherwise demonstrate financial responsibility. Laws
that may apply in such cases include insurance laws, HMO laws or limited prepaid
health service plan laws. Many of these state laws may be preempted in whole or
in part by ERISA, which provides for comprehensive federal regulation of
employee benefit plans. However, the scope of ERISA preemption is uncertain and
is subject to conflicting court rulings. Other state laws may be invalid in
whole or in part as an unconstitutional attempt by a state to regulate
interstate commerce, but the outcome of challenges to these laws on this basis
is uncertain. Accordingly, compliance with state laws and regulations is a
significant operational requirement for the Company.

MAIL PHARMACY REGULATION. The Company's mail service pharmacy is located in
Richardson, Texas and the Company is licensed to do business as a pharmacy in
Texas. Many of the states into which the Company delivers pharmaceuticals have
laws and regulations that require out-of-state mail service pharmacies to
register with the board of pharmacy or similar regulatory body in the state.
These states generally permit the mail service pharmacy to follow the laws of
the state within which the mail service pharmacy is located. The Company has
registered in every state in which, to the Company's knowledge, such
registration is required. In addition, various pharmacy associations and boards
of pharmacy have promoted enactment of laws and regulations directed at
restricting or prohibiting the operation of out-of-state mail service pharmacies
by, among other things, requiring compliance with all laws of certain states
into which the mail service pharmacy dispenses medications whether or not those
laws conflict with the laws of the state in which the pharmacy is located. To
the extent that such laws or regulations are found to be applicable to the
Company, the Company would be required to comply with them.

Other statutes and regulations impact the Company's mail service operations.
Federal statutes and regulations govern the labeling, packaging, advertising and
adulteration of prescription drugs and the dispensing of controlled substances.
The Federal Trade Commission requires mail order sellers of goods generally to
engage in truthful advertising, to stock a reasonable supply of the product to
be sold, to fill mail orders within thirty days, and to provide customers with
refunds when appropriate. The United States Postal Service has statutory
authority to restrict the transmission of drugs and medicines through the mail
to a degree that could have an adverse effect on the Company's mail service
operations. The U.S. Postal Service has exercised such statutory authority only
with respect to controlled substances. Alternative means of delivery are
available to the Company.

EMPLOYEES

As of August 31, 1996, the Company had 312 employees. None of the employees
are represented by a labor union. In the opinion of management, the Company's
relationship with its employees is good.

FACILITIES

The Company's corporate headquarters are located in approximately 8,000
square feet of leased space in Irving, Texas. This lease expires November 30,
1997. The Company's clinical division is located in approximately 11,600 square
feet of leased space in Hunt Valley, Maryland. This lease expires March 31, 1999
with an option to renew for an additional five-year term. The Company's data
services division is located in approximately 23,000 square feet of leased space
in Dallas, Texas. This lease expires November 30, 1999. The Company's mail
service pharmacy is located in approximately 38,000 square feet of leased space
in Richardson, Texas. This lease expires May 31, 2001 and has a five-year fixed
rate renewal option and an option to purchase at any time during the term of the
lease. See Note 6 of Notes to Consolidated Financial Statements.

LITIGATION

The Company is party to routine legal and administrative proceedings arising
in the ordinary course of its business. The proceedings now pending are not, in
the Company's opinion, material either individually or in the aggregate.

28
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information regarding the executive
officers and directors of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- --- --------------------------------------------------------------
<S> <C> <C>
David D. Halbert...................... 40 Chairman of the Board, President and Chief Executive Officer
Jon S. Halbert........................ 36 Executive Vice President, Chief Operating Officer and Director
Joseph J. Filipek, Jr. ............... 41 Executive Vice President
T. Danny Phillips..................... 37 Senior Vice President, Chief Financial Officer, Secretary and
Treasurer
John H. Sattler....................... 44 Senior Vice President, Sales and Marketing
Robert L. Cinquegrana................. 43 Senior Vice President, Strategic Planning and Business
Development
Alan T. Wright, M.D. ................. 39 Vice President and Chief Medical Officer
Peter M. Castleman (2)................ 39 Director
Rogers K. Coleman, M.D................ 64 Director
Mikel D. Faulkner (1), (2)............ 47 Director
Stephen L. Green (2).................. 45 Director
Jeffrey R. Jay, M.D. (1).............. 38 Director
Michael D. Ware (1), (2).............. 50 Director
</TABLE>

- ------------------------
(1) Audit Committee Member
(2) Compensation Committee Member

DAVID D. HALBERT founded the Company in 1986. Mr. Halbert has continuously
served as Chairman of the Board, President and Chief Executive Officer of the
Company. From 1981 to 1985, Mr. Halbert served as Vice President of Finance and
Marketing for LaJet Energy Company, an energy company, and prior to 1981 he
served as Vice President and Chief Operating Officer of Sabian Corporation, a
metal fabrication company. David D. Halbert is the brother of Jon S. Halbert.

JON S. HALBERT joined the Company in January 1988 and has continuously
served as a director and as an executive officer of the Company since such date.
Mr. Halbert currently serves as Executive Vice President and Chief Operating
Officer of the Company. Prior to joining the Company, he worked as a registered
representative of Bear, Stearns & Co. Inc., an investment banking firm. Jon S.
Halbert is the brother of David D. Halbert.

JOSEPH J. FILIPEK, JR., P.D., currently serves as the Executive Vice
President of the Company. Prior to joining the Company in December 1993, Dr.
Filipek founded Advance Clinical in 1991 as a wholly owned subsidiary of BCBS of
Maryland and has continuously served as its Chief Executive Officer and
President. From 1985 to 1990, he served as Director of Pharmacy for FreeState
Health Plan, and from 1982 to 1984, he held various managerial positions in the
Department of Pharmacy, University of Maryland.

T. DANNY PHILLIPS joined the Company in February 1992, and currently serves
as Senior Vice President, Chief Financial Officer, Secretary and Treasurer of
the Company and its subsidiaries. Prior to joining the Company, Mr. Phillips
served as Chief Financial Officer of Aloha Petroleum, Ltd., a retail gasoline
company, from April 1991 to February 1992. From 1985 to April 1991, Mr. Phillips
served in various financial management positions for Harken Energy Corporation,
a publicly held company, and its then wholly owned subsidiary E-Z Serve, Inc.
Prior to 1985, Mr. Phillips, a certified public accountant, was with the
accounting firm of Condley and Company.

29
<PAGE>
JOHN H. SATTLER, R.PH., joined the Company in 1994, and serves as the Senior
Vice President, Sales and Marketing of the Company. Prior to joining the
Company, Mr. Sattler served as Vice President, Sales and Marketing for Health
Care Pharmacy Providers, Inc. from September 1992 to November 1994. Prior to
1992, he served as Manager of Third Party Marketing for American Drug Stores,
Inc.

ROBERT L. CINQUEGRANA currently serves as the Senior Vice President,
Strategic Planning and Business Development of the Company. Prior to joining the
Company in December 1993, Mr. Cinquegrana served as Chief Operating Officer and
Vice President of Advance Clinical since its inception in 1991. From 1987 to
1991, Mr. Cinquegrana was associated with BCBS of Maryland, including service as
Vice President of Strategic Planning and Chief Financial Officer for Columbia
FreeState Health System, a managed care subsidiary of BCBS of Maryland.

ALAN T. WRIGHT, M.D., M.P.H., joined the Company in April 1994 and currently
serves as Vice President and Chief Medical Officer of the Company. Dr. Wright
has been serving as the Vice President and Chief Medical Officer of the Company
since February 15, 1996. From 1992 to April 1994, he served as Associate
Corporate Medical Director at BCBS of Maryland. Prior to 1992, he served as
Medical Director for Aetna Health Plans of the Mid-Atlantic Region. Dr. Wright
practices emergency medicine on a part time basis at Carr County General
Hospital in Westminister, Maryland. He currently serves as a diplomat to the
American Board of Internal Medicine and the National Board of Medical Examiners.

PETER M. CASTLEMAN has served as a director of the Company since August
1993. Mr. Castleman has been a General Partner of J.H. Whitney & Co., a private
investment firm, since January 1989, and has served as the Managing Partner of
J.H. Whitney & Co. since December 1992. He is also a director of a number of
private companies and the following public companies: The North Face, Inc.,
UtiliMed, Inc. and Brothers Gourmet Coffees, Inc.

ROGERS K. COLEMAN, M.D., was appointed as a director of the Company in
September 1996. Dr. Coleman has been employed by BCBS of Texas since 1976, and
has served in various executive capacities for BCBS of Texas since 1986,
including as its President and Chief Executive Officer since January 1991. In
addition, since January 1991, Dr. Coleman has served as a director of the BCBS
Association, the national association of BCBS plans.

MIKEL D. FAULKNER has served as a director of the Company since August 1993.
Since 1982, Mr. Faulkner has served as Chief Executive Officer of Harken Energy
Corporation, a publicly held company. He has been a director of Harken Energy
Corporation since 1982, serving as Chairman of the Board since February 1991.
From 1982 until February 1993, he served as President of Harken Energy
Corporation.

STEPHEN L. GREEN has served as a director of the Company since August 1993.
Mr. Green currently serves as a General Partner of Canaan Partners, a venture
capital firm. Prior to joining Canaan Partners in November 1991, Mr. Green
served as Managing Director in GE Capital's Corporate Finance Group for more
than five years. Mr. Green currently serves on the Board of Directors of the
following public companies: CapMAC Holdings Inc., Chartwell Re Corporation and
Suiza Foods Corporation.

JEFFREY R. JAY, M.D., has served as a director of the Company since August
1993. Since 1993, he has been a General Partner of J.H. Whitney & Co., a private
investment firm. From 1988 to 1993, Dr. Jay was employed by Canaan Partners, a
venture capital firm. Dr. Jay currently is a national advisory member of the
American Medical Association's Physician Capital Source Committee and is a
director of the following public companies: CRA Managed Care, Inc., UtiliMed,
Inc. and Nitinol Medical Technologies.

MICHAEL D. WARE has served as a director of the Company since August 1993.
Mr. Ware is a co-founder of Advance Capital Markets, Inc., a private investment
firm, and has served as its Managing Director since January 1989. Prior to
founding Advance Capital Markets, Inc., Mr. Ware was the President of Reliance
Energy Services, Inc.

BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD

The Board of Directors of the Company consists of ten members, divided into
three classes as nearly equal in number as possible. Messrs. Faulkner, Green and
Ware serve in the class whose term expires in 1996; Dr. Jay and Mr. Castleman in
the class whose term expires in 1997; Messrs. D. Halbert and J. Halbert and Dr.
Coleman

30
<PAGE>

serve in the class whose term expires in 1998; and two vacancies currently
exist. The directors of each class elected after the expiration of the above
terms of office for such class will serve a term of three years. See
"Description of Capital Stock--Certain Provisions of the Company's Restated
Certificate and Bylaws." Officers serve at the discretion of the Board of
Directors.

The Board of Directors has a compensation committee (the "Compensation
Committee") consisting of Messrs. Castleman (Chairman), Faulkner, Green and
Ware. The functions of the Compensation Committee are to review executive
compensation and approve grants of options to Company officers and employees, as
well as renew, approve and recommend to the Board of Directors the terms and
conditions of all stock option plans or changes thereto.

The Board of Directors has an audit committee (the "Audit Committee")
composed of directors who are neither employees nor affiliates of the Company.
Messrs. Faulkner (Chairman) and Ware and Dr. Jay currently comprise the Audit
Committee. The Audit Committee recommends to the Board (for approval by the
stockholders) a public accounting firm to conduct the annual audit of the
accounts of the Company. The Audit Committee meets with the Chief Financial
Officer and the accounting firm at the conclusion of the audit to review the
audited financial statements, and to discuss the results of the audit, any
significant recommendations by the accounting firm for improvement of the
Company's accounting systems and controls, and the quality and depth of staffing
in the accounting and financial departments of the Company.

DIRECTORS COMPENSATION

Directors do not currently receive compensation for serving as directors of
the Company. The Company reimburses directors for out-of-pocket expenses
incurred in connection with attending Board and Committee meetings.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDE PARTICIPATION

In fiscal year 1996, decisions with respect to the compensation of the
Company's executive officers and other employees were made by a Compensation
Committee consisting of Messrs. Castleman, Faulkner, Green and Ware. None of the
members of the Compensation Committee have ever been officers of the Company.

Mr. D. Halbert, Chairman of the Board, Chief Executive Officer and President
of the Company, serves on the Board of Directors of Advance Capital Markets
("ACM"). Mr. Ware, a member of the Company's Board of Directors and the
Compensation and Audit Committees, is the Managing Director of ACM. Each of
Messrs. D. Halbert and Ware participates in the determination of ACM's executive
officer compensation.

31
<PAGE>
EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth information with respect to the compensation
paid or awarded by the Company to the Chief Executive Officer and the four most
highly compensated executive officers whose cash compensation exceeded $100,000
(the "Named Executives") for services rendered in all capacities for fiscal year
1996.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS (#)
- ---------------------------------------------------------------------------- ---------- ----------- -------------
<S> <C> <C> <C>
David D. Halbert............................................................ $ 150,000 $ 52,500 --
Chairman of the Board, President and Chief Executive Officer
Jon S. Halbert.............................................................. 140,000 46,200 --
Executive Vice President and Chief Operating Officer
Joseph J. Filipek, Jr....................................................... 124,200 39,306 --
Executive Vice President
John H. Sattler............................................................. 125,000 37,500 56,250
Senior Vice President, Sales and Marketing
Alan T. Wright.............................................................. 124,200 32,755 18,750
Vice President and Chief Medical Officer
</TABLE>

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information regarding the stock option grants
made by the Company to the Named Executives during fiscal year 1996.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (4)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED (1) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ------------------------------------------ ----------- ------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
David D. Halbert.......................... -- -- -- -- -- --
Jon S. Halbert............................ -- -- -- -- -- --
Joseph J. Filipek, Jr..................... -- -- -- -- -- --
John H. Sattler (2)....................... 56,250 28.8% $ 11.00 11/14/04 $ 389,129 $ 986,128
Alan T. Wright (3)........................ 18,750 9.6% $ 11.00 02/15/06 $ 129,709 $ 328,709
</TABLE>

- ------------------------
(1) The options reflected in this table were all granted under the Company's
1993 Incentive Stock Option Plan. The date of grant is 10 years prior to the
expiration date listed. For additional material terms of the incentive
option, see "--Stock Option Plans."

(2) Mr. Sattler's option is partially vested and exercisable as to 11,250
shares, and will vest and become exercisable in cumulative installments of
11,250 shares on each of the next four anniversaries of the date of grant so
long as Mr. Sattler remains an employee of the Company or its affiliates on
such anniversaries.

(3) Dr. Wright's option vests and becomes exercisable in cumulative installments
of one-fifth of the number of shares of Common Stock upon the first five
anniversaries of the date of grant so long as Dr. Wright remains an employee
of the Company or its affiliates on such anniversaries.

(4) These amounts represent only certain assumed rates of appreciation based on
the grant date value of $11.00 per share in accordance with the Commission's
executive compensation rules. Actual gains, if any, on stock option
exercises will depend on future performance of the Common Stock. No
assurance can be given that the values reflected in these columns will be
achieved.

32
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES

The following table summarizes pertinent information concerning the number
and value of any options held by the Named Executives at March 31, 1996. No
options were exercised by the Named Executives in fiscal year 1996.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR END IN-THE-MONEY OPTIONS
(#) AT FISCAL YEAR END ($)
---------------------------- --------------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
(1) (2)
---------------------------- --------------------------
<S> <C> <C>
David D. Halbert........................................ 68,250/102,500 $ 255,938/$384,375
Jon S. Halbert.......................................... 68,500/102,500 256,875/384,375
Joseph J. Filipek, Jr................................... 30,000/45,000 112,500/168,750
John H. Sattler......................................... 11,250/45,000 12,273/49,091
Alan T. Wright.......................................... 2,500/28,750 2,727/31,364
</TABLE>

- ------------------------

(1) Upon the occurrence of the following events, the vesting of the options will
accelerate: (i) as to the options held by Messrs. D. Halbert and J. Halbert,
upon the consummation of any transaction in which an outside entity gains
more than 50% ownership of the Company, the options will vest immediately
prior to such transaction and (ii) as to the options held by Dr. Filipek,
Mr. Sattler and Dr. Wright, upon a sale of substantially all of the Common
Stock or assets of the Company or a merger in which the Company is not the
surviving entity, the options will vest immediately prior to such
transaction.

(2) The value of the options is based upon the difference between the exercise
price and an assumed market value of $12.00 per share, the midpoint of the
range of the estimated initial public offering price set forth on the cover
of this Prospectus.

EMPLOYMENT AGREEMENTS

On August 4, 1993, each of Messrs. D. Halbert, J. Halbert and Phillips
entered into nondisclosure/ noncompetition agreements with the Company pursuant
to which each agreed during the term of his employment, and for two years
thereafter, not to compete with the Company in the continental United States
and, for the one-year period following termination, not to solicit or interfere
with the Company's relationship with any person or entity doing business with
the Company, or offer employment to any of the Company's employees.

In connection with the Advance Clinical acquisition, Advance Clinical
entered into three-year employment agreements with each of Dr. Filipek and Mr.
Cinquegrana. Dr. Filipek, employed as President and Chief Executive Officer of
Advance Clinical, is entitled to an annual base salary of $120,000, subject to
annual increases in the discretion of the Advance Clinical Board of Directors.
Mr. Cinquegrana, employed as Vice President and Chief Operating Officer of
Advance Clinical, is entitled to an annual base salary of $110,000, subject to
annual increases in the discretion of the Advance Clinical Board of Directors.
In addition, the employment agreements provide that each of Dr. Filipek and Mr.
Cinquegrana are entitled to participate in any bonus, insurance, 401(k) or other
plans generally available to Advance Clinical's employees. See "--Incentive
Compensation Plan." Further, the respective employment agreements grant 75,000
qualified stock options to each of Dr. Filipek and Mr. Cinquegrana, which vest
at a rate of 15,000 options on each of the first five anniversaries of the
respective employment agreements. See "--Stock Option Plans." The employment
agreements contain confidentiality, noncompetition and non-solicitation
provisions effective during the term of employment and for one year after
employment has terminated, unless employment is terminated for cause, in which
case the noncompetition provision will survive for two years.

Effective as of November 14, 1994, the Company entered into a two-year
employment agreement with Mr. Sattler to serve as the Company's Senior Vice
President, Sales and Marketing. Mr. Sattler is entitled to receive an annual
base salary of $125,000, subject to annual increases at the discretion of the
Company's Board of Directors. In addition, the employment agreement provides
that Mr. Sattler is entitled to participate in any bonus and benefit plans of
the Company. Further, the employment agreement grants 56,250 qualified stock
options to Mr. Sattler which will vest at a rate of 20% of the total options on
each of the first five anniversaries of

33
<PAGE>
the employment agreement. See "--Stock Option Plans." The employment agreement
contains confidentiality, noncompetition and non-solicitation provisions
effective during the term of employment and for one year after employment has
terminated.

Effective as of February 15, 1996, the Company entered into a three-year
employment agreement with Dr. Wright to serve as Vice President and Chief
Medical Officer of the Company. Dr. Wright is entitled to an annual base salary
of $165,000 for the fiscal year ending March 31, 1997, $175,000 for the fiscal
year ending March 31, 1998 and $185,000 for the fiscal year ending March 31,
1999. In addition, the employment agreement provides that Dr. Wright is entitled
to participate in any bonus or benefit plans of the Company. Further, the
employment agreement grants 18,750 qualified stock options to Dr. Wright, which
will vest at a rate of 20% of the total options on each of the first five
anniversaries of his employment agreement. See "--Stock Option Plans." The
employment agreement contains confidentiality, noncompetition and
non-solicitation provisions effective during the term of employment and for one
year after employment has terminated, unless employment is terminated for cause,
in which case the noncompetition provision will survive for two years.

STOCK OPTION PLANS

On July 30, 1993, the Board of Directors and the stockholders of the Company
adopted the 1993 Incentive Stock Option Plan (the "Plan") which provides for the
grant of qualified stock options to officers and key employees of the Company.
The purpose of the Plan is to assist the Company in attracting and retaining key
employees. A total of 679,250 shares of Common Stock has been reserved for
issuance under the Plan. As of August 31, 1996, options to purchase 631,750
shares of Common Stock have been granted thereunder. The options granted under
the Plan are incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986.

The Plan is administered by the Compensation Committee of the Board of
Directors, which is comprised of directors who are not participants in the Plan.
Subject to the provisions of the Plan, the Compensation Committee has the
authority to administer the Plan and determine, among other things, the
interpretation of any provision of the Plan, the eligible employees who are to
be granted stock options, the number of shares which may be issued and the
option exercise price. In no event will options be granted at prices less than
the greater of (i) $3.20 per share (as adjusted) and (ii) the fair market value
of the Common Stock on the date of grant. No option can be granted for a term of
more than ten years. The Company has not granted any outstanding options at less
than fair market value.

In addition, on December 1, 1993, in connection with the Advance Clinical
acquisition, the Board of Directors of the Company adopted a second incentive
stock option plan, the terms and provisions of which are identical to those of
the Plan. A total of 178,750 shares of Common Stock were reserved for issuance
under this second incentive stock option plan, all of which have been issued to
employees of Advance Clinical.

At the meeting of the Board of Directors of the Company held on February 15,
1996, the Board of Directors, after review of relevant financial analysis,
indication of interest for sale of the Common Stock and comparisons of similarly
situated companies, determined that the fair market value of the Common Stock
was $11.00 per share. Accordingly, the Board of Directors determined that it
would be in the best interest of the Company to cancel the 151,750 options that
had been granted to employees at a higher exercise price. The Board of Directors
canceled these options and re-issued, effective as of February 15, 1996, the
same number of options to each employee, with a strike price of $11.00 per
share.

In connection with the Merger, the Plan will be amended to increase the
number of shares reserved for issuance thereunder and the Advance Health Care
incentive stock option plan will be merged with and into the Plan. Holders of
options under the Advance Health Care incentive stock option plan will receive
options to purchase Common Stock under the Plan. See "Certain
Transactions--Merger of Advance Health Care With and Into the Company."

Options are not transferable other than by will or under the laws of descent
and distribution, and are exercisable during the lifetime of the optionee only
by the optionee or his guardian or legal representative. Upon termination of the
optionee's employment with the Company, the period of time during which the
stock options are exercisable is restricted to three months. The Board of
Directors has the right to amend, suspend or

34
<PAGE>
terminate the Plan at any time, but no such action after the Plan becomes
effective can affect or impair the rights of any optionee under any options
granted prior to such action. Certain amendments must be approved by the holders
of Common Stock.

INCENTIVE COMPENSATION PLAN

Employees of the Company who hold director-level positions or higher are
eligible to receive annual incentive-based bonus payments if the Company meets
or exceeds certain predetermined annual performance goals. The bonuses payable
under the incentive compensation plan are based on a percentage of each
employee's salary. One-half of the bonus is payable upon the Company meeting the
predetermined performance goals, with the other one-half subject to the
satisfaction of certain performance goals as determined by management for such
individual.

401(K) PLAN

The Company has established a tax-qualified employee savings and retirement
plan (the "401(k) Plan"). All employees who have been employed by the Company
for at least three months are eligible to participate. Employees may contribute
to the 401(k) Plan subject to a statutorily prescribed annual limit. The Company
is required to make contributions to the 401(k) Plan of at least 50% of the
first 6% of salary deferral contributed by each participant.

35
<PAGE>
CERTAIN TRANSACTIONS

WHITNEY DEBT FUND FINANCING

On December 8, 1993, the Company and an affiliate of J.H. Whitney & Co.,
Whitney Subordinated Debt Fund L.P. (the "Whitney Debt Fund"), entered into a
Note and Warrant Purchase Agreement pursuant to which the Whitney Debt Fund paid
the Company $7.0 million in exchange for the Whitney Note and a warrant (the
"Whitney Warrant") to purchase shares of Common Stock. The Whitney Note bears
interest at the rate of 10.1% per annum, payable quarterly. Although the Whitney
Note has a seven-year term, the Company is obligated to prepay the indebtedness,
without penalty or premium, upon consummation of a public offering. See "Use of
Proceeds." The Whitney Warrant grants the Whitney Debt Fund the right to
purchase an aggregate of 336,500 shares of Common Stock at an exercise price of
$4.00 per share until December 8, 2003. The warrant contains certain demand and
piggy-back registration rights with respect to the underlying Common Stock. See
"Share Eligible for Future Sale--Registration Rights."

TRANSACTION FEES RELATING TO THE ADVANCE CLINICAL ACQUISITION

In connection with the acquisition of Advance Clinical in 1993, the Company
agreed to pay a fee of $250,000 each to two officers of Advance Clinical for
services relating to the acquisition. The total $500,000 fee is included as part
of the Advance Clinical purchase price. The Company paid $100,000 of this fee
upon closing of the acquisition and $200,000 in each of February 1995 and
February 1996.

MANAGEMENT RELATIONSHIP WITH ADVANCE HEALTH CARE

Prior to the consummation of the Merger of Advance Health Care and the
Company, as described below, certain management employees of the Company
provided administrative and management services to Advance Health Care. During
fiscal year 1994, the Company paid fees to Advance Health Care for such services
and the use of the office space. See Note 12 of Notes to Consolidated Financial
Statements. Each of Mr. D. Halbert, the Chairman of the Board, President and
Chief Executive Officer of the Company, and Mr. J. Halbert, Executive Vice
President and Chief Operating Officer of the Company, served in the same
positions for Advance Health Care. Additionally, Mr. Phillips, the Company's
Senior Vice President, Chief Financial Officer, Secretary and Treasurer served
as Chief Financial Officer and Vice President of Accounting for Advance Health
Care. Further, Messrs. D. Halbert, J. Halbert, Faulkner and Ware served on the
Board of Directors of Advance Health Care.

As of August 1, 1993, the Company and Advance Health Care entered into an
agreement for the provision of mail pharmacy and claims adjudication services
for the benefit of employees of certain subsidiaries of Advance Health Care.
During fiscal year 1996, Advance Health Care paid the Company approximately
$56,000 (the fair market value as determined by the Board of Directors) for
these services. This agreement had an initial one-year term and renews
automatically for 12-month periods unless terminated by either party upon
written notice delivered 90 days prior to the expiration of any term. This
agreement will terminate as of the effective date of the Merger.

WARRANTS TO BCBS OF TEXAS

On November 25, 1995, the Company granted to BCBS of Texas the right to earn
up to four warrants, each representing the right to acquire 66,750 shares of
Common Stock, in consideration of BCBS of Texas causing additional lives to be
enrolled in the Company's PBM programs (the "BCBS of Texas Warrants"). BCBS of
Texas' right to earn the BCBS of Texas Warrants expires November 25, 2000. Each
BCBS of Texas Warrant will not be exercisable until the first annual anniversary
of its issuance. At such time, the BCBS of Texas Warrant will be exercisable in
whole during a four-year term at an exercise price of $11.00 per share. See
"Description of Capital Stock--Warrants to Purchase Common Stock." As of the
date of this Prospectus, none of the BCBS of Texas Warrants has been earned or
issued.

MERGER OF ADVANCE HEALTH CARE WITH AND INTO THE COMPANY

Immediately prior to the consummation of the Offering, Advance Health Care
will merge with and into the Company. Such Merger will be consummated as a means
of simplifying the corporate structure of the Company and is intended to qualify
as a tax free reorganization. Advance Health Care currently holds 3,125,000
shares of Common Stock. In the Merger, the Company will cancel the shares held
by Advance Health Care and issue shares of Common Stock directly to the Advance
Health Care stockholders based upon their fully-diluted

36
<PAGE>

proportionate ownership interests in Advance Health Care (collectively referred
to as the "AHC Stockholders"). Immediately prior to the Merger, the indebtedness
owed by Advance Health Care to certain of its stockholders will be repaid
through the issuance of additional shares of common stock in Advance Health Care
as follows: Advance Health Care currently owes approximately $750,000 to Halbert
& Associates, Inc. (which will be repaid through the issuance of 1,435 shares of
Advance Health Care common stock); approximately $350,000 to Dr. David S.
Halbert (which will be repaid through the issuance of 667 shares of Advance
Health Care common stock); and approximately $1,320,000 to Dr. Worley, which
includes approximately $900,000 of Advance Health Care indebtedness assumed by
Dr. Worley (which will be repaid through the issuance of 2,532 shares of Advance
Health Care common stock). Halbert & Associates, Inc. and Dr. Worley are among
the Selling Stockholders in this Offering. See "Principal and Selling
Stockholders." Following the repayment of its indebtedness, Advance Health Care
will distribute the stock of certain subsidiaries of Advance Health Care,
operating in businesses unrelated to the Company, to the AHC Stockholders. After
the spin-off and the repayment of indebtedness referred to above are effected,
Advance Health Care will have no operations or known liabilities, or assets of
its own other than its investment in the Company. The spin-off and the repayment
of indebtedness will not impact the number of outstanding shares of the
Company's Common Stock. In connection with the Merger, the Advance Health Care
incentive stock option plan will be merged with the Plan, and holders of options
under the Advance Health Care incentive stock option plan will receive options
to purchase Common Stock under the Plan.

ISSUANCE OF SERIES B PREFERRED STOCK

On June 25, 1996, the Company and BCBS of Texas entered into a stock
purchase agreement (the "Series B Stock Purchase Agreement") pursuant to which
BCBS of Texas purchased an aggregate of 2,597 shares of the Series B Preferred
Stock at an effective purchase price of $3,850 per share. Upon consummation of
this Offering (and assuming an initial public offering price of $12.00 per
share), the number of shares of Series B Preferred Stock will be adjusted to
3,333 shares (at an effective purchase price of $3,000 per share). BCBS of Texas
has certain registration rights in connection with its shares. As of the date of
sale, the conversion rate of the Series B Preferred Stock was one-to-one.
Following the stock split of the Common Stock in connection with this Offering,
each share of Series B Preferred Stock will be convertible into 250 shares of
Common Stock.

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions between the Company and its
officers, directors, principal stockholders and affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will be on terms
no less favorable to the Company than could be obtained from unaffiliated third
parties.

37
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of Common Stock as of June 30, 1996 adjusted on a pro forma basis to
reflect (i) the 250-for-one stock split of the Common Stock, (ii) the automatic
conversion of each share of Series A Preferred Stock into 250 shares of Common
Stock, (iii) consummation of the Merger of Advance Health Care with and into the
Company and (iv) as adjusted to reflect the sale of the shares offered hereby
for (a) each person who is known to own more than 5% of any voting class of
capital stock, (b) each director and each Named Executive and (c) all executive
officers and directors of the Company as a group. Except as otherwise indicated
below, each of the entities or persons named in the table has sole voting and
investment power with respect to all shares of Common Stock beneficially owned.
No effect has been given to shares reserved for issuance under outstanding stock
options except where otherwise indicated.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING (1) NUMBER OFFERING (2)
----------------------- OF SHARES -----------------------
NUMBER PERCENT OFFERED NUMBER PERCENT
---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
J.H. Whitney & Co. (3)................................. 1,586,500 27.8% -- 1,586,500 20.6%
630 Fifth Avenue
Suite 3200
New York, NY 10111
Canaan Capital Partners L.P. (4)....................... 1,090,750 20.3 -- 1,090,750 14.8
105 Rowayton Avenue
Rowayton, CT 06853
Assicurazioni Generali S.p.A........................... 920,500 17.1 416,667** 503,833 6.8
117 Fenchurch Street
London, EC3M 5DY
United Kingdom
David R. Worley (5).................................... 531,500 9.9 110,000** 421,500 5.7
7103 Valburn Drive
Austin, TX 78731
Halbert & Associates, Inc. (6)......................... 88,250 1.6 62,362** 25,888 *
545 E. John Carpenter Freeway
Suite 1900
Irving, TX 75062
David D. Halbert (7)................................... 651,575 11.6 -- 589,213 7.8
Jon S. Halbert (8)..................................... 456,850 8.2 -- 394,488 5.2
Joseph J. Filipek (9).................................. 45,000 * -- 45,000 *
John H. Sattler (10)................................... 22,500 * -- 22,500 *
Alan T. Wright (11).................................... 5,000 * -- 5,000 *
Michael D. Ware........................................ 27,750 * 27,750 *
Mikel D. Faulkner...................................... 119,375 2.2 119,375 1.6
Peter M. Castleman (12)................................ 1,586,500 27.8 -- 1,586,500 20.6
Stephen L. Green (13).................................. 1,106,250 20.6 -- 1,106,250 15.0
Jeffrey R. Jay (14).................................... 1,605,250 28.1 -- 1,605,250 20.8
Rogers K. Coleman (15)................................. 833,333 13.4 -- 833,333 10.1
All directors and executive officers as a group
(14 persons) (16)..................................... 4,895,933 68.4% -- 4,306,904 47.0%
</TABLE>

- ------------------------
* Less than 1%

** The number of shares offered by this stockholder will be adjusted if the
offering price for the shares offered hereby differs from $12.00 per share,
the assumed initial public offering price herein.

(1) Pursuant to the rules of the Commission, certain shares of the Company's
Common Stock which a person has the right to acquire within 60 days of
October 1, 1996, the assumed effective date of the Offering (the "Assumed
Effective Date"), pursuant to the exercise of options or warrants are deemed
to be outstanding for the purposes of computing the percentage ownership of
such person but are not deemed outstanding for the purposes of computing the
percentage ownership of any other person.

38
<PAGE>

(2) Assumes that the Underwriters' over-allotment option is not exercised.

(3) Includes 250,000 shares of Common Stock owned by J.H. Whitney & Co.,
1,000,000 shares of Common Stock owned by the Whitney 1990 Equity Fund, L.P.
(the "Whitney Fund") and 336,500 shares of Common Stock issuable upon
exercise of the Whitney Warrant held by the Whitney Debt Fund. The General
Partners of J.H. Whitney & Co., who are also the General Partners of the
Whitney Fund, exercise sole investment and voting power with respect to the
shares of Common Stock owned by such entities. Mr. Castleman and Dr. Jay,
each a director of the Company, serve as Managing Partner and General
Partner, respectively, of J.H. Whitney & Co.

(4) Includes 117,000 shares of Common Stock owned by Canaan L.P. and 973,750
shares of Common Stock owned by Canaan Capital Offshore Limited Partnership
C.V. ("Canaan Offshore"). Canaan Capital Limited Partnership ("Canaan L.P.")
exercises sole investment and voting power with respect to the shares of
Common Stock owned by such entities. Mr. Green, a director of the Company,
is a General Partner of Canaan L.P. Does not include 125,000 shares held by
Quai Ltd., as to which Canaan L.P. disclaims beneficial ownership.

(5) Includes 30,000 shares of Common Stock held for the benefit of Dr. Worley's
minor children as to which Dr. Worley disclaims beneficial ownership.

(6) David D. Halbert and Jon S. Halbert are the only executive officers and
directors of Halbert & Associates, Inc. and each owns 50% of the outstanding
capital stock of Halbert & Associates, Inc. David D. Halbert and Jon S.
Halbert may be deemed to share beneficial ownership of the shares held by
Halbert & Associates, Inc.

(7) Includes 214,200 shares issuable pursuant to options which are exercisable
within 60 days of the Assumed Effective Date. Includes 88,250 shares held by
Halbert & Associates, Inc. David D. Halbert may be deemed to beneficially
own all of the shares held by Halbert & Associates, Inc. Also includes
30,000 shares of Common Stock held for the benefit of Mr. D. Halbert's minor
children, as to which Mr. D. Halbert disclaims beneficial ownership.

(8) Includes 214,350 shares issuable pursuant to options which are exercisable
within 60 days of the Assumed Effective Date. Includes 88,250 shares held by
Halbert & Associates, Inc. Jon S. Halbert may be deemed to beneficially own
all of the shares held by Halbert & Associates, Inc. Also includes 30,000
shares of Common Stock held for the benefit of Mr. J. Halbert's minor
children, as to which Mr. J. Halbert disclaims beneficial ownership.

(9) Includes 45,000 shares issuable pursuant to options which are exercisable
within 60 days of the Assumed Effective Date.

(10) Includes 22,500 shares issuable pursuant to options which are exercisable
within 60 days of the Assumed Effective Date.

(11) Includes 5,000 shares issuable pursuant to options which are exercisable
within 60 days of the Assumed Effective Date.

(12) Includes no shares held directly by Mr. Castleman. Mr. Castleman, a
director of the Company, is a General Partner of J.H. Whitney & Co., the
General Partner of the Whitney Fund and the Whitney Debt Fund and therefore
may be deemed to share beneficial ownership of the shares held by the
Whitney Investors. J.H. Whitney, the Whitney Fund and the Whitney Debt Fund
are collectively referred to as the "Whitney Investors."

(13) Includes 15,500 shares held directly by Mr. Green. Mr. Green, a director of
the Company, is a General Partner of Canaan Partners, the General Partner of
Canaan L.P. and Canaan Offshore and therefore may be deemed to share
beneficial ownership of the shares held by the Canaan Investors other than
125,000 shares held by Quai Ltd., as to which Mr. Green disclaims beneficial
ownership. Canaan L.P., Canaan Offshore, Quai Ltd., Dr. Jay and Mr. Green
are collectively referred to as the "Canaan Investors."

(14) Includes 18,750 shares held directly by Dr. Jay. Dr. Jay, a director of the
Company, is a General Partner of J.H. Whitney & Co., the General Partner of
the Whitney Fund and the Whitney Debt Fund and therefore may be deemed to
share beneficial ownership of the shares held by the Whitney Investors.

(15) Represents 833,333 shares issuable upon the conversion of the Series B
Preferred Stock held by BCBS of Texas, assuming an initial public offering
price of $12.00 per share. Dr. Coleman is the President and Chief Executive
Officer of BCBS of Texas. Dr. Coleman disclaims beneficial ownership of
these shares.

(16) Includes 2,429,000 shares held by entities affiliated with certain
directors and includes 605,600 shares subject to stock options held by
directors and officers exercisable within 60 days of the Assumed Effective
Date. See footnotes (7)-(11).

39
<PAGE>
DESCRIPTION OF CAPITAL STOCK

The Company's authorized capital stock consists of (i) 7,500,000 shares of
Common Stock, (ii) 10,000 shares of Series A Preferred Stock and (iii) 3,000
shares of Series B Preferred Stock. After giving effect to the Offering and the
consummation of the Merger, 7,379,500 shares of Common Stock, no shares of
Series A Preferred Stock and 3,333 shares of Series B Preferred Stock will be
outstanding. Assuming the underwriters' over-allotment option is exercised in
full, upon consummation of the Offering, 7,767,854 shares of Common Stock will
be outstanding.

The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, the Restated Certificate of the Company and the Bylaws of
the Company that are included as exhibits to the registration statement of which
this Prospectus forms a part and by the provisions of applicable law.

COMMON STOCK

After giving effect to the Merger as if it had occurred on June 30, 1996,
there were 5,379,500 shares of Common Stock outstanding which were held of
record by 53 stockholders, as adjusted to reflect (i) the 250-for-one stock
split, (ii) the conversion of the Series A Preferred Stock and (iii) the
consummation of the Merger all of which will occur immediately prior to or
concurrently with the closing of this Offering. Common Stock is not redeemable,
does not have any conversion rights and is not subject to call. Holders of
shares of Common Stock have no preemptive, redemption, conversion or other
subscription rights. Holders of shares of Common Stock are entitled to one vote
per share on any matter submitted to a vote of stockholders of the Company.
Cumulative voting is prohibited in the election of directors. The holders of
Common Stock are entitled to receive dividends, if any, as and when declared
from time to time by the Board of Directors of the Company out of funds legally
available therefor. See "Dividend Policy." Subject to the rights of the holders
of Preferred Stock, upon liquidation, dissolution or winding up of the affairs
of the Company, the holders of Common Stock will be entitled to participate
equally and ratably, in proportion to the number of shares held, in the net
assets of the Company available for distribution to holders of Common Stock. The
shares of Common Stock currently outstanding are, and the shares of Common Stock
offered hereby when issued will be, validly issued, fully paid and
nonassessable.

PREFERRED STOCK

Upon consummation of this Offering, all shares of the Series A Preferred
Stock will convert automatically into shares of Common Stock at a 250-for-one
conversion rate. All of the shares of the Series A Preferred Stock issued and
outstanding are held by the Canaan Investors and the Whitney Investors. The
holders of the Series A Preferred Stock are entitled to one vote per share on
matters submitted to a vote of the stockholders and, except as otherwise
provided by law, vote together with the holders of Common Stock as a single
class.

Holders of the Series A Preferred Stock are entitled to receive, out of
funds legally available therefor, cumulative dividends, calculated without
compounding, equal to $80 per share per annum. Such cumulative dividends accrue
and accumulate from the date of issuance and are payable if, as and when
declared by the Board of Directors of the Company. Further, the holders of the
Series A Preferred Stock are entitled to any dividends that the Board of
Directors may declare to be payable on shares of Common Stock as if the shares
of the Series A Preferred Stock had been converted into shares of Common Stock.
Upon the liquidation, dissolution or winding up of the Company, the holders of
the Series A Preferred Stock have the right, prior to any existing or future
classes of capital stock, to receive $1,000 plus all accrued and unpaid
dividends for each outstanding share of Series A Preferred Stock and to
participate equally and ratably with the holders of the Common Stock in the net
assets of the Company available for distribution to stockholders. On or after
August 4, 1999, the holders of 60% of the outstanding shares of Series A
Preferred Stock may require the Company to redeem any or all of such holders'
shares at a price equal to the greater of (i) the original price paid per share,
plus accrued and unpaid dividends, and (ii) the fair market value of such
shares. The payment of the redemption price, if any, will be made in three
equal, annual installments. Upon the consummation of this Offering and the
conversion of all outstanding shares of Series A Preferred Stock into Common
Stock, all accrued but unpaid dividends on the Series A Preferred Stock
dividends will be forfeited.

40
<PAGE>

Holders of the Series B Preferred Stock are not entitled to vote on any
matter. The holders of the Series B Preferred Stock are entitled to receive, out
of funds legally available therefor, cumulative dividends, calculated without
compounding, equal to $60.00 per share per annum. Such cumulative dividends
accrue and accumulate from the date of issuance and are payable on March 31 of
each year. Further, the holders of the Series B Preferred Stock are entitled to
any dividends that the Board of Directors may declare to be payable on shares of
Common Stock as if the shares of Series B Preferred Stock had been converted
into shares of Common Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of the Series B Preferred Stock have the right, prior
to any existing or future classes of capital stock, but after the Series A
Preferred Stock, to receive $10.0 million plus all accrued and unpaid dividends
of Series B Preferred Stock and to participate equally and ratably with the
holders of the Common Stock in the net assets of the Company available for
distribution to stockholders. On or after June 25, 1998, the Company, in its
sole discretion, may redeem any or all of such holders' shares at a price equal
to the original price paid per share, plus accrued and unpaid dividends. The
Company has the right to convert the Series B Preferred Stock into Common Stock
at any time after the fifth anniversary of issuance. The conversion rate for the
Series B Preferred Stock will be proportionately adjusted for the 250-for-one
stock split. If the Company forces such a conversion, the holders of the Series
B Preferred Stock will be entitled to piggy-back registration rights in
connection with future registered offerings of shares of Common Stock.

WARRANTS TO PURCHASE COMMON STOCK

Effective December 8, 1993, in connection with the Advance Clinical
acquisition, the Company issued to the Whitney Debt Fund a warrant to purchase
336,500 shares of Common Stock, exercisable in whole or in part during a
ten-year term, at an exercise price of $4.00 per share. In addition, in
connection with the Advance Clinical acquisition, effective December 8, 1993,
the Company issued to BCBS of Maryland a warrant to purchase 56,250 shares of
Common Stock, exercisable in whole during a four-year term at an aggregate
exercise price of $337,500. The warrants contain certain demand and piggy-back
registration rights relating to the Common Stock underlying the warrants. See
"Shares Eligible for Future Sale--Registration Rights."

On November 25, 1995, the Company granted to BCBS of Texas the right to earn
up to four BCBS of Texas Warrants, each representing the right to acquire 66,750
shares of Common Stock, in consideration of BCBS of Texas causing additional
lives to be enrolled in the Company's PBM programs. BCBS of Texas' right to earn
up to four BCBS of Texas Warrants expires November 25, 2000. Each BCBS of Texas
Warrant will not be exercisable until the first anniversary of its issuance. At
such time, the BCBS of Texas Warrant will be exercisable in whole during a
four-year term at a per share exercise price of $11.00. As of the date of the
Prospectus, none of the BCBS of Texas Warrants has been earned or issued.

In addition, prior to the end of September 1996, the Company anticipates
entering into an agreement with VHA Inc. pursuant to which, among other things,
the Company will grant to VHA Inc. the right to earn up to ten warrants, each
representing the right to acquire 28,125 shares of Common Stock in consideration
of VHA Inc. causing additional lives to be enrolled in the Company's PBM
programs (the "VHA Warrants"). VHA Inc.'s right to earn the VHA Warrants will
expire five years after the date of issuance. Each VHA Warrant earned will be
exercisable in whole beginning on the first anniversary of its issuance and
ending on the fifth anniversary of the issuance at an estimated exercise price
equal to 90% of the initial public offering price per share in this Offering.

The Company has agreed pursuant to a letter of intent to issue a warrant
representing the right to acquire $84,500 shares of Common Stock to Principal
Health Care, Inc. ("PHC") upon execution of a definitive agreement pursuant to
which the Company is the provider of PBM services for PHC and its wholly owned
subsidiaries (the "PHC Warrant"). The PHC Warrant will be exercisable in whole
beginning on the first anniversary of its issuance and ending on the fifth
anniversary of its issuance at an exercise price equal to 90% of the initial
public offering price per share in this Offering.

The foregoing description of the warrants issued by the Company is qualified
in its entirety by reference to such warrants which have been filed as exhibits
to the Registration Statement of which this Prospectus constitutes a part.

41
<PAGE>
TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is Chase Mellon
Shareholder Services, L.L.C.

VOTING AGREEMENTS

In connection with the Canaan and Whitney capital investment, Advance Health
Care, the Canaan Investors, the Whitney Investors and Messrs. D. Halbert, J.
Halbert and Phillips entered into a Voting, Co-Sale and Right of First Refusal
Agreement dated as of August 4, 1993 (the "Voting Agreement"). In the Voting
Agreement, the stockholders agreed to vote all of their shares in favor of a
nine member Board of Directors consisting of two persons designated by the
Whitney Investors, two persons designated by the Canaan Investors and five
additional persons, at least two of whom may not be employees or officers of the
Company, designated by Advance Health Care and the Company. Further, the
stockholders agreed to establish an Audit Committee consisting of three members,
at least one of whom will be a director nominated by the Canaan Investors and
the Whitney Investors, and a Compensation Committee consisting of four members,
at least two of whom will be directors nominated by the Canaan Investors and the
Whitney Investors. The parties to the Voting Agreement have agreed to terminate
such agreement effective upon consummation of this Offering (the "Termination
Agreement.")

Holders of the Series B Preferred Stock are not entitled to vote on any
matter. Pursuant to the Series B Stock Purchase Agreement, the holders of the
Series B Preferred Stock (or the holders of Common Stock obtained upon
conversion of the Series B Preferred Stock) agree to consent to and execute any
documents in connection with any proposed merger of the Company where the
Company would not be the surviving entity, the sale of a majority of the capital
stock of the Company, or the sale of all or substantially all of its assets.

The foregoing descriptions of the Voting Agreement, Termination Agreement
and Series B Stock Purchase Agreement are qualified in their entirety by
reference to the Voting Agreement and Termination Agreement which have been
filed as exhibits to the Registration Statement of which this Prospectus
constitutes a part.

CERTAIN PROVISIONS OF THE COMPANY'S RESTATED CERTIFICATE AND BYLAWS

Pursuant to the Restated Certificate, the members of the Board of Directors
are divided into three classes of directors serving staggered three-year terms,
with the number of directors in each class to be as nearly equal as possible.
The term of office of the members in the first class will expire at the next
annual meeting of the stockholders, the second class will expire one year
thereafter, and the third class will expire one year thereafter. The Board of
Directors has no current plans to formulate or effect additional measures that
could have an anti-takeover effect.

Section 102(b)(7) of the Delaware General Corporation Law provides that a
Delaware corporation may include in its certificate of incorporation a provision
eliminating or limiting the personal liability of directors to the corporation
or its stockholders for monetary damages for breach of their fiduciary duty
including acts constituting gross negligence, except under certain
circumstances, including breach of the director's duty of loyalty, acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of law or any transaction from which the director derived improper
personal benefit. The Company's Restated Certificate provides that the Company's
directors are not liable to the Company or its stockholders for monetary damages
for breach of their fiduciary duties, subject to the exceptions specified by
Delaware law.

The Company's Restated Certificate and Bylaws also provide that the Company
will indemnify its directors and officers to the fullest extent permitted by
Delaware law. The Company is generally required to indemnify its directors and
officers for all judgments, fines, loss, liability, settlements, legal fees and
other expenses incurred in connection with pending or threatened legal
proceedings because of the director's or officer's position with the Company or
another entity that the director or officer serves at the Company's request,
subject to certain conditions, and to advance funds to its directors and
officers to enable them to defend against such proceedings. To receive
indemnification, the director or officer must have been successful in the legal
proceeding or acted in good faith and in what he reasonably believed to be a
lawful manner and the Company's best interest.

42
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, the Company will have 7,379,500 shares of
Common Stock outstanding, assuming no exercise of options after August 31, 1996
and after giving effect to (i) the 250-for-one stock split, and (ii) the
issuance of 2,500,000 shares of Common Stock upon automatic conversion of all
shares of Series A Preferred Stock and (iii) the consummation of the Merger, all
of which will occur immediately prior to or concurrently with the closing of
this Offering. Of these shares, the 2,589,029 shares of Common Stock sold in
this Offering will be freely tradeable without restriction or further
registration under the Securities Act except for any shares purchased by
"affiliates" of the Company as that term is defined in the Securities Act. The
remaining 4,790,471 shares of Common Stock outstanding upon completion of this
Offering are restricted securities as that term is defined in Rule 144 under the
Securities Act ("Rule 144"). All of these shares will be subject to "lock-up"
agreements which prohibit their sale for a period of 180 days following the date
of this Prospectus without the prior consent of Hambrecht & Quist LLC.

Upon expiration of the 180-day lock-up period, an aggregate of 3,058,138
shares of Common Stock will be eligible for sale without restriction pursuant to
Rule 144(k) (as described below), and 1,732,333 shares will be eligible for sale
subject to the volume, manner of sale and other applicable restrictions of Rule
144. In addition, of the 1,061,500 shares of Common Stock issuable upon the
exercise of outstanding options, approximately 627,100 shares of Common Stock
are immediately issuable upon the exercise of vested options and will become
eligible for sale, if such options are exercised, after the date of this
Prospectus. The holders of such options are expected to enter into 180-day
lock-up agreements in connection with this Offering.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) whose restricted securities have
been outstanding for at least two years, including a person who may be deemed an
"affiliate" of the Company, may only sell a number of shares within any
three-month period which does not exceed the greater of (i) one percent of the
then outstanding shares of the Company's Common Stock (approximately 73,795
shares after this Offering) or (ii) the average weekly trading volume in the
Company's Common Stock in the four calendar weeks immediately preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice and the availability of current public information about
the Company. A person who is not an affiliate of the issuer, has not been an
affiliate within three months prior to the sale and has owned the restricted
securities for at least three years is entitled to sell such shares under Rule
144(k) without regard to any of the limitations described above.

Beginning 90 days after the date of this Prospectus, certain shares issued
or issuable upon the exercise of options granted by the Company or acquired
pursuant to the Plan prior to the date of this Prospectus will also be eligible
for sale in the public market pursuant to Rule 701 under the Securities Act. In
general, Rule 701 permits resales of shares issued pursuant to certain
compensatory benefit plans and contracts commencing 90 days after the issuer
becomes subject to the reporting requirements of the Exchange Act, in reliance
upon Rule 144, but without compliance with certain restrictions of Rule 144,
including the holding period requirements. As of August 31, 1996 and after
giving effect to the Merger, the Company had options outstanding covering
434,400 shares which become exercisable at various times in the future as such
options vest. Any shares of Common Stock issued upon the exercise of these
options will be eligible for sale pursuant to Rule 701.

Prior to this Offering, there has been no market for the Common Stock and no
prediction can be made as to the effect, if any, that market sales of shares or
the availability of such shares for sale will have on the market price of the
Common Stock. Nevertheless, sales of substantial amounts of Common Stock in the
public market may adversely affect the market price and may impair the Company's
future ability to raise capital through the public sale of its Common Stock.

REGISTRATION RIGHTS

Substantially all of the current stockholders of the Company, as well as
BCBS of Maryland and the Whitney Debt Fund upon exercise of their warrants, and
BCBS of Texas, as the holder of Series B Preferred Stock and the BCBS of Texas
Warrants (collectively, the "Rights Holders"), are entitled to include in any
registration of the Company's Common Stock in a public offering, whether for its
own account or for the account of another security holder up to a total of
approximately 6,672,500 shares of outstanding Common Stock, assuming conversion
of all outstanding Preferred Stock into Common Stock and the full exercise of
the outstanding

43
<PAGE>

warrants (the "Registrable Shares"). Subject to certain limitations, the holders
of at least 60% of the shares currently held by the Canaan Investors, the
Whitney Investors and Advance Health Care and their assigns may require, at any
time commencing six months after the date of this Prospectus, on two occasions,
that the Company cause their shares to be registered under the Securities Act.
Such a demand by the Canaan Investors and the Whitney Investors must include at
least 50% of the outstanding shares issued to them. The managing underwriter of
any offering in which Rights Holders participate may limit the number of
Registrable Shares to be included in the registration; provided that the Canaan
Investors and Whitney Investors will be entitled to register on a pro-rata basis
among such holders two shares for every one share held by Advance Health Care
that is included in a registration. In addition, the holders of at least 60% of
the shares held by the Canaan Investors, the Whitney Investors and Advance
Health Care and their assigns may require the Company, on three occasions, to
cause their shares to be registered on a Form S-3 registration statement (or
other form with similar requirements) under the Securities Act at any time such
form is available to the Company, but in no event more than seven years after
the date of this Prospectus. In connection with the Merger, the registration
rights of Advance Health Care will be assigned to the stockholders of Advance
Health Care. All of the Rights Holders entitled to registration rights, other
than the Selling Stockholders, have waived such rights in connection with this
Offering.

44
<PAGE>
UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC,
Montgomery Securities and J.P. Morgan Securities Inc., have severally agreed to
purchase from the Company and the Selling Stockholders the following respective
numbers of shares of Common Stock.

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- ----------
<S> <C>
Hambrecht & Quist LLC.............................................................
Montgomery Securities.............................................................
J.P. Morgan Securities Inc........................................................

----------
Total......................................................................... 2,589,029
----------
----------
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and the Selling
Stockholders, their counsel and the Company's independent auditors. The nature
of the Underwriters' obligation is such that they are committed to purchase all
shares of Common Stock offered hereby if any such shares are purchased.

The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. The
Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority. After the initial public offering of the shares, the
offering price and other selling terms may be changed by the Representatives of
the Underwriters.

The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 388,354
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of Common Stock offered hereby.

The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.

45
<PAGE>

Under certain agreements between the Representatives and the stockholders of
the Company (or their respective predecessors-in-interest), the existing
stockholders of the Company and of Advance Health Care, including the Selling
Stockholders and the Company's directors and executive officers, who will own in
the aggregate 4,790,471 shares of Common Stock after the Offering, may not,
without the prior written consent of Hambrecht & Quist LLC, directly or
indirectly, sell, offer, contract to sell, transfer the economic risk of
ownership in, make any short sale, pledge or otherwise dispose of any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for or any other rights to purchase or acquire Common Stock beneficially owned
by them during the 180 day period following the effective date of the
Registration Statement. In addition, the Company has agreed that, without the
prior written consent of Hambrecht & Quist LLC on behalf of the Underwriters,
the Company will not, directly or indirectly, sell, offer, contract to sell,
make any short sale, pledge, sell any option or contract to purchase, purchase
any option or contract to sell, grant any option, right or warrant to purchase
or otherwise transfer or dispose of any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for or any rights to purchase or
acquire Common Stock, or enter into any swap or other agreement that transfers,
in whole or in part, any of the economic consequences or ownership of Common
Stock, during the 180 day period following the effective date of the
Registration Statement, except that the Company may issue, and grant options to
purchase, shares of Common Stock under its current stock option plans and may
issue shares of Common Stock in connection with certain acquisition
transactions, provided such shares are subject to the 180-day lock-up agreement.
Sales of such shares in the future could adversely affect the market price of
the Common Stock. Hambrecht & Quist LLC may, in its sole discretion, release any
of the shares subject to the lock-up agreements at any time without notice.

Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation among the Company, the Selling Stockholders and the Representatives.
Among the factors to be considered in determining the initial public offering
price will be prevailing market and economic conditions, revenues and earnings
of the Company, market valuations of other companies engaged in activities
similar to those of the Company, estimates of the business potential and
prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors deemed relevant.

LEGAL MATTERS

The validity of the Common Stock being offered hereby will be passed upon
for the Company by Akin, Gump, Strauss, Hauer & Feld, L.L.P. Certain legal
matters in connection with this Offering will be passed upon for the
Underwriters by Brobeck, Phleger & Harrison LLP, Austin, Texas.

EXPERTS

The Consolidated Financial Statements as of March 31, 1995 and 1996 and for
each of the three years in the period ended March 31, 1996, included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.

46
<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets--March 31, 1995 and 1996 and June 30, 1996 (unaudited).... F-3
Consolidated Statements of Operations for the Years Ended March 31, 1994, 1995 and
1996 and for the Three Months Ended June 30, 1995 and 1996 (unaudited)............... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years ended March
31, 1994, 1995 and 1996 and for the Three Months Ended June 30, 1996 (unaudited)..... F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 1994, 1995 and
1996 and for the Three Months Ended June 30, 1995 and 1996 (unaudited)............... F-6
Notes to Consolidated Financial Statements............................................ F-7

PARADIGM PHARMACY MANAGEMENT, INC.

Report of Independent Public Accountants.............................................. F-16
Statement of Operations for the Eleven Months Ended November 30, 1993................. F-17
Statement of Stockholder's Equity for the Eleven Months Ended November 30, 1993....... F-18
Statement of Cash Flows for the Eleven Months Ended November 30, 1993................. F-19
Notes to Financial Statements......................................................... F-20
</TABLE>

F-1
<PAGE>
After the 250-for-one stock split discussed in Note 15 to the Company's
Consolidated Financial Statements is effected, we expect to be in a position to
render the following audit report.

ARTHUR ANDERSEN LLP

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Advance ParadigM, Inc.:

We have audited the accompanying consolidated balance sheets of Advance
ParadigM, Inc. (a Delaware corporation formerly known as Advance Pharmacy
Services, Inc.) and subsidiaries as of March 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended March 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Advance ParadigM, Inc. and
subsidiaries as of March 31, 1995 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1996, in conformity with generally accepted accounting principles.

As explained in Note 2 to the financial statements, the Company has given
retroactive effect to the change in accounting for network claim costs.

Dallas, Texas,
May 6, 1996 (except with respect to the
matters discussed in Note 15, as to which
the date is , 1996)

F-2
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1995 1996
------------- ------------- JUNE 30, 1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 2,625,000 $ 16,457,000 $ 25,637,000
Accounts receivable, net of allowance for doubtful accounts of
$141,000, $130,000 and $130,000, respectively.................... 15,997,000 23,078,000 26,470,000
Inventories....................................................... 1,231,000 1,598,000 1,483,000
Prepaid expenses and other........................................ 400,000 449,000 627,000
------------- ------------- -------------
Total current assets............................................ 20,253,000 41,582,000 54,217,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization of $980,000, $1,935,000 and $2,236,000,
respectively....................................................... 3,442,000 4,080,000 4,714,000
INTANGIBLE ASSETS, net of accumulated amortization of $461,000,
$808,000 and $895,000, respectively................................ 13,392,000 13,045,000 12,959,000
OTHER ASSETS, net of accumulated amortization of $136,000, $49,000
and $2,000, respectively........................................... 201,000 198,000 201,000
------------- ------------- -------------
Total assets.................................................... $ 37,288,000 $ 58,905,000 $ 72,091,000
------------- ------------- -------------
------------- ------------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.................................................. $ 19,080,000 $ 39,000,000 $ 41,923,000
Accrued salaries and benefits..................................... 873,000 1,283,000 689,000
Other accrued expenses............................................ 509,000 934,000 1,136,000
Current portion of other noncurrent liabilities................... 244,000 49,000 37,000
------------- ------------- -------------
Total current liabilities....................................... 20,706,000 41,266,000 43,785,000
NONCURRENT LIABILITIES:
Long-term debt to related parties................................. 7,000,000 7,000,000 7,000,000
Other noncurrent liabilities, less current portion................ 238,000 241,000 241,000
------------- ------------- -------------
Total liabilities............................................... 27,944,000 48,507,000 51,026,000
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK:
Series A cumulative convertible preferred stock, $.01 par value;
10,000 shares authorized, issued, and outstanding at March 31,
1995 and 1996 and June 30, 1996, with aggregate liquidation
preference of $11,159,000, $11,959,000 and $12,159,000,
respectively..................................................... 11,076,000 11,896,000 12,099,000
------------- ------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT):
Series B preferred stock, $.01 par value; 3,000 shares authorized,
0, 0 and 2,597 shares issued and outstanding at March 31, 1995
and 1996 and June 30, 1996, respectively.........................
Common stock, $.01 par value; 7,500,000 shares authorized,
3,125,000, 3,130,500 and 3,130,500 shares issued and outstanding
at March 31, 1995 and 1996 and June 30, 1996, respectively....... -- -- --
Additional paid-in capital........................................ 1,501,000 1,518,000 11,518,000
Accumulated deficit............................................... (3,233,000) (3,016,000) (2,552,000)
------------- ------------- -------------
Total stockholders' equity (deficit)............................ (1,732,000) (1,498,000) 8,966,000
------------- ------------- -------------
Total liabilities and stockholders' equity (deficit)............ $ 37,288,000 $ 58,905,000 $ 72,091,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-3
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, THREE MONTHS ENDED JUNE 30,
-------------------------------------------- ----------------------------
1994 1995 1996 1995 1996
------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
REVENUES............................ $ 34,970,000 $ 91,306,000 $ 125,333,000 $ 25,692,000 $ 49,809,000
------------- ------------- -------------- ------------- -------------
COST OF OPERATIONS:
Cost of revenues.................. 32,612,000 85,532,000 117,788,000 24,445,000 47,454,000
Selling, general, and
administrative expenses.......... 2,330,000 4,963,000 6,158,000 1,442,000 1,714,000
------------- ------------- -------------- ------------- -------------
Total cost of operations........ 34,942,000 90,495,000 123,946,000 25,887,000 49,168,000
------------- ------------- -------------- ------------- -------------
Operating income (loss)......... 28,000 811,000 1,387,000 (195,000) 641,000
INTEREST INCOME..................... -- 91,000 366,000 39,000 205,000
INTEREST EXPENSE.................... (423,000) (878,000) (716,000) (179,000) (177,000)
------------- ------------- -------------- ------------- -------------
NET INCOME (LOSS)................... $ (395,000) $ 24,000 $ 1,037,000 (335,000) $ 669,000
------------- ------------- -------------- ------------- -------------
------------- ------------- -------------- ------------- -------------
PRO FORMA NET INCOME PER SHARE...... $ .25 $ .12
-------------- -------------
-------------- -------------
PRO FORMA WEIGHTED AVERAGE SHARES
OUTSTANDING........................ 6,956,250 6,956,250
--------------
--------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-4
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

FOR THE YEARS ENDED MARCH 31, 1994, 1995, AND 1996

<TABLE>
<CAPTION>
SERIES B PREFERRED
COMMON STOCK STOCK
---------------------- ---------------------- ADDITIONAL
NUMBER OF NUMBER OF PAID-IN ACUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ---------- ----------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1993.............. 3,125,000 $ -- -- $ -- $ 1,661,000 $ (1,670,000) $ (9,000)
Assumption of note payable in
conjunction with the formation of
API............................... -- -- -- -- (500,000) -- (500,000)
Capital contribution from Parent... -- -- -- -- 173,000 -- 173,000
Issuance of 1,346 Common Stock
warrants valued at $124 per
warrant........................... -- -- -- -- 167,000 -- 167,000
Net loss........................... -- -- -- -- -- (395,000) (395,000)
Dividends ($35.90 per share) and
accretion on Redeemable Preferred
Stock............................. -- -- -- -- -- (372,000) (372,000)
---------- ---------- ----- --------- ------------- ------------ -------------
BALANCE, March 31, 1994.............. 3,125,000 -- -- -- 1,501,000 (2,437,000) (936,000)
Net income......................... -- -- -- -- -- 24,000 24,000
Dividends ($80.00 per share) and
accretion on Redeemable Preferred
Stock............................. -- -- -- -- -- (820,000) (820,000)
---------- ---------- ----- --------- ------------- ------------ -------------
BALANCE, March 31, 1995.............. 3,125,000 -- -- -- 1,501,000 (3,233,000) (1,732,000)
Net income......................... -- -- -- -- -- 1,037,000 1,037,000
Dividends ($80.00 per share) and
accretion on Redeemable Preferred
Stock............................. -- -- -- -- -- (820,000) (820,000)
Issuance of Common Stock in
connection with the exercise of
employee stock options............ 5,500 -- -- -- 17,000 -- 17,000
---------- ---------- ----- --------- ------------- ------------ -------------
BALANCE, March 31, 1996.............. 3,130,500 -- -- -- 1,518,000 (3,016,000) (1,498,000)
Net Income......................... -- -- -- -- -- 669,000 669,000
Issuance of 2,597 shares of Series
B Preferred Stock................. -- -- 2,597 -- 10,000,000 -- 10,000,000
Dividends ($20.00 per share) and
accretion on Redeemable Preferred
Stock............................. -- -- -- -- -- (205,000) (205,000)
---------- ---------- ----- --------- ------------- ------------ -------------
BALANCE, June 30, 1996............... 3,130,500 $ -- 2,597 $ -- $ 11,518,000 $ (2,552,000) $ 8,966,000
---------- ---------- ----- --------- ------------- ------------ -------------
---------- ---------- ----- --------- ------------- ------------ -------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-5
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30
----------------------------------- ---------------------
1994 1995 1996 1995 1996
----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ (395,000) $ 24,000 $1,037,000 $(335,000) $ 669,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities--
Depreciation and amortization............................ 319,000 969,000 1,313,000 306,000 388,000
Noncash interest expense................................. 215,000 162,000 -- -- --
Provision for doubtful accounts.......................... 27,000 58,000 23,000 18,000 --
Change in certain assets and liabilities, net of effects
from acquisition of subsidiary--
(Increase) decrease in accounts receivable............. 204,000 (5,333,000) (7,104,000) 381,000 (3,392,000)
Increase in inventories................................ (697,000) (183,000) (367,000) (190,000) 114,000
(Increase) decrease in prepaid expenses and other
assets................................................ (172,000) (324,000) (58,000) 50,000 (182,000)
Increase in accounts payable, accrued expenses, and
other noncurrent liabilities.......................... 1,535,000 8,285,000 20,809,000 853,000 2,530,000
----------- ---------- ---------- --------- ----------
Net cash provided by operating activities.............. 1,036,000 3,658,000 15,653,000 1,083,000 127,000
----------- ---------- ---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................ (1,270,000) (2,245,000) (1,594,000) (216,000) (935,000)
Acquisition of subsidiary, net of cash received............ (14,134,000) -- -- -- --
----------- ---------- ---------- --------- ----------
Net cash used in investing activities.................. (15,404,000) (2,245,000) (1,594,000) (216,000) (935,000)
----------- ---------- ---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock.................. 9,884,000 -- -- -- 10,000,000
Net proceeds from issuance of long-term debt............... 6,623,000 -- -- -- --
Net proceeds from issuance of Common Stock and warrants.... 167,000 -- 17,000 17,000 --
Net payments on line of credit and long-term obligations... (359,000) (245,000) (244,000) (11,000) (12,000)
Payment of note payable transferred from AHC............... (500,000) -- --
----------- ---------- ---------- --------- ----------
Net cash provided by (used in) financing activities.... 15,815,000 (245,000) (227,000) 6,000 9,988,000
----------- ---------- ---------- --------- ----------
NET INCREASE IN CASH......................................... 1,447,000 1,168,000 13,832,000 873,000 9,180,000
CASH AND CASH EQUIVALENTS, beginning of year................. 10,000 1,457,000 2,625,000 2,625,000 16,457,000
----------- ---------- ---------- --------- ----------
CASH AND CASH EQUIVALENTS, end of year....................... $ 1,457,000 $2,625,000 $16,457,000 $3,498,000 $25,637,000
----------- ---------- ---------- --------- ----------
----------- ---------- ---------- --------- ----------
</TABLE>

SUPPLEMENTARY INFORMATION:

Cash paid for interest totaled approximately $208,000, $716,000, $716,000,
$179,000 and $177,000
in 1994, 1995, 1996, and June 30, 1995 and 1996 respectively.

The Company made no income tax payments in 1994, 1995, 1996 or as of June
30, 1996.

The Company incurred a capital lease obligation of $138,000 in 1994.

The Company received noncash capital contributions from AHC of $173,000 in
1994. It also assumed a
$500,000 note payable in conjunction with the formation of API in 1994.

The accompanying notes are an integral part of these consolidated financial
statements.

F-6
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL:
Advance ParadigM, Inc. (API), a Delaware corporation formerly named Advance
Pharmacy Services, Inc., was formed as a wholly owned subsidiary of Advance
Health Care, Inc. (AHC) in July 1993. The accompanying consolidated financial
statements include the accounts of API and its three wholly owned subsidiaries,
Advance ParadigM Mail Services, Inc. (Advance Mail), Advance ParadigM Data
Services, Inc. (Advance Data), and Advance ParadigM Clinical Services, Inc.
(Advance Clinical), which are collectively referred to as the Company.

API was formed when AHC contributed its wholly owned subsidiaries Advance
Mail and Advance Data subject to a $500,000 note payable (see Note 12) in
exchange for all of the then outstanding shares of API's Common Stock. The
transaction was accounted for as a reorganization of entities under common
control in a manner similar to a pooling of interests. Accordingly, the accounts
of Advance Mail and Advance Data are based on historical cost, and operations of
Advance Mail and Advance Data are included from the date of their formation by
AHC. In December 1993, API acquired all of the outstanding stock of Advance
Clinical in a business combination accounted for as a purchase (see Note 8). The
operating results for Advance Clinical are included for the period since its
acquisition by API.

The Company offers an integrated program of pharmacy benefit management.
Clinical, rebate, and formulary services are provided through Advance Clinical.
Claims processing for prescription drugs purchased at the Company's network of
retail pharmacies is provided through Advance Data. The dispensing of
prescription drugs through the mail is provided through Advance Mail.

In the year ended March 31, 1996, the Company began marketing health benefit
management services (HBM Services) to certain health plans, pharmaceutical
manufacturers, and other research and managed care organizations, and began
programs for disease management services with selected customers.

The Company is currently in the process of an initial public offering (the
Offering) of its $.01 par value Common Stock. The Company plans to use the net
proceeds from the Offering (i) to retire the note payable to Whitney
Subordinated Debt Fund, L.P., an affiliate of a principal stockholder of the
Company, in the amount of $7.0 million, (ii) to provide further automation of
the Company's Richardson, Texas facility, including capital improvements and
equipment (which are estimated to be approximately $2.9 million), and (iii) to
expand the Company's claims processing system (which are estimated to be
approximately $1.8 million). The balance in net proceeds available to the
Company will be used to fund working capital, possible acquisitions of similar
or complementary businesses and general corporate purposes.

In connection with the Offering, the Company's redeemable Series A Preferred
Stock will automatically be converted into 2,500,000 shares of Common Stock. The
pro forma information below gives effect to such conversion and the merger of
AHC with and into API (see Note 15).

<TABLE>
<CAPTION>
JUNE 30, 1996 (UNAUDITED)
----------------------------------------------------
AS STATED PRO FORMA
------------------------- -------------------------
NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Redeemable Series A Preferred Stock..................... 10,000 $ 12,099,000 -- $ --

Stockholders' equity (deficit)--
Series B Preferred Stock.............................. 2,597 $ -- 2,597 $ --
Common stock.......................................... 3,130,500 -- 5,379,500 --
Additional paid-in capital............................ -- 11,518,000 -- 23,617,000
Accumulated deficit................................... -- (2,552,000) -- (2,552,000)
------------- -------------
Total stockholders' equity (deficit).................. $ 8,966,000 $ 21,065,000
------------- -------------
------------- -------------
</TABLE>

F-7
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CONSOLIDATION

The accompanying financial statements include the accounts of API and its
wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

UNAUDITED INTERIM FINANCIAL STATEMENTS

The accompanying unaudited interim financial statements have been prepared
by the Company in accordance with generally accepted accounting principles for
interim financial information and substantially in the form prescribed by the
Securities and Exchange Commission in instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company's management, the June 30,
1995 and 1996 unaudited interim financial statements include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
results for this interim period. The results of operations for the three months
ended June 30, 1995 and 1996 are not necessarily indicative of the results to be
expected for the full year or for any future period.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include overnight investments and money market
accounts.

INVENTORIES

Inventories consist of pharmaceuticals stated at the lower of cost or market
under the first-in, first-out method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed on the straight-line method over
estimated useful lives ranging from three to ten years. Amortization of
leasehold improvements is computed over the lives of the assets or the lease
terms, whichever is shorter. Major renewals and betterments are added to the
property and equipment accounts while costs of repairs and maintenance are
charged to operating expenses in the period incurred. The cost of assets
retired, sold or otherwise disposed of and the applicable accumulated
depreciation are removed from the accounts, and the resultant gain or loss, if
any, is reflected in the statement of operations.

INTANGIBLE ASSETS

Intangible assets represent the excess of cost over the fair value of
tangible net assets acquired (goodwill) in connection with the acquisition of
Advance Clinical (see Note 8). Goodwill is amortized on a straight-line basis
over 40 years. The Company continually evaluates whether events and
circumstances have occurred that indicate the remaining balance of goodwill may
not be recoverable or the useful life may be impaired. Amortization expense was
$115,000, $346,000, and $347,000 in 1994, 1995, and 1996, respectively.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of long-lived assets may warrant
revision or that the remaining balance of an asset may not be recoverable. The
measurement of possible impairment is based on the ability to recover the
balance of assets from expected future operating cash flows on an undiscounted
basis. In the opinion of management, no such impairment existed as of March 31,
1995 or 1996.

F-8
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values of cash, receivables, payables, and accrued liabilities
approximate the fair values of these instruments because of their short-term
maturities. The carrying value of the Company's debt also approximates fair
value as interest rates on the Company's existing debt approximates market.

REVENUE RECOGNITION

Revenues from the dispensing of pharmaceuticals from the Company's mail
service pharmacy are recognized when each prescription is shipped. Revenue from
sales of prescription drugs by pharmacies in the Company's nationwide network
and claims processing service fees are recognized when the claims are
adjudicated. Clinical, formulary, rebate, and disease management service
revenues are recognized as the services are performed and rebates earned in
accordance with contractual agreements.

FEDERAL INCOME TAXES

Prior to the formation of API in July 1993, Advance Mail and Advance Data
were included in the consolidated tax return of AHC. For activities subsequent
to the formation of API, the Company has filed consolidated federal income tax
returns separate from AHC. The Company has calculated its tax provision on a
stand-alone basis for all reported periods.

PRO FORMA NET INCOME PER SHARE

Pro forma net income per share gives effect to (i) the conversion of the
redeemable Series A Preferred Stock to Common Stock, (ii) the issuance of
627,240 shares of Common Stock in the Offering, the net proceeds of which are
intended to be used to retire the $7.0 million note payable to Whitney
Subordinated Debt Fund, L.P., (iii) a reduction of interest expense by the
amount of interest on the $7.0 million note payable and (iv) the impact to
shares and options outstanding of the merger of AHC with and into API (see Note
15). Pro forma net income per share is computed using the weighted average
number of common and common equivalents shares outstanding during the year which
include stock options and warrants. As required by the Commission rules, all
warrants, options, and shares issued during the year immediately preceding the
initial public offering are assumed to be outstanding for purposes of
calculating pro forma net income per share. The primary and fully diluted per
share amounts were the same as the effect of potentially dilutive securities was
antidilutive.

RECLASSIFICATION

Certain prior year amounts have been reclassified to conform with current
year presentation.

RESTATEMENT OF NETWORK CLAIM COSTS

The Company has restated its financial statements for the three months ended
June 30, 1996, and for all prior periods presented. When the Company has an
independent obligation to pay its network pharmacy providers, the Company now
includes payments from plan sponsors for these benefits as revenues and payments
to its pharmacy providers as cost of revenues. If the Company is only
administering plan sponsors' network pharmacy contracts, the Company will
continue to record as net revenues the claims processing service fees. In prior
periods, the Company recorded as net revenues only the fees for administering
claims from network pharmacy providers. The restatement increased revenues and
cost of revenues as follows:

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, THREE MONTHS ENDED JUNE 30,
- ------------------------------------------- ---------------------------
1994 1995 1996 1995 1996
- ------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
$ 11,598,000 $ 25,715,000 $ 37,611,000 $ 8,009,000 $ 22,900,000
</TABLE>

F-9
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:

<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Machinery and equipment..................................................... $ 651,000 $ 709,000
Computer equipment and software............................................. 2,668,000 3,963,000
Furniture and equipment..................................................... 707,000 924,000
Leasehold improvements...................................................... 396,000 419,000
------------ ------------
4,422,000 6,015,000
Less--Accumulated depreciation and amortization............................. (980,000) (1,935,000)
------------ ------------
$ 3,442,000 $ 4,080,000
------------ ------------
------------ ------------
</TABLE>

4. DEBT:
Long-term debt at March 31, 1995 and 1996, consisted of a balance due under
a $7,000,000 Note and Warrant Purchase Agreement (the Agreement) dated December
8, 1993. The note is unsecured, bears interest at 10.101% per annum, payable
quarterly, and is due December 8, 2000. The Agreement obligates the Company to
prepay the indebtedness, without penalty or premium, upon the consummation of a
public offering of any of the Company's securities pursuant to a registration
statement filed with the Commission.

The note carries certain restrictive covenants which, among other things,
limit the ability of the Company to incur additional indebtedness, create liens,
pay dividends, sell assets, make acquisitions, engage in mergers,
consolidations, or reorganizations, or enter into transactions with certain
related parties, including holders of 10% or more of any capital stock of the
Company or its affiliates. Additionally, the Company is required to maintain
certain net worth and interest coverage ratios. The Company was in compliance
with all covenants of the Agreement at March 31, 1996.

In connection with the Agreement, the Company granted the holder of the note
warrants to purchase 336,500 shares of the Company's Common Stock (see Note 10).
The warrants are exercisable for a period of 10 years.

5. OTHER NONCURRENT LIABILITIES:
Other noncurrent liabilities consisted of the following:

<TABLE>
<CAPTION>
MARCH 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Capital lease obligation............................................. $ 93,000 $ 49,000
Other liabilities.................................................... 389,000 241,000
---------- ----------
482,000 290,000
Less--Current portion................................................ (244,000) (49,000)
---------- ----------
$ 238,000 $ 241,000
---------- ----------
---------- ----------
</TABLE>

The Company's capital lease obligation bears interest at 9.5%, and is
payable in monthly installments. The lease is collateralized by the leased
equipment. The lease terminates in March 1997 (see Note 6).

Other liabilities is comprised of deposits held for the benefit of certain
customers in connection with pharmacy benefit contracts, and, at March 31, 1995,
included amounts due to certain officers of Advance Clinical (see Note 12).

F-10
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. LEASES:
The Company leases office and dispensing facility space, equipment, and
automobiles under various operating and capital leases. The Company was
obligated to make future minimum payments under capital lease obligations and
noncancelable operating lease agreements as of March 31, 1996, as follows:

<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
MARCH 31, LEASES LEASES
- -------------------------------------------------------- --------- ---------
<S> <C> <C>
1997.................................................. $ 51,000 $1,063,000
1998.................................................. -- 732,000
1999.................................................. -- 255,000
2000.................................................. -- --
2001.................................................. -- --
--------- ---------
Total minimum lease payments........................ 51,000 $2,050,000
--------- ---------
---------
Less--Amounts representing interest................. (2,000)
---------
Present value of future minimum lease payments (see
Note 5)............................................ $ 49,000
---------
---------
</TABLE>

Total rent expense incurred in 1994, 1995, and 1996 was $221,000, $714,000,
and $1,135,000, respectively.

7. COMMITMENTS AND CONTINGENCIES:

The Company entered into three-year employment agreements with certain
management employees of Advance Clinical. These employment agreements, which
expire in December 1996, provide for certain minimum payments should the
agreements be terminated.

The pharmacy industry is governed by extensive federal and state laws and
regulations. The regulatory requirements with which the Company must comply in
conducting its business vary from state to state. Management believes the
Company is in substantial compliance with, or is in the process of complying
with, all existing laws and regulations material to the operation of its
business. In management's opinion, any existing noncompliance will not have a
material adverse effect on the results of operations or financial condition of
the Company.

8. ACQUISITION OF ADVANCE CLINICAL:
In December 1993, the Company acquired the outstanding stock of Advance
Clinical, formerly Paradigm Pharmacy Management, Inc., for a total consideration
of $16,748,000. Assuming the Advance Clinical acquisition had occurred at the
beginning of fiscal year 1994, condensed unaudited pro forma combined results of
operations for the year ended March 31, 1994, are as follows:

<TABLE>
<S> <C>
Revenues....................................................... $34,128,000
Net income..................................................... 197,000
</TABLE>

9. CONCENTRATION OF BUSINESS:
Two customers accounted for approximately 26.8% of the Company's 1996
revenues. One customer accounted for approximately 23.1% of the Company's 1995
revenues. No other customer accounted for over 10% of the Company's 1996 or 1995
revenues. Three customers accounted for approximately 59.8% of the Company's
1994 revenues. On a pro forma basis, assuming the Advance Clinical acquisition
had occurred on April 1, 1993, these three customers would have accounted for
approximately 51.1% of the Company's 1994 revenues.

10. REDEEMABLE PREFERRED STOCK AND COMMON STOCK:

REDEEMABLE SERIES A PREFERRED STOCK

In August and December 1993, the Company issued a total of 10,000 shares of
$.01 par value, redeemable Series A Preferred Stock under a Preferred Stock
Purchase Agreement. The holders of the Series A Preferred Stock are entitled to
certain rights, as described below:

F-11
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. REDEEMABLE PREFERRED STOCK AND COMMON STOCK: (CONTINUED)
CUMULATIVE DIVIDENDS--Holders of the redeemable Series A Preferred Stock are
entitled to cumulative dividends calculated at an annual rate of 8% per
share of the original issuance price of $1,000, or $80 per share. Such
cumulative dividends accrue and accumulate day to day from the date of
original issuance whether or not earned or declared. As of March 31, 1996,
the cumulative undeclared and unpaid dividends were $1,959,000 and are
included in redeemable Series A Preferred Stock in the accompanying balance
sheet. Upon conversion of the redeemable Series A Preferred Stock to Common
Stock, all such accrued and unpaid cumulative dividends shall be forfeited.

RIGHT OF FIRST OFFER--The Company must first offer to the holders of
preferred shares, and any holder of more than 3% of the capital stock of the
Company, any future offering of equity securities, convertible securities,
or debt-equity security combinations. This right does not apply to any stock
dividends, conversion share issuances, stock grants of up to 569,500 shares
pursuant to the stock option plan, or stock grants of up to 415,500 shares
in connection with the acquisition of another entity.

CONVERSION RIGHTS--The redeemable Series A Preferred Stock is convertible at
any time at the option of the holder into fully paid and nonassessable
shares of Common Stock at a conversion rate equal to the issuance price
divided by the Applicable Conversion Value, as defined, giving effect to any
adjustments. At March 31, 1996, the conversion rate was 250-for-one.

The redeemable Series A Preferred Stock is automatically convertible
immediately prior to the closing of an underwritten public offering on a
firm commitment basis filed on Form S-1 of the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock for which proceeds (net
of underwriters' discounts and commissions but before calculation of
expenses) equal or exceed $10,000,000 and at a price per share greater than
twice the original issuance price of the redeemable Series A Preferred
Stock, as adjusted for dilutive issuances of capital stock, stock dividends,
stock splits, and reverse stock splits.

PARTICIPATING DIVIDENDS--The redeemable Series A Preferred Stock has a
participating feature whereby if dividends, other than stock dividends, are
declared on the Common Stock, the holders of the redeemable Series A
Preferred Stock are entitled to receive an amount of dividends equal to that
which would be payable on the number of common shares into which the
redeemable Series A Preferred Stock is then convertible.

REDEMPTION RIGHTS--If on or after August 4, 1999, the Company has earnings
after interest, but before taxes, of at least $1,500,000 for the 12-month
period preceding the month of the request for redemption, the holders of 60%
of the then outstanding shares of redeemable Series A Preferred Stock may
request the Company to redeem such number of shares of stock outstanding.
The redemptions shall be made in three equal annual installments at a price
which is the greater of (1) the original issue price of the redeemable
Series A Preferred Stock, as adjusted, plus all accrued and unpaid
dividends, or (2) the fair market value, as defined.

COMMON STOCK

The Company is authorized to issue 7,500,000 shares of $.01 par value Common
Stock, of which 3,125,000 and 3,130,500 shares are issued and outstanding at
March 31, 1995 and 1996, respectively. The holders of the Company's Common Stock
are entitled to a right of first offer consistent with holders of the redeemable
Series A Preferred Stock. The Company has reserved shares of Common Stock at
March 31, 1996, for the following:

<TABLE>
<S> <C>
Conversion of Series A Preferred Stock........................... 2,500,000
Exercise of stock options........................................ 858,000
Exercise of warrants............................................. 659,750
---------
4,017,750
---------
---------
</TABLE>

F-12
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. REDEEMABLE PREFERRED STOCK AND COMMON STOCK: (CONTINUED)
During the year ended March 31, 1994, the Company issued warrants to
purchase 336,500 and 56,250 shares of its Common Stock at prices per share of
$4.00 and $6.00, respectively. During the year ended March 31, 1996, the Company
agreed to issue warrants to purchase 267,000 shares of its Common Stock at a
price of $11.00 per share to a customer contingent upon future expansion of
member lives. As of March 31, 1996, no warrants have been earned. In
management's opinion, the fair value of the warrants at the date of the
agreement was not material.

11. STOCK OPTION PLAN:
During 1993, the Board of Directors and the stockholders of the Company
adopted the 1993 Incentive Stock Option Plan and the Incentive Stock Option Plan
(the "Plans"), which provide for the granting of qualified stock options and
incentive options to officers and key employees of the Company. The options must
be granted with exercise prices which equal or exceed the market value of the
common stock at the date of grant. As of March 31, 1996, the number of shares of
Common Stock issuable under the Plans may not exceed 858,000 shares. The Company
has reserved 858,000 shares of Common Stock for such issuance. The Plans are
administered by a compensation committee appointed by the Board of Directors of
the Company.

The stock options generally vest over 5-year periods. In the event of the
sale or merger with an outside corporation gaining 50% or greater ownership,
options granted to certain employees become 100% vested. The options are
exercisable for a period not to exceed 10 years from the date of grant. As of
March 31, 1996, 276,750 options were vested at exercise prices of $3.20 to
$11.00 per share.

The following is a summary of stock option activity:

<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE PER SHARE
--------- ---------------
<S> <C> <C>
Options outstanding at March 31, 1993............................ -- -
Options granted.................................................. 636,750 $ 3.20-$ 4.80
---------
Options outstanding at March 31, 1994............................ 636,750 $ 3.20-$ 4.80
Options granted.................................................. 146,750 $10.80-$30.00
---------
Options outstanding at March 31, 1995............................ 783,500 $ 3.20-$30.00
Options granted.................................................. 195,500 $11.00-$30.00
Options exercised................................................ (5,500) $3.20
Options terminated............................................... (163,000) $ 3.20-$30.00
---------
Options outstanding at March 31, 1996............................ 810,500 $ 3.20-$11.00
---------
---------
</TABLE>

In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123
establishes a fair value-based method of accounting for stock-based
compensation. The Company has decided to adopt SFAS 123 through disclosure with
respect to employee stock-based compensation. Such disclosure requirements are
effective beginning with the Company's 1997 fiscal year.

12. RELATED PARTY TRANSACTIONS:
The long-term debt of the Company is payable to an affiliate of certain
holders of Preferred Stock. In connection with the issuance of this debt, the
Company paid a placement fee of $210,000 to a preferred stockholder.

Prior to 1995, the Company occupied space in an office facility leased by
AHC. In addition, certain management employees of AHC provided administrative
and management services to the Company. In connection with the use of the
facility and the services provided, AHC charged the Company $607,000 during
1994. No such amounts were charged in 1995 and 1996. In July 1993, as part of
the formation of API, AHC transferred a debt obligation of $500,000 to API. API
retired this obligation in August 1993.

F-13
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. RELATED PARTY TRANSACTIONS: (CONTINUED)
In connection with the acquisition of Advance Clinical, the Company agreed
to pay a fee of $250,000 each to two officers of Advance Clinical for services
relating to the acquisition. The total fee of $500,000 is included as part of
the Advance Clinical purchase price. The Company paid $100,000 of this fee upon
closing of the acquisition and $200,000 in February 1995 and February 1996.

The Company entered into an agreement with Advance Capital Markets (ACM) in
October 1993, pursuant to which ACM agreed to use its reasonable best efforts to
secure financing for the Company and to act as financial advisor and investment
banker for the acquisition of Advance Clinical. In exchange for these
professional services, the Company paid ACM a fee of $150,000, which is
equivalent to or less than similar fees incurred in arm's-length transactions.
The Chief Executive Officer and President of the Company also serves on the
board of directors of ACM.

13. RETIREMENT PLAN AND POSTRETIREMENT BENEFITS:
The Company sponsors a retirement plan for all eligible employees. The plan
is qualified under Section 401(k) of the Internal Revenue Code. Compensation
expense associated with the Company's plan amounted to approximately $0 in 1994,
$50,000 in 1995, and $102,000 in 1996. Effective in 1995, the Company is
required to contribute at least 50% of the first 6% of salary deferral
contributed by each participant.

14. INCOME TAXES:
The Company's net income in 1996 was offset by net operating loss
carryforwards. The Company had losses for tax purposes in 1994 and 1995 and had
remaining net operating loss carryforwards for both financial reporting and
federal income tax purposes. The Company had approximately $1,918,000 in net
operating loss carryforwards for federal income tax purposes at March 31, 1996.
The net operating loss carryforwards will expire in the years 2002 through 2010
if not previously utilized.

Deferred income taxes reflect the tax consequences on future years of
temporary differences between the tax bases of assets and liabilities and their
financial reporting bases and the potential benefits of certain tax
carryforwards. The significant deferred tax assets and liabilities and the
changes in those assets and liabilities are as follows:

<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1995 CHANGES 1996
---------- ---------- ----------
<S> <C> <C> <C>
Gross deferred tax asset:
Net operating loss carryforwards.......................................... $ 836,000 $ (184,000) $ 652,000
Other accruals............................................................ 47,000 95,000 142,000
Other..................................................................... 48,000 (4,000) 44,000
---------- ---------- ----------
931,000 (93,000) 838,000
Gross deferred tax liability:
Amortization of goodwill.................................................. (261,000) (197,000) (458,000)
Depreciation.............................................................. (95,000) (98,000) (193,000)
---------- ---------- ----------
575,000 (388,000) 187,000
Valuation allowance....................................................... (575,000) 388,000 (187,000)
---------- ---------- ----------
Net deferred tax asset.................................................... $ -- $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

Because of the uncertainty of the realization of the net deferred tax asset
caused by historical operating losses, the Company recorded a valuation reserve
equal to its net deferred tax asset at March 31, 1995 and 1996. Management will
evaluate the appropriateness of the valuation reserve in the future based upon
historical and anticipated operating results of the Company. The deferred tax
assets arising from the Advance Clinical acquisition, if subsequently
recognized, will be allocated to reduce the goodwill attributable to the
acquisition.

F-14
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. SUBSEQUENT EVENTS (UNAUDITED):

On June 25, 1996, the Company sold an aggregate of 2,597 shares at its
Series B Preferred Stock to a customer at a price of $3,850 per share. The
number of shares issued is subject to potential adjustment depending upon the
price of the Offering.

On , 1996, the stockholders of the Company approved a 250-for-one
stock split of the Company's Common Stock. Accordingly, all share and per share
amounts have been adjusted to reflect the stock split as though it had occurred
at the beginning of the initial period presented.

Immediately prior to the consummation of the Offering, AHC will merge with
and into the Company (the "Merger"). Such Merger will be consummated as a means
of simplifying the corporate structure of the Company and is intended to qualify
as a tax free reorganization. AHC currently holds 3,125,000 shares of Common
Stock. In connection with the Merger, the Advance Health Care incentive stock
option plan will be merged with the Company's Incentive Stock Option Plan, and
holders of options under the Advance Health Care incentive stock option plan
will receive options to purchase Common Stock under the Company's Incentive
Stock Option Plan. In the Merger, the Company will cancel the shares held by AHC
and issue shares of Common Stock directly to the AHC stockholders based upon
their fully-diluted proportionate ownership interests in AHC (collectively
referred to as the "AHC Stockholders") after giving consideration to the new
shares of AHC to be issued in repayment of debt as indicated below. After the
Merger, there will be 2,879,500 shares of Company common stock outstanding and
251,000 additional options outstanding at exercise prices of $0.60 to $2.50 per
share. Immediately prior to the Merger, AHC will distribute the stock of certain
subsidiaries of AHC, operating in businesses unrelated to the Company, to the
AHC Stockholders. Prior to such spin-off, certain indebtedness owed by AHC to
several of its stockholders (including some indebtedness of AHC payable to an
affiliate of a preferred stockholder of the Company which will be assumed by an
AHC stockholder) will be exchanged for additional shares of AHC common stock.
The spin-off and exchange of indebtedness will not impact the number of shares
of the Company's common stock outstanding. After the spin-off and exchange of
indebtedness referred to above are effected, Advance Health Care will have no
operations, known liabilities, or assets of its own other than its investment in
the Company.

F-15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholder of
ParadigM Pharmacy Management, Inc.:

We have audited the accompanying statements of operations, stockholder's
equity, and cash flows of ParadigM Pharmacy Management, Inc. (a Maryland
corporation whose name was subsequently changed to Advance ParadigM Clinical
Services, Inc.) for the eleven months ended November 30, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of its operations and its cash flows of
ParadigM Pharmacy Management, Inc. for the eleven months ended November 30,
1993, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Dallas, Texas,
April 15, 1994

F-16
<PAGE>
PARADIGM PHARMACY MANAGEMENT, INC.

STATEMENT OF OPERATIONS

FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1993

<TABLE>
<S> <C>
REVENUES....................................................................... $14,312,000
COST OF OPERATIONS:
Cost of revenues............................................................. 10,553,000
Selling, general and administrative expenses................................. 1,945,000
----------
Total cost of operations................................................... 12,498,000
Operating income........................................................... 1,814,000

INTEREST INCOME................................................................ 69,000
----------
Income before provision for income taxes................................... 1,883,000

PROVISION FOR INCOME TAXES..................................................... 750,000
----------
Net income................................................................. $1,133,000
----------
----------
</TABLE>

The accompanying notes are an integral part of this financial statement.

F-17
<PAGE>
PARADIGM PHARMACY MANAGEMENT, INC.

STATEMENT OF STOCKHOLDER'S EQUITY

FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1993

<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1992................................... $ -- $ 654,000 $ 840,000 $1,494,000
Net income................................................. -- -- 1,133,000 1,133,000
Additional capitalization from Parent...................... -- 593,000 -- 593,000
--- ------------ ------------ ------------
BALANCE, November 30, 1993................................... $ -- $ 1,247,000 $ 1,973,000 $3,220,000
--- ------------ ------------ ------------
--- ------------ ------------ ------------
</TABLE>

The accompanying notes are an integral part of this financial statement.

F-18
<PAGE>
PARADIGM PHARMACY MANAGEMENT, INC.

STATEMENT OF CASH FLOWS

FOR THE ELEVEN MONTHS ENDED NOVEMBER 30, 1993

<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $1,133,000
Adjustments to reconcile net income to net cash (used in) provided by
operating activities--
Depreciation expense........................................................ 36,000
Increase in receivables..................................................... (5,847,000)
Decrease in due from/to affiliates, net..................................... 248,000
Increase in prepaid expenses and other current assets....................... (3,000)
Increase in deferred income taxes........................................... (20,000)
Increase in accounts payables............................................... 3,926,000
Increase in accrued salaries and benefits................................... 480,000
Increase in other accrued expenses.......................................... 313,000
Decrease in deferred revenue................................................ (473,000)
----------
Net cash used in operating activities....................................... (207,000)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................................... (212,000)
----------
Net cash used in investing activities....................................... (212,000)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional capitalization from Parent......................................... 593,000
----------
Net cash provided by financing activities................................... 593,000
----------
NET INCREASE IN CASH AND CASH EQUIVALENTS....................................... 174,000
CASH AND CASH EQUIVALENTS, beginning of period.................................. 1,840,000
----------
CASH AND CASH EQUIVALENTS, end of period........................................ $2,014,000
----------
----------
SUPPLEMENTAL DISCLOSURE OF INCOME TAXES PAID.................................... $ 113,000
----------
----------
</TABLE>

The accompanying notes are an integral part of this financial statement.

F-19
<PAGE>
PARADIGM PHARMACY MANAGEMENT, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION:
ParadigM Pharmacy Management, Inc. (PPM), a Maryland corporation (name
subsequently changed to Advance ParadigM Clinical Services, Inc.), provides
pharmacy management services to a variety of healthcare companies including
Health Maintenance Organizations, Preferred Provider Organizations and other
employee benefit plans.

PPM began operations on January 1, 1991. During the period from January 1,
1991, through November 30, 1993, PPM was a wholly owned subsidiary of Blue Cross
and Blue Shield of Maryland, Inc. (Parent) and operated under common management
with CFS Health Group, Inc. (CFS), another wholly owned subsidiary of Blue Cross
and Blue Shield of Maryland, Inc.

Effective after the close of business on November 30, 1993, Advance Pharmacy
Services, Inc. (APS), whose name has been subsequently changed to Advance
ParadigM, Inc., acquired all of the outstanding capital stock of PPM. The
accompanying financial statements do not include any accounting to reflect the
purchase transaction.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include overnight investments and short-term notes
with maturities of 60 days or less.

REVENUE RECOGNITION

Clinical, formulary, and rebate service revenues are recognized as the
services are performed and rebates earned in accordance with contractual
agreements. A portion of the rebates earned is shared with the Company's
customers in accordance with contractual agreements. Such amounts are included
in cost of revenues in the accompanying financial statements.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. PPM depreciates property and
equipment on a straight-line basis over the following estimated useful lives:

<TABLE>
<S> <C>
Computer equipment and software............................ 3 years
Furniture and fixtures..................................... 5 years
</TABLE>

DEFERRED REVENUE

Deferred revenue represents the unamortized portion of one-time payments to
PPM by pharmaceutical suppliers during 1992 as an incentive for PPM to obtain a
specific customer in a new line of business. This incentive was deferred and is
being amortized over the 24 months of the initial customer's contract through
June 30, 1994. The amortization of this payment is included in revenues in the
accompanying statements of operations.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

In connection with the acquisition of PPM by APS, PPM agreed to pay $195,000
of the legal and underwriting costs related to the transaction. These costs are
included in selling, general and administrative expenses in the accompanying
statement of operations for the eleven months ended November 30, 1993.

3. INCOME TAXES:
The results of PPM's operations are included in the consolidated tax return
of the Parent for federal income tax purposes. PPM files a separate Maryland
state income tax return and records its tax provision or benefit accordingly.

A provision for income taxes of $750,000 has been provided for financial
reporting purposes for the eleven months ended November 30, 1993. The provision
for income taxes includes deferred taxes resulting from temporary differences in
income for financial accounting and tax purposes, using the liability method.

F-20
<PAGE>
PARADIGM PHARMACY MANAGEMENT, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. INCOME TAXES: (CONTINUED)
The provision (benefit) for income taxes consists of the following:

<TABLE>
<S> <C>
Current--
Federal......................................................... $ 671,000
State, net of federal income tax effect......................... 99,000

Deferred--
Federal......................................................... (17,000)
State, net of federal income tax effect......................... (3,000)
---------
$ 750,000
---------
---------
</TABLE>

The differences between the recorded income tax provision and the "expected"
tax provision based on statutory federal income tax rates is as follows:

<TABLE>
<S> <C>
Computed federal tax provision at statutory rates................. $ 640,000
State income taxes, net of federal income tax effect.............. 94,000
Other............................................................. 16,000
---------
$ 750,000
---------
---------
</TABLE>

PPM maintained a federal tax sharing agreement with its Parent. Under this
agreement, the Parent allocated federal tax expense of $39,000 to PPM for the
eleven months ended November 30, 1993. PPM's income tax provision has been
recorded as if it were a stand-alone company. The differences between the
federal tax allocations from its Parent and the federal tax provision recorded
in the accompanying statement of operations have been recorded as additional
capitalization from its Parent in the accompanying statement of stockholder's
equity.

4. CONCENTRATION OF BUSINESS:
During the eleven months ended November 30, 1993, the Parent and CFS
collectively constituted 32% of PPM's revenues. A non-related customer
constituted approximately 18% of PPM's revenues during the eleven months ended
November 30, 1993.

During the eleven months ended November 30, 1993, two pharmaceutical
suppliers constituted approximately 27% of rebates.

Between November 30, 1993 and January 1, 1994, four customers constituting
approximately 38% of revenues for the eleven months ended November 30, 1993, did
not renew their contracts with PPM. Beginning January 1994, PPM contracted with
three new customers. These new customers represented approximately 37% of the
recorded revenues for the quarter ended March 31, 1994. One of the new customers
is APS, PPM's new parent. APS represented approximately 17% of the recorded
revenues for the quarter ended March 31, 1994. Management believes that the
impact of the customer terminations, when coupled with the impact of new
customers, will not have a material adverse effect on PPM's financial position
or results of operations.

5. RELATED-PARTY TRANSACTIONS:
Through November 30, 1993, PPM had an operating relationship with CFS,
whereby CFS paid certain administrative costs and performed certain
administrative services on behalf of PPM. PPM reimbursed CFS for the costs paid
on PPM's behalf.

PPM provided clinical, administrative and various reporting services to its
Parent during the eleven months ended November 30, 1993. Charges for these
services were approximately $307,000. This amount is included in revenues in the
accompanying statement of operations.

F-21
<PAGE>
PARADIGM PHARMACY MANAGEMENT, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. RELATED-PARTY TRANSACTIONS: (CONTINUED)
PPM leases administrative office facilities from CFS. Rent expense for the
eleven months ended November 30, 1993, was approximately $85,000. The lease
expired on June 30, 1994, unless sooner terminated pursuant to terms of the
lease. Total remaining payments under this lease at November 30, 1993, are
approximately $54,000.

Through November 30, 1993, PPM participated in its Parent's noncontributory
retirement plan and defined contribution savings and retirement plan. The
allocated expense for both plans was not material to PPM.

6. POSTRETIREMENT BENEFITS:
Until November 30, 1993, PPM's employees participated in its Parent's
postretirement benefits. Substantially all employees subject to certain
requirements became eligible for those benefits when they reached normal
retirement age while working for PPM and had at least ten years of service.

In December 1990, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 106 (SFAS 106) "Employer's Accounting for
Postretirement Benefits Other Than Pensions". This standard requires that the
expected cost of these benefits must be charged to expense during the years that
the employees render service. PPM adopted the standard, effective January 1,
1993, on a prospective basis, as permitted. The effect of this adoption was not
material to the accompanying financial statements.

7. COMMITMENTS AND CONTINGENCIES:
Effective with the sale of PPM by Blue Cross and Blue Shield of Maryland,
Inc. on November 30, 1993, PPM's employees no longer participated in its
retirement, defined contribution and postretirement benefit plans. Management of
PPM intends to implement new benefit plans which will also cover the employees'
unvested benefits under the former Blue Cross and Blue Shield of Maryland, Inc.
plans. Accordingly, management has provided a reserve on the balance sheet
related to the assumption of the unvested accumulated benefits as of November
30, 1993.

8. SUBSEQUENT EVENT:
Effective December 1, 1993, the Company entered into employment agreements
with two key executives, through November 1996, aggregating base compensation of
$690,000 over their term. The contracts also provide for additional incentive
payments, subject to performance standards.

F-22
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR
THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

--------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Additional Information............................... 2
Prospectus Summary................................... 3
Risk Factors......................................... 5
Disclosure Regarding Forward-Looking Statements...... 10
The Company.......................................... 11
Use of Proceeds...................................... 11
Dividend Policy...................................... 11
Capitalization....................................... 12
Dilution............................................. 13
Selected Consolidated Financial Data................. 14
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 15
Business............................................. 20
Management........................................... 29
Certain Transactions................................. 36
Principal and Selling Stockholders................... 38
Description of Capital Stock......................... 40
Shares Eligible for Future Sale...................... 43
Underwriting......................................... 45
Legal Matters........................................ 46
Experts.............................................. 46
Index to Financial Statements........................ F-1
</TABLE>

UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

2,589,029 SHARES

[LOGO]

COMMON STOCK

--------------

PROSPECTUS
--------------

HAMBRECHT & QUIST

MONTGOMERY SECURITIES

J.P. MORGAN & CO.

, 1996

- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The estimated expenses in connection with the issuance and distribution of
the securities being registered, other than underwriting discounts and
commissions, are set forth in the following table. All of such expenses will be
borne by Advance ParadigM, Inc. (the "Company").

<TABLE>
<S> <C>
SEC registration fees................................................... $ 13,348
NASD filing fees........................................................ 4,421
Nasdaq National Market System application and listing fees.............. *
Printing and engraving expenses......................................... *
Legal fees and expenses................................................. *
Accounting fees and expenses............................................ *
Blue sky fees and expenses.............................................. *
Transfer agent and registrar fees and expenses.......................... *
Miscellaneous........................................................... *
---------
Total................................................................. $ 500,000
---------
---------
</TABLE>

- ------------------------
*To be filed by amendment

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company, a Delaware corporation, is empowered by Section 145 of the
Delaware General Corporation Law (the "Delaware Act"), subject to the procedures
and limitations stated therein, to indemnify certain parties. Section 145 of the
Delaware Act provides in part that a corporation shall have the power to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (other than
an action by or in the right of the corporation) by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. Similar indemnity is authorized for such persons against
expenses (including attorneys' fees) actually and reasonably incurred in defense
or settlement of any threatened, pending or completed action or suit by or in
the right of the corporation, if such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and provided further that (unless a court of competent jurisdiction
otherwise provides) such person shall not have been adjudged liable to the
corporation. Any such indemnification may be made only as authorized in each
specific case upon a determination by the stockholders or disinterested
directors that indemnification is proper because the indemnitee has met the
applicable standard of conduct. Where an officer or a director is successful on
the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually or reasonably incurred. Section 145 provides further that
indemnification pursuant to its provisions is not exclusive of other rights of
indemnification to which a person may be entitled under any bylaw, agreement,
vote of stockholders or disinterested directors or otherwise.

Article 10 of the Company's Certificate of Incorporation, as amended (the
"Certificate") provides that the Company shall indemnify any and all persons
whom it has the power to indemnify under Section 145 of the Delaware Act to the
fullest extent permitted under such section, and such indemnity shall continue
as to a person who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and administrators of such a
person.

Article 9 of the Company's Certificate eliminates the personal liability of
the Company's directors to the fullest extent permitted under Section 102(b)(7)
of the Delaware Act, as amended. Such section permits a

II-1
<PAGE>
company's certificate of incorporation to eliminate or limit the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) under Section 174 of the Delaware Act (which
addresses director liability for unlawful payment of a dividend or unlawful
stock purchase or redemption) or (iv) for any transaction from which the
director derived an improper personal benefit.

As set forth below, Article 8 of the bylaws of the Company (the "Bylaws")
provides for indemnification of directors and officers, and Section 8.8 of the
Bylaws provides for the authority to purchase insurance with respect to
indemnification of directors and officers.

Article 8 of the Bylaws provides that the Company shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Company) by reason of the fact that he is or was a director, officer, employee
or agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding to the
fullest extent permitted by Delaware law.

The right to indemnification under Article 8 of the Bylaws is a contract
right which includes, with respect to directors, officers, employees and agents,
the right to be paid by the Company the expenses incurred in defending a civil
or criminal action, suit or proceeding in advance of its disposition; provided,
however, that (i) the payment of such expenses incurred by a director or officer
in advance of the final disposition of such action, suit or proceeding shall be
made only upon delivery to the Company of an undertaking, by or on behalf of
such director or officer, to repay all amounts so advanced if it shall
ultimately be determined that such director or officer is not entitled to be
indemnified under Article 8 of the Bylaws or otherwise and (ii) advances for
expenses incurred by other employees and agents may be paid upon such terms and
conditions that the Board of Directors of the Company deems appropriate.

Section 7 of the Underwriting Agreement among the Company, the Underwriters
and the Selling Stockholders, a copy of which is filed herein as Exhibit 1,
provides for the indemnification by the Company of the Underwriters and each
person, if any, who controls any Underwriter against certain liabilities and
expenses, as stated therein, which may include liabilities under the Securities
Act of 1933, as amended. The Underwriting Agreement also provides that the
Underwriters shall similarly indemnify the Company, its directors, officers and
controlling persons, as set forth therein.

The Company intends to apply for a directors and officers insurance policy.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The Company issued 3,125,000 shares of its Common Stock to Advance Health
Care, Inc. ("Advance Health Care") in July 1993 in exchange for all of the
issued and outstanding common stock of and certain debt attributable to Advance
ParadigM Mail Services, Inc. ("Advance Mail") and Advance ParadigM Data
Services, Inc. ("Advance Data").

In a two-step transaction, the Company sold an aggregate of 10,000 shares of
its Series A Preferred Stock in a private financing at an effective price of
$1,000 per share (collectively, the "Canaan/Whitney Capital Investment") as
follows: On August 4, 1993, the Company sold (i) a total of 1,945 shares of
Series A Preferred Stock to Canaan Capital Limited Partnership ("Canaan LP"),
Canaan Capital Offshore Limited Partnership C.V. ("Canaan Offshore") and Quai
Ltd., (ii) a total of 2,000 shares of Series A Preferred Stock to J.H. Whitney &
Co. ("J.H. Whitney") and Whitney 1990 Equity Fund, L.P. ("Whitney Fund"), (iii)
30 shares of Series A Preferred Stock to Jeffrey R. Jay, M.D., and (iv) 25
shares of Series A Preferred Stock to Stephen L. Green; and on December 7, 1993,
in contemplation of the closing of the Advance ParadigM Clinical Services, Inc.
("Advance Clinical") acquisition, the Canaan Investors, the Whitney Investors,
Dr. Jay and Mr. Green purchased an additional 2,918 shares, 3,000 shares, 45
shares and 37 shares, respectively, of the Company's Series A Preferred

II-2
<PAGE>
Stock. Both Dr. Jay and Mr. Green are members of the Board of Directors. The
Canaan and Whitney Investors have certain registration rights in connection with
their shares. For purposes of this Registration Statement and the descriptions
of the Company's related parties contained herein, (i) Canaan LP, Canaan
Offshore, Quai Ltd., Dr. Jay and Mr. Green are collectively referred to as the
"Canaan Investors" and (ii) J.H. Whitney, the Whitney Fund and the Whitney Debt
Fund (as defined below) are collectively referred to as the "Whitney Investors".
All shares of the Preferred Stock issued in the Canaan/Whitney Capital
Investment automatically convert into shares of Common Stock upon the
consummation of this Offering. As of the date of this registration statement,
the conversion rate is one share of Series A Preferred Stock for 250 shares of
Common Stock.

On December 8, 1993, the Company and Whitney Subordinated Debt Fund L.P.
(the "Whitney Debt Fund") entered into a Note and Warrant Purchase Agreement
pursuant to which the Whitney Debt Fund paid the Company $7 million in exchange
for a note payable to the Whitney Debt Fund, in the original principal amount of
$7.0 million (the "Whitney Note") and a warrant to purchase up to 336,500 shares
of common stock of the Company, par value $0.01 (the "Common Stock") (the
"Whitney Warrant"). The Whitney Note bears interest on its original principal
amount of $7 million at the rate of 10.1% per annum, payable quarterly. Although
the Whitney Note has a seven-year term, the Company is obligated to prepay the
indebtedness, without penalty or premium, upon consummation of a public offering
filed with the Commission. The Whitney Warrant grants the Whitney Debt Fund the
right to purchase an aggregate of 336,500 shares of Common Stock at an exercise
price of $4.00 per share until December 8, 2003. The warrant contains certain
demand and piggy-back registration rights relating to the Common Stock
underlying it.

Effective December 8, 1993, in connection with the Advance Clinical
acquisition, the Company sold to Blue Cross and Blue Shield of Maryland ("BCBS
of Maryland") a warrant to purchase 56,250 shares of Common Stock, exercisable
in whole during a four-year term at an aggregate exercise price of $337,500. The
warrant contains certain piggy-back registration rights relating to the Common
Stock underlying it.

In June 1995 an option holder exercised his stock option and purchased 5,500
shares of Common Stock for an aggregate purchase price of $17,600. In July 1996
an option holder exercised her stock option and purchased 1,500 shares of Common
Stock for an aggregate purchase price of $7,200.

On November 25, 1995, in connection with the Warrant Agreement by and
between the Company and BCBS of Texas, the Company granted to BCBS of Texas the
right to earn up to four warrants, each representing the right to acquire 66,750
shares of Common Stock, in consideration of BCBS of Texas causing additional
lives to be enrolled in the Company's PBM programs, which the Company has
estimated the value to be less than $100,000 (the "BCBS of Texas Warrants").
BCBS of Texas' right to earn up to four BCBS of Texas Warrants expires November
25, 2000. Each BCBS of Texas Warrant will not be exercisable until the first
anniversary of its issuance. At such time, the BCBS of Texas Warrant will be
exercisable in whole during a four-year term at an exercise price of $11.00 per
share. As of the date of the Prospectus, none of the BCBS of Texas Warrants has
been earned or issued.

In addition, prior to the end of September 1996, the Company anticipates
entering into an agreement with VHA Inc. pursuant to which, among other things,
the Company will grant to VHA Inc. the right to earn up to ten warrants, each
representing the right to acquire 28,125 shares of Common Stock, in
consideration of VHA Inc. causing additional lives to be enrolled in the
Company's PBM programs (the "VHA Warrants"). VHA Inc.'s right to earn the VHA
Warrants will expire five years after the date of issuance. Each VHA Warrant
earned will be exercisable in whole beginning on the first anniversary of its
issuance and ending on the fifth anniversary of its issuance at an estimated
exercise price equal to 90% of the initial public offering price per share in
this Offering.

The Company has agreed pursuant to a letter of intent to issue a warrant
representing the right to acquire 84,500 shares of Common Stock upon execution
of a definitive agreement pursuant to which the Company is the provider of PBM
services for PHC and its wholly owned subsidiaries (the "PHC Warrant"). The PHC
Warrant will be exercisable in whole beginning on the first anniversary of its
issuance and ending on the fifth anniversary of its issuance at an exercise
price equal to 90% of the initial public offering price per share in this
Offering.

Immediately prior to the consummation of the Offering, the Company intends
to issue shares of Common Stock to the stockholders of Advance Health Care in a
merger of Advance Health Care with and into the

II-3
<PAGE>
Company (the "Merger"). Prior to the Merger, and assuming conversion of the
Series A Preferred Stock into shares of Common Stock, Advance Health Care held
3,125,000 shares of Common Stock, representing 55.5% of the outstanding capital
stock of the Company.

On June 25, 1996, the Company sold an aggregate of 2,597 shares of its
Series B Preferred Stock, par value $.01 per share, in a private financing to
BCBS of Texas at an effective price of $3,850 per share. As of the date of this
registration statement, the conversion rate is one share of Series B Preferred
Stock for 250 shares of Common Stock.

Each of the foregoing issuances is exempt from registration under Section
4(2) of the Securities Act of 1933, as amended.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBITS
- ------------ --------------------------------------------------------------------------------------------------
<S> <C> <C>
1* -- Form of Underwriting Agreement.
3.1***** -- Amended and Restated Certificate of Incorporation of the Company.
3.2***** -- Amended and Restated Bylaws of the Company.
4.1***** -- Specimen Certificate for shares of Common Stock, $.01 par value, of the Company.
4.2* -- Preferred Stock Purchase Agreement dated as of August 4, 1993, among the Company and Canaan LP,
Canaan Offshore, Stephen L. Green, Jeffrey R. Jay, Quai Ltd., J.H. Whitney, and Whitney Fund.
4.3* -- Amendment No. 1 to Preferred Stock Purchase Agreement dated as of December 7, 1993, by and among
Advance Data and the Purchasers.
4.4* -- Amendment No. 2 to Preferred Stock Purchase Agreement dated as of December 8, 1993, by and among
APS, the Purchasers and Whitney Debt Fund.
4.5* -- Voting, Co-Sale and Right of First Refusal Agreement dated as of August 4, 1993, among the
Company, Advance Health Care, David D. Halbert, Jon S. Halbert, Danny Phillips and the Purchasers.
4.6* -- Amendment No. 1 to Voting, Co-Sale and Right of First Refusal Agreement dated as of December 8,
1993, among the Company, Advance Health Care, David D. Halbert, Jon Halbert, Danny Phillips, the
Purchasers and Whitney Debt Fund.
4.7* -- Note and Warrant Purchase Agreement dated December 8, 1993, between the Company and Whitney Debt
Fund.
4.8* -- Promissory Note dated December 8, 1993, made by the Company payable to the order of Whitney Debt
Fund in the original principal amount of $7,000,000.
4.9* -- Common Stock Purchase Warrant dated December 8, 1993, made by the Company in favor of Whitney Debt
Fund.
4.10***** -- Termination Agreement dated as of September , 1996, among the Company, Advance Health Care, David
D. Halbert, Jon S. Halbert, Danny Phillips, the Purchasers and Whitney Debt Fund.
4.11** -- Warrant for Purchase of Shares of Common Stock of the Company dated December 8, 1993, in favor of
BCBS of Maryland.
4.12** -- Stock Purchase Agreement dated as of June 25, 1996, by and between the Company and BCBS of Texas.
4.13*** -- Warrant Agreement dated as of November 25, 1995, by and between the Company and BCBS of Texas.
4.14***** -- Amended and Restated Incentive Stock Option Plan.
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBITS
- ------------ --------------------------------------------------------------------------------------------------
<S> <C> <C>
4.15***** -- Incentive Stock Option Plan.
5***** -- Opinion and Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10.1** -- Managed Pharmaceutical Agreement dated November 1, 1993, by and between Advance Data and the Mega
Life & Health Insurance Company (exhibits excluded).
10.2* -- Nondisclosure/Noncompetition Agreement dated August 4, 1993, between the Company, Advance Data,
Advance Mail and David D. Halbert.
10.3* -- Nondisclosure/Noncompetition Agreement dated August 4, 1993, between the Company, Advance Mail,
Advance Data and Jon S. Halbert.
10.4* -- Nondisclosure/Noncompetition Agreement dated August 4, 1993, between the Company, Advance Mail,
Advance Data and Danny Phillips.
10.5* -- Employment Agreement effective as of December 1, 1993 by and between Advance Clinical (formerly
ParadigM) and Joseph J. Filipek, Jr. and, for the limited purposes of Sections 3(d), 3(g) and 3(h)
thereof, the Company.
10.6* -- Employment Agreement effective as of December 1, 1993, by and between Advance Clinical (formerly
ParadigM) and Robert L. Cinquegrana and for the limited purposes of Sections 3(d), 3(g) and 3(h)
thereof, the Company.
10.7* -- Employment Agreement effective as of November 14, 1994, by and between the Company and John H.
Sattler.
10.8* -- Employment Agreement effective as of February 15, 1996, by and between the Company and Alan T.
Wright.
10.9*** -- Form of Health Benefit Management Services Agreement.
10.10* -- Sublease dated May 2, 1996, between Lincoln National Life Insurance Company and Advance Data.
10.11* -- Lease dated March 16, 1994, by and between Hill Management Services, Inc. and Advance Clinical
(formerly ParadigM).
10.12* -- Lease Agreement dated as of February 24, 1989, as amended November 30, 1992, and December , 1992,
by and between TRST Las Colinas, Inc. and Advance Health Care.
10.13* -- Assignment, Assumption, Bill of Sale and Consent Agreement dated as of October 20, 1993, between
Medco Containment Services, Inc., the Company and Trinity Properties, Ltd.
10.14*** -- Managed Pharmacy Benefit Services Agreement dated September 1, 1995, between the Company and BCBS
of Texas (exhibits excluded).
23.1**** -- Consent of Arthur Andersen LLP.
23.2***** -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in its opinion filed as Exhibit 5
hereto).
27* -- Financial Data Schedule.
</TABLE>

- ------------------------
*Filed as the exhibit indicated to the Registration Statement on Form S-1
filed with the Commission on June 26, 1996.

** Filed as the exhibit indicated on Amendment No. 1 to Form S-1 filed with
the Commission on July 10, 1996.

*** Filed as the exhibit indicated on Amendment No. 1 to Form S-1 filed with
the Commission on July 10, 1996. Confidential treatment has been
requested. The redacted material has been separately filed with the
Commission.

**** Filed herewith.

***** To be filed by amendment.

II-5
<PAGE>
(b) Financial Statement Schedules

The following financial statement schedule is included in Part II of the
registration statement:

Schedule II--Valuation and Qualifying Accounts

All other schedules have been omitted because they are not required, are not
applicable or the information is included in the Consolidated Financial
Statements or Notes thereto.

ITEM 17. UNDERTAKINGS

(a) Undertaking related to equity offerings of nonreporting registrants:

The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.

(b) Undertaking related to acceleration of effectiveness:

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of a registration
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time it was
declared effective.

(2) For purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the Offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

II-6
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 2 to the Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Dallas, State of Texas, on September 11, 1996.

ADVANCE PARADIGM, INC.

By: /s/ DAVID D. HALBERT

-----------------------------------
David D. Halbert
CHIEF EXECUTIVE OFFICER, CHAIRMAN
OF THE BOARD AND PRESIDENT

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement on Form S-1 has been signed by the following
persons in the capacities indicated on September 11, 1996.

NAME TITLE
- ----------------------------------- -----------------------------------

/s/ DAVID D. HALBERT Chief Executive Officer, Chairman
- ----------------------------------- of the Board and President
David D. Halbert (Principal Executive Officer)

JON S. HALBERT*
- ----------------------------------- Chief Operating Officer, Executive
Jon S. Halbert Vice President and Director

Chief Financial Officer, Senior
/s/ DANNY PHILLIPS Vice President, Secretary and
- ----------------------------------- Treasurer (Principal Financial and
Danny Phillips Accounting Officer)

PETER M. CASTLEMAN*
- ----------------------------------- Director
Peter M. Castleman

MIKEL D. FAULKNER*
- ----------------------------------- Director
Mikel D. Faulkner

STEPHEN L. GREEN*
- ----------------------------------- Director
Stephen L. Green

JEFFREY R. JAY*
- ----------------------------------- Director
Jeffrey R. Jay

MICHAEL D. WARE*
- ----------------------------------- Director
Michael D. Ware

*By: /s/ DAVID D. HALBERT

--------------------------------
David D. Halbert
ATTORNEY IN FACT

II-7
<PAGE>

The undersigned director of Advance ParadigM, Inc. hereby constitutes and
appoints David D. Halbert and Danny Phillips and each of them, with full power
to act without the other and with full power of substitution and resubstitution,
my true and lawful attorneys-in-fact with full power to execute in my name and
behalf in the capactities indicated below any and all amendments (including
post-effective amendments and amendments thereto) to this Registration Statement
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission and hereby
ratify and confirm all that such attorneys-in-fact, or either of them, or their
substitutes shall lawfully do or cause to be done by virtue hereof. Pursuant to
the requirements of the Securities Act of 1933, this Amendment No. 2 to
Registration Statement on Form S-1 has been signed by the following persons in
the capacities indicated on September 11, 1996.

NAME TITLE
- ----------------------------------- -----------------------------------

/s/ ROGERS K. COLEMAN, M.D.*
- ----------------------------------- Director
Rogers K. Coleman, M.D.

II-8
<PAGE>
After the 250-for-one stock split discussed in Note 15 to the Company's
Consolidated Financial Statements is effected, we expect to be in a position to
render the following report.

ARTHUR ANDERSEN LLP

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Advance ParadigM, Inc. and subsidiaries
included in this registration statement and have issued our report thereon dated
May 6, 1996 (except with respect to the matters discussed in Note 15, as to
which the date is , 1996). Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. Schedule II is
presented for purposes of complying with the Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

Dallas, Texas
May 6, 1996

S-1
<PAGE>
ADVANCE PARADIGM, INC.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO (1) END OF
YEAR EXPENSES DEDUCTIONS YEAR
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended March 31, 1994:
Allowance for doubtful accounts receivable................... $ 75,000 $ 27,000 $ (11,000) $ 91,000
Year ended March 31, 1995:
Allowance for doubtful accounts receivable................... $ 91,000 $ 58,000 $ (8,000) $ 141,000
Year ended March 31, 1996:
Allowance for doubtful accounts receivable................... $ 141,000 $ 23,000 $ (34,000) $ 130,000
</TABLE>

- ------------------------
(1) Uncollectible accounts written off, net of recoveries

S-2
<PAGE>
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. EXHIBITS NUMBERED PAGE
- ------------ ------------------------------------------------------------------------------------ -------------------
<S> <C> <C> <C>
1* -- Form of Underwriting Agreement.
3.1***** -- Amended and Restated Certificate of Incorporation of the Company.
3.2***** -- Amended and Restated Bylaws of the Company.
4.1***** -- Specimen Certificate for shares of Common Stock, $.01 par value, of the Company.
4.2* -- Preferred Stock Purchase Agreement dated as of August 4, 1993, among the Company and
Canaan LP, Canaan Offshore, Stephen L. Green, Jeffrey R. Jay, Quai Ltd., J.H.
Whitney, and Whitney Fund.
4.3* -- Amendment No. 1 to Preferred Stock Purchase Agreement dated as of December 7, 1993,
by and among Advance Data and the Purchasers.
4.4* -- Amendment No. 2 to Preferred Stock Purchase Agreement dated as of December 8, 1993,
by and among APS, the Purchasers and Whitney Debt Fund.
4.5* -- Voting, Co-Sale and Right of First Refusal Agreement dated as of August 4, 1993,
among the Company, Advance Health Care, David D. Halbert, Jon S. Halbert, Danny
Phillips and the Purchasers.
4.6* -- Amendment No. 1 to Voting, Co-Sale and Right of First Refusal Agreement dated as of
December 8, 1993, among the Company, Advance Health Care, David D. Halbert, Jon
Halbert, Danny Phillips, the Purchasers and Whitney Debt Fund.
4.7* -- Note and Warrant Purchase Agreement dated December 8, 1993, between the Company and
Whitney Debt Fund.
4.8* -- Promissory Note dated December 8, 1993, made by the Company payable to the order of
Whitney Debt Fund in the original principal amount of $7,000,000.
4.9* -- Common Stock Purchase Warrant dated December 8, 1993, made by the Company in favor
of Whitney Debt Fund.
4.10***** -- Termination Agreement dated as of September , 1996, among the Company, Advance
Health Care, David D. Halbert, Jon S. Halbert, Danny Phillips, the Purchasers and
Whitney Debt Fund.
4.11** -- Warrant for Purchase of Shares of Common Stock of the Company dated December 8,
1993, in favor of BCBS of Maryland.
4.12** -- Stock Purchase Agreement dated as of June 25, 1996, by and between the Company and
BCBS of Texas.
4.13*** -- Warrant Agreement dated as of November 25, 1995, by and between the Company and BCBS
of Texas.
4.14***** -- Amended and Restated Incentive Stock Option Plan.
4.15***** -- Incentive Stock Option Plan.
5***** -- Opinion and Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10.1** -- Managed Pharmaceutical Agreement dated November 1, 1993, by and between Advance Data
and the Mega Life & Health Insurance Company (exhibits excluded).
10.2* -- Nondisclosure/Noncompetition Agreement dated August 4, 1993, between the Company,
Advance Data, Advance Mail and David D. Halbert.
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. EXHIBITS NUMBERED PAGE
- ------------ ------------------------------------------------------------------------------------ -------------------
<S> <C> <C> <C>
10.3* -- Nondisclosure/Noncompetition Agreement dated August 4, 1993, between the Company,
Advance Mail, Advance Data and Jon S. Halbert.
10.4* -- Nondisclosure/Noncompetition Agreement dated August 4, 1993, between the Company,
Advance Mail, Advance Data and Danny Phillips.
10.5* -- Employment Agreement effective as of December 1, 1993 by and between Advance
Clinical (formerly ParadigM) and Joseph J. Filipek, Jr. and, for the limited
purposes of Sections 3(d), 3(g) and 3(h) thereof, the Company.
10.6* -- Employment Agreement effective as of December 1, 1993, by and between Advance
Clinical (formerly ParadigM) and Robert L. Cinquegrana and for the limited purposes
of Sections 3(d), 3(g) and 3(h) thereof, the Company.
10.7* -- Employment Agreement effective as of November 14, 1994, by and between the Company
and John H. Sattler.
10.8* -- Employment Agreement effective as of February 15, 1996, by and between the Company
and Alan T. Wright.
10.9*** -- Form of Health Benefit Management Services Agreement.
10.10* -- Sublease dated May 2, 1996, between Lincoln National Life Insurance Company and
Advance Data.
10.11* -- Lease dated March 16, 1994, by and between Hill Management Services, Inc. and
Advance Clinical (formerly ParadigM).
10.12* -- Lease Agreement dated as of February 24, 1989, as amended November 30, 1992, and
December , 1992, by and between TRST Las Colinas, Inc. and Advance Health Care.
10.13* -- Assignment, Assumption, Bill of Sale and Consent Agreement dated as of October 20,
1993, between Medco Containment Services, Inc., the Company and Trinity Properties,
Ltd.
10.14*** -- Managed Pharmacy Benefit Services Agreement dated September 1, 1995, between the
Company and BCBS of Texas (exhibits excluded).
23.1**** -- Consent of Arthur Andersen LLP.
23.2***** -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in its opinion filed
as Exhibit 5 hereto).
27* -- Financial Data Schedule.
</TABLE>

- ------------------------
*Filed as the exhibit indicated to the Registration Statement on Form S-1
filed with the Commission on June 26, 1996.

** Filed as the exhibit indicated on Amendment No. 1 to Form S-1 filed with
the Commission on July 10, 1996.

**** Filed herewith.

***** To be filed by amendment.

<PAGE>
EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of
Amendment No. 2 to Registration Statement No. 333-06931 on Form S-1.

ARTHUR ANDERSEN LLP

Dallas, Texas
September 10, 1996