<PAGE> 1
EXHIBIT 99.1
INDEX
ADVANCEPCS AND SUBSIDIARIES
<TABLE>
<S> <C>
Selected Consolidated Financial Data 1
Management's Discussion and Analysis of
Financial Condition and Results of Operations 3
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of March 31, 1999 and 2000 F-2
Consolidated Statements of Operations for fiscal years ended
March 31, 1998, 1999 and 2000 F-3
Consolidated Statements of Stockholders' Equity for the fiscal years
ended March 31, 1998, 1999 and 2000 F-4
Consolidated Statements of Cash Flows for the fiscal years ended
March 31, 1998, 1999 and 2000 F-5
Notes to Consolidated Financial Statements F-6
Report of Independent Public Accountants on Financial Statement Schedule S-1
Schedule II. Valuation and Qualifying Accounts for the
fiscal years Ended March 31, 1998, 1999 and 2000 S-2
</TABLE>
<PAGE> 2
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables summarize certain selected consolidated financial
data, which should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes related thereto, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," included
elsewhere herein. The selected consolidated financial data of the Company as of
and for each of the years in the five-year period ended March 31, 2000, have
been derived from the Consolidated Financial Statements that have been audited
by Arthur Andersen LLP, independent public accountants.
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------------------------------------
1996(3) 1997(3) 1998 1999 2000
------------ ------------ ------------ ------------ ------------
(In thousands, except net income per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ....................... $ 127,871 $ 256,450 $ 523,525 $ 839,208 $ 2,028,737
Cost of operations:
Cost of revenues ............. 120,334 245,466 493,719 798,249 1,953,235
Selling, general, and
administrative expenses .... 6,158 7,309 18,955 21,006 38,793
------------ ------------ ------------ ------------ ------------
Total cost of operations ... 126,492 252,775 512,674 819,255 1,992,028
------------ ------------ ------------ ------------ ------------
Operating income ............... 1,379 3,675 10,851 19,953 36,709
Interest income ................ 366 1,560 2,950 2,860 1,064
Interest expense ............... (732) (445) (67) -- (3,943)
Loss on disposal of asset ...... -- -- -- -- (160)
Merger costs(2) ................ -- -- (689) -- --
Provision for income taxes .... -- 1,564 4,957 8,669 12,794
------------ ------------ ------------ ------------ ------------
Net income ..................... $ 1,013 $ 3,226 $ 8,088 $ 14,144 $ 20,876
============ ============ ============ ============ ============
Basic:
Net income per share ......... $ 0.03 $ 0.21 $ 0.38 $ 0.59 $ 0.84
Weighted average shares
outstanding ................ 8,013 12,529 21,011 24,004 24,760
Diluted:
Net income per share ......... $ 0.02 $ 0.18 $ 0.31 $ 0.53 $ 0.75
Weighted average shares
outstanding ................ 9,153 18,352 26,202 26,876 27,737
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------------------------------------------
1996(3) 1997(3) 1998 1999 2000
------------ ------------ ------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital .................. $ 269 $ 24,575 $ 27,657 $ 201 $ 12,108
Total assets ..................... 59,861 108,914 178,639 304,016 406,738
Long-term debt ................... 7,000 -- 1,285 50,000 50,000
Redeemable preferred stock ....... 11,896 -- -- -- --
Stockholders' equity (deficit) ... (1,537) 42,577 50,342 68,773 98,044
</TABLE>
1
<PAGE> 3
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------------------------------------------
1996(3) 1997(3) 1998 1999 2000
------------ ------------ ------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA:(1)(3)
Pharmacy network claims
Processed ...................... 9,375 26,579 38,319 50,588 81,225
Mail pharmacy prescriptions
Filled ......................... 536 677 839 1,289 1,674
Estimated health plan
Members (at period end) ........ 9,040 10,200 12,500 15,000 27,500
</TABLE>
----------
(1) This data has not been audited.
(2) Merger costs relate to the acquisition of IMR.
(3) This data has not been combined to reflect the merger with FFI, because
obtaining this information was not feasible at this date.
2
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains or may contain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, including
statements of AdvancePCS's and management's expectations, intentions, plans and
beliefs, including those contained in or implied by "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Notes to
Consolidated Financial Statements. These forward-looking statements, as defined
in Section 21E of the Securities Exchange Act of 1934, are dependent on certain
events, risks and uncertainties that may be outside our control. These
forward-looking statements may include statements of management's plans and
objectives for our future operations and statements of future economic
performance; our capital budget and future capital requirements and AdvancePCS
meeting our future capital needs, and the assumptions described in this report
underlying such forward-looking statements. Actual results and developments
could differ materially from those expressed in or implied by such statements
due to a number of factors, including those described in the context of such
forward-looking statements and the factors set forth in our Form 10-K and Form
10-Q under the caption "Risk Factors." All subsequent written and oral
forward-looking statements attributable to AdvancePCS or persons acting on our
behalf are expressly qualified in their entirety by this section.
OVERVIEW
We group the revenues from our health benefit management services into
three categories: data, mail, and clinical services.
o Data services. In 1992, we established a retail pharmacy network, that
currently consists of over 58,000 retail pharmacies nationwide and
began to provide on-line claims processing services. Under some of our
customer contracts, we contract directly with the retail pharmacies in
our national network. When we have an independent obligation to pay
our own network of retail pharmacy providers for the drugs dispensed,
meaning we are "at risk," we include payments from plan sponsors for
the drug cost and the claims processing fees as revenues. We record
payments we make to our retail pharmacy providers as cost of revenues.
Under other contracts, we manage a network of pharmacies that are
under direct contract with certain of our customers. For those plan
sponsors that have established their own pharmacy network, we
administer the plan sponsors' network pharmacy contracts. The plan
sponsors have the independent obligation to fund payment to those
pharmacies under contract and the plan sponsors are "at-risk" for the
payment for drugs dispensed; we record only the claims processing fees
as revenues. New customers that use our network, where we record both
claims processing fees and costs of drugs as revenues, will generate
higher revenues than new customers that use their own networks, where
we only record claims processing fees as revenues. Thus, while a
customer who uses our network may contribute the same gross profit in
terms of dollars as a customer that uses its own network, gross profit
as a percentage of revenue will be lower for customers using our
network because of the higher level of revenue we recognize.
o Mail services. We derive mail services revenues from the sale of
pharmaceuticals to members of our customers' health plans. These
revenues include the cost of the pharmaceuticals plus a dispensing
fee.
o Clinical services. We have historically derived our clinical revenues
primarily from formulary rebates and volume discounts received from
pharmaceutical manufacturers. Some of these revenues are based on
estimates that are subject to final settlement with the manufacturer.
In addition, we generate clinical revenues from our comprehensive
disease management programs. We also include our newly acquired
clinical trial and medical outcomes research businesses in our
clinical services revenues.
Our cost of revenues includes product costs and other direct costs associated
with the dispensing of prescription drugs and the provision of claims processing
and clinical services.
Effective October 2, 2000, Advance Paradigm, Inc. ("API") acquired all of the
equity of PCS Health Systems, Inc. ("PCS"). The aggregate purchase price paid by
API was $1.0 billion, of which API paid Rite Aid Corporation
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<PAGE> 5
("Rite Aid"), the seller, $675 million in cash, and issued to Rite Aid $200
million in senior subordinated notes and $125 million in API convertible
preferred stock. The cash portion of the purchase price was financed with the
proceeds of an $825 million senior secured credit facility and $150 million in
equity financing committed by Joseph, Littlejohn & Levy, Inc. ("JLL"). The
acquisition of PCS will be accounted for using the purchase method of
accounting. The excess of the purchase price paid over the net identifiable
assets and liabilities of PCS will be recorded as goodwill.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as a
percentage of revenues.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Data services ................................... 64.7% 66.1% 76.1%
Mail services ................................... 15.0 15.2 9.1
Clinical services ............................... 20.3 18.7 14.8
----- ----- -----
Total revenues .......................... 100.0 100.0 100.0
Cost of operations:
Cost of revenues ................................ 94.3 95.1 96.3
Selling, general, and administrative expenses ... 3.6 2.5 1.8
----- ----- -----
Total cost of operations ................ 97.9 97.6 98.1
----- ----- -----
Operating income .................................. 2.1 2.4 1.9
Interest income (expense), net .................... 0.5 0.3 (0.1)
Merger costs ...................................... (0.1) -- --
Provision for income taxes ........................ 0.9 1.0 0.6
----- ----- -----
Net income ........................................ 1.6% 1.7% 1.2%
===== ===== =====
</TABLE>
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
REVENUES. Our revenues for fiscal year 2000 increased by $1.2 billion, or
141.7%, compared to revenues for fiscal year 1999. The number of individuals we
managed continued to increase in fiscal year 2000 as we obtained new customers
including our largest customer, FHS, whose service agreement began April 1,
1999. In addition, our current customers continued to increase their membership
and utilization levels. New customer contracts resulted from increased marketing
efforts and the expansion of our sales and marketing department. Contracts with
new customers in fiscal year 2000 generally included all pharmacy benefit
management products we offer, including claims processing, mail, and clinical
services.
Our revenues from data services increased $990.9 million, or 178.3%,
compared to the prior year. The increase resulted from the addition of new
contracts including the service agreement with FHS and an increase in use of our
services by existing customers. The increase in new individuals resulted in an
increase in pharmacy claims processed from 50.6 million in fiscal year 1999 to
81.2 million in fiscal year 2000, a 60.5% increase. Virtually all of the new
fiscal year 2000 customer contracts use our pharmacy network including FHS,
which has shifted a larger percentage of our total revenues to claims
processing. Revenues from mail services increased $56.8 million, or 44.6%,
compared to the prior year. The increase resulted primarily from the new
individuals added during fiscal year 2000. The increase in new individuals
resulted in an increase in mail prescriptions dispensed from 1.3 million in
fiscal year 1999 to 1.7 million in fiscal year 2000, a 30.8% increase. Revenues
from clinical services increased $143.1 million, or 91.2%, compared to the prior
year. The increase resulted primarily from the new individuals added and the
additional claims processed during fiscal year 2000 compared to the prior year.
COST OF REVENUES. Our cost of revenues for fiscal year 2000 increased by
$1.2 billion, or 144.7%, compared to the prior fiscal year. This increase
primarily resulted from the additional costs associated with our claims
processing growth and the new customers, including FHS, that are using our
retail pharmacy network. As a percentage of revenues, cost of revenues was 96.3%
in fiscal year 2000 compared to 95.1% in fiscal year 1999.
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<PAGE> 6
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Our selling, general, and
administrative expense for fiscal year 2000 increased by $17.8 million, or
84.7%, compared to fiscal year 1999. This increase was primarily the result of
our acquisition of FHPS and the related amortization expense associated with the
intangible assets acquired. In addition, further expansion in management, sales,
and marketing contributed to the increase. In spite of the increase, selling,
general and administrative expenses as a percentage of revenues decreased from
2.5% in fiscal year 1999 to 1.8% in fiscal year 2000 as the result of greater
economies of scale and due to the increase in revenues associated with our
claims processing services. Additional revenues generated by customers using our
network pharmacy providers typically do not result in an increase in selling,
general, and administrative expenses.
INTEREST INCOME AND INTEREST EXPENSE. Our interest expense, net of interest
income, was $2.9 million in fiscal year 2000. We incurred no interest expense in
fiscal year 1999 since we had no outstanding indebtedness until March 31, 1999,
and had $2.9 million in interest income. Interest expense increased as the
result of the acquisition of FHPS on March 31, 1999, and the related bank
borrowings throughout fiscal year 2000.
INCOME TAXES. In fiscal years 2000 and 1999, our income tax expense
approximated an effective tax rate of 38%.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
REVENUES. Our revenues for fiscal year 1999 increased by $315.7 million, or
60.3%, compared to revenues for fiscal year 1998. The number of individuals we
managed continued to increase in fiscal year 1999 as we obtained new customers
and our current customers continued to increase their membership and utilization
levels. New customer contracts resulted from increased marketing efforts and the
expansion of our sales and marketing department. Contracts with new customers in
fiscal year 1999 generally included all pharmacy benefit management products we
offer, including claims processing, mail and clinical services.
Our revenues from claims processing increased $216.3 million, or 63.9%,
compared to the prior year. The increase resulted from the addition of new
individuals and an increase in use of our services by existing customers. The
increase in new individuals resulted in an increase in pharmacy claims processed
from 38.3 million in fiscal year 1998 to 50.6 million in fiscal year 1999, a
32.1% increase. Virtually all of the new fiscal year 1999 customer contracts use
our pharmacy network, which has shifted a larger percentage of our total
revenues to claims processing. Revenues from mail services increased $48.9
million, or 62.5%, compared to the prior year. The increase resulted primarily
from the new individuals added during fiscal year 1999. The increase in new
individuals resulted in an increase in mail prescriptions dispensed from 839,000
in fiscal year 1998 to 1.3 million in fiscal year 1999, a 54.9% increase.
Revenues from clinical services increased $50.4 million, or 47.4%, compared to
the prior year. The increase resulted primarily from the new individuals added
and the additional claims processed during fiscal year 1999 compared to the
prior year.
COST OF REVENUES. Our cost of revenues for fiscal year 1999 increased by
$304.5 million, or 61.7%, compared to the prior fiscal year. This increase
primarily resulted from the additional costs associated with our claims
processing growth and the new customers that are using our retail pharmacy
network. As a percentage of revenues, cost of revenues was 95.1% in fiscal year
1999 compared to 94.3% in fiscal year 1998.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expense for fiscal year 1999 increased by $2.1 million, or 10.8%,
compared to fiscal year 1998. This increase was the result of our expansion of
our sales and marketing activities, as well as increases in administrative and
support staff levels and salaries and benefits in response to volume growth in
all programs. In spite of the increase, selling, general, and administrative
expenses as a percentage of revenues decreased from 3.6% in fiscal year 1998 to
2.5% in fiscal year 1999 as the result of greater economies of scale and due to
the increase in revenues associated with our claims processing services.
Additional revenues generated by customers using our network pharmacy providers
typically do not result in an increase in selling, general, and administrative
expenses.
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<PAGE> 7
INTEREST INCOME AND INTEREST EXPENSE. Our interest income, net of interest
expense, was $2.9 million in fiscal year 1999 and $2.3 million in fiscal year
1998. We incurred no interest expense in fiscal year 1999 since we had no
outstanding indebtedness until March 31, 1999. We maintained higher cash
balances during the first eight months of fiscal year 1999 compared to fiscal
year 1998. In December 1998, we purchased Baumel-Eisner Neuromedical Institute
for $25.0 million; therefore, interest income declined in the fourth quarter of
fiscal year 1999 compared to the first three quarters. We invest our excess cash
in money market funds and high-grade commercial paper.
INCOME TAXES. In fiscal years 1999 and 1998, our income tax expense
approximated an effective tax rate of 38%.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, we had working capital of $12.1 million. While we have
$247.4 million of accounts payable, the majority of these obligations are not
due until cash is collected from our customers. Our net cash provided by
operating activities was $17.3 million, $29.6 million, and $31.2 million for the
fiscal years ended 1998, 1999, and 2000, respectively. The significant increases
in net cash provided by operating activities resulted primarily from the income
we generated and due to the timing of receivables and payables resulting from
our continued growth. Cash we used in investing activities was $6.8 million,
$97.6 million and $22.8 million for the fiscal years ended 1998, 1999, and 2000,
respectively. Such investing activities included purchases of property, plant,
and equipment associated with growth and expansion of our systems and
facilities, as well as cash paid for acquisitions. In December 1998, we used
$24.7 million, net of cash acquired, for the acquisition of Baumel-Eisner
Neuromedical Institute, Inc. In March 1999, we used $65.0 million, net of $5.0
million cash acquired, for the acquisition of Foundation Health Pharmaceutical
Services.
Historically, we have been able to fund our operations and continued growth
through cash flow from operations. In fiscal years 1998, 1999, and 2000, our
operating cash flow funded our capital expenditures and our short-term excess
cash was invested in money market funds and high grade commercial paper. We
anticipate that cash flow from operations, combined with our current cash
balances and amounts available under our credit facility, will be sufficient to
meet our internal operating requirements and expansion programs, including
capital expenditures, for at least the next 18 months. However, if we
successfully continue our expansion, acquisition, and alliance plans, we may be
required to seek additional debt or equity financing in order to achieve these
plans.
CREDIT FACILITY
On March 31, 1999, we entered into a senior revolving credit facility with a
group of lenders. The credit facility consists of a $75.0 million, three year
revolving credit facility. On March 31, 1999, we borrowed $50.0 million under
the credit facility to fund the acquisition of Foundation Health Pharmaceutical
Services. Each of our subsidiaries has guaranteed the credit facility. The
lenders received a first priority security interest in our subsidiaries' capital
stock and negative pledges on accounts receivable and other assets.
Interest on the credit facility accrues at a specified margin above the
London Interbank Offered Rate, or "LIBOR", or an alternate base rate. The
alternate base rate is the bank's prime rate or the federal funds rate plus
0.5%. For LIBOR loans the applicable margin is 1.375% per annum as of March 31,
2000, and the effective interest rate is 7.435%.
The credit facility contains usual and customary affirmative and negative
covenants, including limitations on liens, debts, dividends, capital
expenditures, mergers, acquisitions, and sale of assets. Covenants also include
a specified minimum net worth, maximum leverage ratio and a minimum interest
coverage ratio. The credit facility contains customary events of default
including:
o nonpayment of principal, interest, fees, or other amounts;
o violation of covenants;
o inaccuracy of representations and warranties;
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<PAGE> 8
o default under other indebtedness;
o bankruptcy and other insolvency events;
o material judgements;
o ERISA matters; and
o change of control without the lender's prior written consent.
In fiscal 2000, the Company exceeded the limit for capital expenditures as
required by covenant. The Company received a waiver from the lenders for this
covenant violation.
SUBSEQUENT ACQUISITION AND FINANCING
In conjunction with the API acquisition of PCS the Company obtained an $825
million senior secured credit facility which includes a $175.0 million revolving
credit facility, $100 million interim revolving credit facility, and two term
notes totaling $550.0 million. The term notes are due on October 2, 2005 and
October 2, 2007. The $175 million revolving credit facility accrues interest at
LIBOR plus 3%. The term notes accrue interest at LIBOR plus 3% and LIBOR plus
3.5%. The Company intends to refinance the $100 million interim revolving credit
facility with a collateralized accounts receivable facility by January 2001. The
secured credit facility replaced the $75.0 million, three year revolving credit
facility. The senior secured credit facility contains covenants which are
typical for this type of document. In addition, API issued to Rite Aid $200
million in senior subordinated notes that accrue interest at 11% through April
2002, 12% from April 2002 to October 2002 and 13% thereafter. The senior
subordinated notes issued to Rite Aid have been guaranteed by all of the
subsidiaries of API. Each subsidiary is 100% owned. The guarantees are full,
unconditional, joint and several. There are no restrictions on the ability of
the subsidiary guarantors to pay dividends, make loans or advances to the
parent. API also issued Rite Aid $125 million in convertible preferred stock,
convertible into a class B common stock. In addition, API issued $150 million in
common stock and preferred convertible stock to JLL.
RECENT ACCOUNTING PRONOUNCEMENTS
We adopted SFAS 131, "Disclosure about Segments of an Enterprise and Related
Information," effective April 1, 1998. This pronouncement changes the
requirements under which public businesses must report segment information. The
objective of the pronouncement is to provide information about a company's
different types of business activities and different economic environments. SFAS
131 requires companies to select segments based on their internal reporting
system. We provide integrated health benefit management services to our
customers, and these services account for substantially all of our net revenues.
Such services are typically negotiated under one contract with the customer.
Therefore, our operations will continue to be reported in one segment.
In June 1998, SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. SFAS 133 requires all derivatives to be recognized as
either assets or liabilities in the statement of financial position and measured
at fair value. In addition, SFAS 133 specifies the accounting for changes in the
fair value of a derivative based on the intended use of the derivative and the
resulting designation. We do not have any derivatives and SFAS 133 does not have
a material impact on our financial position or disclosures. SFAS 133, as amended
by SFAS 137, "Accounting for Derivative Instruments and Hedging Activities --
Deferral of Effective Date -- an Amendment of FASB Statement No. 133," and SFAS
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities -- an Amendment of FASB Statement No. 133," is effective beginning in
fiscal year March 31, 2002.
In December 1999, the SEC staff issued SAB 101 "Revenue Recognition in
Financial Statements". SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101 is
effective in our fourth fiscal quarter of 2001. Management is currently
evaluating the impact of adopting SAB 101.
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<PAGE> 9
IMPACT OF INFLATION
Changes in prices charged by manufacturers and wholesalers for
pharmaceuticals we dispense affect our cost of revenues. Historically, we have
been able to pass the effect of such price changes to our customers under the
terms of our agreements. As a result, changes in pharmaceutical prices due to
inflation have not adversely affected our company.
YEAR 2000 READINESS DISCLOSURE
Our operations require our computer systems and information technology to
work effectively. In fiscal year 1998, we began addressing the year 2000 issue
by forming a year 2000 project team. The year 2000 issue is the result of
computer programs written using two digits rather than four digits to define
"date" fields. Information systems have time-sensitive operations that, as a
result of this date field limitation, could disrupt business activities in the
normal business cycle. For example, some computers that are not year 2000
compliant may interpret the year 2000 as the year 1900. This treatment could
result in significant miscalculations when processing critical date-sensitive
information relating to dates after December 31, 1999.
As of the date of this filing, we have experienced no year 2000 issues that
have materially impacted our results of operations or financial condition.
However, we will continue to monitor all year 2000 related issues.
8
<PAGE> 10
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Advance Paradigm, Inc.:
We have audited the accompanying consolidated balance sheets of Advance
Paradigm, Inc. (a Delaware corporation) and subsidiaries as of March 31, 1999
and 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
2000. 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 auditing standards generally
accepted in the United States. 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, 1999 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 2000, in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Dallas, Texas,
October 19, 2000
F-1
<PAGE> 11
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
-----------------------------
1999 2000
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 45,895,000 $ 55,243,000
Accounts receivable, net of allowance for doubtful accounts of
$371,000 and $1,248,000, respectively 130,642,000 200,288,000
Inventories 4,015,000 5,965,000
Prepaid expenses and other 1,701,000 3,241,000
------------ ------------
Total current assets 182,253,000 264,737,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $8,942,000 and $14,311,000, respectively 15,794,000 33,107,000
INTANGIBLE ASSETS, net of accumulated amortization of
$2,191,000 and $6,078,000, respectively 105,041,000 101,154,000
OTHER ASSETS 928,000 7,740,000
------------ ------------
Total assets $304,016,000 $406,738,000
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $174,332,000 $242,440,000
Accrued salaries and benefits 3,780,000 5,386,000
Other accrued expenses 3,940,000 4,803,000
------------ ------------
Total current liabilities 182,052,000 252,629,000
NONCURRENT LIABILITIES:
Long-term debt 50,000,000 50,000,000
Deferred income taxes 2,597,000 3,904,000
Other noncurrent liabilities 594,000 2,161,000
------------ ------------
Total liabilities 235,243,000 308,694,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value;
4,995,000 shares authorized, none issued and outstanding -- --
Series B convertible preferred stock, $.01 par value; 5,000
shares authorized, no shares issued and outstanding -- --
Common stock, $.01 par value; 50,000,000 shares authorized,
24,556,898 and 25,017,154, shares issued and outstanding
at March 31, 1999 and 2000, respectively 246,000 250,000
Additional paid-in capital 48,795,000 58,927,000
Treasury stock -- --
Accumulated earnings 19,732,000 38,867,000
------------ ------------
Total stockholders' equity 68,773,000 98,044,000
------------ ------------
Total liabilities and stockholders' equity $304,016,000 $406,738,000
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE> 12
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------------
1998 1999 2000
---------------- ---------------- ----------------
<S> <C> <C> <C>
REVENUES $ 523,525,000 $ 839,208,000 $ 2,028,737,000
---------------- ---------------- ----------------
COST OF OPERATIONS:
Cost of revenues 493,719,000 798,249,000 1,953,235,000
Selling, general, and administrative expenses 18,955,000 21,006,000 38,793,000
---------------- ---------------- ----------------
Total cost of operations 512,674,000 819,255,000 1,992,028,000
---------------- ---------------- ----------------
Operating income 10,851,000 19,953,000 36,709,000
INTEREST INCOME 2,950,000 2,860,000 1,064,000
LOSS ON DISPOSAL OF ASSET -- -- (160,000)
INTEREST EXPENSE (67,000) -- (3,943,000)
MERGER COSTS (689,000) -- --
---------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES 13,045,000 22,813,000 33,670,000
PROVISION FOR INCOME TAXES 4,957,000 8,669,000 12,794,000
---------------- ---------------- ----------------
NET INCOME $ 8,088,000 $ 14,144,000 $ 20,876,000
================ ================ ================
BASIC:
NET INCOME AVAILABLE TO COMMON
STOCKHOLDERS $ 7,888,000 $ 14,144,000 $ 20,876,000
NET INCOME PER SHARE $ 0.38 $ 0.59 $ 0.84
WEIGHTED AVERAGE SHARES OUTSTANDING 21,011,508 24,004,290 24,760,163
DILUTED:
NET INCOME AVAILABLE TO COMMON
STOCKHOLDERS $ 8,088,000 $ 14,144,000 $ 20,876,000
NET INCOME PER SHARE $ 0.31 $ 0.53 $ 0.75
WEIGHTED AVERAGE SHARES OUTSTANDING 26,201,838 26,876,202 27,737,216
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 13
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998, 1999, and 2000
<TABLE>
<CAPTION>
Series B
Common Stock Preferred Stock
----------------------------- ------------------------------
Number Number
of of
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, March 31, 1997
Giving Effect to the merger with FFI 20,853,790 $ 209,000 4,444 $ --
Comprehensive income and
Net income -- -- -- --
Distributions to owners -- -- -- --
Issuance of Common Stock
in connection with the
exercise of stock options
and warrants 455,154 5,000 -- --
Dividends on Series B
Preferred Stock -- -- -- --
------------ ------------ ------------ ------------
BALANCE, March 31, 1998 21,308,944 214,000 4,444 --
Comprehensive income and
Net income -- -- -- --
Distributions to owners -- -- -- --
Issuance of Common Stock
in connection with the
conversion of Series B
Preferred Stock 2,222,222 22,000 (4,444) --
Issuance of Common Stock
in connection with the
exercise of stock options
and warrants 1,025,732 10,000 -- --
Purchase of treasury stock -- -- -- --
Tax benefit relating to exercise
of employee stock options
and other -- -- -- --
Issuance of warrants -- -- -- --
------------ ------------ ------------ ------------
BALANCE, March 31, 1999 24,556,898 246,000 -- --
FFI activity during the
unreported period
(see Note 2)-
Comprehensive income and
Net income -- -- -- --
Distributions to owners -- -- -- --
------------ ------------ ------------ ------------
ADJUSTED BALANCE,
March 31, 1999 24,556,898 246,000 -- --
Comprehensive income and
Net income -- -- -- --
Distributions to owners -- -- -- --
Issuance of Common Stock
in connection with the
exercise of stock options
and warrants 228,372 2,000 -- --
Tax benefit relating to exercise
of employee stock options
and other -- -- -- --
Investment in CHI 231,884 2,000 -- --
Issuance of common stock
in connection with the
creation of Mature Rx
and HMN -- -- -- --
------------ ------------ ------------ ------------
BALANCE, March 31, 2000 25,017,154 $ 250,000 -- $ --
============ ============ ============ ============
<CAPTION>
Additional Accumulated
Paid-In Earnings
Capital (Deficit) Total
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE, March 31, 1997
Giving Effect to the merger with FFI $ 42,788,000 $ (743,000) $ 42,254,000
Comprehensive income and
Net income -- 8,088,000 8,088,000
Distributions to owners -- (56,000) (56,000)
Issuance of Common Stock
in connection with the
exercise of stock options
and warrants 251,000 -- 256,000
Dividends on Series B
Preferred Stock -- (200,000) (200,000)
------------ ------------ ------------
BALANCE, March 31, 1998 43,039,000 7,089,000 50,342,000
Comprehensive income and
Net income -- 14,144,000 14,144,000
Distributions to owners -- (1,266,000) (1,266,000)
Issuance of Common Stock
in connection with the
conversion of Series B
Preferred Stock (22,000) -- --
Issuance of Common Stock
in connection with the
exercise of stock options
and warrants 2,415,000 -- 2,425,000
Purchase of treasury stock (14,000) (236,000) (250,000)
Tax benefit relating to exercise
of employee stock options
and other 877,000 1,000 878,000
Issuance of warrants 2,500,000 -- 2,500,000
------------ ------------ ------------
BALANCE, March 31, 1999 48,795,000 19,732,000 68,773,000
FFI activity during the
unreported period
(see Note 2)-
Comprehensive income and
Net income -- 509,000 509,000
Distributions to owners -- (300,000) (300,000)
------------ ------------ ------------
ADJUSTED BALANCE,
March 31, 1999 48,795,000 19,941,000 68,982,000
Comprehensive income and
Net income -- 20,876,000 20,876,000
Distributions to owners -- (1,950,000) (1,950,000)
Issuance of Common Stock
in connection with the
exercise of stock options
and warrants 1,567,000 -- 1,569,000
Tax benefit relating to exercise
of employee stock options
and other 3,323,000 -- 3,323,000
Investment in CHI 4,998,000 -- 5,000,000
Issuance of common stock
in connection with the
creation of Mature Rx
and HMN 244,000 -- 244,000
------------ ------------ ------------
BALANCE, March 31, 2000 $ 58,927,000 $ 38,867,000 $ 98,044,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE> 14
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,088,000 $ 14,144,000 $ 20,876,000
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation and amortization 2,469,000 3,836,000 9,110,000
Loss on disposal of assets -- -- 160,000
Provision for doubtful accounts 74,000 24,000 484,000
Deferred income taxes 441,000 1,312,000 1,307,000
Change in certain assets and liabilities--
Accounts receivable (38,106,000) (42,973,000) (75,611,000)
Inventories (1,028,000) (1,128,000) (1,950,000)
Prepaid expenses and other assets (1,606,000) (953,000) (588,000)
Accounts payable, accrued expenses
and other noncurrent liabilities 46,930,000 55,298,000 77,401,000
------------ ------------ ------------
Net cash provided by operating
activities 17,262,000 29,560,000 31,189,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,795,000) (7,860,000) (22,807,000)
Purchase of subsidiaries, net of cash acquired -- (89,701,000) --
------------ ------------ ------------
Net cash used in investing activities (6,795,000) (97,561,000) (22,807,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock 256,000 2,425,000 1,811,000
Proceeds from borrowings 709,000 50,000,000 37,000,000
Payments on long-term obligations (1,608,000) (10,000) (37,000,000)
Capital lease obligations 36,000 (21,000) 22,000
Distributions to owners (56,000) (1,266,000) (1,950,000)
Purchase of treasury shares -- (250,000) --
Payment of preferred stock dividend (200,000) -- --
------------ ------------ ------------
Net cash provided by (used in)
financing activities (863,000) 50,878,000 (117,000)
------------ ------------ ------------
NET INCREASE IN CASH DURING UNREPORTED PERIOD (SEE NOTE 2) -- -- 1,083,000
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 9,604,000 (17,123,000) 9,348,000
CASH AND CASH EQUIVALENTS,
beginning of year 53,414,000 63,018,000 45,895,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
end of year $ 63,018,000 $ 45,895,000 $ 55,243,000
============ ============ ============
SUPPLEMENTARY INFORMATION:
Cash paid for interest $ 67,000 $ -- $ 3,943,000
Cash paid for income taxes $ 5,100,000 $ 5,900,000 $ 7,000,000
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE> 15
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL:
Advance Paradigm, Inc. and Subsidiaries (the "Company" or "API"), a
Delaware corporation, is a leading independent provider of health benefit
management services, providing integrated pharmacy benefit management, disease
management, clinical trials and research and web-based marketing support and
other health related programs. The Company markets its services to managed care
organizations, third-party health plan administrators, insurance companies,
government agencies, employer groups and labor union-based trusts. In addition,
the Company transacts business with pharmaceutical manufacturers as both
suppliers and customers. During the year ended March 31, 1999, the Company
purchased two companies for cash. Foundation Health Pharmaceutical Services,
Inc. ("FHPS") was acquired on March 31, 1999, for $70 million. FHPS was the
pharmacy benefit management business of Foundation Health Systems, Inc. ("FHS").
On December 1, 1998, Baumel-Eisner Neuromedical Institute ("Baumel-Eisner") was
acquired for $25 million. Baumel-Eisner was a privately held clinical trials
company based in South Florida. (See Note 3)
FFI Health Services, acquired on July 5, 2000, is a privately held health
benefit management and direct-to-consumer pharmaceutical marketing services
company. FFI Health Services includes the operations of the affiliated
companies, First Florida International Holdings, Inc., Phoenix Communications
International, Inc., Innovative Pharmaceutical Strategies, Inc., HMN Health
Services, and Mature Rx Plus of Nevada, Inc. (collectively "FFI"). FFI, based in
Cleveland, Ohio, offers several pharmacy-related product lines marketed under
the names aVidaRx(C), femScript(C), MatureRx(C), and MatureRx(C)-Plus to
under-insured or uninsured individuals, women, and senior citizens. In addition,
FFI provides prescription benefit management services to employees and third
party administrators.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying consolidated financial statements give retroactive effect,
for all periods presented, to the combination of API and FFI on July 5, 2000,
which has been accounted for as a pooling of interests.
The consolidated balance sheets include API's historical balance sheets as
of March 31, 1999 and 2000, and the corresponding FFI balance sheets at December
31, 1998 and March 31, 2000.
The consolidated statements of operations, stockholders' equity and cash
flows include API's historical statements of operations, stockholders' equity,
and cash flows for each of the three years in the period ended March 31, 2000,
and the corresponding historical statements of operations, stockholders' equity,
and cash flows of FFI for each of the two years in the period ended December 31,
1998 and the historical statements for the fiscal year ended March 31, 2000. The
three month period from January 1, 1999 through March 31, 1999, (the "unreported
period"), including $13,330,000 and $509,000 in revenues and net income of FFI,
respectively, is not reported in the consolidated financial statements. In
accordance with APB Opinion No. 16, "Accounting for Business Combinations", the
unreported period is included in the beginning retained earnings of the
consolidated balance sheet as of March 31, 2000, to conform the year ends of API
and FFI. The consolidated statements of stockholders' equity reflect the
exchange of all outstanding FFI common shares for the 3.5 million shares of API
Common Stock as if such exchange happened at April 1, 1998. (see Note 3).
F-6
<PAGE> 16
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include overnight investments, money market
accounts, and high-grade commercial paper with original maturities of three
months or less.
Inventories
Inventories consist of purchased pharmaceuticals stated at the lower of
cost or market under the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed on the straight-line method over
estimated useful lives ranging from three to twenty years. Amortization of
leasehold improvements is computed over the lives of the assets or the lease
terms, whichever is shorter. Major renewals and betterments are added to the
property and equipment accounts while costs of repairs and maintenance are
charged to operating expenses in the period incurred. The cost of assets
retired, sold, or otherwise disposed of and the applicable accumulated
depreciation are removed from the accounts, and the resultant gain or loss, if
any, is reflected in the statement of operations.
Intangible Assets
Intangible assets consist of goodwill, customer contracts acquired, and
noncompete agreements. Goodwill represents the excess of cost over the estimated
fair value of tangible net assets acquired. Goodwill is amortized on a
straight-line basis over periods from 25 to 40 years with a weighted average of
29 years. Customer contracts and noncompete agreements are amortized over 10 to
15 years. Amortization expense was approximately $346,000, $691,000 and
$3,887,000 in the years ended March 31, 1998, 1999, and 2000, respectively, and
is included in selling, general and administrative expenses.
Other Assets
In the year ended March 31, 2000, the Company issued 231,884 shares of its
Common Stock to acquire a 19 percent interest in Consumer Health Interactive,
Inc. ("CHI"). The $5,000,000 investment is reflected in other assets.
F-7
<PAGE> 17
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Impairment of Long-Lived Assets
The Company evaluates whether events and circumstances have occurred that
indicate the remaining estimated useful life of long-lived assets, including
goodwill, may warrant revision or that the remaining balance of an asset may not
be recoverable. The assessment of possible impairment is based on the ability to
recover the carrying amount of the asset from expected future cash flows on an
undiscounted basis. If the assessment indicates that the carrying amount of the
asset exceeds the undiscounted cash flows, an impairment has occurred. The
impairment is calculated as the total by which the carrying amount of the asset
exceeds its fair value. The fair value of long-lived assets and goodwill is
estimated based on quoted market prices, if available, or the expected total
value of the cash flows on a discounted basis. The Company recorded no
impairment charges in fiscal 1998, 1999, or 2000.
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 fair value of the Company's bank debt, which approximates the
carrying value, was estimated at current rates for similar debt with similar
maturity.
Other Noncurrent Liabilities
Other liabilities is comprised of deposits from certain customers in
connection with pharmacy benefit contracts.
Revenue Recognition
Revenues from the dispensing of pharmaceuticals from the Company's mail
service pharmacy are recognized when each prescription is shipped. Revenues from
sales of prescription drugs by pharmacies in the Company's nationwide network
and claims processing fees are recognized when the claims are adjudicated. At
the point-of-sale, the pharmacy claims are adjudicated using the Company's
on-line claims processing system. When the Company has an independent obligation
to pay its network pharmacy providers, the Company includes payments from plan
sponsors for these benefits as revenues and payments to its pharmacy providers
as cost of revenues. If the Company is only administering plan sponsors' network
pharmacy contracts, the Company records the claims processing service fees as
revenues. Rebate revenues are recognized as they are earned in accordance with
contractual agreements. Certain of these revenues are based on estimates which
are subject to final settlement with the contract party. These estimates are
reviewed and revised as settled. Revenues from certain disease management and
health benefit management products are reimbursed at predetermined contractual
rates based on the achievement of certain milestones.
Cost of Revenues
Cost of revenues includes product costs, pharmacy claims payments, and
other direct costs associated with the sale and dispensing of prescriptions.
Certain of these expenses are recognized based on estimates which are subject to
final settlement with the contract party. These estimates are reviewed and
revised as settled.
Stock Split
On October 12, 1999, the Company announced a two-for-one stock split,
effected in the form of a stock dividend of the Company's common stock. The
record date was November 11, 1999, and the date of payment was November 30,
1999. Financial information and stock prices contained throughout the Form 10-K
have been retroactively adjusted to reflect the impact of the stock split in all
periods presented.
F-8
<PAGE> 18
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net Income Per Share
Net income per share is computed using the weighted average number of
common and dilutive shares outstanding during the period. A reconciliation of
the numerators and denominators of the basic and diluted per-share computations
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
BASIC
Numerator:
Net income $ 8,088,000 $ 14,144,000 $ 20,876,000
Preferred stock dividends 200,000 -- --
------------ ------------ ------------
$ 7,888,000 $ 14,144,000 $ 20,876,000
============ ============ ============
Denominator:
Weighted average common stock outstanding 21,011,508 24,004,290 24,760,163
============ ============ ============
Net income per share $ 0.38 $ 0.59 $ 0.84
============ ============ ============
DILUTED
Numerator:
Net income $ 8,088,000 $ 14,144,000 $ 20,876,000
============ ============ ============
Denominator:
Weighted average common stock outstanding 21,011,508 24,004,290 24,760,163
Other Dilutive Securities:
Series B preferred stock 2,222,222 73,260 --
Options and warrants using the treasury stock method 2,968,108 2,798,652 2,977,053
------------ ------------ ------------
Weighted average shares outstanding 26,201,838 26,876,202 27,737,216
============ ============ ============
Net income per share $ 0.31 $ 0.53 $ 0.75
============ ============ ============
</TABLE>
Reclassification
Certain prior year amounts have been reclassified to conform with current
year presentation.
Recent Accounting Pronouncements
The Company has adopted SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information," effective April 1, 1998. This pronouncement
changes the requirements under which public businesses must report segment
information. The objective of the pronouncement is to provide information about
a company's different types of business activities and different economic
environments. SFAS 131 requires companies to select segments based on their
internal reporting system. The Company provides integrated health benefit
management services to our customers, and these services account for
substantially all of the Company's revenues. Such services are typically
negotiated under one contract with the customer; therefore, the Company's
operations will continue to be reported in one segment.
F-9
<PAGE> 19
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 1998, SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS 133 requires all derivatives to be
recognized as either assets or liabilities in the statement of financial
position and measured at fair value. In addition, SFAS 133 specifies the
accounting for changes in the fair value of a derivative based on the intended
use of the derivative and the resulting designation. The Company does not have
any derivatives and SFAS 133 does not have a material impact on the Company's
financial position or disclosures. SFAS 133, as amended by SFAS 137, "Accounting
for Derivative Instruments and Hedging Activities -- Deferral of Effective Date
-- an Amendment of FASB Statement No. 133," and SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities -- an Amendment of
FASB Statement No. 133," is effective beginning in fiscal year March 31, 2002.
In December 1999, the SEC staff issued SAB 101 "Revenue Recognition in
Financial Statements". SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101 is
effective in our fourth fiscal quarter of 2001. Management is currently
evaluating the impact of adopting SAB 101.
3. ACQUISITIONS
Effective October 1, 2000, Advance Paradigm, Inc. ("API") acquired all of
the equity of PCS Health Systems, Inc. ("PCS"). The aggregate purchase price
paid by API was $1.0 billion, of which API paid Rite Aid Corporation ("Rite
Aid"), the seller, $675 million in cash, and issued to Rite Aid $200 million in
senior subordinated notes and $125 million in API convertible preferred stock.
The senior subordinated notes issued to Rite Aid have been guaranteed by all of
the subsidiaries of API. Each subsidiary guarantor is 100% owned. The guarantees
are full, unconditional, joint and several. There are no restrictions on the
ability of the subsidiary guarantors to pay dividends, make loans or advances to
the parent. The cash portion of the purchase price was financed with the
proceeds of an $825 million senior secured credit facility and $150 million in
equity financing committed by Joseph, Littlejohn & Levy, Inc. ("JLL"). The
acquisition of PCS will be accounted for using the purchase method of
accounting. The excess of the purchase price paid over the net identifiable
assets and liabilities of PCS will be recorded as goodwill. The portion of the
purchase price allocated to the net identifiable assets and goodwill is
preliminary and subject to revision following the results of an appraisal and
further identification of intangible assets.
The following unaudited pro forma information presents the results of
operations of the Company as if the PCS acquisition had taken place at the
beginning of the period presented (in thousands, except per share amounts):
<TABLE>
<CAPTION>
2000
------------
<S> <C>
Revenues $ 3,293,430
Net income (loss) (6,571)
Net income (loss) per share:
Basic $ (0.23)
Diluted $ (0.23)
Weight average shares outstanding:
Basic 28,967
Diluted 28,967
</TABLE>
F-10
<PAGE> 20
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pro forma information for fiscal years 1998 and 1999 would indicate a
significant loss due to the amortization and interest expense and the size of
API during that year. Management has concluded that such information provides
little relevance to the historical and ongoing operating results of API.
On March 31, 1999, the Company acquired the outstanding stock of FHPS for
$70 million in cash and warrants to purchase 400,000 shares of its $0.01 par
value common stock ("Common Stock"). The Company valued such warrants at fair
market value based upon the Black-Scholes valuation model. Such warrants are
valued at $2.5 million. The acquisition has been accounted for using the
purchase method of accounting. The purchase price was allocated to goodwill,
certain customer contracts, and other intangible assets. Goodwill was valued at
approximately $61.3 million and is being amortized on a straight-line basis over
30 years. Customer contracts were valued at $7.0 million and are being amortized
over 15 years.
The following unaudited pro forma information presents the results of
operations of the Company as if the FHPS acquisition had taken place at the
beginning of the periods presented (in thousands, except net income per share
amounts):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Revenues $576,877 $920,196
Net income $ 4,210 $ 14,000
Net income per share:
Basic $ 0.20 $ 0.58
Diluted $ 0.16 $ 0.52
Weighted average shares outstanding:
Basic 21,011 24,004
Diluted 26,202 26,876
</TABLE>
In December 1998, the Company acquired the outstanding stock of
Baumel-Eisner for $25 million in cash. The acquisition has been accounted for
using the purchase method of accounting. Baumel-Eisner's results have been
included in the Company's consolidated statements of operations since December
1998. The purchase price was allocated to the net assets acquired, primarily
goodwill, based on their estimated fair values. The excess of the purchase price
over the fair value of the net assets acquired (goodwill) was approximately
$24.2 million and is being amortized on a straight-line basis over 25 years.
In February 1998, the Company completed a merger with Innovative Medical
Research, Inc. ("IMR"), a privately held clinical trial and survey research firm
based in Towson, Maryland. The Company issued 1,752,156 shares and options to
purchase 47,844 shares of its Common Stock in exchange for all the outstanding
shares and options of IMR. The merger constituted a tax-free reorganization and
has been accounted for as a pooling of interests under Accounting Principles
Board Opinion No. 16 ("APB 16"). Accordingly, all prior period consolidated
financial statements presented have been restated to include the combined
results of operations, financial position, and cash flows of IMR as though it
had always been a part of the Company.
F-11
<PAGE> 21
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements follow.
<TABLE>
<CAPTION>
Year Ended March 31,
1998
--------------------
<S> <C>
Revenues:
API $515,148,000
IMR 8,377,000
------------
Combined $523,525,000
============
Net income:
API $ 7,322,000
IMR 766,000
------------
Combined $ 8,088,000
============
</TABLE>
In connection with the merger, the Company recorded in the fourth quarter
of fiscal 1998 a charge to operating expenses of $689,000 ($427,000 after taxes,
or $.02 per common share on a dilutive basis) for professional fees and other
merger-related costs pertaining to the transaction.
On July 5, 2000, API completed a merger with FFI (the "Combination"). The
Company issued 3.5 million shares of its Common Stock in exchange for all the
outstanding shares of FFI. The merger constituted a tax-free reorganization and
has been accounted for as a pooling of interests under APB 16. Total Combination
related costs and provisions are estimated to be approximately $1,000,000 and
will be reflected as an expense in the first post-combination accounting period.
The table below presents a reconciliation of revenues and net income, as
reported in the consolidated statements of operations with those previously
reported by the Company. The references to API in this table are to the
Company's historical operating results prior to the merger with FFI.
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------------------
1998 1999 2000
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
API $ 476,664,000 $ 774,822,000 $1,968,406,000
FFI 46,861,000 64,386,000 60,331,000
-------------- -------------- --------------
Total consolidated revenues $ 523,525,000 $ 839,208,000 $2,028,737,000
============== ============== ==============
Net income:
API $ 7,931,000 $ 12,694,000 $ 20,555,000
FFI 157,000 1,450,000 321,000
-------------- -------------- --------------
Total consolidated net income $ 8,088,000 $ 14,144,000 $ 20,876,000
============== ============== ==============
</TABLE>
F-12
<PAGE> 22
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
March 31,
--------------------------------
1999 2000
------------- --------------
<S> <C> <C>
Machinery and equipment................................ $ 4,208,000 $ 6,332,000
Computer equipment and software........................ 13,391,000 29,468,000
Furniture and equipment................................ 2,676,000 4,915,000
Leasehold improvements................................. 2,903,000 5,029,000
Land and buildings..................................... 1,558,000 1,674,000
------------- --------------
................................................. 24,736,000 47,418,000
Less--Accumulated depreciation and amortization........ (8,942,000) (14,311,000)
------------- --------------
$ 15,794,000 $ 33,107,000
============= ==============
</TABLE>
5. DEBT:
On March 31, 1999, the Company entered into a senior credit facility with a
group of lenders. The credit facility consists of a $75 million, 3-year
revolving credit facility. On March 31, 1999, the Company borrowed $50 million
under the credit facility to fund the acquisition of FHPS. As of March 31, 2000,
$50 million is outstanding under the credit facility. Outstanding borrowings
will mature on March 31, 2002. Each of the Company's subsidiaries has guaranteed
the credit facility. The lenders received a first priority security interest in
the subsidiaries' capital stock and negative pledges on accounts receivable and
other assets.
Interest on the credit facility accrues at a specified margin above the
London Interbank Offered Rate, or "LIBOR", or an alternate base rate. The
alternate base rate is the bank's prime rate or the federal funds rate plus
0.5%. For LIBOR loans the applicable margin is 1.375% per annum as of March 31,
2000, and the effective interest rate is 7.435%.
The credit facility contains usual and customary affirmative and negative
covenants, including limitations on liens, debts, dividends, capital
expenditures, mergers, acquisitions, and sale of assets. Covenants also include
a specified minimum net worth, maximum leverage ratio, and a minimum interest
coverage ratio. In fiscal 2000, the Company exceeded the limit for capital
expenditures as required by covenant. The Company received a waiver from the
lenders for this covenant violation.
F-13
<PAGE> 23
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In conjunction with the API acquisition of PCS the Company obtained an $825
million senior secured credit facility which includes a $175.0 million revolving
credit facility, $100 million interim revolving credit facility, and two term
notes totaling $550.0 million. The term notes are due on October 2, 2005 and
October 2, 2007. The $175 million revolving credit facility accrues interest at
LIBOR plus 3%. The term notes accrue interest at LIBOR plus 3% and LIBOR plus
3.5%. The Company intends to refinance the $100 million interim revolving credit
facility with a collateralized accounts receivable facility by January 2001. The
secured credit facility replaced the $75.0 million, three year revolving credit
facility. The senior secured credit facility contains covenants which are
typical for this type of document. In addition, API issued to Rite Aid $200
million in senior subordinated notes that accrue interest at 11% through April
2002, 12% from April 2002 to October 2002 and 13% thereafter. The senior
subordinated notes issued to Rite Aid have been guaranteed by all of the
subsidiaries of API. Each subsidiary guarantor is 100% owned. The guarantees are
full, unconditional, joint and several. There are no restrictions on the ability
of the subsidiary guarantors to pay dividends, make loans or advances to the
parent. API also issued Rite Aid $125 million in convertible preferred stock,
convertible into a class B common stock. In addition, API issued $150 million in
common stock and preferred convertible stock to JLL.
6. LEASES:
The Company leases office and dispensing facility space, equipment, and
automobiles under various operating leases. The Company was obligated to make
future minimum payments under noncancelable operating lease agreements as of
March 31, 2000, as follows:
<TABLE>
<CAPTION>
Years Ending
March 31,
------------
<S> <C>
2001 ................................... $ 7,541,000
2002 ................................... 7,106,000
2003 ................................... 5,645,000
2004 ................................... 4,558,000
2005 ................................... 3,831,000
------------
Total minimum lease payments ...... $ 28,681,000
============
</TABLE>
Total rent expense incurred in the years ended March 31, 1998, 1999, and
2000 was approximately $3,518,000, $4,435,000, and $6,302,000, respectively.
7. COMMITMENTS AND CONTINGENCIES:
The Company is a party to routine legal and administrative proceedings
arising in the ordinary course of its business. The proceedings currently
pending are not, in management's opinion, material either individually or in the
aggregate.
The Company has entered into long-term employment and noncompete agreements
with certain management employees. These employment agreements provide for
certain minimum payments should the agreements be terminated.
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. Management believes that the Company is in
substantial compliance with all existing legal requirements material to the
operation of its business; however, the application of complex standards to the
detailed operation of the business always creates areas of uncertainty.
Moreover, regulation of the field is in a state of flux. Numerous health care
laws and regulations have been proposed at the state and federal level, many of
which could affect the Company's business. Management cannot predict what
additional federal or state
F-14
<PAGE> 24
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
legislation or regulatory initiatives may be enacted in the future regarding
health care, or the business of pharmacy benefit management. It is possible that
federal or state governments might impose additional restrictions or adopt
interpretations of existing laws that could have a material adverse affect on
the Company's business or financial position.
8. CONCENTRATION OF BUSINESS:
A significant portion of the Company's revenues result from contracts with
customers. These contracts normally have terms from one to ten years with
renewal options.
Effective April 1, 1999, the Company entered into a Pharmacy Benefit
Services Agreement with FHS. Under the terms of this ten-year Service Agreement
the Company provides pharmacy services to FHS' affiliated health plans. FHS
accounted for 38% of the Company's revenues for the year ended March 31, 2000.
Another customer of the Company accounted for approximately 21%, 18%, and 8% of
the Company's revenues for the years ended March 31, 1998, 1999, and 2000,
respectively. Another customer accounted for approximately 15% of the Company's
revenues for the year ended March 31, 1998, but revenues from this customer did
not exceed 10% of the Company's revenues for the year ended March 31, 1999, or
2000. No other customer accounted for over 10% of the Company's revenues in
fiscal years 1998, 1999, or 2000.
9. STOCK TRANSACTIONS:
Series B Preferred Stock
On June 25, 1996, the Company issued a total of 4,444 shares of $.01 par
value, Series B convertible preferred stock ("Series B Preferred Stock") to a
customer at a price of $2,250 per share. Shares of the Series B Preferred Stock
could be converted by the holder into 500 fully paid and non-assessable shares
of Common Stock. On April 13, 1998, the holder of the Series B Preferred Stock
converted all of the shares into 2,222,222 shares of Common Stock.
Common Stock
On October 7, 1996, the Company amended and restated its Certificate of
Incorporation to, among other things, increase the number of authorized shares
of its $.01 par value Common Stock to 25,000,000 and the number of shares of its
preferred stock to 5,000,000, of which 5,000 shares are designated as Series B
Preferred Stock. On October 8, 1996, the Company effected a 250-for-one stock
split of the Company's Common Stock. Accordingly, all share and per share
amounts have been adjusted to reflect the stock split as though it had occurred
at the beginning of the initial period presented.
At the 1999 Annual Meeting of Stockholders, the Company amended and
restated the Certificate of Incorporation to increase the number of authorized
shares of its Common Stock to 50,000,000.
On October 12, 1999, the Company announced a two-for-one stock split,
effected in the form of a stock dividend of our Common Stock. The record date
was November 11, 1999, and the date of payment was November 30, 1999. Financial
information and stock prices contained throughout the financial statements have
been adjusted to retroactively reflect the impact of the stock split.
On October 8, 1996, the Company completed the offering ("Offering") of its
Common Stock. The Company sold 4,794,134 shares of its Common Stock at a price
of $4.50 per share, prior to underwriting discount and other offering
F-15
<PAGE> 25
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expenses. In connection with the Offering, the Company's redeemable Series A
cumulative convertible preferred stock ("Series A Preferred Stock")
automatically converted into 5,000,000 shares of Common Stock.
In connection with the IMR merger, the Company issued 1,752,156 shares of
its Common Stock in exchange for all the outstanding shares of IMR. Under the
provisions of APB 16, the shares are reflected as outstanding as though IMR had
always been a part of the Company.
On December 8, 1999 the Company issued 231,884 shares of its Common Stock
to acquire a 19 percent interest in CHI.
In connection with the FFI merger, the Company issued 3,500,000 shares of
its Common Stock in exchange for all the outstanding shares of FFI. Under the
provisions of APB 16, the shares are reflected as outstanding as though FFI had
always been a part of the Company.
Warrants to Purchase Common Stock
The Company has issued warrants to four of our key health plan sponsor
customers representing the right to purchase up to a total of 691,610 shares of
our Common Stock at prices per share ranging from $16.31 to $21.13. The right to
exercise each warrant vests in equal installments on the first five
anniversaries of the date of grant so long as the customer's service agreement
remains in effect. In addition, during the year ended March 31, 1997, the
Company agreed to issue warrants to purchase 562,500 shares of its Common Stock
to one customer contingent upon future expansion of member lives. As of March
31, 2000, none of these warrants have been earned or issued.
Prior to November of 1997, the Company accounted for these warrant
agreements under the provisions of SFAS 123 and the related Emerging Issues Task
Force ("EITF") 96-3. These pronouncements require that all stock issued to
nonemployees be accounted for based on the fair value of the consideration
received or the fair value of equity instruments issued. In addition, they
require that the fair value be measured on the date the parties come to a
"mutual understanding of the terms of the arrangement and agree to a binding
contract" (i.e. the grant date). If the number of equity instruments is
contingent upon the outcome of future events, the number of instruments that
should be accounted for when determining the fair value of the transaction
should be based on the best available estimate of the number of instruments
expected to be issued. In management's opinion, the fair value of the warrants
at the date of the agreements was not material.
Subsequent to November 20, 1997, the Company follows the guidance of EITF
96-18, under which the measurement date is the earlier of the performance
commitment date or completed performance date. The Company chose not to
retroactively apply EITF 96-18 to the eligible warrants, but chose to apply this
EITF prospectively to new arrangements and any modifications of existing
arrangements.
The Company has reserved shares of Common Stock at March 31, 2000, for the
following:
<TABLE>
<S> <C>
Exercise of stock options.................................................. 6,164,658
Exercise of warrants....................................................... 1,254,110
---------
7,418,768
=========
</TABLE>
10. STOCK OPTION PLAN:
At March 31, 2000, the Company has three stock-based compensation plans:
Incentive Stock Option Plan, Amended and Restated Incentive Stock Option Plan,
and the 1997 Nonstatutory Stock Option Plan (the "Plans"). The Plans provide for
the granting of qualified stock options and incentive options to officers,
directors, advisors and employees of
F-16
<PAGE> 26
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 2000, the number of shares of Common Stock issuable under the Plans may not
exceed 7,675,500 shares. The Plans are administered by a compensation committee
appointed by the Board of Directors of the Company.
The stock options generally vest over 5-year periods. In the event of the
sale or merger with an outside corporation gaining 50% or greater ownership,
options granted to certain employees become 100% vested. The options are
exercisable for a period not to exceed 10 years from the date of grant. As of
March 31, 2000, 2,488,092 options were vested at exercise prices of $.49 to
$20.68 per share.
SFAS 123 establishes a fair value-based method of accounting for
stock-based compensation. The Company has elected to adopt SFAS 123 through
disclosure with respect to employee stock-based compensation. The following
table summarizes the Company's stock option activity.
<TABLE>
<CAPTION>
1998 1999 2000
-------------------------- -------------------------- --------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,887,500 $ 3.01 4,123,490 $ 5.27 4,553,276 $ 8.61
Granted 1,304,750 10.63 1,392,300 15.71 1,418,200 20.98
Transferred from IMR 47,844 0.59 -- -- -- --
Exercised (86,104) 2.63 (726,644) 3.40 (177,734) 6.23
Canceled (30,500) 4.89 (235,870) 14.51 (233,990) 14.82
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at end of year 4,123,490 5.27 4,553,276 8.61 5,559,752 11.58
========== ========== ========== ========== ========== ==========
Exercisable at end of year 1,758,764 2.20 1,815,200 3.34 2,488,092 5.42
Price range $.33 to $16.57 $.33 to $20.69 $.49 to $29.08
Weighted average fair value
of options granted $ 3.97 $ 7.32 $ 10.58
</TABLE>
The following table reflects the weighted average exercise price and
weighted average contractual life of various exercise price ranges of the
5,559,752 options outstanding as of March 31, 2000.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ------------------------
Weighted Wtd. Avg. Weighted
Avg. Exercise Contractual Avg. Exercise
Exercise Price Range Shares Price Life (yrs.) Shares Price
-------------------- ------ ------------- ----------- ------ -------------
<S> <C> <C> <C> <C> <C>
$ .49 to $ 4.50 1,631,272 $ 2.16 3.9 1,437,272 $ 1.84
$ 5.40 to $ 9.38 846,100 $ 6.17 6.4 593,500 $ 6.10
$ 10.38 to $ 14.69 804,800 $ 14.29 8.2 178,000 $ 14.20
$ 15.44 to $ 19.50 1,630,880 $ 17.63 9.1 266,320 $ 16.63
$ 20.16 to $ 24.25 375,000 $ 22.43 9.1 13,000 $ 20.68
$ 25.38 to $ 29.08 271,700 $ 25.70 9.4 0 $ 0
-------- -------- --------- ---------- --- --------- --------
$ .49 to $ 29.08 5,559,752 $ 11.58 7.0 2,488,092 $ 5.42
</TABLE>
F-17
<PAGE> 27
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
ranges of assumptions for the years ended March 31, 1998, 1999, and 2000,
respectively: risk-free interest rates of 4.8% to 6.3%; expected lives of three
to five years; expected volatility of 30% to 60%. The Company continues to
account for stock based compensation under APB 25, "Accounting for Stock Issued
to Employees", as allowed by SFAS 123. Had compensation cost for these plans
been determined consistent with SFAS 123, the Company's net income and net
income per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1998 1999 2000
-------------- -------------- --------------
<S> <C> <C> <C>
Net income:
As reported $ 8,088,000 $ 14,144,000 $ 20,876,000
Pro forma $ 7,539,000 $ 12,571,000 $ 17,349,000
Basic net income per share:
As reported $ 0.38 $ 0.59 $ 0.84
Pro forma $ 0.36 $ 0.52 $ 0.70
Diluted net income per share:
As reported $ 0.31 $ 0.53 $ 0.75
Pro forma $ 0.29 $ 0.47 $ 0.63
</TABLE>
Because SFAS 123 method of accounting has not been applied to options granted
prior to April 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
On July 5, 2000, API granted 180,000 options to purchase shares of the
Company's common stock to certain individuals who became employees of the
Company in connection with the merger with FFI.
11. RELATED PARTY TRANSACTIONS:
In fiscal 1998, the Company entered into an agreement with Advance Capital
Markets ("ACM") pursuant to which ACM agreed to act as financial advisor for the
Company. In exchange for these professional services, the Company paid ACM a fee
of $150,000 in 1998 in connection with the IMR transaction and $85,000 in
connection with the Baumel-Eisner transaction. The fees paid are equivalent to
or less than similar fees incurred in arm's-length transactions. The Managing
Director of ACM is also a Director of the Company. Also in fiscal 1998, the
Company paid approximately $671,000 in consulting fees to FFMC. In fiscal 1999,
the Company made rebate payments of approximately $1,529,000 to Health Horizons.
12. RETIREMENT PLAN BENEFITS:
The Company sponsors a retirement plan for all eligible employees, as
defined in the plan document. The plan is qualified under Section 401(k) of the
Internal Revenue Code. The Company is required to contribute at least 50% of the
first 6% of salary deferral contributed by each participant. The Company's
contributions to the plan amounted to approximately $177,000, $268,000, and
$623,000 for the years ended March 31, 1998, 1999, and 2000, respectively.
F-18
<PAGE> 28
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES:
The provision for income taxes for the years ended March 31, 1998, 1999,
and 2000, differed from the amounts computed by applying the U.S. federal tax
rate of 34 percent in 1998 and 1999 and 35 percent in 2000 to pretax earnings as
a result of the following:
<TABLE>
<CAPTION>
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Tax at U.S. federal $ 4,445,000 $ 7,756,000 $ 11,800,000
income tax rate
State taxes 457,000 666,000 540,000
Other, net 55,000 247,000 454,000
------------ ------------ ------------
Provision for income taxes $ 4,957,000 $ 8,669,000 $ 12,794,000
============ ============ ============
1998 1999 2000
------------ ------------ ------------
Current $ 4,516,000 $ 7,357,000 $ 11,487,000
Deferred 441,000 1,312,000 1,307,000
------------ ------------ ------------
$ 4,957,000 $ 8,669,000 $ 12,794,000
============ ============ ============
</TABLE>
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,
1999 Changes 2000
------------ ------------ ------------
<S> <C> <C> <C>
Gross deferred tax assets:
Accruals .................................... $ 153,000 $ 168,000 $ 321,000
Other ....................................... 126,000 14,000 140,000
------------ ------------ ------------
279,000 182,000 461,000
------------ ------------ ------------
Gross deferred tax liabilities:
Amortization of goodwill .................... (1,047,000) (1,118,000) (2,165,000)
Depreciation ................................ (700,000) (773,000) (1,473,000)
Conversion from cash
basis of acquired entities .............. (1,129,000) 402,000 (727,000)
------------ ------------ ------------
(2,876,000) (1,489,000) (4,365,000)
------------ ------------ ------------
Net deferred tax liability .................. $ (2,597,000) $ (1,307,000) $ (3,904,000)
============ ============ ============
</TABLE>
F-19
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
We have audited in accordance with auditing standards generally
accepted in the United States, the consolidated financial statements of Advance
Paradigm, Inc. and subsidiaries included in this Form 8-K and have issued our
report thereon dated October 19, 2000. Our audit was made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. Schedule II is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated 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 consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
October 19, 2000
S-1
<PAGE> 30
ADVANCE PARADIGM, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning Charged to (1) End of
of Year Expenses Deductions Year
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Year ended March 31, 1998:
Allowance for doubtful accounts receivable $ 192,000 $ 74,000 $ 19,000 $ 247,000
Year ended March 31, 1999:
Allowance for doubtful accounts receivable $ 247,000 $ 124,000(2) $ -- $ 371,000
Year ended March 31, 2000:
Allowance for doubtful accounts receivable $ 371,000 $ 904,000 $ 27,000 $1,248,000
</TABLE>
----------
(1) Uncollectible accounts written off, net of recoveries
(2) Includes $100,000 reflected in the acquisition of Baumel-Eisner
(3) Includes $880,000 reflected in the acquisition of FFI.
S-2
