<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number 0-21447
ADVANCE PARADIGM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 75-2493381
(State of Incorporation) (IRS Employer Identification Number)
545 E. John Carpenter Freeway, Suite 1570, Irving, Texas 75062
(Address of principal executive offices) (ZIP Code)
formerly Suite 1900
</TABLE>
(972) 830-6199
(Registrant's Telephone Number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Common stock, $.01 par value: 7,807,567
outstanding as of November 13, 1997
<PAGE> 2
ADVANCE PARADIGM, INC.
INDEX TO QUARTERLY REPORT FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
A. Condensed Consolidated Balance Sheets as of
September 30, 1997 and March 31, 1997 2
B. Condensed Consolidated Statements of Operations
for the Three Months and Six Months Ended
September 30, 1997 and 1996 3
C. Condensed Consolidated Statements of Cash
Flows for the Six Months Ended
September 30, 1997 and 1996 4
D. Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION 11
SIGNATURES 13
</TABLE>
<PAGE> 3
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
March 31, 1997 September 30, 1997
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 51,086,000 $ 54,562,000
Accounts receivable, net of allowance for doubtful accounts of
$142,000 and $135,000, respectively 35,343,000 49,350,000
Inventories 1,859,000 1,912,000
Prepaid expenses and other 426,000 1,234,000
------------- -------------
Total current assets 88,714,000 107,058,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $3,292,000 and $4,142,000, respectively 5,576,000 7,721,000
INTANGIBLE ASSETS, net of accumulated amortization of
$1,154,000 and $1,328,000, respectively 12,699,000 12,526,000
OTHER ASSETS 484,000 1,128,000
------------- -------------
Total assets $ 107,473,000 $ 128,433,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 59,782,000 $ 77,930,000
Accrued salaries and benefits 1,991,000 1,743,000
Income taxes payable 712,000 --
Other accrued expenses 1,365,000 2,225,000
------------- -------------
Total current liabilities 63,850,000 81,898,000
NONCURRENT LIABILITIES:
Deferred income taxes 755,000 626,000
Other noncurrent liabilities 340,000 340,000
------------- -------------
Total liabilities 64,945,000 82,864,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series B preferred stock, $.01 par value; 5,000 shares authorized, 4,444
shares issued and
outstanding -- --
Common stock, $.01 par value; 25,000,000
shares authorized; 7,800,817 and 7,807,567
shares issued and outstanding, respectively 78,000 78,000
Additional paid-in capital 42,891,000 42,917,000
Retained earnings (accumulated deficit) (441,000) 2,574,000
------------- -------------
Total stockholders' equity 42,528,000 45,569,000
------------- -------------
Total liabilities and stockholders' equity $ 107,473,000 $ 128,433,000
============= =============
</TABLE>
See accompanying notes to financial statements.
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ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Six Months Ended September 30,
1996 1997 1996 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 58,019,000 $ 114,430,000 $ 107,829,000 $ 192,140,000
------------- ------------- ------------- -------------
Cost of operations:
Cost of revenues 55,540,000 109,923,000 102,994,000 183,987,000
Selling, general and
administrative expenses 1,781,000 2,415,000 3,495,000 4,527,000
------------- ------------- ------------- -------------
Total cost of operations 57,321,000 112,338,000 106,489,000 188,514,000
------------- ------------- ------------- -------------
Operating income 698,000 2,092,000 1,340,000 3,626,000
Interest income 300,000 726,000 505,000 1,398,000
Interest expense (180,000) -- (358,000) --
------------- ------------- ------------- -------------
Income before income taxes 818,000 2,818,000 1,487,000 5,024,000
Provision for income taxes 311,000 1,071,000 311,000 1,909,000
------------- ------------- ------------- -------------
Net income $ 507,000 $ 1,747,000 $ 1,176,000 $ 3,115,000
============= ============= ============= =============
Net income per share $ 0.07 $ 0.17 $ 0.17 $ 0.30
============= ============= ============= =============
Weighted average
shares outstanding 7,311,298 10,429,785 6,755,743 10,269,951
============= ============= ============= =============
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 5
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended September 30,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,176,000 $ 3,115,000
Adjustments to reconcile net income to
net cash provided by operating activities -
Depreciation and amortization 803,000 1,024,000
Provision for doubtful accounts -- 12,000
Change in certain assets and liabilities -
Accounts receivable (10,898,000) (14,019,000)
Inventories 74,000 (53,000)
Prepaid expenses
and other assets (283,000) (1,453,000)
Accounts payable, accrued expenses
and other noncurrent liabilities 10,494,000 17,819,000
------------ ------------
Net cash provided by operating activities 1,366,000 6,445,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,732,000) (2,995,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock 10,000,000 --
Net proceeds from issuance of Common Stock 7,000 26,000
Net payments on long-term obligations (28,000) --
------------ ------------
Net cash provided by financing activities 9,979,000 26,000
------------ ------------
INCREASE IN CASH 9,613,000 3,476,000
CASH AND CASH EQUIVALENTS, beginning of period 16,457,000 51,086,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 26,070,000 $ 54,562,000
============ ============
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 6
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated 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 (the "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 September 30, 1997 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. In the opinion of the Company's management, the disclosures contained in
this Form 10-Q are adequate to make the information presented not misleading
when read in conjunction with the Notes to Consolidated Financial Statements
included in the Company's Form 10-K for the year ended March 31, 1997. The
results of operations for the three month and six month periods ended September
30, 1997 are not necessarily indicative of the results to be expected for the
full year or for any future period.
2. NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period which include
stock options and warrants. The primary and fully diluted per share amounts were
the same.
In February 1997, the Financial Accounting Standards Board issued Statement
128, "Earnings Per Share" (SFAS 128). SFAS 128 is effective for financial
statements for both interim and annual periods ending after December 15, 1997,
with early application prohibited. SFAS 128 requires the calculation of "Basic"
earnings per share which is computed by dividing net income by the weighted
average number of shares of Common Stock outstanding during the period. In
addition, SFAS 128 requires the calculation of "Diluted" earnings per common
share which is computed using the weighted average
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<PAGE> 7
number of shares of Common Stock and common stock equivalents. Pro forma "Basic"
earnings per share for the three months ended September 30, 1996 and 1997 would
have been $0.08 and $0.22, respectively. Pro forma "Diluted" earnings per share
for the three months ended September 30, 1996 and 1997, would have been $0.07
and $0.17, respectively. Pro forma "Basic" earnings per share for the six months
ended September 30, 1996 and 1997 would have been $0.23 and $0.39, respectively.
Pro forma "Diluted" earnings per share for the six months ended September 30,
1996 and 1997, would have been $0.17 and $0.30, respectively.
3. INCOME TAXES
In the three months and six months ended September 30, 1997, the Company
recorded a provision for income taxes of $1,071,000 and $1,909,000,
respectively. The Company has recorded its tax provision based upon an
estimated, effective tax rate of 38%.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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 Six Months
Ended September 30, Ended September 30,
-------------------- --------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.00%
Cost of operations:
Cost of revenues 95.7 96.1 95.5 95.7
Selling, general and administrative
expenses 3.1 2.1 3.2 2.4
-------- -------- -------- --------
Total cost of operations 98.8 98.2 98.7 98.1
-------- -------- -------- --------
Operating income 1.2 1.8 1.3 1.9
Interest income, net of expense .2 .7 .1 .7
-------- -------- -------- --------
Net income before taxes 1.4% 2.5% 1.4% 2.6%
======== ======== ======== ========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES. Revenues for the three months ended September 30, 1997 increased
$56.4 million, or 97%, compared to revenues for the three months ended September
30, 1996. Approximately 85% of the increase in revenues was attributable to a
63% increase in the number of pharmacy claims processed during the period. The
increase in claims resulted from strong growth in new clients and from an
increase in member lives from existing clients. Approximately 9% of the increase
in revenues resulted from an increase in clinical services revenues derived from
formulary and disease management services. The remaining increase was
attributable to additional sales of the Company's mail pharmacy services.
COST OF REVENUES. Cost of revenues for the three months ended September 30,
1997 increased by $54.4 million, or 98%, compared to the same period in 1996.
This increase was attributable primarily to the additional costs associated with
the Company's claims processing growth and the expanded volume in the Company's
mail pharmacy. As a percentage of revenues, cost of revenues was approximately
96% in the three months ended September 30, 1996 and 1997.
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<PAGE> 9
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expense for the three months ended September 30, 1997 increased
by $634,000, or 36%, compared to the same period in 1996. This increase was the
result of the Company's expansion of its administrative and support staff levels
and salaries and benefits in response to volume growth in all services. In spite
of the increase, selling, general and administrative expenses as a percentage of
revenues decreased from 3.1% for the three months ended September 30, 1996 to
2.1% in the same period in 1997 as the result of greater economies of scale and
due to the increase in revenues associated with the Company's claims processing
services. Additional revenues generated by clients utilizing the Company's
network pharmacy providers do not result in an increase in selling, general and
administrative expenses.
INTEREST INCOME AND INTEREST EXPENSE. Interest income, net of interest
expense, for the three months ended September 30, 1997 increased $606,000
compared to the same period in 1996. The increase resulted from cash management
programs which utilized the Company's short-term excess cash to generate
interest income through investment in money market funds and high-grade
commercial paper. In addition, the Company's cash balance in the three months
ended September 30, 1997 included the $19.3 million proceeds from its October
1996 initial public offering. A portion of the proceeds were used to retire the
Whitney Note and as a result interest expense decreased $180,000.
INCOME TAXES. For the three months ended September 30, 1996 and 1997 the
Company recorded income tax expense based upon an estimated, effective tax rate
of 38%.
NET INCOME PER SHARE. The Company reported net income per share of $.17 per
share for the three months ended September 30, 1997 compared to $.07 per share
for the same period in 1996. The weighted average shares outstanding were 7.3
million and 10.4 million for the three months ended September 30, 1996 and 1997,
respectively. The increase in the weighted average shares resulted primarily
from the issuance of 2.4 million shares in connection with the Company's initial
public offering in October 1996.
SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1996
REVENUES. Revenues for the six months ended September 30, 1997 increased
$84.3 million, or 78%, compared to revenues for the six months ended September
30, 1996. Approximately 84% of the increase in revenues was attributable to a
61% increase in the number of pharmacy claims processed during the period. The
increase in claims resulted from strong growth in new clients and from an
increase in member lives from exisitng clients. Approximately 8% of the increase
in revenues resulted from an increase in clinical services revenues derived from
formulary and disease management services. The remaining increase was
attributable to additional sales of the Company's mail pharmacy services.
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<PAGE> 10
COST OF REVENUES. Cost of revenues for the six months ended September 30,
1997 increased by $81.0 million, or 79%, compared to the same period in 1996.
This increase was attributable primarily to the additional costs associated with
the Company's claims processing growth and the expanded volume in the Company's
mail pharmacy. As a percentage of revenues, cost of revenues was approximately
96% in the six months ended September 30, 1996 and 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expense for the six months ended September 30, 1997 increased by
$1.0 million, or 29%, compared to the same period in 1996. This increase was the
result of the Company's expansion of its administrative and support staff levels
and salaries and benefits in response to volume growth in all services. In spite
of the increase, selling, general and administrative expenses as a percentage of
revenues decreased from 3.2% for the three months ended September 30, 1996 to
2.4% in the same period in 1997 as the result of greater economies of scale and
due to the increase in revenues associated with the Company's claims processing
services. Additional revenues generated by clients utilizing the Company's
network pharmacy providers do not result in an increase in selling, general and
administrative expenses.
INTEREST INCOME AND INTEREST EXPENSE. Interest income, net of interest
expense, for the six months ended September 30, 1997 increased $1.3 million
compared to the same period in 1996. The increase resulted from cash management
programs which utilized the Company's short-term excess cash to generate
interest income through investment in money market funds and high-grade
commercial paper. In addition, the Company's cash balance throughout the six
months ended September 30, 1997 included the $10.0 million proceeds from the
June 1996 issuance of its Series B Preferred Stock and the $19.3 million
proceeds from its October 1996 initial public offering. A portion of the
proceeds were used to retire the Whitney Note and as a result interest expense
decreased $358,000.
INCOME TAXES. For the six months ended September 30, 1996 and 1997 the
Company recorded income tax expense based upon an estimated, effective tax rate
of 21% and 38%, respectively. The Company had income tax loss carryforwards
available to partially offset income generated in fiscal year ended March 31,
1997, and as a result, lowered the Company's effective tax rate for the six
months ended September 30, 1996.
NET INCOME PER SHARE. The Company reported net income per share of $.30 per
share for the six months ended September 30, 1997 compared to $.17 per share for
the same period in 1996. The weighted average shares outstanding were 6.8
million and 10.3 million for the six months ended September 30, 1996 and 1997,
respectively. The increase in the weighted average shares resulted primarily
from the issuance of 2.4 million shares in connection with the Company's initial
public offering in October 1996 and the issuance of Series B preferred stock in
June 1996. The Series B preferred stock is convertible into 1.1 million shares
of Common Stock.
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<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had working capital of $25.2
million. The Company's net cash provided by operating activities was $6.4
million for the six months ended September 30, 1997 resulting primarily from the
Company's net income of $3.1 million for the period and due to the timing of
receivables and payables resulting from the Company's continued growth. During
the six months ended September 30, 1997 the Company used cash of $3.0 million
for purchases of property, plant and equipment associated with the growth and
expansion of the Company's systems and facilities. In particular, $2.1 million
was used to expand the automation and capacity of the Company's mail pharmacy
facility. The Company anticipates that cash from operations, combined with the
proceeds remaining from its initial public offering will be sufficient to meet
the Company's internal operating requirements and expansion programs, including
capital expenditures, for at least the next 18 months.
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 the Company'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
Condensed 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 the Company's
control. These forward-looking statements may include statements of management's
plans and objectives for the Company's future operations and statements of
future economic performance; the Company's capital budget and future capital
requirements, and the Company's meeting its 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, without
limitation, those described in the context of such forward-looking statements,
and the factors set forth in the Company's Form 10-K under the caption "Risk
Factors."
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<PAGE> 12
PART II. OTHER INFORMATION
Items 1-3 are not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders was held on September 23, 1997.
(b) Peter M. Castleman and Jeffrey R. Jay were re-elected directors
of the Company to serve until the Annual Meeting of Stockholders
in 2000 and until their respective successors are elected and
qualified. David D. Halbert, Jon S. Halbert and Rogers K.
Coleman will serve as directors of the Company until the Annual
Meeting of Stockholders in 1998 and until their respective
successors are elected and qualified. Stephen L. Green, Kenneth
J. Linde and Michael D. Ware will serve as directors of the
Company until the Annual Meeting of Stockholders in 1999 and
until their respective successors are elected and qualified.
(c) The stockholder vote for each director elected at the meeting was
as follows:
<TABLE>
<CAPTION>
Votes Cast Votes
For Withheld
--------- -----
<S> <C> <C>
Peter M. Castleman 6,405,734 6,375
Jeffrey R. Jay 6,406,234 5,875
</TABLE>
The stockholders also voted to ratify the appointment of Arthur
Andersen as the Company's independent accountants for the Company's current
fiscal year (6,388,797 affirmative votes; 3,900 negative votes; 19,412
abstention votes)
Item 5 is not applicable.
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<PAGE> 13
Item 6. Exhibits and reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended September 30, 1997.
Exhibits required by Item 601 of S-K:
EXHIBIT NO. EXHIBITS
- ----------- --------
3.1* --- Amended and Restated Certificate of Incorporation of the
Company
3.2* --- Amended and Restated Bylaws of the Company
22** --- Definitive Proxy Statement pursuant to Section 14(a) of
the Securities Exchange Act of 1934, as amended.
27*** --- Financial Data Schedule
* Previously filed in connection with the Company's Registration Statement on
Form S-1 filed October 8, 1996 (No. 333-06931).
** Previously filed on July 29, 1997 (No.000-21447).
*** Filed herewith.
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<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADVANCE PARADIGM, INC.
(Registrant)
Date: November 13, 1997 By: /s/ David D. Halbert
-------------------------------------
David D. Halbert, Chief Executive Officer,
Chairman of the Board and President
Date: November 13, 1997 By: /s/ Danny Phillips
-------------------------------------
Danny Phillips, Chief Financial Officer,
Senior Vice President, Secretary and
Treasurer (Principal Financial and
Accounting Officer)
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<PAGE> 15
EXHIBIT INDEX
EXHIBIT NO. EXHIBITS
- ----------- --------
3.1* --- Amended and Restated Certificate of Incorporation of the
Company
3.2* --- Amended and Restated Bylaws of the Company
22** --- Definitive Proxy Statement pursuant to Section 14(a) of
the Securities Exchange Act of 1934, as amended.
27*** --- Financial Data Schedule
* Previously filed in connection with the Company's Registration Statement on
Form S-1 filed October 8, 1996 (No. 333-06931).
** Previously filed on July 29, 1997 (No.000-21447).
*** Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ADVANCE
PARADIGM, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 54,562
<SECURITIES> 0
<RECEIVABLES> 49,485
<ALLOWANCES> 135
<INVENTORY> 1,912
<CURRENT-ASSETS> 107,058
<PP&E> 11,863
<DEPRECIATION> 4,142
<TOTAL-ASSETS> 128,433
<CURRENT-LIABILITIES> 81,898
<BONDS> 0
0
0
<COMMON> 78
<OTHER-SE> 45,491
<TOTAL-LIABILITY-AND-EQUITY> 128,433
<SALES> 0
<TOTAL-REVENUES> 192,140
<CGS> 0
<TOTAL-COSTS> 183,987
<OTHER-EXPENSES> 4,527
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,398)
<INCOME-PRETAX> 5,024
<INCOME-TAX> 1,909
<INCOME-CONTINUING> 3,115
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,115
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
