<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 June 30, 1998
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)
</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: 10,117,519
outstanding as of August 13, 1998
<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
June 30, 1998 and March 31, 1998 2
B. Condensed Consolidated Statements of Operations
for the Three Months Ended June 30, 1998 and 1997 3
C. Condensed Consolidated Statements of Cash
Flows for the Three Months Ended
June 30, 1998 and 1997 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 12
</TABLE>
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ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1998
-------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 58,342,000 $ 62,672,000
Accounts receivable, net of allowance for doubtful accounts of
$247,000 and $253,000, respectively 68,335,000 77,131,000
Inventories 2,887,000 3,368,000
Prepaid expenses and other 1,487,000 1,569,000
------------ ------------
Total current assets 131,051,000 144,740,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $5,574,000 and $6,206,000, respectively 10,494,000 11,430,000
INTANGIBLE ASSETS, net of accumulated amortization of
$1,501,000 and $1,587,000, respectively 12,353,000 12,266,000
OTHER ASSETS 1,011,000 993,000
------------ ------------
Total assets $154,909,000 $169,429,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 97,495,000 $108,649,000
Accrued salaries and benefits 2,966,000 1,910,000
Income taxes payable 32,000 1,523,000
Other accrued expenses 2,196,000 1,941,000
------------ ------------
Total current liabilities 102,689,000 114,023,000
NONCURRENT LIABILITIES:
Deferred income taxes 1,285,000 1,460,000
Other noncurrent liabilities 371,000 371,000
------------ ------------
Total liabilities 104,345,000 115,854,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series B convertible preferred stock, $.01 par value; 5,000 shares
authorized, 4,444 and 0 shares issued and
outstanding, respectively -- --
Common stock, $.01 par value; 25,000,000
shares authorized; 8,904,472 and 10,102,462
shares issued and outstanding, respectively 89,000 101,000
Additional paid-in capital 43,142,000 43,324,000
Retained earnings 7,333,000 10,150,000
------------ ------------
Total stockholders' equity 50,564,000 53,575,000
------------ ------------
Total liabilities and stockholders' equity $154,909,000 $169,429,000
============ ============
</TABLE>
See accompanying notes to financial statements.
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<PAGE> 4
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------
1997 1998
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<S> <C> <C>
Revenues $ 79,403,000 $164,182,000
------------ ------------
Cost of operations:
Cost of revenues 75,538,000 157,141,000
Selling, general and
administrative expenses 2,111,000 3,263,000
------------ ------------
Total cost of operations 77,649,000 160,404,000
------------ ------------
Operating income 1,754,000 3,778,000
Interest income 672,000 765,000
Interest expense (19,000) --
------------ ------------
Income before income taxes 2,407,000 4,543,000
Provision for income taxes 915,000 1,726,000
------------ ------------
Net income $ 1,492,000 $ 2,817,000
============ ============
Basic
Net income per share $ 0.17 $ 0.28
============ ============
Weighted average
shares outstanding 8,679,145 9,912,502
============ ============
Diluted
Net income per share $ 0.14 $ 0.24
============ ============
Weighted average
shares outstanding 10,986,194 11,693,523
============ ============
</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)
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<CAPTION>
Three Months Ended June 30,
------------------------------
1997 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,492,000 $ 2,817,000
Adjustments to reconcile net income to
net cash provided by operating activities -
Depreciation and amortization 511,000 718,000
Provision for doubtful accounts 6,000 6,000
Change in certain assets and liabilities -
Accounts receivable 1,440,000 (8,802,000)
Inventories (1,777,000) (481,000)
Prepaid expenses
and other assets (98,000) (63,000)
Accounts payable, accrued expenses
and other noncurrent liabilities 554,000 11,509,000
------------ ------------
Net cash provided by operating activities 2,128,000 5,704,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,593,000) (1,568,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock 7,000 194,000
Proceeds from borrowings 400,000 --
Payments on long-term obligations (400,000) --
------------ ------------
Net cash provided by financing activities 7,000 194,000
------------ ------------
INCREASE IN CASH 542,000 4,330,000
CASH AND CASH EQUIVALENTS, beginning of period 51,172,000 58,342,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 51,714,000 $ 62,672,000
============ ============
</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 June 30, 1998 and 1997 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, 1998. The results of operations
for the three month period ended June 30, 1998 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.
In February 1997, the Financial Accounting Standards Board issued Statement
128, "Earnings Per Share" (SFAS 128). SFAS 128 requires the calculation of
"Basic" earnings per share which is computed by dividing net income by the
weighted average number of shares of Common Stock outstanding during the period.
In addition, SFAS 128 requires the calculation of "Diluted" earnings per common
share which is computed using the weighted average number of shares of Common
Stock and common stock equivalents. A reconciliation of the numerators and
denominators of the basic and diluted per-share computations follows:
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<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1997 1998
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<S> <C> <C>
BASIC
Numerator:
Net income $ 1,492,000 $ 2,817,000
Preferred stock dividends 50,000 --
----------- -----------
$ 1,442,000 $ 2,817,000
=========== ===========
Denominator:
Weighted average common
stock outstanding 8,679,145 9,912,502
=========== ===========
Net income per share $ 0.17 $ 0.28
=========== ===========
DILUTED
Numerator:
Net income $ 1,492,000 $ 2,817,000
=========== ===========
Denominator:
Weighted average common 8,679,145 9,912,502
stock outstanding
Other Dilutive Securities:
Series B preferred stock 1,111,111 146,520
Options and warrants using the
treasury stock method 1,195,938 1,634,501
----------- -----------
Weighted average shares outstanding 10,986,194 11,693,523
=========== ===========
Net income per share $ 0.14 $ 0.24
=========== ===========
</TABLE>
3. INCOME TAXES
In the three months ended June 30, 1998 and 1997, the Company recorded a
provision for income taxes of $1,726,000 and $915,000, respectively. The Company
recorded its tax provision based upon an estimated, effective tax rate of 38%
for both periods.
4. STOCK TRANSACTIONS
On April 13, 1998, the Company was notified by the holders of the Series B
convertible preferred stock that they were electing to convert all of the shares
into Common Stock. Subsequently, the shares were converted into 1,111,111 shares
of Common Stock.
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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 total revenues.
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<CAPTION>
Three Months
Ended June 30,
-------------------
1997 1998
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<S> <C> <C>
Data Services 59.2% 69.2%
Mail Services 21.8 16.5
Clinical Services 19.0 14.3
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Total Revenues 100.0 100.0
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Cost of operations:
Cost of revenues 95.1 95.7
Selling, general and administrative
expenses 2.7 2.0
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Total cost of operations 97.8 97.7
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Operating income 2.2 2.3
Interest income, net of expense .8 .5
------ ------
Income before income taxes 3.0 2.8
Provision for income taxes (1.1) (1.1)
------ ------
Net income 1.9% 1.7%
====== ======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
REVENUES. Revenues for the three months ended June 30, 1998 increased $84.8
million, or 107%, compared to revenues for the three months ended June 30, 1997.
Approximately 79% of the increase in revenues was attributable to a 38% increase
in the number of pharmacy claims processed during the period. The increase in
claims resulted from new contracts signed throughout the last twelve months with
new clients. Substantially all of the new clients utilize the Company's pharmacy
network. In cases in which the Company has an independent obligation to pay its
network pharmacy providers, the Company includes payments from its plan sponsors
for these benefits as revenues and payments to its pharmacy providers as cost of
revenues. Therefore, new clients that utilize the Company's network will
generate higher revenues than new business where the Company merely administers
the client's network. The increase in claims resulted from strong growth in new
clients and from an increase in member lives from existing clients.
Approximately 11% of the increase was attributable to additional sales of the
Company's mail pharmacy services, resulting from a 54% increase in the number of
mail prescriptions dispensed. The remaining 10% of the increase in revenues
resulted from an increase in clinical services revenues derived from formulary
and disease management services as well as clinical trials.
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<PAGE> 9
COST OF REVENUES. Cost of revenues for the three months ended June 30, 1998
increased by $81.6 million, or 108%, compared to the same period in 1997. This
increase was attributable primarily to the additional costs associated with the
Company's claims processing growth and the new clients that are utilizing the
Company's retail pharmacy network. As a percentage of revenues, cost of revenues
was approximately 95.7% in the three months ended June 30, 1998 compared to
95.1% in the same period in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expense for the three months ended June 30, 1998 increased by
$1.2 million, or 55%, compared to the same period in 1997. This increase was the
result of the Company's expansion of its sales and marketing activities, as well
as increases in administrative and support staff levels and salaries and
benefits in response to volume growth in all services. In spite of the increase,
selling, general and administrative expenses as a percentage of revenues
decreased from 2.7% for the three months ended June 30, 1997 to 2.0% in the same
period in 1998 as the result of greater economies of scale and due to the
increase in revenues associated with the Company's claims processing services.
Additional revenues generated by clients utilizing the Company's network
pharmacy providers typically 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 June 30, 1998 increased $112,000 compared to
the same period in 1997. The increase resulted from higher cash balances
invested in 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.
INCOME TAXES. For the three months ended June 30, 1998 and 1997 the Company
recorded income tax expense based upon an estimated, effective tax rate of 38%.
NET INCOME PER SHARE. The Company reported diluted net income per share of
$.24 per share for the three months ended June 30, 1998 compared to $.14 per
share for the same period in 1997. The weighted average shares outstanding were
11.0 million and 11.7 million for the three months ended June 30, 1997 and 1998,
respectively. The increase in the weighted average shares resulted primarily
from the the increase in the Company's stock price which has resulted in more
options and warrants becoming common stock equivalents. (See Note 2 for
calculation.)
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<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had working capital of $30.7 million. The
Company's net cash provided by operating activities was $5.7 million for the
three months ended June 30, 1998 resulting primarily from the Company's net
income of $2.8 million for the period and due to the timing of receivables and
payables resulting from the Company's continued growth. During the three months
ended June 30, 1998 the Company used cash of $1.6 million for purchases of
property, plant and equipment associated with the growth and expansion of the
Company's systems and facilities. 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.
YEAR 2000 ISSUES
The Company's operations are dependent upon its computer systems and
information technology. In fiscal year 1998 the Company began addressing the
Year 2000 issue by forming a Year 2000 project team. Year 2000 compliance
relates to: technology, including but not limited to, information technology,
embedded systems, or any other electro-mechanical or processor-based system.
Such technology, when used in accordance with its associated documentation, is
capable of accurately processing, providing and/or receiving date data from,
into and between the twentieth and twenty-first centuries, and the years 1999
and 2000, including leap year calculations. To date, the Company has completed
the "inventory" portion of its Year 2000 project. The Company has documented all
internal hardware, software or equipment that may be date sensitive.
The Company is currently in the second stage of the Year 2000 project which
involves assessing all of the items that have been "inventoried" to determine
whether they are Year 2000 compliant. This assessment stage also includes
surveying all external vendors and customers that transact business with the
Company to determine whether their systems are Year 2000 compliant. This second
stage is expected to be completed by the end of August 1998. The third stage
involves the development of code to convert systems that are not compliant to
Year 2000 compliant systems. This stage is expected to be completed by the end
of October 1998. The final stage involves the testing of all technical systems
to verify Year 2000 compliance. All systems are expected to be tested and
implemented by the end of March 1999.
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<PAGE> 11
The Company has and will incur internal and external personnel costs as
well as other expenses related to this project. Although the Company is still
evaluating the overall costs associated with the Year 2000 project, the Company
does not believe the associated costs are or will be material to the Company's
results of operations or financial condition. However, there can be no assurance
that the Company's efforts to address the Year 2000 issue will be entirely
successful. In addition, there can be no assurance that the software and systems
of other companies from which the Company transacts business will become Year
2000 compliant in a timely manner. Any such failures could have a material
adverse effect on the Company's systems and operations.
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." All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by this section.
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<PAGE> 12
PART II. OTHER INFORMATION
Items 1-5 are not applicable.
Item 6. Exhibits and reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30, 1998.
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
27** --- Financial Data Schedule
* Previously filed in connection with the Company's Registration Statement on
Form S-1 filed October 8, 1996 (No. 333-06931).
** Filed herewith.
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<PAGE> 13
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: August 13, 1998 By: /s/ David D. Halbert
--------------------------
David D. Halbert, Chief Executive Officer,
Chairman of the Board and President
Date: August 13, 1998 By: /s/ Danny Phillips
---------------------------
Danny Phillips, Chief Financial Officer,
Senior Vice President, Secretary and
Treasurer (Principal Financial and
Accounting Officer)
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Index to Exhibits
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<CAPTION>
Exhibit
Number Description
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<S> <C>
27 Financial Data Schedule
</TABLE>
<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, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 62,672
<SECURITIES> 0
<RECEIVABLES> 77,384
<ALLOWANCES> 253
<INVENTORY> 3,368
<CURRENT-ASSETS> 144,740
<PP&E> 17,636
<DEPRECIATION> 6,206
<TOTAL-ASSETS> 169,429
<CURRENT-LIABILITIES> 114,023
<BONDS> 0
0
0
<COMMON> 101
<OTHER-SE> 53,474
<TOTAL-LIABILITY-AND-EQUITY> 169,429
<SALES> 0
<TOTAL-REVENUES> 164,182
<CGS> 0
<TOTAL-COSTS> 157,141
<OTHER-EXPENSES> 3,263
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (765)
<INCOME-PRETAX> 4,543
<INCOME-TAX> 1,726
<INCOME-CONTINUING> 2,817
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,817
<EPS-PRIMARY> .28
<EPS-DILUTED> .24
</TABLE>
