<PAGE>
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, 2000
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)
Delaware 75-2493381
(State of Incorporation) (IRS Employer Identification Number)
5215 North O'Connor, Suite 1600, Irving, Texas 75039
(Address of principal executive offices) (ZIP Code)
(469) 420-6000
(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: 29,605,812
outstanding as of November 13, 2000
<PAGE>
ADVANCE PARADIGM, INC.
INDEX TO QUARTERLY REPORT FORM 10-Q
Part I. Financial Information Page
Item 1. Financial Statements
A. Condensed Consolidated Balance Sheets as of
September 30, 2000 and March 31, 2000 2
B. Condensed Consolidated Statements of Operations
for the Three Months and Six Months Ended
September 30, 2000 and 1999 3
C. Condensed Consolidated Statements of Cash
Flows for the Six Months Ended
September 30, 2000 and 1999 4
D. Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information 16
Signatures 17
<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, 2000 September 30, 2000
-------------- ------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 55,243,000 $ 66,452,000
Accounts receivable, net of allowance for doubtful accounts of
$1,248,000 and $1,260,000, respectively 200,288,000 221,800,000
Inventories 5,965,000 4,781,000
Prepaid expenses and other 3,241,000 4,014,000
------------ ------------
Total current assets 264,737,000 297,047,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $14,311,000 and $18,948,000, respectively 33,107,000 42,764,000
INTANGIBLE ASSETS, net of accumulated amortization of
$6,078,000 and $8,021,000 respectively 101,154,000 99,211,000
OTHER ASSETS 7,740,000 8,122,000
------------ ------------
Total assets $406,738,000 $447,144,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $242,440,000 $272,134,000
Accrued salaries and benefits 5,386,000 4,140,000
Other accrued expenses 4,803,000 6,330,000
------------ ------------
Total current liabilities 252,629,000 282,604,000
NONCURRENT LIABILITIES:
Long-term debt 50,000,000 50,000,000
Deferred income taxes 3,904,000 2,187,000
Other noncurrent liabilities 2,161,000 4,599,000
------------ ------------
Total liabilities 308,694,000 339,390,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000
shares authorized; 25,017,154 and 25,140,130
shares issued and outstanding, respectively 250,000 251,000
Additional paid-in capital 58,927,000 60,320,000
Retained earnings 38,867,000 47,183,000
------------ ------------
Total stockholders' equity 98,044,000 107,754,000
------------ ------------
Total liabilities and stockholders' equity $406,738,000 $447,144,000
============ ============
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Six Months Ended September 30,
-------------------------------- ------------------------------
1999 2000 1999 2000
------------ ------------ ------------ --------------
Revenues $455,015,000 $619,655,000 $892,219,000 $1,230,795,000
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Cost of operations:
Cost of revenues 437,483,000 598,603,000 857,142,000 1,187,563,000
Selling, general and
administrative expenses 9,680,000 8,647,000 18,232,000 20,496,000
------------ ------------ ------------ --------------
Total cost of operations 447,163,000 607,250,000 875,374,000 1,208,059,000
------------ ------------ ------------ --------------
Operating income 7,852,000 12,405,000 16,845,000 22,736,000
Interest income 241,000 361,000 562,000 710,000
Interest expense (965,000) (1,007,000) (1,879,000) (2,136,000)
Merger costs ---- (1,200,000) ---- (1,200,000)
------------ ------------ ------------ --------------
Income before income taxes 7,128,000 10,559,000 15,528,000 20,110,000
Provision for income taxes 2,709,000 4,208,000 5,901,000 7,824,000
------------ ------------ ------------ --------------
Net income $ 4,419,000 $ 6,351,000 $ 9,627,000 $ 12,286,000
============ ============ ============ ==============
Basic
-----
Net income per share $ 0.18 $ 0.25 $ 0.39 $ 0.49
============ ============ ============ ==============
Weighted average
shares outstanding 24,686,456 25,140,130 24,654,970 25,088,798
============ ============ ============ ==============
Diluted
-------
Net income per share $ 0.16 $ 0.22 $ 0.34 $ 0.44
============ ============ ============ ==============
Weighted average
shares outstanding 28,151,996 28,429,957 27,973,999 27,704,242
============ ============ ============ ==============
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended September 30,
------------------------------
1999 2000
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,627,000 $ 12,286,000
Adjustments to reconcile net income to
net cash provided by operating activities -
Depreciation and amortization 3,961,000 6,555,000
Provision for doubtful accounts 12,000 12,000
Change in certain assets and liabilities -
Accounts receivable (40,426,000) (21,524,000)
Inventories (4,952,000) 1,184,000
Prepaid expenses
and other assets (977,000) (1,155,000)
Accounts payable, accrued expenses
and other noncurrent liabilities 44,729,000 30,696,000
------------- -------------
Net cash provided by operating activities 11,974,000 28,054,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (8,205,000) (14,269,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to FFI owners (919,000) (3,970,000)
Net proceeds from issuance of Common Stock 687,000 1,394,000
Proceeds from long-term obligations 12,000,000 22,000,000
Payments on long-term obligations (12,000,000) (22,000,000)
------------- -------------
Net cash provided by financing activities (232,000) (2,576,000)
------------- -------------
INCREASE (DECREASE) IN CASH 3,537,000 11,209,000
CASH AND CASH EQUIVALENTS, beginning of period 45,895,000 55,243,000
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 49,432,000 $ 66,452,000
============= =============
</TABLE>
See accompanying notes to financial statements.
- 4 -
<PAGE>
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 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, 2000 and 1999 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, 2000. The results of operations
for the three month and six month periods ended September 30, 2000 are not
necessarily indicative of the results to be expected for the full year or for
any future period.
The accompanying condensed consolidated financial statements have been
restated, in accordance with APB Opinion No. 16, to give retroactive effect, for
all periods presented, to the combination of the Company and FFI Health Services
on July 5, 2000, which has been accounted for as a pooling of interests. See
Note 2.
In June 1998, Financial Accounting Standards Board Statement 133, Accounting
for Derivative Instruments and Hedging Activities ("SFAS 133") 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 and SFAS 138, is effective beginning in fiscal year March 31, 2002.
In December 1999, the Commission staff issued SAB 101 "Revenue Recognition in
Financial Statements". SAB 101 provides guidance on applying generally accepted
accounting principles to revenues recognition issues in financial statements.
SAB 101 is effective in our fourth fiscal quarter of 2001. Management is
currently evaluating the impact of adopting SAB 101. In connection with our
recent acquisitions, the Company is evaluating certain aspects of SAB 101
including gross vs. net reporting of certain revenues. Net reporting of these
revenues would have no effect on operating income.
-5-
<PAGE>
2. MERGER WITH FFI HEALTH SERVICES
On July 5, 2000 the Company completed a merger with FFI Health Services
which 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)-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. 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 No.16. Total combination related costs and
provisions are estimated to be approximately $1,200,000 and are reflected as an
expense in the post-combination accounting period, the three-month period ended
September 30, 2000.
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>
Three Months Ended Six Months Ended
September 30, September 30,
1999 1999
------------ ------------
<S> <C> <C>
Revenues :
API $434,713,000 $850,999,000
FFI 20,302,000 41,220,000
------------ ------------
Total supplemental
consolidated revenues $455,015,000 $892,219,000
============ ============
Net income (loss) :
API $ 5,036,000 $ 9,627,000
FFI (617,000) - 0 -
------------ ------------
Total supplemental
consolidated net income $ 4 ,419,000 $ 9,627,000
============ ============
</TABLE>
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<PAGE>
3. NET INCOME PER SHARE
Basic net income per share is computed using the weighted average number of
common shares outstanding during the periods presented. Diluted net income per
share is computed in the same manner as basic net income per share but includes
the number of additional common shares that would have been outstanding for the
period if the other dilutive securities had been issued. The difference between
the number of weighted average shares used in the basic and diluted calculation
for all periods are outstanding stock options and stock warrants, all calculated
under the "treasury stock" method in accordance with Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share".
4. INCOME TAXES
In the three months and six months ended September 30, 1999 and 2000, the
Company's recorded income tax expense approximated an effective tax rate of 38%.
The Company recorded a tax benefit of approximately $274,000 in connection with
the merger costs of $1.2 million reflected in the quarter ended September 30,
2000.
5. STOCK SPLIT
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 Form 10-Q have been
retroactively adjusted to reflect the impact of the stock split in all periods
presented.
6. ACQUISITIONS
Effective October 1, 2000, Advance Paradigm, Inc. acquired all of the equity
of PCS Holding Corporation ("PCS"). The aggregate purchase price paid by the
Company 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 the Company's 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. 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.
-7-
<PAGE>
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
periods presented:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
1999 2000 1999 2000
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Revenues $786,959,000 $942,890,000 $1,514,530,000 $1,882,000,000
Net income (loss) (9,733,000) (9,157,000) (8,073,000) (9,887,000)
Net income (loss) per share:
Basic (0.34) (0.31) (0.28) (0.34)
Diluted (0.23) (0.22) (0.19) (0.24)
Weight average shares outstanding:
Basic 28,893,456 29,347,130 28,861,970 29,295,798
Diluted 41,901,996 42,179,957 41,723,999 41,454,242
</TABLE>
6. DEBT
In conjunction with the Company's 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, the Company 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 Company also issued Rite Aid $125 million in convertible preferred stock,
convertible into a class B common stock subject to shareholder approval. In
addition, the Company issued $150 million in common stock and preferred
convertible stock to JLL.
-8-
<PAGE>
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. The
following table and the amounts included in the subsequent discussion have been
restated to give retroactive effect for the combination of the Company and FFI
on July 5, 2000.
<TABLE>
<CAPTION>
Three Months Six Months
Ended September 30, Ended September 30,
--------------------- ---------------------
<S> <C> <C> <C> <C>
1999 2000 1999 2000
----- ----- ----- -----
Data Services 75.3% 76.6% 75.5% 76.6%
Mail Services 9.3 9.4 9.4 9.1
Clinical Services 15.4 14.0 15.1 14.3
----- ----- ----- -----
Total Revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of operations:
Cost of revenues 96.2 96.6 96.1 96.5
Selling, general and administrative
expenses 2.1 1.4 2.0 1.7
----- ----- ----- -----
Total cost of operations 98.3 98.0 98.1 98.2
----- ----- ----- -----
Operating income 1.7 2.0 1.9 1.8
Interest income, net of expense (.1) (.1) (.2) (.1)
Merger costs --- (.2) --- (.1)
----- ----- ----- -----
Income before income taxes 1.6 1.7 1.7 1.6
Provision for income taxes (.6) (.7) (.6) (.6)
----- ----- ----- -----
Net income 1.0% 1.0% 1.1% 1.0%
===== ===== ===== =====
</TABLE>
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Revenues. Our revenues for the three months ended September 30, 2000
increased by $164.6 million, or 36%, compared to revenues for the three months
ended September 30, 1999. Approximately 80% of the increase in revenues was
attributable to a 32% increase in the number of pharmacy claims processed during
the period. The increase in claims resulted from increased utilization from new
contracts signed throughout the last twelve months with customers including
Foundation Health Systems, Inc. ("FHS"), the company's largest customer.
Substantially all of the new customers utilize our pharmacy network. In cases
in which we have an independent obligation to pay our network pharmacy
providers, we include payments from our plan sponsors for these benefits as
revenues and payments to our pharmacy providers as cost of revenues. Therefore,
new customers that utilize our network will generate higher revenues than new
business where we merely administer the customer's network. The increase in
claims resulted from strong growth in new customers and from an increase in
member lives from existing customers. Approximately 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. The
remaining 10% of the increase was attributable to additional sales of our mail
pharmacy services, resulting from a 25% increase in the number of mail
prescriptions dispensed.
-9-
<PAGE>
Cost of Revenues. Our cost of revenues for the three months ended September
30, 2000 increased by $161.1 million, or 37%, compared to the same period in
1999. This increase was attributable primarily to the additional costs
associated with our claims processing growth and the new customers that are
utilizing our retail pharmacy network, including the new business from FHS. As
a percentage of revenues, cost of revenues was approximately 96.6% in the three
months ended September 30, 2000 compared to 96.2% in the same period in 1999.
Revenues from claims processing services generate lower margins than revenues
from our other services.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses for the three months ended September 30, 2000 decreased
by $1.0 million, or 11%, compared to the same period in 1999. This decrease is
due to the merger with FFI in July 2000. In the three months ended September
30, 1999 FFI was accounted for as a Sub-chapter S corporation. Compensation of
officers and owners were reflected as selling, general and administrative
expenses. In the three months ended September 30, 2000 the FFI officers were
employed under employment contracts paying less than their compensation in
previous years. Selling, general and administrative expenses as a percentage of
revenues decreased from 2.1% for the three months ended September 30, 1999 to
1.4% in the same period in 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 utilizing our network pharmacy
providers typically do not result in an increase in selling, general and
administrative expenses.
Interest Income and Interest Expense. Interest expense, net of interest
income, for the three months ended September 30, 2000 decreased only $78,000
compared to the same period in 1999.
Income Taxes. For the three months ended September 30, 2000 and 1999 our
recorded income tax expense approximated an effective tax rate of 38%. The
effective rate for the three months ended September 30, 2000 was higher than 38%
because the effective benefit rate relating to the merger costs was
approximately 22.8%
Net Income Per Share. We reported diluted net income per share of $.22 per
share for the three months ended September 30, 2000 compared to $.16 per share
for the same period in 1999. The weighted average shares outstanding were 28.2
million and 28.4 million for the three months ended September 30, 1999 and 2000,
respectively. The increase in net income per share is attributable to the items
discussed above.
- 10 -
<PAGE>
Six Months Ended September 30, 2000 Compared to Six Months Ended September 30,
1999
Revenues. Our revenues for the six months ended September 30, 2000 increased
by $338.6 million, or 38%, compared to revenues for the six months ended
September 30, 1999. Approximately 79% of the increase in revenues was
attributable to a 41% increase in the number of pharmacy claims processed during
the period. The increase in claims resulted from increased utilization from new
contracts signed throughout the last twelve months with customers including FHS,
the company's largest customer. Substantially all of the new customers utilize
our pharmacy network. In cases in which we have an independent obligation to pay
our network pharmacy providers, we include payments from our plan sponsors for
these benefits as revenues and payments to our pharmacy providers as cost of
revenues. Therefore, new customers that utilize our network will generate higher
revenues than new business where we merely administer the customer's network.
Approximately 12% 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. The remaining 9% of the increase was
attributable to additional sales of our mail pharmacy services, resulting from a
21% increase in the number of mail prescriptions dispensed.
Cost of Revenues. Our cost of revenues for the six months ended September
30, 2000 increased by $330.4 million, or 39%, compared to the same period in
1999. This increase was attributable primarily to the additional costs
associated with our claims processing growth and the new customers that are
utilizing our retail pharmacy network, including the new business from FHS. As a
percentage of revenues, cost of revenues was approximately 96.5% in the six
months ended September 30, 2000 compared to 96.1% in the same period in 1999.
Revenues from claims processing services generate lower margins than revenues
from our other services.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses for the six months ended September 30, 2000 increased by
$2.3 million, or 12%, compared to the same period in 1999. In spite of the
increase, selling, general and administrative expenses as a percentage of
revenues decreased from 2.0% for the six months ended September 30, 1999 to 1.7%
in the same period in 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 utilizing our network pharmacy
providers typically do not result in an increase in selling, general and
administrative expenses.
Interest Income and Interest Expense. Interest expense, net of interest
income, for the six months ended September 30, 2000 increased only $109,000
compared to the same period in 1999.
-11-
<PAGE>
Income Taxes. For the six months ended September 30, 2000 and 1999 our
recorded income tax expense approximated an effective tax rate of 38%. The
effective rate for the six months ended September 30, 2000 was somewhat higher
than 38% because the effective benefit rate relating to the merger costs was
approximately 22.8%.
Net Income Per Share. We reported diluted net income per share of $.44 per
share for the six months ended September 30, 2000 compared to $.34 per share for
the same period in 1999. The weighted average shares outstanding were 28.0
million and 27.7 million for the six months ended September 30, 1999 and 2000,
respectively. The increase in net income per share is attributable to the items
discussed above.
Liquidity and Capital Resources
As of September 30, 2000, we had working capital of $14.4 million. Our net
cash provided by operating activities was $28.1 million for the six months ended
September 30, 2000 resulting primarily from net income and also due to the
timing of receivables and payables resulting from our continued growth. During
the six months ended September 30, 2000 we used cash of $14.3 million for
purchases of property, plant and equipment associated with the growth and
expansion of our systems and facilities.
Historically, we have been able to fund our operations and continued growth
through cash flow from operations. 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.
Subsequent Acquisition and Financing
In conjunction with the Company's 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, the Company 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
Company also issued Rite Aid $125 million in convertible preferred stock,
convertible into a class B common stock. In addition, the Company issued $150
million in common stock and preferred convertible stock to JLL. Class B common
stock is subject to shareholder approval at the annual meeting of shareholders
scheduled for December 7, 2000.
-12-
<PAGE>
Risk Factors
In connection with our recent acquisition of PCS, you should also carefully
consider the following risk factors, as well as the discussion of our
acquisition of PCS contained in the definitive proxy statement filed on November
6, 2000.
We may not realize the benefits of integrating with PCS or be successful in
managing our combined company.
Our acquisition of PCS was consummated on October 2, 2000. Unless our
management is successful in integrating and managing the employees and assets
acquired in the transaction in a cost-efficient manner, we will not be able to
realize or maintain the operating efficiencies and other benefits sought from
the transaction. We cannot assure you that we will be able to successfully
integrate our operations with those of PCS, or that we can successfully manage
the combined company, and the failure to do so could harm our business.
We have substantial debt obligations that could restrict our operations.
To finance our acquisition of PCS, we, among other things, entered into an
$825 million senior secured credit facility and issued to Rite Aid $200 million
in senior subordinated notes. As of June 30, 2000, on a pro forma basis giving
effect to our acquisition of PCS and our acquisition of FFI on July 5, 2000, our
outstanding debt was approximately $820 million and our ratio of debt to total
stockholders' equity was approximately 2.2 to 1.
Our substantial indebtedness could have important consequences, including:
. increasing our vulnerability to adverse economic and industry
conditions;
. limiting our flexibility in planning for, or reacting to, changes in
our business and the industry in which we operate;
. placing us at a disadvantage compared to our competitors that have
less debt; and
. limiting our ability to borrow additional funds.
Further, failing to comply with our debt covenants could result in an event of
default which, if not cured or waived, could adversely affect us.
In addition, approximately $620 million of our outstanding debt bears
interest at a variable rate. Economic conditions could result in higher interest
rates, which could increase debt service requirements on variable rate debt. Our
debt service requirements will require the use of a substantial portion of our
operating cash flow to pay interest on our debt instead of other corporate
purposes.
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<PAGE>
New investors own a significant amount of our stock, giving them influence over
corporate transactions and other matters.
In connection with our acquisition of PCS, we issued to JLL, and certain
other investors, (i) 65,854 shares of Series A-1 preferred stock, (ii) six
shares of Series B preferred stock and (iii) 4,207,000 shares of common stock.
In addition, we issued to Rite Aid 125,000 shares of Series A-2 preferred stock.
Although the Series A-1 and Series A-2 preferred stock is not presently
convertible into our common stock, at the 2000 annual meeting of our
stockholders, we are seeking approval of our stockholders to permit such
conversion. Assuming all shares of Series A-1, Series A-2 and Series B preferred
stock are converted into common stock at the current conversion prices set forth
in the certificates of designations for the preferred stock, JLL would
beneficially own 19.2% of our common stock, Rite Aid would beneficially own
16.1% of our common stock and together they would own approximately 35.3% of our
common stock. Accordingly, these stockholders may be able to substantially
influence the outcome of stockholder votes and otherwise influence us. In
addition, JLL and Rite Aid, as holders of the preferred stock, have the right to
designate four of our eleven directors and we cannot take certain actions
without their consent. You should carefully review our definitive proxy
statement for the 2000 annual meeting of stockholders filed on November 6, 2000
for a detailed discussion of our acquisition of PCS and the rights of the
holders of preferred stock.
Certain proposals to be voted on at our 2000 annual meeting of stockholders will
substantially affect our common stock.
At our 2000 annual meeting of stockholders currently scheduled for December
7, 2000, we are asking our stockholders to, among other things:
. consider and vote upon a proposal to amend and restate our
certificate of incorporation to, among other things, create classes
of common stock to be denominated Class A, Class B-1 and Class B-2,
reclassify the existing common stock as Class A common stock,
increase the number of authorized shares of common stock and change
the governance structure of our board of directors, and
. consider and vote upon a proposal to approve the issuance of shares
of Class B-1 common stock and Class B-2 common stock upon conversion
of the Series A preferred stock recently issued in connection with
our acquisition of PCS.
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<PAGE>
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>
PART II. OTHER INFORMATION
Item 1 is not applicable
Item 2. Changes in Securities and Use of Proceeds.
On July 5, 2000 in connection with our acquisition of FFI, we issued 3.5 million
shares of our common stock in exchange for all the outstanding shares of FFI.
The transaction did not involve any underwriters, underwriting discounts or
commissions, or any public offering, and we believe that it was exempt from the
registration requirements of the Securities Act of 1933, as amended, by virtue
of Section 4 (2) and Rule 506 thereunder on the basis that the transaction was
privately negotiated with a limited number of sophisticated persons who took the
shares subject to restrictions on resale. A registration statement under the
Act for the resale of these securities became effective on November 8, 2000.
Items 3-5 are not applicable.
Item 6. Exhibits and reports on Form 8-K.
A Form 8-K was filed in connection with the merger of FFI on July 19, 2000 and
amended on September 18, 2000 and October 26, 2000.
A Form 8-K was filed in connection with the acquisition of PCS on July 31, 2000
and October 16, 2000 and amended on October 26, 2000.
Exhibits required by Item 601 of Regulation S-K:
Exhibit No. Exhibits
----------- --------
3.1* --- Amended and Restated Certificate of Incorporation
3.2** --- Second Amended and Restated Bylaws of the Company
27*** --- Financial Data Schedule
* Previously filed in connection with our Registration Statement on Form S-1
filed October 8, 1996 (No. 333-06931).
** Previously filed as Exhibit 3.1 to the Company's Form 8-K filed on October
16, 2000
*** Filed herewith.
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<PAGE>
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, 2000 By: /s/ David D. Halbert
------------------------------------------
David D. Halbert, Chief Executive Officer,
Chairman of the Board
Date: November 13, 2000 By: /s/ Danny Phillips
------------------------------------------
Danny Phillips, Chief Financial Officer,
Executive Vice President,
(Principal Financial and
Accounting Officer)
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