<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, 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 Blvd., Suite 1600, Irving, Texas 75039
(Address of principal executive offices) (ZIP Code)
(formerly 545 E. John Carpenter Freeway, Suite 1570, Irving, Texas 75062
(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: 25,097,626
outstanding as of August 11, 2000
<PAGE> 2
ADVANCE PARADIGM, INC.
INDEX TO QUARTERLY REPORT FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C> <C>
Item 1. Financial Statements
A. Condensed Consolidated Balance Sheets as of
June 30, 2000 and March 31, 2000 2
B. Condensed Consolidated Statements of Operations
for the Three Months Ended June 30, 2000 and 1999 3
C. Condensed Consolidated Statements of Cash
Flows for the Three Months Ended
June 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 8
PART II. OTHER INFORMATION 11
SIGNATURES 12
</TABLE>
<PAGE> 3
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 2000 June 30, 2000
-------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 50,111,000 $ 51,614,000
Accounts receivable, net of allowance for doubtful accounts of
$368,000 and $374,000, respectively 187,124,000 193,121,000
Inventories 5,965,000 6,288,000
Prepaid expenses and other 3,229,000 3,025,000
------------ ------------
Total current assets 246,429,000 254,048,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization of $13,679,000 and $15,787,000, respectively 32,619,000 37,451,000
INTANGIBLE ASSETS, net of accumulated amortization of
$6,078,000 and $7,050,000, respectively 101,154,000 100,183,000
OTHER ASSETS 7,733,000 7,582,000
------------ ------------
Total assets $387,935,000 $399,264,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $224,891,000 $227,170,000
Accrued salaries and benefits 5,386,000 4,506,000
Income taxes payable -- 2,779,000
Other accrued expenses 2,107,000 2,822,000
------------ ------------
Total current liabilities 232,384,000 237,277,000
NONCURRENT LIABILITIES:
Long-term debt 50,000,000 50,000,000
Deferred income taxes 3,904,000 4,324,000
Other noncurrent liabilities 2,139,000 2,157,000
------------ ------------
Total liabilities 288,427,000 293,758,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000
shares authorized; 21,517,154 and 21,537,466
shares issued and outstanding, respectively 215,000 215,000
Additional paid-in capital 58,710,000 58,808,000
Retained earnings 40,583,000 46,483,000
------------ ------------
Total stockholders' equity 99,508,000 105,506,000
------------ ------------
Total liabilities and stockholders' equity $387,935,000 $399,264,000
============ ============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 4
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Revenues $ 416,286,000 $ 594,327,000
------------- -------------
Cost of operations:
Cost of revenues 403,355,000 576,612,000
Selling, general and
administrative expenses 4,875,000 7,328,000
------------- -------------
Total cost of operations 408,230,000 583,940,000
------------- -------------
Operating income 8,056,000 10,387,000
Interest income 263,000 259,000
Interest expense (914,000) (1,130,000)
------------- -------------
Income before income taxes 7,405,000 9,516,000
Provision for income taxes 2,814,000 3,616,000
------------- -------------
Net income $ 4,591,000 $ 5,900,000
============= =============
Basic
Net income per share $ 0.22 $ 0.27
============= =============
Weighted average
shares outstanding 21,123,484 21,537,466
============= =============
Diluted
Net income per share $ 0.19 $ 0.25
============= =============
Weighted average
shares outstanding 24,296,002 23,478,526
============= =============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 5
ADVANCE PARADIGM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,591,000 $ 5,900,000
Adjustments to reconcile net income to
net cash provided by (used in) operating activities -
Depreciation and amortization 1,875,000 3,080,000
Provision for doubtful accounts 6,000 6,000
Change in certain assets and liabilities -
Accounts receivable (38,403,000) (6,003,000)
Inventories (1,836,000) (323,000)
Prepaid expenses and other assets (452,000) 355,000
Accounts payable, accrued expenses
and other noncurrent liabilities 24,339,000 5,331,000
------------ ------------
Net cash provided by (used in) operating activities (9,880,000) 8,346,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,017,000) (6,941,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock 341,000 98,000
Proceeds from borrowings -- 8,000,000
Payments on long-term obligations -- (8,000,000)
------------ ------------
Net cash provided by financing activities 341,000 98,000
------------ ------------
INCREASE (DECREASE) IN CASH (12,556,000) 1,503,000
CASH AND CASH EQUIVALENTS, beginning of period 42,492,000 50,111,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 29,936,000 $ 51,614,000
============ ============
</TABLE>
See accompanying notes to financial statements.
4
<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, 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 period ended June 30, 2000 are not necessarily indicative of
the results to be expected for the full year or for any future period.
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 SEC 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.
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. A
reconciliation of the numerators and denominators of the basic and diluted per
share computations follows:
5
<PAGE> 7
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1999 2000
----------- -----------
<S> <C> <C>
BASIC
Numerator:
Net income $ 4,591,000 $ 5,900,000
=========== ===========
Denominator:
Weighted average common
stock outstanding 21,123,484 21,537,466
=========== ===========
Net income per share $ 0.22 $ 0.27
=========== ===========
DILUTED
Numerator:
Net income $ 4,591,000 $ 5,900,000
=========== ===========
Denominator:
Weighted average common 21,123,484 21,537,466
stock outstanding
Other Dilutive Securities:
Options and warrants using the
treasury stock method 3,172,518 1,941,060
----------- -----------
Weighted average shares outstanding 24,296,002 23,478,526
=========== ===========
Net income per share $ 0.19 $ 0.25
=========== ===========
</TABLE>
3. INCOME TAXES
In the three months ended June 30, 2000 and 1999, the Company recorded a
provision for income taxes based upon an estimated, effective tax rate of 38%.
4. 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
<PAGE> 8
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. As of June 30, 2000, $50 million is outstanding under
the credit facility. For the year ended March 31, 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.
6. SUBSEQUENT EVENTS
On July 5, 2000, the Company acquired a group of affiliated, privately-held
companies, collectively known as FFI Health Services ("FFI"). The Company issued
3.5 million shares of its Common Stock for all of the shares of FFI on a fully
diluted basis. The acquisition is anticipated to be accounted for as a tax-free
pooling of interest.
On July 12, 2000, the Company announced the signing of a definitive
agreement under which the Company will acquire for $1 billion, 100% of the
equity of PCS Health Systems, Inc. The Company will pay the seller $675 million
in cash and $200 million in senior subordinated notes. The Company will also
issue the seller $125 million in new equity. The acquisition will be accounted
for as a purchase. The cash portion of the purchase price will be financed with
senior secured debt committed by Merrill Lynch and equity financing of $150
million committed by Joseph Littlejohn and Levy, Inc. The transaction is subject
to the approval of the Federal Trade Commission.
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth certain consolidated financial data as a
percentage of total revenues.
<TABLE>
<CAPTION>
Three Months
Ended June 30,
-----------------
1999 2000
----- -----
<S> <C> <C>
Data Services 76.4% 77.0%
Mail Services 9.9 9.0
Clinical Services 13.7 14.0
----- -----
Total Revenues 100.0 100.0
----- -----
Cost of operations:
Cost of revenues 96.9 97.0
Selling, general and administrative
expenses 1.2 1.2
----- -----
Total cost of operations 98.1 98.2
----- -----
Operating income 1.9 1.8
Interest income (expense), net (.1) (.2)
----- -----
Income before income taxes 1.8 1.6
Provision for income taxes (.7) (.6)
----- -----
Net income 1.1 1.0
===== =====
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
REVENUES. Our revenues for the three months ended June 30, 1999 increased
by $178.0 million, or 43%, compared to revenues for the three months ended June
30, 1999. Approximately 78% of the increase in revenues was attributable to a
20% increase in the number of pharmacy claims processed during the period. The
increase in claims resulted from new contracts signed and implemented throughout
the last twelve months with new customers including Foundation Health Systems,
Inc. ("FHS"). 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 15% 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 7% of the increase was attributable to additional sales of
our mail pharmacy services, resulting from a 16% increase in the number of mail
prescriptions dispensed.
COST OF REVENUES. Our cost of revenues for the three months ended June 30,
2000 increased by $173.3 million, or 43%, compared to the same period in 1999.
This increase was attributable primarily to the additional costs associated with
our claims processing growth and
8
<PAGE> 10
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 97.0% in the three months ended June 30, 2000 compared to 96.9% 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 expense for the three months ended June 30, 2000 increased by
$2.5 million, or 50%, compared to the same period in 1999. This increase was
primarily the result of expansion and increases in personnel in management,
sales and marketing departments. In spite of the increase, selling, general and
administrative expenses as a percentage of revenues was 1.2% for the three
months ended June 30, 1999 and 1.2% for the same period in 2000.
INTEREST INCOME AND INTEREST EXPENSE. Interest expense, net of interest
income, for the three months ended June 30, 2000 increased $200,000 compared to
the same period in 1999. Interest expense increased as the result of higher
interest rates in the three months ended June 30, 2000 compared to the prior
year.
INCOME TAXES. For the three months ended June 30, 2000 and 1999 our
recorded income tax expense approximated an effective tax rate of 38%.
NET INCOME PER SHARE. We reported diluted net income per share of $.25 per
share for the three months ended June 30, 2000 compared to $.19 per share for
the same period in 1999. The weighted average shares outstanding were 24.3
million and 23.5 million for the three months ended June 30, 1999 and 2000,
respectively. The decrease in the weighted average shares resulted primarily
from the decrease in our stock price. (See Note 2 for calculation.)
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, we had working capital of $16.8 million. Our net cash
provided by operating activities was $8.3 million for the three months ended
June 30, 2000 resulting primarily from the income we generated and due to the
timing of receivables and payables resulting from our continued growth. During
the three months ended June 30, 2000 we used cash of $6.9 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 (exclusive of acquisitions), including capital expenditures,
for at least the next 18 months. As of June 30, 2000 $50 million has been
borrowed under our $75.0 million, three year revolving credit facility.
In July 2000, the Company announced the acquisition of PCS Health Systems
("PCS"). The acquisition of PCS will require additional capital and credit
facilities. The $1 billion purchase price will be funded entirely by the
issuance of new debt and equity.
9
<PAGE> 11
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.
10
<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, 2000.
Exhibits required by Item 601 of Regulation S-K:
EXHIBIT NO. EXHIBITS
3.1* --- Amended and Restated Certificate of Incorporation
3.2* --- Amended and Restated Bylaws
27** --- Financial Data Schedule
----------
* Previously filed in connection with our Registration Statement on Form S-1
filed October 8, 1996 (No. 333-06931).
** Filed herewith.
11
<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 11, 2000 By: /s/ David D. Halbert
--------------------------
David D. Halbert, Chief Executive Officer
and Chairman of the Board
Date: August 11, 2000 By: /s/ Danny Phillips
------------------------
Danny Phillips, Chief Financial Officer,
Executive Vice President, Secretary and
Treasurer (Principal Financial and
Accounting Officer)
12
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
3.1* -- Amended and Restated Certificate of Incorporation
3.2* -- Amended and Restated Bylaws
27** -- Financial Data Schedule
----------
* Previously filed in connection with our Registration Statement on Form S-1
filed October 8, 1996 (No. 333-06931).
** Filed herewith.
</TABLE>
