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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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 000-25769
ACCREDO HEALTH, INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE | 62-1642871 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1640 CENTURY CENTER PKWY, SUITE 101, MEMPHIS, TN 38134
(Address of principal executive offices) (Zip Code)
(901) 385-3688
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
CLASS | OUTSTANDING AT April 29, 2003 | ||||
COMMON STOCK, $0.01 PAR VALUE | 47,770,482 | ||||
TOTAL COMMON STOCK | 47,770,482 | ||||
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ACCREDO HEALTH, INCORPORATED
INDEX
Part I - FINANCIAL INFORMATION | ||
Item 1. | Financial Statements | |
Condensed Consolidated Statements of Income (Loss) (unaudited) For the three months and nine months ended March 31, 2002 and 2003 | ||
Condensed Consolidated Balance Sheets June 30, 2002 and March 31, 2003 (unaudited) | ||
Condensed Consolidated Statements of Cash Flows (unaudited) For the nine months ended March 31, 2002 and 2003 | ||
Notes to Condensed Consolidated Financial Statements (unaudited) | ||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. | Quantitative and Qualitative Disclosure About Market Risk | |
Item 4. | Controls and Procedures | |
Part II - OTHER INFORMATION | ||
Item 1. | Legal Proceedings | |
Item 2. | Changes in Securities and Use of Proceeds | |
Item 6. | Exhibits and Reports on Form 8-K | |
Note: | Items 3, 4 and 5 of Part II are omitted because they are not applicable |
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PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(000’S OMITTED, EXCEPT SHARE DATA)
(UNAUDITED)
Nine Months Ended March 31, | Three Months Ended March 31, | ||||||||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net patient revenue | $ | 1,024,132 | $ | 451,408 | $ | 357,828 | $ | 173,563 | |||||||||
Other revenue | 27,259 | 12,478 | 8,336 | 4,362 | |||||||||||||
Equity in net income of joint ventures | 1,345 | 1,445 | 405 | 572 | |||||||||||||
Total revenues | 1,052,736 | 465,331 | 366,569 | 178,497 | |||||||||||||
Cost of sales | 836,938 | 391,766 | 290,267 | 148,995 | |||||||||||||
Gross profit | 215,798 | 73,565 | 76,302 | 29,502 | |||||||||||||
General & administrative | 97,174 | 31,154 | 33,761 | 11,851 | |||||||||||||
Bad debts (note 2) | 80,485 | 3,826 | 66,243 | 1,770 | |||||||||||||
Depreciation and amortization | 8,658 | 2,369 | 3,085 | 907 | |||||||||||||
Income (loss) from operations | 29,481 | 36,216 | (26,787 | ) | 14,974 | ||||||||||||
Interest income (expense), net | (6,084 | ) | 838 | (2,014 | ) | 38 | |||||||||||
Minority interest in consolidated subsidiary | (1,510 | ) | (966 | ) | (507 | ) | (333 | ) | |||||||||
Income (loss) before income taxes | 21,887 | 36,088 | (29,308 | ) | 14,679 | ||||||||||||
Provision for income tax expense (benefit) | 8,637 | 14,006 | (11,539 | ) | 5,691 | ||||||||||||
Net income (loss) | $ | 13,250 | $ | 22,082 | $ | (17,769 | ) | $ | 8,988 | ||||||||
Cash dividends declared on common stock | $ | — | $ | — | $ | — | $ | — | |||||||||
Earnings (loss) per share: | |||||||||||||||||
Basic | $ | 0.28 | $ | 0.56 | $ | (0.37 | ) | $ | 0.23 | ||||||||
Diluted | $ | 0.27 | $ | 0.55 | $ | (0.37 | ) | $ | 0.22 | ||||||||
Weighted average shares outstanding: | |||||||||||||||||
Basic | 47,419,325 | 39,113,457 | 47,698,820 | 39,262,335 | |||||||||||||
Diluted | 48,488,663 | 40,459,524 | 48,541,507 | 40,718,429 |
See accompanying notes to condensed consolidated financial statements.
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ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(000’S OMITTED, EXCEPT SHARE DATA)
(Unaudited) | |||||||||
March 31, | June 30, | ||||||||
2003 | 2002 | ||||||||
ASSETS | |||||||||
Current assets: | |||||||||
Cash and cash equivalents | $ | 32,062 | $ | 42,913 | |||||
Patient accounts receivable, less allowance for doubtful accounts of $134,618 at March 31, 2003 and $81,758 at June 30, 2002 | 311,718 | 335,253 | |||||||
Due from affiliates | 2,772 | 2,255 | |||||||
Other accounts receivable | 21,596 | 22,555 | |||||||
Inventories | 106,692 | 120,809 | |||||||
Prepaids and other current assets | 2,300 | 3,470 | |||||||
Income taxes receivable | 16,246 | — | |||||||
Deferred income taxes | 9,658 | 5,954 | |||||||
Total current assets | 503,044 | 533,209 | |||||||
Property and equipment, net | 30,650 | 23,796 | |||||||
Other assets: | |||||||||
Joint venture investments | 5,332 | 4,637 | |||||||
Goodwill, net | 353,107 | 334,919 | |||||||
Other intangible assets, net | 23,744 | 28,268 | |||||||
Total assets | $ | 915,877 | $ | 924,829 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||
Current liabilities: | |||||||||
Accounts payable | $ | 191,600 | $ | 185,047 | |||||
Accrued expenses | 20,854 | 31,369 | |||||||
Income taxes payable | — | 1,701 | |||||||
Current portion of long-term debt | 16,250 | 5,312 | |||||||
Total current liabilities | 228,704 | 223,429 | |||||||
Long-term debt | 182,500 | 224,688 | |||||||
Deferred income taxes | 7,013 | 4,383 | |||||||
Minority interest in consolidated joint venture | 2,285 | 1,275 | |||||||
Stockholders’ equity: | |||||||||
Undesignated Preferred Stock, 5,000,000 shares authorized, no shares issued | — | — | |||||||
Common Stock, $.01 par value; 100,000,000 shares authorized; 47,770,482 and 46,993,581 shares issued and outstanding at March 31, 2003 and June 30, 2002, respectively | 478 | 470 | |||||||
Additional paid-in capital | 424,308 | 413,004 | |||||||
Accumulated other comprehensive loss | (240 | ) | — | ||||||
Retained earnings | 70,829 | 57,580 | |||||||
Total stockholders’ equity | 495,375 | 471,054 | |||||||
Total liabilities and stockholders’ equity | $ | 915,877 | $ | 924,829 | |||||
See accompanying notes to condensed consolidated financial statements.
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ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000’S OMITTED)
(UNAUDITED)
Nine Months Ended | |||||||||
March 31, | |||||||||
2003 | 2002 | ||||||||
OPERATING ACTIVITIES: | |||||||||
Net income | $ | 13,250 | $ | 22,082 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||
Depreciation and amortization | 9,941 | 2,369 | |||||||
Provision for losses on accounts receivable | 80,484 | 3,826 | |||||||
Deferred income tax benefit | (1,074 | ) | (19 | ) | |||||
Compensation resulting from stock transactions | — | 139 | |||||||
Tax benefit of disqualifying disposition of stock options | 4,430 | 2,148 | |||||||
Minority interest in income of consolidated joint venture | 1,510 | 966 | |||||||
Changes in operating assets and liabilities: | |||||||||
Patient receivables and other | (60,132 | ) | (49,333 | ) | |||||
Due from affiliates | (517 | ) | 230 | ||||||
Inventories | 14,117 | (25,197 | ) | ||||||
Prepaids and other current assets | 1,170 | (141 | ) | ||||||
Accounts payable and accrued expenses | 3,418 | 44,286 | |||||||
Income taxes payable | (17,947 | ) | 2,116 | ||||||
Net cash provided by operating activities | 48,650 | 3,472 | |||||||
INVESTING ACTIVITIES: | |||||||||
Purchases of marketable securities | — | (6,000 | ) | ||||||
Proceeds from sales and maturities of marketable securities | — | 7,000 | |||||||
Purchases of property and equipment | (12,662 | ) | (4,466 | ) | |||||
Business acquisitions and joint venture investments | (21,275 | ) | (47,467 | ) | |||||
Change in joint venture investments, net | (1,196 | ) | (1,805 | ) | |||||
Net cash used in investing activities | (35,133 | ) | (52,738 | ) | |||||
FINANCING ACTIVITIES: | |||||||||
Decrease in long-term notes payable | (31,250 | ) | (6,111 | ) | |||||
Issuance of common stock | 6,882 | 1,960 | |||||||
Net cash used in financing activities | (24,368 | ) | (4,151 | ) | |||||
Decrease in cash and cash equivalents | (10,851 | ) | (53,417 | ) | |||||
Cash and cash equivalents at beginning of period | 42,913 | 54,520 | |||||||
Cash and cash equivalents at end of period | $ | 32,062 | $ | 1,103 | |||||
See accompanying notes to condensed consolidated financial statements. |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2003
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the 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 accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the condensed consolidated financial position, results of operations and cash flows of Accredo Health, Incorporated (the “Company” or “Accredo”) have been included. Operating results for the three and nine-month periods ended March 31, 2003, are not necessarily indicative of the results that may be expected for the fiscal year ended June 30, 2003.
The balance sheet at June 30, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2002.
2. BAD DEBT CHARGE
Our bad debt expense increased from $1.8 million in the three months ended March 31, 2002 to $66.2 million in the three months ended March 31, 2003. Bad debt expense for the nine months ended March 31, 2003, increased to $80.5 million from $3.8 million in the nine months ended March 31, 2002.
During the March quarter, the Company completed an analysis and evaluation of historical collection rates and other data used in the estimation of the Company’s allowance for doubtful accounts based on experience up to and including the current quarter. Included in the third quarter and nine month results is a charge of $58.5 million to increase the allowance for doubtful accounts applicable to accounts receivable of the Specialty Pharmaceutical Services division (“SPS division”), which we acquired on June 13, 2002. As a result of the evaluation conducted during the March quarter, we determined that the historical collection rates and other data used in estimating the reserves for contractual expense and bad debts had not provided a sufficient reserve against the recorded accounts receivable for the SPS division. If the collection rates and other data we used in estimating the reserves during the March quarter had been used at January 1, 2003, a $58.5 million charge would have been recorded as of that date.
On May 5, 2003 we amended our credit facility with Bank of America, N.A. and other participating banks to exclude the bad debt charge recorded in the March 2003 quarter from the calculation of Consolidated EBITDA, as defined in the credit facility, and to reduce the Consolidated Net Worth requirement, as defined in the credit facility, to allow for a reduction in the minimum net worth requirement equal to the net loss incurred in the March 2003 quarter. We paid Bank of America, N. A. $200,000 as an administrative fee to obtain the amendment. We also paid the members of the lending syndicate under the credit facility a one time fee equal to 12.5 basis points of their outstanding credit commitment. Finally, we agreed to a 25 basis point increase in interest rates under the credit facility for a period of twelve months beginning May 15, 2003 and ending May 15, 2004.
3. STOCKHOLDERS’ EQUITY
During the quarter ended March 31, 2003, employees and directors exercised stock options to acquire 193,114 shares of Accredo common stock for a weighted average exercise price of $8.44 per share.
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4. COMPREHENSIVE INCOME
Comprehensive income includes changes in the fair value of certain derivative financial instruments that qualify for hedge accounting. Comprehensive income for all periods presented is as follows:
Nine Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Reported net income (loss) | $ | 13,250 | $ | 22,082 | $ | (17,769 | ) | $ | 8,988 | |||||||
Unrealized gain (loss) on interest rate swap contracts, net of tax benefit | (240 | ) | — | 126 | — | |||||||||||
Comprehensive income (loss) | $ | 13,010 | $ | 22,082 | $ | (17,643 | ) | $ | 8,988 | |||||||
The adjustments made in computing comprehensive income are reflected as a component of stockholders equity under the heading “accumulated other comprehensive loss”.
5. STOCKHOLDER PROTECTION RIGHTS AGREEMENT
On April 21, 2003, we adopted a stockholder protection rights agreement (the “Rights Plan”) and issued Rights in connection with the Rights Plan. The Rights Plan provided that a dividend of one share purchase Right be issued for each outstanding share of common stock to stockholders of record as of the close of business on April 28, 2003. Generally, the Rights are exercisable only if a person or group (other than certain existing shareholders) acquires 15% or more of our common stock or announces a tender offer upon consummation of which, such person or group would beneficially own 15% or more of our common stock. Each Right entitles stockholders to buy one ten-thousandth of a share of a new series of junior participating preferred stock at an exercise price of $100.
If the Rights become exercisable, a Rights holder (other than the person or group acquiring 15% or more) will be entitled to purchase, at the Right’s then-current exercise price, a number of shares of our common stock having a market value of twice such price. If after a person has acquired 15% or more of our common stock, we are acquired by such person, each Right will entitle its holder to purchase, at the Right’s then-current exercise price, a number of shares of the acquiring company’s common stock having market value of twice such price. Following the acquisition of 15% or more of our common stock, but less than 50% by any person or group, the Board may exchange the Rights (other than Rights owned by such person or group) at an exchange ratio of one share of our common stock for each Right.
6. LITIGATION
Commencing April 8, 2003, several substantially similar putative class action lawsuits were filed in the United States District Court for the Western District of Tennessee, Memphis Division. At this time, the Company is aware of four such lawsuits, but only two of the complaints have been served. It is possible that additional lawsuits may be filed. The lawsuits name the Company, David D. Stevens, Joel Kimbrough and in one case John R. Grow, as Defendants. The Company will seek to consolidate these lawsuits and any additional putative class action lawsuits that are filed. The lawsuits allege violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and Section 20 of the Securities Exchange Act of 1934. The putative class representatives seek to represent a class of individuals and entities that purchased Company stock during the period June 16, 2002 through April 7, 2003 and who supposedly suffered damages from the alleged violations of the securities laws.
In addition, on April 17, 2003, a purported derivative lawsuit was filed in the Circuit Court of Shelby County, Tennessee for the Thirtieth Judicial District at Memphis. The derivative action names David D. Stevens, John R. Grow, Kyle J. Callahan, Kevin L. Roberg, Kenneth R. Masterson, Kenneth J. Melkus, Dick R. Gourley, Nancy Ann Deparle, Joel R. Kimbrough, Thomas W. Bell, Jr., and Patrick J. Welsh as defendants. The derivative lawsuit alleges that the defendants breached fiduciary duties owed to the Company by engaging in the same alleged conduct that is the basis of the putative class action lawsuits. On behalf of the Company, the derivative complaint seeks compensatory damages from the defendants and the disgorgement of profits, benefits and other compensation received by the defendants.
Although we believe the claims in these lawsuits are without merit, the ultimate outcome of these lawsuits cannot be predicted with certainty. We are not in a position at this time to quantify the amount or range of expenses or possible losses related to these claims.
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7. PRO FORMA NET INCOME EFFECT OF COMPANY STOCK OPTION PLANS
Pro forma information regarding net income is required by Statement of Financial Accounting Standards Number 123 (“Statement 123”) and has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement 123. Significant assumptions used by the Company in the Black-Scholes option pricing model computations are as follows for the periods ended March 31:
2002 | 2003 | |||||||
Risk-free interest rate | 3.56% to 4.41% | 2.61% to 3.15% | ||||||
Dividend yield | 0 | % | 0 | % | ||||
Volatility factor | .65 | .64 | ||||||
Weighted-average expected life | 4.0 years | 4.0 years | ||||||
Estimated turnover | 8 | % | 8 | % |
The Black-Scholes option model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information for the nine and three month periods ended March 31 is as follows (in thousands, except share data):
Nine Months Ended | Three Months Ended | ||||||||||||||||
March 31, | March 31, | March 31, | March 31, | ||||||||||||||
2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net income (loss), as reported | $ | 13,250 | $ | 22,082 | $ | (17,769 | ) | $ | 8,988 | ||||||||
Less stock-based employee compensation cost, net of related tax effects, applying the fair value method to all awards | (7,561 | ) | (2,725 | ) | (3,013 | ) | (1,250 | ) | |||||||||
Pro forma net income (loss) | $ | 5,689 | $ | 19,357 | (20,782 | ) | $ | 7,738 | |||||||||
Earnings (loss) per share: | |||||||||||||||||
| |||||||||||||||||
Basic — as reported | $ | 0.28 | $ | 0.56 | $ | (0.37 | ) | $ | 0.23 | ||||||||
Basic — pro forma | $ | 0.12 | $ | 0.49 | $ | (0.44 | ) | $ | 0.20 | ||||||||
| |||||||||||||||||
Diluted — as reported | $ | 0.27 | $ | 0.55 | $ | (0.37 | ) | $ | 0.22 | ||||||||
Diluted — pro forma | $ | 0.12 | $ | 0.48 | $ | (0.44 | ) | $ | 0.19 |
8. GOODWILL
On February 11, 2003, our obligations became fixed to make a $16 million earn-out payment in connection with our acquisition of BioPartners In Care, Inc. This obligation was paid during the quarter and was recorded as an increase in the goodwill related to the acquisition.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Some of the information in this quarterly report contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “estimate” and “continue” or similar words. You should read statements that contain these words carefully for the following reasons:
• | the statements discuss our future expectations; | ||
• | the statements contain projections of our future earnings or of our financial condition; and | ||
• | the statements state other “forward-looking” information. |
Specifically, this report contains, among others, forward-looking statements about:
• | our expectations regarding our product mix for periods following March 31, 2003; | ||
• | our expectations regarding our payor mix for periods following March 31, 2003; | ||
• | our expectations regarding the scope and cost of our capital expenditures following March 31, 2003; | ||
• | our sources and availability of funds to satisfy our working capital needs; | ||
• | our critical accounting policies; and | ||
• | our expectations regarding the percentage of our revenues attributable to federal and state programs. |
The forward-looking statements contained in this report reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties. Many important factors could cause our actual results or achievements to differ materially from any future results or achievements expressed in or implied by our forward-looking statements. Many of the factors that will determine future events or achievements are beyond our ability to control or predict. Important factors that could cause actual results or achievements to differ materially from the results or achievements reflected in our forward-looking statements include, among other things, the factors discussed in Part I, Item 2 of this report under the sub-heading “Risk Factors.”
You should read this report, the information incorporated by reference into this report and the documents filed as exhibits to this report completely and with the understanding that our actual future results or achievements may be materially different from what we currently expect or anticipate. You should be aware that the occurrence of any of the events described in the risk factors discussed elsewhere in this quarterly report and other events that we have not predicted or assessed could have a material adverse effect on our earnings, financial condition and business. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.
The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is signed. Except as required by law, we assume no responsibility for updating any forward-looking statements.
We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
RESULTS OF OPERATIONS
ACQUISITION
On June 13, 2002, we acquired the Specialty Pharmaceutical Services Division (“SPS division”) of Gentiva Health Services, Inc. (“Gentiva”). We acquired substantially all of the assets used in the SPS division including 100% of the outstanding stock in three of Gentiva’s subsidiaries that were exclusively in the business conducted by the SPS division. The SPS division provides specialty retail pharmacy services relating to the treatment of patients with certain costly chronic diseases. In addition to the diseases previously served by us, the SPS division is also a leading provider of specialty retail pharmacy services to patients with Pulmonary Arterial Hypertension (PAH). As a result of the acquisition, we expect to be a leading specialty retail pharmacy. The aggregate purchase price paid was $464.7 million (including $14.6 million of acquisition related costs) and consisted of $218 million of cash and accrued liabilities and 7,591,464 shares of common stock valued at $246.7 million. The results of the SPS division’s operations have been included in the consolidated financial statements since June 14, 2002.
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BAD DEBT CHARGE
Our bad debt expense increased from $1.8 million in the three months ended March 31, 2002 to $66.2 million in the three months ended March 31, 2003. Bad debt expense for the nine months ended March 31, 2003, increased to $80.5 million from $3.8 million in the nine months ended March 31, 2002.
During the March quarter, the Company completed an analysis and evaluation of historical collection rates and other data used in the estimation of the Company’s allowance for doubtful accounts based on experience up to and including the current quarter. Included in the third quarter and nine month results is a charge of $58.5 million to increase the allowance for doubtful accounts applicable to accounts receivable of the Specialty Pharmaceutical Services division (“SPS division”), which we acquired on June 13, 2002. As a result of the evaluation conducted during the March quarter, we determined that the historical collection rates and other data used in estimating the reserves for contractual expense and bad debts had not provided a sufficient reserve against the recorded accounts receivable for the SPS division. If the collection rates and other data we used in estimating the reserves during the March quarter had been used at January 1, 2003, a $58.5 million charge would have been recorded as of that date.
OVERVIEW
We provide specialty retail pharmacy services for the treatment of patients with costly, chronic diseases. We derive revenues primarily from the retail sale of 15 drugs to patients. We focus almost exclusively on a limited number of complex and expensive drugs that serve small patient populations. The following table presents the percentage of our total revenues generated from sales with respect to the diseases that we primarily serve:
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Hemophilia and Autoimmune Disorders | 35 | % | 27 | % | 37 | % | 25 | % | ||||||||
Multiple Sclerosis | 13 | % | 27 | % | 15 | % | 32 | % | ||||||||
Pulmonary Arterial Hypertension | 13 | % | 0 | % | 13 | % | 0 | % | ||||||||
Gaucher Disease | 9 | % | 16 | % | 10 | % | 19 | % | ||||||||
Growth Hormone-Related Disorders | 6 | % | 8 | % | 7 | % | 9 | % | ||||||||
Respiratory Syncytial Virus | 11 | % | 19 | % | 6 | % | 13 | % |
Reimbursement for the products we sell comes from governmental payors, Medicare and Medicaid, and non-governmental payors. The following table presents the percentage of our total revenues reimbursed by these payors:
Year Ended | Year Ended | Nine Months Ended | |||||||||||
June 30, 2001 | June 30, 2002 | March 31, 2003 | |||||||||||
Non-governmental | 81 | % | 79 | % | 72 | % | |||||||
Governmental: | |||||||||||||
Medicaid | 17 | % | 19 | % | 20 | % | |||||||
Medicare | 2 | % | 2 | % | 8 | % |
The increase in Medicare reimbursement and the related decrease in non-governmental reimbursement is due to the increase in revenues from hemophilia factor and the PAH products, Flolan® and Remodulin, as a result of the acquisition of the SPS division. These are the only products we distribute for which we are reimbursed directly by Medicare. We anticipate that our payor mix for the remainder of our fiscal year 2003 will be similar to the payor mix achieved in the nine months ended March 31, 2003.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Revenues. Total revenues increased 105% from $178.5 million to $366.6 million from the three months ended March 31, 2002 to the three months ended March 31, 2003. Net patient revenues increased 106% from $173.6 million to $357.8 million from the three months ended March 31, 2002 to the three months ended March 31, 2003. The increase is primarily due to the acquisition of the SPS division from Gentiva in June 2002. In addition, we experienced volume growth with the addition of new patients and additional sales of product to existing patients. We also experienced an increase in our seasonal drug Synagis® for the treatment of Respiratory Syncytial Virus (RSV) as a result of increased patient volume. Sales of Synagis® are seasonal and the majority of our sales occur during the second and third quarters of our fiscal year.
As the product mix table above indicates, the acquisition of the SPS business resulted in a significant increase in the percentage of our revenues related to hemophilia, autoimmune disorders and PAH from 27% to 48% from the three months ended March 31, 2002 to the three months ended March 31, 2003. In addition, the acquisition of the SPS business resulted in a significant decrease in the percentage of our revenues related to multiple sclerosis, Gaucher disease and Respiratory Syncytial Virus from 62% to 33% from the three months ended March 31, 2002 to the three months ended March 31, 2003.
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During the March quarter, we completed the transition to distributing Bio-Technology General Corp.’s products Oxandrin® and Delatestryl® on a consignment basis. As a result of this transition, we will no longer record the revenue for the sale of these products, but we will continue to receive and record a distribution fee. Revenues from Oxandrin® and Delatestryl® amounted to approximately $21 million in the March quarter.
Cost of sales. Cost of sales increased 95% from $149.0 million to $290.3 million from the three months ended March 31, 2002 to the three months ended March 31, 2003, which is commensurate with the increase in revenues discussed above. As a percentage of revenues, cost of sales decreased from 83.5% to 79.2% from the three months ended March 31, 2002 to the three months ended March 31, 2003 resulting in gross margins of 16.5% and 20.8% for the three months ended March 31, 2002 and 2003, respectively. Gross margins for the individual products have remained relatively stable. However, the change in product mix as a result of the SPS acquisition discussed above resulted in an increase in the composite gross margin in the three months ended March 31, 2003. The primary drivers for the improvement in gross margins were increased revenues from our higher margin products. In addition, we benefited from lower acquisition costs on some products that we distribute.
General and Administrative. General and administrative expenses increased from $11.9 million to $33.8 million, or 184%, from the three months ended March 31, 2002 to the three months ended March 31, 2003. The increase is primarily due to the SPS acquisition. In addition, we experienced increased salaries and benefits associated with the expansion of our reimbursement, sales and marketing, clinical, administrative and support staffs, and the addition of office space and related furniture and fixtures to support the revenue growth. As a percentage of revenues, general and administrative expenses increased from 6.6% to 9.2% from the three months ended March 31, 2002 to the three months ended March 31, 2003. The increase in general and administrative expenses as a percentage of revenues is due to the product mix changes discussed above. Our higher margin products, which were a larger percentage of our total revenues in the three months ended March 31, 2003, have higher reimbursement, sales, clinical and other administrative support expenses than many of the other products we distribute.
Bad Debts. Bad debts increased from $1.8 million to $66.2 million from the three months ended March 31, 2002 to the three months ended March 31, 2003. The increase in bad debts is primarily due to the charge discussed in note 2 of the notes to our financial statements.
Depreciation and Amortization. Depreciation expense increased from $.6 million to $1.6 million from the three months ended March 31, 2002 to the three months ended March 31, 2003, as a result of the SPS acquisition, purchases of property and equipment associated with our revenue growth and expansion of our leasehold facility improvements. Amortization expense increased from $.3 million to $1.5 million from the three months ended March 31, 2002 to the three months ended March 31, 2003, due to the SPS acquisition.
Interest Income/Expense, Net. Interest income was $38 thousand for the three months ended March 31, 2002 and interest expense was $2.0 million for the three months ended March 31, 2003. The change, amounting to $2.0 million, is primarily due to the debt outstanding during the quarter that was incurred in June 2002 to finance the cash portion of the SPS acquisition and the related acquisition costs.
Income Tax Expense. The effective tax rate was 38.8% and 39.4% for the three months ended March 31, 2002 and 2003, respectively. The difference between the recognized effective tax rate and the statutory rate of 35% is primarily attributable to state income taxes.
NINE MONTHS ENDED MARCH 31, 2003 COMPARED TO NINE MONTHS ENDED MARCH 31, 2002
Revenues. Total revenues increased 126% from $465.3 million to $1,052.7 million from the nine months ended March 31, 2002 to the nine months ended March 31, 2003. Net patient revenues increased 127% from $451.4 million to $1,024.1 million from the nine months ended March 31, 2002 to the nine months ended March 31, 2003. The increase is primarily due to the acquisitions of BioPartners In Care, Inc. in December 2001 and SPS in June 2002. In addition, we experienced volume growth with the addition of new patients and additional sales of product to existing patients. We also experienced an increase in our seasonal drug Synagis® for the treatment of RSV as a result of increased patient volume. Sales of Synagis® are seasonal and the majority of our sales occur during the second and third quarters of our fiscal year.
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As the product mix table above indicates, the acquisitions of BioPartners In Care, Inc. and the SPS business resulted in a significant increase in the percentage of our revenues related to hemophilia, autoimmune disorders and PAH from 25% to 50% from the nine months ended March 31, 2002 to the nine months ended March 31, 2003. In addition, the acquisitions resulted in a significant decrease in the percentage of our revenues related to multiple sclerosis, Gaucher disease and Respiratory Syncytial Virus from 64% to 31% from the nine months ended March 31, 2002 to the nine months ended March 31, 2003.
Cost of sales. Cost of sales increased 114% from $391.8 million to $836.9 million from the nine months ended March 31, 2002 to the nine months ended March 31, 2003, which is commensurate with the increase in revenues discussed above. As a percentage of revenues, cost of sales decreased from 84.2% to 79.5% from the nine months ended March 31, 2002 to the nine months ended March 31, 2003 resulting in gross margins of 15.8% and 20.5% for the nine months ended March 31, 2002 and 2003, respectively. Gross margins for the individual products have remained relatively stable. However, the change in product mix as a result of the acquisitions discussed above resulted in an increase in the composite gross margin in the nine months ended March 31, 2003. The primary drivers for the improvement in gross margins were increased revenues from our higher margin products. In addition, we benefited from lower acquisition costs on some products that we distribute.
General and Administrative. General and administrative expenses increased from $31.2 million to $97.2 million, or 212%, from the nine months ended March 31, 2002 to the nine months ended March 31, 2003. This increase is primarily due to the acquisitions completed during fiscal 2002. In addition, we experienced increased salaries and benefits associated with the expansion of our reimbursement, sales and marketing, clinical, administrative and support staffs, and the addition of office space and related furniture and fixtures to support the revenue growth. As a percentage of revenues, general and administrative expenses increased from 6.7% to 9.2% from the nine months ended March 31, 2002 to the nine months ended March 31, 2003. The increase in general and administrative expenses as a percentage of revenues is due to the product mix changes discussed above. Our higher margin products, which were a larger percentage of our total revenues in the nine months ended March 31, 2003, have higher reimbursement, sales, clinical and other administrative support expenses than many of the other product lines we distribute.
Bad Debts. Bad debts increased from $3.8 million to $80.5 million from the nine months ended March 31, 2002 to the nine months ended March 31, 2003. The increase in bad debts is primarily due to the charge discussed in note 2 of the notes to our financial statements.
Depreciation and Amortization. Depreciation expense increased from $1.6 million to $4.1 million from the nine months ended March 31, 2002 to the nine months ended March 31, 2003, as a result of the acquisitions completed in fiscal 2002, purchases of property and equipment associated with our revenue growth and expansion of our leasehold facility improvements. Amortization expense increased from $.8 million to $4.5 million from the nine months ended March 31, 2002 to the nine months ended March 31, 2003, due to the acquisitions completed in 2002.
Interest Income/Expense, Net. Interest income was $.8 million for the nine months ended March 31, 2002 and interest expense was $6.1 million for the nine months ended March 31, 2003. The change, amounting to $6.9 million, is primarily due to the debt outstanding during the period that was incurred in June 2002 to finance the cash portion of the SPS acquisition and the related acquisition costs.
Income Tax Expense. The effective tax rate was 38.8% and 39.5% for the nine months ended March 31, 2002 and 2003, respectively. The difference between the recognized effective tax rate and the statutory rate of 35% is primarily attributable to state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2003, working capital was $274.3 million, cash and cash equivalents were $32.1 million and the current ratio was 2.2 to 1.0.
Net cash provided by operating activities was $48.7 million for the nine months ended March 31, 2003. During the nine months ended March 31, 2003, accounts receivable decreased $20.4 million, inventories decreased $14.1 million and accounts payable, accrued expenses and income taxes decreased $14.5 million. These changes are due primarily to our revenue growth and the timing of the collection of receivables, inventory purchases and payments of accounts payable.
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Net cash used in investing activities was $35.1 million for the nine months ended March 31, 2003. Cash used in investing activities consisted of $12.6 million for purchases of property and equipment, $16.0 million in earn out payments related to the acquisition of BioPartners In Care, Inc., $5.3 million for business acquisition costs and $1.2 million of undistributed earnings from our joint ventures.
Net cash used in financing activities was $24.4 million for the nine months ended March 31, 2003, which consisted of $31.3 million in debt repayments less $6.9 million from the net proceeds of stock option exercises and employee stock purchase plan transactions.
Historically, we have funded our operations and continued internal growth through cash provided by operations. We anticipate that our capital expenditures for the fiscal year ending June 30, 2003 will consist primarily of additional computer hardware, a fully integrated pharmacy and reimbursement software system and costs to build out and furnish additional space needed to meet the needs of our growth. We expect the cost of our capital expenditures in fiscal year 2003 to be approximately $17.0 million, exclusive of any acquisitions of businesses. We expect to fund our operations and these capital expenditures through cash provided by operating activities and/or borrowings under the revolving credit agreement with our bank.
During 2002, we amended and restated our $60 million revolving credit facility with Bank of America, N.A. and other participating banks to increase the size of the credit facility to $325 million. The credit facility consists of a $125 million revolving commitment due June 2007, a $75 million term loan (Tranche A Term Loan) due in periodic principal payments through March 2007, and a $125 million term loan (Tranche B Term Loan) due in periodic principal payments through March 2009. The amount available to borrow under this credit facility is based upon certain ratios calculated as of the end of each quarter. Based upon the asset coverage ratio as of March 31, 2003, the total amount available to borrow is approximately $269 million. As of March 31, 2003, the total amount outstanding under the credit facility was $198.8 million, which included $75 million under the Tranche A Term Loan and $123.8 million under the Tranche B Term Loan.
Amounts outstanding under the credit agreement bear interest at varying rates based upon a London Inter-Bank Offered Rate (LIBOR) or prime rate of interest (as selected by us), plus a variable margin rate based upon our leverage ratio as defined by the credit agreement. Our obligations under the credit agreement are secured by a lien on substantially all of our assets, including a pledge of all of the common stock or partnership interest of each of our subsidiaries in which we own an 80% or more interest.
The credit agreement contains financial covenants, including requirements to maintain certain ratios with respect to leverage, fixed charge coverage, net worth and asset coverage each as defined in the agreement. The credit agreement also includes customary affirmative and negative covenants, including covenants relating to transactions with affiliates, uses of proceeds, restrictions on subsidiaries, limitations on indebtedness, limitations on mergers, acquisitions and asset dispositions, limitations on investments, limitations on payment of dividends and stock repurchases, and other distributions. The credit agreement also contains customary events of default, including events relating to changes in control of our company.
On May 5, 2003 the Company amended its credit facility with Bank of America, N.A. and other participating banks to exclude the bad debt charge recorded in the March 2003 quarter from the calculation of Consolidated EBITDA, as defined in the credit facility, and to reduce the Consolidated Net Worth requirement, as defined in the credit facility, to allow for a reduction in the minimum net worth requirement equal to the net loss incurred in the March 2003 quarter. The Company paid Bank of America, N. A. $200,000 as an administrative fee to obtain the amendment. The Company also paid the members of the lending syndicate under the credit facility a one time fee equal to 12.5 basis points of their outstanding credit commitment. Finally, the Company agreed to a 25 basis point increase in interest rates under the credit facility for a period of twelve months beginning May 15, 2003 and ending May 15, 2004.
On July 17, 2002, we entered into an interest rate swap agreement to protect against fluctuations in interest rates. The rate swap agreement effectively converts for a period of one year, $120 million of floating-rate borrowings to fixed-rate borrowings with a fixed rate of 2.175%, plus the applicable margin rate as determined by the credit agreement.
On February 6, 2003, the Securities and Exchange Commission (“SEC”) declared effective our shelf registration statement on Form S-3 providing for the offer, from time to time, of various securities, up to an aggregate of $500 million. The shelf registration statement may enable us to more efficiently raise funds from the offering of securities covered by the shelf registration statement, subject to market conditions and our capital needs.
We believe that our cash from operations, cash available under the revolving credit facility and the proceeds from any offering of debt or equity securities allowed by the shelf registration statement will be sufficient to meet our internal operating requirements and growth plans for at least the next 12 months.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Information regarding our “Critical Accounting Policies and Estimates” can be found in our Annual Report on Form 10-K for our most recent fiscal year ended June 30, 2002, filed with the SEC on September 30, 2002. The three critical accounting policies that we believe are either the most judgmental, or involve the selection or application of alternative accounting policies, and are material to our financial statements are those relating to allowance for doubtful accounts, allowance for contractual discounts and medical claims reserve. In addition, Note 1 to our audited financial statements contained within our most recent Annual Report on Form 10-K, contains a summary of our significant accounting policies.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to adopt policies and make significant judgements and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements. However, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. SFAS 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to SFAS 123’s fair value of accounting for stock-based compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based compensation on reported net income and earnings per share in annual and interim financial statements. SFAS 148 does not require companies to account for stock options using the fair value method. We have not adopted the fair value of accounting provisions of SFAS 123, therefore, the transition provisions of SFAS 148 will not apply. However, SFAS 148 requires additional disclosures in our interim and annual reports beginning with this March 2003 report on Form 10-Q.
RISK FACTORS
You should carefully consider the risks and uncertainties we describe below before investing in Accredo. The risks and uncertainties described below arenotthe only risks and uncertainties that could develop. Other risks and uncertainties that we have not predicted or evaluated could also affect our company.
If any of the following risks occur, our earnings, financial condition or business could be materially harmed, and the trading price of our common stock could decline, resulting in the loss of all or part of your investment.
We are highly dependent on our relationships with a limited number of biopharmaceutical suppliers and the loss of any of these relationships could significantly impact our ability to sustain or grow our revenues.
We derive a substantial percentage of our revenue and profitability from the sale of hemophilia product and intravenous immunoglobin (IVIG) that we primarily purchase from Baxter Healthcare Corporation, Aventis Pharmaceuticals, Inc., Wyeth Pharmaceuticals and Bayer Corporation. Approximately 37% of our revenue in the nine-month period ended March 31, 2003 was derived from the sale of IVIG and hemophilia product. During the nine months ended March 31, 2003 and the fiscal year ended June 30, 2002, the majority of our hemophilia product was purchased from Baxter Healthcare Corporation. We also derive a substantial percentage of our revenue and profitability from our relationships with Biogen, Genzyme, MedImmune and GlaxoSmithKline. Our revenue derived from these relationships represented approximately 40% of our revenue for the nine months ended March 31, 2003.
Our agreements with these suppliers are short-term and cancelable by either party without cause on 30 to 90 days prior notice. These agreements also generally limit our ability to handle competing drugs during and, in some cases, after the term of the agreement, but allow the supplier to distribute through channels other than us. Further, these agreements provide that pricing and other terms of these relationships be periodically adjusted for changed market conditions or required service levels. Any termination or adverse adjustment to any of these relationships could have a material adverse effect on a significant portion of our business, financial condition and results of operations.
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Our ability to grow could be limited if we do not expand our existing base of drugs or if we lose patients.
We primarily sell 15 products. We focus almost exclusively on a limited number of complex and expensive drugs that serve small patient populations. The drugs that we sell with respect to the following core disease markets account for approximately 88% of our revenues, with the drugs for hemophilia and autoimmune disorders constituting approximately 37% of our revenue for the nine months ended March 31, 2003:
• | Hemophilia and Autoimmune Disorders | ||
• | Multiple Sclerosis | ||
• | Pulmonary Arterial Hypertension | ||
• | Gaucher Disease | ||
• | Growth Hormone-Related Disorders | ||
• | Respiratory Syncytial Virus |
Due to the small patient populations that use the drugs we handle, our future growth is highly dependent on expanding our base of drugs. Further, a loss of patient base or reduction in demand for any reason of the drugs we currently handle could have a material adverse effect on a significant portion of our business, financial condition and results of operations.
Our business would be harmed if demand for our products and services is reduced.
Reduced demand for our products and services could be caused by a number of circumstances, including:
• | patient shifts to treatment regimens other than those we offer; | ||
• | new treatments or methods of delivery of existing drugs that do not require our specialty products and services; | ||
• | a recall of a drug; | ||
• | adverse reactions caused by a drug; | ||
• | the expiration or challenge of a drug patent; | ||
• | competing treatment from a new drug or a new use of an existing drug or orphan drug status; | ||
• | the loss of a managed care or other payor relationship covering a number of high revenue patients; | ||
• | the cure of a disease we service; or | ||
• | the death of a high-revenue patient. |
There is substantial competition in our industry, and we may not be able to compete successfully.
The specialty pharmacy industry is highly competitive and is continuing to become more competitive. Most of the drugs, supplies and services that we provide are also available from our competitors. Our current and potential competitors include:
• | other specialty pharmacy distributors; | ||
• | specialty pharmacy divisions of wholesale drug distributors; | ||
• | pharmacy benefit management companies; | ||
• | hospital-based pharmacies; | ||
• | retail pharmacies; | ||
• | home infusion therapy companies; | ||
• | manufacturers that sell their products both to distributors and directly to users; | ||
• | comprehensive hemophilia treatment centers; and | ||
• | other alternative site health care providers. |
Many of our competitors have substantially greater resources and more established operations and infrastructure than we have. We are particularly at risk from any of our suppliers deciding to pursue its own distribution and services and not outsource these needs to companies like us. A significant factor in effective competition will be our ability to maintain and expand relationships with managed care companies, pharmacy benefit managers and other payors who can effectively determine the pharmacy source for their enrollees.
Our business could be harmed by changes in Medicare or Medicaid.
Changes in the Medicare, Medicaid or similar government programs or the amounts paid by those programs for our services may adversely affect our earnings. Such programs are highly regulated and subject to frequent and substantial changes and cost containment measures. In recent years, changes in these programs have limited and reduced reimbursement to providers. According to a Kaiser Family Foundation report released on September 19, 2002, 45 states reported they took actions to decrease Medicaid
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spending in 2002, and 41 reported they would take additional actions to decrease Medicaid spending in 2003. For example, the National Conference of State Legislatures estimates that California faces a 35 billion dollar deficit over fiscal year 2003 and fiscal year 2004. We are a general partner in two California partnerships and a significant number of our patients are insured by California’s MediCal program. In order to deal with these budget shortfalls, some states are attempting to create state administered prescription drug discount plans, limit the number of prescriptions per person that are covered, raising Medicaid co-pays and deductibles, proposing more restrictive formularies and proposing reductions in pharmacy reimbursement rates. As a result of the acquisition of the SPS business, we expect the percentage of our revenues attributable to federal and state programs to increase. Any reductions in amounts reimbursable by government programs for our services or changes in regulations governing such reimbursements could materially and adversely affect our business, financial condition and results of operations.
Changes in average wholesale prices could reduce our pricing and margins.
Many government payors, including Medicare and Medicaid, pay us directly or indirectly at a percentage off the drug’s average wholesale price (or AWP). We have also contracted with a number of private payors to sell drugs at AWP or at a percentage off AWP. AWP for most drugs is compiled and published by several private companies, including First DataBank, Inc. In February 2000, First DataBank published a Market Price Survey of 437 drugs, which was significantly lower than the historic AWP for a number of the clotting factor and IVIG products that we sell. A number of state Medicaid agencies have revised their payment methodology as a result of the Market Price Survey.
Various federal and state government agencies have been investigating whether the reported AWP of many drugs, including some that we sell, is an appropriate or accurate measure of the market price of the drugs. There are also several whistleblower lawsuits pending against various drug manufacturers that have been reported in the business press. These government investigations and lawsuits involve allegations that manufacturers reported artificially inflated AWP prices of various drugs to First DataBank.
On September 21, 2001, the United States House Subcommittees on Health and Oversight & Investigations held hearings to examine how Medicare reimburses providers for the cost of drugs. In conjunction with that hearing, the U.S. General Accounting Office issued its Draft Report recommending that Medicare establish payment levels for part-B prescription drugs and their delivery and administration that are more closely related to their costs, and that payments for drugs be set at levels that reflect actual market transaction prices and the likely acquisition costs to providers. On February 3, 2003, President Bush again included, in his 2004 budget, a proposal for reforms in AWP payments for Medicare outpatient drugs.
On December 3, 2002, the Centers for Medicare and Medicaid Services (“CMS”) issued a Program Memorandum that outlined a uniform single national payment schedule for Medicare part-B drugs. Previously each Medicare carrier would come up with its own estimates of AWP. CMS will base payments on 95% of AWP as established by First DataBank and Redbook.
On February 12, 2003, the U.S. General Accounting Office released a report to the Ranking Minority Member, Subcommittee on Health, Committee on Ways and Means, House of Representatives titled “Payment for Blood Clotting Factor Exceeds Providers’ Acquisition Cost”. The Report dated January 10, 2003 recommends that CMS establish Medicare payment levels for clotting factor that are more closely related to providers’ acquisition cost and establish separate payment for the cost of delivering clotting factor to Medicare beneficiaries.
We cannot predict the eventual results of government proposals, investigations, lawsuits or the changes made by First DataBank. If government payors or private payors revise their pricing based on new methods of calculating the AWP for drugs we handle or implement reimbursement methodology based on some value other than AWP, this could have a material adverse effect on our business, financial condition and results of operation, including reducing the pricing and margins on certain of our products.
Our business will suffer if we lose relationships with payors.
We are highly dependent on reimbursement from non-governmental payors. For the fiscal years ended June 30, 2001 and 2002 and the nine months ended March 31, 2003, we derived approximately 81%, 79% and 72% respectively of our gross patient revenue from non-governmental payors (including self-pay), which included 4%, 3% and 1%, respectively for those periods, from sales to private physician practices whose ultimate payor is typically Medicare.
Many payors seek to limit the number of providers that supply drugs to their enrollees. For example, we were selected by Aetna, Inc. as one of three providers of injectable medications. We received approximately 3 % of our total revenues in the quarter ended March 31, 2003 from various relationships with Gentiva, including the distribution of specialty pharmaceuticals through the CareCentrix division of Gentiva’s home health business. From time to time, payors with whom we have relationships require that we and our competitors bid to keep their business, and there can be no assurance that
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we will be retained or that our margins will not be adversely affected when that happens. The loss of a payor relationship, for example, our relationship with Aetna, Inc. and affiliates (which is terminable on 90 days notice) or our relationship with Gentiva, or an adverse change in the financial condition of a payor like Aetna, could result in the loss of a significant number of patients and have a material adverse effect on our business, financial condition and results of operations.
We incurred additional debt to acquire the SPS business of Gentiva Health Services, Inc. which may limit our future financial flexibility.
The current level of our debt will have several important effects on our future operations, including, among others:
• | A significant portion of our cash flow from operations will be dedicated to the payment of principal and interest on the debt and will not be available for other purposes; | ||
• | Our debt covenants will require us to meet financial tests, and may impose other limitations that may limit our flexibility in planning for and reacting to changes in our business, including possible acquisition opportunities; | ||
• | Our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate and other purposes may be limited; | ||
• | Failure to meet our debt covenants could result in foreclosure by our lenders or an increase in the interest rate or administrative fees associated with our debt; | ||
• | We may be at a competitive disadvantage to similar companies that have less debt; and | ||
• | Our vulnerability to adverse economic and industry conditions may increase. |
Our business could be harmed if payors decrease or delay their payments to us.
Our profitability depends on payment from governmental and non-governmental payors, and we could be materially and adversely affected by cost containment trends in the health care industry or by financial difficulties suffered by non- governmental payors. Cost containment measures affect pricing, purchasing and usage patterns in health care. Payors also influence decisions regarding the use of a particular drug treatment and focus on product cost in light of how the product may impact the overall cost of treatment. Further, some payors, including large managed care organizations and some private physician practices, have recently experienced financial trouble. The timing of payments and our ability to collect from payors also affects our revenue and profitability. If we are unable to collect from payors or if payors fail to pay us in a timely manner, it could have a material adverse effect on our business and financial condition.
The failure to integrate successfully the SPS business acquired from Gentiva may prevent us from achieving the anticipated potential benefits of the acquisition and may adversely affect our business.
We face significant challenges in consolidating functions, integrating the procedures, operations and product lines of the SPS business in a timely and efficient manner, and retaining key personnel of the SPS business. The integration of the SPS business is complex and requires substantial attention from management. The diversion of management attention and any difficulties encountered in the transition and integration process could have a material adverse effect on our revenues, level of expenses and operating results.
If any of our relationships with medical centers are disrupted or cancelled, our business could be harmed.
We have joint venture relationships with four medical centers that provide services primarily related to hemophilia, growth hormone-related disorders and respiratory syncytial virus. For the fiscal years ended June 30, 2001 and 2002 and the nine months ended March 31, 2003, we derived approximately 4%, 4% and 6%, respectively, of our income before income taxes from equity in the net income of unconsolidated joint ventures.
Since April 2000, we have owned 80% of one of our joint ventures with Children’s Home Care, Inc. and the financial results of this joint venture are included in our consolidated financial results. This consolidated joint venture represented approximately 10% of our income before income taxes for the fiscal years ended June 30, 2001 and 2002 and 28% of our income before income taxes for the nine months ended March 31, 2003.
In addition to joint venture relationships, we also provide pharmacy management services to several medical centers.
Our agreements with medical centers have terms of between one and five years, and may be cancelled by either party without cause upon notice of between one and twelve months. Adverse changes in our relationships with those medical centers could be caused, for example, by:
• changes caused by consolidation within the hospital industry;
• changes caused by regulatory uncertainties inherent in the structure of the relationships; or
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• | restrictive changes to regulatory requirements. |
Any termination or adverse change of these relationships could have a material adverse effect on our business, financial condition and results of operations.
If additional providers obtain access to favorable PHS pricing for drugs we handle, our business could be harmed.
The federal pricing program of the Public Health Service, commonly known as PHS, allows hospitals and hemophilia treatment centers to obtain discounts on clotting factor. While we are able to access PHS pricing through our contracts to provide contract pharmacy services to hemophilia treatment centers, we are not eligible to participate directly in these programs. Increased competition from hospitals and hemophilia treatment centers that have such favorable pricing may reduce our profit margins.
Our acquisition and joint venture strategy may not be successful, which could cause our business and future growth prospects to suffer.
As part of our growth strategy, we continue to evaluate acquisition and joint venture opportunities, but we cannot predict or provide assurance that we will complete any future acquisitions or joint ventures. Acquisitions and joint ventures involve many risks, including:
• | difficulty in identifying suitable candidates and negotiating and consummating acquisitions on attractive terms; | ||
• | difficulty in assimilating the new operations; | ||
• | increased transaction costs; | ||
• | diversion of our management’s attention from existing operations; | ||
• | dilutive issuances of equity securities that may negatively impact the market price of our stock; | ||
• | increased debt; and | ||
• | increased amortization expense related to intangible assets that would decrease our earnings. |
We could also be exposed to unknown or contingent liabilities resulting from the pre-acquisition operations of the entities we acquire, such as liability for failure to comply with health care or reimbursement laws. We also face exposure if Gentiva is not able to fulfill its indemnification obligations under the terms of our asset purchase agreement. The purchase price we paid to Gentiva for the SPS business was distributed directly to the shareholders of Gentiva, and should any significant payment be required, Gentiva may not have sufficient funds and may not be able to obtain the funds to satisfy its potential indemnification obligation to us. We may suffer impairment of assets or have to bear a liability for which we are entitled to indemnification but are unable to collect.
Fluctuations in our quarterly financial results may cause our stock price to decline.
Our results of operations may fluctuate on a quarterly basis, which could adversely affect the market price of our common stock. Our results may fluctuate as a result of:
• | lower prices paid by Medicare or Medicaid for the drugs that we sell, including lower prices resulting from recent revisions in the method of establishing average wholesale price (“AWP”); | ||
• | below-expected sales or delayed launch of a new drug; | ||
• | price and term adjustments with our drug suppliers; | ||
• | increases in our operating expenses in anticipation of the launch of a new drug; | ||
• | product shortages; | ||
• | inaccuracies in our estimates of the costs of ongoing programs; | ||
• | the timing and integration of our acquisitions; | ||
• | changes in governmental regulations; | ||
• | the annual renewal of deductibles and co-payment requirements that affect patient ordering patterns; | ||
• | our provision of drugs to treat seasonal illnesses, such as respiratory syncytial virus; | ||
• | physician prescribing patterns; | ||
• | general political and economic conditions; | ||
• | interest rate fluctuations; and | ||
• | adverse experience in collection of accounts receivable. |
Our business would be harmed if the biopharmaceutical industry reduces research, development and production of the types of drugs that are compatible with the services we provide.
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Our business is highly dependent on continued research, development, manufacturing and marketing expenditures of biopharmaceutical companies, and the ability of those companies to develop, supply and generate demand for drugs that are compatible with the services we provide. Our business would be materially and adversely affected if those companies stopped outsourcing the services we provide or failed to support existing drugs or develop new drugs. Our business could also be harmed if the biopharmaceutical industry undergoes any of the following developments:
• | supply shortages; | ||
• | adverse drug reactions; | ||
• | drug recalls; | ||
• | increased competition among biopharmaceutical companies; | ||
• | an inability of drug companies to finance product development because of capital shortages; | ||
• | a decline in product research, development or marketing; | ||
• | a reduction in the retail price of drugs from governmental or private market initiatives; | ||
• | changes in the Food and Drug Administration (“FDA”) approval process; or | ||
• | governmental or private initiatives that would alter how drug manufacturers, health care providers or pharmacies promote or sell products and services. |
Our business could be harmed if the supply of any of the products that we distribute becomes scarce.
The biopharmaceutical industry is susceptible to product shortages. Some of the products that we distribute, such as IVIG and some blood-related products, are collected and processed from human donors. Accordingly, the supply of these products is highly dependent on human donors and their availability has been constrained from time to time. For example, an industry wide recombinant factor VIII product shortage existed for some time, as a result of the manufacturers being unable to increase production to meet rising global demand, and has only recently returned to normal levels. If these products, or any of the other drugs that we distribute, are in short supply for long periods of time, our business could be harmed.
If some of the drugs that we provide lose their “orphan drug” status, we could face more competition.
Our business could also be adversely affected by the expiration or challenge to the “orphan drug” status that has been granted by the FDA to some of the drugs that we handle. When the FDA grants “orphan drug” status, it will not approve a second drug for the same treatment for a period of seven years unless the new drug is chemically different or clinically superior. Not all of the drugs that we sell which are related to our core disease states have “orphan drug” status. The “orphan drug” status applicable to drugs related to the seven core disease states that we handle expires (or expired) as follows:
• | Flolan® expired September 2002 (primary pulmonary hypertension) and expires April 2007 (secondary pulmonary hypertension due to intrinsic pulmonary vascular disease); | ||
• | AVONEX® expires May 2003; | ||
• | Nutropin® Depot expires July 2007; | ||
• | Tracleer™ expires November 2008; | ||
• | Remodulin® expires May 2009. |
However, despite orphan drug status, there are competing products on the market for Avonex and Nutropin® Depot. Tracleer™, Remodulin® and Flolan® also compete in the treatments of pulmonary arterial hypertension. The loss of orphan drug status, or approval of new drugs notwithstanding orphan drug status, could result in additional competitive drugs entering the market, which could harm our business. For example, despite the orphan drug status of AVONEX®, the FDA recently approved a competitive drug called Rebif®, which we do not currently expect to handle.
We rely heavily on a single shipping provider, and our business would be harmed if our rates are increased or our provider is unavailable.
Almost all of our revenues result from the sale of drugs we deliver to our patients and principally all of our products are shipped by a single carrier, FedEx. We depend heavily on these outsourced shipping services for efficient, cost effective delivery of our product. The risks associated with this dependence include:
• | any significant increase in shipping rates; | ||
• | strikes or other service interruptions by our primary carrier, FedEx, or by another carrier that could affect FedEx; or | ||
• | spoilage of high cost drugs during shipment, since our drugs often require special handling, such as refrigeration. |
Disruptions in commercial activities such as those following the September 2001 terrorist attacks on the U.S. may adversely impact our results of operations, our ability to raise capital or our future growth.
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Our operations have been and could again be harmed by terrorist attacks on the U.S. For example, transportation systems and couriers that we rely upon to deliver our drugs have been and could again be disrupted, thereby causing a decrease in our revenues. In addition, we may experience a rise in operating costs, such as costs for transportation, courier services, insurance and security. We also may experience delays in payments from payors, which would harm our cash flow. The U.S. economy in general may be adversely affected by terrorist attacks or by any related outbreak of hostilities. Any such economic downturn could adversely impact our results of operations, impair our cost of or ability to raise debt or equity capital or impede our ability to continue growing our business.
If we are unable to manage our growth effectively, our business will be harmed.
Our rapid growth over the past several years has placed a strain on our resources, and if we cannot effectively manage our growth, our business, financial condition and results of operations could be materially and adversely affected. We have experienced a large increase in the number of our employees, the size of our programs and the scope of our operations. Our ability to manage this growth and be successful in the future will depend partly on our ability to retain skilled employees, enhance our management team and improve our management information and financial control systems.
We could be adversely affected by an impairment of the significant amount of goodwill on our financial statements.
Our formation and our acquisitions have resulted in the recording of a significant amount of goodwill on our financial statements. The goodwill was recorded because the fair value of the net assets acquired was less than the purchase price. There can be no assurance that we will realize the full value of this goodwill. We evaluate on an on-going basis whether events and circumstances indicate that all or some of the carrying value of goodwill is no longer recoverable, in which case we would write off the unrecoverable goodwill in a charge to our earnings. As of March 31, 2003, we had goodwill, net of accumulated amortization, of approximately $353 million, or 39% of total assets and 71% of stockholders’ equity.
Since our growth strategy may involve the acquisition of other companies, we may record additional goodwill in the future. The possible write-off of this goodwill could negatively impact our future earnings. We will also be required to allocate a portion of the purchase price of any acquisition to the value of non-competition agreements, patient base and contracts that are acquired. The amount allocated to these items could be amortized over a fairly short period. As a result, our earnings and the market price of our common stock could be negatively impacted.
We rely on a few key employees whose absence or loss could adversely affect our business.
We depend on a few key executives, and the loss of their services could cause a material adverse effect to our company. We do not maintain “key person” life insurance policies on any of those executives. As a result, we are not insured against the losses resulting from the death of our key executives. Further, we must be able to attract and retain other qualified, essential employees for our technical operating and professional staff, such as pharmacists and nurses. If we are unable to attract and retain these essential employees, our business could be harmed.
We have been named in several shareholder class action lawsuits and a shareholders derivative lawsuit asserting claims under the securities laws.
The uncertainty associated with these unresolved lawsuits could harm our business and financial condition. The defense of these lawsuits also could result in litigation fees and costs, as well as the diversion of resources. Negative developments with respect to the lawsuits could cause our stock price to decline significantly. The indemnification provisions contained in our Certificate of Incorporation and Bylaws require us to indemnify our current and former officers and directors who are named as defendants against the allegations contained in these suits. Even though we maintain directors and officers insurance applicable to the lawsuits, there can be no guarantee that the proceeds of such insurance will be available for defense fees and costs, or payment of any settlement or judgment in the lawsuits or, if available, will be sufficient to cover the fees and costs and any settlement or judgment imposed against us.
The ultimate cost and effect of these lawsuits on the financial condition, results of operations, customer relations and our management is unknown at this time.
The lawsuits are described in Part II, Item 1 — Legal Proceedings.
In addition to the securities litigation currently pending against us and our officers and directors, as more fully described above, we may also in the future be the target of similar litigation. Additional securities litigation could result in substantial costs and divert our attention and resources.
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We may need additional capital to finance our growth and capital requirements, which could prevent us from fully pursuing our growth strategy.
In order to implement our growth strategy, we will need substantial capital resources and will incur, from time to time, short- and long-term indebtedness, the terms of which will depend on market and other conditions. We cannot be certain that existing or additional financing will be available to us on acceptable terms, if at all. As a result, we could be unable to fully pursue our growth strategy. Further, additional financing may involve the issuance of equity or debt securities that would reduce the percentage ownership of our then current stockholders.
Our industry is subject to extensive government regulation and noncompliance by us or our suppliers could harm our business.
The marketing, sale and purchase of drugs and medical supplies is extensively regulated by federal and state governments, and if we fail or are accused of failing to comply with laws and regulations, we could suffer a material adverse effect on our business, financial condition and results of operations. Our business could also be materially and adversely affected if the suppliers or clients we work with are accused of violating laws or regulations. The applicable regulatory framework is complex, and the laws are very broad in scope. Many of these laws remain open to interpretation, and have not been addressed by substantive court decisions.
The health care laws and regulations that especially apply to our activities include:
• | The federal “Anti-Kickback Law” prohibits the offer or solicitation of compensation in return for the referral of patients covered by almost all governmental programs, or the arrangement or recommendation of the purchase of any item, facility or service covered by those programs. The Health Insurance Portability and Accountability Act of 1996, or HIPAA, created new violations for fraudulent activity applicable to both public and private health care benefit programs and prohibits inducements to Medicare or Medicaid eligible patients. The potential sanctions for violations of these laws range from significant fines, to exclusion from participation in the Medicare and Medicaid programs, to criminal sanctions. Although some “safe harbor” regulations attempt to clarify when an arrangement will not violate the Anti-Kickback Law, our business arrangements and the services we provide may not fit within these safe harbors. Failure to satisfy a safe harbor requires analysis of whether the parties intended to violate the Anti-Kickback Law. The finding of a violation could have a material adverse effect on our business. | ||
• | The Department of Health and Human Services recently issued regulations implementing the Administrative Simplification provisions of HIPAA concerning the maintenance of privacy and security of individually identifiable health information. The new regulations require the development and implementation of measures to maintain the privacy and security of health information and require that certain health claims transactions be conducted in accordance with uniform standards. These regulations govern health care providers, health plans and health clearinghouses. Failure to comply with these regulations, or wrongful disclosure of confidential patient information could result in the imposition of administrative or criminal sanctions, including exclusion from the Medicare and state Medicaid programs. In addition, if we choose to distribute drugs through new distribution channels such as the Internet, we will have to comply with government regulations that apply to those distribution channels, which could have a material adverse effect on our business. | ||
• | The Ethics in Patient Referrals Act of 1989, as amended, commonly referred to as the “Stark Law,” prohibits physician referrals to entities with which the physician or their immediate family members have a “financial relationship.” A violation of the Stark Law is punishable by civil sanctions, including significant fines and exclusion from participation in Medicare and Medicaid. | ||
• | State laws prohibit the practice of medicine, pharmacy and nursing without a license. To the extent that we assist patients and providers with prescribed treatment programs, a state could consider our activities to constitute the practice of medicine. If we are found to have violated those laws, we could face civil and criminal penalties and be required to reduce, restructure, or even cease our business in that state. | ||
• | Pharmacies and pharmacists must obtain state licenses to operate and dispense drugs. Pharmacies must also obtain licenses in some states to operate and provide goods and services to residents of those states. Our entities that provide nursing for our patients and our nurses must obtain licenses in certain states to conduct our business. If we are unable to maintain our licenses or if states place burdensome restrictions or limitations on non-resident pharmacies or nurses, this could limit or affect our ability to operate in some states which could adversely impact our business and results of operations. |
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• | Federal and state investigations and enforcement actions continue to focus on the health care industry, scrutinizing a wide range of items such as joint venture arrangements, referral and billing practices, product discount arrangements, home health care services, dissemination of confidential patient information, clinical drug research trials and gifts for patients. Recently, the Office of the Inspector General, the OIG, issued a Special Advisory Bulletin focused on complex contractual joint ventures that could potentially violate the anti-kickback statute. In this bulletin, the OIG discussed the characteristics that potentially indicate a prohibited arrangement. Some of these characteristics are present in our existing joint ventures. | ||
• | The False Claims Act encourages private individuals to file suits on behalf of the government against health care providers such as us. Such suits could result in significant financial sanctions or exclusion from participation in the Medicare and Medicaid programs. |
The market price of our common stock may experience substantial fluctuations for reasons over which we have little control.
Our common stock is traded on the Nasdaq National Market. The market price of our common stock could fluctuate substantially based on a variety of factors, including the following:
• | future announcements concerning us, our competitors, the drug manufacturers with whom we have relationships or the health care market; | ||
• | changes in government regulations; | ||
• | overall volatility of the stock market; | ||
• | changes in estimates by analysts; and | ||
• | changes in operating results from quarter to quarter. |
Furthermore, stock prices for many companies fluctuate widely for reasons that may be unrelated to their operating results. These fluctuations, coupled with changes in our results of operations and general economic, political and market conditions, may adversely affect the market price of our common stock.
Some provisions of our charter documents and the Stockholder Protection Rights Plan may have anti-takeover effects that could discourage a change in control, even if an acquisition would be beneficial to our stockholders.
Our certificate of incorporation, our bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. In addition, our Board of Directors has adopted a Stockholder Protection Rights Plan, sometimes referred to as a poison pill, that would substantially dilute the interest sought by an acquiror.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to the impact of financial market risk is significant. Our primary financial market risk exposure consists of interest rate risk related to interest that we are obligated to pay on our variable-rate debt.
We use derivative financial instruments to manage some of our exposure to rising interest rates on our variable-rate debt, primarily by entering into variable-to-fixed interest rate swaps. We have fixed the interest rate through July 21, 2003 on $120.0 million of our variable-rate debt through the use of a variable-to-fixed interest rate swap. As a result, we will not benefit from any decrease in interest rates nor will we be subjected to any detriment from rising interest rates on this portion of our debt during the period of the swap agreement. Accordingly, a 100 basis point decrease in interest rates along the entire yield curve would not increase pre-tax income by $300,000 for a quarter as would be expected without this financial instrument. However, a 100 basis point increase in interest rates along the entire yield curve would also not decrease pre-tax income by $300,000 for the same period as a result of using this derivative financial instrument.
For the remaining portion of our variable-rate debt, we have not hedged against our interest rate risk exposure. As a result, we will benefit from decreasing interest rates, but we will also be harmed by rising interest rates on this portion of our debt. Accordingly, if we maintain our current level of total debt, a 100 basis point decrease in interest rates along the entire yield curve would result in an increase in pre-tax income of approximately $200,000 during a quarter. However, a 100 basis point increase in interest rates would result in a decrease in pre-tax income of approximately $200,000 for the same period.
Actual changes in rates may differ from the hypothetical assumptions used in computing the exposures in the examples cited above.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) within 90 days prior to the filing of this report and concluded, as of the date that evaluation was completed, that our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(b) Changes in Internal Controls
There have been no significant changes in our internal controls or in other factors that could significantly affect these controls since the date last evaluated.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Commencing April 8, 2003, several substantially similar putative class action lawsuits were filed in the United States District Court for the Western District of Tennessee, Memphis Division. At this time, the Company is aware of four such lawsuits, but only two of the complaints have been served. It is possible that additional lawsuits may be filed. The lawsuits name the Company, David D. Stevens, Joel Kimbrough and in one case John R. Grow, as Defendants. The Company will seek to consolidate these lawsuits and any additional putative class action lawsuits that are filed. The lawsuits allege violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and Section 20 of the Securities Exchange Act of 1934. The putative class representatives seek to represent a class of individuals and entities that purchased Company stock during the period June 16, 2002 through April 7, 2003 and who supposedly suffered damages from the alleged violations of the securities laws. The Company believes that the claims asserted in the putative class action lawsuits are without merit.
In addition, on April 17, 2003, a purported derivative lawsuit was filed in the Circuit Court of Shelby County, Tennessee for the Thirtieth Judicial District at Memphis. The derivative action names David D. Stevens, John R. Grow, Kyle J. Callahan, Kevin L. Roberg, Kenneth R. Masterson, Kenneth J. Melkus, Dick R. Gourley, Nancy Ann Deparle, Joel R. Kimbrough, Thomas W. Bell, Jr., and Patrick J. Welsh as defendants. The derivative lawsuit alleges that the defendants breached fiduciary duties owed to the Company by engaging in the same alleged conduct that is the basis of the putative class action lawsuits. On behalf of the Company, the derivative complaint seeks compensatory damages from the defendants and the disgorgement of profits, benefits and other compensation received by the defendants. The Company believes that the claims asserted in the derivative lawsuit are without merit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Information with respect to our adoption of a Stockholder Protection Rights Plan effective as of April 17, 2003 may be found under Item 5 of our Current Report on the Form 8-K dated April 21, 2003, filed with the Securities and Exchange Commission on April 21, 2003. Such information is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) | Exhibits | |
Exhibit 3.1 | Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of the Company. | |
Exhibit 4.1 | Stockholder Protection Rights Agreement, dated April 17, 2003, between the Company and American Stock Transfer & Trust Company, as Rights Agent. | |
Exhibit 99.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 99.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
(b) | Reports on Form 8-K |
April 21, 2003 — Item 5 — The Company described its adoption of a Stockholder Protection Rights Plan. No financial statements were filed with this report.
April 9, 2003 — Item 9 — The Company provided the transcript of a conference call held on April 8, 2003. No financial statements were filed with this report.
April 8, 2003 — Item 9 — The Company provided a press release announcing revised estimates for its fiscal year ending June 30, 2003 and an examination of certain accounts receivable acquired from Gentiva Health Services, Inc. No financial statements were filed with this report.
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January 7, 2003 — Item 5 — The Company provided Unaudited Pro-Forma Condensed Financial Statement that gave effect to the acquisition of the SPS division from Gentiva Health Services, Inc.
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.
Accredo Health, Incorporated | ||
May 5, 2003 | /s/ David D. Stevens | |
David D. Stevens Chairman of the Board and Chief Executive Officer | ||
May 5, 2003 | /s/ Joel R. Kimbrough | |
Joel R. Kimbrough Senior Vice President, Chief Financial Officer and Treasurer |
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CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David D. Stevens, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Accredo Health, Incorporated (“the registrant”);
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | |
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | |
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | |
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 5, 2003
/s/ David D. Stevens David D. Stevens Chief Executive Officer |
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CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Joel R. Kimbrough, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Accredo Health, Incorporated (“the registrant”);
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
d) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; | |
e) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and | |
f) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; |
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:
c) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and | |
d) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and |
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 5, 2003
/s/ Joel R. Kimbrough Joel R. Kimbrough Chief Financial Officer |
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Exhibit Index
Exhibit | ||
Number | Description of Exhibits | |
3.1 | Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of the Company. | |
4.1 | Stockholder Protection Rights Agreement, dated April 17, 2003, between the Company and American Stock Transfer & Trust Company, as Rights Agent. | |
99.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
99.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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