1
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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 000-25769
ACCREDO HEALTH, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1642871
------------------------------ -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
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 28, 2000
COMMON STOCK, $0.01 PAR VALUE................ 14,076,324
NON-VOTING COMMON STOCK, $0.01 PAR VALUE.....
---------
TOTAL COMMON STOCK........................... 14,076,324
==========
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ACCREDO HEALTH, INCORPORATED
INDEX
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (unaudited)
For the three months and nine months ended March 31,
1999 and 2000
Condensed Consolidated Balance Sheets
June 30, 1999 and March 31, 2000 (unaudited)
Condensed Consolidated Statements of Cash Flows (unaudited)
For the nine months ended March 31, 1999 and 2000
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Part II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(d) Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Note: Items 1 and 3 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 OPERATIONS
(000'S OMITTED, EXCEPT SHARE DATA)
(UNAUDITED)
Nine Months Three Months
Ended March 31, Ended March 31,
-------------------- ------------------
2000 1999 2000 1999
-------- --------- ------- --------
Net patient service revenue $241,413 $ 176,816 $86,788 $ 63,068
Other revenue 11,483 8,861 4,092 3,214
Equity in net income of joint ventures 1,722 1,230 512 599
-------- --------- ------- --------
Total revenues 254,618 186,907 91,392 66,881
Cost of services 217,450 159,198 77,669 57,289
-------- --------- ------- --------
Gross profit 37,168 27,709 13,723 9,592
General & administrative 17,089 12,907 6,011 4,516
Bad debts 4,549 3,420 1,587 1,136
Depreciation and amortization 2,404 3,003 939 1,018
-------- --------- ------- --------
Income from operations 13,126 8,379 5,186 2,922
Interest expense, net 1,498 2,653 714 922
-------- --------- ------- --------
Income before income taxes 11,628 5,726 4,472 2,000
Provision for income taxes 4,580 2,843 1,740 980
-------- --------- ------- --------
Net income 7,048 2,883 2,732 1,020
Preferred stock dividends -- (1,532) -- (511)
-------- --------- ------- --------
Net income to common shareholders $ 7,048 $ 1,351 $ 2,732 $ 509
======== ========= ======= ========
Basic earnings per common share:
Net income $ 0.51 $ 0.34 $ 0.20 $ 0.12
Preferred stock dividends -- (0.18) -- (0.06)
-------- --------- ------- --------
Net income per common share $ 0.51 $ 0.16 $ 0.20 $ 0.06
======== ========= ======= ========
Diluted earnings per common share:
Net income $ 0.48 $ 0.31 $ 0.18 $ 0.11
Preferred stock dividends -- (0.16) -- (0.06)
-------- --------- ------- --------
Net income per common share $ 0.48 $ 0.15 $ 0.18 $ 0.05
======== ========= ======= ========
See accompanying notes to condensed consolidated financial statements.
4
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(000'S OMITTED, EXCEPT SHARE DATA)
(UNAUDITED)
March 31, June 30,
2000 1999
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 8,500 $ 5,542
Accounts receivable, less allowance for doubtful
accounts of $7,508 at March 31, 2000 and
$5,300 at June 30, 1999 62,054 54,816
Due from affiliates 2,638 2,105
Other accounts receivable 12,893 5,856
Inventories 31,869 19,927
Prepaids and other current assets 455 359
Deferred income taxes 2,819 1,554
-------- --------
Total current assets 121,228 90,159
Property and equipment, net 5,270 3,025
Other assets:
Joint venture investments 5,127 3,415
Goodwill and other intangible assets, net 69,767 50,147
-------- --------
Total assets $201,392 $146,746
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 79,403 $ 56,029
Accrued expenses 5,024 4,831
Income taxes payable 57 393
-------- --------
Total current liabilities 84,484 61,253
Long-term notes payable 41,500 20,500
Deferred income taxes 1,184 866
Stockholders' equity:
Undesignated Preferred Stock, 5,000,000 shares
authorized, no shares issued -- --
Non-voting Common Stock, $.01 par value;
2,500,000 shares authorized; no shares issued and outstanding at
March 31, 2000; 1,650,000 shares
issued and outstanding at June 30, 1999 -- 16
Common Stock, $.01 par value; 30,000,000 shares authorized;
14,076,324 and 11,965,631 shares issued and outstanding at
March 31, 2000 and June 30, 1999, respectively 141 120
Additional paid-in capital 66,365 63,322
Retained earnings 7,718 669
-------- --------
Total stockholders' equity 74,224 64,127
-------- --------
Total liabilities and stockholders' equity $201,392 $146,746
======== ========
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,
2000 1999
-------- --------
OPERATING ACTIVITIES:
Net income $ 7,048 $ 2,883
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,404 3,003
Original issue discount amortization -- 184
Provision for losses on accounts receivable 4,549 3,420
Deferred income tax benefit (998) (1,108)
Compensation resulting from stock transactions 138 138
Changes in operating assets and liabilities:
Patient receivables and other (16,802) (22,252)
Due from affiliates (1,110) (1,204)
Inventories (11,477) (2,699)
Prepaids and other current assets (91) (790)
Recoverable income taxes -- 151
Accounts payable and accrued expenses 22,749 15,193
Income taxes payable (336) 3
-------- --------
Net cash provided by (used in) operating activities 6,074 (3,078)
INVESTING ACTIVITIES:
Purchases of property and equipment (2,876) (941)
Business acquisitions and joint venture investments (22,490) (1,298)
Change in joint venture investments, net (1,712) (808)
-------- --------
Net cash used in investing activities (27,078) (3,047)
FINANCING ACTIVITIES:
Proceeds from long-term obligations 21,000 2,000
Issuance of common stock 2,962 212
-------- --------
Net cash provided by financing activities 23,962 2,212
-------- --------
Increase (decrease) in cash and cash equivalents 2,958 (3,913)
Cash and cash equivalents at beginning of period 5,542 5,087
-------- --------
Cash and cash equivalents at end of period $ 8,500 $ 1,174
======== ========
See accompanying notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
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 generally accepted accounting principles
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,
2000, are not necessarily indicative of the results that may be expected for the
fiscal year ended June 30, 2000.
The balance sheet at June 30, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles 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 year ended June 30, 1999.
2. STOCKHOLDERS' EQUITY
During the quarter ended March 31, 2000, employees exercised stock
options to acquire 269,070 shares of Accredo common stock for exercise prices
ranging between $2.00 and $10.67 per share.
3. STOCK SPLIT
On January 31, 2000, the Company announced a three-for-two stock split
in the form of a 50% stock dividend for shareholders of record on February 11,
2000. Shareholders received one additional share of common stock on February 21,
2000 for every two shares held on the record date. The Company has adjusted
earnings per share and all other share related information to reflect the stock
split.
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4. EARNINGS PER SHARE
The following table sets forth the computation of basic and
diluted earnings per share (in thousands, except share data):
Nine Months Ended March 31, Three Months Ended March 31,
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
Numerator for basic and diluted income per
share to common stockholders:
Net income $ 7,048 $ 2,883 $ 2,732 $ 1,020
Preferred stock dividends -- (1,532) -- (511)
------------- ------------- ------------- -------------
Net income to common stockholders $ 7,048 $ 1,351 $ 2,732 $ 509
============= ============= ============= =============
Denominator:
Denominator for basic income per
share to common stockholders -
weighted-average shares 13,764,744 8,433,618 13,903,097 8,438,430
Effect of dilutive stock options 976,631 888,536 948,228 886,702
------------- ------------- ------------- -------------
Denominator for diluted income per
share to common stockholders -
adjusted weighted-average shares 14,741,375 9,322,154 14,851,325 9,325,132
============= ============= ============= =============
Basic earnings per common share:
Net income $ 0.51 $ 0.34 $ 0.20 $ 0.12
Preferred stock dividends -- (0.18) -- (0.06)
------------- ------------- ------------- -------------
Net income per common share $ 0.51 $ 0.16 $ 0.20 $ 0.06
============= ============= ============= =============
Diluted earnings per common share:
Net income $ 0.48 $ 0.31 $ 0.18 $ 0.11
Preferred stock dividends -- (0.16) -- (0.06)
------------- ------------- ------------- -------------
Net income per common share $ 0.48 $ 0.15 $ 0.18 $ 0.05
============= ============= ============= =============
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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.
There may be events in the future that we are not accurately able to
predict or over which we have no control. The risk factors discussed below, as
well as any cautionary language in this quarterly report, provide examples of
risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Examples of these risks, uncertainties and events include the availability of
new drugs, our relationship with the manufacturers whose drugs we handle,
competitive or regulatory factors affecting the drugs we handle or their
manufacturers, the demand for our services, our ability to expand through joint
ventures and acquisitions, our ability to maintain existing pricing arrangements
with suppliers, the impact of government regulation, our need for additional
capital, the seasonality of our operations and our ability to implement our
strategies and objectives.
Investors in our common stock 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES
Total revenues increased 37% from $66.9 million to $91.4 million from the three
months ended March 31, 1999 to the three months ended March 31, 2000.
Approximately $12.2 million, or 50%, of this increase was attributable to our
increased sales of Avonex(R). Cerezyme(R) and Ceredase(R) drug sales increased
approximately $3.3 million, or 14% of the revenue increase. Approximately $2.7
million, or 11%, of this increase was attributable to increased hemophilia
revenue. Approximately $2.8 million, or 11%, of the increase was attributable to
increased sales of growth hormone products. Synagis(R) drug sales increased
approximately $1.2 million, or 5% of the increase, as a result of increased
patients. Approximately $1.7 million, or 7%, of the increase was attributable to
the sale of intravenous immunoglobulin ("IVIG") products we began distributing
in December 1999. The remaining $.6 million, or 2%, of the revenue increase was
attributable to increased sales of other ancillary drugs we dispense as part of
the patient's primary therapy or under contractual obligations within certain
managed care contracts. Total revenues included approximately $5.0 million of
revenues from companies we acquired in the previous quarter.
COST OF SERVICES
Cost of services increased from $57.3 million to $77.7 million, or 36%, from the
three months ended March 31, 1999 to the three months ended March 31, 2000. This
increase is commensurate with the increase in revenues discussed above. As a
percentage of revenues, cost of services decreased from 85.7% to 85.0% from the
three months ended March 31, 1999 to the three months ended March 31, 2000. This
decrease is primarily the result of changes in the revenue mix by therapy type
and more specifically increased sales of intravenous immunoglobulin drugs which
have a lower acquisition cost as a percentage of revenues than the other drugs
we distribute.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $4.5 million to $6.0 million,
or 33%, from the three months ended March 31, 1999 to the three months ended
March 31, 2000. This increase was primarily the result of increased salaries and
benefits associated with the expansion of our reimbursement, sales, marketing,
administrative and support staffs due to existing product line revenue growth,
new product line launches and the two acquisitions made during the previous
quarter. General and
9
administrative expenses represented 6.8% and 6.6% of revenues for the three
months ended March 31, 1999 and 2000, respectively.
BAD DEBTS
Bad debts increased from $1,136,000 to $1,587,000, or 40%, from the three months
ended March 31, 1999 to the three months ended March 31, 2000 primarily due to
the increase in revenues. Bad debt expense was 1.7% of revenues in both of the
three-month periods ended March 31, 1999 and 2000.
DEPRECIATION AND AMORTIZATION
Depreciation expense increased from $160,000 to $302,000 from the three months
ended March 31, 1999 to the three months ended March 31, 2000 as a result of
purchases of property and equipment associated with our revenue growth and
expansion of our leasehold facility improvements. Capital expenditures amounted
to $1.5 million in fiscal year 1999 and $1.65 million in the three months ended
March 31, 2000. Amortization expense associated with goodwill and other
intangible assets decreased from $858,000 to $637,000 from the three months
ended March 31, 1999 to the three months ended March 31, 2000 due to certain
contract intangibles and a non-compete covenant that were fully amortized by the
end of fiscal year 1999. Amortization expense attributable to the acquisitions
made during the previous quarter amounted to approximately $211,000 in the three
months ended March 31, 2000.
INTEREST EXPENSE, NET
Interest expense, net, decreased from $922,000 to $714,000 from the three months
ended March 31, 1999 to the three months ended March 31, 2000. This decrease is
due to lower interest and margin rates payable under our revolving line of
credit agreement, lower fixed interest rate payments associated with our
interest rate swap agreement, and a reduced level of debt resulting from the
early payoff of a significant portion of our debt with a portion of the proceeds
from the initial public offering completed in April 1999. We generated interest
income of approximately $27,000 and $48,000 in the three months ended March 31,
1999 and 2000, respectively.
INCOME TAX EXPENSE
The effective tax rate decreased from 49.0% to 38.9% from the three months ended
March 31, 1999 to the three months ended March 31, 2000 as a result of the
increase in income before taxes while nondeductible amortization expense
decreased. The difference between the recognized tax rate and the statutory tax
rate was primarily attributed to approximately $615,000 and $204,000 of
nondeductible amortization expense in the three months ended March 31, 1999 and
2000, respectively, and state income taxes.
NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO NINE MONTHS ENDED MARCH 31, 1999
REVENUES
Total revenues increased 36% from $186.9 million to $254.6 million, from the
nine months ended March 31, 1999 to the nine months ended March 31, 2000.
Approximately $36.8 million, or 54%, of this increase was attributable to the
increased sales of Avonex(R). Cerezyme(R) and Ceredase(R) drug sales increased
approximately $8.8 million, or 13% of the revenue increase. Approximately $7.6
million, or 11%, of this increase was attributable to increased hemophilia
revenue. Approximately $6.2 million, or 9%, of the increase was attributable to
increased sales of growth hormone products. Synagis(R) drug sales increased
approximately $2.5 million, or 4% of the increase, as a result of increased
patients. Approximately $2.4 million, or 4%, of the increase was attributable to
the sale of IVIG products we began distributing in December 1999. The remaining
$3.4 million, or 5%, of the revenue increase was primarily attributable to
increased sales of other ancillary drugs we dispense as part of the patient's
primary therapy or under contractual obligations within certain managed care
contracts and an increase of approximately $492,000 from our equity in net
income of joint ventures. Total revenues included approximately $8.3 million of
revenues from companies acquired during the nine months ended March 31, 2000.
COST OF SERVICES
Cost of services increased 37% from $159.2 million to $217.5 million from the
nine months ended March 31, 1999 to the nine months ended March 31, 2000. This
increase is commensurate with the increase in our revenues. As a percentage of
revenues, cost of services increased from 85.2% to 85.4% from the nine months
ended March 31, 1999 to the same period in 2000. The increase is primarily the
result of changes in the revenue mix by therapy type and increased pharmacy and
warehouse costs included in cost of services.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $12.9 million to $17.1
million, or 33%, for the nine months ended March 31, 1999 compared to the nine
months ended March 31, 2000. This increase was primarily the result of increased
salaries and benefits associated with the expansion of our reimbursement, sales,
marketing, administrative and support staffs due to existing
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product line revenue growth, new product line launches and the two acquisitions
made during the nine months ended March 31, 2000. General and administrative
expenses represented 6.9% and 6.7% of revenues for the nine months ended March
31, 1999 and 2000, respectively.
BAD DEBTS
Bad debts increased from $3.4 million to $4.5 million, or 32%, from the nine
months ended March 31, 1999 to the nine months ended March 31, 2000. Bad debt
expense was 1.8% of revenues for the nine months ended March 31, 1999 and 2000.
DEPRECIATION AND AMORTIZATION
Depreciation expense increased from $430,000 to $750,000 from the nine months
ended March 31, 1999 to the nine months ended March 31, 2000 as a result of
purchases of property and equipment associated with our revenue growth and
expansion of our leasehold facility improvements. Capital expenditures amounted
to $1.5 million in fiscal year 1999 and $2.9 million in the nine months ended
March 31, 2000. Amortization expense associated with goodwill and other
intangible assets decreased from $2,573,000 to $1,654,000 from the nine months
ended March 31, 1999 to the nine months ended March 31, 2000 due to certain
contract intangibles and a non-compete covenant that were fully amortized by the
end of fiscal year 1999. Amortization expense attributable to the acquisitions
made during the nine months ended March 31, 2000 amounted to approximately
$325,000.
INTEREST EXPENSE, NET
Interest expense, net decreased from $2,653,000 to $1,498,000 from the nine
months ended March 31, 1999 to the nine months ended March 31, 2000. This
decrease is due to lower interest and margin rates payable under our revolving
line of credit agreement, lower fixed interest rate payments associated with our
interest rate swap agreement, and a reduced level of debt resulting from the
early payoff of a significant portion of our debt with a portion of the proceeds
from the initial public offering completed in April 1999. We had interest income
of approximately $114,000 and $157,000 in the nine months ended March 31, 1999
and 2000, respectively.
INCOME TAX EXPENSE
The effective tax rate decreased from 49.6% to 39.4% from the nine months ended
March 31, 1999 to the nine months ended March 31, 2000 as a result of the
increase in income before taxes while nondeductible amortization expense
decreased. The difference between the recognized effective tax rate and the
statutory tax rate is primarily attributed to approximately $1,845,000 and
$612,000 of nondeductible amortization expense in the nine months ended March
31, 1999 and 2000, respectively, and state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, our working capital was $36.7 million. Cash and cash
equivalents were $8.5 million, and the current ratio was approximately 1.4 to
1.0.
Cash provided by operations was $6.1 million for the nine months ended March 31,
2000. During the nine months ended March 31, 2000, accounts receivable, net of
acquisitions, increased $13.4 million; inventory, net of acquisitions, increased
$11.5 million and accounts payable, net of acquisitions, increased $22.7
million. The increases are primarily due to our revenue growth and the timing of
the collection of receivables, inventory purchases and payments of accounts
payable.
One of our joint venture partners owes us approximately $2.0 million for product
and fees. This amount has been outstanding for more than 360 days. Our joint
venture partner's ability to satisfy this amount depends in part on its ability
to collect claims filed with the State of California's MediCal program. We
believe that we have sufficient reserves for any bad debt resulting from the
failure to collect these receivables. These receivables have reduced the amount
of cash that would have otherwise been provided by operations during the current
period.
Net cash used by investing activities was $27.1 million for the nine months
ended March 31, 2000. Cash used in investing activities consisted primarily of
$22.5 million for acquisitions, $2.9 million for purchases of property and
equipment and $1.7 million of undistributed earnings from our joint ventures.
Net cash provided by financing activities was $24.0 million for the nine months
ended March 31, 2000. Cash provided by financing activities consisted primarily
of $21.0 million of net borrowings on the revolving line of credit to finance
the acquisitions and $3.0 million from the proceeds of stock option exercises
and the tax benefit associated with the disqualifying disposition of a portion
of those shares.
Historically, we have funded our operations and continued internal growth
through cash provided by operations. We anticipate that our capital expenditures
for the year ending June 30, 2000 will consist primarily of additional leasehold
improvements,
11
equipment and software systems for the continuing expansion of our leasehold and
to enhance our computer systems to meet needs resulting from our growth. We
expect the cost of our capital expenditures in fiscal year 2000 to be
approximately $4.0 million, exclusive of any acquisitions of businesses, and
expect to fund these expenditures through cash provided by operating activities
and/or borrowings under our revolving credit agreement. In addition, in
connection with two of our acquisitions made this fiscal year, we may be
obligated to make up to $2.2 million in earn-out payments during the fourth
quarter of fiscal year 2000.
We have a $60.0 million revolving credit facility under the terms of our
existing Credit Agreement. The Credit Agreement contains a $20.0 million
sub-limit for working capital loans and letters of credit and is subject to a
borrowing base limit that is based on our cash flow. All outstanding principal
and interest on loans made under the Credit Agreement is due and payable on
December 1, 2001. Interest on loans under the Credit Agreement accrues at a
variable rate index, at our option, based on the prime rate or London Inter Bank
Offered Rate for one, two, three or six months (as selected by us), plus in each
case, a margin depending on the amount of our debt to cash flow ratio as defined
by the Credit Agreement and measured at the end of each quarter for prospective
periods. During the nine months ended March 31, 2000, we have paid margin rates
of .75% to 1.50%.
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
of each of our direct or indirect wholly owned subsidiaries. Each of our
subsidiaries has also guaranteed all of our obligations under the Credit
Agreement. These guarantee obligations are secured by a lien on substantially
all of the assets of each such subsidiary.
The Credit Agreement contains operating and financial covenants, including
requirements to maintain a certain debt to equity ratio and certain leverage and
debt coverage ratios. In addition, the Credit Agreement includes customary
affirmative and negative covenants, including covenants relating to transactions
with affiliates, use of proceeds, restrictions on subsidiaries, limitations on
indebtedness, limitations on liens, limitations on capital expenditures,
limitations on certain mergers, acquisitions and sales of assets, limitations on
investments, prohibitions on payment of dividends and stock repurchases, and
limitations on certain debt payments (including payment of subordinated
indebtedness) and other distributions. The Credit Agreement also contains
customary events of default, including certain events relating to changes in
control of our Company.
We are also a guarantor of a bank loan made to Children's Hemophilia Services, a
California general partnership in which we own a 50% interest. The original line
of credit amounted to $1,500,000. The payment schedule requires that all
outstanding principal amounts in excess of $1,000,000 be paid on January 1,
2000, all outstanding principal amounts in excess of $500,000 be paid on July 1,
2000 and all remaining principal shall be paid in full on November 24, 2000. As
of March 31, 2000, the partnership had $700,000 outstanding under the line of
credit.
We use interest rate swap agreements to manage our interest rate exposure under
the credit agreement. We have effectively converted, for the period through
October 31, 2001, $25.0 million of floating-rate borrowings to fixed rate
borrowings. We have a 5.5% fixed interest rate (exclusive of the margin rate)
under our current interest rate swap agreement.
While we anticipate that our cash from operations, along with the short term use
of the credit agreement will be sufficient to meet our internal operating
requirements and growth plans for at least the next 12 months, we expect that
additional funds may be required in the future to successfully continue our
growth beyond that 12-month period or in the event that we grow more than
expected within such period. We may be required to raise additional funds
through sales of equity or debt securities or seek additional financing from
financial institutions. There can be no assurance, however, that financing will
be available on terms that are favorable to us or, if obtained, will be
sufficient for our needs.
12
IMPACT OF YEAR 2000 ISSUES
In prior years, we discussed the nature and progress of our plans to become Year
2000 ready. In late 1999, we completed the remediation and testing of our
systems. As a result of our planning and implementation efforts, we experienced
no disruptions in our mission critical information technology and
non-information technology systems. We believe these systems successfully
responded to the Year 2000 date change. We are not aware of material problems
resulting from Year 2000 issues, either with our internal systems, our services
or the products and services of third parties with whom we do business. We will
continue to monitor our mission critical computer applications and those of our
suppliers throughout the year 2000 to ensure that any Year 2000 issues that may
arise are properly addressed.
RISK FACTORS
You should carefully consider the risks we describe below before
investing in Accredo. The risks and uncertainties described below are NOT the
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.
We derive a substantial majority of our revenue and profitability from our
relationships with Genzyme Corporation, Biogen, Inc. and Genentech, Inc. The
table below shows the concentration of our revenue derived from these
relationships as a percentage of revenue for the periods indicated:
NINE MONTHS FISCAL YEAR ENDED
ENDED -----------------------------
MARCH 31, 2000 JUNE 30, 1999 JUNE 30, 1998
----------------- ------------- -------------
Biogen 37% 31% 23%
Genzyme 31% 37% 46%
Genentech 4% 5% 6%
Our agreements with these suppliers are short-term and cancelable by either
party without cause on 60 to 90 days prior notice. These agreements also 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, the pricing and other terms of these relationships are
periodically adjusted. Any termination or adverse adjustment to any of these
relationships could have a material adverse effect on our business, financial
condition and results of operations.
OUR ABILITY TO GROW COULD BE LIMITED IF WE DO NOT EXPAND OUR EXISTING BASE OF
DRUGS OR IF WE LOSE PATIENTS.
We focus almost exclusively on a limited number of complex and expensive drugs
that serve small patient populations. The concentration of our revenue related
to these diseases and the associated drugs is shown in the table below as a
percentage of revenue for the periods indicated:
NINE MONTHS FISCAL YEAR ENDED
ENDED -----------------------------
MARCH 31, 2000 JUNE 30, 1999 JUNE 30, 1998
----------------- ------------- -------------
Multiple Sclerosis 37% 31% 23%
Gaucher Disease 31% 37% 46%
Hemophilia and Autoimmune Disorders 20% 21% 23%
Growth Hormone-Related Disorders 7% 6% 7%
Crohn's Disease 1% 1% -
Respiratory Synctial Virus 2% 1% -
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 our business, financial condition
and results of operation.
13
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;
- - 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. All 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;
- - 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 an 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.
RECENT INVESTIGATIONS INTO REPORTING OF AVERAGE WHOLESALE PRICES COULD REDUCE
OUR PRICING AND MARGINS.
Recent government investigations into how the average wholesale price (or AWP)
for drugs is determined could result in reduced pricing and margins for some
drugs we handle. Various federal and state government agencies have been
investigating whether AWP of many drugs, including some that we sell, is an
appropriate or accurate measure of market prices from which government payors
determine how much they reimburse for the drug. Many government payors pay,
directly or indirectly, for some of the drugs that we sell at that drug's AWP,
or at a percentage off AWP. We have also contracted with a number of private
payors to sell our products at AWP or at a percentage discount off AWP. AWP for
most drugs is compiled and published by a private company, First DataBank, Inc.
As recently reported in The Wall Street Journal, there are also several
whistleblower lawsuits pending against manufacturers of certain drugs. These
government investigations and lawsuits involve allegations that manufacturers
have misrepresented the actual selling price of certain drugs to First
DataBank. Bayer AG, one of our suppliers of clotting factor, announced on May
10, 2000, that it is engaged in settlement discussions with the government
regarding these charges. Also, First DataBank announced that it will base AWP on
market prices certified by the manufacturer. First DataBank has published a
Market Price Survey of 437 drugs. The First DataBank survey reduces AWP
significantly for a number of the clotting factor products and IVIG we sell.
We cannot predict the eventual results of these investigations, and the changes
made in AWP by First DataBank. If the reduced average wholesale prices
published by First DataBank for the drugs that we sell are ultimately adopted
as the standard by which we are paid by government payors or private payors,
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.
IF ADDITIONAL PROVIDERS OBTAIN ACCESS TO FAVORABLY PRICED DRUGS WE HANDLE, OUR
BUSINESS COULD BE HARMED.
We are not eligible to participate directly in the pricing program of the
federal Public Health Service, commonly known as PHS, which allows hospitals and
hemophilia treatment centers to obtain discounts on clotting factor. The federal
Health Resources and Services Administration recently issued a notice we expect
will broaden the number of facilities purchasing PHS priced clotting factor.
Increased competition from hospitals and hemophilia treatment centers may reduce
our profit margins.
IF ANY OF OUR RELATIONSHIPS WITH MEDICAL CENTERS ARE DISRUPTED OR CANCELLED, OUR
BUSINESS COULD BE HARMED.
We have significant relationships with seven medical centers that provide
services primarily related to hemophilia, growth hormone-related disorders and
respiratory synctial virus. For the fiscal years ended June 30, 1998 and 1999
and the nine-month period ended March 31, 2000, we received approximately 30%,
23% and 15%, respectively, of our earnings before income taxes and extraordinary
items from equity in the net income from our joint ventures. Our joint ventures
with Children's Home Care, Inc. represent approximately 10% of our earnings
before income taxes for the nine months ended March 31, 2000.
Our agreements with medical centers have terms 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
- - 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.
14
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 recently completed two acquisitions and
entered into two joint venture arrangements. We will continue to evaluate other
joint venture and acquisition 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 goodwill and other 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.
OUR QUARTERLY FINANCIAL RESULTS MAY FLUCTUATE SIGNIFICANTLY.
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:
- - 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
synctial virus;
- - physician prescribing patterns; and
- - general economic conditions.
WE ARE DEPENDENT ON CONTINUED RESEARCH, DEVELOPMENT AND PRODUCTION IN THE
BIOPHARMACEUTICAL INDUSTRY.
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 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.
SOME OF THE PRODUCTS THAT WE DISTRIBUTE COULD BECOME SCARCE.
The biopharmaceutical industry is susceptible to product shortages. Some of the
products that we distribute, such as IVIG and blood-related products, are
collected and processed from human donors. Accordingly, the supply of these
products is highly dependant on human donors and their availability have been
constrained from time to time. 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.
15
IF SOME OF THE DRUGS THAT WE PROVIDE LOSE THEIR "ORPHAN 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 Food and Drug
Administration, 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. The "orphan drug" status applicable to drugs that we handle
expires as follows:
- - Cerezyme(R) expires May 2001;
- - AVONEX(R) expires May 2003; and
- - REMICADE(TM) expires September 2005.
The loss of orphan drug status could result in competitive drugs entering the
market, which could harm our business.
OUR ABILITY TO CONTINUE TO PROVIDE AVONEX(R) COULD BE AFFECTED BY A PENDING
CHALLENGE OF THE DRUG'S PATENT.
16
Our ability to continue to service AVONEX(R) could also be affected by a pending
challenge by Berlex Laboratories, Inc. that Biogen is infringing on a Berlex
patent in the production of AVONEX(R). Berlex is seeking, among other things, a
permanent injunction restraining Biogen from manufacturing AVONEX(R). If the
permanent injunction is granted or if Biogen is unable to continue to supply
AVONEX(R) on terms favorable to us, our business could be harmed. As of the date
of this filing, no trial has been set in this case.
OUR PRODUCT DELIVERY REQUIREMENTS CAUSE US TO DEPEND HEAVILY ON SHIPPING
SERVICES.
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. There are many risks associated with
this dependence, including:
- - 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.
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.
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, 1998 and 1999 and nine-month period ended March 31,
2000, we derived approximately 80%, 82% and 82%, respectively, of our gross
patient service revenue from non-governmental payors (including self-pay), which
included 7%, 6% and 5%, respectively, 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. 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 we will be retained or that our margins will not be adversely
affected when that happens. The loss of a payor relationship 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.
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. We
estimate that approximately 20% of our gross patient service revenue for the
fiscal year ended June 30, 1998 and 18% of our gross patient service revenue for
both the fiscal year ended June 30, 1999 and for the nine months ended March 31,
2000 consisted of reimbursements from federal and state programs, excluding
sales to private physicians whose ultimate payor is typically Medicare. Any
reductions in amounts reimbursable by government programs for our services or
changes in regulations governing such reimbursements could materially and
adversely effect our business, financial condition and results of operations.
17
IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS WILL BE HARMED.
Our rapid growth over the past four 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 of Southern Health Systems, Inc., Hemophilia
Health Services, Inc. and most recently Sunrise Health Management, Inc. and the
specialty pharmacy businesses of Home Medical of America, Inc. resulted in the
recording of a significant amount of goodwill on our financial statements. The
goodwill was recorded because the book value of the tangible and intangible
assets owned by those companies at the time they were acquired was less than the
purchase price. We have determined that the goodwill recorded as a result of
those acquisitions will benefit us for a period of no less than 40 years and, as
a result, we amortize this goodwill evenly over a 40-year period. 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.
If the amortization period for a material portion of goodwill is overly long, it
causes an overstatement of earnings in periods immediately following the
transaction in which the goodwill was recorded. In later periods, it causes
earnings to be understated because of an amortization charge for an asset that
no longer provides a corresponding benefit. Earnings in later periods could also
be significantly affected if the remaining balance of goodwill is impaired and
written off as a charge against earnings. We are not presently aware of any
persuasive evidence that any material portion of our goodwill will be impaired
and written off against earnings. As of March 31, 2000, we had goodwill, net of
accumulated amortization, of approximately $66.4 million, or 33% of total assets
and 89% of stockholders' equity.
Since our growth strategy may involve the acquisition of other companies, we may
record additional goodwill in the future. The amortization and possible
write-off of this goodwill could negatively impact our future earnings. Also, in
future acquisitions we will be required to allocate a portion of the purchase
price to the value of non-competition agreements, patient base and contracts
that are acquired. The value of any amounts allocated to these items could be
amortized over a period much shorter than 40 years. As a result, our earnings
and market price of our common stock could be negatively impacted.
WE RELY ON A FEW KEY EMPLOYEES.
We depend on a small number of 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 that could result from their death. Further, we
must be able to attract and retain other qualified, essential employees for our
technical operating and professional staff, such as pharmacists. If we are
unable to attract and retain these essential employees, our business could be
harmed.
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, additional 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 securities that would reduce the percentage ownership of our then current
stockholders.
OUR INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION.
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, our business, financial condition
and results of operations could materially suffer. Our business could also be
materially and adversely effected 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.
18
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 proposed
regulations implementing the Administrative Simplification provision of
HIPAA concerning the maintenance, transmission and security of
electronic health information, particularly individually identifiable
information. The new regulations, when enacted, will require the
development and implementation of security and transaction standards
for all electronic health information and impose significant use and
disclosure obligations on entities that send or receive individually
identifiable electronic health information. 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.
- - 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. If
we are unable to maintain our licenses or states place burdensome
restrictions or limitations on non-resident pharmacies, this could
limit or affect our ability to operate in some states which could
adversely impact our business and results of operations.
- - 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.
- - 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. Since our common stock
has only been publicly traded for a short time, an active trading market for the
stock may not develop or be maintained. Also, 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 earnings estimates by analysts; and
- - changes in operating results from quarter to quarter.
19
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 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.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company uses derivative financial instruments to manage its exposure to
rising interest rates on its variable-rate debt, primarily by entering into
variable-to-fixed interest rate swaps. We have fixed the interest rate through
October 31, 2001 on $25.0 million of our revolving credit facility through such
a financial instrument. Accordingly, we would not benefit from any decrease in
interest rates on this portion of our credit facility, nor would we be
detrimentally impacted by rising rates on the same portion of our outstanding
debt.
As of March 31, 2000, approximately $16.5 million of our outstanding debt was
not covered by a variable-to-fixed interest rate swap. As a result, the Company
was exposed to the risk of rising interest rates on this portion of its debt.
Accordingly, a 100 basis point increase in interest rates along the entire yield
curve would have reduced our pre-tax income by approximately $124,000 during the
nine months ended March 31, 2000 if this debt had been outstanding throughout
the period.
21
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(d) Use of Proceeds
The Company's Registration Statement on Form S-1 (File No 333-62769)
was declared effective on April 15, 1999. There has been no change in the Use of
Proceeds since that reported in the Company's Form 10-K for the year ended June
30, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(c) None
ITEM 5. OTHER INFORMATION.
On January 31, 2000, the Company announced a three-for-two stock split
in the form of a 50% stock dividend for shareholders of record on February 11,
2000. Shareholders received one additional share of common stock on February 21,
2000 for every two shares held on the record date. The Company has adjusted
current and historical earnings per share and other share related information to
reflect the stock split.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 10.1 Amended and Restated Distribution and Services Agreement
effective as of January 1, 2000 by and between Biogen,
Inc. and Nova Factor, Inc. The Company has requested
confidential treatment with respect to certain portions
of this Exhibit.
Exhibit 10.2 Additional Services Agreement dated January 1, 2000
by and between Biogen, Inc. and Nova Factor, Inc. The
Company has requested confidential treatment with
respect to certain portions of this Exhibit.
Exhibit 10.3 Amended and Restated Contract for the Sale and
Distribution of Genentech Human Growth Hormone effective
as of April 8, 2000 by and between Genentech, Inc. and
Nova Factor, Inc. The Company has requested confidential
treatment with respect to certain portions of this
Exhibit.
Exhibit 27 Financial Data Schedule (for SEC use only) (filed
herewith)
(b) Reports on Form 8-K
On February 11, 2000, we filed Form 8-K/A as amendment No. 1 to our
Current Report on Form 8-K filed on December 16, 1999 related to the acquisition
of Sunrise Health Management, Inc. on December 1, 1999. Form 8-K/A contained the
financial statements of Sunrise Health Management, Inc. and certain pro forma
financial information.
22
Signature
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.
May 15, 2000 Accredo Health, Incorporated
/s/ David D. Stevens
--------------------------------------------
David D. Stevens
Chairman of the Board and
Chief Executive Officer
/s/ Joel R. Kimbrough
--------------------------------------------
Joel R. Kimbrough
Senior Vice President, Chief
Financial Officer and Treasurer
23
Exhibit Index
Exhibit
Number Description of Exhibits
- ------ -----------------------
10.1 Amended and Restated Distribution and Services Agreement effective as
of January 1, 2000 by and between Biogen, Inc. and Nova Factor, Inc.
The Company has requested confidential treatment with respect to
certain portions of this Exhibit.
10.2 Additional Services Agreement dated January 1, 2000 by and between
Biogen, Inc. and Nova Factor, Inc. The Company has requested
confidential treatment with respect to certain portions of this
Exhibit.
10.3 Amended and Restated Contract for the Sale and Distribution of
Genentech Human Growth Hormone effective as of April 8, 2000 by and
between Genentech, Inc. and Nova Factor, Inc. The Company has requested
confidential treatment with respect to certain portions of this
Exhibit.
27 Financial Data Schedule (for SEC use only) (filed herewith)