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 DECEMBER 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
2
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 January 31, 2001
COMMON STOCK, $0.01 PAR VALUE................ 17,028,800
----------
TOTAL COMMON STOCK........................... 17,028,800
==========
3
ACCREDO HEALTH, INCORPORATED
INDEX
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income (unaudited)
For the three months and six months ended December 31,
1999 and 2000
Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 2000 (unaudited)
Condensed Consolidated Statements of Cash Flows (unaudited)
For the six months ended December 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 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, 2 and 3 of Part II are omitted because they are not
applicable.
4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(000'S OMITTED, EXCEPT SHARE DATA)
(UNAUDITED)
Six Months Ended December 31, Three Months Ended December 31,
----------------------------- -------------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Net patient service revenue $ 205,408 $ 154,625 $ 109,811 $ 81,941
Other revenue 7,524 7,391 3,755 3,823
Equity in net income of joint ventures 514 1,210 303 592
--------- --------- --------- ---------
Total revenues 213,446 163,226 113,869 86,356
Cost of services 182,458 139,781 97,450 73,789
--------- --------- --------- ---------
Gross profit 30,988 23,445 16,419 12,567
General & administrative 14,211 11,077 7,575 5,831
Bad debts 3,194 2,962 1,642 1,600
Depreciation and amortization 2,040 1,465 1,027 820
--------- --------- --------- ---------
Income from operations 11,543 7,941 6,175 4,316
Interest (income) expense, net (1,256) 784 (882) 432
Minority interest in consolidated subsidiary 306 -- 157 --
--------- --------- --------- ---------
Income before income taxes 12,493 7,157 6,900 3,884
Provision for income taxes 4,962 2,840 2,733 1,535
--------- --------- --------- ---------
Net income $ 7,531 $ 4,317 $ 4,167 $ 2,349
========= ========= ========= =========
Cash dividends declared on common stock $ -- $ -- $ -- $ --
========= ========= ========= =========
Earnings per share:
Basic $ 0.31 $ 0.21 $ 0.16 $ 0.11
Diluted $ 0.30 $ 0.20 $ 0.16 $ 0.11
Earnings per share has been computed reflecting the upcoming three-for-two stock
split discussed in Note 4 below.
See accompanying notes to condensed consolidated financial statements.
5
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(000'S OMITTED, EXCEPT SHARE DATA)
(UNAUDITED)
December 31, June 30,
2000 2000
------------ ---------
ASSETS
Current assets:
Cash and cash equivalents $ 45,173 $ 10,204
Marketable securities 11,401 --
Patient accounts receivable, less allowance for
doubtful accounts of $10,297 at December 31, 2000
and $8,395 at June 30, 2000 76,264 68,417
Due from affiliates 3,195 1,634
Other accounts receivable 8,574 7,420
Inventories 31,267 32,342
Prepaids and other current assets 584 770
Deferred income taxes 4,118 3,133
--------- ---------
Total current assets 180,576 123,920
Property and equipment, net 7,282 6,992
Other assets:
Joint venture investments 2,196 2,056
Goodwill and other intangible assets, net 71,077 72,261
--------- ---------
Total assets $ 261,131 $ 205,229
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 75,403 $ 79,677
Accrued expenses 5,546 7,115
Income taxes payable 1,522 1,289
Line of credit -- 200
--------- ---------
Total current liabilities 82,471 88,281
Long-term notes payable -- 37,000
Deferred income taxes 1,699 1,355
Minority interest in consolidated joint venture 1,356 1,049
Stockholders' equity:
Undesignated Preferred Stock, 5,000,000 shares
authorized, no shares issued -- --
Common Stock, $.01 par value; 50,000,000 shares authorized;
16,973,086 and 14,106,968 shares issued and outstanding at
December 31, 2000 and June 30, 2000, respectively 170 141
Additional paid-in capital 157,340 66,838
Retained earnings 18,095 10,565
--------- ---------
Total stockholders' equity 175,605 77,544
--------- ---------
Total liabilities and stockholders' equity $ 261,131 $ 205,229
========= =========
See accompanying notes to condensed consolidated financial statements.
6
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000'S OMITTED)
(UNAUDITED)
Six Months Ended
December 31,
2000 1999
-------- --------
OPERATING ACTIVITIES:
Net income $ 7,531 $ 4,317
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,040 1,465
Provision for losses on accounts receivable 3,194 2,962
Deferred income tax benefit (675) (654)
Compensation resulting from stock transactions 92 92
Tax benefit of disqualifying disposition of stock options 1,138 349
Minority interest in income of consolidated joint venture 306 --
Changes in operating assets and liabilities:
Patient receivables and other (12,195) (5,986)
Due from affiliates (1,561) (1,663)
Inventories 1,075 (7,833)
Prepaids and other current assets 180 (177)
Accounts payable and accrued expenses (5,843) 11,406
Income taxes payable 234 96
-------- --------
Net cash provided by (used in) operating activities (4,484) 4,374
INVESTING ACTIVITIES:
Purchases of marketable securities (11,401) --
Purchases of property and equipment (1,037) (1,223)
Business acquisitions and joint venture investments (103) (22,496)
Change in joint venture investments, net (140) (1,175)
-------- --------
Net cash used in investing activities (12,681) (24,894)
FINANCING ACTIVITIES:
Increase (decrease) in long-term notes payable (37,200) 20,900
Issuance of common stock 89,917 826
Payment of costs related to public offerings (583) (467)
-------- --------
Net cash provided by financing activities 52,134 21,259
-------- --------
Increase in cash and cash equivalents 34,969 739
Cash and cash equivalents at beginning of period 10,204 5,542
-------- --------
Cash and cash equivalents at end of period $ 45,173 $ 6,281
======== ========
See accompanying notes to condensed consolidated financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 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 six-month periods ended December
31, 2000 are not necessarily indicative of the results that may be expected for
the fiscal year ended June 30, 2001.
Certain amounts in the periods ended December 31, 1999 have been
reclassified to conform to the December 31, 2000 presentation.
The balance sheet at June 30, 2000 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, 2000.
2. MARKETABLE SECURITIES
The Company has classified all of its investments in marketable
securities as held-to-maturity. Debt securities are classified as
held-to-maturity when there is the positive intent and ability to hold the
securities to maturity. Held-to-maturity securities are stated at amortized
cost, adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in interest income. Interest on
securities is also included in interest income. Investments with an original
maturity of less than three months are included in cash equivalents.
At December 31, 2000, all of the Company's investments in marketable
securities were investment-grade government and corporate debt instruments. The
estimated fair value of the marketable securities approximated the amortized
cost, which amounted to $42.7 million as of December 31, 2000 of which $31.3
million were classified as cash equivalents. All of the investments mature
within one year from December 31, 2000. There were no marketable securities at
June 30, 2000.
3. STOCKHOLDERS' EQUITY
During the quarter ended December 31, 2000, employees exercised stock
options to acquire 5,000 shares of Accredo common stock for an exercise price of
$4.00 per share.
Employees of the Company also acquired 11,054 shares of Accredo common
stock during the quarter pursuant to the provisions of the Company's Employee
Stock Purchase Plan at a price of approximately $29.48 per share. Shares
acquired under the plan were purchased on December 29, 2000 from employee funds
accumulated via payroll deductions from July through December, 2000.
4. SUBSEQUENT EVENT
On January 29, 2001, the Company announced a three-for-two stock split
in the form of a 50% stock dividend for shareholders of record on February 9,
2001. Shareholders will receive one additional share of common stock on February
23, 2001 for every two shares held on the record date. The Company has computed
earnings per share for the six-month and three-month periods presented in this
Form 10-Q on a post-split basis.
8
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except share data) (See Note 4 above):
Six Months Ended December 31, Three Months Ended December 31,
----------------------------- -------------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Numerator for basic and diluted income per
share to common stockholders:
Net income $ 7,531 $ 4,317 $ 4,167 $ 2,349
=========== =========== =========== ===========
Denominator (See Note 4 above):
Denominator for basic income per
share to common stockholders -
weighted-average shares 24,230,211 20,544,476 25,442,693 20,613,443
Effect of dilutive stock options 1,264,570 1,490,853 1,255,696 1,421,984
----------- ----------- ----------- -----------
Denominator for diluted income per
share to common stockholders -
adjusted weighted-average shares 25,494,781 22,035,329 26,698,389 22,035,427
=========== =========== =========== ===========
Earnings per common share (See Note 4 above):
Basic $ 0.31 $ 0.21 $ 0.16 $ 0.11
Diluted $ 0.30 $ 0.20 $ 0.16 $ 0.11
EARNINGS PER SHARE HAS BEEN COMPUTED REFLECTING THE UPCOMING THREE-FOR-TWO
STOCK SPLIT DISCUSSED IN NOTE 4 ABOVE.
9
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
relationships 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 DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1999
REVENUES
Total revenues increased 32% from $86.4 million to $113.9 million from the three
months ended December 31, 1999 to the three months ended December 31, 2000. Net
patient service revenues increased 34% from $81.9 million to $109.8 million from
the three months ended December 31, 1999 to the three months ended December 31,
2000. We have experienced growth in all of our core products (for the treatments
of growth hormone disorders, hemophilia, Gaucher Disease and Multiple Sclerosis)
as a result of the addition of new patients as well as additional sales to
existing patients. In addition, we had an increase in our seasonal drug
SYNAGIS(R) for the treatment of Respiratory Synctial Virus as a result of
increased patient volume.
Equity in net income of joint ventures decreased $.3 million from the three
months ended December 31, 1999 to the three months ended December 31, 2000
primarily due to the acquisition of an additional 30% interest in the joint
venture Childrens Hemophilia Services effective April 1, 2000. The results of
operations of the joint venture have been consolidated with the Company's
results of operations since the date of acquisition and therefore, are no longer
recorded using the equity method of accounting.
COST OF SERVICES
Cost of services increased from $73.8 million to $97.5 million, or 32%, from the
three months ended December 31, 1999 to the three months ended December 31,
2000, which is commensurate with the increase in revenues discussed above. As a
percentage of revenues, cost of services increased from 85.4% to 85.6% from the
three months ended December 31, 1999 to the three months ended December 31,
2000. This increase is primarily the result of changes in the revenue mix by
therapy type and more specifically increased sales of SYNAGIS(R) which has a
higher acquisition cost as a percentage of revenues than many of the other drugs
we distribute.
10
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $5.8 million to $7.6 million,
or 31%, from the three months ended December 31, 1999 to the three months ended
December 31, 2000. This increase was primarily the result of increased salaries
and benefits associated with the expansion of our reimbursement, sales and
marketing, administrative and support staffs and the addition of office space
and related furniture and fixtures to support the revenue growth. General and
administrative expenses represented 6.8% and 6.7% of revenues for the three
months ended December 31, 1999 and 2000, respectively.
BAD DEBTS
Bad debts increased from $1,600,000 to $1,642,000, or 3%, from the three months
ended December 31, 1999 to the three months ended December 31, 2000 primarily
due to the increase in revenues. However, bad debt expense decreased from 1.9%
of revenues to 1.4% of revenues from the three months ended December 31, 1999 to
the three months ended December 31, 2000. The decrease in bad debts as a
percentage of revenues is primarily due to the increased percentage of our
revenues that was reimbursed by Pharmacy Benefit Managers versus a major medical
benefit plan. The majority of reimbursement for both AVONEX(R) and SYNAGIS(R) is
being provided by Pharmacy Benefit Managers, and therefore is subject to much
lower co-payment and deductible amounts (typically $10 to $15) resulting in
lower bad debt expense.
DEPRECIATION AND AMORTIZATION
Depreciation expense increased from $253,000 to $380,000 from the three months
ended December 31, 1999 to the three months ended December 31, 2000 as a result
of purchases of property and equipment associated with our revenue growth and
expansion of our leasehold facility improvements. Amortization expense
associated with goodwill and other intangible assets increased from $567,000 to
$647,000 from the three months ended December 31, 1999 to the three months ended
December 31, 2000 due to acquisitions made in fiscal year 2000.
INTEREST INCOME/EXPENSE, NET
Interest expense, net, amounted to $432,000 for the three months ended December
31, 1999 compared to interest income, net, of $882,000 for the three months
ended December 31, 2000. This change, amounting to $1,314,000, is due to the
repayment of our debt with the proceeds of the stock offering completed during
the first quarter of fiscal 2001, the investment of the excess cash from the
offering and the sale of an interest rate swap for $350,000. We generated
interest income of approximately $54,000 and $915,000 in the three months ended
December 31, 1999 and 2000, respectively.
INCOME TAX EXPENSE
The effective tax rate was 39.5% and 39.6% for the three months ended December
31, 1999 and 2000, respectively. The difference between the recognized tax rate
and the statutory tax rate was primarily attributed to approximately $204,000
and $197,000 of nondeductible amortization expense in the three months ended
December 31, 1999 and 2000, respectively, and state income taxes.
SIX MONTHS ENDED DECEMBER 31, 2000 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1999
REVENUES
Total revenues increased 31% from $163.2 million to $213.4 million from the six
months ended December 31, 1999 to the six months ended December 31, 2000. Net
patient service revenues increased 33% from $154.6 million to $205.4 million
from the six months ended December 31, 1999 to the six months ended December 31,
2000. We have experienced growth in all of our core products (for the treatments
of growth hormone disorders, hemophilia, Gaucher Disease and Multiple Sclerosis)
as a result of the addition of new patients as well as additional sales to
existing patients. We also had an increase in our seasonal drug SYNAGIS(R) for
the treatment of Respiratory Synctial Virus as a result of increased patient
volume. In addition, we had a significant increase in revenues from intravenous
immunoglobulin ("IVIG") drugs, which we added to our portfolio of products in
December 1999, as a result of six months of sales this fiscal year versus one
month in the same period last year.
Equity in net income of joint ventures decreased $.7 million from the six months
ended December 31, 1999 to the six months ended December 31, 2000 primarily due
to the acquisition of an additional 30% interest in the joint venture Childrens
Hemophilia Services effective April 1, 2000. The results of operations of the
joint venture have been consolidated with the Company's results of operations
since the date of acquisition and therefore, are no longer recorded using the
equity method of accounting.
11
COST OF SERVICES
Cost of services increased from $139.8 million to $182.5 million, or 31%, from
the six months ended December 31, 1999 to the six months ended December 31,
2000, which is commensurate with the increase in revenues discussed above. As a
percentage of revenues, cost of services decreased from 85.6% to 85.5% from the
six months ended December 31, 1999 to the six months ended December 31, 2000.
This decrease is primarily the result of changes in the revenue mix by therapy
type and more specifically increased sales of IVIG which has a lower acquisition
cost as a percentage of revenues than many of the other drugs we distribute.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $11.1 million to $14.2
million, or 28%, from the six months ended December 31, 1999 to the six months
ended December 31, 2000. This increase was primarily the result of increased
salaries and benefits associated with the expansion of our reimbursement, sales
and marketing, administrative and support staffs and the addition of office
space and related furniture and fixtures to support the revenue growth. General
and administrative expenses represented 6.8% and 6.7% of revenues for the six
months ended December 31, 1999 and 2000, respectively.
BAD DEBTS
Bad debts increased from $2,962,000 to $3,194,000, or 8%, from the six months
ended December 31, 1999 to the six months ended December 31, 2000 primarily due
to the increase in revenues. However, bad debt expense decreased from 1.8% of
revenues to 1.5% of revenues from the six months ended December 31, 1999 to the
six months ended December 31, 2000. The decrease in bad debts as a percentage of
revenues is primarily due to the increased percentage of our revenues that was
reimbursed by Pharmacy Benefit Managers versus a major medical benefit plan. The
majority of reimbursement for both AVONEX(R) and SYNAGIS(R) is being provided by
Pharmacy Benefit Managers, and therefore is subject to much lower co-payment and
deductible amounts (typically $10 to $15) resulting in lower bad debt expense.
DEPRECIATION AND AMORTIZATION
Depreciation expense increased from $448,000 to $748,000 from the six months
ended December 31, 1999 to the six months ended December 31, 2000 as a result of
purchases of property and equipment associated with our revenue growth and
expansion of our leasehold facility improvements. Amortization expense
associated with goodwill and other intangible assets increased from $1,017,000
to $1,292,000 from the six months ended December 31, 1999 to the six months
ended December 31, 2000 due to acquisitions made in fiscal year 2000.
INTEREST INCOME/EXPENSE, NET
Interest expense, net, amounted to $784,000 for the six months ended December
31, 1999 compared to interest income, net, of $1,256,000 for the three months
ended December 31, 2000. This change, amounting to $2,040,000, is due to the
repayment of our debt with the proceeds of the stock offering completed during
the first quarter of fiscal 2001, the investment of the excess cash from the
offering and the sale of an interest rate swap for $350,000. We generated
interest income of approximately $109,000 and $1,703,000 in the six months ended
December 31, 1999 and 2000, respectively.
INCOME TAX EXPENSE
The effective tax rate was 39.7% in both of the six-month periods ended December
31, 1999 and 2000. The difference between the recognized tax rate and the
statutory tax rate was primarily attributed to approximately $408,000 and
$394,000 of nondeductible amortization expense in the six months ended December
31, 1999 and 2000, respectively, and state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, our working capital was $98.1 million, cash and cash
equivalents were $45.2 million, marketable securities were $11.4 million and the
current ratio was 2.2 to 1.0.
Cash used in operations was $4.5 million for the six months ended December 31,
2000. The use is primarily related to the timing of approximately $6.2 million
in payments for inventory made in July (the beginning of the fiscal year) that
could have been made in June (the end of last fiscal year) and an increase in
accounts receivable and inventory of
12
approximately $3.0 million related to the seasonal drug SYNAGIS(R) that should
reverse entirely by the end of the fiscal year since the SYNAGIS(R) season
effectively ends in March.
Net cash used in investing activities was $12.7 million for the six months ended
December 31, 2000. Cash used in investing activities consisted primarily of
$11.4 million for the purchase of marketable securities, which have an initial
maturity date of greater than 90 days, and $1.0 million for purchases of
property and equipment.
Net cash provided by financing activities was $52.1 million for the six months
ended December 31, 2000. Net cash provided by financing activities consisted
primarily of $88.3 million of net proceeds from the common stock offering
completed in the first quarter plus $1.0 million from the proceeds of stock
option exercises less $37.2 million of net repayments on the revolving line of
credit.
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, 2001 will consist primarily of additional computer
hardware and a fully integrated pharmacy and reimbursement software system to
meet the needs of our growth. We expect the cost of our capital expenditures in
fiscal year 2001 to be approximately $5.5 million, exclusive of any acquisitions
of businesses, and expect to fund these expenditures through existing cash on
hand, cash provided by operating activities and/or borrowings under our
revolving credit agreement.
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 provided by operations. All
outstanding principal and interest on loans made under the credit agreement is
due and payable on December 1, 2001. We are currently in discussions with our
banks to extend the credit facility beyond December 1, 2001. The discussions
should be completed in the quarter ending March 31, 2001.
Interest on loans under the credit agreement accrues at a variable rate index
based on the prime rate or the London Inter Bank Offered Rate for one, two,
three or six months (as selected by us), plus 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. As of December 31, 2000,
there were no borrowings outstanding under the line of credit.
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 operating and financial covenants, including
requirements to maintain a certain debt to equity ratio and minimum leverage and
debt service 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 mergers, acquisitions and sales of assets,
limitations on investments, prohibitions on payment of dividends and stock
repurchases, and limitations on 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 have used interest rate swap agreements to manage our interest rate exposure
under the credit agreement. We had effectively converted, for the period through
October 31, 2001, $25.0 million of floating-rate borrowings to fixed rate
borrowings. We had secured a 5.5% fixed interest rate (exclusive of the margin
rate) using this interest rate swap agreement. On August 21, 2000, in
conjunction with the repayment of the outstanding principal balance of our
revolving line of credit, we surrendered our swap agreement and received
$350,000 in consideration for the early termination of the agreement.
While we anticipate that our cash from operations, along with the short term use
of the revolving credit facility and the net proceeds received from our stock
offering completed in the previous quarter 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 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.
13
RISK FACTORS
You should carefully consider the risks and uncertainties 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 AND THE LOSS OF ANY OF THESE RELATIONSHIPS COULD
SIGNIFICANTLY IMPACT OUR ABILITY TO SUSTAIN OR GROW OUR REVENUES.
We derive a substantial majority of our revenue and profitability from
our relationships with Biogen, Genzyme and Genentech. The table below shows the
concentration of our revenue derived from these relationships as a percentage of
revenue for the periods indicated:
SIX MONTHS FISCAL YEAR ENDED
ENDED ----------------------------------------------
DECEMBER 31, 2000 JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 1998
----------------- ------------- ------------- -------------
Biogen, Genzyme,
and Genentech 68% 71% 72% 75%
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
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.
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 drugs that we
currently sell are prescribed for Multiple Sclerosis, Gaucher Disease,
Hemophilia and Autoimmune Disorders, Growth Hormone-Related Disorders, Crohn's
Disease, and 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 operation.
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;
14
- 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 revisions to how the average wholesale price (or AWP) is
determined will result in reduced prices and profit margins for some drugs that
we handle. Many government payors, including Medicare and Medicaid, pay us
directly or indirectly at the drug's AWP or at a percentage off 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 a private
company, First DataBank, Inc. 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.
As reported in the Wall Street Journal, there are also several whistleblower
lawsuits pending against various drug manufacturers. These government
investigations and lawsuits involve allegations that manufacturers reported
artificially inflated AWP prices of various drugs to First DataBank. Bayer
Corporation, one of the Company's suppliers of clotting factor, recently agreed
to pay $14 million in a settlement with the government regarding these charges.
Bayer also entered into a 5 year corporate integrity agreement with the
government, in which Bayer agreed to provide average selling prices of its drugs
to the government. In February 2000, First DataBank published a Market Price
Survey of 437 drugs. The First DataBank Survey significantly reduces
reimbursement to us for a number of the clotting factor and IVIG products that
we sell.
A number of state Medicaid agencies now pay us for clotting factor at
the prices shown on the Market Price Survey or at a percentage discount off
those prices. Other states have not changed their pricing structure or have
changed back to their pre-Market Price Survey reimbursement rates. The Health
Care Financing Administration (or HCFA) had also announced that effective
October 1, 2000 Medicare intermediaries should calculate the amount that they
pay for certain drugs by using the lower prices on the First DataBank Market
Price Survey. However, the proposal to include clotting factor in the lower
Medicare pricing has been withdrawn. Instead, HCFA will seek legislation that
would establish payments to cover the administrative costs of suppliers of
clotting factor as a supplement to lower AWP pricing for factor.
We estimate that reimbursement by Medicare and state Medicaid agencies
currently make up approximately 1% and 5%, respectively, of our gross patient
service revenues from drugs we handle that are covered by the Market Price
Survey. We have seen an overall reduction in pricing and margins for clotting
factor that we sell. However, we cannot predict the eventual results of the
government investigations and the changes made 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 ANY OF OUR RELATIONSHIPS WITH MEDICAL CENTERS ARE DISRUPTED OR CANCELLED, OUR
BUSINESS COULD BE HARMED.
We have significant relationships with five medical centers that
provide services primarily related to hemophilia, growth hormone-related
disorders and respiratory syncytial virus. For the fiscal years ended June 30,
1999 and 2000 and the six months ended December 31, 2000, we received
approximately 23%, 12% and 4%, respectively, of our earnings before income taxes
and extraordinary item from equity in the net income of unconsolidated joint
ventures associated with these relationships.
As of April 1, 2000, our ownership was increased to 80% in one of our
joint ventures with Children's Home Care, Inc. and the financial results of this
joint venture are now included in our consolidated financial results. This
consolidated joint venture represented approximately 10% of our income before
income taxes for the six months ended December 31, 2000.
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
- 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 FAVORABLY PRICED DRUGS WE HANDLE, OUR
BUSINESS COULD BE HARMED.
We are not eligible to participate directly in the federal pricing
program of the 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
15
Services Administration recently issued a notice that 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.
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 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.
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 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; and
- general economic conditions.
OUR BUSINESS WOULD BE HARMED IF THE BIOPHARMACEUTICAL INDUSTRY CEASES RESEARCH,
DEVELOPMENT AND PRODUCTION OF THE TYPES OF DRUGS THAT ARE COMPATIBLE WITH THE
SERVICES WE PROVIDE.
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.
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 blood-related
products, are collected and processed from human donors. Accordingly, the supply
of these products is highly
16
dependent 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.
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 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 THAT BIOGEN IS INFRINGING ON A PATENT.
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. In
August 2000 the Federal District Court for the District of Massachusetts granted
summary judgment in Biogen's favor ruling that AVONEX(R) does not infringe on a
Berlex patent, and in September 2000 the Court entered a final judgement in
favor of Biogen dismissing the District Court Case. Berlex has appealed this
decision to the U.S. Federal District Court of Appeals.
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. For example, these programs could revise their pricing based on new
methods of calculating the AWP for drugs we handle. We estimate that
approximately 18% of our gross patient service revenues for the fiscal years
ended June 30, 1999 and 2000 and 19% of our gross patient service revenues for
the six months ended December 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.
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, 1999 and 2000 and the six months ended
December 31, 2000 we derived approximately 82%, 82% and 81% respectively of our
gross patient service revenue from non-governmental payors (including self-pay),
which included 6%, 5% and 4%, 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 U.S. Healthcare, Inc.(R)
as one of three providers of injectable medications. 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, for example, our relationship with Aetna (which is
terminable on 90 days notice), 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 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.
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
17
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.
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., 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 December 31, 2000, we had goodwill, net
of accumulated amortization, of approximately $68.2 million, or 26% of total
assets and 39% 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 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. 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 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 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 and 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. 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. If we are unable to
maintain our licenses or if 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.
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.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to the impact of financial market risk is currently not
significant. Our primary financial market risk exposure consists of interest
rate risk related to interest income from our short term investments in money
market and high quality short term debt securities with maturities of twelve
months or less that we intend to hold to maturity. We have invested and expect
to continue to invest a substantial portion of our excess cash in such
securities. Generally, if the overall average return on such securities had
decreased 10% from the average return during the six months and quarter ended
December 31, 2000, then our interest income would have decreased, and pre-tax
income would have decreased approximately $170,000 and $91,000 respectively for
those periods. This amount was determined by considering the impact of a
hypothetical change in interest rates on our interest income. Actual changes in
rates may differ from the hypothetical assumptions used in computing this
exposure.
In prior periods, we have used derivative financial instruments to manage our
exposure to rising interest rates on our variable-rate debt, primarily by
entering into variable-to-fixed interest rate swap agreements. Since we
currently do not have an outstanding balance on our revolving line of credit nor
any outstanding interest rate swap agreements, we do not have an exposure to
financial market risk associated with our revolving line of credit or any
derivative financial instruments.
20
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Company held its annual meeting of stockholders on November 16,
2000 at its offices in Memphis, TN. Stockholders holding 73.8% of the issued and
outstanding shares of the Company's Common Stock were either present in person
or were represented by proxy.
(c) The following matters were voted upon at the meeting:
1. Proposal to elect Kyle J. Callahan and Dick R. Gourley to serve as
Class II directors until the expiration of their term in 2003 or until
their successors are elected and qualified.
VOTED FOR: 12,278,410 VOTED AGAINST: 187,430
2. Proposal to ratify the selection of Ernst & Young LLP as independent
public accountants to audit the Company's financial statements for the
fiscal year ended June 30, 2001.
ABSTENTIONS AND
VOTED FOR: 12,464,828 VOTED AGAINST: 412 BROKER NON-VOTES: 600
3. Proposal to approve an amendment to the Company's Amended and Restated
Certificate of Incorporation which increases the number of authorized
shares of the Company's Common Stock, $.01 par value, from 30,000,000
to 50,000,000.
ABSTENTIONS AND
VOTED FOR: 11,564,283 VOTED AGAINST: 848,990 BROKER NON-VOTES: 52,567
4. Proposal to approve an amendment to the Company's Amended and Restated
Certificate of Incorporation which eliminates the Company's Non-Voting
Common Stock, $.01 par value.
ABSTENTIONS AND
VOTED FOR: 11,985,352 VOTED AGAINST: 427,525 BROKER NON-VOTES: 52,963
5. Proposal to approve an amendment to the Company's Amended and Restated
Certificate of Incorporation which eliminates the Company's Series A
Cumulative Preferred Stock.
ABSTENTIONS AND
VOTED FOR: 10,842,214 VOTED AGAINST: 427,498 BROKER NON-VOTES: 1,196,131
6. Proposal to approve an amendment to the Accredo Health, Incorporated
1999 Long-Term Incentive Plan to increase the number of shares
available for awards under the Plan to 2,250,000.
ABSTENTIONS AND
VOTED FOR: 3,251,453 VOTED AGAINST: 7,936,901 BROKER NON-VOTES: 1,277,486
ITEM 5. OTHER INFORMATION.
On January 29, 2001, the Company announced a three-for-two stock split
in the form of a 50% stock dividend for shareholders of record on February 9,
2001. Shareholders will receive one additional share of common stock on February
23, 2001 for every two shares held on the record date. The Company has computed
earnings per share for the six-month and three-month periods presented in this
Form 10-Q on a post-split basis.
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 3.1 Certificate of Amendment of the Certificate of Incorporation of Accredo Health, Incorporated
Exhibit 10.1 Distribution Agreement, dated October 3, 2000, between MedImmune, Incorporated and Nova
Factor, Inc (The Company has requested confidential treatment with respect to certain
portions of this Exhibit.)
Exhibit 10.2 Non-Qualified Stock Option Agreement of Patrick J. Welsh dated November 1, 2000
Exhibit 10.3 Non-Qualified Stock Option Agreement of Kevin L. Roberg dated November 1, 2000
Exhibit 10.4 Non-Qualified Stock Option Agreement of Kenneth J. Melkus dated November 1, 2000
Exhibit 10.5 Non-Qualified Stock Option Agreement of Kenneth R. Masterson dated November 1, 2000
Exhibit 10.6 Non-Qualified Stock Option Agreement of Dick R. Gourley dated November 1, 2000
Exhibit 10.7 Non-Qualified Stock Option Agreement of Dick R. Gourley dated November 16, 2000
Exhibit 10.8 Incentive Stock Option Agreement of David D. Stevens dated November 1, 2000
Exhibit 10.9 Incentive Stock Option Agreement of John R. Grow dated November 1, 2000
Exhibit 10.10 Incentive Stock Option Agreement of Joel R. Kimbrough dated November 1, 2000
Exhibit 10.11 Incentive Stock Option Agreement of Thomas W. Bell, Jr. dated November 1, 2000
Exhibit 10.12 Incentive Stock Option Agreement of Kyle J. Callahan dated November 1, 2000
Exhibit 10.13 Amendment Number One to Employment Agreement effective as of September 1, 2000 between
Accredo Health, Incorporated and David D. Stevens
Exhibit 10.14 Amendment Number One to Employment Agreement effective as of September 1, 2000 between
Accredo Health, Incorporated and John R. Grow
Exhibit 10.15 Amendment Number One to Employment Agreement effective as of September 1, 2000 between
Accredo Health, Incorporated and Joel R. Kimbrough
Exhibit 10.16 Amendment Number One to Employment Agreement effective as of September 1, 2000 between
Accredo Health, Incorporated and Kyle J. Callahan
Exhibit 10.17 Amendment Number One to Employment Agreement effective as of September 1, 2000 between
Accredo Health, Incorporated and Thomas W. Bell, Jr.
(b) Reports on Form 8-K
On October 30, 2000, we filed a Current Report on Form 8-K to disclose
supplemental information, in accordance with Regulation FD, that was discussed
during our quarterly earnings conference call held on October 30, 2000 and that
may be displayed as slides at future investor conferences.
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.
February 14, 2001 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
- ------- -----------------------
3.1 Certificate of Amendment of the Certificate of Incorporation of Accredo
Health, Incorporated
10.1 Distribution Agreement, dated October 3, 2000, between MedImmune,
Incorporated and Nova Factor, Inc (The Company has requested
confidential treatment with respect to certain portions of this
Exhibit.)
10.2 Non-Qualified Stock Option Agreement of Patrick J. Welsh dated November
1, 2000
10.3 Non-Qualified Stock Option Agreement of Kevin L. Roberg dated November
1, 2000
10.4 Non-Qualified Stock Option Agreement of Kenneth J. Melkus dated
November 1, 2000
10.5 Non-Qualified Stock Option Agreement of Kenneth R. Masterson dated
November 1, 2000
10.6 Non-Qualified Stock Option Agreement of Dick R. Gourley dated November
1, 2000
10.7 Non-Qualified Stock Option Agreement of Dick R. Gourley dated November
16, 2000
10.8 Incentive Stock Option Agreement of David D. Stevens dated November 1,
2000
10.9 Incentive Stock Option Agreement of John R. Grow dated November 1, 2000
10.10 Incentive Stock Option Agreement of Joel R. Kimbrough dated November 1,
2000
10.11 Incentive Stock Option Agreement of Thomas W. Bell, Jr. dated November
1, 2000
10.12 Incentive Stock Option Agreement of Kyle J. Callahan dated November 1,
2000
10.13 Amendment Number One to Employment Agreement effective as of September
1, 2000 between Accredo Health, Incorporated and David D. Stevens
10.14 Amendment Number One to Employment Agreement effective as of September
1, 2000 between Accredo Health, Incorporated and John R. Grow
10.15 Amendment Number One to Employment Agreement effective as of September
1, 2000 between Accredo Health, Incorporated and Joel R. Kimbrough
10.16 Amendment Number One to Employment Agreement effective as of September
1, 2000 between Accredo Health, Incorporated and Kyle J. Callahan
10.17 Amendment Number One to Employment Agreement effective as of September
1, 2000 between Accredo Health, Incorporated and Thomas W. Bell, Jr.