1
EXHIBIT 99.3
RISK FACTORS
Before investing in our securities, you should carefully consider the risks
described below in addition to the other information discussed in this offering
memorandum (including the documents incorporated by reference). Additional risks
and uncertainties not currently known to us or that we currently consider to be
immaterial may also materially and adversely affect our business operations. If
any of the following risks actually occur, we could be materially adversely
affected. In such case, you may lose all or part of your investment.
RISK RELATING TO OUR BUSINESS
THIRD PARTY PAYORS AND GOVERNMENT-SPONSORED PROGRAMS MAY REDUCE PAYMENTS TO US.
Of our total revenues, 73% depend on reimbursement from third-party payors,
such as managed care companies and government-sponsored health insurance
programs. In the first quarter of 2001, 47% of our total revenues were derived
from nongovernmental third-party payors (including employers), 13% were derived
from domestic governmental payors and 13% were derived from foreign governmental
healthcare systems.
Third-party and governmental payors exercise significant control over
patient access and increasingly use their enhanced bargaining power to secure
discounted rates and other concessions from providers. This trend, as well as
other changes in reimbursement rates, policies or payment practices by
third-party and governmental payors (whether initiated by the payor or
legislatively mandated) could have an adverse impact on our disease management
businesses.
Our sales and profitability are affected by the efforts of all payors to
contain or reduce the cost of healthcare by lowering reimbursement rates and
limiting the scope of covered services. Any changes that lower reimbursement
levels under Medicare, Medicaid or private pay programs, including managed care
contracts, could adversely affect us. Furthermore, other changes in these
reimbursement programs or in related regulations could adversely affect us.
These changes may include modifications in the timing or processing of payments
and more stringent reimbursement procedures. Any failure to comply with Medicare
or Medicaid reimbursement procedures could result in delays in, or loss of,
reimbursement and other sanctions, including fines and exclusion from
participation in the programs.
GOVERNMENT REGULATION MAY ADVERSELY AFFECT OUR BUSINESS.
There has been a trend in recent years both in the United States and
outside of the United States toward more stringent regulation and enforcement of
requirements applicable to healthcare providers and medical device
manufacturers. The continuing trend of more stringent regulatory oversight in
healthcare, enforcement activities and product clearance for medical devices has
caused healthcare providers and manufacturers to experience more uncertainty,
greater risk, higher expenses and longer approval cycles.
In the United States, regulation of the healthcare industry is particularly
pervasive. Because nurses from our Women's Health segment occasionally make home
visits to conduct an assessment of a patient or educate a patient on the use of
equipment, many states require us to be licensed as a nursing or a home health
agency and to have medical waste disposal permits. Some states have established
Certificate of Need ("CON") programs regulating the establishment or expansion
of our operations. In addition, the operations of our diabetes disease
management businesses require us to be licensed as a pharmacy in several states.
Moreover, some of our employees are subject to state laws and regulations
regarding the ethics and professional practice of pharmacy and nursing. We also
may be required to obtain certification to participate in governmental payment
programs, such as Medicare and Medicaid. The failure to obtain, renew or
maintain any of the required licenses, permits, CONs or certifications could
adversely affect our businesses.
We are also subject to federal and state laws that regulate and, in some
cases, prohibit certain direct and indirect payments between healthcare
providers. These laws prohibit payments intended to induce or encourage the
referral of patients to, or the recommendation of, a particular provider of
items or services.
1
2
Violation of these laws can result in the loss of licenses, civil and criminal
penalties and exclusion from Medicare, Medicaid and other federal healthcare
programs.
Moreover, many of the medical products we use in the provision of our
services are classified as medical devices under the federal Food, Drug and
Cosmetic Act (the "FDC Act") and are subject to regulation by the United States
Food and Drug Administration ("FDA"). Several recent FDA actions with respect to
home uterine activity monitors may affect our home uterine activity monitoring
business. Currently, we have exclusive rights to use and purchase the only
uterine activity monitor that has received pre-market approval from the FDA for
home use on patients with a history of previous preterm birth. In the past, our
rights to the monitors have been a material competitive advantage in marketing
our uterine activity monitoring services. However, in 2001, the FDA reclassified
the monitors from Class III to Class II devices, which will make substantially
equivalent devices available to our competitors without their having to receive
pre-market approval. As part of the reclassification, the FDA has imposed
special controls on the use of such devices. It is not clear what impact these
developments will have on our home uterine activity monitoring business.
In addition, some of our services involve the use of drugs that are
regulated by the FDA under the FDC Act. Although the medical devices and drugs
we use are labeled for specific indications and cannot be promoted for any other
indications, physicians may and do prescribe them for indications that have not
been approved by the FDA. Any adverse publicity or increased FDA scrutiny
surrounding off-label use of any drugs and devices utilized in our business may
have an adverse effect on our business.
Numerous federal and state laws and regulations also govern the collection,
dissemination, use and confidentiality of patient-identifiable health
information, including the federal Health Insurance Portability and
Accountability Act of 1996, referred to as HIPAA, and related rules. As part of
our business, we collect and maintain patient-identifiable health information. A
violation of HIPAA could result in criminal and civil sanctions. There can be no
assurance that our inability to comply with existing or new laws or regulations
or to incur the costs necessary to comply with these laws or regulations related
to patient health information will not have a material adverse effect on us.
As a result of our desire to assure compliance with the increasingly
complex regulatory environment for the healthcare industry, we maintain a
company-wide compliance program. We believe our operations as currently
conducted are in material compliance with existing applicable laws and
regulations. However, there can be no assurance that we will not become the
subject of a regulatory or other investigation or proceeding or that our
interpretations of applicable laws and regulations will not be challenged. The
defense of any such challenge could result in substantial cost to us and
diversion of management's time and attention. Thus, any such challenge could
have a material adverse effect on our business, regardless of whether it
ultimately is sustained. Moreover, we believe that our businesses will continue
to be subject to increasing regulation, the scope and effect of which we cannot
predict.
THE DEVELOPMENT OF IMPROVED TECHNOLOGIES FOR GLUCOSE MONITORING THAT ELIMINATE
THE NEED FOR CONSUMABLE TESTING SUPPLIES MAY ADVERSELY AFFECT OUR BUSINESS.
Most of the revenues from our fulfillment services business are from the
sale of consumable testing supplies used to draw and test small quantities of
blood for the purpose of measuring and monitoring blood glucose levels. Numerous
research and development efforts are underway to develop more convenient and
less intrusive glucose measurement techniques. The commercialization and
widespread acceptance of new technologies that eliminate or reduce the need for
consumable testing supplies could negatively affect our fulfillment services
business.
THE LOSS OF CERTAIN OF OUR CUSTOMERS WOULD ADVERSELY AFFECT OUR BUSINESS.
In the first quarter of 2001, approximately 22% of our total revenues were
attributable to sales to three large commercial customers in our diabetes
management and fulfillment segment. We have multiple contracts covering various
products with these customers that have expirations ranging from six months to
two years. The loss of any one of these customers may have a material adverse
effect on our results of
2
3
operations. In addition, 13% of our revenues are derived from domestic
governmental payors, primarily in the disease management diabetes segment, and
another 13% of our revenues are derived from foreign governmental payors. Any
change in coverage by governmental payors or in our status as a participating
provider in these government programs may have a material adverse effect on our
business.
WE ARE HIGHLY DEPENDENT ON AN EXCLUSIVE SUPPLY AGREEMENT.
Our microsampling products business is highly dependent on its exclusive
supply relationship with Nipro Corporation, from which it purchases virtually
all of its products on terms we believe to be favorable. Under the agreement,
some terms, such as pricing, are negotiated annually while others, such as our
exclusivity arrangement, are renewable after longer periods. The exclusivity
provisions of our agreement with Nipro will expire in November 2002. While Nipro
has been a supplier to our microsampling business, including prior to our
acquisition of that business in 1999, for more than 15 years, there can be no
assurance that we will be able to negotiate a renewal of our exclusivity
arrangement on favorable terms. Termination of the exclusive supply arrangement
or failure to continue it on favorable terms would have a material adverse
effect on our microsampling component, as would any interruption in the supply
of products from Nipro, whatever the cause.
SOME ASPECTS OF OUR DISEASE MANAGEMENT BUSINESS ARE RELATIVELY UNPROVEN.
Our domestic diabetes disease management program identifies, classifies and
manages the care of patients with diabetes. This particular aspect of our
disease management services is a relatively new component of our business and of
the overall healthcare industry. The success of this component of our business
plan depends on a number of factors. These factors include:
- our ability to differentiate our products and service offerings from
those of our competitors;
- the extent and timing of the acceptance of our services as a replacement
for, or supplement to, traditional managed care offerings;
- our ability to implement new and additional services beneficial to
payors; and
- our ability to effect cost savings for payors through the use of our
program.
Since this aspect of our disease management business is new and unproven,
we may not be able to anticipate and adapt to a developing market. Moreover, we
cannot accurately predict the future growth rate or the ultimate size of the
domestic diabetes disease management market.
OUR DATA MANAGEMENT AND INFORMATION TECHNOLOGY SYSTEMS ARE CRITICAL TO
MAINTAINING AND GROWING OUR BUSINESS.
Our services are dependent on the effective use of information technology.
Although we believe that our TRAX(TM) system provides us with a competitive
advantage in our industry, we are exposed to technology failure and obsolescence
risk. In addition, data acquisition, data quality control and data analysis,
which are a cornerstone of our disease management programs, are intense and
complex processes subject to error. Untimely, incomplete or inaccurate data or
flawed analysis of such data could have a material adverse impact on our
business and revenues.
OUR OPERATING RESULTS HAVE FLUCTUATED IN THE PAST AND ARE LIKELY TO CONTINUE TO
FLUCTUATE SIGNIFICANTLY.
Our operating results have varied in the past and may fluctuate
significantly in the future due to a variety of factors, many of which are
outside of our control. These factors include:
- the impact of substantial divestitures and acquisitions;
- the loss or addition of customers and referral sources;
- changes in the mix of our products and customers;
3
4
- changes in healthcare reimbursement policies and amounts;
- increases in operating expenses;
- increases in selling, general and administrative expenses;
- increased or more effective competition; and
- regulatory changes.
In addition, demand for women's health services historically increases
during the first calendar quarter and decreases during the third and fourth
calendar quarters. The seasonal variability of demand for these services
significantly affects, and we believe will continue to affect, our quarterly
operating results.
In 1999 and 2000, our results of operations were favorably impacted by
significant gains realized on our investment in WebMD Corporation. We have
disposed of much of this investment and do not anticipate realizing similar
gains on our remaining investment in WebMD or on other investments in the
future.
Since mid-2000, we have been making significant investments in an effort to
grow our disease management business. Largely as a result of increased
expenditures associated with these efforts and as contemplated by our public
statements, we expect that our results of operations for the second quarter of
2001 will be less favorable than our results of operations for the comparable
period in 2000. We cannot assure you that our operating results for future
periods will not be similarly less favorable as compared to prior year periods.
THE ACCELERATION OF AMORTIZATION OR WRITE OFF OF OUR INTANGIBLE ASSETS COULD
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
As of March 31, 2001, we had net unamortized intangible assets of
approximately $117 million, which constituted 47% of our total assets. These
intangible assets include goodwill of approximately $114.5 million, which we
amortize over eight to 15 years. We periodically evaluate the rate of
amortization of our intangible assets based on a number of factors, including
the prospects of the acquired companies to which the goodwill relates and
whether changed circumstances indicate that all or a portion of the carrying
value of our intangible assets may no longer be recoverable. Any determination
requiring the significant acceleration of amortization, or the write off of a
significant portion of the unamortized portion, of our intangible assets could
adversely affect our results of operations. In 1998, we recorded an $82.9
million asset impairment charge to write-down goodwill and intangible assets
associated with the merger that resulted in our formation in 1996. There can be
no assurance that we will not be required to take similar charges in the future.
WE OPERATE IN HIGHLY COMPETITIVE BUSINESSES.
The medical industry is characterized by rapidly developing technology and
increased competition. In all of our product and service lines, we compete with
companies, both large and small, located in the United States and abroad.
Competition is strong in all of our lines without regard to the number and size
of the competing companies involved. Some of our competitors and potential
competitors have significantly greater financial, technical and sales resources
than we do and may, in some locations, possess licenses or certificates that
permit them to provide products and services that we cannot currently provide.
We compete on a number of factors, including quality of products and services,
reputation within the medical community, geographical scope and price.
There can be no assurance that we will not encounter increased or more
effective competition in the future which could limit our ability to maintain or
increase our business and adversely affect our operating results.
4
5
FROM TIME TO TIME WE MAY BE SUBJECT TO COSTLY LITIGATION.
Like other participants in the healthcare market, we are subject to
lawsuits alleging negligence, product liability or other similar legal theories,
many of which involve large claims and significant defense costs. Although we
currently maintain liability insurance intended to cover such claims, there can
be no assurance that the coverage limits of such insurance policies will be
adequate or that all such claims will be covered by the insurance. In addition,
these insurance policies must be renewed annually. While we have been able to
obtain liability insurance, such insurance may not be available in the future on
terms acceptable to us, if at all. A successful claim in excess of the insurance
coverage could have a material adverse effect on our results of operations or
financial condition. Claims, regardless of their merit or eventual outcome, also
may have a material adverse effect on our business and reputation.
OUR FOREIGN OPERATIONS ARE SUBJECT TO ADDITIONAL RISKS.
Although the majority of our operations are in the United States, in the
first quarter of 2001 and the years 2000 and 1999, 16% of our revenues were from
sales by our operations outside of the United States. The risks of doing
business in foreign countries include potential adverse changes in the stability
of foreign governments and their diplomatic relations, hostility from local
populations, adverse effects of currency fluctuations and exchange controls,
deterioration of foreign economic conditions and changes in tax laws. Due to the
foregoing risks, any of which, if realized, could have a material adverse effect
on us, we believe that our business activities outside of the United States
involve a higher degree of risk than our domestic activities.
RISKS RELATING TO THIS OFFERING
WE WILL HAVE SUBSTANTIAL OUTSTANDING INDEBTEDNESS FOLLOWING THE SENIOR NOTES
OFFERING.
At March 31, 2001, our total consolidated long-term debt (including current
maturities), after giving effect to the offering of Senior Notes and the
application of the net proceeds from such offering to repay indebtedness as
described in "Use of Proceeds," accounted for approximately 56% of our total
capitalization. In addition, subject to restrictions in the indenture, we may
incur additional indebtedness.
The degree to which we are leveraged could have important consequences to
you, including:
- a substantial portion of our cash flow from operations will be required
to be dedicated to interest and principal payments and may not be
available for operations, working capital, capital expenditures,
expansion, acquisitions or general corporate or other purposes;
- our ability to obtain additional financing in the future may be impaired;
- we may be more highly leveraged than our competitors, which may place us
at a competitive disadvantage;
- our flexibility in planning for, or reacting to, changes in our business
and industry may be limited; and
- our degree of leverage may make us more vulnerable in the event of a
downturn in our business or in our industry or the economy in general.
In addition, the indenture imposes significant operating and financial
restrictions on us. These restrictions limit our ability to, among other things,
incur additional indebtedness, make investments, sell assets, pay dividends,
engage in business activities or enter into certain transactions.
Our ability to make payments on and to refinance our debt, including the
notes, will depend on our ability to generate cash in the future. This, to a
certain extent, is subject to general economic, business, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
We cannot assure you that our business will generate sufficient cash flow
from operations or that future borrowings will be available to us under credit
facilities in an amount sufficient to enable us to pay
5
6
our debt, including the notes, or to fund our other liquidity needs. We may need
to refinance all or a portion of our debt, including the notes, on or before
maturity, and such refinancing may be prohibited or costly under the terms of
the notes. We cannot assure you that we would be able to refinance any of our
debt, including any credit facilities and the notes, on commercially reasonable
terms or at all.
WE PLAN TO USE A SIGNIFICANT PORTION OF THE PROCEEDS TO REPURCHASE OUTSTANDING
SECURITIES.
We plan to use approximately $41.1 million of the proceeds of the Senior
Notes this offering to repurchase certain of our outstanding securities. These
securities, which consist of Series A convertible preferred stock, Series B
redeemable preferred stock, warrants to purchase common stock and subordinated
notes, were issued in January 1999 in connection with an acquisition.
Accordingly, a significant portion of the proceeds of this offering will not be
available for use in our business.
WE PROPOSE TO ENGAGE IN CERTAIN REFINANCING TRANSACTIONS.
We are in the process of replacing our existing bank credit facility. We
have received a commitment for a new credit facility to replace this existing
credit facility. We cannot guarantee that this new credit facility will be in
place upon the closing of this offering. We cannot assure you that the new
credit facility, if entered into, will not contain terms less favorable to us
than those in our existing credit facility. We intend to use the proceeds from
the sale of the notes to repay the amounts currently outstanding under our
existing credit facility, which would terminate immediately thereafter.
While we intend to use the proceeds from this offering to repay outstanding
indebtedness under our existing credit facility, we may be able to reborrow much
of this amount in the future under our proposed credit facility if entered into.
We may have substantial flexibility and broad discretion with respect to these
borrowings and you will be relying on the judgment of our management regarding
the application of proceeds from these borrowings.
6