SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 000-25769
ACCREDO HEALTH, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1642871
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1640 CENTURY CENTER PKWY, SUITE 101, MEMPHIS, TN 38134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(901) 385-3688
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT April 30, 2002
COMMON STOCK, $0.01 PAR VALUE ... 26,223,714
----------
TOTAL COMMON STOCK .............. 26,223,714
==========
ACCREDO HEALTH, INCORPORATED
INDEX
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income (unaudited)
For the three months and nine months ended March 31, 2001 and 2002
Condensed Consolidated Balance Sheets June 30, 2001 and March 31, 2002
(unaudited)
Condensed Consolidated Statements of Cash Flows (unaudited)
For the nine months ended March 31, 2001 and 2002
Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Part II - OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Note: Items 1, 2, 3 and 4 of Part II are omitted because they are not
applicable
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(000'S OMITTED, EXCEPT SHARE DATA)
(UNAUDITED)
Nine Months Ended March 31, Three Months Ended March 31,
----------------------------- -----------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net patient revenue $ 451,408 $ 325,814 $ 173,563 $ 120,406
Other revenue 12,478 11,075 4,362 3,551
Equity in net income of joint ventures 1,445 838 572 323
--------- --------- --------- ---------
Total revenues 465,331 337,727 178,497 124,280
Cost of sales 391,766 289,320 148,995 106,861
--------- --------- --------- ---------
Gross profit 73,565 48,407 29,502 17,419
General & administrative 31,154 21,861 11,851 7,650
Bad debts 3,826 4,729 1,770 1,535
Depreciation and amortization 2,369 3,061 907 1,021
--------- --------- --------- ---------
Income from operations 36,216 18,756 14,974 7,213
Interest income, net 838 2,126 38 870
Minority interest in consolidated subsidiary (966) (476) (333) (170)
--------- --------- --------- ---------
Income before income taxes 36,088 20,406 14,679 7,913
Provision for income taxes 14,006 8,086 5,691 3,124
--------- --------- --------- ---------
Net income $ 22,082 $ 12,320 $ 8,988 $ 4,789
========= ========= ========= =========
Cash dividends declared on common stock $ -- $ -- $ -- $ --
========= ========= ========= =========
Earnings per share:
Basic $ 0.85 $ 0.50 $ 0.34 $ 0.19
Diluted $ 0.82 $ 0.48 $ 0.33 $ 0.18
See accompanying notes to condensed consolidated financial statements.
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(000'S OMITTED, EXCEPT SHARE DATA)
(Unaudited)
March 31, June 30,
2002 2001
---------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 1,103 $ 54,520
Marketable securities 1,000 2,000
Patient accounts receivable, less allowance for
doubtful accounts of $12,815 at March 31, 2002
and $10,808 at June 30, 2001 129,179 76,592
Due from affiliates 2,210 2,440
Other accounts receivable 16,013 13,275
Inventories 61,342 30,711
Prepaids and other current assets 702 537
Deferred income taxes 6,028 4,703
-------- --------
Total current assets 217,577 185,138
Property and equipment, net 11,317 8,195
Other assets:
Joint venture investments 4,114 2,809
Goodwill and other intangible assets, net 136,322 93,102
-------- --------
Total assets $369,330 $289,244
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $136,304 $ 88,611
Accrued expenses 9,303 7,168
Income taxes payable 3,227 1,071
-------- --------
Total current liabilities 148,834 96,850
Deferred income taxes 3,481 2,122
Minority interest in consolidated joint venture 1,567 1,102
Stockholders' equity:
Undesignated Preferred Stock, 5,000,000 shares
authorized, no shares issued -- --
Common Stock, $.01 par value; 50,000,000 shares authorized;
26,223,714 and 25,954,232 shares issued and outstanding
at March 31, 2002 and June 30, 2001, respectively 262 259
Additional paid-in capital 165,284 161,091
Retained earnings 49,902 27,820
-------- --------
Total stockholders' equity 215,448 189,170
-------- --------
Total liabilities and stockholders' equity $369,330 $289,244
======== ========
See accompanying notes to condensed consolidated financial statements.
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000'S OMITTED)
(UNAUDITED)
Nine Months Ended
March 31,
2002 2001
-------- --------
OPERATING ACTIVITIES:
Net income $ 22,082 $ 12,320
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,369 3,061
Provision for losses on accounts receivable 3,826 4,729
Deferred income tax benefit (19) (989)
Compensation resulting from stock transactions 139 139
Tax benefit of disqualifying disposition of stock options 2,148 2,506
Minority interest in income of consolidated joint venture 966 476
Changes in operating assets and liabilities:
Patient receivables and other (49,333) (16,969)
Due from affiliates 230 (1,628)
Inventories (25,197) (898)
Prepaids and other current assets (141) 89
Accounts payable and accrued expenses 44,286 8,286
Income taxes payable 2,116 (649)
-------- --------
Net cash provided by operating activities 3,472 10,473
INVESTING ACTIVITIES:
Purchases of marketable securities (6,000) (11,499)
Proceeds from maturities of marketable securities 7,000 10,000
Purchases of property and equipment (4,466) (1,419)
Business acquisitions and joint venture investments (47,467) (520)
Change in joint venture investments, net (1,805) (683)
-------- --------
Net cash used in investing activities (52,738) (4,121)
FINANCING ACTIVITIES:
Decrease in long-term notes payable (6,111) (37,200)
Issuance of common stock 1,960 91,225
Payment of costs related to public offerings -- (583)
-------- --------
Net cash provided by (used in) financing activities (4,151) 53,442
-------- --------
Increase (decrease) in cash and cash equivalents (53,417) 59,794
Cash and cash equivalents at beginning of period 54,520 10,204
-------- --------
Cash and cash equivalents at end of period $ 1,103 $ 69,998
======== ========
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2002
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary to present fairly the condensed consolidated financial
position, results of operations and cash flows of Accredo Health, Incorporated
(the "Company" or "Accredo") have been included. Operating results for the three
and nine-month periods ended March 31, 2002, are not necessarily indicative of
the results that may be expected for the fiscal year ended June 30, 2002.
The balance sheet at June 30, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended June 30, 2001 as amended by Form 10-K/A filed on May 10, 2002.
2. PRIOR PERIOD ACQUISITIONS
The Company acquired all of the outstanding stock of Pharmacare
Resources, Inc. ("Pharmacare") and NCL Management, Inc. in May 2001 and
BioPartners in Care, Inc. ("BioPartners") in December 2001. NCL Management was
merged with Pharmacare in June 2001. The operating results of Pharmacare and
BioPartners are included in the Company's consolidated statement of operations
beginning in May and December 2001, respectively.
Pro forma amounts for the nine months and three months ended March 31,
2002 and 2001, as if these acquisitions had occurred on July 1, 2000, are as
follows:
Nine Months Ended March 31, Three Months Ended March 31,
---------------------------- ----------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Pro forma total revenues $ 483,127 $ 367,429 $ 178,497 $ 135,431
Pro forma net income 22,562 12,157 8,988 5,097
Basic earnings per common share:
Pro forma net income $ 0.87 $ 0.49 $ 0.34 $ 0.20
Diluted earnings per common share:
Pro forma net income $ 0.84 $ 0.47 $ 0.33 $ 0.19
3. PENDING ACQUISITION
On January 2, 2002, the Company announced that it had entered into an
agreement with Gentiva Health Services, Inc. ("Gentiva") to purchase the
specialty pharmaceutical services ("SPS") business of Gentiva for $415,000,000,
subject to adjustment as set forth in the asset purchase agreement. The purchase
price is to be paid in an equal combination of cash and the Company's common
stock, with the stock portion of the purchase price being subject to a price
collar set forth in the asset purchase agreement. The acquisition is expected to
close in the second quarter of 2002 and is contingent upon approval by the
shareholders of each company and approval by the applicable federal regulatory
agencies.
4. STOCKHOLDERS' EQUITY
During the quarter ended March 31, 2002, employees exercised stock
options to acquire 139,690 shares of Accredo common stock at a weighted exercise
price of $3.38 per share.
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except share data) :
Nine Months Ended March 31, Three Months Ended March 31,
------------------------------ ------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Numerator for basic and diluted income per
share to common stockholders:
Net income $ 22,082 $ 12,320 $ 8,988 $ 4,789
=========== =========== =========== ===========
Denominator:
Denominator for basic income per
share to common stockholders -
weighted-average shares 26,075,638 24,700,863 26,174,890 25,662,716
Effect of dilutive stock options 897,378 1,197,028 970,729 1,073,131
=========== =========== =========== ===========
Denominator for diluted income per
share to common stockholders -
adjusted weighted-average shares 26,973,016 25,897,891 27,145,619 26,735,847
=========== =========== =========== ===========
Earnings per common share:
Basic $ 0.85 $ 0.50 $ 0.34 $ 0.19
Diluted $ 0.82 $ 0.48 $ 0.33 $ 0.18
6. GOODWILL AND OTHER INTANGIBLE ASSETS
On July 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. The Company is
providing transitional, pro-forma, disclosure in the table below for net income
and earnings per share for the comparative prior periods as if SFAS No. 142 had
also been adopted in those periods (in thousands, except for earnings-per-share
amounts).
Nine Months Ended March 31, Three Months Ended March 31,
--------------------------- ----------------------------
2002 2001 2002 2001
--------- ---------- ---------- ----------
Reported net income $ 22,082 $ 12,320 $ 8,988 $ 4,789
Add back: Goodwill amortization -- 1,075 -- 359
-------- -------- ------- -------
Adjusted net income $ 22,082 $ 13,395 $ 8,988 $ 5,148
======== ======== ======= =======
Basic earnings per share:
Reported net income $ 0.85 $ 0.50 $ 0.34 $ 0.19
Goodwill amortization -- 0.04 -- 0.01
-------- -------- ------- -------
Adjusted net income $ 0.85 $ 0.54 $ 0.34 $ 0.20
======== ======== ======= =======
Diluted earnings per share:
Reported net income $ 0.82 $ 0.48 $ 0.33 $ 0.18
Goodwill amortization -- 0.04 -- 0.01
-------- -------- ------- -------
Adjusted net income $ 0.82 $ 0.52 $ 0.33 $ 0.19
======== ======== ======= =======
The impact of the adoption of SFAS No. 142 resulted in an increase in net income
for the nine month and three month periods ended March 31,2002 of approximately
$1,320,000 and $440,000, respectively and an increase in diluted earnings per
share of approximately $0.05 and $0.016, respectively.
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 under the
headings "Risk Factors" and "Risk Factors Relating to the Proposed Acquisition",
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 MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
REVENUES
Total revenues increased 44% from $124.3 million to $178.5 million from the
three months ended March 31, 2001 to the three months ended March 31, 2002. Net
patient revenues increased 44% from $120.4 million to $173.6 million from the
three months ended March 31, 2001 to the three months ended March 31, 2002. The
increase in revenues is the result of volume growth in all of our core products
for the treatments of multiple sclerosis, growth hormone disorders, hemophilia
and Gaucher Disease with the addition of new patients and additional sales to
existing patients. We also experienced an increase in our seasonal drug
SYNAGIS(R) for the treatment of Respiratory Synctial Virus as a result of
increased patient volume. Revenues from acquisitions, which consist primarily of
sales of hemophilia factor and intravenous immunoglobulin ("IVIG"), amounted to
$18.4 million of the increase in the three months ended March 31, 2002.
COST OF SALES
Cost of sales increased from $106.9 million to $149.0 million, or 39%, from the
three months ended March 31, 2001 to the three months ended March 31, 2002,
which is commensurate with the increase in revenues discussed above. As a
percentage of revenues, cost of sales decreased from 86.0% to 83.5% from the
three months ended March 31, 2001 to the three months ended March 31, 2002
resulting in gross margins of 14.0% and 16.5% for the three months ended March
31, 2001 and 2002, respectively. Gross margins for the individual products have
remained relatively stable; however, a change in product mix resulted in an
increase in the composite gross
margin in the three months ended March 31, 2002. The primary drivers for the
improvement in gross margins were increased revenues from hemophilia factor and
IVIG, which have lower acquisition costs as a percentage of revenue than most of
the other products we distribute.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $7.7 million to $11.9
million, or 55%, from the three months ended March 31, 2001 to the three months
ended March 31, 2002. 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, the addition of office space
and related furniture and fixtures to support the revenue growth and
acquisitions. General and administrative expenses represented 6.2% and 6.6% of
revenues for the three months ended March 31, 2001 and 2002, respectively.
BAD DEBTS
Bad debts increased from $1,535,000 to $1,770,000 from the three months ended
March 31, 2001 to the three months ended March 31, 2002. As a percentage of
revenues, bad debt expense decreased from 1.2% to 1.0% from the three months
ended March 31, 2001 to the three months ended March 31, 2002. The decrease in
bad debts as a percentage of revenues is primarily due to the increased
percentage of our revenues that was reimbursed by prescription card benefits
versus major medical benefit plans. The majority of the reimbursement provided
by prescription card benefit plans is subject to much lower co-payment and
deductible amounts (typically $10 to $15) resulting in lower bad debt.
DEPRECIATION AND AMORTIZATION
Depreciation expense increased from $367,000 to $592,000 from the three months
ended March 31, 2001 to the three months ended March 31, 2002 as a result of
purchases of property and equipment associated with our revenue growth and
expansion of our leasehold facility improvements. Amortization expense decreased
from $654,000 to $315,000 from the three months ended March 31, 2001 to the
three months ended March 31, 2002. The decrease is due to the adoption of SFAS
142, Goodwill and Other Intangible Assets during the first quarter of fiscal
year 2002. The application of the non-amortization of goodwill provisions of the
pronouncement resulted in a reduction in amortization expense of approximately
$612,000 in the three months ended March 31, 2002.
INTEREST INCOME, NET
Interest income, net, decreased from $870,000 to $38,000 from the three months
ended March 31, 2001 to the three months ended March 31, 2002. The decrease is
due to a decrease in the average amount of cash invested during the quarter
primarily as a result of cash used for acquisitions and a decrease in interest
rates earned on investments.
INCOME TAX EXPENSE
The effective tax rate was 39.5% and 38.8% for the three months ended March 31,
2001 and 2002, respectively. The decrease in the effective tax rate is primarily
due to the adoption of the non-amortization provisions of SFAS 142 discussed
above. The difference between the recognized effective tax rate and the
statutory rate is primarily attributed to state income taxes.
NINE MONTHS ENDED MARCH 31, 2002 COMPARED TO NINE MONTHS ENDED MARCH 31, 2001
REVENUES
Total revenues increased 38% from $337.7 million to $465.3 million from the nine
months ended March 31, 2001 to the nine months ended March 31, 2002. Net patient
revenues increased 39% from $325.8 million to $451.4 million from the nine
months ended March 31, 2001 to the nine months ended March 31, 2002. The
increase in revenues is the result of volume growth in all of our core products
for the treatments of multiple sclerosis, growth hormone disorders, hemophilia
and Gaucher Disease with the addition of new patients and additional sales to
existing patients. We also experienced an increase in our seasonal drug
SYNAGIS(R) for the treatment of Respiratory Synctial Virus as a result of
increased patient volume. Revenues from acquisitions, which consist primarily of
sales of hemophilia factor and IVIG, amounted to $32.1 million of the increase
in the nine months ended March 31, 2002.
COST OF SALES
Cost of sales increased from $289.3 million to $391.8 million, or 35%, from the
nine months ended March 31, 2001 to the nine months ended March 31, 2002, which
is commensurate with the increase in revenues discussed above. As a percentage
of revenues, cost of sales decreased from 85.7% to 84.2% from the nine months
ended March 31, 2001 to the nine months ended March 31, 2002 resulting in gross
margins of 14.3% and 15.8% for the nine months ended March 31, 2001 and 2002,
respectively. Gross margins for the individual products have remained relatively
stable; however, a change in product mix resulted in an increase in the
composite gross margin in the nine months ended March 31, 2002. The primary
drivers for the improvement in gross margins were increased revenues from
hemophilia factor and IVIG, which have lower acquisition costs as a percentage
of revenue than most of the other products we distribute.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $21.9 million to $31.2
million, or 42%, from the nine months ended March 31, 2001 to the nine months
ended March 31, 2002. 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, the addition of office space
and related furniture and fixtures to support the revenue growth and
acquisitions. General and administrative expenses represented 6.5% and 6.7% of
revenues for the nine months ended March 31, 2001 and 2002, respectively.
BAD DEBTS
Bad debts decreased from $4,729,000 to $3,826,000 from the nine months ended
March 31, 2001 to the nine months ended March 31, 2002. As a percentage of
revenues, bad debt expense decreased from 1.4% to .8% from the nine months ended
March 31, 2001 to the nine months ended March 31, 2002. The decrease in bad
debts as a percentage of revenues is primarily due to the increased percentage
of our revenues that was reimbursed by prescription card benefits versus major
medical benefit plans. The majority of the reimbursement provided by
prescription card benefit plans is subject to much lower co-payment and
deductible amounts (typically $10 to $15) resulting in lower bad debt.
DEPRECIATION AND AMORTIZATION
Depreciation expense increased from $1,115,000 to $1,552,000 from the nine
months ended March 31, 2001 to the nine months ended March 31, 2002 as a result
of purchases of property and equipment associated with our revenue growth and
expansion of our leasehold facility improvements. Amortization expense decreased
from $1,946,000 to $817,000 from the nine months ended March 31, 2001 to the
nine months ended March 31, 2002. The decrease is due to the adoption of SFAS
142, Goodwill and Other Intangible Assets during the first quarter of fiscal
year 2002. The application of the non-amortization of goodwill provisions of the
pronouncement resulted in a reduction in amortization expense of approximately
$1,836,000 in the nine months ended March 31, 2002.
INTEREST INCOME, NET
Interest income, net, decreased from $2,126,000 to $838,000 from the nine months
ended March 31, 2001 to the nine months ended March 31, 2002. The decrease is
due to a decrease in the average amount of cash invested during the period as a
result of cash used for acquisitions and a decrease in interest rates earned on
investments.
INCOME TAX EXPENSE
The effective tax rate was 39.6% and 38.8% for the nine months ended March 31,
2001 and 2002, respectively. The decrease in the effective tax rate is primarily
due to the adoption of the non-amortization provisions of SFAS 142 discussed
above. The difference between the recognized effective tax rate and the
statutory rate is primarily attributed to state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002, our working capital was $68.7 million, cash and cash
equivalents were $1.1 million, marketable securities were $1.0 million and the
current ratio was 1.5 to 1.0.
Our net cash provided by operations was $3.5 million for the nine months ended
March 31, 2002. During the nine months ended March 31, 2002, accounts receivable
increased $45.6 million, inventories increased $25.2 million and accounts
payable, accrued expenses and income taxes increased $46.4 million. These
increases are due primarily to our revenue growth and the timing of the
collection of receivables, inventory purchases and payments of accounts payable.
Net cash used in investing activities was $52.7 million for the nine months
ended March 31, 2002. Cash used in investing activities consisted of $37.5
million for the acquisition of BioPartners in Care, Inc., $6.3 million in earn
out payments related to the acquisition of Pharmacare Resources, Inc., $.4
million in earn out payments related to Childrens' Hemophilia Services (an 80%
owned joint venture), $3.2 million for costs related to the planned acquisition
of the Specialty Pharmaceutical Services division of Gentiva Health Services,
Inc., $4.5 million for purchases of property and equipment, $1.8 million of
undistributed earnings from our joint ventures and less $1.0 million for net
sales of marketable securities, which have an initial maturity date of greater
than 90 days.
Net cash used in financing activities was $4.2 million for the nine months ended
March 31, 2002. Net cash used in financing activities consisted of $6.1 million
of repayments of debt assumed in the acquisition of BioPartners in Care, Inc.
less $1.9 million from the proceeds of stock option exercises.
Historically, we have funded our operations and continued internal growth
through cash provided by operations. We anticipate that our capital expenditures
for the fiscal years ending June 30, 2002 and 2003 will consist primarily of
additional computer hardware, a fully integrated pharmacy and reimbursement
software system and costs to build out and furnish additional space needed to
meet the needs of our growth. We expect the cost of our capital expenditures in
fiscal years 2002 and 2003 to be approximately $7.5 million and $10.0 million,
respectively, exclusive of any acquisitions of businesses. We expect to fund
these expenditures through cash provided by operating activities and/or
borrowings under a revolving credit facility with our bank. In addition, in
connection with an acquisition made in December 2001, we may be obligated to
make up to $16 million in earn-out payments during the next twelve months.
We have a revolving credit facility under the terms of our existing credit
agreement. The agreement has an initial commitment of $30 million. We may
increase the commitment up to $60 million upon (i) 15 days written notice, (ii)
the payment of an additional commitment fee and (iii) delivery of a current
compliance certificate demonstrating no event of default exists and will not
exist following the increase in the commitment. All outstanding principal and
interest on loans made under the credit agreement is due and payable on December
1, 2003. There were no borrowings under the credit agreement as of March 31,
2002.
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.
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, uses of proceeds, restrictions on subsidiaries,
limitations on indebtedness, limitations on capital expenditures, limitations on
mergers, acquisitions and sales of assets, limitations on investments,
prohibitions on payment of dividends and stock repurchases, limitations on debt
payments (including payment of subordinated indebtedness) and other
distributions. The credit agreement also contains customary events of default,
including events relating to changes in control of our company.
On January 2, 2002, we agreed to acquire substantially all of the assets of
Gentiva Health Services, Inc.'s specialty pharmaceutical services business
(SPS). The terms of the asset purchase agreement provide that the purchase price
to be paid to Gentiva is approximately $415 million, which is subject to
adjustment as described in the agreement. The purchase price is payable 50% in
cash and 50% in Accredo common stock. The number of shares of Accredo common
stock to be issued will be equal to one-half of the purchase price divided by
the average closing price for Accredo common stock for the 20 trading days
ending on the second business day prior to the closing of the acquisition.
However,
- - if this average is greater than $41.00 per share, the number of shares
to be issued will be equal to one-half of the purchase price divided by
$41.00, or 5,060,976 (assuming no adjustment to the purchase price); or
- - if this average is less than $31.00 per share, the number of shares to
be issued will be equal to one-half of the purchase price divided by
$31.00, or 6,693,548 (assuming no adjustment to the purchase price).
We are exploring alternatives regarding financing and raising capital for the
cash portion of the purchase price, including borrowing funds or issuing
additional securities. We may use a $275 million credit facility to finance the
cash portion of the purchase price and to provide for working capital needs and
other general corporate purposes. This credit facility would replace the
existing revolving credit facility.
While we anticipate that our cash from operations, along with the short-term use
of the existing revolving credit facility or the new credit facility described
above will be sufficient to meet our internal operating requirements and growth
plans for at least the next 12 months (assuming that cash collections and DSO
rates from the SPS business, if acquired, remain at historical levels for that
business), 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.
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. [You should also review the risk factors specifically related to our
proposed acquisition of the specialty pharmaceutical services business of
Gentiva Health Services, Inc., which are included in Item 5 of this Form 10-Q.]
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, MedImmune and Genentech. The table below
shows the concentration of our revenue derived from these relationships as a
percentage of revenue for the periods indicated:
NINE MONTHS FISCAL YEAR ENDED
ENDED -------------------------------------------------
March 31, 2002 JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 1999
-------------- ------------- ------------- -------------
Biogen, Genzyme,
MedImmune and Genentech 69% 72% 72% 73%
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,
Respiratory Syncytial Virus and pulmonary arterial hypertension.
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;
- - 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.
IF ANY OF OUR RELATIONSHIPS WITH MEDICAL CENTERS ARE DISRUPTED OR CANCELLED, OUR
BUSINESS COULD BE HARMED.
We have significant relationships with four medical centers that
provide services primarily related to hemophilia, growth hormone-related
disorders and respiratory syncytial virus. For the fiscal years ended June 30,
2000 and 2001 and the nine months ended March 31, 2002, we received
approximately 12%, 4% and 4%, respectively, of our earnings before income taxes
and extraordinary item from equity in the net income of unconsolidated joint
ventures.
We own 80% of one of our joint ventures with Children's Home Care, Inc.
and the financial results of this joint venture are included in our consolidated
financial results. This consolidated joint venture represented approximately 11%
of our income before income taxes for the nine months ended March 31, 2002.
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. 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 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 average wholesale price ("AWP");
- - below-expected sales or delayed launch of a new drug;
- - price and term adjustments with our drug suppliers;
- - increases in our operating expenses in anticipation of the launch of a
new drug;
- - product shortages;
- - inaccuracies in our estimates of the costs of ongoing programs;
- - the timing and integration of our acquisitions;
- - changes in governmental regulations;
- - the annual renewal of deductibles and co-payment requirements that
affect patient ordering patterns;
- - our provision of drugs to treat seasonal illnesses, such as respiratory
syncytial virus;
- - physician prescribing patterns; and
- - general political and 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 Food and Drug Administration ("FDA") approval process;
or
- - governmental or private initiatives that would alter how drug
manufacturers, health care providers or pharmacies promote or sell
products and services.
OUR BUSINESS COULD BE HARMED IF THE SUPPLY OF ANY OF THE PRODUCTS THAT WE
DISTRIBUTE BECOMES SCARCE.
The biopharmaceutical industry is susceptible to product shortages.
Some of the products that we distribute, such as IVIG and blood-related
products, are collected and processed from human donors. Accordingly, the supply
of these products is highly dependent on human donors and their availability has
been constrained from time to time. An industry wide recombinant factor VIII
product shortage has existed for some time, as a result of the manufacturers
being unable to increase production to meet rising global demand. Future
availability of product is unclear and we are not certain when the manufacturers
will return to normal product allocations. If these products, or any of the
other drugs that we distribute, are in short supply for long periods of time,
our business could be harmed.
IF SOME OF THE DRUGS THAT WE PROVIDE LOSE THEIR "ORPHAN DRUG" STATUS, WE COULD
FACE MORE COMPETITION.
Our business could also be adversely affected by the expiration or
challenge to the "orphan drug" status that has been granted by the FDA to some
of the drugs that we handle. When the FDA grants "orphan drug" status, it will
not approve a second drug for the same treatment for a period of seven years
unless the new drug is chemically different or clinically superior. The "orphan
drug" status applicable to drugs that we handle expires as follows:
- - Cerezyme(R) expired May 2001;
- - AVONEX(R) expires May 2003; and
- - Tracleer(TM) expires October 2008.
The loss of orphan drug status or approval of new drugs,
notwithstanding orphan drug status, could result in competitive drugs entering
the market, which could harm our business. For example, despite the orphan drug
status of AVONEX(R), the FDA recently approved a competitive drug called Rebif,
which we do not currently expect to handle.
RECENT INVESTIGATIONS INTO REPORTING OF AVERAGE WHOLESALE PRICES COULD REDUCE
OUR PRICING AND MARGINS.
Many government payors, including Medicare and Medicaid, pay us
directly or indirectly at the drug's average wholesale price (or 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. In February 2000, First
DataBank published a Market Price Survey of 437 drugs, which was significantly
lower than the historic AWP for a number of the clotting factor and IVIG
products that we sell.
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 federal government and 45 states 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 a separate action involving alleged inflated pricing, TAP
Pharmaceutical Products agreed to pay federal and state governments $875 million
to settle charges associated with the marketing of Lupron.
A number of state Medicaid agencies have revised their payment
methodology as a result of the Market Price Survey. The Centers for Medicare and
Medicaid Services ("CMMS") had also announced that 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 was withdrawn. Instead,
CMMS has announced that it 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.
On September 21, 2001, the United States House Subcommittees on Health
and oversight & Investigations held hearings to examine how Medicare reimburses
providers for the cost of drugs. In conjunction with that hearing, the U.S.
General Accounting office issued its Draft Report recommending that Medicare
establish payment levels for part-B prescription drugs and their delivery and
administration that are more closely related to their costs, and that payments
for drugs be set at levels that reflect actual market transaction prices and the
likely acquisition costs to providers.
We cannot predict the eventual results of the government
investigations, lawsuits and the changes made by First DataBank. If reduced
average wholesale prices 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.
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. For the fiscal years ended
June 30, 2000 and 2001 and the nine months ended March 31, 2002, we estimate
that approximately 18%, 19%, and 20% respectively of our gross patient service
revenues 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 affect 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, 2000 and 2001 and the nine months ended
March 31, 2002, we derived approximately 82%, 81% and 80% respectively of our
gross patient service revenue from non-governmental payors (including self-pay),
which included 5%, 4% and 3%, respectively for those periods, from sales to
private physician practices whose ultimate payor is typically Medicare. In
fiscal year 2001 and the nine months ended March 31, 2002, one private payor,
Aetna, Inc. and affiliates accounted for approximately 16% of the Company's
revenue.
Many payors seek to limit the number of providers that supply drugs to
their enrollees. For example, we were selected by Aetna, Inc. as one of three
providers of injectible 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), or an adverse change in the financial
condition of a payor like Aetna, could result in the loss of a significant
number of patients and have a material adverse effect on our business, financial
condition and results of operations.
WE RELY HEAVILY ON A SINGLE SHIPPING PROVIDER, AND OUR BUSINESS WOULD BE HARMED
IF OUR RATES ARE INCREASED OR OUR PROVIDER IS UNAVAILABLE.
Almost all of our revenues result from the sale of drugs we deliver to
our patients and principally all of our products are shipped by a single
carrier, FedEx. We depend heavily on these outsourced shipping services for
efficient, cost effective delivery of our product. The risks associated with
this dependence include:
- - any significant increase in shipping rates;
- - strikes or other service interruptions by our primary carrier, FedEx,
or by another carrier that could affect FedEx; or
- - spoilage of high cost drugs during shipment, since our drugs often
require special handling, such as refrigeration.
DISRUPTIONS IN COMMERCIAL ACTIVITIES SUCH AS THOSE FOLLOWING THE SEPTEMBER 2001
TERRORIST ATTACKS ON THE U.S. MAY ADVERSELY IMPACT OUR RESULTS OF OPERATIONS,
OUR ABILITY TO RAISE CAPITAL OR OUR FUTURE GROWTH.
Our operations have been and could again be harmed by terrorist attacks
on the U.S. For example, transportation systems and couriers that we rely upon
to deliver our drugs have been and could again be disrupted, thereby causing a
decrease in our revenues. In addition, we may experience a rise in operating
costs, such as costs for transportation, courier services, insurance and
security. We also may experience delays in payments from payors, which would
harm our cash flow. The U.S. economy in general may be adversely affected by
terrorist attacks or by any related outbreak of hostilities. Any such economic
downturn could adversely impact our results of operations, impair our cost of or
ability to raise debt or equity capital or impede our ability to continue
growing our business.
OUR BUSINESS COULD BE HARMED IF PAYORS DECREASE OR DELAY THEIR PAYMENTS TO US.
Our profitability depends on payment from governmental and
non-governmental payors, and we could be materially and adversely affected by
cost containment trends in the health care industry or by financial difficulties
suffered by non-governmental payors. Cost containment measures affect pricing,
purchasing and usage patterns in health care. Payors also influence decisions
regarding the use of a particular drug treatment and focus on product cost in
light of how the product may impact the overall cost of treatment. Further, some
payors, including large managed care organizations and some private physician
practices, have recently experienced financial trouble. The timing of payments
and our ability to collect from payors also affects our revenue and
profitability. If we are unable to collect from payors or if payors fail to pay
us in a timely manner, it could have a material adverse effect on our business
and financial condition.
IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS WILL BE HARMED.
Our rapid growth over the past several years has placed a strain on our
resources, and if we cannot effectively manage our growth, our business,
financial condition and results of operations could be materially and adversely
affected. We have experienced a large increase in the number of our employees,
the size of our programs and the scope of our operations. our ability to manage
this growth and be successful in the future will depend partly on our ability to
retain skilled employees, enhance our management team and improve our management
information and financial control systems.
WE COULD BE ADVERSELY AFFECTED BY AN IMPAIRMENT OF THE SIGNIFICANT AMOUNT OF
GOODWILL ON OUR FINANCIAL STATEMENTS.
Our formation and our acquisitions of Southern Health Systems, Inc.,
Hemophilia Health Services, Inc., Sunrise Health Management, Inc., Pharmacare
Resources, Inc., NCL Management, Inc., BioPartners in Care, 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 fair value of the net assets acquired was less
than the purchase price. We also expect to record a significant amount of
goodwill from the proposed acquisition of the SPS business from Gentiva. 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.
We are not presently aware of any persuasive evidence that any material
portion of our goodwill will be impaired and written off against earnings. As of
March 31, 2002, we had goodwill, net of accumulated amortization, of
approximately $128.8 million, or 35% of total assets and 60% of stockholders'
equity.
Since our growth strategy may involve the acquisition of other
companies, we may record additional goodwill in the future. The possible
write-off of this goodwill could negatively impact our future earnings. We will
also be required to
allocate a portion of the purchase price of any acquisition to the value of
non-competition agreements, patient base and contracts that are acquired. The
amount allocated to these items could be amortized over a fairly short period.
As a result, our earnings and the market price of our common stock could be
negatively impacted.
WE RELY ON A FEW KEY EMPLOYEES WHOSE ABSENCE OR LOSS COULD ADVERSELY AFFECT OUR
BUSINESS.
We depend on a few key executives, and the loss of their services could
cause a material adverse effect to our company. We do not maintain "key person"
life insurance policies on any of those executives. As a result, we are not
insured against the losses resulting from the death of our key executives.
Further, we must be able to attract and retain other qualified, essential
employees for our technical operating and professional staff, such as
pharmacists. 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, 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 affected if the
suppliers or clients we work with are accused of violating laws or regulations.
The applicable regulatory framework is complex, and the laws are very broad in
scope. Many of these laws remain open to interpretation, and have not been
addressed by substantive court decisions.
The health care laws and regulations that especially apply to our
activities include:
- - The federal "Anti-Kickback Law" prohibits the offer or solicitation of
compensation in return for the referral of patients covered by almost
all governmental programs, or the arrangement or recommendation of the
purchase of any item, facility or service covered by those programs.
The Health Insurance Portability and Accountability Act of 1996, or
HIPAA, created new violations for fraudulent activity applicable to
both public and private health care benefit programs and prohibits
inducements to Medicare or Medicaid eligible patients. The potential
sanctions for violations of these laws range from significant fines, to
exclusion from participation in the Medicare and Medicaid programs, to
criminal sanctions. Although some "safe harbor" regulations attempt to
clarify when an arrangement will not violate the Anti-Kickback Law, our
business arrangements and the services we provide may not fit within
these safe harbors. Failure to satisfy a safe harbor requires analysis
of whether the parties intended to violate the Anti-Kickback Law. The
finding of a violation could have a material adverse effect on our
business.
- - The Department of Health and Human Services recently issued regulations
implementing the Administrative Simplification provision of HIPAA
concerning the maintenance and transmission and security of electronic
health information, particularly individually identifiable information.
The new regulations, when effective, 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.
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 nine months and quarter ended
March 31, 2002, then our interest income would have decreased, and pre-tax
income would have decreased approximately $84,000 and $4,000 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. During the
quarter, we did not have an outstanding balance on our revolving line of credit
nor any outstanding interest rate swap agreements. Therefore, we did not have an
exposure to financial market risk associated with our revolving line of credit
or any derivative financial instruments during the quarter. However, we have
accessed our revolving line of credit since the end of the quarter without
entering into any variable-to-fixed interest rate swap agreements. Rising
interest rates could expose us to financial market risk associated with any
future outstanding debts on the line of credit that are not hedged by an
interest rate swap agreement.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
On January 2, 2002, the Company announced that it had entered into an
agreement with Gentiva Health Services, Inc. to purchase the SPS business of
Gentiva for $415,000,000, subject to adjustment as set forth in the asset
purchase agreement. The purchase price is to be paid in an equal combination of
cash and the Company's common stock, with the stock portion of the purchase
price being subject to a price collar set forth in the asset purchase agreement.
The acquisition is scheduled to close in the second quarter of 2002 and is
contingent upon approval by the shareholders of each company and approval by the
applicable federal regulatory agencies.
Accredo proposes to acquire substantially all of the assets of the SPS
business of Gentiva. The SPS business to be acquired by Accredo includes:
- the distribution of drugs and other biological and
pharmaceutical products and professional support services for
individuals with chronic diseases, such as hemophilia, primary
pulmonary hypertension, autoimmune deficiencies and growth
disorders,
- the administration of antibiotics, chemotherapy, nutrients and
other medications for patients with acute or episodic disease
states,
- marketing and distribution services for pharmaceutical,
biotechnology and medical service firms, and
- clinical support services for pharmaceutical and biotechnology
firms.
Following the closing of the acquisition, Accredo intends to separate
and reorganize the chronic and acute portions of the SPS business. While Gentiva
treated IVIG, Synagis(R), Cerezyme(R) and growth hormone as part of its acute
business, Accredo will consider these drugs as part of the chronic business
which it will continue to operate. Excluding the drugs mentioned above, Accredo
intends to assess strategic options for the portion of the SPS business which
relates to the administration of medications for acute diseases because this
business is inconsistent with Accredo's strategy and focus.
RISK FACTORS RELATED TO THE PROPOSED ACQUISITION
You should carefully consider the risks and uncertainties associated
with this transaction that we describe below before investing in Accredo. The
risks and uncertainties described below are NOT the only risks and uncertainties
that could develop regarding the proposed acquisition of the SPS business. other
risks and uncertainties associated with this transaction that we have not
predicted or evaluated could also affect our company. You should also review the
risk factors related to Accredo's business generally, which are included in Item
2 of this Form 10-Q.
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.
IF ACCREDO'S PROPOSED ACQUISITION OF THE SPECIALTY SERVICES BUSINESS OF
GENTIVA DOES NOT OCCUR, ACCREDO WILL NOT BENEFIT FROM THE EXPENSES IT HAS
INCURRED IN THE PURSUIT OF THE ACQUISITION.
Accredo's planned acquisition of the specialty services business, or
SPS business, of Gentiva may not be completed. The asset purchase agreement may
be terminated for material adverse effects in either Accredo or the SPS
business, failure to obtain regulatory approvals, identified consents, and other
reasons, many of which are beyond the control of Accredo or Gentiva. In the
event of a termination of the asset purchase agreement because either Gentiva or
Accredo has breached its representations, warranties, covenants or agreements,
or because its stockholders have voted against the acquisition, the party in
breach or whose stockholders voted against the transaction has agreed to pay the
costs and expenses actually incurred in connection with the acquisition by the
other party, up to an aggregate of $2.5 million. Accredo will have incurred
substantial expenses, and may have to reimburse the costs and expenses of
Gentiva, for which no ultimate benefit will have been received by Accredo.
ACCREDO MAY INCUR ADDITIONAL DEBT WHICH MAY LIMIT ITS FINANCIAL
FLEXIBILITY.
Accredo is exploring its alternatives regarding financing and raising
capital for the cash portion of the purchase price, including borrowing the
funds or issuing additional securities. Accredo may incur an additional $227
million of indebtedness in order to consummate the acquisition of the SPS
business. After giving effect to the acquisition of the SPS business, including
the issuance of the stock consideration, if Accredo borrows the cash portion of
the acquisition
consideration, as of March 31, 2002, Accredo would have had approximately $227
million of total debt and a total debt to total capitalization ratio of 36%.
Accredo may also incur additional debt in the future, including in connection
with other acquisitions. While Accredo would also have additional assets and
cash flow, the level of Accredo's debt could have several important effects on
the company's future operations, including, among others:
- A significant portion of Accredo's cash flow from operations
will be dedicated to the payment of principal and interest on
the debt and will not be available for other purposes;
- Covenants in Accredo's existing debt arrangements and
anticipated covenants related to the debt that Accredo intends
to incur to finance the cash portion of the acquisition
consideration will require Accredo to meet financial tests,
and may impose other limitations that may limit Accredo's
flexibility in planning for and reacting to changes in its
business, including possible acquisition opportunities;
- Accredo's ability to obtain additional financing for working
capital, capital expenditures, acquisitions, general corporate
and other purposes may be limited;
- Accredo may be at a competitive disadvantage to similar
companies that have less debt; and
- Accredo's vulnerability to adverse economic and industry
conditions may increase.
ACCREDO MAY ISSUE ADDITIONAL SECURITIES WHICH COULD DILUTE YOUR
OWNERSHIP OF ACCREDO COMMON STOCK.
Accredo may issue additional shares of common stock or other securities
to finance the cash portion of the purchase price. In addition, Accredo may
undertake additional transactions in the future to simplify and restructure its
capital structure, which may include, as part of these efforts, additional
issuances of equity securities in exchange for current indebtedness or
indebtedness incurred in order to complete the acquisition. The issuance of
additional shares of common stock or securities convertible into common stock
may be dilutive to the holders of Accredo common stock.
THE FAILURE TO INTEGRATE SUCCESSFULLY ACCREDO AND THE SPS BUSINESS
ACQUIRED FROM GENTIVA MAY PREVENT ACCREDO FROM ACHIEVING THE ANTICIPATED
POTENTIAL BENEFITS OF THE ACQUISITION AND MAY ADVERSELY AFFECT ACCREDO'S
BUSINESS.
Accredo will face significant challenges in consolidating functions,
integrating the procedures, operations and product lines of the SPS business in
a timely and efficient manner, and retaining key personnel of the SPS business.
The integration of Accredo and the SPS business will be complex and will require
substantial attention from management. The diversion of management attention and
any difficulties encountered in the transition and integration process could
have a material adverse effect on the revenues, level of expenses and operating
results of Accredo.
ACCREDO MAY NOT BE ABLE TO BENEFIT FROM THE ACUTE PORTION OF THE SPS
BUSINESS.
Accredo has not historically distributed the drugs represented by the
acute portion of the SPS business of Gentiva, except for IVIG, Synagis(R),
Cerezyme(R) and growth hormone. Following the acquisition, Accredo will treat
these four drugs as part of its chronic business, but otherwise Accredo does not
intend to distribute the drugs represented by the acute portion of the SPS
business. Accredo intends to assess strategic options related to the acute
portion of the SPS business following the closing of the acquisition. Accredo
may not be able to find an available or acceptable strategic alternative for the
acute business, and may have to sell the business for less than its fair value
or to shut down the acute business which could cause Accredo to incur additional
expenses. For these reasons, Accredo has not assigned any value to the acute
portion of the SPS business it is acquiring for financial purposes. In addition,
Accredo's assessment of the strategic alternatives for the acute portion of the
SPS business or the actions required to shut down the acute business could
divert management time and company resources which could be better served
elsewhere.
FOLLOWING THE ACQUISITION OF THE SPS BUSINESS, GENTIVA MAY BE UNABLE TO
INDEMNIFY ACCREDO FOR LIABILITIES.
The asset purchase agreement provides that Gentiva will indemnify
Accredo, after the sale of the SPS business, for losses suffered or incurred by
Accredo and its affiliates arising from the retained liabilities of Gentiva,
breaches of Gentiva's representations, warranties, covenants or agreements under
the asset purchase agreement or agreements delivered pursuant thereto, failure
to deliver good, valid and marketable title to the assets of the SPS business,
and specified tax liabilities of Gentiva, including those related to Gentiva's
split off from olsten Corporation. However, Gentiva may not be able to fulfill
its indemnification obligations. Should any significant payment be required,
Gentiva may not have sufficient funds and may not be able to obtain the funds to
satisfy its potential indemnification obligations to Accredo. Accredo may suffer
impairment of assets or have to bear a liability for which it is entitled to
indemnification, but which it is unable to collect.
ACCREDO'S COMMON STOCK PRICE MAY BE ADVERSELY AFFECTED BY FUTURE SALES
OF ACCREDO COMMON STOCK.
According to the terms of the asset purchase agreement, Accredo could
be obligated to issue up to 6.7 million shares, plus additional shares for
adjustments to the purchase price in accordance with the asset purchase
agreement. Assuming the issuance of the 5.1 million shares based on the recent
closing price of Accredo common stock, upon completion of the acquisition,
Accredo will have outstanding approximately 31.3 million shares of common stock.
The shares issued by Accredo are to be distributed to Gentiva stockholders
following the acquisition, resulting in an increase of approximately 19.4% in
the common stock available for resale on the market. The sale of these
additional shares could result in downward pricing pressure on the Accredo
common stock.
PRODUCT SHORTAGES MAY CONTINUE TO ADVERSELY AFFECT REVENUE GROWTH.
Gentiva has historically reported that its revenue growth was
negatively impacted by some product shortages of recombinant coagulation
therapy, which is used in the treatment of hemophilia, as well as by Bayer
Corporation's decision in 1999 to begin directly distributing Prolastin(R), an
intravenous therapy used in the treatment of the hereditary disorder Alpha 1
Antirypsin Deficiency. These drugs affected by product shortages accounted for
approximately 14% of the revenues of the SPS business for the year ended
December 31, 2001. While Accredo considered these factors when evaluating the
acquisition of the SPS business, continuing shortages of these products and new
product shortages could materially and adversely affect Accredo's ability to
grow revenues.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Employment Agreement dated as of January 7, 2002 between
Accredo Health, Incorporated and Steve Fitzpatrick
10.2 Employment Agreement dated as of January 21, 2002 between
Accredo Health, Incorporated and Barbara H. Biehner
(b) Reports on Form 8-K
None
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 15, 2002 Accredo Health, Incorporated
/s/ David D. Stevens
--------------------
David D. Stevens
Chairman of the Board and
Chief Executive officer
Exhibit Index
Exhibit
Number Description of Exhibits
- ------- -----------------------
10.1 Employment Agreement dated as of January 7, 2002 between Accredo
Health, Incorporated and Steve Fitzpatrick
10.2 Employment Agreement dated as of January 21, 2002 between Accredo
Health, Incorporated and Barbara H. Biehner