<PAGE>
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, 1999
---------------------------------------------
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 333-62679
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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)
NO CHANGE
--------------------------------------------------------
(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 No X
-------- --------
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.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT APRIL 27, 1999
<S> <C>
COMMON STOCK, $0.01 PAR VALUE................ 7,977,087
NON-VOTING COMMON STOCK, $0.01 PAR VALUE..... 1,100,000
---------
TOTAL COMMON STOCK........................... 9,077,087
---------
---------
</TABLE>
<PAGE>
ACCREDO HEALTH, INCORPORATED
INDEX
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (unaudited)
For the three months and nine months ended March 31,
1998 and 1999
Condensed Consolidated Balance Sheets
June 30, 1998 and March 31, 1999 (unaudited)
Condensed Consolidated Statements of Cash Flows (unaudited)
For the nine months ended March 31, 1998 and 1999
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Part II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(d) Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Note: Items 1, 3 and 5 of Part II are omitted because they are not
applicable.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(000'S OMITTED, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended March 31, Three Months Ended March 31,
--------------------------- ----------------------------
Pro Forma Pro Forma
Actual (Note 6 ) Actual (Note 6 )
1999 1998 1999 1999 1998 1999
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net patient service revenue $ 176,816 $ 122,260 $176,816 $ 63,068 $ 41,893 $ 63,068
Other revenue 8,861 7,245 8,861 3,214 2,566 3,214
Equity in net income of joint ventures 1,230 894 1,230 599 354 599
--------- --------- --------- --------- --------- ---------
Total revenues 186,907 130,399 186,907 66,881 44,813 66,881
Cost of services 159,198 111,115 159,198 57,289 38,028 57,289
--------- --------- --------- --------- --------- ---------
Gross profit 27,709 19,284 27,709 9,592 6,785 9,592
Selling, general & administrative 12,907 8,860 12,907 4,516 3,131 4,516
Bad debts 3,420 2,358 3,420 1,136 776 1,136
Depreciation and amortization 3,003 2,882 3,003 1,018 970 1,018
--------- --------- --------- --------- --------- ---------
Income from operations 8,379 5,184 8,379 2,922 1,908 2,922
Interest expense, net 2,653 2,702 1,642 922 921 583
--------- --------- --------- --------- --------- ---------
Income before income taxes 5,726 2,482 6,737 2,000 987 2,339
Provision for income taxes 2,843 1,675 3,220 980 609 1,106
--------- --------- --------- --------- --------- ---------
Net income 2,883 807 3,517 1,020 378 1,233
Preferred stock dividends (1,532) (1,532) - (511) (511) -
--------- --------- --------- --------- --------- ---------
Net income (loss) to common shareholders $ 1,351 $ (725) $ 3,517 $ 509 $ (133) $ 1,233
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Basic earnings per common share:
Net income $ 0.51 $ 0.15 $ 0.39 $ 0.18 $ 0.07 $ 0.14
Preferred stock dividends (0.27) (0.28) - (0.09) (0.09) -
--------- --------- --------- --------- --------- ---------
Net income (loss) per common share $ 0.24 $ (0.13) $ 0.39 $ 0.09 $ (0.02) $ 0.14
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Diluted earnings per common share:
Net income $ 0.46 $ 0.13 $ 0.36 $ 0.16 $ 0.06 $ 0.13
Preferred stock dividends (0.24) (0.26) (0.08) (0.08)
--------- --------- --------- --------- --------- ---------
Net income (loss) per common share $ 0.22 $ (0.13) $ 0.36 $ 0.08 $ (0.02) $ 0.13
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Weighted average shares outstanding:
Basic 5,622,412 5,558,653 9,072,412 5,625,620 5,590,587 9,075,620
Diluted 6,214,769 6,023,629 9,664,769 6,216,754 6,076,839 9,666,754
</TABLE>
(See accompanying notes to condensed consolidated financial statements.)
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(000'S OMITTED, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Pro Forma
Actual (Note 6 )
----------------------------------
March 31, June 30, March 31,
1999 1998 1999
------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,174 $ 5,087 $ 8,568
Accounts receivable, less allowance for doubtful
accounts of $4,836 at March 31, 1999 and
$3,430 at June 30, 1998 59,913 39,876 59,913
Inventories 14,830 12,131 14,830
Prepaids and other current assets 1,100 460 1,848
Deferred income taxes 1,560 324 1,560
--------- --------- --------
Total current assets 78,577 57,878 86,719
Property and equipment, net 2,639 2,128 2,639
Other assets:
Joint venture investments 2,734 628 2,734
Goodwill and other intangible assets, net 50,840 53,415 50,840
--------- --------- --------
Total assets $ 134,790 $ 114,049 $142,932
--------- --------- --------
--------- --------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 44,832 $ 31,305 $ 44,832
Accrued expenses 4,867 3,197 4,864
--------- --------- --------
Total current liabilities 49,699 34,502 49,696
Long-term notes payable 29,498 27,498 29,498
Senior subordinated notes payable 9,104 8,920 -
Deferred income taxes 715 536 715
Mandatorily redeemable cumulative preferred stock, at
redemption amount, 300,000 shares authorized, 255,361 shares
issued and outstanding in 1999 and 1998; no shares issued and
outstanding pro forma as adjusted 31,324 29,792 -
Stockholders' equity:
Undesignated Preferred Stock, 5,000,000 shares
authorized, no shares issued - - -
Non-voting Common Stock, $.01 par value;
2,500,000 shares authorized; no shares issued
and outstanding, actual; 1,100,000 shares - - 11
issued and outstanding, pro forma as adjusted
Common Stock, $.01 par value; 30,000,000 shares authorized;
5,627,087 and 5,590,587 shares issued and outstanding at
March 31, 1999 and June 30, 1998, respectively,
actual; 7,977,087 shares issued and outstanding,
pro forma as adjusted 56 56 80
Additional paid-in capital 13,885 14,039 63,686
Retained earnings (deficit) 509 (1,294) (754)
--------- --------- --------
Total stockholders' equity 14,450 12,801 63,023
--------- --------- --------
Total liabilities and stockholders' equity $ 134,790 $ 114,049 $142,932
--------- --------- --------
--------- --------- --------
</TABLE>
(See accompanying notes to condensed consolidated financial statements.)
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000'S OMITTED)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1999 1998
-----------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,883 $ 807
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 3,003 2,881
Original issue discount amortization 184 123
Interest added to long term obligations - 775
Provision for losses on accounts receivable 3,420 2,359
Deferred income tax benefit (1,108) 1,174
Compensation resulting from stock transactions 138 5
Changes in operating assets and liabilities:
Patient receivables and other (22,252) (8,317)
Due from affiliates (1,204) 107
Inventories (2,699) 8,943
Prepaids and other current assets (790) 282
Recoverable income taxes 151 (717)
Accounts payable and accrued expenses 15,193 (7,788)
Income taxes payable 3 (1,802)
----------- -----------
Net cash used in operating activities (3,078) (1,168)
INVESTING ACTIVITIES:
Purchases of property and equipment (941) (877)
Purchase of joint venture investments (1,298) -
Change in joint venture investments, net (808) (130)
----------- -----------
Net cash used in investing activities (3,047) (1,007)
FINANCING ACTIVITIES:
Proceeds from long-term obligations 2,000 -
Issuance of common stock 212 500
----------- -----------
Net cash provided by financing activities 2,212 500
----------- -----------
Decrease in cash and cash equivalents (3,913) (1,675)
Cash and cash equivalents at beginning of period 5,087 3,676
----------- -----------
Cash and cash equivalents at end of period $ 1,174 $ 2,001
----------- -----------
----------- -----------
SUPPLEMENTARY CASH FLOW DISCLOSURES
Income taxes paid $ 3,731 $ 2,942
----------- -----------
----------- -----------
Cash paid for interest $ 3,036 $ 1,737
----------- -----------
----------- -----------
</TABLE>
(See accompanying notes to condensed consolidated financial statements.)
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the
financial statements for the three and nine-month periods ended March
31, 1999 have been included. During the nine months ended March 31,
1999, the Company incurred $420,000 in compensation cost for stock
transactions at less than fair market value. Operating results for the
three and nine-month periods ended March 31, 1999, may not be
indicative of the results for the fiscal year ended June 30, 1999. For
further information, refer to the June 30, 1998 consolidated financial
statements and footnotes thereto included in the Company's final
prospectus on form S-1 dated April 15, 1999.
2. JOINT VENTURE INVESTMENTS
On November 10, 1998, the Company acquired a 50% general
partnership interest in Childrens Hemophilia Services, a partnership
established to engage in the sale and distribution of blood clotting
factors and ancillary supplies to hemophilia patients, for an initial
purchase price of $917,000. In addition to the purchase price paid on
the acquisition date, the Company will pay up to an additional $833,000
in two installments if targeted earnings specified in the purchase
agreement are achieved for the twelve-month periods ending twenty-four
months and thirty-six months from the acquisition date. This
transaction was recorded by the Company as a joint venture investment
and is being accounted for by the equity method.
On November 10, 1998, the Company acquired a 50% general
partnership interest in Childrens Home Services, a partnership
established to engage in the sale and distribution of human growth
hormone and ancillary supplies to patients with growth hormone-related
disorders, for a purchase price of $381,000. This transaction was
recorded by the Company as a joint venture investment and is being
accounted for by the equity method.
3. NOTES PAYABLE AND FINANCIAL INSTRUMENTS
During the nine months ended March 31, 1999, the Company
extended the term and amount available under its revolving line of
credit agreement. The terms of the agreement were originally extended
for one year from the original expiration date of October 31, 1999 to
October 31, 2000 and subsequently were extended again to December 1,
2001 in conjunction with the amendment on March 1, 1999 to increase the
available line of credit. Upon completion of the Company's initial
public offering on April 21, 1999, the credit limit available under the
revolving line of credit was increased from $40.0 million to $60.0
million pursuant to the Company's amended agreement with its banks.
Amounts outstanding under the line of credit bear interest at varying
rates based upon a LIBOR or prime rate of interest at the periodic
election of the Company plus a variable margin rate based on the
Company's debt to cash flow ratio as defined by the banks. Due to the
Company's improved debt to cash flow ratio during the nine months ended
March 31, 1999, the variable margin rate charged by the banks in
addition to LIBOR decreased from 2% to 1.5% effective November 1, 1998.
The Company also entered into a new interest rate swap agreement with a
bank on January 21, 1999. The new agreement
<PAGE>
cancels the old agreement. The terms of the new agreement require the
Company to pay a lower fixed interest rate of 5.5% on an increased
notional amount of $25 million and receive the 30 day LIBOR rate in
exchange. The terms of the new interest rate swap agreement have also
been extended from the original termination date of October 29, 1999 to
October 31, 2001.
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and
diluted earnings per share (in thousands, except share data) :
<TABLE>
<CAPTION>
Nine Months Ended March 31, Three Months Ended March 31,
------------------------------------------ --------------------------------
Pro Forma Pro Forma
Actual (Note 6 ) Actual (Note 6 )
1999 1998 1999 1999 1998 1999
---------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Numerator for basic and diluted income (loss) per
share to common stockholders:
Net income $ 2,883 $ 807 $ 3,517 $ 1,020 $ 378 $ 1,233
Preferred stock dividends (1,532) (1,532) - (511) (511) -
--------- --------- --------- --------- --------- ---------
Net income (loss) to common stockholders $ 1,351 $ (725) $ 3,517 $ 509 $ (133) $ 1,233
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Denominator:
Denominator for basic income per
share to common stockholders -
weighted-average shares 5,622,412 5,558,653 9,072,412 5,625,620 5,590,587 9,075,620
Effect of dilutive stock options 592,357 464,976 592,357 591,134 486,252 591,134
--------- --------- --------- --------- --------- ---------
Denominator for diluted income per
share to common stockholders -
adjusted weighted-average shares 6,214,769 6,023,629 9,664,769 6,216,754 6,076,839 9,666,754
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Basic earnings per common share:
Net income $ 0.51 $ 0.15 $ 0.39 $ 0.18 $ 0.07 $ 0.14
Preferred stock dividends (0.27) (0.28) - (0.09) (0.09) -
--------- --------- --------- --------- --------- ---------
Net income (loss) per common share $ 0.24 $ (0.13) $ 0.39 $ 0.09 $ (0.02) $ 0.14
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Diluted earnings per common share:
Net income $ 0.46 $ 0.13 $ 0.36 $ 0.16 $ 0.06 $ 0.13
Preferred stock dividends (0.24) (0.26) - (0.08) (0.08) -
--------- --------- --------- --------- --------- ---------
Net income (loss) per common share (1) $ 0.22 $ (0.13) $ 0.36 $ 0.08 $ (0.02) $ 0.13
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
(1) Historical diluted loss per share amounts for the three and nine months
ended March 31,1998 have been calculated to reflect the same result as
the basic loss per share calculation since the inclusion of dilutive
securities in the denominator of the calculation would have an
anti-dilutive effect in those periods.
5. SUBSEQUENT EVENT
In April 1999, the Company sold an aggregate of 3,450,000
shares of Common Stock in an initial public offering (the "Offering")
for $14.88 per share after underwriting discount but before expenses of
the Offering. The aggregate net proceeds of approximately $51.3 million
are being used as follows: (i) to pay expenses of the offering,
estimated at $1,500,000, (ii) to prepay in full all principal and
accrued interest on the Company's outstanding Senior Subordinated Notes
of approximately $11.2 million, (iii) to redeem all outstanding shares
of Series A Preferred Stock, including all accrued dividends thereon of
approximately $31.4 million, and (iv) for working capital and other
general corporate purposes, including possible acquisitions.
In conjunction with a recapitalization effective prior to the
Offering, the Company's majority shareholder also exchanged 1,100,000
shares of Common Stock for 1,100,000 shares of Non-Voting Common Stock
of the Company.
6. PRO FORMA FINANCIAL INFORMATION
The pro forma condensed consolidated statements of operations
for the three and nine-month periods ended March 31, 1999, give effect
to the sale of common stock in the Offering and the application of a
portion of the net proceeds thereof to the prepayment in full of all
principal and accrued interest on the Company's outstanding Senior
Subordinated Notes and the redemption of all outstanding shares of
Series A Preferred Stock, including all accrued dividends thereon, as
if all such transactions had been completed as of July 1, 1998, as
follows:
- The elimination of interest expense (including
original issue discount amortization) associated with
the prepayment of the Senior Subordinated Notes with
a portion of the net proceeds of the offering, and
the elimination of the related income tax benefit
based on the combined federal and state statutory
rate of 37.3%.
- The elimination of the dividends on the Series A
Preferred stock redeemed with a portion of the net
proceeds of the Offering.
In connection with the prepayment of the Senior Subordinated
Notes, the Company will incur an extraordinary charge related to the
early extinguishment of this debt. This extraordinary charge of
approximately $1.3 million, net of a $750,000 tax benefit, is due to
unamortized original issue discount remaining on the debt on the
prepayment date. This charge will be reflected as an extraordinary
nonrecurring charge in the Company's financial results for the three
months and fiscal year ended June 30, 1999. This charge is not
reflected in the pro forma
<PAGE>
condensed consolidated income statement since it does not pertain to
income (loss) from continuing operations.
The pro forma condensed consolidated balance sheet for March
31, 1999, gives effect to the sale of common stock in the Offering and
the application of net proceeds thereof to the prepayment in full of
all principal and accrued interest on the Company's outstanding Senior
Subordinated Notes and the redemption of all outstanding shares of
Series A Preferred Stock, including all accrued dividends thereon, as
if all such transactions had been completed as of March 31, 1999, as
follows:
- "Cash and cash equivalents" has been increased to
reflect the net proceeds of the Offering estimated to
remain after the payment of Offering expenses
estimated at $1.5 million, the prepayment of the
principal and accrued interest associated with the
Senior Subordinated Notes, and the redemption of the
Series A Preferred Stock including accrued dividends.
- In connection with the $2.0 million pretax
extraordinary charge associated with the early
repayment of the Senior Subordinated Notes, there
will also be an associated tax benefit. Accordingly,
"Prepaids and other current assets" and "Accrued
expenses" have been adjusted to reflect the resulting
recoverable income taxes associated with the $750,000
estimated tax benefit based on the combined federal
and state statutory rate of 37.3%. "Retained
Earnings" has been decreased by the extraordinary
charge net of the associated tax benefit.
- The balances of "Senior subordinated notes payable"
and "Mandatorily redeemable cumulative preferred
stock" have been reduced to zero to reflect the
prepayment and redemption of these items.
- The "Non-voting Common Stock" and "Common Stock"
balances have been adjusted to reflect the
recapitalization and the sale of Common Stock and
"Additional paid-in capital" has been increased to
reflect the net proceeds of the Offering in excess of
par value.
The pro forma condensed consolidated financial information
does not purport to represent what the Company's results of operations
would have been had such transactions in fact occurred as of July 1,
1998 in the case of the pro forma condensed consolidated statements of
operations or as of March 31, 1999 in the case of the pro forma
condensed consolidated balance sheet, nor does the pro forma
information purport to project the Company's results of operations in
any future period.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998
REVENUES. Total revenues increased from $130.4 million to $186.9 million, or
43%, from the nine-month period ended March 31, 1998 to the nine-month period
ended March 31, 1999. Approximately $26.8 million, or 47%, of this increase was
attributable to the increased sales volume of Avonex(R). Approximately $11.9
million, or 21%, of this increase was attributable to the increased hemophilia
revenue associated with increased patient volume and wholesale sales.
Cerezyme(R) and Ceredase(R) drug sales increased approximately $8.2 million, or
14% of the revenue increase, as a result of increased patient volume.
Approximately $1.6 million, or 3%, of the increase was also attributable to the
sale of the new drug Remicade(TM) for the treatment of Crohn's Disease. The
remaining $8.0 million, or 15%, of the revenue increase was primarily
attributable to increased sales of growth hormone, service fees associated with
the sales of Ceredase(R), Cerezyme(R), and Avonex(R), and the increased sales
volume of other ancillary drugs the Company dispenses as part of the patient's
primary therapy or under contractual obligations within certain managed care
contracts.
COST OF SERVICES. Cost of services increased from $111.1 million to $159.2
million, or 43%, from the nine-month period ended March 31, 1998 to the
nine-month period ended March 31, 1999. This increase is commensurate with the
increase in the Company's revenues. As a percentage of revenues, cost of
services was 85.2% for both periods.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased from
$8.9 million to $12.9 million, or 46%, from the nine-month period ended March
31, 1998 to the nine-month period ended March 31, 1999. This increase was
primarily the result of increased salaries and benefits associated with the
expansion of the Company's reimbursement, sales, marketing, administrative and
support staffs due to existing product line revenue growth and new product line
launches. General and administrative expenses represented 6.8% and 6.9% of
revenues for the nine months ended March 31, 1998 and 1999, respectively.
BAD DEBTS. Bad debts increased from $2,358,000 to $3,420,000, or 45%, from the
nine-month period ended March 31, 1998 to the nine-month period ended March 31,
1999. Bad debt expense was 1.8% of revenues in both periods.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased from $309,000 to
$430,000 from the nine-month period ended March 31, 1998 to the nine-month
period ended March 31, 1999 as a result of purchases of property and equipment
associated with the Company's revenue growth and expansion of its leasehold
facility improvements. Amortization expense associated with goodwill and other
intangible assets did not change from the nine-month period ended March 31, 1998
to the nine-month period ended March 31, 1999.
INTEREST EXPENSE, NET. Interest expense, net decreased from $2,702,000 to
$2,653,000 from the nine-month period ended March 31, 1998 to the nine-month
period ended March 31, 1999. This decrease is due to lower current interest
rates and margin rates payable under the Company's existing revolving line of
credit agreement with its lenders and the Company's lower fixed interest rate
payments associated with its renegotiated interest rate swap agreement with a
bank.
<PAGE>
INCOME TAX EXPENSE. The Company's effective tax rate decreased from 67.4% to
49.6% from the nine-month period ended March 31, 1998 to the nine-month period
ended March 31, 1999 as a result of the increase in income before taxes while
nondeductible amortization expense remained constant. The primary difference
between the recognized effective tax rate and the statutory rate is attributed
to nondeductible amortization expense of approximately $1,845,000 for each
period and state income taxes.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES. Total revenues increased from $44.8 million to $66.9 million, or 49%,
from the three-month period ended March 31, 1998 to the three-month period ended
March 31, 1999. Approximately $10.1 million, or 46%, of this increase was
attributable to the increased sales volume of Avonex(R). Approximately $4.1
million, or 19%, of this increase was attributable to the increased hemophilia
revenue associated with increased patient volume. Cerezyme(R) and Ceredase(R)
drug sales increased approximately $3.1 million , or 14% of the revenue
increase, as a result of increased patient volume. Approximately $700,000, or
3%, of the increase was also attributable to the sale of the new drug
Remicade(TM) for the treatment of Crohn's Disease. The remaining $4.1 million,
or 18%, of the revenue increase was primarily attributable to increased sales of
growth hormone, service fees associated with the sales of Ceredase(R),
Cerezyme(R), and Avonex(R), and the increased sales volume of other ancillary
drugs the Company dispenses as part of the patient's primary therapy or under
contractual obligations within certain managed care contracts.
COST OF SERVICES. Cost of services increased from $38.0 million to $57.3
million, or 51%, from the three-month period ended March 31, 1998 to the
three-month period ended March 31, 1999. This increase is commensurate with the
increase in the Company's revenues. As a percentage of revenues, cost of
services increased from 84.8% to 85.7% from the three-month period ended March
31, 1998 to the three-month period ended March 31, 1999. This increase is
primarily a result of an increase in certain hemophilia factor acquisition costs
without an associated increase in selling price during the three-month period
ended March 31, 1999.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased from
$3.1 million to $4.5 million, or 44%, from the three-month period ended March
31, 1998 to the three-month period ended March 31, 1999. This increase was
primarily the result of increased salaries and benefits associated with the
expansion of the Company's reimbursement, sales, marketing, administrative and
support staffs due to existing product line revenue growth and new product line
launches. General and administrative expenses represented 7.0% and 6.8% of
revenues for the three months ended March 31, 1998 and 1999, respectively.
BAD DEBTS. Bad debts increased from $776,000 to $1,136,000, or 46%, from the
three-month period ended March 31, 1998 to the three-month period ended March
31, 1999. Bad debt expense was 1.7% of revenues in both periods.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased from $112,000 to
$160,000 from the three-month period ended March 31, 1998 to the three-month
period ended March 31, 1999 as a result of purchases of property and equipment
associated with the Company's revenue growth and expansion of its leasehold
facility improvements. Amortization expense associated with goodwill and other
intangible assets did not change from the three-month period ended March 31,
1998 to the three-month period ended March 31, 1999.
<PAGE>
INTEREST EXPENSE, NET. Interest expense, net was approximately the same for the
three-month periods ended March 31, 1998 and 1999. Although the Company
experienced lower interest rates on its line of credit with its lenders during
the three-month period ended March 31, 1999 when compared to the same period in
the prior year, the interest associated with the Company's Senior Subordinated
Notes was higher in the most recent period due to additional principal
associated with capitalized interest payments made during the fiscal year ended
June 30, 1998 and the increasing amortization of original issue discount on
these notes.
INCOME TAX EXPENSE. The Company's effective tax rate decreased from 61.7% to
49.0% from the three-month period ended March 31, 1998 to the three-month period
ended March 31, 1999 as a result of the increase in income before taxes while
nondeductible amortization expense remained constant. The primary difference
between the recognized effective tax rate and the statutory rate is attributed
to nondeductible amortization expense of approximately $615,000 for each period
and state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999 and June 30,1998, the Company had working capital of $28.9
million and $23.4 million, respectively. The increase in working capital at
March 31 is primarily the result of the increase in patient accounts receivable
resulting from the Company's revenue growth. The Company's net cash used by
operations for the nine-month period ended March 31, 1999 was approximately $3.1
million compared to approximately $1.2 million used in operations during the
same period in the prior year. This use of cash and the variance between these
periods is primarily due to the timing of receivables, inventory purchases and
payables resulting from the Company's continued growth. In regards to the timing
of receivables, in particular, prior to the Company's acquiring an interest in
Children's Hemophilia Services from Children's Home Care ("CHC"), the Company
sold products and services to CHC. As of March 31, 1999, CHC owed the Company
$3,362,000, all of which had been outstanding for more than 90 days. Although
the Company expects to be able to collect these receivables, the length of time
these receivables have been outstanding has impacted cash from operations during
the current period.
Net cash used by investing activities was $3.0 million for the nine-month period
ended March 31, 1999 and $1.0 million for the nine-month period ended March 31,
1998. This cash was primarily used to acquire a 50% interest in two California
partnerships in November, 1998 and for the purchase of property and equipment
during both periods.
Net cash provided by financing activities was $2.2 million for the nine-month
period ended March 31, 1999 and $500,000 for the nine-month period ended March
31, 1998. During the nine-month periods ended March 31, 1999 and 1998, the
Company received approximately $200,000 and $500,000, respectively from the
issuance of its common stock. The Company increased the outstanding balance on
its line of credit as of March 31, 1999 by $2.0 million for short term working
capital needs.
During the nine months ended March 31, 1999 and the nine months ended March 31,
1998, the Company received cash distributions from its joint ventures of
approximately $571,000 and $814,000, respectively, while its associated equity
in net income of these joint ventures was approximately $1.2 million and
$894,000, respectively. In addition, a $150,000 capital contribution was also
made to the two California partnerships during the nine months ended March 31,
1999.
Historically, the Company has funded its operations and continued internal
growth through cash provided by operations. The Company anticipates its capital
expenditures for the year ending June 30, 1999 will
<PAGE>
consist primarily of additional leasehold improvements and equipment for the
continuing expansion of the Company's leasehold to accommodate personnel
necessary to manage the Company's growth. The Company is currently in the
process of negotiating leases for an additional 20,000 square feet of office and
warehouse space and for additional parking space. Since June 30, 1998, the
Company has purchased or committed to purchase approximately $1,400,000 of
furniture, equipment and leasehold improvements. Since the completion of the
Company's initial public offering, the Company has redeemed all outstanding
shares of Series A Preferred Stock and retired the Senior Subordinated Notes. In
connection with the retirement of debt with the Offering proceeds, the Company
will incur an extraordinary charge of approximately $1.3 million net of tax to
its operations in the quarter ended June 30, 1999 in relation to early
extinguishment of its debt.
The Company has a $60.0 million revolving credit facility under the terms of its
existing Credit Agreement. The Credit Agreement contains a $20.0 million
sublimit for working capital loans and letters of credit and is subject to a
borrowing base limit that is based on the Company's cash flow. All outstanding
principal and interest on loans made under the Credit Agreement is due and
payable on December 1, 2001. Interest on loans under the Credit Agreement
accrues at a variable rate index, at the Company's option, based on the prime
rate or London InterBank Offered Rate ("LIBOR") for one, two, three or six
months (as selected by the Company), plus an applicable margin. The Company has
entered into an interest rate swap agreement with NationsBank, N.A. to hedge
against floating rate interest risk. The swap agreement relates to borrowings
under the Credit Agreement of up to $25.0 million and expires on October 31,
2001. The effect of the swap agreement is to fix the interest rate on the first
$25.0 million outstanding under the Credit Agreement at 5.5% per annum plus the
applicable margin rate, which is currently at 1.5% per annum. The effective
interest rate, including the 1.5% margin, on borrowings in excess of $25.0
million under the Credit Agreement ranged from 6.44% per annum to 6.71% per
annum during the three months ended March 31, 1999. The Company's obligations
under the Credit Agreement are secured by a lien on substantially all of the
assets of the Company, including a pledge of all of the common stock of each
direct or indirect wholly owned subsidiary of the Company. Each wholly owned
subsidiary has also guaranteed all of the obligations of the Company under the
Credit Agreement, which guarantee obligations are secured by a lien on
substantially all of the assets of each such subsidiary.
The Credit Agreement contains operating and financial covenants, including
requirements to maintain a certain debt to equity ratio and certain leverage and
debt coverage ratios. In addition, the Credit Agreement includes customary
affirmative and negative covenants, including covenants relating to transactions
with affiliates, use of proceeds, restrictions on subsidiaries, limitations on
indebtedness, limitations on liens, limitations on capital expenditures,
limitations on certain mergers, acquisitions and sale of assets, limitations on
investments, prohibitions on payment of dividends and stock repurchases, and
limitations on certain debt payments (including payment of subordinated
indebtedness) and other distributions. The Credit Agreement also contains
customary events of default, including certain events relating to changes in
control of the Company. The Company is also a guarantor of a loan from
NationsBank, N.A. made to Children's Hemophilia Services ("CHS"), a California
general partnership in which the Company owns a 50% interest. This line of
credit allows the partnership to borrow up to $1.5 million which is repayable in
full on November 24, 2000. As of March 31, 1999, CHS had borrowed $720,000
against the line of credit.
While the Company anticipates its cash from operations, along with the short
term use of the Credit Agreement and the net proceeds received from the
Offering, will be sufficient to meet its internal operating requirements and
growth plans for at least the next 12 months, the Company expects that
additional funds may be required in the future to successfully continue its
growth beyond that 12-month period or in the event that the Company grows more
than expected within such period. The Company may be required to raise
additional funds through sales of equity or debt securities or seek additional
<PAGE>
financing from financial institutions. There can be no assurance, however, that
financing will be available on terms that are favorable to the Company or, if
obtained, will be sufficient for the Company's needs.
YEAR 2000 COMPLIANCE
Introduction. The term "year 2000 issue" is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems arise from hardware and software unable
to distinguish dates in the "2000's" from dates in the "1900's" and from other
sources such as the use of special codes and conventions in software that make
use of a date field.
The Company's State of Readiness. The Company's efforts in addressing the year
2000 issue are focused in the following three areas: (i) implementing procedures
to determine whether the Company's software systems and hardware platforms are
year 2000 compliant; (ii) communicating with suppliers and third party payors to
determine whether there will be any interruption in their systems that could
affect the Company's ability to receive timely shipments of inventory or payment
for services as a result of the year 2000 issue; and (iii) evaluating and making
necessary modifications to other systems that contain embedded chips, such as
phone systems, which process dates and date sensitive material.
The Company is in the process of obtaining written verification from vendors to
the effect that the Company's software applications and hardware platforms
acquired from such vendors will correctly manipulate dates and date-related data
as the year 2000 is approached and reached. By June 30, 1999, the Company
expects to have completed upgrades on its pharmacy management systems, including
its billing and accounts receivable systems, in order to address the year 2000
issue. Nevertheless, there can be no assurance that the software applications
and hardware platforms on which the Company's business relies will correctly
manipulate dates and date-related data as the year 2000 is approached and
reached. Such failures could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's business relies heavily upon its ability to obtain pharmaceuticals
from a limited number of biotechnology manufacturers and from its ability to
obtain reimbursement from third party payors, including Medicare and Medicaid.
The Company is in the process of obtaining written verification from each of its
suppliers, and certain significant third party payors, to determine whether
there will be any interruption in the provision of pharmaceuticals or receipt of
payment resulting from the year 2000 issue. The Company expects to complete this
process by June 30, 1999. The Health Care Financing Administration ("HCFA"),
which administers the Medicare and Medicaid programs, has stated that progress
on its efforts to renovate, test and certify the systems operated by its
contractors that process and pay Medicare claims have lead to its expectation of
being ready on January 1, 2000 to process and pay claims. The failure of HCFA or
any of the Company's other significant third party payors to remedy year 2000
related problems could result in a delay in the Company's receipt of payments
for services which could have a material adverse impact on the Company's
business, financial condition and results of operations. Furthermore, a delay in
receiving pharmaceuticals from certain key biotechnology manufacturers could
hinder the Company's ability to provide services to its customers which could
have a material adverse impact on the Company's business, financial condition
and results of operations.
The Company is aware that certain of its systems, such as phone systems,
facsimile machines, heating and air conditioning, security systems and other
non-data processing oriented systems may include embedded chips which process
dates and date sensitive material. These embedded chips are both difficult to
identify in all instances and difficult to repair; often, total replacement of
the chips is necessary. The
<PAGE>
inventory and evaluation for year 2000 compliance of Company hardware,
telecommunications, and environmental support systems was completed in the first
quarter of fiscal year 1999 and those systems requiring remediation (repair),
rebuilding or replacing (re-engineering) were identified. As of March 31, 1999,
all identified re-engineering, remediation, and replacement requirements have
been completed and tested. However, failure of the Company to identify or
remediate any embedded chips (either on an individual or an aggregate basis) on
which significant business operations depend, such as phone systems, could have
a material adverse impact on the Company's business, financial condition and
results of operations.
Costs to Address the Company's Year 2000 Issues. Based on current information,
the Company has budgeted $100,000 for the cost of repairing, updating or
replacing software and equipment. Because additional funds may be required as a
result of future findings, the Company is not currently able to estimate the
final aggregate cost of addressing the year 2000 issue. The Company expects to
fund the costs of addressing the year 2000 issue from cash flows resulting from
operations and does not expect such costs to have a material effect on the
financial condition of the Company or its results of operations.
Risks Presented by Year 2000 Issues. The Company is still in the process of
evaluating potential disruptions or complications that might result from year
2000 related problems. However, at this time the Company has not identified any
specific business functions that will suffer material disruption as a result of
year 2000 related events. It is possible, however, that the Company may identify
business functions in the future that are specifically at risk of year 2000
disruption. The absence of any such determination at this point represents only
the Company's current status of evaluating potential year 2000 related problems
and facts presently known to the Company, and should not be construed to mean
that there is no risk of year 2000 related disruption. Moreover, due to the
unique and pervasive nature of the year 2000 issue, it is impracticable to
anticipate each of the wide variety of year 2000 events, particularly outside of
the Company, that might arise in a worst case scenario which might have a
material adverse impact on the Company's business, financial condition and
results of operations.
The Company's Contingency Plans. The Company intends to develop contingency
plans for significant business risks that might result from year 2000 related
events. Since the Company has not identified any specific business function that
will be materially at risk of significant year 2000 related disruptions, and
because a full assessment of the Company's risk from potential year 2000
failures is still in process, the Company has not yet developed detailed
contingency plans specific to year 2000 problems. Development of these
contingency plans is currently scheduled to occur before June 30, 1999 and as
otherwise appropriate.
<PAGE>
RISK FACTORS
You should carefully consider the risks we describe below before
investing in Accredo. The risks and uncertainties described below are not the
only risks and uncertainties that could develop. Other risks and uncertainties
that we have not predicted or evaluated could also affect our company.
If any of the following risks occur, our earnings, financial condition
or business could be materially harmed, and the trading price of our common
stock could decline, resulting in the loss of all or part of your investment.
Our business is highly dependent on relationships with a limited
number of biotechnology drug suppliers. The substantial majority of Accredo's
revenue and profitability is derived from our relationships with three
biotechnology drug companies, Genzyme Corporation, Biogen, Inc. and
Genentech, Inc. The concentration of our revenue derived from these
relationships is shown in the table below as a percentage of revenue for the
periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999 June 30, 1998 June 30, 1997
<S> <C> <C> <C>
Genzyme 35% 46% 64%
Biogen 29% 23% 14%
Genentech 4% 6% 9%
</TABLE>
Our agreements with these suppliers are generally short term and
cancelable by either party without cause on 60 to 90 days prior notice. Our
agreement with Biogen is up for renewal in May 1999 and terms are currently
under negotiation. 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 Accredo. Further,
the pricing and other terms of these relationships are periodically adjusted.
Any termination or adverse adjustment to any of these relationships could have a
material adverse affect on our business, financial condition and results of
operation.
Our business is focused on a limited number of drugs for specific
diseases. We focus almost exclusively on a limited number of complex and
expensive drugs that serve small patient populations. The primary diseases
treated by the drugs we handle are as follows:
<PAGE>
- - Gaucher Disease, for which we offer Ceredase(R) and Cerezyme(R)
supplied by Genzyme;
- - Multiple Sclerosis, for which we primarily offer Biogen's Avonex(R)
(Interferon Beta-la);
- - Growth hormone-related disorders, for which we primarily offer
Protropin(R), Nutropin(R) and Nutropin AQ(R) supplied by Genentech;
- - Hemophilia, for which we offer all currently approved clotting factor
products; and
- - Crohn's Disease, for which we began offering Remicade(TM) supplied by
Centocor in October 1998.
The concentration of our revenue related to these drugs is shown in the
table below as a percentage of revenue for the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999 June 30, 1998 June 30, 1997
<S> <C> <C> <C>
Gaucher Disease 35% 46% 64%
Multiple Sclerosis 29% 23% 14%
Hemophilia 22% 23% 9%
Growth Hormone
Disorders 5% 7% 10%
Crohn's Disease 1% N/A N/A
</TABLE>
Factors affecting demand for services. Reduced demand for our services
could be caused by a number of circumstances, including:
- - Patient shift to other available treatments;
- - A new treatment that does not require our specialty services;
- - The recall of or adverse reaction caused by a drug;
- - The expiration or challenge of a drug patent;
- - A 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.
Our business could also be adversely affected by the expiration or
challenge to the "orphan drug" status that has been granted by the Food and Drug
Administration to four 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 physiochemically different or clinically
superior. The "orphan drug" status applicable to drugs handled by Accredo
expires as follows: Nutropin(R) expires November 2000; Cerezyme(R) expires May
2001; Avonex(R) expires May 2003 and Remicade(TM) expires
<PAGE>
September 2005. The loss of orphan drug status could result in competitive drugs
entering the market.
Our ability to continue to service Avonex(R) could also be affected by
a pending challenge by Berlex Laboratories, Inc. that Biogen is infringing on a
Berlex patent in the production of Avonex(R). Trial of this case is set for
September 1999.
Due to the small patient populations that use the drugs we handle, our
future growth is highly dependent on expanding our base of drugs. Further, a
loss of patient base or reduction in demand for any reason of the drugs we
currently handle could have a material adverse effect on our business, financial
condition and results of operation.
A disruption of our relationships with certain medical centers could
hurt our business. Accredo has significant relationships with seven medical
centers that involve services primarily related to hemophilia and growth
hormone-related disorders. For the nine-month period ended March 31, 1999 and
the fiscal year ended June 30, 1998, we received approximately 21% and 30%,
respectively, of our income before income taxes from equity in the net income
from our joint ventures related to hemophilia and growth hormone-related
disorders. Specifically, we derived 5% and 16%, respectively, from our joint
venture with Alternative Care Systems, located in Dallas, Texas, 5% and 9%,
respectively, from our joint venture with CM Healthcare Resources, Inc.
located in Chicago, Illinois, and 9% and 0%, respectively, from our joint
ventures with Children's Home Care located in Los Angeles, California for
such periods.
Our agreements with the medical centers are short-term, 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.
Our business is highly dependant on continued research, development
and production in the biotechnology drug industry. Our business is highly
dependent on continued research, development, manufacturing and marketing
expenditures of biotechnology drug companies, and the ability of those
companies to develop, supply and generate demand for drugs that are
<PAGE>
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 biotechnology drug industry suffers
from unfavorable developments, including:
- - Supply shortages;
- - Adverse drug reactions;
- - Drug recalls;
- - Increased competition among biotechnology drug 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 because of governmental or
private market initiatives;
- - Changes in the FDA approval process; or Governmental or private
initiatives that would alter how drug manufacturers, health care
providers or pharmacies promote or sell products and services.
Decreases in payments by third-party payors could hurt our business.
Our profitability depends on payment from governmental and nongovernmental
third-party payors, and we could be materially and adversely affected by
trends toward cost containment measures in the health care industry or by
financial difficulties suffered by private payors. Cost containment measures
affect pricing, purchasing and usage patterns in health care. Private payors,
managed care organizations and similar groups 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 private payors, including large managed care organizations and some
private physician practices, have recently experienced financial trouble. The
ability to collect from third-party payors also affects Accredo's revenue and
profitability. If the Company is unable to collect from third-party payors,
it could have a material adverse impact on our business and financial
condition.
Our dependence on reimbursement from private payors is evident from the
portion of total revenue they constitute. For the nine-month period ended March
31, 1999 and the fiscal years ended June 30, 1998 and 1997, we derived
approximately 83%, 80% and 83%, respectively, of our gross patient service
revenue from private payors (including self-pay), which included 6%, 7% and 11%,
respectively, from sales to private physician practices whose ultimate payor is
typically Medicare.
Changes in medicare or medicaid could hurt our business. Changes in
the Medicare, Medicaid or similar government programs or the rates paid by
those programs for our services may adversely affect our earnings. We
estimate that approximately 17% of our net revenue for the nine months ended
March 31,
<PAGE>
1999, 20% of our net revenue for the fiscal year ended June 30, 1998 and 17% of
our net revenue for the fiscal year ended June 30, 1997 consisted of
reimbursements from federal and state programs, excluding sales to private
physicians whose ultimate payor is typically Medicare. Any reductions in amounts
reimbursable by government programs for our services or changes in regulations
governing such reimbursements could materially and adversely effect our
business, financial condition and results of operations:
Our quarterly financial results may fluctuate significantly. Our
financial results have historically fluctuated on a quarterly basis, and this
pattern is expected to continue. These quarterly fluctuations could adversely
affect the market price of our common stock and are attributable to many
factors, including:
- - Below-expected sales of a new drug;
- - Increases in our operating expenses in anticipation of the launch of a
new drug;
- - Price and term adjustments with our suppliers;
- - Inaccuracies in our estimates of the cost of ongoing programs;
- - The timing and integration of our acquisitions;
- - Changes in governmental regulations;
- - The annual renewal of deductible and co-payment requirements, so that
patient ordering patterns are affected, causing a seasonal reduction in
revenue from existing drug programs for our third fiscal quarter;
- - Our provision of drugs, now or in the future, to treat seasonal
illnesses;
- - Physician prescribing patterns; and
- - General economic conditions.
Liabilities and costs may arise from our joint ventures and
acquisitions. As part of our growth strategy we continually evaluate joint
venture and acquisition opportunities. Although we cannot predict or provide
assurance that Accredo will complete any future acquisitions or joint
ventures, if we do, Accredo will be exposed to a number of risks, including:
- - Difficulty in assimilating the new operations;
- - Increased transaction costs;
- - Diversion of management's attention from existing operations;
- - Dilutive issuances of equity securities that may negatively impact the
market price of our stock;
- - Increased debt;
- - Increased amortization expense related to goodwill and other intangible
assets that would decrease our earnings.
<PAGE>
Accredo may also expose itself to unknown or contingent liabilities
resulting from the pre-acquisition operations of the entities it acquires, such
as liability for failure to comply with health care or reimbursement laws.
Although we believe that appropriate indemnification provisions were included in
Accredo's previous acquisitions and joint venture arrangements, Accredo could be
exposed to liability for pre-acquisition operations with respect to the
following transactions:
- - The purchase in May 1996 of Southern Health Systems, Inc. Southern
Health had four subsidiaries, each of which had prior operating
histories. While Southern Health divested all of its subsidiaries with
unrelated businesses before closing, Accredo could potentially be held
liable for matters relating to the operations of the divested
subsidiaries for periods before the divestiture.
- - The purchase in June 1997 of Hemophilia Health Services, Inc., which
had an extensive operating history.
- - The purchase in November 1998 of a 50% interest in two California
general partnerships.
Our industry is subject to extensive government regulation. The
marketing, sale and purchase of drugs and medical supplies is extensively
regulated by federal and state governments, and if we fail or are accused of
failing to comply with laws and regulations, we could suffer a material
adverse effect to our business, financial condition and results of
operations. Our business could also be materially and adversely effected if
the suppliers or clients we work with are accused of violating laws or
regulations. The applicable regulatory framework is complex, and the laws are
very broad in scope. Many of these laws remain open to interpretation, and
have not been addressed by substantive court decisions.
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
("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 certain "safe harbor" regulations attempt
to clarify when an arrangement may fall outside of the scope of the
Anti-Kickback Law, our business arrangements and the services we
provide may not fit within these exceptions.
- - 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
<PAGE>
physician or their immediate family member has 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.
- - Federal and state investigations and enforcement actions have recently
begun focusing 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, and can result in significant financial
sanctions.
Our business will be harmed if we are unable to effectively manage
our growth. Our rapid growth over the past two fiscal 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. If
this growth continues, the strain could cause us to relocate our operations
to a new city or area. 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.
Our business could be adversely affected by the substantial
competition within our industry. 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. Accredo's current and potential competitors include:
- - Specialty pharmacy divisions of wholesale drug distributors;
- - Specialty pharmacy 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.
<PAGE>
Many of our competitors have substantially greater resources and more
established operations and infrastructure than Accredo. We are particularly at
risk for one of our suppliers deciding to pursue its own distribution and
services. Some of our competitors, such as hospitals and hemophilia treatment
centers, have the advantage of federally mandated drug discounts that are not
available to Accredo, and which are proposed to be available to even more
potentially competing centers. 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.
Our product delivery requirements depend heavily on available
shipping services appropriate to our products. Since almost all of our
revenues result from the sale of drugs we deliver to our patients, we depend
heavily on our shipping services for efficient, cost effective delivery of
our product. There are many risks associated with this dependence, all of
which could materially and adversely affect our business. Those risks include:
- - Any significant increase in shipping rates;
- - Strikes or other service interruptions by our primary carrier, Federal
Express, or by another carrier that could affect Federal Express; or
- - Product spoilage during shipment, since our drugs are expensive and
often require special handling, such as refrigeration. We do not
maintain insurance against product spoilage during shipment and the
loss of even small shipments could represent a significant cost.
We rely on a few key people. We depend on a number of our 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, Accredo is not insured
against the losses resulting from the death of its 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.
We may need additional capital to finance our growth and capital
requirements. In order to implement our growth strategy, we will need
substantial capital resources and will incur, from time to time, additional
short- and long-term indebtedness, the terms of which will depend on market
and other conditions. We cannot be certain that existing or additional
financing will be available to us on acceptable terms, if at all. As a
result, we could be unable to fully pursue our growth strategy. Further,
additional
<PAGE>
financing may involve the issuance of equity securities that would reduce the
percentage ownership of our then current stockholders.
We could be adversely affected by an impairment of the significant
amount of goodwill on our financial statements. The formation of Accredo and
our acquisitions of Southern Health Systems and Hemophilia Health Services
resulted in the recording of a significant amount of goodwill on our
financial statements. The goodwill was recorded because the value of the
tangible and intangible assets owned by those companies at the time they were
acquired was less than the purchase price. We have determined that the
goodwill recorded as a result of those acquisitions will benefit Accredo for
a period of no less than 40 years and, as a result, we amortize this goodwill
evenly over a 40-year period. There can be no assurance that Accredo will
realize the full value of this goodwill. We evaluate on an on-going basis
whether events and circumstances indicate that all or some of the carrying
value of goodwill is no longer recoverable, in which case we would write off
the unrecoverable goodwill in a charge to our earnings.
If the amortization period for a material portion of goodwill is overly
long, it causes an overstatement of earnings in periods immediately following
the transaction in which the goodwill was recorded. In later periods, it causes
earnings to be understated because of an amortization charge for an asset that
no longer provides a corresponding benefit. Earnings in later periods could also
be significantly affected if the remaining balance of goodwill is impaired and
written off as a charge against earnings. We are not presently aware of any
persuasive evidence that any material portion of our goodwill will be impaired
and written off against earnings. As of March 31, 1999, Accredo had goodwill,
net of accumulated amortization, of approximately $48.7 million, or 36% of total
assets and 337% of stockholders' equity.
Since our growth strategy may involve the acquisition of other
companies, we may record additional goodwill in the future. The amortization and
possible write-off of this goodwill could negatively impact our future earnings.
Also, in future acquisitions we may be required to allocate a portion of the
purchase price to the value of non-competition agreements, patient base and
contracts that are acquired. The value of any amounts allocated to these items
could be amortized over a period much shorter than 40 years. As a result, our
earnings and potentially our stock price could be negatively impacted.
The price of our stock could be volatile and subject to substantial
fluctuations. Our common stock is traded on the Nasdaq National Market. Since
our 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:
<PAGE>
- - Future announcements concerning us, our competitors or the health care
market;
- - Changes in government regulations;
- - 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 demand or reimbursement levels for our services and
general economic, political and market conditions, may adversely affect the
market price of our common stock.
Certain of our stockholders could act together to exert control over
Accredo. Our directors, executive officers and their affiliates, as a group,
including Welsh, Carson, Anderson & Stowe, VII, L.P., beneficially own
approximately 56% of our outstanding voting common stock. If those
stockholders acted together, they could control the election of directors,
and influence other matters that require a vote by our stockholders,
potentially using that power to prevent a change in control at a premium over
the prevailing market price of our common stock.
Future sales of our common stock could cause the price of our shares
to decline. Sales of substantial amounts of our common stock in the public
market, or the belief those sales might occur, could cause the price of our
stock to decline. We presently have outstanding 9,077,087 shares of common
stock, 3,450,000 of which were sold in our initial public offering in April
1999 and are freely tradable.
Subject to certain volume and other limitations of Rule 144, holders of
5,627,087 restricted shares of common stock will be eligible to sell their
shares to the public upon the expiration of a "lock-up" period of 180 days
following April 15, 1999, which was the effective date of the registration
statement relating to our initial public offering. A substantial majority of
those holders also have contractual rights to have their shares registered for
resale after the lock up period expires free of any limitations imposed by Rule
144. If those holders, after the 180-day lockup period, cause a large number of
shares to be sold in the public market, the market for the common stock could be
adversely affected.
Accredo has also registered 698,214 shares of common stock reserved for
future stock awards under our stock plans, and 899,286 shares of common stock
reserved for issuance upon the exercise of outstanding awards. Those shares are
freely tradable upon exercise, except to the extent that the holders are deemed
to be affiliates of Accredo, in which case the transferability of such shares
will be subject to the volume limitations of Rule 144, and except to the extent
the holders are subject to "lock up" agreements.
<PAGE>
Our certificate of incorporation and bylaws could inhibit a takeover
of Accredo, resulting in a decline in the market price for the common stock.
Certain provisions of our Amended and Restated Certificate of Incorporation
and Amended and Restated Bylaws could make it more difficult for a third
party to acquire control of Accredo, or could discourage a third party from
attempting to acquire our company. These provisions might limit the price
that investors would pay in the future for shares of our common stock.
Examples of these provisions include:
- - The classification of our Board of Directors into three classes;
- - Blank check preferred stock that may be issued by our Board of
Directors, without stockholder approval, containing preferences or
rights objectionable to an acquiror;
- - Restrictions on calling special meetings at which an acquisition or
change in control might be brought to a vote of the stockholders; and
- - The right to impose procedural and other requirements that could make
it more difficult for stockholders to effect certain corporate actions.
We are subject to a provision of the Delaware General Corporation Law
(Section 203), that restricts certain business combinations with an "interested
stockholder" and could delay, defer or prevent a change in control of Accredo.
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.
We believe it is important to communicate our expectations to our
investors. There may be events in the future, however, that we are not
accurately able to predict or over which we have no control. The risk factors
listed above, 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, the demand for Accredo's services, our
ability to expand through joint ventures and acquisitions, our ability to
maintain existing pricing arrangements with suppliers, the impact of government
regulation, the impact of year
<PAGE>
2000 issues, our need for additional capital, the seasonality of our operations
and our ability to implement our strategies and objectives.
Before you invest in our common stock, you should be aware that the
occurrence of any of the events described in the above risk factors, 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 our investment.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company uses derivative financial instruments to manage its exposure to
rising interest rates on its variable-rate debt, primarily by entering into
variable-to-fixed interest rate swaps. Since the Company has fixed its interest
rate through October 31, 2001 on $25.0 million of its revolving credit facility
through such a financial instrument, the Company would not benefit from any
decrease in interest rates on this portion of its credit facility. Accordingly,
a 100 basis point decrease in interest rates along the entire yield curve would
not increase pre-tax income by $187,000 for the nine months ended March 31, 1999
as would be expected without this financial instrument. However, a 100 point
increase in interest rates along the entire yield curve would also not decrease
pre-tax income by $187,000 for the same period as a result of using this
derivative financial instrument. Actual changes in rates may differ from the
hypothetical assumptions used in computing this exposure.
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(d) Use of Proceeds
The Company's Registration Statement on Form S-1 (File No. 333-62679)
was declared effective on April 15, 1999. On April 16, 1999, the Company
commenced the Offering of its Common Stock, par value $.01 per share ("Common
Stock"). The managing underwriters for the offering were Hambrecht & Quist,
NationsBanc Montgomery Securities LLC and SunTrust Equitable Securities. The
Company registered 3,450,000 shares of Common Stock, for an aggregate price to
the public of the amount registered of $55,200,000. All of the 3,450,000 shares
of Common Stock registered were offered and sold by the Company. On April 21,
1999, the Company closed on 3,000,000 of such shares of Common Stock, and the
aggregate offering price to the public of such amount was $48,000,000. The
underwriters subsequently exercised in full their over-allotment option to
purchase the remaining registered and unsold shares of Common Stock, and on
April 27, 1999, the Company sold the remaining 450,000 shares of Common Stock
with an aggregate offering price to the public of $7,200,000. Therefore, the
offering was completed following the sale of all 3,450,000 shares of Common
Stock registered, at an aggregate offering price to the public of $55,200,000.
Through May 14, 1999, the aggregate amount of expenses incurred for the
Company's account in connection with the issuance and distribution of its Common
Stock was approximately $5,364,000, including $3,864,000 in underwriting
discounts and commissions and $1,500,000 in other estimated offering expenses.
The net Offering proceeds to the Company, after deducting the estimated
total expenses, were approximately $49,836,000. As of May 14, 1999,
approximately $31.4 million of the net offering proceeds have been used to
redeem all shares of the Company's Series A Cumulative Preferred Stock,
including all accrued dividends; approximately $11.2 million of the proceeds
have been used to prepay in full all principal and accrued interest on the
Company's Senior Subordinated Notes and approximately $7.0 million of the
proceeds have been used to decrease the outstanding balance on the Company's
revolving credit facility. The balance of the net offering proceeds has been
invested in interest bearing investment grade securities.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Shareholders holding a majority of the issued and outstanding shares of
the common stock of the Company acting by written consent without a meeting on
April 12, 1999 in accordance with the By-laws of the Company and Section 228 of
the Delaware General Corporation Law adopted the following matters.
1. Proposed Amendment and Restatement of the Company's Certificate of
Incorporation.
VOTED FOR: 5,109,847 VOTED AGAINST: 0
2. Proposal to approve the Company's 1999 Employee Stock Purchase Plan
VOTED FOR: 5,109,847 VOTED AGAINST: 0
3. Proposal to approve the Company's 1999 Long Term Incentive Plan
VOTED FOR: 5,109,847 VOTED AGAINST: 0
Notice of these corporate actions was given to all of the stockholders
of the Company who did not consent in writing thereto.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule (filed herewith)
(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 14, 1999 Accredo Health, Incorporated
/s/ David D. Stevens
----------------------------
David D. Stevens
Chairman of the Board and
Chief Executive Officer
/s/ Joel R. Kimbrough
----------------------------
Joel R. Kimbrough
Senior Vice President, Chief
Financial Officer and Treasurer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF ACCREDO HEALTH, INCORPORATED FOR THE NINE
MONTHS ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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