<PAGE>
PROSPECTUS
3,000,000 SHARES
[LOGO]
COMMON STOCK
All of the 3,000,000 shares of Common Stock offered hereby (the "Offering")
are being sold by the Company. Prior to this Offering, there has been no public
market for the Common Stock of the Company. The initial public offering price
for the Common Stock will be $16.00 per share. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price. The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol ACDO.
--------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share...................... $16.00 $1.12 $14.88
Total(3)....................... $48,000,000 $3,360,000 $44,640,000
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $1,500,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock solely to cover over-allotments,
if any. If all such shares are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $55,200,000,
$3,864,000 and $51,336,000, respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them, and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about April 21, 1999, at the offices of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY SECURITIES LLC
SUNTRUST EQUITABLE SECURITIES
April 15, 1999
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Common Stock
offered hereby. As permitted by the rules and regulations of the Commission,
this Prospectus, which is part of the Registration Statement, omits certain
information, exhibits, schedules and undertakings set forth in the Registration
Statement. For further information pertaining to the Company and the Common
Stock, reference is made to such Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents or
provisions of any documents referred to herein are not necessarily complete, and
in each instance where a copy of the document has been filed as an exhibit to
the Registration Statement reference is made to the exhibit filed. The
Registration Statement may be inspected without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the
Registration Statement may be obtained from the Commission at prescribed rates
from the Public Reference Section of the Commission at such address, and at the
Commission's regional offices located at 7 World Trade Center, 13th Floor, New
York, New York 10048, and at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60611. In addition, registration
statements and certain other filings made with the Commission through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly
available through the Commission's site on the Internet's World Wide Web,
located at http://www.sec.gov. The Registration Statement, including all
exhibits thereto and amendments thereof, has been filed with the Commission
through EDGAR.
Accredo Health, Incorporated-SM- is a service mark of the Company and Nova
Factor-Registered Trademark- is a trademark of the Company. All other service
marks, trademarks and trade names referred to in this Prospectus are the
property of their respective owners.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS."
THE COMPANY
Accredo Health, Incorporated ("Accredo" or the "Company") provides
specialized contract pharmacy and related services pursuant to agreements with
biotechnology drug manufacturers relating to the treatment of patients with
certain costly, chronic diseases. Because of the unique needs of patients
suffering from chronic diseases, biotechnology drug manufacturers have
recognized the benefits of customized treatment programs to facilitate alternate
site drug administration, ensure compliance with treatment regimens, provide
reimbursement assistance and capture valuable clinical and patient demographic
information. The Company addresses the needs of the manufacturers by providing
specialized services that facilitate product launch and patient acceptance,
including the collection of timely drug utilization and patient compliance
information, patient education and monitoring through the use of written
materials and telephonic consultation, reimbursement expertise and overnight
drug delivery. The Company believes that its ability to accelerate market
penetration and increase revenues for new biotechnology drugs makes it an
attractive partner for manufacturers as evidenced by its preferred relationships
with Genzyme Corporation ("Genzyme"), Biogen, Inc. ("Biogen"), Genentech, Inc.
("Genentech") and Centocor Inc. ("Centocor"). While these relationships are not
exclusive, the Company's preferred status generally involves a designation of
the Company as a preferred or recommended provider of the manufacturer's drugs,
direct marketing of the Company's services, customized pricing reflecting the
Company's specialized services and flexibility in adjusting prices and other
terms in the event of changed market conditions or service levels.
The Company has designed its specialty services to focus primarily on
biotechnology drugs that: (i) are used on a recurring basis to treat chronic and
potentially life threatening diseases; (ii) are expensive, with annual therapy
costs generally ranging from $6,000 to $200,000 per patient; (iii) are
administered through injection; and (iv) require temperature control or other
specialized handling as part of their distribution process. Currently, the
Company provides services that address the needs of patients with the following
diseases: Gaucher Disease, a hereditary liver enzyme deficiency; hemophilia, a
hereditary bleeding disorder; Multiple Sclerosis, a debilitating disease of the
central nervous system; and growth hormone-related disorders. In addition, in
August 1998 the Company entered into an agreement with Centocor to provide its
services to patients with Crohn's Disease, a chronic inflammatory disease
affecting the gastrointestinal tract. These diseases generally require life-long
therapy, except for growth hormone-related disorders which typically require
treatment for six to ten years.
The Company believes that it is well positioned to take advantage of a large
drug development pipeline and the increasing trend toward specialized
outsourcing by the biotechnology drug industry. The Company believes that
biotechnology products represent the most expensive and rapidly growing part of
the new drug pipeline. The Company continuously monitors biotechnology drugs in
various phases of clinical development with a particular focus on identifying
potential new drugs for the treatment of costly, chronic diseases. Unlike many
traditional drugs, these products often possess specific characteristics that
make utilization and compliance increasingly difficult. They are often composed
of unstable proteins which must be taken by injection and require timely,
temperature maintained distribution, dosage monitoring, and controlled inventory
management. In addition, expert reimbursement management is crucial as a result
of their high cost. When addressing chronic diseases, the challenges facing
biotechnology drug manufacturers are often heightened by small patient
populations and the need for patients to remain on therapy for extended periods.
In response to the challenges facing biotechnology drug manufacturers, which
include often limited resources, the unpredictability of the drug approval
process and the onset of significant competition, many manufacturers have sought
to outsource various stages of product development in order to realize a return
on investment prior to the expiration of any patent or orphan drug status
exclusivity. This has included discovery research by outsourcing genomics and
screening functions and clinical development through the use of contract
research organizations (CROs) and site management organizations (SMOs). This
trend has also extended to product commercialization and launch through the
outsourcing of manufacturing, sales and marketing, product detailing, pharmacy
and distribution services and patient support programs.
The Company's objective is to be the leading provider of specialized
contract pharmacy and related services. Key elements of the Company's strategy
include: (i) expanding the number of chronic diseases served; (ii) leveraging
its expertise to expand its service offerings; (iii) establishing additional
relationships with academic medical centers and children's hospitals that treat
patients with costly, chronic diseases; (iv) increasing its number of payor
contracts; and (v) pursuing acquisitions of similar or complementary businesses.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company...................... 3,000,000 shares
Common Stock to be outstanding after the Offering........ 8,627,087 shares(1)
Use of proceeds.......................................... To repay certain indebtedness, to redeem
the Company's outstanding Series A
Cumulative Preferred Stock and, if
available, for working capital and other
general corporate purposes, including
possible acquisitions.
Proposed Nasdaq National Market symbol................... ACDO
</TABLE>
- ------------------------
(1) Includes 1,100,000 shares of the Company's Non-Voting Common Stock, but
excludes 698,214 shares of Common Stock reserved for future stock awards
under the Company's stock option and employee stock purchase plans and
899,286 shares of Common Stock issuable upon the exercise of outstanding
options at a weighted average exercise price of $3.79 per share. See
"Capitalization."
------------------------------
UNLESS THE CONTEXT SUGGESTS OTHERWISE, REFERENCES IN THIS PROSPECTUS TO THE
"COMPANY" OR "ACCREDO" MEAN ACCREDO HEALTH, INCORPORATED AND ITS SUBSIDIARIES
AND PREDECESSOR ENTITIES. EXCEPT WHERE OTHERWISE INDICATED, ALL INFORMATION IN
THIS PROSPECTUS: (I) GIVES EFFECT TO A RECAPITALIZATION TO BE EFFECTIVE PRIOR TO
COMPLETION OF THE OFFERING PURSUANT TO WHICH 1,100,000 SHARES OF COMMON STOCK
HELD BY THE COMPANY'S PRINCIPAL STOCKHOLDER, WELSH, CARSON, ANDERSON AND STOWE
VII, L.P. ("WCAS VII"), WILL BE EXCHANGED FOR 1,100,000 SHARES OF NON-VOTING
COMMON STOCK OF THE COMPANY (THE "RECAPITALIZATION"); (II) GIVES EFFECT TO THE
REDEMPTION OF ALL OUTSTANDING SHARES OF THE COMPANY'S SERIES A CUMULATIVE
PREFERRED STOCK (THE "SERIES A PREFERRED STOCK") AT A REDEMPTION PRICE OF $100
PER SHARE (PLUS ACCRUED AND UNPAID DIVIDENDS) USING A PORTION OF THE NET
PROCEEDS FROM THE OFFERING; AND (III) ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION. UNLESS THE CONTEXT SUGGESTS OTHERWISE, REFERENCES IN THIS
PROSPECTUS TO "COMMON STOCK" INCLUDE THE NON-VOTING COMMON STOCK TO BE ISSUED AS
PART OF THE RECAPITALIZATION.
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
COMPANY(1)
--------------------------------------------
PREDECESSOR(1) SIX
-------------------------- MONTHS
JULY 1, MAY 24, ENDED
1995 1996 YEARS ENDED DECEMBER
YEAR ENDED THROUGH THROUGH JUNE 30, 31,
JUNE 30, MAY 31, JUNE 30, -------------------- ---------
1995 1996 1996 1997 1998 1997
------------- ----------- ----------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Revenues:
Net patient service revenue............. $ 71,513 $ 68,585 $ 6,647 $ 106,143 $ 170,002 $ 80,367
Other revenue........................... 6,710 6,346 597 8,049 9,806 4,680
Equity in net income (loss) of joint
ventures.............................. 646 (139) 49 1,017 1,150 539
------------- ----------- ----------- --------- --------- ---------
Total revenues...................... 78,869 74,792 7,293 115,209 180,958 85,586
Operating expenses:
Cost of services........................ 68,273 65,867 6,450 101,080 154,046 73,087
General and administrative.............. 2,714 2,753 627 5,939 12,489 5,729
Bad debts............................... 1,322 1,860 251 2,977 3,165 1,582
Depreciation and amortization........... 76 104 456 4,877 3,861 1,911
Corporate overhead allocation(2)........ 1,900 4,206 -- -- -- --
------------- ----------- ----------- --------- --------- ---------
Total operating expenses............ 74,285 74,790 7,784 114,873 173,561 82,309
------------- ----------- ----------- --------- --------- ---------
Operating income (loss)..................... 4,584 2 (491) 336 7,397 3,277
Interest expense, net....................... 943 266 106 984 3,552 1,781
------------- ----------- ----------- --------- --------- ---------
Income (loss) before income taxes........... 3,641 (264) (597) (648) 3,845 1,496
Income tax expense (benefit)................ 1,387 (72) (28) 1,502 2,420 1,067
------------- ----------- ----------- --------- --------- ---------
Net income (loss)........................... $ 2,254 $ (192) (569) (2,150) 1,425 429
------------- -----------
------------- -----------
Mandatorily redeemable cumulative preferred
stock dividends........................... (170) (2,043) (2,043) (1,021)
----------- --------- --------- ---------
Net income (loss) attributable to common
stockholders.............................. $ (739) $ (4,193) $ (618) $ (592)
----------- --------- --------- ---------
----------- --------- --------- ---------
Net income (loss) per share attributable to
common stockholders--diluted(4)........... $ (.14) $ (.82) $ (.11) $ (.11)
----------- --------- --------- ---------
----------- --------- --------- ---------
Weighted average shares and dilutive
equivalents outstanding--diluted.......... 5,107 5,418 6,041 5,852
<CAPTION>
1998
---------
STATEMENT OF OPERATIONS DATA:
Revenues:
Net patient service revenue............. $ 113,748
Other revenue........................... 5,647
Equity in net income (loss) of joint
ventures.............................. 631
---------
Total revenues...................... 120,026
Operating expenses:
Cost of services........................ 101,909
General and administrative.............. 8,391
Bad debts............................... 2,284
Depreciation and amortization........... 1,986
Corporate overhead allocation(2)........ --
---------
Total operating expenses............ 114,570
---------
Operating income (loss)..................... 5,456
Interest expense, net....................... 1,730
---------
Income (loss) before income taxes........... 3,726
Income tax expense (benefit)................ 1,863
---------
Net income (loss)........................... 1,863
Mandatorily redeemable cumulative preferred
stock dividends........................... (1,021)
---------
Net income (loss) attributable to common
stockholders.............................. $ 842
---------
---------
Net income (loss) per share attributable to
common stockholders--diluted(4)........... $ .14
---------
---------
Weighted average shares and dilutive
equivalents outstanding--diluted.......... 6,214
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------
AS
ACTUAL ADJUSTED(3)
--------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 1,636 $ 2,844
Working capital..................................................................... 25,470 27,453
Total assets........................................................................ 129,648 131,499
Long-term debt...................................................................... 36,538 27,498
Mandatorily redeemable cumulative preferred stock................................... 30,814 --
Stockholders' equity................................................................ 13,908 55,745
</TABLE>
- ------------------------------
(1) The Company was incorporated on May 24, 1996. On May 31, 1996, the Company
acquired Southern Health Systems, Inc. ("SHS"), a holding company, and its
wholly-owned subsidiary, Nova Factor, Inc. ("Nova Factor" or the
"Predecessor"). Since the Company was newly formed at May 24, 1996, and
because the Predecessor had been in existence for several years, the Company
is considered the successor to the Predecessor's operations. The balance
sheet data of the Predecessor represents the historical cost basis of the
Predecessor's assets and liabilities prior to its acquisition by the
Company. The acquisition of the Predecessor by the Company resulted in a new
basis of accounting such that the Predecessor's assets and liabilities were
recorded at their fair value in the Company's consolidated balance sheet
upon consummation of the acquisition. Additionally, the Company acquired
Hemophilia Health Services, Inc. (formerly known as Horizon Health Systems,
Inc.) ("HHS") on June 1, 1997. Accordingly, the Summary Financial Data are
not strictly comparable for the periods presented. See Notes 1 and 3 of
Notes to the Company's Consolidated Financial Statements.
(2) The Predecessor has been allocated expenses for certain services provided by
its parent, SHS, including cash management, tax reporting, risk management
and executive management services. Charges for these services were based
upon a general allocation methodology determined by SHS (used to allocate
all corporate overhead expenses to SHS subsidiaries), and were not
necessarily allocated based on specific identification of expenses.
Management believes the allocation methodology is reasonable. See Note 6 of
Notes to the Nova Factor, Inc. Financial Statements.
(3) As adjusted to reflect the sale of the Common Stock offered hereby at the
initial public offering price of $16.00 per share and the receipt and
application of the estimated net proceeds therefrom as if such transactions
had occurred on December 31, 1998. See "Use of Proceeds" and
"Capitalization." Retained earnings was reduced due to the extraordinary
charge, net of tax effect, for unamortized Original Issue Discount
associated with the early extinguishment of the Company's Senior
Subordinated Notes Payable with part of the Offering proceeds. At December
31, 1998, the Original Issue Discount charge associated with these Notes was
approximately $1,303,000, net of income taxes of $775,000.
(4) Historical diluted loss per share for the years ended June 30, 1996, 1997
and 1998 and the six-month period ended December 31, 1997 have been
calculated using the same denominator as used for basic loss per share
because the inclusion of dilutive securities in the denominator would have
an anti-dilutive effect.
5
<PAGE>
RISK FACTORS
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. IN ADDITION
TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN EVALUATING THE COMPANY, ITS
BUSINESS AND AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS (WHICH MAY BE IDENTIFIED BY
WORDS SUCH AS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," "INTEND" AND
SIMILAR EXPRESSIONS) INCLUDE, WITHOUT LIMITATION, THE COMPANY'S BELIEFS
CONCERNING THE AVAILABILITY OF NEW DRUGS, THE DEMAND FOR ITS SERVICES, ITS
ABILITY TO EXPAND THROUGH JOINT VENTURES AND ACQUISITIONS, ITS ABILITY TO
MAINTAIN ITS PRICING ARRANGEMENTS WITH SUPPLIERS THAT PRESERVE ITS MARGINS, THE
IMPACT OF EXISTING AND NEW GOVERNMENT REGULATIONS, THE IMPACT OF YEAR 2000
ISSUES, ITS NEED FOR ADDITIONAL CAPITAL, THE SEASONALITY AND VARIABILITY OF ITS
OPERATING RESULTS AND ITS ABILITY TO IMPLEMENT THE STRATEGIES DESCRIBED HEREIN
AND ACHIEVE ITS OBJECTIVES. FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND ARE INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES, MANY
OF WHICH CANNOT BE PREDICTED WITH ACCURACY AND SOME OF WHICH MIGHT NOT EVEN BE
ANTICIPATED. FUTURE EVENTS AND ACTUAL RESULTS, FINANCIAL AND OTHERWISE, COULD
DIFFER MATERIALLY FROM THOSE SET FORTH IN OR CONTEMPLATED BY THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN. IMPORTANT FACTORS THAT COULD CONTRIBUTE TO SUCH
DIFFERENCES ARE SET FORTH BELOW UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS, INCLUDING IN "PROSPECTUS SUMMARY," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS."
DEPENDENCE ON RELATIONSHIPS WITH LIMITED NUMBER OF BIOTECHNOLOGY DRUG
MANUFACTURERS. The Company's revenue and profitability are highly dependent on
its relationships with a limited number of biotechnology drug companies that
manufacture and supply drugs for the specific chronic diseases served by the
Company. The Company derives a substantial portion of its total revenue from its
relationships with its three largest suppliers, Genzyme, Biogen and Genentech.
The Company's revenue derived from these relationships represented 39%, 29% and
5%, respectively, of total revenue for the six months ended December 31, 1998;
46%, 23%, and 6%, respectively, for the fiscal year ended June 30, 1998 and 64%,
14% and 9%, respectively, for the fiscal year ended June 30, 1997. Due to the
Company's focus on a limited number of chronic diseases, the Company is likely
to continue to experience a high degree of concentration of business with
several suppliers, which concentration may increase from continuing
consolidation in the biotechnology industry. The Company's agreements with these
suppliers generally limit the Company's ability to supply competing drugs during
(and in some cases for up to five years after) the term of the agreement and
allow the supplier to distribute directly or through other parties. These
agreements are generally short-term, with the earliest renewal date arising in
May 1999 as to the agreement with Biogen, and may be canceled by either party,
without cause, upon between 60 and 90 days prior notice. The Company and its
suppliers periodically adjust the Company's purchase price and other terms for
the drugs covered by such contracts as well as the scope and pricing of services
provided by the Company under such contracts. Any termination, adverse
adjustment of purchase price or other terms, change in the supplier's
distribution methods or adverse change in the Company's relationship with any of
its suppliers (including as a result of consolidation among drug suppliers)
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Disease Markets and
Manufacturer Relationships" and "--Suppliers."
CONCENTRATION OF DRUGS AND CHRONIC DISEASES. The Company currently focuses
almost exclusively on a limited number of complex and expensive drugs that treat
certain specific chronic diseases: Gaucher Disease, for which the Company offers
Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- supplied by
Genzyme; Multiple Sclerosis, for which the Company primarily offers Biogen's
Avonex-Registered Trademark- (Interferon Beta-1a)
("Avonex-Registered Trademark-"); growth hormone-related disorders, for which
the Company primarily offers Protropin-Registered Trademark-,
Nutropin-Registered Trademark- and Nutropin AQ-Registered Trademark- supplied by
Genentech; and hemophilia, for which the Company offers all currently approved
clotting factor products. In addition, in August 1998 the Company entered into a
contract with Centocor to distribute Remicade-TM- for the treatment of Crohn's
Disease and in October 1998 initiated sales and services with respect to
Remicade-TM-. The Company's revenue derived from its pharmacy services related
to Gaucher Disease, Multiple Sclerosis, growth hormone-related disorders and
hemophilia represented 39%, 29%, 6% and 23%, respectively, of total revenue for
the six months ended December 31, 1998; 46%, 23%, 7% and 23%, respectively, for
the fiscal year ended
6
<PAGE>
June 30, 1998 and 64%, 14%, 10% and 9%, respectively, for the fiscal year ended
June 30, 1997. The drugs offered by the Company are complex (generally requiring
injection, special handling and patient education), are expensive (with small
numbers of patients representing large amounts of revenue), serve small patient
populations in the United States and, other than drugs for hemophilia and growth
hormone-related disorders, are available only from single sources that generally
restrict the Company from offering competing drugs. Certain drugs handled by the
Company have been granted "orphan drug" status by the United States Food and
Drug Administration ("FDA") for the treatment of rare diseases or conditions
with small patient populations. The FDA provides drug manufacturers with special
incentives, including research tax credits and drug study design assistance, for
orphan drug development. Orphan drug status also provides that, once an orphan
drug receives FDA approval, the FDA cannot approve a second drug for the same
treatment indication for a period of seven years, unless the new drug is either
physiochemically different or clinically superior. In particular, orphan drug
status applicable to drugs handled by the Company expires as follows:
Nutropin-Registered Trademark- expires November 2000;
Cerezyme-Registered Trademark- expires May 2001; Avonex-Registered Trademark-
expires May 2003; and Remicade-TM- expires September 2005. The Company is not
the exclusive provider of pharmacy services for all patients in any particular
market or for any particular disease. In addition, there are alternative
treatment regimens, other than those offered by the Company, available for each
disease treated by the Company, except Gaucher Disease. As a result, the Company
could be materially and adversely affected by a variety of factors, such as
patients shifting to other currently available treatment regimens, the
development of a new treatment modality not requiring the Company's specialty
pharmacy services, an adverse reaction to or recall of a drug, the expiration of
or challenge to a drug patent, the expiration or challenge to orphan drug
status, the availability of a competing treatment through a new drug or a new
indication for an existing drug, the loss of a managed care or other payor
relationship covering a number of high revenue patients, a disease cure or the
death of a high revenue patient. Furthermore, due to the small patient
populations of the diseases serviced by the Company, future growth is highly
dependent on the Company expanding the base of drugs for which it provides its
services, expanding its relationships with its current suppliers and
establishing relationships with new suppliers, none of which can be assured. See
"Business--Disease Markets and Manufacturer Relationships" and "--Suppliers."
In July 1996, Berlex Laboratories, Inc. ("Berlex") filed suit against Biogen
alleging patent infringement by Biogen in the production of
Avonex-Registered Trademark- and seeking, among other things, a permanent
injunction restraining Biogen from such alleged infringement. As of March 1999,
the suit involving Berlex was still pending and a trial date is currently set
for September 1999. Further, Serono Laboratories, Inc. ("Serono") recently
requested the FDA to grant an exception to the orphan drug exclusivity of
Avonex-Registered Trademark-, which the FDA declined on March 1, 1999. The
granting of a permanent injunction that would restrain Biogen from manufacturing
Avonex-Registered Trademark-, the inability of Biogen to continue to supply
Avonex-Registered Trademark- on terms favorable to the Company or the loss of
orphan drug exclusivity due to further challenges by Serono or others could have
a material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON MEDICAL CENTER RELATIONSHIPS. The Company has certain joint
venture or business management relationships, as applicable, with seven medical
centers (or their affiliates) that involve services primarily related to
hemophilia and growth hormone-related disorders. For the six-month period ended
December 31, 1998 and the fiscal year ended June 30, 1998, the Company derived
in the aggregate approximately 17% and 30%, respectively, of its income before
income taxes from its equity in the net income of these joint ventures, and in
particular 6% and 16%, respectively, from the Company's joint venture with
Alternative Care Systems, Inc. located in Dallas, Texas and 5% and 9%,
respectively, from the Company's joint ventures with CM Healthcare Resources,
Inc. located in Chicago, Illinois. The Company and each of the medical centers
with which it has a joint venture typically share in the profits and losses of
the venture in proportion to their respective capital contributions, with
neither party having voting control. The agreements with these medical centers
are short-term, ranging between one and five years in duration, and may be
cancelled by either party, without cause, upon between one and twelve months
prior notice. Any termination, adjustment to terms or adverse change in the
Company's relationships with these medical centers, including as a result of
consolidation within the hospital industry, regulatory uncertainties inherent in
the structure of the relationships or restrictive changes to regulatory
requirements, could have a material adverse effect on the Company's business,
financial
7
<PAGE>
condition and results of operations. See "Business--Strategic Relationships with
Medical Centers" and "-- Government Regulation."
DEPENDENCE ON BIOTECHNOLOGY DRUG INDUSTRY. The Company's business is highly
dependent on research, development, manufacturing and marketing expenditures of
biotechnology drug companies and the ability of such companies to develop,
supply and generate demand for drugs that meet the Company's service model. The
Company has benefited to date from the willingness of such companies to
outsource specialty pharmacy services such as those offered by the Company, but
there can be no assurance that this trend will continue. Furthermore, the
Company would be materially and adversely affected by unfavorable developments
in the biotechnology drug industry generally, such as, among other things,
supply shortages, adverse drug reactions, drug recalls, increased competition
among biotechnology drug companies, the inability of drug companies to obtain
capital needed to finance product development, governmental or private market
initiatives to reduce the retail price of drugs, changes in the FDA approval
process or governmental or private initiatives to regulate the manner in which
drug manufacturers, health care providers or pharmacies promote or sell their
products and services. Any of these factors could result in a decline in the
development of drugs, a general decline in research, development and marketing
expenditures, a reduction in the retail price of drugs sold by the Company, a
shortage of drugs sold by the Company or a reduction in the use by drug
companies of the specialty pharmacy services offered by the Company, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Industry Background."
DEPENDENCE ON PAYORS AND REIMBURSEMENT RELATED RISKS. The profitability of
the Company depends on payment and reimbursement from governmental and
nongovernmental third-party payors. The primary trend in the United States
health care industry is toward cost containment. The increasing prevalence of
managed care, centralized purchasing decisions, consolidation among and
integration of health care providers and competition for patients is continuing
to affect pricing, purchasing and usage patterns in health care. Decisions
regarding the use of a particular drug treatment are increasingly influenced by
large private payors, managed care organizations, group purchasing
organizations, pharmacy benefits management companies, regional integrated
delivery systems and similar organizations, and are becoming more economically
focused, with decisions taking into account product cost and whether a product
reduces the overall cost of treatment. For the six-month period ended December
31, 1998 and the fiscal years ended June 30, 1998 and 1997, the Company derived
approximately 83%, 80% and 83%, respectively, of its 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. Prior to the Company acquiring an interest in Childrens
Hemophilia Services from Children's Home Care ("CHC"), the Company sold products
and services to CHC. As of February 28, 1999, CHC owed the Company $3,477,123 of
which $3,447,833 had been outstanding for over 90 days. Furthermore, many other
private payors, including large managed care organizations and some private
physician practices, have recently experienced financial difficulty. There can
be no assurance that the Company will not be adversely affected by cost
containment measures exerted by its third party payors, the influence of such
organizations over decisions regarding the use of drug treatments or the
financial inability of any such payors, including private physician practices,
to satisfy their payment obligations to the Company. See "Business--Payors."
The Company also derives a significant portion of its revenue from
governmental programs such as Medicare and Medicaid. For the six-month period
ended December 31, 1998 and the fiscal years ended June 30, 1998 and 1997, the
Company received reimbursement payments from federal and state programs that
accounted for approximately 17%, 20% and 17%, respectively, of the Company's
gross patient service revenue, excluding sales to private physician practices
whose ultimate payor is typically Medicare. Such programs are highly regulated
and subject to frequent and substantial changes and cost containment measures.
In recent years, changes in these programs have limited and reduced
reimbursement to providers, and Congress recently enacted the Balanced Budget
Act of 1997 which establishes a plan to balance the federal budget by fiscal
year 2002 and which includes significant additional reductions in spending
levels for these programs. This legislation also replaced and relaxed the
federal Medicaid payment standard, thereby increasing state discretion over the
financial administration of Medicaid programs. Furthermore, federal and state
proposals are pending that would
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impose further limitations on governmental payments and that would increase
patient co-payments and deductibles. Additionally, a number of states are
considering legislation designed to reduce their Medicaid expenditures and
provide universal coverage and additional care for certain populations,
including proposals to impose additional taxes on providers to help finance or
expand such programs. Any of these changes could result in significant
reductions in payment levels for drugs handled and services provided by the
Company, which would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Payors."
VARIATION IN QUARTERLY OPERATING RESULTS; SEASONALITY. The Company's
results of operations historically have fluctuated on a quarterly basis and can
be expected to continue to be subject to quarterly fluctuations. In particular,
the Company typically increases its operating expenses in anticipation of the
launch of a new drug, and if the new drug does not generate the levels of sales
during the periods anticipated by management, the Company's results in that and
future quarters could be adversely affected. Quarterly results can also
fluctuate as a result of the timing of periodic adjustments to prices and other
terms with the Company's drug suppliers, the accuracy of estimates of resources
required for ongoing programs, the timing and integration of acquisitions,
changes in regulations related to biotechnology companies, physician prescribing
patterns, and general economic conditions, none of which can be adequately
predicted by the Company. Quarterly operating results also fluctuate as a result
of the annual renewal (on a calendar year basis) of deductible and co-payment
requirements, thereby affecting patient ordering patterns in a manner that
creates a seasonal reduction in revenue from existing drug programs for the
Company's third fiscal quarter ending March 31. Quarterly results may also
fluctuate as a result of the Company providing drugs, now or in the future, that
treat seasonal illnesses. The Company believes that quarterly comparisons of its
financial results may not necessarily be meaningful and should not be relied
upon as an indication of future performance. In addition, fluctuations in
quarterly results could affect the market price of the Common Stock in a manner
unrelated to the longer term operating performance of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Fluctuations and Seasonality."
JOINT VENTURE AND ACQUISITION RISKS. As part of its strategy, the Company
continually evaluates joint venture and acquisition opportunities. Such
transactions involve numerous risks, including difficulties in the assimilation
of operations, costs incurred in connection with the transaction, diversion of
management's attention from other business concerns, potential loss of key
employees of an acquired company and delays to address regulatory requirements.
There can be no assurance that the Company will complete any future acquisitions
or joint ventures, or that such transactions, if completed, will be integrated
successfully or will contribute favorably to the Company's operations and
financial condition. In addition, acquisitions and joint ventures can expose the
Company to unknown or contingent liabilities of acquired businesses, including
liabilities for failure to comply with health care or reimbursement laws. In May
1996 the Company acquired all of the outstanding capital stock of SHS, which had
four subsidiaries (including Nova Factor), each of which had prior operating
histories in one or more health care businesses. Prior to closing the
acquisition, SHS divested all of its subsidiaries other than Nova Factor.
However, there can be no assurance that the Company will not be held liable for
matters relating to the operations of the divested subsidiaries for periods
prior to the divestiture. In June 1997, the Company acquired all of the
outstanding capital stock of HHS, which had an extensive operating history, and
in November 1998 the Company acquired a 50% interest in two California general
partnerships. While the Company negotiates indemnification provisions that it
considers to be appropriate for the transactions that it enters into, there can
be no assurance that liabilities relating to the prior operations of these and
other acquired companies will not have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
future acquisitions or joint ventures may result in dilutive issuances of equity
securities, incurrence of additional debt, amortization of expenses related to
acquired goodwill and intangible assets and exposure to unknown or contingent
liabilities, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "The Company."
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GOVERNMENT REGULATION. The conduct of marketing, selling and purchasing
drugs and medical supplies by and among manufacturers, distributors, health care
providers and patients is extensively regulated and periodically scrutinized by
state and federal governments for compliance with laws and regulations
regarding, among other things, inducements for referrals, prohibited financial
relationships with physicians, joint venture and management arrangements,
product discounts, incentives to patients and professional licensure. This
regulatory framework is complex and the laws are very broad in scope, subject to
differing interpretations and lack substantive court decisions addressing many
arrangements under which the Company has conducted and expects to conduct its
business. Any failure to comply or alleged failure to comply with applicable
laws and regulations could have a material adverse effect on the Company's
business, financial conditions and results of operations. See
"Business--Government Regulation."
In particular, federal and state governments enforce a federal statute that
prohibits the offer, payment, solicitation or receipt of any remuneration,
directly or indirectly, overtly or covertly, to induce or in exchange for the
referral of patients covered by certain governmental programs, or the leasing,
purchasing, ordering or arranging for or recommending the lease, purchase or
order of any item, good, facility or service covered by such programs (the
"Anti-Kickback Law"). The Health Insurance Portability and Accountability Act of
1996 ("HIPAA") greatly expanded the prohibitions of the Anti-Kickback Law by
applying them to almost all health care programs that receive federal funding,
creating new violations for certain fraudulent activity applicable to both
public and private "health care benefit programs" and prohibiting inducements to
Medicare or Medicaid eligible patients. The Company is also subject to the
Ethics in Patient Referrals Act of 1989, as amended, commonly referred to as the
"Stark Law," which prohibits physician referrals for certain health-related
items, including those offered by the Company, to entities with which the
physician or an immediate family member has a "financial relationship," and
prohibits the recipient of any such referral from billing for the referred item.
Violations of these laws are punishable by civil sanctions, including
significant monetary penalties and exclusion from participation in the Medicare
and Medicaid programs, and criminal sanctions in the case of the Anti-Kickback
Law and HIPAA. Due to the breadth and complexity of these laws, there can be no
assurance that the Company, any of its personnel, or any significant customer or
business partner of the Company, will not become subject to sanctions that could
have a material adverse effect on the Company's business, financial condition
and results of operations. Additionally, the sanctioning or exclusion of a
manufacturer or recipient of the Company's products or services, even for
activities unrelated to those of the Company, could also have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Government Regulation."
In an attempt to clarify which arrangements are not subject to prosecution
under the Anti-Kickback Law, the Department of Health and Human Services
("DHHS") adopted certain "safe harbor" regulations and continues to publish
clarifications to such safe harbors. Arrangements that comply with all the
requirements of all applicable safe harbors are deemed not to violate the
Anti-Kickback Law. Several of the Company's business arrangements, such as joint
venture and management arrangements with medical centers, service arrangements
with physicians and product discount arrangements with its suppliers, do not
satisfy all of the requirements necessary to fall within the applicable safe
harbor. Furthermore, the Office of the Inspector General ("OIG") of DHHS has
published certain proposed regulations under HIPAA outlining certain permissible
patient incentives designed to promote preventative care or that are DE MINIMIS
under the HIPAA prohibition against beneficiary inducements. The Company
routinely provides certain items and services to its patients that may not fit
within the proposed regulation. It is possible that some of the Company's
practices could be challenged. Although failure of a transaction or arrangement
to fit within a specific safe harbor provision or the proposed regulation for
beneficiary inducements does not necessarily mean that the transaction or
arrangement is illegal or that prosecution will be pursued, there can be no
assurance that the Company's practices will not be challenged, or that the
Company will not be subject to sanctions or be required to alter or discontinue
certain of its practices, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Government Regulation."
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State laws prohibit the practice of medicine, pharmacy and nursing without a
license. For example, many states interpret the practice of nursing to include
health teaching, health counseling, the provision of care supportive to or
restorative of life and well being and the administration of medical regimens
prescribed by a physician. Accordingly, to the extent that the Company assists
patients and providers in helping patients to comply with prescribed treatment
programs, such activities could be deemed by a state to be the practice of
medicine, pharmacy or nursing. There can be no assurance that the Company's
operations will not be challenged as constituting the unlicensed practice of
medicine or nursing or being outside the scope of its licensed pharmacists or
pharmacy licenses. If such a challenge were made successfully in any state, the
Company and its personnel could be subject to civil and criminal penalties under
such state's law and the Company could be required to reduce, restructure,
outsource or cease its business in that state. See "Business--Government
Regulation."
Significant public attention recently has been focused on the health care
industry due to ongoing federal and state investigations related to among other
things joint ventures, referral and billing practices, product discount
arrangements, home health care services, dissemination of confidential patient
information, clinical drug research trials and gifts for patients. In addition,
state and federal agencies have initiated billing review projects in certain
states and are expected to extend such projects to additional states, including
states in which the Company does business. These enforcement actions increase
the likelihood of governmental investigations of the Company, its affiliates and
their respective predecessors and personnel, and parties with whom it conducts
business, and there can be no assurance that governmental investigators will not
take positions that are inconsistent with industry practices, including the
Company's or such other parties' practices. In addition to investigations and
enforcement actions by governmental agencies, QUI TAM (or "whistleblowers")
actions may be brought under the False Claims Act by private individuals on
behalf of the government. Because the health care industry will continue to be
subject to substantial regulation, there can be no assurance that the Company's
activities will not be challenged or that the Company will not be subject to
sanctions or be required to alter or discontinue certain of its practices, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Government
Regulation."
POSSIBLE HEALTH CARE REFORM. Health care reform measures have been
considered by Congress and other federal and state bodies during recent years.
The intent of the proposals generally has been to reduce health care costs and
the growth of total health care expenditures, to expand health care coverage for
the uninsured and to eliminate fraud, waste and financial abuse. Although
comprehensive health care reform has been considered, only limited proposals
have been enacted. Comprehensive health care reform may be considered again and
efforts to enact reform bills are likely to continue. Implementation of
government health care reform may adversely affect development and marketing
expenditures by biotechnology companies, which could decrease the business
opportunities available to the Company or the demand for its specialty services.
The Company is unable to predict the likelihood of such legislation or similar
legislation being enacted into law or the effects that any such legislation
would have on the Company.
MANAGEMENT OF GROWTH. The Company's business has grown rapidly in its last
two fiscal years with total revenue increasing from $115.2 million in fiscal
year 1997 to $181.0 million in fiscal year 1998, and from $85.6 million in the
first six months of fiscal year 1998 to $120.0 million in the first six months
of fiscal year 1999. This growth has resulted in a substantial increase in the
number of its employees (from 203 at June 30, 1997 to 332 at December 31, 1998),
the size of its programs and the scope of its operations. This growth has placed
and, if such growth continues, will continue to place a strain on operational,
human and financial resources and may necessitate relocation of certain
operations to one or more cities in which the Company does not currently have a
facility. The Company's ability to manage such growth effectively will depend
upon its ability to enhance its management team and its ability to attract and
retain skilled employees. The Company's success will also depend on the ability
of its officers and key employees to continue to implement and improve its
operational, management information and financial control systems, and to
expand, train and manage its work force. There can be no assurance that the
Company will be able to manage any future growth successfully or provide the
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necessary resources to successfully manage its business. Failure to manage
growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION; INDUSTRY CONSOLIDATION. The specialty pharmacy industry is
highly competitive and is experiencing both horizontal and vertical
consolidation. All of the drugs, supplies and services that the Company provides
are available from sources other than the Company. Current and potential
competitors of the Company 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 alternate site
health care providers. In addition, the Company's drug suppliers or their
competitors have developed and may continue to develop and implement their own
direct specialty pharmacy service programs in lieu of using the Company. In
addition, managed care companies, pharmacy benefit managers and other payors can
influence the source from which their enrollees may obtain drugs through
required formularies and may desire to use full-line providers on their provider
panels. Many of the Company's competitors and potential competitors have greater
financial, technical, marketing and managerial resources than the Company.
Furthermore, certain of the Company's competitors, such as hospitals and certain
hemophilia treatment centers, are eligible for federally mandated discounts for
drug purchases that are not available to the Company, and the Federal Health
Resources and Services Administration ("HRSA") is proposing to broaden the
number of centers eligible for such discounts by requiring participation in the
discount program as a condition to receiving HRSA grants. There are relatively
few barriers to entry into the Company's specialty contract pharmacy service
segment and there can be no assurance that, as the segment continues to evolve,
additional competitors with greater resources than the Company will not enter
the market or that the Company's suppliers will not choose to provide such
specialty services directly or through other businesses that have a broader
range of sales, marketing and support services. There can be no assurance that
competitive pressures will not increase, including as a result of further
industry consolidation, or that such pressures will not have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Competition."
RELIANCE ON TELEPHONE AND COMPUTER SYSTEMS; YEAR 2000 COMPLIANCE
RISK. Because the Company believes that its success depends, in part, upon its
services provided over the telephone on a real-time basis, any continuing
disruption in either its computer system or its telephone system could adversely
affect its ability to receive and process customer orders, provide its service
to patients and ship products on a timely basis, and could adversely affect the
Company's relations with its patients and suppliers.
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. By the year 2000, these
date code fields will need to accept four-digit entries to distinguish 21st
century dates from 20th century dates. Computer systems that do not accept
four-digit entries could fail or produce erroneous results and cause disruptions
of operations. As a result, many software and computer systems may need to be
upgraded or replaced in order to comply with such "year 2000" requirements. The
Company is in the process of obtaining written verification from vendors to
determine whether the Company's computer systems and software products are year
2000 compliant. Also, the Company is upgrading its pharmacy management systems,
including its billing and accounts receivable systems, to address year 2000
issues. The failure of the Company's systems to be year 2000 compliant could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Issue."
In addition, the Company has ongoing relationships with third-party payors,
suppliers, vendors, and others that may have computer systems with year 2000
problems that the Company does not control. There can be no assurance that the
Company's payors, including the fiscal intermediaries and governmental agencies,
with which the Company transacts business and which are responsible for payment
to the Company will not experience significant problems with year 2000
compliance. The Health Care Financing Administration ("HCFA"), which administers
the Medicare and Medicaid programs, has stated that its progress as of February
1999 on efforts to renovate, test and certify the systems that process and pay
Medicare claims have lead to its expectation of being ready on January 1, 2000
to process and pay claims. HCFA's failure to remedy year 2000
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problems, however, could delay payment of claims to providers. HCFA has also
stated its concern about the readiness of fiscal intermediaries, carriers,
providers and suppliers to prepare and submit claims in a year 2000 compliant
format and moved the target date for submission of claims in HCFA's year 2000
compliant format from January 1, 1999 to April 5, 1999. The failure of third
parties to remedy year 2000 problems could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS RELATED TO SHIPPING. Substantially all of the Company's revenues are
derived from the sale of drugs that are shipped to its patients. The Company
ships most of its orders by overnight delivery, and typically bears the cost of
shipment. Shipping is a significant expense in the operation of the Company's
business and principally all of the Company's products are shipped by a single
carrier, Federal Express Corporation ("FedEx"). Accordingly, any significant
increase in shipping rates could have an adverse effect on the Company's results
of operations. Similarly, strikes or other service interruptions by FedEx, or by
any other carrier that may indirectly affect FedEx, would adversely affect the
Company's ability to deliver products on a timely basis and therefore its
ability to generate revenue. FedEx pilots are unionized members of the FedEx
Pilot's Association, and in February 1999 ratified their first collectively
bargained contract. The drugs shipped by the Company require special handling,
including refrigeration to maintain temperatures within certain ranges. The
Company does not maintain insurance against product spoilage during shipment.
Due to their high cost, even small shipments of the Company's products can
represent significant dollar amounts of inventory. Accordingly, the spoilage of
one or more shipments of the Company's products could have a material adverse
effect on the Company's results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company depends on a number of key
executives, the loss of the services of which could have a material adverse
effect on the Company. The Company does not maintain "key person" life insurance
policies on any of its executives. The Company also depends on its ability to
attract and retain qualified professional (including pharmacists) and technical
operating staff. There can be no assurance that the Company will be able to
continue to attract and retain such personnel, and its inability to do so could
have a material adverse effect on the Company's business, financial condition
and results of operations.
NEED FOR FINANCING. In order to implement its growth strategy, the Company
will require substantial capital resources and will need to maintain its
existing capital resources and incur, from time to time, additional short- and
long-term indebtedness, including purchasing terms from its suppliers. The
Company also may need to issue, in public or private transactions, equity or
debt securities, the terms of which will depend on market and other conditions.
There can be no assurance that existing or additional financing will be
available on terms acceptable to the Company, if at all. As a result, the
Company may not be able to implement fully its growth strategy. In addition, any
such financing may result in dilutive issuances of equity securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
RISKS RELATED TO INTANGIBLE ASSETS. The formation of the Company by WCAS
VII and certain of its affiliates (collectively, "Welsh Carson") and the
subsequent acquisitions by the Company of SHS and HHS have resulted in the
recording of a significant amount of goodwill on the Company's financial
statements. As of December 31, 1998, the Company had goodwill, net of
accumulated amortization, of approximately $49.0 million, or 38% of total assets
and 352% of stockholders' equity. Goodwill arises when an acquiror pays more for
a business than the fair value of the tangible and separately measurable
intangible net assets. Generally accepted accounting principles require that
goodwill and all other intangible assets be amortized over the period benefited
by such assets. Management has determined that period to be no less than 40
years for goodwill and, therefore, the Company amortizes goodwill on a straight
line basis over a period of 40 years. The use of an inappropriately long
amortization period for a material portion of goodwill would cause an
overstatement of earnings in periods immediately following the transaction and
in later periods would cause earnings to be understated by reason of an
amortization charge for an asset no longer providing a corresponding benefit to
the Company. Earnings in later years could also be significantly affected if
management determined then that the
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remaining balance of goodwill is impaired and needed to be written off as a
charge against earnings. Management has reviewed with its independent
accountants the allocation of consideration paid for the assets (including
goodwill) and liabilities of the acquired business. Management has concluded
that the anticipated future benefit associated with the goodwill recognized to
date will continue indefinitely, and is not presently aware of any persuasive
evidence that any material portion of goodwill will dissipate over a period
shorter than 40 years.
In addition, the Company's growth strategy will likely result in additional
goodwill on the Company's financial statements. There can be no assurance that
the value of goodwill will ever be realized by the Company. On an on-going
basis, the Company makes an evaluation to determine whether events and
circumstances indicate that all or a portion of the carrying value of goodwill
may no longer be recoverable, in which case a charge to earnings may be
necessary to write off unrecoverable goodwill. Any future determination
requiring the write-off of a significant portion of goodwill could have a
material adverse effect on the Company's business, financial condition and
results of operations. See Note 3 of Notes to the Company's Consolidated
Financial Statements as of and for the year ended June 30, 1998.
POTENTIAL LIABILITY; AVAILABILITY OF INSURANCE. The Company's business
exposes it to risks inherent in the provision of drugs and related services.
Although the Company currently maintains professional liability insurance, there
can be no assurance that the scope of coverage or limits of such insurance will
be adequate to protect it against future claims. In addition, there can be no
assurance that the Company will be able to maintain adequate liability insurance
in the future on acceptable terms or with adequate coverage against potential
liabilities.
CONTROL BY AND USE OF PROCEEDS TO BENEFIT EXISTING STOCKHOLDERS. Upon the
completion of this Offering, the Company's directors and executive officers and
their affiliates as a group (including shares held by Welsh Carson) will
beneficially own approximately 60% of the outstanding voting Common Stock (or
approximately 56% if the Underwriters' over-allotment option is exercised in
full). As a result, these stockholders, if acting together, will have effective
control over the Company through their ability to control the election of
directors and all other matters that require a vote by the Company's
stockholders. Such control by the existing stockholders may have the effect of
preventing a change in control of the Company. The existing stockholders'
ability to prevent such a change in control of the Company may have an adverse
effect on the market price of the Common Stock. See "Management--Directors and
Executive Officers," "Principal Stockholders," and "Description of Capital
Stock."
The Company will use a portion of the net proceeds from this Offering to
redeem all of the outstanding shares of Series A Preferred Stock and to prepay
in full all principal and accrued interest on the Company's outstanding 10%
Senior Subordinated Notes due June 1, 2004 (the "Senior Subordinated Notes").
Welsh Carson owns approximately 97% of the outstanding shares of Series A
Preferred Stock and substantially all outstanding Senior Subordinated Notes. In
addition, certain executive officers and directors of the Company own, in the
aggregate, approximately 2% of the outstanding shares of Series A Preferred
Stock. See "Use of Proceeds" and "Certain Transactions."
NO PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE. Prior to the
Offering, there has been no public market for the Common Stock, and there can be
no assurance that an active trading market for the Common Stock will develop or,
if one does develop, that it will be maintained. The initial public offering
price, which was established by negotiations between the Company and the
representatives of the Underwriters, may not be indicative of prices that will
prevail in the trading market for the Common Stock. The market price of the
Common Stock could be subject to wide fluctuations in response to variations in
operating results from quarter to quarter, changes in earnings estimates by
analysts, market conditions in the industry and general economic conditions.
Furthermore, the stock market has experienced significant price and volume
fluctuations unrelated to the operating performance of particular companies.
These market fluctuations may have an adverse effect on the market price of the
Common Stock.
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SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock in the public market, or the perception that such sales might occur, could
have a material adverse effect on the market price of the Common Stock.
Immediately following the Offering, the Company will have outstanding 8,627,087
shares of Common Stock (9,077,087 shares if the Underwriters' over-allotment
option is exercised in full), excluding 899,286 shares reserved for issuance
upon the exercise of outstanding stock options and an additional 698,214 shares
of Common Stock reserved for future stock awards under the Company's stock
option and employee stock purchase plans. The 3,000,000 shares of Common Stock
offered hereby (3,450,000 if the Underwriters' over-allotment option is
exercised in full) will be eligible for public sale without restriction under
the Securities Act by persons other than affiliates (as that term is defined in
Rule 144 under the Securities Act) of the Company. All of the remaining
5,627,087 shares of Common Stock outstanding will be "restricted" within the
meaning of Rule 144 and may not be resold in the absence of registration under
the Securities Act or the availability of an exemption from such registration,
including the exemption provided by Rule 144. Taking into consideration the
effect of the 180-day "lock-up" agreements described herein (covering an
aggregate of 5,627,087 shares and options to purchase an additional 899,286
shares held by executive officers, other employees, directors and certain
existing stockholders of the Company), no restricted shares of Common Stock will
be eligible for sale in the public market immediately after the Offering and all
restricted shares will be eligible for sale upon the expiration of the 180-day
lock-up agreements, subject to certain volume and other limitations of Rule 144.
Holders of 5,627,087 restricted shares of Common Stock have contractual rights
to have those shares registered for resale to the public. If such holders, by
exercising their registration rights after the 180-day lockup period, cause a
large number of shares to be registered and sold in the public market, the
market price of the Common Stock might be adversely affected.
The Company intends to register on Form S-8 under the Securities Act, as
soon as practicable on or after the effective date of the Offering, 698,214
shares of Common Stock reserved for future stock awards under the Company's
stock option and employee stock purchase plans and 899,286 shares of Common
Stock reserved for issuance upon the exercise of outstanding options. This
registration statement will be effective upon filing. Shares registered and
issued pursuant to such registration statement will be freely tradable except to
the extent that the holders thereof are deemed to be affiliates of the Company,
in which case the transferability of such shares will be subject to the volume
limitations of Rule 144. See "Shares Eligible for Future Sale."
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER, BYLAW AND OTHER
PROVISIONS. Certain provisions of the Company's Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws, including the
classification of the Board of Directors into three classes, could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
Such provisions could limit the price that certain investors might be willing to
pay in the future for shares of the Common Stock. Certain of such provisions
allow the Company to issue preferred stock with rights senior to those of the
Common Stock and impose various procedural and other requirements which could
make it more difficult for stockholders to effect certain corporate actions. In
addition, the Company is subject to the provisions of Section 203 of the
Delaware General Corporation Law ("DGCL"), which restricts certain business
combinations with any "interested stockholder" and may delay, defer or prevent a
change in control of the Company. See "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION. The purchasers of shares of Common
Stock pursuant to the Offering will experience immediate and substantial
dilution of the net tangible book value per share of Common Stock from the
initial public offering price. At the initial public offering price of $16.00
per share, purchasers in the Offering will incur dilution of $15.53 per share.
See "Dilution."
ABSENCE OF DIVIDENDS. The Company has not and does not expect to declare or
pay any cash dividends in the foreseeable future. The Company intends to retain
all earnings, if any, in order to expand its operations. Furthermore, the
Company's bank credit agreement presently prohibits the payment of cash
dividends. The payment of cash dividends, if any, in the future is within the
discretion of the Company's Board of Directors and will depend upon the
Company's earnings, if any, capital requirements, financial condition, credit
agreements and other relevant factors. See "Dividend Policy."
15
<PAGE>
THE COMPANY
Accredo provides specialized contract pharmacy and related services
beneficial to patients with certain costly, chronic diseases. Accredo's business
was founded in 1985 by Le Bonheur Health Systems, Inc., the former parent of a
not-for-profit children's hospital in Memphis, Tennessee ("Le Bonheur"). Le
Bonheur operated the business through its subsidiary, Southern Health Systems,
Inc. ("SHS"), and through Nova Factor, Inc., one of four subsidiaries of SHS
("Nova Factor"). In May 1996, Accredo (formerly known as Nova Holdings, Inc.)
was formed to acquire SHS and Nova Factor following the divestiture by SHS of
all of its subsidiaries other than Nova Factor. Accredo continues to own SHS as
a wholly owned subsidiary, and SHS continues to own Nova Factor as a wholly
owned subsidiary. In June 1997, Accredo acquired all of the outstanding stock of
Hemophilia Health Services, Inc. (formerly known as Horizon Health Systems,
Inc.) ("HHS"), which became and continues to be a wholly owned subsidiary of
Accredo. See "Risk Factors--Joint Venture and Acquisition Risks" and Note 3 of
Notes to the Consolidated Financial Statements of the Company.
The Company's principal executive offices are located at 1640 Century Center
Parkway, Suite 101, Memphis, Tennessee 38134, and its telephone number is (901)
385-3688.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby at the initial public offering price of $16.00 per
share, after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company, are estimated to be approximately
$43,140,000 ($49,836,000 if the Underwriters' over-allotment option is exercised
in full).
The Company expects to use the net proceeds it receives from the Offering as
follows: (i) approximately $11.2 million will be used to prepay in full all
principal and accrued interest on the Company's outstanding Senior Subordinated
Notes; (ii) approximately $31.4 million will be used to redeem all outstanding
shares of Series A Preferred Stock, including all accrued dividends thereon; and
(iii) the balance of the net proceeds will be used for working capital and other
general corporate purposes, including possible acquisitions. Pending such uses,
the net proceeds will be invested in short term, investment grade, interest
bearing obligations. The Company from time to time considers various acquisition
proposals, but currently has no commitments or agreements with respect to any
material acquisitions.
The Senior Subordinated Notes bear interest at 10.0% per annum and mature on
June 1, 2004. The Series A Preferred Stock accrues dividends at an annual rate
of $8.00 per share. Such dividends are cumulative and accrue from the date of
issue. The mandatory redemption date of the Series A Preferred Stock is May 31,
2004.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company intends to retain any future earnings to finance the growth
and development of its business and therefore does not anticipate paying any
cash dividends in the forseeable future. The payment of cash dividends in the
future will be at the discretion of the Board of Directors and will depend upon
factors such as the Company's earnings levels, capital requirements, financial
condition and other factors deemed relevant by the Board of Directors. There can
be no assurance that the Company will pay any dividends in the future.
16
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1998 (i) the actual
capitalization of the Company and (ii) the pro forma capitalization of the
Company as adjusted to give effect to (a) the exchange by WCAS VII of 1,100,000
shares of Common Stock for 1,100,000 shares of Non-Voting Common Stock pursuant
to the Recapitalization and (b) the sale by the Company of 3,000,000 shares of
Common Stock in the Offering at the initial public offering price of $16.00 per
share and the application of the estimated net proceeds therefrom (after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company). This table should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------
<S> <C> <C>
PRO FORMA
ACTUAL AS ADJUSTED
----------- ---------------
<CAPTION>
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Long-term notes payable.......................................... $ 27,498 $ 27,498
----------- -------
Senior Subordinated Notes payable................................ 9,040 --
----------- -------
Mandatorily redeemable cumulative preferred stock, at redemption
amount, 300,000 shares authorized, and 255,361 shares issued
and outstanding................................................ 30,814 --
----------- -------
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 issued and outstanding, pro forma as
adjusted................................................... -- 11
Common Stock, $.01 par value; 30,000,000 shares authorized;
5,625,587 shares issued and outstanding, actual; 7,525,587
shares issued and outstanding, pro forma as adjusted(1).... 56 75
Additional paid-in capital................................... 13,852 56,962
Retained earnings (deficit)(2)............................... -- (1,303)
----------- -------
Total stockholders' equity............................... 13,908 55,745
----------- -------
Total capitalization................................. $ 81,260 $ 83,243
----------- -------
----------- -------
</TABLE>
- ------------------------------
(1) Excludes 698,214 shares of Common Stock reserved for future stock awards
under the Company's stock option and employee stock purchase plans and
900,786 shares of Common Stock issuable upon the exercise of outstanding
options as of December 31, 1998 at a weighted average exercise price of
$3.79 per share.
(2) The reduction in pro forma retained earnings is related to the extraordinary
charge for unamortized Original Issue Discount associated with the early
extinguishment of the Company's Senior Subordinated Notes Payable with part
of the Offering proceeds. At December 31, 1998, the Original Issue Discount
charge associated with these Notes was approximately $1,303,000, net of
income taxes of $775,000.
17
<PAGE>
DILUTION
As of December 31, 1998, the Company's net deficit in tangible book value
was ($37.8 million), or $(6.72) per share of Common Stock. Net deficit in
tangible book value per share represents the amount of the Company's total
tangible assets, less total liabilities and mandatorily redeemable cumulative
preferred stock, divided by the number of shares of Common Stock outstanding.
After giving effect to the sale by the Company of 3,000,000 shares of Common
Stock in the Offering at the initial public offering price of $16.00 per share
and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company, the pro forma net tangible book value
of the Company as of December 31, 1998 would have been approximately $4.0
million, or $.47 per share. This represents an immediate increase in net
tangible book value of $7.19 per share to existing stockholders and an immediate
dilution in net tangible book value of $15.53 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share......................... $ 16.00
Net deficit in tangible book value per share before the
Offering(1)................................................. $ (6.72)
Increase per share attributable to new investors.............. 7.19
---------
Pro forma net tangible book value per share after the
Offering(1)................................................... .47
---------
Dilution per share to new investors(2).......................... $ 15.53
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1998, the differences between the existing stockholders and the new investors
with respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid to the Company and the average price per share paid
(based upon the initial public offering price of $16.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ----------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)... 5,625,587 65.2% $18,428,763 27.7% $ 3.28
New investors 3,000,000 34.8 48,000,000 72.3 16.00
--------- ----- ---------- -----
Total.............. 8,625,587 100.0% $66,428,763 100.0%
--------- ----- ---------- -----
--------- ----- ---------- -----
</TABLE>
- ------------------------
(1) Excludes 698,214 shares of Common Stock reserved for future stock awards
under the Company's stock option and employee stock purchase plans and
900,786 shares of Common Stock issuable upon the exercise of outstanding
options as of December 31, 1998 at a weighted average exercise price of
$3.79 per share. To the extent that options are exercised, there could be
further dilution to new investors.
(2) Dilution per share to new investors is determined by subtracting pro forma
net tangible book value per share after the Offering from the initial public
offering price per share. Dilution per share to new investors will be $14.82
if the Underwriters' over-allotment option is exercised in full.
18
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables summarize certain selected financial data, which are
qualified by and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Predecessor's
and the Company's Financial Statements and the Notes thereto included elsewhere
in this Prospectus. The selected financial data with respect to (a) Nova Factor
(Predecessor) as of and for the fiscal years ended June 30, 1994 and 1995, and
as of May 31, 1996 and for the period July 1, 1995 through May 31, 1996, and (b)
the Company as of June 30, 1996 and for the period from inception (May 24, 1996)
through June 30, 1996, and as of and for the fiscal years ended June 30, 1997
and 1998 has been derived from the audited financial statements of the
Predecessor and the Company. The selected financial data at December 31, 1998
and for the six months ended December 31, 1997 and 1998 has been derived from
the unaudited financial statements of the Company, which in the Company's
opinion, include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the information set forth
therein. The information set forth below is not necessarily indicative of the
results of future operations.
<TABLE>
<CAPTION>
PREDECESSOR(1) COMPANY(1)
--------------------------------- ------------------------------------------
SIX
MAY 24, MONTHS
JULY 1, 1996 ENDED
YEARS ENDED 1995 (INCEPTION) DECEMBER
JUNE 30, THROUGH THROUGH YEARS ENDED JUNE 30, 31,
-------------------- MAY 31, JUNE 30, -------------------- ---------
1994 1995(2) 1996 1996 1997 1998 1997
--------- --------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Net patient service revenue.......... $ 5,442 $ 71,513 $ 68,585 $ 6,647 $ 106,143 $ 170,002 $ 80,367
Other revenue........................ 756 6,710 6,346 597 8,049 9,806 4,680
Equity in net income (loss) of joint
ventures........................... 126 646 (139) 49 1,017 1,150 539
--------- --------- ----------- --------- --------- --------- ---------
Total revenues................... 6,324 78,869 74,792 7,293 115,209 180,958 85,586
Operating expenses:
Cost of services..................... 4,016 68,273 65,867 6,450 101,080 154,046 73,087
General and administrative........... 694 2,714 2,753 627 5,939 12,489 5,729
Bad debts............................ 74 1,322 1,860 251 2,977 3,165 1,582
Depreciation and amortization........ 11 76 104 456 4,877 3,861 1,911
Corporate overhead allocation(3)..... 413 1,900 4,206 -- -- -- --
--------- --------- ----------- --------- --------- --------- ---------
Total operating expenses......... 5,208 74,285 74,790 7,784 114,873 173,561 82,309
--------- --------- ----------- --------- --------- --------- ---------
Operating income (loss).................. 1,116 4,584 2 (491) 336 7,397 3,277
Interest expense, net.................... -- 943 266 106 984 3,552 1,781
--------- --------- ----------- --------- --------- --------- ---------
Income (loss) before income taxes........ 1,116 3,641 (264) (597) (648) 3,845 1,496
Income tax expense (benefit)............. 428 1,387 (72) (28) 1,502 2,420 1,067
--------- --------- ----------- --------- --------- --------- ---------
Net income (loss)........................ $ 688 $ 2,254 $ (192) (569) (2,150) 1,425 429
--------- --------- -----------
--------- --------- -----------
Mandatorily redeemable cumulative
preferred stock dividends.............. (170) (2,043) (2,043) (1,021)
--------- --------- --------- ---------
Net income (loss) attributable to common
stockholders........................... $ (739) $ (4,193) $ (618) $ (592)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per share attributable
to common stockholders--diluted(4)..... $ (.14) $ (.82) $ (.11) $ (.11)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares and dilutive
equivalents outstanding--diluted....... 5,107 5,418 6,041 5,852
<CAPTION>
DECEMBER
JUNE 30, JUNE 30, 31,
-------------------- MAY 31, ------------------------------- ---------
1994 1995 1996 1996 1997 1998 1997
--------- --------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 572 $ 645 $ 1,995 $ 3,576 $ 3,676 $ 5,087 $ 2,345
Working capital.......................... 1,234 13,523 1,148 1,384 16,894 23,377 21,797
Total assets(5).......................... 4,135 44,808 27,538 72,036 113,309 114,049 120,134
Long-term debt........................... -- 4,000 -- -- 35,195 36,418 37,778
Mandatorily redeemable cumulative
preferred stock........................ -- -- -- 25,706 27,749 29,792 28,771
Stockholders' equity..................... 1,476 11,315 3,327 14,583 12,790 12,801 12,698
<CAPTION>
1998
---------
<S> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Net patient service revenue.......... $ 113,748
Other revenue........................ 5,647
Equity in net income (loss) of joint
ventures........................... 631
---------
Total revenues................... 120,026
Operating expenses:
Cost of services..................... 101,909
General and administrative........... 8,391
Bad debts............................ 2,284
Depreciation and amortization........ 1,986
Corporate overhead allocation(3)..... --
---------
Total operating expenses......... 114,570
---------
Operating income (loss).................. 5,456
Interest expense, net.................... 1,730
---------
Income (loss) before income taxes........ 3,726
Income tax expense (benefit)............. 1,863
---------
Net income (loss)........................ 1,863
Mandatorily redeemable cumulative
preferred stock dividends.............. (1,021)
---------
Net income (loss) attributable to common
stockholders........................... $ 842
---------
---------
Net income (loss) per share attributable
to common stockholders--diluted(4)..... $ .14
---------
---------
Weighted average shares and dilutive
equivalents outstanding--diluted....... 6,214
1998
---------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 1,636
Working capital.......................... 25,470
Total assets(5).......................... 129,648
Long-term debt........................... 36,538
Mandatorily redeemable cumulative
preferred stock........................ 30,814
Stockholders' equity..................... 13,908
</TABLE>
- ----------------------------------
(1) The Company was incorporated on May 24, 1996. On May 31, 1996, the Company
acquired SHS, a holding company, and its wholly-owned subsidiary, Nova
Factor (the "Predecessor"). Since the Company was newly formed at May 24,
1996, and because the Predecessor had been in existence for several years,
the Company is considered the successor to the Predecessor's operations. The
balance sheet data of the Predecessor represents the historical cost basis
of the Predecessor's assets and liabilities prior to its acquisition by the
Company. The acquisition of the Predecessor by the Company resulted in a new
basis of accounting such that the Predecessor's assets and liabilities were
recorded at their fair value in the Company's consolidated balance sheet
upon consummation of the acquisition. Additionally, the Company acquired HHS
on June 1, 1997. Accordingly, the Selected Financial Data are not strictly
comparable for the periods presented. See Notes 1 and 3 of Notes to the
Company's Consolidated Financial Statements.
(2) On July 1, 1994, the Predecessor was assigned contractual rights from a
subsidiary of SHS relating to the distribution of certain drugs.
(3) The Predecessor has been allocated expenses for certain services provided
by its parent, SHS, including cash management, tax reporting, risk
management and executive management services. Charges for these services
were based upon a general allocation methodology determined by SHS (used to
allocate all corporate overhead expenses to SHS subsidiaries), and were not
necessarily allocated based on specific identification of expenses.
Management believes the allocation methodology is reasonable. See Note 6 of
Notes to the Nova Factor, Inc. Financial Statements.
(4) Historical diluted loss per share for the years ended June 30, 1996, 1997
and 1998 and the six month period ended December 31, 1997 have been
calculated using the same denominator as used for basic loss per share
because the inclusion of dilutive securities in the denominator would have
an anti-dilutive effect.
(5) In May 1996, the Predecessor settled various intercompany accounts with
subsidiaries of SHS.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE PREDECESSOR'S AND THE COMPANY'S FINANCIAL
STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE
DISCUSSION IN THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS
PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN "RISK FACTORS," AS
WELL AS THOSE DISCUSSED ELSEWHERE HEREIN.
OVERVIEW
Accredo provides specialized contract pharmacy and related services for the
treatment of patients with certain costly, chronic diseases. The Company derives
revenues primarily from the sale of biotechnology drugs to patients.
Historically, the majority of the Company's revenues have been derived from
products and services provided with respect to four diseases: Gaucher Disease,
hemophilia, Multiple Sclerosis and growth hormone-related disorders. The
products provided by the Company are purchased directly from biotechnology drug
manufacturers pursuant to preferred relationship agreements in the case of
Gaucher Disease, Multiple Sclerosis, and growth hormone-related disorders and
purchase agreements in the case of hemophilia. Approximately 39%, 29% and 6% of
the Company's total revenues for the six-month period ended December 31, 1998
and 46%, 23% and 7% of total revenues in fiscal year 1998 were generated from
sales and services provided with respect to Gaucher Disease, Multiple Sclerosis
and growth hormone-related disorders, respectively, and which sales and services
were (and will continue to be) dependent upon the Company's preferred
relationships with Genzyme, Biogen and Genentech, respectively. Sales and
services provided with respect to hemophilia represented approximately 23% of
the Company's total revenues for the six-month period ended December 31, 1998
and for fiscal year 1998.
The Company's preferred relationship agreements describe certain services to
be provided by the Company, including contract pharmacy, information, clinical,
reimbursement and customized delivery services. The agreements generally limit
the Company's ability to supply competing drugs during (and in some cases for up
to five years after) the term of the agreement, allow the manufacturer to
distribute directly or through other parties, are generally short term and may
be cancelled by either party, without cause, upon between 60 and 90 days prior
notice. The agreements vary in level of exclusivity and scope of services
provided. The Company typically purchases products at prices below the
manufacturers' average wholesale sales prices, and the Company's resulting
contribution margins vary for each product line. Pricing is customized to
reflect specific services to be provided by Accredo and is subject to periodic
adjustments to reflect changing market conditions.
The Company recognizes revenue at the time the biotechnology drug is
dispensed or when the contractual service has been performed. While the Company
may experience some revenue changes from price fluctuations on its existing
product lines, its revenue growth will depend principally on the introduction of
new drugs and to a lesser extent on volume growth in existing drug lines. In May
1996, the Company entered into a preferred relationship with Biogen and
initiated sales and services with respect to Avonex-Registered Trademark- for
the treatment of Multiple Sclerosis. In August 1998, the Company entered into a
preferred relationship with Centocor and in October 1998 initiated sales and
services with respect to Remicade-TM- for the treatment of Crohn's Disease. In
addition, the Company has expanded its relationship with Genzyme by initiating
sales and services with respect to Thyrogen-Registered Trademark- (thyrotropin
alfa for injection) a therapeutic hormone substitute for use in diagnostic and
monitoring indications for thyroid cancer patients and is awaiting contract
formalization. Although the introduction of new drugs is dependent on the
regulatory approval process, management believes the pipeline of biotechnology
drugs for which the Company's services may be utilized will continue to expand.
20
<PAGE>
In response to growing demand, the Company has expanded its existing
relationships with biotechnology manufacturers through the development of new or
complementary services that fit the specialized needs of the manufacturer and
the patients they serve. For example, the Company has recently implemented a
referral triage service that refers patients to the appropriate provider based
on the patients insurance provider network. This service helps the manufacturers
increase market penetration by obtaining access to patients regardless of
whether the Company is able to act as the provider. Although the revenue
received from the referral triage service is not material, the referral triage
service and the other complimentary services have provided an additional source
of revenue for the Company in fiscal years 1998 and 1997, and management
believes that the need for additional services will continue to expand and will
constitute an increasing percentage of the Company's revenues in the future. See
"Business--Services."
In addition to new services, Accredo may also grow through strategic
acquisitions and joint ventures. The acquisition of HHS in June 1997 enabled the
Company to significantly increase its presence in the hemophilia market.
Subsequent to the acquisition, the Company consolidated its existing hemophilia
operations into HHS to take advantage of volume purchasing discounts, disease
management systems and increased access to certain state Medicaid and managed
care relationships.
Accredo has five joint venture agreements with various medical centers (or
their affiliates) in which the Company owns 50% or less of the venture. Many of
the Company's patient populations have diseases that are discovered before or
during adolescence and require on-going care from physician specialists, many of
whom are based at pediatric, academic and other acute care medical centers. To
date, these ventures have primarily derived revenues from the treatment of
patients with hemophilia and growth hormone-related disorders. The Company and
its joint venture partners share profits and losses in equal proportion to their
respective equity ownership. The Company accounts for its interests in the net
income or loss in its joint ventures under the equity method of accounting. The
Company's equity interest in the net income of these joint ventures represented
approximately 17% and 30%, of the Company's income before income taxes for the
six-month period ended December 31, 1998 and for fiscal year 1998, respectively.
In addition to joint venture relationships, the Company has management
agreements with three medical centers (or their affiliates) for the provision of
specialized contract pharmacy services. The Company receives a management fee
for these services which is classified as other revenue.
Cost of services include drug acquisition costs, pharmacy and warehouse
personnel costs, freight and other direct costs associated with the delivery of
the products and costs of clinical services provided. General and administrative
expenses include the personnel costs of the reimbursement, sales, marketing,
administrative and support staffs as well as corporate overhead and other
general expenses. Bad debts include the Company's provision for patient accounts
receivable which prove to be uncollectable after routine collection efforts have
been exhausted. The Company typically hires personnel and incurs legal,
recruiting, marketing and other expenses in anticipation of the commercial
launch of a new biotechnology drug. In certain instances, a portion of these
expenses are reimbursed to the Company by the biotechnology drug manufacturer.
The Company historically has not capitalized any of these start up expenses.
Amortization expense as a result of intangible assets identified in the
acquisitions of Nova Factor in May 1996 and HHS in June 1997 decreased
significantly in fiscal 1998 compared to fiscal 1997 due to the expiration of
the useful lives of intangible assets assigned to acquired agreements with drug
manufacturers and medical centers. See Notes 2 and 3 to the Company's
consolidated financial statements.
Due to the increasing sensitivity to drug cost within governmental and
private payors, the Company is continuously susceptible to reimbursement and
operating margin pressures. In recent years, pharmacy benefit managers and other
private payors have aggressively attempted to discount their reimbursement rates
for the Company's products. While this aggressive discounting has resulted in
some reduced margins for the Company's services, its preferred agreements with
biotechnology manufacturers typically provide for terms which allow the Company
to compensate for much of these discounts through negotiated adjustments in
product acquisition cost. These relationships have allowed the Company to remain
price competitive while maintaining
21
<PAGE>
relatively stable product margins in recent quarters. See "Risk
Factors--Dependence on Payors and Reimbursement Related Risks."
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, the percentages of
total revenues represented by the respective financial items:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MAY 24, 1996 YEARS ENDED JUNE 30,
(INCEPTION) DECEMBER 31,
THROUGH -------------------- --------------------
JUNE 30, 1996 1997 1998 1997 1998
--------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Net patient service revenue.............. 91.1% 92.1% 94.0% 93.9% 94.8%
Other revenue............................ 8.2 7.0 5.4 5.5 4.7
Equity in net income of joint ventures... 0.7 0.9 0.6 0.6 0.5
----- --------- --------- --------- ---------
Total revenues....................... 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Cost of services......................... 88.5 87.7 85.1 85.4 84.9
General and administrative............... 8.6 5.2 6.9 6.7 7.0
Bad debts................................ 3.4 2.6 1.8 1.8 1.9
Depreciation and amortization............ 6.2 4.2 2.1 2.2 1.6
----- --------- --------- --------- ---------
Total operating expenses............. 106.7 99.7 95.9 96.1 95.4
----- --------- --------- --------- ---------
Operating income (loss)...................... (6.7) 0.3 4.1 3.9 4.6
Interest expense, net........................ 1.5 0.9 2.0 2.1 1.5
----- --------- --------- --------- ---------
Income (loss) before income taxes............ (8.2) (0.6) 2.1 1.8 3.1
Income tax expense (benefit)................. (0.4) 1.3 1.3 1.3 1.6
----- --------- --------- --------- ---------
Net income (loss)............................ (7.8)% (1.9% 0.8% 0.5% 1.5%
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
</TABLE>
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1997.
REVENUES. Total revenues increased from $85.6 million to $120.0 million, or
40%, from the six-months ended December 31, 1997 to the six months ended
December 31, 1998. Approximately, $16.7 million, or 48%, of this increase was
attributable to the increased sales volume of Avonex-Registered Trademark-.
Approximately $7.8 million, or 23%, of this increase was attributed to the
increased hemophilia revenue associated with the increased patient volume and
wholesale sales. Cerezyme-Registered Trademark- and
Ceredase-Registered Trademark- drug sales increased approximately $5.1 million,
or 15% of the revenue increase, as a result of increased patient volume. The
remaining $4.8 million, or 14%, of the revenue increase was attributable
primarily to the increased sales volume of growth hormone, service fees
associated with the sales of Ceredase-Registered Trademark- and
Cerezyme-Registered Trademark- 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 $73.1 million to $101.9
million, or 39%, from the six months ended December 31, 1997 to the six months
ended December 31, 1998. This increase was commensurate with the increase in
sales volume referred to above. As a percentage of revenues, cost of services
decreased from 85.4% to 84.9% from the six months ended December 31, 1997 to the
six months ended December 31, 1998 primarily as a result of an increase in
revenue from drugs with lower acquisition costs as a percentage of revenue.
22
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $5.7 million to $8.4 million, or 47%, from the six months ended December
31, 1997 to the six months ended December 31, 1998. 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
in anticipation of existing product line revenue growth and new product line
launches. General and administrative expenses represented 6.7% and 7.0% of
revenues for the six months ended December 31, 1997 and 1998, respectively.
BAD DEBTS. Bad debts increased from $1.6 million to $2.3 million from the
six-month period ended December 31, 1997 to the six-month period ended December
31, 1998. As a percentage of revenue, bad debt expense increased from 1.8% to
1.9% from the six-month period ended December 31, 1997 to the six-month period
ended December 31, 1998 primarily as a result of increased bad debt provision
associated with certain hemophilia sales.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased from $196,000
to $270,000 from the six-month period ended December 31, 1997 to the six-month
period ended December 31, 1998 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 the
goodwill and other intangible assets did not change from the six-month period
ended December 31, 1997 to the six-month period ended December 31, 1998.
INTEREST EXPENSE, NET. Interest expense, net, decreased from $1.78 million
to $1.73 million for the six months ended December 31, 1997 as compared to the
six months ended December 31, 1998 due to lower current interest rates and
margin rates payable under the Company's existing Loan and Security Agreement
with its lenders (the "Credit Agreement").
INCOME TAX EXPENSE. The Company's effective tax rate decreased from 71.3%
to 50.0% from the six months ended December 31, 1997 to the six months ended
December 31, 1998 as a result of the increase in income before taxes while
nondeductible amortization expense remained constant. The difference between the
recognized tax rate and the statutory tax rate was primarily attributed to
approximately $1,230,000 of nondeductible amortization expense for each period
and state income taxes.
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR 1997
REVENUES. Total revenues increased from $115.2 million to $181.0 million,
or 57%, from fiscal 1997 to fiscal 1998. Approximately $25.1 million, or 38%, of
this increase was attributed to increased sales volume of
Avonex-Registered Trademark-, which was launched in May 1996. Approximately
$30.0 million, or 46%, of the increase was attributed to the increased
hemophilia revenue associated with the acquisition of HHS in June 1997 and
increased patient volume. The remaining $10.7 million, or 16%, of the revenue
increase was attributable primarily to growth in the Company's
Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- drug sales and
associated service fees. The Company's equity in net income of joint ventures
increased from approximately $1.0 million to approximately $1.2 million from
fiscal 1997 to fiscal 1998.
COST OF SERVICES. Cost of services increased from $101.1 million to $154.0
million, or 52%, from fiscal 1997 to fiscal 1998. This increase was attributable
primarily to the expanded revenue volume of Avonex-Registered Trademark-,
hemophilia clotting factor and Ceredase-Registered Trademark- and
Cerezyme-Registered Trademark- along with personnel and other direct expenses
associated with this growth. As a percentage of revenues, cost of services
decreased from 87.7% to 85.1% from fiscal 1997 to fiscal 1998 primarily as a
result of an increase in revenue from drugs with lower acquisition costs as a
percentage of revenue.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $5.9 million to $12.5 million, or 112%, from fiscal 1997 to fiscal 1998.
Approximately $4.2 million, or 66%, of this increase was associated with the
acquisition of HHS in June 1997. The remaining $2.4 million of this increase was
primarily the result of increased salaries and benefits associated with the
expansion of the Company's reimbursement,
23
<PAGE>
sales, marketing, administrative and support staffs in anticipation of revenue
growth and new strategic sales, marketing efforts and approximately $138,000 in
compensation expense recognized primarily due to stock that was sold to a
director at less than estimated fair value. As a percentage of revenues, general
and administrative expenses increased from 5.2% to 6.9% from fiscal 1997 to
fiscal 1998 primarily as a result of the acquisition of HHS which involves a
more cost intensive service model than that of the Company's other drug
therapies.
BAD DEBTS. Bad debts increased from $3.0 million to $3.2 million from
fiscal 1997 to fiscal 1998. As a percentage of revenue, bad debt expense
decreased from 2.6% to 1.8% from fiscal 1997 to fiscal 1998 primarily as a
result of the increased percentage of the Company's revenues being reimbursed by
prescription benefit managers and other payors which reduces the Company's
exposure to the uncollectability of patient co-payments.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased from $231,000
to $430,000 from fiscal 1997 to fiscal 1998. Of this increase, $94,000 was
attributable to the assets acquired as a result of the acquisition of HHS in
June 1997. The remaining increase is a result of approximately $992,000 of
capital expenditures made in fiscal 1998 for the purchases of property and
equipment associated with the Company's revenue growth and expansion of its
leasehold facility improvements. Amortization expense decreased from $4.6
million in fiscal 1997 to $3.4 million in fiscal 1998. This decrease was
primarily attributable to several significant contract intangibles that were
fully amortized by the end of fiscal year 1997. Additional amortization expense
was recognized as a result of the acquisition of HHS in June 1997, which
resulted in approximately $24.4 million of goodwill and other intangible assets.
Approximately $804,000 of additional amortization was attributable to HHS
intangibles in fiscal year 1998. Amortization expense attributable to Nova
Factor intangibles decreased from $4.6 million in fiscal 1997 to $2.5 million in
fiscal 1998.
INTEREST EXPENSE, NET. Interest expense, net, increased from $984,000 to
$3.6 million, from fiscal 1997 to fiscal 1998 primarily as a result of the
issuance of $27.5 million of long-term notes payable and $10.0 million of Senior
Subordinated Notes payable issued as part of the acquisition of HHS in June
1997. The Company generated interest income of approximately $169,000 in fiscal
1998 and $100,000 in fiscal 1997 resulting from cash management programs which
utilized the Company's increased short-term excess cash balances.
INCOME TAX EXPENSE. The Company's effective tax rate decreased from over
100% to 62.9% from fiscal 1997 to fiscal 1998 as a result of increased income
before income taxes while nondeductible amortization expense decreased
substantially. The difference between the recognized effective tax rate and the
statutory tax rate is primarily attributed to approximately $4.6 million and
$2.5 million of nondeductible amortization expense in fiscal 1997 and 1998,
respectively, and state income taxes.
PERIOD FROM INCEPTION (MAY 24, 1996) TO JUNE 30, 1996
Accredo was formed on May 24, 1996, for the purpose of acquiring SHS and its
wholly owned subsidiary Nova Factor, the Company's predecessor. This acquisition
was completed on May 31, 1996. Because the financial statements for the period
from inception (May 24, 1996) to June 30, 1996 reflect only one month of the
Company's operations, a comparison of the Company's financial statements for
that period to the Company's financial statements for fiscal year 1997 would not
be meaningful.
PERIOD FROM JULY 1, 1995 THROUGH MAY 31, 1996 (PREDECESSOR) COMPARED TO FISCAL
YEAR 1995 (PREDECESSOR)
The results of operations for the period July 1, 1995 through May 31, 1996
(eleven months) and for the fiscal year ended June 30, 1995 (fiscal year 1995)
are reflective of the operations of Nova Factor, the Company's predecessor. Due
primarily to the differences in the length of the reporting periods, the
comparison of the operating results may not be meaningful. In addition, the
results of operations for these periods may not be indicative of the results of
operations had the Predecessor been operated on a stand alone basis.
REVENUES. Total revenues were $74.8 million for the eleven-month period
ended May 31, 1996, and were $78.9 million for fiscal year 1995.
24
<PAGE>
COST OF SERVICES. Cost of services were $65.9 million for the eleven-month
period ended May 31, 1996, and were $68.3 million for fiscal year 1995.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.8
million for the eleven-month period ended May 31, 1996, and were $2.7 million
for fiscal year 1995.
BAD DEBTS. Bad debts were $1.9 million for the eleven-month period ended
May 31, 1996, and were $1.3 million for fiscal year 1995.
DEPRECIATION EXPENSE. Depreciation expense was $104,000 for the
eleven-month period ended May 31, 1996, and was $76,000 for fiscal year 1995.
CORPORATE OVERHEAD ALLOCATION. Corporate overhead allocation was $4.2
million for the eleven-month period ended May 31, 1996, and was $1.9 million for
fiscal year 1995.
INTEREST EXPENSE, NET. Interest expense, net, was $266,000 for the
eleven-month period ended May 31, 1996, and was $943,000 for fiscal year 1995.
INCOME TAX EXPENSE. The effective tax rate used to record the tax benefit
for the eleven-month period ended May 31, 1996 was approximately 27%, and was
approximately 38% for fiscal year 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, June 30, 1998 and 1997, the Company had working
capital of $25.5 million, $23.4 million and $16.9 million, respectively. The
increase in working capital for each period resulted principally from the
increase in patient accounts receivable in connection with the Company's revenue
growth. The Company's net cash used by operating activities was approximately
$1.4 million for the six-month period ended December 31, 1998, while $1.9
million was provided by operating activities for the fiscal year ended June 30,
1998. This variance was due primarily to the timing of receivables, inventory
purchases and payables resulting from the Company's continued growth. Net cash
used in investing activities was $2.2 million for the six-month period ended
December 31, 1998 and $967,000 for the fiscal year ended June 30, 1998. Such
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.
For the period from inception (May 24, 1996) through June 30, 1996, the
Company used cash in the amount of approximately $37.7 million to purchase the
outstanding stock of SHS. In fiscal year 1997, the Company used cash in the
amount of approximately $29.7 million to purchase the outstanding stock of HHS.
During fiscal 1997, the Company's cash distributions from its joint ventures in
excess of its equity in the net income from these joint ventures was $378,000.
During the six months ended December 31, 1998 and the fiscal year ended June 30,
1998, the Company received cash distributions from its joint ventures of
approximately $350,000 and $1.2 million, respectively, while its associated
equity in the net income of these joint ventures was approximately $631,000 and
$1.2 million, respectively. In addition, a $150,000 capital contribution was
also made to the two California partnerships during the six months ended
December 31, 1998.
For the period from inception (May 24, 1996) to June 30, 1996, the Company
received $40.0 million from the issuance of common and preferred stock. For the
fiscal year ended June 30, 1997, the Company received approximately $27.5
million from the issuance of long-term notes payable and $10.0 million from the
issuance of the Senior Subordinated Notes which were used to refinance
approximately $7.2 million of long-term debt and to fund the acquisition of HHS.
The Company issued 400,000 shares of Common Stock to the purchasers of the
Senior Subordinated Notes. During fiscal year 1998, the Company elected to issue
additional Senior Subordinated Notes of approximately $1.0 million which
represented the accrued interest on the Senior Subordinated Notes then
outstanding. The Company also received $500,004 and $207,000 from the sale of
83,334 and 35,000 shares of Common Stock during fiscal year 1998 and the
six-month period ended December 31, 1998, respectively.
25
<PAGE>
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 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 a lease
for an additional 20,000 square feet of office and warehouse space. Since June
30, 1998, the Company has purchased or committed to purchase approximately
$1,400,000 of furniture, equipment and leasehold improvements. Upon consummation
of the Offering, the Company plans to redeem all outstanding shares of Series A
Preferred Stock and retire 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 relation to early extinguishment of its debt.
The Company has a $40.0 million revolving credit facility under the terms of
its existing Credit Agreement, which will automatically increase to $60.0
million upon completion of the Offering. 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 Offerred 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. Accordingly, as of January 21, 1999, the effective interest
rate on the first $25.0 million outstanding under the Credit Agreement was 7.0%
per annum, and the effective interest rate on borrowings in excess of $25.0
million under the Credit Agreement was 6.65% per annum. 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 service coverage ratios. In addition, the Credit Agreement includes
customary affirmative and negative covenants, including covenants relating to
transactions with affiliates, use of proceeds, restrictions on subsidiaries,
limitations on indebtedness, limitations on liens, limitations on capital
expenditures, limitations on certain mergers, acquisitions and sales of assets,
limitations on investments, prohibitions on payment of dividends and stock
repurchases, and limitations on certain debt payments (including payment of
subordinated indebtedness) and other distributions. The Credit Agreement also
contains customary events of default, including certain events relating to
changes in control of 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 23, 1999, CHS had borrowed
$720,000 against the line of credit.
While the Company anticipates its cash from operations, along with the short
term use of the Credit Agreement and the net proceeds to be received from the
Offering, will be sufficient to meet its internal operating requirements and
growth plans for at least the next 12 months, the Company expects that
additional funds may be required in the future to successfully continue its
growth beyond that 12-month period or in the event that the Company grows more
than expected within such period. The Company may be required to raise
additional funds through sales of equity or debt securities or seek additional
financing from financial institutions. There can be no assurance, however, that
financing will be available on terms that are favorable to the Company or, if
obtained, will be sufficient for the Company's needs.
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<PAGE>
SELECTED QUARTERLY FINANCIAL RESULTS
The following table presents selected unaudited quarterly statements of
operations items, and the percentages of total revenues represented by those
respective items, for each of the ten quarters beginning July 1, 1996 and ending
December 31, 1998. This information has been prepared on the same basis as the
audited financial statements appearing elsewhere in this Prospectus, and
includes all adjustments, consisting only of normal recurring adjustments, that
the Company considers necessary for a fair presentation of the information when
read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1997 1997(1) 1997 1997 1998
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................ $ 24,544 $ 27,659 $ 28,538 $ 34,468 $ 40,886 $ 44,700 $ 44,813
Operating income.............. (287) (116) 170 569 1,558 1,717 1,908
Income before income taxes.... (498) (292) (3) 145 667 829 986
Net income.................... (798) (658) (390) (304) 175 253 378
AS A PERCENTAGE OF TOTAL REVENUES:
Total revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating income.............. (1.2) (0.4) 0.6 1.7 3.8 3.8 4.3
Income before income taxes.... (2.0) (1.1) -- 0.4 1.6 1.9 2.2
Net income.................... (3.3) (2.4) (1.4) (0.9) 0.4 0.6 0.8
<CAPTION>
<S> <C> <C> <C>
JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues................ $ 50,559 $ 57,348 $ 62,678
Operating income.............. 2,214 2,709 2,747
Income before income taxes.... 1,363 1,844 1,882
Net income.................... 619 915 948
AS A PERCENTAGE OF TOTAL REVENUES:
Total revenues................ 100.0% 100.0% 100.0%
Operating income.............. 4.4 4.7 4.4
Income before income taxes.... 2.7 3.2 3.0
Net income.................... 1.2 1.6 1.5
</TABLE>
- ------------------------------
(1) On June 1, 1997, the Company acquired all of the stock of HHS.
QUARTERLY FLUCTUATIONS AND SEASONALITY
The Company's results of operations historically have fluctuated on a
quarterly basis and can be expected to continue to be subject to quarterly
fluctuations. In particular, the Company typically increases its operating
expenses in anticipation of the launch of a new drug, and if the new drug does
not generate the levels of sales during the periods anticipated by management,
the Company's results in that and future quarters could be adversely affected.
Quarterly results can also fluctuate as a result of the timing of periodic
adjustments to prices and other terms with the Company's drug suppliers, the
accuracy of estimates of resources required for ongoing programs, the timing and
integration of acquisitions, changes in regulations related to biotechnology
companies, physician prescribing patterns, and general economic conditions, none
of which can be adequately predicted by the Company. Quarterly operating results
also fluctuate as a result of the annual renewal (on a calendar year basis) of
deductible and co-payment requirements, thereby affecting patient ordering
patterns in a manner that creates a seasonal reduction in revenue from existing
drug programs for the Company's third fiscal quarter ending March 31. Quarterly
results may also fluctuate as a result of the Company providing drugs, now or in
the future, that treat seasonal illnesses. The Company believes that quarterly
comparisons of its financial results may not necessarily be meaningful and
should not be relied upon as an indication of future performance. In addition,
fluctuations in quarterly results could affect the market price of the Common
Stock in a manner unrelated to the longer term operating performance of the
Company.
THE YEAR 2000 ISSUE
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.
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<PAGE>
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
imbedded 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.
HCFA has also stated its concern about the readiness of fiscal intermediaries,
carriers, providers and suppliers to prepare and submit claims in a year 2000
compliant format and moved from January 1, 1999 to April 5, 1999 the target date
for submission of claims in HCFA's year 2000 compliant format. 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 imbedded chips which process
dates and date sensitive material. These imbedded chips are both difficult to
identify in all instances and difficult to repair; often, total replacement of
the chips is necessary. The Company intends to perform an evaluation of its
systems to determine whether the Company needs to repair or replace any chips to
avoid year 2000 problems. 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
28
<PAGE>
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.
IMPACT OF INFLATION
Changes in prices charged by the biotechnology drug manufacturers for the
drugs dispensed by the Company, along with increasing labor costs, freight and
supply costs and other overhead expenses, affects the Company's cost of services
and general and administrative expenses. Historically, the Company has been able
to pass all, or a portion, of the effect of such increases to the biotechnology
drug manufacturers pursuant to negotiated adjustments made under its preferred
distribution agreements. As a result, changes due to inflation have not had
significant adverse effects on the Company's operations.
29
<PAGE>
BUSINESS
OVERVIEW
Accredo provides specialized contract pharmacy and related services pursuant
to agreements with biotechnology drug manufacturers relating to the treatment of
patients with certain costly, chronic diseases. Because of the unique needs of
these patients, biotechnology drug manufacturers have recognized the benefits of
customized treatment programs to facilitate alternate site drug administration,
ensure compliance with treatment regimens, provide reimbursement assistance and
capture valuable clinical and patient demographic information. The Company
addresses the needs of the manufacturers by providing specialized services that
facilitate product launch and patient acceptance, including the collection of
timely drug utilization and patient compliance information, patient education
and monitoring through the use of written materials and telephonic consultation,
reimbursement expertise and overnight drug delivery. The Company believes that
its ability to accelerate market penetration and increase revenues for new
biotechnology drugs makes it an attractive partner for drug manufacturers as
evidenced by its preferred relationships with Genzyme, Biogen, Genentech and
Centocor. While these relationships are not exclusive, the Company's preferred
status generally involves a designation of the Company as a preferred or
recommended provider of the manufacturer's drugs, direct marketing of the
Company's services, customized pricing reflecting the Company's specialized
services and flexibility in adjusting prices and other terms in the event of
changed market conditions or service levels.
The Company has designed its specialty services to focus primarily on
biotechnology drugs that: (i) are used on a recurring basis to treat chronic and
potentially life threatening diseases; (ii) are expensive, with annual therapy
costs generally ranging from $6,000 to $200,000 per patient; (iii) are
administered through injection; and (iv) require temperature control or other
specialized handling as part of their distribution process. The Company provides
services that address the needs of patients with the following diseases: Gaucher
Disease, a hereditary liver enzyme deficiency; hemophilia, a hereditary bleeding
disorder; Multiple Sclerosis, a debilitating disease of the central nervous
system; and growth hormone-related disorders. In August 1998 the Company entered
into an agreement with Centocor to provide its services to patients with Crohn's
Disease, a chronic inflammatory disease affecting the gastrointestinal tract.
These diseases generally require life-long therapy, except for growth
hormone-related disorders which typically require treatment for six to ten
years.
INDUSTRY BACKGROUND
The pace of drug discovery has accelerated in recent years due to
significant advances in disciplines such as molecular biology, genomics and
high-throughput screening. As a result, opportunities to develop therapies for
previously unmet needs are greater than ever before. The Company believes that
biotechnology products represent the most expensive and rapidly growing part of
the new drug pipeline. Unlike many traditional drugs, these products often
possess specific characteristics which make utilization and compliance
increasingly difficult. They are often composed of unstable proteins which must
be taken by injection and require timely, temperature maintained distribution,
dosage monitoring, and controlled inventory management. In addition, expert
reimbursement management is crucial as a result of the high cost and significant
support services associated with these products.
As a result of increasing competitive pressure to introduce new drugs to
market quickly and the unpredictability of the approval and launch process for
new drugs, many drug manufacturers have sought to preserve often limited
internal resources by outsourcing various stages of product development. This
has included discovery research by outsourcing genomics and screening functions
and clinical development through the utilization of contract research
organizations (CROs) and site management organizations (SMOs). This trend has
also extended beyond development to product commercialization and launch through
the outsourcing of manufacturing, sales and marketing, product detailing,
pharmacy and distribution services and patient support programs.
When addressing chronic diseases, the challenges facing biotechnology drug
manufacturers are often heightened by small patient populations, increased
difficulties in ensuring patient compliance and persistence
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with treatment programs, the need to realize a return on investment prior to the
expiration of any patent or orphan drug status exclusivity and the onset of
significant competition. In addition, many traditional distribution channels
including wholesalers, hospitals, physicians, pharmacies and pharmacy benefit
managers do not want to maintain an inventory of expensive biotechnology
products and lack the specialized knowledge often needed to manage chronic
disease patients. The Company believes that it is well positioned to take
advantage of a large drug development pipeline and an increasing trend toward
specialized outsourcing by the biotechnology drug industry.
ACCREDO STRATEGY
Accredo's objective is to be the leading provider of specialized contract
pharmacy and related services. Key elements of the Company's strategy include:
EXPAND NUMBER OF CHRONIC DISEASES SERVED. The Company closely monitors
biotechnology drugs in development and seeks to increase the number of chronic
diseases for which it provides its services by developing new relationships with
additional manufacturers and leveraging its existing relationships to include
new drugs and new FDA indications for existing drugs. For example, in August
1998 the Company established a new preferred relationship with Centocor in which
the Company provides its specialized services with respect to Remicade-TM- for
use in treating patients with Crohn's Disease and has expanded its relationship
with Genzyme by initiating sales and services with respect to
Thyrogen-Registered Trademark- a therapeutic hormone substitute for use in
diagnostic and monitoring indications for thyroid cancer patients.
LEVERAGE EXPERTISE TO EXPAND SERVICE OFFERINGS. The Company continually
seeks to develop new or complementary services that meet the specialized needs
of biotechnology drug manufacturers and the patients who use their products. The
Company believes that it is uniquely positioned to identify these needs and
develop customized solutions through its close relationships with leading drug
manufacturers. For example, the Company recently implemented a referral triage
service to provide a convenient single source for prescribing physicians and
help manufacturers increase market penetration. The Company believes that
biotechnology drug manufacturers will increasingly recognize the benefits of
outsourcing product development, launch and specialized pharmacy services as the
biotechnology market matures and competition increases.
ESTABLISH ADDITIONAL RELATIONSHIPS WITH MEDICAL CENTERS. The Company
intends to pursue additional strategic relationships with medical centers
through joint ventures and management contracts. Many of the Company's patient
populations have diseases that are discovered before or during adolescence and
require on-going care from physician specialists, who are often based at
pediatric, academic or other acute care medical centers. By establishing
strategic relationships with these centers, the Company believes it can obtain
access to a large number of patients and introduce them to the Company's
specialized services during the initial stages of their treatment program.
INCREASE NUMBER OF PAYOR CONTRACTS. The Company intends to pursue contracts
with additional payors, including managed care companies and employers, in order
to access and provide services to a greater number of patients. Because most
third party payor beneficiaries are restricted to using pharmacy providers
included in their plan's panel of providers, the Company is eligible to receive
reimbursement only for services provided to patients who are enrolled in plans
with which the Company maintains provider contracts. The Company maintains a
dedicated team of sales and marketing personnel that work exclusively on
pursuing additional payor relationships and has a variety of payor education
programs aimed at increasing awareness of the Company's specialized services
among private payors.
PURSUE ACQUISITIONS OF SIMILAR OR COMPLEMENTARY BUSINESSES. The Company
intends to pursue acquisitions that offer attractive growth opportunities and
that involve businesses that are similar to or that complement the Company's
present operations. For example, in June 1997 the Company significantly expanded
the scope of its hemophilia operations with the acquisition of HHS in Nashville,
Tennessee and in November 1998 the
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Company acquired a 50% interest in each of two California general partnerships
that service a number of patients with hemophilia and growth hormone related
disorders, respectively.
SERVICES
The Company believes that its specialized services make it an attractive
partner for manufacturers of biotechnology drugs used in treating certain
costly, chronic diseases and an attractive provider for patients with these
diseases. These services include specialized contract pharmacy, clinical,
reimbursement and delivery services.
CONTRACT PHARMACY SERVICES. The Company offers customized services to
biotechnology drug manufacturers designed to meet specific needs that arise at
various stages in the life cycles of their products. During the pre-launch stage
of product development, the Company provides consulting services related to
strategic pricing decisions and the impact those decisions may have on private
insurance and Medicaid and Medicare reimbursement policies. The Company also
offers analyses and information to assist manufacturers in evaluating payor mix
and pricing strategies for their new drugs. The Company will test a
manufacturer's packaging to assess maintenance of product temperatures and to
determine whether the packaging system will maintain product integrity during
normal shipping conditions. In addition, the Company offers advice on ancillary
injection and infusion supplies and assists in procuring supplies and customized
packaging for infusion supply kits. The Company provides clinical protocols that
assist nurses and caregivers in learning how to safely and effectively
administer a drug, including aseptic techniques, supplies needed and infusion
time required. The Company also has extensive experience with patient assistance
programs for uninsured or underinsured patients and offers consulting services
that assist manufacturers in determining appropriate admission criteria for such
programs.
Following product launch, the Company offers: (i) clinical hotlines that
allow the physician or patient caregiver to inquire about product usage, adverse
drug reactions and other clinical questions; (ii) reimbursement hotlines for
patients and health care professionals; (iii) support for manufacturers' patient
assistance programs for patients without the financial ability to otherwise
acquire needed drugs and services; (iv) replacement drug and supply programs
that replenish patients' inventory of products or supplies that become damaged;
(v) home care coordination programs that provide patient assistance in training,
the identification of home care providers and the transfer of clinical
information to all caregivers; and (vi) triage services that refer patients to
the appropriate provider based on the patients' insurance provider network. When
a drug manufacturer contracts with the Company to provide one or more of these
services, such services (except for home care coordination programs) are made
available to all patients utilizing that manufacturer's drug therapy, regardless
of whether those patients obtain their drugs from the Company or from an
alternative source. Results of the Company's interaction with patients (which is
primarily via telephone) are coded and tracked to compile valuable information,
including side effects, drug interactions, administration problems, supply
issues, changes to new products, and reasons for therapy discontinuation and
non-compliance. The Company will also report on adverse drug reactions, log the
occurrence, and complete an initial preliminary report of the occurrence to
assist manufacturers in completing adverse event reports in a timely manner. The
Company can also create a wide variety of additional reports that can be custom
tailored to meet specific manufacturers' needs. Examples of reports include
sales by physician, sales by zip code, sales trending, first time patient
orders, Medicaid and Medicare sales, inventory status and reasons for patient
discontinuations. Due to the nature of the data it collects, the Company has
established procedures designed to ensure compliance with laws regarding
confidentiality of patient information.
CLINICAL SERVICES. At the initiation of service, the Company works with the
patient and the patient's physician to implement the prescribed plan of care.
Each patient is assigned to a team consisting of a pharmacist, a customer
service representative and a reimbursement specialist. Generally, each patient's
team members specialize only in that patient's disease and work only with payors
and providers in that patient's geographic region. In order to assist patients
with their complicated treatment program, the Company provides clinical
consultation and education regarding the patient's disease and treatment
program, helps patients set realistic expectations for their drug therapy, helps
coordinate backup care in the event of an acute episode, provides
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current information on advances in technology and treatment regimens,
coordinates medication during travel and helps patients establish an inventory
management and record keeping system. These services are provided through a
variety of written materials and regular telephonic communication with patients.
Due to their limited stability, the drugs currently handled by the Company are
not mixed or reconstituted prior to shipment. Accordingly, the Company does not
mix or reconstitute any pharmaceuticals. This makes the Company's patient
education services particularly important for patients just beginning drug
therapy because they generally must learn to reconstitute and administer
products themselves. The Company maintains frequent communication with patients
to monitor and encourage compliance with the prescribed plan of care and
persistence in staying on therapy for the entire course of treatment. The
Company also helps patients understand their medication and manage the potential
side effects and adverse reactions that can occur so that patients are less
likely to discontinue therapy. In addition, the Company assists patients and
their families in coping with a variety of difficult social and emotional
challenges presented by their disease, participates in national, state and local
patient advocacy organizations, assists in the formation of patient support
groups, advocates legislation to advance specific patient interests and
publishes newsletters containing information relevant to its patients.
REIMBURSEMENT SERVICES. By focusing on specific chronic diseases, the
Company has developed significant expertise in managing reimbursement issues
related to the patient's condition and treatment program. Due to the long
duration and high cost of therapy generally required to treat chronic disorders,
the availability of adequate health insurance is a continual concern for
chronically ill patients and their families. Generally, the Company contacts the
payor prior to each shipment to determine the patient's health plan coverage and
the portion of costs that the payor will reimburse. The Company's reimbursement
specialists review such issues as pre-certification or other prior approval
requirements, lifetime limits, pre-existing condition clauses and the
availability of special state programs. By identifying coverage limitations as
part of its initial consultation, the Company can assist the patient in planning
for alternate coverage, if necessary. From time to time, the Company negotiates
with payors to facilitate or expand coverage for the chronic diseases served by
the Company. In addition, the Company accepts assignment of benefits from
numerous payors, which substantially eliminates the claims submission process
for many patients.
DELIVERY SERVICES. The Company provides timely delivery of drugs and
ancillary supplies directly to the patient or the patient's physician in
packaging specially designed to maintain appropriate temperatures and which
typically contains all of the supplies required for reconstitution and
administration in the patient's home or in other alternate sites. Substantially
all products are shipped from the Company's two primary pharmacy locations in
Memphis and Nashville, Tennessee. The Company also maintains satellite pharmacy
locations in Dallas-Ft. Worth, Texas and Birmingham, Alabama. The Company ships
its products via FedEx and believes that its proximity to FedEx's principal
"hub" location in Memphis provides the Company with a competitive advantage in
meeting the time-sensitive needs of its patients.
DISEASE MARKETS AND MANUFACTURER RELATIONSHIPS
Currently, the Company provides its specialty services with respect to the
following diseases:
GAUCHER DISEASE. Type I Gaucher Disease is the most common form of Gaucher
Disease, affecting about 90% of all Gaucher patients. Type I Gaucher Disease is
a seriously debilitating, sometimes fatal, genetic disorder caused by a
deficiency of an important enzyme in the body called glucocerebrosidase ("GCR").
This deficiency results in the accumulation of the glucocerebroside lipid in the
cells of organs in the body. The disease is characterized by an enlarged liver
or spleen, anemia, bleeding problems, fatigue, bone and joint pain and other
orthopedic complications such as repeated fractures and bone erosion. Genzyme's
Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- products are
the only FDA approved products used for treating Gaucher Disease.
The Company (including former affiliates) has had a preferred relationship
with Genzyme relating to Ceredase-Registered Trademark- since the commercial
launch of Ceredase-Registered Trademark- in 1991 and relating to
Cerezyme-Registered Trademark- since the commercial launch of
Cerezyme-Registered Trademark- in 1994. Ceredase-Registered Trademark- is a
modified form of human GCR which uses glycoprotein remodeling technology to
target GCR to the cells where the lipid accumulation occurs.
Cerezyme-Registered Trademark- is a recombinant form of
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GCR which has been remodeled in a similar manner. Ceredase-Registered Trademark-
and Cerezyme-Registered Trademark- are generally administered by intravenous
infusion. Dosing frequencies vary, but a typical dosing regimen involves
administration once every two weeks. The annual revenue to the Company during
its 1998 fiscal year from patients receiving this therapy was predominantly
within the range of $150,000 to $200,000 per patient depending on a patient's
weight, stage in the therapy cycle and severity of condition. As part of its
preferred relationship with Genzyme, the Company and Genzyme have entered into
two agreements (the "Genzyme Agreements"), pursuant to which the Company
dispenses Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- in
the United States and pursuant to which the Company provides various information
and other services to Genzyme. The pricing of Ceredase-Registered Trademark- and
Cerezyme-Registered Trademark- under the Genzyme Agreements, as well as the
scope and pricing of services provided by the Company under such agreements, are
subject to periodic adjustment. The Genzyme Agreements automatically renew on an
annual basis unless either party provides 90 days prior notice of non-renewal,
and are terminable by either party for any reason with 60 days prior notice. In
addition, the Genzyme Agreements provide that during the term of the agreements
and for a period of five years after termination, the Company may not sell any
prescription drug for the treatment of Gaucher Disease other than
Ceredase-Registered Trademark- and Cerezyme-Registered Trademark-. The Company
does not have exclusive rights to sell Ceredase-Registered Trademark- or
Cerezyme-Registered Trademark-, and Genzyme has reserved the right under the
Genzyme Agreements to sell these products directly or to appoint other
distributors of these products.
HEMOPHILIA. Hemophilia is an inherited, genetic, lifelong bleeding disorder
caused by the absence or inactivity of an essential blood clotting protein or
"factor." Two major disease categories exist, hemophilia A, or Factor VIII
deficiency, and hemophilia B, or Factor IX deficiency. Hemophilia occurs almost
exclusively in males and severe cases are often diagnosed at birth or early
childhood. It is estimated that there are approximately 20,000 people with
hemophilia in the United States, and presently there is no known cure.
Individuals with hemophilia are susceptible to bleeding episodes which can occur
spontaneously or as a result of physical activity or trauma. While small surface
cuts can usually be treated with a pressure bandage, the most frequent
complication of hemophilia is internal bleeding into muscles and joints which
can cause arthritis and debilitating orthopedic problems. More serious
complications include internal bleeding in the head, neck, spinal cord or
internal organs which can cause death.
Hemophilia is generally treated by infusing anti-hemophilic factor
concentrates intravenously when the symptoms of a bleed are detected. Products
are dispensed as freeze-dried factor concentrates which are reconstituted with
sterile water prior to use and dosage is determined by the patient's weight.
This therapy is generally administered by the patient or his or her family
members, without the assistance of a nurse, in response to bleeding episodes.
Approximately 60% of the persons with hemophilia in the United States have a
severe form of the disorder as measured by the level of factor naturally present
in the body. In general, the more severe the factor deficiency, the more
frequently the bleeding episodes may occur. On average, someone with severe
hemophilia will need to infuse factor weekly. In many individuals with severe
hemophilia, factor therapy is administered prophylactically to maintain high
enough circulating factor levels to minimize the risk of bleeding. The annual
revenue to the Company during its 1998 fiscal year from patients receiving this
therapy generally ranged from $50,000 to $100,000 per patient depending on a
patient's weight, severity of condition and the presence of complications such
as inhibitors.
Today, with proper treatment, people with hemophilia can live relatively
long and healthy lives. However, in the recent past, many patients contracted
hepatitis or human immunodeficiency virus ("HIV") as a result of contaminated
plasma derivative therapies they received prior to the mid-1980's. Since then,
manufacturers of plasma-derived products have used advanced screening procedures
and viral inactivation methods. While such procedures and methods have
significantly reduced, if not eliminated, the risk of transmission of hepatitis
and HIV in current plasma-derived factor products, it is estimated that
approximately one-half of the hemophilia population who received anti-hemophilic
factor prior to the mid-1980's was exposed to HIV and is at risk of developing
acquired immune deficiency syndrome ("AIDS"). The Company offers medications
used in treating AIDS as a convenience to its hemophilia patients that have
contracted the HIV virus. In the early 1990's, recombinant clotting factor, a
biotechnological alternative to plasma-derived factor, was introduced and to
date has proved to be as effective as the plasma-derived products with virtually
no risk of viral transmission. Current
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utilization reflects increased use of recombinant and monoclonal products by
physicians because of the advantages of increased purity. Issues related to the
development of inhibitors, or antibodies to the infused factor products, may
influence future utilization of these products.
As one of the largest purchasers of clotting factor in the United States,
the Company has supply contracts with all major suppliers of factor in order to
maintain availability of adequate quantities of factor products and competitive
pricing. There are currently six major suppliers of FDA approved products used
for treating hemophilia. The Company purchases Kogenate-Registered Trademark-
from Bayer Corporation and Recombinate-Registered Trademark- from Baxter
Healthcare Corporation in larger quantities than any other factor product, but
no supplier is responsible for a majority of the Company's hemophilia product
purchases. In addition, the Company purchases factor products from Alpha
Therapeutic Corporation, Centeon LLC, Genetics Institute, Inc. and the American
Red Cross.
MULTIPLE SCLEROSIS. Multiple Sclerosis is a debilitating neurological
disease of the central nervous system that is characterized by episodic symptoms
followed by fixed neurologic deficits, increasing disability and physical
decline over a period of 30 to 40 years. The disease is believed to be caused by
the destruction of myelin sheaths by the body's own immune system. Myelin is the
fatty tissue that surrounds and protects the nerve fibers of the central nervous
system and facilitates the flow of nerve impulses to and from the brain. The
loss of myelin disrupts the conduction of nerve impulses, producing the symptoms
of Multiple Sclerosis including vision loss, incontinence, short-term memory
loss, fatigue, slurred speech, poor coordination, loss of balance, depression
and partial or complete paralysis. It is estimated that Multiple Sclerosis
affects between 250,000 and 350,000 people in the United States, approximately
two-thirds of whom are women. Ninety-five percent of the patients are caucasian
and the disease is more prevalent in the northern latitudes with the highest
rates in the Midwest and Northeast areas of the United States. The geography
risk for Multiple Sclerosis appears to be associated with where an individual
lived their first fifteen years of life. Disease onset typically occurs in young
adults between the ages of 20 and 40. Of the patients diagnosed with Multiple
Sclerosis in the United States, about 85% of patients initially have relapsing
Multiple Sclerosis and about half of those patients go on to develop a
progressive form of the disease. About 10 to 15% of patients exhibit a
progressive form of the disease at onset. There are currently three FDA approved
products used for treating relapsing Multiple Sclerosis:
Avonex-Registered Trademark-, which is manufactured by Biogen;
Betaseron-Registered Trademark-, which is manufactured by Chiron Corporation;
and Copaxone-Registered Trademark-, which is manufactured by Teva Pharmaceutical
Industries Limited. Biogen's Avonex-Registered Trademark- product is the only
FDA approved product shown to slow the accumulation of disability in patients
with relapsing forms of Multiple Sclerosis and, as a result,
Avonex-Registered Trademark- is used by a majority of such patients in the
United States currently on drug therapy. The annual revenue to the Company
during its 1998 fiscal year from patients receiving this therapy generally
ranged from $10,000 to $11,000 per patient.
The Company has had a preferred relationship with Biogen relating to
Avonex-Registered Trademark- since its commercial launch in 1996.
Avonex-Registered Trademark- is a recombinant form of a protein produced by
fibroblast cells in response to viral infection. Avonex-Registered Trademark- is
generally administered via a single intramuscular injection once per week. As
part of its preferred relationship with Biogen, the Company and Biogen have
entered into an agreement (the "Biogen Agreement"), pursuant to which the
Company dispenses Avonex-Registered Trademark- and pursuant to which the Company
provides various services and information to Biogen. The scope of services
provided by the Company to Biogen has increased over the course of the Company's
relationship with the manufacturer as the Company has worked with Biogen to
further develop customized service offerings. The pricing of
Avonex-Registered Trademark- under the Biogen Agreement, as well as the scope
and pricing of services provided by the Company under such agreement, are
subject to periodic adjustment. The Biogen Agreement has an initial term of
three years ending May 1999 and is terminable by either party for any reason
with 90 days prior notice. In addition, the Biogen Agreement provides that as
long as the Company is the only preferred home delivery service provider
approved by Biogen (other than providers to Medicaid patients in certain
states), the Company may not without Biogen's approval sell any products that
compete with Avonex-Registered Trademark- for the treatment of Multiple
Sclerosis. The Company does not have any exclusive rights to sell
Avonex-Registered Trademark-, and Biogen has reserved the right under the Biogen
Agreement to sell Avonex-Registered Trademark- directly or to appoint other
providers of home delivery pharmacy services for Avonex-Registered Trademark-,
but such action would eliminate the Company's exclusivity obligations.
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GROWTH HORMONE-RELATED DISORDERS. While growth delay in children may be
caused by a number of factors, including malnutrition, systemic illness,
psychosocial stress or endocrine deficiency, a major treatable cause of growth
delay is growth hormone deficiency. Growth hormone deficiency may result from
damage to or malfunction of the hypothalamus or pituitary gland. Growth hormone
has been used in a variety of conditions associated with short stature,
including growth retardation due to renal insufficiency and Turner's syndrome,
but the major indication for growth hormone therapy is growth hormone
deficiency. It is estimated that there are approximately 20,000 pediatric
patients in the United States who are candidates for growth hormone therapy. The
use of growth hormone to treat disorders caused by growth hormone deficiency has
been commercially available since 1985 and, therefore, the market for growth
hormone products is relatively mature. The annual revenue to the Company during
its 1998 fiscal year from pediatric patients receiving this therapy generally
ranged from $15,000 to $25,000 per patient depending on a patient's weight and
severity of condition. Currently, five manufacturers sell seven FDA-approved
growth hormone products for a variety of indications. However, a majority of
patients currently being treated with growth hormone products use one of
Genentech's growth hormone products, Protropin-Registered Trademark-,
Nutropin-Registered Trademark- or Nutropin AQ-Registered Trademark-.
The Company has purchasing relationships with all five manufacturers of
growth hormone products used in the United States, including a preferred
relationship with Genentech that dates back (through former affiliates of the
Company) to the launch of Genentech's original growth hormone product,
Protropin-Registered Trademark-, in 1985. Growth hormone products are
administered by injection several times per week, and in some cases daily.
Typically, patients or family members are trained to administer the medication
at home without the presence of a nurse. As part of its preferred relationship
with Genentech, the Company and Genentech have entered into a distribution
agreement (the "Genentech Agreement"), pursuant to which the Company dispenses
Genentech's human growth hormone products, Protropin-Registered Trademark-,
Nutropin-Registered Trademark- and Nutropin AQ-Registered Trademark-, in the
United States and pursuant to which the Company provides various information and
other services to Genentech. The pricing of Protropin-Registered Trademark-,
Nutropin-Registered Trademark- and Nutropin AQ-Registered Trademark- under the
Genentech Agreement, as well as the scope and pricing of the services provided
by the Company under such agreement, are subject to periodic adjustment. The
Genentech Agreement has an initial term expiring on December 31, 1999, unless
extended by mutual agreement, and may only be terminated by either party for
cause following a 60-day right to cure or in the event of bankruptcy, insolvency
or similar events affecting the other party. In addition, the Genentech
Agreement provides that during the term of the agreement, the Company can
(subject to certain conditions) sell human growth hormone products other than
Protropin-Registered Trademark-, Nutropin-Registered Trademark- and Nutropin
AQ-Registered Trademark-. The Company does not have any exclusive rights to
distribute Protropin-Registered Trademark-, Nutropin-Registered Trademark- and
Nutropin AQ-Registered Trademark-.
CROHN'S DISEASE. Crohn's Disease is a chronic and debilitating disorder
involving inflammation of the gastrointestinal tract. Symptoms include abdominal
pain, diarrhea, fever, general fatigue and weight loss. Some patients develop
draining fistulae. Remicade-TM-, a drug developed by Centocor, has recently been
approved by the FDA for commercialization for the treatment of moderately to
severely active Crohn's Disease for the reduction of its signs and symptoms in
patients who have an inadequate response to conventional therapy. It has also
been approved as a treatment for patients with fistulizing Crohn's Disease for
reduction in the number of draining fistulae. It is believed that Remicade-TM-
reduces intestinal inflammation in patients with Crohn's Disease by binding to
and neutralizing TNF-A on the cell membrane and in the blood and by destroying
TNF-producing cells. TNF-A is a key biologic response mediator implicated in the
inflammation process.
Crohn's Disease is estimated to affect approximately 400,000 patients in the
United States, of which as many as 140,000 patients have moderate to severe
Crohn's Disease. Of those with moderate to severe Crohn's Disease, more than
40,000 suffer from fistulizing disease.
In August 1998, the Company established a preferred relationship with
Centocor relating to Remicade-TM-. Under an agreement between the Company and
Centocor (the "Centocor Agreement"), the Company dispenses Remicade-TM- and
provides various information and other services to Centocor. The pricing of
Remicade-TM- under the Centocor Agreement, as well as the scope and pricing of
the services provided by the Company under such agreement, are subject to
periodic adjustment. The Centocor Agreement also contemplates extending the
Company's relationship with Centocor to an additional indication for
Remicade-TM- if the additional indication
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receives all required approvals. This additional indication is currently in
Phase III clinical trials. The Centocor Agreement has an initial term of three
years ending August 2001, with a renewal provision. The Company does not have
any exclusive rights to sell Remicade-TM-, and Centocor has reserved the right
under the Centocor Agreement to sell Remicade-TM- directly or to appoint
distributors or other providers of pharmacy services for Remicade-TM-.
Centocor's decision to appoint other providers of pharmacy services would
eliminate the Company's exclusivity obligations.
BUSINESS DEVELOPMENT
At December 31, 1998, the Company had 17 full-time and 7 part-time sales and
marketing personnel who sell the Company's therapies and services to physicians,
patients and private payors. The Company also creates special direct marketing
programs to potential referral sources who specialize in care and support of
patients with chronic disorders. The Company's sales and support personnel also
work closely with each of the referral sources with the goal of addressing the
clinical and reimbursement needs of their patients. The Company assists in
clinical studies, professional training seminars, distribution of patient
support material, development of patient support groups, and other programs
designed to assist patients, payors, manufacturers and physicians in enhancing
the quality of care and quality of life for patients and their families.
The Company continually seeks to obtain contracts with additional payors,
including managed care companies and employers, in order to access and provide
services for a greater number of patients. Because most third party payor
beneficiaries are restricted to using pharmacy providers included in their
payor's provider panel, the Company is eligible to receive reimbursement only
for services provided to patients covered by payors with whom the Company
maintains provider contracts. The Company maintains a dedicated team of sales
and marketing personnel that work exclusively on pursuing additional payor
relationships and has a variety of payor education programs aimed at increasing
awareness of the Company's specialized services among private payors.
In addition, the Company has a full time director of business development
whose responsibilities include tracking biotechnology drugs in development,
determining whether these drugs meet the Company's service criteria and are a
strategic fit for the Company, introducing the Company's services to the
manufacturers of these drugs and assisting in the development of customized
services for these manufacturers. There were an estimated 252 biotechnology
drugs in late stage development as of late-1998. The Company targets
biotechnology drug manufacturers that have a need to outsource specialized
contract pharmacy and related services to an experienced provider of such
services rather than develop the capabilities internally.
SUPPLIERS
Substantially all of the biotechnology drugs sold by the Company, other than
clotting factor products, are available only from single sources: Genzyme, with
respect to Ceredase-Registered Trademark-, Cerezyme-Registered Trademark- and
Thyrogen-Registered Trademark-; Biogen, with respect to
Avonex-Registered Trademark-; Genentech, with respect to
Protropin-Registered Trademark-, Nutropin-Registered Trademark- and Nutropin
AQ-Registered Trademark-; and Centocor, with respect to Remicade-TM-. Although
there are four other manufacturers of FDA approved growth hormone products,
Genentech's products collectively enjoy a market share that exceeds the
aggregate of all other individual manufacturers of growth hormone products.
Accordingly, in the event that one or more of its current suppliers of products
(other than hemophilia products) were to cease selling products to the Company,
the Company's business, financial condition and results of operations would be
materially and adversely affected. Approximately 29%, 23% and 14% of the
Company's total revenues in the six months ended December 31, 1998 and the
fiscal years ended June 30, 1998 and 1997, respectively, were derived from sales
of Avonex-Registered Trademark- and related services. In addition, approximately
39%, 46% and 64% of the Company's total revenues in the six months ended
December 31, 1998 and the fiscal years ended June 30, 1998 and 1997,
respectively, were derived from sales of Ceredase-Registered Trademark- and
Cerezyme-Registered Trademark- and related services. The Company has supply
contracts with all five major suppliers of clotting factor in the United States,
and no supplier is responsible for a majority of the Company's hemophilia
product purchases.
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The Company's agreements with its key suppliers (including Genzyme, Biogen,
Genentech and Centocor) generally may be canceled by either party, without
cause, upon between 60 and 90 days prior notice. Furthermore, the Company and
its suppliers periodically adjust the acquisition cost and other terms for the
drugs and related supplies covered by such contracts. In addition, the Company's
agreements with its suppliers generally provide that during the term of the
agreements (and in certain instances for as much as five years after termination
of the agreements), the Company may not distribute any competing products. The
Company does not have any exclusive rights to distribute its products, and its
suppliers have generally reserved the right under their agreements with the
Company to distribute their products directly or to appoint other distributors
of their products. See "Risk Factors--Dependence on Relationships with Limited
Number of Biotechnology Drug Manufacturers" and "Business--Disease Markets and
Manufacturer Relationships."
STRATEGIC RELATIONSHIPS WITH MEDICAL CENTERS
Many of the patients served by the Company have diseases that are discovered
before or during adolescence and require on-going care from specialist
physicians, who are often based at pediatric, academic or other acute care
medical centers. In order for the Company to obtain access to additional
patients and introduce them to the Company's specialized services during the
initial stages of their treatment program, the Company seeks to establish
strategic relationships, including joint ventures and management contracts, with
such medical centers.
The Company currently has joint ventures with four medical centers (or their
affiliates): Childrens Home Care located in Los Angeles, California; Alternative
Care Systems, Inc. located in Dallas, Texas; Cook Childrens Medical Center
located in Ft. Worth, Texas; and CM Healthcare Resources, Inc. located in
Chicago, Illinois. In the typical joint venture arrangement, the Company and a
medical center (or its affiliate) form a joint venture entity that then enters
into a management agreement with the Company to obtain specialized contract
pharmacy services. Under the terms of the joint venture agreement, the Company
manages the sales, marketing and provision of specialty pharmacy services in
exchange for a monthly management fee and the reimbursement of certain expenses.
Generally, the Company and the medical center share in the profits and losses of
the joint venture entity in proportion to their respective capital
contributions. The agreements generally have initial terms of between one and
five years and contain certain restrictive covenants and rights of first
refusal.
In addition to joint venture relationships, the Company has entered into
management agreements with medical centers (or their affiliates) to provide
specialized contract pharmacy services. The Company currently has contract
management relationships with three medical centers (or their affiliates):
LeBonheur Children's Medical Center located in Memphis, Tennessee; duPont
Hospital for Children located in Wilmington, Delaware and Children's National
Medical Center located in Washington D.C. Pursuant to these management
agreements, the Company provides goods and services used in the medical center's
specialized pharmacy business, including drugs and related supplies, patient
education, clinical consultation and certain reimbursement services. While the
payment terms under such management agreements vary, the Company is generally
reimbursed for its costs and is paid a monthly management fee from the sale of
those products and services. These agreements usually have terms of between one
and five years and are terminable by either party, with or without cause, with
between one and twelve months prior notice. See "Risk Factors--Dependence on
Medical Center Relationships."
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PAYORS
The following are the approximate percentages of the Company's gross patient
service revenue attributable to various payor categories for the fiscal year
ended June 30, 1998 and the six months ended December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JUNE 30, 1998 DECEMBER 31, 1998
--------------------- ---------------------
<S> <C> <C>
Private payors (including self
pay)(1)............................. 80% 83%
Medicaid and other state programs..... 17% 14%
Medicare and other federal programs... 3% 3%
-- --
Total............................. 100% 100%
-- --
-- --
</TABLE>
- ------------------------------
(1) Includes sales to private physician practices, whose ultimate payor is
typically Medicare, which accounted for approximately 7% of gross patient
service revenue for fiscal year 1998 and 6% of gross patient service revenue
for the six months ended December 31, 1998.
The Company typically agrees to furnish drugs and services to substantially
all patients recommended to the Company by its referral sources. The Company
believes this approach is important to maintain the confidence, support, and
loyalty of referral sources. The Company acts on behalf of the patients it
serves to assist them in obtaining reimbursement from third-party payors,
including managed care companies. Generally, the Company contacts third-party
payors before the commencement of services or delivery of product in order to
determine the patient's coverage and the percentage of costs that the payor will
cover. The Company's reimbursement staff reviews issues such as lifetime limits,
pre-existing condition clauses, the availability of special state programs, and
other reimbursement-related matters. The Company often will negotiate with
third-party payors on the patient's behalf to obtain or extend coverage. The
Company typically obtains assignment of benefits from patients that enable it to
file claims for its services and be paid directly for the covered amounts of its
charges. Due to the high cost of the products distributed by the Company and the
complexity of payor systems, claims often cannot be submitted electronically,
which increases labor costs associated with obtaining reimbursement. As with
most health care providers, the Company can experience lengthy collection
periods as a result of third party payment systems and, consequently, management
of accounts receivable through patient registration, billing, collection and
reimbursement procedures is critical to the Company.
The primary trend in the United States health care industry is toward cost
containment. The increasing prevalence of managed care, centralized purchasing
decisions, consolidation among and integration of health care providers and
competition for patients has and continues to affect pricing, purchasing and
usage patterns in health care. Decisions regarding the use of a particular drug
treatment are increasingly influenced by large private payors, including managed
care organizations, pharmacy benefit managers, group purchasing organizations,
regional integrated delivery systems and similar organizations and are becoming
more economically focused, with decisions taking into account product cost and
whether a product reduces the cost of treatment. Efforts by payors to eliminate,
contain or reduce costs through coverage exclusions, lower reimbursement rates,
greater claims scrutiny, closed provider panels, restrictions on required
formularies, claim delays or denials and other similar measures could adversely
affect the Company's revenues, profitability and cash flow. Certain payors set
lifetime limits on the amount reimbursable to patients for medical costs.
Certain of the Company's patients may reach these limits because of the high
cost of their medical treatment and associated pharmaceutical regimens. To date,
the Company has not had significant experience with patients reaching lifetime
limits. Certain payors may attempt to further control costs by selecting certain
firms to be their exclusive providers of pharmaceutical or other medical product
benefits. If any such arrangements were with the Company's competitors, the
Company would be unable to be reimbursed for purchases made by such patients.
The Company derives a significant portion of its revenue from governmental
programs such as Medicare and Medicaid. Such programs are highly regulated and
subject to frequent and substantial changes and cost containment measures. In
recent years, changes in these programs have limited and reduced reimbursement
to providers and Congress recently enacted the Balanced Budget Act of 1997
(which establishes a plan to balance
39
<PAGE>
the federal budget by 2002) that includes significant additional reductions in
spending levels for these programs. This legislation also replaced and relaxed
the federal Medicaid payment standard thereby increasing state discretion over
administration of Medicaid programs. Furthermore, federal and state proposals
are pending that would impose further limitations on governmental payments and
that would increase patient co-payments and deductibles. Additionally, a number
of states are considering legislation designed to reduce their Medicaid
expenditures and provide universal coverage and additional care for certain
populations, including proposals to impose additional taxes on providers to help
finance or expand such programs. Any of these changes could result in
significant reductions in payment levels for drugs handled and services provided
by the Company, which would have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company may be required to maintain a licensed pharmacy in certain states in
order to qualify for reimbursement under state administered reimbursement plans.
See "Risk Factors--Dependence on Payors and Reimbursement Risks."
Certain of the medical centers with which the Company has a joint venture or
management relationship have hemophilia treatment centers ("HTC") that are
eligible to purchase factor from manufacturers at a discount pursuant to a
provision of the Public Health Service Act as enacted by the Veteran's Health
Care Act of 1992 ("PHS Pricing"). Manufacturers that sell outpatient drugs to
eligible entities sign an agreement with DHHS under which they agree to not
charge a price for covered outpatient drugs in excess of a statutorily set
amount. The Company does not directly own or operate an HTC that is eligible for
PHS Pricing, which may place it at a competitive disadvantage as a provider of
factor, except in the limited circumstances where its affiliated medical centers
are eligible for PHS Pricing. Under DHHS contract pharmacy guidelines, an
eligible HTC may obtain factor at PHS Pricing, and dispense it to patients of
the HTC through a contract pharmacy. However, eligible centers which fail to
comply with the contract pharmacy guidelines, or divert PHS Pricing factor to
non-patients of the HTC in violation of DHHS guidelines, may incur civil
penalties, or liability to drug manufacturers for the amount of discount
provided.
The HRSA published notice in October 1998 proposing to change current grant
award requirements for certain entities eligible under the Section 340B Drug
Discount Program (centers eligible for PHS Pricing). This notice proposes
imposing a grant award requirement in which all entities that receive HRSA
grants listed in Section 340B(a)(4) of the Public Health Service Act and that
purchase or reimburse for covered outpatient drugs must participate in PHS
Pricing or demonstrate good cause for nonparticipation. If the proposed change
in the grant award requirement is finalized, the number of treatment centers and
hospitals accessing PHS Pricing is expected to increase, thereby providing
additional competition to the Company's sale of clotting factor.
COMPETITION
The specialty pharmacy services industry is highly competitive and is
experiencing both horizontal and vertical consolidation. The industry is
fragmented, with many public and private companies focusing on different product
or customer niches. Some of the Company's current and potential competitors
include specialty pharmacy divisions of national wholesale drug distributors;
specialty pharmacy distributors, such as Caremark Therapeutic Services (a
subsidiary of MedPartners, Inc.) and Olsten Corporation; pharmacy benefit
management companies; hospital-based pharmacies; retail pharmacies; home
infusion therapy companies; certain manufacturers that sell their products both
to distributors and directly to users, including clinics and physician offices;
and hospital-based comprehensive hemophilia care centers and other alternate
site health care providers. Some of the Company's competitors have greater
financial, technical, marketing and managerial resources than the Company.
While competition is often based primarily on price and quality of care and
service, it can also be affected by the ability to develop and maintain
relationships with patients and referral sources, depth of product line,
technical support systems, specific patient requirements and reputation. There
can be no assurance that competitive pressures will not have a material adverse
affect on the Company's business, financial condition and results of operations.
40
<PAGE>
Through federal legislation such as the Social Security Act, as amended, the
Veterans Health Care Act of 1992, and the Public Health Services Act, and the
rules and regulations thereunder, manufacturers of certain types of outpatient
drugs, including clotting factor, are required to provide price discounts for
such drugs to various types of federally funded hemophilia treatment centers,
which is a competitive advantage to such providers not available to the Company.
COMPLIANCE PROGRAM
The Company adopted a new corporate compliance program, entitled "Code of
Ethics and Business Conduct," in February 1998 (the "Compliance Program"). The
Compliance Program was implemented to detect and prevent inappropriate or
dishonest conduct in the workplace, including violations of antitrust laws,
dishonest or misleading dealings with suppliers, patients, payors, and
competitors, and the disclosure of confidential or sensitive information. Upon
accepting a job with the Company, employees receive a written copy of the
Compliance Program and are asked to read the document prior to their first day
of employment. A training session is conducted during new employee orientation
and all employees are required to sign a written acknowledgment that he or she
has read and understands the Compliance Program and will adhere to the standards
set forth therein. The Company has a corporate compliance officer and a
compliance committee with representation from each operating subsidiary. The
compliance officer is responsible for administering the program, which includes
training, internal audits and reviews, and responding to reported issues with
the assistance of the compliance committee. Employees are encouraged to ask
questions or reveal potential compliance issues to either their supervisor or
their compliance committee member or via a toll free hotline number. These calls
can be made anonymously, if so desired. Employees also receive corporate
compliance training periodically with respect to potential compliance issues.
Issues that are reported to the committee will normally be handled at the
committee level unless the compliance officer believes that the Company's Board
of Directors should be involved. At least once a year, the corporate compliance
officer will meet with or submit a written report to the Company's Board of
Directors. While there is not a standing compliance committee of the Board of
Directors, an outside director, Kenneth R. Masterson, has been designated as a
liaison from whom the compliance officer may seek advice.
GOVERNMENT REGULATION
The conduct of marketing, selling and purchasing drugs and medical supplies
by and among manufacturers, distributors, health care providers and patients is
extensively regulated and periodically scrutinized by state and federal
governments for compliance with laws and regulations regarding, among other
things, inducements for referrals, prohibited financial relationships with
physicians, joint venture and management arrangements, product discounts,
incentives to patients and professional licensure. This regulatory framework is
complex and the laws are very broad in scope, subject to differing
interpretations and lack substantive court decisions addressing many
arrangements under which the Company has and expects to conduct its business.
Because civil and criminal sanctions may be imposed for violations of these
laws, compliance is a significant operational requirement for the Company.
Because of the nature of this regulatory framework, there can be no assurance
that all of the Company's business practices would be construed to comply with
these laws in all respects, and any violation or alleged violation of these laws
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is unable to predict the future course of federal, state and
local regulation, legislation or enforcement, and changes in this complex
regulatory framework or in the interpretation of these laws, rules and
regulations could have a material adverse effect on the Company's business,
financial condition and results of operations.
LICENSURE AND REGISTRATION. In general, the Company's pharmacy operations
are regulated by the statutes and regulations of Tennessee, where it is licensed
as a retail pharmacy and wholesale distributor of pharmaceuticals, as well as
the states of Alabama, and Texas, where it operates satellite retail pharmacies.
In addition, the Company currently delivers prescription products from its
licensed pharmacies to patients in other states in
41
<PAGE>
which the Company does not operate a pharmacy. Many of these states have laws or
regulations requiring out-of-state pharmacies to be licensed as a condition to
the delivery of prescription products to patients in such states. The Company
believes that it is in substantial compliance with such laws as are applicable.
Various federal and state pharmacy associations and some boards of pharmacy
have attempted to promote laws or regulations directed at restricting the
activities of out-of-state pharmacies, thereby benefiting local pharmacies with
which the Company competes from time to time. In addition, a number of states
have laws or regulations which, if successfully enforced, would effectively
limit some of the financial incentives available to third-party payors that
offer managed care prescription drug programs. To the extent such laws or
regulations are found to be applicable to the Company, there is no assurance the
Company could comply, and noncompliance could adversely affect the Company's
pharmacy service operations.
The federal and state controlled substances laws and regulations govern
manufacturers, distributors and dispensers of controlled substances. Any person
who manufactures, distributes, or dispenses controlled substances must obtain a
registration from the United States Attorney General and, where required, from
the appropriate state agency. A separate registration is required at each
principal place of business where the applicant manufactures, distributes, or
dispenses controlled substances. The laws and regulations also specify label and
packaging requirements for manufacturers and distributors and record-keeping and
reporting requirements for all registrants. Although the Company maintains
federal and applicable state regulations under these laws, it handles small
amounts of inventory that are subject to controlled substances laws.
PROFESSIONAL PRACTICE. State laws prohibit the practice of pharmacy without
a license. Accordingly, the Company's pharmacists are all licensed in Tennessee,
and other states where required. The Company monitors the professional aspects
of their practice. However, to the extent that the Company's employees assist
patients and providers in helping patients comply with prescribed treatment
programs, such activities could be deemed by a state to be the practice of
medicine, nursing, or outside the scope of permitted pharmacy practice.
PHARMACY COUNSELING LAW. Federal support of state Medicaid programs for
covered outpatient drugs is conditioned on the state having a drug use review
("DUR") program. The DUR program must consist of prospective drug review,
retrospective drug use review, the application of predetermined standards, and
an educational program. The purpose of the DUR program is to improve the quality
of pharmaceutical care by ensuring that prescriptions are appropriate and
medically necessary, and that they are not likely to result in adverse medical
events. As part of the program, the state must develop standards containing the
minimum specified requirements for the counseling by pharmacists of patients or
their caregivers. The standards must address special situations where the
patient or the patient's representative is not readily available to receive an
offer to counsel, such as prescriptions delivered through the mail. The Company
believes that its pharmacists monitor these requirements and provide the
requisite counseling in the ordinary course of their activities.
FEDERAL MAIL ORDER. In addition to state regulations of pharmacies and
pharmacists, federal statutes and regulations establish standards for the
labeling, packaging, repackaging, advertising and adulteration of prescription
drugs and the dispensing of "controlled" substances and prescription drugs. To
the extent that the Company were to use the federal postal service, Federal
Trade Commission and United States Postal Service regulations require mail order
sellers to engage in truthful advertising, to stock a reasonable supply of
drugs, to fill mail orders within thirty days and, if that is impossible, to
inform the consumer of his or her right to a refund. The Company believes that
it is in substantial compliance with the above requirements.
THE PRESCRIPTION DRUG MARKETING ACT. The federal Prescription Drug
Marketing Act ("PDMA") provides that certain drugs and devices, generally those
requiring a prescription by a physician, are exempted from the federal labeling
and packing requirements, upon the condition that such drugs are not adulterated
or misbranded. The PDMA also generally prohibits the selling, purchasing, or
trading of any drug sample, which is not intended to be sold or intended to
promote the sale of the drug. The PDMA imposes certain documentation and record
keeping requirements, as well as proper drug storage and maintenance
requirements, in connection with the distribution of drug samples. In those
instances where the PDMA applies to drugs or services provided by
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<PAGE>
the Company, the Company believes that it complies with the PDMA through its
ordinary course of documentation, record keeping and storage procedures.
ANTI-KICKBACK AND SELF-REFERRAL. As a health care company, the Company is
subject to various federal laws that regulate the relationship between providers
of health care services and referral sources such as physicians and hospitals.
Under Medicare, Medicaid and other programs of government payment and
reimbursement of health-related costs, the federal and state governments enforce
a federal statute that prohibits the offer, payment, solicitation or receipt of
any remuneration, directly or indirectly, overtly or covertly, in cash or in
kind to induce or in exchange for (i) the referral of patients covered by the
programs, or (ii) the leasing, purchasing, ordering or arranging for or
recommending the lease, purchase or order of any item, good, facility or service
covered by the programs (the "Anti-Kickback Law"). Penalties include criminal
fines, civil monetary penalties, and imprisonment, and the exclusion of anyone,
including an individual or an entity who has committed any of the prohibited
acts, from participation in the Medicare and Medicaid programs whether such
individual or entity participates in such governmental programs directly or
indirectly. If applied to the Company, any of its personnel, or any significant
customer or business partner of the Company, such sanctions could have a
material adverse effect on the Company's business, financial condition and
results of operations. Additionally, the sanctioning or exclusion of a
manufacturer or a recipient of the Company's services from those programs, for
activities unrelated to those of the Company, could also have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, numerous states have existing or proposed laws that prohibit
financial arrangements among health care providers. These state laws are not
necessarily limited to items or services for which payment is made by Medicare
or Medicaid. Violations of these laws include civil and criminal penalties, as
well as the suspension or termination of a provider's ability to continue to
provide services in the state. Federal and state court decisions interpreting
these federal and state statutes are limited, but some courts have construed the
statutes to apply if "one purpose" of remuneration is to induce referrals or
other conduct within the proscriptions of the statute.
In an effort to curb health care fraud, Congress included several anti-fraud
measures in the Health Insurance Portability and Accountability Act of 1996
("HIPAA"). HIPAA, among other things, amends existing crimes and criminal
penalties for Medicare fraud and enacts new federal health care fraud crimes.
HIPAA also expands the federal Anti-Kickback Law to apply to all federal health
care programs, which is any plan or program that provides health benefits
through insurance funded by the federal government. Under HIPAA, the Secretary
of the Department of Health and Human Services ("the Secretary") may exclude
from the Medicare program any individual who has a direct or indirect ownership
or control interest in a health care entity that has been convicted of a health
care fraud crime or that has been excluded from the Medicare program, if the
individual knew or should have known of the action constituting the basis for
the conviction or exclusion of the entity. HIPAA directs the Secretary to
establish a program to collect information on health care fraud and abuse to
encourage individuals to report information concerning fraud and abuse against
the Medicare program and provides for payment of a portion of amounts collected
to such individuals. HIPAA mandates the establishment of a Fraud and Abuse
Program, among other programs, to control fraud and abuse with respect to health
plans and to conduct investigations, audits, evaluations, and inspections
relating to the delivery of and payment for health care in the United States.
HIPAA prohibits any person or entity from knowingly and willfully committing
a federal health care offense relating to a health care benefit program. Under
HIPAA, a "health care benefit program" broadly includes "any public or private
plan or contract, affecting commerce, under which any medical benefit, item, or
service is provided to any individual." Among the "federal health care offenses"
prohibited by HIPAA are health care fraud and making false statements relative
to health care matters. Any person or entity that knowingly and willfully
defrauds or attempts to defraud a health care benefit program or obtains by
means of false or fraudulent pretenses, representations, or promises, any of the
money or property of any health care benefit program in connection with the
delivery of health care services is subject to a fine and/or imprisonment. In
addition, HIPAA provides that any person or entity that knowingly and willfully
falsifies or conceals or covers up a material fact or
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makes any materially false or fraudulent statements in connection with the
delivery of or payment of health care services by a health care benefit plan is
subject to a fine and/or imprisonment. These provisions of HIPAA represent the
criminalization of situations which previously would have been handled civilly
through the administrative processes of repayments of overpayments, offsets, and
fines.
The Anti-Kickback Law and similar state statutes are broad in scope, subject
to frequent modification and differing interpretations. In an attempt to clarify
which arrangements are not subject to prosecution under the Anti-Kickback Law,
the Department of Health and Human Services ("DHHS") adopted a set of "safe
harbor" regulations and continues to publish clarifications to such safe
harbors. Arrangements that comply with all the requirements of all applicable
safe harbors are deemed not to violate the Anti-Kickback Law. The Company has
several business arrangements, such as, without limitation, joint venture and
management arrangements with medical centers, service arrangements with
physicians and product pricing arrangements with suppliers that do not satisfy
all of the requirements necessary to fall within the safe harbors, and there is
not safe harbor protection for each and every Company arrangement. Due to the
breadth and complexity of these laws and regulations, and the absence in many
instances of court decisions addressing arrangements by which the Company has
conducted and expects to conduct its business, it is possible that some of the
Company's practices could be challenged. Although failure of a transaction or
arrangement to fit within a specific safe harbor provision does not necessarily
mean that the structure of the transaction is illegal or that prosecution under
the Anti-Kickback Law will be pursued, there can be no assurance that the
Company's practices will not be challenged, or that the Company will not be
subject to sanctions or be required to alter or discontinue certain of its
practices, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
OIG FRAUD ALERTS. The Office of Inspector General ("OIG") has issued "Fraud
Alerts" identifying certain arrangements and practices which it believes may
implicate the federal fraud and abuse laws. The OIG has issued a Fraud Alert
providing its views on certain joint venture and contractual arrangements
between health care providers. The OIG has issued a Fraud Alert concerning
prescription drug marketing practices that could potentially violate federal
fraud and abuse laws. Pharmaceutical marketing activities may implicate the
federal fraud and abuse laws because drugs are often paid for by Medicare and
the Medicaid program. According to the Fraud Alert, examples of practices that
may implicate the fraud and abuse laws include arrangements under which
remuneration is made to pharmacists to recommend the use of a particular
pharmaceutical product. In addition, a number of states have recently undertaken
enforcement actions against pharmaceutical manufacturers involving
pharmaceutical marketing programs, including programs containing incentives for
pharmacists to dispense one particular product rather than another. These
enforcement actions arise under state consumer protection laws which generally
prohibit false advertising, deceptive trade practices and the like. Further, a
number of the states involved in these enforcement actions have requested that
the FDA exercise greater regulatory oversight in the area of pharmaceutical
promotional activities by pharmacists. It is not possible to determine whether
the FDA will act in this regard or what effect, if any, FDA involvement would
have on the Company's operations.
THE STARK LAW. The Company and any physician (or the physician's immediate
family members) with whom the Company may have business dealings are also
subject to the Ethics in Patient Referrals Act of 1989, commonly called the
"Stark Law." Unless excepted, the Stark Law prohibits physicians from making a
referral for the rendering of certain health-related items or services if such
practitioner or his or her family member has a financial relationship with the
entity receiving the referral. Correspondingly, such entity cannot bill for a
service or item provided pursuant to a prohibited referral. The prohibitions of
the Stark Law apply to the products and services provided by the Company. Among
other sanctions, a civil monetary penalty may be levied for each product or
service provided pursuant to a prohibited referral upon both the person making
the referral and the provider rendering the service. Such persons or entities
are also subject to exclusion from Medicare and Medicaid. The prohibitions of
the Stark Law apply to the Company's products and services. Due to the breadth
and complexity of the Stark Law and the absence of court decisions construing
such law, it is possible that some of the Company's practices could be
challenged and there can be no assurance that the Company will not be
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subject to sanctions or be required to alter or discontinue certain of its
practices, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
BENEFICIARY INDUCEMENT. HIPAA created new civil monetary penalties for
individuals and entities that offer remuneration or other inducements to the
beneficiaries of federal health care programs, such as Medicare, Medicaid and
CHAMPUS, which the provider knows or should know will influence the
beneficiaries' decision to seek specific governmentally reimbursable items or
services or to choose a particular provider to provide those items or medical
services. HIPAA provides an exception to this prohibition by excluding items
provided to promote the delivery of preventive care. Under the statutory
exemption, it would not be considered impermissible remuneration for a provider
to give certain types of incentives to a beneficiary to encourage the
beneficiary to receive preventive care. The statutory exception would apply
where "such care is provided or directly supervised by the medical provider that
has provided the incentive."
The OIG has issued proposed regulations concerning the HIPAA prohibition
against inducements to beneficiaries (the "Proposed Regulations"). In contrast
to the statute, the OIG has taken the position that the statutory exception for
incentives to promote preventive care does not include the "direct rendering of
preventive medical care." The Preamble of the Proposed Regulations provides
examples of the type of preventive care incentives the OIG would consider
permissible under this statutory exemption: (i) transportation to and from
preventive care services; (ii) car seats, formula and other items for those
participating in prenatal or postnatal classes; and (iii) tee shirts, videos and
water bottles for those participating in post-cardiac care fitness programs. The
OIG has indicated that items and services related to general health promotion
such as health club memberships, vitamins, nutritional supplements and the like
would not be permissible incentives under the statutory exception. The OIG has
also stated that permissible incentives would not include cash or cash
equivalents. As the OIG noted in the Preamble, the committee report on these
provisions had stated that the provision of items and services of nominal value
was permissible, offering as examples, "refreshments, medical literature,
complimentary local transportation services, or participation in free health
fairs." The OIG has interpreted this statement restrictively to mean that the
aggregate value of such services is nominal and that the provision of even
nominally priced incentives on a frequent basis would be impermissible. The
Company from time to time provides certain items at no charge to its patients in
connection with their drug therapies. Although the Company believes these items
fall within the scope of the statutory preventive care exception, or are
otherwise of nominal value, there can be no assurance regarding the scope of any
final regulations, or that the Company will not be challenged on its practices
and suffer applicable sanctions or be required to alter or discontinue its "no
charge" practices, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
THE FALSE CLAIMS ACT. The Company is also subject to federal and state
laws, including the federal False Claims Act, prohibiting an individual or
entity from knowingly and willfully presenting claims for payment (by Medicare,
Medicaid, or other third party payors) that contain false or fraudulent
information. These laws also provide for both criminal and civil penalties.
Furthermore, providers found to have submitted claims which they knew or should
have known were false, fraudulent, or for items or services that were not
provided as claimed, may be excluded from Medicare and Medicaid participation,
required to repay previously collected amounts, and subject to substantial civil
monetary penalties.
GOVERNMENT INVESTIGATIONS. There is increasing scrutiny by law enforcement
authorities, the OIG, the courts, and Congress of arrangements between health
care providers and potential referral sources to ensure that the arrangements
are not designed as a mechanism to exchange remuneration for patient care
referrals and opportunities. Investigators have demonstrated a willingness to
look behind the formalities of a business transaction to determine the
underlying purpose of payments between health care providers and potential
referral sources. Enforcement actions have increased, as evidenced by recent
highly publicized enforcement investigations. Although, to its knowledge, the
Company is not currently the subject of any investigation, there can be no
assurance that the Company will not be the subject of investigations or
inquiries in the future nor that
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any such investigation would not have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition to investigations and enforcement actions initiated by
governmental agencies, health care companies may also be the subject of qui tam
actions brought under the False Claims Act by private individuals on behalf of
the government. Furthermore, actions under the False Claims Act, commonly known
as "whistleblower" lawsuits are generally filed under seal to allow the
government adequate time to investigate and determine whether it will intervene
in the action, and defendant health care providers are often without knowledge
of such actions until the government has completed its investigation and the
seal is lifted.
CONFIDENTIALITY. Various federal and state laws establish minimum standards
for the maintenance of medical records and protect the confidentiality of
patient medical information. In the course of its business, the Company
maintains medical records for each patient to whom it dispenses drugs. As a
result, it is subject to one or more of these medical record and patient
confidentiality laws. In addition, the Company may become subject to new rules
recently mandated by HIPAA, and proposed by HCFA to ensure the integrity and
confidentiality of patient data by creating mandatory security standards for
entities which maintain or transmit health information electronically. The
Company maintains written procedures and provides regular training to its
employees in an effort to comply with all of the medical record and patient
confidentiality laws to which the Company is subject. Unauthorized disclosure of
confidential patient information, or other failure to comply with any applicable
laws and regulations regarding the maintenance of patient records and the
confidentiality of medical information, could have a material adverse effect on
the Company's business, financial condition and results of operation.
BALANCED BUDGET ACT. Each state has its own Medicaid program that is funded
jointly by the state and Federal government. Federal law governs how each state
manages its Medicaid program, but there is wide latitude for states to customize
Medicaid programs to fit the needs and resources to their citizens. As a result,
each state Medicaid plan has its own payment formula and recipient eligibility
criteria. In recent years, changes in Medicare and Medicaid programs have
resulted in limitations on, and reduced levels of, payment and reimbursement for
a substantial portion of health care goods and services. Congress recently
enacted the Balanced Budget Act of 1997, which establishes a plan to balance the
federal budget by fiscal year 2002, and includes significant additional
reductions in spending levels for the Medicare and Medicaid programs.
The Medicare, Medicaid, CHAMPUS and other governmental programs are subject
to statutory and regulatory changes, administrative rulings, interpretations and
determinations, requirements for utilization review and new governmental funding
restrictions, all of which may materially increase or decrease program payments
as well as affect the cost of providing services and the timing of payments. The
final determination of amounts earned under the programs often requires many
years, because of audits by the program representatives, providers' rights of
appeal and the application of numerous technical provisions. The Company
believes adequate provision has been made for such adjustments. Until final
adjustment, however, significant issues remain unresolved and payments received
could be recouped.
REFORM. Political, economic and regulatory influences are subjecting the
health care industry in the United States to fundamental change. A variety of
new approaches have been proposed, including mandated basic health care
benefits, controls on health care spending through limitations on the growth of
private health insurance premiums and Medicare and Medicaid spending, and the
creation of large purchasing groups. In addition, some of the states in which
the Company operates have adopted or are considering various health care reform
proposals. The Company anticipates that Congress and state legislatures will
continue to review and assess alternative health care delivery systems and
payment methods and that public debate of these issues will likely continue in
the future. Because of uncertainty regarding the ultimate features of reform
initiatives and their enactment and implementation, the Company cannot predict
which, if any, of such reform proposals will be adopted, when they may be
adopted, or what impact they may have on the Company.
46
<PAGE>
FACILITIES
The Company's corporate headquarters is located in Memphis, Tennessee and
its primary pharmacy locations are in Memphis and Nashville, Tennessee. In
addition, the Company has a satellite pharmacy location in the Birmingham,
Alabama area and two satellite pharmacy locations in the Dallas/Ft. Worth, Texas
area that are leased by partnerships in which the Company is a general partner.
MEMPHIS, TENNESSEE. The Company currently leases an aggregate of
approximately 42,000 square feet of space in an office/warehouse business park
in Memphis, Tennessee pursuant to two lease agreements that expire in 2003, each
with an option to extend the lease term for one additional five year period. The
Company is negotiating to lease an additional 20,000 square feet of space.
NASHVILLE, TENNESSEE. The Company currently leases approximately 24,000
square feet of space in Nashville, Tennessee pursuant to a lease agreement that
expires in October 1999, with an option to extend the lease term for one
additional five year period.
BIRMINGHAM, ALABAMA. The Company currently leases approximately 2,400
square feet of space in the Birmingham, Alabama area pursuant to a lease
agreement that expires in February 2000.
DALLAS/FORT WORTH, TEXAS. Partnerships in which the Company is a general
partner currently lease an aggregate of approximately 2,400 square feet of space
in two locations in the Dallas/Fort Worth, Texas area pursuant to two lease
agreements that expire in May 2002, each with an option to extend the lease term
for one additional three year period.
EMPLOYEES
The Company had 296 full-time and 36 part-time employees as of December 31,
1998, which included 29 full-time and four part-time pharmacists. None of the
Company's employees are represented by a labor union, and management considers
its relations with its employees to be good.
LIABILITY INSURANCE
Providing health care services and products entails an inherent risk of
liability. In recent years, participants in the health care industry have become
subject to an increasing number of lawsuits, many of which involve large claims
and significant defense costs. The Company may from time to time be subject to
such suits as a result of the nature of its business. The Company maintains
general liability insurance, including professional and product liability, in an
amount deemed adequate by management. There can be no assurance, however, that
claims in excess of, or beyond the scope of, the Company's insurance coverage
will not arise. In addition, the Company's insurance policies must be renewed
annually. Although the Company has not experienced difficulty in obtaining
insurance coverage in the past, there can be no assurance that it will be able
to do so in the future on acceptable terms or at all.
LEGAL PROCEEDINGS
The Company is involved in various lawsuits and claims arising in the normal
course of business. In the opinion of Company management, although outcomes of
these lawsuits and claims are uncertain, in the aggregate they should not have a
material adverse effect on the Company's business, financial condition or
results of operations.
47
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
David D. Stevens.......................... 45 Chairman of the Board of Directors and
Chief Executive Officer
John R. ("Randy") Grow.................... 50 President and Director
Joel R. Kimbrough......................... 41 Senior Vice President, Chief Financial
Officer and Treasurer
Kyle J. Callahan.......................... 32 Senior Vice President and Director
Thomas W. Bell, Jr........................ 47 Senior Vice President, General Counsel and
Secretary
Kenneth R. Masterson(1)................... 54 Director
Kenneth J. Melkus(1)...................... 52 Director
Andrew M. Paul(2)......................... 42 Director
Patrick J. Welsh(2)....................... 55 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
DAVID D. STEVENS has served as Chief Executive Officer of Accredo since it
was acquired from Le Bonheur in 1996 and has served as a Director of Accredo
since June 1997. Previously, Mr. Stevens served as Chief Operating Officer of
SHS since its inception in 1983. Mr. Stevens has served as President of SHS
since 1993 and Director since 1996. He has served as Chief Executive Officer of
Nova Factor since 1996 and as a Director since 1990.
JOHN R. ("RANDY") GROW has served as President of Accredo since it was
acquired from Le Bonheur in 1996 and has served as a Director of Accredo since
June 1997. Mr. Grow has also served as President of Nova Factor since 1996, and
Chief Operating Officer and Director since 1990. Previously, Mr. Grow was
employed in the home infusion industry as President of Curaflex Health Infusion
Services, Inc. from 1988 to 1989 and as Area Vice President of Caremark, Inc.
from 1985 to 1988.
JOEL R. KIMBROUGH has served as Senior Vice President and Chief Financial
Officer and Treasurer of Accredo since it was acquired from Le Bonheur in 1996.
He has also served as Chief Financial Officer and Director of Nova Factor since
its inception in 1990, as Chief Financial Officer of SHS since 1989, and as a
Director of SHS since 1996. Previously, Mr. Kimbrough, a certified public
accountant, was employed by Ernst & Young LLP from 1980 to 1989.
KYLE J. CALLAHAN has served as Senior Vice President and a Director of
Accredo since HHS was acquired by the Company in June 1997. Mr. Callahan has
served as President of HHS since June 1997. From HHS's inception in 1990 until
June 1997, Mr. Callahan served in several management and executive positions
with HHS, including Vice President of Operations.
THOMAS W. BELL, JR. joined Accredo as Senior Vice President and General
Counsel in July 1998 and was elected Secretary of the Company in October 1998.
Prior to joining the Company, Mr. Bell practiced law from
48
<PAGE>
1976 to 1998 as a member of the firm of Armstrong Allen Prewitt Gentry Johnston
& Holmes, PLLC in Memphis, Tennessee, where Mr. Bell represented Nova Factor and
SHS since their inception in 1990 and 1983, respectively.
KENNETH R. MASTERSON has been a Director of Accredo since April 1998. Mr.
Masterson joined FedEx in 1980 and in 1996 he became Executive Vice President,
General Counsel and Secretary of FedEx. In 1998, Mr. Masterson assumed the same
duties for FDX Corporation, a transportation holding company and the parent
company of FedEx. Mr. Masterson is also a director of Thomas & Betts
Corporation.
KENNETH J. MELKUS has been a Director of Accredo since October 1997. Mr.
Melkus currently serves as a consultant to WCA Management Corporation, an
affiliate of WCAS VII. From its founding in 1993 to its sale in 1996, Mr. Melkus
served as Chairman of the Board and Chief Executive Officer of HealthWise of
America, Inc., an operator of health maintenance organizations. From 1986 until
1993, Mr. Melkus served as Vice Chairman and President of Surgical Care
Affiliates, Inc., an operator of outpatient surgery centers. Mr. Melkus is also
a director of Quorum Health Group, Inc.
ANDREW M. PAUL has been a Director of Accredo since 1996. Mr. Paul joined
Welsh Carson in 1984 and is a general partner of the sole general partner of
WCAS VII and an affiliated entity that are stockholders of the Company. Mr. Paul
also is a director of Lincare, Inc., Centennial HealthCare Corporation and
several privately held companies.
PATRICK J. WELSH has been a Director of Accredo since June 1997. Mr. Welsh
was a founder of Welsh Carson in 1979 and is a general partner of the sole
general partner of WCAS VII and an affiliated entity that are stockholders of
the Company. Prior to 1979, Mr. Welsh was president and a Director of Citicorp
Venture Capital, Ltd., an affiliate of Citicorp engaged in venture capital
investing. Mr. Welsh also serves as a director of several private companies.
Upon completion of the Offering, the Board of Directors will be divided into
three classes, each consisting of approximately one-third of the total number of
directors. There are currently seven directors. Class I directors, consisting of
Messrs. Stevens and Melkus, will hold office until the 1999 annual meeting of
stockholders; Class II directors, consisting of Messrs. Paul and Callahan, will
hold office until the 2000 annual meeting of stockholders; and Class III
directors, consisting of Messrs. Welsh, Grow and Masterson, will hold office
until the 2001 annual meeting of stockholders. See "Description of Capital
Stock--Special Provisions of the Certificate of Incorporation, Bylaws and
Delaware Law."
Mr. Callahan was elected to the Board of Directors in connection with the
Company's acquisition of HHS in 1997. Mr. Callahan's employment agreement
provides that he may terminate his employment for "good reason" (as defined in
the employment agreement) if he is willing to serve but is not elected to the
Board of Directors of the Company while WCAS VII owns a majority of the
outstanding Common Stock of the Company and the Company has not consummated an
initial public offering. Pursuant to a letter dated June 3, 1997, WCAS VII
agreed to vote its shares of Common Stock to elect Mr. Callahan to the Board of
Directors of the Company, and Mr. Callahan was elected to the Board on June 30,
1997. See "Certain Transactions."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors currently includes a Compensation Committee and an
Audit Committee. The Compensation Committee, which is composed of Messrs. Welsh
and Paul, is responsible for the approval of compensation arrangements for
executive officers of the Company and administers the Company's stock option and
employee stock purchase plans. The Audit Committee, which is composed of Messrs.
Masterson and Melkus, reviews the scope and results of audits and other services
performed by the independent public accountants of the Company and reviews the
adequacy of the Company's internal controls.
49
<PAGE>
COMPENSATION OF DIRECTORS
Employees of the Company who are members of the Board of Directors do not
receive any compensation for serving on the Board of Directors. Each
non-employee member of the Board of Directors receives a fee of $1,500 for each
meeting attended. All directors of the Company, including members who are
employees, receive reimbursement of out-of-pocket expenses incurred in
connection with attending meetings. In addition, all directors of the Company
are eligible to receive grants of stock options or other awards pursuant to the
Company's stock option plans. During the fiscal year ended June 30, 1998,
Messrs. Welsh, Paul, Melkus and Masterson each received a grant of a ten-year
non-qualified stock option for 20,000 shares of Common Stock at an exercise
price of $6.00 per share. All of such options vest at an annual rate of 25%,
with the first 25% vesting on the first anniversary of the date of grant.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid by the Company for
services rendered for the fiscal year ended June 30, 1998 with respect to the
Company's Chief Executive Officer and the Company's other executive officers
whose total salary and bonus for the fiscal year ended June 30, 1998 exceeded
$100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ----------------------------
------------------------------------------ RESTRICTED SECURITIES
NAME AND PRINCIPAL FISCAL OTHER ANNUAL STOCK UNDERLYING
POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) AWARD(S)($) OPTIONS(#)
- -------------------------- ----------- ---------- --------- ------------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
David D. Stevens.......... 1998 $ 250,938 $ 45,360 -- --
Chairman of the Board
and
Chief Executive Officer
John R. Grow.............. 1998 167,269 30,600 -- --
President
Joel R. Kimbrough......... 1998 159,306 29,430 -- --
Senior Vice President,
Chief Financial Officer
and Treasurer
Kyle J. Callahan.......... 1998 160,621 29,430 -- -- 40,000
Senior Vice President
<CAPTION>
NAME AND PRINCIPAL ALL OTHER
POSITION COMPENSATION($)(2)
- -------------------------- -------------------
<S> <C>
David D. Stevens.......... $ 4,657
Chairman of the Board
and
Chief Executive Officer
John R. Grow.............. 4,525
President
Joel R. Kimbrough......... 3,587
Senior Vice President,
Chief Financial Officer
and Treasurer
Kyle J. Callahan.......... 3,740
Senior Vice President
</TABLE>
- ------------------------
(1) Excludes perquisites and other personal benefits which for each Named
Executive Officer during any such year did not exceed the lesser of $50,000
or 10% of such individual's salary plus annual bonus.
(2) Includes contributions by the Company under its 401(k) Plan on behalf of
Messrs. Stevens, Grow, Kimbrough and Callahan in the amount of $3,749;
$3,192; $2,909; and $3,592, respectively. Also includes insurance premiums
paid by the Company with respect to term life insurance for the benefit of
Messrs. Stevens, Grow, Kimbrough and Callahan in the amount of $908; $1,333;
$678; and $148, respectively.
50
<PAGE>
OPTION GRANTS
The following table sets forth certain information regarding options granted
by the Company to the Named Executive Officers during the fiscal year ended June
30, 1998.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SHARES OPTIONS GRANTED TO EXERCISE GRANT DATE
UNDERLYING EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME OPTIONS GRANTED(#) FISCAL YEAR ($/SHARE) DATE VALUE($)(1)
- ----------------------------- ------------------- --------------------- ----------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
David D. Stevens............. -- -- -- -- --
John R. Grow................. -- -- -- -- --
Joel R. Kimbrough............ -- -- -- -- --
Kyle J. Callahan(2).......... 30,000 28.2% $6.00 9/3/07 $ 97,950
10,000 9.4% 6.00 2/9/08 32,300
</TABLE>
- ------------------------
(1) These values were determined using the Black-Scholes methodology and the
assumptions described in Note 10 to the Company's Consolidated Financial
Statements included in this Prospectus.
(2) Mr. Callahan was granted an incentive stock option to purchase 30,000 shares
of Common Stock (divided into 15,000 Tranche A option shares and 15,000
Tranche B option shares) and an incentive stock option to purchase 10,000
shares of Common Stock (divided into 7,000 Tranche A option shares and 3,000
Tranche B option shares) on September 3, 1997 and February 9, 1998,
respectively. The exercise price per share of each option was equal to the
fair market value of the Common Stock on the respective dates of grant, as
determined by the Board of Directors. Pursuant to each option, the option
shares subject to Tranche A will vest at an annual rate of 25%, and the
option shares subject to Tranche B will vest in 2002 (or at an annual rate
of 25% in the event the Company meets certain performance goals based upon
target earning levels). The options will vest immediately upon certain
changes in control of the Company. The term of each option expires ten years
from the date of grant (or earlier, in the event the optionee ceases to be
employed by the Company or any subsidiary or parent thereof).
OPTION EXERCISES AND YEAR END OPTION VALUES
The following table provides information with respect to options exercised
by the Named Executive Officers during the fiscal year ended June 30, 1998 and
the value of unexercised options held by the Named Executive Officers as of June
30, 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
NUMBER OF SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE AT FISCAL YEAR END 1998(#) FISCAL YEAR END 1998($)(1)
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------- --------------------- ----------------- ------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C> <C>
David D. Stevens......... -- -- 95,000/176,429 $ 1,235,000/$2,293,577
John R. Grow............. -- -- 47,500/88,214 617,500/1,146,782
Joel R. Kimbrough........ -- -- 47,500/88,214 617,500/1,146,782
Kyle J. Callahan......... -- -- 3,750/36,250 37,500/362,500
</TABLE>
- ------------------------
(1) For purposes of this calculation, value is based upon the difference between
the exercise price and the initial public offering price of $16.00 per
share.
51
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Welsh and Paul, who presently serve as members of the Compensation
Committee of the Board of Directors, served on the Compensation Committee during
the fiscal year ended June 30, 1998. Neither Messrs. Welsh or Paul, nor any
executive officer of the Company, serves as a member of a board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of the Company's Board of Directors.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Stevens,
Grow and Kimbrough as of May 31, 1996, and with Mr. Bell as of July 10, 1998.
HHS, a wholly owned subsidiary of the Company, entered into an employment
agreement with Mr. Callahan as of June 5, 1997. The terms of such employment
agreements expire on May 31, 1999 (with respect to Messrs. Stevens, Grow and
Kimbrough), June 1, 2000 (with respect to Mr. Callahan), and June 30, 2001 (with
respect to Mr. Bell), although each employment agreement is subject to automatic
one-year renewals. The Company may terminate the employment agreements at any
time. Each employment agreement provides that in the event the Company
terminates the executive's employment without "cause" (as defined therein) and
other than by reason of his death or disability, or in the event the executive
terminates his or her employment for "good reason" (as defined therein), the
executive shall continue to receive his or her salary as a severance payment for
a certain period of time (one year, with respect to Messrs. Stevens, Grow,
Kimbrough and Bell, and 18 months, with respect to Mr. Callahan). In addition,
upon such termination, Messrs. Stevens, Grow, Kimbrough and Bell would be
entitled to continue to participate in the Company's benefit plans for a period
of one year (or until the commencement of other full-time employment, whichever
is earlier).
The employment agreements entitle Messrs. Stevens, Grow, Kimbrough, Bell and
Callahan to annual base salaries presently set at $264,600, $178,500, $173,300,
$168,000 and $171,675, respectively. Each employment agreement also provides for
the payment of an annual bonus of up to 50% of salary with respect to Messrs.
Stevens, Grow, Kimbrough and Callahan and up to 40% of salary with respect to
Mr. Bell, based upon the extent to which the Company achieves certain
performance goals based upon target earning levels established by the Board of
Directors. Each of the employment agreements entitles the executive to all
benefits provided by the Company for its senior executives. In addition, the
Company has agreed to maintain $500,000 in term life insurance for each of
Messrs. Stevens, Grow, Kimbrough and Bell, payable to their respective named
beneficiaries.
Each of the employment agreements prohibits the executive's disclosure and
use of confidential information and restricts, for certain periods of time
following termination of employment (12 months, with respect to Messrs. Stevens,
Grow, Kimbrough and Bell, and 36 months, with respect to Mr. Callahan), his
solicitation of certain employees of the Company, conduct of certain business
with the Company's five largest suppliers, or competition with the Company.
LONG-TERM INCENTIVE PLAN
Prior to the completion of the Offering, the Accredo Health, Incorporated
1999 Long-Term Incentive Plan (the "Incentive Plan") will be adopted by the
Board of Directors of the Company and will be approved by the Company's
stockholders. A summary of the Incentive Plan is set forth below. The summary is
qualified in its entirety by reference to the full text of the Incentive Plan, a
copy of which is included as an exhibit to the Registration Statement of which
this Prospectus is a part.
The purpose of the Incentive Plan is to promote the success, and enhance the
value, of the Company by linking the personal interests of employees, officers,
consultants and directors to those of the stockholders, and by providing such
persons with an incentive for outstanding performance. Upon completion of the
Offering, approximately 40 persons will be eligible to participate in the
Incentive Plan.
52
<PAGE>
The Incentive Plan authorizes the granting of awards ("Awards") to
employees, officers, consultants and directors of the Company or its
subsidiaries in the following forms: (i) options to purchase shares of Common
Stock ("Options"), which may be incentive stock options that meet the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code") ("ISOs") or non-qualified stock options ("NQSOs"), (ii) stock
appreciation rights ("SARs"); (iii) performance units ("Performance Units");
(iv) restricted stock ("Restricted Stock"); (v) dividend equivalent rights; and
(vi) other stock-based awards. Subject to adjustment as provided in the
Incentive Plan, the aggregate number of shares of Common Stock reserved and
available for Awards or which may be used to provide a basis of measurement for
or to determine the value of an Award (such as with a SAR or Performance Share)
is 500,000. The maximum number of shares of Common Stock with respect to one or
more Options and/or SARs that may be granted during any one calendar year under
the Incentive Plan to any one participant is 500,000. The maximum fair market
value of any Awards (other than Options and SARs) that may be received by a
participant (less any consideration paid by the participant for such Award)
during any one calendar year under the Incentive Plan is $2,000,000.
The Incentive Plan is administered by the Compensation Committee, which has
the power, authority and discretion to designate participants; determine the
type or types of Awards to be granted to each participant and the terms and
conditions thereof; establish, adopt or revise any rules and regulations as it
may deem necessary or advisable to administer the Incentive Plan; and make all
other decisions and determinations that may be required under, or as it deems
necessary or advisable to administer, the Incentive Plan. The Board or the
Compensation Committee may, at any time and from time to time, terminate, amend
or modify the Incentive Plan without stockholder approval. No termination,
amendment, or modification of the Incentive Plan may adversely affect any Award
previously granted under the Incentive Plan, without the consent of the
participant.
Upon the participant's death or disability during his or her employment or
his or her service as a director, all outstanding Options, SARs, and other
Awards in the nature of rights that may be exercised will become fully vested
and exercisable and all restrictions on outstanding Awards will lapse. In
addition, in the event of a Change in Control of the Company (as defined in the
Incentive Plan), all outstanding Options, SARs, and other Awards in the nature
of rights that may be exercised will become fully vested and exercisable and all
restrictions on all outstanding Awards will lapse. Unexercised or restricted
Awards generally will not be assignable or transferable by a participant other
than by will or the laws of descent and distribution or, except in the case of
an ISO, pursuant to a qualifying domestic relations order.
Pursuant to Section 162(m) of the Code, the Company may not deduct
compensation in excess of $1.0 million paid to the Chief Executive Officer and
the four next most highly compensated executive officers of the Company. The
Incentive Plan is designed to comply with Code Section 162(m) so that the grant
of Options and SARs under the Incentive Plan, and other Awards, such as
Performance Shares, that are conditioned on the performance goals described in
the Incentive Plan, will be excluded from the calculation of annual compensation
for purposes of Code Section 162(m) and will be fully deductible by the Company.
STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN
The Nova Holdings, Inc. and its Subsidiaries Stock Option and Restricted
Stock Purchase Plan, as amended and restated (the "Option Plan"), became
effective as of May 31, 1996, the date of its original adoption by the Board of
Directors of the Company. The amendment and restatement of the Option Plan was
approved by the Company's stockholders on June 30, 1997. A summary of the Plan
is set forth below. The summary is qualified in its entirety by reference to the
full text of the Plan, a copy of which is included as an exhibit to the
Registration Statement of which this Prospectus is a part.
The Option Plan authorizes the granting of options to purchase shares of
Common Stock, which may be ISOs or NQSOs, and other related awards, to
employees, officers, and directors of the Company or its subsidiaries. Subject
to adjustment as provided in the Option Plan, the aggregate number of shares of
Common Stock for which Options or awards may be granted under the Option Plan is
965,000. As of December 31, 1998, there were approximately 35 persons eligible
to participate in the Plan.
53
<PAGE>
The Option Plan is administered by the Compensation Committee, which has the
power, authority and discretion to designate participants, determine the type or
types of awards to be granted to each participant and the terms and conditions
thereof, and establish any other terms, restrictions and conditions applicable
to any option or award not inconsistent with the provisions of the Option Plan.
The Board or the Compensation Committee may, at any time and from time to time,
terminate, amend or modify the Option Plan without stockholder approval;
provided that stockholder approval shall be required in the case of an amendment
to increase the aggregate number of shares issuable subject to the Option Plan,
to decrease the minimum exercise price in respect of ISOs, or to change the
class of employees eligible to receive ISOs under the Option Plan. No
termination, amendment, or modification of the Option Plan may adversely affect
any option or award previously granted under the Option Plan, without the
consent of the participant.
EMPLOYEE STOCK PURCHASE PLAN
Prior to the completion of the Offering, the Accredo Health, Incorporated
1999 Employee Stock Purchase Plan (the "ESPP") will be adopted by the Board of
Directors of the Company and approved by the Company's stockholders. The purpose
of the ESPP, which is intended to qualify as an employee stock purchase plan
under Section 423 of the Code, is to enhance the proprietary interest among the
employees of the Company and its participating subsidiaries through ownership of
Common Stock of the Company. A summary of the ESPP is set forth below. The
summary is qualified in its entirety by reference to the full text of the ESPP,
a copy of which is included as an exhibit to the Registration Statement of which
this Prospectus is a part.
Pursuant to the ESPP, eligible employees make contributions, through payroll
deductions, to a plan account during a six-month "offering period." The offering
periods commence and end on or about January 1 to June 30 and July 1 to December
31 of each year, provided that the first offering period will commence on the
date of the initial public offering of the Company's Common Stock and end on
December 31, 1999. On the first business day of each offering period, the
Company will grant to each participant in the ESPP an option to purchase, on the
last day of such offering period, a maximum of 2,500 shares of Common Stock. No
option will be granted to a participant if such option, when combined with all
other options granted under all of the Code Section 423 employee stock purchase
plans of the Company, its parents and its subsidiary corporations, would permit
such participant to purchase shares of Common Stock of the Company having a fair
market value in excess of $25,000 per year.
The participant will be entitled to exercise such option to the extent of
the participant's accumulated payroll deductions on the last day of such
offering period; provided, however, that if the participant's accumulated
payroll deductions on the last day of the offering period would enable the
participant to purchase more than 2,500 shares, the excess of the amount of the
accumulated payroll deductions over the aggregate purchase price of the shares
will be refunded to the participant, without interest. The option price for each
offering period will be the lesser of (i) 85% of the fair market value of the
Common Stock on the first business day of the offering period, or (ii) 85% of
the fair market value of the Common Stock on the last business day of the
offering period. Employees may authorize payroll deductions in amounts not less
than one percent (1%) but not more than ten percent (10%) of their respective
total compensation, including base pay or salary and any bonuses or commissions.
Each employee of the Company and each employee of any participating
subsidiary is eligible to participate in the ESPP, provided such employee: (i)
is regularly scheduled to work at least 20 hours each week and at least five
months in the calendar year, and (ii) immediately after the grant of an option
to him or her under the ESPP would own less than five percent of the total
combined voting power or value of all classes of stock of the Company or any of
its subsidiaries. Upon completion of the Offering, approximately 300 employees
will be eligible to participate in the ESPP.
Shares subject to the ESPP may be authorized but unissued shares or shares
that were once issued and subsequently reacquired by the Company. The total
number of shares of Common Stock for which options may be granted under the ESPP
is 135,000 shares, subject to adjustment in accordance with the ESPP.
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The ESPP will be administered by the Compensation Committee or the Board of
Directors, which will have authority to interpret and administer the ESPP. The
ESPP may be terminated at any time by the Board, but such termination will not
affect options then outstanding. The ESPP will terminate in any case when all or
substantially all of the unissued shares of stock reserved for the purposes of
the ESPP have been purchased. If at any time shares of stock reserved for the
ESPP remain available for purchase but not in sufficient number to satisfy all
then unfilled purchase requirements, the available shares will be apportioned
among participants in proportion to their options and the ESPP will terminate.
Upon termination, all payroll deductions not used to purchase stock will be
refunded. The Committee or the Board may from time to time amend the ESPP
provided that, without the approval of the stockholders, no amendment may (i)
materially affect the eligibility requirements or the definition of "Employer,"
(ii) increase the number of shares of Common Stock subject to any options issued
to participants, or (iii) materially increase the benefits to participants under
the Plan.
An employee's rights under the ESPP will terminate when he or she ceases to
be an employee for any reason, and the cash balance in his or her contribution
account will be distributed to such employee (or his or her designated
beneficiary). An employee's rights under the ESPP may not be transferred other
than by will or the laws of descent and distribution. Any option granted under
the ESPP to an employee may be exercised, during the employee's lifetime, only
by the employee.
401(K) PLAN
The Company sponsors a defined contribution plan (the "401(k) Plan") for
eligible employees of the Company under Section 401(k) of the Code.
Substantially all the Company's employees who have attained the age of 21 and
who have completed at least three months of service are eligible to participate
in the 401(k) Plan. Participants may contribute up to 18% of their annual
compensation to the 401(k) Plan, subject to certain limitations. All
contributions made by participants are fully vested and are not subject to
forfeiture. The Company makes matching contributions to the 401(k) Plan on
behalf of each eligible participant based upon the participant's total years of
service with the Company. The Company matches 25% of "eligible contributions"
(as defined in the 401(k) Plan) made by participants with less than five years
of service, and 50% of eligible contributions made by participants with five or
more years of service.
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CERTAIN TRANSACTIONS
INITIAL FORMATION, CAPITALIZATION AND ACQUISITION OF SHS
In May 1996, the Company (formerly known as Nova Holdings, Inc.) was formed
for the purpose of acquiring all of the outstanding equity securities of SHS,
then a subsidiary of Le Bonheur. In connection with the initial capitalization
of the Company, Welsh Carson purchased an aggregate of 4,972,534 shares of the
Company's Common Stock for $14,917,602 and an aggregate of 248,624 shares of
Series A Preferred Stock for $24,862,400. Additional investors purchased a total
of 27,466 shares of the Company's Common Stock for $82,398 and 1,376 shares of
Series A Preferred Stock for $137,600. In connection with the Recapitalization,
Welsh Carson will exchange 1,100,000 shares of Common Stock for 1,100,000 shares
of Non-Voting Common Stock. All outstanding shares of Series A Preferred Stock
will be redeemed by the Company with a portion of the net proceeds from the
Offering and possibly together with other available Company funds.
On May 31, 1996, the Company acquired all of the outstanding Class A Common
Stock and Class B Common Stock of SHS (the "SHS Common Stock"). Prior to the
Company's purchase of the SHS Common Stock, SHS spun-off its three subsidiaries
other than Nova Factor and repurchased certain shares of SHS Common Stock held
by persons other than Le Bonheur. In addition, Messrs. Grow, Kimbrough and
Stevens (in addition to certain other holders of SHS Common Stock) exchanged
their shares of SHS Common Stock for 19,560, 12,225 and 61,125 shares of the
Company's Common Stock, respectively, and 978, 611 and 3,056 shares of Series A
Preferred Stock, respectively.
REGISTRATION RIGHTS AGREEMENT
In connection with the formation of the Company in May 1996, Welsh Carson
entered into a Registration Rights Agreement with the Company (the "Registration
Rights Agreement"). The Registration Rights Agreement provides for demand
registration rights that may be exercised on up to two occasions by the holders
of Restricted Stock (as defined therein, which definition includes substantially
all shares of Common Stock outstanding prior to the Offering) constituting at
least a majority of the total Restricted Stock outstanding at the time of
exercise. The Registration Rights Agreement also provides unlimited demand
registration rights to holders of Restricted Stock for registrations on Form
S-3, so long as the reasonably anticipated aggregate price to the public of such
offering is at least $1.0 million; provided, however, that such demand
registrations may not be exercised more than once every 180 days. No
registration effected pursuant to these unlimited demand registration rights on
Form S-3 will be counted toward the limit of two demand registration rights
referred to above.
The Registration Rights Agreement also provides that, subject to certain
limitations including the discretion of the managing underwriter in an
underwritten offering, holders of Restricted Stock may request inclusion of
their shares in a registration of securities initiated by the Company. The
Company is required to pay all costs of any registration pursuant to the
Registration Rights Agreement, subject to certain limitations provided in the
agreement. All of the parties to the Registration Rights Agreement have waived
any right to participate in this Offering.
All shares of Common Stock owned by the executive officers and directors of
the Company are shares of Restricted Stock as such term is defined in the
Registration Rights Agreement and are, therefore, subject to the above described
registration rights.
ACQUISITION OF HHS
In June 1997, the Company purchased all of the outstanding shares of common
stock of HHS for an aggregate purchase price of approximately $29,996,000.
Dianne R. Griffith, the mother of Mr. Callahan, was a significant stockholder of
HHS and received a material economic benefit from the transaction. See Note 3 of
the Notes to the Company's Consolidated Financial Statements. Of the
consideration received by the selling shareholders, $2,070,400 is currently
being held in two escrow accounts to secure potential indemnification
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claims for breaches of the sellers' representations and warranties and to
satisfy certain accounts payable of HHS that had not been resolved at closing.
Absent a claim for indemnification, $1,450,000 will be paid out of escrow to the
selling shareholders on June 5, 1999. Any remaining amounts in escrow will be
paid to the selling shareholders, including Ms. Griffith, upon a resolution of
the accounts payable amount. Ms. Griffith also entered into a three month
consulting agreement with the Company pursuant to which she provided certain
consulting services to the Company in exchange for a total of $26,500.
Ms. Griffith leases approximately 24,000 square feet of office space located
in Nashville, Tennessee to HHS pursuant to a lease that expires on October 31,
1999. The Company is obligated under the lease to make annual rent payments to
Ms. Griffith in the amount of $302,277.
Also in connection with the acquisition of HHS, the Company entered into an
employment agreement and a stock option agreement with Mr. Callahan. See
"Management--Executive Compensation" and "--Employment Agreements." Mr.
Callahan's employment agreement permits him to terminate his employment for
"good reason", including if he is willing to serve and he is not elected to the
Board of Directors of the Company while WCAS VII owns a majority of the
outstanding Common Stock and the Company has not consummated an initial public
offering. Pursuant to a letter dated June 3, 1997, WCAS VII agreed to vote its
shares of Common Stock to elect Mr. Callahan to the Board of Directors of the
Company, and Mr. Callahan was elected to the Board on June 30, 1997. Also, on
October 1, 1997, Mr. Callahan purchased 41,667 shares of Common Stock for a
total purchase price of $250,002 and was granted registration rights covering
those shares with the same terms and conditions as those granted to Welsh Carson
in the Registration Rights Agreement.
10% SENIOR SUBORDINATED NOTES DUE JANUARY 1, 2004
On June 4, 1997, Welsh Carson purchased $10.0 million of the Company's
Senior Subordinated Notes. The Senior Subordinated Notes bear interest at 10%
and are due and payable in full on June 1, 2004, with interest payable thereon
quarterly in arrears on the first day of March, June, September and December of
each year commencing on September 1, 1997. At the option of the Company, the
amount of interest due and payable through June 1, 1999 may be added to the
unpaid principal balance of the Senior Subordinated Notes.
Upon the Company's prior written notice to the holders of the Senior
Subordinated Notes, the Company may prepay all or any portion of the Senior
Subordinated Notes. The Company is required to make certain mandatory
prepayments of the Senior Subordinated Notes in full if at any time while the
Senior Subordinated Notes are outstanding: (i) the Company merges or
consolidates with or into another entity (subject to certain exceptions); (ii)
the Company sells or otherwise disposes of substantially all of its assets to a
third-party; or (iii) the Company consummates a public offering of equity
securities pursuant to an effective registration statement under the Securities
Act of 1933. The Company intends to prepay in full the entire principal balance
of the Senior Subordinated Notes and all accrued interest thereon with a portion
of the net proceeds of this Offering. See "Use of Proceeds."
In connection with the issuance of the Senior Subordinated Notes, the
Company also issued to purchasers of the Senior Subordinated Notes 1 share of
Common Stock for each $25 principal amount of Senior Subordinated Notes
purchased, for a total of 400,000 shares of Common Stock.
COMMON STOCK PURCHASES BY AFFILIATES
In connection with the appointment of Mr. Melkus to the Company's Board of
Directors, his daughter, Lauren Melkus, acquired 41,667 shares of Common Stock
for $250,002 on October 27, 1997. In addition, Mr. Masterson, upon his
appointment to the Company's Board of Directors, acquired 34,000 shares of
Common Stock for $204,000 on July 24, 1998 pursuant to a subscription agreement
entered into by Mr. Masterson in April 1998. Both Ms. Melkus and Mr. Masterson
were granted registration rights covering those shares with the same terms and
conditions as those granted to Welsh Carson in the Registration Rights
Agreement. See "Certain Transactions--Registration Rights Agreement."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1998, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby, by (i) each
person known to the Company to beneficially own more than 5% percent of the
outstanding Common Stock, (ii) each of the Company's directors, (iii) each of
the Company's Named Executive Officers, and (iv) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
SHARES --------------------------------
BENEFICIALLY BEFORE AFTER
NAME OWNED(1) OFFERING OFFERING
------ ----------- --------------- ---------------
<S> <C> <C> <C>
Welsh, Carson, Anderson & Stowe VII, L.P.(2)(3)..... 5,372,534 95.5% 62.3%
David D. Stevens.................................... 156,125 2.7% 1.8%
Joel R. Kimbrough................................... 59,725 1.1% *
Kyle J. Callahan.................................... 45,417 * *
John R. ("Randy") Grow.............................. 67,060 1.2% *
Thomas W. Bell, Jr.................................. -- -- --
Kenneth R. Masterson................................ 34,000 * *
Kenneth J. Melkus(4)................................ 46,667 * *
Andrew W. Paul(2)(5)................................ 5,135,088 91.2% 59.5%
Patrick J. Welsh(2)(6).............................. 5,177,656 92.0% 60.0%
All directors and executive officers as a group (9
persons).......................................... 5,611,891 96.2% 63.5%
</TABLE>
- ------------------------------
* Less than one percent.
(1) The percentages shown are based on 5,625,587 shares of Common Stock
outstanding prior to the Offering and 8,625,587 shares of Common Stock
(including Non-Voting Common Stock) outstanding after the Offering. Pursuant
to the rules of the Commission, shares of Common Stock which a person has
the right to acquire within 60 days pursuant to the exercise of stock
options are deemed to be outstanding for the purpose of computing the
percentage ownership of such person but are not deemed outstanding for the
purpose of computing percentage ownership of any other person. Accordingly,
the totals for the following persons include the following shares
represented by options exercisable within 60 days of December 31, 1998: Mr.
Stevens, 95,000 shares; Mr. Kimbrough, 47,500 shares; Mr. Callahan, 3,750
shares; Mr. Grow, 47,500 shares; Mr. Melkus, 5,000 shares; Mr. Paul, 5,000
shares; Mr. Welsh, 5,000 shares; and all directors and executive officers as
a group, 208,750 shares.
(2) The business address of the named person is 320 Park Ave., Suite 2500, New
York, New York 10022.
(3) Includes 101,273 shares of Common Stock owned by WCAS Healthcare Partners,
L.P. , 1,100,000 shares of Non-Voting Common Stock held by WCAS VII and
262,687 shares of Common Stock held by individual general partners of a
general partnership that is the sole general partner of WCAS VII. WCAS
Healthcare Partners, L.P. is a limited partnership with two general
partners: Russell L. Carson and Patrick J. Welsh. The sole general partner
of WCAS VII is a general partnership with eleven general partners, including
Messrs. Carson, Welsh and Paul. The additional general partners of the sole
general partner of WCAS VII are Bruce K. Anderson, Thomas E. McInerney,
Laura VanBuren, Robert A. Minicucci, Anthony J. deNicola, Paul B. Queally,
Lawrence B. Sorrel, and Priscilla A. Newman.
(4) Includes 41,667 shares of Common Stock held by Mr. Melkus' daughter, Lauren
Melkus.
(5) Includes those shares held directly and indirectly by WCAS VII except for
shares owned by the individual general partners of the sole general partner
of WCAS VII other than Mr. Paul. See footnote (3) above. Mr. Paul is a
director of the Company and a general partner of the sole general partner of
WCAS VII.
(6) Includes those shares held directly and indirectly by WCAS VII except for
shares owned by the individual general partners of the sole general partner
of WCAS VII other than Mr. Welsh. See footnote (3) above. Mr. Welsh is a
director of the Company and a general partner of the sole general partner of
WCAS VII.
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DESCRIPTION OF CAPITAL STOCK
The following summary is a description of certain provisions of the
Company's Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation"). Such summary does not purport to be complete and is subject to,
and is qualified in its entirety by, all of the provisions of the Certificate of
Incorporation, a copy of which is included as an exhibit to the Registration
Statement of which this Prospectus is a part.
Upon completion of the Offering, the Company's authorized capital stock will
consist of 30,000,000 shares of Common Stock, $0.01 par value per share,
2,500,000 shares of Non-Voting Common Stock, $0.01 par value per share
("Non-Voting Common Stock"), and 5,000,000 shares of preferred stock, $1.00 par
value per share ("Preferred Stock"). Currently, there are outstanding 5,627,087
shares of Common Stock and 255,361 shares of Series A Preferred Stock. All
outstanding shares of Series A Preferred Stock will be redeemed by the Company
using a portion of the net proceeds from the Offering. Upon completion of the
Offering, the Company will have outstanding 8,627,087 shares of Common Stock
(including 1,100,000 shares of Non-Voting Common Stock) and no shares of
Preferred Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders and are not entitled to cumulative voting
in the election of directors. The holders of Common Stock are entitled to share
ratably in dividends, if any, as may be declared from time to time by the Board
of Directors in its discretion out of funds legally available therefor. The
Company currently anticipates that all of its earnings will be retained to
finance the growth and development of its business and, therefore, does not
anticipate that any cash dividends will be declared on the Common Stock in the
foreseeable future. See "Dividend Policy". The holders of Common Stock are
entitled to share ratably in any assets remaining after satisfaction of all
prior claims upon liquidation of the Company. The Certificate of Incorporation
gives holders of Common Stock no preemptive or other subscription or conversion
rights, and there are no redemption provisions with respect to such shares. All
outstanding shares of Common Stock are, and the shares offered hereby will be,
when issued and paid for, fully paid and nonassessable. The rights, preferences,
and privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of holders of shares of any series of Preferred Stock
which the Company may designate and issue in the future.
NON-VOTING COMMON STOCK
The shares of Non-Voting Common Stock to be issued to WCAS VII pursuant to
the Recapitilization will be fully paid and nonassessable. Subject to the prior
rights of the holders of any Preferred Stock, and on a pro rata basis with the
holders of Common Stock, the holders of outstanding shares of Non-Voting Common
Stock will be entitled to receive dividends out of assets legally available
therefor at such time and in such amounts as the Board of Directors may from
time to time determine. The shares of Non-Voting Common Stock will be
convertible into Common Stock at any time provided that WCAS VII will not own
50% or more of the Common Stock after such conversion. In the event WCAS VII
sells any Non-Voting Common Stock to third parties, such shares shall
automatically convert to Common Stock. The holders of Non-Voting Common Stock
will have no preemptive or subscription rights to purchase any securities of the
Company. Upon liquidation, dissolution or winding up of the Company, and on a
pro rata basis with the holders of Common Stock, the holders of Non-Voting
Common Stock would be entitled to receive pro rata the assets of the Company
that are legally available for distribution after payment of all debts and other
liabilities and subject to the prior rights of any holders of Preferred Stock
then outstanding. Holders of outstanding shares of Non-Voting Common Stock will
not be entitled to vote such shares on any matter submitted to a vote of
stockholders.
PREFERRED STOCK
Subject to conditions specified in the Certificate of Incorporation, the
DGCL and other applicable law, the Board of Directors has the authority to issue
undesignated Preferred Stock in one or more class or series and to determine the
dividend rights, dividend rate, conversion rights, voting rights, redemption
rights and terms,
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liquidation preferences, sinking fund provisions, number of shares constituting
any class or series, and designations of such class or series without any
further vote or action by the stockholders of the Company. The Company has no
present intention to issue any shares of Preferred Stock.
One of the effects of undesignated Preferred Stock is to enable the Board of
Directors to render more difficult or to discourage an attempt to obtain control
of the Company by means of a tender offer, proxy contest, merger or otherwise,
and thereby to protect the continuity of the Company's management. For example,
the Company could issue a series of Preferred Stock having characteristics that
would make a takeover prohibitively expensive. The issuance of shares of the
Preferred Stock pursuant to the Board of Directors' authority described above
may adversely affect the rights of the holders of Common Stock. For example,
Preferred Stock issued by the Company may rank senior to the Common Stock as to
dividend rights, liquidation preference or both, may have full or unlimited
voting rights and may be convertible into shares of Common Stock. Accordingly,
the issuance of shares of Preferred Stock may discourage bids for the Common
Stock or may otherwise adversely affect the market price of the Common Stock.
SPECIAL PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW
Certain provisions of the Certificate of Incorporation and the Company's
Amended and Restated Bylaws (the "Bylaws") may be deemed to have an
anti-takeover effect or may delay, defer or prevent a tender offer or takeover
attempt that a stockholder might consider in such stockholder's best interest,
including those attempts that might result in a premium over the market price
for the shares held by such stockholder.
DELAWARE ANTI-TAKEOVER LAW. Section 203 of the DGCL ("Section 203") applies
to the Company and generally provides that a person who, together with
affiliates and associates owns, or within three years did own, 15% or more of
the outstanding voting stock of a corporation subject to the statute (an
"Interested Stockholder"), but less than 85% of such stock, may not engage in
certain business combinations with the corporation for a period of three years
after the date on which the person became an Interested Stockholder unless (i)
prior to such date, the corporation's board of directors approved either the
business combination or the transaction in which the stockholder became an
Interested Stockholder, (ii) the Interested Stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes such person an Interested Stockholder (excluding shares owned by persons
who are both officers and directors of the corporation, and shares held by
certain employee stock ownership plans), or (iii) subsequent to such date, the
business combination is approved by the corporation's board of directors and
authorized at a stockholders' meeting by a vote of at least two-thirds of the
corporation's outstanding voting stock not owned by the Interested Stockholder.
Section 203 defines the term "business combination" to encompass a wide variety
of transactions with or caused by an Interested Stockholder, including mergers,
asset sales, and other transactions in which the Interested Stockholder receives
or could receive a benefit on other than a pro rata basis with other
stockholders.
The Company's stockholders, by adopting an amendment to the Certificate of
Incorporation, may elect not to be governed by Section 203, which election would
be effective 12 months after such adoption. Neither the Certificate of
Incorporation nor the Bylaws presently exclude the Company from the restrictions
imposed by Section 203, and the restrictions imposed by Section 203 apply to the
Company. The provisions of Section 203 could delay or frustrate a change in
control of the Company, deny stockholders the receipt of a premium on their
Common Stock and have a depressing effect on the market price of the Common
Stock. The provisions also could discourage, impede or prevent a merger, tender
offer or proxy contest, even if such event would be favorable to the interests
of stockholders.
CLASSIFIED BOARD OF DIRECTORS. Prior to the completion of the Offering, the
Certificate of Incorporation will provide for the Board of Directors to be
divided into three classes of directors serving staggered three-year terms. A
director may be removed from office prior to the expiration of his or her term
only "for cause," so any person acquiring control of the Company would need
three annual meetings to replace all of the members of the Board of Directors.
The classified board provision of the Certificate of Incorporation could have
the effect of making the removal of incumbent directors more time-consuming and
difficult, and, therefore discouraging a
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third party from making a tender offer or otherwise attempting to obtain control
of the Company, even though such an attempt might be beneficial to the Company
and its stockholders. Thus, the classified board provision could increase the
likelihood that incumbent directors will retain their positions. The Company
believes that a classified Board of Directors will help to assure the continuity
and stability of the Board of Directors and of the business strategies and
policies of the Company as determined by the Board of Directors. See
"Management."
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES. The Certificate of
Incorporation and Bylaws provide that the number of directors will be fixed from
time to time with the consent of two-thirds of the Board of Directors. Moreover,
the Certificate of Incorporation provides that directors may only be removed
with cause by the affirmative vote of the holders of at least a majority of the
outstanding shares of capital stock of the Company then entitled to vote at an
election of directors. This provision prevents stockholders from removing any
incumbent director without cause and allows two-thirds of the incumbent
directors to add additional directors without approval of stockholders until the
next annual meeting of stockholders at which directors of that class are
elected.
ADVANCE NOTICE OF NOMINATIONS AND STOCKHOLDER PROPOSALS. The Bylaws contain
a provision requiring at least 60 but no more than 90 days advance notice by a
stockholder of a proposal or director nomination that such stockholder desires
to present at any annual or special meeting of stockholders, which would prevent
a stockholder from making a proposal or a director nomination at a stockholder
meeting without the Company having advance notice of the proposal or director
nomination. This provision could make a change in control more difficult by
providing the directors of the Company with more time to prepare an opposition
to a proposed change in control.
VOTE REQUIREMENT FOR CALLING SPECIAL MEETING. The Bylaws also contain a
provision requiring the vote of the holders of two-thirds of the outstanding
Common Stock in order to call a special meeting of stockholders. This provision
would prevent a stockholder with less than a two-thirds interest from calling a
special meeting to consider a merger unless such stockholder had first garnered
adequate support from a sufficient number of other stockholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION
LIMITATIONS OF DIRECTOR LIABILITY. Section 102(b)(7) of the DGCL authorizes
corporations to limit or to eliminate the personal liability of directors to
corporations and their stockholders for monetary damages for breach of
directors' fiduciary duty of care. Although Section 102(b) of the DGCL does not
change directors' duty of care, it enables corporations to limit available
relief to equitable remedies such as injunction or rescission. The Certificate
of Incorporation limits the liability of directors to the Company or its
stockholders to the full extent permitted by such Section 102(b). Specifically,
directors of the Company are not to be personally liable for monetary damages
for breach of a director's fiduciary duty as a director, except for liability:
(i) for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit.
INDEMNIFICATION. To the maximum extent permitted by law, the Certificate of
Incorporation provides for mandatory indemnification of directors and officers
of the Company against any expense, liability or loss to which they may become
subject, or which they may incur, as a result of being or having been a director
or officer of the Company. In addition, the Company must advance or reimburse
directors and officers for expenses incurred by them in connection with
indemnifiable claims.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 8,627,087
shares of Common Stock (9,077,087 shares, if the Underwriters' over-allotment
option is exercised in full, excluding 899,286 shares reserved for issuance upon
the exercise of outstanding stock options). Of these shares, all of the
3,000,000 shares sold in the Offering (3,450,000 shares, if the Underwriters'
over-allotment option is exercised in full) will be freely tradable without
restriction or further registration under the Securities Act, unless held by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act. The remaining 5,627,087 shares outstanding are "restricted
securities" as that term is defined under Rule 144 and were issued by the
Company in one or more private transactions in reliance upon one or more
exemptions under the Securities Act. Such restricted securities may not be
resold in the public market in the absence of registration under the Securities
Act or the availability of an exemption from such registration, including the
exemption provided by Rule 144.
In general, under Rule 144 a person (or persons whose shares are
aggregated), including an affiliate of the Company, who has beneficially owned
restricted securities for at least one year is entitled to sell within any
three-month period a number of shares that does not exceed the greater of the
average weekly trading volume during the four calendar weeks preceding such sale
or 1% of the then outstanding shares of Common Stock, provided certain manner of
sale and notice requirements and requirements as to the availability of current
public information about the Company are satisfied. In addition, affiliates of
the Company must comply with the restrictions and requirements of Rule 144,
other than the one-year holding period, to sell unrestricted shares of Common
Stock. A person who is deemed not to have been an "affiliate" of the Company at
any time during the 90 days preceding a sale by such person, and who has
beneficially owned such shares for at least two years, would be entitled to sell
such shares without regard to the limitations described above. Taking into
consideration the effect of the 180-day lock-up agreements described below, no
restricted shares of Common Stock will be eligible for sale in the public market
immediately after the Offering. However, restricted shares will be eligible for
sale upon the expiration of the 180-day lock-up agreements, subject to the
volume and other limitations of Rule 144.
In addition to the outstanding shares of Common Stock, upon completion of
the Offering 698,214 shares of Common Stock will be reserved for future stock
awards under the Company's stock option and employee stock purchase plans and
899,286 shares of Common Stock will be reserved for issuance upon the exercise
of outstanding options. The Company intends to register on Form S-8 under the
Securities Act as soon as practicable on and after the effective date of the
Offering all of the 1,597,500 shares reserved for issuance pursuant to these
plans. This registration statement will be effective upon filing. Shares
registered and issued pursuant to this registration statement will be freely
tradable except to the extent that the holders thereof are deemed to be
affiliates of the Company, in which case the transferability of such shares will
be subject to the volume limitations of Rule 144, and except to the extent that
the holders thereof are subject to the lock-up agreements described below.
Subject to certain exceptions, the Company, its directors and executive
officers and certain holders of outstanding shares of Common Stock and optionees
holding options to purchase a total of 899,286 shares of Common Stock have
agreed, subject to certain exceptions, with the Underwriters not to sell or
otherwise dispose of any shares of Common Stock, any options to purchase Common
Stock or any securities convertible into, or exchangeable for, shares of Common
Stock for a period of 180 days after the date of this Prospectus without the
prior written consent of Hambrecht & Quist LLC.
Following the consummation of the Offering and subject to the lock-up
agreements, certain stockholders will be entitled to require the Company to
register under the Securities Act a total of 5,627,087 shares of outstanding
Common Stock (the "Registrable Shares"). In addition, in the event the Company
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of a security holder, such stockholders may
be entitled to include the Registrable Shares in such registration, subject to
certain limitations on the number of shares to be included in the registration
by the underwriter of such Offering. See "Certain Transactions--Registration
Rights Agreement."
Sales of substantial amounts of shares of Common Stock in the public market,
or the perception that such sale might occur, could adversely affect the market
price of the Common Stock and could impair the Company's future ability to raise
capital through an offering of its equity securities. See "Risk Factors-Shares
Eligible for Future Sale."
62
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below through their Representatives, Hambrecht & Quist LLC,
NationsBanc Montgomery Securities LLC and SunTrust Equitable Securities
Corporation have severally agreed to purchase from the Company the following
respective number of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ----------------------------------------------------------------- -----------
<S> <C>
Hambrecht & Quist LLC............................................ 884,250
NationsBanc Montgomery Securities LLC............................ 540,375
SunTrust Equitable Securities Corporation........................ 540,375
Bear, Stearns & Co. Inc. ........................................ 90,000
BT Alex. Brown Incorporated...................................... 90,000
Warburg Dillon Read LLC.......................................... 90,000
Charles Schwab & Co., Inc. ...................................... 90,000
S.G. Cowen Securities Corporation................................ 90,000
Morgan Keegan & Company, Inc. ................................... 90,000
George K. Baum & Company......................................... 90,000
Wheat First Securities, Inc...................................... 90,000
Hanifen, Imhoff Inc. ............................................ 45,000
J.J.B. Hilliard, W.L. Lyons, Inc. ............................... 45,000
Raymond James & Associates, Inc. ................................ 45,000
J.C. Bradford & Co. ............................................. 45,000
The Robinson-Humphrey Company, LLC............................... 45,000
Stephens Inc. ................................................... 45,000
Vector Securities International, Inc. ........................... 45,000
-----------
Total...................................................... 3,000,000
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $0.64 per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $0.10 per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the Representatives. The Representatives have informed
the Company that the Underwriters do not intend to confirm sales to accounts
over which they exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
that the number of shares of Common Stock to be purchased by it shown in the
table above bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of Common Stock offered hereby.
63
<PAGE>
The Offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The executive officers and directors of the Company and certain stockholders
have executed lock-up agreements in which they have agreed that they will not,
without the prior written consent of Hambrecht & Quist LLC, directly or
indirectly, offer, sell, pledge, contract to sell (including any short sale),
grant any option to purchase or otherwise dispose of any shares of Common Stock
(including, without limitation, shares of Common Stock which may be deemed to be
beneficially owned by the parties to the lock-up agreements in accordance with
the rules and regulations of the Commission and shares of Common Stock which may
be issued upon exercise of a stock option or warrant or conversion of any
convertible securities) or enter into any short sale (whether or not against the
box) or any purchase, sale or grant of any right (including without limitation,
any put or call option) with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any significant
part of its value from the Common Stock (each of the foregoing referred to as a
"Disposition") for a period continuing until 180 days after the effective date
of the registration statement relating to the Offering (the "Lock-Up Period").
The lock-up agreements are intended to preclude the Company's officers,
directors and certain of its stockholders from engaging in any transaction which
is designed to or reasonably expected to lead to or result in a Disposition
during the Lock-Up Period even if the securities would be disposed of by someone
other than the parties to the lock-up agreements. Sales of such shares in the
future could adversely affect the market price of the Common Stock. Hambrecht &
Quist LLC may, in its sole discretion, release any of the shares subject to the
lock-up agreements at any time without notice.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation between the Company and the Representatives. Among the factors
considered in determining the initial public offering price will be prevailing
market conditions, revenues and earnings of the Company, market valuations of
other companies engaged in activities similar to those of the Company, estimates
of the business potential and prospects of the Company, the present state of the
Company's business operations, the Company's management and other factors deemed
relevant. The estimated initial public offering price range set forth on the
cover of this preliminary prospectus is subject to change as a result of market
conditions and other factors.
Certain persons participating in this Offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the Offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
Offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq Stock Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
64
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the validity of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Alston & Bird LLP, Atlanta, Georgia. Certain other matters in connection with
this Offering will be passed upon for the Underwriters by Goodwin, Procter &
Hoar LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements and schedule of Accredo Health,
Incorporated as of and for the years ended June 30, 1997 and 1998, and for the
period May 24, 1996 through June 30, 1996; the statement of operations and
schedule of the Predecessor for the period July 1, 1995 through May 31, 1996;
the financial statements of Horizon Health Systems, Inc. as of and for the years
ended December 31, 1995 and 1996; the financial statements and schedule of Texas
Health Pharmaceutical Resources as of and for the year ended June 30, 1997; the
financial statements and schedule of Children's Memorial Home Hemophilia
Services as of and for the year ended June 30, 1997 included in this Prospectus
and in the Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
65
<PAGE>
INDEX OF FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NO.
-----
<S> <C>
ACCREDO HEALTH, INCORPORATED
Report of Independent Auditors..................................................... F-2
Consolidated Balance Sheets--June 30, 1997 and 1998................................ F-3
Consolidated Statements of Operations--for the period from inception (May 24, 1996)
through June 30, 1996, for years ended June 30, 1997 and 1998.................... F-4
Consolidated Statements of Stockholders' Equity and Mandatorily Redeemable
Cumulative Preferred Stock--for the period from inception (May 24, 1996) through
June 30, 1996, for the years ended June 30, 1997 and 1998........................ F-5
Consolidated Statements of Cash Flows--for the period from inception (May 24, 1996)
through June 30, 1996, for the years ended June 30, 1997 and 1998................ F-6
Notes to Consolidated Financial Statements......................................... F-7
Condensed Consolidated Balance Sheet at December 31, 1998 (unaudited).............. F-18
Condensed Consolidated Statements of Operations for the six months ended December
31, 1997 and 1998 (unaudited).................................................... F-19
Condensed Consolidated Statement of Stockholders' Equity for the six months ended
December 31, 1998 (unaudited).................................................... F-20
Condensed Consolidated Statements of Cash Flows for the six months ended December
31, 1997 and 1998 (unaudited).................................................... F-21
Notes to Condensed Consolidated Financial Statements (unaudited)................... F-22
NOVA FACTOR, INC.
Report of Independent Auditors..................................................... F-24
Statement of Operations--for the period July 1, 1995 through May 31, 1996.......... F-25
Statement of Stockholder's Equity--for the period July 1, 1995 through May 31,
1996............................................................................. F-26
Statement of Cash Flows--for the period July 1, 1995 through May 31, 1996.......... F-27
Notes to Financial Statements--for the period July 1, 1995 through May 31, 1996.... F-28
HORIZON HEALTH SYSTEMS, INC.
Report of Independent Auditors..................................................... F-32
Statements of Income--for the years ended December 31, 1995 and 1996 and for the
three months ended March 31, 1996 (unaudited) and 1997 (unaudited)............... F-33
Statements of Stockholders' Equity--for the years ended December 31, 1995 and 1996
and for the three months ended March 31, 1997 (unaudited)........................ F-34
Statements of Cash Flows--for the years ended December 31, 1995 and 1996 and for
the three months ended March 31, 1996 (unaudited) and 1997 (unaudited)........... F-35
Notes to Financial Statements...................................................... F-36
TEXAS HEALTH PHARMACEUTICAL RESOURCES
Report of Independent Auditors..................................................... F-38
Balance Sheets as of June 30, 1997 and 1998 (unaudited)............................ F-39
Statements of Operations for the years ended June 30, 1996 (unaudited), 1997 and
1998 (unaudited)................................................................. F-40
Statements of Partners' Equity for the years ended June 30, 1996 (unaudited), 1997
and 1998 (unaudited)............................................................. F-41
Statements of Cash Flows for the years ended June 30, 1996 (unaudited), 1997 and
1998 (unaudited)................................................................. F-42
Notes to Financial Statements...................................................... F-43
CHILDREN'S MEMORIAL HOME HEMOPHILIA SERVICES
Report of Independent Auditors..................................................... F-46
Balance Sheets as of June 30, 1997 and 1998 (unaudited)............................ F-47
Statements of Operations for the years ended June 30, 1996 (unaudited), 1997 and
1998 (unaudited)................................................................. F-48
Statements of Partners' Equity for the years ended June 30, 1996 (unaudited), 1997
and 1998 (unaudited)............................................................. F-49
Statements of Cash Flows for the years ended June 30, 1996 (unaudited), 1997 and
1998 (unaudited)................................................................. F-50
Notes to Financial Statements...................................................... F-51
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Accredo Health, Incorporated
We have audited the accompanying consolidated balance sheets of Accredo
Health, Incorporated (formerly Nova Holdings, Inc.) (the "Company") as of June
30, 1997 and 1998, and the related consolidated statements of operations,
stockholders' equity and mandatorily redeemable cumulative preferred stock, and
cash flows for the period from inception (May 24, 1996) through June 30, 1996,
and for the years ended June 30, 1997 and 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Accredo
Health, Incorporated at June 30, 1997 and 1998, and the results of its
operations and its cash flows for the period from inception (May 24, 1996)
through June 30, 1996, and for the years ended June 30, 1997 and 1998, in
conformity with generally accepted accounting principles.
As discussed more fully in Notes 1, 2 and 3, the Company changed its
accounting for intangible assets and its accounting for stock based compensation
and, accordingly, has restated the consolidated financial statements referred to
above to reflect these changes.
/s/ Ernst & Young LLP
Memphis, Tennessee
August 12, 1998, except for Notes 1, 2 and 3
as to which the date is March 21, 1999.
F-2
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------
<S> <C> <C>
1997 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 3,675,819 $ 5,087,135
Receivables:
Patient accounts............................................. 33,922,326 40,062,375
Allowance for doubtful accounts.............................. (3,802,326) (3,429,863)
----------- -----------
30,120,000 36,632,512
Due from affiliates.......................................... 414,272 321,487
Other........................................................ 2,077,950 2,921,672
----------- -----------
32,612,222 39,875,671
Recoverable income taxes....................................... -- 150,893
Inventories.................................................... 16,016,166 12,131,032
Prepaids and other current assets.............................. 452,093 309,587
Deferred income taxes.......................................... 1,488,227 323,986
----------- -----------
Total current assets............................................. 54,244,527 57,878,304
Property and equipment, net...................................... 1,565,682 2,127,749
Other assets:
Joint venture investments...................................... 652,374 627,728
Goodwill, net.................................................. 50,941,866 49,647,250
Other intangible assets, net................................... 5,904,513 3,767,756
----------- -----------
Total assets..................................................... $113,308,962 $114,048,787
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $33,420,517 $31,304,771
Accrued expenses............................................... 2,127,784 3,196,977
Income taxes payable........................................... 1,802,161 --
----------- -----------
Total current liabilities........................................ 37,350,462 34,501,748
Long-term notes payable.......................................... 27,497,725 27,497,725
Senior subordinated notes payable................................ 7,696,984 8,920,180
Deferred income taxes............................................ 224,650 535,907
Mandatorily redeemable cumulative preferred stock, at redemption
amount, 300,000 shares authorized, and 255,361 shares issued
and outstanding in 1997 and 1998............................... 27,749,221 29,792,109
Stockholders' equity:
Common Stock, $.01 par value; 7,000,000 shares authorized,
5,507,253 in 1997 and 5,590,587 in 1998 issued and
outstanding................................................ 55,073 55,906
Common stock subscribed--83,334 shares in 1997 and 34,000
shares in 1998............................................. 500,004 204,000
Additional paid-in capital................................... 15,453,564 14,038,973
Retained deficit............................................. (2,718,717) (1,293,761)
----------- -----------
13,289,924 13,005,118
Subscription receivable.......................................... (500,004) (204,000)
----------- -----------
Total stockholders' equity....................................... 12,789,920 12,801,118
----------- -----------
Total liabilities and stockholders' equity....................... $113,308,962 $114,048,787
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 24,
1996) YEARS ENDED JUNE 30,
THROUGH ------------------------
JUNE 30, 1996 1997 1998
------------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Net patient service revenue..................... $6,647,165 $106,143,403 $170,001,733
Other revenue................................... 597,283 8,048,870 9,806,296
Equity in net income of joint ventures.......... 49,255 1,016,518 1,150,122
------------- ----------- -----------
Total revenues.................................... 7,293,703 115,208,791 180,958,151
Operating expenses:
Cost of services................................ 6,450,279 101,080,589 154,045,458
General and administrative...................... 626,688 5,938,874 12,488,698
Bad debts....................................... 251,538 2,976,718 3,165,292
Depreciation.................................... 17,300 230,887 429,702
Amortization.................................... 439,051 4,646,203 3,431,373
------------- ----------- -----------
Total operating expenses.......................... 7,784,856 114,873,271 173,560,523
------------- ----------- -----------
Operating income (loss)........................... (491,153) 335,520 7,397,628
Other expense (income):
Interest expense................................ 106,014 1,083,431 3,721,528
Interest income................................. -- (99,890) (169,398)
------------- ----------- -----------
106,014 983,541 3,552,130
------------- ----------- -----------
Income (loss) before income taxes................. (597,167) (648,021) 3,845,498
Income tax expense (benefit)...................... (28,420) 1,501,949 2,420,542
------------- ----------- -----------
Net income (loss)................................. (568,747) (2,149,970) 1,424,956
Mandatorily redeemable cumulative preferred stock
dividends....................................... (170,233) (2,042,888) (2,042,888)
------------- ----------- -----------
Net loss attributable to common stockholders...... $(738,980) $(4,192,858) $ (617,932)
------------- ----------- -----------
------------- ----------- -----------
Net loss per share attributable to common
stockholders:
Basic........................................... $ (0.14) $ (0.82) $ (0.11)
Diluted......................................... $ (0.14) $ (0.82) $ (0.11)
</TABLE>
See accompanying notes.
F-4
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK
<TABLE>
<CAPTION>
COMMON COMMON ADDITIONAL TOTAL
STOCK COMMON STOCK SUBSCRIPTION PAID-IN RETAINED STOCKHOLDERS'
SHARES STOCK SUBSCRIBED RECEIVABLE CAPITAL DEFICIT EQUITY
---------- --------- ---------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization..... 5,000,000 $ 50,000 $ -- $ -- $ 14,950,000 $ -- $ 15,000,000
Issuance of common stock
and mandatorily
redeemable preferred
stock for acquired
Company.................. 107,253 1,073 -- -- 320,685 -- 321,758
Accrued dividends on
mandatorily redeemable
cumulative preferred
stock.................... -- -- -- -- (170,233) -- (170,233)
Net loss................... -- -- -- -- -- (568,747) (568,747)
---------- --------- ---------- ----------- ------------- ------------ -------------
Balance at June 30, 1996... 5,107,253 51,073 -- -- 15,100,452 (568,747) 14,582,778
Issuance of common stock... 400,000 4,000 -- -- 2,396,000 -- 2,400,000
Common stock subscribed
(83,334 shares).......... -- -- 500,004 -- -- -- 500,004
Subscription receivable.... -- -- -- (500,004) -- -- (500,004)
Accrued dividends on
mandatorily redeemable
cumulative preferred
stock.................... -- -- -- -- (2,042,888) -- (2,042,888)
Net loss................... -- -- -- -- -- (2,149,970) (2,149,970)
---------- --------- ---------- ----------- ------------- ------------ -------------
Balance at June 30, 1997... 5,507,253 55,073 500,004 (500,004) 15,453,564 (2,718,717) 12,789,920
Issuance of common stock... 83,334 833 (500,004) 500,004 499,171 -- 500,004
Common stock subscribed
(34,000 shares).......... -- -- 204,000 -- -- -- 204,000
Subscription receivable.... -- -- -- (204,000) -- -- (204,000)
Accrued dividends on
mandatorily redeemable
cumulative preferred
stock.................... -- -- -- -- (2,042,888) -- (2,042,888)
Compensation resulting from
stock transactions, net
of income tax benefit.... -- -- -- -- 129,126 -- 129,126
Net income................. -- -- -- -- -- 1,424,956 1,424,956
---------- --------- ---------- ----------- ------------- ------------ -------------
Balance at June 30, 1998... 5,590,587 $ 55,906 $ 204,000 $(204,000) $ 14,038,973 $ (1,293,761) $ 12,801,118
---------- --------- ---------- ----------- ------------- ------------ -------------
---------- --------- ---------- ----------- ------------- ------------ -------------
<CAPTION>
MANDATORILY
REDEEMABLE
CUMULATIVE
PREFERRED
STOCK
-------------
<S> <C>
Initial capitalization..... $ 25,000,000
Issuance of common stock
and mandatorily
redeemable preferred
stock for acquired
Company.................. 536,100
Accrued dividends on
mandatorily redeemable
cumulative preferred
stock.................... 170,233
Net loss................... --
-------------
Balance at June 30, 1996... 25,706,333
Issuance of common stock... --
Common stock subscribed
(83,334 shares).......... --
Subscription receivable.... --
Accrued dividends on
mandatorily redeemable
cumulative preferred
stock.................... 2,042,888
Net loss................... --
-------------
Balance at June 30, 1997... 27,749,221
Issuance of common stock...
Common stock subscribed
(34,000 shares).......... --
Subscription receivable.... --
Accrued dividends on
mandatorily redeemable
cumulative preferred
stock.................... 2,042,888
Compensation resulting from
stock transactions, net
of income tax benefit.... --
Net income................. --
-------------
Balance at June 30, 1998... $ 29,792,109
-------------
-------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 24,
1996) YEARS ENDED JUNE 30,
THROUGH ----------------------
JUNE 30, 1996 1997 1998
------------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................... $ (568,747) $(2,149,970) $1,424,956
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 456,351 4,877,090 3,861,075
Original issue discount amortization............. -- 11,975 177,370
Interest added to long-term obligations.......... -- 85,009 1,045,826
Provision for losses on accounts receivable...... 251,538 2,976,718 3,165,292
Deferred income tax expense (benefit)............ (150,260) 111,384 1,466,643
Compensation resulting from stock transactions... -- -- 137,981
Changes in operating assets and liabilities, net of
effect from purchase of companies:
Patient receivables and other.................. (900,707) (11,059,965) (10,521,526)
Due from affiliates............................ (39,392) 478,512 92,785
Inventories.................................... (5,349,168) (5,260,633) 3,885,134
Prepaids and other current assets.............. (26,480) (216,048) 142,506
Recoverable income taxes....................... 23,264 -- (150,893)
Accounts payable and accrued expenses.......... 7,230,569 9,378,288 (1,046,553)
Income taxes payable........................... 305,289 261,340 (1,802,161)
------------- ---------- ----------
Net cash provided by (used in) operating
activities......................................... 1,232,257 (506,300) 1,878,435
INVESTING ACTIVITIES
Purchases of property and equipment.................. (23,326) (349,049) (991,769)
Purchase of Horizon Health Systems, Inc. in 1997 and
Southern Health Systems, Inc. in 1996, net of cash
acquired........................................... (37,733,715) (29,721,000) --
Change in joint venture investments, net............. 100,745 378,482 24,646
------------- ---------- ----------
Net cash used in investing activities................ (37,656,296) (29,691,567) (967,123)
FINANCING ACTIVITIES
Proceeds from long-term obligations.................. -- 27,897,725 --
Issuance of preferred stock.......................... 25,000,000 -- --
Issuance of common stock............................. 15,000,000 2,400,000 500,004
------------- ---------- ----------
Net cash provided by financing activities............ 40,000,000 30,297,725 500,004
------------- ---------- ----------
Increase in cash and cash equivalents................ 3,575,961 99,858 1,411,316
Cash and cash equivalents at beginning of period..... -- 3,575,961 3,675,819
------------- ---------- ----------
Cash and cash equivalents at end of period........... $ 3,575,961 $3,675,819 $5,087,135
------------- ---------- ----------
------------- ---------- ----------
SUPPLEMENTARY CASH FLOW DISCLOSURES:
Income taxes paid.................................... $ 204,687 $ 858,840 $1,531,692
------------- ---------- ----------
------------- ---------- ----------
Cash paid for interest............................... $ 105,854 $ 567,999 $2,675,701
------------- ---------- ----------
------------- ---------- ----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND RESTATEMENT OF FINANCIAL STATEMENTS
RESTATEMENT OF FINANCIAL STATEMENTS
The Company has restated its consolidated financial statements for the
periods ended June 30, 1996, 1997 and 1998 in order to reflect the reallocation
of the purchase price of certain acquired businesses to include identified
intangible assets, and to record stock-based compensation not previously
recognized. As more fully discussed in Notes 2 and 3, the Company identified
intangible assets which were not previously identified. The impact of the
restatement on the Company's consolidated financial results as originally
reported is summarized below:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
PERIOD FROM INCEPTION (MAY ----------------------------------------------------------
24, 1996) THROUGH JUNE 30,
1996 1997 1998
---------------------------- ---------------------------- ----------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED AS REPORTED AS RESTATED
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
General and administrative
expense...................... $ 626,688 $ 626,688 $ 5,938,874 $ 5,938,874 $ 12,350,717 $ 12,488,698
Amortization expense........... 108,604 439,051 1,368,299 4,646,203 2,098,584 3,431,373
Net income (loss).............. (238,300) (568,747) 1,122,453 (2,149,970) 2,821,098 1,424,956
Retained earnings (deficit).... (238,300) (568,747) -- (2,718,717) 778,210 (1,293,761)
Stockholders' Equity........... 14,913,225 14,582,778 16,392,790 12,789,920 17,671,004 12,801,118
Net income (loss) per share
attributable to common
stockholders':
Basic...................... $ (0.08) $ (0.14) $ (0.18) $ (0.82) $ .14 $ (0.11)
Diluted.................... (0.08) (0.14) (0.18) (0.82) .13 (0.11)
</TABLE>
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Accredo Health, Incorporated (formerly Nova Holdings, Inc.) (the Company)
was incorporated on May 24, 1996. As more fully described in Note 3, on May 31,
1996, the Company acquired Southern Health Systems, Inc. (a holding company) and
its wholly-owned subsidiary, Nova Factor, Inc. Since the Company was newly
formed at May 24, 1996, and because Nova Factor, Inc. had been in existence for
several years, the Company is considered the successor to Nova Factor Inc.'s
operations.
The consolidated financial statements include the accounts and transactions
of the Company and its subsidiaries for the period from inception (May 24, 1996)
through June 30, 1998, and its subsidiary Horizon Health Systems, Inc. (HHS) for
the period from its acquisition, June 1, 1997, through June 30, 1998.
Significant intercompany accounts have been eliminated in consolidation.
DESCRIPTION OF BUSINESS
The Company provides specialized contract pharmacy and related services
pursuant to agreements with biotechnology drug manufacturers relating to the
treatment of patients with certain costly chronic diseases. Because of the
unique needs of patients suffering from chronic diseases, biotechnology drug
manufacturers have recognized the benefits of customized programs to facilitate
alternate site drug administration, ensure compliance with treatment regimens,
provide reimbursement assistance and capture valuable clinical and patient
demographic information. The Company addresses the needs of the manufacturers by
providing specialized services that facilitate product launch and patient
acceptance including the collection of timely drug utilization
F-7
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
and patient compliance information, patient education and monitoring through the
use of written materials and telephonic consultation, reimbursement expertise
and overnight drug delivery.
The Company has designed its specialty services to focus primarily on
biotechnology drugs that: (i) are used on a recurring basis to treat chronic,
and potentially life threatening diseases; (ii) are expensive; (iii) are
administered through injection; and (iv) require temperature control or other
specialized handling as part of their distribution process. Currently, the
Company provides specialized contract pharmacy and related services that address
the needs of patients with the following diseases: Gaucher Disease, a hereditary
liver enzyme deficiency; hemophilia, a hereditary bleeding disorder; Multiple
Sclerosis, a debilitating disease of the central nervous system; and growth
hormone related disorders. These diseases generally require life-long therapy,
except for the treatment of growth hormone-related disorders which typically
require treatment for six to ten years.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial maturity
of three months or less to be cash equivalents.
PATIENT ACCOUNTS RECEIVABLE
The Company's primary concentration of credit risk is patient accounts
receivable, which consists of amounts owed by various governmental agencies,
insurance companies and private patients. The Company manages the receivables by
regularly reviewing its accounts and contracts and by providing appropriate
allowances for uncollectible amounts. Significant concentrations of gross
patient accounts receivable consist of the following at June 30:
<TABLE>
<CAPTION>
1997 1998
--- ---
<S> <C> <C>
Medicare......................................................................... 5% 3%
Medicaid......................................................................... 17% 23%
</TABLE>
Concentration of credit risk relating to accounts receivable is limited to
some extent by the diversity and number of patients and payors and the
geographic dispersion of the Company's operations The Company grants credit
without collateral to its patients.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of receivables, accounts payable and notes payable
approximates fair value of these financial instruments at June 30, 1997 and
1998.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Provisions for depreciation are
computed primarily by the straight-line method based on the estimated useful
lives of the related assets of 2 to 7 years.
F-8
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the cost of businesses acquired over fair
value of net tangible and identifiable intangible assets at the date of
acquisition. As discussed in Note 1, the 1996, 1997 and 1998 financial
statements have been restated to reflect the reallocation of the purchase price
of acquired businesses to include identified intangible assets. The Company
recorded $22,388,459 in goodwill, $1,000,000 in non-compete agreements, and
$1,007,636 in acquired patient population on June 1, 1997, and $29,396,195 in
goodwill, $1,117,783 in non-compete agreements, $6,136,581 in value associated
with agreements with drug manufacturers and medical centers, $247,466 in
acquired patient population, and $361,416 in other intangible assets on May 31,
1996, in connection with business acquisitions. These assets are being amortized
using the straight-line method over their estimated useful lives of 40 years for
goodwill, 3 and 10 years for the non-compete agreements, 3 months to 3 years for
the value associated with agreements with drug manufacturers and medical
centers, 4 to 8 years for acquired patient population, and 10 years for the
other intangible assets. Goodwill is net of accumulated amortization of $842,788
and $2,137,404 at June 30, 1997 and 1998, respectively. Other intangible assets
are net of accumulated amortization of $4,242,466 and $6,379,223 at June 30,
1997 and 1998, respectively.
VALUATION OF LONG-LIVED ASSETS
Management periodically evaluates carrying values of long-lived assets,
including property and equipment, strategic investments, goodwill and other
intangible assets, to determine whether events and circumstances indicate that
these assets have been impaired. An asset is considered impaired when
undiscounted cash flows to be realized from such asset are less than its
carrying value. In that event, a loss is determined based on the amount the
carrying value exceeds the fair market value of such asset.
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK
The Company is authorized to issue up to 300,000 shares of nonvoting
mandatorily redeemable cumulative preferred stock (Series A). In connection with
its formation, the Company issued, at the $100 redemption amount, 250,000 shares
of the preferred stock on May 31, 1996, and 5,361 shares on the same date in
connection with the acquisition (see note 3), for a total of $25,536,100. The
nonvoting mandatorily redeemable cumulative preferred stock is entitled to an $8
per share annual dividend. Accumulated unpaid dividends of $2,213,121 and
$4,256,009 at June 30, 1997 and 1998, respectively, are included in the
mandatorily redeemable cumulative preferred stock in the accompanying
consolidated balance sheets. Accumulated unpaid dividends are $16.67 per share
at June 30, 1998.
The Company may, at its option, redeem at any time a portion or all of the
preferred stock at the redemption price of $100 per share, plus any accrued but
unpaid dividends, with the consent of the bank holding the senior debt. On May
31, 2004, the Company must purchase and redeem, at the redemption price of $100
plus any accrued and unpaid dividends, all the then outstanding shares of the
redeemable preferred stock. If at any time the Company consummates a public
offering of its common stock, the Company shall apply any net cash proceeds of
such offering to redeem, at the redemption price, shares of the preferred stock.
F-9
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company recognizes stock-based compensation using the intrinsic value
method as permitted by Financial Accounting Standards Board Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION (Statement 123). Accordingly, no
compensation expense is recorded for stock-based awards issued at market value
at the date such awards are granted. However, the Company incurred $435,840 in
compensation cost for 1998 stock transactions at less than fair market value.
The Company makes pro forma disclosures of net income as if the market-value
method was followed.
REVENUE RECOGNITION
Net patient service revenues are reported at the net amounts billed to
patients, third-party payors and others in the period the services are rendered.
The Company has agreements with certain third-party payors that provide for
payments to the Company at amounts discounted from its established rates.
Approximately 18%, 17% and 20% of gross patient service revenues for the
periods ended June 30, 1996, 1997 and 1998, respectively, is from participation
in the Medicare and state-sponsored Medicaid programs.
Other revenues primarily consist of management fees from biotech
manufacturers and various management agreements with hospitals and joint
ventures. The Company recognizes revenues in the period the services are
rendered.
INTEREST RATE SWAP AGREEMENTS
The Company enters into interest rate swap agreements as a means of managing
its interest rate exposure. The differential to be paid or received is
recognized over the life of the agreement as an adjustment to interest expense.
NET EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 128. Earnings per Share. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented to conform to Statement 128 requirements.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates. Estimates are used primarily in recording the allowance for
doubtful accounts.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. The
Statement changes the way public companies report segment information in
financial statements and also requires those companies to report selected
segment information in interim financial reports to shareholders. The Statement
is effective for the Company beginning
F-10
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
with its June 30, 1999, financial statements. The Statement affects only
disclosures presented in the financial statements and will have no effect on
consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is
required to be adopted in years beginning after June 15, 1999. Management of the
Company does not anticipate that the adoption of the new Statement will have a
significant effect on results of operations or the financial position of the
Company.
3. BUSINESS ACQUISITIONS
On May 31, 1996, the Company acquired all of the outstanding shares of
Southern Health Systems, Inc. (SHS) common stock. SHS was a holding company
whose wholly-owned operating subsidiary was Nova Factor, Inc. In connection with
the acquisition of SHS common stock, the Company paid cash of $39,169,291 and
issued 107,253 shares of the Company's common stock and 5,361 shares of the
Company's mandatorily redeemable preferred stock with a value of $857,858. Total
assets acquired and liabilities assumed were $27,537,936 and $24,210,786,
respectively. This transaction was recorded by the Company using the purchase
method of accounting. The excess of the total purchase price of $40,586,591,
including acquisition costs of $559,442, over the fair market value of the net
assets acquired of $3,327,150 was allocated to goodwill and other identifiable
intangible assets. The Company recorded $29,396,195 in goodwill, $1,117,783 in
non-compete agreements, $6,136,581 in value associated with agreements with drug
manufacturers and medical centers, $247,466 in acquired patient population, and
$361,416 in other intangible assets which are included in the accompanying
consolidated balance sheets.
On June 1, 1997, the Company acquired substantially all the assets of HHS, a
Company engaged in the sale and distribution of blood clotting factors and
ancillary supplies to hemophilia patients, through an acquisition accounted for
using the purchase method of accounting. The consideration paid by the Company
related to this acquisition was $29,996,127. Total assets acquired and
liabilities assumed were $9,018,540 and $3,152,031, respectively. This
transaction was recorded by the Company using the purchase method of accounting.
The excess of the purchase price of $24,396,095, including acquisition costs of
$266,477, over the fair market value of the net assets acquired, was allocated
to goodwill and other identifiable intangible assets. The Company recorded
$22,388,459 in goodwill, $1,000,000 in non-compete agreements, and $1,007,636 in
acquired patient population. The operating results of HHS are included in the
Company's consolidated statement of operations beginning June 1, 1997.
Pro forma amounts for the periods ended June 30, 1996 and 1997, as if the
acquisition had occurred on May 24, 1996 (inception), are as follows:
<TABLE>
<CAPTION>
1996 1997
------------ --------------
<S> <C> <C>
Pro forma total revenues........................................ $ 8,971,000 $ 142,777,000
Pro forma net loss attributable to common stockholders.......... $ (850,000) $ (4,571,000)
Pro forma loss per share attributable to common stockholders.... $ (0.17) $ (0.89)
</TABLE>
F-11
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Equipment......................................................... $ 817,142 $ 1,304,935
Furniture and fixtures............................................ 996,727 1,487,585
------------ ------------
1,813,869 2,792,520
Accumulated depreciation.......................................... (248,187) (664,771)
------------ ------------
$ 1,565,682 $ 2,127,749
------------ ------------
------------ ------------
</TABLE>
5. NOTES PAYABLE
At June 30, 1998, the Company has a revolving line of credit agreement for
up to $40 million with banks, which expires October 31, 1999. The Company's
borrowing base, as defined in the agreement, was approximately $33,155,000 and
$39,843,000 at June 30, 1997 and 1998, respectively. 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 (the
combination of a 2% margin and LIBOR base rate resulted in effective rates of
7.69% at June 30, 1997 and 7.625% at June 30, 1998). The Company entered into an
interest rate swap agreement with a bank in October 1997 in order to fix a
portion of its interest rate exposure on this line of credit. The terms of the
agreement require the Company to pay a fixed interest rate of 6.15% on a $15
million notional amount and receive the 30 day LIBOR rate in exchange. The
interest rate swap agreement terminates October 29, 1999. The line of credit is
secured by substantially all assets of the Company. The bank's security interest
in a portion of the Company's inventory is subordinate to the liens on that
inventory under the terms of a security agreement between the Company and one of
its vendors. The same vendor has a security interest in certain accounts
receivable of the Company which is subordinate to the rights of the banks. At
June 30, 1998, the balance outstanding under this line of credit was
$27,497,725.
As defined in the credit agreements, the line of credit contains financial
covenants which require the Company to maintain certain levels of net worth,
tangible net worth, working capital, debt to net worth and liquidity ratios. The
credit agreement also restricts certain changes in management and ownership of
the Company.
During June 1997, the Company issued $10 million in senior subordinated
notes (the Notes) to certain stockholders of the Company in connection with the
purchase of HHS. The Notes, which are due June 1, 2004, have a stated interest
rate of 10% and an effective rate of 16%. The Notes are unsecured. Concurrently
with the issuance of the Notes, the Company issued 400,000 shares of its common
stock to the Noteholders. The excess of the fair market value of the 400,000
shares of common stock issued over the purchase price of $4,000 was recorded as
an original issue discount. This original issue discount, which accretes over
the life of the related obligation using the effective interest method, is
reflected as a reduction of the Notes in the accompanying consolidated balance
sheets.
At the option of the Company, the amount of interest due and payable
September 1, 1998; December 1, 1998; March 1, 1999 and June 1, 1999, may be
added to the unpaid principal balance of the Notes. During 1997 and 1998, the
Company added $85,009 and $1,045,826, respectively, of accrued interest due
during 1997 and 1998 to the unpaid principal balance of the Notes.
F-12
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE (CONTINUED)
If at any time while the Notes are outstanding, the Company shall consummate
a public offering, as defined in the note purchase agreement, or merge or
consolidate, as defined in the note purchase agreement, the Company shall use
the net proceeds of such offering to repay the principal amount of the Notes,
plus accrued interest (see Note 12). On any interest payment date on or after
June 1, 2002, the Company shall pay an amount of accrued original issue discount
on the Notes as shall be necessary to ensure that such Notes shall not be
considered applicable high yield discount obligations as defined in the note
purchase agreement.
6. INCOME TAXES
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company is indemnified for income tax
liabilities arising prior to May 31, 1996, by its former parent.
Income tax expense (benefit) consist of the following for the periods ended
June 30:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal............................................. $ 121,840 $ 1,159,425 $ 850,062
State............................................... -- 231,140 103,837
---------- ------------ ------------
121,840 1,390,565 953,899
Deferred:
Federal............................................. (142,852) 95,426 1,239,311
State............................................... (7,408) 15,958 227,332
---------- ------------ ------------
(150,260) 111,384 1,466,643
---------- ------------ ------------
$ (28,420) $ 1,501,949 $ 2,420,542
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
The provision (benefit) for income taxes differed from the amount computed
by applying the statutory federal income tax rate of 34% for the periods ended
June 30 due to the following:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------- -------------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate........................ $ (203,037) $ (220,380) $ 1,307,434
State income tax expense (benefit), net of federal income tax expense
(benefit)........................................................... (4,889) 164,418 218,572
Goodwill amortization................................................. 149,277 1,552,595 836,298
Other................................................................. 30,229 5,316 58,238
------------ ------------- -------------
Income tax expense (benefit).......................................... $ (28,420) $ 1,501,949 $ 2,420,542
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
F-13
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at June 30 are as follows:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserves.................................... $ 1,350,846 $ 175,637
Accrued expenses................................................ 84,505 96,904
Joint venture investments....................................... 20,322 17,129
Other........................................................... 32,554 34,316
------------ ------------
1,488,227 323,986
Deferred tax liabilities:
Property and equipment.......................................... (99,863) (150,458)
Intangible assets............................................... (37,910) (301,352)
Joint venture investments....................................... (86,877) (84,097)
------------ ------------
(224,650) (535,907)
------------ ------------
Net deferred tax assets (liabilities)............................. $ 1,263,577 $ (211,921)
------------ ------------
------------ ------------
</TABLE>
7. OPERATING LEASES
The Company leases office space and equipment under various operating
leases. Rent expense for all operating leases was approximately $24,000,
$429,000 and $758,000 for the periods ended June 30, 1996, 1997 and 1998,
respectively.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial terms of one year or more consist of the following
at June 30, 1998 (including executed lease extensions through August 12, 1998):
<TABLE>
<S> <C>
1999............................................................ $ 780,000
2000............................................................ 522,000
2001............................................................ 360,000
2002............................................................ 388,000
2003............................................................ 361,000
---------
$2,411,000
---------
---------
</TABLE>
8. INVESTMENT IN JOINT VENTURES
Texas Health Pharmaceutical Resources, Teddy Bear Home Care/Drug Therapies
and Children's Memorial Home Hemophilia Services are partnerships in which the
Company has a 50% ownership interest. Campus Home Health Care-Home Hemophilia is
a limited liability company in which the Company has a 25% ownership interest.
These joint ventures are accounted for by the Company under the equity method of
accounting. Amounts due from these joint ventures to the Company are classified
as due from affiliates in the accompanying consolidated balance sheets. The
portion of the Company's retained earnings at June 30, 1998, attributable to
undistributed earnings of these joint ventures is $628,000.
F-14
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENT IN JOINT VENTURES (CONTINUED)
The Company provided management services to these joint ventures of $21,000,
$362,000 and $413,000 for the periods ended June 30, 1996, 1997 and 1998,
respectively, which are recorded as other revenues in the accompanying
consolidated statements of operations.
Summary financial information for affiliated joint ventures (20 percent to
50 percent owned) accounted for by the equity method is as follows as of and for
the periods ended June 30:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------- -------------
<S> <C> <C> <C>
Current assets.................................... $ 3,365,000 $ 2,783,000 $ 2,322,000
Property and equipment and other assets........... 96,000 84,000 78,000
Current liabilities............................... 1,403,000 1,546,000 1,133,000
Total revenues.................................... 729,000 12,736,000 10,215,000
Net income........................................ 99,000 2,050,000 2,315,000
</TABLE>
9. DEFINED CONTRIBUTION PLAN
The Company has a qualified defined contribution plan under Section 401(k)
of the Internal Revenue Code. Substantially all employees with a minimum of
three months of service qualify for participation in the plan. The Company
matches employee contributions, as defined in the plan. The Company made annual
matching contributions of approximately $2,000, $41,000 and $43,000 for the
periods ended June 30, 1996, 1997 and 1998, respectively.
10. STOCK OPTION PLAN
The Company's Amended and Restated Stock Option and Restricted Stock
Purchase Plan has authorized the grant of options to selected employees,
officers, and directors for up to 965,000 shares of the Company's common stock.
All options granted have 10 year terms and vest and become fully exercisable
over a period of 1 to 6 years of continued employment. Certain options granted
with up to 6 year vesting terms also have provisions for accelerated vesting
over the first 4 years if certain Company income targets are achieved during
that period. Otherwise, these options become fully exercisable at the end of up
to 6 years of continued employment.
Pro forma information regarding net income is required by Statement 123 and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of Statement 123. Significant assumptions
used by the Company in the Black-Scholes option pricing model computations are
as follows for the periods ended June 30:
<TABLE>
<CAPTION>
1996 1997 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Risk-free interest rates............. 6.25% to 6.40% 6.08% to 6.93% 5.48% to 6.22%
Dividend yield....................... 0% 0% 0%
Volatility factor.................... .60 .60 .60
Weighted-average expected life....... 4.6 years 4.5 years 4.45 years
</TABLE>
The Black-Scholes option model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the
F-15
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLAN (CONTINUED)
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the periods ended June 30 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
Net income (loss) "as reported"...................... $ (568,747) $ (2,149,970) $ 1,424,956
Pro forma net income (loss).......................... $ (583,834) $ (2,357,628) $ 1,119,194
</TABLE>
These pro forma disclosures are not necessarily representative of the
effects of stock options on reported pro forma net income for future years.
A summary of the Company's stock option activity and related information for
the periods ended June 30 follows:
<TABLE>
<CAPTION>
1996 1997 1998
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ----------- --------- ----------- --------- -----------
Outstanding at beginning of period..................... -- $ -- 542,857 $ 3 670,858 $ 3
Granted................................................ 542,857 3 130,001 3 186,428 6
Exercised.............................................. -- -- -- -- -- --
Forfeited.............................................. -- -- (2,000) 3 (857) 3
--------- ----- --------- ----- --------- -----
Outstanding at end of period........................... 542,857 $ 3 670,858 $ 3 856,429 $ 4.84
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Exercisable at end of period........................... -- $ -- 116,000 $ 3 247,001 $ 3.17
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Weighted-average fair value of options granted during
the year............................................. $ 1.64 $ 1.63 $ 2.61
--------- --------- ---------
--------- --------- ---------
</TABLE>
The range of exercise prices for the Company's stock options outstanding at
June 30, 1998, is $3.00 to $6.00. The weighted-average remaining contractual
life of those outstanding options is 8.3 years at June 30, 1998.
F-16
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share for the periods ended June 30:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Numerator for basic and diluted income (loss) per share
attributable to common stockholders:
Net income (loss).......................................... $ (568,747) $ (2,149,970) $ 1,424,956
Less preferred stock dividends............................. (170,233) (2,042,888) (2,042,888)
------------ ------------ ------------
Net loss attributable to common stockholders............... $ (738,980) $ (4,192,858) $ (617,932)
------------ ------------ ------------
------------ ------------ ------------
Denominator:
Denominator for basic loss per share attributable to common
stockholders--weighted-average shares.................... 5,107,253 5,140,586 5,566,281
Effect of dilutive stock options........................... -- 277,138 474,492
------------ ------------ ------------
Denominator for diluted income (loss) per share
attributable to common stockholders--adjusted
weighted-average shares.................................. 5,107,253 5,417,724 6,040,773
------------ ------------ ------------
------------ ------------ ------------
Net loss per share attributable to common
stockholders--basic........................................ $ (0.14) $ (0.82) $ (0.11)
------------ ------------ ------------
------------ ------------ ------------
Net loss per share attributable to common
stockholders--diluted (1).................................. $ (0.14) $ (0.82) $ (0.11)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
(1) Historical diluted loss per share amounts for 1996, 1997 and 1998 have been
calculated using the same denominator as used in the basic loss per share
calculation as the inclusion of dilutive securities in the denominator would
have an anti-dilutive effect.
F-17
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
1998
--------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................................... $ 1,636,058
Patient accounts receivable, less allowance for doubtful accounts of $4,460,770................. 53,092,303
Inventories..................................................................................... 16,012,130
Prepaids and other current assets............................................................... 1,037,413
Deferred income taxes........................................................................... 1,469,475
--------------
Total current assets.............................................................................. 73,247,379
Property and equipment, net....................................................................... 2,346,423
Other assets:
Joint venture investments....................................................................... 2,355,229
Goodwill and other intangible assets, net....................................................... 51,699,319
--------------
Total assets...................................................................................... $ 129,648,350
--------------
--------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................................ $ 43,433,520
Accrued expenses................................................................................ 4,344,067
--------------
Total current liabilities......................................................................... 47,777,587
Long-term notes payable........................................................................... 27,497,725
Senior subordinated notes payable................................................................. 9,040,438
Deferred income taxes............................................................................. 611,124
Mandatorily redeemable cumulative preferred stock, at redemption amount, 300,000 shares
authorized, 255,361 shares issued and outstanding............................................... 30,813,553
Stockholders' equity:
Common Stock, $.01 par value; 7,000,000 shares authorized, 5,625,587 shares issued and
outstanding................................................................................... 56,256
Additional paid-in capital...................................................................... 13,851,667
Retained Earnings............................................................................... --
--------------
Total stockholders' equity........................................................................ 13,907,923
--------------
Total liabilities and stockholders' equity........................................................ $ 129,648,350
--------------
--------------
</TABLE>
See accompanying notes.
F-18
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-----------------------------
1997 1998
------------- --------------
<S> <C> <C>
Revenues:
Net patient service revenue...................................................... $ 80,366,889 $ 113,747,690
Other revenue.................................................................... 4,679,634 5,647,678
Equity in net income of joint ventures........................................... 539,642 631,155
------------- --------------
Total revenues..................................................................... 85,586,165 120,026,523
Operating expenses:
Cost of services................................................................. 73,086,872 101,909,318
General and administrative....................................................... 5,728,899 8,391,329
Bad debts........................................................................ 1,582,203 2,283,627
Depreciation..................................................................... 195,830 270,374
Amortization..................................................................... 1,715,687 1,715,687
------------- --------------
Total operating expenses........................................................... 82,309,491 114,570,335
------------- --------------
Operating income................................................................... 3,276,674 5,456,188
Other expense (income):
Interest expense................................................................. 1,859,783 1,816,846
Interest income.................................................................. (78,464) (86,381)
------------- --------------
1,781,319 1,730,465
------------- --------------
Income before income taxes......................................................... 1,495,355 3,725,723
Income tax expense................................................................. 1,066,367 1,862,354
------------- --------------
Net income......................................................................... 428,988 1,863,369
Mandatorily redeemable cumulative preferred stock dividends........................ (1,021,444) (1,021,444)
------------- --------------
Net income (loss) attributable to common stockholders.............................. $ (592,456) $ 841,925
------------- --------------
------------- --------------
Net income (loss) per share attributable to common stockholders:
Basic............................................................................ $ (0.11) $ 0.15
Diluted.......................................................................... $ (0.11) $ 0.14
Weighted average number of shares and share equivalents outstanding:
Basic............................................................................ 5,543,033 5,620,842
Diluted.......................................................................... 5,852,030 6,222,964
</TABLE>
See accompanying notes.
F-19
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK
(UNAUDITED)
<TABLE>
<CAPTION>
MANDATORILY
REDEEMABLE
COMMON COMMON ADDITIONAL RETAINED TOTAL CUMULATIVE
STOCK COMMON STOCK SUBSCRIPTION PAID-IN EARNINGS STOCKHOLDERS' PREFERRED
SHARES STOCK SUBSCRIBED RECEIVABLE CAPITAL (DEFICIT) EQUITY STOCK
--------- ----------- ----------- ----------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998....... 5,590,587 $ 55,906 $ 204,000 ($204,000) $14,038,973 ($1,293,761) $12,801,118 2$9,792,109
Issuance of common stock....... 34,000 340 (204,000) 204,000 203,660 -- 204,000 --
Exercise of stock options...... 1,000 10 -- -- 2,990 -- 3,000 --
Accrued dividends on
mandatorily redeemable
cumulative preferred stock... -- -- -- -- (451,836) (569,608) (1,021,444) 1,021,444
Compensation resulting from
stock transactions, net of
income tax benefit........... -- -- -- -- 57,880 -- 57,880 --
Net income..................... -- -- -- -- -- 1,863,369 1,863,369 --
--------- ----------- ----------- ----------- ---------- ---------- ------------ -----------
Balance at December 31, 1998... 5,625,587 $ 56,256 $ -0- $ -0- $13,851,667 $ -- $13,907,923 3$0,813,553
--------- ----------- ----------- ----------- ---------- ---------- ------------ -----------
--------- ----------- ----------- ----------- ---------- ---------- ------------ -----------
</TABLE>
See accompanying notes.
F-20
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31,
------------------------------
<S> <C> <C>
1997 1998
-------------- --------------
OPERATING ACTIVITIES
Net income........................................................................ $ 428,988 $ 1,863,369
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization................................................... 1,911,517 1,986,061
Original issue discount amortization............................................ 73,405 120,257
Interest added to long-term obligations......................................... 510,096 --
Provision for losses on accounts receivable..................................... 1,582,203 2,283,627
Deferred income tax benefit..................................................... (4,343) (1,104,704)
Compensation resulting from stock transactions.................................. -- 92,312
Changes in operating assets and liabilities:
Patient receivables and other................................................... (7,962,893) (14,883,446)
Due from affiliates............................................................. 79,140 (616,813)
Inventories..................................................................... (3,446,839) (3,881,098)
Prepaids and other current assets............................................... 274,880 (727,823)
Recoverable income taxes........................................................ (35,570) 150,893
Accounts payable and accrued expenses........................................... 5,098,330 13,143,072
Income taxes payable............................................................ (1,802,161) 132,765
-------------- --------------
Net cash used in operating activities............................................. (3,293,247) (1,441,528)
INVESTING ACTIVITIES
Purchases of property and equipment............................................... (553,099) (489,048)
Purchase of joint venture investments............................................. -- (1,297,667)
Change in joint venture investments, net.......................................... 15,358 (429,834)
-------------- --------------
Net cash used in investing activities............................................. (537,741) (2,216,549)
FINANCING ACTIVITIES
Proceeds from long-term obligations............................................... 2,000,000 --
Issuance of common stock.......................................................... 500,004 207,000
-------------- --------------
Net cash provided by financing activities......................................... 2,500,004 207,000
-------------- --------------
Decrease in cash and cash equivalents............................................. (1,330,984) (3,451,077)
Cash and cash equivalents at beginning of period.................................. 3,675,819 5,087,135
-------------- --------------
Cash and cash equivalents at end of period........................................ $ 2,344,835 $ 1,636,058
-------------- --------------
-------------- --------------
SUPPLEMENTARY CASH FLOW DISCLOSURES
Income taxes paid................................................................. $ 2,775,182 $ 2,618,000
-------------- --------------
-------------- --------------
Cash paid for interest............................................................ $ 1,279,536 $ 2,148,469
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-21
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1998
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 have
been included. During the six months ended December 31, 1998, the Company
incurred $420,000 in compensation cost for stock transactions at less than fair
market value. Operating results for the six months ended December 31, 1998, are
not necessarily indicative of the results that may be expected for the fiscal
year ending June 30, 1999. For further information, refer to the June 30, 1998
consolidated financial statements and footnotes thereto included elsewhere
herein.
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 $916,667. In addition to
the purchase price paid on the acquisition date, the Company will pay up to an
additional $833,333 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
During the six months ended December 31, 1998, the Company extended the term
of its $40 million revolving line of credit agreement. The terms of the
agreement were extended for one year from the original expiration date of
October 31, 1999 to October 31, 2000. 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 six months ended
December 31, 1998, 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
recently entered into a new interest rate swap agreement with a bank on January
21, 1999. The new agreement 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.
F-22
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
DECEMBER 31, 1998
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings, (loss) per share for the six-month periods ended December 31:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Numerator for basic and diluted income per share attributable to common stockholders:
Net income.......................................................................... $ 428,988 $ 1,863,369
Less preferred stock dividends...................................................... (1,021,444) (1,021,444)
------------ ------------
Net income (loss) attributable to common stockholders............................... $ (592,456) $ 841,925
------------ ------------
------------ ------------
Denominator:
Denominator for basic income per share attributable to common stockholders-
weighted-average shares........................................................... 5,543,033 5,620,842
Effect of dilutive stock options.................................................... 308,997 602,122
------------ ------------
Denominator for diluted income per share attributable to common
stockholders-adjusted weighted-average shares..................................... 5,852,030 6,222,964
------------ ------------
------------ ------------
Net income (loss) per share attributable to common stockholders--basic................ $ (0.11) $ 0.15
------------ ------------
------------ ------------
Net income (loss) per share attributable to common stockholders--diluted(1)........... $ (0.11) $ 0.14
------------ ------------
------------ ------------
</TABLE>
(1) Historical diluted loss per share amounts for 1997 have been calculated
using the same denominator as used in the basic loss per share calculation
as the inclusion of dilutive securities in the denominator would have an
anti-dilutive effect.
5. SUBSEQUENT EVENTS
PUBLIC OFFERING
The Company is currently in the process of an initial public offering of its
common stock (the "Offering"). The net proceeds from the Offering are planned to
be used primarily to repay the Notes and redeem Series A mandatorily redeemable
cumulative preferred stock.
CHANGES IN COMMON STOCK
Immediately prior to the consummation of the Offering, the Company completed
a recapitalization pursuant to which 1,100,000 shares of Common Stock held by
the Company's principal stockholder were exchanged for 1,100,000 shares of
Non-voting Common Stock of the Company. In addition, the Company increased the
number of authorized shares of Common Stock to 30,000,000 shares.
F-23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Nova Factor, Inc.
We have audited the accompanying statements of operations, stockholder's
equity and cash flows for Nova Factor, Inc. (the "Company") for the period July
1, 1995 through May 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations, changes in stockholder's
equity and cash flows of Nova Factor, Inc. for the period July 1, 1995 through
May 31, 1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Memphis, Tennessee
August 30, 1996
F-24
<PAGE>
NOVA FACTOR, INC.
STATEMENT OF OPERATIONS
ELEVEN-MONTH PERIOD ENDED MAY 31, 1996
<TABLE>
<S> <C>
Revenues:
Net patient service revenue.................................................. $68,584,991
Other revenue................................................................ 6,346,546
Equity in net loss of joint ventures......................................... (138,970)
----------
Total revenues................................................................. 74,792,567
Operating expenses:
Cost of services............................................................. 65,867,240
General and administrative................................................... 2,753,353
Bad debts.................................................................... 1,860,253
Depreciation................................................................. 103,352
Corporate overhead allocation................................................ 4,206,274
----------
Total operating expenses....................................................... 74,790,472
----------
Operating income............................................................... 2,095
Other (expense) income:
Interest expense............................................................. (1,281,683)
Interest income.............................................................. 1,015,664
----------
(266,019)
----------
Loss before income tax benefit................................................. (263,924)
Income tax benefit: 72,090
----------
Net loss....................................................................... $ (191,834)
----------
----------
</TABLE>
See accompanying notes.
F-25
<PAGE>
NOVA FACTOR, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON COMMON PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS TOTAL
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995........... 100 $ 1,000 $7,585,731 $3,728,265 $11,314,996
Dividend to SHS.................. -- -- (4,259,581) (3,536,431) (7,796,012)
Net loss for the period ended May
31, 1996....................... -- -- -- (191,834) (191,834)
----------- ----------- ---------- ---------- ----------
Balance at May 31, 1996............ 100 $ 1,000 $3,326,150 $ -- $3,327,150
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
F-26
<PAGE>
NOVA FACTOR, INC.
STATEMENT OF CASH FLOWS
ELEVEN-MONTH PERIOD ENDED MAY 31, 1996
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss........................................................................ $ (191,834)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation.................................................................. 103,352
Provision for losses on patient receivables................................... 1,860,253
Provision for deferred income taxes........................................... 78,778
Changes in operating assets and liabilities:
Patient receivables and other............................................... (720,568)
Recoverable income taxes.................................................... (23,264)
Due to affiliates........................................................... 1,048,753
Inventories................................................................. 5,027,002
Prepaids and other current assets........................................... (59,462)
Accounts payable and accrued expenses....................................... (5,089,028)
Income taxes payable........................................................ (161,972)
----------
Net cash provided by operating activities....................................... 1,872,010
INVESTING ACTIVITIES
Purchases of property and equipment............................................. (880,057)
Increase in other assets........................................................ (12,346)
Change in joint venture investments, net........................................ 401,570
----------
Net cash used in investing activities........................................... (490,833)
FINANCING ACTIVITIES
Payments on notes payable....................................................... (30,883)
----------
Increase in cash................................................................ 1,350,294
Cash at beginning of period..................................................... 644,723
----------
Cash at end of period........................................................... $1,995,017
----------
----------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest.......................................................... $ 366,000
----------
----------
Cash paid for income taxes...................................................... $ 193,000
----------
----------
</TABLE>
See accompanying notes.
F-27
<PAGE>
NOVA FACTOR, INC.
NOTES TO FINANCIAL STATEMENTS
ELEVEN-MONTH PERIOD ENDED MAY 31, 1996
1. ORGANIZATION AND NATURE OF OPERATIONS
ORGANIZATION
Nova Factor, Inc. (the Company) is a wholly-owned subsidiary of Southern
Health Systems, Inc. (SHS), a holding company. Prior to May 31, 1996, Le Bonheur
Health Systems, Inc. was the majority shareholder of SHS. On May 31, 1996,
Accredo Health, Incorporated (Accredo) (formerly Nova Holdings, Inc.) purchased
from Le Bonheur Health Systems, Inc. all of the outstanding shares of SHS common
stock. The financial statements reflect the historical cost-basis financial
statements of the Company, the predecessor to Accredo, prior to the acquisition.
DESCRIPTION OF BUSINESS
The Company provides specialized contract pharmacy and related services
beneficial to patients with certain costly chronic diseases. Because of the
unique needs of patients suffering from chronic diseases, biotechnology drug
manufacturers have recognized the benefits of customized programs to facilitate
alternate site drug administration, ensure compliance with treatment regimens,
provide reimbursement assistance and capture valuable clinical and patient
demographic information. The Company addresses the needs of the manufacturers by
providing specialized services that facilitate product launch and patient
acceptance including timely drug utilization and patient compliance information,
patient education and monitoring, reimbursement expertise and overnight drug
delivery.
The Company has designed its specialty services to focus primarily on
biotechnology drugs that: (i) are used on a recurring basis to treat chronic,
and potentially life threatening diseases; (ii) are expensive; (iii) are
administered through injection; and (iv) require temperature control or other
specialized handling as part of their distribution process.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Net patient service revenues are reported at the net amounts billed to
patients, third-party payors and others in the period the services are rendered.
The Company has agreements with certain third party-payors that provide for
payments to the Company at amounts discounted from its established rates.
Approximately 18% of gross patient service revenue for the eleven-month
period ended May 31, 1996, is from participation in the Medicare and
state-sponsored Medicaid programs. The Company grants credit without collateral
to its patients.
Other revenues primarily consist of management fees from biotech
manufacturers and various management agreements with hospitals and joint
ventures. The Company recognizes revenues in the period the services are
rendered.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
F-28
<PAGE>
NOVA FACTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ELEVEN-MONTH PERIOD ENDED MAY 31, 1996
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION
Provisions for depreciation are computed by the straight-line method based
on the estimated useful lives of the related assets of 2 to 7 years.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Estimates are used primarily in recording the allowance for doubtful
accounts.
3. INCOME TAXES
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company is indemnified for income tax
liabilities arising prior to May 31, 1996, by Le Bonheur Health Systems, Inc.,
SHS's former parent.
SHS files a consolidated federal income tax return. Financial Accounting
Standards Board Statement 109, ACCOUNTING FOR INCOME TAXES, requires the
allocation of federal income tax expense to the members of a control group that
file a consolidated income tax return for federal income tax purposes.
Therefore, SHS allocated federal income tax benefits of $72,090 to the Company
for the eleven-month period ended May 31, 1996, as if a separate federal income
tax return were filed for the Company.
Income tax (expense) benefit consists of the following for the period ended
May 31, 1996:
<TABLE>
<S> <C>
Current federal benefit.......................................... $ 150,868
Deferred federal expense......................................... (78,778)
---------
$ 72,090
---------
---------
</TABLE>
The benefit for income taxes differed from the amount computed by applying
the statutory federal income tax rate of 34% for the eleven-month period ended
May 31, 1996, due to the following:
<TABLE>
<S> <C>
Income tax benefit at statutory rate.............................. $ 89,734
Nondeductible expenses............................................ (17,644)
---------
Income tax benefit $ 72,090
---------
---------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
4. OPERATING LEASES
The Company leases office space and equipment under various operating
leases. Rent expense for all operating leases was approximately $162,000 for the
eleven-month period ended May 31, 1996.
F-29
<PAGE>
NOVA FACTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ELEVEN-MONTH PERIOD ENDED MAY 31, 1996
4. OPERATING LEASES (CONTINUED)
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with terms of one year or more consist of the following for the
years ended June 30:
<TABLE>
<S> <C>
1997............................................................ $ 287,000
1998............................................................ 287,000
1999............................................................ 287,000
2000............................................................ 287,000
2001............................................................ 263,000
---------
$1,411,000
---------
---------
</TABLE>
5. DEFINED CONTRIBUTION PLAN
The Company participates in a qualified defined contribution plan of SHS,
under Section 401(k) of the Internal Revenue Code (IRC). Substantially all full
time employees qualify for participation in the plan. The Company makes matching
contributions to the employees' accounts, as defined in the plan. The Company
made matching contributions of approximately $7,500 in the eleven-month period
ended May 31, 1996.
6. RELATED PARTIES
In connection with the sale of SHS by Le Bonheur Health Systems, Inc. on May
31, 1996, the Company declared a non-cash dividend consisting of the amount owed
to the Company by SHS at May 31, 1996 of $7,796,012 by forgiving such amounts
due from SHS. This dividend was recorded as a reduction of stockholder's equity.
Dividends on a per share basis do not provide meaningful information and are not
disclosed herein.
The Company received certain services provided by SHS that include cash
management, tax reporting, risk management and executive management. Allocated
expenses for such services, amounting to $2,753,268 for the eleven-month period
ended May 31, 1996, have been included in the accompanying statement of
operations. Charges for these corporate services were based upon a general
allocation methodology determined by SHS (used to allocate all corporate
overhead expenses to SHS subsidiaries), and were not necessarily allocated based
on specific identification of expenses. Management believes the allocation
methodology is reasonable, and results in amounts that approximate the amounts
that would have been incurred on a stand-alone basis. Additionally, SHS
allocated expenses of $1,453,006 incurred in connection with the sale of the
Company to Accredo.
Texas Health Pharmaceutical Resources, Teddy Bear Home Care/Drug Therapies
and Children's Memorial Home Hemophilia Services are joint ventures in which the
Company has a 50% ownership interest. These joint ventures are accounted for by
the Company under the equity method of accounting.
The Company provided management services to these joint ventures of
approximately $342,000 for the eleven-month period ended May 31, 1996. The
management fees are recorded as other revenues in the accompanying statement of
operations.
F-30
<PAGE>
NOVA FACTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ELEVEN-MONTH PERIOD ENDED MAY 31, 1996
7. INVESTMENT IN JOINT VENTURES
Texas Health Pharmaceutical Resources, Teddy Bear Home Care/Drug Therapies
and Children's Memorial Home Hemophilia Services are partnerships in which the
Company has a 50% ownership interest. Campus Home Health Care-Home Hemophilia is
a limited liability company in which the Company has a 25% ownership interest.
These joint ventures are accounted for by the Company under the equity method of
accounting. The portion of the Company's retained earnings at May 31, 1996,
attributable to undistributed earnings of these joint ventures is $1,130,000.
The Company provided management services to these joint ventures of $578,000
for the eleven-month period ended May 31, 1996, which are recorded as other
revenues in the accompanying statement of operations.
Summary financial information for affiliated joint ventures (20 percent to
50 percent owned) accounted for by the equity method is as follows as of and for
the period ended May 31, 1996:
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Current assets.................................................. $3,372,000
Property and equipment and other assets......................... 14,000
Current liabilities............................................. 1,127,000
Total revenues.................................................. 10,498,000
Net loss........................................................ (278,000)
</TABLE>
F-31
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Horizon Health Systems, Inc.
We have audited the accompanying statements of income, stockholders' equity
and cash flows for Horizon Health Systems, Inc. (the "Company") for the years
ended December 31, 1995 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations, changes in stockholders'
equity and cash flows of Horizon Health Systems, Inc. for the years ended
December 31, 1995 and 1996, in conformity with generally accepted accounting
principles.
Memphis, Tennessee /s/ Ernst & Young LLP
July 30, 1998
F-32
<PAGE>
HORIZON HEALTH SYSTEMS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, ------------------------
------------------------- MARCH 31, MARCH 31,
1995 1996 1996 1997
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Net patient service revenues............ 2$3,834,480 $27,427,988 $6,311,473 $7,196,407
Operating expenses:
Cost of services...................... 16,820,301 19,757,939 4,514,174 5,141,500
General and administrative............ 4,138,634 4,595,068 911,187 1,062,323
Depreciation and amortization......... 101,866 82,086 22,759 21,079
----------- ------------ ----------- -----------
Total operating expenses................ 21,060,801 24,435,093 5,448,120 6,224,902
----------- ------------ ----------- -----------
Operating income........................ 2,773,679 2,992,895 863,353 971,505
Other expense (income):
Interest income....................... (19,532) (80,653) (17,281) (17,149)
Interest expense...................... 100,831 17,384 14,515 --
----------- ------------ ----------- -----------
81,299 (63,269) (2,766) (17,149)
----------- ------------ ----------- -----------
Income before income taxes.............. 2,692,380 3,056,164 866,119 988,654
State income taxes...................... 112,574 143,562 51,967 40,853
----------- ------------ ----------- -----------
Net income.............................. $2,579,806 $2,912,602 $ 814,152 $ 947,801
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
See accompanying notes.
F-33
<PAGE>
HORIZON HEALTH SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON COMMON RETAINED STOCKHOLDERS'
SHARES STOCK EARNINGS EQUITY
------------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995.................... 100 $ 150,100 $1,479,488 $1,629,588
Net income.................................. -- -- 2,579,806 2,579,806
Dividends paid.............................. -- -- (1,148,650) (1,148,650)
--
----------- ---------- ------------
Balance at December 31, 1995.................. 100 150,100 2,910,644 3,060,744
Net income.................................. -- -- 2,912,602 2,912,602
Dividends paid.............................. -- -- (1,800,000) (1,800,000)
--
----------- ---------- ------------
Balance at December 31, 1996.................. 100 150,100 4,023,246 4,173,346
Net income.................................. -- -- 947,801 947,801
Dividends paid.............................. -- -- (400,000) (400,000)
--
----------- ---------- ------------
Balance at March 31, 1997 (unaudited)......... 100 $ 150,100 $4,571,047 $4,721,147
--
--
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
See accompanying notes.
F-34
<PAGE>
HORIZON HEALTH SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, ------------------------
------------------------- MARCH 31, MARCH 31,
1995 1996 1996 1997
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income.............................. $2,579,806 $2,912,602 $ 814,152 $ 947,801
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 101,866 82,086 22,759 21,079
Loss on abandoned property............ -- 32,516 -- --
Changes in operating assets and
liabilities:
Patient receivables and other....... 596,058 (1,291,267) 734,136 577,996
Inventories......................... (625,878) (210,472) 36,206 133,674
Prepaids and other assets........... (55,039) (6,456) 44,482 8,388
Accounts payable and accrued
expenses.......................... 230,304 715,371 (580,217) (745,315)
Refunds payable..................... (33,523) 620,400 -- --
Income taxes payable................ 10,625 (61,655) (40,120) (30,310)
----------- ------------ ----------- -----------
Net cash provided by operating
activities............................ 2,804,219 2,793,125 1,031,398 913,313
INVESTING ACTIVITIES
Purchases of property and equipment..... (65,630) (70,981) (42,758) (112,317)
FINANCING ACTIVITIES
Proceeds from long term obligations..... 750,000 -- -- --
Net payments on line of credit.......... (1,768,000) -- -- --
Principal payments on long-term debt.... (125,000) (625,000) (37,500) --
Payment of dividends.................... (1,148,650) (1,800,000) (600,000) (400,000)
----------- ------------ ----------- -----------
Net cash used in financing activities... (2,291,650) (2,425,000) (637,500) (400,000)
----------- ------------ ----------- -----------
Increase in cash and cash equivalents... 446,939 297,144 351,140 400,996
Cash and cash equivalents at beginning
of period............................. 729,722 1,176,661 1,176,661 1,473,805
----------- ------------ ----------- -----------
Cash and cash equivalents at end of
period................................ $1,176,661 $1,473,805 $1,527,801 $1,874,801
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
SUPPLEMENTARY CASH FLOW DISCLOSURES:
Cash paid for interest.................. $ 100,831 $ 17,384 $ 14,515 $ --
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Income taxes paid....................... $ 101,949 $ 113,130 $ 40,484 $ 105,851
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
See accompanying notes.
F-35
<PAGE>
HORIZON HEALTH SYSTEM, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996
1. ORGANIZATION AND NATURE OF OPERATIONS
ORGANIZATION
Prior to June 1, 1997, Horizon Health Systems, Inc. d/b/a Hemophilia Health
Services (the Company) was organized as an S corporation. On June 1, 1997,
Accredo Health, Incorporated (formerly Nova Holdings, Inc.) acquired
substantially all of the assets of the Company and the Company became a
wholly-owned subsidiary of Accredo Health, Incorporated.
DESCRIPTION OF BUSINESS
The Company is engaged in the sale and distribution of clotting factors and
ancillary supplies to hemophilia patients located throughout the United States.
The Company provides value-added clinical and distribution services to patients
and payors such as insurance companies, health maintenance organizations, self
insured employers and through the federal Medicare and state-funded health care
programs.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Net patient service revenues are reported at the net amounts billed to
patients, third-party payors and others in the period the services are rendered.
The Company has agreements with certain third-party payors that provide for
payments to the Company at amounts discounted from its established rates. The
Company grants credit without collateral to its patients.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
DEPRECIATION AND AMORTIZATION
Provisions for depreciation and amortization are computed principally by
accelerated and straight-line methods based on the estimated useful lives of the
related assets of 5 to 7 years.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
3. INCOME TAXES
The Company, with the consent of its shareholders, has elected to be an S
Corporation under the Internal Revenue Code. Instead of the Company paying
federal corporate income taxes, the stockholders are taxed individually on the
Company's taxable income. Therefore no provision for federal income taxes has
been made. The Company is liable for state franchise and excise taxes and,
accordingly, a provision has been made for such taxes.
F-36
<PAGE>
HORIZON HEALTH SYSTEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
4. OPERATING LEASES
The Company leases office space and equipment under various operating
leases. Rent expense for all operating leases was approximately $274,000 and
$226,000 for the years ended December 31, 1995 and 1996, respectively.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial terms of one year or more consist of the following
at December 31, 1996:
<TABLE>
<S> <C>
1997.............................................................. $ 251,000
1998.............................................................. 226,000
1999.............................................................. 198,000
---------
$ 675,000
---------
---------
</TABLE>
5. RELATED PARTIES
The Company leased office space from the President and 79% owner of the
Company prior to June 1, 1997. Monthly payments on the lease, which expires
November 1999, are $17,988.
6. NOTES PAYABLE
At December 31, 1995, the Company had a promissory note with a bank for
$750,000. The note carried interest at the bank's prime rate plus an additional
amount based on the Company's leverage rate, ranging from 0.25% to 1.0% (9.5% at
December 31, 1995). The note was paid in full during 1996.
7. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited financial statements for the three-month periods ended March
31, 1996 and 1997, have been prepared in accordance with generally accepted
accounting principles for interim financial information and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of recurring adjustments, necessary for a fair presentation have been included.
Operating results for the three-month periods ended March 31, 1996 and 1997, are
not necessarily indicative of the results that may be expected for the entire
year.
F-37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners
Texas Health Pharmaceutical Resources
We have audited the accompanying balance sheet of Texas Health
Pharmaceutical Resources (the Partnership) as of June 30, 1997, and the related
statements of operations, partners' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Texas Health Pharmaceutical
Resources at June 30, 1997, and the results of its operations and cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Memphis, Tennessee
August 21, 1998
F-38
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 198,728 $ 53,979
------------ ------------
Receivables:
Patient accounts.................................................................. 602,827 520,806
Allowance for doubtful accounts................................................... (123,003) (170,160)
------------ ------------
479,824 350,646
Due from affiliates............................................................... 183,239 192,096
Other............................................................................. 39,515 124,765
------------ ------------
702,578 667,507
Inventories......................................................................... 413,371 252,731
Prepaids and other current assets................................................... 3,860 1,159
------------ ------------
Total current assets.................................................................. 1,318,537 975,376
Furniture and equipment, net of accumulated depreciation of $24,397 and $30,356 for
1997 and 1998, respectively......................................................... 56,575 55,385
------------ ------------
Total assets.......................................................................... $ 1,375,112 $ 1,030,761
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 583,026 $ 388,156
Accrued expenses.................................................................... 10,173 29,281
Due to partner...................................................................... 7,851 13,896
------------ ------------
Total current liabilities............................................................. 601,050 431,333
Partners' equity...................................................................... 774,602 599,428
------------ ------------
Total liabilities and partners' equity................................................ $ 1,375,112 $ 1,030,761
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-39
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues:
Net patient service revenue............................. $7,465,691 $7,217,045 $3,840,253
Other revenue........................................... -- 43,315 718,469
--------- --------- ---------
Total revenues............................................ 7,465,691 7,260,360 4,558,722
Expenses:
Cost of services........................................ 5,480,648 5,300,908 2,771,129
General and administrative.............................. 144,005 162,534 166,626
Management, accounting and reimbursement fees........... 771,085 245,967 194,198
Bad debts............................................... 223,369 283,357 177,351
Depreciation............................................ 2,120 13,350 13,857
--------- --------- ---------
Total operating expenses.................................. 6,621,227 6,006,116 3,323,161
--------- --------- ---------
Operating income.......................................... 844,464 1,254,244 1,235,561
Other income (expense):
Interest income......................................... -- 19,691 14,268
Forgiveness of amounts due from affiliates.............. (1,635,143) -- --
--------- --------- ---------
(1,635,143) 19,691 14,268
--------- --------- ---------
Net income (loss)......................................... $(790,679) $1,273,935 $1,249,829
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-40
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
STATEMENTS OF PARTNERS' EQUITY
<TABLE>
<CAPTION>
<S> <C>
Balance at June 30, 1995 (unaudited)............................................ $2,240,806
Net loss (unaudited).......................................................... (790,679)
---------
Balance at June 30, 1996........................................................ 1,450,127
Distributions to partners..................................................... (1,950,000)
Net income.................................................................... 1,273,935
---------
Balance at June 30, 1997........................................................ 774,062
Distributions to partners (unaudited)......................................... (1,424,463)
Net income (unaudited)........................................................ 1,249,829
---------
Balance at June 30, 1998 (unaudited)............................................ $ 599,428
---------
---------
</TABLE>
See accompanying notes.
F-41
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income (loss)......................................... $(790,679) $1,273,935 $1,249,829
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation............................................ 2,120 13,350 13,857
Gain on sale of equipment............................... -- -- (2,000)
Forgiveness of amounts due from affiliates.............. 1,635,143 -- --
Provision for losses on patient accounts receivable..... 223,369 283,357 177,351
Changes in operating assets and liabilities:
Patient receivables and other......................... (612,037) 645,220 (133,423)
Due from affiliates................................... (485,375) (107,636) (8,857)
Inventories........................................... 310,329 (1,104) 160,640
Prepaids and other current assets..................... (10,551) 6,691 2,701
Accounts payable and accrued expenses................. (517,463) 333,754 (175,762)
Due to partner........................................ 425,652 (410,736) 6,045
--------- --------- ---------
Net cash provided by operating activities................. 180,508 2,036,831 1,290,381
INVESTING ACTIVITIES
Purchases of furniture and equipment...................... (62,276) (6,335) (12,667)
Proceeds from sale of equipment........................... -- -- 2,000
--------- --------- ---------
Net cash used in investing activities..................... (62,276) (6,335) (10,667)
FINANCING ACTIVITIES
Distributions to general partners......................... -- (1,950,000) (1,424,463)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents.......... 118,232 80,496 (144,749)
Cash and cash equivalents at beginning of year............ -- 118,232 198,728
--------- --------- ---------
Cash and cash equivalents at end of year.................. $ 118,232 $ 198,728 $ 53,979
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-42
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED AS TO 1996 AND 1998)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
1. ORGANIZATION AND NATURE OF OPERATIONS
ORGANIZATION
Texas Health Pharmaceutical Resources (the Partnership) is a general
partnership formed on July 1, 1994. The Partnership has two general partners,
Nova Factor, Inc. (NFI) and Alternative Care Systems, Inc. (ACS), each of which
has a 50% ownership interest and shares equally in the profits and losses of the
Partnership. Under the partnership agreement, the partnership term will end on
March 31, 1999, unless extended by mutual agreement of the partners.
DESCRIPTION OF BUSINESS
The purpose of the Partnership is to provide specialized contract pharmacy
services beneficial to patients with certain costly chronic diseases. The
Partnership markets, sells and distributes drugs such as growth hormone and
provides hemophilia therapy services and supplies.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid investments with an initial
maturity of three months or less to be cash equivalents.
PATIENT ACCOUNTS RECEIVABLE
The Partnership's primary concentration of credit risk is patient accounts
receivable, which consists of amounts owed by various governmental agencies,
insurance companies and private patients. The Partnership manages the
receivables by regularly reviewing its accounts and contracts and by providing
appropriate allowances for uncollectible accounts. Significant concentrations of
gross patient accounts receivable are as follows at June 30:
<TABLE>
<CAPTION>
1997
--------- 1998
-----------
(UNAUDITED)
<S> <C> <C>
Medicare................................................................ 24% 14%
Medicaid................................................................ 29% 32%
</TABLE>
Concentration of credit risk relating to accounts receivable is limited to
some extent by the diversity and number of patients and payors, and could be
adversely affected by the geographic service area of the business which, under
the partnership agreement, is the area encompassed within the 50-mile radius of
Dallas, Texas, and within the city limits of Lubbock, Texas. The Partnership
grants credit without collateral to its patients.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of receivables and accounts payable approximates fair
value of these financial instruments.
F-43
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO 1996 AND 1998)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Provisions for depreciation are
computed by the straight-line method based on the estimated useful lives of the
related assets of three to seven years.
REVENUE RECOGNITION
Net patient service revenues are reported at the net amounts billed to
patients, third-party payors and others in the period the services are rendered.
The Partnership has agreements with certain third-party payors that provide for
payments to the Partnership at amounts discounted from its established rates.
Approximately 59% (unaudited), 63% and 63% (unaudited) of gross patient service
revenues for the years ended June 30, 1996, 1997 and 1998, respectively, are
from participation in the Medicare and state-sponsored Medicaid programs.
Other revenues primarily consist of management fees. Management fees are
primarily based upon the amount of patient service revenues generated by a
hospital program managed by the Partnership.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Estimates are used primarily in recording the allowances for doubtful
accounts.
3. OPERATING LEASES
The Partnership leases office space and equipment under various operating
leases. Rent expense for all operating leases was approximately $1,700
(unaudited), $15,000 and $15,000 (unaudited), for the years ended June 30, 1996,
1997 and 1998, respectively.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with terms of one year or more, consist of the following for
the years ended June 30:
<TABLE>
<S> <C>
1999............................................................... $ 14,000
2000............................................................... 13,000
---------
$ 27,000
---------
---------
</TABLE>
4. RELATED PARTIES
During 1996, the Partnership forgave $1,635,143 (unaudited) of amounts due
from affiliates in which ACS and an affiliate of NFI were each 50% partners. Due
from affiliates of $183,239 and $192,096 (unaudited) at June 30, 1997 and 1998,
respectively, consists of accounts receivable from other entities affiliated
with NFI.
The Partnership receives certain services provided by NFI that include cash
management, tax reporting, risk management, executive management, computer
processing, and accounting and reimbursement services. For these services, the
Partnership pays management, reimbursement and accounting fees to NFI.
Management, accounting and reimbursement fees were $771,085 (unaudited),
$245,967 and $194,198 (unaudited) for the years ended June 30, 1996, 1997 and
1998, respectively. The Partnership received management fees of approximately
$708,000 (unaudited) from an affiliate of ACS for the year ended June 30, 1998.
F-44
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO 1996 AND 1998)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
5. INCOME TAXES
No provision is made in the accounts of the Partnership for federal and
state income taxes, as such taxes are liabilities of the partners. The
Partnership's tax returns and amounts of allocable Partnership revenues and
expenses are subject to examination by federal and state taxing authorities. If
such examinations occur and result in changes, the portion of the Partnership's
income or loss reported by the partners may also change.
F-45
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners
Children's Memorial Home Hemophilia Services
We have audited the accompanying balance sheet of Children's Memorial Home
Hemophilia Services (the Partnership) as of June 30, 1997, and the related
statements of income, partners' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Children's Memorial Home
Hemophilia Services at June 30, 1997, and the results of its operations and cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Memphis, Tennessee
March 19, 1999
F-46
<PAGE>
CHILDREN'S MEMORIAL HOME HEMOPHILIA SERVICES
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
-----------------------
<S> <C> <C>
1997 1998
---------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 252,352 $ 306,029
Receivables:
Patient accounts..................................................................... 569,830 420,159
Allowance for doubtful accounts...................................................... (4,461) (29,446)
---------- -----------
565,369 390,713
---------- -----------
Total current assets..................................................................... 817,721 696,742
Furniture and equipment, net of accumulated depreciation of $29 for 1998................. -- 404
---------- -----------
Total assets............................................................................. $ 817,721 $ 697,146
---------- -----------
---------- -----------
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................................................. $ 155,953 $ 163,909
Due to partner......................................................................... 221,874 288,149
---------- -----------
Total current liabilities................................................................ 377,827 452,058
Partners' equity......................................................................... 439,894 245,088
---------- -----------
Total liabilities and partners' equity................................................... $ 817,721 $ 697,146
---------- -----------
---------- -----------
</TABLE>
See accompanying notes.
F-47
<PAGE>
CHILDREN'S MEMORIAL HOME HEMOPHILIA SERVICES
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------ ------------ ------------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues:
Net patient service revenues.......................................... $ 1,777,291 $ 2,572,296 $ 2,826,371
Expenses:
Cost of services...................................................... 1,253,644 1,701,032 1,839,937
General and administrative............................................ 2,304 2,347 1,043
Management, accounting and reimbursement fees......................... 14,041 22,473 106,810
Bad debts............................................................. 59,314 181,713 212,452
Depreciation.......................................................... -- -- 29
------------ ------------ ------------
Total operating expenses................................................ 1,329,303 1,907,565 2,160,271
------------ ------------ ------------
Operating income........................................................ 447,988 664,731 666,100
Other income:
Interest income....................................................... 2,039 6,732 9,094
------------ ------------ ------------
Net income.............................................................. $ 450,027 $ 671,463 $ 675,194
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
F-48
<PAGE>
CHILDREN'S MEMORIAL HOME HEMOPHILIA SERVICES
STATEMENTS OF PARTNERS' EQUITY
<TABLE>
<S> <C>
Balance at June 30, 1995 (unaudited)............................................. $ 828,404
Distributions to partners (unaudited).......................................... (900,000)
Net income (unaudited)......................................................... 450,027
---------
Balance at June 30, 1996......................................................... 378,431
Distributions to partners...................................................... (610,000)
Net income..................................................................... 671,463
---------
Balance at June 30, 1997......................................................... 439,894
Distributions to partners (unaudited).......................................... (870,000)
Net income (unaudited)......................................................... 675,194
---------
Balance at June 30, 1998 (unaudited)............................................. $ 245,088
---------
---------
</TABLE>
See accompanying notes.
F-49
<PAGE>
CHILDREN'S MEMORIAL HOME HEMOPHILIA SERVICES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------
1996 1997 1998
----------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income................................................................. $ 450,027 $ 671,463 $ 675,194
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation............................................................. -- -- 29
Provision for losses on patient receivables.............................. 59,314 181,713 212,452
Changes in operating assets and liabilities:
Patient receivables.................................................... 219,704 (96,815) (37,796)
Accounts payable and accrued expenses.................................. 105,751 12,501 7,956
Due to partner......................................................... (94,958) 31 66,275
----------- ---------- -----------
Net cash provided by operating activities.................................. 739,838 768,893 924,110
INVESTING ACTIVITIES
Purchases of furniture and equipment....................................... -- -- (433)
FINANCING ACTIVITIES
Distributions to general partners.......................................... (900,000) (610,000) (870,000)
----------- ---------- -----------
Increase (decrease) in cash and cash equivalents........................... (160,162) 158,893 53,677
Cash and cash equivalents at beginning of year............................. 253,621 93,459 252,352
----------- ---------- -----------
Cash and cash equivalents at end of year................................... $ 93,459 $ 252,352 $ 306,029
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
See accompanying notes.
F-50
<PAGE>
CHILDREN'S MEMORIAL HOME HEMOPHILIA SERVICES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED AS TO 1996 AND 1998)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
1. ORGANIZATION AND NATURE OF OPERATIONS
Children's Memorial Home Hemophilia Services (the Partnership) is a general
partnership formed on October 27, 1992. The Partnership has two general
partners, Nova Factor, Inc. (NFI) and CM Healthcare Resources, Inc. (CMH), each
of which has a 50% ownership interest and shares equally in the profits and
losses of the Partnership. Under the partnership agreement, the partnership term
initially ended on October 31, 1997, with automatic extensions of six months,
unless terminated by mutual agreement of the partners.
DESCRIPTION OF BUSINESS
The purpose of the Partnership is to market, sell and provide hemophilia
therapy services and supplies to pediatric patients in a home setting.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid investments with an initial
maturity of three months or less to be cash equivalents.
PATIENT ACCOUNTS RECEIVABLE
The Partnership's primary concentration of credit risk is patient accounts
receivable, which consists of amounts owed by various governmental agencies,
insurance companies and private patients. The Partnership manages the
receivables by regularly reviewing its accounts and contracts and by providing
appropriate allowances for uncollectible accounts. Significant concentrations of
gross patient accounts receivable are as follows at June 30:
<TABLE>
<CAPTION>
1997 1998
--- -------------
<S> <C> <C>
(UNAUDITED)
Medicaid................................................................... 3% 19%
Cigna...................................................................... 38% 18%
</TABLE>
Concentration of credit risk relating to accounts receivable is limited to
some extent by the diversity and number of patients and payors, and could be
adversely affected by the geographic service area of the business which, under
the partnership agreement, encompasses the counties of McHenry, Cook, Du Page,
Lake, Will, Kendall and Kane located in the State of Illinois. The Partnership
grants credit without collateral to its patients.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of receivables and accounts payable approximates fair
value of these financial instruments.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Provisions for depreciation are
computed by the straight-line method based on the estimated useful lives of the
related assets of three to seven years.
F-51
<PAGE>
CHILDREN'S MEMORIAL HOME HEMOPHILIA SERVICES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO 1996 AND 1998)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Net patient service revenues are reported at the net amounts billed to
patients, third-party payors and others in the period the services are rendered.
The Partnership has agreements with certain third-party payors that provide for
payments to the Partnership at amounts discounted from its established rates.
Approximately 49% (unaudited), 12% and 10% (unaudited) of gross patient service
revenues for the years ended June 30, 1996, 1997 and 1998, respectively, are
from participation in the state-sponsored Medicaid program.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Estimates are used primarily in recording the allowances for
contractual adjustments and bad debts.
3. RELATED PARTIES
The Partnership receives certain services provided by NFI that include cash
management, tax reporting, risk management, executive management, computer
processing, and accounting and reimbursement services. For these services, the
Partnership pays management, reimbursement and accounting fees to NFI.
Management, accounting and reimbursement fees were $14,041 (unaudited), $22,473
and $106,810 (unaudited) for the years ended June 30, 1996, 1997 and 1998,
respectively.
4. INCOME TAXES
No provision is made in the accounts of the Partnership for federal and
state income taxes, as such taxes are liabilities of the partners. The
Partnership's tax returns and amounts of allocable Partnership revenues and
expenses are subject to examination by federal and state taxing authorities. If
such examinations occur and result in changes, the portion of the Partnership's
income or loss reported by the partners may also change.
F-52
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 6
The Company.......................... 16
Use of Proceeds...................... 16
Dividend Policy...................... 16
Capitalization....................... 17
Dilution............................. 18
Selected Financial Information....... 19
Management's Discussion and
Analysis............................ 20
Business............................. 30
Management........................... 48
Certain Transactions................. 56
Principal Stockholders............... 58
Description of Capital Stock......... 59
Shares Eligible for Future Sale...... 62
Underwriting......................... 63
Legal Matters........................ 65
Experts.............................. 65
Index to Financial Statements........ F-1
</TABLE>
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UNTIL MAY 10, 1999 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
3,000,000 SHARES
[LOGO]
COMMON STOCK
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PROSPECTUS
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HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY
SECURITIES LLC
SUNTRUST EQUITABLE
SECURITIES
April 15, 1999
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