<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-25769
ACCREDO HEALTH, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1642871
---------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1640 CENTURY CENTER PKWY, SUITE 101, MEMPHIS, TN 38134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(901) 385-3688
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NO CHANGE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
<PAGE> 2
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT OCTOBER 29, 1999
<S> <C>
COMMON STOCK, $0.01 PAR VALUE................ 9,155,512
NON-VOTING COMMON STOCK, $0.01 PAR VALUE..... 0
----------
TOTAL COMMON STOCK........................... 9,155,512
==========
</TABLE>
<PAGE> 3
ACCREDO HEALTH, INCORPORATED
INDEX
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (unaudited)
For the three months ended September 30, 1998 and 1999
Condensed Consolidated Balance Sheets
June 30, 1999 and September 30, 1999 (unaudited)
Condensed Consolidated Statements of Cash Flows (unaudited)
For the three months ended September 30, 1998 and 1999
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Part II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) Sales of Unregistered Securities
(d) Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Note: Items 1, 3 and 5 of Part II are omitted because they are not
applicable.
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(000'S OMITTED, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
------- --------
<S> <C> <C>
Net patient service revenue $72,684 $ 54,365
Other revenue 3,569 2,733
Equity in net income of joint ventures 618 250
------- --------
Total revenues 76,871 57,348
Cost of services 65,992 48,525
------- --------
Gross profit 10,879 8,823
General & administrative 5,246 3,997
Bad debts 1,363 1,131
Depreciation and amortization 645 986
------- --------
Income from operations 3,625 2,709
Interest expense, net 352 865
------- --------
Income before income taxes 3,273 1,844
Provision for income taxes 1,305 929
------- --------
Net income 1,968 915
Preferred stock dividends -- (510)
------- --------
Net income to common shareholders $ 1,968 $ 405
======= ========
Cash dividends declared on common stock $ -- $ --
======= ========
Basic earnings per common share:
Net income $ 0.22 $ 0.16
Preferred stock dividends -- (0.09)
------- --------
Net income per common share $ 0.22 $ 0.07
======= ========
Diluted earnings per common share:
Net income $ 0.20 $ 0.15
Preferred stock dividends -- (0.08)
------- --------
Net income per common share $ 0.20 $ 0.07
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 5
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(000'S OMITTED, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
---------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,169 $ 5,542
Patient accounts receivable, less allowance for
doubtful accounts of $5,558 at September 30, 1999
and $5,300 at June 30, 1999 52,866 54,816
Due from affiliates 2,275 2,105
Other accounts receivable 6,027 5,856
Inventories 21,997 19,927
Prepaids and other current assets 371 359
Deferred income taxes 1,993 1,554
-------- --------
Total current assets 90,698 90,159
Property and equipment, net 3,285 3,025
Other assets:
Joint venture investments 4,033 3,415
Goodwill and other intangible assets, net 49,696 50,147
-------- --------
Total assets $147,712 $146,746
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 53,330 $ 56,029
Accrued expenses 4,606 4,831
Income taxes payable 1,743 393
-------- --------
Total current liabilities 59,679 61,253
Long-term notes payable 20,500 20,500
Deferred income taxes 908 866
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 at
September 30, 1999; 1,100,000
shares issued and outstanding at June 30, 1999 - 11
Common Stock, $.01 par value; 30,000,000 shares authorized;
9,154,887 and 7,977,087 shares issued and outstanding at
September 30, 1999 and June 30, 1999, respectively 92 80
Additional paid-in capital 63,896 63,367
Retained earnings 2,637 669
-------- --------
Total stockholders' equity 66,625 64,127
-------- --------
Total liabilities and stockholders' equity $147,712 $146,746
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 6
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000'S OMITTED)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,968 $ 915
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 645 986
Original issue discount amortization -- 59
Provision for losses on accounts receivable 1,363 1,131
Deferred income tax benefit (413) (765)
Compensation resulting from stock transactions 46 46
Changes in operating assets and liabilities:
Patient receivables and other 416 (10,099)
Due from affiliates (170) (61)
Inventories (2,070) (2,816)
Prepaids and other current assets (12) (83)
Recoverable income taxes -- 151
Accounts payable and accrued expenses (2,924) 9,125
Income taxes payable 1,350 1,482
------- --------
Net cash provided by operating activities 199 71
INVESTING ACTIVITIES:
Purchases of property and equipment (455) (200)
Change in joint venture investments, net (618) (5)
------- --------
Net cash used in investing activities (1,073) (205)
FINANCING ACTIVITIES:
Issuance of common stock 501 207
------- --------
Net cash provided by financing activities 501 207
------- --------
Increase (decrease) in cash and cash equivalents (373) 73
Cash and cash equivalents at beginning of period 5,542 5,087
------- --------
Cash and cash equivalents at end of period $ 5,169 $ 5,160
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary to
present fairly the condensed consolidated financial position, results of
operations and cash flows of Accredo Health, Incorporated (the "Company" or
"Accredo") have been included. Operating results for the three-month period
ended September 30, 1999, are not necessarily indicative of the results that may
be expected for the fiscal year ended June 30, 2000.
The balance sheet at June 30, 1999 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended June 30, 1999.
2. ACQUISITION
On October 20, 1999, the Company acquired the majority of the
operating assets of the specialty pharmacy businesses operated by certain
affiliates of Home Medical of America, Inc., of Cherry Hill, New Jersey ("HMA").
The assets acquired consist of two pharmacies located in Jacksonville, Florida
and Temecula, California, which are engaged in the pharmaceutical care of
certain chronic, long-term patients, including those requiring growth hormone,
hemophilia and intravenous gammaglobulin products and services.
The purchase price for these assets consists of a cash payment
of $7.7 million, plus a potential earn-out payment of up to $1.2 million if
certain revenue goals are achieved by the Company from this acquisition during
the six-month period beginning November 1, 1999 and ending April 30, 2000. The
Company also paid $500,000 as consideration for an agreement from HMA, SPS and
certain other of their affiliates not to compete for a period of five years. No
indebtedness was assumed with this acquisition.
This transaction will be accounted for using the purchase
method of accounting and the results of operations of these pharmacies will be
included in the consolidated financial statements of the Company subsequent to
the date of acquisition. The excess of the total estimated purchase price,
including estimated acquisition costs of $100,000, over the fair market value of
the net assets acquired of approximately $234,000, will be allocated to goodwill
and other identifiable intangible assets and amortized using the straight-line
method over their estimated useful lives. The $500,000 payment for the
non-compete agreement will be amortized using the straight-line method over its
five year life. The results of operations of these pharmacies would not have
been material to the results of the Company for the three months ended September
30, 1999 or 1998.
3. INVESTMENT IN JOINT VENTURE
On October 1, 1999 the Company entered into a joint venture
agreement with Children's National Medical Center in Washington, DC, to market,
sell, provide and distribute Synagis(R) and growth hormone and related services
and supplies. The term of the joint venture is for a period of five years unless
terminated at an earlier date pursuant to the terms of the agreement. Both
companies contributed $50,000 in capital to the joint venture and will share
equally in the assets, liabilities, profits and losses.
In conjunction with the formation of this joint venture, the
Company also entered into a management, service and sales agreement with the
joint venture, whereby the Company will provide specialty pharmacy and
management services to the
<PAGE> 8
joint venture in exchange for a monthly management fee and the reimbursement of
certain expenses. The Company previously had a direct management agreement
relationship with an affiliate of Children's National Medical Center.
4. COMMITMENTS
In October 1999, the Company entered into a six year lease
agreement with its current landlord for approximately 30,570 square feet of
additional office and warehouse space in Memphis, Tennessee, and a land lease
for an expanded parking lot adjacent to the office and warehouse space. In
conjunction with the acquisition of the two pharmacy locations in Florida and
California discussed in Note 2, the Company also assumed the leases for these
pharmacy locations.
Revised future minimum payments, by fiscal year and in the
aggregate, under non-cancelable operating leases with initial terms of one year
or more consist of the following after taking into account these most recent
lease obligations (in thousands):
<TABLE>
<S> <C>
2000 $ 721
2001 574
2002 575
2003 545
2004 225
Thereafter 236
-------
$ 2,876
=======
</TABLE>
5. STOCKHOLDERS' EQUITY
During the quarter ended September 30, 1999, the Company's
largest shareholder converted 1,100,000 shares of the Company's outstanding
Non-voting Common Stock to 1,100,000 shares of voting Common Stock.
During the quarter ended September 30, 1999, employees
exercised stock options to acquire 77,800 shares for exercise prices ranging
between $3.00 and $6.00 per share.
<PAGE> 9
6. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except share data):
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998
-------------------------------
<S> <C> <C>
Numerator for basic and diluted income per
share to common stockholders:
Net income $ 1,968 $ 915
Preferred stock dividends -- (510)
---------- -------------
Net income to common stockholders $ 1,968 $ 405
========== =============
Denominator:
Denominator for basic income per
share to common stockholders -
weighted-average shares 9,100,227 5,616,098
Effect of dilutive stock options 690,255 592,745
---------- -------------
Denominator for diluted income per
share to common stockholders -
adjusted weighted-average shares 9,790,482 6,208,843
========== =============
Basic earnings per common share:
Net income $ 0.22 $ 0.16
Preferred stock dividends -- (0.09)
---------- -------------
Net income per common share $ 0.22 $ 0.07
========== =============
Diluted earnings per common share:
Net income $ 0.20 $ 0.15
Preferred stock dividends -- (0.08)
---------- -------------
Net income per common share $ 0.20 $ 0.07
========== =============
</TABLE>
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
Some of the information in this quarterly report contains
forward-looking statements that involve substantial risks and uncertainties. You
can identify these statements by forward-looking words such as "may," "will,"
"expect," "anticipate," "believe," "intend," "estimate" and "continue" or
similar words. You should read statements that contain these words carefully for
the following reasons:
- the statements discuss our future expectations;
- the statements contain projections of our future earnings or of our
financial condition; and
- the statements state other "forward-looking" information.
There may be events in the future that we are not accurately able to
predict or over which we have no control. The risk factors discussed below, as
well as any cautionary language in this quarterly report, provide examples of
risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Examples of these risks, uncertainties and events include the availability of
new drugs, competitive or regulatory factors affecting the drugs we handle or
their manufacturers, the demand for Accredo's services, our ability to expand
through joint ventures and acquisitions, our ability to maintain existing
pricing arrangements with suppliers, the impact of government regulation, the
impact of year 2000 issues, our need for additional capital, the seasonality of
our operations and our ability to implement our strategies and objectives.
Investors in our common stock should be aware that the occurrence of
any of the events described in the risk factors discussed elsewhere in this
quarterly report and other events that we have not predicted or assessed could
have a material adverse effect on our earnings, financial condition and
business. In such case, the trading price of our common stock could decline and
you may lose all or part of your investment.
RESULTS OF OPERATIONS
REVENUES
Total revenues increased from $57.3 million to $76.9 million, or 34%, from the
three-month period ended September 30, 1998 to the three-month period ended
September 30, 1999. Approximately $12.9 million, or 66%, of this increase was
attributable to the increased sales volume of Avonex(R). Cerezyme(R) and
Ceredase(R) drug sales increased approximately $2.6 million, or 13% of the
revenue increase, as a result of increased patient volume. Approximately $1.4
million, or 7%, of this increase was attributable to the increased hemophilia
revenue associated with increased patient volume. Approximately $700,000, or 4%,
of the increase was attributable to the sale of the new drug Remicade(TM) for
the treatment of Crohn's Disease. The remaining $2.0 million, or 10%, of the
revenue increase was primarily attributable to increased sales of growth
hormone, 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 and an increase of approximately $368,000 from
the Company's equity in net income of joint ventures.
COST OF SERVICES
Cost of services increased from $48.5 million to $66.0 million, or 36%, from the
three-month period ended September 30, 1998 to the three-month period ended
September 30, 1999. This increase is commensurate with the increase in revenues
discussed above. As a percentage of revenues, cost of services increased from
84.6% to 85.8% from the three-month period ended September 30, 1998 to the
three-month period ended September 30, 1999. This increase is primarily a result
of an increase in certain hemophilia factor acquisition costs without an
associated increase in selling price during the three-month period ended
September 30, 1999, in addition to changes in the revenue mix by therapy type.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from $4.0 million to $5.2 million,
or 30%, from the three-month period ended September 30, 1998 to the three-month
period ended September 30, 1999. This increase was primarily the result of
increased salaries and benefits associated with the expansion of the Company's
reimbursement, sales, marketing, administrative and support staffs due to
existing product line revenue growth and new product line launches. General and
administrative expenses represented 7.0% and 6.8% of revenues for the three
months ended September 30, 1998 and 1999, respectively.
<PAGE> 11
BAD DEBTS
Bad debts increased from $1,131,000 to $1,363,000, or 21%, from the three-month
period ended September 30, 1998 to the three-month period ended September 30,
1999. Bad debt expense was 2.0% and 1.8% of revenues for the three months ended
September 30, 1998 and 1999, respectively.
DEPRECIATION AND AMORTIZATION
Depreciation expense increased from $128,000 to $195,000 from the three-month
period ended September 30, 1998 to the three-month period ended September 30,
1999. The increase was a result of purchases of property and equipment
associated with the Company's revenue growth and expansion of its leasehold
facility improvements amounting to $1.5 million in fiscal year 1999 and $455,000
in the three-month period ended September 30, 1999. Amortization expense
associated with goodwill and other intangible assets decreased from $858,000 to
$450,000 from the three-month period ended September 30, 1998 to the three-month
period ended September 30, 1999 due to certain contract intangibles and a
non-compete covenant that were fully amortized by the end of fiscal year 1999.
INTEREST EXPENSE, NET
Interest expense, net, decreased from $865,000 to $352,000 from the three-month
period ended September 30, 1998 to the three-month period ended September 30,
1999 due to lower interest and margin rates payable under the Company's existing
revolving line of credit agreement with its lenders, lower fixed interest rate
payments associated with its interest rate swap agreement, and a reduced level
of debt resulting from the early payoff of a significant portion of the
Company's debt with a portion of the proceeds from the initial public offering
completed in April 1999. The Company generated interest income of approximately
$44,000 and $55,000 in the three months ended September 30, 1998 and 1999,
respectively.
INCOME TAX EXPENSE
The Company's effective tax rate decreased from 50.4% to 39.9% from the
three-month period ended September 30, 1998 to the three-month period ended
September 30, 1999 as a result of the increase in income before taxes while
nondeductible amortization expense decreased. The difference between the
recognized tax rate and the statutory tax rate was primarily attributed to
approximately $615,000 and $205,000 of nondeductible amortization expense in the
three months ended September 30, 1998 and 1999, respectively, and state income
taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999 and June 30, 1999, the Company had working capital of
$31.0 million and $28.9 million, respectively. The Company's net cash provided
by operations for the three-month period ended September 30, 1999 was
approximately $199,000, while approximately $71,000 was provided by operations
for the three-month period ended September 30, 1998. These increases are
primarily due to the Company's continued growth in income and the timing of the
collection of receivables, inventory purchases and payables. In regards to the
timing of the collection of receivables, in particular, the Company is owed
approximately $2.0 million as of September 30, 1999 from one of its joint
venture partners that has been outstanding for more than 180 days. Although the
Company expects to be able to collect these receivables, and has collected
approximately $700,000 since June 30, 1999, the length of time these receivables
have been outstanding has reduced the amount of cash that would have otherwise
been provided by operations during the current period.
Net cash used by investing activities was $1,073,000 and $205,000 for the three
months ended September 30, 1999 and 1998, respectively. The increase in cash
used by investing activities is due to an increase in the purchase of property
and equipment as a result of the Company's continued growth and an increase in
the amount of undistributed earnings from the Company's joint ventures.
Purchases of property and equipment amounted to $455,000 and $200,000 for the
three months ended September 30, 1999 and 1998, respectively. There were no cash
distributions from the joint ventures during the three-month period ended
September 30, 1999 and $245,000 of cash distributions during the three-month
period ended September 30, 1998, while the Company's associated equity in the
net income of these joint ventures was approximately $618,000 and $250,000,
respectively.
Net cash provided by financing activities was $501,000 and $207,000 for the
three months ended September 30, 1999 and 1998, respectively, from the issuance
of its common stock. The cash provided from stock issued during the three months
ended September 30, 1999 was the result of stock option exercises and includes a
tax benefit of $249,000 associated with the disqualifying disposition of a
portion of those shares.
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, 2000 will consist primarily of
additional leasehold
<PAGE> 12
improvements and equipment for the continuing expansion of the Company's
leasehold to accommodate personnel necessary to manage the Company's growth. The
Company expects the cost of its capital expenditures in fiscal year 2000 to be
approximately $3.1 million, exclusive of any acquisitions of businesses, and
expects to fund these expenditures through cash provided by operating activities
and/or borrowings under the revolving credit agreement with its bank.
The Company has negotiated a lease for an additional 30,570 square feet of
office and warehouse space and for additional parking space. The term of the
lease for the office and warehouse space is six years with lease payments
amounting to approximately $122,000 per year in years one through four and
approximately $138,000 per year in years five and six. The lease for the
additional parking space is also for a period of six years with lease payments
amounting to approximately $29,000 per year. Both leases have a five-year
extension option.
On October 20, 1999, the Company acquired certain assets of the specialty
pharmacy businesses operated by certain affiliates of Home Medical of America,
Inc. The assets acquired include two pharmacies located in Jacksonville, Florida
and Temecula, California, which are engaged in the pharmaceutical care of
certain chronic, long-term patients including those requiring growth hormone,
hemophilia and intravenous gammaglobulin products and services. The purchase
price for these assets consists of a cash payment of $7.7 million, plus a
potential earn-out payment of up to $1.2 million if certain revenue goals are
achieved by the Company from this acquisition during the six-month period
beginning November 1, 1999 and ending April 30, 2000. The Company also paid
$500,000 as consideration for an agreement from the seller not to compete for a
period of five years. No indebtedness was assumed with this acquisition.
The Company has a $60.0 million revolving credit facility under the terms of its
existing Credit Agreement. The Credit Agreement contains a $20.0 million
sub-limit 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 Inter Bank Offered Rate ("LIBOR") for one, two, three or six
months (as selected by the Company), plus in each case, a margin depending on
the amount of the Company's debt to cash flow ratio as defined by the Credit
Agreement and measured at the end of each quarter for prospective periods.
During the three-month period ended September 30, 1999, the Company paid a
margin rate of .75%.
The Company's obligations under the Credit Agreement are secured by a lien on
substantially all of the assets of the Company, including a pledge of all of the
common stock of each direct or indirect wholly owned subsidiary of the Company.
Each wholly owned subsidiary has also guaranteed all of the obligations of the
Company under the Credit Agreement, which guarantee obligations are secured by a
lien on substantially all of the assets of each such subsidiary.
The Credit Agreement contains operating and financial covenants, including
requirements to maintain a certain debt to equity ratio and certain leverage and
debt coverage ratios. In addition, the Credit Agreement includes customary
affirmative and negative covenants, including covenants relating to transactions
with affiliates, use of proceeds, restrictions on subsidiaries, limitations on
indebtedness, limitations on liens, limitations on capital expenditures,
limitations on certain mergers, acquisitions and 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 bank loan 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 September 30,
1999, CHS had borrowed $1.5 million against the line of credit.
Interest rate swap agreements are used to manage the Company's interest rate
expense under the Credit Agreement. The Company has effectively converted, for
the period through October 31, 2001, $25.0 million of floating-rate borrowings
to fixed rate borrowings. The Company has a 5.5% fixed interest rate (exclusive
of the margin rate) under its current interest rate swap agreement.
While the Company anticipates its cash from operations, along with the short
term use of the Credit Agreement 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 would be required in the future to
successfully continue any growth that would extend 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.
<PAGE> 13
YEAR 2000 COMPLIANCE
Introduction. The term "year 2000 issue" is a general term used to
describe the various problems that may result from the improper processing of
dates and date-sensitive calculations by computers and other machinery as the
year 2000 is approached and reached. These problems arise from hardware and
software unable to distinguish dates in the "2000's" from dates in the "1900's"
and from other sources such as the use of special codes and conventions in
software that make use of a date field.
The Company's State of Readiness. The Company's efforts in addressing
the year 2000 issue 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; (iii)
evaluating and making necessary modifications to other systems that contain
embedded chips, such as phone systems, which process dates and date sensitive
material.
The Company has completed its 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. Additionally, as
of September 30, 1999, the Company has 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 recently acquired two new pharmacy locations
("Acquired Business"), which the Company has assessed as not presenting a
material year 2000 issue. With the exception of third party payors and suppliers
unique to the Acquired Business, the Company has completed its process of
obtaining written verification from its suppliers, and third party payors, to
determine whether there will be any material interruption in the provision of
pharmaceuticals or receipt of payment resulting from the year 2000 issue. As a
result of the Company's analysis and those written responses received from its
third party payors, the Company believes that there is minimal cash flow risk
associated with the issue of year 2000 compliance of its significant third party
payors, including those payors unique to the Acquired Business. However, the
Company has been unable to assess the year 2000 compliance status of all of its
third party payors. 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. However, the Company does have
contingency plans in place in order to respond to a year 2000 related failure of
a third party payor. Those contingency plans include lines of credit sufficient
to minimize the impact which could result from any disruption in the Company's
cash flow from third party payors. Furthermore, a delay in receiving
pharmaceuticals from certain key biotechnology manufacturers could hinder the
Company's ability to provide services to its customers which could have a
material adverse impact on the Company's business, financial condition and
results of operations.
The Company is aware that certain of its systems, such as phone
systems, facsimile machines, heating and air conditioning, security systems and
other non-data processing oriented systems may include embedded chips which
process dates and date sensitive material. These embedded chips are both
difficult to identify in all instances and difficult to repair; often, total
replacement of the chips is necessary. The inventory and evaluation for year
2000 compliance of Company hardware, telecommunications, and environmental
support systems was completed in the first quarter of fiscal year 1999 and those
systems requiring remediation (repair), rebuilding or replacing (re-engineering)
were identified. As of September 30, 1999, all identified re-engineering,
remediation, and replacement requirements have been completed and tested.
However, failure of the Company to identify or remediate any embedded chips
(either on an individual or an aggregate basis) on which significant business
operations depend, such as phone systems, could have a material adverse impact
on the Company's business, financial condition and results of operations.
Costs to Address the Company's Year 2000 Issues. The Company completed
its year 2000 related software and hardware upgrades prior to September 30,
1999. Although the Company is continuing to monitor its internal systems for
year 2000 compliance, no material additional expenses are anticipated. In the
unlikely event that any additional year 2000 software or
<PAGE> 14
hardware related requirements are identified as part of the Company's ongoing
due diligence process, the Company plans to fund the costs of installing those
year 2000 modifications from cash flows resulting from operations or borrowings
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 maintains an ongoing
process of evaluating potential disruptions or complications that might result
from year 2000 related problems. However, at this time the Company has not
identified any specific business functions that will suffer material disruption
as a result of year 2000 related events. It is possible, however, that the
Company may identify business functions in the future that are specifically at
risk of year 2000 disruption. The absence of any such determination at this
point represents only the Company's current status of evaluating potential year
2000 related problems and facts presently known to the Company, and should not
be construed to mean that there is no risk of year 2000 related disruption.
Moreover, due to the unique and pervasive nature of the year 2000 issue, it is
impracticable to anticipate each of the wide variety of year 2000 events,
particularly outside of the Company, that might arise in a worst case scenario
which might have a material adverse impact on the Company's business, financial
condition and results of operations.
The Company's Contingency Plans. The Company has in place and is
continually updating its contingency plans for significant business risks that
might result from year 2000 related events. To date, the Company has not
identified any specific internal business function that will be materially at
risk of significant year 2000 related disruptions. However, these contingency
plans will be monitored and adjusted as required for any risks identified during
the remainder of this calendar year 1999 and the year 2000.
<PAGE> 15
RISK FACTORS
You should carefully consider the risks we describe below before
investing in Accredo. The risks and uncertainties described below are NOT the
only risks and uncertainties that could develop. Other risks and uncertainties
that we have not predicted or evaluated could also affect our company.
If any of the following risks occur, our earnings, financial condition
or business could be materially harmed, and the trading price of our common
stock could decline, resulting in the loss of all or part of your investment.
OUR BUSINESS IS HIGHLY DEPENDENT ON RELATIONSHIPS WITH A LIMITED NUMBER
OF BIOTECHNOLOGY DRUG SUPPLIERS
The substantial majority of Accredo's revenue and profitability is
derived from our relationships with three biotechnology drug companies, Genzyme
Corporation, Biogen, Inc. and Genentech, Inc. The concentration of our revenue
derived from these relationships is shown in the table below as a percentage of
revenue for the years indicated:
<TABLE>
<CAPTION>
THREE MONTHS FISCAL YEAR ENDED
ENDED ----------------------------------------------------------
SEPTEMBER 30, 1999 JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997
<S> <C> <C> <C> <C>
Genzyme 33% 37% 46% 64%
Biogen 38% 31% 23% 14%
Genentech 4% 5% 6% 9%
</TABLE>
Our agreements with these suppliers are generally short term and
cancelable by either party without cause on 60 to 90 days prior notice. Our
current agreement with Biogen has been extended to November 30, 1999 and renewal
terms are currently under negotiation. These agreements also generally limit our
ability to handle competing drugs during and in some cases after the term of the
agreement, but allow the supplier to distribute through channels other than
Accredo. Further, the pricing and other terms of these relationships are
periodically adjusted. Any termination or adverse adjustment to any of these
relationships could have a material adverse affect on our business, financial
condition and results of operation.
OUR BUSINESS IS FOCUSED ON A LIMITED NUMBER OF DRUGS FOR SPECIFIC
DISEASES
Drugs handled and diseases served. We focus almost exclusively on a
limited number of complex and expensive drugs that serve small patient
populations. The primary diseases treated by the drugs we handle are as follows:
- Gaucher Disease, for which we offer Ceredase(R) and
Cerezyme(R) supplied by Genzyme;
- Multiple Sclerosis, for which we primarily offer Biogen's
Avonex(R) (Interferon Beta-la);
- Growth hormone-related disorders, for which we primarily
offer Protropin(R), Nutropin(R) and Nutropin AQ(R) supplied
by Genentech;
- Hemophilia, for which we offer all currently approved
clotting factor products;
- Crohn's Disease, for which we began offering Remicade(TM)
supplied by Centocor during fiscal year 1999; and
- Respiratory Synctial Virus (RSV) for which we began offering
Synagis supplied by MedImmune during fiscal year 1999.
The concentration of our revenue related to these diseases and the
associated drugs is shown in the table below as a percentage of revenue for the
years indicated:
<TABLE>
<CAPTION>
THREE MONTHS FISCAL YEAR ENDED
ENDED -----------------------------------------------------------
SEPTEMBER 30, 1999 JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997
<S> <C> <C> <C> <C>
Gaucher Disease 33% 37% 46% 64%
Multiple Sclerosis 38% 31% 23% 14%
Hemophilia 20% 21% 23% 9%
Growth Hormone
Disorders 6% 6% 7% 10%
Crohn's Disease 1% 1% N/A N/A
RSV (Seasonal) 0% 1% N/A N/A
</TABLE>
<PAGE> 16
Many factors affect the demand for our services. Reduced demand for our
services could be caused by a number of circumstances, including:
- Patient shift to other available treatments;
- A new treatment that does not require our specialty services;
- The recall of or adverse reaction caused by a drug;
- The expiration or challenge of a drug patent;
- A competing treatment from a new drug or a new use of an
existing drug;
- The loss of a managed care or other payor relationship
covering a number of high revenue patients;
- The cure of a disease we service; or
- The death of a high revenue patient.
Our business could also be adversely affected by the expiration or
challenge to the "orphan drug" status that has been granted by the Food and Drug
Administration to four drugs that we handle. When the FDA grants "orphan drug"
status, it will not approve a second drug for the same treatment for a period of
seven years unless the new drug is physiochemically different or clinically
superior. The "orphan drug" status applicable to drugs handled by Accredo
expires as follows: Nutropin(R) expires November 2000; Cerezyme(R) expires May
2001; Avonex(R) expires May 2003 and Remicade(TM) expires September 2005. The
loss of orphan drug status could result in competitive drugs entering the
market.
Our ability to continue to service Avonex(R) could also be affected by
a pending challenge by Berlex Laboratories, Inc. that Biogen is infringing on a
Berlex patent in the production of Avonex(R). No trial date has been set in this
case.
Due to the small patient populations that use the drugs we handle, our
future growth is highly dependent on expanding our base of drugs. Further, a
loss of patient base or reduction in demand for any reason of the drugs we
currently handle could have a material adverse effect on our business, financial
condition and results of operation.
A DISRUPTION OF OUR RELATIONSHIPS WITH CERTAIN MEDICAL CENTERS COULD
HURT OUR BUSINESS
Accredo has significant relationships with seven medical centers that
involve services primarily related to hemophilia and growth hormone-related
disorders. For the three months ended September 30, 1999 and fiscal years ended
June 30, 1999 and 1998, we received approximately 19%, 23% and 30%,
respectively, of our income before income taxes and extraordinary items from
equity in the net income from our joint ventures related to hemophilia and
growth hormone-related disorders. Specifically, we derived 2%, 5% and 16%,
respectively, from our joint venture with Alternative Care Systems, located in
Dallas, Texas; 2%, 5% and 9%, respectively, from our joint venture with CM
Healthcare Resources, Inc. located in Chicago, Illinois; and 12%, 11% and 0%,
respectively, from our joint ventures with Children's Home Care located in Los
Angeles, California for such periods.
Our agreements with the medical centers are short-term, between one and
five years, and may be cancelled by either party without cause upon notice of
between one and twelve months. Adverse changes in our relationships with those
medical centers could be caused, for example, by:
- Changes caused by consolidation within the hospital industry;
- Changes caused by regulatory uncertainties inherent in the
structure of the relationships; or
- Restrictive changes to regulatory requirements.
Any termination or adverse change of these relationships could have a material
adverse effect on our business, financial condition and results of operations.
<PAGE> 17
OUR BUSINESS IS HIGHLY DEPENDENT ON CONTINUED RESEARCH, DEVELOPMENT AND
PRODUCTION IN THE BIOTECHNOLOGY DRUG INDUSTRY
Our business is highly dependent on continued research, development,
manufacturing and marketing expenditures of biotechnology drug companies, and
the ability of those companies to develop, supply and generate demand for drugs
that are compatible with the services we provide. Our business would be
materially and adversely affected if those companies stopped outsourcing the
services we provide or failed to support existing drugs or develop new drugs.
Our business could also be harmed if the biotechnology drug industry suffers
from unfavorable developments, including:
- Supply shortages;
- Adverse drug reactions;
- Drug recalls;
- Increased competition among biotechnology drug companies;
- An inability of drug companies to finance product development
because of capital shortages;
- A decline in product research, development or marketing;
- A reduction in the retail price of drugs because of
governmental or private market initiatives;
- Changes in the FDA approval process; or
- Governmental or private initiatives that would alter how drug
manufacturers, health care providers or pharmacies promote or
sell products and services.
DECREASES IN PAYMENTS BY THIRD-PARTY PAYORS COULD HURT OUR BUSINESS
Our profitability depends on payment from governmental and
nongovernmental third-party payors, and we could be materially and adversely
affected by trends toward cost containment measures in the health care industry
or by financial difficulties suffered by private payors. Cost containment
measures affect pricing, purchasing and usage patterns in health care. Private
payors, managed care organizations and similar groups also influence decisions
regarding the use of a particular drug treatment and focus on product cost in
light of how the product may impact the overall cost of treatment. Further, some
private payors, including large managed care organizations and some private
physician practices, have recently experienced financial trouble. The ability to
collect from third-party payors also affects Accredo's revenue and
profitability. If the Company is unable to collect from third-party payors, it
could have a material adverse impact on our business and financial condition.
Our dependence on reimbursement from private payors is evident from the
portion of total revenue they constitute. For the three months ended September
30, 1999 and fiscal years ended June 30, 1999, 1998 and 1997, we derived
approximately 82%, 82%, 80% and 83%, respectively, of our gross patient service
revenue from private payors (including self-pay), which included 5%, 6%, 7% and
11%, respectively, from sales to private physician practices whose ultimate
payor is typically Medicare.
CHANGES IN MEDICARE OR MEDICAID COULD HURT OUR BUSINESS
Changes in the Medicare, Medicaid or similar government programs or the
rates paid by those programs for our services may adversely affect our earnings.
We estimate that approximately 18% of our gross patient service revenue for the
three months ended September 30, 1999, 18% of our gross patient service revenue
for the fiscal year ended June 30, 1999, 20% of our gross patient service
revenue for the fiscal year ended June 30, 1998 and 17% of our gross patient
service revenue for the fiscal year ended June 30, 1997 consisted of
reimbursements from federal and state programs, excluding sales to private
physicians whose ultimate payor is typically Medicare. Any reductions in amounts
reimbursable by government programs for our services or changes in regulations
governing such reimbursements could materially and adversely effect our
business, financial condition and results of operations:
OUR QUARTERLY FINANCIAL RESULTS MAY FLUCTUATE SIGNIFICANTLY
Our financial results have historically fluctuated on a quarterly
basis, and this pattern is expected to continue. These quarterly fluctuations
could adversely affect the market price of our common stock and are attributable
to many factors, including:
- Below-expected sales of a new drug;
- Increases in our operating expenses in anticipation of the
launch of a new drug;
- Price and term adjustments with our suppliers;
- Inaccuracies in our estimates of the cost of ongoing
<PAGE> 18
programs;
- The timing and integration of our acquisitions;
- Changes in governmental regulations;
- The annual renewal of deductible and co-payment requirements,
so that patient ordering patterns are affected, causing a
seasonal reduction in revenue from existing drug programs for
our third fiscal quarter;
- Our provision of drugs, now or in the future, to treat
seasonal illnesses such as RSV;
- Physician prescribing patterns; and
- General economic conditions.
- Patient ordering patterns due to Year 2000 concerns could
cause an increase in revenue during our second quarter and a
coinciding decrease in revenue during our third fiscal
quarter.
LIABILITIES AND COSTS MAY ARISE FROM OUR JOINT VENTURES AND
ACQUISITIONS
As part of our growth strategy we continually evaluate joint venture
and acquisition opportunities. Although we cannot predict or provide assurance
that Accredo will complete any future acquisitions or joint ventures, if we do,
Accredo will be exposed to a number of risks, including:
- Difficulty in assimilating the new operations;
- Increased transaction costs;
- Diversion of management's attention from existing operations;
- Dilutive issuances of equity securities that may negatively
impact the market price of our stock;
- Increased debt;
- Increased amortization expense related to goodwill and other
intangible assets that would decrease our earnings.
Accredo may also expose itself to unknown or contingent liabilities
resulting from the pre-acquisition operations of the entities it acquires, such
as liability for failure to comply with health care or reimbursement laws.
Accredo could be exposed to liability for pre-acquisition operations with
respect to the following transactions:
- The purchase in May 1996 of Southern Health Systems, Inc.
Southern Health had four subsidiaries, each of which had prior
operating histories. While Southern Health divested all of its
subsidiaries with unrelated businesses before closing, Accredo
could potentially be held liable for matters relating to the
operations of the divested subsidiaries for periods before the
divestiture.
- The purchase in June 1997 of Hemophilia Health Services, Inc.,
which had an extensive operating history.
- The purchase in November 1998 of a 50% interest in two
California general partnerships.
- The purchase in October 1999 of the assets of pharmacies
in Jacksonville, Florida and Temecula, California.
OUR INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION
The marketing, sale and purchase of drugs and medical supplies is
extensively regulated by federal and state governments, and if we fail or are
accused of failing to comply with laws and regulations, we could suffer a
material adverse effect to our business, financial condition and results of
operations. Our business could also be materially and adversely effected if the
suppliers or clients we work with are accused of violating laws or regulations.
The applicable regulatory framework is complex, and the laws are very broad in
scope. Many of these laws remain open to interpretation, and have not been
addressed by substantive court decisions.
<PAGE> 19
The health care laws and regulations that especially apply to our
activities include:
- The federal "Anti-Kickback Law" prohibits the offer or
solicitation of compensation in return for the referral of
patients covered by almost all governmental programs, or the
arrangement or recommendation of the purchase of any item,
facility or service covered by those programs. The Health
Insurance Portability and Accountability Act of 1996 ("HIPAA")
created new violations for fraudulent activity applicable to
both public and private health care benefit programs and
prohibits inducements to Medicare or Medicaid eligible
patients. The potential sanctions for violations of these laws
range from significant fines, to exclusion from participation
in the Medicare and Medicaid programs, to criminal sanctions.
Although certain "safe harbor" regulations attempt to clarify
when an arrangement may fall outside of the scope of the
Anti-Kickback Law, our business arrangements and the services
we provide may not fit within these exceptions.
- The Ethics in Patient Referrals Act of 1989, as amended,
commonly referred to as the "Stark Law," prohibits physician
referrals to entities with which the physician or their
immediate family member has a "financial relationship." A
violation of the Stark Law is punishable by civil sanctions,
including significant fines and exclusion from participation
in Medicare and Medicaid.
- State laws prohibit the practice of medicine, pharmacy and
nursing without a license. To the extent that we assist
patients and providers with prescribed treatment programs, a
state could consider our activities to constitute the practice
of medicine. If we are found to have violated those laws, we
could face civil and criminal penalties and be required to
reduce, restructure, or even cease our business in that state.
- Federal and state investigations and enforcement actions have
recently begun focusing on the health care industry,
scrutinizing a wide range of items such as joint venture
arrangements, referral and billing practices, product discount
arrangements, home health care services, dissemination of
confidential patient information, clinical drug research
trials and gifts for patients.
- The False Claims Act encourages private individuals to file
suits on behalf of the government, and can result in
significant financial sanctions.
OUR BUSINESS WILL BE HARMED IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR
GROWTH
Our rapid growth over the past three fiscal years has placed a strain
on our resources and if we cannot effectively manage our growth, our business,
financial condition and results of operations could be materially and adversely
affected. We have experienced a large increase in the number of our employees,
the size of our programs and the scope of our operations. If this growth
continues, the strain could cause us to relocate our operations to a new city or
area. Our ability to manage this growth and be successful in the future will
depend partly on our ability to retain skilled employees, enhance our management
team and improve our management information and financial control systems.
<PAGE> 20
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY THE SUBSTANTIAL COMPETITION
WITHIN OUR INDUSTRY.
The specialty pharmacy industry is highly competitive and is continuing
to become more competitive. All of the drugs, supplies and services that we
provide are also available from our competitors. Accredo's current and potential
competitors include:
- Specialty pharmacy divisions of wholesale drug distributors;
- Specialty pharmacy distributors;
- Pharmacy benefit management companies
- Hospital-based pharmacies;
- Retail pharmacies;
- Home infusion therapy companies;
- Comprehensive hemophilia treatment centers; and
- Other alternative site health care providers.
Many of our competitors have substantially greater resources and more
established operations and infrastructure than Accredo. We are particularly at
risk for one of our suppliers deciding to pursue its own distribution and
services. Some of our competitors, such as hospitals and hemophilia treatment
centers, have the advantage of federally mandated drug discounts that are not
available to Accredo, and which are proposed to be available to even more
potentially competing centers. A significant factor in effective competition
will be an ability to maintain and expand relationships with managed care
companies, pharmacy benefit managers and other payors who can effectively
determine the pharmacy source for their enrollees.
OUR PRODUCT DELIVERY REQUIREMENTS DEPEND HEAVILY ON AVAILABLE SHIPPING
SERVICES APPROPRIATE TO OUR PRODUCTS
Since almost all of our revenues result from the sale of drugs we
deliver to our patients, we depend heavily on our shipping services for
efficient, cost effective delivery of our product. There are many risks
associated with this dependence, all of which could materially and adversely
affect our business. Those risks include:
- Any significant increase in shipping rates;
- Strikes or other service interruptions by our primary
carrier, Federal Express, or by another carrier that could
affect Federal Express; or
- Product spoilage during shipment, since our drugs are
expensive and often require special handling, such as
refrigeration. We do not maintain insurance against product
spoilage during shipment and the loss of even small shipments
could represent a significant cost.
WE RELY ON A FEW KEY PEOPLE
We depend on a number of our key executives, and the loss of their
services could cause a material adverse effect to our company. We do not
maintain "key person" life insurance policies on any of those executives. As a
result, Accredo is not insured against the losses resulting from the death of
its key executives. Further, we must be able to attract and retain other
qualified, essential employees for our technical operating and professional
staff, such as pharmacists.
WE MAY NEED ADDITIONAL CAPITAL TO FINANCE OUR GROWTH AND CAPITAL
REQUIREMENTS
In order to implement our growth strategy, we will need substantial
capital resources and will incur, from time to time, additional short- and
long-term indebtedness, the terms of which will depend on market and other
conditions. We cannot be certain that existing or additional financing will be
available to us on acceptable terms, if at all. As a result, we could be unable
to fully pursue our growth strategy. Further, additional financing may involve
the issuance of equity securities that would reduce the percentage ownership of
our then current stockholders.
<PAGE> 21
WE COULD BE ADVERSELY AFFECTED BY AN IMPAIRMENT OF THE SIGNIFICANT
AMOUNT OF GOODWILL ON OUR FINANCIAL STATEMENTS
The formation of Accredo and our acquisitions of Southern Health
Systems and Hemophilia Health Services resulted in the recording of a
significant amount of goodwill on our financial statements. The goodwill was
recorded because the value of the tangible and intangible assets owned by those
companies at the time they were acquired was less than the purchase price. We
have determined that the goodwill recorded as a result of those acquisitions
will benefit Accredo for a period of no less than 40 years and, as a result, we
amortize this goodwill evenly over a 40-year period. There can be no assurance
that Accredo will realize the full value of this goodwill. We evaluate on an
on-going basis whether events and circumstances indicate that all or some of the
carrying value of goodwill is no longer recoverable, in which case we would
write off the unrecoverable goodwill in a charge to our earnings.
If the amortization period for a material portion of goodwill is overly
long, it causes an overstatement of earnings in periods immediately following
the transaction in which the goodwill was recorded. In later periods, it causes
earnings to be understated because of an amortization charge for an asset that
no longer provides a corresponding benefit. Earnings in later periods could also
be significantly affected if the remaining balance of goodwill is impaired and
written off as a charge against earnings. We are not presently aware of any
persuasive evidence that any material portion of our goodwill will be impaired
and written off against earnings. As of September 30, 1999, Accredo had
goodwill, net of accumulated amortization, of approximately $48.0 million, or
33% of total assets and 72% of stockholders' equity.
Since our growth strategy may involve the acquisition of other
companies, we may record additional goodwill in the future. The amortization and
possible write-off of this goodwill could negatively impact our future earnings.
Also, in future acquisitions we may be required to allocate a portion of the
purchase price to the value of non-competition agreements, patient base and
contracts that are acquired. The value of any amounts allocated to these items
could be amortized over a period much shorter than 40 years. As a result, our
earnings and potentially our stock price could be negatively impacted.
THE PRICE OF OUR STOCK COULD BE VOLATILE AND SUBJECT TO SUBSTANTIAL
FLUCTUATIONS
Our common stock is traded on the Nasdaq National Market. Since our
stock has only been publicly traded for a short time, an active trading market
for the stock may not develop or be maintained. Also, the market price of our
common stock could fluctuate substantially based on a variety of factors,
including the following:
- Future announcements concerning us, our competitors, the drug
manufacturers with whom we have relationships or the
health care market;
- Changes in government regulations;
- Changes in earnings estimates by analysts; and
- Changes in operating results from quarter to quarter.
Furthermore, stock prices for many companies fluctuate widely for
reasons that may be unrelated to their operating results. These fluctuations,
coupled with changes in demand or reimbursement levels for our services and
general economic, political and market conditions, may adversely affect the
market price of our common stock.
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE THE PRICE OF OUR SHARES TO
DECLINE
Sales of substantial amounts of our common stock in the public market,
or the belief those sales might occur, could cause the price of our stock to
decline. As of October 29, 1999, we have outstanding 9,155,512 shares of common
stock, 3,450,000 of which were sold in our initial public offering in April 1999
and are freely tradable.
Subject to certain volume and other limitations of Rule 144, holders of
5,627,087 restricted shares of common stock are eligible to sell their shares to
the public now that the expiration of a "lock-up" period of 180 days following
April 15, 1999 ( the effective date of the registration statement relating to
our initial public offering ), has occurred. These holders also have contractual
rights to have their shares registered for resale free of any limitations
imposed by Rule 144. If these holders cause a large number of shares to be sold
in the public market, the market for the common stock could be adversely
affected.
In addition, as of October 29, 1999, 1,519,075 shares of Accredo's
registered common stock have been reserved for future stock awards under Company
stock plans, and for issuance upon the exercise of outstanding awards. As of
October 29, 1999, options to purchase 847,701 of these registered shares have
been granted and not yet exercised. Those shares are freely tradable
<PAGE> 22
upon exercise, except to the extent that the holders are deemed to be affiliates
of Accredo, in which case the transferability of such shares will be subject to
the volume limitations of Rule 144.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS COULD INHIBIT A TAKEOVER OF
ACCREDO, RESULTING IN A DECLINE IN THE MARKET PRICE FOR THE COMMON STOCK
Certain provisions of our Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws could make it more difficult for a
third party to acquire control of Accredo, or could discourage a third party
from attempting to acquire our company. These provisions might limit the price
that investors would pay in the future for shares of our common stock. Examples
of these provisions include:
- The classification of our Board of Directors into three
classes;
- Blank check preferred stock that may be issued by our Board of
Directors, without stockholder approval, containing
preferences or rights objectionable to an acquiror;
- Restrictions on calling special meetings at which an
acquisition or change in control might be brought to a vote
of the stockholders;
- The right to impose procedural and other requirements that
could make it more difficult for stockholders to effect
certain corporate actions.
We are subject to a provision of the Delaware General Corporation Law
(Section 203), that restricts certain business combinations with an "interested
stockholder" and could delay, defer or prevent a change in control of Accredo.
<PAGE> 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company uses derivative financial instruments to manage its exposure to
rising interest rates on its variable-rate debt, primarily by entering into
variable-to-fixed interest rate swaps. Since the Company has fixed its interest
rate through October 31, 2001 on $25.0 million of its revolving credit facility
through such a financial instrument, the Company would not benefit from any
decrease in interest rates on this portion of its credit facility. Accordingly,
a 100 basis point decrease in interest rates along the entire yield curve would
not increase pre-tax income by $62,500 for the three months ended September 30,
1999 as would be expected without this financial instrument. However, a 100
point increase in interest rates along the entire yield curve would also not
decrease pre-tax income by $62,500 for the same period as a result of using this
derivative financial instrument. Actual changes in rates may differ from the
hypothetical assumptions used in computing this exposure.
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) Sales of Unregistered Securities
During the quarter, the Company's largest shareholder, Welsh, Carson,
Anderson & Stowe VII, L. P., exchanged all of the outstanding shares of the
Company's unregistered, "restricted" Non-Voting Common Stock that it owned
(1,100,000 shares) for 1,100,000 shares of the Company's unregistered,
"restricted" Common Stock.
(d) Use of Proceeds
The Company's Registration Statement on Form S-1 (File No 333-62769)
was declared effective on April 15, 1999. There has been no change in the Use of
Proceeds since that reported in the Company's Form 10-K for the year ended June
30, 1999.
<PAGE> 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<S> <C>
Exhibit 10.1 Amendment No. 3 dated October 14, 1999 to Loan and
Security Agreement as amended on June 5, 1997 among
Accredo Health, Incorporated and its Subsidiaries and
Bank of America, N.A., First Tennessee Bank National
Association and Brown Brothers Harriman & Co. and
Bank of America, N.A. as Agent
Exhibit 27 Financial Data Schedule (for SEC use only)
(filed herewith)
</TABLE>
(b) Reports on Form 8-K
None.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 15, 1999 Accredo Health, Incorporated
BY: /s/ David D. Stevens
---------------------
David D. Stevens
Chairman of the Board and
Chief Executive Officer
/s/ Joel R. Kimbrough
---------------------
Joel R. Kimbrough
Senior Vice President, Chief
Financial Officer and Treasurer
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NO. 3
DATED AS OF OCTOBER 14, 1999
TO
LOAN AND SECURITY AGREEMENT
AS AMENDED
DATED AS OF JUNE 5, 1997
AMONG
ACCREDO HEALTH, INCORPORATED AND ITS SUBSIDIARIES
AND
BANK OF AMERICA, N.A.,
FIRST TENNESSEE BANK NATIONAL ASSOCIATION
AND
BROWN BROTHERS HARRIMAN & CO.
AND
BANK OF AMERICA, N.A., AS AGENT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Definitions..............................................................1
2. Amendments to Agreement..................................................1
3. Representations and Warranties...........................................2
3.1. Incorporation...................................................2
3.2. Due Authorization, No Conflicts, Etc............................2
3.3. Due Execution, Etc..............................................2
4. Conditions Precedent.....................................................3
4.1. Conditions Precedent to Effectiveness of Amendment No. 3........3
5. Effectiveness of Amendment No. 3.........................................4
6. Closing..................................................................4
7. Governing Law, Etc.......................................................4
8. Section Titles and Table of Contents.....................................4
9. Waiver of Jury Trial.....................................................4
10. Counterparts.............................................................4
11. Agreement to Remain in Effect............................................5
</TABLE>
<PAGE> 3
AMENDMENT NO. 3 dated as of October 14, 1999 under and to that
certain Loan and Security Agreement dated as of June 5, 1997 as amended by
Amendment No. 1 dated August 28, 1998 and further amended by Amendment No. 2
dated March 1, 1999 (collectively, the "Agreement"), among Accredo Health,
Incorporated (formerly Nova Holdings, Inc.), a Delaware corporation (the
"Borrower"); the Guarantors, jointly and severally; each of the undersigned
Banks (in such capacity, the "Banks"), and Bank of America, N.A. (successor to
NationsBank, N.A.), as Agent for the Banks (in such capacity, the "Agent").
W I T N E S S E T H :
WHEREAS, the Borrower, the Guarantors, the Banks and the Agent
are parties to the Agreement; and
WHEREAS, Nova Factor, Inc., a subsidiary of Southern Health
Systems, Inc. which is itself a subsidiary of Accredo Health, Incorporated, has
formed a new subsidiary, being a Tennessee corporation known as AHI Pharmacies,
Inc.; and
WHEREAS, the formation of such additional subsidiary requires
the consent of the Banks, which consent the Banks hereby grant subject to the
conditions and provisions of this Amendment No. 3 being satisfied as hereinafter
set forth;
NOW THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements set forth herein, and for other good and
valuable consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. All capitalized terms used in this
Amendment No. 3 which are not otherwise defined herein shall have the respective
meanings ascribed thereto in the Agreement.
2. AMENDMENTS TO AGREEMENT.
2.1. Section I of the Agreement, DEFINITIONS, is
hereby amended by adding thereto the following new definitions as follows:
"AMENDMENT NO. 3 EFFECTIVE DATE" has the meaning
specified in Section 5 of this Amendment No. 3.
In addition to the foregoing new definition, the following definition is hereby
amended:
"Guarantor" is hereby amended to replace the period after
subparagraph (C)
<PAGE> 4
with a comma, and to add a subparagraph (D) as follows:
"(D) AHI Pharmacies, Inc., a Tennessee corporation".
2.2. AHI Pharmacies, Inc., a Tennessee
corporation, hereby agrees to become a party to the Agreement as a Guarantor
thereunder, and hereby grants and confirms the grant of the security interest
contained therein.
3. REPRESENTATIONS AND WARRANTIES. To induce the Banks
and the Agent to enter into this Amendment No. 3, Borrower and Guarantors
jointly and severally represent and warrant to the Banks and the Agent as
follows:
3.1. INCORPORATION. Accredo Health, Incorporated
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, and is qualified to transact business in the
State of Tennessee; Nova Factor, Inc., Southern Health Systems, Inc., Hemophilia
Health Services (successor to Horizon Health Systems, Inc.) and AHI Pharmacies,
Inc. are corporations duly organized, validly existing and in good standing
under the laws of the State of Tennessee; each of the foregoing corporations has
the lawful power to own its properties and to engage in the business it now
conducts, and each is duly qualified and in good standing as a foreign
corporation in the jurisdictions wherein the nature of the business transacted
by it or property owned by it is both material and makes qualification
necessary; Accredo Health, Incorporated has its chief executive office and
principal place of business in Memphis, Tennessee, and each of the other
corporations has its chief executive office and principal place of business
located in either Nashville, Tennessee, or Memphis, Tennessee.
3.2. DUE AUTHORIZATION, NO CONFLICTS, ETC. The
execution, delivery and performance by the Borrower and Guarantors of this
Amendment No. 3 and any and all other agreements, instruments and documents to
be executed and/or delivered by the Borrower or any Guarantor pursuant hereto or
in connection herewith, and the consummation by Borrower and Guarantors of the
transactions contemplated hereby or thereby: (a) are within the corporate powers
of each; (b) have been duly authorized by all necessary corporate action,
including without limitation, the consent of stockholders where required; (c) do
not and will not (i) contravene the respective certificate of incorporation or
by-laws or other comparable governing documents of Borrower or any Guarantor,
(ii) violate any Laws, or any order or decree of any court or governmental
authority, or (iii) conflict with or result in the breach of, or constitute a
default under, or result in the termination of, any material contractual
obligation of Borrower or any Guarantor, and (d) do not require the consent,
authorization by, or approval of, or notice to, or filing or registration with,
any governmental authority or any other Person other than those which have been
obtained and copies of which have been delivered to the Agent pursuant to
Subsection 4.1(a)(ii) hereof, each of which is in full force and effect.
2
<PAGE> 5
3.3. DUE EXECUTION, ETC. This Amendment No. 3 and
each of the other agreements, instruments and documents to be executed and/or
delivered by Borrower or any Guarantor pursuant hereto or in connection herewith
(a) has been duly executed and delivered, and (b) constitutes the legal, valid
and binding obligation of each, enforceable against it in accordance with its
terms, subject however to state and federal bankruptcy, insolvency,
reorganization and other laws and general principles of equity affecting
enforcement of the rights of creditors generally.
4. CONDITIONS PRECEDENT. The effectiveness of this
Amendment No. 3 is subject to the fulfillment of the following conditions
precedent on or prior to the Amendment No. 3 Effective Date (as hereinafter
defined in Section 5 hereof):
4.1. CONDITIONS PRECEDENT TO EFFECTIVENESS OF
AMENDMENT NO. 3. The Agent shall have received, on or prior to the Amendment No.
3 Effective Date, the following, each dated on or prior to the Amendment No. 3
Effective Date unless otherwise indicated, in form and substance satisfactory to
the Agent and in sufficient copies for each Bank:
(a) Certified copies of (i) the
resolutions of the Board of Directors of Borrower and each Guarantor approving
this Amendment No. 3 and each other agreement, instrument or document to be
executed by them pursuant hereto or as contemplated hereby, and (ii) all
documents evidencing other necessary corporate action and required governmental
and third party approvals, licenses and consents with respect to this Amendment
No. 3 and the transactions contemplated hereby.
(b) A certificate of the Secretary or
an Assistant Secretary of Borrower and each Guarantor certifying the names and
true signatures of the officers of Borrower and each Guarantor who have been
authorized to execute on behalf of Borrower and such Guarantor this Amendment
No. 3 and any other agreement, instrument or document executed or to be executed
by Borrower and any Guarantor in connection herewith.
(c) A certificate dated the Amendment
No. 3 Effective Date signed by the President or any Vice-President of Borrower,
to the following effect:
(i) The representations and warranties
of the Borrower contained in Sections 3.1, 3.2 and 3.3 of this
Amendment No. 3 are true and correct on and as of such date as
though made on and as of such date;
(ii) No Default or Event of Default has
occurred and is continuing, and no Default or Event of Default
would result from the execution and delivery of this Amendment
No. 3 or the other agreements, instruments and documents
contemplated hereby; and
3
<PAGE> 6
(iii) The Borrower has paid or agreed to
pay all amounts payable by it pursuant to the Agreement as
amended hereby (including, without limitation, all legal fees
and expenses of Banks' counsel incurred in connection
herewith) to the extent then due and payable.
(d) Original Guaranty and Suretyship
Agreements duly executed by AHI Pharmacies, Inc. in the form attached hereto as
EXHIBIT F-1.
(e) Such UCC financing statements and
amendments thereto (including to pay additional Tennessee Privilege Taxes) as
may be required by the Banks.
(f) Original Stock Pledge Agreement
duly executed by Nova Factor, Inc. in the form attached hereto as Exhibit E-1
together with the original of all outstanding stock certificates held by Nova
Factor, Inc. in AHI Pharmacies, Inc., together with such blank stock powers as
may be required by the Agent.
5. EFFECTIVENESS OF AMENDMENT NO. 3. This Amendment No.
3 and the Exhibits attached hereto shall become effective at such time as (a)
each of the conditions precedent set forth in Section 4.1 hereof shall have been
satisfied, and (b) counterparts of this Amendment No. 3, executed and delivered
by the Borrower, the Guarantors, the Banks and the Agent shall have been
received by the Agent (or, alternatively, confirmation of the execution hereof
by such parties shall have been received by the Agent). The date upon which the
conditions described in clauses (a) and (b) of the foregoing sentence shall have
been fulfilled is referred to herein as the "Amendment No. 3 Effective Date".
6. CLOSING. The Closing under this Amendment No. 3 shall
occur on the Amendment Effective Date at the offices of Boult, Cummings, Conners
& Berry, PLC, 414 Union Street, Nashville, Tennessee 37219, or such other
location as the parties may agree.
7. GOVERNING LAW, ETC. This Amendment No. 3 shall be
governed by, and construed in accordance with, the laws of the State of
Tennessee as provided in Section 10.9 of the Agreement, which Section is
incorporated herein by reference and made a part hereof as though set forth in
full herein.
8. SECTION TITLES AND TABLE OF CONTENTS. The Section
Titles and Table of Contents contained in this Amendment No. 3 are and shall be
without substantive meaning or content of any kind whatsoever and are not a
part of the agreement among the parties hereto.
9. WAIVER OF JURY TRIAL. EACH PARTY HERETO, INCLUDING
THE BORROWER, EACH SUBSIDIARY, THE BANKS, AND THE AGENT, HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE (TO THE EXTENT PERMITTED BY APPLICABLE LAWS)
ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE ARISING UNDER,
RELATING TO, OR CONNECTED
4
<PAGE> 7
WITH THIS AGREEMENT, THE COLLATERAL OR ANY OTHER AGREEMENT, INSTRUMENT OR
DOCUMENT CONTEMPLATED HEREBY OR DELIVERED IN CONNECTION HEREWITH AND AGREE THAT
ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY. THIS
PROVISION IS A MATERIAL INDUCEMENT FOR THE BANKS' AND THE AGENT ENTERING INTO
THIS AGREEMENT.
10. COUNTERPARTS. This Amendment No. 3 may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same instrument.
11. AGREEMENT TO REMAIN IN EFFECT. Except as expressly
provided herein, the Agreement and each other Collateral Document shall be and
shall continue in full force and effect in accordance with its respective terms.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment No. 3 to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
AGENT BORROWER
BANK OF AMERICA, N.A., ACCREDO HEALTH, INCORPORATED
as Agent
BY: BY:
------------------------------- -------------------------------
TITLE: TITLE:
---------------------------- ----------------------------
BANKS GUARANTORS AND SUBSIDIARIES
BANK OF AMERICA, N.A. SOUTHERN HEALTH SYSTEMS, INC.
BY: BY:
------------------------------- -------------------------------
TITLE: TITLE:
---------------------------- ----------------------------
5
<PAGE> 8
FIRST TENNESSEE BANK NATIONAL NOVA FACTOR, INC.
ASSOCIATION
BY: BY:
------------------------------- -------------------------------
TITLE: TITLE:
---------------------------- ----------------------------
BROWN BROTHERS HARRIMAN & CO. HEMOPHILIA HEALTH SERVICES, INC.
(successor to Horizon Health Systems, Inc.)
BY: BY:
------------------------------- -------------------------------
TITLE: TITLE:
---------------------------- ----------------------------
AHI PHARMACIES, INC.
BY:
-------------------------------
TITLE:
----------------------------
6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF ACCREDO HEALTH, INCORPORATED FOR THE THREE
MONTHS ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> SEP-30-1999
<CASH> 5,169
<SECURITIES> 0
<RECEIVABLES> 64,451
<ALLOWANCES> 5,558
<INVENTORY> 21,997
<CURRENT-ASSETS> 90,698
<PP&E> 4,753
<DEPRECIATION> 1,468
<TOTAL-ASSETS> 147,712
<CURRENT-LIABILITIES> 59,679
<BONDS> 20,500
0
0
<COMMON> 92
<OTHER-SE> 66,533
<TOTAL-LIABILITY-AND-EQUITY> 147,712
<SALES> 72,684
<TOTAL-REVENUES> 76,871
<CGS> 64,148
<TOTAL-COSTS> 65,992
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,363
<INTEREST-EXPENSE> 352
<INCOME-PRETAX> 3,273
<INCOME-TAX> 1,305
<INCOME-CONTINUING> 1,968
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,968
<EPS-BASIC> .22
<EPS-DILUTED> .20
</TABLE>
