<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 26, 1999
REGISTRATION NO. 333-62679
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ACCREDO HEALTH, INCORPORATED
(Exact name of registrant as specified in its charter)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 8099 62-1642871
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
1640 CENTURY CENTER PARKWAY, SUITE 101
MEMPHIS, TN 38134
(901) 385-3688
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------
DAVID D. STEVENS
CHIEF EXECUTIVE OFFICER
ACCREDO HEALTH, INCORPORATED
1640 CENTURY CENTER PARKWAY, SUITE 101
MEMPHIS, TN 38134
(901) 385-3688
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
STEVEN L. POTTLE, ESQ. JOHN J. EGAN III, P.C.
ALSTON & BIRD LLP GOODWIN, PROCTER & HOAR LLP
ONE ATLANTIC CENTER EXCHANGE PLACE
1201 WEST PEACHTREE STREET BOSTON, MA 02109-2881
ATLANTA, GA 30309-3424 (617) 570-1000
(404) 881-7000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable on or after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of this prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 26, 1999
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<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. It is currently estimated that the
initial public offering price for the Common Stock will be between $15.00 and
$17.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company has
applied to have the Common Stock quoted 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...................... $ $ $
Total(3)....................... $ $ $
</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 $ , $ and $
, 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 , 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
, 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 an
assumed 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
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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, and
possibly together with other available Company funds, 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 will be 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.
14
<PAGE>
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 an assumed 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 an assumed 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
$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,
and possibly together with other available Company funds, 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, if any, 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 an assumed 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 an assumed 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>
Assumed 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 an assumed 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 assumed
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 increased 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. Further, the Company will
supplement the net proceeds from the Offering as needed from other available
Company funds to fully retire the Series A Preferred Stock and the Senior
Subordinated Notes.
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 if the Offering results in net cash proceeds to the Company of at least
$42,500,000. The credit facility includes a subfacility for letters of credit.
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
$720,000 against the line of credit.
While the Company anticipates its cash from operations, along with the short
term use of the Credit Agreement and the net proceeds to be received from the
Offering, will be sufficient to meet its internal operating requirements and
growth plans for at least the next 12 months, the Company expects that
additional funds may be required in the future to successfully continue its
growth beyond that 12-month period or in the event that the Company grows more
than expected within such period. The Company may be required to raise
additional funds through sales of equity or debt securities or seek additional
financing from financial institutions.
26
<PAGE>
There can be no assurance, however, that financing will be available on terms
that are favorable to the Company or, if obtained, will be sufficient for the
Company's needs.
SELECTED QUARTERLY FINANCIAL RESULTS
The following table presents selected unaudited quarterly statements of
operations items, and the percentages of total revenues represented by those
respective items, for each of the ten quarters beginning July 1, 1996 and ending
December 31, 1998. This information has been prepared on the same basis as the
audited financial statements appearing elsewhere in this Prospectus, and
includes all adjustments, consisting only of normal recurring adjustments, that
the Company considers necessary for a fair presentation of the information when
read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1997 1997(1) 1997 1997 1998
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
($ 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
27
<PAGE>
unable to distinguish dates in the "2000's" from dates in the "1900's" and from
other sources such as the use of special codes and conventions in software that
make use of a date field.
THE COMPANY'S STATE OF READINESS. The Company's efforts in addressing the
year 2000 issue are focused in the following three areas: (i) implementing
procedures to determine whether the Company's software systems and hardware
platforms are year 2000 compliant; (ii) communicating with suppliers and third
party payors to determine whether there will be any interruption in their
systems that could affect the Company's ability to receive timely shipments of
inventory or payment for services as a result of the year 2000 issue; and (iii)
evaluating and making necessary modifications to other systems that contain
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.
28
<PAGE>
RISKS PRESENTED BY YEAR 2000 ISSUES. The Company is still in the process of
evaluating potential disruptions or complications that might result from year
2000 related problems. However, at this time the Company has not identified any
specific business functions that will suffer material disruption as a result of
year 2000 related events. It is possible, however, that the Company may identify
business functions in the future that are specifically at risk of year 2000
disruption. The absence of any such determination at this point represents only
the Company's current status of evaluating potential year 2000 related problems
and facts presently known to the Company, and should not be construed to mean
that there is no risk of year 2000 related disruption. Moreover, due to the
unique and pervasive nature of the year 2000 issue, it is impracticable to
anticipate each of the wide variety of year 2000 events, particularly outside of
the Company, that might arise in a worst case scenario which might have a
material adverse impact on the Company's business, financial condition and
results of operations.
THE COMPANY'S CONTINGENCY PLANS. The Company intends to develop contingency
plans for significant business risks that might result from year 2000 related
events. Since the Company has not identified any specific business function that
will be materially at risk of significant year 2000 related disruptions, and
because a full assessment of the Company's risk from potential year 2000
failures is still in process, the Company has not yet developed detailed
contingency plans specific to year 2000 problems. Development of these
contingency plans is currently scheduled to occur before June 30, 1999 and as
otherwise appropriate.
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.
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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 242 biotechnology
drugs in late stage development as of mid-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
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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.
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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
45
<PAGE>
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
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<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 assumed 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.
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<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.
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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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<PAGE>
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.
61
<PAGE>
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 1,600,000 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............................................
NationsBanc Montgomery Securities LLC............................
SunTrust Equitable Securities Corporation........................
-----------
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 $ per share. The Underwriters may allow, and such dealers may reallow,
a concession not in excess of $ 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.
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.
63
<PAGE>
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.
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.
64
<PAGE>
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>
- ---------------------------------------------------------
---------------------------------------------------------
- ---------------------------------------------------------
---------------------------------------------------------
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.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<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........................ 64
Experts.............................. 65
Index to Financial Statements........ F-1
</TABLE>
--------------
UNTIL , 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
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY
SECURITIES LLC
SUNTRUST EQUITABLE
SECURITIES
, 1999
- ----------------------------------------------
----------------------------------------------
- ----------------------------------------------
----------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be borne by the
Company in connection with the issuance and distribution of the securities being
registered hereby, other than underwriting discounts and commissions. The
Company is paying all of these expenses in connection with the issuance and
distribution of the securities.
<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 25,774
NASD Filing Fee................................................. 7,000
Nasdaq Original Listing Fee.....................................
Accountants' Fees and Costs.....................................
Legal Fees and Costs............................................
Printing and Engraving Costs....................................
Blue Sky Fees and Costs.........................................
Transfer Agent and Registrar fees...............................
Insurance Premium Associated with Registration..................
Miscellaneous...................................................
---------
Total....................................................... $1,500,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Amended and Restated Certificate of Incorporation provides
that the Company shall, to the fullest extent permitted by Section 145 of the
DGCL, as amended from time to time, indemnify its officers and directors.
Section 145 of the DGCL permits a corporation, under specified
circumstances, to indemnify its directors, officers, employees or agents against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by third parties by reason of the fact that
they were or are directors, officers, employees or agents of the corporation, if
such directors, officers, employees or agents acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reason to believe their conduct was unlawful. In a derivative action, i.e., one
by or in the right of the corporation, indemnification may be made only for
expenses actually and reasonably incurred by directors, officers, employees or
agents in connection with the defense or settlement of any action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant directors, officers, employees or
agents are fairly and reasonably entitled to indemnity for such expenses despite
such adjudication of liability.
The Company's Amended and Restated Certificate of Incorporation contains a
provision which eliminates, to the fullest extent permitted by the DGCL,
director liability for monetary damages for breaches of the fiduciary duty of
care or any other duty as a director.
The Company intends to purchase a policy of director's and officer's
insurance that would in certain instances provide the funds necessary for the
Company to meet its indemnification obligations under its Amended and Restated
Certificate of Incorporation.
II-1
<PAGE>
Reference is hereby made to Section of the Underwriting Agreement, the form
of which is filed as Exhibit 1.1 hereto, in which the Company has agreed to
indemnify the Underwriters and certain other persons against certain
liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the Company's original capitalization, on May 31, 1996
the Company sold to Welsh, Carson, Anderson & Stowe VII, L.P. ("WCAS VII") and
certain of its affiliates an aggregate of 4,972,534 shares of Common Stock for
$14,917,602 and an aggregate of 248,624 shares of Series A Preferred Stock for
$24,862,400. In addition, certain other investors acquired 27,466 shares of
Common Stock for $82,398 and 1,376 shares of Series A Cumulative Preferred Stock
for $137,600.
In connection with the Company's acquisition of Southern Health Systems,
Inc. ("SHS") on May 31, 1996, 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 shares, 611 shares and 3,056 shares of the Series A
Preferred Stock, respectively.
In order to finance the acquisition of Hemophilia Health Services, Inc.
formerly known as Horizon Health Systems, Inc. ("HHS") and to provide working
capital, the Company issued $10.0 million in Senior Subordinated Notes to WCAS
VII and certain of its affiliates on June 4, 1997. In connection with the
issuance of the Senior Subordinated Notes, the Company issued an aggregate of
400,000 shares of Common Stock to the holders of the Senior Subordinated Notes.
Furthermore, as a condition to the acquisition of HHS and the appointment of
Kyle J. Callahan to the Company's Board of Directors, Mr. Callahan acquired
41,667 shares of the Company's Common Stock for $250,002 on October 1, 1997.
In connection with the appointment of Kenneth J. Melkus to the Company's
Board of Directors, Lauren Melkus acquired 41,667 shares of Common Stock for
$250,002 on October 27, 1997.
In connection with the appointment of Kenneth R. Masterson to the Company's
Board of Directors, the Company sold 34,000 shares of Common Stock to Mr.
Masterson for $204,000 on July 24, 1998 pursuant to a subscription agreement
entered into by Mr. Masterson in April 1998.
Except as otherwise noted, all issuances of securities described above were
made in reliance on the exemption from registration provided by Section 4(2) of
the Securities Act of 1933, as amended, as transactions by an issuer not
involving a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
*3.1 Amended and Restated Certificate of Incorporation of the Registrant
*3.2 Amended and Restated Bylaws of the Registrant
4.1 Form of Common Stock Certificate
5.1 Opinion of Alston & Bird LLP with respect to validity of Common Stock
+10.1 Employment Agreement dated May 31, 1996 between the Company and David D. Stevens
+10.2 Employment Agreement dated May 31, 1996 between the Company and John R. Grow
+10.3 Employment Agreement dated May 31, 1996 between the Company and Joel R.
Kimbrough
+10.4 Employment Agreement dated June 5, 1997 between the Company and Kyle J. Callahan
+10.5 Employment Agreement dated July 10, 1998 between the Company and Thomas W. Bell
Jr.
*10.6 Accredo Health 1999 Long-Term Incentive Plan
*10.7 Accredo Health 1999 Employee Stock Purchase Plan
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
+10.8 Nova Holdings, Inc. and its Subsidiaries Stock Option and Restricted Purchase
Plan, as amended and restated
+10.9 Note Purchase Agreement dated June 4, 1997 among the Company, Welsh, Carson,
Anderson & Stowe VII, L.P. and certain other investors
+10.10 Registration Rights Agreement dated May 31, 1996 among the Company, Welsh,
Carson, Anderson & Stowe VII, L.P. and certain other investors
+10.11 Amendment Number One to the Registration Rights Agreement dated October 27, 1997
among the Company, Welsh, Carson, Anderson & Stowe VII, L.P. and certain other
investors
+10.12 Amendment Number Two to the Registration Rights Agreement dated July 24, 1998
among the Company, Welsh, Carson, Anderson & Stowe VII, L.P. and certain other
investors
+10.13 Subscription and Exchange Agreement dated May 31, 1996 among the Company and
certain purchasers and exchanging shareholders
+10.14 Stock Purchase Agreement dated May 31, 1996 among Le Bonheur Health Systems,
Inc., Southern Health Systems, Inc., the Company and Welsh, Carson, Anderson &
Stowe VII, L.P.
+10.15 Modification Agreement dated May 31, 1996 among Le Bonheur Health Systems, Inc.,
Southern Health Systems, Inc., Nova Holdings, Inc. and Welsh, Carson Anderson &
Stowe VII, L.P.
+10.16 Non-Disclosure and Non-Competition Agreement dated May 31, 1996 by and among Le
Bonheur Health Systems, Inc., PharmaThera, Inc., Welsh, Carson, Anderson & Stowe
VII, L.P., Southern Health Systems, Inc., Nova Factor, Inc. and Nova Holdings,
Inc.
+10.17 Stock Purchase Agreement dated as of June 5, 1997 among Dianne R. Martz, A.B.
Charlton, III, the Company and Horizon Health Systems, Inc.
+10.18 Non-Disclosure and Non-Compete Agreement dated as of June 5, 1997 by and among
Horizon Health Systems, Inc., the Company and Dianne R. Martz
+10.19 Grant Agreement dated as of June 5, 1997 by and between Kyle Callahan and the
Company
+10.20 Subscription and Restriction Agreement dated as of June 5, 1997 by and between
the Company and Kyle Callahan
+10.21 Consulting and Transition Agreement dated as of June 5, 1997 by and between
Dianne Martz and Horizon Health Systems, Inc.
+10.22 Letter Agreement dated as of June 3, 1997 from Andrew M. Paul to Kyle Callahan
regarding Mr. Callahan's election to the Board of Directors of the Company
+10.23 Lease Agreement dated September 1, 1994 between Dianne Martz and Horizon Health
Systems, Inc.
+10.24 Addendum to Lease Agreement dated September 1, 1994 amending the square footage
of Premises and annual rental payments
+10.25 Escrow Agreement dated June 5, 1997 among First American National Bank, Nova
Holdings, Inc. and Dianne Martz and A. B. Charlton, III
+10.26 Refunds Payable Escrow Agreement dated June 5, 1997 among First American
National Bank, Nova Holdings, Inc. and Dianne Martz and A. B. Charlton, III
+10.27 Contract for the Sale and Distribution of Genentech Human Growth Hormone dated
March 1, 1997 by and between Genentech, Inc. and Nova Factor, Inc. (The Company
has requested confidential treatment of certain portions of this Exhibit.)
+10.28 Distribution Agreement dated September 30, 1994 by and between Nova Factor, Inc.
and Genzyme Corporation (The Company has requested confidential treatment of
certain portions of this Exhibit.)
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
+10.29 Amendment No. 1 to Distribution Agreement dated January 1, 1995 by and between
Nova Factor, Inc. and Genzyme Corporation (The Company has requested
confidential treatment of certain portions of this Exhibit.)
+10.30 Second Amended and Restated Distribution Agreement dated July 1, 1994 by and
among PharmaThera, Inc., Nova Factor, Inc. and Genzyme Corporation (The Company
has requested confidential treatment of certain portions of this Exhibit.)
+10.31 Amendment No. 1 to Second Amended and Restated Distribution Agreement dated
September 30, 1994 by and between PharmaThera, Inc., Nova Factor, Inc. and
Genzyme Corporation (The Company has requested confidential treatment of certain
portions of this Exhibit.)
+10.32 Amendment No. 2 to Second Amended and Restated Distribution Agreement dated
January 1, 1995 by and between Nova Factor, Inc. and Genzyme Corporation (The
Company has requested confidential treatment of certain portions of this
Exhibit.)
+10.33 Distribution and Services Agreement dated November 1, 1995 by and between
Biogen, Inc. and Nova Factor, Inc. (The Company has requested confidential
treatment of certain portions of this Exhibit.)
+10.34 Amendment No. 1 to Distribution and Services Agreement dated May 17, 1996 by and
between Biogen, Inc. and Nova Factor, Inc. (The Company has requested
confidential treatment of certain portions of this Exhibit.)
+10.35 Addendum and Amendment No. 2 to Distribution and Services Agreement dated May
21, 1997 by and between Biogen, Inc. and Nova Factor, Inc. (The Company has
requested confidential treatment of certain portions of this Exhibit.)
+10.36 Addendum and Amendment No. 3 to Distribution and Services Agreement dated July
1, 1997 by and between Biogen, Inc. and Nova Factor, Inc. (The Company has
requested confidential treatment of certain portions of this Exhibit.)
+10.37 Addendum and Amendment No. 4 to Distribution and Services Agreement dated
January 1, 1998 by and between Biogen, Inc. and Nova Factor, Inc. (The Company
has requested confidential treatment of certain portions of this Exhibit.)
+10.38 Loan and Security Agreement dated as of June 5, 1997 among Nova Holdings, Inc.
and its Subsidiaries and NationsBank of Tennessee, N.A. and First Tennessee Bank
National Association
+10.39 Swing Line Note dated December 1, 1997 entered into by Nova Holdings, Inc. with
NationsBank of Tennessee, N.A.
+10.40 ISDA Master Agreement dated August 7, 1997 between NationsBank of Tennessee,
N.A. and Nova Holdings, Inc.
+10.41 Texas Health Pharmaceutical Resources Partnership Agreement dated July 1, 1994
(The Company has requested confidential treatment of certain portions of this
Exhibit.)
+10.42 Distribution Business Management and Service Agreement dated July 1, 1994 by and
among Southern Health Systems, Inc. and Texas Health Pharmaceutical Resources
(The Company has requested confidential treatment of certain portions of this
Exhibit.)
+10.43 Amendment No. 1 to Distribution Business Management and Service Agreement dated
July 1, 1994 by and among Southern Health Systems, Inc. and Texas Health
Pharmaceutical Resources (The Company has requested confidential treatment of
certain portions of this Exhibit.)
+10.44 Hemophilia Therapy Pharmacy Management Agreement dated May 9, 1997 by and among
Texas Health Pharmaceutical Resources and Children's Medical Center of Dallas
(The Company has requested confidential treatment of certain portions of this
Exhibit.)
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
+10.45 Amendment No. 1 to Hemophilia Therapy Pharmacy Management Agreement, dated
February 28, 1998, by and among Texas Health Pharmaceutical Resources and
Children's Medical Center of Dallas (The Company has requested confidential
treatment of certain portions of this Exhibit.)
+10.46 Incentive Stock Option Agreement of David Stevens dated May 31, 1996
+10.47 Incentive Stock Option Agreement of Joel R. Kimbrough dated May 31, 1996
+10.48 Incentive Stock Option Agreement of John R. Grow dated May 31, 1996
+10.49 Incentive Stock Option Agreement of Kyle Callahan dated September 3, 1997
+10.50 Non-Qualified Stock Option Agreement of Patrick J. Welsh dated February 9, 1998
+10.51 Non-Qualified Stock Option Agreement of Ken Melkus dated February 9, 1998
+10.52 Incentive Stock Option Agreement of Kyle Callahan dated February 9, 1998
+10.53 Non-Qualified Stock Option Agreement of Andrew M. Paul dated February 9, 1998
+10.54 Non-Qualified Stock Option Agreement of Kenneth R. Masterson dated April 30,
1998
+10.55 Incentive Stock Option Agreement of Thomas W. Bell, Jr. dated July 10, 1998
+10.56 Amendment No. 1 Loan and Security Agreement dated as of August 28, 1998 among
Nova Holdings, Inc., a Delaware corporation, and its Subsidiaries and
NationsBank of Tennessee, N.A. and First Tennessee Bank National Association
+10.57 Loan Agreement dated November 24, 1998 between NationsBank, N.A. and Children's
Hemophilia Services, a California general partnership composed of Children's
Home Care, a California not-for-profit public benefit corporation and Horizon
Health Systems, Inc., a Tennessee Corporation
+10.58 Limited Guaranty dated November 24, 1998 between NationsBank, N.A. and Accredo
Health, Incorporated
+10.59 Promissory Note dated December 24, 1998 between NationsBank, N.A. and Children's
Hemophilia Services
+10.60 Amended and Restated General Partnership Agreement of Children's Home Services
+10.61 Amended and Restated General Partnership Agreement of Children's Hemophilia
Services
+10.62 Growth Hormone Drug Therapy Business Management, Service and Sales Agreement
dated November 10, 1998 between Nova Factor, Inc., a Tennessee corporation, and
Children's Home Services, a California general partnership (The Company has
requested confidential treatment of certain portions of this Exhibit.)
+10.63 Hemophilia Therapy Business Management, Services and Sales Agreement, dated
November 10, 1998 between Horizon Health Systems, Inc., a Tennessee corporation,
and Children's Hemophilia Services, a California general partnership (The
Company has requested confidential treatment of certain portions of this
Exhibit.)
+10.64 Product Supply and Service Agreement dated November 10, 1998 between Nova
Factor, Inc., a Tennessee corporation, and Children's Home Care, a California
non-profit benefit corporation (The Company has requested confidential treatment
of certain portions of this Exhibit.)
10.65 Distribution and Services Agreement dated August 28, 1998 between Centocor, Inc.
and its affiliates and Nova Factor, Inc. (The Company has requested confidential
treatment of certain portions of this Exhibit.)
10.66 Amendment No. 2 dated March 2, 1999 to Loan and Security Agreement as amended on
June 5, 1997 among Accredo Health, Incorporated and its Subsidiaries and
NationsBank, N.A. and First Tennessee Bank National Association and NationsBank,
N.A. as Agent
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
10.67 Amendment No. 1 to Distribution and Service Agreement dated January 11, 1999 by
and between Centocor, Inc. and its Affiliates and Nova Factor, Inc.
*21.1 Subsidiaries of the Company
23.1 Consent of Alston & Bird LLP (included in opinion filed as Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
+24.1 Power of Attorney (included on the signature page)
+27.1 Financial Data Schedule
</TABLE>
(B) Financial Statement Schedules
Accredo Health, Incorporated
Schedule II--Valuation and Qualifying Accounts
Nova Factor, Inc.
Schedule II--Valuation and Qualifying Accounts
Texas Health Pharmaceutical Resources
Schedule II--Valuation and Qualifying Accounts
Children's Memorial Home Hemophilia Services
Schedule II--Valuation and Qualifying Accounts
Schedules other than those listed above are omitted because they are not
required or are not applicable, or the required information is shown in the
respective financial statements or notes thereto.
- ------------------------
* To be filed by amendment.
+ Previously filed.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the
Representatives of the Underwriters at the closing specified in the underwriting
agreements certificates in such denominations and registered in such names as
required by the Representatives of the Underwriters to permit prompt delivery to
each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Memphis, State of
Tennessee, on March 26, 1999.
<TABLE>
<S> <C> <C>
ACCREDO HEALTH, INCORPORATED
By: /s/ DAVID D. STEVENS
-----------------------------------------
David D. Stevens
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on March 26, 1999.
SIGNATURE TITLE
- ------------------------------ ---------------------------
/s/ DAVID D. STEVENS Chief Executive Officer and
- ------------------------------ Chairman of the Board of
David D. Stevens Directors
* President and Director
- ------------------------------
John R. Grow
Senior Vice President and
/s/ JOEL R. KIMBROUGH Chief Financial Officer
- ------------------------------ (principal financial and
Joel R. Kimbrough accounting officer)
* Senior Vice President and
- ------------------------------ Director
Kyle J. Callahan
* Director
- ------------------------------
Patrick J. Welsh
* Director
- ------------------------------
Andrew M. Paul
* Director
- ------------------------------
Kenneth J. Melkus
* Director
- ------------------------------
Kenneth R. Masterson
*By: /s/ JOEL R. KIMBROUGH
------------------------------
Joel R. Kimbrough
ATTORNEY-IN-FACT
II-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Accredo Health, Incorporated
We have audited the consolidated financial statements of Accredo Health,
Incorporated as of June 30, 1997 and 1998, and for the period from inception
(May 24, 1996) through June 30, 1996, and for the years ended June 30, 1997 and
1998, and have issued our report thereon dated August 12, 1998, except for Notes
1, 2 and 3 as to which the date is March 21, 1999 (included elsewhere in this
Registration Statement). Our audit also included the financial statement
schedule of the Company listed in Item 16(b) of this Registration Statement.
This Schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Memphis, Tennessee
August 12, 1998
S-1
<PAGE>
ACCREDO HEALTH, INCORPORATED
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. C
------------------------
ADDITIONS
COL. B ------------------------ COL. E
---------- CHARGED TO COL. D ----------
COL. A BALANCE AT CHARGED TO OTHER ------------ BALANCE AT
- ------------------------------------- BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ------------------------------------- ---------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Period from inception (May 24, 1996)
through June 30, 1996:
Allowance for doubtful accounts.... $ -- $ 251,538 $2,749,847 (1) $291,370 (2) $2,710,015
Year ended June 30, 1997:
Allowance for doubtful accounts.... 2,710,015 2,976,718 -- 1,884,407 (2) 3,802,326
Year ended June 30, 1998:
Allowance for doubtful accounts.... 3,802,326 3,165,292 -- 3,537,755 (2) 3,429,863
</TABLE>
- --------------------------
(1) Allowance as a result of acquisition of Nova Factor, Inc.
(2) Uncollectible accounts written off, net of recoveries.
S-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Nova Factor, Inc.
We have audited the statements of operations, stockholder's equity and cash
flows of Nova Factor, Inc. for the period July 1, 1995 through May 31, 1996, and
have issued our report thereon dated August 30, 1996 (included elsewhere in this
Registration Statement). Our audit also included the financial statement
schedule of the Company listed in Item 16(b) of this Registration Statement.
This Schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Memphis, Tennessee
August 30, 1996
S-3
<PAGE>
NOVA FACTOR, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. C
-----------------------
ADDITIONS
COL. B ----------------------- COL. E
---------- CHARGED TO COL. D ----------
COL. A BALANCE AT CHARGED TO OTHER ------------ BALANCE AT
- --------------------------------------- BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- --------------------------------------- ---------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Period from July 1, 1995 through May
31, 1996:
Allowance for doubtful accounts...... $3,982,980 $1,860,253 $ -- 3$,093,386 (1) $2,749,847
</TABLE>
- --------------------------
(1) Uncollectible accounts written off, net of recoveries.
S-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners
Texas Health Pharmaceutical Resources
We have audited the financial statements of Texas Health Pharmaceutical
Resources as of June 30, 1997, and for the year then ended, and have issued our
report thereon dated August 21, 1998 (included elsewhere in this Registration
Statement). Our audit also included the information for the year ended June 30,
1997, in the financial statement schedule of the Partnership listed in Item
16(b) of this Registration Statement. This Schedule is the responsibility of the
Partnership's management. Our responsibility is to express an opinion based on
our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein for
the year ended June 30, 1997.
/s/ Ernst & Young LLP
Memphis, Tennessee
August 21, 1998
S-5
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. C
------------------------
ADDITIONS
COL. B ------------------------ COL. E
----------- CHARGED TO COL. D -----------
COL. A BALANCE AT CHARGED TO OTHER ------------ BALANCE AT
- ------------------------------------------ BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ------------------------------------------ ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1996 (unaudited):
Allowance for doubtful accounts......... $ 248,912 $ 223,369 $ -- $358,995 (1) $ 113,286
Year ended June 30, 1997:
Allowance for doubtful accounts......... 113,286 283,357 -- 273,640 (1) 123,003
Year ended June 30, 1998 (unaudited):
Allowance for doubtful accounts......... 123,003 177,351 -- 130,194 (1) 170,160
</TABLE>
- --------------------------
(1) Uncollectible accounts written off, net of recoveries.
S-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners
Children's Memorial Home Hemophilia Services
We have audited the financial statements of Children's Memorial Home
Hemophilia Services as of June 30, 1997, and for the year then ended, and have
issued our report thereon dated March 19, 1999 (included elsewhere in this
Registration Statement). Our audit also included the information for the year
ended June 30, 1997, in the financial statement schedule of the Partnership
listed in Item 16(b) of this Registration Statement. This Schedule is the
responsibility of the Partnership's management. Our responsibility is to express
an opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein for
the year ended June 30, 1997.
/s/ Ernst & Young LLP
Memphis, Tennessee
March 19, 1999
S-7
<PAGE>
CHILDREN'S MEMORIAL HOME HEMOPHILIA SERVICES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. C
------------------------
ADDITIONS
COL. B ------------------------ COL. E
----------- CHARGED TO COL. D -----------
COL. A BALANCE AT CHARGED TO OTHER ------------ BALANCE AT
- ------------------------------------------ BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ------------------------------------------ ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1996 (unaudited):
Allowance for doubtful accounts......... $ 2,712 $ 59,314 $ -- $47,026 (1) $ 15,000
Year ended June 30, 1997:
Allowance for doubtful accounts......... 15,000 181,713 -- 192,252 (1) 4,461
Year ended June 30, 1998 (unaudited):
Allowance for doubtful accounts......... 4,461 212,452 -- 187,467 (1) 29,446
</TABLE>
- --------------------------
(1) Uncollectible accounts written off, net of recoveries.
S-8
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. EXHIBIT INDEX NUMBERED PAGE
- --------- -------------------------------------------------------------------------------- ----------------
<C> <S> <C>
1.1 Form of Underwriting Agreement
*3.1 Amended and Restated Certificate of Incorporation of the Registrant
*3.2 Amended and Restated Bylaws of the Registrant
4.1 Form of Common Stock Certificate
5.1 Opinion of Alston & Bird LLP with respect to validity of Common Stock
+10.1 Employment Agreement dated May 31, 1996 between the Company and David D. Stevens
+10.2 Employment Agreement dated May 31, 1996 between the Company and John R. Grow
+10.3 Employment Agreement dated May 31, 1996 between the Company and Joel R.
Kimbrough
+10.4 Employment Agreement dated June 5, 1997 between the Company and Kyle J. Callahan
+10.5 Employment Agreement dated July 10, 1998 between the Company and Thomas W. Bell
Jr.
*10.6 Accredo Health 1999 Long-Term Incentive Plan
*10.7 Accredo Health 1999 Employee Stock Purchase Plan
+10.8 Nova Holdings, Inc. and its Subsidiaries Stock Option and Restricted Purchase
Plan, as amended and restated
+10.9 Note Purchase Agreement dated June 4, 1997 among the Company, Welsh, Carson,
Anderson & Stowe VII, L.P. and certain other investors
+10.10 Registration Rights Agreement dated May 31, 1996 among the Company, Welsh,
Carson, Anderson & Stowe VII, L.P. and certain other investors
+10.11 Amendment Number One to the Registration Rights Agreement dated October 27, 1997
among the Company, Welsh, Carson, Anderson & Stowe VII, L.P. and certain other
investors
+10.12 Amendment Number Two to the Registration Rights Agreement dated July 24, 1998
among the Company, Welsh, Carson, Anderson & Stowe VII, L.P. and certain other
investors
+10.13 Subscription and Exchange Agreement dated May 31, 1996 among the Company and
certain purchasers and exchanging shareholders
+10.14 Stock Purchase Agreement dated May 31, 1996 among Le Bonheur Health Systems,
Inc., Southern Health Systems, Inc., the Company and Welsh, Carson, Anderson &
Stowe VII, L.P.
+10.15 Modification Agreement dated May 31, 1996 among Le Bonheur Health Systems, Inc.,
Southern Health Systems, Inc., Nova Holdings, Inc. and Welsh, Carson Anderson &
Stowe VII, L.P.
+10.16 Non-Disclosure and Non-Competition Agreement dated May 31, 1996 by and among Le
Bonheur Health Systems, Inc., PharmaThera, Inc., Welsh, Carson, Anderson & Stowe
VII, L.P., Southern Health Systems, Inc., Nova Factor, Inc. and Nova Holdings,
Inc.
+10.17 Stock Purchase Agreement dated as of June 5, 1997 among Dianne R. Martz, A.B.
Charlton, III, the Company and Horizon Health Systems, Inc.
+10.18 Non-Disclosure and Non-Compete Agreement dated as of June 5, 1997 by and among
Horizon Health Systems, Inc., the Company and Dianne R. Martz
+10.19 Grant Agreement dated as of June 5, 1997 by and between Kyle Callahan and the
Company
+10.20 Subscription and Restriction Agreement dated as of June 5, 1997 by and between
the Company and Kyle Callahan
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. EXHIBIT INDEX NUMBERED PAGE
- --------- -------------------------------------------------------------------------------- ----------------
<C> <S> <C>
+10.21 Consulting and Transition Agreement dated as of June 5, 1997 by and between
Dianne Martz and Horizon Health Systems, Inc.
+10.22 Letter Agreement dated as of June 3, 1997 from Andrew M. Paul to Kyle Callahan
regarding Mr. Callahan's election to the Board of Directors of the Company
+10.23 Lease Agreement dated September 1, 1994 between Dianne Martz and Horizon Health
Systems, Inc.
+10.24 Addendum to Lease Agreement dated September 1, 1994 amending the square footage
of Premises and annual rental payments
+10.25 Escrow Agreement dated June 5, 1997 among First American National Bank, Nova
Holdings, Inc. and Dianne Martz and A. B. Charlton, III
+10.26 Refunds Payable Escrow Agreement dated June 5, 1997 among First American
National Bank, Nova Holdings, Inc. and Dianne Martz and A. B. Charlton, III
+10.27 Contract for the Sale and Distribution of Genentech Human Growth Hormone dated
March 1, 1997 by and between Genentech, Inc. and Nova Factor, Inc. (The Company
has requested confidential treatment of certain portions of this Exhibit.)
+10.28 Distribution Agreement dated September 30, 1994 by and between Nova Factor, Inc.
and Genzyme Corporation (The Company has requested confidential treatment of
certain portions of this Exhibit.)
+10.29 Amendment No. 1 to Distribution Agreement dated January 1, 1995 by and between
Nova Factor, Inc. and Genzyme Corporation (The Company has requested
confidential treatment of certain portions of this Exhibit.)
+10.30 Second Amended and Restated Distribution Agreement dated July 1, 1994 by and
among PharmaThera, Inc., Nova Factor, Inc. and Genzyme Corporation (The Company
has requested confidential treatment of certain portions of this Exhibit.)
+10.31 Amendment No. 1 to Second Amended and Restated Distribution Agreement dated
September 30, 1994 by and between PharmaThera, Inc., Nova Factor, Inc. and
Genzyme Corporation (The Company has requested confidential treatment of certain
portions of this Exhibit.)
+10.32 Amendment No. 2 to Second Amended and Restated Distribution Agreement dated
January 1, 1995 by and between Nova Factor, Inc. and Genzyme Corporation (The
Company has requested confidential treatment of certain portions of this
Exhibit.)
+10.33 Distribution and Services Agreement dated November 1, 1995 by and between
Biogen, Inc. and Nova Factor, Inc. (The Company has requested confidential
treatment of certain portions of this Exhibit.)
+10.34 Amendment No. 1 to Distribution and Services Agreement dated May 17, 1996 by and
between Biogen, Inc. and Nova Factor, Inc. (The Company has requested
confidential treatment of certain portions of this Exhibit.)
+10.35 Addendum and Amendment No. 2 to Distribution and Services Agreement dated May
21, 1997 by and between Biogen, Inc. and Nova Factor, Inc. (The Company has
requested confidential treatment of certain portions of this Exhibit.)
+10.36 Addendum and Amendment No. 3 to Distribution and Services Agreement dated July
1, 1997 by and between Biogen, Inc. and Nova Factor, Inc. (The Company has
requested confidential treatment of certain portions of this Exhibit.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. EXHIBIT INDEX NUMBERED PAGE
- --------- -------------------------------------------------------------------------------- ----------------
<C> <S> <C>
+10.37 Addendum and Amendment No. 4 to Distribution and Services Agreement dated
January 1, 1998 by and between Biogen, Inc. and Nova Factor, Inc. (The Company
has requested confidential treatment of certain portions of this Exhibit.)
+10.38 Loan and Security Agreement dated as of June 5, 1997 among Nova Holdings, Inc.
and its Subsidiaries and NationsBank of Tennessee, N.A. and First Tennessee Bank
National Association
+10.39 Swing Line Note dated December 1, 1997 entered into by Nova Holdings, Inc. with
NationsBank of Tennessee, N.A.
+10.40 ISDA Master Agreement dated August 7, 1997 between NationsBank of Tennessee,
N.A. and Nova Holdings, Inc.
+10.41 Texas Health Pharmaceutical Resources Partnership Agreement dated July 1, 1994
(The Company has requested confidential treatment of certain portions of this
Exhibit.)
+10.42 Distribution Business Management and Service Agreement dated July 1, 1994 by and
among Southern Health Systems, Inc. and Texas Health Pharmaceutical Resources.
(The Company has requested confidential treatment of certain portions of this
Exhibit.)
+10.43 Amendment No. 1 to Distribution Business Management and Service Agreement dated
July 1, 1994 by and among Southern Health Systems, Inc. and Texas Health
Pharmaceutical Resources (The Company has requested confidential treatment of
certain portions of this Exhibit.)
+10.44 Hemophilia Therapy Pharmacy Management Agreement dated May 9, 1997 by and among
Texas Health Pharmaceutical Resources and Children's Medical Center of Dallas
(The Company has requested confidential treatment of certain portions of this
Exhibit.)
+10.45 Amendment No. 1 to Hemophilia Therapy Pharmacy Management Agreement dated
February 28, 1998 by and among Texas Health Pharmaceutical Resources and
Children's Medical Center of Dallas (The Company has requested confidential
treatment of certain portions of this Exhibit.)
+10.46 Incentive Stock Option Agreement of David Stevens dated May 31, 1996
+10.47 Incentive Stock Option Agreement of Joel R. Kimbrough dated May 31, 1996
+10.48 Incentive Stock Option Agreement of John R. Grow dated May 31, 1996
+10.49 Incentive Stock Option Agreement of Kyle Callahan dated September 3, 1997
+10.50 Non-Qualified Stock Option Agreement of Patrick J. Welsh dated February 9, 1998
+10.51 Non-Qualified Stock Option Agreement of Ken Melkus dated February 9, 1998
+10.52 Incentive Stock Option Agreement of Kyle Callahan dated February 9, 1998
+10.53 Non-Qualified Stock Option Agreement of Andrew M. Paul dated February 9, 1998
+10.54 Non-Qualified Stock Option Agreement of Kenneth R. Masterson dated April 30,
1998
+10.55 Incentive Stock Option Agreement of Thomas W. Bell, Jr. dated July 10, 1998
+10.56 Amendment No. 1 Loan and Security Agreement dated as of August 28, 1998 among
Nova Holdings, Inc., a Delaware corporation, and its Subsidiaries and
NationsBank of Tennessee, N.A. and First Tennessee Bank National Association
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. EXHIBIT INDEX NUMBERED PAGE
- --------- -------------------------------------------------------------------------------- ----------------
<C> <S> <C>
+10.57 Loan Agreement dated November 24, 1998 between NationsBank, N.A., and Children's
Hemophilia Services, a California general partnership composed of Children's
Home Care, a California not-for-profit public benefit corporation and Horizon
Health Systems, Inc., a Tennessee Corporation
+10.58 Limited Guaranty dated November 24, 1998 between NationsBank, N.A. and Accredo
Health, Incorporated
+10.59 Promissory Note dated December 24, 1998 between NationsBank, N.A. and Children's
Hemophilia Services
+10.60 Amended and Restated General Partnership Agreement of Children's Home Services
+10.61 Amended and Restated General Partnership Agreement of Children's Hemophilia
Services
+10.62 Growth Hormone Drug Therapy Business Management, Service and Sales Agreement
dated November 10, 1998 between Nova Factor, Inc., a Tennessee corporation, and
Children's Home Services, a California general partnership (The Company has
requested confidential treatment of certain portions of this Exhibit.)
+10.63 Hemophilia Therapy Business Management, Services and Sales Agreement dated
November 10, 1998 between Horizon Health Systems, Inc., a Tennessee corporation,
and Children's Hemophilia Services, a California general partnership (The
Company has requested confidential treatment of certain portions of this
Exhibit.)
+10.64 Product Supply and Service Agreement dated November 10, 1998 between Nova
Factor, Inc., a Tennessee corporation, and Children's Home Care, a California
non-profit benefit corporation (The Company has requested confidential treatment
of certain portions of this Exhibit.)
10.65 Distribution and Services Agreement dated August 28, 1998 between Centocor, Inc.
and its affiliates and Nova Factor, Inc. (The Company has requested confidential
treatment of certain portions of this Exhibit.)
10.66 Amendment No. 2 dated March 2, 1999 to Loan and Security Agreement as amended on
June 5, 1997 among Accredo Health, Incorporated and its Subsidiaries and
NationsBank, N.A. and First Tennessee Bank National Association and NationsBank,
N.A. as Agent
10.67 Amendment No. 1 to Distribution and Service Agreement dated January 11, 1999 by
and between Centocor, Inc. and its Affiliates and Nova Factor, Inc.
*21.1 Subsidiaries of the Company
23.1 Consent of Alston & Bird LLP (included in Opinion filed as Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
+24.1 Power of Attorney (included on the signature page)
+27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
<PAGE>
Exhibit 1.1
GPH Draft April __, 1999
ACCREDO HEALTH, INCORPORATED
3,000,000 Shares
Option to Purchase 450,000 Shares
Common Stock
UNDERWRITING AGREEMENT
March ___, 1999
Hambrecht & Quist LLC
NationsBanc Montgomery Securities LLC
SunTrust Equitable Securities Corporation
Co-Managers
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
<PAGE>
Ladies and Gentlemen:
Accredo Health, Incorporated, a Delaware corporation (herein called the
Company), proposes to issue and sell 3,000,000 shares of its authorized but
unissued Common Stock, $0.01 par value (herein called the Common Stock) (said
shares of Common Stock being herein called the Underwritten Stock). The
Company proposes to grant to the Underwriters (as hereinafter defined) an
option to purchase up to 450,000 additional shares of Common Stock (herein
called the Option Stock and with the Underwritten Stock herein collectively
called the Stock). The Common Stock is more fully described in the
Registration Statement and the Prospectus hereinafter described.
The Company hereby confirms the agreements made with respect to the
purchase of the Stock by the several underwriters, for whom you are acting,
named in Schedule I hereto (herein collectively called the Underwriters, which
term shall also include any underwriter purchasing Stock pursuant to Section
3(b) hereof). You represent and warrant that you have been authorized by each of
the other Underwriters to enter into this Agreement on its behalf and to act for
it in the manner herein provided.
1. Registration Statement. The Company has filed with the Securities and
Exchange Commission (herein called the Commission) a registration statement on
Form S-1 (No. 333-62679), including the related preliminary prospectus, for the
registration of the Stock under the Securities Act of 1933, as amended (herein
called the Securities Act). Copies of such registration statement and of each
amendment thereto, if any, including the related preliminary prospectus (meeting
the requirements of Rule 430A of the rules and regulations of the Commission,
except for the omission of share amounts) heretofore filed by the Company with
the Commission have been delivered to you.
The term Registration Statement as used in this Agreement shall mean such
registration statement, including all exhibits and financial statements and all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), the term Registration Statement shall also mean (from and after the
effectiveness of such amendment) such registration statement as so amended
(including any Rule 462(b) registration statement). The term Prospectus as used
in this Agreement shall mean the prospectus relating to the Stock first filed
with the Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing
is required, as included in the Registration Statement) and, in the event of any
supplement or amendment to such prospectus after the Effective Date, shall also
mean (from and after the filing with the Commission of such supplement or of the
effectiveness of such amendment) such prospectus as so supplemented or amended.
The term Preliminary Prospectus as used in this Agreement shall mean each
preliminary prospectus included in such registration statement prior to the time
it becomes effective.
- 2 -
<PAGE>
The Registration Statement, in the form delivered to you, has been
declared effective under the Securities Act, and no post-effective amendment to
the Registration Statement has been filed as of the date of this Agreement. No
stop order suspending the effectiveness of the Registration Statement has been
issued and no proceeding for that purpose has been initiated or, to the
knowledge of the Company, threatened by the Commission. The Company has caused
to be delivered to you copies of the Registration Statement and of each
Preliminary Prospectus and has consented to the use of such copies for the
purposes permitted by the Securities Act. No order preventing or suspending the
use of any Preliminary Prospectus has been issued by the Commission.
2. Representations and Warranties of the Company. The Company hereby
represents and warrants to the Underwriters as follows:
(a) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of incorporation, has full corporate power and
authority to own or lease its properties and conduct its business as described
in the Registration Statement and the Prospectus and as being conducted, and is
duly qualified as a foreign corporation and in good standing in all
jurisdictions in which the character of the property owned or leased or the
nature of the business transacted by it makes qualification necessary (except
where the failure to be so qualified would not have a material adverse effect on
the business, properties, financial condition, results of operations or
prospects of the Company and its subsidiaries, taken as a whole). The Company
does not own or control, directly or indirectly, any corporation, association or
other entity other than the subsidiaries listed in Exhibit 21 of the
Registration Statement and the joint ventures referred to in the Prospectus.
(b) Each of the Company and its subsidiaries has all necessary
consents, approvals, authorizations, orders, registrations, qualifications,
licenses and permits of and from all public, regulatory and governmental
agencies and bodies to own, lease and operate its properties and conduct its
business as now being conducted and as described in the Registration Statement
and the Prospectus, and no such consent, approval, authorization, order,
registration, qualification, license or permit contains a materially burdensome
restriction not disclosed in the Registration Statement and the Prospectus.
(c) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any material
adverse change in the business, properties, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business, other than as set
forth in the Registration Statement and the Prospectus. Since such dates,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement and the Prospectus
other than in the ordinary course of business.
(d) The Registration Statement and the Prospectus comply, and on the
Closing Date (as hereinafter defined) and any later date on which Option Stock
is to be
- 3 -
<PAGE>
purchased, the Registration Statement and the Prospectus will comply, in all
material respects, with the provisions of the Securities Act and the rules and
regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material fact
and did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. On the
Effective Date the Prospectus did not and, on the Closing Date and any later
date on which Option Stock is to be purchased, the Registration Statement and
the Prospectus will not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. None of
the representations and warranties in this paragraph (d) shall apply to
statements in, or omissions from, the Registration Statement or the Prospectus
made in reliance upon and in conformity with information herein or otherwise
furnished in writing to the Company by or on behalf of the Underwriters for use
in the Registration Statement or the Prospectus.
(e) The authorized, issued and outstanding capital stock and the
outstanding long-term debt of the Company is as described in the Prospectus as
of the dates specified therein. Except as described in the Prospectus, there are
no outstanding warrants, options or other rights to acquire any capital stock of
the Company. All of the issued shares of capital stock of the Company have been
duly and validly authorized and issued, are fully paid and non-assessable, and
conform to the description thereof contained in the Prospectus. All of the
issued shares of capital stock of each subsidiary of the Company have been duly
and validly authorized and issued, are fully paid and non-assessable and are
owned directly or indirectly by the Company, free and clear of all liens,
encumbrances, security interests and claims whatsoever other than as described
in the Prospectus. The Stock will be, when issued and sold to the Underwriters
as provided herein duly and validly issued, fully paid and nonassessable and
conforms to the description thereof in the Prospectus. No further approval or
authority of the stockholders or the Board of Directors of the Company is
required for the issuance and sale of the Stock by the Company as contemplated
herein.
(f) The Company has filed a registration statement pursuant to
Section 12(g) of the Securities Exchange Act of 1934, as amended (herein called
the Exchange Act), to register the Stock, has filed an application to list the
stock on the Nasdaq National Market, and has received notification that such
listing has been approved, subject to official notice of issuance and sale.
(g) The Company and each of its subsidiaries are conducting business
in compliance with all applicable statutes, ordinances, orders, judgements,
decrees, laws, rules and regulations of the jurisdictions in which they are
conducting business, including, without limitation, all applicable local, state
and federal environmental regulations, except where the failure to be in
compliance would not have a material adverse effect on the business, properties,
financial condition, results of operations or prospects of the Company and its
subsidiaries taken as a whole. Neither the Company nor any of its subsidiaries
has provided or provides monetary compensation to the medical community in
return for patient referrals in violation of any applicable law, rule or
regulation.
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(h) The Company and each of its subsidiaries maintain insurance of
the types and in the amounts generally deemed adequate for their business,
including, but not limited to, professional liability insurance and insurance
covering real and personal property owned or leased by the Company or any of its
subsidiaries against theft, loss, damage, destruction, acts of vandalism, all of
which insurance is in full force and effect.
(i) The Company is not aware that (A) any executive officer, key
employee or significant group of employees of the Company or any of its
subsidiaries (the loss of whom would have a material adverse effect on the
Company) plans to terminate employment with the Company or any of its
subsidiaries or (B) any such executive officer or key employee is subject to any
non-competition, non-disclosure, confidentiality, employment, consulting or
similar agreement that would be violated by the present or proposed business
activities of the Company or any of its subsidiaries.
(j) The issuance and sale of the Stock to be sold by the Company and
the compliance by the Company with all of the provisions of this Agreement and
the consummation of the transactions herein contemplated will not conflict with
or result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or material instrument to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the Company
or any of its subsidiaries is subject, nor will such action result in any
violation of the provisions of the Articles of Incorporation or By-laws, each as
amended to date, of the Company or any statute or any order, rule or regulation
of any court or governmental agency or body having jurisdiction over the Company
or any of its subsidiaries or any of their properties; and no consent, approval,
authorization, order, registration or qualification of or with any such court or
governmental agency or body is required for the issuance and sale of the Stock
or the consummation by the Company of the transactions contemplated by this
Agreement, except the registration under the Securities Act of the Stock and
such consents, approvals, authorizations, registrations or qualifications as may
be required under state securities or blue sky laws in connection with the
purchase and distribution of the Stock by the Underwriters.
(k) Neither the Company nor any of its subsidiaries is in violation
of its Certificate of Incorporation or By-laws. Neither the Company nor any of
its subsidiaries is in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any indenture,
mortgage, deed of trust, loan agreement, lease or other agreement or instrument
to which it is a party or by which it or any of its properties may be bound
other than any defaults that singly or in the aggregate will not have a material
adverse effect on the financial position, stockholders' equity or results of
operations of the Company and its subsidiaries.
(l) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the Stock, are an accurate description of such terms in all
material respects.
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(m) Other than as described in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its subsidiaries
is a party or of which any property of the Company or any of its subsidiaries is
the subject which, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a material adverse
effect on the consolidated financial position, stockholders' equity or results
of operations of the Company and its subsidiaries; and, to the best of the
Company's knowledge, other than as described in the Prospectus, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others.
(n) The Company is not and, after giving effect to the offering and
sale of the Stock, will not be an "investment company" or an entity "controlled"
by an "investment company," as such terms are defined in the Investment Company
Act of 1940, as amended.
(o) Ernst & Young LLP, who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Securities Act and the rules and regulations of
the Commission thereunder.
(p) Except as disclosed in the Prospectus, the Company and each of
its subsidiaries own or possess (or otherwise have rights to the use of) the
patents, patent licenses, trademarks, trade names, service marks, service names,
copyrights and other intellectual property rights (collectively, the
"Intellectual Property") necessary to carry on the Company's business as
presently conducted and as proposed in the Prospectus to be conducted, without
any conflict with the rights of others, except for such conflicts as do not and
will not have a material adverse effect on the financial position, stockholders'
equity or results of operations of the Company and each of its subsidiaries,
taken as a whole; neither the Company nor its subsidiaries have received any
notice of infringement or violation or conflict with (and knows of no such
infringement or conflict with) asserted rights of others with respect to any
Intellectual Property or any trade secrets, proprietary information, inventions,
know-how, processes and procedures owned, used by or licensed to the Company or
any such subsidiary which, singly or in the aggregate, if the subject of any
unfavorable decision, ruling or finding, would have a material adverse effect on
the financial position, stockholders' equity or results of operations of the
Company and its subsidiaries, taken as a whole.
(q) The Company and its subsidiaries have endeavored in good faith
to structure their relationships with respect to the establishment of joint
ventures and management agreements in compliance with applicable governmental
laws and regulations relating to (i) licensure of pharmacies, (ii) fee-splitting
between health care providers and other entities, (iii) payment for health care
services (including without limitation the rules of participation for the
Medicare program and comparable provisions of state and federal law pertaining
to the Medicaid program), (iv) the federal and state fraud and abuse laws and
regulations thereunder (42 U.S.C. ss. 1320a-7b et seq.), and the Stark law and
regulations thereunder (42 U.S.C. ss. 1395nn et seq.) collectively, the "Health
Care Laws"). To the Company's best knowledge, it is in compliance with all
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Health Care Laws. Further, the Company has not been notified or advised by any
governmental agent or authority that it is under investigation with respect to
any violation or alleged violation of any of the Health Care Laws.
3. Purchase of the Stock by the Underwriters.
(a) On the basis of the representations and warranties and subject
to the terms and conditions herein set forth, the Company agrees to issue and
sell 3,000,000 shares of the Underwritten Stock to the several Underwriters and
each of the Underwriters agrees to purchase from the Company the respective
aggregate number of shares of Underwritten Stock set forth opposite its name in
Schedule I. The price at which such shares of Underwritten Stock shall be sold
by the Company and purchased by the several Underwriters shall be $___ per
share. In making this Agreement, each Underwriter is contracting severally and
not jointly; except as provided in paragraphs (b) and (c) of this Section 3, the
agreement of each Underwriter is to purchase only the respective number of
shares of the Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company shall immediately give notice thereof
to you, and the non-defaulting Underwriters shall have the right within 24 hours
after the receipt by you of such notice to purchase, or procure one or more
other Underwriters to purchase, in such proportions as may be agreed upon
between you and such purchasing Underwriter or Underwriters and upon the terms
herein set forth, all or any part of the shares of the Stock which such
defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail so to make such arrangements with respect to all such shares
and portion, the number of shares of the Stock which each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining shares and
portion which the defaulting Underwriter or Underwriters agreed to purchase;
provided, however, that the non-defaulting Underwriters shall not be obligated
to purchase the shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Stock exceeds 10% of the total number of shares of the Stock which all
Underwriters agreed to purchase hereunder. If the total number of shares of the
Stock which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the 24-hour period
referred to above, to make arrangements with other underwriters or purchasers
satisfactory to you for the purchase of such shares and portion on the terms
herein set forth. In any such case, either you or the Company shall have the
right to postpone the Closing Date determined as provided in Section 5 hereof
for not more than seven business days after the date originally fixed as the
Closing Date pursuant to said Section 5 in order that any necessary changes in
the Registration Statement, the Prospectus or any other documents or
arrangements may be made. If neither the non-defaulting Underwriters nor the
Company shall make arrangements within the 24-hour periods
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stated above for the purchase of all the shares of the Stock which the
defaulting Underwriter or Underwriters agreed to purchase hereunder, this
Agreement shall be terminated without further act or deed and without any
liability on the part of the Company to any non-defaulting Underwriter and
without any liability on the part of any non-defaulting Underwriter to the
Company. Nothing in this paragraph (b), and no action taken hereunder, shall
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase, severally and
not jointly, up to 450,000 shares in the aggregate of the Option Stock from the
Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of shares of the
Option Stock as to which the several Underwriters are exercising the option.
Delivery of certificates for the shares of Option Stock, and payment therefor,
shall be made as provided in Section 5 hereof. The number of shares of the
Option Stock to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Stock to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Stock, as
adjusted by you in such manner as you deem advisable to avoid fractional shares.
4. Offering by Underwriters.
(a) The terms of the initial public offering by the Underwriters of
the Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine, subject to compliance by the
Underwriters with applicable laws, rules and regulations relating thereto.
(b) The information set forth in the last paragraph on the outside
front prospectus cover page, the last paragraph on the inside front prospectus
cover page and under the caption "Underwriting" in the Registration Statement,
any Preliminary Prospectus and the Prospectus relating to the Stock filed by the
Company (insofar as such information relates to the Underwriters) constitutes
the only information furnished by the Underwriters in writing to the Company for
inclusion in the Registration Statement, any Preliminary Prospectus, and the
Prospectus, and on behalf of the respective Underwriters you represent and
warrant to the Company that the statements made therein are correct.
5. Delivery of and Payment for the Stock.
(a) Delivery of certificates for the shares of the Underwritten
Stock and the Option Stock (if the option granted by Section 3(c) hereof shall
have been
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exercised not later than 7:00 a.m., San Francisco time, on the date two business
days preceding the Closing Date), and payment therefor, shall be made at the
office of Hambrecht & Quist LLC, One Bush Street, San Francisco, California
94104, at 7:00 a.m., San Francisco time, on the fourth business day after the
date of this Agreement, or at such time on such other day, not later than seven
full business days after such fourth business day, as shall be agreed upon in
writing by the Company and you. The date and hour of such delivery and payment
(which may be postponed as provided in Section 3(b) hereof) are herein called
the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Hambrecht & Quist LLC, One Bush
Street, San Francisco, California 94104 at 7:00 a.m., San Francisco time, on the
third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made
to the Company or its order by, at the Company's option, wire transfer or one or
more certified or official bank check or checks in same day funds. The Company
must notify the Underwriters at least three business days preceding the Closing
Date and at least one business day preceding the purchase of the Option Stock of
its election, and if it elects to receive payment by wire transfer. Such
notification shall include the appropriate wire instructions. Such payment shall
be made upon delivery of certificates for the Stock (or by electronic delivery
through the facilities of the Depository Trust Company) to you for the
respective accounts of the several Underwriters against receipt therefor signed
by you. If certificates for the Stock are to be delivered, such certificates
shall be registered in such name or names and shall be in such denominations as
you may request at least one business day before the Closing Date, in the case
of Underwritten Stock, and at least one business day prior to the purchase
thereof, in the case of the Option Stock. Such certificates will be made
available to the Underwriters for inspection, checking and packaging at the
offices of Lewco Securities Corporation, 2 Broadway, New York, New York 10004 on
the business day prior to the Closing Date or, in the case of the Option Stock,
by 3:00 p.m., New York time, on the business day preceding the date of purchase.
Time shall be of the essence and delivery at the time and place specified above
is a further condition to the obligations of the Underwriters.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later date on which Option Stock is
purchased for the account of such Underwriter. Any such payment by you shall not
relieve such Underwriter from any of its obligations hereunder.
6. Further Agreements of the Company. The Company covenants and agrees as
follows:
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(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A;
provided, however, that the Company shall not file such Prospectus under Rule
424(b) or any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission. The Company will provide evidence satisfactory to the Underwriters
of the timely filing of the Prospectus filed under Rule 424(b).
(b) The Company will promptly notify each Underwriter in the event
of (i) the request by the Commission for amendment of the Registration Statement
or for any supplement to the Prospectus or for any additional information, (ii)
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement, (iii) the institution or notice of intended
institution of any action or proceeding for that purpose, (iv) the receipt by
the Company of any notification with respect to the suspension of the
qualification of the Stock for sale in any jurisdiction, or (v) the receipt by
the Company of notice of the initiation or threatening of any proceeding for
such purpose. The Company will make every reasonable effort to prevent the
issuance of such a stop order and, if such an order shall at any time be issued,
to obtain the withdrawal thereof at the earliest possible moment.
(c) The Company will (i) on or before the date hereof, and with
respect to documents filed after the date hereof, on or before the Closing Date,
deliver to you a signed copy of the Registration Statement as originally filed
and of each amendment thereto filed prior to the time the Registration Statement
becomes effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that a sufficient number of copies of each may be distributed to each
Underwriter, (ii) as promptly as possible deliver to you and send to the several
Underwriters, at such office or offices as you may designate, as many copies of
the Prospectus as you may reasonably request, and (iii) thereafter from time to
time during the period in which a prospectus is required by law to be delivered
by an Underwriter or dealer, likewise send to the Underwriters as many
additional copies of the Prospectus and as many copies of any supplement to the
Prospectus and of any amended prospectus, filed by the Company with the
Commission, as you may reasonably request for the purposes contemplated by the
Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event relating
to or affecting the Company, or of which the Company shall be advised in writing
by you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement or
amend the Prospectus in order to make the Prospectus not misleading in the light
of the circumstances existing at the time it is
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delivered to a purchaser of the Stock, the Company will forthwith prepare and
file with the Commission, at its own expense, a supplement to the Prospectus or
an amended prospectus so that the Prospectus as so supplemented or amended will
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in light of the
circumstances existing at the time such Prospectus is delivered to such
purchaser, not misleading. In addition, upon your written request, the Company
will at its own expense prepare and file with the Commission any amendments or
supplements to the Registration Statement or Prospectus which, in the opinion of
counsel to the Underwriters, may be necessary or advisable in connection with
the distribution of the Stock by the Underwriters. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company
will submit to you, for your information, a copy of any post-effective amendment
to the Registration Statement and any supplement or amendment to the Prospectus
proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time to
time, prepare and file such statements, reports, and other documents as are or
may be required to continue such qualifications in effect for so long a period
as you may reasonably request for distribution of the Stock.
(g) During a period of five years commencing with the date hereof,
the Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and upon request of all information, documents and reports filed
with the Commission.
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date, the
Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
(i) Whether or not the transactions contemplated hereunder are
consummated or this Agreement is terminated, the Company agrees to pay all costs
and expenses incident to the performance of its obligations under this
Agreement, including all costs and expenses incident to (i) the preparation,
printing and filing with the Commission and the National Association of
Securities Dealers, Inc. ("NASD") of the Registration Statement, any Preliminary
Prospectus and the Prospectus (other than,
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except as provided for in paragraph (j) below and unless expressly provided for
elsewhere herein, fees and disbursements of Underwriters' counsel, fees and
expenses incurred by the Underwriters in connection with the preparation of the
Registration Statement, the Preliminary Prospectus and the Prospectus and any
advertising or marketing expenses incurred in connection with the offering by
the Underwriters), (ii) the furnishing to the Underwriters of copies of any
Preliminary Prospectus, and of the several documents required by paragraph (c)
of this Section 6 to be so furnished, (iii) the printing of documents required
to be delivered to the Underwriters pursuant hereof, (iv) the preparation,
printing and filing of all supplements and amendments to the Prospectus referred
to in paragraph (d) of this Section 6 (other than, except as provided for in
paragraph (j) below and unless expressly provided for elsewhere herein, fees and
disbursements of Underwriters' counsel and fees and expenses incurred by the
Underwriters in connection with the preparation of any such supplement or
amendment), (v) the furnishing to you and the Underwriters of the reports and
information referred to in paragraph (g) of this Section 6 and (vi) the printing
and issuance of stock certificates, including the transfer agent's fees.
(j) The Company agrees to reimburse you, for the account of the
several Underwriters, for blue sky fees and related disbursements (including,
without limitation, filing fees, counsel fees and disbursements) paid by or for
the account of the Underwriters or their counsel in qualifying the Stock under
state securities or blue sky laws and in the review of the offering by the NASD.
(k) The Company hereby agrees that, without the prior written
consent of Hambrecht & Quist LLC on behalf of the Underwriters, the Company will
not, 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 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 for a period continuing until 180 days after the
effective date of the registration statement relating to the initial Public
Offering. The foregoing sentence shall not apply to (A) the Stock to be sold to
the Underwriters pursuant to this Agreement, (B) shares of Common Stock issued
by the Company upon the exercise of options granted or other awards under the
stock option plans of the Company (the "Option Plans"), all as described in the
Preliminary Prospectus, and (C) options to purchase Common Stock or other awards
of (or relating to) Common Stock granted under the Option Plans.
(l) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate
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a press release or other public statement, reasonably satisfactory to you,
responding to or commenting on such rumor, publication or event.
(m) The Company is familiar with the Investment Company Act of 1940,
as amended, and has in the past conducted its affairs, and will in the future
conduct its affairs, in such a manner to ensure that the Company was not and
will not be an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.
(n) The Company will apply the net proceeds of the sale of the Stock
sold by it substantially in accordance with its statements under the caption
"Use of Proceeds" in the Prospectus.
7. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person (including each partner or officer thereof) who
controls any Underwriter within the meaning of Section 15 of the Securities Act
from and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act, or the common law or otherwise, and
the Company agrees to reimburse each such Underwriter and controlling person for
any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case to the extent the same arises out of or is
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (including the Prospectus
constituting a part thereof and any Rule 462(b) registration statement) or any
post-effective amendment thereto (including any Rule 462(b) registration
statement), or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or (ii) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged omission
to state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; provided, however, that (1) the indemnity agreements of the Company
contained in this paragraph (a) shall not apply to any such losses, claims,
damages,
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liabilities or expenses if such statement or omission was made in the last
paragraph on the outside front prospectus cover page, the last paragraph on the
inside front prospectus cover page, or under the caption "Underwriting" in any
Preliminary Prospectus or the Registration Statement or the Prospectus or any
such amendment thereof or supplement thereto and (2) the indemnity agreement
contained in this paragraph (a) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
such losses, claims, damages, liabilities or expenses purchased the Stock which
is the subject thereof (or to the benefit of any person controlling such
Underwriter) if at or prior to the written confirmation of the sale of such
Stock a copy of the Prospectus (or the Prospectus as amended or supplemented)
was not sent or delivered to such person and the untrue statement or omission of
a material fact contained in such Preliminary Prospectus was corrected in the
Prospectus (or the Prospectus as amended or supplemented) unless the failure is
the result of noncompliance by the Company with paragraph (c) of Section 6
hereof. The indemnity agreements of the Company contained in this paragraph (a)
and the representations and warranties of the Company contained in Section 2
hereof shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any indemnified party and shall survive
the delivery of and payment for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its officers who signs the Registration Statement on his
own behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, from and against any and all losses, claims, damages
or liabilities, joint or several, to which such indemnified parties or any of
them may become subject under the Securities Act, the Exchange Act, or the
common law or otherwise and to reimburse each of them for any legal or other
expenses (including, except as otherwise hereinafter provided, reasonable fees
and disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case to the extent the same arises out of or is based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus constituting a part thereof and
any Rule 462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, if such statement or omission was
made in the last paragraph on the outside front prospectus cover page, the last
paragraph on the inside front prospectus cover page, or under the caption
"Underwriting" in any Preliminary Prospectus or the Registration Statement or
the Prospectus or any such amendment thereof or supplement thereto. The
indemnity agreement of each Underwriter contained in this paragraph (b) shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any indemnified party and shall survive the delivery of
and payment for the Stock.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written
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<PAGE>
notification of the commencement of any investigation or inquiry of, or
proceeding against, it in respect of which indemnity may be sought on account of
any indemnity agreement contained in such paragraphs, it will promptly give
written notice (herein called the Notice) of such service or notification to the
party or parties from whom indemnification may be sought hereunder. No
indemnification provided for in such paragraphs shall be available to any party
who shall fail so to give the Notice if the party to whom such Notice was not
given was unaware of the action, suit, investigation, inquiry or proceeding to
which the Notice would have related and was prejudiced by the failure to give
the Notice, but the omission so to notify such indemnifying party or parties of
any such service or notification shall not relieve such indemnifying party or
parties from any liability which it or they may have to the indemnified party
for contribution or otherwise than on account of such indemnity agreement. Any
indemnifying party shall be entitled at its own expense to participate in the
defense of any action, suit or proceeding against, or investigation or inquiry
of, an indemnified party. Any indemnifying party shall be entitled, if it so
elects within a reasonable time after receipt of the Notice by giving written
notice (herein called the Notice of Defense) to the indemnified party, to assume
(alone or in conjunction with any other indemnifying party or parties) the
entire defense of such action, suit, investigation, inquiry or proceeding, in
which event such defense shall be conducted, at the expense of the indemnifying
party or parties, by counsel chosen by such indemnifying party or parties and
reasonably satisfactory to the indemnified party or parties; provided, however,
that (i) if the indemnified party or parties reasonably determine that there may
be a conflict between the positions of the indemnifying party or parties and of
the indemnified party or parties in conducting the defense of such action, suit,
investigation, inquiry or proceeding or that there may be legal defenses
available to such indemnified party or parties different from or in addition to
those available to the indemnifying party or parties, then counsel for the
indemnified party or parties shall be entitled to conduct the defense to the
extent reasonably determined by such counsel to be necessary to protect the
interests of the indemnified party or parties and (ii) in any event, the
indemnified party or parties shall be entitled to have counsel chosen by such
indemnified party or parties participate in, but not conduct, the defense. If,
within a reasonable time after receipt of the Notice, an indemnifying party
gives a Notice of Defense and the counsel chosen by the indemnifying party or
parties is reasonably satisfactory to the indemnified party or parties, the
indemnifying party or parties will not be liable under paragraphs (a) through
(c) of this Section 7 for any legal or other expenses subsequently incurred by
the indemnified party or parties in connection with the defense of the action,
suit, investigation, inquiry or proceeding, except that (A) the indemnifying
party or parties shall bear the legal and other expenses incurred in connection
with the conduct of the defense as referred to in clause (i) of the proviso to
the preceding sentence and (B) the indemnifying party or parties shall bear such
other expenses as it or they have authorized to be incurred by the indemnified
party or parties. If, within a reasonable time after receipt of the Notice, no
Notice of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party or
parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding.
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<PAGE>
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Underwriters shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Stock received by
the Company and the total underwriting discount received by the Underwriters, as
set forth in the table on the cover page of the Prospectus, bear to the
aggregate public offering price of the Stock. Relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by each indemnifying party and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (d) shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigation, preparing to defend or defending against
any action or claim which is the subject of this paragraph (d). Notwithstanding
the provisions of this paragraph (d), no Underwriter shall be required to
contribute any amount in excess of the underwriting discount applicable to the
Stock purchased by such Underwriter. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this paragraph
(d) to contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of
a summons or other initial legal process upon it in any action instituted
against it in respect of which contribution may be sought, it will promptly give
written notice of such service to the party or parties from whom contribution
may be sought, but the omission so to notify such party or parties of any such
service shall not relieve the party from whom contribution may be sought from
any obligation it may have hereunder or otherwise (except as specifically
provided in paragraph (c) of this Section 7).
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<PAGE>
(e) The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or proceeding.
8. Termination. This Agreement may be terminated by you at any time prior
to the Closing Date by giving written notice to the Company if after the date of
this Agreement trading in the Common Stock shall have been suspended, or if
there shall have occurred (i) the engagement in hostilities or an escalation of
major hostilities by the United States or the declaration of war or a national
emergency by the United States on or after the date hereof, (ii) any outbreak of
hostilities or other national or international calamity or crisis or change in
economic or political conditions if the effect of such outbreak, calamity,
crisis or change in economic or political conditions in the financial markets of
the United States would, in the Underwriters' reasonable judgment, make the
offering or delivery of the Stock impracticable, (iii) suspension of trading in
securities generally or a material adverse decline in value of securities
generally on the New York Stock Exchange, the American Stock Exchange or the
Nasdaq National Market, or limitations on prices (other than limitations on
hours or numbers of days of trading) for securities on either such exchange or
system, (iv) the enactment, publication, decree or other promulgation of any
federal or state statute, regulation, rule or order of, or commencement of any
proceeding or investigation by, any court, legislative body, agency or other
governmental authority which in the Underwriters' reasonable opinion materially
and adversely affects or will materially or adversely affect the business or
operations of the Company, (v) declaration of a banking moratorium by either
federal or New York State authorities or (vi) the taking of any action by any
federal, state or local government or agency in respect of its monetary or
fiscal affairs which in the Underwriters' reasonable opinion has a material
adverse effect on the securities markets in the United States. If this Agreement
shall be terminated pursuant to this Section 8, there shall be no liability of
the Company to the Underwriters and no liability of the Underwriters to the
Company; provided, however, that in the event of any such termination the
Company agrees to indemnify and hold harmless the Underwriters from all costs or
expenses incident to the performance of the obligations of the Company under
this Agreement, to the extent provided for in paragraphs (i) and (j) of Section
6 hereof.
9. Conditions of Underwriters' Obligations. The obligations of the several
Underwriters to purchase and pay for the Stock shall be subject to the accuracy
of the representations and warranties on the part of the Company and the
performance by the Company of all its obligations to be performed hereunder at
or prior to the Closing Date and, solely with respect to the Option Stock, on
any later date on which Option Stock is to be purchased, as the case may be, and
to the following further conditions:
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<PAGE>
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder
and the validity and form of the certificates representing the Stock, all
corporate proceedings and other legal matters incident to the foregoing, and the
form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved at or prior to
the Closing Date by Goodwin, Procter & Hoar LLP, counsel for the Underwriters,
provided that such approval is not unreasonably withheld.
(c) You shall have received from Alston & Bird LLP, counsel for the
Company, an opinion, addressed to the Underwriters and dated the Closing Date,
covering the matters set forth in Annex A hereto, and if Option Stock is
purchased at any date after the Closing Date, additional opinions from each such
counsel, addressed to the Underwriters and dated such later date, confirming
that the statements expressed as of the Closing Date in such opinions remain
valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment filed with the Commission, (iii) since the respective
dates as of which information is given in the Registration Statement in the form
in which it originally became effective and the Prospectus contained therein,
there has not been any material adverse change or any development involving a
prospective material adverse change in or affecting the business, properties,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions in the
ordinary course of business, and, since such dates, except in the ordinary
course of business, neither the Company nor any of its subsidiaries has entered
into any material transaction not referred to in the Registration Statement in
the form in which it originally became effective and the Prospectus contained
therein, (iv) neither the Company nor any of its subsidiaries has any material
contingent obligations which are not disclosed in the Registration Statement and
the Prospectus, (v) there are not any pending or known threatened legal
proceedings to which the Company or any of its subsidiaries is a party or of
which property of the Company or any of its subsidiaries is the subject which
are required to be disclosed in the Registration Statement and the Prospectus
and which are not disclosed as required, (vi) there are not any franchises,
contracts, leases or other documents which are required to be filed as exhibits
to the Registration Statement which have not been filed as required, (vii) the
representations and warranties of the Company herein are true and correct in all
material respects as of the Closing Date and on any later date on which Option
Stock is to be purchased, as the case may be, and (viii) there has not been any
material change in the market for securities in general or in political,
financial or economic conditions and which renders it
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<PAGE>
impracticable in your reasonable judgment to make a public offering of the
Stock, or a material adverse change in market levels for securities in general
(or those of companies in particular) or financial or economic conditions which
render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later
date on which Option Stock is purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, in their capacities as such officers, stating
that the respective signers of said certificate have carefully examined the
Registration Statement in the form in which it originally became effective and
the Prospectus contained therein and any supplements or amendments thereto, and
that the statements included in clauses (i) through (vii) of paragraph (d) of
this Section 9 are true and correct.
(f) You shall have received from Ernst & Young LLP, a letter or
letters, addressed to the Underwriters and dated the Closing Date and any later
date on which Option Stock is purchased, confirming that they are independent
public accountants with respect to the Company within the meaning of the
Securities Act and the applicable published rules and regulations thereunder
and, based upon the procedures described in their letter delivered to you
concurrently with the execution of this Agreement (herein called the Original
Letter), but carried out to a date not more than three business days prior to
the Closing Date or such later date on which Option Stock is purchased, (i)
confirming, to the extent true, that the statements and conclusions set forth in
the Original Letter are accurate as of the Closing Date or such later date, as
the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of the Original Letter or to reflect the availability of more recent
financial statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or affecting the
business or properties of the Company and its subsidiaries, taken as a whole,
which, in your sole judgment, makes it impractical or inadvisable to proceed
with the public offering of the Stock or the purchase of the Option Stock as
contemplated by the Prospectus.
(g) You shall have received from Ernst & Young a letter stating that
their review of the Company's system of internal accounting controls, to the
extent they deemed necessary in establishing the scope of their examination of
the Company's financial statements as at June 30, 1998, did not disclose any
weakness in internal controls that they considered to be material weaknesses.
(h) Prior to the Closing Date, the Stock to be issued and sold by
the Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(i) On or prior to the Closing Date, you shall have received from
all stockholders agreements, in form reasonably satisfactory to Hambrecht &
Quist LLC, stating that without the prior written consent of Hambrecht & Quist
LLC on behalf of the Underwriters, such person or entity will not, directly or
indirectly offer, sell, pledge,
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<PAGE>
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 such agreements in accordance with the rules and regulations of the
Securities and Exchange 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 for a period continuing until 180 days
after the effective date of the registration statement relating to the initial
public offering.
The lock-up agreement described above shall not apply to transfers (i) in
connection with the initial public offering of the Company's Stock to the extent
that the stockholder is a selling stockholder in such offering, (ii) by gift,
will or intestacy, (iii) in the event the stockholder is an individual, to his
or her immediate family or to a trust the beneficiaries of which are exclusively
the stockholder and/or a member or members of his or her immediate family, (iv)
as a distribution to partners, members or shareholders of the stockholder, or
(v) to an affiliate of the stockholder; provided, however, that in the case of
transfers under clauses (ii), (iii), (iv) and (v), it shall be a condition to
the transfer that the transferee execute an agreement stating that the
transferee is receiving and holding the Stock subject to the provisions of the
lock-up agreement, and there shall be no further transfer of such Stock except
in accordance with the lock-up agreement.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if you and Goodwin, Procter & Hoar LLP, counsel for the
Underwriters, shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that (i) in the event of such termination, the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement to the
extent provided for in paragraphs (i) and (j) of Section 6 hereof, and (ii) if
this Agreement is terminated by you because of any refusal, inability or failure
on the part of the Company to perform any agreement of the Company herein, to
fulfill any of the conditions herein, or to comply with any provision hereof
that is applicable to the Company, other than by reason of a default by any of
the Underwriters, the Company will reimburse the Underwriters severally upon
demand for all out-of-pocket expenses (including reasonable fees and
disbursements of counsel) that shall have been incurred by them in connection
with the transactions contemplated hereby.
10. Conditions of the Obligation of the Company. The obligation of the
Company to deliver the Stock shall be subject to the conditions that (a) the
Registration
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<PAGE>
Statement shall have become effective and (b) no stop order suspending the
effectiveness thereof shall be in effect and no proceedings therefor shall be
pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company by giving notice to
you. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that in the event of any such termination the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement to the
extent provided for in paragraphs (i) and (j) of Section 6 hereof.
11. Reimbursement of Certain Expenses. In addition to its other
obligations under Section 7 of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. Persons Entitled to Benefit of Agreement. This Agreement shall inure
to the benefit of the Company and the several Underwriters and, with respect to
the provisions of Section 7 hereof, the several parties (in addition to the
Company and the several Underwriters) indemnified under the provisions of said
Section 7, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the Stock from any of the several Underwriters.
13. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing and, if to the Underwriters, shall be mailed, sent
via overnight courier, sent by facsimile or delivered to Hambrecht & Quist LLC,
One Bush Street, San Francisco, California 94104; and if to the Company, shall
be mailed, sent via overnight courier, sent by facsimile or delivered to it at
its office, 1640 Century Center Parkway, Suite 101, Memphis, TN 38134,
Attention: David D. Stevens. Any notice sent in accordance with the provisions
of this Section 13 shall be deemed to have been received on the date which is:
(i) three (3) business days after the date of proper posting, if sent by
certified U.S. mail, postage prepaid, return receipt requested; or (ii) the date
on which sent, if sent by facsimile transmission, with confirmation and with the
original to
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<PAGE>
be sent by certified U.S. mail; or (iii) the next business day if sent by
overnight delivery by a national courier service.
14. Miscellaneous. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or their respective directors or officers, and (c) delivery and
payment for the Stock under this Agreement; provided, however, that if this
Agreement is terminated prior to the Closing Date, the provisions of paragraph
(k) of Section 6 hereof shall be of no further force or effect.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
ACCREDO HEALTH, INCORPORATED
By
--------------------------
David D. Stevens
Chief Executive Officer
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
NATIONSBANC MONTGOMERY SECURITIES LLC
SUNTRUST EQUITABLE SECURITIES LLC
By Hambrecht & Quist LLC
By:
--------------------------
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<PAGE>
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
SCHEDULE I
UNDERWRITERS
Number of Shares to be
Underwriters Purchased
Hambrecht & Quist LLC
NationsBank Montgomery Securities LLC
SunTrust Equitable Securities Corporation
Total
ANNEX A
Matters to be Covered in the Opinion of
Alston & Bird LLP Counsel for the Company
(i) The Company has been duly incorporated and is validly
existing as a corporation and is in good standing under the laws of the
State of Delaware, and is qualified to transact business as a foreign
corporation in the State[s] of ________. The Company has the corporate
power and authority to own or lease its properties and conduct its
business as described in the Registration Statement. Each of the Company's
corporate subsidiaries has been duly incorporated and is validly existing
as a corporation and is in good standing under the laws of the State of
Tennessee, and is qualified to transact business as a foreign corporation
in the State[s] of ________. Each of the Company an its subsidiaries is
duly qualified to do business in each jurisdiction in which it owns or
leases property or in which the conduct of its business requires such
qualification (as such properties and business are described in the
Registration Statement.) Each of the Company's corporate subsidiaries has
the corporate power and the corporate authority to own or lease its
properties and conduct its business as described in the Registration
Statement; all the issued and outstanding capital stock of each of the
subsidiaries of the Company has been duly authorized and validly issued
and is fully paid and nonassessable, and except as disclosed in the
Prospectus, is owned by the Company free and clear of all liens,
encumbrances and security interests, and to such counsel's knowledge, no
options, warrants or other rights to purchase, agreements or other
obligations to
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<PAGE>
issue or other rights to convert any obligations into shares of capital
stock or ownership interests in such subsidiaries are outstanding.
(ii) the authorized capital stock of the Company consists of
___ shares of Preferred Stock, none of which there are outstanding, and
___________ shares of Common Stock, $____ par value, of which there are
outstanding ___________ shares (including the Underwritten Stock plus the
number of shares of Option Stock, if any, issued on the date hereof); such
authorized capital stock has been duly authorized; all of the outstanding
shares of such capital stock (including the Underwritten Stock and the
shares of Option Stock issued, if any) have been validly issued and are
fully paid and nonassessable; and no preemptive rights of, or rights of
refusal in favor of, stockholders exist with respect to the Stock, or the
issue and sale thereof, pursuant to the Certificate of Incorporation or
Bylaws of the Company and, to the knowledge of such counsel, there are no
contractual preemptive rights, rights of first refusal or rights of
co-sale that have not been waived with respect to the issue and sale of
the Stock;
(iii) the descriptions of statutes and regulations under the
captions "Risk Factors--Government Regulation" and "Business--Government
Regulation" of the Registration Statement accurately summarize and fairly
present the matters therein described.
(iv) the Registration Statement and the Prospectus (except as
to the financial statements and schedules and other financial and
statistical data contained therein, as to which such counsel need express
no opinion) comply as to form in all material respects with the
requirements of the Securities Act and the rules and regulations of the
Commission thereunder;
(v) the information required to be set forth in the
Registration Statement in answer to Items 9, 10 (insofar as it relates to
such counsel) and 11(c) of Form S-1 is to such counsel's knowledge
accurately and adequately set forth therein in all material respects or no
response is required with respect to such Items, and, the description of
the Company's stock option plan and the options granted and which may be
granted thereunder set forth in the Prospectus accurately presents the
information required to be shown with respect to said plan and options to
the extent required by the Securities Act and the rules and regulations of
the Commission thereunder;
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<PAGE>
(vi) such counsel do not know of any franchises, contracts,
leases, documents or legal or governmental proceedings, pending or
threatened, which in the opinion of such counsel are of a character
required to be described in the Registration Statement or the Prospectus
or to be filed as exhibits to the Registration Statement, which are not
described and filed as required;
(vii) the Underwriting Agreement has been duly authorized,
executed and delivered by the Company;
(viii) the issuance and sale by the Company of the shares of
Stock sold by the Company and the consummation of the transactions as
contemplated by the Underwriting Agreement do not conflict with, or result
in a breach of, or a default under the Certificate of Incorporation or
Bylaws of the Company or any of its subsidiaries or any agreement or
instrument known to such counsel to which the Company or any of its
subsidiaries is a party or any applicable law or regulation, or insofar as
is known to such counsel, any order, writ, injunction or decree to which
the Company or its subsidiaries are subject;
(ix) all holders of securities of the Company having rights to
the registration of shares of Common Stock, or other securities, because
of the filing of the Registration Statement by the Company have waived
such rights or such rights have expired by reason of lapse of time
following notification of the Company's intent to file the Registration
Statement;
(x) no consent, approval, authorization or order of any court
or governmental agency or body is required for the issuance or sale of the
Stock or the consummation of the transactions contemplated in the
Underwriting Agreement, except such as have been obtained under the
Securities Act and such as may be required under state securities or blue
sky laws in connection with the purchase and distribution of the Stock by
the Underwriters;
(xi) neither the Company nor any of its subsidiaries is an
"investment company" or an entity "controlled" by an "investment company,"
as such terms are defined in the Investment Company Act of 1940.
--------------------
Counsel has participated in conferences with officials and other
representatives of the Company, the Representatives, Underwriters' Counsel
and the independent certified public accountants of the Company, at which
such conferences the contents of the Registration Statement and Prospectus
and related matters were discussed. Based on our participations in these
conferences, our review of corporate documents furnished to us by the
Company, our understanding of applicable law and the experience we have
gained in our practice thereunder, nothing has come to the attention of
such counsel which leads us to believe that the Registration Statement
(except as to the financial statements and schedules and other financial
and statistical data contained therein, as to which such counsel need not
express any opinion or belief) at the Effective Date
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<PAGE>
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus (except as to
the financial statements and schedules and other financial and statistical
data contained therein, as to which such counsel need not express any
opinion or belief) as of its date or at the Closing Date (or any later
date on which the Option Stock is purchased), contained or contains any
untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the provisions of the
Delaware General Corporation Law, upon opinions of local counsel
satisfactory in form and scope to counsel for the Underwriters, and as to
questions of fact, upon representations or certificates of officers of the
Company and of government officials. Copies of any opinions so relied upon
shall be delivered to the Representatives and to counsel for the
Underwriters and the foregoing opinion shall also state that counsel knows
of no reason the Underwriters are not entitled to rely upon the opinions
of such local counsel.
- 26 -
<PAGE>
COMMON STOCK COMMON STOCK
- ------NUMBER------ ------SHARES------
ACCREDO
HEALTH, INCORPORATED
- ------------------ ------------------
INCORPORATED UNDER SEE REVERSE FOR CERTAIN
THE LAWS OF THE DEFINITIONS AND A
STATE OF DELAWARE STATEMENT AS TO THE RIGHTS,
PREFERENCES, PRIVILEGES AND
RESTRICTIOINS OF SHARES
CUSIP 00437V 10 4
- ----------------------------------------------------------------------------
THIS CERTIFIES THAT
IS THE OWNER OF
- ----------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF
- ----------------------- -----------------------
- ----------------------- ACCREDO HEALTH, INCORPORATED -----------------------
- ----------------------- -----------------------
transferable only on the books of the Corporation by the registered holder
hereof in person or by duly authorized attorney upon surrender of this
certificate properly endorsed. This certificate is not valid unless
countersigned by the Transfer Agent and registered by the Registrar.
In Witness Whereof, the Corporation has caused this certificate to be
signed in facsimile by its authorized officers and its facsimile seal to be
hereunto affixed.
Dated:
[SEAL]
/s/ Thomas W. Bell, Jr. /s/ David D. Stevens
--------------------------- ----------------------
SECRETARY CHAIRMAN OF THE BOARD
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, NEW YORK) TRANSFER AGENT
AND REGISTRAR
BY:
AUTHORIZED SIGNATURE
<PAGE>
ACCREDO HEALTH, INCORPORATED
A statement of the rights, preferences, privileges and restrictions granted
to or imposed upon the respective classes or series of shares and upon the
holders thereof as established, from time to time, by the Articles of
Incorporation of the Corporation and by any certificate of determination, and
the number of shares constituting each class and series and the designations
thereof, may be obtained by the holder hereof upon written request and
without charge from the Secretary of the Corporation at its corporate
headquarters or the Registrar named on the face of this certificate.
- ----------------------------------------------------------------------------
The following abbreviations when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM- as tenants in common UNIF GIFT MIN ACT-_________________Custodian______________
TEN ENT- as tenants by the entireties (Cust) (Minor)
JT TEN- as joint tenants with
right of survivorship and under Uniform Gifts to Minors Act
not as tenants in common ____________________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value received, ______________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
_____________________________________________________________________________
_____________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_______________________________________________________________________Shares
of the common stock represented by the within certificate, and do hereby
irrevocably constitute and appoint___________________________________________
__________________________________________________________________Attorney to
transfer the said stock on the books of the within-named Corporation with full
power of substitution in the premises.
Dated, ______________________________ X ______________________________________
X ______________________________________
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF
THE CERTIFICATE, IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT, OR
ANY CHANGE WHATSOEVER.
SIGNATURE GUARANTEED: ____________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE, IF IT IS LOST, STOLEN, OR
DESTROYED, THE CORPORATION MAY REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
<PAGE>
EXHIBIT 5.1
ALSTON & BIRD LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
404-881-7000
Fax: 404-881-7777
March 26, 1999
Accredo Health, Incorporated
1640 Century Center Parkway, Suite 101
Memphis, TN 38134
Re: Form S-1 Registration Statement
Accredo Health, Incorporated
Ladies and Gentlemen:
We have acted as counsel for Accredo Health, Incorporated, a Delaware
corporation (the "Corporation"), in connection with the above referenced
Registration Statement on Form S-1 (the "Registration Statement") being filed
by the Corporation with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended, and covering
3,000,00 shares of the Corporation's common stock, $0.01 par value ("Common
Stock"). This Opinion Letter is rendered pursuant to Item 16 of Form S-1 and
Item 601(b)(5) of Regulation S-K. Capitalized terms used in this Opinion
Letter and not otherwise defined herein shall have the meanings assigned to
such terms in the Registration Statement.
In the capacity described above, we have considered such matters of law
and of fact, including the examination of originals or copies, certified or
otherwise identified to our satisfaction, of such records and documents of
the Corporation, certificates of public officials and such other documents as
we have deemed appropriate as a basis for the opinions hereinafter set forth.
The opinions set forth herein are limited to the laws of the State of
Delaware, in reliance solely on published general compilations thereof as of
the date hereof.
<TABLE>
<S> <C> <C>
1211 East Morehead Street 3605 Glenwood Avenue, Suite 310 601 Pennsylvania Avenue, N.W.
P.O. Drawer 34009 P.O. Drawer 31107 North Building, 11th Floor
Charlotte, NC 28234-4009 Raleigh, NC 27622-1107 Washington, DC 20004-2601
704-331-6000 919-420-2200 202-756-3300
Fax: 704-334-2014 Fax: 919-420-2260 Fax: 202-756-3333
</TABLE>
<PAGE>
Based upon the foregoing, it is our opinion that when issued the
3,000,000 shares of Common Stock covered by the Registration Statement will
be legally and validly issued, fully paid and nonassessable.
This Opinion Letter is provided to you for your benefit and for the
benefit of the Commission, in each case, solely with regard to the
Registration Statement, may be relied upon by you and the Commission only in
connection with the Registration Statement, and may not be relied upon by any
other person or for any other purpose without our prior written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and further consent to the use of our name wherever
appearing in the Registration Statement.
Sincerely,
ALSTON & BIRD
By: /s/ Steven L. Pottle
-------------------------------
Steven L. Pottle, Esq.
2
<PAGE>
Exhibit 10.65
Certain portions of this Exhibit have been omitted based upon a request for
confidential treatment pursuant to Rule 406 under the Securities Act of 1933.
The omitted portions have been filed separately with the Securities and
Exchange Commission.
DISTRIBUTION AND SERVICES AGREEMENT
This Distribution and Services Agreement is entered into as of this 28th
day of August, 1998 (the "Effective Date"), by and between Centocor, Inc., and
its Affiliates, with principal offices located at 200 Great Valley Parkway,
Malvern, Pennsylvania 19355 ("Centocor"), and Nova Factor, Inc., with principal
offices located at 1620 Century Center Parkway, Suite 109, Memphis, Tennessee
38134 ("Nova Factor").
RECITALS
WHEREAS, Centocor has developed an anti-TNF chimeric monoclonal antibody
product known as Remicade(TM) (the "Product") for use as an agent in the
treatment of (a) inflammatory bowel diseases, including Crohn's Disease
(collectively referred to as "Inflammatory Bowel Disease"); (b) rheumatoid
arthritis, and (c) new indication(s) to be defined.
WHEREAS, as of the Effective Date, the Product has received commercial
marketing approval in the United States of America for certain indications of
Crohn's Disease from the United States of America Food and Drug Administration;
WHEREAS, Centocor is in the process of establishing a distribution network
for the sale of the Product in the United States of America;
WHEREAS, as a part of the distribution network, Centocor intends to
appoint a preferred retail distributor to provide retail assignment of benefits
services to users of the Product;
WHEREAS, Nova Factor, as both a retail and wholesale pharmacy, has the
facilities and expertise to distribute the Product to out-patient customers, to
provide reimbursement assistance and other customer services to its customers
and to provide data reporting and other services to Centocor;
WHEREAS, Centocor is willing to appoint Nova Factor as a preferred retail
distributor of the Product on the terms and conditions set forth in this
Agreement, and Nova Factor is willing to accept such appointment.
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, the parties hereby agree as follows:
<PAGE>
1. DEFINITIONS
For purposes of this Agreement the following terms shall have the
following meanings:
1.1 "Adverse Event" shall have the meaning set forth in 21 CFR 600.80.
1.2 "Affiliates" shall mean, with respect to a given party, any
corporation, firm, partnership or other entity which directly or
indirectly controls or is controlled by or is under common control
with such party. For purposes of this Section 1.2, "control" shall
mean direct or indirect ownership of fifty percent (50%) or greater
of the equity having the power to vote on or direct the affairs of
the entity.
1.3 "Assignment of Benefits" ("AOB") shall mean the assignment by the
Outpatient Customer of Insurance Benefits for the Product to Nova
Factor as payment for the Product.
1.4 "AOB Services" shall have the meaning ascribed to such term in
Section 4.6 of this Agreement.
1.5 "Average Wholesale Price" ("AWP") for purposes of this Agreement
shall mean the estimated wholesale price submitted by Centocor for
the Product based on convention employed by First Data Bank, Blue
Book, Red Book, and Medispan. *
1.6 "Bad Debt" shall mean Insurance Benefits assigned to and accepted by
Nova Factor as payment for Product, including unpaid Outpatient
Customer co-pay amounts, which are uncollectible determined on an
accrual basis as provided by Generally Accepted Accounting
Principles ("GAAP").
1.7 "Contractual Allowance" shall mean any discount off Centocor AWP, or
rebate provided by Nova Factor to a third party health insurer,
government program or other third party benefits payor determined on
an accrual basis as provided by GAAP.
1.8 "Database" shall have the meaning set forth in Section 7.1.
1.9 "Documedics" shall mean Documedics, 185 Berry Street, Suite 4805,
San Francisco, California 94017.
*Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities and Exchange Commission.
- 2 -
<PAGE>
1.10 "Facility" shall mean Nova Factor's facility located at 1620 Century
Center Parkway, Suite 109, Memphis Tennessee 38134.
1.11 "FDA" shall mean the United States of America Food and Drug
Administration.
1.12 "Infusion Provider" shall mean a Patient's treating physician or the
hospital outpatient clinic or infusion center, etc. at which a
Patient is administered Product.
1.13 "Insurance Benefit" shall mean the amounts paid by a Patient's third
party health insurer, government program or other third party payor
for Product.
1.14 "LHSI" shall mean Livingston Healthcare Services, Inc., 220 Lake
Drive, Newark, Delaware and its Affiliates, where Product shall be
warehoused on Centocor's behalf.
1.15 "Outpatient Customers" shall mean (a) out-patient infusion Patients
or the Patient's Infusion Provider in the Territory who are referred
to Nova Factor by their treating physicians or (b) the Patient's
Infusion Provider (hospital, out-patient clinic, infusion center,
etc.) in the Territory; and the Patient, physician or Infusion
Provider has elected to assign the Product Insurance Benefit to a
third party as payment for the Product.
1.16 "Patient" shall mean an individual who is to be administered the
Product.
1.17 "Product" shall have the meaning ascribed to such term in the first
recital of this Agreement.
1.18 "Purchase Price" shall have the meaning ascribed to such term in
Section 8.1 of this Agreement.
1.19 "Retail" shall mean the provision of Product by a Centocor
distributor for the Product on a named Patient basis to an
Outpatient Customer, and the Insurance Benefit for such Product is
assigned to the Centocor distributor as payment for the Product.
1.20 "SOP" shall mean the written standard operating procedures prepared
by Centocor and agreed to by Nova Factor, as modified from time to
time by the mutual agreement of the parties, which will be used by
Nova Factor to provide certain services under this Agreement. In the
event of a conflict between the SOPs and this Agreement, the terms
of this Agreement shall govern. The SOPs will be completed within
sixty (60) days of the Effective Date, then appended to this
Agreement as Schedule "A", and incorporated herein by reference.
- 3 -
<PAGE>
1.21 "Territory" shall mean the United States of America.
1.22 "Triage Services" shall have the meaning ascribed to such term in
Section 5.2 of this Agreement.
1.23 "US" shall mean the United States of America.
2. APPOINTMENT AS PREFERRED DISTRIBUTOR
2.1 Subject to the terms and conditions in this Agreement, Centocor
hereby appoints Nova Factor and Nova Factor hereby accepts
appointment as a preferred Retail distributor of Product to
Outpatient Customers in the Territory on a Retail AOB basis.
Centocor expressly reserves the right to sell Product to
wholesalers, wholesale specialty distributors, hospitals, pharmacy
benefit managers and other third parties, to sell Product directly
and to appoint other distributors, retail or otherwise, inside and
outside of the Territory. Centocor shall provide Nova Factor with
written notice at least * (*) days prior to the effective date of
any agreement between Centocor and a Retail AOB distributor under
which Centocor grants the Retail AOB distributor the right to
provide Product to Outpatient Customers in the Territory on a Retail
AOB basis, which notice shall specify the name of the other Retail
AOB distributor but shall not specify any other business terms of
the Agreement with the other Retail AOB distributor. If Centocor
contracts directly with a Home Care Delivery Company for Home Care
Services, Centocor will notify Nova Factor of the existence of that
contract, but not the terms and conditions of that contract. Nova
Factor will not promote wholesale distribution and will not sell
Product directly to Infusion Providers unless specifically approved
in writing in advance by Centocor; except Nova Factor may (i)
provide wholesale distribution of Product on a named-patient basis
for Medicaid Patients in those states listed on Schedule "B"
attached hereto and incorporated herein by reference; and (ii)
provide wholesale distribution on a named-patient basis to those
hospitals or other entities listed on Schedule "C" attached hereto
and incorporated by reference. Schedule "C" may be amended by Nova
Factor with the prior written consent of Centocor.
2.2 Nova Factor agrees to use commercially reasonable efforts to market,
sell and distribute the Product to managed care payors, and to work
with Centocor's marketing team, including without limitation,
outside contract sales representatives, if any, during the terms of
this Agreement to distribute the Product in the Territory in an
effective and diligent manner.
*Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities and Exchange Commission.
- 4 -
<PAGE>
3. ORDERS, DELIVERY
3.1 The parties hereto agree that, commencing upon the date hereof and
continuing during the term of this Agreement, Centocor will sell the
Product to Nova Factor for resale by Nova Factor in the Territory
and Nova Factor shall purchase Product from Centocor at the Purchase
Price, subject to the right of Centocor to allocate supplies of
Product under Section 3.5 specified herein. Nova Factor shall order
Product from Centocor in such quantities as are necessary to meet
the demand for Product from Nova Factor's Outpatient Customers
provided that Nova Factor will keep a minimum stock of Product equal
to an average of * (*) * total sales to Outpatient Patient
Customers, which average shall be based on the previous * (*) *
sales of Product by Nova Factor. All purchases of Product by Nova
Factor shall be in accordance with SOPs, and in accordance with the
terms and conditions set forth in this Agreement.
3.2 Centocor shall cause LHSI to ship Product to Nova Factor FOB Point
of Origin. Product shall be transported from the LHSI warehouse
facility to the Facility by means of transportation selected by
Centocor. * will prepay all freight costs incurred to ship Product
from LHSI to Nova Factor's Facility. Title to Product shall transfer
to Nova Factor upon delivery of Product to the carrier. * will pay
any costs due to special shipping requests made by *. Centocor may
ship Product in installments as it deems advisable or necessary, in
accordance with SOPs. Risk of loss of Product will remain with
Centocor during transit from LHSI to the Facility and will transfer
to Nova Factor upon delivery of Product to the Facility.
3.3 Product supplied to Nova Factor hereunder shall be in final labeled
and packaged vials. Nova Factor shall unload each shipment of
Product immediately upon receipt at the Facility. Nova Factor shall
carefully examine Products upon delivery and shall immediately
notify Centocor's Customer Service Department and the carrier by
phone or fax of any claim of nondelivery of a portion of a shipment
or any defect or damage in any Product which is reasonably
discoverable upon visual inspection of the Product without unloading
individual shipping units. Along with notice of any defect or
damage, Nova Factor shall furnish to Centocor a detailed written
description of the nature of the defect or damage. In the event of
any such claim, Nova Factor shall hold the Product pending receipt
of Centocor's instruction concerning disposition and permit Centocor
to inspect the Product upon request. Centocor agrees to provide such
instruction promptly.
*Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities and Exchange Commission.
- 5 -
<PAGE>
Upon receipt of notice of any defect or nondelivery, Centocor, at
its option, shall replace or repair any defective Product, in
accordance with the Centocor Wholesaler Returned Goods Policy
attached hereto as Schedule "D" and incorporated herein by
reference, as amended from time to time. The Product will be deemed
to have been received in good condition unless Nova Factor notifies
Centocor to the contrary within * (*) * of opening the shipment
container but in no event later than * (*) * following receipt by
Nova Factor. Nova Factor shall, at * expense, follow Centocor's
instructions to return to Centocor, LHSI or a third party disposal
company designated by Centocor, any Products delivered to Nova
Factor which are not in compliance with Centocor's FDA approved
quality assurance specifications. Nova Factor shall cooperate with
Centocor in investigating the cause of any suspected defect in
Product.
3.4 Nova Factor shall not alter Product packaging without Centocor's
written consent (except to remove Product from the shipping
containers) and shall not alter Product labeling except to add a
prescription label to Product, as permitted by applicable law. Nova
Factor shall at all times comply with the SOPs and information and
recommendations otherwise communicated by Centocor in writing with
respect to storage, handling and shipment of Products (including
storage of Product at 2-8 degrees Celsius, if requested by
Centocor), provided that if such information and recommendations are
materially different than those otherwise set forth in the SOPs and
result in a material increase in the costs incurred by Nova Factor
in performing its obligations under this Agreement, *. Nova Factor
shall pay for all costs associated with storage, handling and
shipment of Product from the Facility.
3.5 Notwithstanding anything herein to the contrary, in the event of a
shortage of Product, Centocor shall allocate available supplies of
Product in such manner that Nova Factor is treated as well as
Centocor's other direct customers in the Territory as determined by
Centocor. If Centocor is not able to supply Product to Nova Factor
in the quantities ordered by Nova Factor for more than * (*) * on
any occasion during the term of this Agreement because of a Product
shortage caused by factors other than the market demand exceeding
Centocor's full capacity to produce Product (including, but not
limited to, factors such as an FDA recall due to negligence or
intentional wrongdoing of Centocor, major plant shutdown, or similar
event), Nova Factor shall have the right to terminate this Agreement
upon * (*) * written notice.
*Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities and Exchange Commission.
- 6 -
<PAGE>
3.6 Notwithstanding Section 3.5 above, should the FDA quarantine the
Product, Centocor shall have * (*) * from the date of receipt of
notice of quarantine from the FDA to cure the quarantine. In the
event Centocor has not cured the quarantine within * (*) * after
receipt of notice of quarantine from the FDA, Nova Factor may
terminate this Agreement upon expiration of * (*) * notice period.
4. CUSTOMER ORDERS AND IN-OFFICE DELIVERY
4.1 Centocor will provide such marketing, sales and patient/physician
education materials to be distributed by Nova Factor as shall be
deemed necessary by Centocor to promote the Product. Relevant
Patient and Infusion Provider marketing and sales literature
distributed by Centocor's sales force will describe the AOB program
offered through Nova Factor (as described in this Agreement), and
will contain a Nova Factor toll-free number as the point of contact
for enrollment in such program. Centocor and Nova Factor shall
mutually agree on the description of Nova Factor to be used in
Centocor's sales, marketing, and patient/physician educational
materials. Nova Factor shall maintain such telephone and fax lines
dedicated to calls from customers for Product as it determines to be
needed to service these customers.
4.2 In accordance with a Physician's prescription, Nova Factor shall
ship Product and the appropriate infusion-related medical supplies
listed in Schedule "E" attached hereto and incorporated herein by
reference, to Outpatient Customers at any office or other location
at which the Patient will receive infusion, such as a hospital,
clinic, or infusion center, all as designated by the Outpatient
Customer, via Federal Express standard overnight delivery service or
another mutually agreed to overnight carrier in accordance with SOPs
and at no cost to Centocor. Schedule "E" may be modified or changed
by mutual written agreement of Centocor and Nova Factor. Nova Factor
shall have sole responsibility for purchasing and shipping the
infusion-related medical supplies for the Product at no cost to
Centocor. Nova Factor shall use its best efforts to ship Product so
that Product having the earliest expiration date is shipped first
from available inventory. Nova Factor shall track each shipment of
Product to each Outpatient Customer and confirm receipt in
accordance with SOPS.
4.3 Nova Factor will, upon the request of the Outpatient Customer, work
with personnel to coordinate plans for outpatient Product
administration for Patients. Nova Factor will provide written and
telephone assistance regarding home administration of the Product to
Patients.
*Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities and Exchange Commission.
- 7 -
<PAGE>
4.4 Nova Factor will provide the following services to each Outpatient
Customer requesting Product from Nova Factor: Nova Factor will
reasonably investigate whether the Patient qualifies for AOB
Services in accordance with Section 4.7 of this Agreement. If the
Patient qualifies for AOB Services, Nova Factor will provide such
AOB Services in accordance with Sections 4.5 through 4.9 of this
Agreement. If the Patient does not qualify for AOB Services because
the Patient's health insurer/governmental program/third party payor
does not utilize Nova Factor as a pharmacy, Nova Factor will
transfer the Patient's prescription to the pharmacy designated by
the Patient's health insurer/governmental program/third party payor
with Triage Services in accordance with Sections 5.1 and 5.2 of this
Agreement. If, after reasonable efforts (as defined in Section 4.7),
Nova Factor cannot obtain Insurance Benefits for Product requested
by an Outpatient Customer, Nova Factor will refer the Outpatient
Customer to * in accordance with Section 4.7 of this Agreement.
4.5 In Retail transactions, Nova Factor will obtain an AOB from the
Outpatient Customer and will bill the Outpatient Customer/insurance
company/ governmental program/other third party payor in Nova
Factor's name. Nova Factor shall use reasonable efforts to obtain
reimbursement clearance, if necessary, for anticipated subsequent
orders from an Outpatient Customer prior to actual receipt of the
subsequent order.
4.6 Nova Factor will use its Retail AOB service model ("AOB Services")
to distribute the Product to Outpatient Customers. Nova Factor will
offer a toll-free phone number where health care professionals in
clinics, physician's offices, infusion centers, or home care can:
o identify whether Patients have Insurance Benefits for the
Product;
o coordinate timely delivery of Product and supplies:
o arrange to have Product billed directly to the Outpatient
Customer's insurance company/governmental program/other
third-party payor.
*Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities and Exchange Commission.
- 8 -
<PAGE>
Nova Factor Retail AOB Services will include the following:
A. Reimbursement services.
1. Accepting Patient referrals by toll free phone call or
fax.
2. Verification of Patient's Insurance Benefit.
3. Use reasonable efforts to obtain prior authorization for
therapy and other supporting documentation.
4. Initiating requests for formulary status or medical
review on a Patient specific basis.
5. Explaining the Outpatient Customer's Insurance Benefits
and their responsibility to the appropriate party.
6. Accepting the Outpatient Customer's AOB, which includes
consent for therapy, release of medical records, and
acknowledgement of financial responsibility.
7. Filing insurance claims on the Outpatient Customer's
behalf.
8. Use reasonable efforts to collect from the Outpatient
Customer's insurance company/governmental program/third
party payor.
9. Use reasonable efforts to appeal denied claims.
10. Use reasonable efforts to collect Outpatient Customer's
copayments and deductibles.
11. Coordination of Insurance Benefits with Outpatient
Customer's secondary insurance.
B. Pharmacy services.
1. Obtaining the prescription for the Product.
2. Filling the prescription and labeling the medications in
compliance with state pharmacy laws.
3. Providing current information about Product
administration procedures.
4. Coordinating planned delivery times with the
administration site so that the Product is available in
time for the Outpatient Customer's infusion appointment.
5. Shipping the Product to the administration site, and
following up via the Federal Express tracking system to
confirm receipt.
6. Providing information about procedures for Product
administration to healthcare professionals.
- 9 -
<PAGE>
7. Providing information about the Product for the
Outpatient Customer.
8. Computerized next shipment scheduling capability for
follow-up doses.
9. Follow-up calls to the prescriber to arrange the next
doses of Product.
C. Managed care sales support.
1. Contracting with various payor groups, Health
Maintenance Organizations, Preferred Provider
Organizations, PBM organizations, PPM organizations or
indemnity insurance carriers to obtain in-network
provider status.
2. Identifying patients with closed networks or for whom
Nova Factor is out-of-network and follow-up of these
contracting opportunities.
3. Collaboration with the Centocor managed care sales force
through sharing of information to achieve formulary
status for the Product and to gain network provider
status to Nova Factor.
4.7 Nova Factor will use reasonable effort to attempt to obtain
Insurance Benefits for all FDA approved indications for the Product.
For all referrals or non-FDA approved indications for the Product,
Nova Factor will refer the Patient to * for reimbursement clearance.
Patients referred to * for non-FDA approved indications for
reimbursement assistance will be referred back to Nova Factor for
Retail AOB Services once reimbursement clearance is obtained.
4.8 Nova Factor shall incur all billing and collection costs associated
with its sale of Product.
4.9 Nova Factor shall pay for all costs associated with distribution and
delivery of Product to its Outpatient Customers.
5. TRIAGE AND PATIENT-RELATED SERVICES
5.1 Nova Factor will accept referrals for the retail AOB Services
program, and will perform insurance verification. If Nova Factor is
in-network for the Patient's health plan, Nova Factor will serve the
Patient directly through Retail AOB Services. If Nova Factor is not
in-network due to either a closed network, lack of network
affiliation, or requirements for an in-state provider, Nova Factor
will refer the Outpatient Customer to the in-network provider
designated by the Patient's health insurer/governmental
program/other third party payor.
*Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities and Exchange Commission.
- 10 -
<PAGE>
5.2 Reimbursement services will include accepting the referral and
collecting patient demographic information, following up with the
patient for additional information (prescription, drug card,
secondary insurance), contacting the insurance carrier to verify
benefits, obtaining prior authorization when permitted, and
notifying the patient of his or her insurance benefits and financial
responsibility. The triage process includes contacting the
in-network provider, transferring the prescription by phone or fax
as required by State Pharmacy laws, and following up with the
Infusion Provider to let prescriber know who will be providing
services ("Triage Services"). Nova Factor will use Triage Services
only for FDA approved indications for the Product.
6. OTHER SERVICES
6.1 Nova Factor shall provide a licensed pharmacist, who is properly
trained to answer Product-related questions or requests for
emergency supplies of Product, to answer telephone questions
relating to the Product posed by doctors and/or Outpatient Customers
(i) from 9:00 A.M. to 6:00 P.M. E.S.T., Monday through Friday,
except legal holidays, for routine calls and (ii) twenty-four hours
(24) per day for emergency calls. Nova Factor will not handle
requests for clinical information outside of the scope of Nova
Factor's usual pharmacist counseling which will be limited to
information covered in the Product package insert. Nova Factor shall
pay for all costs associated with the services provided pursuant to
this Section 6.1.
7. DATA AND REPORTS
7.1 Nova Factor shall maintain in a separate, Centocor-specific database
(the "Database") the information specified in Schedule "F" attached
hereto and incorporated herein by reference, for each customer and
each order. In addition, Nova Factor shall maintain in the Database,
by Outpatient Customer, any information Centocor reasonably requests
Nova Factor to track to the extent that collection of such other
information will not result in a material increase in the costs
incurred by Nova Factor in performing its obligations under this
Agreement.
7.2 As permitted by law, Nova Factor shall generate and furnish to
Centocor electronic or written reports at a mutually agreed upon
frequency from the Database as specified in Schedule "G" attached
hereto and incorporated herein by reference and such other reports
as Centocor may from time to
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time reasonably request to the extent that generation of such other
reports will not result in a material increase in the costs incurred
by Nova Factor in performing its obligations under this Agreement.
The reports shall identify Outpatient Customers only by number and
not by name. Physician-level data will be provided, as specified, on
a named basis. Reports shall include, without limitation, the
following information: physician name, physician practice name,
practice address, Patient number and Patient diagnosis.
8. PRICE, PAYMENT
8.1 Nova Factor shall purchase Product from Centocor at a price *
("Purchase Price"). Any changes in Purchase Price will be effective
upon written notice to Nova Factor. Nova Factor shall have the sole
responsibility and authority for determining the price at which it
will sell Product to its Outpatient Customers.
8.2 Nova Factor shall prepare and provide to Centocor * (*) * after the
end of each calendar quarter, a calendar quarterly report in the
format set forth in Schedule "H" attached hereto and incorporated
herein by reference, which report will show the * for the calendar
quarter and * for the calendar quarter. *
8.3 All amounts due under Section 8.1 above are payable by electronic
funds transfer to Centocor in US Dollars. Centocor shall invoice
upon shipment to Nova Factor for all amounts due hereunder. *
8.4 Centocor shall pay Nova Factor for Triage Services provided under
Section 5 of this Agreement an amount equal to *. Nova Factor shall
invoice Centocor monthly for this amount and all billed amounts are
due within thirty days of the date of receipt of invoice by
Centocor.
8.5 Except as otherwise expressly set forth herein, Nova Factor shall be
responsible for all costs and expenses associated with fulfilling
its obligations under this Agreement, including reimbursement and
AOB Services.
8.6 All Product prices (including Purchase Price) are exclusive of
federal, state and local excise, sales, use and other taxes levied
or imposed on the sale, shipment, delivery, ownership, possession or
resale of Product or any other activities contemplated under this
Agreement. Except for taxes on Centocor's income, Nova Factor shall
be liable for and pay all taxes imposed in connection with the
activities contemplated hereunder.
*Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities and Exchange Commission.
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8.7 *
9. REPLACEMENT AND RETURNS
9.1 In the event Nova Factor, or a Nova Factor Outpatient Customer,
returns or requests to return a Product, Centocor will accept return
of such Product and replace, or give a credit to Nova Factor for,
the Product in accordance with the Centocor Wholesaler Return Goods
Policy, attached hereto as Schedule "D", and incorporated herein by
reference, as amended by Centocor from time to time. Centocor will
accept such returns of Product under such policy from, and provide
replacement Product or credit to, only Nova Factor. Nova Factor
shall be solely responsible for returns of Product from, and
replacements and/or credits for Product to, Nova Factor Outpatient
Customers.
10. ADVERSE EVENT REPORTING AND CUSTOMER COMPLAINTS
10.1 Nova Factor will not be responsible for FDA reporting of Adverse
Events Nova Factor will comply with those policies and instructions
concerning adverse events which are set out on Schedule "I" attached
hereto and incorporated herein by reference. Nova Factor will
immediately report to Centocor any Product problems such as
defective or mislabeled Product.
11. SUSPENSION OF DISTRIBUTION AND RECALLS
11.1 If requested by Centocor as the result of a problem with Product
quality or directive from the FDA, Nova Factor shall suspend
distribution of Product. If the suspension continues for more than *
(*) *, Centocor will repurchase the Product held in inventory by
Nova Factor at the Purchase Price paid by Nova Factor including all
contractual discounts, Nova Factor will ship the repurchased Product
to Centocor at * expense and Nova Factor shall have the right to
terminate this Agreement upon * (*) * written notice.
11.2 Centocor shall promptly notify Nova Factor of any recalls of Product
initiated by Centocor or required by the FDA. Upon receipt of notice
of a recall of Product from Centocor, Nova Factor shall notify as
appropriate the affected customers. Centocor shall provide Nova
Factor with the form of letter to be used in connection with notice
of any recall which shall contain the appropriate instructions as to
whether the customer should return or dispose of the affected
Product. *. Nova Factor shall cooperate in any recalls by providing
Product tracking information reasonably requested by Centocor.
*Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities and Exchange Commission.
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<PAGE>
11.3 Nova Factor shall maintain for two (2) years after termination or
expiration of this Agreement such information as shall be reasonably
required by Centocor to effect a Product recall after termination or
expiration of this Agreement, and shall make such information
available to Centocor, at Centocor's request, in the event of such a
recall.
11.4 Nova Factor shall cooperate with Centocor in investigating any
Product failure which resulted in the need for a recall.
12. REPRESENTATIONS, WARRANTIES AND COVENANTS OF NOVA FACTOR
12.1 Nova Factor is a corporation duly organized, validly existing and in
good standing under the laws of the State of Tennessee.
12.2 In performing its obligations under this Agreement, Nova Factor
shall comply with all applicable laws and regulations, including
federal and state pharmacy laws, laws relating to the disposal of
pharmaceutical products and hazardous wastes, to the extent disposal
of Product is Nova Factor's responsibility under this Agreement, and
all applicable professional and industry standards and good business
practices.
12.3 Nova Factor represents and warrants that it is currently eligible to
participate as a provider in the Medicaid program in each state in
the Territory except those states listed on Schedule "J", attached
hereto and incorporated herein by reference, and covenants that it
will maintain such eligibility during the term of this Agreement.
Nova Factor may amend Schedule "J" in its sole discretion to add
additional states and shall provide Centocor with prompt notice of
any such amendment, provided that Nova Factor shall not add any
state to Schedule "J" unless that state has changed its laws to
require an in-state pharmacy presence for eligibility in its
Medicaid program. Nova Factor shall remove a state from Schedule "J"
(and shall provide notice to Centocor of such removal) when the
state no longer requires an in-state pharmacy presence for the
eligibility in the state's Medicaid program.
12.4 Nova Factor covenants that it shall not take any action which would
materially adversely affect its standing or that of Centocor in the
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<PAGE>
pharmaceutical industry or with respect to Product customer base or
which would undermine the image of Product.
12.5 Nova Factor represents and warrants that it now has and shall
maintain in full force during the term of this Agreement all federal
and state pharmacy, wholesaler, retailer and other licenses or
approvals required by Nova Factor to fulfill its obligations under
this Agreement, except as otherwise set forth in Section 12.3, and
except that Nova Factor shall not be required to maintain its
licenses in any state which amends its laws and regulations to
require an in-state pharmacy presence as a requirement for licensing
if the new requirement would materially increase the costs incurred
by Nova Factor in performing its obligations under this Agreement.
Nova Factor covenants that it shall provide Centocor with notice of
any communications with pharmacy licensing boards which relate to
potential problems with facilities, operations or procedures used by
Nova Factor in its distribution of Product, including notices of
inquiries, investigations or inspections and resulting findings.
12.6 Nova Factor covenants that it shall not make any performance claims
or engage in any promotional activities with respect to Product
except for the distribution of Product literature prepared by
Centocor and any other activities expressly approved by Centocor.
12.7 Nova Factor shall not use the trademarks or tradenames of Centocor
except to the extent contained in Product literature provided by
Centocor and on Product labels or as otherwise approved by Centocor.
12.8 Nova Factor represents and warrants that it has the authority to
enter into this Agreement and that its execution of this Agreement
and its performance of its obligations hereunder will not conflict
with and is not prohibited by any other agreement to which Nova
Factor is a party.
12.9 No consent, approval, order of authorization of, or registration,
qualification, designation, declaration or filing with, any federal,
state or local government authority is required in connection with
the consummation by Nova Factor of the transactions contemplated by
this Agreement.
12.10 Nova Factor covenants to Centocor that it will: (i) comply fully
with all laws applicable to Nova Factor and its activities under
this Agreement; (ii) notify Centocor in writing of any material
civil, criminal or administrative action brought against Nova
Factor, its directors, officers, employees or agents which is likely
adversely to affect Nova Factor's ability to perform its obligations
under this Agreement, and promptly to provide Centocor with
reasonably detailed information regarding Nova
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<PAGE>
Factor's handling and disposition of any such action; and (iii) not
initiate any voluntary communications with regulatory agencies
relating to the Product without Centocor's prior knowledge.
13. REPRESENTATIONS AND WARRANTIES OF CENTOCOR
13.1 Centocor is a corporation duly organized, validly existing and in
good standing under the laws of the Commonwealth of Pennsylvania.
13.2 Centocor shall not use the trademark or tradenames of Nova Factor
except to the extent necessary for activities contemplated under
this Agreement.
13.3 Centocor shall be responsible for testing Product and ensuring that
Product complies, when shipped to Nova Factor, with all applicable
laws, regulations, directives and requirements of the FDA, including
without limitation, standards of identity, strength, quality and
purity, packaging and labeling requirements, product warning
requirements, product design and safety requirements and advertising
requirements.
13.4 Centocor represents that it has the authority to enter into this
Agreement and that its execution of this Agreement and its
performance of its obligations hereunder will not conflict with and
is not prohibited by any other Agreement to which Centocor is a
party.
13.5 No consent, approval, order of authorization of, or registration,
qualification designation, declaration or filing with, any federal,
state or local government authority is required in connection with
the consummation by Centocor of the transactions contemplated by
this Agreement, other than the commercial marketing approval for the
Product discussed in the second recital of this Agreement.
13.6 Centocor covenants to Nova Factor that it will: (i) comply fully
with all laws applicable to Centocor and its activities under this
Agreement; (ii) notify Nova Factor in writing of any material civil,
criminal or administrative action brought against Centocor, its
directors, officers, employees or agents which is likely adversely
to affect Centocor's ability to perform its obligations under this
Agreement, and promptly to provide Nova Factor with reasonably
detailed information regarding Centocor's handling and disposition
of any such action; and (iii) notify Nova Factor after Centocor's
voluntary communications with regulatory agencies which may
materially affect Centocor's ability to perform its obligations
under this Agreement.
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<PAGE>
14. DISCLAIMER AND LIMITATION OF REMEDIES
14.1 EXCEPT AS STATED IN SECTIONS 13.3, 13.4, 13.5 and 13.6 OF THIS
AGREEMENT, CENTOCOR MAKES NO WARRANTY, EXPRESS OR IMPLIED, REGARDING
THE PRODUCT SOLD TO NOVA FACTOR.
14.2 Except for Section 17.1, Nova Factor's sole and exclusive remedy for
delivery of defective or nonconforming Product will be to receive
credit or like quantity of replacement goods, upon the return of
defective or nonconforming Product. Under no circumstances will
Centocor be liable for any incidental or consequential damages based
on Product purchased by Nova Factor.
15. TERM AND TERMINATION
15.1 The Agreement will be for a three (3) year term and will
automatically renew from year to year thereafter unless either party
should terminate the Agreement upon notice as set forth below.
15.2 * may terminate this Agreement for *, at any time upon * (*) * prior
written notice.
15.3 Upon receipt or delivery of a termination notice or * (*) * prior to
the expiration of this Agreement at the end of the term, as
applicable, the parties shall begin to transition distribution of
Product for Nova Factor's customers to a party to be designated by
Centocor. Transition of distribution under this section shall mean
the following:
(i) At Centocor's request, Nova Factor shall provide written
notice to all of Nova Factor's customers of the change in
distributors; and
(ii) Nova Factor shall transfer a copy of the Database and customer
information including prescription files to Centocor,
provided, that if the applicable patient confidentiality laws
prohibit transfer of the customer's name to Centocor, Nova
Factor shall transfer the Database and customer information
using customer numbers instead of names; and
(iii) Nova Factor's obligation to order additional Product shall
cease and Centocor shall repurchase any Product held in
inventory by Nova Factor within * (*) * after the date of
termination at *. All such inventory shall be returned to
Centocor at * cost.
15.4 Sections 9, 10, 11, 14, 15, 16, 17, 18 and 22.9 shall survive
termination or expiration of this Agreement.
*Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities and Exchange Commission.
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<PAGE>
16. REGULATORY, INSPECTIONS, AUDITS
16.1 Nova Factor shall provide to Centocor all documents and information
requested by the FDA or by Centocor in support of its regulatory
filings. Copies of all documents to be provided to the FDA shall be
provided to Centocor in advance, if practicable, or otherwise within
two (2) business days of delivery to the FDA. Nova Factor shall
notify Centocor immediately upon receipt of notice of any inspection
by the FDA directed specifically toward Product, and Centocor shall
have the right to have an employee present at any such inspection,
if allowed by law. In addition, Nova Factor shall notify Centocor of
any FDA correspondence or inspections that concern Nova Factor
generally and which are not related to a non-Centocor product. Nova
Factor shall notify Centocor immediately of any notices, requests
for information or other communications related to Product from the
U.S. Department of Health and Human Services or any other government
agency or any state healthcare program or other state agency and to
the extent permitted under the applicable law, shall give Centocor
copies of such communication.
16.2 Nova Factor shall provide to Centocor, at Centocor's request, any
information reasonably required in connection with Centocor
investigations relating to recalled or returned Product or any
requests or investigations by or filings with governmental bodies,
including the FDA or in support of Centocor's applications to the
FDA. Nova Factor shall respond within two (2) business days to any
reasonable requests for information by Centocor.
16.3 Nova Factor shall from time to time submit to inquiries, audits and
inspections by Centocor during normal business hours or at any other
time during which the services being audited are ongoing, including
but not limited to, audits of regulatory and quality assurance
standard operating procedures and FDA correspondence referenced in
Section 16.1 above. Centocor shall give Nova Factor at least two (2)
business days prior notice of any audit or inspection and shall bear
the costs of such audit or inspection.
16.4 Nova Factor shall permit Centocor's auditors, or its designated
representatives to have reasonable access, upon five (5) business
days
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<PAGE>
prior written notice to Nova Factor and during normal business
hours, to Nova Factor's financial books and records as may be
reasonably necessary to verify all documentation and/or address any
financial issues regarding the Product and services provided under
this Agreement.
17. INDEMNIFICATION
17.1 Centocor shall at all times during the term of this Agreement and
thereafter, defend, indemnify and hold Nova Factor and its officers,
directors, agents and employees harmless from and against any and
all claims, suits, damages, liabilities, costs and expenses,
including but not limited to court costs and reasonable attorney's
fees, incurred in connection with any third-party claim arising out
of the use of any Product, except to the extent caused by or based
upon (i) the negligence or intentional misconduct of Nova Factor or
any of its officers, directors, agents and employees or (ii) the
breach by Nova Factor of any of the terms of this Agreement.
17.2 Nova Factor shall at all times during the term of this Agreement and
thereafter, defend, indemnify and hold Centocor and its officers,
directors, agents and employees harmless from and against any and
all claims, suits damages, liabilities, costs and expenses,
including but not limited to court costs and reasonable attorney's
fees, incurred in connection with any third-party claim arising out
of the (i) negligence or intentional misconduct of Nova Factor or
any of its officers, directors, agents and employees or (ii) breach
by Nova Factor of any of the terms of this Agreement.
17.3 A party seeking indemnification under this Section shall give prompt
notice of the claim to the other party and, provided that the
indemnifying party is not contesting the indemnity obligation, shall
permit the indemnifying party to control any litigation relating to
such claim and disposition of any such claim, provided that the
indemnifying party shall act reasonably and in good faith with
respect to all matters relating to the settlement or disposition of
any claim as the settlement or disposition relates to the parties
being indemnified under this Section and the indemnifying party
shall not settle or otherwise resolve any claim without prior notice
to the indemnified party. The indemnified party shall cooperate with
the indemnifying party in its defense of any claim for which
indemnification is sought hereunder.
17.4 In no event shall Nova Factor be liable for loss of profit or any
other incidental or consequential damages to Centocor.
17.5 In no event shall Centocor be liable for loss of profit or any other
incidental or consequential damages to Nova Factor.
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<PAGE>
18. CONFIDENTIALITY
18.1 Nova Factor agrees to treat any confidential or proprietary
information obtained from Centocor and any confidential or
proprietary information generated by Nova Factor in performing its
obligations under this Agreement, including, but not limited to,
information regarding Centocor's pricing policies and reimbursement
for the Product, information regarding the cost of providing
services to Centocor, the Database, the information in the Database,
and anything derived therefrom, (collectively, the "Centocor
Information") as the confidential and exclusive property of
Centocor, and agrees not to disclose any of the Centocor Information
to any third party without first obtaining the written consent of
Centocor. Notwithstanding this provision, Nova Factor may disclose
Centocor Information to Nova Factor's accountants, bankers,
auditors, and attorneys on an as needed basis and may also disclose
such information in response to requirements of law or governmental
regulations or in response to subpoena or other lawful process. Nova
Factor may provide Patient usage data to managed care organizations,
but may not provide pricing, discount or other information relating
to Product acquisition cost. Nova Factor agrees that it will use any
Centocor Information only for purposes of performing its obligations
hereunder and for no other purpose without the prior written consent
of Centocor. Nova Factor further agrees to take all practicable
steps to ensure that the Centocor Information will not be used by
its directors, officers, or employees, except on like terms of
confidentiality as aforesaid, and will be kept confidential by them.
The above provisions of confidentiality shall not apply to that part
of the Centocor Information which Nova Factor is able to demonstrate
by documentary evidence:
(a) was in Nova Factor's possession prior to receipt from
Centocor; or
(b) was generally available to the public at the time of receipt
from Centocor; or
(c) became generally available to the public through no fault of
Nova Factor, its directors, officers, or employees; or
(d) was lawfully received by Nova Factor from some third party not
disclosing the information on behalf of Centocor and having a
right of further disclosure; or
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<PAGE>
(e) is required by law to be disclosed, provided that Nova Factor
notifies Centocor prior to any such disclosure so as to permit
Centocor to oppose same by appropriate legal action.
Nova Factor agrees that, at Centocor's request, it shall return to
Centocor all parts of the Centocor Information existing in
documentary form, not including pharmacy records, and will, at
Centocor's request, return or destroy any copies thereof made by
Nova Factor, its directors, officers or employees except that Nova
Factor shall retain a copy of the Database, subject to the ongoing
obligation of confidentiality. Nova Factor shall not dispose of the
information in the Database without first offering in writing, given
at least sixty (60) days prior to such disposal, to deliver the
information to Centocor.
18.2 Centocor agrees to treat confidential or proprietary information
obtained from Nova Factor, (not including the Database, or
information about insurers' reimbursement policies with respect to
Product) and anything derived therefrom, (collectively, the "Nova
Factor Information") as the confidential and exclusive property of
Nova Factor, and Centocor agrees not to disclose any of the Nova
Factor Information to any third party without first obtaining the
written consent of Nova Factor, provided that Centocor may disclose
Nova Factor Information to any third party providing reimbursement
related services to Centocor as long as the third party is obligated
to Centocor to keep such information confidential. Notwithstanding
this provision, Centocor may disclose Nova Factor Information to
Centocor's accountants, bankers, auditors, and attorneys on an as
needed basis and may also disclose such information in response to
requirements of law or governmental regulations or in response to
subpoena or other lawful process. Such confidential information
shall include, but shall not be limited to, FDA files, training
materials, methods of doing business, financial information and
operating procedures. Centocor agrees that it will use any Nova
Factor Information only for purposes of activities contemplated
hereunder and for no other purpose without the prior written consent
of Nova Factor. Centocor further agrees to take all practicable
steps to ensure that the Nova Factor Information will not be used by
its directors, officers, or employees, except on like terms of
confidentiality as aforesaid, and will be kept confidential by them.
The above provisions of confidentiality shall not apply to that part
of the Nova Factor Information which Centocor is able to demonstrate
by documentary evidence:
(a) was in Centocor's possession prior to receipt from Nova
Factor; or
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<PAGE>
(b) was generally available to the public at the time of receipt
from Nova Factor; or
(c) became generally available to the public through no fault of
Centocor, its directors, officers and employees, or
(d) was lawfully received by Centocor from some third party not
disclosing the information on behalf of Nova Factor and having
a right of further disclosure; or
(e) is required by law to be disclosed, provided that Centocor
notifies Nova Factor prior to any such disclosure so as to
permit Nova Factor to oppose same by appropriate legal action.
Centocor agree that, at Nova Factor's request, it shall return to
Nova Factor all parts of the Nova Factor Information existing in
documentary form and will, at Nova Factor's request, return or
destroy any copies thereof made by Centocor, its directors, officers
or employees.
18.3 Nothing contained herein shall be deemed to grant to either party
any rights or licenses under any patent applications or patents or
to any know-how, technology, inventions or other intellectual
property rights of the other party.
18.4 The obligations of the parties under this Section 18 shall continue
during the term of this Agreement and for a period ending five (5)
years after termination or expiration of this Agreement.
19. INSURANCE
19.1 Nova Factor agrees (i) to obtain and maintain at its cost and
expense, while this Agreement is in effect, commercial general
liability insurance, including products liability insurance with
coverage limits of not less than $1,000,000.00 per occurrence; and
$3,000,000.00 in the aggregate, and (ii) not to cancel the insurance
or reduce the coverage without giving at least thirty (30) days
prior written notice to Centocor. Nova Factor shall cause Centocor
to be a notice party on each insurance policy such that Centocor
shall receive notice of any cancellation or change in policy. At the
request of Centocor, Nova Factor shall provide Centocor with a copy
of a certificate of insurance to verify that insurance with the
required coverage is in effect. In the event of cancellation or
termination of the coverage described herein, Nova Factor shall
immediately obtain substitute or replacement coverage.
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<PAGE>
19.2 Centocor agrees to maintain, at its cost and expense while this
Agreement is in effect, general public liability, products liability
and property damage insurance with coverage limits of not less than
$1,000,000.00 per occurrence; and $3,000,000.00 per annum aggregate.
Centocor shall cause Nova Factor to be a notice party on each
insurance policy such that Nova Factor shall receive notice of any
cancellation or change in policy. At the request of Nova Factor,
Centocor will provide Nova Factor with a copy of a certificate of
insurance to verify that insurance with the required coverage is in
effect, and shall provide that notice of cancellation of termination
thereof shall be provided in advance to Nova Factor. In the event of
cancellation or termination of the coverage described herein,
Centocor shall immediately obtain substitute or replacement
coverage.
20. TRAINING
Nova Factor will prepare a training manual and orientation program for
Nova Factor personnel to familiarize the personnel with the Product and
the market. Any training manual or orientation program regarding the
Product must be approved by Centocor in writing prior to implementation.
Nova Factor shall allow Centocor to audit Nova Factor's personnel training
sessions.
21. NONCOMPETITION
21.1 During the term of this Agreement, Nova Factor shall not promote,
sell or distribute in the Territory another company's treatment for
inflammatory bowel disease, rheumatoid arthritis, or *, unless
agreed to in writing by Centocor * (*) days prior to such promotion,
sale or distribution. After termination of this Agreement for any
reason, Nova Factor shall not promote, sell or distribute in the
Territory another company's treatment for inflammatory bowel
disease, rheumatoid arthritis, or * for a period of * (*) *
following the date of termination.
21.2 In the event Centocor enters into a signed written agreement which
grants a Retail AOB distributor other than Nova Factor the right to
provide Product to Outpatient Customers in the Territory on a Retail
AOB basis, the restrictions of Section 21.1 shall not apply. Nova
Factor shall provide Centocor with written notice at least * (*) *
prior to the effective date of any agreement between Nova Factor and
another company promoting, selling or distributing in the Territory
treatment for inflammatory bowel diseases, rheumatoid arthritis or
*.
21.3 In the event the FDA quarantines the Product or requires recall of
the Product from the market in the Territory, the restrictions of
Section 21.1 shall not apply.
22. MISCELLANEOUS
22.1 This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, provided
that neither party shall have the right to assign this Agreement or
its rights and obligations hereunder without the prior written
consent of the other party, which such consent shall not be
unreasonably withheld, except that
*Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities and Exchange Commission.
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Centocor may assign this Agreement or its rights and obligations
hereunder to its Affiliates or successors in business who assume and
agree to be bound by the terms hereof provided the entity has
demonstrated financial ability to carry out Centocor's obligations
hereunder.
22.2 This Agreement constitutes the entire and only agreement between the
parties relating to the subject matter hereof, and all prior
negotiations, representations, agreements and understandings are
superseded hereby. No agreements amending, altering or supplementing
the terms hereof may be made except by means of a written document
signed by the duly authorized representatives of both parties.
22.3 Any notice required by this Agreement shall be given by prepaid,
first class, certified mail, return receipt requested, or by air
courier, hand delivery, or facsimile, to the parties at the
following addresses:
If to Centocor:
Centocor, Inc.
200 Great Valley Parkway
Malvern, Pennsylvania 19355
Attn: Corporate Secretary
Fax: (610) 651-6331
If to Nova Factor:
Nova Factor, Inc.
1620 Century Center Parkway
Suite 109
Memphis, Tennessee 38134
Attn: President
Fax: (901) 385-3780
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<PAGE>
with a copy to:
Thomas W. Bell, Jr.
Armstrong Allen Prewitt Gentry
Johnson & Holmes, PLLC
Brinkley Plaza
80 Monroe Avenue, Suite 700
Memphis, Tennessee 38103-2467
Fax: (901) 524-4936
Any notice sent under this Section shall be deemed delivered within
five (5) days if sent by mail and within twenty-four (24) hours if
sent by fax, courier or hand delivery.
22.4 Neither party shall be liable for any failure or delay caused by
fires, flood, earthquakes, peril of the sea, accidents, explosions,
sabotage, strikes, or other labor disturbances (regardless of the
reasonableness of the demands of labor), civil commotions, riots,
invasions, wars, acts, restraints, requisitions, regulations, or
directions of governmental authorities, shortages of labor, fuel,
power, or raw material, inability to obtain equipment or supplies,
inability to obtain or delays in transportation, acts of God, or any
other cause beyond its reasonable control ("Force Majeure").
22.5 Headings included herein are for convenience only, and shall not be
used to construe this Agreement.
22.6 For purposes of this Agreement, Nova Factor and its employees and
agents shall not be deemed agents, servants, partners, joint
venturers or employees of Centocor. Thus, they do not have the
authority to take action on Centocor's behalf or to bind Centocor
without Centocor's prior written consent. Nova Factor, its employees
and agents are acting in the capacity of independent contractors of
Centocor. Centocor is not responsible for withholding, and shall not
withhold, FICA or taxes of any kind from any payments it owes to
Nova Factor. Nova Factor is responsible to provide any and all
compensation, benefits and/or insurance to its employees and agents.
Nova Factor employees and agents are not eligible to participate in,
nor are they eligible for coverage under, any of Centocor's benefit
plans, programs, employment policies, procedures or workers'
compensation insurance.
22.7 If any provision of this Agreement shall be found by a court to be
void, invalid or unenforceable, the same shall either be reformed to
comply with applicable law or stricken if not so conformable, so as
not to affect the validity or enforceability of this Agreement,
except if the principal intent
- 25 -
<PAGE>
of the Agreement is frustrated by such reformation or deletion, in
which case this Agreement shall terminate.
22.8 Failure of either party to enforce a right under this Agreement
shall not act as a waiver of that right or the ability to later
assert that right relative to the particular situation involved or
to terminate this Agreement as a result of any subsequent default or
breach.
22.9 Neither Nova Factor nor Centocor shall make any news release or
other public statement, whether to the press, stockholders or
otherwise, disclosing the terms of this Agreement or of any
amendments hereto, or to performance hereunder or the existence of
the arrangement between the parties without the prior written
approval of the other party, which approval shall not be
unreasonably withheld, or unless required by law.
22.10 This Agreement shall be construed and enforced in accordance with
the laws of the Commonwealth of Pennsylvania, excluding choice of
law rules.
22.11 This Agreement may be executed in counterparts, including
counterparts transmitted by facsimile, each of which shall
constitute an original and all of which shall be considered one and
the same Agreement. Counterparts or facsimile copies executed by
Centocor and Nova Factor shall have the same effect as if the
signatures to each counterpart or facsimile copy were on the same
document and copies of such documents shall be deemed valid as
originals. Centocor and Nova Factor agree to exchange copies of the
Agreement with original signatures as soon as practicable after the
execution of the facsimile copies.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date first above written.
CENTOCOR, INC. NOVA FACTOR, INC.
By: /s/ James Schoeneck By: /s/ Randy Grow
--------------------------------- -----------------------
Title: Vice President/General Manager Title: President
------------------------------ --------------------
Dated: 8/27/99 Dated: 8/27/98
------------------------------ --------------------
- --------------------------------------------------------------------------------
- 26 -
<PAGE>
SCHEDULE A
SOP'S
(To be furnished by Centocor within 60 days of contract execution)
<PAGE>
SCHEDULE B
States with network pharmacy relationships for Medicaid patients
Alabama
Colorado
Delaware
Florida
Georgia
Kansas
Massachusetts
Maine
North Carolina
Texas
Vermont
Wisconsin
<PAGE>
SCHEDULE C
Nova Factor Hospital Relationships
Alfred I. duPont Institute Children's Hospital Wilmington, DE.
Cook Children's Medical Center Fort Worth, TX.
Cook Children's Home Care
Children's Medical Center of Dallas Dallas, TX.
Texas Pharmaceutical Health Resources
Children's Memorial Hospital Chicago, IL.
CM Factor Care
National Children's Medical Center Washington, D.C.
Preferred Pediatrics
Egleston Children's Hospital at Emory University Atlanta, GA.
Georgia Health Resources
Zale Lipshy University Hospital Dallas, TX.
Campus Home Health Care
<PAGE>
SCHEDULE D
Centocor Inc.
Wholesaler Returned Goods Policy
1. Returned Goods - General
a) No returns will be accepted without prior authorization for credit
or exchange.
b) All returned cartons must have affixed a "Return Goods
Authorization" shipping label.
C) All returned cartons must be clearly marked with the return goods
authorization number.
d) Centocor will only accept physical receipt of returned product
through its designated warehouse and shipping firm:
Livingston Healthcare Systems, Inc.,
220 Lake Drive
Newark, DE 19702
Telephone (877)438-2686
Fax (877)438 -2368
e) Centocor will not accept returns of product directly from hospital
accounts.
f) Livingston Healthcare Systems, Inc. will supply appropriate shipping
and packaging instructions for returns.
2. Returnable Items
a) In-date product, with prior approval by Centocor Customer Service
Department.
b) Product shipped in error.
c) Product damaged in transit.
d) Product dated less than two (2) months before and less than six (6)
months after stated expiration date.
e) Product returned pursuant to an official drug recall.
f) Product discontinued by Centocor.
3. Non-Returnable Items
a) Product not in the original packaging, product whose contents have
been adulterated, or which show signs of tampering.
b) Product obtained in violation of state or Federal regulations.
c) Product damaged or made unsaleable due to improper storage,
handling, or shipping by customer.
d) Product involved in a fire sale, sacrifice or bankruptcy sale, or
has been acquired in other than normal channels of trade
distribution.
e) Product sold on a non-returnable basis.
f) Product damaged by fire or water and/or other insurable hazards.
g) Product more than six (6) months beyond expiration.
4. Credits
a) Credit for approved returns will be issued upon receipt of product.
b) All credits will be issued to designated wholesalers.
c) No debit memos will be accepted.
<PAGE>
Centocor, Inc.
RETURN GOODS AUTHORIZATION
Date: Control #:
- --------------------------------------------------------------------------------
Bill to: Credit To:
----------------------------------------------
Customer Name:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Telephone:
- ---------------------------------------
Fax:
- ---------------------------------------
Person Requesting:
- ---------------------------------------
Product: #To Be Returned:
- --------------------------------------------------------------------------------
NDC #: Lot #: Expiration Date:
- --------------------------------------------------------------------------------
Invoice #:
- ---------------------------------------
Price:
- ---------------------------------------
Reason for Return:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Institution Credit*: (attach list if necessary)
- ------------------------------------------------
*Note: all authorizations must have a Purchase Order # & Invoice #
- --------------------------------------------------------------------------------
Authorized by: (Signed Name)
- --------------------------------------------------------------------------------
(Printed Name)
- --------------------------------------------------------------------------------
Date
-----------------------------
<PAGE>
Internal
- --------
Authorized by: (Signed Name)
- --------------------------------------------------------------------------------
(Printed Name)
- --------------------------------------------------------------------------------
Date
-----------------------------
- 2 -
<PAGE>
Centocor, Inc.
Terms and Conditions of Sale
Pricing & Orders:
Purchaser may mail, fax, phone or transmit electronically orders for products
marketed by Centocor, Inc. Centocor, Inc. sells its products through licensed
wholesale distributors at published price in effect on the date of receipt of
order. Prices are subject to change without prior notice.
Prices are invoiced at list price and are only subject to the applicable cash
discount(s) listed on the invoice. Centocor's terms are 2%, 30 days, net 31 from
date of invoice. Centocor reserves the right to charge back the Purchaser for
any unearned discount taken.
All purchase orders for Centocor products are subject to these term and
conditions of sale and any additional or inconsistent provisions contained in
any purchase order or other document provided by the Purchaser are not binding
unless accepted in writing by Centocor, Inc. Centocor, Inc. reserves the right
to limit the quantities of products and drop shipments to be shipped pursuant to
any order or to refuse any order prior to shipment.
Emergency drop shipments may be made to designated customers of the Purchaser.
Products must be ordered in unit packages as described in the Centocor, Inc.
Price List.
Title, Shipment, Delivery:
Title to and Risk of loss of Centocor, Inc. products passes to Purchaser upon
delivery to a common carrier. Centocor will pay the cost of freight and
insurance to Purchaser's location. Purchaser will pay any costs due to special
shipping requests. Centocor, Inc. reserves the right to make shipments in
installments as it deems advisable or necessary, and all such installments
shipped separately will be separately invoiced and paid.
Inspection:
Immediately upon receipt of a shipment of Centocor, Inc.'s products, Purchaser
must inspect the products and notify their carrier and Centocor, Inc.'s Customer
Service Department by phone or by Fax of any claims for shortages, overages,
defects or damage. In the event of any such claim, Purchaser must hold the
products pending receipt of Centocor Inc.'s instruction concerning disposition
and permit Centocor, Inc. or it's representative to inspect them upon request.
Purchaser will follow procedures described in Returns. If Purchaser fails to
notify Centocor, Inc. within 2 days from receipt of order, the products will be
deemed to have been received in good condition in the quantities stated on the
invoice and to have been accepted by Purchaser.
Warranty and Indemnification:
Centocor, Inc. warrants that, as of the date of shipment, Centocor, Inc.'s
products will not be adulterated or misbranded within the meaning of the United
States Food, Drug, and Cosmetic Act and will not be articles that may not be
introduced into interstate commerce under such act. Centocor, Inc. will defend
Purchaser and indemnify it against any claim based on the failure of a Centocor,
Inc. product purchased directly from Centocor, Inc. to meet appropriate
standards of identity, strength, quality, and purity, provided that Purchaser
gives Centocor, Inc. prompt notice of the assertion of the claim, or service of
a complaint and fully cooperates in the defense thereof by counsel of Centocor,
Inc.'s choice. This warranty and indemnification does not apply if the claim
results from Purchaser's negligence or it's alteration, misuse, or improper
testing, handling or storage of the product.
Sole and Exclusive Remedies:
Except as stated in the preceding section, Centocor, Inc. makes no warranty,
express or implied, regarding the products sold to Purchaser. Purchaser's sole
and exclusive remedy for delivery of defective or nonconforming products will be
to receive credit or like quantity of replacement goods, upon the return of
<PAGE>
defective or nonconforming product. Under no circumstance will Centocor, Inc. be
liable for any incidental or consequential damages based on product purchased by
Purchaser.
Returns:
Customer agrees to abide by Centocor's published Return Goods Policy.
Product Recall:
Centocor, Inc. will compensate Purchaser for the reasonable direct expense
incurred in performing all requested product recall services.
Other Terms:
Credit. Purchaser must furnish financial information requested by Centocor, Inc.
to establish and maintain it's financial responsibility. Centocor reserves the
right to require cash payment before shipment or on delivery if, in its sole
judgement, Purchaser's financial responsibility has become impaired.
Change of Ownership. Purchaser must notify Centocor, Inc., in writing of any
sale or transfer of majority ownership or controlling interest in Purchaser and
any change of address or Distribution centers at least 30 days before such
action.
Confidential Information. All information provided to the Purchaser concerning
Centocor, Inc. or it's products that is designated confidential must not be
disclosed except with the written permission of Centocor, Inc.
Taxes & Other Charges. Purchaser will pay, or reimburse Centocor, Inc. for, any
use tax, sales tax, duty, inspection or testing fee, or any other tax, fee or
charge of any nature imposed by any governmental authority on purchases of
Centocor, Inc.'s products by Purchaser. If Purchaser claims an exemption from
any tax, it must inform, and provide copies to, Centocor, Inc. of all applicable
exemptions.
By placing orders for Centocor, Inc. products Purchaser will accept the above
terms and conditions.
- 2 -
<PAGE>
SCHEDULE E
Infusion-Related Medical Supplies
o NaCl 0.9% 250 ml in non-PVC infusion container
o Non-PVC IV administration set with in-line 1.2 micron filter and infusion
regulator
o 50 ml sterile water for injection
o Five alcohol wipes
o IV bag label
<PAGE>
SCHEDULE F
Centocor Reports
*
*Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities and Exchange Commission.
<PAGE>
SCHEDULE G
Database for Reports
*
*Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities and Exchange Commission.
<PAGE>
SCHEDULE H
*
*Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities and Exchange Commission.
<PAGE>
SCHEDULE I
Policy for Adverse Event Reporting
1. Nova Factor is not responsible for FDA reporting of adverse events.
2. When adverse events are identified through contacts with either patients
or health care professionals, Nova Factor will transfer the call to the
Centocor Medical Affairs Department.
3. In the event that Nova Factor cannot transfer the call directly to the
Centocor Medical Affairs Department, Nova Factor will instruct the caller
to contact the Medical Affairs Department and will inform the caller of
the appropriate phone number.
<PAGE>
SCHEDULE J
States for which Nova Factor cannot Serve Medicaid Patients due to Requirements
for
an In-State Provider
District of Columbia
Hawaii
Indiana
Nevada
Rhode Island
South Carolina
West Virginia
<PAGE>
Exhibit 10.66
AMENDMENT NO. 2
DATED AS OF MARCH 1, 1999
TO
LOAN AND SECURITY AGREEMENT
AS AMENDED
DATED AS OF JUNE 5, 1997
AMONG
ACCREDO HEALTH, INCORPORATED AND ITS SUBSIDIARIES
AND
NATIONSBANK, N.A.
AND
FIRST TENNESSEE BANK NATIONAL ASSOCIATION
AND
NATIONSBANK, N.A., AS AGENT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. DEFINITIONS..............................................................................................3
2. AMENDMENTS TO AGREEMENT..................................................................................3
3. REPRESENTATIONS AND WARRANTIES...........................................................................4
3.1. INCORPORATION...................................................................................4
3.2. DUE AUTHORIZATION, NO CONFLICTS, ETC............................................................4
3.3. DUE EXECUTION, ETC..............................................................................5
4. CONDITIONS PRECEDENT.....................................................................................5
4.1. CONDITIONS PRECEDENT TO EFFECTIVENESS OF AMENDMENT NO. 2........................................5
5. EFFECTIVENESS OF AMENDMENT NO. 2.........................................................................6
6. CLOSING..................................................................................................6
7. GOVERNING LAW, ETC.......................................................................................6
8. SECTION TITLES AND TABLE OF CONTENTS.....................................................................7
9. WAIVER OF JURY TRIAL.....................................................................................7
10. COUNTERPARTS.............................................................................................7
11. AGREEMENT TO REMAIN IN EFFECT............................................................................7
</TABLE>
<PAGE>
AMENDMENT NO. 2 dated as of March 1, 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 (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 NationsBank, N.A.
(successor to NationsBank of Tennessee, 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, Borrower has requested that the Banks increase their
Commitments under the Agreement from Forty Million Dollars ($40,000,000) to
Sixty Million Dollars ($60,000,000), and the Banks are willing to do so, subject
to certain other changes to be made to the Agreement 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. 2 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. 2 EFFECTIVE DATE" has the meaning specified
in Section 5 of this Amendment No. 2.
In addition to the foregoing new definition, the following definitions are
hereby amended:
2.1.1. "COMMITMENTS" and "TOTAL COMMITMENTS" are
each hereby amended to replace the figure of $40,000,000 where it appears
therein with the figure of $60,000,000.
2.1.2. "FINANCIAL STATEMENTS" is hereby amended to
replace the dates contained therein with the dates of June 30, 1998 and January
31, 1999;
2.1.3. "LOAN TERMINATION DATES" is hereby amended to
replace the date of October 31, 2000 with the date of December 1, 2001.
<PAGE>
2.2. The Agreement is hereby amended to replace the figure
of Forty Million Dollars ($40,000,000) wherever it appears therein with the
figure of Sixty Million Dollars ($60,000,000).
2.3. Paragraph 6.17(B), DEBT SERVICE COVERAGE, is hereby
amended to replace the ratio of 1.20 to 1.00 with the ratio of 1.25 to 1.0.
2.4. The Borrower hereby agrees to pay to the Agent for the
benefit of the Banks on a prorated basis a fee of Forty Thousand Dollars
($40,000) in connection herewith and in consideration of this Amendment, said
fee to be payable upon the earlier to occur of one year from the date hereof or
upon the Borrower's acquiring any other Person via an Acquisition or merger.
2.5. The form of the Notes attached as EXHIBIT A to the
Schedule of Exhibits to the Agreement is hereby amended to replace said Notes
with the form of the Notes attached hereto as EXHIBIT A-1. In addition, the form
of the Guaranty and Suretyship Agreements attached as EXHIBIT F to the Schedule
of Exhibits to the Agreement is hereby amended to replace said Guaranties with
the form of the Guaranties attached hereto as EXHIBIT F-1.
3. REPRESENTATIONS AND WARRANTIES. To induce the Banks and the
Agent to enter into this Amendment No. 2, 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. and Horizon Health
Systems, 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. 2
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
2
<PAGE>
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.
3.3. DUE EXECUTION, ETC. This Amendment No. 2 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. 2 is subject to the fulfillment of the following conditions precedent on or
prior to the Amendment No. 2 Effective Date (as hereinafter defined in Section 5
hereof):
4.1. CONDITIONS PRECEDENT TO EFFECTIVENESS OF AMENDMENT NO.
2. The Agent shall have received, on or prior to the Amendment No. 2 Effective
Date, the following, each dated on or prior to the Amendment No. 2 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. 2
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. 2 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. 2 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. 2 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. 2 are true and correct on and as of such date as
though made on and as of such date;
3
<PAGE>
(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. 2
or the other agreements, instruments and documents
contemplated hereby; and
(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) Two (2) original Revolving Notes duly executed
by the Borrower in the amount of $40,000,000 and $20,000,000, respectively,
evidencing the renewal, modification and increase of the existing Revolving
Notes, in the form attached hereto as EXHIBIT A-1.
(e) Original Guaranty and Suretyship Agreements
duly executed by each of Nova Factor, Inc., Southern Health Systems, Inc. and
Horizon Health Systems, Inc., in the form attached hereto as EXHIBIT F-1.
(f) Such UCC financing statements and amendments
thereto (including to pay additional Tennessee Privilege Taxes) as may be
required by the Banks.
(g) Evidence that Borrower has successfully
completed an IPO that has resulted in net cash proceeds to the Borrower of
$42,500,000.00.
5. EFFECTIVENESS OF AMENDMENT NO. 2. This Amendment No. 2 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. 2, 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. 2 Effective Date".
6. CLOSING. The Closing under this Amendment No. 2 shall occur
on the Amendment Effective Date at the offices of Boult, Cummings, Conners &
Berry, PLC, 1 NationsBank Plaza, Nashville, Tennessee 37219, or such other
location as the parties may agree.
7. GOVERNING LAW, ETC. This Amendment No. 2 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.
4
<PAGE>
8. SECTION TITLES AND TABLE OF CONTENTS. The Section Titles
and Table of Contents contained in this Amendment No. 2 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 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. 2 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. 2 to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
AGENT BORROWER
NATIONSBANK, N.A., ACCREDO HEALTH, INCORPORATED
as Agent
BY: /s/ Elizabeth Knox BY: /s/ Joel Kimbrough
------------------------------ ---------------------------------
TITLE: Senior Vice President TITLE: Senior Vice President and
--------------------------- Chief Financial Officer
------------------------------
5
<PAGE>
BANKS GUARANTORS AND SUBSIDIARIES
NATIONSBANK, N.A. SOUTHERN HEALTH SYSTEMS, INC.
BY: /s/ Elizabeth Knox BY: /s/ Joel Kimbrough
------------------------------ ---------------------------------
TITLE: Senior Vice President TITLE: Senior Vice President and
--------------------------- Chief Financial Officer
------------------------------
FIRST TENNESSEE BANK NATIONAL NOVA FACTOR, INC.
ASSOCIATION
BY: /s/ Elizabeth Knox BY: /s/ Joel Kimbrough
------------------------------ ---------------------------------
TITLE: Senior Vice President TITLE: Senior Vice President and
--------------------------- Chief Financial Officer
------------------------------
HORIZON HEALTH SYSTEMS, INC.
BY: /s/ Joel Kimbrough
---------------------------------
TITLE: Senior Vice President and
Chief Financial Officer
------------------------------
6
<PAGE>
Exhibit 10.67
AMENDMENT ONE TO DISTRIBUTION & SERVICE AGREEMENT
This Amendment is made and entered into this 11th day of January, 1999 by
and between Centocor, Inc. and its Affiliates ("Centocor") and Nova Factor, Inc.
("NFI").
WHEREAS, NFI and Centocor have entered into a Distribution and ServiceS
Agreement dated August 28, 1998, and
WHEREAS, Centocor and NFI desire to amend the Distribution and Services
Agreement effective August 28, 1998.
NOW THEREFORE, for and exchange of the mutual promises contained herein
and for other good and valuable consideration, the receipt and adequacy of which
is hereby acknowleged, the parties hereto agree as follows:
1. Effective August 28, 1998, Section 1.20 is deleted in its entirety and
the following is substituted for and in the place thereof:
1.20 "SOP" shall mean those standard operating procedures which will
be used by Nova Factor to provide certain services under this
Agreement. In the event that Centocor should desire that the
procedures used by NFI to provide services under this Agreement, be
changed or modified, Centocor shall advise NFI and NFI and Centocor
shall mutually agree on changes in the procedures used by NFI to
provide services under the Agreement.
2. As amended, all terms and provisions of the Distribution and Services
Agreement shall remain in full force and effect.
CENTOCOR, INC.
By: /s/ Barry Bazogamy
------------------------------------------
Title: Executive Director & Corporate Counsel
--------------------------------------
NOVA FACTOR, INC.
By: /s/ Thomas W. Bell
------------------------------------------
Title: Secretary
--------------------------------------
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated (i) August 12, 1998, except with respect to Notes 1, 2
and 3 as to which the date is March 21, 1999, with respect to the consolidated
financial statements and schedule of Accredo Health, Incorporated, (ii) August
30, 1996 with respect to the financial statements and schedule of Nova Factor,
Inc. (iii) July 30, 1998 with respect to the financial statements of Horizon
Health Systems, Inc. (iv) August 21, 1998 with respect to the financial
statements and schedule of Texas Health Pharmaceutical Resources and (v) March
19, 1999 with respect to the financial statements and schedule of Children's
Memorial Home Hemophilia Services, in Amendment No. 4 to the Registration
Statement (Form S-1 No. 333-62679) and related Prospectus of Accredo Health,
Incorporated for the registration of 3,000,000 shares of its common stock.
/s/ Ernst & Young LLP
Memphis, Tennessee
March 24, 1999
