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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): AUGUST 16, 2000
ACCREDO HEALTH, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 000-25769 62-1642871
(STATE OR OTHER JURISDICTION OF (COMMISSION FILE NUMBER) (IRS EMPLOYER
INCORPORATION) IDENTIFICATION NUMBER)
1640 Century Center Pkwy
Suite 101
Memphis, Tennessee 38134
(Address of principal executive offices) (Zip Code)
(901) 385-3688
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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ITEM 5. OTHER EVENTS
<TABLE>
<CAPTION>
Documents filed as part of this Report: Page
<S> <C>
Capitalization 3
Management's Discussion and Analysis of Financial Condition
and Results of Operations 4
Financial Statements:
Report of Independent Auditors F-1
Consolidated Balance Sheets at June 30, 1999
and 2000 F-2
Consolidated Statements of Operations for the years
ended June 30, 1998, 1999 and 2000 F-4
Consolidated Statements of Stockholders' Equity and
Mandatorily Redeemable Cumulative Preferred Stock
for the years ended June 30, 1998, 1999 and 2000 F-5
Consolidated Statements of Cash Flows for the years
ended June 30, 1998, 1999 and 2000 F-6
Notes to Consolidated Financial Statements F-7
Financial Statement Schedules:
Schedule II - Consolidated Schedule -- Valuation and
Qualifying Accounts S-1
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been
omitted.
</TABLE>
ITEM 7. FINANCIAL STATEMENTS and EXHIBITS
(c) Exhibit: 23.1 Consent of Ernst & Young LLP.
Exhibit: 99.1 Company Press Release dated August 16, 2000.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
- on an actual basis; and
- on an as adjusted basis to reflect our sale of 2,000,000 shares of
common stock, as contemplated by our Registration Statement on Form S-3
(Reg. No. 33-42386, at an assumed offering price of $36.375 per share,
the receipt of the estimated net proceeds of such sale after deducting
underwriting discounts and commission and estimated offering expenses,
and the application of net proceeds as described in "Use of Proceeds"
in our Registration Statement on Form S-3.
This table should be read in conjunction with our consolidated financial
statements and notes thereto included elsewhere in this Form 8-K and our
Registration Statement on Form S-3.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
-----------------------
ACTUAL AS ADJUSTED
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(IN THOUSANDS)
<S> <C> <C>
Long-term notes payable ............................................................. $ 37,000 $ --
-------- --------
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, no shares issued and
outstanding as adjusted ..................................................... -- --
Common Stock, $.01 par value; 30,000,000 shares authorized,
14,106,968 shares issued and outstanding actual, 16,106,968
shares issued and outstanding as adjusted ................................... 141 161
Additional paid-in capital .......................................................... 66,838 134,999
Retained earnings ................................................................... 10,565 10,565
-------- --------
Total stockholders' equity ................................................. 77,544 145,725
-------- --------
Total capitalization ....................................................... $114,544 $145,725
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</TABLE>
The outstanding share information shown in the table excludes:
- options to purchase 1,187,287 shares of common stock granted under our
Amended and Restated Stock Option and Restricted Stock Purchase Plan
and 1999 Long-Term Incentive Plan at a weighted average exercise price
of $5.95 per share; and
- 717,605 shares of common stock available for future issuance under our
Amended and Restated Stock Option and Restricted Stock Purchase Plan,
1999 Long-Term Incentive Plan and 1999 Employee Stock Purchase Plan.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following should be read in conjunction with our Financial Statements and
the Notes thereto included elsewhere in this Report on Form 8-K. The following
discussion contains forward-looking statements. The cautionary statements made
in this Form 8-K and our other periodic filings with the Securities and Exchange
Commission should be read as being applicable to all forward-looking statements
wherever they appear in this Report. Our actual results may differ
significantly from those projected in the forward-looking statements.
OVERVIEW
We provide specialized contract pharmacy services for the treatment of patients
with costly, chronic diseases. We derive revenues primarily from the sale of
drugs to patients.
The following table presents the percentage of our total revenues generated from
sales and services provided with respect to the diseases that we service for the
years ended June 30:
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Multiple Sclerosis 23% 31% 37%
Gaucher Disease 46% 37% 30%
Hemophilia and Autoimmune Disorders 23% 21% 21%
Growth Hormone-Related Disorders 7% 6% 7%
Respiratory Syncytial Virus -- 1% 1%
Crohn's Disease -- 1% 1%
Rheumatoid Arthritis -- -- --
</TABLE>
Sales and services with respect to Multiple Sclerosis, Gaucher Disease, growth
hormone-related disorders, Crohn's Disease and rheumatoid arthritis are
dependent upon our preferred relationships with Biogen, Genzyme, Genentech and
Centocor. Our agreements with these manufacturers describe the services to be
provided by us, including contract pharmacy, information, clinical,
reimbursement and customized delivery services. These agreements generally:
- limit our ability to supply competing drugs during (and in some cases
up to five years after) the term of the agreement;
- allow the manufacturer to distribute directly or through other parties;
and
- are short-term and may be cancelled by either party, without cause,
upon between 60 and 90 days prior notice.
These agreements vary in level of exclusivity and scope of services provided. We
typically purchase products at prices below the manufacturers' average wholesale
sales prices, and our resulting contribution margins vary for each product line.
Pricing is customized to reflect specific services to be provided by us and is
subject to periodic adjustments to reflect changing market conditions.
We purchase drugs for hemophilia and autoimmune disorders from all available
sources on a volume discount basis. We were one of the national providers
selected by MedImmune, Inc. to distribute drug for respiratory syncytial virus
for the 1999-2000 season and are in discussions with MedImmune, Inc. to be a
national provider for the 2000-2001 season.
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We recognize revenue at the time we ship drugs or when we have performed the
contractual service. While we may experience revenue changes from price
fluctuations on our existing product lines, our revenue growth will depend
principally on the introduction of new drugs and, to a lesser extent, on volume
growth in existing drug lines.
We have five joint venture agreements with various medical centers (or their
affiliates) in which we own 50% of each venture and one joint venture agreement
with a medical center affiliate in which we increased our ownership from 50% to
80% effective April 1, 2000. Many of our patient populations have diseases that
are discovered before or during adolescence and require ongoing 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, growth hormone-related
disorders and respiratory syncytial virus. We share profits and losses with our
joint venture partners in equal proportion to our respective equity ownership.
We account for our interests in the net income or loss in our 50% owned joint
ventures under the equity method of accounting, and in our 80% owned joint
venture under the consolidated method of accounting. Our equity interest in the
net income of the unconsolidated joint ventures represented approximately 23%
and 12% of our income before income taxes for the years ended June 30, 1999 and
2000, respectively. In addition to joint venture relationships, we have a
management agreement with one medical center for the provision of specialized
contract pharmacy services. We receive a management fee for these services,
which we classify as other revenue.
Costs of services include drug acquisition costs, pharmacy and warehouse
personnel costs, freight and other direct costs associated with the delivery of
our 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 our provision for patient accounts
receivable which prove to be uncollectible after routine collection efforts have
been exhausted. We typically hire personnel and incur legal, recruiting,
marketing and other expenses in anticipation of the commercial launch of a new
biopharmaceutical drug. In some instances, a portion of these expenses are
reimbursed to us by the biopharmaceutical manufacturer. We have not historically
capitalized any of these start-up expenses.
Due to the increasing sensitivity to drug cost within governmental and
non-governmental payors, we are continuously susceptible to reimbursement and
operating margin pressures. In recent years, pharmacy benefit managers and other
non-governmental payors have aggressively attempted to discount their
reimbursement rates for our products. Although this aggressive discounting has
resulted in some reduced margins for our services, our agreements with
biopharmaceutical manufacturers typically have provisions that address these
discounts through adjustments in product acquisition cost. These provisions have
allowed us to remain price competitive while maintaining relatively stable
operating margins.
Many government payors, including Medicare and Medicaid, pay us directly or
indirectly for some of the drugs that we sell at the drug's average wholesale
price ("AWP") or a percentage discount off AWP. Recent government investigations
into the reporting of AWP by drug manufacturers have lead First DataBank, Inc.
to publish a Market Price Survey of 437 drugs that significantly reduces
reimbursement for a number of the clotting factor products and IVIG we sell.
A number of state Medicaid agencies now pay us for clotting factor at the prices
shown on the Market Price Survey or at a percentage discount off those prices.
Other states have not changed their pricing structure or have changed back to
their pre-Market Price Survey reimbursement rates. The Health Care Financing
Administration ("HCFA") has also announced that, effective October 1, 2000,
Medicare intermediaries should calculate the amount that they pay for clotting
factor and 49 other drugs by using the lower prices on the First DataBank Market
Price Survey. It is expected that all of the Medicare intermediaries will adopt
the lower pricing.
We estimate that reimbursements by Medicare and state Medicaid agencies make up
approximately 2% and 7%, respectively, of our gross patient service revenues
from drugs we handle that are covered by the Market
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Price Survey. We have seen an overall reduction in pricing and margins for
clotting factor that we sell. However, we cannot predict the eventual results of
the government investigations and the changes made by First DataBank. If the
reduced average wholesale prices published by First DataBank for the drugs that
we sell are ultimately adopted as the standard by which we are paid by
government payors or private payors, this could have a material adverse effect
on our business, financial condition and results of operations, including
reducing the pricing and margins on certain of our products.
We do not have agreements with manufacturers of clotting factor to adjust our
product acquisition costs and we have experienced reduced reimbursement in our
sales of clotting factor to patients who are insured by Medicaid in a number of
states. While we cannot predict the eventual results of the changes being
considered by the various government agencies, we expect that we will receive
less reimbursement from our sales of clotting factor to patients insured by
Medicare and Medicaid.
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>
YEARS ENDED JUNE 30,
------------------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Revenues:
Net patient service revenue 94.0% 94.5% 95.0%
Other revenue 5.4 4.8 4.4
Equity in net income of joint ventures 0.6 0.7 0.6
------ ------ ------
Total revenues 100.0 100.0 100.0
Operating expenses:
Cost of services 85.1 85.4 85.2
General and administrative 6.9 6.8 6.8
Bad debts 1.8 1.8 1.7
Depreciation and amortization 2.1 1.5 1.0
------ ------ ------
Total operating expenses 95.9 95.5 94.7
------ ------ ------
Operating income 4.1 4.5 5.3
Interest expense, net 2.0 1.3 .6
------ ------ ------
Income before minority interest, income taxes and
extraordinary item 2.1 3.2 4.7
Minority interest -- -- .1
------ ------ ------
Income before income taxes and extraordinary item 2.1 3.2 4.6
Income tax expense 1.3 1.5 1.8
------ ------ ------
Income before extraordinary item 0.8 1.7 2.8
Extraordinary charge, net of income tax benefit -- (.5) --
====== ====== ======
Net income .8% 1.2% 2.8%
====== ====== ======
</TABLE>
FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1999
Revenues. Total revenues increased 37% from $258.4 million to $353.0 million
from fiscal year 1999 to fiscal year 2000. Approximately $50.3 million, or 53%,
of this increase was attributable to our increased sales of AVONEX(R).
Approximately $18.6 million, or 20% of this increase, was attributable to
increased hemophilia factor and IVIG revenue. Our Cerezyme(R) and Ceredase(R)
drug sales increased approximately $11.8 million, or 12% of the revenue
increase. Approximately $10.6 million, or 11%, of the increase was attributable
to the increased sales of growth hormone products. Synagis(R) drug sales
increased approximately $2.6 million, or 3% of the
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increase, as a result of increased patients. The remaining $0.7 million, or 1%,
of our revenue increase was primarily attributable to increased sales of other
ancillary drugs that we dispense as part of the patient's primary therapy or
under contractual obligations within some managed care contracts. Total revenues
included approximately $16.1 million of revenues from companies that we acquired
during the year ended June 30, 2000.
Cost of Services. Cost of services increased 37% from $220.5 million to $301.0
million from fiscal year 1999 to fiscal year 2000. This increase is commensurate
with the increase in our revenues. As a percentage of revenues, cost of services
decreased from 85.4% to 85.2% from fiscal year 1999 to fiscal year 2000. The
decrease is primarily the result of changes in the revenue mix by therapy type,
primarily from increased sales of IVIG drugs which have a lower acquisition cost
as a percentage of revenues than the other drugs we distribute.
General and Administrative. General and administrative expenses increased from
$17.6 million to $23.8 million, or 35%, from fiscal year 1999 to fiscal year
2000. This increase was primarily the result of increased salaries and benefits
associated with the expansion of our reimbursement, sales, marketing,
administrative and support staffs due to existing product line revenue growth,
new product line launches and the acquisitions we made during the year ended
June 30, 2000. General and administrative expenses represented 6.8% of our
revenues for both fiscal years 1999 and 2000.
Bad Debts. Bad debts increased from $4.7 million to $6.1 million, or 30%, from
fiscal year 1999 to fiscal year 2000. As a percentage of revenues, bad debt
expense decreased from 1.8% to 1.7% from fiscal year 1999 to fiscal year 2000.
Depreciation and Amortization. Depreciation expense increased from $614,000 to
$1,094,000 from fiscal year 1999 to fiscal year 2000 as a result of purchases of
property and equipment associated with our revenue growth and the expansion of
our leasehold facility improvements. Amortization expense associated with
goodwill and other intangible assets decreased from $3,297,000 to $2,303,000
from fiscal year 1999 to fiscal year 2000 due to some contract intangibles and a
non-compete covenant that were fully amortized by the end of fiscal year 1999.
Amortization expense attributable to the acquisitions made during fiscal year
2000 amounted to approximately $550,000.
Interest Expense, Net. Interest expense, net, decreased from $3,165,000 to
$2,136,000 from fiscal year 1999 to fiscal year 2000. This decrease was due to
lower interest and margin rates payable under our existing revolving line of
credit, lower fixed interest rate payments associated with our interest rate
swap agreement, and the payoff of the senior subordinated notes, with an
effective interest rate of 16.7%, in fiscal year 1999. We had interest income of
approximately $181,000 and $323,000 in fiscal years 1999 and 2000, respectively.
Income Tax Expense. Our effective tax rate decreased from 47.7% to 39.7% from
fiscal year 1999 to fiscal year 2000 as a result of the increase in income
before taxes while nondeductible amortization expense decreased. The difference
between the recognized effective tax rate and the statutory tax rate is
primarily attributed to approximately $2,300,000 and $816,000 of nondeductible
amortization expense in fiscal years 1999 and 2000, respectively, and state
income taxes.
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998
Revenues. Total revenues increased from $181.0 million to $258.4 million, or
43%, from fiscal year 1998 to fiscal year 1999. Approximately $39.5 million, or
51%, of this increase was attributable to our increased sales volume of
AVONEX(R). Approximately $14.2 million, or 18%, of this increase was
attributable to the increased hemophilia revenue associated with increased
patient
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volume and wholesale sales. Our Cerezyme(R) and Ceredase(R) drug sales
increased approximately $12.6 million, or 16%, of the revenue increase, as a
result of increased patient volume. Approximately $2.4 million, or 3%, of the
increase was attributable to the sale of the new drug REMICADE(TM) for the
treatment of Crohn's Disease. Approximately $2.3 million, or 3%, of the increase
was attributable to the sale of Synagis(R), a drug used in the treatment of
respiratory syncytial virus in pediatric patients. The remaining $6.4 million,
or approximately 9%, of our revenue increase was primarily attributable to
increased sales of growth hormone, service fees associated with our sales of
Ceredase(R), Cerezyme(R), and AVONEX(R), increased sales of other ancillary
drugs we dispense as part of a patient's primary therapy or under contractual
obligations within some managed care contracts and an increase of approximately
$769,000 from our equity in net income of joint ventures.
Cost of Services. Cost of services increased from $154.0 million to $220.5
million, or 43%, from fiscal year 1998 to fiscal year 1999. This increase was
commensurate with the increase in our sales referred to above. As a percentage
of revenues, cost of services increased from 85.1% to 85.4% from fiscal year
1998 to fiscal year 1999. This increase is primarily a result of an increase in
hemophilia factor acquisition costs without an associated increase in selling
price during fiscal year 1999 in addition to changes in our volume of net
patient service revenue by therapy type.
General and Administrative. General and administrative expenses increased from
$12.5 million to $17.6 million, or 41%, from fiscal year 1998 to fiscal year
1999. This increase was primarily the result of increased salaries and benefits
associated with the expansion of our reimbursement, sales, marketing,
administrative and support staffs due to existing product line revenue growth
and new product line launches. General and administrative expenses represented
6.9% and 6.8% of our revenues for the fiscal years 1998 and 1999, respectively.
Bad Debts. Bad debts increased from $3.2 million to $4.7 million from fiscal
year 1998 to fiscal year 1999. Bad debt expense was 1.8% of our revenue in both
periods.
Depreciation and Amortization. Depreciation expense increased from $430,000 to
$614,000 from fiscal year 1998 to fiscal year 1999 as a result of $1.5 million
in purchases of property and equipment in fiscal year 1999 associated with our
revenue growth and expansion of our leasehold facility improvements.
Amortization expense associated with goodwill and other intangible assets
decreased from $3.4 million to $3.3 million from fiscal year 1998 to fiscal year
1999 due to contract intangibles and a non-compete covenant that were fully
amortized by the end of fiscal year 1999.
Interest Expense, Net. Interest expense, net, decreased from $3.6 million to
$3.2 million from fiscal year 1998 to fiscal year 1999 due to lower interest and
margin rates payable under our existing revolving line of credit agreement with
our lenders, lower fixed interest rate payments associated with our renegotiated
interest rate swap agreement, and a reduced level of debt resulting from the
early payoff of a significant portion of our debt with a portion of the proceeds
from our initial public offering completed in April 1999. We generated interest
income of approximately $181,000 in fiscal year 1999 and $169,000 in fiscal year
1998 as a result of cash management programs which utilized our increased
short-term excess cash balances.
Income Tax Expense. Our effective tax rate decreased from 62.9% to 47.7% from
fiscal year 1998 to fiscal year 1999 as a result of the increase in income
before taxes while nondeductible amortization expense decreased. The difference
between the recognized tax rate and the statutory tax rate was primarily
attributed to approximately $2.5 million and $2.3 million of nondeductible
amortization expense in fiscal year 1998 and 1999, respectively, and state
income taxes.
Extraordinary Item. We incurred an extraordinary charge of approximately $1.3
million, net of tax, in connection with the re-payment of the senior
subordinated notes with the offering proceeds of our initial public offering in
April 1999.
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LIQUIDITY AND CAPITAL RESOURCES
On July 27, 2000, we filed a Form S-3 registration statement with the Securities
and Exchange Commission for the offering of up to 2,300,000 shares of our common
stock, including 300,000 shares to cover over-allotments. The proceeds of the
planned stock offering will be used to repay the outstanding principal balance
of the revolving line of credit and for working capital and other general
corporate purposes, including possible acquisitions.
As of June 30, 2000 and 1999, we had working capital of $35.6 million and $28.9
million, respectively. Our net cash provided by operating activities was
approximately $17.9 million for the year ended June 30, 2000 and $4.1 million
for the year ended June 30, 1999. These increases are due primarily to our
revenue growth and the timing of the collection of receivables, inventory
purchases and payments of accounts payable.
Net cash used by investing activities was $30.6 million for the year ended June
30, 2000 and $4.3 million for the year ended June 30, 1999. Cash used by
investing activities in the year ended June 30, 2000 consisted primarily of
$24.5 million for acquisitions, $4.4 million for purchases of property and
equipment and $1.7 million of undistributed earnings from our joint ventures.
Cash used by investing activities in fiscal 1999 consisted primarily of $1.3
million for the acquisition of a 50% interest in two California partnerships,
$1.5 million for purchases of property and equipment and $1.5 million of
undistributed earnings from our joint ventures.
Net cash provided by financing activities was $17.4 million for the year ended
June 30, 2000 and $0.6 million for the year ended June 30, 1999. Cash provided
by financing activities for the year ended June 30, 2000 consisted primarily of
$16.0 million of net borrowings on our revolving line of credit to finance our
acquisitions and $1.9 million from the proceeds of stock option exercises less
$.5 million of payments for costs of the initial public offering. In April 1999,
we completed our initial public offering of 5,175,000 shares of common stock.
The aggregate net proceeds from that offering of approximately $51.3 million
were used to pay costs of the offering, redeem all outstanding shares of Series
A preferred stock plus accrued dividends ($31.4 million), prepay in full all
principal and accrued interest on our senior subordinated notes ($11.2 million)
and reduce the outstanding balance of our revolving line of credit ($7.0
million). During fiscal year 1999, we also received approximately $0.2 million
from the private sale of our common stock.
Historically, we have funded our operations and continued internal growth
through cash provided by operations. Capital expenditures amounted to $4.4
million in fiscal year 2000 and $1.5 million in fiscal year 1999. We anticipate
that our capital expenditures for the fiscal year ending June 30, 2001 will
consist primarily of additional computer hardware and a fully integrated
pharmacy and reimbursement software system to meet the needs of our growth. We
expect the cost of our capital expenditures in fiscal year 2001 to be
approximately $5.5 million, exclusive of any acquisitions of businesses, and
expect to fund these expenditures through cash provided by operating activities,
proceeds from the planned stock offering and/or borrowings under the revolving
credit agreement with our bank. In addition, in connection with three of our
acquisitions that were completed in fiscal years 1999 and 2000, we may be
obligated to make up to $2.5 million in earn-out payments during the next twelve
months.
We have a $60.0 million revolving credit facility under the terms of our
existing credit agreement. The credit agreement contains a $20.0 million
sub-limit for working capital loans and letters of credit and is subject to a
borrowing base limit that is based on our cash provided by operations. All
outstanding principal and interest on loans made under the credit agreement are
due and payable on December 1, 2001. Interest on loans under the credit
agreement accrues at a variable rate index based on the prime rate or the London
Inter Bank Offered Rate for one, two, three or six months (as selected by us),
plus a margin depending on the amount of our debt to cash flow ratio as defined
by the credit agreement and measured at the end of each quarter for prospective
periods. During the year ended June 30, 2000, we paid margin rates of 0.75% to
1.50%.
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Our obligations under the credit agreement are secured by a lien on
substantially all of our assets, including a pledge of all of the common stock
or partnership interest of each of our subsidiaries in which we own an 80% or
more interest.
The credit agreement contains operating and financial covenants, including
requirements to maintain a minimum debt to equity ratio and minimum leverage and
debt service coverage ratios. In addition, the credit agreement includes
customary affirmative and negative covenants, including covenants relating to
transactions with affiliates, use of proceeds, restrictions on subsidiaries,
limitations on indebtedness, limitations on liens, limitations on capital
expenditures, limitations on mergers, acquisitions and sales of assets,
limitations on investments, prohibitions on payment of dividends and stock
repurchases, and limitations on debt payments (including payment of subordinated
indebtedness) and other distributions. The credit agreement also contains
customary events of default, including events relating to changes in control of
our company.
We are also a guarantor of a bank loan made to Children's Hemophilia Services, a
California general partnership in which we own an 80% interest. The original
line of credit amounted to $1.5 million. The payment schedule requires that all
outstanding principal amounts in excess of $1.0 million be paid on January 1,
2000, all outstanding principal amounts in excess of $0.5 million be paid on
July 1, 2000 and all remaining principal shall be paid in full on November 24,
2000. As of June 30, 2000, the partnership had $0.2 million outstanding under
the line of credit.
We use interest rate swap agreements to manage our interest rate exposure under
the credit agreement. We have effectively converted, for the period through
October 31, 2001, $25.0 million of floating-rate borrowings to fixed-rate
borrowings. We secured a 5.5% fixed interest rate (exclusive of the margin rate)
under our current interest rate swap agreement.
While we anticipate that our cash from operations, along with the short term use
of the revolving credit facility and the net proceeds to be received from the
planned stock offering, will be sufficient to meet our internal operating
requirements and growth plans for at least the next 12 months, we expect that
additional funds may be required in the future to successfully continue our
growth beyond that 12-month period or in the event that we grow more than
expected within such period. We may be required to raise additional funds
through sales of equity or debt securities or seek additional financing from
financial institutions. There can be no assurance, however, that our planned
offering will successfully be completed or that financing will be available on
terms that are favorable to us or, if obtained, will be sufficient for our
needs.
QUARTERLY FLUCTUATIONS
Our results of operations may fluctuate on a quarterly basis. In particular, we
typically increase our 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 our management, our results in that and future quarters
could be adversely affected. Quarterly results can also fluctuate as a result
of:
- lower prices paid by Medicare or Medicaid for the drugs that we sell,
including lower prices resulting from recent revisions in the method of
determining AWP;
- the timing of periodic adjustments to prices and other terms with our
drug suppliers;
- the accuracy of estimates of resources required for ongoing programs;
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- the timing and integration of acquisitions;
- changes in regulations related to biopharmaceutical companies;
- physicians prescribing patterns;
- general economic conditions;
- the annual renewal (on a calendar year basis) of deductible and
co-payment requirements, which affects patient ordering patterns;
- our providing drugs, now or in the future, that treat seasonal
illnesses.
We believe that quarterly comparisons of our 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 our common stock in a manner unrelated to our longer term
operating performance.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, Statement of Financial Accounting Standards (SFAS) No.133,
Accounting for Derivative Instruments and Hedging Activities, was issued, and is
required to be adopted in years beginning after June 15, 1999. In June 1999,
SFAS No.137 was issued, deferring the effective date of SFAS No.133 for one
year. We expect to adopt Statement No.133 in fiscal year 2001. We do not
anticipate that the adoption of Statement No.133 will have a significant effect
on our results of operations or our financial position.
IMPACT OF INFLATION
Changes in prices charged by the biopharmaceutical manufacturers for the drugs
we dispense, along with increasing labor costs, freight and supply costs and
other overhead expenses, affect our cost of services and general and
administrative expenses. Historically, we have been able to pass all, or a
portion, of the effect of such increases to the biopharmaceutical manufacturers
pursuant to negotiated adjustments made under our preferred distribution
agreements. As a result, changes due to inflation have not had significant
adverse effects on our operations.
IMPACT OF YEAR 2000 ISSUES
In prior years, we discussed the nature and progress of our plans to become Year
2000 ready. In late 1999, we completed the remediation and testing of our
systems. As a result of our planning and implementation efforts, we experienced
no disruptions in our mission critical information technology and
non-information technology systems. We believe these systems successfully
responded to the Year 2000 date change. We are not aware of material problems
resulting from Year 2000 issues, either with our internal systems, our services
or the products and services of third parties with whom we do business. We will
continue to monitor our mission critical computer applications and those of our
suppliers throughout the year 2000 to ensure that any Year 2000 issues that may
arise are properly addressed.
FORWARD LOOKING STATEMENTS
Certain matters discussed in the preceding pages of this Form 8-K contain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities
11
<PAGE> 12
Exchange Act of 1934, as amended. We intend for these forward-looking
statements to be covered by the safe harbor for forward-looking statements in
these sections. These forward-looking statements include, without limitation,
statements regarding implementation of our strategy, development of new drugs by
the pharmaceutical and biotechnology industries, anticipated growth and
revenues, anticipated working capital and sources of funding for growth
opportunities, expenditures, interest, costs and income and the effects of year
2000 issues. These forward-looking statements are usually accompanied by words
such as "believe," "anticipate," "plan," "seek," "expect," "intend," and similar
expressions. The forward-looking information is based on various factors and was
derived using numerous assumptions. Our actual results could be materially
different or worse from those expressed or implied by these forward-looking
statements as a result of various factors including the risk factors described
in our filings with the Securities and Exchange Commission, including but not
limited to our Registration Statement on Form S-3.
12
<PAGE> 13
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Accredo Health, Incorporated
We have audited the accompanying consolidated balance sheets of Accredo Health,
Incorporated (the "Company") as of June 30, 1999 and 2000, and the related
consolidated statements of operations, stockholders' equity and mandatorily
redeemable cumulative preferred stock, and cash flows for each of the three
years in the period ended June 30, 2000. Our audits also included the financial
statement schedule listed in the Index at Item 5. These financial statements and
the schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 1999 and 2000, and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 2000, in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule, 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 7, 2000
F-1
<PAGE> 14
ACCREDO HEALTH, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(000's omitted, except share data)
<TABLE>
<CAPTION>
JUNE 30
1999 2000
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,542 $ 10,204
Receivables:
Patient accounts 60,116 76,812
Allowance for doubtful accounts (5,300) (8,395)
--------- ---------
54,816 68,417
Due from affiliates 2,105 1,634
Other 5,856 7,420
--------- ---------
62,777 77,471
Inventories 19,927 32,342
Prepaid expenses and other current assets 359 770
Deferred income taxes 1,554 3,133
--------- ---------
Total current assets 90,159 123,920
Property and equipment, net 3,025 6,992
Other assets:
Joint venture investments 3,415 2,056
Goodwill and other intangible assets, net 50,147 72,261
--------- ---------
Total assets $ 146,746 $ 205,229
========= =========
</TABLE>
F-2
<PAGE> 15
<TABLE>
<CAPTION>
JUNE 30
1999 2000
--------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 56,029 $ 79,677
Accrued expenses 4,831 7,115
Income taxes payable 393 1,289
Line of credit -- 200
--------- ---------
Total current liabilities 61,253 88,281
Long-term notes payable 20,500 37,000
Deferred income taxes 866 1,355
Minority interest in consolidated joint venture -- 1,049
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;
1,650,000 shares in 1999 and no shares in 2000 issued and outstanding 16 --
Common stock, $.01 par value; 30,000,000 shares authorized; 11,965,631
shares in 1999 and 14,106,968 shares in 2000 issued and outstanding 120 141
Additional paid-in capital 63,322 66,838
Retained earnings 669 10,565
--------- ---------
Total stockholders' equity 64,127 77,544
========= =========
Total liabilities and stockholders' equity $ 146,746 $ 205,229
========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE> 16
ACCREDO HEALTH, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted, except share data)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Net patient service revenue $ 170,002 $ 244,158 $ 335,601
Other revenue 9,806 12,277 15,432
Equity in net income of joint ventures 1,150 1,919 2,002
--------- --------- ---------
Total revenues 180,958 258,354 353,035
Operating expenses:
Cost of services 154,046 220,517 300,973
General and administrative 12,489 17,637 23,831
Bad debts 3,165 4,739 6,117
Depreciation 430 614 1,094
Amortization 3,431 3,297 2,303
--------- --------- ---------
Total operating expenses 173,561 246,804 334,318
--------- --------- ---------
Operating income 7,397 11,550 18,717
Other expense (income):
Interest expense 3,721 3,346 2,459
Interest income (169) (181) (323)
--------- --------- ---------
3,552 3,165 2,136
--------- --------- ---------
Income before minority interest in income of consolidated
joint venture, income taxes and extraordinary item 3,845 8,385 16,581
Minority interest in income of consolidated joint venture -- -- (177)
--------- --------- ---------
Income before income taxes and extraordinary item 3,845 8,385 16,404
Income tax expense 2,420 4,003 6,508
--------- --------- ---------
Income before extraordinary item 1,425 4,382 9,896
Extraordinary charge for early extinguishment of debt, net of
income tax benefit -- (1,254) --
--------- --------- ---------
Net income 1,425 3,128 9,896
Mandatorily redeemable cumulative preferred stock dividends (2,043) (1,617) --
--------- --------- ---------
Net income (loss) to common stockholders $ (618) $ 1,511 $ 9,896
========= ========= =========
Basic earnings per common share:
Income before extraordinary item $ 0.17 $ 0.46 $ 0.71
Extraordinary charge -- (0.13) --
Preferred stock dividends (0.24) (0.17) --
--------- --------- ---------
Net income (loss) to common stockholders $ (0.07) $ 0.16 $ 0.71
========= ========= =========
Diluted earnings per common share:
Income before extraordinary item $ 0.17 $ 0.42 $ 0.67
Extraordinary charge -- (0.12) --
Preferred stock dividends (0.24) (0.16) --
--------- --------- ---------
Net income (loss) to common stockholders $ (0.07) $ 0.14 $ 0.67
========= ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 17
ACCREDO HEALTH, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK
(000's omitted, except share data)
<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, 1997 8,260,880 $ 83 $ 500 $(500) $ 15,426 $ (2,719) $ 12,790 $ 27,749
Issuance of common stock 125,001 1 (500) 500 499 -- 500 --
Common stock subscribed
(51,000 shares) -- -- 204 -- -- -- 204 --
Subscription receivable -- -- -- (204) -- -- (204) --
Accrued dividends on mandatorily
redeemable cumulative preferred
stock -- -- -- -- (2,043) -- (2,043) 2,043
Compensation resulting from stock
transactions, net of income tax
benefit -- -- -- -- 129 -- 129 --
Net income -- -- -- -- -- 1,425 1,425 --
---------- ---- ----- ----- -------- -------- -------- --------
Balance at June 30, 1998 8,385,881 84 204 (204) 14,011 (1,294) 12,801 29,792
Issuance of common stock 5,229,750 52 (204) 204 51,496 -- 51,548 --
Costs related to public offering -- -- -- -- (1,849) -- (1,849) --
Accrued dividends on mandatorily
redeemable cumulative preferred
stock -- -- -- -- (452) (1,165) (1,617) 1,617
Redemption of mandatorily
redeemable cumulative preferred
stock -- -- -- -- -- -- -- (31,409)
Compensation resulting from stock
transactions, net of income tax
benefit -- -- -- -- 116 -- 116 --
Net income -- -- -- -- -- 3,128 3,128 --
---------- ---- ----- ----- -------- -------- -------- --------
Balance at June 30, 1999 13,615,631 136 -- -- 63,322 669 64,127 --
Issuance of common stock:
Exercise of stock options 420,481 4 -- -- 1,095 -- 1,099 --
Employee stock purchase plan 70,856 1 -- -- 769 -- 770 --
Tax benefit of disqualifying
dispositions of stock options -- -- -- -- 1,536 -- 1,536 --
Compensation resulting from stock
transactions, net of income tax
benefit -- -- -- -- 116 -- 116 --
Net income -- -- -- -- -- 9,896 9,896 --
========== ==== ===== ===== ======== ======== ======== ========
Balance at June 30, 2000 14,106,968 $141 $ -- $ -- $ 66,838 $ 10,565 $ 77,544 $ --
========== ==== ===== ===== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 18
ACCREDO HEALTH, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30
--------------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,425 $ 3,128 $ 9,896
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,861 3,911 3,397
Original issue discount amortization 177 198 --
Interest added to long term obligations 1,046 -- --
Extraordinary charge for early retirement of debt -- 2,000 --
Provision for losses on accounts receivable 3,165 4,739 6,117
Deferred income taxes 1,466 (969) (1,158)
Compensation resulting from stock transactions 138 184 185
Tax benefit of disqualifying disposition of stock options -- -- 1,536
Minority interest in income of consolidated joint venture -- -- 177
Changes in operating assets and liabilities, net of effect from business
acquisitions:
Patient receivables and other (10,522) (25,857) (13,419)
Due from affiliates 93 (1,784) (990)
Inventories 3,885 (7,796) (11,950)
Prepaid expenses and other current assets 144 (49) (406)
Recoverable income taxes (151) 151 --
Accounts payable and accrued expenses (1,047) 25,891 23,618
Income taxes payable (1,802) 393 896
-------- -------- --------
Net cash provided by operating activities 1,878 4,140 17,899
INVESTING ACTIVITIES
Purchases of property and equipment (992) (1,511) (4,452)
Business acquisitions and joint venture investments -- (1,298) (24,480)
Change in joint venture investments, net 25 (1,489) (1,707)
-------- -------- --------
Net cash used in investing activities (967) (4,298) (30,639)
FINANCING ACTIVITIES
Proceeds from (payment of) notes payable and line of credit -- (18,116) 16,000
Redemption of preferred stock -- (31,409) --
Capitalized loan fees -- (27) --
Issuance of common stock 500 51,547 1,869
Payment of costs related to public offering -- (1,382) (467)
-------- -------- --------
Net cash provided by financing activities 500 613 17,402
-------- -------- --------
Increase in cash and cash equivalents 1,411 455 4,662
Cash and cash equivalents at beginning of year 3,676 5,087 5,542
-------- -------- --------
Cash and cash equivalents at end of year $ 5,087 $ 5,542 $ 10,204
======== ======== ========
SUPPLEMENTARY CASH FLOW DISCLOSURES
Income taxes paid $ 1,532 $ 3,731 $ 5,235
======== ======== ========
Cash paid for interest $ 1,826 $ 3,836 $ 2,529
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 19
Accredo Health, Incorporated
Notes to Consolidated Financial Statements
June 30, 2000
1. DESCRIPTION OF BUSINESS
The consolidated financial statements and related notes to the consolidated
financial statements include the accounts of Accredo Health, Incorporated (the
Company), its wholly-owned subsidiaries and its 80% owned joint venture.
Significant intercompany accounts have been eliminated in consolidation.
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 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: Multiple Sclerosis, Gaucher
Disease, hemophilia, growth hormone related disorders, Crohn's Disease,
rheumatoid arthritis, and respiratory syncytial virus.
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.
F-7
<PAGE> 20
Accredo Health, Incorporated
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF RISKS
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>
1999 2000
---- ----
<S> <C> <C>
Medicare 4% 2%
Medicaid 19% 25%
</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.
The Company derives a substantial portion of its revenue from the sale of drugs
provided by a limited number of biopharmaceutical suppliers. The table below
shows the concentration of the Company's revenue derived from the sale of drugs
provided by these suppliers for the years ended June 30:
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Biogen 23% 31% 37%
Genzyme 46% 37% 30%
Genentech 6% 4% 4%
</TABLE>
Federal deposit insurance is limited to $100,000 per depositor. Management has
weighed the risks involved in entrusting a single depository bank with assets in
excess of the insurance limit and has considered the bank's financial stability
and FDIC risk rating. Management believes that there is low risk associated with
this practice. Included in cash and cash equivalents at June 30, 1999 and 2000,
are cash balances at several institutions, which exceed the federal deposit
insured limit of $5,241,000 and $9,670,000, respectively.
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 accounts receivable, accounts payable and notes payable
approximates fair value of these financial instruments at June 30, 1999 and
2000.
F-8
<PAGE> 21
Accredo Health, Incorporated
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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. Other intangible assets consist primarily of non-compete
agreements, acquired patient populations and value associated with agreements
with drug manufacturers and medical centers 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 to 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 5 to 10 years for other intangible assets.
Goodwill and other intangible assets consist of the following at June 30 (in
thousands):
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Goodwill $ 51,785 $ 74,096
Other intangible assets 10,176 12,282
-------- --------
61,961 86,378
Accumulated amortization (11,814) (14,117)
-------- --------
$ 50,147 $ 72,261
======== ========
</TABLE>
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.
STOCK-BASED COMPENSATION
The Company recognizes stock-based compensation using the intrinsic value method
as permitted by Financial Accounting Standards Board Statement (FASB) No. 123,
Accounting for Stock-Based Compensation (Statement 123). Accordingly, no
compensation expense is recorded for employee stock-based awards issued at
market value at the date such awards are granted. However, the Company incurred
$436,000 and $420,000 in compensation cost in 1998 and 1999, respectively, for
stock transactions at less than fair market value. There was no compensation
cost for stock-based awards in 2000. The Company makes pro forma disclosures of
net income as if the market-value method was followed.
F-9
<PAGE> 22
Accredo Health, Incorporated
Notes to Consolidated Financial Statements (continued)
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
Company has agreements with certain third-party payors that provide for payments
to the Company at amounts discounted from its established rates (see Note 9).
Approximately 20%, 18% and 18% of gross patient service revenue for the years
ended June 30, 1998, 1999 and 2000, 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.
EARNINGS PER SHARE
The Company presents earnings per share in accordance with FASB Statement No.
128, Earnings Per Share. All per share amounts have been calculated using the
weighted average number of shares outstanding during each period. Diluted
earnings per share are adjusted for the impact of common stock equivalents using
the treasury stock method when the effect is dilutive.
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.
F-10
<PAGE> 23
Accredo Health, Incorporated
Notes to Consolidated Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RISK MANAGEMENT
During 1999, the Company adopted a self-insured medical and dental plan for
employees. Claims are accrued under these plans as the incidents that give rise
to them occur. Unpaid claim accruals are based on the estimated ultimate cost of
settlement, including claim settlement expenses. The Company has entered into a
reinsurance agreement with an independent insurance company to limit its losses
on claims. Under the terms of this agreement, the insurance company will
reimburse the Company for individual claims generally in excess of $25,000 and
when total claims exceed an aggregate amount based on the number of covered
lives. These reimbursements are included in general and administrative expense
in the accompanying consolidated statements of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which, as amended, is required to be adopted
in years beginning after June 15, 2000. 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 October 20, 1999, the Company acquired the majority of the operating assets
of the specialty pharmacy businesses operated by certain affiliates of Home
Medical of America, Inc. ("HMA"), a company engaged in the sale and distribution
of blood clotting factors and growth hormone products. This transaction was
accounted for using the purchase method of accounting. The price paid by the
Company for this acquisition was $7,765,000. The Company also accrued an
additional $482,000 for a related earn out payment based upon the achievement of
certain revenue goals in the six-month period ended April 30, 2000, resulting in
a total purchase price of $8,247,000. The total value of tangible assets
acquired was $234,000 and no indebtedness was assumed. The excess of the total
purchase price, including acquisition costs of $91,000, over the fair value of
the tangible assets acquired was allocated as follows: $7,663,000 to goodwill,
$300,000 to acquired patient population and $50,000 to other intangible assets.
The Company also paid $500,000 as consideration for an agreement from HMA and
certain of its other affiliates not to compete for a period of five years.
F-11
<PAGE> 24
Accredo Health, Incorporated
Notes to Consolidated Financial Statements (continued)
3. BUSINESS ACQUISITIONS (CONTINUED)
The Company acquired all of the outstanding stock of Sunrise Health Management,
Inc. ("Sunrise") from its shareholders effective December 1, 1999. Sunrise is
headquartered in Norcross, Georgia and is a provider of pharmaceutical care for
certain chronic, long-term patient populations, including those requiring
intravenous immunoglobulin ("IVIG"), clotting factor and growth hormone. This
transaction was accounted for using the purchase method of accounting. The price
paid by the Company for this acquisition was $13,724,000. The Company also
accrued an additional $1,000,000 for a related earn out payment based upon the
achievement of certain financial results for the six-month period ended May 31,
2000, resulting in a total purchase price of $14,724,000. Total assets acquired
and liabilities assumed were $1,903,000 and $882,000, respectively. The excess
of the total purchase price, including acquisition costs of $45,000, over the
fair value of the net assets acquired of $1,021,000 was allocated as follows:
$12,987,000 to goodwill, $646,000 to acquired patient population and $70,000 to
other intangible assets. The Company also paid $500,000 as consideration for an
agreement with the selling shareholders and a prior officer of Sunrise not to
compete with the Company in certain product lines for a period of ten years.
Effective April 1, 2000, the Company acquired an additional 30% interest in one
of its joint ventures, Childrens Hemophilia Services, increasing its ownership
in the joint venture to 80%. Childrens Hemophilia Services is located in Los
Angeles, California and is a provider of blood clotting factors and ancillary
supplies to hemophilia patients. This transaction was accounted for using the
purchase method of accounting. The price paid by the Company for this
acquisition was $2,086,000. Total assets acquired and liabilities assumed were
$1,788,000 and $479,000, respectively. The excess of the purchase price over the
fair value of the net assets acquired of $1,309,000, which amounted to $777,000,
was allocated to goodwill.
Any additional earn out payments made under these purchase agreements will be
treated as additional purchase cost and amortized over the remaining useful life
of 40 years.
The results of these acquisitions have been included in the Company's results
from their respective dates of acquisition.
The pro forma results of operations for the years ended June 30, 1999 and 2000,
as if the acquisitions had occurred on July 1, 1998, are as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Total revenues $270,237 $362,142
Income before extraordinary item 5,187 10,731
Net income 3,933 10,731
Net income per common share:
Basic $ .41 $ .78
Diluted $ .38 $ .73
</TABLE>
F-12
<PAGE> 25
Accredo Health, Incorporated
Notes to Consolidated Financial Statements (continued)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30 (in thousands):
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Equipment $ 1,936 $ 4,638
Furniture and fixtures 2,362 4,709
-------- --------
4,298 9,347
Accumulated depreciation (1,273) (2,355)
-------- --------
$ 3,025 $ 6,992
======== ========
</TABLE>
5. NOTES PAYABLE
At June 30, 2000, the Company has a revolving line of credit agreement for up to
$60 million with banks, which expires December 1, 2001. The Company's borrowing
base, as defined in the agreement, was approximately $54,112,000 and $60,000,000
at June 30, 1999 and 2000, 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 variable rate margin and LIBOR base rate resulted in effective
rates of 6.44% at June 30, 1999 and 8.15% at June 30, 2000. 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, 1999 and 2000, the balance outstanding under this line of credit was
$20,500,000 and $37,000,000, respectively.
The credit agreement 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.
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 were revised and extended on January 21,
1999, and require the Company to pay a fixed interest rate of 5.5% on a $25
million notional amount and receive the 30-day LIBOR rate in exchange. The
interest rate swap agreement terminates October 31, 2001.
The Company's 80% owned joint venture has a revolving line of credit agreement
with a bank. Amounts outstanding under the line of credit bear interest at the
prime rate, less six-tenths of one percent (.60%), per annum. The line of credit
expires November 24, 2000. At June 30, 2000, the balance outstanding under this
line of credit was $200,000. The Company has guaranteed the line of credit.
F-13
<PAGE> 26
Accredo Health, Incorporated
Notes to Consolidated Financial Statements (continued)
5. NOTES PAYABLE (CONTINUED)
During June 1997, the Company issued $10 million in senior subordinated notes
(the Notes) to certain stockholders of the Company in connection with an
acquisition. The Notes, which were due June 1, 2004, had a stated interest rate
of 10% and an effective rate of 16%. The Notes were unsecured. Concurrently with
the issuance of the Notes, the Company issued 400,000 shares of its common stock
to the Note holders. 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. In accordance with the terms of the Notes, the Company
added $1,046,000 of accrued interest due during 1998 to the unpaid principal
balance of the Notes.
The note purchase agreement specified that if at any time while the Notes were
outstanding, the Company consummated a public offering, or merged or
consolidated, the Company was required to use the net proceeds of such offering
to repay the principal amount of the Notes, plus accrued interest.
In connection with its initial public offering of common stock in April 1999,
the Company repaid in full all principal and accrued interest on the Notes. As a
result of this repayment, the Company incurred an extraordinary charge related
to the early extinguishment of debt. This extraordinary charge of $1,254,000,
net of a $746,000 income tax benefit for the year ended June 30, 1999 was due to
unamortized original issue discount remaining on the Notes on the repayment
date.
6. MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK
In connection with its formation, the Company issued, at a $100 redemption
amount, 255,361 shares of Series A mandatorily redeemable preferred stock on May
31, 1996, for a total of $25,536,100. The nonvoting mandatorily redeemable
cumulative preferred stock was entitled to an $8 per share annual dividend.
In connection with its initial public offering of common stock in April 1999,
the Company redeemed all the outstanding shares of nonvoting mandatorily
redeemable cumulative preferred stock (Series A) and all accrued and unpaid
dividends thereon.
7. 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.
F-14
<PAGE> 27
Accredo Health, Incorporated
Notes to Consolidated Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
Income tax expense (benefit) consists of the following for the years ended June
30 (in thousands):
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 850 $ 4,306 $ 6,634
State 104 666 1,032
-------- -------- --------
954 4,972 7,666
Deferred:
Federal 1,239 (839) (1,004)
State 227 (130) (154)
-------- -------- --------
1,466 (969) (1,158)
-------- -------- --------
$ 2,420 $ 4,003 $ 6,508
======== ======== ========
</TABLE>
The provision for income taxes differed from the amount computed by applying the
statutory federal income tax rates for the years ended June 30 due to the
following (in thousands):
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Income tax expense at statutory rate $ 1,307 $ 2,851 $ 5,619
State income tax expense, net of federal income tax benefit
219 354 577
Goodwill amortization 836 790 279
Other 58 8 33
-------- -------- --------
Income tax expense $ 2,420 $ 4,003 $ 6,508
======== ======== ========
</TABLE>
F-15
<PAGE> 28
Accredo Health, Incorporated
Notes to Consolidated Financial Statements (continued)
7. 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 (in
thousands):
<TABLE>
<CAPTION>
1999 2000
------- -------
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserves $ 1,186 $ 2,605
Accrued expenses 295 378
Joint venture investments 11 47
Other 62 103
------- -------
1,554 3,133
Deferred tax liabilities:
Property and equipment (235) (303)
Intangible assets (587) (1,015)
Joint venture investments (44) (37)
------- -------
(866) (1,355)
------- -------
Net deferred tax assets $ 688 $ 1,778
======= =======
</TABLE>
Management has evaluated the need for a valuation allowance for the deferred tax
assets and believes it is more likely than not that the assets will ultimately
be realized through future taxable income from operations.
8. COMMITMENTS
The Company leases office space and equipment under various operating leases.
Rent expense for all operating leases was approximately $758,000, $985,000 and
$1,227,000 for the years ended June 30, 1998, 1999 and 2000, respectively.
Future minimum payments, by year and in the aggregate, under non-cancelable
operating leases with initial terms of one year or more consist of the following
at June 30, 2000 (in thousands):
<TABLE>
<S> <C>
2001 $1,285
2002 1,175
2003 1,120
2004 694
2005 323
Thereafter 91
------
$4,688
======
</TABLE>
F-16
<PAGE> 29
Accredo Health, Incorporated
Notes to Consolidated Financial Statements (continued)
8. COMMITMENTS (CONTINUED)
In connection with three of the acquisitions made during fiscal years 1999 and
2000, the Company may be obligated to make up to $2.5 million in earn-out
payments during the next twelve months.
9. CONTINGENCY
Recent revisions to how the average wholesale price (or AWP) is determined will
result in reduced prices and profit margins for some drugs that the Company
handles. Many government payors, including Medicare and Medicaid pay the Company
directly or indirectly at the drug's AWP or at a percentage off AWP. The Company
has also contracted with a number of private payors to sell drugs at AWP or at a
percentage off AWP. AWP for most drugs is compiled and published by a private
company, First DataBank, Inc. Various federal and state government agencies have
been investigating whether the reported AWP of many drugs, including some that
the Company sells, is an appropriate or accurate measure of the market price of
the drugs. As recently reported in the Wall Street Journal, there are also
several whistleblower lawsuits pending against various drug manufacturers. These
government investigations and lawsuits involve allegations that manufacturers
reported artificially inflated AWP prices of various drugs to First DataBank.
Bayer AG, one of the Company's suppliers of clotting factor, announced on May 9,
2000, that it is engaged in settlement discussions with the government regarding
these charges. In February 2000, First DataBank published a Market Price Survey
of 437 drugs. The First DataBank Survey significantly reduces reimbursement to
the Company for a number of the clotting factor products and IVIG the Company
sells.
A number of state Medicaid agencies now pay the Company for clotting factor at
the prices shown on the Market Price Survey or at a percentage discount off
those prices. Other states have not changed their pricing structure or have
changed back to their pre-Market Price Survey reimbursement rates. The Health
Care Financing Administration (or HCFA) has also announced that effective
October 1, 2000, Medicare intermediaries should calculate the amount that they
pay for clotting factor and 49 other drugs by using the lower prices on the
First DataBank Market Price Survey. It is expected that all of the Medicare
intermediaries will adopt the lower pricing.
The Company estimates that reimbursements by Medicare and state Medicaid
agencies make up approximately 2% and 7%, respectively, of the Company's gross
patient service revenues from drugs the Company handles that are covered by the
Market Price Survey. The Company has seen an overall reduction in pricing and
margins for clotting factor that the Company sells. However, management of the
Company cannot predict the eventual results of the government investigations and
the changes made by First DataBank. If the reduced average wholesale prices
published by First DataBank for the drugs that the Company sells are ultimately
adopted as the standard by which the Company is paid by government payors or
private payors, this could have a material adverse effect on the Company's
business, financial condition and results of operations, including reducing the
pricing and margins on certain of the Company's products.
F-17
<PAGE> 30
Accredo Health, Incorporated
Notes to Consolidated Financial Statements (continued)
10. INVESTMENT IN JOINT VENTURES
Texas Health Pharmaceutical Resources, Teddy Bear Home Care/Drug Therapies,
Children's Memorial Home Hemophilia Services, Childrens Home Services, Childrens
Biotech Pharmacy Services and Specialized Pharmaceutical 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
had a 25% ownership interest (this entity was dissolved during the fiscal year
ended June 30, 1999). The Company uses the equity method of accounting for these
joint ventures. 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, 1999 and
2000, attributable to undistributed earnings of these joint ventures is
$1,053,000 and $1,385,000, respectively.
On November 10, 1998, the Company acquired a 50% general partnership interest in
Childrens Hemophilia Services, a partnership established to engage in the sale
and distribution of blood clotting factors and ancillary supplies to hemophilia
patients, for an initial purchase price of $917,000. In addition to the purchase
price paid on the acquisition date, the Company will pay up to an additional
$833,000 in two installments if targeted earnings specified in the purchase
agreement are achieved for the twelve-month periods ending twenty-four months
and thirty-six months from the acquisition date. Effective April 1, 2000, the
Company acquired an additional 30% interest in Childrens Hemophilia Services,
increasing its ownership in the joint venture to 80% (see Note 3).
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.
The difference in the purchase price and the Company's interest in the fair
value of net tangible assets of these partnerships of $1,298,000 is being
amortized over its estimated useful life of 40 years. Any additional payments
made under the purchase agreement will be treated as additional purchase cost
and amortized over the remaining useful life at the date of payment.
On October 1, 1999, the Company entered into a joint venture agreement with
Children's National Medical Center in Washington, DC, to market, sell, provide
and distribute Synagis(R) and growth hormone and related services and supplies.
The term of the joint venture is for a period of five years unless terminated at
an earlier date pursuant to the terms of the agreement. Both companies
contributed $40,000 in capital to the joint venture and will share equally in
the assets, liabilities, profits and losses. In conjunction with the formation
of this joint venture, the Company also entered into a management, service and
sales agreement with the joint venture, whereby the Company will provide
specialty pharmacy and management services to the joint venture in exchange for
a management fee and the reimbursement of certain expenses.
F-18
<PAGE> 31
Accredo Health, Incorporated
Notes to Consolidated Financial Statements (continued)
10. INVESTMENT IN JOINT VENTURES (CONTINUED)
On January 1, 2000, the Company entered into a joint venture agreement with
Specialized Pharmaceutical Services, Inc. ("SPS") to market, sell, provide and
distribute intravenous immunoglobulin ("IVIG") products and related services and
supplies in thirteen northeastern and eastern states. The term of the joint
venture is for a period of six years unless terminated at an earlier date
pursuant to the terms of the agreement. The Company has contributed $200,000 to
this joint venture and has committed to make an additional $300,000 capital
contribution. The companies will share equally in the assets, liabilities,
profits and losses of the joint venture. In conjunction with the formation of
the joint venture, the Company entered into management, service and sales
agreements with the joint venture, whereby the Company will provide specialty
pharmacy and management services to the joint venture in exchange for a
management fee and the reimbursement of certain expenses. The Company will also
sell IVIG products to the joint venture.
The Company received fees for management services from the joint ventures of
$413,000, $589,000 and $819,000 for the years ended June 30, 1998, 1999 and
2000, 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 years ended June 30 (in thousands):
<TABLE>
<CAPTION>
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Current assets $ 2,322 $ 8,519 $ 6,229
Property and equipment and other assets 78 81 84
Current liabilities 1,133 3,101 3,130
Total revenues 10,215 17,512 20,637
Net income 2,315 3,866 4,057
</TABLE>
11. DEFINED CONTRIBUTION RETIREMENT PLAN
The Company sponsors a qualified, defined contribution retirement plan under
Section 401(k) of the Internal Revenue Code in which substantially all employees
qualify for participation. The Company matches employee contributions, as
defined in the plan. The Company made annual matching contributions of
approximately $66,000, $98,000 and $152,000 for the years ended June 30, 1998,
1999 and 2000, respectively.
F-19
<PAGE> 32
Accredo Health, Incorporated
Notes to Consolidated Financial Statements (continued)
12. STOCKHOLDERS' EQUITY
COMMON STOCK
In April 1999, the Company completed its initial public offering of 5,175,000
shares of common stock at an offering price of $10.67 per share. In connection
with the offering, the Company's majority shareholder exchanged 1,650,000 shares
of the Company's $.01 par value common stock for 1,650,000 shares of the
Company's $.01 par value non-voting common stock. The net proceeds from the
offering were used to redeem the outstanding balance of the Series A redeemable
cumulative preferred stock plus accrued dividends, repay the Company's senior
subordinated notes and reduce the balance of the outstanding revolving line of
credit. During fiscal year 2000, the shareholder converted the 1,650,000 shares
of the Company's $.01 par value non-voting common stock to 1,650,000 shares of
the Company's $.01 par value common stock.
On February 21, 2000, the Company effected a three-for-two stock split in the
form of a 50% stock dividend for shareholders of record on February 11, 2000,
whereby shareholders received one additional share of common stock for every two
shares held. All share and per share data in the consolidated financial
statements and the notes hereto have been retroactively adjusted for the split.
PREFERRED STOCK
In April 1999, the Company's Board of Directors and Stockholders authorized the
establishment of a new class of undesignated preferred stock.
13. EMPLOYEE STOCK PURCHASE PLAN
In April 1999, the Company's Board of Directors adopted and the stockholders
approved the Accredo Health, Incorporated 1999 Employee Stock Purchase Plan (the
ESPP). Under the ESPP, employees may purchase shares of common stock at 85% of
market price on the first day of an offering period (usually consisting of a
six-month period beginning January 1 or July 1) or the last day of an offering
period, whichever is lower. The shares are purchased at the end of each period
with funds withheld from employees' pay during the period. A total of 202,500
shares of the Company's common stock have been reserved for issuance under the
ESPP. Participation in the ESPP commenced on the effective date of the Company's
initial public offering in April 1999. There were 70,856 shares of common stock
issued during the year ended June 30, 2000, pursuant to this employee stock
purchase plan.
F-20
<PAGE> 33
Accredo Health, Incorporated
Notes to Consolidated Financial Statements (continued)
14. STOCK OPTION PLAN
The Company's Amended and Restated Stock Option and Restricted Stock Purchase
Plan authorizes the grant of options to selected employees, officers and
directors for up to 1,447,500 shares of the Company's common stock. All options
granted have ten-year terms and vest and become fully exercisable over a period
of up to six years of continued employment. Certain options granted with up to
six-year vesting terms also have provisions for accelerated vesting over the
first four years if certain Company income targets are achieved during that
period. Otherwise, these options become fully exercisable at the end of up to
six years of continued employment.
The Company's 1999 Long-Term Incentive Plan authorizes the grant of options to
selected employees, officers and directors for up to 750,000 shares of the
Company's common stock. As of June 30, 2000, options for 177,861 shares of stock
have been granted under this plan under terms similar to those discussed above.
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 years ended June 30:
<TABLE>
<CAPTION>
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
Risk-free interest rates 5.48% to 6.22% 5.05% to 5.40% 5.81% to 6.59%
Dividend yield 0% 0% 0%
Volatility factor .60 .50 .72
Weighted-average expected life 4.45 years 4.47 years 3.19 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 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.
F-21
<PAGE> 34
Accredo Health, Incorporated
Notes to Consolidated Financial Statements (continued)
14. STOCK OPTION PLAN (CONTINUED)
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 years ended June 30 is as follows (in thousands,
except share data):
<TABLE>
<CAPTION>
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
Net income "as reported" $ 1,425 $ 3,128 $ 9,896
Pro forma net income $ 1,119 $ 2,729 $ 8,784
Pro forma basic earnings per share $ 0.13 $ 0.29 $ 0.63
Pro forma diluted earnings per share $ 0.13 $ 0.26 $ 0.60
</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>
1998 1999 2000
----------------------------- ---------------------------- ------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ---------------- --------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period 1,006,288 $2.00 1,284,644 $2.43 1,401,109 $ 2.85
Granted 279,642 4.00 130,715 6.84 222,866 19.38
Exercised -- -- (3,750) 2.00 (420,481) 2.62
Forfeited (1,286) 2.00 (10,500) 2.67 (16,207) 8.88
---------- ----- ---------- ----- ---------- ------
Outstanding at end of
period 1,284,644 $2.43 1,401,109 $2.85 1,187,287 $ 5.95
========== ===== ========== ===== ========== ======
Exercisable at end of year 370,502 $2.11 608,628 $2.29 728,330 $ 4.70
========== ===== ========== ===== ========== ======
Weighted-average fair
value of options granted
during the year $ 1.75 $ 3.32 $ 10.02
========== ========== =========
</TABLE>
The range of exercise prices for the Company's stock options outstanding at June
30, 2000, is $2.00 to $19.58. The weighted-average remaining contractual life of
those outstanding options is 7.1 years at June 30, 2000.
F-22
<PAGE> 35
Accredo Health, Incorporated
Notes to Consolidated Financial Statements (continued)
15. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share for the years ended June 30 (in thousands, except share data):
<TABLE>
<CAPTION>
1998 1999 2000
---------- ----------- -----------
<S> <C> <C> <C>
Numerator for basic and diluted income (loss) per share
to common stockholders:
Income before extraordinary item $ 1,425 $ 4,382 $ 9,896
Extraordinary item -- (1,254) --
Preferred stock dividends (2,043) (1,617) --
---------- ----------- -----------
Net income (loss) to common stockholders $ (618) $ 1,511 $ 9,896
========== =========== ===========
Denominator:
Denominator for basic income (loss) per share to
common stockholders-weighted-average shares 8,349,422 9,501,806 13,843,187
Effect of dilutive stock options 711,738 930,139 940,032
---------- ----------- -----------
Denominator for diluted income (loss) per share to
common stockholders-adjusted weighted-average
shares 9,061,160 10,431,945 14,783,219
========== =========== ===========
Basic earnings per common share:
Income before extraordinary item $ 0.17 $ 0.46 $ 0.71
Extraordinary item -- (0.13) --
Preferred stock dividends (0.24) (0.17) --
---------- ----------- -----------
Net income (loss) to common stockholders $ (0.07) $ 0.16 $ 0.71
========== =========== ===========
Diluted earnings per common share:
Income before extraordinary item $ 0.17 $ 0.42 $ 0.67
Extraordinary item -- (0.12) --
Preferred stock dividends (0.24) (0.16) --
---------- ----------- -----------
Net income (loss) to common stockholders(1) $ (0.07) $ 0.14 $ 0.67
========== =========== ===========
</TABLE>
(1) Historical diluted loss per share amounts for 1998 have been calculated
using the same denominator as used in the basic loss per share calculation since
the inclusion of dilutive securities in the denominator of the calculation would
have an anti-dilutive effect.
F-23
<PAGE> 36
Accredo Health, Incorporated
Notes to Consolidated Financial Statements (continued)
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended June 30, 1999 and 2000, is
summarized below (in thousands, except share data):
<TABLE>
<CAPTION>
2000
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues $76,871 $86,356 $91,392 $98,417
Operating income 3,625 4,316 5,186 5,590
Income before income taxes 3,273 3,884 4,472 4,775
Net income 1,968 2,349 2,732 2,847
Basic earnings per common share:
Net income 0.14 0.17 0.20 0.20
Diluted earnings per common share:
Net income 0.13 0.16 0.18 0.19
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total revenues $57,348 $62,678 $66,881 $71,447
Operating income 2,709 2,747 2,922 3,170
Income before income taxes and extraordinary item 1,844 1,882 2,000 2,659
Net income before extraordinary item 915 948 1,020 1,499
Net income 915 948 1,020 245
Net income to common stockholders 405 437 509 160
Basic earnings per common share:
Income before extraordinary item 0.11 0.11 0.12 0.12
Net income 0.11 0.11 0.12 0.02
Net income to common stockholders 0.05 0.05 0.06 0.01
Diluted earnings per common share:
Income before extraordinary item 0.10 0.10 0.11 0.11
Net income 0.10 0.10 0.11 0.02
Net income to common stockholders 0.05 0.05 0.06 0.01
</TABLE>
17. SUBSEQUENT EVENT
On July 27, 2000, the Company filed a Form S-3 registration statement with the
Securities and Exchange Commission for the offering of up to 2,300,000 shares of
its common stock.
F-24
<PAGE> 37
ACCREDO HEALTH, INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------------------------- ------------------------ ------------------------------------ -------------- ----------------
Additions
------------------------------------
CHARGED TO CHARGED TO
BALANCE AT BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
------------------------- ------------------------ ----------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1998:
Allowance for doubtful $ 3,802 $ 3,165 $ -- $ 3,537(2) $ 3,430
accounts
Year ended June 30, 1999:
Allowance for doubtful 3,430 4,739 -- 2,869(2) 5,300
accounts
Year ended June 30, 2000:
Allowance for doubtful 5,300 6,117 76(1) 3,098(2) 8,395
accounts
</TABLE>
(1) Allowance as a result of acquisitions
(2) Uncollectible accounts written off, net of recoveries
S-1
<PAGE> 38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ACCREDO HEALTH, INCORPORATED
By: /s/ Joel K. Kimbrough
-----------------------
Joel K. Kimbrough
Chief Financial Officer
Date: August 16, 2000
<PAGE> 39
EXHIBIT INDEX
TO
CURRENT REPORT ON FORM 8-K
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
23.1 Consent of Ernst & Young LLP.
99.1 Company Press Release dated August 16, 2000.
</TABLE>
