ACCUHEALTH, INC.
LEADING THE HOME HEALTH AND LONG TERM CARE MARKETS
1997 ANNUAL REPORT
<PAGE>
CORPORATE PROFILE
ABOUT ACCUHEALTH, INC.
- --------------------------------------------------------------------------------
Accuhealth, Inc. is a leading home health care company, providing intravenous
solutions, oral medications, related equipment for infusion therapy, and
instruction and monitoring of this therapy to critically ill home-bound
patients. The Company also delivers home care equipment and provides
pharmaceutical supplies and management services to residential care facilities
serving the critically ill. Alternative care site programs are one of the
fastest growing segments of the health care industry, and Accuhealth is
strategically positioned to capitalize on this trend.
<PAGE>
TO OUR FELLOW SHAREHOLDERS:
Accuhealth, Inc. has now completed its third year of rebuilding under new
management. During these past thirty-six months, we were able to eliminate
unprofitable operations, strengthen our financial position and create a platform
upon which the Company could build profits, expand geographically and broaden
our health care service delivery capabilities. This past year, the Company
focused its attention on achieving the size, the capability and the strength for
regional home healthcare leadership. We would like to take this opportunity to
bring you up to date on Accuhealth's accomplishments over the past year and our
plans for fiscal 1998.
POSITIONING ACCUHEALTH FOR REGIONAL HOME HEALTHCARE LEADERSHIP
We believe that by the end of the decade there will be only a few leading home
healthcare companies serving the New York, Connecticut and New Jersey area.
Accelerated competition, shrinking margins, and the increasing need to provide a
full range of comprehensive health care services to managed care entities are
all fueling the consolidation of home care providers. Recognizing this trend,
Accuhealth embarked on an acquisition search for companies with a strong niche
in the home care marketplace, quality management, and profitable and synergistic
business operations.
[PHOTO OF STANLEY GOLDSTEIN, CHAIRMAN OF THE BOARD &
GLENN C. DAVIS, PRESIDENT & CEO]
We identified these qualities in ProHealthCare Infusion Services, Inc. and
acquired the company this past July. ProHealthCare specializes in caring for
complex HIV/AIDS patients and has a strong disease management capability in
treating this type of patient. Additionally, ProHealthCare has made strong
inroads into physician management services and marketing to physicians,
supplementing Accuhealth's strong niche in institutional-based referrals. We
were also impressed by ProHealthCare's accreditation with commendation by the
Joint Commission of American Healthcare Organizations (JCAHO)-a level of
achievement matched by only a few companies in the industry. Our acquisition of
ProHealthCare will further strengthen our position in central New Jersey-a key
geographic area of growth and help Accuhealth maintain its predominance as the
major provider of care to individuals suffering from HIV/AIDS in the tri-state
area.
We followed this acquisition by announcing a merger with Healix Healthcare
Inc., a privately-held company located in Westchester County, New York. Healix
is one of the region's fastest growing, JCAHO accredited providers of
comprehensive health care services. The company provides fully-integrated home
health care including nursing, respiratory and infusion therapy, durable medical
equipment and supplies, home health care attendants and renal dialysis. Healix
is a major provider of alternate site care to managed care organizations.
Finally, during the year Accuhealth announced its intention to acquire one of
the region's largest home medical equipment dealers. The company provides
comprehensive care in all equipment-related home care settings. In addition to
being a JCAHO accredited, full service durable medical equipment and supply
company, the company specializes in rehabilitation products and maintains a
state-of-the-art respiratory therapy program. As of the date of this letter,
Accuhealth is conducting its due diligence of this company.
We hope to consummate these mergers in the current year and thus be positioned
to capture growth opportunities faster and more effectively, grow top-line
revenues and enter new markets quicker than we could have as an individual
provider.
The Company continues to penetrate the New York health care market where we
were successful on a number of fronts. First, we continued our aggressive
pursuit of the managed care marketplace and won contracts with United Healthcare
and MetroPlus, a new Medicaid managed care entity operated by the City of New
York's Health and Hospital Corporation. With the addition of these two leading
HMO's, Accuhealth has become recognized as a leader in providing care to managed
care entities in the New York metropolitan area.
We were particularly proud to renew our comprehensive pharmacy services
contract with the Rivington House Health Care Facility-the nation's largest AIDS
specific health care facility through the year 2000. Through this relationship,
our organizations are working together to improve the delivery of quality and
cost-effective health care to the critically-ill AIDS patient.
Finally, among the high points of our new business development initiatives
this past year, was our obtaining
Accuhealth, Inc. and Subsidiaries 1
<PAGE>
the contract to serve Bronx-based CASAPROMESA. This engagement involves our
provision of pharmacy services to this 109-bed AIDS health care facility and the
hundreds of patients in its adult day treatment program.
FINANCIAL RESULTS
As you can see from these accomplishments, Accuhealth grew stronger this past
year. We were able to increase our revenues through internal growth and our
operations consistently generated operating income. We were able to restructure
our operations and achieve cost savings and overhead reductions enabling
Accuhealth to improve the productivity and cost effectiveness of its operations.
The Company achieved a profit in each of its fiscal quarters.
Net sales for the fiscal year ended March 31, 1997 increased approximately
$1,257,000 to $16,369,000 from $15,112,000 reported in fiscal 1996. Operating
income for the twelve months ended March 31, 1997 was $623,337, versus a net
operating loss of $(172,880) in fiscal 1996. Net income for the fiscal year 1997
was $126,731, versus a net loss of $(778,332), in fiscal 1996. Fiscal year
1997's net income is before redeemable preferred stock dividends and accretion
on the Company's 6% Convertible Preferred Stock of $162,000, versus $203,836 in
fiscal 1996. Net loss applicable to common stockholders was $(35,269) or $(.03)
versus $(982,168) or $(.77) for the prior year.
With the addition of ProHealthCare, the commencement of operations of PROMESA
and the planned closure of our merger with Healix Healthcare in early winter of
1998, we are confident that we will continue to generate profits and build value
for our shareholders in fiscal 1998.
ACCUHEALTH--A RESOURCE OF MEDICAL KNOWLEDGE
It has been Accuhealth's goal to be more than simply a provider of quality
care. The Company's stated mission includes research and initiatives designed to
expand medical science's understanding of the home care patient, while at the
same time strengthening our commitment to patient care. Illustrative of this
commitment, this past May Accuhealth announced its intention to found the
Institute for Applied Research in Continuing Care at Rivington House. The goal
of the Institute is to improve the practice of health and social service
delivery for patients with continuing care needs. The Institute will be guided
by the goals of extending basic research into active practice, investigating
effectiveness as well as efficacy, and responding quickly to pressing medical
and social issues with focused investigations that produce relevant answers for
continuing care professionals.
A large population of Accuhealth's patients suffer from HIV/AIDS and, as a
result, Accuhealth has become a leading provider of the new protease inhibitor
medications to individuals suffering from this disease. The Company has sought
to disseminate its knowledge and experience in this regard and has sponsored a
number of conferences on this topic, including the first large-scale discussion
in New York City on the impact and implications of protease inhibitors and other
advances in the treatment of AIDS.
In another exciting development, Accuhealth was selected to participate in a
study of a new AIDS vaccine in conjunction with the National Institutes of
Health and the New York Blood Center.
Among the strengths of Accuhealth and its combined companies will be its
extensive patient referral base which will include several hundred HMO, PPO,
hospital, hospice and home care agency contracts. In 1998, Accuhealth intends to
invest heavily in further developing its managed care referral network by
introducing a new model combining specific disease management protocols with a
capitation capability for contracting with payers.
In the past year, Accuhealth has continued to position itself for regional
home healthcare leadership. We look forward to keeping you abreast of the
changes that will be taking place as Accuhealth moves forward in new and
exciting directions. We appreciate the support of our shareholders and the
dedication of our employees who have enabled us to build and strengthen
Accuhealth.
Sincerely,
/s/ Stanley Goldstein
- ---------------------------
Stanley Goldstein
Chairman of the Board
September 19, 1997
/s/ Glenn C. Davis
- ---------------------------
Glenn C. Davis
President and Chief Executive Officer
September 19, 1997
2 Accuhealth, Inc. and Subsidiaries
<PAGE>
SELECTED FINANCIAL DATA
Statement of Operations Data:
<TABLE>
<CAPTION>
Fiscal Year
------------------------------------------------------------
1997 1996 1995 1994
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales ................................... $ 16,369,376 $ 15,112,071 $ 15,468,402 $ 15,380,043
Gross profit ................................ 6,770,120 6,931,649 7,211,622 6,920,977
Selling, general and
administrative expenses .................... 6,146,783 7,104,529 6,913,959 7,599,214
Interest expense ............................ 496,606 605,452 635,848 270,833
Recovery (expenses) related to
pre-investigation management off
book cash practices ........................ -- -- 525,820 (454,065)
Debt surrendered in settlement of claims .... -- -- 488,500 --
Income (loss) from continuing operations
before income taxes ........................ 126,731 (778,332) 676,135 (1,403,135)
Income (loss) from continuing operations .... 126,731 676,135
Discontinued operations ..................... -- -- (278,733) (1,187,055)
Income (loss) before extraordinary item ..... 126,731 (778,332) 397,402 (2,545,706)
Extraordinary gain on debt
surrendered in settlement of claims ........ -- -- 60,000 --
Net (loss) income ........................... 126,731 (778,332) 457,402 (2,545,706)
Net (loss) income applicable to
common stockholders ........................ (35,269) (982,168) 350,555
Net loss (income) per common share:
Primary:
Loss (income) from continuing operations .. (.03) (.77) .39 (.87)
Income (loss) before extraordinary item ... (.03) (.77) .20 (1.64)
Extraordinary item ........................ -- -- .04 --
Net (loss) income per share ............... (.03) (.77) .24 (1.64)
Fully Diluted:
Income (loss) from continuing operations .. (.03) (.77) .36 (.87)
Income (loss) before extraordinary item ... (.03) (.77) .20 (1.64)
Extraordinary item ........................ -- -- .04 --
Net (loss) income per share ............... (.03) (.77) .24 (1.64)
Weighted average number of shares
of common stock and equivalents outstanding
Primary ................................. 1,400,423 1,273,274 1,472,854 1,550,000
Fully diluted ........................... 1,400,423 1,273,274 1,893,991 1,550,000
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA March 31,
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1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Total assets .................... $ 8,500,165 $ 7,650,957 $ 7,294,898 $ 7,823,526 $13,018,469
Long-term liabilities ........... 974,543 488,352 694,628 1,586,394 1,684,351
Total liabilities ............... 7,078,786 6,356,309 5,277,090 8,242,117 10,917,730
Preferred stock ................. -- -- 2,710,164 -- --
Stockholders' equity (deficiency) 1,421,379 1,294,648 (692,356) (418,591) 2,100,739
Accuhealth, Inc. and Subsidiaries 3
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Management's Discussion and Analysis should be read in conjunction with
the consolidated financial statements of the Company and related notes included
elsewhere in this Form 10-K.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 1997 AS COMPARED TO FISCAL YEAR ENDED MARCH 31, 1996
Net sales for Fiscal 1997 increased approximately $1,257,000 to $16,369,000
from the $15,112,000 reported in Fiscal 1996. The increase was the result of an
increase of approximately $2,143,000 and $81,000 in the Company's institutional
pharmacy business and oral medication revenues, respectively, offset partially
by decreases in the Company's infusion services and durable medical equipment
revenues of $853,000 and $114,000, respectively.
The revenues from infusion services were lower than the previous fiscal year
services partially as a result of the Company's marketing shift away from
treating a small number of high revenue patients, primarily HIV/AIDS Medicaid
patients, to increased numbers of lower revenue patients referred to the Company
via insurance companies and HMO's. The strategy derives from two trends: the
HIV/AIDS population stabilizing and the downward pressure on Medicaid
reimbursements for infusion therapy services.
Gross profits for Fiscal 1997 were approximately $6.8 million and were 41.4%
of total net sales as compared to approximately $6.9 million or 45.9% for Fiscal
1996. The decrease in gross profits reflects an overall shift in the Company's
mix of business, including expanded institutional pharmacy business which
carries lower margins.
Selling, general and administrative expenses ("SG&A") were approximately $6.1
million or 37.6% of net sales for Fiscal 1997 as compared to $7.1 million or
47.0% for Fiscal 1996. The decrease was principally the result of reductions in
professional fees ($283,000), marketing costs ($190,000), certain clinical and
administrative salaries ($159,000), and other administrative costs ($368,000).
Interest expense in Fiscal 1997 was $496,606 as compared to $605,452 in Fiscal
1996.
FISCAL YEAR ENDED MARCH 31, 1996 AS COMPARED TO FISCAL YEAR ENDED MARCH 31, 1995
Net sales for Fiscal 1996 decreased approximately $356,000 to $15,112,000 from
the $15,468,000 reported in Fiscal 1995. The decrease was the result of a
reduction of approximately $2,544,000 and $321,000 in the Company's revenues
from infusion services and oral medications, respectively, offset partially by
an increase in the Company's institutional pharmacy revenues of $2,423,000.
The revenues from infusion services and oral medications were lower than the
previous fiscal year services partially as a result of the Company's marketing
shift away from treating a small number of high revenue patients, primarily
HIV/AIDS Medicaid patients, to increased numbers of lower revenue patients
referred to the Company via insurance companies and HMO's. The strategy derives
from two trends: the HIV/AIDS population stabilizing and the downward pressure
on Medicaid reimbursements for infusion therapy services. In addition, the
Company lost a physician referral source approximating $1 million in net sales.
Gross profits for Fiscal 1996 were approximately $6.9 million and were 45.9%
of total net sales as compared to approximately $7.2 million or 46.6% for Fiscal
1995. The decrease in gross profits reflects an overall shift in the Company's
mix of business, including expanded institutional pharmacy business which
carries lower margins.
Selling, general and administrative expenses ("SG&A") were approximately $7.1
million or 47.0% of net sales for Fiscal 1996 as compared to $6.9 million or
44.7% for Fiscal 1995. The increase was primarily attributable to higher than
expected legal fees and marketing costs and a reduction of $387,000 in its
reserves for contingencies in Fiscal 1995. Legal fees were approximately
$114,000 higher than in the prior period as a result of certain litigation,
which has now been either settled or closed. Non-recurring marketing costs were
approximately $117,000 higher than the prior period due to the Company's
attempts to increase the number of patients it serves.
Actions taken in the second half of Fiscal 1996, principally a reduction in
compensation costs, were directed to bringing the Company's level of SG&A
expenses into line with revenues. As a result of these efforts, fourth quarter
SG&A expenses were $1,587,000 compared to an average of $1,839,000 for the three
quarters ended December 31, 1995.
Interest expense in Fiscal 1996 was $605,452 or 4.8% lower than Fiscal 1995.
Fiscal 1995 included interest charges of $59,000 related to debt surrendered in
settlement of claims.
FINANCIAL CONDITION
As of March 31, 1997, the Company had working capital of approximately
$63,000.
The Company's cash provided by financing activities of approximately $479,000
was primarily attributable to the proceeds of approximately $869,000 under the
Company's revolving credit facility and term loan offset by principal payments
on capital leases.
Accounts receivable include amounts due from third party payors, primarily
governmental agencies (Medicare and Medicaid). At March 31, 1997, gross Medicare
and Medicaid receivables aggregated $2,415,732.
4 Accuhealth, Inc. and Subsidiaries
<PAGE>
On April 28, 1994, the Company obtained a $2.5 million maximum commitment
working capital facility from Rosenthal and Rosenthal ("Rosenthal") and used
funds borrowed under that facility to reduce its indebtedness. The loan is
secured by assets of the Company including its receivables, inventories,
equipment and fixtures. The Company's ability to use this credit facility is
dependent upon the level of its eligible receivables as defined in the Loan and
Security Agreement. Pursuant to the terms of a Loan and Security Agreement with
Rosenthal, the Company granted Rosenthal warrants to purchase 70,000 shares of
the Company's common stock.
Effective February 1, 1996, the Company agreed to an amendment of the Loan and
Security Agreement. The amendment extended the agreement through April 28, 1997
and allowed the Company to borrow, under certain conditions and terms, up to
$3,500,000 at an interest rate of prime plus 3 7/8%. In addition, the Company
granted Rosenthal warrants to purchase 30,000 shares of the Company's common
stock.
Effective February 1, 1997, the Company agreed to an amendment of the Loan and
Security Agreement. This amendment extends the agreement through April 1, 1998
and allows the Company to borrow, under certain conditions, up to $4,000,000 in
the form of a Term Loan of $500,000 at an interest rate of prime plus 5%, and a
working capital facility of $3,500,000 at an interest rate of prime plus 27
7/8%. In addition, the expiration date of the 100,000 warrants was amended to be
the later of April 1, 2001 or thirty-six months following the last day of any
term to which the loan commitment has been extended and the exercise price for
all warrants was restated to $2.00 per share.
The Company operates under cash flow pressure primarily due to losses and
insufficient working capital. The Company believes that its cash position and
liquidity will continue to require careful management for the foreseeable
future, but that its existing credit facility, together with cash generated by
operations, will be sufficient to fund the Company's operations and required
debt repayments at least through March 31, 1998.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), which is required to be adopted beginning with the quarter ended December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options and warrants will be excluded. The Company does
not anticipate that the adoption of SFAS 128 will have a significant impact on
the calculation of primary and fully diluted earnings per share.
Accuhealth, Inc. and Subsidiaries 5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
March 31,
--------------------------
1997 1996
--------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash ........................................................ $ 31,548 $ 2,694
Accounts receivable, less allowance for doubtful
accounts of $317,000 in 1997 and $292,000 in 1996 .......... 5,279,369 4,459,693
Inventories ................................................. 665,335 621,838
Prepaid expenses and other current assets ................... 191,323 103,114
--------------------------
Total Current Assets ........................................ 6,167,575 5,187,339
Revenue producing equipment, net .............................. 485,305 670,352
Fixed assets, net ............................................. 1,659,056 1,758,646
Other ......................................................... 188,229 34,620
--------------------------
Total Assets ................................................ $ 8,500,165 $ 7,650,957
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable-revolving credit facility ..................... $ 2,782,677 $ 2,413,392
Notes payable-other ......................................... 224,869 294,598
Accounts payable ............................................ 1,801,120 1,512,836
Accrued expenses and other
current liabilities ........................................ 1,128,828 1,221,422
Current portion of capital lease-Facility ................... 53,625 71,500
Current portion of other capital lease obligations .......... 113,124 354,209
--------------------------
Total Current Liabilities ................................. 6,104,243 5,867,957
Notes payable-term loan ....................................... 500,000 --
Notes payable-other ........................................... 101,031 --
Capital lease-Facility, less current portion .................. 303,875 375,375
Other capital lease obligations, less current portion ......... 69,637 112,977
--------------------------
Total Liabilities ......................................... 7,078,786 6,356,309
Commitments and Contingencies (See Notes 7 and 10)
Stockholders' Equity:
Preferred stock, $.01 par value; authorized 3,650,000 shares;
no shares issued and outstanding
6% Redeemable cumulative convertible preferred stock $.01 par value;
$2,754,000 liquidation preference, authorized
issued and outstanding 1,350,000 shares .................... 13,500 13,500
Common stock, $0.1 par value; authorized 15,000,000 shares;
1,787,598 (1997) and 1,630,233 (1996) shares issued ........ 17,876 16,302
Additional paid-in capital .................................. 6,168,364 6,007,938
(Deficit) ................................................... (4,154,041) (4,118,772)
--------------------------
2,045,699 1,918,968
Less treasury stock (308,004 shares) at cost ................ 624,320 624,320
--------------------------
Total Stockholders' Equity .................................. 1,421,379 1,294,648
--------------------------
Total Liabilities and Stockholders' Equity ................ $ 8,500,165 $ 7,650,957
==========================
</TABLE>
See notes to consolidated financial statements.
6 Accuhealth, Inc. and Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31,
--------------------------------------------
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Net sales ............................................................ $ 16,369,376 $ 15,112,071 $ 15,468,402
Cost of goods sold ................................................... 9,599,256 8,180,422 8,256,780
--------------------------------------------
Gross profit ......................................................... 6,770,120 6,931,649 7,211,622
Selling, general and administrative expenses ......................... 6,146,783 7,104,529 6,913,959
--------------------------------------------
Operating (loss) income .............................................. 623,337 (172,880) 297,663
Interest expense ..................................................... (496,606) (605,452) (635,848)
Other income:
Recovery related to pre-investigation
management off book cash practices ................................ -- -- 525,820
Debt surrendered in settlement of claims ........................... -- -- 488,500
--------------------------------------------
Income (loss) from continuing operations ............................. 126,731 (778,332) 676,135
Discontinued operations:
Loss from discontinued retail drugstore operations ................. -- -- (473,177)
Gain on disposal of retail drug stores ............................. -- -- 194,444
--------------------------------------------
-- -- (278,733)
--------------------------------------------
Income (loss) before extraordinary item .............................. 126,731 (778,332) 397,402
Extraordinary gain on debt surrendered in settlement of claims ....... -- -- 60,000
--------------------------------------------
Net income (loss) .................................................... 126,731 (778,332) 457,402
--------------------------------------------
Redeemable preferred stock dividends and accretion ................... (162,000) (203,836) (106,847)
--------------------------------------------
Net (loss) income applicable to common stockholders ............... $ (35,269) $ (982,168) $ 350,555
============================================
Net (loss) income per common share applicable to common stockholders:
Primary:
(Loss) income from continuing operations ........................... $(.03) $(.77) $.39
(Loss) income before extraordinary item ............................ $(.03) $(.77) $.20
Extraordinary item ................................................. -- -- $.04
Net (loss) income per share ........................................ $(.03) $(.77) $.24
Fully diluted:
(Loss) income from continuing operations ........................... $(.03) $(.77) $.36
(Income) loss before extraordinary item ............................ $(.03) $(.77) $.20
Extraordinary item ................................................. $ -- -- $.04
Net (loss) income per share ........................................ $(.03) $(.77) $.24
Weighted number of common shares and equivalents outstanding:
Primary ............................................................ 1,400,423 1,273,274 1,472,854
Fully diluted ...................................................... 1,400,423 1,273,274 1,893,991
See notes to consolidated financial statements.
Accuhealth, Inc. and Subsidiaries 7
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31,
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ........................................................ $ 126,731 $ (778,332) $ 457,402
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Recovery related to pre-investigation management off book cash practices -- -- (624,320)
Debt surrendered in settlement of claims ............................... -- -- (647,000)
Amortization of financing costs ........................................ 7,688 142,251 126,885
Depreciation and amortization .......................................... 343,761 410,354 359,022
Write off of Revenue Producing Equipment ............................... -- 53,376 --
Reserve for contingencies .............................................. -- -- (480,000)
Deferred rent .......................................................... -- -- 168,000
Loss on sale of drug store assets ...................................... -- -- (194,444)
Changes in operating assets and liabilities:
Accounts receivable .................................................. (819,676) (795,446) 321,567
Refundable income taxes .............................................. -- -- 200,000
Inventories .......................................................... (43,497) (76,279) 39,660
Prepaid expenses and other current assets ............................ (88,209) (23,040) (39,391)
Other assets ......................................................... (4,297) (49,530) (202,721)
Accounts payable ..................................................... 288,284 225,260 (1,647,347)
Notes payable, other ................................................. -- (248,373) --
Accrued expenses and other current liabilities ....................... (249,594) 103,466 127,835
-----------------------------------------
Cash used in operating activities ...................................... (438,809) (1,036,293) (2,034,852)
-----------------------------------------
INVESTING ACTIVITIES
Cash proceeds from sale of drug store assets ........................... -- -- 25,000
Notes receivable ....................................................... -- 82,000 --
Purchase of fixed assets and revenue producing equipment................ (11,295) (32,629) (91,892)
-----------------------------------------
Cash (used in) provided by investing activities ........................ (11,295) 49,371 (66,892)
-----------------------------------------
FINANCING ACTIVITIES
10% loans converted to redeemable convertible preferred shares ......... -- -- 400,000
Proceeds from sale of redeemable convertible preferred shares .......... -- 62,500 2,250,000
Proceeds from note payable--revolving credit facility, net ............. 369,285 916,227 1,497,165
Proceeds from notes payable--term loan ................................. 500,000 -- --
Notes payable--other ................................................... 31,302 395,565 (1,189,294)
Principal payments on note payable--Towerview .......................... -- -- (56,635)
Principal payments on capital lease--Facility .......................... (89,375) (71,500) (214,500)
Payments on other capital lease obligations ............................ (332,254) (271,261) (155,605)
Due to prior officers .................................................. -- (189,222) (310,778)
Cash provided by financing activities .................................. 478,958 842,309 2,220,353
-----------------------------------------
Net increase (decrease) in cash ........................................ 28,854 (144,613) 118,609
Cash at beginning of period ............................................ 2,694 147,307 28,698
-----------------------------------------
Cash at end of period .................................................. $ 31,548 $ 2,694 $ 147,307
=========================================
Supplemental disclosure of cash flow information:
Interest paid .......................................................... $ 500,000 $ 613,000 $ 522,771
=========================================
Income taxes paid ...................................................... $ -- $ -- $ --
=========================================
Noncash investing and financing activities:
Additions to capital leases ............................................ $ 48,000 $ 212,000 $ 609,000
=========================================
</TABLE>
See notes to consolidated financial statements.
8 Accuhealth, Inc. and Subsidiaries
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIENCY)
Years Ended March 31, 1997, 1996 and 1995
---------------------------------------------------------------------
Preferred Stock Common Stock
--------------------- -------------------- Additional
Number $.01 Number $.01 Paid-In
of Shares Par Value of Shares Par Value Capital Deficit
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1994 ......................... -- $ -- 1,550,000 $ 15,500 $3,053,068 $(3,487,159)
Surrender of shares by former officers
& directors recorded as treasury stock .........
Net income ...................................... 457,402
Accretion of redeemable preferred stock
and preferred stock dividends accrued .......... (106,847)
---------------------------------------------------------------------
Balance, March 31, 1995 ......................... -- -- 1,550,000 15,500 3,053,068 (3,136,604
Reclassification of redeemable preferred stock .. 1,325,000 13,250 2,739,282
Sale of preferred stock ......................... 25,000 250 62,250
Preferred stock dividends paid with
common stock--September 28, 1995................ 25,440 254 72,886 (26,468)
Preferred stock dividends paid with
common stock--May 7, 1996....................... 54,793 548 80,452 (81,000)
Accretion of redeemable preferred stock
and preferred stock dividends accrued .......... (96,368)
Net loss ........................................ (778,332)
---------------------------------------------------------------------
Balance, March 31, 1996.......................... 1,350,000 $ 13,500 1,630,233 $16,302 $ 6,007,938 $(4,118,772)
Preferred stock dividends paid
with common stock--July 8, 1996................ 52,856 529 80,471 (81,000)
Preferred stock dividends paid
with common stock--April 11, 1997.............. 104,509 1,045 79,955 (81,000)
Net Income ...................................... 126,731
---------------------------------------------------------------------
Balance, March 31, 1997.......................... 1,350,000 $ 13,500 1,787,598 $17,876 $6,168,364 $(4,154,041)
=====================================================================
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------
Treasury Stock
-------------------------
Number
of Shares Cost Equity
-----------------------------------
<S> <C> <C> <C>
Balance, March 31, 1994 ......................... -- $ -- $ (418,591)
Surrender of shares by former officers
& directors recorded as treasury stock ......... (308,004) (624,320) (624,320)
Net income ...................................... 457,402
Accretion of redeemable preferred stock
and preferred stock dividends accrued .......... (106,847)
-----------------------------------
Balance, March 31, 1995 ......................... (308,004) (624,320) (692,356)
Reclassification of redeemable preferred stock .. 2,752,532
Sale of preferred stock ......................... 62,500
Preferred stock dividends paid with
common stock--September 28, 1995................ 46,672
Preferred stock dividends paid with
common stock--May 7, 1996....................... --
Accretion of redeemable preferred stock
and preferred stock dividends accrued .......... 96,368
Net loss ........................................ (778,332)
-----------------------------------
Balance, March 31, 1996.......................... (308,004)$ (624,320) $1,294,648
Preferred stock dividends paid
with common stock--July 8, 1996................ --
Preferred stock dividends paid
with common stock--April 11, 1997.............. --
Net Income ...................................... 126,731
-----------------------------------
Balance, March 31, 1997.......................... (308,004)$ (624,320) $1,421,379
====================================
</TABLE>
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Accuhealth, Inc., together with its subsidiaries (collectively, the
"Company"), provides comprehensive home health care services, including
administration of a wide array of infusion therapies, sales of oral medications
and sales and rentals of durable medical equipment and related supplies. The
Company operates throughout the New York, New Jersey and Connecticut
metropolitan area.
BASIS OF PREPARATION
The consolidated financial statements include the accounts of Accuhealth, Inc.
and its subsidiaries, all of which are wholly-owned. Significant intercompany
accounts and transactions have been eliminated in consolidation.
Management is formulating plans to strengthen the Company's working capital
position and generate sufficient cash to meet its operating needs through at
least March 31, 1998 by among other actions, obtaining additional financing and
attempting to increase its institutional pharmacy business.
INVENTORIES
Inventories consist of over-the-counter and prescription drugs, infusion
products and supplies, and home health care equipment and supplies and are
priced at the lower of cost or market using the first-in, first-out ("FIFO")
method.
CONTRACTUAL ALLOWANCES
Certain prescription pharmaceutical sales, medical equipment and supply
revenues are recorded at the Company's established rates and reduced by
estimated contractual allowances pursuant to third-party reimbursement
arrangements.
RECLASSIFICATIONS
Certain items in the March 31, 1996 financial statements have been
reclassified to conform to the March 31, 1997 presentation.
FIXED ASSETS AND REVENUE PRODUCING EQUIPMENT
Fixed assets and revenue producing equipment are stated at cost. Depreciation
is computed principally by the straight-line method over the estimated useful
lives of the assets and for revenue producing equipment and leasehold
improvements, over the shorter of the estimated useful lives or the term of the
related leases.
Accuhealth, Inc. and Subsidiaries 9
<PAGE>
EARNINGS PER SHARE
For Fiscal 1997 and 1996, net loss per share was computed by dividing the
applicable net loss by the weighted average number of shares outstanding during
the year. Shares of common stock used to pay preferred stock dividends were
considered outstanding as of the declaration date. Common share equivalents,
which represents shares issuable upon the exercise of stock options and
warrants, were not included as their effect would be antidilutive.
For Fiscal 1995, primary earnings per common share was calculated by dividing
net earnings applicable to common stock by the weighted average of common stock
and common stock equivalents outstanding. On a fully diluted basis, both net
earnings and shares outstanding, if applicable, are adjusted to assume the
conversion of convertible preferred stock from the date of issue and for the
incremental option shares for fully diluted purposes.
In February 1997 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), which is required to be adopted beginning with the quarter ended December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options and warrants will be excluded. The Company does
not anticipate the adoption of SFAS 128 to have a significant impact on the
calculation of primary and fully diluted earnings per share.
INCOME TAXES
The Company files consolidated Federal, combined New York State and combined
New York City income tax returns. The Company's method of accounting for income
taxes is the liability method required by FASB Statement No. 109 "Accounting for
Income Taxes."
Deferred income taxes reflect the 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.
CASH EQUIVALENTS
The Company considers all highly liquid financial instruments with a maturity
of three months or less when purchased to be cash equivalents. At March 31, 1997
and 1996, the Company had no cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to trade accounts receivable
include amounts due from third party payers, primarily governmental agencies
(Medicare and Medicaid). At March 31, 1997 and 1996, gross Medicare and Medicaid
receivables aggregated $2,415,732 and $2,082,751, respectively.
Laws and regulations governing the Medicare and Medicaid programs are complex
and subject to interpretation for which action for noncompliance includes fines,
penalties, and exclusion from the Medicare and Medicaid programs. The Company
believes that it is in compliance with all applicable laws and regulations.
The Company's revenues from one customer accounted for 19% and 16% of the
Company's net sales for the years ended March 31, 1997 and 1996, respectively.
At March 31, 1997 and 1996, 20% and 22%, respectively, of net accounts
receivable was due from this customer. No single customer accounted for more
than 10% of net sales for the year ended March 31, 1995.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 is effective for fiscal years beginning
after December 31, 1995 and prescribes accounting and reporting standards for
all stock-based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights. SFAS 123
requires compensation expense to be recorded (i) using the new fair value method
or (ii) using existing accounting rules prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations with pro forma disclosure of what net income and
earnings per share would have been had the Company adopted the new fair value
method. The Company intends to continue to account for its stock based
compensation plans in accordance with the provisions of APB 25.
2. SALE OF DRUGSTORE ASSETS
On December 1, 1994 the Company sold the assets of its two remaining drugstore
subsidiaries for $665,000. The sale resulted in a gain for financial reporting
purposes of $194,444.
Net sales of the discontinued retail drugstores operations were approximately
$3,332,000 for the year ended March 31, 1995.
3. REVENUE PRODUCING EQUIPMENT, NET
The following summarizes the Company's investment in revenue producing
equipment:
March 31,
--------------------------- Estimated
1997 1996 Useful Lives
---------------------------------------------
Revenue producing
equipment primarily
under capital lease....... $1,957,661 $2,006,809 3-5 years
Less accumulated
depreciation and
amortization.............. 1,472,356 1,336,457
----------------------------
$ 485,305 $ 670,352
============================
10 Accuhealth, Inc. and Subsidiaries
<PAGE>
4. FIXED ASSETS
March 31,
----------------------- Estimated
1997 1996 Useful Lives
--------------------------------------
Land under capital lease $ 136,277 $ 136,277
Building under
capital lease .......... 1,226,498 1,226,498 40 years
Equipment, furniture
and fixtures ........... 816,078 778,863 5-10 years
Leasehold improvements .. 3,838 3,838 10-15 years
Equipment, furniture
and fixture under
capital leases ......... 164,953 164,953 5-10 years
Building improvements ... 292,956 285,463 40 years
-----------------------
2,640,600 2,595,892
Less accumulated
depreciation and
amortization, including
$399,740 in 1997 and
$345,341 in 1996
attributable to assets
under capital leases ... 981,544 837,246
-----------------------
$1,659,056 $1,758,646
=======================
5. NOTES PAYABLE AND LONG-TERM DEBT
NOTES PAYABLE-OTHER
The Company's other notes which arose in connection with the purchase of
inventories are as follows:
(A) In December 1995, the Company issued an unsecured note payable to a trade
creditor in the principal amount aggregating $348,616. The note was
satisfied as of March 31, 1997. The outstanding principal balance at March
31, 1996 of $247,649 was payable in monthly installments of $36,808 which
included interest at 12% per annum.
(B) The Company converted a portion of its accounts payable into a note
payable to a trade creditor in the principal amount aggregating $46,949.
This note is payable in monthly installments of approximately $4,200
beginning October 11, 1996 which includes interest at 10.9% per annum. At
March 31, 1996, the Company classified the principal balance as a note
payable-other. The outstanding principal balance at March 31, 1997 was
$20,183.
(C) The Company converted several of its capital leases into notes payable to
a trade creditor in principal amounts aggregating $276,830. These notes
are payable in monthly installments ranging from approximately $2,000 to
$8,000 with interest rates ranging from 10.0% to 14.5%. Future minimum
payments on the outstanding principal balance of $233,767 at March 31,
1997 are $187,537 (fiscal 1998) and $46,230 (fiscal 1999).
(D) In February 1997, the Company reached a settlement with the City of New
York relating to an audit of General Corporation and Commercial Rent taxes
for the years 1990 through 1992. In accordance with this settlement
agreement, the outstanding principal balance at March 31, 1997 of $71,950
is payable in monthly installments of $1,976 which includes interest at
10% per annum. A final balloon payment of $18,146 is due on March 1, 2000.
The weighted average interest rate for notes payable-other was 12.51%, 10.94%
and 9.31% for the years ended March 31, 1997, 1996 and 1995, respectively. The
average amount of notes payable-other outstanding for the years ended March 31,
1997 and 1996 was approximately $210,000 and $122,000, respectively. Notes
payable-other are principally short-term in nature. As such, fair value
approximates the carrying value.
NOTES PAYABLE-REVOLVING CREDIT FACILITY AND TERM LOAN
In April 1994, the Company entered into a Loan and Security Agreement (the
"Agreement") with Rosenthal and Rosenthal ("Rosenthal") to borrow, under certain
conditions and terms, up to $2,500,000 at an interest rate of prime plus 4 7/8%.
Borrowings under the Agreement are collateralized by certain assets of the
Company, including accounts receivables, inventories, equipment and fixtures.
The Company's ability to use this revolving credit facility is dependent upon
the level of its eligible receivables, as defined in the Agreement. In addition,
the Company granted Rosenthal warrants to purchase 70,000 shares of the
Company's common stock (see Note 11).
Effective February 1, 1996, the Company and Rosenthal amended the Loan and
Security Agreement ("Amendment No. 1"). Amendment No. 1 extended the Agreement
through April 28, 1997 and allowed the Company to borrow, under certain
conditions and terms up to $3,500,000 (based on eligible accounts receivable, as
defined) at an interest rate of prime plus 3 7/8%. Effective February 1, 1997,
the Company and Rosenthal amended the Loan and Security Agreement ("Amendment
No. 2") to extend the Agreement through April 1, 1998 and reduce the interest
rate to prime (8 1/2% at March 31, 1997) plus 2 7/8%. In addition, the Company
granted Rosenthal warrants to purchase an additional 30,000 shares of the
Company's common stock (see Note 11). Commencing April 28, 1996, the Company was
required to pay a facility fee of $35,000 per annum, which Amendment No. 2 has
increased to $40,000 per annum.
Amendment No. 2 also provided a $500,000 term loan to the Company due on April
1, 1998 with interest payable monthly at a rate of prime plus 5%.
The revolving credit facility and the term loan bear interest at variable
market rates and as such the carrying value approximates their fair value.
The weighted average interest rate, including the facility fee, for the years
ended March 31, 1997, 1996 and 1995 was 13.14%, 17.8% and 16.9%, respectively.
The average amount outstanding for the years ended March 31, 1997 and 1996 was
$2,801,000 and $1,963,000, respectively.
6. CAPITAL LEASE OBLIGATIONS
The Company leases its principal offices and warehouse facility and certain
equipment, furniture and fixtures, rental equipment and leasehold improvements
under capital lease agreements which extend through April 2000.
CAPITAL LEASE-FACILITY
The Company occupies a pharmacy warehouse and office facility (the "Facility")
which was obtained under a ten-year lease (the "Lease Agreement") with the New
York City Industrial Development Agency (the "Agency") as lessor. The Agency
issued to National Westminster Bank, U.S.A. (now "Fleet") $1,072,500 principal
amount of its
Accuhealth, Inc. and Subsidiaries 11
<PAGE>
Industrial Development bonds (the "Bonds") pursuant to an Indenture of Mortgage
and Agreement dated April 1, 1989 (the "Indenture") which created a lien on the
facility. The Company also paid $227,500 in order for the Agency to purchase the
warehouse. This amount and other acquisition costs are capitalized as land and
building under capital lease (see Note 4).
At the end of the term of the lease, the Company may purchase the Facility for
one dollar so long as all terms and conditions of the lease have been met. The
Lease Agreement and Guaranty Agreement require the Company and its subsidiaries
to comply with certain covenants, including but not limited to, maximum debt to
worth ratio, maximum allowable losses and debt service coverage ratio. The
Company's non-compliance with the debt to worth ratio covenant was waived by
Fleet through April 1, 1998.
In lieu of rent the Company pays principal on the Bonds in quarterly
installments of $17,875, plus interest at the rate of prime (8 1/2% at March 31,
1997) plus 1%. On April 28, 1994, in conjunction with the Rosenthal financing
(Note 5), the Company made an additional principal payment of $143,000. A final
balloon payment of $232,375 plus interest thereon is due on April 1, 1999. Each
of the Company's wholly-owned subsidiaries has guaranteed the Company's
obligations under the lease. The Lease Agreement and Guaranty Agreement also
restrict the payment of cash dividends in any one year to an aggregate amount
not to exceed 25% of the Company's net income for the immediately preceding
year.
The obligation under capital lease-Facility bears interest at variable market
rates and as such the carrying value approximates its fair value.
OTHER CAPITAL LEASES
The Company leases durable medical equipment under capital lease agreements
which extend through March 31, 2000 with interest rates ranging from 9.00% to
16.71%.
Future minimum lease payments under capital leases with initial or remaining
noncancellable lease terms in excess of one year are as follows:
Capital Other
Lease Capital
Fiscal Year Facility Leases
- -----------------------------------------------
1998.................... $ 85,465 $143,693
1999.................... 96,689 47,296
2000.................... 234,215 13,571
-------------------
416,369 204,560
Less interest .......... 58,869 21,799
-------------------
Present value of net
minimum obligations .. 357,500 182,761
Less current portion ... 53,625 113,124
-------------------
Long-term obligations at
March 31, 1997 ....... $303,875 $ 69,637
===================
7. CONTINGENCIES
In June 1995, a former employee commenced an action in Supreme Court, New York
County, New York against the Company and certain of its former and current
officers, directors and shareholders. The action alleges that the Company
breached plaintiff's employment agreement by withholding at least $750,000 in
commissions allegedly owed to him. In addition to the breach of contract claim,
plaintiff asserted claims for violation of the Racketeering Influence and
Corruption Act ("RICO"), violations of New York's Labor Law (stemming from the
Company's alleged breach of contract) and fraud. In or about September 1995, the
defendants made a pre-Answer motion to dismiss the RICO, fraud and conspiracy
claims. On June 18, 1996 the Court granted defendants' motion effectively
dismissing the Complaint as to the Company's current and former officers,
directors and shareholders and leaving plaintiff's claim for breach of contract
and violation of New York's Labor Law solely against the Company. The Company
has now served an Answer and a Document Request. The plaintiff has not proceeded
with discovery and the case is currently dormant. The Company intends to deny
the principal allegations in the Complaint and to defend this action vigorously.
Management believes that this action will not have any material adverse impact
on the Company's financial position, results of operations or cash flows.
An agency of New York State is conducting a review of the Company's Medicaid
reimbursement for the years 1990 through 1993. The Company has not been advised
as to whether any claim will be made.
Management believes that the above matters will be settled without any
material adverse impact to the Company's financial position, results of
operations or cash flows.
8. SIX PERCENT CONVERTIBLE PREFERRED STOCK
On December 14, 1994 and January 30, 1995, the Company completed the sale at
$2.00 per share, of 1,325,000 shares of redeemable convertible preferred stock
(Preferred Stock) with a 6% per annum cumulative dividend. During the quarter
ended December 31, 1995, the Company sold at $2.50 per share, 25,000 additional
shares of Preferred Stock to certain officers and directors of the Company. The
Preferred Stock is convertible at any time at the option of the holder, subject
to antidilution adjustments, into 1,350,000 shares of common stock. The Company
has reserved 1,350,000 shares of common stock for such conversion. At any time
on or after December 31, 1995, subject to certain conditions, such as the
registration of the underlying common stock under the Securities Act of 1933,
compliance with the terms of the Preferred Stock and any other agreement with
the holders of the Preferred Stock and the payment of all dividends that are
accrued and unpaid on the Preferred Stock as of the Redemption Date, the Company
may redeem all or any portion of the Preferred Stock then outstanding. For each
share that is called for redemption, the Company shall pay $3.00 per share from
December 31, 1995 through December 31, 1997 and $4.00 per share on or after
January 1, 1998. The holders of the Preferred Stock are entitled to voting
rights equivalent to that of the common stock. The Preferred Stock is senior to
the common stock in the event of a liquidation of the Company. The liquidation
preference is $2.00 per share plus accrued and unpaid dividends.
The Preferred Stock was subject to mandatory redemption requirements of up to
$4.00 per share plus accrued dividends. As of June 16, 1995, the 6% Convertible
Preferred shareholders agreed to modify their stockholder agreements to negate
the mandatory redemption requirements. This modification eliminates the need for
recognition of accretion effective June 16, 1995, and results in the 6%
Convertible Preferred Shares being classified as equity rather than debt.
12 Accuhealth, Inc. and Subsidiaries
<PAGE>
The Company is obligated to pay annual dividends of $.12 per share on its
1,350,000 outstanding shares of Preferred Stock. Such dividends accrue daily,
are payable each June 1 and December 1 and, at the election of the Company, may
be paid in shares of Common Stock valued in accordance with the terms of such
stock. Dividends on the Company's Preferred Stock are payable in preference and
priority to any payment of any dividends on the common stock.
The June 1, 1996 dividend was paid out in 52,856 shares of common stock on
July 8, 1996. The December 1, 1996 dividend was paid out in 104,509 shares of
common stock subsequent to year-end. Accrued and unpaid dividends from December
1, 1996 to March 31, 1997 of $54,000 are included in accrued expenses and other
current liabilities at March 31, 1997.
9. RECOVERY RELATED TO PRE-INVESTIGATION MANAGEMENT
The Company's prior management in place through February 26, 1993 had engaged
in certain improprieties through such date. Such improprieties were the subject
of a formal SEC investigation which resulted in prior management making
restitution to the Company valued at $1,212,320 and the Company agreeing to an
SEC order to cease and desist from committing or causing any violation or future
violation of certain anti-fraud, reporting, record keeping and internal controls
provisions of the Securities Act of 1933 and Securities Exchange Act of 1934.
The order did not impose any financial penalty on the Company.
Effective October 12, 1994, settlements of the Company's restitution claims
against its former Chief Executive Officer and President and two former officers
and directors were concluded. The terms of the agreements include: the surrender
to the Company of a $588,000 promissory note; the surrendering of 298,504 shares
of Company's common stock held by these individuals; the termination of all
stock options and warrants held by these individuals; a restriction of their
rights to sell voting securities for the next two years; a release of Accuhealth
from any financial obligations to them; and a release of these individuals by
Accuhealth from any claims, damages or losses that the Company may suffer
because of the actions claimed to have been committed. The agreements also
prohibit these individuals from acquiring shares of the Company for a period of
10 years.
These transactions were recorded by the Company in the quarter ended December
31, 1994. The restitution of 298,504 shares of stock was valued at $597,008, the
estimated fair value of such stock at the time of restitution. The determination
of estimated fair market value of such stock at $2.00 per share on October 12,
1994 was principally based on the average closing price of the Company's common
stock during the preceding 21 days of trading ($2.75 a share), reduced to
reflect an appropriate blockage discount for the large amount of stock in
relation to the outstanding common shares of the Company. The Company believes
that the valuation of the stock received is reasonable and was determined using
appropriate and conservative methodologies. The restitution was offset by
professional fees of approximately $98,500.
The loan from an officer and director of $588,000 at March 31, 1994
represented the amount of loans previously made to the Company by its former
Chief Executive Officer and President. The fair value of the note payable
surrendered on October 12, 1994 was $587,000 based on a rate of 9.3% (difference
between the Company's weighted average borrowing rate of 16.9% and the stated
rate in the note of 7.6%) and assuming that the note had a one year extended
maturity. The difference between the carrying amount of the note ($647,000
including accrued interest of $59,000) and the fair value of the note ($587,000)
or $60,000 was classified as extraordinary income. The restitution was offset by
professional fees of $98,500.
On March 31, 1995, settlements of the Company's restitution claims against
another former officer and director of the Company were concluded. This
individual surrendered 9,500 shares of the Company's common stock. The shares of
stock were valued at $27,312, the estimated fair value of such shares at the
time of restitution, and recorded in the quarter ended March 31, 1995.
10. COMMITMENTS
OPERATING LEASES
Rent expense for the year ended March 31, 1995 was approximately $335,000.
This amount represents retail drugstore rents included in discontinued
operations.
A vendor has a security interest in certain assets of the Company, including
accounts receivable, inventories, equipment and fixtures. This security interest
is subordinate and junior in all respects to the Loan and Security Agreement.
(See Note 5.)
RELATED PARTY TRANSACTIONS
A director has a consulting arrangement with the Company whereby he receives
$4,000 and an office expense reimbursement of $1,000 per month.
EMPLOYMENT AGREEMENT
Subsequent to year-end, the Company modified its employment agreement with its
President and Chief Executive Officer providing for, among other things, annual
compensation of $250,000 and 25,000 shares of the Company's common stock.
11. STOCK OPTIONS AND WARRANTS
In September 1988, the Company adopted, and in September 1994 amended, the
1988 Stock Option Plan ("Stock Option Plan"), under which options to purchase an
aggregate maximum of 300,000 shares of the Company's common stock may be
granted. The Stock Option Plan is administered by the Board of Directors, who
are responsible for determining the individuals who will be granted options, the
number of shares to be subject to each option, the option price per share, and
the exercise period of each option. The option price may not be less than the
fair market value of the Company's common stock. The fair market value is
defined in the Stock Option Plan to be the mean between the closing bid and the
closing asked prices for the common stock of the Company on the date of grant.
No option may have a term in excess of ten years. As to any stockholder who owns
10% or more of the Company's common stock, the option price per share will be no
less than 110% of the fair market value of the Company's common stock on the
date of grant and such options shall not have a term in excess of five years.
Pursuant to the Stock Option Plan, in February 1992 the former Board of
Directors granted a total of 54,000 options to purchase shares of the Company's
common stock to
Accuhealth, Inc. and Subsidiaries 13
<PAGE>
fifteen employees with an exercise price of $4.75 per share. In June 1996 and
1995, the Board of Directors granted a total of 188,500 and 159,000 options,
respectively, to purchase shares of the Company's common stock to employees with
an exercise price of $1.625 and $2.75 per share, respectively. These options are
exercisable in three equal annual increments.
Weighted
Average
Exercise
Price
Shares Per Share
--------------------
Outstanding March 31, 1994 ......... 30,500 $4.75
Canceled ........................... (20,000) 4.75
--------------------
Outstanding March 31, 1995 ......... 10,500 4.75
Granted ............................ 159,000 2.75
Canceled ........................... 52,000 3.12
--------------------
Outstanding March 31, 1996 ......... 117,500 $2.77
Granted ............................ 188,500 1.63
Canceled ........................... 36,500 2.31
--------------------
Outstanding at March 31, 1997 ...... 269,500 $2.03
====================
Exercisable at March 31, 1995 ...... 10,500 $4.75
====================
Exercisable at March 31, 1996 ...... 1,000 $4.75
====================
Exercisable at March 31, 1997 ...... 32,500 $2.81
====================
Separate from options issued under the Stock Option Plan, in June 1990, the
Company granted options to purchase 60,500 shares of common stock at a price of
$5.00 per share ("1990 Options"). The 1990 Options vest and become exercisable
ratably after the first, second and third anniversaries of the grant date and
expire after the fifth anniversary of the grant date.
Options to purchase shares of the Company's common stock pursuant to the 1990
Options and related aggregate option prices were as follows:
Aggregate
Shares Price
-----------------
Outstanding March 31, 1994 and 1995 ........ 22,500 112,500
Expired .................................... 22,500 112,550
-----------------
Outstanding March 31, 1996 ................. -- --
-----------------
Separate from options issued under the Stock Option Plan, in February 1992,
the Board of Directors granted to three former directors of the Company a total
of 60,000 options to purchase shares of the Company's common stock ("1992
Options"). The exercise price of the 1992 Options is the mean between the
closing bid and the closing asked prices for the common stock of the Company on
the date of grant, which was $4.75. These options may be exercised in 25%
increments on the first, second, third and fourth anniversary of the date of
issue, and have a term of ten years. During the year ended March 31, 1995,
30,000 of these options were canceled, leaving 15,000 options outstanding as of
March 31, 1997 and 1996.
During fiscal 1995, separate from options issued under the Stock Option Plan,
the Company granted options to purchase 352,500 of common shares to officers and
directors ("1995 Options"). The exercise prices of the 1995 Options range from
$2.00 to $3.00, with options to purchase 135,000 shares vesting immediately at
$2.00 and the balance vesting over five years from the date of issuance. During
the fiscal years ended March 31, 1997 and 1996, options to purchase an
additional 79,167 shares and 104,167 shares, respectively, vested at prices
ranging from $2.00 to $3.00 per share. At March 31, 1997, these options remain
unexercised and outstanding.
In September 1995, separate from options issued under the Stock Option Plan,
the Company granted options to purchase 37,500 of the Company's common shares to
directors ("1996 Options"). The exercise price of the 1996 Options are $1.875
with the shares vesting over five years from the date of issuance.
In June 1996, separate from options issued under the Stock Option Plan, the
Company granted options to purchase 37,500 of the Company's common shares to
directors ("1997 Options"). The exercise price of the 1997 Options are $1.625
with the shares vesting over five years from the date of issuance.
In June 1996, separate from options issued under the Stock Option Plan, the
Company granted options to purchase 50,000 of the Company's common shares to a
director ("June 1996 Options"). The exercise price of the June 1996 Options are
$1.625 with the shares vesting over three years from the date of issuance.
As of March 31, 1997, an aggregate 898,000 shares of the Company's common
stock are reserved for issuance under the Stock Option Plan, and the 1990, 1992,
1995, 1996, June 1996 and 1997 Options. As of March 31, 1997, options to
purchase 238,334 of such shares are exercisable.
Pro forma information regarding net income and earnings per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS 123. The fair market
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 1997
and 1996:
March 31,
---------------------------
Assumption 1997 1996
- ---------------------------------------------------------------
Risk-free rate .................. 6.2% 6.0%
Dividend yield .................. 0% 0%
Volatility factor of the expected
market price of the Company's
common stock ................... 1.7 1.7
Average life .................... 4.9 years 4.8 years
The Black-Scholes option valuation 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.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting period of the options. The Company's
pro forma information follows:
Years Ended March 31,
---------------------------
1997 1996
--------------------------
Pro forma net loss ........... $ (91,725) $ (900,140)
Pro forma net loss per share.. (0.18) (0.87)
14 Accuhealth, Inc. and Subsidiaries
<PAGE>
The weighted average fair value of options granted during the years ended
March 31, 1997 and 1996 were $1.53 and $2.60, respectively, for shares granted
with an exercise price equal to the market price on the date of grant. The
weighted average fair value of options granted during the year ended March 31,
1996 for which the exercise price was less than the market price on the date of
grant was $1.83. The weighted average remaining contractual life of options
exercisable at March 31, 1997 is 4.3 years. The exercise prices range from $1.63
to $4.95 for options outstanding as of March 31, 1997.
In April 1994, pursuant to the terms of a Loan and Security Agreement (see
Note 5), the Company granted to a financing company warrants to purchase 70,000
shares of common stock at a price of $2.00 per share. On February 1, 1996, the
Company granted warrants to purchase an additional 30,000 shares of common stock
at $2.50 per share expiring on April 28, 1998. On February 1, 1997, the
expiration date of the 100,000 warrants was amended to be the later of April 1,
2001 or thirty-six months following the last day of any term to which the Loan
Commitment has been extended and the exercise price for all warrants was
restated to $2.00 per share. As of March 31, 1997, no warrants have been
exercised and an aggregate of 100,000 of the Company's common stock are reserved
for issuance under warrants.
12. EMPLOYEE SAVINGS AND PROFIT SHARING PLAN
In December 1986, the Company established a profit sharing and thrift plan
(the "Plan") covering substantially all eligible employees. The Plan qualifies
under Section 401(k) of the Internal Revenue Code. The Company matches
contributions equal to 50% (25% effective July 1, 1996) of an eligible
employee's pre-tax 401(k) contribution. The matching contribution is limited for
any part of an eligible employee's pre-tax 401(k) contribution which exceeds 10%
of their compensation. At the discretion of the Board of Directors, the Company
may also make additional contributions dependent on profits each year for the
benefit of eligible employees under the Plan. The Company's contribution to the
Plan was approximately $35,000, $47,000 and $67,000 for the years ended March
31, 1997, 1996 and 1995, respectively.
In August 1995, the Company adopted a deferred compensation plan for the Board
of Directors (the "Directors Plan"). Under the Directors Plan, a director may
elect to defer receipt of all or a specified portion of his or her compensation.
As of March 31, 1997, no director had elected to defer any portion of his or her
compensation.
13. INCOME TAXES
The Company had net deferred assets as follows:
March 31,
--------------------------
1997 1996
--------------------------
Federal, State and Local Net
Operating Loss Carryforwards.. $ 1,726,000 $ 1,570,000
Reserve for Doubtful Accounts.. 143,000 132,000
Business Credit Carryforwards.. 52,000 52,000
Other ......................... (16,000) 214,000
--------------------------
Total ......................... 1,905,000 1,968,000
Less: Valuation Allowance ..... 1,905,000 1,968,000
--------------------------
Net Deferred Assets ........... $ -- $ --
==========================
The following is a reconciliation of the amount of the income tax expense
(benefit) attributable to continuing operations to the amount of income tax that
would result from applying the federal rate to pretax income from continuing
operations:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------
(Benefit) (Benefit) (Benefit)
Percent Liability Percent Liability Percent Liability
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax
(benefit) at
statutory rate 34% $ 43,000 (34%) $(265,000) 34% $ 300,000
Permanent differences 5.1% 6,500 -- -- -- --
Other decrease
in valuation
allowances
related to the
Federal portion
of continuing
operations (39.1%) (49,500) -- -- (34%) (300,000)
Loss producing no
current benefit -- -- 34% 265,000 -- --
--------------------------------------------------------------
-- $ -- -- $ -- -- $ --
==============================================================
</TABLE>
At March 31, 1997, based upon tax returns filed and to be filed, the Company
has net operating loss carryforwards for U.S. tax purposes of approximately
$3,528,000 which will begin to expire in 2009 and a general business tax credit
carryforward of approximately $52,000 available to reduce future payments of
federal income taxes. The Company also has net operating loss carryforwards for
New York State and City tax purposes of approximately $4,481,000 and $4,487,000,
respectively.
The valuation allowances decreased $63,000 in 1997, increased $265,000 in 1996
and decreased $214,000 in 1995, amounts equal to the changes in deferred tax
assets to reflect the uncertainty as to realization of such assets.
The availability of net operating loss carryforwards and general business tax
carryforwards is subject to various limitations under the Internal Revenue Code
of 1986 as amended (the "Code"). Although a formal study has not been performed,
it appears that as of March 31, 1995, the Company may have undergone an
ownership change as defined by Section 382 of the Code. The effect of such an
ownership change is to limit the amount of taxable income and tax liability that
can be offset in any tax year by the net operating loss and credit carryovers.
14. ACQUISITION
The Company has entered into an agreement, subject to certain terms and
conditions, to acquire the stock of ProHealth Care Infusion Services, Inc. in
exchange for 300,000 shares of the Company's common stock. The acquisition is
expected to close after June 16, 1997.
Accuhealth, Inc. and Subsidiaries 15
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET
The Company's common stock, par value $.01 per share (the "Common Stock")
trades on the over-the-counter Bulletin Board under the symbol AHLT.U.
The following table sets forth, for the periods indicated, the high and low
closing bid prices for the Common Stock as reported by the NASDAQ Stock Market
Trading and Market Services Department. Such over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
do not necessarily represent actual transactions.
Fiscal 1997 Fiscal 1996
------------------------------
High Low High Low
------------------------------
Quarter ended June 30 2 1 3 3/8 2 3/4
Quarter ended September 30 2 1 1/8 3 1 3/4
Quarter ended December 31 1 3/8 1 1/2 1 3/4 1
Quarter ended March 31 3 1/16 1 11/16 1 1/8 1
The Company's 6% Redeemable Cumulative Convertible Preferred Stock is subject
to significant restrictions on sale and does not have a public trading market.
NUMBER OF SHAREHOLDERS
Management has been advised by the Company's transfer agent that there were 56
holders of record of the Common Stock as of June 15, 1997. Since most holders of
the Company's stock have placed their shares in street name, this figure is much
lower than the actual number of beneficial holders of common stock, which is
estimated to be approximately 300 stockholders.
DIVIDENDS
To date, the Company has not paid any cash dividends on the Common Stock. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend upon the Company's earnings, its capital
requirements and financial condition and other relevant factors. The Board does
not intend to declare any dividends on the Common Stock in the foreseeable
future, but instead intends to retain all earnings, if any, for use in the
Company's business operations.
The Company is obligated to pay annual dividends of $.12 per share on its
1,350,000 outstanding shares of 6% Redeemable Cumulative Convertible Preferred
Stock. Such dividends accrue daily, are payable each June 1 and December 1 and,
at the election of the Company, may be paid in shares of Common Stock valued in
accordance with the terms of such stock. Dividends on the Company's 6%
Redeemable Cumulative Convertible Preferred Stock are payable in preference and
priority to any payment of any dividends on the Common Stock.
The Company satisfied its liability payable at June 1, 1996 and at December 1,
1996 by the issuance of 52,856 and 104,509 shares of the Company's Common Stock
issued July 8, 1996 and April 11, 1997, respectively.
The Company satisfied its liability payable at June 1, 1995 and at December 1,
1995 by the issuance of 25,440 and 54,793 shares of the Company's Common Stock
issued September 28, 1995 and May 7, 1996, respectively.
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
ACCUHEALTH, INC.
We have audited the accompanying consolidated balance sheets of Accuhealth,
Inc. and subsidiaries as of March 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity/(deficiency) and
cash flows for each of the three years in the period ended March 31, 1997. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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 consolidated financial position of
Accuhealth, Inc. and subsidiaries at March 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 31, 1997, in conformity with generally
accepted accounting principles. 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
---------------------
ERNST & YOUNG LLP
New York, New York
June 16, 1997
16 Accuhealth, Inc. and Subsidiaries
<PAGE>
CORPORATE INFORMATION
BOARD OF DIRECTORS
- -----------------------------------------
Stanley Goldstein(1,5)
Chairman of the Board
Glenn C. Davis(1)
President & Chief Executive Officer
E. Virgil Conway(1,3,4,5)
Chairman of the Metropolitan
Transportation Authority
Sally Hernandez-Pinero(2,3)
Member of Kalkines Arky Zall
& Bernstein
Former Deputy Mayor of the
City of New York
Donald B. Louria, M.D.(2)
Chairman of the Department of
Preventive Medicine and Community
Health of the University of Medicine
& Dentistry of New Jersey--
New Jersey Medical College
Corbett A. Price(2,4)
Chairman of the Board of
KURRON Shares of America, Inc.
- ------------------
(1) Member of Executive Committee of which
Mr. Goldstein is Chairman.
(2) Member of Professional Conduct Committee
of which Dr. Louria is Chairman.
(3) Member of Compensation and
Nominations Committee of which
Ms. Hernandez-Pinero is Chairwoman.
(4) Member of Audit Committee of which
Mr. Conway is Chairman.
(5) Member of Stock Option Committee of
which Mr. Conway is Chairman.
OFFICERS
- -----------------------------------------
Glenn C. Davis
President & Chief Executive Officer
Gary S. LaPorta
Chief Financial and Accounting Officer,
Treasurer and Secretary
CORPORATE HEADQUARTERS
- -----------------------------------------
1575 Bronx River Avenue
Bronx, New York 10460
(718) 518-9511
CORPORATE COUNSEL
- -----------------------------------------
Proskauer Rose Goetz & Mendelsohn LLP
1585 Broadway
New York, New York 10036-8299
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
- -----------------------------------------
Ernst & Young, L.L.P.
787 Seventh Avenue
New York, New York 10019
TRANSFER AGENT
- -----------------------------------------
North American Transfer Company
147 W. Merrick Road
Freeport, New York 11520
FORM 10-K
- -----------------------------------------
Copies of the Company's Annual Report on
Form 10-K for the year ended March 31,
1997, as filed with the Securities and
Exchange Commission, or any of the
exhibits to such Form 10-K, will be
furnished upon request to:
Glenn C. Davis
President & Chief Executive Officer
Accuhealth, Inc.
1575 Bronx River Avenue
Bronx, New York 10460
Copies can also be obtained from the
Public Registrar's Report Service by
calling 1-800-4-ANNUAL or by visiting
www.prars.com on the Internet.
Designed by Curran & Connors, Inc.
<PAGE>
Accuhealth, Inc.
1575 Bronx River Ave.
Bronx, New York 10460
