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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended March 31, 1999
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For transition period from ___________________ to ____________________
Commission file No. 0-17292
ACCUHEALTH, INC.
(Exact name of registrant as specified)
New York 13-3176233
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1575 Bronx River Avenue, Bronx, New York 10460
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (718) 518-9511
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
As of June 29, 1999, the aggregate market value of the Common Stock
held by non-affiliates of the registrant was approximately $1,880,808.
As of June 29, 1999, there were 4,819,589 shares of the Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Accuhealth, Inc. (the "Company") is one of the largest integrated
providers of comprehensive home health care services in the New York, New Jersey
and Connecticut area. Together with its wholly owned subsidiaries, 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 ("DME") and related supplies and home
nursing. The Company has implemented a Regional Growth Strategy, expanding from
one location in one state in 1996, to three offices in two states at June 30,
1999. The Company was incorporated in the State of New York on August 25, 1983.
Effective August 20, 1990, the present name, Accuhealth, Inc., was adopted
pursuant to an amendment to the Company's Certificate of Incorporation. The
Company's principal offices are located at 1575 Bronx River Avenue, Bronx, New
York 10460, and its telephone number is (718) 518-9511. Unless the context
otherwise requires, references herein to the "Company" include Accuhealth, Inc.
and all of its wholly owned subsidiaries.
On July 1, 1997, the Company consummated its acquisition of
ProHealthCare Infusion Services, Inc. ("PHCIS") pursuant to an agreement and
plan of merger, dated as of March 14, 1997, by and among the Company, ACH
Acquiring Corp., a New Jersey corporation and a subsidiary of the Company,
PHCIS, ProHealthCare, Inc., a Delaware corporation and the parent of PHCIS,
Thomas Laurita and David Brian Cohen (the "PHCIS Merger Agreement"). The Company
has determined that the initial merger consideration of 300,000 shares of
Company's Common Stock will be decreased by 59,386 shares of Company Common
Stock pursuant to certain merger consideration adjustment provisions of the
PHCIS Merger Agreement. The acquisition has been accounted for by the purchase
method of accounting. PHCIS, based in Springfield, New Jersey, specializes in
caring for complex HIV/AIDS patients and those suffering from cancer. PHCIS also
has a strong disease management capability in treating patients suffering from
congestive heart failure and cardiomyopathy.
During the fiscal year ended March 31, 1999, management determined that
the goodwill resulting from the PHCIS acquisition and Americare (a subsidiary of
Healix) was impaired and warranted write off of the remaining balance. The
impairment resulted from a severe decline in revenue, primarily caused by the
filing for liquidation of HIP of New Jersey in February 1999.
On December 1, 1997, the Company and Healix Healthcare, Inc. ("Healix")
entered into an agreement and plan of merger (the "Merger Agreement") which
provided for the merger of Healix with and into the Company (the "Merger"), with
the Company being the surviving corporation. The Merger was consummated on April
9, 1998. In accordance with the Healix Merger Agreement, the shareholders of
Healix received .740721 shares of the Company's common stock for each share of
Healix common stock in a tax free exchange, with an aggregate of 1,488,850
shares of the Company's common stock issued in exchange for all of the issued
and outstanding common shares of Healix. The merger resulted in Healix becoming
a wholly owned subsidiary of Accuhealth, Inc. and was accounted for as a pooling
of interests.
Healix, together with its wholly owned subsidiaries, provides a full
range of healthcare services to the alternate site including infusion therapy,
home medical equipment, renal dialysis, skilled nursing and home health
services. Healix is accredited by the JCAHO of Healthcare Organizations
("JCAHO") and operates throughout New York and New Jersey.
The Company has diversified its business mix from approximately 61% of
home infusion therapy revenues in 1996 to 40% for the year ended March 31, 1999.
This shift reflects the addition and growth in institutional pharmacy management
services, and sales of home medical equipment and oral medications. The Company
expects that it will continue to shift its business mix towards home medical
equipment and institutional pharmacy services and oral medications. Home
infusion therapy however, will continue to represent an important part of the
Company's business mix.
The Company believes its ability to offer a full range of integrated
home nursing, respiratory therapy, home medical equipment, oral medications, and
infusion therapy throughout its market creates an important competitive
advantage in obtaining patient referrals. Managed care organizations and other
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referral sources generally favor home health care providers that offer
integrated health care services, because "one-stop shop" providers like the
Company provide superior coordination of care and reduce the administrative and
service quality complications of contracting with multiple providers.
INDUSTRY OVERVIEW
Home health care is among the fastest growing segments of the health care
industry with estimated annual expenditures of 36.1 billion in 1995, up from an
estimated $12.9 billion in 1990, representing a compounded annual growth rate of
approximately 23%. The underlying growth factors in the home health care
industry include: (i) the cost-effective nature of home health care; (ii) an
increasing number of patients due to growth in the elderly population; (iii)
technological advances that expand the range of home health care procedures; and
(iv) patient preference for treatment in the home.
The home health care industry is highly fragmented with more than 18,500
providers delivering home health care services in the United States. Many of
these companies are local providers that offer a limited scope of services in a
defined geographical area and lack the capital necessary to substantially expand
their operations. Managed care organizations and cost containment initiatives by
payors have driven the growth of home health care by emphasizing lower cost
alternatives to hospitals and skilled nursing facilities. These organizations
and payors seek coordinated, consistent quality home health care across broad
geographic areas in order to serve their patients more effectively.
BUSINESS STRATEGY
Accuhealth's business objective is to enhance its position as one of the leading
integrated providers of comprehensive home health care services in New York,
Connecticut and New Jersey. Elements of the Company's strategy include:
PROVIDE ONE-STOP SHOP FOR HOME HEALTH CARE SERVICES. Accuhealth
provides payors, physicians and patients with fully integrated one-stop shop
home health care services. The integration of comprehensive home health care
services enhances the Company's appeal to managed care organizations and other
referral sources that increasingly prefer single-source providers of home health
care. The Company believes that full integration of services enables it to
provide highly coordinated patient care and enable it to increase revenues and
profitability by providing multiple services to an individual patient referral.
FOCUS ON MANAGED CARE RELATIONSHIPS. The Company has intensified its
managed care marketing efforts in order to take advantage of the increased
market penetration of managed care organizations in the home health care market.
The Company is the sole or principal provider for a number of large managed care
plans, and the Company believes that its broad product offering, quality of
service and regional focus contribute to the Company's competitive advantage.
EXPAND THE MANAGEMENT SERVICES THE COMPANY PROVIDES ITS REFERRAL
SOURCES. The Company seeks to expand the services it currently provides to the
sources of its patient referrals to include the full range of patient care
coordination and the management of the network of providers used to service the
patient. As a cornerstone of this service strategy, the Company is implementing
enhanced financial and clinical management information systems. The Company
believes that these systems could improve profitability by efficiently servicing
increased volumes of managed care referrals, increase productivity gains, reduce
costs and provide outcomes data to payors.
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SERVICES AND PRODUCTS
HOME INFUSION THERAPY. The Company offers comprehensive home infusion therapies.
Home infusion therapy involves the administration of nutrients, antibiotics and
other medications intravenously (into the vein), subcutaneously (under the
skin), intramuscularly (into the muscle), intrathecally or epidurally (via
spinal routes), or through feeding tubes into the digestive tract. Infusion
therapy often begins during hospitalization of a patient and continues in the
home. New patients are instructed in the administration of infusion therapy and
related services by a registered nurse who provides the patient's first home
treatment and continuing supervision of care. The Company's principal infusion
therapies follow:
ANTIBIOTIC THERAPY is the infusion of antibiotic medications into a
patient's bloodstream to treat a variety of infections and diseases.
ENTERAL NUTRITION is the infusion of essential nutrients through a
feeding tube, and is necessary for patients who are unable to orally ingest
adequate nutrients.
TOTAL PARENTERAL NUTRITION is the infusion of a nutrient solution to
restore and maintain electrolyte balance and nutritional function.
PAIN MANAGEMENT is provided to patients experiencing acute pain as a
result of traumatic injury, surgical procedures or other medical disorders. The
Company provides a comprehensive approach to pain management that includes a
thorough knowledge of available agents, routes of administration and appropriate
dosage levels as directed.
CHEMOTHERAPY is provided in the home or in other locations and allows
patients with cancer an alternative to frequent and expensive hospital stays.
PENTAMIDINE is an agent used specifically in the treatment of patients
with AIDS who have experienced one or more of pneumocystis carinii pneumonia.
HOME NURSING. The Company provides a wide range of nursing services to
individuals with acute illness, long-term chronic conditions, permanent
disabilities, terminal illness or post-procedural needs. Primary care or
specialty physicians and managed care case managers typically refer patients to
the Company. After reviewing the patient's medical records and treatment plan, a
nurse, therapist or home health aide, where appropriate, provides care to the
patient in the home. The plan of care may require a few visits over a short
period of time or many visits over several years. The Company provides the
following home nursing services.
GENERAL NURSING care is the periodic assessment of the appropriateness
of home health care, the performance of clinical procedures, and
instruction of the patient and the family or other caregiver regarding
proper treatments. Registered nurses or licensed practical nurses
provide such care. Patients receiving such care typically include
stabilized postoperative patients, patients who are acutely ill but who
do not require hospitalization, and patients who are chronically or
terminally ill.
SPECIALTY NURSING care is the provision of specialized nursing services
such as geriatric, pediatric or neonatal nursing. Nurses provide such
care with the appropriate experience or certification in such
specialty. Specialty nursing care also involves the instruction of the
patient and the family or other caregiver in the self-administration of
certain procedures, such as wound care and infection control, emergency
procedures and the proper handling and usage of medication, medical
supplies and equipment.
THERAPY SERVICES consist of rehabilitation therapies such as physical,
occupational and speech therapy to patients recovering from strokes,
trauma or certain surgeries, services for high risk pregnancies,
postpartum care, AIDS therapy, various medical social services, and
case management services to insurance companies and self-insured
employers.
HOME HEALTH AIDE CARE is the provision of personal care services and
assistance with activities of daily living such as personal hygiene and
meal preparation. The Company's home health aides must pass certain
competency tests and are supervised by a registered nurse.
PRIMARY HOME HEALTH CARE is provided by the Company through state
administered programs that pay for unskilled homemaker services to the
elderly or the disabled, as ordered by a physician. A registered nurse
makes the initial assessment and assigns a homemaker to provide
housekeeping, shopping and limited personal care.
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RESPIRATORY THERAPY/MEDICAL EQUIPMENT. The Company provides a wide variety of
home respiratory, monitoring and medical equipment. Respiratory therapists
provide care to the patient according to the physician-directed plan of care and
educate the patient and the family or other care giver regarding treatment
requirements, use of equipment and self-care. The Company rents, sells and
services respiratory equipment for patient use in the home and supplies patients
with aerosol medications for use in respiratory therapy treatments. The
Company's principal respiratory services include:
OXYGEN SYSTEMS THAT ASSIST PATIENTS WITH BREATHING. The Company
provides three types of oxygen systems: (i) oxygen concentrators, which
are stationary units that filter ordinary air in order to provide a
continuous flow of oxygen and are generally the most cost effective
supply of oxygen for patients who require a continuous flow of
supplemental oxygen; (ii) liquid oxygen systems, which are containers
used for patients who require a continuous high flow of supplemental
oxygen; and (iii) high pressure oxygen cylinders, which provide an
ambulatory patient with the ability to obtain supplemental oxygen
outside of the home.
NEBULIZERS that deliver aerosol medications that are inhaled directly
by the patients. Nebulizers are used to treat patients with asthma,
chronic obstructive pulmonary disease, cystic fibrosis and
neurologically related respiratory problems, and patients with AIDS.
HOME VENTILATORS that mechanically sustain a patient's respiratory
function in cases of severe respiratory failure.
CONTINUOUS POSITIVE AIRWAY PRESSURE therapy that forces air through
respiratory passageways during sleep. This treatment is provided to
adults with sleep apnea, a condition in which a patient's normal
breathing patterns are disturbed during sleep. Monitoring services are
usually provided with this therapy.
DURABLE MEDICAL EQUIPMENT. The Company also leases and sells convalescent
equipment, in connection with the provision of its other services to patients in
the hone. Such equipment includes hospital beds, wheelchairs, walkers, and
patient lifts as well as medical and surgical supplies such as stethoscopes,
orthopedic supplies, urinary catheters, syringes, and needles. The Company is
able to increase revenues by providing durable medical equipment and supplies to
its patients who are also receiving nursing, respiratory therapy or infusion
therapy.
The Company has contracts with three hospices in New York City to
provide DME, on a non-exclusive basis to patients upon their discharge from the
hospices. The Company also has contracts to provide DME, on a non-exclusive
basis, to patients of seven nursing services whose trained personnel provide
outpatient care. In addition, the Company's name appears on "approved provider"
lists given to patients upon their discharge from approximately 30 hospitals in
the New York metropolitan area.
OTHER THERAPIES. Other therapies provided by the Company currently
represent a small percentage of its business. These therapies are dobutamine
therapy, blood components, IV gamma globulin, hydration therapy, tocolytic
therapy and aerosol pentamidine.
The Company also provides comprehensive pharmacy services to large
institutional pharmacy clients including sub-acute and long term care
facilities. These engagements typically involve the Company's managing and
operating the pharmacy under contract with the institution and providing the
drugs, medication, biologicals and supplies the patients require.
SALES AND MARKETING
The Company promotes its infusion therapy and durable medical equipment
products and services via contacts with physicians whose patients use these
services, hospital discharge planners, social workers and hospital nurses who
work with patients requiring these services. The Company also works closely with
nursing services and agencies that provide home care to patients. The Company
also markets its products and services to insurance companies, Health
Maintenance Organizations ("HMO's"), Preferred Provider Organizations ("PPO's")
and case management companies. Marketing efforts emphasize the quality of the
Company's services, cost containment and technological excellence offered by the
Company. In addition, the Company participates in clinics run by New York City
hospitals.
Because the Company can provide oral medications to its home health
care customers, the Company promotes itself as a "one-stop shop" for infusion
therapy, durable medical equipment and pharmaceuticals. The Company stocks
pharmaceuticals not widely used by the general population to meet the needs of
critically ill patients.
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The Company has made special efforts to meet the needs of persons
afflicted with AIDS. The Company has a contract with a nursing service program
to supply DME for persons suffering from AIDS and provides special instructions
to employees who visit the homes of persons afflicted with AIDS and other
communicable diseases. The Company also markets to certain freestanding
AIDS-specific rehabilitation centers and hospitals. The Company currently
provides products and services to patients in two such facilities (Rivington
House and Phoenix House both in Manhattan).
The Company believes that its ability to provide a full range of
services to clients in all of its market is a significant advantage in
developing relationships with managed care organizations. In addition, the
Company works with managed care organizations to meet their specialized demands
for services, pricing, billing and other matters.
QUALITY ASSURANCE
The Company believes that quality of service is critical to its ability to
obtain referrals and increase revenues and profitability. To assure the delivery
of high-quality patient care, and to assure the overall quality of service, the
Company has a quality improvement program designed to integrate and assess the
quality improvement activities and processes across all services. The
cornerstone of this quality improvement program is the company's internal
compliance and quality improvement programs. These programs are designed to
routinely measure compliance with federal and state regulations, JCAHO
standards, and the Company's standards of care and practice. The survey process
includes review of clinical and billing documentation, interviews of clinical
personnel and observations of home visits performed by Company staff. Other
quality assurance initiatives include measuring customer satisfaction, reporting
adverse medical incidents monitoring risk management, and ensuring a safe and
appropriate working environment.
The Company is accredited by JCAHO and believes that managed care and other
third-party payors generally prefer this accreditation.
HUMAN RESOURCE MANAGEMENT
The Company continuously recruits, screens, trains and offers benefits and other
programs in an effort to attract and retain its personnel. Recruiting is
conducted primarily through advertising, personnel agencies, direct contact with
community groups and the use of bonuses.
The Company provides orientation and training to new employees and continuing
education for existing employees. The Company routinely develops and distributes
quality improvement in-service materials, manuals, and forms to its nurses and
has implemented an internal system of employee recognition and rewards. In
addition, skilled nurses are initially assigned to a nurse preceptor until the
Company believes that these new nurses have acquired a sufficient degree of home
health care knowledge and experience. The Company also has implemented an
infusion therapy verification program for skilled nurses.
The retention of qualified employees is a high priority for the Company. As of
March 31, 1999, the Company employs 180 individuals. Management believes that
the Company's employee relations are good. None of the Company's employees are
represented by a labor union or other collective bargaining organization.
REIMBURSEMENT FROM THIRD-PARTY PAYORS
The Company accepts assignment of Medicare claims, as well as claims with
respect to other third-party payors, on behalf of its patients whenever the
reimbursement coverage is adequate to ensure payment of the patient's
obligations. The Company processes its customers' claims, accepts payment at
prevailing and allowable rates and assumes the risks of delay for improperly
billed services or non-payment for services which are determined by the
third-party payor as being medically unnecessary. Although no assurance can be
given that a significant number of future requests for reimbursement will not be
denied, the Company's policies, procedures and prices are intended to minimize
this risk.
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The Company works closely with the patients it serves to properly document and
file claims for timely and direct reimbursement from third party payors and
governmental agencies. Generally, the Company contacts third-party payors prior
to the commencement of services or delivery of product in order to determine the
patient's coverage and the percentage of costs that the payor will reimburse.
The Company's reimbursement specialists carefully review such issues as lifetime
limits, pre-existing condition clauses, the availability of special state
programs and other reimbursement-related issues. The Company will often
negotiate with the third-party payor on the patient's behalf to help ensure that
coverage is available. In addition, the Company typically obtains an assignment
of benefits from the patient that enables the Company to file claims for its
services with the third-party payors. As a result, third-party payors pay the
Company directly for the reimbursable amounts of its charges. Once reimbursement
processing for a patient has been established by a third-party payor, claims
processing and reimbursement tend to become routine, subject to continued
patient eligibility and other coverage limitations.
Like other health care companies, the Company's revenues and profitability are
adversely affected by the continuing efforts of third-party payors to contain or
reduce the costs of health care by lowering reimbursement rates, increasing case
management review of bills for services and negotiating reduced contract
pricing. Home health care, which is generally less costly to third-party payors
than hospital-based care, has benefited from such cost containment objectives.
However, as expenditures in the home health care market continue to grow,
initiatives aimed at reducing costs of health care delivery at non-hospital
sites are increasing.
COMPETITION
The home infusion therapy market is highly competitive and the Company
anticipates that competition will intensify. There are many small local
providers, some of whom do not offer the variety of therapies provided by the
Company. There are also several large regional or national companies that offer
more therapies than the Company. The primary competitive factors are quality of
care, including responsiveness of service and quality of professional personnel;
ability to establish and maintain relationships with referring physicians,
hospitals, health maintenance organizations, clinics and nursing services; price
and breadth of infusion therapies offered; general reputation with physicians,
other referral sources and potential patients and the ability to function as a
"one-stop shop."
The DME business is also very competitive. The Company competes with national,
regional and local specialty suppliers of medical equipment, chain drugstores
and local independent drugstores. Competitive factors in DME markets generally
track those stated above.
Many of the Company's competitors have greater name recognition, broader
geographic markets and substantially greater marketing, financial and
administrative resources than the Company. Some of the larger existing and
future competitors can be expected to expand the varieties of therapies offered.
JCAHO ACCREDITATION
The Company is accredited by JCAHO. Accreditation by JCAHO has become a
prerequisite for contracts from many hospices and hospitals, certified home
health agencies, insurance companies, HMO's and PPO's.
INSURANCE
Physicians, hospitals and other participants in the health care market are
routinely subject to lawsuits alleging malpractice, product liability or related
legal theories, many of which involve large claims and significant defense
costs. The Company has in force general liability insurance with coverage limits
of $1,000,000 per incident and $2,000,000 in the aggregate annually, and
professional liability insurance on each of its pharmacy employees and
professionals with coverage limits of $1,000,000 per claim and in the aggregate
annually. The Company has not experienced difficulty in obtaining insurance in
the past, and management believes that the Company's insurance coverage is
reasonable given its claims history.
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The Company believes that the insurance that it maintains, in relationship to
the size of its business, is customary in the home healthcare industry. However,
there can be no assurance that any such insurance will be adequate to cover the
Company's liabilities.
CUSTOMERS
During the years ended March 31, 1999, 1998 and 1997, services provided to
Rivington House accounted for 14%, 15% and 19%, respectively, of the Company's
net sales for that year.
SUPPLIERS
The Company does not depend upon a limited number of suppliers for the conduct
of its continuing business and generally has second sources for all of the
materials and products used in its business. The Company purchases drugs,
solutions, medical equipment and other materials and leases certain equipment in
connection with the Company's business from many suppliers and distributors. The
Company is not currently experiencing and does not anticipate that it will
experience in the future any material difficulty in purchasing or leasing the
required products, supplies and equipment used in its business. During Fiscal
1999, the Company was unable to service certain patients due to the limited
supply of a particular drug. Sources for the drug continue to be limited, and,
accordingly, our ability to service these patients is indeterminable.
In the event that existing suppliers or distributors are unable to or should
fail to deliver products, supplies and equipment to the Company, management
believes that alternate sources are available to adequately meet its needs at
comparable prices.
REGULATION
The Company's business is subject to extensive and increasing regulation by
federal, state and local government. The Federal agencies which regulate aspects
of the Company's business include the Department of Health and Human Services,
Healthcare Finance Administration, the Office of the Inspector General, the Food
and Drug Administration, the Department of Labor, the Drug Enforcement Agency,
and the Occupational Safety and Health Administration. In most states, home
health care providers are regulated by the state department of health and board
of pharmacy.
The Company is subject to federal laws regulating the repackaging and dispensing
of drugs and regulating interstate motor-carrier transportation and state laws
regulating pharmacies, nursing services and certain types of home health agency
activities. Under state laws, the Company's offices must be licensed prior to
commencing business and must renew their licenses periodically. In addition,
certain of the Company's employees are subject to state laws and regulations
governing the professional practice of respiratory therapy, pharmacy and
nursing. Failure to comply with regulatory laws could expose the Company to
criminal and civil penalties, and jeopardize the licensure of one or more of its
home health care agencies, or their participation in the Medicare, Medicaid and
other reimbursement programs.
As a provider of services under the Medicare and Medicaid programs, the Company
is subject to the various "anti-fraud and abuse" laws, including the federal
health care programs anti-kickback statute. This law prohibits any offer,
payment, solicitation or receipt of any form of remuneration to induce the
referral of business reimbursable under a federal health care program or in
return for the purchase, lease, order, arranging for, or recommendation of items
or services covered by any such program. Federal health care programs are
defined as any health care plans or programs that are funded by the United
States (other than certain federal employee health insurance benefits) and
certain state health care programs that receive federal funds under various
programs, such as Medicaid. A related law forbids the offer or transfer of any
item or service for less than fair market value, or certain waivers of
co-payment obligations, to a beneficiary of Medicare or a state health care
program that is likely to influence the beneficiary's selection of healthcare
providers. Violations of the anti-fraud and abuse laws can result in the
imposition of substantial civil and criminal penalties and, potentially,
exclusion from furnishing services under any federal health care programs. In
addition, the states in which the Company operates generally have laws that
prohibit certain direct or indirect payments or fee-splitting arrangements
between health care providers where they are designed to obtain the referral of
patients to a particular provider.
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Congress adopted legislation in 1989, known as the "Stark" Law, that generally
prohibits a physician ordering clinical laboratory services for a Medicare
beneficiary where the entity providing that service has a financial relationship
(including direct or indirect ownership or compensation relationships) with the
physician (or a member of his immediate family), and prohibits such entity from
billing for or receiving reimbursement for such services, unless a specified
exemption is available. Additional legislation became effective as of January 1,
1993 known as "Stark II" that extends the Stark Law prohibitions to services
under state Medicaid programs, and beyond clinical laboratory services to all
"designated health services", including home health services, durable medical
equipment and supplies, outpatient prescription drugs, and parenteral and
enteral nutrients, equipment, and supplies. Violators who are compensated by the
Company are prohibited from making referrals to the Company, and the Company
will be prohibited from seeking reimbursement for services rendered to such
patients unless an exception applies. Several of the states in which the Company
conducts business have also enacted statutes similar in scope and purpose to the
federal fraud and abuse laws and the Stark Laws.
Various federal and state laws impose criminal and civil penalties for
making false claims for Medicare, Medicaid or other health care reimbursements.
The Company believes that it bills for its services under such programs
accurately. However, the rules governing coverage of, and reimbursements for,
the Company's services are complex. There can be no assurance that these rules
will be interpreted in a manner consistent with the Company's billing practices.
In May 1995, the federal government instituted Operation Restore Trust,
a health care fraud and abuse initiative focusing on nursing homes, home health
care agencies and durable medical equipment companies located in the five states
with the largest Medicare populations. New York, the Company's corporate base,
was one of the original targeted states. The purpose of this initiative is to
identify fraudulent and abusive practices such as billing for services not
provided, providing unnecessary services and making prohibited referral payments
to health care professionals. Operation Restore Trust has been responsible for
significant fines, penalties and settlements. Operation Restore Trust was
recently expanded to cover twelve additional states for the next two years. The
program was also expanded to include reviews of psychiatric hospitals, certain
independent laboratories and partial hospitalization benefits. Further, there
are plans to eventually apply the program's investigation techniques in all
fifty states and throughout the Medicare and Medicaid programs. One of the
results of the program has been increased auditing and inspection of the records
of health care providers and stricter interpretations of Medicare regulations
governing reimbursement and other issues. Specifically, the government plans to
double the number of comprehensive home health agency audits it performs each
year (from 900-1800) and also to increase the number of claims reviewed by 25.0%
(from 200,000 to 250,000). In general, the application of these anti-fraud and
abuse laws is evolving.
JCAHO has established written standards for home care services,
including standards for services provided by home infusion therapy companies.
Many payors use these criteria in order to select only the highest quality
providers. The Company's facility presently complies with JCAHO's standards and
has been accredited since February 1990. In addition, the Company received
approval in 1991 from the New York State Department of Health to provide nursing
services in New York State.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to trade accounts receivable
include amounts due from third party payors, primarily governmental agencies
(Medicare and Medicaid). At March 31, 1999, gross Medicare and Medicaid
receivables aggregated $5,150,643.
EMPLOYEES
As at March 31, 1999, the Company employed 180 persons, of whom 168
were full-time employees and 12 were part-time employees. The supply of
qualified staff is adequate and retainable in the New York City area. The
Company considers its relations with its employees to be satisfactory.
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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information in Items 1, 2, 3, 6,
7, and 8 of this Form 10-K include information that is forward looking, such as
the Company's opportunities to increase sales through, among other things,
increasing its number of patients, its anticipated liquidity and the Company's
ability to achieve significant cost savings or synergies from its recent
acquisition or other restructuring efforts. The matters referred to in
forward-looking statements could be affected by the risks and uncertainties
involved in the Company's business. These risks and uncertainties include, but
are not limited to, the effect of economic and market conditions, the impact of
the cost containment efforts of third-party payors and the Company's ability to
obtain and maintain required licenses, as well as certain other risks described
above in this Item under "Competition" and "Government Regulation," and in Item
7 in "Management's Discussion and Analysis of Financial Condition and Results of
Operations." Subsequent written and oral forward looking statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements in this paragraph and elsewhere in this
Form 10-K.
ITEM 2. PROPERTIES
The Company's offices, pharmacies and warehousing are located in a
31,000 square-foot building (the "Facility") in the Bronx. The Company is lessee
under a ten-year capital lease dated as of April 1, 1989 with the New York City
Industrial Development Agency (the "IDA"), the lessor (the "Lease Agreement").
The IDA acquired the property in April 1989 by issuing an Industrial Development
Bond (the "Bond").
At the end of the term of the capital lease, April 1, 1999, the Company
communicated to IDA that it intends to exercise its option to purchase the
Facility for one dollar plus any fees and expenses in connection with the
redemption of the Bond. The Company is in the process of obtaining short term
financing to pay off the outstanding principal and interest of approximately
$235,000.
The Company believes the Facility is in good condition and is adequate
to meet its needs in Fiscal 1999. However, to enhance productivity and provide
technological enhancements, the Company has signed a lease to rent 37,000 square
feet in Yonkers, New York, where it plans to consolidate its major offices and
warehouses at an average cost of approximately $26,000 per month over the life
of the lease. The initial term is for a period of sixty five months with two
renewals, each for a sixty month period.
As a result of the Company's recent acquisitions (see Item 1.
Description of Business), the Company also leases the space previously occupied
by Healix Healthcare, Inc. in Valhalla, New York, Long Island City, New York,
and ProHealthCare Infusion Services, Inc., Springfield, New Jersey. Each of
these facilities is separately leased under terms ranging from 1-5 years with
payments averaging from $1200 to $13,000 per month over the life of each lease.
In connection with our new lease in Yonkers, the space previously occupied by
Healix in Valhalla is currently being offered for sublease and the Facility in
the Bronx is currently offered for sale.
ITEM 3. LEGAL PROCEEDINGS
In June 1995, a former employee had 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 alleged that the Company
breached plaintiff's employment agreement by withholding at least $750,000 in
commissions allegedly owed to him. As of June 1998, this matter had thought to
have been settled through court recommended mediation. In May 1999, the former
employee petitioned the court to reopen the matter. The matter is still pending
with the court; however, management believes there will be no material adverse
effect on the Company's consolidated financial position, results of operations
or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
10
<PAGE>
PART II
ITEM 5. 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, markdown or
commission and do not necessarily represent actual transactions.
Fiscal 1999 Fiscal 1998
----------- -----------
High Low High Low
---- --- ---- ---
Quarter ended June 30............ 1-3/4 1-3/4 3-3/8 1-5/8
Quarter ended September 30....... 1-13/16 1-5/8 3-1/4 1-1/2
Quarter ended December 31........ 1-1/8 1-3/16 2-3/8 3/4
Quarter ended March 31........... 7/8 5/8 2-11/16 1-1/4
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 65 holders of record of the Common Stock as of June 30, 1999. 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. On October 10, 1998, 1,245,000 shares were converted into
1,431,750 shares of common stock leaving a balance of 105,000 6% Redeemable
Cumulative Convertible Preferred Stock outstanding. 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 of June 1, 1998 by the
issuance of 46,526, on December 17, 1998 and accrued 4,388 shares of the
Company's Common Stock to be issued for the December 1, 1998 dividend.
The Company satisfied its liability payable at June 1, 1997 and at
December 1, 1997 by the issuance of 45,556 and 35,354 shares of the Company's
Common Stock issued July 18, 1997 and January 15, 1998, respectively.
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.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the
consolidated financial statements of the Company, its subsidiaries and Healix
for the years ended March 31, 1999, 1998, 1997, 1996 and 1995. The years ended
March 31, 1999 and 1998 were audited and reported upon by Marcum & Kliegman LLP.
For the years ended March 31, 1997, 1996 and 1995 of Accuheath, Inc. and its
subsidiaries, prior to their restatement for the fiscal 1999 of interests, were
audited and reported upon by Ernst & Young LLP, and should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and the notes thereto included elsewhere in this Form 10-K. The Company has not
declared or paid any cash dividends on the Common Stock.
On April 9, 1998, the Company completed a merger with Healix
Healthcare, Inc. ("Healix") whereby 1,488,850 shares of the company's common
stock were exchanged for all of the outstanding common stock of Healix. The
merger constituted a tax-free organization and has been accounted for as a
pooling of interests. Accordingly, all prior period consolidated financial
statements presented have been restated to include the combined results of
operations, financial position and cash flows of Healix as though it had always
been a part of the Company.
Prior to the merger, Healix had a fiscal year end of September 30. The
following consolidated financial statements for the years ended March 31, 1998,
1997 and 1996 reflect restated numbers which combine financial statements for
the twelve months ended March 31, 1998, 1997 and 1996 of Accuhealth, Inc. and
its subsidiaries and September 30, 1997, 1996, and 1995 of Healix, respectively.
STATEMENT OF OPERATIONS DATA:
(In Thousands, except shares and per share data)
<TABLE>
<CAPTION>
Fiscal Year ended March 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales..................................... $ 38,127 $ 31,673 $ 24,694 $ 22,381 $ 20,534
Gross profit.................................. 14,062 14,749 11,129 10,871 9,826
Selling, general and administrative expenses.. 17,913 14,105 10,724 11,075 9,326
Interest expense, net......................... (1,627) (814) (631) (651) (695)
Miscellaneous Income (Expense) 12 93 53 (137) 81
Recovery related to pre-investigation of
management off book cash practices......... -- -- -- -- 525
Debt surrendered in settlement of claims...... -- -- -- -- 488
Write off of merger related costs............. -- (295) -- -- --
Income (loss) from continuing operations
before income taxes........................ (5,466) (372) (173) (992) 899
Income Tax (Expense) Benefits................. 90 (104) 112 97 (97)
Equity and loss from unconsolidated subsidiary -- -- (100) -- --
Discontinued operations....................... -- -- -- -- (278)
Income (loss) before extraordinary item....... (5,376) (476) (161) (895) 524
Extraordinary items........................... -- -- 136 -- 60
Net income (loss) ............................ (5,376) (476) (25) (895) 584
Net income (loss) applicable to common
stockholders............................... $ (5,463) $ (638) $ (187) $ (1,099) $ 476
Weighted average common stock outstanding
Basic...................................... 4,357,239 3,243,192 2,889,273 2,762,124 2,899,003
Diluted.................................... 4,357,239 3,243,192 2,889,273 2,762,124 2,995,416
Earning (loss) per share data
Basic...................................... ($1.25) ($.20) ($.06) ($0.40) $ 0.16
Diluted.................................... ($1.25) ($.20) ($.06) ($0.40) $ 0.16
Balance Sheet Data
Total assets.................................. $ 21,970 $ 17,232 $ 12,449 $ 9,689 $ 8,909
Long-term liabilities......................... 7,497 1,487 1,527 720 1,182
Total liabilities............................. 25,824 14,852 10,143 7,216 5,990
Redeemable Preferred Stock.................... -- -- -- -- 2,710
Stockholders' equity (deficiency)............. (3,854) 2,380 2,306 2,473 (209)
</TABLE>
12
<PAGE>
ITEM 7. 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, 1999 as Compared to Fiscal Year ended March 31, 1998
- --------------------------------------------------------------------------------
Net sales for Fiscal 1999 increased approximately $6,454,000 to
$38,127,000 from the $31,673,000 reported in Fiscal 1998. The increase was the
result of increases in the Company's oral medication and institutional pharmacy
revenues and durable medical equipment revenues offset by a decrease in infusion
revenues.
Gross profits for Fiscal 1999 were approximately $14.1 million and were
37% of total net sales as compared to approximately $14.7 million or 47% for
Fiscal 1998. The decrease in the gross profit percentage was due primarily to
the loss of a highly profitable infusion product revenues due to the lack of
availability of the drug needed to service this product line and due to the
increase in sales from institutional and oral medication which generated lower
gross margins.
Selling, general and administrative expenses increased approximately
$3.8 million to $17.9 million or 47% of sales for 1999 from $14.1 million or 45%
for sales for fiscal 1998. The increase was primarily due to increase in bad
debt expenses ($3,175,000), goodwill write-offs ($1,300,000), consulting
expenses ($160,000), insurance expense ($200,000), data processing maintenance
($160,000), auto leasing expense ($150,000), dispatch and delivery expense
($125,000), offset by a decrease in salaries ($500,000).
Net Interest expense in Fiscal 1999 was $1,615,000 as compared to
$814,000 in Fiscal 1998 due to increased net borrowings under our revolving line
of credit and issuance of $6,250,000 in 12% Subordinated Debentures.
Fiscal Year ended March 31, 1998 as Compared to Fiscal Year Ended March 31, 1997
- --------------------------------------------------------------------------------
Net sales from Fiscal 1998 increased approximately $6,979,000 to
$31,673,000 from the $24,694,000 reported in Fiscal 1997. The increase was the
result of an increase in all lines of businesses, primarily the Company's oral
medication revenues with more moderate increases from institutional pharmacy,
infusion services and durable medical equipment revenues.
Gross profits from Fiscal 1998 were approximately $14.7 million and
were 47 % of total net sales as compared to approximately $11.1 million or 45%
for Fiscal 1997. The increase in the gross profit percentage was due primarily
to a higher gross profit margin on ProHealthCare's portion of the increase in
the sales and an increase in managed care sales with carry margins that are
greater than the Company's institutional pharmacy sales.
Selling, general and administrative expenses increased approximately
$3.4 million to $14.1 million or 45% of sales for 1998 from $10.7million or 43%
for sales from Fiscal 1997. The increase was primarily due to increases in
salaries ($500,000), consulting ($100,000), expenses relating to ProHealth Care,
Infusion Services, Inc. which was acquired on July 1, 1997 ($720,000), merger
expenses in connection with Healix Healthcare, Inc. ($295,000), legal
settlements ($108,000), rent ($186,000), depreciation and amortization
($225,000).
Net interest expense in Fiscal 1998 was $814,000 as compared to
$631,000 in Fiscal 1997.
LIQUIDITY AND FINANCIAL CONDITION
As of March 31, 1999, the Company had working capital of approximately
$550,000.
13
<PAGE>
The Company's cash provided by financing activities of approximately
$7,386,000 was primarily attributable to the net proceeds of approximately
$6,250,000 from the 12% Cumulative Convertible Notes and net proceeds of
$3,028,000 under the Company's revolving credit facility and term loan offset by
principal payments on capital leases. The cash used in operating activities of
approximately $6,796,000 was primarily attributable to the net loss of
approximately $5,376,000 and increases in accounts receivable of approximately
$3,900,000 partially offset by goodwill write-offs.
Accounts receivable include amounts due from third-party payors,
primarily governmental agencies (Medicare and Medicaid). At March 31, 1999,
gross Medicare and Medicaid receivables aggregated $5,150,643.
Effective April 3 1998, the Company agreed to an amendment of the Loan
and Security Agreement. The amendment extended the agreement through April 1,
2000 and allows the company to borrow, under certain conditions and terms, up to
$9 million under a revolving loan agreement at an interest rate of prime plus 1
1/2%, as well as an overdraft line of $1,000,000 at prime plus 3%. The amendment
also increased the term loan available to the Company to $750,000. In addition,
the Company granted Rosenthal warrants to purchase 50,000 shares of the
Company's common stock.
At its meeting of the Board of Directors on June 25, 1998, the Company
approved the issuance of 12% Cumulative Convertible Subordinated Notes in the
face amount of $6,250,000. As a further component of this financing, the
Company's current 6% cumulative convertible Preferred Stock was be converted to
common stock in Accuhealth at a 15% premium per an agreement with the preferred
stockholders. In December 1998 1,245,000 shares of 6% Cumulative convertible
Preferred Stock was converted into 1,432,000 shares of the Company's common
stock.
The Company operates under cash flow pressure primarily due to
difficulty in collecting its accounts receivable on a timely basis. Management
has taken actions and is formulating additional plans to generate sufficient
cash to meet its operating needs through March 31, 2000 and beyond. Among the
actions taken are the restructuring of the reimbursement (collections) and
customer service departments to enhance productivity and collection efforts,
redirecting the sales initiatives to focus on the qualitative aspects of new
business such as account profitability and collectibility of the Company's
billings, obtaining better terms and financing from vendors and reducing
corporate expenses, primarily compensation and bad debt expense. The Company has
commenced discussions to increase the borrowing capacity under its revolving
credit facility.
During the year ended March 31, 1998, the Company adopted the provision
of statements of accounting standards No. 128 Earnings per Share ("SFAS No.
128"). SFAS No. 128 eliminates the presentation of primary and fully diluted
earnings per share ("EPS") and requires presentation of basic and diluted EPS.
Basic EPS is computed by dividing income (loss) available to common stockholders
by the weighted-average number of common shares outstanding for the period.
Diluted EPS is computed by dividing the weighted average number of
common shares and common stock equivalents outstanding. For the years ended
March 31, 1999 and 1998, weighted average number of common shares outstanding
throughout the periods includes shares issued by Accuhealth as a result of the
Healix merger. Common stock equivalents have been excluded from the
weighted-average shares for 1999, 1998, and 1997, as inclusion is anti-dilutive.
Potentially diluted securities, which consist of stock options and warrants, may
be potentially diluted in the future. All prior period EPS data has been
restated to conform to the new pronouncement.
Year 2000 Readiness
The Company has completed its assessment of its computer systems and
facilities that could be affected by the "Year 2000 problem" and has developed a
plant to resolve the issue. The Year 2000 problem arose because many existing
computer programs use only the last two digits to refer to a year. Therefore,
these computer programs do not properly recognize a year that begins with "20"
instead of the familiar "19". If not corrected, many computer applications could
fail or create erroneous results.
The Company is implementing its Year 2000 compliance program as part of
a plan to replace and upgrade its information technology systems (the "Upgrade
Program"). The Upgrade Program was initiated to replace information systems of
certain substances of the Company acquired by merger, to fully integrate those
systems with the Company's information technology systems, and to update the
Company's information technology systems. The Company has divided the Upgrade
Program into the following phases: assessment, planning, remediation and
14
<PAGE>
testing. The Company is currently approximately 30% complete with the Upgrade
Program and anticipates being complete with all phases of the Upgrade Program,
including year 2000 compliance by the fourth quarter of 1999. Although the
Company believes that it will complete the Upgrade Program by the fourth quarter
of 1999, there can be no assurance that such remediation will be completed or
that the Company's operations will not be disrupted to some degree.
The Company currently expects the Upgrade Program to be completed in a
time frame to avoid any material adverse effect on operations. As of March 31,
1999, the Company had incurred approximately $285,000 of expenses in connection
with the Upgrade Program. The Company expects to incur additional expenses of
approximately $300,000 to complete the implementation of the Upgrade Program.
The Company would have implemented the Upgrade Program irrespective of the Year
2000 problem, and although the Company expects that the implementation of the
Upgrade Program will achieve Year 2000 compliance, the Company cannot separately
assess the expenses relating to the Year 2000 compliance. The Company's
inability to complete Year 2000 compliance on a timely basis or the inability of
other companies with which the Company does business to complete their Year 2000
modifications on a timely basis could adversely affect the Company's operations.
The Company has initiated communications with its major vendors to
identify and, to the extent possible, to resolve issues involving the Year 2000
Problem. The Company is attempting to mitigate its risk with respect to the
failure of such vendors to be Year 2000 compliant by, among other things,
obtaining Year 2000 compliance certifications or written assurances from its
material vendors. However, the Company has limited or no control over the
actions of these suppliers. Thus, while the Company expects that it will be able
to resolve any significant Year 2000 Problems with these systems, there can be
no assurance that these suppliers will resolve any or all Year 2000 Problems
with these systems before the occurrence of a material disruption to the
business of the Company or any of its customers. Any failure of these suppliers
to resolve Year 2000 Problems with their systems in a timely manner could have a
material adverse effect on the Company's business, financial condition, and
results of operation.
Management believes that the most significant risk to the Company from
the Year 2000 Problem is the effect such issues may have on third party payors,
such as Medicare. News reports have indicated that various agencies of the
federal government may have difficulty becoming year 2000 compliant before the
Year 2000. The Company has not yet undertaken to quantify the effects of such
noncompliance or to determine whether such quantification is even possible. The
Company has initiated communications with its third party payors to identify
and, to the extent possible, to resolve issues involving the Year 2000 problem.
However, the Company has limited or no control over the actions of these third
party payors. Thus, while the Company expects that it will be able to resolve
any significant Year 2000 problems with these payors, there can be no assurance
that these payors will resolve any or all Year 2000 problems with their systems
before the occurrence of a material disruption to the business of the Company.
Any failure of these third party payors to resolve Year 2000 problems with their
systems in a timely manner could have a material adverse effect on the Company's
business, financial condition, and results of operation.
The Company is in the process of generating a Year 2000 contingency
plan in the event compliance is not achieved. In connection therewith, the
Company expects to identify reasonably likely scenarios which could arise in the
event of the Company's Year 2000 noncompliance. Once these scenarios have been
identified, the Company will develop plans in an attempt to reduce the impact of
these noncompliance scenarios on the Company and its core functions. The Company
expects to be substantially complete with this contingency plan by the third
quarter of 1999. However, there can be no assurance that this contingency plan
will be completed on a timely basis or that such a plan will protect the Company
from experiencing a material adverse effect on its financial condition or
results of operations.
Potential consequences of the Company's failure to resolve its Year
2000 issues could include, among others, (i) the inability to accurately and
timely process claims, respond to third party payor inquiries about claims,
enroll customers, bill third party payors, collect receivables, pay vendors,
record and disclose accurate data and perform other core functions (ii)
increased scrutiny be regulators and breach of contractual obligations, and
(iii) litigations in connection therewith.
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and financial statement schedules are included in
the Consolidated Financial Statements, as a separate section of this Report, set
forth on pages F-1 through F-21, attached hereto, and found immediately
following the signature pages of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
At a meeting held on March 5, 1998, the Board of Directors of the
Company approved the engagement of Marcum & Kliegman LLP as its independent
auditors for the fiscal year ending March 31, 1998 to replace the firm of Ernst
& Young LLP ("E & Y"), who were dismissed as auditors of the Company effective
April 15, 1998. The audit committee of the Board of Directors approved the
change in auditors on March 25, 1998.
The reports of E & Y on the Company's financial statements for the past
two fiscal years did not contain an adverse opinion and were not qualified or
modified as to uncertainty, audit scope, or accounting principles, except that E
& Y's audit report for fiscal year 1996 was modified with regard to the
Company's ability to continue as a going concern. In connection with the audits
of the Company's financial statements for each of the two fiscal years ended
March 31, 1997, there were no disagreements with E & Y on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of E & Y would
have caused E & Y to make reference to the matter in their report.
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are the executive officers and directors of the Company at
June 29, 1999:
<TABLE>
<CAPTION>
Annual Meeting
Officer or at Which Term
Name Director Since Age Position will Expire
---- -------------- --- -------- -----------
<S> <C> <C> <C> <C>
E. Virgil Conway................. 1994 69 Director 1999
Glenn C. Davis................... 1994 50 President, Chief Executive 2000
Officer and Director
Stanley Goldstein................ 1994 63 Chairman and Director 2001
Howard C. Landis................. 1998 45 Director 2001
Donald B. Louria, M.D............ 1994 70 Director 2000
Sally Hernandez-Pinero........... 1994 46 Director 2000
Corbett A. Price................. 1994 49 Director 1999
Jeffrey S. Freed, M.D............ 1998 54 Director and Executive Vice 2001
President--Strategy
</TABLE>
Set forth below are brief summaries of the business experience of the
persons who were directors as of June 29, 1999:
E. VIRGIL CONWAY chairs the Company's Audit and Stock Option Committees
and was elected a director on April 29, 1994. Mr. Conway is a member of the
Executive and Compensation and Nominations Committees. Since May 16, 1995, he
has served as Chairman of the Board of the Metropolitan Transportation
Administration of the City of New York and, from 1989 to 1996, he served as
Chairman of the Audit Committee of the City of New York. From 1992 until July
1995, Mr. Conway served as Chairman of the Financial Accounting Standards
Advisory Council. From 1968 through 1988, Mr. Conway served as Chairman and
Chief Executive Officer and as a director of the Seamen's Bank for Savings, FSB.
From 1986 until 1989, Mr. Conway also served as Vice Chairman of Seamen's
Corporation. From 1967 to 1968, Mr. Conway served as an Executive Vice President
and Trustee at the Manhattan Savings Bank. From 1964 to 1967, Mr. Conway served
as First Deputy Superintendent of Banks of the State of New York and Secretary
of the New York State Banking Board. Mr. Conway specializes in financial
consulting. Mr. Conway serves on several corporate boards, including Union
Pacific Corporation, Con Edison corporation, Urstadt-Biddle, a real estate
investment trust, Trism, Inc., a specialized trucking firm, and mutual funds
managed by Phoenix Home Life.
GLENN C. DAVIS became a director, Chief Executive Officer and President
of the Company on February 3, 1994 and since April 15, 1999 is serving as acting
Chief Financial Officer. Mr. Davis is a member of the Executive Committee. From
June 1993 until June 30, 1995, Mr. Davis was a general partner of Capstone
Management Company, an investment partnership engaged principally in the
initiation, acquisition and management of businesses in the health care
industry. Mr. Davis is a certified public accountant. From 1980 until January
1993, Mr. Davis was a partner with Coopers & Lybrand, an international
accounting and consulting firm.
17
<PAGE>
JEFFREY S. FREED, M.D., was elected a director on June 25, 1998 in
connection with the Healix Healthcare, Inc. merger. Dr. Freed is a member of the
Professional Conduct Committee. Since April 1998, Dr. Freed has served as
Executive Vice President -- Strategic Development and Medical Director for
Accuhealth. From March 1995 to March 1998, Dr. Freed was President and Medical
Director of Healix Healthcare, Inc. He also is a Clinical Associate Professor of
Surgery at the Mount Sinai School of Medicine and a practicing general surgeon.
STANLEY GOLDSTEIN was elected Chairman of the Company's Board of
Directors on April 29, 1994. Mr. Goldstein has been a private investor from 1981
until the present. Mr. Goldstein is Chairman of the Executive Committee. From
June 1993 until June 30, 1995, Mr. Goldstein was a general partner of Capstone
Management Company, an investment partnership engaged principally in initiation,
acquisition and management of businesses in the health care industry. Mr.
Goldstein is a certified public accountant. From 1964 until 1981, Mr. Goldstein
was the founder and Managing Partner of Goldstein Golub Kessler & Company,
Certified Public Accountants. Mr. Goldstein serves on the boards of directors of
Security Mutual Life Insurance Company and Security Equity Life Insurance
Company.
HOWARD C. LANDIS was elected a director on June 25, 1998 pursuant to
agreements executed in connection with the purchase by RFE Investment Partners
V.L.P. of convertible subordinate debt. Mr. Landis is a member of the Audit
Committee. Since 1980, Mr. Landis has been employed by RFE Management Corp., an
investment manager of private equity investment funds. Since 1983 Mr. Landis has
been a general partner of these private equity funds. Mr. Landis is also a
director of a number of privately owned companies.
DONALD B. LOURIA, M.D., M.A.C.P. was elected a director on April 29,
1994. Dr. Louria chairs the Professional Conduct Committee. Dr. Louria has been
a Professor and Chairman of the Department of Preventive Medicine and Community
Health of the University of Medicine and Dentistry of New Jersey-New Jersey
Medical School from July 1969 until the present. Over the same period, among
other appointments, Dr. Louria has served as a consultant in Infectious Diseases
to Memorial Hospital for Cancer and Allied Diseases and, from 1971 until the
present, has served on the Consultant Medical Staff in Infectious Diseases at
St. Michael's Medical Center in Newark, New Jersey.
SALLY B. HERNANDEZ-PINERO was elected a director on September 20, 1994.
On May 1, 1999 Ms. Hernandez-Pinero became a Senior Vice President for Corporate
Affairs for Related Companies LLP, a real estate development, management,
syndication and financing company. Since June 1998 to April 1999 she was the
Managing Director of Fannie Mae where she identified equity investment
opportunities for the capital fund. She was previously a member of the law firm
of Kalkines Arky Zall & Bernstein. Ms. Hernandez-Pinero served as Chairwoman of
the New York City Housing Authority from February 1992 to January 1994. In that
position she had direct operational responsibility for the nation's largest
public housing program with 325 developments housing over 600,000 people, a
staff of 16,000 and a budget of $1.45 billion. From January 1990 to February
1992, Ms. Hernandez-Pinero was Deputy Mayor for Finance and Economic
Development, in which position she designed and supervised the development and
implementation of business, industrial and commercial development policies for
the City of New York. From January 1988 to January 1990 she served as
Commissioner/Chairwoman of the Board of Directors of the Financial Services
Corporation of New York City where she developed and implemented the course of
action and priorities for that agency's economic development programs. Prior to
January 1988, Ms. Hernandez-Pinero served as Deputy Borough President of
Manhattan, General Counsel to the State of New York Mortgage Agency, and as an
attorney with a number of community development and legal service organizations.
Ms. Hernandez-Pinero is a director of Con Edison Corporation and the Dime
Savings Bank and National Income Realty Trust.
CORBETT A. PRICE was elected a director on September 20, 1994. Mr.
Price chairs the Compensation and Nomination Committee and is a member of the
Stock Option and Audit Committees. He is the Chairman and Chief Executive
Officer of KURRON, a New York based health care management company which Mr.
Price founded in January 1990. KURRON specializes in the rehabilitation of
distressed hospitals and health care systems. Mr. Price began his career in
health care management in 1975 at the Hospital Corporation of America, where he
served as a Vice President from 1983 to 1989. As head of Hospital Corporation of
America's Mid-Atlantic Division, he directed the operations of approximately
twenty hospitals in four states and the District of Columbia. Mr. Price has
advised the governments of Mexico, Barbados and Jamaica on health care delivery
systems and facilities.
The Company has Audit, Compensation and Nominations, Executive,
Professional Conduct and Stock Options Committees. The Compensation and
Nominations Committee administers the Company's stock option plans.
18
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
From April 1, 1994 through May 31, 1994, the Company paid directors who
were not officers of the Company $2,000 per meeting attended. In June 1994, the
Board of Directors established a policy of paying directors who are not officers
or consultants a fee of $6,000 per annum plus $1,000 per annum ($2,000 per annum
for the Chair) for each committee on which they serve. Messrs. Conway and Price,
Dr. Louria and Ms. Hernandez-Pinero are eligible for the foregoing fees. The
Company does not intend to pay any fee to officers for serving as directors.
Effective June 28, 1994, the Company entered into a Consulting Agreement with
Mr. Goldstein for certain services to be rendered. Such consulting agreement
calls for a monthly consulting fee and expense reimbursement of $5,000.
Effective April 1, 1999 the consulting agreement was amended to have
the monthly consulting fee and expense reimbursement reduced to $3,000 monthly.
The following table sets forth all compensation earned, awarded or paid
by the Company to its Chief Executive Officer, Executive Vice President and
Chief Operating Officer and Senior Vice President -- Finance and Chief Financial
Officer for the fiscal year ended March 31, 1999. No other person who was a
director, executive officer or employee at any time during the fiscal year ended
March 31, 1999, received salary and bonus in excess of $100,000 during or
attributable to such fiscal year.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Annual Long Term
Compensation Compensation
------------ ------------
All Other
Name and Principal Position Year Salary Bonus Compensation
--------------------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Glenn C. Davis................... FY1999 $275,000 -- --
President and Chief Executive.. FY1998 $250,000 $ 25,000 --
Officer........................ FY1997 $200,000 -- --
Mary Comerford................... FY1999 $175,000 -- --
Executive Vice President and
Chief Operating Officer
Prisco DeMercurio................ FY1999 $125,000 $ 25,000
Senior Vice President and Chief
Financial Officer
Dr. Jeffrey S. Freed............. FY1999 $ 65,000 -- $ 41,000(1)
Executive Vice President
</TABLE>
- -----------------
(1) Comprised of life insurance premiums of $29,000 per year and
an auto allowance of $12,000 per year.
EMPLOYMENT AGREEMENT
At the Company's Board of Directors meeting on June 25, 1998, the Company
renewed its employment agreement with its President and Chief Executive Officer
through May 2, 2001. The Company's President and Chief Executive Officer is
entitled to an annual salary at a rate of $275,000 and 62,500 restricted shares
of the Company's common stock. The agreement also provides for a severance
payment equal to 150% of his annual compensation, including base salary and any
initial bonus ("Annual Compensation"), at the date of termination if (i) his
employment is terminated by him due to a breach of the agreement by the Company,
(ii) the Company fails to offer to extend his employment for additional terms of
one year on the same terms; or (iii) his employment terminates due to
disability. If the employment is terminated due to his death, the severance
payment is equal to 50% of his Annual Compensation at the date of death. The
agreement further provides that, in the event of a merger or sale of
substantially all of the assets of the Company, either the successor corporation
or he may elect to terminate his employment and that, if his employment is so
terminated, he will be entitled to receive a severance payment equal to 300% of
his Annual Compensation at the date of termination. In addition, the agreement
provides that he will not compete with the Company for 18 months after a
termination of his employment, except that, if such termination is by the
Company for cause, the non-competition period will be for 24 months.
19
<PAGE>
In connection with the Healix merger, Dr. Jeffrey S. Freed entered into an
employment agreement with the Company. Under the employment agreement Dr. Freed
shall serve a Executive Vice-President and be entitled to an annual salary at a
rate of $65,000 and options to purchase 60,000 shares of the Company's common
stock. The agreement also provides for reimbursement for business expenses
incurred in the performance of the employment duties, a $1,000 per month auto
allowance and payment of $28,245 per year of life insurance premiums pursuant to
a Split-Dollar Agreement whereby the cash values of the policies are assigned to
the employer as collateral for the ultimate repayment to the Employer for the
premium outlay. The term of this agreement expires on December 31, 2001 (initial
term) with a two year renewal, provision ending December 31, 2003 (renewal
period). The agreement also provides for certain payments for termination due to
death or disability equal to the Executives Base Salary, for termination to
Employer's Breach equal to the later of (A) the remaining term of the agreement
or (B) six months and if termination results from a change in control any unpaid
Base Salary and a severance payment in the amount equal to 2.9 times the
Executive's Base Salary. Further, the agreement contains Non-Solicitation;
Non-Competition; and Confidentiality provisions ranging from one to three years
as the circumstances as defined so warrant.
In connection with the Healix merger, Mary B. Comerford entered into an
employment agreement with the Company. Under the employment agreement, Ms.
Comerford shall serve as Executive Vice President and be entitled to an annual
salary at a rate of $175,000 a hire-on bonus of 50,000 shares of the Company's
common stock issued in three annual installments (none issued as of March 31,
1999), an annual bonus based on certain performance criteria up to 50% of the
base salary, and options to purchase 50,000 shares of the Employer Common Stock
pursuant to the terms of an option agreement. The term of this agreement expires
on December 31, 2001 (initial term) with a two year renewal provisions ending
December 31, 2003 (renewal period). The agreement also provides for certain
payments for termination due to death or disability equal to the Executive Base
Salary, for termination due to Employer's Breach equal to the later of (A) the
remaining term of the agreement or (B) six months and if termination results
from a change in control any unpaid Base Salary and a severance payment in the
amount equal to 2.9 times the Executive's Base Salary. Further, this agreement
contains Non-Solicitation; Non-Competition; and Confidentiality provisions
ranging from one to three years as the circumstances as defined so warrant.
STOCK OPTIONS
The following tables set forth information concerning exercisable options during
the fiscal year ended March 31, 1999, with respect to the Common Stock. Stock
options totalling 110,000 shares were granted in April, 1998 to two executive
officers. No stock appreciation rights were granted to executive officers and no
stock options or stock appreciation rights were exercised by executive officers
during such year.
<TABLE>
<CAPTION>
FISCAL YEAR-END OPTION VALUES
Number of Shares Underlying
Unexercised Options at Value of Unexercisable in-the-Money
Fiscal Year End Options at Fiscal Year End
--------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Glenn C. Davis 140,000 60,000(1) -- --
Jeffrey S. Freed 0 60,000(2) -- --
Mary Comerford 0 50,000(2) -- --
Prisco DeMercurio 25,000 25,000(1) -- --
</TABLE>
(1) The option exercise price of such shares is $2.00 per share.
(2) The option exercise price of such shares is $2.875 per share.
20
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth existing stock ownership as of June 29,
1999, with respect to the beneficial ownership of shares of Common Stock by (i)
each person known by the Company to be the beneficial owner of 5% of more of the
outstanding shares of Common Stock, (ii) each nominee for director, (iii) each
director, and (iv) all officers and directors as a group, and the percentage of
the outstanding shares of Common Stock represented thereby.
Amount of Nature of
Beneficial
Name of Beneficial Owner(1) Ownership (1) Percent of Class (2)
- --------------------------- ------------- --------------------
Glenn C. Davis 260,760(3)(4)(5) 5.31
c/o Accuhealth, Inc.
1575 Bronx River Ave.
Bronx, New York, 10460
Stanley Goldstein 333,842(3)(4)(6) 6.91
c/o Accuhealth, Inc.
1575 Bronx River Ave.
Bronx, New York, 10460
E. Virgil Conway 34,229(11)(12) *
Howard C. Landis 0 *
Donald B. Louria, M.D. 31,500(7) *
Sally Hernandez-Pinero 15,500(12) *
Corbett A. Price 29,204(16) *
Mary Comerford 124,072(17) 2.55%
Prisco DeMercurio 0 *
Special Situation Fund III, L.P. 706,928(8) 14.67
153 East 53rd Street
New York, New York 10022
Penfield Partners, L.P. 324,027(9) 6.72
153 East 53rd Street
New York, New York 10022
Special Situations Cayman Fund, L.P. 244,251(10) 5.07
153 East 53rd Street
New York, New York 10022
CMNY Capital II, L.P. 355,368(13) 7.37
c/o Carl Marks & Company, Inc.
135 East 57th Street
27th Floor
New York, New York 10022
Jeffrey S. Freed, M.D. 521,883(15) 10.69
All Directors and Executive 1,376,940(14) 26.80
Officers as a Group (10 persons)
* Percentage of shares beneficially owned does not exceed 1% of the
class.
21
<PAGE>
(1) As used herein, the term "beneficial ownership" with respect to a
security is defined by Rule 13d-3 under the Securities Exchange Act of
1934 as consisting of sole or shared voting power (including the power
to vote or direct the vote) and/or sole or shared investment power
(including the power to dispose or direct the disposition of the
shares) with respect to the security through any contract, arrangement,
understanding, relationship or otherwise, including a right to acquire
such power(s) during the next 60 days. Unless otherwise noted,
beneficial ownership consists of sole ownership, voting and investment
rights.
(2) Percent of class assumes issuance of the shares subject to currently
exercisable options and shares issuable upon the conversion of 6%
Preferred Stock, as well as an equivalent increase in the number of
shares outstanding.
(3) Includes 40,000 and 20,000 shares issuable pursuant to currently
exercisable stock options for Davis and Goldstein, respectively.
(4) Includes 220,760 and 314,842 shares owned of record and beneficially
for Davis and Goldstein, respectively.
(5) Includes 50,000 shares issuable upon conversion of 50,000 shares of 6%
Preferred Stock.
(6) Includes 3,000 shares issuable upon conversion of 3,000 shares of 6%
Preferred Stock.
(7) Includes 24,500 shares issuable pursuant to currently exercisable stock
options and 7,000 shares owned directly or in trust for the benefit of
members of Dr. Louria's family.
(8) Includes 706,928 shares owned of record and beneficially.
(9) Includes 324,027 shares owned of record and beneficially.
(10) Includes 244,251 shares owned of record and beneficially.
(11) Includes 18,729 shares owned of record and beneficially.
(12) Includes 15,500 shares issuable pursuant to currently exercisable stock
options.
(13) Includes 355,368 shares owned of record and beneficially.
(14) Includes 1,057,940 shares owned of record and beneficially, 266,000
shares issuable pursuant to currently exercisable stock options and
53,000 shares issuable upon conversion of 53,000 shares of 6% Preferred
Stock.
(15) Includes 461,883 shares issued pursuant to the Healix acquisition to
Jeffrey S. Freed, M.D., and 60,000 shares issuable pursuant to
currently exercisable stock options.
(16) Includes 13,704 shares owned of record and beneficially and 15,500
shares issuable pursuant to currently exercisable stock options.
(17) Includes 74,072 shares owned of record and beneficially and 50,000
shares issuable pursuant to currently exercisable stock options.
(17a) Based solely on a review of Forms 3, 4 and 5 (and amendments thereto)
furnished to the Company, and certain written representations received
by it, the Company is not aware of any person who, during the prior
fiscal year, was a director, officer or beneficial owner of more than
10% of its outstanding Common Stock, during (or with respect to) the
prior or (except as may have been previously reported) previous fiscal
year, who failed to file with the Securities and Exchange Commission on
a timely basis reports required by Section 16 (a) of the Securities
Exchange Act of 1934.except that the following persons reported changes
in their beneficial ownership of the Company's securities with respect
to the following transactions in year-end filings on Form 5 rather than
earlier in the year: the conversion of the Company's preferred stock to
Common Stock on December 1, 1998 (Messrs. Conway and Goldstein); and
the issuance of shares of the Company's common stock in the Healix
merger on October 9, 1998 (Dr. Freed and Ms. Comerford); and the
issuance of stock options on October 23, 1997 (Messrs, Conway and
Price, Ms. Hernandez-Pinero and Dr. Louria).
22
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of June 28, 1994, the Company entered into a Consulting Agreement with
Stanley Goldstein, who is Chairman of the Board. Mr. Goldstein does not receive
compensation for services provided as a director of the Company during the term
of his consulting agreement.
Pursuant to such Consulting Agreement, Mr. Goldstein provides consulting
services to the Company in, among other areas, capital financing, mergers and
acquisitions. The Company has agreed to pay consulting fees to Mr. Goldstein in
the amount of $4,000 per month and an office expense reimbursement of $1,000 per
month for use of Mr. Goldstein's offices and support facilities in the
performance of his consulting duties. In further consideration of Mr.
Goldstein's consulting services, the Company granted to Mr. Goldstein an option
to purchase 150,000 shares of Common Stock at prices ranging from $1.625 to
$3.00 per share. During the fiscal year ended March 31, 1999 the Company issued
46,957 of its common stock in consideration of forgiveness of accrued consulting
fees of $135,000 owed Mr. Goldstein.
During the Fiscal year 1999, the Company granted a loan to Mr. Glenn C. Davis,
President and CEO, in the amount of $100,000 due on demand, bearing interest of
8%. Such loan is collateralized by 50,000 shares of the Company's 6% cumulative
convertible and Preferred Stock.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a)(1), (a)(2) See the separate section of this report following Item 14 for
a list of financial statements and schedules filed herewith.
(a)(3) Exhibits as required by Item 601 of Regulation S-K are listed in Item
14(c) below.
(b) The Company did not file any Reports on Form 8-K during the last
quarter of the fiscal year ended March 31, 1999.
(c) EXHIBITS
3.1 Registrant's Articles of Incorporation, as amended (incorporated herein
by reference to Exhibit 3 (I) to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1994)
3.2 Registrant's By-laws, as amended (incorporated herein by reference to
Exhibit 3(ii) to the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1994)
10.01 Loan and Security Agreement dated April 28, 1994 between Rosenthal &
Rosenthal, Inc. and the Registrant, Midview Drug, Inc., Accuhealth Home
Care, Inc. and Citiview Drug Co., Inc. (the "Loan and Security
Agreement") (incorporated herein by reference to Exhibit 10 (l) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended March
31, 1994)
10.02 Amendment No. 1 to the Loan and Security Agreement, dated as of
February 1, 1996
10.03 Amendment No. 2 to the Loan and Security Agreement, dated as of
February 1, 1997.
23
<PAGE>
10.04 Amendment No. 3 to the Loan and Security Agreement dated as of July 30,
1997.
10.05 Amendment No. 4 to the Loan and Security Agreement dated as of April 9,
1998.
10.06 Warrant dated April 28, 1994 for the Registrant's Common Stock issued
by the Registrant to Rosenthal & Rosenthal, Inc. (incorporated herein
by reference to Exhibit 10(m) to the Registrant's Annual Report on Form
10-K for the fiscal year ended March 31, 1994)
10.07 Employment Agreement dated May 2, 1994 between Glenn C. Davis and the
Registrant (incorporated herein by reference to Exhibit 10.14 to the
Registrant's Annual Report on Form 10-K for the year ended March 31,
1995)
10.08 Consulting Agreement dated June 28, 1994 between Donald B. Louria, M.D.
and the Registrant (incorporated herein by reference to the
Registrant's Annual Report on Form 10-K for the year ended March 31,
1995)
10.09 Consulting Agreement dated June 28, 1994 between Stanley Goldstein and
the Registrant (incorporated herein by reference to Exhibit 10.16 to
the Registrant's Annual Report on Form 10-K for the year ended March
31, 1995)
10.10 Amended and Restated 1988 Stock Option Plan (incorporated herein by
reference to Exhibit B to the Registrant's 1994 Notice of Annual
Meeting and Proxy Statement)
10.11 Option Agreement dated September 20, 1994 between Corbett A. Price and
the Registrant (incorporated herein by reference to Exhibit 10.19 to
the Registrant's Annual Report on Form 10-K for the year ended March
31, 1995)
10.12 Option Agreement dated September 20, 1994 between E. Virgil Conway and
the Registrant (incorporated herein by reference to Exhibit 10.21 to
the Registrant's Annual Report on Form 10-K for the year ended March
31, 1995)
10.13 Option Agreement dated September 20, 1994 between Sally
Hernandez-Pinero and the Registrant (incorporated herein by reference
to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the
year ended March 31, 1995)
10.14 Option Agreement dated June 28, 1994 between Glenn C. Davis and the
Registrant (incorporated herein by reference to Exhibit 10.24 to the
Registrant's Annual Report on Form 10-K for the year ended March 31,
1995)
10.15 Option Agreement dated June 28, 1994 between Stanley Goldstein and the
Registrant (incorporated herein by reference to Exhibit 10.25 to the
Registrant's Annual Report on Form 10-K for the year ended March 31,
1995)
10.16 Option Agreement dated June 28, 1994 between Donald B. Louria, M.D. and
the Registrant (incorporated herein by reference to Exhibit 10.27 to
the Registrant's Annual Report on Form 10-K for the year ended March
31, 1995)
10.17 Agreement and Plan of Merger dated as of March 14, 1997 among
Accuhealth, Inc., ACH Acquiring Corp., ProHealthCare, Inc.,
ProHealthCare Infusion Services, Inc., Thomas Laurita and David Brian
Cohen.
10.18 Agreement and Plan of Merger, dated as of April 9, 1998, among
Accuhealth, Inc., HHI Acquiring Corp., Healix HealthCare, Inc., Linda
Barkan, Chaim Charytan, Mary Comerford, Jeffrey S. Freed, Donald
Giaquinto, Robert Giaquinto, Robert Labra, Kathleen P. O'Brien McDonald
and Arthur Schwacke, Jr. (incorporated by reference to Exhibit 2.1 to
the Registrant's Current Report on Form 8-K, dated April 30, 1998).
24
<PAGE>
10.19 Registration Rights Agreement between Accuhealth, Inc. and Robert M.
GiaQunito.
10.20 Registration Rights Agreement between Accuhealth, Inc. and Jeffrey S.
Freed, M.D.
10.21 Registration Rights Agreement between Accuhealth, Inc. and Linda
Barkan.
10.22 Employment Agreement dated April 1, 1998 between Dr. Jeffrey S. Freed
and the Registrant
10.23 Employment Agreement dated April 1, 1998 between Mary Comerford and the
Registrant
11 Statement re Computation of Per-Share Earnings
15.1 Letter from Ernst & Young LLP, dated April 23, 1998, regarding change
in certifying accountant (incorporated by reference to Exhibit 16 to
the Registrant's Current Report on Form 8-K/A, dated April 23, 1998).
21 Subsidiaries of the Registrant
27 Article 5 - Financial Data Schedule
25
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ACCUHEALTH, INC.
Date: July 14, 1999 By: /s/ Glenn C. Davis
-----------------------------------------
Glenn C. Davis
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: July 14, 1999 By: /s/ Stanley Goldstein
-----------------------------------------
Stanley Goldstein
Chairman of the Board of Directors
Date: July 14, 1999 By: /s/ Glenn C. Davis
-----------------------------------------
Glenn C. Davis
Chief Executive Officer,
President and Director
Date: July 14, 1999 By: /s/ E. Virgil Conway
-----------------------------------------
E. Virgil Conway,
Director
Date: July 14, 1999 By: /s/ Jeffrey S. Freed, M.D.
-----------------------------------------
Jeffrey S. Freed, M.D.
Director
Date: July 14, 1999 By: /s/ Howard C. Landis
-----------------------------------------
Howard C. Landis
Director
Date: July 14, 1999 By: /s/ Donald B. Louria, M.D.
-----------------------------------------
Donald B. Louria, M.D.
Director
Date: July 14, 1999 By: /s/ Sally Hernandez-Pinero
-----------------------------------------
Sally Hernandez-Pinero, Director
Date: July 14, 1999 By: /s/ Corbett A. Price
-----------------------------------------
Corbett A. Price, Director
26
<PAGE>
<TABLE>
<CAPTION>
ACCUHEALTH, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Page
----
<S> <C>
Reports of Independent Auditors............................................................ F-2,3
Consolidated Balance Sheets at March 31, 1999 and March 31, 1998........................... F-4
Consolidated Statements of Operations and comprehensive income (loss) for the Years
Ended March 31, 1999, 1998 and 1997.................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficiency) for the Years
Ended March 31, 1999, 1998 and 1997.................................................... F-6
Consolidated Statements of Cash Flows for the Years
Ended March 31, 1999, 1998 and 1997.................................................... F-7-8
Notes to Consolidated Financial Statements................................................. F-9-23
Financial Statement Schedules
II. Valuation and Qualifying Accounts..................................................... F-24
</TABLE>
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.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Accuhealth, Inc.
We have audited the accompanying consolidated balance sheets of Accuhealth, Inc.
and subsidiaries as of March 31, 1999 and 1998, and the related consolidated
statements of operations and comprehensive loss, stockholders' (deficiency)
equity and cash flows for the years then ended. Our audit also included the
financial statement schedule listed in index at item 14(a). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Accuhealth, Inc. and
subsidiaries as of March 31, 1999 and 1998, and the results of their operations
and their cash flows for the years then ended 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.
We previously audited and reported on the consolidated statements of operations
and cash flows of Healix Healthcare, Inc., and subsidiaries for the year ended
September 30, 1996, prior to their restatement for the fiscal 1999 pooling of
interests. The contribution of Healix Healthcare, Inc. and subsidiaries to total
assets, revenues and net loss represented 32 percent, 608 percent, of the fiscal
1997 respective restated totals. Separate consolidated financial statements of
Accuhealth, Inc. and subsidiaries included in the fiscal 1997 restated
consolidated statements of operations and cash flows were audited and reported
on separately by other auditors. We also have audited the combination of the
accompanying consolidated statements of operations and cash flows for the year
ended March 31, 1997, after restatement for the fiscal 1999 pooling of
interests; in our opinion, such consolidated statements have been properly
combined on the basis described in Note 1 of notes to consolidated financial
statements.
July 9, 1999
MARCUM & KLIEGMAN LLP
New York, New York
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Accuhealth, Inc.
We have audited the accompanying consolidated balance sheet of Accuhealth, Inc.
and subsidiaries as of March 31, 1997 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the two 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 the consolidated results
of their operations and their cash flows for each of the two 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.
ERNST & YOUNG LLP
New York, New York
June 16, 1997
F-3
<PAGE>
<TABLE>
<CAPTION>
ACCUHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except shares and per share data)
March 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash ......................................................................... $ 85 $ 382
Marketable securities ........................................................ 2,372 --
Accounts receivable, less allowance for doubtful accounts of
$1,615 in 1999 and $516 in 1998 ............................................ 14,499 10,221
Inventories .................................................................. 1,653 1,770
Prepaid expenses and other current assets .................................... 267 374
-------- --------
Total Current Assets ......................................................... 18,876 12,747
Revenue producing equipment, net ................................................ 901 493
Fixed assets, net ............................................................... 2,100 2,051
Goodwill, net ................................................................... -- 1,387
Other ........................................................................... 93 554
-------- --------
Total Assets ................................................................. 21,970 17,232
======== ========
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
Current Liabilities:
Notes payable - revolving credit facility .................................... 7,765 5,354
Current portion of notes payable - other ..................................... 857 925
Margin payable ............................................................... 1,281 --
Accounts payable ............................................................. 5,517 5,052
Accrued expenses and other current liabilities ............................... 2,245 1,660
Current portion of capital lease - Facility .................................. 232 107
Current portion of other capital lease obligations ........................... 430 177
Deferred Income Taxes ........................................................ -- 90
-------- --------
Total Current Liabilities ................................................ 18,327 13,365
12% Subordinated Debentures ..................................................... 6,250 --
Notes payable - term loan ....................................................... 750 500
Notes payable - other, less current portion ..................................... 109 510
Capital lease - Facility, less current portion .................................. -- 232
Other capital lease obligations, less current portion ........................... 388 245
-------- --------
Total Liabilities ........................................................ 25,824 14,852
Commitments and Contingencies (See Notes 9 and 11)
Stockholders' (Deficiency) Equity:
Preferred Stock, $.01 par value: authorized 3,650,000 shares; no
shares issued and outstanding
Preferred stock, $.01 par value; 6% cumulative convertible, $213
and $2,754 liquidation preference in 1999 and 1998, respectively,
authorized 1,350,000 shares; issued and outstanding 105,000 shares
(1999) and 1,350,000 shares (1998) ......................................... 1 14
Common stock $0.1 par value; authorized 15,000,000 shares;
5,127,593 (1999) and 3,597,972 (1998) shares issued and
outstanding ................................................................ 51 36
Additional paid-in capital ................................................... 7,606 7,385
Accumulated other comprehensive loss ......................................... (42) --
Accumulated deficit .......................................................... (10,846) (4,431)
-------- --------
(3,230) 3,004
Less treasury stock (308,004 shares) at cost ................................. (624) (624)
-------- --------
Total Stockholders' (Deficiency) Equity ......................................... (3,854) 2,380
-------- --------
Total Liabilities and Stockholders' (Deficiency) Equity ......................... $ 21,970 $ 17,232
======== ========
See notes to consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Amounts in thousands, except shares and per share data)
-----------------------------------------
YEARS ENDED MARCH 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales ............................................................. $ 38,127 $ 31,673 $ 24,694
Cost of goods sold .................................................... 24,065 16,924 13,565
----------- ----------- -----------
Gross profit ...................................................... 14,062 14,749 11,129
Selling, general and administrative expenses .......................... 17,913 14,105 10,724
Merger related costs .................................................. -- 295 --
----------- ----------- -----------
Operating income (loss) ............................................... (3,851) 349 405
Other Income Expense:
Net interest expense .............................................. (1,627) (814) (631)
Miscellaneous income .............................................. 12 93 53
Equity in Loss from unconsolidated subsidiary ..................... -- -- (100)
----------- ----------- -----------
Income (Loss) Before Income Taxes ..................................... (5,466) (372) (273)
Income Tax (Expense) Benefit .......................................... 90 (104) 112
----------- ----------- -----------
Loss before Extraordinary Item ........................................ (5,376) (476) (161)
Extraordinary Item -- forgiveness of debt net of
applicable income tax of $13 ...................................... -- -- 136
Net loss .............................................................. (5,376) (476) (25)
Redeemable preferred stock dividends and accretion .................... (87) (162) (162)
----------- ----------- -----------
Net loss applicable to common stockholders ............................ $ (5,463) $ (638) $ (187)
=========== =========== ===========
Weighted average common stock outstanding:
Basic ............................................................. 4,417,711 3,243,192 2,889,273
Diluted ........................................................... 4,417,711 3,243,192 2,889,273
Earning (loss) per share data:
Basic ............................................................. ($1.22) ($0.20) ($0.06)
Diluted ........................................................... ($1.22) ($0.20) ($0.06)
Net loss .......................................................... $ (5,376) $ (476) $ (25)
Other Comprehensive loss, net of tax:
Unrealized loss on marketable securities, net of tax benefits of $1 $ (42) $ 0 $ 0
----------- ----------- -----------
Total comprehensive loss ....................................... $ (5,418) $ (476) $ (25)
=========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
ACCUHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIENCY) EQUITY
YEARS ENDED MARCH 31, 1999, 1998, 1997
(Amounts in thousands, except shares and per share data)
Preferred Stock Common Stock Treasury Stock
---------------------------------------------------------------------------
Other
$.01 $.01 Additional Compre-
Number of Par Number of Par Paid-In Retained Number hensive
Shares Value Shares Value Capital Earnings of Shares Cost (loss) Total
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1996,
as previously reported............ 1,350,000 $ 14 1,630,233 $ 16 $ 6,008 $ (4,119) (308,004) $(624) $ $1,294
Shares issued to Healix in
connection with pooling
of interests...................... 1,488,850 14 509 655 1,179
---------------------------------------------------------------------------------------------
Balance, March 31, 1998, as restated. 1,350,000 14 3,119,083 30 6,517 (3,464) (308,004) (624) 2,473
Preferred stock dividends paid with
common stock - July 8, 1996....... 52,856 1 80 (81) -0-
Preferred stock dividends paid with
common stock - April 11, 1997..... 104,509 1 80 (81) -0-
Distributions to Healix stockholders. (142) (142)
Net loss............................. (25) (25)
---------------------------------------------------------------------------------------------
Balance, March 31, 1997.............. 1,350,000 14 3,276,448 32 6,677 (3,793) (308,004) (624) 2,306
Healix equity adjustments before the
acquisition....................... 110 110
Issuance of common stock in connection
with the merger................... 300,000 3 555 558
Preferred stock dividends paid with
common stock - July 25, 1997...... 45,556 1 80 (81) -0-
Preferred stock dividends paid with
common stock - January, 1998...... 35,354 81 (81) -0-
Redemption of shares................. (59,386) (118) (118)
Net loss............................. (476) (476)
---------------------------------------------------------------------------------------------
Balance - March 31, 1998............. 1,350,000 14 3,597,972 36 7,385 (4,431) (308,004) (624) 2,380
Healix loss for six months ended
March 31, 1998 (unaudited)........ (952) (952)
Preferred stock dividends paid with
common stock - June 1, 1998....... 46,526 1 80 (81)
Preferred stock conversion
into common stock ................ (1,245,000) (13) 1,431,750 14 (1)
Conversion of debt to common stock... 46,957 136 136
Preferred stock dividends paid with
common stock - December 1998...... 4,388 6 (6) 0
Unrealized loss on
marketable securities............. (42) (42)
Net Loss............................. (5,376) (5,376)
Balance, March 31, 1999.............. 105,000 $ 1 5,127,593 $ 51 $ 7,606 $(10,846) (308,004) $(624) $ (42)$(3,854)
=============================================================================================
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
ACCUHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
YEARS ENDED MARCH 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ....................................................................... $(5,376) $ (476) $ (25)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes ...................................................... (90) 106 3
Amortization of financing costs ............................................ 12 8
Realized gain on sales of marketable securities............................. (12) -- --
Depreciation and amortization .............................................. 775 692 416
Write off of goodwill ...................................................... 1,305 -- --
Changes in operating assets and liabilities:
Accounts receivable ..................................................... (3,901) (2,134) (1,777)
Inventories ............................................................. (184) (167) (274)
Prepaid expenses and other current assets ............................... 29 19 (239)
Other assets ............................................................ 436 (222) (147)
Deferred costs .......................................................... -- (121) (90)
Accounts payable ........................................................ 131 1,049 1,134
Accrued expenses and other current liabilities .......................... 91 275 (250)
------- ------- -------
Cash used in operating activities ....................................... (6,796) (967) (1,241)
------- ------- -------
INVESTING ACTIVITIES
Acquisition of goodwill .................................................... -- (32) (213)
Purchases of marketable securities ......................................... (4,382) -- --
Proceeds from sales of marketable securities ............................... 1,980 -- --
Purchases of fixed assets and revenue producing equipment .................. (83) (204) (238)
Cash acquired in connection with acquisition ............................... -- 22 --
Proceeds from margin payable ............................................... 1,281 -- --
------- ------- -------
Cash used in investing activities .......................................... (1,204) (214) (451)
------- ------- -------
FINANCING ACTIVITIES
Proceeds from issuance of capital stock .................................... -- 33 55
Proceeds from sale of subordinated debentures .............................. 6,250 -- --
Proceeds from note payable - revolving credit facility, net of payments .... 3,028 2,208 928
Proceed from notes payable - term loan ..................................... -- -- 500
Proceeds from (repayment of) notes payable, other, net ..................... (497) (246) 827
Principal payments on capital lease - facility ............................. (71) (54) (89)
Payments on other capital lease obligations ................................ (874) (461) (347)
Distribution to stockholders ............................................... -- -- (142)
Repayment of stockholders loan ............................................. -- -- (149)
------- ------- -------
Cash provided by financing activities ...................................... 7,836 1,480 1,583
------- ------- -------
Net increase (decrease) in cash ............................................ (164) 299 (109)
Net changes in cash from October 1, 1997 to
March 31, 1998 of Healix (unaudited) ..................................... (133) -- --
Cash at beginning of period ................................................ 382 83 192
------- ------- -------
Cash at end of period ...................................................... $ 85 $ 382 $ 83
======= ======= =======
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
ACCUHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
YEARS ENDED MARCH 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid .............................................................. $ 1,137 $ 803 $ 616
======= ======= =======
Income taxes paid .......................................................... $ 37 $ 41 $ 80
======= ======= =======
Noncash investing and financing activities:
Additions to capital leases and notes payable .............................. $ 774 $ 820 $ 363
Goodwill recorded pursuant to acquisition .................................. -- 1,208 --
Redemption of common shares ................................................ -- (119) --
Conversion of liabilities to common stock .................................. 135 78 --
Conversion of accounts payable to notes payable ............................ 600 350 --
Write-off of property and equipment ........................................ -- 12 --
Issuance of common stock in exchange for assets acquired ................... -- -- 55
Conversion of Preferred Stock to Common Stock .............................. 13 -- --
Unrealized Losses on Marketable Securities ................................. 42 -- --
The Company acquired the following noncash assets and
liabilities in connection with its acquisition of ProHealthCare
Infusion Services Inc. during fiscal year ended March 31, 1998:
Accounts Receivable......................................................... $ 658
Inventory................................................................... 63
Property and Equipment...................................................... 65
Accounts Payable............................................................ (902)
-------
Total................................................................ $ (116)
=======
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except shares and per share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Accuhealth Inc., ("Accuhealth") 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 PRESENTATION
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.
On July 1, 1997, the Company consummated its acquisition of
ProHealthCare Infusion Services, Inc. ("PHCIS") pursuant to an
agreement and plan of merger, dated as of March 14, 1997, by and among
the Company, ACH Acquiring Corp., a New Jersey corporation and a
subsidiary of the Company, PHCIS, ProHealthCare, Inc., a Delaware
corporation and the parent of PHCIS, Thomas Laurita and David Brian
Cohen (the "PHCIS Merger Agreement"). The Company has determined that
the initial merger consideration of 300,000 shares of Company Common
Stock will be decreased by 59,386 shares of Company Common Stock
pursuant to certain merger consideration adjustment provisions of the
PHCIS Merger Agreement. The aggregate purchase price for the
acquisition of ProHealthCare, Inc. stock was $1,208 which includes the
cost of the acquisition, direct costs and assumption of certain
liabilities of PHCIS. The acquisition has been accounted for by the
purchase method of accounting. Pro forma disclosure information in
connection with this transaction is not included because it is
considered immaterial as it relates to the Company's financial
statements in accordance with the regulations of the Securities and
Exchange Commission.
During the fiscal year ended March 31, 1999, management determined that
the goodwill resulting from the PHCIS Acquisition was impaired and
warranted write off of the remaining balance. The impairment resulted
from a severe decline in revenue, primarily caused by the filing for
liquidation of HIP of New Jersey in February 1999.
On April 9, 1998, Accuhealth completed a merger with Helix Healthcare,
Inc. ("Healix") whereby 1,488,850 shares of Accuhealth's common stock
were exchanged for all of the outstanding common stock of Healix. Each
share of Healix common stock was exchanged for .740721 shares of
Accuhealth's common stock. The merger constituted a tax-free
organization and has been accounted for as a pooling of interests.
Accordingly, all prior period consolidated financial statements
presented have been restated to include the combined results of
operations, financial position and cash flows of Healix as though it
had always been a part of the Company.
Prior to the merger, Healix had a fiscal year end of September 30. The
accompanying consolidated financial statements for the years ended
March 31, 1998 and 1997 reflect restated numbers which combine
financial statements for the twelve months ended March 31, 1998 and
1997 of Accuhealth and September 30, 1997 and 1996 of Healix,
respectively.
Amounts shown in the consolidated statements of operations differ from
those previously reported to stockholders due to a subsequent
pooling-of-interests transaction. A reconciliation of sales and net
income is as follows:
F-9
<PAGE>
<TABLE>
<CAPTION>
ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except shares and per share data)
Years ended March 31
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Net Sales:
The Company, as previously reported................ $ 18,603 $ 16,369
Healix (pooled company) for twelve months ended
September 30, 1997 and 1996...................... $ 13,070 $ 8,325
--------- ---------
$ 31,673 $ 24,694
========= =========
Net income (loss):
The Company as previously reported................. $ (206) $ 127
Healix (pooled company) for twelve months ended
September 30, 1997 and 1996...................... $ (271) $ (152)
--------- ---------
$ (477) $ (25)
========= =========
</TABLE>
MANAGEMENT PLANS
Management has taken action and is formulating additional plans to
strengthen the Company's working capital position and generate
sufficient cash to meet its operating needs through March 31, 2000 and
beyond. Among the actions taken are restructuring of the reimbursement
and customer service departments to enhance productivity and collection
efforts, obtaining better terms and financing from vendors and reducing
corporate expenses. No assurances can be made that management will be
successful in achieving its plans.
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.
GOODWILL
Goodwill in connection with the acquisitions is being amortized on a
straight-line basis over a fifteen-year period. Amortization of
goodwill charged to operations for the years ended March 31, 1999 and
March 31, 1998 amounted to $96 and $56, respectively. In addition,
$1,305 of unamortized goodwill has been written off during the last
quarter ended March 31, 1999 as management determined such goodwill was
impaired in accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long lived Assets and for
long lived Assets to be disposed of." The amount of goodwill impairment
was measured based on the projected discounted future operating cash
flows compared to the carrying value of goodwill.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" requires that the Company disclose
estimated fair values of financial instruments. The carrying amounts
reported in the statement of financial position for current assets and
current liabilities qualifying as financial instruments is a reasonable
estimate of fair value. The fair value of long-term debt is estimated
to approximate fair market value based on the current rates offered to
the Company for debt of the same remaining maturities.
F-10
<PAGE>
ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except shares and per share data)
MERGER RELATED COSTS
Merger transaction costs related to the Healix merger consists of fees
for attorneys, accountants, financial printing and other expenses
directly related to the merger. The Company recorded expenses incurred
of $295 related to this merger in the period ended March 31, 1998.
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.
EARNINGS PER SHARE
The Company calculated earnings per share in accordance with the
provision of statements of accounting standards No. 128 Earnings per
Share ("SFAS No. 128"). SFAS No. 128 eliminates the presentation of
primary and fully diluted earnings per share ("EPS") and requires
presentation of basic and diluted EPS. Basic EPS is computed by
dividing income (loss) available to common stockholders by the
weighted-average number of common shares outstanding for the year.
Diluted EPS is computed by dividing the weighted average number of
common shares and common stock equivalents outstanding during the year.
For the years ended March 31, 1998 and 1997, weighted average number of
common shares outstanding throughout the periods includes shares issued
by Accuhealth as a result of the Healix merger. Common stock
equivalents have been excluded from the weighted-average shares for
1999, 1998 and 1997, as inclusion is anti-dilutive. Potentially diluted
securities, which consist of convertible debentures, stock options and
warrants, may be potentially diluted in the future. All prior period
EPS data has been restated to conform to the new pronouncement.
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
Statements of Accounting Standards 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 AND 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, 1999 and 1998, the Company had no cash equivalents.
The Company has cash balances in banks and investments in a financial
institution in excess of the maximum amount insured by the FDIC and
SIPC as of March 31, 1999.
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.
F-11
<PAGE>
ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except shares and per share data)
LONG-LIVED ASSETS
In 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed of." In accordance with
SFAS No. 121, the carrying values of long-lived assets are periodically
reviewed by the Company and impairments are recognized if the expected
future operating non-discounted cash flows derived from an asset are
less than its carrying value.
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, 1999 and 1998, gross
Medicare and Medicaid receivables aggregated $5,151 and $3,601,
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 14%, 15% and 19%
of the Company's net sales for the years ended March 31, 1999, 1998 and
1997, respectively. At March 31, 1999, 1998 and 1997, 5%, 6% and 13%,
respectively, of net accounts receivable was due from this customer.
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 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.
COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of
comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial
statements.
F-12
<PAGE>
ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except shares and per share data)
BUSINESS SEGMENT
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 ("SFAS No. 131"), "Disclosures About Segments of an
Enterprise and Related Information", which supersedes SFAS No. 14,
"Financial Reporting for Segments of A Business Enterprise." SFAS No.
131 establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in
interim financial statements regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. The company has determined that under SFAS No.
131, it operates in one segment of home health care services. The
Company's customers and operations are within the United States.
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, Statement of Position ("SOP") 98-5, "Reporting on the
Costs of Start-Up Activities" was issued. This SOP provides guidance on
the financial reporting of start-up costs and organization costs. It
requires the costs of start-up activities and organization costs to be
expensed as incurred. The SOP is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company does not
expect that the adoption of SOP No. 98-5 will have a material impact on
its financial statements.
In June 1998, the Financial Accounting Standards Board issued statement
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is required to be adopted in years beginning after
June 15, 1999. Management 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.
F-13
<PAGE>
ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except shares and per share data)
2. MARKETABLE SECURITIES/MARGIN PAYABLE
Companies are required to classify each of their investments into one
of three categories, with different accounting for each category. At
March 31, 1999, management has classified all their equity securities
as available-for-sale securities, which are reported at fair market
value, with unrealized gains and losses reported as other comprehensive
income. Gains or losses on the sale of securities are recognized on a
specific identification basis. The Company's investment in marketable
securities for the year ended March 31, 1999 is summarized as follows:
Amortized Unrealized Gain Fair Market
Cost (loss) Value
--------- -------- ----------
Balance - March 31, 1998....... $ 0 $ 0 $ 0
Purchases...................... $ 4,382 -- $ 4,382
Sales.......................... (1,980) -- (1,980)
Realized gain.................. 12 -- 12
Unrealized loss................ -- (42) (42)
--------- -------- ----------
Balance - March 31, 1999....... $ 2,414 $ (42) $ 2,372
========= ======== ==========
The Company may purchase up to 50% of its investments on margin
advances by its broker. Interest, which is payable at 7% amounted to
$31 during the year ended March 31, 1999.
3. REVENUE PRODUCING EQUIPMENT, NET
The following summarizes the Company's investment in revenue producing
equipment:
<TABLE>
<CAPTION>
March 31,
----------------------- Estimated
1999 1998 Useful Lives
------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Revenue producing
Equipment primarily under capital lease... $ 3,154 $ 2,145 3-5 years
Less accumulated depreciation and
amortization.............................. 2,253 1,652
-------- --------
$ 901 $ 493
======== ========
4. FIXED ASSETS
March 31,
----------------------- Estimated
1999 1998 Useful Lives
------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Land under capital lease................... $ 136 $ 136
Building under capital lease............... 1,226 1,226 40 years
Equipment, furniture and fixtures.......... 1,265 1,219 5-10 years
Leasehold improvements..................... 4 4 10-15 years
Equipment, furniture and fixture under
capital leases........................... 804 681 5-10 years
Building improvements...................... 337 328 40 years
-------- --------
3,772 3,594
Less accumulated depreciation and
amortization, including $651 in 1999
and $578 in 1998 attributable to assets
under capital leases..................... 1,672 1,543
-------- --------
$ 2,100 $ 2,051
======== ========
</TABLE>
F-14
<PAGE>
ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except shares and per share data)
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) The Company converted a portion of its accounts payable into a notes
payable to trade creditors in the principal amount aggregating $600 and
$1,699 during the years ended March 31, 1999 and 1998, respectively..
These notes are payable in monthly installments of approximately $2 to
$8 with interest rates ranging from 8.5% to 14.5%. The outstanding
principal balance at March 31, 1999 and 1998 were $916 and $1,379,
respectively.
(B) 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,
1999 and March 31, 1998 of $50 and $56, respectively, is payable in
monthly installments of $2 which includes interest at 10% per annum. A
final balloon payment of $18 is due on March 1, 2000.
The weighted average interest rate for notes payable-other was 11.3%,
11.7%, and 12.51% for the years ended March 31, 1999, 1998 and 1997,
respectively. The average amount of notes payable-other outstanding for
the years ended March 31, 1999 and 1998 was approximately $1,159 and
$529 respectively. Notes payable other are principally short-term in
nature. As such, fair value approximates the carrying value.
Future minimum cash payments under notes payable - other and in the
aggregate are as follows:
Fiscal Year Amount
----------- --------
2000 $ 857
2001 109
--------
$ 966
========
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 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 12).
F-15
<PAGE>
ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except shares and per share data)
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 (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 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
12). Commencing April 28, 1996, the Company was required to pay a
facility fee of $35 per annum, which Amendment No. 2 increased to $40
per annum.
Amendment No. 2 also provided a $500 term loan to the Company due on
April 1, 1998 with interest payable monthly at a rate of prime plus 5%.
Effective April 3, 1998, the Company agreed to an amendment of the Loan
and Security Agreement. The amendment extended the agreement through
April 1, 2000 and allows the Company to borrow, under certain
conditions and terms, up to $9,000 under a revolving loan agreement at
an interest rate of prime (prime at March 31, 1999 was 7.75%) plus 1
1/2%, as well as an overdraft line of $1,000 at prime plus 3%. The
amendment also increased the term loan available to the Company to
$750. In addition, the Company granted Rosenthal warrants to purchase
50,000 shares of the Company's common stock (see Note 12).
In connection with the RFE Investment Partners L.P. financing approval
in July 1998 (see Note 6), the Company granted Rosenthal warrants to
purchase 10,000 shares of the Company's common stock (See Note 12).
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, 1999, 1998 and 1997 was 10.8%, 13.1%
and 13.14%, respectively. The amount outstanding at March 31, 1999 and
1998 was $8,515, and $5,854 respectively.
6. 12% SUBORDINATED DEBENTURES
On July 14, 1998 the Company entered into a Note Purchase Agreement
with RFE Investment Partners L.P., ("RFE") whereby RFE purchased $5,000
of the Company's 12% Subordinated Debentures. On August 21, 1998,
Amendment No. 1 to the Note Purchase Agreement was executed, whereby
Sterling/Carl Marks Capital, Inc. was added as an "Additional
Purchaser". Sterling/Carl Marks Capital, Inc. purchased an additional
$750 of 12% Subordinated Debentures. On October 26, 1998, Amendment No.
2 to the Note Purchase Agreement was executed, whereby Austin Marxe was
added as an "Additional Purchaser". Austin Marxe purchase an additional
$500 of 12% Subordinated Debentures.
Interest on the debentures is payable quarterly, in arrears. The
Company may, at its sole discretion, accrue up to six quarterly
interest payments, which would otherwise be due, until the maturity
date. Such accrued interest payments shall bear interest at the same
rate and are payable on the same terms as original interest on the
debentures.
Maturity dates on the above debentures are July 14, August 26, and
October 26, 2003 for RFE, Sterling/Carl Marks Capital, Inc. and Austin
Marxe, respectively.
At the option of the note holders, the notes can be converted into
shares of common stock equal to the quotient obtained by dividing the
aggregate principal amount by the Conversion Price, as defined. The
initial Conversion Price is $2.875 and the Conversion Price is subject
to adjustment as set forth in the agreement. If a Conversion Event, as
defined, occurs, the notes will be mandatory converted into the shares
of common stock.
F-16
<PAGE>
ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except shares and per share data)
In addition, on the maturity date, the Company is required to deliver a
Common Stock Warrant, as defined, to each of the holders with an
exercise price per share equal to $0.01, to purchase certain shares of
the Company's common stock. The number of shares of Common Stock to be
purchased will be computed based upon a pre-determined formula as
prescribed in the agreement.
7. PROVISION FOR UNCOLLECTIBLE AMOUNT DUE FROM MAJOR CUSTOMER
Since December 1996, the Company has been providing services to HIP
Health Plan of New Jersey ("HIP"). In October 1997, HIP entered into a
contract with Pinnacle Health Enterprises ("PHE"), a subsidiary of PHP
Health Care Corporation (PHP), wherein PHE would manage the medical
risk and provide all the health care services and supplies to HIP
members and pay claims and contracts with providers on behalf of HIP.
HIP requested that the Company coordinate its HIP network management
and provider services and forward its invoices to PHE for processing
and payment.
On November 19, 1998, PHP, including PHE, filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. This action followed HIP's
announced intention to terminate its Health Services Agreement with
PHE.
In December 1998, the Company received $795, representing 30% of open
claims through November 20, 1998 and increased its allowance for
doubtful accounts for the remaining balance of $1.1 million. This was
in concert with the HIP Rehabilitation Plan implemented by the State of
New Jersey.
8. 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 expire
through March 31, 2004.
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 principal amount of its 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 $228 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 3).
At the end of the term of the lease, the Company has communicated its
intention to purchase the Facility for one dollar pursuant to the terms
of the capital lease. 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.
In lieu of rent the Company pays principal on the Bonds in quarterly
installments of $18, plus interest at the rate of prime (prime rate at
March 31, 1999 was 7.75%) plus 1%. A final balloon payment of $232 plus
interest thereon was 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 Company is currently in default of this balloon payment.
The balloon payment of $232 is presently to be paid pursuant to a
financing arrangement with Rosenthal, whereby Rosenthal will lend the
Company $250 to be paid in six equal installments, plus interest at the
rate of prime, plus 4%, commencing on November 30, 1999. If the
Facility is sold prior to October 30, 1999, then the outstanding
principal, plus interest, is due at closing.
F-17
<PAGE>
ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except shares and per share data)
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 and computers under
capital lease agreements which extend through March 31, 2004 with
interest rates ranging from 6.50% to 16.71%.
Future minimum cash payments under capital leases with initial or
remaining noncancellable lease terms in excess of one year at March 31,
1999 are as follows:
Capital Lease Other Capital
Fiscal Year Facility Leases
----------- ------------ ------------
2000....................................... $ 232 $ 509
2001....................................... -- 315
2002....................................... -- 77
2003....................................... -- 30
2004....................................... -- 15
------------ ------------
232 946
Less interest.............................. -- 128
------------ ------------
Present value of net minimum obligations... 232 818
Less current portion....................... 232 430
------------ ------------
Long term obligations at March 31, 1999.... $ 0 $ 388
============ ============
9. CONTINGENCIES
The Company is involved in litigation through the normal course of
business. The Company believes that the resolution of these matters
will not have a material adverse effect on the financial position of
the Company.
10. 6% 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 (the "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. On
October 10, 1998, 1,245,000 shares were converted in common shares at a
15% premium per an agreement with the Preferred stock holders.
Accordingly, 1,431,750 shares of common stock were issued, leaving
105,000 shares of Preferred Stock outstanding. 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.
The Company is obligated to pay annual dividends of $.12 per share on
its 105,000 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.
F-18
<PAGE>
ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except shares and per share data)
The June 1, 1997 dividend was paid out in 45,556 shares of common stock
on July 18, 1997. The December 1, 1997 dividend was paid out in 35,354
shares of common stock on January 15, 1998. The June 1, 1998 dividend
was paid out in 46,526 shares of common stock on December 17, 1998. The
December 1, 1998 dividend will be paid out in 4,388 shares of common
stock in 1999.
11. COMMITMENTS
OPERATING LEASES
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.
RELATED PARTY TRANSACTIONS
A director has a consulting arrangement with the Company whereby he
receives a consulting fee of $4 per month and an office expense
reimbursement of $1 per month.
The Company's president/chief executive officer has a loan payable to
the Company in the amount of $100 due on demand bearing interest at 8%
per year and is collateralized by 50,000 shares of the Company's
preferred stock.
EMPLOYMENT AGREEMENT
The Company's President and Chief Executive Officer is entitled to an
annual salary at a rate of $250 and 25,000 shares of the Company's
common stock. At the Company's Board of Directors meeting on June 25,
1998, the Company renewed its employment agreement with its President
and Chief Executive Officer through May 2, 2001. Under the employment
agreement, the Company's President and Chief Executive Officer is
entitled to an annual salary at a rate of $275 and 62,500 restricted
shares of the Company's common stock.
In connection with the Healix merger, the Company entered into
employment agreements with two officers. Under these agreements, the
officers are entitled to an aggregate annual salary of $240 and 110,000
restricted shares of common stock.
F-19
<PAGE>
ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except shares and per share data)
12. STOCK OPTIONS AND WARRANTS
In September 1988, the Company adopted, and in September 1994 amended,
the 1988 Stock Option Plan ("Stock Option Plan"). In 1999, the Company
adopted a 1998 stock option plan, whereby all options granted under the
1988 Option Plan will be rolled over to the 1998 stock option plan.
Under the plan, an aggregate maximum of 2,000,000 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.
During the years ended March 31, 1999 and 1998, the Board of Directors
granted a total of 152,500 and 130,000 options, respectively, to
purchase shares of the Company's common stock to employees with
exercise prices ranging from $1.75 to $2.875 per share. These options
are exercisable in four equal annual increments.
Weighted
Average
Exercise Price
Shares Per Share
------ ---------
Outstanding at March 31, 1997............... 269,500 $2.03
Granted..................................... 130,000 2.38
Cancelled................................... (28,250) (1.99)
---------- -----
Outstanding at March 31, 1998............... 371,250 $2.22
Granted..................................... 152,500 $2.88
Cancelled................................... (4,500) (1.95)
---------- -----
Outstanding at March 31, 1999............... 519,250 $2.37
========== =====
Exercisable at March 31, 1997............... 32,500 $2.81
========== =====
Exercisable at March 31, 1998............... 66,450 $2.22
========== =====
Exercisable at March 31, 1999............... 184,800 $2.29
========== =====
F-20
<PAGE>
ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except shares and per share data)
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. There were 16,000 options outstanding as of March 31, 1999.
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. At March 31, 1999 and 1998,
295,000 and 287,500 shares of option are vested, and 0 and 50,000
shares of options were cancelled, respectively. There were 302,500
options outstanding as of March 31, 1999.
In September 1995, separate from options issued under the Stock Option
Plan, the Company granted options to purchase 45,000 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 45,000 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 five years
from the date of issuance.
In October 1996, separate from options issued under the Stock Option
Plan, the Company granted options to purchase 20,000 of the Company's
common shares to employees ("1997 Options"). The options carry an
exercise price of $2.125 and vest over five years from the date of
issuance.
In October 1997, separate from options issued under the Stock Option
Plan, the Company granted options to purchase 40,000 of the Company's
common shares to directors ("1998 Options"). The exercise price of the
1998 options are $2.125, with the shares vesting over five years from
the date of issuance.
During fiscal 1998, separate from options issued under the Stock Option
Plan, the Company granted options to purchase 70,000 of the Company's
common shares to employees ("1998 Options"), with exercise prices
ranging from $2.00 to $2.125. Fifty thousand of these options vest
ratably over 24 months from the date of issuance, with the balance
vesting in four equal increments beginning one year from date of
issuance.
F-21
<PAGE>
ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except shares and per share data)
During fiscal 1999, separate from options issued under the Stock Option
Plan, the Company granted options to purchase 40,000 of the Company's
common shares to directors ("1999 Options"). The exercise price of the
1999 options are $2.875, with the shares vesting over five years from
the date of issuance.
As of March 31, 1999 and 1998, an aggregate 1,147,750 and 1,068,750
shares, respectively, of the Company's common stock are reserved for
issuance under the Stock Option Plan, and the 1990, 1992, 1995, 1996,
1997, 1998 and 1999 options. As of March 31, 1999, 620,733 shares of
such options 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 1999, 1998 and 1997:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------
ASSUMPTION 1999 1998 1997
---------- ---- ---- ----
<S> <C> <C> <C>
Risk-free rate...................................... 5.34% 5.47% 6.2%
Dividend yield...................................... 0% 0% 0%
Volatility factor of the expected market price of
the Company's common stock........................ 1.085 0.949 1.7
Average life........................................ 5 years 5 years 4.9 years
</TABLE>
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,
------------------------------
1999 1998 1997
---- ---- ----
Pro forma net loss.................. ($5,692) ($704) ($244)
Pro forma net loss per share........ ($1.29) ($.22) ($0.85)
The weighted average fair value of options granted during the years
ended March 31, 1999, 1998 and 1997 were $0.86, $1.86 and $1.53,
respectively, for shares granted. The weighted-average remaining
contractual life of options exercisable at March 31, 1999 is 3 years.
The exercise prices range from $1.625 to $4.75 for options outstanding
as of March 31, 1999.
F-22
<PAGE>
ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except shares and per share data)
In April 1994, pursuant to the terms of a Loan and Security Agreement
(see Note 4), 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. During the year ended March 31, 1999, the Company
granted to this financing company two warrants to purchase 50,000 and
10,000 shares of the Company's common stock at a price of $2 and $2.875
per share, respectively, expiring on July 1, 2003. These 60,000 shares
of warrants have been valued at $0.88 per share in records with SFAS
123. As of March 31, 1999, no warrants have been exercised and an
aggregate of 160,000 of the Company's common stock are reserved for
issuance under these warrants.
13. 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 25% 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 $71, $33, and $43 for the years ended March 31,
1999, 1998 and 1997, 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, 1999, no director
had elected to defer any portion of his or her compensation.
14. INCOME TAXES
The Company had net deferred assets and liabilities as follows:
March 31,
------------------------
1999 1998
---------- ---------
Federal, State and Local Net Operating
Loss Carry forwards................... $ 3,075 $ 1,881
Allowance for Doubtful Accounts....... 727 197
Business Credit Carry-forwards........ 52 52
Other................................. 667 67
---------- ---------
Total................................. 4,521 2,197
Less: Valuation Allowance............ (4,521) (2,287)
---------- ---------
Net Deferred Liabilities.............. $ 0 $ (90)
========== =========
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:
F-23
<PAGE>
ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except shares and per share data)
<TABLE>
<CAPTION>
For the years ended
March 31,
--------------------------------------
1999 1998 1997
(Benefit) (Benefit) (Benefit)
Liability Liability Liability
--------- -------- ---------
<S> <C> <C> <C>
Income tax (benefit) at statutory
rate at 34%....................... $ (1,216) $ (162) $ (9)
Permanent Differences -- 6
Other decrease in valuation
allowances related to the
federal portion of continuing
operations...................... (90) -- (49)
Amount attributable and
pooling of interests............ (26) -- (60)
Loss producing no current
benefit......................... 1,216 240 --
--------- -------- ---------
$ (90) $ 104 $ (112)
========= ======== =========
</TABLE>
At March 31, 1999, based upon tax returns filed and to be filed, the
Company has net operating loss carryforwards for U.S. tax purposes of
approximately $6,540 which will begin to expire in 2009 and a general
business tax credit carryforward of approximately $52 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 $7,507 and $7,504, respectively.
The valuation allowances increased $2,234 in 1999, decreased $382 in
1998 and increased $265 in 1996. These amounts are 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.
15. SUBSEQUENT EVENTS
In June 1995, a former employee had 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
alleged that the Company breached plaintiff's employment agreement by
withholding at least $750,000 in commissions allegedly owed to him. As
of June 1998, this matter had thought to have been settled through
court recommended mediation. In May 1999 the former employee petitioned
the court to reopen the matter. The matter is still pending with the
court; however, management believes there will be no material adverse
effect on the Company's consolidated financial position, results of
operations or cash flows.
To enhance productivity and provide technological enhancements, the
Company signed a lease in June, 1999 to rent 37,000 square feet in
Yonkers, New York, where it plans to consolidate its major offices and
warehouses at an average cost of approximately $26,000 per month over
the life of the lease. The initial term is for a period of sixty-five
months with two renewals each for a sixty month period.
F-24
<PAGE>
ACCUHEALTH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Amounts in thousands, except shares and per share data)
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged to
Beginning of Cost and Balance at End
Period Expenses Deductions of Period
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year Ended March 31, 1997 Allowance
for Doubtful Accounts $ 320 $ 279 $ 238 $ 361
Year Ended March 31, 1998 Allowance
for Doubtful Accounts $ 361 $ 336 $ 181 $ 516
Year Ended March 31, 1999 Allowance
for Doubtful Accounts $ 516 $ 3,175 $ 2,076 $ 1,615
</TABLE>
F-25
Exhibit 11
STATEMENT RE COMPUTATION OF PER-SHARE EARNINGS
(Amounts in thousands, except shares and per share data)
<TABLE>
<CAPTION>
Years Ended March 31
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Basic and Diluted
Average common shares outstanding ................. 4,417,711 3,243,192 2,889,273
Net effect of dilutive stock options - based on the
treasury method using average market price ........ -- -- --
----------- ----------- -----------
Total ............................................. 4,417,711 3,243,192 2,889,273
=========== =========== ===========
(Loss) income from continuing operations .......... $ (5,376) $ (477) $ (2,597)
Preferred stock dividends ......................... (87) (162) (162)
----------- ----------- -----------
(Loss) income applicable to common stockholders ... ($5,463) (639) (187)
=========== =========== ===========
</TABLE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
List of subsidiary corporations, each of which is wholly owned by the
Registrant:
NAME STATE OF INCORPORATION
---- ----------------------
Midview Drug, Inc. New York
*Embee Drug, Inc. New York
*Riverview Pharmacy, Inc. New York
Citiview Drug, Inc. New York
*Westview Drug Corp., Inc. New York
*Eastview 87th Street, Inc. New York
*Brittany Chemists, Inc. New York
*Villageview Pharmacy, Inc. New York
Towerview, Inc. New York
Accuhealth Home Care, Inc. Delaware
ProHealth Care Infusion Services, Inc. New Jersey
Healthcare, Inc. and Subsidiaries Delaware
*Inactive
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The financial data schedule contains summary financial information extracted
from March 31, 1999 10-K balance sheet and income statement and is qualified in
its entirety by reference to such financial statements. (Amounts in thousands,
except shares and per share data).
</LEGEND>
<CIK> 0000840401
<NAME> Accuhealth
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Mar-31-1999
<PERIOD-START> Apr-01-1998
<PERIOD-END> Mar-31-1999
<EXCHANGE-RATE> 1
<CASH> 85
<SECURITIES> 2,372
<RECEIVABLES> 16,523
<ALLOWANCES> 2,025
<INVENTORY> 1,653
<CURRENT-ASSETS> 18,876
<PP&E> 6,926
<DEPRECIATION> 3,925
<TOTAL-ASSETS> 21,970
<CURRENT-LIABILITIES> 18,327
<BONDS> 6,250
0
1
<COMMON> 51
<OTHER-SE> (3,906)
<TOTAL-LIABILITY-AND-EQUITY> 21,970
<SALES> 38,127
<TOTAL-REVENUES> 38,127
<CGS> 24,065
<TOTAL-COSTS> 24,065
<OTHER-EXPENSES> 17,913
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,615
<INCOME-PRETAX> (5,376)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,376)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,376)
<EPS-BASIC> (1.22)
<EPS-DILUTED> (1.22)
</TABLE>
