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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended June 30, 1999
Commission file number: 0-21006
INFU-TECH, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3127689
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
374 Starke Road 07072
Carlstadt, N.J. (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (201) 896-0100
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
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 NO /X/
--- ---
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. [X]
As of September 30, 1999 the aggregate market value of the voting stock held by
non-affiliates of the registrant was $2,137,637.
As of September 30, 1999, 3,262,571 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of definitive proxy statement to be filed not later
than October 29, 1999.
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TABLE OF CONTENTS
Part I
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Page
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Item 1. Business............................................... 3-9
Item 2. Properties............................................. 9
Item 3. Legal Proceedings...................................... 10
Item 4. Submission of Matters to a Vote of
Security Holders..................................... 10
Part II
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Item 5. Market Information..................................... 10
Item 6. Selected Consolidated Financial Data................... 11
Item 7. Management's Discussion and Analysis of
Consolidated Financial Condition and Results
of Operations........................................ 12-15
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.................................... 14
Item 8. Consolidated Financial Statements and
Supplementary Data................................... 16
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures.............. 16
Part III ....................................................... 17
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Part IV
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Item 14. Exhibits, Consolidated Financial Statements, Financial
Statement Schedules, and Reports on Form 8-K......... 18
Signatures ............................................................Last Page
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PART I
Item 1. Business.
General
Infu-Tech, Inc. (the "Company") provides infusion therapy (i.e.,
administration of nutrients, antibiotics and other medications either
intravenously or through feeding tubes) and other medical products to patients
in their homes, Infu-Tech's ambulatory IV suites, nursing homes and subacute
care facilities. It was incorporated in 1988 as the continuation of a business
begun by Kuala Healthcare, Inc. ("KUAL") in 1982. KUAL was one of the early
marketers of equipment and nutrients for infusion therapy and was one of the
first to market equipment and formulations for intravenous infusion of nutrients
and medication outside hospitals. On December 31, 1992, the Company completed
the initial public offering of its common stock.
In November 1995, the Company changed its fiscal year to end on June 30
of each year from December 31. Therefore, unless otherwise noted, references to
a year are to the fiscal year-ending June 30.
The Company is organized into two units. The Intravenous Infusion unit
provides a broad range of home, ambulatory and subacute infusion therapy
services, including intravenous total parenteral nutrition therapy, antibiotic
therapy, enteral nutrition therapy, chemotherapy, chronic pain management
therapy, hydration therapy and a variety of other therapies. The Contract
Services unit provides medical products and services, including enteral
nutrition therapy, intravenous infusion therapy, urological products and wound
care products, to residents in long term care facilities.
The Company's sales and marketing efforts are primarily directed
towards Managed Care. The Company has over 70 agreements with Managed Care
companies, which have over 20 million members, to provide infusion therapy and
specialty pharmaceuticals. The agreements with Managed Care companies vary from
preferred provider relationships to being one of several providers.
Reimbursement is generally on a per diem basis.
The Company's continued marketing efforts directed at managed care
companies bring significant opportunity to promote new programs like Disease
Management through existing relationships. The Company is now expanding its
marketing of specialty pharmaceuticals to its customer base. Specialty
pharmaceuticals include Cerezyme for Gauchers patients, Synagis for prevention
of serious lower respiratory diseases in pediatric patients, growth hormone
drugs and other injectable drugs. This product range will expand as the company
signs more agreements with biotechnology companies who are looking for expanded
distribution.
Shortly the company will launch its disease management programs on the
internet. The site named Smartmeds.com at URL www.Smartmeds.com will include an
online pharmacy featuring specialty pharmaceuticals, medical products, health
care and disease management information and patient interaction with medical
professionals.
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The following table sets forth the percentages of the Company's
revenues, by service unit, from the various therapies, products and services.
<TABLE>
<CAPTION>
Year ended Year ended Year ended
June 30, 1997 June 30, 1998 June 30, 1999
------------------------------- ------------------------------- -------------------------------
Intravenous Contract Total Intravenous Contract Total Intravenous Contract Total
Infusion Services Revenues Infusion Services Revenues Infusion Services Revenues
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Enteral Nutrition 3% 71% 20% 4% 77% 19% 5% 75% 21%
Antibiotic 27% - 20% 19% - 15% 17% - 13%
TPN 5% - 4% 6% - 4% 4% - 3%
Immune Globulin 10% - 7% 9% - 7% 13% - 10%
Ceredase/Cerezyme 32% - 24% 41% - 33% 45% - 35%
Wound Care - 1% - - - - - - -
Other 23% 28% 25% 21% 23% 22% 16% 25% 18%
--- --- --- --- --- --- --- --- ---
100% 100% 100% 100% 100% 100% 100% 100% 100%
=== === === === === === === === ===
</TABLE>
Overview of the Home Health Care Industry
One of the major factors contributing to the rapid growth of home
health care has been the use of alternate site health care to contain the rising
costs of health care. Consumers of all types, including governmental bodies,
managed care organizations, insurance companies and private payors are
recognizing the savings that can be realized by offering care in the home as
opposed to institutional settings. In addition, an aging population and
patients' preferences for receiving health care in the comfort of the home,
combined with advances in medical technology making the delivery of
sophisticated treatments in the home a reality, are contributing to the
continued growth of the home health care industry.
Managed care organizations have become important factors in the home
health market and have exerted pricing pressure on the providers of home health
care services. Such pressure has negatively impacted the profit margins of home
health care producers. In addition, as the managed care organizations continue
to grow, they may show a preference to deal only with those home health care
service providers who can offer a comprehensive range of services throughout the
managed care organizations' areas of operations. In response, what once was a
very fragmented health care industry is undergoing a wave of consolidation.
With the growing number of online pharmacies, the opportunity to
attract a broader base of customers looking for medications for chronic diseases
both intravenous as well as orals will help grow the market opportunity.
Intravenous Infusion Therapy
Intravenous infusion therapy principally involves the intravenous
administration of nutrients, antibiotics or other medications to patients in
their homes, in Infu-Tech ambulatory suites, or in Infu-Tech credentialed
subacute facilities, often as a continuation of treatment initiated in the
hospital. The national non-hospital infusion therapy market has grown to over $4
billion since its inception approximately 17 years ago. The Company believes the
primary factors contributing to the rapid growth of the non-hospital infusion
therapy market have been health care cost containment pressures, incentives by
third party payors to use home care, rapid growth of the elderly population and
increased acceptance of home infusion therapy by the medical community and
patients. Additionally, the number of therapies that can be administered safely
outside the hospital has increased significantly in recent years because of
technological innovations such as more sophisticated portable infusion control
devices, implantable injection ports, new vascular access devices and advances
in drug therapy. Consequently, more infections and diseases that would otherwise
have required patients to be hospitalized are now treated without
hospitalization.
Before accepting a patient for infusion therapy, the Company consults
with the physician or clinician and hospital personnel in assessing the
patient's specific medical needs and suitability for home infusion therapy. This
assessment process includes an analysis of
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the patient's physical condition as well as social factors such as the stability
of the patient's home life and the availability of family members or others who
can assist in the administration of the patient's infusion therapy. Once the
patient is accepted for therapy, the Company provides training and education to
the patient and his family or others relating to proper infusion techniques,
care and use of equipment, care of infusion sites, and other aspects of the
patient's infusion therapy. Infusion therapy equipment, consisting primarily of
poles and pumps, is owned or leased by the Company and provided to patients
along with other services.
Throughout the course of treatment, all prescribed drugs and solutions
are delivered directly to the patient's home or to an Infu-Tech credentialed
subacute care facility. In approximately 90% of the cases, the Company's own
pharmacies provide the prescribed drugs, solutions and supplies. Due to
geography, patients who cannot be adequately serviced through a Company-owned
pharmacy are covered by one of six satellite pharmacies. The Company maintains
contact with the patient and the patient's physician in order to monitor and,
when directed by the physician, refine the patient's plan of care. The Company's
nursing and pharmacy services are available on-call 24 hours a day for
consultation, home visits and special prescription needs.
A registered nurse clinical-coordinator follows each case and monitors
the therapy with the patient, the nurses assigned to the case and the patient's
physician. Billing information is coordinated at a central billing department
which bills the appropriate payor and tracks payments.
During 1994, the Company began also to provide infusion therapy
services in ambulatory infusion suites attached to Company pharmacies, where
patients receive infusion therapy on an out-patient basis. In addition, the
Company began arranging with nursing homes and other subacute facilities to have
patients admitted on a short term basis to receive infusion and other subacute
therapies.
Contract Services
Since late 1990, the Contract Services unit has offered an expanding
number of products to patients in nursing homes and other health care
institutions, and it expects to offer additional products, embodying advances in
health care technology, in the future. On the other hand, changes in
reimbursement regulations or interpretations have led the Contract Services unit
to reduce sales of products in the past and may do so in the future.
The Company's contract services involve the distribution of products
and services to residents in long term care facilities. Products and services
are provided through arrangements with the long term care facilities for
specific residents' use. Generally, the Company bills a third party payor,
principally Medicare, on behalf of the individual resident.
Until late 1990, a large majority of the products and services the
Company provided to residents of long term care facilities involved enteral
nutrition therapy. Beginning in late 1990, the Company began marketing other
products to residents of long term care facilities in circumstances in which
these products are eligible for reimbursement under Medicare and other programs.
These include, in addition to enteral feeding, parenteral feeding,
medical/surgical products, wound care products, urological products and other
supplies.
As part of providing its products and services to residents in long
term care facilities, the Company handles the procedures for obtaining
reimbursement from Medicare and other third party payors for these products and
services.
The Company's sales representatives call upon long term care facilities
within their respective geographical territories to review the medical status of
the facilities' residents in order to determine the needs of individuals for the
products and services provided by the Company. Since most of the residents
participate in the Medicare program, the representatives review insurance
coverage and the appropriateness of the products and services under Medicare
reimbursement regulations. The sales representatives are responsible for
processing the paperwork for billing by the central billing department.
Orders for products and services are processed through the customer
service department at the Company's corporate offices in Carlstadt and shipped
from the Company's Carlstadt, New Jersey warehouse. The Company primarily uses
its own trucks for local (New York-New Jersey) deliveries and common carriers
for deliveries outside the local area.
Reimbursement for Services
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The Company is reimbursed for its products and services by Medicare,
Medicaid, private payors (private insurance companies, self-insured employers,
health maintenance organizations, other managed care systems and patients) and
other third party sources. Prior to accepting a patient, the Company's
reimbursement specialists determine the availability and amount of third party
coverage and, thereafter, the Company processes all payment claims on behalf of
the patient.
Most of the Company's contract services revenues result from Medicare
reimbursement. The Company has more than fifteen years' experience in billing
Medicare. Medicare provides reimbursement for 80% of the amounts shown on fee
schedules it has developed. The remaining 20% co-insurance portion is not paid
by Medicare, although in most cases, Medicaid reimburses the remaining 20% for
"medically indigent" patients; in other cases, the Company bills other third
party payors or patients responsible for co-insurance reimbursement. The Company
often has difficulty collecting the 20% co-insurance portion of charges for
Medicare-eligible items, particularly when there is no third party reimbursement
and these sums must be collected directly from residents. The Company actively
pursues the residents or guarantors for this payment, and where necessary uses
legal action. Inability to collect the 20% co-insurance portion of bills largely
contributes to the Company's provision for uncollectible accounts.
The Company also bills private payors (primarily private insurance
companies, self-insured employers, health maintenance organizations and managed
care systems), which generally pay for services and products based upon
contracted rates or "reasonable and customary" charges. The Company's billing
specialists also work closely with these payors to maximize reimbursement.
Private payors have been increasingly concerned about cost containment and often
seek to negotiate lower rates directly with providers, including the Company.
The following table details the sources of payments to the Company
during the twelve months ended June 30, 1999:
Home Contract Total
Infusion Services Revenues
-------- -------- --------
Medicare.................................... 3% 80% 20%
Private Pay................................. 91% 2% 75%
Medicaid.................................... 6% 18% 5%
--------- ----- -----
100% 100% 100%
========= ==== ====
Sales and Marketing
The Company's principal sources of patient referrals are health
maintenance organizations, physicians, hospital discharge planners, other
hospital officials, nursing homes, insurance companies and other managed care
systems. The Company's products and services are marketed through its sales
force and clinicians. The Company's sales force is responsible for establishing
and maintaining referral sources. As of June 30, 1999, the sales force included
7 full time sales employees and 3 sales and service representatives, who report
to their respective regional managers. Sales employees receive a base salary
plus commissions based on revenues. The Company conducts regular sales training
programs, intended to enable its sales force to generate more revenue from
current and new sources of patient referrals and to assist sales employees in
targeting and developing new revenue sources.The Company will also be marketing
its products and services online through its pharmacy Smartmeds.com at URL
www.Smartmeds.com. The site will feature specialty pharmaceuticals, medical
products, health care and disease management informaiton and patient interaction
with medical professionals.
The "Infu-Tech" trademark is registered and is established in the areas
in which the Company does business.
Suppliers
The Company purchases drugs and other materials and leases equipment
from many suppliers. The Company has not experienced difficulty in purchasing
supplies or leasing equipment. The Company believes there are alternative
sources for virtually all the supplies and equipment it requires. The Company
has a distribution agreement with Genzyme which automatically renews for one
year terms unless canceled at the end of a term on 90 days prior notice. The
agreement may also be terminated at any time on 60 days notice. Because of
slower payments and reduced reimbursements from managed care organizations, the
Company does not believe
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its activities in distributing Ceredase and Cerezyme have been at an acceptable
profit level recently. The Company is attempting to negotiate new terms which
will enable it to distribute those products at an acceptable profit level. If it
cannot do that, the Company may have to discontinue selling Ceredase and
Cerezyme.
Potential Liability and Insurance
Participants in the health care market are subject to lawsuits based
upon alleged negligence or similar legal theories, many of which involve large
claims and significant defense costs. The Company could be subject to such
suits. However, to date the Company has not been subject to a significant
lawsuit by a purchaser of its products or services. The Company maintains
general liability insurance, including insurance against professional and
products liability, with coverage limits of $10 million. The Company's insurance
policy provides coverage on an "occurrence" basis and is subject to annual
renewal. A successful claim against the Company in excess of the applicable
insurance coverage could have a material adverse effect upon the Company's
business and results of operations. Claims against the Company, regardless of
their merit or eventual outcome, also may have a material adverse effect upon
the Company's reputation. There can be no assurance that the coverage limits of
the Company's insurance policies will be adequate. While the Company has been
able to obtain liability insurance in the past, such insurance varies in cost,
is difficult to obtain and may not be available in the future on acceptable
terms or at all.
Competition
The segments of the health care market in which the Company operates
are highly competitive. In each of its lines of business there are relatively
few barriers to entry, a limited number of national providers, as many of the
large national providers have recently merged, and numerous regional and local
providers. The principal competitors for sales to residents in long term care
facilities are local providers of health care products and the operators of the
facilities themselves.
The competitive factors most important in the Company's lines of
business are quality of care and service, on-time delivery, reputation with
referring health care professionals, ease of doing business with the provider,
ability to develop and maintain the confidence of potential sources of patient
referrals and price of service. Infusion therapy is being affected by increasing
availability of oral medications which were previously only available as
intravenous infusion drugs. Some competitors in the Company's lines of business
have also attempted to enhance sales by entering into joint ventures or other
financial relationships with potential referral sources. Increasingly stringent,
and increasingly enforced, laws prohibiting remuneration between health care
providers have reduced these arrangements as a competitive factor. The Company
believes that it competes effectively in each of its service areas with respect
to all of the above factors. Some of the Company's current and potential
competitors have or may obtain significantly greater financial and marketing
resources than the Company. It is likely that the Company will encounter
increased competition in the future, which could limit the Company's ability to
maintain or increase its market share and could adversely affect the Company's
operating results. Other types of health care providers, including hospitals,
physician groups and home health agencies, have entered, and may continue to
enter, the Company's lines of business.
Government Regulation
Health care is an industry subject to extensive regulation and frequent
regulatory change. Changes in the law or new interpretations of existing law can
have a dramatic effect on permissible activities, the relative cost associated
with doing business and the amount of reimbursement by government and third
party payors, such as Medicare and Medicaid. Charges under government programs
are also subject to audit. A reduction in coverage or payment rates by third
party payors, or significant audit adjustments, could have a material adverse
effect on the Company's business and results of operations.
The Federal government and each of the states in which the Company
currently operates regulate some aspects of the Company's business. In
particular, the operations of the Company's branch locations are subject to
Federal and state laws. The Company's operations also are subject to state laws
governing pharmacies, nursing services and certain types of home health agency
activities. Certain of the Company's employees are subject to state laws and
regulations governing the ethics and professional practice of people providing
various therapies, pharmacy and nursing. Certificates of need, permits or
licenses may be required for certain business activities and may be restricted
or otherwise difficult to obtain. The Company believes it and its employees have
all certificates of need, permits and licenses which are required for the
business currently being conducted by the Company. The failure to obtain, renew
or maintain any of the required regulatory approvals or licenses could adversely
affect the Company's business.
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There are Federal laws which generally prohibit any remuneration in
return for the referral of Medicare or Medicaid patients, and prohibit the
referral of any Medicare or Medicaid patient by a health care practitioner to a
provider in which the practitioner has an ownership or financial interest. In
addition, the Federal government and several states in which the Company
operates have laws that prohibit financial arrangements, certain direct or
indirect payments or fee-splitting arrangements between health care providers.
The Company maintains an internal regulatory compliance review program and uses
in-house counsel to monitor compliance with all such laws and regulations.
Increased attention has been paid recently to enforcement of these laws and
regulations. Possible sanctions for failure to comply with these laws and
regulations include exclusion from government programs, loss of license and
civil and criminal penalties.
Prospective payment which was introduced January 1, 1999 which
redefined reimbursement for nursing homes from Medicare may have an effect on
the Company's potential to gain new business for its Contract Services division.
Executive Officers of the Company
The following is a list of executive officers of the Company, together
with a brief description of the business experience for the last five years of
the officers who are not directors. A brief description of the business
experience of officers who are directors is included in Item 10, "Directors".
Name Office Age
---- ------ ---
Jack Rosen Chairman of the Board of Directors, 54
President, Chief Executive Officer
Joseph Rosen Vice President, Assistant Secretary 49
and Director
Pritpal Virdee President, Chief Operating Officer 40
Principal Financial Officer
Israel Ingberman Secretary, Director 54
Pritpal Virdee has served as President and Chief Operating Officer
since April 1999. Prior to that he had served as Executive Vice President of the
Company and as President of Intrx Medical, Inc., a subsidiary of the Company,
since February 1993. From 1989 to 1992, he served as President and Director of
Fresenius Pharma USA, a leading medical products and pharmaceutical company.
Prior to that, he had worked as General Manager of Fresenius Pharma U.K.
Employees
As of June 30, 1999, the Company had approximately 120 employees. Of
these employees, four were in executive capacities (in addition to executives of
KUAL who rendered services to the Company), approximately 10 were in sales or
service capacities, approximately 49 were in clinical or pharmaceutical
capacities and the remainder were administrative or distribution personnel. The
Company's employees are not currently represented by a labor union or other
labor organization. The Company believes that its employee relations are good.
Item 2. Properties.
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The Company maintains corporate offices in Carlstadt, New Jersey and it
leases four branch offices for its branch operations. Offices provide a home
base for salespeople, clinicians and administrative and technical personnel, as
well as storage for excess equipment and supplies. In addition, the Company
maintains a central pharmacy and a warehouse in Moonachie, New Jersey and
pharmacies and ambulatory infusion suites in Memphis, Tennessee, Boston,
Massachusetts and Philadelphia, Pennsylvania. Lease payments for the corporate
office, four branch offices, the central pharmacy, the Memphis, Boston and
Philadelphia pharmacies, the infusion suites and the warehouse total $36,333 per
month. In communities which cannot be serviced from a Company office, staffing
and administration is handled by a representative residing in the area. The
Company believes its facilities are adequate for its current needs.
Item 3. Legal Proceedings.
The Company is subject to legal proceedings and claims which arise in
the ordinary course of its business. The Company does not believe any litigation
to which it is a party is likely to have a material adverse effect upon its
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to the vote of security holders during the
year ended June 30, 1999.
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Matters.
The high and low last sale prices of the Company Stock reported on the
NASDAQ National Market System with regard to each calendar quarter during 1998
and through June 30, 1999 were as follows:
High Low
---- ---
1998:
First Quarter 6 1/4 5 3/4
Second Quarter 6 7/8 5 3/4
Third Quarter 6 1/8 2 1/2
Fourth Quarter 4 1/8 2
1999:
First Quarter 4 7/8 1 5/16
Second Quarter 1 3/16 7/8
The Company has not paid any dividends on its Common Stock since shares
were sold to the public in December 1992. Prior to that, all the Company's
available cash was retained by KUAL, which was its sole stockholder. From 1989
through 1992, the Company paid KUAL dividends totaling $9,866,000, as well as
management fees totaling $1,258,000 and tax payments totaling $1,555,000. Any
decision by the Company's Board of Directors to pay dividends on its Common
Stock in the future will be based upon the Company's earnings, cash flow,
capital needs and available funds, and any other factors the Company's directors
deem relevant. Because KUAL owns 58% of the stock of the Company, and all the
Company's directors are also directors of KUAL the Company's directors may be
influenced by KUAL's cash needs in deciding whether the Company should declare
dividends. Under Delaware law, the Company is only permitted to pay dividends
out of accumulated surplus or the current or prior year's net profits.
As of September 30, 1999, there were 42 holders of record of the
Company's Common Stock.
Item 6. Selected Financial Data.
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The following table sets forth selected financial data of the Company
and should be read in conjunction with the consolidated financial statements as
of June 30, 1999 and 1998 and for each of the years in the three year period
ending June 30, 1999 and the related notes, included elsewhere in this Report.
<TABLE>
<CAPTION>
Six Months
Years Ended June 30, Ended June 30,
-------------------------------------------------- --------------
1999 1998 1997 1996 1995
--------- --------- -------- -------- --------------
<S> <C> <C> <C> <C> <C>
Revenues......................................$ 25,486 $ 26,466 $26,003 $24,638 $10,601
(Loss) income before income taxes (1,162) 345 1,615 1,465 (849)
(Benefit) provision for income taxes (34) 149 662 270 --
Net (loss) income.............................$ (1,128) $ 196 $ 953 $ 1,195 $ (849)
(Loss) income per share
Basic (1)................................$ (.35) $ .06 $ .30 $ .38 $ (.27)
Diluted (2)..............................$ (.35) $ .06 $ .29 $ .38 $ (.27)
</TABLE>
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- -------- -------- --------------
<S> <C> <C> <C> <C> <C>
Accounts receivable (net).....................$ 7,799 $ 6,530 $ 7,302 $ 5,669 $ 3,608
Total assets................................... 13,798 12,122 11,618 9,484 7,414
Working capital................................ 1,258 3,502 5,044 4,696 3,571
Total Stockholders' Equity..................... 5,198 6,326 6,101 4,976 3,770
</TABLE>
(1) Based on 3,262,571, 3,125,666, 3,192,797, and 3,168,037 shares
outstanding in the years June 30, 1999, 1998, 1997, and 1996 and
3,160,974 shares outstanding in the six months ended 1995.
(2) Based on 3,262,571, 3,328,213, 3,231,706, 3,210,407 shares outstanding
at June 30, 1999, 1998 and 1997, and 3,170,366 shares outstanding in
1995.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Twelve Months Ended June 30, 1999 Compared with Twelve Months Ended June 30,
1998.
Total revenues decreased by $980,000, or 3.7% from $26,466,000 in 1998 to
$25,486,000 in 1999, primarily due to a decrease in contract services division
revenues. The decrease in infusion revenues is due to the exit from contractual
arrangements that were not meeting profitability standards. The Company is
currently in the process of negotiating revised terms for its contract with
Genzyme. Which will allow the Company to distribute Cerezyme at more acceptable
profit levels. If it cannot accomplish this, the Company may have to discontinue
selling Ceredase and Cerezyme.
Costs of medical and nutritional products sold to patients and other customers
increased by $994,000 or 6.7% from $14,861,000 in 1998 to $15,855,000 in 1999.
As a percentage of total revenues, medical and nutritional product costs
increased from 56% in 1998 to 62% in 1999. The business mix of the Company has
changed to reflect more sales of specialty pharmaceuticals like Cerezyme and
Synagis. These products have a higher cost of sales compared to other company
products.
Total personnel costs decreased by $1,150,000 or 16% from $7,158,000 in 1998 to
$6,008,000 in 1999, primarily due to the realization of efficiencies within the
nursing and pharmacy operations due to the change in the business mix reflecting
more sales of the specialty pharmaceuticals which require less nursing and
pharmacy time and the closing of the Florida Pharmacy operations.
Selling, general and administrative expenses in 1999 increased by $29,000, or
1% from $3,326,000 in 1998 to $3,355,000 in 1999.
Management fees to KUAL of $390,000 in 1999 and $423,000 in 1998 were 1.6% of
revenues in both years.
After a management review of its existing policies and procedures for estimating
collectibility of its accounts receivable, the Company increased its provision
for uncollectible accounts by $610,000. The company increased its provision
because of the difficulties experienced in collecting payments from managed care
organizations.
Depreciation and amortization expense decreased from $152,000 in 1998 to $84,000
in 1999 due to retirement of property and equipment.
Other income of $7,000 in 1999 and $152,000 in 1998 consisted of interest
payments in 1999 and write offs of accounts payable in 1998.
The net (loss) in 1999 was ($1,128,000) or ($.35) (basic) per share compared to
net income in 1998 of $196,000, or $.06 (basic) per share. The (loss) before
taxes for the twelve months ended June 30, 1999 was ($1,162,000) compared to
$345,000 for the comparable prior period. The change was due to a decrease in
revenue and an increase in the cost of medical and nutritional products and
higher provision for uncollectable accounts.
A number of Federal and State income tax returns for previous years were not
filed when due. The Company has completed and filed a portion of those
outstanding returns. It is contemplated that all prior year returns will be
completed and filed shortly. The Company believes ultimately no Federal taxes
are due. There are several claims for penalties and interest associated with
late filings which are being appealed.
Twelve Months Ended June 30, 1998 Compared with Twelve Months Ended June 30,
1997.
Total revenues increased by $463,000, or 2% from $26,003,000 in 1997 to
$26,466,000 in 1998, primarily due to a $410,000, or 7% increase in home
infusion division revenues. This increase in revenues is offset by decreased
therapy days and lower pricing from managed care.
Costs of medical and nutritional products sold to patients and other customers
increased by $1,347,000 or 9% from $13,514,000 in 1997 to $14,861,000 in 1998.
As a percentage of total revenues, medical and nutritional product costs
increased from 51% in 1997 to 56% in 1998. This increase in product costs as a
percentage of sales is partially attributable to the increased pricing pressures
from certain vendors
11
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
and the Company's need to secure immunoglobulin products which due to a national
shortage are only available at a premium price. These products were needed to
provide continued treatment for existing patients.
Total personnel costs decreased by $47,000, from $7,205,000 in 1997 to
$7,158,000 in 1998, primarily attributable to the reorganization of the contract
service division as well as creating efficiencies within the nursing and
pharmacy operations.
Selling, general and administrative expenses in 1998 decreased by $162,000, or
5% from $3,488,000 in 1997 to $3,326,000 in 1998, due to non-recurring
investment costs in 1997 and more effective use of existing resources leading to
elimination of certain positions.
During 1998 the Company instituted new procedures related to accounts
receivable. The Company reorganized its billing and collection functions to
monitor activity by branch and by insurance carrier and established a document
control function to monitor and follow up on outstanding documentation required
to bill. As a result in 1998, a total of $752,000 was released from the reserve
for uncollectible accounts because such reserves were no longer considered
necessary.
Management fees to KUAL of $423,000 in 1998 and $416,000 in 1997 were 1.6% of
revenues in both years.
Depreciation and amortization expense increased from $139,000 in 1997 to
$152,000 in 1998 due to property and equipment additions.
Other income, net of $152,000 in 1998 and $178,000 in 1997 consisted of write
offs of accounts payable in 1998, and in 1997 write offs of accounts payable and
$72,000 amortization of a $628,000 payment received by the Company in 1992 as
consideration for the Company's releasing the buyer of KUAL's former Home
Nursing Division from an agreement not to sell infusion therapy services in
California, Arizona or Tennessee for a period of five years.
The net income in 1998 was $196,000, or $.06 (basic) per share compared to a net
income in 1997 of $953,000, or $.30 (basic) per share. Income before taxes for
the twelve months ended June 30, 1998 was $345,000 compared to $1,615,000 for
the comparable prior period.
Liquidity and Capital Resources
As of June 30, 1999, the Company had total assets of $13.8 million, working
capital of $1.3 million and a net worth of $5.2 million. The Company entered
into a loan agreement with Heller Healthcare Financial effective December
30, 1998. The Company has a $1.5 million line of credit secured by certain
accounts receivable. As of June 30, 1999, the outstanding loan was $746,000.
At June 30, 1999, the Company's net accounts receivable were $7.8 million
compared to $6.5 million, at June 30, 1998. This reflected an increase in the
Company's accounts receivable from 135 days sales outstanding ("DSO") at June
30, 1998 to 158 DSO at year end. The 158 DSO is a result of slowed payments from
managed care companies.
Among the nursing homes with which the Company did business in 1999 were five
facilities which were owned or managed by KUAL. For the year ended June 30, 1999
the Company's sales plus interest charged on outstanding balances to those
nursing homes totaled $477,000. At June 30, 1999, the Company's net receivable
from those nursing homes totaled $2,065,000. During the twelve months ended June
30, 1999, the Company realized revenues of $570,000 from the sale of products
and services to residents of those nursing homes. Payments to the Company for
these products and services are made directly to the Company by Medicare,
Medicaid, and other third party payers. In addition, KUAL owes $1.3
million to the Company for KUAL's share of common expenses paid on behalf of
KUAL by the Company.
12
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
KUAL has agreed to pay back the $3.4 million balance, plus interest at 7% in
twenty quarterly installments beginning in January, 2000. Due to the
deterioration of KUALA's financial condition KUAL has given the company a
security interest in 1,500,000 shares of the Company's common stock that it owns
to secure that obligation. Payments may be in cash or with Infu-Tech's common
stock owned by KUAL.
The Company incurred a $1.1 million loss for the year ended June 30, 1999 and is
experiencing a slowdown in payments from several managed care organizations
which have affected its ability to pay its suppliers on a timely basis. The
company has extended its payment terms with some of its suppliers while also
executing a plan to pursue collection of its accounts receivable and consolidate
its operations.
Year 2000
As the year 2000 approaches, an issue impacting all companies has emerged
relating to how existing application programs and operating systems can
accommodate a two-digit date position which represents the year. Many existing
application programs in the marketplace were designed to accommodate a two-digit
date position which represents the year (e.g. "99" is stored on the system and
represents the year 1999). As a result of this design, systems could fail to
operate or produce correct results if they interpret "00" to mean 1900, rather
than 2000.
The Year 2000 problem could affect computers, software, and other equipment
used, operated or maintained by the Company. Accordingly, the Company conducted
a review of its internal computer programs and systems to ensure that the
programs and systems will be Year 2000 compliant. The Company has developed a
task force to research a solution to the Year 2000 System Compliance. To date,
the task force has identified the programs that will be effected by the Year
2000 System Compliance issue and the procedures that are required to meet the
demands for this business.
The Company believes that it has identified substantially all the major
computers, software, and related equipment used in connection with its internal
operations that must be modified, upgraded, or replaced to minimize the
possibility of material disruption to its business. Currently, the Company's
task force has explored many options to resolve the Year 2000 System Compliance
issues.
The Company recently completed the purchase of a new hardware and software
system. The total cost of the new system which the Company has been told is Year
2000 compliant, is estimated at $400,000 and will be funded through a capital
lease agreement obtained by the Company.
The Company began implementing the new system in October. As with any
implementation of a new computer system there are risks such as delays in down
loading existing files, software that might require debugging, upgrading or
training difficulties. The Company is taking steps that it believes to be
reasonable and prudent to assess the Year 2000 readiness, and believes that it
will be on schedule to replace, test and implement the new software and
equipment required to be Year 2000 compliant.
Management believes that the most significant risk to the Company for 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 are having difficulty becoming Year 2000 compliant before the Year
2000. The Company has not yet undertaken quantification of the effects of such
noncompliance or to determine whether such quantification is even possible. The
Company has communicated 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 operations.
Another area of potential risk is with certain patient service equipment items
that have microprocessors with date functionality that could malfunction in the
year 2000. Although Infu-Tech has found that the majority of such
microprocessors include duration time clocks and not date time clocks,
management has initiated formal communications with its suppliers to obtain
assurance that the equipment they supply is Year 2000 compliant.
13
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Infu-Tech has not developed a formal contingency plan in the event that the
modifications to its internal operating systems prove to be inadequate. Such
inadequacies could result in system failure or miscalculations. This would cause
disruptions to normal business processes including, among other things, the
temporary inability to process transactions and generate billings. If such a
disruption continued for an extended period, it could have a material adverse
effect on the results of operations cash flow and financial condition of
Infu-Tech.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
In the normal course of business, the Company is exposed to market risks
relating to fluctuations in interest rates.
Interest Rate Risk
As the Company seeks asset based lending financing to maintain its ongoing
operations and sustain its growth, it is exposed to interest rate risk.
Borrowings under the Company's $1.5 million loan and security facility with
Heller Healthcare Financial are sensitive to changes in interest rates as such
borrowings bear interest at one and one half percent above the "Prime Rate of
Interest."
14
<PAGE>
Item 8. Consolidated Financial Statements and Supplementary Data.
The consolidated financial statements required by this item appear
beginning at page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
Item 10f. Heller Healthcare Financial document to be filed by amendment.
15
<PAGE>
PART III
Part III Items 10 through 13 to be filed by October 29, 1999 as part of
definitive proxy statement.
16
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedule, and Reports on Form 8-K.
(a) Documents filed as part of this Report.
1. Financial Statements
Listed on Index to Consolidated Financial Statements and Financial
Statement Schedule.
2. Financial Statement Schedules
Listed on Index to Consolidated Financial Statements and Financial
Statement Schedule.
3. Exhibits
The following exhibits are filed with this Report or incorporated by
reference:
3(a) Certificate of Incorporation (1)
3(b) Certificate of Amendment of Certificate of Incorporation (1)
3(C) By-laws (1)
4(a) Specimen of Common Stock Certificate(2)
4(b) Form of Representative's Warrant(1)
10(a) Joint Venture Agreement dated January 1992 between Medline
Industries, Inc. and Intrx Medical, Inc.(1)
10(b) Management and Non-Competition Agreement between Infu-Tech,
Inc. and C.H.A..(1)
10(c) Infu-Tech 1992 Stock Option Plan.(1)
10(d) Distribution Agreement between Infu-Tech, Inc. and Genzyme
Corporation dated November 11, 1994.(3)
10(e) Infu-Tech 1996 Key Employees and Key Personnel Stock Option
Plan.
10(f) Heller Healthcare Financial Loan And Security Agreement. To
be filed by amendment.
21 List of Subsidiaries.
- -----------
(1) Incorporated by reference to Registration Statement File No. 33-50122.
(2) Incorporated by reference to Report on Form 10-K for the year ended
December 31, 1992.
(3) Incorporated by reference to Report on Form 10-K for the year ended
December 31, 1994.
(4) Incorporated by reference to definitive proxy statement dated June 1996.
(b) Reports on Form 8-K filed during the year ended June 30, 1999.
(c) The exhibits to this Report are listed in Item 14(a)(3).
(d) The financial statement schedule required by Regulation S-K which is
excluded from the Annual Report to Stockholders by Rule 14a-3(b)(1)
is listed in Item 14(a)(2).
17
<PAGE>
INFU-TECH, INC.
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999, 1998 and 1997
(With Independent Auditors' Report Thereon)
<PAGE>
INFU-TECH INC.
Index to Consolidated Financial Statements and
Financial Statement Schedule
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Consolidated Financial Statements:
Independent Auditors' Report.....................................................................F - 3
Balance Sheets
June 30, 1999 and 1998..................................................................... F - 4
Statements of Operations:
Years Ended June 30, 1999, 1998 and 1997....................................................F - 5
Statements of Stockholders' Equity:
Years Ended June 30, 1999, 1998 and 1997....................................................F - 6
Statements of Cash Flows:
Years Ended June 30, 1999, 1998 and 1997..........................................F - 7 - F - 8
Notes to Consolidated Financial Statements...............................................F - 9 - F- 18
2. Financial Statement Schedule:
Valuation and Qualifying Accounts................................................................S - 1
</TABLE>
Other schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the
consolidated financial statements or notes thereto.
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Infu-Tech, Inc.:
We have audited the consolidated financial statements of Infu-Tech, Inc. and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement 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 financial position of Infu-Tech, Inc. and
subsidiaries as of June 30, 1999 and 1998 and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 1999, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
October 19, 1999
F - 3
<PAGE>
INFU-TECH, INC.
Consolidated Balance Sheets
(Dollars in thousands)
(Except per Share Data)
<TABLE>
<CAPTION>
June 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................. $ 258 $ 163
Accounts receivable, net of allowances for uncollectible
accounts of $1,845 and $1,578................................... 7,799 6,530
Accounts receivable from affiliates .................................. 340 437
Inventories........................................................... 541 1,452
Deferred income taxes................................................. 539 551
Prepaid expenses and other current assets............................. 381 165
------------- -------------
Total current assets....................................... 9,858 9,298
Property and equipment, at cost, net of accumulated
depreciation of $636 and $552................................... 317 370
Goodwill, net......................................................... 110 125
Receivables from affiliates, non-current.............................. 3,063 2,189
Other assets.......................................................... 450 140
------------- -------------
Total assets............................................... $ 13,798 $ 12,122
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt....................................................... $ 746 $ -
Accounts payable...................................................... 7,192 5,057
Accrued payroll and related expenses.................................. 222 435
Income taxes payable.................................................. - 194
Other current liabilities............................................. 440 110
------------- -------------
Total current liabilities.................................. 8,600 5,796
Stockholders' Equity:
Common stock, $.01 par value; 5,000,000 shares authorized;
3,262,571 (1999) and 3,262,571 (1998) issued 33 33
Additional paid-in capital...................................... 3,128 3,128
Retained earnings............................................... 2,110 3,238
Treasury stock, at cost; 39,300 shares.......................... (73) (73)
-------------- -------------
Total stockholders' equity................................. 5,198 6,326
------------- -------------
Commitments and Contingencies
Total liabilities and stockholders' equity $ 13,798 $ 12,122
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F - 4
<PAGE>
INFU-TECH, INC.
Consolidated Statements of Operations
(Dollars in thousands)
(Except per Share Data)
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues............................................. $ 25,486 $ 26,466 $ 26,003
------------- ------------- -------------
Costs and Expenses:
Medical and nutritional product................ 15,855 14,861 13,514
Personnel...................................... 6,008 7,158 7,205
Selling, general and administrative............ 3,355 3,326 3,488
Provision for uncollectible accounts........... 963 353 (196)
Management fees to majority shareholder........ 390 423 416
Depreciation and amortization.................. 84 152 139
Other income, net.............................. (7) (152) (178)
-------------- ------------- -------------
26,648 26,121 24,388
------------- ------------- -------------
(Loss) income before income taxes (1,162) 345 1,615
Income tax (benefit) provision....................... (34) 149 662
-------------- ------------- -------------
Net (loss) income ............................. $ (1,128) $ 196 $ 953
============== ============= =============
(Loss) earnings per share
Basic.......................................... $ (0.35) $ 0.06 $ 0.30
-------------- ------------- -------------
Diluted........................................ $ (0.35) $ 0.06 $ 0.29
-------------- ------------- -------------
Basic weighted average number of common
shares........................................ 3,262,571 3,215,666 3,192,797
------------- ------------- -------------
Diluted weighted average number of common
shares......................................... 3,262,571 3,328,213 3,231,706
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F - 5
<PAGE>
INFU-TECH, INC.
Consolidated Statements of Stockholders' Equity
Years Ended June 30, 1999, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Retained Treasury Stockholders'
Capital Earnings Stock Equity
------- -------- ----- ------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996................... $ 32 $ 2,928 $ 2,089 $ (73) $ 4,976
Net income .............................. -- -- 953 -- 953
Warrants issued.......................... -- 44 -- -- 44
Stock issued............................. -- 100 -- -- 100
Exercise of options...................... -- 28 -- -- 28
--------- ---------- ---------- ---------- ---------
Balance, June 30, 1997................... $ 32 $ 3,100 $ 3,042 $ (73) $ 6,101
Net income............................... -- -- 196 -- 196
Warrants issued.......................... -- -- -- -- --
Stock issued............................. -- -- -- -- --
Exercise of options...................... 1 28 -- -- 29
--------- ---------- ---------- ---------- ---------
Balance, June 30, 1998................... $ 33 $ 3,128 $ 3,238 $ (73) $ 6,326
========= ========== ========== ========== =========
Net loss................................. -- -- (1,128) -- (1,128)
Warrants issued.......................... -- -- -- -- --
Stock issued............................. -- -- -- -- --
Exercise of options...................... -- -- -- -- --
--------- ---------- ---------- ---------- ---------
Balance, June 30, 1999................... $ 33 $ 3,128 $ 2,110 $ (73) $ 5,198
========= ========== ========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 6
<PAGE>
INFU-TECH, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------
1999 1998 1997
---- ---- -----
<S> <C> <C> <C>
Operating activities:
Net (loss) income ............................... $(1,128) $ 196 $ 953
Adjustments to reconcile net (loss) income to net
cash (used in) provided by
operating activities:
Amortization expense ........................ 15 35 7
Depreciation expense ........................ 69 117 132
Warrants issued ............................. -- -- 44
Provision for uncollectible accounts ........ 963 353 (196)
Amortization of deferred income ............. -- -- (72)
Provision for deferred income taxes ......... 12 151 172
Increase (decrease) from changes in:
Accounts receivable ......................... (2,232) (809) (1,104)
Accounts receivable from affiliates ......... 97 (137) (88)
Inventories ................................. 911 202 (8)
Prepaid expenses and other current assets ... (216) 200 (160)
Receivables from affiliates, non-current .... (874) (698) (678)
Other assets ................................ (310) (17) (31)
Taxes payable ............................... (194) (255) 374
Accounts payable ............................ 2,135 769 1,509
Accrued payroll and related expenses ........ (213) (64) 96
Other current liabilities ................... 358 (75) (802)
------- ------- -------
Net cash (used in) provided by operating
activities .................................. (607) (32) 148
------- ------- -------
Investing activities:
Expenditures for property and equipment ......... (16) (243) (69)
Acquisition of Universal Home Infusion .......... -- -- (190)
------- ------- -------
Net cash used in investing activities ........... (16) (243) (259)
Financing activities:
Net proceeds from short-term debt ............... 746 -- --
Payment of capital lease obligation ............. (28) (103) (96)
Proceeds from exercise of options ............... -- 29 28
------- ------- -------
Net cash provided by (used in)
financing activities ....................... 718 (74) (68)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents ..................................... 95 (349) (179)
Cash and cash equivalents, beginning of
the year ........................................ 163 512 691
------- ------- -------
Cash and cash equivalents, end of the year ........ $ 258 $ 163 $ 512
======= ======= =======
</TABLE>
(Continued on next page)
F - 7
<PAGE>
INFU-TECH, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands except per share amounts)
June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Supplemental disclosures of cash flow data:
Income tax paid....................................... $ -- $ 154 $ 110
=========== ========== =========
Interest paid......................................... $ 81 $ -- $ --
=========== ========== =========
Non cash investing and financing activity:
Stock issued in connection with Acquisition $ -- $ -- $ 100
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F - 8
<PAGE>
INFU-TECH, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands except per share amounts)
June 30, 1999, 1998 and 1997
1. The Company
Infu-Tech, Inc. (the "Company") is a provider of clinical services and
products to the non-hospital based health care market. This includes a
broad range of home infusion therapy services including total parenteral
nutrition therapy, antibiotic therapy and other therapies to patients at
home and enteral nutrition infusion therapy and other medical services and
products provided primarily to residents in long-term care facilities. The
Company is 58% owned by Kuala Healthcare, Inc. ("KUAL"), formerly
Continental Health Affiliates, Inc., a public company. The remaining 42%
of the Company's equity is publicly traded.
The Company is subject to certain risks and uncertainties as a result of
changes that could occur in the healthcare industry, including Medicare
and Medicaid reimbursement rates.
Liquidity
The Company experienced a $1.1 million loss and is experiencing a
slowdown in payments from several managed care organizations which have
affected its ability to pay its suppliers on a timely basis. The Company
has extended its payment terms with some of its suppliers while also
executing a plan to pursue collection of its accounts receivable and
consolidate its operations.
2. Significant Accounting Policies
Basis of Consolidation
The accompanying financial statements include all wholly owned
subsidiaries. Intercompany transactions are eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company classifies all highly liquid investments with maturities of
three months or less when purchased as cash equivalents.
Revenue Recognition
Revenue is reported at the net amounts estimated to be realized from
patients, third party payors and others for services rendered. The Company
receives payments for services to eligible patients under Medicare and
various state Medicaid programs. Approximately 25% (1999), 25% (1998), and
24% (1997) of total revenues were derived from such medical assistance
programs. Revenues under these programs are based upon government approved
rates which are subject to audit. In the opinion of management,
retroactive adjustments, if any, would not be material to the Company's
financial position or results of operations. Certain of the Company's
revenues are earned based upon fixed monthly payments for each member of a
particular health plan. The Company monitors its costs for services
provided under this agreement to insure that they are appropriately
matched with the revenues earned.
Inventories
Inventories, which consist of medical and nutritional products, are valued
at the lower of cost (first-in, first-out method) or market.
Property and Equipment
F - 9
<PAGE>
INFU-TECH, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands except per share amounts)
June 30, 1999, 1998 and 1997
Property and equipment, which consists primarily of equipment, furniture
and fixtures, and leasehold improvements, is depreciated using the
straight-line method at rates that charge the cost of the assets over the
periods of expected use. The range of useful lives is primarily three to
five years.
Income Taxes
Income taxes are provided for on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and operating
loss carry forwards and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
Earnings Per Share
Basic and diluted earnings per share is based on the net income for the
relevant period divided by the weighted average number of shares issued
and outstanding during the period. For purposes of the diluted earnings
per share calculation, the exercise or conversion of all dilutive
potential common shares is included, for the years ended June 30, 1998 and
1997. There is no dilutive effect on common shares due to a loss incurred
for the year ended June 30, 1999.
Employee Stock Options
The Company accounts for its stock option plans in accordance with the
provisions of the Accounting Principles Board's Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees" and related interpretations.
Effective July 1, 1996 the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standard No. 123 (SFAS
123), "Accounting for Stock Based Compensation." Accordingly, the Company
has elected to provide pro forma disclosures as required by SFAS 123.
Treasury Stock
Shares of common stock held in treasury are accounted for at cost.
3. Deferred Income
In February 1992, the Company received $628 in consideration of its
agreement not to compete with Hospital Staffing Services, Inc. ("HSSI") in
providing nursing services in California, Arizona and Tennessee for a
period of five years and the termination of a non-competition provision
which had barred HSSI from providing infusion therapy services. The $628
was recorded as deferred income and was amortized to other income over
five years.
4. Stockholders' Equity
F - 10
<PAGE>
INFU-TECH, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands except per share amounts)
June 30, 1999, 1998 and 1997
On December 31, 1992, the Company completed an initial public offering of
its common stock at issue price of $6.00 per share. The Company sold
600,000 newly issued shares and received net proceeds of $2,923. The
excess of net proceeds received over the par value of the newly issued
shares was credited to additional paid-in capital. KUAL, which owned 100%
of the outstanding common stock of the Company prior to the offering, sold
730,000 shares which reduced its ownership of the Company to 58%.
In June 1994, the Board of Directors authorized the Company to repurchase
up to 200,000 shares of its common stock in the open market. Through June
30, 1999, the Company had purchased 39,300 of its common shares at an
aggregate cost of $73.
During the fiscal year ended June 30, 1997, 125,000 warrants, with
exercise prices of between $3.50 and $6.96 per share were issued to
financial consultants to the Company. The cost of the warrants in 1997 has
been calculated at $44 and charged to expense. All the warrants expired
without being exercised.
In connection with the acquisition of Universal Home Infusion, the Company
issued 24,000 shares during fiscal 1997.
In July 1992, the Company adopted a stock option plan (the "Infu-Tech
Plan") under which it is authorized to grant stock options to designated
employees, officers and directors of the Company. The Plan authorized
grant of stock options up to a maximum of 150,000 shares of common stock.
In 1994, the maximum number of shares which may be granted under the Plan
was increased to 300,000 shares of common stock. Options may not be
granted at a price that is less than 100% of fair market value on the date
of the grant (110% of fair market value for persons owning 10% or more of
Infu-Tech common stock). Options become exercisable 12 months after the
date of the grant and are exercisable until ten years from the date of
grant. In January 1997, the Company adopted the 1996 Key Employees and Key
Personnel Stock Option Plan which replaced the 1992 Plan. The Plan
authorized 500,000 shares and the conditions are essentially the same as
the 1992 Plan.
Stock option transactions for the years ended June 30, 1999, 1998 and 1997
are summarized as follows:
Weighted average
Number Option Price
of shares Per Share
--------- ---------
Outstanding, June 30, 1996 . . . . . . . 208,300 $4.37
Granted 461,744 $4.16
Canceled (41,400) $4.71
Exercised (10,750) $2.46
----------
Outstanding, June 30, 1997 . . . . . . . 617,894 $4.24
Granted 213,500 $5.23
Canceled (77,800) $3.92
Exercised (8,900) $3.27
----------
Outstanding, June 30, 1998 . . . . . . . 744,694 $4.59
Granted 64,000 $2.84
Canceled (178,252) $4.50
Exercised -- $ -
----------- -----
Outstanding, June 30, 1999 . . . . . . . 630,442 $4.50
=========== ======
F - 11
<PAGE>
INFU-TECH, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands except per share amounts)
June 30, 1999, 1998 and 1997
Options to purchase 72,562 shares were available for grant at June 30,
1999 under the 1996 Plan.
The following table summarizes information about stock options
outstanding at June 30, 1999:
<TABLE>
<CAPTION>
Number Weighted Weighted Number Weighted
Range of Outstanding Average Remaining Average Exercisable at Average
Exercise Prices at 6/30/99 Contractual Life Years Exercise Price 6/30/99 Exercise Price
--------------- ---------- ---------------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$1.00 - $3.13 90,900 7.6 $2.50 72,400 $3.14
$3.38 - $4.13 94,742 7.8 $3.79 94,742 $3.79
$4.25 200,000 7.6 $4.25 200,000 $4.25
$4.50 - $5.88 113,800 8.8 $5.29 113,800 $5.29
$6.00 - $7.00 131,000 5.6 $6.11 131,000 $6.11
------- -------- ------- ----------- ---------
630,442 7.4 $4.50 611,942 $4.64
======= ========= ======= =========== =========
</TABLE>
F - 12
<PAGE>
INFU-TECH, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands except per share amounts)
June 30, 1999, 1998 and 1997
The Company has computed, the pro forma weighted average fair value per
option granted under the stock option plan to be $2.64, $4.11 and $3.41
for 1999, 1998 and 1997 respectively. The computations were made using
the Black-Scholes model, as prescribed by SFAS No. 123, with the
following weighted average assumptions for grants as follows:
Years Ended June 30,
-------------------------
1999 1998 1997
-------------------------
Risk-free interest rate................... 5.5% 4.2% 4.9%
Expected dividend yield................... 0% 0% 0%
Expected term until exercise (years) 10 8.2 8.5
Expected volatility....................... 106% 60.79% 68.61%
If the Company had accounted for these plans in accordance with SFAS No.
123, the Company's net income and net income per share would have
decreased as reflected in the following pro forma amounts:
Years Ended June 30,
-----------------------
1999 1998 1997
---- ----- ----
Net (Loss) Income:........................
As reported............................ $(1,128) $ 196 $ 953
Pro forma.............................. (1,297) (265) 277
Net (Loss) Income per share:
Basic as reported...................... $ (.35) $ .06 $ .30
Basic pro forma........................ (.40) (.08) .09
Net (Loss) Income per share:
Diluted as reported................... $ (.35) $ .06 $ .29
Diluted pro forma..................... (.40) (.09) .09
The pro forma effects on net (loss) income may not be representative of
future years since compensation costs are primarily attributed to the
year of grant as vesting is within one year.
5. Debt.
Infu-Tech has a working capital line of credit available totaling $1.5
million at June 30, 1999. This line is secured by certain accounts
receivable balances the Company maintains. At June 30, 1999 the balance
on this credit facility was $746.
The term of this agreement is for a two year period expiring January 1,
2001 with the option to renew at one year periods. During the year the
company experienced a weighted average interest rate of 13.5%. The main
affirmative covenant that must be met is that the company will not at any
time allow its net worth, as computed in accordance with GAAP, to fall
below $4,000. The Company is currently in violation of one of the
covenants with regard to payments to vendors of invoices over 120 days
old. The Company has received a waiver through June 30, 2000 from the
lender. After giving effect to this waiver, the Company is in compliance
with the loan agreement covenants.
6. Commitments and Contingencies
F - 13
<PAGE>
INFU-TECH, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands except per share amounts)
June 30, 1999, 1998 and 1997
Operating Lease Commitments
The Company is obligated under various operating leases for facilities
and equipment with initial terms expiring at various dates through 2002.
The leases generally require the Company to pay all costs of maintaining
the leased properties.
The following is a schedule of future minimum annual rental payments
required under operating leases as of June 30, 1999:
Year ending
June 30, Facilities Equipment Total
-------- ---------- --------- -----
2000........................... 325 43 368
2001........................... 309 16 325
2002........................... 99 3 102
-- -- --
---------- --------- ------
$ 733 $ 62 $ 795
========== ========= ======
Rent expense was $394, $425 and $550 in 1999, 1998 and 1997,
respectively.
Employment Commitments
The Company has an employment agreement with its Chairman of the Board,
who is also Chairman of the Board and President of KUAL, through July
2000. He renders part-time services to the Company for a salary of $150
per year. Pursuant to this employment agreement, a bonus provision exists
which is based upon an increase in the market capitalization of the
Company exceeding the 1995 base year. As of June 30, 1998 a bonus payable
of $108 was accrued relating to this provision. No bonus was earned in
1997 or 1999.
Contingencies
There is no significant litigation pending against the Company, nor is
the Company aware of any threatened litigation, which may have a material
adverse affect upon the Company.
Participants in the health care market are subject to lawsuits based upon
alleged negligence or similar legal theories. The Company currently has
in force general liability insurance, including professional and product
liability, with coverage limits of $10,000 which is subject to annual
renewal. The Company has not recorded any related loss liabilities as of
June 30, 1999.
7. Transactions with Affiliates
The Company provides nutritional and other supplies and infusion therapy
services to nursing homes owned or managed by KUAL and derived revenues
from sales to those nursing homes plus interest charged on their
outstanding balances of $477 in 1999, $437 in 1998 and $564 in 1997.
Included in personnel costs in 1998 and 1997, respectively, are charges
of $332 and $746 from subsidiaries of KUAL for contracted nursing
services. There were no costs incurred in 1999.
A management and non-competition agreement (the "Agreement") between the
Company and KUAL extended to September 30, 2000 prohibits the Company
from lending money to (or borrowing money from) KUAL.
Pursuant to the Agreement, KUAL provides services to the Company, which
includes, among others, the services of KUAL's senior executive
management. A management fee equal to 1.6% of revenues is charged by KUAL
to the Company for these services. The Company estimates that had it
provided such services for itself, its costs would have been at least
that amount.
In 1997 the Company was charged $27, by a corporation owned by the
F - 14
<PAGE>
INFU-TECH, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands except per share amounts)
June 30, 1999, 1998 and 1997
Company's Chairman of the Board for use of an airplane owned by that
corporation. The Company believes the rates it was charged for use of
that airplane were lower than those which would have been available from
an independent charter company for use of a similar airplane.
Receivables from affiliates non-current and current are $3,403 and
$2,626, in 1999 and 1998, respectively, that arose from the sales of
nutritional and other products and services to wholly owned subsidiaries
of KUAL. Interest on the outstanding balance and KUAL's share of common
expenses paid on behalf of KUAL by the company.
KUAL has agreed to pay back the June 30, 1999 $3.4 million balance, plus
interest at 7% in twenty quarterly installments beginning in January,
2000. Due to the deterioration of KUALA's financial condition KUAL has
also given the company a security interest in 1,500,000 shares of the
Company's common stock that it owns to secure that obligation. Payments
may be in cash or with Infu-Tech's common stock owned by KUAL.
F - 15
<PAGE>
INFU-TECH, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands except per share amounts)
June 30, 1999, 1998 and 1997
The (benefit) provision for income taxes consists of the following:
Years Ended June 30,
----------------------------------------
1999 1998 1997
---- ---- ----
Current
Federal............... $ (38) $ - $ 400
State................. (8) - 90
------------ ---------- -----------
$ (46) $ - $ 490
Deferred:
Federal............... 11 124 143
State................. 1 25 29
----------- ----------- -----------
$ 12 $ 149 $ 172
----------- ----------- -----------
$ (34) $ 149 $ 662
============ =========== ===========
The following table reconciles the Federal income tax provision computed
at statutory Federal income tax rates to the total (benefit) provision
for income taxes shown above:
Years Ended June 30,
----------------------------
1999 1998 1997
---- ---- ----
Federal income tax (benefit)
provision at statutory rate (395) $ 117 $ 550
State income tax provision,
net of Federal income tax
benefit............................ (81) 25 112
Increase (decrease) in valuation
allowance.......................... 10 - -
Other nondeductible expenses........... 331 - -
Other - net............................ 101 7 -
-------- ----- ------
$ (34) $ 149 $ 662
======== ===== ======
F - 16
<PAGE>
INFU-TECH, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands except per share amounts)
June 30, 1999, 1998 and 1997
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets are as follows:
<TABLE>
<CAPTION>
June 30,
------------------------
1999 1998
---- ----
<S> <C> <C>
Net deferred income tax assets:
Allowances for uncollectible accounts
receivable........................................ $ 756 $ 647
Net operating tax loss carry forwards............... - 94
Compensated absences, principally due
to accrual for financial purposes................. 30 37
Other - net ...................................... 28 38
--------- --------
Sub-total ...................................... 814 816
Valuation allowance................................. (275) (265)
---------- --------
Net deferred income tax assets...................... $ 539 $ 551
========= ========
</TABLE>
A number of Federal and State income tax returns for previous years
were not filed when due. The Company has completed and filed a portion
of those outstanding returns. It is contemplated that all prior year
returns will be completed and filed shortly. The Company believes
ultimately no Federal taxes are due. There are several claims for
penalties and interest associated with late filings which are being
appealed.
8. Distribution Agreement
In November 1994, the Company entered into a distribution agreement
with a drug manufacturer under which the Company provides a specific
home infusion therapy utilizing the manufacturer's drug. This
agreement was renewed in January 1998 for another year. Under this
agreement, accounts payable to the drug manufacturer ($3,215 at June
30, 1999) are secured by the Company's inventories of the drug ($25 at
June 30, 1999) and related Accounts Receivable ($1,606 at June 30,
1999).
9. Business and Credit Concentrations
The Company generally does not require collateral or other security in
extending credit to patients, however, it routinely obtains assignment
of (or is otherwise entitled to receive) patients' benefits payable
under their health insurance programs, plans or policies (e.g.
Medicare, Medicaid, Blue Cross, health maintenance organizations, and
commercial insurance policies).
At June 30, 1999, and June 30, 1998 the Company had gross receivables
from the Federal Government (Medicare) of approximately $2,033, and
$2,725 respectively.
F-17
<PAGE>
INFU-TECH, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands except per share amounts)
June 30, 1999, 1998 and 1997
10. Estimated Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined
based upon available market information and appropriate valuation
methodologies. However, considerable judgement is necessarily required
in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company might realize in a current
market exchange. The use of different market assumptions and or
estimation methodologies may have a material effect on the estimated
fair value.
The carrying amounts of cash and cash equivalents, accounts
receivable, amounts due from affiliates, short term debt, accounts
payable and accrued expenses are reasonable estimates of their fair
values.
11. Fourth Quarter Adjustments
As a result of a deterioration of the aging of the accounts
receivable, the Company performed a detailed review of the balances
and focused efforts on collection during the 4th quarter. As a result
of this review, approximately $650 of bad debt expense was recorded in
the 4th quarter. In addition, the Company determined that it was
liable for $250 of additional taxes including interest and penalties.
Such amount was recorded in the 4th quarter.
F-18
<PAGE>
Schedule II
INFU-TECH, INC.
Valuation and Qualifying Accounts
(Dollars in thousands)
June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
-------------------------
Balance at Charged to Balance
beginning cost and at end
Description of period expenses Other Deductions(a) of period
----------- --------- -------- ----- -------------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for
uncollectible
accounts:
1999...................... $ 1,578 $ 963 $ -- $ 696 $ 1,845
===== ====== ========== ======= =====
1998...................... $ 1,995 $ 353 $ - $ 770 $ 1,578
===== ====== ========= ====== =====
1997...................... $ 2,456 $ (196) $ 513 $ 778 $ 1,995
===== ====== ========= ====== =====
</TABLE>
(a) Uncollectible accounts charged off during the year, net of recoveries.
S - 1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
INFU-TECH, INC.
Date: October 26, 1999 By: /s/ JACK ROSEN
--------------------
Jack Rosen
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Company in the capacities and on the dates indicated.
/s/ Jack Rosen Chairman of the Board, Director (Principal
- -------------------------------- Executive Officer)
Jack Rosen
/s/ Pritpal Virdee President, Chief Operating Officer
- -------------------------------- and Principal Financial Officer
Pritpal Virdee
/s/ Stephen Saposnik Principal Accounting Officer
- --------------------------------
Stephen Saposnik
/s/ Joseph Rosen Director
- --------------------------------
Joseph Rosen
/s/ Israel Ingberman Director
- --------------------------------
Israel Ingberman
/s/ Joseph M. Giglio Director
- --------------------------------
Joseph M. Giglio
/s/ Bruce Slovin Director
- --------------------------------
Bruce Slovin
<PAGE>
INFU-TECH, INC.
AND SUBSIDIARIES
The following are the subsidiaries of Infu-Tech, Inc. ("Infu-Tech" or the
"Company").
A. Infu-Tech, Inc. (a Delaware corporation).
1) Infu-Tech, Inc. (a New Jersey corporation) (formerly
Temporary Nursing Services, Inc.).
2) Infu-Tech of Florida, Inc. (a Florida corporation).
3) Infu-Tech of Illinois, Inc. (a Illinois corporation).
4) Infu-Tech of Massachusetts, Inc. (a Massachusetts corporation).
5) Infu-Tech of New York, Inc. (a New York corporation).
6) Infu-Tech of Tennessee, Inc. (a Tennessee corporation).
7) Intrx Medical, Inc. (a New Jersey corporation)
