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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- -----------Exchange Act of 1934
For the quarterly period ended June 30, 2002
OR
Transition report pursuant to Section 13 or 15 (d) of the
- -------------Securities Exchange Act of 1934
Commission File Number: 000-19370
Curative Health Services, Inc.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1503914
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
150 Motor Parkway
Hauppauge, New York 11788
(631) 232-7000
(Address of principal executive offices)
-------------------------------------
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
--------- ---------
As of August 1, 2002, there were 11,659,094 shares of the Registrant's Common
Stock, $.01 par value, outstanding.
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INDEX
Part I Financial Information Page No.
- -------------------------------------------------------------------------------
Item 1 Financial Statements:
Condensed Consolidated Statements of Operations
Three and Six Months ended June 30, 2002 and 2001 3
Condensed Consolidated Balance Sheets
June 30, 2002 and December 31, 2001 4
Condensed Consolidated Statements of Cash Flows
Six Months ended June 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk 17
Part II Other Information Page No.
- -------------------------------------------------------------------------------
Item 1 Legal Proceedings 18
Item 2 Changes in Securities and Use of Proceeds 18
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits and Reports on Form 8-K 19
Signatures 21
Part I. Financial Information
Item 1. Financial Statements
Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------------------- ---------------------
Revenues:
Services $ 8,964 $12,281 $17,859 $25,798
Products 22,956 11,690 36,825 11,690
------- ------- ------- -------
Total revenues 31,920 23,971 54,684 37,488
Costs and operating expenses:
Cost of services 3,976 7,242 8,434 15,339
Cost of product sales 16,468 9,931 26,267 9,931
Selling, general & administrative 6,610 6,633 11,533 11,762
------- ------- ------- -------
Total costs and operating expenses 27,054 23,806 46,234 37,032
------- ------- ------- -------
Income from operations 4,866 165 8,450 456
Interest income 17 154 53 711
Interest expense 145 - 282 -
------- ------- ------- -------
Income before taxes 4,738 319 8,221 1,167
------- ------- ------- -------
Income taxes 1,907 309 3,340 665
------- ------- ------- -------
Net income $ 2,831 $ 10 $ 4,881 $ 502
======= ======= ======= =======
Net income per common share, basic $ 0.25 $ 0.00 $ 0.46 $ 0.07
======= ======= ======= =======
Net income per common share, diluted $ 0.23 $ 0.00 $ 0.42 $ 0.07
======= ======= ======= =======
Weighted average common shares, basic 11,536 7,116 10,582 7,119
======= ======= ======= =======
Weighted average common shares, diluted 12,349 7,545 11,608 7,451
======= ======= ======= =======
See accompanying notes
Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, 2002 December 31, 2001
----------------------------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 2,120 $12,264
Accounts receivable, net 25,827 13,139
Deferred tax assets 6,711 6,265
Inventory 11,581 4,547
Prepaid and other current assets 2,730 745
-------- -------
Total current assets 48,969 36,960
Property and equipment, net 3,483 3,795
Goodwill and intangibles 106,114 34,787
Other Assets 6,146 1,385
-------- -------
Total assets $164,712 $76,927
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 16,500 $ 9,249
Accrued expenses 16,957 25,186
Other current liability 1,617 -
-------- -------
Total current liabilities 35,074 34,435
Long term liabilities 26,055 6,000
Stockholders' equity
Common stock 115 75
Additional paid in capital 96,188 34,019
Retained earnings 7,280 2,398
-------- -------
Total stockholders' equity 103,583 36,492
Total liabilities and
stockholders' equity $164,712 $76,927
======== =======
See accompanying notes
Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended June 30,
2002 2001
-------------------------
OPERATING ACTIVITIES:
Net income $ 4,881 $ 502
Adjustments to reconcile net income to net cash
used in operating activities
Equity in operations of investee (45) 242
Depreciation and amortization 1,138 1,680
Changes in operating assets and liabilities (8,654) (4,953)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (2,680) (2,529)
INVESTING ACTIVITIES:
Notes receivable - 3,190
Acquisition of eBiocare.com, Inc. - (38,657)
Acquisition of Hemophilia Access, Inc., net of cash acquired (307) -
Acquisition of Apex Therapeutics, Inc., net of cash acquired (20,870) -
Acquisition of Infinity Infusion Care, Ltd., net of cash acquired (17,923) -
Purchase of property and equipment and other (330) (350)
Sales of marketable securities - 26,978
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (39,430) (8,839)
FINANCING ACTIVITIES:
Proceeds from secondary offering, net of fees 16,493 -
Stock repurchases - (1,118)
Proceeds from exercise of stock options 3,856 518
Borrowing from credit facilities 11,617 -
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 31,966 (600)
NET DECREASE IN CASH AND CASH EQUIVALENTS (10,144) (11,968)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,264 19,016
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,120 $ 7,048
======== ========
SUPPLEMENTAL INFORMATION
Interest paid $ 7 $ -
Income taxes paid $ 1,273 $ 85
See accompanying notes
Curative Health Services, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The condensed consolidated financial statements are unaudited and reflect
all adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements for the year ended December 31, 2001 and notes
thereto contained in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission. The results of operations for the three and
six months ended June 30, 2002 are not necessarily indicative of the results to
be expected for the entire fiscal year ending December 31, 2002.
Note 2. Net Income per Common Share
Net income per common share, basic, is computed by dividing the net income
by the weighted average number of common shares outstanding. Net income per
common share, diluted, is computed by dividing net income by the weighted
average number of shares outstanding plus dilutive common share equivalents. The
following table sets forth the computation of weighted average shares, basic and
diluted, used in determining basic and diluted earnings per share (in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------------------- --------------------
Weighted average shares,basic 11,536 7,116 10,582 7,119
Effect of dilutive stock 813 429 1,026 332
------ ----- ------ -----
Weighted average shares,diluted 12,349 7,545 11,608 7,451
====== ===== ====== =====
Note 3. Purchase of Apex Therapeutic Care, Inc.
On February 28, 2002, the Company acquired all of the outstanding shares of
Apex Therapeutic Care, Inc. ("Apex"), a leading provider of biopharmaceutical
products, therapeutic supplies and services to people with hemophilia and
related bleeding disorders, for an aggregate purchase price of $60 million.
Approximately $40 million of the purchase price was paid in shares of the
Company's common stock with the remainder paid in cash and a $5 million
promissory note bearing interest at the rate of 4.4 percent per annum and
maturing on February 28, 2007. Payment of the promissory note is contingent
upon certain business performance criteria; therefore, the actual payment amount
may be subject to a reduction. The Company and the former shareholders of Apex
amended and restated the promissory note on May 30, 2002, to change the terms
relating to the business performance criteria and to add a convertible feature.
The amended and restated promissory note is convertible into a maximum of
250,000 shares of the Company's common stock. The operating results of Apex are
included in the accompanying financial statements from the date of acquisition.
Unaudited pro forma amounts for the six months ended June 30, 2002 and 2001,
assuming the Apex acquisition had occurred on January 1, 2001, are as follows
(in thousands, except per share data):
Curative Health Services, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Purchase of Apex Therapeutic Care, Inc. (continued)
Six Months Ended June 30,
2002 2001
-------------------------
Revenues $62,834 $72,230
======= =======
Net Income $ 5,852 $ 2,282
======= =======
Net income per share, diluted $ 0.47 $ 0.22
======= =======
The pro forma operating results shown above are not necessarily indicative
of operations in the periods following acquisition. The unaudited pro forma
operating results include the results of eBiocare.com ("eBiocare") as if the
eBiocare acquisition, which occurred on March 31, 2001, had occurred on January
1, 2001.
Note 4. Purchase of Infinity Infusion Care, Inc.
On June 28, 2002, the Company purchased Infinity Infusion Care, Ltd.
("Infinity"), a Houston, Texas, based distributor of specialty pharmaceuticals
and a provider of infusion therapy services. Infinity focuses on the specialty
infusion market, primarily in immunoglobulin therapy (prescribed for individuals
whose immune systems cannot function sufficiently to fight infectious or
inflammatory diseases). The aggregate purchase price was $24 million, which
consisted of $18 million in cash and $6 million in promissory notes, which bear
interest at a rate of 3 percent per annum, mature on June 28, 2007, and are
convertible at a price per share of $16.08 into an aggregate of 373,111 shares
of the Company's common stock. The cash portion of the consideration was funded
in part by cash on hand and in part by borrowing on the Company's credit lines
with Healthcare Business Credit Corporation ("HBCC"). The acquisition was
accounted for using the purchase method of accounting, and the accounts of
Infinity and related goodwill are included in the condensed consolidated
financial statements at June 30, 2002.
Note 5. Segment Information
The Company adheres to the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Company has two reportable segments: Specialty
Healthcare Services and Specialty Pharmacy Services. In its Specialty Healthcare
Services business unit, the Company contracts with hospitals to manage
outpatient Wound Care Center(R) programs. In its Specialty Pharmacy Services
business unit, the Company contracts with insurance companies, government and
other payors to provide direct to patient distribution of biopharmaceutical
products. The Company evaluates segment performance based on income from
operations. Management estimates that corporate general and administrative
expenses allocated to the reportable segments are 60% for Specialty Health
Services and 40% for Specialty Pharmacy Services. Intercompany transactions are
eliminated to arrive at consolidated totals.
Curative Health Services, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the results of operations and total assets of the
reportable segments of the Company for the three months ended June 30, 2002 and
2001 (in thousands):
For the Three Months Ended
June 30, 2002
--------------------------------------------------
Specialty Specialty Eliminating
Health Pharmacy Entries Total
--------------------------------------------------
Revenues $ 8,964 $ 22,956 - $ 31,920
======= ======== ======= ========
Income from operations $ 1,682 $ 3,184 - $ 4,866
======= ======== ======= ========
Total assets $42,741 $118,686 $ 3,285 $164,712
======= ======== ======= ========
For the Three Months Ended
June 30, 2001
--------------------------------------------------
Specialty Specialty Eliminating
Health Pharmacy Entries Total
--------------------------------------------------
Revenues $ 12,281 $11,690 $ - $23,971
======== ======= ======= =======
Income from operations $ (360) $ 525 $ - $ 165
======== ======= ======= =======
Total assets $ 38,285 $40,505 $(2,456) $76,334
======== ======= ======= =======
The following tables present the results of operations and total assets of the
reportable segments of the Company for the six months ended June 30, 2002 and
2001 (in thousands):
For the Six Months Ended
June 30, 2002
--------------------------------------------------
Specialty Specialty Eliminating
Health Pharmacy Entries Total
--------------------------------------------------
Revenues $17,859 $ 36,825 $ - $ 54,684
======= ======== ======== ========
Income from operations $ 3,885 $ 4,565 $ - $ 8,450
======= ======== ======== ========
Total assets $42,741 $118,686 $ 3,285 $164,712
======= ======== ======== ========
For the Six Months Ended
June 30, 2001
--------------------------------------------------
Specialty Specialty Eliminating
Health Pharmacy Entries Total
--------------------------------------------------
Revenues $ 25,798 $11,690 $ - $37,488
======== ======= ======= =======
Income from operations $ (69) $ 525 $ - $ 456
======== ======= ======= =======
Total assets $ 38,285 $40,505 $(2,456) $76,334
======== ======= ======= =======
Curative Health Services, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Goodwill and other intangible assets
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting and specifies
criteria that intangible assets acquired in a business combination must meet in
order to be recognized and reported apart from goodwill. SFAS No. 142 requires
that purchased goodwill and intangible assets with indefinite useful lives no
longer be amortized into results of operations. Instead, goodwill and intangible
assets should be tested, at least annually, for impairment and, if necessary,
written down and charged to results of operations only in the periods in which
the recorded value of goodwill and certain intangibles exceeds fair value. The
provisions of each statement were adopted by the Company on January 1, 2002. The
following table sets forth the pro forma net income and earnings per share for
the current and corresponding prior period as if SFAS No. 142 had been adopted
in the prior period (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------------------ -----------------
Reported net income $2,831 $ 10 $4,881 $502
Add back: Goodwill amortization - 434 - 477
------ ---- ------ ----
Adjusted net income $2,831 $444 $4,881 $979
====== ==== ====== ====
Basic earnings per share:
Reported net income $0.25 $ - $0.46 $0.07
Goodwill amortization - $0.06 - $0.07
----- ----- ----- -----
Adjusted net income $0.25 $0.06 $0.46 $0.14
===== ===== ===== =====
Diluted earnings per share:
Reported net income $0.23 $ - $0.42 $0.07
Goodwill amortization - $0.06 $ - $0.07
----- ----- ----- -----
Adjusted net income $0.23 $0.06 $0.42 $0.14
===== ===== ===== =====
Curative Health Services, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Goodwill and other intangible assets (continued)
As the Company's acquisitions were accounted for as stock purchases, its
goodwill amortization is not tax deductible. Therefore, the impact of the
adoption of SFAS No. 142 resulted in an increase in net income of $.4 million
and an increase in diluted earnings per share of approximately $0.06 for the
three months ended June 30, 2001. For the first six months of 2001, the adoption
of SFAS No. 142 resulted in an increase of $.5 million in net income and $0.07
in diluted earnings per share.
As required under SFAS No. 142, the Company will test its goodwill for
impairment. Although the Company has not yet completed the impairment test, the
Company does not expect to record an impairment charge in 2002.
Note 7. Changes in Capital Structure
During the first six months of 2002, the Company had the following
significant changes in capital structure:
Acquisition of Hemophilia Access, Inc. On January 8, 2002, the Company
acquired all of the outstanding shares of Hemophilia Access, Inc. in exchange
for 175,824 shares of its common stock, which amounted to approximately $2.4
million, and approximately $.3 million in cash.
Private Placement. On February 8, 2002, the Company completed a private
placement of 1,059,000 shares of common stock to accredited investors for net
proceeds of $16.5 million.
Acquisition of Apex. On February 28, 2002, the Company acquired all of the
outstanding shares of Apex Therapeutic Care, Inc. for $60 million. Approximately
$40 million of the purchase price was paid in shares of the Company's common
stock with the remainder paid in cash and a $5 million promissory note bearing
interest at the rate of 4.4 percent per annum and maturing on February 28, 2007.
Payment of the promissory note is contingent upon certain business performance
criteria; therefore, the actual payment amount may be subject to a reduction.
The Company and the former shareholders of Apex amended and restated the
promissory note on May 30, 2002, to change the terms relating to the business
performance criteria and to add a convertible feature. The amended and restated
promissory note is convertible into a maximum of 250,000 shares of the Company's
common stock.
Acquisition of Infinity Infusion Care, Ltd. On June 28, 2002, the Company
acquired all of the outstanding partnership interests of Infinity Infusion Care,
Ltd. for $24 million which consisted of $18 million in cash and $6 million in
promissory notes, which bear interest at a rate of 3 percent per annum, mature
on June 28, 2007, and are convertible at a price per share of $16.08 into an
aggregate of 373,111 shares of the Company's common stock.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Curative Health Services, Inc. ("Curative" or the "Company") is a leading
disease management company that operates in two business segments: Specialty
Pharmacy Services and Specialty Healthcare Services. In its Specialty Pharmacy
operations, the Company purchases biopharmaceutical products from manufacturers
and then contracts with insurance companies, government and other payors to
provide direct to patient distribution of and education about, and other support
services relating to, these biopharmaceutical products. With the purchase of
Infinity, the Specialty Pharmacy Services business unit offers, under contracts
with payors, infusion therapy services for patients with immune system
disorders. The Company's Specialty Pharmacy revenues are derived primarily from
fees paid by the payors under these contracts for the purchase and distribution
of these biopharmaceuticals and for infusion services provided. In addition, as
part of its Specialty Pharmacy operations, the Company provides
biopharmaceutical product distribution and support services under contract with
retail pharmacies for which it receives service fees. The biopharmaceutical
products distributed and the infusion therapies offered by the Company are used
by patients with chronic conditions, such as hemophilia, hepatitis C, rheumatoid
arthritis, multiple sclerosis, and immune system disorders. The Company
contracts with approximately 197 payors and 15 retail pharmacies.
The Specialty Healthcare Services business unit contracts with hospitals to
manage, Wound Care Center(R) programs. These Wound Care Center(R) programs offer
a comprehensive range of services that enable the Specialty Healthcare Services
business unit to provide patient specific wound care diagnosis and treatments on
a cost-effective basis. Specialty Healthcare Services currently operates two
types of Wound Care Center(R) programs with hospitals: a management model and an
"under arrangement" model.
In the management model, Specialty Healthcare Services provides management
and support services for a chronic wound care facility owned or leased by the
hospital and staffed by employees of the hospital, and generally receives a
fixed monthly management fee or a combination of a fixed monthly management fee
and a variable case management fee. In the "under arrangement" model, Specialty
Healthcare Services provides management and support services, as well as the
clinical and administrative staff, for a chronic wound care facility owned or
leased by the hospital, and generally receives fees based on the services
provided to each patient. In both models physicians remain independent.
Specialty Healthcare Services offers assistance in recruiting and provides
training in wound care to the physicians and staff associated with the Wound
Care Center(R) programs.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. On an
on-going basis, management evaluates its estimates and judgments, including
those related to bad debts, inventories, intangibles, income taxes and revenue
recognition. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. Management believes the following
critical accounting policies, among others, affect its more significant
judgments and estimates used in the preparation of its consolidated financial
statements:
Trade receivables: Considerable judgment is required in assessing the
ultimate realization of receivables, including the current financial condition
of the customer, age of the receivable, and the relationship with the customer.
The Company estimates its allowances for doubtful accounts using these factors.
If the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. In circumstances where the Company is aware of a
specific customer's inability to meet its financial obligations (e.g.,
bankruptcy filings), a specific reserve for bad debts is recorded against
amounts due to reduce the receivable to the amount the Company reasonably
believes will be collected. For all other customers, the Company has reserves
for bad debt based upon the total accounts receivable balance. As of June 30,
2002, the Company's reserves for accounts receivable was approximately 22
percent of total receivables.
Inventory: Inventories are carried at the lower of cost or market on a
first in, first out basis. Inventory consists of high cost biopharmaceuticals
that in many cases require refrigeration or other special handling. As a result,
inventories are subject to spoilage or shrinkage. On a quarterly basis, the
Company performs a physical inventory and determines whether any shrinkage or
spoilage adjustments are needed. Although the Company believes its inventory
balances at June 30, 2002 are reasonably accurate, there can be no assurances
that spoilage or shrinkage adjustments will not be needed in the future. The
recording of any such reserve may have a negative impact on the Company's
operating results.
Deferred tax assets: The Company has approximately $6.7 million in deferred
tax assets as of June 30, 2002 to record against future income. The Company does
not have a valuation allowance against this asset as it believes it is more
likely than not that the tax assets will be realized. The Company has considered
future income expectations and prudent tax strategies in assessing the need for
a valuation allowance. In the event that the Company determines in the future
that it needs to record a valuation allowance, an adjustment to deferred tax
assets would be charged against income in the period of determination.
Goodwill and intangibles: Goodwill and intangibles consist of the excess of
purchase price over the fair value of net tangible and intangible assets
acquired, and separately identifiable intangibles such as pharmacy and customer
relationships, covenants not to compete, and trademarks. Effective January 1,
2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
and is required to analyze its goodwill for impairment on an annual basis. In
assessing the recoverability of the Company's goodwill and intangibles, the
Company must make assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets. If these estimates
or assumptions change in the future, the Company may need to record an
impairment charge for these assets. An impairment charge would reduce operating
income in the period it was determined that the charge was needed.
Results of Operations
Revenues. The Company's revenues for the second quarter of 2002 increased
33 percent to $31.9 million compared to $24.0 million for the second quarter of
the prior fiscal year. For the first six months of 2002, revenues increased 46
percent to $54.7 million from $37.5 million for the same period in 2001.
Service revenues, attributed entirely to the Specialty Healthcare Services
business unit, decreased 27 percent to $9.0 million in the second quarter of
2002 from $12.3 million in the second quarter of 2001. For the first six months
of 2002, service revenues decreased 31 percent to $17.9 million compared to
$25.8 million for the same period in 2001. The service revenues decreases of
$3.3 million for the second quarter 2002 and $7.9 million for the first six
months of 2002 are attributable to the operation of 96 Wound Care Center (R)
programs at the end of the second quarter of 2002 as compared to 112 at the end
of the second quarter of the prior fiscal year as the result of contract
terminations and renegotiation. At any time during any given year, 10 percent to
20 percent of hospital contracts are being renegotiated. The Company expects to
continue contract renegotiations in 2002. Historically, some hospital contracts
have expired without renewal and others have been terminated by the Company or
the client hospital for various reasons prior to their scheduled expiration.
Hospitals are currently facing financial challenges associated with lower
occupancy rates and reduced revenue streams due to pricing pressures from third
party payors. Program terminations by client hospitals have been effected for
such reasons as reduced reimbursement, financial restructuring, layoffs,
bankruptcies or even hospital closings. Further, the Medicare program
implemented a new reimbursement system during 2000 for hospital outpatient
services which has reduced reimbursement rates to hospitals. The termination,
non-renewal or renegotiations of a material number of management contracts could
result in a continued decline in the Company's Specialty Healthcare Services
business unit revenue.
Product revenues increased $11.3 million, or 96 percent, to $23.0 million
in the second quarter of 2002 from $11.7 million in the second quarter of 2001.
The increase in product revenues is primarily attributable to the internal
growth of hemophilia patient revenues and the inclusion of the acquisitions of
Hemophilia Access, Inc. ("HAI") and Apex in 2002, offset by a reduction in
Specialty Healthcare Services revenues of $.9 million as the result of the
elimination of Procuren product sales and the elimination of Specialty Pharmacy
Services sales related to unprofitable injectable contracts. For the second
quarter of 2002, product revenues included $21.1 million of hemophilia related
products and $1.8 million of other injectable products. For the first six months
of 2002, product revenues increased $25.1 million, or 215 percent, to $36.8
million compared to $11.7 million for the same period in 2001. This increase
reflects the internal growth of hemophilia patient related revenues, the
inclusion of eBiocare for six months in 2002 versus three months in 2001, as
well as the inclusion of the results of HAI and Apex in 2002, offset by a
decrease of $1.5 million in eliminated Procuren product sales and a reduction of
$4.2 million in Specialty Pharmacy Services unprofitable injectable product
sales. For the first six months of 2002, product revenues included $32.6 million
of hemophilia related products and $4.3 million of other injectable products.
Cost of Services. The cost of services, attributed entirely to the
Specialty Healthcare Services business unit, decreased $3.2 million, or 44
percent, to $4.0 million in the second quarter of 2002 from $7.2 million in the
second quarter of 2001. The decrease is attributable to reduced staffing and
operating expenses of approximately $1.0 million related to the operation of 96
programs at the end of the second quarter of 2002 as compared with 112 programs
operating at the end of the second quarter 2001. Additionally, there were 11
fewer under-arrangement programs in operation at the end of the second quarter
of 2002 as compared to the same period for 2001, at which the services component
of costs is higher than at the Company's other centers due to the additional
clinical staffing and expenses that these models require. For the second quarter
of 2002, this reduction in the number of under-arrangement programs accounted
for approximately $.9 million of the decrease in the cost of services. For the
first six months of 2002, the cost of services attributed to the Specialty
Healthcare Services business unit decreased $6.9 million, or 45 percent, to $8.4
million compared to $15.3 million for the same period in 2001. The decrease is
the result of reduced staffing and operating expenses of $2.3 million related to
the decrease in the number of programs. Further, the reduction of 11
under-arrangement programs in operation at the end of the first six months of
2002 as compared to the same period for 2001 accounted for approximately $2.0
million of the decrease in costs. As a percentage of service revenues, the cost
of services for the second quarter of 2002 was 44 percent compared to 59 percent
for the same period in 2001. For the first six months of 2002, the cost of
services as a percentage of service revenues was 47 percent compared to 59
percent for the same period in 2001. These improvements are primarily
attributable to the reorganization done by the Company in the fourth quarter of
2001.
Cost of product sales. The cost of product sales increased $6.6 million, or
67 percent to $16.5 million from $9.9 million in the second quarter of 2001. The
increase is attributable to the internal growth of hemophilia patient revenues
and the HAI and Apex acquisitions in 2002, offset by the reduction in Procuren
related costs of $.8 million as the result of the elimination of Procuren sales,
and a reduction in sales of Specialty Pharmacy Services unprofitable injectable
products. For the first six months of 2002, the cost of product sales increased
$16.4 million, or 166 percent, to $26.3 million compared to $9.9 million for the
same period in 2001. This increase is due to the Specialty Pharmacy acquisitions
in 2002 and the six months of costs related to eBiocare in 2002 versus three
months in 2001, offset by the eliminated Procuren related costs of $1.8 million,
and a reduction in sales of Specialty Pharmacy Services unprofitable injectable
products. As a percentage of product sales, the cost of product sales for the
second quarter was 72 percent compared to 85 percent for the same period in
2001. For the first six months of 2002, the cost of product sales as a
percentage of product revenues was 71 percent compared to 85 percent for the
first six months of 2001. This improvement is attributable to a higher mix of
hemophilia related product sales in the Specialty Pharmacy Services business
unit and the elimination of Procuren sales.
Selling, General and Administrative. Selling, general and administrative
expenses were flat at $6.6 million for the second quarter 2002 as compared to
the same period of 2001. For the first six months of 2002, selling, general and
administrative expenses totaled $11.5 million compared to $11.8 million for the
same period in 2001, a decrease of $.3 million, or 2 percent. The reduction for
the six-month period is attributable to a decrease in expenses related to
Specialty Health Services of $1.8 million, offset by an increase of $2.0 million
of Specialty Pharmacy Services expenses attributable to the acquisitions and
increased costs related to additional corporate staff. As a percentage of
revenues, selling, general and administrative expenses were 21 percent in the
second quarter of 2002, compared to 28 percent for 2001, and 21 percent for the
first six months of 2002 compared to 31 percent for the same period for 2001.
The improvement is due to the increased revenue base and lower Specialty
Healthcare Services expenses in 2002.
Net Income. Net income was $2.8 million or $0.23 per diluted share in the
second quarter of 2002 compared to $.01 million, or breakeven per diluted share,
in the second quarter of 2001. For the first six months of 2002, net income was
$4.9 million, or $0.42 per diluted share compared to net income of $0.5 million,
or $0.07 per diluted share for the same period in 2001. The increases in
earnings of $2.8 million for the second quarter of 2002 and $4.4 million for the
first six months of 2002 are primarily attributable to the inclusion of the
Specialty Pharmacy Services business unit results in 2002, the elimination of
Procuren product sales and the reduction of Specialty Healthcare Services
selling general and administrative costs.
Liquidity and Capital Resources.
Working capital was $13.9 million at June 30, 2002 compared to $2.5 million
at December 31, 2001. Total cash and cash equivalents as of June 30, 2002 was
$2.1 million and was invested primarily in highly liquid money market funds. The
ratio of current assets to current liabilities was 1.4:1 at June 30, 2002 and
1.1:1 at December 31, 2001. The improvement in the Company's working capital and
current ratio is primarily attributable to the acquisitions of Apex and HAI in
the first quarter of 2002 and the acquisition of Infinity in the second quarter
of 2002.
Cash flows used in operating activities for the six months ended June 30,
2002 totaled $2.7 million primarily attributable to an increase in accounts
receivable, a reduction in accounts payable and accrued expenses, including $9.5
million in payments made during the first six months of 2002 related to the
settlement of the Department of Justice lawsuit. Cash flows used in investing
activities totaled $39.4 million primarily attributable to the purchases of HAI,
Apex and Infinity. Cash flows provided by financing activities totaled $32.0
million, attributable to net proceeds of $16.5 million from the Company's sale
of shares in a private placement transaction, $3.9 million in proceeds from the
exercise of stock options, and $11.6 million in borrowings from the Company's
credit facilities.
For the first six months of 2002, the Company experienced a net increase in
accounts receivable of $12.7 million, primarily attributable to the purchases of
Apex, HAI and Infinity. Days sales outstanding were 68 days as of June 30, 2002,
as compared to 58 days at December 31, 2001. At June 30, 2002, days sales
outstanding for the Specialty Healthcare Services business was 61 days and 70
days for the Specialty Pharmacy Services business.
The Company's longer term cash requirements include working capital for the
expansion of its Specialty Pharmacy Services business and Specialty Healthcare
Services business, and for acquisitions. Other cash requirements are anticipated
for capital expenditures in the normal course of business, including the
acquisition of software, computers and equipment related to the Company's
management information systems. Additionally, as of June 30, 2002, the Company
has a $7.0 million obligation, payable over approximately four years, to the
Department of Justice related to the settlement of its litigation and a $6.5
million obligation related to the settlement of its Shareholder lawsuit. (See
Legal Proceedings, Part II Item 1). In January of 2002, the Company entered into
$25 million line of credit with HBCC, and, in February 2002, the Company sold
1,059,000 shares of common stock in a private placement transaction raising a
net total of $16.5 million. In addition, in May of 2002, the Company secured a
4-year, $10 million term loan facility with HBCC. These transactions were to
provide liquidity for both working capital and acquisitions. The Company paid $9
million in January 2002 to the Department of Justice as part of the Company's
settlement agreement, used approximately $21 million in cash related to the
purchase of Apex in February 2002, and paid $18 million in cash in connection
with the acquisition of Infinity in June 2002. The Company expects that, based
on its current business plan, its existing cash and cash equivalents and
available credit will be sufficient to satisfy its working capital needs at
least through June 30, 2003. The effect of inflation risk is considered
immaterial.
Health Insurance Portability and Accountability Act
During 2000, final regulations regarding the protection of the privacy of
personal health information, promulgated by the Department of Health and Human
Services, were published in the Federal Register. These regulations set the
standards for securing patient records and generally prohibit covered entities
from using or disclosing protected health information. As a result of these
regulations, the Company anticipates expenditures in ensuring patient data kept
on computer networks maintained at the Specialty Healthcare Services Wound Care
Center(R) programs, Specialty Pharmacy Services operations and corporate offices
are in compliance with these regulations. While the Company believes that it
will be in compliance by the February 2003 deadline, there can be no assurances
that the cost of reaching compliance will not have a material impact on the
financial condition of the Company.
Cautionary Statement
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements include statements
regarding intent, belief or current expectations of the Company and its
management. These forward-looking statements are not guarantees of future
performance and involve a number of risks and uncertainties that may cause the
Company's actual results to differ materially from the results discussed in
these statements. Factors that might cause such differences include, but are not
limited to, those described under the heading, "Critical Accounting Policies and
Estimates" herein, or those described in Exhibit 99 to this Form 10-Q, and other
factors described in the Company's future filings with the SEC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not have operations subject to risks of material foreign
currency fluctuations, nor does it use derivative financial instruments in its
operations or investment portfolios. The Company places its investments in
instruments that meet high credit quality standards, as specified in the
Company's investment policy guidelines. The Company does not expect any material
loss with respect to its investment portfolio or exposure to market risks
associated with interest rates.
Curative Health Services, Inc. and Subsidiaries
Part II. Other Information
Item 1. Legal Proceedings
With respect to the Company's legal proceedings previously disclosed,
except as described in the next sentence, there have been no material
developments since the disclosure provided in Item 3 - "Legal Proceedings" in
the Company's Annual Report on Form 10-K filed with the SEC for the year ended
December 31, 2001. With respect to the eBioCare indemnification litigation, on
or about May 2, 2002, the court stayed the litigation with respect to
substantially all such claims, pending arbitration of such matters.
With respect to the shareholder lawsuit previously disclosed, on July 11,
2002, the United States District Court for the Eastern District of New York
ordered a final judgment approving the settlement. Pursuant to the terms of the
settlement, even though the Company maintained that there was no basis for the
imposition of liability, in order to avoid the delay and expense of protracted
litigation, the Company made the final payment of $6.5 million in an aggregate
of 421,044 shares of the Company's common stock on August 2, 2002 and August 5,
2002. The remaining $4 million was previously paid from insurance proceeds.
Item 2.
Changes in Securities and Use of Proceeds
(c)
Acquisition of Hemophilia Access, Inc. On January 8, 2002, Curative
acquired all of the outstanding shares of Hemophilia Access, Inc. in exchange
for 175,824 shares of its common stock, which amounted to approximately $2.4
million, and approximately $.3 million in cash.
Private Placement. On February 8, 2002, Curative completed a private
placement of 1,059,000 shares of common stock to accredited investors for net
proceeds of $16.5 million. U.S. Bancorp Piper Jaffray acted as placement agent
for the shares and received a placement fee of approximately $.4 million.
Acquisition of Apex. On February 28, 2002, Curative acquired all of the
outstanding shares of Apex Therapeutic Care, Inc. for $60 million. Approximately
$40 million of the purchase price was paid in shares of the Company's common
stock with the remainder paid in cash and a $5 million promissory note bearing
interest at the rate of 4.4 percent per annum and maturing on February 28, 2007.
Payment of the promissory note is contingent upon certain business performance
criteria; therefore, the actual payment amount may be subject to a reduction.
The Company and the former shareholders of Apex amended and restated the
promissory note on May 30, 2002, to change the terms relating to the business
performance criteria and to add a convertible feature. The amended and restated
promissory note is convertible into a maximum of 250,000 shares of the Company's
common stock.
Acquisition of Infinity Infusion Care, Ltd. On June 28, 2002, Curative
acquired all of the outstanding partnership interests of Infinity Infusion Care,
Ltd. for $24 million which consisted of $18 million in cash and $6 million in
promissory notes, which bear interest at a rate of 3 percent per annum, mature
on June 28, 2007, and are convertible at a price per share of $16.08 into an
aggregate of 373,111 shares of the Company's common stock.
Each of the issuances and sales of shares of common stock described above were
deemed to be exempt from registration under the Securities Act of 1933 in
reliance on Section 4(2) of the Act or Regulation D promulgated thereunder as
transactions by the issuer not involving a public offering, where the purchasers
represented their intention to acquire securities for investment purposes only
and not with a view to or for sale in connection with any distribution thereof,
and received or had access to adequate information about Curative Health
Services, Inc.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 2002 annual meeting of stockholders on May 30, 2002.
Proxies for the meeting were solicited pursuant to Section 14 of the Securities
Exchange Act of 1934, as amended, and there was no solicitation in opposition to
management's nominees as listed in the proxy statement. There were present at
the Annual Meeting in person or by proxy the holders of 9,103,823 votes. At the
meeting, the stockholders elected all seven members of the Company's Board of
Directors to serve for a term of one year.
Elected members of the Board of Directors: (Shares voted affirmative in
parenthesis)
Affirmative Withheld/Against
Paul Auerbach (9,058,546) 45,277
Daniel Berce (9,051,262) 52,561
Lawrence P. English (9,051,135) 52,688
Joseph Feshbach (9,049,387) 54,436
Timothy I. Maudlin (9,051,035) 52,788
Gerard Moufflet (9,057,469) 46,354
John C. Prior (9,051,142) 52,681
The stockholders approved of the following:
(a) The proposed amendments to the Curative Health Services, Inc. 2000
Stock Incentive Plan. Number of votes for were 6,853,857, against
2,230,489, and 19,477 abstained.
(b) The proposed amendments to the Curative Health Services, Inc.
Non-Employee Director Stock Option Plan. Number of votes for were
7,209,452, against 1,876,309, and 18,062 abstained.
(c) The ratification of the appointment of Ernst & Young LLP as the Company's
independent auditors. Number of votes for were 9,084,712, against 14,924,
and 4,187 abstained.
Item 5. Other Information
The Chairman and Chief Executive Officer of the Company, Joseph Feshbach,
withdrew his Rule 10b5-1 plan on May 20, 2002.
Lawrence English resigned from the Compensation and Stock Option Committee of
the Board of Directors of the Company on June 21, 2002, and was replaced by
Dr.Paul Auerbach.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 2.1 Purchase Agreement, dated as of June 10, 2002, by and among
Curative Health Services, Inc., Infinity Infusion, LLC and
Infinity Infusion II, LLC, and IIC GP, LLC, Azar I. Delpassand,
Dr. Ebrahim Delpassand, Tara Imani, Maryam Panahi and Yassamin
Norouzian (incorporated by reference to Exhibit 99.2 to the
Company's Current Report on Form 8-K dated June 10, 2002)
Exhibit 2.2 Amendment No. 1 to Purchase Agreement, dated June 28, 2002,
by and among Curative Health Services, Inc., Infinity Infusion,
LLC and Infinity Infusion II, LLC and Bijan Imani, as Sellers'
Representative on behalf of the Sellers (incorporated by
reference to Exhibit 2.2 to the Company's Current Report on Form
8-K dated June 28, 2002)
Exhibit 10.1 Amended and Restated Loan and Security Agreement by and
among Curative Health Services, Inc., eBioCare.com, Inc.,
Hemophilia Access, Inc., Apex Therapeutic Care, Inc. and
Healthcare Business Credit Corporation, dated as of May 17,
2002 (incorporated by reference to Exhibit 99.3 to the
Company's Current Report on Form 8-K dated June 10, 2002)
Exhibit 99 Cautionary Statements
The Company has excluded from the exhibits filed with this report instruments
defining the rights of holders of long-term convertible debt of the Company
where the total amount of the securities authorized under such instruments
does not exceed 10 percent of its total assets. The Company hereby agrees
to furnish a copy of any of these instruments to the SEC upon request.
(b)Form 8-K
Form 8-K/A dated February 28, 2002 (and filed May 3, 2002), reporting under
Item 7 on the financial statements of the business acquired. This Form 8-K/A
amends the Form 8-K filed with the Securities and Exchange Commission on
March 11, 2002.
Form 8-K dated May 20, 2002, reporting under Item 5 on the securing of a 4
year, $10 million term loan facility with Healthcare Business Credit
Corporation. This loan facility is in addition to the $25 million line of
credit which was established with Healthcare Business Credit Corporation in
January 2002, giving the Company an aggregate $35 million in credit
facilities to fund its acquisition strategy and for general operating
purposes.
Form 8-K dated June 10, 2002, reporting under Item 2 on the entering into an
agreement to acquire Infinity Infusion Care, Ltd., and reporting under Item 5
on the entering into an Amended and Restated Loan and Security Agreement with
Healthcare Business Credit Corporation, consisting of a $25 million revolving
credit and a 4 year, $10 million term loan facility.
Form 8-K dated June 28, 2002, reporting under Item 2 on the acquisition of
Infinity Infusion Care, Ltd.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 2002
Curative Health Services, Inc.
(Registrant)
/s/ Joseph Feshbach
-------------------
Joseph Feshbach
Chief Executive Officer and Chairman
/s/ Thomas Axmacher
--------------------
Thomas Axmacher
Chief Financial Officer
(Principal Financial and Accounting Officer)
Exhibit 99
CAUTIONARY STATEMENTS
RISK RELATED TO OUR BUSINESS
If we fail to comply with the terms of our settlement agreement with the
government, we could be subject to additional litigation or other governmental
actions which would be harmful to our business.
On December 28, 2001, we entered into a settlement with the Department of
Justice, the United States Attorney for the Southern District of New York, the
United States Attorney for the Middle District of Florida and the U.S.
Department of Health and Human Services, Office of the Inspector General, in
connection with all federal investigations and legal proceedings related to the
whistleblower lawsuits previously pending against us in the United States
District Court for the Southern District of New York and the United States
District Court for the District of Columbia. The focus of the government
investigation and resolution was the allegation that we improperly caused our
hospital customers to seek reimbursement for a portion of our management fees
that included costs related to advertising and marketing activities by our
personnel. Under the terms of the settlement, we were released from claims
associated with services we provided to hospitals and, we agreed to pay the
United States a $9 million initial payment, with an additional $7.5 million to
be paid over the next four years. Pursuant to the settlement, we will be
required to fulfill certain additional obligations, including abiding by a
five-year Corporate Integrity Agreement (which incorporates much of our existing
compliance program), avoiding violations of law and providing certain
information to the Department of Justice from time to time. If we fail or if we
are accused of failing to comply with the terms of the settlement, we may be
subject to additional litigation or other governmental actions. In addition, as
part of the settlement, we consented to the entry of a judgment for $28 million
against us if we fail to comply with the terms of the settlement.
We are involved in litigation which may harm the value of our business.
We are currently in dispute with some of the former shareholders of
eBioCare.com, Inc. over claims by us for indemnification in connection with our
acquisition of eBioCare.com, Inc. These claims are for indemnification in an
aggregate amount in excess of $3 million, which is currently held in escrow, for
a breach of certain representations and warranties made by such former
shareholders. In response to our indemnification claims, the former shareholders
filed a lawsuit in Superior Court of California, County of Santa Clara, on or
about January 18, 2002 against us seeking a declaratory judgment in their favor
with respect to certain of our claims, and other remedies including the
rescission of our acquisition of eBioCare.com, Inc. On or about May 2, 2002, the
court stayed the litigation with respect to substantially all such claims,
pending arbitration of such matters. Although we believe this lawsuit is
groundless and we intend to defend these claims vigorously, an adverse result in
this dispute could harm our business.
In addition, in the ordinary course of our business, we are the subject of
or party to various lawsuits, including those arising out of services or
products provided by or to our operations, personal injury and employment
disputes, the outcome of which, in the opinion of management, will not have a
material adverse effect on our financial position or results of operations.
If we are unable to manage our growth effectively, our business will be harmed.
Our growth strategy will likely place a strain on our resources, and if we
cannot effectively manage our growth, our business will be harmed. In connection
with our growth strategy, we will likely experience a large increase in the
number of our employees, the size of our programs and the scope of our
operations. Our ability to manage this growth and be successful in the future
will depend partly on our ability to retain skilled employees, enhance our
management team and improve our management information and financial control
systems.
As part of our growth strategy, we continue to evaluate acquisition
opportunities. Acquisitions involve many risks, including:
o the specialty pharmacy industry is undergoing consolidation; therefore, we
may experience difficulty in identifying suitable candidates and
negotiating and consummating acquisitions on attractive terms;
o in the industry in which our Specialty Pharmacy Services division
operates, customers have a strong affiliation with their community-based
representatives; it is sometimes difficult to retain and assimilate the
community-based representatives of companies we acquire;
o because of the relationships between community-based representatives and
customers, the loss of a single community-based representative may entail
the loss of a significant number of customers, and we are, therefore,
subject to a significant potential for loss of customers, especially
during the periods in which we attempt to integrate newly-acquired
businesses;
o a growth strategy that involves significant acquisitions results in a
diversion of our management's attention from existing operations;
o intangible assets typically represent a significant portion of the value
of specialty pharmacy businesses; therefore, any future acquisition may
involve increased amortization expense related to such assets and any such
increase would decrease our earnings.
We could also be exposed to unknown or contingent liabilities resulting
from the pre-acquisition operations of the entities we acquire, such as
liability for failure to comply with health care or reimbursement laws.
We may need additional capital to finance our growth and capital requirements,
which could prevent us from fully pursuing our growth strategy.
In order to implement our present growth strategy, we will need substantial
capital resources and will incur, from time to time, short- and long-term
indebtedness, the terms of which will depend on market and other conditions. Due
to uncertainties inherent in the capital markets (e.g., availability of capital,
fluctuation of interest rates, etc.), we cannot be certain that existing or
additional financing will be available to us on acceptable terms, if at all. As
a result, we could be unable to fully pursue our growth strategy. Further,
additional financing may involve the issuance of equity securities that would
reduce the percentage ownership of our then current shareholders.
We could be adversely affected by an impairment of the significant amount of
goodwill on our financial statements.
Our acquisitions of the Specialty Pharmacy companies, eBioCare.com, Inc.,
Hemophilia Access, Inc., Apex Therapeutic Care, Inc., and Infinity Infusion
Care, Ltd. resulted in the recording of a significant amount of goodwill on our
financial statements. The goodwill was recorded because the fair value of the
net assets acquired was less than the purchase price. We may not realize the
full value of this goodwill. As such, we evaluate on at least an annual basis
whether events and circumstances indicate that all or some of the carrying value
of goodwill is no longer recoverable, in which case we would write off the
unrecoverable goodwill as a charge to our earnings.
Since our growth strategy will likely involve the acquisition of other
companies, we may record additional goodwill in the future. The possible
write-off of this goodwill could negatively impact our future earnings. We will
also be required to allocate a portion of the purchase price of any acquisition
to the value of any intangible assets that meet the criteria specified in the
Statement of Financial Accounting Standards No. 141 such as marketing, customer
or contract-based intangibles. The amount allocated to these intangible assets
could be amortized over a fairly short period. As a result, our earnings and the
market price of our common stock could be negatively affected.
We are highly dependent on our relationships with a limited number of
biopharmaceutical and other suppliers, and the loss of any of these
relationships could significantly affect our ability to sustain or grow our
revenues.
The biopharmaceutical industry is susceptible to product shortages. Some of
the products that we distribute, such as intra-venous immunoglobulin and blood
or blood plasma-related products, are collected and processed from human donors.
Accordingly, the supply of these products is highly dependent on human donors,
and their availability has been constrained from time to time. The industry wide
recombinant factor VIII product shortage has lessened and while supply will
increase significantly this year, demand will continue to grow. In 2001,
approximately 42 percent, or $15 million, of our revenues derived from our sale
of factor VIII. In 2001, we purchased our supplies of blood and blood
plasma-related products from five manufacturers, including Baxter Healthcare
Corp., Novo Nordisk Pharmaceuticals, Inc., and Wyeth. The Company believes that
these five manufacturers represent substantially all of the production capacity
for recombinant factor VIII. In the event that one of these suppliers is unable
to continue to supply us with products, it is uncertain whether the remaining
suppliers would be able to make up any shortfall resulting from such inability.
Our ability to take on additional customers or to acquire other specialty
pharmacy businesses with significant hemophilia customer bases could be affected
negatively in the event we are unable to secure adequate supplies of our
products from these manufacturers. If these products, or any of the other drugs
or products that we distribute, are in short supply for long periods of time,
our business could be harmed.
If additional providers obtain access to favorably priced products we handle,
our business could be harmed.
Because we do not receive federal grants under the Public Health Service
Act, we are not eligible to participate directly in a federal pricing program
administered by the Federal Health Resources and Services Administration's
Public Health Service, which allows certain entities with such grants, such as
certain hospitals and hemophilia treatment centers, to obtain discounts on
drugs, including certain biopharmaceutical products (e.g., hemophilia clotting
factor) which products represented 23 percent of our revenues in 2001. To the
best of our information, these entities benefit by being able to acquire,
pursuant to this federal program, products competitive with ours at prices lower
than our cost for the same products. Our customers, where eligible, may elect to
obtain hemophilia clotting factor, or other products, from such lower-cost
entities and this would result in a loss of revenue.
Recent investigations into reporting of average wholesale prices could reduce
our pricing and margins.
Many government payors, including Medicare and Medicaid, as well as some
private payors, pay us directly or indirectly based upon the drug's average
wholesale price. If a drug's average wholesale price declines, and if we are
unable to recoup the full amount of such decline from our customers, we will
lose revenues. Biopharmaceutical products, including hemophilia factor, are
included as part of this drug reimbursement methodology. In 2001, 43 percent of
our revenues resulted from reimbursements based on the average wholesale price
of our products. Average wholesale price for most drugs is compiled and
published by private companies such as First DataBank, Inc. Various federal and
state government agencies have been investigating whether the reported average
wholesale price of many drugs, including some that we sell, is an appropriate or
accurate measure of the market price of the drugs. As reported in the Wall
Street Journal, there are also several whistleblower lawsuits pending against
various drug manufacturers in connection with the appropriateness of the
manufacturer's average wholesale price for a particular drug. These government
investigations and lawsuits involve allegations that manufacturers reported
artificially inflated average wholesale prices of various drugs to First
DataBank, which in turn reported these prices to its subscribers including many
state Medicaid agencies who then included these average wholesale prices in the
state's reimbursement policies. In 2001, Bayer Corporation, an occasional
supplier of hemophilia factor to us, agreed to pay $14 million in a settlement
with the federal government and 45 states in order to close an investigation
regarding these charges. Bayer also entered into a five-year corporate integrity
agreement with the government, in which Bayer agreed to provide information on
the average sale price of its drugs to the government. In February 2000, First
DataBank published a Market Price Survey of 437 drugs, which was significantly
lower than the historic average wholesale price for a number of the clotting
factor and intra-venous immunoglobulin products that we sell. Consequently, a
number of state Medicaid agencies have revised their payment methodology as a
result of the Market Price Survey. Although the Centers for Medicare and
Medicaid Services had also announced that Medicare fiscal agents should
calculate the amount that they pay for Medicare claims for certain drugs by
using the lower prices on the First DataBank Market Price Survey, the proposal
to include clotting factor in the lower Medicare pricing was withdrawn. The
Centers for Medicare and Medicaid Services has announced that it will seek
legislation that would establish payments to cover the administrative costs of
suppliers of clotting factor as a supplement to a lower average wholesale price
pricing for hemophilia factor.
On September 21, 2001, the United States House Subcommittees on Health and
Oversight & Investigations held hearings to examine how Medicare reimburses
providers for the cost of drugs. In conjunction with that hearing, the United
States General Accounting Office issued its Draft Report recommending that
Medicare establish payment levels for part-B prescription drugs and their
delivery and administration that are more closely related to their costs, and
that payments for drugs be set at levels that reflect actual market transaction
prices and the likely acquisition costs to providers. More recently, on March
14, 2002, the Senate Finance Committee's Subcommittee on Health conducted a
hearing on Medicare drug reimbursement issues, including average wholesale
price. This hearing reflects Congress' interest in possibly changing the manner
in which the government reimburses providers for drugs.
The government investigations and the changes occurring in the reporting of
average wholesale price and its effects on Medicare and Medicaid prices could
have a negative effect on our business. For example, if the reduced average
wholesale prices published by First DataBank for the drugs that we sell are
ultimately adopted as the standard by which we are paid by government payors or
private payors, this could have an adverse effect on our business, including
reducing the pricing and margins on certain of our products.
Our business would be harmed if demand for our products and services is reduced.
Reduced demand for our products and services, in either our Specialty Pharmacy
Services or Specialty Healthcare Services businesses, could be caused by a
number of circumstances, including:
o customer shifts to treatment regimens other than those we offer;
o new treatments or methods of delivery of existing drugs that do not
require our specialty products and services;
o the recall of a drug;
o adverse reactions caused by a drug;
o the expiration or challenge of a drug patent;
o competing treatment from a new drug, a new use of an existing drug or
genetic therapy;
o drug companies cease to develop, supply and generate demand for drugs
that are compatible with the services we provide;
o drug companies stop outsourcing the services we provide or fail to
support existing drugs or develop new drugs;
o governmental or private initiatives that would alter how drug
manufacturers, health care providers or pharmacies promote or sell
products and services;
o the loss of a managed care or other payor relationship covering a
number of high revenue customers;
o the cure of a disease we service; or
o the death of a high-revenue customer.
Our business involves risks of professional, product and hazardous substance
liability, and any inability to obtain adequate insurance may adversely affect
our business.
The provision of health services entails an inherent risk of professional
malpractice, regulatory violations and other similar claims. Claims, suits or
complaints relating to health services and products provided by physicians,
pharmacists or nurses in connection with our Specialty Healthcare Services and
Specialty Pharmacy Services programs may be asserted against us in the future.
Our operations involve the handling of bio-hazardous materials. Our
employees, like those of all companies that provide services dealing with human
blood specimens, may be exposed to risks of infection from AIDS, hepatitis and
other blood-borne diseases if appropriate laboratory practices are not followed.
Although we believe that our safety procedures for handling and disposing of
such materials comply with the standards prescribed by state and federal
regulations, the risk of accidental infection or injury from these materials
cannot be completely eliminated. In the event of such an accident, we could be
held liable for any damages that result, and such liability could harm our
business.
Our operations expose us to product and professional liability risks that
are inherent in managing the delivery of wound care services and the provision
and marketing of biopharmaceutical products. We currently maintain professional
and product liability insurance coverage of $25 million in the aggregate.
Because we cannot predict the nature of future claims that may be made, we can
not assure you that the coverage limits of our insurance would be adequate to
protect us against any potential claims, including claims based upon the
transmission of infectious disease, contaminated product or otherwise. In
addition, we may not be able to obtain or maintain professional and product
liability insurance in the future on acceptable terms or with adequate coverage
against potential liabilities.
We rely on key community-based representatives whose absence or loss could harm
our business.
The success of our Special Pharmacy Services division depends upon our
ability to retain key employees known as community-based representatives, and
the loss of their services could adversely affect our business and prospects.
Our community-based representatives are our chief contact and maintain the
primary relationship with our customers and the loss of a single community-based
representative could result in the loss of a significant number of customers. We
do not have key man insurance on any of our community-based representatives. In
addition, our success will depend, among other things, upon the successful
recruitment and retention of qualified personnel, and we may not be able to
retain all of our key management personnel or be successful in recruiting
additional replacements should that become necessary.
Our inability to maintain a number of important contractual relationships could
adversely affect our operations.
Substantially all of the revenues of our Specialty Healthcare Services
operations are derived from management contracts with acute care hospitals. At
present, we have approximately 100 management contracts. The contracts generally
have initial terms of three to five years, and many have automatic renewal terms
unless specifically terminated. During the year ending December 31, 2002, the
contract terms of 32 of our management contracts will expire, including 14
contracts which provide for automatic one-year renewals. The contracts often
provide for early termination either by the client hospital if specified
performance criteria are not satisfied, or by us under various other
circumstances. Historically, some contracts have expired without renewal, and
others have been terminated by us or the client hospital for various reasons
prior to their scheduled expiration. During 2001, nine contracts expired without
renewal, and an additional 31 contracts were terminated prior to their scheduled
expiration. Generally, these contracts were terminated by hospitals because of
the Specialty Healthcare Services legal action, hospital financial difficulties
and Medicare reimbursement changes which reduced hospital revenues. Our
continued success is subject to our ability to renew or extend existing
management contracts and obtain new management contracts. Any hospital may
decide not to continue to do business with us following expiration of its
management contract, or earlier if such management contract is terminable prior
to expiration. In addition, any changes in the Medicare program or third-party
reimbursement levels which generally have the effect of limiting or reducing
reimbursement levels for health services provided by programs managed by us
could result in the early termination of existing management contracts and could
adversely affect our ability to renew or extend existing management contracts
and to obtain new management contracts. The termination or non-renewal of a
material number of management contracts could harm our business.
In addition, a portion of the revenues of our Specialty Pharmacy Services
operations is derived from contractual relationships with retail pharmacies. Our
success is subject to the continuation of these relationships, and termination
of one or more of these relationships could harm our business.
Our business will suffer if we lose relationships with payors.
We are highly dependent on reimbursement from non-governmental payors. For
the fiscal years ended December 31, 2001, 2000 and 1999, we derived
approximately 74 percent, 100 percent, and 100 percent, respectively, of our
gross patient service revenue from non-governmental payors, none of which
individually accounted for more than 10% of our total revenues. Many payors seek
to limit the number of providers that supply drugs to their enrollees. From time
to time, payors with whom we have relationships require that we and our
competitors bid to keep their business, and, therefore, due to the uncertainties
involved in any bidding process, we may either not be retained or our margins
may be adversely affected. The loss of a significant number of payor
relationships, or an adverse change in the financial condition of a significant
number of payors could result in the loss of a significant number of patients
and harm our business.
Changes in reimbursement rates may cause reductions in the revenues of our
operations.
As a result of the Balanced Budget Act of 1997, the Centers for Medicare
and Medicaid Services implemented the Outpatient Prospective Payment System for
all hospital outpatient department services furnished to Medicare patients
beginning August 2000. Under the system, a predetermined rate is paid to
hospitals for clinic services rendered, regardless of the hospital's cost. The
new payment system does not provide comparable reimbursement for previously
reimbursed services, and the payment rates for many services are insufficient
for many of our hospital customers, resulting in revenue and income shortfalls
for the Wound Care Center(R) programs managed by us on behalf of the hospitals.
As a result, during 2001 and 2000, we renegotiated and modified many of our
management contracts, which has resulted in reduced revenue and income to us
from the modified contracts and, in numerous cases, contract termination. These
renegotiations resulted in reduced revenues of approximately $8.5 million. In
addition, we lost approximately $28 million in revenues as the result of
contract terminations. At any time during any given year, 10 percent to 20
percent of hospital contracts are being renegotiated. We expect that contract
renegotiation and modification with many of our hospital customers will
continue, and this could result in further reduced revenues and income to us
from those contracts and even contract terminations. These results could harm
our business.
The Wound Care Center(R) programs managed by Specialty Healthcare Services
on behalf of acute care hospitals are generally treated as "provider based
entities" for Medicare reimbursement purposes. This designation is required for
the hospital based program to be covered under the Medicare outpatient
reimbursement system. With the Outpatient Prospective Payment System, Medicare
published criteria for determining when programs may be designated "provider
based entities." Although the implementation date for Provider Based Designation
Regulations for our managed outpatient programs is October 2002, the regulations
continue to be subject to change and further clarification. Specialty Healthcare
Services' 10 managed "under arrangement" models, where we employ the clinical
and administrative staff that work in the center, are potentially at risk for
not meeting the criteria for a "provider based entity." Specialty Healthcare
Services has been in discussions with its "under arrangement" hospital customers
to convert the programs to a management model. The interpretation and
application of these criteria are not entirely clear, and there is a risk that
some of the programs, in particular the 10 under arrangement models, managed by
Specialty Healthcare Services could be found not to be "provider based
entities." Although we believe that the programs it manages substantially meet
the current criteria to be designated "provider based entities," a widespread
denial of such designation would harm our business.
The profitability of our Specialty Pharmacy Services operations depends in large
part on the reimbursement we receive from third-party payors. In recent years,
competition for patients, efforts by traditional third-party payors to contain
or reduce healthcare costs, and the increasing influence of managed care payors,
such as health maintenance organizations, have resulted in reduced rates of
reimbursement. If these trends continue, they could harm our business. The
profitability of our specialty pharmacy operations also depends, indirectly, on
reimbursement from third-party payors because our customers seek reimbursement
from third-party payors for the cost of drugs and related medical supplies that
we distribute. Changes in reimbursement policies of private and governmental
third-party payors, including policies relating to the Medicare, Medicaid and
other federally funded programs, could reduce the amounts reimbursed to these
customers for our products and, in turn, the amount these customers would be
willing to pay for our products and services. In addition, where we have direct
relationships with payors, changes in their reimbursement policies may reduce
amounts payable directly to us by such payors. Changes in those reimbursement
policies could affect our customers, which in turn could harm our business.
We are subject to pricing pressures and other risks involved with commercial
payors.
Commercial payors, such as managed care organizations and traditional
indemnity insurers, increasingly are requesting fee structures and other
arrangements providing for health care providers to assume all or a portion of
the financial risk of providing care. The lowering of reimbursement rates,
increasing medical review of bills for services and negotiating for reduced
contract rates could harm our business. Pricing pressures by commercial payors
may continue, and our business may be adversely affected by these trends.
Also, continued growth in managed care and capitated plans have pressured health
care providers to find ways of becoming more cost competitive. Managed care
organizations have grown substantially in terms of the percentage of the
population they cover and in terms of the portion of the health care economy
they control. Managed care organizations have continued to consolidate to
enhance their ability to influence the delivery of health care services and to
exert pressure to control health care costs. A rapid increase in the percentage
of revenue derived from managed care payors or under capitated arrangements
without a corresponding decrease in our operating costs could harm our business.
There is substantial competition in our industry, and we may not be able to
compete successfully.
The principal competition with our Specialty Healthcare Services business
consists of specialty clinics that have been established by some hospitals or
physicians. Additionally, there are some private companies which provide wound
care services through a hyperbaric oxygen therapy program format. In addition,
recently developed technologies, or technologies that may be developed in the
future, are or may be the basis for products which compete with our chronic
wound care services. We may not be able to enter into co-marketing arrangements
with respect to these products, and we may not be able to compete effectively
against such companies in the future. Our Specialty Pharmacy Services business
faces competition from other disease management entities, general health care
facilities and service providers, pharmaceutical companies, biopharmaceutical
companies as well as other competitors. Many of these companies have
substantially greater capital resources and marketing staffs and greater
experience in commercializing products and services than we have.
If we are unable to effectively adapt to changes in the healthcare industry, our
business will be harmed.
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. Although Congress has
failed to pass comprehensive health care reform legislation thus far, we
anticipate that Congress and state legislatures will continue to review and
assess alternative health care delivery and payment systems and may in the
future propose and adopt legislation effecting fundamental changes in the health
care delivery system as well as changes to the Medicare Program's coverage and
payments of the drugs and services we provide. It is possible that future
legislation enacted by Congress or state legislatures will contain provisions
that may harm our business, or may change the operating environment for our
targeted customers (including hospitals and managed care organizations). Health
care industry participants may react to such legislation or the uncertainty
surrounding related proposals by curtailing or deferring expenditures and
initiatives, including those relating to our programs and services. It is also
possible that future legislation either could result in modifications to the
nation's public and private health care insurance systems, or coverage for
biopharmaceutical products, which could affect reimbursement policies in a
manner adverse to us, or could encourage integration or reorganization of the
health care delivery system in a manner that could materially and adversely
affect our ability to compete or to continue our operations without substantial
changes. Other legislation relating to our business or to the health care
industry may be enacted, including legislation relating to third-party
reimbursement, and such legislation may have a negative effect on our business.
Our industry is subject to extensive government regulation, and noncompliance by
us or our suppliers, our customers or our referral sources could harm our
business.
The marketing, labeling, dispensing, storage, provision and purchase of
drugs, health supplies and health services including the biopharmaceutical
products we provide, are extensively regulated by federal and state governments,
and if we fail or are accused of failing to comply with laws and regulations,
our business could be harmed. Our business could also be harmed if the
suppliers, customers or referral sources we work with are accused of violating
laws or regulations. The applicable regulatory framework is complex, and the
laws are very broad in scope. Many of these laws remain open to interpretation
and have not been addressed by substantive court decisions. The federal
government, or states in which we operate, could, in the future, enact more
restrictive legislation or interpret existing laws and regulations in a manner
that could limit the manner in which we can operate our business and have a
negative impact on our business.
There are a number of state and federal laws and regulations that apply to our
operations including, but not limited to:
o The federal "anti-kickback law" prohibits the offer or solicitation of
remuneration in return for the referral of patients covered by almost
all governmental programs, or the arrangement or recommendation of the
purchase of any item, facility or service covered by those programs.
The Health Insurance Portability and Accountability Act of 1996, or
HIPAA, created new violations for fraudulent activity applicable to
both public and private health care benefit programs and prohibits
inducements to Medicare or Medicaid eligible patients. The potential
sanctions for violations of these laws include significant fines,
exclusion from participation in the Medicare and Medicaid programs and
criminal sanctions. Although some "safe harbor" regulations attempt to
clarify when an arrangement will not violate the anti-kickback law, our
business arrangements and the services we provide may not fit within
these safe harbors. Failure to satisfy a safe harbor requires further
analysis of whether the parties violated the anti-kickback law. In
addition to the anti-kickback law, many states have adopted similar
kickback and/or fee-splitting laws, which can affect the financial
relationships we may have with physicians, vendors, other retail
pharmacies and patients. The finding of a violation of the federal or
one of these state laws could harm our business.
o In 2000, the Department of Health and Human Services issued final
regulations implementing the Administrative Simplification provision of
HIPAA concerning the maintenance, transmission and security of
electronic health information, particularly individually identifiable
information. The regulations, when effective, will require the
development and implementation of security and transaction standards
for all electronic health information and impose significant use and
disclosure obligations on entities that send or receive individually
identifiable electronic health information. As a result of these
regulations, we anticipate new expenditures in ensuring that patient
data kept on our computer networks are in compliance with these
regulations. While we believe that we will be in compliance by the
current February 2003 deadline, the cost of reaching compliance may
harm our business. Also, failure to comply with these regulations or
wrongful disclosure of confidential patient information could result in
the imposition of administrative or criminal sanctions, including
exclusion from the Medicare and state Medicaid programs. In addition,
if we choose to distribute drugs through new distribution channels such
as the Internet, we will have to comply with government regulations
that apply to those distribution channels, which could harm our
business.
o The Ethics in Patient Referrals Act of 1989, as amended, commonly referred
to as the "Stark Law," prohibits physician referrals to entities with
which the physician or their immediate family members have a "financial
relationship." A violation of the Stark Law is punishable by civil
sanctions, including significant fines and exclusion from participation in
Medicare and Medicaid.
o State laws prohibit the practice of medicine, pharmacy and nursing
without a license. To the extent that we assist patients and providers
with prescribed treatment programs, a state could consider our
activities to constitute the practice of medicine. In addition, in
some states, coordination of nursing services for patients could
necessitate licensure as a home health agency and/or could necessitate
the need to use licensed nurses to provide certain patient directed
services. If we are found to have violated those laws, we could face
civil and criminal penalties and be required to reduce, restructure or
even cease our business in that state.
o Pharmacies (retail, mail-order and wholesale) as well as pharmacists
often must obtain state licenses to operate and dispense drugs.
Pharmacies must also obtain licenses in some states in order to operate
and provide goods and services to residents of those states. If we are
unable to maintain our licenses, or if states place burdensome
restrictions or limitations on non-resident pharmacies, this could
limit or affect our ability to operate in some states which could harm
our business.
o Federal and state investigations and enforcement actions continue to focus
on the health care industry, scrutinizing a wide range of items such as
joint venture arrangements, referral and billing practices, product
discount arrangements, home health care services, dissemination of
confidential patient information, clinical drug research trials and gifts
for patients or referral sources.
o The federal False Claims Act encourages private individuals to file suits
on behalf of the government against health care providers such as us. Such
suits could result in significant financial sanctions or exclusion from
participation in the Medicare and Medicaid programs.
There is a delay between our performance of services and our reimbursement.
The health care industry is characterized by delays that typically range
from three to nine months between when services are provided and when the
reimbursement or payment for these services is received. This makes working
capital management, including prompt and diligent billing and collection, an
important factor in our results of operations and liquidity. Trends in the
industry may further extend the collection period and impact our working
capital.
We rely heavily on a limited number of shipping providers, and our business
would be harmed if our rates are increased or our providers are unavailable.
A significant portion of our revenues result from the sale of drugs we
deliver to our patients, and a significant amount of our products are shipped by
mail, overnight courier or in person through our community based
representatives. The costs incurred in shipping are not passed on to our
customers and, therefore, changes in these costs directly impact our margins. We
depend heavily on these outsourced shipping services for efficient, cost
effective delivery of our product. The risks associated with this dependence
include:
o any significant increase in shipping rates;
o strikes or other service interruptions by these carriers; and
o spoilage of high cost drugs during shipment, since our drugs often
require special handling, such as refrigeration.
RISK RELATED TO OUR COMMON STOCK
Possible volatility of stock price in the public market.
The market price of our common stock has experienced, and may continue to
experience, substantial volatility. Over the past eight quarters, the market
price of our common stock has ranged from a low of $5.06 per share in the third
quarter of 2000 to a high of $22.75 in the first quarter of 2002. Many factors
have influenced the common stock price in the past, including fluctuations in
our earnings and changes in our financial position, management changes, low
trading volume, and negative publicity and uncertainty resulting from the legal
actions brought against us. In addition, the securities markets have, from time
to time, experienced significant broad price and volume fluctuations that may be
unrelated to the operating performance of particular companies. All of these
factors could adversely affect the market price of our common stock.
Provisions of our articles of incorporation and Minnesota law may make it more
difficult for you to receive a change-in-control premium.
Our Board's ability to designate and issue up to 10 million shares of
preferred stock and issue up to 50 million shares of common stock could
adversely affect the voting power of the holders of common stock, and could have
the effect of making it more difficult for a person to acquire, or could
discourage a person from seeking to acquire, control of our company. If this
occurred, you could lose the opportunity to receive a premium on the sale of
your shares in a change of control transaction.
In addition, the Minnesota
Business Corporation Act contains provisions that would have the effect of
restricting, delaying or preventing altogether certain business combinations
with any person who becomes an interested stockholder. Interested stockholders
include, among others, any person who, together with affiliates and associates,
acquires 10 percent or more of a corporation's voting stock in a transaction
which is not approved by a duly constituted committee of the Board of the
corporation. These provisions could also limit your ability to receive a premium
in a change of control transaction.