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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
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Exchange Act of 1934
For the quarterly period ended September 30, 2002
OR
Transition report pursuant to Section 13 or 15 (d) of the Securities
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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)
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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
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes X No
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As of November 1, 2002, there were 11,988,795 shares of the Registrant's
Common Stock, $.01 par value, outstanding.
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INDEX
Part I Financial Information Page No.
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Item 1 Financial Statements:
Condensed Consolidated Statements of Operations
Three and Nine Months ended September 30, 2002 and 2001 3
Condensed Consolidated Balance Sheets
September 30, 2002 and December 31, 2001 4
Condensed Consolidated Statements of Cash Flows
Nine Months ended September 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 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk 18
Item 4 Controls and Procedures 18
Part II Other Information Page No.
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Item 1 Legal Proceedings 19
Item 2 Changes in Securities and Use of Proceeds 19
Item 5 Other Information 19
Item 6 Exhibits and Reports on Form 8-K 19
Signatures 21
Part I Financial Information
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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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------------------- -------------------
Revenues:
Products $28,025 $12,827 $64,849 $26,037
Services 8,826 10,937 26,686 35,215
------- ------- ------- -------
Total revenues 36,851 23,764 91,535 61,252
Costs and operating expenses:
Cost of product sales 19,310 10,889 46,118 22,656
Cost of services 3,562 6,018 11,455 19,521
Selling, general & administrative 7,086 6,502 18,619 18,264
------- ------- ------- -------
Total costs and operating expenses 29,958 23,409 76,192 60,441
------- ------- ------- -------
Income from operations 6,893 355 15,343 811
Interest income 4 55 57 766
Interest expense 393 - 675 -
------- ------- ------- -------
Income before taxes 6,504 410 14,725 1,577
Income taxes 2,570 234 5,910 899
------- ------- ------- -------
Net income $ 3,934 $ 176 $ 8,815 $ 678
======= ======= ======= =======
Net income per common share, basic $ 0.33 $ 0.02 $ 0.79 $ 0.09
======= ======= ======= =======
Net income per common share, diluted $ 0.31 $ 0.02 $ 0.73 $ 0.08
======= ======= ======= =======
Weighted average common shares, basic 11,869 7,186 11,098 7,141
======= ======= ======= =======
Weighted average common shares, diluted 12,726 8,149 12,117 8,133
======= ======= ======= =======
See accompanying notes
Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 30, 2002 December 31, 2001
------------------- -------------------
ASSETS
Cash and cash equivalents $ 7,601 12,264
Accounts receivable, net 27,251 13,139
Deferred tax assets 6,711 6,265
Inventory 8,539 4,547
Prepaids and other assets 2,990 745
-------- -------
Total current assets 53,092 36,960
Property and equipment, net 3,310 3,795
Intangibles subject to amortization, net 1,963 550
Goodwill 106,698 34,237
Other assets 4,233 1,385
-------- -------
Total assets $169,296 $76,927
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 18,574 $ 9,249
Accrued expenses 9,017 14,686
Current portion of long-term liabilities 4,504 10,500
-------- -------
Total current liabilities 32,095 34,435
Long-term liabilities 23,113 6,000
Stockholders' equity
Common stock 120 75
Additional paid in capital 102,755 34,019
Retained earnings 11,213 2,398
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Total stockholders' equity 14,088 36,492
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Total liabilities and stockholders' equity $169,296 $76,927
======== =======
See accompanying notes
Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
2002 2001
--------------------------------
OPERATING ACTIVITIES:
Net income $ 8,815 $ 678
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Equity in operations of investee (168) 290
Depreciation and amortization 1,639 2,806
Changes in operating assets and liabilities (6,160) (7,353)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 4,126 (3,579)
INVESTING ACTIVITIES:
Notes receivable - 3,683
Specialty Pharmacy acquisitions, net of cash acquired (38,873) (38,648)
Purchase of property and equipment and other (616) (439)
Sales of marketable securities - 26,482
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (39,489) (8,922)
FINANCING ACTIVITIES:
Proceeds from private placement, net of fees 16,462 -
Stock repurchases - (1,118)
Exercise of Stock Options 4,238 778
Borrowing from credit facilities 10,000 -
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 30,700 (340)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,663) (12,841)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,264 19,016
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,601 $ 6,175
======== ========
SUPPLEMENTAL INFORMATION
Interest paid $ 352 $ -
======== ========
Income taxes paid $ 1,501 $ 150
======== ========
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. Certain prior year amounts have been
reclassified to conform to the current year classifications. The results of
operations for the three and nine months ended September 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 Nine Months Ended
September 30, September 30,
------------------ -------------------
2002 2001 2002 2001
------ ------ ------ ------
Weighted average shares, basic 11,869 7,186 11,098 7,141
Effect of dilutive stock options 857 963 1,019 992
------ ----- ------ -----
Weighted average shares, diluted 12,726 8,149 12,117 8,133
====== ===== ====== =====
Note 3. Purchases of Apex Therapeutic Care, Inc. and
Infinity Infusion 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.
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
Curative Health Services, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 from the Company's commercial
lender.
The acquisitions of Apex and Infinity (the "Specialty Pharmacy acquisitions")
were accounted for using the purchase method of accounting. The accounts of Apex
and Infinity and related goodwill are included in the accompanying condensed
consolidated balance sheets. The operating results of Apex and Infinity are
included in the accompanying condensed consolidated statements of operations
from the dates of acquisition.
Unaudited pro forma amounts for the three and nine months ended September 30,
2002 and 2001, assuming the Specialty Pharmacy acquisitions had occurred on
January 1, 2001, are as follows (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------------------- ------------------------
Revenues $ 36,851 $ 40,257 $ 105,117 $ 117,717
======== ======== ========= =========
Net income $ 3,934 $ 2,021 $ 11,167 $ 5,874
======== ======== ========= =========
Net income per share, diluted $ 0.31 $ 0.22 $ 0.88 $ 0.53
======== ======== ========= =========
The pro forma operating results shown above are not necessarily indicative of
operations in the periods following acquisitions. The unaudited pro forma
operating results include the results of eBioCare.com, Inc. ("eBioCare") as if
the eBioCare acquisition, which occurred on March 31, 2001, had occurred on
January 1, 2001.
Note 4. 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 47 percent for Specialty
Health Services and 53 percent 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
Note 4. Segment Information (continued)
The following tables present the results of operations and total assets of the
reportable segments of the Company for the three and nine months ended September
30, 2002 and 2001 (in thousands):
For the three months ended September 30, 2002
---------------------------------------------------------
Specialty Specialty Eliminating
Healthcare Pharmacy Entries Total
---------------------------------------------------------
Revenues $ 8,826 $ 28,025 $ - $ 36,851
======== ========= ======== =========
Income from operations $ 2,395 $ 4,498 $ - $ 6,893
======== ========= ======== =========
Total assets $ 39,010 $ 123,026 $ 7,260 $ 169,296
======== ========= ======== =========
For the three months ended September 30, 2001
---------------------------------------------------------
Specialty Specialty Eliminating
Healthcare Pharmacy Entries Total
---------------------------------------------------------
Revenues $ 11,085 $ 12,679 $ - $ 23,764
======== ========= ========= =========
Income from operations $ (379) $ 734 $ - $ 355
======== ========= ========= =========
Total assets $ 37,423 $ 40,918 $ (3,472) $ 74,869
======== ========= ========= =========
For the nine months ended September 30, 2002
---------------------------------------------------------
Specialty Specialty Eliminating
Healthcare Pharmacy Entries Total
---------------------------------------------------------
Revenues $ 26,686 $ 64,849 $ - $ 91,535
======== ========= ========= ==========
Income from operations $ 6,280 $ 9,063 $ - $ 15,343
======== ========= ========= ==========
Total assets $ 39,010 $ 123,026 $ 7,260 $ 169,296
======== ========= ========= ==========
For the nine months ended September 30, 2001
---------------------------------------------------------
Specialty Specialty Eliminating
Healthcare Pharmacy Entries Total
---------------------------------------------------------
Revenues $ 36,883 $ 24,369 $ - $ 61,252
======== ======== ========= ==========
Income from operations $ (448) $ 1,259 $ - $ 811
======== ======== ========= ==========
Total assets $ 37,423 $ 40,918 $ (3,472) $ 74,869
======== ======== ========= ==========
Curative Health Services, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 5. 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 Nine Months Ended
September 30, September 30,
-------------------- ------------------
2002 2001 2002 2001
------ ------ ------ ------
Reported net income $ 3,934 $ 176 $ 8,815 $ 678
Add back: Goodwill amortization - 470 - 946
-------- ----- ------- -------
Adjusted net income $ 3,934 $ 646 $ 8,815 $ 1,624
======= ===== ======= =======
Basic earnings per share:
Reported net income $ 0.33 $ 0.02 $ 0.79 $ 0.09
Goodwill amortization - 0.07 - 0.13
------- -------- ------- -------
Adjusted net income $ 0.33 $ 0.09 $ 0.79 $ 0.22
======= ======== ======= =======
Diluted earnings per share:
Reported net income $ 0.31 $ 0.02 $ 0.73 $ 0.08
Goodwill amortization - 0.06 - 0.12
------- -------- -------- -------
Adjusted net income $ 0.31 $ 0.08 $ 0.73 $ 0.20
======= ======== ======== =======
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 $.5 million
and an increase in diluted earnings per share of approximately $0.06 for the
three months ended September 30, 2001. For the first nine months of 2001, the
adoption of SFAS No. 142 resulted in an increase of $.9 million in net income
and $0.12 in diluted earnings per share.
As required under SFAS No. 142, the Company will test its goodwill for
impairment. Although the Company has obtained fair market valuations, the
amounts are preliminary and subject to change. Therefore, the Company has not
yet completed the impairment test; however, it does not expect to record an
impairment charge in 2002.
Curative Health Services, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Changes in Capital Structure
During the first nine 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.
Settlement of Shareholder Lawsuit. On August 2, 2002 and August 5, 2002, the
Company made the final payment of $6.5 million in an aggregate of 421,044 shares
of the Company's common stock with respect to the shareholder lawsuit previously
disclosed. The remaining $4 million was previously paid from insurance proceeds.
Payment was made pursuant to the terms of the settlement in order to avoid the
delay and expense of protracted litigation, even though the Company maintained
that there was no basis for the imposition of liability.
Note 7. Subsequent Events
On October 23, 2002, the Company acquired the specialty pharmacy business and
certain related assets of Home Care of New York, Inc. ("Home Care"), a Scotia,
New York, based specialty pharmacy and home infusion company that specializes in
the provision of Synagis(R) for the prevention of Respiratory Syncytial Virus,
the most common cause of lower respiratory infections in infants and children
worldwide. In addition, the Company entered into an agreement to purchase
certain assets of Home Care related to its home health agency business, subject
to applicable governmental approvals. The aggregate purchase price of
approximately $12 million includes $9 million in cash and $3 million in a 3
percent convertible note.
-10-
On November 14, 2002, the Company announced that it has entered into a
definitive agreement to acquire OptCare Plus, Inc. ("OptCare") for approximately
$10.5 million in cash, subject to customary conditions. OptCare could also
receive additional proceeds depending upon the achievement of certain targets in
calendar year 2003. OptCare is a specialty pharmacy dispensing biological
medications such as hemophilia clotting factors. OptCare's focus is on persons
affected by bleeding disorders. In addition, OptCare coordinates infusion
nursing and provides complete pharmacy services, clinical and reimbursement
support services to chronic disease communities. The acquisition is expected to
close in the fourth quarter of 2002.
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 infusion therapy
services for patients with immune system disorders. The Company's Specialty
Pharmacy revenues are derived primarily from fees paid by insurance companies,
government and other payors 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 193 payors and 19 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:
-11-
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 September
30, 2002, the Company's reserves for accounts receivable was approximately 24
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
September 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 September 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 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.
-12-
Results of Operations
Revenues. The Company's revenues for the third quarter of 2002 increased 55
percent to $36.9 million compared to $23.8 million for the third quarter of the
prior fiscal year. For the first nine months of 2002, revenues increased 49
percent to $91.5 million from $61.3 million for the same period in 2001.
Product revenues increased $15.2 million, or 119 percent, to $28.0 million in
the third quarter of 2002 from $12.8 million in the third quarter of 2001. The
increase in product revenues is primarily attributable to the internal growth of
hemophilia patient revenues and the inclusion of the Specialty Pharmacy
acquisitions in 2002, offset by a reduction in Procuren revenues of $0.1 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 third quarter of 2002, product revenues included $23.4
million of hemophilia related products and $4.6 million of other injectable
products. For the first nine months of 2002, product revenues increased $38.8
million, or 149 percent, to $64.8 million compared to $26.0 million for the same
period in 2001. This increase reflects the internal growth of hemophilia patient
related revenues, the inclusion of eBioCare for nine months in 2002 versus six
months in 2001, as well as the inclusion of the results of the Specialty
Pharmacy acquisitions in 2002, offset by a decrease of $1.7 million in
eliminated Procuren product sales and a reduction of $8.9 million in Specialty
Pharmacy Services unprofitable injectable product sales. For the first nine
months of 2002, product revenues included $56.0 million of hemophilia related
products and $8.8 million of other injectable products.
Service revenues, attributed entirely to the Specialty Healthcare Services
business unit, decreased 19 percent to $8.8 million in the third quarter of 2002
from $10.9 million in the third quarter of 2001. For the first nine months of
2002, service revenues decreased 24 percent to $26.7 million compared to $35.2
million for the same period in 2001. The service revenues decreases of $2.1
million for the third quarter 2002 and $8.5 million for the first nine months of
2002 are attributable to the operation of 97 Wound Care Center(R) programs at
the end of the third quarter of 2002 as compared to 110 at the end of the third
quarter of the prior fiscal year as the result of contract terminations and
renegotiation. Program terminations by client hospitals have been effected for
such reasons as reduced reimbursement, financial restructuring, layoffs,
bankruptcies or even hospital closings. 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.
Cost of product sales. The cost of product sales increased $8.4 million, or 77
percent to $19.3 million from $10.9 million in the third quarter of 2001. The
increase is attributable to the internal growth of hemophilia patient revenues
and the Specialty Pharmacy acquisitions in 2002, offset by the reduction in
Procuren related costs of $.081 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 nine months of 2002, the cost of
product sales increased $23.5 million, or 104 percent, to $46.1 million compared
to $22.6 million for the same period in 2001. This increase is due to the
Specialty Pharmacy acquisitions in 2002, and the inclusion of nine months of
costs related to eBioCare in 2002 versus six months in 2001, offset by the
eliminated Procuren related costs of $1.9 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 third quarter was 69 percent
compared to 85 percent for the same period in 2001. For the first nine months of
2002, the cost of product sales as a percentage of product revenues was 71
percent compared to 87 percent for the first nine 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.
-13-
Cost of Services. The cost of services, attributed entirely to the Specialty
Healthcare Services business unit, decreased $2.4 million, or 40 percent, to
$3.6 million in the third quarter of 2002 from $6.0 million in the third quarter
of 2001. The decrease is attributable to reduced staffing and operating expenses
of approximately $.6 million related to the operation of 97 programs at the end
of the third quarter of 2002 as compared with 110 programs operating at the end
of the third quarter 2001. Additionally, there were eight fewer
under-arrangement programs in operation at the end of the third 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 third quarter
of 2002, this reduction in the number of under-arrangement programs accounted
for approximately $.8 million of the decrease in the cost of services. For the
first nine months of 2002, the cost of services attributed to the Specialty
Healthcare Services business unit decreased $8.0 million, or 41 percent, to
$11.5 million compared to $19.5 million for the same period in 2001. The
decrease is the result of reduced staffing and operating expenses of $2.9
million related to the decrease in the number of programs. Further, the
reduction of eight under-arrangement programs in operation at the end of the
first nine months of 2002 as compared to the same period for 2001 accounted for
approximately $2.8 million of the decrease in costs. As a percentage of service
revenues, the cost of services for the third quarter of 2002 was 40 percent
compared to 55 percent for the same period in 2001. For the first nine months of
2002, the cost of services as a percentage of service revenues was 43 percent
compared to 55 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.
Selling, General and Administrative. Selling, general and administrative
expenses increased $.6 million, or 9 percent, to $7.1 million for the third
quarter of 2002 from $6.5 million for the third quarter 2001. The increase is
due to an increase of $1.3 million of Specialty Pharmacy Services expenses
attributable to the Specialty Pharmacy acquisitions and increased costs related
to additional corporate staff, offset by a decrease in expenses related to
Specialty Health Services of $.8 million. For the first nine months of 2002,
selling, general and administrative expenses totaled $18.6 million compared to
$18.3 million for the same period in 2001, an increase of $.3 million, or 2
percent. The increase is due to an increase of $3.2 million of Specialty
Pharmacy Services expenses attributable to the Specialty Pharmacy acquisitions
and increased costs related to additional corporate staff, offset by a decrease
in expenses related to Specialty Health Services of $2.6 million. As a
percentage of revenues, selling, general and administrative expenses were 19
percent in the third quarter of 2002 compared to 27 percent for 2001, and 20
percent for the first nine months of 2002 compared to 30 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 $3.9 million or $0.31 per diluted share in the third
quarter of 2002 compared to $.2 million, or $0.02 diluted share, in the third
quarter of 2001. For the first nine months of 2002, net income was $8.8 million,
or $0.73 per diluted share compared to net income of $.7 million, or $0.08 per
diluted share for the same period in 2001. The increases in earnings of $3.7
million for the third quarter of 2002 and $8.1 million for the first nine months
of 2002 are primarily attributable to the inclusion of the 2002 results related
to the Specialty Pharmacy acquisitions, the elimination of Procuren product
sales and the reduction of Specialty Healthcare Services selling general and
administrative costs.
-14-
Liquidity and Capital Resources
Working capital was $21.0 million at September 30, 2002 compared to $2.5 million
at December 31, 2001. Total cash and cash equivalents as of September 30, 2002
was $7.6 million. The ratio of current assets to current liabilities was 1.7:1
at September 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 the Specialty Pharmacy companies in the first quarter and second
quarter of 2002.
Cash flows provided by operating activities for the nine months ended September
30, 2002 totaled $4.1 million, primarily attributable to the $8.8 million in net
income for the nine months ended September 30, 2002, an increase in accounts
receivable, a reduction in accounts payable and accrued expenses, including $10
million in payments made during the first nine months of 2002 related to the
settlement of the Department of Justice lawsuit. Cash flows used in investing
activities totaled $39.5 million primarily attributable to the Specialty
Pharmacy acquisitions. Cash flows provided by financing activities totaled $30.7
million, attributable to net proceeds of $16.5 million from the Company's sale
of shares in a private placement transaction, $4.2 million from the exercise of
stock options, and $10.0 million in borrowings from the Company's credit
facilities.
For the first nine months of 2002, the Company experienced a net increase in
accounts receivable of $14.1 million, primarily attributable to the Specialty
Pharmacy acquisitions. Days sales outstanding were 66 days as of September 30,
2002, as compared to 58 days at December 31, 2001. At September 30, 2002, days
sales outstanding for the Specialty Healthcare Services business was 61 days and
68 days for the Specialty Pharmacy Services business.
As of September 30, 2002, the Company's short-term liabilities of $4.5 million
included $2.4 million, representing the current portion of the Company's
borrowings from its commercial lender, and $2.1 million, representing the
current portion of the Department of Justice obligation. As of September 30,
2002, the Company's long-term liabilities of $23.1 million included a $4.5
million note payable for the Department of Justice obligation, a $5 million
promissory note related to the purchase of Apex, $6 million in promissory notes
related to the purchase of Infinity, and $7.6 million in borrowed funds from the
Company's commercial lender.
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 September 30, 2002, the
Company has a $6.5 million obligation, payable over approximately four years, to
the Department of Justice related to the settlement of its litigation. (See
Legal Proceedings, Part II Item 1.) In January of 2002, the Company entered into
$25 million line of credit with its commercial lender for which there was a zero
balance as of September 30, 2002, 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
four-year, $10 million term loan facility with its commercial lender. These
transactions were to provide liquidity for both working capital and
acquisitions. The Company has paid $10 million in 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 September 30, 2003. The effect of inflation risk
is considered immaterial.
-15-
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 99.1 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.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) and Rule 15d-15(c) under the Exchange
Act) as of a date (the "Evaluation Date") within 90 days prior to the filing
date of this report. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures were effective in timely alerting them to the
material information relating to us (or our consolidated subsidiaries) required
to be included in our periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during
the period covered by this report or, to our knowledge, in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
-16-
Curative Health Services, Inc. and Subsidiaries
Part II Other Information
- ----------------------------
Item 1. Legal Proceedings
With respect to the Company's legal proceedings previously disclosed, there have
been no material developments since the disclosure provided in (i) 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, (ii) Part II, Item 1 - "Legal
Proceedings" in the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002, and (iii) Part II, Item 1 - "Legal Proceedings" in the
Company's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2002.
Item 2. Changes in Securities and Use of Proceeds
(c)
Settlement of Shareholder Lawsuit. On August 2, 2002 and August 5, 2002, the
Company made the final payment of $6.5 million in an aggregate of 421,044 shares
of the Company's common stock with respect to the shareholder lawsuit previously
disclosed. The remaining $4 million was previously paid from insurance proceeds.
Payment was made pursuant to the terms of the settlement in order to avoid the
delay and expense of protracted litigation, even though the Company maintained
that there was no basis for the imposition of liability.
The issuance of shares of common stock described above was deemed to be exempt
from registration under the Securities Act of 1933 in reliance on Section
3(a)(10) of the Act as a transaction not involving an exchange of shares of
common stock for bona fide outstanding claims, where the fairness of such
exchange was approved, after a hearing, by a court.
Item 5. Other Information
Lawrence English replaced Joseph Feshbach as Chairman of the Executive Committee
of the Board of Directors on August 13, 2002.
The Audit Committee approved the non-audit engagement of the Company's auditors,
Ernst & Young LLP ("E&Y"), whereby E&Y performed tax related services pertaining
to certain acquisition costs.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 Employment agreement dated as of July 24, 2002 between
Joseph Feshbach and the Company.
Exhibit 10.2 Employment agreement dated as of March 13, 2002 between
Thomas Axmacher and the Company.
Exhibit 99.1 Cautionary Statements
Exhibit 99.2 Certification of Chief Executive Officer pursuant to 18
U.S.C. ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99.3 Certification of Chief Financial Officer pursuant to 18
U.S.C. ss.1350, as adopted pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002.
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 filed July 2, 2002, reporting under Item 2 on the acquisition of
Infinity Infusion Care, Ltd.
Form 8-K filed July 29, 2002, reporting under Item 5 on the press release
announcing the Company's earnings for the second quarter ended June 30,
2002, and the appointment of the Company's new Chief Executive Officer.
Form 8-K filed September 6, 2002, reporting under Item 5 on the date and
number of shares of the Company's common stock that will become freely
tradable in accordance with the provisions of the Registration Rights and
Lock-Up Agreement entered into by the Company and Apex Therapeutic Care,
Inc., in connection with the Company's acquisition of Apex on February 28,
2002.
-17-
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: November 14, 2002
Curative Health Services, Inc.
(Registrant)
/s/ Joseph Feshbach
--------------------
Joseph Feshbach
Chief Executive Officer and Chairman
(Principal Executive Officer)
/s/ Thomas Axmacher
--------------------
Thomas Axmacher
Chief Financial Officer
(Principal Financial and Accounting Officer)
-18-
CERTIFICATIONS
I, Joseph Feshbach, certify that:
1. I have reviewed this quarterly report of Curative Health Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which the quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 14, 2002
/s/ Joseph Feshbach
--------------------
Joseph Feshbach
Chief Executive Officer
-19-
CERTIFICATIONS
I, Thomas Axmacher, certify that:
1. I have reviewed this quarterly report of Curative Health Services, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which the quarterly report is being
prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 14, 2002
/s/ Thomas Axmacher
--------------------
Thomas Axmacher
Chief Financial Officer
Exhibit 10.1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made effective as of July
24, 2002 (the "Effective Date"), between CURATIVE HEALTH SERVICES, INC., a
Minnesota corporation (the "Company"), and JOSEPH L. FESHBACH ("Executive"), an
individual resident of the State of California.
WHEREAS, the Executive has served as an officer and director of the
Company;
WHEREAS, the Company recognizes that Executive's contribution to the
growth and success of the Company has been substantial and therefore desires to
assure the Company of Executive's continued employment; and
WHEREAS, based on the foregoing, the Company and Executive now wish to
formalize the terms of Executive's employment with the Company.
NOW, THEREFORE, in consideration of the promises and the mutual covenants
and agreements herein contained, the Company and Executive hereby agree as
follows:
1. Employment
1.1 Employment and Duties. The Company hereby agrees to employ Executive
for the Term (as hereinafter defined) as Chief Executive Officer, subject to the
direction of the Board of Directors, and in connection therewith Executive
agrees to discharge all of the duties normally associated with said position, to
faithfully and to the best of his abilities perform such other duties and
services consistent with his position as a Chief Executive Officer as may from
time to time be assigned to him by the Board of Directors, and to use his best
efforts to perform the reasonable directives of the Board of Directors that are
consistent with his position as Chief Executive Officer. Executive hereby
accepts such employment and agrees to render such services. Executive shall
perform his duties and carry out his responsibilities hereunder in a diligent
manner, shall devote his full working time, attention and effort to the affairs
of the Company, shall use his best efforts to promote the interests of the
Company and shall be just and faithful in the performance of his duties and in
carrying out his responsibilities.
1.2 Location. The Company shall establish an office in the San Francisco
Bay area, within thirty-five (35) miles of Executive's current residence, which
shall be the principal location for performance of Executive's services
hereunder, subject to reasonable travel requirements during the course of such
performance.
1.3 Board of Directors. Executive agrees to accept election and to serve
during all or any part of the Term as a director of the Company and of any
subsidiary or affiliate of the Company, without any compensation therefor other
than that specified herein, if elected to any such position by the Board of
Directors or by the stockholders of the Company or of any subsidiary or
affiliate, as the case may be. The Company will use its best efforts to cause
and maintain the election of Executive to the Company's Board of Directors. In
connection therewith, the Company shall use its best efforts to include
Executive in the management slate for election as a director at every annual
meeting of shareholders of the Company at which his term as a director would
otherwise expire. Upon the termination of this Agreement or Executive's
employment hereunder for any reason, Executive shall resign from the Board and
from all other positions as an officer or director of any of the Company's
subsidiaries or affiliates.
2. Employment Term
The term of Executive's employment hereunder (the "Term") shall be
deemed to commence on the Effective Date and shall end on the first
anniversary of the Effective Date, unless sooner terminated as hereinafter
provided; provided, however, that the Term shall be automatically renewed and
extended for an additional period of one (1) year on each anniversary thereafter
unless either party gives a Notice of Termination (as defined below) to the
other party at least three (3) months prior to such anniversary.
3. Compensation and Benefits
3.1 Cash Compensation.
(a) Base Salary. The Company shall pay Executive an annual
salary of $400,000 payable in bi-weekly installments, in arrears (the "Base
Salary"). The Base Salary shall be reviewed annually by the Company's
Compensation and Stock Option Committee no later than March 1 of each calendar
year, and may be increased, but not decreased (unless mutually agreed upon by
Executive and the Company).
(b) Target Bonus. Executive shall be eligible to participate in
an annual bonus program that will provide him with an opportunity to earn an
annual bonus (the "Bonus"). The amount of the Bonus shall be based upon the
performance of Executive and the Company in each calendar year and shall be paid
promptly following the completion of the annual audit of the Company's financial
statements for such year. Executive's individual performance objectives and
those of the Company shall be mutually agreed upon by the Board of Directors and
Executive by no later than December 31 of the year preceding the year in which
the Bonus may be earned; provided, however, that such objectives in respect of
the year ending December 31, 2002 have been set by the Company and Executive
prior to the execution of this Agreement. With respect to the year ending
December 31, 2002, Executive shall be eligible to receive 5/6th of the Bonus he
would otherwise receive under the terms hereof.
3.2 Participation in Benefit Plans. Subject to the respective terms and
conditions of the employee benefit plans or programs of the Company, Executive
shall be entitled to participate in all employee benefit plans or programs of
the Company available to senior level executives of the Company. The Company
does not guarantee the continuance of any particular employee benefit plan or
program during the Term, and Executive's participation in any such plan or
program shall be subject to all terms, provisions, rules and regulations
applicable thereto. Executive will be entitled to twenty (20) days of vacation
per year, to be used in accordance with the Company's vacation policy for senior
executives as it may change from time to time. For the Benefit Period, if any,
(as hereinafter defined), the Company will arrange to provide Executive with
welfare benefits (including life and health insurance benefits) of substantially
similar design and cost to Executive as the welfare benefits and other employee
benefits available to Executive prior to Executive's or the Company's, as the
case may be, receipt of Notice of Termination (as hereinafter defined). In the
event that Executive shall obtain full-time employment providing welfare
benefits during the Benefit Period, Executive shall promptly notify the Company
of such fact and such benefits as otherwise receivable hereunder by Executive
shall be discontinued.
3.3 Expenses. The Company will pay or reimburse Executive for all
reasonable and necessary out-of-pocket expenses incurred by him in the
performance of his duties under this Agreement, including the cost of first
class air travel. Executive shall keep detailed and accurate records of expenses
incurred in connection with the performance of his duties hereunder and
reimbursement therefor shall be in accordance with policies and procedures to be
established from time to time by the Board.
3.4 Automobile Expenses. During the Term, Executive shall be entitled to
the use of an automobile leased in the name of the Company. The automobile shall
be selected by Executive subject to the reasonable approval of the Company.
Executive shall be repaid by the Company for all automobile expenses, including
automobile insurance reasonably acceptable to Executive and the Company,
incurred by Executive in the performance of his duties under this Agreement.
4. Termination of Employment
4.1 Definitions.
(a) "Benefit Period" shall mean (i) the twelve (12) month period
commencing on the Date of Termination which occurs in connection with a
termination of employment described in the first sentence of Section 4.5(a), or
(ii) the twenty-four (24) month period commencing on the Date of Termination
which occurs in connection with a termination of employment described in the
first sentence of Section 4.5.(b)
(b) "Cause" shall mean any of the following:
(i) the Executive's willful act of fraud, embezzlement,
dishonesty or other misconduct that materially damages the Company;
(ii) any intentional act or omission by Executive, other
than that made in good faith, that is detrimental in any material
respect to the interests of the Company;
(iii) the commission by Executive of a felony; or
(iv) the material breach by Executive of his agreements
or obligations under this Agreement.
No termination for Cause pursuant to the preceding clause (iv) shall
occur unless the Company has provided Executive with written notice of
the existence of such Cause, and Executive is given at least fifteen
(15) days to cure, except that no such notice shall be required if the
act or omission constituting Cause is not susceptible of cure.
(c) A "Change of Control" shall mean any of the following:
(i) a sale of all or substantially all of the assets of
the Company;
(ii) the acquisition of more than fifty percent (50%) of
the Common Stock of the Company (with all classes or series thereof
treated as a single class) by any person or group of persons, except a
Permitted Shareholder (as hereinafter defined), acting in concert. A
"Permitted Shareholder" means a holder, as of the Effective Date, of
Common Stock;
(iii) a reorganization of the Company wherein the
holders of Common Stock of the Company receive stock in another company
(other than a subsidiary of the Company), a merger of the Company with
another company wherein there is an fifty percent (50%) or greater
change in the ownership of the Common Stock of the Company as a result
of such merger, or any other transaction in which the Company (other
than as the parent corporation) is consolidated for federal income tax
purposes or is eligible to be consolidated for federal income tax
purposes with another corporation;
(iv) in the event that the Common Stock is traded on an
established securities market, a public announcement that any person has
acquired or has the right to acquire beneficial ownership of more than
fifty percent (50%) of the then-outstanding Common Stock and for this
purpose the terms "person" and "beneficial ownership" shall have the
meanings provided in Section 13(d) of the Securities and Exchange Act of
1934 or related rules promulgated by the Securities and Exchange
Commission, or the commencement of or public announcement of an
intention to make a tender offer or exchange offer for more than fifty
percent (50%) of the then outstanding Common Stock;
(v) a majority of the Board of Directors is not
comprised of Continuing Directors. A "Continuing Director" means a
director recommended by the Board of Directors of the Company for
election as a director of the Company by the stockholders; or
(vi) the Board of Directors of the Company, in its sole
and absolute discretion, determines that there has been a sufficient
change in the share ownership of the Company to constitute a change of
effective ownership or control of the Company.
(d) "Good Reason" shall mean, within the twelve (12) month
period immediately following a Change of Control, the occurrence of any
one or more of the following events:
(i) the assignment to Executive of any duties
inconsistent in any respect with Executive's position as Chief Executive
Officer (including status, offices, title, and reporting requirements),
authority, duties or other responsibilities as in effect immediately
prior to the Change of Control or any other action of the Company that
results in a diminishment in such position, authority, duties or
responsibilities, other than an insubstantial and inadvertent action
that is remedied by the Company promptly after receipt of notice thereof
given by Executive;
(ii) a requirement that Executive relocate to a location
more than thirty-five (35) miles from his then current office location
immediately prior to the Change of Control;
(iii) a reduction by the Company in Executive's Base
Salary as in effect on the date hereof and as the same shall be
increased from time to time hereafter;
(iv) a reduction in (a) any material compensation or
benefit plan, program, policy or practice in which Executive was
participating at the time of the Change of Control or (b) compensation
and benefits (in terms of benefit levels and/or reward opportunities) to
those provided for under each employee benefit plan, program, policy and
practice as in effect immediately prior to the Change of Control (or as
in effect following the Change of Control, if greater);
(v) the failure of the Company to obtain a satisfactory
agreement from any successor to the Company to assume and agree to
perform this Agreement;
(vi) any material breach of this Agreement by the
Company; and
(vii) any purported termination by the Company of
Executive's employment that is not effected pursuant to a Notice of
Termination (as defined below).
No termination for Good Reason shall occur unless Executive has provided the
Company with written notice of the existence of such Good Reason, and the
Company is given at least fifteen (15) days to cure, except that no such notice
shall be required if the act or omission constituting Good Reason is not
susceptible of cure.
(e) "Date of Termination" shall mean the date specified in the
Notice of Termination (as hereinafter defined) (except in the case of
Executive's death, in which case the Date of Termination shall be the date of
death); provided, however, that if Executive's employment is terminated by the
Company other than for Cause, the date specified in the Notice of Termination
shall be at least thirty (30) days from the date the Notice of Termination is
given to Executive and if Executive's employment is terminated by Executive for
Good Reason, the date specified in the Notice of Termination shall not be more
than sixty (60) days from the date the Notice of Termination is given to the
Company.
(f) "Notice of Termination" shall mean a written notice either
from the Company to Executive, or Executive to the Company, that indicates
Section 2 or the specific provision of Section 4 of this Agreement relied upon
as the reason for such termination or nonrenewal, the Date of Termination, and,
in reasonable detail, the facts and circumstances claimed to provide a basis for
termination or nonrenewal pursuant to Section 2 or this Section 4 of this
Agreement.
4.2 Termination Upon Death or Disability. This Agreement, and
Executive's employment hereunder, shall terminate automatically and without the
necessity of any action on the part of the Company upon the death of Executive.
In addition, if at any time during the Term Executive has become so physically
or mentally disabled as to be incapable of satisfactorily performing his duties
and services hereunder for (i) a period of six (6) consecutive months, or (ii)
for shorter periods aggregating six (6) months during any twelve (12) month
period, the Company may at any time after the last day of the sixth consecutive
month of disability or the day on which the shorter periods of disability shall
have equaled an aggregate of six (6) months, by written notice to Executive (but
before Executive has recovered from such disability), terminate this Agreement
and Executive's employment hereunder. In such case, in addition to Executive's
rights under Section 4.5, Executive shall be entitled to receive the welfare
benefits described in Section 3.2 for twenty-four (24) months following the Date
of Termination. The determination of whether or not Executive is disabled shall
be made by an independent physician selected by mutual consent of the Board of
Directors and Executive or, if appropriate, Executive's representative.
4.3 Company's and Executive's Right to Terminate--Prior to Change of
Control. Prior to a Change of Control, this Agreement and Executive's employment
hereunder may be terminated at any time by the Company, with or without Cause,
upon thirty (30) days prior written notice to Executive, and by Executive, at
any time, upon thirty (30) days prior written notice to the Company. Any
termination of Executive's employment by the Company without Cause prior to a
Change of Control that occurs (i) at the request or insistence of any person
(other than the Company) relating to such Change of Control or (ii) in
anticipation of a Change of Control shall be deemed to have occurred after the
Change of Control for the purposes of this Agreement. For purposes of this
Agreement, it will be presumed that any termination of Executive's employment by
the Company without Cause ninety (90) days prior to a Change of Control, is a
termination that occurred pursuant to (i) or (ii) above.
4.4 Company's and Executive's Right to Terminate--Following a Change of
Control. Following a Change of Control, this Agreement and Executive's
employment hereunder may be terminated at any time (i) by the Company, with or
without Cause, upon thirty (30) days prior written notice to Executive, and (ii)
by Executive, with or without Good Reason, upon thirty (30) days prior written
notice to the Company. Executive's right to terminate his employment pursuant to
this Section 4.4 shall not be affected by incapacity due to physical or mental
illness. Executive's continued employment following a Change of Control shall
not constitute consent to, or a waiver of rights with respect to, any
circumstance constituting Good Reason hereunder.
4.5 Compensation Upon Termination.
(a) Termination Prior to Change of Control. In the event the
Company terminates (or elects not to renew) this Agreement without Cause, and
such termination (or nonrenewal) without Cause occurs prior to any Change of
Control, Executive shall be entitled to receive his Base Salary through the Date
of Termination, the welfare benefits described in Section 3.2 for the Benefit
Period, and not later than thirty (30) days after the Date of Termination, a
lump sum severance payment equal to the sum of Executive's then Current Base
Salary plus the arithmetic average of the bonus payments made to Executive with
respect to the three (3) fiscal years immediately preceding the fiscal year in
which the Date of Termination occurs (in the event that Executive has not been
employed by the Company for three (3) fiscal years prior to the Date of
Termination, then the arithmetic average of the annual bonus payments made to
Executive for the fiscal year(s) in which Executive was employed as Chief
Executive Officer by the Company shall be used in such calculation). In
addition, to the extent not otherwise required under the Company's Stock Option
Plan or any award agreement with Executive, any unvested stock option awards or
restricted stock grants theretofore awarded to Executive which would otherwise
vest or become exercisable during the twelve (12) month period commencing on the
Date of Termination shall vest and/or become exercisable on the Date of
Termination. In the event this Agreement is terminated (or not renewed) for any
reason other than by the Company without Cause, and such termination (or
nonrenewal) occurs prior to a Change of Control, Executive shall not be entitled
to the continuation of any compensation, bonuses or benefits provided hereunder,
or any other payments following the Date of Termination, other than Base Salary
earned through such Date of Termination.
(b) Termination Following Change of Control. If this Agreement
is terminated (or not renewed) (i) by the Company without Cause, or (ii) by
Executive for Good Reason during the twelve (12) month period immediately
following a Change of Control, and such termination (or nonrenewal) occurs
following a Change of Control, Executive shall be entitled to receive his full
Base Salary through the Date of Termination, the welfare benefits described in
Section 3.2 for the Benefit Period and, not later than thirty (30) days after
the Date of Termination, a lump sum severance payment equal to the product of
two (2) times the sum of Executive's then current annual Base Salary plus the
arithmetic average of the bonus payments made to Executive with respect to the
three (3) fiscal years immediately preceding the fiscal year in which the Date
of Termination occurs (in the event that Executive has not been employed by the
Company for three (3) fiscal years prior to the Date of Termination, then the
arithmetic average of the annual bonus payments made to Executive for the fiscal
year(s) in which Executive was employed as Chief Executive Officer by the
Company shall be used in such calculation). The Company will reimburse Executive
for reasonable office expenses such as, office rent and secretarial support,
incurred by Executive in the twelve (12) month period following the Date of
Termination. In addition, to the extent not otherwise required under the
Company's Stock Option Plan or any award agreement with Executive, any unvested
stock option awards or restricted stock grants theretofore awarded to Executive
shall vest and/or become immediately exercisable in full. In the event this
Agreement is terminated (or not renewed) for any reason other than (i) by the
Company without Cause, or (ii) by Executive for Good Reason, and such
termination (or nonrenewal) occurs following a Change of Control, Executive
shall not be entitled to the continuation of any compensation, bonuses or
benefits provided hereunder, or any other payments following the Date of
Termination, other than Base Salary earned through the Date of Termination.
(c) At Executive's option to be exercised by written notice to
the Company, the severance benefits payable under this Section 4.5 shall be paid
in accordance with the Company's normal payroll procedures over the twelve (12)
month or longer period as contemplated by Section 4.5(b), as the case may be,
corresponding to the amount of the payments instead of in a lump sum.
(d) Anything to the contrary contained herein notwithstanding,
as a condition to Executive receiving severance benefits to be paid pursuant to
this Section 4.5, Executive shall execute and deliver to the Company a general
release in form and substance reasonably satisfactory to the Company releasing
the Company and its officers, directors, employees and agents from all
liabilities, claims and obligations of any nature whatsoever, excepting only the
Company's obligations under this Agreement, under any Stock Option Award
Agreements, and under any other employee benefit plans or programs in which
Executive participates under Section 3.2 hereof, subject to all terms and
conditions of such plans or programs and this Agreement.
(e) Notwithstanding any other provision of this Agreement, if
(i) there is a change in the ownership or effective control of the Company or in
the ownership of a substantial portion of the assets of the Company within the
meaning of Section 280G(b)(2)(A) of the Internal Revenue Code of 1986, as
amended (the "Code"), and (ii) the payments otherwise to be made pursuant to
this Agreement and any other payments or benefits otherwise to be paid to or for
the benefit of Executive in the nature of compensation and contingent upon such
event within the meaning of Code Section 280G (collectively, the "Termination
Payments") would create an "excess parachute payment" within the meaning of
Section 280G of the Code, then the Termination Payments shall be limited so that
the aggregate present value (measured as of the effective time of the
transaction and determined in accordance with the provisions of Code Section
280G(d)(4)) of the Termination Payments to which Executive becomes entitled will
in no event exceed in amount the greater of the following dollar amounts:
(i) 2.99 times Executive's "base amount" (as such term
is defined in Code Section 280G(b)(3)), or
(ii) the greatest after-tax amount of the Termination
Payments, taking into account any excise tax imposed under Code Section
4999 on the Termination Payments.
5. Employment Covenants
5.1 Trade Secrets and Confidential Information. Executive agrees that he
shall, during the course of his employment and thereafter, hold inviolate and
keep secret all documents, materials, knowledge or other confidential business
or technical information of any nature whatsoever disclosed to or developed by
him or to which he had access as a result of his employment (hereinafter
referred to as "Confidential Information"). Such Confidential Information shall
include technical and business information, including, but not limited to,
inventions, research and development, engineering, products, designs,
manufacture, methods, systems, improvements, trade secrets, formulas, processes,
marketing, merchandising, selling, licensing, servicing, customer lists, records
or financial information, manuals or Company strategy concerning its business,
strategy or policies. Executive agrees that all Confidential Information shall
remain the sole and absolute property of the Company. During the course of his
employment, Executive shall not use, disclose, disseminate, publish, reproduce
or otherwise make available such Confidential Information to any person, firm,
corporation or other entity, except for the purpose of conducting business on
behalf of the Company. Following the Term, Executive shall not use, disclose,
disseminate, publish, reproduce or otherwise make available such Confidential
Information to any person, firm, corporation or other entity. Upon termination
of his employment with the Company, Executive will leave with or deliver to the
Company all records and any compositions, articles, devices, equipment and other
items which disclose or embody Confidential Information including all copies or
specimens thereof, whether prepared by him or by others. The foregoing
restrictions on disclosure of Confidential Information shall apply so long as
the information has not properly come into the public domain through no action
of Executive.
5.2 Transfer of Inventions. Executive, for himself and his heirs and
representatives, will promptly communicate and disclose to the Company, and upon
request will, without additional compensation, execute all papers reasonably
necessary to assign to the Company or the Company's nominees, free of
encumbrance or restrictions, all inventions, discoveries, improvements, whether
patentable or not, conceived or originated by Executive solely or jointly with
others, at the Company's expense or at the Company's facilities, or at the
Company's request, or in the course of his employment, or based on knowledge or
information obtained during the Term. All such assignments shall include the
patent rights in this and all foreign countries. Notwithstanding the foregoing,
this Section 5.2 shall not apply to any invention for which no equipment,
supplies, facilities or trade secret information of the Company was used and
which was developed entirely on Executive's own time and (a) that does not
relate (1) directly to the business of the Company or (2) to the Company's
actual or demonstrably anticipated research or development, or (b) that does not
result from any work performed by Executive for the Company.
5.3 Exclusivity of Employment. During the Term, Executive agrees not to
actively engage in any other employment, occupation or consulting activity for
any direct or indirect remuneration without the prior approval of the Board of
Directors; provided, however, that Executive may, without the approval of the
Board of Directors, serve in any capacity with any civic, educational or
charitable organization. Executive may own, as a passive investor, securities of
any corporation.
5.4 Covenant Not to Compete. Executive agrees to be bound and abide
by the following covenant not to compete:
(a) Term and Scope. During his employment with the Company and
for a period of two (2) years after the Term, Executive will not render to any
Conflicting Organization (as hereinafter defined), services, directly or
indirectly, anywhere in the world in connection with any Conflicting Product,
except that Executive may accept employment with a large Conflicting
Organization whose business is diversified (and which has separate and distinct
divisions) if Executive first certifies to the Board of Directors in writing
that he has provided a copy of Section 5 of this Agreement to such prospective
employer, that such prospective employer is a separate and distinct division of
the Conflicting Organization and that Executive will not render services
directly or indirectly in respect of any Conflicting Product (as hereinafter
defined). Such two-year time period shall be tolled during any period that
Executive is engaged in activity in violation of this covenant.
(b) Judicial Action. Executive and the Company agree that, if
the period of time or the scope of the restrictive covenant not to compete
contained in this Section 5.4 shall be adjudged unreasonable in any court
proceeding, then the period of time and/or scope shall be reduced accordingly,
so that this covenant may be enforced in such scope and during such period of
time as is judged by the court to be reasonable. In the event of a breach or
violation of this Section 5.4 by Executive, the parties agree than in addition
to all other remedies, the Company shall be entitled to equitable relief for
specific performance, and Executive hereby agrees and acknowledges that the
Company has no adequate remedy at law for the breach of the covenants contained
herein.
(c) Definitions. For purposes of this Agreement, the following terms
shall have the following meanings:
"Conflicting Product" means any product, method or process, system or
service of any person or organization other than the Company which is
related to the areas of disease management, wound care or specialty
pharmaceutical services, or the provision or sale of data in respect
thereof, that is the same as or similar to or competes with a product,
method or process, system or service of or provided by the Company or any
of its affiliates in existence or under development at the time
Executive's employment with the Company terminates or about which
Executive acquires Confidential Information.
"Conflicting Organization" means any person or organization which is
engaged in disease management, wound care or specialty pharmaceutical
services, or the provision or sale of data in respect thereof, and which
is, or about to become, engaged in research on or development, production,
marketing, licensing, selling or servicing of a Conflicting Product.
5.5 Disclosure to Prospective Employers. Executive will disclose to any
prospective employer, prior to accepting employment, the existence of Section 5
of this Agreement. The obligation imposed by this Section 5.5 shall terminate
two (2) years after termination of Executive's employment with the Company;
provided, however, the running of such two-year period shall be tolled to the
extent the covenant not to compete contained in Section 5.4(a) hereof is tolled.
5.6 Non-Solicitation. For one (1) year after termination of employment
with the Company for any reason, Executive shall not directly or indirectly
solicit or hire, or assist any other person in soliciting or hiring, any
employee of the Company (as of the Date of Termination) or any person who, as of
the Date of Termination, was in the process of being recruited by the Company or
induce any such employee to terminate his or her employment with the Company.
6. Miscellaneous
6.1 Notices. Any notice required or permitted to be delivered hereunder
shall be in writing and shall be deemed to be delivered on the earlier of (i)
the date received, or (ii) the date of delivery, refusal or non-delivery
indicated on the return receipt, if deposited in a United States Postal Service
depository, postage prepaid, sent registered or certified mail, return receipt
requested, addressed to the party to receive the same at the address of such
party set forth below, or at such other address as may be designated in a notice
delivered or mailed as herein provided.
To Company: Curative Health Services, Inc.
150 Motor Parkway
Hauppauge, New York 11788
Attention: Nancy F. Lanis, Esq.
Executive: Joseph L. Feshbach
27600 Edgerton Road
Los Altos Hills, California 94022
6.2 Headings. The headings of the articles and sections of this
Agreement are inserted for convenience only and shall not be deemed a part of or
affect the construction or interpretation of any provision hereof.
6.3 Fees. Upon presentation of itemized invoices, the Company shall pay
all reasonable fees and expenses of Executive's attorneys and accountants in
connection with the contemplation, negotiation, preparation, review and/or
execution of this Agreement.
6.4 Modifications; Waiver. No modification of any provision of this
Agreement or waiver of any right or remedy herein provided shall be effective
for any purpose unless specifically set forth in a writing signed by the party
to be bound thereby. No waiver of any right or remedy in respect of any
occurrence or event on one occasion shall be deemed a waiver of such right or
remedy in respect of such occurrence or event on any other occasion.
6.5 Entire Agreement. This Agreement contains the entire agreement of
the parties with respect to the subject matter hereof and supersedes all other
agreements, oral or written, heretofore made with respect thereto.
6.6 Severability. Any provision of this Agreement prohibited by or
unlawful or unenforceable under any applicable law of any jurisdiction shall as
to such jurisdiction be ineffective without affecting any other provision
hereof. To the full extent, however, that the provisions of such applicable law
may be waived, they are hereby waived, to the end that this Employment Agreement
be deemed to be a valid and binding agreement enforceable in accordance with its
terms.
6.7 Controlling Law. This Agreement has been entered into by the parties
in the State of New York and shall be continued and enforced in accordance with
the laws of that State.
6.8 Assignments. The Company shall have the right to assign this
Agreement and to delegate all rights, duties and obligations hereunder to any
entity that controls the Company, that the Company controls or that may be the
result of the merger, consolidation, acquisition or reorganization of the
Company and another entity. Executive agrees that this Agreement is personal to
him and his rights and interest hereunder may not be assigned, nor may his
obligations and duties hereunder be delegated (except as to delegation in the
normal course of operation of the Company), and any attempted assignment or
delegation in violation of this provision shall be void.
6.9 Attorney Fees. In the event of litigation between the parties, to
enforce their respective rights under this Agreement, the prevailing party shall
be entitled to receive from the non-prevailing party reimbursement of the
prevailing party's reasonable attorney's fees and costs at all levels of trial
and appeal.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
CURATIVE HEALTH SERVICES, INC.
By:
---------------------------
Its: Senior Vice President and
Chief Financial Officer
---------------------------
Executive
Exhibit 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made effective as of
March 13, 2002 (the "Effective Date"), between CURATIVE HEALTH SERVICES, INC., a
Minnesota corporation (the "Company"), and Thomas Axmacher ("Executive").
WHEREAS, the Executive has been in the employ of the Company
pursuant to that certain Employment Agreement (the "Original Agreement") dated
as of September 24, 1999, on the terms and conditions set forth therein;
WHEREAS, the Company recognizes that Executive's contribution to the
growth and success of the Company has been substantial and therefore desires to
assure the Company of Executive's continued employment; and
WHEREAS, based on the foregoing, the Company and Executive now wish
to amend and restate the terms of the Original Agreement.
NOW, THEREFORE, in consideration of the promises and the mutual
covenants and agreements herein contained, the Company and Executive hereby
agree that the Original Agreement shall be and is hereby amended and restated in
its entirety to read as follows:
1. Employment
1.1 Employment and Duties. The Company hereby agrees to employ Executive
for the Term (as hereinafter defined) as Senior Vice President - Finance and
Chief Financial Officer, subject to the direction of the Chief Executive
Officer, and in connection therewith, to perform such duties as he shall
reasonably be directed by the Chief Executive Officer to perform. Executive
hereby accepts such employment and agrees to render such services. Executive
shall perform his duties and carry out his responsibilities hereunder in a
diligent manner, shall devote his exclusive and full working time, attention and
effort to the affairs of the Company, shall use his best efforts to promote the
interests of the Company and shall be just and faithful in the performance of
his duties and in carrying out his responsibilities.
1.2 Location. The principal location for performance of Executive's
services hereunder shall be at the Company's executive offices, which are
currently located in Hauppauge, New York, subject to reasonable travel
requirements during the course of such performance.
2. Employment Term
The term of Executive's employment hereunder (the "Term") shall be deemed
to commence on the Effective Date and shall end on the first anniversary of the
Effective Date, unless sooner terminated as hereinafter provided; provided,
however, that the Term shall be automatically renewed and extended for an
additional period of one (1) year on each anniversary thereafter unless either
party gives a Notice of Termination (as defined below) to the other party at
least three (3) months prior to such anniversary.
3. Compensation and Benefits
3.1 Cash Compensation.
(a) Base Salary. The Company shall pay Executive an annual salary
of $175,000 payable in bi-weekly installments, in arrears (the
"Base Salary"). The Base Salary shall be reviewed annually by
the Company's Board of Directors and may be increased, but not
decreased (unless mutually agreed upon by Executive and the
Company).
(b) Bonus Plan. Executive shall be entitled to participate in the
Company's Executive Bonus Compensation Program, in accordance
with and subject to the terms and provisions thereof.
3.2 Participation in Benefit Plans. Executive shall be entitled to
participate in all employee benefit plans or programs of the Company to the
extent that his position, title, tenure, salary, age, health and other
qualifications make him eligible to participate. The Company does not guarantee
the continuance of any particular employee benefit plan or program during the
Term, and Executive's participation in any such plan or program shall be subject
to all terms, provisions, rules and regulations applicable thereto. Executive
will be entitled to twenty (20) days of vacation per year, to be used in
accordance with the Company's vacation policy for senior executives as it may
change from time to time. For the Benefit Period, if any, (as hereinafter
defined), the Company will arrange to provide Executive with welfare benefits
(including life and health insurance benefits) of substantially similar design
and cost to Executive as the welfare benefits and other employee benefits
available to Executive prior to Executive's or the Company's, as the case may
be, receipt of a Notice of Termination (as hereinafter defined). In the event
that Executive shall obtain full-time employment providing welfare benefits
during the Benefit Period, such benefits as otherwise receivable hereunder by
Executive shall be discontinued.
3.3 Expenses. The Company will pay or reimburse Executive for all
reasonable and necessary out-of-pocket expenses incurred by him in the
performance of his duties under this Agreement. Executive shall keep detailed
and accurate records of expenses incurred in connection with the performance of
his duties hereunder and reimbursement therefore shall be in accordance with
policies and procedures to be established from time to time by the Board.
3.4 Automobile Expenses. During the Term and in accordance with the
Company's Executive Automobile Policy, Executive shall be repaid by the Company
for the monthly lease expense for an automobile leased in the name of the
Executive and for all normal automobile operating expenses incurred by the
Executive in the performance of his duties under this Agreement.
4. Termination of Employment
4.1 Definitions
(a) "Benefit Period" shall mean (i) the twelve (12) month period
commencing on the Date of Termination which occurs in connection with a
termination of employment described in the first sentence of Section 4.5(a), or
(ii) the twenty-four (24) month period commencing on the Date of Termination
which occurs in connection with a termination of employment described in the
first sentence of Section 4.5(b).
(b) "Cause" shall mean any of the following:
(i) any act or failure to act (or series or combination
thereof) by Executive done with the intent to harm in any material respect the
interests of the Company;
(ii) the commission by Executive of a felony;
(iii) the perpetration by Executive of a dishonest act or
common law fraud against the Company or any subsidiary thereof;
(iv) a grossly negligent act or failure to act (or series or
combination thereof) by Executive detrimental in any material respect to the
interests of the Company;
(v) the material breach by Executive of his agreements or
obligations under this Agreement; or
(vi) the continued refusal to follow the directives of the
Chief Executive Officer or Board of Directors that are consistent with
Executive's duties and responsibilities identified in Section 1.1 hereof.
(c) A "Change of Control" shall mean any of the following:
(i) a sale of all or substantially all of the assets of the
Company;
(ii) the acquisition of more than fifty percent (50%) of the
Common Stock of the Company (with all classes or series thereof treated as a
single class) by any person or group of persons, except a Permitted Shareholder
(as hereinafter defined), acting in concert. A "Permitted Shareholder" means a
holder, as of the date the Plan was adopted by the Company, of Common Stock;
(iii) a reorganization of the Company wherein the holders of
Common Stock of the Company receive stock in another company, a merger of the
Company with another company wherein there is a fifty percent (50%) or greater
change in the ownership of the Common Stock of the Company as a result of such
merger, or any other transaction in which the Company (other than as the parent
corporation) is consolidated for federal income tax purposes or is eligible to
be consolidated for federal income tax purposes with another corporation;
(iv) in the event that the Common Stock is traded on an
established securities market, a public announcement that any person has
acquired or has the right to acquire beneficial ownership of fifty percent (50%)
or more of the then-outstanding Common Stock and for this purpose the terms
"person" and "beneficial ownership" shall have the meanings provided in Section
13(d) of the Securities and Exchange Act of 1934 or related rules promulgated by
the Securities and Exchange Commission, or the commencement of or public
announcement of an intention to make a tender offer or exchange offer for fifty
percent (50%) or more of the then outstanding Common Stock;
(v) a majority of the Board of Directors is not comprised of
Continuing Directors. A "Continuing Director" means a director recommended by
the Board of Directors of the Company for election as a director of the Company
by the stockholders; or
(vi) the Board of Directors of the Company, in its sole and
absolute discretion, determines that there has been a sufficient change in the
share ownership of the Company to constitute a change of effective ownership or
control of the Company.
(d) "Good Reason" shall mean, within the twelve (12) month period
immediately following a Change of Control, the occurrence of any one or more of
the following events:
(i) the assignment to Executive of any duties inconsistent in
any respect with Executive's position (including status, offices, title, and
reporting requirements), authority, duties or other responsibilities as in
effect immediately prior to the Change of Control or any other action of the
Company that results in a diminishment in such position, authority, duties or
responsibilities, other than an insubstantial and inadvertent action that is
remedied by the Company promptly after receipt of notice thereof given by
Executive;
(ii) a reduction by the Company in Executive's Base Salary as
in effect on the date hereof and as the same shall be increased from time to
time hereafter;
(iii) the Company's requiring Executive to be based at a
location in excess of fifty (50) miles from the location of Executive's
principal office immediately prior to the Change of Control;
(iv) the failure by the Company to (a) continue in effect any
material compensation or benefit plan, program, policy or practice in which
Executive was participating at the time of the Change of Control or (b) provide
Executive with compensation and benefits at least equal (in terms of benefit
levels and/or reward opportunities) to those provided for under each employee
benefit plan, program, policy and practice as in effect immediately prior to the
Change of Control (or as in effect following the Change of Control, if greater);
(v) the failure of the Company to obtain a satisfactory
agreement from any successor to the Company to assume and agree to perform this
Agreement; and
(vi) any purported termination by the Company of Executive's
employment that is not effected pursuant to a Notice of Termination (as defined
below).
(e) "Date of Termination" shall mean the date specified in the
Notice of Termination (as hereinafter defined) (except in the case of
Executive's death, in which case Date of Termination shall be the date of
death); provided, however, that if Executive's employment is terminated by the
Company other than for Cause, the date specified in the Notice of Termination
shall be at least thirty (30) days from the date the Notice of Termination is
given to Executive and if Executive's employment is terminated by Executive for
Good Reason, the date specified in the Notice of Termination shall not be more
than sixty (60) days from the date the Notice of Termination is given to the
Company.
(f) "Notice of Termination" shall mean a written notice either from
the Company to Executive, or Executive to the Company, that indicates Section 2
or the specific provision of Section 4 of this Agreement relied upon as the
reason for such termination or nonrenewal, the Date of Termination, and, in
reasonable detail, the facts and circumstances claimed to provide a basis for
termination or nonrenewal pursuant to Section 2 or this Section 4 of this
Agreement.
4.2 Termination Upon Death or Disability. This Agreement, and Executive's
employment hereunder, shall terminate automatically and without the necessity of
any action on the part of the Company upon the death of Executive. In addition,
if at any time during the Term Executive shall become physically or mentally
disabled, whether totally or partially, so that he is unable substantially to
perform his duties and services hereunder for (i) a period of six (6)
consecutive months, or (ii) for shorter periods aggregating six (6) months
during any twelve (12) month period, the Company may at any time after the last
day of the sixth consecutive month of disability or the day on which the shorter
periods of disability shall have equalled an aggregate of six (6) months, by
written notice to Executive (but before Executive has recovered from such
disability), terminate this Agreement and Executive's employment hereunder.
4.3 Company's and Executive's Right to Terminate-Prior to Change of
Control. Prior to a Change of Control, this Agreement and Executive's employment
hereunder may be terminated at any time by the Company, with or without Cause,
upon thirty (30) days prior written notice to Executive, and by Executive, at
any time, upon thirty (30) days prior written notice to the Company. Any
termination of Executive's employment by the Company without Cause prior to a
Change of Control that occurs at the request or insistence of any person (other
than the Company) relating to such Change of Control shall be deemed to have
occurred after the Change of Control for the purposes of this Agreement.
4.4 Company's and Executive's Right to Terminate-Following a Change of
Control. Following a Change of Control, this Agreement and Executive's
employment hereunder may be terminated at any time (i) by the Company, with or
without Cause, upon thirty (30) days prior written notice to Executive, and (ii)
by Executive for Good Reason upon thirty (30) days prior written notice to the
Company. Executive's right to terminate his employment pursuant to this Section
4.4 shall not be affected by incapacity due to physical or mental illness.
Executive's continued employment following a Change of Control shall not
constitute consent to, or a waiver of rights with respect to, any circumstance
constituting Good Reason hereunder.
4.5 Compensation Upon Termination.
(a) Termination Prior to Change of Control. In the event the Company
terminates (or elects not to renew) this Agreement without Cause, and such
termination (or nonrenewal) without Cause occurs prior to any Change of Control,
Executive shall be entitled to receive his Base Salary through the Date of
Termination, the welfare benefits described in Section 3.2 for the Benefit
Period, and not later than thirty (30) days after the Date of Termination, a
lump sum severance payment equal to the sum of Executive's then Current Base
Salary plus the arithmetic average of payments made to Executive pursuant to the
Company's Executive Bonus Compensation Program with respect to the three (3)
fiscal years immediately preceding the fiscal year in which the Date of
Termination occurs. In addition, to the extent not otherwise required under the
Company's Stock Option Plan or any award agreement with Executive, any unvested
stock option awards theretofore awarded to Executive which would otherwise vest
and become exercisable during the twelve (12) month period commencing on the
Date of Termination shall vest and become exercisable on the Date of
Termination. In the event this Agreement is terminated (or not renewed) for any
reason other than by the Company without Cause, and such termination (or
nonrenewal) occurs prior to a Change of Control, Executive shall not be entitled
to the continuation of any compensation, bonuses or benefits provided hereunder,
or any other payments following the Date of Termination, other than Base Salary
earned through such Date of Termination.
(b) Termination Following Change of Control. If this Agreement is
terminated (or not renewed) (i) by the Company without Cause, or (ii) by
Executive for Good Reason during the twelve (12) month period immediately
following a Change of Control, and such termination (or nonrenewal) occurs
following a Change of Control, Executive shall be entitled to receive his full
Base Salary through the Date of Termination, the welfare benefits described in
Section 3.2 for the Benefit Period and, not later than thirty (30) days after
the Date of Termination, a lump sum severance payment equal to the product of
two (2) times the sum of Executive's then current Base Salary plus the
arithmetic average of payments made to Executive pursuant to the Company's
Executive Bonus Compensation Program with respect to the three (3) fiscal years
immediately preceding the fiscal year in which the Date of Termination occurs.
In addition, to the extent not otherwise required under the Company's Stock
Option Plan or any award agreement with Executive, any unvested stock option
awards theretofore awarded to Executive shall vest and become immediately
exercisable in full. In the event this Agreement is terminated (or not renewed)
for any reason other than (i) by the Company without Cause, or (ii) by Executive
for Good Reason, and such termination (or nonrenewal) occurs following a Change
of Control, Executive shall not be entitled to the continuation of any
compensation, bonuses or benefits provided hereunder, or any other payments
following the Date of Termination, other than Base Salary earned through the
Date of Termination.
(c) At Executive's option to be exercised by written notice to the
Company, the severance benefits payable under this Section 4.5 shall be paid in
accordance with the Company's normal payroll procedures over the twelve (12) or
twenty-four (24) month period, as the case may be, corresponding to the amount
of the payments instead of in a lump sum.
(d) Anything to the contrary contained herein notwithstanding, as a
condition to Executive receiving severance benefits to be paid pursuant to this
Section 4.5, Executive shall execute and deliver to the Company a general
release in form and substance reasonably satisfactory to the Company releasing
the Company and its officers, directors, employees and agents from all
liabilities, claims and obligations of any nature whatsoever, excepting only the
Company's obligations under this Agreement, under any Stock Option Award
Agreements, and under any other employee benefit plans or programs in which
Executive participates under Section 3.2 hereof, subject to all terms and
conditions of such plans or programs and this Agreement.
(e) Anything to the contrary contained herein notwithstanding, in
the event that any payment or benefit received or to be received by Executive in
connection with a Change in Control of the Company or termination of Executive's
employment (whether payable pursuant to the terms of this Agreement or any other
plan, contract, agreement or arrangement with the Company, with any person whose
actions result in a Change in Control of the Company or with any person
constituting a member of an "affiliated group" as defined in Section 280G(d)(5)
of the Internal Revenue Code of 1986, as amended (the "Code"), with the Company
or with any person whose actions result in a Change in Control of the Company
(collectively, the "Total Payments") would not be deductible (in whole or in
part) by the Company or such other person making such payment or providing such
benefit solely as a result of Section 280G of the Code, the amount payable to
Executive pursuant to this Section 4.5 shall be reduced until no portion of the
Total Payments is not deductible solely as a result of Section 280G of the Code
or such amount payable to Executive pursuant to Section 4.5 is reduced to zero.
For purposes of this limitation, (a) no portion of the Total Payments the
receipt or enjoyment of which Executive shall have effectively waived in writing
prior to the date of payment of the amount pursuant to Section 4.5 shall be
taken into account; (b) no portion of the Total Payments shall be taken into
account which in the opinion of tax counsel selected by the Company and
reasonably acceptable to Executive does not constitute a "parachute payment"
within the meaning of Section 280G(b)(2) of the Code; (c) the payment pursuant
to Section 4.5 shall be reduced only to the extent necessary so that the Total
Payments (other than those referred to in the immediately preceding clause (b))
in their entirety constitute reasonable compensation within the meaning of
Section 280G(b)(4)(B) of the Code, in the opinion of the tax counsel referred to
in the immediately preceding clause (b); and (d) the value of any other non-cash
benefit or of any deferred cash payment included in the Total Payments shall be
determined by the Company's independent auditors in accordance with the
principles of Sections 280G(d)(3) and (4) of the Code.
5. Employment Covenants
5.1 Trade Secrets and Confidential Information. Executive agrees that he
shall, during the course of his employment and thereafter, hold inviolate and
keep secret all documents, materials, knowledge or other confidential business
or technical information of any nature whatsoever disclosed to or developed by
him or to which he had access as a result of his employment (hereinafter
referred to as "Confidential Information"). Such Confidential Information shall
include technical and business information, including, but not limited to,
inventions, research and development, engineering, products, designs,
manufacture, methods, systems, improvements, trade secrets, formulas, processes,
marketing, merchandising, selling, licensing, servicing, customer lists, records
or financial information, manuals or Company strategy concerning its business,
strategy or policies. Executive agrees that all Confidential Information shall
remain the sole and absolute property of the Company. During the course of his
employment, Executive shall not use, disclose, disseminate, publish, reproduce
or otherwise make available such Confidential Information to any person, firm,
corporation or other entity, except for the purpose of conducting business on
behalf of the Company. Following the Term, Executive shall not use, disclose,
disseminate, publish, reproduce or otherwise make available such Confidential
Information to any person, firm, corporation or other entity. Upon termination
of his employment with the Company, Executive will leave with or deliver to the
Company all records and any compositions, articles, devices, equipment and other
items which disclose or embody Confidential Information including all copies or
specimens thereof, whether prepared by him or by others. The foregoing
restrictions on disclosure of Confidential Information shall apply so long as
the information has not properly come into the public domain through no action
of Executive.
5.2 Transfer of Inventions. Executive, for himself and his heirs and
representatives, will promptly communicate and disclose to the Company, and upon
request will, without additional compensation, execute all papers reasonably
necessary to assign to the Company or the Company's nominees, free of
encumbrance or restrictions, all inventions, discoveries, improvements, whether
patentable or not, conceived or originated by Executive solely or jointly with
others, at the Company's expense or at the Company's facilities, or at the
Company's request, or in the course of his employment, or based on knowledge or
information obtained during the Term. All such assignments shall include the
patent rights in this and all foreign countries. Notwithstanding the foregoing,
this Section 5.2 shall not apply to any invention for which no equipment,
supplies, facilities or trade secret information of the Company was used and
which was developed entirely on Executive's own time and (a) that does not
relate (1) directly to the business of the Company or (2) to the Company's
actual or demonstrably anticipated research or development, or (b) that does not
result from any work performed by Executive for the Company.
5.3 Exclusivity of Employment. During the Term, Executive shall not
directly or indirectly engage in any activity competitive with or adverse to the
Company's business or welfare or render a material level of services of a
business, professional or commercial nature to any other person or firm, whether
for compensation or otherwise.
5.4 Covenant Not to Compete. Executive agrees to be bound and abide
by the following covenant not to compete:
(a) Term and Scope. During his employment with the Company and for a
period of two (2) years after the Term, Executive will not render to any
Conflicting Organization (as hereinafter defined), services, directly or
indirectly, anywhere in the world in connection with any Conflicting Product,
except that Executive may accept employment with a large Conflicting
Organization whose business is diversified (and which has separate and distinct
divisions) if Executive first certifies to the Board of Directors in writing
that he has provided a copy of Section 5 of this Agreement to such prospective
employer, that such prospective employer is a separate and distinct division of
the Conflicting Organization and that Executive will not render services
directly or indirectly in respect of any Conflicting Product (as hereinafter
defined). Such two-year time period shall be tolled during any period that
Executive is engaged in activity in violation of this covenant.
(b) Judicial Action. Executive and the Company agree that, if the
period of time or the scope of the restrictive covenant not to compete contained
in this Section 5.4 shall be adjudged unreasonable in any court proceeding, then
the period of time and/or scope shall be reduced accordingly, so that this
covenant may be enforced in such scope and during such period of time as is
judged by the court to be reasonable. In the event of a breach or violation of
this Section 5.4 by Executive, the parties agree than in addition to all other
remedies, the Company shall be entitled to equitable relief for specific
performance, and Executive hereby agrees and acknowledges that the Company has
no adequate remedy at law for the breach of the covenants contained herein.
(c) Definitions. For purposes of this Agreement, the following terms
shall have the following meanings:
"Conflicting Product" means any product, method or process, system
or service of any person or organization other than the Company, in
existence or under development at the time Executive's employment
with the Company terminates, that is the same as or similar to or
competes with a product, method or process, system or service of or
provided by the Company or any of its affiliates or about which
Executive acquires Confidential Information.
"Conflicting Organization" means any person or organization which is
engaged in or about to become engaged in, research on or
development, production, marketing, licensing, selling or servicing
of a Conflicting Product.
5.5 Disclosure to Prospective Employers. Executive will disclose to any
prospective employer, prior to accepting employment, the existence of Section 5
of this Agreement. The obligation imposed by this Section 5.5 shall terminate
two (2) years after termination of Executive's employment with the Company;
provided, however, the running of such two-year period shall be tolled to the
extent the covenant not to compete contained in Section 5.4(a) hereof is tolled.
5.6 Non-Solicitation. For one (1) year after termination of employment
with the Company for any reason, the Executive shall not directly or indirectly
solicit or hire, or assist any other person in soliciting or hiring, any
employee of the Company (as of the date of termination) or any person who, as of
the date of termination, was in the process of being recruited by the Company or
induce any such employee to terminate his or her employment with the Company.
6. Miscellaneous
6.1 Notices. Any notice required or permitted to be delivered hereunder
shall be in writing and shall be deemed to be delivered on the earlier of (i)
the date received, or (ii) the date of delivery, refusal or non-delivery
indicated on the return receipt, if deposited in a United States Postal Service
depository, postage prepaid, sent registered or certified mail, return receipt
requested, addressed to the party to receive the same at the address of such
party set forth below, or at such other address as may be designated in a notice
delivered or mailed as herein provided.
To Company: Curative Health Services, Inc.
150 Motor Parkway, 4th Floor
Hauppauge, NY 11788
Attention: Nancy F. Lanis, Senior Vice President
and General Counsel
Executive: Thomas Axmacher
62 Elderwood Drive N.
St. James, New York 11780
6.2 Headings. The headings of the articles and sections of this Agreement
are inserted for convenience only and shall not be deemed a part of or affect
the construction or interpretation of any provision hereof.
6.3 Modifications; Waiver. No modification of any provision of this
Agreement or waiver of any right or remedy herein provided shall be effective
for any purpose unless specifically set forth in a writing signed by the party
to be bound thereby. No waiver of any right or remedy in respect of any
occurrence or event on one occasion shall be deemed a waiver of such right or
remedy in respect of such occurrence or event on any other occasion.
6.4 Entire Agreement. This Agreement contains the entire agreement of the
parties with respect to the subject matter hereof and supersedes all other
agreements, oral or written, heretofore made with respect thereto, including,
without limitation, the Original Agreement.
6.5 Severability. Any provision of this Agreement prohibited by or
unlawful or unenforceable under any applicable law of any jurisdiction shall as
to such jurisdiction be ineffective without affecting any other provision
hereof. To the full extent, however, that the provisions of such applicable law
may be waived, they are hereby waived, to the end that this Employment Agreement
be deemed to be a valid and binding agreement enforceable in accordance with its
terms.
6.6 Controlling Law. This Agreement has been entered into by the parties
in the State of New York and shall be continued and enforced in accordance with
the laws of that State.
6.7 Assignments. The Company shall have the right to assign this Agreement
and to delegate all rights, duties and obligations hereunder to any entity that
controls the Company, that the Company controls or that may be the result of the
merger, consolidation, acquisition or reorganization of the Company and another
entity. Executive agrees that this Agreement is personal to him and his rights
and interest hereunder may not be assigned, nor may his obligations and duties
hereunder be delegated (except as to delegation in the normal course of
operation of the Company), and any attempted assignment or delegation in
violation of this provision shall be void.
6.8 Attorney Fees. In the event of litigation between the parties, to
enforce their respective rights under this Agreement, the prevailing party shall
be entitled to receive from the non-prevailing party reimbursement of the
prevailing party's reasonable attorney's fees and costs at all levels of trial
and appeal.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the Effective Date.
CURATIVE HEALTH SERVICES, INC.
By:
---------------------------
Name: Joseph L. Feshbach
Title: Chairman and Chief
Executive Officer
--------------------------
Executive
Exhibit 99.1
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., Wyeth, Alpha Therapeutics Corp., and
Aventis Behring. 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, 9 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 percent 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' 8 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 8 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 $5.20 per share in the second
quarter of 2001 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.
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. ss.1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Curative Health Services, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Joseph Feshbach, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that, to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Joseph Feshbach
-------------------------------------
Joseph Feshbach
Chief Executive Officer
November 14, 2002
Exhibit 99.3
CERTIFICATION PURSUANT TO
18 U.S.C. ss.1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Curative Health Services, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Thomas Axmacher, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that, to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Thomas Axmacher
-------------------------------------
Thomas Axmacher
Chief Financial Officer
November 14, 2002