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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES 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 EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-25769
ACCREDO HEALTH, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1642871
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1640 CENTURY CENTER PKWY, SUITE 101, MEMPHIS, TN 38134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(901) 385-3688
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NO CHANGE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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/
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 1, 2002
COMMON STOCK, $0.01 PAR VALUE................ 31,578,906
NON-VOTING COMMON STOCK, $0.01 PAR VALUE..... 0
----------
TOTAL COMMON STOCK........................... 31,578,906
==========
ACCREDO HEALTH, INCORPORATED
INDEX
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income (unaudited)
For the three months ended September 30, 2001 and 2002
Condensed Consolidated Balance Sheets
June 30, 2002 and September 30, 2002 (unaudited)
Condensed Consolidated Statements of Cash Flows (unaudited)
For the three months ended September 30, 2001 and 2002
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II - OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Note: Items 1, 2, 3 and 4 of Part II are omitted because they are not
applicable.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(000'S OMITTED, EXCEPT SHARE DATA)
(UNAUDITED)
Three
Months Ended September 30,
---------------------------
2002 2001
--------- ---------
Net patient revenue $ 312,535 $ 122,295
Other revenue 8,885 3,907
Equity in net income of joint ventures 345 446
--------- ---------
Total revenues 321,765 126,648
Cost of sales 255,825 107,012
--------- ---------
Gross profit 65,940 19,636
General & administrative 30,744 8,481
Bad debts 6,608 1,055
Depreciation and amortization 2,711 691
--------- ---------
Income from operations 25,877 9,409
Interest income (expense), net (2,075) 514
Minority interest in consolidated subsidiary (484) (319)
--------- ---------
Income before income taxes 23,318 9,604
Provision for income taxes 9,348 3,727
--------- ---------
Net income $ 13,970 $ 5,877
========= =========
Cash dividends declared on common stock $ -- $ --
========= =========
Net income per common share:
Basic $ 0.44 $ 0.23
========= =========
Diluted $ 0.43 $ 0.22
========= =========
Weighted average shares outstanding:
Basic 31,404,139 25,996,817
Diluted 32,206,432 26,848,897
See accompanying notes to condensed consolidated financial statements.
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(000'S OMITTED, EXCEPT SHARE DATA)
(Unaudited)
September 30, June 30,
2002 2002
-----------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,886 $ 42,913
Patient accounts receivable, less allowance for
doubtful accounts of $85,645 at September 30, 2002
and $81,758 at June 30, 2002 330,725 335,253
Due from affiliates 3,625 2,255
Other accounts receivable 20,788 22,555
Inventories 115,610 120,809
Prepaids and other current assets 3,644 3,470
Deferred income taxes 7,560 5,954
--------- ---------
Total current assets 492,838 533,209
Property and equipment, net 28,227 23,796
Other assets:
Joint venture investments 4,842 4,637
Goodwill, net 335,043 334,919
Other intangible assets, net 26,760 28,268
--------- ---------
Total assets $ 887,710 $ 924,829
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 160,205 $ 185,047
Accrued expenses 24,547 31,369
Income taxes payable 8,142 1,701
Current portion of long-term debt 5,000 5,312
--------- ---------
Total current liabilities 197,894 223,429
Long-term debt 194,375 224,688
Deferred income taxes 4,739 4,383
Minority interest in consolidated joint venture 1,459 1,275
Stockholders' equity:
Undesignated Preferred Stock, 5,000,000 shares
authorized, no shares issued - -
Common Stock, $.01 par value; 50,000,000 shares authorized;
31,538,633 and 31,329,054 shares issued and outstanding at
September 30, 2002 and June 30, 2002, respectively 315 313
Additional paid-in capital 417,752 413,161
Accumulated other comprehensive loss (374) --
Retained earnings 71,550 57,580
--------- ---------
Total stockholders' equity 489,243 471,054
--------- ---------
Total liabilities and stockholders' equity $ 887,710 $ 924,829
========= =========
See accompanying notes to condensed consolidated financial statements.
ACCREDO HEALTH, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000'S OMITTED)
(UNAUDITED)
Three Months Ended
September 30,
2002 2001
------------------------------
OPERATING ACTIVITIES:
Net income $ 13,970 $ 5,877
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,070 691
Provision for losses on accounts receivable 6,608 1,055
Deferred income tax benefit (1,250) (150)
Compensation resulting from stock transactions -- 46
Tax benefit of disqualifying disposition of stock options 2,611 1,662
Minority interest in income of consolidated joint venture 484 319
Changes in operating assets and liabilities:
Patient receivables and other (4,455) (5,608)
Due from affiliates (1,369) 88
Inventories 5,199 (3,086)
Prepaids and other current assets (174) (459)
Accounts payable and accrued expenses (27,138) 2,626
Income taxes payable 6,441 1,400
---------- ----------
Net cash provided by operating activities 3,997 4,461
INVESTING ACTIVITIES:
Purchases of marketable securities -- (3,500)
Purchases of property and equipment (6,177) (2,339)
Business acquisitions and joint venture investments (700) --
Change in joint venture investments, net (505) (546)
---------- ----------
Net cash used in investing activities (7,382) (6,385)
FINANCING ACTIVITIES:
Decrease in long-term notes payable (30,625) --
Issuance of common stock 1,983 728
---------- ----------
Net cash provided by (used in) financing activities (28,642) 728
---------- ----------
Decrease in cash and cash equivalents (32,027) (1,196)
Cash and cash equivalents at beginning of period 42,913 54,520
---------- ----------
Cash and cash equivalents at end of period $ 10,886 $ 53,324
========== ==========
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2002
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and
with the instructions to form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary to present fairly the condensed consolidated financial
position, results of operations and cash flows of Accredo Health,
Incorporated ( the "Company" or "Accredo" ) have been included.
Operating results for the three-month period ended September 30, 2002,
are not necessarily indicative of the results that may be expected for
the fiscal year ended June 30, 2003.
The balance sheet at June 30, 2002 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended June 30, 2002.
2. STOCKHOLDERS' EQUITY
During the quarter, employees exercised stock options to acquire
209,579 shares of Accredo common stock at a weighted average exercise
price of $9.46 per share.
3. BUSINESS ACQUISITIONS - ASSETS TO BE SOLD
As discussed in footnote 3 of the consolidated financial statements in the
Company's Annual Report on Form 10-K for the year ended June 30, 2002, the
purchase price allocation associated with the Company's acquisition of the
Specialty Pharmaceutical Services Division ("SPS business") of Gentiva Health
Services, Inc. is preliminary due to the plans to exit the acute pharmacy
business, which could have an impact on the allocation. The Company plans to
exit the acute pharmacy business acquired as part of the SPS business by
December 2002. The Company's intentions are to retain the accounts receivable
of the acute pharmacy business and dispose of the other assets of the business,
which are immaterial. The Company has accounted for the acute pharmacy business
in accordance with EITF 87-11, "Allocation of Purchase Price to Assets to be
Sold." In accordance with EITF 87-11, the expected net proceeds from the sale
of the acute division, the expected results of the acute operations during the
period from acquisition to disposal and the expected interest expense during
the holding period on the incremental debt incurred to finance the acute
business have been recorded as an adjustment to the purchase price. Any
difference between the actual and expected results will result in an adjustment
to goodwill, unless the adjustment results from a post-acquisition event. The
results of operations of the acute division, amounting to a $390,000 loss, net
of tax benefit, during the three month period ended September 30, 2002, are
excluded from the Company's results of operations in the accompanying financial
statements. The amount of interest expense allocated to the acute pharmacy
business was $241,000, net of tax benefit, during the three month period ended
September 30, 2002.
4. COMPREHENSIVE INCOME
Comprehensive income includes changes in the fair value of certain
derivative financial instruments that qualify for hedge accounting.
Comprehensive income for all periods presented is as follows:
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
2002 2001
---- ----
Reported net income 13,970 5,877
Unrealized loss on interest rate swap contracts,
net of tax benefit <374> --
------ -----
Comprehensive income 13,596 5,877
====== =====
The adjustments made in computing comprehensive income are reflected as
a component of stockholders equity under the heading "accumulated other
comprehensive loss".
5. SUBSEQUENT EVENT
On November 4, 2002, the Company announced a three-for-two stock split
in the form of a 50% stock dividend for shareholders of record on
November 15, 2002. Shareholders will receive one additional share of
common stock on December 2, 2002 for every two shares held on the
record date.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD LOOKING STATEMENTS
Some of the information in this quarterly report contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "intend," "estimate" and "continue" or similar words.
You should read statements that contain these words carefully for the following
reasons:
- the statements discuss our future expectations;
- the statements contain projections of our future earnings or
of our financial condition; and
- the statements state other "forward-looking" information.
There may be events in the future that we are not accurately able to predict or
over which we have no control. The risk factors discussed below, as well as any
cautionary language in this quarterly report, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. Examples
of these risks, uncertainties and events include the availability of new drugs,
our relationships with the manufacturers whose drugs we handle, integration of
the SPS business acquired from Gentiva, competitive or regulatory factors
affecting the drugs we handle or their manufacturers, the demand for our
services, our ability to expand through joint ventures and acquisitions, our
ability to maintain existing pricing arrangements with suppliers, the impact of
government regulation, our need for additional capital, the seasonality of our
operations and our ability to implement our strategies and objectives.
Investors in our common stock should be aware that the occurrence of any of the
events described in the risk factors discussed elsewhere in this quarterly
report and other events that we have not predicted or assessed could have a
material adverse effect on our earnings, financial condition and business. In
such case, the trading price of our common stock could decline and you may lose
all or part of your investment.
RESULTS OF OPERATIONS
On June 13, 2002, we acquired the Specialty Pharmaceutical Services Division
("SPS business") of Gentiva Health Services, Inc. We acquired substantially all
of the assets used in the SPS business including 100% of the outstanding stock
in three of Gentiva's subsidiaries that were exclusively in the business
conducted by the SPS business. The SPS business provides specialized contract
pharmacy and related services relating to the treatment of patients with
certain costly chronic diseases. In addition to the diseases previously served
by us, the SPS business is also a leading provider of contract pharmacy and
related services to patients with pulmonary arterial hypertension. The
aggregate purchase price was $462.4 million (including $12.3 million of
acquisition related costs) and consisted of $215.7 million of cash and
5,060,976 shares of common stock valued at $246.7 million. The results of the
SPS business have been included in the consolidated financial statements since
June 14, 2002.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
Revenues. Total revenues increased 154% from $126.6 million to $321.8 million
from the three months ended September 30, 2001 to the three months ended
September 30, 2002. Net patient revenues increased 156% from $122.3 million to
$312.5 million from the three months ended September 30, 2001 to the three
months ended September 30, 2002. The increase is primarily due to the
acquisitions of BioPartners in Care, Inc. in December 2001 and the Specialty
Pharmaceutical Services division (SPS) of Gentiva Health Services, Inc. in June
2002. In addition, we experienced growth in our products for the treatments of
multiple sclerosis, growth hormone disorders, Gaucher disease, hemophilia and
autoimmune disorders and Pulmonary Arterial Hypertension as a result of volume
growth with the addition of new patients and additional sales of product to
existing patients.
As a result of the acquisition of the SPS business, revenues related to
Hemophilia and Pulmonary Arterial Hypertension significantly increased as a
percentage of our revenue during the quarter ended September 30, 2002
as compared to the three months ended September 30, 2001. Due to the additional
revenue primarily resulting from the SPS business, the percentage of revenue
generated by our product lines for Multiple Sclerosis and Gaucher's disease
significantly decreased from the percentage of our total revenue in the
corresponding period ended September 30, 2001. The percentage of our total
revenue generated from sales of products for growth hormone related disorders
and respiratory syncytial virus also decreased for the three month period ended
September 30, 2002 as compared to the three month period ended September 30,
2001. Sales of Synagis(R) for the treatment of respiratory syncytial virus are
seasonal and the majority of our sales occur during the second and third
quarters of our fiscal year. The percentage of revenue derived from the sale of
Synagis in the second and third quarters of our 2003 fiscal year is expected to
increase from the percentage of revenue in the first quarter.
Cost of Services. Cost of services increased 139% from $107.0 million to $255.8
million from the three months ended September 30, 2001 to the three months
ended September 30, 2002. As a percentage of revenues, cost of services
decreased from 84.5% to 79.5% from the three months ended September 30, 2001 to
the three months ended September 30, 2002, resulting in gross margins of 15.5%
and 20.5% for the three months ended September 30, 2001 and 2002, respectively.
Gross margins for the individual products have remained relatively stable;
however, a change in product mix resulted in an increase in the composite gross
margin in the three months ended September 30, 2002. The primary drivers for
the improvement in gross margins were increased revenues from hemophilia
factor, intravenous immunoglobulin ("IVIG") for the treatment of autoimmune
disorders and Flolan(R) for the treatment of pulmonary arterial hypertension.
These products have lower acquisition costs as a percentage of revenue than
most of the other products we distribute.
General and Administrative. General and administrative expenses increased from
$8.5 million to $30.7 million, or 261.2%, from the three months ended September
30, 2001 to the three months ended September 30, 2002. The increase is
primarily due to the acquisitions completed during fiscal 2002. In addition, we
experienced increased salaries and benefits associated with the expansion of
our reimbursement, sales and marketing, administrative and support staffs and
the addition of office space and related furniture and fixtures to support
revenue growth. As a percentage of revenues, general and administrative
expenses increased from 6.7% to 9.6% from the three months ended September 30,
2001 to the three months ended September 30, 2002. The increase is due to the
product mix changes discussed above. Our higher margin products, which were a
larger percentage of our total revenues in the September 2002 quarter, have
higher reimbursement, sales and other administrative support expenses than many
of the other product lines we distribute.
Bad Debts. Bad debts increased from $1.1 million to $6.6 million from the three
months ended September 30, 2001 to the three months ended September 30, 2002.
As a percentage of revenues, bad debt expense increased from .8% to 2.1% from
the three months ended September 30, 2001 to the three months ended September
30, 2002. The increase in bad debts as a percentage of revenues is primarily
due to the acquisition of the SPS business, which resulted in an increase in
the percentage of our revenues that were reimbursed by major medical benefit
plans versus prescription card benefits. The majority of the reimbursements
provided by major medical benefit plans are subject to much higher co-payment
and deductible amounts resulting in higher bad debt.
Depreciation and Amortization. Depreciation expense increased from $.5 million
to $1.2 million from the three months ended September 30, 2001 to the three
months ended September 30, 2002, as a result of the acquisitions completed in
fiscal 2002, purchases of property and equipment associated with our revenue
growth and the expansion of our leasehold facility improvements. Amortization
expense increased from $.2 million to $1.5 million from the three months ended
September 30, 2001 to the three months ended September 30, 2002, due to the
acquisitions completed in fiscal 2002.
Interest Income/Expense, Net. Interest income was $.5 million for the three
months ended September 30, 2001 and interest expense was $2.1 million for the
three months ended September 30, 2002. The change, amounting to $2.6 million,
is due to the $230 million of debt incurred in June 2002 to finance the cash
portion of the acquisition of the SPS business and the related acquisition
costs.
Income Tax Expense. Our effective tax rate increased from 38.8% to 40.1% from
the three months ended September 30, 2001 to the three months ended September
30, 2002. This increase is due to our expanded business operations in states
with higher income tax rates. As a result of our SPS acquisition and the
resulting increase in
operating locations, a significant part of our business operations are now
subject to tax in states with higher income tax rates than our previous
operations, resulting in a higher effective state income tax rate. The
difference between the recognized effective tax rate and the statutory federal
rate of 35% is primarily attributable to state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, working capital was $294.9 million, cash and cash
equivalents were $10.9 million and the current ratio was 2.5 to 1.0.
Net cash provided by operating activities was $4.0 million for the three months
ended September 30, 2002. During the three months ended September 30, 2002,
accounts receivable decreased $2.2 million, inventories decreased $5.2 million
and accounts payable and accrued expenses increased $20.7 million. These
changes are due primarily to our revenue growth and the timing of the
collection of receivables, inventory purchases and payments of accounts payable.
Net cash used in investing activities was $7.4 million for the three months
ended September 30, 2002. Cash used in investing activities consisted of $6.2
million for purchases of property and equipment, $.7 million for business
acquisition costs and $.5 million of undistributed earnings from our joint
ventures.
Net cash used in financing activities was $28.6 million for the three months
ended September 30, 2002, which consisted of $30.6 million in debt repayments
less $2.0 million from the net proceeds of stock option exercises.
Historically, we have funded our operations and continued internal growth
through cash provided by operations. We anticipate that our capital
expenditures for the fiscal year ending June 30, 2003 will consist primarily of
additional computer hardware, a fully integrated pharmacy and reimbursement
software system and costs to build out and furnish additional space needed to
meet our growth. We expect the cost of our capital expenditures in fiscal year
2003 to be approximately $17.0 million, exclusive of any acquisitions of
businesses. We expect to fund these expenditures through cash provided by
operating activities and/or borrowings under the revolving credit facility with
our bank. In addition, in connection with our acquisition of BioPartners in
Care, Inc., we may be obligated to make up to $16 million in earn-out payments
during the next twelve months.
During 2002, we amended and restated our $60 million revolving credit facility
with Bank of America, N.A. and other participating banks to increase the size
of the credit facility to $325 million. The credit facility consists of a $125
million revolving commitment due June 2007, a $75 million term loan (Tranche A
Term Loan) due in periodic principal payments through March 2007, and a $125
million term loan (Tranche B Term Loan) due in periodic principal payments
through March 2009. As of September 30, 2002, the total amount outstanding
under the credit facility was $199.4 million, which included $75 million under
the Tranche A Term Loan and $124.4 million under the Tranche B Term Loan.
Amounts outstanding under the credit agreement bear interest at varying rates
based upon a London Inter-Bank Offered Rate (LIBOR) or prime rate of interest
(as selected by us), plus a variable margin rate based upon our leverage ratio
as defined by the credit agreement.
Our obligations under the credit agreement are secured by a lien on
substantially all of our assets, including a pledge of all of the common stock
or partnership interest of each of our subsidiaries in which we own an 80% or
more interest.
The credit agreement contains financial covenants, including requirements to
maintain certain ratios with respect to leverage, fixed charge coverage, net
worth and asset coverage each as defined in the agreement. The credit agreement
also includes customary affirmative and negative covenants, including covenants
relating to transactions with affiliates, uses of proceeds, restrictions on
subsidiaries, limitations on indebtedness, limitations on mergers, acquisitions
and asset dispositions, limitations on investments, limitations on payment of
dividends and stock repurchases, and other distributions. The credit agreement
also contains customary events of default, including events relating to changes
in control of our company.
On July 17, 2002, we entered into an interest rate swap to protect against
fluctuations in interest rates. The agreement effectively converts for a period
of one year $120 million of floating-rate borrowings to fixed-rate borrowings
with a fixed rate of 2.175%, plus the applicable margin rate as determined by
the credit agreement.
While we anticipate that our cash from operations, along with the short-term
use of the revolving credit facility will be sufficient to meet our internal
operating requirements and growth plans for at least the next 12 months, we
expect that additional funds may be required in the future to successfully
continue our growth beyond such period. We may be required to raise additional
funds through sales of equity or debt securities or seek additional financing
from financial institutions. There can be no assurance, however, that financing
will be available on terms that are favorable to us or, if obtained, will be
sufficient for our needs.
The following table sets forth a summary of our contractual cash obligations as
of September 30, 2002. The long-term debt is reflected on our balance sheet,
while the lease commitments are disclosed as future obligations under
accounting principles generally accepted in the United States.
Payments due for the year ending June 30 (in thousands):
2003 (1) 2004 2005 2006 2007 Thereafter
----------------------------------------------------------------------------
Long-term debt:
Revolving credit facility $ - $ - $ - $ - $ - $ -
Tranche A term loan 3,750 15,000 16,875 22,500 16,875 -
Tranche B term loan 937 1,250 1,250 1,250 15,781 103,907
Operating leases 5,374 5,914 4,692 2,166 587 -
----------------------------------------------------------------------------
Total $ 10,061 $ 22,164 $ 22,817 $ 25,916 $ 33,243 $ 103,907
============================================================================
(1) Cash obligations for the remainder of fiscal year ending June 30, 2003.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Information regarding our "Critical Accounting Policies and Estimates" can be
found in our Annual Report on Form 10-K for our most recent fiscal year ended
June 30, 2002, filed with the Securities and Exchange Commission on September
30, 2002. The three critical accounting policies that we believe are either the
most judgmental, or involve the selection or application of alternative
accounting policies, and are material to our financial statements are those
relating to allowance for doubtful accounts, allowance for contractual
discounts and medical claims reserve. In addition, Note 1 to our audited
financial statements contained within our most recent Annual Report on Form
10-K, contains a summary of our significant accounting policies.
RISK FACTORS
You should carefully consider the risks and uncertainties we describe below
before investing in Accredo. The risks and uncertainties described below are
not the only risks and uncertainties that could develop. Other risks and
uncertainties that we have not predicted or evaluated could also affect our
company.
If any of the following risks occur, our earnings, financial condition or
business could be materially harmed, and the trading price of our common stock
could decline, resulting in the loss of all or part of your investment.
WE ARE HIGHLY DEPENDENT ON OUR RELATIONSHIPS WITH A LIMITED NUMBER OF
BIOPHARMACEUTICAL SUPPLIERS AND THE LOSS OF ANY OF THESE RELATIONSHIPS COULD
SIGNIFICANTLY IMPACT OUR ABILITY TO SUSTAIN OR GROW OUR REVENUES.
We derive a substantial percentage of our revenue and profitability
from the sale of hemophilia product and intravenous immunoglobin (IVIG) that we
primarily purchase from Baxter Healthcare Corporation, Bayer Corporation and
Wyeth Pharmaceuticals. Approximately 40% of our revenue in the quarter ended
September 30, 2002 was derived from the sale of IVIG and hemophilia product.
During the quarter ended September 30, 2002 and the fiscal year ended June 30,
2002, the majority of our hemophilia product was purchased from Baxter
Healthcare Corporation. We also derive a substantial percentage of our revenue
and profitability from our relationships with Biogen, Genzyme, MedImmune and
GlaxoSmithKline. Our revenue derived from these relationships was in excess of
36% of our revenue for the quarter ended September 30, 2002.
Our agreements with these suppliers are short-term and cancelable
by either party without cause on 30 to 90 days prior notice. These agreements
also generally limit our ability to handle competing drugs during and, in some
cases, after the term of the agreement, but allow the supplier to distribute
through channels other than us. Further, these agreements provide that pricing
and other terms of these relationships be periodically adjusted for changed
market conditions or required service levels. Any termination or adverse
adjustment to any of these relationships could have a material adverse effect
on a significant portion of our business, financial condition and results of
operations.
OUR ABILITY TO GROW COULD BE LIMITED IF WE DO NOT EXPAND OUR EXISTING BASE OF
DRUGS OR IF WE LOSE PATIENTS.
We primarily sell 20 products. We focus almost exclusively on a
limited number of complex and expensive drugs that serve small patient
populations. The drugs that we sell with respect to the following core disease
markets account for over 85% of our revenues with the drugs for hemophilia and
autoimmune disorders constituting approximately 40% of our revenue for the
quarter ended September 30, 2002:
- Hemophilia and Autoimmune Disorders
- Multiple Sclerosis
- Pulmonary Arterial Hypertension
- Gaucher Disease
- Growth Hormone-Related Disorders
- Respiratory Syncytial Virus
Due to the small patient populations that use the drugs we handle,
our future growth is highly dependent on expanding our base of drugs. Further,
a loss of patient base or reduction in demand for any reason of the drugs we
currently handle could have a material adverse effect on a significant portion
of our business, financial condition and results of operations.
OUR BUSINESS WOULD BE HARMED IF DEMAND FOR OUR PRODUCTS AND SERVICES IS REDUCED.
Reduced demand for our products and services could be caused by a
number of circumstances, including:
- patient shifts to treatment regimens other than those we offer;
- new treatments or methods of delivery of existing drugs that do
not require our specialty products and services;
- a recall of a drug;
- adverse reactions caused by a drug;
- the expiration or challenge of a drug patent;
- competing treatment from a new drug or a new use of an existing
drug or orphan drug status;
- the loss of a managed care or other payor relationship covering
a number of high revenue patients;
- the cure of a disease we service; or
- the death of a high-revenue patient.
THERE IS SUBSTANTIAL COMPETITION IN OUR INDUSTRY, AND WE MAY NOT BE ABLE TO
COMPETE SUCCESSFULLY.
The specialty pharmacy industry is highly competitive and is
continuing to become more competitive. Most of the drugs, supplies and services
that we provide are also available from our competitors. Our current and
potential competitors include:
- other specialty pharmacy distributors;
- specialty pharmacy divisions of wholesale drug distributors;
- pharmacy benefit management companies;
- hospital-based pharmacies;
- retail pharmacies;
- home infusion therapy companies;
- manufacturers that sell their products both to distributors and
directly to users;
- comprehensive hemophilia treatment centers; and
- other alternative site health care providers.
Many of our competitors have substantially greater resources and more
established operations and infrastructure than we have. We are particularly at
risk from any of our suppliers deciding to pursue its own distribution and
services and not outsource these needs to companies like us. A significant
factor in effective competition will be our ability to maintain and expand
relationships with managed care companies, pharmacy benefit managers and other
payors who can effectively determine the pharmacy source for their enrollees.
OUR BUSINESS COULD BE HARMED BY CHANGES IN MEDICARE OR MEDICAID.
Changes in the Medicare, Medicaid or similar government programs or
the amounts paid by those programs for our services may adversely affect our
earnings. Such programs are highly regulated and subject to frequent and
substantial changes and cost containment measures. In recent years, changes in
these programs have limited and reduced reimbursement to providers. According
to a Kaiser Family Foundation report released on September 19, 2002, 45 states
reported they took actions to decrease Medicaid spending on 2002, and 41
reported they would take additional actions to decrease Medicaid spending in
2003. As a result of the acquisition of the SPS business, we expect the
percentage of our revenues attributable to federal and state programs to
increase. In September 2002, the Bush administration proposed deep reductions
in Medicare payments for a wide range of drugs provided as outpatient services
by Hospitals. Among the drugs included in this proposal are Avonex(R),
Remicade(R) and hemophilia products. We are not directly affected by this
proposal as Medicare only reimburses for Avonex(R) and Remicade(R) dispensed in
a hospital or physician clinic. However, if this proposal is adopted, we
cannot predict whether state Medicaid programs would adopt similar pricing. Any
reductions in amounts reimbursable by government programs for our services or
changes in regulations governing such reimbursements could materially and
adversely affect our business, financial condition and results of operations.
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 June 30, 2001 and 2002 and the quarter ended
September 30, 2002, we derived approximately 81%, 79% and 72% respectively of
our gross patient revenue from non-governmental payors (including self-pay),
which included 4%, 3% and 1%, respectively for those periods, from sales to
private physician practices whose ultimate payor is typically Medicare.
Many payors seek to limit the number of providers that supply drugs
to their enrollees. For example, we were selected by Aetna, Inc. as one of
three providers of injectable medications. From time to time, payors with whom
we have relationships require that we and our competitors bid to keep their
business, and there can be no assurance that we will be retained or that our
margins will not be adversely affected when that happens. The loss of a payor
relationship, for example, our relationship with Aetna, Inc. and affiliates
(which is terminable on 90 days notice), or an adverse change in the financial
condition of a payor like Aetna, could result in the loss of a significant
number of patients and have a material adverse effect on our business,
financial condition and results of operations.
WE INCURRED ADDITIONAL DEBT TO ACQUIRE THE SPS BUSINESS OF GENTIVA HEALTH
SERVICES, INC. WHICH MAY LIMIT OUR FUTURE FINANCIAL FLEXIBILITY.
The current level of our debt will have several important effects
on our future operations, including, among others:
- A significant portion of our cash flow from operations will be
dedicated to the payment of principal and interest on the debt
and will not be available for other purposes;
- Our debt covenants will require us to meet financial tests, and
may impose other limitations that may limit our flexibility in
planning for and reacting to changes in our business, including
possible acquisition opportunities;
- Our ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate and other
purposes may be limited;
- Failure to meet our debt covenants could result in foreclosure by
our lenders;
- We may be at a competitive disadvantage to similar companies that
have less debt; and
- Our vulnerability to adverse economic and industry conditions
may increase.
THE FAILURE TO INTEGRATE SUCCESSFULLY THE SPS BUSINESS ACQUIRED FROM GENTIVA
MAY PREVENT US FROM ACHIEVING THE ANTICIPATED POTENTIAL BENEFITS OF THE
ACQUISITION AND MAY ADVERSELY AFFECT OUR BUSINESS.
We face significant challenges in consolidating functions, integrating
the procedures, operations and product lines of the SPS business in a timely
and efficient manner, and retaining key personnel of the SPS business. The
integration of the SPS business is complex and requires substantial attention
from management. The diversion of management attention and any difficulties
encountered in the transition and integration process could have a material
adverse effect on our revenues, level of expenses and operating results.
IF ANY OF OUR RELATIONSHIPS WITH MEDICAL CENTERS ARE DISRUPTED OR
CANCELLED, OUR BUSINESS COULD BE HARMED.
We have joint venture relationships with four medical centers
that provide services primarily related to hemophilia, growth hormone-related
disorders and respiratory syncytial virus. For the fiscal years ended June 30,
2001 and 2002 and the quarter ended September 30, 2002, we derived
approximately 4%, 4% and 1%, respectively, of our income before income taxes
from equity in the net income of unconsolidated joint ventures.
Since April 2000, we have owned 80% of one of our joint ventures
with Children's Home Care, Inc. and the financial results of this joint venture
are included in our consolidated financial results. This consolidated joint
venture represented approximately 10% of our income before income taxes for the
fiscal years ended June 30, 2001 and 2002 and 8% of our income before income
taxes for the quarter ended September 30, 2002.
In addition to joint venture relationships, we also provide pharmacy
management services to several medical centers.
Our agreements with medical centers have terms of between one and
five years, and may be cancelled by either party without cause upon notice of
between one and twelve months. Adverse changes in our relationships with those
medical centers could be caused, for example, by:
- changes caused by consolidation within the hospital industry;
- changes caused by regulatory uncertainties inherent in the
structure of the relationships; or
- restrictive changes to regulatory requirements.
Any termination or adverse change of these relationships could have
a material adverse effect on our business, financial condition and results of
operations.
IF ADDITIONAL PROVIDERS OBTAIN ACCESS TO FAVORABLE PHS PRICING FOR
DRUGS WE HANDLE, OUR BUSINESS COULD BE HARMED.
The federal pricing program of the Public Health Service, commonly
known as PHS, allows hospitals and hemophilia treatment centers to obtain
discounts on clotting factor. While we are able to access PHS pricing through
our contracts to provide contract pharmacy services to hemophilia treatment
centers, we are not eligible to participate directly in these programs.
Increased competition from hospitals and hemophilia treatment centers that have
such favorable pricing may reduce our profit margins.
OUR ACQUISITION AND JOINT VENTURE STRATEGY MAY NOT BE SUCCESSFUL, WHICH COULD
CAUSE OUR BUSINESS AND FUTURE GROWTH PROSPECTS TO SUFFER.
As part of our growth strategy, we continue to evaluate acquisition
and joint venture opportunities, but we cannot predict or provide assurance
that we will complete any future acquisitions or joint ventures. Acquisitions
and joint ventures involve many risks, including:
- difficulty in identifying suitable candidates and negotiating and
consummating acquisitions on attractive terms;
- difficulty in assimilating the new operations;
- increased transaction costs;
- diversion of our management's attention from existing operations;
- dilutive issuances of equity securities that may negatively
impact the market price of our stock;
- increased debt; and
- increased amortization expense related to intangible assets that
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
also face exposure if Gentiva is not able to fulfill its indemnification
obligations under the terms of our asset purchase agreement. The purchase price
we paid to Gentiva for the SPS business was distributed directly to the
shareholders of Gentiva, and should any significant payment be required,
Gentiva may not have sufficient funds and may not be able to obtain the funds
to satisfy its potential indemnification obligation to us. We may suffer
impairment of assets or have to bear a liability for which we are entitled to
indemnification but are unable to collect.
FLUCTUATIONS IN OUR QUARTERLY FINANCIAL RESULTS MAY CAUSE OUR STOCK
PRICE TO DECLINE.
Our results of operations may fluctuate on a quarterly basis, which
could adversely affect the market price of our common stock. Our results may
fluctuate as a result of:
- lower prices paid by Medicare or Medicaid for the drugs that we
sell, including lower prices resulting from recent revisions in
the method of establishing average wholesale price ("AWP");
- below-expected sales or delayed launch of a new drug;
- price and term adjustments with our drug suppliers;
- increases in our operating expenses in anticipation of the launch
of a new drug;
- product shortages;
- inaccuracies in our estimates of the costs of ongoing programs;
- the timing and integration of our acquisitions;
- changes in governmental regulations;
- the annual renewal of deductibles and co-payment requirements that
affect patient ordering patterns;
- our provision of drugs to treat seasonal illnesses, such as
respiratory syncytial virus;
- physician prescribing patterns;
- general political and economic conditions;
- interest rate fluxuations; and
- adverse experience in collection of accounts receivable.
OUR BUSINESS WOULD BE HARMED IF THE BIOPHARMACEUTICAL INDUSTRY REDUCES
RESEARCH, DEVELOPMENT AND PRODUCTION OF THE TYPES OF DRUGS THAT ARE COMPATIBLE
WITH THE SERVICES WE PROVIDE.
Our business is highly dependent on continued research, development,
manufacturing and marketing expenditures of biopharmaceutical companies, and
the ability of those companies to develop, supply and generate demand for drugs
that are compatible with the services we provide. Our business would be
materially and adversely affected if those companies stopped outsourcing the
services we provide or failed to support existing drugs or develop new drugs.
Our business could also be harmed if the biopharmaceutical industry undergoes
any of the following developments:
- supply shortages;
- adverse drug reactions;
- drug recalls;
- increased competition among biopharmaceutical companies;
- an inability of drug companies to finance product development
because of capital shortages;
- a decline in product research, development or marketing;
- a reduction in the retail price of drugs from governmental or
private market initiatives;
- changes in the Food and Drug Administration ("FDA") approval
process; or
- governmental or private initiatives that would alter how drug
manufacturers, health care providers or pharmacies promote or sell
products and services.
OUR BUSINESS COULD BE HARMED IF THE SUPPLY OF ANY OF THE PRODUCTS THAT WE
DISTRIBUTE BECOMES SCARCE.
The biopharmaceutical industry is susceptible to product shortages.
Some of the products that we distribute, such as IVIG and blood-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. For example, an industry
wide recombinant factor VIII product shortage existed for some time, as a
result of the manufacturers being unable to increase production to meet rising
global demand, and has only recently returned to normal levels. In addition,
the SPS business has historically reported that its revenue growth was
negatively impacted by some product shortages of recombinant coagulation
therapy, which is used in the treatment of hemophilia, as well as by Bayer
Corporation's decision in 1999 to begin directly distributing Prolastin(R), an
intravenous therapy used in the treatment of the hereditary disorder Alpha 1
Antirypsin Deficiency. These drugs affected by product shortages accounted for
approximately 14% of the revenues of the SPS business (including the acute
business) for the year ended December 31, 2001. If these products, or any of
the other drugs that we distribute, are in short supply for long periods of
time, our business could be harmed.
IF SOME OF THE DRUGS THAT WE PROVIDE LOSE THEIR "ORPHAN DRUG" STATUS,
WE COULD FACE MORE COMPETITION.
Our business could also be adversely affected by the expiration or
challenge to the "orphan drug" status that has been granted by the FDA to some
of the drugs that we handle. When the FDA grants "orphan drug" status, it will
not approve a second drug for the same treatment for a period of seven years
unless the new drug is chemically different or clinically superior. Not all of
the drugs that we sell which are related to our core disease states have "orphan
drug" status. The "orphan drug" status applicable to drugs related to the seven
core disease states that we handle expires (or expired) as follows:
- Flolan(R) expired September 2002 (primary pulmonary hypertension)
and expires April 2007 (secondary pulmonary hypertension due to
intrinsic pulmonary vascular disease);
- AVONEX(R) expires May 2003;
- Nutropin(R) Depot expires July 2007;
- Tracleer(TM) expires November 2008;
- Remodulin(R) expires May 2009.
However, despite orphan drug status, there are competing products on
the market for Avonex and human growth hormone products, including Nutropin(R)
Depot. Tracleer(TM), Remodulin(R) and Flolan(R) also compete in the treatments
of pulmonary arterial hypertension. The loss of orphan drug status, or approval
of new drugs notwithstanding orphan drug status, could result in additional
competitive drugs entering the market, which could harm our business. For
example, despite the orphan drug status of AVONEX(R), the FDA recently approved
a competitive drug called Rebif(R), which we do not currently expect to handle.
RECENT INVESTIGATIONS INTO REPORTING OF AVERAGE WHOLESALE PRICES COULD
REDUCE OUR PRICING AND MARGINS.
Many government payors, including Medicare and Medicaid, pay us
directly or indirectly at a percentage off the drug's average wholesale price
(or AWP). We have also contracted with a number of private payors to sell drugs
at AWP or at a percentage off AWP. AWP for most drugs is compiled and published
by several private companies, including First DataBank, Inc. In February 2000,
First DataBank published a Market Price Survey of 437 drugs, which was
significantly lower than the historic AWP for a number of the clotting factor
and IVIG products that we sell.
Various federal and state government agencies have been
investigating whether the reported AWP of many drugs, including some that we
sell, is an appropriate or accurate measure of the market price of the drugs.
There are also several whistleblower lawsuits pending against various drug
manufacturers that have been reported in the business press. These government
investigations and lawsuits involve allegations that manufacturers reported
artificially inflated AWP prices of various drugs to First DataBank.
A number of state Medicaid agencies have revised their payment
methodology as a result of the Market Price Survey. The Centers for Medicare
and Medicaid Services ("CMMS") had also announced that Medicare intermediaries
should calculate the amount that they pay for certain drugs by using the lower
prices on the First DataBank Market Price Survey. However, the proposal to
include clotting factor in the lower Medicare pricing was withdrawn. Instead,
CMMS 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
lower AWP pricing for 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 U.S.
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.
We cannot predict the eventual results of the government
investigations, lawsuits and the changes made by First DataBank. If government
payors or private payors revise their pricing based on new methods of
calculating the AWP for drugs we handle or implement reimbursement methodology
based on some value other than AWP, this could have a material adverse effect
on our business, financial condition and results of operation, including
reducing the pricing and margins on certain of our products.
WE RELY HEAVILY ON A SINGLE SHIPPING PROVIDER, AND OUR BUSINESS WOULD
BE HARMED IF OUR RATES ARE INCREASED OR OUR PROVIDER IS UNAVAILABLE.
Almost all of our revenues result from the sale of drugs we deliver
to our patients and principally all of our products are shipped by a single
carrier, FedEx. We depend heavily on these outsourced shipping services for
efficient, cost effective delivery of our product. The risks associated with
this dependence include:
- any significant increase in shipping rates;
- strikes or other service interruptions by our primary carrier,
FedEx, or by another carrier that could affect FedEx; or
- spoilage of high cost drugs during shipment, since our drugs often
require special handling, such as refrigeration.
DISRUPTIONS IN COMMERCIAL ACTIVITIES SUCH AS THOSE FOLLOWING THE SEPTEMBER 2001
TERRORIST ATTACKS ON THE U.S. MAY ADVERSELY IMPACT OUR RESULTS OF OPERATIONS,
OUR ABILITY TO RAISE CAPITAL OR OUR FUTURE GROWTH.
Our operations have been and could again be harmed by terrorist
attacks on the U.S. For example, transportation systems and couriers that we
rely upon to deliver our drugs have been and could again be disrupted, thereby
causing a decrease in our revenues. In addition, we may experience a rise in
operating costs, such as costs for transportation, courier services, insurance
and security. We also may experience delays in payments from payors, which
would harm our cash flow. The U.S. economy in general may be adversely affected
by terrorist attacks or by any related outbreak of hostilities. Any such
economic downturn could adversely impact our results of operations, impair our
cost of or ability to raise debt or equity capital or impede our ability to
continue growing our business.
OUR BUSINESS COULD BE HARMED IF PAYORS DECREASE OR DELAY THEIR PAYMENTS TO US.
Our profitability depends on payment from governmental and
non-governmental payors, and we could be materially and adversely affected by
cost containment trends in the health care industry or by financial
difficulties suffered by non-governmental payors. Cost containment measures
affect pricing, purchasing and usage patterns in health care. Payors also
influence decisions regarding the use of a particular drug treatment and focus
on product cost in light of how the product may impact the overall cost of
treatment. Further, some payors, including large managed care organizations and
some private physician practices, have recently experienced financial trouble.
The timing of payments and our ability to collect from payors also affects our
revenue and profitability. If we are unable to collect from payors or if payors
fail to pay us in a timely manner, it could have a material adverse effect on
our business and financial condition.
IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS WILL BE HARMED.
Our rapid growth over the past several years has placed a strain on
our resources, and if we cannot effectively manage our growth, our business,
financial condition and results of operations could be materially and adversely
affected. We have experienced 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.
WE COULD BE ADVERSELY AFFECTED BY AN IMPAIRMENT OF THE SIGNIFICANT AMOUNT OF
GOODWILL ON OUR FINANCIAL STATEMENTS.
Our formation and our acquisitions have 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.
There can be no assurance that we will realize the full value of this goodwill.
We evaluate on an on-going 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 in a charge to our
earnings. As of September 30, 2002, we had goodwill, net of accumulated
amortization, of approximately $335 million, or 37.7% of total assets and 68%
of stockholders' equity.
Since our growth strategy may 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 non-competition agreements, patient base and contracts that are
acquired. The amount allocated to these items could be amortized over a fairly
short period. As a result, our earnings and the market price of our common
stock could be negatively impacted.
WE RELY ON A FEW KEY EMPLOYEES WHOSE ABSENCE OR LOSS COULD ADVERSELY AFFECT OUR
BUSINESS.
We depend on a few key executives, and the loss of their services
could cause a material adverse effect to our company. We do not maintain "key
person" life insurance policies on any of those executives. As a result, we are
not insured against the losses resulting from the death of our key executives.
Further, we must be able to attract and retain other qualified, essential
employees for our technical operating and professional staff, such as
pharmacists and nurses. If we are unable to attract and retain these essential
employees, our business could be harmed.
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 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. 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 stockholders.
OUR INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND NONCOMPLIANCE BY
US OR OUR SUPPLIERS COULD HARM OUR BUSINESS.
The marketing, sale and purchase of drugs and medical supplies is
extensively regulated by federal and state governments, and if we fail or are
accused of failing to comply with laws and regulations, we could suffer a
material adverse effect on our business, financial condition and results of
operations. Our business could also be materially and adversely affected if the
suppliers or clients 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 health care laws and regulations that especially apply to our
activities include:
- The federal "Anti-Kickback Law" prohibits the offer or
solicitation of compensation 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 range from
significant fines, to exclusion from participation in the
Medicare and Medicaid programs, to 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
analysis of whether the parties intended to violate the
Anti-Kickback Law. The finding of a violation could have a
material adverse effect on our business.
- The Department of Health and Human Services recently issued
regulations implementing the Administrative Simplification
provision of HIPAA concerning the maintenance and transmission
and security of electronic health information, particularly
individually identifiable information. The new 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. 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 have a material adverse effect on our
business.
- 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.
- 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.
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.
- Pharmacies and pharmacists must obtain state licenses to operate
and dispense drugs. Pharmacies must also obtain licenses in some
states to operate and provide goods and services to residents of
those states. Our entities that provide nursing for our patients
and our nurses must obtain licenses in certain states to conduct
our business. If we are unable to maintain our licenses or if
states place burdensome restrictions or limitations on
non-resident pharmacies or nurses, this could limit or affect
our ability to operate in some states which could adversely
impact our business and results of operations.
- 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.
- The 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.
THE MARKET PRICE OF OUR COMMON STOCK MAY EXPERIENCE SUBSTANTIAL FLUCTUATIONS
FOR REASONS OVER WHICH WE HAVE LITTLE CONTROL.
Our common stock is traded on the Nasdaq National Market. The market
price of our common stock could fluctuate substantially based on a variety of
factors, including the following:
- future announcements concerning us, our competitors, the drug
manufacturers with whom we have relationships or the health care
market;
- changes in government regulations;
- overall volatility of the stock market;
- changes in earnings estimates by analysts; and
- changes in operating results from quarter to quarter.
Furthermore, stock prices for many companies fluctuate widely for
reasons that may be unrelated to their operating results. These fluctuations,
coupled with changes in our results of operations and general economic,
political and market conditions, may adversely affect the market price of our
common stock.
SOME PROVISIONS OF OUR CHARTER DOCUMENTS MAY HAVE ANTI-TAKEOVER EFFECTS THAT
COULD DISCOURAGE A CHANGE IN CONTROL, EVEN IF AN ACQUISITION WOULD BE
BENEFICIAL TO OUR STOCKHOLDERS.
Our certificate of incorporation, our bylaws and Delaware law
contain provisions that could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to the impact of financial market risk is significant. Our primary
financial market risk exposure consists of interest rate risk related to
interest that we are obligated to pay on our variable-rate debt.
We use derivative financial instruments to manage some of our exposure to
rising interest rates on our variable-rate debt, primarily by entering into
variable-to-fixed interest rate swaps. We have fixed the interest rate through
July 21, 2003 on $120.0 million of our variable-rate debt through the use of a
variable-to-fixed interest rate swap. As a result, we will not benefit from any
decrease in interest rates nor will we be subjected to any detriment from
rising interest rates on this portion of our debt during the period of the swap
agreement. Accordingly, a 100 basis point decrease in interest rates along the
entire yield curve would not increase pre-tax income by $300,000 for a quarter
as would be expected without this financial instrument. However, a 100 basis
point increase in interest rates along the entire yield curve would also not
decrease pre-tax income by $300,000 for the same period as a result of using
this derivative financial instrument.
For the remaining portion of our variable-rate debt, we have not hedged against
our interest rate risk exposure. As a result, we will benefit from decreasing
interest rates, but we will also be harmed by rising interest rates on this
portion of our debt. Accordingly, if we maintain our current level of total
debt, a 100 basis point decrease in interest rates along the entire yield curve
would result in an increase in pre-tax income of approximately $200,000 during
a quarter. However, a 100 basis point increase in interest rates would result
in a decrease in pre-tax income of $200,000 for the same period.
Actual changes in rates may differ from the hypothetical assumptions used in
computing the exposures in the examples cited above.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated
our disclosure controls and procedures (as such term is defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended)
within 90 days prior to the filing of this report and concluded, as of the date
that evaluation was completed, that our disclosure controls and procedures are
designed to provide reasonable assurance that information required to be
disclosed in our reports under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules
and forms.
(b) Changes in Internal Controls
There have been no significant changes in our internal controls or in
other factors that could significantly affect these controls since the date
last evaluated.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On November 4, 2002, the Company announced a three-for-two stock split in the
form of a 50% stock dividend for shareholders of record on November 15, 2002.
Shareholders will receive one additional share of common stock on December 2,
2002 for every two shares held on the record date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 3.1 Certificate of Amendment of the Certificate of Incorporation
of Accredo Health, Incorporated
Exhibit 10.1 Stock Option Agreement of David D. Stevens dated
September 3, 2002
Exhibit 10.2 Stock Option Agreement of John R. Grow dated September 3, 2002
Exhibit 10.3 Stock Option Agreement of Joel R. Kimbrough dated
September 3, 2002
Exhibit 10.4 Stock Option Agreement of Kyle J. Callahan dated
September 3, 2002
Exhibit 10.5 Stock Option Agreement of Barbara H Biehner dated
June 24, 2002
Exhibit 10.6 Stock Option Agreement of Barbara H. Biehner dated
September 3, 2002
Exhibit 10.7 Employment Agreement effective as of September 1, 2001 between
Accredo Health, Incorporated and David D. Stevens
Exhibit 10.8 Employment Agreement effective as of September 1, 2002 between
Accredo Health, Incorporated and John R. Grow
Exhibit 10.9 Employment Agreement effective as of September 1, 2001 between
Accredo Health, Incorporated and Joel R. Kimbrough
Exhibit 10.10 Employment Agreement effective as of September 1, 2002 between
Accredo Health, Incorporated and Kyle J. Callahan
(b) Reports on Form 8-K
None
Signature
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.
November 14, 2002 Accredo Health, Incorporated
BY: /s/ David D. Stevens
-------------------------------
David D. Stevens
Chairman of the Board and
Chief Executive Officer
/s/ Joel R. Kimbrough
-------------------------------
Joel R. Kimbrough
Senior Vice President, Chief
Financial Officer and Treasurer
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David D. Stevens, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Accredo Health,
Incorporated ("the registrant");
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 this 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:
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.
Date: November 14, 2002
/s/ David D. Stevens
-----------------------
David D. Stevens
Chief Executive Officer
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Joel R. Kimbrough, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Accredo Health,
Incorporated ("the registrant");
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:
d) 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 this quarterly
report is being prepared;
e) 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
f) 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:
c) 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
d) 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.
Date: November 14, 2002
/s/ Joel R. Kimbrough
----------------------
Joel R. Kimbrough
Chief Financial Officer
Exhibit Index
Exhibit
Number Description of Exhibits
- ------ -----------------------
3.1 Certificate of Amendment of the Certificate of Incorporation of
Accredo Health, Incorporated
10.1 Stock Option Agreement of David D. Stevens dated September 3, 2002
10.2 Stock Option Agreement of John R. Grow dated September 3, 2002
10.3 Stock Option Agreement of Joel R. Kimbrough dated September 3, 2002
10.4 Stock Option Agreement of Kyle J. Callahan dated September 3, 2002
10.5 Stock Option Agreement of Barbara H Biehner dated June 24, 2002
10.6 Stock Option Agreement of Barbara H. Biehner dated September 3, 2002
10.7 Employment Agreement effective as of September 1, 2001 between
Accredo Health, Incorporated and David D. Stevens
10.8 Employment Agreement effective as of September 1, 2002 between
AccredoHealth, Incorporated and John R. Grow
10.9 Employment Agreement effective as of September 1, 2001 between
Accredo Health, Incorporated and Joel R. Kimbrough
10.10 Employment Agreement effective as of September 1, 2002 between
Accredo Health, Incorporated and Kyle J. Callahan