ITEM 1. DESCRIPTION OF BUSINESS
Accuhealth, Inc. (the "Company") is one of the largest integrated providers of home health care services in the New York, New Jersey and Connecticut area. Together with its wholly owned subsidiaries, the Company provides home health care services, including administration of an array of infusion therapies and sales of oral medications) and related supplies and home nursing. The Company has two offices in one state at June 30, 2000. The Company was incorporated in the State of New York on August 25, 1983. Effective August 20, 1990, the present name, Accuhealth, Inc., was adopted pursuant to an amendment to the Company's Certificate of Incorporation. The Company's principal offices are located at Ridge Hill, Yonkers, New York 10710, and its telephone number is (914) 964-6700. Unless the context otherwise requires, references herein to the "Company" include Accuhealth, Inc. and all of its wholly owned subsidiaries.
On July 1, 1997, the Company consummated its acquisition of ProHealthCare Infusion Services, Inc. ("PHCIS") pursuant to an agreement and plan of merger, dated as of March 14, 1997, by and among the Company, ACH Acquiring Corp., a New Jersey corporation and a subsidiary of the Company, PHCIS, ProHealthCare, Inc., a Delaware corporation and the parent of PHCIS, Thomas Laurita and David Brian Cohen (the "PHCIS Merger Agreement"). The Company has determined that the initial merger consideration of 300,000 shares of Company's Common Stock will be decreased by 59,386 shares of Company Common Stock pursuant to certain merger consideration adjustment provisions of the PHCIS Merger Agreement. The acquisition has been accounted for by the purchase method of accounting. PHCIS, based in Springfield, New Jersey, specializes in caring for complex HIV/AIDS patients and those suffering from cancer. PHCIS also has a strong disease management capability in treating patients suffering from congestive heart failure and cardiomyopathy.
During the fiscal year ended March 31, 1999, management determined that the goodwill resulting from the PHCIS acquisition and Americare (a subsidiary of Healix) was impaired and warranted write off of the remaining balance. The impairment resulted from a severe decline in revenue, primarily caused by the filing for liquidation of HIP of New Jersey in February 1999.
On December 1, 1997, the Company and Healix Healthcare, Inc. ("Healix") entered into an agreement and plan of merger (the "Merger Agreement") which provided for the merger of Healix with and into the Company (the "Merger"), with the Company being the surviving corporation. The Merger was consummated on April 9, 1998. In accordance with the Healix Merger Agreement, the shareholders of Healix received .740721 shares of the Company's common stock for each share of Healix common stock in a tax free exchange, with an aggregate of 1,488,850 shares of the Company's common stock issued in exchange for all of the issued and outstanding common shares of Healix. The merger resulted in Healix becoming a wholly owned subsidiary of Accuhealth, Inc. and was accounted for as a pooling of interests.
Healix, together with its wholly owned subsidiaries, provides a full range of healthcare services to the alternate site including infusion therapy, home medical equipment, renal dialysis, skilled nursing and home health services. Healix is accredited by the JCAHO of Healthcare Organizations ("JCAHO") and operates throughout New York and New Jersey.
During the year ended March 31, 2000 the Company's sales mix continued to shift from the higher margin businesses to the lower margin oral medication business. Moreover, pricing pressures further reduced the traditional higher margin business. The Company expects that more emphasis will be placed on increasing the infusion therapy and home nursing services.
On May 24, 2000 the Company signed an Asset Purchase Agreement to sell its Durable Medical Equipment Business consisting of inventory and the customer base for approximately $800. Under the terms of the agreement, the Company will receive approximately $338 in cash (including a $98 non-refundable deposit), $425 in notes and the purchaser will assume lease obligations of approximately $87. The sale is subject to transferring the assets free of all liens; and, accordingly, the Company is in process of negotiating the release of the liens. The Company has until September 24, 2000 to obtain releases or the sale will be terminated. During this time, the purchaser is operating the business under an interim management agreement and is responsible for all expenses in connection with such operation.
The Company's overhead has been reduced by consolidating two operations into one, significantly reduced personnel costs, finalized payment arrangements with its largest trade creditor (see Note 6), eliminated non profitable business lines and ceased business with two managed care companies. The aforementioned is expected to enhance working capital. Further, significant collection efforts have been initiated, including engaging collection consultants and commencing several lawsuits. Management continues to negotiate better terms and financing from vendors and reducing corporate expenses. The Company is also attempting to secure additional capital from venture capitalists seeking to merge several heath care related companies. Also, negotiations are in process with several trade vendors to convert the amounts owed them to long term notes. No assurance can be made that the management will be successful in achieving its plan. The continuation of the Company as a going concern is dependent upon the success of future financing and generating sufficient revenue.
The Company believes its ability to offer a broad range of integrated home nursing, respiratory therapy, oral medications, and infusion therapy throughout its market creates an important competitive advantage in obtaining patient referrals. Managed care organizations and other referral sources generally favor home health care providers that offer integrated health care services.
INDUSTRY OVERVIEW
Home health care is among the fastest growing segments of the health care industry with estimated annual expenditures of 36.1 billion in 1995, up from an estimated $12.9 billion in 1990, representing a compounded annual growth rate of approximately 23%. The underlying growth factors in the home health care industry include: (i) the cost-effective nature of home health care; (ii) an increasing number of patients due to growth in the elderly population; (iii) technological advances that expand the range of home health care procedures; and (iv) patient preference for treatment in the home.
The home health care industry is highly fragmented with more than 18,500 providers delivering home health care services in the United States. Many of these companies are local providers that offer a limited scope of services in a defined geographical area and lack the capital necessary to substantially expand their operations. Managed care organizations and cost containment initiatives by payors have driven the growth of home health care by emphasizing lower cost alternatives to hospitals and skilled nursing facilities. These organizations and payors seek coordinated, consistent quality home health care across broad geographic areas in order to serve their patients more effectively.
BUSINESS STRATEGY
Accuhealth's business objective is to enhance its position as one of the leading integrated providers of comprehensive home health care services in New York, Connecticut and New Jersey. Elements of the Company's strategy include:
PROVIDE ONE-STOP SHOP FOR HOME HEALTH CARE SERVICES. Accuhealth provides payors, physicians and patients with fully integrated one-stop shop home health care services. The integration of comprehensive home health care services enhances the Company's appeal to manage care organizations and other referral sources that increasingly prefer single-source providers of home health care. The Company believes that full integration of services enables it to provide highly coordinated patient care and enable it to increase revenues and profitability by providing multiple services to an individual patient referral.
FOCUS ON MANAGED CARE RELATIONSHIPS. The Company has intensified its managed care marketing efforts in order to take advantage of the increased market penetration of managed care organizations in the home health care market. The Company is the sole or principal provider for a number of large managed care plans, and the Company believes that its broad product offering, quality of service and regional focus contribute to the Company's competitive advantage.
EXPAND THE MANAGEMENT SERVICES THE COMPANY PROVIDES ITS REFERRAL SOURCES. The Company seeks to expand the services it currently provides to the sources of its patient referrals to include the full range of patient care coordination and the management of the network of providers used to service the patient. As a cornerstone of this service strategy, the Company is implementing enhanced financial and clinical management information systems. The Company
believes that these systems could improve profitability by efficiently servicing increased volumes of managed care referrals, increase productivity gains, reduce costs and provide outcomes data to payors.
SERVICES AND PRODUCTS
HOME INFUSION THERAPY. The Company offers comprehensive home infusion therapies. Home infusion therapy involves the administration of nutrients, antibiotics and other medications intravenously (into the vein), subcutaneously (under the skin), intramuscularly (into the muscle), intrathecally or epidurally (via spinal routes), or through feeding tubes into the digestive tract. Infusion therapy often begins during hospitalization of a patient and continues in the home. New patients are instructed in the administration of infusion therapy and related services by a registered nurse who provides the patient's first home treatment and continuing supervision of care. The Company's principal infusion therapies follow:
ANTIBIOTIC THERAPY is the infusion of antibiotic medications into a patient's bloodstream to treat a variety of infections and diseases.
ENTERAL NUTRITION is the infusion of essential nutrients through a feeding tube, and is necessary for patients who are unable to orally ingest adequate nutrients.
TOTAL PARENTERAL NUTRITION is the infusion of a nutrient solution to restore and maintain electrolyte balance and nutritional function.
PAIN MANAGEMENT is provided to patients experiencing acute pain as a result of traumatic injury, surgical procedures or other medical disorders. The Company provides a comprehensive approach to pain management that includes a thorough knowledge of available agents, routes of administration and appropriate dosage levels as directed.
CHEMOTHERAPY is provided in the home or in other locations and allows patients with cancer an alternative to frequent and expensive hospital stays.
PENTAMIDINE is an agent used specifically in the treatment of patients with AIDS who have experienced one or more of pneumocystis carinii pneumonia.
HOME NURSING. The Company provides a wide range of nursing services to individuals with acute illness, long-term chronic conditions, permanent disabilities, terminal illness or post-procedural needs. Primary care or specialty physicians and managed care case managers typically refer patients to the Company. After reviewing the patient's medical records and treatment plan, a nurse, therapist or home health aide, where appropriate, provides care to the patient in the home. The plan of care may require a few visits over a short period of time or many visits over several years. The Company provides the following home nursing services.
GENERAL NURSING care is the periodic assessment of the appropriateness of home health care, the performance of clinical procedures, and instruction of the patient and the family or other caregiver regarding proper treatments. Registered nurses or licensed practical nurses provide such care. Patients receiving such care typically include stabilized postoperative patients, patients who are acutely ill but who do not require hospitalization, and patients who are chronically or terminally ill.
SPECIALTY NURSING care is the provision of specialized nursing services such as geriatric, pediatric or neonatal nursing. Nurses provide such care with the appropriate experience or certification in such specialty. Specialty nursing care also involves the instruction of the patient and the family or other caregiver in the self-administration of certain procedures, such as wound care and infection control, emergency procedures and the proper handling and usage of medication, medical supplies and equipment.
THERAPY SERVICES consist of rehabilitation therapies such as physical, occupational and speech therapy to patients recovering from strokes, trauma or certain surgeries, services for high risk pregnancies, postpartum care, AIDS therapy, various medical social services, and case management services to insurance companies and self-insured employers.
HOME HEALTH AIDE CARE is the provision of personal care services and assistance with activities of daily living such as personal hygiene and meal preparation. The Company's home health aides must pass certain competency tests and are supervised by a registered nurse.
PRIMARY HOME HEALTH CARE is provided by the Company through state administered programs that pay for unskilled homemaker services to the elderly or the disabled, as ordered by a physician. A registered nurse makes the initial assessment and assigns a homemaker to provide housekeeping, shopping and limited personal care.
RESPIRATORY THERAPY/MEDICAL EQUIPMENT. The Company provides a wide variety of home respiratory, monitoring and medical equipment. Respiratory therapists provide care to the patient according to the physician-directed plan of care and educate the patient and the family or other care giver regarding treatment requirements, use of equipment and self-care. The Company rents, sells and services respiratory equipment for patient use in the home and supplies patients with aerosol medications for use in respiratory therapy treatments. The Company's principal respiratory services include:
OXYGEN SYSTEMS THAT ASSIST PATIENTS WITH BREATHING. The Company provides three types of oxygen systems: (i) oxygen concentrators, which are stationary units that filter ordinary air in order to provide a continuous flow of oxygen and are generally the most cost effective supply of oxygen for patients who require a continuous flow of supplemental oxygen; (ii) liquid oxygen systems, which are containers used for patients who require a continuous high flow of supplemental oxygen; and (iii) high pressure oxygen cylinders, which provide an ambulatory patient with the ability to obtain supplemental oxygen outside of the home.
NEBULIZERS that deliver aerosol medications that are inhaled directly by the patients. Nebulizers are used to treat patients with asthma, chronic obstructive pulmonary disease, cystic fibrosis and neurologically related respiratory problems, and patients with AIDS.
HOME VENTILATORS that mechanically sustain a patient's respiratory function in cases of severe respiratory failure.
CONTINUOUS POSITIVE AIRWAY PRESSURE therapy that forces air through respiratory passageways during sleep. This treatment is provided to adults with sleep apnea, a condition in which a patient's normal breathing patterns are disturbed during sleep. Monitoring services are usually provided with this therapy.
DURABLE MEDICAL EQUIPMENT. The DME services were sold on May 24, 2000 along with the inventory and assumption of leases on equipment used to generate DME revenues. ( See Note 16 to the financial statements).
OTHER THERAPIES. Other therapies provided by the Company currently represent a small percentage of its business. These therapies are dobutamine therapy, blood components, IV gamma globulin, hydration therapy, tocolytic therapy and aerosol pentamidine.
The Company also provides comprehensive pharmacy services to large institutional pharmacy clients including sub-acute and long term care facilities. These engagements typically involve the Company's managing and operating the pharmacy under contract with the institution and providing the drugs, medication, biologicals and supplies the patients require.
SALES AND MARKETING
The Company promotes its home health care products and services via contacts with physicians whose patients use these products and services, hospital discharge planners, social workers and hospital nurses who work with patients requiring these products and services. The Company also works closely with nursing services and agencies that provide home care to patients. The Company also markets its products and services to insurance companies, Health
Maintenance Organizations ("HMO's"), Preferred Provider Organizations ("PPO's") and case management companies. Marketing efforts emphasize the quality of the Company's services, cost containment and technological excellence offered by the Company. In addition, the Company participates in clinics run by New York City hospitals.
Because the Company can provide oral medications to its home health care customers, the Company promotes itself as a "one-stop shop" for infusion therapy and pharmaceuticals. The Company stocks pharmaceuticals not widely used by the general population to meet the needs of critically ill patients.
The Company has made special efforts to meet the needs of persons afflicted with AIDS. The Company has special instructions to employees who visit the homes of persons afflicted with AIDS and other communicable diseases. The Company also markets to certain freestanding AIDS-specific rehabilitation centers and hospitals. The Company provided products and services to patients in two such facilities, both of which have or will be terminating their contracts with the Company.
The Company believes that its ability to provide a full range of services to clients in all of its market is a significant advantage in developing relationships with managed care organizations. In addition, the Company works with managed care organizations to meet their specialized demands for services, pricing, billing and other matters.
QUALITY ASSURANCE
The Company believes that quality of service is critical to its ability to obtain referrals and increase revenues and profitability. To assure the delivery of high-quality patient care, and to assure the overall quality of service, the Company has a quality improvement program designed to integrate and assess the quality improvement activities and processes across all services. The cornerstone of this quality improvement program is the company's internal compliance and quality improvement programs. These programs are designed to routinely measure compliance with federal and state regulations, JCAHO standards, and the Company's standards of care and practice. The survey process includes review of clinical and billing documentation, interviews of clinical personnel and observations of home visits performed by Company staff. Other quality assurance initiatives include measuring customer satisfaction, reporting adverse medical incidents monitoring risk management, and ensuring a safe and appropriate working environment.
The Company is accredited by JCAHO and believes that managed care and other third-party payors generally prefer this accreditation.
HUMAN RESOURCE MANAGEMENT
The Company continuously recruits, screens, trains and offers benefits and other programs in an effort to attract and retain its personnel. Recruiting is conducted primarily through advertising, personnel agencies, direct contact with community groups and the use of bonuses.
The Company provides orientation and training to new employees and continuing education for existing employees. The Company routinely develops and distributes quality improvement in-service materials, manuals, and forms to its nurses and has implemented an internal system of employee recognition and rewards. In addition, skilled nurses are initially assigned to a nurse preceptor until the Company believes that these new nurses have acquired a sufficient degree of home health care knowledge and experience. The Company also has implemented an infusion therapy verification program for skilled nurses.
The retention of qualified employees is a high priority for the Company. As of March 31, 2000, the Company employed 128 individuals. Management believes that the Company's employee relations are good. None of the Company's employees are represented by a labor union or other collective bargaining organization.
REIMBURSEMENT FROM THIRD-PARTY PAYORS
The Company accepts assignment of Medicare claims, as well as claims with respect to other third-party payors, on behalf of its patients whenever the reimbursement coverage is adequate to ensure payment of the patient's obligations. The Company processes its customers' claims, accepts payment at prevailing and allowable rates and assumes the risks of delay for improperly billed services or non-payment for services which are determined by the third-party payor as being medically unnecessary. Although no assurance can be given that a significant number of future requests for reimbursement will not be denied, the Company's policies, procedures and prices are intended to minimize this risk.
The Company works closely with the patients it serves to properly document and file claims for timely and direct reimbursement from third party payors and governmental agencies. Generally, the Company contacts third-party payors prior to the commencement of services or delivery of product in order to determine the patient's coverage and the percentage of costs that the payor will reimburse. The Company's reimbursement specialists carefully review such issues as lifetime limits, pre-existing condition clauses, the availability of special state programs and other reimbursement-related issues. The Company will often negotiate with the third-party payor on the patient's behalf to help ensure that coverage is available. In addition, the Company typically obtains an assignment of benefits from the patient that enables the Company to file claims for its services with the third-party payors. As a result, third-party payors pay the Company directly for the reimbursable amounts of its charges. Once reimbursement processing for a patient has been established by a third-party payor, claims processing and reimbursement tend to become routine, subject to continued patient eligibility and other coverage limitations.
Like other health care companies, the Company's revenues and profitability are adversely affected by the continuing efforts of third-party payors to contain or reduce the costs of health care by lowering reimbursement rates, increasing case management review of bills for services and negotiating reduced contract pricing. Home health care, which is generally less costly to third-party payors than hospital-based care, has benefited from such cost containment objectives. However, as expenditures in the home health care market continue to grow, initiatives aimed at reducing costs of health care delivery at non-hospital sites are increasing.
COMPETITION
The home infusion therapy market is highly competitive and the Company anticipates that competition will intensify. There are many small local providers, some of whom do not offer the variety of therapies provided by the Company. There are also several large regional or national companies that offer more therapies than the Company. The primary competitive factors are quality of care, including responsiveness of service and quality of professional personnel; ability to establish and maintain relationships with referring physicians, hospitals, health maintenance organizations, clinics and nursing services; price and breadth of infusion therapies offered; general reputation with physicians, other referral sources and potential patients and the ability to function as a "one-stop shop."
The DME business is also very competitive. The Company competes with national, regional and local specialty suppliers of medical equipment, chain drugstores and local independent drugstores. Competitive factors in DME markets generally track those stated above. This business was sold on May 24, 2000, see Note 16 to financial statements.
Many of the Company's competitors have greater name recognition, broader geographic markets and substantially greater marketing, financial and administrative resources than the Company. Some of the larger existing and future competitors can be expected to expand the varieties of therapies offered.
JCAHO ACCREDITATION
The Company is accredited by JCAHO. Accreditation by JCAHO has become a prerequisite for contracts from many hospices and hospitals, certified home health agencies, insurance companies, HMO's and PPO's.
INSURANCE
Physicians, hospitals and other participants in the health care market are routinely subject to lawsuits alleging malpractice, product liability or related legal theories, many of which involve large claims and significant defense costs. The Company has not experienced difficulty in obtaining insurance in the past, and management believes that the Company's insurance coverage is reasonable given its claims history.
The Company believes that the insurance that it maintains, in relationship to the size of its business, is customary in the home healthcare industry. However, there can be no assurance that any such insurance will be adequate to cover the Company's liabilities.
CUSTOMERS
During the years ended March 31, 2000, 1999 and 1998, services provided to Rivington House accounted for 15%, 14% and 15%, respectively, of the Company's net sales for that year. Effective as of August 11, 2000 the contract with Rivington House has been terminated.
SUPPLIERS
The Company does not depend upon a limited number of suppliers for the conduct of its continuing business and generally has second sources for all of the materials and products used in its business. The Company purchases drugs, solutions, medical equipment and other materials and leases certain equipment in connection with the Company's business from many suppliers and distributors. The Company is not currently experiencing any material difficulty in purchasing or leasing the required products, supplies and equipment used in its business. Due to the Company's lack of sufficient cash flow there have been instances whereby existing vendors refused to ship product until payment toward older balances were resolved. During Fiscal 2000 and 1999, the Company was unable to service certain patients due to the limited supply of a particular drug. Sources for the drug continue to be limited, and, accordingly, our ability to service these patients is indeterminable.
In the event that existing suppliers or distributors are unable to or should fail to deliver products, supplies and equipment to the Company, management believes that alternate sources are available to adequately meet its needs, but at the risk of higher prices.
REGULATION
The Company's business is subject to extensive and increasing regulation by federal, state and local government. The Federal agencies which regulate aspects of the Company's business include the Department of Health and Human Services, Healthcare Finance Administration, the Office of the Inspector General, the Food and Drug Administration, the Department of Labor, the Drug Enforcement Agency, and the Occupational Safety and Health Administration. In most states, home health care providers are regulated by the state department of health and board of pharmacy.
The Company is subject to federal laws regulating the repackaging and dispensing of drugs and regulating interstate motor-carrier transportation and state laws regulating pharmacies, nursing services and certain types of home health agency activities. Under state laws, the Company's offices must be licensed prior to commencing business and must renew their licenses periodically. In addition, certain of the Company's employees are subject to state laws and regulations governing the professional practice of respiratory therapy, pharmacy and nursing. Failure to comply with regulatory laws could expose the Company to criminal and civil penalties, and jeopardize the licensure of one or more of its home health care agencies, or their participation in the Medicare, Medicaid and other reimbursement programs.
As a provider of services under the Medicare and Medicaid programs, the Company is subject to the various "anti-fraud and abuse" laws, including the federal health care programs anti-kickback statute. This law prohibits any offer, payment, solicitation or receipt of any form of remuneration to induce the referral of business reimbursable under a federal health care program or in
return for the purchase, lease, order, arranging for, or recommendation of items or services covered by any such program. Federal health care programs are defined as any health care plans or programs that are funded by the United States (other than certain federal employee health insurance benefits) and certain state health care programs that receive federal funds under various programs, such as Medicaid. A related law forbids the offer or transfer of any item or service for less than fair market value, or certain waivers of co-payment obligations, to a beneficiary of Medicare or a state health care program that is likely to influence the beneficiary's selection of healthcare providers. Violations of the anti-fraud and abuse laws can result in the imposition of substantial civil and criminal penalties and, potentially, exclusion from furnishing services under any federal health care programs. In addition, the states in which the Company operates generally have laws that prohibit certain direct or indirect payments or fee-splitting arrangements between health care providers where they are designed to obtain the referral of patients to a particular provider.
Congress adopted legislation in 1989, known as the "Stark" Law, that generally prohibits a physician ordering clinical laboratory services for a Medicare beneficiary where the entity providing that service has a financial relationship (including direct or indirect ownership or compensation relationships) with the physician (or a member of his immediate family), and prohibits such entity from billing for or receiving reimbursement for such services, unless a specified exemption is available. Additional legislation became effective as of January 1, 1993 known as "Stark II" that extends the Stark Law prohibitions to services under state Medicaid programs, and beyond clinical laboratory services to all "designated health services", including home health services, durable medical equipment and supplies, outpatient prescription drugs, and parenteral and enteral nutrients, equipment, and supplies. Violators who are compensated by the Company are prohibited from making referrals to the Company, and the Company will be prohibited from seeking reimbursement for services rendered to such patients unless an exception applies. Several of the states in which the Company conducts business have also enacted statutes similar in scope and purpose to the federal fraud and abuse laws and the Stark Laws.
On January 9, 1998, HCFA issued proposed Stark II regulations. Final regulations have not yet been issued and there can be no assurance that the final Stark II regulations will not adopt a position which may adversely impact the manner in which the Company currently operates its business.
The Company is also subject to federal and state laws prohibiting an individual or entity from knowingly and willfully presenting claims for payment (by Medicare, Medicaid and certain other third-party payers) that contain false or fraudulent information. These laws provide for both criminal and civil penalties. Furthermore, providers found to have submitted claims which they knew or should have known were false or fraudulent, or for items or services that were not provided, may be excluded from Medicare and Medicaid participation, required to repay previously collected amounts, and/or be subjected substantial civil monetary penalties. Although false claim violations are generally subject to investigation and prosecution by the applicable governmental agency, violations of the federal False Claim Act can also be the subject of Qui Tam (or whistle blower) litigation. In Qui Tam situations, individuals with knowledge of False Claim Act violations can bring suit on behalf of the federal government, for such violations. As a "reward" for bringing successful Qui Tam cases, Qui Tam plaintiffs are entitled to a significant percentage of any penalties ultimately recovered by the federal government as a result of the violations prosecuted in the Qui Tam action. The number of health care Qui Tam cases is growing, and these cases increasingly involve arguments that a violation of the Anti-Kickback and Stark Laws could constitute a false claim under the federal False Claims Act, subjecting health care providers to Qui Tam actions for alleged Anti-Kickback and Stark Law violations. The Company believes that it bills for its services under such programs accurately. However, the rules governing coverage of, and reimbursements for, the Company's services are complex. There can be no assurance that these rules will be interpreted in a manner consistent with the Company's billing practices.
In May 1995, the federal government instituted Operation Restore Trust, a health care fraud and abuse initiative focusing on nursing homes, home health care agencies and durable medical equipment companies located in the five states with the largest Medicare populations. New York, the Company's corporate base, was one of the original targeted states. The purpose of this initiative is to identify fraudulent and abusive practices such as billing for services not provided, providing unnecessary services and making prohibited referrals and payments to health care professionals. Operation Restore Trust has been responsible for significant fines, penalties and settlements. Operation Restore Trust was recently expanded to cover twelve additional states for the next two years. The program was also expanded to include reviews of psychiatric
hospitals, certain independent laboratories and partial hospitalization benefits. Further, there are plans to eventually apply the program's investigation techniques in all fifty states and throughout the Medicare and Medicaid programs. One of the results of the program has been increased auditing and inspection of the records of health care providers and stricter interpretations of Medicare regulations governing reimbursement and other issues. Specifically, the government plans to double the number of comprehensive home health agency audits it performs each year (from 900-1800) and also to increase the number of claims reviewed by 25.0% (from 200,000 to 250,000). In general, the application of these anti-fraud and abuse laws is evolving.
The Office of Inspector General of the Department of Health and Human Services has issued proposed guidelines for the institution of a compliance program by a home care company, advising such companies that a compliance program may evidence an intent on the part of the company to comply with applicable federal and state laws and regulations. The Company has instituted a compliance program and there can be no assurance that the program will be deemed to be complete or will prevent an audit or investigation of the Company by a federal or state regulatory agency as HCFA.
JCAHO has established written standards for home care services, including standards for services provided by home infusion therapy companies. Many payors use these criteria in order to select only the highest quality providers. The Company's facility presently complies with JCAHO's standards and has been accredited since February 1990. In addition, the Company received approval in 1991 from the New York State Department of Health to provide nursing services in New York State.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to trade accounts receivable include amounts due from third party payors, primarily governmental agencies (Medicare and Medicaid). At March 31, 2000, gross Medicare and Medicaid receivables aggregated $4,141,000.
EMPLOYEES
As at March 31, 2000, the Company employed 128 persons, of whom 110 were full-time employees and 18 were part-time employees. The supply of qualified staff is adequate and retainable in the New York City area. The Company considers its relations with its employees to be satisfactory.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information in Items 1, 2, 3, 6, 7, and 8 of this Form 10-K include information that is forward looking, such as the Company's opportunities to increase sales through, among other things, increasing its number of patients, its anticipated liquidity and the Company's ability to achieve significant cost savings or synergies from its or other restructuring efforts. The matters referred to in forward-looking statements could be affected by the risks and uncertainties involved in the Company's business. These risks and uncertainties include, but are not limited to, the effect of economic and market conditions, the impact of the cost containment efforts of third-party payors and the Company's ability to obtain and maintain required licenses, as well as certain other risks described above in this Item under "Competition" and "Government Regulation," and in Item 7 in "Management's Discussion and Analysis of Financial Condition and Results of Operations." Subsequent written and oral forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Form 10-K.
ITEM 2.
ITEM 2. PROPERTIES
The Company's offices, pharmacies and warehousing are located in a 37,000 square-foot building (the "Facility") in Yonkers, New York. The Company is lessee under a sixty-five month lease dated as of September 15, 1999 with two renewals, each for a sixty-month period.
The Company leases, on a month to month basis for $2,800 a month, office space in Long Island City for its PRN subsidiary and in the process of evaluating other space in the vicinity.
The Company also leases the space previously occupied by Healix Healthcare, Inc. in Valhalla, New York. This facility is separately subleased for the duration of the Company's lease with a lease payment of $11,250.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In June 1995, a former employee had commenced an action in Supreme Court, New York County, New York against the Company and certain of its former and current officers, directors, and shareholders. The action alleged that the Company breached plaintiff's employment agreement by withholding at least $750,000 in commissions allegedly owed to him. As of June 1998, this matter had thought to have been settled through court recommended mediation. In May 1999, the former employee petitioned the court to reopen the matter. The matter is still pending with the court; however, management believes there will be no material adverse effect on the Company's consolidated financial position, results of operations or cash flows.
On January 28, 2000 in an action entitled McKesson HBOC versus AccuHealth, Inc. and Midview Drug Inc. in the Supreme Court of the State of New York, County of Westchester, the Company was served with an order to show cause with temporary restraints and a verified complaint from its former primary drug distributor alleging the Company owed a sum in excess of $4,000,000 and the Company was ordered via restraining order from conducting business. On February 1, 2000 the Company was successful in lifting the restraining order and on March 30,2000 settled the matter by converting the trade debt of $4,212,000 to a five-year note payable (see Note 6 to the financial statements).
On February 9, 2000 in an action entitled Newman Distributors, Inc. against Midview Drug, Inc. in the Supreme Court of the State of New York, County of Kings, the Company was also served with a restraining notice to judgment Debtor from another drug distributor alleging that it was owed $205,000. Subsequent to February, this distributor filed for protection under Chapter 11 of the US Bankruptcy Code and in June 2000 the matter was settled by Rosenthal & Rosenthal, the Company's lender under a revolving credit agreement purchasing the judgment of $205,000 for $100,000, subject to approval of the Bankruptcy Court.
There is one significant judgment against the Healix Health Care, Inc. a/k/a AccuHealth/Healix Health, Inc. in the amount of approximately $143,000. The Company is attempting to negotiate a payment plan to settle the matter. There are several other lawsuits against the Company aggregating less than $200,000. The Company's management is confident it has meritorious defenses in these proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET
The Company's common stock, par value $.01 per share (the "Common Stock") trades on the over-the-counter Bulletin Board under the symbol AHLT.U.
The following table sets forth, for the periods indicated, the high and low closing bid prices for the Common Stock as reported by the NASDAQ Stock Market Trading and Market Services Department. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and do not necessarily represent actual transactions.
Fiscal 2000 Fiscal 1999 ----------- ----------- High Low High Low ---- --- ---- --- Quarter ended June 30......... 3/4 1/2 1-3/4 1-3/4 Quarter ended September 30.... 5/8 1/8 1-13/16 1-5/8 Quarter ended December 31..... 1/2 1/8 1-1/8 1-3/16 Quarter ended March 31........ 3/8 1/8 7/8 5/8
The Company's 6% Redeemable Cumulative Convertible Preferred Stock is subject to significant restrictions on sale and does not have a public trading market.
NUMBER OF SHAREHOLDERS
The Company's transfer agent has advised management that there were 69 holders of record of the Common Stock as of June 30, 2000. Since most holders of the Company's stock have placed their shares in street name, this figure is much lower than the actual number of beneficial holders of common stock, which is estimated to be approximately 300 stockholders.
DIVIDENDS
To date, the Company has not paid any cash dividends on the Common Stock. The payment of dividends, if any, in the future is within the discretion of the Board of Directors and will depend upon the Company's earnings, its capital requirements and financial condition and other relevant factors. The Board does not intend to declare any dividends on the Common Stock in the foreseeable future, but instead intends to retain all earnings, if any, for use in the Company's business operations.
The Company is obligated to pay annual dividends of $.12 per share on its outstanding shares of 6% Redeemable Cumulative Convertible Preferred Stock. On October 10, 1998, 1,245,000 shares were converted into 1,431,750 shares of common stock leaving a balance of 105,000 6% Redeemable Cumulative Convertible Preferred Stock outstanding. Such dividends accrue daily, are payable each June 1 and December 1 and, at the election of the Company, may be paid in shares of Common Stock valued in accordance with the terms of such stock. Dividends on the Company's 6% Redeemable Cumulative Convertible Preferred Stock are payable in preference and priority to any payment of any dividends on the Common Stock. The Company satisfied its liability for dividends, which were payable at June 1, 1999 and at December 1, 1999 by the issuance of 9,161 and 28,798 shares of the Company's Common Stock on March 31, 2000.
The Company satisfied its liability payable of June 1, 1998 and at December 1, 1998 by the issuance of 46,526 and 4,388 shares of the Company's Common Stock on December 17, 1998 and March 31,2000.
The Company satisfied its liability payable at June 1, 1997 and at December 1, 1997 by the issuance of 45,556 and 35,354 shares of the Company's Common Stock on July 18, 1997 and January 15, 1998, respectively.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the consolidated financial statements of the Company, its subsidiaries and Healix for the years ended March 31, 2000, 1999, 1998, 1997, and 1996. The years ended March 31, 2000, 1999 and 1998 were audited and reported upon by Marcum & Kliegman LLP. For the years ended March 31, 1997, and 1996 of Accuhealth, Inc. and its subsidiaries, prior to their restatement for the fiscal 1999 pooling of interests, were audited and reported upon by Ernst & Young LLP, and should be read in conjunction with "Item 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
This Management's Discussion and Analysis should be read in conjunction with the consolidated financial statements of the Company and related notes included elsewhere in this Form 10-K.
RESULTS OF OPERATIONS:
FISCAL YEAR ENDED MARCH 31, 2000 AS COMPARED TO FISCAL YEAR ENDED MARCH 31, 1999
Net sales from Fiscal 2000 decreased approximately $5.1 million to $33 million from the $38.1 million reported in Fiscal 1999. The decrease was the result of a decrease in the durable medical and infusion therapy revenues offset by an increase oral medication revenues.
Gross profits from Fiscal 2000 were approximately $9.4 million and were 28% of total net sales as compared to approximately $14.1 million or 37% for Fiscal 1999. The decrease in gross profit was primarily due to the mix of revenues shifting to lower margin business. The lowest margin business, oral medications, increased to 29% of the revenues in Fiscal 2000 from 20% in Fiscal 1999 while the two highest margin businesses, DME and infusion therapy, decreased 5% and 4%, respectively, as a percentage of revenues when compared to Fiscal 1999.
Selling, general and administrative expenses decreased approximately $5 million to $14.7 million or 45% of sales for 2000 from $17.9 million or 47% for sales from Fiscal 1999. The decrease was primarily due to decreases in goodwill write-off ($1,300), salaries ($700), bad debt expense ($600) professional fees ($100) and insurance ($400).
Net interest expense in Fiscal 2000 was $2,325 as compared to $1,627 in Fiscal 1999 due to higher borrowing under the revolving line of credit, increase in prime rate and additional interest resulting from interest on the unpaid interest on the subordinated debentures.
FISCAL YEAR ENDED MARCH 31, 1999 AS COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998
Net sales for Fiscal 1999 increased approximately $6.5 million to $38.1 million from the $31.6 million reported in Fiscal 1998. The increase was the result of increases in the Company's oral medication and institutional pharmacy revenues and durable medical equipment revenues offset by a decrease in infusion revenues.
Gross profits for Fiscal 1999 were approximately $14.1 million and were 37% of total net sales as compared to approximately $14.7 million or 47% for Fiscal 1998. The decrease in the gross profit percentage was due primarily to the loss of a highly profitable infusion product revenues due to the lack of availability of the drug needed to service this product line and due to the increase in sales from institutional and oral medication which generated lower gross margins.
Selling, general and administrative expenses increased approximately $3.8 million to $17.9 million or 47% of sales for 1999 from $14.1 million or 45% for sales for fiscal 1998. The increase was primarily due to increase in bad debt expenses ($3,175), goodwill write-offs ($1,300), consulting expenses ($160), insurance expense ($200), data processing maintenance ($160), auto leasing expense ($150), dispatch and delivery expense ($125), offset by a decrease in salaries ($500).
Net Interest expense in Fiscal 1999 was $1,627 as compared to $814 in Fiscal 1998 due to increased net borrowings under our revolving line of credit and issuance of $6,250 in 12% Subordinated Debentures.
LIQUIDITY AND FINANCIAL CONDITION
As of March 31, 2000, the Company had negative working capital of approximately $3,797.
The Company's cash used in financing activities of approximately $1,612 was primarily attributable to repayment of various notes, term loan and capital lease obligations. The cash provided by operating activities of approximately $223 was primarily attributable to decreases in inventory ($1,074), accounts receivable ($2,823) and increases in accounts payable ($2,408) and offset by the net loss of approximately $8,203.
Accounts receivable include amounts due from third-party payors, primarily governmental agencies (Medicare and Medicaid). At March 31, 2000, gross Medicare and Medicaid receivables aggregated $4,141.
Effective April 3 1998, the Company agreed to an amendment of the Loan and Security Agreement. The amendment extended the agreement through April 1, 2000 and allows the company to borrow, under certain conditions and terms, up to $9 million under a revolving loan agreement at an interest rate of prime plus 1 1/2%, as well as an overdraft line of $1,000 at prime plus 3%. The amendment also increased the term loan available to the Company to $750. In addition, the Company granted Rosenthal warrants to purchase 50,000 shares of the Company's common stock.
At its meeting of the Board of Directors on June 25, 1998, the Company approved the issuance of 12% Cumulative Convertible Subordinated Notes in the face amount of $6,250. As a further component of this financing, the Company's current 6% cumulative convertible Preferred Stock was converted to common stock in Accuhealth at a 15% premium per an agreement with the preferred stockholders. In December 1998 1,245 shares of 6% Cumulative convertible Preferred Stock was converted into 1,432 shares of the Company's common stock.
In addition to the continuing losses, the Company operates under cash flow pressure primarily due to difficulty in collecting its accounts receivable on a timely basis. The difficulty in collecting sufficient accounts receivable during the year ended March 31, 2000 has required that the Company attempt to negotiate extended terms for vendor payments. At March 31, 2000 the Company was successful in converting its accounts payable of $4,212 to its major drug distributor into a five-year term note. The Company has also taken steps to reduce its overhead by eliminating over 90 full time positions, disposing of its DME business line and ceasing to conduct business with two managed care companies who were slow payors.
The need for additional capital is critical to the ongoing operations of the Company; and accordingly, various alternatives are being explored. At March 31, 2000 The Company has exceeded the maximum allowable under the formula guidelines of the revolving loan agreement. The loan agreement expired on April 1, 2000 and the Company is borrowing under the same terms on a day to day basis. There is no assurance that the loan agreement will continue and accordingly, if the Company is put into default by the lender, if the Company is not successful in obtaining additional capital or if the Company incurs significant litigation it will not be able to sustain its operations. Further, the current liabilities and total liabilities exceed the current assets and total assets, respectively, at March 31, 2000. Considering these factors as well as the day to day condition the Company operates in, create an uncertainty as to the Company's ability to continue as a going concern (see Note 4 to the financial statements).
During the year ended March 31, 1998, the Company adopted the provision of statements of accounting standards No. 128 Earnings per Share ("SFAS No. 128"). SFAS No. 128 eliminates the presentation of primary and fully diluted earnings per share ("EPS") and requires presentation of basic and diluted EPS. Basic EPS is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period.
Diluted EPS is computed by dividing the weighted average number of common shares and common stock equivalents outstanding. For the years ended March 31, 2000, 1999 and 1998, weighted average number of common shares outstanding throughout the periods includes shares issued by Accuhealth as a result of the Healix merger. Common stock equivalents have been excluded from the weighted-average shares for 2000, 1999 and 1998, as inclusion is anti-dilutive. Potentially diluted securities, which consist of stock options and warrants, may be potentially diluted in the future. All prior period EPS data has been restated to conform to the new pronouncement.
Year 2000 Readiness
The Company has completed its assessment of its computer systems and facilities that could be affected by the "Year 2000 problem" and has developed a plan to resolve the issue. The Year 2000 problem arose because many existing computer programs use only the last two digits to refer to a year. Therefore, these computer programs do not properly recognize a year that begins with "20" instead of the familiar "19". If not corrected, many computer applications could fail or create erroneous results.
The Company is implementing its Year 2000 compliance program as part of a plan to replace and upgrade its information technology systems (the "Upgrade Program"). The Upgrade Program was initiated to replace information systems of the Company acquired by merger, to fully integrate those systems with the Company's information technology systems, and to update the Company's information technology systems. The Company has divided the Upgrade Program into the following phases: assessment, planning, remediation and testing. The Company is currently complete with the majority of the Upgrade Program and expects to complete the last upgrade phase in by the third quarter of 2000. Although the Company believes that it will complete the Upgrade Program by the third quarter of 2000, there can be no assurance that such remediation will be completed or that the Company's operations will not be disrupted to some degree.
The Company currently expects the Upgrade Program to be completed in a time frame to avoid any material adverse effect on operations. As of March 31, 2000, the Company had incurred approximately $500 of expenses in connection with the Upgrade Program. The Company expects to incur additional expenses of approximately $50 to complete the implementation of the Upgrade Program. The Company would have implemented the Upgrade Program irrespective of the Year 2000 problem, and although the Company expects that the implementation of the Upgrade Program will achieve Year 2000 compliance, the Company cannot separately assess the expenses relating to the Year 2000 compliance. The Company's inability to complete Year 2000 compliance on a timely basis or the inability of other companies with which the Company does business to complete their Year 2000 modifications on a timely basis could adversely affect the Company's operations.
The Company has initiated communications with its major vendors to identify and, to the extent possible, to resolve issues involving the Year 2000 Problem. The Company is attempting to mitigate its risk with respect to the failure of such vendors to be Year 2000 compliant by, among other things, obtaining Year 2000 compliance certifications or written assurances from its material vendors. However, the Company has limited or no control over the actions of these suppliers. Thus, while the Company expects that it will be able to resolve any significant Year 2000 Problems with these systems, there can be no assurance that these suppliers will resolve any or all Year 2000 Problems with these systems before the occurrence of a material disruption to the business of the Company or any of its customers. Any failure of these suppliers to resolve Year 2000 Problems with their systems in a timely manner could have a material adverse effect on the Company's business, financial condition, and results of operation.
Management believes that the most significant risk to the Company from the Year 2000 Problem is the effect such issues may have on third party payors, such as Medicare. News reports have indicated that various agencies of the federal government may have difficulty becoming year 2000 compliant before the Year 2000. The Company has not yet undertaken to quantify the effects of such noncompliance or to determine whether such quantification is even possible. The Company has initiated communications with its third party payors to identify and, to the extent possible, to resolve issues involving the Year 2000 problem. However, the Company has limited or no control over the actions of these third party payors. Thus, while the Company expects that it will be able to resolve any significant Year 2000 problems with these payors, there can be no assurance that these payors will resolve any or all Year 2000 problems with their systems before the occurrence of a material disruption to the business of the Company. Any failure of these third party payors to resolve Year 2000 problems with their systems in a timely manner could have a material adverse effect on the Company's business, financial condition, and results of operation.
Potential consequences of the Company's failure to resolve its Year 2000 issues could include, among others, (i) the inability to accurately and timely process claims, respond to third party payor inquiries about claims, enroll customers, bill third party payors, collect receivables, pay vendors, record and disclose accurate data and perform other core functions (ii) increased scrutiny be regulators and breach of contractual obligations, and (iii) litigations in connection therewith. As of March 31, 2000 the Company has not experienced any significant Year 2000 issues that have adversely affected the Company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and financial statement schedules are included in the Consolidated Financial Statements, as a separate section of this Report, set forth on pages through attached hereto, and found immediately following the signature pages of this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
At a meeting held on March 5, 1998, the Board of Directors of the Company approved the engagement of Marcum & Kliegman LLP as its independent auditors for the fiscal year ending March 31, 1998 to replace the firm of Ernst & Young LLP ("E & Y"), who were dismissed as auditors of the Company effective April 15, 1998. The audit committee of the Board of Directors approved the change in auditors on March 25, 1998.
The reports of E & Y on the Company's financial statements for the Fiscal years 1997 and 1996 did not contain an adverse opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles, except that E & Y's audit report for fiscal year 1996 was modified with regard to the Company's ability to continue as a going concern. In connection with the audits of the Company's financial statements for each of the two fiscal years ended March 31, 1997, there were no disagreements with E & Y on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of E & Y would have caused E & Y to make reference to the matter in their report.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are the executive officers and directors of the Company at June 29, 2000:
Set forth below are brief summaries of the business experience of the persons who were directors as of June 29, 2000:
E. VIRGIL CONWAY chairs the Company's Audit and Stock Option Committees and was elected a director on April 29, 1994. Mr. Conway is a member of the Executive and Compensation and Nominations Committees. Since May 16, 1995, he has served as Chairman of the Board of the Metropolitan Transportation Administration of the City of New York and, from 1989 to 1996, he served as Chairman of the Audit Committee of the City of New York. From 1992 until July 1995, Mr. Conway served as Chairman of the Financial Accounting Standards Advisory Council. From 1968 through 1988, Mr. Conway served as Chairman and Chief Executive Officer and as a director of the Seamen's Bank for Savings, FSB. >From 1986 until 1989, Mr. Conway also served as Vice Chairman of Seamen's Corporation. From 1967 to 1968, Mr. Conway served as an Executive Vice President and Trustee at the Manhattan Savings Bank. From 1964 to 1967, Mr. Conway served as First Deputy Superintendent of Banks of the State of New York and Secretary of the New York State Banking Board. Mr. Conway specializes in financial consulting. Mr. Conway serves on several corporate boards, including Union Pacific Corporation, Con Edison corporation, Urstadt-Biddle, a real estate investment trust, Trism, Inc., a specialized trucking firm, and mutual funds managed by Phoenix Home Life.
GLENN C. DAVIS became a director, Chief Executive Officer and President of the Company on February 3, 1994 and since April 15, 1999 is serving as acting Chief Financial Officer. Mr. Davis is a member of the Executive Committee. From June 1993 until June 30, 1995, Mr. Davis was a general partner of Capstone Management Company, an investment partnership engaged principally in the initiation, acquisition and management of businesses in the health care industry. Mr. Davis is a certified public accountant. From 1980 until January 1993, Mr. Davis was a partner with Coopers & Lybrand, an international accounting and consulting firm.
JEFFREY S. FREED, M.D., was elected a director on June 25, 1998 in connection with the Healix Healthcare, Inc. merger. Dr. Freed is a member of the Professional Conduct Committee. From December 1999 to present, Dr. Freed serves
as the Company's Medical Director on a consulting basis. From April 1998 to December 1999 Dr. Freed has served as Executive Vice President -- Strategic Development and Medical Director for Accuhealth. From March 1995 to March 1998, Dr. Freed was President and Medical Director of Healix Healthcare, Inc. He also is a Clinical Associate Professor of Surgery at the Mount Sinai School of Medicine and a practicing general surgeon.
STANLEY GOLDSTEIN was elected Chairman of the Company's Board of Directors on April 29, 1994. Mr. Goldstein has been a private investor from 1981 until the present. Mr. Goldstein is Chairman of the Executive Committee. From June 1993 until June 30, 1995, Mr. Goldstein was a general partner of Capstone Management Company, an investment partnership engaged principally in initiation, acquisition and management of businesses in the health care industry. Mr. Goldstein is a certified public accountant. From 1964 until 1981, Mr. Goldstein was the founder and Managing Partner of Goldstein Golub Kessler & Company, Certified Public Accountants. Mr. Goldstein serves on the board of directors of Security Equity Life Insurance Company.
HOWARD C. LANDIS was elected a director on June 25, 1998 pursuant to agreements executed in connection with the purchase by RFE Investment Partners V.L.P. of convertible subordinate debt. Mr. Landis is a member of the Audit Committee. Since 1980, Mr. Landis has been employed by RFE Management Corp., an investment manager of private equity investment funds. Since 1983 Mr. Landis has been a general partner of these private equity funds. Mr. Landis is also a director of a number of privately owned companies.
DONALD B. LOURIA, M.D., M.A.C.P. was elected a director on April 29, 1994. Dr. LOURIA chairs the Professional Conduct Committee. Dr. Louria has been a Professor and Chairman of the Department of Preventive Medicine and Community Health of the University of Medicine and Dentistry of New Jersey-New Jersey Medical School from July 1969 until the present. Over the same period, among other appointments, Dr. Louria has served as a consultant in Infectious Diseases to Memorial Hospital for Cancer and Allied Diseases and, from 1971 until the present, has served on the Consultant Medical Staff in Infectious Diseases at St. Michael's Medical Center in Newark, New Jersey.
SALLY B. HERNANDEZ-PINERO was elected a director on September 20, 1994. On May 1, 1999 Ms. Hernandez-Pinero became a Senior Vice President for Corporate Affairs for Related Companies LLP, a real estate development, management, syndication and financing company. Since June 1998 to April 1999 she was the Managing Director of Fannie Mae where she identified equity investment opportunities for the capital fund. She was previously a member of the law firm of Kalkines Arky Zall & Bernstein. Ms. Hernandez-Pinero served as Chairwoman of the New York City Housing Authority from February 1992 to January 1994. In that position she had direct operational responsibility for the nation's largest public housing program with 325 developments housing over 600,000 people, a staff of 16,000 and a budget of $1.45 billion. From January 1990 to February 1992, Ms. Hernandez-Pinero was Deputy Mayor for Finance and Economic Development, in which position she designed and supervised the development and implementation of business, industrial and commercial development policies for the City of New York. From January 1988 to January 1990 she served as Commissioner/Chairwoman of the Board of Directors of the Financial Services Corporation of New York City where she developed and implemented the course of action and priorities for that agency's economic development programs. Prior to January 1988, Ms. Hernandez-Pinero served as Deputy Borough President of Manhattan, General Counsel to the State of New York Mortgage Agency, and as an attorney with a number of community development and legal service organizations. Ms. Hernandez-Pinero is a director of Con Edison Corporation and the Dime Savings Bank and National Income Realty Trust.
CORBETT A. PRICE was elected a director on September 20, 1994. Mr. Price chairs the Compensation and Nomination Committee and is a member of the Stock Option and Audit Committees. He is the Chairman and Chief Executive Officer of KURRON, a New York based health care management company which Mr. Price founded in January 1990. KURRON specializes in the rehabilitation of distressed hospitals and health care systems. Mr. Price began his career in health care management in 1975 at the Hospital Corporation of America, where he served as a Vice President from 1983 to 1989. As head of Hospital Corporation of America's Mid-Atlantic Division, he directed the operations of approximately twenty hospitals in four states and the District of Columbia. Mr. Price has advised the governments of Mexico, Barbados and Jamaica on health care delivery systems and facilities.
The Company has Audit, Compensation and Nominations, Executive, Professional Conduct and Stock Options Committees. The Compensation and Nominations Committee administers the Company's stock option plans.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
From April 1, 1994 through May 31, 1994, the Company paid directors who were not officers of the Company $2,000 per meeting attended. In June 1994, the Board of Directors established a policy of paying directors who are not officers or consultants a fee of $6,000 per annum plus $1,000 per annum ($2,000 per annum for the Chair) for each committee on which they serve. Messrs. Conway and Price, Dr. Louria and Ms. Hernandez-Pinero are eligible for the foregoing fees. The Company does not intend to pay any fee to officers for serving as directors. Effective June 28, 1994, the Company entered into a Consulting Agreement with Mr. Goldstein for certain services to be rendered. Such consulting agreement calls for a monthly consulting fee and expense reimbursement of $5,000. Effective April 1, 1999 the consulting agreement was amended to have the monthly consulting fee and expense reimbursement reduced to $3,000 monthly. In addition, effective December 1, 1999 the Company entered into a consulting agreement with Dr. Jeffrey Freed to serve as the Company's Medical Director Consultant for $1,000 per month, plus car allowance up to $1,000 a month.
The following table sets forth all compensation earned, awarded or paid by the Company to its Chief Executive Officer and Executive Vice President and Chief Operating Officer. No other person who was a director, executive officer or employee at any time during the fiscal year ended March 31, 2000, received salary and bonus in excess of $100,000 during or attributable to such fiscal year.
Summary Compensation Table
Annual Long Term Compensation Compensation ------------ ------------ All Other Name and Principal Position Year Salary Bonus Compensation --------------------------- ---- ------ ----- ------------
Glenn C. Davis............. FY2000 $275,000 -- -- President and Chief...... FY1999 $275,000 -- -- Executive Officer........ FY1998 $250,000 $25,000 -- Mary Comerford............. FY2000 $131,000 -- -- Executive Vice President. FY1999 $175,000 -- -- and Chief Operating Officer
EMPLOYMENT AGREEMENT
On June 25, 1998, the Company renewed its employment agreement with its President and Chief Executive Officer through May 2, 2001, The Company's President and Chief Executive Officer is entitled to an annual salary at a rate of $275,000 and 62,500 restricted shares of the Company's common stock. The agreement also provides for a severance payment equal to 150% of his annual compensation, including base salary and any initial bonus ("Annual Compensation"), at the date of termination if (i) his employment is terminated by him due to a breach of the agreement by the Company, (ii) the Company fails to offer to extend his employment for additional terms of one year on the same terms; or (iii) his employment terminates due to disability. If the employment is terminated due to his death, the severance payment is equal to 50% of his Annual Compensation at the date of death. The agreement further provides that, in the event of a merger or sale of substantially all of the assets of the Company, either the successor corporation or he may elect to terminate his employment and that, if his employment is so terminated, he will be entitled to receive a severance payment equal to 300% of his Annual Compensation at the date of termination. In addition, the agreement provides that he will not compete with the Company for 18 months after a termination of his employment, except that, if such termination is by the Company for cause, the non-competition period will be for 24 months.
In connection with the Healix merger, Mary B. Comerford entered into an employment agreement with the Company. Under the employment agreement, Ms. Comerford served as Executive Vice President and be entitled to an annual salary at a rate of $175,000 a hire-on bonus of 50,000 shares of the Company's common stock, an annual bonus based on certain performance criteria up to 50% of the base salary, and options to purchase 50,000 shares of the Employer Common Stock pursuant to the terms of an option agreement. Further, this agreement contains Non-Solicitation; Non-Competition; and Confidentiality provisions ranging from one to three years as the circumstances as defined so warrant. Mary Comerford resigned as of December 31, 1999 and the aforementioned agreement was terminated without further payment.
STOCK OPTIONS
The following tables set forth information concerning exercisable options during the fiscal year ended March 31, 2000, with respect to the Common Stock. Stock options totalling 110,000 shares were granted in September 1999 to the President and CEO. No stock appreciation rights were granted to executive officers and no stock options or stock appreciation rights were exercised by executive officers during such year.
FISCAL YEAR-END OPTION VALUES
Number of Shares Underlying Value of Unexercisable Unexercised Options at in-the-Money Options at Fiscal Year End Fiscal Year End --------------------------- --------------------------- Name Exercisable Unexercisable Exercisable Unexercisable --- ----------- ------------- ----------- ------------- Glenn C. Davis 60,000(1) 150,000(2) -- --
(1) The option exercise price of such shares is $1.65 per share. (2) The option exercise price of 40,000 shares is $1.65 and 110,000 shares is $.44 per share.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth existing stock ownership as of June 29, 2000, with respect to the beneficial ownership of shares of Common Stock by (i) each person known by the Company to be the beneficial owner of 5% of more of the outstanding shares of Common Stock, (ii) each nominee for director, (iii) each director, and (iv) all officers and directors as a group, and the percentage of the outstanding shares of Common Stock represented thereby.
Amount of Nature of Beneficial Name of Beneficial Owner(1) Ownership (1) Percent of Class (2) --------------------------- ---------------- --------------------
Glenn C. Davis 386,337(3)(4)(5) 7.62 c/o Accuhealth, Inc. Ridge Hill Yonkers, New York 10710
Stanley Goldstein 345,926(3)(4)(6) 6.93 c/o Accuhealth, Inc. Ridge Hill. Yonkers, New York 10710
E. Virgil Conway 42,729(11)(12) *
Howard C. Landis 0 *
Donald B. Louria, M.D. 23,500(7) *
Sally Hernandez-Pinero 24,000(12) *
Corbett A. Price 37,704(16) *
Special Situation Fund III, L.P. 706,928(8) 14.25 153 East 53rd Street New York, New York 10022
Penfield Partners, L.P. 324,027(9) 6.53 153 East 53rd Street New York, New York 10022
Special Situations Cayman Fund, L.P. 244,251(10) 4.92 153 East 53rd Street New York, New York 10022
CMNY Capital II, L.P. 355,368(13) 7.16 c/o Carl Marks & Company, Inc. 135 East 57th Street 27th Floor New York, New York 10022
Robert M. GiaQuinto 444,432(15) 8.96
Jeffrey S. Freed, M.D. 461,883(15) 9.31
All Directors and Executive 1,322,028(14) 25.46 Officers as a Group (8 persons)
* Percentage of shares beneficially owned does not exceed 1% of the class.
(1) As used herein, the term "beneficial ownership" with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934 as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose or direct the disposition of the shares) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, including a right to acquire such power(s) during the next 60 days. Unless otherwise noted, beneficial ownership consists of sole ownership, voting and investment rights.
(2) Percent of class assumes issuance of the shares subject to currently exercisable options and shares issuable upon the conversion of 6% Preferred Stock, as well as an equivalent increase in the number of shares outstanding.
(3) Includes 60,000 and 30,000 shares issuable pursuant to currently exercisable stock options for Davis and Goldstein, respectively.
(4) Includes 276,337 and 312,926 shares owned of record and beneficially for Davis and Goldstein, respectively.
(5) Includes 50,000 shares issuable upon conversion of 50,000 shares of 6% Preferred Stock.
(6) Includes 3,000 shares issuable upon conversion of 3,000 shares of 6% Preferred Stock.
(7) Includes 16,500 shares issuable pursuant to currently exercisable stock options and 7,000 shares owned directly or in trust for the benefit of members of Dr. Louria's family.
(8) Includes 706,928 shares owned of record and beneficially.
(9) Includes 324,027 shares owned of record and beneficially.
(10) Includes 244,251 shares owned of record and beneficially.
(11) Includes 18,729 shares owned of record and beneficially.
(12) Includes 24,000 shares issuable pursuant to currently exercisable stock options.
(13) Includes 355,368 shares owned of record and beneficially.
(14) Includes 1,090,528 shares owned of record and beneficially, 178,500 shares issuable pursuant to currently exercisable stock options and 53,000 shares issuable upon conversion of 53,000 shares of 6% Preferred Stock.
(15) Includes 461,883 and 444,432 shares issued pursuant to the Healix acquisition to Jeffrey S. Freed, M.D. and Robert M. GiaQuinto, respectively.
(16) Includes 13,704 shares owned of record and beneficially and 24,000 shares issuable pursuant to currently exercisable stock options.
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Based solely on a review of Forms 3, 4 and 5 (and amendments thereto) furnished to the Company, and certain written representations received by it, the Company is not aware of any person who, during the prior fiscal year, was a director, officer or beneficial owner of more than 10% of its outstanding Common Stock, during (or with respect to) the prior or (except as may have been previously reported) previous fiscal year, who failed to file with the Securities and Exchange Commission on a timely basis reports required by Section 16 (a) of the Securities Exchange Act of 1934.except that the following persons reported changes in their beneficial ownership of the Company's securities with respect to the following transactions in year-end filings on Form 5 rather than earlier in the year: the conversion of the Company's preferred stock to Common Stock on December 1, 1998 (Messrs. Conway and Goldstein); and the issuance of shares of the Company's common stock in the Healix merger on October 9, 1998 (Dr. Freed ); and the issuance of stock options on October 23, 1997 (Messrs, Conway and Price, Ms. Hernandez-Pinero and Dr. Louria).
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of June 28, 1994, the Company entered into a Consulting Agreement with Stanley Goldstein, who is Chairman of the Board. Mr. Goldstein does not receive compensation for services provided as a director of the Company during the term of his consulting agreement.
Pursuant to such Consulting Agreement, Mr. Goldstein provides consulting services to the Company in, among other areas, capital financing, mergers and acquisitions. The Company has agreed to pay consulting fees to Mr. Goldstein in the amount of $4,000 per month and an office expense reimbursement of $1,000 per month for use of Mr. Goldstein's offices and support facilities in the performance of his consulting duties. In further consideration of Mr. Goldstein's consulting services, the Company granted to Mr. Goldstein an option to purchase 150,000 shares of Common Stock at prices ranging from $1.625 to
$3.00 per share. During the fiscal year ended March 31, 1999 the Company issued 46,957 of its common stock in consideration of forgiveness of accrued consulting fees of $135,000 owed Mr. Goldstein. Effective April 1, 1999 the consulting agreement was amended to have the monthly fee and expense reimbursement reduced to $3,000 a month.
During the Fiscal year 1999, the Company granted a loan to Mr. Glenn C. Davis, President and CEO, in the amount of $100,000 due on demand, bearing interest of 8%. Such loan is collateralized by 50,000 shares of the Company's 6% cumulative convertible and Preferred Stock.
In December 1999 the Company terminated the employment agreement with Dr. Jeffrey Freed and entered into a consulting agreement. Dr. Freed receives, in addition to his Director's fee, $1,000 per month as a consultant for serving as the Medical Director. In addition, he receives an expense reimbursement for documented business expenses.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1), (a)(2) See the separate section of this report following Item 14 for a list of financial statements and schedules filed herewith.
(a)(3) Exhibits as required by Item 601 of Regulation S-K are listed in Item 14(c) below.
(b) The Company did not file any Reports on Form 8-K during the last quarter of the fiscal year ended March 31, 2000.
(c) EXHIBITS
3.1 Registrant's Articles of Incorporation, as amended (incorporated herein by reference to Exhibit 3 (I) to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1994)
3.2 Registrant's By-laws, as amended (incorporated herein by reference to Exhibit 3(ii) to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1994)
10.01 Loan and Security Agreement dated April 28, 1994 between Rosenthal & Rosenthal, Inc. and the Registrant, Midview Drug, Inc., Accuhealth Home Care, Inc. and Citiview Drug Co., Inc. (the "Loan and Security Agreement") (incorporated herein by reference to Exhibit 10 (l) to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1994)
10.02 Amendment No. 1 to the Loan and Security Agreement, dated as of February 1, 1996
10.03 Amendment No. 2 to the Loan and Security Agreement, dated as of February 1, 1997.
10.04 Amendment No. 3 to the Loan and Security Agreement dated as of July 30, 1997.
10.05 Amendment No. 4 to the Loan and Security Agreement dated as of April 9, 1998.
10.06 Warrant dated April 28, 1994 for the Registrant's Common Stock issued by the Registrant to Rosenthal & Rosenthal, Inc. (incorporated herein by reference to Exhibit 10(m) to the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1994)
10.07 Employment Agreement dated May 2, 1994 between Glenn C. Davis and the Registrant (incorporated herein by reference to Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the year ended March 31, 1995)
10.08 Consulting Agreement dated June 28, 1994 between Donald B. Louria, M.D. and the Registrant (incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the year ended March 31, 1995)
10.09 Consulting Agreement dated June 28, 1994 between Stanley Goldstein and the Registrant (incorporated herein by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the year ended March 31, 1995)
10.10 Amended and Restated 1988 Stock Option Plan (incorporated herein by reference to Exhibit B to the Registrant's 1994 Notice of Annual Meeting and Proxy Statement)
10.11 Option Agreement dated September 20, 1994 between Corbett A. Price and the Registrant (incorporated herein by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the year ended March 31, 1995)
10.12 Option Agreement dated September 20, 1994 between E. Virgil Conway and the Registrant (incorporated herein by reference to Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the year ended March 31, 1995)
10.13 Option Agreement dated September 20, 1994 between Sally Hernandez-Pinero and the Registrant (incorporated herein by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the year ended March 31, 1995)
10.14 Option Agreement dated June 28, 1994 between Glenn C. Davis and the Registrant (incorporated herein by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the year ended March 31, 1995)
10.15 Option Agreement dated June 28, 1994 between Stanley Goldstein and the Registrant (incorporated herein by reference to Exhibit 10.25 to the Registrant's Annual Report on Form 10-K for the year ended March 31, 1995)
10.16 Option Agreement dated June 28, 1994 between Donald B. Louria, M.D. and the Registrant (incorporated herein by reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the year ended March 31, 1995)
10.17 Agreement and Plan of Merger dated as of March 14, 1997 among Accuhealth, Inc., ACH Acquiring Corp., ProHealthCare, Inc., ProHealthCare Infusion Services, Inc., Thomas Laurita and David Brian Cohen.
10.18 Agreement and Plan of Merger, dated as of April 9, 1998, among Accuhealth, Inc., HHI Acquiring Corp., Healix HealthCare, Inc., Linda Barkan, Chaim Charytan, Mary Comerford, Jeffrey S. Freed, Donald Giaquinto, Robert Giaquinto, Robert Labra, Kathleen P. O'Brien McDonald and Arthur Schwacke, Jr. (incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K, dated April 30, 1998).
10.19 Registration Rights Agreement between Accuhealth, Inc. and Robert M. GiaQuinto.
10.20 Registration Rights Agreement between Accuhealth, Inc. and Jeffrey S. Freed, M.D.
10.21 Registration Rights Agreement between Accuhealth, Inc. and Linda Barkan.
10.22 Employment Agreement dated April 1, 1998 between Dr. Jeffrey S. Freed and the Registrant
10.23 Employment Agreement dated April 1, 1998 between Mary Comerford and the Registrant
10.24 Consulting Agreement dated December 1, 1999 between Dr. Jeffrey Freed and the Registrant.
11 Statement re Computation of Per-Share Earnings
16. Letter from Ernst & Young LLP, dated April 23, 1998, regarding change in certifying accountant (incorporated by reference to Exhibit 16 to the Registrant's Current Report on Form 8-K/A, dated April 23, 1998).
21 Subsidiaries of the Registrant
27 Article 5 - Financial Data Schedule
ACCUHEALTH, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE
Reports of Independent Auditors....................................... F - 2
Consolidated Balance Sheets at March 31, 2000 and March 31, 1999...... F - 3
Consolidated Statements of Operations and comprehensive income (loss) for the Years Ended March 31, 2000, 1999 and 1998.................. F - 4
Consolidated Statements of Stockholders' Equity (Deficiency) for the Years Ended March 31, 2000, 1999 and 1998...................... F - 5-6
Consolidated Statements of Cash Flows for the Years Ended March 31, 2000, 1999 and 1998................................................ F - 7-8
Notes to Consolidated Financial Statements............................ F - 9-25
FINANCIAL STATEMENT SCHEDULES
II. Valuation and Qualifying Accounts................................ F - 26
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of AccuHealth, Inc.
We have audited the accompanying consolidated balance sheets of AccuHealth, Inc. and subsidiaries as of March 31, 2000 and 1999, and the related consolidated statements of operations and comprehensive loss, stockholders' deficiency and cash flows for the years ended March 31, 2000, 1999 and 1998. Our audit also included the financial statement schedule listed in the index at item 14(a). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AccuHealth, Inc. and subsidiaries as of March 31, 2000 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statements schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the financial statements, the Company incurred a net loss of $8,203 during the year ended March 31, 2000, and as of that date, the Company's current liabilities exceeded its current assets by $3,797 and its total liabilities exceeded its total assets by $12,004 and there are uncertain conditions that the Company faces. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note 4. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We previously audited and reported on the consolidated statements of operations and cash flows of Healix Healthcare, Inc., and subsidiaries for the year ended September 30, 1996, prior to their restatement for the fiscal 1999 pooling of interests. The contribution of Healix Healthcare, Inc. and subsidiaries to total assets, revenues and net loss represent 32 percent, 608 percent, of the fiscal 1997 respective restated totals. Separate consolidated financial statements of AccuHealth, Inc. and subsidiaries included in the fiscal 1997 restated consolidated statements of operations and cash flows were audited and reported on separately by other auditors. We also have audited the combination of the accompanying consolidated statements of operations and cash flows for the year ended March 31, 1997, after restatement for the fiscal 1999 pooling of interests; in our opinion, such consolidated statements have been properly combined on the basis described in Note 1 of notes to consolidated financial statements.
July 11, 2000
Marcum & Kliegman LLP New York, New York
ACCUHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
See notes to consolidated financial statements.
ACCUHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
See notes to consolidated financial statements.
ACCUHEALTH, INC. AND SUBSIDIARIES
ACCUHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
ACCUHEALTH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
See notes to consolidated financial statements.
ACCUHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except shares and per share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Accuhealth Inc., ("Accuhealth") together with its subsidiaries (collectively, the "Company"), provides home health care services, including administration of a wide array of infusion therapies, sales of oral medications. The Company operates throughout the New York, New Jersey and Connecticut metropolitan area.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Accuhealth, Inc. and its subsidiaries, all of which are wholly owned. Significant intercompany accounts and transactions have been eliminated in consolidation.
On July 1, 1997, the Company consummated its acquisition of ProHealthCare Infusion Services, Inc. ("PHCIS") pursuant to an agreement and plan of merger, dated as of March 14, 1997, by and among the Company, ACH Acquiring Corp., a New Jersey corporation and a subsidiary of the Company, PHCIS, ProHealthCare, Inc., a Delaware corporation and the parent of PHCIS, Thomas Laurita and David Brian Cohen (the "PHCIS Merger Agreement"). The Company has determined that the initial merger consideration of 300,000 shares of Company Common Stock will be decreased by 59,386 shares of Company Common Stock pursuant to certain merger consideration adjustment provisions of the PHCIS Merger Agreement. The aggregate purchase price for the acquisition of ProHealthCare, Inc. stock was $1,208,000 which includes the cost of the acquisition, direct costs and assumption of certain liabilities of PHCIS. The acquisition has been accounted for by the purchase method of accounting. Pro forma disclosure information in connection with this transaction is not included because it is considered immaterial as it relates to the Company's financial statements in accordance with the regulations of the Securities and Exchange Commission.
During the fiscal year ended March 31, 1999, management determined that the goodwill resulting from the PHCIS Acquisition was impaired and warranted write off of the remaining balance. The impairment resulted from a severe decline in revenue, primarily caused by the filing for liquidation of HIP of New Jersey in February 1999.
On April 9, 1998, Accuhealth completed a merger with Healix Healthcare, Inc. ("Healix") whereby 1,488,850 shares of Accuhealth's common stock were exchanged for all of the outstanding common stock of Healix. Each share of Healix common stock was exchanged for .740721 shares of Accuhealth's common stock. The merger constituted a tax-free organization and has been accounted for as a pooling of interests. Accordingly, all prior period consolidated financial statements presented have been restated to include the combined results of operations, financial position and cash flows of Healix as though it had always been a part of the Company.
Prior to the merger, Healix had a fiscal year end of September 30. The accompanying consolidated financial statements for the year ended March 31, 1998 reflect restated numbers which combine financial statements for the twelve months ended March 31, 1998 of Accuhealth and September 30, 1997 of Healix.
Amounts shown in the consolidated statements of operations differ from those previously reported to stockholders due to a subsequent pooling-of-interests transaction. A reconciliation of sales and net income is as follows:
ACCUHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except shares and per share data)
Year Ended March 31 ------------------------ ------------------------ Net Sales: The Company, as previously reported... $ 18,603 Healix (pooled company) for twelve months ended September 30, 1997....... $ 13,070 ---------- $ 31,673 ========== Net income (loss): The Company as previously reported.... $ (206) Healix (pooled company) for twelve months ended September 30, 1997....... $ (271) ---------- $ (477) ==========
MANAGEMENT PLANS
Management has reduced the overhead by consolidating two operations into one, significantly reduced personnel costs, finalized payment arrangements with its largest trade creditor (see Note 6), eliminated non profitable business lines and ceased business with two managed care companies. The aforementioned is expected to enhance working capital. Further, significant collection efforts have been initiated, including engaging collection consultants and commencing several lawsuits. Management continues to negotiate better terms and financing from vendors and reducing corporate expenses. No assurances can be made that management will be successful in achieving its plans.
INVENTORIES
Inventories consist of over-the-counter and prescription drugs, infusion products and supplies, and home health care equipment and supplies and are priced at the lower of cost or market using the first-in, first-out ("FIFO") method.
CONTRACTUAL ALLOWANCES
Certain prescription pharmaceutical sales, medical equipment and supply revenues are recorded at the Company's established rates and reduced by estimated contractual allowances pursuant to third-party reimbursement arrangements.
GOODWILL
Goodwill in connection with the acquisitions is being amortized on a straight-line basis over a fifteen-year period. Amortization of goodwill charged to operations for the years ended March 31, 1999 and March 31, 1998 amounted to $96 and $56 respectively. In addition, $1,305 of unamortized goodwill has been written off during the last quarter ended March 31, 1999 as management determined such goodwill was impaired in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long lived Assets and for long lived Assets to be disposed of." The amount of goodwill impairment was measured based on the projected discounted future operating cash flows compared to the carrying value of goodwill.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" requires that the Company disclose estimated fair values of financial instruments. The carrying amounts
ACCUHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except shares and per share data)
reported in the statement of financial position for current assets and current liabilities qualifying as financial instruments is a reasonable estimate of fair value. The fair value of long-term debt is estimated to approximate fair market value based on the current rates offered to the Company for debt of the same remaining maturities.
MERGER RELATED COSTS
Merger transaction costs related to the Healix merger consists of fees for attorneys, accountants, financial printing and other expenses directly related to the merger. The Company recorded expenses incurred of $295 related to this merger in the period ended March 31, 1998.
FIXED ASSETS AND REVENUE PRODUCING EQUIPMENT
Fixed assets and revenue producing equipment are stated at cost. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets and for revenue producing equipment and leasehold improvements, over the shorter of the estimated useful lives or the term of the related leases.
EARNINGS PER SHARE
The Company calculated earnings per share in accordance with the provision of statements of accounting standards No. 128 Earnings per Share ("SFAS No. 128"). SFAS No. 128 eliminates the presentation of primary and fully diluted earnings per share ("EPS") and requires presentation of basic and diluted EPS. Basic EPS is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the year. Diluted EPS is computed by dividing the weighted average number of common shares and common stock equivalents outstanding during the year. For the year ended March 31, 1998 the weighted average number of common shares outstanding throughout the periods includes shares issued by Accuhealth as a result of the Healix merger. Common stock equivalents have been excluded from the weighted-average shares for 2000, 1999 and 1998, as inclusion is anti-dilutive. Potentially diluted securities, which consist of convertible debentures, stock options and warrants, may be potentially diluted in the future. All prior period EPS data has been restated to conform to the new pronouncement.
INCOME TAXES
The Company files consolidated Federal, combined New York State and combined New York City income tax returns. The Company's method of accounting for income taxes is the liability method required by Statements of Accounting Standards No. 109, "Accounting for Income Taxes."
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments with a maturity of three months or less when purchased to be cash equivalents. At March 31, 2000 and 1999, the Company had no cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Actual results could differ from those estimates.
ACCUHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except shares and per share data)
LONG-LIVED ASSETS
In 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of." In accordance with SFAS No. 121, the carrying values of long-lived assets are periodically reviewed by the Company and impairments are recognized if the expected future operating non-discounted cash flows derived from an asset are less than its carrying value.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to trade accounts receivable include amounts due from third party payers, primarily governmental agencies (Medicare and Medicaid). At March 31, 2000 and 1999, gross Medicare and Medicaid receivables aggregated $4,141 and $5,151 respectively.
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation for which action for noncompliance includes fines, penalties, and exclusion from the Medicare and Medicaid programs. The Company believes that it is in compliance with all applicable laws and regulations.
The Company's revenues from one customer accounted for 15%, 14% and 15% of the Company's net sales for the years ended March 31, 2000, 1999 and 1998, respectively. At March 31, 2000, 1999 and 1998, 4%, 5% and 6%, respectively, of net accounts receivable was due from this customer.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights. SFAS 123 requires compensation expense to be recorded (i) using the new fair value method or (ii) using existing accounting rules prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations with pro forma disclosure of what net income and earnings per share would have been had the Company adopted the new fair value method. The Company intends to continue to account for its stock based compensation plans in accordance with the provisions of APB 25.
COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.
BUSINESS SEGMENT
In 1998, the Company adopted Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures About Segments of an Enterprise and Related Information", "which supersedes SFAS No. 14, "Financial Reporting for Segments of A Business Enterprise." SFAS No. 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief
ACCUHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except shares and per share data)
operating decision maker in deciding how to allocate resources and in assessing performance. The company has determined that under SFAS No. 131, it operates in one segment of home health care services. The Company's customers and operations are within the United States.
ADVERTISING COSTS
Advertising cost are expensed as incurred and were $30, $57 and $18 for the years ended March 31, 2000, 1999 and 1998, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, The Financial Accounting Standards Board issued statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" which is required to be adopted in years beginning after June 15, 2000. Management does not anticipate that the adoption of the new statement will have a significant effect on results of operations or the financial position of the Company.
ACCUHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except shares and per share data)
2. MARKETABLE SECURITIES/MARGIN PAYABLE
Companies are required to classify each of their investments into one of three categories, with different accounting for each category. At March 31, 2000 and 1999, management has classified all their equity securities as available-for-sale securities, which are reported at fair market value, with unrealized gains and losses reported as other comprehensive income. Gains or losses on the sale of securities are recognized on a specific identification basis. The Company's investment in marketable securities for the years ended March 31, 2000 and 1999 is summarized as follows:
March 31, ---------------------- 2000 1999 --------- --------- Beginning balance ................ $ 2,372 $ 0
Purchases ........................ $ 758 4,382 Sales ............................ (3,088) (1,980) Realized gain (loss) ............. (84) 12 Unrealized loss .................. -- (42) Reclassification adjustment of losses included in net loss.... 42 -- --------- ---------
Ending balance ................... $ 0 $ 2,372
The Company may purchase up to 50% of its investments on margin advances by its broker. Interest, which is payable at 7% amounted to$3 and $31 during the years ended March 31, 2000 and 1999.
3. REVENUE PRODUCING EQUIPMENT, NET
The following summarizes the Company's investment in revenue producing equipment:
March 31, --------------------- Estimated 2000 1999 Useful Lives -------- -------- ------------ Revenue producing (In Thousands) Equipment primarily under capital lease................... $ 2,493 $ 3,154 3-5 years
Less accumulated depreciation and amortization................ 1,935 2,253 -------- --------
$ 558 $ 901 ======== ========
4. GOING CONCERN
As shown in the accompanying financial statements, the Company incurred a net loss of $8,203 during the year ended March 31, 2000. As of March 31, 2000 the Company's current liabilities exceeded its current assets by $3,797 and its total liabilities exceeded its total assets by $12,004. These factors, as well as the uncertain conditions that the Company faces in its day-to-day operations,
ACCUHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except shares and per share data)
create an uncertainty as to the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The continuation of the Company as a going concern is dependent upon the success of future financing and generating sufficient revenue.
Management has taken action and is formulating additional plans to strengthen the Company's working capital position and generate sufficient cash to meet its operating needs through March 31, 2001 and beyond. Among the actions taken, the Company is attempting to secure additional capital from venture capitalists seeking to merge several heath care related companies. Also, negotiations are in process with several trade vendors to convert the amounts owed them to long term notes. No assurance can be made that the management will be successful in achieving its plan.
5. FIXED ASSETS
6. NOTES PAYABLE AND LONG-TERM DEBT
NOTES PAYABLE - OTHER
The Company converted a portion of its accounts payable into a notes payable to trade creditors in the principal amount aggregating $4,212 and $600 during the years ended March 31, 2000 and 1999, respectively. These notes are payable in monthly installments of approximately $2 to $75 with interest rates ranging from 8.5% to 14.5%. The outstanding principal balance at March 31, 2000 and 1999 were $4,687 and $916, respectively.
ACCUHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except shares and per share data)
The weighted average interest rate for notes payable-other was 11.1%, 11.3%, and 11.7% for the years ended March 31, 2000, 1999, and 1998. The average amount of notes payable-other outstanding for the years ended March 31, 2000 and 1999 was approximately $1,453 and $1,159 respectively. Notes payable - other are principally short-term in nature. As such, fair value approximates the carrying value.
Maturities of notes payable at March 31, 2000 are as follows:
Fiscal Year Amount ------------ --------
2001 $1,400 2002 799 2003 766 2004 766 2005 766 There After 190 ------ $4,687 ======
NOTES PAYABLE - REVOLVING CREDIT FACILITY AND TERM LOAN
In April 1994, the Company entered into a Loan and Security Agreement (the "Agreement") with Rosenthal and Rosenthal ("Rosenthal") to borrow, under certain conditions and terms, up to $2,500 at an interest rate of prime plus 4-7/8%. Borrowings under the Agreement are collateralized by certain assets of the Company, including accounts receivables, inventories, equipment and fixtures. The Company's ability to use this revolving credit facility is dependent upon the level of its eligible receivables, as defined in the Agreement. In addition, the Company granted Rosenthal warrants to purchase 70,000 shares of the Company's common stock (see Note 12).
Effective February 1, 1996, the Company and Rosenthal amended the Loan and Security Agreement ("Amendment No. 1"). Amendment No. 1 extended the Agreement through April 28, 1997 and allowed the Company to borrow, under certain conditions and terms up to $3,500 (based on eligible accounts receivable, as defined) at an interest rate of prime plus 3 7/8%. Effective February 1, 1997, the Company and Rosenthal amended the Loan and Security Agreement ("Amendment No. 2") to extend the Agreement through April 1, 1998 and reduce the interest rate to prime plus 2 7/8%. In addition, the Company granted Rosenthal warrants to purchase an additional 30,000 shares of the Company's common stock (see Note 12). Commencing April 28, 1996, the Company was required to pay a facility fee of $35 per annum, which Amendment No. 2 increased to $40 per annum.
Amendment No. 2 also provided a $500 term loan to the Company due on April 1, 1998 with interest payable monthly at a rate of prime plus 5%.
Effective April 3, 1998, the Company agreed to an amendment of the Loan and Security Agreement. The amendment extended the agreement through April 1, 2000 and allows the Company to borrow, under certain conditions and terms, up to $9,000 under a revolving loan agreement at an interest rate of prime (prime at March 31, 1999 was 7.75%) plus 1 1/2%, as well as an overdraft line of $1,000 at prime plus 3%. The amendment also increased the term loan available to the Company to $750. In addition, the Company granted Rosenthal warrants to purchase 50,000 shares of the Company's common stock (see Note 12).
ACCUHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except shares and per share data)
The Agreement expired on April 1, 2000 and although the Company has exceeded its borrowing under the Rosenthal formula, Rosenthal has continued funding the Company on a daily basis while the Company explores other financing alternatives. Rosenthal is not obligated to continue funding the Company and at its own discretion, place the loan in default. If Rosenthal institutes default then the Company's ability to continue as a going concern is significantly impaired.
In connection with the RFE Investment Partners L.P. financing approval in July 1998 (see Note 6), the Company granted Rosenthal warrants to purchase 10,000 shares of the Company's common stock (See Note 13).
The revolving credit facility and the term loan bear interest at variable market rates and as such the carrying value approximates their fair value. The weighted average interest rate, including the facility fee, for the years ended March 31, 2000, 1999 and 1998 was 10.7%, 10.8% and 13.1%, respectively. The amount outstanding at March 31, 2000 and 1999 was $8,199 and $8,515, respectively.
7. 12% SUBORDINATED DEBENTURES
On July 14, 1998 the Company entered into a Note Purchase Agreement with RFE Investment Partners L.P., ("RFE") whereby RFE purchased $5,000 of the Company's 12% Subordinated Debentures. On August 21, 1998, Amendment No. 1 to the Note Purchase Agreement was executed, whereby Sterling/Carl Marks Capital, Inc. was added as an "Additional Purchaser". Sterling/Carl Marks Capital, Inc. purchased an additional $750 of 12% Subordinated Debentures. On October 26, 1998, Amendment No. 2 to the Note Purchase Agreement was executed, whereby Austin Marxe was added as an "Additional Purchaser". Austin Marxe purchase an additional $500 of 12% Subordinated Debentures.
Interest on the debentures is payable quarterly, in arrears. The Company has accrued six quarterly interest payments, as permitted in the agreement, which would otherwise be due. Such accrued interest payments bear interest at the same rate and are payable on the same terms as original interest on the debentures. The Company may further, at its sole discretion, pay any quarterly interest payments by executing an Interest Series Note in the amount of the interest due.
Maturity dates on the above debentures are July 14, August 26, and October 26, 2003 for RFE, Sterling/Carl Marks Capital, Inc. and Austin Marxe, respectively.
At the option of the note holders, the notes can be converted into shares of common stock equal to the quotient obtained by dividing the aggregate principal amount by the Conversion Price, as defined. The initial Conversion Price is $2.875 and the Conversion Price is subject to adjustment as set forth in the agreement. If a Conversion Event, as defined, occurs, the notes will be mandatory converted into the shares of common stock.
In addition, on the maturity date, the Company is required to deliver a Common Stock Warrant, as defined, to each of the holders with an exercise price per share equal to $0.01, to purchase certain shares of the Company's common stock. The number of shares of Common Stock to be purchased will be computed based upon a pre-determined formula as prescribed in the agreement.
8. PROVISION FOR UNCOLLECTIBLE AMOUNT DUE FROM MAJOR CUSTOMER
Since December 1996, the Company has been providing services to HIP Health Plan of New Jersey ("HIP"). In October 1997, HIP entered into a contract with Pinnacle Health Enterprises ("PHE"), a subsidiary of PHP Health Care Corporation (PHP), wherein PHE would manage the medical risk and provide all the health care services and supplies to HIP members and pay claims and contracts with providers on behalf of HIP. HIP requested that the Company coordinate its HIP network management and provider services and forward its invoices to PHE for processing and payment.
On November 19, 1998, PHP, including PHE, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. This action followed HIP's announced intention to terminate its Health Services Agreement with PHE.
ACCUHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except shares and per share data)
In December 1998, the Company received $795, representing 30% of open claims through November 20, 1998 and increased its allowance for doubtful accounts for the remaining balance of $1.1 million. This was in concert with the HIP Rehabilitation Plan implemented by the State of New Jersey.
9. CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment, furniture and fixtures, rental equipment and leasehold improvements under capital lease agreements which expire through December 2004.
CAPITAL LEASE-FACILITY
The Company previously occupied a pharmacy warehouse and office facility (the "Facility") which was obtained under a ten-year lease (the "Lease Agreement") with the New York City Industrial Development Agency (the "Agency") as lessor. The Agency issued to National Westminster Bank, U.S.A. (now "Fleet") $1,072 principal amount of its Industrial Development bonds (the "Bonds") pursuant to an Indenture of Mortgage and Agreement dated April 1, 1989 (the "Indenture") which created a lien on the facility. The Company also paid $228 in order for the Agency to purchase the warehouse.
At the end of the term of the lease, the Company purchased the Facility for one dollar pursuant to the terms of the capital lease. In March 2000 the building was sold for a loss of $502.
In lieu of rent the Company paid principal on the Bonds in quarterly installments of $18, plus interest at the rate of prime plus 1%. A final balloon payment of $232 plus interest thereon was paid on September 23, 1999.
OTHER CAPITAL LEASES
The Company leases durable medical equipment and computers under capital lease agreements which extend through March 31, 2004 with interest rates ranging from 6.50% to 16.71%.
Future minimum cash payments under capital leases with initial or remaining noncancellable lease terms in excess of one year at March 31, 2000 are as follows:
Other Capital Fiscal Year Leases ----------- ------------- 2001................................. $ 365 2002................................. 100 2003................................. 53 2004................................. 22 --------
Less interest........................ 66 -------- Present value of net minimum obligations.......................... 474 Less current portion................. 333 -------- Long term obligations at March 31, 2000 $ 141 ========
ACCUHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except shares and per share data)
10. CONTINGENCIES
There is one significant judgment against the Healix Health Care, Inc. a/k/a Accuhealth/Healix Health, Inc. in the amount of approximately $143. The Company is attempting to negotiate a payment plan.
In June 1995, a former employee had commenced an action in Supreme Court, New York County, New York against the Company and certain of its former and current officers, directors and shareholders. The action alleged that the Company breached plaintiff's employment agreement by withholding at least $750 in commissions allegedly owed to him. As of June 1998, this matter had thought to have been settled through court recommended mediation. In May 1999 the former employee petitioned the court to reopen the matter. The matter is still pending with the court; however, management believes there will be no material adverse effect on the Company's consolidated financial position, results of operations or cash flows.
There are several other lawsuits against the Company aggregating less than $200. The Company's management believes it has meritorious defenses.
11. 6% CONVERTIBLE PREFERRED STOCK
On December 14, 1994 and January 30, 1995, the Company completed the sale at $2.00 per share, of 1,325,000 shares of redeemable convertible preferred stock (the "Preferred Stock") with a 6% per annum cumulative dividend. During the quarter ended December 31, 1995, the Company sold at $2.50 per share, 25,000 additional shares of Preferred Stock to certain officers and directors of the Company. The Preferred Stock is convertible at any time at the option of the holder, subject to antidilution adjustments, into 1,350,000 shares of common stock. On October 10, 1998, 1,245,000 shares were converted in common shares at a 15% premium per an agreement with the Preferred stock holders. Accordingly, 1,431,750 shares of common stock were issued, leaving 105,000 shares of Preferred Stock outstanding. The holders of the Preferred Stock are entitled to voting rights equivalent to that of the common stock. The Preferred Stock is senior to the common stock in the event of a liquidation of the Company. The liquidation preference is $2.00 per share plus accrued and unpaid dividends.
The Preferred Stock was subject to mandatory redemption requirements of up to $4.00 per share plus accrued dividends. As of June 16, 1995, the 6% Convertible Preferred shareholders agreed to modify their stockholder agreements to negate the mandatory redemption requirements. This modification eliminates the need for recognition of accretion effective June 16, 1995, and results in the 6% Convertible Preferred Shares being classified as equity rather than debt.
The Company is obligated to pay annual dividends of $.12 per share on its 105,000 outstanding shares of Preferred Stock. Such dividends accrue daily, are payable each June 1 and December 1 and, at the election of the Company, may be paid in shares of Common Stock valued in accordance with the terms of such stock. Dividends on the Company's Preferred Stock are payable in preference and priority to any payment of any dividends on the common stock.
12. COMMITMENTS
OPERATING LEASES
A vendor has a security interest in certain assets of the Company, including accounts receivable, inventories, equipment and fixtures. This security interest is subordinate and junior in all respects to the Loan and Security Agreement.
To enhance productivity and provide technological enhancements, the Company signed a lease in June 1999 to rent 37,000 square feet in Yonkers, New York, where it moved in December 1999 to consolidate its offices and warehouses at an average cost of approximately $26,000 per month over the life of the lease. The initial term is for a period of sixty-five months with two renewals each for a sixty-month period.
ACCUHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except shares and per share data)
Future minimum cash payments under Leases with initial or remaining noncancellable lease terms in excess of one year at March 31, 2000 are as follows:
2001 $ 404 2002 323 2003 333 2004 343 2005 353 Thereafter 29 ------- 1,785
Less: sublease income to be received 130 -------
$ 1,655
Rent expense for the years ended March 31, 2000, 1999 and 1998 were $401, $261 and $173, respectively.
Rental income for the years ended March 31, 2000, 1999 and 1998 were $68, $0 and $0, respectively.
RELATED PARTY TRANSACTIONS
A director has a consulting arrangement with the Company whereby he receives a consulting fee of $3 per month inclusive of an office expense reimbursement of $1 per month. Another director has a consulting arrangement with the Company whereby he receives a consulting fee of $1 per month for serving as the Medical Director to the Company. In addition he receives reimbursement for expenses of approximately $1 per month.
The Company's president/chief executive officer has a loan payable to the Company in the amount of $100 due on demand bearing interest at 8% per year and is collateralized by 50,000 shares of the Company's preferred stock.
EMPLOYMENT AGREEMENT
At the Company's Board of Directors meeting on June 25, 1998, the Company renewed its employment agreement with its President and Chief Executive Officer through May 2, 2001. Under the employment agreement, the Company's President and Chief Executive Officer is entitled to an annual salary at a rate of $275 and 62,500 restricted shares of the Company's common stock.
13. STOCK OPTIONS AND WARRANTS
In September 1988, the Company adopted, and in September 1994 amended, the 1988 Stock Option Plan ("Stock Option Plan"). In 1999, the Company adopted a 1998 stock option plan, whereby all options granted under the 1988 Option Plan will be rolled over to the 1998 stock option plan. Under the plan, an aggregate maximum of 2,000,000 shares of the Company's common stock may be granted. The Stock Option Plan is administered by the Board of Directors, who are responsible for determining the individuals who will be granted options, the number of shares to be subject to each option, the option price per share, and the exercise period of each option. The option price may not be less than the fair market value of the Company's common stock. The fair market value is defined in the Stock Option Plan to be the mean between the closing bid and the closing asked prices for the common stock of the Company on the date of grant. No option may have a term in excess of ten years. As to any stockholder who owns 10% or more of the Company's common stock the option price per share will be no less than 110% of the fair market value of the Company's common stock on the date of grant and such options shall not have a term in excess of five years.
ACCUHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except shares and per share data)
During the years ended March 31, 2000 and 1999, the Board of Directors granted a total of 130,000 and 152,500 options, respectively, to purchase shares of the Company's common stock to employees with exercise prices ranging from $.43 to $2.875 per share. These options are exercisable in four equal annual increments.
Weighted Average Exercise Price Shares Per Share --------------------------
Outstanding at March 31, 1998.. 371,250 $ 2.22 Granted ....................... 152,500 2.88 Cancelled ..................... (4,500) (1.95) -------- ------- Outstanding at March 31, 1999.. 519,250 2.37 Granted ....................... 130,000 .44 Cancelled ..................... (288,500) (2.55) -------- ------- Outstanding at March 31, 2000.. 360,750 1.53 ======== ======= Exercisable at March 31, 1998.. 66,450 2.22 Exercisable at March 31, 1999.. 184,800 2.29 Exercisable at March 31, 2000.. 140,950 2.14
Separate from options issued under the Stock Option Plan, in February 1992, the Board of Directors granted to three former directors of the Company a total of 60,000 options to purchase shares of the Company's common stock ("1992 Options"). The exercise price of the 1992 Options is the mean between the closing bid and the closing asked prices for the common stock of the Company on the date of grant, which was $4.75. These options may be exercised in 25% increments on the first, second, third and fourth anniversary of the date of issue, and have a term of ten years. There were 16,000 options outstanding as of March 31, 2000.
During fiscal 1995, separate from options issued under the Stock Option Plan, the Company granted options to purchase 352,500 of common shares to officers and directors ("1995 Options"). The exercise prices of the 1995 Options range from $2.00 to $3.00. At March 31, 2000 and 1999, 37,500 and 295,000 shares of option are vested and 265,000 and -0- options were cancelled, respectively. There were 37,500 options outstanding as of March 31, 2000.
In September 1995, separate from options issued under the Stock Option Plan, the Company granted options to purchase 45,000 of the Company's common shares to directors ("1996 Options"). The exercise price of the 1996 Options are $1.875 with the shares vesting over five years from the date of issuance.
In June 1996, separate from options issued under the Stock Option Plan, the Company granted options to purchase 45,000 of the Company's common shares to directors ("1997 Options"). The exercise price of the 1997 Options are $1.625 with the shares vesting over five years from the date of issuance.
In June 1996, separate from options issued under the Stock Option Plan, the Company granted options to purchase 50,000 of the Company's common shares to a director ("June 1996 Options"). The exercise price of the June 1996 Options are $1.625 with the shares vesting over five years from the date of issuance.
In October 1996, separate from options issued under the Stock Option Plan, the Company granted options to purchase 20,000 of the Company's common shares to employees ("1997 Options"). The options carry an exercise price of $2.125 and vest over five years from the date of issuance. At March 31, 2000, 10,000 shares of option were cancelled and 10,000 shares of option were outstanding.
ACCUHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except shares and per share data)
In October 1997, separate from options issued under the Stock Option Plan, the Company granted options to purchase 40,000 of the Company's common shares to directors ("1998 Options"). The exercise price of the 1998 options are $2.125, with the shares vesting over five years from the date of issuance.
During fiscal 1998, separate from options issued under the Stock Option Plan, the Company granted options to purchase 70,000 of the Company's common shares to employees ("1998 Options"), with exercise prices ranging from $2.00 to $2.125. These options vest ratably in four equal increments beginning one year from date of issuance. At March 31, 2000, 50,000 shares of option were cancelled.
During fiscal 1999, separate from options issued under the Stock Option Plan, the Company granted options to purchase 40,000 of the Company's common shares to directors ("1999 Options"). The exercise price of the 1999 options are $2.875, with the shares vesting over five years from the date of issuance.
As of March 31, 2000 and 1999 an aggregate 1,310,750 and 1,147,750 shares, respectively, of the Company's common stock are reserved for issuance under the Stock Option Plan, and the 1992, 1995, 1996, 1997, 1998, 1999 and 2000 options. As of March 31, 2000, 326,450 shares of such options are exercisable.
During fiscal 2000, separate from options issued under the Stock Option Plan, the Company granted options to purchase 486,500 of the Company's common shares to officers and directors ("2000 Options"). The exercise price of the 2000 options are $.44, with these options vesting ratably in five equal increments beginning one year from the date of issuance.
Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The fair market value for these options was estimated at the date of grant using Black-Scholes option-pricing model with the following weighted-average assumptions for 2000, 1999 and 1998:
March 31, --------------------------- Assumption 2000 1999 1998 ---------- ------- ------- -------
Risk-free rate 6.15% 5.34% 5.47% Dividend yield 0% 0% 0% Volatility of the expected market price of the Company's common stock 251.85% 108.5% 94.9% Average life 5 years 5 years 5 years
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the value of its employee stock options.
ACCUHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except shares and per share data)
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the options. The Company's pro forma information follows:
Years Ended March 31, ---------------------------------- 2000 1999 1998 -------- -------- -------
Pro forma net loss ($8,148) ($5,692) ($704)
Pro forma net loss per share ($1.69) ($1.29) ($.22)
The weighted average fair value of options granted during the years ended March 31, 2000, 1999 and 1998 were $.44, $.86 and $1.86, respectively, for shares granted. The weighted-average remaining contractual life of options exercisable at March 31, 2000 is 3 years. The exercise prices range from $.44 to $4.75 for options outstanding as of March 31, 2000.
In April 1994, pursuant to the terms of a Loan and Security Agreement (see Note 4), the Company granted to a financing company warrants to purchase 70,000 shares of common stock at a price of $2.00 per share. On February 1, 1996, the Company granted warrants to purchase an additional 30,000 shares of common stock at $2.50 per share expiring on April 28, 1998. On February 1, 1997, the expiration date of the 100,000 warrants was amended to be the later of April 1, 2001 or thirty-six months following the last day of any term to which the Loan Commitment has been extended and the exercise price for all warrants was restated to $2.00 per share. During the year ended March 31, 1999, the Company granted to this financing company two warrants to purchase 50,000 and 10,000 shares of the Company's common stock at a price of $2 and $2.875 per share, respectively, expiring on July 1, 2003. These 60,000 shares of warrants have been valued at $0.88 per share in accordance with SFAS 123. As of March 31, 2000, no warrants have been exercised and an aggregate of 160,000 of the Company's common stock are reserved for issuance under these warrants.
14. EMPLOYEE SAVINGS AND PROFIT SHARING PLAN
In December 1986, the Company established a profit sharing and thrift plan (the "Plan") covering substantially all eligible employees. The Plan qualifies under Section 401(k) of the Internal Revenue Code. The Company has the option to match contributions equal to 25% of an eligible employee's pre-tax 401(k) contribution. The matching contribution is limited for any part of an eligible employee's pre-tax 401(k) contribution which exceeds 10% of their compensation.
At the discretion of the Board of Directors, the Company may also make additional contributions dependent on profits each year for the benefit of eligible employees under the Plan. The Company's contribution to the Plan was approximately $0, $71, and $33 for the years ended March 31, 2000, 1999 and 1998, respectively.
In August 1995, the Company adopted a deferred compensation plan for the Board of Directors (the "Directors Plan"). Under the Directors Plan, a director may elect to defer receipt of all or a specified portion of his or her compensation. As of March 31, 2000, no director had elected to defer any portion of his or her compensation.
ACCUHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except shares and per share data)
15. INCOME TAXES
The Company had net deferred assets and liabilities as follows:
March 31, --------------------------- 2000 1999 --------- --------- Federal, State and Local Net Operating Loss Carry forwards.. $ 6,651 $ 3,075
Allowance for Doubtful Accounts 945 727
Business Credit Carry-forwards. 52 52
Other.......................... 646 667 --------- ---------
Total.......................... 8,294 4,521
Less: Valuation Allowance..... (8,294) (4,521) --------- ---------
Net Deferred Assets............ $ 0 $ (0) ========= =========
ACCUHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except shares and per share data)
The following is a reconciliation of the amount of the income tax expense (benefit) attributable to continuing operations to the amount of income tax that would result from applying the federal rate to pretax income from continuing operations:
For the years ended March 31, ------------------------------- 2000 1999 1998 (Benefit) (Benefit) (Benefit) Liability Liability Liability --------- --------- --------- Income tax (benefit) at statutory rate at 34%..... $(2,657) $(1,216) $ (162)
Other decrease in valuation allowances related to the federal portion of continuing operations..... 30 (90) -- Amount attributable and pooling of interests.... -- -- 26 Loss producing no current benefit................. 2,657 1,216 240 --------- --------- --------- $ 30 $ (90) $ 104 ========= ========= =========
At March 31, 2000, based upon tax returns filed and to be filed, the Company has net operating loss carryforwards for U.S. tax purposes of approximately $14,293 of which $7,815 and $2,811 for the year ended March 31,2000 and 1999, respectively will expire in 2019 and 2020 and the remaining $3,667will begin to expire in 2010. A general business tax credit carryforward of approximately $52 available to reduce future payments of federal income taxes. The Company also has net operating loss carryforwards for New York State and City tax purposes of approximately $15,246 and $15,243, respectively.
The valuation allowances increased $3,773 in 2000, increased $2,234 in 1999. These amounts are equal to the changes in deferred tax assets to reflect the uncertainty as to realization of such assets.
The availability of net operating loss carryforwards and general business tax carryforwards is subject to various limitations under the Internal Revenue Code of 1986 as amended (the "Code"). Although a formal study has not been performed, it appears that as of March 31, 1995, the Company may have undergone an ownership change as defined by Section 382 of the Code. The effect of such an ownership change is to limit the amount of taxable income and tax liability that can be offset in any tax year by the net operating loss and credit carryovers.
16. SUBSEQUENT EVENTS
On May 24, 2000 the Company signed an Asset Purchase Agreement to sell its Durable Medical Equipment Business consisting of inventory and the customer base for approximately $800. Under the terms of the agreement, the Company will receive approximately $338 in cash (including a $98 non-refundable deposit), $425 in notes and the purchaser will assume lease obligations of approximately $87. The sale is subject to transferring the assets free of all liens; and, accordingly, the Company is in process of negotiating the release of the liens. The Company has until September 24, 2000 to obtain releases or the sale will be terminated. During this time, the purchaser is operating the business under an interim management agreement and is responsible for all expenses in connection with such operation.
In June 2000 Rosenthal purchased a $205 judgment against the Company from a drug distributor presenting in Chapter 11 of the Bankruptcy Code for $100 and is awaiting the Bankruptcy Court's approval. The $100 will be treated as an additional loan advance under the Rosenthal agreement.
ACCUHEALTH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (Amounts in thousands, except shares and per share data)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ACCUHEALTH, INC.
Date: July 14, 2000 By: /s/ GLENN C. DAVIS ------------------------------------- Glenn C. Davis President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: July 14, 2000 By: /s/ STANLEY GOLDSTEIN ------------------------------------- Stanley Goldstein Chairman of the Board of Directors
Date: July 14, 2000 By: /s/ GLENN C. DAVIS ------------------------------------- Glenn C. Davis Chief Executive Officer, President and Director
Date: July 14, 2000 By: /s/ E. VIRGIL CONWAY ------------------------------------- E. Virgil Conway, Director
Date: July 14, 2000 By: /s/ JEFFREY S. FREED, M.D. ------------------------------------- Jeffrey S. Freed, M.D. Director
Date: July 14, 2000 By: /s/ HOWARD C. LANDIS ------------------------------------- Howard C. Landis Director
Date: July 14, 2000 By: /s/ DONALD B. LOURIA, M.D. ------------------------------------- Donald B. Louria, M.D. Director
Date: July 14, 2000 By: /s/ SALLY HERNANDEZ-PINERO ------------------------------------- Sally Hernandez-Pinero, Director
Date: July 14, 2000 By: /s/ CORBETT A. PRICE ------------------------------------- Corbett A. Price, Director