================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
-----------------
(Mark One)
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2003
OR
|_| Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission File Number: 000-50371
Curative Health Services, Inc.
(Exact name of registrant as specified in its charter)
MINNESOTA 51-0467366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
150 Motor Parkway
Hauppauge, New York 11788
(631) 232-7000
(Address and phone number of principal executive offices)
-------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes |X| No |_|
As of November 5, 2003, there were 12,829,495 shares of the Registrant's
Common Stock, $.01 par value, outstanding.
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INDEX
Part I Financial Information Page No.
--------------------------------------------------------------------------------
Item 1 Financial Statements:
Condensed Consolidated Income Statements 3
Three and Nine Months ended September, 2003 and 2002
Condensed Consolidated Balance Sheets 4
September 30, 2003 and December 31, 2002
Condensed Consolidated Statements of Cash Flows 5
Nine Months ended September 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition 13
and Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk 20
Item 4 Controls and Procedures 20
Part II Other Information Page No.
--------------------------------------------------------------------------------
Item 1 Legal Proceedings 21
Item 2 Changes in Securities and Use of Proceeds 21
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-K 22
Signatures 24
2
Part I Financial Information
Item 1 Financial Statements
Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------------------- -------------------------
Revenues:
Products $ 39,215 $ 28,025 $ 127,038 $ 64,849
Services 7,372 8,826 22,258 26,686
--------- --------- --------- ---------
Total revenues 46,587 36,851 149,296 91,535
Costs and operating expenses:
Cost of product sales 27,744 19,310 90,299 46,118
Cost of services 3,254 3,562 10,114 11,455
Selling, general and administrative 12,014 7,086 32,848 18,619
--------- --------- --------- ---------
Total costs and operating expenses 43,012 29,958 133,261 76,192
--------- --------- --------- ---------
Income from operations 3,575 6,893 16,035 15,343
Interest income 3 4 7 57
Interest expense (661) (393) (1,673) (675)
--------- --------- --------- ---------
Income before income taxes 2,917 6,504 14,369 14,725
Income taxes 1,152 2,570 5,676 5,910
--------- --------- --------- ---------
Net income $ 1,765 $ 3,934 $ 8,693 $ 8,815
========= ========= ========= =========
Net income per common share, basic $ .14 $ .33 $ .70 $ .79
========= ========= ========= =========
Net income per common share, diluted $ .13 $ .31 $ .64 $ .73
========= ========= ========= =========
Weighted average common shares, basic 12,434 11,869 12,344 11,098
========= ========= ========= =========
Weighted average common shares, diluted 14,025 12,726 13,880 12,117
========= ========= ========= =========
See accompanying notes
3
Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 30, 2003 December 31, 2002
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 995 $ 2,643
Accounts receivable, net 43,945 36,438
Inventories 10,839 12,766
Prepaids and other current assets 2,394 2,212
Deferred tax assets 3,088 2,957
--------- ---------
Total current assets 61,261 57,016
Property and equipment, net 6,128 3,284
Intangibles subject to amortization, net 1,654 1,652
Intangibles not subject to amortization (trade names) 683 636
Goodwill 147,818 122,877
Other assets 1,827 979
--------- ---------
Total assets $ 219,371 $ 186,444
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,931 $ 21,786
Accrued expenses 11,833 11,579
Current portion of long-term liabilities 7,916 6,102
--------- ---------
Total current liabilities 39,680 39,467
Long-term liabilities 41,919 26,076
Stockholders' equity:
Common stock 127 121
Additional paid in capital 113,516 106,124
Retained earnings 25,736 17,043
Notes receivable - stockholders (1,607) (2,387)
--------- ---------
Total stockholders' equity 137,772 120,901
--------- ---------
Total liabilities and stockholders' equity $ 219,371 $ 186,444
========= =========
See accompanying notes
4
Curative Health Services, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
2003 2002
-------- --------
OPERATING ACTIVITIES:
Net income $ 8,693 $ 8,815
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,949 1,639
Provision for doubtful accounts 2,383 657
Equity in operations of investee -- (168)
Changes in operating assets and liabilities, net of effects from
Specialty Pharmacy acquisitions:
Accounts receivable (8,040) (2,409)
Other operating assets, net 2,654 523
Accounts payable and accrued expenses (6,228) (4,931)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,411 4,126
INVESTING ACTIVITIES:
Specialty Pharmacy acquisitions, net of cash acquired (24,316) (38,873)
Purchases of property and equipment (4,181) (616)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (28,497) (39,489)
FINANCING ACTIVITIES:
Proceeds from private placement, net of fees -- 16,462
Stock repurchases (1,524) --
Proceeds from exercise of stock options 3,940 4,238
Proceeds from repayment of notes receivable - stockholders 780 --
Borrowing from credit facilities 35,610 10,000
Repayment on credit facilities (13,368) --
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,438 30,700
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,648) (4,663)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,643 12,264
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 995 $ 7,601
======== ========
SUPPLEMENTAL INFORMATION
Interest paid $ 1,554 $ 352
======== ========
Income taxes paid $ 4,583 $ 1,501
======== ========
See accompanying notes
5
Curative Health Services, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The condensed consolidated financial statements are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements for the year ended December 31, 2002 and notes
thereto contained in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission. The results of operations for the three and
nine months ended September 30, 2003 are not necessarily indicative of the
results to be expected for the entire fiscal year ending December 31, 2003.
Stock Based Compensation Plans
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition to SFAS No. 123's fair value method of accounting for
stock-based employee compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 and Accounting Principles Board ("APB") No. 28,
"Interim Financial Reporting," to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting policy
with respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. While SFAS No.
148 does not amend SFAS No. 123 to require companies to account for employee
stock options using the fair value method, the disclosure provisions of SFAS No.
148 are applicable to all companies with stock-based employee compensation,
regardless of whether they account for that compensation using the fair value
method of SFAS No. 123 or the intrinsic value method of APB No. 25, "Accounting
for Stock Issued to Employees." The Company adopted SFAS No. 148 effective
December 31, 2002.
The Company grants options for a fixed number of shares to employees, directors,
consultants and advisors with an exercise price equal to the fair value of the
shares at the date of grant. The Company accounts for stock option grants under
the recognition and measurement principles of APB No. 25 and related
Interpretations because the Company believes the alternate fair value accounting
provided for under SFAS No. 123 requires the use of option valuation models that
were not developed for use in valuing employee stock options. Under APB No. 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recorded.
The following table illustrates the effect on net income and earnings per share
as if the Company had applied the fair value recognition provisions of SFAS No.
123 to stock-based compensation for the three and nine months ended September
30, 2003 and 2002 (in thousands, except per share data):
6
Curative Health Services, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation (continued)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Adjusted net income (see Note 3) $ 1,806 $ 3,934 $ 8,865 $ 8,815
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 1,145 970 3,470 2,394
--------- --------- --------- ---------
Pro forma net income $ 661 $ 2,964 $ 5,395 $ 6,421
Earnings per share:
Basic - as reported $ .14 $ .33 $ .70 $ .79
Basic - pro forma .05 .25 .44 .58
Diluted - as reported $ .13 $ .31 $ .64 $ .73
Diluted - pro forma .05 .23 .39 .53
Note 2. Reclassifications
Certain prior year amounts in the condensed consolidated financial statements
have been reclassified to conform to the current year classifications.
Note 3. Net Income per Common Share
Net income per common share, basic, is computed by dividing the net income by
the weighted average number of common shares outstanding. Net income per common
share, diluted, is computed by dividing adjusted net income (see below) by the
weighted average number of shares outstanding plus dilutive common share
equivalents. The following table sets forth the computation of weighted average
shares, basic and diluted, used in determining basic and diluted earnings per
share (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
--------------------- ---------------------
Weighted average shares, basic 12,434 11,869 12,344 11,098
Effect of dilutive stock options and convertible notes 1,591 857 1,536 1,019
------ ------ ------ ------
Weighted average shares, diluted 14,025 12,726 13,880 12,117
====== ====== ====== ======
7
Curative Health Services, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Net Income per Common Share (continued)
Adjusted net income and net income per common share, diluted, for the three and
nine months ended September 30, 2003 and 2002 were computed as follows (in
thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------- ------- ------- -------
Net income, as reported $ 1,765 $ 3,934 $ 8,693 $ 8,815
Add back interest related to convertible notes, net of tax 41 -- 172 --
------- ------- ------- -------
Adjusted net income $ 1,806 $ 3,934 $ 8,865 $ 8,815
======= ======= ======= =======
Net income per common share, diluted $ .13 $ .31 $ .64 $ .73
======= ======= ======= =======
Weighted average shares, diluted 14,025 12,726 13,880 12,117
======= ======= ======= =======
In accordance with SFAS No. 128, "Earnings Per Share," net income per common
share, diluted, for the three and nine months ended September 30, 2003 was
calculated under the "as if converted" method, which requires adding shares
related to convertible notes that have no contingencies to the denominator for
diluted earnings per share and adding to net income, the numerator, tax effected
interest expense relating to those convertible notes.
Note 4. Specialty Pharmacy Acquisitions
On February 3, 2003, the Company acquired MedCare, Inc. ("MedCare"), a specialty
pharmacy with locations in Alabama, Mississippi, West Virginia and Florida.
MedCare's primary product line is Synagis(R) for the prevention of respiratory
syncytial virus, while other product lines include growth hormone and hemophilia
clotting factor. The purchase price for MedCare was $6.6 million, of which $5.5
million was paid in cash, $.6 million in cash was placed into escrow for
purposes of providing for any indemnifications due to the Company and $.5
million in cash which was withheld pending delivery of agreed-upon working
capital. In May 2003, the working capital agreement was settled and in July
2003, approximately $.2 million out of the $.5 million in cash withheld was paid
to the former shareholder, which effectively reduced the purchase price to $6.3
million. The Company acquired approximately $1.8 million of MedCare's assets,
including $1.5 million in accounts receivable and $.3 million in inventory. The
Company also assumed $1.6 million of MedCare's liabilities. The excess of the
acquisition cost over the fair value of identifiable net assets acquired was
approximately $6.1 million, consisting of approximately $.3 million in covenants
not to compete, which are being amortized over three years from the date of
acquisition, and goodwill of approximately $5.8 million, which is not being
amortized for book purposes per SFAS No. 142, "Goodwill and Other Intangible
Assets." Fair market valuations have not yet been finalized and, as such, the
allocation of the purchase price is preliminary, pending completion of a formal
valuation.
8
Curative Health Services, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Specialty Pharmacy Acquisitions (continued)
On April 23, 2003, the Company acquired the assets and specialty pharmacy
business of All Care Medical, Inc. ("All Care"), a Louisiana-based Synagis(R)
pharmacy. The purchase price of All Care was $2.1 million, of which $1.0 million
was paid in cash at closing and $1.1 million was paid in cash in July 2003 which
consisted of approximately $.8 million paid to the sellers and approximately $.3
million to be held in escrow for 18 months until indemnifications rights under
the purchase agreement expire. The Company acquired approximately $.7 million of
All Care's assets, including $.6 million in accounts receivable, $.06 million in
inventory and $.04 million in fixed assets. The Company also assumed $.1 million
of All Care's liabilities. The excess of the acquisition cost over the fair
value of identifiable net assets acquired was approximately $1.5 million,
consisting of approximately $.05 million in covenants not to compete, which are
being amortized over two years from the date of acquisition, and trade name and
goodwill of approximately $.02 million and $1.4 million, respectively, which are
not being amortized for book purposes per SFAS No. 142. Fair market valuations
have not yet been finalized and, as such, the allocation of the purchase price
is preliminary, pending completion of a formal valuation.
On June 10, 2003, the Company acquired certain assets of Prescription City, Inc.
("Prescription City"), a Spring Valley, NY, specialty pharmacy business
specializing in the provision of chemotherapy and cancer drugs. Prescription
City's service area includes southern New York and some areas of northeastern
Pennsylvania. Drug therapies provided by Prescription City include chemotherapy,
HIV/AIDS drugs, Synagis(R), intravenous immune globulins ("IVIG"), pain
management and Remicade(R). The purchase price for Prescription City was $17.5
million, of which $16.5 million was paid in cash and $1.0 million in a one-year
note bearing interest at a rate of three percent and maturing on June 9, 2004.
The Company acquired approximately $.4 million of Prescription City's inventory,
none of its accounts receivables and assumed none of its liabilities. The excess
of the acquisition cost over the fair value of identifiable net assets acquired
was approximately $17.1 million, consisting of approximately $.1 million in
covenants not to compete, which are being amortized over two years from the date
of acquisition, and trade name and goodwill of approximately $.02 million and
$17.0 million, respectively, which are not being amortized for book purposes per
SFAS No. 142. Fair market valuations have not yet been finalized and, as such,
the allocation of the purchase price is preliminary, pending completion of a
formal valuation.
The acquisitions of MedCare, All Care and Prescription City were consummated for
purposes of expanding the Company's Specialty Pharmacy business and were
accounted for using the purchase method of accounting. The accounts of MedCare,
All Care and Prescription City and related goodwill are included in the
accompanying condensed consolidated balance sheets, and the operating results
are included in the accompanying condensed consolidated income statements from
the dates of acquisition.
Unaudited pro forma amounts for the three and nine months ended September 30,
2003 and 2002, assuming the MedCare, All Care and Prescription City acquisitions
had occurred on January 1, 2002, are as follows (in thousands, except per share
data):
9
Curative Health Services, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Specialty Pharmacy Acquisitions (continued)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Revenues $ 46,587 $ 42,125 $162,499 $124,010
Net income $ 1,765 $ 4,431 $ 10,500 $ 13,704
Net income per share, diluted $ .13 $ .35 $ .76 $ 1.08
The pro forma operating results shown above are not necessarily indicative of
operations in the periods following the acquisitions. The unaudited pro forma
operating results include the results of Apex Therapeutic Care, Inc. ("Apex")
and Infinity Infusion Care, Inc. ("Infinity") as if the Apex and Infinity
acquisitions, which occurred on February 28, 2002 and June 28, 2002,
respectively, had occurred on January 1, 2002.
Note 5. Segment Information
The Company adheres to the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company has two
reportable segments: Specialty Pharmacy Services and Specialty Healthcare
Services. In its Specialty Pharmacy Services business unit, the Company
contracts with insurance companies and other payors to provide direct to patient
distribution of, and other support services, including the provision or
coordination of injection or infusion services related to, biopharmaceutical and
pharmaceutical products, including Synagis(R) for the prevention of respiratory
syncytial virus. Revenues from Synagis(R) sales for the three and nine months
ended September 30, 2003 were approximately $.5 million and $18.8 million,
respectively. As respiratory syncytial virus occurs primarily during the winter
months, the major portion of the Company's Synagis(R) sales may be higher during
the first and fourth quarters of the calendar year which may result in
significant fluctuations in the Company's quarterly operating results.
In its Specialty Healthcare Services business unit, the Company contracts with
hospitals to manage outpatient Wound Care Center(R) programs. The Company
evaluates segment performance based on income from operations. At and for the
three months ended September 30, 2003, management estimates that corporate
general and administrative expenses allocated to the reportable segments are 62
percent for Specialty Pharmacy Services and 38 percent for Specialty Healthcare
Services. At and for the nine months ended September 30, 2003, management
estimates that corporate general and administrative expenses allocated to the
reportable segments are 58 percent for Specialty Pharmacy Services and 42
percent for Specialty Healthcare Services. Such allocations are not necessarily
indicative of costs that would be absorbed or eliminated in the event of a sale
of the Specialty Healthcare Services business which the Company is currently
exploring. Intercompany transactions are eliminated to arrive at consolidated
totals.
10
Curative Health Services, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Segment Information (continued)
The following tables present the results of operations and total assets of the
reportable segments of the Company at and for the three and nine months ended
September 30, 2003 and 2002 (in thousands):
At and for the three months ended September 30, 2003
----------------------------------------------------
Specialty Specialty
Pharmacy Healthcare Total
--------- ---------- --------
Revenues $ 39,215 $ 7,372 $ 46,587
Income from operations $ 3,027 $ 548 $ 3,575
Total assets $195,914 $ 23,457 $219,371
At and for the three months ended September 30, 2002
----------------------------------------------------
Specialty Specialty
Pharmacy Healthcare Total
--------- ---------- --------
Revenues $ 28,025 $ 8,826 $ 36,851
Income from operations $ 4,498 $ 2,395 $ 6,893
Total assets $132,182 $ 37,114 $169,296
At and for the nine months ended September 30, 2003
----------------------------------------------------
Specialty Specialty
Pharmacy Healthcare Total
--------- ---------- --------
Revenues $127,038 $ 22,258 $149,296
Income from operations $ 13,669 $ 2,366 $ 16,035
Total assets $195,914 $ 23,457 $219,371
At and for the nine months ended September 30, 2002
----------------------------------------------------
Specialty Specialty
Pharmacy Healthcare Total
--------- ---------- --------
Revenues $ 64,849 $ 26,686 $ 91,535
Income from operations $ 9,063 $ 6,280 $ 15,343
Total assets $132,182 $ 37,114 $169,296
The change in the total assets for Specialty Healthcare business to $23.5
million at September 30, 2003 from $37.1 million at September 30, 2002 is the
result of the pushdown of goodwill, resulting from the Company's Specialty
Pharmacy acquisitions, to the Specialty Pharmacy business.
11
Curative Health Services, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Employee and Facility Termination Costs
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which nullifies Emerging Issues Task Force
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 addresses financial accounting and reporting for
costs associated with exit or disposal activities initiated after December 31,
2002. SFAS No. 146 establishes fair value as the objective for initial
measurement of liabilities related to exit or disposal activities and requires
that such liabilities be recognized when incurred.
In the first quarter of 2003, the Company consolidated its pharmacy operations
in California which resulted in the termination of a total of 25 employees and
the vacating of a leased facility. The Company recorded a charge of $1.6 million
related to this activity.
The following provides a reconciliation of the related accrued costs associated
with the pharmacy consolidation, which are included in Selling, General and
Administrative expenses on the accompanying condensed consolidated income
statements at and for the three and nine months ended September 30, 2003 (in
thousands):
At and for the three months ended September, 30, 2003
--------------------------------------------------------------
Beginning Costs Charged Costs Paid or Ending
Balance to Expense Otherwise Settled Balance
------- ---------- ----------------- -------
Employee termination costs $ 132 $ -- $ 93 $ 39
Facility termination costs 541 -- 50 491
------ ------ ------ ------
$ 673 $ -- $ 143 $ 530
At and for the nine months ended September, 30, 2003
--------------------------------------------------------------
Beginning Costs Charged Costs Paid or Ending
Balance to Expense Otherwise Settled Balance
------- ---------- ----------------- -------
Employee termination costs $ -- $ 871 $ 832 $ 39
Facility termination costs -- 759 268 491
------ ------ ------ ------
$ -- $1,630 $1,100 $ 530
Note 7. Changes in Capital Structure
During the first nine months of 2003, the Company had the following significant
changes in capital structure:
Repurchase of Common Stock. On January 29, 2003, the selling shareholder of
Hemophilia Access, Inc. ("HAI") exercised a put option right under the Stock
Purchase Agreement of HAI, requiring the Company to repurchase shares issued to
acquire HAI. The Company repurchased 97,070 of such shares of common stock for
approximately $1.5 million.
Notes Converted into Common Stock. In July 2003, certain selling shareholders of
Infinity exercised their rights under convertible notes and converted
approximately $4.9 million of such notes into 300,389 shares of the Company's
common stock.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Curative Health Services, Inc. ("Curative" or the "Company"), through its two
business units, Specialty Pharmacy Services and Specialty Healthcare Services,
seeks to deliver high-quality results and exceptional patient satisfaction for
patients experiencing serious or chronic medical conditions.
In its Specialty Pharmacy operations, the Company purchases various
pharmaceutical products, including both biopharmaceuticals (biological products,
e.g., hemophilia factor and intravenous immune globulins, or IVIG), as well as
pharmaceuticals (i.e., MedImmune Inc.'s Synagis(R) and Centocor, Inc.'s
Remicade(R)), from suppliers to provide direct-to-patient distribution of,
education about, reimbursement and other support services, including injection
or infusion services, related to these biopharmaceutical and pharmaceutical
products. The Company's Specialty Pharmacy Services revenues are derived
primarily from fees paid by insurance companies and other payors for the
purchase and distribution of these biopharmaceuticals and pharmaceuticals and
for injection or infusion services provided. Further, as part of its Specialty
Pharmacy Services operations, the Company provides biopharmaceutical and
pharmaceutical product distribution and support services under contract with
retail pharmacies for which it receives product supply and related service fees.
The biopharmaceutical and pharmaceutical products distributed and the injection
and infusion therapies offered by the Company are used by patients with chronic
or severe conditions such as hemophilia, respiratory syncytial virus, immune
system disorders, cancer and chemotherapy, rheumatoid arthritis, hepatitis C,
multiple sclerosis and growth hormone deficiency. As of September 30, 2003, the
Specialty Pharmacy Services business unit had approximately 306 payor contracts
and 22 retail pharmacy contracts. The Special Pharmacy Services business unit
operates in at least 40 states.
The period-to-period comparability of the Company's financial statements is
affected by its acquisition activity. The Company entered the Specialty Pharmacy
Services business with its acquisition of eBioCare.com, Inc. ("eBioCare") in
March 2001, which was its first acquisition of a specialty pharmacy services
business. Since then, the Company has completed ten specialty pharmacy
acquisitions (including the acquisition of eBioCare).
The following provides approximate percentages of Specialty Pharmacy Services'
patient revenues for the nine months ended September 30, 2003 and for the year
ended December 31, 2002:
September 30, December 31,
2003 2002
------------- ------------
Private Payors 42.8% 37.1%
Medicaid 50.2% 54.1%
Medicare 7.0% 8.8%
The decrease in the percentage of the Company's revenues from Medicaid payors
and the increase in the percentage of its revenues from private payors for the
nine months ended September 30, 2003 compared to the year ended December 31,
2002 is the result of increased sales of Synagis(R).
13
The Specialty Healthcare Services business unit contracts with hospitals to
manage outpatient Wound Care Center programs. These Wound Care Center programs
offer a comprehensive range of services that enable the Company to provide
patient-specific wound care diagnosis and treatments on a cost-effective basis.
Specialty Healthcare Services currently operates two types of Wound Care Center
programs with hospitals: a management model and an "under arrangement" model.
The Company is currently exploring the possible sale of this business. The
Company's Wound Care Center network consists of approximately 86 out patient
clinics located on or near campuses of acute care hospitals in 28 states.
In the management model, Specialty Healthcare Services provides management and
support services for a chronic wound care facility owned or leased by the
hospital and staffed by employees of the hospital, and generally receives a
fixed monthly management fee or a combination of a fixed monthly management fee
and a variable case management fee. In the "under arrangement" model, Specialty
Healthcare Services provides management and support services, as well as the
clinical and administrative staff, for a chronic wound care facility owned or
leased by the hospital, and generally receives fees based on the services
provided to each patient. In both models, physicians remain independent.
Specialty Healthcare Services offers assistance in recruiting and provides
training in wound care to the physicians and staff associated with the Wound
Care Center programs. As of September 30, 2003, the Company had 79 management
and seven "under arrangement" Wound Care Center programs.
In August 2003, the Company effected a holding company reorganization in which
each share of the registrant's outstanding common stock was deemed to have been
exchanged for one share of common stock in a newly formed corporation (the "new
holding company"). Pursuant to Section 302A.626 (subd. 7) of the Minnesota
Business Corporation Act, the articles of incorporation, bylaws and name of the
new holding company, and the authorized capital stock of the new holding company
(including the designations, rights, powers and preferences of such capital
stock and the qualifications, limitations and restrictions thereof) are all
consistent with those of the registrant as it existed prior to the
reorganization. In addition, the directors and executive officers of the new
holding company are the same individuals who were directors and executive
officers, respectively, of the registrant prior to the reorganization. The terms
"Curative" and the "Company" as used in this report refer, for periods prior to
the reorganization, to the corporation that was the registrant prior to the
reorganization, and, for periods after the reorganization, to the new holding
company.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these condensed consolidated
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the condensed consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, management evaluates its estimates
and judgments, including those related to revenue recognition, bad debts,
inventories, income taxes and intangibles. Management bases its estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. Management believes
the following critical accounting policies, among others, affect its more
significant judgments and estimates used in the preparation of its condensed
consolidated financial statements:
14
Revenue recognition. Specialty Pharmacy Services' revenues are recognized, net
of any contractual allowances, when the product is shipped to a patient, retail
pharmacy or a physician's office. Specialty Healthcare Services' revenues are
recognized after the management services are rendered and are billed monthly in
arrears.
Trade receivables: Considerable judgment is required in assessing the ultimate
realization of receivables, including the current financial condition of the
customer, age of the receivable and the relationship with the customer. The
Company estimates its allowances for doubtful accounts using these factors. If
the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. In circumstances where the Company is aware of a
specific customer's inability to meet its financial obligations (e.g.,
bankruptcy filings), a specific reserve for bad debts is recorded against
amounts due to reduce the receivable to the amount the Company reasonably
believes will be collected. For all other customers, the Company has reserves
for bad debt based upon the total accounts receivable balance. As of September
30, 2003, the Company's reserve for accounts receivable was approximately 7.2
percent of total receivables.
Inventories: Inventories are carried at the lower of cost or market on a first
in, first out basis. Inventories consist of high cost biopharmaceutical and
pharmaceutical products that, in many cases, require refrigeration or other
special handling. As a result, inventories are subject to spoilage or shrinkage.
On a quarterly basis, the Company performs a physical inventory and determines
whether any shrinkage or spoilage adjustments are needed. Although the Company
believes its inventories balances at September 30, 2003 are reasonably accurate,
the Company cannot assure that spoilage or shrinkage adjustments will not be
needed in the future. The recording of any such reserve may have a negative
impact on the Company's operating results.
Deferred tax assets: The Company has approximately $3.1 million in deferred tax
assets as of September 30, 2003 to record against future income. The Company
does not have a valuation allowance against this asset as it believes it is more
likely than not that the tax assets will be realized. The Company has considered
future income expectations and prudent tax strategies in assessing the need for
a valuation allowance. In the event the Company determines in the future that it
needs to record a valuation allowance, an adjustment to deferred tax assets
would be charged against income in the period of determination.
Goodwill and intangibles: Goodwill represents the excess of purchase price over
the fair value of net assets acquired. Intangibles consist of the separately
identifiable intangibles, such as pharmacy and customer relationships, covenants
not to compete and trademarks. Effective January 1, 2002, the Company adopted
SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that
goodwill and intangible assets with indefinite lives no longer be amortized but
rather be reviewed annually, or more frequently if impairment indicators arise,
for impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. In
assessing the recoverability of the Company's goodwill and intangibles, the
Company must make assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets. If these estimates
or assumptions change in the future, the Company may need to record an
impairment charge for these assets. An impairment charge would reduce operating
income in the period it was determined that the charge was needed.
15
Results of Operations
Revenues. The Company's revenues for the third quarter of 2003 increased 26
percent to $46.6 million compared to $36.9 million for the third quarter of the
prior fiscal year. For the first nine months of 2003, revenues increased 63
percent to $149.3 million from $91.5 million for the same period in 2002. The
increase in revenues is the result of the Specialty Pharmacy acquisitions the
Company completed in 2003 and 2002, as well as internal growth in hemophilia
products, offset by a reduction in service revenues in the Specialty Healthcare
business unit.
Product revenues, attributable entirely to the Specialty Pharmacy Services
business unit, increased $11.2 million, or 40 percent, to $39.2 million in the
third quarter of 2003 from $28.0 million in the third quarter of 2002. For the
third quarter of 2003, product revenues included $28.3 million of hemophilia
related products, $4.9 million in IVIG and infusables sales, $3.7 million in
Oncology sales, $.5 million in Synagis(R) sales and $1.8 million of other
injectable products. For the same period in 2002, product revenues included
$23.4 million of hemophilia related products, $3.5 million in IVIG and
infusables and $1.1 million of other injectable products. For the first nine
months of 2003, product revenues increased $62.2 million, or 96 percent, to
$127.0 million compared to $64.8 million for the same period in 2002. For the
first nine months of 2003, product revenues included $85.5 million of hemophilia
related products, $13.6 million in IVIG and infusables sales, $4.6 million in
Oncology sales, $18.8 million in Synagis(R) sales and $4.5 million of other
injectable products. For the same period in 2002, product revenues included
$55.9 million of hemophilia related products, $4.8 million in IVIG and
infusables and $4.1 million of other injectable products. The increases in
revenues for the three and nine months ended September 30, 2003 compared to the
same periods in 2002 are primarily the result of growth of hemophilia patient
related revenues and the inclusion of Synagis(R), IVIG and infusable revenues
and Oncology sales as the result of the Specialty Pharmacy acquisitions
completed in 2003 and 2002. As respiratory syncytial virus occurs primarily
during the winter months, the major portion of the Company's Synagis(R) sales
may be higher during the first and fourth quarters of the calendar year which
may result in significant fluctuations in the Company's quarterly operating
results.
Service revenues, attributed entirely to the Specialty Healthcare Services
business unit, decreased 16 percent to $7.4 million in the third quarter of 2003
from $8.8 million in the third quarter of 2002. For the first nine months of
2003, service revenues decreased 17 percent to $22.3 million compared to $26.7
million for the same period in 2002. The service revenues decreases of $1.5
million for the third quarter 2003 and $4.4 million for the first nine months of
2003 are attributable to the operation of 86 Wound Care Center programs at the
end of the third quarter of 2003 as compared to 97 at the end of the third
quarter of 2002 as the result of contract terminations. For the third quarter of
2003, the Company signed five new Wound Care Management contracts and had three
contracts terminated. For the first nine months of 2003, the Company signed nine
new contracts and had nine contracts terminated. Program terminations by client
hospitals have been effected for reasons such as reduced reimbursement,
financial restructuring, layoffs, bankruptcies, hospital closings or a
hospital's decision to maintain a wound care center without external management.
The continued termination, non-renewal or renegotiations of a material number of
management contracts or the inability to sign new contracts could result in a
continued decline in the Company's Specialty Healthcare Services business unit
revenue. The Company is currently exploring the possibility of a sale of the
Specialty Healthcare Services business unit.
Cost of Product Sales. Cost of product sales, attributable entirely to the
Specialty Pharmacy Services business unit, increased 44 percent to $27.7 million
in the third quarter 2003 from $19.3 million in the third quarter of 2002. For
the first nine months of 2003, cost of product sales increased 96 percent to
$90.3 million compared to $46.1 million for the same period in 2002. The
increases of $8.4 million for the third quarter of 2003 and $44.2 million for
the first nine months of 2003 are attributable to the internal
16
growth of hemophilia patient revenues and the inclusion of the Specialty
Pharmacy acquisitions completed in 2003 and 2002. As a percentage of product
sales, cost of product sales for the third quarter of 2003 was 71 percent
compared to 69 percent for the same period in 2002. For the first nine months of
2003, cost of product sales as a percentage of product revenue was flat at 71
percent compared to the first nine months of 2002.
Cost of Services. Cost of services, attributed entirely to the Specialty
Healthcare Services business unit, decreased nine percent to $3.3 million in the
third quarter of 2003 from $3.6 million in the third quarter of 2002. For the
first nine months of 2003, cost of services decreased 12 percent to $10.1
million compared to $11.5 million for the same period in 2002. The decreases of
$.3 million for the third quarter and $1.3 million for the first nine months of
2003 compared to the same periods in 2002 are attributable to reduced staffing
and operating expenses related to the operation of 86 programs at the end of the
third quarter of 2003 as compared to 97 programs operating at the end of the
third quarter of 2002. As a percentage of service revenues, cost of services for
the third quarter of 2003 was 44 percent compared to 40 percent for the same
period in 2002. This increase is primarily attributable to the decline in
service revenues. For the first nine months of 2003, cost of services as a
percentage of service revenues was 45 percent compared to 43 percent for the
same period in 2002.
Selling, General and Administrative. Selling, general and administrative
expenses increased $4.9 million, or 70 percent, to $12.0 million for the third
quarter of 2003 from $7.1 million for the same period in 2002. For the third
quarter of 2003, selling, general and administrative expenses consisted of $4.4
million related to the Specialty Pharmacy Services business, $1.2 million
related to the Specialty Healthcare Services business, $4.6 million related to
corporate services and $1.8 million in charges, including $.7 million in costs
associated with a convertible note offering not completed, $.5 million in
severance costs related to the terminations of certain executives during the
quarter, $.3 million in costs related to an acquisition not completed and $.3
million in additional costs for the previously disclosed corporate legal
structure reorganization. The increase of $4.9 million is primarily due to an
increase of $1.7 million of Specialty Pharmacy Services expenses attributable to
the Specialty Pharmacy acquisitions completed in 2003 and 2002, increased costs
of $1.4 million related to additional corporate staff to support these
acquisitions and the $1.8 million in charges.
For the first nine months of 2003, selling general and administrative expenses
increased $14.2 million, or 76 percent, to $32.8 million from $18.6 million for
the same period in 2002 and consisted of $12.7 million related to the Specialty
Pharmacy Services business, $3.5 million related to the Specialty Healthcare
Services business, $11.3 million related to corporate services and $5.3 million
in charges. The $5.3 million in charges included $.7 million in costs associated
with a convertible note offering not completed, $.5 million in severance costs
related to the terminations of certain executives, $.3 million in costs related
to an acquisition not completed and $.3 million in additional costs for the
corporate legal structure reorganization (recorded in the third quarter of
2003); $.8 million in charges for early termination of the Company's previous
credit line and legal and other costs associated with the corporate legal
structure reorganization (recorded in the second quarter of 2003); and $2.7
million related to the Company's consolidation of its pharmacy operations in
California and other costs associated with the settlement of executive
departures in March 2002 (recorded in the first quarter of 2003). The increase
of $14.2 million is primarily due to an increase of $6.6 million of Specialty
Pharmacy Services expenses attributable to the Specialty Pharmacy acquisitions
completed in 2003 and 2002, increased costs of $2.0 million related to
additional corporate staff to support these acquisitions, $.3 million
attributable the Specialty Healthcare business and the $5.3 million in charges.
As a percentage of revenues, selling, general and administrative expenses were
26 percent in the third quarter of 2003 compared to 19 percent for same period
in 2002, and 22 percent for the first nine months of 2003 compared to 20 percent
for the same period in 2002.
17
Net Income. Net income was $1.8 million, or $.13 per diluted share, in the third
quarter of 2003 compared to $3.9 million, or $.31 per diluted share, in the
third quarter of 2002. For the first nine months of 2003, net income was $8.7
million, or $.64 per diluted share, compared to net income of $8.8 million, or
$.73 per diluted share, for the same period in 2002. The decreases in earnings
of $2.2 million for the third quarter of 2003 and $.1 million for the first nine
months of 2003 are primarily attributable to the charges of $1.8 million and
$5.3 million for the third quarter and first nine months of 2003, respectively,
the costs related to hiring a sales force for the Specialty Pharmacy business
unit and corporate hires to support acquisition growth.
Liquidity and Capital Resources
Working capital was $21.6 million at September 30, 2003 compared to $17.5
million at December 31, 2002. Total cash and cash equivalents as of September
30, 2003 was $1.0 million. The ratio of current assets to current liabilities
was 1.5:1 at September 30, 2003 and 1.4:1 at December 31, 2002.
Cash flows provided by operating activities for the nine months ended September
30, 2003 totaled $1.4 million, primarily attributable to the $8.7 million in net
income, $1.9 million in depreciation and amortization, a decrease of $2.7
million in other operating assets, net, offset by an increase of $5.7 million in
accounts receivable, net, and a decrease of $6.2 million in accounts payable and
accrued expenses of which approximately $4.0 million was in payments made
related to the $5.3 million in charges incurred in the first nine months of
2003.
Cash flows used in investing activities totaled $28.5 million attributable to
$25.8 million used in the acquisitions completed during the first nine months of
2003 and $4.2 million used in fixed asset purchases, offset by $1.5 million in
proceeds received from accounts receivable, indemnification and other claims
related to the purchases of eBioCare and Apex, transactions which were recorded
as purchase price adjustments in the first quarter of 2003.
Cash flows provided by financing activities totaled $25.4 million, attributable
to proceeds of $35.6 million in borrowings from the Company's credit facilities,
$3.9 million in proceeds from the exercise of stock options and $.8 million in
proceeds from repayment of notes receivable - stockholders, offset by $1.5
million of cash used for the repurchase of stock used in the purchase of HAI and
$13.4 million used in repayments of debt obligations.
For the first nine months of 2003, the Company experienced a net increase in
accounts receivable of $7.5 million attributable to the growth in revenues and
an increase in accounts days outstanding. Days sales outstanding were 88 days as
of September 30, 2003, as compared to 62 days at December 31, 2002. At September
30, 2003, days sales outstanding for the Specialty Pharmacy Services business
were 93 days and 63 days for the Specialty Healthcare business. The Company has
significant receivables from the State of California Medicaid Program, Medi-Cal,
and experienced an increase in receivable days outstanding from Medi-Cal by
approximately four days and 26 days for the three and nine months ended
September 30, 2003, respectively. The State of California has experienced large
budget deficits, and this has seemingly caused this increase in days sales
outstanding.
As of September 30, 2003, the Company's current portion of long-term liabilities
of $7.9 million included $4.0 million representing the current portion of the
Company's borrowings from its commercial lender, $2.0 million representing the
current portion of the Department of Justice ("DOJ") obligation, $.9 million
representing the current portion of a convertible note payable used in
connection with the purchase of Apex in February 2002 and $1.0 million
representing the note payable used in connection with the purchase of certain
assets of Prescription City in June 2003. As of September 30, 2003, the
Company's
18
long-term liabilities of $41.9 million included $2.5 million related to the DOJ
obligation, a $2.4 million promissory note representing the long-term portion of
the convertible note used in the purchase of Apex, $1.2 million in convertible
notes payable related to the purchase of Infinity in June 2002, $3.0 million in
a convertible note payable related to the purchase of Home Care of New York,
Inc. in October 2002 and $32.8 million in borrowed funds from the Company's
commercial lender.
The Company's current portion of long-term liabilities and long-term liabilities
increased $17.7 million to $49.8 million as of September 30, 2003 compared to
$32.2 million as of December 31, 2002. The increase is due to cash used of $25.2
million for the acquisitions of MedCare, All Care and certain assets of
Prescription City during the first nine months of 2003, for which the Company
drew upon its credit facilities.
The Company's longer term cash requirements include working capital for the
expansion of its Specialty Pharmacy Services business and for acquisitions.
Other cash requirements are anticipated for capital expenditures in the normal
course of business, including the acquisition of software, computers and
equipment related to the Company's management information systems. As of
September 30, 2003, the Company has a $4.5 million obligation, payable over
approximately three years, to the DOJ related to the settlement of its
litigation previously disclosed, as well as bank debt and convertible and
promissory notes totaling $45.3 million payable over various periods through
2007. The Company expects that, based on its current business plan, its expected
operating cash flow and existing credit facilities will be sufficient to meet
working capital needs and a minimal number of acquisitions. Any acquisitions of
substantial size will require the Company to either increase its credit
facilities, issue equity or offer some combination of both debt and equity.
In July 2003, certain selling shareholders of Infinity exercised their right
under the convertible notes and converted approximately $4.9 million of the
notes into 300,389 shares of the Company's common stock.
Credit Facility
In June 2003, the Company completed a new senior secured credit facility with GE
Capital. Under the credit agreement, the Company obtained a secured revolving
credit facility of up to $15 million, of which it can utilize up to $5 million
as a letter of credit subfacility and up to $5 million as a swingline
subfacility (i.e., a short-term loan advance facility), and a $20 million
secured term loan which was subsequently increased to $25 million, for a total
facility of $40 million. As of September 30, 2003, the Company had $36.9 million
outstanding against these facilities. The Company used the funds available under
this new credit facility to immediately pay all of its outstanding borrowings,
accrued interest and termination fees under its credit facility with Healthcare
Business Credit Corporation and to finance its acquisition of certain assets of
Prescription City, Inc. If GE Capital, using its best efforts, is able to
syndicate this credit facility with other lenders, then funds available to the
Company under the credit facility may be increased by up to $45 million to fund
future acquisitions.
Cautionary Statement
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements include statements regarding
intent, belief or current expectations of the Company and its management. These
forward-looking statements are not guarantees of future performance and involve
a number of risks and uncertainties that may cause the Company's actual results
to differ materially from the results discussed in these statements. Factors
that might cause such differences include, but are not limited to, those
described under the heading, "Critical Accounting Policies and Estimates"
herein, or
19
those described in Exhibit 99.1 to this Form 10-Q and other factors
described in the Company's future filings with the SEC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company does not have operations subject to risks of material foreign
currency fluctuations, nor does it use derivative financial instruments in its
operations or investment portfolios. The Company places its investments in
instruments that meet high credit quality standards, as specified in the
Company's investment policy guidelines. The Company does not expect any material
loss with respect to its investment portfolio or exposure to market risks
associated with interest rates.
Item 4. Controls and Procedures
The Company carried out an evaluation under the supervision and with the
participation of its management, including its Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), of the effectiveness of its disclosure
controls and procedures as of September 30, 2003, the end of the period covered
by this report. Disclosure controls and procedures are procedures that are
designed with the objective of ensuring that information required to be
disclosed in the Company's reports filed under the Securities Exchange Act of
1934, such as this Form 10-Q, is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms. Based on that evaluation, the CEO and CFO have concluded that
the disclosure controls and procedures are effective to satisfy the objectives
for which they are intended.
During the quarter ended September 30, 2003, there has been no change in the
Company's internal controls over financial reporting that has materially
affected or is reasonably likely to materially affect, its internal controls
over financial reporting.
20
Curative Health Services, Inc. and Subsidiaries
Part II Other Information
Item 1. Legal Proceedings
In the normal course of its business, the Company may be involved in lawsuits,
claims, audits and investigations, including any arising out of services or
products provided by or to the Company's operations, personal injury claims and
employment disputes, the outcome of which, in the opinion of management, will
not have a material adverse effect on the Company's financial position or
results of operations.
Item 2. Changes in Securities and Use of Proceeds
(c)(i) Holding Company Reorganization
In August 2003, the Company completed a holding company
reorganization in which each share of common stock outstanding prior
to the reorganization was exchanged, on a share for share basis, for
one share of common stock of the new holding company. As a result,
each shareholder of the Company prior to the reorganization became
the owner of an identical number of shares of common stock of the
new holding company after the reorganization. Additionally, each
option to purchase shares of common stock outstanding prior to the
reorganization was automatically converted into an option to
purchase, upon the same terms and conditions, an identical number of
shares of the new holding company's common stock.
The conversion of shares of capital stock occurred without an
exchange of certificates. Accordingly, the certificates formerly
representing shares of capital stock outstanding prior to the
reorganization are deemed to represent the same number of shares of
capital stock in the new holding company. The exchange of shares was
effected without registration under the Securities Act in reliance
on Section 3(a)(9) of that Act as an exchange of securities by an
issuer with its existing security holders where no commission or
other remuneration was paid or given directly or indirectly for
soliciting such exchange.
(c)(ii) Conversion of Notes
In July 2003, the Company issued an aggregate of 300,389 shares of
common stock upon the conversion of $4.9 million of convertible
notes held by certain former shareholders of Infinity Infusion Care
Ltd. which was acquired by the Company in June 2002. The issuance of
the shares was effected without registration under the Securities
Act in reliance on Section 3(9) of that Act as an exchange of
securities by an issuer with its existing security holders where no
commission or other remuneration was paid or given directly or
indirectly for soliciting such exchange.
Item 5. Other Information
On November 5, 2003, the Company issued a press release reporting that a search
warrant issued by a U.S. Magistrate Judge, Southern District of New York,
relating to a criminal investigation was executed on November 4, 2003 at its
recently acquired Prescription City pharmacy in Spring Valley, New York. The
Government has informed the Company that the Company is not a target of the
investigation.
21
Item 5. Other Information (continued)
The Company was served with the search warrant on Tuesday, November 4, 2003
while it was conducting its own compliance review at the Spring Valley pharmacy.
While the search warrant did result in billing and related records being removed
temporarily from the premises, the pharmacy continues to operate and serve
patient needs. The Company intends to cooperate fully with the U.S. Attorney's
Office in its investigation.
Based on information known to date, the Company has terminated Paul Frank, the
former principal shareholder of Prescription City. The Company also has placed
two other employees on administrative leave. The Company has also hired outside
counsel in connection with this investigation.
Certain assets of Prescription City were purchased by the Company in June 2003.
The purchase was structured as an asset purchase with the Company being provided
indemnifications, representations and warranties by the seller. On behalf of its
shareholders, the Company will review and, if appropriate, pursue all remedies
available under the purchase agreement.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 2.1 Plan of Merger, dated as of August 15, 2003, by and among
Curative Health Services, Inc., Curative Holding Co., and
Curative Health Services Co. (incorporated by reference to
Exhibit 2.1 of Form 8-K dated August 19, 2003, of Curative
Health Services, Inc., the predecessor company)
Exhibit 3.1 Amended and Restated Articles of Incorporation of Curative
Health Services, Inc. (incorporated by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K
filed August 19, 2003)
Exhibit 3.2 By-Laws of Curative Health Services, Inc. (incorporated by
reference to Exhibit 3.2 to the Company's Current Report
on Form 8-K filed August 19, 2003)
Exhibit 4.1 Rights Agreement, dated as of October 25, 1995, by and
between Curative Health Services, Inc. and Wells Fargo
Bank Minnesota, N.A. as Rights Agent (incorporated by
reference to Exhibit 4 of Form 8-K dated November 8, 1995,
of Curative Health Services, Inc., the predecessor
company)
Exhibit 10.1 Employment agreement dated as of September 2, 2003 between
Anne Bruce and Company
Exhibit 10.2 Second Amendment to Credit Agreement, made and entered
into as of October 10, 2003, among General Electric
Capital Corporation and the Company and the related Term
Note
Exhibit 10.3 Form of Acknowledgment Relating to Employment Agreement,
dated as of June 3, 2003, executed by John C. Prior
Exhibit 10.4 Form of Acknowledgment of Assignment of Employment
Agreement, dated as of June 3, 2003, executed by
Joseph L. Feshbach, William C. Tella, Thomas Axmacher
and Nancy F. Lanis
Exhibit 10.5 Form of Amendment to and Second Acknowledgment Relating
to Employment Agreement, dated as of August 19, 2003,
executed by John C. Prior
Exhibit 10.6 Form of Amendment to and Second Acknowledgment of
Assignment of Employment Agreement, dated as of
August 19, 2003, executed by Joseph L. Feshbach,
William C. Tella, Thomas Axmacher and Nancy F. Lanis
Exhibit 10.7 Form of Acknowledgment of Limitations on Exercise of
Stock Options, dated as of June 3, 2003, executed by
Timothy I. Maudlin, Gerard Moufflet, Lawrence P. English,
Paul S. Auerbach and Daniel E. Berce
22
Item 6. Exhibits and Reports on Form 8-K (continued)
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) (Section 302 Certification), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) (Section 302 Certification), as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.1 Cautionary Statements
The Company has excluded from the exhibits filed with this report
instruments defining the rights of holders of long-term convertible debt
of the Company where the total amount of the securities authorized under
such instruments does not exceed 10 percent of its total assets. The
Company hereby agrees to furnish a copy of any of these instruments to the
SEC upon request.
(b) Form 8-K
Form 8-K/A filed July 9, 2003, reporting under Item 7 to amend and revise
Item 7 in the Company's Form 8-K filed July 2, 2002 to include required
historical and pro forma financial information of Infinity Infusion Care,
Inc. which was omitted from the report as initially filed.
Form 8-K filed July 31, 2003, furnishing under Item 12 on the press
release announcing the Company's results of operations and financial
condition for the completed fiscal quarter ended June 30, 2003.
Form 8-K filed on August 19, 2003 by the entity that was the registrant
prior to the holding company reorganization, to (i) report under Item 5
Company's formation of a new public holding company, Curative Health
Services, Inc., and completion of a holding company reorganization, and
(ii) file under Item 7 a copy of the Plan of Merger for the
reorganization.
Form 8-K filed on August 19, 2003 by the entity that became the registrant
after the holding company reorganization (i.e., the new public holding
company), to (i) report under Item 5 Company's formation of a new public
holding company, Curative Health Services, Inc., and completion of a
holding company reorganization, and (ii) file under Item 7 copies of the
Plan of Merger for the reorganization, the Articles of Incorporation and
Bylaws of the new holding company, and the Rights Agreement dated as of
October 25, 1995 between the Company and Wells Fargo Bank Minnesota, N.A.
as Rights Agent.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2003
Curative Health Services, Inc.
(Registrant)
/s/ Joseph Feshbach
---------------------------------------
Joseph Feshbach
Chief Executive Officer and Chairman
(Principal Executive Officer)
/s/ Thomas Axmacher
---------------------------------------
Thomas Axmacher
Chief Financial Officer
(Principal Financial and Accounting
Officer)