e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| |
|
|
| þ |
|
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the fiscal year ended March 31, 2007
or
| |
|
|
| o |
|
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the Transition period from to .
Commission file number 000-31249
Arcadia Resources, Inc.
(Exact name of registrant as specified in its charter)
| |
|
|
| NEVADA
|
|
88-0331369 |
| (State or other jurisdiction of
|
|
(I.R.S. Employer I.D. Number) |
| incorporation or organization) |
|
|
| 26777 CENTRAL PARK BLVD., SUITE 200 |
|
|
| SOUTHFIELD, MI
|
|
48076 |
| (Address of principal executive offices)
|
|
Zip Code |
Issuer’s telephone number: (248) 352-7530
Securities registered under Section 12(b) of the Exchange Act: Common Stock, $0.001 par value.
Securities registered under Section 12(g) of the Exchange Act: None.
Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act. Yes o No þ
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13
or Section 15(d) of the Act.
Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§
229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).
Large Accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o¨ No þ
The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of
September 30, 2006, based on $3.25 per share (the last reported sale price of our Common Stock
quoted on the American Stock Exchange), was approximately $204 million. For purposes of this
computation only, all executive officers, directors and 10% beneficial owners of the Registrant
are assumed to be affiliates.
As of June
27, 2007, the Registrant had 122,053,000 shares of Common Stock outstanding.
Documents incorporated by reference:
Portions of the definitive Proxy Statement for the Registrant’s fiscal 2007 Annual
Meeting of Stockholders to be filed pursuant to Regulation 14A within 120 days after
the Registrant’s fiscal year end on March 31, 2007 are incorporated by reference
into Part III of this Report.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
We caution you that certain statements contained in this report (including any of our documents
incorporated herein by reference), or which are otherwise made by us or on our behalf, are
forward-looking statements. Also, documents which we subsequently file with the SEC and are
incorporated herein by reference will contain forward-looking statements. Forward-looking
statements involve known and unknown risks, uncertainties and other factors, which could cause
actual financial or operating results, performances or achievements expressed or implied by such
forward-looking statements not to occur or be realized. Such forward-looking statements generally
are based on our reasonable estimates of future results, performances or achievements, predicated
upon current conditions and the most recent results of the companies involved and their respective
industries. Forward-looking statements are also based on economic and market factors and the
industry in which we do business, among other things. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can give no assurance
that such expectations will prove to have been correct. Forward-looking statements are not
guaranties of future performance. Important factors that could cause actual results to differ
materially from the Company’s expectations are disclosed in this Form 10-K.
Forward-looking statements include statements that are predictive in nature and depend upon or
refer to future events or conditions. Forward-looking statements include words such as “believe,”
“plan,” “anticipate,” “estimate,” “expect,” “intend,” “seek,” “may,” “can,” “will,” “could,”
“should,” “project,” “expect,” “plan,” “predict,” “believe,” “estimate,” “aim,” “anticipate,”
“intend,” “continue,” “potential,” “opportunity” or similar forward-looking terms, variations of
those terms or the negative of those terms or other variations of those terms or comparable words
or expressions. In addition, any statements concerning future financial performance, ongoing
business strategies or prospects, and possible future actions, which may be provided by our
management, are also forward-looking statements.
Other parts of, or documents incorporated by reference into, this report may also describe
forward-looking information. Forward-looking statements are based on current expectations and
projections about future events. Forward-looking statements are subject to risks, uncertainties,
and assumptions about our company. Forward-looking statements are also based on economic and market
factors and the industry in which we do business, among other things. These statements are not
guaranties of future performance. We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
Actual events and results may differ materially from those expressed or forecasted in
forward-looking statements due to a number of factors. Important factors that could cause actual
results to differ materially include, but are not limited to (1) our ability to compete with our
competitors; (2) our ability to obtain additional debt or equity financing and/or to restructure
existing indebtedness, which may be difficult due to our history of operating losses and negative
cash flows; although management believes that the Company’s short-term cash needs can be adequately
sourced, we cannot assure that such additional sources of financing will be available on acceptable
terms, if at all, and an inability to raise sufficient capital to fund our operations would have a
material adverse affect on our business and would raise substantial doubt about our ability to
continue as a going concern; (3) the ability of our affiliated agencies to effectively market and
sell our services and products; (4) our ability to procure product inventory for resale; (5) our
ability to recruit and retain temporary workers for placement with our customers; (6) the timely
collection of our accounts receivable; (7) our ability to attract and retain key management
employees; (8) our ability to timely develop new services and products and enhance existing
services and products; (9) our ability to execute and implement our growth strategy; (10) the
impact of governmental regulations; (11) marketing risks; (12) our ability to adapt to economic,
political and regulatory conditions affecting the health care industry; (13) other unforeseen
events that may impact our business; (14) our ability to successfully integrate acquisitions; and
(15) the ability of our new management team to successfully pursue its business plan and the risk
that the Company may be required to enact restructuring measures in addition to those announced on
March 30, 2007.
Readers are urged to carefully review and consider the various disclosures made by us in this
Report on Form 10-K and our other filings with the U.S. Securities and Exchange Commission. These
reports and filings attempt to advise interested parties of the risks and factors that may affect
our business, financial condition and results of operations and prospects. The forward-looking
statements made in this Form 10-K speak only as of the date hereof and we disclaim any obligation
to provide updates, revisions or amendments to any forward-looking statements to reflect changes in
our expectations or future events.
2
Part I
ITEM 1. BUSINESS
Overview
Arcadia Resources, Inc. (“Arcadia” or the “Company”) is a national provider of in-home health care
and retail / employer health care services. The Company has five distinct segements: Services,
Products (Durable Medical Equipment or “DME”), Retail, Pharmacy and Clinics. The Services segment
is a national provider of medical staffing services, including home healthcare and medical
staffing, as well as light industrial, clerical and technical staffing services. Based in
Southfield, Michigan, the Services segment provides its staffing services through a network of
affiliate and company-owned offices throughout the United States. The Products segment markets,
rents and sells products and equipment across the United States including a catalog out-sourcing
and product fulfuillment business which sells various medical equipment product offerings. In
addition, the Retail segment includes operations which sell medical equipment at certain Sears and
Wal-Mart retail locations. The Company is in the process of winding down this portion of the
Retail segment in order to focus exclusively on the catalog business. The Pharmacy segment
provides pharmacy services to grocery pharmacy retailers nationally and offers DailyMed™, the
patented and patent pending compliance packaging medication system, to at-home patients and senior
living communities. In addition, the Company offers pharmacy services to employers through a
contracted relationship with a large pharmacy benefits manager. Pharmacy services to grocers and
employers include staffing, pharmacy management, DailyMed™, an exclusive retail pharmacy benefit
network and a 420 square foot automated pharmacy footprint that allows its customers to reduce
space needs and improve labor efficiencies. The Clinics segment is a new business venture launched
in fiscal 2007 focused on establishing non-emergency medical care facilities in retail location
host sites.
Financial information about our segments can be found in note 14 to our consolidated financial
statements.
Prior to May 2004, the Company was named Critical Home Care, Inc. (“CHC”). RKDA, Inc., which as of
March 31, 2007 is a wholly-owned subsidiary of Arcadia Resources, Inc. and the holding company of
Arcadia Services, Inc., completed a reverse acquisition with CHC on May 10, 2004 and, being the
accounting acquirer, is now the reporting entity for financial statement purposes. The Company
changed its name from “Critical Home Care, Inc.” to “Arcadia Resources, Inc.” on November 16, 2004
to better reflect its identity and businesses as a result of the business combinations.
From the time of the reverse acquisition in May 2004 through March 31, 2007, the Company has
acquired a total of 27 businesses in the various segments. The acquisitions are summarized by
fiscal year by segment as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Year Ended |
|
|
| March 31,: |
|
Number of Acquisitions by Segment |
| |
|
Products |
|
Services |
|
Retail |
|
Pharmacy |
|
Clinics |
|
Total |
2005 |
|
|
3 |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6 |
|
2006 |
|
|
10 |
|
|
|
3 |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
15 |
|
2007 |
|
|
2 |
|
|
|
— |
|
|
|
2 |
|
|
|
2 |
|
|
|
— |
|
|
|
6 |
|
| |
|
|
Total |
|
|
15 |
|
|
|
6 |
|
|
|
4 |
|
|
|
2 |
|
|
|
— |
|
|
|
27 |
|
| |
|
|
Strategy
Brand our name and concept. We will continue to position Arcadia as the provider of a wide array of
healthcare offerings, including: prescription drugs, home care, durable and home medical equipment,
non-emergency care clinics and staffing related services in the markets where we operate. By doing
so, Arcadia will make healthcare more convenient and affordable for consumers. In outlying markets
without a Company-owned or affiliated location, we will extend our brand by selling regional
providers on a fee-for-service basis with our licensed service model or a turn-key “healthcare”
offering which allows contracted providers immediate access to our core offerings to better service
a consumer-driven healthcare segment in a more cost effective and profitable fashion.
3
Focus on internal and organic growth. We intend to leverage our existing patient and caregiver
relationships as a means to cross promote and sell additional healthcare products and services core
to Arcadia. We will continue working with Company-owned and affiliated locations on marketing
programs and consumer education materials with demonstrated Company best practices as a means to
increase overall penetration. In non-Arcadia markets, we will extend our cross-sell offerings to
our existing licensed service contracts as an avenue to grow our core business segments. Moreover,
Arcadia will further extend the DailyMed™ offering into larger U.S. metropolitan markets on a
direct-to-consumer basis as a means to more appropriately grow this emerging business unit.
Improve organizational support. We intend to continue to improve our organization’s effectiveness
and performance through increased standardization and support to the operating locations. We
continue to expand our information systems capabilities to obtain better data with which to make
decisions, to provide more abilities to our operating locations to enhance their productivity, and
to obtain operating efficiencies. Such efficiencies will allow us to attract and retain talented
healthcare professionals who are committed to our Company on a go-forward basis.
Obtain additional capital support. We intend to obtain additional capital to enable us to implement
our business strategies, to accomplish our objectives and to bolster our brand. We will explore
various alternatives including business divestitures, strategic partnerships, joint ventures and
equity and debt funding.
Products and Services
The Company’s products and services are organized into two strategic groups:
The first group consists of home care services, which deliver home care services and healthcare
products to patients at home. Products offered include traditional pharmaceuticals, DailyMed™, and
all manner of durable medical equipment and home medical equipment. The principal customer for
these services is the family caregiver.
The second group consists of retail and employer services, which includes the licensed pharmacy
services, minor medical clinics and the durable medical equipment kiosks and catalog. This set of
services sells first to the retail host or payor and then through them to the end user who is often
the family caregiver.
The segments and their offerings are discussed in more detail as follows:
Services Segment — Home Care (Skilled and Personal Care) and Staffing (Medical and Non-Medical)
Arcadia Services, Inc. (“Arcadia Services”), a wholly-owned subsidiary of Arcadia Resources, Inc.,
is a national provider of staffing and home care services operating in 19 states through
approximately 75 locations. Arcadia Services’ home care staffing includes nurses, home care aides,
homemakers and companions. We also offer physical therapists, occupational therapists, speech
pathologists and medical social workers. Arcadia Services’ medical staffing includes registered
nurses, licensed practical nurses, certified nursing assistants, respiratory therapists,
technicians and medical assistants. In August 2003, Arcadia Services expanded its medical staffing
component and entered the travel staffing business segment whereby health care professionals,
primarily nurses, are placed on long term assignments in health care facilities across the country.
The Services segment’s non-medical staffing includes light industrial, clerical and technical
personnel and represents less than 20% of our revenue.
Products Segment — Respiratory and Durable Medical Equipment and Related Products
We operate durable medical equipment businesses providing oxygen and other respiratory therapy
services and home medical equipment in 11 states through 44 locations; however, through
restructuring efforts subsequent to year end, we will close eight locations. The Company’s
equipment and supplies for these businesses are readily available in the marketplace, and the
Company is not dependent on a single supplier. We also provide Continuous Positive Airway Pressure
(CPAP) equipment to patients with sleep disorders. Reimbursement and payor sources include
Medicare, Medicaid, insurance companies, managed caregroups, HMO’s, PPO’s and private pay (payments
from patients).
4
Retail Segment — Retail Distribution
We operate a home health-oriented products catalog and related website to sell ambulatory and
mobility products, respiratory products, daily living aids and bathroom safety products, and
bathroom and home modifications to serve our existing patient base. This business extends the
offering to prospective customers by means of our directed mailing list, which is a database
compiled over many years. Additionally, we attract e-commerce customers through our website. In
March 2005, the Company and Sears, Roebuck and Co. executed a licensing agreement which allows the
Company to sell similar merchandise and services within selected Sears stores in designated
territories as well as provide a healthcare products fulfillment support for their Sears.com
website. During fiscal 2007, the Company entered into a similar agreement which allows the Company
to sell this type of merchandise and services within selected Wal-Mart stores in designated
territories. In March 2007, the Company decided to sell the Sears retail operations.
Additionally, the Company is planning the closure of the Wal-Mart facilities in accordance with the
contractual terms. These decisions were made due to financial results not meeting expectations and
to allow management to focus its efforts on the catalog and web portal business for Arcadia as well
as Sears.com.
Pharmacy Segment — Mail Order Pharmacy and Related Products
The Pharmacy segment offers a full-service mail-order pharmacy based in Kentucky. It offers a
full-line of services and products including the dispensing of pills and other medications,
including multi-dose strip medication packages, respiratory supplies and medications, diabetic care
management, drug interaction monitoring, and special assisted living medication packaging. The
Pharmacy segment ships medications and supplies directly to the customer’s residence and submits
billing claims on the patient’s behalf to Medicare, some state Medicaid programs, and most private
insurances. Multi-dose strip medication is packaged to facilitate patient compliance with
physician’s orders and to improve accuracy for patients and their caregivers, leading to a greater
efficacy of the prescribed drug therapy and reducing the likelihood of medication errors.
With the acquisition of PrairieStone Pharmacy, LLC in February 2007, the Pharmacy segment began
marketing DailyMed™, which represents a more advanced medication packaging product than previously
offered by the Company. DailyMed™ sorts medications into single dose packets organized by date and
time, which further simplifies patient compliance with physician’s orders while reducing the chance
of medication errors. Additionally, the Pharmacy segment markets a license service model whereby
it contracts with regional grocery chain pharmacies to provide pharmacy expertise, access to a
restricted third party network and the right to sell DailyMed™ on a fee for service basis.
Clinics Segment – Non-Emergency Care Clinics
Beginning in fiscal 2007, the Company began a new business venture to launch non-emergency medical
care facilities in retail location host sites. Management believes that the convenience and
cost-efficiency of these types of facilities provide attractive alternatives to traditional medical
care facilities. Currently, our efforts are focused on regional chains of 50 to 300 stores, though
we are evaluating all potential opportunities for new clinic locations. The Company continues to
invest in this segment, and, eventually, management envisions creating and marketing a licensed
service model similar to what is currently offered through the Pharmacy segment. In addition,
management believes that there are opportunities to combine the retail-site pharmacy and care
clinics into one location of approximately the same size as traditional grocery pharmacy, thereby
improving operating efficiencies and reducing overhead costs. The additional services available
through the PrairieStone division provide a level of competitive differentiation for the Clinics
segment when competing for new hosts.
Organization
Operations
Arcadia’s operating locations are split into the segments described above to enable seasoned managers to oversee the operations and evaluate
each segment for performance and profitability. Strategic development, financial control and
operating policies are administered at the corporate level. Reporting mechanisms are in place at
the operating center level to monitor performance and to ensure accountability at the location
level.
5
Management
We have a decentralized management approach which we believe allows the local management to more
effectively deal with the challenges and opportunities presented by their local marketplace. The
delivery of health care services and products is conceptually the same but can be significantly
different between markets due to a variety of local factors, such as the availability and quality
of services at hospitals and other facilities. These differences often create opportunities that
only a local manager would be able to discern and capitalize on in a timely manner.
Sales and Marketing
Arcadia’s referral sources recognize our reputation for providing high-quality services through our
employee base. The sales function is carried out by our full-time sales representatives at each
location with assistance and guidance from a regional manager. Our principal referral sources are
physicians, case managers, medical social workers and hospital discharge planners and existing
patients or their caregivers. No single referral source accounts for more than one percent of our
revenues. Arcadia has more than 25,000 patients, and the loss of any particular referral source
would not significantly impact our business.
In terms of the Company’s licensed service model, the Company is in the process of employing a
full-time sales force with experience in high-end selling at the senior management level. This
sales team will direct its efforts on small to medium size grocery chains throughout the United
States with pharmacy locations ranging from 10 to over 500 sites. The sales team will sell an
a-la-carte suite of goods and services offered by the Company on a fee for service basis.
Currently, the Company operates licensed pharmacy services in over 300 grocery locations.
Finally, the Company will continue to launch DailyMed™ with a direct-to-consumer sales and
marketing strategy. The Company is currently testing the campaign, which was already developed by
PrairieStone and used in the Minneapolis/St. Paul marketplace, in Arcadia and non-Arcadia markets
in order to maximize the go-forward messaging in a cost effective manner.
Information Systems
Arcadia Services has developed a proprietary management information system for the home care and
staffing services portion of our business that we believe is one of our competitive advantages in
obtaining and retaining customers. The system allows the flexibility and customization in billing
our services that is attractive to our customers and provides management with the necessary
information to timely measure its performance. The Company continues to consolidate its
non-services billing systems. The Company expects to expend additional resources during the next
several years to continue to enhance our ability to obtain better and more timely information with
which to manage the business.
Accounts Receivable Management
We perform the accounts receivable management at two national billing centers, one for home care
and staffing services claims and one for pharmacy, respiratory and medical equipment claims,
staffed with experienced reimbursement personnel and supported by strong information systems.
Third-party reimbursement is a detailed and complicated process that involves knowledge of and
compliance with regulatory and billing processing issues. Success in billing and collections is
vital to our business plan, which drives our continued focus on investment in improving these
capabilities. Billing, collections and receivables management for the clinic business is handled in
our Southfield billing office. The majority of our revenue in this business is received at the
time of service. We continue to train, monitor and audit our billing staff to assist them in this
highly regulated environment.
Compliance
Arcadia has a dedicated credentialing and compliance group that manages our licensure, contracting
and related processes to ensure compliance with regulatory matters. Compliance with billing
related matters is performed continually by the billing center personnel, managed by seasoned
employees in their respective areas of expertise including quality control.
6
Accreditation and Education
The Company’s locations are not accredited by independent accreditation agencies. We continuously
consider the need for obtaining accreditation, primarily to be eligible for those contractual
awards that require such credentials. We continue to standardize our operations to facilitate
future accreditation. We offer computer-based continuing professional education to our health care
professionals to recruit and retain employees and to ensure ease in obtaining the required
education for the maintenance of their respective licenses.
Competition and Market Conditions
Competition for the medical staffing, non-medical staffing and home care industries is based upon
the quality of the employee, the availability of the employee, the cost of the employee and the
geography. Staffing and home care industries include national, international, regional and local
firms that compete with each other to attract employees and to obtain and maintain customers. A
local presence is essential to establish the name/brand recognition as a provider of qualified
staff and home care aides that must meet specific job requirements, while suppliers of longer term
employees must have the reputation and reach to meet the needs of customers across the country.
The segment of the health care market in which our respiratory and durable medical equipment and
related businesses operate is fragmented and highly competitive. There are a limited number of
national providers and numerous regional and local providers operating in each of our product and
service line markets.
Competition for pharmacy services in the senior care industry, including assisted living,
independent living, intermediate care and home health care, is based upon the quality of products
and services provided, as well as customer service factors and location. There is a wide variety
of local and national competing providers that offer a broad range of products and services. Brand
and company recognition play a role, but sales are more immediately impacted by unique delivery
systems, such as our DailyMed ™ product, that increase facility efficiencies and reduce medication
errors. In a very competitive market place, reliability is also a key factor in terms of pharmacy
delivery, availability of staff, turn-around time, medication changes and problem solving ability.
According to an industry report, consolidation activity in the home care industry has increased and
is expected to continue to increase due to both the projected increased demand for skilled
employees and the projected staffing shortage, especially in nursing, as well as to obtain the
necessary infrastructure to comply with new health care regulations.
The major competition we face in the minor medical clinics are traditional sites of service, such
as urgent care centers, emergency rooms and doctors’ offices. We expect that other clinic
providers will continue to expand in the markets in which we operate and become more of a
competitive force over time. With respect to competition for hosts, the minor medical clinic
industry remains fragmented with many providers of similar size to our Clinics segment, and some
are more experienced and better capitalized. The two largest competitors have been integrated into
large pharmacy chains. Other retailers are thus less likely to use these providers to operate
clinics within their stores.
In terms of our licensed service model, the Company recognizes a number of significant suppliers
with scale and resources, such as a pharmaceutical and/or food wholesalers, which often provide
goods and services to those pharmacy operators within the grocery channel. These services are
typically an “add-on” to the distribution business and with limited focus, tends to produce
marginal results for the pharmacy operator. Moreover, the Company recognizes the pharmacy market
is very competitive with a significant number of providers, both start-up and matured, offering
goods and services within the channel. Such providers will compete aggressively for the grocery
chain’s time and interest.
Finally, our DailyMed™ product will compete in an extremely competitive direct-to-consumer
marketplace. While the Company is optimistic with the value points of DailyMed™, messaging such
points to an already strectched caregiver/consumer will be challenging and expensive if not managed
correctly.
Suppliers
We purchase equipment and supplies from various vendors and manufacturers. We are not dependent
upon any single supplier and believe that our product needs can be met by an adequate number of
various manufacturers.
7
Government Regulation
Our health care-related businesses (e.g., durable medical equipment, oxygen, home health care,
pharmacy, etc.) are subject to extensive government regulation, including numerous laws directed at
preventing fraud and abuse and laws regulating reimbursement under various governmental programs.
The federal government and all states in which we currently operate and intend to operate regulate
various aspects of our health care-related businesses. In particular, our operating branches are
subject to federal laws covering the repackaging of drugs (including oxygen) and regulating
interstate motor-carrier transportation. Our locations also will be subject to state laws
governing, among other things, pharmacies, nursing services, distribution of medical equipment and
certain types of home health care activities. Certain of our employees are subject to state laws
and regulations governing the ethics and professional practice of respiratory therapy and nursing
and in the future, pharmacy.
The marketing, billing, documentation and other practices of health care companies are all subject
to government scrutiny. To ensure compliance with Medicare and other regulations, regional carriers
often conduct audits and request patient records and other documents to support claims submitted by
our Company for payment of services rendered to patients. Similarly, government agencies
periodically open investigations and obtain information from health care providers pursuant to the
legal process. Violations of federal and state regulations can result in severe criminal, civil and
administrative penalties and sanctions, including disqualification from Medicare and other
reimbursement programs.
Health care is an area of rapid regulatory change. Changes in law and regulations, as well as new
interpretations of existing laws and regulations, may affect permissible activities, the relative
costs associated with doing business, and reimbursement amounts paid by federal, state and other
third party payors. We can not predict the future of federal, state and local regulation or
legislation, including Medicare and Medicaid statutes and regulations, or possible changes in
national health care policies, each of which could have a material adverse impact on our Company.
Material laws and regulations that affect our operations include, but are not necessarily limited
to, Medicare and Medicaid reimbursement laws; laws permitting Medicare, Medicaid and other payors
to audit claims and seek repayment when claims have been over paid; laws such as the Health
Insurance Portability and Accountability Act regulating the privacy of individually identifiable
health information; laws prohibiting kickbacks and the exchange of remuneration as an inducement
for the provision of reimbursable services or products; laws regulating physician self-referral
relationships; and laws prohibiting the submission of false claims.
Employees
As of March 31, 2007, we had approximately 16,500 employees, the majority of which were part-time
temporary field employees. We have no unionized employees, and do not have any collective
bargaining agreements. We believe our relationship with our employees is good.
Environmental Matters
We believe that we are currently in compliance, in all material respects, with applicable federal,
state and local statutes and ordinances regulating the discharge of hazardous materials into the
environment. We believe that our Company will not be required to expend any material amounts in
order to remain in compliance with these laws and regulations or that such compliance will
materially affect its capital expenditures, earnings or competitive position.
Available Information
Our internet website address is www.ArcadiaResourcesInc.com. We provide free access to various
reports that we file with or furnish to the United States Securities and Exchange Commission
(“SEC”) through our website, as soon as reasonably practicable after they have been filed or
furnished. These reports include, but are not limited to, our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports.
Our SEC reports can be accessed through the investors section of our website, or through
www.sec.gov. Information on our website does not constitute part of this 10-K report or any other
report we file or furnish with the SEC.
8
Executive Officers
The following table sets forth information concerning our executive officers, including their ages,
positions and tenure as of March 31, 2007:
| |
|
|
|
|
|
|
|
|
| Name |
|
Age |
|
Position(s) |
|
Served as Officer Since |
John E. Elliott, II
|
|
|
50 |
|
|
Chairman, Chief Executive Officer and Director (1)
|
|
May 2004 |
Marvin R. Richardson
|
|
|
49 |
|
|
Chief Operating Officer and Director (2)
|
|
February 2007 |
Lynn K. Fetterman
|
|
|
60 |
|
|
Interim Chief Financial Officer, Secretary and Treasurer
|
|
February 2007 |
James E. Haifley
|
|
|
50 |
|
|
Executive Vice President
|
|
December 2005 |
Alan Lotvin
|
|
|
45 |
|
|
Chief Medical Officer
|
|
February 2007 |
Cathy Sparling
|
|
|
52 |
|
|
Vice President of Administration
|
|
May 2004 |
|
|
|
| (1) |
|
Chief Executive Officer until May 24, 2007. Mr. Elliott remains Chairman of the Board
and a Director. |
| |
| (2) |
|
On May 24, 2007, Marvin R. Richardson was named President and Chief Executive Officer.
The Chief Operating Officer position remains vacant. |
John E. Elliott, II. Mr. Elliott was formerly Chairman of AMI Holdings, Inc., which is a major
shareholder in Fidlar Doubleday, Inc. Beginning his career in healthcare in 1978, Mr. Elliott has
started up companies and acquired others. He founded Allied Medical, Inc., a durable medical
equipment supplier which private labeled most of its product line and conducted manufacturing in
the U.S., Pacific rim and Europe. After Allied, he purchased Guardian Medical Supplies, Inc. and
Medical Equipment Providers, Inc. both DME dealers which he sold in 1997 to Rotech Medical, Inc.
With a non-compete in the healthcare business, he formed a new business group in the
education/governmental marketplace. Leading a group of investors in 1998, he purchased Doubleday
Bros. & Co., the publishing unit from Standard Publishing Inc. (Standex). Additionally, they
purchased Fidlar Doubleday, Inc., of which he served as Chairman through 2002. The company is a
market leader in governmental software and holds a substantial share of the election business in
this country. As a member of Standard Automotive Inc.’s board of directors, he was selected to
restructure the company and protect the employee and creditor base, which was accomplished in 2003.
Mr. Elliott has a Bachelor of Science degree in Business Administration from Lawrence Technological
University.
Marvin R. Richardson. Mr. Richardson, who has over 30 years of health care and retail pharmacy
experience, joined the Company in conjunction with its acquisition of PrairieStone Pharmacy, LLC in
January, 2007. Mr. Richardson was the President and Chief Executive Officer of PrairieStone since
founding PrairieStone in 2003. Prior to his involvement with PrairieStone, Mr. Richardson held
management positions with Walgreen and Rite Aid. He also co-founded and served as President and
CEO of Lowcost Health Care, a company that owned and operated retail pharmacies as well as a long
term care pharmacy operation, which he later sold. Mr. Richardson is a 1980 graduate of Purdue
University, where he earned his Bachelor of Science degree in Pharmacy. He is a former Chairman of
the National Association of Community Pharmacies and served on the Pharmacy Committee for the
National Association of Chain Drug Stores. He has been an advisor to several major government
leaders on healthcare policy.
Lynn Fetterman. Mr. Fetterman has over 30 years of experience in internal auditing, finance and
senior management. He previously served as Chief Operating Officer and Chief Financial Officer of
360 Global Wine Company, as Chief Financial Officer of Nicola International, Incorporated, and as a
partner in the Orange County, California practices of Tatum CFO Partners, LLP. He also served in
senior management positions with ConAgra, Inc. and Canandaigua Brands, Inc. Mr. Fetterman received
a B.A. in accounting from Thiel College in Greenville, Pennsylvania.
James E. Haifley. On December 7, 2005, the Company appointed Mr. Haifley as its Executive Vice
President. His duties include oversight for the Company’s staffing and durable medical equipment
divisions. Mr. Haifley joined Arcadia in 2004 as Director of Business Development. From 2000 to
2004, Mr. Haifley was a Divisional Director of Operations for Rotech Healthcare, Inc., a provider
of home respiratory care and durable medical equipment and services. While at Rotech, Mr. Haifley
was responsible for operations of its Central Division. Previously, Mr. Haifley was General Manager
at Hook’s Medical, from 1995 to 2000, at which time the company was acquired by Rotech. He is a
graduate of the University of St. Francis with a degree in business administration and concentrated
studies in marketing and management.
9
Alan Lotvin, M.D. Dr. Lotvin was named Chief Medical Officer after serving as the President and
Chief Executive Officer of Care Clinic, Inc., a majority-owned subsidiary of the Company, a
position held since September 25, 2006. Before joining Care Clinic, Dr. Lotvin, a trained
cardiologist, was President and Chief Operating Officer of M | C Communications, a leading U.S.
provider of medical education. He also held numerous management positions during eight years with
Medco Health Solutions, one of America’s largest prescription drug benefit managers. Dr. Lotvin
received his Doctor of Medicine degree from the State University of New York- Health Sciences
Center at Brooklyn in 1986, and a Master of Arts in Medical Informatics from Columbia University in
1999.
Cathy Sparling. Ms. Sparling serves as the Vice President of Administration. She joined Arcadia
Services, Inc. in 1990. She has over 25 years of clinical and business management experience in the
home care and medical staffing industries. Prior to her current position, Ms. Sparling previously
served as the Chief Operating Officer of Arcadia Services, Inc. and as its Vice President and
Administrator of Affiliate Services. Ms. Sparling earned a Bachelor of Science degree in Nursing
from Michigan State University and has pursued graduate course work in business administration.
ITEM 1A. RISK FACTORS
This Annual Report, including Management’s Discussion and Analysis of Financial Condition and
Results of Operations, contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We face a number of
risks and uncertainties that could cause actual results or events to differ materially from those
contained in any forward-looking statement. Factors that could cause or contribute to such
differences include, but are not limited to, the risks and uncertainties listed below. You should
carefully consider and evaluate the risks and uncertainties listed below, as well as the other
information set forth in this Report.
We recently became a public company and have a limited operating history as a public company upon
which you can base an investment decision.
The shares of our Common Stock were quoted on the OTC Bulletin Board from August 2, 2002 through
June 30, 2006 and began trading on the American Stock Exchange on July 3, 2006. We have a limited
operating history as a public company upon which you can make an investment decision, or upon which
we can accurately forecast future sales. You should, therefore, consider us subject to all of the
business risks associated with a new business. The likelihood of our success must be considered in
light of the expenses, difficulties and delays frequently encountered in connection with the
formation and initial operations of a new and unproven business.
To finance the numerous acquisitions made as part of our growth strategy, the Company incurred
significant debt which must be repaid. Our debt level could adversely affect our financial health
and affect our ability to run our business.
We acquired Arcadia Services and Arcadia Rx on May 10, 2004 and have acquired an additional 27
companies since that time. We incurred substantial debt to finance these acquisitions. This debt
has been reduced periodically through capital infusions. As of March 31, 2007, the current portion
of our debt, including lines of credit and capital lease obligations, totals approximately $25.0
million, while the long-term portion of our debt totals approximately $21.9 million, for a total of
approximately $46.9 million. This level of debt could have consequences to holders of our shares.
Below are some of the material potential consequences resulting from this amount of debt:
| |
o |
|
We may be unable to obtain additional financing for working capital, capital
expenditures, acquisitions and general corporate purposes. |
| |
| |
o |
|
Our ability to adapt to changing market conditions may be hampered. We may be more
vulnerable in a volatile market and at a competitive disadvantage to our competitors that
have less debt. |
| |
| |
o |
|
Our operating flexibility is more limited due to financial and other restrictive
covenants, including restrictions on incurring additional debt, creating liens on our
properties, making acquisitions and paying dividends. |
| |
| |
o |
|
We are subject to the risks that interest rates and our interest expense will increase. |
10
| |
o |
|
Our ability to plan for, or react to, changes in our business is more limited. |
Under certain circumstances, we may be able to incur additional indebtedness in the future. If we
add new debt, the related risks that we now face could intensify. In order to repay our debt
obligations timely and as discussed below, we must maintain adequate cash flow from operations or
raise additional capital from equity investment or other sources. Cash which we must use to repay
these obligations will reduce cash available for other purposes, such as payment of operating
expenses, investment in new products and services offered by the Company, self-financing of
acquisitions to grow the Company’s business, or distribution to our shareholders as a return on
investment.
Due to our debt level, we may not be able to increase the amount we can draw on our revolving
credit facility with Comerica Bank, or to obtain credit from other sources, to fund our future
needs for working capital or acquisitions.
As of March 31, 2007, we have total outstanding long-term obligations (lines of credit, notes
payable and capital lease obligations) of $46.9 million. Due to our debt level, there is the risk
that Comerica Bank or other sources of credit may decline to increase the amount we are permitted
to draw on the revolving credit facilities or to lend additional funds for working capital or other
purposes. This development could result in various consequences to the Company, ranging from
implementation of cost reductions which could impact our product and service offerings, to the
modification or abandonment of our present business strategy.
The terms of our Credit Agreements with Comerica Bank subject us to the risk of foreclosure on
certain property.
RKDA granted Comerica Bank a first priority security interest in all of the issued and outstanding
capital stock of Arcadia Services. Arcadia Services and its subsidiaries granted the bank security
interests in all of their assets. The credit agreement provides that the debt will mature on
October 1, 2008. If an event of default occurs, Comerica Bank may, at its option, accelerate the
maturity of the debt and exercise its right to foreclose on the issued and outstanding capital
stock of Arcadia Services and on all of the assets of Arcadia Services and its subsidiaries. Any
such default and resulting foreclosure would have a material adverse effect on our financial
condition.
SSAC, LLC, the sole-shareholder of Trinity Healthcare, granted Comerica Bank a first priority
security interest in all of the issued and outstanding capital stock of Trinity Healthcare. Trinity
Healthcare granted the bank a security interest in all of its assets. The master revolving demand
note provides that the debt will mature and is payable upon the demand of Comerica Bank. If an
event of default occurs, Comerica Bank may, at its option, accelerate the maturity of the debt and
exercise its right to foreclose on the issued and outstanding capital stock of and on all of the
assets of Trinity Healthcare. Any such default and resulting foreclosure would have a material
adverse effect on our financial condition.
In order to repay our short term debt obligations, as well as to pursue our growth strategy, we may
seek additional equity financing, which could result in dilution to our security holders.
The Company may continue to raise additional financing through the equity markets to pay short term
debt obligations and to fund operations. Further, because of the capital requirements needed to
pursue our growth strategy, we may access the public or private equity markets whenever conditions
appear to us to be favorable, even if we do not have an immediate need for additional capital at
that time. The Company also plans to expand its walk-in medical clinic business, as well as to
continue to expand product and service offerings in its existing sites. Cash flow from operations
is not expected to fund these efforts, and the scope of these plans may be determined by the
Company’s ability to generate cash flow or to secure additional new funding. To the extent we
access the equity markets, the price at which we sell shares may be lower than the current market
prices for our Common Stock. If we obtain financing through the sale of additional equity or
convertible debt securities, this could result in dilution to our security holders by increasing
the number of shares of outstanding stock. We cannot predict the effect this dilution may have on
the price of our Common Stock. In December 2006, the Company sold 5,000,000 shares of common stock
for aggregate proceeds of $10,000,000 through a private placement. In May 2007, the Company sold
11,019,000 shares of common stock for aggregate proceeds of $13,112,000 through another private
placement. In conjunction with the May 2007 private placement, the investors also received an
aggregate of 2,755,000 warrants to purchase shares of common stock at $1.75 per share for a period
of seven years.
11
The Company has completed 21 acquisitions over the past two years. The licensure and credentialing
process under the new ownership must be satisfied timely in order to bill and collect for services
rendered to beneficiaries of government-based health care programs and other insurance carriers.
Cash flow related to these transitions can be impaired sufficient to require additional external
financing in the form of debt or equity.
The Company has made several recent acquisitions of durable medical and respiratory equipment
businesses, the transitional credentialing of which has taken longer than expected, which has
slowed the billing and collections process, resulting in a negative impact to the timing of cash in
flows from the respective entities or in the worst case scenario, resulting in uncollectible fees
for services provided. Management has recently brought additional resources to these efforts. The
Company’s experience in ultimately billing and collecting for services provided in the transition
period in question has been somewhat inconsistent. The inability to collect receivables timely or
not at all could have a negative impact on its ability to meet its current obligations timely.
This delay in collecting cash from normal operations could force the Company to pursue outside
financing that it would not otherwise need to pursue.
To be able to implement our business plan as currently projected for the retail clinic operations,
the Company must raise additional funding which could result in dilution to our security holders or
to our holdings in the subsidiaries that hold the clinic operations.
In addition to the 11 clinics currently in operation, the Company plans to open five additional
clinics for operation within the next several months. This effort is expected to require $160,000
per site in capital for building, supplying and operating the clinics prior to cash flow breakeven.
In the event sufficient capital is not obtained to carry out this plan, the Company will modify its
schedule of clinic openings accordingly to accommodate its funding ability.
To the extent we do not raise adequate funds from the equity markets or possible business
divestitures to satisfy short term debt obligations, we would need to seek debt financing or modify
or abandon our growth strategy or product and service offerings.
Although we raised $13,112,000 in equity financing in May 2007, these funds, in combination with
funds generated from operations, may not be adequate to satisfy short term cash needs. To the
extent that we are unsuccessfully in raising funds from the equity markets or through the possible
divestiture of certain businesses, we will need to seek debt financing. In this event, we may need
to modify or abandon our aggressive growth strategy or may need to eliminate certain product or
service offerings, because debt financing is generally at a higher cost than financing through
equity investment. Higher financing costs, modification or abandonment of our growth strategy, or
the elimination of product or service offerings could negatively impact our profitability and
financial position, which in turn could negatively impact the price of our Common Stock.
Because the Company is dependent on key management and advisors, the loss of the services or advice
of any of these persons could have a material adverse effect on our business and prospects. We
also face certain risks as a result of the recent changes to our management team.
The success of the Company is dependent on its ability to attract and retain qualified and
experienced management and personnel. We do not presently maintain key person life insurance for
any of our personnel. There can be no assurance that the Company will be able to attract and retain
key personnel in the future, and the Company’s inability to do so could have a material adverse
effect on us. We have recently made significant changes in our senior management team. In
addition, the Company has experienced several changes in key accounting personnel as part of its
restructuring initiatives, as well as the transition of certain accounting functions from Orlando,
Florida to Southfield, Michigan. Our management team will need to work together effectively to
successfully develop and implement our business strategies and financial operations. In addition,
management will need to devote significant attention and resources to preserve and strengthen
relationships with employees, customers and the investor community. If our new management team is
unable to achieve these goals, our ability to grow our business and successfully meet operational
challenges could be impaired.
A decline in the rate of growth of the staffing and home care industries, or negative growth, could
adversely affect us by reducing sales, thereby resulting in less cash being available for the
payment of operating expenses, debt obligations and to pursue our strategic plans.
12
We believe the staffing industry, including both medical and non-medical staffing, is a large and
growing market. The growth in medical staffing is being driven by the shrinkage in the number of
healthcare professionals at the same time as the demand for their services is increasing.
Healthcare providers are increasingly using temporary staffing to manage fluctuations in demand for
their services. Growth in non-medical staffing is driven by companies seeking to control personnel
costs by increasingly using temporary employees to meet fluctuating personnel needs. Our business
strategy is premised on the continued and consistent growth of the staffing and home care
industries. A decline in the rate of growth of the staffing and home care industries, or negative
growth, could adversely affect us by reducing sales, resulting in lower cash collections. Even if
we were to pursue cost reductions in this event, there is a risk that less cash would be available
to us to pay operating expenses, in which case we may have to contract our existing businesses by
abandoning selected product or service offerings or geographic markets served, as well as to modify
or abandon our present business strategy. We could have less cash available to pay our short and
long-term debt obligations as they become due, in which event we could default on our obligations.
Even if none of these events occurred following a negative change in the growth of the staffing and
home care industries, the market for our shares of Common Stock could react negatively to a decline
in growth or negative growth of these industries, potentially resulting in the diminished value of
our Company’s Common Stock.
Sales of certain of our services and products are largely dependent upon payments from governmental
programs and private insurance, and cost containment initiatives may reduce our revenues, thereby
harming our performance.
We have a number of contractual arrangements with governmental programs and private insurers,
although no individual arrangement accounted for more than 10% of our net revenues for the fiscal
years ended March 31, 2007, 2006, or 2005. Nevertheless, sales of certain of our services and
products are largely dependent upon payments from governmental programs and private insurance, and
cost containment initiatives may reduce our revenues, thereby harming our performance.
In the U.S., healthcare providers and consumers who purchase durable medical equipment,
prescription drug products and related products generally rely on third party payers to reimburse
all or part of the cost of the healthcare product. Such third party payers include Medicare,
Medicaid and other health insurance and managed care plans. Reimbursement by third party payers may
depend on a number of factors, including the payer’s determination that the use of our products is
clinically useful and cost-effective, medically necessary and not experimental or investigational.
Also, third party payers are increasingly challenging the prices charged for medical products and
services. Since reimbursement approval is required from each payer individually, seeking such
approvals can be a time consuming and costly process. In the future, this could require us to
provide supporting scientific, clinical and cost-effectiveness data for the use of our products to
each payer separately. Significant uncertainty exists as to the reimbursement status of newly
approved healthcare products. Third party payers are increasingly attempting to contain the costs
of healthcare products and services by limiting both coverage and the level of reimbursement for
new and existing products and services. There can be no assurance that third party reimbursement
coverage will be available or adequate for any products or services that we develop.
We could be subject to severe fines and possible exclusion from participation in federal and state
healthcare programs if we fail to comply with the laws and regulations applicable to our business
or if those laws and regulations change.
Certain of the healthcare-related products and services offered by the Company are subject to
stringent laws and regulations at both the federal and state levels, requiring compliance with
burdensome and complex billing, substantiation and record-keeping requirements. Financial
relationships between our Company and physicians and other referral sources are subject to
governmental regulation. Government officials and the public will continue to debate healthcare
reform and regulation. Changes in healthcare law, new interpretations of existing laws, or changes
in payment methodology may have a material impact on our business and results of operations.
The markets in which the Company operates are highly competitive and the Company may be unable to
compete successfully against competitors with greater resources.
The Company competes in markets that are constantly changing, intensely competitive (given low
barriers to entry), highly fragmented and subject to dynamic economic conditions. Increased
competition is likely to result in price
13
reductions, reduced gross margins, loss of customers, and loss of market share, any of which could
harm our net revenue and results of operations. Many of the Company’s competitors and potential
competitors relative to the Company’s products and services in the areas of durable medical
equipment, and oxygen and respiratory services, have more capital, substantial marketing, and
technical resources and expertise in specialized financial services than does the Company. These
competitors include: on-line marketers, national wholesalers, and national and regional
distributors. Further, the Company may face a significant competitive challenge from alliances
entered into between and among its competitors, major HMO’s or chain drugstores, as well as from
larger competitors created through industry consolidation. These potential competitors may be able
to respond more quickly than the Company to emerging market changes or changes in customer needs.
In addition, certain of our competitors may have or may obtain significantly greater financial and
marketing resources than we may have. In addition, relatively few barriers to entry exist in local
healthcare markets. As a result, we could encounter increased competition in the future that may
increase pricing pressure and limit our ability to maintain or increase our market share for our
durable medical equipment, mail order pharmacy and related businesses.
We may not be able to successfully integrate acquired businesses, which could result in our failure
to increase revenues or to avoid duplication of costs among acquired businesses, thereby adversely
affecting our financial results and profitability.
The successful integration of an acquired business is dependent on various factors including the
size of the acquired business, the assets and liabilities of the acquired business, the complexity
of system conversions, the scheduling of multiple acquisitions in a given geographic area and
management’s execution of the integration plan. Our business plan is premised on increasing our
revenues by leveraging the strengths of our staffing and home care network to cross sell our other
products and services. Our business plan is also premised on avoiding duplication of cost among our
existing and acquired businesses where possible. If we fail to successfully integrate in these key
areas, our Company’s financial results and profitability will be adversely affected, due to the
failure to capitalize on the economies of scale presented by spreading our cost structure over a
wider revenue base.
The failure to implement the Company’s business strategy may result in our inability to be
profitable and adversely impact the value of our Common Stock.
We anticipate that the Company will continue to pursue an aggressive internal growth strategy,
which will depend, in large part, upon our ability to develop and expand the Company’s businesses.
We believe that the failure to implement an aggressive growth strategy, or a failure to
successfully integrate recently acquired businesses, may result in our inability to be profitable,
because our business plan is premised on, among other things, capitalizing on the economies of
scale presented by spreading our cost structure over a wider revenue base. Our inability to achieve
profitability could adversely impact the value of our Common Stock.
We cannot predict the impact that the registration of the shares may have on the price of the
Company’s shares of Common Stock.
We cannot predict the effect, if any, that sales of, or the availability for sale of, shares of our
Common Stock by the selling security holders pursuant to a prospectus or otherwise will have on the
market price of our securities prevailing from time to time. The possibility that substantial
amounts of our Common Stock might enter the public market could adversely affect the prevailing
market price of our Common Stock and could impair our ability to fund acquisitions or to raise
capital in the future through the sales of securities. Sales of substantial amounts of our
securities, including shares issued upon the exercise of options or warrants, or the perception
that such sales could occur, could adversely effect prevailing market prices for our securities.
Ownership of our stock is concentrated in a small group of security holders who may exercise
substantial control over our actions to the detriment of our other security holders.
There are four shareholders of the Company, after elimination of duplication due to attribution
resulting from application of the beneficial ownership provisions of the Securities Exchange Act of
1934, as amended, including John E. Elliott II, Chairman of the Board of Directors, who are
beneficial owners of 5% or more of the Company’s shares of Common Stock outstanding as of March 31,
2007. These shareholders collectively own 38% of our shares of Common Stock outstanding as of March
31, 2007. This concentrated ownership of our Common Stock gives a few security holders the ability
to control our Company and the direction of our business as to matters requiring shareholder
approval, such as mergers,
14
certain acquisitions, asset sales and other significant corporation transactions. This concentrated
ownership may prevent other shareholders from influencing the election of directors and other
significant corporate decisions, to the extent that these four shareholders vote their shares of
Common Stock together.
The price of our Common Stock has been, and will likely continue to be, volatile, which could
diminish the ability to recoup an investment, or to earn a return on an investment, in our
Company.
The market price of our Common Stock, like that of the securities of many other companies with
limited operating history and public float, has fluctuated over a wide range, and it is likely that
the price of our Common Stock will fluctuate in the future. Since the reverse merger on May 10,
2004, the closing price of our Common Stock, as quoted by the OTC Bulletin Board and the American
Stock Exchange (AMEX) beginning July 3, 2006, has fluctuated from a low of $.60 to a high of $3.49.
From March 31, 2006 through June 27, 2007, our Common Stock has fluctuated from a low of $1.16 to
a high of $3.48. Slow demand for our Common Stock has resulted in limited liquidity, and it may be
difficult to dispose of the Company’s securities. Due to the volatility of the price our Common
Stock, an investor may be unable to resell shares of our Common Stock at or above the price paid
for them, thereby exposing an investor to the risk that he may not recoup an investment in our
Company or earn a return on an investment. In the past, securities class action litigation has been
brought against companies following periods of volatility in the market price of their securities.
If we are the target of similar litigation in the future, our Company would be exposed to incurring
significant litigation costs. This would also divert management’s attention and resources, all of
which could substantially harm our business and results of operations.
Resale of our securities by any holder may be limited and affected by state blue-sky laws, which
could adversely affect the price of our securities and the holder’s investment in our Company.
Under the securities laws of some states, shares of common stock and warrants can be sold in such
states only through registered or licensed brokers or dealers. In addition, in some states,
warrants and shares of common stock may not be sold unless these shares have been registered or
qualified for sale in the state or an exemption from registration or qualification is available and
is complied with. The requirement of a seller to comply with the requirements of state blue sky
laws may lead to delay or inability of a holder of our securities to dispose of such securities,
thereby causing an adverse effect on the resale price of our securities and your investment in our
Company.
The issuance of our preferred stock could materially impact the price of Common Stock and the
rights of holders of our Common Stock.
The Company is authorized to issue 5,000,000 shares of serial preferred stock, par value $0.001.
Shares of preferred stock may be issued from time to time in one or more series as may be
determined by the Company’s Board of Directors. Except as otherwise provided in the Company’s
Articles of Incorporation, the Board of Directors has authority to fix by resolution adopted before
the issuance of any shares of each particular series of preferred stock, the designation, powers,
preferences, and relative participating, optional and other rights, and the qualifications,
limitations, and restrictions. The issuance of our preferred stock could materially impact the
price of Common Stock and the rights of holders of our Common Stock, including voting rights. The
issuance of preferred stock could decrease the amount of earnings and assets available for
distribution to holders of Common Stock, and may have the effect of delaying, deferring or
preventing a change in control of our Company, despite such change of control being in the best
interest of the holders of our shares of Common Stock. The existence of authorized but unissued
preferred stock may enable the Board of Directors to render more difficult or to discourage an
attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise.
The exercise of common stock warrants may depress our stock price and may result in dilution to our
Common Security holders.
A total of approximately 19.5 million warrants to purchase 19.5 million shares of our Common Stock
are issued and outstanding as of March 31, 2007. In addition, approximately 2.8 million warrants
to purchase 2.8 million shares of our Common Stock were issued in May 2007. The market price of
our Common Stock is above the exercise price of some of the outstanding warrants; therefore,
holders of those securities are likely to exercise their warrants and sell the Common Stock
acquired upon exercise of such warrants in the open market. Sales of a substantial number of shares
of our Common Stock in the public market by holders of warrants may depress the prevailing market
price for our Common Stock and could impair our ability to raise capital through the future sale of
our equity securities. Additionally, if the holders of
15
outstanding warrants exercise those warrants, our common security holders will incur dilution. The
exercise price of all common stock warrants, including Classes A, B-1 and B-2 Warrants, is subject
to adjustment upon stock dividends, splits and combinations, as well as certain anti-dilution
adjustments as set forth in the respective common stock warrants.
We have granted stock options to certain management employees and directors as compensation which
may depress our stock price and result in dilution to our common security holders.
As of March 31, 2007, options to purchase approximately 7.4 million shares of our Common Stock were
issued and outstanding. On August 18, 2006, the Board of Directors approved the Arcadia Resources,
Inc. 2006 Equity Incentive Plan (the “Plan”), which was subsequently approved by the security
holders on September 26, 2006. The Plan allows for the granting of additional incentive stock
options, non-qualified stock options, stock appreciation rights and restricted shares up to 5
million shares (2.5% of the Company’s authorized shares of common stock as of the date the Plan was
approved). The market price of our Common Stock is above the exercise price of some of the
outstanding options; therefore, holders of those securities are likely to exercise their options
and sell the Common Stock acquired upon exercise of such options in the open market. Sales of a
substantial number of shares of our Common Stock in the public market by holders of options may
depress the prevailing market price for our Common Stock and could impair our ability to raise
capital through the future sale of our equity securities. Additionally, if the holders of
outstanding options exercise those options, our common security holders will incur dilution. The
exercise price of all common stock options is subject to adjustment upon stock dividends, splits
and combinations, as well as anti-dilution adjustments as set forth in the option agreement.
We are dependent on our affiliated agencies and our internal sales force to sell our services and
products, the loss of which could adversely affect our business.
We largely rely upon our affiliated agencies to sell our staffing and home care services and on our
internal sales force to sell our durable medical equipment and pharmacy products. Arcadia Services’
affiliated agencies are owner-operated businesses. The office locations maintained by our
affiliated agencies are listed on our Company’s website. The primary responsibilities of Arcadia
Services’ affiliated agencies include the recruitment and training of field staff employed by
Arcadia Services and generating and maintaining sales to Arcadia Services’ customers. The
arrangements with affiliated agencies are formalized through a standard contractual agreement,
which state performance requirements of the affiliated agencies. Our affiliated agencies and
internal sales force operate in particular defined geographic regions. Our employees provide the
services to our customers and the affiliated agents and internal sales force are restricted by
non-competition agreements. In the event of loss of our affiliated agents or internal sales force
personnel, we would recruit new sales and marketing personnel and/or affiliated agents which could
cause our operating costs to increase and our sales to fall in the interim.
Our recurring losses from operations have caused us to receive a going concern opinion from
our independent auditors, which could negatively affect our business and results of operation.
After conducting an audit of the Company’s consolidated financial statements for the fiscal year
ended March 31, 2007, our independent auditors issued an unqualified opinion on the financial
statements that included a material uncertainty related to our ability to continue as a going
concern due to recurring losses from operations, which could adversely impact our ability to raise
additional capital. The Company’s ability to continue as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely basis. Management
anticipates that the Company will require additional financing to fund operating activities during
fiscal 2008. The Company’s new management team is exploring various alternatives for raising
additional capital, including potential divestitures of non-strategic businesses, seeking new debt
or equity financing, and pursuing joint venture arrangements. To the extent that seeking new debt,
restructuring operations or selling non-strategic businesses are insufficient to fund operating
activities over the next year, management anticipates raising capital through offering equity
securities in private or public offerings or through subordinated debt. If the Company is unable
to obtain additional funds when they are required or if the funds cannot be obtained on terms
favorable to the Company, management may be required to delay, scale back or eliminate its current
business strategy. Additionally, the Company must continue to satisfy the listing standards of the
American Stock Exchange. Although the Company has received no notification of any adverse action,
the American Stock Exchange, as a matter of policy, will consider the suspension or delisting of
any security when, in the opinion of the Exchange the financial condition and/or operating results
of the issuer appear to be unsatisfactory.
In connection with our evaluation of internal controls over financial reporting as required by
Section 404 under the Sarbanes-Oxley Act of 2002, we identified certain material weaknesses, which
could impact our ability to provide reliable and accurate financial reports and prevent fraud. We
could fail to meet our financial reporting responsibilities in future reporting periods if these
weaknesses are not remediated timely, or if any future failures by us to maintain adequate internal
controls over financial reporting result in additional material weaknesses.
Section 404 of the Sarbanes-Oxley Act of 2002 requires detailed review, documentation and testing
of our internal controls over financial reporting. This detailed review, documentation and testing
includes the assessment of the risks that could adversely affect the timely and accurate
preparation of our financial statements and the identification of internal controls that are
currently in place to mitigate the risks of untimely or inaccurate preparation of these financial
statements. The Company was required to comply with the requirements of Section 404 for the first
time in fiscal 2007. As part of this first-year review, management identified several control
deficiencies that represent material weaknesses at March 31, 2007. The Public Company Accounting
Oversight Board has defined “material weakness” as “a significant deficiency or combination of
significant deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented or detected.”
Although the Company is implementing remedial controls, if we fail to remedy these material
weaknesses in a timely manner, or if we fail in the future to maintain adequate internal controls
over financial reporting which result in additional material weaknesses, it could cause us to
improperly record our financial and operating results and could result in us failing to meet our
financial reporting responsibilities in future reporting periods.
16
We may not be able to secure the additional financing to fund operating activities through the end
of fiscal year 2008, which would raise substantial doubt about our ability to continue as a going
concern and would have a material adverse effect on our business and prospects.
Management anticipates that we will require additional financing to fund operating activities
during fiscal 2008 as described under the section entitled “Liquidity and Capital Resources.” The
Company’s new management team has developed a business plan that addresses operations, the
expectation of positive cash flow and alternatives for raising additional capital, including
potential divestitures of non-strategic businesses, restructuring existing short-term indebtedness
and/or seeking new debt or equity financing, and pursuing joint venture arrangements. To the
extent that restructuring existing short-term indebtedness, seeking new debt, restructuring
operations or selling non-strategic businesses are insufficient to fund operating activities over
the next year, management anticipates raising capital through offering equity securities in private
or public offerings or through subordinated debt. Our ability to secure additional financing in
this time period may be difficult due to our history of operating losses and negative cash flows,
and we cannot guarantee that such additional sources of financing will be available on acceptable
terms, if at all. An inability to raise sufficient capital to fund our operations would have a
material adverse affect on our business and would raise substantial doubt about our ability to
continue as a going concern, which would have a material adverse effect on our businesses and
prospects.
Our financial results could suffer as a result of the goodwill and intangible asset impairment
expense recognized for the year ended March 31, 2007.
As of March 31, 2007, a goodwill impairment expense of $17,197,000 was recognized in the Products
reporting unit and an additional customer relationships impairment expense of $1,457,000 was
recognized in the Products reporting unit, for total impairment expense in the Products reporting
unit of $18,654,000. Depending upon the outcome of our restructuring initiatives, the carrying
values of goodwill and other intangible assets could continue to be negatively impacted. We will
perform impairment tests periodically, and at least annually, in the future. Whenever we perform
impairment tests, the carrying value of goodwill or other intangible assets could exceed their
implied fair value and would, therefore, require adjustment. Such adjustment would result in a
non-cash charge to our operating income in that period, which could harm our financial results.
Our financial results could suffer if the goodwill and other intangible assets we acquired in our
acquisition of PrairieStone Pharmacy, LLC become impaired, or as a result of costs associated with
the acquisition.
Primarily as a result of our acquisition of PrairieStone Pharmacy, LLC, approximately 53% of our
total assets are goodwill and other intangibles as of March 31, 2007, of which approximately $33.3
million is goodwill and $29.0 million is other intangibles. In accordance with the Financial
Accounting Standards Board’s Statement No. 142, “Goodwill and Other Intangible Assets”, goodwill is
not amortized but is reviewed for impairment annually, or more frequently if impairment indicators
arise. Other intangibles are also reviewed at least annually or more frequently, if certain
conditions exist, and may be amortized. Management is contemplating cost reduction initiatives that
may result in the closure or sale of certain non-strategic businesses. Depending upon the outcome
of such initiatives, the carrying values of goodwill and other intangible assets could be
negatively impacted. When we perform impairment tests, the carrying value of goodwill or other
intangible assets could exceed their implied fair value and would, therefore, require adjustment.
Such adjustment would result in a charge to our operating income in that period, which would likely
harm our financial results. In addition, we believe that we may incur charges to operations, which
are not currently reasonably estimable, in subsequent quarters after the acquisition was completed,
to reflect costs associated with integrating PrairieStone. It is possible that we will incur
additional material charges in subsequent quarters to reflect additional costs associated with the
acquisition.
We have a history of operating losses and negative cash flow that may continue into the foreseeable
future.
We have a history of operating losses and negative cash flow. If we fail to execute our strategy to
achieve and maintain profitability in the future, investors could lose confidence in the value of
our common stock, which could cause our stock price to decline, adversely affect our ability to
raise additional capital, and could adversely affect our ability to meet the financial covenants
contained in our credit agreement with our financial institution. Further, if we continue to incur
operating losses and negative cash flow we may have to implement significant cost cutting measures
which could include a substantial reduction in work force, location closures, and/ or the sale or
disposition of certain subsidiaries. We cannot
17
assure that any of the cost cutting measures we implement will be effective or result in
profitability or positive cash flow. Our acquisitions may not create the benefits and results we
expect, adversely affecting our strategy to achieve profitability. To achieve profitability, we
will also need to, among other things, effectively integrate our acquisitions, increase our revenue
base, reduce our cost structure and realize economies of scale. If we are unable to achieve and
maintain profitability, our stock price could be materially adversely affected.
We may not be able to meet the financial covenants contained in our credit facility, and we may not
be able to obtain a waiver for such violations.
Under our existing credit facility, we are required to adhere to certain financial covenants. As
of March 31, 2007, the Company was not in compliance with certain covenants and received a waiver
from the lender. If there are future covenant violations and we do not receive a waiver for such
future covenant violations, then our lender could declare a default under the credit facility and,
among other actions, increase our borrowing costs and demand the immediate repayment of the credit
facility. If such demand is made and we are unable to refinance the credit facility or obtain an
alternative source of financing, such demand for repayment would have a material adverse affect on
our financial condition and liquidity. Based on our history of operating losses, we cannot
guarantee that we would be able to refinance or obtain alternative financing.
In
addition to the financial covenants, our existing credit facility
with Comerica Bank includes a subjective acceleration clause and
requires the Company to maintain a lockbox. Currently, the Company
has the ability to control the funds in the deposit account and
determine the amount issued to pay down the line of credit balance.
The bank reserves the right under the security agreement to request
that the indebtedness be on a remittance basis in the future, whether
or not an event of default has occurred. If the bank exercises this
right, then the Company would be forced to use its cash to pay down
this indebtedness rather than for other needs, including day-to-day
operations, expansion initiatives or the pay down of debt which
accrues at a higher interest rate.
The disposition of businesses that do not fit with our evolving strategy can be highly uncertain.
We will continue to evaluate the potential disposition of assets and businesses that are not
profitable or are no longer consistent with our strategic objectives. When we decide to sell assets
or a business, we may encounter difficulty in finding buyers or alternative exit strategies on
acceptable terms in a timely manner, which could delay the accomplishment of our strategic
objectives, or we may dispose of a business at a price or on terms which are less than we had
anticipated. There is also a risk that we sell a business whose subsequent performance exceeds our
expectations, in which case our decision would have potentially sacrificed enterprise value.
Conversely, we may be too optimistic about a particular business’s prospects, in which case we may
be unable to find a buyer at a price acceptable to us and, therefore, may have potentially
sacrificed enterprise value.
The Centers for Medicare and Medicaid Services (“CMS”) recently announced a competitive bidding
program related to durable medical equipment. The program will operate within the ten largest
metropolitan areas during 2008 and then be expanded to 70 additional areas in 2009. As a durable
medical equipment vendor, the competitive bidding program could result in loss of revenue due to
over-bidding by the Company and will increase the compliance costs.
Starting in 2007, Medicare is scheduled to begin to phase in a nationwide competitive bidding
program to replace the existing fee schedule payment methodology. The program is to begin in 10
high-population metropolitan statistical areas, or MSAs, expanding to 80 MSAs in 2009 and
additional areas thereafter. Under competitive bidding, suppliers compete for the right to provide
items to beneficiaries in a defined region. Only a limited number of suppliers will be selected in
any given MSA, resulting in restricted supplier choices for beneficiaries. The Medicare
Modernization Act of 2003 permits certain exemptions from competitive bidding, including exemptions
for rural areas and areas with low population density within urban areas that are not competitive,
unless there is a significant national market through mail-order for the particular item. On April
24, 2006, CMS issued proposed regulations regarding the implementation of competitive bidding. The
proposed regulations include, among other things, proposals regarding how CMS will determine in
which MSAs to initiate the program, conditions to be met for awarding contracts, and the
“grandfathering” of existing oxygen and other HME agreements with beneficiaries if a supplier is
not selected. The proposed regulations also would revise the methodology CMS would use to price new
products not included in competitive bidding. The proposed regulations do not provide many of the
details needed to assess the impact that competitive bidding and other elements of the rule will
have on our business. Until the regulations are finalized, significant uncertainty remains as to
how the competitive bidding program will be implemented. At this time, we do not know which of our
products will be subject to competitive bidding, nor can we predict the impact that it will have on
our business.
Several anti-takeover measures under Nevada law could delay or prevent a change of our control,
despite such change of control being in the best interest of the holders of our shares of Common
Stock.
Several anti-takeover measures under Nevada law could delay or prevent a change of our control,
despite such change of control being in the best interest of the holders of our shares of Common
Stock. This could make it more difficult or discourage an attempt to obtain control of us by means
of a merger, tender offer, proxy contest or otherwise. This could negatively impact the value of
an investment in our Company, by discouraging a potential suitor who may otherwise be willing to
offer a premium for shares of the Company’s common stock.
18
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES
We do not own any real estate or improvements. Our The Company and its subsidiaries presently
occupy leased space including the locations listed in the following table:
| |
|
|
|
|
|
|
|
|
| Street Address |
|
City |
|
State |
|
Zip Code |
Corporate Offices |
|
|
|
|
|
|
|
|
| |
26777 Central Park Blvd., Ste. 200 |
|
Southfield |
|
Michigan |
|
|
48076 |
|
405 5th Avenue South, Ste. 6 |
|
Naples |
|
Florida |
|
|
34102 |
|
801 N. Magnolia Avenue, Ste. 210 & 450 |
|
Orlando |
|
Florida |
|
|
32803 |
|
|
|
|
|
|
|
|
|
|
Products Locations |
|
|
|
|
|
|
|
|
| |
1810 Decatur Highway, Ste. 124 |
|
Fultondale |
|
Alabama |
|
|
35068 |
|
3592 Lorna Ridge Drive |
|
Hoover |
|
Alabama |
|
|
35216 |
|
531 5th Street, Unit B |
|
San Fernando |
|
California |
|
|
91340 |
|
955 E. 58th Ave., Unit O |
|
Denver |
|
Colorado |
|
|
80216 |
|
2828 South McCall Road, Suite 26 |
|
Englewood |
|
Florida |
|
|
34224 |
|
13850 Treeline Avenue South |
|
Ft. Myers |
|
Florida |
|
|
33913 |
|
6900 Phillips Hwy, Ste. 23 |
|
Jacksonville |
|
Florida |
|
|
32216 |
|
105 N. Lakeshore Way |
|
Lake Alfred |
|
Florida |
|
|
33850 |
|
1050 Corporate Avenue, Unit 105 |
|
North Port |
|
Florida |
|
|
34289 |
|
1455 Railhead Road, Ste. 28 |
|
Naples |
|
Florida |
|
|
34110 |
|
5355 McIntosh Road, Ste. C |
|
Sarasota |
|
Florida |
|
|
34233 |
|
5935 US 27 N., Suite 105 |
|
Sebring |
|
Florida |
|
|
33870 |
|
2840 Scherer Drive, Ste. 425 |
|
St. Petersburg |
|
Florida |
|
|
33716 |
|
221A Pat Haralson Memorial Drive |
|
Blairsville |
|
Georgia |
|
|
30512 |
|
590 Historic Hwy. 441N |
|
Demorest |
|
Georgia |
|
|
30535 |
|
1651 Thompson Vr Rd. NW |
|
Gainesville |
|
Georgia |
|
|
30501 |
|
310 E. 41st Street |
|
Savannah |
|
Georgia |
|
|
31401 |
|
200 Technology Court, Ste. 300 |
|
Smyrna |
|
Georgia |
|
|
30082 |
|
111 Erick Street |
|
Crystal Lake |
|
Illinois |
|
|
60014 |
|
1126 Wall Street |
|
Jacksonville |
|
Illinois |
|
|
62650 |
|
1665 Quincy Ave., Unit 111 |
|
Naperville |
|
Illinois |
|
|
60540 |
|
2201 West Townline, Suite F |
|
Peoria |
|
Illinois |
|
|
61615 |
|
381 Kairns Drive |
|
Crown Point |
|
Indiana |
|
|
46307 |
|
1600 Kepner Dr. |
|
Lafayette |
|
Indiana |
|
|
47905 |
|
61 West Main Street |
|
Rossville |
|
Indiana |
|
|
46065 |
|
868 Hwy. 15 South |
|
Jackson |
|
Kentucky |
|
|
41339 |
|
3306 Clays Mill Road, Suite 104 D3 & D4 |
|
Lexington |
|
Kentucky |
|
|
40503 |
|
762 Summa Avenue |
|
Westbury |
|
New York |
|
|
11590 |
|
1635 North Bridge Street |
|
Elkin |
|
North Carolina |
|
|
28621 |
|
9801 West Kincey Ave., Ste 170 |
|
Huntersville |
|
North Carolina |
|
|
28078 |
|
101 North Third Street |
|
Mebane |
|
North Carolina |
|
|
27302 |
|
496 B. N. Main Street |
|
Mount Airy |
|
North Carolina |
|
|
27030 |
|
186 West Independence Blvd |
|
Mount Airy |
|
North Carolina |
|
|
27030 |
|
3851 Hwy 64 East, Ste. 4 |
|
Murphy |
|
North Carolina |
|
|
28906 |
|
46 Boone Trail |
|
North Wilkesboro |
|
North Carolina |
|
|
28659 |
|
1760 Jonestown Road, Ste. 100 |
|
Winston-Salem |
|
North Carolina |
|
|
27103 |
|
416A Robertson Blvd. |
|
Waterboro |
|
South Carolina |
|
|
29488 |
|
606 East Stuart Drive |
|
Galax |
|
Virginia |
|
|
24333 |
|
|
|
|
|
|
|
|
|
|
Retail Locations |
|
|
|
|
|
|
|
|
| |
3200 Old Boynton Road |
|
Boyton Beach |
|
Florida |
|
|
33436 |
|
6225 E. State Road 64 |
|
Bradenton |
|
Florida |
|
|
34208 |
|
19
| |
|
|
|
|
|
|
|
|
| Street Address |
|
City |
|
State |
|
Zip Code |
5851 NW 177th Street |
|
Hialeah |
|
Florida |
|
|
33015 |
|
2300 W. Atlantic Blvd |
|
Pompano Beach |
|
Florida |
|
|
33069 |
|
3501 34th Street South |
|
St. Petersburg |
|
Florida |
|
|
33711 |
|
7700 Brush Hill, Suite 240 |
|
Burr Ridge |
|
Illinois |
|
|
60527 |
|
32123 Gratiot Avenue |
|
Roseville |
|
Indiana |
|
|
48066 |
|
2100 Southfield |
|
Lincoln Park |
|
Michigan |
|
|
48146 |
|
18320 Middlebelt Road |
|
Livonia |
|
Michigan |
|
|
48152 |
|
27600 Novi Road |
|
Novi |
|
Michigan |
|
|
48377 |
|
14100 Lakeside Circle |
|
Sterling Heights |
|
Michigan |
|
|
48313 |
|
300 W. 14 Mile Road |
|
Troy |
|
Michigan |
|
|
48083 |
|
2701 Carlisle Blvd NE |
|
Albuquerque |
|
New Mexico |
|
|
87110 |
|
200 West Interstate 20 |
|
Midland |
|
Texas |
|
|
79701 |
|
|
|
|
|
|
|
|
|
|
Services Locations |
|
|
|
|
|
|
|
|
| |
4350 Fowler Street #1B |
|
Ft. Myers |
|
Florida |
|
|
33901 |
|
3840 E. Packard , Suite 160 |
|
Ann Arbor |
|
Michigan |
|
|
48108 |
|
1532 Opdyke Road, Ste. 400 |
|
Auburn Hills |
|
Michigan |
|
|
48326 |
|
5350 E. Beckley Road |
|
Battle Creek |
|
Michigan |
|
|
49015 |
|
6540 Millenium Drive, Ste. 160 |
|
Lansing |
|
Michigan |
|
|
48917 |
|
535 N. Clippert Ste. 2 |
|
Lansing |
|
Michigan |
|
|
48912 |
|
1787 W. Genessee, Suite A |
|
Lapeer |
|
Michigan |
|
|
48446 |
|
18706 Eureka Road |
|
Southgate |
|
Michigan |
|
|
48195 |
|
34869 Mound Road |
|
Sterling Heights |
|
Michigan |
|
|
48310 |
|
380 Maple Avenue West, Ste. 204 |
|
Vienna |
|
Michigan |
|
|
22180 |
|
770 Patton Avenue, Ste. F |
|
Asheville |
|
North Carolina |
|
|
28806 |
|
6320 Angus Drive, Ste. D |
|
Raleigh |
|
North Carolina |
|
|
27617 |
|
1033 Randolph Street, Suite 21 |
|
Thomasville |
|
North Carolina |
|
|
27360 |
|
1650 W. Market Street, Ste. 27 |
|
Akron |
|
Ohio |
|
|
44313 |
|
1 Commerce Park Square, 23210 Chagrin Blvd., Ste. 101 |
|
Beachwood |
|
Ohio |
|
|
44122 |
|
762 Independence Blvd., Suite 798 |
|
Virginia Beach |
|
Virginia |
|
|
23455 |
|
|
|
|
|
|
|
|
|
|
Products and Services Locations |
|
|
|
|
|
|
|
|
| |
7990 Grand River, Suite C |
|
Brighton |
|
Michigan |
|
|
48114 |
|
10 Vans Avenue, Ste. 4 & 6 |
|
Coldwater |
|
Michigan |
|
|
49036 |
|
3029 Page Avenue |
|
Jackson |
|
Michigan |
|
|
49203 |
|
5413 S. Westnedge Ave., Ste. A |
|
Kalamazoo |
|
Michigan |
|
|
49002 |
|
26431 Southfield Rd. |
|
Lathrup Village |
|
Michigan |
|
|
48076 |
|
728 Pleasant Street, Ste. 4 |
|
St. Joseph |
|
Michigan |
|
|
49085 |
|
105 Mall Boulevard, Suite 283W |
|
Monroeville |
|
Pennsylvania |
|
|
15146 |
|
|
|
|
|
|
|
|
|
|
Pharmacy Locations |
|
|
|
|
|
|
|
|
| |
2024 Hollywood Blvd |
|
Hollywood |
|
Florida |
|
|
33020 |
|
3524 Park Plaza Road |
|
Paducah |
|
Kentucky |
|
|
42001 |
|
2800 Campus Drive, Ste. 30 |
|
Plymouth |
|
Minnesota |
|
|
55441 |
|
|
|
|
|
|
|
|
|
|
Clinics Locations |
|
|
|
|
|
|
|
|
| |
6309 Lima Road |
|
Fort Wayne |
|
Indiana |
|
|
46818 |
|
5909 Illinois Road |
|
Fort Wayne |
|
Indiana |
|
|
46804 |
|
2507 Chester Blvd |
|
Richmond |
|
Indiana |
|
|
47374 |
|
2425 Alpine Avenue |
|
Grand Rapids |
|
Michigan |
|
|
49544 |
|
3757 Plainfield Avenue |
|
Grand Rapids |
|
Michigan |
|
|
49525 |
|
5500 Clyde Park Avenue SW |
|
Wyoming |
|
Michigan |
|
|
49509 |
|
1701 N. Green Valley Parkway |
|
Henderson |
|
Nevada |
|
|
89074 |
|
9425 W. Desert Inn Road |
|
Las Vegas |
|
Nevada |
|
|
89117 |
|
160 Summit Avenue |
|
Montvale |
|
New Jersey |
|
|
07645 |
|
20
ITEM 3. LEGAL PROCEEDINGS
We are a defendant from time to time in lawsuits incidental to our business. We are not currently
subject to, and none of our subsidiaries are subject to, any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the quarter ended March 31, 2007.
Part II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of our Common Stock are currently quoted on the American Stock Exchange (“AMEX”) under the
symbol “KAD.” Prior to July 3, 2006, shares of our Common Stock were quoted on the OTC Bulletin
Board. The following table sets forth the quarterly high and low bid prices for our Common Stock
for the periods indicated. The prices set forth below represent inter-dealer quotations, without
retail markup, markdown or commission and may not be reflective of actual transactions. There is no
established public trading market for any of our warrants, options or any other securities.
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Bid Price |
| Fiscal Year |
|
Period |
|
High |
|
Low |
| |
|
|
|
|
Fiscal Year ended March 31, 2007 |
|
Fourth Quarter ended March 31, 2007 |
|
$ |
2.37 |
|
|
$ |
1.77 |
|
|
|
Third Quarter ended December 31, 2006 |
|
$ |
3.38 |
|
|
$ |
2.06 |
|
|
|
Second Quarter ended September 30, 2006 (1) |
|
$ |
3.48 |
|
|
$ |
2.19 |
|
|
|
First Quarter ended June 30, 2006 |
|
$ |
3.29 |
|
|
$ |
2.14 |
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year ended March 31, 2006 |
|
Fourth Quarter ended March 31, 2006 |
|
$ |
3.53 |
|
|
$ |
2.36 |
|
|
|
Third Quarter ended December 31, 2005 |
|
$ |
2.90 |
|
|
$ |
2.48 |
|
|
|
Second Quarter ended September 30, 2005 |
|
$ |
2.80 |
|
|
$ |
2.06 |
|
|
|
First Quarter ended June 30, 2005 |
|
$ |
2.46 |
|
|
$ |
1.74 |
|
|
|
|
| (1) |
|
On July 3, 2006, the Company became listed on the
American Stock Exchange and changed its
stock symbol to “KAD.” |
There is no established market for our Classes A, B-1 and B-2 Warrants. The Company’s respective
warrants are not quoted by the American Stock Exchange, nor are they listed on any exchange. We do
not expect our warrants to be quoted by the American Stock Exchange or listed on any exchange. As a
result, an investor may find it difficult to trade, dispose of, or to obtain accurate quotations of
the price of, our warrants.
There are
approximately 310 record holders of our Common Stock as of June
27, 2007. The number of
record holders of our Common Stock excludes an estimate of the number of beneficial owners of
Common Stock held in street name, totaling approximately 26 million shares. The transfer agent and
registrar for our Common Stock is National City Bank, 629 Euclid Avenue, Suite 635, Cleveland, Ohio
44114 (216-222-2537).
We have never paid any cash dividends on our common shares, and we do not anticipate that we will
pay any dividends with respect to those securities in the foreseeable future. Our current business
plan is to retain any future earnings to finance the expansion and development of our business. Any
future determination to pay cash dividends will be at the discretion of our Board of Directors, and
will be dependent upon our financial condition, results of operations, capital requirements and
other factors as our Board may deem relevant at that time.
The information presented in Item 9B pertaining to sales of unregistered equity securities is
incorporated herein by this reference. The information presented in Item 12 regarding compensation
plans under which equity securities of the Company are authorized for issuance is incorporated
herein by this reference.
21
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated summary financial data is set forth in the table below. Results for the
period from April 1, 2004 to May 9, 2004 and the years ended March 31, 2004 and 2003 are those of
Arcadia Services, Inc. and its subsidiaries presented on a consolidated basis (i.e., the
Predecessor entity). Results for the years ended March 31, 2007 and 2006 and for the period from
May 10, 2004 to March 31, 2005 are those of the Successor entity as described below subsequent to
the reverse merger transaction. You should read the following summary consolidated financial data
in conjunction with the audited consolidated financial statements and notes thereto included
elsewhere in this Form 10-K.
The “Predecessor” entity is Arcadia Services, Inc. and its subsidiaries. On May 7, 2004, RKDA
acquired Arcadia Services, Inc. This acquisition, which preceded the RKDA reverse merger, was
accounted for as a purchase transaction. The “Successor” entity is the combined company resulting
from the RKDA reverse merger, including “old” Critical Home Care, Inc., RKDA, Arcadia Services and
its subsidiaries, Arcadia RX and all other entities purchased subsequent to the reverse merger
through March 31, 2007. Results for periods up to May 9, 2004 are those of Arcadia Services, Inc.
and its subsidiaries presented on a consolidated basis (i.e., the Predecessor entity). Results for
periods after May 10, 2004 are those of the Successor entity as described above subsequent to the
reverse merger transaction.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Successor |
|
|
Predecessor |
| |
|
|
|
|
|
Year Ended |
|
Period from |
|
|
Period from |
|
Year Ended |
|
Year Ended |
| (in thousands, except per |
|
Year Ended March 31, |
|
March 31, |
|
May 10, 2004 to |
|
|
April 1, 2004 to |
|
March 31, |
|
March 31, |
| share data) |
|
2007 |
|
2006 |
|
March 31, 2005 |
|
|
May 9, 2004 |
|
2004 |
|
2003 |
| |
|
|
|
|
|
Revenues, net |
|
$ |
158,411 |
|
|
$ |
130,929 |
|
|
$ |
95,855 |
|
|
|
$ |
9,487 |
|
|
$ |
78,359 |
|
|
$ |
76,276 |
|
Cost of revenues |
|
|
106,008 |
|
|
|
87,564 |
|
|
|
67,050 |
|
|
|
|
6,906 |
|
|
|
56,205 |
|
|
|
53,822 |
|
| |
|
|
Gross profit |
|
|
52,403 |
|
|
|
43,365 |
|
|
|
28,805 |
|
|
|
|
2,581 |
|
|
|
22,154 |
|
|
|
22,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses |
|
|
65,288 |
|
|
|
43,174 |
|
|
|
32,264 |
|
|
|
|
2,102 |
|
|
|
18,424 |
|
|
|
18,172 |
|
Goodwill and intangible asset
impairment |
|
|
22,921 |
|
|
|
— |
|
|
|
707 |
|
|
|
|
16 |
|
|
|
— |
|
|
|
— |
|
Depreciation and amortization |
|
|
4,256 |
|
|
|
2,326 |
|
|
|
1,458 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
Operating income (loss) |
|
|
(40,063 |
) |
|
|
(2,135 |
) |
|
|
(5,624 |
) |
|
|
|
463 |
|
|
|
3,730 |
|
|
|
4,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses (income) |
|
|
— |
|
|
|
— |
|
|
|
(87 |
) |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Interest expense (income), net |
|
|
3,572 |
|
|
|
2,457 |
|
|
|
2,174 |
|
|
|
|
— |
|
|
|
(2 |
) |
|
|
(1 |
) |
| |
|
|
|
|
|
Total other expenses, net |
|
|
3,572 |
|
|
|
2,457 |
|
|
|
2,087 |
|
|
|
|
— |
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income
tax expense (benefit) |
|
|
(43,634 |
) |
|
|
(4,592 |
) |
|
|
(7,711 |
) |
|
|
|
463 |
|
|
|
3,732 |
|
|
|
4,283 |
|
Income tax expense |
|
|
138 |
|
|
|
119 |
|
|
|
186 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
Net income (loss) |
|
$ |
(43,772 |
) |
|
$ |
(4,711 |
) |
|
$ |
(7,897 |
) |
|
|
$ |
463 |
|
|
$ |
3,732 |
|
|
$ |
4,283 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma income tax expense from
tax status change |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
158 |
|
|
|
1,269 |
|
|
|
1,456 |
|
Pro forma income after income tax
from tax status change |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
$ |
305 |
|
|
$ |
2,463 |
|
|
$ |
2,827 |
|
Income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.48 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.11 |
) |
|
|
$ |
0.49 |
|
|
$ |
3.94 |
|
|
$ |
4.52 |
|
Diluted |
|
$ |
(0.48 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.11 |
) |
|
|
$ |
0.49 |
|
|
$ |
3.94 |
|
|
$ |
4.52 |
|
Pro forma income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
$ |
0.32 |
|
|
$ |
2.60 |
|
|
$ |
2.98 |
|
Diluted |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
$ |
0.32 |
|
|
$ |
2.60 |
|
|
$ |
2.98 |
|
Weighted average number of shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
91,433 |
|
|
|
83,834 |
|
|
|
72,456 |
|
|
|
|
948 |
|
|
|
948 |
|
|
|
948 |
|
Diluted |
|
|
91,433 |
|
|
|
83,834 |
|
|
|
72,456 |
|
|
|
|
948 |
|
|
|
948 |
|
|
|
948 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31, |
|
March 31, |
|
March 31, |
|
|
March 31, |
|
March 31, |
| |
|
2007 |
|
2006 |
|
2005 |
|
|
2004 |
|
2003 |
| |
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
$ |
41,922 |
|
|
$ |
32,322 |
|
|
$ |
24,536 |
|
|
|
$ |
13,612 |
|
|
$ |
12,325 |
|
Working capital |
|
|
1,210 |
|
|
|
19,734 |
|
|
|
10,032 |
|
|
|
|
9,069 |
|
|
|
8,874 |
|
Total assets |
|
|
117,228 |
|
|
|
85,151 |
|
|
|
55,593 |
|
|
|
|
17,203 |
|
|
|
14,999 |
|
Total long-term debt, including current maturities |
|
|
46,890 |
|
|
|
19,772 |
|
|
|
22,825 |
|
|
|
|
430 |
|
|
|
2 |
|
Total liabilities |
|
|
63,144 |
|
|
|
28,107 |
|
|
|
30,071 |
|
|
|
|
4,973 |
|
|
|
3,453 |
|
Total stockholders’ equity |
|
|
54,084 |
|
|
|
57,044 |
|
|
|
25,522 |
|
|
|
|
12,230 |
|
|
|
11,546 |
|
22
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautonary Statement Concerning Forward-Looking Statements
The MD&A should be read in conjunction with the other sections of this report, including the
consolidated financial statements and notes thereto beginning on page F-1 of this report and the
subsection captioned “Statements Regarding Forward-Looking Information” above. Historical results
set forth in Selected Consolidated Financial Information and the Financial Statements beginning on
page F-1 and this section should not be taken as indicative of our future operations.
As previously stated, we caution you that statements contained in this report (including our
documents incorporated herein by reference) include forward-looking statements. The Company claims
all safe harbor and other legal protections provided to it by law for all of its forward-looking
statements. Forward-looking statements involve known and unknown risks, assumptions, uncertainties
and other factors about our Company, which could cause actual financial or operating results,
performances or achievements expressed or implied by such forward-looking statements not to occur
or be realized. Such forward-looking statements generally are based on our reasonable estimates of
future results, performances or achievements, predicated upon current conditions and the most
recent results of the companies involved and their respective industries. Forward-looking
statements are also based on economic and market factors and the industry in which we do business,
among other things. Forward-looking statements are not guaranties of future performance.
Forward-looking statements may be identified by the use of forward-looking terminology such as
“may,” “can,” “will,” “could,” “should,” “project,” “expect,” “plan,” “predict,” “believe,”
“estimate,” “aim,” “anticipate,” “intend,” “continue,” “potential,” “opportunity” or similar terms,
variations of those terms or the negative of those terms or other variations of those terms or
comparable words or expressions.
Actual events and results may differ materially from those expressed or forecasted in
forward-looking statements due to a number of factors. Important factors that could cause actual
results to differ materially include, but are not limited to (1) our ability to compete with our
competitors; (2) our ability to obtain additional debt or equity financing and/or to restructure
existing indebtedness, which may be difficult due to our history of operating losses and negative
cash flows; although management believes that the Company’s short-term cash needs can be adequately
sourced, we cannot assure that such additional sources of financing will be available on acceptable
terms, if at all, and an inability to raise sufficient capital to fund our operations would have a
material adverse affect on our business and would raise doubts about our ability to continue as a
going concern; (3) the ability of our affiliated agencies to effectively market and sell our
services and products; (4) our ability to procure product inventory for resale; (5) our ability to
recruit and retain temporary workers for placement with our customers; (6) the timely collection of
our accounts receivable; (7) our ability to attract and retain key management employees; (8) our
ability to timely develop new services and products and enhance existing services and products; (9)
our ability to execute and implement our growth strategy; (10) the impact of governmental
regulations; (11) marketing risks; (12) our ability to adapt to economic, political and regulatory
conditions affecting the health care industry; (13) other unforeseen events that may impact our
business; (14) our ability to successfully integrate acquisitions; and (15) the ability of our new
management team to successfully pursue its business plan and the risk that the Company may be
required to enact restructuring measures in addition to those announced on March 30, 2007.
Overview
Arcadia Resources, Inc. (“Arcadia” or the “Company”) is a national provider of in-home health care
and retail / employer health care services. The Company has five distinct segements: Services,
Products (Durable Medical Equipment or “DME”), Retail, Pharmacy and Clinics. The Services segment
is a national provider of medical staffing services, including home healthcare and medical
staffing, as well as light industrial, clerical and technical staffing services. Based in
Southfield, Michigan, the Services segment provides its staffing services through a network of
affiliate and company-owned offices throughout the United States. The Products segment markets,
rents and sells products and equipment across the United States including a catalog out-sourcing
and product fulfuillment business which sells various medical equipment product offerings. In
addition, the Retail segment includes operations which sell medical equipment at certain Sears and
Wal-Mart retail locations. The Company is in the process of disposing of this portion of the
Retail segment in order to focus exclusively on the catalog business. The Pharmacy segment
provides pharmacy services to grocery pharmacy retailers nationally and offers DailyMed™, the
patented and patent pending compliance packaging medication system, to at-home patients and senior
living communities. In addition, the Company offers pharmacy services to employers through a
contracted relationship with a large pharmacy benefits manager. Pharmacy services to grocers and
23
employers include staffing, pharmacy management, DailyMed™, an exclusive retail pharmacy benefit
network and an 420 square foot automated pharmacy footprint that allows its customers to reduce
space needs and improve labor efficiencies. The Clinics segment is a new business venture launched
in fiscal 2007 focused on establishing non-emergency medical care facilities in retail location
host sites.
The Company generated the following tabular progression of net sales by quarter during fiscal 2007
and 2006. There were no material changes in sales prices from the quarter ended June 30, 2005 to
the quarter ended March 31, 2007 to contribute to the changes in revenues. See Results of
Operations and Liquidity and Capital Resources.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Increase (decrease) |
|
Increase (decrease) |
| |
|
|
|
|
|
from prior |
|
from same |
| Net sales by quarter: |
|
(in millions) |
|
quarter |
|
quarter prior year |
| |
|
|
First quarter ended June 30, 2005
|
|
|
$30.7 |
|
|
|
7.4 |
% |
|
|
33.0 |
% |
Second quarter ended September 30, 2005
|
|
|
32.7 |
|
|
|
6.5 |
% |
|
|
28.2 |
% |
Third quarter ended December 31, 2005
|
|
|
33.3 |
|
|
|
1.8 |
% |
|
|
18.5 |
% |
Fourth quarter ended March 31, 2006
|
|
|
34.2 |
|
|
|
2.7 |
% |
|
|
19.6 |
% |
First quarter ended June 30, 2006
|
|
|
37.6 |
|
|
|
9.9 |
% |
|
|
22.5 |
% |
Second quarter ended September 30, 2006
|
|
|
41.4 |
|
|
|
10.3 |
% |
|
|
26.8 |
% |
Third quarter ended December 31, 2006
|
|
|
41.0 |
|
|
|
(0.9 |
)% |
|
|
23.2 |
% |
Fourth quarter ended March 31, 2007
|
|
|
38.4 |
|
|
|
(6.8 |
)% |
|
|
10.9 |
% |
Growth Strategy
Historically, we have pursued a strategy of growth through acquisitions. With our new approach to
both in-home health are and retail/employer services, we intend to focus on an organic growth
strategy to capitalize on customer demand for a larger array of integrated home care services by
obtaining greater penetration within existing markets and to expand service offerings by cross
selling home care patients with personal services, DailyMed™ and some durable medical equipment
products. In addition, we will cross sell additional pharmacy and clinic services to retail
customers that participate in our proprietary pharmacy benefit network and DailyMed™.
To date, our growth strategy has primarily encompassed expansion of our business by acquisition.
In line with this strategy, during the period from May 10, 2004 to March 31, 2007, we completed 27
acquisitions. During the year ended March 31, 2007, the Company purchased the operations of six
entities, as more fully described in the footnotes to the consolidated financial statements. The
total amounts assigned to assets and liabilities for those operations purchased during the year
ended March 31, 2007 are as follows:
| |
|
|
|
|
Description of assets acquired and liabilities assumed: |
|
|
|
|
Current assets |
|
$ |
2,823,000 |
|
Property and equipment |
|
|
3,067,000 |
|
Intangible assets |
|
|
16,937,000 |
|
Liabilities |
|
|
(7,409,000 |
) |
Goodwill |
|
|
23,883,000 |
|
|
|
|
|
|
|
$ |
39,301,000 |
|
|
|
|
|
(The above includes the acquisition of Pinnacle EasyCare, LLC, which had no operations at the time
of acquisition. For accounting purposes, this acquisition was not considered a business
combination.)
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States 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 amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Identified below are some of the more significant accounting policies followed by Arcadia in
preparing the accompanying consolidated financial statements. For further discussion of our
accounting policies see “Note 1 – Description of Company and Significant Accounting Policies” in
the notes to consolidated financial statements.
24
Revenue Recognition
In general, the Company recognizes revenue when all revenue recognition criteria are met,which typically is when:
| |
• |
|
Evidence of an arrangement exists |
| |
| |
• |
|
Services have been provided or goods have been delivered |
| |
| |
• |
|
The price is fix or determinable |
| |
| |
• |
|
Collection is reasonably assured. |
Revenues for services are recorded in the period the services are rendered. Revenues for products
are recorded in the period delivered based on rental or sales prices established with the client or
their insurer prior to delivery.
Net patient service revenues are recorded at net realizable amounts estimated to be paid by the
customers and third-party payers. A provision for contractual adjustments is recorded as a
reduction to net patient services revenues and consists of a) the difference between the payer’s
allowable amount and the customary billing rate; and b) services for which payment is denied by
governmental or third-party payors or otherwise deemed non-billable. The Company records the
provision for contractual adjustments based on a percentage of revenue using historical data. Due
to the complexity of many third-party billing arrangements, adjustments are sometimes made to
amounts originally recorded. These adjustments are typically identified and recorded upon cash
receipts or claim denial.
Allowance for Doubtful Accounts
The Company reviews all accounts receivable balances and provides for an allowance for doubtful
accounts based on historical analysis of its records. The analysis is based on patient and
institutional client payment histories, the aging of the accounts receivable, and specific review
of patient and institutional client records. As actual collection experience changes, revisions to
the allowance may be required. Any unanticipated change in customers’ credit worthiness or other
matters affecting the collectibility of amounts due from customers, could have a material effect on
the results of operations in the period in which such changes or events occur. After all attempts
to collect a receivable have failed, the receivable is written off against the allowance.
Goodwill and Intangible Assets
Goodwill is assessed for impairment on an annual basis, or more frequently if circumstances
warrant, in accordance with the Statement of Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets”(“SFAS No. 142”). We assess goodwill related to reporting
units for impairment and write down the carrying amount of goodwill as required. We have five
distinct reporting units, which are consistent with the reportable segments identified in the
footnotes to the consolidated financial statements. The reporting units are as follows: Services,
Products, Retail, Pharmacy and Clinics. Each reporting unit represents a distinct business unit
that offers different products and services. Management monitors each unit separately.
SFAS No. 142 requires that a two-step impairment test be performed on goodwill. In the first step,
we compare the estimated fair value of each reporting unit to its carrying value. We determine the
estimated fair value of each reporting unit using a combination of the income approach and the
market approach. Under the income approach, we estimate the fair value of a reporting unit based
on the present value of estimated future cash flows. Under the market approach, we estimate the
fair value based on market multiples of revenues or earnings for comparable companies. If the fair
value of the reporting unit exceeds the carrying value of the net assets assigned to that unit,
goodwill is not impaired and we are not required to perform further testing. If the carrying value
of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then
we are required to perform the second step to determine the implied fair value of the reporting
unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. If the
carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we must record
an impairment loss equal to the difference.
SFAS No. 142 also requires that the fair value of intangible assets with indefinite lives be
estimated and compared to the carrying value. We estimate the fair value of these intangible
assets using the income approach. We recognize an impairment loss when the estimated fair value of
the intangible asset is less than the carrying value. Intangible assets with finite lives are
amortized using the estimated economic benefit method over the useful life.
25
The income approach, which we use to estimate the fair value of our reporting units and intangible
assets, is dependent on a number of factors including estimates of future market growth and trends,
forecasted revenue and costs, expected periods the assets will be utilized, appropriate discount
rates and other variables. We base our fair value estimates on assumptions we believe to be
reasonable but which are unpredictable and inherently uncertain. Actual future results may differ
from those estimates. In addition, we make certain judgments about the selection of comparable
companies used in the market approach in valuing our reporting units, as well as certain
assumptions to allocate shared assets and liabilities to calculate the carrying values for each of
our reporting units.
Income Taxes
Income taxes are accounted for under the asset and liability method. Accordingly, deferred tax
assets and liabilities are recognized currently for the future tax consequences attributable to the
temporary differences between the financial statement carrying amounts of assets and liabilities
and their respective tax bases, as well as for tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. A valuation allowance is recorded to reduce
the carrying amounts of deferred tax assets if it is more likely than not that such assets will not
be realized.
We consider all available evidence, both positive and negative, to determine whether, based on the
weight of that evidence, a valuation allowance is needed for some portion or all of a net deferred
tax asset. Judgment is used in considering the relative impact of negative and positive evidence.
In arriving at these judgments, the weight given to the potential effect of negative and positive
evidence is commensurate with the extent to which it can be objectively verified. We record a
valuation allowance to reduce our deferred tax assets and review the amount of such allowance
periodically. When we determine certain deferred tax assets are more likely than not to be
utilized, we will reduce our valuation allowance accordingly.
Realization of deferred tax assets is dependent on future earnings,
if any, the timing and amount of which are uncertain.
Internal Revenue Code Section 382 rules limit the utilization of net operating losses following a
change in control of a company. It has been determined that a change in control of Arcadia has
taken place. Therefore, Arcadia’s ability to utilize certain net operating losses generated by
Critical Home Care will be subject to severe limitations in future periods, which could have an
effect of eliminating substantially all the future income tax benefits of the respective net
operating losses. Tax benefits from the utilization of net operating loss carryforwards will be
recorded at such time as they are considered more likely than not to be realized.
Results of Operations — Year Ended March 31, 2007 Compared to Year Ended March 31, 2006
| |
|
|
|
|
|
|
|
|
| |
|
Years Ended |
| |
|
March 31, |
| |
|
2007 |
|
2006 |
| |
|
|
Revenues, net |
|
$ |
158,411,000 |
|
|
$ |
130,929,000 |
|
Cost of revenues |
|
|
106,008,000 |
|
|
|
87,563,000 |
|
| |
|
|
Gross profit |
|
|
52,403,000 |
|
|
|
43,366,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
65,288,000 |
|
|
|
43,175,000 |
|
Depreciation and amortization |
|
|
4,256,000 |
|
|
|
2,326,000 |
|
Goodwill and intangible asset impairment |
|
|
22,921,000 |
|
|
|
— |
|
| |
|
|
Total operating expenses |
|
|
92,465,000 |
|
|
|
45,501,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(40,063,000 |
) |
|
|
(2,135,000 |
) |
|
|
|
|
|
|
|
|
|
Interest expense (income), net |
|
|
3,572,000 |
|
|
|
2,457,000 |
|
|
|
|
|
|
|
|
|
|
Net loss before income tax expense |
|
|
(43,634,000 |
) |
|
|
(4,592,000 |
) |
Income tax expense |
|
|
138,000 |
|
|
|
119,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(43,772,000 |
) |
|
$ |
(4,711,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares — basic and diluted (in thousands) |
|
|
91,433 |
|
|
|
83,834 |
|
Net loss per share — basic and diluted |
|
$ |
(0.48 |
) |
|
$ |
(0.06 |
) |
| |
|
|
26
Revenues, Cost of Revenues and Gross Profits
The following summarizes revenues, cost of revenues and gross profits by segment for the years
ended March 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
% of Total |
|
|
|
|
|
% of Total |
| |
|
2007 |
|
Revenue |
|
2006 |
|
Revenue |
| |
|
|
Revenues, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
$ |
121,505,000 |
|
|
|
76.7 |
% |
|
$ |
110,152,000 |
|
|
|
84.1 |
% |
Products |
|
|
23,589,000 |
|
|
|
14.9 |
|
|
|
14,758,000 |
|
|
|
11.3 |
|
Retail |
|
|
4,022,000 |
|
|
|
2.5 |
|
|
|
3,663,000 |
|
|
|
2.8 |
|
Pharmacy |
|
|
9,236,000 |
|
|
|
5.8 |
|
|
|
2,356,000 |
|
|
|
1.8 |
|
Clinics |
|
|
59,000 |
|
|
|
0.0 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
$ |
158,411,000 |
|
|
|
100.0 |
% |
|
$ |
130,929,000 |
|
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
$ |
89,387,000 |
|
|
|
|
|
|
$ |
80,340,000 |
|
|
|
|
|
Products |
|
|
6,619,000 |
|
|
|
|
|
|
|
3,872,000 |
|
|
|
|
|
Retail |
|
|
1,972,000 |
|
|
|
|
|
|
|
1,613,000 |
|
|
|
|
|
Pharmacy |
|
|
7,314,000 |
|
|
|
|
|
|
|
1,738,000 |
|
|
|
|
|
Clinics |
|
|
716,000 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
| |
|
|
|
|
$ |
106,008,000 |
|
|
|
|
|
|
$ |
87,563,000 |
|
|
|
|
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
| |
|
|
|
|
|
Profit % |
|
|
|
|
|
Profit % |
Gross profits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
$ |
32,118,000 |
|
|
|
26.4 |
% |
|
$ |
29,812,000 |
|
|
|
27.1 |
% |
Products |
|
|
16,970,000 |
|
|
|
72.0 |
|
|
|
10,886,000 |
|
|
|
73.8 |
|
Retail |
|
|
2,050,000 |
|
|
|
51.0 |
|
|
|
2,050,000 |
|
|
|
56.0 |
|
Pharmacy |
|
|
1,922,000 |
|
|
|
20.8 |
|
|
|
618,000 |
|
|
|
26.2 |
|
Clinics |
|
|
(657,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
$ |
52,403,000 |
|
|
|
33.1 |
% |
|
$ |
43,366,000 |
|
|
|
33.1 |
% |
| |
|
|
Net revenue was $158,411,000 for the year ended March 31, 2007 compared to $130,929,000 for the
year ended March 31, 2006, an increase of $27,482,000 or 21.0%. Cost of revenues for the year ended
March 31, 2007 was $106,008,000 resulting in a gross profit of $52,403,000 or 33.1% of revenues.
Cost of revenues for the year ended March 31, 2006 was $87,563,000 resulting in a gross profit of
$43,366,000 or 33.1% of revenues. With the expansion of the durable medical equipment operations
(Products segment) and the pharmacy operations (Pharmacy segment), the revenue mix continues to
change, but the Services segment revenue remains the largest revenue source for the Company. The
cost of revenues in the Services and Clinics segment are primarily employee costs. The costs of
revenue in the Products, Retail and Pharmacy segments are largely the cost of products and
medication sold to patients, as well as, to a lesser extend, the services provided to patients and
supplies used in the delivery of other rental products. The Products segment cost of revenues
includes the depreciation of patient rental equipment (discussed in “Depreciation and Amortization”
section).
The Services segment revenues for the year ended March 31, 2007 were $121,505,000 compared to
$110,152,000 for the year ended March 31, 2006, an increase of $11,353,000 or 10.3%. The increase
in Services’ revenue was due to organic growth which was fairly consistent with prior year growth
rates. The Services segment revenues as a percentage of total Company revenues decreased from
84.1% for the year ended March 31, 2006 to 76.7% for the year ended March 31, 2007. This decrease
reflects the Company’s emphasis on growing the various other segments which have higher gross
profit margins. The Services segment gross profit percentage remained fairly consistent in the
year ended March 31, 2007 at 26.4% compared to 27.1% for the year ended March 31, 2006.
The Products segment revenues for the year ended March 31, 2007 were $23,589,000 compared to
$14,758,000 for the year ended March 31, 2006, an increase of $8,831,000 or 59.8%. The increase is
primarily due to the acquisitions of Alliance Oxygen and Medical Equipment, Inc. (July 12, 2006)
and Lovell Medical Equipment, Inc. (August 25, 2006) during the year ended March 31, 2007 as well
as a full year of revenue being generated from certain Products segment
27
acquisitions during the
year ended March 31, 2006, specifically O2 Plus (November 3, 2005) and Remedy Therapeutics,
Inc. (January 27, 2006). The Products revenue as a percentage of total Company revenues increased
from 11.3% for the year ended March 31, 2006 to 14.9% for the year ended March 31, 2007. This
increase was due to management’s efforts to grow the Products segment, primarily through
acquisition. The Products gross profit percentage remained fairly consistent at approximately
72.0% for the year ended March 31, 2007 compared to 73.8% for the year ended March 31, 2006.
The Retail segment revenues for the year ended March 31, 2007 were $4,022,000 compared to
$3,663,000 for the year ended March 31, 2006, an increase of $359,000 or 9.8%. The Retail segment
includes sites within Sears and Walmart stores as well as a mail-order catalog operation. The
various Walmart locations were opened during the year ended March 31, 2007 and represent the
primary reason for the increase in revenue. In March 2007, the Company decided to sell the Sears
retail operations due to poor performance so the year ending March 31, 2008 will include nominal
revenue from the Sears locations. The Retail segment gross profits for the year ended March 31,
2007 were $2,051,000 compared to $2,050,000 for the year ended March 31, 2006, an increase of less
than 1%. The gross profit margin decreased from 56.0% for the year ended March 31, 2006 to 51.0%
for the year ended March 31, 2007. The decrease in the gross profit margin reflects the change in
the product mix with the Retail segment.
The Pharmacy segment revenues for the year ended March 31, 2007 were $9,236,000 compared to
$2,356,000 for the year ened March 31, 2006, an increase of $6,880,000 or 292%. The Pharmacy
segment includes the operations acquired through the Wellscripts, LLC acquisition in June 2006, the
operations acquired through the PrairieStone acquisition in February 2007, as well as the mail
order pharmacy operations of the Company that were already in place prior to these acquisitions.
The increase in revenues is primarily due to the revenues generated subsequent the Wellscripts, LLC
acquisition. The Pharmacy segment gross profits for the year ended March 31, 2007 were $1,922,000
compared to $617,000 for the year ended March 31, 2006, an increase of $1,305,000 or 211%. The
increase in gross profit is consistent with the increase in revenues. The gross profit margin
decreased from 26.2% for the year ended March 31, 2006 to 20.8% for the year ended March 31, 2007.
The decrease in the gross profit margin reflects the change in the product mix and the difference
in the acquired pharmacies’ operations.
For the year ended March 31, 2007, the Clinics segment revenues were $59,000 and its cost of
revenues were $716,000. The Clinics segment consists of non-emergency care clinics in retail
sites. The Company made a significant investment in developing these clinics beginning in the year
ended March 31, 2007. This investment included staffing the newly opened clinics before the number
of patient visits fully materialized. This resulted in a negative gross margin of $657,000. The
clinics began generating revenue in the fiscal fourth quarter. As of March 31, 2007, 11 clinics
were operational. Management intends to continue its investment in the Clinics segment and
anticipates opening additional clinics throughout the year ending March 31, 2008.
Selling, General and Administrative
Selling, general and administrative expenses for the year ended March 31, 2007 were $65,288,000, or
40.9% of revenues, compared to $43,175,000, or 33.0% of revenues, for the year ended March 31,
2006, which represents a $22,019,000 or 50.2% increase in total selling, general and administrative
expenses. The approximate increase by segment is as follows:
| |
|
|
|
|
Products |
|
$ |
9,542,000 |
|
Corporate |
|
|
4,375,000 |
|
Clinics |
|
|
3,688,000 |
|
Services |
|
|
2,412,000 |
|
Pharmacy |
|
|
1,716,000 |
|
Retail |
|
|
380,000 |
|
|
|
|
|
Total |
|
$ |
22,113,000 |
|
|
|
|
|
The increase in the Products segment selling, general and administrative expense was primarily due
to a full year of expenses subsequent to the ten business acquisitions during the year ended March
31, 2006, two acquisitions during the year ended March 31, 2007, as well as an increase in bad debt
expense related to the transition of the acquired businesses into Arcadia and an increase in
headcount in existing stores as management focused on sales efforts to grow the Products segment.
28
The increase in Corporate selling, general and administrative expense was primarily due to
severance compensation for the Company’s former COO, consulting expenses relating to the first-year
Sarbanes-Oxley 404 efforts, increased professional fees and other increases for certain headcount
as well as costs surrounding the implementation of the Company’s ERP system implemented during the
third and fourth quarters 2007.
During 2007, the Company began developing the Clinic segment, which resulted in a significant
increase in selling, general and administrative expenses in order to open new locations in the
marketplace. This included an increase in highly compensated management and severance charges
incurred at year end as part of the Company’s restructuring efforts.
The increase in the Services segment selling, general and administrative expense relates to an
overall increase in headcount for sales, operations and certain back office functions. These
increases were part of management’s efforts to increase the revenue of the segment.
The increase in the Pharmacy segment selling, general and administrative expense was due to the
fiscal 2007 acquisitions of Wellscripts, LLC and PrairieStone.
The increase in the Retail segment selling, general and administrative expense relates to the
increase in the number of stores through expansion in the Wal-Mart channel. As part of the
on-going restructuring initiatives, these locations have been identified for possible closure in
accordance with contractual terms, and management anticipates no additional Wal-Mart
location-related selling, general and administrative expenses after the end of the third quarter
2008.
Overall, the Company’s selling, general and administrative expense increased as all segments
expanded into new geographic locations, as legal fees increased due to the increased complexity of
the Company’s organizational structure, and as compliance efforts relating to Sarbanes-Oxley 404
increased. In addition, additional expenses were incurred relating to licensure issues subsequent
to certain acquisitions and to the integration of operations for all acquired entities into an
overall central structure. Management anticipates operating expenses to decrease during the year
ended March 31, 2008 as it works towards improving operating efficiencies subsequent to the period
of rapid growth primarily through acquisition.
Depreciation and Amortization
The following summarizes depreciation and amortization expense for the years ended March 31:
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
| |
|
|
Depreciation – cost of revenues |
|
$ |
2,857,000 |
|
|
$ |
1,100,000 |
|
| |
|
|
Depreciation and amortization of property and equipment |
|
$ |
1,467,000 |
|
|
$ |
781,000 |
|
Amortization of acquired intangible assets |
|
|
2,789,000 |
|
|
|
1,545,000 |
|
| |
|
|
Depreciation and amortization – operating expense |
|
$ |
4,256,000 |
|
|
$ |
2,326,000 |
|
| |
|
|
Depreciation expense included in cost of revenues, which represents depreciation related to
equipment rented to patients, was approximately $2,857,000 for the year ended March 31, 2007
compared to $1,100,000 for the year ended March 31, 2006, an increase of $1,804,000 or 171%. The
increase reflects the significant increase in equipment currently being rented by the Products
segment, which is consistent with the growth in the Products segment revenue. The amount of rental
equipment owned by the Company increased by approximately $3,443,000 during the year ended March
31, 2007. Rental equipment is depreciated over three years.
Total depreciation and amortization expense included in operating expenses was approximately
$4,256,000 for the year ended March 31, 2007 compared to $2,326,000 for the year ended March 31,
2006, an increase of $1,930,000 or 83.0%. Depreciation and amortization of property and equipment
was approximately $1,467,000 for the year ended March 31, 2007 compared to $781,000 for the year
ended March 31, 2006, an increase of $686,000 or 87.7%. The increase reflects the increase in
property and equipment subsequent to various current year acquisitions, as well as a full year of
depreciation expense on property and equipment acquired as part of prior year acquisitions. Also,
the Company made a
29
significant investment in software during the year ended March 31, 2007, and software is
depreciated over three years resulting in a significant increase in software depreciation expense.
Finally, the Company accelerated the amortization expense associated with certain leasehold
improvements at facilities which management decided to shut down, primarily the Sears retail sites
included in the Retail segment. This contributed an additional $238,000 in amortization expense
for the year ended March 31, 2007.
Amortization of acquired intangible assets was approximately $2,789,000 for the year ended March
31, 2007 compared to $1,545,000 for the year ended March 31, 2006, an increase of $1,245,000 or
80.6%. The increase reflects the increase in the various acquired intangible asset values,
primarily customer relationships, subsequent to the various current year acquisitions, as well as a
full year of amortization expense on acquired intangible assets assumed as part of prior year
acquisitions.
Goodwill and Intangible Asset Impairment
No goodwill or intangible asset impairment expense was recognized for the year ended March 31,
2006. The following summarizes the goodwill and intangible asset impairment expense for the year
ended March 31, 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Acquired Intangible |
|
|
| Acquisition |
|
Goodwill |
|
Assets |
|
Total |
| |
|
|
Products reporting unit |
|
$ |
17,197,000 |
|
|
$ |
1,457,000 |
|
|
$ |
18,654,000 |
|
Wellscripts, LLC (“Wellscripts”) |
|
|
2,050,000 |
|
|
|
908,000 |
|
|
|
2,958,000 |
|
Pinnacle EasyCare, LLC (“Pinnacle”) |
|
|
— |
|
|
|
965,000 |
|
|
|
965,000 |
|
Sears (retail sites) |
|
|
344,000 |
|
|
|
— |
|
|
|
344,000 |
|
| |
|
|
Other |
|
$ |
19,591,000 |
|
|
$ |
3,330,000 |
|
|
$ |
22,921,000 |
|
| |
|
|
Goodwill is tested for impairment at least annually in the fourth quarter after the annual
forecasting process is completed. Operating profits and cash flows for the year ended March 31,
2007 were lower than expected in the Products segment. The projections for the next several years
reflects this trend. In March 2007, a goodwill impairment expense of $17,197,000 was recognized in
the Products reporting unit. The fair value of the reporting unit was estimated using the expected
present value of future cash flows. In conjunction with the goodwill impairment analysis of the
Product reporting unit, the Product intangible assets were also revalued based on the expected
present value of future cash flows. This resulted in an additional customer relationships
impairment expense of $1,457,000 being recognized in the Products reporting unit. The total
impairment expense in the Products reporting unit recognized in conjunction with the annual
analysis was $18,654,000.
On March 22, 2007, a subsidiary of the Company closed an agreement to sell all outstanding
membership interests of Wellscripts back to Wellscripts former sole member who had originally sold
the membership interest to the subsidiary on June 30, 2006. Subsequent to the sale of the
outstanding membership interests of Wellscripts back to the former sole member of Wellscripts, the
Company lost the majority of the customers in the geographic region served by this location.
Management determined that the customer relationships acquired in conjunction with the originally
acquisition, as well as the original goodwill, had been significantly impaired. During the fiscal
fourth quarter, the Company recognized an impairment of goodwill of $2,050,000 and of the customer
relationships of $908,000 resulting in a total impairment expense of $2,958,000. The impairment
expense relates to the Pharmacy segment.
In conjunction with the Pinnacle acquisition in November 2006, the Company acquired a master lease
agreement with a major retailer originally valued at $1,499,000. This agreement allowed for the
opening of clinics at certain retail sites. As of March 31, 2007, the Company was in negotiations
to sell its interest in Pinnacle back to the original sellers who had remained minority interest
owners of Pinnacle. The Company will receive no future benefit under the master lease agreement,
and as such, management determined that its investment in Pinnacle was impaired. The Company
recognized an impairment expense of $965,000, and reduced the
minority interest liability balance to $0. The impairment expense relates to the Clinics
segment.
30
Interest Expense and Income
The following summarizes interest expense and income for the years ended March 31:
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
| |
|
|
Interest expense |
|
$ |
3,625,000 |
|
|
$ |
2,523,000 |
|
Interest income |
|
|
(53,000 |
) |
|
|
(66,000 |
) |
| |
|
|
|
|
$ |
3,572,000 |
|
|
$ |
2,457,000 |
|
| |
|
|
Interest expense was $3,625,000 for the year ended March 31, 2007 compared to $2,523,000 for the
year ended March 31, 2006, an increase of $1,102,000 or 43.7%. Interest income was $53,000 for the
year ended March 31, 2007 compared to $66,000 for the year ended March 31, 2006, a decrease of
$13,000 or 18.5%. The increase in interest expense is due to the increase in total interest
bearing liabilities (lines of credit, long-term obligations, and capital leases) during the year
ended March 31, 2007. As of March 31, 2007, the total balance of interest bearing liabilities was
$46,890,000 compared to $19,772,000 at March 31, 2006, an increase of $27,118,000. The average
balance of interest bearing liabilities (computed based on the balance at each year end divided by
two) for the year ended March 31, 2007 was $33,331,000 compared to $21,299,000 for the year ended
March 31, 2006, an increase of $12,033,000 or 56.5%. Borrowings from Jana Master Fund, Ltd.
totaling $19,564,000 incurred during the year ended March 31, 2007 represent the primary reason for
the net increase in interest bearing liabilities. These funds were primarily used for the Product
segment acquisitions and the expansion of the Clinics segment.
Income Taxes
Income tax expense was $138,000 for the year ended March 31, 2007 compared to $119,000 for the year
ended March 31, 2006, an increase of $19,000 or 16.3%. Due to the Company’s losses in recent
years, it has paid nominal federal income taxes. The income tax expense is primarily the result of
state income tax liabilities of the subsidiary operating companies. For federal income tax
purposes, the Company had significant permanent and timing differences between book income and
taxable income resulting in combined net deferred tax assets of $14,247,000 to be utilized by the
Company for which an offsetting valuation allowance has been established for the entire amount. The
Company has a net operating loss carryforward for tax purposes totaling $17,227,000 that expires at
various dates through 2027. Internal Revenue Code Section 382 rules limit the utilization of
certain of these net operating loss carryforwards upon a change of control of the Company. It has
been determined that a change in control took place, and as such, the utilization of $770,000 of
the net operating loss carryforwards will be subject to severe limitations in future periods.
31
Results of Operations — Year Ended March 31, 2006 Compared to Year Ended March 31, 2005
The table below showing results of operations of April 1, 2004 to May 9, 2004 are those of Arcadia
Services, Inc. and its subsidiaries presented on a consolidated basis (i.e., the Predecessor
entity). Results for the period from May 10, 2004 to March 31, 2005 and for the year ended March
31, 2006 are those of the combined Company resulting from the RKDA reverse merger, and other
entities purchased subsequent to the reverse merger, presented on a consolidated basis (i.e., the
Successor entity). The two companies, Predecessor and Successor, are combined to accommodate
discussion and comparability between the years ended March 31, 2006 and 2005.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Total |
|
Successor |
|
Predecessor |
| |
|
|
|
|
|
|
|
|
|
Period from |
|
Period From |
| |
|
|
|
|
|
|
|
|
|
May 10, 2004 |
|
April 1, 2004 |
| |
|
|
|
|
|
|
|
|
|
To |
|
To |
| |
|
2006 |
|
2005 |
|
March 31, 2005 |
|
May 9, 2004 |
| |
|
|
Revenues, net |
|
$ |
130,929,000 |
|
|
$ |
105,341,000 |
|
|
$ |
95,855,000 |
|
|
$ |
9,486,000 |
|
Cost of revenues |
|
|
87,563,000 |
|
|
|
73,956,000 |
|
|
|
67,050,000 |
|
|
|
6,906,000 |
|
| |
|
|
Gross profit |
|
|
43,366,000 |
|
|
|
31,385,000 |
|
|
|
28,805,000 |
|
|
|
2,580,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
43,175,000 |
|
|
|
34,366,000 |
|
|
|
32,264,000 |
|
|
|
2,102,000 |
|
Depreciation and amortization |
|
|
2,326,000 |
|
|
|
1,458,000 |
|
|
|
1,458,000 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and intangible asset impairment |
|
|
— |
|
|
|
723,000 |
|
|
|
707,000 |
|
|
|
16,000 |
|
| |
|
|
Total operating expenses |
|
|
45,501,000 |
|
|
|
36,547,000 |
|
|
|
34,429,000 |
|
|
|
2,118,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(2,135,000 |
) |
|
|
(5,161,000 |
) |
|
|
(5,624,000 |
) |
|
|
463,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
2,457,000 |
|
|
|
2,087,000 |
|
|
|
2,087,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income tax expense |
|
|
(4,592,000 |
) |
|
|
(7,248,000 |
) |
|
|
(7,711,000 |
) |
|
|
463,000 |
|
Income tax expense |
|
|
119,000 |
|
|
|
186,000 |
|
|
|
186,000 |
|
|
|
— |
|
| |
|
|
| |
Net loss |
|
$ |
(4,711,000 |
) |
|
$ |
(7,434,000 |
) |
|
$ |
(7,897,000 |
) |
|
$ |
463,000 |
|
| |
|
|
Weighted average number of shares — basic
and diluted (in thousands) |
|
|
83,834 |
|
|
|
72,456 |
|
|
|
|
|
|
|
|
|
Net loss per share — basic and diluted |
|
$ |
(0.06 |
) |
|
$ |
(0.10 |
) |
|
|
|
|
|
|
|
|
Revenues, Cost of Revenues, and Gross Profit
Net sales were $130,929,000 for the year ended March 31, 2006 compared to $105,341,000 for the year
ended March 31, 2005, representing an increase of 24%. The Company generated revenues from
operations acquired since March 31, 2005 totaling 58% of the increase in sales, while internal
growth of existing operations represented 10% of the increase in sales compared to the year ended
March 31, 2005. There were no material changes in sales prices from the year ended March 31, 2005
to the year ended March 31, 2006, net of pharmacy-related pricing reductions, to contribute to the
improvement in revenues.
The Company had the following component increases in net sales for the period from April 1, 2005
through March 31, 2006*:
| |
|
|
|
|
| |
|
(in millions) |
|
Internal growth from operations of entities owned as of March 31, 2005 |
|
$ |
10.8 |
|
Two Services Division entities acquired during the year ended March 31, 2006 |
|
|
7.9 |
|
Eleven home respiratory care and DME operations acquired during the year ended March 31, 2006 |
|
|
3.6 |
|
Internal growth from Retail Division start up and one acquisition during the year ended
March 31, 2006 |
|
|
3.3 |
|
|
|
|
|
Total increase in sales for the year ended March 31, 2006* |
|
$ |
25.6 |
|
|
|
|
|
|
|
|
| * |
|
Includes results from the Predecessor entity |
32
The Company’s consolidated gross profit margin was 33.1% for the year ended March 31, 2006 compared
to 29.8% for the year ended March 31, 2005. The Company’s acquisition and expansion into pharmacy
and durable medical equipment operations in May 2004, addition of a mail-order catalog operation in
May 2005 and initiation of its retail store concept in September 2005 resulted in changes to the
consolidated gross profit margin of the Company. The Services segment revenues for the year ended
March 31, 2006 were $110,151,000 and yielded a gross margin of 27.1% compared to $97,200,000 at a
gross margin of 27.1% for the year ended March 31, 2005. The Products segment revenues for the year
ended March 31, 2006 were $17,100,000 at a gross margin of 73.4% compared to revenues for the year
ended March 31, 2005 of $8,100,000 at a gross margin of 61.8%. Cost of revenues for the Services
segment are primarily employee costs, while cost of sales for the Products segment represents the
cost of products and medications sold to patients and supplies used in the delivery of other rental
products and services to patients, including the related depreciation of the equipment rented to
patients. The components of the Retail segment were acquired or opened during the year ended March
31, 2006 and generated revenues of $3,663,000 at a 56.0% gross margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended March 31, 2006 were $43,175,000 or
33.1% of revenues versus $34,366,000 or 32.6% of revenues for the year ended March 31, 2005. The
26.2% increase is due primarily to changes in the Company’s mix of business. The selling, general
and administrative expenses for the Services, Products and Retail segments were 22.0%, 66.7% and
84.4% of revenues for the year ended March 31, 2006, respectively as compared to 22.3%, 75.5% and
0% (no Retail segment in this period) for the year ended March 31, 2005. The Company recorded
$4,600,000 in non-cash expenses during the year ended March 31, 2006, of which $1,100,000 are
included in selling, general and administrative expenses compared to total non-cash expenses of
$802,000 for the year ended March 31, 2005. The Company continues to incur expenses toward building
an infrastructure for the Products segment and bolstering the existing Services segment
infrastructure to accommodate recent and expected acquisitions, most of which are personnel and
information systems related. The Company’s investment in its retail store concept incurred selling,
general and administrative expenses of $1,100,000 during the year ended March 31, 2006, compared to
none for the same period in the prior year.
Depreciation and Amortization Expense
Total depreciation and amortization expense was approximately $3,379,000 for the year ended March
31, 2006 compared to $1,458,000 for the year ended March 31, 2005. Depreciation expense related to
equipment rented to patients of approximately $1,053,000 is included as a component of cost of
sales for the year ended March 31, 2006 compared to none in the year ended March 31, 2005. The
increase in depreciation expense relates primarily to the increase in the Company’s fleet of
vehicles and equipment held for rental to patients, additional information systems technology and
equipment benefiting the entire Company. Other intangibles were amortized based on their expected
useful lives (3 to 30 years) which resulted in amortization expense of $1,545,000 for the year
ended March 31, 2006 compared to $782,000 recorded in the year ended March 31, 2005.
Interest Expense and Income
Interest expense was $2,523,000 for the year ended March 31, 2006 compared to $2,172,000 for the
year ended March 31, 2005. Of this total, Amortization of deferred debt discount was $933,000 for
the year ended March 31, 2006 compared to $1,228,000 for the year ended March 31, 2005. Even though
the Company paid down $22,800,000 in interest-bearing debt during the quarter ended September 30,
2005, the increase in interest expense is a result of borrowings resulting from the expansion of
the Products segment along with acquisitions of the various entities. Total interest-bearing
borrowings were $19,800,000 million at March 31, 2006 at rates ranging from 7.75% to 8.25% per
annum compared to $22,800,000 at higher interest rates at rates ranging from 6.25% to 12% at March
31, 2005. The deferred debt discounts were generated by the attachment of warrants to two notes
payable and a conversion feature attached to a third note payable. The Company fully amortized all
of its outstanding debt discounts as of September 30, 2005 upon repayment of the related
instruments. The deferred debt discounts have been amortized over the lives of the respective
promissory notes, all of which were paid in full as of September 30, 2005.
33
Income Tax Expense
The Company had income tax expense of $119,000 for the year ended March 31, 2006 compared to
$186,000 for the year ended March 31, 2005, primarily related to state income tax expenses. The
Company has total net operating loss carryforwards for tax purposes of $7,200,000 that expire at
various dates through 2026.
Liquidity and Capital Resources
The
Company’s consolidated financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the settlement of liabilities in the normal
course of business and the continuation of the Company as a going concern. The Company has
experienced operating losses and negative cash flows since its inception and currently has an
accumulated deficit. These factors raise substantial doubt about the Company’s ability to continue
as a going concern. Liquidation values may be substantially different from carrying values as
shown and these consolidated financial statements do not give effect to adjustments, if any, that
would be necessary to the carrying values and classification of assets and liabilities should the
Company be unable to continue as a going concern.
The Company has grown primarily through acquisition since the reverse merger in May 2004 and
has incurred operating losses since that time. For the years ended March 31, 2007 and 2006, the
Company incurred net losses of $43.8 million and $4.7 million, respectively. The fiscal 2007 net
loss included non-cash expenses totaling $37.3 million. During the year ended March 31, 2007, the
Company used approximately $13.8 million of cash in operations and had approximately $3 million in
cash and cash equivalents at March 31, 2007. Additionally, the
Company’s debt agreements included provisions that allow certain
of its lenders to, in their sole discretion, determine that the
Company has experienced a material adverse change which, in turn,
would be an event of default.
Our continuation as a going concern is dependent upon several factors, including our
ability to generate sufficient cash flow to meet our obligations on a timely basis. Management’s
current cash projections indicate significant improvement in the cash generated from operations but
anticipate the need for additional capital during fiscal 2008.
Management has prepared projections for fiscal 2008 that anticipate an increase in revenue and
reductions in monthly operating expenses. After a period of growth through acquisition, management
intends to focus its efforts on improving operating efficiencies and reducing selling, general and administrative expenses while growing the developing businesses. The first step in this process
includes certain restructuring initiatives, which the Board of Directors approved and the Company
announced in March 2007. Management anticipates significant improvements in cash flows from
operations during fiscal 2008 compared to fiscal 2007. Management anticipates strong growth in
revenues from the Pharmacy and Clinic segments as well as continued steady growth in the Services
segment. Management believes the significant cost reductions can be realized with certain
administrative expenses, including accounting/consulting fees, legal costs, and facility costs.
Management is committed to reducing costs to appropriate levels if the projected revenue increases
do not materialize.
As
described below, in May 2007, the Company raised $13 million through the sale of common
stock. Additionally, in June 2007, the Company restructured a significant portion of its
outstanding debt, which included the extension of the maturity date to June 30, 2008. Even after
these two events, management anticipates that the Company will require additional financing to fund
operating activities during fiscal 2008. The Company’s new management team is exploring various
alternatives for raising additional capital, including potential divestitures of non-strategic
businesses, seeking new debt or equity financing, pursuing joint venture arrangements and
restructuring current clinic operating agreements. To the extent that seeking new debt,
restructuring operations or selling non-strategic businesses are insufficient to fund operating
activities over the next year, management anticipates raising capital through offering equity securities in private or
public offerings or through subordinated debt.
Although management believes that its efforts in obtaining additional financing will be successful,
there can be no assurance that its efforts will ultimately be
successful. The Company’s primary needs for liquidity and
capital resources are the funding of operating and administrative
expenses related to the management of the Company and its
subsidiaries. Secondarily, through the year ended March 31,
2007, the Company continued to execute its long-term strategic
growth plan, which includes internal growth at existing locations,
expanded product offerings and synergistic integration of the
Company’s types of businesses.
At March 31, 2007, the Company maintained $2,994,000 in cash and cash equivalents. Working
capital, which represents current assets less current liabilities, was $1,210,000.
The following summarizes the Company’s cash flows for the past three fiscal years:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Period from |
|
Period From |
| |
|
Year |
|
Year |
|
May 10, 2004 |
|
April 1, 2005 |
| |
|
Ended |
|
Ended |
|
To |
|
To |
| |
|
March 31, 2007 |
|
March 31,2006 |
|
March 31, 2005 |
|
May 9, 2004 |
| |
|
|
Net income (loss) |
|
$ |
(43,772,000 |
) |
|
$ |
(4,711,000 |
) |
|
$ |
7,897,000 |
|
|
$ |
463,000 |
|
Net cash used in operating activities |
|
|
(13,779,000 |
) |
|
|
(7,385,000 |
) |
|
|
(7,074,000 |
) |
|
|
(545,000 |
) |
Net cash used in investing activities |
|
|
(15,867,000 |
) |
|
|
(16,743,000 |
) |
|
|
(5,647,000 |
) |
|
|
(157,000 |
) |
Net cash provided by financing activities |
|
|
32,110,000 |
|
|
|
23,247,000 |
|
|
|
14,134,000 |
|
|
|
703,000 |
|
Net increase (decrease) in cash and cash
equivalents |
|
|
2,464,000 |
|
|
|
(882,000 |
) |
|
|
1,412,000 |
|
|
|
— |
|
Cash and cash equivalents at the end of the period |
|
$ |
2,994,000 |
|
|
$ |
530,000 |
|
|
$ |
1,412,000 |
|
|
$ |
— |
|
Net cash used in operating activities was $13,779,000 and $7,385,000 for the years ended March 31,
2007 and 2006, respectively, and $7,075,000 for the period from May 10, 2004 to March 31, 2005.
The increase in the cash used during fiscal 2007 was primarily due the significant increase in the
cash expenditures. Specifically, the Company incurred costs associated with the investment in the
new Clinics segment as well as an increase in professional and legal fees. Further, the costs
associated with recent acquisitions contributed to the increase in cash expenditures in the
day-to-day operations. The increase in the cash used in operations was also due to a slowdown in
cash collections primarily due to difficulties collecting receivables relating to recent
acquisitions for various reasons, including licensure issues.
Net cash used in investing activities was $15,867,000 and $16,743,000 for the years ended March 31,
2007 and 2006, respectively, and $5,647,000 for the period from May 10, 2004 to March 31, 2005.
Cash used in investing activities primarily includes net cash used for business acquisitions. The
amount fluctuated based on the number of acquisitions and the portion of the total consideration
paid in cash. Cash used in investing activities also includes cash used to purchase property and
equipment. The increase in the purchase of equipment in fiscal 2007 was primarily due to the
additional rental equipment acquired by the Products segment.
Net cash provided by financing activity was $32,110,000 and $23,247,000 for the years ended March
31, 2007 and 2006, respectively, and $14,134,000 for the period from May 10, 2004 to March 31,
2005. The Company has financed its expansion and acquisitions through a combination of debt and
equity financing. The Company raised in excess of $30 million in fiscal 2006 through the sale of
warrants and common stock. In fiscal 2007, the Company raised $9.7 million through the sale of
common stock and raised an additional $23.6 million through the issuances of notes payable with the
majority of this balance provided by one lender, Jana Master Fund, Ltd (“Jana”).
Gross accounts receivable at March 31, 2007 of approximately $41,737,000 represent accounts
receivable from operations and from acquired entities. As of March 31, 2007, the Company’s net
accounts receivable represented 81 days sales outstanding By type of revenue, as of March 31,
2007, the days sales outstanding for Services segment revenues were 79 days, the days sales
outstanding for Products segment revenues were 131 days and days sales outstanding for Pharmacy
segment revenues were 55 days. The Retail segment has minimal accounts receivable as its sales are
primarily via charges to customers’ credit cards. The Company calculates its days sales
outstanding as accounts receivable, net of the related allowance for doubtful accounts, divided by
the net revenues for the preceding year.
34
The integration of acquisitions in the Products segment during the last two fiscal years has
affected the related collection process due to the required re-working of licensure, specifically,
the provider number changeover with payers after a change in ownership among other things. This
licensure process can take up to a year depending on the laws and licensure requirements in the
state of operations and the various payers involved. As of March 31, 2007, the Company has a total
of $1.27 million or 9% of its DME receivables that were generated from ongoing operations from 2007
newly acquired locations. The Company has a limited number of customers with individually large
amounts due at any given balance sheet date. The Company’s payer mix for the year ended March 31,
2007 was as follows:
| |
|
|
|
|
Government-funded |
|
|
28 |
% |
Institutions |
|
|
44 |
% |
Commercial Insurance |
|
|
11 |
% |
Private Pay |
|
|
17 |
% |
As of March 31, 2007, the Company had total outstanding borrowings under its line of credit
agreements of $23.0 million. The Company had approximately $1,100,000 available on its line of
credit with Comerica Bank, which borrowings are contingent on the results of supporting borrowing
base calculations. In addition, the Company’s line of credit with AmerisourceBergen Drug
Corporation will increase from $2,500,000 to $4,000,000 in September 2007. Borrowings will be
subject to PrairieStone satisfying certain borrowing base requirements and beginning in June 2007,
PrairieStone achieving certain EBITDA targets. The Company was not in compliance with certain
financial covenants relating to its line of credit agreement with Comerica Bank but received a
waiver letter.
As of March 31, 2007, the Company had total long-term obligations of $22.2 million, of which $19.6
million is payable to Jana.
In May 2007, the Company sold 11,019,000 shares of common stock at $1.19 per share to various
investors in a private placement for aggregate proceeds of $13,112,000. The investors also
received a total of 2,755,000 warrants to purchase common stock at $1.75 per share for a period of
seven years. In conjunction with this private placement, the Company paid a placement fee of
$655,000. A portion of the proceeds were used to pay off $2,564,000 of outstanding debt due Jana
and the Trinity Healthcare line of credit balance with Comerica Bank of $2,000,000. In addition,
the Company paid $1,000,000 of the outstanding Comerica Bank line of credit.
In June 2007, the Company and Jana entered into an Amended and Restated Promissory Note relating to
the $17,000,000 note dated November 30, 2006. The amended note extends the maturity date to June
30, 2008. Effective July 1, 2007, the interest rate shall be equal to the one year LIBOR rate plus
8%. If the outstanding balance of the note is reduced to less than $8,500,000, the interest rate
will be reduced to the one year LIBOR rate plus 4%. Accrued unpaid interest on the outstanding
principal balance shall be due and payable on June 30, 2007, and 50% of the accrued unpaid interest
shall be due and payable on the following dates: September 30, 2007, December 31, 2007 and March
31, 2008. All remaining unpaid accrued interest shall be due and payable on the maturity date of
June 30, 2008. If the Company prepays any portion of the principal amount before December 30,
2007, a prepayment fee equal to the one year LIBOR rate plus 1.5% will be due. If the Company
sells assets, other than inventory in the ordinary course of business, it is required to use a
portion of the proceeds to pay down the outstanding debt. Specifically, the Company must remit to
Jana 50% of the net proceeds on the sale of assets up to $10 million and 75% of the net proceeds to
the extent that the aggregate net proceeds exceed $10 million.
35
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Contractual Obligations and Commercial Commitments
As of March 31, 2007, the Company had contractual obligations, in the form of non-cancelable debt
and lease agreements, as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
2015 |
|
2016 |
| |
|
|
Operating leases |
|
$ |
3,469,000 |
|
|
$ |
1,702,000 |
|
|
$ |
643,000 |
|
|
$ |
388,000 |
|
|
$ |
302,000 |
|
|
$ |
228,000 |
|
|
$ |
119,000 |
|
|
$ |
35,000 |
|
|
$ |
35,000 |
|
|
$ |
17,000 |
|
Capital leases |
|
|
1,717,000 |
|
|
|
1,020,000 |
|
|
|
550,000 |
|
|
|
96,000 |
|
|
|
51,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Long-term
obligations |
|
|
22,217,000 |
|
|
|
21,320,000 |
|
|
|
652,000 |
|
|
|
134,000 |
|
|
|
80,000 |
|
|
|
31,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Lines of credit |
|
|
22,956,000 |
|
|
|
2,613,000 |
|
|
|
20,343,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Interest |
|
|
5,301,000 |
|
|
|
4,182,000 |
|
|
|
941,000 |
|
|
|
108,000 |
|
|
|
66,000 |
|
|
|
4,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
55,660,000 |
|
|
$ |
30,837,000 |
|
|
$ |
23,129,000 |
|
|
$ |
726,000 |
|
|
$ |
499,000 |
|
|
$ |
263,000 |
|
|
$ |
119,000 |
|
|
$ |
35,000 |
|
|
$ |
35,000 |
|
|
$ |
17,000 |
|
| |
|
|
In February 2007, the former COO entered into a separation agreement with the Company. As
part of this agreement, the Company is obligated to pay $700,000 during fiscal 2008.
In March 2007, the the Board of Directors of the Company approved a restructuring initiative, which
included the termination of approximately 40 employees and the closure nine locations. Cash
severance expected to be paid totals approximately $547,000 and lease termination costs total
approximately $394,000.
Recent Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in
Income Taxes,” which amends and clarifies previous guidance on the accounting for deferred income
taxes as presented in SFAS No. 109, “Accounting for Income Taxes”. The statement is effective for
income taxes incurred during fiscal years beginning after December 15, 2006. Arcadia has not
completed its analysis of the effect of FIN 48; however, the Company does not expect the adoption
of FIN 48 to have a material effect on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles
and expands disclosure about fair value measurements. The statement is effective for financial
statements issued for fiscal years beginning after November 15,
36
2007, and interim periods within those years. Management is currently evaluating the statement to
determine what, if any, impact it will have on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities,” which permits companies to make a one-time election to carry eligible types
of financial assets and liabilities at fair value, even if measurement is not required by GAAP.
The statement is effective for fiscal years beginning after November 15, 2007. Management is
currently evaluating the statement to determine what, if any, impact it will have on the Company’s
consolidated financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) 108, “Considering the Effects
of Prior Year Misstatements when quantifying Misstatements in Current Year Financial Statements”,
which requires companies to evaluate the materiality of identified unadjusted errors on each
financial statement and related financial statement disclosure using both the rollover approach and
the iron curtain approach. The rollover approach quantifies misstatements based on the amount of
the error in the current year financial statement whereas the iron curtain approach quantifies
misstatements based on the effects of correcting the misstatement existing in the balance sheet at
the end of the current year, irrespective of the misstatement’s year(s) of origin. Financial
statements would require adjustment when either approach results in quantifying a misstatement that
is material. Correcting prior year financial statements for immaterial errors would not require
previously filed reports to be amended. We adopted SAB 108 as of March 31, 2007 and such adoption
had no financial impact on our results of operations or financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The majority of our cash balances and cash equivalents are held primarily in highly liquid
commercial bank accounts. The Company utilizes lines of credit to fund operational cash needs. The
risk associated with fluctuating interest rates is limited to our cash equivalents and our
borrowings. We do not believe that a 10% change in interest rates would have a significant effect
on our results of operations or cash flows. All revenues since inception have been in the U.S. and
in U.S. Dollars; therefore, management has not yet adopted a strategy for foreign currency rate
exposure as it is not anticipated that foreign revenues are likely to occur in the near future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements follow Item 15 beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTNG AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to provide reasonable assurance
that information required to be disclosed in its reports filed pursuant to the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s rules and forms. Such
information is accumulated and communicated to management, including our Chief Executive Officer
and Chief Financial Officer as appropriate, to allow timely decisions regarding required
disclosure. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance the objectives of the control system are met.
As of March 31, 2007, our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls
and procedures as such term is defined in Rule 13a-15(e) under the Exchange Act. Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were not effective as of March 31, 2007, because of the
identification of the material weaknesses in internal control over financial reporting described
below. Notwithstanding the material weaknesses that existed as of March 31, 2007, our Chief
Executive Officer and Chief
37
Financial Officer have each concluded that the consolidated financial statements included in this
Annual Report on Form 10-K present fairly, in all material respects, the financial position,
results of operations and cash flows of the Company and its subsidiaries in conformity with
accounting principles generally accepted in the United States of America (“GAAP”).
Report of Management on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control
over financial reporting for the Company. Internal control over financial reporting is a set of
processes designed by, or under the supervision of, the Company’s CEO and CFO, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP and includes those policies and
procedures that:
| |
• |
|
Pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect our transactions and dispositions of our assets; |
| |
| |
• |
|
Provide reasonable assurance our transactions are recorded as necessary to permit
preparation of our financial statements in accordance with GAAP, and that receipts and
expenditures are being made only in accordance with authorizations of our management and
directors; and |
| |
| |
• |
|
Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the
financial statement. |
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. It should be noted that any system of internal control, however well designed
and operated, can provide only reasonable, and not absolute, assurance that the objectives of the
system will be met. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of the Company’s management, including the
Company’s CEO and CFO, the Company conducted an assessment of the effectiveness of its internal
control over financial reporting based on criteria established in “Internal Control-Integrated
Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
as of March 31, 2007.
A material weakness is a control deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of annual or interim financial
statements will not be prevented or detected. In connection with the assessment described above,
management identified the following control deficiencies that represent material weaknesses at
March 31, 2007:
| |
• |
|
Management did not design and maintain effective control relating to the month
end closing and financial reporting process due to lack of evidence of review surrounding
various account reconciliations and properly evidenced journal entries. Additionally, the
Company had insufficient personnel resources and technical accounting and reporting
expertise within the Company’s financial closing and reporting functions. |
| |
| |
• |
|
Management did not maintain adequate control relating to the business acquisition
process due to lack of formalized due diligence procedures and evidentiary support of
purchase accounting review. |
| |
| |
• |
|
Management did not design and maintain controls to analyze and record appropriate
adjustments to the accounts receivable reserve and properly monitor review of reductions
to accounts receivable due to ineffective controls over contract pricing and the
standardization of a contract pricing system emphasized by changes in payer mix and other
contracting licensure issues. |
As a result of these material weaknesses described above, management has concluded that, as of
March 31, 2007, the Company’s internal control over financial reporting was not effective based on
the criteria in “Internal Control-Integrated Framework” issued by COSO. Management’s assessment of
the effectiveness of the Company’s internal control over financial reporting as of March 31, 2007
has been audited by BDO Seidman, LLP, an independent registered public accounting firm, as stated
in its report which is included under the “Report of Independent Registered Public Accounting Firm”
in this Annual Report on Form 10-K.
38
PrairieStone Pharmacy, LLC (“PrairieStone”), which was acquired on February 16, 2007, has been
excluded from management’s assessment of internal controls as of March 31, 2007. PrairieStone was
acquired during the current fiscal year and it was not possible for management to conduct an
assessment of the related internal control over financial reporting in the period between the
acquisition date and the date of management’s assessment. PrairieStone constituted 20% and 44% of
total assets and net assets, respectively, as of March 31, 2007, and less than 1% of revenues and
net loss for the year then ended.
The Company intends to initiate measures to remediate the identified material weaknesses through
various means including, but not necessarily limited to, the following:
| |
• |
|
Applying a more rigorous review of the monthly close processes to ensure that the
performance of the control is evidenced through appropriate documentation which is
consistently maintained. |
| |
| |
• |
|
Evaluating necessary changes to the Company’s acquisition process and the establishment
of a formalized process to ensure key controls are identified, control design is
appropriate, and appropriate evidentiary documentation is maintained throughout the
process. |
| |
| |
• |
|
Evaluating changes to the Products Segment billing process, improvements to the Products
Segment’s revenue pricing methodology by the deployment of software designed to handle
third party payor contracts, and enhanced training to ensure that proper documentary
evidence is maintained of the performance of key controls. |
Other than as described below in this paragraph during the fiscal quarter ended March 31, 2007,
there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act) that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting. The Company continued to implement a newly-acquired
management information system in order to bolster timeliness and standardization of internal
information processing as well as continuing to improve existing systems currently in use.
ITEM 9B. OTHER INFORMATION
On June 25, 2007, the Company and Jana Master Fund, Ltd. (“Jana”) entered into an Amended and
Restated Promissory Note (the “Agreement”) relating to the $17,000,000 note dated November 30,
2006. Pursuant to the Agreement, the original maturity date was extended to June 30, 2008. In
addition, effective July 1, 2007, the interest rate shall be equal to the one year LIBOR rate (as
published in the Wall Street Journal) plus 8%. If the outstanding balance of the note is reduced
to less than $8,500,000, the interest rate will be reduced to the one year LIBOR rate plus 4%.
Accrued unpaid interest on the outstanding principal balance shall be due and payable on June 30,
2007, and 50% of the accrued unpaid interest shall be due and payable on the following dates:
September 30, 2007, December 31, 2007 and March 31, 2008. All remaining unpaid accrued interest
shall be due and payable on the maturidy date of June 30, 2008. If the Company prepays any portion
of the principal amount before December 30, 2007, a prepayment fee equal to the one year LIBOR rate
plus 1.5% will be due. The Agreement includes various covenants consistent with the covenants in
the original agreemed dated November 30, 2006. If the Company sells assets, other than inventory
in the ordinary course of business, it is required to use a portion of the proceeds to pay down the
outstanding debt. Specifically, the Company must remit to Jana 50% of the net proceeds on the sale
of assets up to $10 million and 75% of the net proceeds to the extent that the aggregate net
proceeds exceed $10 million.
39
Part III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our board of directors, audit committee, audit committee financial expert and
code of ethics is set forth under the caption “Election of Directors,” in our definitive Proxy
Statement to be filed in connection with our fiscal 2007 Annual Meeting of Stockholders and such
information is incorporated herein by reference. Information regarding Section 16(a) beneficial
ownership compliance is set forth under the caption “Executive Compensation—Compliance with Section
16(a) of the Securities and Exchange Act” our definitive Proxy Statement to be filed in connection
with our fiscal 2007 Annual Meeting of Stockholders and such information is incorporated by
reference. A list of our executive officers is included in Part I, Item 1 of this Report under the
heading “Executive Officers.”
We have adopted a Code of Business Conduct and Ethics that applies to each of our directors,
officers and employees, including our principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar functions. The Company
will provide a copy of the Amended and Restated Code of Ethics, without charge, to any person who
sends a written request addressed to the Chairman and CEO at Arcadia Resources, Inc. at 26777
Central Park Blvd., Suite 200 Southfield, Michigan 48076. The Company intends to disclose any
waivers or amendments to its Amended and Restated Code of Ethics in a report on Form 8-K Item 5.05,
filing rather than by disclosure on its website.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the captions “Executive Compensation and
Other Information” and “Election of Directors—Compensation of Directors” in our definitive Proxy
Statement to be filed in connection with our fiscal 2007 Annual Meeting of Stockholders and such
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this item is set forth under the captions “Security Ownership of
Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our
definitive Proxy Statement to be filed in connection with our fiscal 2007 Annual Meeting of
Stockholders and such information is incorporated herein by reference.
ITEM 13. CERTAN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the captions “Certain Relationships and
Related Transactions” and “Compensation Committee Interlocks and Insider Participation” in our
definitive Proxy Statement to be filed in connection with our fiscal 2007 Annual Meeting of
Stockholders and such information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is set forth under the caption “Fees Paid to Independent
Registered Auditors” in our definitive Proxy Statement to be filed in connection with our fiscal
2007 Annual Meeting of Stockholders and such information is incorporated herein by reference.
40
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) |
|
Documents filed as part of this report: |
| |
1. |
|
Financial Statements: |
| |
| |
|
|
Reports of Independent Registered Public Accounting Firm |
| |
| |
|
|
Consolidated balance sheets as of March 31, 2007 and 2006 |
| |
| |
|
|
Consolidated statements of operations for the years ended
March 31, 2007 and 2006 the period May 10, 2004 through
March 31, 2005 and the period April 1, 2004 through
May 9, 2004 |
| |
| |
|
|
Consolidated statements of stockholders’ equity for the
years ended March 31, 2007 and 2006 the period May 10, 2004 through
March 31, 2005 and the period April 1, 2004 through
May 9, 2004 |
| |
| |
|
|
Consolidated statements of cash flows for the years ended
March 31, 2007 and 2006 the period May 10, 2004 through
March 31, 2005 and the period April 1, 2004 through
May 9, 2004 |
| |
| |
|
|
Notes to consolidated financial statements |
| |
| |
2. |
|
Financial Statement Schedules: |
| |
| |
|
|
Schedule II – Valuation and Qualifying Accounts |
| |
| |
|
|
All other schedules for which provision is made in Regulation S-X either (i) are not
required under the related instructions or are inapplicable and, therefore, have been
omitted, or (ii) the information required is included in the Consolidated Financial
Statements or the Notes thereto that are a part hereof. |
| |
| |
3. |
|
Exhibits: |
| |
| |
|
|
The exhibits included as part of this report are listed in the attached Exhibit Index,
which is incorporated herein by reference. |
41
ARCADIA RESOURCES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
| |
|
|
Reports of Independent Registered Public Accounting Firm |
|
F-1 |
Consolidated
Balance Sheets as of Marcy 31, 2007 and 2006 |
|
F-5 |
Consolidated statements of operations for the years ended
March 31, 2007 and 2006 the period May 10, 2004 through
March 31, 2005 and the period April 1, 2004 through
May 9, 2004 |
|
F-6 |
Consolidated statements of stockholders’ equity for the
years ended March 31, 2007 and 2006 the period May 10, 2004 through
March 31, 2005 and the period April 1, 2004 through
May 9, 2004 |
|
F-7 |
Consolidated statements of cash flows for the years ended
March 31, 2007 and 2006 the period May 10, 2004 through
March 31, 2005 and the period April 1, 2004 through
May 9, 2004 |
|
F-8 |
Notes to Consolidated Financial Statements |
|
F-10 |
Schedule II – Valuation and Qualifying Accounts |
|
F-35 |
42
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.
| |
|
|
|
|
June 29, 2007
|
|
By:
|
|
/s/ Marvin R. Richardson |
|
|
|
|
|
|
|
|
|
Marvin R. Richardson |
|
|
|
|
Chief Executive Officer (Principal |
|
|
|
|
Executive Officer) and a Director |
|
|
|
|
|
June 29, 2007
|
|
By:
|
|
/s/ Lynn K. Fetterman |
|
|
|
|
|
|
|
|
|
Lynn K. Fetterman |
|
|
|
|
Interim Secretary, Treasurer |
|
|
|
|
and Chief Financial Officer |
|
|
|
|
(Principal Financial and Accounting 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.
| |
|
|
|
|
June 29, 2007
|
|
By:
|
|
/s/ John E. Elliott, II |
|
|
|
|
|
|
|
|
|
John E. Elliott, II |
|
|
|
|
Chairman and a Director |
|
|
|
|
|
June 29, 2007
|
|
By:
|
|
/s/ John T. Thornton |
|
|
|
|
|
|
|
|
|
John T. Thornton |
|
|
|
|
Director |
|
|
|
|
|
June 29, 2007
|
|
By:
|
|
/s/ Peter Anthony Brusca |
|
|
|
|
|
|
|
|
|
Peter Anthony Brusca |
|
|
|
|
Director |
|
|
|
|
|
June 29, 2007
|
|
By:
|
|
/s/ Joseph Mauriello |
|
|
|
|
|
|
|
|
|
Joseph Mauriello |
|
|
|
|
Director |
|
|
|
|
|
June 29, 2007
|
|
By:
|
|
/s/ Russell T. Lund, III |
|
|
|
|
|
|
|
|
|
Russell T. Lund, III |
|
|
|
|
Director |
|
|
|
|
|
June 29, 2007
|
|
By:
|
|
/s/ Daniel Eisenstadt |
|
|
|
|
|
|
|
|
|
Daniel Eisenstadt |
|
|
|
|
Director |
43
Exhibit Index
The following Exhibits are filed herewith and made a part hereof:
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibit |
2.1
|
|
Asset Purchase Agreement, dated September 13, 2002, between All Care Medical Products Inc. and
Critical Home Care, Incorporated (9) |
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation (26) |
|
|
|
3.2
|
|
Amended and Restated By-Laws (25) |
|
|
|
3.3
|
|
Amendment to By-Laws, dated May 4, 2004 (8) |
|
|
|
3.4
|
|
Amendment to By-Laws, dated June 11, 2004 (8) |
|
|
|
4.1
|
|
Amended and Restated Articles of Incorporation Section Regarding Shares of Common Stock (See Exhibit
3.1, Section 4) |
|
|
|
4.2
|
|
Amended and Restated By-Laws Article Regarding Capital Stock (See Exhibit 3.2, Article IV) |
|
|
|
4.3
|
|
Form of Regulation D Class A Common Stock Purchase Warrant (1) |
|
|
|
4.4
|
|
Class A Warrant issued to John E. Elliott, II (1) |
|
|
|
4.5
|
|
Class A Warrant issued to Lawrence Kuhnert (1) |
|
|
|
4.6
|
|
John E. Elliot, II and Lawrence Kuhnert Registration Rights Agreement, dated May 7, 2004 (8) |
|
|
|
4.7
|
|
Form Note Purchase Agreement (8) |
|
|
|
4.8
|
|
Jana Warrants, dated March 11, 2004, to purchase 250,000 Shares (8) |
|
|
|
4.9
|
|
Jana Registration Rights Agreement, dated March 11, 2004 (8) |
|
|
|
4.10
|
|
Amended and Restated Subordinated Convertible Promissory Note, dated June 12, 2004 (8) |
|
|
|
4.11
|
|
Cleveland Overseas Settlement Agreement, dated June 16, 2004 (8) |
|
|
|
4.12
|
|
Cleveland Overseas Warrant for Purchase of 100,000 Shares of Common Stock (8) |
|
|
|
4.13
|
|
Cleveland Overseas Registration Rights Agreement, dated February 28, 2003 (8) |
|
|
|
4.14
|
|
Stephen Garchik Option to Acquire 500,000 Shares, dated February 3, 2004 2004, between Critical Home
Care, Inc. and Jana Master Fund, Ltd. (8) |
|
|
|
4.15
|
|
Stephen Garchik Registration Rights Agreement, dated February 3, 2004 (8) |
|
|
|
4.16
|
|
Global Asset Management Settlement Agreement which includes provision regarding registration rights
(to be filed by amendment) (8) |
|
|
|
4.17
|
|
Stanley Scholsohn Family Partnership Stock Option Agreement, dated February 22, 2003 (8) |
|
|
|
4.18
|
|
Stanley Scholsohn Family Partnership Registration Rights Agreement, dated February 22, 2004 (8) |
|
|
|
4.19
|
|
Form of Regulation D Registration Rights Agreement (8) |
|
|
|
4.20
|
|
Form of stock purchase agreement (7) |
|
|
|
4.21
|
|
Jana Convertible Promissory Note dated April 27, 2005 (7) |
|
|
|
4.22
|
|
Warrant Purchase and Registration Rights Agreement dated September 26, 2005 (10) |
|
|
|
4.23
|
|
Warrant Purchase and Registration Rights Agreement dated September 28, 2005 (10) |
|
|
|
4.24
|
|
Form of B-1 Warrant (10) |
|
|
|
4.25
|
|
Form of B-2 Warrant (10) |
|
|
|
4.26
|
|
Private Stock Purchase Agreement SICAV 1 dated November 28, 2005 (22) |
|
|
|
4.27
|
|
Private Stock Purchase Agreement SICAV 2 dated November 28, 2005 (22) |
44
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibit |
4.28
|
|
Jana Promissory Note dated November 30, 2006 (28) |
|
|
|
4.29
|
|
Jana Promissory Note dated March 20, 2007 |
|
|
|
4.30
|
|
Jana Promissory Note dated June 25, 2007 |
|
|
|
9.1
|
|
Form of Voting Agreement (1) |
|
|
|
10.20
|
|
Consulting Agreement, dated as of June 28, 2002, by and between Critical Home Care, Inc., All Care
Medical Products Corp., and Luigi Piccione (3) |
|
|
|
10.21
|
|
Employment Agreement, dated as of September 26, 2002, by and between the Company and Bradley Smith (3) |
|
|
|
10.22
|
|
2006 Equity Incentive Plan (23) |
|
|
|
10.23
|
|
Employment Agreement, dated as of March 10, 2003, by and between the Company and Eric Yonenson (4) |
|
|
|
10.24
|
|
Premises lease by and between HomeCare Alliance, Inc. as tenant and Dawson Holding Company as Landlord
(4) |
|
|
|
10.25
|
|
Sublease for premises by and between the Company as tenant and ProHealth Corp. as landlord (5) |
|
|
|
10.26
|
|
Agreement and Plan of Merger dated May 7, 2004 by and among RKDA, Inc., CHC Sub, Inc., Critical Home
Care, Inc., John E. Elliott, II, Lawrence Kuhnert and David Bensol (1) |
|
|
|
10.27
|
|
Stock Purchase Agreement dated as of May 7, 2004 by and among RKDA, Inc., Arcadia Services, Inc.,
Addus Healthcare, Inc. and W. Andrew Wright (1) |
|
|
|
10.28
|
|
Employment Agreement dated May 7, 2004, by and between Critical Home Care, Inc. and Lawrence Kuhnert.
(1) |
|
|
|
10.29
|
|
Employment Agreement dated May 7, 2004, by and between Critical Home Care, Inc. and John E. Elliott,
II. (1) |
|
|
|
10.30
|
|
Employment Agreement dated May 7, 2004, by and between Critical Home Care, Inc. and David Bensol (1) |
|
|
|
10.31
|
|
Termination of Employment Agreement and Release dated May 7, 2004, by and between Critical Home Care,
Inc. and David Bensol. (1) |
|
|
|
10.32
|
|
Escrow Agreement made as of May 7, 2004, by and among Critical Home Care, Inc., John E. Elliott, II,
Lawrence Kuhnert and Nathan Neuman & Nathan P.C. (1) |
|
|
|
10.33
|
|
Escrow Agreement made as of May 7, 2004, by and among Critical Home Care, Inc., David Bensol and
Nathan Neuman & Nathan P.C. (1) |
|
|
|
10.34
|
|
Stock Option Agreement dated May 7, 2004, between Critical Home Care, Inc. and John E. Elliott, II. (1) |
|
|
|
10.35
|
|
Stock Option Agreement dated May 7, 2004, between Critical Home Care, Inc. and Lawrence Kuhnert (1) |
|
|
|
10.36
|
|
Agreement of Modification (without exhibits) dated May 6, 2004, among Critical Home Care, Inc. and
David Bensol and All Care Medical Products Corp., Luigi Piccione and S&L Realty, LLC. (1) |
|
|
|
10.37
|
|
Credit Agreement dated as of May 7, 2004, by and among Arcadia Services, Inc., Arcadia Health
Services, Inc. Grayrose, Inc. and Arcadia Health Services of Michigan, Inc. (1) |
|
|
|
10.38
|
|
Lease of City Center Office Park—South Building (8) |
|
|
|
10.39
|
|
Promissory Note and Warrant Purchase Agreement by and among Critical Home Care, Inc. and BayStar
Capital II, L.P. dated September 21, 2004 (11) |
|
|
|
10.40
|
|
Critical Home Care, Inc. Promissory Note in the principal amount of $5,000,000 bearing interest at 6%,
compounded quarterly, dated September 21, 2004 (11) |
|
|
|
10.41
|
|
Critical Home Care, Inc. Common Stock Purchase Warrant to Purchase up to 3,150,000 Shares of the
Common Stock of Critical Home Care, Inc., dated September 21, 2004 (11) |
|
|
|
10.42
|
|
Investor Rights Agreement by and among Critical Home Care, Inc. and BayStar Capital II, L.P. dated
September 21, 2004 (11) |
|
|
|
10.43
|
|
Stock Purchase Agreement by and among SSAC, LLC (“Buyer”), Trinity Healthcare of Winston-Salem, Inc. |
45
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibit |
|
|
(“Company”), and Roy Hathcock, Dale Benzine, Chris Norman and Marc Leonard (“Sellers”), dated
September 23, 2004 (11) |
|
|
|
10.44
|
|
SSAC, LLC Promissory Note in the principal amount of $660,774 bearing interest at 6%, compounded
quarterly, dated September 23, 2004 (11) |
|
|
|
10.45
|
|
Subordinated Security Agreement by and between Roy Hathcock and Dale Benzine (the “Secured Party”) and
SSAC, LLC (the “Debtor”), dated September 23, 2004 (11) |
|
|
|
10.46
|
|
Guaranty dated September 23, 2004, given by Critical Home Care, Inc. in favor of Roy Hathcock, Dale
Benzine, Chris Norman and Marc Leonard (11) |
|
|
|
10.47
|
|
Escrow Agreement made on September 23, 2004, by and among SSAC, LLC (the “Buyer”), Chris Norman and
Marc Leonard, and Kerr, Russell and Weber, PLC (11) |
|
|
|
10.48
|
|
Asset Purchase Agreement dated August 30, 2004 by and between Arcadia Health Services, Inc., Second
Solutions, Inc., Merit Staffing Resources, Inc. and Harriette Hunter (12) |
|
|
|
10.49
|
|
Agreement and Plan of Merger between Critical Home Care, Inc. and Arcadia Resources, Inc. (13) |
|
|
|
10.50
|
|
Stock Purchase Agreement by and among Arcadia Resources, Inc. (“Buyer”), Beacon Respiratory Services,
Inc., Beacon Respiratory Services of Alabama, Inc., Beacon Respiratory Services of Colorado, Inc., and
Beacon Respiratory Services of Georgia, Inc. (“Companies”), and Rebecca Irish, Ryan Powers and Reid
Wilburn (“Sellers”), dated December 22, 2004 (14) |
|
|
|
10.51
|
|
Employment Agreement effective January 1, 2005 by and between the Company and Rebecca Irish (15) |
|
|
|
10.52
|
|
Form Stock Purchase Agreement (16) |
|
|
|
10.53
|
|
Form of Credit Facility Agreement between Comerica Bank and Trinity Healthcare of Winston-Salem, Inc.
dated February 18, 2005 (17) |
|
|
|
10.54
|
|
Form of Master Revolving Note given by Trinity Healthcare of Winston-Salem, Inc. to Comerica Bank
dated February 18, 2005 (17) |
|
|
|
10.55
|
|
Form of Advance Formula Agreement between Comerica Bank and Trinity Healthcare of Winston-Salem, Inc.
dated February 18, 2005 (18) |
|
|
|
10.56
|
|
Director Compensation Agreement dated March 22, 2005 (19) |
|
|
|
10.57
|
|
Stock Option Agreement dated March 22, 2005 (19) |
|
|
|
10.58
|
|
Stock Purchase Agreement dated April 29, 2005, by and among Arcadia Health Services of Michigan, Inc.,
Home Health Professionals, Inc., and the selling shareholders (7) |
|
|
|
10.59
|
|
Haifley Employment Agreement dated December 7, 2005. (22) |
|
|
|
10.60
|
|
Haifley Non-Qualified Stock Option Agreement dated December 7, 2005. (22) |
|
|
|
10.61
|
|
Haifley Restricted Stock Grant Agreement dated December 7, 2005. (22) |
|
|
|
10.62
|
|
Form of Director Compensation Agreement (30) |
|
|
|
10.63
|
|
Form of Director Stock Option Agreement (30) |
|
|
|
10.64
|
|
Form of Stock Grant Agreement dated June 22, 2006 (30) |
|
|
|
10.65
|
|
Employment Agreement dated September 26, 2006, by and between Care Clinic, Inc. and Alan Lotvin. |
|
|
|
10.66
|
|
Employment Agreement dated May 26, 2007, by and between Arcadia Resources, Inc. and Lynn Fetterman. |
|
|
|
10.67
|
|
Employment Agreement dated
March 1, 2007, by and between Arcadia Resources, Inc. and Marvin
Richardson. |
|
|
|
10.68
|
|
Severance and Release Agreement dated February 21, 2007 by and between Arcadia Resources, Inc. and
Lawrence R. Kuhnert |
|
|
|
10.69
|
|
Limited Liability Company Ownership Interest Purchase Agreement dated January 28, 2007 by and among
Arcadia Resources, Inc., PrairieStone Pharmacy, LLC, and the selling shareholders of PrairieStone
Pharmacy, LLC. (25) |
46
| |
|
|
| Exhibit |
|
|
| Number |
|
Description of Exhibit |
10.70
|
|
Registration Rights Agreement dated February ___, 2007 by and among Arcadia Resources, Inc.,
PrairieStone Pharmacy, LLC, and the selling shareholders of PrairieStone Pharmacy, LLC. |
|
|
|
10.71
|
|
Form of Securities Purchase Agreement from May 2007 Private Placement |
|
|
|
10.72
|
|
Form of Registration Rights Agreement from May 2007 Private Placement |
|
|
|
10.73
|
|
Form of Securities Purchase Agreement from December 2006 Private Placement (27) |
|
|
|
10.74
|
|
Form of Registration Rights Agreement from December 2006 Private Placement (27) |
|
|
|
10.75
|
|
Form of Restricted Stock Award Agreement (24) |
|
|
|
10.76
|
|
Form of Stock Option Agreement (24) |
|
|
|
10.77
|
|
Lynn Fetterman Project Agreement. (25) |
|
|
|
14.1
|
|
Code of Ethics (29) |
|
|
|
16.1
|
|
Change in Critical Home Care, Inc.’s Certifying Accountant (6) |
|
|
|
21.1
|
|
Subsidiaries of Arcadia Resources, Inc. |
|
|
|
23.1
|
|
Consent of Independent Registered
Public Accounting Firm |
|
|
|
31.1
|
|
Section 302 CEO Certification |
|
|
|
31.2
|
|
Section 302 Principal
Financial and Accounting Officer Certification |
|
|
|
32.1
|
|
Section 906 CEO Certification |
|
|
|
32.2
|
|
Section 906 Principal
Financial and Accounting Officer Certification |
|
|
|
99.1
|
|
Arcadia Resources, Inc. news release dated April 11, 2005 (20) |
|
|
|
99.2
|
|
Arcadia Resources, Inc. news release dated June 30, 2005 (21) |
|
|
|
| (1) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Current
Report on 8-K filed on May 24, 2004. |
| |
| (2) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Annual
Report on Form 10 KSB filed on February 19, 2003. |
| |
| (3) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Annul
Report on Form 10 QSB filed on November 19, 2002. |
| |
| (4) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Annual
Report on Form 10 KSB filed on February 18, 2004. |
| |
| (5) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Annual
Report on Form 10 QSB filed on March 9, 2004. |
| |
| (6) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Current
Report on 8-K/A filed on July 28, 2004. |
| |
| (7) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Current
Report on 8-K/A filed on May 2, 2005. |
| |
| (8) |
|
Originally filed with the Securities and Exchange Commission as an Exhibit to Form S-1/A,
Amendment No. 1, filed August 27, 2004 and reprinted and incorporated herein without change
except to reflect the Company’s name change which occurred on November 16, 2004. |
| |
| (9) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Annual
Report on Form 10- QSB filed on February 19, 2003. |
| |
| (10) |
|
Previously filed with the Securities and Exchange Commission as and Exhibit to the Current
Report on Form 8-K filed on September 30, 2005. |
| |
| (11) |
|
Previously filed with the Securities and Exchange Commission as and Exhibit to the Current
Report on Form 8-K filed on September 30, 2005. |
47
|
|
|
| (12) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s
Current Report on Form 8-K filed on September 2, 2004. |
| |
| (13) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s
Current Report on Form 8-K filed on November 16, 2004. |
| |
| (14) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s
Current Report on Form 8-K filed on December 28, 2004. |
| |
| (15) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s
Current Report on Form 8-K filed on January 12, 2005. |
| |
| (16) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s
Current Report on Form 8-K filed on February 8, 2005. |
| |
| (17) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s
Current Report on Form 8-K filed on February 23, 2005. |
| |
| (18) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s
Current Report on Form 8-K filed on February 23, 2005. |
| |
| (19) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s
Current Report on Form 8-K on March 28, 2005 |
| |
| (20) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s
Current Report on Form 8-K on April 20, 2005. |
| |
| (21) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s
Current Report on Form 8-K on June 30, 2005. |
| |
| (22) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s
Quarterly Report on Form 10-Q on February 14, 2006. |
| |
| (23) |
|
Previously filed with the Securities and Exchange Commission as Appendix C to the Company’s
Proxy Statement on Schedule 14A on August 28, 2006. |
| |
| (24) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s
Registration Statement on Form S-8 on October 4, 2006. |
| |
| (25) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s
Quarterly Report on Form 10-Q filed on February 14, 2007. |
| |
| (26) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s
Current Report on Form 8-K filed on October 2, 2006. |
| |
| (27) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s
Current Report on Form 8-K filed on January 4, 2007. |
| |
| (28) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s
Current Report on Form 8-K filed on December 6, 2006. |
| |
| (29) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s
Current Report on Form 8-K filed on December 21, 2006. |
| |
| (30) |
|
Previously filed with the Securities and Exchange Commission as an Exhibit to the Company’s
Annual Report on Form 10-K filed on June 29, 2006. |
48
ARCADIA RESOURCES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
| |
|
|
|
|
Reports of Independent Registered Public Accounting Firm |
|
|
F-1 |
|
|
|
|
F-5 |
|
|
|
|
F-6 |
|
|
|
|
F-7 |
|
|
|
|
F-8 |
|
|
|
|
F-10 |
|
|
|
|
F-35 |
|
49
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Arcadia Resources, Inc. and Subsidiaries
Southfield, Michigan
We have audited the accompanying consolidated balance sheets of Arcadia Resources, Inc. and
Subsidiaries (the “Company”) as of March 31, 2007 and 2006 and the related consolidated statements
of operations, stockholders’ equity, and cash flows for the years ended March 31, 2007 and 2006,
for the period May 10, 2004 through March 31, 2005, and for the period April 1, 2004 through May 9,
2004. We have also audited the schedule listed in the accompanying index. These financial
statements and schedule are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and schedule are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and schedule, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the
financial statements and schedule. 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 Arcadia Resources, Inc. and Subsidiaries at March 31,
2007 and 2006, and the results of its operations and its cash flows for the years ended March 31,
2007 and 2006, for the period May 10, 2004 through March 31, 2005, and for the period April 1, 2004
through May 9, 2004, in conformity with accounting principles generally accepted in the United
States of America.
..
Also in our opinion, the schedule for the years ended March 31, 2007 and 2006, for the period May
10, 2004 through March 31, 2005, and for the period April 1, 2004 through May 9, 2004 presents
fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As described in Note 2 to the consolidated financial statements,
the Company has suffered recurring losses from operations that raise substantial doubt about its
ability to continue as a going concern. Management’s plans in regard to these matters are also
described in Note 2. The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Arcadia Resources, Inc. and
Subsidiaries’ internal control over financial reporting as of March 31, 2007, based on criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated June 28, 2007, expressed an
adverse opinion thereon.
/s/ BDO Seidman, LLP
Troy, Michigan
June 28, 2007
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Arcadia Resources, Inc.
Southfield, Michigan
We have audited management’s assessment, included in the accompanying “Management’s Report on
Internal Control over Financial Reporting” (Item 9A), that Arcadia Resources, Inc. and Subsidiaries
(the “Company”) did not maintain effective internal control over financial reporting as of March
31, 2007, because of the effect of the material weaknesses identified in management’s assessment,
based on criteria established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s assessment and an opinion on the
effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are made only in accordance with authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future
F-2
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying “Management’s Report on Internal Control over Financial Reporting”
(Item 9A), management’s assessment of and conclusion on the effectiveness of internal control over
financial reporting did not include the internal controls of PrairieStone Pharmacy, LLC
(“PrairieStone”), which was acquired on February 16, 2007 and which are included in the Company’s
consolidated balance sheet as of March 31, 2007, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for the year then ended. PrairieStone constituted
20% and 44% of total assets and net assets, respectively, as of March 31, 2007, and less than 1% of
revenues and net loss for the year then ended. Management did not assess the effectiveness of
internal control over financial reporting of PrairieStone because of the timing of the acquisition,
which was completed on February 16, 2007. Our audit of internal control over financial reporting of
the Company also did not include an evaluation of the internal control over financial reporting of
PrairieStone.
A material weakness is a control deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. The following material weaknesses have been
identified and included in management’s assessment as of March 31, 2007:
| |
• |
|
Management did not design and maintain effective control relating to the month end
closing and financial reporting process due to lack of evidence of review surrounding
various account reconciliations and properly evidenced journal entries. Additionally, the
Company had insufficient personnel resources and technical accounting and reporting
expertise within the Company’s financial closing and reporting functions. |
| |
| |
• |
|
Management identified inadequate formalized process established to maintain
documentation evidencing management’s due diligence, negotiations, and evaluation
performance measures. Further, management identified ineffective controls relating to the
accounting for certain business acquisitions and evidentiary support of purchase
accounting review. |
| |
| |
• |
|
Management did not design and maintain controls to analyze and record appropriate
adjustments to the accounts receivable reserve and properly monitor review of reductions
to accounts receivable due to ineffective controls over contract pricing and the
standardization of a contract pricing system emphasized by changes in payor mix and other
contracting licensure issues. |
Due to the material adjustments identified in the fourth quarter and year-end financial statements,
the significance of the deficiencies in the financial closing and reporting process related to the
preparation of reliable financial statements, and the pervasiveness of the deficiencies identified
in the financial closing and reporting process, there is more than remote likelihood that a
material misstatement of the interim and annual financial statements would not have been prevented
or detected. These material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2007
F-3
consolidated financial statements and this report does not affect our report dated June 27, 2007 on those consolidated financial statements.
In our opinion, management’s assessment that the Company did not maintain effective internal
control over financial reporting as of March 31, 2007, is fairly stated, in all material respects,
based on the COSO criteria. Also in our opinion, because of the effect of the material weaknesses
described above on the achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of March 31, 2007, based on the
COSO criteria. We do not express or take any other form of assurance on management’s statements
referring to any correction actions it intends to take.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Arcadia Resources, Inc. and Subsidiaries
as of March 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’
equity and cash flows for the years ended March 31, 2007 and 2006, for the period May 10, 2004
through March 31, 2005, and for the period April 1, 2004 through May 9, 2004 and our report dated
June 28, 2007 expressed an unqualified opinion thereon. Our report contains an explanatory
paragraph regarding the Company’s ability to continue as a going concern.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Troy, Michigan
June 28, 2007
F-4
ARCADIA RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
| |
|
March 31 |
|
| |
|
2007 |
|
|
2006 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,994,322 |
|
|
$ |
530,344 |
|
Accounts receivable, net of allowance of $8,310,000 and $1,891,000,
respectively |
|
|
33,427,284 |
|
|
|
27,109,601 |
|
Inventories, net |
|
|
2,732,533 |
|
|
|
1,502,276 |
|
Prepaid expenses and other current assets |
|
|
2,768,231 |
|
|
|
3,180,002 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
41,922,370 |
|
|
|
32,322,223 |
|
Property and equipment, net |
|
|
12,606,480 |
|
|
|
6,225,043 |
|
Goodwill |
|
|
33,335,921 |
|
|
|
28,263,208 |
|
Acquired intangible assets, net |
|
|
28,982,628 |
|
|
|
18,325,732 |
|
Other assets |
|
|
380,374 |
|
|
|
14,940 |
|
|
|
|
|
|
|
|
|
|
$ |
117,227,773 |
|
|
$ |
85,151,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Lines of credit, current portion |
|
$ |
2,612,996 |
|
|
$ |
2,000,000 |
|
Accounts payable |
|
|
6,861,262 |
|
|
|
1,912,860 |
|
Accrued expenses: |
|
|
|
|
|
|
|
|
Compensation and related taxes |
|
|
4,462,726 |
|
|
|
2,417,832 |
|
Commissions |
|
|
359,401 |
|
|
|
279,262 |
|
Accrued interest |
|
|
818,655 |
|
|
|
141,463 |
|
Other |
|
|
1,049,065 |
|
|
|
1,266,598 |
|
Payable to affiliated agencies, current portion |
|
|
1,548,827 |
|
|
|
2,163,954 |
|
Long-term obligations, current portion |
|
|
21,320,198 |
|
|
|
2,056,311 |
|
Capital lease obligations, current portion |
|
|
1,020,421 |
|
|
|
349,555 |
|
Deferred revenue |
|
|
659,258 |
|
|
|
— |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
40,712,809 |
|
|
|
12,587,835 |
|
Other
liabilities |
|
|
457,161 |
|
|
|
— |
|
Line of credit, less current portion |
|
|
20,342,796 |
|
|
|
14,487,967 |
|
Payable to affiliated agencies, less current portion |
|
|
37,848 |
|
|
|
152,750 |
|
Long-term obligations, less current portion |
|
|
896,870 |
|
|
|
266,447 |
|
Capital lease obligations, less current portion |
|
|
696,787 |
|
|
|
612,054 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
63,144,271 |
|
|
|
28,107,053 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value, 5,000,000 shares authorized, none outstanding |
|
|
— |
|
|
|
— |
|
Common stock, $.001 par value, 200,000,000 shares and 150,000,000 shares
authorized, respectively; 121,059,177 shares and 97,262,333 shares issued, respectively |
|
|
121,059 |
|
|
|
97,263 |
|
Treasury
stock, at cost, 0 and 859,297 shares, respectively |
|
|
— |
|
|
|
(2,660,840 |
) |
Additional paid-in capital |
|
|
110,342,704 |
|
|
|
72,215,658 |
|
Accumulated deficit |
|
|
(56,380,261 |
) |
|
|
(12,607,988 |
) |
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
54,083,502 |
|
|
|
57,044,093 |
|
|
|
|
|
|
|
|
|
|
$ |
117,227,773 |
|
|
$ |
85,151,146 |
|
|
|
|
|
|
|
|
See accompanying notes to these consolidated financial statements.
F - 5
ARCADIA RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Successor |
|
|
Predecessor |
| |
|
|
|
|
|
|
|
|
|
Period From |
|
|
Period From |
| |
|
|
|
|
|
|
|
|
|
May 10, 2004 |
|
|
April 1, 2004 |
| |
|
Year Ended |
|
Year Ended |
|
To |
|
|
to |
| |
|
March 31, 2007 |
|
March 31, 2006 |
|
March 31, 2005 |
|
|
May 9, 2004 |
| |
|
|
|
|
|
Revenues, net |
|
$ |
158,411,484 |
|
|
$ |
130,928,641 |
|
|
$ |
95,854,671 |
|
|
|
$ |
9,486,601 |
|
Cost of revenues |
|
|
106,008,488 |
|
|
|
87,563,329 |
|
|
|
67,049,756 |
|
|
|
|
6,905,998 |
|
| |
|
|
|
|
|
Gross profit |
|
|
52,402,996 |
|
|
|
43,365,312 |
|
|
|
28,804,915 |
|
|
|
|
2,580,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
65,288,339 |
|
|
|
43,174,514 |
|
|
|
32,264,457 |
|
|
|
|
2,101,381 |
|
Depreciation and amortization |
|
|
4,256,203 |
|
|
|
2,326,119 |
|
|
|
1,457,936 |
|
|
|
|
— |
|
Goodwill and intangible asset impairment |
|
|
22,921,045 |
|
|
|
— |
|
|
|
707,044 |
|
|
|
|
16,055 |
|
| |
|
|
|
|
|
Total operating expenses |
|
|
92,465,587 |
|
|
|
45,500,633 |
|
|
|
34,429,437 |
|
|
|
|
2,117,436 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(40,062,591 |
) |
|
|
(2,135,321 |
) |
|
|
(5,624,522 |
) |
|
|
|
463,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
3,571,548 |
|
|
|
2,456,799 |
|
|
|
2,174,207 |
|
|
|
|
— |
|
Other income |
|
|
— |
|
|
|
— |
|
|
|
(87,152 |
) |
|
|
|
— |
|
| |
|
|
|
|
|
Total other expenses |
|
|
3,571,548 |
|
|
|
2,456,799 |
|
|
|
2,087,055 |
|
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income taxes |
|
|
(43,634,139 |
) |
|
|
(4,592,120 |
) |
|
|
(7,711,577 |
) |
|
|
|
463,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense |
|
|
138,134 |
|
|
|
118,791 |
|
|
|
185,500 |
|
|
|
|
— |
|
| |
|
|
|
|
|
NET INCOME (LOSS) |
|
$ |
(43,772,273 |
) |
|
$ |
(4,710,911 |
) |
|
$ |
(7,897,077 |
) |
|
|
$ |
463,167 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding (in thousands) |
|
|
91,433 |
|
|
|
83,834 |
|
|
|
72,456 |
|
|
|
|
948 |
|
Basic and diluted net income (loss) per share |
|
$ |
(0.48 |
) |
|
$ |
(0.06 |
) |
|
$ |
(0.11 |
) |
|
|
$ |
0.49 |
|
| |
|
|
|
|
|
See accompanying notes to these consolidated financial statements.
F - 6
ARCADIA RESOURCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Earnings |
|
|
Due |
|
|
Total |
|
| |
|
Common Stock |
|
|
Treasury Stock |
|
|
Paid-In |
|
|
(Accumulated |
|
|
From |
|
|
Stockholders’ |
|
| |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit) |
|
|
Stockholder |
|
|
Equity |
|
| |
|
|
Predecessor: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, April 1, 2004 |
|
|
947,636 |
|
|
$ |
948 |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
7,627,047 |
|
|
$ |
15,233,460 |
|
|
$ |
(10,631,183 |
) |
|
$ |
12,230,272 |
|
Net income for the period |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
463,167 |
|
|
|
— |
|
|
|
463,167 |
|
| |
|
|
Predecessor balance May 10, 2004 |
|
|
947,636 |
|
|
$ |
948 |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
7,627,047 |
|
|
$ |
15,696,627 |
|
|
$ |
(10,631,183 |
) |
|
$ |
12,693,439 |
|
| |
|
|
Successor: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization of RKDA |
|
|
21,300,000 |
|
|
$ |
21,300 |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
47,450 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
68,750 |
|
Sale of common stock to private investors in
CHC prior to reverse merger, net of $885,000
in fees |
|
|
32,980,000 |
|
|
|
32,980 |
|
|
|
— |
|
|
|
— |
|
|
|
7,327,020 |
|
|
|
— |
|
|
|
— |
|
|
|
7,360,000 |
|
Sale of common stock to investors in CHC
prior to reverse merger |
|
|
840,000 |
|
|
|
840 |
|
|
|
— |
|
|
|
— |
|
|
|
209,160 |
|
|
|
— |
|
|
|
— |
|
|
|
210,000 |
|
Deemed issuance of common stock to CHC
shareholders in reverse acquisition |
|
|
23,903,351 |
|
|
|
23,904 |
|
|
|
— |
|
|
|
— |
|
|
|
13,077,072 |
|
|
|
— |
|
|
|
— |
|
|
|
13,100,976 |
|
| |
|
|
Balance, May 10, 2004 |
|
|
79,023,351 |
|
|
|
79,024 |
|
|
|
— |
|
|
|
— |
|
|
|
20,660,702 |
|
|
|
— |
|
|
|
— |
|
|
|
20,739,726 |
|
Sale of common stock, including 100,000
shares valued at $225,000 issued as fees |
|
|
5,100,000 |
|
|
|
5,100 |
|
|
|
— |
|
|
|
— |
|
|
|
4,269,900 |
|
|
|
— |
|
|
|
— |
|
|
|
4,275,000 |
|
Conversion of debt |
|
|
3,235,396 |
|
|
|
3,235 |
|
|
|
— |
|
|
|
— |
|
|
|
3,676,063 |
|
|
|
— |
|
|
|
— |
|
|
|
3,679,298 |
|
Payment for current year acquisitions |
|
|
1,833,276 |
|
|
|
1,833 |
|
|
|
— |
|
|
|
— |
|
|
|
1,447,917 |
|
|
|
— |
|
|
|
— |
|
|
|
1,449,750 |
|
Stock-based compensation expense |
|
|
651,890 |
|
|
|
652 |
|
|
|
— |
|
|
|
— |
|
|
|
584,869 |
|
|
|
— |
|
|
|
— |
|
|
|
585,521 |
|
Cashless exercise of warrants |
|
|
424,750 |
|
|
|
425 |
|
|
|
(112,109 |
) |
|
|
(187,375 |
) |
|
|
186,950 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Proceeds from exercise of stock options |
|
|
144,999 |
|
|
|
145 |
|
|
|
— |
|
|
|
— |
|
|
|
26,105 |
|
|
|
— |
|
|
|
— |
|
|
|
26,250 |
|
Release of escrowed shares |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,664,000 |
|
|
|
— |
|
|
|
— |
|
|
|
2,664,000 |
|
Net loss for the period |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,897,077 |
) |
|
|
— |
|
|
|
(7,897,077 |
) |
| |
|
|
Balance, March 31, 2005 |
|
|
90,413,662 |
|
|
|
90,414 |
|
|
|
(112,109 |
) |
|
|
(187,375 |
) |
|
|
33,516,506 |
|
|
|
(7,897,077 |
) |
|
|
— |
|
|
|
25,522,468 |
|
Sale of warrants, net of $1,820,000 in fees |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
29,180,000 |
|
|
|
— |
|
|
|
— |
|
|
|
29,180,000 |
|
Sale of common stock, net of $140,000 in fees |
|
|
1,212,121 |
|
|
|
1,212 |
|
|
|
— |
|
|
|
— |
|
|
|
1,858,788 |
|
|
|
— |
|
|
|
— |
|
|
|
1,860,000 |
|
Conversion of debt |
|
|
48,865 |
|
|
|
49 |
|
|
|
— |
|
|
|
— |
|
|
|
119,183 |
|
|
|
— |
|
|
|
— |
|
|
|
119,232 |
|
Payment for current year acquisitions |
|
|
1,795,173 |
|
|
|
1,795 |
|
|
|
— |
|
|
|
— |
|
|
|
3,775,930 |
|
|
|
— |
|
|
|
— |
|
|
|
3,777,725 |
|
Stock-based compensation expense |
|
|
108,545 |
|
|
|
109 |
|
|
|
— |
|
|
|
— |
|
|
|
371,638 |
|
|
|
— |
|
|
|
— |
|
|
|
371,747 |
|
Conversion rights issued |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
618,323 |
|
|
|
— |
|
|
|
— |
|
|
|
618,323 |
|
Proceeds from exercise of warrants |
|
|
534,883 |
|
|
|
535 |
|
|
|
— |
|
|
|
— |
|
|
|
267,407 |
|
|
|
— |
|
|
|
— |
|
|
|
267,942 |
|
Cashless exercise of warrants |
|
|
3,111,318 |
|
|
|
3,111 |
|
|
|
(747,188 |
) |
|
|
(2,473,465 |
) |
|
|
2,470,354 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Proceeds from exercise of stock options |
|
|
37,766 |
|
|
|
38 |
|
|
|
— |
|
|
|
— |
|
|
|
37,529 |
|
|
|
— |
|
|
|
— |
|
|
|
37,567 |
|
Net loss for the year |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,710,911 |
) |
|
|
— |
|
|
|
(4,710,911 |
) |
| |
|
|
Balance, March 31, 2006 |
|
|
97,262,333 |
|
|
|
97,263 |
|
|
|
(859,297 |
) |
|
|
(2,660,840 |
) |
|
|
72,215,658 |
|
|
|
(12,607,988 |
) |
|
|
— |
|
|
|
57,044,093 |
|
Cancellation of outstanding treasury stock |
|
|
(859,297 |
) |
|
|
(859 |
) |
|
|
859,297 |
|
|
|
2,660,840 |
|
|
|
(2,659,980 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Sale of common stock, net of $700,000 in fees |
|
|
4,999,999 |
|
|
|
5,000 |
|
|
|
— |
|
|
|
— |
|
|
|
9,294,998 |
|
|
|
— |
|
|
|
— |
|
|
|
9,299,998 |
|
Conversion of debt |
|
|
54,034 |
|
|
|
54 |
|
|
|
— |
|
|
|
— |
|
|
|
151,241 |
|
|
|
— |
|
|
|
— |
|
|
|
151,295 |
|
Payment for current year acquisitions |
|
|
13,224,249 |
|
|
|
13,224 |
|
|
|
— |
|
|
|
— |
|
|
|
27,027,943 |
|
|
|
— |
|
|
|
— |
|
|
|
27,041,167 |
|
Contingent consideration relating to prior
year acquisitions |
|
|
321,764 |
|
|
|
322 |
|
|
|
— |
|
|
|
— |
|
|
|
794,898 |
|
|
|
— |
|
|
|
— |
|
|
|
795,220 |
|
Stock-based compensation expense |
|
|
159,439 |
|
|
|
159 |
|
|
|
— |
|
|
|
— |
|
|
|
3,029,282 |
|
|
|
— |
|
|
|
— |
|
|
|
3,029,441 |
|
Proceeds from exercise of warrants |
|
|
687,622 |
|
|
|
688 |
|
|
|
— |
|
|
|
— |
|
|
|
443,123 |
|
|
|
— |
|
|
|
— |
|
|
|
443,811 |
|
Cashless exercise of warrants |
|
|
5,108,180 |
|
|
|
5,108 |
|
|
|
— |
|
|
|
— |
|
|
|
(5,108 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Proceeds from exercise of stock options |
|
|
35,000 |
|
|
|
35 |
|
|
|
— |
|
|
|
— |
|
|
|
50,715 |
|
|
|
— |
|
|
|
— |
|
|
|
50,750 |
|
Cashless exercise of stock options |
|
|
65,854 |
|
|
|
66 |
|
|
|
— |
|
|
|
— |
|
|
|
(66 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net loss for the year |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(43,772,273 |
) |
|
|
— |
|
|
|
(43,772,273 |
) |
| |
|
|
Balance, March 31, 2007 |
|
|
121,059,177 |
|
|
$ |
121,059 |
|
|
|
— |
|
|
$ |
— |
|
|
$ |
110,342,704 |
|
|
$ |
(56,380,261 |
) |
|
|
— |
|
|
$ |
54,083,502 |
|
| |
|
|
See accompanying notes to consolidated financial statements.
F - 7
ARCADIA RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Successor |
|
|
Predecessor |
| |
|
|
|
|
|
|
|
|
|
Period from |
|
|
Period from |
| |
|
Year |
|
Year |
|
May 10, 2004 |
|
|
April 1, 2004 |
| |
|
Ended |
|
Ended |
|
To |
|
|
to |
| |
|
March 31, 2007 |
|
March 31, 2006 |
|
March 31, 2005 |
|
|
May 9, 2004 |
| |
|
|
|
|
|
Cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) for the period |
|
$ |
(43,772,273 |
) |
|
$ |
(4,710,911 |
) |
|
$ |
(7,897,077 |
) |
|
|
$ |
463,167 |
|
Adjustments to reconcile net loss to net cash used in
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts |
|
|
4,210,004 |
|
|
|
879,802 |
|
|
|
930,799 |
|
|
|
|
42,192 |
|
Amortization and depreciation of property and equipment |
|
|
4,324,168 |
|
|
|
1,834,534 |
|
|
|
449,586 |
|
|
|
|
77 |
|
Loss on disposal of property and equipment |
|
|
— |
|
|
|
— |
|
|
|
89,810 |
|
|
|
|
— |
|
Amortization of intangible assets |
|
|
2,789,135 |
|
|
|
1,544,594 |
|
|
|
782,222 |
|
|
|
|
— |
|
Goodwill and intangible asset impairment |
|
|
22,921,045 |
|
|
|
— |
|
|
|
707,044 |
|
|
|
|
|
|
Amortization of deferred financing costs |
|
|
— |
|
|
|
1,032,284 |
|
|
|
1,432,464 |
|
|
|
|
— |
|
Stock-based compensation expense |
|
|
3,029,441 |
|
|
|
371,747 |
|
|
|
585,521 |
|
|
|
|
— |
|
Issuance of common stock for interest |
|
|
— |
|
|
|
— |
|
|
|
101,013 |
|
|
|
|
— |
|
Issuance of common stock from escrow |
|
|
— |
|
|
|
— |
|
|
|
2,664,000 |
|
|
|
|
— |
|
Net change in operating components of working capital net
of impact of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(8,976,086 |
) |
|
|
(5,141,709 |
) |
|
|
(5,031,949 |
) |
|
|
|
(692,193 |
) |
Inventories |
|
|
(565,936 |
) |
|
|
(583,802 |
) |
|
|
(230,232 |
) |
|
|
|
— |
|
Other assets |
|
|
190,767 |
|
|
|
(1,932,993 |
) |
|
|
(644,761 |
) |
|
|
|
27,903 |
|
Accounts payable |
|
|
1,845,762 |
|
|
|
(219,259 |
) |
|
|
(405,051 |
) |
|
|
|
(271,202 |
) |
Accrued expenses |
|
|
1,075,079 |
|
|
|
78,132 |
|
|
|
(299,674 |
) |
|
|
|
(301,999 |
) |
Due to affiliated agencies |
|
|
(730,029 |
) |
|
|
(537,535 |
) |
|
|
(308,682 |
) |
|
|
|
170,915 |
|
Deferred revenue |
|
|
(119,721 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
| |
|
|
|
|
|
Net cash used in operating activities |
|
|
(13,778,644 |
) |
|
|
(7,385,116 |
) |
|
|
(7,074,967 |
) |
|
|
|
(545,085 |
) |
| |
|
|
|
|
|
Cash provided by (used in) investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of businesses, net of cash acquired |
|
|
(8,530,256 |
) |
|
|
(12,931,124 |
) |
|
|
(4,642,944 |
) |
|
|
|
(157,500 |
) |
Purchase of intangible asset |
|
|
(200,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
Purchases of property and equipment |
|
|
(7,136,957 |
) |
|
|
(3,812,324 |
) |
|
|
(1,003,697 |
) |
|
|
|
— |
|
| |
|
|
|
|
|
Net cash used in investing activities |
|
|
(15,867,213 |
) |
|
|
(16,743,448 |
) |
|
|
(5,646,641 |
) |
|
|
|
(157,500 |
) |
| |
|
|
|
|
|
Cash provided by (used in) financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of common stock warrants |
|
|
— |
|
|
|
29,180,000 |
|
|
|
— |
|
|
|
|
— |
|
Proceeds from issuance of note payable |
|
|
23,564,103 |
|
|
|
— |
|
|
|
283,928 |
|
|
|
|
702,585 |
|
Proceeds from issuance of common stock, net |
|
|
9,299,998 |
|
|
|
1,860,00 |
|
|
|
4,301,250 |
|
|
|
|
— |
|
Proceeds from exercise of stock options/warrants |
|
|
494,561 |
|
|
|
305,508 |
|
|
|
— |
|
|
|
|
— |
|
Net advances (payments) on line of credit |
|
|
5,677,825 |
|
|
|
933,378 |
|
|
|
3,795,709 |
|
|
|
|
— |
|
Payments on notes payable and capital lease obligations |
|
|
(6,926,652 |
) |
|
|
(9,032,246 |
) |
|
|
(1,783,191 |
) |
|
|
|
— |
|
Cash acquired with reverse merger |
|
|
— |
|
|
|
— |
|
|
|
7,536,180 |
|
|
|
|
— |
|
| |
|
|
|
|
|
Net cash provided by financing activities |
|
|
32,109,835 |
|
|
|
23,246,640 |
|
|
|
14,133,876 |
|
|
|
|
702,585 |
|
| |
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
2,463,978 |
|
|
|
(881,924 |
) |
|
|
1,412,268 |
|
|
|
|
— |
|
Cash and cash equivalents, beginning of period |
|
|
530,344 |
|
|
|
1,412,268 |
|
|
|
— |
|
|
|
|
— |
|
| |
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
2,994,322 |
|
|
$ |
530,344 |
|
|
$ |
1,412,268 |
|
|
|
$ |
— |
|
| |
|
|
|
|
|
See accompanying notes to these consolidated financial statements.
F - 8
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Successor |
|
|
Predecessor |
| |
|
|
|
|
|
|
|
|
|
Period from |
|
|
Period from |
| |
|
Year |
|
Year |
|
May 10, 2004 |
|
|
April 1, 2004 |
| |
|
Ended |
|
Ended |
|
To |
|
|
to |
| |
|
March 31, 2007 |
|
March 31, 2006 |
|
March 31, 2005 |
|
|
May 9, 2004 |
Supplementary information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
2,948,226 |
|
|
$ |
1,430,718 |
|
|
|
— |
|
|
|
|
— |
|
Income taxes |
|
|
175,000 |
|
|
|
189,472 |
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing / financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of intangible asset with common stock |
|
|
903,000 |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
Payments on note payable with issuance of common stock |
|
|
151,295 |
|
|
|
119,232 |
|
|
|
— |
|
|
|
|
— |
|
Contingent consideration relating to prior year
acquisitions paid with issuance of common stock |
|
|
795,220 |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
Financing of equipment with notes payable / capital
lease obligations |
|
|
590,294 |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
Forgiveness of note payable |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
Conversion
rights issued |
|
|
— |
|
|
|
618,323 |
|
|
|
— |
|
|
|
|
— |
|
Debt issue discount |
|
|
— |
|
|
|
314,862 |
|
|
|
— |
|
|
|
|
— |
|
Related party payable recorded as part of the
purchase price of an acquired business |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
$ |
574,430 |
|
See accompanying notes to these consolidated financial statements.
F - 9
ARCADIA RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Description of Company and Significant Accounting Policies
Description of Company
Arcadia Resources, Inc. (“Arcadia” or the “Company”) is a national provider of in-home health care
and retail / employer health care services. The Company has five distinct segments: Services,
Products (Durable Medical Equipment or “DME”), Retail, Pharmacy and Clinics. The Services segment
is a national provider of medical staffing services, including home healthcare and medical
staffing, as well as light industrial, clerical and technical staffing services. Based in
Southfield, Michigan, the Services segment provides its staffing services through a network of
affiliate and company-owned offices throughout the United States. The Products segment markets,
rents and sells products and equipment across the United States including a catalog out-sourcing
and product fulfillment business which sells various medical equipment product offerings. In
addition, the Retail segment includes operations which sell medical equipment at certain Sears and
Wal-Mart retail locations. The Company is in the process of disposing of this portion of the
Retail segment in order to focus exclusively on the catalog business. The Pharmacy segment
provides pharmacy services to grocery pharmacy retailers nationally and offers DailyMed™, the
patented and patent pending compliance packaging medication system, to at-home patients and senior
living communities. In addition, the Company offers pharmacy services to employers through a
contracted relationship with a large pharmacy benefits manager. Pharmacy services to grocers and
employers include staffing, pharmacy management, DailyMed™, an exclusive retail pharmacy benefit
network and an 420 square foot automated pharmacy footprint that allows its customers to reduce
space needs and improve labor efficiencies. The Clinics segment is a new business venture launched
in fiscal 2007 focused on establishing non-emergency medical care facilities in retail location
host sites.
Effective July 3, 2006, the Company became listed on the American Stock Exchange and changed its
stock symbol to KAD. Previously, the Company was not listed on an exchange and its stock symbol on
the OTC Bulletin Board was ACDI.
The consolidated financial statements for the period from
April 1, 2004 to May 9, 2004 include the accounts of Arcadia Services, Inc. (“Arcadia Services” or
“Predecessor”) and subsidiaries prior to the effect of the acquisition and merger described below.
All significant intercompany balances and transactions have been eliminated in consolidation.
Effective May 10, 2004, CHC Sub, Inc., a wholly-owned subsidiary of the Company, merged with and
into RKDA, Inc. (“RKDA”), a Michigan corporation, (the
“RKDA Merger”). RKDA’s assets consisted of
all of the capital stock of Arcadia Services and the membership interest of SSAC, LLC d/b/a Arcadia
Rx. RKDA acquired Arcadia Services on May 7, 2004 pursuant to a Stock Purchase Agreement by and
among RKDA, Arcadia Services, Addus HealthCare, Inc. (“Addus”), and the principal stockholder of
Addus. The transaction between RKDA and Arcadia was considered a reverse merger, and RKDA is
considered the acquirer of the Company for accounting purposes.
Principles of Consolidation
The consolidated financial statements include the accounts of Arcadia Resources, Inc. and its
wholly-owned and majority-owned subsidiaries. The earnings of the subsidiaries are included from
the date of acquisition. All intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities as of the date of the financial statements and revenue and expenses during the
reporting period. Changes in these estimates and assumptions may have a material impact on the
financial statements and accompanying notes.
F - 10
Cash and Cash Equivalents
The Company considers cash in banks and all highly liquid investments with terms to maturity at
acquisition of three months or less to be cash and cash equivalents.
Allowance for Doubtful Accounts
The Company reviews all accounts receivable balances and provides for an allowance for doubtful
accounts based on historical analysis of its records. The analysis is based on patient and
institutional client payment histories, the aging of the accounts receivable, and specific review
of patient and institutional client records. Items greater than one year old are fully reserved. As
actual collection experience changes, revisions to the allowance may be required. Any unanticipated
change in customers’ creditworthiness or other matters affecting the collectibility of amounts due
from customers could have a material effect on the results of operations in the period in which
such changes or events occur. After all attempts to collect a receivable have failed, the
receivable is written off against the allowance.
Inventories
Inventories are stated at the lower of cost or market utilizing the first in, first out (FIFO)
method. Inventories include products and supplies held for sale at the Company’s individual
locations. The home care and pharmacy operations possess the majority of the inventory. Inventories
are evaluated periodically for obsolescence and shrinkage.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are provided on the
straight-line method over the estimated useful lives of the assets (3 to 15 years). The majority
of the Company’s property and equipment includes equipment held for rental to patients in the home
for which the related depreciation expense is included in cost of revenue.
Goodwill and Acquired Intangible Assets
The Company has acquired several entities resulting in the recording of intangible assets including
goodwill, which represents the excess of the purchase price over the net assets of businesses
acquired. The Company follows Statement of Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets.” Goodwill is tested for impairment annually in the fourth
quarter, and between annual tests in certain circumstances, by comparing the estimated fair value
of each reporting unit to its carrying value. Fair value is determined by estimating the future
cash flows for each reporting unit.
Acquired intangible assets are amortized using the economic benefit method when reliable
information regarding future cash flows is available and the straight-line method when this
information is unavailable. The estimated useful lives are as follows:
| |
|
|
|
|
Trade name |
|
30 years |
Customers and referral source relationships (depending on
the type of business purchased) |
|
5 and 20 years |
Acquired technology |
|
3 years |
Non-competition agreements (length of agreement) |
|
5 years |
Impairment of Long-Lived Assets
The Company reviews its long-lived assets (except goodwill, as described above) for impairment
whenever changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. To determine if impairment exists, the Company compares the estimated future
undiscounted cash flows from the related long-lived assets to the net carrying amount of such
assets. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment
charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated
fair value of the asset, generally determined by discounting the estimated future cash flows.
F - 11
Payables to Affiliated Agencies
Arcadia Services operates independently and through a network of affiliated agencies throughout the
United States. These affiliated agencies are independently-owned, owner-managed businesses, which
have been contracted by the Company to sell services under the Arcadia Services name. The
arrangements with affiliated agencies are formalized through a standard contractual agreement. The
affiliated agencies operate in particular regions and are responsible for recruiting and training
field service employees and marketing their services to potential customers within the region. The
field service employees are employees of Arcadia Services. Arcadia Services provides sales and
marketing support to the affiliated agencies and develops and maintains operating manuals that
provide suggested standard operating procedures. The contractual agreements require a specific,
timed, calculable flow of funds and expenses between the affiliated agencies and Arcadia Services.
The net amounts due to affiliated agencies under these agreements include short-term and long-term
net liabilities.
Income Taxes
Income taxes are accounted for in accordance with the provisions specified in Statement of
Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” Accordingly, the
Company provides deferred income taxes based on enacted income tax rates in effect on the dates
temporary differences between the financial reporting and tax bases of assets and liabilities
reverse and tax credit carryforwards are utilized. The effect on deferred tax assets and
liabilities of a change in income tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax
assets to amounts that are more likely than not to be realized.
Revenue Recognition and Concentration of Credit Risk
Revenues for services are recorded in the period the services are rendered. Revenues for products
are recorded in the period delivered based on rental or sales prices established with the client or
their insurer prior to delivery.
Net patient service revenues are recorded at net realizable amounts estimated to be paid by the
customers and third-party payers. A provision for contractual adjustments is recorded as a
reduction to net patient services revenues and consists of a) the difference between the payer’s
allowable amount and the customary billing rate; and b) services for which payment is denied by
governmental or third-party payors or otherwise deemed non-billable. The Company records the
provision for contractual adjustments based on a percentage of revenue using historical data. Due
to the complexity of many third-party billing arrangements, adjustments are sometimes made to
amounts originally recorded. These adjustments are typically identified and recorded upon cash
remittance or claim denial.
Revenues reimbursed under arrangements with Medicare, Medicaid and other governmental-funded
organizations were approximately 28%, 24% and 24% for the years ended March 31, 2007, 2006 and
2005, respectively. No customers represent more than 10% of the Company’s revenues for the periods
presented.
Business Combinations and Valuation of Intangible Assets
The Company accounts for business combinations in accordance with SFAS No. 141, “Business
Combinations” (“SFAS No. 141”). SFAS No. 141 requires business combinations to be accounted for
using the purchase method of accounting and includes specific criteria for recording intangible
assets separate from goodwill. Results of operations of acquired businesses are included in the
financial statements of the Company from the date of acquisition. Net assets of the acquired
company are recorded at their estimated fair value at the date of acquisition. As required by SFAS
No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), the Company does not amortize
goodwill but instead tests goodwill for impairment periodically (and at least annually) and if
necessary, would record any impairment in accordance with SFAS No. 142. Identifiable intangibles,
such as the acquired customer relationships, are amortized over their expected economic lives.
F - 12
Earnings (Loss) Per Share
Basic earnings per share is computed by dividing net income (loss) available to common stockholders
by the weighted average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities, or other contracts to issue
common stock, were exercised or converted into shares of common stock. Shares held in escrow that
are contingently issuable upon a future outcome are not included in earnings per share until they
are released. Outstanding stock options and warrants to acquire common shares and escrowed shares
have not been considered in the computation of dilutive losses per share since their effect would
be antidilutive for all applicable periods shown. As of March 31, 2007, there were approximately
41,516,000 potentially dilutive shares outstanding.
Stock-Based Compensation
Through March 31, 2005, the Company accounted for stock-based compensation using the intrinsic
value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”), and, accordingly, recognized no compensation expense related to stock
options. The Company historically reported pro forma results under the disclosure-only provisions
of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition
and Disclosure” (“SFAS No. 123”).
Effective April 1, 2005, the Company adopted SFAS No. 123R, “Share-Based Payment” (“SFAS No.
123R”), which replaced SFAS No. 123 and superseded APB 25, using the modified prospective
transition method. Under the modified prospective transition method, fair value accounting and
recognition provisions of SFAS No. 123R are applied to stock-based awards granted or modified
subsequent to the date of adoption. Prior periods presented are not restated. In addition, for
awards granted prior to the effective date, the unvested portion of the awards are recognized in
periods subsequent to the effective date based on the grant date fair value determined for pro
forma disclosure purposes under SFAS No. 123.
Had compensation cost been determined on the basis of fair value pursuant to SFAS No. 123, net loss
and basic and diluted loss per share for the period from May 10, 2004 to March 31, 2005 would have
been as follows:
| |
|
|
|
|
Net loss as reported |
|
$ |
(7,897,077 |
) |
Add: stock-based employee compensation expense
included in income, net of related tax effects |
|
|
— |
|
Less: total stock-based employee compensation
expense determined under the fair value method, net
of related tax effects |
|
|
764,167 |
|
|
|
|
|
Pro forma net loss |
|
$ |
(8,661,244 |
) |
|
|
|
|
Net loss per share: |
|
|
|
|
Basic and diluted loss per share as reported |
|
$ |
(0.11 |
) |
Pro forma basic and diluted loss per share |
|
$ |
(0.12 |
) |
Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, and accrued expenses, approximate their fair values due to
their short maturities. Based on borrowing rates currently available to the Company for similar
terms, the carrying value of the lines of credit, capital lease obligations, and long-term
obligations approximate fair value.
Advertising Expense
Advertising costs are expensed as incurred. For the years ended March 31, 2007, 2006 and 2005,
advertising expenses were $1,449,000, $1,043,000 and $362,000, respectively.
Reclassifications
Certain amounts presented in prior periods have been reclassified to conform to current period
presentation.
F - 13
Recent Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in
Income Taxes”, which amends and clarifies previous guidance on the accounting for deferred income
taxes as presented in SFAS No. 109, “Accounting for Income Taxes”. The statement is effective for
fiscal years beginning after December 15, 2006. Arcadia has not completed its analysis of the
effect of FIN 48; however, the Company does not expect the adoption of FIN 48 to have a material
effect on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles
and expands disclosure about fair value measurements. The statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and interim periods within
those years. Management is currently evaluating the statement to determine what, if any, impact it
will have on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities,” which permits companies to make a one-time election to carry eligible types
of financial assets and liabilities at fair value, even if measurement is not required by GAAP.
The statement is effective for fiscal years beginning after November 15, 2007. Management is
currently evaluating the statement to determine what, if any, impact it will have on the Company’s
consolidated financial statements.
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin
(“SAB”) 108, “Considering the Effects of Prior Year Misstatements when quantifying Misstatements in
Current Year Financial Statements”, which requires companies to evaluate the materiality of
identified unadjusted errors on each financial statement and related financial statement disclosure
using both the rollover approach and the iron curtain approach. The rollover approach quantifies
misstatements based on the amount of the error in the current year financial statement whereas the
iron curtain approach quantifies misstatements based on the effects of correcting the misstatement
existing in the balance sheet at the end of the current year, irrespective of the misstatement’s
year(s) of origin. Financial statements would require adjustment when either approach results in
quantifying a misstatement that is material. Correcting prior year financial statements for
immaterial errors would not require previously filed reports to be amended. We adopted SAB 108 as
of March 31, 2007 and such adoption had no financial impact on our results of operations or
financial condition.
Note 2 — Management’s Plan
The accompanying consolidated financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the settlement of liabilities in the normal
course of business and the continuation of the Company as a going concern. The Company has
experienced operating losses and negative cash flows since its inception and currently has an
accumulated deficit. These factors raise substantial doubt about the Company’s ability to continue
as a going concern. Liquidation values may be
substantially different from carrying values as shown and these consolidated financial statements
do not give effect to adjustments, if any, that would be necessary to the carrying values and
classification of assets and liabilities should the Company be unable to continue as a going
concern.
The Company has grown primarily through acquisition since the reverse merger in May 2004. For
the years ended March 31, 2007 and 2006, the Company incurred net losses of $43.8 million and $4.7
million, respectively. The fiscal 2007 net loss included non-cash expenses totaling $37.3 million.
During the year ended March 31, 2007, the Company used approximately $13.8 million of cash in
operations and had approximately $3 million in cash and cash
equivalents at March 31, 2007. Additionally, the Company’s
debt agreements included provisions that allow certain of its lenders
to, in their sole descretion, determine that the Company has
experienced a material adverse change which, in turn, would be an
event of default.
Our continuation as a going concern is dependent upon several factors, including our ability
to generate sufficient cash flow to meet our obligations on a timely basis. Management’s current
cash projections indicate significant improvement in the cash generated from operations but
anticipate the need for additional capital during fiscal 2008.
Management has prepared projections for fiscal 2008 that anticipate an increase in revenue and
reductions in monthly operating expenses. After a period of growth through acquisition, management
intends to focus its efforts on improving operating efficiencies and reducing selling, general and
administrative expenses while growing the developing businesses. The first step in this process
includes certain restructuring initiatives, which the Board of Directors approved and the Company
announced in March 2007. Management anticipates significant improvements in cash flows from
operations during fiscal 2008 compared to fiscal 2007. Management anticipates strong growth in
revenues from the Pharmacy and Clinic segments as well as continued steady growth in the Services
segment. Management believes the significant cost reductions can be realized with certain
administrative expenses, including accounting/consulting fees, legal costs, and facility costs.
Management is committed to reducing costs to appropriate levels if the projected revenue increases
do not materialize.
In May 2007, the Company raised $13 million through the sale of common stock. Approximately
$5.5 million of the proceeds was used to pay down outstanding debt. In June 2007, the Company
restructured a significant portion of its outstanding debt, which included the extension of the
maturity date to June 30, 2008 (see Note 16 — Subsequent Events). Even after these two events,
management anticipates that the Company will require additional financing to fund operating
activities during fiscal 2008. The Company’s new management team is exploring various alternatives
for raising additional capital, including potential divestitures of non-strategic businesses,
seeking new debt or equity financing, and pursuing joint venture arrangements. To the extent that
seeking new debt, restructuring operations or selling non-strategic businesses are insufficient to
fund operating activities over the next year, management anticipates raising capital through
offering equity securities in private or public offerings or through subordinated debt.
Although management believes that its efforts in obtaining additional financing will be
successful, there can be no assurance that its efforts will ultimately be successful.
F - 14
Note 3 – Business Acquisitions
Fiscal 2007
The following summarizes the purchase price allocations for business acquisitions made during the
year ended March 31, 2007. The acquisitions are described more fully below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
PrairieStone |
|
Others |
|
Total |
Share consideration |
|
$ |
23,641,085 |
|
|
$ |
2,497,084 |
|
|
$ |
26,138,169 |
|
Cash consideration |
|
|
— |
|
|
|
8,929,983 |
|
|
|
8,929,983 |
|
Note payable / future obligation |
|
|
161,760 |
|
|
|
2,074,560 |
|
|
|
2,236,320 |
|
Acquisition costs |
|
|
327,240 |
|
|
|
566,100 |
|
|
|
893,340 |
|
| |
|
|
Total purchase price |
|
$ |
24,130,085 |
|
|
$ |
14,067,727 |
|
|
$ |
38,197,812 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
1,713,153 |
|
|
$ |
1,109,680 |
|
|
$ |
2,822,833 |
|
Fixed assets |
|
|
1,388,557 |
|
|
|
1,678,414 |
|
|
|
3,066,971 |
|
Liabilities |
|
|
(4,369,610 |
) |
|
|
(1,702,021 |
) |
|
|
(6,071,631 |
) |
Line of credit |
|
|
(750,000 |
) |
|
|
— |
|
|
|
(750,000 |
) |
Note payable |
|
|
(213,600 |
) |
|
|
— |
|
|
|
(213,600 |
) |
Intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
|
9,720,000 |
|
|
|
5,740,000 |
|
|
|
15,460,000 |
|
Goodwill |
|
|
16,641,585 |
|
|
|
7,241,654 |
|
|
|
23,883,239 |
|
| |
|
|
Total net identifiable assets |
|
$ |
24,130,085 |
|
|
$ |
14,067,727 |
|
|
$ |
38,197,812 |
|
| |
|
|
The weighted-average useful life of customer relationships acquired during the year ended March 31,
2007 is 19.3 years. The $23,883,239 in goodwill was assigned to the Pharmacy and Products segments
in the amount of $18,691,733 and $5,191,506, respectively.
PrairieStone Pharmacy, LLC
On February 16, 2007, the Company acquired 100% of the outstanding membership interest of
PrairieStone Pharmacy, LLC (“PrairieStone”), PrairieStone markets a license service model whereby
it contracts with regional grocery chain pharmacies to provide pharmacy expertise, access to a
restricted third party network and the right to sell DailyMed™, a product which sorts medications
into single dose packets organized by date and time. The primary reasons for the acquisition were
to expand and improve the pharmacy product offerings and to complement the clinic business recently
launched by the Company. The total purchase price of $24,130,085 included the issuance of
9,730,737 shares of common stock, a “price adjustment” of $161,760 to be paid on the one-year
anniversary date in cash or stock at the Company’s discretion and acquisition costs of $327,240.
8,000,000 shares of common stock were issued at closing. 195,600 of these shares were placed into
escrow and represent contingent consideration. The value of the common stock takes into
consideration the fact that the Company has guaranteed the share price of $2.50 and that additional
shares or cash, at the Company’s discretion, are to be issued at the one-year anniversary date if
the share price falls short. An additional 1,926,337 shares were issued at closing to pay off a
$3,750,000 term note payable due to one of the members of PrairieStone. For accounting purposes,
these shares were valued at $2.15 per share which represents the closing stock price on the day of
acquisition. The consolidated financial statements presented herein include the results of
operations of PrairieStone from February 17, 2007. The acquired business is included in the
Pharmacy segment.
In addition to the purchase price consideration previously described, the purchase agreement
provides for additional contingent consideration to be issued if certain earnings before income
taxes, depreciation and amortization (“EBITDA”) milestones are achieved for the first and second
twelve month periods after the acquisition date. Specifically, if the EBITDA for the first twelve
month period exceeds $1,500,000, then the earn-out consideration is equal to 25% of EBITDA. If the
EBITDA for the second twelve month period exceeds $18,000,000, then the earn-out consideration is
equal to 20% of the excess of the EBITDA for the second twelve month period over EBITDA for the
first twelve month period. The earn-out consideration can be paid by the Company in cash or common
stock at the discretion of the Company.
F - 15
The 195,600 shares of common stock issued at closing and held in escrow are to be released if
PrairieStone’s EBITDA for the fiscal year ending March 31, 2009 exceeds $10,000,000. If EBITDA is
less than $10,000,000, then 50% of the shares are to be released following the first fiscal quarter
after the fiscal year ending March 31, 2009 that PrairieStone exceeds EBITDA of $10,000,000 on an
annualized basis. The remaining 50% of the shares are to be released following the second fiscal
quarter that PrairieStone exceeds EBITDA of $10,000,000 on an annual basis. If PrairieStone’s
annualized EBITDA does not exceed $10,000,000 on or before the quarter ending March 31, 2010, then
these shares are to be released to the Company and cancelled.
Additional contingent consideration, if any, will increase the purchase price when the contingency
is resolved and the consideration becomes issuable.
On February 15, 2007 and in conjunction with the closing of Arcadia’s acquisition of PrairieStone,
PrairieStone closed on the sale of the assets of fifteen retail pharmacies located within grocery
stores owned and operated by Lunds, Inc. and Byerly’s, Inc. to Lunds, Inc., which transaction
included execution of a five-year Management Services Agreement and a five-year Licensed Services
Agreement between Lunds, Inc. and PrairieStone. Under the terms of the Management Services
Agreement, PrairieStone will provide such services that are appropriate for the day-to-day
management of the pharmacies. PrairieStone will receive a $600,000 management fee for the first
year of the agreement. The management fee for the second year of the agreement is equal to 50% of
the net income of the pharmacies capped at $200,000. The management fee for year three through
year five is also based on a percentage of net income, which percentage decreases as net income
increases. Under the terms of the Licensed Services Agreement, PrairieStone will provide its
licensed services model to Lunds, Inc. The fees for these services depend on the specific types of
services provided at each pharmacy location. The Asset Purchase Agreement with Lunds includes a
“post-closing risk-share” clause whereby PrairieStone will pay Lunds 50% of the first two years’
losses, if any, up to a cumulative total loss of $914,321.
The following unaudited pro forma supplemental information on the results of operations has been
prepared to give effect to the PrairieStone acquisition described above. This pro forma
information has been prepared as if the acquisition had been completed as of the first day of the
indicated period. The unaudited pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the results that would have actually been reported had the
acquisition occurred on the first date of the indicated period nor is it necessarily indicative of
future results.
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended |
| |
|
March 31, 2007 |
|
March 31, 2006 |
Net revenue |
|
$ |
162,822,000 |
|
|
$ |
131,366,000 |
|
Net loss |
|
$ |
(46,992,000 |
) |
|
$ |
(7,224,000 |
) |
Loss per share (basic and diluted) |
|
$ |
(0.46 |
) |
|
$ |
(0.08 |
) |
Weighted average common shares (in thousands) |
|
|
101,164 |
|
|
|
93,565 |
|
F - 16
Other Business Combinations
In addition to PrairieStone, the Company acquired the following four businesses during the year
ending March 31, 2007:
| |
|
|
|
|
|
|
| |
|
Acquisition |
|
|
|
|
| Entity Name |
|
Date |
|
Segment |
|
Description |
Wellscripts, LLC
(“Wellscripts”) |
|
June 30, 2006 |
|
Pharmacy |
|
Sells and delivers prescription drugs to assisted living, nursing home and similar facilities. |
|
|
|
|
|
|
|
Alliance Oxygen and
Medical Equipment,
Inc. (“Alliance”) |
|
July 12, 2006 |
|
Products |
|
Sells and rents durable medical equipment, including respiratory medical equipment. |
|
|
|
|
|
|
|
Lovell Medical
Equipment, Inc.
(“Lovell”) |
|
August 25, 2006 |
|
Products |
|
Sells and rents durable medical equipment, including respiratory medical equipment. |
|
|
|
|
|
|
|
Metro Health Basic
Care (“Metro”) |
|
December 27, 2006 |
|
Clinics |
|
Participates in the delivery of basic health care services in retail centers. |
In addition to the business combinations described above, on November 13, 2006, the Company
acquired a 75% interest in Pinnacle EasyCare, LLC (“Pinnacle”) for $200,000 in cash and common
stock valued at $903,000. At the time of the transaction, Pinnacle had no operations, and its only
asset was a master lease agreement with a retail chain. For accounting purposes, this transaction
is not considered a business combination but rather a purchase of an intangible asset.
On March 22, 2007, a subsidiary of the Company closed on an agreement to sell all outstanding
membership interests of Wellscripts back to Wellscripts’ former sole member who had previously sold
the membership interests to the subsidiary. All of the assets of Wellscripts, other than provider
numbers and provider agreements, were transferred to the subsidiary prior to the closing. As
consideration for the sale, the remaining balance of a note payable of $925,440 entered into as
part of the original acquisition was canceled. See Note 5 for a description of the related
impairment expense.
F - 17
Fiscal 2006
Services Segment
On April 29, 2005, the Company entered into and closed on an agreement by which it purchased the
outstanding capital stock of Home Health Professionals, Inc. and certain assets of Home Health
Professionals Staffing, LLC. The acquisition was effective May 1, 2005. Home Health Professionals
operates a home care services business headquartered in Battle Creek, Michigan. The purchase price
for the acquired stock was a cash payment of $2,500,000, plus 1,058,201 shares of the Company’s
common stock valued at $2,000,000, plus the payment of amounts to be determined per an earnout
formula over the twelve month period following the closing. At closing, the cash consideration and
shares of the Company’s common stock were paid, less amounts escrowed to satisfy potential
indemnification and other claims of the purchaser. The Company utilized proceeds from a convertible
promissory note issued to a third party to pay the cash portion of the purchase price.
Because the balance of the purchase price payable is computed per a specified earnout formula based
on operations, the Company does not anticipate that it will incur debt to finance payment of the
balance of the purchase price.
On July 18, 2005, the Company acquired certain assets of Alternative Home Health Care of Lee County
with a cash payment of $100,000.
On October 21, 2005, the Company acquired certain assets of Sparrow Private Duty Services with a
cash payment of $90,000.
Products Segment
On April 7, 2005, the Company acquired the net assets of United Health Care Services (“United”) and
of two related smaller companies. United is a home respiratory and durable medical equipment
company located in Ft. Myers and Port Charlotte, Florida. The purchase price was $1,588,000 as
follows: cash of $1,200,000 drawn on the Company’s line of credit, the delivery of an unsecured
subordinated promissory note in the principal amount of $100,000, with interest at five (5%)
percent per annum, payable in two equal installments due at six months and twelve months from the
closing date, and the issuance of an aggregate of 147,500 shares of the Company’s common stock
having an aggregate value of $288,000.
On May 13, 2005, the Company acquired the net assets of HealthLink, a home respiratory and durable
medical equipment company located in Crown Point, Indiana. The purchase price was a note to the
seller of $160,000 plus 15,000 shares of the Company’s common stock valued at $30,300. The purchase
price payable is due in 12 equal monthly installments of $6,700 plus a final payment of $80,000 one
year from the closing date.
On August 12, 2005, the Company acquired certain assets of Summit Healthcare with a cash payment of
$100,000 funded from operations and a note payable of $550,000 which $500,000 was paid in full as
of September 30, 2005. The remaining payment is due within one year pending resolution of certain
items.
On September 27, 2005, the Company acquired certain assets of Low Country Home Medical Equipment
Company, Inc. with a cash payment of $1.5 million funded with proceeds from its warrant offering.
The Company also issued of 191,571 shares of the its common stock valued at $500,000 to escrow to
be distributed to the sellers, subject to attainment of certain earnings goals, one year after the
purchase.
On October 17, 2005, the Company acquired certain assets of Madrid Medical Equipment with cash
payments totaling $170,000 and assumption of debts totaling $72,000.
On November 3, 2005, the Company acquired the outstanding stock of O2 Plus. The purchase price of
$1.9 million included $1.1 million cash funded with proceeds from its warrant offering; plus
assumption of the outstanding liabilities of $739,000; and $100,000 pending the satisfaction of
certain post-closing requirements. In the event that certain future growth goals are met, an
additional purchase price of up to $1 million could be paid over two years to the sellers in shares
of the Company’s common stock.
On January 11, 2006, the Company acquired certain assets of HomeLife Medical Equipment, Inc. with a
cash payment of $1.4 million funded with proceeds from its warrant offering, along with assumption
of liabilities of $92,000.
On January 27, 2006, the Company acquired certain assets from Remedy Therapeutics, Inc. The
purchase price of $4.8 million included $3.2 million cash funded with proceeds from its warrant
offering, a note payable to sellers of $800,000 bearing interest at 8%, 192,901 shares of the
Company’s common stock valued at $500,000 plus assumption of the outstanding liabilities of
$342,000.
On March 3, 2006, the Company acquired certain assets and of Regional Oxygen and Medical Equipment,
Inc. with cash generated from operations of $275,000 and the assumption of specific liabilities
totaling $17,000.
On March 11, 2006, the Company acquired certain assets of Encore Respiratory with $1.8 million in
cash funded from its line of credit, along with 60,000 shares of its common stock valued at
$191,000.
Retail Segment
On May 31, 2005, the Company acquired the membership interests in Rite at Home Health Care, LLC, a
health care product-oriented catalog company located in Illinois. The purchase price of $1.34
million included 88,000 shares of the Company’s common stock valued at $189,000, $325,000 cash plus
assumption of the outstanding liabilities of $829,000. The line of credit in place for Rite at Home
Health Care, LLC provided $750,000 toward the funding of the transaction.
On June 27, 2005, the Company issued 42,000 shares of its common stock valued at $79,800 to a
limited liability company for intellectual property it developed and the related rights to pursue a
licensing agreement for providing durable medical equipment through a retailer’s store locations.
Fiscal 2005
Effective May 10, 2004, CHC Sub, Inc., a wholly-owned subsidiary of Arcadia Resources, Inc., merged
with and into RKDA, Inc. (“RKDA”), a Michigan corporation. RKDA was formerly owned by John E.
Elliott, II and Lawrence R. Kuhnert. On May 10, 2004, pursuant to the terms of the merger, the
Company issued Messrs. Elliott and Kuhnert 21,300,000 shares of its Common Stock and 1,000,000
Class A Warrants to purchase 1,000,000 shares of the Company’s Common Stock at $0.50 per share
within seven years, in exchange for their interest in RKDA. RKDA’s assets consist of the
outstanding capital stock of Arcadia Services and the membership interest of SSAC, LLC d/b/a
Arcadia Rx. RKDA acquired Arcadia Services on May 7, 2004 pursuant to a Stock Purchase Agreement by
and among RKDA, Arcadia Services, Addus Healthcare, Inc. (Addus) and Addus’s principal stockholder.
The purchase price of Arcadia Services was $16,800,000, including the assumption of accounts
payable and a note payable totaling $700,000.
Services Segment
On July 30, 2004, the Company purchased selected assets of the Staffing Source of St. Petersburg,
Florida. The Staffing Source, Inc. with offices in Bradenton, Clearwater and St. Petersburg
provides temporary personnel for health care facilities and other business. The purchase price is computed per a specified formula based on the annualized
revenue, with a minimum total payment of $480,000 and a maximum total payment of $600,000.
On August 30, 2004, the Company purchased selected assets of Merit Staffing Resources, Inc
(“Merit”). Merit provides temporary personnel for healthcare facilities and other businesses. It
has offices in Danvers, Dedham, Lakeville, Sandwich, and Weymouth,
Massachusetts. The purchase price is (a) cash equal to a specified percentage of the seller’s
accounts receivable under 120 days outstanding as of closing, plus $200,000, subject to a total
maximum cash payment at closing of $1,600,000 plus (b) forty eight monthly payments computed per a specified formula based on gross margin with a
minimum total payment of $864,000 and a maximum total payment of $1,600,000.
On December 17, 2004, the Company’s Grayrose, Inc. subsidiary purchased substantially all of the
assets of BK Tool, Inc., a light industrial staffing business located in Sterling Heights,
Michigan, with approximately $2,000,000 in annual revenues. The total purchase price of $468,000
included payment of $175,000 plus 85% of accounts receivables no greater than 60 days outstanding.
At closing, the seller was paid $393,000 in cash, drawn on the line of credit, and the remaining
$75,000 was paid to the seller in January 2005.
Products Segment
On August 20, 2004, the Company purchased American Oxygen, Inc. of Peoria, Illinois. The purchase
price was 200,000 shares of the Company valued at $186,000. American Oxygen operates from two
locations in Illinois and sells durable medical equipment, including respiratory/oxygen.
On September 23, 2004, the Company purchased Trinity Healthcare of Winston-Salem, Inc (Trinity).
The acquisition was a stock purchase and the price was $5,400,000. Trinity provides oxygen and
other respiratory services, as well as home intravenous therapy services. Trinity has locations in
Winston-Salem and Huntersville, North Carolina, and Marietta and Demorest, Georgia. Two of
Trinity’s selling shareholders were paid the following portions of the purchase price at closing on
September 23, 2004: (a) payment of $2,500,000 in cash; (b) issuance of 1,225,410 shares of the
Company’s common stock with an aggregate value of $916,250; and (c) delivery of a promissory note
in the aggregate principal amount of $660,740, secured by a wholly owned subsidiary under a
security agreement subordinated to their primary lender. The promissory note’s term is 21 months
beginning January 15, 2005 and maturing October 15, 2006. The promissory note bears simple interest
at 8% per annum commencing January 15, 2005 and provides for equal quarterly payments of principal
and interest. Payment of the promissory note is subject to SSAC’s rights of recoupment/offset and
is guaranteed by the Company per an unsecured guaranty. Trinity’s two other selling shareholders
were paid the following subsequent portions of the purchase price: (a) $975,510 cash, subject to
SSAC’s rights of recoupment/offset and the Company’s unsecured guaranty; and (b) 407,866 shares of
the Company’s common stock with an aggregate value of $347,500, of which 305,898 shares with an
aggregate value of $260,625 will be escrowed for one year.
On December 22, 2004, Arcadia Resources, Inc. agreed to purchase all of the outstanding shares of
common stock of Beacon Respiratory Services, Inc., Beacon Respiratory Services of Alabama, Inc.,
Beacon Respiratory Services of Colorado, Inc., and Beacon Respiratory Services of Georgia, Inc.
(collectively “Beacon”). Beacon provides respiratory services in Florida, Alabama, Colorado, and
Georgia and collectively had annual revenues of approximately $1,900,000. The purchase agreement
was signed on December 22, 2004 to become effective on January 1, 2005, with the purchase price
distributed based on the actual liabilities as of December 31, 2004. The purchase price was
$1,500,000, including the payment of outstanding shareholder notes totaling $258,891 and assumption
of leases and accounts payable totaling $257,681. The purchase price was subject to increase by up
to an additional $400,000 based on expected pricing changes for certain of the Company’s products
and services for calendar year 2005, with any additional amounts owed being payable to the sellers
by January 1, 2006. In 2005, the Company paid $833,428 in cash to Beacon’s shareholders, plus
$150,000 to be held by the Company to offset valid indemnification and other claims of the Company.
On January 15, 2005, one of Beacon’s selling shareholders was issued a promissory note for
$150,000, with a one-year term at 8% annual interest. Principal and interest will be payable
quarterly. If the Company defaults on the note, the selling shareholder may require the Company to
transfer back the shares of stock sold by this selling shareholder (i.e., 33% of the Beacon shares
purchased by the Company) or elect other remedies. These shares will be held by the Company’s
counsel until the note is paid. Until the note is paid, the Company may vote such shares and shall
have all incidents of ownership.
Contingent Consideration
Fiscal 2007 Acquisitions
In addition to the potential contingent consideration relating to the PrairieStone acquisition
described previously, the Alliance acquisition also provided for possible contingent consideration.
Specifically, in the event that monthly revenue for any month between August 2006 and July 2008
exceeds the base amount, as defined, plus $600,000, an additional 1,068,140 shares of common stock
will be released. If monthly revenue for any month between August 2008 and July 2010 exceeds the
base amount plus $1,000,000, then an additional 1,068,140 shares of common stock will be released.
A reduced number of shares could be issued if these targets are not met.
Additional contingent consideration, if any, will increase the purchase price when the contingency
is resolved and the consideration becomes issuable.
Prior Year Acquisitions
In conjuction with the Home Health Professionals, Inc. acquisition on April 29, 2005, additional
consideration is to be issued to the sellers based a multiple of annual EBITDA at a particular
geographic location. For the first twelve month period subsequent to the acquisition, Company
issued 73,388 shares valued at $187,874 as additional contingent consideration, which was reflected
as additional goodwill in fiscal 2007.
In conjunction with the O2 Plus acquisition on November 3, 2005, if monthly revenue in November
2006 from oxygen patients exceeds $85,500, then an additional 188,679 shares of common stock will
be issued to the sellers. If monthly revenue in November 2007 from oxygen patients exceeds
$109,250, then an additional 188,679 shares of common stock will be issued to the sellers. As of
March 31, 2007, management determined that the November 2006 revenue criteria had been met. As
such, the Company issued 188,679 shares valued at $499,999, which represents the stock price on the
last day of the measurement period (November 30, 2007) and was reflected as additional goodwill in
fiscal 2007.
In conjunction with the Remedy Therapeutics acquisition on January 27, 2006, if annualized
quarterly EBITDA for the quarters ended June 30, 2006 and December 31, 2006 exceeds $1,437,000 and
$1,650,000, respectively, then an additional $250,000 in cash and 192,901 shares of common stock
per quarter will be issued. If EBITDA is less than these targets yet greater than $1,100,000, then
the sellers are eligible for a lesser amount of cash and stock. The EBITDA target for the quarter
ended June 30, 2006 was not met. As of March 31, 2007, management determined that a portion of the
contingent consideration related to the December 31, 2006 EBITDA target had been earned. As such,
the Company issued 59,697 shares valued at $107,347, which represents the stock price on the last
day of the measurement period (December 31, 2007) and was reflected as additional goodwill in
fiscal 2007.
Additional contingent consideration, if any, will increase the purchase price when the contingency
is resolved and the consideration becomes issuable.
Note 4 – Property and Equipment
Property and equipment consists of the following at March 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
| |
|
|
|
|
|
Depreciation/ |
|
|
|
|
|
|
Depreciation/ |
|
| |
|
Cost |
|
|
Amortization |
|
|
Cost |
|
|
Amortization |
|
Equipment |
|
$ |
10,432,868 |
|
|
$ |
3,071,413 |
|
|
$ |
5,883,779 |
|
|
$ |
1,416,903 |
|
Software |
|
|
3,507,729 |
|
|
|
411,285 |
|
|
|
564,419 |
|
|
|
101,179 |
|
Furniture and fixtures |
|
|
1,280,495 |
|
|
|
679,876 |
|
|
|
810,054 |
|
|
|
413,897 |
|
Vehicles |
|
|
1,234,179 |
|
|
|
350,585 |
|
|
|
799,793 |
|
|
|
142,026 |
|
Leasehold improvements |
|
|
919,258 |
|
|
|
254,890 |
|
|
|
391,587 |
|
|
|
150,584 |
|
| |
|
|
|
|
|
17,374,529 |
|
|
$ |
4,768,049 |
|
|
|
8,449,632 |
|
|
$ |
2,224,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization |
|
|
(4,768,049 |
) |
|
|
|
|
|
|
(2,224,589 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
$ |
12,606,480 |
|
|
|
|
|
|
$ |
6,225,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 18
Total depreciation and amortization expense for property and equipment was $4,324,168, $1,834,534
and $449,586 for the years ended March 31, 2007, 2006 and 2005, respectively. Depreciation expense
included in cost of revenues was $2,857,100, $1,100,000 and $0 for the years ended March 31, 2007,
2006 and 2005, respectively.
Note 5 – Goodwill and Acquired Intangible Assets
The following table presents goodwill by segment at March 31:
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
Services |
|
$ |
13,922,354 |
|
|
$ |
13,967,563 |
|
Products |
|
|
1,970,291 |
|
|
|
13,160,647 |
|
Retail |
|
|
801,691 |
|
|
|
1,134,998 |
|
Pharmacy |
|
|
16,641,585 |
|
|
|
— |
|
| |
|
|
|
|
$ |
33,335,921 |
|
|
$ |
28,263,208 |
|
| |
|
|
During the year ended March 31, 2007, the change in goodwill included $23,883,239 related to fiscal
2007 business acquisitions, $795,220 in additional contingent consideration related to prior year
acquisitions, $14,980 of various goodwill allocation adjustments and $19,590,766 of goodwill
impairment (see discussion of impairment expense below).
During the year ended March 31, 2006, the change in goodwill included $13,981,252 related to fiscal
2006 business acquisitions and $1,422,787 of various goodwill allocation adjustments.
Goodwill of approximately $8,300,000 is amortizable over 15 years for tax purposes while the
remainder of the Company’s goodwill is not amortizable for tax purposes as the acquisitions related
to the purchase of common stock rather than of assets or net assets.
Acquired intangible assets consist of the following at March 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
| |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
| |
|
Cost |
|
|
Amortization |
|
|
Cost |
|
|
Amortization |
|
| |
|
|
Trade name |
|
$ |
8,000,000 |
|
|
$ |
445,987 |
|
|
$ |
8,000,000 |
|
|
$ |
511,111 |
|
Customer relationships |
|
|
27,941,031 |
|
|
|
7,098,834 |
|
|
|
10,982,000 |
|
|
|
1,127,988 |
|
Non-competition agreements |
|
|
874,360 |
|
|
|
309,054 |
|
|
|
860,000 |
|
|
|
151,614 |
|
Acquired technology |
|
|
760,000 |
|
|
|
738,888 |
|
|
|
760,000 |
|
|
|
485,555 |
|
| |
|
|
|
|
|
37,575,391 |
|
|
$ |
8,592,763 |
|
|
|
20,602,000 |
|
|
$ |
2,276,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated amortization |
|
|
(8,592,763 |
) |
|
|
|
|
|
|
(2,276,268 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquired intangible assets |
|
$ |
28,982,628 |
|
|
|
|
|
|
$ |
18,325,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for acquired intangible assets was $2,789,135, $1,544,594 and $782,222 for the
years ended March 31, 2007, 2006 and 2005, respectively. Additionally, impairment expense of
acquiried intangible assets totaled $3,330,279 for the year ended March 31, 2007 (see discussion of
impairment expense below). The estimated amortization expense related to acquired intangible
assets in existence as of March 31, 2007 is as follows:
| |
|
|
|
|
Fiscal 2008: |
|
$ |
2,541,548 |
|
Fiscal 2009: |
|
|
2,272,964 |
|
Fiscal 2010: |
|
|
2,203,399 |
|
Fiscal 2011: |
|
|
1,888,652 |
|
Fiscal 2012: |
|
|
1,645,069 |
|
Thereafter |
|
|
18,430,996 |
|
|
|
|
|
Total |
|
$ |
28,982,628 |
|
|
|
|
|
F - 19
Impairment Expense
Fiscal 2007
Goodwill is tested for impairment in the fourth quarter after the annual forecasting process is
completed. Operating profits and cash flows for the year ended March 31, 2007 were lower than
expected in the Products segment. The projections for the next several years reflect this trend.
In March 2007, a goodwill impairment expense of $17,196,770 was recognized in the Products
reporting unit. The fair value of the reporting unit was estimated using the expected present
value of future cash flows. In conjunction with the goodwill impairment analysis of the Product
reporting unit, the Product intangible assets were also revalued based on the expected present
value of future cash flows. This resulting in an additional customer relationships impairment
expense of $1,457,279 being recognized in the Products reporting unit. The total impairment
expense in the Products reporting unit recognized in conjunction with the annual analysis was
$18,654,049.
Subsequent to the sale of the outstanding membership interests of Wellscripts back to the former
sole member of Wellscripts, the Company lost the majority of the customers in the geographic region
served by this location. Management determined that the customer relationships acquired in
conjunction with the original acquisition, as well as the original goodwill, had been significantly
impaired. During the fiscal fourth quarter 2007, the Company recognized an impairment of goodwill
of $2,050,148 and of the customer relationships of $908,195 resulting in a total impairment expense
of $2,958,343. The impairment expense relates to the Pharmacy segment.
In conjunction with the Pinnacle transaction in November 2006, the Company acquired a master lease
agreement with a major retailer originally valued at $1,499,031. This agreement allowed for the
opening of clinics at certain retail sites. As of March 31, 2007, the Company was in negotiations
to sell its interest in Pinnacle back to the original sellers who had remained minority interest
owners of Pinnacle. The Company will receive no future benefit from the master lease agreement,
and as such, management determined that its investment in Pinnacle was impaired. The Company
recognized an impairment expense of $964,805, and reduced the minority interest balance to $0. The impairment expense relates to the Clinics
segment.
Fiscal 2005
The Company recognized an impairment of goodwill of $707,044 for the period from May 10, 2004 to
March 31, 2005 and $16,055 for the period from April 1, 2004 to May 9, 2004. The decline in value
was primarily related to a business acquired as a byproduct of the reverse acquisition on May 10,
2004. The specific operating subsidiary was dependent on its employees’ expertise and
relationships. Many of its employees exited the operation subsequent to the acquisition, resulting
in a decline in revenues and profitability.
The impairment expenses described above are included in the “goodwill and intangible asset
impairment” line item in the Statements of Operations.
Note 6 – Lines of Credit
Arcadia Services and four of its wholly-owned subsidiaries have an outstanding line of credit
agreement with Comerica Bank. The credit agreement, as amended, provides the borrowers with a
revolving credit facility of up to $19 million. Advances under the credit facility shall be used
primarily for working capital or acquisition purposes. The credit agreement provides that advances
to the Company will not exceed the lesser of the revolving credit commitment amount or the
aggregate principal amount of indebtedness permitted under the advance formula amount at any one
time. The advance formula base is 85% of the eligible accounts receivable, plus the lesser of 85%
of eligible unbilled accounts or $3.0 million. The maturity date
is October 1, 2008. The line of credit agreement contains a
subjective acceleration clause and requires the Company to maintain a
lockbox. However, the Company has the ability to control the funds in
the deposit account and to determine the amount used to pay down the
line of credit balance. As such, the line of credit is classified as
a long-term liability in the consolidated balance sheet.
F - 20
Amounts outstanding under this agreement totaled
$17,892,796 and $13,887,971 at March 31, 2007 and 2006, respectively.
RKDA, Inc. (“RKDA”), a wholly-owned subsidiary of Arcadia Resources, Inc. and the holding company
of Arcadia Services, Inc. and Arcadia Products, Inc., granted Comerica Bank a first priority
security interest in all of the issued and outstanding capital stock of Arcadia Services. Arcadia
Services granted Comerica Bank a first priority security interest in all of its assets. The
subsidiaries of Arcadia Services granted the bank security interests in all of their assets. RDKA
is restricted from paying dividends to Arcadia Resources, Inc. RKDA executed a guaranty to Comerica
Bank for all indebtedness of Arcadia Services and its subsidiaries.
Advances under the credit facility bear interest at the prime-based rate (as defined) or the
Eurodollar based rate (as defined), at the election of the borrowers. Currently, the Company has
elected the prime-based rate, effectively 8.25% at March 31, 2007. Arcadia Services agreed to
various financial covenant ratios, to have any person who acquires Arcadia Services’ capital stock
to pledge such stock to Comerica Bank, and to customary negative covenants. If an event of default
occurs, Comerica Bank may, at its option, accelerate the maturity of the debt and exercise its
right to foreclose on the issued and outstanding capital stock of Arcadia Services and on all of
the assets of Arcadia Services and its subsidiaries. Any such default and resulting foreclosure
would have a material adverse effect on our financial condition. As of March 31, 2007, the Company
was not in compliance with certain financial covenants but received a
waiver letter from the bank. Additionally, the Credit Facility
includes provisions that allow the lender in its sole discretion, to
determine that the Company has experienced a material adverse change,
which, in turn, would be an event of default.
Trinity Healthcare of Winston-Salem, Inc. (“Trinity Healthcare”), a wholly-owned subsidiary, has a
separate outstanding line of credit agreement with Comerica Bank which provides Trinity Healthcare
with a revolving credit facility of up to $2.0 million payable upon demand of Comerica Bank,
bearing interest at prime plus 0.5%, effectively 8.75% at March 31, 2007. The credit agreement
provides that advances to Trinity Healthcare will not exceed the lesser of the revolving credit
commitment amount or the aggregate principal amount of indebtedness permitted under the advance
formula amount at any one time. The advance formula base is 80% of the eligible accounts
receivable, subject to Comerica Bank’s adjustment to account for dilution of accounts receivable
caused by customer credits, returns, setoffs, etc., plus 30% of eligible inventory. If an event of
default occurs, Comerica Bank may, at its option, accelerate the maturity of the debt and exercise
its right to foreclose on the issued and outstanding capital stock of Trinity Healthcare and on all
of the assets of Trinity Healthcare and its subsidiaries. Any such default and resulting
foreclosure would have a material adverse effect on our financial condition. There was $2,000,000
outstanding under this agreement at both March 31, 2007 and 2006 (see Note 16 — Subsequent Events).
The Company was in compliance with all covenants at March 31, 2007.
Both Arcadia Services and Trinity Healthcare line of credit agreements were amended in October 2006
for a short term to include an over formula advance of $1.0 million in the Arcadia Services credit
agreement and to increase the credit limit from $2.0 million to $2.5 million in the Trinity
Healthcare credit agreement. The Arcadia Services over formula advance is due on June 15, 2007. The
Trinity Healthcare credit agreement reverted back to $2 million in January 2007 upon the repayment
of a $500,000 advance.
Rite at Home, LLC, a wholly-owned subsidiary, has an outstanding line of credit agreement with
Fifth Third Bank. The line of credit is for a maximum of $750,000, matured on June 1, 2007 and
bears interest at prime plus 0.5%, effectively 8.75% at March 31, 2007. The maturity date of the
note was extended until August 1, 2007. The outstanding balance under this agreement totaled
$612,996 and $599,996 at March 31, 2007 and 2006, respectively.
In connection with the acquisition of PrairieStone in February 2007, PrairieStone entered into a
line of credit agreement with one of the previous owners of PrairieStone for a maximum of
$4,000,000. The line of credit had an outstanding balance of $750,000 at the time the acquisition
closed. The amount that PrairieStone may borrow against the line of credit will gradually increase
from $2,500,000 to $4,000,000 after September 30, 2007. Draws against the line of credit must be
made in $250,000 increments, are subject to PrairieStone satisfying certain borrowing base
requirements, and beginning June 30, 2007, are subject to PrairieStone achieving certain EBITDA
targets. The line of credit is secured by a security interest in all of the assets of PrairieStone
and SSAC, LLC and is guaranteed by the Company. The line of credit bears annual interest at the
prime rate plus 2%, effectively 10.25% at March 31, 2007, and the agreement ends in September 2010.
Amounts outstanding under this agreement totaled $2,450,000 at March 31, 2007.
The weighted average interest rate of borrowings under line of credit agreements as of March 31,
2007 and 2006 was 8.52% and 7.83%, respectively.
F - 21
Note 7 – Long-Term Obligations
Long-term obligations consist of the following at March 31:
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
|
2006 |
|
Note payable to Jana Master Fund, Ltd.
dated November 30, 2006, with interest
payable quarterly and the principal due in
full on January 31, 2008. The original
interest rate was the one year LIBOR rate
plus 7.5%. Starting on February 1, 2007,
the interest rate increases 1.0% on the
first day of each month for five months.
The maximum rate on the promissory note is
the one year LIBOR rate plus 12.5%. The note payable is
unsecured. At
March 31, 2007, the effective interest rate
was 14.70%. (See Note 16 – Subsequent
Events) |
|
$ |
17,000,000 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
Note payable to Jana Master Fund, Ltd. dated
March 20, 2007 bearing interest at the one
year LIBOR rate plus 7.5% with interest
payable quarterly beginning June 30, 2007
and the principal due in full on January 31,
2008. In the event that the entire
principal balance is not paid in full by May
15, 2007, the interest rate will increase by
1.0% on May 6, 2007 and on the fifteenth
day of each month thereafter. The note payable is
unsecured. At March 31,
2007, the effective interest rate was
12.70%. (See Note 16 - Subsequent Events) |
|
|
2,564,103 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Purchase price payable to the selling
shareholder of Alliance Oxygen & Medical
Equipment, Inc., dated July 12, 2006,
bearing simple interest of 8% per year
payable in equal quarterly payments of
principal and interest with the final
payment due on July 12, 2007. The note payable is
unsecured. |
|
|
1,019,800 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Purchase price payable to Remedy
Therapeutics, Inc. dated January 27, 2006,
bearing simple interest of 8% per year
payable in equal quarterly payments of
principal and interest with the final
payment due on January 27, 2009. The note payable is
unsecured. |
|
|
617,455 |
|
|
|
800,000 |
|
|
|
|
|
|
|
|
|
|
Purchase price payable to the selling
shareholders of Trinity Healthcare dated
September 23, 2004, bearing simple interest
of 8%. The note payable was paid in full in
October 2006. |
|
|
— |
|
|
|
294,422 |
|
|
|
|
|
|
|
|
|
|
Other purchase price payables to be paid
over time to the selling shareholders or
selling entities of various acquired
entities, due dates ranging from April 2007
to March 2008. |
|
|
187,606 |
|
|
|
711,126 |
|
|
|
|
|
|
|
|
|
|
Other long-term obligations with interest
charged at various rates ranging from 4% to
18% to be paid over time based on respective
terms, due dates ranging from April 2007 to
November 2011. |
|
|
828,104 |
|
|
|
517,210 |
|
|
|
|
|
|
|
|
Total long-term obligations |
|
|
22,217,068 |
|
|
|
2,322,758 |
|
Less current portion of long-term obligations |
|
|
(21,320,198 |
) |
|
|
(2,056,311 |
) |
|
|
|
|
|
|
|
Long-term obligations, less current portion |
|
$ |
896,870 |
|
|
$ |
$266,447 |
|
|
|
|
|
|
|
|
As of March 31, 2007, future maturities of long-term obligations are as follows:
| |
|
|
|
|
Fiscal 2008 |
|
$ |
21,320,198 |
|
Fiscal 2009 |
|
|
651,932 |
|
Fiscal 2010 |
|
|
133,631 |
|
Fiscal 2011 |
|
|
80,144 |
|
Fiscal 2012 |
|
|
31,163 |
|
|
|
|
|
Total |
|
$ |
22,217,068 |
|
|
|
|
|
The weighted average interest rate of outstanding long-term obligations as of March 31, 2007 and
2006 was 11.9% and 7.71%, respectively.
Note 8 – Stockholders’ Equity
General
“On
June 22, 2006, the Company returned all outstanding treasury
shares to the registrar to make them available for reissuance. The
Company will account for cashless exercises of options and/or
warrants on a net basis prospectively.”
On September 26, 2006, the Company’s shareholders approved an amendment to the Company’s Articles
of Incorporation to increase the number of authorized shares of the Company’s common stock to
200,000,000, $0.001 par value per share from 150,000,000, $0.001 par value per share.
The Company’s Chairman/former-Chief Executive Office (“former CEO”), and former President/Chief
Operating Officer (“former COO”) and certain other shareholders of the Company entered into a
Voting Agreement dated May 7, 2004. The Voting Agreement provided the former CEO and former COO
control of the votes of approximately 59 million shares of
F - 22
common stock for the election of a majority of the Board of Directors. This agreement was
terminated on September 27, 2006.
Escrow Shares
In conjunction with the merger and recapitalization of the Company in May 2004, the former CEO,
former COO and one former officer of the Company entered into an escrow agreement. As of March 31,
2007, the former CEO, former COO and one former officer of the Company have escrowed 4,800,000,
3,200,000 and 1,600,000 shares of the Company’s common stock, respectively, pursuant to Escrow
Agreements dated as of May 7, 2004 (collectively, the “Escrow Shares”). These shares represent 80%
of the shares originally escrowed pursuant to the agreements. The other 20% of the shares were
released from escrow in February 2005 due to the average closing stock price of the Company’s
common stock being at least $1.00 for the 20 consecutive-day period ended January 26, 2005. During
the period ended March 31, 2005, the Company recognized $2,664,000 in expense representing the fair
value of the 2,400,000 shares at the date earned. Because the Company failed to meet the specified
targets during fiscal 2006 and 2007, the remaining escrowed shares are to be returned to the
Company and cancelled within 60 days after the completion of the fiscal 2007 audit. The shares
held in escrow described herein are not included in the calculation of the weighted average shares
outstanding for any periods.
Common Stock Transactions – Fiscal 2007
On May 2, 2006, the Company issued 54,034 shares of its common stock valued at $151,000 in lieu of
a cash payment of the same amount on an outstanding note payable and related accrued interest
issued as a part of the January 2006 acquisition of Remedy Therapeutics, Inc. The fair value of the
common stock was determined to be $2.80 per share, which represents the closing price on the date
of the transaction.
On July 19, 2006, the Company issued 60,000 shares of its common stock valued at $150,000 as
partial consideration for a finder’s fee in conjunction with the Jana Master Fund note payable
executed on June 29, 2006. The fair value of the common stock was determined to be $2.50 per share,
which represents the closing price on the date of the transaction .
On December 28, 2006, the Company sold 4,999,999 shares of common stock to institutional investors
at $2.00 per share for total proceeds of $9,999,998.
Common Stock Transactions – Fiscal 2006
On April 26, 2005, the Company sold an aggregate 1,212,121 shares of its common stock valued at
$1.65 per share, for aggregate consideration of $2,000,000 in a private transaction to an
accredited investor.
On April 27, 2005, the Company issued Jana Master Fund, LTD a $5,000,000 convertible promissory
note with a term due May 1, 2006 and providing for quarterly interest payments at 12% annual
interest. Under the terms of the note, Jana could have converted the outstanding balance into shares of the
Company’s common stock at the rate of one share of common stock per $2.25 of outstanding debt. The
$5,000,000 convertible promissory note was repaid in fiscal second quarter 2006 with proceeds from
the September 2005 warrant offering described below and the remaining
debt discount representing the beneficial conversion value at the
date of issuance was amortized at
that time.
Beginning September 16, 2005, the Company sold to accredited investors, Series B-1 common stock
purchase warrants and Series B-2 common stock purchase warrants for aggregate consideration
totaling $31,000,000. An aggregate of 13,800,000 shares of the Company’s common stock are issuable
on exercise of the Series B-1 warrants at an exercise price of $0.001 per share. An aggregate of
4,700,000 shares of the Company’s common stock are issuable on exercise of the Series B-2 warrants
at an exercise price of $2.25 per share. The Series B-1 and Series B-2 warrants are exercisable for
a term of seven years and after one year, they may be exercised on a cashless basis. A holder may
not acquire shares of common stock on exercise to the extent that the number of shares of common
stock beneficially owned would exceed 4.9% of the Company’s common stock then issued and
outstanding. If applicable, the seven-year term is subject to an 18-month extension if this
limitation applies on expiration of the term.
F - 23
Warrants
The following represents warrants outstanding as of March 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Description |
|
Exercise Price |
|
Granted |
|
Expiration |
|
2007 |
|
2006 |
|
2005 |
Class A Warrants |
|
$ |
0.50 |
|
|
Various |
|
Various |
|
|
5,779,036 |
|
|
|
6,849,905 |
|
|
|
10,285,791 |
|
Class B-1 Warrants |
|
$ |
0.001 |
|
|
September 2005 |
|
September 2009 |
|
|
8,990,277 |
|
|
|
13,777,777 |
|
|
|
— |
|
Class B-2 Warrants |
|
$ |
2.25 |
|
|
September 2005 |
|
September 2009 |
|
|
4,711,110 |
|
|
|
4,711,110 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Total Warrants Outstanding |
|
|
|
|
|
|
|
|
|
|
19,480,423 |
|
|
|
25,338,792 |
|
|
|
10,285,791 |
|
| |
|
|
|
|
|
|
|
|
|
|
The outstanding warrants have no voting rights and provide the holder with the right to convert one
warrant for one share of the Company’s common stock at the stated exercise price. The majority of
the outstanding warrants have a cashless exercise feature.
During the year ended March 31, 2007, a total of 5,858,369 warrants were exercised resulting in the
issuance of 5,795,802 shares of common stock. Of the total warrants exercised, 5,170,747 were
exercised on a cashless basis resulting in the issuance of 5,108,180 shares of common stock. The
Company received $443,811 in cash proceeds from the exercise of warrants.
During the year ended March 31, 2006, a total of 3,646,201 warrants were exercised resulting in the
issuance of 2,899,013 shares of common stock. Of the total warrants exercised, 3,111,318 were
exercised on a cashless basis resulting in the issuance of 2,364,130 shares of common stock. The
Company received $267,942 in cash proceeds from the exercise of warrants.
During the period ended March 31, 2005, a total of 424,750 warrants were exercised on a cashless
basis resulting in the issuance of 312,641 shares of common stock.
Note 9 — Commitments and Contingencies
Lease Commitments
The Company leases office space under several operating lease agreements, which expire through
2011. Rent expense relating to these leases amounted to approximately $2,463,000, $1,569,000, and
$849,000 for the years ended March 31, 2007, 2006 and 2005 respectively.
The Company has entered into several capital leases covering computer operating systems, patient
rental equipment and various other equipment. The capital lease obligations payable have a lease
term ranging from two to five years, monthly payments ranging from $121 to $9,633 and interest
rates ranging from 4% to 15%.
The following is a schedule of approximate future minimum lease payments, exclusive of real estate
taxes and other operating expenses, required under operating and capital leases that have initial
or remaining non-cancelable lease terms in excess of one year:
| |
|
|
|
|
|
|
|
|
| |
|
Capital |
|
|
Operating |
|
| |
|
Leases |
|
|
Leases |
|
Year ending March 31: |
|
|
|
|
|
|
|
|
2008 |
|
$ |
1,099,351 |
|
|
$ |
1,702,446 |
|
2009 |
|
|
630,146 |
|
|
|
643,303 |
|
2010 |
|
|
141,210 |
|
|
|
388,342 |
|
2011 |
|
|
57,198 |
|
|
|
301,764 |
|
2012 |
|
|
— |
|
|
|
227,673 |
|
Thereafter |
|
|
— |
|
|
|
290,200 |
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
|
1,927,905 |
|
|
$ |
3,553,728 |
|
|
|
|
|
|
|
|
|
Less amount representing interest |
|
|
(210,697 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total principal payments |
|
|
1,717,208 |
|
|
|
|
|
Less current maturities |
|
|
(1,020,421 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
696,787 |
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 24
Contingencies
As a health care provider, the Company is subject to extensive federal and state government
regulation, including numerous laws directed at preventing fraud and abuse and laws regulating
reimbursement under various government programs. The marketing, billing, documenting and other
practices of health care companies are all subject to government scrutiny. To ensure compliance
with Medicare and other regulations, audits may be conducted, with requests for patient records and
other documents to support claims submitted for payment of services rendered to customers,
beneficiaries of the government programs. Violations of federal and state regulations can result in
severe criminal, civil and administrative penalties and sanctions, including disqualification from
Medicare and other reimbursement programs.
The Company is subject to various legal proceedings and claims which arise in the ordinary course
of business. The Company does not believe that the resolution of such actions will materially
affect the Company’s business, results of operations or financial condition.
Note 10 – Stock-Based Compensation
On August 18, 2006, the Board of Directors unanimously approved the Arcadia Resources, Inc. 2006
Equity Incentive Plan (the “2006 Plan”), which was subsequently approved by the stockholders on
September 26, 2006. The 2006 Plan provides for grants of incentive stock options, non-qualified
stock options, stock appreciation rights and restricted shares (collectively “Awards”). The 2006
Plan will terminate and no more Awards will be granted after August 2, 2016, unless terminated by
the Board of Directors sooner. The termination of the 2006 Plan will not affect previously granted
Awards. The total number of shares of common stock that may be issued pursuant to Awards under the
2006 Plan may not exceed an aggregate of 2.5% of the Company’s authorized and unissued shares of
common stock as of the date the Plan is approved by the shareholders or 5,000,000 shares. All
non-employee directors, executive officers and employees of the Company and its subsidiaries are
eligible to receive Awards under the 2006 Plan. As of March 31, 2007, 2,443,515 shares were
available for grant under the 2006 Plan.
Prior to the approval of the 2006 Plan, certain officers, directors and members of management were
granted stock options and restricted shares of the Company’s common stock with varying terms.
Stock Options
As of March 31, 2007, a total of 18,697 stock options have been granted under the 2006 Plan.
Additionally, stock options to purchase 90,117 shares of the Company’s common stock were granted in
July 2006 prior to the adoption of the 2006 Plan.
Additional stock options were granted prior to the adoption of the 2006 Plan in September 2006. The
terms of these options vary depending on the nature and timing of the grant. The maximum
contractual term for the options granted to date is seven years. A significant number of options to
purchase shares of common stock were granted to two former executives and are contingent on the
meeting of certain financial milestones. These options do not have an expiration date and are more
fully described in the following paragraph.
On May 7, 2004, the former CEO (and continuing Chairman of the Board of Directors) and former COO
were each granted stock options to purchase 4.0 million shares of common stock exercisable at $0.25
per share. The options vest in six tranches provided certain EBITDA milestones are met through
fiscal 2008, subject to acceleration upon certain events occurring. The options may be exercised by
these two individuals as long as they are employed by the Company and for one year from termination
for any reason provided they have achieved the EBITDA milestones. The milestones and vesting for
each individual are as follows: fiscal 2006 EBITDA of $10.7 million will vest 500,000 options, if
$11.0 million, an additional 500,000 options will vest; fiscal 2007 EBITDA of $13.5 million will
vest 500,000 options, if $14.0 million, an additional 500,000 options will vest; fiscal 2008 EBITDA
of $17.5 million will vest 1 million options, if $18.5 million, an additional 1 million options
will vest. The Company did not meet the EBITDA milestone for fiscal 2006, and, as such, the
corresponding options did not vest. There is still a potential that the options related to the 2006
fiscal year could be re-activated in the event of a change of control. The expense, if any, related
to these options will be recognized in the period the milestones are achieved or are deemed likely
to be achieved. During fiscal 2007, the Company determined it was unlikely to meet the targets
described above for fiscal 2007, and, therefore, no amounts related to these options
F - 25
were expensed during this year. To date, no compensation expense has been recognized relating to
these stock options due to the achievement of these financial milestones.
The fair value of each stock option award is estimated on the date of the grant using a
Black-Scholes based option valuation model that uses the assumptions noted in the following table.
Expected volatilities are based on the historical volatility. The expected term of options granted
represents the period of time that options granted are expected to be outstanding. The risk-free
interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.
Following are the specific valuation assumptions, where applicable, used for each respective
period:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
|
2005 |
Weighted-average expected volatility |
|
|
20 |
% |
|
|
45 |
% |
|
|
45 |
% |
Expected dividend yields |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Expected terms (in years) |
|
|
7 |
|
|
|
7 |
|
|
|
3 to 7 |
|
Risk-free interest rate |
|
|
53% – 5.11 |
% |
|
|
3.92 |
% |
|
|
3.19% - 3.92 |
% |
Stock option activity for the years ended March 31, 2007 and 2006 is summarized below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
| |
|
|
|
|
|
Weighted- |
|
Average |
|
|
| |
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
| |
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
| Options |
|
Shares |
|
Price |
|
Term (Years) |
|
Value |
Outstanding at March 31, 2005 |
|
|
9,536,540 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
24,303 |
|
|
|
2.20 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(37,500 |
) |
|
|
1.00 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
9,523,343 |
|
|
|
0.37 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
108,814 |
|
|
|
2.80 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(185,000 |
) |
|
|
1.21 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(2,015,504 |
) |
|
|
0.27 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
7,431,653 |
|
|
$ |
0.42 |
|
|
|
5.18 |
|
|
$ |
11,694,586 |
|
Exercisable at March 31, 2007 |
|
|
4,431,653 |
|
|
$ |
0.53 |
|
|
|
5.18 |
|
|
$ |
6,504,586 |
|
The weighted-average grant-date fair value of options granted during the years ended March 31, 2007
and 2006 was $1.02 and $1.15, respectively. The total intrinsic value of options exercised during
the years ended March 31, 2007 and 2006 was $202,200 and $46,500, respectively.
During the years ended March 31, 2007 and 2006, the Company recognized $1,106,000 and $109,000,
respectively, in stock-based compensation expense relating to stock options.
On February 28, 2007, the former COO’s employment with the Company ended. Consistent with his
stock option agreement and severance and release agreement, all unvested stock options vest if his
employment with the Company is terminated by the Company for any reason other than for cause, as
defined in his employment agreement. The former COO had 3,000,000 unvested stock options at
February 28, 2007. This total included the stock options relating to the fiscal 2007 and 2008
milestones discussed previously. All 3,000,000 stock options vested upon the former COO’s
departure. The related expense is included in the $1,106,000 of stock-based compensation
recognized during the year ended March 31, 2007. For tax reasons, he cannot exercise any of these
stock options until September 30, 2007, and consistent with the terms of his stock option
agreement, the stock options expire on the one-year anniversary of his departure.
As of March 31, 2007, the only unrecognized stock-based compensation expense for unvested stock
options was related to the options granted to the former CEO as described above. The vesting and
expensing of these stock options are contingent on the Company meeting certain financial milestones
or his departure from the Company for any reason other than for cause, as defined in his employment
agreement. The fiscal 2007 EBITDA milestones were not met so the former CEO forfeited 1,000,000
stock options on April 1, 2007. As mentioned previously, there is still a potential that the
options related to the fiscal 2006 and 2007 EBITDA milestones could be re-activated in the event of
a change of control.
F - 26
During the year ended March 31, 2007 and 2006, the Company received $50,750 and $37,567,
respectively, from the exercising of stock options.
Restricted Stock – Arcadia Resources, Inc.
Restricted stock is measured at fair value on the date of the grant, based on the number of shares
granted and the quoted price of the Company’s common stock. The value is recognized as compensation
expense ratably over the corresponding employee’s specified service period. Restricted stock vests
upon the employees’ fulfillment of specified performance and service-based conditions.
As of March 31, 2007, the Company had granted a total of 3,172,000 shares of restricted stock, of
which 650,000 were granted prior to the adoption of the 2006 Plan.
The following table summarizes the activity for restricted stock awards during the years ended
March 31, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted- |
| |
|
|
|
|
|
Average |
| |
|
|
|
|
|
Grant Date |
| |
|
|
|
|
|
Fair Value |
| |
|
Shares |
|
per Share |
| |
|
|
Unvested at March 31, 2005 |
|
|
— |
|
|
$ |
— |
|
Granted |
|
|
405,000 |
|
|
|
2.47 |
|
Vested |
|
|
(66,041 |
) |
|
|
2.48 |
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2006 |
|
|
338,959 |
|
|
|
2.47 |
|
Granted |
|
|
2,767,000 |
|
|
|
2.73 |
|
Vested |
|
|
(221,959 |
) |
|
|
2.35 |
|
Forfeited |
|
|
(151,458 |
) |
|
|
2.34 |
|
| |
|
|
Unvested at March 31, 2007 |
|
|
2,732,542 |
|
|
$ |
2.75 |
|
| |
|
|
The weighted-average grant-date fair value of restricted stock awards granted during the year ended
March 31, 2007 and 2006 was $2.73 and $2.47, respectively. The total intrinsic value of restricted
stock awards released was $554,000 and $196,000 for the years ended March 31, 2007 and 2006,
respectively.
During the years ended March 31, 2007 and 2006, the Company recognized $1,719,000 and $45,000,
respectively, of stock-based compensation expense related to restricted stock.
During the years ended March 31, 2007 and 2006, the total fair value of restricted stock vested was
$522,000 and $164,000, respectively.
As of March 31, 2007, total unrecognized stock-based compensation expense related to unvested
restricted stock awards was $6,386,000, which is expected to be expensed over a weighted-average
period of 3.1 years. Subsequent to March 31, 2007, a total of 624,165 shares of unvested
restricted stock were forfeited upon the termination of certain employees in conjunction with the
Company’s restructuring initiatives (see Note 15 –
Restructuring). These forfeitures reduced the
unrecognized stock-based compensation expense by $1,713,000.
Restricted Stock – Care Clinic, Inc.
During the year ended March 31, 2007, the Company sold a total of 137,600 shares of restricted
stock of Care Clinic, Inc., a subsidiary of Arcadia Resources, Inc., to certain key employees of
Care Clinic, Inc. for $0.10 per share, which approximated the fair value per share at the date of
grant, resulting in total proceeds to the Company of $13,760. No compensation expense was
recognized related to the grant of these restricted shares. The shares vest equally on September
1, 2007 and 2008 contingent on continued employment with the Company. As of March 31, 2007, all
137,600 restricted shares remained outstanding, and none of these restricted shares were vested.
Subsequent to March 31, 2007, a total of 42,525 shares of unvested Care Clinic, Inc. restricted
stock were forfeited upon the termination of certain employees in conjunction with the Company’s
restructuring initiatives (see Note 15 – Restructuring).
F - 27
Note 11 – Income Taxes
As of March 31, 2007, the Company has total net operating loss carryforwards (“NOL’s”) of
$17,227,000, which may be available to reduce taxable income if any, which expire through 2027.
However, Internal Revenue Code Section 382 rules limit the utilization of certain of these NOL’s
upon a change in control of the Company. It has been determined that a subsequent change in control
has taken place. Since the change in control has taken place, utilization of $770,000 of the
Company’s NOL’s will be subject to severe limitations in future periods, which could have an effect
of eliminating substantially all the future income tax benefits of these NOL’s. The Company has
$16,457,000 in NOL’s that are not subject to the limitations described above.
F - 28
The
Company incurred $138,000, $119,000 and $186,000 of state and local income
tax expense during the years ended March 31, 2007, and 2006 and
the period ended March 31, 2005, respectively.
Total income tax expense differs from the amounts computed by applying a U.S. federal income tax
rate of 34% to loss before income taxes as a result of the
following for the periods ended March 31, 2007 and 2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
|
2005 |
| |
|
|
Income tax benefit at 34% |
|
|
(34.0 |
%) |
|
|
(34.0 |
%) |
|
|
(34.0 |
%) |
State and local income taxes |
|
|
0.3 |
% |
|
|
2.6 |
% |
|
|
3.0 |
|
Goodwill amortization/impairment |
|
|
9.2 |
% |
|
|
(9.1 |
%) |
|
|
3.4 |
|
Non-deductible
amortization of debt discount |
|
|
— |
|
|
|
10.6 |
% |
|
|
5.8 |
|
Non-deductible other items |
|
|
1.1 |
% |
|
|
0.5 |
|
|
|
9.7 |
|
Other |
|
|
2.3 |
% |
|
|
— |
|
|
|
|
|
Valuation allowance |
|
|
21.4 |
% |
|
|
32.0 |
% |
|
|
15.1 |
|
| |
|
|
Effective tax rate |
|
|
0.3 |
% |
|
|
2.6 |
% |
|
|
3.0 |
% |
| |
|
|
As of March 31, 2007, the Company has NOL’s of approximately $17.2 million that will be available
to offset future taxable income through the dates shown below (in thousands):
| |
|
|
|
|
September 30, 2022 |
|
$ |
58 |
|
September 30, 2023 |
|
|
1,066 |
|
September 30, 2024 |
|
|
794 |
|
March 31, 2025 |
|
|
1,952 |
|
March 31, 2026 |
|
|
2,135 |
|
March 31, 2027 |
|
|
11,222 |
|
|
|
|
|
|
|
$ |
17,227 |
|
|
|
|
|
Significant components of the Company’s deferred tax assets and liabilities are comprised of the
following (in thousands) at March 31:
| |
|
|
|
|
|
|
|
|
| |
|
2007 |
|
2006 |
| |
|
|
Net operating losses |
|
$ |
6,374 |
|
|
$ |
2,647 |
|
Allowance for doubtful accounts |
|
|
2,684 |
|
|
|
699 |
|
Depreciation and amortization |
|
|
4,011 |
|
|
|
920 |
|
Other temporary differences |
|
|
1,178 |
|
|
|
696 |
|
| |
|
|
Total |
|
|
14,247 |
|
|
|
4,962 |
|
Valuation allowance |
|
|
(14,247 |
) |
|
|
(4,962 |
) |
| |
|
|
Net deferred income taxes |
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
Goodwill related to asset purchases is amortized over 15 years for tax purposes, and goodwill
related to the purchase of stock of corporations is not amortized for tax purposes.
FAS 109 requires that a valuation allowance be established when it is more likely than not that all
or a portion of deferred tax assets will not be realized. A review of all available positive and
negative evidence needs to be considered, including a company’s performance, the market environment
in which the company operates, the length of carryback and carryforward periods, and expectation of
future profits. FAS 109 further states that forming a conclusion that a valuation allowance is not
needed is difficult when there is negative evidence such as the cumulative losses in recent years.
Therefore, cumulative losses weigh heavily in the overall assessment. The Company will provide a
full valuation allowance on future tax benefits until it can sustain a level of profitability that
demonstrates its ability to utilize the assets, or other significant positive evidence arises that
suggests the Company’s ability to utilize such assets.
F - 29
Tax benefits of net deferred tax assets will be recorded at such time and to such extent, that they
are more likely than not to be realized. As such, the resulting estimated net deferred tax assets
of approximately $14,200,000 as of March 31, 2007 have been offset by a corresponding valuation
allowance. Realization of deferred tax assets is dependent on future
earnings, if any, the timing and amount of which are uncertain.
Note 12 – Employee Benefit Plans
The Company has a 401(K) defined contribution plan, whereby eligible employees may defer a
percentage of compensation up to Internal Revenue Services limits. The Company may make
discretionary employer contributions. The Company made no contributions on the employees’ behalf
for each of the years ended March 31, 2007, 2006 and 2005.
PraireStone, a wholly-owned subsidiary of the Company, has a 401(K) defined contribution plan,
whereby eligible employees may defer a percentage of compensation up to Internal Revenue Services
limits. PrairieStone matches 100% of a participant’s elective deferrals up to 4% of the
participant’s compensation. The employer’s matching contribution vest 100% in year six. Expenses
for contributions to the plan since the PrairieStone acquisition on February 16, 2007 were
approximately $5,000.
Note 13 – Related Party Transactions
The Company issued a promissory note to Jana Master Fund, Ltd. on June 29, 2006 for $15 million. On
November 30, 2006, the promissory note was amended and restated to increase the principal balance
to $21 million (see details in Note 7 – Long-Term Obligations), to change the interest rate
provision and to extend the maturity date to January 31, 2008. On March 20, 2007, the Company
issued a second promissory note to Jana Master Fund, Ltd. for $2,564,103, which matures on January
31, 2008 (see Note 16 — Subsequent Events). At March 31, 2007, the total amount due Jana Master
Fund, Ltd. relating to these two promissory notes was $19,564,103. Jana Master Fund, Ltd. held
approximately 14% of the outstanding shares of Company common stock on March 31, 2007.
PrairieStone has a line of credit agreement with a former owner of PrairieStone, which was issued
shares of the Company’s common stock as part of the purchase price consideration. At March 31,
2007, the outstanding balance of the line of credit is $2,450,000 (see details in Note 6 – Lines of
Credit). The former owner held approximately 4% of the outstanding shares of Company common stock
on March 31, 2007.
Note 14 – Segment Information
For financial reporting purposes, our branch offices are aggregated into five reportable segments,
Services, Products, Retail, Clinics and Pharmacy, which are managed separately based on their
predominant line of business. Management identified the Clinics segment as a separate segment
beginning during the year ended March 31, 2007. Further, with the acquisition of PrairieStone in
February 2007, management isolated the Pharmacy segment in fourth quarter fiscal 2007. Prior to
then, the pre-existing mail-order pharmacy business was included in the Products segment. Prior
period segment information has been reclassified in order to conform to the current year
presentation.
The Services segment consists primarily of a national provider of home care and staffing services
currently operating in 19 states through its 73 locations. The Services Division operates primarily
in the home health care area of the health care industry by providing care to patients in their
home, some of which is prescribed by a physician. The Company also utilizes its base of employees
to provide staffing to institutions on a temporary basis.
The Products segment consists primarily of respiratory and durable medical equipment operations,
which service patients in 12 states through its 44 locations.
The Retail segment consists of 13 retail sites in five states and a home health-oriented mail-order
catalog and related website. The catalog and website were acquired in May 2005. The first six
retail sites opened between September and December 2005 and the next seven sites opened beginning
in October 2006.
The Clinics segment consists of 11 non-emergency care clinics in retail host sites in three states.
The costs associated with the start up of the clinics began during the year ended March 31, 2007.
F - 30
The Pharmacy segment provides pharmacy services to grocery pharmacy retailers nationally and offers
DailyMed™, a patented and patent pending compliance packaging medication system, to at-home
patients and senior living communities. In addition, the Company offers pharmacy services to
employers through a contracted relationship with a large pharmacy benefits manager. Pharmacy
services to grocers and employers include staffing, pharmacy management, DailyMed™, an exclusive
retail pharmacy benefit network and an 420 square foot automated pharmacy footprint that allows its
customers to reduce space needs and improve labor efficiencies.
The accounting policies of each of the operating segments are the same as those described in the
Summary of Significant Accounting Policies. We evaluate performance based on profit or loss from
operations, excluding corporate, general and administrative expenses.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (in thousands) |
|
2007 |
|
2006 |
|
2005 |
| |
|
|
Revenue, net: |
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
$ |
121,505 |
|
|
$ |
110,152 |
|
|
$ |
97,218 |
|
Products |
|
|
23,589 |
|
|
|
14,758 |
|
|
|
8,123 |
|
Retail |
|
|
4,022 |
|
|
|
3,663 |
|
|
|
— |
|
Pharmacy |
|
|
9,236 |
|
|
|
2,356 |
|
|
|
— |
|
Clinics |
|
|
59 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
Total revenue |
|
$ |
158,411 |
|
|
$ |
130,929 |
|
|
$ |
105,341 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
$ |
3,868 |
|
|
$ |
4,376 |
|
|
|
3,860 |
|
Products |
|
|
(23,097 |
) |
|
|
(81 |
) |
|
|
(2,366 |
) |
Retail |
|
|
(2,033 |
) |
|
|
(1,211 |
) |
|
|
— |
|
Pharmacy |
|
|
(4,174 |
) |
|
|
(275 |
) |
|
|
— |
|
Clinics |
|
|
(5,597 |
) |
|
|
— |
|
|
|
— |
|
Unallocated corporate overhead |
|
|
(9,029 |
) |
|
|
(4,944 |
) |
|
|
(6,655 |
) |
| |
|
|
Total operating loss |
|
|
(40,062 |
) |
|
|
(2,135 |
) |
|
|
(5,161 |
) |
| |
|
|
| |
Interest and other expense, net |
|
|
3,572 |
|
|
|
2,457 |
|
|
|
2,087 |
|
| |
|
|
Net loss before income tax expense |
|
|
(43,634 |
) |
|
|
(4,592 |
) |
|
|
(7,248 |
) |
Income tax expense |
|
|
138 |
|
|
|
119 |
|
|
|
186 |
|
| |
|
|
Net loss |
|
$ |
(43,772 |
) |
|
$ |
(4,711 |
) |
|
$ |
(7,434 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
$ |
1,585 |
|
|
$ |
1,164 |
|
|
$ |
612 |
|
Products |
|
|
1,424 |
|
|
|
516 |
|
|
|
576 |
|
Retail |
|
|
362 |
|
|
|
170 |
|
|
|
— |
|
Pharmacy |
|
|
300 |
|
|
|
39 |
|
|
|
33 |
|
Clinics |
|
|
287 |
|
|
|
— |
|
|
|
— |
|
Corporate |
|
|
298 |
|
|
|
437 |
|
|
|
237 |
|
| |
|
|
Total depreciation and amortization |
|
$ |
4,256 |
|
|
$ |
2,326 |
|
|
$ |
1,458 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and intangible asset impairment: |
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
723 |
|
Products |
|
|
18,654 |
|
|
|
— |
|
|
|
— |
|
Retail |
|
|
344 |
|
|
|
— |
|
|
|
— |
|
Pharmacy |
|
|
2,958 |
|
|
|
— |
|
|
|
— |
|
Clinics |
|
|
965 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
Total goodwill and intangible asset impairment |
|
$ |
22,921 |
|
|
$ |
— |
|
|
$ |
723 |
|
| |
|
|
F - 31
| |
|
|
|
|
|
|
|
|
| |
|
March 31, |
| (in thousands) |
|
2007 |
|
2006 |
| |
|
|
Assets: |
|
|
|
|
|
|
|
|
Services |
|
$ |
51,069 |
|
|
$ |
48,337 |
|
Products |
|
|
28,085 |
|
|
|
30,902 |
|
Retail |
|
|
2,292 |
|
|
|
2,160 |
|
Pharmacy |
|
|
31,339 |
|
|
|
742 |
|
Clinics |
|
|
1,879 |
|
|
|
— |
|
Unallocated corporate assets |
|
|
2,564 |
|
|
|
3,010 |
|
| |
|
|
Total assets |
|
$ |
117,228 |
|
|
$ |
85,151 |
|
| |
|
|
Note 15 — Restructuring
On March 30, 2007, the Board of Directors of the Company approved management’s recommendation to
end the employment of approximately 40 employees, to close and/or consolidate nine facilities, and
to exit certain unprofitable businesses. This decision was made in order to reduce future
operating expenses and cash outflows. In addition, management expects enhanced efficiency as it
focuses on its core businesses and as certain operations are centralized into fewer facilities.
The Company expects the restructuring to be completed by September 30, 2007.
The estimated restructuring charges include the follow:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Type |
|
Products |
|
Retail |
|
Clinics |
|
Corporate |
|
Total |
One-time termination benefits |
|
$ |
70,000 |
|
|
$ |
120,000 |
|
|
$ |
387,000 |
|
|
$ |
90,000 |
|
|
$ |
667,000 |
|
Lease termination costs |
|
|
280,000 |
|
|
|
— |
|
|
|
114,000 |
|
|
|
— |
|
|
|
394,000 |
|
Other associated costs |
|
|
80,000 |
|
|
|
— |
|
|
|
10,000 |
|
|
|
— |
|
|
|
90,000 |
|
Write-off leasehold improvements |
|
|
30,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
30,000 |
|
| |
|
|
Total |
|
$ |
460,000 |
|
|
$ |
120,000 |
|
|
$ |
511,000 |
|
|
$ |
90,000 |
|
|
$ |
1,181,000 |
|
| |
|
|
At March 31, 2007, accrued expenses include $523,000 of one-time termination benefits. The expense
was recognized in the various segments as follows: Clinics — $387,000, Retail — $120,000, Products
- $8,000, and Pharmacy — $8,000. The remaining $658,000 in restructuring costs is expected to be
recognized in fiscal first and second quarters 2008.
The restructuring costs totaling $523,000 recognized as of March 31, 2007 are included in the
“selling, general and administrative” expense line item in the Statements of Operations.
Note 16 – Subsequent Events
F - 32
Related Party Transactions
On and effective April 5, 2007, the Board of Directors of the Company appointed Russell T. Lund,
III as a director. Mr. Lund has minority ownership interests in each of Lunds, Inc. and LFHI Rx,
LLC and serves as the Chairman and CEO of Lunds, Inc. These two entities held an ownership
interest in PrairieStone prior to its acquisition by the Company. Lunds, Inc. and LFHI Rx, LLC
received 2,400,000 shares of Company common stock at the closing of the transaction and may be
entitled to receive additional shares under the terms of the purchase agreement.
On and effective May 24, 2007, the Board of Directors of the Company appointed Daniel Eisenstadt as
a director. Mr. Eisenstadt is the Director of Private Equity of CMS Companies. Entities affiliated
with CMS Companies purchased 4,201,681 shares of the Company’s common stock for $5,000,000 as part
of the May 2007 private placement discussed below. In addition, these entities received a total of
1,050,420 warrants to purchase shares of common stock at $1.75 per share for a period of seven
years.
Private Placement
In May 2007, the Company sold to various investors a total of 11,018,906 shares of common stock at
$1.19 per share for aggregate proceeds of $13,112,498. In conjunction with the sale of common
stock, the investors received a total of 2,754,726 warrants to purchase shares of common stock at
$1.75 per share for a period of seven years. If the Company sells shares of stock at a price less
than $1.19 per share, then the exercise price of the warrants will decrease to the new offering
price, and the number of warrants will increase such that the total aggregate exercise price
remains unchanged. This warrant repricing provision excludes certain common stock offerings,
including offerings under the Company’s equity incentive plan, previously existing shareholder
rights, and stock spits. Under the accompanying registration rights agreements, the Company agreed
to file, within 60 days of closing, a registration statement to register the resale of the shares.
The Company must use its best efforts to cause the registration statement to be declared effective
within 120 days after the registration statement is filed and to keep the registration statement
effective for the designated time period. The Company agreed to issue warrants to purchase shares
of common stock equal to one percent of the aggregate number of shares purchased per month, up to
ten percent of the aggregate number of shares purchased, as liquidated damages in the event of
failure to comply with the effectiveness provisions.
In conjunction with the private placement, the Company paid a placement fee of $655,625.
The Company used a portion of the proceeds from the private placement to pay off the Jana Master
Fund, Ltd. note payable balance of $2,564,103 and the Trinity Healthcare line of credit balance
with Comerica Bank of $2,000,000. In addition, the Company paid off $1,000,000 of the remaining
outstanding Comerica Bank line of credit.
Jana Master Fund, Ltd. – Amended and Restated Promissory Note
On June 25, 2007, the Company and Jana Master Fund, Ltd. (“Jana”) entered into an Amended and
Restated Promissory Note relating to the $17,000,000 note dated November 30, 2006. The amended
note extends the maturity date to June 30, 2008. Effective July 1, 2007, the interest rate shall
be equal to the one year LIBOR rate plus 8%. If the outstanding balance of the note is reduced to
less than $8,500,000, the interest rate will be reduced to the one year LIBOR rate plus 4%.
Accrued unpaid interest on the outstanding principal balance shall be due and payable on June 30,
2007, and 50% of the accrued unpaid interest shall be due and payable on the following dates:
September 30, 2007, December 31, 2007 and March 31, 2008. All remaining unpaid accrued interest
shall be due and payable on the maturidy date of June 30, 2008. If the Company prepays any portion
of the principal amount before December 30, 2007, a prepayment fee equal to the one year LIBOR rate
plus 1.5% will be due. If the Company sells assets, other than inventory in the ordinary course of
business, it is required to use a portion of the proceeds to pay down the outstanding debt.
Specifically, the Company must remit to Jana 50% of the net proceeds on the sale of assets up to
$10 million and 75% of the net proceeds to the extent that the aggregate net proceeds exceed $10
million.
Securities Redemption Agreement — Pinnacle EasyCare, LLC
On June 26, 2007, the Company entered into a Securities Redemption Agreement with the minority
interest holders of Pinnacle. Pursuant to the agreement, the Company agreed to sell its 75%
interest in Pinnacle, which was originally acquired in November 2006 (see Note 3 – Busines
Acquistions), to the minority interest holders for the return of
200,000 shares of the Company’s common stock that was issued to the minority interest holders as
partial consideration in the original transaction.
F - 33
Note 17 — Quarterly Results (Unaudited)
The following table summarizes selected quarterly data of the Company for the years ended March 31,
2007 and 2006 (in thousands, except per share data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended |
| |
|
June 30, |
|
September 30, |
|
December 31, |
|
March 31, |
| |
|
2006 |
|
2006 |
|
2006 |
|
2007 |
| |
|
|
Revenues, net |
|
$ |
37,555 |
|
|
$ |
41,419 |
|
|
$ |
41,026 |
|
|
$ |
38,411 |
|
Gross profit |
|
|
13,182 |
|
|
|
14,566 |
|
|
|
14,483 |
|
|
|
10,172 |
|
Operating income (loss) |
|
|
286 |
|
|
|
222 |
|
|
|
(2,565 |
) |
|
|
(38,006 |
) |
Net loss |
|
|
(158 |
) |
|
|
(736 |
) |
|
|
(3,718 |
) |
|
|
(39,161 |
) |
Basic and diluted loss per common share |
|
$ |
(0.00 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.42 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended |
| |
|
June 30, |
|
September 30, |
|
December 31, |
|
March 31, |
| |
|
2005 |
|
2005 |
|
2005 |
|
2006 |
| |
|
|
Revenues, net |
|
$ |
30,739 |
|
|
$ |
32,665 |
|
|
$ |
33,299 |
|
|
$ |
34,226 |
|
Gross profit |
|
|
9,896 |
|
|
|
10,701 |
|
|
|
11,313 |
|
|
|
11,455 |
|
Operating loss |
|
|
(292 |
) |
|
|
(374 |
) |
|
|
(628 |
) |
|
|
(841 |
) |
Net loss |
|
|
(1,251 |
) |
|
|
(1,479 |
) |
|
|
(813 |
) |
|
|
(1,168 |
) |
Basic and diluated loss per common share |
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
The increase in the operating loss and net loss in the fiscal fourth quarter 2007 compared to the
three previous quarters was primarily due to the following:
| |
• |
|
Total goodwill and intangible asset impairment expense recognized in fiscal fourth
quarter 2007 of $22,921,000 (see Note 5 – Goodwill and Acquired Intangible Assets). |
| |
| |
• |
|
Net revenue decreased due to an increase to the contractual allowance adjustment
necessary in the Products segment as well as a decrease in the Services segment revenue
compared to the previous three quarters. |
| |
| |
• |
|
The fiscal fourth quarter 2007 includes a full quarter of expenses subsequent to the
various acquisitions in the first three quarters plus expenses relating to PrairieStone
subsequent to its acquisition in February 2007. |
| |
| |
• |
|
Bad debt expense recognized in fiscal fourth quarter 2007 necessary to increase the
allowance for uncollectible accounts receivable of $2,669,000. |
| |
| |
• |
|
Non-cash compensation expense relating to the vesting of 3,000,000 stock options held by
the former COO recognized in fiscal fourth quarter 2007 of $1,044,000 (see Note 10 –
Stock-Based Compensation). |
| |
| |
• |
|
Severance expense associated with the former COO’s separation agreement recognized in
February 2007 of $700,000. |
| |
| |
• |
|
Total one-time termination benefits associated with a restructuring announced in March
2007 of $523,000 (see Note 15 – Restructuring). |
F - 34
ARCADIA RESOURCES, INC. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
Charged to |
|
Charged to |
|
|
|
|
|
Balance at |
| |
|
Beginning |
|
Costs and |
|
Other |
|
|
|
|
|
End |
| |
|
of Period |
|
Expenses |
|
Accounts (a) |
|
Deductions |
|
of Period |
Year ended March 31, 2007
Deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance
for doubtful accounts and contractual allowance |
|
$ |
1,891,000 |
|
|
$ |
8,629,000 |
|
|
$ |
— |
|
|
$ |
(2,210,000 |
) |
|
$ |
8,310,000 |
|
| |
Year ended March 31, 2006
Deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts and contractual allowance |
|
$ |
1,692,000 |
|
|
$ |
880,000 |
|
|
$ |
211,000 |
|
|
$ |
(892,000 |
) |
|
$ |
1,891,000 |
|
| |
Period from May 10, 2004 to March 31, 2005
Deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts and contractual allowance |
|
$ |
832,000 |
|
|
$ |
931,000 |
|
|
$ |
806,000 |
|
|
$ |
(877,000 |
) |
|
$ |
1,692,000 |
|
| |
Period from April 1, 2004 to May 9, 2004
Deducted from asset accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts |
|
$ |
780,000 |
|
|
$ |
52,000 |
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
832,000 |
|
|
|
|
| (a) |
|
Addition from acquired entities |
F - 35