Part II
Item 5. Market for Common Equity and Related Stockholder Matters.
Shares of our Common Stock are currently quoted on the OTC Bulletin Board
under the symbol "ACDI." Our Common Stock has had a limited and sporadic trading
history. The following table sets forth the quarterly high and low bid prices
for our Common Stock on the OTC Bulletin Board 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. In
November 2004, the Company changed its trading symbol to "ACDI" in correlation
to its name change to Arcadia Resources, Inc. There is no established public
trading market for any of our warrants, options or any other securities. The
Company expects a change to its trading symbol upon listing and trading on the
Amex and will notify shareholders of its new trading symbol as soon as it
becomes available.
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Bid Price
Period High Low
Fiscal Year Ended 3/31/2006 Fourth Quarter ended 3/31/06 $ 3.53 $ 2.36
Third Quarter ended 12/31/05 $ 2.90 $ 2.48
Second Quarter ended 9/30/05 $ 2.80 $ 2.06
First Quarter ended 6/30/05 $ 2.46 $ 1.74
Fiscal Year Ended 3/31/2005 Fourth Quarter ended 3/31/05 $ 2.00 $ 1.11
Third Quarter ended 12/31/04 (1) $ 1.28 $ 0.64
Second Quarter ended 9/30/04 $ 1.08 $ 0.60
First Quarter ended 6/30/04 $ 1.08 $ 0.39
(1) On November 16, 2004, the Company's ticker symbol change to "ACDI."
There is no established market for our Classes A, B-1 and B-2 Warrants. The
Company's respective warrants are not quoted on the OTC Bulletin Board, nor are
they listed on any exchange. We do not expect our warrants to be quoted on the
OTC Bulletin Board 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 1,800 record holders of our Common Stock as of June 26,
2006. 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.
Item 6. Selected Consolidated Financial Data.
SELECTED CONSOLIDATED 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, 2003, 2002 and 2001 are those of Arcadia Services, Inc.
and its subsidiaries presented on a consolidated basis (i.e., the Predecessor
entity). Results for the year ended March 31, 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. We derived the statement of
operations data for the year ended March 31, 2001 and the balance sheet data as
of March 31, 2001 from unaudited financial statements. 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, 2005. Results for the period from 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 are those of the Successor entity
as described above subsequent to the reverse merger transaction. A
reclassification of commissions paid to affiliated agencies from cost of sales
to general and administrative expenses is reflected herein to be more comparable
with our peers in the staffing industry.
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(Results shown in thousands) Successor Predecessor
Year Ended Period from Period from Year Ended Year Ended Year Ended
March 31, May 10, 2004 to April 1, 2004 to March 31, March 31, March 31,
2006 March 31, 2005 May 9, 2004 2004 2003 2002
Net Sales $ 130,929 $ 95,855 $ 9,487 $ 78,359 $ 76,276 $ 75,848
Cost of Sales 87,564 67,050 6,906 56,205 53,822 53,134
Gross Profit 43,365 28,805 2,581 22,154 22,454 22,714
General and Administrative
Expenses 43,174 32,264 2,102 18,424 18,172 18,824
Impairment of Goodwill - 707 16 - - -
Depreciation and Amortization 2,326 1,458 - - - -
Operating Income (Loss) (2,135 ) (5,624 ) 463 3,730 4,282 3,890
Other Expenses Other (Income) - (87 ) - - - -
Interest Expense (Income), Net 1,524 946 - (2 ) (1 ) (4 )
Amortization of Debt Discount 933 1,228 - - - -
Total Other Expenses (Income) 2,457 2,087 - (2 ) (1 ) (4 )
Net Income (Loss) Before Income
Tax Expense (Benefit) (4,592 ) (7,711 ) 463 3,732 4,283 3,894
Income Tax Expense 119 186 - - - -
Net Income (Loss) $ (4,711 ) $ (7,897 ) $ 463 $ 3,732 $ 4,283 $ 3,894
Pro Forma Income Tax expense
from tax status change 158 1,269 1,456 1,324
Pro Forma Income after Income
Tax from tax status change $ 305 $ 2,463 $ 2,827 $ 2,570
Income (Loss) per Share:
Basic $ (0.06 ) $ (0.11 ) $ 0.49 $ 3.94 $ 4.52 $ 4.11
Fully diluted $ (0.06 ) $ (0.11 ) $ 0.49 $ 3.94 $ 4.52 $ 4.11
Pro Forma Income (Loss) per
Share:
Basic $ 0.32 $ 2.60 $ 2.98 $ 2.71
Fully diluted $ 0.32 $ 2.60 $ 2.98 $ 2.71
Weighted average number of
shares (in thousands):
Basic 83,834 72,456 948 948 948 948
Fully diluted 83,834 72,456 948 948 948 948
Successor Predecessor
March 31, March 31, March 31, March 31, March 31,
2006 2005 2004 2003 2002
(In thousands)
Balance Sheet Data:
Total Current Assets $ 32,322 $ 24,536 $ 13,612 $ 12,325 $ 12,498
Working Capital $ 19,734 $ 10,032 $ 9,069 $ 8,874 $ 8,254
Total Assets $ 85,151 $ 55,593 $ 17,203 $ 14,999 $ 15,094
Total Long-Term Debt, including
current maturities $ 19,772 $ 22,825 $ 430 $ 2 $ 113
Total Liabilities $ 28,107 $ 30,071 $ 4,973 $ 3,453 $ 4,357
Total Stockholders' Equity $ 57,044 $ 25,522 $ 12,230 $ 11,546 $ 10,737
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 financing; (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 be listed on a national securities exchange or
quotation system; (13) our ability to adapt to economic, political and
regulatory conditions affecting the health care industry; and (14) other
unforeseen events that may impact our business.
Overview
The Company has undergone substantial changes in its financial position and
business operations since May 10, 2004. Before the RKDA merger, we had
continuing losses, cash flow problems and faced going concern issues. We had
annual sales of approximately $4 million. The Company entered into the merger
agreement with RKDA in order to expand product and service offerings, increase
geographic markets served, and to spread its cost structure over a wider base of
customers, products and service offerings. The net effect of the RKDA merger was
to considerably expand the Company's base of business and to alleviate its
financial problems. From the time of the merger through March 31, 2006, the
Company raised $48 million in equity funding and completed 21 acquisitions.
Arcadia Resources, Inc. provides home health care services and products
through its subsidiaries' 108 operating locations in 24 states. Arcadia
Services, a wholly-owned subsidiary of Arcadia Resources, Inc., is a national
provider of home care and staffing services currently operating in 19 states
through its 76 locations, referred to herein as the Services Division. The
Products Division includes Arcadia HOME (home oxygen and medical equipment),
which provides respiratory and durable medical equipment to patients in 11
states through its 25 locations, including a full-service mail-order pharmacy
operated for the benefit of all of our patients. Our Retail Division consists of
six retail operations, a home health-oriented mail order catalog and a related
retail website
The Company's assets and net sales increased substantially during the period
from May 10, 2004 to March 31, 2006. As of March 31, 2006, we reported total
assets of approximately $85.2 million, on a consolidated basis, compared to
$17.2 million as of March 31, 2004 reported by Arcadia Services, Inc., the
entity treated as the acquirer for accounting purposes in the RKDA merger. See
below for more information on the reverse merger accounting treatment of the
RKDA merger.
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The Company generated the following tabular progression of net sales by quarter
since the merger. There were no material changes in sales prices from the
quarter ended March 31, 2005 to the quarter ended March 31, 2006 to contribute
to the improvement in revenues. See Results of Operations and Liquidity and
Capital Resources.
Increase from prior Increase from same
Net sales by quarter: (in millions) Quarter quarter prior year
First quarter ended
June 30, 2004* $ 23.1 11.5 % 26.9 %
Second quarter ended
September 30, 2004 25.5 10.4 % 30.5 %
Third quarter ended
December 31, 2004 28.1 10.2 % 41.4 %
Fourth quarter ended
March 31, 2005 28.6 1.8 % 38.1 %
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 %
* Includes results from the Predecessor entity
Growth Strategy. We have pursued a strategy of growth internally and externally
through acquisitions. Our internal growth strategy is 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, mail order pharmacy and home
oxygen and medical equipment products. In addition, we intend to proactively
remind customers to reorder and replace their supplies. To this end, we have
hired a director of business development in mid-2004 to spearhead the
development of internal growth. During the year ended March 31, 2005, we
generated internal growth of 15.5%, principally within our home care and
staffing business, due to a continued trend in economic recovery and expanded
marketing efforts. During the year ended March 31, 2006, we generated internal
growth of 10.2% as we continued to increase our product offerings, in spite of
some downward pressure on margins in the staffing business and reductions in
reimbursement of services provided to Medicare beneficiaries receiving
pharmaceuticals and certain durable medical equipment products and services. We
continue to challenge our sales and marketing strategies and our delivery of
products and services to achieve better customer satisfaction, market share and
operating results. See Results of Operations.
Our growth strategy also encompasses expansion of our business by acquisition.
There are many small local competitors currently serving the marketplace, each
of which has a complete infrastructure in place to support its existing
business. We hope to capitalize on the consolidation opportunities that we
believe exist within the fragmented home care and staffing industries by
becoming a larger provider of comprehensive national home care and staffing
services through greater economies of scale. We intend to implement this
strategy by smaller companies joining our affiliate network and by acquiring
other home care, staffing and durable medical equipment businesses.
In line with this strategy, during the period from May 10, 2004 to March 31,
2006, we completed 21 acquisitions. During the year ended March 31, 2006, the
Company purchased the operations of 15 entities, as more fully described below
in the footnotes to the financial statements. The total amounts assigned to
assets and liabilities for those operations purchased during the year ended
March 31, 2006 are as follows:
(in thousands)
Description of assets and (liabilities) purchased:
Current Assets $ 1,889
Property and Equipment 1,972
Intangibles 5,390
Liabilities (5,154 )
Goodwill 13,312
Total assets and liabilities acquired $ 17,409
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.
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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 "Summary of Accounting
Policies" of the Notes to Consolidated Financial Statements.
Revenue Recognition
Revenues for services are recorded in the period the services are rendered at
rates established contractually or by other agreement made with the institution
or patient prior to the services being delivered. 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. Insurance entities generally
determine their pricing schedules based on the regional usual and customary
charges or based on contractual arrangements with their insureds.
Federally-based Medicare and state-based Medicaid programs publish their pricing
schedules periodically for covered products and services. Revenues reimbursed
under arrangements with Medicare, Medicaid and other governmental-funded
organizations were approximately 28%, 24% and 19% for the years ended March 31,
2006, 2005 and 2004, respectively. No customers represent more than 10% of the
Company's revenues for the periods presented. Revenues are recorded based on the
expected amount to be realized by the Company.
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. See Revenue Recognition above for
credit concentrations within payor sources. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance.
Goodwill
Prior to 2002, Arcadia amortized its goodwill using the straight-line method
over periods ranging from seven to fifteen years. In 2002, Arcadia adopted SFAS
No. 142 "Goodwill and Other Intangible Assets." Accordingly, amortization of
goodwill ceased as of December 31, 2002. Goodwill is now tested for impairment
annually by comparing the fair value of each reporting unit to its carrying
value.
We review goodwill and other intangible assets for impairment annually and
whenever events or changes in circumstances indicate the carrying value of an
asset may not be recoverable in accordance with the Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 142 requires that a two-step impairment test be performed on goodwill.
In the first step, we compare the fair value of each reporting unit to its
carrying value. Our reporting units are consistent with the reportable segments
identified in Note (7) of the consolidated financial statements. We determine
the fair value of our reporting units using a combination of the income approach
and the market approach. Under the income approach, we calculate 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 the purchased 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.
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The income approach, which we use to estimate the fair value of our reporting
units and purchased 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. 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 annually. When we determine certain deferred
tax assets are more likely than not to be utilized, we will reduce our valuation
allowance accordingly.
We have provided a valuation allowance for the net deferred tax assets including
the asset related to the net operating loss carryover of approximately
$7.2 million generated post-merger, expiring through 2026. 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 $1.2 million
net operating losses generated by Critical 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.
Prior to May 10, 2004, Arcadia Services elected to be taxed as a Subchapter S
corporation with the individual shareholders reporting their respective share of
income on their income tax return. Accordingly, the Company has no deferred tax
assets or liabilities recorded in prior periods.
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.
Arcadia Resources, Inc.
Consolidated Statements of Income
(In thousands)
Successor Successor Predecessor
Period from Period From
Year May 10, 2004 April 1, 2004
Ended To To
March 31, 2006 March 31, 2005 May 9, 2004
Net Sales $ 130,929 $ 95,855 $ 9,487
Cost of Sales 87,564 67,050 6,906
Gross Profit 43,365 28,805 2,581
General and Administrative Expenses 43,174 32,264 2,102
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Successor Successor Predecessor
Period from Period From
Year May 10, 2004 April 1, 2004
Ended To To
March 31, 2006 March 31, 2005 May 9, 2004
Impairment of Goodwill - 707 16
Depreciation and Amortization 2,326 1,458 -
Operating Income (Loss) (2,135 ) (5,624 ) 463
Other Expenses
Other Income - (87 ) -
Interest Expense, Net 1,524 946 -
Amortization of Debt Discount 933 1,228 -
Total Other Expenses 2,457 2,087 -
Net Income (Loss) Before Income Tax Expense (4,592 ) (7,711 ) 463
Income Tax Expense 119 186 -
Net Income (Loss) $ (4,711 ) $ (7,897 ) $ 463
Net sales were $130.9 million for the year ended March 31, 2006 compared to
$105.3 million for the year ended March 31, 2006, representing a 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 10.2% 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
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 has and is expected
to continue to drive changes to the consolidated gross profit margin of the
Company. The Services' Division revenues for the year ended March 31, 2006 were
$110.1 million and yielded a gross margin of 27.1% compared to $97.2 million at
a gross margin of 27.1% for the year ended March 31, 2005. The Products'
Divisional revenues for the year ended March 31, 2006 were $17.1 million at a
gross margin of 73.4% compared to revenues for the year ended March 31, 2005 of
$8.1 million at a gross margin of 61.8%. Cost of sales for Services are
primarily employee costs, while cost of sales for Products 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
Division were acquired or opened during the year ended March 31, 2006 and
generated revenues of $3.7 million at a 56.0% gross margin.
General and administrative expenses for the year ended March 31, 2006 were
$43.4 million or 33.1% of revenues versus $34.4 million 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 general and administrative expenses for the
Services, Products and Retail Divisions 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 Division in this period) for the year ended March 31, 2005). The
Company recorded $4.6 million in non-cash expenses during the year ended
March 31, 2006, of which $1.1 million are included in 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 Division and bolstering the existing Services
Division 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 general and administrative expenses of
$1.1 million during the year ended March 31, 2006, compared to none for the same
period in the prior year.
Total depreciation and amortization expense was approximately $3.4 million for
the year ended March 31, 2006 compared to $1.5 million for the year ended
March 31, 2005. Depreciation expense related to equipment rented to patients of
approximately $1.1 million 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
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amortized based on their expected useful lives (3 to 30 years) which resulted in
amortization expense of $1.5 million for the year ended March 31, 2006 compared
to $782,000 recorded in the year ended March 31, 2005. Amortizable net
intangibles, other than goodwill, were $46.6 million at March 31, 2006 compared
to $13.0 million at March 31, 2005.
Interest expense was $1.5 million for the year ended March 31, 2006 compared to
$946,000 for the year ended March 31, 2005. Even though the Company paid down
$22.8 million 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 Division along with acquisitions of the various
entities as discussed in the Notes to the Consolidated Financial Statements.
Total interest-bearing borrowings were $19.8 million at March 31, 2006 at rates
ranging from 7.75% to 8.25% per annum compared to $22.8 million at higher
interest rates at rates ranging from 6.25% to 12% at March 31, 2005.
Amortization of deferred debt discount was $933,000 for the year ended March 31,
2006 compared to $1.2 million for the year ended March 31, 2005. These discounts
were generated by the attachment of warrants to two notes payable and a
conversion feature attached to a third note payable as explained in Notes to the
Consolidated Financial Statements. The Company fully amortized all of its
outstanding debt discounts as of September 30, 2005 upon repayment of the
related instruments, therefore, there was no related amortization expense during
the two quarter ended March 31, 2006. 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.
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 $7.2 million that expire at various dates
through 2026.
The Company's net loss for the year ended March 31, 2006 was $4.7 million
compared to a net loss of $7.4 million for the year ended March 31, 2005. The
Company incurred total non-cash expenses of $5.7 million in the year ended
March 31, 2006 compared to $7.7 million for the year ended March 31, 2005. The
other costs responsible for the net loss for the year ended March 31, 2006 are:
debt discount amortization and related interest expense, costs related to the
Company's investment in its retail store concept, costs related to stock options
pursuant to FAS 123R, acquisition related amortization and depreciation,
infrastructure building, higher workers' compensation costs, and those costs
related to public offering registration expenses.
Year Ended March 31, 2005 Compared to Year Ended March 31, 2004
The Company had the following component increases in net sales for the period
from April 1, 2004 through March 31, 2005*:
(in millions)
Operations of entities acquired in the reverse acquisition on May 10 $ 3.4
Two staffing entities acquired between January 1, 2004 and June 30,
2004 4.4
Three staffing operations and two entities acquired between July 1,
2004 and March 31, 2005 4.2
Home respiratory care and DME operations acquired during the period
ended March 31, 2005 4.7
Internal growth from existing operations 10.3
Total increase in sales for the year ended March 31, 2005* $ 27.0
* Includes results from the Predecessor entity
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There were no significant changes in sales prices during the period May 10, 2004
through March 31, 2005 until an approximate 30% pricing reduction on
reimbursement from the Medicare program on certain respiratory medications was
effective on January 1, 2005, primarily affecting the Company's Arcadia RX
pharmacy operation and certain acquired home respiratory care operations.
Gross profit margin for the period from May 10, 2004 to March 31, 2005 increased
to 30% of sales. Gross profit margin for the period from April 1, 2004 to May 9,
2004 was 27% of sales. The combined gross profit margin for the year ended
March 31, 2005 was 30% compared with the year ended March 31, 2004 at 28%. The
Company's expansion into home care in May 2004 has and will continue to drive
changes to the consolidated gross profit margin of the Company. Staffing
revenues for the period ended March 31, 2005 were $88.1 million and yielded a
gross margin of 27.1%, while the home care revenues were $7.8 million at a gross
margin of 63.6%. Cost of sales for staffing are primarily employee costs, while
cost of sales for home care represents the cost of products and medications sold
to patients and supplies used in the delivery of other rental products and
services to patients. The staffing business' gross margins were negatively
affected in the year ended March 31, 2005 than the same period of the prior year
due to the business and client mix of institutional customers, increases in
workers' compensation insurance costs and a lower margin service staffing demand
in the facilities.
General and administrative expenses for the period from May 10, 2004 to
March 31, 2005 were $32.3 million and for the period from April 1, 2004 to
May 9, 2004 were $2.1 million. Combined general and administrative expenses
totaled $34.4 million for the year ended March 31, 2005 compared to
$18.4 million for the year ended March 31, 2004. The 87% increase is due to the
changes in the Company's mix of business, costs related to being a separate
publicly-held company rather than a subsidiary of a privately-held company and
additional general and administrative expenses related to the merged entities as
discussed in the notes to the consolidated financial statements. Of the
$7.7 million in non-cash expenses incurred by the Company during the period
ended March 31, 2005, $4.2 million are included in general and administrative
expenses with no corresponding comparable items in the prior year except for bad
debt expense of $42,000. The Company incurred expenses of approximately $755,000
in the year ended March 31, 2005 toward building a home care infrastructure and
bolstering its existing services infrastructure to accommodate recent and
expected acquisitions, most of which is personnel and information systems
related. The post-transaction costs of registering securities issued in the
offering are considered an expense for accounting purposes. Due to the complex
nature of the business combination and the time schedule required, those costs
have been significant to the Company for the year ended March 31, 2005. Such
related costs include primarily external professional fees for legal, accounting
and auditing services along with internal costs of preparing and filing the
required documents with the Securities and Exchange Commission. The Company
estimates its external costs were $660,000 for the year ended March 31, 2005.
Additional costs will be incurred until the registration is completed.
The Company recognized an impairment of goodwill of $707,000 for the period from
May 10, 2004 to March 31, 2005 compared to $16,000 for the period from April 1,
2004 to May 9, 2004. The decline in value was quantified primarily related to a
business acquired as a byproduct of the reverse acquisition on May 10, 2004. The
specific operating subsidiary is in a specific product line which is very
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 and ultimate closure of 1 of the 3 locations
acquired. Total net intangible assets were $28.8 million of which $15.7 million
was goodwill as of March 31, 2005.
Depreciation and amortization expense was $1.5 million for the year ended
March 31, 2005 yet the Company had none in the prior year ended March 31, 2004.
The increase consists primarily of depreciation expense of the home care
component associated with the fleet of vehicles, equipment held for rental to
patients, pharmacy equipment and office furnishings and equipment required to
service the patients and additional information systems technology and equipment
benefiting the entire Company. The base of depreciable assets increased from
$75,000 at March 31, 2004 to $3.1 million at March 31, 2005. Other intangibles
were amortized based on their expected useful lives which resulted in
amortization expense of $782,000. Amortizable net intangibles, other than
goodwill, were $13 million at March 31, 2005.
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Interest expense was $946,000 for the year ended March 31, 2005. There was no
interest expense for the year ended March 31, 2004 as the company had no
interest-bearing borrowings. Interest expense incurred in the year ended
March 31, 2005 included $630,000 to banks and $316,000 to note holders. Total
interest-bearing borrowings were $22.9 million at March 31, 2005 at rates
ranging from 6.25% to 12% per annum compared to no interest-bearing borrowings
at March 31, 2004. The increase in interest expense is a result of borrowings
resulting from the acquisitions of the various merged entities as discussed in
the Notes to the Consolidated Financial Statements.
Amortization of deferred debt discount was $1.2 million for the year ended
March 31, 2005 generated by the attachment of warrants to two notes payable,
while there were no such arrangements for the same period in the prior year. The
deferred debt discount is the fair value of stock options and warrants granted
to certain note holders as explained in Notes to the Consolidated Financial
Statements. The deferred debt discount is being amortized over the life of the
respective promissory notes.
The Company reported no income tax expense for the period from April 1, 2004 to
May 9, 2004 as it was a Subchapter S taxpayer. The Company had income tax
expense of $185,000 for the period from May 10, 2004 to March 31, 2005,
primarily related to state income tax expenses. The Company had significant
temporary differences between book income and taxable income resulting in
combined net deferred tax assets of $2.7 million 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 of
$4.0 million that expires at various dates through 2025.
Net income was $463,000 for the period from April 1, 2004 to May 9, 2004
combined with a net loss of $7.9 million for the period from May 10, 2004 to
March 31, 2005, resulting in a net loss for the year ended March 31, 2005 of
$7.4 million. The Company had net income of $3.7 million for the year ended
March 31, 2004. The costs responsible for this reduction in net income are:
those costs related to being a separate publicly-held entity versus a subsidiary
of a privately-held entity, debt discount amortization and related interest
expense, public offering registration expenses, infrastructure building and
related improvements, higher workers' compensation costs, costs related to the
release of escrowed shares and the impairment of goodwill.
Liquidity and Capital Resources
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, the Company began executing its
long-term strategic growth plan in May 2004, which includes plans for
complementary acquisitions, internal growth at existing locations, expanded
product offerings and synergistic integration of the Company's types of
businesses.
Successor Successor Predecessor
Year Period from May 10, Period from April 1,
SUMMARY CONSOLIDATED end 2004 to March 31, 2004 to May 9,
STATEMENTS OF CASH FLOWS (in millions) March 31, 2006 2005 2004
Net income (loss) $ (4.7 ) $ (7.9 ) $ 0.5
Net cash (used in) operating activities $ (7.4 ) $ (0.5 ) $ (0.5 )
Net cash (used in) investing activities $ (16.7 ) $ (0.2 ) $ (0.2 )
Net cash provided by financing activities $ 23.2 $ 0.7 $ 0.7
Net increase (decrease) in cash and cash equivalents $ (0.9 ) $ 1.4 $ -
Cash and cash equivalents at the end of the period $ 0.5 $ 1.4 $ -
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Prior to undertaking the Company's long-term strategic growth plan, the
operating company was generating significant cash flows from operations and
pre-tax income of 5% of revenues. Management has shown the ability to raise
funds sufficient to provide for the cash flow needs of the Company in pursuit of
its long-term strategic growth plan, as evidenced by the $48 million raised in
equity instruments after the merger through March 31, 2006 (including the
conversion of notes payable into common stock). The Company also has in place a
long-term line of credit, a short-term line of credit and has used notes payable
to sellers and shares of its common stock as a means of financing some
acquisitions.
On September 29, 2005, the Company completed a warrant offering. With the $29.2
million of net proceeds from this offering, the Company reduced its
interest-bearing debt as of September 30, 2005. Most of the debt was generated
by the reverse merger transaction of May 2004 and subsequent acquisitions.
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During the year ended March 31, 2006, the Company made 15 acquisitions with a
combination of cash of $12.9 million, $3.9 million in notes or escrows payable,
assumption of certain liabilities totaling $1.3 million and 1.8 million shares
of its common stock valued at $3.8 million. The Company had $5.3 million
available as of March 31, 2006 through its various lines of credit with the
potential of an additional $758,000 million available, based on borrowing base
calculations.
The Company has been successful in using notes payable and common stock as part
of its consideration paid for acquisitions. In the event the Company is unable
to continue to obtain financing through the sale of additional common stock or
increased borrowings, management will reduce the amount of acquisitions and
investments in related infrastructure and focus on the performance of the
operations of the Company, until it can once again resume its strategic plans.
The Company's cash position as of March 31, 2006 was $530,000. The Company's
total debt to equity ratio was 0.49 to 1 and its current ratio was 2.57 to 1 at
March 31, 2006.
Gross accounts receivable at March 31, 2006 of approximately $27.1 million
represent accounts receivable from operations and from acquired entities. As of
March 31, 2006, the Company's net accounts receivable represented 64 days sales
outstanding, consistent with the 67 days sales outstanding as of March 31, 2005.
By type of revenue, as of March 31, 2006, the days sales outstanding for
Services Division revenues were 60 and the days sales outstanding on Products
Division revenues were 83 days. The Retail Division has minimal accounts
receivable as its sales are primarily via charges to customers' credit cards.
The integration of billing related to acquisitions of Products Division
operations during the year ended March 31, 2006 has affected the related
collection process due to the required reworking of licensure and account
statuses with payors after a change in ownership. Additional support has been
added to improve the results in fiscal 2007. The Company was not in the Products
business until August 2004 and opened a regional billing center in January 2005
to consolidate the billing of the local operations. The Company calculates its
days sales outstanding as accounts receivable less acquired accounts receivable,
net of the related allowance for doubtful accounts, divided by the average daily
net sales for the preceding three months. The Company has a limited number of
customers with individually large amounts due at any given balance sheet date.
The Company's payor mix for the year ended March 31, 2006 was as follows:
Government-funded 24 %
Institutions 45 %
Commercial Insurance 15 %
Private Pay 16 %
Financing Transactions
On April 26, 2005, the Company sold an aggregate 1,212,121 shares of its common
stock valued at $1.65 per share, for net aggregate consideration of
$1.86 million, in a private transaction to an accredited investor as defined in
Rule 501(a) of Regulation D.
On April 27, 2005, the Company issued Jana Master Fund, LTD ("Jana") a
$5.0 million 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 may convert the outstanding balance into shares of the
Company's common stock at the rate of one (1) share of common stock per $2.25 of
outstanding debt. The debt was repaid on September 30, 2005 with proceeds from
our Class B-1 Warrant Offering and therefore, the conversion rights were
extinguished.
The Company received $306,000 from the exercise of stock options and warrants
during the year ended March 31, 2006.
On November 28, 2005, the Company agreed to sell for placement with two European
bank SICAV funds an aggregate of 2,222,222 shares of common stock for aggregate
consideration totaling $5,000,000. Due to the delays experienced, the funds
agreed on March 7, 2006 to increase the price per share to $2.55, therefore
increasing the total subscription to $5.7 million. The transactions were
terminated on June 20, 2006 by the Company for failure of the SICAV funds to
fund the transactions.
Management believes that cash from operations will be sufficient to repay
short-term debt obligations. The Company generated net cash from operating
activities of $855,000 during the quarter ended March 31, 2006, compared to
negative net cash from operations in each of the preceeding three quarters.
However, cash from operations alone may not be sufficient to pursue management's
strategy of growth through acquisition. Management anticipates that the sources
of funds for the reduction of long-term debt obligations and for acquisitions
will be primarily from the equity market. As of March 31, 2006, the Company's
interest-bearing debt totals approximately $4.4 million classified as current
and approximately $15.5 million classified as long-term for a total of
approximately $19.9 million. During fiscal years 2005 and 2006, the Company
raised $48 million from the equity markets (including the conversion of notes
payable into common stock) in accordance with its plan and has retired short
term debt, reduced borrowings on its lines of credit, funded internal growth and
financed 21 acquisitions. In the short term, the Company anticipates raising
additional debt or
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equity funding for selected acquisitions. Raising capital through equity will
result in dilution to our holders of Common Stock. The Company expects to incur
additional debt to fund the growth of its durable medical equipment and
respiratory business. Vendor-based financing is available in the form of short
term notes payable or capital leases for medical and information systems
equipment. The Company does not have any material commitments for capital
expenditures, but does intend to spend up to $1 million related to information
systems technology.
The Company also plans to expand into certain new start-up locations related to
retail DME and walk-in medical clinics, as well as to continue to expand product
and service offerings in its existing sites. Cash flow from operations is
expected to fund these efforts, the scope of which may be determined by the
Company's ability to generate cash flow or to secure additional new funding.
To the extent that we do not successfully raise funds from the equity markets to
finance new acquisitions, we may seek debt financing, which reduces available
cash for operations by the amount of interest expense and repayments.
Alternatively, we may choose to modify or postpone our strategy to grow through
acquisition or may choose to eliminate certain product or service offerings.
Higher financing costs, modification of our growth strategy, or the elimination
of product or service offerings could negatively impact our profitability and
financial position. Given the Company's net proceeds from financing activities
during the twenty-one months ended March 31, 2006, the changes in the Company's
operational and financial position that have occurred during this period, and
assuming no material decline in our revenues, management does not anticipate
that the Company will be unsuccessful in its efforts to raise funds from the
equity markets, although there is no guarantee that the Company will
successfully raise such funds.
The revolving credit commitment amount on the original Comerica Bank credit
facility has been increased four times since its May 7, 2004 inception. In
August 2005, the credit agreement was amended to in the credit commitment amount
to $19 million and to extend the maturity date to September 1, 2007. The Company
is permitted to draw on the revolving credit facility to finance working capital
or staffing business acquisitions. Factors that have bearing on whether we may
require additional credit include our ability to assimilate our acquired
businesses by reducing operating costs through economies of scale, our ability
to increase revenues through internal growth based on our existing cost
structure, and our ability to generate cash from operations sufficient to
service our debt level and operating costs. There is always 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 facility or to lend additional
funds for working capital or acquisition 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.
Contractual Obligations and Commercial Commitments
As of March 31, 2006, the Company had contractual obligations, in the form of
non-cancelable operating leases and employment agreements as follows, in
thousands:
Payments due by March 31,
Total 2007 2008 2009 2010 2011
Operating Leases $ 2,701 $ 1,425 $ 963 $ 215 $ 58 $ 40
Debt Maturities 19,772 4,406 14,992 242 75 57
Employment Agreements 1,257 867 390 - - -
Interest Expense 2,446 1,753 663 30 - -
Total $ 26,176 $ 8,451 $ 17,008 $ 487 $ 133 $ 97
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The majority of our cash balances 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 investment portfolio 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 our revenues since inception have been in the U.S.
and in U.S. Dollars therefore we have not yet adopted a strategy for this future
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.
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Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
The Board of Directors of Arcadia Resources, Inc., with the approval of the
Audit Committee of the Board of Directors, engaged BDO Seidman, LLP as the
Company's new independent accountants as of June 22, 2004. BDO Seidman, LLP
performed the audits of Arcadia Services, Inc. for the years ended March 31,
2004, 2003 and 2002.
Prior to the RKDA reverse merger with Critical Home Care, Inc., the Board of
Directors and Audit Committee of Critical Home Care, Inc. adopted resolutions on
June 22, 2004 dismissing Critical Home Care, Inc.'s independent accountant,
Marcum & Kliegman LLP. Marcum & Kliegman LLP was notified of its dismissal on
June 30, 2004. The reports of Marcum & Kliegman LLP on the consolidated
financial statements of Critical Home Care, Inc. as of September 30, 2003, and
the year then ended, contained a qualified opinion as to substantial doubt about
the ability of Critical Home Care, Inc. to continue as a going concern.
None of the events described in Regulation S-K 304(a)(1)(v) occurred during
the two most recent fiscal years and the subsequent period through and including
June 26, 2006.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures. Our chief executive officer and our chief
financial officer, after evaluating our "disclosure controls and procedures" (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")) have concluded that as of March 31, 2006, our
disclosure controls and procedures are effective to ensure that information we
are required to disclose in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms, and that
information is accumulated and communicated to our management, including our
chief executive officer and our chief financial officer, as appropriate to allow
timely decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
Changes in Internal Controls. During our fiscal quarter ended March 31, 2006,
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. Additional resources in the accounting, finance and information
technology departments of the Company have been added to accommodate the
Company's growth through acquisitions. The Company has acquired and has begun
the process to implement a comprehensive management information system during
the next 12 months to bolster timeliness and standardization of internal
information processing as well as continuing to improve existing systems
currently in use.
Item 9B. Other Information.
During our fiscal quarter ended March 31, 2006, there was no information
required to be disclosed in a report on Form 8-K that was not reported on Form
8-K.
Since the Company last filed a Current Report on Form 8-K, Item 3.02, on
March 27, 2006, the Company has not been required per Item 3.02(b) to report
unregistered sales of equity securities which in the aggregate constitute less
than one (1%) percent of the number of securities of the same class outstanding.
Notwithstanding, the Company hereby reports that from March 28, 2006 to June 26,
2006, the Company issued shares of its common stock pursuant to the following
transactions:
In April 2006, the Company issued 15,000 shares of its common stock valued at
$44,000 to a contracted entity for achievement of a specific, contractually
agreed upon, performance goal.
In April 2006, 29,582 shares of common stock valued at $73,000 vested in
compliance with outstanding restricted stock grant agreements as more fully
described in Note 9 of the audited financial statements included herein.
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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.
On June 7, 2006, the Company issued 73,388 shares of its common stock valued
at $188,000 and cash of $183,000, provided from operations, to pay its
obligation to the shareholders of Home Health Professionals under the earnout
provision of the respective purchase agreement dated April 29, 2005 as more
fully described in Note 4 of the audited financial statements included herein.
On June 22, 2006, the Company granted a total of 225,000 restricted shares of
the Company's common stock to three officers. The individual grants were as
follows: Rebecca Irish, Chief Financial Officer, 125,000 shares; James E.
Haifley, Executive Vice President, 50,000 shares; and, Cathy Sparling, Vice
President of Administration, 50,000 shares. The granted shares vest ratably each
quarter over four years, contain registration rights, are subject to
acceleration upon certain events occurring and contingent upon continued
employment through each vesting date. Pursuant to these agreements, 14,062
shares valued at $32,000 vested on June 22, 2006. The form of stock grant
agreement is attached as Exhibit 10.64.
Each of the above referenced issuances of shares of common stock were issued in
private placement transactions exempt from registration under the Securities Act
pursuant to Section 4(2) of the Securities Act of 1933 and/or Regulation D
because the transactions did not involve any public offering. The sales of these
securities were made without general solicitation or advertising. There was no
underwriter, and no underwriting commissions or discounts were paid. Further,
each securities certificate issued in each transaction bears a legend providing,
in substance, that the securities have been acquired for investment only and may
not be sold, transferred or assigned in the absence of an effective registration
statement or opinion of the Company's counsel that registration is not required
under the Securities Act of 1933. The shares issued in the referenced
transactions carry registration rights.
On June 16, 2006, the Company's Board of Directors appointed Peter Anthony
Brusca, M.D., and Anna Maria Nekoranec to the Board of Directors effective
July 1, 2006, to fill vacant director positions. The Board appointed Dr. Brusca
and Ms. Nekoranec as members of the Board's Audit Committee, commencing July 1,
2006. The Board determined that Dr. Brusca and Ms. Nekoranec each are
independent within the meaning of the Sarbanes-Oxley Act of 2002, its
implementing regulations, and the Charter of the Board's Audit Committee.
Director and Audit Committee Chairman John T. Thornton, whom the Board
previously determined qualifies as independent, will continue as Chairman of the
Audit Committee. So that the Company's Audit Committee will consist solely of
three independent directors, Director and Audit Committee member Lawrence R.
Kuhnert, who is also the Company's President and Chief Operating Officer, will
conclude his term of service as a member of the Audit Committee as of June 30,
2006. Dr. Brusca and Ms. Nekoranec will each be compensated for service on the
Board of Directors and the Audit Committee per the Company's compensation
arrangement for independent directors which consists of an annual retainer of
$25,000, payable at the individual's election in cash, options to purchase
shares of the Company's common stock or a combination thereof; and $1,000 per
each Board meeting attended and $500 per each committee meeting attended,
payable in shares of the Company's common stock. The forms of director
compensation and stock option agreements are attached as Exhibits 10.62 and
10.63, respectively.
On November 28, 2005, the Company agreed to sell for placement with two
European bank SICAV funds an aggregate of 2,222,222 shares of common stock for
aggregate consideration totaling $5,000,000. Due to the delays experienced, the
funds agreed on March 7, 2006 to increase the price per share to $2.55,
therefore increasing the total subscription to $5.7 million. The transactions
were terminated on June 20, 2006 by the Company for failure of the SICAV funds
to fund the transactions.
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