<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[Mark One]
X Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act
- --- of 1934
For the quarterly period ended September 30, 1998.
Transition report under Section 13 or 15 (d) of the Securities Exchange Act
- --- of 1934
For the transition period from __________to__________
Commission file number 333-1700
COMMUNITY CARE SERVICES, INC
(Exact Name of Small Business Issuer as
Specified in its Charter)
New York 13-3677548
(State or other Jurisdiction (I.R.S. Employer)
Incorporation or Organization).
18 Sargent Place
Mount Vernon, New York 10550
(Issuer's Telephone Number)
(914) 665-9050
NONE
(Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days.
Yes x No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documented and reports required to be
filed by Section 13 or 15 (d) of the Exchange Act after the distribution of
securities under a Plan confirmed by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 7,145,049
Transitional Small Business Disclosure Format (check one):
Yes x No
----- -----
<PAGE> 2
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
SECOND QUARTER REPORT ON FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL
INFORMATION
Item I. Financial Statements
Condensed Consolidated Balance Sheets at
September 30, 1998 (unaudited) and March 31, 2
1998
Condensed Consolidated Statements of
Operations for the Three and Six Months Ended
September 30,1998(unaudited) and 3
1997(unaudited)
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended September 30,
1998(unaudited) and 1997(unaudited) 4-5
Notes to Condensed Consolidated Financial 6-9
Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE> 3
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AT AT
SEPTEMBER 30, MARCH 31,
1998 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 517,000 $ 276,000
Accounts receivable,net of allowance for doubtful
accounts of $1,831,000 and $1,401,000 5,024,000 5,606,000
Income tax receivable -- 268,000
Inventory, net 617,000 669,000
Prepaid expenses and other current assets 211,000 127,000
Deferred tax asset, net 513,000 560,000
------------ ------------
TOTAL CURRENT ASSETS 6,882,000 7,506,000
Rental equipment, net 2,110,000 2,057,000
Property and equipment, net 1,267,000 1,065,000
Excess of purchase price over fair value of
net assets acquired, net 2,221,000 2,272,000
Covenants not to compete, net 416,000 487,000
Accounts and customer list, net 284,000 305,000
Other assets 65,000 57,000
Deferred taxes assets, net 69,000 69,000
------------ ------------
TOTAL ASSETS $ 13,314,000 $ 13,818,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES:
Note payable - Bank $ 2,500,000 $ 2,403,000
Accounts payable 2,837,000 2,820,000
Accrued expenses 1,069,000 1,138,000
Current portion of long term debt 1,326,000 1,865,000
Current portion of capital lease obligations 106,000 146,000
------------ ------------
TOTAL CURRENT LIABILITIES 7,838,000 8,372,000
Long term portion of debt 724,000 775,000
Long term portion of capital lease obligations 160,000 161,000
------------ ------------
TOTAL LIABILITIES 8,722,000 9,308,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 shares none issued
Common stock, $.01 par value; authorized 20,000,000 shares,
issued and outstanding 7,145,049 shares 71,000 71,000
Additional paid in capital 9,944,000 9,931,000
Accumulated deficit (5,423,000) (5,492,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 4,592,000 4,510,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,314,000 $ 13,818,000
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 4
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- Unaudited -
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET REVENUES $ 4,433,000 $ 5,005,000 $ 8,865,000 $ 9,238,000
----------- ----------- ----------- -----------
COST AND EXPENSES:
Cost of net revenues
Product and supply costs 1,629,000 1,433,000 3,218,000 3,350,000
Rental equipment depreciation 154,000 373,000 401,000 465,000
----------- ----------- ----------- -----------
Cost of net revenues 1,783,000 1,806,000 3,619,000 3,815,000
Selling, general and administrative 2,185,000 2,787,000 4,296,000 5,021,000
Provision for doubtful accounts 217,000 101,000 430,000 278,000
Amortization of intangible assets 100,000 114,000 199,000 205,000
----------- ----------- ----------- -----------
Total cost and expenses 4,285,000 4,808,000 8,544,000 9,319,000
OPERATING INCOME (LOSS) 148,000 197,000 321,000 (81,000)
Interest expense,net 106,000 147,000 214,000 179,000
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes 42,000 50,000 107,000 (260,000)
Provision (benefit) for income taxes 18,000 22,000 38,000 (115,000)
----------- ----------- ----------- -----------
NET INCOME (LOSS) 24,000 28,000 69,000 (145,000)
=========== =========== =========== ===========
Per share data :
Net income (loss) per common share:
Basic and diluted $ 0.00 $ 0.00 $ 0.01 $ (0.02)
=========== =========== =========== ===========
Weighted average number of shares outstanding 7,145,049 7,421,900 7,145,049 7,166,823
=========== =========== =========== ===========
Basic and diluted
</TABLE>
The accompanying notes are an intergral part of these condensed consolidated
financial statements.
3
<PAGE> 5
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- Unaudited -
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 69,000 $ (145,000)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization expense 670,000 670,000
Write off of rental equipment 37,000 22,000
Provision for doubtful accounts 430,000 278,000
Deferred tax asset 38,000 --
Non cash compensation 9,000 --
Changes in operating assets and liabilities net of effects
from Metropolitan Respirator Service, Inc. acquisition:
Accounts receivable 152,000 (1,009,000)
Inventory 52,000 (8,000)
Prepaid expenses and other current assets 184,000 (396,000)
Other assets (8,000) 51,000
Accounts payable and accrued expenses (52,000) 833,000
Income tax payable -- 203,000
----------- -----------
Net cash provided by operating activities 1,581,000 499,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of rental equipment (466,000) (495,000)
Acquisition of property and equipment (289,000) (354,000)
Acquisition, of Metropolitan Respirator Service, Inc. -- (4,411,000)
----------- -----------
Net cash (used in) investing activities (755,000) (5,260,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from promissory note 223,000 --
Proceeds of bank borrowings under credit line 150,000 1,980,000
Exercise of underwriters warrants 6,000 --
Repayments of credit line and term loan (53,000) (1,072,000)
Principal repayments of notes payable to suppliers (515,000) (67,000)
Repayments of former MRS stockholders notes (156,000) --
Principal repayments of notes payable to Adam
Health Care Equipment Corp. (142,000) (118,000)
Principal repayments of capital lease obligations (98,000) (186,000)
----------- -----------
Net cash (used in) provided by financing activities (585,000) 537,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 241,000 (4,224,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 276,000 4,648,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 517,000 $ 424,000
=========== ===========
</TABLE>
(continued)
4
<PAGE> 6
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- Unaudited -
(continued)
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period
Interest $ 203,000 $ 130,000
----------- -----------
Taxes $ -- $ 45,000
----------- -----------
SUPPLEMENTARY DISCLOSURES OF NON CASH ACTIVITIES:
Rental equipment acquired under capital lease 40,000 24,000
Property and equipment acquired under capital lease 20,000 103,000
Conversion of trade payables into notes payable -- 281,000
The Company purchased Metropolitan Respirator Service, Inc. for $8,791,000
(including cash payments of $4,411,000) The purchase price was allocated
to the assets and and liabilities assumed based on their fair value as
follows:
Current assets 3,771,000
Rental equipment 434,000
Property, plant and equipment 181,000
Other assets 947,000
Excess of purchase price over net assets acquired 6,527,000
Customer List 225,000
Non Compete Covenant 360,000
Current liabilities (3,431,000)
Long term liabilities (223,000)
-----------
8,791,000
Less:
Promissory notes issued (3,066,000)
Common stock issued (1,314,000)
-----------
Cash paid to acquire Metropolitan Respirator Service, Inc. $ 4,411,000
-----------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 7
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE A) - ORGANIZATION AND BACKGROUND
[1] Organization
Community Care Services, Inc., ("CCS") was incorporated in July 1992 in
the State of New York. CCS and its wholly owned subsidiary, Metropolitan
Respirator Service, Inc. ("MRS"), collectively, "The Company", provide home
health care services and products consisting primarily of respiratory equipment,
rental and sale of durable medical equipment and sells home health care supplies
primarily in the five boroughs of New York City, and Westchester, Rockland and
Nassau Counties in New York State, as well as northern New Jersey. The condensed
consolidated financial statements include information regarding both CCS and its
wholly owned subsidiary, MRS. Intercompany balances and transactions have been
eliminated in consolidation.
The condensed consolidated financial statements of the Company for the
three and six months ended September 30, 1998 and 1997 included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management of the Company, the accompanying
unaudited condensed consolidated financial statements reflect all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the consolidated financial position at September 30, 1998, the results of
operations for the three and six months ended September 30, 1998 and 1997, and
the cash flows for the six months ended September 30, 1998 and 1997.
The results of operations for the three and six months ended September 30,
1998 and 1997 are not necessarily indicative of the operating results for the
entire respective years. These condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended March 31, 1998 as filed with the Securities and Exchange Commission.
[2] Investigation by U.S. Department of Justice and New York State Department
of Health
On June 4, 1997, a search warrant was executed at the Company's executive
offices. The Company was informed that its then Chief Executive Officer and then
Chief Operating Officer and the Company itself are targets of a Department of
Justice criminal investigation for allegedly improper payments relating to a
contract, involving Medicare, to provide healthcare services outside of New York
State. If the Company is charged with criminal wrongdoing and it is determined
that the Company engaged in criminal wrongdoing, the Company will be subject to
criminal penalties, which may include a fines of up to $1,000,000 or more and an
order of restitution, would be terminated as a Medicaid and Medicare services
provider, and could also be at the risk of having its contracts with private
insurers and other non-governmental agencies terminated. Additionally, even if
the Company is not charged with criminal wrongdoing itself, but one of its past
or present officers or employees are convicted of crimes related to their
employment, the Company could be terminated as a Medicaid and Medicare provider.
In these circumstances, although the Company would not be subjected to automatic
exclusion from such programs, it could be at risk of having its contracts with
private insurers and other non-governmental agencies terminated. If such
occurred, it would have a material adverse effect on the
6
<PAGE> 8
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Company's business, results of operations, and financial condition and the
Company may not be able to continue as a going concern. The Company has
cooperated with the government in the Department of Justice criminal
investigation and has incurred legal expenses related thereto of $37,000 for the
three months ended September 30, 1998 and $301,000 for the fiscal year ended
March 31, 1998.
The New York State Department of Health ("DOH") performs audits and
investigations of the New York State Medicaid Program. The New York State
Department of Social Services ("DSS") previously performed this function. The
DSS recently was abolished as a result of recent New York State legislation.
Prior to the abolishment of DSS, that agency, on May 16, 1997, issued a Draft
Notice of Proposed Agency Action and Draft Audit Report regarding the Company
("The Draft Notice"). Pursuant to the Draft Notice, DSS sought recovery of
$227,000 from the Company as well as exclusion of the Company as a provider
under the New York State Medicaid program. Pursuant to DOH's process, the
Company, through its healthcare regulatory counsel, submitted a detailed
response to the Draft Notice. DOH thereafter reviewed its draft findings and
recommendations and issued a final Notice. Pursuant to which DOH reduced the
amount of the proposed audit recovery to $83,978. DOH has also withdrawn it's
intention to exclude the Company as a provider under the New York State Medicaid
program. DOH has issued an advisory to the Company that continued performance
issues of the type or nature addressed in the audit could result in a severe
sanction in the future.
[3] Net Income Per Share
The basic calculation is determined by dividing net income (loss)
attributable to common shares outstanding (the basic numerator) by the weighted
average number of common shares outstanding (the basic denominator) during the
period.
The diluted calculation is determined by adjusting the basic numerator to
add back the after tax amount of interest recognized in the period associated
with potentially issued common shares and for any other changes in income or
loss that would result from the assumed conversion or exercise of potentially
issued common shares. Additionally, the basic denominator is increased to
include the additional number of common shares that would be outstanding if the
potentially issued common shares had been issued, if dilutive. Potentially
issued common shares, consisting of options, warrants and convertible notes are
not included in this calculation where the effect of the inclusion would be
antidilutive. The treasury stock method is used to reflect the dilutive effect
of outstanding options and warrants.
[4] Reclassifications
Certain reclassifications have been made to the 1997 financial statements
to conform to the 1998 presentation.
7
<PAGE> 9
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(NOTE B) - ACQUISITIONS
[1] Metropolitan Respirator Service, Inc.
On May 10, 1997, the Company acquired 68% of the outstanding shares of
MRS. MRS was incorporated on April 15, 1974. The purchase price was
approximately $5,993,000, consisting of approximately $2,800,000 in cash, of
Promissory Notes ("Promissory Notes") with a face value of $2,967,000 accruing
interest at a rate of 6% per annum, a portion of which was issued to certain MRS
employees (including a Promissory Note for $444,000 issued to Wade Wilson, the
brother-in-law of Alan T. Sheinwald, who at the time was the President and Chief
Executive Officer of the Company), and 62,243 shares of the Company's common
stock with a value of $226,000. The notes are payable in two payments. On
January 2, 1999, one half of the principal and accrued interest is payable and
the remaining one half of the principal and accrued interest is payable January
2, 2000. In lieu of cash payment, the Promissory Notes holder ("Note Holder")
may elect to convert up to eighty percent (80%) of the outstanding principal
balance of the Promissory Notes and the accrued interest thereon payable on the
dates set forth above into shares of common stock, par value $.01 per share
based on a valuation of $4.00 per share, irrespective of the actual market value
of the shares on the date of such conversion. If the Note Holder does not make
such election, the Company may do so. With respect to the remaining twenty (20%)
of the payment due, the Note Holder may, but is not obligated to, require that
such amount be converted into shares or take such payment in cash. In the
aggregate, the Promissory Notes and accrued interest may be converted into a
maximum of 897,000 shares of common shares of the Company.
Also on May 10, 1997, the Company purchased the remaining 32% of the
outstanding shares of MRS in a separate transaction. The purchase price was
approximately $2,487,000 consisting of $1,300,000 in cash, 300,000 shares of
common shares of the Company with a value of $1,087,000 and a one year
Promissory Note with a face value of $100,000 accruing interest at a rate of 6%
payable quarterly.
On March 1, 1998, Messrs. Louis Rocco and Donald Fargnoli, officers of the
Company and former owners of MRS, who were issued Promissory Notes by the
Company in the amounts of $1,302,000 and $1,176,000, respectively, surrendered
their Promissory Notes. In consideration for such action, the Company converted
eighty percent of the Promissory Notes into shares of its common stock, with
Messrs. Rocco and Fargnoli receiving 293,056 shares and 264,750 shares,
respectively and cash payments of $73,000 and $66,000, respectively. The
remaining amount of the Promissory Notes and interest thereon will be repaid
monthly. Messrs. Rocco and Fargnoli will receive monthly payments of $10,000 and
$9,000, respectively. On May 8, 1998, Mr. Fargnoli resigned from his positions
with the Company and entered into a Consulting Agreement for a term of two years
expiring on May 9, 2000, for a fee of $55,000 per year.
8
<PAGE> 10
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Unaudited pro forma summary of data for the six months ended September 30,
1997, assuming the acquisition of MRS had taken place on April 1, 1997, is as
follows:
<TABLE>
<S> <C>
Net revenues $ 10,236,000
Net (loss) income $ (893,000)
Net (loss) income per common share - basic and diluted $ (0.12)
</TABLE>
[2] Adam Health Care Equipment Corp.
On April 14, 1997, the Company entered into a Settlement Agreement and
Release discharging its lawsuit against Adam Health Care Equipment Corp.
("Adam") and its principals and all counterclaims made by Adam against the
Company. As part of the settlement the Company agreed to pay Adam the sum of
$1,450,000, of which $725,000 was paid immediately, with the balance payable
over a 36-month period, bearing interest at the rate of 9% per annum.
Additionally, a new covenant not to compete covering a period of five years was
entered into with certain principals of Adam in exchange for $250,000, of which
$125,000 was paid immediately and the balance is payable over three years.
(NOTE C) - CONSULTING AGREEMENT
On August 24, 1998, the Company entered into a six-month consulting
agreement with Harris G. LeRoy II ("the consultant") to provide a strategic
operating overview of the Company. Mr. LeRoy will receive $1,000 a day along
with 1,000 stock options per day. The exercise price of the options is $1.31
which is the average closing price of the Company's common stock during the
month of August, 1998. The options shall accumulate and be issued to the
consultant upon the expiration or the earlier termination of the agreement.
Fifty percent (50%) of the total number of options that the consultant is
eligible to receive are guaranteed by the Company. The issuance of the
remaining fifty percent (50%) of the options are subject to the discretion of
the Board of Directors of the Company, which may elect to grant the
consultant all, none, or a portion of such options. The Company recorded a
charge to earnings of approximately $9,000 in the period ended September 30,
1998 representing the value of 10,500 options earned during such period, and
will incur additional future charges to earnings.
9
<PAGE> 11
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
PART 1 - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD LOOKING STATEMENTS
From time to time the Company may publish forward-looking statements
related to such matters as anticipated financial performance and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. These statements are typically identified
by the inclusion of phrases such as "the Company anticipates," "the Company
believes", "Management believes", and other phrases of similar meaning. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. The
Company is subject to significant external factors which could significantly
impact its business, including changes in Medicare, Medicaid, and private pay
reimbursement, government fraud and abuse initiatives and other such factors
which are beyond the control of the Company. Certain of these factors are
discussed herein. These factors, as well as future changes in reimbursement and
changes in interpretations of regulations, could cause future results to differ
materially from historical trends and management's current expectations.
INVESTIGATIONS BY U.S. DEPARTMENT OF JUSTICE AND NEW YORK STATE DEPARTMENT OF
HEALTH
If it is determined in the investigations by the U.S. Department of
Justice and the New York State Department of Health that the Company engaged in
criminal wrongdoing, the Company would be subject to criminal penalties. In
addition, if it is determined that the Company engaged in criminal wrongdoing,
the Company would be terminated as a Medicaid and Medicare services provider,
and will be at risk of having its contracts with private insurers and other
non-governmental agencies terminated. Additionally, even if the Company is not
charged with criminal wrongdoing itself, but one of its past or present
officers or employees are convicted of crimes relating to their employment, the
Company could be terminated as a Medicaid and Medicare provider. In these
circumstances, although the Company would not be subject to automatic exclusion
from such programs, it could be at risk of having its contracts with private
insurers and other non-governmental agencies terminated. If such occurred, it
would have a material adverse effect on the Company's business, results of
operations, and financial condition and the Company may not be able to continue
as a going concern.
MEDICAL REIMBURSEMENT FOR OXYGEN THERAPY SERVICES
The Balanced Budget Act (the "Budget Act") was signed by President Clinton
on August 5, 1997. The Budget Act provides for reductions in Medicare
reimbursement rates for oxygen and certain oxygen equipment. Oxygen
reimbursement rates were reduced to seventy five percent (75%) of their 1997
levels, beginning January 1, 1998 and will be further reduced to seventy
percent (70%) of their 1997 levels beginning
10
<PAGE> 12
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
January 1, 1999. In addition, Consumer Price Index increases in oxygen
reimbursement rates will not resume until the year 2003.
The results for the six months ended September 30, 1998 reflect the
reduction for the aforementioned Medicare reimbursement rates as compared to the
six months ended September 30, 1997 which does not reflect the reductions since
they did not go into effect until January 1, 1998.
THREE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
1997
NET REVENUES - Net revenues decreased by approximately $572,000 or 11.4 %
to $4,433,000 for the three months ended September 30, 1998 from $5,005,000 for
the three months ended September 30, 1997. The decrease in net revenues was
primarily attributable to certain external factors that continued to impact the
Company including, the reductions in the oxygen reimbursements rates as a result
of the Budget Act, reductions in reimbursement rates by certain third party
payors and a reduction in referral based business.
COST OF NET REVENUES - Cost of net revenues decreased by approximately
$23,000 or 1.3% to $1,783,000 for the three months ended September 30, 1998 from
$1,806,000 for the three months ended September 30, 1997. Cost of net revenues
increased as a percentage of net revenues to 40.2% for the three months ended
September 30, 1998 from 36.1% for the three months ended September 30, 1997.
This increase in cost of net revenues, as a percentage of net revenues, for the
three months ended September 30, 1998 is primarily attributable to the change in
the mix of net revenues and the decrease in the oxygen reimbursement rates
resulting from the Budget Act.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative
expenses decreased by approximately $602,000 or 21.6% to $2,185,000 for the
three months ended September 30, 1998 from $2,787,000 for the three months ended
September 30, 1997, and also decreased as a percentage of net revenues to 49.3%
from 55.7%. The reduction in selling, general and administrative expenses as a
percentage of net revenues is primarily attributable to decreases in operating
expenses relating to the consolidation of operations, and the reduction of
personnel.
For the three months ended September 30, 1998 and 1997, the Company
incurred approximately $14,000 and $95,000 respectively, of legal expenses
related to the investigation by the U. S. Department of Justice (See Note A[2]).
OPERATING INCOME (LOSS) - The Company generated operating income of
approximately $148,000 for the three months ended September 30, 1998 as compared
to an operating income of $197,000 for the three months ended September 30,
1997.
INTEREST EXPENSE, NET - Interest expense, net decreased by approximately
$41,000 to $106,000 for the three months ended September 30, 1998 from $147,000
for the three months ended September 30, 1997. This decrease was due to a lower
overall outstanding debt balance as a result of the conversion of MRS
stockholders notes. (See Note B).
11
<PAGE> 13
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NET (LOSS) INCOME - The Company had a net income of approximately $24,000
for the three months ended September 30, 1998 as compared with net income of
$28,000 for the three months ended September 30, 1997.
SIX MONTHS ENDED SEPTEMBER 30, 1998 VERSUS SIX MONTHS ENDED SEPTEMBER 30, 1997
NET REVENUES - Net revenues decreased by approximately $373,000 or 4.0 %
to $8,865,000 for the six months ended September 30, 1998 from $9,238,000 for
the six months ended September 30, 1997. The decrease in net revenues was
primarily attributable to certain external factors that continued to impact the
Company including, the reductions in the oxygen reimbursements rates as a result
of the Budget Act, reductions in reimbursement rates by certain third party
payors and a reduction in referral based business.
COST OF NET REVENUES - Cost of net revenues decreased by approximately
$196,000 or 5.1% to $3,619,000 for the six months ended September 30, 1998 from
$3,815,000 for the six months ended September 30, 1997. Cost of net revenues
decreased as a percentage of net revenues to 40.8% for the six months ended
September 30, 1998 from 41.3% for the six months ended September 30, 1997. This
decrease in cost of net revenues as a percentage of net revenues for the six
months ended September 30, 1998 is primarily attributable to the change in the
mix of net revenues and the decrease in the rental equipment depreciation.
SELLING, GENERAL AND ADMINISTRATIVE - Selling, general and administrative
expenses decreased by approximately $725,000 or 14.4% to $4,296,000 for the six
months ended September 30, 1998 from $5,021,000 for the six months ended
September 30, 1997, and also decreased as a percentage of net revenues to 48.5%
from 54.4%. The reduction in selling, general and administrative expenses is
primarily attributable to decreases in operating expenses relating to the
consolidation of operations and the reduction of personnel.
For the six months ended September 30, 1998 and 1997, the Company incurred
approximately $37,000 and $273,000, respectively, of legal expenses related to
the investigation by the U. S. Department of Justice (See Note A[2]).
OPERATING INCOME (LOSS) - The Company generated operating income of
approximately $321,000 for the six months ended September 30, 1998 as compared
to an operating loss of $81,000 for the six months ended September 30, 1997.
INTEREST EXPENSE, NET - Interest expense, net increased by approximately
$35,000 to $214,000 for the six months ended September 30, 1998 from $179,000
for the three months ended September 30, 1997. This increase was due to an
increase in outstanding indebtedness related to the Company's line of credit
with the Bank of New York, notes payable to vendors, and notes issued to Adam
and to former MRS stockholders (See Note B).
12
<PAGE> 14
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NET (LOSS) INCOME - The Company had a net income of approximately $69,000
for the six months ended September 30, 1998 as compared with net loss of
$145,000 for the six months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased to a deficiency of approximately $957,000 at
September 30, 1998 from a working capital deficiency of $866,000 at March 31,
1998. The current ratio decreased slightly t0 .88 at September 30, 1998 from .90
at March 31, 1998.
Net cash provided by operating activities was approximately $1,581,000 for
the six months ended September 30, 1998 compared with net cash provided by
operating activities of approximately $499,000 for the six months ended
September 30, 1997. The increase of approximately $1,082,000 was primarily
attributable to the decreases in accounts payable and accrued expenses, prepaid
expenses and other current assets, and accounts receivable.
Net cash used in investing activities was approximately $755,000 for the
six months ended September 30, 1998, compared with approximately $5,260,000 for
the six months ended September 30, 1997. The decrease of approximately
$4,505,000 is primarily attributable to the acquisition of MRS in the six months
ended September 30, 1997 offset by decreases in additions of rental equipment
and property and equipment in the six months ended September 30, 1998.
Net cash used in financing activities was approximately $585,000 for the
six months ended September 30, 1998, compared with net cash provided by
financing activities of approximately $537,000 for the six months ended
September 30, 1997. The decrease of approximately $1,122,000 was primarily
attributable to an increase in repayments to former MRS stockholders, Adam, and
supplier notes, in conjunction with decreases in credit line borrowings and
repayments.
The Company's future liquidity will continue to be dependent upon the
relative amounts of current assets (principally cash, accounts receivable and
inventories) and current liabilities (principally accounts payable and accrued
expenses). In that regard, accounts receivable can have a significant impact on
the Company's liquidity. The Company has various types of accounts receivable,
such as receivables from patients and contracts. Accounts receivable are
generally outstanding for longer periods of time in the health care industry
than many other industries because of requirements to provide third party payors
with additional information subsequent to billing and the time required by such
payors to process claims. Certain accounts receivable frequently are outstanding
for more than 90 days.
Recently there has been consolidation within the New York Metropolitan
area in the industry in which the Company operates. Such recent consolidation
may limit the Company's ability to maintain or increase its market share and
could materially adversely affect its business, results of operations and
financial condition.
13
<PAGE> 15
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company currently has a $2,500,000 line of credit with the Bank of New
York with interest payable at the prime rate. As of September 30, 1998,
approximately $2,500,000 was drawn down under the line. In July 1997, The Bank
of New York notified the Company that it put a $2,500,000 cap on borrowings
until the uncertainty surrounding the Federal Investigation of the Company was
resolved. Subsequently, on October 22, 1998, the bank reconfirmed the cap on the
credit line with the Company at $2,500,000.
The Company believes that internally generated funds will provide
sufficient liquidity and enable it to meet its currently foreseeable working
capital requirements for at least the next twelve months. However, the Company
may need to obtain additional financing to continue its operations. There can be
no assurance that additional financings will be available if and when needed by,
or on terms acceptable to, the Company. Potential sources for any such
financings have not yet been identified. Furthermore, as indicated above, if in
connection with the Federal Investigation, the Company is found to have engaged
in criminal wrongdoing and/or is terminated as a Medicaid and Medicare provider,
it would have a material adverse effect on the Company's business, results of
operations and financial condition, and the Company may not be able to continue
as a going concern.
SEASONALITY
The Company generally has not experienced seasonal fluctuation.
INFLATION
The Company has not experienced large increases in either the cost of
supplies or operating expenses due to inflation. Because of restrictions by
government and private medical insurance programs and the pressures to contain
the growth in the costs of such programs, the Company bears the risk that
reimbursement rates set by such programs will not keep pace with inflation. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Medical Reimbursement for Oxygen Therapy Services").
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruption of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the Company determined that it would be
required to modify or replace significant portions of its software so that its
computer systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications to existing software and
conversions to new software, the Year 2000 Issue can be mitigated. However, if
such
14
<PAGE> 16
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
modifications and conversions are not made, or are not completed timely, the
Year 2000 Issue could have a material impact on the operations of the Company.
The Company is in the process of assessing the impact of the Year 2000
issue on its information technology systems and devices that contain embedded
microprocessors to operate. The Company plans to complete this assessment by
January 31, 1999.
The Company has inquired with all of its significant suppliers and large
customers to determine the extent to which the Company is vulnerable to those
parties' failure to remediate their own Year 2000 Issue. The Company's total
Year 2000 project cost and estimates to complete include the estimated costs and
time associated with the impact of relevant other parties' Year 2000 Issue, and
are based on presently available information. However, there can be no guarantee
that the systems of other companies on which the Company's systems rely will be
timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems, would not have
material adverse effect on the Company.
The Company will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications. The
Company plans to complete the Year 2000 project by March 31, 1999. The total
cost of the Year 2000 modifications is estimated at $1,115,000 and is being
funded by a credit line. To date, the Company has incurred costs of $679,000
related to the assessment of, and preliminary efforts in connection with, its
Year 2000 project and the development of a remediation plan.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
others factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
15
<PAGE> 17
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
PART II-OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Information concerning legal matters in incorporated by reference from
Part I, Note A[2] of Notes to the Condensed Consolidated Financial
Statements.
The Company is currently subject to review by the New York State Attorney
General's Medicaid Fraud Control Unit. In response to a subpoena duces
tecum issued by the Medicaid Fraud Control Unit in September 1996, the
Company has produced a substantial number of documents and provided its
full cooperation. The review is pending and the Company has not been
advised of any determination by the Medicaid Fraud Control Unit. Several
other providers of medical equipment and supplies in the same geographic
area have recently been subject to similar reviews.
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
The Company's Chief Financial Officer and Secretary, Joel Quall resigned
effective October 23, 1998. Elia Guarneri, the Company's Corporate
Controller has been appointed to serve as the Interim Chief Financial
Officer.
On October 5, 1998 the Company terminated the employment of Wade Wilson
Senior Vice President, Operations Systems. Mr. Wilson is continuing to
provide consultant services on a per diem basis.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8K
None
16
<PAGE> 18
COMMUNITY CARE SERVICES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 14th day of November 1998.
COMMUNITY CARE SERVICES, INC
-------------------------------
(Registrant)
/s/ Saverio D. Burdi
-------------------------------
Saverio D. Burdi,
Chief Operating Officer
/s/ Elia C. Guarneri
-------------------------------
Interim Chief Financial Officer
and Principal Financial &
Accounting Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENT OF INCOME OF THE COMPANY AS OF AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BE REFERENCED TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 517,000
<SECURITIES> 0
<RECEIVABLES> 6,855,000
<ALLOWANCES> 1,831,000
<INVENTORY> 617,000
<CURRENT-ASSETS> 6,882,000
<PP&E> 1,267,000
<DEPRECIATION> 99,000
<TOTAL-ASSETS> 13,314,000
<CURRENT-LIABILITIES> 7,839,000
<BONDS> 0
0
0
<COMMON> 71,000
<OTHER-SE> 9,944,000
<TOTAL-LIABILITY-AND-EQUITY> 13,314,000
<SALES> 8,865,000
<TOTAL-REVENUES> 8,865,000
<CGS> 3,619,000
<TOTAL-COSTS> 8,544,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 214,000
<INCOME-PRETAX> 107,000
<INCOME-TAX> 38,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,000
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
