<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 30, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______ to _______
Commission File Number: 0-20881
HEALTHCOR HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 75-2294072
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8150 North Central Expressway, Suite M-2000, Dallas, Texas 75206
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 692-4663
---------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ x ] No [ ]
As of September 30, 1998 approximately 10,095,180 shares of Common Stock
were issued and outstanding.
Total number of sequentially numbered pages 18
Exhibit Index on sequentially numbered page 16
1
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- --------------------------------------------------------------------------------
The unaudited condensed consolidated financial statements include the
accounts of HealthCor Holdings, Inc. and subsidiaries (the "Company") and have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation in the following financial
statements have been included. These condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and the related notes for the year ended December 31, 1997, included in the
Company's Report on Form 10-K, as filed with the Securities and Exchange
Commission.
2
<PAGE> 3
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
------------- -------------
ASSETS 1998 1997
------------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................ $ 960,593 $ 21,820,308
Accounts receivable, net ................................................. 42,728,616 38,635,806
Federal income tax receivable ............................................ 178,087 5,828,888
Supplies inventory ....................................................... 4,938,198 4,258,834
Deferred income taxes .................................................... -- 973,233
Prepaid expenses and other assets ........................................ 1,952,612 1,358,026
------------- -------------
Total current assets .............................................. 50,758,106 72,875,095
Property and equipment, net ................................................ 27,215,605 29,131,578
Excess of cost of acquired businesses over fair values of
net assets acquired, net .................................................. 42,719,513 48,085,306
Other assets ............................................................... 3,385,287 3,121,044
------------- -------------
Total assets ...................................................... $ 124,078,511 $ 153,213,023
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued payroll and related expenses ..................................... $ 6,548,045 $ 8,130,484
Accounts payable and accrued expenses .................................... 12,483,745 11,099,771
Current portion of long-term debt ........................................ 5,152,637 1,576,502
Income taxes payable ..................................................... 305,000
Current portion of capital lease obligations ............................. 3,354,124 6,738,548
------------- -------------
Total current liabilities ......................................... 27,538,551 27,850,305
Other long-term liabilities ................................................ 5,787 4,063,260
Long-term debt ............................................................. 358,608 644,236
11% Senior Notes ........................................................... 80,000,000 80,000,000
Capital lease obligations .................................................. 1,115,383 1,393,691
------------- -------------
Total liabilities ................................................. 109,018,329 113,951,492
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 40,000,000 shares authorized; 10,095,180 and
10,089,346 shares issued and outstanding at June 30, 1998 and December
31,1997, respectively ................................................... 100,951 100,893
Additional paid-in capital ................................................ 39,908,756 39,906,814
Retained deficit .......................................................... (24,949,525) (746,176)
------------- -------------
Total stockholders' equity ........................................ 15,060,182 39,261,531
------------- -------------
Total liabilities and stockholders' equity ........................ $ 124,078,511 $ 153,213,023
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheets
3
<PAGE> 4
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net revenues ............................... $ 30,259,142 $ 34,313,884 $ 62,941,518 $ 68,078,592
Direct expenses ............................ 15,896,154 17,726,364 33,697,597 31,530,002
------------ ------------ ------------ ------------
Gross profit ............................... 14,362,988 16,587,520 29,243,921 36,548,590
Other costs and expenses:
General and administrative ................ 14,721,942 15,687,804 28,954,630 29,834,098
Depreciation and amortization ............. 6,312,611 1,237,347 7,745,525 2,330,313
Provision for doubtful accounts ........... 9,169,462 3,731,372 11,513,088 4,777,915
------------ ------------ ------------ ------------
Total costs and expenses ............ 30,204,015 20,656,523 48,213,243 36,942,326
------------ ------------ ------------ ------------
Loss from operations ........................ (15,841,027) (4,069,003) (18,969,322) (393,736)
Interest expense, net ....................... 2,675,573 1,115,933 5,035,371 1,777,464
------------ ------------ ------------ ------------
Loss before income taxes .................... (18,516,600) (5,184,936) (24,004,693) (2,171,200)
Provision (credit) for income taxes ......... 198,655 (1,848,919) 198,655 (643,445)
------------ ------------ ------------ ------------
Net loss .................................... $(18,715,255) $ (3,336,017) $(24,203,348) $ (1,527,755)
============ ============ ============ ============
Net loss per common share ................... $ (1.85) $ (.33) $ (2.40) $ (.15)
============ ============ ============ ============
Weighted average common shares outstanding... 10,094,861 10,041,104 10,092,478 10,032,309
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
<PAGE> 5
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
June 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ..................................................................... $(24,203,348) $ (1,527,755)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization ............................................. 9,361,105 3,792,206
Proceeds on disposition on assets ......................................... 4,003 17,792
Changes in operating assets and liabilities, net of acquired businesses:
Accounts receivable, net ................................................ (4,092,905) (7,631,427)
Prepaid expenses and other assets ....................................... (1,544,924) 653,361
Deferred income taxes ................................................... -- (760,253)
Accounts payable and accrued expenses ................................... (3,282,707) (1,859,645)
Deferred revenue ........................................................ -- (1,069,599)
Income taxes ............................................................ 5,301,801 (2,024,896)
------------ ------------
Net cash used in operating activities ................................ (18,412,975) (10,410,216)
------------ ------------
Cash flows from investing activities:
Payments and adjustments for business acquisitions,
net of cash acquired .................................................... 53,421 (13,433,786)
Additions to property and equipment .......................................... (2,052,427) (2,820,414)
------------ ------------
Net cash used in investing activities ................................ (1,999,006) (16,254,200)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of debt ............................................... 15,946,236 28,446,579
Payments on debt and capital lease obligations ............................... (16,395,970) (2,919,022)
Issuance of common stock ..................................................... 2,000 224,231
------------ ------------
Net cash used in financing activities ................................ (447,734) 25,751,788
------------ ------------
Net decrease in cash and cash equivalents ...................................... (20,859,715) (912,628)
Cash and cash equivalents, beginning of period ................................. 21,820,308 (184,264)
------------ ------------
Cash and cash equivalents, end of period ....................................... $ 960,593 $ (1,096,892)
============ ============
Supplemental disclosure of cash flow information:
Debt issued in acquisitions ................................................... $ -- $ 1,450,000
Liabilities and debt assumed in acquisitions .................................. -- 876,756
Issuance of capital lease obligations ......................................... 77,510 2,060,066
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
<PAGE> 6
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed consolidated financial statements include the
accounts of HealthCor Holdings, Inc. and subsidiaries (the "Company") for the
three and six months ended June 30, 1998 and 1997. All significant intercompany
transactions have been eliminated. Direct expenses on the statements of income
include all costs directly related to the production of net revenues, such as
salary and related benefit costs, depreciation of hand-held point-of-care
computers, billable medical supplies, product purchase costs, and rental
equipment depreciation. Depreciation costs not directly attributable to the
generation of net revenues are included in other costs and expenses. The
accompanying unaudited condensed consolidated financial statements and notes
should be read in conjunction with the Company's consolidated financial
statements and related notes included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997. Certain amounts in the statements of
income have been reclassified from earlier presentations.
2. Basis of Reporting
The Company recorded a net loss of approximately $(15.6) million during
1997 and a net loss of approximately $(24.2) million for the six months ended
June 30, 1998 and had negative cash flow from operations for both periods. The
Company expects to report additional net losses and negative cash flow amounts
for the remainder of 1998. These factors have negatively impacted the Company's
overall liquidity position in 1998 raising uncertainties about the Company's
ability to continue as a going concern.
Management has taken the following actions with respect to these
matters: (i) established a secured working capital finance relationship (see
note 4.), (ii) obtained additional equipment lease finance facilities, (iii)
substantially reduced its on-going loss exposure from Medicare nursing
operations (see "Management's Discussion and Analysis of Financial Condition and
Results of Operation - Overview"), (iv) identified opportunities to reduce
corporate operating expenses, (v) accelerated realization of approximately $5.8
million of cash flow from tax positions and (vi) identified non-core business
operations for sale. The Company has also engaged the services of an investment
bank to assist it in evaluating various approaches to strengthen and grow the
Company. Management is actively pursuing recapitalization, merger or sale of the
Company.
The unaudited condensed consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amounts and classification of liabilities should
the Company be unable to continue as a going concern. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources")
3. 11% Senior Notes:
On December 1, 1997, an offering of senior notes was completed to
refinance indebtedness outstanding under the previous bank credit facility. The
Company sold $80 million principal amount of 11% Senior Notes due December 1,
2004 (the "Senior Notes") to qualified institutional buyers in reliance on the
exemption from the registration requirements of the Securities Act of 1933
provided by Rule 144. The Senior Notes bear interest at the rate of 11% per
annum, payable in arrears on June 1 and December 1 of each year, commencing June
1, 1998. The Company filed a Form S-4 registration statement with the Securities
and Exchange Commission to register the Senior Notes so the original restricted
notes may be exchanged, at the option of the holder, for identical notes without
resale or transfer restrictions. The exchange offer was completed during the
second quarter of 1998. The Indenture under the Senior Notes prohibits the
Company from incurring additional indebtedness (other than certain limited
permitted indebtedness) or issuing preferred equity instruments unless the
consolidated fixed charge ratio is greater than 2.0 to 1. At June 30, 1998, the
Company's consolidated fixed charge ratio is less than 2.0 to 1. The Indenture,
however, does permit the Company to incur indebtedness under any credit facility
in an amount not to exceed $20.0 million. (See Note 4.)
6
<PAGE> 7
4. Borrowings:
During the second quarter of 1998, the Company replaced its revolving
credit line with a two-year secured line of credit with a maximum availability
of $15 million and a current availability of $10.5 million. Advances are based
on 80% of the net collectable value of the Company's accounts receivable and a
pledge of a company subsidiary. "Net Collectable Value" is defined as the amount
the Company bills third party payors less patient co-payments and deductible
obligations and contractual allowances established by the Company and acceptable
to the lender. Interest on the outstanding balance of the facility is payable
monthly at an annual rate of the prime rate plus two percent. The Company also
pays a collateral management fee of 0.083% per month on the average outstanding
balance. Collections of receivables by the Company are credited to the facility
on a daily basis. Advances under this facility may be used to finance the
working capital and general corporate requirements of the Company. As of
September 25, 1998, the Company had approximately $9.8 million outstanding under
the line.
.
5. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128 entitled "Earnings
Per Share" which requires publicly held companies with potentially dilutive
securities to change their earnings per share computation for years ending after
December 15, 1997, and show a basic earnings per share (based on the weighted
average number of common shares outstanding) and a diluted earnings per share
(based on the weighted average number of common shares outstanding plus the
effect of all dilutive securities, such as stock options and warrants). The
Company adopted SFAS No. 128 in the fourth quarter of 1997. Due to the net loss
for all periods presented, basic and diluted net loss per common share are the
same.
6. Income Taxes
As a result of the net loss recorded during the six months ended June
30, 1998, and the inability to carry the net loss back to prior periods, the
Company did not record a federal income tax benefit for the six months ended
June 30, 1998.
7. Writedown of Goodwill
In connection with the Company's decision during the second quarter of
1998 to close substantially all of the remaining Medicare nursing offices, the
Company determined that an impairment existed at June 30, 1998 with respect to
the recorded goodwill amounts associated with the Medicare nursing programs.
Accordingly, the Company recorded a charge of $4.8 million during the second
quarter to reduce the goodwill associated with the Medicare nursing programs to
zero. This charge is recorded in depreciation and amortization expense in the
accompanying unaudited condensed consolidated statements of income.
8. Amounts Due Medicare
As of June 30, 1998, the Company estimated payables (cost report and
PIP overpayment) on demand to Medicare of approximately $7.4 million. The
Company is in the process of confirming the liability and negotiating with
Medicare for extended repayment. Although management expects Medicare to agree
to a revised payment plan, there is no assurance at this time that the proposed
items will be accepted by Medicare.
7
<PAGE> 8
9. Litigation
On March 20, 1998, the Company and several of its current and former
officers were named as defendants in a lawsuit alleging certain violations of
federal securities laws by the Company. The plaintiffs in the lawsuit seek to
represent a class of persons who purchased shares of the Company's common stock
from March 31, 1997 through and including March 31, 1998. The Company intends to
vigorously defend the lawsuit but is currently unable to assess the likelihood
of success in the litigation, which is in the early stages of fact finding. An
adverse result in the litigation could have a material adverse effect on the
Company's financial position and results of operations.
8
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Overview
The Company provides integrated home health care services including
nursing, respiratory therapy/medical equipment and infusion therapy in nine
states in the southwestern and central United States.
The Company's net revenue mix has changed dramatically as a result of
acquisitions and internal growth, shifting from predominantly nursing services
to higher margin respiratory therapy/medical equipment and infusion therapy
businesses. Following is a breakdown of net revenue mix (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------------- -----------------------------------------
1998 1997 1998 1997
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial Nursing ........... $ 4,176 13.8% $ 3,524 10.2% $ 8,558 13.6% $ 4,860 7.1%
Medicare Nursing ............. 2,440 8.1 14,755 43.0 8,381 13.3 31,169 45.8
Respiratory therapy/medical
Equipment ................ 15,378 50.8 8,634 25.2 29,372 46.7 17,986 26.4
Infusion therapy ............. 4,712 15.6 4,875 14.2 9,498 15.1 9,634 14.2
State Programs ............... 2,056 6.8 1,202 3.5 4,055 6.4 1,724 2.5
Other ........................ 1,497 4.9 1,324 3.9 3,077 4.9 2,706 4.0
------- ------- ------- ------- ------- ------- ------- -------
$30,259 100.0% $34,314 100.0% $62,941 100.0% $68,079 100.0%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The Company has experienced a significant change in its operating
environment due to substantial changes and reductions made in reimbursement for
Medicare Part A nursing and therapy services. Medicare's complex revised
methodology required the Company to assess the economic impact of the reduced
reimbursement and re-evaluate its participation in the Medicare program. The
Company implemented a restructuring of its operations through branch closure and
consolidation in the first and second quarters of 1998. As of June 30, 1998, the
Company estimated payables (cost report and PIP overpayment) on demand to
Medicare of approximately $7.4 million. The Company is in the process of
confirming the liability and negotiating with Medicare for extended repayment.
Although management expects Medicare to agree to a revised payment plan, there
is no assurance at this time that the proposed items will be accepted by
Medicare.
The Company's net revenues for the non-Medicare nursing business line
grew approximately 44% in the second quarter of 1998 and 51% for the six months
of 1998 compared to the same periods of 1997. Adjusted for acquisitions and
Medicare oxygen reimbursement cuts, same store net revenues grew approximately
46% in the second quarter of 1998 and 42% for the first six months of 1998. This
rapid increase of for-profit volume occurring simultaneously with a 73%
year-to-date reduction Medicare nursing net revenues has placed significant
challenges on management. The result has been a re-alignment of the Company's
operations and a reduction in its liquidity position.
The Company has also experienced increased difficulties in collecting
from managed care organizations. These issues have led the Company to terminate
or sharply reduce its relationships with three such organizations and other
relationships are currently under review. The Company recorded a substantial
increase in the provision for doubtful accounts during the second quarter of
1998 as a result of these collection difficulties.
The six month loss of $(24.2) million in 1998 is attributable primarily
to (i) goodwill write-off of approximately $4.8 million relating to the Medicare
nursing program, (ii) additional provision for doubtful accounts of $7.0
million, (iii) a loss in Medicare nursing operations of approximately $10.5
million and (iv) a loss in non-Medicare nursing operations adjusted for an
additional provision for doubtful accounts of $2.3 million.
9
<PAGE> 10
Results of Operations
The following table sets forth certain items included in the Company's
unaudited condensed consolidated statements of income as a percentage of net
revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Direct expenses 52.5 51.7 53.5 46.3
---------- ---------- ---------- ----------
Gross profit 47.5 48.3 46.5 53.7
Other costs and expenses:
General and administrative 48.7 45.7 46.0 43.8
Depreciation and amortization 20.9 3.6 12.3 3.5
Provision for doubtful accounts 30.3 10.8 18.3 7.0
---------- ---------- ---------- ----------
Total costs and expenses 99.9 60.1 76.6 54.3
---------- ---------- ---------- ----------
Loss from operations (52.4) (11.8) (30.1) (0.6)
Interest, net 8.8 3.3 8.0 2.6
---------- ---------- ---------- ----------
Loss before income taxes (61.2) (15.1) (38.1) (3.2)
Provision (credit) for income taxes .7 (5.4) .3 (1.0)
========== ========== ========== ==========
Net Loss (61.9)% (9.7)% (38.4)% (2.2)%
========== ========== ========== ==========
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Net revenues. Net revenues decreased from $34.3 million for the three
months ended June 30, 1997 to $30.3 million for the same period in 1998, a
decrease of $4.0 million, or 11.7%. This decrease is attributable to a reduction
in Medicare nursing revenues resulting from regulatory changes and declining
visit volumes. These decreases resulted in large part from the closing or
consolidation of its Medicare nursing offices during the first and second
quarters of 1998. This decrease is partially offset by an increase in net
revenues from internal growth in respiratory therapy, commercial nursing and
state wavered programs.
As a result of 1998 Medicare per-visit cost limitations and the
per-beneficiary limitations enacted by the Medicare Interim Payment System
(IPS), the Company recorded a $0.9 million revenue adjustment during the three
months ended June 30, 1998. This revenue adjustment is based on estimates of the
potential effect these reimbursement changes will have on the Company's 1998
results of operations. The actual effects related to the per-beneficiary limits
could differ from the estimates used during the three months ended June 30,
1998.
Direct expenses. Included in direct expenses are all costs directly
related to the production of net revenues, including salary and employee benefit
costs, depreciation of hand-held point-of-care computers, billable medical
supplies, product purchase costs, and rental equipment depreciation. Direct
expenses decreased from $17.7 million for the three months ended June 30, 1997
to $15.9 million for the same period in 1998, a decrease of $1.8 million, or
10.2%. This decrease is the result of the closing or consolidation of its
Medicare nursing offices during the first and second quarter of 1998.
General and administrative. Included in general and administrative
expenses are occupancy costs, field office administration, corporate office
salaries and benefits, legal and accounting fees, and other non-patient care
operating expenses. These costs decreased from $15.7 million for the three
months ended June 30, 1997 to $14.7 million for the same period in 1998, a
decrease of $1.0 million, or 6.4%. The general and administrative expenses
increased as a percent of net revenues from 45.7% in 1997 to 48.7% in 1998. The
shift in business mix contributed to higher general and administrative expenses.
Additionally, central office overhead could not be reduced as rapidly as the
Medicare nursing cost, therefore additional expenses were shifted to the
for-profit businesses. The second quarter of 1998 also includes additional
reserves associated with the closing of the Medicare nursing program.
10
<PAGE> 11
Depreciation and Amortization. Depreciation and amortization expense
increased from $1.2 million for the three months ended June 30, 1997, to $6.3
million for the same period in 1998, an increase of $5.1 million, or 425%. The
increase is primarily due to the amortization of goodwill associated with
acquisitions, a $4.8 million goodwill write-off and increased depreciation of
capital expenditures for purchases of home medical equipment to service the
growing respiratory/infusion therapy business.
Provision for doubtful accounts. The provision for doubtful accounts
increased from $3.7 million for the three months ended June 30, 1997, to $9.2
million for the same period in 1998, an increase of $5.5 million, or 149%. This
increase is primarily due to the Company's continuing evaluation of certain
accounts receivable in view of the current industry environment. As a percentage
of net revenues, the provision for doubtful accounts has increased from 10.9%
for the three months ended June 30, 1997 to 30.3% in 1998.
Interest, net. Interest, net increased from $1.1 million for the three
months ended June 30, 1997, to $2.7 million for the same period in 1998, an
increase of $1.6 million, or 145%. This increase is primarily a result of the
issuance of the 11% Senior Notes on December 1, 1997.
Provision for income taxes. The provision for income taxes decreased
from a credit of $1.8 million for the three months ended June 30, 1997, to $.2
for the same period in 1998, an increase of $2.0 million, or 111%.
The 1998 provision relates to state tax liabilities.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net revenues. Net revenues decreased from $68.1 million for the six
months ended June 30, 1997 to $62.9 million for the same period in 1998, a
decrease of $5.2 million, or 7.6%. This decrease is attributable to a reduction
in Medicare nursing revenues resulting from regulatory changes and declining
visit volumes. These decreases resulted in large part from closing or
consolidation of its Medicare nursing offices during the year. This decrease is
partially offset by an increase in net revenues generated from internal growth
in respiratory therapy, infusion therapy, commercial nursing and state wavered
programs.
As a result of 1998 Medicare per-visit cost limitations and the
per-beneficiary limitations enacted by the Medicare Interim Payment System
(IPS), the Company recorded a $6.7 million revenue adjustment during 1998. This
revenue adjustment is based on estimates of the potential effect these
reimbursement changes will have on the Company's 1998 results of operations. The
actual effects related to the per-beneficiary limits could differ from the
estimates used during 1998.
Direct expenses. Included in direct expenses are all costs directly
related to the production of net revenues, including salary and employee benefit
costs, depreciation of hand-held point-of-care computers, billable medical
supplies, product purchase costs, and rental equipment depreciation. Direct
expenses increased from $31.5 million for the six months ended June 30, 1997 to
$33.7 million for the same period in 1998, an increase of $2.2 million, or 6.9%.
This increase is primarily attributable to a shift in the business mix and costs
associated with the restructuring of the Medicare nursing program. As a
percentage of net revenues, direct expenses increased from 46.3% for the six
months ending June 30, 1997 to 53.5% for the six months ending June 30, 1998.
General and administrative. Included in general and administrative
expenses are occupancy costs, field office administration, corporate office
salaries and benefits, legal and accounting fees, and other non-patient care
operating expenses. These costs decreased from $29.8 million for the six months
ended June 30, 1997 to $29.0 million for the same period in 1998, a decrease of
$.8 million, or 2.7%. The decrease is attributable to the closure of 48 nursing
offices and their associated overhead expenses. The general and administrative
expenses increased as a percent of net revenues from 43.8% in 1997 to 46.0% in
1998. The shift in business mix contributed to higher general and administrative
expenses. Respiratory therapy/medical equipment and infusion therapy businesses
are proportionality higher because the majority of all personnel costs for these
businesses are classified in this category.
Depreciation and Amortization. Depreciation and amortization expense
increased from $2.3 million for the six months ended June 30, 1997, to $7.7
million for the same period in 1998, an increase of $5.4 million, or 235%. The
increase is primarily due to the amortization of goodwill associated with
acquisitions, a $4.8 million goodwill write-off and increased depreciation of
capital expenditures for purchases of home medical equipment to service the
growing respiratory/infusion therapy business.
11
<PAGE> 12
Provision for doubtful accounts. The provision for doubtful accounts
increased from $4.8 million for the six months ended June 30, 1997, to $11.5
million for the same period in 1998, an increase of $6.7 million, or 140%. This
increase is primarily due to a $7.0 million increase in the allowance for
doubtful accounts for the six months ended June 30, 1998 as a result of the
Company's increased difficulties in collecting from certain managed care
relationships. As a percentage of net revenues, the provision for doubtful
accounts has increased from 7.0% for the six months ended June 30, 1997, to
18.3% in 1998.
Interest, net. Interest, net increased from $1.8 million for the six
months ended June 30, 1997, to $5.0 million for the same period in 1998, an
increase of $3.2 million, or 178%. This increase is primarily a result of the
issuance of the 11% Senior Notes on December 1, 1997.
Provision for income taxes. The provision for income taxes increased
from a credit of $.6 million for the six months ended June 30, 1997, to $.2 for
the same period in 1998, an increase of $.8 million or 133%. The 1998 provision
relates to state tax liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are for debt service, and
additional working capital to fund growth of the Company's for-profit business
lines. The Company recorded a net loss of $(24.2) million for the six months
ended June 30, 1998 and had negative cash flow from operations. The Company
expects to have additional losses and negative cash flow amounts in 1998. This
has negatively impacted the availability of the Company's current financing
sources and is expected to decrease the Company's overall liquidity position
during the remainder of 1998. Management believes that, assuming continued
access to its secured working capital finance relationship, sale of non-core
operations, continuation of equipment lease finance facilities, controls to
reduce future losses from Medicare nursing operations and intensified collection
effort the Company will have sufficient liquidity to meet its capital
requirements through December 31, 1998. There is no assurance that the Company
will be successful in accomplishing these goals and maintaining adequate
liquidity through 1998.
At June 30, 1998, the Company had current assets of $50.8 million and
current liabilities of $27.5 million, resulting in working capital of $23.3
million as compared to working capital of $45.0 million as of December 31, 1997.
Working capital decreased by $21.7 million primarily as a result of the net loss
for the six months ended June 30, 1998.
Accounts receivable at June 30, 1998, were $42.7 million, compared to
$38.6 million at December 31, 1997. Days of Sales Outstanding ("DSO"), defined
as trade accounts receivable divided by average daily net revenues for the
preceding three months, were 124 as of June 30, 1998, compared to 94 at December
31, 1997. The increase in DSO from December 31, 1997 to June 30, 1998 is
attributable primarily to an overall increase in net revenue from respiratory
therapy/medical equipment and infusion therapy. Historically these lines of
business have higher DSO and slowness by third parties in paying. In addition,
Medicare nursing, which produces shorter dated receivables has sharply declined.
Also, Medicare has implemented a policy to slow, by 14 days, the payment of
respiratory/medical equipment billings. The Company is continuing intensified
initiatives to address the increase in DSO, including adding more experienced
billing and collecting management, commencing installation of an electronic
claims submission system, and more closely managing the billing and collecting
process to increase efficiency and effectiveness.
Net cash used in operating activities increased from $10.4 million for
the six months ended June 30, 1997, to $18.4 million for the same period in
1998, or an additional cash outflow of $8.0 million. The year-to-date net loss,
increase in accounts receivable and the reduction in debt obligations were
primarily responsible for the reduction in operating cash during 1998. Net cash
used in investing activities increased from $16.3 million for the six months
ended June 30, 1997 to $2.0 million for the same period in 1998. Part of the
increase is attributable to the increased purchases of home medical equipment.
Net cash provided by (used in) financing activities decreased from $25.7 million
for the six months ended June 30, 1997 to $(0.4) million for the same period in
1998 primarily as a result of reduced net borrowings. The Company utilizes
capital leases to acquire equipment, primarily information technology equipment
and medical equipment needed to accommodate increased sales volume in the
respiratory therapy/medical equipment business. Such lease amounts were $2.1
million and $0.07 million for the six months
12
<PAGE> 13
ended June 30, 1998 and 1997, respectively. The Company obtained lease financing
and deferred payment terms from two significant home medical/respiratory
equipment vendors during 1998.
As of June 30, 1998 the Company estimated payables (cost report and PIP
overpayment) on demand to Medicare of approximately $7.4 million. The Company is
in the process of confirming the liability and negotiating with Medicare for
extended repayment. Although management expects Medicare to agree to a revised
payment plan, there is no assurance at this time that the proposed terms will be
accepted by Medicare.
As of June 30, 1998, the Company had a cash balance of $0.9 million.
The Indenture under the Company's Senior Notes prohibits the Company from
incurring additional indebtedness (other than limited permitted indebtedness) or
issuing preferred equity interests (as defined in the Indenture) unless the
consolidated fixed charge ratio is greater than 2.0 to 1. At June 30, 1998, the
Company's consolidated fixed charge ratio is less than 2.0 to 1. The Indenture,
however, does permit the Company to incur indebtedness under any credit facility
in an amount not to exceed $20.0 million.
The Company has replaced its revolving credit line with a two-year
secured line of credit with a maximum availability of $15 million. The advances
are based on 80% of the net collectable value of the Company's accounts
receivable. "Net Collectable Value" is defined as the amount the Company bills
third party payors less patient co-payments and deductible obligations and
contractual allowances established by the Company and acceptable to the lender.
Interest on the outstanding balance of the facility is payable monthly at an
annual rate of the prime rate plus two percent. The Company will also pay a
collateral management fee of 0.083% per month on the average outstanding
balance. Collections of receivables by the Company will be credited to the
facility on a daily basis. Advances under this facility may be used to finance
the working capital and general corporate requirements of the Company.
13
<PAGE> 14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- --------------------------------------------------------------------------------
(a) Exhibits:
Exhibit
Number Description of Exhibit
11 Computation of net income per common equivalent share
27 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the quarterly
period ended March 31, 1998.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHCOR HOLDINGS, INC.
Date: September 30, 1998 By: /s/ S. Wayne Bazzle
------------------------------
S. Wayne Bazzle, Chairman of
the Board and Chief Executive
Officer
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
<S> <C>
11 Computation of net income per common equivalent share
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED NET INCOME PER COMMON EQUIVALENT SHARES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Primary and fully diluted earnings per share June 30, June 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $(18,715,255) $ (3,336,017) $(24,203,348) $ (1,527,755)
============ ============ ============ ============
Shares:
Weighted average common shares issued 10,094,861 10,041,104 10,092,478 10,032,309
Assuming exercise of options, reduced by the
Number of common shares which could have
been purchased with the proceeds from
Exercise of such options -- -- -- --
Assuming conversion of Series A preferred stock -- -- -- --
Assuming conversion of Series B preferred stock -- -- -- --
------------ ------------ ------------ ------------
Weighted average number of common shares
Outstanding, as adjusted 10,094,861 10,041,104 10,092,478 10,032,309
============ ============ ============ ============
Net income per common share $ (1.85) $ (0.33) $ (2.40) $ (0.15)
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM JUNE 30, 1998 10-Q BALANCE SHEET & INCOME STATEMENT AND IS QUALIFED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 960,593
<SECURITIES> 0
<RECEIVABLES> 42,728,616
<ALLOWANCES> 0
<INVENTORY> 4,938,198
<CURRENT-ASSETS> 50,758,106
<PP&E> 27,215,605
<DEPRECIATION> 0
<TOTAL-ASSETS> 124,078,511
<CURRENT-LIABILITIES> 27,538,551
<BONDS> 0
0
0
<COMMON> 100,951
<OTHER-SE> 14,959,231
<TOTAL-LIABILITY-AND-EQUITY> 124,078,511
<SALES> 62,941,518
<TOTAL-REVENUES> 62,941,518
<CGS> 33,697,597
<TOTAL-COSTS> 33,697,597
<OTHER-EXPENSES> 36,700,155
<LOSS-PROVISION> 11,513,088
<INTEREST-EXPENSE> 5,035,371
<INCOME-PRETAX> (24,004,693)
<INCOME-TAX> 198,655
<INCOME-CONTINUING> (24,203,348)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,203,348)
<EPS-PRIMARY> (2.40)
<EPS-DILUTED> (2.40)
</TABLE>
