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 September 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, all of
which comprise a single class, with a $0.01 par value, were issued and
outstanding.
Total number of sequentially numbered pages 19
Exhibit Index on sequentially numbered page 15
1
<PAGE>
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 unaudited 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>
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
------------- -------------
ASSETS 1998 1997
------------- -------------
(UNAUDITED)
Current assets:
Cash and cash equivalents ................... $ 1,653,435 $ 21,820,308
Accounts receivable, net .................... 42,644,718 38,635,806
Federal income tax receivable ............... 389,126 5,828,888
Supplies inventory .......................... 6,212,504 4,258,834
Deferred income taxes ....................... -- 973,233
Prepaid expenses and other assets ........... 1,841,171 1,358,026
------------- -------------
Total current assets ................. 52,740,954 72,875,095
Property and equipment, net ................... 25,914,874 29,131,578
Excess of cost of acquired businesses over fair
values of net assets acquired, net ............ 42,429,512 48,085,306
Other assets .................................. 3,355,234 3,121,044
------------- -------------
Total assets ......................... $ 124,440,574 $ 153,213,023
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued payroll and related expenses ........ $ 6,021,673 $ 8,130,484
Accounts payable and accrued expenses ....... 18,586,653 11,099,771
Demand notes and current portion of
long-term debt ............................. 10,739,664 1,576,502
Income taxes payable ........................ -- 305,000
Demand notes and current portion of capital
lease obligations .......................... 3,125,348 6,738,548
------------- -------------
Total current liabilities ............ 38,473,338 27,850,305
Other long-term liabilities ................... 9,706 4,063,260
Long-term debt ................................ 213,982 644,236
11% Senior Notes .............................. 80,000,000 80,000,000
Capital lease obligations ..................... 566,050 1,393,691
------------- -------------
Total liabilities .................... 119,263,076 113,951,492
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 40,000,000
shares authorized; 10,095,180 and 10,089,346 shares
issued and outstanding at September 30, 1998 and
December 31,1997, respectively ............. 100,951 100,893
Additional paid-in capital .................. 39,908,756 39,906,814
Retained deficit ............................ (34,832,209) (746,176)
------------- -------------
Total stockholders' equity ........... 5,177,498 39,261,531
------------- -------------
Total liabilities and stockholders'
equity .............................. $ 124,440,574 $ 153,213,023
============= =============
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
3
<PAGE>
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ---------------------------------
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues ....................................... $ 27,950,170 $ 40,504,088 $ 90,891,688 $ 108,582,680
Direct expenses .................................... 13,601,084 17,451,773 47,298,681 48,981,775
------------- ------------- ------------- -------------
Gross profit ....................................... 14,349,086 23,052,315 43,593,007 59,600,905
Other costs and expenses:
General and administrative. ...................... 14,179,333 16,214,442 43,133,964 46,048,540
Depreciation and amortization .................... 1,579,483 1,285,725 9,325,008 3,616,038
Provision for doubtful accounts .................. 5,890,576 1,960,557 17,403,663 6,738,472
------------- ------------- ------------- -------------
Total costs and expenses ................... 21,649,392 19,460,724 69,862,635 56,403,050
------------- ------------- ------------- -------------
Income (loss) from operations ...................... (7,300,306) 3,591,591 (26,269,628) 3,197,855
Interest expense, net .............................. 2,930,512 1,437,301 7,965,882 3,214,765
------------- ------------- ------------- -------------
Income (loss) before income taxes .................. (10,230,818) 2,154,290 (34,235,510) (16,910)
Provision for income taxes ......................... (348,133) 861,716 (149,477) 218,271
------------- ------------- ------------- -------------
Net income (loss) .................................. $ (9,882,685) $ 1,292,574 $ (34,086,033) $ (235,181))
============= ============= ============= =============
Net income (loss) per common share ................. $ (.98) $ .13 $ (3.38) $ (.02))
============= ============= ============= =============
Weighted average common shares outstanding ......... 10,095,180 10,064,000 10,093,389 10,042,957
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
SEPTEMBER 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................ $(34,086,033) $ (235,181)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .................... 11,980,204 6,029,171
Proceeds on disposition on assets ................ (3,949,986) 31,427
Changes in operating assets and
liabilities, net of acquired businesses:
Accounts receivable, net ....................... (4,009,006) (16,153,174)
Prepaid expenses and other assets .............. (2,677,735) 813,299
Deferred income taxes .......................... -- (721,598)
Accounts payable and accrued expenses........... 2,297,748 3,552,943
Deferred revenue ............................... -- (946,904)
Income taxes ................................... 5,134,763 (1,146,174)
------------ ------------
Net cash used in operating activities ....... (25,310,045) (8,776,191)
------------ ------------
Cash flows from investing activities:
Payments and adjustments for business
acquisitions, net of cash acquired ................. 53,422 (13,433,786
Additions to property and equipment ................. 873,195 (4,744,404)
------------ ------------
Net cash used in investing
activities ................................. 926,617 (18,178,190)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of debt ...................... 44,468,557 30,946,579
Payments on debt and capital lease
obligations ........................................ (40,254,002) (4,221,294
Issuance of common stock ............................ 2,000 229,096
------------ ------------
Net cash provided by financing
activities ................................. 4,216,555 26,954,381
------------ ------------
Net decrease in cash and cash equivalents ............. (20,166,873) --
Cash and cash equivalents, beginning of
period ............................................... 21,820,308 --
------------ ------------
Cash and cash equivalents, end of period .............. $ 1,653,435 $ 0
============ ============
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 5,626,303
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
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 nine months ended September 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 for the
year ended December 31, 1997 and a net loss of approximately $(34.1) million for
the nine months ended September 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
substantial doubt about the Company's ability to continue as a going concern.
Management has taken the following actions during 1998 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) initiated a program to reduce corporate
operating expenses, (v) realized approximately $5.8 million of cash flow from
tax positions and (vi) identified non-core business operations for sale (see
Note 10.). The Company has also engaged investment banking services to assist in
evaluating various approaches to strengthen and grow the Company. Management is
actively developing a plan of recapitalization.
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 as
amended 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 could 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 September 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). As a
result of the liquidity factors discussed in Note 2, there is substantial doubt
about the Company's ability to meet its December 1, 1998 debt service obligation
on the Senior Notes, and
6
<PAGE>
any such failure to meet the December 1, 1998 debt service obligation could have
a material adverse effect on the Company.
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 the stock 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 30, 1998, the Company had approximately $9.9 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. Basic and diluted
net income (loss) per common share are the same in each period presented.
6. Income Taxes
As a result of the net loss recorded during the nine months ended
September 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 nine
months ended September 30, 1998. The 1998 benefit through September 30, 1998
relates to estimated state tax benefits.
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 September 30, 1998, the Company estimated net payables (cost report
and PIP overpayment) on demand to Medicare of approximately $4.9 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, and any such failure to obtain a revised
payment plan will have a material adverse effect on the Company.
7
<PAGE>
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.
10. Subsequent Event
In November, 1998, the Company entered into an agreement to sell its
operations in Louisiana. The sale proceeds along with collection of the accounts
receivable are expected to produce a positive cash flow of approximately $6.0
million. The Company expects to record a net loss on the sale of approximately
$1.4 million during the fourth quarter of 1998. As a result of the sale, the
Company expects its current availability under its revolving credit line to be
reduced by $.7 million to $9.8 million, sixty (60) days following the closing
date of the Southern Medical Mart sale.
11. Common Stock
The Company's Common Stock is currently listed on The Nasdaq SmallCap
Market via an exception from the minimum bid price filing requirement. While the
Company fails to meet this requirement, the Company was granted a temporary
exception from this standard which will expire on December 28, 1998. In order
for the Company's stock to continue to be listed on The Nasdaq SmallCap Market,
its share must trade at or above $1.00. In the event the Company is deemed to
have met the terms of the expectation, it shall continue to be listed on The
Nasdaq SmallCap Market. If at some future date the Company's securities should
cease to be listed on The Nasdaq SmallCap Market, they may continue to be listed
in the OTC Bulletin Board. For the duration of the exception the Company's
Nasdaq symbol will be HCORC.
8
<PAGE>
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 eight
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 SEPT. 30, NINE MONTHS ENDED SEPT. 30,
-------------------------------------- --------------------------------------
1998 1997 1998 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial Nursing ........ $ 4,059 14.5% $ 4,162 10.3% $ 12,617 13.9% $ 9,021 8.3%
Medicare Nursing .......... 1,184 4.2 16,281 40.2 9,565 10.5 47,450 43.7
Respiratory therapy/medical
Equipment ............. 14,664 52.5 12,189 30.1 44,036 48.4 30,175 27.8
Infusion therapy .......... 4,960 17.7 4,876 12.0 14,458 15.9 14,510 13.4
State Programs ............ 1,748 6.3 1,451 3.6 5,803 6.4 3,176 2.9
Other ..................... 1,335 4.8 1,545 3.8 4,412 4.9 4,251 3.9
-------- ----- -------- ----- -------- ----- -------- -----
$ 27,950 100.0% $ 40,504 100.0% $ 90,891 100.0% $108,583 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</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 closures
during 1998. As of September 30, 1998, the Company estimated net payables (cost
report and PIP overpayment) on demand to Medicare of approximately $4.9 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, and any such failure to obtain a revised
payment plan will have a material adverse effect on the Company.
The Company's net revenues for the for-profit business lines grew
approximately 10.5% in the third quarter of 1998 and 33% for the nine months of
1998 compared to the same periods of 1997. Adjusted for acquisitions and
Medicare oxygen reimbursement cuts, same store net revenues grew approximately
12% in the third quarter of 1998 and 31% for the first nine months of 1998. This
rapid increase of for-profit volume occurring simultaneously with an 80%
year-to-date reduction of 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 continued to experience 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 1998 as a result of these
collection difficulties.
The nine month loss of $(34.1) 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 $11.0
million, (iii) a loss from nursing operations of approximately $20 million
including additional provision for doubtful accounts of $0.9 million and a $6.7
million revenue adjustment as the result of 1998 Medicare per-visit cost and
per-beneficiary limitations.
9
<PAGE>
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:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1998 1997 1998 1997
---------- --------- ---------- ----------
Net revenues .................... 100.0% 100.0% 100.0% 100.0%
Direct expenses ................. 48.7 43.1 52.0 45.1
---------- --------- ---------- ----------
Gross profit .................... 51.3 56.9 48.0 54.9
Other costs and expenses:
General and
administrative ............. 50.7 40.0 47.5 42.4
Depreciation and
amortization ............... 5.6 3.2 10.2 3.3
Provision for doubtful
accounts ................... 21.1 4.8 19.2 6.2
---------- --------- ---------- ----------
Total costs
and expenses ....... 77.4 48.0 76.9 51.9
---------- --------- ---------- ----------
Loss from operations ............ (26.1) 8.9 (28.9) 3.0
Interest, net ................... 10.5 3.6 8.8 3.0
---------- --------- ---------- ----------
Loss before income taxes ........ (36.6) 5.3 (37.7) (0.0)
Provision (credit) for
income taxes ................... (1.2) 2.1 (0.2) 0.2
---------- --------- ---------- ----------
Net Loss ........................ (35.4)% 3.2% (37.5)% (0.2)%
========== ========= ========== ==========
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
NET REVENUES. Net revenues decreased from $40.5 million for the three
months ended September 30, 1997 to $28.0 million for the same period in 1998, a
decrease of $12.5 million, or 30.9%. This decrease is attributable to a
reduction in Medicare nursing revenues resulting from regulatory changes, which
lead the company to substantially exit this line of business. Volume lost as a
result of this action was partially offset by an increase in net revenues from
growth in respiratory therapy, commercial nursing and state Medicaid waver
programs.
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 $17.5 million for the three months ended September 30,
1997 to $13.6 million for the same period in 1998, a decrease of $3.9 million,
or 22.3%. This decrease is largely the result of closing Medicare nursing
offices during 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 $16.2 million for the three
months ended September 30, 1997 to $14.2 million for the same period in 1998, a
decrease of $2.0 million, or 12.4%. The general and administrative expenses
increased as a percent of net revenues from 40.0% in 1997 to 50.7% in 1998. The
rapid reduction of Medicare nursing revenue contributed to a higher ratio of
general and administrative expenses. Additionally, central office overhead and
certain field office costs could not be reduced as rapidly as the Medicare
nursing cost; therefore additional expenses were shifted to the for-profit
businesses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased from $1.3 million for the three months ended September 30, 1997, to
$1.6 million for the same period in 1998, an increase of $.3 million, or 23%.
The increase is primarily due to 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 $2.0 million for the three months ended September 30, 1997, to
$5.9 million for the same period in 1998, an increase of $3.9 million, or 195%.
This increase is primarily due to the Company's continued difficulties in
collecting from managed care
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<PAGE>
organizations. As a percentage of net revenues, the provision for doubtful
accounts has increased from 4.8% for the three months ended September 30, 1997
to 21.1% for the same period in 1998.
INTEREST, NET. Interest, net increased from $1.4 million for the three
months ended September 30, 1997, to $2.9 million for the same period in 1998, an
increase of $1.5 million, or 107%. 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 liability of $.9 million for the three months ended September 30, 1997, to a
receivable of $.3 million for the same period in 1998, a decrease of $1.2
million, or 133%. The 1998 provision relates to state tax benefits.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
NET REVENUES. Net revenues decreased from $108.6 million for the nine
months ended September 30, 1997 to $90.9 million for the same period in 1998, a
decrease of $17.7 million, or 16.3%. This decrease is attributable to a
reduction in Medicare nursing revenues resulting from regulatory changes and
office closures. This impact was partially offset by an increase in net revenues
generated from growth in respiratory therapy, infusion therapy, and commercial
nursing and state Medicaid waver programs.
As a result of 1998 Medicare per-visit cost and 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 decreased from $49.0 million for the nine months ended September 30,
1997 to $47.3 million for the same period in 1998, a decrease of $1.7 million,
or 3.5 %. This decrease is attributable to closing Medicare nursing offices
during the year, which resulted in direct cost reductions of $13.0 million. As a
percentage of net revenues, direct expenses increased from 45.1% for the nine
months ending September 30, 1997 to 52.0% for the nine months ending September
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 $46.0 million for the nine months
ended September 30, 1997 to $43.1 million for the same period in 1998, a
decrease of $2.9 million, or 6.3%. The decrease is attributable to the closure
of 60 nursing offices and their associated overhead expenses. The general and
administrative expenses increased as a percent of net revenues from 42.4% in
1997 to 47.5% in 1998. The rapid reduction of Medicare nursing revenues
contributed to a higher ratio of general and administrative expenses.
Respiratory therapy/medical equipment and infusion therapy businesses are
proportionately 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 $3.6 million for the nine months ended September 30, 1997, to
$9.3 million for the same period in 1998, an increase of $5.7 million, or 158%.
The increase is primarily due to 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
decreased from $6.7 million for the nine months ended September 30, 1997, to
$17.4 million for the same period in 1998, an increase of $10.7 million, or
160%. This increase is primarily due to an $11.0 million increase in the
allowance for doubtful accounts 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 6.2% for the nine months ended September 30, 1997, to 19.2% for the same
period in 1998.
11
<PAGE>
INTEREST, NET. Interest, net increased from $3.2 million for the nine
months ended September 30, 1997, to $8.0 million for the same period in 1998, an
increase of $4.8 million, or 150%. 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
an expense of $.2 million for the nine months ended September 30, 1997, to a
benefit of $.15 million for the same period in 1998, a decrease of $.35 million
or 175%. The 1998 provision relates to state tax benefits.
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 $(34.1) million for the nine months
ended September 30, 1998 and had negative cash flow from operations. The Company
expects to have additional losses and negative cash flow in the fourth quarter
of 1998. This negatively impacts 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 creating a concern about the Company's
ability to continue as a going concern. Management has taken the following
actions during 1998 with respect to these matters: (i) established a secured
working capital finance relationship, (ii) obtained additional equipment lease
finance facilities, (iii) substantially reduced its on-going loss exposure from
Medicare nursing operations, (iv) initiated a program to reduce corporate
operating expenses, (v) realized approximately $5.8 million of cash flow from
tax positions and (vi) identified non-core business operations for sale. The
Company has also engaged investment banking services to assist in evaluating
various approaches to strengthen and grow the Company. Management is actively
developing a plan of recapitalization.
At September 30, 1998, the Company had current assets of $52.7 million and
current liabilities of $38.5 million, resulting in working capital of $14.2
million as compared to working capital of $45.0 million as of December 31, 1997.
Working capital decreased by $30.8 million primarily as a result of the net loss
for the nine months ended September 30, 1998.
Accounts receivable at September 30, 1998, were $42.6 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 128 as of September 30, 1998, compared to 94 at
December 31, 1997. The increase in DSO from December 31, 1997 to September 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 $8.8 million for the
nine months ended September 30, 1997, to $25.3 million for the same period in
1998, or an additional cash outflow of $16.5 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 decreased from $18.2 million for the nine months
ended September 30, 1997 to $.9 million for the same period in 1998. Net cash
provided by financing activities decreased from $27.0 million for the nine
months ended September 30, 1997 to $4.2 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 $5.6
million and $0.07 million for the nine months ended September 30, 1997 and 1998,
respectively. The Company obtained lease financing and deferred payment terms
from two significant home medical/respiratory equipment vendors during 1998.
As of September 30, 1998 the Company estimated net payables (cost report
and PIP overpayment) on demand to Medicare of approximately $4.9 million. The
Company is in the process of confirming the liability and
12
<PAGE>
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, and any such failure to
obtain a revised payment plan will have a material adverse effect on the
Company.
As of September 30, 1998, the Company had a cash balance of $1.7 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 September 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.
The Company has been advised by its independent public accountants that,
if the Company's operations do not improve significantly and/or additional
sources of financing deemed clearly adequate to support 1999 operations and
other cash requirements are not obtained or freely available to the Company
prior to the completion of their audit of the Company's financial statements for
the year ending December 31, 1998, their auditors report on those financial
statements would be modified for going concern matters.
YEAR 2000 ISSUE
The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
Many existing computer programs and databases use two digits to identify a
year in the date field (i.e., 98 would represent 1998). These programs and
databases were not originally designed to operate after December 31, 1999. If
not corrected, many computer programs and databases could fail or create
erroneous results relating to the year 2000. If the Company, its significant
customers, or suppliers fail to make necessary modifications and conversions on
a timely basis, the Year 2000 issue could have a material adverse effect on the
Company operations. However, the impact cannot be quantified at this time. The
Company believes that its competitors face a similar risk.
The Company is in the process of addressing the possible exposures related
to the impact on its computer programs and databases of the Year 2000 issue. Key
management information systems and operational systems, including equipment with
embedded microprocessors, have been or are currently being inventoried and
assessed, and detailed plans have been or are currently being developed for the
required program and database modifications or replacements. Progress against
these plans is monitored and reported to management on a regular basis.
Implementation of required changes to critical systems is expected to be
completed during fiscal 1999. The Company is also focusing on major payors,
which consist of third-party payors such as state and federal government, and
managed care plans and certain key software suppliers to assess their
compliance. The Company expects to complete such assessment by June 30, 1999. In
the event a material payor or supplier is not Year 2000 compliant, the Company's
business, financial condition and results of operations could be materially and
adversely affected.
The cost incurred to date related to these programs have not been material
and the Company does not expect its future costs related to these programs to be
material. Such costs have been and will continue to be funded through operating
cash flows. The Company presently believes that the total cost of achieving Year
2000 compliance will not be material to its financial condition, liquidity, or
results of operations.
13
<PAGE>
Time and costs estimates are based on currently available information.
Developments that could affect estimates include, but are not limited to, the
availability and costs of trained personnel; the ability to locate and correct
all relevant computer code and systems; and remediation success of the Company's
payors and significant suppliers.
The proceeding "Year 2000 Readiness Disclosure" contains various forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934 and the Section 27A Securities Act of 1933. These forward-looking
statements represent the Company's beliefs or expectations regarding future
events. When used in the "Year 2000 Readiness Disclosure", the words "believes,"
"expects," "estimates" and similar expressions are intended to identify
forward-looking statements. Forward-looking statements include, without
limitation, the Company's expectations as to when it will complete the
modification and testing phases of its Year 2000 project plan as well as its
Year 2000 contingency plans; its estimated cost of achieving Year 2000
readiness; and the Company's belief that its internal systems will be Year 2000
compliant in a timely manner. All forward-looking statements involve a number of
risks and uncertainties that could cause the actual results to differ materially
from the projected results. Factors that may cause these differences include,
but are not limited to, the availability of qualified personnel and other
information technology resources; the ability to identify and remediate all date
sensitive lines of computer code or to replace embedded computer chips in
affected systems or equipment, and the actions of governmental agencies or other
third parties with respect to Year 2000 problems.
14
<PAGE>
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
(b) The Company filed no reports on Form 8-K during the quarterly period
ended September 30,1998.
15
<PAGE>
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: November 19, 1998 By: /s/ S. WAYNE BAZZLE
S. Wayne Bazzle, Chairman of the
Board and Chief Executive Officer
16
EXHIBIT 11
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED NET INCOME PER COMMON EQUIVALENT SHARES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
PRIMARY AND FULLY DILUTED EARNINGS PER SHARE SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
1998 1997 1998 1997
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) ....................................... $(9,882,685) $ (1,292,574) $(34,086,033) $ (235,181)
=========== ============ ============ ============
Shares:
Weighted average common shares issued ................ 10,095,180 10,064,000 10,093,389 10,042,957
Assuming exercise of options, reduced by the
number of common shares which could have
been purchased with the proceeds from
exercise of such options ........................... -- 95,210 -- --
----------- ------------ ------------ ------------
Weighted average number of common shares
Outstanding, as adjusted ........................... 10,095,180 10,159,210 10,093,389 10,042,957
=========== ============ ============ ============
Net income (loss) per common share - basic .............. $ (.98) $ 0.13 $ (3.38) $ (0.02)
=========== ============ ============ ============
Net income (loss) per common share - diluted ............ $ (.98) $ 0.13 $ (3.38) $ (0.02)
=========== ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM SEPTEMBER 30, 1998 10-Q BALANCE SHEET & INCOME STATEMENT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,653,435
<SECURITIES> 0
<RECEIVABLES> 42,644,718
<ALLOWANCES> 0
<INVENTORY> 6,212,504
<CURRENT-ASSETS> 52,740,954
<PP&E> 25,914,874
<DEPRECIATION> 0
<TOTAL-ASSETS> 124,440,574
<CURRENT-LIABILITIES> 38,473,338
<BONDS> 0
0
0
<COMMON> 100,951
<OTHER-SE> 5,177,498
<TOTAL-LIABILITY-AND-EQUITY> 124,440,574
<SALES> 90,891,688
<TOTAL-REVENUES> 90,891,688
<CGS> 47,298,681
<TOTAL-COSTS> 47,298,681
<OTHER-EXPENSES> 69,862,635
<LOSS-PROVISION> 17,403,663
<INTEREST-EXPENSE> 7,965,882
<INCOME-PRETAX> (34,235,510)
<INCOME-TAX> (149,477)
<INCOME-CONTINUING> (34,086,033)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,086,033)
<EPS-PRIMARY> (3.38)
<EPS-DILUTED> (3.38)
</TABLE>
