SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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
OR
[ ] 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 1-9848
CARETENDERS HEALTH CORP.
(Exact name of registrant as specified in its charter)
Delaware 06-1153720
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
100 Mallard Creek Road, Suite 400 40207
(Address of principal executive offices) (Zip Code)
(502) 899-5355
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
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 and 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 .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class of Common Stock $.10 par value
Shares outstanding at June 30, 1998 - 3,130,413
<PAGE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998
and March 31, 1998 3
Consolidated Statements of Operations for the Three
Months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the Three
Months ended June 30, 1998 and 1997 5
Notes to Interim Consolidated Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 15
Part II. Other Information
Items 1 through 6 16
<PAGE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS
<TABLE>
June 30, 1998 March 31, 1998
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS: ------------- --------------
Cash and cash equivalents $ 51,046 $ 824,293
Accounts receivable - net 25,293,792 23,832,574
Prepaid expenses and other current assets 1,424,564 1,649,579
Deferred tax assets 88,635 88,635
------------- --------------
TOTAL CURRENT ASSETS 26,858,037 26,395,081
PROPERTY AND EQUIPMENT - net 8,126,798 7,752,103
COST IN EXCESS OF NET ASSETS ACQUIRED - net 7,605,143 13,514,130
DEFERRED TAX ASSETS 3,072,199 690,000
OTHER ASSETS 526,258 1,181,309
------------- --------------
$ 46,188,435 $ 49,532,623
============= ==============
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 12,223,266 $ 12,139,101
Current portion of long-term debt
and capital leases 3,233,121 3,248,185
Other current liabilities 100,000 100,000
------------- --------------
TOTAL CURRENT LIABILITIES 15,556,387 15,487,286
LONG-TERM LIABILITIES
Revolving Credit Facility 13,812,023 11,038,646
Term debt and capital lease obligations 152,519 197,184
Other liabilities 332,843 726,614
------------- --------------
TOTAL LONG-TERM LIABILITIES 14,297,385 11,962,444
------------- --------------
TOTAL LIABILITIES 29,853,772 27,449,730
Commitments and Contingencies
Stockholders' equity:
Common stock, par value $.10; authorized
10,000,000 shares; 3,130,436 issued
and outstanding 313,044 313,044
Treasury stock, at cost, 10,000 shares (95,975) (95,975)
Additional paid-in capital 25,345,586 25,345,586
Accumulated deficit (9,227,992) (3,479,762)
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 16,334,663 22,082,893
------------- --------------
$ 46,188,435 $ 49,532,623
============= ==============
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE>
<TABLE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Quarter Ended June 30,
----------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Net revenues $ 23,666,455 $ 21,521,250
Cost of sales and services 20,330,479 17,078,144
Selling, general and administrative expenses 2,966,017 2,478,296
Depreciation and amortization expense 617,764 608,386
Provision for uncollectible accounts 690,413 619,633
Goodwill write-down 6,967,560 -
Income (loss) before other income (expense) -------------- --------------
and income taxes (7,905,778) 736,791
Other income (expense):
Interest expense (390,045) (238,801)
Income (loss) before provision -------------- --------------
for income taxes (8,295,823) 497,990
Income tax provision (benefit) (2,930,108) 205,421
Net income (loss) before Cumulative Effect -------------- --------------
of a Change in Accounting Principle (5,365,715) 292,569
Cumulative effect on prior years of a change
in method of accounting for pre-opening
costs (Note 4) (382,515) -
-------------- --------------
Net Income (loss) $ (5,748,230) $ 292,569
============== ==============
Per Share Amounts - Basic
Average Shares Outstanding 3,120,413 3,119,413
Net income (loss) before Cumulative
Effect of a Change in Accounting
Principle $ (1.72) $ 0.09
Cumulative effect on prior years of a
change in method of accounting for
pre-opening costs (0.12) -
-------------- --------------
Net Income (loss) $ (1.84) $ 0.09
============== ==============
Per Share Amounts - Diluted
Average Shares Outstanding 3,120,413 3,143,945
Net income (loss) before Cumulative
Effect of a Change in Accounting
Principle $ (1.72) $ 0.09
Cumulative effect on prior years of a
change in method of accounting for
pre-opening costs (0.12) -
-------------- --------------
Net Income (loss) $ (1.84) $ 0.09
============== ==============
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE>
<TABLE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended June 30,
---------------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ (5,748,230) $ 292,569
Adjustments to reconcile net income to
net cash provided (used) by
operating activities:
Depreciation and amortization 617,764 608,386
Provision for uncollectible accounts 690,413 619,633
Goodwill write-down 6,967,560 -
Cumulative Effect of Change in Accounting Principle 651,090 -
Deferred Income Taxes (2,382,199) -
------------- --------------
796,398 1,520,588
Change in certain net current assets:
(Increase) decrease in:
Accounts receivable (3,330,818) 5,839
Prepaid expenses and other current assets (74,985) (100,424)
Increase (decrease) in:
Accounts payable and accrued liabilities 84,165 80,323
------------- --------------
Net cash provided (used) by operating activities (2,525,240) 1,506,326
Cash flows from investing activities:
Capital expenditures (797,969) (1,307,535)
Other assets (69,915) (194,578)
------------- --------------
Net cash provided (used) by investing activities (867,884) (1,502,113)
Cash flows from financing activities:
Principal payments on long-term debt and capital leases (59,729) 13,327
Net revolving credit facility borrowings 2,773,377 (239,173)
Other (93,771) (41,854)
------------- --------------
Net cash provided (used) by financing activities 2,619,877 (267,700)
------------- --------------
Net increase/(decrease) in cash (773,247) (263,487)
Cash and cash equivalents at beginning of period 824,293 1,014,604
------------- --------------
Cash and cash equivalents at end of period $ 51,046 $ 751,117
============= ==============
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements
for the three months ended June 30, 1998 and 1997 have been
prepared 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 omitted pursuant to such
rules and regulations. Accordingly, the reader of this Form
10-Q may wish to refer to the Company's Form 10-K for the
year ended March 31, 1998 for further information. In the
opinion of management of the Company, the accompanying
unaudited interim financial statements reflect all
adjustments (consisting of normally recurring adjustments)
necessary to present fairly the financial position at June
30, 1998 and the results of operations and cash flows for the
periods ended June 30, 1998 and 1997.
The results of operations for the three months ended June 30,
1998 are not necessarily indicative of the operating results
for the year.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and
expenses during the reported period. Actual results could
differ from those estimates.
2. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company, from time to time, is subject to claims and
suits arising in the ordinary course of its business,
including claims for damages for personal injuries. In the
opinion of management, the ultimate resolution of any of
these pending claims and legal proceedings will not have a
material effect on the Company's financial position or
results of operations.
On January 26, 1994 Franklin Capital Associates L.P., Aetna
Life and Casualty Company and Aetna Casualty and Surety
Company, shareholders, who at one time held approximately
320,000 shares of the Company's common stock (approximately
13% of shares outstanding) filed suit in Chancery Court of
Williamson County, Tennessee claiming unspecified damages not
to exceed three million dollars in connection with
registration rights they received in the Company's
acquisition of National Health Industries in February 1991.
The suit alleges the Company failed to use its best efforts
to register the shares held by the plaintiffs as required by
the merger agreement. The Company believes it has
meritorious defenses to the claims and does not expect that
the ultimate outcome of the suit will have a material impact
on the Company's results of operations, liquidity or
financial position. The Company plans to vigorously defend
its position in this case. No amounts have been recorded in
the accompanying financial statements related to this suit.
<PAGE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Legal Proceedings (continued)
In January 1997, Aetna Life and Casualty Company withdrew its
claim against the Company without prejudice.
3. FINANCIAL STATEMENT RECLASSIFICATIONS
Certain amounts have been reclassified in the 1998 financial
statements in order to conform to the 1997 presentation.
Such reclassifications had no effect on previously reported
net income.
4. ACCOUNTING FOR THE COSTS OF START-UP ACTIVITIES
Effective April 1, 1998, the Company adopted AICPA Statement
of Position 98-5 Reporting on the Costs of Start-up
Activities (SOP 98-5) which requires all costs incurred
readying a new business for operation prior to revenue
generation to be expensed as incurred. SOP 98-5 was issued
in 1998. The Company had previously deferred such costs and
amortized them over a period of 24 months, which was
permissible previous to the issuance of these new rules.
Accordingly, the accompanying statement of operations for
the quarter ended June 30, 1998 includes a one-time, net of
tax, expense of approximately $383,000 for the cumulative
effect of this change in accounting principle.
5. GOODWILL WRITE-DOWN
During the quarter ended June 30, 1998, the Company recorded
a one-time write-down of goodwill of $6,967,560 million
before taxes ($4.6 million after tax). This write-down is
the result of April 1, 1998 changes in Medicare
reimbursement and their resulting impact on the home health
market place and the Company. The write-down of goodwill
was required under Statement of Financial Accounting
Standard No. 121 (SFAS 121), Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed Of based upon management's estimate of the
impact of the changes in Medicare reimbursement for home
health nursing services. Management determined that this
impact indicated the carrying value of goodwill should be
written down by approximately $7 million based on the net
present value of expected future cash flows of specific
acquired (primarily Medicare) nursing operations. This
write-down is reflected in the accompanying consolidated
statement of operations.
6. SUBSEQUENT EVENT - RESTRUCTURING
In July 1998 the Company executed a restructuring plan
including work force reduction, branch closings, and changes
in compensation programs. The actions are expected to
reduce operating costs by an annualized amount of
approximately $7 million ($4.9 million of which is expected
to be realized in the current fiscal year). The Company
plans to record a charge of $550,000 before taxes ($323,000
after tax) in the second quarter for severance, branch
closings and other one-time costs associated with the July
restructuring activities.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
OVERVIEW
Strategic Focus
The Company is positioning itself to take advantage of healthcare
reform activities by focusing its resources on its home and
community based health care business units which consist of adult
day health services and home health care (home health care
includes nursing, infusion therapy and durable medical
equipment). These businesses are involved with the delivery of
health care in alternative settings which the Company believes
are preferred by consumers and which operate at lower costs than
hospitals and nursing homes. The trend toward alternative site
delivery of healthcare is increasing, as more payer organizations
are seeking to reduce the costs of medical care.
Today more than seven million senior Americans are in need of
alternatives to long-term nursing home confinement and this
number is expanding rapidly. These individuals desire to remain
in their homes and out of nursing homes and conserve their
financial resources as long as possible. Caretenders SeniorCare
Solutions provides seniors in need with a lower-cost alternative
to institutional care helping them gain economic security, access
to health care, mobility and independence without isolation.
Utilizing its strengths in home health care and adult day health
services, the Company is actively addressing the issue of senior
care in America with its comprehensive strategy - Caretenders
SeniorCare Solutions. Through care management by a Registered
Nurse (RN), Caretenders helps families identify solutions for
caring for loved ones who can no longer meet their own health and
personal care needs. Through the Company's Care Manager,
families can learn about long-term care options available for
seniors and obtain assistance in choosing from Caretenders'
SeniorCare Day and Home Health Care Centers or, if appropriate,
other available community based resources.
The Company's strategic plan calls for consolidation of home care
providers and integration of home health operations with adult
day care centers to offer a fully integrated home and community
based health care solution for seniors in need of care. However,
certain changes in Medicare reimbursement for home nursing
services became effective for the Company on April 1, 1998. As
described herein these changes have had a material impact on the
Company's results of operations and financial position. The
Company plans, subject to the implications of the items described
in the section Reimbursement Changes below and Cautionary
Statements - Forward Outlook and Risks included in the Company's
Form 10K for the year ended March 31, 1998, to continue its
efforts to expand its business operations. Management will
monitor the effects of such items and may consider modifications
to its expansion strategy when and if necessary.
<PAGE>
Results for the Quarter
For the quarter ended June 30, 1998 the Company reported a net
loss from operations (excluding one-time items) of ($780,354) or
($0.25) per share versus net income of $292,569 or $0.09 per
share in the prior year. These results were principally due to
the impact of the Interim Payment System for Medicare home health
services legislated by the Balanced Budget Act of 1997 (BBA),
which became effective for the Company April 1, 1998, and the
reaction of the home health market place to these new rules.
Material portions of the rules were not published by HCFA until
March 31, 1998, the day before the June 1998 quarter began. The
Company reported a net loss of $5.7 million after one-time
charges relating to a write-down in goodwill and required
accounting changes discussed in more detail below.
As indicated the Company's filing on Form 10K for the year ended
March 31, 1998 management expected a loss from operations in this
quarter due to the changes in Medicare reimbursement for home
care services. The new reimbursement system imposes new and
lower limitations on costs that will be reimbursed by the
Medicare program. These changes have caused confusion among
referral sources, leading to lower admissions and lower
utilization of home care nationwide. As a result the Company
incurred pre-tax operating costs of about $1 million in excess of
reimbursement limits during the quarter ended June 30, 1998. In
comparison, the Company operated well under the then-higher
reimbursement limits during the same quarter of the prior year.
Restructuring Plan Implemented
In July 1998 the Company executed a restructuring plan including
work force reduction, branch closings, and changes in
compensation programs. The actions are expected to reduce
operating costs by an annualized amount of approximately $7
million ($4.9 million of which is expected to be realized in the
current fiscal year). Since the Company expects to incur costs
below the reimbursement limits for the balance of the year it
expects to recover a substantial portion of the first quarter net
loss from operations (excluding one-time charges) in the third
and fourth quarters.
As a part of this restructuring program, the Company recorded a
one-time write-down of goodwill of $7 million before taxes ($4.6
million after tax) due to the April 1, 1998 changes in Medicare
reimbursement and their resulting impact on the home health
market place and the Company. Additionally, the Company plans to
record a charge of $550,000 before taxes ($323,000 after tax) in
the second quarter for severance, branch closings and other one-
time costs associated with the July restructuring activities.
The write-down of goodwill was required under Statement of
Financial Accounting Standard No. 121 (SFAS 121), Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed Of based upon management's estimate of the impact
of the changes in Medicare reimbursement for home health nursing
services. Management determined that this impact indicated the
carrying value of goodwill should be written down by
approximately $7 million, based on the net present value of
expected future cash flows of specific (primarily Medicare)
acquired nursing operations. This write-down is reflected in the
accompanying consolidated statement of operations.
Accounting for Costs of Start-up Activities
The Company also recorded a one-time after-tax charge of $383,000
for a change in its method of accounting for costs incurred prior
to revenue generation to ready new businesses for operation.
This change was mandated by the recently issued AICPA Statement
of Position 98-5 Reporting on the Costs of Start-up Activities.
Previously, generally accepted accounting principles (GAAP)
permitted these costs to be deferred and amortized over time once
the new business began generating revenues. The new rules now
require that these costs be expensed as incurred. This charge is
reflected in the accompanying statement of operations as a
cumulative effect of a change in accounting principle.
<PAGE>
RESULTS OF OPERATIONS
Caretenders Health Corp.
Operating Data
for the three months ended June 30,
<TABLE>
1 9 9 8 1 9 9 7 Change
--------------------- --------------------- ------------------
% of % of
Amount Revenues Amount Revenues Amount %
----------- --------- ----------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues
Home Healthcare $19,112,337 100.0% $17,641,056 100.0% $1,471,281 8.3%
Adult Day Health Services 4,554,118 100.0% 3,880,194 100.0% 673,924 17.4%
------------ ------------ -----------
23,666,455 21,521,250 2,145,205 10.0%
Costs of Sales and Services
Home Healthcare 16,553,721 86.6% 13,787,752 78.2% 2,765,969 20.1%
Adult Day Health Services 3,776,758 82.9% 3,290,392 84.8% 486,366 14.8%
------------ ------------ -----------
20,330,479 85.9% 17,078,144 79.4% 3,252,335 19.0%
Center Contribution
Home Healthcare 2,558,616 13.4% 3,853,304 21.8% (1,294,688) (33.6%)
Adult Day Health Services 777,360 17.1% 589,802 15.2% 187,558 31.8%
------------ ------------ -----------
3,335,976 14.1% 4,443,106 20.6% (1,107,130) (24.9%)
Selling, General &
Administrative 2,966,017 12.5% 2,478,296 11.5% 487,721 19.7%
Depreciation and Amortization 617,764 2.6% 608,386 2.8% 9,378 1.5%
Provision for Uncollectible
Accounts 690,413 2.9% 619,633 2.9% 70,780 11.4%
Interest, Net 390,045 1.6% 238,801 1.1% 151,244 63.3%
------------ ------------ -----------
Income (Loss) Before Taxes,
goodwill write-down and
accounting changes $(1,328,263) (5.6%) $497,990 2.3% $(1,826,253) NM
------------ ------------ -----------
Goodwill write-down 6,967,560 - 6,967,560
Income (Loss) Before Taxes,
and accounting changes $(8,295,823) $497,990 $(8,793,813)
============ ============ ============
</TABLE>
NM - Not Meaningful
Home Health Care
----------------
NET REVENUES. Net revenues increased approximately 8.3%
primarily as a result of increased volumes from acquired
home health care operations. Revenues were negatively
impacted by 1) approximately $1 million as a direct result
of lower Medicare nursing cost limits and 2) approximately
$250,000 as a result of lower Medicare reimbursement for
home oxygen therapy.
COSTS OF SALES AND SERVICES. Costs of sales and services
increased primarily as a result of increased volumes from
acquired home health operations. Costs as a percent of
revenues increased due to reduced Medicare reimbursement
rates for home nursing and oxygen therapy services.
<PAGE>
Adult Day Health Services
-------------------------
NET REVENUES. The 17.4% increase in adult day health
services revenues was a primarily a result of increased
volumes in the Company's centers. As of June 30, 1998, the
Company had 22 centers in operation versus 20 centers at
June 30, 1997.
COST OF SALES AND SERVICES. Costs of sales and services
increased due to the increased number of centers opened and
the increased volume of patient days. As a percent of net
revenues, cost of sales and services for recurring
operations decreased 2.2% reflecting improved profitability
from increased occupancy rates.
SELLING, GENERAL AND ADMINISTRATIVE. The increase in
selling, general and administrative costs resulted from
additions to the Company's corporate infrastructure made in
the latter part of last fiscal year as part of its plan to
become a more aggressive acquirer of home and community
based health care operations. In July 1998, the Company
executed a restructuring plan that is expected to reduce
these costs in the future by approximately $480,000 per
quarter for the balance of the fiscal year.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. The provision for
uncollectible accounts for the quarters ended June 30, 1998
and 1997 was recorded at approximately 2.9% of net revenues
based on management's evaluation of collectibility.
DEPRECIATION AND AMORTIZATION. The increase results
primarily from capital additions.
INTEREST. The increase in interest is primarily the result
of higher average outstanding debt levels incurred to
finance operating losses, increased investments in working
capital and capital expenditures.
DEFERRED TAX BENEFIT. The accompanying statement of
operations includes the anticipated income tax benefit of
the losses reported in the quarter ended June 30, 1998. Of
the $7 million write-down of goodwill recorded in the
quarter ended June 30, 1998 approximately $6.3 million is
tax deductible. The Company has written this goodwill down
for book purposes; however, it will continue to be taken as
a tax deduction over the remainder of its 15 year statutory
tax life. As a result of this goodwill write-down for book
purposes, a deferred tax asset of approximately $2.4 million
was generated and is reflected in the accompanying financial
statements. The Company's ability to generate the expected
amounts of taxable income from future operations and realize
its deferred tax assets is dependent upon general economic
conditions, competitive pressures on revenues and margins
and legislation and regulation at all levels of government.
There can be no assurances that the Company will meet its
expectations of future taxable income. However, management
has considered the above factors in reaching its conclusions
that it is more likely than not that future taxable income
will be sufficient to fully utilize the deferred tax assets
as of June 30, 1998.
<PAGE>
Liquidity and Capital Resources
Revolving Credit Facility
The Company has $19 million in revolving credit facilities,
comprised of $16 million with the Healthcare Financial
Services Division of Heller Financial, Inc. and $3 million
with Bank One, Kentucky NA. Interest accrues on amounts drawn
under the facility at a rate of 1 percent over prime for the
Heller facility and at a rate of / percent over prime for the
Bank One facility. Availability from the Heller facility is
determined pursuant to a formula principally consisting of a
percentage of accounts receivable subject to certain
exclusions.
At June 30, 1998, the Company had total cash and unused
borrowings of approximately $2.2 million available. The
Heller facility remains in effect until October 13, 1999 and
for annual one year terms thereafter unless either party to
the credit agreement provides the other with a written notice
of termination one year and 60 days prior to the renewal date.
The Bank One Facility will remain in effect until October 4,
1998. The Company's results of operations for the quarter
ended June 30, 1998 created defaults under of the Heller
credit facility financial covenants with respect to tangible
net worth and capital expenditure limitations, which defaults
have been waived by Heller. As of June 30, 1998, the Company
was in compliance with the debt service covenants of that
facility. Nonetheless, the Company's ability to access
additional credit and its ability to finance acquisition
opportunities with debt will remain diminished until such time
as it returns to profitable operation.
The Company is currently negotiating a replacement credit
facility in a range of $20-$30 million. While there can be no
assurance that the replacement credit facility will be
obtained, management believes that it will be completed during
the second or third quarter of its fiscal 1999 year. If the
Company is unable to obtain satisfactory financing it would
have an adverse impact on the Company's liquidity and its
ability to execute its development plans.
Management will continuously pursue additional capital
including possible debt and equity investments in the Company
to support a more rapid development of the business than would
be possible with internal funds.
Cash Flows
Key elements to the Consolidated Statements of Cash Flows
were (in thousands):
<TABLE>
<S> <C> <C>
Net Change in Cash and Cash Equivalents 1998 1997
- -------------------------------------------- --------- ---------
Provided by (used in):
Operating activities $(2,525) $1,506
Investing activities (868) (1,502)
Financing activities 2,620 (268)
--------- --------
Net Change in Cash and Cash Equivalents $ (773) (264)
========= ========
</TABLE>
<PAGE>
Net cash used in operating activities of approximately $2.6
million resulted principally from current period losses net
of non-cash expenses such as depreciation, bad debt
provision, goodwill write-down, cumulative effect of
accounting change and deferred income taxes and increased
investment in accounts receivable. Net cash used in
investing activities of approximately $0.8 million resulted
principally from amounts invested in new ADC facilities
($350,000) and capital expenditures related to durable
medical equipment and improvement of information systems.
Net cash of approximately $2.6 million was provided by
financing activities through increases in the outstanding
balance on the revolving credit facility.
Contract Management Services
The Company currently provides contract management services to
two home health agencies (the Agencies) in the Louisville, KY
area owned by Columbia/HCA Health Corporation (Columbia).
Columbia has announced its plans to sell these operations to a
third party. The Company has terminated the Agencies' rights
to operate under the Caretenders trade name and is now actively
competing with the Agencies for patients. The Company believes
that the sale of the Columbia owned operations will result in
termination of the management agreements (which generated
approximately $3 million of revenues in fiscal 1998) and that
upon such termination, a termination fee should be payable to
the Company by Columbia. Due to the current status of
negotiations, the Company is unable to predict the amount of
termination fees, if any, that will ultimately be paid, or the
ultimate outcome of competition with the buyer of the Agencies.
Thus there can be no assurance that the ultimate resolution of
this matter will not have an adverse impact on the Company.
Health Care Reform
The health care industry, particularly home health, has
experienced, and is expected to continue to experience,
extensive and dynamic change. In addition to economic forces
and regulatory influences, continuing political debate is
subjecting the health care industry to significant reform.
Health care reforms have been enacted as discussed elsewhere in
this document and proposals for additional changes are
continuously formulated by the federal government
administration, members of Congress, and state legislators.
Certain adverse changes in Medicare reimbursement for home
nursing services became effective for the Company on April 1,
1998. See Reimbursement Changes below.
Government officials can be expected to continue to review and
assess alternative health care delivery systems and payment
methodologies. Changes in the law or new interpretations of
existing laws may have a dramatic effect on the definition of
permissible or impermissible activities, the relative cost of
doing business, and the methods and amounts of payments for
medical care by both governmental and other payers. Legislative
changes to "balance the budget" and slow the annual rate of
growth of Medicare and Medicaid are expected to continue. Such
changes will impact reimbursement for home health care. There
can be no assurance that future legislation or regulatory
changes will not have a material adverse effect on the future
operations of the Company.
Refer to the sections on Reimbursement Changes below and
Cautionary Statements - Forward Outlook and Risks in the
Company's Form 10K for the year ended March 31, 1998 for
additional information.
Reimbursement Changes
In August of 1997, President Clinton signed into law the
Balanced Budget Act of 1997 (the BBA). This bill made
significant changes in the reimbursement system for Medicare
home health services. The primary changes that affect the
Company include a reduction in the reimbursement for oxygen
<PAGE>
therapy services and a restructuring of the reimbursement system
related to Medicare certified home care agencies.
Oxygen Reimbursement
The reimbursement of certain oxygen therapy services and
products was cut 25% for services provided on or after January
1, 1998. An additional cut of 5% will take affect on January 1,
1999. Future increases to the reimbursement rate have been tied
to the Consumer Price Index and will not resume until 2003. Had
this reduction not taken place, revenues and pre-tax income for
the quarter ended June 30, 1998 would have been approximately
$250,000 higher.
Interim Payment System for Medicare Certified Home Health
Nursing Services
The BBA also included a revised Interim Payment System (IPS) for
Medicare-certified home health services. IPS remains a cost-
based reimbursement system. However, per visit cost limits have
been reduced and a new Per Beneficiary Limit (PBL) has been
added. IPS is effective for all home care agencies for cost
reporting years beginning on or after October 1, 1997. For the
Company's agencies the new system went into effect on April 1,
1998. The BBA states that IPS will remain in effect until a new
prospective payment system (PPS) is implemented for cost
reporting years beginning on or after October 1, 1999.
The Interim Payment System, as well as other requirements
imposed upon home health providers in the BBA were designed to
contain the growth in home health care resulting in slower
growth in Medicare home health expenditures. As a result of
these changes, home health providers are being forced to reduce
their costs of providing services and reduce utilization of home
care services per beneficiary. Under certain conditions,
Medicare beneficiaries who had previously been entitled to
services no longer qualify under Medicare reimbursement
guidelines.
The PBL places an aggregate cap on reimbursable costs based on
the number of beneficiaries served during a period multiplied
by a complicated cost-based formula. This has the effect of
placing an additional limit on reimbursement. The PBL serves
to create a ceiling on the amount of care that can be provided
to the average beneficiary and constrains the utilization of
visits per patient.
The Company believes that IPS is causing a contraction of
Medicare home health operations nationwide and is, despite
Congressional intentions and HCFA assurances to the contrary, a
reduction of the Medicare home care benefit. Due to
complexities in the rules, particularly differences in the
effective date and the per beneficiary limit for different
providers, the ultimate amount of contraction cannot yet be
predicted with certainty.
In late calendar 1997 and early 1998, the Company developed and
began implementing action plans to operate under IPS. However,
HCFA published final rules on March 31, 1998 that were
substantially worse than the industry expected. Accordingly,
in April 1998, the Company revised its action plans to further
reduce costs (including staff reductions) and appropriately
control utilization for operation in the IPS environment.
Since April 1, the Company has experienced a decline in census,
volumes, and length of stay commensurate with the expectations
outlined above. As a result, the Company experienced a decline
in revenues and contribution from this portion of its
operations (which incurred costs of approximately $1 million in
excess of the new Medicare cost limits during the first quarter
of fiscal 1999). As discussed previously herein, this was the
primary cause of the Company's $780,000 net loss from
operations before goodwill write-down and the cumulative effect
of an accounting change.
In July 1998, the Company executed a restructuring plan
including work force reduction, branch closings, and changes in
compensation programs. The actions are expected to reduce
operating costs by an annualized amount of approximately $7
million ($4.9 million of which is expected to be realized in
<PAGE>
the current fiscal year). Since the Company expects to incur
costs below the reimbursement limits for the balance of the
year it expects to recover a substantial portion of the first
quarter Medicare costs in excess of limits in the third and
fourth quarters however, there can be no assurance that this
will occur.
As a part of this restructuring program, the Company recorded a
one-time write-down of goodwill of $7 million before taxes
($4.6 million after tax) due to the Medicare reimbursement
impact on the home health operating environment. Additionally,
the Company plans to record a charge of $550,000 before taxes
($323,000 after tax) in the second quarter for severance,
branch closings and other one-time costs associated with the
July restructuring activities. The write-down of goodwill was
required under Statement of Financial Accounting Standard No.
121 (SFAS 121), Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of based upon
management's estimate of the impact of the changes in Medicare
reimbursement for home health nursing services. Management
determined that this impact indicated the carrying value of
goodwill should be written down by approximately $7 million,
based on the net present value of expected future cash flows of
specific (primarily Medicare) acquired nursing operations.
This write-down is reflected in the accompanying consolidated
statement of operations.
The Company believes its restructuring plan will allow it to
operate within the Medicare reimbursement limits for the
balance of the fiscal year and enable the Company to return to
profitable operation in both the third and fourth quarters.
However, there can be no assurance that losses will not
continue past the first quarter and perhaps for the year. The
Company will continue to make further assessments of the
implications of the current reimbursement environment and may,
if necessary, make additional cost reductions and other
adjustments to its operational and development plans in the
future.
In addition to IPS, the Balance Budget Act mandated
establishment of a prospective payment system ("PPS") for home
health services by October 1, 1999 (April 1, 2000 for the
Company). However, rules and regulations have not yet been
developed by HCFA and there can be no assurance that such
deadline will be met. In the event that home care PPS is not
implemented by that date the BBA as legislated requires cost
limits then in existence to be lowered by an additional 15%.
Such a prospective payment system, or in the alternative such
lower cost limits, could have a material effect on the
operating results and cash flows of the Company.
State legislative proposals continue to be introduced that
would impose more limitations on payments to providers of
health care services such as the Company. Many states have
enacted, or are considering enacting, measures that are
designed to reduce their Medicaid expenditures.
The Company cannot predict what additional government
regulations may be enacted in the future, if any, affecting its
business or how existing or future laws and regulations might
be interpreted, or whether the Company will be able to comply
with such laws and regulations in its existing or future
markets.
Year 2000 Computer System Issue
The year 2000 issue is the result of computer programs which
were written using two digits rather than four to define the
applicable year. The Company's principal information systems
operate in a database environment which uses four digits for
the year, and, accordingly, this issue is not expected to have
a significant impact on the majority of the Company's computer
systems. Certain purchased systems used by the Company, and
for which the Company does not control the programming code,
use two digits for the year. These systems are relatively old
and have been independently slated for replacement with new
systems that better meet the information needs of the Company
as it expands and deals with the current operating environment.
<PAGE>
The Company anticipates that these conversions will be
completed to provide compliance with the requirements to handle
the year 2000 issue with no significant operational concerns.
Management currently believes that the financial resources
necessary to accomplish such compliance will not be material to
the Company's financial condition or results of operations.
However, there is no guarantee that the Company's expected
results will be achieved and actual results could differ
materially from those expected results.
The Company depends on receipt of payment from its payer
sources, which utilize computer software to process those
payments. The Company has over 3,000 individual payers
including Medicare and Medicaid programs, insurance companies
and HMO's. The Company is currently unable to predict what
effect, if any, the year 2000 issue may have on the computer
systems of those payers, or in turn on the Company. System
maintenance and modification costs to existing software will be
expensed as incurred. The costs associated with purchasing
replacement software will be capitalized and amortized over the
useful life of the software.
Impact of Inflation
Management does not believe that inflation has had a
material effect on income during the past several years.
<PAGE>
Commission File No. 1-9848
Part II - Other Information
Item 1. Legal Proceedings
None
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
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 Computation of Earnings per share (attached)
(b) No reports on Form 8-K have been filed during the quarter ended
June 30, 1998
<PAGE>
<TABLE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
EXHIBIT 11
Three Months Ended June 30,
------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
BASIC
- -----
Net income for basic income per common share $(5,748,230) $ 292,569
Weighted average outstanding shares during the period 3,120,413 3,119,413
Net income (loss) per share ($1.84) $0.09
FULLY DILUTED
- -------------
Net income for fully diluted income per common share $(5,748,230) $ 292,569
Weighted average outstanding shares during the period 3,120,413 3,119,413
Add-common equivalent shares representing shares issuable
upon exercise of dilutive options and warrants (a) 24,532
---------- ------------
3,120,413 3,143,945
Net income (loss) per share ($1.84) $0.09
(a) anti-dilutive
</TABLE>
<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 of the undersigned thereunto duly authorized.
Date: August 14, 1998
CARETENDERS HEALTH CORP.
BY /s/ William B. Yarmuth
William B. Yarmuth,
Chairman of the Board, President
and Chief Executive Officer
BY /s/ C. Steven Guenthner
C. Steven Guenthner,
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 51
<SECURITIES> 0
<RECEIVABLES> 28,498
<ALLOWANCES> (3,205)
<INVENTORY> 0
<CURRENT-ASSETS> 1,513
<PP&E> 19,818
<DEPRECIATION> (11,691)
<TOTAL-ASSETS> 46,188
<CURRENT-LIABILITIES> 15,556
<BONDS> 0
<COMMON> 16,335
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 46,188
<SALES> 23,666
<TOTAL-REVENUES> 23,666
<CGS> 20,948
<TOTAL-COSTS> 20,948
<OTHER-EXPENSES> 9,934
<LOSS-PROVISION> 690
<INTEREST-EXPENSE> 390
<INCOME-PRETAX> (8,296)
<INCOME-TAX> (2,930)
<INCOME-CONTINUING> (5,366)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (383)
<NET-INCOME> (5,748)
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</TABLE>
