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 September 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, Louisville, KY 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 September 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 September 30,
1998 and March 31, 1998 3
Consolidated Statements of Operations for the
Three Months ended September 30, 1998 and 1997 4
Consolidated Statements of Operations for the Six
Months ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the Six
Months ended September 30, 1998 and 1997 6
Notes to Interim Consolidated Financial
Statements 7 - 9
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 20
Part II. Other Information
Items 1 through 6 21
<PAGE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS
<TABLE>
ASSETS
September March 31,
30, 1998 1998
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 26,970 $ 824,293
Accounts receivable _ net 23,939,814 23,832,574
Prepaid expenses and other current
assets 1,223,031 1,649,579
Deferred tax assets 205,693 88,635
----------- -----------
TOTAL CURRENT ASSETS 25,395,508 26,395,081
PROPERTY AND EQUIPMENT - net 8,347,228 7,752,103
COST IN EXCESS OF NET ASSETS ACQUIRED - net 7,556,532 13,514,130
DEFERRED TAX ASSETS 3,072,199 690,000
OTHER ASSETS 765,847 1,181,309
------------ ------------
$45,137,315 $49,532,623
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $11,099,233 $12,139,101
Current portion of term debt and capital
lease obligations 3,252,757 3,248,185
Other current liabilities 100,000 100,000
------------ ------------
TOTAL CURRENT LIABILITIES 14,451,990 15,487,286
LONG-TERM LIABILITIES:
Revolving Credit Facility 13,687,640 11,038,646
Term debt and capital lease obligations 146,167 197,184
Other liabilities 672,988 726,614
----------- ------------
TOTAL LONG-TERM LIABILITIES 14,506,795 11,962,444
----------- ------------
TOTAL LIABILITIES 28,958,785 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 (9,384,125) (3,479,762)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 16,178,530 22,082,893
----------- -----------
$45,137,315 $49,532,623
</TABLE>
See accompanying notes to interim consolidated financial
statements.
<PAGE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
Three Months Ended
September September
30, 1998 30, 1997
<S> <C> <C>
Net revenues $ 24,524,299 $22,833,566
Cost of sales and services 20,041,193 17,951,478
Selling, general and administrative expenses 2,649,824 2,647,336
Depreciation and amortization expense 574,387 634,414
Provision for uncollectible accounts 559,212 661,951
Restructuring Charges 550,000 -
----------- ------------
Income (loss) before other income (expense) 149,683 938,387
and income taxes
Other income (expense):
Interest expense (415,078) (232,579)
----------- ------------
Income (loss) before provision for income (265,395) 705,808
taxes
Provision for income taxes (benefit) (109,262) 291,145
----------- ------------
Net income (loss) $(156,133) $414,663
----------- ------------
Per Share Amounts _ Basic
Average shares outstanding 3,120,413 3,119,413
Net income (loss) $ (0.05) $ 0.13
Per Share Amounts _ Diluted
Average shares outstanding 3,120,413 3,143,945
Net income (loss) $ (0.05) $ 0.13
</TABLE>
See accompanying notes to interim consolidated financial
statements.
<PAGE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
Six Months Ended
September September
30, 1998 30, 1997
<S> <C> <C>
Net revenues $48,190,754 $44,354,816
Cost of sales and services 40,371,673 34,836,903
Selling, general and administrative expenses 5,615,841 5,318,351
Depreciation and amortization expense 1,192,151 1,242,800
Provision for uncollectible accounts 1,249,625 1,281,584
Goodwill write-down 6,967,560 -
Restructuring Charges 550,000 -
------------ -----------
Income (loss) before other income (expense) (7,756,095) 1,675,178
and income taxes
Other income (expense):
Interest expense (805,123) (471,380)
------------ -----------
Income (loss) before provision for income (8,561,218) 1,203,798
taxes
Provision for income taxes (benefit) (3,039,370) 496,566
------------ -----------
Net income (loss) before Cumulative Effect of
a Change in Accounting Principle (5,521,848) 707,232
Cumulative effect on prior years of a change
in method of Accounting for pre-opening
costs, net (Note 4) (382,515) -
------------ -----------
Net income (loss) $(5,904,363) $ 707,232
------------ -----------
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 $(1.77) $ 0.23
Cumulative effect on prior years of a
change in method of accounting for
pre-opening costs (0.12) -
------------ -----------
Net income (loss) $(1.89) $ 0.23
------------ -----------
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 $(1.77) $ 0.22
Cumulative effect on prior years of a
change in method of accounting for
pre-opening costs (0.12) -
------------ -----------
Net income (loss) $(1.89) $ 0.22
------------ -----------
</TABLE>
See accompanying notes to interim consolidated financial
statements.
<PAGE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
Six Months Ended
September September
30, 1998 30, 1997
<S> <C> <C>
Cash flows from operating
activities:
Net income (loss) $(5,904,363) $ 707,232
Adjustments to reconcile net
income to net cash provided
(used) by operating activities:
Depreciation and amortization 1,192,151 1,242,800
Provision for uncollectible 1,249,625 1,281,584
accounts
Goodwill write-down & 7,517,560 -
restructuring charges
Accounting change 651,090 -
Deferred taxes (2,499,257) -
------------ -----------
2,206,806 3,231,616
Change in certain net current assets
(Increase) decrease in:
Accounts receivable (2,549,168) 332,535
Prepaid expenses and 426,548 167,685
other current assets
Increase (decrease) in:
Accounts payable and (1,589,868) 493,477
accrued liabilities
------------ -----------
Net cash provided (used) by (1,505,682) 4,225,313
operating activities
Cash flows from investing activities:
Capital expenditures (1,542,921) (2,223,334)
Other assets (297,643) (325,908)
------------ -----------
Net cash provided (used) (1,840,564) (2,549,242)
by investing activities
Cash flows from financing activities:
Principal payments on long- (46,445) (116,457)
term debt
Net revolving credit facility 2,648,994 (1,552,163)
borrowings
Other (53,626) (83,488)
------------ -----------
Net cash provided (used) 2,548,923 (1,752,108)
by financing activities
------------ -----------
Net increase (decrease) in cash (797,323) (76,037)
Cash and cash equivalents at 824,293 1,014,604
beginning of period
------------ -----------
Cash and cash equivalents at end
of period $ 26,970 $ 938,567
------------ -----------
</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 and six months ended September 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 September 30, 1998 and the results of operations
and cash flows for the periods ended September 30, 1998 and
1997.
The results of operations for the three months ended
September 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
Franklin
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.
Columbia
Prior to October 1, 1998 the Company managed two home health
agencies operating in the Louisville, KY area, which were
owned by Columbia/HCA. The Company also owns and operates a
competing agency in Louisville. The Company performed
management services pursuant to management agreements
scheduled to expire in February and June 2000. These
services generated approximately $3 million of management fee
revenues in the Company's most recent fiscal year, which
ended March 31, 1998 and $1.3 million in the six months ended
September 30, 1998. On September 30, 1998 Columbia sold the
agencies to a third party and notified the Company that its
services would no longer be needed for home health visits
performed after that date. The Company believes that the
contracts are non-cancelable in the event of a sale, and,
accordingly, the Company believes that Columbia's action
constitutes a breach of contract, for which the Company is
entitled to monetary damages.
The Company is pursuing recovery of damages through
litigation and through settlement discussions with Columbia.
The Company is also attempting to mitigate the financial
impact of the loss of these contracts through its company-
owned agency also operating in the Louisville market. Due to
the current status of events, the Company is unable to
predict the ultimate outcome of this matter.
3. FINANCIAL STATEMENT RECLASSIFICATIONS
Certain amounts have been reclassified in the fiscal 1999
financial statements in order to conform to the fiscal 1998
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 six months ended September 30, 1998 includes a non-
recurring, 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 non-recurring 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.
<PAGE>
6. RESTRUCTURING CHARGES
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
recorded a pretax charge of $550,000 in the second quarter
of fiscal 1999 related to restructuring activities. The
charge included approximately $412,0000 for work force
reductions $84,000 for branch closing costs and $54,000 for
work force reorganization. As of September 30, 1998, the
Company has a restructuring reserve balance of approximately
$200,000 which is primarily comprised of amounts related to
branch closings and work force reorganization costs.
<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 care solutions
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 September 30, 1998 the Company generated
net income from operations (excluding non-recurring items) of
$166,867 or $0.05 per share versus net income of $414,663 or
$0.13 per share in the prior year. These lower 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 Company reported a
net loss of ($156,133) or $0.05 per share after non-recurring
restructuring charges relating to work force reduction, branch
closings, and changes in compensation programs as discussed
below.
As indicated in 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 impact of 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 $500,000 in
excess of reimbursement limits during the quarter ended September
30, 1998, (most of which occurred in the month of July prior to
the restructuring). In comparison, the Company operated well
under the then-higher reimbursement limits during the same
quarter of the prior year.
Restructuring Plan Implemented
On July 31, 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 portion of the initial net losses from
operations (excluding non-recurring charges) in the third and
fourth quarters.
The Company recorded in the first quarter a non-recurring 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. In addition, the Company recorded a charge of
$550,000 before taxes ($323,000 after tax) in the second quarter
for severance, branch closings and other non-recurring 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.
<PAGE>
Results of Operations
Caretenders Health Corp.
Operating Data Excluding Non-Recurring Items
for the three months ended September 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 Health Care $19,628,621 100.0% $18,667,044 100.0% $ 961,577 5.2%
Adult Day Health 4,895,678 100.0% 4,166,522 100.0% 729,156 17.5%
Services ----------- ----------- ----------
24,524,299 22,833,566 1,690,733 7.4%
Costs of Sales and
Services
Home Health Care 16,285,338 83.0% 14,465,292 77.5% 1,820,046 12.6%
Adult Day Health 3,755,855 76.7% 3,486,186 83.7% 269,669 7.7%
Services ----------- ----------- ----------
20,041,193 81.7% 17,951,478 78.6% 2,089,715 11.6%
Center Contribution
Home Health Care 3,343,283 17.0% 4,201,752 22.5% (858,469)(20.4%)
Adult Day Health 1,139,823 23.3% 680,336 16.3% 459,487 67.5%
Services ----------- ----------- ----------
4,483,106 18.3% 4,882,088 21.4% (398,982) (8.2%)
Selling, General & 2,649,824 10.8% 2,647,336 11.6% 2,488 0.1%
Administrative
Depreciation and 574,387 2.3% 634,414 2.8% (60,027) (9.5%)
Amortization
Provision for 559,212 2.3% 661,951 2.9% (102,739)(15.5%)
Uncollectible Accounts
Interest, Net 415,078 1.7% 232,579 1.0% 182,499 78.5%
Income before taxes
and non-recurring ----------- ----------- ----------
items 284,605 1.2% 705,808 3.1% (421,203) (59.7%)
</TABLE>
Home Health Care
Revenues. Net revenues increased approximately 5.2%
primarily as a result of increased volumes from acquired
home health care operations partially offset by the
following reductions: 1) approximately $500,000 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 17.5% increase in adult day health
services revenues was primarily a result of increased
occupancy levels in the Company's centers. The Company had
22 centers in operation versus 20 centers at September 30,
1997.
Costs 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 decreased 7 percentage
points reflecting improved profitability from increased
occupancy rates.
Selling, General and Administrative. Selling, general and
administrative costs increased only slightly as compared to
the three months ended September 30, 1997. As a percentage
of revenue, these costs decreased from 11.6% to 10.8% as a
result of revenue growth and the implementation of the
Company's restructuring plan mentioned above. SG&A expenses
declined approximately $316,000 from the quarter ended June
30, 1998 primarily as a result of two months of operation
after the restructuring plan was implemented on July 31.
Provision for Uncollectible Accounts. The provision for
uncollectible accounts for the quarters ended September 30,
1998 and 1997 was recorded based on management's evaluation
of collectibility.
Depreciation and Amortization. The decrease resulted from
the following: 1) amortization eliminated due to the write-
down of goodwill in the first quarter, 2) amortization
related to pre-opening costs eliminated due to the adoption
of SOP 98-5 in the first quarter, and 3) the fully
depreciated status of certain of the Company's older assets.
This was offset somewhat by depreciation related to
investments in capital assets made during the period.
Interest. The increase in interest is primarily the result of
higher average outstanding debt levels incurred to finance
acquisitions, 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 September 30, 1998. 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 September 30,
1998.
<PAGE>
Caretenders Health Corp.
Operating Data Excluding Non-Recurring Items
for the six months ended September 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 Health Care $38,740,957 100.0% $36,308,100 100.0% $2,432,857 6.7%
Adult Day Health 9,449,796 100.0% 8,046,716 100.0% 1,403,080 17.4%
Services ----------- ----------- ----------
48,190,754 44,354,816 3,835,937 8.6%
Costs of Sales and
Services
Home Health Care 32,839,059 84.8% 28,060,325 77.3% 4,778,734 17.0%
Adult Day Health 7,532,613 79.7% 6,776,578 84.2% 756,035 11.2%
Services ----------- ----------- ----------
40,371,672 83.8% 34,836,903 78.5% 5,534,769 15.9%
Center Contribution
Home Health Care 5,901,899 15.2% 8,247,775 22.7% (2,345,876)(28.4%)
Adult Day Health 1,917,183 20.3% 1,270,138 15.8% 647,045 50.9%
Services ----------- ----------- ----------
7,819,082 16.2% 9,517,913 21.5% (1,698,831)(17.8%)
Selling, General & 5,615,841 11.7% 5,318,351 12.0% 297,490 5.6%
Administrative
Depreciation and 1,192,151 2.5% 1,242,800 2.8% (50,649) (4.1%)
Amortization
Provision for 1,249,625 2.6% 1,281,584 2.9% (31,959) (2.5%)
Uncollectible Accounts
Interest, Net 805,123 1.7% 471,380 1.1% 333,743 70.8%
Income before taxes
goodwill write-down
restructuring charges
and non-recurring ----------- ----------- ----------
items (1,043,658) (2.2%) 1,203,798 2.7% (2,247,456) NM
</TABLE>
NM _ Not Meaningful
Home Health Care
Revenues. Net revenues increased approximately 6.7%
primarily as a result of increased volumes from acquired
home health care operations partially offset by the
following reductions: 1) approximately $1,500,000 as a
direct result of lower Medicare nursing cost limits and 2)
approximately $500,000 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 primarily a result of increased
occupancy in the Company's centers. The Company had 22
centers in operation versus 20 centers at September 30,
1997.
Costs 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 decreased 4.5
percentage points reflecting improved profitability from
increased occupancy rates.
Selling, General and Administrative. Selling, general and
administrative costs increased 5.6% compared to the six
months ended September 30, 1997 with substantially all of the
increase occurring in the quarter ended June 30, 1998. Refer
to the quarterly discussion above for information on the
quarter ended September 31, 1998 impact.
Provision for Uncollectible Accounts. The provision for
uncollectible accounts for the six months ended September 30,
1998 and 1997 was recorded based on management's evaluation
of collectibility.
Depreciation and Amortization. The decrease resulted from the
following: 1) amortization eliminated due to the write-down
of goodwill in the first quarter, 2) amortization related to
pre-opening costs eliminated due to the adoption of SOP 98-5
in the first quarter, and 3) the fully depreciated status of
certain of the Company's older assets. This was offset
somewhat by depreciation related to investments in capital
assets made during the period.
Interest. The increase in interest is primarily the result of
higher average outstanding debt levels incurred to finance
acquisitions, 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 September 30, 1998. 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 September 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 September 30, 1998, the Company had total cash and unused
borrowings of approximately $2.3 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 December
1998. The Company's results of operations for the six months
ended September 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 September 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 may remain diminished until such time
as it returns to profitable operation.
The Company is currently negotiating a $20 million replacement
credit facility. While there can be no assurance that the
replacement credit facility will be obtained, management
believes that it will be completed during the third or fourth
quarter of its fiscal 1999 year. If the Company is unable to
obtain satisfactory financing it could 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>
Six months ended
September 30,
Net Change in Cash and Cash 1998 1997
Equivalents
<S> <C> <C>
Provided by (used in)
Operating activities $(1,506) $ 4,225
Investing activities (1,840) (2,549)
Financing activities 2,549 (1,752)
Net Change in Cash and Cash -------- ---------
Equivalents $ (797) $ (76)
</TABLE>
Net cash used in operating activities of approximately
$1.5 million resulted principally from current period
losses net of non-cash expenses such as depreciation,
bad debt provision, goodwill write-down, restructuring
charges, cumulative effect of accounting change and
deferred income taxes, increased investment in accounts
receivable and reduced accounts payable. Net cash used
in investing activities of approximately $1.8 million
resulted principally from amounts invested in new ADC
facilities and capital expenditures related to durable
medical equipment and improvement of information
systems. Net cash of approximately $2.5 million was
provided by financing activities through increases in
the outstanding balance on the revolving credit
facility.
<PAGE>
Contract Management Services
Prior to October 1, 1998 the Company managed two home health
agencies operating in the Louisville, KY area, which were owned
by Columbia/HCA. The Company also owns and operates a
competing agency in Louisville. The Company performed the
management services pursuant to management agreements scheduled
to expire in February and June 2000. These services generated
approximately $3 million of management fee revenues in the
Company's most recent fiscal year, which ended March 31, 1998
and $1.3 million in the six months ended September 30, 1998.
On September 30, 1998 Columbia sold the agencies to a third
party and notified the Company that its services would no
longer be needed for home health visits performed after that
date. The Company believes that the contracts are non-
cancelable in the event of a sale, and, accordingly, the
Company believes that Columbia's action constitutes a breach of
contract, for which the Company is entitled to monetary
damages.
The Company is pursuing recovery of damages through litigation
and through settlement discussions with Columbia. The Company
is also attempting to mitigate the financial impact of the loss
of these contracts through its company-owned agency also
operating in the Louisville market. Due to the current status
of events, the Company is unable to predict the ultimate
outcome of this matter. The Company estimates that the loss of
this business will lower its revenues by $1.2 million and its
net income by $575,000 or $0.18 per share over the balance of
the fiscal year ending March 31, 1999.
As indicated above, the Company effected a restructuring of its
operations on July 31, 1998 resulting in a reduction of
operating costs totaling an estimated $7.0 million annually.
This restructuring included substantial reductions in staff,
closing certain unprofitable branch locations and the write-
down of goodwill and deferred pre-opening costs. Management
believes that this restructuring and other changes in the
Company's operations, should enable the Company to operate
profitably in the third and fourth quarters of this fiscal year
even after the loss of the contract management services
business described above. However, such a result cannot be
assured.
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.
<PAGE>
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
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 six months ended September 30, 1998 would have been
approximately $500,000 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. In
legislation passed in October 1998, this date was extended to
October 1, 2000 which would go in effect for the Company's
agencies on April 1, 2001.
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
<PAGE>
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 $1.5 million
in excess of the new Medicare cost limits during the first six
months of fiscal 1999). As discussed previously herein, this
was the primary cause of the Company's first quarter $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
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 portion of the first and second
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
non-recurring 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 recorded a charge of $550,000 before taxes
($323,000 after tax) in the second quarter for severance,
branch closings and other non-recurring 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.
During the quarter ended September 30, 1998 the Company
incurred costs in excess of limits of approximately $500,000 or
one half the amount incurred in the first quarter. The
majority of these excess costs were incurred prior to the July
31, 1998 restructuring 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. 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). In the event that home care PPS is not implemented
by October 1, 2000 the BBA as legislated required cost limits
then in existence to be lowered by an additional 15%.
In legislation passed in October 1998, the date for
implementing PPS or further reducing cost limits was extended
by one year to October 1, 2000 and April 1, 2001, respectively.
Additionally, the new legislation provided for small increases
in cost limits. With respect to PPS and the October 1, 2000
deadline, rules and regulations have not yet been developed by
HCFA and there can be no assurance that such deadline will be
met. 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.
<PAGE>
If the PPS deadline is not met and the further 15% limit
reduction is made the Company would make every effort to
operate within the lower limits. The Company is unable to
predict at this time whether it would be able to operate all of
its agencies under such limits nor is it able to state at this
time what alternative actions, if any, it might take.
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 has implemented a plan to
evaluate and address its year 2000 issues. The plan has
identified that the Company's principle 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. Some moderate modification and testing is still
required to verify the year 2000 readiness of these systems.
The Company believes these final measures will be substantially
completed prior to the year 2000.
The Company also utilizes certain purchased systems for which
the Company does not control the programming. These purchased
systems are not in compliance to handle the year 2000 issue 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. The
Company is currently in the evaluation phase of potential
replacement systems. 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.
The Company depends on receipt of payment from its payor
sources, which utilize computer software to process those
payments. The Company has over 3,000 individual payors
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 payors, or in turn on the Company.
The above status of the Company's year 2000 issues is based
upon certain management assumptions such as the availability of
appropriate implementation personnel, consultants, software
vendors and related resources. 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 assumptions or expected results
will be achieved and actual results could differ materially
from those expected results. Possible consequences of not
addressing the year 2000 issue by the Company, its vendors or its
reimbursement sources include, but are not limited to, a potential
inability of the Company to obtain sufficient goods and services to
operate its business and the potential inability to obtain timely
reimbursement for services provided by the Company. Company
continues to evaluate contingency plans related to its year 2000
issues on an ongoing basis. Such contingency plans are
highly dependent upon actions taken by its payor sources regarding
year 2000.
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.
<PAGE>
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 (attached)
Exhibit 27 (attached)
(b) Form 8-K was filed by the Company on October 15,
1998 related to certain management contracts.
<PAGE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
EXHIBIT 11
<TABLE>
Three Months Ended Six Months Ended
September 30, September 30,
1998 1997 1998 1997
---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
BASIC
Net income for basic income per common share $ (156,133) $ 414,663 $(5,904,363) $ 707,232
Weighted average outstanding shares during the period 3,120,413 3,119,413 3,120,413 3,119,413
---------- ----------- ------------ ----------
Net income (loss) per common share $ (0.05) $ 0.13 $ (1.89) $ 0.23
---------- ----------- ------------ ----------
DILUTED
Net income for diluted income per common share $ (156,133) $ 414,663 $(5,904,363) $ 707,232
Weighted average outstanding shares during the period 3,120,413 3,119,413 3,120,413 3,119,413
Add - Common equivalent shares representing shares
issuable upon exercise of dilutive options and warrants (a) 24,532 (a) 24,532
---------- ----------- ------------ ----------
3,120,413 3,143,945 3,120,413 3,143,945
---------- ----------- ------------ ----------
Net income (loss) per common share $ (0.05) $ 0.13 $ (1.89) $ 0.22
---------- ----------- ------------ ----------
</TABLE>
(a) anti-dultive
<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: November 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>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<CASH> 27
<SECURITIES> 0
<RECEIVABLES> 27,153
<ALLOWANCES> (3,213)
<INVENTORY> 0
<CURRENT-ASSETS> 1,429
<PP&E> 20,470
<DEPRECIATION> (12,123)
<TOTAL-ASSETS> 45,137
<CURRENT-LIABILITIES> 11,099
<BONDS> 0
<COMMON> 16,179
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 45,137
<SALES> 48,191
<TOTAL-REVENUES> 48,191
<CGS> 40,372
<TOTAL-COSTS> 40,372
<OTHER-EXPENSES> 6,808
<LOSS-PROVISION> 1,249
<INTEREST-EXPENSE> 805
<INCOME-PRETAX> (8,561)
<INCOME-TAX> (3,039)
<INCOME-CONTINUING> (5,522)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (383)
<NET-INCOME> (5,904)
<EPS-PRIMARY> (1.89)
<EPS-DILUTED> (1.89)
</TABLE>
