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 December 31, 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 of (IRS Employer Identification No.)
incorporation or organization)
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 December 31, 1998 - 3,130,436
<PAGE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998
and March 31, 1998 3
Consolidated Statements of Operations for the Three
Months ended December 31, 1998 and 1997 4
Consolidated Statements of Operations for the Nine
Months ended December 31, 1998 and 1997 5
Consolidated Statements of Cash Flows for the Nine
Months ended December 31, 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 - 21
Part II. Other Information
Items 1 through 6 22
<PAGE>
<TABLE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS
December 31, 1998 March 31, 1998
----------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 51,373 $ 824,293
Accounts receivable _ net 23,168,216 23,832,574
Prepaid expenses and other current assets 1,497,334 1,649,579
Deferred tax assets 195,661 88,635
------------- -------------
TOTAL CURRENT ASSETS 24,912,584 26,395,081
PROPERTY AND EQUIPMENT, net 7,876,582 7,752,103
COST IN EXCESS OF NET ASSETS ACQUIRED, net 7,504,311 13,514,130
DEFERRED TAX ASSETS 3,072,199 690,000
OTHER ASSETS 772,670 1,181,309
------------- -------------
$ 44,138,346 $ 49,532,623
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 10,510,938 $ 12,139,101
Current portion of term debt and capital
lease obligations 3,252,046 3,248,185
Other current liabilities 100,000 100,000
------------- -------------
TOTAL CURRENT LIABILITIES 13,862,984 15,487,286
------------- -------------
LONG-TERM LIABILITIES:
Revolving Credit Facility 12,230,142 11,038,646
Term debt and capital lease obligations 140,025 197,184
Other liabilities 663,796 726,614
------------- -------------
TOTAL LONG-TERM LIABILITIES 13,033,963 11,962,444
------------- -------------
TOTAL LIABILITIES 26,896,947 27,449,730
------------- -------------
Commitments and Contingencies (Note 2)
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 (8,321,256) (3,479,762)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 17,241,399 22,082,893
------------- -------------
$ 44,138,346 $ 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)
Three Months Ended
----------------------------
December December
31, 1998 31, 1997
------------- -------------
<S> <C> <C>
Net revenues $ 24,821,022 $ 23,436,107
Cost of sales and services 20,078,342 18,692,200
Selling, general and administrative expenses 2,584,230 2,530,681
Depreciation and amortization expense 613,377 628,068
Provision for uncollectible accounts 690,898 673,856
Litigation settlement (gain) (1,350,000) -
------------- -------------
Income before other income (expense) and
income taxes 2,204,175 911,302
Other income (expense):
Interest expense, net (396,359) (212,741)
------------- -------------
Income before provision for income taxes 1,807,816 698,561
Provision for income taxes 744,947 288,157
------------- -------------
Net income $ 1,062,869 $ 410,404
============= =============
AVERAGE SHARES OUTSTANDING:
Basic 3,120,413 3,119,413
Diluted 3,151,103 3,176,561
PER SHARE:
Net income - Basic $ 0.34 $ 0.13
Net income - Diluted $ 0.34 $ 0.13
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE>
<TABLE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended
----------------------------
December December
31, 1998 31, 1997
------------- -------------
<S> <C> <C>
Net revenues $ 73,011,776 $ 67,790,923
Cost of sales and services 60,450,014 53,340,924
Selling, general and administrative expenses 8,200,071 8,037,211
Depreciation and amortization expense 1,805,528 1,870,868
Provision for uncollectible accounts 1,940,523 1,955,440
Restructuring charge 550,000 -
Litigation settlement (gain) (1,350,000) -
Goodwill writedown 6,967,560 -
------------- -------------
Income (loss) before other income (expense),
income taxes and cumulative effect of a
change in accounting principle (5,551,920) 2,586,480
Other income (expense):
Interest expense, net (1,201,482) (684,121)
------------- -------------
Income (loss) before provision for income
taxes and cumulative effect of a change
in accounting principle (6,753,402) 1,902,359
Provision (benefit) for income taxes (2,294,423) 784,723
------------- -------------
Income before cumulative effect of a change
in accounting principle (4,458,979) 1,117,636
Cumulative effect on prior years of a change
in method of accounting for pre-opening
costs, net (382,515) -
------------- -------------
Net income (loss) $ (4,841,494) $ 1,117,636
============= =============
PER SHARE - BASIC:
Average shares outstanding 3,120,413 3,119,413
============= =============
Net income (loss) before Cumulative Effect
of a Change in Accounting Principle $ (1.43) $ 0.36
Cumulative effect on prior years of a
change in method of accounting for
pre-opening costs, net (0.12) -
------------- -------------
Net income (loss) $ (1.55) $ 0.36
============= =============
PER SHARE - DILUTED:
Average shares outstanding 3,120,413 3,161,706
============= =============
Net income (loss) before Cumulative Effect
of a Change in Accounting Principle $ (1.43) $ 0.36
Cumulative effect on prior years of a
change in method of accounting for
pre-opening costs, net (0.12) -
------------- -------------
Net income (loss) $ (1.55) $ 0.36
============= =============
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE>
<TABLE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
----------------------------
December December
31, 1998 31, 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (4,841,494) $ 1,117,636
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization 1,805,528 1,870,868
Provision for uncollectible accounts 1,940,523 1,955,440
Goodwill writedown and restructuring charge 7,517,560 -
Cumulative effect of change in accounting
principle 651,090 -
Deferred Taxes (2,489,225) -
------------- -------------
4,583,982 4,943,944
Change in certain net current assets
(Increase) decrease in:
Accounts receivable (2,468,467) (1,475,316)
Prepaid expenses and other current assets 152,245 (90,227)
Increase (decrease) in:
Accounts payable and accrued liabilities (2,178,163) 583,190
------------- -------------
Net cash provided (used) by operating
activities 89,597 3,961,591
------------- -------------
Cash flows from investing activities:
Capital expenditures (2,037,998) (3,096,988)
Sale of property 568,867 -
Other assets (468,766) (710,019)
------------- -------------
Net cash provided (used)by investing
activities (1,937,897) (3,807,007)
------------- -------------
Cash flows from financing activities:
Principal payments on long-term debt (53,298) (157,189)
Net revolving credit facility borrowings 1,191,496 1,418,261
Other (62,818) (124,511)
------------- -------------
Net cash provided (used) by financing
activities 1,075,380 1,136,561
------------- -------------
Net increase (decrease) in cash (772,920) 1,291,145
Cash and cash equivalents at
beginning of period 824,293 1,014,604
------------- -------------
Cash and cash equivalents at end of period $ 51,373 $ 2,305,749
============= =============
</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 nine months ended December 31, 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 December 31, 1998 and the results of operations
and cash flows for the periods ended December 31, 1998 and 1997.
The results of operations for the three and nine months ended December 31,
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.
Franklin
---------
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 meritorious12defenses 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
--------
In its previously filed report on Form 8-K, the Company announced a dispute
with Columbia/HCA arising from management agreements between the parties.
In December, 1998 the parties reached an agreement under which Columbia will
pay the Company a total of $1.5 million in settlement of breach claims and
in return for certain wind-down services to be provided through June, 1999.
Of the settlement payments, $150,000 will be used to offset the estimated
costs of providing the wind-down services. The balance of $1,350,000
($793,000 or $.25 per share after tax) has been recognized as a non-
recurring litigation settlement gain in the third quarter of which $925,000
has been collected as of December 31, 1998. The remainder is in an escrow
account and is expected to be collected by June 1999
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 nine months ended December 31, 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 by14approximately $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>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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 have reduced operating costs by an annualized amount of
approximately $7 million ($4.9 million in the current fiscal year). As of
December 31, 1998, restructuring plan activities have resulted in cost
savings that are consistent with the Company's expectations.
The Company recorded a pretax charge of $550,000 in the second quarter of
fiscal 1999 related to restructuring activities. The charge included
approximately $412,000 for work force reductions $84,000 for branch closing
costs and $54,000 for work force reorganization. As of December 31, 1998,
the Company has a remaining restructuring reserve balance of approximately
$69,000 which is primarily comprised of amounts related to branch closings.
7. STOCK OPTIONS
-------------
On December 14, 1998, the Company adopted a plan to revalue the exercise
price of the outstanding stock options related to its five stock option
plans. The plan revalued the exercise price for all outstanding options as
of December 14, 1998 that were priced in excess of market price ($2.625) to
the market price. The impact on the FAS 123 pro-forma disclosure of stock
based compensation was immaterial for the quarter. Refer to the Company's
10-K for the year ended March 31, 1998 for additional information on the
Company's stock option plans.
8. SUBSEQUENT EVENTS
-----------------
On January 29, 1999 the Company sold its Richmond, VA market operations for
$850,000 in cash. It simultaneously initiated the closure of its Boston,
MA home medical equipment operations. The Company expects to report a
fourth quarter after-tax charge not to exceed $1 million related to these
dispositions. For the quarter and nine-months ended December 31, 1998 the
effected operations generated revenues of $1.2 million and $3.7 million and
contributed pre-tax losses of $244,000 and $476,000, respectively.
<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 adult day health services and home health care,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. 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 December 31, 1998 the Company generated net income
from operations (excluding non-recurring items) of $269,744 or $0.09 per
share versus net income of $410,404 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.
The Company reported a net gain of $793,000 or $0.25 per share
resulting from the settlement of litigation as discussed below.
In response to the impact of the Interim Payment System for Medicare,
the Company executed a restructuring plan including work force reduction,
branch closings, and changes in compensation programs in July 1998. During the
quarter ended December 31, 1998 the Company experienced benefits from the
restructuring plan. These benefits included approximately $740,000 in lower
losses related to Medicare cost limits compared to the quarter ended June 30,
1998 (prior to the restructuring plan).
Year to Date
- ------------
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's prospects for future cash
flow in certain markets. 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
<TABLE>
Caretenders Health Corp.
Operating Data
for the three months ended December 31,
` 1 9 9 8 1 9 9 7 Change
----------------- ---------------- -----------------
Amount % Amount % Amount %
---------- ------ ---------- ----- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues:
Home Health Care 19,812,872 100.0% 19,229,812 100.0% 583,060 3.0%
Adult Day Health Services 5,008,150 100.0% 4,206,295 100.0% 801,855 19.1%
---------- ---------- ----------
24,821,022 23,436,107 1,384,915 5.9%
---------- ---------- ----------
Costs of Sales and Services:
Home Health Care 16,236,502 81.9% 15,215,464 79.1% 1,021,038 6.7%
Adult Day Health Services 3,841,840 76.7% 3,476,736 82.7% 365,104 0.5%
---------- ---------- ----------
20,078,342 80.9% 18,692,200 79.8% 1,386,142 7.4%
---------- ---------- ----------
Center Contribution
Home Health Care 3,576,370 18.1% 4,014,348 20.9% (437,978)(10.9%)
Adult Day Health Services 1,166,310 23.3% 729,559 17.3% 436,751 59.9%
---------- ---------- ----------
4,742,680 19.1% 4,743,907 20.2% (1,227) (0.0%)
---------- ---------- ----------
Selling, General &
Administrative 2,584,230 10.4% 2,530,681 10.8% 53,549 2.1%
Depreciation and
Amortization 613,377 2.5% 628,068 2.7% (14,691) (2.3%)
Provision for Uncollectible
Accounts 690,898 2.8% 673,856 2.9% 17,042 2.5%
Interest, Net 396,359 1.6% 212,741 0.9% 183,618 86.3%
---------- ---------- ----------
Income Before Taxes and
Litigation Settlement 457,816 1.8% 698,561 3.0% (240,745)(34.5%)
========== ========== ==========
</TABLE>
Home Health Care
----------------
NET REVENUES. Net revenues increased approximately 3.0% primarily as
a result of volumes from acquired home health care operations
partially offset by the following reductions: 1) approximately
$267,000 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 volumes from acquired
home health operations partially offset by cost savings
resulting from the Company's restructuring plan. 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 19.1% 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 December 31, 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 6 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 December
31, 1997. As a percentage of revenue, these costs decreased from 10.8% to
10.4% as a result of revenue growth and the implementation of the Company's
restructuring plan mentioned above.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS: The provision for uncollectible
accounts for the quarters ended December 31, 1998 and 1997 was recorded
based on management's evaluation of collectibility.
DEPRECIATION AND AMORTIZATION: The decrease resulted primarily from
amortization related to pre-opening costs that were eliminated due to the
adoption of SOP 98-5 in the first quarter. This was offset partially by
depreciation related to investments in capital assets made during the year.
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.
<PAGE>
<TABLE>
Caretenders Health Corp.
Operating Data
for the nine months ended December 31,
` 1 9 9 8 1 9 9 7 Change
----------------- ---------------- -----------------
Amount % Amount % Amount %
---------- ------ ---------- ----- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues:
Home Health Care 58,553,830 100.0% 55,537,912 100.0% 3,015,918 5.4%
Adult Day Health Services 14,457,946 100.0% 12,253,011 100.0% 2,204,935 18.0%
---------- ---------- ----------
73,011,776 67,790,923 5,220,853 7.7%
---------- ---------- ----------
Costs of Sales and Services:
Home Health Care 49,011,368 83.7% 43,087,610 77.6% 5,923,758 13.7%
Adult Day Health Services 11,438,646 79.1% 10,253,314 83.7% 1,185,332 11.6%
---------- ---------- ----------
60,450,014 82.8% 53,340,924 78.7% 7,109,090 13.3%
---------- ---------- ----------
Center Contribution
Home Health Care 9,542,462 16.3% 12,450,302 22.4%(2,907,840)(23.4%)
Adult Day Health Services 3,019,300 20.9% 1,999,697 16.3% 1,019,603 51.0%
---------- ---------- ----------
12,561,762 17.2% 14,449,999 21.3%(1,888,239)(13.1%)
---------- ---------- ----------
Selling, General &
Administrative 8,200,071 11.2% 8,037,211 11.9% 162,860 2.0%
Depreciation and
Amortization 1,805,528 2.5% 1,870,868 2.8% (65,340) (3.5%)
Provision for Uncollectible
Accounts 1,940,523 2.7% 1,955,440 2.9% (14,917) (0.8%)
Interest, Net 1,201,482 1.6% 684,121 1.0% 517,361 75.6%
---------- ---------- ----------
Income (Loss) Before Taxes,
Goodwill Write-Down,
Restructuring Charge,
Litigation Settlement and
Cumulative Effect of a
Change in Accounting
Principle (585,842) (0.8%) 1,902,359 2.8% (2,488,201)(130.8%)
========== ========== ===========
</TABLE>
Home Health Care
----------------
REVENUES: Net revenues increased approximately 5.4% primarily as a
result of volumes from acquired home health care operations partially
offset by the following reductions: 1) approximately $1.7 million as a
direct result of lower Medicare nursing cost limits and 2) approximately
$750,000 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 volumes from acquired home health
operations partially offset by cost savings resulting from the Company's
restructuring plan. 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 18.0% 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 December 31,
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 4.6 percentage points reflecting improved profitability from
increased occupancy rates.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
costs increased 2.0% compared to the nine months ended December 31, 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 December 31, 1998 impact.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS: The provision for uncollectible
accounts for the nine months ended December 31, 1998 and 1997 was recorded
based on management's evaluation of collectibility.
DEPRECIATION AND AMORTIZATION: The decrease resulted primarily from
amortization related to pre-opening costs that was eliminated due to the
adoption of SOP 98-5 in the first quarter. This was offset partially by
depreciation related to investments in capital assets made during the year.
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 nine months
ended December 31, 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 December 31, 1998.
<PAGE>
Liquidity and Capital Resources
-------------------------------
Revolving Credit Facility
-------------------------
The Company has $18 million in revolving credit facilities, comprised of
$15 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 December 31, 1998, the Company had total cash and unused borrowings
of approximately $2.2 million. 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 March 1999. As
of December 31, 1998, the Company was in compliance with the financial
covenants of the Heller facility.
The Company has a commitment for a new a $20 million replacement
credit facility which is expected to be in place prior to March 31,
1998. If the Company is unable to close this facility or obtain
other satisfactory financing it could have an adverse impact on the
Company's liquidity and its ability to execute its development plans.
Management will continuously evaluate 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>
Nine months ended December 31,
----------------------
Net Change in Cash and Cash
Equivalents 1998 1997
--------- ----------
<S> <C> <C>
Provided by (used in)
Operating activities $ 90 $ 3,962
Investing activities (1,938) (3,807)
Financing activities 1,075 1,136
Net Change in Cash and --------- ----------
Cash Equivalents $ (773) $ 1,291
========= ==========
</TABLE>
The Company generated cash from operating activities of
approximately $90,000 for the nine months ending24December 31, 1998
compared to approximately $4 million for the same period in the prior year.
The decrease is primarily as a result lower net income from
continuing operations, reductions in current liabilities owed by the
Company and slower cash collections from Medicare. Net cash used in
investing activities decreased approximately $1.9 million as a result of
lower capital investment in new facilities and medical equipment and the
sale of certain real property. Net cash procided by by financing
activities decreased only slightly due to lower payments of term debt and
other liabilities.
<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 management services pursuant to
management agreements scheduled to expire in February and June 2000. These
services generated approximately $2.9 million of management fee revenues and
$1.3 million in the nine months ended December 31, 1997 and 1998,
respectively. 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.
In its previously filed report on Form 8-K, the Company announced a dispute
with Columbia/HCA arising from management agreements between the parties.
In December, 1998 the parties reached an agreement under which Columbia will
pay the Company a total of $1.5 million in settlement of breach claims and
in return for certain wind-down services to be provided through June, 1999.
Of the settlement payments, $150,000 will be used to offset the estimated
costs of providing the wind-down services. The balance of $1,350,000
($793,000 or $.25 per share after tax) has been recognized as a non-
recurring litigation settlement gain in the third quarter of which $925,000
has been collected as of December 31, 1998. The remainder is in an escrow
account and is expected to be collected by June 1999
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 therapy
services and a restructuring of the reimbursement system related to Medicare
certified home care agencies.
<PAGE>
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 nine months ended December 31, 1998 would have been approximately
$750,000 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 was 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 Company believes that IPS has caused a contraction of Medicare home
health operations nationwide and 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 determined.
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
In response to IPS , the Company executed a restructuring plan in July 1998.
The plan included work force reductions, branch closings, and changes in
compensation programs designed to minimize the impact of IPS on the Company's
operations. The actions have reduced 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).
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 and related prospects for future cash flows in certain markets.
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 and 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>
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.
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.
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. Certain of 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. The 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.
<PAGE>
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.
NASDAQ Listing Status
---------------------
The Company has been notified by NASDAQ and has an upcoming hearing
concerning listing qualifications for the National NASDAQ market system. The
Company currently does not meet the minimum public float requirement of $5
million. Should the Company be unable to meet the requirement of NASDAQ its
stock would move from the National market system to the NASDAQ SmallCap
Market.
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)Ehibits
Exhibit 11 (attached)
Exhibit 27 (attached)
(b)Form 8-K was filed by the Company on October 15, 1998 and
January 4, 1999 related to certain management contracts.
<PAGE>
<TABLE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
EXHIBIT 11
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------- -----------------------
1998 1997 1998 1997
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC
Net income (loss) for basic
income per common share $1,062,869 $ 410,404 $(4,841,494) $1,117,636
Weighted average outstanding ========== =========== ============ ===========
shares during the period 3,120,413 3,119,413 3,120,413 3,120,413
Net income (loss) per ---------- ----------- ------------ -----------
common share $ 0.34 $ 0.13 $ (1.55) $ 0.36
========== =========== ============ ===========
DILUTED
Net income (loss)for diluted
income per common share $1,062,869 $ 410,404 $(4,841,494) $1,117,636
Weighted average outstanding ========== =========== ============ ==========
shares during the period 3,120,413 3,119,413 3,120,413 3,120,413
Add - Common equivalent shares
representing shares issuable
upon exercise of
dilutive options 30,690 57,148 (a) 41,293
---------- ----------- ----------- -----------
3,151,103 3,176,561 3,120,413 3,161,706
---------- ----------- ----------- -----------
Net income (loss) per
common share $ 0.34 $ 0.13 $ (1.55) $ 0.35
========== =========== =========== ===========
</TABLE>
(a) anti-dilutive
<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: February 14, 1999
----------------------
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> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 51
<SECURITIES> 0
<RECEIVABLES> 27,727
<ALLOWANCES> (3,559)
<INVENTORY> 0
<CURRENT-ASSETS> 1,497
<PP&E> 20,463
<DEPRECIATION> (12,586)
<TOTAL-ASSETS> 44,138
<CURRENT-LIABILITIES> 13,863
<BONDS> 0
<COMMON> 17,241
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 44,138
<SALES> 73,012
<TOTAL-REVENUES> 73,012
<CGS> 62,256
<TOTAL-COSTS> 62,256
<OTHER-EXPENSES> 14,366
<LOSS-PROVISION> 1,940
<INTEREST-EXPENSE> 1,201
<INCOME-PRETAX> (6,753)
<INCOME-TAX> (2,294)
<INCOME-CONTINUING> (4,459)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (383)
<NET-INCOME> (4,841)
<EPS-PRIMARY> (1.55)
<EPS-DILUTED> (1.55)
</TABLE>
