SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from -----------to-----------
Commission file number 1-9848
CARETENDERS HEALTH CORP.
(Exact name of registrant as specified in its charter)
Delaware 06-1153720
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
100 Mallard Creek Road, Suite 400 40207
(Address of principal executive offices) (Zip Code)
(502) 899-5355
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock $.10 par value
Shares outstanding at June 30, 1999 - 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 June 30, 1999
and March 31, 1999 3
Consolidated Statements of Operations for the Three
Months ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows for the Three
Months ended June 30, 1999 and 1998 5
Notes to Interim Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 16
Part II. Other Information
Items 1 through 6 17
<PAGE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS June 30, 1999 March 31, 1999
(UNAUDITED)
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 242,512 $ 1,038,751
Accounts receivable - net 19,653,270 20,463,414
Prepaid expenses and other current assets 1,236,350 1,371,719
------------ -----------
TOTAL CURRENT ASSETS 21,132,132 22,873,884
PROPERTY AND EQUIPMENT - net 7,219,899 7,453,203
COST IN EXCESS OF NET ASSETS ACQUIRED - net 7,329,971 7,394,238
DEFERRED TAX ASSETS 4,137,000 4,137,000
OTHER ASSETS 760,847 903,639
----------- -----------
$40,579,849 $42,761,965
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 8,937,227 $ 9,548,648
Current portion of term debt and capital
lease obligations 60,000 3,122,749
Other current liabilities 315,943 673,000
------------ ------------
TOTAL CURRENT LIABILITIES 9,341,411 13,344,397
============ ============
LONG-TERM LIABILITIES:
Revolving Credit Facility 14,484,707 12,530,258
Term debt and capital lease obligations 555,694 574,610
Other liabilities 283,578 457,474
------------ ------------
TOTAL LONG-TERM LIABILITIES 15,323,979 13,562,342
------------ ------------
TOTAL LIABILITIES 24,665,391 26,906,739
------------ ------------
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 (9,648,197) (9,707,429)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 15,914,458 15,855,226
---------- ----------
$40,579,849 $42,761,965
=========== ===========
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE>
<TABLE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three Months Ended
June 30, 1999 June 30, 1998
<S> <C> <C>
Net revenues $ 24,785,917 $ 23,666,455
Cost of sales and services 20,963,529 20,862,565
Selling, general and administrative
expenses 2,138,507 2,433,931
Depreciation and amortization expense 570,558 617,764
Provision for uncollectible accounts 593,944 690,413
Goodwill write-down - 6,967,560
-------------- -------------
Income (loss) before other income
(expense) and income taxes 519,380 (7,905,778)
Other income (expense):
Interest expense (325,554) (390,045)
Loss on sale of building (91,701) -
Income before income taxes 102,125 (8,295,823)
Income tax expense (benefit) 42,892 (2,930,108)
--------------- -------------
Net income (loss) before cumulative effect
of a change in accounting principle 59,232 (5,365,715)
Cumulative effect on prior years of a change
in method of accounting
for pre-opening costs (Note 4) - (382,515)
-------------- -----------------
Net income (loss) $ 59,232 $ (5,748,230)
============== =================
Per share amounts - Basic:
Average shares outstanding 3,120,436 3,120,436
Net income (loss) before cumulative
effect of a change in accounting
principle $ 0.02 $ (1.72)
Cumulative effect on prior years
of a change in method of accounting
for pre-opening costs (Note 4) - (0.12)
---------------- -------------
Net income (loss) $ 0.02 $ (1.84)
================ ==============
Per share amounts - Diluted:
Average shares outstanding 3,185,945 3,120,436
Net income (loss) before cumulative
effect of a change in accounting
principle $ 0.02 $ (1.72)
Cumulative effect on prior years
of a change in method of accounting
for pre-opening costs (Note 4) - (0.12)
----------------- --------------
Net income (loss) $ 0.02 $ (1.84)
================= ===============
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE>
<TABLE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months Ended
------------------
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 59,232 $ (5,748,230)
Adjustments to reconcile net income
to net cash provided(used) by
operating activities:
Depreciation and amortization 570,558 617,764
Provision for uncollectible accounts 593,944 690,413
Goodwill write-down - 6,967,560
Loss on sale of assets 91,701 -
Change in accounting principle - 651,090
Deferred income taxes - (2,382,199)
------------ ----------------
1,315,435 796,398
Change in certain net assets
(Increase) decrease in:
Accounts receivable 216,200 (3,330,818)
Prepaid expenses and other
current assets 135,370 (74,985)
Increase (decrease) in:
Accounts payable and
accrued liabilities (583,179) 84,165
Other liabilities (530,953) (93,771)
Other assets 217,678 (69,915)
------------ ----------------
Net cash provided (used) by
operating activities 770,551 (2,688,926)
Cash flows from investing activities:
Capital expenditures (558,673) (797,969)
Sale of assets 119,099 -
------------ ----------------
Net cash provided (used) by
investing activities (439,574) (797,969)
Cash flows from financing activities:
Principal payments on long-term debt (81,655) (59,729)
Net revolving credit facility
borrowings (1,045,551) 2,773,377
------------ ----------------
Net cash provided (used) by
financing activities (1,127,216) 2,713,648
------------- ----------------
Net increase (decrease) in cash (796,239) (773,247)
Cash and cash equivalents at beginning
of period 1,038,751 824,293
------------ -----------------
Cash and cash equivalents at end
of period $ 242,512 $ 51,046
============ =================
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
The accompanying interim consolidated financial statements for the three
months ended June 30, 1999 and 1998 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 is referred to the Companys Form 10-K for the year ended March 31, 1999
for further information. In the opinion of management of the Company, the
accompanying unaudited interim financial statements reflect all adjustments
(consisting of normally recurring adjustments) necessary to present fairly the
financial position at June 30, 1999 and the results of operations and cash
flows for the periods ended June 30, 1999 and 1998.
The results of operations for the three months ended June 30, 1999 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 Companys 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 Companys 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 Companys 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 Companys 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 1998, Aetna Life and Casualty Company withdrew its claim against
the Company without prejudice. Trial has been scheduled for February 2000.
3. FINANCIAL STATEMENT RECLASSIFICATIONS
-------------------------------------
Certain amounts have been reclassified in the 1998 financial statements in
order to conform to the 1999 presentation. Such reclassifications had no
effect on previously reported net income (loss).
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. Accordingly, the accompanying
statement of operations for the three months ended June 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 managements 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>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
6. LOSS ON SALE OF BUILDING
------------------------
In May 1999, the Company sold an office building resulting in a non-operating
loss of $91,701. The transaction generated net cash of $79,093 after repaying
mortgage debt of approximately $40,000.
7. SEGMENT DATA
------------
The Company operates in four reportable business segments: adult day health
services, visiting nurses, product operations and contract management
services. Reportable segments have been identified based upon how management
has organized the business by services provided to customers and the criteria
in SFAS 131, "Disclosures about Segment of an Enterprise and Related
Information". Selling, general and administrative expenses incurred at the
corporate level have not been allocated to the segments. Identifiable assets
are those used in the operations of each business segment. The Company
provides 1) adult day health services, and 2) ancillary services as follows:
a) visiting nurse services and b) product operation services (infusion
therapy, oxygen and durable medical equipment). The Company has operations
in Alabama, Connecticut, Florida, Indiana, Kentucky, Maryland, Massachusetts,
and Ohio.The following table sets forth the selected results of operations by
business segment:
<TABLE>
<CAPTION>
In thousands 1999 1998
---- ----
Net Revenues
<S> <C> <C>
Adult day health services $ 9,772 $ 9,327
Visiting nurses 9,677 8,348
Product operations 5,337 5,286
Contract management services - 704
--------- ---------
$ 24,786 $ 23,666
========= ========
Earnings before interest, taxes, depreciation and amortization before unusual
items
Adult day health services $ 1,380 $ 982
Visiting nurses 579 (416)
Product operations 1,269 1,037
Contract management services - 510
--------- ---------
$ 3,228 $ 2,113
Corporate/Unallocated 3,034 3,441
--------- ---------
$ 194 $ (1,328)
========= =========
</TABLE>
<PAGE>
8. SUBSEQUENT EVENT
----------------
On August 5, 1999 the Company completed a new $20 million revolving credit
facility with Bank One Kentucky, NA. Proceeds available under the facility
were used to retire obligations of approximately $14 million previously
outstanding under the Companys credit facilities with Heller Financial and
Bank One. The new credit facility bears interest at prime plus a margin
(ranging from 0% to 1.0%, currently 0.75%) dependent upon total leverage and
is secured by substantially all assets and the stock of the Companys
subsidiaries. Borrowings are available equal to the greater of a multiple of
earnings before interest, taxes, depreciation and amortization (as defined)
or, b) an asset based formula, primarily based on accounts receivable. As of
August 13, 1999 approximately $14 million was outstanding and approximately $3
million of additional borrowings were available under the formula. Borrowings
under the facility may be used for working capital, capital expenditures,
development and growth of the business and other corporate purposes. The
facility has an expiration date of April 10, 2001. Accordingly, approximately
$3 million owed to Bank One as of June 30, 1999 which would otherwise have
been classified as current has been reclassified to long-term.
<PAGE>
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Quarter Ended June 30, 1999 Compared With Quarter Ended June 30, 1998
<TABLE>
Operating Data
for the Years Ended June 30,
1 9 9 9 1 9 9 8 Change
------ ------ ------
Amount % of Revenues Amount % of Revenues Amount %
------ ------------ ----- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues
Adult Day Health Services $ 9,771,685 39.4% $ 9,327,654 39.4% $ 444,031 4.8%
Visiting Nurses 9,676,965 39.0% 8,348,027 35.3% 1,328,938 15.9%
Product Operations 5,337,267 21.5% 5,286,609 22.3% 50,658 1.0%
Contract Management - - % 478,850 2.0% (704,165) (100.0%)
------------ ----------- ----------
24,785,917 100.0% 23,666,455 100.0% 1,119,462 4.7%
------------ ----------- ----------
Cost of Sales and Services*
Adult Day Health Services 8,391,623 85.9% 8,344,943 89.5% 46,680 0.6%
Visiting Nurses 9,097,384 94.0% 8,764,061 105.0% 333,323 3.8%
Product Operations 4,068,466 76.2% 4,250,038 80.4% (181,572) (4.3%)
Contract Management - - % 133,935 27.5% (193,936) (100.0%)
------------ ----------- -----------
21,557,473 87.0% 21,552,978 91.1% 4,495 (0.0%)
------------ ----------- ----------
Segment Contribution
Adult Day Health Services 1,380,062 14.1% 982,710 10.5% 397,352 40.4%
Visiting Nurses 579,581 6.0% (416,033) (5.0%) 995,614 NM
Product Operations 1,268,801 23.8% 1,036,571 19.6% 232,230 22.4%
Contract Management - - % 510,229 72.5% (510,229) (100.0%)
------------ ----------- ----------
3,228,444 13.0% 2,113,477 8.9% 1,114,967 52.8%
------------ ----------- ----------
Selling, General & Administrative 2,138,507 8.6% 2,433,931 10. 3% (295,425) (12.1%)
Depreciation and Amortization 570,558 2.3% 617,764 2.6% (47,206) (7.6%)
Interest, Net 325,554 1.3% 390,045 1.6% (64,491) (16.5%)
Income (Loss) Before Taxes,
Non-recurring items ------------ ----------- ----------
and accounting change 193,826 0.8% (1,328,263) (5.6%) 1,522,089 NM
Non-recurring items:
Goodwill write-down - NM 6,967,560 NM (6,967,560) NM
Loss on sale of building 91,701 NM - NM 91,701 NM
Income (Loss) Before Taxes, and ------------ ---------- ----------
Accounting Change $ 102,125 NM $ (8,295,823) NM $($8,397,948) NM
============ ============ =============
</TABLE>
NM=Not Meaningful
* Includes provision for uncollectible accounts
<PAGE>
Adult Day Health Services
- -------------------------
Net revenues increased 4.8% to $9.8 million from $9.3 million. After
adjusting for the sale of the Richmond market (which took place in the quarter
ended March 31, 1999), revenues grew $792,000 or 8.8%. Growth came primarily
from volumes, which grew to 135,410 days of care in 1999 from 131,490 in 1998
(excluding Richmond). Average revenue per day of care increased approximately
5% as a result of pricing and mix changes.
Cost of sales and services as a percent of revenues declined to 86% in 1999
from 90% in 1998 primarily as a result of increased volumes of business and
increased occupancy rates for in-facility care. The Richmond sale did not have
a significant impact on cost of sales and services as a percent of revenues.
Visiting Nurses
- ---------------
Net revenues increased by $1.3 million or 16% primarily due to increased
volumes in the Companys 12 Medicare-certified home health agencies.
Excluding the sold Richmond operations revenues grew by $1.6 million or 17%.
Same store volumes increased by 16% to 136,644 visits in 1999 from 117,975
visits in 1998. Of the total $9.7 million of revenues in this segment
approximately $8.8 million or 91% was derived from cost reimbursed programs,
primarily Medicare. Average reimbursement per visit increased slightly (1%)
due to in part to increased cost reimbursement limits. However, operating
cost per unit declined by approximately $6 or 7% due to increased volumes and
the Companys cost reduction actions taken after June 30, 1998. The Company
incurred costs in excess of cost reimbursement limits of approximately $95,000
or 1%, in 1999 versus approximately $1.7 million or 23% in 1998.
Cost of sales and services in total increased 4% to $9.1 million in 1999 from
$8.7 million in 1998. However, due to the more rapid increase in volumes and
revenues explained above, cost of sales and services as a percent of revenues
fell to 94% in 1999 from 105% in 1998. The Richmond sale did not have a
significant impact on cost of sales and services as a percent of revenues.
Product Operations
- ------------------
Net revenues increased by $50,658 or 1%. Adjusting for the Boston operations
closed in late fiscal 1999, revenues grew $606,000 or 13%. Significant mix
changes took place between the periods due to an intentional reduction in low
margin products and growth in certain higher revenue per unit product types.
As a result, total units of service decreased 2% to 91,153 in 1999 while
average reimbursement per unit increased 15%, primarily in infusion therapy
products.
Cost of sales and services in total decreased $182,000 or 4% overall.
Adjusting for the Boston closure these costs actually increased by $361,000 or
11%. Due to the shift toward higher cost therapies, average cost of sales and
services per unit increased by 13% while cost of sales and services as a
percent of revenues decreased to 71% in 1999 from 75% in 1998.
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. As
described more fully in the Companys report on Form 10K for the year ended
March 31, 1999, services provided under these contracts ended on September 30,
1998.
<PAGE>
Selling, General and Administrative
- -----------------------------------
The decrease of $295,425 is due primarily to the Companys July 1998
down-sizing in response to reduced Medicare reimbursements legislated in the
Balanced Budget Act of 1997 (BBA). SG&A as a percent of revenues dropped to
8.6% in 1999 from 10.3% in 1998.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization declined by 7.6% or $47,206, primarily due to
the June 1998 non-recurring write-down of goodwill. This was partially offset
by the impact of capital expenditures, net of certain property items still in
service reaching the end of their useful lives.
Interest, Net
- -------------
The decrease in interest, net is primarily a result of lower average
outstanding debt levels associated with the Companys improved operating
results and proceeds from post-June 1998 transactions.
Income Taxes
- ------------
As of June 30, 1999, the Company has net deferred tax assets of approximately
$3.5 million. The net deferred tax asset is composed of $4.1 of long-term
deferred tax assets and $600,000 of current deferred tax liabilities.
The Company has provided a valuation allowance against certain net deferred
tax assets based upon managements estimation of realizability of those assets
through future taxable income. This valuation was based in large part on the
Companys history of generating operating income or losses, individual tax
locales and expectations for the future. The Companys ability to generate
the expected amounts of taxable income from future operations is dependent
upon general economic conditions, competitive pressures on revenues and
margins and legislation and regulation at all levels of government. 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 net deferred tax assets. However, there can be no assurances that the
Company will meet its expectations of future taxable income.
The effective income tax rate was approximately 42% of income before income
taxes for 1999 as compared to an effective income tax rate of approximately
35% of loss before taxes for 1998. The benefit in 1998 resulted directly from
the recognition of losses incurred from continuing operations and was provided
at a lower than statutory rate due to the tax implications of state and local
net operating loss carryforwards arising from the 1998 losses.
Non-recurring Items
- -------------------
Goodwill Write-down
During the quarter ended June 30, 1998, the Company recorded a non-recurring
write-down of goodwill of $6,967,560. This write-down was the result of April
1, 1998 changes in Medicare reimbursement and their resulting impact on the
home health marketplace 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 managements 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>
Building Sale
In May 1999, the Company sold an office building resulting in a non-operating
loss of $91,701. The transaction generated net cash of $79,093 after repaying
mortgage debt of approximately $40,000.
Liquidity and Capital Resources
- -------------------------------
Revolving Credit Facility
- -------------------------
On August 5, 1999 the Company completed a new $20 million revolving credit
facility with Bank One Kentucky, NA. Proceeds available under the facility
were used to retire obligations of approximately $14 million previously
outstanding under the Companys credit facilities with Heller Financial and
Bank One. The new credit facility bears interest at prime plus a margin
(ranging from 0% to 1.0%, currently 0.75%) dependent upon total leverage and
is secured by substantially all assets and the stock of the Companys
subsidiaries. Borrowings are available equal to the greater of a multiple of
earnings before interest, taxes, depreciation and amortization (as defined)
or, b) an asset based formula, primarily based on accounts receivable. As of
August 13, 1999 approximately $14 million was outstanding and approximately $3
million of additional borrowings were available under the formula. Borrowings
under the facility may be used for working capital, capital expenditures,
development and growth of the business and other corporate purposes. The
facility has an expiration date of April 10, 2001. Accordingly, approximately
$3 million owed to Bank One as of June 30, 1999 which would otherwise have
been classified as current has been reclassified to long-term.
The Company believes that this facility will be sufficient to fund its
operating needs for at least the next twelve months.
Management will continue to 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.
<PAGE>
Cash Flows and Financial Condition
----------------------------------
Key elements to the Consolidated Statements of Cash Flows were (in thousands):
<TABLE>
<CAPTION>
Net Change in Cash and Cash Equivalents 1999 1998
- --------------------------------------- ---- ----
<S> <C> <C>
Provided by (used in)
Operating activities $ 770 $ (2,689)
Investing activities (439) (798)
Financing activities (1,127) 2,714
------- ---------
Net Change in Cash and Cash Equivalents $ (796) $ (773)
======= =========
</TABLE>
1999
----
Net cash provided by operating activities of approximately $770,000
resulted principally from current period income, net of changes in
accounts receivable, accounts payable and accrued expenses. The decrease
in accounts payable and accrued liabilities resulted principally from the
timing of payments. Net cash used in investing activities of
approximately $440,000 resulted principally from amounts invested in
adult day health services expansion activities, the purchase of certain
durable medical equipment and enhancements and improvements to the
Companys information systems, net of $119,000 generated from the sale of
a building. Net cash used in financing activities of approximately $1.1
million resulted primarily from reduced borrowings under the Companys
credit facility and $40,000 of reduced mortgage obligations related to
the building sold.
1998
----
Net cash used by operating activities of approximately $2.7 million
resulted principally from current period losses, adjusted for non-cash
items (refer to discussion of operating results above and to statement of
cash flows) net of changes in accounts receivable, accounts payable and
accrued expenses. Net cash used in investing activities of approximately
$798,000 resulted principally from amounts invested in acquisition and
expansion activities and capital expenditures related to purchase of
certain durable medical equipment and real estate. Net cash provided by
financing activities of approximately $2.7 million resulted primarily
from an increase in the Companys credit facility related to investments
made in acquisitions and geographic expansion.
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 Companys 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 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 implementing replacement systems. The Company
<PAGE>
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 also utilizes medical equipment and other non-information
technology equipment some of which may be impacted by this issue. The Company
is in the process of completing a detailed inventory of affected equipment and
surveying vendors for remediation plans. The Company is currently unable to
predict the outcome of this work, however, it is not currently expected to
have a material impact on the Company.
The Company depends on receipt of payment from its payor sources, which
utilize computer software to process those payments. The Company has over
1,000 different payors including Medicare and Medicaid programs, insurance
companies and HMOs. Should the Federal Medicare program and/or state Medicaid
programs, or a large number of private insurance payors cease, or interrupt
payments as a result of year 2000 issues, this would have a material adverse
impact on the Company. Approximately 70% of the Company's revenues are
derived from HCFA funded programs. To date the Company has received no
notification from HCFA (or any other third party payor) that year 2000 issues
are expected to interrupt payments. The Company is currently unable to
predict what effect, if any, the year 2000 issue may have on the computer
systems of its 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
internal compliance will be funded by operating cash flow and 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. However, in any event, contingency plans are highly dependent
upon actions taken by its payor sources regarding year 2000.
System maintenance and modification costs to existing software are expensed as
incurred. The costs associated with purchasing replacement software will be
capitalized and amortized over the useful life of the software.
Health Care Reform
- ------------------
The health care industry, particularly the visiting nurse and product
segments, 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 departments of the federal government, Congress,
and state legislatures. Certain adverse changes in Medicare reimbursement for
oxygen therapy services and Medicare-certified home health services became
effective for the Company on January 1, and April 1, 1998 respectively. 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
<PAGE>
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 payors. Legislative changes to "balance the
budget" and slow the annual rate of growth of Medicare and Medicaid are
expected to continue. Such future changes may further 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 operations
of the Company.
Refer to the sections on Reimbursement Changes and Cautionary Statements
Forward Outlook and Risks in Part I, the notes to the accompanying financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations all included in the Companys report on Form 10K for the
fiscal year ended March 31, 1999 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-certified home health services. The primary changes that
effected the Company included a reduction in the reimbursement for oxygen
therapy services and a restructuring of the reimbursement system related to
Medicare-certified home care agencies. The primary effect of the changes in
reimbursement for oxygen therapy services has been reflected in both
comparative periods presented in this Form 10Q. Please refer to the Form 10K
for the year ended March 31, 1999 for a more detailed discussion of Medicare
oxygen reimbursement changes.
Interim Payment System for Medicare Certified Home Health Nursing Services
The BBA 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 were reduced and a new "Per Beneficiary Limit"
(PBL) was added. IPS became effective for all home care agencies for cost
reporting years beginning on or after October 1, 1997. For the Companys
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.
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%.
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.
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. In July 1998, the Company
<PAGE>
implemented a restructuring plan including work force reduction, branch
closings, and changes in compensation programs designed to lower its operating
costs and recorded (in the quarter ended September 1998) a related charge of
$550,000 before taxes for severance, branch closings and other non-recurring
expenses. As a part of this restructuring program, in the quarter ended June
30, 1998, the Company recorded a non-recurring write-down of goodwill of
approximately $7 million before taxes due to the Medicare reimbursement impact
on the home health operating environment. 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.
In October 1998, HCFA announced new cost per visit limits which are now in
effect for the Company's current fiscal year that are approximately 9% higher
than the limits in place during fiscal 1999. The Company's operating costs
exceeded limits by approximately 23% in the quarter ended June 30, 1998. As
a result of the Company's actions to reduce its unit costs (combined, to a
lesser extent with increased reimbursement limits) the Company's operating
costs exceeded reimbursement limits by $95,000 or 1% in the quarter ended June
30, 1999.
With respect to PPS and the October 1, 2000 deadline, rules and regulations
have not yet been published 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 adverse 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.
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 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.
Impact of Inflation
- -------------------
Management does not believe that inflation has had a material effect on income
during the past several years.
<PAGE>
ITEM 2a. Quantitative and Qualitative Disclosures About Market Risk
Derivative Instruments
The Company does not use derivative instruments.
Market Risk of Financial Instruments
The Company's primary market risk exposure with regard to financial
instruments is to changes in interest rates.
At June 30, 1999, a hypothetical 100 basis point increase in short-term
interest rates would result in a reduction of approximately $147,000 in
annual pre-tax earnings.
<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 10.1 Loan and Security Agreement
Exhibit 11 Calculation of Earnings Per Share (attached)
Exhibit 27 Financial Data (electronic filing only)
(b) Form 8-K - None
<PAGE>
<TABLE>
CARETENDERS HEALTH CORP. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
EXHIBIT 11
<CAPTION>
Three Months Ended
------------------
June 30, 1999
-------------
BASIC 1999 1998
<S> <C> <C>
Net income (loss) before cumulative effect
of a change in accounting principle $ 59,232 $(5,365,715)
Weighted average outstanding shares during the period 3,120,436 3,120,436
Net income (loss) before cumulative effect of a change
in accounting principle $0.02 $(1.72)
DILUTED
Net income for diluted income per common share $ 59,232 $(5,365,715)
Weighted average outstanding shares during the period 3,120,436 3,120,436
Add-common equivalent shares representing shares
issuable upon exercise of dilutive options and warrants 65,509 (a)
---------- -----------
3,185,945 3,120,436
---------- -----------
Net income (loss) before cumulative effect of a change
in accounting principle $0.02 $(1.72)
========== ===========
(a) anti-dultive
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
Date: August 13, 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> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> JUN-30-1999
<CASH> 243
<SECURITIES> 0
<RECEIVABLES> 22,576
<ALLOWANCES> (2,923)
<INVENTORY> 0
<CURRENT-ASSETS> 1,236
<PP&E> 19,805
<DEPRECIATION> (12,586)
<TOTAL-ASSETS> 40,580
<CURRENT-LIABILITIES> 9,340
<BONDS> 0
<COMMON> 16,914
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 40,580
<SALES> 24,786
<TOTAL-REVENUES> 24,786
<CGS> 20,963
<TOTAL-COSTS> 20,963
<OTHER-EXPENSES> 2,801
<LOSS-PROVISION> 594
<INTEREST-EXPENSE> 326
<INCOME-PRETAX> 102
<INCOME-TAX> 43
<INCOME-CONTINUING> 59
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 59
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
